WEBVTT - Fedsplaining with Ira Jersey 0:00:06.000 --> 0:00:08.880 Welknd A trillions. I'm Joel Weipper and I'm Eric beltis 0:00:12.320 --> 0:00:15.200 Eric these inflation numbers, it's like it might not even 0:00:15.200 --> 0:00:19.239 be a problem anymore, right, Well, it's become. It depends 0:00:19.280 --> 0:00:24.080 on your narrative. These these numbers, it's like they perfectly 0:00:24.120 --> 0:00:28.000 fit two different narratives. Uh, and politics are now involved. 0:00:28.040 --> 0:00:31.200 It's a shame. Politics ruins everything. But basically, some people 0:00:31.240 --> 0:00:35.559 are out saying inflation is zero percent, which in a 0:00:35.560 --> 0:00:38.000 way it is if you look month over month, but 0:00:38.360 --> 0:00:40.480 it's also eight point five percent if you look over 0:00:40.720 --> 0:00:43.640 I was gonna say it's not zero. Yeah, So actually 0:00:43.640 --> 0:00:46.599 pulled people, I said, what would you say? Us inflation 0:00:46.680 --> 0:00:49.640 is in July zero or eight point five, like two 0:00:49.680 --> 0:00:52.519 massively different numbers, and it was almost fifty fifty. So 0:00:52.560 --> 0:00:55.959 I think it depends on you know, I had. It's 0:00:55.960 --> 0:00:59.160 probably depends on where you fall politically. It also probably 0:00:59.160 --> 0:01:01.720 depends on whether you're a fan of the FED or 0:01:01.800 --> 0:01:04.000 you hate the Fed. There's a lot of things that 0:01:04.080 --> 0:01:06.920 go into people presenting this number. There are some people 0:01:07.000 --> 0:01:10.440 middle of the road who do explain all that. They say, well, 0:01:10.520 --> 0:01:13.920 it's good that it didn't grow, but it's still a problem. Overall, 0:01:14.280 --> 0:01:16.319 and I think that's sort of the route I like 0:01:16.400 --> 0:01:18.800 to see or I like to take. But this number, 0:01:19.280 --> 0:01:22.200 the importance of this number isn't just the elections. It's 0:01:22.200 --> 0:01:25.520 also what the FED will do so and what the 0:01:25.520 --> 0:01:28.560 FED does just determines everything. Again, the Feds like God, 0:01:28.680 --> 0:01:30.840 and we all have to live under this God. So 0:01:30.880 --> 0:01:34.200 we need to know what God is up to to 0:01:34.280 --> 0:01:37.520 help us make sense of of what God is up to. You, 0:01:37.520 --> 0:01:40.319 you came up with a person on Bloomberg Intelligence named 0:01:40.319 --> 0:01:43.760 Ira Jersey for us to speak to. He's got a 0:01:43.800 --> 0:01:47.920 direct line to God, direct line to God. He's the 0:01:48.040 --> 0:01:53.280 US interest rate strategist in Bloomberg Intelligence. So so why 0:01:53.280 --> 0:01:56.240 do we want to talk to Ira today? I have 0:01:56.560 --> 0:01:59.040 found him to be the smartest person on this topic. 0:01:59.480 --> 0:02:02.280 He also worked as an actual asset manager, so he's 0:02:02.280 --> 0:02:05.160 had to put money to work. Now he writes about it, 0:02:05.200 --> 0:02:06.960 but I like that he had to have skin in 0:02:06.960 --> 0:02:10.560 the game for many years, and so he he really 0:02:10.760 --> 0:02:13.840 is great in interpreting the FED and how they will 0:02:14.360 --> 0:02:17.760 interpret different numbers their balance sheet. There's a lot of 0:02:18.160 --> 0:02:21.520 things that go into quote, just what's the FED gonna do? Um? 0:02:21.560 --> 0:02:23.720 And he's that's all He writes about So I thought 0:02:23.720 --> 0:02:26.400 he'd be good to give his take on where we're 0:02:26.400 --> 0:02:28.760 going to go from here and sort of fed splain 0:02:29.680 --> 0:02:34.280 all of the numbers that are coming out, namely the inflation. Okay, 0:02:34.280 --> 0:02:37.000 so joining us is going to be Ira Jersey of 0:02:37.000 --> 0:02:39.480 bloom Brig Intelligence. He's also one of the hosts of 0:02:39.520 --> 0:02:44.120 the Thick Focus podcast by bloom Brig Intelligence. So if 0:02:44.160 --> 0:02:46.120 you like what he has to say this time, please 0:02:46.160 --> 0:02:52.160 go check out that podcast as well, this time on Trilliance, 0:02:53.080 --> 0:02:59.240 fed splaining AI, Right, welcome to Trilliance, Thanks very much 0:02:59.240 --> 0:03:03.000 for having me. Okay, so we've got these inflation numbers. 0:03:03.800 --> 0:03:07.040 Maybe a little bit surprising because after you know, the 0:03:07.120 --> 0:03:11.000 numbers have just been on a tear. Maybe he's plateau ing. Now, 0:03:11.080 --> 0:03:14.919 how does that change the Fed's next move? Well, first, 0:03:15.480 --> 0:03:19.360 it was not completely unexpected that we'd have somewhat slower 0:03:19.400 --> 0:03:23.000 inflation in July than we had in June. Um, we 0:03:23.000 --> 0:03:25.360 were always expecting June to kind of be the peak 0:03:25.480 --> 0:03:29.040 in a year on year inflation in particular. Um. So 0:03:29.120 --> 0:03:31.160 for the FED, they're gonna look past some of these 0:03:31.240 --> 0:03:33.320 numbers for for one thing, it's only one number, right, 0:03:33.400 --> 0:03:36.600 So so we need a string of better numbers for 0:03:36.680 --> 0:03:40.520 the FED reserve not to remain relatively hawkish on hike 0:03:40.560 --> 0:03:44.040 interest rates. That's number one and number two. Um, when 0:03:44.040 --> 0:03:46.640 when you look into the details, right, So why was 0:03:46.920 --> 0:03:51.360 headline inflation zero month on month? Primarily because gas prices 0:03:51.480 --> 0:03:53.839 are down a lot. And then when you look under 0:03:53.880 --> 0:03:56.000 the hood and you look at a lot of the 0:03:56.040 --> 0:03:59.360 details of the numbers, so what we call call core inflation, 0:03:59.400 --> 0:04:02.200 so that's x looting food and energy that was still 0:04:02.280 --> 0:04:04.880 up pretty hefty and looks like you know, on on 0:04:04.920 --> 0:04:08.440 a on an annualized basis still up almost four percent, 0:04:08.640 --> 0:04:11.040 so and and on a year on year basis still 0:04:11.120 --> 0:04:14.040 up almost six percent. So you're still looking at inflation 0:04:14.080 --> 0:04:17.200 trends in for most goods and services that are still 0:04:17.320 --> 0:04:20.800 rising very significantly. And um, and the Fed is still 0:04:20.839 --> 0:04:22.240 not going to like that. And I think that you're 0:04:22.240 --> 0:04:23.800 going to have to hear that from a lot of 0:04:23.800 --> 0:04:26.640 FED speakers over the next six weeks or so before 0:04:26.680 --> 0:04:30.119 the next meeting. So, um, you know I have heard again, 0:04:30.240 --> 0:04:32.159 um correctly if I'm wrong, that the Fed is would 0:04:32.160 --> 0:04:34.880 like to get two what is the two percent the 0:04:34.960 --> 0:04:38.600 year over year? Like what what? What? What? What number 0:04:38.760 --> 0:04:42.120 is two percent? And how would they get there? Yeah, so, 0:04:42.120 --> 0:04:44.560 so the goal of the Federal Reserve is two percent 0:04:44.760 --> 0:04:47.919 year on year inflation for the headline number. Now, you know, 0:04:47.960 --> 0:04:50.400 if they hit two point three or you know, if 0:04:50.560 --> 0:04:52.440 if it's within the range and then they see core 0:04:52.520 --> 0:04:54.919 inflation that that X food and energy is kind of 0:04:54.960 --> 0:04:57.920 at two percent, they that would make them pretty happy. Um. 0:04:58.080 --> 0:05:01.520 So that's their goal and that's their state objective. The 0:05:01.600 --> 0:05:03.880 problem is is that it's quite frankly, it's gonna take 0:05:03.960 --> 0:05:06.200 years for them to get there. So the question is 0:05:06.240 --> 0:05:10.880 do they remain um in this inflation fighting mode until 0:05:10.920 --> 0:05:13.760 they get to two percent? Or if you see this 0:05:13.920 --> 0:05:17.840 massive downtrend and inflation, will that make them you know, 0:05:17.880 --> 0:05:21.160 stop hiking interest rates and maybe do some more dovish activity, 0:05:21.320 --> 0:05:23.880 especially if the rest of the economy looks like it's 0:05:23.920 --> 0:05:27.039 falling apart. So if you see unemployment going up and 0:05:27.120 --> 0:05:30.320 you see um retail sales for example, start to plummet 0:05:30.440 --> 0:05:34.000 very significantly again excluding gas, right because get you know, 0:05:34.040 --> 0:05:36.359 retail sales with gas in it is going to be 0:05:36.400 --> 0:05:39.480 down anyway, just because we're paying less at the pump. Um. 0:05:39.520 --> 0:05:42.360 So so I that really is that number, Eric, that 0:05:42.360 --> 0:05:44.400 that you have to focus on when you're thinking about 0:05:44.440 --> 0:05:47.120 what is the federal reserves next move, is that um 0:05:47.600 --> 0:05:49.680 is going to be the trend in that headline number, 0:05:49.720 --> 0:05:51.880 but also that core number. So you really need to 0:05:51.960 --> 0:05:54.920 look at both. Well, okay, let me okay, if it's 0:05:55.000 --> 0:05:58.719 year over year and it was nine in June and 0:05:58.800 --> 0:06:01.800 now eight point five percent in July, I guess my 0:06:01.839 --> 0:06:05.880 point is we elevated that much in a year. Now 0:06:06.080 --> 0:06:10.600 are they looking to undo the elevation or just hang 0:06:10.680 --> 0:06:13.719 on for the next ten months until the elevated number 0:06:14.160 --> 0:06:17.760 goes up less than two from an already elevated number. 0:06:17.800 --> 0:06:20.359 Like if we're let's let's put this in weight terms, 0:06:20.720 --> 0:06:23.279 where we weigh two hundred pounds nick, but Julie did 0:06:23.279 --> 0:06:25.080 this on Twitter. I thought it was a good metaphor. 0:06:25.440 --> 0:06:28.880 We now we weigh two hundred and twenty pounds, uh, 0:06:28.920 --> 0:06:32.280 and in July we gain no weight. We're still to twenty. 0:06:32.000 --> 0:06:34.560 Are they Are they going to look to go back 0:06:34.560 --> 0:06:37.479 down to two hundred or just keep to twenty for 0:06:37.520 --> 0:06:40.719 the next eight months or ten months? Well, so, so 0:06:40.800 --> 0:06:43.440 the real goal is to get the growth rate lower. 0:06:43.600 --> 0:06:47.239 So it would be the weight example is not quite 0:06:47.240 --> 0:06:49.640 good because I'd be saying you know, we went from 0:06:49.680 --> 0:06:52.360 two percent to two or two two hundred pounds to 0:06:52.440 --> 0:06:55.280 twenty and now in the future we only want to 0:06:55.320 --> 0:06:57.480 go up. We only want to go up about four 0:06:57.520 --> 0:06:59.839 pounds a year, right, And so so I'm not sure 0:06:59.880 --> 0:07:03.400 that analogy is why I don't like that. That sounds 0:07:03.560 --> 0:07:10.920 that sounds too real, um, which which you know may 0:07:10.920 --> 0:07:13.200 be true for some people. But but the real goal 0:07:13.320 --> 0:07:16.400 is to kind of stop the stop the increase, right, 0:07:16.440 --> 0:07:18.280 So it's really but in other words, but that that 0:07:18.400 --> 0:07:22.240 still accepts the fact that it has increased. Prices are up, 0:07:22.440 --> 0:07:24.840 and that's so in other words, we're okay at this 0:07:24.880 --> 0:07:27.640 new normal. We just don't want it to grow anymore. Correct. 0:07:27.640 --> 0:07:30.240 So so the so so the FEDS, the FEDS job 0:07:30.320 --> 0:07:34.400 here is to um slow the growth, not change the level, 0:07:34.560 --> 0:07:36.880 if that makes sense, right. You know, it's okay, you 0:07:36.880 --> 0:07:38.920 don't want to go from the Fed's not going to 0:07:39.000 --> 0:07:41.040 go from two to two hundred, right, that would be 0:07:41.080 --> 0:07:44.120 deflation or disinflation. That would be a whole different problem. 0:07:44.360 --> 0:07:46.320 We're gonna be in the heavyweight category from now on. 0:07:48.240 --> 0:07:49.720 I'm going to use this on my wife because I 0:07:49.760 --> 0:07:52.120 did put on about fifteen pounds during the pandemic, but 0:07:52.160 --> 0:07:55.120 I haven't gained any weight in about six months. I 0:07:55.160 --> 0:07:57.400 was gonna do that inflation Jedi mind trick on her 0:07:57.480 --> 0:08:00.320 and be like, I haven't gained any weight zero. Good 0:08:00.400 --> 0:08:02.200 luck with that. She's gonna go, Yes, you have, but 0:08:02.240 --> 0:08:07.480 I'm like, no, I'm talking about in July. So so 0:08:07.520 --> 0:08:11.680 if you're the Fed, your j PAL, you're looking at 0:08:11.720 --> 0:08:15.280 this in your options, what what are you looking for 0:08:15.480 --> 0:08:18.680 going forward here in these next few weeks before this 0:08:18.920 --> 0:08:22.120 next right decision that might you know, change the course 0:08:22.160 --> 0:08:25.640 of what the next hike or non hike looks like. Well, 0:08:25.680 --> 0:08:29.120 what's interesting about this cycle is normally you you get 0:08:29.160 --> 0:08:31.680 six weeks in between Federal Reserve meetings, so you kind 0:08:31.680 --> 0:08:34.360 of get one and a half month's worth of data 0:08:34.440 --> 0:08:36.760 before the FED has to make a decision. But this 0:08:36.800 --> 0:08:39.560 time is unusual because they're gonna have two months. They 0:08:39.559 --> 0:08:42.440 have eight weeks in between FED meetings, and because of that, 0:08:42.440 --> 0:08:44.480 they're actually gonna get two sets of data. So even 0:08:44.480 --> 0:08:47.400 though we got the July numbers for CPI and we'll 0:08:47.400 --> 0:08:50.840 get the July retail sales numbers um and you know, 0:08:50.880 --> 0:08:54.480 before the Jackson Whole symposium where where j PAL will 0:08:54.520 --> 0:08:58.080 speak and probably make a pretty important policy address. They're 0:08:58.080 --> 0:09:00.199 gonna get all the August numbers too before or the 0:09:00.280 --> 0:09:03.200 next meeting, so they're gonna have this whole huge set 0:09:03.240 --> 0:09:05.400 of data that they're going to have to consider. So 0:09:05.679 --> 0:09:09.000 if there's a re acceleration, like you know, oil prices 0:09:09.000 --> 0:09:11.000 are up a little bit now compared to where they 0:09:11.040 --> 0:09:15.720 were um when when the when the July number was calculated, 0:09:16.000 --> 0:09:19.760 so all of these things will probably see um, you know, 0:09:19.840 --> 0:09:24.760 a a maybe a slightly continued downtrend of of headline inflation, 0:09:25.080 --> 0:09:27.960 but things like core inflation at five point nine percent, 0:09:28.080 --> 0:09:30.200 which is by the way, a multi decade high, and 0:09:30.240 --> 0:09:33.319 we stayed there um from June to July, so it's 0:09:33.320 --> 0:09:35.400 at the exact same number on a year on year basis. 0:09:35.800 --> 0:09:38.480 If that stays at those kind of levels, that's going 0:09:38.559 --> 0:09:41.160 to lead the FED to say, okay, well we think 0:09:41.160 --> 0:09:43.360 that inflation is going to be much stickier and at 0:09:43.440 --> 0:09:45.960 levels we don't like. So so the FED is going 0:09:46.040 --> 0:09:50.120 to be looking for significant down trends in the economy um. 0:09:50.320 --> 0:09:52.400 And there are some signs of that of a slowing 0:09:52.400 --> 0:09:55.120 in the economy, but they haven't rolled over enough I 0:09:55.120 --> 0:09:57.080 think for the FED Reserve to get dubbish. So they're 0:09:57.080 --> 0:10:01.280 gonna keep on reducing their balance sheet. Eric Apply alluded 0:10:01.320 --> 0:10:03.600 to that not so long ago, UM. And at the 0:10:03.640 --> 0:10:05.800 other at the other side, they're also going to be 0:10:06.120 --> 0:10:08.320 UM continuing to hike interest rates, even if it's at 0:10:08.320 --> 0:10:11.080 a slower pace. Right, the seventy five basis point hikes 0:10:11.080 --> 0:10:13.640 that they've done the last couple of meetings probably won't 0:10:13.640 --> 0:10:16.480 be sustained, UM, But if they go fifty basis points 0:10:16.480 --> 0:10:19.319 in September and then basis points there after, that wouldn't 0:10:19.360 --> 0:10:21.720 be a huge surprise to us. And just can you 0:10:21.800 --> 0:10:25.079 break down what happens when the Fed hikes let's say 0:10:25.080 --> 0:10:29.200 they hike seventy five basis points, how does that action 0:10:30.000 --> 0:10:33.480 cause a reaction that helps inflation? Like, can you just 0:10:33.880 --> 0:10:36.480 take us through that chain of events and where that 0:10:36.720 --> 0:10:39.920 hike goes. Sure? So, so in the olden days, when 0:10:39.960 --> 0:10:43.080 we go back to the pre N three you know, 0:10:43.160 --> 0:10:46.640 when we're on the gold standard, the Federal Reserve tried 0:10:46.679 --> 0:10:49.160 to slow the economy and increase the economy by changing 0:10:49.160 --> 0:10:51.160 the amount of money in the economy. So they used 0:10:51.200 --> 0:10:54.360 to target monetary aggregates, what they called monetary aggregates. So 0:10:54.880 --> 0:10:57.559 M three M two UM and and some of these 0:10:57.559 --> 0:11:01.320 other money supply measures UM and so since that time. 0:11:01.520 --> 0:11:04.800 But but so since the nineteen seventy three, they instead 0:11:04.840 --> 0:11:09.199 of targeting any particular stock of money, they basically say 0:11:09.240 --> 0:11:12.480 we're gonna make borrowing either more or less expensive, and 0:11:12.520 --> 0:11:15.280 they do that by raising the Federal Funds rate, which 0:11:15.280 --> 0:11:18.920 is the base rate that banks uh that banks lend 0:11:18.920 --> 0:11:21.520 money to each other. So when the Fed Funds rate 0:11:21.559 --> 0:11:24.120 goes up, that means that that bank borrowing costs go 0:11:24.240 --> 0:11:26.640 up that and they pass that along to the consumer, 0:11:27.000 --> 0:11:30.880 and it just generally makes it more expensive, um for 0:11:30.880 --> 0:11:34.520 for people to buy things on credit and UM and 0:11:34.640 --> 0:11:37.800 and because it's it's more difficult to buy things on credit, 0:11:37.840 --> 0:11:40.760 because it's just more expensive to do so, UM, that 0:11:40.800 --> 0:11:44.120 tends to slow economic activity. And that's that's certainly worked 0:11:44.480 --> 0:11:48.240 pretty pretty effectively over the last forty years or so. UM. 0:11:48.320 --> 0:11:51.880 Paul Vulker, you know, UH famously raised interest rates to 0:11:53.080 --> 0:11:56.720 during the nineteen uh the early nineteen eighties, and that 0:11:56.800 --> 0:12:00.000 had a significant effect on credit growth in the econom 0:12:00.000 --> 0:12:02.920 of me. UM. What's important now, and this is something 0:12:02.960 --> 0:12:05.120 that that we've noted in some of our recent research, 0:12:05.880 --> 0:12:09.520 is the the challenge I think for policymakers is that 0:12:09.840 --> 0:12:12.160 not only is inflation very high, but one of the 0:12:12.200 --> 0:12:15.480 reasons inflation is very high is because is that wages 0:12:15.520 --> 0:12:19.000 are going up. So so now you have a situation 0:12:19.040 --> 0:12:21.000 where the FED is going to be hiking short term 0:12:21.040 --> 0:12:23.720 interest rates to try and slow the economy, but in 0:12:23.760 --> 0:12:27.840 an environment where companies are willing to pay employees more money. Um. 0:12:28.000 --> 0:12:30.400 And and that's something that you haven't seen since the 0:12:30.480 --> 0:12:33.520 nineteen seventies. And I think that that's an important shift 0:12:33.640 --> 0:12:36.720 from the last forty years versus say the nineteen seventies, 0:12:36.720 --> 0:12:40.360 when people had were unions and they had automatic wage 0:12:40.360 --> 0:12:43.640 increases when CPI was um what what went up? They 0:12:43.679 --> 0:12:46.080 automatically had their wages increased. So you have this big 0:12:46.120 --> 0:12:50.520 wage spiral. You're seeing some similar activity today, um, which 0:12:50.600 --> 0:12:54.560 is which is very unusual, particularly in a non unionized workforce. 0:12:56.280 --> 0:12:59.320 Speaking of sort of historical precedents, one of the things 0:12:59.320 --> 0:13:01.800 that's interesting here, I saw a reference I think in 0:13:01.960 --> 0:13:05.880 John Author's recent column about what the FED got wrong 0:13:06.120 --> 0:13:09.240 in the seventies and sort of what what vocal Vulgar 0:13:09.360 --> 0:13:11.560 ended up having to correct, and that was sort of 0:13:11.600 --> 0:13:14.200 on on the Burns watch, I think, right. And so 0:13:14.440 --> 0:13:15.720 one of the things I guess I would ask you 0:13:15.760 --> 0:13:17.760 just to make that to bring it forward to now 0:13:17.880 --> 0:13:21.480 is what what could the Fed potentially get wrong here 0:13:21.600 --> 0:13:25.400 that J. Powell will be mindful of. Yeah. So I 0:13:25.440 --> 0:13:28.400 think that the big danger here is that the FED decides, 0:13:28.440 --> 0:13:30.760 because we're having a mid cycle slow down and the 0:13:30.760 --> 0:13:34.400 economy slows a little bit, that they stop hiking interest rates, 0:13:34.520 --> 0:13:38.040 and in doing so, the economy then re accelerates and 0:13:38.120 --> 0:13:42.280 you wind up with more persistent inflation, more persistent inflation expectations, 0:13:42.800 --> 0:13:46.719 and that forces the FED Reserve to hike even more later. Um. 0:13:46.800 --> 0:13:49.160 So I think that that's a real danger. And when 0:13:49.240 --> 0:13:51.800 you in all the work that that we've done, and 0:13:51.840 --> 0:13:54.720 that even that our colleagues at Bloomberg Economics with that 0:13:54.800 --> 0:13:57.240 and I'm Wrong's team in the US is has done, 0:13:57.480 --> 0:13:59.960 we all think that the Fed Reserve is probably going 0:14:00.040 --> 0:14:02.559 to have to hike more than what the market is 0:14:02.559 --> 0:14:05.520 currently pricing. So the markets pricing you know, round numbers 0:14:05.559 --> 0:14:07.120 three and a half to three and a half percent, 0:14:07.160 --> 0:14:10.520 So another hundred basis points one percent increase in in 0:14:10.600 --> 0:14:12.560 the FED funds rate over the over the next six 0:14:12.640 --> 0:14:15.280 months or so, and then the market has has the 0:14:15.320 --> 0:14:17.680 Fed stopping. Um. But we think that the Fed is 0:14:17.679 --> 0:14:20.240 going to have to keep going into three up to 0:14:20.920 --> 0:14:22.920 I think more like four and a quarter percent. The 0:14:22.920 --> 0:14:26.560 Bloomberg Economics things five percent, but but still significantly more 0:14:26.640 --> 0:14:29.600 than what the market is pricing. And in part because 0:14:29.640 --> 0:14:32.840 if they don't do that, then if if if in 0:14:32.920 --> 0:14:35.280 fact we're in the midst of a mid cycle slowdown, 0:14:35.280 --> 0:14:39.760 which is not unusual after very large pickups in the economy, UM, 0:14:39.960 --> 0:14:43.560 then you wind up getting more entrenched inflation expectations, and 0:14:43.600 --> 0:14:47.240 that forces employees to ask for more money. UH. Wages 0:14:47.280 --> 0:14:50.240 go up, profits get crimped on the on the corporate 0:14:50.600 --> 0:14:53.080 UH side, which you know, we've already priced some of 0:14:53.120 --> 0:14:57.480 that into the stock market for sure. But the you 0:14:57.520 --> 0:15:01.320 wind up getting getting inflation that has to be crimped 0:15:01.360 --> 0:15:05.920 down even harder and more. Um. So, so the worry 0:15:06.040 --> 0:15:08.040 is that you wind up with a you know, an 0:15:08.120 --> 0:15:10.800 Arthur Byurne situation where you stop hiking after a little 0:15:10.800 --> 0:15:13.560 while and then you have to hike even more later um. 0:15:13.720 --> 0:15:15.920 And so so we need a Vulcar. And I thought 0:15:15.920 --> 0:15:18.760 it was interesting a couple of meetings ago. J. Powell 0:15:18.760 --> 0:15:21.480 actually mentioned Vulcan and said that you know, they were 0:15:21.600 --> 0:15:24.280 very that that the Federal Reserve was very keen and 0:15:24.320 --> 0:15:27.120 appreciated what Volker had to do back in the nineteen eighties. 0:15:27.160 --> 0:15:29.160 And and I took that to mean that, like, they 0:15:29.560 --> 0:15:31.880 recognize what happened back then and they don't want to 0:15:31.880 --> 0:15:43.520 repeat the same mistakes. Let's talk about the hiking and 0:15:43.560 --> 0:15:47.880 the impact on on bonds first. Um. So, obviously, if 0:15:47.880 --> 0:15:52.120 the Fed hikes rates, interest rates go up, it basically 0:15:52.160 --> 0:15:55.040 means all the bonds that people hold are just worthless 0:15:55.120 --> 0:15:57.440 because you can now get bonds at a higher rate. Right, 0:15:57.560 --> 0:16:01.040 So what we've seen is just a bond e t 0:16:01.240 --> 0:16:04.480 F s and bond mutual funds are down. I mean 0:16:04.560 --> 0:16:07.520 basically everyone's down over the last twelve months. And in 0:16:07.520 --> 0:16:09.840 the mutual fund space there's been a ton of outflows too. 0:16:09.920 --> 0:16:12.920 It's just pretty bad. We have seen a lot of 0:16:12.920 --> 0:16:15.280 flows in the treasury ETFs all year. They basically about 0:16:15.320 --> 0:16:20.000 double their normal inflow takage. Then sometimes you'll see people 0:16:20.000 --> 0:16:23.280 shift down the curve, um, but then they'll go back 0:16:23.360 --> 0:16:26.480 to short term what's going on there? Um As a 0:16:26.520 --> 0:16:29.440 money manager, what's your interpretation of all the flows into 0:16:29.600 --> 0:16:32.000 treasury e t f this year? Yeah, I think part 0:16:32.040 --> 0:16:35.160 of that is just taking advantage of of higher yields. 0:16:35.320 --> 0:16:37.760 So when when interest rates or at zero, and they 0:16:37.800 --> 0:16:40.480 were at zero obviously for more than more than a year, 0:16:41.200 --> 0:16:44.240 you didn't have a lot of room to actually lose 0:16:44.280 --> 0:16:46.480 any money. Right, So, if you were buying, say a 0:16:46.800 --> 0:16:49.760 bond mutual fund, where when the tenure yield was at 0:16:49.840 --> 0:16:54.520 one percent or under one percent, then if you if 0:16:54.720 --> 0:16:56.880 interest rates only went up a couple of basis points, 0:16:56.880 --> 0:16:58.960 you'd start to lose money because the price of that 0:16:59.080 --> 0:17:01.960 bond would go down own um. There's something we call 0:17:02.080 --> 0:17:06.160 duration and um where where it's basically the relationship between 0:17:06.240 --> 0:17:09.480 the price and yield of a bond. Where um and 0:17:09.640 --> 0:17:12.200 and durations were very high, meaning that if you get 0:17:12.280 --> 0:17:14.760 just a one or two basis point increase in in 0:17:14.880 --> 0:17:17.960 bond yields, you'd wind up with a large decrease in 0:17:18.040 --> 0:17:20.520 the price of the bond. And that's exactly what's happened 0:17:20.560 --> 0:17:23.399 over the course of this year in particular. But now 0:17:23.480 --> 0:17:25.720 that we've reached you know, upwards of three percent on 0:17:25.800 --> 0:17:28.600 the ten year yield um, it makes it a little 0:17:28.600 --> 0:17:32.040 bit more attractive because you can actually get a coupon, 0:17:32.160 --> 0:17:35.240 you actually get interest payments of some you know, some 0:17:36.000 --> 0:17:38.280 amount I mean not the three percent is particularly high 0:17:38.320 --> 0:17:41.159 in historical standards for the last forty years, but it's 0:17:41.200 --> 0:17:43.600 still significantly more than you know, the seventy five basis 0:17:43.640 --> 0:17:46.320 points where um, where bonds were at the beginning of 0:17:47.000 --> 0:17:49.080 one right. So um, So, so you wind up with 0:17:49.240 --> 0:17:51.600 with an environment where it's maybe a little bit more 0:17:51.640 --> 0:17:54.360 attractive to buy bonds today than it has been recently. 0:17:55.160 --> 0:17:57.440 So I read this being an e t F podcast, 0:17:57.960 --> 0:18:01.520 Just let's stick with, uh what your outlook and how 0:18:01.600 --> 0:18:05.879 that informs E t fs. And you know, Eric specifically 0:18:05.960 --> 0:18:09.119 mentioned bonds. They're curious, um, you know, even on the 0:18:09.200 --> 0:18:11.640 equity side, like where do you when you think about 0:18:11.680 --> 0:18:15.240 this on a bigger macro level, what do people in 0:18:15.320 --> 0:18:18.080 the E t F world? What should they be mindful 0:18:18.119 --> 0:18:21.640 of here? Yeah? So, so I think firstly, if if 0:18:21.720 --> 0:18:25.080 we are right and the Federal Reserve hikes a little 0:18:25.119 --> 0:18:27.760 bit more um than the market is currently pricing, that 0:18:27.920 --> 0:18:30.879 you could still see negative returns for bonds over the 0:18:30.960 --> 0:18:34.560 next uh six six to twelve months. Um. But but 0:18:34.600 --> 0:18:37.160 I don't think it's gonna compare anything like we had 0:18:37.359 --> 0:18:39.960 over the previous six months. So um. You know, the 0:18:40.600 --> 0:18:46.280 first half of has been absolutely abysmal forum for treasury 0:18:46.359 --> 0:18:50.120 securities and and bonds in general. UM. So it's it's 0:18:50.680 --> 0:18:52.720 what to look out for in particular is when the 0:18:52.760 --> 0:18:56.119 Fed stops right, So, when the Federal Reserve stops hiking 0:18:56.160 --> 0:18:59.200 interest rates, it's very likely that UM that shorter term 0:18:59.280 --> 0:19:02.720 securities going to do a bit better than longer term securities. Now, 0:19:02.800 --> 0:19:04.880 if you're you're if you're buying any t F typically 0:19:05.760 --> 0:19:08.520 they don't wait securities by their risk profile, by the 0:19:08.640 --> 0:19:11.399 duration that I talked about earlier. But what they do 0:19:11.720 --> 0:19:15.320 what so so in total return terms UM is short 0:19:15.440 --> 0:19:19.359 end securities could still maybe underperform longer term securities on 0:19:19.440 --> 0:19:22.280 a price basis, but but you could wind up with 0:19:22.359 --> 0:19:25.280 an environment like we have today where short term securities 0:19:25.359 --> 0:19:29.399 offer more yield, more interest UM over over the near term. 0:19:29.480 --> 0:19:31.720 So it really depends on what your risk profile is 0:19:31.760 --> 0:19:35.119 why you're buying bonds UM. If you're buying bonds and 0:19:35.400 --> 0:19:38.360 you're buying a bond fund you know t LT for example, 0:19:38.640 --> 0:19:40.800 or one of those types of ETFs that that is 0:19:40.920 --> 0:19:44.240 long only and tends to be longer term securities, they 0:19:44.640 --> 0:19:46.600 at this point might be more of a hedge to 0:19:47.440 --> 0:19:51.719 your equity portfolio than they were when um uh, when 0:19:52.160 --> 0:19:55.040 interest rates were basically at zero, and and they didn't 0:19:55.119 --> 0:19:58.120 offer very much protection because even if the stock market 0:19:58.160 --> 0:20:01.119 went down ten percent, the tenure yield wasn't going to 0:20:01.200 --> 0:20:03.320 go down so much that you were going to be 0:20:03.359 --> 0:20:05.920 able to make up for that um that that that 0:20:06.080 --> 0:20:09.440 downturn in your risk ask set portfolio. So so so 0:20:09.520 --> 0:20:11.560 I think at this point we're going to have start 0:20:11.640 --> 0:20:15.080 to have more and more of a normal relationship where 0:20:15.240 --> 0:20:18.440 you know, equities go up, you know, bond prices go down, 0:20:18.560 --> 0:20:21.480 and then vice versa, where where you can actually use 0:20:21.560 --> 0:20:23.680 bonds as a hedge again, which you couldn't do for 0:20:23.720 --> 0:20:26.160 a couple of years. Yeah. No, that was a big deal, 0:20:26.280 --> 0:20:28.440 is that the sixty and the forty were down. Although 0:20:28.520 --> 0:20:31.120 I was trying to explain to people that both went 0:20:31.280 --> 0:20:34.960 up for many years. I think part of the reason 0:20:35.000 --> 0:20:37.040 they both went up was the Fed was very accommodative. 0:20:37.080 --> 0:20:39.200 So stands to reason if the Fed good does a 0:20:39.280 --> 0:20:41.439 one eight uh, they would both go down for at 0:20:41.520 --> 0:20:44.800 least a little bit um, which has happened already this year. Actually, 0:20:44.800 --> 0:20:47.560 are right, So so you you have seen both stocks 0:20:47.600 --> 0:20:51.359 and bonds prices go down and have negative returns and 0:20:51.400 --> 0:20:53.840 like you said, sixty was terrible and and that's the 0:20:54.400 --> 0:20:57.479 that's the quantitative tightening trade right there. So well when 0:20:57.600 --> 0:21:00.320 when you and let me just jump in on that 0:21:00.480 --> 0:21:03.119 quantitative tightening. So we just talked about the rates. Just 0:21:03.400 --> 0:21:05.800 let's just hand like deal with the other side of this. 0:21:06.400 --> 0:21:09.359