Investors Look to Safe Havens as Davos Kicks Off

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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. Michael Purvis with decades of experience at Tallback and particularly with a wonderful Asia perspective. Let me cut to the chase. Is Japan idiosyncratic? Well, you know, I think what's really idiosyncratic with Japan right now is the fact that their 30-year bond is this, you know, that yield is a surging, right? And it's an interesting contrast because in the United States, for all the time we talk about the Fed and the chair and inflation and all this interest rate stuff, the reality is that rate volatility in the U.S. has been extraordinarily low, perhaps until last night there. And rate volatility overseas is doing, in Japan particularly, is doing very interesting things. I think so what's happening is that we're kind of importing a little bit of rate volatility from Japan right now. Well, I've got an impressed purpose here. Yes, you know, he got up so early to be with this. So I took the 40-year piece in Japan, quoted in yield. I figured it out in price. And I looked at a standard deviation study. And you and I know that four standard deviations is where things get exciting. The price has gone 90-something to 83. And four standard deviations is only one. point more from 83 to 82 really begins to show the stress. Does that matter to the global bond market that we're coming up on a four standard deviation move and some of this stuff? Well, I think you're seeing a little bit of it. It matters a little bit right now to the global bond market. You know, it's funny. If you look at calculations of the term premium, right? For several years, that was that that term premium for the U.S. treasuries was extraordinarily low. At the same time, the Japanese and European yields were in negative territory. Now, there's no more negative yielding debt. That's been the condition for a while now. And our term premium has been at a hot, much higher elevated level. So we do have to, you know, sort of... you know, contextualize our treasury yields in a global, in a global construct. We import and export interest rates, just like other countries do. It is one big global bond market. But to get back to Tom's question, the question is how much does it really matter here, right? And I think right now, Japan is clearly very important. You know, is it going to yank our 10-year up to 4.75 percent? I doubt it. But it's sort of a subtle underlying pressure there that will sort of ultimately, you know, reinforce valuations for treasuries, you know, on our side. Well, boy, I mean, again, I've been sitting on a beach for a week. I come back to 10-year U.S. Treasury.

Four spot two nine percent. What's going on there? Paul. Did you see the 30 year bond? Yeah, I know. The 30 point 90. We're on the five percent. Watch. It's a crisis. I mean, and look at the, you know, there's a big steepening New York. What do you make at the longer end of the U.S. curve here? Well, look, I think there's been this tension for some time really over the last year or so that that. actually really started in September 24 with our cutting cycle where, you know, we cut 50 basis points in September 24 and that marked the low interest rates for that part of the curve. And so normally, when you start a cutting cycle, all interest rates tend to go lower, right? And in this case, it's sort of been the opposite. And I think there's this thing about, you know, the term premium or, you know, the steepener, if you will, you know, being sort of higher, sticky, higher, longer. Why is that the case? Part of it is because, you know, we've been cutting into generally pretty good growth and pretty low unemployment and pretty resilient inflation. And I think part of it is back to our earlier discussion that we're importing some of this from other countries, for example, Japan, right? So the global bond market is kind of lifting our back end as well. I think that it does create a challenge. I do want to talk about rate volatility a little bit more, though, because I think it's important. Who's still in the interview? Folks, Michael Purvis with this across the nation, right now, a clinic on rate volatility. And on YouTube, subscribe to Bloomberg podcast for our rate volatility interview. Go. Look, it's a subtle thing, but the move index is extraordinarily low right now. And if you look at the range of the 10-year treasury yield over the last couple of months, that range is about 20 basis points. You take the highest point to the lowest point. You go back to 1980. that's the tightest range in the 40 plus years, right? So why is that the case when we have all this drama about who's going to run the Fed and all that kind of stuff? I think part of this goes back to the fact that if, let's say we get a super dove in as a very dove-ish set of policies coming out of the Fed, prospectively, well, that is offset by higher term premium, and it kind of tends to dull the overall volatility picture. Similarly, if we were getting a more hawkish unexpected Fed in the coming months, you know, that would reduce the term premium there, given this sort of backdrop of sticky higher inflation north of two and a half percent and an economy that stole pretty good and these foreign bond yields, right? So it's keeping it in a very tight range, usually tight range, it is breaking out really literally just as we talk to higher levels. How much it breaks out, I think we'll have to see because I think you have to get back to U.S. fundamentals too. Michael, what are clients doing these days? I mean, we have the market futures down at 1.5%. Europe trading off over 1% here today. Geopolitical risk, right back on the front burner, I guess. Are they buying risk? Are they buying protection? What are your clients? They're buying risk, but they're very much, if you're an equity fund, long short or long only, you are a stock picker right now, more than ever, right? Implied correlations across the stock market are record lows.

you know they're spiking right now but but off record lows there and i think they're they're they're really being very sort of careful i think the the protection um you know in terms of hedging market risk yeah there's a lot of anxiety because we've had you know three amazing years maybe we'll have another good year but people want to you know protect gains um you know after such a great run um it's hard i think with you know buying vicks calls or s and p puts simply because the correlations across stocks are so low, and that tends to suppress movements and surges in the VIX. When you have, look, we step back, we have monetary, some level of monetary easing, on top of fiscal easing, we're going to get stimulus just clocking in soon, on top of a pretty good economy, right, with this massive fixed asset boom there. And that's driving correlations low. So the violence within the market is within the market. It's rotation and all that there. So when you see, when you wake up on a Saturday morning and there's a Venezuela headline like we had a couple weeks ago or what I've been saying, if you want to hedge those kinds of risk, don't do it with Vick's calls or S&B puts, do it with long gold or... long gold in some form. Michael Purvis, for the source who welcome you on the eastern seashore. Nathan Hager Radio, 991 FM, Washington, 92.9 FM in Patriotland. Bloomberg 113 here in New York. Good morning. The way you listen to a serious Exxon Channel 121, particularly across Canada. Stay warm out there. The cold coming for the next 15 days. We're efforting Rob Carolyn to give us historic perspective. Paul, like in 10 days. it's like the coldest i've ever seen in new york yeah it's gonna get there yeah and they get in the midwest right now they're getting hammered so so are you surfing yeah exactly no stay close to home michael purvis here and let's talk folks basic equity market i'm gonna be filtering in folks i worked all weekend the zeitgeist was just absolutely unreal and just now is an example adam posen peterson institute just in lemond i haven't read it yet I'll not read it in French, Michael. Excuse me. But Dr. Posen, Europe is cross a Rubicon. Good. Here is a guideline for what to do now. I'll report on that in a moment. What it comes down to is what do I do with my 401K, given a cacophony of news flow? How do you distill President Trump zeitgeist, if you will, to an investment portfolio? Well, I think it really, this is sort of a tired cliche, but I think it does speak to diversification, right? If you diversified into European equities a year ago, right, you vacillably have performed pretty much any part of the U.S. equity complex. They're probably not only in local terms, but particularly so in dollar terms. there. And I think that's part of where, you know, like there's so many unknown unknowns with respect to how all these, this geopolitical realignments are going to shake out. But if you step back, look, it's not just the US economy that's doing pretty well. It's most economies in the world are doing remarkably well. I was talking to a friend of mine just yesterday about European exports and he was like, you know,

European exports of the U.S. represent less than 3% of European, I'm sorry, of German GDP up there. And so I think there's a lot of, there's a lot of, you know, important things that are happening outside of the U.S. that where there's really great opportunities. And particularly, you know, if Europe really goes from, you know, a narrative to actual action with respect to the... Some of the stimulus and reaction to the geopolitical alignment, that's going to be, there's going to be a lot of great earnings growth there and probably a strong sequel to last year's performance. Torsten Slocke, our good friend at Apollo is out with a note this morning saying, companies with negative earnings continue to outperform companies with positive earnings, and now this is since Liberation Day. What does that tell you here? It seems like investors are willing to take on even more risk? Yeah. Look, look, you have, I mean, I'm going to get back to this comment that when you have concurrence of monetary stimulus in some form, where you are in some form of easing cycle, we don't know how much, but we are cutting into 4. What is it, 3% unemployment and robust GDP. And you have that combined with the fiscal side, late cycle, and you have an unbelievable. fixed asset boom measured in trillions, like four companies are spending more than most federal governments are around the world, just on CapEx. And then you have deregulation. Like you kind of have to be risk on. I think you're waiting for those negative earnings companies to suddenly get killed. And they probably will at some point, but right now it's a reflection of the risk set up. 20 seconds. So you're not selling Nvidia today. Because the man is going on in Europe and in Davos. No, no, I don't think so. I think, you know, there's a, there's a, there's a lot of, uh, uh, You have to recognize, like, you know, we could have a higher, more volatile equity market and still have positive equity performance. Like, if you look at the 1998, 1999, 2000 period, you had great equity performance. The VIX never got below 20. Thank you. Thank you. Michael Purvis, just fabulous, very fortunate to have you. Stay with us. More from Bloomberg's surveillance coming up after this. A new chapter in global growth is being written, and much of it is happening in Africa. Africans need to invest. There are deals to be done and business to be won. I'm Jennifer Zabasaja. Every week on the Next Africa podcast, we track capital flows and political shifts shaping the continent's future. The digitalization of Africa is going to power its growth. Putting the world of something like HIV is possible. Population growth is so enormous in Africa. Listen to Next Africa on Apple, Spotify, or wherever you get your podcasts.

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. Steve Laplaceley's with us, Global Co-head of Ice Shears Fixed Income at Lawrence Finkin Company, Black Rock. And I just want to say, folks, I've got a nodding acquaintance over the years with Klaus Schwab. And I know there's been a huge amount of controversy about Dr. Schwab. Somebody had to come in and pick up the debris. And Larry Fink, the bond trader from UCLA, is the one who said, I got a Rolodex. We're going to save this thing. And Paul, I don't think enough can be said, given the moment of President Trump. Yep. of what larry think is done see what's it like working for larry think like if you see him on the elevator does he talk to you oh he's quite friendly actually yes you bump into him on the elevator once in a while but yeah I mean, what he's done in Black Rock's done, I mean, how much did you bring in last year, the GDP of Greenland? Well, so, I mean, the industry had an amazing year. So the industry took in, you know, high 600s in bond ETF flows. The United States, we were well over 400 of that. I shares itself took in around 180 billion globally of that in fixed income ETF flows. So, yeah, it was a monster year for bond flows in general. ETF flows in particular industry is, you know, sitting well above a trillion now. Where are you putting all that money then? I mean, that's got to be the hardest part of your job is where do you put all the money every day? Well, I think it's, we've talked about the sort of, I think, cautious behavior of investors. A lot of the money went into short in Treasury. So we had close to $40 billion in our T-Bell Fund, S.gov. But we also had a fair amount go into our active income fund, Recreter's Fund Bank. That doubled last year to- Excuse me, Chairman Reeder. No comment on that. But yeah, that fund doubled to around $16 billion last year. So the flows are pretty well spread out. I mean, I do think investors are highly focused on income. It shows in the flows. You have a lot of flows going into the short end of the treasure curve, but a lot of income generating assets as well. So, you know, 2025 was a really good year for fixed income, high single-digit total returns here. Is 2026? Am I just clipping coupons here? Is that how I should approach it? Well, today might give people pause, but we've seen this movie a lot. So it's funny because just last week, everybody was talking about how the 10-year hasn't moved in months. I mean, if you look at the average of it is 415, now we're at 430, right? High 420. So this volatility comes and goes. We've seen the 10-year round trip all the way close to 5, back down to below 4.

And, you know, here we go again. But I think long-term investors are looking through that and just trying to clip coupons. I mean, I mean, Secretary Scott Bessent with Maria Bartaromo. I'm bringing in a hat tomorrow because Maria is wearing like this killer hat in Davos. Okay. I'm not my Maria hat. Maria is with the secretary. And, you know, he's talking about equivalency to Liberation Day. Because the three of us, at least that we remember what our 201 case did, Liberation Day. How do you buy the dip in bonds? I mean, I get it how to buy in the equity market. If yield up, price down, what's the process to buy the Steve Laplie dip? Well, let's look at it two ways, right? What's driving today? You have the JGB shock. That's part of it. You have concern in general over U.S. term premium. If you look at term premium, it's kind of, yeah, it's higher, but... It's been higher than this, right? So it's been bouncing around a lot. I do think there is something structurally long term. We've been cautious on the long end. What we've been advocating forever is, you know, stay sort of in the belly, look at, you know, really just trying to generate income while mitigating duration. You can't eliminate it, but you have to go out on the curve a little bit. So I think just sort of staying in that intermediate part of the curve, yeah, it can be a rough ride, you know, for part of it. Overall, if you look at the last year in the last couple years, it's been great to sort of just sit through that volatility and earn that income. So talk to us or just kind of what you think this Fed is going to do this year. I mean, I guess the market's looking for one or two rate cuts. Is that kind of where you guys are? I mean, we think if you look at how the dynamics of the economy have played out as of late. We think inflation is yesterday's problem and labor is today's problem, right? So you've seen a pretty significant slowdown in labor growth. And so I think that's sort of what the focus should be. So the market is pricing in two cuts. It could be more. You know, I did hear, I was listening to your show the other day, and Anna Wong was calling for four. So, you know, you listen to it. Yeah. You listen to our show. Actually. Lisa, can you be sure he gets merch on the way out? Yes. Right. What did Dr. Wong say? She was calling for four. I think my ears serve me. Correct. So it's, you know, we're kind of, the market is pricing in two. close to two so we'll so we'll see how that plays out but labor markets certainly is slowed if you strip out health care it's been negative in the latter part of the year so fixed income i mean you can hold your head high in any cocktail party these days right i mean because you guys had great returns very strong returns in 2025 coupons still a nice way to play the game in How much risk do you want to take? How much credit risk do you want to take? I mean, and this is the part about being diversified, right? And that sounds like a throwaway answer. It's not because right now, you know, credit spreads are really snug. Now, we're going to have a repricing today, but, you know, they were approaching very, very historically tight levels. And so what we've been seeing investors do is by multi-sector, right? So you're, you know, the ag, yes, but also things like bank.

things like our new total bond fund be taught. And also, it's something simple like iBonds, right? That defined maturity concept, people are worried about yields bouncing around. We've seen a lot of wealth investors. Just buy these defined maturity products, ride them down and let them mature. What does BlackRock say about international bonds? Damien Sassauer's taking all of January off because, you know, they did so well. I got the equity market in Japan up 65%. and U.S. dollars since the Liberation Day festivities. Do you do back-to-back in bonds and get that kind of return? So as far as international goes, we like hard currency EM relative to local. I mean, last year local. What does that mean? So dollar, dollar or euro denominated, right? So you're taking the FX. You want Malaysia paper that's in euro or dollars. I think it was overall. I mean, yeah, local currency returned quite a bit last year, but you know, I think hard currency overall takes out some of that. FX volatility. In general, though, are you going to rinse and repeat? I mean, you don't know, but this is still a very, very attractive market for fixed income where yields are sitting now. You're going to get yields moving around, but it's a great market for fixed income. Global co-head of high shares fixed income. It's got to be the easiest job in the world. The money's flowing. It shows us like, too much. I mean, come on. Talk us about just the ETF. Where do you think we are in that kind of evolution? Because Tom and I grew up with a mutual fund one in Boston, gone to Boston four times a year to see our mutual fund clients. Do you have lunches with ETFs? Do you want lunch meetings? Like in mutual funds? I mean, yeah, we have lunch meetings. Okay. So what's to say? But are we in the early stages or the weekend? Yeah, no, very early. I mean, so we're, you know, if you look at the global bond market, we're less than 3%. Really? Right. So, you know, we are far behind the curve in terms of equity ETS versus equity markets. Bond ETS still have a long, long runway. Really? So I think we're just now, you know, we're in early innings. It's a fast river, but it's early innings. Steve Leibbe, thanks so much with BlackRock. Seriously, thank you for the comments on Leader Fink, as they would say in China. Steve Lippey is with Black Rock. Paul, I mean, it just wasn't the same with Alexis. I mean, I'm sorry. 80 to 50 Duke Stanford 71 to 56 Duke, Duke, California. SMU was close, 82 to 75, and now Wake Forest. And, you know, I mean, is it like the best season ever for the Dukes? Yeah, until we get to the March and then you need experience and we don't have experience because we have kids. Everybody's 17. It's like the Montreal Canadiens. So it happens every single year. We win the recruiting wars. We win the regular season. But when it comes to March, it's a tough time. So maybe we'll see how these guys play out here. I feel the same way about the Montreal Canaanists. There's no one over. I said, Cooper flag at Madison Square Garden yesterday? Phenomenal. Oh, listen to you. Lisa, can we get Sweetie's life? Stay with us. More from Bloomberg's surveillance coming up after this.

Harness the power of Bloomberg Intelligence every business day. Hi, I'm Scarlett Fu. And I'm Paul Sweeney, inviting you to join us for the Bloomberg Intelligence podcast. We bring you deep dives into the company's moving markets from stocks like Apple, Nvidia, Microsoft, and Alphabet, to private companies in the news like Open AI and SpaceX. Listen on your way home from work to catch up on the analysis that keeps you ahead of the competition. Subscribe to the Bloomberg Intelligence podcast today on Apple, Spotify, or anywhere you listen. 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. Michael Darda. He's just, just outstanding. I can't say enough about his use of economics folded into market analysis. He's managing director, chief economist Roth. And we're thrilled he can join us this morning. Michael, you and I go way, way back, and I would suggest this geopolitics has a different color to it, the tone of Mr. McCraugh at the meetings of the World Economic Forum, the tone of stub of Finland. How do you synthesize that into your economic and market analysis? Well, Tom, I mean, it's really difficult to look at geopolitical risks and translate them directly into earnings trajectories or even, you know, what happens to financial markets. It's certainly a unique time in history in a little bit of a nervous time because equity market valuations in the United States are quite high, just above a 22 forward multiple. That's where we started 2025 and ended 2025 with quite a bit of volatility in the spring of last year. So that's really the question. I mean, all of these moving parts, whether they're domestic disturbances or international ones with high expectations, how does this all come together as 2026 unfolds? I essentially worked all weekend, folks. A major shout out. William Rhodes. in Project Syndicate writing a blistering essay on the moment at hand, Paul. He's 91 years old. We say good morning, Brown University's Bill Rhodes. Michael Dardy, you've got the single sentence of the weekend. No, 7 to 8% nominal GDP growth is not a good idea for the next Fed chair. Why does the next Fed chair not want China GDP? Well, Tom, you know, straightforwardly, because we don't have a supply side of the U.S. economy that can grow five or six percent. And so if you have total aggregate demand, which is what NGDP is, total nominal spending, growing at nearly double-digit rates, you're going to have very high inflation. And we just went through that in, you know, 2021, 22. And the American people hated it.

So I'm not sure if that was a, you know, a bit of a miscue or misstatement on the part of the Treasury Secretary, but those kinds of numbers would be highly inflationary, in my opinion. Even if you're optimistic on AI and productivity, you know, we are getting a little bit better productivity growth in this cycle versus the last, just over 2%, versus a 1.6% average in the last business cycle. But, you know, a seven to eight percent nominal growth handle on top of that you know take two percentage points away from seven to eight and that's your trend inflation rate that's way way way too high it's just preposterous frankly hey michael we're once again here today dealing with a frequent discussion point which is tariffs this time maybe with our friends over there in europe here how do you kind of frame out some of that given our experiences from april last year You know, it's unfortunate because this has been so chaotic and it's creating a lot of business uncertainty. I mean, the U.S. economy absorbed a 100-year tariff storm last year brilliantly, largely because of the actions of the Federal Reserve. They kept nominal growth almost perfectly stable just above 5%. So the slowdown in the real economy. was minor, but there was a fairly significant cooling in the labor market where, you know, private sector job growth actually was cut in half last year. And we think that owes largely to the uncertainty spike last spring. And, you know, tariffs, if they're chaotically applied and you have all this uncertainty and, you know, there are legal questions about about this as well, just not helpful. I mean, the U.S. economy has really been. brilliant in coming through these shocks. Fed Chair Jerome Powell after obviously stumbling in 2021 and 22 with NGDP that was way too fast. I mean, he's had a brilliant save here and has guided this soft landing incredibly. Really, it's a historic. situation we've never seen before. Maybe, you know, the closest parallel would be the Treasury Fed accord of the early 50s, where we came off of high inflation, high nominal growth and into a period of stability. But that happened under quite different circumstances. So the Fed has been brilliant here with a lot of shocks and perturbations and the supply side of the economy in particular. And what thanks does he get? Justice Department criminal investigation. I mean, it's shameful. So where do we go here, Michael? I mean, if you're the Fed here, I mean, the data, you could make an argument that they should just sit pat here, but the market's pricing in maybe two rate cuts this year. Yeah, Paul, great point. I do think the Fed is on hold here until further notice. What does that mean? If we look at when the Fed was cutting rates in 2024 and 2025, those cuts happened after the unemployment rate started to move upward in a persistent way. And just recently, we had some more stable numbers for the unemployment rate. It did rise modestly last year.

And so I think they're going to be looking really closely at labor market. Slack is a proxy for whether the economies are growing above or below trend. So if we kind of just flatline here with the unemployment rate, they're going to be on hold. Marker, Dr. McGrath, thank you so much. Stay with us. More from Bloomberg surveillance coming up after this. Follow the money in the world of sports every week on the Bloomberg Business of Sports podcast. Hello, I'm Randall Williams, join Michael Barr, Vanessa Podomo, Maglione, and me as we take you inside the deals, decisions, and innovations that power this multi-billion dollar industry. Plus, we'll speak with executives, athletes, and visionaries that are transforming sports across the globe. Subscribe to the Bloomberg Business of Sports podcast on Apple, Spotify, or anywhere you listen. 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. Lisa, you know, Paul was sitting there at the bunker. He's got the rum punch rocking at 10 a.m. And he's going, is there a time change with the Rubik? Yeah, they're an hour ahead. They're an hour ahead. Yes. How confusing. Exactly. And, you know, he's like, I miss newspapers. That's what he was thinking. Lisa Mateo with the newspapers. You got it. Okay. So here you go. Your daily dose. So this is a look into the labor market for top business school grads. This is in the Wall Street Journal. And they say they're having a tough time landing jobs, even considering taking pay cuts. They're saying it's taking them months to land except offers. There were some rebounds for some of the elite programs like Harvard and Columbia, but hiring it a lot of still those top-tier business schools still below pre-pandemic levels. They gave an example, like Georgetown University School of Business. Some of them still looking for work three months after graduation. It was up about 16% from the year before, so more of them having a tough time finding a job. The reason why, well, Georgetown is saying basically more than half of their graduates were international students, so visas can be an issue. But the Washington, D.C. labor market. It was flooded. You had a lot of federal cuts, so they're having a tough time finding jobs because so many more people looking for jobs. AI also an issue. They're competing against candidates who were laid off, like from that exact position. And yet, there's some are changing career paths. They're looking for pay cuts. You know, I look at this, and I guess it's cyclical. Like there's just times where it ebbs. But you wonder, Paul, is this time different? Is this like just, there's a whole field? What's happened in having sat on the board of the Duke Business School for 12 years, the business school is changing big time. If you're not a top top program, you're really struggling. So a lot of schools, major schools like Wake Forest have shut down their daytime programs in general here. And there's lots of. one-year programs that are supplanting the MBA. So it's tough out there because, again, the economy's generally been pretty strong and people have jobs and they don't want to step back. They're saying they're trying, like they're trying to increase networking efforts, but also train them in AI too before they graduate.

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