WEBVTT - Surveillance: Tight Labor with Richardson 0:00:05.080 --> 0:00:08.440 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.480 --> 0:00:12.320 with Jonathan Farrell and Lisa Abramowitz. Join us each day 0:00:12.320 --> 0:00:16.800 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.239 --> 0:00:22.000 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.239 --> 0:00:26.560 anywhere you get your podcasts, and always I'm Bloomberg dot Com, 0:00:26.600 --> 0:00:30.400 the Bloomberg Terminal and the Bloomberg Business App. She has 0:00:30.440 --> 0:00:34.360 the advantages of working for automatic data processing Nila Richardson 0:00:34.680 --> 0:00:37.760 as chief KADOS for the people that punch out the 0:00:37.840 --> 0:00:42.720 payroll checks like nobody from C to shining C. Nila 0:00:42.880 --> 0:00:46.800 at the ADP franchise, what do you see in your 0:00:46.920 --> 0:00:53.000 ADP granularity? We see wages are strong. Look. ADP provides 0:00:53.040 --> 0:00:56.600 payroll services for over twenty five million workers, that's about 0:00:56.680 --> 0:01:00.800 twenty percent of the working population, and we're tracking wage 0:01:00.840 --> 0:01:05.880 is very carefully, especially as the economy is looking in 0:01:05.920 --> 0:01:08.080 the phase of inflation, and what we're seeing is a 0:01:08.120 --> 0:01:12.200 little bit of a deceleration and pay growth but still 0:01:12.240 --> 0:01:15.240 too high to be consistent with a two percent target, 0:01:15.560 --> 0:01:18.520 and that speaks to the tightness of the labor market. 0:01:18.560 --> 0:01:22.640 It's not maximum tightness. Right now, we've seen things come down, 0:01:22.840 --> 0:01:26.480 We've seen jobless claims go up. It's not at the 0:01:26.560 --> 0:01:30.000 maximum like it was in the summer and early fall 0:01:30.040 --> 0:01:33.440 of twenty twenty two, but it's still very, very tight 0:01:33.680 --> 0:01:37.080 compared to where we were before the pandemic, even though 0:01:37.120 --> 0:01:40.240 the unemployment rate is about the same. How difficult, Nila, 0:01:40.400 --> 0:01:42.679 is it to talk about the labor market as a 0:01:42.720 --> 0:01:45.039 whole rather than the specific parts. And I say this 0:01:45.120 --> 0:01:48.480 because yesterday in the Beige Book, there was an anecdote 0:01:48.520 --> 0:01:52.040 about a construction company having a commissioning a plane to 0:01:52.120 --> 0:01:55.000 fly workers out to it because that was cheaper than 0:01:55.000 --> 0:01:57.400 trying and actually more effective to get workers, not even 0:01:57.480 --> 0:02:00.560 cheaper than trying to hire in the region. And I mean, 0:02:00.640 --> 0:02:03.040 how much are you seeing strength that you've never seen 0:02:03.080 --> 0:02:08.560 before ongoing in specific industries. It's a very fragmented market. 0:02:08.600 --> 0:02:12.040 To your point, Lisa, Some parts of the of this 0:02:12.160 --> 0:02:17.040 economy are so interest rates sensitive housing construction, and yet 0:02:17.160 --> 0:02:22.840 some of those sectors are chronically undersupply housing construction, and 0:02:22.880 --> 0:02:25.640 so you're seeing a real mix in the market right now. 0:02:26.400 --> 0:02:30.000 There are companies that overhired or maybe extended. They're hiring 0:02:30.040 --> 0:02:34.280 aggressively during the pandemic, you're seeing those same companies fullback. 0:02:34.560 --> 0:02:37.400 There are smaller companies that we track in our data 0:02:37.480 --> 0:02:40.560 that never got really a legend to this market because 0:02:40.560 --> 0:02:43.400 the labor market was so competitive and they had to 0:02:43.440 --> 0:02:47.280 compete for talent with larger firms. So it's really a 0:02:47.440 --> 0:02:51.240 mixed bag. But the common thread is that wage growth 0:02:51.240 --> 0:02:55.720 has been stronger than before the pandemic throughout the economy. 0:02:55.880 --> 0:02:59.079 How bifurcated is it that wage growth among the lower 0:02:59.120 --> 0:03:03.560 income sector has outpaced the higher income sectors pretty substantially. 0:03:03.560 --> 0:03:05.519 I mean, as that gap continued to widen, as you 0:03:05.560 --> 0:03:07.600 see some of the layoffs in the tech sector and 0:03:07.680 --> 0:03:11.200 the white collar the middle office workers that have gotten 0:03:11.200 --> 0:03:14.120 stripped out of certain areas, while you still see some 0:03:14.200 --> 0:03:18.639 of these service sectors continue to robustly higher. Yeah, so 0:03:18.720 --> 0:03:22.520 we've still see double digit wage growth in leisure and 0:03:22.600 --> 0:03:26.839 hospitality sector and the ADP data, and that growth has 0:03:26.880 --> 0:03:30.280 calmed down. It's down a lot since again the summer 0:03:30.320 --> 0:03:35.520 of last year. But overall, the wage moderation has been 0:03:35.560 --> 0:03:39.080 really really modest. In fact, there's only a couple of 0:03:39.160 --> 0:03:43.200 sectors where wage growth now is lower than it was 0:03:43.360 --> 0:03:47.000 before the pandemic, Information tech, is actually one of those sectors. 0:03:47.240 --> 0:03:50.600 So even though we're as we're seeing layoffs, we're actually 0:03:50.680 --> 0:03:57.440 seeing information in the tech economy decelerate, the sharpest decline 0:03:57.480 --> 0:04:01.200 in wage growth of any other sector. That's notable. The 0:04:01.240 --> 0:04:03.840 markets here recovering here they were in negative a lot 0:04:03.880 --> 0:04:05.720 of red in the screen. Order back to a mixed 0:04:05.760 --> 0:04:08.960 red and green picture here SMP futures at negative one 0:04:08.960 --> 0:04:12.000 point five zero. I should point out that widely watched 0:04:12.040 --> 0:04:15.520 twos tens spread with the pros watch is now at 0:04:15.520 --> 0:04:18.120 one hundred and five basis points. Interesting to see if 0:04:18.160 --> 0:04:21.800 that breaks to a less inversion. Neil Richardson, I just 0:04:21.800 --> 0:04:24.680 did a very informal long term moving average study of 0:04:24.760 --> 0:04:30.360 claims out eight minutes ago and critically the long term 0:04:30.400 --> 0:04:34.080 moving average in March of twenty and twenty. The end 0:04:34.120 --> 0:04:37.400 of the pre pandemic is the same as it was 0:04:37.839 --> 0:04:42.159 right now. Two hundred nineteen thousand is a close approximation 0:04:42.240 --> 0:04:45.719 of any arbitrary long term moving average there are we 0:04:45.880 --> 0:04:52.640 back to pre pandemic now. The economy has changed structurally. 0:04:52.839 --> 0:04:56.560 There's so many things that are different than they were 0:04:56.720 --> 0:05:02.560 in twenty twenty. Just the advancement and adoption of hybrid 0:05:02.560 --> 0:05:06.320 work for example, the fact that we're seeing double digit 0:05:06.360 --> 0:05:10.200 wage games in the lowest part of the pay scale. 0:05:10.279 --> 0:05:15.000 That's a complete, one complete change from the pandemic. At 0:05:15.360 --> 0:05:18.719 During the pandemic, these low wage workers were barely keeping 0:05:18.800 --> 0:05:22.240 up with then very low inflation, so we even saw 0:05:22.360 --> 0:05:25.520 declines year over year and pay growth for the lowest 0:05:25.839 --> 0:05:28.960 end of the spectrum. These workers have become much more 0:05:29.000 --> 0:05:33.880 competitive post pandemic, as noted by the double digit wage game. 0:05:34.000 --> 0:05:36.960 So the wage structure has been turned around in the 0:05:37.000 --> 0:05:40.000 last three years, and the question is will that endure 0:05:40.760 --> 0:05:43.440 through the next three years. Now, before we let you go, 0:05:43.800 --> 0:05:46.560 we're hearing from a little birdie named Michael McKee that 0:05:46.600 --> 0:05:48.600 the Whisper number for tomorrow is currently two hundred and 0:05:48.640 --> 0:05:51.479 forty seven thousand. Do you think after two two undred 0:05:51.520 --> 0:05:55.800 forty seven million, to excuse me, being created, I'm curious 0:05:55.839 --> 0:05:58.360 from your perspective two hundred forty seven thousand, what you 0:05:58.440 --> 0:06:01.360 believe will be the number based on the anecdotal information 0:06:01.400 --> 0:06:04.000 that you're seeing come out. I think you're going to 0:06:04.040 --> 0:06:07.280 get a solid number, let's start there. I think you're 0:06:07.279 --> 0:06:10.880 going to get strong job growth based on the private 0:06:10.920 --> 0:06:13.760 sector payroll data that we're seeing an ADP. We're not 0:06:13.839 --> 0:06:16.560 predicting the BLS. We're just looking at the market as 0:06:16.600 --> 0:06:18.880 we see it. And if you compare that with other 0:06:19.000 --> 0:06:22.240 data like jobless claims, like job over thanks, you're still 0:06:22.240 --> 0:06:24.760 seeing a robust game. But I don't think you're going 0:06:24.839 --> 0:06:27.000 to get a half a million jobs. We should have 0:06:27.040 --> 0:06:29.159 me on every day, Neila Richardson, Thank you so much. 0:06:29.160 --> 0:06:32.680 I can't say enough, folks about the granularity of payroll 0:06:32.800 --> 0:06:41.720 analysis at Automatic Data Processing. Let's dive into this right now. 0:06:41.720 --> 0:06:44.000 Andrew Sheets is really quite good at this chief cross 0:06:44.200 --> 0:06:48.440 asset across asset strategists, I should say, at Morgan Stanley, 0:06:48.600 --> 0:06:54.680 Andrew coalescing the wonderful and fractious narratives plural at Morgan Stanley, 0:06:55.040 --> 0:07:00.400 what is your conviction right now? Well? Thanks, it's great 0:07:00.640 --> 0:07:03.600 to be here with you. So we still think that 0:07:03.680 --> 0:07:06.520 the US economy is going to slow as we go 0:07:06.600 --> 0:07:09.640 throughout this year, and I do think the market might 0:07:09.640 --> 0:07:11.840 be a little bit too fixated on this kind of 0:07:11.840 --> 0:07:15.280 will they won't they question of a recession when the 0:07:15.360 --> 0:07:17.640 dominant force we think is still going to be a 0:07:17.680 --> 0:07:21.440 slowing and economy, both in real and nominal terms. Now, 0:07:21.880 --> 0:07:23.840 the recent data that we had out of payrolls and 0:07:23.880 --> 0:07:26.440 retail sales was very strong. I think that definitely worked 0:07:26.480 --> 0:07:29.680 against that narrative. But we'll see what the data comes 0:07:29.680 --> 0:07:32.200 this month. We'll see how that data looks without those 0:07:32.280 --> 0:07:35.680 large seasonal revisions in the same way. And we still 0:07:35.720 --> 0:07:38.960 see a lot of leading indicators pointing to a slowdown. 0:07:39.040 --> 0:07:41.560 So we still think that we should be positioned for 0:07:41.840 --> 0:07:45.880 decelerating growth, weaker than expected earnings, and we still think 0:07:45.880 --> 0:07:48.200 that that will be the dominant narrative when investors reach 0:07:48.280 --> 0:07:51.200 the midpoint of the year. You'll underweight global equities Andrew, 0:07:51.240 --> 0:07:54.800 so let's start there. Is that spread evenly equally between 0:07:54.880 --> 0:07:59.440 regions or other regions that you favor over others. So 0:07:59.680 --> 0:08:03.640 I think the story in Asia is actually pretty notably 0:08:03.720 --> 0:08:05.480 different from the story we see elsewhere. So I think 0:08:05.480 --> 0:08:07.560 if you talk to investors and you ask them, why 0:08:07.560 --> 0:08:10.880 are you concerned about markets? The concern is decelerating growth, 0:08:10.960 --> 0:08:16.440 high inflation, hawkish monetary policy, high competing rates on cash, 0:08:16.480 --> 0:08:22.240 decelerating earnings, growth, expensive valuations. That's not the story in Asia. 0:08:22.280 --> 0:08:24.760 That's not the story with Asian equities. These are markets 0:08:24.800 --> 0:08:28.400 that are generally pretty reasonably valued versus history. Growth is 0:08:28.440 --> 0:08:31.880 going to be improving, Inflation is not high, the central 0:08:31.880 --> 0:08:34.880 banks in Asia are not hawkish, and cash as a 0:08:34.920 --> 0:08:38.079 competing asset is actually quite quite low and yield. So 0:08:38.480 --> 0:08:40.720 I think that this is a story where overall we 0:08:41.040 --> 0:08:43.960 still see a lot of signs that suggest that this 0:08:44.040 --> 0:08:46.200 is a time to hold less equities than normal, to 0:08:46.240 --> 0:08:50.239 be underweight equities. But within that, we're much more optimistic 0:08:50.280 --> 0:08:52.600 about stocks in Asia, and we think there's a legitimately 0:08:52.640 --> 0:08:55.760 different macro story there that could help support that. How 0:08:55.760 --> 0:09:00.360 can you justify andrew being underweight equities yet more positive, 0:09:00.440 --> 0:09:04.800 more constructive on credit. So I do think that this 0:09:04.880 --> 0:09:06.880 is an environment where I think it's a little bit 0:09:06.960 --> 0:09:10.120 better suited to credit. And you know, some of that 0:09:10.240 --> 0:09:13.080 is that I think in a decelerating growth environment that 0:09:13.280 --> 0:09:16.560 is still tough for earnings. You know, my colleague Mike 0:09:16.600 --> 0:09:19.439 Wilson and our equity strategy team, we are very worried 0:09:19.440 --> 0:09:23.760 about operating leverage, meaning that earnings really underperform what you 0:09:23.800 --> 0:09:26.760 see at a GDP. But that type of decline in earnings, 0:09:26.800 --> 0:09:30.320 we don't think really creates major credit problems, major refinancing 0:09:30.360 --> 0:09:33.079 problems for the bulk of the credit market. I also 0:09:33.160 --> 0:09:37.120 think that when we think about incentives as yields move higher, 0:09:37.160 --> 0:09:39.559 think about this from a corporate treasure perspective. All of 0:09:39.559 --> 0:09:42.360 a sudden, paying down your debt looks a lot more 0:09:42.400 --> 0:09:45.480 attractive than buying back your stock if the debt is 0:09:45.559 --> 0:09:48.000 yielding five and a half six percent, and so the 0:09:48.040 --> 0:09:51.120 idea that it higher yields we might get more credit 0:09:51.160 --> 0:09:55.000 friendly activity rather than shareholder friendly activity is another part 0:09:55.000 --> 0:09:57.600 of our thinking. Andrew to combine these ideas of both 0:09:57.600 --> 0:10:00.760 the international approach and picking different regions with and equities, 0:10:01.480 --> 0:10:06.439 and also your appreciation of credit and how it functions. 0:10:06.440 --> 0:10:09.440 How different is the picture for credit in different regions 0:10:09.600 --> 0:10:12.120 based on what Christina Kampmany was talking about, which is 0:10:12.120 --> 0:10:15.000 that there are different regions with different sensitivities to rising rates, 0:10:15.120 --> 0:10:20.760 potentially more given variable rate interests. So I do think 0:10:20.840 --> 0:10:23.600 that's a really great and important point, and I think 0:10:23.600 --> 0:10:25.680 i'll across a lot of these different credit markets you 0:10:25.679 --> 0:10:29.240 do see different outcomes. So a market like Europe is 0:10:29.240 --> 0:10:31.559 a market, especially European investment grade is a market we 0:10:31.720 --> 0:10:33.680 like a lot. You know, that's an investment grade market 0:10:33.800 --> 0:10:36.920 yields four and a half percent in euros. That's the 0:10:36.559 --> 0:10:39.040 same yield you've got back in two thousand and three 0:10:39.120 --> 0:10:42.280 or two thousand and four, and these companies have refinanced 0:10:42.280 --> 0:10:44.480 their debt to a pretty significant extent at some of 0:10:44.480 --> 0:10:47.560 the longest duration in that market that we've seen in 0:10:47.600 --> 0:10:50.480 its history. On the other hand, I think the leverage 0:10:50.520 --> 0:10:53.000 loan market, where you have more issuers, where those debt 0:10:53.040 --> 0:10:56.839 costs are resetting quickly. There you have the feed through 0:10:56.880 --> 0:10:59.880 of costs that are much more significant. And my colleagues 0:10:59.880 --> 0:11:02.920 are also pretty cautious on the commercial real estate side, 0:11:02.960 --> 0:11:04.760 you know, we still think that that is a market 0:11:04.800 --> 0:11:07.960 where you could really get hit from kind of both directions. 0:11:08.000 --> 0:11:11.560 That cap rates need to come up, as risk free 0:11:11.640 --> 0:11:14.080 rates have come up, but then also financing costs are 0:11:14.200 --> 0:11:16.880 up significantly, and so that's an area where we're more cautious. 0:11:17.120 --> 0:11:19.520 Where we're more cautious on the equity side, and I 0:11:19.559 --> 0:11:21.760 think that's still an area where we probably want to 0:11:22.120 --> 0:11:24.959 avoid relative to parts of the corporate credit market we 0:11:25.080 --> 0:11:27.120 like more. Andrew, just to take this an extra question, 0:11:27.280 --> 0:11:29.199 I'm quite interested by this thing that you have that 0:11:29.320 --> 0:11:32.000 ultimately the C suite will make decisions that benefit credit 0:11:32.040 --> 0:11:34.960 investors more than equity investors. Is this another way of 0:11:34.960 --> 0:11:37.160 saying I want to bet on fallen angels becoming rise 0:11:37.240 --> 0:11:39.400 and stars. Is that a story that you like within 0:11:39.480 --> 0:11:43.320 high yield credit, Well, I do think that this is 0:11:43.320 --> 0:11:46.400 an environment where I think the incentives to be more 0:11:46.440 --> 0:11:49.040 conservative and be more cautious would seem to be there. 0:11:49.080 --> 0:11:52.520 I think if you combine CEO surveys, which are pretty 0:11:52.520 --> 0:11:55.800 notable that much of the C suite seems relatively downbeat 0:11:55.800 --> 0:11:57.839 about growth, that's I've gotten a little bit better in 0:11:57.920 --> 0:12:02.000 the most recent month, but stillatively downbeat. And then just 0:12:02.040 --> 0:12:05.200 the math of where bond yields are relative to equity 0:12:05.240 --> 0:12:08.000 and dividend yields that I do think that this is 0:12:08.000 --> 0:12:10.840 an environment where we want to play for credit improvement 0:12:10.840 --> 0:12:13.400 more broadly, so in terms of the fallen angels specifically, 0:12:13.679 --> 0:12:16.280 I think that could be a little bit more complicated 0:12:16.400 --> 0:12:19.160 because I think there you are often dealing with companies 0:12:19.160 --> 0:12:21.400 with a little bit more cick locality, and there it 0:12:21.679 --> 0:12:24.120 might be harder to support that given our below consensus 0:12:24.200 --> 0:12:26.679 growth forecasts. But I think the idea, I do think 0:12:26.720 --> 0:12:29.880 it supports the idea of credit versus equities overall within 0:12:29.920 --> 0:12:33.280 a portfolio context. Andrew, thank you for that smart stuff. 0:12:33.280 --> 0:12:49.960 Andrew Shaits of Morgan Standing, Christian Maliglishman, Managing Director, Portfolio Strategy, Sex. 0:12:50.080 --> 0:12:52.600 We're not going to start sinking, Christian Dan Warri. Let's 0:12:52.600 --> 0:12:55.199 talk about how low that bar is for fifty from 0:12:55.200 --> 0:12:58.280 this federal Reserve. What would we need Friday morning, tomorrow 0:12:58.600 --> 0:13:02.440 and on CPID next week. Yeah, I mean, listen. I 0:13:02.440 --> 0:13:06.959 think it's all about the trend, and the FAT wants 0:13:06.960 --> 0:13:10.480 to see a down trend that's convincing. I think we 0:13:10.559 --> 0:13:13.679 had this blockbuster print last time, so it's going to 0:13:13.720 --> 0:13:17.080 be a down trend. How much I think consensus is 0:13:17.120 --> 0:13:19.200 looking for two hundred thousand or so. I think we're 0:13:19.240 --> 0:13:22.160 two hundred and fifty on payrolls, so we're a bit above. 0:13:22.840 --> 0:13:26.079 I think it's dead enough to push the FAT to fifty. 0:13:26.600 --> 0:13:28.800 I think you would need to put it in contact 0:13:28.880 --> 0:13:32.120 with the inflation data, with the average hourly earnings. We're 0:13:32.120 --> 0:13:34.520 actually expect the average hourly earnings to be a bit 0:13:34.559 --> 0:13:38.080 more moderate, in line with consensus. We're a bit above 0:13:38.280 --> 0:13:42.120 on the inflation side as well. But our economists actually 0:13:42.160 --> 0:13:44.880 kept the twenty five bibs and I think they feel 0:13:44.920 --> 0:13:47.640 like it's it's making sense for Powell to open the 0:13:47.679 --> 0:13:51.160 door to fifty. But to step up after you step down. 0:13:51.440 --> 0:13:54.360 I think that is still a significant step. So the 0:13:54.440 --> 0:13:57.040 question is really if there's you know, some type of 0:13:57.160 --> 0:14:00.920 blockbuster surprise to the upside, it can get them there. 0:14:01.040 --> 0:14:03.280 I think with the current data set, our economy is 0:14:03.360 --> 0:14:06.400 kept the twenty five. Christian's going to Tony and you 0:14:06.440 --> 0:14:09.480 did this at the Work Business School years ago. We're 0:14:09.559 --> 0:14:12.040 Jane attended. Christian. I'm going to look at your phrase 0:14:12.760 --> 0:14:17.160 macro momentum. I think this is incredibly important physics and 0:14:17.280 --> 0:14:21.080 the of the mass of the system, the velocity of 0:14:21.080 --> 0:14:25.280 the system, which leads to an immovable macro momentum. What 0:14:25.480 --> 0:14:29.640 is the macro momentum right now? Yeah, I mean like 0:14:29.880 --> 0:14:33.280 the challenge is exactly as you said. The momentum is 0:14:33.280 --> 0:14:36.120 actually really good. I mean you've had the pms and 0:14:36.160 --> 0:14:39.520 new orders over inventories, a lot of the leading components 0:14:39.560 --> 0:14:42.760 are confirming what markets have been pricing now for two 0:14:42.800 --> 0:14:45.840 months or so, which is that the global economy is 0:14:46.600 --> 0:14:51.480 kind of accelerating actually and the US is not decelerating 0:14:51.520 --> 0:14:55.120 as much as anticipated. So the momentum is positive and 0:14:55.160 --> 0:14:57.680 we've taken the credit for that already. That's the big 0:14:57.720 --> 0:15:02.240 problem you mentioned it The vixus kind of eighteen nineteen twenty. 0:15:02.480 --> 0:15:04.960 If you compare it to the move index, the type 0:15:05.000 --> 0:15:08.600 of rates vonds generating, it tells you, like the market 0:15:08.640 --> 0:15:12.720 already discounts that better growth, because otherwise equities would have suffered, 0:15:12.760 --> 0:15:16.000 just like last year from the rates volatility. So so 0:15:16.080 --> 0:15:19.080 my senses, growth momentum is very good. The challenge is 0:15:19.120 --> 0:15:21.680 that where we are on the cycle to your statement 0:15:21.720 --> 0:15:24.800 with regards the state variables, we are still late. We 0:15:24.880 --> 0:15:28.720 still have unemployment, very low, inflation very high, risk premia 0:15:28.840 --> 0:15:31.320 very low. That just creates a bit of a tension 0:15:31.360 --> 0:15:34.560 between momentum and where you are. I was looking at 0:15:34.560 --> 0:15:36.760 your allocation as you look at this mess that we 0:15:36.800 --> 0:15:39.040 all are looking at and trying to understand where we're going, 0:15:39.480 --> 0:15:42.560 and it says that your neutral equities and credit underweight bonds, 0:15:42.720 --> 0:15:47.760 overweight cash, and commodities underweight bonds. How counter consensus is that? 0:15:47.920 --> 0:15:52.000 And why? Yeah? I mean, listen, I think as you 0:15:52.120 --> 0:15:55.160 all like, our view has been that rates volatility over 0:15:55.200 --> 0:15:57.680 the course of the year is fading and all because 0:15:57.760 --> 0:16:01.360 you have peak inflation. Center banks are also to the 0:16:01.480 --> 0:16:04.080 end of their tightening cycles, and now we have this 0:16:04.200 --> 0:16:08.720 new burst of rates volatility because inflation is stickier, there's 0:16:08.760 --> 0:16:11.960 re acceleration risk, and we need to get through that 0:16:12.360 --> 0:16:15.560 in this process. We have to be clear, we're quite advanced. 0:16:15.680 --> 0:16:18.720 The market has repriced the peak grade for the FAT 0:16:18.920 --> 0:16:22.200 for the ECB and it looks much more symmetric. We've 0:16:22.280 --> 0:16:24.960 kept the underweight at this juncture. We've had the underweight 0:16:25.000 --> 0:16:27.600 for a few weeks now because we feel like it's 0:16:27.600 --> 0:16:30.840 a h for the portfolio in case there is really 0:16:31.600 --> 0:16:35.400 this type of blockbuster data that scares the market, And 0:16:35.640 --> 0:16:38.760 a lot of conversations we currently have with clients evolve 0:16:38.840 --> 0:16:44.040 around maybe monetary policy is not as effective anymore in 0:16:44.240 --> 0:16:49.400 tightening financial conditions and possibly getting demand under control. If 0:16:49.520 --> 0:16:53.960 that narrative gains traction, you could easily overshoot peak grades 0:16:54.280 --> 0:16:57.680 that are currently priced. And that means that, yeah, you 0:16:57.760 --> 0:16:59.720 want to probably have a bit of a short duration 0:16:59.760 --> 0:17:02.280 by and be careful to go back to bonds too quickly. 0:17:02.560 --> 0:17:04.400 But we have to be clear. The yields that we're 0:17:04.440 --> 0:17:06.840 starting to see in the front end, they look much 0:17:06.840 --> 0:17:09.639 more symmetric. How would I play offense in that world? 0:17:10.040 --> 0:17:12.040 What would I do with my portfolio to set up 0:17:12.080 --> 0:17:17.560 for that story? In terms of rates, in terms of equities. Yeah, 0:17:17.560 --> 0:17:19.520 in terms of equities, I think we need to go 0:17:19.640 --> 0:17:22.440 to the sources where there is the biggest growth momentum, 0:17:22.440 --> 0:17:25.479 of course, and I think we've been quite focused on Asia, 0:17:25.960 --> 0:17:30.080 both Asia X Japan, China, and also we like Japan, 0:17:30.119 --> 0:17:32.280 which is linked to growth in the region but always 0:17:32.280 --> 0:17:35.879 has a certain global growth linkage. It does have incremented 0:17:35.920 --> 0:17:39.160 catalysts via the BOJ policies. So we've been very focused 0:17:39.200 --> 0:17:43.520 on non US markets to kind of add cyclical risk tactically. 0:17:44.119 --> 0:17:45.679 There is a bit of a setback on some of 0:17:45.720 --> 0:17:47.960 those traits because you know, you have a bit of 0:17:48.000 --> 0:17:51.000 a kind of moderation of the narrative and obviously risk 0:17:51.000 --> 0:17:54.200 appetite that could actually create a good opportunity to revisit 0:17:54.240 --> 0:17:57.600 doors into that better no momentum at this juncture. Christine, 0:17:57.640 --> 0:17:59.560 thank you, really fascinating stuff. You said a lot there. 0:18:00.160 --> 0:18:07.399 Ten minutes. Christie mcclisman of Goldman Sacond on our radar 0:18:07.480 --> 0:18:10.200 now in the white marble of Capitol Hills, Henrietta Trey's 0:18:10.280 --> 0:18:13.880 managing director partner, I should say of economic research data 0:18:13.960 --> 0:18:17.200 partners always informative as well. I'm going to cut to 0:18:17.320 --> 0:18:21.880 the chase, Henrietta. The budget outlook At cbo IS nineteen 0:18:22.280 --> 0:18:27.040 xcel spreadsheet lines the interest payment is modeled out at 0:18:27.119 --> 0:18:31.679 six point eight percent of the budget, and it is 0:18:32.000 --> 0:18:34.960 jaw dropping their model of what we're going to pay 0:18:35.080 --> 0:18:38.440 in interest over the next ten years on a per 0:18:38.520 --> 0:18:41.919 year basis. I thought it was a cumulative summation and 0:18:42.000 --> 0:18:44.800 it's not. Ten years from now, we're gonna pay one 0:18:44.840 --> 0:18:49.440 point four trillion in interest. Is it out of control? 0:18:51.560 --> 0:18:53.399 I think everybody's going to make the case that it 0:18:53.480 --> 0:18:55.480 is out of control, but nobody's going to do anything 0:18:55.560 --> 0:18:58.280 to stop it. To put it in perspective, there's a 0:18:58.400 --> 0:19:02.040 thirty one point three eight one trillion dollars debt ceiling 0:19:02.040 --> 0:19:05.760 and we're talking about cutting three hundred billion dollars into 0:19:05.800 --> 0:19:09.359 the deficit. So it is definitely a humongous number. It 0:19:09.359 --> 0:19:11.439 will continue to rise, but there are no plans on 0:19:11.440 --> 0:19:13.800 the horizon to materially dentist. So get used to it. 0:19:13.960 --> 0:19:18.159 Many others say, calm down because the mathematics, the complex 0:19:18.280 --> 0:19:21.879 mathematics of this is wrapped around the gross rate of 0:19:21.960 --> 0:19:26.720 a nation versus the our start and the implied economics 0:19:26.760 --> 0:19:29.959 of the moment. Do we have the growthiness of America 0:19:30.119 --> 0:19:34.600 to get out five years, let alone ten years. I mean, 0:19:34.680 --> 0:19:36.760 I think you obviously have the growth right now. And 0:19:36.880 --> 0:19:38.840 another question is how does it compare to the other 0:19:38.920 --> 0:19:41.359 nations that are coming out of the COVID stale, that 0:19:41.359 --> 0:19:44.600 are in recession dealing with bigger inflation than we are. 0:19:44.840 --> 0:19:47.400 A big question about it in sort of the morality 0:19:47.400 --> 0:19:50.680 circles of economic policies. How much does it matter? And 0:19:50.720 --> 0:19:53.159 what are we looking like compared to our peers the 0:19:53.200 --> 0:19:57.000 rest of the globalized economy. So I think in general, 0:19:57.160 --> 0:20:00.440 the feeling is and the voters are telling you, we 0:20:00.760 --> 0:20:03.679 love to rail about the deficit when it's convenient, but 0:20:03.760 --> 0:20:07.040 we don't have any bandwidth or the backbone to actually 0:20:07.040 --> 0:20:09.479 do anything about it. So you'll see that play out 0:20:09.520 --> 0:20:11.520 in the Social Security or the Medicare debate. You'll see 0:20:11.520 --> 0:20:15.560 that play out with Republicans calling to extend the twenty 0:20:15.760 --> 0:20:19.000 seventeen tax cut, which alone was a five trillion dollar bill, 0:20:19.400 --> 0:20:21.359 one and a half trillion dollars of which was pure 0:20:21.400 --> 0:20:25.359 deficit increases. So nobody's really willing to do anything about it, 0:20:25.359 --> 0:20:26.920 but they love to jump on about it, which is 0:20:26.920 --> 0:20:28.560 a reason that maybe we're going to be talking more 0:20:28.560 --> 0:20:31.160 about TikTok than the debt sailing debate or coming into 0:20:31.160 --> 0:20:33.280 the election season just because it's easier for people to 0:20:33.280 --> 0:20:35.800 wrap their heads around I mean, is that basically how 0:20:35.800 --> 0:20:39.120 you can interpret some of the discussion and the unity 0:20:39.320 --> 0:20:43.560 that you see within parties otherwise is lacking. Absolutely, this 0:20:43.600 --> 0:20:47.080 is entirely about comparing and contrasting. And what's interesting about 0:20:47.160 --> 0:20:50.879 American politics right now is that almost everyone unanimously believes 0:20:50.880 --> 0:20:53.280 that China is a problem. So you'll see this president's 0:20:53.280 --> 0:20:55.800 budget come out later today with eight hundred and eighty 0:20:55.800 --> 0:21:00.000 five I think billion dollars just for defense. That's humongous 0:21:00.040 --> 0:21:02.960 for a Democrat or a Republican. And then on the 0:21:03.000 --> 0:21:06.320 other side, we have the issue of China. Obviously, of 0:21:06.359 --> 0:21:09.240 all these defense folks coming out saying we need more 0:21:09.800 --> 0:21:12.240 capabilities on the defense side, but we need to continue 0:21:12.280 --> 0:21:15.760 to bolster Ukraine because it's a proxy war for what 0:21:15.880 --> 0:21:18.840 China would do to Taiwan. So there's just this tremendous 0:21:18.880 --> 0:21:23.320 focus on China from every direction, whether it's IP defense spending, 0:21:23.440 --> 0:21:27.960 TikTok ai, it's across the board. I think the view 0:21:28.000 --> 0:21:30.920 the budget on the deficit conversation through the lens of China, 0:21:31.080 --> 0:21:35.200 and it helps everything makes sense. And given the needs 0:21:35.359 --> 0:21:38.040 or the asks with respect to spending, and given the 0:21:38.200 --> 0:21:41.000 reluctance on all sides really to raise taxes ahead of 0:21:41.040 --> 0:21:43.399 an election season, and it's always ahead of an electric season, 0:21:44.200 --> 0:21:46.280 what is the likelihood that we really have a problem 0:21:46.359 --> 0:21:48.480 here with respect to the debt ceiling debate. It's different 0:21:48.520 --> 0:21:51.080 that has a different character than the previous debt ceialing debates. 0:21:52.000 --> 0:21:54.560 I was just talking to a dear former colleague peak 0:21:54.600 --> 0:21:57.600 going about this. I love that everybody says this time 0:21:57.680 --> 0:22:00.239 is different. This time it's a calamity. This time it's 0:22:00.240 --> 0:22:03.840 a train wreck. The House is a disaster, exactly. None 0:22:03.840 --> 0:22:06.600 of that is different from how it was in twenty eleven, 0:22:06.680 --> 0:22:10.119 twenty thirteen, twenty sixteen. I mean, we have seen two 0:22:10.359 --> 0:22:14.560 consecutive Republican speakers heads role as a result of conflating 0:22:14.600 --> 0:22:17.879 the death ceiling with the government funding bill and relying 0:22:17.880 --> 0:22:20.080 on Democrats to provide the bulk of the votes. And 0:22:20.359 --> 0:22:23.600 that's precisely what's going to happen here this year as well. 0:22:23.880 --> 0:22:27.800 So I find a lot more consistencies than differences, and 0:22:27.840 --> 0:22:31.360 the dysfunction is a normal part of especially the House 0:22:31.359 --> 0:22:33.720 of Representatives. I'm gonna tries one of the best always 0:22:33.760 --> 0:22:37.840 great to get your thoughts, Hendrid to try cynicism is off. 0:22:38.320 --> 0:22:41.240 Let's be clear, though, and connect that Washington cynicism with 0:22:41.320 --> 0:22:45.200 how markets will at least take that point. The biggest 0:22:45.280 --> 0:22:48.480 risk is that people believe that it isn't different this time. 0:22:58.960 --> 0:23:01.400