Factors Driving Equity and Bond Investors amid Uncertainty
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Bloomberg Audio Studios. Podcasts. Radio. News. 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. We start strong today with Amanda Lynam. She's a BlackRock investor.

as you look at the fixed income space. Let's just go there with the real yield. The real yield is the inflation-adjusted yield. There's different ways to measure it. The one I use is 1.92, well in over 2%. Why is the real yield coming in? Is it a growth prediction? Good morning. Thank you for having me. I do think that's exactly it, Tom, a moderation and growth outlook for the U.S., so that real yield is coming in.

And I think that makes sense. When you listen to corporate earnings calls, even the ones that have occurred over the past week, there's a significant lack of visibility where these corporates can really see forward. They're having a difficult time disentangling what is front-loading of demand, what is real demand. Many of the consumer companies are expecting to be mitigating tariffs for the next few quarters.

But I think there's a debate that is happening both internally and I would say externally where the market is saying, well, the hard data hasn't yet caught down to the softer sentiment data, so maybe it won't. Maybe that moderation won't happen. We think that that's actually just a matter of time. The hard data will actually catch down to the soft data, but we shouldn't expect it to happen imminently.

I got the 10-year Treasury. Boy, we're back down to 4.16%. Everything's coming in. Holy cow. I mean, where do you think we end the year here? Well, I think our two, I would say, more higher conviction assumptions are for steeper curves and a rebuild of term premium at the long end. And so really, when you think about the long end, the drivers there are budget deficits, concern about the fiscal situation, possible increase in inflation expectations over the long term.

at the front end we actually think the fed has a more constrained reaction function because inflation is just already above target and is probably moving higher still so we don't expect the fed to be cutting preemptively we expect that they will actually need to see real deterioration in the labor market probably not this friday but over time it's really going to be that visible inflection in the hard data that will allow the fed to cut they may start with a 50 basis point cut right

Right. That's not out of the question. It's not out of the question. But I think as it relates to the Treasury market, steeper curves, a rebuild of term premium at the long end and actually kind of pushing back against market pricing. Although I will say market pricing really isn't reflecting a full cut until July. Amanda Lynam is so intimidating, folks. I have to have a logarithmic chart up here just to calm before I go to her. So I did the Bloomberg chart.

Total Return Corporate Index. And I think it's greatly unknown by people that the bond hemorrhage that we had a number of years ago, price down, yield way up, has really been a bond recovery here. What has led the recovery of

of price up, yield down in bonds. - So two things, one, that's absolutely right, and the higher risk-free rate, the higher yield just compounding over time and boosting those total returns has really helped. That's been a big-- - Just capturing the yield. - Staying invested, capturing yield. - She read the yield book, Sydney Homer, cover to cover. - So staying invested, capturing that higher yield that has been compounding. What has been really more striking to me is if you disentangle the corporate bond market into the subsets of quality,

High yield pockets of it have outperformed investment grade on a total return basis year to date. And then even more interestingly, the triple C pocket of the high yield market has outperformed the S&P 500, the NASDAQ 100, and the Russell. And so the lowest quality portion of the high yield market, despite all of the growth concerns you mentioned at the top, has actually been outperforming the equity market on a total return basis year to date, which I find to be really interesting. So, I mean, sure.

Should we still be thinking about taking credit risk here? Yes. So I say selectively is the key point. So if you are an investor that is constrained to the investment grade market, right, you really can just buy investment grade paper. We like moving down into the triple Bs, that low end of the investment grade universe. If you're more unconstrained, you can really go anywhere. We like dipping down into the high end of high yield.

That double B factor. What we found is that you're actually not giving up that much credit quality by dipping into the high end of high yield versus triple Bs. Those leverage metrics have actually converged. I mean, can someone actually go out and do that? Yeah, they can. So, for example, the yield on the investment grade aggregate index is above 5% at the moment. The yield on the high yield index in aggregate is around 7.8%.

So there's still a meaningful difference that you're picking up by kind of crossing into high yield territory. Why is that important? Given the volatility in the treasury market that you mentioned, yes, we're lower on yields year to date in the treasury market, but it's been volatile, as you know. Picking up that incremental spread

staying invested, letting that compound will boost total returns over time. So we like dipping in selectively into the lower quality pockets of the market. We would not, however, importantly, be chasing all the way down into the tail of the market, into that triple C pocket. You really need to go back to basics, do real credit work. This is a really challenging environment dynamically to invest. Are there some...

Industries that screen better for you guys these days? There are. So we've been favoring domestic-focused services sectors. So that could include things like insurance, banks. Banks are a massive part of the investment grade index. And they issue, like they...

Release earnings on Tuesday, they issue on Wednesday. Yes, and they tend to front load other issuance earlier in the year. Historically, that's the seasonal pattern. The new issue market is wide open and investment grade. I know you've had conversations on the debt capital market side. So we do actually like that. I would say parts of even telecom, services-based, domestic-based, they're not importing goods across international waters and dealing with ships and trade policy. The one thing you do have to keep in mind, however, is that

all of these sectors would be impacted by a downturn in growth. So a high yield ETF for retirees, they're going to pop 5, 6, 7% yield. Great.

what's their price risk right now? What would you say to grandpa and grandma right now? Actually, I would say the price risk in high yield is less than the price risk in investment grade because high yield tends to have shorter duration. So if you do have that sell-off in treasury yields that we expect, that steeper curve, then you would have less of a price impact in that shorter duration pocket of the market relative to the investment grade portion. So again, that's why we like moving selectively down in quality.

Paul, one year trailing. I'm looking at just a given ETF with a superior Sharpe ratio. 9.1% return. Yeah. I can live on that. Nothing wrong with that. I'll tell you right now. It's almost like my New Jersey municipal bonds. That's almost as good as a triple leverage to all cash flow. Exactly. Without the intended fees. Exactly. Red headline crossing the terminal here. Ukraine ready to sign U.S. resources deal as early as...

as wednesday we'll have more reporting coming up that's today we'll see how that goes so amanda

What's the BlackRock call on this economy here as you think about credit research? And are you guys thinking that this economy has got some real headwinds here? Two things, I would say. A more challenging growth inflation mix, unquestionably, in the U.S. So lower growth, higher inflation. The magnitude has yet to be determined, largely driven by what is the off-ramp for trade policy and what are the positive offsets, for example, tax cuts. We have to consider the totality of the policy package, but absolutely.

Absolutely expecting more challenging growth inflation mix. I think the recovery in risk assets that we've seen over the past few weeks is more of a temporary reprieve. We don't think that we're out of the woods quite yet. High yield spreads, for example, have retraced over 40% of the widening since mid-February, but we still don't really have substantial trade deals locked in at this moment. So I think...

we are expecting for periods of volatility. That will be something important to monitor. I would say importantly though, Paul, recession is not our base case across the platform. So really a slowdown in growth is what we're expecting, not a severe downturn. - What does BlackRock see that people are doing with their money?

I would say using periods of strength to reposition portfolios in a more defensive way, but it's not defensive, just generic up in quality. It's really underwriting what companies and sectors can navigate this period of uncertainty. A lot of idiosyncratic

credit work, what are companies actually saying about the impact, bracing for a slowdown in consumer spending, higher inflation, again, not relying on bonds to be the ballast in the portfolio. So if that's a structural low yield, price up, yield down, that means new issuance takes off, right? Well,

Well, I would say yields are lower on the year, but still structurally high. I think the driver of corporate issuance is going to be CFOs and treasurers taking a prudent approach and continuing to pre-fund years in advance. I remember during the financial crisis, some companies were shut out of the market in 2008 because they waited too long to issue and they were forced to repay, you know,

bonds with cash on hand, CP. So I do think actually the driver of issuance is corporate behavior and conservatism. CP is commercial paper. Yeah, I know. I got it. I remember the first days of the pandemic, the cruise lines rushed into the marketplace and were selling debt. Boy, were they smart because they knew those ships were going to be tied up for a while here. Talk to us about credit quality. We've never, it seems like a long time since we've had to worry about

Credit quality, there's so much stimulus money into the economy. Is credit quality something you guys think about? Of course. I would say there is deterioration in credit quality. It's just happening at the tails of the market amongst the smaller issuers, so it's not impacting in the index level. For example, there's a subset of the leveraged loan market where leverage is above seven times.

Triple C's and high yield interest coverage is already below one time. So they actually can't cover their interest expense. And importantly, they're doing well. They're doing they're doing better. They're doing perplexed. Yes. But I think the thing that I would be monitoring, Tom, given given just we're always monitoring risks.

That's before we've had deterioration in the hard data. So you have these tails in the market that have already deteriorated, but before we've seen the deterioration in the hard data. How have ETFs changed your world? Significantly, because it's allowed for risk transfer in markets in a more seamless way. I would add portfolio trading and algorithmic trading to that list as well. So actually, in periods of disruption, the risk transfer in the corporate credit market has become much more efficient.

And we've seen that actually investors can move risk in ways that they previously couldn't during the financial crisis, for example. So that's been a positive development in our view. And the liquidity is there. The liquidity is there. And you don't see shadows of leverage or risk. Well, the ETF product is more just a repackaging of a fixed income instrument. If you're talking about leverage in parts of the market,

For example, there are highly levered companies. Is that a systemic risk? Not an average. I love busting your chops. Can you come every morning at 7 o'clock? It is a wonderful wake-up. Amanda Leiden, thank you so much for BlackRock. Just absolutely hyperkinetic on fixed income, a huge value add.

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carplay and android auto with the bloomberg business app or watch us live on youtube looking and fixing them this hour we finished drawing with morgan stanley's jim carron who joins us now to get us to the top of the other gina martin adams on this equity market we'll do that at the eight o'clock moment wall street uh time jim carron it's not too early in this chaos

to ask what are you going to write Friday into the weekend? What within the Morgan Stanley sphere of fixed income are you thinking about?

Well, it's all about jobs because I think that's going to determine the trajectory. So our forecast, the economics team's forecast, I should say, is 135,000 jobs added, around 4.2% unemployment rate. Look, that might not sound like a dramatic change. We did recently get the JOLTS data. We are starting to see some softening in the jobs data, but we're not seeing a collapse in the jobs market.

So going forward, it's really all about consumption. How does a consumer handle potentially higher prices with tariffs and everything else? But we got a negative 0.2 percent Q1 GDP survey here at 830 coming up in 50 minutes. That's pretty moldy, isn't it?

Yeah. And, you know, Tom, I think the risk is that the number could even be weaker. So there's a lot of adjustments that really took place as of yesterday just because of the trade data that came in. You know, the deficit came in at record levels. So that forced all the Wall Street analysts to grumble.

reduce or downgrade their GDP estimates for today. And essentially what we have to understand is that a lot of this is coming from imports, meaning that companies have pulled forward purchases. So their imports have actually gone up. When you have high imports versus exports, that actually subtracts, that's a negative, what we call the net number is actually subtracting from GDP. But there's a problem, Tom.

The problem is that what's also not being calculated is that these things should balance out. Not only if you have really big imports, you should then start to see inventory build and you should also start to see spending and consumption on those imports.

That's not yet coming into the equation yet. There's a quirk in the timing here. So it's almost like you're going to get the negative aspects, but you're going to miss some of the positive. And that's what's giving it a big negative number. When in doubt, Paul, I go to, this is Bettina Dalton with Fidelity years ago, domestic final sales. Okay. That's where I go. Sort of interior, it's inside statistics. I'll try to find that number. I'm not as good as McKee. Okay.

It takes me a while to find. He's got it all. He's got it like three seconds. It takes me an hour. Hey, Jim, we've seen the stock market bounce back a little bit off that initial sell-off on the tariff worries. We haven't seen the dollar bounce back at all. Why are people so sour on the dollar these days?

yeah you know i in my view is that the dollar is going to weaken but it's not because of safe haven status or anything like that i mean i listened to georgian kovas earlier my former colleague and friend um and i think he's right about this look the first thing that we have to understand is if you go back to 2010 post financial crisis there was an onslaught of investment that came in from foreigners into the u.s markets which means you have to buy the dollar the

If you look at the Fed's broad dollar trade weighted index, a very good index and measure to look at the dollar, that index shows a dollar appreciation since 2010 to the end of 2024 of about 40%.

which means that the dollar is very expensive and people are overweight foreigners are overweight U.S assets what we're seeing right now is a rebalancing we're not seeing a sale a liquidation of dollars a loss of faith a loss of confidence none of that is really taking place what you're seeing is people who are overweight U.S assets now we have tariffs and what have you and U.S assets equities are kind of moving sideways people are repatriating

And what that means is that the dollar is going to weaken, but from very expensive levels. And I think that's an important caveat to actually make in this whole story here. So, you know, look, I do think the dollar is going to weaken, but I don't think that it's cause for alarm. I think we have to put this into context. So again, Jim, so real quick here, what's the number one issue here?

You're talking with clients these days at Morgan Stanley. So what does it mean when the dollar starts to weaken like this, right? What does it mean when it starts to sell off from very expensive levels? It means that bond yields have to make the adjustment. So effectively what it tells us is that longer term bond yields will not go down as much as what we had previously seen over the last 15 years.

So a lot of the relationships that we look at, like, oh, the equity market's down, how come bond yields aren't down more? Or why isn't the bond market supporting the equity market as much? It's because this rebalancing is taking place. So what we're telling clients is that when you start to construct a portfolio of fixed income and equities and alternatives, and you put everything together, essentially we have to understand that

bonds will not hedge your equity risk like they did in the past, at least not longer duration bonds. So what we're telling clients is that shorter duration bonds, front-end bonds, two-year yields around 365, I mean, you know, that's being controlled by Fed and Fed policy and expectations. Shorter-term bonds are actually

But longer term bonds are going to be a little bit more risky and we see a yield curve steepener. Jim, too short a visit. Got to do it longer next time. Mr. Karen is with Morgan Stanley. Thank you so much. This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at 7 a.m. Eastern on Apple

carplay and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa, play Bloomberg 1130. George Kankalvis joins us, head of U.S. Macro Strategy, MUFG Securities Americas as well. I love this where we have Amanda Leinem and Jim Caron scheduled and you're with us.

Is everybody on the same page in your world or is within the daily grind of the fixed income industry? Is there a lot of debate out there? - There is, and you mentioned earlier, there's dispersion everywhere. There's dispersion around economic forecast, views, and it obviously leads to some volatility every so often.

So, George, actually, first, Lisa, George is a Rutgers grad. I mean, you guys are everywhere on global Wall Street. Rutgers State University of New Jersey. George, what are we doing here? I mean, I've got so much uncertainty out there in the marketplace. I've got equity markets really don't know which way to go. I've got the dollar on for sale.

Where are you suggesting your clients really focus these days? Because this level of uncertainty, it seems like it's going to be here for a while.

- Absolutely, and look, we tailor more towards institutional investors and we're obviously facing these large investors. And the concerns, it kind of naturally forces people to kind of de-risk and really get defensive. And we have been advocating for a long time, buying the dips in the two year, I know it sounds boring, but it's been like a really simple trade that's worked.

I do think that we are differentiating amongst fixed income, high quality, in many ways, like in Amanda's last segment, which I heard, which she did great, this kind of barbelled approach that you could, in an odd way, high yield has become better quality over time. - Right, wow. - In terms of rating, it's shorter duration, and less volatile, but there's always that point where you don't know about the macro. If we enter an inflection point,

All bets are off, credit does become problematic. - Are you guys focusing on, do you guys think the recession, is that in your scenario? - See the thing is, we're all debating are we accelerating to kind of get into this downturn and then pop back out? I mean, a recession usually obviously has negative connotations and people are always concerned about that it might linger.

If it's just kind of like a technical recession, because we're seeing all these oscillations within these large segments of the economy, people might look through it. And many investors that I talk to are saying, well, you know what? It's going to be a blip, so why should I get defensive? You forever have been just wonderful about the foreign appetite for full faith and credit U.S. paper. I should point out, folks, MUFG is a wonderful Japanese entity. What do you see...

of the confidence to buy full faith in credit. - Yeah, look, so this has been for years now, especially in the higher rate environment, it's become much more tactical. You have to remember that a lot of these investors overseas have been legacy holders for decades. - Yeah. - And then they naturally have a role to roll over.

The question is, are they adding, right? And what you see in the public data and what you kind of can witness, they're much more traders. They're more tactically moving things in and out. They're actively trading the news flow. We've got to stop the show, folks. This is really, really important. There's a gajillion dollars of full faith and credit U.S. overseas. It's like a lead brick. It's staying there, right?

I do think that, look, you can't square the circle. If we're trying to fix our trade deficit, but we're running large budget deficits, either U.S. savings have to go up a lot and you have to force U.S. investors to buy all the treasuries. I mean, it has to kind of...

I hate to tell you that I remember when that was actually the case. But what's important here is if they, or if MUFG sees them walk away, doesn't that by definition price down, yield higher? Look, I think we're not losing the support of the foreign investor. And I know we get into these moments where we're scared about de-dollarization, we're worried about the perceptions about how people are viewing policies out of the US.

There's still the biggest reserve currency. It's what anchors all these central banks around the world is still the dollar, even though it's been coming down over the last 15, 20 years. It's not a new phenomenon. So you just don't abandon it overnight.

You can't just like walk away from the holdings of treasuries and dollars. There's a lot of hysteria, Paul, about this. I try to stay cool. One day, Japan or China is going to walk away. And the others, where are they going to go? Where are they going to go? Exactly. That's my point. And that's what people tell me. All right. George is with MUFG. That stands for Mitsubishi UFJ Financial Group, a major Japanese financial group. You're better than most. Headquarters. Deep into the room. He's a Duke intern. Exactly. Now they're headquarters in Tokyo.

How do the folks in Japan view the U.S. market these days? I mean, I'm sure you have. You do talk to your clients. You do talk to your staff. I travel to Japan a lot. And you travel to. How are they viewing the U.S. these days? I think that there's a view that the medium term is still a great place to invest in the U.S.,

It's more about perhaps we got over our skis on the US exceptionalism and unhedged. It's just easy to be long US everything. And now it's more about being more selective. Let me ask you the question that we asked Amanda Line and we'll probably ask Jim Caron that when he comes up here as well, as we celebrate the coupon. How have ETFs changed George Kankal's life?

I mean, I think if anything, it broadened out like the ability to express views. Massively. Yes. Without doubt. And it's an efficient vehicle and there's a lot of things that go along with it. But within it, you know, there's been a lot of just automation technology. It's really made fixed income even more, more transparent. And it's, you know, for times it was very opaque being in fixed income and you had to like do a lot of work and you still have to do a lot, a lot of that sort of due diligence and credit work. But I think it's kind of, you know,

you know democratized fixed income i mean paul would sit there with a budweiser and he can't cans and he can and he'd have the stand by your horse yeah and you'd have the the and you have the standard and poor's blue book open because you know besides immunities you'd want to take a look at a boise cascade 10-year piece those days are gone i mean you just buy the boise cascade etf or whatever now yeah so what are you doing on the credit side george i mean credit risk

How much better is it going to take here? I am, again, more cautious by design around that we think that we are heading into a slowdown. And the tariff news and the shock that we just went through just exacerbated that. And look, the weaker credits have been exposed.

And I do think that there is going to be credit risks starting to surface in the second half of the year. It's going to be, you know, even if we try to pivot and the economy avoids like a full-blown recession, I think the damage is done. Fabulous, George. Thank you so much. George Kankavas with this Mitsubishi...

They're in Japan. U F G. Yeah. Trading as Schwab is now powered by Ameritrade, bringing you an expanding library of education with even more ways to sharpen your trading skills, access new online courses, insightful webcasts, articles, engaging videos, and more all curated just for traders. Plus guided learning paths with content designed to fit your unique interests.

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This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at 7 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal. This is a really important conversation we're going to have right now because it's something that Paul and I, we just simply don't do enough on, which is loans, high-yield businesses,

It's things with a coupon that stays there, sophisticated stuff. He comes out of PIMCO after a tour of duty at Harvard and wandered over to Chicago to look at a lot of math there, a lot of microeconomics, which helps out. Cynjibar and Jones is right now, and he's with Beach Point. We have to describe that. Scott Klein, what's Beach Point?

Beach Point Capital is an asset manager based out of Santa Monica, California. Life's tough. You need someone there to fill the coffee cups for you.

Well, you guys should be proud. It seems like you're doing weather right out here these days. So it's very nice to be here, and thanks for having me. Actually, yesterday I sat on the deck and said, oh, my God, it's like California is for 160 days of the year. We don't do enough on this. Explain to our audience what a loan is in your world. It's not like a mortgage, is it?

No. So, I mean, we're talking mostly about senior bank loans in the form of lending to different companies in both the public and private corporate credit markets, but all forms of credit, really. And Beach Point traffics across all of these asset classes, but primarily in credit and primarily in leveraged credit. And so a

A loan is an instrument that sits at the top of a company's capital structure. It usually comes with some form of security and collateral that backstops us as lenders, and it comes with some form of protections. And so it's something in this environment with a lot of volatility that we like a lot in terms of having in our portfolios and performing well in addition to

all of the underlying fundamentals that support it in terms of the corporate issuer base. So what are you finding in your market here? There's a lot of uncertainty in the marketplace. We see that reflected across financial markets. Where are you seeing it in the high-yield market and the leveraged loan market? What's happening today? Sure. Well,

These markets are really solving for two things, really. The first is the first order impact of tariff exposure. And so you've seen those types of credits that have direct import exposure and predominantly to China sell off the most in terms of price. The second thing the market's solving for is what is the economic uncertainty that we are already experiencing? We have some distortion today in terms of GDP data, but how long will that last?

and how will these corporate issuers fare and navigate this environment? And so you're seeing much higher dispersion in the market. This is not dissimilar from other asset classes where you're seeing certain sectors trade off more so than others, certain credits. To us, we think this is the beginning of a really nice opportunity. - When I was at the Chase Manhattan Bank, I was doing leverage lending to TMT companies. I'd do a $500 million loan, I'd syndicate $480 million off my books

to guys like you. Although I don't remember ever being on...

Santa Monica's marketing alone. But so in the senior secured, highly leveraged loans, is that something you guys look at? Absolutely. Yeah. We look at senior secured, levered loans, as well as high yield bonds. I mean, those primarily comprise the leverage credit universe and they can come in both public and private flavors. Are there certain industries you guys like today? Does anything screen better one or the other?

Sure. I mean, there are some industries that we think will have more resilience through this environment. They don't have import risk. They may have some cyclicality attached to them, but they have contractual revenues, so they have a lot of visibility into the future. And they're the ones who are not necessarily softening their outlooks when they're reporting. Yeah.

Cedric Barnum this morning, folks, for a nice lengthy conversation. Here he's Senior Bank Loan Portfolio Manager, Beach Point Capital. Here he's driving the market lower. We are at negative 70 now, negative 79 on futures. VIX out two big figures, 26.48. The 10-year yield, you know, I was making jokes about it, but...

You know, I'm not there yet. The 10-year yield is 4.18%. I'm not in a 399 watch. I look at the number one question. Paul's been great on this. But just the prism, and particularly in the crucible of Southern California, of Pacific Investment Management Company, of TCW, the Capital Group, Amundsen, all of the finance out there, how do you people look at private credit?

I mean what is your window into private credit from the adults out in Southern California? Well we at Beach Point invest in both public and private credit and

What we've observed in the growth of that particular corner of the market is that companies have a choice. They can finance themselves in various ways and there are different, I would say, puts and takes for doing so in either public or private. But you can't ignore the amount of credit creation that's gone on in the private markets. And it has scaled at a time when we have not had a prolonged depreciation in asset prices or a real credit freeze.

Most private credit funds have built in defense mechanisms in terms of not marking to market, good liquidity, a very sticky investor base. All of these attributes are very positive to be able to see through this particular environment. Okay, but this is important. I don't trust mark to market. How do they do a legit... I mean, let's take it even over to private equity. Is it like VC where they're making it up as they go? Or is there a legitimate mark to market?

Well, the pricing services would provide legitimate pricing for those assets. The danger comes in just that, you know, for example, in the environment we're in, the more prolonged it becomes, the more damage to these companies' operating ability and their profit margins would occur. And as that starts to erode, you know, perhaps some of those prices don't fully reflect the underlying asset base. Do you have in your head an average duration of private credit?

Well, a lot of private credit is floating rates. So in terms of interest rate duration, it's not going to be sensitive to moves of the 10-year, for example. It's like almost European. Right. But what they do have, if they were market-to-market, is spread duration. So they are going to be sensitive to interest rate duration in terms of the reaction to risk assets in the credit space to whatever is happening in the economy as it relates to the risk-free

Did you understand what he said? I got it. I had no clue. I went to the Chase Manhattan Bank credit training program. I had no clue. You survived. I forgot more than this guy knows about credit. That's true. So I go to the Beach Point Capital website. Very nice website. The intro video...

is of Manhattan. We have a New York office. Yeah, but you're L.A.-based. You can't find something in L.A. So are you guys at L.A.? Come on, cut to the chase. Don't give me this New York City, Manhattan, Vista stuff. Are you guys three days a week at Michael's? Is that what you're doing? We're not doing that at all. A long lunch is three days a week at Michael's? These are serious credit people over there. How do you guys think about credit quality? We haven't had to worry about credit quality for, I don't know, 15 years since the great financial crisis.

Is that something you're telling your analysts? Hey, guys, go back to your models. Start stressing them out a little bit. How do you guys think about credit quality?

Yeah, it's a great question and it's really where the proverbial rubber will meet the road the longer this goes. And so the way we look at it is, first of all, we're coming off of the inflationary and rate hiking cycle which allowed companies with pricing power to improve their margins and that's what really fed into the solid credit fundamentals that we have today. And so the risk is that that profitability starts to come off in a stagflationary environment

And that's going to start to erode credit fundamentals. That's when you start to see trouble increase, defaults start to increase. And so the way we approach it is we take everything from the macro level down to the micro level. We want our analysts to be calling the management teams of the issuers in which we invest regularly to get their outlook, what their color is, and to stress test their companies and their business models

for a variety, a range of outcomes that we can foresee. For Global Wall Street, great conversation. We continue with Sidney Bowron of Santa Monica. I mean, can we just go there? Forget about this New York stuff. I want to point out three tweets in a row, back to back. Lizanne Saunders, Zandy of Moody's, Furman of Harvard.

Lizanne Saunders, net exports subtracted nearly five percentage points, most in history. Zandi of Moody's, the decline in GDP overstates the weakness, but it is weak.

Professor Furman of Act 10 at Harvard, not the most exciting day today, but private wages, X incentive compensation up nicely, a slight bump, but taken together, ECI is still a downward trend. Cynthia, did you take Act 10 at Harvard? Did you survive? Was it Mankiw or Feldstein?

So I did, but then I also went to the University of Chicago Business School, where I also had a concentration in economics. Way too much math there. So what do you think this Federal Reserve is going to do here? What are you guys at each point thinking about this year? I'm not sure how much they can do, given some of the things that are happening from a policy perspective. I'm not really sure how much they can do. What are you guys discounting?

Well, we would agree with that. We think that, I mean, similar to the last sort of, well, during the rate hiking cycle in 2022 and 23, the Fed was effectively given permission to raise rates because it was doing so into a strong economy and a very strong consumer base. And until, fast forward to today, the soft data translates into much weaker hard data, we would agree that the Fed, if they had their wish, would stay on pause. And so that's one reason why

On the margin, we like floating rate over fixed rate high yield, for example, because of that extra current income and carry that you get through this particular cycle. And so that's the real tension, though. What does the Fed do? Which side of their dual mandate do they attempt to resolve? And we think it's going to be still sensitive to inflation over the near term.

until we get data that shows that, you know, we're not really experiencing the same inflationary pressures that we did last time. One final question, and this is really important, and we talk to the L.A. port people all the time. I mean, you guys in Southern California, and the absolute crucible of this trade war is L.A. and Long Beach as well, and it's just...

As simple as, is there a belief at Beach Point that we just get back to normal after this trade war? Or is this a new, we're going to do this for Thomas Kuhn at Harvard 49, I think it was. Is it a new paradigm? Yeah, that's a great question. We would say that

it kind of depends on the cohort of the market you're discussing. So it is a new paradigm for smaller companies. They don't have the bargaining power. They can't easily diversify their supply lines. And so if this really is even a 90-day pause on tariffs, but then it recommences, some of those smaller types of companies are just going to have a lot of difficulty in this new economic structure that we've established. One final question. When the Harvard Club of Southern California

Gets together at Sheva's Ravine for the Dodgers. Are you guys sitting by the dugout?

We will sit wherever we can in Dodgers stadium, especially when they're playing the Yankees. You're up on Mookie Betts. That's right. You're just out there. We like to cheer on Mookie. Red Sox, dumbest trade in history, right? Go away. Very painful. Well, LA benefits from those types of trades. Don't be a stranger. Next time, bring Jerome Schneider a pinball with you. We'll have the two of you on here on short, short paper and long paper.

This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at 7 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say, Alexa, play Bloomberg 1130. Yeah, I look at Ritholt's book, How Not to Invest. Do you understand Amazon's put that little amber goldy number one bestseller on it? Has it?

Oh, I didn't know that. He wakes up every morning and he buys 50 bucks, just a goose of numbers. Kelly Cox is Reddit cover to cover. She joins us right now working as Barry's chief market strategist, riddles wealth management. Let's just cut to the case, Kelly. Part one, bad ideas. Section two, media madness. How does our audience interpret

market punditry given this chaos? This feels like a loaded question, but seriously, you have to watch your media diet here. Barry is one of the biggest disciples of this and, you know, honestly, read Barry if you haven't. But there's a lot

of noise out there. I think I'm understating that. But you have to also remember your timeframe. Look years and decades down the road. Many of us are investing for retirement. So as you process headlines, take them in, contextualize them, but ultimately remember that 90% of them aren't going to affect your decisions. Then why take them in? That's the arch question. I'm as guilty of this as anyone. You got a three-year, a five-year, a 10-year perspective, and I'm watching Bloomberg headlines.

Tom, you're talking against your own book. I'm surprised. But seriously, you know, why take in the short-term madness if I got a three-year perspective?

Well, we're all human. A lot of this boils down to we're all human and we want to hear what's happening around us. That is natural. And I don't think that's a bad thing. I don't think you can tell clients and investors to just stop listening. That's like sticking your head in the sand. That's impossible. We're human. If you get into Duke and Chapel Hill, you choose to go to Chapel Hill, right? Yeah, correct. That's what humans do. That's what humans do. Just last week when I was down at Duke for reunions, I drove down Franklin Street and Chapel Hill. There might not be a

prettier college town anywhere. I mean, it's unbelievable. I agree with this. Callie, so, you know, I would say for the last 15 years, tech has driven equity returns. Is that still the story, do you think? Well,

Obviously, over the past few months, they've driven returns in the wrong direction, which makes sense, right? When you hit bumpy roads in the stock market, usually what's done really well sells off the hardest. Tech is in a weird spot right now. Earnings expectations are high. Analysts expect tech earnings to grow an astounding 25% this year, which feels really high considering that tech is the most exposed from a cost of goods perspective and an international revenue perspective. So...

combine that with the fact that the ai story while still very real might hit some speed bumps here as well and you have to wonder if there are better areas to sit in to weather this market sell-off so how will you interpret microsoft's earnings this afternoon how does a general market strategist or our audience interpret one ginormous company's report i think there are two ways to answer this i am a bird's eye view strategist so i'm not i i

I look through earnings calls, but I'm not parsing through and making calls on individual stocks. That's just not the way we invest at Ritholtz. But of course, we're watching earnings. Of course, you know, you have to watch Microsoft earnings. Microsoft is one of the biggest stocks on the market. And I think it's an interesting bellwether right now, as is Apple, as is NVIDIA. A lot of those MAG7 stocks that we talk about because they are a part of this tech sector that is incredibly exposed to international, well, to tariffs and international catalysts. How do you use the VIX?

that's a fun question so the vix of course is the fear index it's the gauge of 30-day s p options prices a lot of people watch it as as a sentiment index i watch it as well um i think the vix has changed a lot because the options market has just become so much more complex so much more popular there are so many more options for lack of a better word to hedge positions and hedge around events so typically in sell-offs you see the vix spike and usually when the vix spikes

strategists like me say, okay, it's time to buy. I think it's a little more complicated, especially in sell-offs where there are economic cracks, which I expect to be the case here. I think it's an open window for long-term investors. You know, maybe think about being more opportunistic here, but I don't think at this point the VIX could mark the bottom of the sell-off. That's what I'm worried about. I haven't seen the emotion. No? No.

I just haven't seen the catharsis. I've heard people say it's been an orderly sell-off and those types of things. I don't know. But we did have the VIX well above 30 there for a while. So, Kelly, do the good folks at Red Holtz Wealth Management, have you guys changed kind of how you think about stocks, given that maybe this tariff thing is going to be around for a while and some industries and sectors will be more impacted than others? Has it affected your stock selection at all?

Well, look, we've had a lot of conversations around this. I think if you're a money manager and you haven't at least had discussions around what's going on, then you're probably falling behind. We haven't made any changes to our portfolios, but we are 30% invested in international equities. Okay, that's good. In our main equity sleeve. So we've always been a proponent of international investing. I think it's all the more important right now because as money moves around and money doesn't evaporate, remember it moves somewhere always, right?

You know, we think it could be looking for international sources, but so far no changes. And, you know, we build our portfolios so we don't have to change. Do you understand that you're 30 percent international? So Barry can expense a trip to Italy. Well, you got to take that one out with Barry and tell him I want a ticket. Is he insufferable now because of the New York Knicks? I mean, is he Josh, are you guys, have you medicated Barry? No.

We're definitely a Knicks office. That's something I've learned over the past year or so. And everybody's pretty excited. I don't get into the NBA. The Charlotte Hornets haven't been a part of the conversation for forever. But I'm happy for the Knicks and I'm excited because my colleagues are exciting. She's got some problems with the North Carolina Tar Heels basketball program.

Or the football program. Well, football's going to be, that's going to be fun. We have Chapel Bill, though. That's going to be fun. We have Chapel Bill. Chapel Bill, that's right. Is that what you call him? Yeah, that's his name. And his girlfriend. There you go. Be careful, Dow Youngman. I'm just saying. I'm optimistic. I'm cautiously optimistic. 20 seconds. What do you publish today? What's the lead idea you're publishing with within, you know, Dow negative 450?

There's going to be a lot of talk around stagflation. I've already written a lot about this. Agreed. Well said. I don't think we are quite there yet.

Obviously, the GDP data didn't look great, but there's still pretty buoyant demand underneath. And it's also hard to read data at the moment because of all the craziness. The GDP price index just screams depletion of some form. And I think that's what's spooking people because that's the worry in the background, right? Deepest economic trench you could be in. Lauren Summers, thank you so much for your coverage with David Weston on that. Larry, so maybe it's not a...

Huge stagflation, but nevertheless, it's tangible. Kelly Cox with his chief market strategist, Ritholtz, wealth management. This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts.

Listen live each weekday, 7 to 10 a.m. Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.