WEBVTT - Surveillance: Hyman's Fed Forecast 0:00:05.120 --> 0:00:08.480 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, 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 --> 0:00:30.760 the Bloomberg Terminal, and the Bloomberg Business App. We're started 0:00:30.760 --> 0:00:34.519 to bring you. The chairman of Evercore, Isi at Heimann 0:00:34.600 --> 0:00:37.000 joins us for a midyear update. I wanted a little 0:00:37.040 --> 0:00:40.400 history at John's got like six serious questions. I'm calling 0:00:40.440 --> 0:00:45.160 the October Bottom, the Ralphankopora, Edward Yard Denny Bottom. Many 0:00:45.200 --> 0:00:48.479 other people were out there as optimistic, but Edyard Denny 0:00:48.840 --> 0:00:53.520 absolutely nailed the bottom. You basically gave him his job. 0:00:53.560 --> 0:00:56.200 You were at CJ. Lawrence a million years ago. I 0:00:56.240 --> 0:00:59.640 read your research worshipfully, and you went out the door 0:00:59.760 --> 0:01:02.160 to set up your own shop, and Yard Denny replaced you. 0:01:02.280 --> 0:01:02.920 Is that true? 0:01:03.280 --> 0:01:06.280 So I had to deal with my boss then, Jim Molt, 0:01:06.319 --> 0:01:10.959 who ran the firm, that I wouldn't leave until we've 0:01:11.000 --> 0:01:13.200 got a replacement. And so Jim came in and said, 0:01:13.319 --> 0:01:14.440 Ed you can leave. 0:01:16.080 --> 0:01:20.080 I said, oh, the imbred optimism that Ed Heyman has 0:01:20.120 --> 0:01:22.800 an ed Yard Denny has. What does the gloom crew 0:01:22.880 --> 0:01:27.520 get wrong here about the need to understand America will persevere? 0:01:28.160 --> 0:01:31.840 So I think we're going to have a recession. And 0:01:31.959 --> 0:01:34.679 I follow ed Yard any closely and I just read 0:01:34.680 --> 0:01:39.360 his piece over the weekend where he's doesn't have a recession. 0:01:40.480 --> 0:01:45.200 And I've been through this more time than anybody on 0:01:45.240 --> 0:01:49.040 your show. The He'll curve works, and the you'll curve 0:01:49.160 --> 0:01:52.720 is really inverted, and then if that doesn't do it, 0:01:53.280 --> 0:01:55.680 you have a contraction and the money supply the most 0:01:55.720 --> 0:01:59.840 since the nineteen thirties, and then you have a significant 0:02:00.040 --> 0:02:05.200 recent rates plus QT and so Mike Tyson could get 0:02:05.240 --> 0:02:08.160 you with any one of those much less. It's got 0:02:08.200 --> 0:02:08.919 three shots. 0:02:09.480 --> 0:02:09.880 And so. 0:02:11.400 --> 0:02:12.600 I just have to add that. 0:02:14.480 --> 0:02:14.920 From when the. 0:02:14.960 --> 0:02:19.000 Yell curve inverts, it can take eighteen months for the 0:02:19.040 --> 0:02:22.560 economy to go into recession, and just before it goes 0:02:22.560 --> 0:02:27.079 into recession it looks great. It's a very humbling business. 0:02:27.320 --> 0:02:29.359 And Tom, I got to say, I have not been 0:02:29.400 --> 0:02:32.040 forecasting a recession for the past year. I fought last 0:02:32.120 --> 0:02:35.400 year the two down quarters like crazy and I have 0:02:35.560 --> 0:02:41.320 the third quarter down, which seems too aggressive, but I'm 0:02:41.360 --> 0:02:43.120 pretty flexible, but I'm sure it's coming. 0:02:43.320 --> 0:02:47.320 Does this have a preweight feel to it in that regard. 0:02:47.680 --> 0:02:51.160 Not really just except for the yell curve, but that 0:02:51.280 --> 0:02:54.280 the wait my ment specifically, well for sure on that, 0:02:56.000 --> 0:02:57.920 and it's playing out pretty much like that. But you 0:02:57.960 --> 0:03:01.120 don't have the housing bubble, you don't have something that 0:03:01.120 --> 0:03:04.560 would cause a severe recession like we had in eight 0:03:04.680 --> 0:03:05.120 or nine. 0:03:05.280 --> 0:03:07.360 Where are you on the inflation backdrop at the moment? 0:03:07.360 --> 0:03:08.800 We had a guest in the Lost down rows So 0:03:09.160 --> 0:03:13.799 who suggested that inflation expectations are bottominc botsomic for the cycle, 0:03:13.880 --> 0:03:16.320 that ultimately inflation is going to be sticky and a 0:03:16.400 --> 0:03:17.640 recession won't address it. 0:03:18.040 --> 0:03:22.120 So I'm on the other side big time. So I 0:03:22.280 --> 0:03:25.760 just looked before I came over here at gasoline prices, 0:03:25.800 --> 0:03:29.520 which have a big influence on inflation expectations. Inflation expectations 0:03:29.560 --> 0:03:33.680 have come down significantly, but they also are influenced by 0:03:33.680 --> 0:03:38.040 gasoline prices, and the futures have gasoline prices going down 0:03:38.080 --> 0:03:40.200 another ten cents in the next six weeks, not a 0:03:40.200 --> 0:03:43.960 big move, but not up twenty cents, and gasoline prices 0:03:44.040 --> 0:03:48.520 where they were fifteen years ago. So inflation is coming 0:03:48.560 --> 0:03:52.360 down around the world. They just reported this morning the 0:03:52.480 --> 0:03:56.320 PPI for the Eurozone was now in deflation minus one 0:03:56.360 --> 0:03:59.200 and a half percent, which you reported, and then last 0:03:59.200 --> 0:04:02.920 week the Spain CPI went below two percent for the 0:04:02.960 --> 0:04:06.520 first time. So I try and connect the dots the 0:04:06.520 --> 0:04:10.320 best I can, and it looks to me as though 0:04:10.320 --> 0:04:14.320 inflation is really going down. And with that policy backdrop 0:04:14.360 --> 0:04:16.960 I mentioned, it's going to keep going down. 0:04:17.000 --> 0:04:18.760 We let's build on that. So we've got you on growth, 0:04:18.920 --> 0:04:21.560 got you on inflation, build on the policy backdrop. Most 0:04:21.560 --> 0:04:24.680 people anticipating now the FED goes again this month, right, 0:04:24.800 --> 0:04:26.919 maybe goes again after that. Where are you doing the 0:04:26.920 --> 0:04:27.360 scene now? 0:04:27.480 --> 0:04:31.120 So Chrishna Guha does our FED work. He has one 0:04:31.160 --> 0:04:34.600 more and done, and so that's what I would follow. 0:04:36.480 --> 0:04:39.040 At this point, the one more is baked in the cake. 0:04:40.120 --> 0:04:43.159 I think anything from now is a mistake. They're just 0:04:43.240 --> 0:04:47.800 creating a deeper recession or the more likelihood of a recession. 0:04:48.920 --> 0:04:53.880 But at you know, five and at quarter, with the 0:04:53.920 --> 0:04:58.719 bonyle at three eighty, they're pretty much done and inflation slowing. 0:04:59.240 --> 0:05:04.839 The FED height rates in March of twenty twenty two, 0:05:06.600 --> 0:05:11.320 and at that point inflation had already gone crazy, and 0:05:11.360 --> 0:05:14.200 they were still doing the transitory and then they were 0:05:14.200 --> 0:05:18.039 still doing Q. They're still doing Q and so, and 0:05:18.080 --> 0:05:20.400 as I can tell, by the time they by the 0:05:20.400 --> 0:05:23.400 time they cut rates, inflation will be so far down 0:05:23.600 --> 0:05:26.360 it'll make them look a little wrong. 0:05:26.360 --> 0:05:28.919 Forted together, in the years, you've been considered for a 0:05:28.960 --> 0:05:32.760 FED president, certainly as a FED governor as well. And 0:05:32.920 --> 0:05:36.400 what did this FED get wrong? Was it too much communication? 0:05:37.080 --> 0:05:40.479 Were we advantaged with the silence of green spin. 0:05:42.360 --> 0:05:47.800 I think it's very difficult to have three hundred PhDs 0:05:47.960 --> 0:05:53.120 make a forecast, not buttering you up town. But I'd 0:05:53.160 --> 0:05:56.440 rather have you make that forecast than three hundred PhDs. 0:05:57.360 --> 0:06:01.239 Mike said, I can't do Mike walked in one day. 0:06:01.360 --> 0:06:04.000 So Tom, I don't need any forecasts on air continue. 0:06:04.320 --> 0:06:09.360 And so I think it's it's just part of the 0:06:09.400 --> 0:06:11.320 stickiness of the decision making. 0:06:11.600 --> 0:06:12.560 It's by committee. 0:06:12.680 --> 0:06:16.560 It's by committee. And I also tend to try and 0:06:16.680 --> 0:06:19.320 always go where the puck is going to put it 0:06:19.360 --> 0:06:24.080 in your terms, and boy, the evidence, the evidence that 0:06:24.440 --> 0:06:28.719 things are slowing on inflation is really pretty awesome. 0:06:29.120 --> 0:06:31.160 We're going to have you back but you hired Gretzky. 0:06:31.200 --> 0:06:34.839 How's Julian Emmanuel doing to me? Like his his weekly 0:06:34.960 --> 0:06:37.279 note during earning season is the most valuable thing that 0:06:37.320 --> 0:06:39.599 comes over the transom. And what I want to say 0:06:39.680 --> 0:06:43.359 is this guy captured the equity market left maybe not 0:06:43.440 --> 0:06:45.760 all tech tech. He didn't tell you to buy him Vidio. 0:06:46.160 --> 0:06:48.479 But is Julian Emanuel doing okay? Over at the show 0:06:48.520 --> 0:06:49.039 doing great? 0:06:49.400 --> 0:06:54.640 So we have an open office, I learned from Mike Bloomberg. 0:06:55.640 --> 0:06:58.479 So I have a desk, and I have Rich Ross, 0:06:58.560 --> 0:07:01.839 and then I have Julian Emmanuel. And where within I 0:07:01.839 --> 0:07:04.240 wouldn't say shouting distance with her? In talking distance? 0:07:04.240 --> 0:07:06.440 Is he talking about a second leg of the bullmarket? 0:07:06.560 --> 0:07:09.679 Like Edheiman nailed? Got to be quick here, but second 0:07:09.720 --> 0:07:10.560 leg of the bullmarket? 0:07:10.640 --> 0:07:14.600 All of a sudden he cautious, cautiously, up, very cautiously. 0:07:14.680 --> 0:07:16.440 They separate Tom and in the office you know that 0:07:16.880 --> 0:07:18.240 I didn't know, so that we're not allowed to sit 0:07:18.280 --> 0:07:20.080 next to each other at Hymen. 0:07:20.160 --> 0:07:22.200 I want you to talk about the hallmark of your 0:07:22.280 --> 0:07:25.400 work back to CJ. Lawrence, And that's the granularity of 0:07:25.440 --> 0:07:31.600 studying data. Does the granularity of freight rates? This that 0:07:31.760 --> 0:07:35.080 the green spanning and data study still work in a 0:07:35.200 --> 0:07:37.080 modern high tech age. 0:07:37.160 --> 0:07:40.880 Or it's even better. Why because there is so much 0:07:40.960 --> 0:07:43.840 high quality data now, you know, generated by a computer. 0:07:44.840 --> 0:07:49.480 And so I really think that my success in studying 0:07:49.480 --> 0:07:53.840 the economy and forecasting comes from being more granular. So 0:07:54.160 --> 0:07:57.000 the FED seems to look at one data point that 0:07:57.040 --> 0:07:59.760 comes out like the super core, and I've looked at 0:07:59.760 --> 0:08:03.240 maybe twenty at that point, and like what Michael was 0:08:03.280 --> 0:08:06.040 talking about on the employment number, there's a lot of 0:08:06.160 --> 0:08:09.600 data points and they're generally pretty darn strong for employment. 0:08:09.760 --> 0:08:14.080 So we're estimating two twenty Alan Zentner, I think is terrific. 0:08:14.920 --> 0:08:19.200 But I don't see that sub one hundred number or 0:08:19.280 --> 0:08:21.520 a really low number in the data that we get 0:08:21.600 --> 0:08:26.800 so far, like unemployment claims or we servey employment agencies 0:08:26.840 --> 0:08:27.400 once a week. 0:08:28.200 --> 0:08:30.840 I look at the data, and I mean the hallmark 0:08:30.880 --> 0:08:33.800 here across the decades is we used to aggregate off 0:08:33.800 --> 0:08:37.080 the revolution of nineteen forty seven, the way we bring 0:08:37.160 --> 0:08:41.319 in macrodata. Do you, what, ever, core ISI still aggregate 0:08:42.000 --> 0:08:45.520 or are you partitioning out now for different quintiles, death 0:08:45.559 --> 0:08:50.840 siles or John Edwards to Americas? Can you aggregate still? Yes? 0:08:50.920 --> 0:08:53.559 But you have to take into account the different pieces, 0:08:53.960 --> 0:08:59.560 and right now the manufacturing sector is pretty weak maybe 0:08:59.640 --> 0:09:03.320 inner session, and many other parts of the economy are 0:09:03.360 --> 0:09:07.720 doing quite well. Services like over the holiday July fourth, 0:09:07.800 --> 0:09:12.400 and you also have home buildings now actually coming back. 0:09:12.760 --> 0:09:17.480 It's been very strong and has accelerated in the past 0:09:17.520 --> 0:09:18.480 couple of months. 0:09:18.559 --> 0:09:21.640 Right you took a kufel Annuncer slide rule from Texas 0:09:21.679 --> 0:09:25.040 to MIT. I don't know if you study was solo 0:09:25.200 --> 0:09:29.440 there after fifty seven productivity, but explain the evercore ISI 0:09:29.600 --> 0:09:34.960 view on America's productivity given the new technology over there. 0:09:35.000 --> 0:09:36.040 You're an optimist or not. 0:09:36.800 --> 0:09:40.640 I'm an optimist, but it's not in the numbers. One 0:09:40.720 --> 0:09:43.800 of the phrases is proctivity is everywhere but in the numbers. 0:09:44.280 --> 0:09:47.920 But you know, what you do has enormous proctivity, and 0:09:47.960 --> 0:09:52.200 what I do, frankly has enormous proctivity. But it's but 0:09:52.280 --> 0:09:55.920 you're not getting it period right now in the numbers 0:09:56.280 --> 0:10:01.000 and plumbent's good, but the economy is still slowing. 0:10:01.040 --> 0:10:03.600 I think, what do you think about the Frenzy Gloom Crew, 0:10:03.640 --> 0:10:06.240 particularly they come out every Friday. Friday seems to you know, 0:10:06.240 --> 0:10:09.640 you're published for the weekend and that. But the I 0:10:09.640 --> 0:10:12.520 mean we've always worried back. I mean think of eighty 0:10:12.600 --> 0:10:15.680 seven or the August of nineteen ninety eight. The worry, 0:10:15.760 --> 0:10:17.600 the angst has always been there, but there seems to 0:10:17.600 --> 0:10:20.200 be a different character to have gloomed. How do you 0:10:20.240 --> 0:10:20.840 respond to that? 0:10:21.200 --> 0:10:26.480 So the forecast for recession was virtually unanimous a few 0:10:26.520 --> 0:10:29.720 months ago, and now there are many people going to 0:10:29.800 --> 0:10:34.559 a non recession forecast. I am the most parish I've 0:10:34.559 --> 0:10:37.760 ever been on the economy without being in a recession. 0:10:38.000 --> 0:10:40.800 It's because of the yell curve, the contraction of money 0:10:41.559 --> 0:10:43.760 and QT at the same time they're hiking rates. 0:10:44.040 --> 0:10:44.920 That three. 0:10:48.000 --> 0:10:52.360 Blow hit to the economy is going to cause recession, 0:10:52.360 --> 0:10:54.040 but it doesn't happen overnight. 0:10:54.679 --> 0:10:57.840 So can you own stocks given the statement you just 0:10:57.920 --> 0:11:01.120 made that you're the most gloomy you've ever are you 0:11:01.200 --> 0:11:04.160 all in cash or can you own ebodies and participate? 0:11:04.520 --> 0:11:10.480 So I mentioned I think three times now the six 0:11:10.600 --> 0:11:13.440 oh seven going into eight, and the S and P 0:11:14.920 --> 0:11:20.240 went up twenty and peaked like two months before the 0:11:20.280 --> 0:11:26.640 Great Recession hit. Boys, it tough, and so right now 0:11:27.960 --> 0:11:31.560 I think the economy is doing well and the stock 0:11:31.600 --> 0:11:36.160 markets going up the technicals are good, and so I 0:11:36.200 --> 0:11:39.319 think we'll keep going up until it looks like we're 0:11:39.360 --> 0:11:42.400 about to hit the recession. And that's not today. 0:11:43.000 --> 0:11:46.040 I got two minutes left. You're the only one who 0:11:46.120 --> 0:11:49.400 hasn't moved to Florida. You are part of the New 0:11:49.520 --> 0:11:53.800 York City fabric. Explain how you view the future of 0:11:53.840 --> 0:11:54.680 this great city. 0:11:55.120 --> 0:11:58.760 It's very tough because so many people are moving to Florida, 0:11:59.360 --> 0:12:04.280 but this city is so vibrant just being here with you, 0:12:04.360 --> 0:12:06.840 which I know you love the city and all the 0:12:06.840 --> 0:12:07.640 institutions in. 0:12:07.760 --> 0:12:09.880 Never bet against New York. That's the only reason I 0:12:09.920 --> 0:12:12.600 got this job. That the mayor at the time, he said, 0:12:12.640 --> 0:12:13.439 you're hired. 0:12:14.640 --> 0:12:17.800 Anyway, as long as Mike Bloomberger is here. I think 0:12:17.800 --> 0:12:18.199 we're here. 0:12:18.280 --> 0:12:20.280 Okay, what do we do with the FED? One final question? 0:12:20.320 --> 0:12:23.040 What's the fed Aedheimen FED strategy here forward? 0:12:23.520 --> 0:12:25.679 So they're gonna hike one more and then they're done. 0:12:26.120 --> 0:12:28.440 When did they cut? Uh? Probably? 0:12:28.720 --> 0:12:31.040 You know, I think towards the end of this year, 0:12:31.080 --> 0:12:35.360 but maybe early next year. But I can I can 0:12:35.440 --> 0:12:38.160 look down the street, I can't see around the corner, 0:12:38.280 --> 0:12:41.040 but when I get to the corner, you'll have a 0:12:41.120 --> 0:12:42.160 much better idea. 0:12:41.880 --> 0:12:44.880 Just a smoke from Canada. That's why I can't see 0:12:45.120 --> 0:12:46.760 Ed Hyman. Thank you so much. I know you've got 0:12:46.800 --> 0:12:50.400 a run here. He is with evercore Isi and truly 0:12:50.920 --> 0:12:58.720 iconic on the street today. In your equity belief, we're 0:12:58.720 --> 0:13:00.320 going to bring it over to the fixed in comes 0:13:00.320 --> 0:13:02.640 to face. Thomssorus Jones has not had a fixed income 0:13:02.720 --> 0:13:05.960 research at stigas it is a bird company. You have 0:13:06.000 --> 0:13:09.560 the huge advantage Tom of working with one Jay Trennert, 0:13:09.600 --> 0:13:15.240 who does beautiful quality stock free cash flow persistency of 0:13:15.360 --> 0:13:18.640 profit analysis, did it with Adheimen and will join us 0:13:18.880 --> 0:13:21.960 here later. You guys own the high ground on the 0:13:22.000 --> 0:13:26.480 linkage of equity analysis into your bond analysis. What does 0:13:26.520 --> 0:13:29.480 your bond analysis say about a second leg of a 0:13:29.480 --> 0:13:30.160 bull market? 0:13:30.559 --> 0:13:34.920 Ah, highly unlikely. And with that said, we recognize that 0:13:34.960 --> 0:13:37.800 the equity market seems to disagree with that hypothesis. But 0:13:38.360 --> 0:13:40.800 when we look at that inverted yield curve, what we 0:13:40.920 --> 0:13:45.600 see is a market an economy which has is already 0:13:45.600 --> 0:13:48.760 facing excessive tightening from the Federal reserve. That is, the 0:13:48.760 --> 0:13:50.960 Federal Reserve is already tightened to the point where Main 0:13:51.000 --> 0:13:53.760 Street is feeling the pinch. But When you see, as 0:13:53.800 --> 0:13:57.520 you mentioned earlier, financial conditions easing, what you also see 0:13:57.800 --> 0:14:01.040 is a financial market where the FED has not tightened 0:14:01.120 --> 0:14:03.560 enough on Wall Street. So one of the ways we 0:14:03.640 --> 0:14:06.240 phrase this is, when you use the FED funds rate 0:14:06.280 --> 0:14:08.720 to tighten, you put most of the pain on Main Street. 0:14:08.760 --> 0:14:10.559 When you use the balance sheet to tighten, you put 0:14:10.600 --> 0:14:12.720 most of the pain on Wall Street. The FED has 0:14:12.760 --> 0:14:15.960 not tightened enough on Wall Street. By using the balance 0:14:16.000 --> 0:14:19.520 sheet to reduce liquidity in the financial system, they've already 0:14:19.520 --> 0:14:23.280 tightened excessively on Main Street. So a recession still seems 0:14:23.280 --> 0:14:25.120 inevitable to us in the second half of the year, 0:14:25.120 --> 0:14:28.320 and that has got to impact earnings on the equity side. 0:14:28.400 --> 0:14:31.520 As a thermometer, I'm gonna look at the inflation adjusted 0:14:31.560 --> 0:14:33.760 ten year yield. There's other metrics as well that are 0:14:33.760 --> 0:14:36.600 sophisticate lesi source uses, but I'm gonna look at the 0:14:36.600 --> 0:14:38.600 ten year real yield at one point five to eight 0:14:38.720 --> 0:14:41.240 up percent, maybe it was one point six to two, 0:14:41.280 --> 0:14:44.000 getting a little lofty. Do you anticipate that that will 0:14:44.040 --> 0:14:47.560 break out to a higher real yield? And what level 0:14:47.760 --> 0:14:50.160 is normal of the higher real yield? 0:14:50.360 --> 0:14:53.040 Well, a normal might be keep in mind we only 0:14:53.040 --> 0:14:55.520 have about twenty five years of actual data on real 0:14:55.640 --> 0:14:58.160 yields I yesterday back to the tips market of ninety 0:14:58.160 --> 0:15:00.920 seven ninety eight, normal might be one hundred and fifty 0:15:00.920 --> 0:15:03.400 bases points. So we're roughly at what you might expect 0:15:03.400 --> 0:15:06.680 to be a normal real interest on ten year treasury. Now, 0:15:06.720 --> 0:15:09.640 with that said, we do not necessarily expect ten year 0:15:09.680 --> 0:15:12.640 real yields to rise much from here because we expect 0:15:12.640 --> 0:15:15.760 inflation expectations to get Inflation itself is getting close to 0:15:15.800 --> 0:15:18.080 bottoming this cycle. We think it's going to be very 0:15:18.080 --> 0:15:20.520 difficult for the Fed to get inflation below three percent, 0:15:20.680 --> 0:15:22.960 and we've already gotten expectations below three. 0:15:23.080 --> 0:15:25.240 The headline there, John is on the edge of beyonco. 0:15:25.560 --> 0:15:28.040 I mean, this is the second time in forty eight hours. 0:15:27.920 --> 0:15:31.080 That phras I almost thought you misspoke. You think inflation 0:15:31.200 --> 0:15:33.560 expectations are bottoming for this cycle. 0:15:33.400 --> 0:15:36.440 Yes, and that's because we buy into the hypothesis that 0:15:36.480 --> 0:15:38.920 inflation is going to remain sticky and that the Fed 0:15:38.960 --> 0:15:41.640 does not have the stomach to do what it takes 0:15:41.720 --> 0:15:46.120 to permanently bring this structural inflation back to a neutral. 0:15:46.400 --> 0:15:49.280 By that, we mean do excessive damage to the labor 0:15:49.320 --> 0:15:53.320 market bring aggregate demand well below potential. That's what's required, 0:15:53.320 --> 0:15:55.080 and that's a pretty deeper session. We don't think the 0:15:55.120 --> 0:15:56.400 Fed has the appetite to do that. 0:15:56.760 --> 0:15:59.680 You ju'mp buy into the vulcaresque delivery of cham and 0:15:59.720 --> 0:16:02.040 pound in late August last year. No, I don't. 0:16:02.520 --> 0:16:05.240 If they were serious about bringing inflation in line with 0:16:05.600 --> 0:16:08.880 long run targets, they would have reduced the balance sheet 0:16:08.880 --> 0:16:10.800 at probably three times the pace they're going on. 0:16:10.880 --> 0:16:12.400 So, just to be clear on the pane of sheet cool, 0:16:12.680 --> 0:16:15.240 you think they should be more aggressive with QT, You 0:16:15.240 --> 0:16:16.040 don't think they will be? 0:16:16.200 --> 0:16:18.200 Oh, absolutely exactly both to them. 0:16:18.880 --> 0:16:19.760 Yes, to both of those. 0:16:20.360 --> 0:16:22.280 We think they should have been more aggressive, but we 0:16:22.320 --> 0:16:23.240 think they will not be. 0:16:24.200 --> 0:16:27.720 I'm fascinated by this. Jim Bianco out in Chicago, and 0:16:27.800 --> 0:16:31.680 you guys have a call of a dis disinflation. We're 0:16:31.680 --> 0:16:35.120 gonna disinflate, come down and then at three percent, what 0:16:35.120 --> 0:16:37.360 do you do reverse and go up? How much? What's 0:16:37.400 --> 0:16:38.200 that model show? 0:16:38.360 --> 0:16:41.280 Well, right now we're expecting a bottom around three percent. 0:16:41.320 --> 0:16:44.120 We'll call it your overra headline CPI. On a quarter 0:16:44.120 --> 0:16:46.600 over quarter basis, we might see inflation dip below three 0:16:46.640 --> 0:16:50.200 percent fairly easily. But you start to see around three percent, 0:16:50.320 --> 0:16:52.920 the FED gets weak knees. You start to see that 0:16:52.960 --> 0:16:55.360 the labor market is getting to a point where to 0:16:55.480 --> 0:16:59.200 bring inflation down much lower, you gotta do a substantial 0:16:59.200 --> 0:17:02.200 amount of damage because all of a sudden, businesses are 0:17:02.200 --> 0:17:05.120 no longer hoarding staff. They're laying off staff they do need, 0:17:05.400 --> 0:17:08.760 and that's demand destruction, and that's a bigger recession ahead 0:17:08.760 --> 0:17:11.320 of twenty twenty four that the FED probably go again. 0:17:11.400 --> 0:17:14.040 Does it bring it over to Jason Trunnet's work. If 0:17:14.080 --> 0:17:17.320 I have a sustained three percent, which is your minimum call, 0:17:17.480 --> 0:17:23.560 maybe actually higher, that gives me a nominal GDP that's extraordinary. 0:17:23.600 --> 0:17:26.880 Does that support well run companies in America? 0:17:26.960 --> 0:17:30.280 Well, that supports companies that have low borrowing costs. That 0:17:30.359 --> 0:17:33.439 supports companies that have bargaining power or pricing power in 0:17:33.480 --> 0:17:38.240 their industry and strong management and have basically barriers to 0:17:38.400 --> 0:17:41.119 entry as well. It doesn't support companies. 0:17:40.720 --> 0:17:43.000 It describes john Ford Stocks. 0:17:43.240 --> 0:17:47.760 And we'll look at the Russell two Forty five percent 0:17:47.800 --> 0:17:50.080 of the companies in the Russell two thousand don't fit that. 0:17:50.080 --> 0:17:51.320 They're the exact opposite. 0:17:51.560 --> 0:17:55.000 These are big cos if you're expecting inflation expectations to 0:17:55.000 --> 0:17:57.720 bought them out. What is that LAFE fixed income for 0:17:57.760 --> 0:17:59.760 people sitting in the tenure right now? Taking on a 0:17:59.760 --> 0:18:01.440 bit more, you're ration, what are your tuning them? 0:18:01.480 --> 0:18:01.680 Well? 0:18:01.760 --> 0:18:04.359 Right now, let's say ten year treasury at three eighty five. 0:18:04.480 --> 0:18:08.000 That actually looks attractive to us. In a environment where 0:18:08.000 --> 0:18:11.080 the US economy goes into recession, real yields come down, 0:18:11.320 --> 0:18:12.879 inflation expectations really. 0:18:12.800 --> 0:18:14.400 Don't move much. They might even go up. 0:18:14.600 --> 0:18:17.080 You still have downside and ten year treasury yield up 0:18:17.119 --> 0:18:18.840 down to maybe a three percent to three and a 0:18:18.880 --> 0:18:22.200 quarter percent. But let's put that in perspective. The average 0:18:22.200 --> 0:18:24.680 recession sees a ten year treasury drop two hundred and 0:18:24.720 --> 0:18:27.120 twenty five to two hundred and fifty basis points. That's 0:18:27.160 --> 0:18:28.800 probably not going to happen this cycle. 0:18:29.119 --> 0:18:29.639 At most. 0:18:29.680 --> 0:18:31.520 We're looking at that ten year going from four to 0:18:31.640 --> 0:18:34.199 thirty where it peaked last year, maybe down to a 0:18:34.240 --> 0:18:35.760 three twenty to three percent. 0:18:35.920 --> 0:18:37.800 This is really important stuff. What we're discussing here is 0:18:37.880 --> 0:18:39.760 ultimately how the bum market's going to behave in what 0:18:39.880 --> 0:18:41.840 you've described, and I'll put a name on it, and 0:18:41.880 --> 0:18:44.080 a saxflation we will yep. Is that correct? 0:18:44.280 --> 0:18:44.480 Yes? 0:18:44.560 --> 0:18:45.000 Exactly? 0:18:45.080 --> 0:18:48.159 And again we're looking at positive total return in a 0:18:48.200 --> 0:18:51.080 ten year treasury. We'll call it a seven percent total 0:18:51.119 --> 0:18:54.400 return upside when yields drop, And if you're levered three 0:18:54.440 --> 0:18:57.040 times like many funds are, that's a twenty percent return 0:18:57.080 --> 0:18:59.639 that offsets maybe a twenty five to thirty percent loss 0:18:59.640 --> 0:19:01.679 on the x what he said. But the thing is, 0:19:01.760 --> 0:19:04.240 you're not looking at a fifty percent return in treasuries. 0:19:04.280 --> 0:19:07.200 You're looking at a six percent, seven percent levered up 0:19:07.200 --> 0:19:08.040 to twenty percent. 0:19:08.520 --> 0:19:09.959 Amazing, some just amazing. 0:19:10.119 --> 0:19:13.400 I really can't say enough. You know, we're making jokes 0:19:13.440 --> 0:19:15.240 about it, folks. We're going to the summer. We're getting 0:19:15.320 --> 0:19:18.800 lazy and sloppy like everybody else. It's an incredibly holiday 0:19:18.880 --> 0:19:24.720 shortened week. We're compressing three days john of serious economic analysis. 0:19:25.080 --> 0:19:29.320 And I got two competent shops, Bionco and Strtigas saying 0:19:29.359 --> 0:19:32.040 the same thing that we're gonna diss I'm making this 0:19:32.080 --> 0:19:34.120 word up, dis disinflate. 0:19:34.280 --> 0:19:36.439 Well that let's all brand new. That phrase. Just this 0:19:36.560 --> 0:19:40.160 idea that inflation expectations are bottoming out for the cycle. 0:19:41.040 --> 0:19:43.440 That is not what this feder Reserve Tom wants to 0:19:43.480 --> 0:19:46.320 hear at all, at all. No, So twenty five in 0:19:46.440 --> 0:19:49.680 July is what most people anticipate, some people saying maybe 0:19:49.680 --> 0:19:52.280 another twenty five, the Committee suggesting that might be the 0:19:52.320 --> 0:19:55.080 direction of travel, and then you think they're done as well. 0:19:55.320 --> 0:19:57.720 I think so, And let's keep this in mind. 0:19:58.000 --> 0:19:59.760 The higher they go with the Fed funds rate, the 0:19:59.800 --> 0:20:01.920 more likely they are to reach their target of two 0:20:01.920 --> 0:20:04.359 percent inflation. But we just don't think that they have 0:20:04.400 --> 0:20:07.640 the stomach to keep doing this. There's gonna be demand destruction. 0:20:08.040 --> 0:20:09.600 And you've got to also look at the second half 0:20:09.600 --> 0:20:11.240 of the year. The two stories in the second half 0:20:11.240 --> 0:20:13.400 of the year. Obviously, recession risk is one of them. 0:20:13.400 --> 0:20:16.200 The other one is you're looking at massive liquidity drain 0:20:16.520 --> 0:20:19.800 from the treasury raising cash and adding back to its 0:20:19.840 --> 0:20:22.760 Treasury General account. And you're looking at the FED continuing 0:20:22.760 --> 0:20:25.160 to reduce its balance sheet, albeit at a very slow pace. 0:20:25.600 --> 0:20:27.679 So if the Fed were to go to let's say 0:20:27.720 --> 0:20:30.080 a six percent Fed funds rate, of course the chances 0:20:30.080 --> 0:20:33.280 of them bringing inflation down are much higher. But I 0:20:33.359 --> 0:20:36.080 don't see them doing that because it's already liquidity drag 0:20:36.160 --> 0:20:37.880 or liquidity drain coming in the second half. 0:20:37.880 --> 0:20:40.240 Well, you o code in recession anyway, yep, And a 0:20:40.240 --> 0:20:42.040 recession that comes without right cuts. 0:20:42.720 --> 0:20:44.800 For now, Yes, because I do think where the FED 0:20:44.880 --> 0:20:47.200 will be sticky. And keep in mind, I don't think 0:20:47.200 --> 0:20:48.760 the FED is going to go to six percent Fed 0:20:48.800 --> 0:20:50.679 funds rate, but I do think they're gonna hold the 0:20:50.720 --> 0:20:53.480 funds rate at whatever they terminate, five and a quarter, 0:20:53.600 --> 0:20:55.040 five and a half, whatever it is, They're gonna hold 0:20:55.040 --> 0:20:58.240