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Ken, I'll start with you. I know you're a "bull," but just this morning we got news that the private sector only added 27,000 jobs. We are seeing some of the largest institutional investors pull funds out of stocks. We saw what happened throughout this bull market. Okay, we also saw investors, particularly private investors, exit the market en masse last month .
the most this month, $44 billion outflow, and you should like that. So tell me why I should like it. Because it is a sign of pessimism. Well, pessimism always returns to the mean. The thing is, just think about it. If you take this employment data, you can focus on the negative if you want, but if you look at the European PMIs released overnight, with one exception, they all showed a positive surprise, and no one is writing about it.
But is this a reason to stay in American stocks ? Oh, there 's a better reason to stay in American stocks. A huge, huge, huge reason. Now think about it, because no one understands this. Okay, right now there's almost a 3% gap that you can drive a truck through, which nobody talks about, because I can borrow money at zero interest in Europe and use it to lend to my American unit with a currency hedge , and use it in America.
So, then I get the spread. I can borrow this if I want, with zero risk. I get almost 3% spread after I complete the currency hedging. And it's almost free money. And this is happening both from Japan and from the continent, not so much from Britain, but in very large volumes. And no one talks about it.
Money is flowing into America from abroad, financed from abroad on a massive scale. And no one understands this because of the difference between our short-term rates and their short-term rates. This is a very simple arbitrage operation, this mechanism is huge, and no one understands it. This is the reason why the US should feel good compared to other markets right now, because they are financing us.
You know, Ken, just now, Fed Governor L. Brainard told our Brian Chung: They're ready to adjust policy. As we know, bull markets don't die of old age. The Fed is killing them. So isn't the Fed slowly killing this "bull" market with this kind of rhetoric? I don't think the Fed is as important as people think.
Just remember what I said a minute ago. When they keep short-term rates high, it simply attracts capital from abroad. The global yield curve is important, not just the American one. The world is global. Here we see the opening bell of the New York Stock Exchange and NASDAQ. We saw futures rise for the second day in a row.
It looks like the Dow Jones will start the day with a triple-digit gain, up 137 points. Scott, what are you paying attention to this morning? Well, I will of course continue to monitor how the market reacts to what we heard from Jerome Powell yesterday. I was a little skeptical about the market's overreaction to Powell's words that we would support the expansion, plus 500 points.
Yes. And when you see such big moves up, or even big moves down, it's not necessarily a sign of a healthy market. But I have a question for Ken about this. What is your reaction to the drop in 10- year Treasury yields ? Is this an assessment of what investors think about the US economy, or is it more like what you were talking about earlier— the fall in European government bond yields, which is dragging down our performance?
Long-term rates move in parallel around the world. Some are a little more, some are a little less, but the correlations there are very high. And you used a word, Scott, that I think is the right one— "feeling." I completely agree that feelings are bad. I like it when people feel bad because feelings are moods.
You are scaring us. Ken, feelings are moods that tend to revert to the mean. The reality is that play is reality versus perception. And when perception is worse than future reality, markets rise. When future reality is worse than perception, markets fall. The indicators turn out to be better than people expect on a global scale over and over again, when they expect horror and then recalibrate to expect horror.
Well, the IMF just lowered its expectations for China today. So, are you happy about this? Yes, because the more often they do it...keep in mind, is everything okay in China? No. But China has implemented a lot of monetary stimulus, and monetary stimulus in China usually takes about six months to kick in.
The fact is that the IMF can lower these figures. They've already done it twice this year, and that was before we even got to the first phase of the big recovery after the drop in the fourth quarter of last year. The point is, has the IMF ever been able to predict anything? No, definitely not. You know, Ken, uh, about the predictions.
I've always considered you a long-term investor. You are always focused on the long term . Should investors be worried about President Trump winning the election because he is clearly taking a tougher stance on trade policy, which could undermine business confidence and may already be starting to do so ?
That's a great question. So let me go in a different direction. If you look at the history of third years of presidential terms since the creation of the S&P 500 index in the 1920s, they have been positive 91% of the time. The thing is, it's usually focused at the beginning of the year. We've already had a lot of that growth early on this year.
Usually the pace slows down towards the end of the year, and there is more excitement around the upcoming presidential election, which I think we already have quite a lot of. The thing is, we always have all these crazy people running for president, and then eventually we're left with two candidates, we get a winner, and we always somehow get a winner in November of an election year, and I predict we'll get a winner in November.
And what usually happens, if you look at the average course of the fourth year of a presidential term, it starts a little slow, and then it accelerates in the second half, when you go through the primaries, you get two clear candidates, and the market pre-estimates the outcome, because that's what markets do professionally.
Evaluates the winner in advance. Will Trump be re-elected? I have no idea. I think it's too early to know such things. The point is that I predict that the Democrats will have a candidate. I predicted, I'll bet on it, I'll invest in it, because you just look at the history of the second half of fourth- year presidential terms, and on average they're pretty powerful.
We've only had four negative fourth years of presidential terms in the history of the S&P 500. We've only had two during the third year of a presidential term. The last one was in 1939, when World War II was beginning. This is actually a good thing in American history. But let me tell you about another thing that Americans don't think about much.
Forget about these elections, because they are still a long way off . What just happened is more important, namely the elections to the European Parliament. We had five, eight of them before that. And in all but the very first case, the market was positive over the next 12 months because you get the same effect: the consequence of going from high uncertainty to low uncertainty, right?
And we know that the markets don't like it. But you know what I find ironic is that with all these tariffs, even if they were to slow growth here, ironically, it would force the Fed to do exactly what Trump wants them to do, which is lower interest rates. And wouldn't the market react positively to that ?
Well, lately, yes, the market has been tied to the Fed. Um , but I think that's not necessarily a constructive model , and ultimately what drives corporate earnings and stocks is how the underlying companies perform, that is, fundamentals. I will add something else to this discussion. I think investors should know that Union Pacific gave a presentation at UBS this morning.
They said their volumes were down 3%. This company is heavily dependent on Mexico. So if you are trading in this market, you are feeling quite confident because of yesterday's Fed statements. This is corporate America talking to you. Here is the impact of the trade war. That's it. So, how to trade now?
Should I stay fully invested in stocks, despite all these tariff disputes that seem to have engulfed the entire world? You know, we have been discussing tariffs since the beginning of 2018; and the point is that if you add up the total cost of these tariffs, and assume that they are all real and implemented (which they won't be), and if no one can circumvent them through substitution ( and some, by definition, can), you still end up with an impact of less than 1% of GDP.
GDP, which in the world is growing at 3% , is something that reduces annual growth by a maximum of a third. The fact is that I go back to my previous argument. PMI indices around the world are pleasantly surprising in the world's largest blocs. Even economic indices are positive and growing. In America, we just had this...
the world is not focusing on the positive right now. The world is now focusing on the negative. I like it when the world focuses on the negative. So the answer is yes. This is a " bull" market. It will become a "bull" market again. I don't know exactly when . Today? Who knows. Eventually, soon. Yes.
The fact is that people are too focused on the negative. Let me digress for a second , if I may. Yes, you have 10 seconds. Watch what Trump does with tariffs on Mexico, because I guarantee it won't be what everyone expects. We'll come back and talk about this another time.
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