WEBVTT - Surveillance: Fast as Lehman with McDonald (Podcast) 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferroll and Lisa Abramowitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.800 --> 0:00:23.759 To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:31.000 and of course on the Bloomberg Terminal. Long ago and 0:00:31.200 --> 0:00:35.519 far away, Lehman Brothers was a shop that excelled in 0:00:35.600 --> 0:00:40.600 the fixed income trading market. When Lawrence McDonald worked there, 0:00:41.120 --> 0:00:43.760 he made them some money. He went on to do 0:00:43.880 --> 0:00:46.520 all sorts of other things, including books and of course 0:00:46.880 --> 0:00:50.120 the Bear Traps Report. But what he's really known for 0:00:50.240 --> 0:00:53.480 is every once in a while writing an essay we're 0:00:53.479 --> 0:00:56.639 in a given year, you stop. He did that this 0:00:56.720 --> 0:01:00.600 morning for the Esteem zero Hedge. Larry. First thing I 0:01:00.640 --> 0:01:04.480 read this morning as well. I've been talking up Tunisia 0:01:05.160 --> 0:01:08.360 is something interesting in the Middle East and in the Levant, 0:01:08.720 --> 0:01:13.360 and you are focused on the fixed income deterioration of 0:01:13.400 --> 0:01:18.600 emerging markets. We've seen this before, haven't we. Oh, Tom, 0:01:18.680 --> 0:01:22.360 it's amazing. This period that we're right now is so 0:01:22.840 --> 0:01:27.520 amazing because once or twice a decade, maybe three times 0:01:27.520 --> 0:01:30.920 in twenty years, you get a two three four week 0:01:31.080 --> 0:01:36.240 period where asset prices are moving at an accelerated pace 0:01:36.400 --> 0:01:40.600 so fast, and normally economists that that are on all 0:01:40.640 --> 0:01:44.440 the shows they're looking at economic data. But when when 0:01:44.520 --> 0:01:47.160 risk assets are moving this fast, the risk at risk 0:01:47.200 --> 0:01:51.120 assets take over economics a difference delivery. The difference here, 0:01:51.120 --> 0:01:53.840 and this is really important, folks, is a mens esteem. 0:01:53.880 --> 0:01:56.720 For Lawrence McDonald. While everybody else in the bow tie 0:01:56.760 --> 0:02:00.080 world was studying economics, McDonald was down at the Brothers 0:02:00.120 --> 0:02:02.840 for in the casino by the sea on Cape Cod 0:02:03.120 --> 0:02:05.920 having a good time where he learned how to trade. 0:02:06.200 --> 0:02:08.800 And as you know, Larry McDonald, what this is about 0:02:09.280 --> 0:02:13.640 is the bid walks away. You've got a Bloomberg terminal 0:02:13.680 --> 0:02:17.240 behind you there in your Matt's explain to me right 0:02:17.280 --> 0:02:22.840 now the character of the bid walking away right now? Well, 0:02:22.880 --> 0:02:25.400 it's the rate of change of asset price. It's where 0:02:25.400 --> 0:02:29.280 it be leverage loans, emerging market bonds, UH credit, the 0:02:29.320 --> 0:02:33.480 fault swaps on banks. So we're seeing just just the 0:02:33.480 --> 0:02:36.480 the highest acceleration in the rate of change speed. It's 0:02:36.680 --> 0:02:40.680 literally as fast as COVID, as fast as Lehman, and 0:02:40.919 --> 0:02:43.480 economists around the world are looking at Okay, all these 0:02:43.560 --> 0:02:46.640 rate hikes. At the end of the day, credit risk 0:02:46.760 --> 0:02:51.040 is about to veto the FEDS policy path. In other words, 0:02:51.240 --> 0:02:55.000 the dollar is so strong it's the global wrecking ball. Uh. 0:02:55.040 --> 0:02:57.680 The i m F, for example, is owed one hundred 0:02:57.720 --> 0:03:01.640 billion dollars tom from emerging market countries and the FED 0:03:01.760 --> 0:03:05.079 is lighting that balance sheet on fire right now. Well, 0:03:05.080 --> 0:03:07.040 but Larry, I'm trying to write my head around some 0:03:07.080 --> 0:03:09.400 of the rhetoric, which is incredibly poetic, that describes the 0:03:09.480 --> 0:03:12.360 moment credit risk is about to veto the Fed's tightening path, 0:03:12.840 --> 0:03:16.480 that risk assets are taking over for economics. Basically, we're 0:03:16.520 --> 0:03:19.600 reaching a breaking point akin to a Lehman moment or 0:03:19.639 --> 0:03:22.360 even what we saw during COVID. Are you basically saying 0:03:22.360 --> 0:03:24.560 the FED will have to backtrack or are you saying 0:03:24.639 --> 0:03:27.880 that there is a more more material fissure that's coming 0:03:28.080 --> 0:03:33.440 that's really irredeemable given where the FED is with inflation. Well, 0:03:33.520 --> 0:03:35.640 think of you've done a great at least of this morning. 0:03:35.680 --> 0:03:38.080 Your job when the stress has have been phenomenal, because 0:03:38.400 --> 0:03:41.960 if you look back on June, late June, the results 0:03:42.000 --> 0:03:46.320 came out and the media was really celebrating these results, 0:03:46.320 --> 0:03:48.720 and now here we are not even three weeks later 0:03:48.840 --> 0:03:52.640 and there's a restatement of those results. That tells me 0:03:52.760 --> 0:03:59.000 that the regulators uh saw a shock. Um something is 0:03:59.040 --> 0:04:03.320 really scared the regulators for that type of change in 0:04:03.400 --> 0:04:06.000 position over thirty days. And if you look at the 0:04:06.040 --> 0:04:11.000 rate of change in bonds, copper, and um in oil 0:04:11.160 --> 0:04:13.480 inside a thirty day period, we've never had a move 0:04:13.600 --> 0:04:18.640 like that without jobs being down like a hundred thousands 0:04:18.680 --> 0:04:22.640 to two hundred thousand within three months. So it's so, 0:04:22.640 --> 0:04:24.280 what's the breaking point here? I mean, you talked about 0:04:24.279 --> 0:04:27.280 emerging markets, you said multiply that by ten, and are 0:04:27.279 --> 0:04:29.920 we seeing that already beginning or are we not yet 0:04:29.920 --> 0:04:31.680 even seeing it? And we're just sort of on the 0:04:31.680 --> 0:04:34.960 precipice of we're seeing the beginnings of the breakage in 0:04:35.000 --> 0:04:37.520 the dollar in what you're seeing with a Japanese yen, 0:04:37.880 --> 0:04:41.080 in which you're seeing in certain markets for risk assets. 0:04:42.960 --> 0:04:45.520 The fan is trying to stop inflation in the United 0:04:45.520 --> 0:04:50.000 States by promising, you know, a thousand rate hikes essentially, right, 0:04:50.160 --> 0:04:52.960 I'm just exaggerating, but about fifteen rate heiks, including one 0:04:53.279 --> 0:04:56.120 trillion of quantitative tightening. The rest of the world is 0:04:56.160 --> 0:04:58.440 not doing anything in that regard in the developed markets 0:04:58.440 --> 0:05:00.800 sets up from maybe Canada. So what happens is when 0:05:00.839 --> 0:05:04.760 the dollar strengthens and you're in Indonesia, an emerging market country, 0:05:04.800 --> 0:05:07.280 You're trying to buy wheats, you try to buy corn, 0:05:07.320 --> 0:05:10.719 you're trying to buy oil gas, You're the FETE is 0:05:10.800 --> 0:05:15.800 essentially exporting information from the United States through the developing world, 0:05:16.040 --> 0:05:19.680 and they're crushing civilizations around the planet. Larry, I get 0:05:19.839 --> 0:05:21.960 this one question and before we go, and that is 0:05:22.000 --> 0:05:24.840 the famous shot of Lehman brothers and they're standing there 0:05:24.880 --> 0:05:27.680 watching the deterioration of the company, and the Gartment report 0:05:27.760 --> 0:05:30.919 is up on the guy's screen as well. That was 0:05:30.960 --> 0:05:36.000 a time of leverage. The optimists are pushing back against you, 0:05:36.560 --> 0:05:39.159 saying the leverage here is not like it was a 0:05:39.279 --> 0:05:41.960 ninety eight or in the Great Financial Crisis. Do you 0:05:42.080 --> 0:05:45.160 buy it or is the leverage just different in different 0:05:45.200 --> 0:05:49.240 place this time? Well, we behind me. We run a 0:05:49.240 --> 0:05:52.839 Bloomberg chat tom with institutional investors on the by side 0:05:52.839 --> 0:05:56.480 in twenty plus countries, so we monitor the conversation. In 0:05:56.520 --> 0:06:00.240 the last two weeks three weeks, the conversation from by 0:06:00.279 --> 0:06:03.640 side investors that run billions of dollars is focused on 0:06:04.040 --> 0:06:06.719 sovereign risk, and that's where your nose has been focused 0:06:06.720 --> 0:06:09.960 on this week, and so exactly which transferred the Lehman 0:06:10.120 --> 0:06:13.640 risk from the balance sheets of the banks to the sovereigns. 0:06:13.920 --> 0:06:17.200 And now the Feds accelerating rates up and they're blowing 0:06:17.279 --> 0:06:19.640 up the global bond market and that's what's going to 0:06:19.720 --> 0:06:27.560 stop them. Larry McDonald, thank you so much. Sobrata Rajapa 0:06:27.920 --> 0:06:30.520 now was suck and joining us here. What is the 0:06:30.560 --> 0:06:33.360 correlation that matters to you right now? Sobrata, what is 0:06:33.400 --> 0:06:39.559 the relationship not only in rates but outside rates for you? Well, 0:06:39.600 --> 0:06:41.960 I mean everything is a correy ad market, right, I mean, 0:06:42.600 --> 0:06:45.039 the bond heels are all very correlated. What's happening in 0:06:45.080 --> 0:06:49.159 Europe is definitely impacting what's happening in the In the US, 0:06:49.200 --> 0:06:53.559 inflation is correlated. It's it's a global phenomena. But what 0:06:53.600 --> 0:06:57.000 we're really seeing right now is sort of a record 0:06:57.080 --> 0:07:00.680 slow motion, if you will. We're in the US. You're 0:07:00.680 --> 0:07:03.599 seeing the steady rise in inflation, prints the Fed acting 0:07:03.640 --> 0:07:08.599 aggressively as predicted, and then the very sharp inversion of 0:07:08.600 --> 0:07:11.400 of the yield curve because of that, and the market 0:07:11.400 --> 0:07:13.920 is starting to price in a much higher probability of 0:07:13.960 --> 0:07:18.320 a recession that leading to potentially, uh, you know, FED 0:07:18.400 --> 0:07:21.400 funds rate peeking around three and a quarter three and 0:07:21.440 --> 0:07:24.320 a half to three point seven five percent, and then 0:07:24.400 --> 0:07:26.960 cuts being priced in for next year. So this is 0:07:27.000 --> 0:07:30.360 all very much what you would expect would happen in 0:07:30.360 --> 0:07:34.040 a scenario like this where the FED is very aggressive. UM, 0:07:34.080 --> 0:07:37.200 as far as Europe is concerned and Easy Beast concerned, 0:07:37.200 --> 0:07:39.480 they're in a much toughest spot. Like you pointed out, 0:07:39.840 --> 0:07:43.640 you're looking at you know, very high inflation, headline inflation 0:07:43.680 --> 0:07:47.679 because of higher energy costs, higher oil prices, potential rationing. 0:07:48.080 --> 0:07:49.560 But then on the other hand they have to be 0:07:49.560 --> 0:07:52.000 concerned about growth as well, because if there is a 0:07:52.080 --> 0:07:55.120 shutdown of of nursing one, that's going to lead to 0:07:55.160 --> 0:07:59.559 a significantly sharp decline and growth. So policy there becomes 0:07:59.560 --> 0:08:02.160 a lot tricky than it is in the US. We 0:08:02.200 --> 0:08:05.760 need to be building up gas storage in Germany apparently 0:08:05.840 --> 0:08:09.440 right now we're working it down. This is really problematic, Savantara. 0:08:09.560 --> 0:08:12.040 More broadly, for the bond market, I'm trying to work 0:08:12.040 --> 0:08:15.560 out what the anchor of global rates will be. Over 0:08:15.560 --> 0:08:17.320 the last twenty years. It was Japan, then it was 0:08:17.400 --> 0:08:19.280 Japan of the e c B and Europe and the 0:08:19.320 --> 0:08:21.880 button market, and now there are doubts about the policy 0:08:21.880 --> 0:08:24.480 at the b J complete unknown. When it comes to 0:08:24.560 --> 0:08:27.280 European debt market, I've got no idea how you forecast 0:08:27.440 --> 0:08:29.920 European debt yields at the moment, Savanria, how do you 0:08:29.920 --> 0:08:32.080 come up the treasury call as you think about the 0:08:32.080 --> 0:08:37.400 global fixed income universe. So to me, at this point, 0:08:37.440 --> 0:08:41.400 the anchor is the treasury market because things in the 0:08:41.480 --> 0:08:44.200 US are much more predictable, like you pointed out, than 0:08:44.240 --> 0:08:47.880 in other jurisdictions. Uh. You know, the Bank of Japan, 0:08:48.200 --> 0:08:50.480 you have they have eukur controls are in some respects 0:08:50.520 --> 0:08:53.200 along and it's going to remain somewhat PEG, but there's 0:08:53.200 --> 0:08:55.760 a lot of pressure on the currency side of the equation. 0:08:56.080 --> 0:08:58.120 So at some point they're going to have to, you know, 0:08:59.160 --> 0:09:03.319 move away from the hag in Japan. So for me, 0:09:03.400 --> 0:09:06.480 what I'm really anchoring our rate forecast is on on 0:09:06.480 --> 0:09:10.160 on on the tenure and you know trajectory, the trajectory 0:09:10.160 --> 0:09:13.000 for growth over the next couple of years. Uh, And 0:09:13.120 --> 0:09:14.800 that's really where I think that it's going to be 0:09:14.880 --> 0:09:18.319 very difficult for tenny yields. Rives meaningfully from huron given 0:09:18.360 --> 0:09:21.280 the fact that growth is poised to store on quite 0:09:21.320 --> 0:09:26.240 meaningfully over the next year with the Fed expeditiously hiking 0:09:26.320 --> 0:09:28.640 rates over the over the next you know, three to 0:09:28.679 --> 0:09:30.760 six months, so bad. Let's take that a step further 0:09:30.760 --> 0:09:32.839 and building what Bank of America did where they down 0:09:32.880 --> 0:09:36.200 gooded their forecast for the yield of differential and this 0:09:36.240 --> 0:09:38.959 rever the baseline yields for ten year and thirty year 0:09:39.040 --> 0:09:41.960 treasuries at the year end and even next year. How 0:09:42.120 --> 0:09:45.440 low and have you been revising even lower your expectations 0:09:45.480 --> 0:09:49.280 for those yields based on the deteriorating macro economic backdrop. 0:09:50.840 --> 0:09:53.920 So our view for for the for treasuries is that 0:09:53.960 --> 0:09:57.160 tenny yields will peak sometime in the second or third quarter, 0:09:57.200 --> 0:09:59.839 we might have already peaked, and then after that we 0:10:00.000 --> 0:10:03.400 have a very steady trajectory of yields going lower from 0:10:03.400 --> 0:10:05.760 from here on after the third quarter of perhaps ending 0:10:05.800 --> 0:10:07.599 around you know, two and a quarter to two and 0:10:07.600 --> 0:10:09.600 a half percent by the middle of next year. So 0:10:09.640 --> 0:10:11.839 that's kind of the trajectory we're looking at. It is 0:10:11.920 --> 0:10:15.000 quite a dramatic move lower in yields from where we 0:10:15.040 --> 0:10:17.840 are right now, but it's all about, you know, the 0:10:17.840 --> 0:10:22.360 trajectory for for growth after the FED has addressed it's uh, 0:10:22.400 --> 0:10:25.640 it's you know, raised rates and address the inflation problem 0:10:25.679 --> 0:10:27.679 if you will. How much is also a hinged on 0:10:27.720 --> 0:10:29.480 the idea that the FED will not be able to 0:10:29.520 --> 0:10:33.559 shrink its balance sheet materially beyond perhaps just the middle 0:10:33.600 --> 0:10:36.080 of next year, because they will have to backtrack in 0:10:36.080 --> 0:10:39.960 the face of altility, in the face of recession. Yeah, 0:10:40.000 --> 0:10:43.719 that's a very good question because the whole policy framework, 0:10:43.800 --> 0:10:46.680 it's very very tricky this time around, given the fact 0:10:46.760 --> 0:10:49.520 that you know, after September, the Fed's balance it's going 0:10:49.520 --> 0:10:52.360 to decline at around ninety five billion a month, So 0:10:52.480 --> 0:10:55.760 that's a very rapid pace of balance sheet on wine 0:10:55.800 --> 0:10:59.160 starting as as early as as September. So, you know, 0:10:59.280 --> 0:11:02.000 I think I view is that the FED might be 0:11:02.160 --> 0:11:05.079 able to raise rates, maybe to get to three and 0:11:05.120 --> 0:11:06.760 a quarter three and a half percent by the end 0:11:06.800 --> 0:11:09.320 of the year. But then you're going to see this 0:11:09.320 --> 0:11:11.800 this the balance sheet run off act as a as 0:11:11.840 --> 0:11:15.240 a second second order effect tightening financial conditions as well. 0:11:15.600 --> 0:11:17.840 So it's gonna be it's yet to be seen if 0:11:17.840 --> 0:11:19.400 they're going to be able to continue to run off 0:11:19.440 --> 0:11:22.360 their balance sheet after the middle of next year, given 0:11:22.400 --> 0:11:24.160 the fact that they're going to potentially have to cut 0:11:24.280 --> 0:11:27.760 rates if the economy slows down meaningfully. Savantra also going 0:11:27.800 --> 0:11:29.199 to get your views. What a morning for it? What 0:11:29.280 --> 0:11:32.120 a twenty four savant Jamper of schen What a year 0:11:32.480 --> 0:11:34.280 it's been? What a few years? I'm sure somebody are 0:11:34.320 --> 0:11:36.960 screaming at the TV and radio as I say those 0:11:37.000 --> 0:11:46.560 words right now. Conrado Quadros who the senior economic advisor 0:11:46.840 --> 0:11:50.079 that bring capital? And this is the conversation of the day. 0:11:50.320 --> 0:11:54.160 If you're worried about where that's so called terminal rate is, 0:11:54.200 --> 0:11:57.200 there's three, there's three and a half. John Farrell just 0:11:57.280 --> 0:12:00.840 mentioned four percent and a given bank, Okay, you out 0:12:00.880 --> 0:12:04.520 do them all. What happens to us if we go 0:12:04.720 --> 0:12:08.920 to a bring capital four and a half percent home, 0:12:08.960 --> 0:12:11.600 maybe we make some progress on bringing inflation down. I mean, 0:12:11.760 --> 0:12:15.880 obviously the problem of the day right now is is inflation. Um. 0:12:15.960 --> 0:12:18.520 We've had, over the course of the last two and 0:12:18.520 --> 0:12:21.360 a half years a number of poor narratives on inflation. 0:12:21.480 --> 0:12:24.439 Right We started with the COVID's going to be disinflationary. 0:12:24.520 --> 0:12:26.680 That went for six months with economists and the FED. 0:12:27.080 --> 0:12:29.560 Then its inflation is going to be transitory. It's only 0:12:29.600 --> 0:12:32.000 in a handful of goods. We saw on yesterday's CPI 0:12:32.080 --> 0:12:36.920 report that Um, it's neither transitory obviously, um. And we 0:12:37.000 --> 0:12:39.200 have very broad based increases. I mean, it looks to 0:12:39.240 --> 0:12:42.280 us like underlying inflation is somewhere in the neighborhood of 0:12:42.280 --> 0:12:44.600 five percent. Now if we look at those trimmed means 0:12:44.640 --> 0:12:47.640 and medians and steaky price measures. So so the problem 0:12:47.640 --> 0:12:49.880 of the day is dealing with inflation. Um. And you 0:12:50.040 --> 0:12:52.560 raise a very important point on that TTERMO FED funds, right, 0:12:52.600 --> 0:12:55.160 and the the idea here from the Fed is to 0:12:55.240 --> 0:12:58.720 get policy to neutral and maybe a little bit beyond neutral. 0:12:59.000 --> 0:13:01.400 But the problem is, I think they're misjudging neutral. The 0:13:01.440 --> 0:13:04.480 two and a half percent neutral rate is a neutral 0:13:04.559 --> 0:13:06.560 rate that existed when inflation was still at two percent. 0:13:06.640 --> 0:13:08.880 We're not at two percent anymore, and it's a nominal rate, 0:13:08.960 --> 0:13:12.160 so that neutral rate is probably higher, and I think 0:13:12.160 --> 0:13:13.640 the Fed has got some work to do to get 0:13:13.679 --> 0:13:16.520 policy tight and bring inflation down the terminal rate four 0:13:16.520 --> 0:13:18.760 and a half percent. The path to get there is 0:13:18.800 --> 0:13:21.240 important to understand. Is this a front loading? Is this 0:13:21.320 --> 0:13:24.280 a rapid rate rise of a hundred basis points at 0:13:24.280 --> 0:13:27.600 several consecutive meetings or is this a gradual and steady, 0:13:27.760 --> 0:13:30.600 painful drip drip drip of let's get it up there, 0:13:30.640 --> 0:13:33.520 because it's not coming down when we look at inflation, well, 0:13:33.559 --> 0:13:35.440 at least, I think that the Fed will take what 0:13:35.480 --> 0:13:38.400 the market gives it. And right now the market is 0:13:38.640 --> 0:13:41.200 giving the Fed basically a green light to go by 0:13:41.200 --> 0:13:43.760 a hundred basis point at the July meetings. So unless 0:13:43.800 --> 0:13:46.600 that changes before July, I think the Fed will take that. 0:13:46.640 --> 0:13:48.680 They have told us that they want to get um 0:13:48.920 --> 0:13:50.720 as you said, they want to frontload these moves. They 0:13:50.720 --> 0:13:52.920 want to get the funds rate to what they think 0:13:53.000 --> 0:13:55.839 is neutral and maybe a little bit beyond. And as 0:13:55.840 --> 0:13:58.560 I said, I think that that judgment might be off. 0:13:58.800 --> 0:14:01.120 I think that the neutral rate is probably higher. I mean, 0:14:01.120 --> 0:14:02.680 if you if you think about it, if you look 0:14:02.720 --> 0:14:05.280 at the the FED funds right and put it in 0:14:05.320 --> 0:14:08.240 real terms, it's still significantly negative. And I don't know 0:14:08.320 --> 0:14:12.080 how we bring inflation down with negative real rates. Conrad, 0:14:12.120 --> 0:14:13.320 when we take a look at some of the data 0:14:13.360 --> 0:14:15.320 that we've gotten this week, We've gotten the cp I, 0:14:15.360 --> 0:14:17.839 we've got JP Morgan earnings, and Morgan Stanley, and now 0:14:17.840 --> 0:14:20.560 we have p p I and perhaps more importantly, initial 0:14:20.640 --> 0:14:24.720 jobless claims coming out higher than expected, rising more than expected. 0:14:25.040 --> 0:14:28.480 Can you put into perspective how telling that is versus 0:14:28.520 --> 0:14:32.960 perhaps noise and data that has been pretty noisy. Yes, 0:14:33.000 --> 0:14:35.520 And I think that's the jobless claims are important. It's 0:14:35.560 --> 0:14:37.920 it's a very high frequency indicator of the labor market, 0:14:38.000 --> 0:14:39.560 as might point it out. And I think it's a 0:14:39.640 --> 0:14:42.280 very important point that July is a difficult time to 0:14:42.280 --> 0:14:45.040 read jobless claims because of those auto shutdowns. And we 0:14:45.080 --> 0:14:47.000 had an announcement a couple of weeks ago from one 0:14:47.040 --> 0:14:49.800 of the large auto manufacturers that they're shutting down production 0:14:49.920 --> 0:14:53.120 until September, and that's related to shortages of parts. UM. 0:14:53.160 --> 0:14:54.800 But if we take a broader view of the labor 0:14:54.840 --> 0:14:57.240 market and we look at things like job openings, whether 0:14:57.280 --> 0:15:00.720 it's the BLS data on job openings or small business 0:15:00.800 --> 0:15:04.600 job openings for June, which showed fifty of small businesses 0:15:04.600 --> 0:15:07.240 survey reported a job that they could not fill UM 0:15:07.280 --> 0:15:08.920 the record high, and we have data on that going 0:15:08.960 --> 0:15:12.160 back to three The record high was fifty one last month, 0:15:12.200 --> 0:15:15.800 so we have very high levels of job openings. UM. 0:15:15.840 --> 0:15:18.440 We might see some pick up in in in layoff rates. 0:15:18.480 --> 0:15:20.600 But but right now, if you look at the broader 0:15:20.680 --> 0:15:22.400 data or the small business data, it looks like there 0:15:22.400 --> 0:15:24.240 are a lot of jobs out there to fill. So 0:15:24.280 --> 0:15:26.440 as people lose jobs, I think there'll be opportunities to 0:15:26.920 --> 0:15:31.080 get jobs with other firms. Conrad. Long ago, there were 0:15:31.120 --> 0:15:33.240 research reports that would come out and there was a 0:15:33.240 --> 0:15:35.640 young Turk named John Riding or you have a nudding 0:15:35.720 --> 0:15:40.520 acquaintance with that would write about tumal like I remember 0:15:40.560 --> 0:15:43.680 this very clearly, waiting for Elliott Platt's book and all 0:15:43.720 --> 0:15:45.680 of it and all the research from Bear Stearns and 0:15:46.440 --> 0:15:49.680 d l J and such. Are we back there now? 0:15:49.800 --> 0:15:53.120 When you look at the correlations out there, the deterioration 0:15:53.200 --> 0:15:56.040 and e M two stents spread in a heart beat 0:15:56.080 --> 0:15:59.160 down to twenty seven basis points an hour ago. Are 0:15:59.200 --> 0:16:03.360 we getting that kind of tension in the global system? Well? 0:16:03.440 --> 0:16:05.480 I I think one of the things that we're trying 0:16:05.480 --> 0:16:09.560 to adjust here is to a market that is UM 0:16:09.720 --> 0:16:12.280 is more on its own, it's less being influenced by 0:16:12.320 --> 0:16:15.600 by the FED in terms of UM its balance sheet. Right, 0:16:15.600 --> 0:16:17.280 so we have the FED that's begun the process of 0:16:17.320 --> 0:16:19.920 normalizing the balance sheet I think that that's had very 0:16:19.920 --> 0:16:23.080 important implications for the functioning of markets UM and and 0:16:23.120 --> 0:16:27.560 it raises other issues right in my opinion, the we 0:16:27.600 --> 0:16:29.760 can look now at the FED shift and it's it's 0:16:29.800 --> 0:16:33.480 monetary policy framework to flexible inflation average targeting and say 0:16:33.520 --> 0:16:35.720 that that's been a disaster for price stability. But I 0:16:35.760 --> 0:16:37.960 also think the other issue we have to deal with 0:16:38.560 --> 0:16:40.600 is we've had over the last fifteen years or so 0:16:40.680 --> 0:16:43.600 a shift in the FEDS reserve policy, and this relates 0:16:43.640 --> 0:16:46.320 to markets UM and the first FED has shifted to 0:16:46.360 --> 0:16:50.320 an ample reserves policy, but with tight regulations on bank liquidity, 0:16:50.360 --> 0:16:52.120 and I think that we're going to have some stresses 0:16:52.160 --> 0:16:54.600 to deal with as it begins to reduce its balance 0:16:54.640 --> 0:16:57.320 sheet as forward funding rates are now a lot less 0:16:57.320 --> 0:16:59.560 certain If you think back to late May and you 0:16:59.640 --> 0:17:02.360 told all that so for for example, would be two 0:17:02.360 --> 0:17:04.000 and a half percent at the end of July or 0:17:04.040 --> 0:17:06.000 approximately that, that would have been a shock, right, So 0:17:06.000 --> 0:17:08.560 there's a lot more uncertainty and funding rates UM. The 0:17:08.640 --> 0:17:10.960 FED is pulling back on on the size of his 0:17:11.000 --> 0:17:14.399 balance sheet, and aggregate liquidity is still very high UM. 0:17:14.440 --> 0:17:16.600 But we've learned over the last few years that liquidity 0:17:16.640 --> 0:17:19.240 doesn't necessarily get to markets that needed, and so we've 0:17:19.280 --> 0:17:21.639 had these these policies we had to blow up in 0:17:21.680 --> 0:17:23.480 the treasury market in March. I mean, these are some 0:17:23.520 --> 0:17:25.159 of the issues that we that we still have to 0:17:25.200 --> 0:17:26.840 deal with, and I think we think are still out 0:17:26.840 --> 0:17:29.720 there given the FEDS reserve policys. Thank you so much. 0:17:34.160 --> 0:17:36.480 Let's take what we see in the correlations of the 0:17:36.520 --> 0:17:40.440 market and go to the single correlation for Washington, which 0:17:40.480 --> 0:17:44.080 is no one's getting paid anything given this high inflation. 0:17:44.200 --> 0:17:47.479 It's the real wage reality that all of Washington faces. 0:17:47.520 --> 0:17:51.080 Andrew Blacker has spent years looking at this. Ec ten 0:17:51.240 --> 0:17:55.080 told him at Harvard years ago, guess what jobs matter? 0:17:55.280 --> 0:17:58.120 The wage matters. He is with Investco, his global head 0:17:58.119 --> 0:18:01.880 of public policy, Andy. What is the urgency this time 0:18:01.920 --> 0:18:09.000 around of a horrific negative real wage. Well, politically it's 0:18:09.040 --> 0:18:13.200 it can be deaf um for politicians. So right now, 0:18:13.480 --> 0:18:16.720 we talk about the economy always being the most important thing. Well, 0:18:17.160 --> 0:18:19.760 inflation is a major part of the economy that talks 0:18:19.800 --> 0:18:23.320 about how people actually live every day. And so with 0:18:23.400 --> 0:18:26.160 this latest spike to nine point one percent and us 0:18:26.200 --> 0:18:29.840 not seeing the top um soon enough for the November elections, 0:18:29.880 --> 0:18:32.240 I think it can have a real impact on what's 0:18:32.280 --> 0:18:35.359 happening in the midterm elections. I guess the suits and 0:18:35.480 --> 0:18:39.320 ties will tell us that a higher unemployment rate is 0:18:39.400 --> 0:18:43.520 good for us right now, explain that to the American people. 0:18:43.960 --> 0:18:48.560 How does Mr Powell, frankly, how does President Biden sell 0:18:49.280 --> 0:18:52.760 a higher unemployment rate is good for you as we 0:18:52.880 --> 0:18:57.280 bring inflation down. So, of course you give me the 0:18:57.320 --> 0:19:01.200 tough task here, But theoretically, thought would be a higher 0:19:01.240 --> 0:19:07.320 unemployment rate would actually soften wage inflation, and which can 0:19:07.359 --> 0:19:09.680 be the core of inflation, so that they're really focused 0:19:09.720 --> 0:19:12.200 on getting down inflation for and if you're just looking 0:19:12.240 --> 0:19:15.160 at it from an inflation perspective, it could be good. 0:19:15.200 --> 0:19:17.800 But but the other side of it is it's an 0:19:17.840 --> 0:19:21.439 economic downturn potentially, So um, they are really trying to 0:19:21.440 --> 0:19:23.720 walk that fine line. And as you've seen, you guys 0:19:23.760 --> 0:19:25.679 have been talking about, you know, we've had the seventy 0:19:25.680 --> 0:19:28.359 five basis point increase, we're looking at the full point 0:19:28.800 --> 0:19:32.600 um this full hundred basis points. This is this is 0:19:32.640 --> 0:19:34.879 a tough place to be right now, and I'm just 0:19:34.880 --> 0:19:36.399 glad I'm not working at the FED to try to 0:19:36.480 --> 0:19:38.840 navigate this. Meanwhile, in the here and now we're trying 0:19:38.920 --> 0:19:41.920 to parse out the rhetoric of President Biden and some 0:19:42.040 --> 0:19:45.199 of his associates with what they're actually are planning to 0:19:45.280 --> 0:19:47.959 do with respect to going after companies that they are 0:19:47.960 --> 0:19:51.240 accusing of price gouging. I'm thinking of oil companies, for example. 0:19:51.320 --> 0:19:53.760 But I'm wondering who's next. Considering the fact that places 0:19:53.800 --> 0:19:57.080 like airlines are not increasing capacity in the face of 0:19:57.359 --> 0:20:00.640 increasing demand, how much is this going to be a reality? 0:20:00.760 --> 0:20:03.879 Is their meat behind some of these threats versus just 0:20:03.920 --> 0:20:08.119 simply lip service. Well, there's only meat behind the threats 0:20:08.119 --> 0:20:12.280 if there's actual um mouthfeasance. So I mean that remains 0:20:12.320 --> 0:20:14.560 we've seen. Look, the administration right now is in the 0:20:14.560 --> 0:20:17.800 toughest of all world. They have high inflation, they have 0:20:17.880 --> 0:20:21.080 a potential recession on on the on the horizon, they 0:20:21.119 --> 0:20:23.920 have people really feeling the pain, and so they make 0:20:24.000 --> 0:20:26.000 they need to make sure that they are out there 0:20:26.640 --> 0:20:29.440 looking at every level they can, pulling every level to 0:20:29.520 --> 0:20:33.560 help make things better. And so whether it's going to 0:20:33.600 --> 0:20:36.080 Saudi Arabia, which we you know, we've heard that may 0:20:36.160 --> 0:20:38.000 not be about oil, but we know it's a big 0:20:38.040 --> 0:20:41.160 part of it is oil, or whether it's going after 0:20:41.520 --> 0:20:43.880 UM companies in the US. They're trying to pull every 0:20:43.960 --> 0:20:46.280 level to make it look like they are doing everything 0:20:46.359 --> 0:20:47.919 they can for the American people. And when they have 0:20:47.960 --> 0:20:50.200 no more levers andy, they say, look to the FED. 0:20:50.280 --> 0:20:52.959 They're going to do everything. It's their job. How politicized 0:20:53.040 --> 0:20:56.720 right now is the FED? Well, the reality is the 0:20:56.720 --> 0:20:59.080 Fed's been politicized for some time. And I don't want 0:20:59.080 --> 0:21:01.240 to go too far here here, but I mean we've 0:21:01.280 --> 0:21:05.680 gone from a dobbish FED, who many people think relate 0:21:05.720 --> 0:21:09.280 to the inflation UM acknowledgement maybe saying it was short 0:21:09.400 --> 0:21:12.719 term UM, to now where they are really kind of 0:21:12.760 --> 0:21:16.399 putting on the gas to raise rates. And and to 0:21:16.440 --> 0:21:18.920 say that politics didn't play a role in both being 0:21:18.960 --> 0:21:22.000 dubbish at the beginning and now being hawkish, I think 0:21:22.000 --> 0:21:25.040