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Speaker 1: Welcome to the Bloomberg surveillance podcast. I'm Tom Keane. Along

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Speaker 1: with Jonathan Ferroll and Lisa Brownowitz, daily we bring you

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Speaker 1: insight from the best and economics, finance, investment and international relations.

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Speaker 1: To Find Bloomberg surveillance on Apple podcast, Suncloud, Bloomberg Dot

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Speaker 1: Com and, of course, on the Bloomberg terminal. It is

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Speaker 1: so true that the media, the financial media, loves to

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Speaker 1: look at strategists to say, are you right or wrong?

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Speaker 1: You've failed, you're done. The reality is the way strategists

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Speaker 1: are used on Wall Street and no one has given

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Speaker 1: more guidance this year, in the last twelve months, and

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Speaker 1: Michael Wilson, C I O in chief US equity strategist

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Speaker 1: at Morgan Stanley, because it's been a consistent and coagent

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Speaker 1: message of beware the future. Mike. We are now where

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Speaker 1: we have a Mike Wilson's stock market, and what I

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Speaker 1: note is, you mentioned it is picked over. I can't

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Speaker 1: find scale, there's not enough to choose from. WHERE DO

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Speaker 1: I hide? Yeah, well, thanks, Tom, appreciate your kind words.

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Speaker 1: I mean look, I think the I mean the market,

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Speaker 1: is picked over, because this is where we are in

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Speaker 1: the evolution of this bear market. Essentially, when bear markets begin,

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Speaker 1: they always go after the high flyers, you know, things

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Speaker 1: that are kind of ridiculously priced or where their earnings

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Speaker 1: risk is is more evident. And that's what happened really,

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Speaker 1: you know, kind of earlier this year, late last year.

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Speaker 1: Quite frankly, really began almost a year ago and now.

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Speaker 1: But as you kind of go through, people getting high.

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Speaker 1: It's like, you know, in the water rise as you

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Speaker 1: go to the higher part of the mountain, and so

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Speaker 1: everybody's kind of crammed into the same stuff, just kind

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Speaker 1: of waiting for, you know, some conclusion to this story.

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Speaker 1: Either we avoid a recession and move forward to a

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Speaker 1: soft landing, or we don't and we clear the decks

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Speaker 1: and then we can move forward from there. We're kind

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Speaker 1: of more in that second camp because our view on

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Speaker 1: earnings is just so negative, whether we have a recession

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Speaker 1: or not. All of our top down models, which are,

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Speaker 1: you know, pretty good, are telling us that, know, the

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Speaker 1: spread between our forecasts and the actual forecast by the street,

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Speaker 1: mean bottoms up, has never been wider. It's the only

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Speaker 1: time it's been as wide. As you know, no eight,

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Speaker 1: and then back in no one, and we know what

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Speaker 1: happened there. So the earning story is what we're focused on.

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Speaker 1: I mean the Fed is important still. Obviously they're not

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Speaker 1: getting off the gas here on their hawkishness, and nor

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Speaker 1: should they. But that's pretty priced. I mean I I

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Speaker 1: wouldn't be surprised if today we get some relief, quite frankly,

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Speaker 1: led by the bottom market, after the Fed does their thing.

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Speaker 1: Maybe stocks can rally one more time. But the end

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Speaker 1: game for us is all about the earnings and the

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Speaker 1: growth now and we're you know, we're just not optimistic

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Speaker 1: there for the next six or twelve months and that

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Speaker 1: that will get price pretty quickly. So he got thirty

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Speaker 1: four undred as the base case, fifty probability. My three

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Speaker 1: thousand the back case recession scenario, forty percent probability. I

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Speaker 1: put out this research, that quote on twitter in the

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Speaker 1: last week and a lot of people wanted to know

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Speaker 1: where's the other ten percent, Mike, what's the ten percent? Yeah,

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Speaker 1: that's uh, that's the mystery now. I mean it's pretty

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Speaker 1: straightforward to me. In the bolt case is just not

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Speaker 1: that probable. Uh, I think you know November and we

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Speaker 1: talked about this, as you recall, John, the bolt case

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Speaker 1: was goldilocks and we said well, you know, the probability

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Speaker 1: of goldilocks looks pretty unlikely. So we, you know, are

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Speaker 1: boat case. You know, we can flex that from you

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Speaker 1: know zero, or not really zero but five, that we're,

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Speaker 1: you know, sort of five to ten percent now. But

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Speaker 1: the boat case is not no longer goldilocks. It's kind

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Speaker 1: of this soft landing for the economy. However, that's not

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Speaker 1: a soft landing for earning. So, you know, our bowl

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Speaker 1: case is not getting much different from our from our

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Speaker 1: base case. I mean we think, we think maybe you

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Speaker 1: don't make new loads in the bowlt case, but Um,

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Speaker 1: there's not a lot of upside. Okay, over the next

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Speaker 1: six months. And that's really how we manage money. I

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Speaker 1: mean we you know, we look at risk reward and

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Speaker 1: you know, at thirty nine the risk reward is probably

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Speaker 1: five to one. You know. On the down side it's

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Speaker 1: sort of the it's sort of the middle of our

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Speaker 1: our viewpoint, and that's at the SMP level. I want

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Speaker 1: to make this clear because, you know, tom asked the

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Speaker 1: right question, which is, you know, this is the part

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Speaker 1: of the bear market we should be looking for individual

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Speaker 1: stocks that you want to own coming out of this.

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Speaker 1: Some are priced, you know, appropriately where you want to

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Speaker 1: take that risk. But look what happened this week with

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Speaker 1: F X. I mean, like you know clearly that wasn't priced. Um.

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Speaker 1: So you gotta be really careful, like thinking, oh well,

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Speaker 1: everybody knows this, it's already priced. Then you get hit

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Speaker 1: over the head and the stacks down. That's uh, you

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Speaker 1: know that. Everybody has their own risk tolerance, they have

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Speaker 1: their own work and you know, we have our own

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Speaker 1: focused list as well. We're staying defensively oriented. We're not

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Speaker 1: reaching for cignicality or, you know, kind of crazy growth

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Speaker 1: stacks yet. We think it's premature for that. But we're

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Speaker 1: getting closer. I mean we think we're within a couple

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Speaker 1: of months probably. So there's an issue with how long

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Speaker 1: this is going to last. We were speaking yesterday with

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Speaker 1: Christopher own who talked of a lost decade of profits

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Speaker 1: on the headline level for the SMP, just based on

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Speaker 1: the fact that eelds are going to remain higher, inflation

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Speaker 1: is going to be greater. Do you agree or do

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Speaker 1: you think that we're gonna get a rebound on the

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Speaker 1: other side of this six months, twelve months down the line? Yeah,

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Speaker 1: I mean I think we will get a rebound but

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Speaker 1: you know, our view for a while now has been

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Speaker 1: we've moved out of the monetary policy dominant world to

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Speaker 1: a fiscal dominant policy world, and what that means is

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Speaker 1: that the Fed is no longer another central banks quay.

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Speaker 1: Frank you can no longer smooth over the edges the

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Speaker 1: way they have historically because inflation, while maybe it's gonna

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Speaker 1: come down over the next six months, which is our

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Speaker 1: core view, um it's not going away, it's gonna be

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Speaker 1: dormant and then we'll re accelerate again in the next upturn.

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Speaker 1: What's gonna Happen least, I think, is that you're going

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Speaker 1: to clear the decks and up on expectations on growth,

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Speaker 1: that you can then have a re acceleration and that

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Speaker 1: will be driven by the natural ebbing and flowing of

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Speaker 1: supplying demand, but also more aggressive fiscal policy. I think

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Speaker 1: it's interesting to note in the last month, I mean

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Speaker 1: fiscal policy, has been turned down like a spicket again. Right,

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Speaker 1: we have this debt forgiveness program here we have this

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Speaker 1: two hundred billion pound stimulus for energy subsidies in the UK,

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Speaker 1: which is equivalent to a trillion dollars in the US

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Speaker 1: economic standpoint. So it's it's kind of interesting and you

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Speaker 1: you have kind of everybody's worried about inflation, but the

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Speaker 1: fiscal policy is working counterproductively to the monetary tightening. But

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Speaker 1: that's the world, I think we're living in now and

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Speaker 1: you have to understand that, because it's not all barish right.

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Speaker 1: There will be a time when fiscal picks it up

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Speaker 1: a again next year, even though monetary can't do its

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Speaker 1: job it has been doing in the past and in

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Speaker 1: the fetes job in my view, and the in the

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Speaker 1: in the CBS view and Exbus job and my view,

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Speaker 1: their their main job going forward is to be funding

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Speaker 1: the government. Whatever the government decides to spend, they will

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Speaker 1: have to fund implicitly, very similar to the forties analog

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Speaker 1: that we've been using. Mike, just want for the question,

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Speaker 1: and I think it's lost in the conversations. Often say

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Speaker 1: with you that it's not just about an index level.

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Speaker 1: Col with you and the team, there's some single name

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Speaker 1: stuff in the mix too. Could you have us with

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Speaker 1: just the call right now? Something you do like in

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Speaker 1: the security market, something that has worked that you stick

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Speaker 1: in with? Yeah, I mean I think like the managed

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Speaker 1: care stocks have been terrific Um and that's an area

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Speaker 1: that you know, these are these are gross stacks Um,

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Speaker 1: and they don't. They don't. They're not priced as grows

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Speaker 1: stacks and they never have been because of, you know,

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Speaker 1: concerns about perhaps regulatory oversight and things like that. But,

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Speaker 1: you know, healthcare in general, I would argue, is an

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Speaker 1: area of the market where you have pent up demand

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Speaker 1: from the pandemic as opposed to back in demand like

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Speaker 1: for technology spending or consumer goods. And for whatever reason

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Speaker 1: it's still trades really cheaply Um. And once again it

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Speaker 1: goes back to this idea that there may be fear about,

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Speaker 1: you know, pricing controls and things like that, but to

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Speaker 1: me that's a fat pitch and uh, you know that

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Speaker 1: that scenario. We've had a lot of exposure. UH, would be,

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Speaker 1: you know, in Pharma, managed care, some of the cheaper

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Speaker 1: areas of healthcare, and I think that continues to work.

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Speaker 1: The other area would be, say, integrated energy companies, where

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Speaker 1: they're they're more defensively oriented, not so depending on the

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Speaker 1: price deck. They pay a great dividend Um and you

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Speaker 1: get some come out of exposure, you know, as a

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Speaker 1: hedge against you know, inflation staying sticky or hot. But

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Speaker 1: the overwriting message, John, as you know, this year from

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Speaker 1: us has been defensive, earning, stability, operational efficiency, boring type metrics.

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Speaker 1: But you know it's been working nicely and I think

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Speaker 1: it will continue until we get the trough in this

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Speaker 1: beer market. It's been working in a tough, tough year.

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Speaker 1: Congrats to you in the same Mike Wilson, so far

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Speaker 1: for just absolutely brilliant. Mike Wilson, that of more CON Stanley.

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Speaker 1: One of those some years ago was Michael Pond. His

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Speaker 1: fancy title now is head of global inflation linked research

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Speaker 1: at Barclay's. Far More Accurately, he is truly expert, with

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Speaker 1: the exception maybe of Ian Lincoln at Demo. I'm full

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Speaker 1: faith in credit and he joins us today. Michael Pond.

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Speaker 1: If I look at the real yield and I look

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Speaker 1: at two partial differentials of the nominal yield and some

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Speaker 1: measurement of inflation, which matters right now, it's the real

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Speaker 1: yield that that matters and it's moved up a lot

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Speaker 1: over the summer. The market was was not really buying

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Speaker 1: into the feds resolved to hike rates enough to slow

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Speaker 1: the economy and getting inflation down. Um, since Jackson Hole, though.

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Speaker 1: Really yields have have soared, particularly at the at the

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Speaker 1: front end, where they were almost at at zero earlier

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Speaker 1: this month. Now they're above one percent when we look

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Speaker 1: at shorthand forward. So the markets moved a lot and

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Speaker 1: accepted the hawks tone of the FT. So if I

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Speaker 1: look not at the ten year real yield but Michael Pon,

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Speaker 1: let's go shorter to maybe the two year, if you

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Speaker 1: agree with me on that, from a negative three hundred

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Speaker 1: basis points in version to a positive one hundred sixty

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Speaker 1: four basis points, that's a hugely linear jump condition. How

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Speaker 1: do other asset classes react to the Michael Pond World? Well,

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Speaker 1: risk assets do not love higher yields that are not

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Speaker 1: supported by strong growth. Really, where really yields are rising

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Speaker 1: here is because the fat has become much more Hawk

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Speaker 1: is trying to slow the economy and that's in part

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Speaker 1: why risk assets have been on the back foot since

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Speaker 1: Jackson Hall. So the Fed's trying to get the economy

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Speaker 1: in a position where inflation comes down and then it

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Speaker 1: can take it's its foot off the off the brake

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Speaker 1: a little bit and allow growth to go back up. Well, we're,

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Speaker 1: we think we're years from that. The Fed's resolve is

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Speaker 1: strong here. That was clear at the at the Jackson

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Speaker 1: Hole Speech by by chair Powell ripping up this, up

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Speaker 1: the script then and channeling his his inner volcre risk

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Speaker 1: assets have responded, but now they're at the point where

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Speaker 1: perhaps they've overreacted. You know, obviously we'll we'll get the

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Speaker 1: message from the Fed that's on the hawkish side, but

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Speaker 1: markets are already prepared for a very hawk is fed.

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Speaker 1: So it's a delicate balance. Today, before we veer too

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Speaker 1: far into that they might be prepared for Hawk is Fed,

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Speaker 1: there's a question of how quickly that leads to economic deterioration,

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Speaker 1: and we can get there. But I want to sit

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Speaker 1: on this idea right now of what it means to

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Speaker 1: have a vulcarized fedsure reserve, particularly with wheel rates at

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Speaker 1: the highest levels going back to two thousand and eleven.

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Speaker 1: Do you foresee ever again in the next few decades

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Speaker 1: this fedures are of going back to zero interest rates?

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Speaker 1: It's very possible. You know, we we thought that the

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Speaker 1: market was pricing in too much of a too high

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Speaker 1: of a probability of strong fed cuts in next year,

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Speaker 1: in in late summer. Uh, those that basically been taken

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Speaker 1: out as appropriate. But we certainly could if you look

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Speaker 1: at the housing market and say the housing market becomes

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Speaker 1: a sign of the broader economic outlook it, and then

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Speaker 1: then we could be in in trouble here and the

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Speaker 1: Fed would have to respond, putting its dove hat back on.

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Speaker 1: We think we're we're not likely to enter that that regime,

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Speaker 1: but it's certainly possible that we enter a recession. They've

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Speaker 1: had hastories, you know, backtrack and send rates right back

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Speaker 1: to zero. Well, okay, so this is sort of the

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Speaker 1: big attention right now in a bond markets, particularly on

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Speaker 1: the long end, with your tenure yields at the highest

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Speaker 1: levels that they've been going back years and years. And

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Speaker 1: yet some people, including Michael Collins from peach of fixed

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Speaker 1: income earlier, saying it's unclear whether it's really time to

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Speaker 1: pounce because there could be more. Is this the last

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Speaker 1: time that we'll see real yields of this level, because

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Speaker 1: this fed is poised to make some sort of turn

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Speaker 1: in the not so distant future. I think depends on

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Speaker 1: the path of core inflation readings and the labor market.

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Speaker 1: That's why the FT is reacting so hawkishly here. They've

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Speaker 1: done quite a bit. Uh. Some parts of the economy

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Speaker 1: has has begun to slow, such as the housing market,

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Speaker 1: but the latest print on core CPI was point six

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Speaker 1: and labor markets clearly remain quite, quite tight, quite robust,

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Speaker 1: at a three point seven percent unemployment rate. The Fed

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Speaker 1: really needs to see a slow down in the monthly

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Speaker 1: pace of inflation readings, particularly on core, and a weakening

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Speaker 1: of the labor market. Again, the chair talked about inducing

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Speaker 1: pain in the economy. Again, channeling is inner vocre uh,

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Speaker 1: in order to get inflation down. So the fat has

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Speaker 1: to do a lot more to get get the economy

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Speaker 1: where it wants. Michael, they you embrace a dual mandate.

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Speaker 1: I get that and you know, we could talk all

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Speaker 1: day about jobless claims, this, that and the other thing,

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Speaker 1: or trim mean Dallas. Maybe the chairman will bring that

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Speaker 1: up today. He's got another mandate, which is the credibility

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Speaker 1: that fed. But just up against political realities. If we

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Speaker 1: get a Barclay's recession, if we get a barklay sort

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Speaker 1: of recession, does that become a third mandate for this chairman? Well,

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Speaker 1: the Fed is absolutely trying to make sure it retains credibility,

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Speaker 1: particularly what when it comes to UH inflation fighting. So

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Speaker 1: one of the reasons why it's being so hawkish here

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Speaker 1: is to make sure that inflation expectations don't get out

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Speaker 1: of control, because that's when the Fed fears and inflationary spiral.

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Speaker 1: We're inflation is high, people expect it to be high

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Speaker 1: and it just feeds on itself. So one of the

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Speaker 1: things that Fed is trying to do here is make

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Speaker 1: sure that high inflation itself doesn't lead to higher inflation expectations.

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Speaker 1: So it's trying to maintain its credibility and if we

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Speaker 1: look at break evens, if we look at surveys such

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Speaker 1: as that from the New York Fed or the University

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Speaker 1: of Michigan, the Fed is doing a good job on

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Speaker 1: that front and it's able to ignore any political issues

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Speaker 1: with a with a slow down, John. I'm sorry, politics

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Speaker 1: matters here. It's gonna Matter Tomorrow for Bank of England.

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Speaker 1: It's gonna Matter Today for Chairman Paul. I dentists agree,

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Speaker 1: and I think, Michael, this is going to be the

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Speaker 1: difficult part. How do they convince people that high unemployment

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Speaker 1: is a price worth paying for lower inflation? Easy to

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Speaker 1: say that now, but when people actually start to see

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Speaker 1: materially higher unemployment? How difficult you think this is going

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Speaker 1: to get? Well, that's one of the SEP the survey

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Speaker 1: of economic productions, or the dots, if you will, will

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Speaker 1: be so important today, Um, when we get the statement,

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Speaker 1: when we look at the statement, one of the things

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Speaker 1: we'll be looking at is the unemployment rate path. So

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Speaker 1: you know the the the SEP is opposed to be

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Speaker 1: the the economic outlook under a path of perfect monetary policy.

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Speaker 1: And if the unemployment rate remains elevated in their forecast,

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Speaker 1: that's a signal to the market that they're willing to

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Speaker 1: tolerate UH decently higher unemployment rates in order to get

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Speaker 1: in Asian down. That's a message that the fete has

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Speaker 1: been sending, but we'll really be looking at the SEP

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Speaker 1: to confirm that. Michael, just real quick here. I'm wondering

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Speaker 1: what your projection is for how quickly inflation will come

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Speaker 1: down that headline CPI, at the end of this year,

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Speaker 1: at the end of next. We're fairly optimistic that it

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Speaker 1: will start to slow particularly with the October reading, in

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Speaker 1: part because of technical reasons, at least in CP I,

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Speaker 1: but even beyond that, again we've seen signs and commodities

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Speaker 1: and shipping rates, uh in in UH related futures, corn wheat,

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Speaker 1: et CETERA. That many price pressures have peaked. Wages, though,

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Speaker 1: are keeping inflation high and that's the key to inflation

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Speaker 1: really rolling over. Michael, just quickly, what are you talking

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Speaker 1: about in terms of levels? Are we gonna end the

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Speaker 1: year at six percent? When do we get back? We

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Speaker 1: think we'll. Will certainly come down from that when it

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Speaker 1: comes to headline inflation, in part because of the strong

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Speaker 1: decline in gasoline prices since since since March, but core

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Speaker 1: can remain sticky. So well, we think will slow in

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Speaker 1: inflation readings, but certainly well above where the Fed would

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Speaker 1: like them least. Thank you very good we will continue

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Speaker 1: right now on this on corporate credit with Michael Collins,

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Speaker 1: senior portfolio manager of Pigeon Fixed Income. Michael, what I

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Speaker 1: noticed here, and I understand the mathewness of it, let's

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Speaker 1: forget that yield up. We all know that. Chairman Powell

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Speaker 1: deal that today. But in many cases price very, very,

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Speaker 1: very down, and we're seeing it in the Bloomberg Total

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Speaker 1: Return Aggregate Index, the Old Lehman Barclay's indusease as well.

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Speaker 1: What is the significance of new low price on those

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Speaker 1: aggregate indices. Yeah, Tomas, as you point out, has really

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Speaker 1: been nowhere to hide this year. And Fixed Income, I

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Speaker 1: mean in our shop we've gotten three big things right.

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Speaker 1: We've kind of stepped aside on on duration, meaning taking

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Speaker 1: our our long positions down to to neutral. We've taken

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Speaker 1: credit risk way down, we've generally been a little along

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Speaker 1: the dollar, but that has not been enough to protect

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Speaker 1: investors from that big trend down in prices. The good

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Speaker 1: news is, as you know, when bond prices are down

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Speaker 1: below par, which they all are really for the first

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Speaker 1: time I can think of in my career, Tom we're

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Speaker 1: seeing the bonds across the board, across all of our portfolios,

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Speaker 1: trading a big discounts to par and, as you know,

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Speaker 1: as long as they don't default, as Lisa pointed out,

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Speaker 1: they end up back at par right. So so you

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Speaker 1: actually have this really uh positive long term opportunity and

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Speaker 1: fixed income which we haven't had for for well over

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Speaker 1: a decade. Michael, I look at the mantra of the

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Speaker 1: real yield, the whole professional study of the inflation adjusted

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Speaker 1: yield explained to mere mortals, while the real yield matters. Yeah,

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Speaker 1: I mean that is the world's discount right, right. I

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Speaker 1: mean I'm always surprised when when people say, wow, I

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Speaker 1: can't believe stocks and bonds are both selling off at

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Speaker 1: the same time this year, and what I tell them is, well,

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Speaker 1: you just wait until you see real estate and private

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Speaker 1: debt and other assets that that haven't sold off because

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Speaker 1: they're not actively traded, they're not marked to market every day.

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Speaker 1: Wait for those shoes to drop, because when the discount rate,

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Speaker 1: the world's discount rate, which is really real treasury yields,

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Speaker 1: by and large, goes up as much as it has,

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Speaker 1: as much as you know, a couple hundred basis points,

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Speaker 1: all asset prices have to come down and the question

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Speaker 1: really is, have they come down enough at this point? Well,

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Speaker 1: let's get into that right now. Mike. We caught up

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Speaker 1: with our good friends buff Michael of jpmrecan asset management yesterday.

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Speaker 1: I asked him about high he already said not yet.

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Speaker 1: Patients spreads need to get somewhere close to seven fifty

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Speaker 1: basis points. The Trad series need to get somewhere close

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Speaker 1: to four point five. The fat funds could push five.

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Speaker 1: Any of that resonating with you? Right now, Mike, or

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Speaker 1: would you take the other side of that trade? Yeah,

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Speaker 1: you know, I'll take a little bit of the other side.

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Speaker 1: On on the rate thing, I think we're much closer

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Speaker 1: on the rate side right our view is that the

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Speaker 1: rates are going to crest and come down first, and

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Speaker 1: then credit spreads and and equities will will continue to

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Speaker 1: to widen and sell off before they they settle down.

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Speaker 1: But but I think we're really getting close to a point, Jonathan,

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Speaker 1: where the likelihood of the Fed and and most other

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Speaker 1: central banks over shooting significantly on the upside and having

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Speaker 1: to reverse course. I know the whole concept of the pivot,

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Speaker 1: you know, it was in vogue a couple of months

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Speaker 1: ago and now people are pushing that aside. And Wow,

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Speaker 1: as as as they keep pushing these rates up at

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Speaker 1: the same time that global growth, you know, risk is

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Speaker 1: coming down, earnings are coming down, as Lisa points out,

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Speaker 1: the faults are probably going to go off, geopolitical risk

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Speaker 1: continues to to elevate. Wow, and inflation globally is really

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Speaker 1: kind of rolling over and I think it's going to

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Speaker 1: be probably a lot lower a year from now. Just

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Speaker 1: as all those things are happening, these central banks are

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Speaker 1: jacking up rates at Nauseam, and I think that's a

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Speaker 1: real recipe for a big reverse course on the rate side.

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Speaker 1: On the credit side, I think you're right. I mean earnings.

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Speaker 1: We've done a lot of work on on earnings expectations

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Speaker 1: going forward and and I think they're gonna keep coming down. Right,

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Speaker 1: and people don't talk enough about the dollar and the

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Speaker 1: impact on that for US companies, for their competitiveness, for

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Speaker 1: their repate patriated earnings. The labor costs continue to put

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Speaker 1: pressure on margins and, as Lisa pointed out, you know,

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Speaker 1: you're starting to see layoffs. Finally happened. So I think

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Speaker 1: there's a little more downside and credit before before you

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Speaker 1: jump in with both feet. This is all really messy.

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Speaker 1: Of Michael, I wonder, just to put it all together quickly,

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Speaker 1: if you could give us a sense of how you

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Speaker 1: play this, the conviction behind buying certain discounted bonds, taking

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Speaker 1: the other side of Bob, Michael, but also acknowledging what

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Speaker 1: you see coming. Yeah, I mean you stick with you

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Speaker 1: stick with higher quality credit, right and and uh, presumably

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Speaker 1: that's what a big active shop. We have a hundred,

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Speaker 1: forty analysts, Lisa right, and that's really our our bread

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Speaker 1: and butter, and this is an opportunity in the market

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Speaker 1: where where everything is kind of sold off right in

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Speaker 1: unison to to some extent, and there are a lot

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Speaker 1: of relative value opportunities. You can buy really high quality

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Speaker 1: credits at really big yields, really big spreads, low dollar prices.

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Speaker 1: H So there is a lot of opportunity there without

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Speaker 1: taking a lot of credit risk. And we've taken our

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Speaker 1: credit risk down, but the yields that we're seeing across

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Speaker 1: the board in the bonds we own, the high quality

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Speaker 1: bonds we own, the portfolios we manage, are really big. Right. So,

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Speaker 1: I mean you don't have to take a lot of

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Speaker 1: credit risk. Ultimately you'll want to do that dip down

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Speaker 1: and credit. But but it's definitely too early. Just so

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Speaker 1: I can quite you for the rest of the day

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Speaker 1: and get it right if you even found this tenure

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Speaker 1: at three. Yeah, we we. We haven't yet. We're dead

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Speaker 1: neutral here, Jonathan Um. But but again, that is going

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Speaker 1: to be the big first trade really out of the

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Speaker 1: gates here, and maybe you have to wait for for today.

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Speaker 1: The Fed is going to probably sound Pretty Hawk is today,

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Speaker 1: even though they've done a good job on fed days.

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Speaker 1: I know we've talked about this on the program before. UH,

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00:22:12,280 --> 00:22:14,639
Speaker 1: typically the days the Fed meets and the days Jerome

430
00:22:14,680 --> 00:22:16,880
Speaker 1: Powell speaks, that the equity markets tend to go up.

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00:22:16,920 --> 00:22:19,320
Speaker 1: So they do a good job of getting investors off

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00:22:19,320 --> 00:22:21,560
Speaker 1: the ledge a little bit. But but you know, though,

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00:22:21,600 --> 00:22:24,160
Speaker 1: that dot plot is going to be ugly. I think

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00:22:24,160 --> 00:22:26,119
Speaker 1: a lot of it's probably priced in and the markets

435
00:22:26,119 --> 00:22:28,960
Speaker 1: are braced for it. But there will be an opportunity,

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00:22:29,640 --> 00:22:31,320
Speaker 1: I would bet, in the next couple of quarters, to

437
00:22:31,320 --> 00:22:33,560
Speaker 1: to really start getting along duration. We'll catch up and

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00:22:33,600 --> 00:22:36,640
Speaker 1: talk about it. Mike Collins, the PM. Thank you, Mike.

439
00:22:41,320 --> 00:22:44,640
Speaker 1: Can particularly a shock to the nations of commodities. Kna

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Speaker 1: Hack joins us now a head of research at E

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00:22:47,000 --> 00:22:49,840
Speaker 1: D N F man and is just brilliant. On the

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00:22:49,960 --> 00:22:54,240
Speaker 1: soft something we don't talk enough about. Cona the impact

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00:22:54,359 --> 00:22:59,359
Speaker 1: of a strong dollar on commodity nations, commodity E m.

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00:22:59,359 --> 00:23:03,760
Speaker 1: How large is it? Huge? Huge. I mean if you

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00:23:03,800 --> 00:23:07,159
Speaker 1: think about only six months ago when the war began

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00:23:07,200 --> 00:23:11,240
Speaker 1: in Ukraine, Um everything went up. When there was energy grains,

447
00:23:11,320 --> 00:23:14,760
Speaker 1: they all went up and that was because it's highly inflasionary.

448
00:23:14,800 --> 00:23:17,480
Speaker 1: But then the inflationary store in the US letter higher

449
00:23:17,600 --> 00:23:22,640
Speaker 1: US dollar. that US dollar then caused that whole commodity

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00:23:23,280 --> 00:23:25,760
Speaker 1: elevation to just come collapsing down and now we're back

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00:23:25,800 --> 00:23:29,280
Speaker 1: to pre war levels. Um. So yeah, the dollar impact

452
00:23:29,320 --> 00:23:33,760
Speaker 1: on commodities, it's very intact. And reverse co invest correlations

453
00:23:33,800 --> 00:23:37,400
Speaker 1: as intact as ever. My training is to always pivot

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00:23:37,440 --> 00:23:45,080
Speaker 1: to Indonesia and Brazil and dollar strength. Are they of interest? Well, yes, Indonesia, obviously,

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00:23:45,200 --> 00:23:48,880
Speaker 1: palm oil, massive producer of palm oil, exporter and cold

456
00:23:48,920 --> 00:23:52,240
Speaker 1: as well. Um. And for Brazil, I mean particularly the

457
00:23:52,280 --> 00:23:55,480
Speaker 1: soft commodities. You cannot underestimate the impact of the Brazilian

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00:23:55,480 --> 00:23:58,359
Speaker 1: real on all of these commodities. So what we're seeing

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00:23:58,400 --> 00:24:02,520
Speaker 1: today is the strong dollar is causing the brl to weaken. Um.

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00:24:02,720 --> 00:24:06,639
Speaker 1: That intern is putting pressure on things like coffee, sugar,

461
00:24:06,840 --> 00:24:10,000
Speaker 1: soy beans, all the major posian exports, iron or even.

462
00:24:10,640 --> 00:24:12,880
Speaker 1: But it's not just that. I mean I think today

463
00:24:13,040 --> 00:24:17,119
Speaker 1: commodities are reacting. They were positive initially because of the

464
00:24:17,119 --> 00:24:21,080
Speaker 1: inflation story, but now they're coming off because the inflation

465
00:24:21,119 --> 00:24:24,120
Speaker 1: story has moved to a recessionary story and obviously that's

466
00:24:24,119 --> 00:24:28,280
Speaker 1: not great for commodities. Um, the worse for metals. And Energy,

467
00:24:28,760 --> 00:24:32,440
Speaker 1: arguably less so for soft but it's still it still

468
00:24:32,520 --> 00:24:36,119
Speaker 1: isn't does have a dampling effect for sure. The focus

469
00:24:36,160 --> 00:24:39,080
Speaker 1: so very much on the energy story, especially for Europe

470
00:24:39,119 --> 00:24:42,159
Speaker 1: as they face off with a potentially catastrophic winter, depending

471
00:24:42,160 --> 00:24:45,520
Speaker 1: on the meteorologist reports that we get. I'm wondering, from

472
00:24:45,520 --> 00:24:48,920
Speaker 1: your perspective, if the answer is what Germany is now doing,

473
00:24:48,920 --> 00:24:52,280
Speaker 1: which is to nationalize energy companies, does that help support

474
00:24:52,400 --> 00:24:55,040
Speaker 1: things in a more concrete way, or does it just

475
00:24:55,119 --> 00:24:58,320
Speaker 1: basically put a band aid over the actual bill some

476
00:24:58,400 --> 00:25:03,239
Speaker 1: of these countries are facing? Yes, so I think in

477
00:25:03,280 --> 00:25:06,439
Speaker 1: my opinion it's a band aid because the reality is

478
00:25:06,480 --> 00:25:11,480
Speaker 1: that none of this is providing additional supply. So we

479
00:25:11,520 --> 00:25:15,240
Speaker 1: have a supply demand mismatch right now in the energy crisis.

480
00:25:15,280 --> 00:25:18,639
Speaker 1: So we either tackle demands, so you have to ration demand,

481
00:25:18,680 --> 00:25:22,200
Speaker 1: and I can't see Germany effectively rational in the demand

482
00:25:22,720 --> 00:25:27,479
Speaker 1: and certainly in the UK they're actually accepsidizing the demands.

483
00:25:27,480 --> 00:25:29,560
Speaker 1: So that doesn't even ketch up with that sort of thing.

484
00:25:30,040 --> 00:25:32,280
Speaker 1: And on the supply side, I think I don't see

485
00:25:32,320 --> 00:25:37,440
Speaker 1: them investing or allowing more UM natural guests to come out.

486
00:25:37,560 --> 00:25:43,280
Speaker 1: So I don't see this as fundamentally altering the situation

487
00:25:43,600 --> 00:25:46,840
Speaker 1: too much, and I think this this can go on

488
00:25:46,920 --> 00:25:49,040
Speaker 1: for a while. Well, when when you say this can

489
00:25:49,040 --> 00:25:51,439
Speaker 1: go on for a while, there is a question of

490
00:25:51,480 --> 00:25:53,760
Speaker 1: how much has already been priced in in terms of

491
00:25:53,800 --> 00:25:56,040
Speaker 1: what is to come for this winter, and then there

492
00:25:56,080 --> 00:25:58,200
Speaker 1: is a question, as John's highlighted many times, of the

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00:25:58,280 --> 00:26:01,680
Speaker 1: duration of how long, how many years, we face off

494
00:26:01,920 --> 00:26:04,480
Speaker 1: with this lack of supply and the face of demand?

495
00:26:04,800 --> 00:26:09,520
Speaker 1: What's your view on both of those? So with time,

496
00:26:10,000 --> 00:26:13,240
Speaker 1: you know, humans are very innovative and markets are adapted.

497
00:26:13,359 --> 00:26:15,200
Speaker 1: So with time what's going to happen is, as long

498
00:26:15,240 --> 00:26:18,520
Speaker 1: as prices continue to provide this pain pressure, you will

499
00:26:18,520 --> 00:26:22,720
Speaker 1: start seeking adaptation, so you will move towards alternatives, renewables,

500
00:26:22,760 --> 00:26:25,320
Speaker 1: you will become more efficient. So that's definitely something that

501
00:26:25,359 --> 00:26:28,600
Speaker 1: will happen with time. Overnight you're not going to get that.

502
00:26:28,680 --> 00:26:31,480
Speaker 1: So I think effectively what we're saying is we need

503
00:26:31,560 --> 00:26:34,040
Speaker 1: that pain pressure to continue for a little bit, what more,

504
00:26:34,520 --> 00:26:38,240
Speaker 1: to to materialize these kind of actions. Only then will

505
00:26:38,280 --> 00:26:41,439
Speaker 1: we start seeing a proper diversification both in terms of

506
00:26:41,480 --> 00:26:45,160
Speaker 1: demand and also supply, so we can start relying less

507
00:26:45,200 --> 00:26:49,480
Speaker 1: on natural gas, relying less on Russia, um even relying

508
00:26:49,560 --> 00:26:53,280
Speaker 1: less on energy. I'm of understanding that the energy carriers are,

509
00:26:53,520 --> 00:26:55,040
Speaker 1: you know, the freights are going through the roof, that

510
00:26:55,160 --> 00:26:57,680
Speaker 1: they're strugging to get hold of ships. So it's a

511
00:26:57,800 --> 00:27:00,000
Speaker 1: multitude of problems are not going to be fixed overnight

512
00:27:00,200 --> 00:27:01,760
Speaker 1: and this is gonna take you a while. Kind of

513
00:27:01,760 --> 00:27:04,760
Speaker 1: hack that of eight and F man. Thank you, Connor

514
00:27:04,800 --> 00:27:09,480
Speaker 1: as owis. This is the Bloomberg surveillance podcast. Thanks for listening.

515
00:27:09,800 --> 00:27:13,160
Speaker 1: Join US live weekdays from seven to ten am eastern

516
00:27:13,400 --> 00:27:17,480
Speaker 1: on Bloomberg radio and on Bloomberg television each day from

517
00:27:17,480 --> 00:27:22,160
Speaker 1: six to nine am for insight from the best in economics, finance,

518
00:27:22,240 --> 00:27:27,560
Speaker 1: investment and international relations, and subscribe to the surveillance podcast

519
00:27:27,840 --> 00:27:31,480
Speaker 1: on apple podcast, soundcloud, Bloomberg Dot Com and, of course,

520
00:27:31,800 --> 00:27:36,119
Speaker 1: on the terminal. I'm Tom Keene and this is Bloomberg