Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Joining us now the one that puts Greek and Latin
Speaker 2: into our bond coverage. Robert Michael, Bobmichael of JP Morgan.
Speaker 2: How do the Greeks right now? The derivative Greeks play
Speaker 2: into what you do When you look at the quiet
Speaker 2: of holes in the market or renew volatility, maybe it's
Speaker 2: skew that you play into. How does a derivative space
Speaker 2: fit in?
Speaker 3: They're critical to what we do in the markets. I
Speaker 3: think so much of what you try to do is
Speaker 3: in the cash market, but there's limited bandwidth. Broker Dealer
Speaker 3: balance sheets aren't what they used to be, and a
Speaker 3: lot of the balance sheet in the industry sits with
Speaker 3: investors like ourselves, and we tend to own securities until
Speaker 3: we change our mind. So we're not in the market
Speaker 3: actively trying to change positions. You go in to the
Speaker 3: derivatives market to help you change the positioning of your
Speaker 3: portfolio or perhaps put a bit of a hedge on.
Speaker 2: Is there a a bot Michael and I think of
Speaker 2: Ian Lingotn at BMO Capital. You're saying we're going to
Speaker 2: see price up, yield down. Is there a bet in
Speaker 2: the space. Now like what you believe that we will
Speaker 2: see as a regime lower.
Speaker 3: Yields, Well, it's everywhere. We liken the current environment to
Speaker 3: nineteen ninety five. There's one critical difference. When the FED
Speaker 3: finished hiking rates from three percent to six percent in
Speaker 3: ninety five, the entire yeld curve was above the FED
Speaker 3: funds rate. Today, we think the Fed is done hiking rates,
Speaker 3: but the entire yeal curve is trading roughly one hundred
Speaker 3: basis points through the FED funds rate. So that's telling
Speaker 3: us that the market still believes that the Fed will
Speaker 3: come in take pressure off of businesses and households by
Speaker 3: doing at least a few rate cuts over the next
Speaker 3: twelve months.
Speaker 1: Bob, we're sitting here at the two year treasury almost
Speaker 1: at five percent. Here, I don't know. I'm gonna park
Speaker 1: my money right there, and I'm gonna feel fine. Is
Speaker 1: that a bad trade?
Speaker 3: It's not a bad trade, but you may feel lonely
Speaker 3: compared to the money that's sitting in money market funds.
Speaker 3: You're willing to step out. But what we're looking at
Speaker 3: is over six trillion dollars of assets sitting in money
Speaker 3: market funds. YEP and they're feeling cozier at somewhere closer
Speaker 3: to a five and a half percent yield. For that
Speaker 3: money to come out and come into the bond market,
Speaker 3: we do need to see the Fed begin to cut rates,
Speaker 3: or at least telegraph that they're thinking about it again
Speaker 3: and not dropping these sins that maybe rates could go higher.
Speaker 1: So what do you think our Fed should do? I mean,
Speaker 1: the economic data suggests that maybe there's no reason two
Speaker 1: cut rates. We've got I don't know, inflation still out there.
Speaker 3: If I were at the Fed, everything looks so good,
Speaker 3: I would just sit in my hands for the next
Speaker 3: couple quarters, see what happens into the election and do nothing.
Speaker 3: You're looking at over two years of unemployment below four percent.
Speaker 3: I know we get PCEE at the end of this week.
Speaker 3: There's a lot of debate. Is it going to be
Speaker 3: two seven or two point eight year every year? Is
Speaker 3: it a point two five or a point twenty seven increase?
Speaker 3: The reality is to something year every year is much
Speaker 3: lower than the six point six percent year every year
Speaker 3: it was a couple of years ago.
Speaker 2: A stated system. Is there leverage in the system? Is
Speaker 2: there that animal? I don't I don't want to say,
Speaker 2: animal spirit, that that ancient animal instinct to leverage up
Speaker 2: when we're certain we know what we're doing. Is there
Speaker 2: that bet right now?
Speaker 3: You're not seeing it to the extent that we saw previously,
Speaker 3: either headed into the dot com bubble in two thousand
Speaker 3: or certainly into the Great Financial Crisis into one thousand
Speaker 3: and seven two thousand and eight. But there is a
Speaker 3: lot of borrowing going on out there. The most leffed
Speaker 3: balance sheet are not businesses in household they're actually federal
Speaker 3: governments globally. When you look about the extension of credit
Speaker 3: into the system, bank balance sheets may have shrunk, but
Speaker 3: private credit is out there.
Speaker 2: But the heart of the matter, going back to Roguoff
Speaker 2: and Reinhardt this time is different. Is they took within
Speaker 2: their iconic study of debt that it's about public and
Speaker 2: private combination of debt. Would you suggest we're going to
Speaker 2: see a private debt issuance and build up in belief
Speaker 2: in debt, so we've got both public and private over indebtedness.
Speaker 3: It doesn't feel like we're heading there. I agree. Right
Speaker 3: right now it feels like and I know you did
Speaker 3: a story that consumers are looking to do a bit
Speaker 3: more vacationing and a third of them are willing to
Speaker 3: put that, willing to go into debt to do that.
Speaker 3: Going into the financial crisis, one hundred and twenty percent
Speaker 3: of them would have been willing to have gone into
Speaker 3: debt to go on vacation. So there is some moderation.
Speaker 3: You look at housing, consumers aren't changing art chasing housing
Speaker 3: prices higher.
Speaker 2: Let's listen to our Latin tour guide here as we.
Speaker 3: Go to Rome Arma where room quay kind of troy
Speaker 3: I qui primus aboris.
Speaker 2: That's great, and that's like Lisa Mateo's schedule to go
Speaker 2: to Rome Here she's going deep into debt okay and
Speaker 2: to go to loans so she can catch up with
Speaker 2: Bob Michael and the Latin.
Speaker 1: That's perfect.
Speaker 2: It's out there as well. It's going to happen.
Speaker 1: Bob.
Speaker 3: What do I do here?
Speaker 1: And if I want to take some credit risk here,
Speaker 1: do I stay with investment grade? Do I go to
Speaker 1: high yield because high yield was the performer last year
Speaker 1: in the fixed income space. Where do we go in
Speaker 1: a credit space?
Speaker 3: You hope that over the next week high yield pulls
Speaker 3: back a little bit further, and then you go in
Speaker 3: without recession on the horizon. You have nothing to fear
Speaker 3: but yourself. If you stay out of the high yield market,
Speaker 3: you're picking up now yields of over eight percent. Wow,
Speaker 3: corporate profitability looks good. It's a much cleaner high yield
Speaker 3: market than anything in my lifetime. Six percent of it
Speaker 3: washed away back in twenty twenty.
Speaker 2: I guess I got to go to the FED meeting
Speaker 2: as well. The basic idea is it's a snoozefest to
Speaker 2: get to June when they redo the dots and as
Speaker 2: a raging debate now Craig Taurus with great leadership on
Speaker 2: this over the weekend about the FED almost over communicating.
Speaker 2: Is your world made more complex because there's too much
Speaker 2: communication from FED presidents, governors and leaders?
Speaker 3: You know, Tom, the one dead language that I miss
Speaker 3: is FED speak. Remember in the days back in the eighties,
Speaker 3: when the FED wasn't always tell you every day what
Speaker 3: you were thinking.
Speaker 2: I yearned for it.
Speaker 3: You used to get the Fed minutes, You used to
Speaker 3: get the listen to the Humphrey Hawkins testimony. You heard
Speaker 3: what Greenspan said, then you got out your secret FED
Speaker 3: decoder ring and interpretd what he meant and there was
Speaker 3: a value to that, and I think there is just
Speaker 3: way too much daily information coming Paul.
Speaker 2: The most important conversation I've had on this is someone
Speaker 2: that Bob Michael knows, Richard Berner, who drove the ship
Speaker 2: at Morgan Stanley for Steve Roach for years in the
Speaker 2: US economy, public service to the nation at Treasury. And
Speaker 2: what was so important here is there was just what
Speaker 2: mister Michael says. And then you would go see a
Speaker 2: president at a rotary club or some other economic club
Speaker 2: and they'd say, just as little at the breakfast is
Speaker 2: they were saying to us on the street.
Speaker 1: Bob, you're head of the global fixed in them Currency
Speaker 1: and Commodities group. Here, let's go currencies. What is there
Speaker 1: a bare case for the US dollar here? Or are
Speaker 1: we just all along the US dollar and letting everybody
Speaker 1: else deal with it.
Speaker 3: There's a bare case for the dollar when the Fed
Speaker 3: starts cutting rates. Until they do that, there's no sense
Speaker 3: fighting the strength and the dollar. If you look at
Speaker 3: when the dollar really started to gain strength, it's when
Speaker 3: the FED started hiking the FED funds rate at the
Speaker 3: start of twenty twenty two. Back then yen was about
Speaker 3: one ten, not one fifty. The entire strength and dollar
Speaker 3: yen has come from the FED hiking rates, not anything
Speaker 3: that's happened on the Bank of Japan's part.
Speaker 1: So, and we see central banks around the world cutting
Speaker 1: rates or saying they will cut rates, signaling that they
Speaker 1: will cut rates. So I mean, does a FED, how
Speaker 1: does the FED think about the dollar when they think
Speaker 1: about their rate policy.
Speaker 3: You're right, there have been seven thousand basis points of
Speaker 3: rate cuts in the emerging market central banks. So those
Speaker 3: central banks have been cutting rates for over a year,
Speaker 3: and I have to imagine they're starting to second guests
Speaker 3: whether they need to keep cutting rates. Here. I don't
Speaker 3: know that the FED thinks about the dollar all that much.
Speaker 3: If we go back, we were just talking about the
Speaker 3: FED speak of the nineteen eighties. I remember we used
Speaker 3: to look at the tanbook, We used to look at
Speaker 3: the minutes. We used to see how they prioritized inflation,
Speaker 3: growth and the dollar, and many times the dollar was
Speaker 3: their number one priority. I don't think it's their priority
Speaker 3: right now. I think it's a huge one for the
Speaker 3: ECB and the Bank of Japan.
Speaker 2: ABOB and the time we got left, I really want
Speaker 2: to focus here on endo. The earning season in corporate
Speaker 2: issuance off of like v body at Boston University, or
Speaker 2: there's a thing folks called eminem It's not the candy,
Speaker 2: but it's a theory here and the allocation of your
Speaker 2: capital structure to debt. Are we underdebted right now in
Speaker 2: quality corporate America? Do they have not enough bills, notes
Speaker 2: and bonds?
Speaker 3: I think we are. We have spent the last quarter
Speaker 3: trying to poke holes in corporate profitability in the markets
Speaker 3: and at JP Morgan with our credit research team, and
Speaker 3: they can't do it. And instead what they're seeing is
Speaker 3: a reacceleration in corporate profitability and businesses thinking about investing
Speaker 3: in cap X Again, it looks pretty bright out there
Speaker 3: for corporate America. It does remind me in nineteen ninety five.
Speaker 2: Do you suggest bond issuance will be the surprise of
Speaker 2: the next eighteen months.
Speaker 3: I don't know. I think there's a shortage of corporate
Speaker 3: debt right now. We were looking out over the next
Speaker 3: couple quarters and there's more money maturing from there are points.
Speaker 2: What you just heard there, folks, is classic John Templeton
Speaker 2: from Bob Michael. I'm sorry, Paul, I'm in this camp.
Speaker 2: There's a shortage of bonds. Nobody's looking at the Bob
Speaker 2: Michael world and it's a tangible part of how we
Speaker 2: do this, and it links into the equity market, and
Speaker 2: there's just a shortage of bonds. That's all there is.
Speaker 1: I mean, Bob, you're JP Morgan asset management. You guys
Speaker 1: are pretty big. If you wanted to get out of
Speaker 1: a position change a big allocation. Is there enough liquidity
Speaker 1: on the street to kind of get that trade done
Speaker 1: to your liking today versus ten or fifteen years ago.
Speaker 1: How much harder is it, if at all, to kind
Speaker 1: of make major trades for you guys.
Speaker 3: Right now when things are relatively stable, you can do it.
Speaker 3: It will take a little bit of time, depending how
Speaker 3: large a position you're trying to move. There's a lot
Speaker 3: more in portfolio trading, so hundreds of line items all
Speaker 3: at once at a single price. That's a feature that
Speaker 3: didn't exist pre financial crisis. But when everyone is waried
Speaker 3: and everyone's pulling back liquidity and their balance sheet, then
Speaker 3: it is far more challenging than it was.
Speaker 1: JP Morgan, you say, get that trade done for me, right?
Speaker 1: I mean, you guys are players.
Speaker 3: You try not to do that because you are you
Speaker 3: are reliant on a counterparty. I think that's a pre
Speaker 3: financial crisis, is that right?
Speaker 2: Let me pin down the tenure yield twelve months from now,
Speaker 2: just a vanilla media call here for animals like me.
Speaker 3: I think we're going to be right around four percent.
Speaker 2: Down, but not down with the drama that financial meautia.
Speaker 3: Not a whole lot, not a whole lot. I think
Speaker 3: the FED could probably get one hundred and one hundred
Speaker 3: and twenty five basis points of great cut.
Speaker 2: So are you doing cliff notes now in FED speak?
Speaker 2: If you've got Greek and Latin down from your undergraduate days.
Speaker 3: I don't. Are you looking at FED speakers, I don't
Speaker 3: need to do it. They're telling us every ten minutes
Speaker 3: what they're thinking. You don't need cliff now.
Speaker 2: Bob Michael, thank you so much. Just generous with his
Speaker 2: time here on a Monday. That morning, he of course,
Speaker 2: is with JP Morgan