1 00:00:00,080 --> 00:00:02,480 Speaker 1: Let's get to Francis Stacy, who joins us for the 2 00:00:02,520 --> 00:00:06,520 Speaker 1: half hour. Frances is director of strategy at Optimal Capital. 3 00:00:06,720 --> 00:00:09,480 Speaker 1: On the line from Tampa, Florida. Francis, thanks for being 4 00:00:09,520 --> 00:00:11,960 Speaker 1: with us. So we have in version of the U 5 00:00:12,039 --> 00:00:14,920 Speaker 1: S yield curve in that two to ten year range. 6 00:00:15,040 --> 00:00:17,400 Speaker 1: We heard today from Goldwyn Sachs. They are a warning 7 00:00:17,400 --> 00:00:21,119 Speaker 1: of maybe some slowing and hiring. They may even cut 8 00:00:21,200 --> 00:00:23,840 Speaker 1: some staff. And then we dropped a story on Apple 9 00:00:23,880 --> 00:00:26,800 Speaker 1: planning to slow hiring and spending for some teams next year. 10 00:00:27,520 --> 00:00:32,960 Speaker 1: Does this suggest that we're inevitably facing a recession? I 11 00:00:33,000 --> 00:00:36,240 Speaker 1: think so. I think the mechanics are in place. I think, um, 12 00:00:36,280 --> 00:00:38,720 Speaker 1: you know, they're the majority of the times that the 13 00:00:38,760 --> 00:00:41,479 Speaker 1: curve is inverted. It's now deeply inverted. I think it's 14 00:00:41,479 --> 00:00:45,000 Speaker 1: the biggest inversion since two thousand. I saw somewhere. Um 15 00:00:45,040 --> 00:00:47,920 Speaker 1: you know, there are a few exceptions where it didn't 16 00:00:47,960 --> 00:00:51,080 Speaker 1: roll into a recession, and but mostly it does lead 17 00:00:51,120 --> 00:00:54,360 Speaker 1: to a recession. And you're starting to see the whole 18 00:00:54,480 --> 00:00:57,760 Speaker 1: justification for a soft landing from J. Powell is that 19 00:00:57,800 --> 00:01:00,360 Speaker 1: we've got to loosen the labor market, and you're really 20 00:01:00,400 --> 00:01:02,959 Speaker 1: starting to see that first it was tech. Now we're 21 00:01:02,960 --> 00:01:05,960 Speaker 1: seeing a little bit of it in banks, UM, you know, 22 00:01:06,120 --> 00:01:09,640 Speaker 1: and that probably is going to spread, and that's the 23 00:01:09,680 --> 00:01:15,200 Speaker 1: Fed's plan for a soft landing. Well, the dug observed 24 00:01:15,240 --> 00:01:19,400 Speaker 1: earlier apples at a date you're not the only person 25 00:01:19,440 --> 00:01:21,800 Speaker 1: who sees the recission is almost inevitable now. So in 26 00:01:21,920 --> 00:01:25,400 Speaker 1: terms of markets, is the bottom in? Personally, I don't 27 00:01:25,400 --> 00:01:27,640 Speaker 1: think the bottom is in, because I don't think that 28 00:01:27,720 --> 00:01:31,280 Speaker 1: the balance sheet reduction simultaneous to these um you know, 29 00:01:31,920 --> 00:01:35,000 Speaker 1: rate hikes at an accelerated rate, have been priced in 30 00:01:35,080 --> 00:01:38,360 Speaker 1: fully UM And I think what the problem is is 31 00:01:38,400 --> 00:01:41,399 Speaker 1: that because we're making such large moves over such a 32 00:01:41,400 --> 00:01:44,600 Speaker 1: small amount of time, the system doesn't have a chance 33 00:01:44,640 --> 00:01:47,960 Speaker 1: to recalibrate each of those moves, and so you're actually 34 00:01:48,000 --> 00:01:50,840 Speaker 1: embedding additional risk into the credit markets. If I look 35 00:01:50,880 --> 00:01:55,559 Speaker 1: at the corporate UM index UH spread option adjusted spread, 36 00:01:55,880 --> 00:01:59,520 Speaker 1: you know, we're reaching the level where they pivoted in eighteen, 37 00:01:59,680 --> 00:02:02,240 Speaker 1: so UM they pivoted at one point six two and 38 00:02:02,640 --> 00:02:05,240 Speaker 1: eighteen and we're at one point five eight UM and 39 00:02:05,280 --> 00:02:08,040 Speaker 1: it's been slowly going up, slowly going up, slowly going up. 40 00:02:08,080 --> 00:02:10,560 Speaker 1: So as we get more aggressive with the tightening, as 41 00:02:10,639 --> 00:02:14,080 Speaker 1: we as financial conditions tighten, as we reduce the liquidity 42 00:02:14,080 --> 00:02:16,960 Speaker 1: in the system. Uh, you know, the credit risk is 43 00:02:17,000 --> 00:02:20,119 Speaker 1: going up and and that's being reflected in the trading. Yeah, definitely, 44 00:02:20,120 --> 00:02:22,280 Speaker 1: when you get tighter financial conditions, one of the by 45 00:02:22,360 --> 00:02:25,280 Speaker 1: products is a stronger dollar low And behold here we 46 00:02:25,320 --> 00:02:28,560 Speaker 1: have IBM after the Bell lowering its forecast for free 47 00:02:28,639 --> 00:02:31,639 Speaker 1: cash flow this year because of a strong dollar. So 48 00:02:32,440 --> 00:02:33,880 Speaker 1: are we going to see a lot more of this 49 00:02:34,000 --> 00:02:38,520 Speaker 1: noise here when it comes to corporate earnings? I mean definitely. 50 00:02:38,560 --> 00:02:40,519 Speaker 1: I mean there are a number of things that are 51 00:02:40,600 --> 00:02:44,400 Speaker 1: crunching profits and we still have that sag sagflationary sentiment 52 00:02:44,440 --> 00:02:47,239 Speaker 1: in the system, and particularly with the upside surprise on CPI. 53 00:02:48,000 --> 00:02:50,800 Speaker 1: UM I do think that you know, the labor market, 54 00:02:50,960 --> 00:02:54,080 Speaker 1: you know that we're still adding jobs, so you know, 55 00:02:54,120 --> 00:02:56,359 Speaker 1: the labor market is still pretty tight. That's going to 56 00:02:56,440 --> 00:02:59,760 Speaker 1: be a lagging indicator UM and so, and the FED 57 00:02:59,880 --> 00:03:02,680 Speaker 1: is focused on CPI. And if you think about the 58 00:03:02,680 --> 00:03:05,520 Speaker 1: prices that have dropped as the components of CPI, even 59 00:03:05,600 --> 00:03:08,240 Speaker 1: energy has a one month lag before it hits CPI, 60 00:03:08,880 --> 00:03:11,160 Speaker 1: food has a four to eight month lag before it 61 00:03:11,240 --> 00:03:14,800 Speaker 1: hits cp I, and owners equivalent rent, which is a 62 00:03:15,080 --> 00:03:19,359 Speaker 1: nice component of cp I, has like an eighteen month lag, right, 63 00:03:19,400 --> 00:03:23,120 Speaker 1: So these lags are what are what are causing inflation 64 00:03:23,160 --> 00:03:26,960 Speaker 1: to remain sticky in the numbers even though these commodities 65 00:03:26,960 --> 00:03:30,680 Speaker 1: are selling off in the background. And so corporations looking 66 00:03:30,720 --> 00:03:33,799 Speaker 1: at their profit margins and looking at the earnings expectations 67 00:03:33,919 --> 00:03:36,840 Speaker 1: versus the growth expectations, which quite frankly are kind of 68 00:03:36,880 --> 00:03:39,320 Speaker 1: headed in the opposite direction. So one is going to 69 00:03:39,400 --> 00:03:42,480 Speaker 1: have to reconcile with the other. Um They're looking at 70 00:03:42,480 --> 00:03:44,600 Speaker 1: all of these things and it's like, wait, do we 71 00:03:44,720 --> 00:03:46,640 Speaker 1: do we price this in? Or do we price this in? 72 00:03:47,160 --> 00:03:50,640 Speaker 1: And I think that where the puck is going is 73 00:03:50,760 --> 00:03:53,800 Speaker 1: inflation is going to eventually roll over. It's eventually going 74 00:03:53,840 --> 00:03:56,720 Speaker 1: to come in the numbers. But the Fed has said 75 00:03:57,360 --> 00:03:59,880 Speaker 1: very specifically that they're now paying attention to headline c 76 00:04:00,080 --> 00:04:03,600 Speaker 1: p I and frantis we were discussing inflation when we 77 00:04:03,680 --> 00:04:05,520 Speaker 1: lift off. As you said, there are a lot of 78 00:04:05,560 --> 00:04:10,000 Speaker 1: components to the CPI, some of which a lag by months. 79 00:04:10,040 --> 00:04:12,520 Speaker 1: So with that in mind, have we hit the peak 80 00:04:12,560 --> 00:04:15,560 Speaker 1: of inflation? And does have to be careful here about 81 00:04:15,600 --> 00:04:20,200 Speaker 1: tightening too much? I kind of feel like it's Murphy's law. 82 00:04:20,240 --> 00:04:22,280 Speaker 1: If I say that we've hit the peak, we haven't. 83 00:04:22,360 --> 00:04:24,080 Speaker 1: And if I say we haven't hit the peak, we 84 00:04:24,160 --> 00:04:29,160 Speaker 1: finally will have hit the peak. It's impossible to say. Um, 85 00:04:29,200 --> 00:04:31,560 Speaker 1: I think the Fed. You know, when they did their 86 00:04:31,640 --> 00:04:35,360 Speaker 1: last iteration of tightening, they stopped reducing. I mean they 87 00:04:35,360 --> 00:04:39,000 Speaker 1: started reducing, stopped producing, sorry, stopped adding assets to the 88 00:04:39,000 --> 00:04:42,440 Speaker 1: balance sheet in October. Then they did lift off in 89 00:04:42,480 --> 00:04:46,680 Speaker 1: December of fifteen, you know, and then they waited quite 90 00:04:46,720 --> 00:04:50,440 Speaker 1: a while before they started, um, you know, actually reducing 91 00:04:50,440 --> 00:04:53,000 Speaker 1: the assets on the balance sheet. Now that all happened 92 00:04:53,040 --> 00:04:55,719 Speaker 1: over a several several year period before they had to 93 00:04:55,720 --> 00:05:00,240 Speaker 1: pivot in late and you know, the SMP sold unt 94 00:05:00,640 --> 00:05:03,880 Speaker 1: We still had a liquidity shortage in the system around 95 00:05:03,880 --> 00:05:07,839 Speaker 1: the quarterly tax payment in September nineteen, which is important 96 00:05:07,839 --> 00:05:12,080 Speaker 1: because it reignited que before COVID, where we added half 97 00:05:12,080 --> 00:05:14,719 Speaker 1: a trillion dollars to the balance sheet before COVID occurred. 98 00:05:15,040 --> 00:05:19,120 Speaker 1: And so that's the risk. We're making a similar um 99 00:05:19,240 --> 00:05:22,960 Speaker 1: or more move in a year's time rather than over 100 00:05:23,000 --> 00:05:26,040 Speaker 1: a couple of years. And the problem with that, again 101 00:05:26,160 --> 00:05:29,520 Speaker 1: is that the system can't recalibrate all of these incremental moves, 102 00:05:29,520 --> 00:05:32,960 Speaker 1: and every time we raise rates um consumers. You know, 103 00:05:33,000 --> 00:05:35,400 Speaker 1: the bank CEOs were saying that consumers are in great shape. 104 00:05:35,440 --> 00:05:39,480 Speaker 1: Consumers are using credit cards. We now have less savings 105 00:05:39,560 --> 00:05:41,960 Speaker 1: in the system than we did pre pandemic, so they're 106 00:05:42,000 --> 00:05:44,359 Speaker 1: putting this stuff on credit cards. Every time that interest 107 00:05:44,440 --> 00:05:47,120 Speaker 1: rate goes up seventy five bps, credit card rates are 108 00:05:47,120 --> 00:05:51,120 Speaker 1: going up, so and of course this is disproportionately affecting 109 00:05:51,200 --> 00:05:53,400 Speaker 1: the lower echelon of society and the fact that they're 110 00:05:53,400 --> 00:05:57,920 Speaker 1: already paying between twelve and more for things like food 111 00:05:58,360 --> 00:06:01,320 Speaker 1: and then now they're paying you know, their interest rate 112 00:06:01,400 --> 00:06:04,040 Speaker 1: is going up, so collectively they're paying a lot more 113 00:06:04,120 --> 00:06:06,080 Speaker 1: than the rest of us for some of these things, 114 00:06:06,080 --> 00:06:09,440 Speaker 1: which is unfortunate. But the thing is is what happened 115 00:06:09,520 --> 00:06:13,120 Speaker 1: during COVID is these people got stimulus checks, which created demands. 116 00:06:13,160 --> 00:06:15,800 Speaker 1: So now this part of the society is going to 117 00:06:15,880 --> 00:06:18,840 Speaker 1: hurt the most. But we can't give them stimulus checks 118 00:06:18,880 --> 00:06:22,159 Speaker 1: because that would be creating more demand. And the FED 119 00:06:22,279 --> 00:06:26,440 Speaker 1: is trying to unmock inflation by destroying demands. So we're 120 00:06:26,480 --> 00:06:29,039 Speaker 1: in a really we're in a catch twenty two. But 121 00:06:29,120 --> 00:06:31,800 Speaker 1: the point being is that if you raise seventy five 122 00:06:31,839 --> 00:06:34,840 Speaker 1: bps in June July. You know, we won't know if 123 00:06:34,880 --> 00:06:38,600 Speaker 1: these people are defaulting days that will be lagging, and 124 00:06:38,600 --> 00:06:41,520 Speaker 1: so we won't see problems in the credit market's probably 125 00:06:41,600 --> 00:06:44,359 Speaker 1: until it's too late, and then that could be a 126 00:06:44,480 --> 00:06:47,400 Speaker 1: major headache for the FED to try to get out 127 00:06:47,440 --> 00:06:49,920 Speaker 1: from underneath a scenario such as that. But I want 128 00:06:49,960 --> 00:06:52,719 Speaker 1: to focus more on the opportunities that you're seeing globally 129 00:06:52,839 --> 00:06:55,240 Speaker 1: right now. We just heard from ED about China being 130 00:06:55,680 --> 00:06:58,080 Speaker 1: a little bit more at risk of frequent lockdowns and 131 00:06:58,120 --> 00:07:01,479 Speaker 1: mass testing. We know the energy story, how it's impacting Europe. 132 00:07:01,800 --> 00:07:07,560 Speaker 1: Are you seeing opportunities offshore right now outside the US? UM, 133 00:07:07,560 --> 00:07:10,000 Speaker 1: I feel like Europe is an embarrassed market. Europe is 134 00:07:10,040 --> 00:07:13,000 Speaker 1: also on a trajectory of tightening. UM. They're reducing their 135 00:07:13,000 --> 00:07:16,880 Speaker 1: money supply, reducing their liquidity. UH. China is really the 136 00:07:16,920 --> 00:07:20,000 Speaker 1: only place around the globe that's easing. Of course, there's 137 00:07:20,040 --> 00:07:22,320 Speaker 1: a tremendous amount of additional risk, whether it's g a 138 00:07:22,360 --> 00:07:27,840 Speaker 1: political risk UM. You know, opinions are varied, But basically, 139 00:07:28,000 --> 00:07:31,000 Speaker 1: we have a small position in c h i Q 140 00:07:31,680 --> 00:07:35,600 Speaker 1: and I'm watching the technicals and watching support. UH if 141 00:07:35,640 --> 00:07:39,080 Speaker 1: it drops below a level where I'm comfortable then obviously 142 00:07:39,120 --> 00:07:41,760 Speaker 1: we'll sell it. But just like we don't want to 143 00:07:41,800 --> 00:07:44,160 Speaker 1: fight the FED over here, I think you don't want 144 00:07:44,160 --> 00:07:46,239 Speaker 1: to fight the central bank in China. They held steady 145 00:07:46,280 --> 00:07:48,800 Speaker 1: on their rates, but they are stimulating. And you know, 146 00:07:49,360 --> 00:07:51,480 Speaker 1: we saw what happened when you put a lot of 147 00:07:51,480 --> 00:07:55,280 Speaker 1: stimulus in the system attendance to the lockdowns, right, we 148 00:07:55,280 --> 00:07:56,680 Speaker 1: we got a lot of growth and we got a 149 00:07:56,720 --> 00:08:00,680 Speaker 1: lot of inflation, and so mechanically and us pensively, they 150 00:08:00,720 --> 00:08:02,600 Speaker 1: could do the same thing. Now if that proves not 151 00:08:02,640 --> 00:08:05,640 Speaker 1: to be true, we sell it um and take a loss. 152 00:08:05,640 --> 00:08:07,800 Speaker 1: But really, China is the only place on the globe 153 00:08:07,800 --> 00:08:10,360 Speaker 1: that's adding to their money supply rather than reducing it. 154 00:08:10,920 --> 00:08:13,200 Speaker 1: M hmm, yep. Di virgin still very much a thing. 155 00:08:13,480 --> 00:08:17,240 Speaker 1: Francis Stacey, director of strategy at Optimal Capital, thanks so 156 00:08:17,320 --> 00:08:19,679 Speaker 1: much for joining us on the Bloomberg Daybreak Asia