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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 Ferrell and Lisa A. Brawmowitz. Daily we bring

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Speaker 1: you insight from the best and economics, finance, investment, and

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Speaker 1: international relations. To find Bloomberg Surveillance on Apple podcast, SoundCloud,

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

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Speaker 1: Right now, and this is a joy, John and Lisa

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Speaker 1: are gonna talk to Vincent Reinhardt of Dreyfus and Mellon,

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Speaker 1: their chief economists about the moment at Anne. He's a

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Speaker 1: little concerned about communication at the FED, but I want

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Speaker 1: to talk about the communication at the beginning of the panic.

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Speaker 1: Reinhart and Reinhard, Carmen Reinhart, your wife was at the

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Speaker 1: World Bank, wrote the mother of all essays of this pandemic,

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Speaker 1: on the Pandemic Depression. And we are now, Vincent, at

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Speaker 1: a point where as you said, then, the global economy

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Speaker 1: will never be the same, if I may, can you

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Speaker 1: expand on that and tell us how this global economy

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Speaker 1: will never be the same as we are now somewhat

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Speaker 1: out of this pandemic. Let me first admit where we

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Speaker 1: were wrong back then. We were worried that there would

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Speaker 1: be a long, dramatic and persistent decline and output, and

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Speaker 1: that was because they'd be insufficient policy stimulus and policies

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Speaker 1: showed up. Worrying about policy stimulus was was uh not

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Speaker 1: that relevant? And that and that's the really good news.

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Speaker 1: But what's the other key message? That is economic dislocations,

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Speaker 1: whether it's a recession or just depression, leave lasting scars.

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Speaker 1: They leave lasting scars on balance sheets, they leave lasting

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Speaker 1: scars on people. People act differently coming out of severe

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Speaker 1: economic dislocation. So let's go to Lawrence Summers and Olivia

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Speaker 1: Blanchard and talk about hysteresis, which is when you're out

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Speaker 1: of the system, you never get back. Are we so

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Speaker 1: much out of the system that you have to mark

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Speaker 1: down g d P and the Fed maybe will be

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Speaker 1: more dubbish because they will have to mark down due

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Speaker 1: to our pandemic Hysteriesius Well, a big lesson. And by

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Speaker 1: the way, Tom, what is the most costly uh thing

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Speaker 1: coming out of a recession or depression? It's the lessons

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Speaker 1: you take away from it, because that influences how you

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Speaker 1: think about behaviors for the next babies, like our parents,

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Speaker 1: exactly what Lisa, you're too young for this, But Brianan

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Speaker 1: and I grew up as depression We had parents that

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Speaker 1: were depression babies. It was terrible. So that's really exactly

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Speaker 1: where I wanted to go. And when do we start

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Speaker 1: to see consumers pull back, especially given the fact that

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Speaker 1: it seems like Target and perhaps others are not able

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Speaker 1: to pass along the price increases as rapidly as rapidly

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Speaker 1: as they'd like. Another message of what of the paper

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Speaker 1: Tom was talking about is the shock was very regressive

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Speaker 1: in incidents, i e. It really hit low income families harder.

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Speaker 1: So when you talk about the consumer, you've got to

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Speaker 1: ask who's got to wear withal with withstand a slow

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Speaker 1: patch in the economy. Remember, probably there's still about two

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Speaker 1: trillion dollars of excess savings sucked away given all the

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Speaker 1: government programs in two thousand uh in two thousand twenty one,

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Speaker 1: those households will be able to ride out the shock. However,

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Speaker 1: lower income households are going to have a harder time

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Speaker 1: and and we are going to see some pulling back.

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Speaker 1: But what's the key metric right now that tells your

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Speaker 1: households aren't really that worried about recession saving rate is low.

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Speaker 1: If people were worried about their income prospects, they wouldn't

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Speaker 1: be spending so much out of their income, which might

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Speaker 1: be a good thing, it might be a bad thing,

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Speaker 1: especially because the quits rate is going up too. So

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Speaker 1: it's not exactly as though people are particularly concerned, but

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Speaker 1: maybe they should be, is what some people are saying,

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Speaker 1: especially as they forecast the potential for recession out in

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Speaker 1: one do gas prices become a recessionary one? Do oil

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Speaker 1: prices higher actually become a disinflationary rather than inflation area

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Speaker 1: some people are projecting, So I think the person asks

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Speaker 1: Jim Hamilton of U C. S d us donal done

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Speaker 1: the important work on oil prices and economic uh business cycle,

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Speaker 1: and the plane fact is when oil prices move away

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Speaker 1: from where they've been for a while, when they get

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Speaker 1: salient and household decisions, when they really get your attention,

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Speaker 1: that's when they matter for economic activity and guess out,

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Speaker 1: guess what, we're long past that point. It is number

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Speaker 1: one concern among household It's got to be crimping household spending,

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Speaker 1: particularly for those who hit who get hit harder, weller

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Speaker 1: income household visit right now Jerome Powell is not going

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Speaker 1: to show up as you, I'm sure, Coach j Allen

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Speaker 1: greenspan to Humphrey Hawkins or whatever it's called now and say, frankly,

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Speaker 1: I don't give a damn, but it isn't gone with

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Speaker 1: the wind market, you say, Scarlett O'Hara is sit at

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Speaker 1: the FED table where tomorrow is another day? Is it

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Speaker 1: a day with too much communication? Is this a FED

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Speaker 1: talking way too much versus a silence in the halls

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Speaker 1: when you were there for twenty four years? Well, I

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Speaker 1: can tend to date myself, but I will admit one

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Speaker 1: of the formative books coming into the FED, which was

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Speaker 1: the big, big, big book of the late eighties, was

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Speaker 1: William Grider's Secrets of the Temple. That talks so much

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Speaker 1: about it? Are they talking too much? At least it

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Speaker 1: gets up and does our brief Here, John, we're in

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Speaker 1: a quiet period, right speak? Do you want that? Do

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Speaker 1: you want a permanent quiet period? Except for Chairman Paul uh,

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Speaker 1: you gotta listen to the chair. There are opportunities for

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Speaker 1: members to talk. Part of the genius, if it is

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Speaker 1: a genius, of the construction of the Federal Reserve system,

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Speaker 1: is to let a diversity of opinions flourish, and if

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Speaker 1: there's a diversity opinions, you want to hear that. However,

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Speaker 1: it's not helpful and everyone's talking and everyone's reading the

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Speaker 1: same page of the hymnal. How much information did you

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Speaker 1: get from FED speakers over this intermeding period. What they

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Speaker 1: told you was the summary of what would appear in

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Speaker 1: the minutes, and that share Power already told us in

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Speaker 1: the press conference. What I worry about is their communications strategy.

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Speaker 1: Uh is fractured gradualism. What they're doing right now, we're

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Speaker 1: gonna do fifty, will do fifty for the next couple

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Speaker 1: of meetings, is about very near term guidance because tomorrow

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Speaker 1: is another day. Listen to the Chair Power to press conference.

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Speaker 1: He doesn't want to talk about hypothetic goals and doing

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Speaker 1: things in the future. But then they published the summary

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Speaker 1: of economic projections that gives a sense of where interest

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Speaker 1: rates are gonna be five years from now. Uh, it's

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Speaker 1: it's it's not not consistent. I'm afraid to ask this.

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Speaker 1: Let's go with Vincent John. Have you seen Going with

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Speaker 1: the Wind? I haven't some not ready my style, those

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Speaker 1: kind of movies you know, you know, we're at a

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Speaker 1: time sake. You're exactly right, it's not politically can you

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Speaker 1: see loud Brainard turned to chairman Paul and go, sir,

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Speaker 1: you are no gentleman, No, it's rant. Thank you, Tom.

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Speaker 1: You got keeping on the clock? Are you at a

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Speaker 1: time vas nice? More about the clock than you too, apparently,

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Speaker 1: which is why stuff gone with the wind. Oliver Chen

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Speaker 1: with us senior equity research analyst at cow and who

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Speaker 1: usually talked to him about fancy sweatshirts at Selene. Not

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Speaker 1: today we talked target. We note that he teaches at

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Speaker 1: Columbia Business School on retail as well. Owever, I want

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Speaker 1: to talk about the reality of target, which is the

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Speaker 1: Chloe ankle strap sandal is usually sixteen seventeen dollars and

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Speaker 1: you can go in there and for the kid buy

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Speaker 1: it for thirteen fifty nine. If they lower that puppy

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Speaker 1: down to eleven ninety nine, will they sustain the traffic

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Speaker 1: that you say is required? Well, Tom, what we have

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Speaker 1: here is the consumers reposition very quickly, so we had

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Speaker 1: a cooler April. Unfortunately, Anniversary the stimulus was also an issue,

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Speaker 1: and these markdowns taking place now are critical. Speed is

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Speaker 1: the name of game in retail, and Target is doing

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Speaker 1: that now. The consumer shifted faster than they expected in

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Speaker 1: terms of the consumer going out requiring suitcases instead of swimsuits,

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Speaker 1: and big and bulky and home that's been under pressure too,

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Speaker 1: So doing this quickly is a positive action and markdowns

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Speaker 1: will occur in the marketplace now this quarter we're looking

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Speaker 1: forward to a better back half and Target another's execute

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Speaker 1: well for back to school. Back to school should be

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Speaker 1: pretty good. Um, we are seeing a bifurcation in the consumer.

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Speaker 1: On the one hand, there's lots of savings on the sidelines,

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Speaker 1: but the consumer are the lower end consumers under plenty

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Speaker 1: of pressure, specifically the under fifty k household income as

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Speaker 1: inflation takes hold. But this is what we want to

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Speaker 1: talk about. You've touched on it in a couple of ways.

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Speaker 1: There has to strength to the consumer change or is

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Speaker 1: it just a basket that has changed, or is it both?

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Speaker 1: What is it? It's a it's a little bit of both, John.

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Speaker 1: I think the consumer pivoted faster than retailers could plan for,

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Speaker 1: so retailers had to be very quick and agile. In

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Speaker 1: the case of home product and big and bulky, that's

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Speaker 1: a very long lead time category, so it was difficult

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Speaker 1: to shift and Target and Walmart had executed so well

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Speaker 1: through the pandemic, really stalking up to offer great customer

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Speaker 1: service that this change was faster than expected. What's really next.

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Speaker 1: We still see a very strong luxury consumer. We also

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Speaker 1: think a consumer focused on value such as Planet Fitness,

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Speaker 1: grocery outlet. Those are great ideas, and then tom as

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Speaker 1: we think in themes. Our second major theme is health,

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Speaker 1: wellness and beauty. As you know, we like Alter a lot.

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Speaker 1: And then thirdly digital platforms like Revolved. It was nice

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Speaker 1: of you to mention some when you started talking about

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Speaker 1: health and not make thank you. Let's talk about Target

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Speaker 1: a little bit more, and I want to talk about

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Speaker 1: whether we should write down the culture down the year.

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Speaker 1: We touched on this a little bit earlier. This morning.

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Speaker 1: The stock stands seven percent, but that's about the pain

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Speaker 1: in the quarter and arguably and invested right now, that's

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Speaker 1: just spooked Loft confidence in any kind as this company provides.

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Speaker 1: But they are still looking for a bounce back in

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Speaker 1: margins in the second half of the year. Now, Oliver,

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Speaker 1: I want you to help us understand how doable, how

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Speaker 1: achievable that actually is when they're looking for two percent

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Speaker 1: this quarter. That's the damage and they're looking to get

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Speaker 1: back to six percent in the second half of the year. Yeah,

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Speaker 1: Target has assessed the situation where they're out with that

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Speaker 1: press released today, and what will happen is these markdowns

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Speaker 1: and markdown reserves will drive the top line. We've been

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Speaker 1: in a volatile situation with the comparers and what's been

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Speaker 1: happening with the consumer. But this should be a good

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Speaker 1: glimpse into what's achievable and doable and a reset which

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Speaker 1: was needed in terms of what they're seeing now. Um So,

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Speaker 1: looking forward, the fixture is on unemployment. Unemployment still very

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Speaker 1: low at three point six percent. That is something we're

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Speaker 1: going to monitor, you know, as a risk factor to

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Speaker 1: retail at large. But now the consumers going out again

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Speaker 1: and this portfolio and the markdown should be in the

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Speaker 1: right place. Target has unique vulnerability because keep in mind

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Speaker 1: groceries about it's about fifty percent at Walmart, which has

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Speaker 1: led to a little more stability and the Walmart numbers

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Speaker 1: and guidance Oliver how much does this challenge the model

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Speaker 1: that came out of the pandemic where a lot of

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Speaker 1: companies in particular retailers were building up inventories to avoid

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Speaker 1: getting caught up in supply chain disruptions at least. So

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Speaker 1: what we liked about the pandemic in terms of retail

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Speaker 1: is curbside pick up, these sortation centers, the integration of

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Speaker 1: omni um those will be powerful tools for the long term.

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Speaker 1: And also Target and Walmart running marketplaces. So there is

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Speaker 1: a lot of positives that came out of building a

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Speaker 1: better mousetrap for the long term. Oliver real quickly here

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Speaker 1: and we love to talk to you about luxury all

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Speaker 1: the way on down to Target. We don't make light

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Speaker 1: of it. It's really important. Could you explain to me

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Speaker 1: why a sweatshirt it Target is fifteen dollars in a

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Speaker 1: sweatshirt and sleeen is eight hundred ninety dollars. Explain that, well, Tom,

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Speaker 1: the magic of retail and we teach it that Columbia's

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Speaker 1: magic and logic Uvedury Goods really has a lot of

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Speaker 1: emotional components that go into the good and retail is

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Speaker 1: about a willingness to pay model when it comes to apparel.

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Speaker 1: What we also see happening is re commerce and this

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Speaker 1: move to sustainability. I'm here in Europe it's a very

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Speaker 1: big important topic. So Tom, I'd encourage you to look

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Speaker 1: at resale. You'll get that Selene sweatshirt. But what I know, John,

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Speaker 1: which is so true, is they both shrink in the wash,

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Speaker 1: which is my problem with sween. Are you are well

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Speaker 1: aware of my particular of pse what happens when the

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Speaker 1: other half wants to wear your sweatshirt and deliberately shrinks it. Yes,

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Speaker 1: dry that that's what happens. That's what happens. That's what

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Speaker 1: happened out of the Shannon Cow. Thank you, Thank Cassette.

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Speaker 1: As the other half confessed to deliver. We all not

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Speaker 1: watched she did it? We all not watch, did no?

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Speaker 1: She laughed. She knows what happened, so that we got.

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Speaker 1: She's happy. Good for her. Lisane Saunders joins us NOW

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Speaker 1: Chief Investment Strategies. Charles schwab lisenne let's get out front

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Speaker 1: surveillance and needs to know your mid year update? What

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Speaker 1: is it? Not quite as gloomy as what the year

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Speaker 1: ahead outlook for two was in December, But that's in

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Speaker 1: large part given that we're pretty well into a bear

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Speaker 1: market here. Certainly for a NaSTA can wrestle two thousand.

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Speaker 1: I'm pretty close for the SMP. A lot of churn

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Speaker 1: under the surface. So um, some of what I think

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Speaker 1: the market is facing has been priced into stocks, maybe

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Speaker 1: not yet the extreme. I think Phase one and Phase

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Speaker 1: two were about tighter financial conditions title liquidity environment, inflation raids.

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Speaker 1: Phase two was reflecting the weakness in the economy, which

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Speaker 1: of course was witnessed in the first quarter. Now I

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Speaker 1: think we may be in a phase that the market

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Speaker 1: needs to price in a change in the profit's outlook.

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Speaker 1: UM nothing, nothing dire, But I think this maybe the

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Speaker 1: first quarter that we start to see a noticeable hit

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Speaker 1: to profit margins. And then what's important here is a

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Speaker 1: separation of profit making enterprises from those that are not

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Speaker 1: what happens in a bear market, to nonprofit making enterprises

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Speaker 1: that have a story. You know, you and I used

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Speaker 1: to call him story stocks. What happens to story stocks?

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Speaker 1: Given the lovely mood we're in, Well, maybe the question,

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Speaker 1: Tom is what has happened If you look at nonprofitable tech,

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Speaker 1: which has been a really popular area of the market.

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Speaker 1: UM Golden Sacks has an index you can find it

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Speaker 1: on Bloomberg that that had it its worse UM seventy

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Speaker 1: two percentral down, So I would argue that that's not

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Speaker 1: really a perspective thing. That's we've been living in massive

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Speaker 1: draw downs across the spectrum of these narrative driven groups

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Speaker 1: of of story stocks that really represent the ultimate in

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Speaker 1: a long duration a pick because they have no profits

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Speaker 1: right now, so you're you're investing in them based on

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Speaker 1: the hopes for profits and in a at afford to

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Speaker 1: year high inflation with with the FT as aggressive as

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Speaker 1: it is, I think there has been a shortening of

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Speaker 1: duration on the equity side as well, And and I

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Speaker 1: don't think other than maybe some trading lifts in called

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Speaker 1: these lower quality segments of the market, I don't think

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Speaker 1: that's the bet investors should be making at this point

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Speaker 1: in the cycle. So what should the the the investors

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Speaker 1: are making right now? Quality? I think sort of a

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Speaker 1: quality rapper. I think the factors that have had consistency

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Speaker 1: and leadership, and I think at least near term will

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Speaker 1: continue to have consistency and leadership would be things like

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Speaker 1: strong free cash, full yield, strong balance sheet, cash rich

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Speaker 1: balance sheet, low debt. In this more constrained earnings revisions environment,

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Speaker 1: positive earnings revisions, So all of those have that quality

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Speaker 1: wrapper around them, and I think that's still the approach

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Speaker 1: that investors want to take, even if there are those

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Speaker 1: trading maybe opportunities in the very short term down the

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Speaker 1: quality spectrum. There's a fight right now in markets and

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Speaker 1: among strategists around whether people are being too barished or

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Speaker 1: not barish enough with respect to the economic outlook, whether

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Speaker 1: the idea of recession is a likelihood or an outlier

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Speaker 1: event that could come down the pike. Where do you

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Speaker 1: stand in terms of how investors should think about this,

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Speaker 1: how much potential health that they should give up hanging

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Speaker 1: out in safety and hedging against some sort of recessionary circumstance. Well,

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Speaker 1: you know, my answer leads to that question. If we

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Speaker 1: were at all time highs recession versus soft landing would

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Speaker 1: probably be different, because I think at that point it

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Speaker 1: would make a big difference given the pain we've already

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Speaker 1: experienced in in the market, especially under the surface. Even

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Speaker 1: in the case of the S and P at the

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Speaker 1: recent lows, the average draw down across the five members

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Speaker 1: wast So I think the question of recession no recession

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Speaker 1: maybe matters a little bit less right now in terms

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Speaker 1: of ultimately what the downside for the market is. Yes,

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Speaker 1: You can look at history, bear markets with recessions down

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Speaker 1: in the low thirties on average, bear markets without you

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Speaker 1: mid twenties. But there's a wide range around both of those. UM.

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Speaker 1: I don't think that assuming we were going to get

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Speaker 1: a recession, and that's always the better bet if you

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Speaker 1: use history as a guide in tightening cycles, I don't know.

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Speaker 1: It could suggests an oh seven to oh nine kind

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Speaker 1: of recession. There aren't so many massive imbalances. Even if

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Speaker 1: housing continues to falter, it doesn't take the entire financial

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Speaker 1: system down with it. This would be the more typical

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Speaker 1: end to a cycle. Uh. But again, the fact that

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Speaker 1: the market has suffered a lot already, I'm not sure

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Speaker 1: it makes such a huge difference in terms of where

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Speaker 1: we go from here. Listen talk about US and talk

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Speaker 1: about profit making companies that have announced share buy backs.

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Speaker 1: Do they speed them up? Given the draw down that

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Speaker 1: we've seen across NASDACK SPX in now, do they do

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Speaker 1: they complete their buy backs quicker to announce more? Um? Well,

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Speaker 1: you have seen a pickup this year, and what's interesting

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Speaker 1: is it's not just among the SMP companies, but you're

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Speaker 1: seeing a recent pickup and buy backs. UM. Down the spectrum,

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Speaker 1: down the cap spectrum into the wrestle two thousand sphere

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Speaker 1: and Thomas, you know, when you look at insider buying

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Speaker 1: or selling, insider selling is less valuable and indicator because

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Speaker 1: they can sell for lots of reason. It's the buying.

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Speaker 1: So you've got insider buying and now buy backs um

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Speaker 1: as an attempt to help boost the profits picture. And

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Speaker 1: you know in net that's a positive for the market

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Speaker 1: and couldn't accelerate. Sure, So, Lizian people used to say

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Speaker 1: that companies would borrow to buy back their shares. That's

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Speaker 1: kind of out the window right now, given where the

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Speaker 1: rates are to borrow money at least for the vast,

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Speaker 1: vast majority of companies. But when do they actually have

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Speaker 1: trouble raising cash? On another level, Deutsche Bank came out

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Speaker 1: with a note this morning talking about an increase in

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Speaker 1: defaults in a return to a higher default cycle. Do

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Speaker 1: you see that as a likelihood. I think we're going

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Speaker 1: to start to see more trouble When when people talk

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Speaker 1: about spreads in the credit market, they often think of

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Speaker 1: it in level terms, but I think it's directions, So

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Speaker 1: maybe it's seven per cent or so, that's not egregious.

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Speaker 1: But when it's up from four percent and you were

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Speaker 1: maybe on the marginal end of the spectrum having trouble

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Speaker 1: financing foreign change, it becomes much more difficult even with

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Speaker 1: another couple of percent. So I think that's also has

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Speaker 1: the potential to be more of a story in the

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Speaker 1: second half of the year. One final question, Lisanne, what's

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Speaker 1: the sweat factor among retail right now? What is Charles

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Speaker 1: schwabsey In terms of flows in and out of equity, UM,

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Speaker 1: we've seen pretty steady flows into et f s the

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Speaker 1: passive side. More of the outflows have been on the

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Speaker 1: mutual fund side. What's interesting about that is we actually

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Speaker 1: have equal weight doing better than than cap weighted right now,

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Speaker 1: but not a lot of panic. We we we saw

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Speaker 1: sort of capitulation on the attitudinal side of of sentiment,

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Speaker 1: a lot of fear, a lot of angst and concern,

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Speaker 1: but it really wasn't matched on the behavioral side. And

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Speaker 1: this is almost always a case with with our investors.

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Speaker 1: If they have what we call an advised approach, if

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Speaker 1: their discipline, they have strategic acid allocation, they're disciplined around

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Speaker 1: that using uh you methodology like diversification rebalancing. They tend

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Speaker 1: to ride through tough environments more so than they call

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Speaker 1: it the wing it traders, the winget trite as we

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Speaker 1: like that, Lizan, thank yous that of swap Right now,

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Speaker 1: we a great to fix income and we do it

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Speaker 1: with Mark Cabana. He has head of US rate Strategy,

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Speaker 1: Bank of America writing a very wonderful sequential note on

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Speaker 1: what is to come for price and yield. Mark, Let's

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Speaker 1: get to the philosophical first. You say this is a

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Speaker 1: FED that is dovish at its core. Are they going

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Speaker 1: to blink? Not yet. We do think that they're dovished

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Speaker 1: at their core, because ultimately what the FETE is trying

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Speaker 1: to do here has achieved that elusive soft landing. It's

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Speaker 1: gonna be difficult for them to do so, but they

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Speaker 1: know that that's what they're after, and as a result,

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Speaker 1: once they get rates into the range of two to

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Speaker 1: three percent, which is their perception of nominal neutral, then

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Speaker 1: they're gonna probably think about slower things down a bit.

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Speaker 1: It's very consistent with our blood that we delivering to

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Speaker 1: fifty basis point heights in the next two meetings, but

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Speaker 1: then ultimately downshift to twenty five basis points. Maybe disappointed

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Speaker 1: market that seems to be believing the feed is going

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Speaker 1: to go more aggressive away from sophisticated trades. Our viewers

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Speaker 1: and listeners are hammered by yield up, price down, and

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Speaker 1: you say, you say, have the courage to own duration,

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Speaker 1: get out there and get in the game. How exactly

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Speaker 1: do you get in a game? We're in full faith

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Speaker 1: and credit. You have a draw down of a negative

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Speaker 1: twelve percent. Yeah, So we think that what an investor

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Speaker 1: should be doing here is recognized. Where we are in

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Speaker 1: this economic cycle. We're in the later innings of this.

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Speaker 1: We're going likely to see an economic moderation and a

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Speaker 1: tightening of financial conditions, which is exactly what the FED

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Speaker 1: needs to see in order to bring inflation lower. And

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Speaker 1: as that happens, what investors should be doing is they

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Speaker 1: should be looking to diversify out of risk and into

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Speaker 1: safer assets that typically benefit when we are in these

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Speaker 1: late stages of an economic cycle. And as a result,

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Speaker 1: that just means diversifying away from equities and credit into

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Speaker 1: more safe type of fixed income alternatives. We do think

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Speaker 1: that that's going to benefit the U. S. Treasury market

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Speaker 1: as we get two levels around three percent maybe slightly

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Speaker 1: above three percent, because it makes it increasingly easy for

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Speaker 1: investors who are managing multi asset portfolios to diversify and

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Speaker 1: make sure that they get some protection in case we

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Speaker 1: do start to see a more rapid economic slowdown, which

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Speaker 1: is a reason why we've seen buying come in around

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Speaker 1: that three percent mark. Mark. I am wondering about your

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Speaker 1: interpretation of what we just got out of Target and

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Speaker 1: this real margin compression that we're seeing, and how that

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Speaker 1: really feeds into the Fed's view. Does this encourage them

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Speaker 1: to keep going with rate hikes because of how much

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Speaker 1: the consumer is feeling inflation, or does it actually point

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Speaker 1: to something more like a slowdown and give them more

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Speaker 1: breathing space. Well, they know that they have to get

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Speaker 1: inflation under control, and likely one of the challenges that

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Speaker 1: Target is having is trying to manage around inventory, recognizing

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Speaker 1: that costs arising and that they need to pass along

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Speaker 1: some of that to consumers, but knowing how much they

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Speaker 1: can pass along, how that impacts inventory, and then trying

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Speaker 1: to figure out how their demand is going to be

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Speaker 1: impacted by that is a very very tough calculus. And

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Speaker 1: so for the FED, I think that they recognize, look,

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Speaker 1: they are missing on their inflation mandate. They need to

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Speaker 1: get that under control. They're gonna be hiking reasonably aggressively

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Speaker 1: and at least the next two meetings and then probably

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Speaker 1: guiding the market to expect further rate hikes. Now, what

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Speaker 1: that's gonna do is it's going to help tighten financial conditions,

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Speaker 1: cool demand, and we do believe that that will ultimately

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Speaker 1: increased demand for fixed income as investors allocate again out

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Speaker 1: of risk and into safer assets. When you're coming up

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Speaker 1: with a call for the FED and these macro proclamations

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Speaker 1: about where the bond market is going to go, how

431
00:24:43,520 --> 00:24:46,200
Speaker 1: much are you looking at the resilience of the consumer

432
00:24:46,320 --> 00:24:49,119
Speaker 1: on the ability to absorb some of these price increases

433
00:24:49,160 --> 00:24:54,000
Speaker 1: and frankly, their willingness to continue to spend. Yeah, so far,

434
00:24:54,080 --> 00:24:58,560
Speaker 1: we've been very surprised by the resilience of the American consumer.

435
00:24:58,960 --> 00:25:01,800
Speaker 1: Our firm's credit our data does indeed show that there's

436
00:25:01,840 --> 00:25:05,480
Speaker 1: been a lot of resilience, especially on the low income

437
00:25:05,560 --> 00:25:08,520
Speaker 1: spending coke for We're watching this carefully to see if

438
00:25:08,520 --> 00:25:11,480
Speaker 1: there's any cracks, but right now we haven't really seen them,

439
00:25:11,760 --> 00:25:13,800
Speaker 1: and that just makes us more confident that the FED

440
00:25:14,040 --> 00:25:16,720
Speaker 1: is going to be delivering these hikes. They will be

441
00:25:16,800 --> 00:25:19,959
Speaker 1: slowing down later this year, but they're probably gonna go,

442
00:25:20,280 --> 00:25:23,600
Speaker 1: in our base case beyond what the market is currently pricing,

443
00:25:23,720 --> 00:25:27,600
Speaker 1: not necessarily getting there super fast, but in the second

444
00:25:27,680 --> 00:25:30,680
Speaker 1: half of the year, really in the third and fourth quarters,

445
00:25:30,920 --> 00:25:33,280
Speaker 1: begin to slow down these pace of rate hikes, and

446
00:25:33,400 --> 00:25:35,919
Speaker 1: ultimately we think get to a level that's about twenty

447
00:25:36,000 --> 00:25:38,920
Speaker 1: or thirty basis points above what the market is currently pricing,

448
00:25:38,960 --> 00:25:40,840
Speaker 1: around three and a half percent by the middle of

449
00:25:40,920 --> 00:25:46,000
Speaker 1: next year. I look mark at where the yield is

450
00:25:46,240 --> 00:25:49,160
Speaker 1: right now in the simple issue is we've popped above

451
00:25:49,320 --> 00:25:53,119
Speaker 1: three percent three point zero two percent on the tenure yield.

452
00:25:53,480 --> 00:25:55,800
Speaker 1: What's your view out one year on that. I mean,

453
00:25:55,840 --> 00:25:58,159
Speaker 1: if somebody needs to know a single point be of

454
00:25:58,240 --> 00:26:02,240
Speaker 1: a guess. Yeah. So look, our forecasts have the tenure

455
00:26:02,280 --> 00:26:03,760
Speaker 1: at the end of this year at three point to

456
00:26:03,960 --> 00:26:06,840
Speaker 1: five percent. It's a single point in time estimate. It's

457
00:26:06,840 --> 00:26:09,440
Speaker 1: awfully difficult to have a lot of confidence around that,

458
00:26:09,920 --> 00:26:12,600
Speaker 1: but we do think that there's you know, modest further

459
00:26:12,760 --> 00:26:16,680
Speaker 1: upside in yield from here. Now that said, we've recognized

460
00:26:16,760 --> 00:26:20,000
Speaker 1: that given how the market has recently behaved, the risks

461
00:26:20,000 --> 00:26:23,280
Speaker 1: are probably skewed to the downside on that forecast. And

462
00:26:23,760 --> 00:26:26,520
Speaker 1: even though we think that our forecast is slightly above

463
00:26:26,520 --> 00:26:29,000
Speaker 1: where the market is today, that doesn't prevent us from

464
00:26:29,000 --> 00:26:32,439
Speaker 1: believing that duration is not a bad addition to investors.

465
00:26:32,640 --> 00:26:36,320
Speaker 1: We're looking for some protection again against that economic moderation

466
00:26:36,440 --> 00:26:39,200
Speaker 1: that is likely ahead of us, and Mark Awesome, that's

467
00:26:39,200 --> 00:26:42,040
Speaker 1: a white smock amount of that. Thanks American level research.

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00:26:42,480 --> 00:26:46,240
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join

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00:26:46,359 --> 00:26:49,760
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