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This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern on Apple CarPlay or Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. George Noble needs no introduction. He and a guy named Mobius basically took Sir John Templeton's path-breaking value large cap.
international investment and said, let's make this dance. What was it like way back at Fidelity, like the first couple of months of Fidelity International? You had to justify your existence. So my mentor, Peter Lynch, had insatiable curiosity and he needed a foreign stock jock. So they came to me in early 84. They said, you've never been abroad. I said, I've been to Tijuana, I've been to Montreal. So they sent me off to here and they said, get your glove because end of the year of 84, we're going to start our first foreign stock fund. I was it. So, you know, but it was one of the things with Ned Johnson.
they gave you opportunity three into the fire and let's see what you got the fire right now is ai you are scathing our listeners and viewers that own this stuff in their retirement plans at fidelity everywhere else as well what should be their action into the autumn why am i not surprised by the question we spoke about a couple months ago when i was last on things have gone from bad to worse um and let's just step back for a second because there's so much day-to-day volatility this announcement that release etc etc most recently all this stuff over the weekend i mean tom paul think about this you have a commodity that's deflating at like record speed with debt that's being built up at record speed like what could possibly go wrong okay so every day you know every week it's another model that comes out and then the chinese can do it for 95 off and now there's noises about you know trump maybe he's going to ban chinese ai whatever um as we said last time i think this is going to be the biggest misallocation of capital in history and when people say is it Worse than .com, not as bad as .com. History rhymes, it doesn't repeat. I read something interesting the other day, not an original thought, but I thought this fellow put it brilliantly. He said, you know, this AI thing, it kind of reminds him, it's kind of like if you took .com and merged it with the great financial crisis, i.e. all the Ponzi finance schemes of housing, it's kind of what you got. Oh, boy. So what aren't you buying here, I guess, in terms of the concept of AI? I mean, I think we're all kind of disabled. We're trying to every day learn a little bit more what this means, what it actually is. To me, it just feels like what we're talking about five years ago, which is big data, and it's just another term.
But I've been told, no, no, no. This is a new way of computing. This is a new way of processing information, and it requires a tremendous amount of computing power, which requires a tremendous amount of capital, and that's kind of what you've got to get your head around. You're not buying that? No. We all use AI. I use AI. People savagely attack me on Substack and X because, oh, you use AI. Yeah, I like AI. Okay? It doesn't mean it's a good investment. It's like, you know, Peter always talks about the difference between a product and a stock, right? The question is, is AI, if you do reverse engineer the math, and you look at the trillions they're spending on CapEx, and just...
reverse engineer and say, okay, how much gross profits do they need to make to justify that? And in turn, what are the implied revenues that you need to justify that? Liars figure, but figures don't lie. And so the question is, is there going to be an acceptable return on capital, all those trillions of dollars being spent, or is this just going to be, you know, $100 billion TAM, and you're going to be a commodity business, and there's going to be no margins? That's the issue. One last point I want to say on this, Peter Baer is a bank credit analyst, made a really good observation a couple months ago, likened to .com. He said, you know, the folks in 99 who were all bullish on the internet,
They were right. Internet traffic went up like 43% compound for the next 25 years. It went up like 25 million percent. Didn't stop Nortel from going bankrupt and Global CrossFit from going bankrupt. These are two different things. George Noble with his folks. Hugely visible on social. Can't say enough about his careful writings on Twitter, on LinkedIn as well. Of course, definitive forever at Fidelity International. I love how Justin Baird treated you in the book. I mean, I read the book cover to cover. Just enjoyed it. They kept lockovers out of it. You know, I went through, I did an index search for lockovers just to see how many people were in it. Thank God they kept that. Then the Boston Racket Club they kept.
They kept out of it. What's different now in the racket? Is it easier not to lose money now because of the cacophony we're living in terms of financial? Is it easier not to lose money? I actually think it's easier to lose money. And the reason is, and I'm breaking this here, breaking. The term fiscal dominance has made the rounds the last couple of years. If I hear that term one more time, I'm going to put my fist through the wall. Well, I'm coming out with a new phrase. It's called narrative dominance.
narrative dominance in other words i love that okay it's it's do you remember the book alan keys wrote a couple years ago years ago the post-truth society we're in the post-truth stock market it doesn't matter what reality is right they're trying to tell you this is what you should believe and we're going to put enough liquidity spike the drinks enough so what are you complaining about time you look at these numbers and everything can you parse can you parse between mag seven or do you treat them all the same they're all a little bit different but so for instance uh No surprise, we've talked about this before. The electric car company that shall not be named uniquely stands out for being extraordinarily unattractive. I've never seen a short at such scale, a trillion five, and then with its cousin SpaceX, which we spoke about last time as well. SpaceX is not Max 7, but those are just unbelievable companies. They're just atrocious. And then at the other extreme, you have Google, fine, and then everything in between. So again, it's a market of stocks. Know what you own. Peter Lynch, please call your office. So how concerned are you about the overall economy if, because so much of economic growth?
Underlying economic growth is AI related. You pull that out. What does that mean? Again, the economy is not the market. The market's not the economy. I am concerned. My call has not been for recession. Ours has been for rotation, not recession. However, as we've been discussing, you know, this Ponzi finance, circular financing with its underwriting AI, when the market says no mas, when you start looking at the CDS on Oracle or, you know, whatever, and the market says game over to your point, you're asking the right question.
and i think we're looking at you know i'm focused on the market not on the economy so much but when you're spending trillions of dollars and running a deficit of seven percent of gdp like how you gonna get a recession all right problem is you're looking at a global increase in cost of capital in a nominal gdp or character of it maybe we've never seen before so you mentioned cds credit default swap and you know there's a debate folks about its efficacy in that the blunt instrument is i'm looking on the screen at the yield space price down yield up how does that play out is it play out where like in august of 1998 it just breaks or because of leverage or whatever? Or do you see it as just sort of ebbing into some form of capitalism? Well, what's really interesting here, much has been said about the passive bid and indexation and much has been said about the huge deficit spending. And so if you think about past cycles, Tom, what will bring on the contraction is if stocks go down, corporate managers cut back, and that gives you the economic impulse to have a slowdown if not recession. With stock prices, though, continuing to stay up there.
that sort of information content from the pricing was missing. All right. And they keep driving the economy more fiscal spending. So to your question, everyone wants to know what's the magic level of rates that is going to cause this thing to topple over. As you know, I've been pretty outspoken about Scott Besson and what the Fed's trying to do. And, you know, on August 19th, when he said we're buying bonds, we're going from 2 billion to 4 billion, 4 billion, whatever the number was. I said, no, this is a sign to short bonds, not buy bonds. Scott Besson is the modern day equivalent of Norman Lamont. This is the UK, 1991. I find it really rich that Mr. Besson, who.
By the way, he's wrongly credited for having been involved in the Soros Drucker-Miller takedown of the Bank of England, had nothing to do with it at all. He basically is Norman Lamont now. And by that, I mean, what got the Bank of England in trouble is when you defend an artificial price that's not justified by the fundamentals, the market attacks you. And that's what he's trying to do with our bond market right now. As a matter of fact, the whole AI complex, I would say, they're trying to prop something up which has no economic justification. It goes back to our last meeting, right? And people say, yeah, show me the cash flows. You can't. And so I think the market's going to continue to attack the bonds. I think yields are going to continue to go up. I also think the market's going to attack AI. And I expect the whole edifice to collapse.
Well, that means a lot of the S&P earnings that we've seen year to date this year, I mean, 20 handle, 30 handle in the second quarter. I'm not sure the exact math, but what I'm hearing from strategists, like at least half of that growth was AI spending related, margin related. So that doesn't bode well for the equity markets at all. I don't think so. I agree with you. You know, markets are discounting mechanisms. Wayne Gretzky, please call your office. Let's go to where the puck is going, not where it is right now. And so, and then the other thing I would say, in respect to where we are in the earnings clock right now, I find it remarkable that the market has held up as well as it has, given the surge in bond yields and surge in oil prices. If Tom had come to us, Paul, two months ago and said, you know, I have a dream that one day bond yields are going to be at five and crude's going to be at wherever, what's the equity market going to do? We'd say, no, it's going to be down a lot.
One final question here, which is people are comfortable. And I would suggest every conversation buried in paragraph six, is they're comfortable because they have Phil Correa at Pioneer was brilliant on that. The inflation, the bright lights of inflation helping out and it's into this high nominal GDP. Is Mr. Worscht going to depress nominal GDP? And will that be the catalyst?
for your just concerns. My crystal ball in Fed watching is no better than anybody else. As a matter of fact, I don't spend much time on it at all. It's a waste of time because I'm a good at it and I don't know anybody who really is. That being said, I think Walsh is an impossible position. You know, if he says, gee, I love these terms that come up with, this is a dovish hike or a bullish pause or whatever it is. If he comes up with a dovish hike, Mr. Mark's going to say, oh, so you're done? So I think if he comes up with a dovish hike, rates are going up. If he says, no, we're going to do two or three rate hikes at the market's discounting, they're not going to like that. So I think he's in a thankless position. And then coming back to Mr. Best, and when I've been so absolutely critical of Scott, I said, what should he do? What advice would you give
Resign. George Noble, thank you so much. Managing partner, Noble Capital Advisors with a small affinity to Mr. Lynch and Fidelity from ages ago. Stay with us. More from Bloomberg Surveillance coming up after this.
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You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App. Or watch us live on YouTube. It's across America and worldwide for Global Wall Street. Dominic Constam joins us. Parchment, I should say, out of Cambridge and Oxford. Dr. Constam, thank you so much for joining us. You say we could have three rate increases. Why can't worse just say one and done? We have to look for more data.
Well, basically, it appears Walsh has sort of shifted the Fed's ears in the terms of how they're looking at inflation and highlighting the view that underlying inflation is higher than they want it to be. And prior to Walsh, Powell would have had a view that underlying inflation was actually relatively low and was just dealing with a lot of shocks that are going through the system. So Walsh has a different view on inflation. It would appear from Jackson Hole. In your beautiful note, folks, get the constant parchment. Get it from Mizzoua. We are not going to give you that. We protect the copyright of all of our guests. Your distinction here is Walsh is conventional with a vector or trend analysis. He's committed to a higher inflation where Powell...
And now the proxy, the game theorist from Washington State, Waller, is saying, no, this is a shock moment. Why can't we be patient? given the war shocks and the rest out there? Well, I mean, I think the Powell Fed, you know, did have a view that you could be patient. But the trouble with patience is if it goes on sort of too long and you keep waiting, waiting, then basically those shocks get embedded into the trend is kind of the issue. And I think Walsh is sort of highlighting that. He feels that sort of has happened already. And so we're taking him at face value. And the idea is, yes, I mean, this isn't like one or two insurance hikes. This is a series of hikes. Three is reasonable. It could be four. But the market will certainly price for what I would call a proper tightening cycle. And that's what we're in the process of doing.
How important, Dominic, is it tomorrow for the Fed to show the market a unified kind of stance here? I think it's pretty important. I think Walsh will bring along the kind of Powell-Fed holdout, so to speak. So I think it will be pretty much unanimous move, assuming they do hike. It would then signal some sort of commitment to bring down inflation in a fairly timely way.
way. And I would, I think, they should just basically get it over and done with. I mean, people say Walsh is quite political. Well, you know, you've got the midterms, which obviously complicates, you know, an October hike, for example. But by the end of the day, just get it all over and done with by early next year and slow the economy. And then you can set yourselves up for some re-acceleration and growth in 2028. That's the way I would think the politics should work. Speaking of the politics, Treasury Secretary Besant came out several weeks ago and said, I'm going to get long-term rates down.
That hasn't really happened, has it? What's going on there? Well, I mean, a couple of things. It's obviously, I mean, the idea had been, had Walsh not been so apparently committed to raising rates, then the long end was obviously going to have trouble stabilizing in this elevated inflation world. So the idea for Besson was to basically try and sort of lean against the moves high in rates by doing something. He could cut supply. He could increase buybacks. He obviously signaled this sort of a potentially aggressive buyback strategy. The problem, if you like, was that although this number was quite large, almost six billion in the last buyback, they didn't really buy through the market. They didn't buy, they still bought bonds at a discount. So if you want to really stabilize rates, we'd argue they'd probably have
to be a bit more aggressive in their buybacks and should basically buy through the market. Buy prices higher than mid, basically. And he didn't do that. Across America, the way you choose to listen to us. Good morning, 92.9 FM Boston, 99.1 at Nathan Hager Radio in Washington. Good morning in a beautiful New York Bloomberg 11. Dominic Constant with him with Zuo. George Noble will join us here at some point this morning as well. Dominic, I want to pile into one thing you said there about a good economy and that we have a nominal GDP of a banana republic. Now, there's a set of solutions. I'm going to call it a four-box outcome, whatever. There's a set of solutions to how you bring nominal down.
What is the most efficacious way for the Fed to assist to bring nominal GDP down to something, quote unquote, normal? Well, a lot of the nominal GDP growth is oil. I mean, a lot of the contribution, for example, was very strong state and local government spending, and that was oil. I spoke to the BA about that, and they're basically deflated as they use that to really drive that up. So I do think it's mainly an oil issue. Ironically, it kind of is vaguely helpful in terms of debt GDP to have an elevated nominal GDP. The real concern, I think, is the real GDP. And if the Fed's hiking to slow the economy and bring inflation down, the consumer is kind of teetering a little bit here because they've cut their savings rates so much to accommodate the oil price rise. They can't really cut it anymore. So where are you at Ferroli over at J.P. Morgan? He's from Chicago.
That's an economic school out there. It's West dominant. Ferole's at 2.75%. Others are looking for a buoyant consumer. How quickly and in what level magnitude does a consumer crash given higher rates? Well, I think a consumer necessarily needs to slow down significantly. And 100 base point tightening, for example, in our estimates would definitely do that. The problem is the savings rate started at 4.4% this year. It's currently below 3%. It's never really been this low on a sustained basis. And when you look at the measures of underlying inflation, there's actually a negative demand price shock going through the system at the moment. Those 200 components that Walsh highlights in the PCE, a bunch of them are showing basically
below-trend pricing and below-trend demand. That's a negative demand shock, and that will get worse. Then why are we raising rates per Drew Madison Pet Life and Dr. Konstem at Mizzoua? Because we're impatient to wait through supply shocks, and we're going to work off this elevated underlying, even if that comes at the cause of demand. The real irony is that Walsh sort of says the dual mandate is in conflict. Well, I'm afraid I think the dual mandate is in conflict. It's certainly in conflict in the short term. If you want to bring down underlying inflation, you're going to see that negative demand shock get worse. You're going to see a slowing economy, and that's why risk assets are kind of on the back foot until you sort of get through these next few months.
If he comes out and suggests more one-and-done tomorrow, what does that do? Well, I think it takes 10-year notes on the way to 5.25% and 5.5%. I think the market would take it very badly. I think they need to come out unanimous. They need to either basically say nothing about how much further they're going to go, or they could be clear and say that this is a tightening process, and they're going to basically see it through until inflation comes down. That's kind of what the market wants, to stabilize the back end. If you don't do that, then they're going to have a whole set of problems, and you go back to Besson, what does he want to do about it? We've got a lot of... Chair Warsh has set up a lot of committees and commissions and looking at this and looking at that. Do you expect any...
color for that tomorrow? Well, I mean, okay, so in a funny way, so the reason why these committees, if you like, task forces were set up, we thought initially, was to buy the Fed time to get over the midterm elections, so they didn't have to make difficult decisions. That seems to have sort of, you know, fallen foul, basically, of the market. So that's why you've got these. Now, it's just possible. I mean, what are the chances that the Fed doesn't raise rates tomorrow? I mean, the market obviously thinks it's at least 90% they will. There's a small chance they don't. If they don't, then one of the reasons why, maybe because he defers to the committees, and that would be where they'd come in. Otherwise, I don't think they should really feature. I just want to point out, I thought Constance would be selected for a task force. Yeah. But I think he took Ira Jersey.
The two of you from Credit Suisse years ago. Bring this internationally. I'm looking at German-French spreads, jaw-dropping. The 10-year Japanese yield well outside to standard deviation. Move. I got the idiosyncratic peso, Philippine peso at 63. What's the contagion effect?
of everything happening at the Eccles building? Well, I think in general, there's this sort of people don't like government debt. You know, the debt ratios have all sort of deteriorated ever since COVID. There was never been any proper fiscal tightening. So I think term premium are high everywhere. And there's this pressure, if you like, on central banks to kind of tighten policy and bring and stabilize those yields since the government's sectors aren't going to do it. They're not going to tighten fiscal policy enough. And so that's basically what the US is not alone in this. And that's why there's pricing, tightening pricing everywhere. The only thing for the US is they've probably been a bit behind the curve in terms of other central banks. And also the ECB has been a bit more forceful. The UK is finally catching up in terms of pricing. The BOJ.
been a bit behind as well but they're going to be tightening as well quite aggressively in the end so what do you think is the message really should be from Chairman Warsh tomorrow, if he really wants to go ahead and set a tone here, what do you think that he should say, do you think? Well, I think at this stage, he's got to basically kind of go all in. I mean, he said in Jackson Hole, underlying inflation is too high. And that was a very, very profound thing. I think the market kind of was a bit slow to understand how important that was. Assuming that he genuinely believes that, I think he has to go all in and basically say they're going to raise rates until the job is done and you bring down underlying inflation. And that is a proper tightening cycle that will be finished, hopefully by, let's say, the first half of next year. The distinction of your research note, Dominic Constam, is the supply shocks and demand shocks perceived.
by waller of washington state minnesota the governor and the chairman kevin warsh i guess of stanford to be polite about it and of wall street they're starkly different aren't they to paul's good question on the dissent why won't they show dissent tomorrow between the waller world and the warship world It's a risk. I mean, it's definitely a risk. My guess is Walsh will be very persuasive and bring them along, and therefore there won't be any dissent. But it's definitely a risk. If Walsh wants to dig in his heels and say we should be waiting this out, then he could do that. And that would be a bit of a mixed message from the Fed that will unfortunately not be taken very well by the markets. Is Masuo a quieter and more stable place because Steve Rusciuto retired? It's definitely quieter. I wouldn't say it's more stable. Major shout out to Stephen Rusciuto of Masuo for decades of work in market economics on Wall Street. Absolutely brilliant.
at parsing out our gross national product. Dominic Constant, thank you so much with Mizzou. Stay with us. More from Bloomberg Surveillance coming up after this. You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App. Or watch us live on YouTube. So Marina Zavlach, when she was at Notre Dame, they didn't rate Rice 52-0. Were you with the game? I was not. No. I live in London now. You were in London because you are our chief Euro equity strategist at Morgan Stanley. What a well-timed conversation. Marina Zavlach with us this morning. How much cheaper is Europe?
versus america even with the mag 7 adjustment is it like you wake up and go omg the mother of all values or is there a different story now it's about 20 like for like discount sector neutral taking out max seven so more like for like comparison 20 um at the peak it was 40 so it's not as extreme but i think the interesting thing is if you look at that chart the discount rate on a long-term history January 1st this year, we broke out. So we broke out of a 10-year downtrend. Nobody ever wanted to talk about Europe's cheapness before. Now it's the first question you asked me. We broke out, and history suggests when we break out like this, we will keep going to single-digit levels of discount versus the U.S. So talk to us about earnings in Europe, because here in the U.S., as you well know, the primary driver of equity performance, certainly this year, but has been a really strong earnings growth coming out of the S&P 500. Talk to us about in Europe, what you're seeing.
I mean, it's not quite as strong as the S&P, but it's very strong by European standards. So aggregate earnings growth for this year is now running at 19 percent. The median stock is doing 12. This is all coming at a 20 percent discount, as I mentioned, to the U.S. The median isn't that dramatically lower. So I think if you do that, like for like comparisons, quite attractive. And I would summarize what's driving the earnings and how sustainable it's inflation. Companies in Europe benefit from inflation because we have a lot of real assets and we have banks that benefit from inflation. In, I guess, last year, the beginning of President Trump's second term with the tariffs coming on.
There's a real sense that Europe was going to start increasing its spending on defense, on infrastructure. Has that happened? Has that been happening and where it's been stronger than other places? It is happening very gradually. I think there was a lot of excitement about that, as you say, last year. That excitement has faded. The infrastructure spend in Germany, we estimate two-thirds of it is going to social. The defense is happening, but running below target, it will pick up at the end of the year, I think. Marina's out of luck with us. Morgan Stanley here, the European equity strategist. I say chief strategist. She has to put up with Martin Ross on commodities. I mean, that alone is.
I love at the bottom here, your Morgan Stanley police say, Marina cannot speak to single-named stocks. Boring. Marina cannot discuss political figures. Boring. So let's try to do this. France is flat on its back. I'm looking at the spread widening. Germany to France. Translate into the opportunity for French stocks.
given the turmoil there that you can't talk about. Yeah, I mean, we've written about it, so I won't go into political figures, but I will say from an equities market point of view, first of all, France and everything in Europe is extremely global. So the proportion of stocks that are highly correlated to OET spread widening is pretty low. It's a quarter of the index. And then within that, you have the banks, which is a big chunk. They actually benefit from higher yields.
It can impact sentiment in the short term when yields move quickly. But ultimately, when they report earnings, earnings are going to be strong. And they're already trading at a 20 percent discount. So we did a case study of how stocks are trading relative to many historical presidential elections. We're already pricing a lot of negativity. And the feedback we're getting from investors is actually they're looking for idiosyncratic stories to buy because the market has kind of run ahead of itself. I mean, Paul, Celine Dion picked Paris. Not sure. What else do you need to know? Exactly right. Marina, talk to us like here in the U.S.
One of the key drivers in addition to earnings has been AI broadly defined and the spending associated with AI has been such a driver of so many sectors here in the S&P as you all know. What's the corollary to European investing as it relates to AI? I mean, it drives Europe as well. So I mentioned earnings. Earnings revisions breadth in Europe, again, not as high as the US, but it's 20% now. What's leading? All of our AI is leading. So semis, cap goods, cap goods in Europe is now largely AI driven. Those continue to lead. I would say they're accelerating. If you look at the weight of our index, we estimate about 15% is direct AI capex exposure. And then you have a lot of secondary exposure. So banks, huge part of our index, they're actually outperforming mega cap tech in the US because yields, for multiple reasons, but partly AI driven yields are going higher.
banks in europe retail banks just like regional banks here they benefit from that dynamic how much is your study hinged on euro dynamics my study, my outlook. The performance of euro equities given where the euro is. To me, the euro's pretty much quiet. It's not a topic of discussion right now. Yeah, yeah. It is an odd dynamic with euro dollar because if euro strengthens, I mean, I come marketing here in New York and I hear investors, historically, they've been like, oh, euro's weakening, so it's destroying our returns. But then if euro strengthens, suddenly, because our companies report in euro and local currencies, you'll have downgrades because they're just translating, they're very foreign exposed. So right now, it's not really a story, but generally,
Weaker dollar would be positive overall. Paul and I were talking about your 3.30 meeting this morning. Paul and I are in real agreement on the mystery of this. Maybe you more than anyone we talk to. Should companies report four times a year or twice a year? I think four times. We have half of our, this is a great question because it's happening here. Half of our free flow market cap weight reports semi-annually.
And the problem is, I mean, some of them, they'll report trading updates and things like that. But you just have this kind of vacuum of information for six months. You have more volatility in those stocks. Those stocks can get left behind. You'll have companies reporting sales and squeezing on the back of sales. And then later on, you find out that they actually missed on earnings. I think it just creates more volatility. Who doesn't want to go to more exposure, more visibility? The companies? Yeah. Yeah. I mean, I prefer more visibility. So there's still a euro. I'm going to cut to the chase. There's still a euro arrogance. We don't play by the rule book. We're not going to switch to a more Anglo-American model.
We're going to stay the continent of Europe. We're fixed income and debt is everything and be undervalued forever. it's becoming less undervalued from an equities point of view. And equities, like I said, majority of equities exposure is not in Europe or UK. So, but just real quickly, 30 seconds. It feels like, is the AI trade alive in Europe, I guess? Yes. It is, okay. Because it feels like, obviously you don't have that many tech companies per se, you know, relative to the US and the weighting. But AI feels a little bit different, do you think? So we don't have as many tech companies, but we have adopters. So we are seeing ROI starting to come through. At some stage, when that ROI starts to come through in force, I think it will be Europe's moment because we have so much low-hanging fruit.
in terms of potential for productivity improvements, demographics, where returns are starting. This has been wonderful. Thank you so much for coming in. Are you based in London, Paris, Strasbourg? London. I wish Paris, but London, yeah. They're at the Canary Wharf. Oh, okay. I didn't know that. Yeah, they were one of the first. They should move in by us. You can't get the big floors for the trading platform. It's hard. Also, it's a walk. It's a swagger. But now that there's direct, Bachman's light rail goes out there. When I was there, you had to take like 27 different subways. Is Gatwick better?
I think it's the same. It's the same. Morgan Stanley, thank you so much. Stay with us. More from Bloomberg Surveillance coming up after this.
You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. We did something twisted now. We're going to talk about the twist. We're going to talk about the shift. We're going to talk about what's going on. The butterfly within the yield space. Because it's so simplistic in the media. OMG, price down, yield higher, world coming to an end. Sinjin Bowen with us right now. High yield bonds and all at Beach Point Capital. Decades of experience. But spreads haven't changed. Right?
That's right. Spreads are pretty flat. They're historically tight, especially in the higher quality parts of the market. That's good. It is good, especially for the issuer base, which is still exhibiting really strong fundamentals. It doesn't bode well if a company does have an operational misstep. The asymmetric downside can be extreme in price action. But so far, the index is performing really well, and that's in large part just because of those fundamentals. This is what I do when a bond person comes in, because I don't know what's going on in the bond market. I go to INGO function, and I click on Fix Income. I look at some of the returns in the United States.
in the various bond markets. So just for example, the U.S. ag is down 1.46%. So that's the aggregate corporate bond market in the U.S. But here's some outliers. U.S. corporate high yield, positive 1.8% this year to date. Leverage loans, which is where I used to play back in the day, actually up 3.4%. So Sinjin, in your world, people are willing to take risk here, it seems like credit risk, and then go a little bit down in the capital structure.
Yeah, it's true. I mean, part of that is a function of bond math itself. So high yield has lower interest rate sensitivity than the ag does. And floating rate, it continues to outperform and mostly simply because of interest rates. But also, you know, the issuer base itself, you know, hasn't had the same, you know, there are different degrees of exposures to both cyclical functions coming out of the inflationary pressures from the macro down, as well as the AI trade on both sides of it. The marketing chit chat.
is, oh, energy, don't worry about it. Everything's fine. Gather yield while you wait for price to come back. Translate that into your real adult world. Is it valid to say I'm going to capture yield while my price is down 3%, 4%, 5%, 6%?
I think that's valid, especially in floating rate right now. And if we do get a hike tomorrow and all signals point to yes, then floating rate should continue to outperform. And that's real income that you're generating off those loan assets. On the high yield side, over 50% is rated double B. It is longer in interest rate duration. It's higher quality. And it is more sensitive to those interest rate moves. And so that yields might be a little more volatile in that space.
How do you guys pick bonds these days? Is it sector? Is it factor? Is it just risk-weighted adjusted returns? How do you guys kind of screen stuff? So we are fundamental bottom-up investors. So we are screening the entire universe of investable bonds and loans, and we're doing sector research to understand the industry trends, pick which ones might then translate into winners and losers who choose to finance themselves in our asset classes, and then we do careful security selection from that point. It's just that we've got to get to the market over. Let me get this in and we'll come back. Sinjin Bowering with us with Beach Point Capital. What is your take?
on the next marginal gazillion eight-tronch hyperscaler bond deal. Is it different than the last 14 or is it a new-new now? We actually don't think it's a new-new. We think that there's very little nuance and price differentiation between these types of deals. And that won't happen until there is some sort of credit differential from a fundamental perspective. So we've largely avoided that space, but at some point it's going to be hard to ignore just because of the sheer amount of issuance. So how's the issuance in your market? Is it...
Active is the new investment grade? It is coming back. So after Labor Day especially, the new issue market reamplified. There's a range of different use of proceeds from even new money transactions in the form of LBOs and M&A, as well as dividend deals. In the loan market, because it's outperformed so well, you do have this repricing wave, which causes some repression among buyers as they crowd up into the upper echelons. But in general, the new issue market's pretty healthy. And in fact, there are a few...
indicators showing that even some of the software names can push out some of their maturities, but they do sell at a cost. Let's come back. Cynthia Brown-Ruthers with Beach Point Capital here on the shades of credit and bills, notes, and bonds that are out there. Futures have improved in the last two, three hours. Negative seven now with a VIX in nicely, 16.84. Yields are higher. That's the big story of the day. We need to get to the market opening.
All right. Thanks a lot, Tom. Not only yields are higher, oil higher as well. Brent crude up one and a third percent, now above $107 a barrel. And WTI crude sitting at $103 a barrel, up one and a half percent. As for stocks, we are seeing some red arrows here in the equities market to start our morning. The S&P 500 down just three points. We've got the Dow Jones Industrial Average down two-tenths of a percent, or 110. NASDAQ Composite down 34, or about one-tenth of a percent. And the NASDAQ 100 down about 15 points to start our day. The Bloomberg Dollar Spot Index up a tenth of a percent at 1196.87. And the Japanese yen down half a percent at 15508 against the U.S. dollar. Bitcoin down about 3 percent now at 76.
And as a result, we have got a lot of crypto-related stocks starting the morning lower. Coinbase down 5%, Robinhood down 3%, and Strategy down about 4%, and Yields mixed the 10-year at 5%, its highest level since 2007. That is your Bloomberg Opening Bell Report. Tom and Paul. Alexis Christophers, thank you so much. Really, really appreciate it. This morning, down negative 170. Cindy Brown with us from Los Angeles, of course, with Beach Point Capital Management. Would you buy LA paper now? Would you buy municipal bonds out of California? Is there a debt opportunity there with the upward over taxation and people migrating?
It's certainly good for headlines. And, you know, it's hard to know sort of what the path forward is, especially given that this sort of we're in an election year and there's a range of policy proposals, not only in California, but across, you know, most local municipalities and even at the federal level. So it's hard to gauge at this point. Probably don't want to touch that volatility. How's the private credit market impacted your market, the high yield market, the senior loan market? Because now I need some capital. I've not got another place to go. How's that impacted your market?
There's been a lot of share shift. And issuers now, especially sponsor-backed issuers, can shop around for the best asset class and solve for their needs, whether it's structure or a specific debt package that they want, or it's simply cost of borrowing. That convergence between the asset classes ebbs and flows. Right now, it's more on the private issuers coming back to the public side, in part because they're solving for that cost of borrowing first and foremost. But over time, we expect more convergence between these asset classes. They're not all that different other than size of company and speed of execution of getting a deal done. What's hidden out there?
On October of 1987, I learned what was hidden. Portfolio insurance. I've had the honor of talking, I think, three times to Myron Scholes about 1998 and what was hidden. It's always in your world. It's always your fault. With the history of Harvard and Chicago, what's hidden out there, Sinjin?
Well, first of all, there's been a lot of private credit that's been created over the past five and ten years. Do we know what it's worth? It's worth par, according to most marks. But just by the sheer nature of private credit, that is opaque in terms of financial disclosures and being able to aggregate that up to a more macro view. And so it's hard to know if the underwriting standards across all of that credit has been created in a responsible way and is priced appropriately. And I would say that...
A lot of that credit has been created at times when the economy has been performing very well. And so if we do get even sort of a garden variety recession, how does all of that behave through that time period? Thank you so much. It's been wonderful. We're going to LA in February, right? I mean, Lucas Shaw's got his thing in there, but I mean, I can just say 3 a.m. Sure. Out there. No problem. Beachside Sunset Tower Hotel. Yep. Sinjin Barn. Yep, we can do that. Sounds great. Sinjin, thank you so much. Beachpoint Capitalist. I learned a lot. I love having a bond guy when the equity market opens. That's how strange the show is. We'll have to talk to the bookers about that. This is the Bloomberg Surveillance Podcast.
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