Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and
Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot com,
Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Jerome Schneider,
Speaker 1: I think he inherited Bill Gross's Monroe Trader out at PIMCO,
Speaker 1: does the short term ballet there with a four point
Speaker 1: eight seven percent to your yield and joins us this morning.
Speaker 1: Just an open question on your desk, what is the
Speaker 1: focal point within the short term space. There's a couple
Speaker 1: of vocal points clearly the topic and topic to yours,
Speaker 1: you know, simply that cash it back, bonds are back,
Speaker 1: yields are higher. We can find a lot of attraction
Speaker 1: simply being at the front of yolkurf. That's that's sort
Speaker 1: of a no known but them. The minutia, which really
Speaker 1: investors and savers need to think about is the fact
Speaker 1: that depository rates are low. They need to be incentivized
Speaker 1: to really look at that move out of one and
Speaker 1: two percent depository rates out the curve, even into t
Speaker 1: builds short term strategies to your notes things like that.
Speaker 1: The second thing is is that clearly the FED is
Speaker 1: data dependent, but that's also going to create an involving process.
Speaker 1: Not necessarily that now that we're approaching the five point
Speaker 1: four five point five percent terminal rate that people expect,
Speaker 1: but more importantly that the cutting mechanism is focused less
Speaker 1: on supporting growth, and that goes for the ECB two
Speaker 1: as well tom as well, focused on the supporting growth,
Speaker 1: but focusing on fighting inflation. We know that, and that's
Speaker 1: a fundamental change compared to where we've been over the
Speaker 1: past few decades in terms of that. And the final
Speaker 1: thing really to think about is don't necessarily be worried
Speaker 1: about liquidity conditions in the near term. There's plenty of
Speaker 1: excess reserves around in this system and etc. But the
Speaker 1: higher nominal rates that we are experiencing within the broader
Speaker 1: economy are going to have reverberations in corporate credit within
Speaker 1: various structures and we're going to see that proliferate. So
Speaker 1: investors need to be thinking about how to go about
Speaker 1: maintaining their degrees of freedom, high degrees of liquidity, and
Speaker 1: more importantly, embracing these higher yields, which simply are going
Speaker 1: to be a much more acceptable place to be over
Speaker 1: the next year or so as we sort of continue
Speaker 1: to romanticize going from, you know, effectively the deflationary utopia
Speaker 1: that we once were in just a few weeks ago,
Speaker 1: to the inflationary dystopia. Maybe that's a strong word that
Speaker 1: we're possibly embarking on at this point in time. This
Speaker 1: is a process takes a while. Whenever I speak to
Speaker 1: you or see you now, I just think, which you run?
Speaker 1: Must be so so busy. How long does this take
Speaker 1: for people to shift and get away from their bank accounts,
Speaker 1: which like off your zero and come to you and
Speaker 1: give you the money. Well, for the short term desk
Speaker 1: at PIMCO, it's very quick because we try to optimize
Speaker 1: between all these mechanisms. But for the investor, even the
Speaker 1: most sophisticated institutional investor, they're really not moving as quickly
Speaker 1: as you would expect. And there's actually pretty big diversions. Sure,
Speaker 1: a lot of retail investors are now focused on the
Speaker 1: high amounts of sitting in their accounts. They're well aware
Speaker 1: of yields where they are today. That's making an attraction
Speaker 1: to be that bonds are back is a well known
Speaker 1: thought process over the past few months, but the reality
Speaker 1: is is that it's still an evolutionary process. It does
Speaker 1: take time. The higher yields that we're sitting here talking
Speaker 1: about today, even a four percent ten year note, is
Speaker 1: a relatively new phenomenon, especially in history in the post
Speaker 1: GFC world, So we need to think about the construction
Speaker 1: of portfolios in a much more widespread, widespread criteria than
Speaker 1: simply the past six weeks. And that's really what we're
Speaker 1: going to do. So this is much more protracted evaluation
Speaker 1: of how to create a different investment approach over the
Speaker 1: medium term. One phrase that has cropped up over the
Speaker 1: last couple of weeks is reinvestment risk, just the idea
Speaker 1: that if you go short, too short, maybe miss the
Speaker 1: window to really take these yields and bake them in
Speaker 1: much longer. How do you advocate for where people should
Speaker 1: be on the curve in the treasury mark. It's probably
Speaker 1: a measured response, quite honestly, and you have to think
Speaker 1: about it. You can look at it from an economic
Speaker 1: point of view, where's the neutral rate of where's where
Speaker 1: a neutral rate's going to be. There's inflationary expectations that
Speaker 1: come into them into that as well, and so if
Speaker 1: you think inflation is going to be higher, you have
Speaker 1: to think where the neutral rate should be, which obviously
Speaker 1: affects where you think you should be buying duration buying bonds,
Speaker 1: and that of itself is a point to your point.
Speaker 1: More microscopically, it cuts both ways, quite honestly, John, When
Speaker 1: you think about it, the two year note actually has
Speaker 1: a negative return so far this year, and if you
Speaker 1: bought it, you know, at the end of last year
Speaker 1: or to today, it's actually a negative return. If you
Speaker 1: think about it, well, it does yield almost five percent
Speaker 1: at this point in time, so that is attractive. So
Speaker 1: it also beckons what is your horizon? What is your
Speaker 1: investment horizon? What is your purpose as liquidity management? Is
Speaker 1: that something to plan for the buying a house over
Speaker 1: the next two or three years. Even though mortgage rates
Speaker 1: are highed, there's a variety of circumstances. So understanding and
Speaker 1: matching your investment needs with the investment itself is actually important,
Speaker 1: and that's probably going to be the main driver of
Speaker 1: how much are where an interest rate curve you you
Speaker 1: end up buying. At this point in time, people are
Speaker 1: trying to game out ostantially higher rates as we see
Speaker 1: ongoing surprises with respect to inflation data. How disruptive would
Speaker 1: it be if rates were to rise substantially more from here? Well,
Speaker 1: you obviously have a different framework in play, and I
Speaker 1: think again to reemphasize, the framework is not necessarily supporting
Speaker 1: growth at this point in time. It's fighting inflation at
Speaker 1: this point in time, something very different. So it's going
Speaker 1: to be a bit of a long and dusty road
Speaker 1: to that destination. We should expect a little bit more volatility.
Speaker 1: We've clearly witnessed that over the past few weeks. Ultimately,
Speaker 1: it's a question whether the FED takes the high road
Speaker 1: or the low road proverbly and literally with rates and
Speaker 1: understand where it's ultimately going to go. So, if you
Speaker 1: did have a shock to the system of another few
Speaker 1: hundred basis point of rates, sure, what we would recommend
Speaker 1: and you would see is that the risk adversion you
Speaker 1: would have would be focused on the center of those
Speaker 1: concentric circles of risk that we have at PEMCO, meaning
Speaker 1: the safest areas, and the outer realms of those concentric
Speaker 1: circles would move wider in terms of price and spread
Speaker 1: and yield to compensate for that. And what I suggested
Speaker 1: where we are now is a gentle recalibration. What you're
Speaker 1: suggesting by moving to those higher rates is a more methodical,
Speaker 1: very drastic rationalization of return expectations, risk assumptions, spread assumptions.
Speaker 1: So there is there is very much, you know, a
Speaker 1: recalibration that would go on tightening conditions and you might
Speaker 1: actually see some breakage at that point in time. But
Speaker 1: I also think that what you're hearing clearly from the
Speaker 1: FED is the process which is going to be a
Speaker 1: digestive situation where they're going to digest the data. And
Speaker 1: the market has rationalized over the past few weeks, not
Speaker 1: necessarily that there's a lot of more rate hikes to come,
Speaker 1: but there's less cuts to come, and there's a big
Speaker 1: difference in that. So even at PIMCO, we've shifted our
Speaker 1: expectations of a recession this year, push possibly pushing that
Speaker 1: out to twenty twenty four, so modest growth in two
Speaker 1: twenty three, perhaps pushing that out to twenty twenty four.
Speaker 1: That's something that actually creates a longer road for the
Speaker 1: FED to really rationalized decisions, be more data dependent, fortunately
Speaker 1: or unfortunately, and maybe doesn't necessarily create that shock to
Speaker 1: the system that you're suggesting. So I'm you're going to
Speaker 1: stick with us, But to say up in the next segment,
Speaker 1: high phlonga, we all get the higher piece of this.
Speaker 1: You've just touched on the plonger bit of it. Where
Speaker 1: are you on the forlonga bit of it? How long full? Yeah?
Speaker 1: And I think that's really putting it. You're going to
Speaker 1: have ultimately when you see PCE core specifically coming down,
Speaker 1: and you might not actually get that data until late
Speaker 1: this year and early next year. So the longer is
Speaker 1: an eternity. It's maybe just a pensive thought process which
Speaker 1: puts us well into twenty twenty four. It is a
Speaker 1: joy to have Jerome Schneider with us with PIMCO. Undiscovered Jerome.
Speaker 1: This week was what I'm gonna call the IDEs of October.
Speaker 1: I know you run your short term portfolio off lunar astrology,
Speaker 1: but not the IDEs of March. But the Bloomberg Total
Speaker 1: Return Index reached a low in October of last year,
Speaker 1: priced down, yield up very quietly this week we slipped
Speaker 1: below the December The history here between October and now,
Speaker 1: is there a possibility we retest priced down yield up
Speaker 1: that we saw in October? And what will be the
Speaker 1: consequences to your short term paper now that you divulge
Speaker 1: the secret of the short term desk at PIMCO. I'm
Speaker 1: embarrassed fund, but at the reality is is that there's
Speaker 1: one thing very different in the calculus today than October yield.
Speaker 1: When you think about total return, whether it's a short
Speaker 1: term bond fund, a total term bond fund, income, it's
Speaker 1: the composition of capital appreciation plus yield, and that yield
Speaker 1: and carry component is worth five hundred plus basis points
Speaker 1: depending on the type of strategy at this point in time,
Speaker 1: That in of itself can alleviate a lot of the
Speaker 1: capital appreciation or depreciation. To say so, when I said before,
Speaker 1: be careful owning the two year note because it's actually
Speaker 1: a negative total return this year. Yes, we're looking at
Speaker 1: a microcosum of a couple of months. In general, if
Speaker 1: you're holding it to maturity, you will make those yields.
Speaker 1: But there's different ways to manage your interest rate exposure
Speaker 1: and interestrate exposures, the sensitivities right where I wanted to go,
Speaker 1: and I want to play it off Mandalorian because I
Speaker 1: know at PIMCO, when they make a successful trade, they go,
Speaker 1: this is the way. But the answer is you and
Speaker 1: Chris z are the only two people on the planet
Speaker 1: that read FIBOZI cover to cover and to keep it
Speaker 1: real simple, here do I gather a ten year success
Speaker 1: by taking five two year tranches out? Is that where
Speaker 1: we are right now in terms of retail clients. Grab
Speaker 1: the two year and trunch it out five times. I
Speaker 1: think when investors are looking to do is simply navigate
Speaker 1: the next one to two years of uncertainty in the macroeconomics.
Speaker 1: And typically you're having an inflection point. You owe equities.
Speaker 1: You own equities because you believe that there is a
Speaker 1: rate stabilization and inflation understanding that is going to be
Speaker 1: stable for the next empteen years, and that inevitably owning
Speaker 1: inequity is effectively owning a long duration bond with some
Speaker 1: given profitability, earnings and obviously risk free rate assumptions baked in.
Speaker 1: What we ultimately want to think about, though, is investors
Speaker 1: have had a lot of reinvestment to do over the
Speaker 1: past few years, and then they were faced with uncertainty, wars, pandemics.
Speaker 1: These are all factors that really change the psychology of
Speaker 1: investors that we have to think about things that we
Speaker 1: haven't seen in many years. In fact, many traders today
Speaker 1: on Wall Street, young people haven't seen many of the
Speaker 1: phenomenon that we are witnessing today. Even positive rates as
Speaker 1: an obvious example, inflationary expectations in the general population. These
Speaker 1: are things that we haven't seen in forty plus years.
Speaker 1: So the calculus is ripe for a pause. It means
Speaker 1: that traditional mechanisms for just simply earning interest put the
Speaker 1: baton firmly in the hand of savers, and it doesn't
Speaker 1: necessarily mean you me to make these bold predictions in
Speaker 1: terms of taking a lot of risk at this point
Speaker 1: in time. Having some optionality, just like the FED, is
Speaker 1: exactly what investors want to do at this point in time.
Speaker 1: When you talk about optionality. People have gotten a little
Speaker 1: bit hysterical this week, and I admit that I understand
Speaker 1: why this feeling that maybe we have totally underestimated inflation
Speaker 1: and how sticky it is globally. What central banks have
Speaker 1: to do, what a terminal rate actually looks like there
Speaker 1: has been a reset this week. What gives you the
Speaker 1: Pimco confidence that we're not at that point that the
Speaker 1: market's gotten ahead of itself right now, that the Fed
Speaker 1: doesn't need to do that much more, It just needs
Speaker 1: to pause, and that the data that's coming in shows
Speaker 1: progress even if the headline big numbers aren't necessarily screaming
Speaker 1: that message. Yea. We are actually debating this next week
Speaker 1: at pimcoone an arcyclical form which we look at the
Speaker 1: next year or so view of where we're headed for
Speaker 1: the economy. I think one of the healthy debates in
Speaker 1: there is not necessarily just where the neutral rate would
Speaker 1: be and where their interest or inflation expectations come down,
Speaker 1: but really how sticky they are going to remain. And
Speaker 1: I think unfortunately we are on this long road and
Speaker 1: we are not necessarily knowing where the end of that
Speaker 1: road is going to be. So the consequences the Fed's
Speaker 1: going to probably remain unhold. They're going to be faced
Speaker 1: with pc core PCs that are well above that two
Speaker 1: percent number. We don't necessarily see that coming down until
Speaker 1: twenty twenty four, possibly twenty five at the earliest. So
Speaker 1: the consequences is that there is a lot of unknowns
Speaker 1: right now, and that's perfectly fine, and investors unfortunately have
Speaker 1: to be prepared for that uncertainty as a result. So
Speaker 1: what we want to do and as a practitioner, is
Speaker 1: prepare portfolios for that resiliency that we think is going
Speaker 1: to be necessary to survive the insority the next few years.
Speaker 1: So can you give us a sneak peek into that
Speaker 1: committee brawl and this sort of discussion what the range
Speaker 1: of views looks like in terms of terminal rates, in
Speaker 1: terms of inflation over the longer term. Yeah, I wouldn't
Speaker 1: necessarily give the depiction of an economic gladiator set, but
Speaker 1: it is. It is like it is effectively a healthy debate,
Speaker 1: and we put all these variables and we want to
Speaker 1: effectively understand how portfolios can behave in a variety of
Speaker 1: circumstances left tail, right tail, and then ultimately rationalize it
Speaker 1: in this higher rate environment. As an example, when we
Speaker 1: actually think about this environment right now, we're faced with
Speaker 1: the multitude of things which create different levels of uncertainty. However,
Speaker 1: higher rates create different outcomes than zero or near zero
Speaker 1: or even negative rates, So we have to think about
Speaker 1: the construction and that confidence. We think that, as I
Speaker 1: said previously, that we're not necessarily going to see a recession,
Speaker 1: you know, in two twenty three, it might get pushed
Speaker 1: to twenty twenty four. That and of itself puts us
Speaker 1: in this situation where the Fed probably has a little
Speaker 1: bit longer runway to be on that holder building period
Speaker 1: for a little bit longer. Here, it doesn't necessarily create
Speaker 1: saying that this is fair value right this second. There's
Speaker 1: clearly curve construction, curve considerations where the ten year note is,
Speaker 1: which involves term premiums, and that's obviously a factor whether
Speaker 1: you want to be in the REDCNY. But a four
Speaker 1: percent ten ye note, five percent to your note, those
Speaker 1: are very different constructions of owning duration, owning bonds, which
Speaker 1: makes it a very interesting environment. This this goes to
Speaker 1: the herder what we were talking about two hours ago,
Speaker 1: which is suddenly you get a higher rate, you get
Speaker 1: some inflation, you get some nominal GDP, and things actually
Speaker 1: work out better. Giving Powell and Laguard breathing room, this
Speaker 1: is transformational. I'm not sure anything about what's happening right
Speaker 1: now gives panel to God breathing room back what's happening
Speaker 1: Canno with actually recently all right? Was that correction are correct?
Speaker 1: Sur corrections rare? Thank you, it's good to see you, undimcut.
Speaker 1: Lindsay Piggs is on her fourth we do with the
Speaker 1: architect on the blowout of the kitchen in Wisconsin and
Speaker 1: joins us today here in New York chief economist at Steple.
Speaker 1: What's the mood of the consumer? I mean, is there
Speaker 1: in New York here? We clearly get this effervescence that's
Speaker 1: out there. The residents are packed, etc. You know the
Speaker 1: drill as well. Is it legit nationwide? Well, it's interesting
Speaker 1: because we did see that pop and consumer activity at
Speaker 1: the start of the year, but at the same time,
Speaker 1: we saw consumer confidence tick down at the start of
Speaker 1: the year. So it doesn't appear as if the consumer
Speaker 1: is increasingly confident in their financial footing. It appears more
Speaker 1: as if we're seeing the consumer's last stand, if you will,
Speaker 1: As households are drawing down the very last of savings,
Speaker 1: they're ramping up credit card debt. Now this doesn't mean
Speaker 1: that it's a one month off. We could see continued
Speaker 1: strength then in February, maybe even March, but this is
Speaker 1: not a lasting trend of robust activity on the consumer part.
Speaker 1: So some people will push back inevitably since that's what
Speaker 1: the market is doing, pushing back against your view and saying, well,
Speaker 1: if you look at all of the inflation data, it's
Speaker 1: come in surprisingly hot again and again. What can give
Speaker 1: us confidence that is that this is just the last
Speaker 1: gasp before a more protracted disinflation and more protracted decline. Oh,
Speaker 1: I don't think we have the confidence right now, and
Speaker 1: certainly from the Fed's point of view, we're not seeing
Speaker 1: that in the inflation data. So they're going to have
Speaker 1: to see a market decline in consumer activity translating into
Speaker 1: then significant job destruction in order to see confidence in
Speaker 1: the sense that wage pressures are coming down. Now. Earlier
Speaker 1: we were talking about services, and for the FED, that's
Speaker 1: where the focus lies in core services, excluded housing. They
Speaker 1: want to see that proxy for the wage price spiral
Speaker 1: show improvement, and we just haven't seen that yet. So
Speaker 1: while we are confident that is the FED continues to
Speaker 1: raise rates, the economy will slow, and by extension, the
Speaker 1: consumer will slow, there's still a considerable amount of work
Speaker 1: left to be done. Let's talk about long and variable lags.
Speaker 1: This question around when we'll start to see the bulk
Speaker 1: of some of the rate rises that already have taken place.
Speaker 1: Tom was talking about that Dallas FED survey on housing
Speaker 1: potentially declining by twenty percent in valuations as a response
Speaker 1: in a response to what we're seeing in mortgage rates.
Speaker 1: Can you talk about how long those lags are before
Speaker 1: we start to see some sort of repricing based in
Speaker 1: the fact that people aren't moving around. They've got locked
Speaker 1: in mortgage rates that are very low and they're not
Speaker 1: moving well. Traditionally, the impact from earlier policy metrics take
Speaker 1: about six to nine months to filter into financial markets,
Speaker 1: but now, arguably that lag is much shorter. If you
Speaker 1: think about all of the transparency that we have with
Speaker 1: the FED. We didn't have a press conference at every
Speaker 1: FED meeting in the past. We didn't have a summary
Speaker 1: of economic projections every quarter. We didn't have every FETE
Speaker 1: official taking the stage at every opportunity to explain not
Speaker 1: only what the FED has done, but what they're going
Speaker 1: to do. So arguably there's an anticipatory nature of financial
Speaker 1: market reactions, and I do think that has significantly reduced
Speaker 1: the lag, or the need for the FED to pause
Speaker 1: and take a look back. One of microeconomic foundations here
Speaker 1: is just as one example, oversupply solves oversupply, and to
Speaker 1: carry it over doctor Terry Weisman who was with us
Speaker 1: with mcquarie earlier, and he said high inflation can solve
Speaker 1: high inflation. Oliver Chen at TD Cowen published moments ago
Speaker 1: that he observes costco seeing finally food disinflation in America.
Speaker 1: Does high inflation solve high inflation? It could on the
Speaker 1: supply side, but on the demand side, what we're seeing
Speaker 1: is this lingering imbalance between labor demand and labor supply,
Speaker 1: and that will not be solved by high inflation. That
Speaker 1: becomes the wage price spiral that the FED so greatly fears,
Speaker 1: where high inflation leads to even higher inflation. So for
Speaker 1: the Fed, I don't think simply standing by the wayside
Speaker 1: and allowing natural markets to clear itself will be a
Speaker 1: long term solution. Do you think it's realistic that the
Speaker 1: Fed could get to six percent in the FED funds rate? Absolutely?
Speaker 1: That has been our long standing call for the terminal rate. Absolutely. Okay,
Speaker 1: So at what point do they sort of signal that
Speaker 1: to markets? Because that is significantly above where the market
Speaker 1: has retraced too, and we have seen a big repricing
Speaker 1: this week. What kicks them up to that level? Well,
Speaker 1: I think they're slowly making their way, but they don't
Speaker 1: want to overpromise in terms of the terminal rate. If
Speaker 1: in fact inflation does so, excuse me, does show market improvement.
Speaker 1: But given the fact that the market and the FED
Speaker 1: consistently underestimates the sticky nature of inflation, what we've seen
Speaker 1: is the FED consistently revised higher. Their forecast now two
Speaker 1: hundred and thirty basis points higher than that initial forecast
Speaker 1: in March of last year. Might help me here. You know,
Speaker 1: we've got a huge formula one weekend and we were
Speaker 1: so honored to have Christian Horner where this from Red
Speaker 1: Bull with us on Monday after the race. Did I
Speaker 1: miss the memo that we have to dress Ferrari today?
Speaker 1: Did I miss? Did I miss the memo? I mean
Speaker 1: it's just like it's like Red Wow on radio. We
Speaker 1: have two lovely ladies in red I mean, yeah, I
Speaker 1: just love dressing Ferrari is fine and they're all Ferrari. Mark,
Speaker 1: you listen to this. What do you think of this?
Speaker 1: What do you think of this? Inflation solves high inflation. Well,
Speaker 1: I mean that's an old line about the cure for
Speaker 1: high commodity prices is high commodity prices, because then it
Speaker 1: brings more people in more supply, and so prices come down.
Speaker 1: And I think that's probably what's going to happen eventually.
Speaker 1: The question is how long it takes for inflation to
Speaker 1: come down, and how sticky it is, and how much
Speaker 1: the Fed thinks it can affect that by continuing to
Speaker 1: raise interest rates. Their view is they're pretty close to
Speaker 1: restrictive enough. They're not sure if they're restrictive. Ye, yet
Speaker 1: they're right on the line. So do they go to
Speaker 1: six percent? I think it'd be a slow process for
Speaker 1: them to do that and to talk about it, because,
Speaker 1: as Lindsay says, you don't want to overpromise, and indrices, well,
Speaker 1: why didn't you go to six percent if suddenly we
Speaker 1: see things to start to turn around? But Lindsay, I
Speaker 1: don't want to go back to something to Jerome Schneider
Speaker 1: was talking about if Pimco that if we were to
Speaker 1: get to six percent, that would perhaps get us that
Speaker 1: much closer to a hard landing. Right that then further
Speaker 1: the Fed has to go. The more you're almost securing
Speaker 1: a very difficult situation for this economy. Is that what
Speaker 1: you're saying that that's almost the base case for you
Speaker 1: at a time when a lot of people might be
Speaker 1: pushing back their accession calls but not necessarily increasing the
Speaker 1: depth of them. I think if we do get to
Speaker 1: a six percent rate and have to hold at six percent,
Speaker 1: I think we're increasing the probability of a hard landing. If, however,
Speaker 1: the FED pushes up to six percent, realizes that they're
Speaker 1: sufficiently restrictive, and then come back to a five five
Speaker 1: and a half percent range, we may be able to
Speaker 1: mitigate some of the depth or duration of the downturn.
Speaker 1: But from the FEDS point of view, a period of
Speaker 1: pain is not only likely but necessary for the economy
Speaker 1: reinstate price stability. But to that point, Tom, and you're
Speaker 1: right to that point, lindsay, what kind of damage do
Speaker 1: we see to housing valuations that haven't been gamed into
Speaker 1: the Dallas FEDS point? We're going to see a significant
Speaker 1: decline appsolutely. But remember when we talk about this housing
Speaker 1: market cycle, I think it's a very maybe superficial analysis
Speaker 1: to assume that because it's the most interest rate sensitive
Speaker 1: sector of the economy. As the FED raises rates, the
Speaker 1: housing market falls off a cliff. This time around, we
Speaker 1: went into the cycle with a multi year deficit in
Speaker 1: terms of housing stock, and so even with demand coming
Speaker 1: off of peaks and supply arguably coming off the lows,
Speaker 1: we still have a disconnect in the market that should
Speaker 1: provide somewhat of a floor to this housing market cycle,
Speaker 1: even if we continue to see downward momentum from here.
Speaker 1: There's an interesting thing going on in the housing markets
Speaker 1: too that I was talking to some FED officials. They've
Speaker 1: been surprised by that a lot of builders are subsidizing
Speaker 1: mortgage loans right now. They're doing buy downs for people
Speaker 1: because they want to keep the business going. And we
Speaker 1: saw a little bit of something like that with Automo
Speaker 1: Wheels coming out of the Great Financial Crisis, where the
Speaker 1: auto companies offered zero percent loans and kept people buying cars.
Speaker 1: So it may be a little harder to model out
Speaker 1: what's going to happen in the housing industry if people
Speaker 1: are going to buy you into it. One of the
Speaker 1: most complicated environments I could possibly imagine. Lindsay Pegska of CFL,
Speaker 1: thank you so much for being here. Michael McKey as
Speaker 1: always wonderful to get your comments. Katy Kamitski joins NA
Speaker 1: chief Reset strategist to Alpha Simplex. Katie, you have been
Speaker 1: phenomenal for the whole of last year and then into
Speaker 1: this year. Katie, everyone's turned around. I say, everyone, you
Speaker 1: know where I'm coming with this. A lot of people
Speaker 1: turned around and said, it's the year of bonds, get
Speaker 1: long fixed income, and you went shut stay shure, Ksey,
Speaker 1: Why well, let's just focus on the fact that inflation
Speaker 1: is looking stickier, and if we look at last year,
Speaker 1: I think we like to see it this way, is
Speaker 1: that the stock market and the bond market don't agree.
Speaker 1: Right now. The stock market things everything's great. The bond
Speaker 1: market that says, this could be dangerous. Look at the curve.
Speaker 1: It's inverted. We could have problems. So we think last
Speaker 1: year the bond market was right. This year it's a
Speaker 1: little gear. We're seeing that the bond market is looking
Speaker 1: a little weaker in the sense that stock market is
Speaker 1: looking positive, saying hey, wait a minute, we might pause.
Speaker 1: Either way, we're not there, which means that even if
Speaker 1: the stock market's right and we pause, we could see
Speaker 1: the end of the curve steep and severely, and that
Speaker 1: would cause negative trends in the long end of the curve.
Speaker 1: Or if the bond market's right and we're looking in
Speaker 1: a recession and deflationary environment, then you're also looking at
Speaker 1: higher rates, at least in the short term. So bonds
Speaker 1: are definitely looking tricky this year, even though many a
Speaker 1: little bit more about this short then where across the
Speaker 1: curve is that short, more pronounces it spread evenly, Is
Speaker 1: it a specific pocket pop point of that yield curve, Well,
Speaker 1: generally it's pretty much short across the board across global economies,
Speaker 1: and that in some sense tells you that we have
Speaker 1: farther to go in terms of raising rates to either
Speaker 1: get to a point where we can find inflation get
Speaker 1: it to be less sticky, or we get to a
Speaker 1: situation where central bankers throw up their hands and say
Speaker 1: we're going to tolerate a higher inflation level. And either
Speaker 1: of those is going to be very tricky for fixed
Speaker 1: cash flows, which means that bond signals in general remain
Speaker 1: short on the technical side, even though the fundamental side,
Speaker 1: many people are starting to get interested. Katie, Let's have
Speaker 1: fun on Friday. Let's channel Wells Wilder who invented so
Speaker 1: much of this in nineteen seventy eight. I know you
Speaker 1: named your dog average to range, Katie. The answer is
Speaker 1: there's been a magnificent trend of higher yield. I was
Speaker 1: shocked to go to the Bloomberg and under one technical
Speaker 1: study ad x DMI see that A the trends in
Speaker 1: place and we're really in a good position to continue
Speaker 1: the trend out there. How do you use that kind
Speaker 1: of mumbo jumbo to stay in a trend once you've profited. Well,
Speaker 1: that's a good point. I mean, I'll be honest. January
Speaker 1: was a period where we saw consolidation. People thought yields
Speaker 1: were not going to go higher, And it's really about
Speaker 1: balancing the long term and term views. And what we've
Speaker 1: seen is longer term views are saying we're in a
Speaker 1: secular move towards higher rates, and we're not there yet.
Speaker 1: I think the equity market also likes to be quick
Speaker 1: to say that things are over so I think it's
Speaker 1: really about balancing multiple perspectives and seeing things over time
Speaker 1: as opposed to reacting too quickly. What are you looking for,
Speaker 1: Katie to unwind too short bet on rates? Well, I
Speaker 1: think The biggest is if the stock market wins, aka,
Speaker 1: if central bankers step back like we saw commentary yesterday
Speaker 1: and say wait a minute, we're going to tolerate more inflation.
Speaker 1: What that means is that you're going to see a
Speaker 1: steepening of the curve. So you're going to see sort
Speaker 1: of the bottom of the short end of the short
Speaker 1: end of the curve, So shorter term rates will be stickier,
Speaker 1: and then you'll start to see people actually take on
Speaker 1: higher yields and then bond. But that's going to mean
Speaker 1: that longer term yields are gonna have to go up
Speaker 1: to compensate for that risk over longer terms. So I
Speaker 1: think that's where you're going to see the shorts disappearing
Speaker 1: on the short end of the curve. You're gonna still
Speaker 1: see some strong signals on the long end of the
Speaker 1: curve as the market moves to a higher inflation tolerance environment. Katie,
Speaker 1: can you talk a little bit about the long end
Speaker 1: and where you see the range, because right now we
Speaker 1: have a growing number of bond strategists saying that we
Speaker 1: possibly are at the peaks, and you're suggesting we're far
Speaker 1: from them. How far well? I think it will definitely
Speaker 1: be a situation if we had a healthy yield curve
Speaker 1: which we could see, and we were to tolerate higher inflation,
Speaker 1: you could imagine that you had the longer term rates
Speaker 1: going up several percent above what you see on the
Speaker 1: two year. I mean that would sort of symbolize a
Speaker 1: very stable environment with higher inflation, whereas I don't think
Speaker 1: you're seeing that yet, but that would be an environment
Speaker 1: where basically we give up on trying to find inflation
Speaker 1: down to two and thus the risk premium on the
Speaker 1: longer end has to go up and you have to
Speaker 1: get a longer yield if you don't expect yields to
Speaker 1: go up or inflation to go down in the longer term. Katy,
Speaker 1: you've just been phenomenal. Thanks for being with a sismonic shadow.
Speaker 1: And let's cant shout more often, Katy Kamiskia of Alpha Simplex.
Speaker 1: Terry Weisman is out of Vasser and out of Harvard.
Speaker 1: We had the privilege of being in the same corridors.
Speaker 1: Is Benjamin Freedman. I'm going to go back right now
Speaker 1: to the gentleman strategist at Macquarie, to Benjamin Freedman's great
Speaker 1: the consequences the moral consequences of growth. I want you
Speaker 1: to sum up today where we are, and that is
Speaker 1: the consequences of pandemic stimulus that include that broadening inflation. Yeah,
Speaker 1: in some respect, what policymakers did during the pandemic has
Speaker 1: turned out to be a disaster. I think that what
Speaker 1: they were thinking was they were looking back on the
Speaker 1: past ten years and saw very little relationship between unemployment
Speaker 1: and inflation. They saw, as a result of the big
Speaker 1: increase in monetary balances coming out of the GFC, really
Speaker 1: no inflation, and they thought they could effectively repeat that experiment,
Speaker 1: and it's been proven to be wrong. I think it
Speaker 1: was wrong this time around because it wasn't just a
Speaker 1: monetary experiment. It was an experiment combined with a fiscal experiment.
Speaker 1: In other words, excessive fiscal spending not just in the
Speaker 1: Western world, but across the developed markets and the emerging markets.
Speaker 1: At the same time expansive monetary policy in the emerging
Speaker 1: market and developed markets. So we have a global inflation
Speaker 1: problem as a result of this. The good news, if
Speaker 1: there is any is that there are you know, there
Speaker 1: are ways to stop inflations. There were really two ways.
Speaker 1: In fact, one of them is to tighten monetary policy
Speaker 1: for the other the other way, Interestingly enough, it is
Speaker 1: actually to let the inflation happen, because when you do that,
Speaker 1: real monetary balances start to shrink. And when real monetary
Speaker 1: balances shrink, the consumer feels squeezed. And you can see
Speaker 1: that in the US data right if you look at
Speaker 1: real monetary balances measured by commercial deposits should say bank
Speaker 1: deposits commercial banks in the US, they're almost back to
Speaker 1: their trend level. Part of that is the quantitative tightening
Speaker 1: that we've seen over the last few months, but most
Speaker 1: of that is the inflation that's already happened. In other words,
Speaker 1: by virtue of having inflation, you eventually slow down and
Speaker 1: reduce the real balances and the consumer feels squeeze. One
Speaker 1: of the reasons why I think that we're going to
Speaker 1: see a resumption of the trend in disinflation in the
Speaker 1: US is for that very reason. Europe, on the other hand,
Speaker 1: is another story. They're just starting their QT. Let's go
Speaker 1: to Chicago on this. How do you overlay? As you mentioned,
Speaker 1: the monetary balance is how do you overlay as stunning
Speaker 1: increase and then stunning decline we've seen in M two. God,
Speaker 1: Milton Friedman on us right now? Is that of value
Speaker 1: to you to see M two as such a plunge?
Speaker 1: It is, And I have to admit that, you know,
Speaker 1: posted GFC, I might have been one of those who
Speaker 1: thought that money was no longer important. I might have
Speaker 1: abandoned the old monitoris view coming out of the University
Speaker 1: of Chicago because the data simply didn't didn't support it.
Speaker 1: The correlations didn't support it, the trends didn't support it.
Speaker 1: But now we see a resumption of validity in the
Speaker 1: monit to a story that money does matter. And we
Speaker 1: probably got to a point where those real monetary balances
Speaker 1: in the US got to about twenty percent above the
Speaker 1: trend line. Well guess what that would necessary? That would
Speaker 1: you know, you know, back of the envelope, That would
Speaker 1: imply that we're going to see a twenty percent increase
Speaker 1: in prices over and above the trend line for CPI.
Speaker 1: It's not so far from where we've gotten to, right um.
Speaker 1: And But but again, the good news is that it's
Speaker 1: being unwound here certainly not in other places, but in
Speaker 1: the US it is. So let's talk about the unwinding process,
Speaker 1: because there has been percolating on the peripherise this question
Speaker 1: of unwinding the balance sheet about the ECB and the
Speaker 1: US more quickly than people have previously thought, that that
Speaker 1: will be the primary tool over the next nine to
Speaker 1: twelve months, rather than rate hikes. How much higher does
Speaker 1: that push longer and rates both in the US and
Speaker 1: in Europe. Well, you can you can say that by
Speaker 1: virtue of quant tightening, we were going to see the
Speaker 1: central banks no longer buying bonds and eventually potentially even
Speaker 1: selling their bonds. But that that's running up against the
Speaker 1: other problem, which is the problem of a slowing economy.
Speaker 1: And I'm not exactly sure which is going to dominate,
Speaker 1: but I think for the next three to six months,
Speaker 1: we're probably going to see lower yields in the US,
Speaker 1: not higher yields. I know this is not necessarily the
Speaker 1: vogue thing to say right now. The ten year yield
Speaker 1: just reach a cyclical high of four point one yesterday,
Speaker 1: but keep in mind. My view is that we're going
Speaker 1: to see a slowdown in the US economy in the
Speaker 1: next few months, and it will be significant. I think
Speaker 1: in many sectors we're already seeing it. Technology is certainly
Speaker 1: in a recessionary environment right now, all new economy sectors
Speaker 1: are finance potentially as well housing certainly, so that's going
Speaker 1: to broaden. And I think we're looking at peak ten
Speaker 1: year yields right now. I think they're going to start
Speaker 1: heading down over the next three to six months. Not
Speaker 1: by a lot, mind you. Okay, but this has important
Speaker 1: implications for a yield curve that has been deeply inverted.
Speaker 1: And does this mean that it gets even more so
Speaker 1: substantially more inverted. Potentially, yes, But keep in mind it
Speaker 1: depends how you measure that inversion. If it's two's to tens,
Speaker 1: and by the time we rolled you three months from now,
Speaker 1: you know the fattest signaling that's about to stop hiking rates, well,
Speaker 1: that inversion may stop on a TuS to tens basis,
Speaker 1: it may still persist on a three month to ten
Speaker 1: year yield curve basis. So it's Terry, what I'm hearing
Speaker 1: from you is that right, differentials between Europe the Anonis
Speaker 1: states could narrow and if they do, web with that
Speaker 1: leaf phone exchange, So that's that's absolutely right. You could
Speaker 1: see higher yields in Europe still because they've been late
Speaker 1: to addressing the inflation issue, and inflation is higher there
Speaker 1: on top of that. And I would make even a
Speaker 1: case that the esoteric truth out there is that the
Speaker 1: European economy is actually stronger than the US economy right now. Yes,
Speaker 1: believe it or not, it may very well be. Look
Speaker 1: at the PMIS this morning on the services side, they
Speaker 1: there's a potential that they come in in line with
Speaker 1: the US. Remember, Europe is coming out of its funk
Speaker 1: that it experienced in Q four by virtue of the
Speaker 1: of the winter emergency. It has China backing it up
Speaker 1: all of a sudden with its stimulus. It's very possible
Speaker 1: that the European economy is doing a little bit better
Speaker 1: than the US right now in terms of growth, and
Speaker 1: that all supports higher yields in the Euro Area versus
Speaker 1: the US, at least on a relative basis twenty seconds.
Speaker 1: How long could Europe remain stronger economically than the US
Speaker 1: in your view, well until we finally start to see
Speaker 1: some real tightening by the ECB, and we haven't seen
Speaker 1: that yet. I mean, you know, if Tom was talking
Speaker 1: about nine percent inflation headline basis in the Euro Area,
Speaker 1: the deposit rates two and a half, I mean those
Speaker 1: are the kind of negative real rates that you would
Speaker 1: expect from a rogue central bank a Turkey for example.
Speaker 1: I hate to use that term, but I can't find
Speaker 1: a better one. At this point, it looks blotically. You
Speaker 1: can make a case that the ECB has gotten rogue
Speaker 1: and it's just finally starting to get back inst It's really,
Speaker 1: it's only really since December that Christine Lagarde has really
Speaker 1: emphasized the need to address the inflation issue. And I
Speaker 1: think it was that time, you know, just really two
Speaker 1: months ago the she, you know, to her credit, started
Speaker 1: to realize that this was there was a broadening of
Speaker 1: the inflation December was strung and then we had the
Speaker 1: last mate, which was kind of developed where she said
Speaker 1: that risks around the inflation outlook had become more balanced.
Speaker 1: I wonder if that gets revised. I meant structurally, there
Speaker 1: are a bunch of problems that are point to higher
Speaker 1: inflation in your area as well, right, I mean, you
Speaker 1: know Cornell University as an institute that does fantastic work
Speaker 1: on just tracking labor action, labor strikes in the US. Well,
Speaker 1: guess what it peaked in the summer. Yes, Since then,
Speaker 1: labor has become less agitated in the US, less active,
Speaker 1: less strike oriented, different than in Europe right now. Look
Speaker 1: at the UK, they're worried about more strikes. Francis just
Speaker 1: getting through a wave of them right now. Wage pressures
Speaker 1: are higher in your area right now than the r
Speaker 1: in US. Was not that case in the summer. It
Speaker 1: is the case against the club. I got to squeeze
Speaker 1: it in again. You're at tull'st one of six. Everything
Speaker 1: you've said just screamed stronger Europe doesn't stronger euro So
Speaker 1: what's your talk is? Yeah, for the next for the
Speaker 1: next two or three or four months into the middle
Speaker 1: of the year, I think we get back up to
Speaker 1: that one ten level in the Europe Okay, right, Yeah,
Speaker 1: nothing too dramatic, nothing too dramatic. Remember, if the world
Speaker 1: goes into recession, that tends to be good for the dollars.
Speaker 1: You have to consider that's going to offset that, that
Speaker 1: that upward pressure on these terry. This was great, just fantastic,
Speaker 1: my pleasure, your perspective, pretty original. Right now. I've got
Speaker 1: to say, yeah, you're a consensus stronger than the US actually,
Speaker 1: or they've heard that a couple of times in the
Speaker 1: last twenty four hours. I hope Europe better than the US.
Speaker 1: Thank I love it. I'm not sure pressing the card
Speaker 1: would have left that this morning, Terry Wassman mcquore, Terry,
Speaker 1: thank you, just wonderful. Subscribe to the Bloomberg Surveillance Podcasts
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