WEBVTT - Bob Michele Talks Monetary Policy

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Joining us now the one that puts Greek and Latin

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<v Speaker 2>into our bond coverage. Robert Michael, Bobmichael of JP Morgan.

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<v Speaker 2>How do the Greeks right now? The derivative Greeks play

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<v Speaker 2>into what you do When you look at the quiet

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<v Speaker 2>of holes in the market or renew volatility, maybe it's

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<v Speaker 2>skew that you play into. How does a derivative space

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<v Speaker 2>fit in?

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<v Speaker 3>They're critical to what we do in the markets. I

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<v Speaker 3>think so much of what you try to do is

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<v Speaker 3>in the cash market, but there's limited bandwidth. Broker Dealer

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<v Speaker 3>balance sheets aren't what they used to be, and a

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<v Speaker 3>lot of the balance sheet in the industry sits with

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<v Speaker 3>investors like ourselves, and we tend to own securities until

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<v Speaker 3>we change our mind. So we're not in the market

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<v Speaker 3>actively trying to change positions. You go in to the

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<v Speaker 3>derivatives market to help you change the positioning of your

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<v Speaker 3>portfolio or perhaps put a bit of a hedge on.

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<v Speaker 2>Is there a a bot Michael and I think of

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<v Speaker 2>Ian Lingotn at BMO Capital. You're saying we're going to

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<v Speaker 2>see price up, yield down. Is there a bet in

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<v Speaker 2>the space. Now like what you believe that we will

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<v Speaker 2>see as a regime lower.

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<v Speaker 3>Yields, Well, it's everywhere. We liken the current environment to

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<v Speaker 3>nineteen ninety five. There's one critical difference. When the FED

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<v Speaker 3>finished hiking rates from three percent to six percent in

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<v Speaker 3>ninety five, the entire yeld curve was above the FED

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<v Speaker 3>funds rate. Today, we think the Fed is done hiking rates,

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<v Speaker 3>but the entire yeal curve is trading roughly one hundred

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<v Speaker 3>basis points through the FED funds rate. So that's telling

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<v Speaker 3>us that the market still believes that the Fed will

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<v Speaker 3>come in take pressure off of businesses and households by

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<v Speaker 3>doing at least a few rate cuts over the next

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<v Speaker 3>twelve months.

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<v Speaker 1>Bob, we're sitting here at the two year treasury almost

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<v Speaker 1>at five percent. Here, I don't know. I'm gonna park

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<v Speaker 1>my money right there, and I'm gonna feel fine. Is

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<v Speaker 1>that a bad trade?

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<v Speaker 3>It's not a bad trade, but you may feel lonely

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<v Speaker 3>compared to the money that's sitting in money market funds.

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<v Speaker 3>You're willing to step out. But what we're looking at

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<v Speaker 3>is over six trillion dollars of assets sitting in money

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<v Speaker 3>market funds. YEP and they're feeling cozier at somewhere closer

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<v Speaker 3>to a five and a half percent yield. For that

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<v Speaker 3>money to come out and come into the bond market,

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<v Speaker 3>we do need to see the Fed begin to cut rates,

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<v Speaker 3>or at least telegraph that they're thinking about it again

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<v Speaker 3>and not dropping these sins that maybe rates could go higher.

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<v Speaker 1>So what do you think our Fed should do? I mean,

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<v Speaker 1>the economic data suggests that maybe there's no reason two

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<v Speaker 1>cut rates. We've got I don't know, inflation still out there.

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<v Speaker 3>If I were at the Fed, everything looks so good,

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<v Speaker 3>I would just sit in my hands for the next

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<v Speaker 3>couple quarters, see what happens into the election and do nothing.

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<v Speaker 3>You're looking at over two years of unemployment below four percent.

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<v Speaker 3>I know we get PCEE at the end of this week.

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<v Speaker 3>There's a lot of debate. Is it going to be

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<v Speaker 3>two seven or two point eight year every year? Is

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<v Speaker 3>it a point two five or a point twenty seven increase?

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<v Speaker 3>The reality is to something year every year is much

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<v Speaker 3>lower than the six point six percent year every year

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<v Speaker 3>it was a couple of years ago.

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<v Speaker 2>A stated system. Is there leverage in the system? Is

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<v Speaker 2>there that animal? I don't I don't want to say,

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<v Speaker 2>animal spirit, that that ancient animal instinct to leverage up

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<v Speaker 2>when we're certain we know what we're doing. Is there

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<v Speaker 2>that bet right now?

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<v Speaker 3>You're not seeing it to the extent that we saw previously,

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<v Speaker 3>either headed into the dot com bubble in two thousand

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<v Speaker 3>or certainly into the Great Financial Crisis into one thousand

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<v Speaker 3>and seven two thousand and eight. But there is a

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<v Speaker 3>lot of borrowing going on out there. The most leffed

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<v Speaker 3>balance sheet are not businesses in household they're actually federal

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<v Speaker 3>governments globally. When you look about the extension of credit

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<v Speaker 3>into the system, bank balance sheets may have shrunk, but

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<v Speaker 3>private credit is out there.

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<v Speaker 2>But the heart of the matter, going back to Roguoff

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<v Speaker 2>and Reinhardt this time is different. Is they took within

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<v Speaker 2>their iconic study of debt that it's about public and

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<v Speaker 2>private combination of debt. Would you suggest we're going to

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<v Speaker 2>see a private debt issuance and build up in belief

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<v Speaker 2>in debt, so we've got both public and private over indebtedness.

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<v Speaker 3>It doesn't feel like we're heading there. I agree. Right

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<v Speaker 3>right now it feels like and I know you did

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<v Speaker 3>a story that consumers are looking to do a bit

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<v Speaker 3>more vacationing and a third of them are willing to

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<v Speaker 3>put that, willing to go into debt to do that.

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<v Speaker 3>Going into the financial crisis, one hundred and twenty percent

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<v Speaker 3>of them would have been willing to have gone into

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<v Speaker 3>debt to go on vacation. So there is some moderation.

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<v Speaker 3>You look at housing, consumers aren't changing art chasing housing

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<v Speaker 3>prices higher.

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<v Speaker 2>Let's listen to our Latin tour guide here as we.

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<v Speaker 3>Go to Rome Arma where room quay kind of troy

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<v Speaker 3>I qui primus aboris.

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<v Speaker 2>That's great, and that's like Lisa Mateo's schedule to go

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<v Speaker 2>to Rome Here she's going deep into debt okay and

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<v Speaker 2>to go to loans so she can catch up with

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<v Speaker 2>Bob Michael and the Latin.

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<v Speaker 1>That's perfect.

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<v Speaker 2>It's out there as well. It's going to happen.

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<v Speaker 1>Bob.

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<v Speaker 3>What do I do here?

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<v Speaker 1>And if I want to take some credit risk here,

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<v Speaker 1>do I stay with investment grade? Do I go to

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<v Speaker 1>high yield because high yield was the performer last year

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<v Speaker 1>in the fixed income space. Where do we go in

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<v Speaker 1>a credit space?

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<v Speaker 3>You hope that over the next week high yield pulls

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<v Speaker 3>back a little bit further, and then you go in

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<v Speaker 3>without recession on the horizon. You have nothing to fear

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<v Speaker 3>but yourself. If you stay out of the high yield market,

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<v Speaker 3>you're picking up now yields of over eight percent. Wow,

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<v Speaker 3>corporate profitability looks good. It's a much cleaner high yield

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<v Speaker 3>market than anything in my lifetime. Six percent of it

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<v Speaker 3>washed away back in twenty twenty.

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<v Speaker 2>I guess I got to go to the FED meeting

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<v Speaker 2>as well. The basic idea is it's a snoozefest to

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<v Speaker 2>get to June when they redo the dots and as

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<v Speaker 2>a raging debate now Craig Taurus with great leadership on

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<v Speaker 2>this over the weekend about the FED almost over communicating.

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<v Speaker 2>Is your world made more complex because there's too much

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<v Speaker 2>communication from FED presidents, governors and leaders?

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<v Speaker 3>You know, Tom, the one dead language that I miss

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<v Speaker 3>is FED speak. Remember in the days back in the eighties,

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<v Speaker 3>when the FED wasn't always tell you every day what

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<v Speaker 3>you were thinking.

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<v Speaker 2>I yearned for it.

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<v Speaker 3>You used to get the Fed minutes, You used to

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<v Speaker 3>get the listen to the Humphrey Hawkins testimony. You heard

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<v Speaker 3>what Greenspan said, then you got out your secret FED

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<v Speaker 3>decoder ring and interpretd what he meant and there was

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<v Speaker 3>a value to that, and I think there is just

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<v Speaker 3>way too much daily information coming Paul.

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<v Speaker 2>The most important conversation I've had on this is someone

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<v Speaker 2>that Bob Michael knows, Richard Berner, who drove the ship

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<v Speaker 2>at Morgan Stanley for Steve Roach for years in the

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<v Speaker 2>US economy, public service to the nation at Treasury. And

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<v Speaker 2>what was so important here is there was just what

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<v Speaker 2>mister Michael says. And then you would go see a

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<v Speaker 2>president at a rotary club or some other economic club

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<v Speaker 2>and they'd say, just as little at the breakfast is

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<v Speaker 2>they were saying to us on the street.

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<v Speaker 1>Bob, you're head of the global fixed in them Currency

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<v Speaker 1>and Commodities group. Here, let's go currencies. What is there

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<v Speaker 1>a bare case for the US dollar here? Or are

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<v Speaker 1>we just all along the US dollar and letting everybody

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<v Speaker 1>else deal with it.

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<v Speaker 3>There's a bare case for the dollar when the Fed

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<v Speaker 3>starts cutting rates. Until they do that, there's no sense

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<v Speaker 3>fighting the strength and the dollar. If you look at

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<v Speaker 3>when the dollar really started to gain strength, it's when

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<v Speaker 3>the FED started hiking the FED funds rate at the

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<v Speaker 3>start of twenty twenty two. Back then yen was about

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<v Speaker 3>one ten, not one fifty. The entire strength and dollar

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<v Speaker 3>yen has come from the FED hiking rates, not anything

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<v Speaker 3>that's happened on the Bank of Japan's part.

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<v Speaker 1>So, and we see central banks around the world cutting

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<v Speaker 1>rates or saying they will cut rates, signaling that they

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<v Speaker 1>will cut rates. So I mean, does a FED, how

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<v Speaker 1>does the FED think about the dollar when they think

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<v Speaker 1>about their rate policy.

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<v Speaker 3>You're right, there have been seven thousand basis points of

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<v Speaker 3>rate cuts in the emerging market central banks. So those

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<v Speaker 3>central banks have been cutting rates for over a year,

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<v Speaker 3>and I have to imagine they're starting to second guests

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<v Speaker 3>whether they need to keep cutting rates. Here. I don't

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<v Speaker 3>know that the FED thinks about the dollar all that much.

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<v Speaker 3>If we go back, we were just talking about the

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<v Speaker 3>FED speak of the nineteen eighties. I remember we used

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<v Speaker 3>to look at the tanbook, We used to look at

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<v Speaker 3>the minutes. We used to see how they prioritized inflation,

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<v Speaker 3>growth and the dollar, and many times the dollar was

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<v Speaker 3>their number one priority. I don't think it's their priority

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<v Speaker 3>right now. I think it's a huge one for the

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<v Speaker 3>ECB and the Bank of Japan.

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<v Speaker 2>ABOB and the time we got left, I really want

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<v Speaker 2>to focus here on endo. The earning season in corporate

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<v Speaker 2>issuance off of like v body at Boston University, or

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<v Speaker 2>there's a thing folks called eminem It's not the candy,

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<v Speaker 2>but it's a theory here and the allocation of your

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<v Speaker 2>capital structure to debt. Are we underdebted right now in

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<v Speaker 2>quality corporate America? Do they have not enough bills, notes

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<v Speaker 2>and bonds?

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<v Speaker 3>I think we are. We have spent the last quarter

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<v Speaker 3>trying to poke holes in corporate profitability in the markets

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<v Speaker 3>and at JP Morgan with our credit research team, and

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<v Speaker 3>they can't do it. And instead what they're seeing is

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<v Speaker 3>a reacceleration in corporate profitability and businesses thinking about investing

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<v Speaker 3>in cap X Again, it looks pretty bright out there

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<v Speaker 3>for corporate America. It does remind me in nineteen ninety five.

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<v Speaker 2>Do you suggest bond issuance will be the surprise of

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<v Speaker 2>the next eighteen months.

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<v Speaker 3>I don't know. I think there's a shortage of corporate

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<v Speaker 3>debt right now. We were looking out over the next

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<v Speaker 3>couple quarters and there's more money maturing from there are points.

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<v Speaker 2>What you just heard there, folks, is classic John Templeton

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<v Speaker 2>from Bob Michael. I'm sorry, Paul, I'm in this camp.

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<v Speaker 2>There's a shortage of bonds. Nobody's looking at the Bob

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<v Speaker 2>Michael world and it's a tangible part of how we

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<v Speaker 2>do this, and it links into the equity market, and

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<v Speaker 2>there's just a shortage of bonds. That's all there is.

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<v Speaker 1>I mean, Bob, you're JP Morgan asset management. You guys

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<v Speaker 1>are pretty big. If you wanted to get out of

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<v Speaker 1>a position change a big allocation. Is there enough liquidity

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<v Speaker 1>on the street to kind of get that trade done

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<v Speaker 1>to your liking today versus ten or fifteen years ago.

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<v Speaker 1>How much harder is it, if at all, to kind

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<v Speaker 1>of make major trades for you guys.

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<v Speaker 3>Right now when things are relatively stable, you can do it.

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<v Speaker 3>It will take a little bit of time, depending how

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<v Speaker 3>large a position you're trying to move. There's a lot

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<v Speaker 3>more in portfolio trading, so hundreds of line items all

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<v Speaker 3>at once at a single price. That's a feature that

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<v Speaker 3>didn't exist pre financial crisis. But when everyone is waried

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<v Speaker 3>and everyone's pulling back liquidity and their balance sheet, then

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<v Speaker 3>it is far more challenging than it was.

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<v Speaker 1>JP Morgan, you say, get that trade done for me, right?

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<v Speaker 1>I mean, you guys are players.

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<v Speaker 3>You try not to do that because you are you

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<v Speaker 3>are reliant on a counterparty. I think that's a pre

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<v Speaker 3>financial crisis, is that right?

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<v Speaker 2>Let me pin down the tenure yield twelve months from now,

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<v Speaker 2>just a vanilla media call here for animals like me.

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<v Speaker 3>I think we're going to be right around four percent.

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<v Speaker 2>Down, but not down with the drama that financial meautia.

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<v Speaker 3>Not a whole lot, not a whole lot. I think

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<v Speaker 3>the FED could probably get one hundred and one hundred

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<v Speaker 3>and twenty five basis points of great cut.

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<v Speaker 2>So are you doing cliff notes now in FED speak?

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<v Speaker 2>If you've got Greek and Latin down from your undergraduate days.

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<v Speaker 3>I don't. Are you looking at FED speakers, I don't

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<v Speaker 3>need to do it. They're telling us every ten minutes

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<v Speaker 3>what they're thinking. You don't need cliff now.

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<v Speaker 2>Bob Michael, thank you so much. Just generous with his

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<v Speaker 2>time here on a Monday. That morning, he of course,

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<v Speaker 2>is with JP Morgan