Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
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Speaker 1: living it right now. A brief from Mark McCormick, Global
Speaker 1: Head of Foreign Exchange in EM Strategy TD Securities. Mark,
Speaker 1: and why don't you to explain to our audience why
Speaker 1: a super strong dollars from twenty twelve and a super
Speaker 1: week yen is disturbing?
Speaker 2: Well, I think of what it does is it just
Speaker 2: shows the massive divergence you have between central banks. I
Speaker 2: think one of the things that you can unpack is
Speaker 2: there are certain currencies that care about growth, there's certain
Speaker 2: currencies that care about commodities, there's certain currencies that care
Speaker 2: about different relative central bank functions. The thing that the
Speaker 2: end cares a lot about is the ten year point
Speaker 2: to look at euro. Euro cares about the two year
Speaker 2: point of the curve. More than say the ten year
Speaker 2: and if you take the combination of what we had,
Speaker 2: and this is one of the most important things going
Speaker 2: on effects is the relative terms of trade shift. Japan
Speaker 2: is also a massive importer of energy and other commodities.
Speaker 2: So you take the commodity story, you take the great
Speaker 2: differential story, and now you take the aggressive bear steepening
Speaker 2: of the US curves this summer, and you've got basically
Speaker 2: a trifective things that will weaken the end quite considerably
Speaker 2: unless the BOJ does something.
Speaker 1: Well to the trifecta. Let's go to Mondel of Columbia.
Speaker 1: I mentioned this with Vice Chairman Clara to the other day.
Speaker 1: He will join US folks for our special FED coverage.
Speaker 1: Look for that? Is that tomorrow? Yes, it's tomorrow. The
Speaker 1: FED meeting is too more might people have just briefed
Speaker 1: me and Mark I'm looking at that. I want to
Speaker 1: echo what I talked to Professor Clara about, which is
Speaker 1: something has to give here. When something gives, what is
Speaker 1: the instability our audiences should be worried about?
Speaker 2: Well, I think of the context of the end, what
Speaker 2: needs to give is the actual the currency itself. As
Speaker 2: you mentioned, there is a very interesting policy mix where
Speaker 2: fiscal policy is actually quite favorable in forms of in
Speaker 2: terms of growth, also inflation. You see the BOJ is
Speaker 2: expecting higher inflation to kind of be a bit more sticky,
Speaker 2: I think, than markets are looking for. And they've also
Speaker 2: basically said we don't have a cap anymore. It can
Speaker 2: go above one percent. So I think what they're trying
Speaker 2: to do is synchronize themselves a little bit, which which
Speaker 2: has been US yield rising, which would contain the weakness
Speaker 2: in the end, But this is not a policy mix
Speaker 2: that is coherent and it is no longer sustainable. So
Speaker 2: I think a big thing is what we're going to
Speaker 2: see is things are going to change. It will change abruptly,
Speaker 2: but I think the movement that we had overnight where
Speaker 2: they said there's no longer a one percent cap, is
Speaker 2: actually quite a significant change. But it will take time
Speaker 2: for this to work through the market. So again i'd
Speaker 2: say that the thing that needs to break is yields
Speaker 2: needs to be higher, yet needs to be stronger. It's
Speaker 2: just going to take more time because we also need
Speaker 2: to see a peak in the US yield story, which
Speaker 2: again is not even about the FED anymore. When we
Speaker 2: talk about the ten year yield. It's more about supply
Speaker 2: and demand for ten year bonds.
Speaker 3: This is a big mishmash. Do you have a sense
Speaker 3: of what the response mechanism from the Bank of Japan is,
Speaker 3: what the lines in the sand are, what they're sort
Speaker 3: of looking at. I mean, we were talking about some
Speaker 3: of the opacity that they put forward overnight.
Speaker 2: It's very tricky because I think obviously most central banks
Speaker 2: it's very common language. At this point, they care more
Speaker 2: about the currency movements. So the end has not been
Speaker 2: as volatile. So as you can see, we have not
Speaker 2: the report came out this morning like they did not
Speaker 2: intervene last month. So I think I don't think there's
Speaker 2: a red line per se. I think they're all kind
Speaker 2: of doing what everyone in the market's doing. They're very
Speaker 2: confused about the drivers, They're very confused about the actual
Speaker 2: themes in the market. FX has become very challenged, I
Speaker 2: think for many people. So I think the line in
Speaker 2: the sand is you're kind of thinking it's loose fiscal policy,
Speaker 2: loose monetary policy, weakest currency on record. It deviated from
Speaker 2: our longer term models by you know, magnitudes, you know,
Speaker 2: our longer term fair value model and dollar again is
Speaker 2: in one twenties. So what you're kind of looking for
Speaker 2: is like the pressure points that will cause these things
Speaker 2: to break. And again, I think a big part of
Speaker 2: it is US data needs to roll over, US yields
Speaker 2: need to come down a little bit, and the BOJ
Speaker 2: I think the one thing that we're very out of
Speaker 2: consensus on is we are looking for them to move
Speaker 2: out of NERP next year because of the wage pressure
Speaker 2: we're seeing in Japan right around the Shuto wage negoiation negotiations,
Speaker 2: we should see higher wages and as a result of
Speaker 2: you know, essentially higher wages and higher nominal rates coming up,
Speaker 2: we should see real rates in Japan move substantially in
Speaker 2: their favor versus the US next year.
Speaker 3: When you take a step back, there's a question of
Speaker 3: slowly or all at once, And you were saying it
Speaker 3: will be all at once at some point. How disruptive
Speaker 3: is this going to be at a time when so
Speaker 3: many people were talking about Japanese flows underpinning are basically
Speaker 3: suppressing yields globally and really keeping things a little bit
Speaker 3: more in sync.
Speaker 2: Yeah, I think that's a that's a big component because
Speaker 2: I think since the summer, since the BOJ let the
Speaker 2: the you know, kind of opened up the yield curve
Speaker 2: control the suppression they had on it. We have seen
Speaker 2: term premium rise across the world. We have seen the
Speaker 2: US ten year rise. So I do think that there
Speaker 2: is a blowback here that's happening slowly behind the scenes.
Speaker 2: And again, I think a lot of people will make
Speaker 2: the point that the ten year yield is now advanced
Speaker 2: above FED expectations for twenty twenty four. It's above data surprises,
Speaker 2: it's above US data trends. It's no longer reflecting the
Speaker 2: correlations we saw in July. So I do think that
Speaker 2: the BOJ and the fact that they're kind of moving
Speaker 2: out of it. Obviously quantitative tightening has a component of
Speaker 2: this as well, but the BOJ does have the ability
Speaker 2: to kick start, you know, rises in the US ten years.
Speaker 1: Well, bring up this board again on television and radio.
Speaker 1: I have to review you this. I didn't do this.
Speaker 1: Simon did this in the control and he's been reading.
Speaker 1: Michael Rosenbergen for inn Exchange. Bring up that board again here. Yeah,
Speaker 1: one fifty one week week week end two year yield
Speaker 1: finally above zero ten year yield almost one percent. Those
Speaker 1: are unimaginable numbers to pros mark. Is this going to
Speaker 1: end stochastically? I talked to Martin Feldstein about this years ago,
Speaker 1: Like Looney, let's go to Toronto Dominion Bank. Looney goes
Speaker 1: up one thirty eight, you get up to one forty
Speaker 1: two and it gets fixed. Is that where we're heading,
Speaker 1: where the system just fixes itself.
Speaker 4: No.
Speaker 2: I think the system's quite dynamic. I think that that's
Speaker 2: the interesting point. Like we brun out variations of lots
Speaker 2: of different types of tools and models and different things.
Speaker 2: We're trying to understand what's going on in the market.
Speaker 2: As I mentioned, the things that are driving a weaker
Speaker 2: yen are fundamentally based. They make they make a lot
Speaker 2: of sense. And again the commodity story behind the scene
Speaker 2: is quite quite important, especially from the handover to last year,
Speaker 2: because what it does is it eliminates the trade surplus
Speaker 2: and the trade surplus plus the current account plus the
Speaker 2: balance of payments that is FX. You know, essentially everything
Speaker 2: we talk about every day is trying to think about
Speaker 2: how do we predict the balance of payments? So for
Speaker 2: the end, I don't think any of this is stable.
Speaker 2: I think is very unstable. Equilibrium even the shorter term
Speaker 2: models that we look at that we use for trading
Speaker 2: ideas Dollar Interview one five based on redifferentials and equities
Speaker 2: and risk and these kind of things. So it's even
Speaker 2: deviated now because you know markets are looking for a
Speaker 2: trend to trade in dollar again, is the only one
Speaker 2: that makes any sense right now?
Speaker 1: Three people just drove off the Garden State Parkway. There's
Speaker 1: your Global Wall Street Brief and foreign exchange. If you
Speaker 1: only understood half of that like I did. He's Mark
Speaker 1: McCormick of TD Securities.
Speaker 3: John Solstice has been listening to this and wants to
Speaker 3: weigh out on the Bunker Remo and beyond. And I'll
Speaker 3: let you get to that, but first I want to
Speaker 3: start to say how much are you basically saying we've
Speaker 3: just a run out of time to get to that
Speaker 3: forty nine hundred mark?
Speaker 4: Yeah?
Speaker 5: Really, really is? We We had to right size our expectations.
Speaker 5: We always suggest that to do investors as they as
Speaker 5: they consider what happens when markets.
Speaker 6: Are are in.
Speaker 5: Royal and so to speak. And what we've got to
Speaker 5: consider here is the calendar is telling us that we're
Speaker 5: getting close to a year end. The average rallies are positive.
Speaker 5: You know, we get positive rallies after a dip like
Speaker 5: we've seen traditionally or historically, but it's smaller amounts and
Speaker 5: there are still lots of uncertainty that bears and nervous
Speaker 5: investors and those who are skeptics can use to take
Speaker 5: more profits out of the fabulous rally that we're still
Speaker 5: living off from the lows of October twelfth of last year.
Speaker 3: I feel like one just after another is basically coming
Speaker 3: on and saying give investors a prozac, because frankly, there
Speaker 3: is a lot of optimism. They're just not seeing it.
Speaker 3: How much can you really hinge unfundamentals if the sentiment
Speaker 3: is just so gloomy and prepared for the worst.
Speaker 5: The problem is, I think that when you're in a
Speaker 5: FED funds high cycle, it takes a while before the
Speaker 5: marketplace gets a sense that the FED is indeed not
Speaker 5: trying to destroy things, and that the FED might actually
Speaker 5: succeed at its goals. The Fed isn't it isn't infallible,
Speaker 5: but the FED has a remarkably simple a mandate essentially,
Speaker 5: you know, stable economic growth with maximum employment. Of course,
Speaker 5: what is it. A few weeks ago, I think was
Speaker 5: the daily quote on the Bloomberg was Martin Scorsese, and
Speaker 5: it was something that like simple is the best, but
Speaker 5: it's the hardest to achieve. Well, that's what happens in
Speaker 5: a FED funds hike cycle. But what happens is eventually
Speaker 5: the marketplace. And you can see it related to higher
Speaker 5: prices being accepted by consumers and business in that you
Speaker 5: were just mentioning before there's a sense, Okay, we can
Speaker 5: deal with this now and we keep moving forward. The
Speaker 5: FED has been so set in applying it's mandate that
Speaker 5: it hasn't knocked a part the resilience in the consumer,
Speaker 5: in business and the overall economy.
Speaker 1: That's just an extraordinary John Michael McKee with a brilliant
Speaker 1: idea on the Magnificent Seven. He's going back to the movie.
Speaker 1: He's looking at YOU'L. Brenner, Steve McQueen, Charles Bronson, Robert Vaughan,
Speaker 1: James Coburn, Horse Bucklets and Brad Dexter. I mean they
Speaker 1: were the Magnificent seven. What do you do with the
Speaker 1: modern Magnificent seven? Is Apple going to deliver here? And
Speaker 1: if you're going gloomy forty four hundred, do you sell
Speaker 1: your big tech Well.
Speaker 5: I'm not gloomy of four hundred at all. I'm just
Speaker 5: saying it's more realistic from here to the end of
Speaker 5: the year. Just wait until we put in our Brice
Speaker 5: target for next year. That'll be later on.
Speaker 1: Oh good, and no one's watching here, Come on compliance
Speaker 1: at opcos not watching.
Speaker 7: Give me a number.
Speaker 1: Can you pop a five thousand for next year?
Speaker 5: To do it? I got, I got compliance breeding down
Speaker 5: my back. But when we look at things are getting
Speaker 5: better and we think we're going to see competition return
Speaker 5: in a lot of spaces, and competition is when all
Speaker 5: of a sudden you've got everybody is passing on the
Speaker 5: old higher prices getting away with it. And then some
Speaker 5: guy in business or gal discovers the idea of well
Speaker 5: maybe if I give up a little bit what I
Speaker 5: get in per unit costs, maybe I can make it
Speaker 5: up big time and volume. And that'll happen across the sectors.
Speaker 5: But in the meantime, tech is empowering everything, and we
Speaker 5: don't mean it like in some kind of a moonshot,
Speaker 5: but it exists. Today. Corporations are doing better navigating very
Speaker 5: tough environments. Well, it's the financial advices. Whether it was
Speaker 5: the pandemic, post pandemic, the supply chain stabilization, the getting
Speaker 5: away from one country centricity in terms of the global
Speaker 5: supply chain. All of this technology is enabling a lot
Speaker 5: of things both for the can consumer as well as
Speaker 5: for business. And it's it's a dramatic change that combined
Speaker 5: with sensitivity by the FED communication transparency that we think
Speaker 5: is you know, the branking legacy that is still being
Speaker 5: practiced by Jerome Howell in his own way. Yeah, you know,
Speaker 5: positive effect.
Speaker 3: I keep thinking the economy is not the stock market,
Speaker 3: and this is not necessarily a stock market that's representative
Speaker 3: of the broader economy that really is maybe the Russell
Speaker 3: two thousand or the banking index, the regional Banking Index.
Speaker 3: Does your optimism bleed over to small caps, to the
Speaker 3: KBW index?
Speaker 5: Well, I'd say not necessarily to the k b W.
Speaker 5: Yet we've got to wait for the economy to show
Speaker 5: a greater sustainability going forward and not as many concerns
Speaker 5: in terms of commercial real estate and subbrime auto loans
Speaker 5: and things like that. But what we would say is
Speaker 5: when we when we look at this picture where all
Speaker 5: things are getting better, it's been led by the large
Speaker 5: caps but if we get to that point where we
Speaker 5: get to see the sustainability of the economic expansion, of
Speaker 5: becoming predominant in the picture, you're going to want to
Speaker 5: own smalls and mid caps, and you probably want to consider,
Speaker 5: for instance, we're near market cap agnostic in some ways
Speaker 5: because our goal is beyond we're intermediate to longer term investors,
Speaker 5: and the valuations are ridiculously low in many quality indices
Speaker 5: of the small caps and mid caps.
Speaker 1: Joss Dolphis thank you so much, greatly appreciating this should
Speaker 1: be a two hour conversation. I can't say enough about
Speaker 1: the work of doctor Miller. He is Aaron David Miller.
Speaker 1: He's a senior fellow the Carnegie Endowment for in an
Speaker 1: national piece. The signal is from the University of Michigan
Speaker 1: Definitive and International Relations. And he wrote a book in
Speaker 1: two thousand and eight. It was shockingly, shockingly prescient fifteen
Speaker 1: years on about the mess we're in in the Eastern Mediterranean.
Speaker 1: Aaron David Miller, thank you so much for joining us
Speaker 1: this morning. When you wrote your masterpiece in two thousand
Speaker 1: and eight, did you expect the tragedy we're living now?
Speaker 8: I expected John at an unresolved Israeli Palestinian conflict driven
Speaker 8: by a proximity problem. Israelis and Palestinians are living on
Speaker 8: top of one another, and frankly, I think it was
Speaker 8: Mark Twitter said that proximity breachs contempt and children. I
Speaker 8: figured that this conflict would endure, It would go through
Speaker 8: periods of accommodation, perhaps as it did, but also periods
Speaker 8: of conflict that we've seen. But I think I, for one,
Speaker 8: I'll put myself at the top of the list, never
Speaker 8: anticipate paid the kind of trigger to this particular phase
Speaker 8: of the Israeli Palestinian conflict. That is to say, what
Speaker 8: happened on October seven, with Hamasa's brutal and savage attack
Speaker 8: and it's wilful and intentional, indiscriminate murder of men, women
Speaker 8: and children. I did not anticipate that, and clearly, in
Speaker 8: what probably one of the two greatest intelligence failures in
Speaker 8: the history of the State of Israel, neither did the Israelis.
Speaker 1: Aaron David Miller. Robert Gates writes a piercing essay and
Speaker 1: the New Foreign Affairs magazine. I read every word of it.
Speaker 1: The former Defense Secretary and head of CIA on a
Speaker 1: dysfunctional America, a dysfunctional superpower. You are someone that straddled
Speaker 1: the line. I would say, within the politics of Washington,
Speaker 1: what's Aaron David Miller's best practice? Now for the Biden administration.
Speaker 8: Come to this particular crisis. Remember, we now have an
Speaker 8: archa crisis. We have a major crisis in the Middle
Speaker 8: East with the potential of escalade. Even further, if you
Speaker 8: end up with in Israeli his bull of war, You're
Speaker 8: going to see, not to mention the prospects of Iranian
Speaker 8: involvement and direct conversation between Israel and I Ran, which
Speaker 8: would lead to spiking oil prices and plunging financial markets,
Speaker 8: and even more uncertainty with respect to the global economy.
Speaker 8: You've got Russia's invasion of Ukraine, You've got tensions in
Speaker 8: the Indo Pacific. Look, I long believe you know. I'm
Speaker 8: a follower reinhold Nebe approximate solutions to insoluble problems. This
Speaker 8: is a world that cannot be resolved. That is to say,
Speaker 8: I'm not sure there is one conflict factor you could
Speaker 8: identify that had a definitive, a comprehensive solution. This is
Speaker 8: all about smart, smart management and a judicious and very
Speaker 8: balanced view of the projection of American power in air
Speaker 8: is that in fact we can, we can and effect.
Speaker 8: But no, this is not a world to be redeemed
Speaker 8: or resolved. It's want to be managed if we're lucky
Speaker 8: and smart.
Speaker 1: Aaron David Miller Robert Kaplan's new book, The Loom of
Speaker 1: Time is my book of the year. It's just a
Speaker 1: sprawling treatise from Morocco all the way over to Persia,
Speaker 1: indeed on to Afghanistan as well. And what permeates Caplin's
Speaker 1: real politic is the basic idea that we have a
Speaker 1: human rights led foreign policy. Is our human rights led
Speaker 1: foreign policy at risk given what we see in the
Speaker 1: Eastern Mediterranean region.
Speaker 8: You know, Caplin's you a really smart guy. Based on
Speaker 8: my experience John working for Republicans and Democrats over a
Speaker 8: thirty year period from Jimmy Carter to Bush forty three,
Speaker 8: I don't think we have a human rights based policy.
Speaker 8: In fact, human rights democracy promotion, responsibility to protect, the intervention,
Speaker 8: to to prevent or even respond to mass killings, from
Speaker 8: the Holocaust at Cambodia to Rwanda to Dartford to Sauth,
Speaker 8: Sudan to Syria. Where has the United States been with
Speaker 8: respect to the protection of human rights. I'm not saying
Speaker 8: that that is a role we need to play and
Speaker 8: can't play all the time, but I think human rights
Speaker 8: is a factor. But based on my experience from Carter
Speaker 8: to Bush forty three, it's rarely at the top of
Speaker 8: our agenda.
Speaker 1: There's been shades of isolationism there, even off of the
Speaker 1: shock of Jimmy Carter and the Iranian hostage crisis. And
Speaker 1: I believe seventy nine, what does our new isolationism look like.
Speaker 8: I'm not sure. Well, clearly we're not there now. I mean,
Speaker 8: I think the America first notion, although I think that
Speaker 8: largely would translate into putting America last. We've got to
Speaker 8: find the right balance, John, between doing too much in
Speaker 8: the world and not doing enough. One of my former
Speaker 8: VOUSE bosses, medal In Albert, referred to the United States
Speaker 8: as the indispensable power. You know, and I remember what
Speaker 8: de gaul said about the cemeteries of France. They're filled
Speaker 8: with indispensable people. We can't be the indispensable power if
Speaker 8: indispensability means that we need to be everywhere, to everyone
Speaker 8: all the time. We have a dysfunctional political system. That's
Speaker 8: the strength, by the way repairing that is critically important
Speaker 8: for our capacity to lead, not by the what it was,
Speaker 8: Joe Biden says, not by the example of our power,
Speaker 8: but by the power of our example. There is something
Speaker 8: to that.
Speaker 1: From where you sit in international relations. Is our pentagon
Speaker 1: properly funded? And specifically does the Navy have enough ships
Speaker 1: and submarines?
Speaker 8: Probably know, and no, I suspect, even though there some
Speaker 8: will argue that our defense budget is way out of whack,
Speaker 8: It'll be fascinating to try to see how we're going
Speaker 8: to resource going forward because each of these problems I
Speaker 8: referred to what you're seeing in the Middle East right now,
Speaker 8: Russia's warview against Ukraine which seems to be forever, and
Speaker 8: the prospects of arising China in the Indo Pacific. All
Speaker 8: of these things have to be properly resourced. And that's
Speaker 8: a concern that I have, given the nature of our
Speaker 8: domestic politics.
Speaker 1: One final questionnaireon to circle back to your two thousand
Speaker 1: and eight treaties, there is a much too promised land.
Speaker 1: What should we advocate to Israel and the Palestinians in
Speaker 1: this November.
Speaker 8: You know, a lot of people I respect John believe
Speaker 8: that the so called two state solution has gone the
Speaker 8: way of the Dodo. I understand the argument, but frankly,
Speaker 8: it's the least bad solution to this conflict. Israelis and
Speaker 8: Palestinians need to separate from one another through negotiations. There's
Speaker 8: no precedent that I can think of of two two
Speaker 8: national movements, one of state, a nonstate actor seeking to
Speaker 8: become a movement living happily ever after under one roof.
Speaker 8: It's Cyprus, Lebanon, Syria, Iraq. I mean, the beat goes on,
Speaker 8: so it's not it's just a hop, skip and a
Speaker 8: jump to understanding that if in fact you're going to
Speaker 8: have anything resembling a conflict ending solution, I'm choosing my
Speaker 8: words very carefully here. You really do need to have
Speaker 8: separation through negotiation, maybe into a confederation at some point,
Speaker 8: but you need to satisfy the political, territorial, emotional, psychological,
Speaker 8: and religious underpinnings of this conflict. The only thing that
Speaker 8: does that, in my judgment, is to separate through negotiation
Speaker 8: state of Israel living peacefully next door to a Palestinian polity.
Speaker 8: That to me is the only way to even begin
Speaker 8: to think about fixation.
Speaker 1: Aaron David Miller, thank you so much for the brief.
Speaker 1: Hugely valuable with the Carnegie Endowment for International Peace. Stephen
Speaker 1: Stanley joins us at right now with Santander or US
Speaker 1: Capital Markets. You are acclaimed for analysis and GDP. How
Speaker 1: does the bond market affect your analysis?
Speaker 9: You know, I think the Fed is overstating the importance
Speaker 9: of this little backup in bonnials that we've seen over
Speaker 9: the last month. As we talked about the last time
Speaker 9: I was here, I see it maybe as a little
Speaker 9: bit more of an excuse than a reason. I think
Speaker 9: they wanted to hold off, and that provided them with
Speaker 9: a convenient reason.
Speaker 7: Financial conditions have tightened a little bit.
Speaker 9: But look, you know, as you all discuss, the economy
Speaker 9: is still rolling at this point. So I think it's
Speaker 9: wishful thinking that the last twenty or thirty basis points
Speaker 9: on the on the bonyold is going to roll the economy.
Speaker 1: But the I'll go with this easy, easy question here.
Speaker 1: It's a cliche, but unfortunately it's apped right now. Are
Speaker 1: they fighting in the last war?
Speaker 9: I think it's too soon to say that, because you know,
Speaker 9: the idea I assume what you're suggesting is well, inflation
Speaker 9: has already licked well.
Speaker 1: Dominicq constum in MISSOUI is calling it super restrictive. I
Speaker 1: got people say in the five percent reality lay on
Speaker 1: the bond market is a seven percent reality in the
Speaker 1: economy as well? Are they? Are they working now? They
Speaker 1: go to the meeting tomorrow in a restrictive milieu.
Speaker 7: I think policy is restrictive, but is it restrictive enough?
Speaker 9: I mean, until the economy actually slows down, until inflation
Speaker 9: really comes off. It's it's hard to say that, and
Speaker 9: so I think that's why that at a minimum, they're
Speaker 9: certainly going to want to keep their options open. You know,
Speaker 9: they they've signaled another pause, but Pallas certainly kept the
Speaker 9: door open to further hikes.
Speaker 3: So I'm not throw this question at you what I
Speaker 3: was asking before, which is how long can the US
Speaker 3: continue surprising to the upside with economic data and showing
Speaker 3: momentum at the same time that you see Europe running
Speaker 3: into recession coming out recession around the world a lot
Speaker 3: of pain.
Speaker 9: Maybe not to be overly glib, but basically forever. Because
Speaker 9: the US is a domestically driven economy, and I think
Speaker 9: economists and particularly the FED, have systematically over the years
Speaker 9: overestimated the importance of the global economy for the US economy. We're,
Speaker 9: you know what, between ten and fifteen percent of our
Speaker 9: economy is trade, whereas for most of the other major
Speaker 9: economies it's thirty forty percent.
Speaker 3: Okay, I'll challenge that in one way, And this is
Speaker 3: something that a lot of people have been talking about,
Speaker 3: and I would love for you to push back if
Speaker 3: this is the case, people say that the international transmission
Speaker 3: transmission mechanism is the US yield is how many international
Speaker 3: buyers are going to be coming in and picking up
Speaker 3: treasuries at a time where the Bank of Japan's not
Speaker 3: going to be buying, where you're going to have or
Speaker 3: not going to be really pushing investors out of that
Speaker 3: nation's asset market. Where you have certainly around the world
Speaker 3: yields going higher and China not buying how much does
Speaker 3: apply change that narrative and create more of an international
Speaker 3: transmission mechanism than ever before.
Speaker 7: Yeah, that's an interesting angle. Actually.
Speaker 9: I think the root of the problem there, of course,
Speaker 9: is the fact that we're that we're running such large deficits.
Speaker 9: If we had a smaller deficit then this would be
Speaker 9: so much of a problem. But the fact that the
Speaker 9: Treasury is to borrow on extra to two and a
Speaker 9: half trillion dollars a year, they need demand anywhere they
Speaker 9: can get it, so that that actually does bring a
Speaker 9: good point, which is that the it feels like the
Speaker 9: international community has pulled back a little bit for various reasons,
Speaker 9: and I think you know that's that's part of it,
Speaker 9: a piece of why yields have backed up recently.
Speaker 1: Well, Mike McKey summarizes for us we've heard this twice
Speaker 1: today and surveillant Shill Moweko accent Stephen Stanley of Santandra
Speaker 1: agree the United States is a relatively closed economy. Are
Speaker 1: we an economy a fiscal stimulus thinking of refunding and
Speaker 1: all the other debates versus Europe in austerity stimulus? I mean,
Speaker 1: are we living a fiscal stimus that makes us different?
Speaker 10: Well, yeah, I mean we as Chris says, we're, as
Speaker 10: Steve says, we're a sort of closed economy. We don't
Speaker 10: have to worry necessarily about what's happening in Europe as
Speaker 10: much as Europe has to worry about what's happening in
Speaker 10: the United States. And China their biggest trading partner, and
Speaker 10: so we can stimulate the economy and we can run
Speaker 10: deficits for a lot longer. Nobody knows exactly how high
Speaker 10: or how long, but it doesn't have the same kind
Speaker 10: of effect. Interesting to note where we are with yields
Speaker 10: these days is where we were in the nineteen nineties
Speaker 10: when we were growing at four and a half percent
Speaker 10: a year. So can we live with this? I mean
Speaker 10: for now we can't.
Speaker 1: Right, Steven Stanley with us, So I'm not going to
Speaker 1: go higher for longer. But just pick one of them.
Speaker 1: Are we going to go higher or are we going
Speaker 1: to go longer?
Speaker 7: Well, I think the more important thing is the longer part.
Speaker 9: You know, they may go one more time, but we're
Speaker 9: pretty to the end, so I don't think the higher
Speaker 9: part is the more important of the two right now.
Speaker 9: I think is the more important issue is how long
Speaker 9: are they going to stay?
Speaker 1: Can the American economy equilibriate through a higher nominal and
Speaker 1: real rate or almost equal calibrate?
Speaker 9: I would said yes, I think We're in the process
Speaker 9: of that. I think that in my mind, the neutral
Speaker 9: rate is you know, anywhere from fifty to one hundred
Speaker 9: basis points higher than it was before COVID.
Speaker 1: So give me a ten year real rate, which is
Speaker 1: going to be a run rate.
Speaker 9: I think it's probably you know, one to one half
Speaker 9: percent something like that.
Speaker 3: Okay, when we look right now at the data that
Speaker 3: we've getting this week, you said that the Fed seems
Speaker 3: to be looking for an excuse, and it's not really
Speaker 3: that they're so concerned about what you call this little
Speaker 3: backup and yields. So what data could make it difficult
Speaker 3: for them to use the backup and yields as some
Speaker 3: sort of excuse.
Speaker 9: Well, boy, we're really testing that right because since the
Speaker 9: September meeting, we've had a blowout payroll number, a high
Speaker 9: inflation number, stronger than expected consumer spending, and now we
Speaker 9: get a firm wage number. So you know, you're pretty
Speaker 9: much a clean sweep, and yet they're clearly going to pause.
Speaker 9: So I think it's going to have to be not
Speaker 9: so much a particular data point, but a duration of
Speaker 9: a stretch of good data. If we continue to see
Speaker 9: good data for another month or two, then I mean
Speaker 9: it just becomes increasingly compelling.
Speaker 3: So tomorrow, based on what they say and based on
Speaker 3: the economic data, what are the chances from your view,
Speaker 3: that they've got to go significantly further than currently markets
Speaker 3: are pricing.
Speaker 9: Yeah, so significantly further is a really important part of
Speaker 9: that question, because, as I said, I mean my base case,
Speaker 9: I have one more hike. But that's I mean, you know,
Speaker 9: whether they do one or not, it's not that important.
Speaker 9: But there is a scenario where inflation reaccelerates and they
Speaker 9: end up having to go multiple times. That's the I
Speaker 9: think that's the scenario that you might have in mind.
Speaker 9: I mean, to me, that's the biggest risk fact. I
Speaker 9: see that as a bigger risk than the risk that
Speaker 9: the economy slides into recession and they end up easing
Speaker 9: much sooner than people expect it. But it's at this
Speaker 9: point it's for me, it's a risk scenario, not a
Speaker 9: base case.
Speaker 1: Are Is it true you're going for Halloween?
Speaker 7: You're going to dot plot that. That's a room, right?
Speaker 7: I can't confirm you had bullered up at the tippy
Speaker 7: top of your head. There you go. Okay, I have
Speaker 7: a lot of room on my head for you dods.
Speaker 1: So do some of us is well? Also? John Ferrell,
Speaker 1: going as you'll Brunner, I don't know if you knew
Speaker 1: that one of the mania for seven.
Speaker 10: John.
Speaker 1: It was good to hear Stephen Stanley with his chief
Speaker 1: US economist of Santander, Emily rolling this morning from Boston
Speaker 1: here on a Halloween. What's your biggest fear out there
Speaker 1: besides trigger treating, what's your biggest fear, Emily in this market?
Speaker 11: My biggest fear is that we're actually in a scary
Speaker 11: movie right now, but it's not over yet.
Speaker 5: You know.
Speaker 4: You think about the villain kind of being wounded.
Speaker 11: But still alive, and the villain is higher borrowing costs
Speaker 11: and the wake of the FED raising interest rates in
Speaker 11: the shortest amount of time and the greatest extent in
Speaker 11: several decades here, and we really haven't felt the sting
Speaker 11: from that as far as consumers pulling back, you know,
Speaker 11: as far as earning's getting hurt by that profit margin's
Speaker 11: getting crushed.
Speaker 4: So everything's fine right now.
Speaker 11: We're sort of running to the safe part of the
Speaker 11: house as we're getting chased by this villain, but we
Speaker 11: need to remember that the movie simply isn't over yet.
Speaker 6: Oh my god, Emily, I'm just thinking about you at
Speaker 6: the sleepover with a bunch of eleven year old saying
Speaker 6: it's a scary house and the bond villain is coming
Speaker 6: to get you at some point. I'm wondering, Emily, how
Speaker 6: much we're looking.
Speaker 3: At a scenario we're yield to kind of reach to
Speaker 3: a peak, and that really the uncertainty lies. And I
Speaker 3: keep harping on this, but it lies with the deficit
Speaker 3: financing and what we get tomorrow from the Treasury Department.
Speaker 3: What we got yesterday actually underwhelmed with the amount that
Speaker 3: the US would have to borrow in the third quarter,
Speaker 3: and arguably that's what's leading yields lower this morning.
Speaker 11: Yeah, certainly fears around supply have been a key to
Speaker 11: the narrative around rising bond yields, but it's not like
Speaker 11: we woke up one morning over the last few weeks
Speaker 11: and all of a sudden found out that the treasure
Speaker 11: was going to have to issue more debt.
Speaker 4: That's been a known issue.
Speaker 11: So for US, that's not really the primary reason that
Speaker 11: bond yields have picked up. It's been just this unrelenting
Speaker 11: strength in the economic data in the US, and certainly
Speaker 11: fiscal spending has played a role in that. Excess savings
Speaker 11: have played a role in that. In twenty twenty and
Speaker 11: twenty twenty one. But really it's been the strength of
Speaker 11: the data. There's something really really unusual happening in the
Speaker 11: bond market right now. One, we're facing down potentially the
Speaker 11: third consecutive year of negative returns for high quality bonds.
Speaker 11: That's never happened before in history. We're also looking at
Speaker 11: an environment where if the FED was done in July,
Speaker 11: and we can talk about that, it's really unusual to
Speaker 11: see the ten year treasure yield continuing to rise. Typically
Speaker 11: what happens is that the ten year peaks right around
Speaker 11: the same time, are just before the FED pauses, very unusual.
Speaker 11: And then finally the elusive bear steepener another very notable
Speaker 11: dynamic here that is not consistent with what we've seen
Speaker 11: in recent history. So our view is that we could
Speaker 11: be getting close here to the peak and yields.
Speaker 3: This doesn't sound like a scary story actually. Arguably, and
Speaker 3: as Gina Martin Adams yesterday was saying, this really speaks
Speaker 3: to a pain trade of more momentum of gains of
Speaker 3: a rally and risk assets. Because if yields are rising
Speaker 3: because of growth, isn't it a good and beautiful thing?
Speaker 11: Yeah? I mean, I think our standards for growth have
Speaker 11: seemed to be shifted a little bit. Yes, there's a
Speaker 11: lot of strength in the labor market, but we all
Speaker 11: know that that's lagging data and those cracks are starting
Speaker 11: to form. I think this week's going to be really
Speaker 11: critical in terms of the jobs report on Friday, initial claims,
Speaker 11: which have stayed stubbornly low. We've got to remember that
Speaker 11: that data is subject to heavy revisions, and we're seeing
Speaker 11: a lot of cracks in the consumer stories starting to emerge.
Speaker 4: There's a lot of heads.
Speaker 11: Out there, the resumption of student loan payments, credit card
Speaker 11: interest rates at twenty five percent right now, auto loans
Speaker 11: at seven percent, mortgage rate over eight percent.
Speaker 4: That's a challenge.
Speaker 1: How do you get out thirty six months? You're going
Speaker 1: to tell me part of a carefully managed portfolio is
Speaker 1: so look out three years, five years, years, maybe when
Speaker 1: the red SOX go above five hundred again, Emily, the
Speaker 1: basic idea here is people are scared stiff. How much
Speaker 1: cash at five x percent should they own? Versus having
Speaker 1: the courage to reach out thirty six months?
Speaker 11: Yeah, I think the critical the scary part I guess
Speaker 11: about being in cash right now is that your subject
Speaker 11: to significant reinvestment risk.
Speaker 4: Our view is that the normal.
Speaker 11: Relationship with the economic cycle and bond yields remarries as
Speaker 11: we head into this economic contraction into next year, and
Speaker 11: in that environment, you want to move out the curve
Speaker 11: and just really be able to capture the five six
Speaker 11: percent income that you're seeing in high quality bonds right now.
Speaker 11: I know we've been talking about this for a while.
Speaker 11: There's been these significant odd dislocations in the bond market,
Speaker 11: but if you're in cash right now, you might not
Speaker 11: get that yield next year.
Speaker 4: We have an opportunity again to lock that income stream
Speaker 4: in for years, and I think we're going to look
Speaker 4: back on this is quite an incredible opportunity to unlock
Speaker 4: the value in bonds.
Speaker 1: Thank you, Emily Rowland, John Hancock Investment Management, Boston. Subscribe
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Speaker 7: Thanks for listening. I'm Tom Keane, and this is Bloomberg