1 00:00:05,120 --> 00:00:08,480 Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along 2 00:00:08,520 --> 00:00:12,360 Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day 3 00:00:12,400 --> 00:00:16,880 Speaker 1: for insight from the best an economics, geopolitics, finance and investment. 4 00:00:17,280 --> 00:00:22,079 Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 5 00:00:22,320 --> 00:00:26,600 Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot Com, 6 00:00:26,640 --> 00:00:31,400 Speaker 1: the Bloomberg Terminal and the Bloomberg Business app. Torston Slock 7 00:00:31,400 --> 00:00:35,519 Speaker 1: of Apollo Global Management was on Williams R. Start Torston 8 00:00:35,600 --> 00:00:40,720 Speaker 1: I was absolutely thunderstruck by the responses capmany out at 9 00:00:40,720 --> 00:00:43,960 Speaker 1: four percent, leaf Farage in a three handle, and even 10 00:00:44,080 --> 00:00:47,680 Speaker 1: you going all un anchored on Williams and suggesting we 11 00:00:47,760 --> 00:00:51,120 Speaker 1: go from this two percent nirvana up to something higher 12 00:00:51,240 --> 00:00:54,320 Speaker 1: under three percent, but something higher. How does our world 13 00:00:54,440 --> 00:00:59,080 Speaker 1: change if we get a new interest rate regime out 14 00:00:59,080 --> 00:00:59,800 Speaker 1: there somewhere. 15 00:01:00,040 --> 00:01:02,680 Speaker 2: Well, I do think a very important implication is that 16 00:01:02,680 --> 00:01:05,200 Speaker 2: then the cost of capital will be higher, The cost 17 00:01:05,240 --> 00:01:07,720 Speaker 2: of capital will be higher for companies, the cost of 18 00:01:07,760 --> 00:01:10,560 Speaker 2: borrowing for consumers will be higher, and all that will, 19 00:01:10,640 --> 00:01:13,440 Speaker 2: of course imply that we're going to have more of 20 00:01:13,480 --> 00:01:15,959 Speaker 2: a significant impact, at least in the near term, on 21 00:01:16,400 --> 00:01:19,000 Speaker 2: not only consumption, but also on corporate spy price. 22 00:01:19,040 --> 00:01:22,840 Speaker 1: Do we see asset price reduction because they got yield 23 00:01:22,959 --> 00:01:25,080 Speaker 1: up price down in a simplistic way. 24 00:01:24,920 --> 00:01:27,240 Speaker 2: Yeah, because your equacy risk premium model, if you change 25 00:01:27,240 --> 00:01:30,400 Speaker 2: the risk free rate and you permanently increase that for 26 00:01:30,520 --> 00:01:35,800 Speaker 2: whatever recent demographics, interdy transition, less immigration, whatever it might be, 27 00:01:36,280 --> 00:01:38,520 Speaker 2: if you have the discount rate going up in any 28 00:01:38,520 --> 00:01:41,000 Speaker 2: finance model on page one in your textbook, would tell 29 00:01:41,040 --> 00:01:43,520 Speaker 2: you that then risky assets are going to become less 30 00:01:43,560 --> 00:01:44,600 Speaker 2: attractive relatively. 31 00:01:44,840 --> 00:01:47,360 Speaker 3: This has been a fascinating week because we've seen the 32 00:01:47,400 --> 00:01:50,160 Speaker 3: fastest pace of issue once this year when it comes 33 00:01:50,160 --> 00:01:53,560 Speaker 3: to investment grade bonds, the third busiest post labor day 34 00:01:53,600 --> 00:01:58,120 Speaker 3: couple of sessions going back to twenty ten. Companies are saying, Okay, 35 00:01:58,320 --> 00:02:00,560 Speaker 3: rates are going to be higher for longer. We're going 36 00:02:00,640 --> 00:02:02,400 Speaker 3: to sell debt because you know what, we're going to 37 00:02:02,440 --> 00:02:05,280 Speaker 3: have to just absorb these higher costs. Isn't this a 38 00:02:05,320 --> 00:02:09,280 Speaker 3: positive sign that they're actually able to absorb these costs 39 00:02:09,360 --> 00:02:12,239 Speaker 3: and able to access the credit markets and things keep 40 00:02:12,280 --> 00:02:14,160 Speaker 3: going even if at a more expensive rate. 41 00:02:14,360 --> 00:02:17,600 Speaker 2: Well, I mean, broadly speaking, of course, September is mainly 42 00:02:17,600 --> 00:02:20,160 Speaker 2: having a lot of issues because the summer normally has 43 00:02:20,360 --> 00:02:22,640 Speaker 2: relatively low levels of issue. So first there's a seasonal 44 00:02:22,639 --> 00:02:25,520 Speaker 2: issue why issuance has been so high this week. But 45 00:02:25,600 --> 00:02:27,679 Speaker 2: the other issue is also that well, we're at the 46 00:02:27,720 --> 00:02:30,320 Speaker 2: same time in the background seeing that the high yield 47 00:02:30,320 --> 00:02:32,840 Speaker 2: default rate is actually moving up quite quickly. In the 48 00:02:32,919 --> 00:02:35,880 Speaker 2: last six months, we're now at least on the Moody's 49 00:02:35,880 --> 00:02:37,639 Speaker 2: default rate, we are at around four percent. 50 00:02:38,040 --> 00:02:39,640 Speaker 4: And if we keep rates at these levels. 51 00:02:39,760 --> 00:02:41,760 Speaker 2: You know, every day on the Bloomberg Term and Lucy 52 00:02:41,800 --> 00:02:44,040 Speaker 2: stories about their companies that cannot get a new loan, 53 00:02:44,360 --> 00:02:46,880 Speaker 2: companies that cannot roll low on existing loan, in particular 54 00:02:47,000 --> 00:02:50,359 Speaker 2: for lower rated companies with higher leverage, and especially when 55 00:02:50,360 --> 00:02:53,399 Speaker 2: it comes to interest covers ratios. Insuest covers ratios, which 56 00:02:53,480 --> 00:02:57,440 Speaker 2: measure earnings divided by interest expense, is coming down both 57 00:02:57,480 --> 00:02:59,720 Speaker 2: for ig quite quickly and also for high yields. So 58 00:02:59,760 --> 00:03:01,720 Speaker 2: it is not the case that all firms just have 59 00:03:01,800 --> 00:03:04,800 Speaker 2: locked in long duration of lending. It is the case 60 00:03:04,840 --> 00:03:07,280 Speaker 2: that we're actually seeing interest covers ratios going down. 61 00:03:07,320 --> 00:03:08,639 Speaker 4: Both are the IT and HIGHAL index. 62 00:03:08,760 --> 00:03:10,799 Speaker 3: This is fascinating. The spike up that we're seeing in 63 00:03:10,840 --> 00:03:13,480 Speaker 3: high yel defaults I'll be it from really low rates 64 00:03:13,560 --> 00:03:17,000 Speaker 3: and I'll be it still at historically low levels when 65 00:03:17,040 --> 00:03:20,040 Speaker 3: you part, when you pass that out, are you basically 66 00:03:20,120 --> 00:03:23,080 Speaker 3: model the next six months, the next sex twelve months. 67 00:03:23,280 --> 00:03:26,400 Speaker 3: Do you end up with an acceleration of these defaults 68 00:03:26,840 --> 00:03:28,600 Speaker 3: or does it kind of plateau. Are we seeing the 69 00:03:28,600 --> 00:03:30,880 Speaker 3: pain now as some of the rate hikes come into 70 00:03:30,880 --> 00:03:31,280 Speaker 3: the market. 71 00:03:31,320 --> 00:03:34,080 Speaker 2: Well this is really important because so far the soft 72 00:03:34,160 --> 00:03:36,840 Speaker 2: landing document is that it has been very orderly the 73 00:03:36,920 --> 00:03:39,320 Speaker 2: slowdown in the label. Mind, it's been very orderly, the 74 00:03:39,360 --> 00:03:42,480 Speaker 2: slowdown in inflation. So what's the problem. Well, the problem 75 00:03:42,560 --> 00:03:44,640 Speaker 2: is that in the background, if you have this increase 76 00:03:44,760 --> 00:03:46,920 Speaker 2: in default rates, especially in high yield, and remember the 77 00:03:47,000 --> 00:03:50,360 Speaker 2: high yield industry basically has employment of roughly eleven million 78 00:03:50,400 --> 00:03:52,800 Speaker 2: people in the economy, so it's not small. So the 79 00:03:52,840 --> 00:03:55,560 Speaker 2: conclusion is if high yield default rates are going to 80 00:03:55,600 --> 00:03:59,240 Speaker 2: continue to move higher because companies cannot get financing, well, 81 00:03:59,280 --> 00:04:01,680 Speaker 2: then the if will be that maybe at the moment 82 00:04:01,680 --> 00:04:03,800 Speaker 2: these are names that many people tell me or we 83 00:04:03,880 --> 00:04:06,240 Speaker 2: haven't heard about. Well just wait until you get the 84 00:04:06,320 --> 00:04:08,240 Speaker 2: fault in a name that actually everyone has heard about. 85 00:04:08,240 --> 00:04:11,560 Speaker 2: Then that industry, that rating, that type of interest covers ratio, 86 00:04:11,560 --> 00:04:13,600 Speaker 2: that type of leverage is going to be much more vulnerable. 87 00:04:13,640 --> 00:04:16,640 Speaker 2: And that's to change sentiment potentially quite quickly in particularly 88 00:04:16,640 --> 00:04:17,960 Speaker 2: in highyel but also in IG. 89 00:04:18,080 --> 00:04:20,360 Speaker 3: And just across the board in terms of what kind 90 00:04:20,400 --> 00:04:22,400 Speaker 3: of rate structure is going to be important going forward. 91 00:04:22,400 --> 00:04:25,359 Speaker 3: As we were hearing from Stephen Major of HSBC in 92 00:04:25,360 --> 00:04:29,719 Speaker 3: particular that catalyst event. From your vantage point, how does 93 00:04:29,720 --> 00:04:32,600 Speaker 3: this play out the barecase? Is it some sort of 94 00:04:32,720 --> 00:04:35,760 Speaker 3: deep recession, is it some sort of fissure in the 95 00:04:35,760 --> 00:04:39,159 Speaker 3: credit markets, or is this just a recession the one 96 00:04:39,160 --> 00:04:41,120 Speaker 3: that everyone was calling for earlier this year. 97 00:04:41,320 --> 00:04:43,120 Speaker 2: So I do think that it will be a continuation 98 00:04:43,200 --> 00:04:46,360 Speaker 2: of what we're seeing the FED. They're stepping hot and 99 00:04:46,400 --> 00:04:48,559 Speaker 2: hot on the brakes, and this is not just about 100 00:04:48,560 --> 00:04:50,720 Speaker 2: the change in interest rates. This is about the level 101 00:04:50,720 --> 00:04:53,680 Speaker 2: of interest rates. And as that process continues, if you're 102 00:04:53,680 --> 00:04:55,920 Speaker 2: on your Bloomberg screen type ECFC, go have a look 103 00:04:55,920 --> 00:04:58,080 Speaker 2: at what nonvum payrolls are telling you about Q one 104 00:04:58,080 --> 00:05:01,160 Speaker 2: of next year. The consensus is expecting that non van 105 00:05:01,200 --> 00:05:04,440 Speaker 2: payrolls in January, February and March will be twelve thousand. 106 00:05:05,080 --> 00:05:06,920 Speaker 2: So you now lean back and say, well, if we're 107 00:05:06,960 --> 00:05:09,279 Speaker 2: getting non van payrolls in six months that will be 108 00:05:09,360 --> 00:05:11,880 Speaker 2: close to zero for three months in a row. How 109 00:05:11,920 --> 00:05:13,480 Speaker 2: do you think risk will trade on that? And if 110 00:05:13,480 --> 00:05:16,200 Speaker 2: that process of slowing the economy down as a result 111 00:05:16,240 --> 00:05:18,400 Speaker 2: of the feed having raised the cost of capital continues, 112 00:05:18,600 --> 00:05:21,440 Speaker 2: we should expect to see an ongoing slow down ahead 113 00:05:21,480 --> 00:05:23,520 Speaker 2: of us. And I do think that ultimately that we'll 114 00:05:23,560 --> 00:05:25,960 Speaker 2: create a risk of a hot landing. 115 00:05:25,720 --> 00:05:27,880 Speaker 1: In the last eighteen months coming out of COVID with 116 00:05:28,000 --> 00:05:31,640 Speaker 1: all the original economic framework that we have, the supply shock, etc. 117 00:05:32,640 --> 00:05:35,640 Speaker 1: We've had so many things wrong. We got the recession wrong, 118 00:05:36,400 --> 00:05:39,640 Speaker 1: we got before that transitory wrong, We've got four other 119 00:05:39,680 --> 00:05:41,679 Speaker 1: things on the red sox. You know, we thought they'd 120 00:05:42,120 --> 00:05:44,880 Speaker 1: have a good year, it didn't work out and Harry 121 00:05:44,920 --> 00:05:48,839 Speaker 1: Kane would never leave Tottenham. What right now that's a 122 00:05:48,880 --> 00:05:51,440 Speaker 1: consensus call. Do you think we're going to sit back 123 00:05:51,440 --> 00:05:53,120 Speaker 1: a year from now eighteen months ago? 124 00:05:53,520 --> 00:05:54,440 Speaker 4: God, we got that wrong. 125 00:05:54,640 --> 00:05:56,760 Speaker 2: What I think is truly fascinating is that we did 126 00:05:56,839 --> 00:05:59,200 Speaker 2: go into this year all of us expecting as shop 127 00:05:59,240 --> 00:06:01,800 Speaker 2: a slowdown. Then what we saw and because effects as 128 00:06:01,839 --> 00:06:04,039 Speaker 2: savings in the household sector, this just took a longer time. 129 00:06:04,120 --> 00:06:06,680 Speaker 2: More people have been traveling on airplanes, staying at hotels, 130 00:06:06,680 --> 00:06:09,200 Speaker 2: eating in restaurants. The service sector, which makes up eighty 131 00:06:09,200 --> 00:06:11,640 Speaker 2: pcent of GDP, has just been a lot stronger. So 132 00:06:11,680 --> 00:06:14,320 Speaker 2: it is a bit ironic that this process of slowing 133 00:06:14,320 --> 00:06:16,920 Speaker 2: things down has continued. The FED has kept on raising rates, 134 00:06:17,120 --> 00:06:19,320 Speaker 2: cost of capsule continues to go up, the linquagy rates 135 00:06:19,320 --> 00:06:21,160 Speaker 2: for credit cards and orderlones continue. 136 00:06:20,800 --> 00:06:21,400 Speaker 4: To move higher. 137 00:06:21,600 --> 00:06:25,360 Speaker 2: And just as all these things finally started appearing, everyone said, wow, 138 00:06:25,400 --> 00:06:26,960 Speaker 2: now we're not going to have more off a slowdown. 139 00:06:27,120 --> 00:06:29,000 Speaker 2: Now it's just goldilocks and we'll have a soft landing. 140 00:06:29,040 --> 00:06:31,080 Speaker 1: So you think goldilocks right now is the thing that 141 00:06:31,120 --> 00:06:31,840 Speaker 1: we're getting wrong. 142 00:06:32,120 --> 00:06:34,360 Speaker 2: I do think that the risk is that this process remembered. 143 00:06:34,360 --> 00:06:35,840 Speaker 2: Think about what the FED is doing. The FED is 144 00:06:35,920 --> 00:06:38,279 Speaker 2: raising interests face because they want us to spend less 145 00:06:38,279 --> 00:06:40,080 Speaker 2: money on our credit casts. They want us to buy 146 00:06:40,120 --> 00:06:42,120 Speaker 2: fewer casts, they want us to buy fewer homes. That's 147 00:06:42,120 --> 00:06:43,880 Speaker 2: the whole idea. So we're slowing things down. 148 00:06:44,200 --> 00:06:48,080 Speaker 1: Off of Jonathan Spence's classic work, an orbal Shell, published 149 00:06:48,080 --> 00:06:50,120 Speaker 1: like I believe it was in the Telegraph, is staying 150 00:06:50,160 --> 00:06:54,159 Speaker 1: corrected if that's wrong. Orbitshell writing on China. What I'm 151 00:06:54,160 --> 00:06:57,080 Speaker 1: getting out there right now basically is the death of China. 152 00:06:57,839 --> 00:07:01,000 Speaker 1: All my raiders up, tour stin roll down this morning. 153 00:07:01,080 --> 00:07:02,080 Speaker 4: That is a major risk. 154 00:07:02,120 --> 00:07:03,840 Speaker 2: And the FED had a working paper a few years 155 00:07:03,880 --> 00:07:06,000 Speaker 2: ago where they tried to quantify what is the impact 156 00:07:06,040 --> 00:07:09,280 Speaker 2: on the US of correction in Chinese GDP, and they 157 00:07:09,320 --> 00:07:12,440 Speaker 2: found a relatively modest impact that a one percent decline 158 00:07:12,480 --> 00:07:15,080 Speaker 2: in GDP only had a zero point two percent in China, 159 00:07:15,080 --> 00:07:17,320 Speaker 2: had only zero point two percent impact on the US. 160 00:07:17,320 --> 00:07:19,360 Speaker 2: But this is now to be tested because China is 161 00:07:19,400 --> 00:07:22,280 Speaker 2: not only slowing for cyclical reasons, meaning exports are going 162 00:07:22,320 --> 00:07:24,480 Speaker 2: down because US is slowing and Europe is slowing. They 163 00:07:24,520 --> 00:07:27,360 Speaker 2: also have two other issues, namely, the housing situation is 164 00:07:27,360 --> 00:07:29,320 Speaker 2: getting more serious, and on top of that, they also 165 00:07:29,320 --> 00:07:31,680 Speaker 2: had the demographic situation that's getting more serious. So all 166 00:07:31,680 --> 00:07:35,040 Speaker 2: that combined is generally going to drag down GDP growth 167 00:07:35,080 --> 00:07:37,440 Speaker 2: in China and also have implications in particular for Europe 168 00:07:37,520 --> 00:07:38,520 Speaker 2: but also for the US. 169 00:07:38,920 --> 00:07:41,760 Speaker 3: But just one of the big counterpoints to the barish 170 00:07:41,880 --> 00:07:45,120 Speaker 3: argument that you're making is that growth has surprised to 171 00:07:45,200 --> 00:07:48,240 Speaker 3: the upside and it continues to albeit at a slowing pace, 172 00:07:48,760 --> 00:07:51,520 Speaker 3: and that companies are still doing well. How do you 173 00:07:51,640 --> 00:07:54,160 Speaker 3: understand that surprising resilience? 174 00:07:54,400 --> 00:07:56,680 Speaker 2: Yeah, well, the nuance to that is that growth and 175 00:07:56,720 --> 00:07:59,800 Speaker 2: employment has continued to slow down. And also when it 176 00:07:59,840 --> 00:08:02,240 Speaker 2: comes to our companies really doing well. But why default 177 00:08:02,280 --> 00:08:04,520 Speaker 2: raised then going up so much? Why interest coverage ratio 178 00:08:04,640 --> 00:08:07,960 Speaker 2: going down so much? All these things that credit conditions 179 00:08:08,000 --> 00:08:10,960 Speaker 2: are tightening in the background, interest rates are essentially, as 180 00:08:10,960 --> 00:08:14,160 Speaker 2: the FIT want it, biting harder and harder on consumers 181 00:08:14,360 --> 00:08:17,960 Speaker 2: and biting harder and harder on corporates, and combining that 182 00:08:18,000 --> 00:08:21,120 Speaker 2: with student loan repayments coming back, and also households running 183 00:08:21,120 --> 00:08:22,840 Speaker 2: out of excess savings. At least according to the San 184 00:08:22,840 --> 00:08:25,600 Speaker 2: Francisco FIT, you can't begin to worry about the next 185 00:08:25,640 --> 00:08:27,720 Speaker 2: few months having a continuation of what the. 186 00:08:27,680 --> 00:08:30,920 Speaker 4: Federals to see. It's so slocky in gloom seeing the 187 00:08:30,960 --> 00:08:32,880 Speaker 4: slowdown continue going ahead. 188 00:08:32,960 --> 00:08:35,040 Speaker 3: What would you have to see to change your view? 189 00:08:36,280 --> 00:08:38,080 Speaker 2: So what we need to see is essentially the cost 190 00:08:38,120 --> 00:08:40,880 Speaker 2: of capsule coming down, because the first domino brick in 191 00:08:40,880 --> 00:08:43,200 Speaker 2: this process of the data that we're all watching across 192 00:08:43,240 --> 00:08:45,520 Speaker 2: the board is that the FIT has raised the cost 193 00:08:45,520 --> 00:08:47,960 Speaker 2: of capsule. And as Tom was saying, maybe there are 194 00:08:47,960 --> 00:08:49,960 Speaker 2: some reasons why the cost of capsule might not be 195 00:08:50,040 --> 00:08:53,600 Speaker 2: permanently higher. And the fact is that all this higher 196 00:08:53,679 --> 00:08:56,560 Speaker 2: cost of capsule is having an impact across the board 197 00:08:56,640 --> 00:08:59,679 Speaker 2: in particular consumers corporates, but of course also again on 198 00:08:59,800 --> 00:09:01,480 Speaker 2: high you have the fault rates moving high on. 199 00:09:01,440 --> 00:09:07,920 Speaker 1: The Trystan slack with us, it's great to have Steve 200 00:09:08,000 --> 00:09:10,760 Speaker 1: Major with us with HSBC, and they have Earl Davis 201 00:09:10,800 --> 00:09:14,480 Speaker 1: with us today with a heritage with BEMO Asset Management 202 00:09:14,520 --> 00:09:17,280 Speaker 1: in Canada, Bank of Montreal, it's just great to have 203 00:09:17,320 --> 00:09:21,160 Speaker 1: Earl with us. Earle, I love the pedigreed. It's your fault. 204 00:09:21,240 --> 00:09:24,079 Speaker 1: The Toronto maple leafs are terrible. You were in Ontario 205 00:09:24,280 --> 00:09:27,320 Speaker 1: teachers for years. They used to own the maple leafs. 206 00:09:27,320 --> 00:09:30,920 Speaker 1: They're the ones that buried them into obscurity. You've been 207 00:09:31,000 --> 00:09:34,360 Speaker 1: on the investment side of debt and also of course 208 00:09:34,400 --> 00:09:38,240 Speaker 1: working with Bemo Asset Management right now and your code 209 00:09:38,320 --> 00:09:41,679 Speaker 1: here is longer. We are going to be longer longer. 210 00:09:41,840 --> 00:09:45,160 Speaker 1: How longer is longer for Earl Davis? 211 00:09:45,840 --> 00:09:48,240 Speaker 5: Yeah, I think we'll be higher for longer for you 212 00:09:48,240 --> 00:09:52,000 Speaker 5: know what, most likely until twenty twenty five. Don't foresee 213 00:09:52,000 --> 00:09:55,080 Speaker 5: any cuts next year for two reasons. One is all 214 00:09:55,120 --> 00:09:56,760 Speaker 5: central bankers are telling you that, and I think we 215 00:09:56,840 --> 00:09:58,800 Speaker 5: have to believe them. The other thing is you see 216 00:09:58,840 --> 00:10:02,280 Speaker 5: the economic numbers, the resilience. Even though I know you 217 00:10:02,320 --> 00:10:05,960 Speaker 5: guys were discussing discussing jobs and the decline there, but 218 00:10:05,960 --> 00:10:07,720 Speaker 5: there's still excess demand for workers. 219 00:10:07,800 --> 00:10:08,800 Speaker 6: It's still positive. 220 00:10:08,840 --> 00:10:12,040 Speaker 5: So the question is not whether things are declining, is 221 00:10:12,040 --> 00:10:14,920 Speaker 5: whether they're declining fast enough. And I believe some of 222 00:10:14,960 --> 00:10:17,920 Speaker 5: the secondary data that we're getting is telling us no. 223 00:10:18,400 --> 00:10:20,280 Speaker 5: And that means if they're not going to hike too 224 00:10:20,360 --> 00:10:22,320 Speaker 5: much more because they have to wait to see the 225 00:10:22,360 --> 00:10:25,319 Speaker 5: cumulative effects of rights, they have to hold on for. 226 00:10:25,320 --> 00:10:30,520 Speaker 1: Longer, accumulate US across twenty twenty four to year twenty 227 00:10:30,760 --> 00:10:36,320 Speaker 1: twenty five, how does fixed income react to a longer 228 00:10:36,360 --> 00:10:38,880 Speaker 1: that most people aren't predicting like you are. 229 00:10:40,160 --> 00:10:43,400 Speaker 5: Well, the interesting thing is we don't believe there's hikes 230 00:10:43,480 --> 00:10:45,720 Speaker 5: next here. We believe they're a whole next year. So 231 00:10:45,760 --> 00:10:49,000 Speaker 5: what happens in that environment is that the longer end 232 00:10:49,040 --> 00:10:52,080 Speaker 5: of the curve starts doing the fight against inflation, you know, 233 00:10:52,200 --> 00:10:54,800 Speaker 5: and that comes through the market doing the fight against inflation. 234 00:10:55,240 --> 00:10:56,240 Speaker 6: So there's two things. 235 00:10:56,040 --> 00:10:57,800 Speaker 5: That have to happen first one is the market right 236 00:10:57,800 --> 00:11:00,160 Speaker 5: now is discounting eases in the two year volondo all 237 00:11:00,200 --> 00:11:02,080 Speaker 5: throughout next year. I think there's four or five yusas 238 00:11:02,120 --> 00:11:05,120 Speaker 5: discounted in the US. That has to be work itself out, 239 00:11:05,120 --> 00:11:08,520 Speaker 5: and that means higher yields across the board. But we 240 00:11:08,600 --> 00:11:11,960 Speaker 5: believe we'll have steepening before because people are scared of 241 00:11:12,000 --> 00:11:15,920 Speaker 5: the UAW negotiations. What's the impact of that, because let's 242 00:11:15,920 --> 00:11:18,120 Speaker 5: say there is you know, for argument's sake, of twenty 243 00:11:18,120 --> 00:11:21,439 Speaker 5: five percent increase in wages. That does not show itself 244 00:11:21,520 --> 00:11:24,600 Speaker 5: immediately in inflation, but it will show itself in six 245 00:11:24,640 --> 00:11:27,280 Speaker 5: months as car prices go up because your cost are 246 00:11:27,280 --> 00:11:30,400 Speaker 5: going up, and this is happening across a number of industries. 247 00:11:30,760 --> 00:11:33,679 Speaker 5: So we believe we are in that wage price spiral. 248 00:11:33,720 --> 00:11:35,920 Speaker 5: We've seen a number of wage gains this year. You 249 00:11:35,960 --> 00:11:39,920 Speaker 5: know your pilots. We saw ups significant wage gains, which 250 00:11:40,000 --> 00:11:42,720 Speaker 5: doesn't show up in inflation until people start paying and 251 00:11:42,760 --> 00:11:45,760 Speaker 5: buying stuff with that increased income. So we believe we're 252 00:11:45,760 --> 00:11:47,840 Speaker 5: in that spiral. That's why I'll be higher for longer, 253 00:11:47,960 --> 00:11:51,880 Speaker 5: and we don't foresee cuts until twenty twenty five at earliest, 254 00:11:52,120 --> 00:11:55,240 Speaker 5: late Q four twenty twenty four, but I don't anticipate 255 00:11:55,280 --> 00:11:56,080 Speaker 5: that at this point in. 256 00:11:56,600 --> 00:11:58,800 Speaker 3: We talk a lot about the long and variable lags, 257 00:11:58,840 --> 00:12:02,040 Speaker 3: and there's a huge disagreement about whether they've already basically 258 00:12:02,800 --> 00:12:05,959 Speaker 3: impacted on the economy or if they are yet to come. 259 00:12:06,640 --> 00:12:09,320 Speaker 3: Aside from just the treasury market, when you take a 260 00:12:09,320 --> 00:12:12,600 Speaker 3: look at credit, are you seeing companies being able to 261 00:12:12,720 --> 00:12:14,840 Speaker 3: absorb some of the higher rates and all of the 262 00:12:14,840 --> 00:12:17,319 Speaker 3: debt sales that we've seen over the past couple of days, 263 00:12:17,679 --> 00:12:20,360 Speaker 3: or is there something else going on that makes you 264 00:12:20,400 --> 00:12:22,320 Speaker 3: think it's going to bite in a more material way. 265 00:12:23,200 --> 00:12:26,839 Speaker 5: Well, they could easily absorb that the debt hikes from 266 00:12:26,880 --> 00:12:29,839 Speaker 5: where they're refinancing. And the reason why is, let's look 267 00:12:29,840 --> 00:12:32,480 Speaker 5: at US tenure bonds. Let's say a company issues US 268 00:12:32,520 --> 00:12:38,280 Speaker 5: corporate credit at what say one hundred above above overnight 269 00:12:38,800 --> 00:12:42,280 Speaker 5: above ten year yields. They're still earning a positive return. 270 00:12:42,960 --> 00:12:45,120 Speaker 5: They're not paying because of the inversion of the yield 271 00:12:45,120 --> 00:12:47,760 Speaker 5: curve and where overnight rates are, so it's not costing 272 00:12:47,800 --> 00:12:50,400 Speaker 5: them as much as people think, especially the ones who 273 00:12:50,720 --> 00:12:53,840 Speaker 5: issued last year or the year before and still have five, six, seven, 274 00:12:53,920 --> 00:12:56,120 Speaker 5: eight years left on this debt. I think This is 275 00:12:56,160 --> 00:12:57,880 Speaker 5: part of the story and part of the reason why 276 00:12:57,920 --> 00:12:59,880 Speaker 5: we're seeing the resilience in the market that we're seeing, 277 00:13:00,080 --> 00:13:04,480 Speaker 5: especially from corporates. There's no earnings recession. There's no margin 278 00:13:04,559 --> 00:13:07,200 Speaker 5: compression at this point in time, and that's something that 279 00:13:07,280 --> 00:13:09,720 Speaker 5: has to change for inflation to come. 280 00:13:09,600 --> 00:13:11,680 Speaker 3: Down as well, if you do have some sort of 281 00:13:11,679 --> 00:13:14,400 Speaker 3: wage price spiral. Are you saying, Earl, that we're on 282 00:13:14,440 --> 00:13:17,480 Speaker 3: the cusp of a reacceleration of the US economy that 283 00:13:17,520 --> 00:13:20,080 Speaker 3: people are not foreseeing, and that that's slow sort of 284 00:13:20,400 --> 00:13:23,440 Speaker 3: soft landing and decline is not an accurate portrayal. 285 00:13:24,480 --> 00:13:27,840 Speaker 5: It's a great question. The answer is, it depends, and 286 00:13:27,920 --> 00:13:31,120 Speaker 5: it depends on what the FED and FOMC reaction to 287 00:13:31,280 --> 00:13:33,360 Speaker 5: that is. You know, it's our belief it's going to 288 00:13:33,360 --> 00:13:35,520 Speaker 5: be very difficult for them to hike in twenty twenty 289 00:13:35,520 --> 00:13:39,479 Speaker 5: four because of the election, and I know they're independent, 290 00:13:39,520 --> 00:13:44,280 Speaker 5: but it does impact popular opinion when politicians are talking 291 00:13:44,280 --> 00:13:47,480 Speaker 5: about hiking when things are turning. So depends on the 292 00:13:47,480 --> 00:13:50,960 Speaker 5: reaction function of the FED. If the FED chooses to 293 00:13:51,120 --> 00:13:55,240 Speaker 5: counter that reacceleration, if it does happen, then no, we'll 294 00:13:55,240 --> 00:13:57,600 Speaker 5: be all right. But if they choose to wait because 295 00:13:57,600 --> 00:14:00,600 Speaker 5: of the cumulative effects and because of other reasons, then 296 00:14:00,640 --> 00:14:03,480 Speaker 5: we could see some ongoing volatility in the bond market, 297 00:14:03,559 --> 00:14:05,360 Speaker 5: especially that ten to thirty year sector. 298 00:14:05,840 --> 00:14:08,080 Speaker 7: Oh that word. But can I pick up on that? 299 00:14:08,520 --> 00:14:11,520 Speaker 7: They're independent? But I've always struggled with that. Well, they're 300 00:14:11,559 --> 00:14:14,320 Speaker 7: either independent or they're not. There's no butts about it. 301 00:14:14,360 --> 00:14:16,559 Speaker 6: Why is that always I'll give you the butt. Let 302 00:14:16,559 --> 00:14:17,400 Speaker 6: me answer that question. 303 00:14:17,400 --> 00:14:21,800 Speaker 5: Show they are independent, but the politicians Congress, Senate, they 304 00:14:21,800 --> 00:14:24,040 Speaker 5: could change the mandate of the FED in five years. 305 00:14:24,240 --> 00:14:28,000 Speaker 5: So they're independent now. But the reaction function in five 306 00:14:28,040 --> 00:14:32,000 Speaker 5: years in regards to the ongoing mandate, that's that's subject 307 00:14:32,000 --> 00:14:32,400 Speaker 5: to change. 308 00:14:32,400 --> 00:14:33,480 Speaker 6: That's not perfect. Interesting. 309 00:14:33,800 --> 00:14:35,160 Speaker 7: Oh you think that might change? 310 00:14:35,200 --> 00:14:38,600 Speaker 6: Then I didn't say that. I'll just tell it. 311 00:14:39,120 --> 00:14:41,920 Speaker 5: That is in the cards, so that has to be 312 00:14:41,960 --> 00:14:45,000 Speaker 5: taken into account. Let me look at it. 313 00:14:45,480 --> 00:14:46,080 Speaker 6: Rephrase it. 314 00:14:46,600 --> 00:14:49,760 Speaker 5: I'm a fixed income trader. I look at net present value, 315 00:14:50,160 --> 00:14:52,720 Speaker 5: so which means you're cash flows over next ten years. 316 00:14:53,120 --> 00:14:55,400 Speaker 5: When they font see makes a decision, they have to 317 00:14:55,400 --> 00:14:58,400 Speaker 5: look at what's the impact, not just immediately but next year, 318 00:14:58,520 --> 00:15:01,240 Speaker 5: two years, three years, four years, by years. Part of 319 00:15:01,280 --> 00:15:04,360 Speaker 5: that calculus is what I'm saying, and that's what you 320 00:15:04,440 --> 00:15:07,080 Speaker 5: have to distill back to ensure that you have longevity 321 00:15:07,240 --> 00:15:09,600 Speaker 5: in what you do. And that's how we kind of 322 00:15:09,600 --> 00:15:15,720 Speaker 5: see the game theory of monetary policy, fiscal policy, and 323 00:15:16,800 --> 00:15:18,520 Speaker 5: that's how we put our risk on. We look at 324 00:15:18,520 --> 00:15:20,720 Speaker 5: this and we incorporate that into our risk taking. 325 00:15:21,040 --> 00:15:24,040 Speaker 7: That's fascinating. Oh, thank you, thanks for the explanation. Oh 326 00:15:24,120 --> 00:15:37,200 Speaker 7: Davis the of BMO Asset Management, pretty good, right. 327 00:15:37,080 --> 00:15:40,440 Speaker 1: To it right now. This is an important conversation. Pierre 328 00:15:40,520 --> 00:15:46,000 Speaker 1: Farragu has been just brilliant and decidedly not an Apple fanboy. 329 00:15:46,080 --> 00:15:50,480 Speaker 1: He is global technology infrastructure head at New Street Research. Pierre, 330 00:15:50,520 --> 00:15:54,400 Speaker 1: I love your phrase, the silicon wall. I'm going to 331 00:15:54,480 --> 00:15:58,200 Speaker 1: give you credit for that, the Faragu silicon wall. That's 332 00:15:58,240 --> 00:16:03,640 Speaker 1: attention this morning. Is there a silicon wall identifiable between 333 00:16:03,640 --> 00:16:05,040 Speaker 1: America and China. 334 00:16:07,160 --> 00:16:09,560 Speaker 8: Well, I don't think we see the wall yet because 335 00:16:09,640 --> 00:16:12,920 Speaker 8: China is buying about twenty twenty five percent of any 336 00:16:13,040 --> 00:16:17,400 Speaker 8: you know, Western tech company or any Western semiconductor companies, 337 00:16:17,400 --> 00:16:20,040 Speaker 8: so they still China is still a very big market. 338 00:16:20,080 --> 00:16:23,200 Speaker 8: But what we see that both sides are we think 339 00:16:23,400 --> 00:16:27,120 Speaker 8: very very actively at building up that ball with the US, 340 00:16:27,160 --> 00:16:31,360 Speaker 8: you know, increasing restrictions China doing their best to develop 341 00:16:31,440 --> 00:16:34,200 Speaker 8: their own, their own supply chain, and you see like 342 00:16:34,280 --> 00:16:38,640 Speaker 8: with Quawi this week announcing like their first you know, 343 00:16:39,120 --> 00:16:40,640 Speaker 8: high end phone power. 344 00:16:40,400 --> 00:16:43,120 Speaker 6: By a homegrown chip. 345 00:16:43,520 --> 00:16:46,760 Speaker 8: These moves are very important and are setting the foundations 346 00:16:46,760 --> 00:16:49,120 Speaker 8: for the world in some ways. 347 00:16:49,160 --> 00:16:52,280 Speaker 6: And that's that's the way we think about it. 348 00:16:52,320 --> 00:16:54,520 Speaker 8: And you know, it took like a few centuries to 349 00:16:54,520 --> 00:16:58,040 Speaker 8: build them the Wall of China, and it's probably going 350 00:16:58,080 --> 00:17:00,520 Speaker 8: to take a decade or two to to build the 351 00:17:00,600 --> 00:17:03,080 Speaker 8: Silicon Wall as well. It's going to take a very 352 00:17:03,160 --> 00:17:05,639 Speaker 8: long time for China to be able to be more 353 00:17:05,640 --> 00:17:09,760 Speaker 8: autonomous and for you know. 354 00:17:11,080 --> 00:17:13,680 Speaker 6: Their ability to replace Western supplies. 355 00:17:14,160 --> 00:17:18,560 Speaker 1: Your note, Pierre, your note is extremely constructive on short 356 00:17:18,640 --> 00:17:22,000 Speaker 1: term for Apple in China. What is the power this 357 00:17:22,280 --> 00:17:26,879 Speaker 1: way that Tim Cook has over the Chinese government and 358 00:17:26,920 --> 00:17:29,760 Speaker 1: over the Chinese manufacturing establishment. 359 00:17:31,800 --> 00:17:35,040 Speaker 8: So let's yeah, I think you raise a good point 360 00:17:35,119 --> 00:17:38,040 Speaker 8: that you know, China has to you know, be very 361 00:17:38,040 --> 00:17:41,119 Speaker 8: careful to what they do with Apple because China depends 362 00:17:41,119 --> 00:17:45,240 Speaker 8: on Apple for many things that even more important in 363 00:17:45,280 --> 00:17:47,560 Speaker 8: the upstream of apples than the downstream of Apple. 364 00:17:47,840 --> 00:17:48,640 Speaker 6: That's a very good point. 365 00:17:48,640 --> 00:17:50,240 Speaker 8: But even if you take a step back, you know, 366 00:17:50,640 --> 00:17:53,800 Speaker 8: let's talk about learn instead of talking about team and 367 00:17:53,840 --> 00:17:58,080 Speaker 8: see what happened. In twenty twenty one, China banned the 368 00:17:58,240 --> 00:18:01,159 Speaker 8: use of tests like gas for similar like a similar 369 00:18:01,200 --> 00:18:05,960 Speaker 8: scope of Chinese Chinese officials and Chinese military state owned companies, 370 00:18:06,840 --> 00:18:09,399 Speaker 8: And how is TESTA doing in China's His day is 371 00:18:09,400 --> 00:18:10,000 Speaker 8: pretty well. 372 00:18:10,160 --> 00:18:13,760 Speaker 6: So you know these bands, the direct impact. 373 00:18:13,359 --> 00:18:16,920 Speaker 8: Of this band is very, very like and to be honest, 374 00:18:16,960 --> 00:18:21,040 Speaker 8: actually invisible. You don't even see it. And so that's 375 00:18:21,040 --> 00:18:23,639 Speaker 8: the reason why I'm going to be constructive on the situation. 376 00:18:23,880 --> 00:18:26,439 Speaker 8: You're like, this band is not going to affect that 377 00:18:26,440 --> 00:18:28,720 Speaker 8: good in the near term. Of course, it's a wake 378 00:18:28,800 --> 00:18:31,080 Speaker 8: up call for investors. They're like, oh my god, Like 379 00:18:31,480 --> 00:18:33,760 Speaker 8: this situation with China is not getting well. 380 00:18:34,359 --> 00:18:36,160 Speaker 6: And I think the ban is one thing. The one 381 00:18:36,200 --> 00:18:37,320 Speaker 6: way phone is another one. 382 00:18:37,359 --> 00:18:39,280 Speaker 8: And it's not a coincidence that we see the two 383 00:18:39,280 --> 00:18:42,000 Speaker 8: things popping up in the in. 384 00:18:41,880 --> 00:18:43,359 Speaker 6: The in the same way. 385 00:18:43,560 --> 00:18:46,200 Speaker 8: So the way I see it, whether it's Team Cook 386 00:18:46,320 --> 00:18:50,240 Speaker 8: or even mess, these guys have a good ability to 387 00:18:50,280 --> 00:18:54,280 Speaker 8: engage with Chinese authorities understand the importance of China as 388 00:18:54,280 --> 00:18:54,760 Speaker 8: a market. 389 00:18:55,160 --> 00:18:57,080 Speaker 6: China understands the importance of having. 390 00:18:56,920 --> 00:19:02,840 Speaker 8: Them building factories leveraging the Chinese supply chain, and so 391 00:19:03,600 --> 00:19:05,800 Speaker 8: you know, nobody is going to mess the Apple cart 392 00:19:06,840 --> 00:19:10,399 Speaker 8: in the near term, but in the longer run, I 393 00:19:10,440 --> 00:19:12,880 Speaker 8: think you have to keep in mind the second wall 394 00:19:12,920 --> 00:19:16,240 Speaker 8: is building up, and slowly but surely China is going 395 00:19:16,280 --> 00:19:18,920 Speaker 8: to get out of the mix of the revenues of 396 00:19:19,000 --> 00:19:23,479 Speaker 8: an Apple, of the Tesla, of an Intel, of all 397 00:19:23,600 --> 00:19:24,600 Speaker 8: Western technology. 398 00:19:25,160 --> 00:19:26,639 Speaker 3: So at what point are you looking to see how 399 00:19:26,720 --> 00:19:30,040 Speaker 3: much Tim Cook heads over to New Delhi to Mumbai 400 00:19:30,280 --> 00:19:33,680 Speaker 3: to really have a discussion about expanding production in India. 401 00:19:34,400 --> 00:19:39,840 Speaker 8: Yes, you know, exactly, very similar, very slow moves that 402 00:19:39,960 --> 00:19:42,480 Speaker 8: are going to play out over years and years. So 403 00:19:43,480 --> 00:19:45,600 Speaker 8: it took China like a few years, you know, to 404 00:19:46,400 --> 00:19:48,560 Speaker 8: be able to pull out a chip that could power 405 00:19:48,600 --> 00:19:52,359 Speaker 8: a phone that could more you know, compete with a kniphone, 406 00:19:53,200 --> 00:19:59,720 Speaker 8: but still like well behind. And you know, like revenge 407 00:19:59,760 --> 00:20:03,200 Speaker 8: is a is a dish that is better, that tastes 408 00:20:03,280 --> 00:20:03,920 Speaker 8: better cold. 409 00:20:04,000 --> 00:20:05,960 Speaker 6: And now China is. 410 00:20:05,920 --> 00:20:08,760 Speaker 8: Starting to put up is putting up this phone and 411 00:20:08,760 --> 00:20:12,040 Speaker 8: in a position to start like pushing back on the iPhone, 412 00:20:12,320 --> 00:20:15,600 Speaker 8: and Tim Cook and Steam are very clearly you know, 413 00:20:15,760 --> 00:20:18,639 Speaker 8: cognizant of that, and they're making sure they're lowering that 414 00:20:18,720 --> 00:20:20,560 Speaker 8: dependency on China as well. 415 00:20:20,720 --> 00:20:23,359 Speaker 6: So that's that's the world building slowly but surely. 416 00:20:23,440 --> 00:20:25,560 Speaker 3: I have to say, this is a frustrating conversation to 417 00:20:25,600 --> 00:20:28,040 Speaker 3: be having, not because anything that you're saying is frustrating 418 00:20:29,080 --> 00:20:32,000 Speaker 3: or not incredibly interesting. It's more just going forward that 419 00:20:32,119 --> 00:20:34,960 Speaker 3: it feels like we have all these geopolitical headlines and 420 00:20:35,000 --> 00:20:38,840 Speaker 3: then we have people coming on and predicting with really 421 00:20:38,880 --> 00:20:41,399 Speaker 3: no basis of whether this is something meaningful or something 422 00:20:41,440 --> 00:20:43,439 Speaker 3: this isn't. How do you just deal with this? You 423 00:20:43,480 --> 00:20:46,880 Speaker 3: just discount all of the geopolitical headlines as near term 424 00:20:47,000 --> 00:20:50,359 Speaker 3: noise and look at the fundamentals and say, longer term maybe, 425 00:20:50,359 --> 00:20:52,000 Speaker 3: but we have to really wait and see. 426 00:20:53,000 --> 00:20:54,080 Speaker 6: Yes, you know, I. 427 00:20:54,000 --> 00:20:57,040 Speaker 8: Wish I had started a hedge from twenty four months ago, 428 00:20:57,400 --> 00:21:00,560 Speaker 8: just like buying the deeper favorite geobietic headlines. 429 00:21:00,760 --> 00:21:03,040 Speaker 6: And I'm pretty sure we have made a lot of money. 430 00:21:05,760 --> 00:21:10,960 Speaker 8: China the Silicon roll like tensions between China and the West. 431 00:21:11,440 --> 00:21:13,119 Speaker 8: The way I like to frame it is the following. 432 00:21:13,280 --> 00:21:17,240 Speaker 8: Let's say China is an average twenty percent of Western tech, 433 00:21:18,640 --> 00:21:21,840 Speaker 8: and let's say in a decade or two from now, 434 00:21:21,880 --> 00:21:24,359 Speaker 8: in fifteen years from now, China is out of the picture. 435 00:21:24,960 --> 00:21:28,399 Speaker 8: That means Western tach is going to lose barely a 436 00:21:28,560 --> 00:21:32,280 Speaker 8: point of growth every year over the next fifteen years. 437 00:21:33,119 --> 00:21:35,600 Speaker 6: So yes, you can reflect that in your this year's 438 00:21:35,640 --> 00:21:38,160 Speaker 6: valuation and things like that and begin to give you. 439 00:21:38,160 --> 00:21:41,080 Speaker 8: Like a single digit, you know, headwind on your valuation 440 00:21:41,160 --> 00:21:43,200 Speaker 8: if you're a fundamental investor. But at the end of 441 00:21:43,280 --> 00:21:46,119 Speaker 8: the day, it's not a big it's not We are 442 00:21:46,160 --> 00:21:49,280 Speaker 8: ready for that. And because the market is what it is, 443 00:21:49,320 --> 00:21:51,880 Speaker 8: every time there is a piece of news, it's massively 444 00:21:51,880 --> 00:21:54,440 Speaker 8: over reacting on something that is going to play over 445 00:21:54,520 --> 00:21:57,560 Speaker 8: fifteen years. So yes, I tend to see each of 446 00:21:57,640 --> 00:21:59,800 Speaker 8: this reaction as a buying opportunity. 447 00:22:00,119 --> 00:22:02,200 Speaker 7: Yeah, I'm happy to look at opening that fun with you. 448 00:22:02,480 --> 00:22:07,320 Speaker 7: Look forward to working together new Stream Research per Thank you, buddy, 449 00:22:07,320 --> 00:22:13,200 Speaker 7: always great to get your perspective. I'm pleased to say 450 00:22:13,200 --> 00:22:15,520 Speaker 7: that my good friend on my side, Steve Major, joins 451 00:22:15,600 --> 00:22:17,680 Speaker 7: us right now glob I had to fixed income Research 452 00:22:17,720 --> 00:22:20,240 Speaker 7: at HSBC Steve wonder for to catch up with you, sir, 453 00:22:20,359 --> 00:22:21,919 Speaker 7: We're going to park the football. We're going to talk 454 00:22:21,960 --> 00:22:24,919 Speaker 7: about this bond market. You are bullish. What do you 455 00:22:24,960 --> 00:22:27,560 Speaker 7: think the bear Steve have got wrong? About the outlook 456 00:22:27,600 --> 00:22:29,280 Speaker 7: for this bond market in America. 457 00:22:30,640 --> 00:22:33,800 Speaker 9: Well, a way to start. I think that the list 458 00:22:33,920 --> 00:22:37,240 Speaker 9: is getting longer and longer. When I look at valuations, 459 00:22:38,000 --> 00:22:42,840 Speaker 9: absolute and relative valuations, treasuries just stand out. We completed 460 00:22:42,880 --> 00:22:46,639 Speaker 9: our monthly ass allocation this week, and most of my 461 00:22:46,720 --> 00:22:50,440 Speaker 9: colleagues have reined in their enthusiasm on other bond markets 462 00:22:50,480 --> 00:22:54,119 Speaker 9: because they're not attractive. I mean, I'm struggling to find 463 00:22:54,160 --> 00:22:57,800 Speaker 9: a single em raids market that I want to buy 464 00:22:57,920 --> 00:23:01,800 Speaker 9: right now. Much of the total turn's come through effex anyway, 465 00:23:02,200 --> 00:23:08,199 Speaker 9: Credit is tight, Treasuries are standing out versus equities. But 466 00:23:08,440 --> 00:23:10,800 Speaker 9: at some stage people are going to start moving from 467 00:23:10,840 --> 00:23:13,639 Speaker 9: bills into bonds because they're gonna start thinking about the 468 00:23:13,680 --> 00:23:18,879 Speaker 9: opportunity cost. So I'll tell you that I think that 469 00:23:19,040 --> 00:23:22,600 Speaker 9: yields today, okay, tenure yield to one hundred basis points 470 00:23:22,640 --> 00:23:24,800 Speaker 9: higher than they were in the early summer, but they're 471 00:23:24,840 --> 00:23:28,760 Speaker 9: the same level as they were in October twenty two, 472 00:23:28,840 --> 00:23:31,199 Speaker 9: and since then, the Fed tyked by two hundred and 473 00:23:31,200 --> 00:23:36,200 Speaker 9: twenty five basis points. So something's going on to contain 474 00:23:36,400 --> 00:23:40,200 Speaker 9: that ten year yield, and I think it's difficult to 475 00:23:40,240 --> 00:23:42,439 Speaker 9: see it going much higher. So I look at it 476 00:23:42,520 --> 00:23:47,199 Speaker 9: and think it's asymmetric. Maybe nothing much happens. We go 477 00:23:47,320 --> 00:23:49,880 Speaker 9: sideways for a bit, but when the yields moved, they're 478 00:23:49,880 --> 00:23:50,680 Speaker 9: going to move down. 479 00:23:50,720 --> 00:23:51,480 Speaker 6: And a lot. 480 00:23:51,680 --> 00:23:54,360 Speaker 1: Steeven you and ags we see are hardwired the end 481 00:23:54,359 --> 00:23:56,919 Speaker 1: of the China slow down, the knowledge of China, the 482 00:23:57,000 --> 00:24:00,680 Speaker 1: dynamic of their GDP. If we do get some form 483 00:24:00,760 --> 00:24:06,440 Speaker 1: of new diminished Chinese economic growth, is that a disinflationary 484 00:24:06,600 --> 00:24:12,480 Speaker 1: impulse that assists in driving yields lower fixed income prices. 485 00:24:12,000 --> 00:24:16,440 Speaker 9: Up, well, quite possibly, yes, it's it's not good for 486 00:24:17,160 --> 00:24:22,320 Speaker 9: many markets. I mean, the EEM tends to quite like 487 00:24:22,400 --> 00:24:25,879 Speaker 9: a soft dollar and a strong China. It's got the 488 00:24:25,920 --> 00:24:29,880 Speaker 9: opposite right now. So the channels through which China might 489 00:24:30,000 --> 00:24:34,359 Speaker 9: matter to global fixed income are many. It could be 490 00:24:34,480 --> 00:24:38,640 Speaker 9: through capital flows, it could be through trade and therefore GDP. 491 00:24:39,040 --> 00:24:41,800 Speaker 9: It could be through FX, it could be through some 492 00:24:41,840 --> 00:24:45,320 Speaker 9: form of contagion, some kind of financial stability incident. I mean, 493 00:24:45,320 --> 00:24:47,520 Speaker 9: there's so many that the list is long, and it 494 00:24:47,680 --> 00:24:51,919 Speaker 9: seems that already there's some influence. But what kind of 495 00:24:51,920 --> 00:24:55,800 Speaker 9: policy maker is ever going to say, But what's really 496 00:24:55,840 --> 00:24:59,600 Speaker 9: happening We're going to find out afterwards. So I think 497 00:24:59,680 --> 00:25:04,000 Speaker 9: that the already you've got a big gap between the 498 00:25:04,080 --> 00:25:09,800 Speaker 9: yield levels offered by China and many other markets compared 499 00:25:09,840 --> 00:25:12,520 Speaker 9: to the US, and that's the thing I'm focusing on 500 00:25:12,680 --> 00:25:16,359 Speaker 9: at the moment. It's very difficult to determine exactly what 501 00:25:16,560 --> 00:25:19,040 Speaker 9: the channel and the process is going to be, but 502 00:25:19,160 --> 00:25:20,120 Speaker 9: I think it matters. 503 00:25:20,440 --> 00:25:23,200 Speaker 3: How do you understand, Steve, why we haven't seen yield 504 00:25:23,280 --> 00:25:26,080 Speaker 3: go lower this year, why they've seen so sticky and 505 00:25:26,119 --> 00:25:30,480 Speaker 3: persistently so with economic data surprising to the upside that 506 00:25:30,640 --> 00:25:31,360 Speaker 3: we've we've. 507 00:25:31,160 --> 00:25:36,639 Speaker 9: Just completed the most aggressive tightening phase in four decades. 508 00:25:36,840 --> 00:25:40,680 Speaker 9: It looks like the momentum of the tightening is definitely fading, 509 00:25:42,160 --> 00:25:45,159 Speaker 9: and I think that we're, you know, we're entering a 510 00:25:45,280 --> 00:25:47,560 Speaker 9: very important period here where there's probably going to be 511 00:25:47,560 --> 00:25:51,600 Speaker 9: a handoff from the focus on inflation onto the really 512 00:25:51,640 --> 00:25:54,960 Speaker 9: colomby data, and it's going to be a slow process. 513 00:25:55,080 --> 00:25:58,159 Speaker 9: But I think that you know, I repeat what I 514 00:25:58,280 --> 00:26:01,520 Speaker 9: just said, Yields probably go side ways for now, but 515 00:26:01,600 --> 00:26:04,480 Speaker 9: when they make the next big move, it's very unlucky 516 00:26:04,520 --> 00:26:06,880 Speaker 9: to be up. The next big move is more likely 517 00:26:06,920 --> 00:26:09,000 Speaker 9: to be down, and therefore you're better to be long. 518 00:26:09,320 --> 00:26:12,080 Speaker 3: Are you saying that the risk right now is for 519 00:26:12,240 --> 00:26:14,880 Speaker 3: some sort of systemic event and that you see one 520 00:26:14,920 --> 00:26:18,879 Speaker 3: on the horizon versus the upside growth surprises that we 521 00:26:18,960 --> 00:26:20,680 Speaker 3: have been seeing, which is like a lot of people 522 00:26:20,680 --> 00:26:23,640 Speaker 3: to say that, really the asymmetry goes to the other side. 523 00:26:23,840 --> 00:26:25,880 Speaker 3: The growth could actually reignite. And I've heard this even 524 00:26:25,880 --> 00:26:27,360 Speaker 3: from FED officials themselves. 525 00:26:28,080 --> 00:26:32,520 Speaker 9: So the GDP now a is a notoriously volatile series. 526 00:26:32,800 --> 00:26:37,919 Speaker 9: It's been goosed up by the fiscal loosening, and the 527 00:26:37,960 --> 00:26:41,439 Speaker 9: trend GDP is still what one seventy five, one eighty. 528 00:26:42,920 --> 00:26:46,359 Speaker 9: The smart people, I believe recognize that the R star 529 00:26:46,560 --> 00:26:50,200 Speaker 9: is unchanged from before the pandemic. So the policy rate 530 00:26:50,359 --> 00:26:53,760 Speaker 9: is more than double what the equilibrium rate is going 531 00:26:53,800 --> 00:26:56,840 Speaker 9: to be. So it says to me that we are 532 00:26:56,920 --> 00:26:59,880 Speaker 9: at or very close to the peak in the. 533 00:26:59,800 --> 00:27:04,119 Speaker 1: So given that, Steve, where do you how do you 534 00:27:05,440 --> 00:27:08,720 Speaker 1: place a bet here out a year or two? Are 535 00:27:08,760 --> 00:27:11,120 Speaker 1: you you know, on a retail basis, are you laddered? 536 00:27:11,560 --> 00:27:15,040 Speaker 1: Do you barbell? What's the major strategy that's to go 537 00:27:15,160 --> 00:27:16,320 Speaker 1: press up, yield down? 538 00:27:17,200 --> 00:27:20,920 Speaker 9: Yeah, that's now the key question. I've got much more 539 00:27:20,920 --> 00:27:25,120 Speaker 9: comfortable with just outright long of ten year plus rather 540 00:27:25,240 --> 00:27:28,239 Speaker 9: than trying to play anything fancy with the curve. If 541 00:27:28,280 --> 00:27:31,680 Speaker 9: you if you start buying twos versus tens and players steepener, 542 00:27:31,840 --> 00:27:35,280 Speaker 9: you've got too much carry to overcome, and so so 543 00:27:35,880 --> 00:27:39,080 Speaker 9: the strategy favors taking duration over yield. 544 00:27:39,119 --> 00:27:39,960 Speaker 6: Curve expressure. 545 00:27:40,080 --> 00:27:42,240 Speaker 1: Right now, I can't say enough John, how important it 546 00:27:42,400 --> 00:27:45,080 Speaker 1: is to see a bullet approach from a major bank. 547 00:27:45,160 --> 00:27:47,560 Speaker 1: You don't see that nowadays. Everybody wants to do ballet 548 00:27:48,040 --> 00:27:51,560 Speaker 1: fancy fancy CFA garbage and major just says, shut up 549 00:27:51,600 --> 00:27:52,000 Speaker 1: and buy it. 550 00:27:52,040 --> 00:27:54,560 Speaker 7: We're talking about treasury, says Steve. Let's talk about that 551 00:27:54,640 --> 00:27:56,919 Speaker 7: trade relative to what you expect to happen in the 552 00:27:57,040 --> 00:28:00,560 Speaker 7: UK in Europe is a similar story, Steve, Or is 553 00:28:00,560 --> 00:28:01,000 Speaker 7: it different? 554 00:28:02,160 --> 00:28:05,760 Speaker 9: Well, the UK might be leading things today. At least 555 00:28:06,080 --> 00:28:11,280 Speaker 9: happens occasionally, doesn't that. I think for every hundred days, 556 00:28:11,320 --> 00:28:14,040 Speaker 9: maybe there's five to ten days when the UK and 557 00:28:14,119 --> 00:28:18,359 Speaker 9: the Eurozone can pull the US around, and today might 558 00:28:18,400 --> 00:28:20,480 Speaker 9: have been one of those. The front end of the 559 00:28:20,600 --> 00:28:23,520 Speaker 9: UK got some life into it. Seems like the UK 560 00:28:23,640 --> 00:28:25,880 Speaker 9: could be at the peak. The data is supporting that, 561 00:28:26,680 --> 00:28:31,479 Speaker 9: so it's all connected. I just think that at the moment, 562 00:28:31,920 --> 00:28:36,199 Speaker 9: the relative value between treasuries and boons and guilt and 563 00:28:36,280 --> 00:28:40,240 Speaker 9: Ossie Canada it favors treasuries. Just just run a spread 564 00:28:40,320 --> 00:28:44,520 Speaker 9: series of the markets. And that's what struck me is 565 00:28:44,560 --> 00:28:47,400 Speaker 9: that it's a relative argument, not just an absolute one. 566 00:28:47,560 --> 00:28:50,320 Speaker 7: Stay final question, Top four west Ham. What does James 567 00:28:50,360 --> 00:28:52,560 Speaker 7: ward Prows have to do to get a call up 568 00:28:52,840 --> 00:28:54,480 Speaker 7: for the national team? 569 00:28:54,760 --> 00:28:55,680 Speaker 9: Hasn't he been great? 570 00:28:55,760 --> 00:28:56,720 Speaker 6: What a joy? 571 00:28:58,040 --> 00:28:59,560 Speaker 9: Surely he must be on the list. 572 00:29:00,040 --> 00:29:01,080 Speaker 6: It's been a joy to watch. 573 00:29:01,400 --> 00:29:04,000 Speaker 7: Just snubs by Southgate continuously. 574 00:29:04,240 --> 00:29:06,640 Speaker 1: I'll get it, kay. I read the press on this, 575 00:29:06,720 --> 00:29:09,240 Speaker 1: Henry Wonder and all that, and you guys are vicious 576 00:29:09,280 --> 00:29:10,720 Speaker 1: over there. I mean, we don't have this. 577 00:29:10,960 --> 00:29:14,520 Speaker 7: It's pretty brutal stuff. Yes stuff, Yeah, the tamploid the 578 00:29:14,560 --> 00:29:17,280 Speaker 7: sports pages. Steve, thank you sir for the update on 579 00:29:17,320 --> 00:29:19,280 Speaker 7: the bond market and a sneak peak of some of 580 00:29:19,280 --> 00:29:21,480 Speaker 7: the football chat as Wallow for an England Steve Major 581 00:29:21,720 --> 00:29:22,520 Speaker 7: of HSBC. 582 00:29:33,560 --> 00:29:37,160 Speaker 1: Right now working with Ian Bremer at Eurasia Group is 583 00:29:37,280 --> 00:29:41,920 Speaker 1: Anna Ashton, director of China Corporate Affairs. On of course 584 00:29:41,960 --> 00:29:44,520 Speaker 1: this relationship with US and China. We need a brief 585 00:29:44,560 --> 00:29:47,320 Speaker 1: this morning as well, and I'm going to cut to 586 00:29:47,360 --> 00:29:50,760 Speaker 1: the chase. I see a lot of hysteria, and we've 587 00:29:50,760 --> 00:29:54,760 Speaker 1: had some good voices calm us down a bit, take 588 00:29:54,840 --> 00:30:00,320 Speaker 1: us away from the immediate hysteria of China to clear thing. 589 00:30:00,720 --> 00:30:06,720 Speaker 1: How are you thinking clearly about the domestic challenges of China. 590 00:30:06,880 --> 00:30:10,520 Speaker 10: Well, Tom, it is quite a challenge to be the 591 00:30:10,520 --> 00:30:13,400 Speaker 10: one who's supposed to come up with the positive take, 592 00:30:13,480 --> 00:30:17,680 Speaker 10: because you know, China really is facing some serious economic 593 00:30:17,760 --> 00:30:20,640 Speaker 10: hurdles right now, and they're different from hurdles in the past. 594 00:30:21,520 --> 00:30:25,320 Speaker 10: The slowdown is systemic, the real estate crisis is affecting 595 00:30:25,360 --> 00:30:27,800 Speaker 10: lots of sectors. But at the same time, you know, 596 00:30:27,840 --> 00:30:30,240 Speaker 10: it is important to remember that while China may be 597 00:30:30,360 --> 00:30:34,880 Speaker 10: growing at this present moment more slowly than the United States, 598 00:30:35,520 --> 00:30:38,520 Speaker 10: which is odd, and it's still growing and it is 599 00:30:38,560 --> 00:30:42,560 Speaker 10: an enormous country that is also growing in population with 600 00:30:42,640 --> 00:30:45,560 Speaker 10: a middle class that is set to grow. So there's 601 00:30:45,600 --> 00:30:47,320 Speaker 10: a ton of opportunity that remains. 602 00:30:47,360 --> 00:30:47,680 Speaker 1: I think. 603 00:30:47,720 --> 00:30:51,680 Speaker 10: One of the issues that is kind of separate from 604 00:30:51,880 --> 00:30:57,120 Speaker 10: the slowdown but also makes it harder and harder for 605 00:30:57,120 --> 00:31:00,200 Speaker 10: foreign firms to do business successfully, and has nothing to 606 00:31:00,240 --> 00:31:02,920 Speaker 10: do actually with regulations either, is just the fact that 607 00:31:03,560 --> 00:31:06,440 Speaker 10: there's more competition in the Chinese market from domestic companies 608 00:31:06,480 --> 00:31:07,200 Speaker 10: than there used to be. 609 00:31:08,240 --> 00:31:11,400 Speaker 1: If I look at the domestic companies, it comes back 610 00:31:11,440 --> 00:31:16,040 Speaker 1: to the soees, the state owned enterprises like the waves. 611 00:31:16,080 --> 00:31:18,680 Speaker 1: Every eight years, we're going to de emphasize them, We're 612 00:31:18,680 --> 00:31:20,000 Speaker 1: going to re emphasize them. 613 00:31:19,960 --> 00:31:20,160 Speaker 4: Or that. 614 00:31:20,760 --> 00:31:24,520 Speaker 1: What is a relationship of those state owned enterprises now 615 00:31:25,000 --> 00:31:27,840 Speaker 1: with the nu Xi regime in Beijing. 616 00:31:28,680 --> 00:31:34,200 Speaker 10: Well, definitely Shijinping is more of a state sector man. 617 00:31:34,680 --> 00:31:38,720 Speaker 10: He has definitely moved away from his predecessors in re 618 00:31:38,920 --> 00:31:42,960 Speaker 10: emphasizing the role of the state and in his you know, 619 00:31:43,040 --> 00:31:47,000 Speaker 10: pretty firm belief that the state needs to be involved 620 00:31:47,040 --> 00:31:51,480 Speaker 10: in directing which parts of Chinese China's economy are going 621 00:31:51,520 --> 00:31:56,720 Speaker 10: to be emphasized and are supposed to grow. But you know, interestingly, 622 00:31:57,200 --> 00:31:59,720 Speaker 10: that seems to be the direction that US politics is 623 00:31:59,720 --> 00:32:02,400 Speaker 10: going to a lesser extent as well. 624 00:32:03,160 --> 00:32:05,520 Speaker 3: Anna, we had Pierre fergu on earlier and he was 625 00:32:05,560 --> 00:32:07,160 Speaker 3: saying that he wants to start it or he wished 626 00:32:07,160 --> 00:32:09,120 Speaker 3: he had started a hedge fund to buy every dip 627 00:32:09,600 --> 00:32:11,680 Speaker 3: in some of the names that are most affected by 628 00:32:11,680 --> 00:32:15,240 Speaker 3: the geopolitical headlines in particular about US and China relationships. 629 00:32:15,480 --> 00:32:16,959 Speaker 3: Souring is this time different. 630 00:32:19,360 --> 00:32:21,840 Speaker 10: On the one hand, I would agree with him. You know, 631 00:32:21,920 --> 00:32:25,600 Speaker 10: how many times has there been a prediction that China 632 00:32:26,040 --> 00:32:29,400 Speaker 10: was becoming collapse of China? But China had reached the 633 00:32:29,560 --> 00:32:34,320 Speaker 10: end of its miracle of growth and development. But so 634 00:32:34,880 --> 00:32:37,720 Speaker 10: I tend to err on the side of China. We'll 635 00:32:37,720 --> 00:32:39,560 Speaker 10: figure it out, because there have been all of these 636 00:32:39,600 --> 00:32:41,640 Speaker 10: times in the past when we thought it was different too. 637 00:32:42,280 --> 00:32:45,600 Speaker 10: But there are some serious differences here. A big one 638 00:32:45,720 --> 00:32:49,480 Speaker 10: is that there's really no way for China to try 639 00:32:49,520 --> 00:32:53,640 Speaker 10: to come in and bail out the economy and rescue 640 00:32:54,120 --> 00:32:56,360 Speaker 10: growth with a huge stimulus the way it is done 641 00:32:56,360 --> 00:32:59,680 Speaker 10: in the past without reinflating the real estate bubble. And 642 00:33:00,000 --> 00:33:02,120 Speaker 10: if they did come in with a stimulus, it wouldn't 643 00:33:02,160 --> 00:33:05,040 Speaker 10: necessarily do what they truly needed to do, which is 644 00:33:05,200 --> 00:33:10,120 Speaker 10: increase consumer and private sector confidence so that there's more consumption, 645 00:33:10,520 --> 00:33:12,720 Speaker 10: and that that really is a change. 646 00:33:12,960 --> 00:33:15,200 Speaker 3: Do you also think that there needs to be or 647 00:33:15,240 --> 00:33:17,400 Speaker 3: that there will be more of a response from the 648 00:33:17,520 --> 00:33:20,040 Speaker 3: US in light of the fact that the new development 649 00:33:20,080 --> 00:33:24,720 Speaker 3: in the Chinese phone was released during the Commerce Secretary's 650 00:33:24,800 --> 00:33:27,280 Speaker 3: visit to China, And you know, Ramondo is there the 651 00:33:27,320 --> 00:33:31,160 Speaker 3: timing very much trying to sum the nose at the 652 00:33:31,280 --> 00:33:33,960 Speaker 3: US government and that there seems to be a much 653 00:33:34,000 --> 00:33:35,360 Speaker 3: more direct tit for tat. 654 00:33:37,040 --> 00:33:39,760 Speaker 10: There's definitely a much more direct tip for tat. And 655 00:33:39,840 --> 00:33:42,120 Speaker 10: you know, we've seen that play out in a number 656 00:33:42,240 --> 00:33:45,560 Speaker 10: of different forums in the last few days. So there 657 00:33:45,680 --> 00:33:50,520 Speaker 10: was Gina Raimondo's statement on Face the Nation about not 658 00:33:50,560 --> 00:33:53,680 Speaker 10: necessarily wanting to apply the word trust to the relationship 659 00:33:53,760 --> 00:33:56,440 Speaker 10: or improved trust after her visit, but saying, you know, 660 00:33:56,480 --> 00:33:59,040 Speaker 10: we really need to see action. And there was you know, 661 00:33:59,640 --> 00:34:04,480 Speaker 10: sort of similar tone from Vice President Kamla Harris when 662 00:34:04,480 --> 00:34:07,040 Speaker 10: she was at the Avion Summit and the East stage 663 00:34:07,040 --> 00:34:10,239 Speaker 10: of the summit talking about the need for China to 664 00:34:11,160 --> 00:34:14,719 Speaker 10: not not you know, percee these grad zone activities in 665 00:34:14,760 --> 00:34:15,640 Speaker 10: the South China Sea. 666 00:34:16,080 --> 00:34:18,360 Speaker 1: All right, go ahead, Well, thank you and I greatly 667 00:34:18,400 --> 00:34:20,600 Speaker 1: appreciate too short a visit today. Let's do it again, 668 00:34:20,719 --> 00:34:23,239 Speaker 1: someone we will with China so much in the news 669 00:34:23,239 --> 00:34:25,600 Speaker 1: and Ashton with us with Ian burmersh to raise your group. 670 00:34:25,719 --> 00:34:29,520 Speaker 1: Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and 671 00:34:29,640 --> 00:34:33,840 Speaker 1: anywhere else you get your podcasts. Listen live every weekday 672 00:34:34,120 --> 00:34:37,600 Speaker 1: starting at seven am Eastern on Bloomberg dot Com. The 673 00:34:37,760 --> 00:34:42,279 Speaker 1: iHeartRadio app Tune In and the Bloomberg Business App. You 674 00:34:42,320 --> 00:34:46,359 Speaker 1: can watch us live on Bloomberg Television and always. I'm 675 00:34:46,360 --> 00:34:50,400 Speaker 1: the Bloomberg Terminal. Thanks for listening. I'm Tom Keane, and 676 00:34:50,480 --> 00:34:52,040 Speaker 1: this is Bloomberg