WEBVTT - Surveillance: Stepping on Brakes with Slok 0:00:05.120 --> 0:00:08.480 This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:08.520 --> 0:00:12.360 with Jonathan Farrow and Lisa Abramowitz. Join us each day 0:00:12.400 --> 0:00:16.880 for insight from the best an economics, geopolitics, finance and investment. 0:00:17.280 --> 0:00:22.079 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.320 --> 0:00:26.600 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.640 --> 0:00:31.400 the Bloomberg Terminal and the Bloomberg Business app. Torston Slock 0:00:31.400 --> 0:00:35.519 of Apollo Global Management was on Williams R. Start Torston 0:00:35.600 --> 0:00:40.720 I was absolutely thunderstruck by the responses capmany out at 0:00:40.720 --> 0:00:43.960 four percent, leaf Farage in a three handle, and even 0:00:44.080 --> 0:00:47.680 you going all un anchored on Williams and suggesting we 0:00:47.760 --> 0:00:51.120 go from this two percent nirvana up to something higher 0:00:51.240 --> 0:00:54.320 under three percent, but something higher. How does our world 0:00:54.440 --> 0:00:59.080 change if we get a new interest rate regime out 0:00:59.080 --> 0:00:59.800 there somewhere. 0:01:00.040 --> 0:01:02.680 Well, I do think a very important implication is that 0:01:02.680 --> 0:01:05.200 then the cost of capital will be higher, The cost 0:01:05.240 --> 0:01:07.720 of capital will be higher for companies, the cost of 0:01:07.760 --> 0:01:10.560 borrowing for consumers will be higher, and all that will, 0:01:10.640 --> 0:01:13.440 of course imply that we're going to have more of 0:01:13.480 --> 0:01:15.959 a significant impact, at least in the near term, on 0:01:16.400 --> 0:01:19.000 not only consumption, but also on corporate spy price. 0:01:19.040 --> 0:01:22.840 Do we see asset price reduction because they got yield 0:01:22.959 --> 0:01:25.080 up price down in a simplistic way. 0:01:24.920 --> 0:01:27.240 Yeah, because your equacy risk premium model, if you change 0:01:27.240 --> 0:01:30.400 the risk free rate and you permanently increase that for 0:01:30.520 --> 0:01:35.800 whatever recent demographics, interdy transition, less immigration, whatever it might be, 0:01:36.280 --> 0:01:38.520 if you have the discount rate going up in any 0:01:38.520 --> 0:01:41.000 finance model on page one in your textbook, would tell 0:01:41.040 --> 0:01:43.520 you that then risky assets are going to become less 0:01:43.560 --> 0:01:44.600 attractive relatively. 0:01:44.840 --> 0:01:47.360 This has been a fascinating week because we've seen the 0:01:47.400 --> 0:01:50.160 fastest pace of issue once this year when it comes 0:01:50.160 --> 0:01:53.560 to investment grade bonds, the third busiest post labor day 0:01:53.600 --> 0:01:58.120 couple of sessions going back to twenty ten. Companies are saying, Okay, 0:01:58.320 --> 0:02:00.560 rates are going to be higher for longer. We're going 0:02:00.640 --> 0:02:02.400 to sell debt because you know what, we're going to 0:02:02.440 --> 0:02:05.280 have to just absorb these higher costs. Isn't this a 0:02:05.320 --> 0:02:09.280 positive sign that they're actually able to absorb these costs 0:02:09.360 --> 0:02:12.239 and able to access the credit markets and things keep 0:02:12.280 --> 0:02:14.160 going even if at a more expensive rate. 0:02:14.360 --> 0:02:17.600 Well, I mean, broadly speaking, of course, September is mainly 0:02:17.600 --> 0:02:20.160 having a lot of issues because the summer normally has 0:02:20.360 --> 0:02:22.640 relatively low levels of issue. So first there's a seasonal 0:02:22.639 --> 0:02:25.520 issue why issuance has been so high this week. But 0:02:25.600 --> 0:02:27.679 the other issue is also that well, we're at the 0:02:27.720 --> 0:02:30.320 same time in the background seeing that the high yield 0:02:30.320 --> 0:02:32.840 default rate is actually moving up quite quickly. In the 0:02:32.919 --> 0:02:35.880 last six months, we're now at least on the Moody's 0:02:35.880 --> 0:02:37.639 default rate, we are at around four percent. 0:02:38.040 --> 0:02:39.640 And if we keep rates at these levels. 0:02:39.760 --> 0:02:41.760 You know, every day on the Bloomberg Term and Lucy 0:02:41.800 --> 0:02:44.040 stories about their companies that cannot get a new loan, 0:02:44.360 --> 0:02:46.880 companies that cannot roll low on existing loan, in particular 0:02:47.000 --> 0:02:50.359 for lower rated companies with higher leverage, and especially when 0:02:50.360 --> 0:02:53.399 it comes to interest covers ratios. Insuest covers ratios, which 0:02:53.480 --> 0:02:57.440 measure earnings divided by interest expense, is coming down both 0:02:57.480 --> 0:02:59.720 for ig quite quickly and also for high yields. So 0:02:59.760 --> 0:03:01.720 it is not the case that all firms just have 0:03:01.800 --> 0:03:04.800 locked in long duration of lending. It is the case 0:03:04.840 --> 0:03:07.280 that we're actually seeing interest covers ratios going down. 0:03:07.320 --> 0:03:08.639 Both are the IT and HIGHAL index. 0:03:08.760 --> 0:03:10.799 This is fascinating. The spike up that we're seeing in 0:03:10.840 --> 0:03:13.480 high yel defaults I'll be it from really low rates 0:03:13.560 --> 0:03:17.000 and I'll be it still at historically low levels when 0:03:17.040 --> 0:03:20.040 you part, when you pass that out, are you basically 0:03:20.120 --> 0:03:23.080 model the next six months, the next sex twelve months. 0:03:23.280 --> 0:03:26.400 Do you end up with an acceleration of these defaults 0:03:26.840 --> 0:03:28.600 or does it kind of plateau. Are we seeing the 0:03:28.600 --> 0:03:30.880 pain now as some of the rate hikes come into 0:03:30.880 --> 0:03:31.280 the market. 0:03:31.320 --> 0:03:34.080 Well this is really important because so far the soft 0:03:34.160 --> 0:03:36.840 landing document is that it has been very orderly the 0:03:36.920 --> 0:03:39.320 slowdown in the label. Mind, it's been very orderly, the 0:03:39.360 --> 0:03:42.480 slowdown in inflation. So what's the problem. Well, the problem 0:03:42.560 --> 0:03:44.640 is that in the background, if you have this increase 0:03:44.760 --> 0:03:46.920 in default rates, especially in high yield, and remember the 0:03:47.000 --> 0:03:50.360 high yield industry basically has employment of roughly eleven million 0:03:50.400 --> 0:03:52.800 people in the economy, so it's not small. So the 0:03:52.840 --> 0:03:55.560 conclusion is if high yield default rates are going to 0:03:55.600 --> 0:03:59.240 continue to move higher because companies cannot get financing, well, 0:03:59.280 --> 0:04:01.680 then the if will be that maybe at the moment 0:04:01.680 --> 0:04:03.800 these are names that many people tell me or we 0:04:03.880 --> 0:04:06.240 haven't heard about. Well just wait until you get the 0:04:06.320 --> 0:04:08.240 fault in a name that actually everyone has heard about. 0:04:08.240 --> 0:04:11.560 Then that industry, that rating, that type of interest covers ratio, 0:04:11.560 --> 0:04:13.600 that type of leverage is going to be much more vulnerable. 0:04:13.640 --> 0:04:16.640 And that's to change sentiment potentially quite quickly in particularly 0:04:16.640 --> 0:04:17.960 in highyel but also in IG. 0:04:18.080 --> 0:04:20.360 And just across the board in terms of what kind 0:04:20.400 --> 0:04:22.400 of rate structure is going to be important going forward. 0:04:22.400 --> 0:04:25.359 As we were hearing from Stephen Major of HSBC in 0:04:25.360 --> 0:04:29.719 particular that catalyst event. From your vantage point, how does 0:04:29.720 --> 0:04:32.600 this play out the barecase? Is it some sort of 0:04:32.720 --> 0:04:35.760 deep recession, is it some sort of fissure in the 0:04:35.760 --> 0:04:39.159 credit markets, or is this just a recession the one 0:04:39.160 --> 0:04:41.120 that everyone was calling for earlier this year. 0:04:41.320 --> 0:04:43.120 So I do think that it will be a continuation 0:04:43.200 --> 0:04:46.360 of what we're seeing the FED. They're stepping hot and 0:04:46.400 --> 0:04:48.559 hot on the brakes, and this is not just about 0:04:48.560 --> 0:04:50.720 the change in interest rates. This is about the level 0:04:50.720 --> 0:04:53.680 of interest rates. And as that process continues, if you're 0:04:53.680 --> 0:04:55.920 on your Bloomberg screen type ECFC, go have a look 0:04:55.920 --> 0:04:58.080 at what nonvum payrolls are telling you about Q one 0:04:58.080 --> 0:05:01.160 of next year. The consensus is expecting that non van 0:05:01.200 --> 0:05:04.440 payrolls in January, February and March will be twelve thousand. 0:05:05.080 --> 0:05:06.920 So you now lean back and say, well, if we're 0:05:06.960 --> 0:05:09.279 getting non van payrolls in six months that will be 0:05:09.360 --> 0:05:11.880 close to zero for three months in a row. How 0:05:11.920 --> 0:05:13.480 do you think risk will trade on that? And if 0:05:13.480 --> 0:05:16.200 that process of slowing the economy down as a result 0:05:16.240 --> 0:05:18.400 of the feed having raised the cost of capital continues, 0:05:18.600 --> 0:05:21.440 we should expect to see an ongoing slow down ahead 0:05:21.480 --> 0:05:23.520 of us. And I do think that ultimately that we'll 0:05:23.560 --> 0:05:25.960 create a risk of a hot landing. 0:05:25.720 --> 0:05:27.880 In the last eighteen months coming out of COVID with 0:05:28.000 --> 0:05:31.640 all the original economic framework that we have, the supply shock, etc. 0:05:32.640 --> 0:05:35.640 We've had so many things wrong. We got the recession wrong, 0:05:36.400 --> 0:05:39.640 we got before that transitory wrong, We've got four other 0:05:39.680 --> 0:05:41.679 things on the red sox. You know, we thought they'd 0:05:42.120 --> 0:05:44.880 have a good year, it didn't work out and Harry 0:05:44.920 --> 0:05:48.839 Kane would never leave Tottenham. What right now that's a 0:05:48.880 --> 0:05:51.440 consensus call. Do you think we're going to sit back 0:05:51.440 --> 0:05:53.120 a year from now eighteen months ago? 0:05:53.520 --> 0:05:54.440 God, we got that wrong. 0:05:54.640 --> 0:05:56.760 What I think is truly fascinating is that we did 0:05:56.839 --> 0:05:59.200 go into this year all of us expecting as shop 0:05:59.240 --> 0:06:01.800 a slowdown. Then what we saw and because effects as 0:06:01.839 --> 0:06:04.039 savings in the household sector, this just took a longer time. 0:06:04.120 --> 0:06:06.680 More people have been traveling on airplanes, staying at hotels, 0:06:06.680 --> 0:06:09.200 eating in restaurants. The service sector, which makes up eighty 0:06:09.200 --> 0:06:11.640 pcent of GDP, has just been a lot stronger. So 0:06:11.680 --> 0:06:14.320 it is a bit ironic that this process of slowing 0:06:14.320 --> 0:06:16.920 things down has continued. The FED has kept on raising rates, 0:06:17.120 --> 0:06:19.320 cost of capsule continues to go up, the linquagy rates 0:06:19.320 --> 0:06:21.160 for credit cards and orderlones continue. 0:06:20.800 --> 0:06:21.400 To move higher. 0:06:21.600 --> 0:06:25.360 And just as all these things finally started appearing, everyone said, wow, 0:06:25.400 --> 0:06:26.960 now we're not going to have more off a slowdown. 0:06:27.120 --> 0:06:29.000 Now it's just goldilocks and we'll have a soft landing. 0:06:29.040 --> 0:06:31.080 So you think goldilocks right now is the thing that 0:06:31.120 --> 0:06:31.840 we're getting wrong. 0:06:32.120 --> 0:06:34.360 I do think that the risk is that this process remembered. 0:06:34.360 --> 0:06:35.840 Think about what the FED is doing. The FED is 0:06:35.920 --> 0:06:38.279 raising interests face because they want us to spend less 0:06:38.279 --> 0:06:40.080 money on our credit casts. They want us to buy 0:06:40.120 --> 0:06:42.120 fewer casts, they want us to buy fewer homes. That's 0:06:42.120 --> 0:06:43.880 the whole idea. So we're slowing things down. 0:06:44.200 --> 0:06:48.080 Off of Jonathan Spence's classic work, an orbal Shell, published 0:06:48.080 --> 0:06:50.120 like I believe it was in the Telegraph, is staying 0:06:50.160 --> 0:06:54.159 corrected if that's wrong. Orbitshell writing on China. What I'm 0:06:54.160 --> 0:06:57.080 getting out there right now basically is the death of China. 0:06:57.839 --> 0:07:01.000 All my raiders up, tour stin roll down this morning. 0:07:01.080 --> 0:07:02.080 That is a major risk. 0:07:02.120 --> 0:07:03.840 And the FED had a working paper a few years 0:07:03.880 --> 0:07:06.000 ago where they tried to quantify what is the impact 0:07:06.040 --> 0:07:09.280 on the US of correction in Chinese GDP, and they 0:07:09.320 --> 0:07:12.440 found a relatively modest impact that a one percent decline 0:07:12.480 --> 0:07:15.080 in GDP only had a zero point two percent in China, 0:07:15.080 --> 0:07:17.320 had only zero point two percent impact on the US. 0:07:17.320 --> 0:07:19.360 But this is now to be tested because China is 0:07:19.400 --> 0:07:22.280 not only slowing for cyclical reasons, meaning exports are going 0:07:22.320 --> 0:07:24.480 down because US is slowing and Europe is slowing. They 0:07:24.520 --> 0:07:27.360 also have two other issues, namely, the housing situation is 0:07:27.360 --> 0:07:29.320 getting more serious, and on top of that, they also 0:07:29.320 --> 0:07:31.680 had the demographic situation that's getting more serious. So all 0:07:31.680 --> 0:07:35.040 that combined is generally going to drag down GDP growth 0:07:35.080 --> 0:07:37.440 in China and also have implications in particular for Europe 0:07:37.520 --> 0:07:38.520 but also for the US. 0:07:38.920 --> 0:07:41.760 But just one of the big counterpoints to the barish 0:07:41.880 --> 0:07:45.120 argument that you're making is that growth has surprised to 0:07:45.200 --> 0:07:48.240 the upside and it continues to albeit at a slowing pace, 0:07:48.760 --> 0:07:51.520 and that companies are still doing well. How do you 0:07:51.640 --> 0:07:54.160 understand that surprising resilience? 0:07:54.400 --> 0:07:56.680 Yeah, well, the nuance to that is that growth and 0:07:56.720 --> 0:07:59.800 employment has continued to slow down. And also when it 0:07:59.840 --> 0:08:02.240 comes to our companies really doing well. But why default 0:08:02.280 --> 0:08:04.520 raised then going up so much? Why interest coverage ratio 0:08:04.640 --> 0:08:07.960 going down so much? All these things that credit conditions 0:08:08.000 --> 0:08:10.960 are tightening in the background, interest rates are essentially, as 0:08:10.960 --> 0:08:14.160 the FIT want it, biting harder and harder on consumers 0:08:14.360 --> 0:08:17.960 and biting harder and harder on corporates, and combining that 0:08:18.000 --> 0:08:21.120 with student loan repayments coming back, and also households running 0:08:21.120 --> 0:08:22.840 out of excess savings. At least according to the San 0:08:22.840 --> 0:08:25.600 Francisco FIT, you can't begin to worry about the next 0:08:25.640 --> 0:08:27.720 few months having a continuation of what the. 0:08:27.680 --> 0:08:30.920 Federals to see. It's so slocky in gloom seeing the 0:08:30.960 --> 0:08:32.880 slowdown continue going ahead. 0:08:32.960 --> 0:08:35.040 What would you have to see to change your view? 0:08:36.280 --> 0:08:38.080 So what we need to see is essentially the cost 0:08:38.120 --> 0:08:40.880 of capsule coming down, because the first domino brick in 0:08:40.880 --> 0:08:43.200 this process of the data that we're all watching across 0:08:43.240 --> 0:08:45.520 the board is that the FIT has raised the cost 0:08:45.520 --> 0:08:47.960 of capsule. And as Tom was saying, maybe there are 0:08:47.960 --> 0:08:49.960 some reasons why the cost of capsule might not be 0:08:50.040 --> 0:08:53.600 permanently higher. And the fact is that all this higher 0:08:53.679 --> 0:08:56.560 cost of capsule is having an impact across the board 0:08:56.640 --> 0:08:59.679 in particular consumers corporates, but of course also again on 0:08:59.800 --> 0:09:01.480 high you have the fault rates moving high on. 0:09:01.440 --> 0:09:07.920 The Trystan slack with us, it's great to have Steve 0:09:08.000 --> 0:09:10.760 Major with us with HSBC, and they have Earl Davis 0:09:10.800 --> 0:09:14.480 with us today with a heritage with BEMO Asset Management 0:09:14.520 --> 0:09:17.280 in Canada, Bank of Montreal, it's just great to have 0:09:17.320 --> 0:09:21.160 Earl with us. Earle, I love the pedigreed. It's your fault. 0:09:21.240 --> 0:09:24.079 The Toronto maple leafs are terrible. You were in Ontario 0:09:24.280 --> 0:09:27.320 teachers for years. They used to own the maple leafs. 0:09:27.320 --> 0:09:30.920 They're the ones that buried them into obscurity. You've been 0:09:31.000 --> 0:09:34.360 on the investment side of debt and also of course 0:09:34.400 --> 0:09:38.240 working with Bemo Asset Management right now and your code 0:09:38.320 --> 0:09:41.679 here is longer. We are going to be longer longer. 0:09:41.840 --> 0:09:45.160 How longer is longer for Earl Davis? 0:09:45.840 --> 0:09:48.240 Yeah, I think we'll be higher for longer for you 0:09:48.240 --> 0:09:52.000 know what, most likely until twenty twenty five. Don't foresee 0:09:52.000 --> 0:09:55.080 any cuts next year for two reasons. One is all 0:09:55.120 --> 0:09:56.760 central bankers are telling you that, and I think we 0:09:56.840 --> 0:09:58.800 have to believe them. The other thing is you see 0:09:58.840 --> 0:10:02.280 the economic numbers, the resilience. Even though I know you 0:10:02.320 --> 0:10:05.960 guys were discussing discussing jobs and the decline there, but 0:10:05.960 --> 0:10:07.720 there's still excess demand for workers. 0:10:07.800 --> 0:10:08.800 It's still positive. 0:10:08.840 --> 0:10:12.040 So the question is not whether things are declining, is 0:10:12.040 --> 0:10:14.920 whether they're declining fast enough. And I believe some of 0:10:14.960 --> 0:10:17.920 the secondary data that we're getting is telling us no. 0:10:18.400 --> 0:10:20.280 And that means if they're not going to hike too 0:10:20.360 --> 0:10:22.320 much more because they have to wait to see the 0:10:22.360 --> 0:10:25.319 cumulative effects of rights, they have to hold on for. 0:10:25.320 --> 0:10:30.520 Longer, accumulate US across twenty twenty four to year twenty 0:10:30.760 --> 0:10:36.320 twenty five, how does fixed income react to a longer 0:10:36.360 --> 0:10:38.880 that most people aren't predicting like you are. 0:10:40.160 --> 0:10:43.400 Well, the interesting thing is we don't believe there's hikes 0:10:43.480 --> 0:10:45.720 next here. We believe they're a whole next year. So 0:10:45.760 --> 0:10:49.000 what happens in that environment is that the longer end 0:10:49.040 --> 0:10:52.080 of the curve starts doing the fight against inflation, you know, 0:10:52.200 --> 0:10:54.800 and that comes through the market doing the fight against inflation. 0:10:55.240 --> 0:10:56.240 So there's two things. 0:10:56.040 --> 0:10:57.800 That have to happen first one is the market right 0:10:57.800 --> 0:11:00.160 now is discounting eases in the two year volondo all 0:11:00.200 --> 0:11:02.080 throughout next year. I think there's four or five yusas 0:11:02.120 --> 0:11:05.120 discounted in the US. That has to be work itself out, 0:11:05.120 --> 0:11:08.520 and that means higher yields across the board. But we 0:11:08.600 --> 0:11:11.960 believe we'll have steepening before because people are scared of 0:11:12.000 --> 0:11:15.920 the UAW negotiations. What's the impact of that, because let's 0:11:15.920 --> 0:11:18.120 say there is you know, for argument's sake, of twenty 0:11:18.120 --> 0:11:21.439 five percent increase in wages. That does not show itself 0:11:21.520 --> 0:11:24.600 immediately in inflation, but it will show itself in six 0:11:24.640 --> 0:11:27.280 months as car prices go up because your cost are 0:11:27.280 --> 0:11:30.400 going up, and this is happening across a number of industries. 0:11:30.760 --> 0:11:33.679 So we believe we are in that wage price spiral. 0:11:33.720 --> 0:11:35.920 We've seen a number of wage gains this year. You 0:11:35.960 --> 0:11:39.920 know your pilots. We saw ups significant wage gains, which 0:11:40.000 --> 0:11:42.720 doesn't show up in inflation until people start paying and 0:11:42.760 --> 0:11:45.760 buying stuff with that increased income. So we believe we're 0:11:45.760 --> 0:11:47.840 in that spiral. That's why I'll be higher for longer, 0:11:47.960 --> 0:11:51.880 and we don't foresee cuts until twenty twenty five at earliest, 0:11:52.120 --> 0:11:55.240 late Q four twenty twenty four, but I don't anticipate 0:11:55.280 --> 0:11:56.080 that at this point in. 0:11:56.600 --> 0:11:58.800 We talk a lot about the long and variable lags, 0:11:58.840 --> 0:12:02.040 and there's a huge disagreement about whether they've already basically 0:12:02.800 --> 0:12:05.959 impacted on the economy or if they are yet to come. 0:12:06.640 --> 0:12:09.320 Aside from just the treasury market, when you take a 0:12:09.320 --> 0:12:12.600 look at credit, are you seeing companies being able to 0:12:12.720 --> 0:12:14.840 absorb some of the higher rates and all of the 0:12:14.840 --> 0:12:17.319 debt sales that we've seen over the past couple of days, 0:12:17.679 --> 0:12:20.360 or is there something else going on that makes you 0:12:20.400 --> 0:12:22.320 think it's going to bite in a more material way. 0:12:23.200 --> 0:12:26.839 Well, they could easily absorb that the debt hikes from 0:12:26.880 --> 0:12:29.839 where they're refinancing. And the reason why is, let's look 0:12:29.840 --> 0:12:32.480 at US tenure bonds. Let's say a company issues US 0:12:32.520 --> 0:12:38.280 corporate credit at what say one hundred above above overnight 0:12:38.800 --> 0:12:42.280 above ten year yields. They're still earning a positive return. 0:12:42.960 --> 0:12:45.120 They're not paying because of the inversion of the yield 0:12:45.120 --> 0:12:47.760 curve and where overnight rates are, so it's not costing 0:12:47.800 --> 0:12:50.400 them as much as people think, especially the ones who 0:12:50.720 --> 0:12:53.840 issued last year or the year before and still have five, six, seven, 0:12:53.920 --> 0:12:56.120 eight years left on this debt. I think This is 0:12:56.160 --> 0:12:57.880 part of the story and part of the reason why 0:12:57.920 --> 0:12:59.880 we're seeing the resilience in the market that we're seeing, 0:13:00.080 --> 0:13:04.480 especially from corporates. There's no earnings recession. There's no margin 0:13:04.559 --> 0:13:07.200 compression at this point in time, and that's something that 0:13:07.280 --> 0:13:09.720 has to change for inflation to come. 0:13:09.600 --> 0:13:11.680 Down as well, if you do have some sort of 0:13:11.679 --> 0:13:14.400 wage price spiral. Are you saying, Earl, that we're on 0:13:14.440 --> 0:13:17.480 the cusp of a reacceleration of the US economy that 0:13:17.520 --> 0:13:20.080 people are not foreseeing, and that that's slow sort of 0:13:20.400 --> 0:13:23.440 soft landing and decline is not an accurate portrayal. 0:13:24.480 --> 0:13:27.840 It's a great question. The answer is, it depends, and 0:13:27.920 --> 0:13:31.120 it depends on what the FED and FOMC reaction to 0:13:31.280 --> 0:13:33.360 that is. You know, it's our belief it's going to 0:13:33.360 --> 0:13:35.520 be very difficult for them to hike in twenty twenty 0:13:35.520 --> 0:13:39.479 four because of the election, and I know they're independent, 0:13:39.520 --> 0:13:44.280 but it does impact popular opinion when politicians are talking 0:13:44.280 --> 0:13:47.480 about hiking when things are turning. So depends on the 0:13:47.480 --> 0:13:50.960 reaction function of the FED. If the FED chooses to 0:13:51.120 --> 0:13:55.240 counter that reacceleration, if it does happen, then no, we'll 0:13:55.240 --> 0:13:57.600 be all right. But if they choose to wait because 0:13:57.600 --> 0:14:00.600 of the cumulative effects and because of other reasons, then 0:14:00.640 --> 0:14:03.480 we could see some ongoing volatility in the bond market, 0:14:03.559 --> 0:14:05.360 especially that ten to thirty year sector. 0:14:05.840 --> 0:14:08.080 Oh that word. But can I pick up on that? 0:14:08.520 --> 0:14:11.520 They're independent? But I've always struggled with that. Well, they're 0:14:11.559 --> 0:14:14.320 either independent or they're not. There's no butts about it. 0:14:14.360 --> 0:14:16.559 Why is that always I'll give you the butt. Let 0:14:16.559 --> 0:14:17.400 me answer that question. 0:14:17.400 --> 0:14:21.800 Show they are independent, but the politicians Congress, Senate, they 0:14:21.800 --> 0:14:24.040 could change the mandate of the FED in five years. 0:14:24.240 --> 0:14:28.000 So they're independent now. But the reaction function in five 0:14:28.040 --> 0:14:32.000 years in regards to the ongoing mandate, that's that's subject 0:14:32.000 --> 0:14:32.400 to change. 0:14:32.400 --> 0:14:33.480 That's not perfect. Interesting. 0:14:33.800 --> 0:14:35.160 Oh you think that might change? 0:14:35.200 --> 0:14:38.600 Then I didn't say that. I'll just tell it. 0:14:39.120 --> 0:14:41.920 That is in the cards, so that has to be 0:14:41.960 --> 0:14:45.000 taken into account. Let me look at it. 0:14:45.480 --> 0:14:46.080 Rephrase it. 0:14:46.600 --> 0:14:49.760 I'm a fixed income trader. I look at net present value, 0:14:50.160 --> 0:14:52.720 so which means you're cash flows over next ten years. 0:14:53.120 --> 0:14:55.400 When they font see makes a decision, they have to 0:14:55.400 --> 0:14:58.400 look at what's the impact, not just immediately but next year, 0:14:58.520 --> 0:15:01.240 two years, three years, four years, by years. Part of 0:15:01.280 --> 0:15:04.360 that calculus is what I'm saying, and that's what you 0:15:04.440 --> 0:15:07.080 have to distill back to ensure that you have longevity 0:15:07.240 --> 0:15:09.600 in what you do. And that's how we kind of 0:15:09.600 --> 0:15:15.720 see the game theory of monetary policy, fiscal policy, and 0:15:16.800 --> 0:15:18.520 that's how we put our risk on. We look at 0:15:18.520 --> 0:15:20.720 this and we incorporate that into our risk taking. 0:15:21.040 --> 0:15:24.040 That's fascinating. Oh, thank you, thanks for the explanation. Oh 0:15:24.120 --> 0:15:37.200 Davis the of BMO Asset Management, pretty good, right. 0:15:37.080 --> 0:15:40.440 To it right now. This is an important conversation. Pierre 0:15:40.520 --> 0:15:46.000 Farragu has been just brilliant and decidedly not an Apple fanboy. 0:15:46.080 --> 0:15:50.480 He is global technology infrastructure head at New Street Research. Pierre, 0:15:50.520 --> 0:15:54.400 I love your phrase, the silicon wall. I'm going to 0:15:54.480 --> 0:15:58.200 give you credit for that, the Faragu silicon wall. That's 0:15:58.240 --> 0:16:03.640 attention this morning. Is there a silicon wall identifiable between 0:16:03.640 --> 0:16:05.040 America and China. 0:16:07.160 --> 0:16:09.560 Well, I don't think we see the wall yet because 0:16:09.640 --> 0:16:12.920 China is buying about twenty twenty five percent of any 0:16:13.040 --> 0:16:17.400 you know, Western tech company or any Western semiconductor companies, 0:16:17.400 --> 0:16:20.040 so they still China is still a very big market. 0:16:20.080 --> 0:16:23.200 But what we see that both sides are we think 0:16:23.400 --> 0:16:27.120 very very actively at building up that ball with the US, 0:16:27.160 --> 0:16:31.360 you know, increasing restrictions China doing their best to develop 0:16:31.440 --> 0:16:34.200 their own, their own supply chain, and you see like 0:16:34.280 --> 0:16:38.640 with Quawi this week announcing like their first you know, 0:16:39.120 --> 0:16:40.640 high end phone power. 0:16:40.400 --> 0:16:43.120 By a homegrown chip. 0:16:43.520 --> 0:16:46.760 These moves are very important and are setting the foundations 0:16:46.760 --> 0:16:49.120 for the world in some ways. 0:16:49.160 --> 0:16:52.280 And that's that's the way we think about it. 0:16:52.320 --> 0:16:54.520 And you know, it took like a few centuries to 0:16:54.520 --> 0:16:58.040 build them the Wall of China, and it's probably going 0:16:58.080 --> 0:17:00.520 to take a decade or two to to build the 0:17:00.600 --> 0:17:03.080 Silicon Wall as well. It's going to take a very 0:17:03.160 --> 0:17:05.639 long time for China to be able to be more 0:17:05.640 --> 0:17:09.760 autonomous and for you know. 0:17:11.080 --> 0:17:13.680 Their ability to replace Western supplies. 0:17:14.160 --> 0:17:18.560 Your note, Pierre, your note is extremely constructive on short 0:17:18.640 --> 0:17:22.000 term for Apple in China. What is the power this 0:17:22.280 --> 0:17:26.879 way that Tim Cook has over the Chinese government and 0:17:26.920 --> 0:17:29.760 over the Chinese manufacturing establishment. 0:17:31.800 --> 0:17:35.040 So let's yeah, I think you raise a good point 0:17:35.119 --> 0:17:38.040 that you know, China has to you know, be very 0:17:38.040 --> 0:17:41.119 careful to what they do with Apple because China depends 0:17:41.119 --> 0:17:45.240 on Apple for many things that even more important in 0:17:45.280 --> 0:17:47.560 the upstream of apples than the downstream of Apple. 0:17:47.840 --> 0:17:48.640 That's a very good point. 0:17:48.640 --> 0:17:50.240 But even if you take a step back, you know, 0:17:50.640 --> 0:17:53.800 let's talk about learn instead of talking about team and 0:17:53.840 --> 0:17:58.080 see what happened. In twenty twenty one, China banned the 0:17:58.240 --> 0:18:01.159 use of tests like gas for similar like a similar 0:18:01.200 --> 0:18:05.960 scope of Chinese Chinese officials and Chinese military state owned companies, 0:18:06.840 --> 0:18:09.399 And how is TESTA doing in China's His day is 0:18:09.400 --> 0:18:10.000 pretty well. 0:18:10.160 --> 0:18:13.760 So you know these bands, the direct impact. 0:18:13.359 --> 0:18:16.920 Of this band is very, very like and to be honest, 0:18:16.960 --> 0:18:21.040 actually invisible. You don't even see it. And so that's 0:18:21.040 --> 0:18:23.639 the reason why I'm going to be constructive on the situation. 0:18:23.880 --> 0:18:26.439 You're like, this band is not going to affect that 0:18:26.440 --> 0:18:28.720 good in the near term. Of course, it's a wake 0:18:28.800 --> 0:18:31.080 up call for investors. They're like, oh my god, Like 0:18:31.480 --> 0:18:33.760 this situation with China is not getting well. 0:18:34.359 --> 0:18:36.160 And I think the ban is one thing. The one 0:18:36.200 --> 0:18:37.320 way phone is another one. 0:18:37.359 --> 0:18:39.280 And it's not a coincidence that we see the two 0:18:39.280 --> 0:18:42.000 things popping up in the in. 0:18:41.880 --> 0:18:43.359 The in the same way. 0:18:43.560 --> 0:18:46.200 So the way I see it, whether it's Team Cook 0:18:46.320 --> 0:18:50.240 or even mess, these guys have a good ability to 0:18:50.280 --> 0:18:54.280 engage with Chinese authorities understand the importance of China as 0:18:54.280 --> 0:18:54.760 a market. 0:18:55.160 --> 0:18:57.080 China understands the importance of having. 0:18:56.920 --> 0:19:02.840 Them building factories leveraging the Chinese supply chain, and so 0:19:03.600 --> 0:19:05.800 you know, nobody is going to mess the Apple cart 0:19:06.840 --> 0:19:10.399 in the near term, but in the longer run, I 0:19:10.440 --> 0:19:12.880 think you have to keep in mind the second wall 0:19:12.920 --> 0:19:16.240 is building up, and slowly but surely China is going 0:19:16.280 --> 0:19:18.920 to get out of the mix of the revenues of 0:19:19.000 --> 0:19:23.479 an Apple, of the Tesla, of an Intel, of all 0:19:23.600 --> 0:19:24.600 Western technology. 0:19:25.160 --> 0:19:26.639 So at what point are you looking to see how 0:19:26.720 --> 0:19:30.040 much Tim Cook heads over to New Delhi to Mumbai 0:19:30.280 --> 0:19:33.680 to really have a discussion about expanding production in India. 0:19:34.400 --> 0:19:39.840