Speaker 1: Welcome to the Bloomberg surveillance podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferroll and Lisa Brownowitz, daily we bring you
Speaker 1: insight from the best and economics, finance, investment and international relations.
Speaker 1: To Find Bloomberg surveillance on Apple podcast, Suncloud, Bloomberg Dot
Speaker 1: Com and, of course, on the Bloomberg terminal. It is
Speaker 1: so true that the media, the financial media, loves to
Speaker 1: look at strategists to say, are you right or wrong?
Speaker 1: You've failed, you're done. The reality is the way strategists
Speaker 1: are used on Wall Street and no one has given
Speaker 1: more guidance this year, in the last twelve months, and
Speaker 1: Michael Wilson, C I O in chief US equity strategist
Speaker 1: at Morgan Stanley, because it's been a consistent and coagent
Speaker 1: message of beware the future. Mike. We are now where
Speaker 1: we have a Mike Wilson's stock market, and what I
Speaker 1: note is, you mentioned it is picked over. I can't
Speaker 1: find scale, there's not enough to choose from. WHERE DO
Speaker 1: I hide? Yeah, well, thanks, Tom, appreciate your kind words.
Speaker 1: I mean look, I think the I mean the market,
Speaker 1: is picked over, because this is where we are in
Speaker 1: the evolution of this bear market. Essentially, when bear markets begin,
Speaker 1: they always go after the high flyers, you know, things
Speaker 1: that are kind of ridiculously priced or where their earnings
Speaker 1: risk is is more evident. And that's what happened really,
Speaker 1: you know, kind of earlier this year, late last year.
Speaker 1: Quite frankly, really began almost a year ago and now.
Speaker 1: But as you kind of go through, people getting high.
Speaker 1: It's like, you know, in the water rise as you
Speaker 1: go to the higher part of the mountain, and so
Speaker 1: everybody's kind of crammed into the same stuff, just kind
Speaker 1: of waiting for, you know, some conclusion to this story.
Speaker 1: Either we avoid a recession and move forward to a
Speaker 1: soft landing, or we don't and we clear the decks
Speaker 1: and then we can move forward from there. We're kind
Speaker 1: of more in that second camp because our view on
Speaker 1: earnings is just so negative, whether we have a recession
Speaker 1: or not. All of our top down models, which are,
Speaker 1: you know, pretty good, are telling us that, know, the
Speaker 1: spread between our forecasts and the actual forecast by the street,
Speaker 1: mean bottoms up, has never been wider. It's the only
Speaker 1: time it's been as wide. As you know, no eight,
Speaker 1: and then back in no one, and we know what
Speaker 1: happened there. So the earning story is what we're focused on.
Speaker 1: I mean the Fed is important still. Obviously they're not
Speaker 1: getting off the gas here on their hawkishness, and nor
Speaker 1: should they. But that's pretty priced. I mean I I
Speaker 1: wouldn't be surprised if today we get some relief, quite frankly,
Speaker 1: led by the bottom market, after the Fed does their thing.
Speaker 1: Maybe stocks can rally one more time. But the end
Speaker 1: game for us is all about the earnings and the
Speaker 1: growth now and we're you know, we're just not optimistic
Speaker 1: there for the next six or twelve months and that
Speaker 1: that will get price pretty quickly. So he got thirty
Speaker 1: four undred as the base case, fifty probability. My three
Speaker 1: thousand the back case recession scenario, forty percent probability. I
Speaker 1: put out this research, that quote on twitter in the
Speaker 1: last week and a lot of people wanted to know
Speaker 1: where's the other ten percent, Mike, what's the ten percent? Yeah,
Speaker 1: that's uh, that's the mystery now. I mean it's pretty
Speaker 1: straightforward to me. In the bolt case is just not
Speaker 1: that probable. Uh, I think you know November and we
Speaker 1: talked about this, as you recall, John, the bolt case
Speaker 1: was goldilocks and we said well, you know, the probability
Speaker 1: of goldilocks looks pretty unlikely. So we, you know, are
Speaker 1: boat case. You know, we can flex that from you
Speaker 1: know zero, or not really zero but five, that we're,
Speaker 1: you know, sort of five to ten percent now. But
Speaker 1: the boat case is not no longer goldilocks. It's kind
Speaker 1: of this soft landing for the economy. However, that's not
Speaker 1: a soft landing for earning. So, you know, our bowl
Speaker 1: case is not getting much different from our from our
Speaker 1: base case. I mean we think, we think maybe you
Speaker 1: don't make new loads in the bowlt case, but Um,
Speaker 1: there's not a lot of upside. Okay, over the next
Speaker 1: six months. And that's really how we manage money. I
Speaker 1: mean we you know, we look at risk reward and
Speaker 1: you know, at thirty nine the risk reward is probably
Speaker 1: five to one. You know. On the down side it's
Speaker 1: sort of the it's sort of the middle of our
Speaker 1: our viewpoint, and that's at the SMP level. I want
Speaker 1: to make this clear because, you know, tom asked the
Speaker 1: right question, which is, you know, this is the part
Speaker 1: of the bear market we should be looking for individual
Speaker 1: stocks that you want to own coming out of this.
Speaker 1: Some are priced, you know, appropriately where you want to
Speaker 1: take that risk. But look what happened this week with
Speaker 1: F X. I mean, like you know clearly that wasn't priced. Um.
Speaker 1: So you gotta be really careful, like thinking, oh well,
Speaker 1: everybody knows this, it's already priced. Then you get hit
Speaker 1: over the head and the stacks down. That's uh, you
Speaker 1: know that. Everybody has their own risk tolerance, they have
Speaker 1: their own work and you know, we have our own
Speaker 1: focused list as well. We're staying defensively oriented. We're not
Speaker 1: reaching for cignicality or, you know, kind of crazy growth
Speaker 1: stacks yet. We think it's premature for that. But we're
Speaker 1: getting closer. I mean we think we're within a couple
Speaker 1: of months probably. So there's an issue with how long
Speaker 1: this is going to last. We were speaking yesterday with
Speaker 1: Christopher own who talked of a lost decade of profits
Speaker 1: on the headline level for the SMP, just based on
Speaker 1: the fact that eelds are going to remain higher, inflation
Speaker 1: is going to be greater. Do you agree or do
Speaker 1: you think that we're gonna get a rebound on the
Speaker 1: other side of this six months, twelve months down the line? Yeah,
Speaker 1: I mean I think we will get a rebound but
Speaker 1: you know, our view for a while now has been
Speaker 1: we've moved out of the monetary policy dominant world to
Speaker 1: a fiscal dominant policy world, and what that means is
Speaker 1: that the Fed is no longer another central banks quay.
Speaker 1: Frank you can no longer smooth over the edges the
Speaker 1: way they have historically because inflation, while maybe it's gonna
Speaker 1: come down over the next six months, which is our
Speaker 1: core view, um it's not going away, it's gonna be
Speaker 1: dormant and then we'll re accelerate again in the next upturn.
Speaker 1: What's gonna Happen least, I think, is that you're going
Speaker 1: to clear the decks and up on expectations on growth,
Speaker 1: that you can then have a re acceleration and that
Speaker 1: will be driven by the natural ebbing and flowing of
Speaker 1: supplying demand, but also more aggressive fiscal policy. I think
Speaker 1: it's interesting to note in the last month, I mean
Speaker 1: fiscal policy, has been turned down like a spicket again. Right,
Speaker 1: we have this debt forgiveness program here we have this
Speaker 1: two hundred billion pound stimulus for energy subsidies in the UK,
Speaker 1: which is equivalent to a trillion dollars in the US
Speaker 1: economic standpoint. So it's it's kind of interesting and you
Speaker 1: you have kind of everybody's worried about inflation, but the
Speaker 1: fiscal policy is working counterproductively to the monetary tightening. But
Speaker 1: that's the world, I think we're living in now and
Speaker 1: you have to understand that, because it's not all barish right.
Speaker 1: There will be a time when fiscal picks it up
Speaker 1: a again next year, even though monetary can't do its
Speaker 1: job it has been doing in the past and in
Speaker 1: the fetes job in my view, and the in the
Speaker 1: in the CBS view and Exbus job and my view,
Speaker 1: their their main job going forward is to be funding
Speaker 1: the government. Whatever the government decides to spend, they will
Speaker 1: have to fund implicitly, very similar to the forties analog
Speaker 1: that we've been using. Mike, just want for the question,
Speaker 1: and I think it's lost in the conversations. Often say
Speaker 1: with you that it's not just about an index level.
Speaker 1: Col with you and the team, there's some single name
Speaker 1: stuff in the mix too. Could you have us with
Speaker 1: just the call right now? Something you do like in
Speaker 1: the security market, something that has worked that you stick
Speaker 1: in with? Yeah, I mean I think like the managed
Speaker 1: care stocks have been terrific Um and that's an area
Speaker 1: that you know, these are these are gross stacks Um,
Speaker 1: and they don't. They don't. They're not priced as grows
Speaker 1: stacks and they never have been because of, you know,
Speaker 1: concerns about perhaps regulatory oversight and things like that. But,
Speaker 1: you know, healthcare in general, I would argue, is an
Speaker 1: area of the market where you have pent up demand
Speaker 1: from the pandemic as opposed to back in demand like
Speaker 1: for technology spending or consumer goods. And for whatever reason
Speaker 1: it's still trades really cheaply Um. And once again it
Speaker 1: goes back to this idea that there may be fear about,
Speaker 1: you know, pricing controls and things like that, but to
Speaker 1: me that's a fat pitch and uh, you know that
Speaker 1: that scenario. We've had a lot of exposure. UH, would be,
Speaker 1: you know, in Pharma, managed care, some of the cheaper
Speaker 1: areas of healthcare, and I think that continues to work.
Speaker 1: The other area would be, say, integrated energy companies, where
Speaker 1: they're they're more defensively oriented, not so depending on the
Speaker 1: price deck. They pay a great dividend Um and you
Speaker 1: get some come out of exposure, you know, as a
Speaker 1: hedge against you know, inflation staying sticky or hot. But
Speaker 1: the overwriting message, John, as you know, this year from
Speaker 1: us has been defensive, earning, stability, operational efficiency, boring type metrics.
Speaker 1: But you know it's been working nicely and I think
Speaker 1: it will continue until we get the trough in this
Speaker 1: beer market. It's been working in a tough, tough year.
Speaker 1: Congrats to you in the same Mike Wilson, so far
Speaker 1: for just absolutely brilliant. Mike Wilson, that of more CON Stanley.
Speaker 1: One of those some years ago was Michael Pond. His
Speaker 1: fancy title now is head of global inflation linked research
Speaker 1: at Barclay's. Far More Accurately, he is truly expert, with
Speaker 1: the exception maybe of Ian Lincoln at Demo. I'm full
Speaker 1: faith in credit and he joins us today. Michael Pond.
Speaker 1: If I look at the real yield and I look
Speaker 1: at two partial differentials of the nominal yield and some
Speaker 1: measurement of inflation, which matters right now, it's the real
Speaker 1: yield that that matters and it's moved up a lot
Speaker 1: over the summer. The market was was not really buying
Speaker 1: into the feds resolved to hike rates enough to slow
Speaker 1: the economy and getting inflation down. Um, since Jackson Hole, though.
Speaker 1: Really yields have have soared, particularly at the at the
Speaker 1: front end, where they were almost at at zero earlier
Speaker 1: this month. Now they're above one percent when we look
Speaker 1: at shorthand forward. So the markets moved a lot and
Speaker 1: accepted the hawks tone of the FT. So if I
Speaker 1: look not at the ten year real yield but Michael Pon,
Speaker 1: let's go shorter to maybe the two year, if you
Speaker 1: agree with me on that, from a negative three hundred
Speaker 1: basis points in version to a positive one hundred sixty
Speaker 1: four basis points, that's a hugely linear jump condition. How
Speaker 1: do other asset classes react to the Michael Pond World? Well,
Speaker 1: risk assets do not love higher yields that are not
Speaker 1: supported by strong growth. Really, where really yields are rising
Speaker 1: here is because the fat has become much more Hawk
Speaker 1: is trying to slow the economy and that's in part
Speaker 1: why risk assets have been on the back foot since
Speaker 1: Jackson Hall. So the Fed's trying to get the economy
Speaker 1: in a position where inflation comes down and then it
Speaker 1: can take it's its foot off the off the brake
Speaker 1: a little bit and allow growth to go back up. Well, we're,
Speaker 1: we think we're years from that. The Fed's resolve is
Speaker 1: strong here. That was clear at the at the Jackson
Speaker 1: Hole Speech by by chair Powell ripping up this, up
Speaker 1: the script then and channeling his his inner volcre risk
Speaker 1: assets have responded, but now they're at the point where
Speaker 1: perhaps they've overreacted. You know, obviously we'll we'll get the
Speaker 1: message from the Fed that's on the hawkish side, but
Speaker 1: markets are already prepared for a very hawk is fed.
Speaker 1: So it's a delicate balance. Today, before we veer too
Speaker 1: far into that they might be prepared for Hawk is Fed,
Speaker 1: there's a question of how quickly that leads to economic deterioration,
Speaker 1: and we can get there. But I want to sit
Speaker 1: on this idea right now of what it means to
Speaker 1: have a vulcarized fedsure reserve, particularly with wheel rates at
Speaker 1: the highest levels going back to two thousand and eleven.
Speaker 1: Do you foresee ever again in the next few decades
Speaker 1: this fedures are of going back to zero interest rates?
Speaker 1: It's very possible. You know, we we thought that the
Speaker 1: market was pricing in too much of a too high
Speaker 1: of a probability of strong fed cuts in next year,
Speaker 1: in in late summer. Uh, those that basically been taken
Speaker 1: out as appropriate. But we certainly could if you look
Speaker 1: at the housing market and say the housing market becomes
Speaker 1: a sign of the broader economic outlook it, and then
Speaker 1: then we could be in in trouble here and the
Speaker 1: Fed would have to respond, putting its dove hat back on.
Speaker 1: We think we're we're not likely to enter that that regime,
Speaker 1: but it's certainly possible that we enter a recession. They've
Speaker 1: had hastories, you know, backtrack and send rates right back
Speaker 1: to zero. Well, okay, so this is sort of the
Speaker 1: big attention right now in a bond markets, particularly on
Speaker 1: the long end, with your tenure yields at the highest
Speaker 1: levels that they've been going back years and years. And
Speaker 1: yet some people, including Michael Collins from peach of fixed
Speaker 1: income earlier, saying it's unclear whether it's really time to
Speaker 1: pounce because there could be more. Is this the last
Speaker 1: time that we'll see real yields of this level, because
Speaker 1: this fed is poised to make some sort of turn
Speaker 1: in the not so distant future. I think depends on
Speaker 1: the path of core inflation readings and the labor market.
Speaker 1: That's why the FT is reacting so hawkishly here. They've
Speaker 1: done quite a bit. Uh. Some parts of the economy
Speaker 1: has has begun to slow, such as the housing market,
Speaker 1: but the latest print on core CPI was point six
Speaker 1: and labor markets clearly remain quite, quite tight, quite robust,
Speaker 1: at a three point seven percent unemployment rate. The Fed
Speaker 1: really needs to see a slow down in the monthly
Speaker 1: pace of inflation readings, particularly on core, and a weakening
Speaker 1: of the labor market. Again, the chair talked about inducing
Speaker 1: pain in the economy. Again, channeling is inner vocre uh,
Speaker 1: in order to get inflation down. So the fat has
Speaker 1: to do a lot more to get get the economy
Speaker 1: where it wants. Michael, they you embrace a dual mandate.
Speaker 1: I get that and you know, we could talk all
Speaker 1: day about jobless claims, this, that and the other thing,
Speaker 1: or trim mean Dallas. Maybe the chairman will bring that
Speaker 1: up today. He's got another mandate, which is the credibility
Speaker 1: that fed. But just up against political realities. If we
Speaker 1: get a Barclay's recession, if we get a barklay sort
Speaker 1: of recession, does that become a third mandate for this chairman? Well,
Speaker 1: the Fed is absolutely trying to make sure it retains credibility,
Speaker 1: particularly what when it comes to UH inflation fighting. So
Speaker 1: one of the reasons why it's being so hawkish here
Speaker 1: is to make sure that inflation expectations don't get out
Speaker 1: of control, because that's when the Fed fears and inflationary spiral.
Speaker 1: We're inflation is high, people expect it to be high
Speaker 1: and it just feeds on itself. So one of the
Speaker 1: things that Fed is trying to do here is make
Speaker 1: sure that high inflation itself doesn't lead to higher inflation expectations.
Speaker 1: So it's trying to maintain its credibility and if we
Speaker 1: look at break evens, if we look at surveys such
Speaker 1: as that from the New York Fed or the University
Speaker 1: of Michigan, the Fed is doing a good job on
Speaker 1: that front and it's able to ignore any political issues
Speaker 1: with a with a slow down, John. I'm sorry, politics
Speaker 1: matters here. It's gonna Matter Tomorrow for Bank of England.
Speaker 1: It's gonna Matter Today for Chairman Paul. I dentists agree,
Speaker 1: and I think, Michael, this is going to be the
Speaker 1: difficult part. How do they convince people that high unemployment
Speaker 1: is a price worth paying for lower inflation? Easy to
Speaker 1: say that now, but when people actually start to see
Speaker 1: materially higher unemployment? How difficult you think this is going
Speaker 1: to get? Well, that's one of the SEP the survey
Speaker 1: of economic productions, or the dots, if you will, will
Speaker 1: be so important today, Um, when we get the statement,
Speaker 1: when we look at the statement, one of the things
Speaker 1: we'll be looking at is the unemployment rate path. So
Speaker 1: you know the the the SEP is opposed to be
Speaker 1: the the economic outlook under a path of perfect monetary policy.
Speaker 1: And if the unemployment rate remains elevated in their forecast,
Speaker 1: that's a signal to the market that they're willing to
Speaker 1: tolerate UH decently higher unemployment rates in order to get
Speaker 1: in Asian down. That's a message that the fete has
Speaker 1: been sending, but we'll really be looking at the SEP
Speaker 1: to confirm that. Michael, just real quick here. I'm wondering
Speaker 1: what your projection is for how quickly inflation will come
Speaker 1: down that headline CPI, at the end of this year,
Speaker 1: at the end of next. We're fairly optimistic that it
Speaker 1: will start to slow particularly with the October reading, in
Speaker 1: part because of technical reasons, at least in CP I,
Speaker 1: but even beyond that, again we've seen signs and commodities
Speaker 1: and shipping rates, uh in in UH related futures, corn wheat,
Speaker 1: et CETERA. That many price pressures have peaked. Wages, though,
Speaker 1: are keeping inflation high and that's the key to inflation
Speaker 1: really rolling over. Michael, just quickly, what are you talking
Speaker 1: about in terms of levels? Are we gonna end the
Speaker 1: year at six percent? When do we get back? We
Speaker 1: think we'll. Will certainly come down from that when it
Speaker 1: comes to headline inflation, in part because of the strong
Speaker 1: decline in gasoline prices since since since March, but core
Speaker 1: can remain sticky. So well, we think will slow in
Speaker 1: inflation readings, but certainly well above where the Fed would
Speaker 1: like them least. Thank you very good we will continue
Speaker 1: right now on this on corporate credit with Michael Collins,
Speaker 1: senior portfolio manager of Pigeon Fixed Income. Michael, what I
Speaker 1: noticed here, and I understand the mathewness of it, let's
Speaker 1: forget that yield up. We all know that. Chairman Powell
Speaker 1: deal that today. But in many cases price very, very,
Speaker 1: very down, and we're seeing it in the Bloomberg Total
Speaker 1: Return Aggregate Index, the Old Lehman Barclay's indusease as well.
Speaker 1: What is the significance of new low price on those
Speaker 1: aggregate indices. Yeah, Tomas, as you point out, has really
Speaker 1: been nowhere to hide this year. And Fixed Income, I
Speaker 1: mean in our shop we've gotten three big things right.
Speaker 1: We've kind of stepped aside on on duration, meaning taking
Speaker 1: our our long positions down to to neutral. We've taken
Speaker 1: credit risk way down, we've generally been a little along
Speaker 1: the dollar, but that has not been enough to protect
Speaker 1: investors from that big trend down in prices. The good
Speaker 1: news is, as you know, when bond prices are down
Speaker 1: below par, which they all are really for the first
Speaker 1: time I can think of in my career, Tom we're
Speaker 1: seeing the bonds across the board, across all of our portfolios,
Speaker 1: trading a big discounts to par and, as you know,
Speaker 1: as long as they don't default, as Lisa pointed out,
Speaker 1: they end up back at par right. So so you
Speaker 1: actually have this really uh positive long term opportunity and
Speaker 1: fixed income which we haven't had for for well over
Speaker 1: a decade. Michael, I look at the mantra of the
Speaker 1: real yield, the whole professional study of the inflation adjusted
Speaker 1: yield explained to mere mortals, while the real yield matters. Yeah,
Speaker 1: I mean that is the world's discount right, right. I
Speaker 1: mean I'm always surprised when when people say, wow, I
Speaker 1: can't believe stocks and bonds are both selling off at
Speaker 1: the same time this year, and what I tell them is, well,
Speaker 1: you just wait until you see real estate and private
Speaker 1: debt and other assets that that haven't sold off because
Speaker 1: they're not actively traded, they're not marked to market every day.
Speaker 1: Wait for those shoes to drop, because when the discount rate,
Speaker 1: the world's discount rate, which is really real treasury yields,
Speaker 1: by and large, goes up as much as it has,
Speaker 1: as much as you know, a couple hundred basis points,
Speaker 1: all asset prices have to come down and the question
Speaker 1: really is, have they come down enough at this point? Well,
Speaker 1: let's get into that right now. Mike. We caught up
Speaker 1: with our good friends buff Michael of jpmrecan asset management yesterday.
Speaker 1: I asked him about high he already said not yet.
Speaker 1: Patients spreads need to get somewhere close to seven fifty
Speaker 1: basis points. The Trad series need to get somewhere close
Speaker 1: to four point five. The fat funds could push five.
Speaker 1: Any of that resonating with you? Right now, Mike, or
Speaker 1: would you take the other side of that trade? Yeah,
Speaker 1: you know, I'll take a little bit of the other side.
Speaker 1: On on the rate thing, I think we're much closer
Speaker 1: on the rate side right our view is that the
Speaker 1: rates are going to crest and come down first, and
Speaker 1: then credit spreads and and equities will will continue to
Speaker 1: to widen and sell off before they they settle down.
Speaker 1: But but I think we're really getting close to a point, Jonathan,
Speaker 1: where the likelihood of the Fed and and most other
Speaker 1: central banks over shooting significantly on the upside and having
Speaker 1: to reverse course. I know the whole concept of the pivot,
Speaker 1: you know, it was in vogue a couple of months
Speaker 1: ago and now people are pushing that aside. And Wow,
Speaker 1: as as as they keep pushing these rates up at
Speaker 1: the same time that global growth, you know, risk is
Speaker 1: coming down, earnings are coming down, as Lisa points out,
Speaker 1: the faults are probably going to go off, geopolitical risk
Speaker 1: continues to to elevate. Wow, and inflation globally is really
Speaker 1: kind of rolling over and I think it's going to
Speaker 1: be probably a lot lower a year from now. Just
Speaker 1: as all those things are happening, these central banks are
Speaker 1: jacking up rates at Nauseam, and I think that's a
Speaker 1: real recipe for a big reverse course on the rate side.
Speaker 1: On the credit side, I think you're right. I mean earnings.
Speaker 1: We've done a lot of work on on earnings expectations
Speaker 1: going forward and and I think they're gonna keep coming down. Right,
Speaker 1: and people don't talk enough about the dollar and the
Speaker 1: impact on that for US companies, for their competitiveness, for
Speaker 1: their repate patriated earnings. The labor costs continue to put
Speaker 1: pressure on margins and, as Lisa pointed out, you know,
Speaker 1: you're starting to see layoffs. Finally happened. So I think
Speaker 1: there's a little more downside and credit before before you
Speaker 1: jump in with both feet. This is all really messy.
Speaker 1: Of Michael, I wonder, just to put it all together quickly,
Speaker 1: if you could give us a sense of how you
Speaker 1: play this, the conviction behind buying certain discounted bonds, taking
Speaker 1: the other side of Bob, Michael, but also acknowledging what
Speaker 1: you see coming. Yeah, I mean you stick with you
Speaker 1: stick with higher quality credit, right and and uh, presumably
Speaker 1: that's what a big active shop. We have a hundred,
Speaker 1: forty analysts, Lisa right, and that's really our our bread
Speaker 1: and butter, and this is an opportunity in the market
Speaker 1: where where everything is kind of sold off right in
Speaker 1: unison to to some extent, and there are a lot
Speaker 1: of relative value opportunities. You can buy really high quality
Speaker 1: credits at really big yields, really big spreads, low dollar prices.
Speaker 1: H So there is a lot of opportunity there without
Speaker 1: taking a lot of credit risk. And we've taken our
Speaker 1: credit risk down, but the yields that we're seeing across
Speaker 1: the board in the bonds we own, the high quality
Speaker 1: bonds we own, the portfolios we manage, are really big. Right. So,
Speaker 1: I mean you don't have to take a lot of
Speaker 1: credit risk. Ultimately you'll want to do that dip down
Speaker 1: and credit. But but it's definitely too early. Just so
Speaker 1: I can quite you for the rest of the day
Speaker 1: and get it right if you even found this tenure
Speaker 1: at three. Yeah, we we. We haven't yet. We're dead
Speaker 1: neutral here, Jonathan Um. But but again, that is going
Speaker 1: to be the big first trade really out of the
Speaker 1: gates here, and maybe you have to wait for for today.
Speaker 1: The Fed is going to probably sound Pretty Hawk is today,
Speaker 1: even though they've done a good job on fed days.
Speaker 1: I know we've talked about this on the program before. UH,
Speaker 1: typically the days the Fed meets and the days Jerome
Speaker 1: Powell speaks, that the equity markets tend to go up.
Speaker 1: So they do a good job of getting investors off
Speaker 1: the ledge a little bit. But but you know, though,
Speaker 1: that dot plot is going to be ugly. I think
Speaker 1: a lot of it's probably priced in and the markets
Speaker 1: are braced for it. But there will be an opportunity,
Speaker 1: I would bet, in the next couple of quarters, to
Speaker 1: to really start getting along duration. We'll catch up and
Speaker 1: talk about it. Mike Collins, the PM. Thank you, Mike.
Speaker 1: Can particularly a shock to the nations of commodities. Kna
Speaker 1: Hack joins us now a head of research at E
Speaker 1: D N F man and is just brilliant. On the
Speaker 1: soft something we don't talk enough about. Cona the impact
Speaker 1: of a strong dollar on commodity nations, commodity E m.
Speaker 1: How large is it? Huge? Huge. I mean if you
Speaker 1: think about only six months ago when the war began
Speaker 1: in Ukraine, Um everything went up. When there was energy grains,
Speaker 1: they all went up and that was because it's highly inflasionary.
Speaker 1: But then the inflationary store in the US letter higher
Speaker 1: US dollar. that US dollar then caused that whole commodity
Speaker 1: elevation to just come collapsing down and now we're back
Speaker 1: to pre war levels. Um. So yeah, the dollar impact
Speaker 1: on commodities, it's very intact. And reverse co invest correlations
Speaker 1: as intact as ever. My training is to always pivot
Speaker 1: to Indonesia and Brazil and dollar strength. Are they of interest? Well, yes, Indonesia, obviously,
Speaker 1: palm oil, massive producer of palm oil, exporter and cold
Speaker 1: as well. Um. And for Brazil, I mean particularly the
Speaker 1: soft commodities. You cannot underestimate the impact of the Brazilian
Speaker 1: real on all of these commodities. So what we're seeing
Speaker 1: today is the strong dollar is causing the brl to weaken. Um.
Speaker 1: That intern is putting pressure on things like coffee, sugar,
Speaker 1: soy beans, all the major posian exports, iron or even.
Speaker 1: But it's not just that. I mean I think today
Speaker 1: commodities are reacting. They were positive initially because of the
Speaker 1: inflation story, but now they're coming off because the inflation
Speaker 1: story has moved to a recessionary story and obviously that's
Speaker 1: not great for commodities. Um, the worse for metals. And Energy,
Speaker 1: arguably less so for soft but it's still it still
Speaker 1: isn't does have a dampling effect for sure. The focus
Speaker 1: so very much on the energy story, especially for Europe
Speaker 1: as they face off with a potentially catastrophic winter, depending
Speaker 1: on the meteorologist reports that we get. I'm wondering, from
Speaker 1: your perspective, if the answer is what Germany is now doing,
Speaker 1: which is to nationalize energy companies, does that help support
Speaker 1: things in a more concrete way, or does it just
Speaker 1: basically put a band aid over the actual bill some
Speaker 1: of these countries are facing? Yes, so I think in
Speaker 1: my opinion it's a band aid because the reality is
Speaker 1: that none of this is providing additional supply. So we
Speaker 1: have a supply demand mismatch right now in the energy crisis.
Speaker 1: So we either tackle demands, so you have to ration demand,
Speaker 1: and I can't see Germany effectively rational in the demand
Speaker 1: and certainly in the UK they're actually accepsidizing the demands.
Speaker 1: So that doesn't even ketch up with that sort of thing.
Speaker 1: And on the supply side, I think I don't see
Speaker 1: them investing or allowing more UM natural guests to come out.
Speaker 1: So I don't see this as fundamentally altering the situation
Speaker 1: too much, and I think this this can go on
Speaker 1: for a while. Well, when when you say this can
Speaker 1: go on for a while, there is a question of
Speaker 1: how much has already been priced in in terms of
Speaker 1: what is to come for this winter, and then there
Speaker 1: is a question, as John's highlighted many times, of the
Speaker 1: duration of how long, how many years, we face off
Speaker 1: with this lack of supply and the face of demand?
Speaker 1: What's your view on both of those? So with time,
Speaker 1: you know, humans are very innovative and markets are adapted.
Speaker 1: So with time what's going to happen is, as long
Speaker 1: as prices continue to provide this pain pressure, you will
Speaker 1: start seeking adaptation, so you will move towards alternatives, renewables,
Speaker 1: you will become more efficient. So that's definitely something that
Speaker 1: will happen with time. Overnight you're not going to get that.
Speaker 1: So I think effectively what we're saying is we need
Speaker 1: that pain pressure to continue for a little bit, what more,
Speaker 1: to to materialize these kind of actions. Only then will
Speaker 1: we start seeing a proper diversification both in terms of
Speaker 1: demand and also supply, so we can start relying less
Speaker 1: on natural gas, relying less on Russia, um even relying
Speaker 1: less on energy. I'm of understanding that the energy carriers are,
Speaker 1: you know, the freights are going through the roof, that
Speaker 1: they're strugging to get hold of ships. So it's a
Speaker 1: multitude of problems are not going to be fixed overnight
Speaker 1: and this is gonna take you a while. Kind of
Speaker 1: hack that of eight and F man. Thank you, Connor
Speaker 1: as owis. This is the Bloomberg surveillance podcast. Thanks for listening.
Speaker 1: Join US live weekdays from seven to ten am eastern
Speaker 1: on Bloomberg radio and on Bloomberg television each day from
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Speaker 1: on the terminal. I'm Tom Keene and this is Bloomberg