1 00:00:00,040 --> 00:00:02,400 Speaker 1: Let's get to Peter Cheer, head of macro strategy at 2 00:00:02,440 --> 00:00:06,280 Speaker 1: Academy Securities. So Peter, thanks very much for joining us 3 00:00:06,519 --> 00:00:08,600 Speaker 1: for this half hour leading up to our interview with 4 00:00:08,680 --> 00:00:12,639 Speaker 1: David Melpass. So it should be good, well, inflation, I 5 00:00:12,640 --> 00:00:15,880 Speaker 1: wouldn't say it's exactly peaking, but it's in the process 6 00:00:15,920 --> 00:00:18,600 Speaker 1: of peaking, that's what it feels like. But the Fed 7 00:00:18,760 --> 00:00:22,200 Speaker 1: doesn't seem to be ready to be patient to see 8 00:00:22,200 --> 00:00:24,840 Speaker 1: what the effects of the rate hikes that they've already 9 00:00:24,880 --> 00:00:28,320 Speaker 1: made will be. So we're still expecting something aggressive. You 10 00:00:28,400 --> 00:00:30,880 Speaker 1: probably heard me say your Danny expects a hundred, the 11 00:00:30,920 --> 00:00:34,360 Speaker 1: market expects seventy five year thoughts on that. I think 12 00:00:34,400 --> 00:00:36,479 Speaker 1: we probably get seventy five. But I do think the 13 00:00:36,520 --> 00:00:38,680 Speaker 1: set is kind of pushing on making a mistake because 14 00:00:38,920 --> 00:00:41,320 Speaker 1: even you look at last week's CPI data was kind 15 00:00:41,360 --> 00:00:44,000 Speaker 1: of royal markets. A big part of it was the 16 00:00:44,120 --> 00:00:47,800 Speaker 1: housing inflation was point seven and that's based on owners 17 00:00:47,880 --> 00:00:50,680 Speaker 1: equivalent rent, and I think there's just a massive lag 18 00:00:50,720 --> 00:00:54,880 Speaker 1: effect when you look at any sort of contemparative contemporaneous 19 00:00:55,040 --> 00:00:58,000 Speaker 1: data on the housing market. It is softening. Here mortgage 20 00:00:58,040 --> 00:01:00,280 Speaker 1: rates are about six percent, so I think they risk 21 00:01:00,400 --> 00:01:03,120 Speaker 1: pushing this and no matter what they do, I think 22 00:01:03,800 --> 00:01:06,000 Speaker 1: they have to send a message that they want to 23 00:01:06,000 --> 00:01:08,000 Speaker 1: give some time to see how markets are going to 24 00:01:08,040 --> 00:01:10,160 Speaker 1: be impact from what's already been done, and that they 25 00:01:10,160 --> 00:01:13,520 Speaker 1: remained data dependent. If he comes across as aggressive as 26 00:01:13,560 --> 00:01:15,600 Speaker 1: he was at Jackson Hall, markets are going to be 27 00:01:15,640 --> 00:01:19,399 Speaker 1: in some severe trouble. Tell me something here, Peter, I mean, 28 00:01:19,520 --> 00:01:22,160 Speaker 1: ultimately is this you know? I think it was Daddy 29 00:01:22,160 --> 00:01:26,000 Speaker 1: Blancheut from Duman University as a professor talking about how 30 00:01:26,120 --> 00:01:30,240 Speaker 1: the FED is actually raising rates at a time when 31 00:01:30,319 --> 00:01:36,000 Speaker 1: he sees inflation dissipating, accused the FED of actually then 32 00:01:36,040 --> 00:01:40,959 Speaker 1: perhaps going in essentially pushing the U S economy into 33 00:01:41,000 --> 00:01:45,160 Speaker 1: a deep, deep dive and saying that they were really 34 00:01:46,240 --> 00:01:51,480 Speaker 1: victims of group think. Yeah, I would say along those lines. 35 00:01:51,960 --> 00:01:54,160 Speaker 1: You know, there's a reason traders have stop losses, right, 36 00:01:54,200 --> 00:01:55,720 Speaker 1: if you make a bad decision, you want to get 37 00:01:55,760 --> 00:01:58,200 Speaker 1: stopped out. And I think if you look back, it 38 00:01:58,240 --> 00:02:01,120 Speaker 1: was pretty clear we probably should have ended QUE last summer. 39 00:02:01,360 --> 00:02:03,440 Speaker 1: And when they were giving reasons for keeping QUE last 40 00:02:03,480 --> 00:02:08,160 Speaker 1: summers about bondmarket liquidity, etcetera. And yet bondmarket liquidity, especially 41 00:02:08,160 --> 00:02:10,080 Speaker 1: in the treasury market, was better last summer than it 42 00:02:10,120 --> 00:02:13,239 Speaker 1: is now. I think they miss transitory and are now 43 00:02:13,280 --> 00:02:15,639 Speaker 1: making up for that. And two wrongs do not make 44 00:02:15,639 --> 00:02:17,919 Speaker 1: a right. So I think we're supposed to be, as 45 00:02:18,080 --> 00:02:20,440 Speaker 1: you know, Danny says, let's be a little bit cautious here, 46 00:02:20,520 --> 00:02:22,640 Speaker 1: let's see how things play out. And I think we're 47 00:02:22,639 --> 00:02:25,639 Speaker 1: going to find that the politicians and mainstream media are 48 00:02:25,680 --> 00:02:29,079 Speaker 1: going to realize that job losses and a recession are 49 00:02:29,200 --> 00:02:31,840 Speaker 1: far worse than a bit of inflation. But Peter, the 50 00:02:32,160 --> 00:02:35,519 Speaker 1: FED is looking at housing market that I mean, these 51 00:02:35,560 --> 00:02:38,239 Speaker 1: rents are not going to come down anytime soon, probably 52 00:02:38,280 --> 00:02:40,760 Speaker 1: because I mean it's part of the nature of things. 53 00:02:40,960 --> 00:02:45,360 Speaker 1: Rates are high, so nobody's buying now, and so you 54 00:02:45,400 --> 00:02:47,560 Speaker 1: know people will rent and there's demand, and so the 55 00:02:47,600 --> 00:02:49,880 Speaker 1: rents are going to stay high. And that's a third 56 00:02:49,880 --> 00:02:53,359 Speaker 1: of CPR, So it's gonna take some time. One there's 57 00:02:53,360 --> 00:02:56,360 Speaker 1: a lag effect on how they calculate the rental equivalent. 58 00:02:56,600 --> 00:02:58,920 Speaker 1: They basically, I think, take about one tenth of the homes. 59 00:02:59,240 --> 00:03:02,440 Speaker 1: So I they heavily understated the inflation that we're seeing 60 00:03:02,440 --> 00:03:04,880 Speaker 1: on the rent a year ago, but now they're going 61 00:03:04,919 --> 00:03:07,200 Speaker 1: to be overstating that for a period to come pet 62 00:03:07,320 --> 00:03:10,320 Speaker 1: we're just talking about about the fet just conclude on 63 00:03:10,480 --> 00:03:13,880 Speaker 1: that subject essentially by asking you whether j Pale has 64 00:03:14,000 --> 00:03:18,160 Speaker 1: turned and heaven for saying this taint turned tend Pool 65 00:03:18,200 --> 00:03:22,000 Speaker 1: Volca just at the wrong moment. Well, I think Jackson 66 00:03:22,040 --> 00:03:24,880 Speaker 1: Hole gave him the opportunity to sound very very hockeysh 67 00:03:25,200 --> 00:03:26,880 Speaker 1: there were no Q and A, there was nothing he 68 00:03:26,919 --> 00:03:28,880 Speaker 1: had to respond to. I think it's gonna be a 69 00:03:28,960 --> 00:03:32,440 Speaker 1: little bit more difficult, given where yields are, what we're 70 00:03:32,440 --> 00:03:35,560 Speaker 1: seeing in some of the economic data and even stocks 71 00:03:35,600 --> 00:03:37,680 Speaker 1: for him to sound quite as hockey. I expect he'll 72 00:03:37,760 --> 00:03:39,480 Speaker 1: kind of come across a little bit doubbish here, and 73 00:03:39,520 --> 00:03:42,360 Speaker 1: they're not massively but just enough to spur a little 74 00:03:42,360 --> 00:03:44,360 Speaker 1: bit of a relief rally. And the other thing I'm 75 00:03:44,360 --> 00:03:47,600 Speaker 1: looking for him to talk about is quantitative tightening and 76 00:03:47,600 --> 00:03:50,000 Speaker 1: if they can do something to address the market's concern 77 00:03:50,080 --> 00:03:52,760 Speaker 1: about needing to sell mortgage backed securities. That's been a 78 00:03:52,760 --> 00:03:54,600 Speaker 1: big part of the rise in mortgage yields, which is 79 00:03:54,600 --> 00:03:56,839 Speaker 1: really hit housing. So look for him maybe to say 80 00:03:56,880 --> 00:04:00,240 Speaker 1: something about that where maybe quantitative tightening switches a little 81 00:04:00,280 --> 00:04:03,080 Speaker 1: bit more to the treasury side of things rather than 82 00:04:03,120 --> 00:04:06,280 Speaker 1: the mortgage side. It feels like we do have some 83 00:04:06,360 --> 00:04:10,120 Speaker 1: residual strength in the US economy, and I'm curious how 84 00:04:10,200 --> 00:04:13,720 Speaker 1: we can measure the slow down. The slowdown in housing 85 00:04:13,760 --> 00:04:16,680 Speaker 1: for instance, is it prices falling, is it the number 86 00:04:16,760 --> 00:04:22,159 Speaker 1: of transactions dropping general activity? Is it rents? And then 87 00:04:22,279 --> 00:04:24,760 Speaker 1: when you look at the economy, it seems like both 88 00:04:24,800 --> 00:04:29,200 Speaker 1: consumers and companies their balance sheets are looking okay. So 89 00:04:29,240 --> 00:04:33,320 Speaker 1: I'd agree that consumers and companies the balance sheets look okay. Um, 90 00:04:33,360 --> 00:04:36,440 Speaker 1: particularly investment grade companies. I'm fine with that. You look 91 00:04:36,440 --> 00:04:39,040 Speaker 1: at some of the retail spending numbers, though they were 92 00:04:39,080 --> 00:04:42,640 Speaker 1: okay but not great. You saw some and what's concerning 93 00:04:42,680 --> 00:04:45,120 Speaker 1: me is on the retail sales, you also saw it 94 00:04:45,160 --> 00:04:48,680 Speaker 1: in the jobs numbers. You're starting to see revisions to 95 00:04:48,760 --> 00:04:51,760 Speaker 1: pass data. So maybe it was too optimistic and I'm 96 00:04:51,760 --> 00:04:53,560 Speaker 1: stuck in this is we're really trying to figure out, Okay, 97 00:04:53,600 --> 00:04:55,440 Speaker 1: where's the ball going to be? Where should we be 98 00:04:55,480 --> 00:04:59,440 Speaker 1: moving to, not where we're at. And you start looking 99 00:04:59,480 --> 00:05:02,000 Speaker 1: at mortgage rates, what you're seeing in the housing data, 100 00:05:02,040 --> 00:05:05,799 Speaker 1: what you're seeing in terms of um confidence, whether it's builders, 101 00:05:06,400 --> 00:05:08,960 Speaker 1: you look at the inventory overhangs, you start looking at 102 00:05:08,960 --> 00:05:11,520 Speaker 1: the Baltic dry shipping. Things to me that are better 103 00:05:11,640 --> 00:05:14,400 Speaker 1: leading indicators have all rolled over a little bit. So 104 00:05:14,440 --> 00:05:18,480 Speaker 1: I think you're gonna see the So you'd rather see 105 00:05:18,600 --> 00:05:20,359 Speaker 1: I mean, let's let's put it this way. You just 106 00:05:20,640 --> 00:05:22,880 Speaker 1: much rather see a little patience from the Fed. That's 107 00:05:22,920 --> 00:05:26,360 Speaker 1: your basic point. Yes, I think I'm really concerned. They've 108 00:05:26,400 --> 00:05:29,320 Speaker 1: already gone too far, and let's not push it even further. 109 00:05:29,440 --> 00:05:32,080 Speaker 1: Let's see where this things plays out. And look at housing, right, 110 00:05:32,279 --> 00:05:35,520 Speaker 1: the cost of carry was negligible, inventorious, cost of carry 111 00:05:35,600 --> 00:05:38,200 Speaker 1: was minimal. All those now have real cost of carry. 112 00:05:38,480 --> 00:05:40,080 Speaker 1: Let's see how this goes out. Let's see how the 113 00:05:40,080 --> 00:05:41,720 Speaker 1: winter plays out in Europe, because that could be a 114 00:05:41,760 --> 00:05:45,320 Speaker 1: disaster economically as well. So rather than pushing this too far, 115 00:05:45,720 --> 00:05:48,679 Speaker 1: let's say we've done a lot. We're going to not pause, 116 00:05:48,760 --> 00:05:51,000 Speaker 1: but we're gonna be very very data dependent, and we 117 00:05:51,040 --> 00:05:52,760 Speaker 1: want to see where this is playing out. And I 118 00:05:52,800 --> 00:05:56,120 Speaker 1: think that's necessary to keep the economy on pace. But 119 00:05:56,320 --> 00:05:59,039 Speaker 1: as the strength of the dollar been hinders or help 120 00:05:59,279 --> 00:06:01,479 Speaker 1: for the US of con me you know, I think 121 00:06:01,480 --> 00:06:03,680 Speaker 1: it's been good in respect that it's been driving down 122 00:06:03,720 --> 00:06:06,200 Speaker 1: commodity prices since most of those trade in dollars, but 123 00:06:06,240 --> 00:06:08,440 Speaker 1: I think it's going to be tough for companies who 124 00:06:08,480 --> 00:06:10,600 Speaker 1: have to translate earnings back to dollars. So right now, 125 00:06:11,080 --> 00:06:13,360 Speaker 1: I would say it started the summer as being good 126 00:06:13,400 --> 00:06:16,120 Speaker 1: because it helped push inflation pressions down. Right now, it's 127 00:06:16,160 --> 00:06:18,479 Speaker 1: about neutral. If it continues, I think people are going 128 00:06:18,560 --> 00:06:22,239 Speaker 1: to be really worried about US earnings because we've moved 129 00:06:22,279 --> 00:06:27,039 Speaker 1: so far in certain directions, particularly with the dollar, but 130 00:06:27,160 --> 00:06:29,840 Speaker 1: also with a pretty broad sell off in equities. So 131 00:06:30,360 --> 00:06:33,360 Speaker 1: if you look at the equal weight e t F 132 00:06:33,640 --> 00:06:36,840 Speaker 1: for the SNP, those valuations are not high at all. 133 00:06:36,880 --> 00:06:42,440 Speaker 1: Those those stocks have suffered a lot. I mean, really, um, 134 00:06:42,560 --> 00:06:45,400 Speaker 1: you wonder whether or not if the FED pauses, or 135 00:06:45,520 --> 00:06:48,520 Speaker 1: if it does fifty instead of seventy instead of fifty, 136 00:06:48,800 --> 00:06:52,760 Speaker 1: whether or not it's just kind of unleashes revenge reversals. 137 00:06:52,800 --> 00:06:55,800 Speaker 1: So what are you thinking about in that area. I'm 138 00:06:55,920 --> 00:06:58,000 Speaker 1: less concerned about how much they hike and more about 139 00:06:58,040 --> 00:06:59,800 Speaker 1: the messaging. And I think that the messaging is that 140 00:06:59,839 --> 00:07:01,400 Speaker 1: we get a pause. I think we get a very 141 00:07:01,440 --> 00:07:05,920 Speaker 1: nice relief. Rally, what I'm seeing it's we switch from 142 00:07:05,920 --> 00:07:08,840 Speaker 1: over brought to oversoul that record pace two weeks ago, 143 00:07:08,880 --> 00:07:11,240 Speaker 1: we felt overbought and now we feel all oversould. So yes, 144 00:07:11,280 --> 00:07:14,080 Speaker 1: I think that could raise a really nice rally. But 145 00:07:14,120 --> 00:07:15,440 Speaker 1: then I think we're gonna have to sit back and 146 00:07:15,480 --> 00:07:17,600 Speaker 1: say what are earning is gonna look like? Where is 147 00:07:17,640 --> 00:07:20,080 Speaker 1: cash flow coming from? And I keep looking at crypto. 148 00:07:20,080 --> 00:07:21,720 Speaker 1: I think we get a short term bounce in crypto, 149 00:07:21,960 --> 00:07:23,400 Speaker 1: but if that falls off, I think it's going to 150 00:07:23,480 --> 00:07:26,160 Speaker 1: be a symbol that all these very aggressive assets that 151 00:07:26,320 --> 00:07:29,880 Speaker 1: rose from almost nothing too really high could continue to 152 00:07:29,920 --> 00:07:32,680 Speaker 1: go down. And yes they're down, but many are still 153 00:07:32,760 --> 00:07:36,360 Speaker 1: up fift or from two years ago, so I think 154 00:07:36,360 --> 00:07:39,440 Speaker 1: there's more room to fall. And if we are headed 155 00:07:39,480 --> 00:07:41,920 Speaker 1: towards a nominal recession in the US, not just a 156 00:07:41,960 --> 00:07:44,120 Speaker 1: real recession, but a nominal recession, which I think is 157 00:07:44,120 --> 00:07:47,600 Speaker 1: a real possibility, no pun intended, we will see further 158 00:07:47,640 --> 00:07:50,560 Speaker 1: pain in equity markets while yields fall. So we have 159 00:07:50,640 --> 00:07:53,600 Speaker 1: not yet seen a really good risk off type moment 160 00:07:53,600 --> 00:07:56,520 Speaker 1: where yields go much lower and equities fall, And I 161 00:07:56,560 --> 00:07:58,560 Speaker 1: think that's going to be the final capitulation. I think 162 00:07:58,560 --> 00:08:01,600 Speaker 1: we get that sometime eight to this fall. Peter, what 163 00:08:02,040 --> 00:08:05,640 Speaker 1: is the deal in your view of quantitative tightening and 164 00:08:05,760 --> 00:08:08,480 Speaker 1: how is it playing out with regards to liquidity in 165 00:08:08,480 --> 00:08:12,360 Speaker 1: the economy itself. So I find it easier to think 166 00:08:12,360 --> 00:08:15,680 Speaker 1: about quantity of easing easing first and to me, quantity 167 00:08:15,720 --> 00:08:18,680 Speaker 1: of easing pushed people out the risk spectrum. So when 168 00:08:18,680 --> 00:08:21,120 Speaker 1: the FED came in and bought treasuries, whether it's ten year, 169 00:08:21,200 --> 00:08:23,720 Speaker 1: twenty year, or thirty year, whether they bought mortgages, it 170 00:08:23,760 --> 00:08:26,600 Speaker 1: made people along the curve have three decisions. You could 171 00:08:26,600 --> 00:08:29,440 Speaker 1: either take on more duration, you could take on more 172 00:08:29,480 --> 00:08:32,439 Speaker 1: credit risk, or you could take on less liquid assets. 173 00:08:32,440 --> 00:08:35,320 Speaker 1: And I think that pushed everyone out. And I use 174 00:08:35,400 --> 00:08:37,280 Speaker 1: this example. It's called Newton's cradle, but I don't know 175 00:08:37,280 --> 00:08:38,880 Speaker 1: if you've ever seen those little things that have six 176 00:08:38,920 --> 00:08:41,559 Speaker 1: balls hanging on strings, and even with the one ball, 177 00:08:41,880 --> 00:08:43,880 Speaker 1: it hits the first one and it's the last one 178 00:08:43,920 --> 00:08:45,840 Speaker 1: that moves out. So I think that's what we saw 179 00:08:45,880 --> 00:08:49,360 Speaker 1: when they were doing quantitative easing. That risk got pushed out, 180 00:08:49,400 --> 00:08:51,720 Speaker 1: and you saw the cryptocurrencies of the world. You saw 181 00:08:51,760 --> 00:08:54,560 Speaker 1: the arch type stops of the world really just skyrocket 182 00:08:54,559 --> 00:08:56,680 Speaker 1: because there was no more risky asset for people to 183 00:08:56,720 --> 00:09:01,000 Speaker 1: invest in. So that creates the opportunity. I think quantitative tightening, 184 00:09:01,000 --> 00:09:02,760 Speaker 1: you're going to see the opposite, and you're gonna see 185 00:09:02,760 --> 00:09:05,360 Speaker 1: people be able to move down the risk spectrum take 186 00:09:05,480 --> 00:09:07,800 Speaker 1: less risk for the same returns. I don't think it's 187 00:09:07,800 --> 00:09:09,320 Speaker 1: going to be quite as dramatic because one thing to 188 00:09:09,320 --> 00:09:12,000 Speaker 1: remember is the set was buying ten year treasuries, thirty 189 00:09:12,040 --> 00:09:15,720 Speaker 1: year treasuries, laundated mortgage backed securities. By and large, they 190 00:09:15,760 --> 00:09:17,720 Speaker 1: are going to allow things to mature, so you're not 191 00:09:17,760 --> 00:09:19,880 Speaker 1: going to have that duration impact, So it's not going 192 00:09:19,920 --> 00:09:21,880 Speaker 1: to be quite as dramatic. But I think you're gonna 193 00:09:21,880 --> 00:09:23,560 Speaker 1: see on the fifteenth of the month and the thirty 194 00:09:23,800 --> 00:09:25,360 Speaker 1: month or the end of the month, because that's when 195 00:09:25,400 --> 00:09:28,600 Speaker 1: treasury is mature, you'll see pressure on markets as people 196 00:09:28,600 --> 00:09:30,840 Speaker 1: have to deal with that lack of liquidity. So there's 197 00:09:30,840 --> 00:09:32,959 Speaker 1: still pressure on the stock market. But does the bond 198 00:09:32,960 --> 00:09:35,640 Speaker 1: market look fairly well supported here with a two year 199 00:09:35,720 --> 00:09:39,640 Speaker 1: yield really pushing fo Yeah, I think it's very well supported. 200 00:09:39,679 --> 00:09:42,400 Speaker 1: I really think you want to own yields here. Even 201 00:09:42,440 --> 00:09:45,120 Speaker 1: if the economy stabilizes, we do well and more and more. 202 00:09:45,160 --> 00:09:47,080 Speaker 1: I'm looking for that big risk off move, so I 203 00:09:47,080 --> 00:09:52,120 Speaker 1: do want to own treasuries. YEA. Looking at the treasury 204 00:09:52,120 --> 00:09:54,600 Speaker 1: market itself, and you know, do you think it's bottomed yet. 205 00:09:55,480 --> 00:09:57,720 Speaker 1: I think it's very close. And you know, we're talking 206 00:09:57,800 --> 00:10:00,400 Speaker 1: and we've seen people talk about say ten percent return 207 00:10:00,480 --> 00:10:02,360 Speaker 1: for the long bone of people. Well, that seems aggressive 208 00:10:02,400 --> 00:10:04,000 Speaker 1: in the next month or two. But if you look 209 00:10:04,000 --> 00:10:06,240 Speaker 1: at the current US long bone, the thirty year, it 210 00:10:06,320 --> 00:10:08,720 Speaker 1: was issued around ninety eight cents on the dollars trading 211 00:10:08,720 --> 00:10:10,560 Speaker 1: at ninety one and less than a month and a half. 212 00:10:10,640 --> 00:10:13,760 Speaker 1: So that sort of potential return is there. And I 213 00:10:13,800 --> 00:10:16,880 Speaker 1: think the upside is much better in the rates market 214 00:10:16,960 --> 00:10:19,160 Speaker 1: right now than the downside. So yes, I want to 215 00:10:19,200 --> 00:10:22,360 Speaker 1: own that. All right, Peter, we will close it. There 216 00:10:22,160 --> 00:10:25,280 Speaker 1: are interesting discussion. Thanks very much for joining us here. 217 00:10:25,400 --> 00:10:29,400 Speaker 1: Peter cheer, and of macro Strategy at Academy Security said