WEBVTT - Surveillance: Bonds are Back, says Schneider 0:00:05.080 --> 0:00:08.440 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.480 --> 0:00:12.240 with Jonathan Farrow and Lisa Abramowitz. Join us each day 0:00:12.320 --> 0:00:16.800 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.239 --> 0:00:22.000 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.239 --> 0:00:26.560 anywhere you get your podcasts, and always on Bloomberg dot com, 0:00:26.600 --> 0:00:30.880 the Bloomberg Terminal, and the Bloomberg Business App. Jerome Schneider, 0:00:30.920 --> 0:00:34.520 I think he inherited Bill Gross's Monroe Trader out at PIMCO, 0:00:34.560 --> 0:00:37.080 does the short term ballet there with a four point 0:00:37.120 --> 0:00:41.000 eight seven percent to your yield and joins us this morning. 0:00:41.000 --> 0:00:44.640 Just an open question on your desk, what is the 0:00:45.159 --> 0:00:48.280 focal point within the short term space. There's a couple 0:00:48.280 --> 0:00:51.080 of vocal points clearly the topic and topic to yours, 0:00:51.159 --> 0:00:53.640 you know, simply that cash it back, bonds are back, 0:00:53.760 --> 0:00:56.080 yields are higher. We can find a lot of attraction 0:00:56.200 --> 0:00:58.120 simply being at the front of yolkurf. That's that's sort 0:00:58.120 --> 0:01:02.240 of a no known but them. The minutia, which really 0:01:02.280 --> 0:01:04.520 investors and savers need to think about is the fact 0:01:04.600 --> 0:01:07.880 that depository rates are low. They need to be incentivized 0:01:07.920 --> 0:01:09.600 to really look at that move out of one and 0:01:09.680 --> 0:01:12.440 two percent depository rates out the curve, even into t 0:01:12.560 --> 0:01:15.200 builds short term strategies to your notes things like that. 0:01:15.600 --> 0:01:18.080 The second thing is is that clearly the FED is 0:01:18.160 --> 0:01:21.200 data dependent, but that's also going to create an involving process. 0:01:21.240 --> 0:01:24.160 Not necessarily that now that we're approaching the five point 0:01:24.160 --> 0:01:27.080 four five point five percent terminal rate that people expect, 0:01:27.480 --> 0:01:31.560 but more importantly that the cutting mechanism is focused less 0:01:31.600 --> 0:01:34.520 on supporting growth, and that goes for the ECB two 0:01:34.560 --> 0:01:37.920 as well tom as well, focused on the supporting growth, 0:01:38.080 --> 0:01:40.399 but focusing on fighting inflation. We know that, and that's 0:01:40.400 --> 0:01:42.360 a fundamental change compared to where we've been over the 0:01:42.400 --> 0:01:44.720 past few decades in terms of that. And the final 0:01:44.760 --> 0:01:47.880 thing really to think about is don't necessarily be worried 0:01:47.920 --> 0:01:51.240 about liquidity conditions in the near term. There's plenty of 0:01:51.280 --> 0:01:54.720 excess reserves around in this system and etc. But the 0:01:54.800 --> 0:01:57.520 higher nominal rates that we are experiencing within the broader 0:01:57.560 --> 0:02:01.240 economy are going to have reverberations in corporate credit within 0:02:01.360 --> 0:02:03.880 various structures and we're going to see that proliferate. So 0:02:03.880 --> 0:02:06.360 investors need to be thinking about how to go about 0:02:06.400 --> 0:02:10.000 maintaining their degrees of freedom, high degrees of liquidity, and 0:02:10.240 --> 0:02:13.000 more importantly, embracing these higher yields, which simply are going 0:02:13.040 --> 0:02:16.160 to be a much more acceptable place to be over 0:02:16.200 --> 0:02:18.480 the next year or so as we sort of continue 0:02:18.480 --> 0:02:22.079 to romanticize going from, you know, effectively the deflationary utopia 0:02:22.120 --> 0:02:24.640 that we once were in just a few weeks ago, 0:02:24.840 --> 0:02:28.239 to the inflationary dystopia. Maybe that's a strong word that 0:02:28.280 --> 0:02:31.160 we're possibly embarking on at this point in time. This 0:02:31.240 --> 0:02:33.760 is a process takes a while. Whenever I speak to 0:02:33.760 --> 0:02:35.200 you or see you now, I just think, which you run? 0:02:35.280 --> 0:02:37.359 Must be so so busy. How long does this take 0:02:37.440 --> 0:02:39.560 for people to shift and get away from their bank accounts, 0:02:39.600 --> 0:02:42.800 which like off your zero and come to you and 0:02:42.880 --> 0:02:44.839 give you the money. Well, for the short term desk 0:02:44.840 --> 0:02:47.240 at PIMCO, it's very quick because we try to optimize 0:02:47.320 --> 0:02:50.040 between all these mechanisms. But for the investor, even the 0:02:50.040 --> 0:02:54.120 most sophisticated institutional investor, they're really not moving as quickly 0:02:54.120 --> 0:02:57.239 as you would expect. And there's actually pretty big diversions. Sure, 0:02:57.320 --> 0:02:59.200 a lot of retail investors are now focused on the 0:02:59.280 --> 0:03:01.840 high amounts of sitting in their accounts. They're well aware 0:03:01.840 --> 0:03:04.440 of yields where they are today. That's making an attraction 0:03:04.480 --> 0:03:07.720 to be that bonds are back is a well known 0:03:07.760 --> 0:03:10.359 thought process over the past few months, but the reality 0:03:10.480 --> 0:03:13.040 is is that it's still an evolutionary process. It does 0:03:13.120 --> 0:03:16.000 take time. The higher yields that we're sitting here talking 0:03:16.040 --> 0:03:18.239 about today, even a four percent ten year note, is 0:03:18.280 --> 0:03:20.960 a relatively new phenomenon, especially in history in the post 0:03:21.000 --> 0:03:24.760 GFC world, So we need to think about the construction 0:03:24.800 --> 0:03:29.840 of portfolios in a much more widespread, widespread criteria than 0:03:29.919 --> 0:03:32.359 simply the past six weeks. And that's really what we're 0:03:32.360 --> 0:03:35.640 going to do. So this is much more protracted evaluation 0:03:35.720 --> 0:03:38.800 of how to create a different investment approach over the 0:03:38.840 --> 0:03:40.760 medium term. One phrase that has cropped up over the 0:03:40.800 --> 0:03:43.440 last couple of weeks is reinvestment risk, just the idea 0:03:43.480 --> 0:03:45.760 that if you go short, too short, maybe miss the 0:03:45.760 --> 0:03:48.280 window to really take these yields and bake them in 0:03:48.400 --> 0:03:51.720 much longer. How do you advocate for where people should 0:03:51.760 --> 0:03:53.720 be on the curve in the treasury mark. It's probably 0:03:53.720 --> 0:03:55.640 a measured response, quite honestly, and you have to think 0:03:55.680 --> 0:03:57.360 about it. You can look at it from an economic 0:03:57.360 --> 0:04:00.640 point of view, where's the neutral rate of where's where 0:04:00.680 --> 0:04:03.160 a neutral rate's going to be. There's inflationary expectations that 0:04:03.200 --> 0:04:05.760 come into them into that as well, and so if 0:04:05.760 --> 0:04:07.880 you think inflation is going to be higher, you have 0:04:07.920 --> 0:04:10.280 to think where the neutral rate should be, which obviously 0:04:10.520 --> 0:04:14.200 affects where you think you should be buying duration buying bonds, 0:04:14.600 --> 0:04:17.320 and that of itself is a point to your point. 0:04:17.360 --> 0:04:21.479 More microscopically, it cuts both ways, quite honestly, John, When 0:04:21.480 --> 0:04:23.880 you think about it, the two year note actually has 0:04:23.880 --> 0:04:26.680 a negative return so far this year, and if you 0:04:26.760 --> 0:04:28.120 bought it, you know, at the end of last year 0:04:28.160 --> 0:04:30.000 or to today, it's actually a negative return. If you 0:04:30.000 --> 0:04:32.359 think about it, well, it does yield almost five percent 0:04:32.400 --> 0:04:34.720 at this point in time, so that is attractive. So 0:04:34.800 --> 0:04:37.600 it also beckons what is your horizon? What is your 0:04:37.640 --> 0:04:40.880 investment horizon? What is your purpose as liquidity management? Is 0:04:40.880 --> 0:04:42.720 that something to plan for the buying a house over 0:04:42.760 --> 0:04:45.440 the next two or three years. Even though mortgage rates 0:04:45.440 --> 0:04:48.200 are highed, there's a variety of circumstances. So understanding and 0:04:48.279 --> 0:04:52.520 matching your investment needs with the investment itself is actually important, 0:04:52.560 --> 0:04:54.039 and that's probably going to be the main driver of 0:04:54.080 --> 0:04:56.280 how much are where an interest rate curve you you 0:04:56.400 --> 0:04:58.520 end up buying. At this point in time, people are 0:04:58.520 --> 0:05:01.720 trying to game out ostantially higher rates as we see 0:05:02.000 --> 0:05:06.960 ongoing surprises with respect to inflation data. How disruptive would 0:05:06.960 --> 0:05:10.880 it be if rates were to rise substantially more from here? Well, 0:05:10.920 --> 0:05:13.839 you obviously have a different framework in play, and I 0:05:13.880 --> 0:05:17.279 think again to reemphasize, the framework is not necessarily supporting 0:05:17.279 --> 0:05:19.600 growth at this point in time. It's fighting inflation at 0:05:19.640 --> 0:05:21.880 this point in time, something very different. So it's going 0:05:21.920 --> 0:05:23.760 to be a bit of a long and dusty road 0:05:23.839 --> 0:05:26.839 to that destination. We should expect a little bit more volatility. 0:05:26.839 --> 0:05:30.000 We've clearly witnessed that over the past few weeks. Ultimately, 0:05:30.040 --> 0:05:31.880 it's a question whether the FED takes the high road 0:05:31.960 --> 0:05:34.640 or the low road proverbly and literally with rates and 0:05:34.800 --> 0:05:37.400 understand where it's ultimately going to go. So, if you 0:05:37.440 --> 0:05:40.159 did have a shock to the system of another few 0:05:40.200 --> 0:05:42.840 hundred basis point of rates, sure, what we would recommend 0:05:42.839 --> 0:05:45.240 and you would see is that the risk adversion you 0:05:45.240 --> 0:05:47.840 would have would be focused on the center of those 0:05:47.839 --> 0:05:50.000 concentric circles of risk that we have at PEMCO, meaning 0:05:50.040 --> 0:05:53.080 the safest areas, and the outer realms of those concentric 0:05:53.080 --> 0:05:55.440 circles would move wider in terms of price and spread 0:05:55.440 --> 0:05:58.719 and yield to compensate for that. And what I suggested 0:05:58.720 --> 0:06:01.560 where we are now is a gentle recalibration. What you're 0:06:01.600 --> 0:06:04.880 suggesting by moving to those higher rates is a more methodical, 0:06:05.000 --> 0:06:10.279 very drastic rationalization of return expectations, risk assumptions, spread assumptions. 0:06:10.320 --> 0:06:12.919 So there is there is very much, you know, a 0:06:13.000 --> 0:06:15.800 recalibration that would go on tightening conditions and you might 0:06:15.839 --> 0:06:17.880 actually see some breakage at that point in time. But 0:06:18.240 --> 0:06:20.479 I also think that what you're hearing clearly from the 0:06:20.480 --> 0:06:22.800 FED is the process which is going to be a 0:06:22.800 --> 0:06:26.040 digestive situation where they're going to digest the data. And 0:06:26.080 --> 0:06:28.400 the market has rationalized over the past few weeks, not 0:06:28.520 --> 0:06:31.280 necessarily that there's a lot of more rate hikes to come, 0:06:31.480 --> 0:06:34.520 but there's less cuts to come, and there's a big 0:06:34.560 --> 0:06:37.560 difference in that. So even at PIMCO, we've shifted our 0:06:37.600 --> 0:06:41.920 expectations of a recession this year, push possibly pushing that 0:06:41.960 --> 0:06:44.640 out to twenty twenty four, so modest growth in two 0:06:44.880 --> 0:06:47.440 twenty three, perhaps pushing that out to twenty twenty four. 0:06:47.839 --> 0:06:50.719 That's something that actually creates a longer road for the 0:06:50.760 --> 0:06:54.080 FED to really rationalized decisions, be more data dependent, fortunately 0:06:54.120 --> 0:06:57.240 or unfortunately, and maybe doesn't necessarily create that shock to 0:06:57.279 --> 0:06:59.200 the system that you're suggesting. So I'm you're going to 0:06:59.240 --> 0:07:01.000 stick with us, But to say up in the next segment, 0:07:01.560 --> 0:07:03.560 high phlonga, we all get the higher piece of this. 0:07:03.760 --> 0:07:05.760 You've just touched on the plonger bit of it. Where 0:07:05.880 --> 0:07:08.760 are you on the forlonga bit of it? How long full? Yeah? 0:07:08.880 --> 0:07:10.840 And I think that's really putting it. You're going to 0:07:10.920 --> 0:07:15.840 have ultimately when you see PCE core specifically coming down, 0:07:15.920 --> 0:07:17.920 and you might not actually get that data until late 0:07:17.960 --> 0:07:20.800 this year and early next year. So the longer is 0:07:20.840 --> 0:07:24.600 an eternity. It's maybe just a pensive thought process which 0:07:24.600 --> 0:07:27.240 puts us well into twenty twenty four. It is a 0:07:27.320 --> 0:07:31.120 joy to have Jerome Schneider with us with PIMCO. Undiscovered Jerome. 0:07:31.200 --> 0:07:34.480 This week was what I'm gonna call the IDEs of October. 0:07:34.520 --> 0:07:37.840 I know you run your short term portfolio off lunar astrology, 0:07:38.360 --> 0:07:41.320 but not the IDEs of March. But the Bloomberg Total 0:07:41.360 --> 0:07:44.720 Return Index reached a low in October of last year, 0:07:44.800 --> 0:07:48.760 priced down, yield up very quietly this week we slipped 0:07:48.800 --> 0:07:53.640 below the December The history here between October and now, 0:07:53.960 --> 0:07:58.600 is there a possibility we retest priced down yield up 0:07:58.680 --> 0:08:01.680 that we saw in October? And what will be the 0:08:01.760 --> 0:08:04.440 consequences to your short term paper now that you divulge 0:08:04.520 --> 0:08:06.640 the secret of the short term desk at PIMCO. I'm 0:08:06.680 --> 0:08:09.960 embarrassed fund, but at the reality is is that there's 0:08:10.000 --> 0:08:15.200 one thing very different in the calculus today than October yield. 0:08:15.600 --> 0:08:18.480 When you think about total return, whether it's a short 0:08:18.560 --> 0:08:21.720 term bond fund, a total term bond fund, income, it's 0:08:21.800 --> 0:08:26.040 the composition of capital appreciation plus yield, and that yield 0:08:26.040 --> 0:08:29.400 and carry component is worth five hundred plus basis points 0:08:29.400 --> 0:08:31.560 depending on the type of strategy at this point in time, 0:08:31.960 --> 0:08:34.600 That in of itself can alleviate a lot of the 0:08:34.640 --> 0:08:38.040 capital appreciation or depreciation. To say so, when I said before, 0:08:38.160 --> 0:08:40.600 be careful owning the two year note because it's actually 0:08:40.640 --> 0:08:43.640 a negative total return this year. Yes, we're looking at 0:08:43.640 --> 0:08:45.920 a microcosum of a couple of months. In general, if 0:08:45.920 --> 0:08:48.120 you're holding it to maturity, you will make those yields. 0:08:48.360 --> 0:08:50.680 But there's different ways to manage your interest rate exposure 0:08:50.679 --> 0:08:53.000 and interestrate exposures, the sensitivities right where I wanted to go, 0:08:53.000 --> 0:08:54.880 and I want to play it off Mandalorian because I 0:08:54.920 --> 0:08:57.360 know at PIMCO, when they make a successful trade, they go, 0:08:57.480 --> 0:08:59.599 this is the way. But the answer is you and 0:08:59.679 --> 0:09:01.680 Chris z are the only two people on the planet 0:09:01.720 --> 0:09:04.360 that read FIBOZI cover to cover and to keep it 0:09:04.400 --> 0:09:09.079 real simple, here do I gather a ten year success 0:09:09.480 --> 0:09:13.280 by taking five two year tranches out? Is that where 0:09:13.320 --> 0:09:16.240 we are right now in terms of retail clients. Grab 0:09:16.280 --> 0:09:19.080 the two year and trunch it out five times. I 0:09:19.080 --> 0:09:21.760 think when investors are looking to do is simply navigate 0:09:21.800 --> 0:09:25.760 the next one to two years of uncertainty in the macroeconomics. 0:09:25.800 --> 0:09:29.160 And typically you're having an inflection point. You owe equities. 0:09:29.160 --> 0:09:31.400 You own equities because you believe that there is a 0:09:31.480 --> 0:09:34.800 rate stabilization and inflation understanding that is going to be 0:09:34.840 --> 0:09:38.360 stable for the next empteen years, and that inevitably owning 0:09:38.360 --> 0:09:41.880 inequity is effectively owning a long duration bond with some 0:09:41.960 --> 0:09:46.640 given profitability, earnings and obviously risk free rate assumptions baked in. 0:09:47.280 --> 0:09:50.080 What we ultimately want to think about, though, is investors 0:09:50.120 --> 0:09:51.840 have had a lot of reinvestment to do over the 0:09:51.840 --> 0:09:56.680 past few years, and then they were faced with uncertainty, wars, pandemics. 0:09:56.840 --> 0:09:59.319 These are all factors that really change the psychology of 0:09:59.440 --> 0:10:01.640 investors that we have to think about things that we 0:10:01.640 --> 0:10:04.439 haven't seen in many years. In fact, many traders today 0:10:04.480 --> 0:10:07.400 on Wall Street, young people haven't seen many of the 0:10:07.400 --> 0:10:10.120 phenomenon that we are witnessing today. Even positive rates as 0:10:10.440 --> 0:10:14.640 an obvious example, inflationary expectations in the general population. These 0:10:14.640 --> 0:10:16.760 are things that we haven't seen in forty plus years. 0:10:16.800 --> 0:10:20.520 So the calculus is ripe for a pause. It means 0:10:20.520 --> 0:10:24.160 that traditional mechanisms for just simply earning interest put the 0:10:24.679 --> 0:10:27.319 baton firmly in the hand of savers, and it doesn't 0:10:27.320 --> 0:10:29.560 necessarily mean you me to make these bold predictions in 0:10:29.679 --> 0:10:32.120 terms of taking a lot of risk at this point 0:10:32.120 --> 0:10:34.680 in time. Having some optionality, just like the FED, is 0:10:34.679 --> 0:10:36.880 exactly what investors want to do at this point in time. 0:10:37.080 --> 0:10:39.720 When you talk about optionality. People have gotten a little 0:10:39.720 --> 0:10:43.280 bit hysterical this week, and I admit that I understand 0:10:43.320 --> 0:10:46.840 why this feeling that maybe we have totally underestimated inflation 0:10:46.920 --> 0:10:49.840 and how sticky it is globally. What central banks have 0:10:49.920 --> 0:10:52.120 to do, what a terminal rate actually looks like there 0:10:52.160 --> 0:10:54.880 has been a reset this week. What gives you the 0:10:54.920 --> 0:10:58.480 Pimco confidence that we're not at that point that the 0:10:58.520 --> 0:11:00.920 market's gotten ahead of itself right now, that the Fed 0:11:01.000 --> 0:11:02.640 doesn't need to do that much more, It just needs 0:11:02.679 --> 0:11:05.400 to pause, and that the data that's coming in shows 0:11:05.480 --> 0:11:09.240 progress even if the headline big numbers aren't necessarily screaming 0:11:09.240 --> 0:11:11.400 that message. Yea. We are actually debating this next week 0:11:11.440 --> 0:11:14.160 at pimcoone an arcyclical form which we look at the 0:11:14.200 --> 0:11:16.160 next year or so view of where we're headed for 0:11:16.200 --> 0:11:18.280 the economy. I think one of the healthy debates in 0:11:18.320 --> 0:11:20.320 there is not necessarily just where the neutral rate would 0:11:20.360 --> 0:11:23.480 be and where their interest or inflation expectations come down, 0:11:23.679 --> 0:11:25.880 but really how sticky they are going to remain. And 0:11:25.920 --> 0:11:28.360 I think unfortunately we are on this long road and 0:11:28.400 --> 0:11:30.480 we are not necessarily knowing where the end of that 0:11:30.559 --> 0:11:33.400 road is going to be. So the consequences the Fed's 0:11:33.440 --> 0:11:35.280 going to probably remain unhold. They're going to be faced 0:11:35.280 --> 0:11:38.079 with pc core PCs that are well above that two 0:11:38.120 --> 0:11:40.440 percent number. We don't necessarily see that coming down until 0:11:40.480 --> 0:11:43.880 twenty twenty four, possibly twenty five at the earliest. So 0:11:43.920 --> 0:11:46.800 the consequences is that there is a lot of unknowns 0:11:46.840 --> 0:11:49.520 right now, and that's perfectly fine, and investors unfortunately have 0:11:49.640 --> 0:11:52.520 to be prepared for that uncertainty as a result. So 0:11:52.760 --> 0:11:55.120 what we want to do and as a practitioner, is 0:11:55.160 --> 0:11:58.800 prepare portfolios for that resiliency that we think is going 0:11:58.840 --> 0:12:02.240 to be necessary to survive the insority the next few years. 0:12:02.280 --> 0:12:04.240 So can you give us a sneak peek into that 0:12:04.280 --> 0:12:07.200 committee brawl and this sort of discussion what the range 0:12:07.200 --> 0:12:09.720 of views looks like in terms of terminal rates, in 0:12:09.840 --> 0:12:12.880 terms of inflation over the longer term. Yeah, I wouldn't 0:12:12.880 --> 0:12:15.360 necessarily give the depiction of an economic gladiator set, but 0:12:15.400 --> 0:12:18.400 it is. It is like it is effectively a healthy debate, 0:12:18.440 --> 0:12:20.200 and we put all these variables and we want to 0:12:20.200 --> 0:12:24.400 effectively understand how portfolios can behave in a variety of 0:12:24.440 --> 0:12:28.160 circumstances left tail, right tail, and then ultimately rationalize it 0:12:28.200 --> 0:12:30.400 in this higher rate environment. As an example, when we 0:12:30.440 --> 0:12:32.959 actually think about this environment right now, we're faced with 0:12:33.000 --> 0:12:36.440 the multitude of things which create different levels of uncertainty. However, 0:12:36.679 --> 0:12:39.920 higher rates create different outcomes than zero or near zero 0:12:40.040 --> 0:12:42.400 or even negative rates, So we have to think about 0:12:42.440 --> 0:12:45.200 the construction and that confidence. We think that, as I 0:12:45.200 --> 0:12:48.160 said previously, that we're not necessarily going to see a recession, 0:12:48.400 --> 0:12:50.120 you know, in two twenty three, it might get pushed 0:12:50.120 --> 0:12:52.400 to twenty twenty four. That and of itself puts us 0:12:52.400 --> 0:12:54.320 in this situation where the Fed probably has a little 0:12:54.320 --> 0:12:57.199 bit longer runway to be on that holder building period 0:12:57.240 --> 0:12:59.560 for a little bit longer. Here, it doesn't necessarily create 0:12:59.600 --> 0:13:01.719 saying that this is fair value right this second. There's 0:13:01.760 --> 0:13:04.960 clearly curve construction, curve considerations where the ten year note is, 0:13:05.120 --> 0:13:08.080 which involves term premiums, and that's obviously a factor whether 0:13:08.120 --> 0:13:10.040 you want to be in the REDCNY. But a four 0:13:10.080 --> 0:13:12.720 percent ten ye note, five percent to your note, those 0:13:12.760 --> 0:13:15.880 are very different constructions of owning duration, owning bonds, which 0:13:15.880 --> 0:13:18.040 makes it a very interesting environment. This this goes to 0:13:18.080 --> 0:13:20.480 the herder what we were talking about two hours ago, 0:13:20.679 --> 0:13:23.600 which is suddenly you get a higher rate, you get 0:13:23.600 --> 0:13:27.239 some inflation, you get some nominal GDP, and things actually 0:13:27.240 --> 0:13:31.080 work out better. Giving Powell and Laguard breathing room, this 0:13:31.240 --> 0:13:34.080 is transformational. I'm not sure anything about what's happening right 0:13:34.120 --> 0:13:36.760 now gives panel to God breathing room back what's happening 0:13:36.880 --> 0:13:41.280 Canno with actually recently all right? Was that correction are correct? 0:13:41.760 --> 0:13:47.559 Sur corrections rare? Thank you, it's good to see you, undimcut. 0:13:58.520 --> 0:14:00.480 Lindsay Piggs is on her fourth we do with the 0:14:00.600 --> 0:14:03.280 architect on the blowout of the kitchen in Wisconsin and 0:14:03.360 --> 0:14:06.840 joins us today here in New York chief economist at Steple. 0:14:06.880 --> 0:14:09.320 What's the mood of the consumer? I mean, is there 0:14:10.080 --> 0:14:13.040 in New York here? We clearly get this effervescence that's 0:14:13.080 --> 0:14:15.240 out there. The residents are packed, etc. You know the 0:14:15.320 --> 0:14:19.040 drill as well. Is it legit nationwide? Well, it's interesting 0:14:19.040 --> 0:14:21.680 because we did see that pop and consumer activity at 0:14:21.680 --> 0:14:23.320 the start of the year, but at the same time, 0:14:23.360 --> 0:14:26.560 we saw consumer confidence tick down at the start of 0:14:26.560 --> 0:14:29.560 the year. So it doesn't appear as if the consumer 0:14:29.720 --> 0:14:33.600 is increasingly confident in their financial footing. It appears more 0:14:33.640 --> 0:14:36.880 as if we're seeing the consumer's last stand, if you will, 0:14:37.160 --> 0:14:40.080 As households are drawing down the very last of savings, 0:14:40.360 --> 0:14:43.240 they're ramping up credit card debt. Now this doesn't mean 0:14:43.240 --> 0:14:45.960 that it's a one month off. We could see continued 0:14:46.000 --> 0:14:49.120 strength then in February, maybe even March, but this is 0:14:49.200 --> 0:14:53.720 not a lasting trend of robust activity on the consumer part. 0:14:53.840 --> 0:14:56.120 So some people will push back inevitably since that's what 0:14:56.160 --> 0:14:59.360 the market is doing, pushing back against your view and saying, well, 0:14:59.400 --> 0:15:01.560 if you look at all of the inflation data, it's 0:15:01.560 --> 0:15:04.560 come in surprisingly hot again and again. What can give 0:15:04.640 --> 0:15:07.680 us confidence that is that this is just the last 0:15:07.720 --> 0:15:12.640 gasp before a more protracted disinflation and more protracted decline. Oh, 0:15:12.680 --> 0:15:14.360 I don't think we have the confidence right now, and 0:15:14.400 --> 0:15:16.480 certainly from the Fed's point of view, we're not seeing 0:15:16.480 --> 0:15:18.760 that in the inflation data. So they're going to have 0:15:18.800 --> 0:15:23.240 to see a market decline in consumer activity translating into 0:15:23.280 --> 0:15:27.720 then significant job destruction in order to see confidence in 0:15:28.200 --> 0:15:31.040 the sense that wage pressures are coming down. Now. Earlier 0:15:31.040 --> 0:15:33.760 we were talking about services, and for the FED, that's 0:15:33.800 --> 0:15:37.680 where the focus lies in core services, excluded housing. They 0:15:37.800 --> 0:15:40.360 want to see that proxy for the wage price spiral 0:15:40.720 --> 0:15:44.040 show improvement, and we just haven't seen that yet. So 0:15:44.120 --> 0:15:46.440 while we are confident that is the FED continues to 0:15:46.520 --> 0:15:49.600 raise rates, the economy will slow, and by extension, the 0:15:49.640 --> 0:15:52.840 consumer will slow, there's still a considerable amount of work 0:15:52.880 --> 0:15:56.520 left to be done. Let's talk about long and variable lags. 0:15:56.600 --> 0:15:58.960 This question around when we'll start to see the bulk 0:15:59.120 --> 0:16:01.600 of some of the rate rises that already have taken place. 0:16:01.640 --> 0:16:04.400 Tom was talking about that Dallas FED survey on housing 0:16:04.840 --> 0:16:08.480 potentially declining by twenty percent in valuations as a response 0:16:08.480 --> 0:16:10.840 in a response to what we're seeing in mortgage rates. 0:16:11.080 --> 0:16:14.480 Can you talk about how long those lags are before 0:16:14.480 --> 0:16:16.160 we start to see some sort of repricing based in 0:16:16.160 --> 0:16:18.320 the fact that people aren't moving around. They've got locked 0:16:18.320 --> 0:16:20.200 in mortgage rates that are very low and they're not 0:16:20.280 --> 0:16:24.480 moving well. Traditionally, the impact from earlier policy metrics take 0:16:24.560 --> 0:16:28.760 about six to nine months to filter into financial markets, 0:16:29.160 --> 0:16:32.640 but now, arguably that lag is much shorter. If you 0:16:32.680 --> 0:16:35.480 think about all of the transparency that we have with 0:16:35.520 --> 0:16:38.560 the FED. We didn't have a press conference at every 0:16:38.560 --> 0:16:40.640 FED meeting in the past. We didn't have a summary 0:16:40.640 --> 0:16:44.280 of economic projections every quarter. We didn't have every FETE 0:16:44.280 --> 0:16:47.600 official taking the stage at every opportunity to explain not 0:16:47.720 --> 0:16:49.560 only what the FED has done, but what they're going 0:16:49.600 --> 0:16:53.560 to do. So arguably there's an anticipatory nature of financial 0:16:53.600 --> 0:16:57.640 market reactions, and I do think that has significantly reduced 0:16:57.760 --> 0:17:00.000 the lag, or the need for the FED to pause 0:17:00.200 --> 0:17:03.040 and take a look back. One of microeconomic foundations here 0:17:03.360 --> 0:17:07.359 is just as one example, oversupply solves oversupply, and to 0:17:07.480 --> 0:17:09.719 carry it over doctor Terry Weisman who was with us 0:17:09.720 --> 0:17:13.440 with mcquarie earlier, and he said high inflation can solve 0:17:13.480 --> 0:17:18.040 high inflation. Oliver Chen at TD Cowen published moments ago 0:17:18.720 --> 0:17:24.800 that he observes costco seeing finally food disinflation in America. 0:17:25.160 --> 0:17:29.119 Does high inflation solve high inflation? It could on the 0:17:29.160 --> 0:17:32.119 supply side, but on the demand side, what we're seeing 0:17:32.200 --> 0:17:35.719 is this lingering imbalance between labor demand and labor supply, 0:17:36.000 --> 0:17:38.879 and that will not be solved by high inflation. That 0:17:39.000 --> 0:17:42.240 becomes the wage price spiral that the FED so greatly fears, 0:17:42.480 --> 0:17:46.000 where high inflation leads to even higher inflation. So for 0:17:46.040 --> 0:17:48.640 the Fed, I don't think simply standing by the wayside 0:17:48.640 --> 0:17:51.879 and allowing natural markets to clear itself will be a 0:17:51.920 --> 0:17:54.000 long term solution. Do you think it's realistic that the 0:17:54.000 --> 0:17:56.719 Fed could get to six percent in the FED funds rate? Absolutely? 0:17:56.760 --> 0:18:01.320 That has been our long standing call for the terminal rate. Absolutely. Okay, 0:18:01.359 --> 0:18:03.879 So at what point do they sort of signal that 0:18:03.920 --> 0:18:06.480 to markets? Because that is significantly above where the market 0:18:06.520 --> 0:18:09.240 has retraced too, and we have seen a big repricing 0:18:09.280 --> 0:18:12.160 this week. What kicks them up to that level? Well, 0:18:12.200 --> 0:18:14.760 I think they're slowly making their way, but they don't 0:18:14.800 --> 0:18:18.120 want to overpromise in terms of the terminal rate. If 0:18:18.160 --> 0:18:21.920 in fact inflation does so, excuse me, does show market improvement. 0:18:22.200 --> 0:18:24.240 But given the fact that the market and the FED 0:18:24.320 --> 0:18:28.120 consistently underestimates the sticky nature of inflation, what we've seen 0:18:28.200 --> 0:18:31.400 is the FED consistently revised higher. Their forecast now two 0:18:31.520 --> 0:18:34.560 hundred and thirty basis points higher than that initial forecast 0:18:34.840 --> 0:18:37.440 in March of last year. Might help me here. You know, 0:18:37.520 --> 0:18:40.120 we've got a huge formula one weekend and we were 0:18:40.160 --> 0:18:42.600 so honored to have Christian Horner where this from Red 0:18:42.640 --> 0:18:45.600 Bull with us on Monday after the race. Did I 0:18:45.640 --> 0:18:49.080 miss the memo that we have to dress Ferrari today? 0:18:48.760 --> 0:18:51.920 Did I miss? Did I miss the memo? I mean 0:18:52.840 --> 0:18:56.320 it's just like it's like Red Wow on radio. We 0:18:56.359 --> 0:18:58.320 have two lovely ladies in red I mean, yeah, I 0:18:58.359 --> 0:19:02.320 just love dressing Ferrari is fine and they're all Ferrari. Mark, 0:19:02.359 --> 0:19:03.879 you listen to this. What do you think of this? 0:19:04.040 --> 0:19:08.120 What do you think of this? Inflation solves high inflation. Well, 0:19:08.119 --> 0:19:10.800 I mean that's an old line about the cure for 0:19:10.880 --> 0:19:13.560 high commodity prices is high commodity prices, because then it 0:19:13.600 --> 0:19:17.480 brings more people in more supply, and so prices come down. 0:19:17.640 --> 0:19:21.120 And I think that's probably what's going to happen eventually. 0:19:21.200 --> 0:19:24.199 The question is how long it takes for inflation to 0:19:24.200 --> 0:19:27.000 come down, and how sticky it is, and how much 0:19:27.040 --> 0:19:29.840 the Fed thinks it can affect that by continuing to 0:19:29.920 --> 0:19:33.520 raise interest rates. Their view is they're pretty close to 0:19:34.040 --> 0:19:38.359 restrictive enough. They're not sure if they're restrictive. Ye, yet 0:19:38.440 --> 0:19:41.040 they're right on the line. So do they go to 0:19:41.080 --> 0:19:43.719 six percent? I think it'd be a slow process for 0:19:43.760 --> 0:19:46.680 them to do that and to talk about it, because, 0:19:46.720 --> 0:19:49.080 as Lindsay says, you don't want to overpromise, and indrices, well, 0:19:49.080 --> 0:19:52.000 why didn't you go to six percent if suddenly we 0:19:52.080 --> 0:19:55.119 see things to start to turn around? But Lindsay, I 0:19:55.160 --> 0:19:56.840 don't want to go back to something to Jerome Schneider 0:19:57.000 --> 0:19:58.920 was talking about if Pimco that if we were to 0:19:58.920 --> 0:20:02.119 get to six percent, that would perhaps get us that 0:20:02.200 --> 0:20:04.600 much closer to a hard landing. Right that then further 0:20:04.640 --> 0:20:08.080 the Fed has to go. The more you're almost securing 0:20:08.280 --> 0:20:11.280 a very difficult situation for this economy. Is that what 0:20:11.280 --> 0:20:14.000 you're saying that that's almost the base case for you 0:20:14.280 --> 0:20:15.760 at a time when a lot of people might be 0:20:15.800 --> 0:20:19.439