Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and am Marie Hordern. Join us each
Speaker 2: day for insight from the best in markets, economics, and
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Speaker 2: Bloomberg Terminal and the Bloomberg Business App. Max Ketner of
Speaker 2: HSBC writing, we don't think it's time to pull the
Speaker 2: plug on risk. We therefore add to US equities as
Speaker 2: Q three warnings, or rather earnings expectations. Also don't look
Speaker 2: challenging to be. Max joins us now for more Max
Speaker 2: Good Mornings.
Speaker 3: You, sir, good morning.
Speaker 2: That's the equity call. I want to get to the
Speaker 2: credit call. There was a shift on high yeal FEME
Speaker 2: in the last week. You move that overweight from max
Speaker 2: overweight to where are we now?
Speaker 3: Slight overweight? Slight overweight from exciting to boring.
Speaker 2: So what's that shift about? Let's start there.
Speaker 4: I think look, when we look at high yield, it's
Speaker 4: not like it's bearish, So certainly in your high yeld
Speaker 4: things look still pretty okay. Valiation wise, it looks a
Speaker 4: bit more attractive. I think in you as high yeld
Speaker 4: there's partly a story around valiations. You know you have
Speaker 4: high yield spreads around three twenty. There's not an awful
Speaker 4: lot to go anymore. There's not an awful lot of
Speaker 4: spread tightening that you can still see. So at some
Speaker 4: point it gets around pure carry it and then you
Speaker 4: sort of okay, is that still the best place where
Speaker 4: I get the carry? Or is other places better such
Speaker 4: as EUM local debt for example, where perhaps you know
Speaker 4: you get higher carry.
Speaker 3: It's a bit sure, it's sort of equal.
Speaker 4: Similarly short duration, and it looks a little bit more
Speaker 4: attractive now given how much has been priced in since April,
Speaker 4: they're similar to the fair and I guess you know,
Speaker 4: when we look at it from a total return perspective
Speaker 4: as well. In high yields, if you get now these
Speaker 4: sort of ten eleven cuts priced and by the end
Speaker 4: of this year, if you get just a few priced
Speaker 4: out right, let's say compare high yield to equities, then
Speaker 4: if if you're a long equities, now, if you're long
Speaker 4: the S and P, do you care whether they cu't
Speaker 4: ten eleven times by the end of the year or
Speaker 4: they can't seven eight times by the end of next year.
Speaker 4: Not really right, That's not really the big tail risk anymore.
Speaker 4: The big tail risk, particularly in April or in September
Speaker 4: October last year, was they're not going to cut at all,
Speaker 4: or they may even have to hike. The tail risk
Speaker 4: now is well, maybe I'll do only four or five,
Speaker 4: but they will be cutting. So for equities it doesn't matter.
Speaker 4: For high yel that matters because obviously the front end
Speaker 4: of the curve goes up.
Speaker 2: Well, doesn't it matter for em as well? Can we
Speaker 2: get into EM a little bit more? What are the
Speaker 2: assumptions you're making on rates on the US STARLA to
Speaker 2: make that cool?
Speaker 3: Yeah?
Speaker 4: I do think however that in EM again, valiations are
Speaker 4: a little bit more enticing if you look at EMD
Speaker 4: spreads in particular, you know, year today, so there's sort
Speaker 4: of flattage. Of course, there's been some index composition changes
Speaker 4: as well, yes, of course, but from a valiation perspective,
Speaker 4: certainly there's a bit more juice left compared to you
Speaker 4: as high yields. So we're really at the stage now
Speaker 4: where it's not really bearers about high yield and much
Speaker 4: more bullish on the other stuff. It's a bit like, okay,
Speaker 4: you're really harvesting that carry. Where's the carry best across
Speaker 4: all the epic classes?
Speaker 5: How much is this just a revival of the fomo trade?
Speaker 5: Essentially look for the biggest return and go, And that's
Speaker 5: essentially because the FED is cutting rates and so.
Speaker 3: Yeah, yeah, pretty much.
Speaker 4: I think it's it's sort of the you know, we
Speaker 4: were saying in twenty I think it was twenty twenty
Speaker 4: one that it's all pretty much a yolo world, right,
Speaker 4: and it was sort of the return to Yola. You
Speaker 4: could argue that's sort of what we're seeing, for example
Speaker 4: this week. But let's be honest, we could also sit
Speaker 4: maybe by the end the next week, we could sit
Speaker 4: here and you guys talk about one and a half trillion.
Speaker 3: Being wiped out again.
Speaker 4: Like if we had had this chat last Friday, we
Speaker 4: wouldn't be that upbeat. No, we would all be like,
Speaker 4: oh my god, is this recession? And you know, are
Speaker 4: we closer to the end now and the start of
Speaker 4: a bear market, and what is commodities trying.
Speaker 3: To tell us and all this sort of stuff, And
Speaker 3: now we sit there and we're like, yolo, yeah, everything's great.
Speaker 4: So you know, this is how much it shifts within
Speaker 4: a week, if we're honest.
Speaker 5: We were having a conversation to start the show about
Speaker 5: twenty five versus fifty basis points, and I wonder how
Speaker 5: much you were rolling your eyes and how much you
Speaker 5: are actually saying this is going to matter to the market.
Speaker 3: You want me to roll my own.
Speaker 2: I don't.
Speaker 6: Happy you're viewing who actually can go seeing on his weekend,
Speaker 6: But I am curious about whether you are seeing a
Speaker 6: market that is likely to sell off in response to
Speaker 6: a fifty basis point rate cut or respond with that
Speaker 6: cheer and you're low.
Speaker 3: Yeah, so it depends.
Speaker 4: I think they would have had the chance in the
Speaker 4: last few weeks to say, look, we're so comfortable with
Speaker 4: this disinflation picture. If they had had look we're so
Speaker 4: comfortable with this disinflation picture. Look what has happened since
Speaker 4: April this year. We've had super core down, We've had
Speaker 4: all these you know, all these components down. So because
Speaker 4: of this inflation, we could cunt higher, right, we could
Speaker 4: cut more, we could start more aggressive. The problem now
Speaker 4: is that, of course, particularly with Jackson Hole you said, oh,
Speaker 4: we're attentive to growth risks more than inflation. So the
Speaker 4: problem is if you start with fifty now, particularly with
Speaker 4: what John was saying in terms of the data, the
Speaker 4: totality of the data, you.
Speaker 2: Know, sorry, not making fun of course, of course, now,
Speaker 2: of course it's not more language anyway, while we play,
Speaker 2: we me for that.
Speaker 3: That's chairman Belle.
Speaker 4: So if we look at that, then the last couple
Speaker 4: of weeks actually has been really good. Look at look
Speaker 4: at weekly same store retail sales data. It's been picking
Speaker 4: up from four and a half to six and.
Speaker 3: A half percent.
Speaker 4: Now when we look at jobless claims, you look at
Speaker 4: weekly consumer confidence data, you look at you know, some of.
Speaker 3: The electricity output. Look at the Dallas Fed's.
Speaker 4: Weekly Economic index, look at the GDP now from Atlanta Fed.
Speaker 3: We're talking two and a half percent. So it just
Speaker 3: doesn't warrant it currently. So the risk is if you
Speaker 3: go fifty.
Speaker 4: First, the market wall say what do you know that
Speaker 4: I don't?
Speaker 3: What am I missing?
Speaker 4: And that's I think that's what the market will take
Speaker 4: a bit of, like, oh, God, this, I don't like this.
Speaker 4: I really don't like that.
Speaker 7: Can't the chairman just clean that up in his press conference?
Speaker 4: I think he could, But I think particularly with Jackson Hall,
Speaker 4: they've sort of missed the boat. And it was particularly
Speaker 4: also with Jackson Hole that they could have said, Look,
Speaker 4: it's it's really because of inflation. It's really because of
Speaker 4: the disinflation that.
Speaker 3: We're so comfortable with.
Speaker 4: That is why we could be cutting much more aggressively
Speaker 4: from the start, right, That's why we could sort of
Speaker 4: rush out of the gates and be like, we can
Speaker 4: cut fifty. Yeah, growth has been a bit of wobbly,
Speaker 4: but we're really comfortable with this still. It's just because
Speaker 4: of disinflation, and they sort of missed the boat on that.
Speaker 7: Since you're visiting US from abroad, I have to ask
Speaker 7: about the US election. How concerned you about the risks
Speaker 7: that are tied to November?
Speaker 3: Yeah, look, not an awful lot.
Speaker 4: But because when we look, for example, at twenty twenty five,
Speaker 4: I think people talk a lot about the US election,
Speaker 4: I'm not sure how much people have positions on. Certainly
Speaker 4: when you look at our tactic glance allocation convictions, they
Speaker 4: are really not particularly tied to the US election, because
Speaker 4: I think what we're missing looking a bit into twenty
Speaker 4: twenty five as well, there is the debt ceiling issue looming,
Speaker 4: for example. So but the Treasury has made it clear
Speaker 4: that we want to have these seven hundred billions stocked
Speaker 4: up in the Treasury General account in order to be
Speaker 4: able to pay that down, which could be at least
Speaker 4: perceived by the market, again but as temporary stimulus, you know,
Speaker 4: similar to what we had in Q two last year,
Speaker 4: which is actually pretty good.
Speaker 3: Now, that's independent of the election.
Speaker 4: We know that in twenty twenty five, of course, there's
Speaker 4: a couple of those tax cuts from twenty seventeen expiring.
Speaker 4: Again that's independent of the election. We're going to have
Speaker 4: to deal with that. There is some sort of fiscal
Speaker 4: cliff awaiting us perhaps second half of next year, when
Speaker 4: the negotiations start. There is going to be something looming
Speaker 4: that's independent of the elections.
Speaker 2: Any evidence from your conversations that the Europeans are willing
Speaker 2: to de risk from US as sets ahead of all
Speaker 2: of that. Are they concerned about it?
Speaker 3: No, not at all, not at all, not at all.
Speaker 4: I think if anything we've seen in the last particularly
Speaker 4: let's call it five months.
Speaker 3: We've seen the opposite.
Speaker 4: I think we've had this sort of long Europe trade
Speaker 4: into April, call it April May long europeerhaps long Japan,
Speaker 4: a bit of diversifying. Oh is the XUS performance is
Speaker 4: that really now kicking off? And in fair is when
Speaker 4: we look at all the activity data, when we look
Speaker 4: at the high frequency data, it's really strong. Still in
Speaker 4: the US, we're talking about the fiscal picture of the
Speaker 4: fiscal support, it's really strong in the s Look at
Speaker 4: what drag he was saying this week around come on,
Speaker 4: we've got to be with supporting more, right, We've got
Speaker 4: to be supporting more. And where it's happening is here.
Speaker 4: It's in the US. So if anything, you know, then
Speaker 4: you've got this, uh, you have the.
Speaker 3: French elections of cars.
Speaker 4: So there was these sort of concerns around that as well,
Speaker 4: whether the unwarranted or warranted, don't care.
Speaker 3: But all of that really led a little bit more
Speaker 3: of the inflo picture back into the US.
Speaker 2: Max, It's good to see you here in New York,
Speaker 2: Thank you, sir. Going to catch up Mass Canada of HSBC.
Speaker 2: That's where Bank for America's Business Owner report showing cautious
Speaker 2: optimism from small and mid sized businesses as the FED
Speaker 2: prepares to cut interest rates. Sharon Miller of Bank for
Speaker 2: America writing rate cuts will reduce the cost of debt
Speaker 2: servicing on floating rate credit facilities. This easing of the
Speaker 2: expense environment may create cash flow capacity for expansion or
Speaker 2: investment opportunities. We're lucky this morning that Sharon gets to
Speaker 2: join us on this program. Sharon, Welcome to this program.
Speaker 2: I just want to start with this one. The amount
Speaker 2: of insight that you and the team have across one
Speaker 2: in every three small businesses in America. We're worried about
Speaker 2: stress starting to build, weakness starting to materialize. What are
Speaker 2: you seeing in the businesses that you cover at the moment.
Speaker 1: Well, you're right. We cover three point four million small
Speaker 1: and mid sized businesses in the US and we are
Speaker 1: the number one lender to small business across the US,
Speaker 1: and so we do have a lot of insight into
Speaker 1: what's happening. In our most recent survey that we did
Speaker 1: with business owners in the spring, we found cautious optimism
Speaker 1: from our clients and so they do expect their revenues
Speaker 1: to increase over the next twelve months. And we know
Speaker 1: that that debt servicing, as you said in the opening here,
Speaker 1: will be reduced because we do expect that rates will
Speaker 1: be cut as wese our economists do you here at
Speaker 1: Bank of America twenty five bass point in the next
Speaker 1: five said meetings.
Speaker 2: So Shanny, you saying they've got the confidence the expansion
Speaker 2: linds of reading that just waiting for small reductions for
Speaker 2: the Federal Reserve over the next few cooltzas.
Speaker 1: They are, and we still see demand in the marketplace now,
Speaker 1: So I'm not saying that they're rating entirely. There is
Speaker 1: good growth in the across the small and mid sized
Speaker 1: company sectors, but they are watching that and certainly as
Speaker 1: we see rates come down, that will improve their cash
Speaker 1: grow and certainly consumer demand.
Speaker 5: Sharon I got to say, I was reading this report
Speaker 5: and I was shocked to the recent.
Speaker 8: Report that you put out.
Speaker 5: I was kind of shocked that actually we saw such
Speaker 5: sanguine sentiment that people were expecting to continue to hire,
Speaker 5: that they were continuing to expand they had positive outlook
Speaker 5: for their businesses. How do you reconcile that with some
Speaker 5: of the rhetoric that we hear every single day. This
Speaker 5: is an economy that's on the raisor edge of turning negative.
Speaker 9: You know, I think with small and.
Speaker 8: Mid sized companies.
Speaker 1: So we've bank clients in the business banking space from
Speaker 1: startup to fifty million in revenues.
Speaker 8: And so when you have a.
Speaker 1: Smaller company, you're certainly more nimble, You're able to really
Speaker 1: think about your business, your growth, and you can pivot easily.
Speaker 1: Bigger corporations may have more of a hard time doing that,
Speaker 1: and so that is a competitive advantage of small to
Speaker 1: mid size companies and we see that come through in
Speaker 1: the data and just in our conversations that we're having
Speaker 1: every day across the death from these clients.
Speaker 5: What I thought also was striking was in the market,
Speaker 5: it seems like inflation is no longer a significant concern.
Speaker 5: We heard just a couple of days ago from Mike
Speaker 5: Wilson over at Morgan Stanley that's dead. Essentially, Inflation is
Speaker 5: no longer an issue when it comes to what you're
Speaker 5: seeing in bonds. Nonetheless, sixty eight percent of small business
Speaker 5: owners so they've raised their prices over the past twelve months,
Speaker 5: and on average they've raised prices by twelve percent. They're
Speaker 5: talking about inflation as a more pressing concern than many
Speaker 5: other things that we talk about every day.
Speaker 8: How do you.
Speaker 5: Understand whether this is really a small business issue or
Speaker 5: whether maybe we're not giving enough credence to just much
Speaker 5: ongoing inflationary pressure there actually is.
Speaker 1: Well, there is ongoing and inflationary pressure. It is a
Speaker 1: sticky issue, and so we continue to hear that that
Speaker 1: is the number one concern of small and mid sized companies.
Speaker 1: And so you have seen price increases brought along because
Speaker 1: of all the pressure they are. So I do see
Speaker 1: it as a concern. We hear it from our business owners,
Speaker 1: and we do feel that as we go forward and
Speaker 1: the cycle begins to ease a bit, that it's going
Speaker 1: to take some pressure off.
Speaker 7: Sharon, given that pricing pressure, how difficult is it for
Speaker 7: these small companies to keep up with the bigger players?
Speaker 1: Well, I think that you know, there is some difficulty
Speaker 1: in keeping up with the bigger players, but I would
Speaker 1: say that you know, they also have a competitive advantage.
Speaker 1: And so you know, as supply chains have improved, and
Speaker 1: as businesses have expanded, and certainly they've gone more online,
Speaker 1: gone more digital, they have more UACh and scale than
Speaker 1: they might have had before the pandemic, and so what
Speaker 1: we are seeing are expansion plans from small and missized
Speaker 1: companies and they are competing and certainly, you know, they
Speaker 1: benefit from the downstream impact as well from larger corporations.
Speaker 7: We're talking about inflation, We're talking about the fact that
Speaker 7: they're preparing for these rate cuts. When you talk to clients,
Speaker 7: what is their number one concern right now in this economy?
Speaker 1: Their number one concern is inflation, and then right next
Speaker 1: to that is hiring and making sure that they have
Speaker 1: the right skilled labor, the right employees to go into
Speaker 1: their business to work. And so those are the concerns
Speaker 1: that we hear every day. We were also in an
Speaker 1: election year, so you do hear that as well, but
Speaker 1: we hear that with every election cycle. We've been doing
Speaker 1: this report for the last ten years, and so in
Speaker 1: each election cycle, we'd see, you know, concerns once the
Speaker 1: election is over, no matter who wins, no matter what party,
Speaker 1: that there's certainty and so people can move forward. So
Speaker 1: that's what we're hearing discycle as well. And you know,
Speaker 1: I anticipate after November there'll be certainty and people will
Speaker 1: continue with their plans.
Speaker 2: Sharon talk to us a little bit about how things
Speaker 2: have changed since March of last year, given all the
Speaker 2: banking stress in this country and some of the banking
Speaker 2: failures as well. How some of your clients have changed
Speaker 2: the way they do business with you. Where they've managed
Speaker 2: to attract a lot more small businesses over the last
Speaker 2: twelve months, worried about where they place that cash, and
Speaker 2: they want to put it with a bigger institution like
Speaker 2: Banks of America.
Speaker 1: Sharon, how much has changed, Well, I mean, I think, listen,
Speaker 1: we are the number one small business bank in the US,
Speaker 1: and we're very proud of that. We have been for
Speaker 1: the last four years plus, and so you know, we
Speaker 1: continue to stand on our clients and good times and
Speaker 1: bad and certainly you know we every day we work
Speaker 1: to attract new clients and to retain the clients we
Speaker 1: have because this is our mission. This is where communities
Speaker 1: meet business, and that is what we do at Bank
Speaker 1: of America. So we want to be sure that we
Speaker 1: are there for our clients. We have capabilities they need,
Speaker 1: whether it's to transact internationally, to be able to have
Speaker 1: expansion in their business, to get a loan, to provide
Speaker 1: payments for merchants.
Speaker 8: So all of.
Speaker 1: Those different areas we are able to help our clients,
Speaker 1: and so we want to make sure that we're there
Speaker 1: for them, whether it be our online tools and capabilities
Speaker 1: to manage their PASK flows. So we're investing in the
Speaker 1: business based on what we hear from clients and what
Speaker 1: they need.
Speaker 2: Well, we were thankful that you managed to make some
Speaker 2: time for us this morning, and we appreciate it. Sharon,
Speaker 2: thanks for joining the program. Thank you, Sharon Miller. That
Speaker 2: thanks America. Over the next week, a busy slate ahead
Speaker 2: with retail salves and a FED decision next week. Tiffany
Speaker 2: Wilding of PIMCO saying, we're heading back to pre pandemic conditions.
Speaker 2: Develop market economies now look more like they did in
Speaker 2: twenty nineteen than are any time since the pandemic. In
Speaker 2: that context, we think the more question is this, why
Speaker 2: are interest rates still well above where they were in
Speaker 2: twenty nineteen? Tiffany joins us now for more So, Tiffany,
Speaker 2: you've got to give us the answer. What did that
Speaker 2: conversation sound like a pincoke this past week?
Speaker 10: Well, I think the bottom line for US is certainly
Speaker 10: interest rates are coming down. The Federal Reserve, I think
Speaker 10: has also been very clear about that. Pale when he
Speaker 10: spoke at Jackson Hole, I think acknowledged the fact that
Speaker 10: monetary policy now probably doesn't reflect the underlying conditions in
Speaker 10: the US economy. And if you look at the labor markets,
Speaker 10: we don't think that the US economy is in recession,
Speaker 10: but nevertheless, the recent loosening in labor markets just suggests
Speaker 10: that there is some possibility for overshooting on that side.
Speaker 8: And in that kind of vein.
Speaker 10: You know, the Federal Reserve should be focused on moving
Speaker 10: policy rates back to neutral, and I think the question
Speaker 10: at this point is is just how quickly they get there.
Speaker 10: We think they probably will revise down their own estimates
Speaker 10: for the rate path in September.
Speaker 8: We're looking for a.
Speaker 10: Twenty five basis point rate cut, but for them to
Speaker 10: really signal they're going to do sequence.
Speaker 2: Of cuts here, Tiffany tell us why you think neutral
Speaker 2: is if they revise the path down, what is the
Speaker 2: path two?
Speaker 8: Yeah, I mean I think that's a great question.
Speaker 10: So the Phtal Reserve still believes it's between two and
Speaker 10: a half and three on a nominal basis, you know,
Speaker 10: And I think ultimately that's why they will get there, you.
Speaker 8: Know, with not overnight.
Speaker 10: They're not going to move the policy rate there overnight
Speaker 10: because they're not exactly sure where it is. And when
Speaker 10: you're not sure, you want to just go slowly. Now
Speaker 10: how slowly, I guess is the question. It's about balancing risks.
Speaker 10: You obviously don't want to take the economy into recession
Speaker 10: because your.
Speaker 8: Policy is too tight.
Speaker 10: We think a reasonable kind of baseline for them is
Speaker 10: to kind of write down a median rate path of
Speaker 10: kind of three and a half percent by the end
Speaker 10: of twenty twenty five, could even be a little bit
Speaker 10: lower than that, you know, And so that's the kind
Speaker 10: of pace every meeting, type of pace over the next
Speaker 10: several meetings to see how the economy responds, and then
Speaker 10: they can they can reassess and make a further decision
Speaker 10: from there.
Speaker 5: Tiffany, we've been talking a lot about twenty five basis
Speaker 5: points or fifty basis points on Wednesday, and before we
Speaker 5: get into the guessing game of how you interpret the
Speaker 5: tea leaves that have come out of a number of
Speaker 5: publications overnight, I am curious about how you will be
Speaker 5: gauging the trickle through effect the real economy of whether
Speaker 5: they cut twenty five or fifty.
Speaker 8: How will you understand how.
Speaker 5: That's being sort of deployed in the real economy.
Speaker 10: Yeah, well, I mean I think if you know, a
Speaker 10: fifty basis point cut is if they if they end
Speaker 10: up doing it, you know, it suggests to us that
Speaker 10: or would suggest I think that they're they're more worried
Speaker 10: about downside risk to the economy and they want to
Speaker 10: you know, kind of more quickly get to neutral. You know,
Speaker 10: we've said they've achieved a stoff landing. Now really it's
Speaker 10: going to be about sticking that soft landing and keeping
Speaker 10: it going, you know. And I think again the question
Speaker 10: is about how quickly they know they need to get
Speaker 10: to neutral.
Speaker 8: How quickly do they get there?
Speaker 11: You know.
Speaker 8: So that's how we would be read.
Speaker 10: I mean, we still think a twenty five basis point
Speaker 10: rate cut is probably reasonable here. We don't think the
Speaker 10: economy is in session right now. You know, certainly the
Speaker 10: labor market indicators you know, are worrisome, but we have
Speaker 10: had this big surgeon immigration that is kind of blurring
Speaker 10: the picture with some of those indicators. So you know,
Speaker 10: I think there's a lot of things they have to
Speaker 10: take into consideration here, you know. And so again twenty
Speaker 10: five with a sequence of costs that they signal seems
Speaker 10: reasonable to us.
Speaker 5: Just what I'm trying to get at is what's going
Speaker 5: to be the actual implementation of lower rates in the economy.
Speaker 5: Will you'll be looking for some sort of significant uptick
Speaker 5: in small businesses borrowing. Are you going to see increases
Speaker 5: in consumer borrowing or reductions in say some of the
Speaker 5: delinquencies as people as borrowing costs go down. What are
Speaker 5: the sort of signs that this actually is working at
Speaker 5: a time where the efficacy of monetary policy has been
Speaker 5: profoundly questioned as rates went up, and now the question
Speaker 5: is how quickly I'll be implemented on the way down.
Speaker 10: Yeah, I mean, I think if you look at the
Speaker 10: household sector. We've been talking a lot about this as well.
Speaker 10: You know, households just haven't really felt higher interest rates.
Speaker 10: Many of them have low rate mortgages that they locked
Speaker 10: in two of.
Speaker 8: Thirty year periods during the pandemic.
Speaker 10: So the household sector probably won't feel a lot of it,
Speaker 10: you know, unless you have new home buyers or first
Speaker 10: home buyers. But where I do think it could be
Speaker 10: potentially helpful, you know, is in terms of housing supply.
Speaker 10: So we've all known that we've been in a period
Speaker 10: of underbuilding relative to population growth over the last decade
Speaker 10: post pandemic or more. And that's resulted just in you know,
Speaker 10: supply demand and balances in the housing market, which which
Speaker 10: suggests us that as you have rates coming down, you
Speaker 10: can have real residential investment that picks up. That's obviously
Speaker 10: going to be helpful for the economy. We think housing
Speaker 10: investment probably subtracted a point and a half from GDP
Speaker 10: in the third quarter. That's a pretty big subtraction, you know,
Speaker 10: so just getting that back into some modest growth we
Speaker 10: think is probably helpful, you know, and you could certainly
Speaker 10: get that as you have rates coming down.
Speaker 7: I'm glad you mentioned housing. There's been this debate on
Speaker 7: what actually will happen when rates come down, Well, people
Speaker 7: start moving and more supply will come in the market
Speaker 7: and costs will come down, or potentially will we actually
Speaker 7: see housing prices go higher?
Speaker 10: Yeah, I mean I so in terms of you know,
Speaker 10: the moving and the existing home sales and things like that.
Speaker 10: You know, when people move, they usually move from one
Speaker 10: house to another, so you know, in terms of the
Speaker 10: aggregate supply picture from that, yes, you get more churn
Speaker 10: in the market. But it's not on net really that
Speaker 10: it doesn't It shouldn't increase by that much the overall
Speaker 10: supply of homes. What increases the overall supply of homes
Speaker 10: is new building, and so that I think is is.
Speaker 8: Really the key.
Speaker 10: You know, building you know, has been slow and sluggish
Speaker 10: this year because interest rates are elevated. You know, many
Speaker 10: builders you talk to say the economics are you know,
Speaker 10: make less sense with higher interest rates, and so we
Speaker 10: when rates come down, we do think that you know,
Speaker 10: building will you know, will accelerate somewhat, and I think
Speaker 10: that's ultimately good for the economy, you know, it's good
Speaker 10: for the supply demand and balances. Eventually hopefully that helps
Speaker 10: to moderate housing prices, you know, although you know, we
Speaker 10: don't think that they drop. Housing prices will probably be
Speaker 10: you know, kind of five kind of five percent type
Speaker 10: is ranges, you know, But again I think I think
Speaker 10: that's not necessarily.
Speaker 8: A bad thing for the economy.
Speaker 7: Tiffany, and just circling back to what Lisa alluded to,
Speaker 7: some of the tea leads that are coming out of
Speaker 7: things like the Wall Street Journal or the Financial Times.
Speaker 7: If the market is now presented with potentially next week,
Speaker 7: the FED going fifty basis points. Does that mean now
Speaker 7: there's outside weight on retail sales next week?
Speaker 8: Well, certainly.
Speaker 10: I think if retail sales next week is bad, is
Speaker 10: much worse than expected, I think that would maybe potentially
Speaker 10: increase some probability.
Speaker 8: You know.
Speaker 10: I think if you just kind of take the whole
Speaker 10: the broader range of data that we've gotten over the
Speaker 10: last you know, month or two, labor market data in
Speaker 10: our minds is important. And the labor market data that
Speaker 10: we saw, you know, it wasn't great, but it wasn't
Speaker 10: terrible either, you know.
Speaker 8: So it does.
Speaker 10: Suggest that labor markets are slowing, and I think the
Speaker 10: Federal Reserve wants to try to understand what's going on
Speaker 10: there a bit more. The slowing that we've gotten over
Speaker 10: the last couple of months, I think has been more
Speaker 10: pronounced than many people expected, both in payroll growth and
Speaker 10: of course the unemployment rates taking up. You know, So
Speaker 10: I think, you know, they they probably look at that
Speaker 10: and they say, you know, we.
Speaker 8: Are a little bit concerned about that.
Speaker 10: And if you're concerned about payroll growth slowing the labor
Speaker 10: market slowing, of course, you'd expect consumption to be slowing
Speaker 10: as well, so they probably will be looking at retail
Speaker 10: sales and those consumption indicators, you know, to kind of
Speaker 10: confirm or deny, if you will, whether the labor market
Speaker 10: slowing is having a broader impact on the economy.
Speaker 2: Tiffany, I appreciate the updiate. Thank you, Tiffany Welding the
Speaker 2: pincome looking ahet some explain. Joining us now to discuss
Speaker 2: is Troy Gasking of FS investments. Troy got to say,
Speaker 2: as always, welcome back to the program. Before we get
Speaker 2: into the markets, let's talk about the Federal Reserve. What's
Speaker 2: the base case for you and the team?
Speaker 11: Yeah, so three twenty five basis points cuts. You know,
Speaker 11: we came into this year thinking two to three. There
Speaker 11: was some overreaction obviously early on at there'd be six,
Speaker 11: and then when the inflation data came hot in Q two,
Speaker 11: some folks were arguing for none. But you know, it's
Speaker 11: almost a certainty at this point that we're going to
Speaker 11: get three cuts.
Speaker 9: Clearly, believer market softened and there's no doubt about it.
Speaker 9: Inflation's gotten much more under control. That's the right policy response.
Speaker 9: And I'll tell you.
Speaker 11: Know, when you think of credit investors like ourselves or
Speaker 11: originators of private debt. You know, we're more than happy
Speaker 11: to trade off some degree of incremental income to further
Speaker 11: reduce the risk of a recession going forward.
Speaker 9: And so that's where we're at.
Speaker 11: The economy, and it's going to be an appropriate response
Speaker 11: to your point before it's now about next year in
Speaker 11: the year there after, where there's much much more certain.
Speaker 2: Yeah, much more to play for, Troy. I want to
Speaker 2: get to the quote from Tiffany Wilder just moments ago
Speaker 2: from PIMCO when she said this, and I'd love your
Speaker 2: reaction to it. Develop market economies now look more like
Speaker 2: they did in twenty nineteen than any time since the pandemic.
Speaker 2: In that context, we think the more relevant question is this,
Speaker 2: why are interest rights still well above where they were
Speaker 2: in twenty nineteen? Troy, what's the best argument for that?
Speaker 2: Do you think?
Speaker 9: Yeah? So when you think longer term, right, arguably the biggest.
Speaker 11: Reason why we should have more sustainable inflation going forward
Speaker 11: than we did pre pandemic, and particularly in the post
Speaker 11: GFC realm, as we all know that that was struggling
Speaker 11: just to.
Speaker 9: Get inflation too. It is a much globally tighter labor market.
Speaker 11: Right, you think of places like Japan or even China
Speaker 11: now climbing working age population.
Speaker 9: The US labor market has gotten much more structurally and efficient.
Speaker 9: So that's arguably reason number one.
Speaker 11: And then reason number two, of course, is this really
Speaker 11: desire to onshore production.
Speaker 9: Obviously we're going through a period of protectionism.
Speaker 11: So you know, I think that debate is new term,
Speaker 11: right two and a half or three, We can debate
Speaker 11: that quite vociparously. However, it's certainly not zero unless we
Speaker 11: have some type of major exogy shock that is unforeseen.
Speaker 5: There is this question right now of how much we
Speaker 5: can really count on just sort of inflation continuing to diminish.
Speaker 5: And I just want to build on what you're mentioning.
Speaker 5: How are you arranging how are you sort of countering
Speaker 5: the assumption in markets that inflation is dead in terms
Speaker 5: of more contrariant investments that push against that.
Speaker 9: Yeah, you know, I don't think we're arguing our most
Speaker 9: rational market participants are arguing that inflation is dead.
Speaker 11: It's just that we've made significant progress and the balance
Speaker 11: of risks is now much more symmetric between the.
Speaker 9: Labor markets and inflation.
Speaker 11: But in terms of countercyclical to that thinking there's really
Speaker 11: nothing specific there. However, you know, opportunistically, we have to
Speaker 11: look across markets and try to find areas where there's
Speaker 11: more inefficient pricing. So, for instance, if you look at
Speaker 11: most spread product whether it's HYO bonds or levered loans,
Speaker 11: and even in on the run.
Speaker 9: Private credit spreads your relatively tight.
Speaker 11: They're a little bit tired than they were coming into
Speaker 11: twenty twenty two.
Speaker 9: You still have very attractive yield. However, if you look
Speaker 9: over at public markets, what you're seeing is markets you're
Speaker 9: pricing about a twenty two percent probability of deal breaks
Speaker 9: in each individual deal. With mergers.
Speaker 11: Historically, over ten twenty years it's been five Even in
Speaker 11: this environment.
Speaker 9: It's peaked at eight percent.
Speaker 11: So we're trying to identify and efficiencies like that that
Speaker 11: we can take advantage of in our liquid strategies.
Speaker 5: I know you focus on liquid strategies and some of
Speaker 5: the private investments. You're talking about merger arbitrage, and let's
Speaker 5: go there, because this is actually one area that a
Speaker 5: lot of people don't want to get caught dead in
Speaker 5: just simply because a lot of these deals have been
Speaker 5: broken and we have seen a very different FTC under
Speaker 5: Lena Kan.
Speaker 8: How can you have confidence.
Speaker 5: To go in and bet the deals are going to
Speaker 5: get done now given how politicized so many of these
Speaker 5: deals are actually getting.
Speaker 9: Yeah, well, I think again that gets back into pricing.
Speaker 11: Let's say, for instance, markets are pricing in twelve or
Speaker 11: fifteen percent probability deal breaks and the historical averages somewhere.
Speaker 9: Between five and eight. Depending on how aggressive the FTC
Speaker 9: was or not, it would be a different story.
Speaker 11: But you're as an investor, you're always trying to look
Speaker 11: at market miss pricings versus empirical data, and this is
Speaker 11: one of the more glaring and we're going to say
Speaker 11: it's an overreaction to your point of very active STC.
Speaker 11: It's just presenting itself with a very attractive them over
Speaker 11: the next twelve eighteen months.
Speaker 9: And I think at this point, regardless of the political
Speaker 9: outcome in November, that looks.
Speaker 11: Like a very attractive risk reward to us relative to
Speaker 11: other strategies out there.
Speaker 2: Interesting, Troy, It's going to hear from everybody as always.
Speaker 2: Trokski then of FS Investments, Thank you, Troy, appreciate it.
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