Speaker 1: Welknd A trillions. I'm Joel Weipper and I'm Eric beltis
Speaker 1: Eric these inflation numbers, it's like it might not even
Speaker 1: be a problem anymore, right, Well, it's become. It depends
Speaker 1: on your narrative. These these numbers, it's like they perfectly
Speaker 1: fit two different narratives. Uh, and politics are now involved.
Speaker 1: It's a shame. Politics ruins everything. But basically, some people
Speaker 1: are out saying inflation is zero percent, which in a
Speaker 1: way it is if you look month over month, but
Speaker 1: it's also eight point five percent if you look over
Speaker 1: I was gonna say it's not zero. Yeah, So actually
Speaker 1: pulled people, I said, what would you say? Us inflation
Speaker 1: is in July zero or eight point five, like two
Speaker 1: massively different numbers, and it was almost fifty fifty. So
Speaker 1: I think it depends on you know, I had. It's
Speaker 1: probably depends on where you fall politically. It also probably
Speaker 1: depends on whether you're a fan of the FED or
Speaker 1: you hate the Fed. There's a lot of things that
Speaker 1: go into people presenting this number. There are some people
Speaker 1: middle of the road who do explain all that. They say, well,
Speaker 1: it's good that it didn't grow, but it's still a problem. Overall,
Speaker 1: and I think that's sort of the route I like
Speaker 1: to see or I like to take. But this number,
Speaker 1: the importance of this number isn't just the elections. It's
Speaker 1: also what the FED will do so and what the
Speaker 1: FED does just determines everything. Again, the Feds like God,
Speaker 1: and we all have to live under this God. So
Speaker 1: we need to know what God is up to to
Speaker 1: help us make sense of of what God is up to. You,
Speaker 1: you came up with a person on Bloomberg Intelligence named
Speaker 1: Ira Jersey for us to speak to. He's got a
Speaker 1: direct line to God, direct line to God. He's the
Speaker 1: US interest rate strategist in Bloomberg Intelligence. So so why
Speaker 1: do we want to talk to Ira today? I have
Speaker 1: found him to be the smartest person on this topic.
Speaker 1: He also worked as an actual asset manager, so he's
Speaker 1: had to put money to work. Now he writes about it,
Speaker 1: but I like that he had to have skin in
Speaker 1: the game for many years, and so he he really
Speaker 1: is great in interpreting the FED and how they will
Speaker 1: interpret different numbers their balance sheet. There's a lot of
Speaker 1: things that go into quote, just what's the FED gonna do? Um?
Speaker 1: And he's that's all He writes about So I thought
Speaker 1: he'd be good to give his take on where we're
Speaker 1: going to go from here and sort of fed splain
Speaker 1: all of the numbers that are coming out, namely the inflation. Okay,
Speaker 1: so joining us is going to be Ira Jersey of
Speaker 1: bloom Brig Intelligence. He's also one of the hosts of
Speaker 1: the Thick Focus podcast by bloom Brig Intelligence. So if
Speaker 1: you like what he has to say this time, please
Speaker 1: go check out that podcast as well, this time on Trilliance,
Speaker 1: fed splaining AI, Right, welcome to Trilliance, Thanks very much
Speaker 1: for having me. Okay, so we've got these inflation numbers.
Speaker 1: Maybe a little bit surprising because after you know, the
Speaker 1: numbers have just been on a tear. Maybe he's plateau ing. Now,
Speaker 1: how does that change the Fed's next move? Well, first,
Speaker 1: it was not completely unexpected that we'd have somewhat slower
Speaker 1: inflation in July than we had in June. Um, we
Speaker 1: were always expecting June to kind of be the peak
Speaker 1: in a year on year inflation in particular. Um. So
Speaker 1: for the FED, they're gonna look past some of these
Speaker 1: numbers for for one thing, it's only one number, right,
Speaker 1: So so we need a string of better numbers for
Speaker 1: the FED reserve not to remain relatively hawkish on hike
Speaker 1: interest rates. That's number one and number two. Um, when
Speaker 1: when you look into the details, right, So why was
Speaker 1: headline inflation zero month on month? Primarily because gas prices
Speaker 1: are down a lot. And then when you look under
Speaker 1: the hood and you look at a lot of the
Speaker 1: details of the numbers, so what we call call core inflation,
Speaker 1: so that's x looting food and energy that was still
Speaker 1: up pretty hefty and looks like you know, on on
Speaker 1: a on an annualized basis still up almost four percent,
Speaker 1: so and and on a year on year basis still
Speaker 1: up almost six percent. So you're still looking at inflation
Speaker 1: trends in for most goods and services that are still
Speaker 1: rising very significantly. And um, and the Fed is still
Speaker 1: not going to like that. And I think that you're
Speaker 1: going to have to hear that from a lot of
Speaker 1: FED speakers over the next six weeks or so before
Speaker 1: the next meeting. So, um, you know I have heard again,
Speaker 1: um correctly if I'm wrong, that the Fed is would
Speaker 1: like to get two what is the two percent the
Speaker 1: year over year? Like what what? What? What? What number
Speaker 1: is two percent? And how would they get there? Yeah, so,
Speaker 1: so the goal of the Federal Reserve is two percent
Speaker 1: year on year inflation for the headline number. Now, you know,
Speaker 1: if they hit two point three or you know, if
Speaker 1: if it's within the range and then they see core
Speaker 1: inflation that that X food and energy is kind of
Speaker 1: at two percent, they that would make them pretty happy. Um.
Speaker 1: So that's their goal and that's their state objective. The
Speaker 1: problem is is that it's quite frankly, it's gonna take
Speaker 1: years for them to get there. So the question is
Speaker 1: do they remain um in this inflation fighting mode until
Speaker 1: they get to two percent? Or if you see this
Speaker 1: massive downtrend and inflation, will that make them you know,
Speaker 1: stop hiking interest rates and maybe do some more dovish activity,
Speaker 1: especially if the rest of the economy looks like it's
Speaker 1: falling apart. So if you see unemployment going up and
Speaker 1: you see um retail sales for example, start to plummet
Speaker 1: very significantly again excluding gas, right because get you know,
Speaker 1: retail sales with gas in it is going to be
Speaker 1: down anyway, just because we're paying less at the pump. Um.
Speaker 1: So so I that really is that number, Eric, that
Speaker 1: that you have to focus on when you're thinking about
Speaker 1: what is the federal reserves next move, is that um
Speaker 1: is going to be the trend in that headline number,
Speaker 1: but also that core number. So you really need to
Speaker 1: look at both. Well, okay, let me okay, if it's
Speaker 1: year over year and it was nine in June and
Speaker 1: now eight point five percent in July, I guess my
Speaker 1: point is we elevated that much in a year. Now
Speaker 1: are they looking to undo the elevation or just hang
Speaker 1: on for the next ten months until the elevated number
Speaker 1: goes up less than two from an already elevated number.
Speaker 1: Like if we're let's let's put this in weight terms,
Speaker 1: where we weigh two hundred pounds nick, but Julie did
Speaker 1: this on Twitter. I thought it was a good metaphor.
Speaker 1: We now we weigh two hundred and twenty pounds, uh,
Speaker 1: and in July we gain no weight. We're still to twenty.
Speaker 1: Are they Are they going to look to go back
Speaker 1: down to two hundred or just keep to twenty for
Speaker 1: the next eight months or ten months? Well, so, so
Speaker 1: the real goal is to get the growth rate lower.
Speaker 1: So it would be the weight example is not quite
Speaker 1: good because I'd be saying you know, we went from
Speaker 1: two percent to two or two two hundred pounds to
Speaker 1: twenty and now in the future we only want to
Speaker 1: go up. We only want to go up about four
Speaker 1: pounds a year, right, And so so I'm not sure
Speaker 1: that analogy is why I don't like that. That sounds
Speaker 1: that sounds too real, um, which which you know may
Speaker 1: be true for some people. But but the real goal
Speaker 1: is to kind of stop the stop the increase, right,
Speaker 1: So it's really but in other words, but that that
Speaker 1: still accepts the fact that it has increased. Prices are up,
Speaker 1: and that's so in other words, we're okay at this
Speaker 1: new normal. We just don't want it to grow anymore. Correct.
Speaker 1: So so the so so the FEDS, the FEDS job
Speaker 1: here is to um slow the growth, not change the level,
Speaker 1: if that makes sense, right. You know, it's okay, you
Speaker 1: don't want to go from the Fed's not going to
Speaker 1: go from two to two hundred, right, that would be
Speaker 1: deflation or disinflation. That would be a whole different problem.
Speaker 1: We're gonna be in the heavyweight category from now on.
Speaker 1: I'm going to use this on my wife because I
Speaker 1: did put on about fifteen pounds during the pandemic, but
Speaker 1: I haven't gained any weight in about six months. I
Speaker 1: was gonna do that inflation Jedi mind trick on her
Speaker 1: and be like, I haven't gained any weight zero. Good
Speaker 1: luck with that. She's gonna go, Yes, you have, but
Speaker 1: I'm like, no, I'm talking about in July. So so
Speaker 1: if you're the Fed, your j PAL, you're looking at
Speaker 1: this in your options, what what are you looking for
Speaker 1: going forward here in these next few weeks before this
Speaker 1: next right decision that might you know, change the course
Speaker 1: of what the next hike or non hike looks like. Well,
Speaker 1: what's interesting about this cycle is normally you you get
Speaker 1: six weeks in between Federal Reserve meetings, so you kind
Speaker 1: of get one and a half month's worth of data
Speaker 1: before the FED has to make a decision. But this
Speaker 1: time is unusual because they're gonna have two months. They
Speaker 1: have eight weeks in between FED meetings, and because of that,
Speaker 1: they're actually gonna get two sets of data. So even
Speaker 1: though we got the July numbers for CPI and we'll
Speaker 1: get the July retail sales numbers um and you know,
Speaker 1: before the Jackson Whole symposium where where j PAL will
Speaker 1: speak and probably make a pretty important policy address. They're
Speaker 1: gonna get all the August numbers too before or the
Speaker 1: next meeting, so they're gonna have this whole huge set
Speaker 1: of data that they're going to have to consider. So
Speaker 1: if there's a re acceleration, like you know, oil prices
Speaker 1: are up a little bit now compared to where they
Speaker 1: were um when when the when the July number was calculated,
Speaker 1: so all of these things will probably see um, you know,
Speaker 1: a a maybe a slightly continued downtrend of of headline inflation,
Speaker 1: but things like core inflation at five point nine percent,
Speaker 1: which is by the way, a multi decade high, and
Speaker 1: we stayed there um from June to July, so it's
Speaker 1: at the exact same number on a year on year basis.
Speaker 1: If that stays at those kind of levels, that's going
Speaker 1: to lead the FED to say, okay, well we think
Speaker 1: that inflation is going to be much stickier and at
Speaker 1: levels we don't like. So so the FED is going
Speaker 1: to be looking for significant down trends in the economy um.
Speaker 1: And there are some signs of that of a slowing
Speaker 1: in the economy, but they haven't rolled over enough I
Speaker 1: think for the FED Reserve to get dubbish. So they're
Speaker 1: gonna keep on reducing their balance sheet. Eric Apply alluded
Speaker 1: to that not so long ago, UM. And at the
Speaker 1: other at the other side, they're also going to be
Speaker 1: UM continuing to hike interest rates, even if it's at
Speaker 1: a slower pace. Right, the seventy five basis point hikes
Speaker 1: that they've done the last couple of meetings probably won't
Speaker 1: be sustained, UM, But if they go fifty basis points
Speaker 1: in September and then basis points there after, that wouldn't
Speaker 1: be a huge surprise to us. And just can you
Speaker 1: break down what happens when the Fed hikes let's say
Speaker 1: they hike seventy five basis points, how does that action
Speaker 1: cause a reaction that helps inflation? Like, can you just
Speaker 1: take us through that chain of events and where that
Speaker 1: hike goes. Sure? So, so in the olden days, when
Speaker 1: we go back to the pre N three you know,
Speaker 1: when we're on the gold standard, the Federal Reserve tried
Speaker 1: to slow the economy and increase the economy by changing
Speaker 1: the amount of money in the economy. So they used
Speaker 1: to target monetary aggregates, what they called monetary aggregates. So
Speaker 1: M three M two UM and and some of these
Speaker 1: other money supply measures UM and so since that time.
Speaker 1: But but so since the nineteen seventy three, they instead
Speaker 1: of targeting any particular stock of money, they basically say
Speaker 1: we're gonna make borrowing either more or less expensive, and
Speaker 1: they do that by raising the Federal Funds rate, which
Speaker 1: is the base rate that banks uh that banks lend
Speaker 1: money to each other. So when the Fed Funds rate
Speaker 1: goes up, that means that that bank borrowing costs go
Speaker 1: up that and they pass that along to the consumer,
Speaker 1: and it just generally makes it more expensive, um for
Speaker 1: for people to buy things on credit and UM and
Speaker 1: and because it's it's more difficult to buy things on credit,
Speaker 1: because it's just more expensive to do so, UM, that
Speaker 1: tends to slow economic activity. And that's that's certainly worked
Speaker 1: pretty pretty effectively over the last forty years or so. UM.
Speaker 1: Paul Vulker, you know, UH famously raised interest rates to
Speaker 1: during the nineteen uh the early nineteen eighties, and that
Speaker 1: had a significant effect on credit growth in the econom
Speaker 1: of me. UM. What's important now, and this is something
Speaker 1: that that we've noted in some of our recent research,
Speaker 1: is the the challenge I think for policymakers is that
Speaker 1: not only is inflation very high, but one of the
Speaker 1: reasons inflation is very high is because is that wages
Speaker 1: are going up. So so now you have a situation
Speaker 1: where the FED is going to be hiking short term
Speaker 1: interest rates to try and slow the economy, but in
Speaker 1: an environment where companies are willing to pay employees more money. Um.
Speaker 1: And and that's something that you haven't seen since the
Speaker 1: nineteen seventies. And I think that that's an important shift
Speaker 1: from the last forty years versus say the nineteen seventies,
Speaker 1: when people had were unions and they had automatic wage
Speaker 1: increases when CPI was um what what went up? They
Speaker 1: automatically had their wages increased. So you have this big
Speaker 1: wage spiral. You're seeing some similar activity today, um, which
Speaker 1: is which is very unusual, particularly in a non unionized workforce.
Speaker 1: Speaking of sort of historical precedents, one of the things
Speaker 1: that's interesting here, I saw a reference I think in
Speaker 1: John Author's recent column about what the FED got wrong
Speaker 1: in the seventies and sort of what what vocal Vulgar
Speaker 1: ended up having to correct, and that was sort of
Speaker 1: on on the Burns watch, I think, right. And so
Speaker 1: one of the things I guess I would ask you
Speaker 1: just to make that to bring it forward to now
Speaker 1: is what what could the Fed potentially get wrong here
Speaker 1: that J. Powell will be mindful of. Yeah. So I
Speaker 1: think that the big danger here is that the FED decides,
Speaker 1: because we're having a mid cycle slow down and the
Speaker 1: economy slows a little bit, that they stop hiking interest rates,
Speaker 1: and in doing so, the economy then re accelerates and
Speaker 1: you wind up with more persistent inflation, more persistent inflation expectations,
Speaker 1: and that forces the FED Reserve to hike even more later. Um.
Speaker 1: So I think that that's a real danger. And when
Speaker 1: you in all the work that that we've done, and
Speaker 1: that even that our colleagues at Bloomberg Economics with that
Speaker 1: and I'm Wrong's team in the US is has done,
Speaker 1: we all think that the Fed Reserve is probably going
Speaker 1: to have to hike more than what the market is
Speaker 1: currently pricing. So the markets pricing you know, round numbers
Speaker 1: three and a half to three and a half percent,
Speaker 1: So another hundred basis points one percent increase in in
Speaker 1: the FED funds rate over the over the next six
Speaker 1: months or so, and then the market has has the
Speaker 1: Fed stopping. Um. But we think that the Fed is
Speaker 1: going to have to keep going into three up to
Speaker 1: I think more like four and a quarter percent. The
Speaker 1: Bloomberg Economics things five percent, but but still significantly more
Speaker 1: than what the market is pricing. And in part because
Speaker 1: if they don't do that, then if if if in
Speaker 1: fact we're in the midst of a mid cycle slowdown,
Speaker 1: which is not unusual after very large pickups in the economy, UM,
Speaker 1: then you wind up getting more entrenched inflation expectations, and
Speaker 1: that forces employees to ask for more money. UH. Wages
Speaker 1: go up, profits get crimped on the on the corporate
Speaker 1: UH side, which you know, we've already priced some of
Speaker 1: that into the stock market for sure. But the you
Speaker 1: wind up getting getting inflation that has to be crimped
Speaker 1: down even harder and more. Um. So, so the worry
Speaker 1: is that you wind up with a you know, an
Speaker 1: Arthur Byurne situation where you stop hiking after a little
Speaker 1: while and then you have to hike even more later um.
Speaker 1: And so so we need a Vulcar. And I thought
Speaker 1: it was interesting a couple of meetings ago. J. Powell
Speaker 1: actually mentioned Vulcan and said that you know, they were
Speaker 1: very that that the Federal Reserve was very keen and
Speaker 1: appreciated what Volker had to do back in the nineteen eighties.
Speaker 1: And and I took that to mean that, like, they
Speaker 1: recognize what happened back then and they don't want to
Speaker 1: repeat the same mistakes. Let's talk about the hiking and
Speaker 1: the impact on on bonds first. Um. So, obviously, if
Speaker 1: the Fed hikes rates, interest rates go up, it basically
Speaker 1: means all the bonds that people hold are just worthless
Speaker 1: because you can now get bonds at a higher rate. Right,
Speaker 1: So what we've seen is just a bond e t
Speaker 1: F s and bond mutual funds are down. I mean
Speaker 1: basically everyone's down over the last twelve months. And in
Speaker 1: the mutual fund space there's been a ton of outflows too.
Speaker 1: It's just pretty bad. We have seen a lot of
Speaker 1: flows in the treasury ETFs all year. They basically about
Speaker 1: double their normal inflow takage. Then sometimes you'll see people
Speaker 1: shift down the curve, um, but then they'll go back
Speaker 1: to short term what's going on there? Um As a
Speaker 1: money manager, what's your interpretation of all the flows into
Speaker 1: treasury e t f this year? Yeah, I think part
Speaker 1: of that is just taking advantage of of higher yields.
Speaker 1: So when when interest rates or at zero, and they
Speaker 1: were at zero obviously for more than more than a year,
Speaker 1: you didn't have a lot of room to actually lose
Speaker 1: any money. Right, So, if you were buying, say a
Speaker 1: bond mutual fund, where when the tenure yield was at
Speaker 1: one percent or under one percent, then if you if
Speaker 1: interest rates only went up a couple of basis points,
Speaker 1: you'd start to lose money because the price of that
Speaker 1: bond would go down own um. There's something we call
Speaker 1: duration and um where where it's basically the relationship between
Speaker 1: the price and yield of a bond. Where um and
Speaker 1: and durations were very high, meaning that if you get
Speaker 1: just a one or two basis point increase in in
Speaker 1: bond yields, you'd wind up with a large decrease in
Speaker 1: the price of the bond. And that's exactly what's happened
Speaker 1: over the course of this year in particular. But now
Speaker 1: that we've reached you know, upwards of three percent on
Speaker 1: the ten year yield um, it makes it a little
Speaker 1: bit more attractive because you can actually get a coupon,
Speaker 1: you actually get interest payments of some you know, some
Speaker 1: amount I mean not the three percent is particularly high
Speaker 1: in historical standards for the last forty years, but it's
Speaker 1: still significantly more than you know, the seventy five basis
Speaker 1: points where um, where bonds were at the beginning of
Speaker 1: one right. So um, So, so you wind up with
Speaker 1: with an environment where it's maybe a little bit more
Speaker 1: attractive to buy bonds today than it has been recently.
Speaker 1: So I read this being an e t F podcast,
Speaker 1: Just let's stick with, uh what your outlook and how
Speaker 1: that informs E t fs. And you know, Eric specifically
Speaker 1: mentioned bonds. They're curious, um, you know, even on the
Speaker 1: equity side, like where do you when you think about
Speaker 1: this on a bigger macro level, what do people in
Speaker 1: the E t F world? What should they be mindful
Speaker 1: of here? Yeah? So, so I think firstly, if if
Speaker 1: we are right and the Federal Reserve hikes a little
Speaker 1: bit more um than the market is currently pricing, that
Speaker 1: you could still see negative returns for bonds over the
Speaker 1: next uh six six to twelve months. Um. But but
Speaker 1: I don't think it's gonna compare anything like we had
Speaker 1: over the previous six months. So um. You know, the
Speaker 1: first half of has been absolutely abysmal forum for treasury
Speaker 1: securities and and bonds in general. UM. So it's it's
Speaker 1: what to look out for in particular is when the
Speaker 1: Fed stops right, So, when the Federal Reserve stops hiking
Speaker 1: interest rates, it's very likely that UM that shorter term
Speaker 1: securities going to do a bit better than longer term securities. Now,
Speaker 1: if you're you're if you're buying any t F typically
Speaker 1: they don't wait securities by their risk profile, by the
Speaker 1: duration that I talked about earlier. But what they do
Speaker 1: what so so in total return terms UM is short
Speaker 1: end securities could still maybe underperform longer term securities on
Speaker 1: a price basis, but but you could wind up with
Speaker 1: an environment like we have today where short term securities
Speaker 1: offer more yield, more interest UM over over the near term.
Speaker 1: So it really depends on what your risk profile is
Speaker 1: why you're buying bonds UM. If you're buying bonds and
Speaker 1: you're buying a bond fund you know t LT for example,
Speaker 1: or one of those types of ETFs that that is
Speaker 1: long only and tends to be longer term securities, they
Speaker 1: at this point might be more of a hedge to
Speaker 1: your equity portfolio than they were when um uh, when
Speaker 1: interest rates were basically at zero, and and they didn't
Speaker 1: offer very much protection because even if the stock market
Speaker 1: went down ten percent, the tenure yield wasn't going to
Speaker 1: go down so much that you were going to be
Speaker 1: able to make up for that um that that that
Speaker 1: downturn in your risk ask set portfolio. So so so
Speaker 1: I think at this point we're going to have start
Speaker 1: to have more and more of a normal relationship where
Speaker 1: you know, equities go up, you know, bond prices go down,
Speaker 1: and then vice versa, where where you can actually use
Speaker 1: bonds as a hedge again, which you couldn't do for
Speaker 1: a couple of years. Yeah. No, that was a big deal,
Speaker 1: is that the sixty and the forty were down. Although
Speaker 1: I was trying to explain to people that both went
Speaker 1: up for many years. I think part of the reason
Speaker 1: they both went up was the Fed was very accommodative.
Speaker 1: So stands to reason if the Fed good does a
Speaker 1: one eight uh, they would both go down for at
Speaker 1: least a little bit um, which has happened already this year. Actually,
Speaker 1: are right, So so you you have seen both stocks
Speaker 1: and bonds prices go down and have negative returns and
Speaker 1: like you said, sixty was terrible and and that's the
Speaker 1: that's the quantitative tightening trade right there. So well when
Speaker 1: when you and let me just jump in on that
Speaker 1: quantitative tightening. So we just talked about the rates. Just
Speaker 1: let's just hand like deal with the other side of this.
Speaker 1: The Fed also has a balance sheet, right and do
Speaker 1: you hear words like run off. In the past, they
Speaker 1: were buying bonds, which was called quantitative easing. Now we're
Speaker 1: doing cute quantitative tightning. You just explain where we're at
Speaker 1: with that. Sure, So in in August of two, the
Speaker 1: Federal Reserve is running off its balance sheet by allowing
Speaker 1: maturing bonds not to um not get reinvested into their portfolio.
Speaker 1: So that has the effect of shrinking the Fed's asset
Speaker 1: pool in their balance sheets. So both mortgage backed securities
Speaker 1: and trosury securities are running off. Starting in September of
Speaker 1: this year, that will go up significantly where they're going
Speaker 1: to run off up to billion dollars a month of
Speaker 1: their portfolio. Now I don't never reach uh, primarily because
Speaker 1: mortgage backed securities run off at different um at different
Speaker 1: speeds based on how many people prepaid mortgages and and
Speaker 1: with interest rates as high as they are, not as
Speaker 1: many people are pre paying their mortgages as they used
Speaker 1: to do, is not refinancings. People aren't moving as frequently
Speaker 1: as they used to, so so that that's running more
Speaker 1: like twenty billion dollars instead of the thirty five billion
Speaker 1: dollar cap that the Federal Reserve um has put on.
Speaker 1: But they will run off sixty billion dollars of treasury securities. Now,
Speaker 1: some people think that because they're running off sixty billion
Speaker 1: of treasury securities that means that bond yields should be
Speaker 1: going higher. Well, just because you have extra supply in
Speaker 1: the market. Um I would say there's two parts to that.
Speaker 1: One is that the markets already anticipated that, because we've
Speaker 1: known this now for six months, so the markets already
Speaker 1: adjusted for this additional supply. This number one. Number two,
Speaker 1: you have another interesting dynamic which has nothing to do
Speaker 1: with the FED. It has to do with wages as
Speaker 1: growing as strongly as they are. Tax receipts into the
Speaker 1: federal government have been much larger than most of us anticipated.
Speaker 1: And because of that those higher tax receipts the government,
Speaker 1: the government deficit much lower than we thought it was
Speaker 1: going to be. So even though the FED is running
Speaker 1: off the treasury portfolio, Um, they don't have to uh
Speaker 1: sell those bonds to the market or more bonds to
Speaker 1: the market. So you've actually had a situation where, um,
Speaker 1: where where the supply dynamics and the treasury market have
Speaker 1: been more more even than you might have expected with
Speaker 1: with the runoff of the Fed's portfolio. So, UM, there'll
Speaker 1: be a little bit of a bump when we get
Speaker 1: to when we get to September and October, but it's
Speaker 1: not going to be very significant. In fact, we just
Speaker 1: got information, um at the beginning of August that the
Speaker 1: Treasury Department cut the amount of Treasury bonds that are
Speaker 1: going to be issued every single month, and and they're
Speaker 1: they're likely to cut it just a little bit more
Speaker 1: over the next few months too, even with this extra
Speaker 1: supply coming from the from the federal reserves runnel. That
Speaker 1: is good to know. UM. And I think let's just
Speaker 1: let's pivot here, and UM, I think we did. We've
Speaker 1: covered the FED. I think hopefully everybody has a better
Speaker 1: handle on what's going on and where the FEDS point
Speaker 1: of views is going to be. I wanna do like
Speaker 1: a rapid fire with you uh, and just throw out
Speaker 1: some different type of bond ETFs and get your take
Speaker 1: on them. Um. Again, I've always enjoyed talking to you
Speaker 1: and hearing your take when a new e t F
Speaker 1: comes out, usually it's interesting. Um, I want to start
Speaker 1: with tips. Um. You you you're not a fan of
Speaker 1: tip e t fs, but you are a fan of tips.
Speaker 1: Explain why? Sure? Well? So so tips are treasury inflation
Speaker 1: protected securities. These are these are bonds that UM if
Speaker 1: you if you were to buy an individual bond and
Speaker 1: hold it to maturity, you would get whatever the yield
Speaker 1: was plus inflation. The problem is is that when you
Speaker 1: buy it an e t F form UM, you're you
Speaker 1: you don't hold to maturity and you take a lot
Speaker 1: of interest rate risks. So if you're looking for an
Speaker 1: inflation hedge, UM, you're not going to get it because
Speaker 1: as interest rates go up, the price of a bond
Speaker 1: goes down. That's true for tips as well. UM, So
Speaker 1: as an inflation hedge, it's tips are not very good
Speaker 1: now as an alternative to say, if you were to
Speaker 1: go out and buy a TIP fund instead of say
Speaker 1: t lt UM, it makes a lot of sense during
Speaker 1: a time when inflation is going up and very high,
Speaker 1: because then you have UM because your tip fund will
Speaker 1: probably outperform the bond fund UM. But but that's not true.
Speaker 1: It's not a true inflation head. So if you buy
Speaker 1: tips as an inflation hedge, really what you have to
Speaker 1: do is head your interest rate exposure. And there's not
Speaker 1: too many funds that actually do that. UM. So there's
Speaker 1: one fund called r I n F that actually buys
Speaker 1: tips and then hedges your interest rate exposure, so you
Speaker 1: do capture most of the UH, most of the inflation increase.
Speaker 1: So that so that's one way that if you are
Speaker 1: worried that inflation is going to remain very high for
Speaker 1: the longer term, that's a fund that you might consider. UM.
Speaker 1: But but but you know, buying tips tip fund outright,
Speaker 1: thinking it's an inflation hedge is just absolutely false and
Speaker 1: and and and that's why I don't love tips funds
Speaker 1: unless you want to buy them as an alternative to
Speaker 1: another bond fund in your portfolio UM, and you have
Speaker 1: a good reason to do that. What about single bond
Speaker 1: exchange traded funds. This is a relatively new phenomenon UH
Speaker 1: and they hold UH ten year, two year, three year
Speaker 1: treasury bonds right and bills. So that is like brand
Speaker 1: new and I'm curious how that's going to play out.
Speaker 1: UM and these tickers, Eric, uh, correct me if I'm wrong.
Speaker 1: They've got uh U t E, n U t WO
Speaker 1: and then T BUILD T B I L. So what's
Speaker 1: your what's your outlook for those? Yeah? So so again
Speaker 1: like it's it's they're more trading instruments then I think
Speaker 1: that they would be in terms of buying hold um.
Speaker 1: But but there is certain advantage to them because if
Speaker 1: you you can you know, hone in on a particular
Speaker 1: part of the yield curve. So when when we talk
Speaker 1: about managing money, you know, you have two choices, right,
Speaker 1: you can buy a bond, or you can buy the market. Right,
Speaker 1: so you can buy an index like you can buy
Speaker 1: the Bloomberg Treasury Index for example. And then obviously there's
Speaker 1: mutual funds out there that that do that, and there's
Speaker 1: ettfs out there that um that that have that mandate.
Speaker 1: But if you do that, you're buying the entire market
Speaker 1: from you know, the from one year treasuries all the
Speaker 1: way out the thirty year treasuries. So this allows you
Speaker 1: to say, okay, well we think that that ten year
Speaker 1: securities are going to do better than two year security,
Speaker 1: So I want to buy just the ten year part
Speaker 1: of the curve. UM and and so a single um,
Speaker 1: a single bond ETF would allow you to do that. Um,
Speaker 1: you know, is it Is it going to be something
Speaker 1: that's going to be used by most investors. I'm not
Speaker 1: sure that they make sense for most investors, who if
Speaker 1: you're going to buy a certain part of the curve,
Speaker 1: you'd be better off buying, say this a seven to
Speaker 1: ten year fund. And there's plenty of ETFs out there
Speaker 1: that are like intermediate term bond funds or short term
Speaker 1: bond funds, and I think those might make a little
Speaker 1: more sense than buying a single bond ETF for for
Speaker 1: a vast majority of investors. But for traders, if you
Speaker 1: have a specific reason to buy a particular part of
Speaker 1: the curve, then than a single bond ETF could make
Speaker 1: a lot of sense. Okay, what about a new bond
Speaker 1: blocks is a new sort of upstart bond ETF company
Speaker 1: with some people who used to work at black Rock,
Speaker 1: and they're very smart people there. Um we actually lost
Speaker 1: Bloomberg person went to work there as well. Um x
Speaker 1: C C C. This is um all triple C bonds
Speaker 1: in an e t F. This is to me interesting
Speaker 1: because up until now the most triple cs you can
Speaker 1: get in a junk bond ETF was about it held
Speaker 1: maybe was triple C. This is a hundred, so it's
Speaker 1: going from to a hundred and h y G and
Speaker 1: J and K only hold about eight. So this is
Speaker 1: very very huge, big step forward into the junkier side
Speaker 1: of junk. And I want to get your take on that.
Speaker 1: So there's a couple of things. I mean, high yield
Speaker 1: in general and and the lower rated you get, so
Speaker 1: like going down to triple C, which is very close
Speaker 1: to default ratings. So these are very low rated bonds
Speaker 1: and not actually the sector that I curve currently, although
Speaker 1: I haven't in the in the distant past, it was
Speaker 1: part of my job. Um, they tend not to be
Speaker 1: very interest rate sensitive, right, so so they tend to
Speaker 1: trade more on price as opposed to yield. Um. You know,
Speaker 1: if that if the five year treasury or ten year
Speaker 1: treasury moves a lot, you might not see any movement
Speaker 1: in triple C bonds because they trade much more like equities.
Speaker 1: So buying a triple C bond is basically saying, I
Speaker 1: don't think that the majority of companies within this UM,
Speaker 1: within this portfolio, we're going to default, right, are gonna
Speaker 1: stop paying their their interest and principal payments. So so
Speaker 1: triple cs are very low rated, tend to be very
Speaker 1: sensitive to two movements in the equity market and in
Speaker 1: the underlying stocks of the companies that are UM that
Speaker 1: are in that portfolio. So if you're going to buy that,
Speaker 1: just know that you're you're not really buying interest rates,
Speaker 1: You're you're more buying credit risk if you're if you're
Speaker 1: going to buy anyt F like that, Okay, I want
Speaker 1: to ask you about another one. This is one of
Speaker 1: the fastest growing bond ETFs on the market. It's called
Speaker 1: I U s B and it's the I shares Core
Speaker 1: Total US Bond Market et F. Traditionally everybody has gone
Speaker 1: into b n D and a g G, which tracked
Speaker 1: the quote AG. The Aggregate Bond Index, which is a
Speaker 1: Bloomberg index used to be Barkley's easily the most popular. Right,
Speaker 1: a lot of fixed income managers have easily beaten the
Speaker 1: EGG to a higher rate than equity managers can beat
Speaker 1: the SNP, and thus they have staved off the move
Speaker 1: to passive much better. But the agg IS holds a
Speaker 1: lot of treasuries and doesn't hold any high yielded international
Speaker 1: And many of these managers go out and they buy
Speaker 1: high yield international. An I U s B holds dose
Speaker 1: of high yield and international and it's more bonds. And
Speaker 1: when you compare the fixed income managers to that, their
Speaker 1: beat rate gets more in line with the equity side.
Speaker 1: Thoughts on that as being your chords that of a
Speaker 1: g g UM I have to admit I'm not as
Speaker 1: familiar with with a USB at all, but it seems
Speaker 1: to me like it. Again, it would depend on what
Speaker 1: your um what your goal was. I mean, I mean
Speaker 1: anytime you hold a broad based fixed income index, your
Speaker 1: your primary returns are going to come from rates um
Speaker 1: particularly investment grade indices, which which is what you're talking
Speaker 1: about here. So if you own a g g like,
Speaker 1: your return is going to come from what goes on
Speaker 1: in mind market. The rest of it is going to
Speaker 1: come from credit risk or what's gone on in the
Speaker 1: mortgage market, where mortgage spreads might widen or tighten a
Speaker 1: little bit because of supplying demand dynamics and the like.
Speaker 1: UM so any time that that you own these I think,
Speaker 1: you know, it's things like cost that are gonna matter,
Speaker 1: you know, for for sure um. And then also how
Speaker 1: much credit exposure do you want? Because I think that
Speaker 1: that you know, there's a lot of people who in
Speaker 1: a period where say they think that risk assets are
Speaker 1: going to do better, they might want more credit exposure.
Speaker 1: So you want to look at how muchy corporate bonds
Speaker 1: and how much high yield is in any particular portfolio,
Speaker 1: you know, whether it's whether it's an et F or
Speaker 1: or a mutual fund. And you know, so I think
Speaker 1: you really want to make sure that that your risk
Speaker 1: profile also isn't um isn't commingled right. So so if
Speaker 1: you were, if you're an investor who you know, you
Speaker 1: have a lot of stocks, and you have a lot
Speaker 1: of you know, say small cap stocks for example, you
Speaker 1: might not want necessarily a whole lot of high yield
Speaker 1: exposure because now you have two asset classes that are
Speaker 1: very collinear um and and that will move very similarly.
Speaker 1: So you you know, a lot of times you buy bonds,
Speaker 1: like why do you buy bonds? If you buy bonds
Speaker 1: because it's a hedge for your stock portfolio. Then you know,
Speaker 1: you don't want a whole lot of um, a whole
Speaker 1: lot of credit exposure compared to say treasuries or mortgages,
Speaker 1: which tend to have less correlation in terms of in
Speaker 1: terms of excess returns compared to the equity market. So um,
Speaker 1: you know. So, so I would say in general that
Speaker 1: that's what you have to look at, is just you
Speaker 1: know what, what kind of risk profiles both of those
Speaker 1: portfolios are going to have, regardless of of of which
Speaker 1: broduct there. Okay Ira. At the top of this episode,
Speaker 1: Eric likened the FED to God. So does God exist
Speaker 1: well as one of the as one of the priests,
Speaker 1: I have to say, yes, okay, So alright, I was
Speaker 1: expecting that answer. Yeah. I don't know if am I
Speaker 1: going to get in trouble from the real God for that?
Speaker 1: Let me just say to the real God, it's just
Speaker 1: the figure of speech, but I will say when it
Speaker 1: comes to markets, Um, I'm just so blown away. Over
Speaker 1: the last fifteen years, in particular, almost everything is related
Speaker 1: to how the FED will react. So bad news can
Speaker 1: be good and good news can be bad. And it's
Speaker 1: just really interesting of how much power this one service
Speaker 1: and the one person particularly whoever is the FED chair
Speaker 1: has over the markets. I mean the whole thing. It's
Speaker 1: like the sun. Maybe that's a better metaphor, but um,
Speaker 1: it's just it's just something else. It's just really um
Speaker 1: more than I thought when I was in like college
Speaker 1: and stuff. I just didn't think the FED was this
Speaker 1: this omnipotent. They always have been eric and you know,
Speaker 1: the Federal Reserve when we go back to you know,
Speaker 1: and I started my career in the early nineteen nineties,
Speaker 1: and we were worried, and we were very worried about
Speaker 1: the Federal Reserve, um, you know, hiking interest rates back then.
Speaker 1: And and you know, one point, they hiked interest rate
Speaker 1: basis points at one point, just like they did the
Speaker 1: Less couple of meetings, and that was a bit of
Speaker 1: a surprise because people thought that they were only gonna
Speaker 1: hike fifty right. So, so you had this significant You've
Speaker 1: always had the Federal Reserve and and the markets anticipating
Speaker 1: what will the Federal Reserve do? And then what effect
Speaker 1: will that then have on the economy and therefore the
Speaker 1: markets and and so so the analysis of financial markets
Speaker 1: in general almost has to start with the macroeconomy and
Speaker 1: then how the Federal Reserve is going to react to that,
Speaker 1: and then everything else stems from there and kind uh
Speaker 1: you know, spokes off the wheel that you know, if
Speaker 1: the if the Federal reserves that kind of in the
Speaker 1: middle of the of that wheel. Think about all the
Speaker 1: spokes that that come off from that and uh, and
Speaker 1: how that affects the different parts of the economy and
Speaker 1: the different markets. Okay, So last question, Ira, We've got
Speaker 1: this Jackson Hole uh FED annual meeting happening soon. You
Speaker 1: mentioned earlier that you would expect a big sort of
Speaker 1: policy presence or or statement from from Pal. Pretend you're
Speaker 1: j Pal and you have this forum. What what are
Speaker 1: you going to put forward? Yeah, so Jackson Hole, I
Speaker 1: think J. Powell will um, uh what will probably basically
Speaker 1: stay the course and say, look, even though the CPI
Speaker 1: data is better, and and we're encouraged by the fact
Speaker 1: that we had you know, zero percent inflation court month
Speaker 1: over month, um, we're still very concerned about core inflation measures.
Speaker 1: We still think the employment the employment situation is very
Speaker 1: hot and wages arising very quickly, and all of these
Speaker 1: things still point to us needing to be vigilant over inflation,
Speaker 1: which once he uses language like that that's suggesting that
Speaker 1: they're still going to be in hiking mode. And I
Speaker 1: think that J. Powell is likely to take the opportunity
Speaker 1: to continue to say that, and I would agree with
Speaker 1: him in that regard um. But but again, like I
Speaker 1: think that he might even need to be And if
Speaker 1: I were him, I would be even more forceful and say, like, look,
Speaker 1: the market has it wrong. Just say it. The market
Speaker 1: thinks that we're only going to hike to three and
Speaker 1: a half percent, We're going more than that. And you've
Speaker 1: already had a lot of speakers since the July meeting
Speaker 1: say we've already you know, we we think we're gonna
Speaker 1: hike to three point seven five to four percent by
Speaker 1: year end. Well, you know the market is still not
Speaker 1: pricing for that. So and and and this would be
Speaker 1: his big opportunity for I think the FED chair to
Speaker 1: be very explicit about the expectations of the Committee as
Speaker 1: a whole and him in particular as to how how
Speaker 1: much they're going to hike for the rest of the
Speaker 1: year and in twenty me through it. I have a
Speaker 1: last question for you. Do you have a favorite et
Speaker 1: F ticker? Uh? You mean the actual ticker or the fund.
Speaker 1: Well let's start with ticker, but you can tick. You
Speaker 1: can if if you prefer fun that's okay too. Uh yeah,
Speaker 1: well it's funny now that since my parents live in
Speaker 1: North Carolina, I was I was thinking what Eric just
Speaker 1: said with you all, um, but the yeah, probably probably tip.
Speaker 1: I think that that's a great, great ticker, like just
Speaker 1: in general, because it could actually have meant a lot
Speaker 1: of things, Like I was actually surprised that, you know,
Speaker 1: someone else didn't have some kind of e t F
Speaker 1: that automatically, um, you know, did things off of you know,
Speaker 1: tips that that uh you know, maybe maybe equity analysts
Speaker 1: had or something like that. Um, but uh yeah, tip
Speaker 1: is a great ticker, I think. Ira Gersy, thanks so
Speaker 1: much for joining us on Trillions. Thank you for having me,
Speaker 1: Thanks for listening to Trillions until next time. You can
Speaker 1: find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify,
Speaker 1: or wherever else you'd like to listen. We'd love to
Speaker 1: hear from you. We're on Twitter, I'm at Joel Webber Show.
Speaker 1: He's at Eric Baltunas. This episode of Trillions was produced
Speaker 1: by Magnus Hendrickson spipe