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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and am Marie Hordern. Join us each

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Speaker 2: day for insight from the best in markets, economics, and

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Speaker 2: geopolitics from our global headquarters in New York City. We

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Speaker 2: Bloomberg Terminal and the Bloomberg Business App. Max Ketner of

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Speaker 2: HSBC writing, we don't think it's time to pull the

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Speaker 2: plug on risk. We therefore add to US equities as

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Speaker 2: Q three warnings, or rather earnings expectations. Also don't look

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Speaker 2: challenging to be. Max joins us now for more Max

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Speaker 2: Good Mornings.

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Speaker 3: You, sir, good morning.

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Speaker 2: That's the equity call. I want to get to the

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Speaker 2: credit call. There was a shift on high yeal FEME

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Speaker 2: in the last week. You move that overweight from max

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Speaker 2: overweight to where are we now?

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Speaker 3: Slight overweight? Slight overweight from exciting to boring.

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Speaker 2: So what's that shift about? Let's start there.

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Speaker 4: I think look, when we look at high yield, it's

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Speaker 4: not like it's bearish, So certainly in your high yeld

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Speaker 4: things look still pretty okay. Valiation wise, it looks a

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Speaker 4: bit more attractive. I think in you as high yeld

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Speaker 4: there's partly a story around valiations. You know you have

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Speaker 4: high yield spreads around three twenty. There's not an awful

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Speaker 4: lot to go anymore. There's not an awful lot of

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Speaker 4: spread tightening that you can still see. So at some

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Speaker 4: point it gets around pure carry it and then you

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Speaker 4: sort of okay, is that still the best place where

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Speaker 4: I get the carry? Or is other places better such

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Speaker 4: as EUM local debt for example, where perhaps you know

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Speaker 4: you get higher carry.

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Speaker 3: It's a bit sure, it's sort of equal.

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Speaker 4: Similarly short duration, and it looks a little bit more

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Speaker 4: attractive now given how much has been priced in since April,

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Speaker 4: they're similar to the fair and I guess you know,

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Speaker 4: when we look at it from a total return perspective

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Speaker 4: as well. In high yields, if you get now these

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Speaker 4: sort of ten eleven cuts priced and by the end

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Speaker 4: of this year, if you get just a few priced

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Speaker 4: out right, let's say compare high yield to equities, then

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Speaker 4: if if you're a long equities, now, if you're long

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Speaker 4: the S and P, do you care whether they cu't

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Speaker 4: ten eleven times by the end of the year or

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Speaker 4: they can't seven eight times by the end of next year.

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Speaker 4: Not really right, That's not really the big tail risk anymore.

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Speaker 4: The big tail risk, particularly in April or in September

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Speaker 4: October last year, was they're not going to cut at all,

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Speaker 4: or they may even have to hike. The tail risk

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Speaker 4: now is well, maybe I'll do only four or five,

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Speaker 4: but they will be cutting. So for equities it doesn't matter.

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Speaker 4: For high yel that matters because obviously the front end

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Speaker 4: of the curve goes up.

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Speaker 2: Well, doesn't it matter for em as well? Can we

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Speaker 2: get into EM a little bit more? What are the

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Speaker 2: assumptions you're making on rates on the US STARLA to

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Speaker 2: make that cool?

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Speaker 3: Yeah?

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Speaker 4: I do think however that in EM again, valiations are

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Speaker 4: a little bit more enticing if you look at EMD

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Speaker 4: spreads in particular, you know, year today, so there's sort

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Speaker 4: of flattage. Of course, there's been some index composition changes

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Speaker 4: as well, yes, of course, but from a valiation perspective,

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Speaker 4: certainly there's a bit more juice left compared to you

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Speaker 4: as high yields. So we're really at the stage now

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Speaker 4: where it's not really bearers about high yield and much

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Speaker 4: more bullish on the other stuff. It's a bit like, okay,

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Speaker 4: you're really harvesting that carry. Where's the carry best across

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Speaker 4: all the epic classes?

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Speaker 5: How much is this just a revival of the fomo trade?

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Speaker 5: Essentially look for the biggest return and go, And that's

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Speaker 5: essentially because the FED is cutting rates and so.

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Speaker 3: Yeah, yeah, pretty much.

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Speaker 4: I think it's it's sort of the you know, we

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Speaker 4: were saying in twenty I think it was twenty twenty

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Speaker 4: one that it's all pretty much a yolo world, right,

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Speaker 4: and it was sort of the return to Yola. You

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Speaker 4: could argue that's sort of what we're seeing, for example

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Speaker 4: this week. But let's be honest, we could also sit

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Speaker 4: maybe by the end the next week, we could sit

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Speaker 4: here and you guys talk about one and a half trillion.

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Speaker 3: Being wiped out again.

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Speaker 4: Like if we had had this chat last Friday, we

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Speaker 4: wouldn't be that upbeat. No, we would all be like,

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Speaker 4: oh my god, is this recession? And you know, are

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Speaker 4: we closer to the end now and the start of

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Speaker 4: a bear market, and what is commodities trying.

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Speaker 3: To tell us and all this sort of stuff, And

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Speaker 3: now we sit there and we're like, yolo, yeah, everything's great.

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Speaker 4: So you know, this is how much it shifts within

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Speaker 4: a week, if we're honest.

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Speaker 5: We were having a conversation to start the show about

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Speaker 5: twenty five versus fifty basis points, and I wonder how

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Speaker 5: much you were rolling your eyes and how much you

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Speaker 5: are actually saying this is going to matter to the market.

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Speaker 3: You want me to roll my own.

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Speaker 2: I don't.

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Speaker 6: Happy you're viewing who actually can go seeing on his weekend,

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Speaker 6: But I am curious about whether you are seeing a

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Speaker 6: market that is likely to sell off in response to

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Speaker 6: a fifty basis point rate cut or respond with that

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Speaker 6: cheer and you're low.

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Speaker 3: Yeah, so it depends.

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Speaker 4: I think they would have had the chance in the

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Speaker 4: last few weeks to say, look, we're so comfortable with

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Speaker 4: this disinflation picture. If they had had look we're so

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Speaker 4: comfortable with this disinflation picture. Look what has happened since

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Speaker 4: April this year. We've had super core down, We've had

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Speaker 4: all these you know, all these components down. So because

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Speaker 4: of this inflation, we could cunt higher, right, we could

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Speaker 4: cut more, we could start more aggressive. The problem now

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Speaker 4: is that, of course, particularly with Jackson Hole you said, oh,

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Speaker 4: we're attentive to growth risks more than inflation. So the

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Speaker 4: problem is if you start with fifty now, particularly with

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Speaker 4: what John was saying in terms of the data, the

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Speaker 4: totality of the data, you.

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Speaker 2: Know, sorry, not making fun of course, of course, now,

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Speaker 2: of course it's not more language anyway, while we play,

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Speaker 2: we me for that.

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Speaker 3: That's chairman Belle.

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Speaker 4: So if we look at that, then the last couple

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Speaker 4: of weeks actually has been really good. Look at look

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Speaker 4: at weekly same store retail sales data. It's been picking

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Speaker 4: up from four and a half to six and.

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Speaker 3: A half percent.

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Speaker 4: Now when we look at jobless claims, you look at

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Speaker 4: weekly consumer confidence data, you look at you know, some of.

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Speaker 3: The electricity output. Look at the Dallas Fed's.

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Speaker 4: Weekly Economic index, look at the GDP now from Atlanta Fed.

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Speaker 3: We're talking two and a half percent. So it just

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Speaker 3: doesn't warrant it currently. So the risk is if you

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Speaker 3: go fifty.

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Speaker 4: First, the market wall say what do you know that

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Speaker 4: I don't?

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Speaker 3: What am I missing?

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Speaker 4: And that's I think that's what the market will take

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Speaker 4: a bit of, like, oh, God, this, I don't like this.

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Speaker 4: I really don't like that.

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Speaker 7: Can't the chairman just clean that up in his press conference?

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Speaker 4: I think he could, But I think particularly with Jackson Hall,

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Speaker 4: they've sort of missed the boat. And it was particularly

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Speaker 4: also with Jackson Hole that they could have said, Look,

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Speaker 4: it's it's really because of inflation. It's really because of

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Speaker 4: the disinflation that.

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Speaker 3: We're so comfortable with.

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Speaker 4: That is why we could be cutting much more aggressively

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Speaker 4: from the start, right, That's why we could sort of

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Speaker 4: rush out of the gates and be like, we can

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Speaker 4: cut fifty. Yeah, growth has been a bit of wobbly,

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Speaker 4: but we're really comfortable with this still. It's just because

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Speaker 4: of disinflation, and they sort of missed the boat on that.

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Speaker 7: Since you're visiting US from abroad, I have to ask

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Speaker 7: about the US election. How concerned you about the risks

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Speaker 7: that are tied to November?

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Speaker 3: Yeah, look, not an awful lot.

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Speaker 4: But because when we look, for example, at twenty twenty five,

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Speaker 4: I think people talk a lot about the US election,

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Speaker 4: I'm not sure how much people have positions on. Certainly

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Speaker 4: when you look at our tactic glance allocation convictions, they

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Speaker 4: are really not particularly tied to the US election, because

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Speaker 4: I think what we're missing looking a bit into twenty

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Speaker 4: twenty five as well, there is the debt ceiling issue looming,

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Speaker 4: for example. So but the Treasury has made it clear

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Speaker 4: that we want to have these seven hundred billions stocked

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Speaker 4: up in the Treasury General account in order to be

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Speaker 4: able to pay that down, which could be at least

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Speaker 4: perceived by the market, again but as temporary stimulus, you know,

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Speaker 4: similar to what we had in Q two last year,

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Speaker 4: which is actually pretty good.

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Speaker 3: Now, that's independent of the election.

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Speaker 4: We know that in twenty twenty five, of course, there's

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Speaker 4: a couple of those tax cuts from twenty seventeen expiring.

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Speaker 4: Again that's independent of the election. We're going to have

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Speaker 4: to deal with that. There is some sort of fiscal

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Speaker 4: cliff awaiting us perhaps second half of next year, when

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Speaker 4: the negotiations start. There is going to be something looming

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Speaker 4: that's independent of the elections.

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Speaker 2: Any evidence from your conversations that the Europeans are willing

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Speaker 2: to de risk from US as sets ahead of all

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Speaker 2: of that. Are they concerned about it?

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Speaker 3: No, not at all, not at all, not at all.

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Speaker 4: I think if anything we've seen in the last particularly

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Speaker 4: let's call it five months.

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Speaker 3: We've seen the opposite.

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Speaker 4: I think we've had this sort of long Europe trade

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Speaker 4: into April, call it April May long europeerhaps long Japan,

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Speaker 4: a bit of diversifying. Oh is the XUS performance is

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Speaker 4: that really now kicking off? And in fair is when

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Speaker 4: we look at all the activity data, when we look

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Speaker 4: at the high frequency data, it's really strong. Still in

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Speaker 4: the US, we're talking about the fiscal picture of the

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Speaker 4: fiscal support, it's really strong in the s Look at

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Speaker 4: what drag he was saying this week around come on,

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Speaker 4: we've got to be with supporting more, right, We've got

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Speaker 4: to be supporting more. And where it's happening is here.

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Speaker 4: It's in the US. So if anything, you know, then

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Speaker 4: you've got this, uh, you have the.

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Speaker 3: French elections of cars.

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Speaker 4: So there was these sort of concerns around that as well,

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Speaker 4: whether the unwarranted or warranted, don't care.

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Speaker 3: But all of that really led a little bit more

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Speaker 3: of the inflo picture back into the US.

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Speaker 2: Max, It's good to see you here in New York,

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Speaker 2: Thank you, sir. Going to catch up Mass Canada of HSBC.

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Speaker 2: That's where Bank for America's Business Owner report showing cautious

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Speaker 2: optimism from small and mid sized businesses as the FED

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Speaker 2: prepares to cut interest rates. Sharon Miller of Bank for

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Speaker 2: America writing rate cuts will reduce the cost of debt

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Speaker 2: servicing on floating rate credit facilities. This easing of the

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Speaker 2: expense environment may create cash flow capacity for expansion or

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Speaker 2: investment opportunities. We're lucky this morning that Sharon gets to

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Speaker 2: join us on this program. Sharon, Welcome to this program.

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Speaker 2: I just want to start with this one. The amount

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Speaker 2: of insight that you and the team have across one

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Speaker 2: in every three small businesses in America. We're worried about

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Speaker 2: stress starting to build, weakness starting to materialize. What are

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Speaker 2: you seeing in the businesses that you cover at the moment.

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Speaker 1: Well, you're right. We cover three point four million small

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Speaker 1: and mid sized businesses in the US and we are

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Speaker 1: the number one lender to small business across the US,

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Speaker 1: and so we do have a lot of insight into

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Speaker 1: what's happening. In our most recent survey that we did

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Speaker 1: with business owners in the spring, we found cautious optimism

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Speaker 1: from our clients and so they do expect their revenues

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Speaker 1: to increase over the next twelve months. And we know

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Speaker 1: that that debt servicing, as you said in the opening here,

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Speaker 1: will be reduced because we do expect that rates will

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Speaker 1: be cut as wese our economists do you here at

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Speaker 1: Bank of America twenty five bass point in the next

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Speaker 1: five said meetings.

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Speaker 2: So Shanny, you saying they've got the confidence the expansion

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Speaker 2: linds of reading that just waiting for small reductions for

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Speaker 2: the Federal Reserve over the next few cooltzas.

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Speaker 1: They are, and we still see demand in the marketplace now,

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Speaker 1: So I'm not saying that they're rating entirely. There is

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Speaker 1: good growth in the across the small and mid sized

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Speaker 1: company sectors, but they are watching that and certainly as

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Speaker 1: we see rates come down, that will improve their cash

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Speaker 1: grow and certainly consumer demand.

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Speaker 5: Sharon I got to say, I was reading this report

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Speaker 5: and I was shocked to the recent.

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Speaker 8: Report that you put out.

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Speaker 5: I was kind of shocked that actually we saw such

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Speaker 5: sanguine sentiment that people were expecting to continue to hire,

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Speaker 5: that they were continuing to expand they had positive outlook

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Speaker 5: for their businesses. How do you reconcile that with some

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Speaker 5: of the rhetoric that we hear every single day. This

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Speaker 5: is an economy that's on the raisor edge of turning negative.

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Speaker 9: You know, I think with small and.

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Speaker 8: Mid sized companies.

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Speaker 1: So we've bank clients in the business banking space from

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Speaker 1: startup to fifty million in revenues.

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Speaker 8: And so when you have a.

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Speaker 1: Smaller company, you're certainly more nimble, You're able to really

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Speaker 1: think about your business, your growth, and you can pivot easily.

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Speaker 1: Bigger corporations may have more of a hard time doing that,

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Speaker 1: and so that is a competitive advantage of small to

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Speaker 1: mid size companies and we see that come through in

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Speaker 1: the data and just in our conversations that we're having

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Speaker 1: every day across the death from these clients.

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Speaker 5: What I thought also was striking was in the market,

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Speaker 5: it seems like inflation is no longer a significant concern.

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Speaker 5: We heard just a couple of days ago from Mike

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Speaker 5: Wilson over at Morgan Stanley that's dead. Essentially, Inflation is

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Speaker 5: no longer an issue when it comes to what you're

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Speaker 5: seeing in bonds. Nonetheless, sixty eight percent of small business

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Speaker 5: owners so they've raised their prices over the past twelve months,

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Speaker 5: and on average they've raised prices by twelve percent. They're

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Speaker 5: talking about inflation as a more pressing concern than many

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Speaker 5: other things that we talk about every day.

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Speaker 8: How do you.

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Speaker 5: Understand whether this is really a small business issue or

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Speaker 5: whether maybe we're not giving enough credence to just much

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Speaker 5: ongoing inflationary pressure there actually is.

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Speaker 1: Well, there is ongoing and inflationary pressure. It is a

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Speaker 1: sticky issue, and so we continue to hear that that

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Speaker 1: is the number one concern of small and mid sized companies.

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Speaker 1: And so you have seen price increases brought along because

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Speaker 1: of all the pressure they are. So I do see

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Speaker 1: it as a concern. We hear it from our business owners,

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Speaker 1: and we do feel that as we go forward and

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Speaker 1: the cycle begins to ease a bit, that it's going

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Speaker 1: to take some pressure off.

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Speaker 7: Sharon, given that pricing pressure, how difficult is it for

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Speaker 7: these small companies to keep up with the bigger players?

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Speaker 1: Well, I think that you know, there is some difficulty

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Speaker 1: in keeping up with the bigger players, but I would

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Speaker 1: say that you know, they also have a competitive advantage.

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Speaker 1: And so you know, as supply chains have improved, and

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Speaker 1: as businesses have expanded, and certainly they've gone more online,

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Speaker 1: gone more digital, they have more UACh and scale than

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Speaker 1: they might have had before the pandemic, and so what

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Speaker 1: we are seeing are expansion plans from small and missized

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Speaker 1: companies and they are competing and certainly, you know, they

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Speaker 1: benefit from the downstream impact as well from larger corporations.

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Speaker 7: We're talking about inflation, We're talking about the fact that

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Speaker 7: they're preparing for these rate cuts. When you talk to clients,

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Speaker 7: what is their number one concern right now in this economy?

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Speaker 1: Their number one concern is inflation, and then right next

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Speaker 1: to that is hiring and making sure that they have

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Speaker 1: the right skilled labor, the right employees to go into

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Speaker 1: their business to work. And so those are the concerns

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Speaker 1: that we hear every day. We were also in an

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Speaker 1: election year, so you do hear that as well, but

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Speaker 1: we hear that with every election cycle. We've been doing

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Speaker 1: this report for the last ten years, and so in

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Speaker 1: each election cycle, we'd see, you know, concerns once the

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Speaker 1: election is over, no matter who wins, no matter what party,

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Speaker 1: that there's certainty and so people can move forward. So

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Speaker 1: that's what we're hearing discycle as well. And you know,

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Speaker 1: I anticipate after November there'll be certainty and people will

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Speaker 1: continue with their plans.

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Speaker 2: Sharon talk to us a little bit about how things

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Speaker 2: have changed since March of last year, given all the

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Speaker 2: banking stress in this country and some of the banking

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Speaker 2: failures as well. How some of your clients have changed

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Speaker 2: the way they do business with you. Where they've managed

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Speaker 2: to attract a lot more small businesses over the last

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Speaker 2: twelve months, worried about where they place that cash, and

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Speaker 2: they want to put it with a bigger institution like

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Speaker 2: Banks of America.

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Speaker 1: Sharon, how much has changed, Well, I mean, I think, listen,

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Speaker 1: we are the number one small business bank in the US,

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Speaker 1: and we're very proud of that. We have been for

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Speaker 1: the last four years plus, and so you know, we

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Speaker 1: continue to stand on our clients and good times and

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Speaker 1: bad and certainly you know we every day we work

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Speaker 1: to attract new clients and to retain the clients we

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Speaker 1: have because this is our mission. This is where communities

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Speaker 1: meet business, and that is what we do at Bank

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Speaker 1: of America. So we want to be sure that we

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Speaker 1: are there for our clients. We have capabilities they need,

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Speaker 1: whether it's to transact internationally, to be able to have

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Speaker 1: expansion in their business, to get a loan, to provide

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Speaker 1: payments for merchants.

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Speaker 8: So all of.

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Speaker 1: Those different areas we are able to help our clients,

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Speaker 1: and so we want to make sure that we're there

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Speaker 1: for them, whether it be our online tools and capabilities

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Speaker 1: to manage their PASK flows. So we're investing in the

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Speaker 1: business based on what we hear from clients and what

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Speaker 1: they need.

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Speaker 2: Well, we were thankful that you managed to make some

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Speaker 2: time for us this morning, and we appreciate it. Sharon,

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Speaker 2: thanks for joining the program. Thank you, Sharon Miller. That

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Speaker 2: thanks America. Over the next week, a busy slate ahead

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Speaker 2: with retail salves and a FED decision next week. Tiffany

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Speaker 2: Wilding of PIMCO saying, we're heading back to pre pandemic conditions.

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Speaker 2: Develop market economies now look more like they did in

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Speaker 2: twenty nineteen than are any time since the pandemic. In

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Speaker 2: that context, we think the more question is this, why

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Speaker 2: are interest rates still well above where they were in

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Speaker 2: twenty nineteen? Tiffany joins us now for more So, Tiffany,

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Speaker 2: you've got to give us the answer. What did that

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Speaker 2: conversation sound like a pincoke this past week?

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Speaker 10: Well, I think the bottom line for US is certainly

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Speaker 10: interest rates are coming down. The Federal Reserve, I think

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Speaker 10: has also been very clear about that. Pale when he

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Speaker 10: spoke at Jackson Hole, I think acknowledged the fact that

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Speaker 10: monetary policy now probably doesn't reflect the underlying conditions in

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Speaker 10: the US economy. And if you look at the labor markets,

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Speaker 10: we don't think that the US economy is in recession,

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Speaker 10: but nevertheless, the recent loosening in labor markets just suggests

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Speaker 10: that there is some possibility for overshooting on that side.

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Speaker 8: And in that kind of vein.

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Speaker 10: You know, the Federal Reserve should be focused on moving

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Speaker 10: policy rates back to neutral, and I think the question

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Speaker 10: at this point is is just how quickly they get there.

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Speaker 10: We think they probably will revise down their own estimates

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Speaker 10: for the rate path in September.

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Speaker 8: We're looking for a.

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Speaker 10: Twenty five basis point rate cut, but for them to

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Speaker 10: really signal they're going to do sequence.

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Speaker 2: Of cuts here, Tiffany tell us why you think neutral

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Speaker 2: is if they revise the path down, what is the

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Speaker 2: path two?

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Speaker 8: Yeah, I mean I think that's a great question.

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Speaker 10: So the Phtal Reserve still believes it's between two and

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Speaker 10: a half and three on a nominal basis, you know,

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Speaker 10: And I think ultimately that's why they will get there, you.

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Speaker 8: Know, with not overnight.

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Speaker 10: They're not going to move the policy rate there overnight

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Speaker 10: because they're not exactly sure where it is. And when

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Speaker 10: you're not sure, you want to just go slowly. Now

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Speaker 10: how slowly, I guess is the question. It's about balancing risks.

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Speaker 10: You obviously don't want to take the economy into recession

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Speaker 10: because your.

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Speaker 8: Policy is too tight.

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Speaker 10: We think a reasonable kind of baseline for them is

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Speaker 10: to kind of write down a median rate path of

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Speaker 10: kind of three and a half percent by the end

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Speaker 10: of twenty twenty five, could even be a little bit

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Speaker 10: lower than that, you know, And so that's the kind

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Speaker 10: of pace every meeting, type of pace over the next

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Speaker 10: several meetings to see how the economy responds, and then

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Speaker 10: they can they can reassess and make a further decision

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Speaker 10: from there.

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Speaker 5: Tiffany, we've been talking a lot about twenty five basis

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Speaker 5: points or fifty basis points on Wednesday, and before we

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Speaker 5: get into the guessing game of how you interpret the

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Speaker 5: tea leaves that have come out of a number of

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Speaker 5: publications overnight, I am curious about how you will be

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Speaker 5: gauging the trickle through effect the real economy of whether

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Speaker 5: they cut twenty five or fifty.

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Speaker 8: How will you understand how.

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Speaker 5: That's being sort of deployed in the real economy.

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Speaker 10: Yeah, well, I mean I think if you know, a

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Speaker 10: fifty basis point cut is if they if they end

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Speaker 10: up doing it, you know, it suggests to us that

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Speaker 10: or would suggest I think that they're they're more worried

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Speaker 10: about downside risk to the economy and they want to

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Speaker 10: you know, kind of more quickly get to neutral. You know,

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Speaker 10: we've said they've achieved a stoff landing. Now really it's

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Speaker 10: going to be about sticking that soft landing and keeping

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Speaker 10: it going, you know. And I think again the question

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Speaker 10: is about how quickly they know they need to get

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Speaker 10: to neutral.

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Speaker 8: How quickly do they get there?

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Speaker 11: You know.

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Speaker 8: So that's how we would be read.

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Speaker 10: I mean, we still think a twenty five basis point

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Speaker 10: rate cut is probably reasonable here. We don't think the

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Speaker 10: economy is in session right now. You know, certainly the

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Speaker 10: labor market indicators you know, are worrisome, but we have

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Speaker 10: had this big surgeon immigration that is kind of blurring

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Speaker 10: the picture with some of those indicators. So you know,

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Speaker 10: I think there's a lot of things they have to

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Speaker 10: take into consideration here, you know. And so again twenty

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Speaker 10: five with a sequence of costs that they signal seems

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Speaker 10: reasonable to us.

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Speaker 5: Just what I'm trying to get at is what's going

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Speaker 5: to be the actual implementation of lower rates in the economy.

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Speaker 5: Will you'll be looking for some sort of significant uptick

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Speaker 5: in small businesses borrowing. Are you going to see increases

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Speaker 5: in consumer borrowing or reductions in say some of the

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Speaker 5: delinquencies as people as borrowing costs go down. What are

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Speaker 5: the sort of signs that this actually is working at

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Speaker 5: a time where the efficacy of monetary policy has been

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Speaker 5: profoundly questioned as rates went up, and now the question

442
00:19:48,640 --> 00:19:51,240
Speaker 5: is how quickly I'll be implemented on the way down.

443
00:19:53,040 --> 00:19:54,440
Speaker 10: Yeah, I mean, I think if you look at the

444
00:19:54,480 --> 00:19:56,920
Speaker 10: household sector. We've been talking a lot about this as well.

445
00:19:57,240 --> 00:20:00,320
Speaker 10: You know, households just haven't really felt higher interest rates.

446
00:20:00,320 --> 00:20:03,359
Speaker 10: Many of them have low rate mortgages that they locked

447
00:20:03,400 --> 00:20:03,919
Speaker 10: in two of.

448
00:20:04,000 --> 00:20:05,920
Speaker 8: Thirty year periods during the pandemic.

449
00:20:06,560 --> 00:20:09,560
Speaker 10: So the household sector probably won't feel a lot of it,

450
00:20:09,840 --> 00:20:12,200
Speaker 10: you know, unless you have new home buyers or first

451
00:20:12,200 --> 00:20:14,880
Speaker 10: home buyers. But where I do think it could be

452
00:20:14,920 --> 00:20:18,800
Speaker 10: potentially helpful, you know, is in terms of housing supply.

453
00:20:19,520 --> 00:20:22,800
Speaker 10: So we've all known that we've been in a period

454
00:20:22,840 --> 00:20:27,399
Speaker 10: of underbuilding relative to population growth over the last decade

455
00:20:27,440 --> 00:20:30,919
Speaker 10: post pandemic or more. And that's resulted just in you know,

456
00:20:31,040 --> 00:20:35,040
Speaker 10: supply demand and balances in the housing market, which which

457
00:20:35,080 --> 00:20:36,960
Speaker 10: suggests us that as you have rates coming down, you

458
00:20:37,000 --> 00:20:40,040
Speaker 10: can have real residential investment that picks up. That's obviously

459
00:20:40,119 --> 00:20:42,560
Speaker 10: going to be helpful for the economy. We think housing

460
00:20:43,119 --> 00:20:46,119
Speaker 10: investment probably subtracted a point and a half from GDP

461
00:20:46,280 --> 00:20:48,679
Speaker 10: in the third quarter. That's a pretty big subtraction, you know,

462
00:20:48,720 --> 00:20:51,240
Speaker 10: so just getting that back into some modest growth we

463
00:20:51,320 --> 00:20:54,399
Speaker 10: think is probably helpful, you know, and you could certainly

464
00:20:54,400 --> 00:20:56,000
Speaker 10: get that as you have rates coming down.

465
00:20:56,359 --> 00:20:58,560
Speaker 7: I'm glad you mentioned housing. There's been this debate on

466
00:20:58,600 --> 00:21:01,800
Speaker 7: what actually will happen when rates come down, Well, people

467
00:21:01,840 --> 00:21:04,480
Speaker 7: start moving and more supply will come in the market

468
00:21:04,520 --> 00:21:07,920
Speaker 7: and costs will come down, or potentially will we actually

469
00:21:07,920 --> 00:21:09,439
Speaker 7: see housing prices go higher?

470
00:21:11,600 --> 00:21:14,000
Speaker 10: Yeah, I mean I so in terms of you know,

471
00:21:14,080 --> 00:21:16,879
Speaker 10: the moving and the existing home sales and things like that.

472
00:21:16,920 --> 00:21:19,160
Speaker 10: You know, when people move, they usually move from one

473
00:21:19,200 --> 00:21:21,879
Speaker 10: house to another, so you know, in terms of the

474
00:21:21,880 --> 00:21:26,040
Speaker 10: aggregate supply picture from that, yes, you get more churn

475
00:21:26,160 --> 00:21:29,920
Speaker 10: in the market. But it's not on net really that

476
00:21:30,800 --> 00:21:34,640
Speaker 10: it doesn't It shouldn't increase by that much the overall

477
00:21:34,720 --> 00:21:37,720
Speaker 10: supply of homes. What increases the overall supply of homes

478
00:21:37,760 --> 00:21:40,600
Speaker 10: is new building, and so that I think is is.

479
00:21:40,560 --> 00:21:41,280
Speaker 8: Really the key.

480
00:21:42,280 --> 00:21:45,520
Speaker 10: You know, building you know, has been slow and sluggish

481
00:21:45,560 --> 00:21:48,640
Speaker 10: this year because interest rates are elevated. You know, many

482
00:21:48,680 --> 00:21:51,040
Speaker 10: builders you talk to say the economics are you know,

483
00:21:51,080 --> 00:21:53,720
Speaker 10: make less sense with higher interest rates, and so we

484
00:21:53,800 --> 00:21:55,560
Speaker 10: when rates come down, we do think that you know,

485
00:21:55,600 --> 00:22:00,159
Speaker 10: building will you know, will accelerate somewhat, and I think

486
00:22:00,160 --> 00:22:03,480
Speaker 10: that's ultimately good for the economy, you know, it's good

487
00:22:03,520 --> 00:22:07,119
Speaker 10: for the supply demand and balances. Eventually hopefully that helps

488
00:22:07,119 --> 00:22:09,840
Speaker 10: to moderate housing prices, you know, although you know, we

489
00:22:09,920 --> 00:22:12,439
Speaker 10: don't think that they drop. Housing prices will probably be

490
00:22:12,960 --> 00:22:15,840
Speaker 10: you know, kind of five kind of five percent type

491
00:22:15,880 --> 00:22:18,400
Speaker 10: is ranges, you know, But again I think I think

492
00:22:18,400 --> 00:22:19,800
Speaker 10: that's not necessarily.

493
00:22:19,359 --> 00:22:20,520
Speaker 8: A bad thing for the economy.

494
00:22:20,800 --> 00:22:23,239
Speaker 7: Tiffany, and just circling back to what Lisa alluded to,

495
00:22:23,280 --> 00:22:24,879
Speaker 7: some of the tea leads that are coming out of

496
00:22:24,920 --> 00:22:27,439
Speaker 7: things like the Wall Street Journal or the Financial Times.

497
00:22:28,000 --> 00:22:31,920
Speaker 7: If the market is now presented with potentially next week,

498
00:22:31,960 --> 00:22:34,280
Speaker 7: the FED going fifty basis points. Does that mean now

499
00:22:34,280 --> 00:22:37,080
Speaker 7: there's outside weight on retail sales next week?

500
00:22:40,000 --> 00:22:40,680
Speaker 8: Well, certainly.

501
00:22:40,720 --> 00:22:44,639
Speaker 10: I think if retail sales next week is bad, is

502
00:22:44,800 --> 00:22:49,399
Speaker 10: much worse than expected, I think that would maybe potentially

503
00:22:49,400 --> 00:22:50,960
Speaker 10: increase some probability.

504
00:22:51,280 --> 00:22:51,439
Speaker 8: You know.

505
00:22:51,520 --> 00:22:53,359
Speaker 10: I think if you just kind of take the whole

506
00:22:53,640 --> 00:22:55,760
Speaker 10: the broader range of data that we've gotten over the

507
00:22:55,840 --> 00:23:00,119
Speaker 10: last you know, month or two, labor market data in

508
00:23:00,200 --> 00:23:03,399
Speaker 10: our minds is important. And the labor market data that

509
00:23:03,440 --> 00:23:06,240
Speaker 10: we saw, you know, it wasn't great, but it wasn't

510
00:23:06,480 --> 00:23:08,320
Speaker 10: terrible either, you know.

511
00:23:08,640 --> 00:23:09,200
Speaker 8: So it does.

512
00:23:09,080 --> 00:23:11,879
Speaker 10: Suggest that labor markets are slowing, and I think the

513
00:23:11,920 --> 00:23:14,600
Speaker 10: Federal Reserve wants to try to understand what's going on

514
00:23:14,640 --> 00:23:16,800
Speaker 10: there a bit more. The slowing that we've gotten over

515
00:23:16,800 --> 00:23:18,600
Speaker 10: the last couple of months, I think has been more

516
00:23:18,640 --> 00:23:22,480
Speaker 10: pronounced than many people expected, both in payroll growth and

517
00:23:22,520 --> 00:23:24,879
Speaker 10: of course the unemployment rates taking up. You know, So

518
00:23:24,920 --> 00:23:26,800
Speaker 10: I think, you know, they they probably look at that

519
00:23:26,840 --> 00:23:28,440
Speaker 10: and they say, you know, we.

520
00:23:28,200 --> 00:23:29,600
Speaker 8: Are a little bit concerned about that.

521
00:23:30,240 --> 00:23:33,960
Speaker 10: And if you're concerned about payroll growth slowing the labor

522
00:23:34,000 --> 00:23:38,000
Speaker 10: market slowing, of course, you'd expect consumption to be slowing

523
00:23:38,040 --> 00:23:40,159
Speaker 10: as well, so they probably will be looking at retail

524
00:23:40,200 --> 00:23:43,080
Speaker 10: sales and those consumption indicators, you know, to kind of

525
00:23:43,119 --> 00:23:47,399
Speaker 10: confirm or deny, if you will, whether the labor market

526
00:23:47,520 --> 00:23:50,200
Speaker 10: slowing is having a broader impact on the economy.

527
00:23:50,440 --> 00:23:52,760
Speaker 2: Tiffany, I appreciate the updiate. Thank you, Tiffany Welding the

528
00:23:52,840 --> 00:24:03,959
Speaker 2: pincome looking ahet some explain. Joining us now to discuss

529
00:24:04,000 --> 00:24:07,000
Speaker 2: is Troy Gasking of FS investments. Troy got to say,

530
00:24:07,359 --> 00:24:09,400
Speaker 2: as always, welcome back to the program. Before we get

531
00:24:09,400 --> 00:24:11,520
Speaker 2: into the markets, let's talk about the Federal Reserve. What's

532
00:24:11,560 --> 00:24:13,480
Speaker 2: the base case for you and the team?

533
00:24:13,720 --> 00:24:16,119
Speaker 11: Yeah, so three twenty five basis points cuts. You know,

534
00:24:16,280 --> 00:24:19,200
Speaker 11: we came into this year thinking two to three. There

535
00:24:19,240 --> 00:24:22,160
Speaker 11: was some overreaction obviously early on at there'd be six,

536
00:24:22,240 --> 00:24:24,760
Speaker 11: and then when the inflation data came hot in Q two,

537
00:24:25,359 --> 00:24:28,000
Speaker 11: some folks were arguing for none. But you know, it's

538
00:24:28,040 --> 00:24:29,840
Speaker 11: almost a certainty at this point that we're going to

539
00:24:30,000 --> 00:24:30,880
Speaker 11: get three cuts.

540
00:24:31,359 --> 00:24:34,040
Speaker 9: Clearly, believer market softened and there's no doubt about it.

541
00:24:34,080 --> 00:24:38,160
Speaker 9: Inflation's gotten much more under control. That's the right policy response.

542
00:24:38,160 --> 00:24:39,800
Speaker 9: And I'll tell you.

543
00:24:39,280 --> 00:24:42,119
Speaker 11: Know, when you think of credit investors like ourselves or

544
00:24:42,160 --> 00:24:45,200
Speaker 11: originators of private debt. You know, we're more than happy

545
00:24:45,359 --> 00:24:49,560
Speaker 11: to trade off some degree of incremental income to further

546
00:24:49,680 --> 00:24:51,880
Speaker 11: reduce the risk of a recession going forward.

547
00:24:51,920 --> 00:24:52,840
Speaker 9: And so that's where we're at.

548
00:24:52,840 --> 00:24:55,280
Speaker 11: The economy, and it's going to be an appropriate response

549
00:24:55,320 --> 00:24:58,159
Speaker 11: to your point before it's now about next year in

550
00:24:58,200 --> 00:25:00,400
Speaker 11: the year there after, where there's much much more certain.

551
00:25:00,600 --> 00:25:03,199
Speaker 2: Yeah, much more to play for, Troy. I want to

552
00:25:03,200 --> 00:25:05,640
Speaker 2: get to the quote from Tiffany Wilder just moments ago

553
00:25:05,720 --> 00:25:08,199
Speaker 2: from PIMCO when she said this, and I'd love your

554
00:25:08,200 --> 00:25:10,919
Speaker 2: reaction to it. Develop market economies now look more like

555
00:25:10,920 --> 00:25:13,960
Speaker 2: they did in twenty nineteen than any time since the pandemic.

556
00:25:14,520 --> 00:25:17,080
Speaker 2: In that context, we think the more relevant question is this,

557
00:25:17,560 --> 00:25:19,760
Speaker 2: why are interest rights still well above where they were

558
00:25:20,000 --> 00:25:22,080
Speaker 2: in twenty nineteen? Troy, what's the best argument for that?

559
00:25:22,119 --> 00:25:22,560
Speaker 2: Do you think?

560
00:25:23,359 --> 00:25:28,640
Speaker 9: Yeah? So when you think longer term, right, arguably the biggest.

561
00:25:28,320 --> 00:25:31,560
Speaker 11: Reason why we should have more sustainable inflation going forward

562
00:25:31,600 --> 00:25:34,040
Speaker 11: than we did pre pandemic, and particularly in the post

563
00:25:34,080 --> 00:25:37,920
Speaker 11: GFC realm, as we all know that that was struggling

564
00:25:38,000 --> 00:25:38,240
Speaker 11: just to.

565
00:25:38,160 --> 00:25:41,879
Speaker 9: Get inflation too. It is a much globally tighter labor market.

566
00:25:42,040 --> 00:25:44,520
Speaker 11: Right, you think of places like Japan or even China

567
00:25:44,640 --> 00:25:47,160
Speaker 11: now climbing working age population.

568
00:25:47,960 --> 00:25:50,920
Speaker 9: The US labor market has gotten much more structurally and efficient.

569
00:25:51,000 --> 00:25:53,240
Speaker 9: So that's arguably reason number one.

570
00:25:53,480 --> 00:25:56,320
Speaker 11: And then reason number two, of course, is this really

571
00:25:56,400 --> 00:25:58,560
Speaker 11: desire to onshore production.

572
00:25:59,160 --> 00:26:01,879
Speaker 9: Obviously we're going through a period of protectionism.

573
00:26:02,000 --> 00:26:04,600
Speaker 11: So you know, I think that debate is new term,

574
00:26:04,680 --> 00:26:07,080
Speaker 11: right two and a half or three, We can debate

575
00:26:07,119 --> 00:26:12,639
Speaker 11: that quite vociparously. However, it's certainly not zero unless we

576
00:26:12,680 --> 00:26:15,560
Speaker 11: have some type of major exogy shock that is unforeseen.

577
00:26:16,320 --> 00:26:18,919
Speaker 5: There is this question right now of how much we

578
00:26:19,000 --> 00:26:23,240
Speaker 5: can really count on just sort of inflation continuing to diminish.

579
00:26:23,240 --> 00:26:24,880
Speaker 5: And I just want to build on what you're mentioning.

580
00:26:25,520 --> 00:26:28,480
Speaker 5: How are you arranging how are you sort of countering

581
00:26:28,600 --> 00:26:32,399
Speaker 5: the assumption in markets that inflation is dead in terms

582
00:26:32,440 --> 00:26:35,159
Speaker 5: of more contrariant investments that push against that.

583
00:26:36,440 --> 00:26:39,800
Speaker 9: Yeah, you know, I don't think we're arguing our most

584
00:26:39,920 --> 00:26:42,960
Speaker 9: rational market participants are arguing that inflation is dead.

585
00:26:43,119 --> 00:26:47,119
Speaker 11: It's just that we've made significant progress and the balance

586
00:26:47,160 --> 00:26:49,399
Speaker 11: of risks is now much more symmetric between the.

587
00:26:49,440 --> 00:26:51,639
Speaker 9: Labor markets and inflation.

588
00:26:52,720 --> 00:26:56,560
Speaker 11: But in terms of countercyclical to that thinking there's really

589
00:26:56,560 --> 00:27:00,119
Speaker 11: nothing specific there. However, you know, opportunistically, we have to

590
00:27:00,160 --> 00:27:02,359
Speaker 11: look across markets and try to find areas where there's

591
00:27:02,440 --> 00:27:05,960
Speaker 11: more inefficient pricing. So, for instance, if you look at

592
00:27:06,240 --> 00:27:08,959
Speaker 11: most spread product whether it's HYO bonds or levered loans,

593
00:27:09,160 --> 00:27:10,520
Speaker 11: and even in on the run.

594
00:27:10,400 --> 00:27:12,640
Speaker 9: Private credit spreads your relatively tight.

595
00:27:13,400 --> 00:27:15,320
Speaker 11: They're a little bit tired than they were coming into

596
00:27:15,680 --> 00:27:16,439
Speaker 11: twenty twenty two.

597
00:27:16,840 --> 00:27:19,800
Speaker 9: You still have very attractive yield. However, if you look

598
00:27:19,800 --> 00:27:22,959
Speaker 9: over at public markets, what you're seeing is markets you're

599
00:27:22,960 --> 00:27:27,360
Speaker 9: pricing about a twenty two percent probability of deal breaks

600
00:27:27,640 --> 00:27:29,440
Speaker 9: in each individual deal. With mergers.

601
00:27:29,840 --> 00:27:32,919
Speaker 11: Historically, over ten twenty years it's been five Even in

602
00:27:32,960 --> 00:27:34,200
Speaker 11: this environment.

603
00:27:33,720 --> 00:27:34,840
Speaker 9: It's peaked at eight percent.

604
00:27:35,400 --> 00:27:37,879
Speaker 11: So we're trying to identify and efficiencies like that that

605
00:27:37,960 --> 00:27:40,880
Speaker 11: we can take advantage of in our liquid strategies.

606
00:27:41,080 --> 00:27:43,800
Speaker 5: I know you focus on liquid strategies and some of

607
00:27:43,840 --> 00:27:47,160
Speaker 5: the private investments. You're talking about merger arbitrage, and let's

608
00:27:47,160 --> 00:27:48,960
Speaker 5: go there, because this is actually one area that a

609
00:27:49,000 --> 00:27:50,720
Speaker 5: lot of people don't want to get caught dead in

610
00:27:50,840 --> 00:27:53,040
Speaker 5: just simply because a lot of these deals have been

611
00:27:53,080 --> 00:27:56,040
Speaker 5: broken and we have seen a very different FTC under

612
00:27:56,119 --> 00:27:56,840
Speaker 5: Lena Kan.

613
00:27:57,000 --> 00:27:58,840
Speaker 8: How can you have confidence.

614
00:27:58,560 --> 00:28:00,080
Speaker 5: To go in and bet the deals are going to

615
00:28:00,119 --> 00:28:03,160
Speaker 5: get done now given how politicized so many of these

616
00:28:03,160 --> 00:28:04,480
Speaker 5: deals are actually getting.

617
00:28:04,960 --> 00:28:07,240
Speaker 9: Yeah, well, I think again that gets back into pricing.

618
00:28:07,480 --> 00:28:10,480
Speaker 11: Let's say, for instance, markets are pricing in twelve or

619
00:28:10,520 --> 00:28:14,359
Speaker 11: fifteen percent probability deal breaks and the historical averages somewhere.

620
00:28:14,080 --> 00:28:16,480
Speaker 9: Between five and eight. Depending on how aggressive the FTC

621
00:28:16,720 --> 00:28:19,000
Speaker 9: was or not, it would be a different story.

622
00:28:19,119 --> 00:28:21,320
Speaker 11: But you're as an investor, you're always trying to look

623
00:28:21,359 --> 00:28:25,119
Speaker 11: at market miss pricings versus empirical data, and this is

624
00:28:25,160 --> 00:28:27,120
Speaker 11: one of the more glaring and we're going to say

625
00:28:27,160 --> 00:28:30,040
Speaker 11: it's an overreaction to your point of very active STC.

626
00:28:30,600 --> 00:28:33,640
Speaker 11: It's just presenting itself with a very attractive them over

627
00:28:33,680 --> 00:28:35,240
Speaker 11: the next twelve eighteen months.

628
00:28:35,320 --> 00:28:38,280
Speaker 9: And I think at this point, regardless of the political

629
00:28:38,320 --> 00:28:40,720
Speaker 9: outcome in November, that looks.

630
00:28:40,520 --> 00:28:42,880
Speaker 11: Like a very attractive risk reward to us relative to

631
00:28:42,960 --> 00:28:44,080
Speaker 11: other strategies out there.

632
00:28:44,200 --> 00:28:46,600
Speaker 2: Interesting, Troy, It's going to hear from everybody as always.

633
00:28:46,680 --> 00:28:50,320
Speaker 2: Trokski then of FS Investments, Thank you, Troy, appreciate it.

634
00:28:51,040 --> 00:28:54,600
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635
00:28:54,640 --> 00:28:57,960
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636
00:28:58,000 --> 00:29:00,960
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637
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638
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639
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640
00:29:13,600 --> 00:29:13,640
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