WEBVTT - Surveillance: Bond Vigilantes with Yardeni 0:00:05.080 --> 0:00:08.280 This is the Bloomberg Surveillance Podcast. I'm Lisa A. 0:00:08.320 --> 0:00:11.640 Bromoids, along with Tom Keen and Jonathan Farrell. Join us 0:00:11.680 --> 0:00:15.280 each day for insight from the best in economics, geopolitics, 0:00:15.320 --> 0:00:16.440 finance and investment. 0:00:16.760 --> 0:00:18.760 Subscribe to Bloomberg Surveillance. 0:00:18.360 --> 0:00:21.840 On demand on Apple, Spotify and anywhere you get your podcasts, 0:00:22.160 --> 0:00:25.200 and always on Bloomberg dot Com, the Bloomberg Terminal and 0:00:25.200 --> 0:00:26.440 the Bloomberg Business app. 0:00:27.520 --> 0:00:30.760 At Guthentic Joces now president of Youathny Research, and I 0:00:30.760 --> 0:00:33.400 didn't know whether to be offended or not by those comments. 0:00:33.520 --> 0:00:35.080 At great to catch out with you, you coined the 0:00:35.120 --> 0:00:38.959 phrase bon vigilantes at the vigilances back. 0:00:39.840 --> 0:00:43.800 I think they are. They're certainly saddling up. Look, usually 0:00:43.800 --> 0:00:48.280 the bond market is driven by inflation, inflation expectations, and 0:00:48.720 --> 0:00:52.519 what everybody expects the FED to do about inflation. Usually 0:00:52.520 --> 0:00:55.400 supply and demand really don't matter that much, and that's 0:00:55.520 --> 0:01:00.240 usually because federal deficits tend to widen during recessions when 0:01:00.240 --> 0:01:02.840 the Fed's lowering interest rates. This time around, we've got 0:01:03.040 --> 0:01:05.800 the federal deficit widening when the economy is doing well. 0:01:05.840 --> 0:01:09.039 And I think the vigilianis are quite concerned about that 0:01:09.440 --> 0:01:10.319 way too much supply. 0:01:10.840 --> 0:01:13.240 How much of this bond move is a threat ahead 0:01:13.280 --> 0:01:14.800 wind to your bullish equity call it? 0:01:16.319 --> 0:01:19.400 Well, look, I thought we would end up the year 0:01:19.440 --> 0:01:21.679 at forty six hundred on the S and P five hundred. 0:01:21.720 --> 0:01:23.800 We got there at the end of July, and I 0:01:23.880 --> 0:01:27.720 decided not to raise my forecast. So I'm looking for 0:01:27.760 --> 0:01:31.959 the market to move sideways or continue with this pullback, 0:01:32.720 --> 0:01:35.039 maybe even down to the two hundred day move an average, 0:01:35.080 --> 0:01:38.400 and concerns about what the bond market's bond vigilanis are 0:01:38.400 --> 0:01:40.040 going to do. But then I think by year end 0:01:40.040 --> 0:01:42.240 will still end up around forty six hundred. Next year, 0:01:42.680 --> 0:01:44.840 I'm looking for fifty four hundred. But I think in 0:01:44.880 --> 0:01:47.920 the short term here it's why the market has been 0:01:47.960 --> 0:01:51.000 down for since. Really the end of July, is. 0:01:51.160 --> 0:01:53.440 A forty six hundred level or even a fifty four 0:01:53.560 --> 0:01:57.120 hundred level a next year realistic or consistent with bond 0:01:57.200 --> 0:01:59.880 yields that don't materially go down from where they are 0:02:00.080 --> 0:02:00.480 right now. 0:02:01.720 --> 0:02:04.720 Well, welcome back to normal. Right We had, you know, 0:02:05.160 --> 0:02:08.280 abnormally low interest rates for a very long time, and 0:02:09.080 --> 0:02:11.600 central banks around the world kept trying to pump more 0:02:11.639 --> 0:02:14.320 liquidity into the system to bring inflation all the way 0:02:14.320 --> 0:02:17.680 back up to two percent. Now we're back to where 0:02:17.680 --> 0:02:20.280 we were before the two thousand and seven two thousand 0:02:20.280 --> 0:02:25.120 and eight calamity. We've seen real interest rates, the tips seel, 0:02:25.160 --> 0:02:27.200 the ten year tips shield go back to two percent 0:02:27.280 --> 0:02:31.480 instead of going staying around zero or slightly negative. You know, 0:02:31.520 --> 0:02:36.600 two percent plus two and a half percent inflation premium 0:02:36.639 --> 0:02:39.800 is four and a half percent. So that's pretty close 0:02:39.840 --> 0:02:43.200 to where we are. And so far the economy is 0:02:43.240 --> 0:02:45.960 demonstrating that normal is okay. I mean, even the housing 0:02:46.000 --> 0:02:50.480 market has recovered despite the fact that interest rates has 0:02:50.480 --> 0:02:54.160 gone up. Look, I remember when I was younger. I 0:02:54.160 --> 0:02:57.520 guess it was the When I was younger, it was 0:02:58.200 --> 0:03:00.799 a nineteen eighties, early nineteen eighties, I been six percent 0:03:00.880 --> 0:03:05.480 for a mortgage in Westchester, So you know, it's all 0:03:05.520 --> 0:03:07.120 a matter of perspective, right, Well. 0:03:06.960 --> 0:03:09.600 But housing prices were a lot lower that, right, We 0:03:09.639 --> 0:03:13.080 hadn't necessarily seen the inflation relative to income. We hadn't 0:03:13.120 --> 0:03:16.480 seen the inflation and assets that was spurred by lower 0:03:16.560 --> 0:03:20.040 rate policies for so long. There was a theory before 0:03:20.080 --> 0:03:22.680 we got here that it rates going up to this 0:03:22.760 --> 0:03:25.520 level would decimate all these bubbles. 0:03:25.080 --> 0:03:26.399 That it emerged during that era. 0:03:26.440 --> 0:03:28.880 Are you saying that that's not true, that people have 0:03:29.240 --> 0:03:32.440 basically refinanced and manage their balance. 0:03:32.080 --> 0:03:33.920 Sheets well enough to avoid that. 0:03:36.360 --> 0:03:41.120 Yes, Empirically, it's pretty clear that all this talk about 0:03:41.400 --> 0:03:44.480 a recession so far hasn't panned out. I mean, we 0:03:44.560 --> 0:03:47.640 still have that kind of risk, I suppose. But really 0:03:47.640 --> 0:03:52.080 the way it's unfolded is as a rolling recession. It 0:03:52.120 --> 0:03:54.520 hit housing and then it hit goods. Now it's going 0:03:54.560 --> 0:03:57.800 to hit commercial real estate. But now I think, given 0:03:57.840 --> 0:04:01.680 what retail sales did in July, the goods recession maybe 0:04:02.000 --> 0:04:06.680 maybe over, and the housing recession maybe bottoming. 0:04:07.080 --> 0:04:08.560 Can I just put it on the record that if 0:04:08.560 --> 0:04:10.400 a boomer wants to sound with their home for fifty 0:04:10.480 --> 0:04:13.840 thousand dollars, I'm happy to pay fifteen percent on a 0:04:13.920 --> 0:04:14.480 loan for that. 0:04:14.640 --> 0:04:16.040 Okay, it's on the record number. 0:04:16.120 --> 0:04:17.840 Back back then, that was a lot of money for 0:04:17.880 --> 0:04:18.400 our house. 0:04:18.240 --> 0:04:20.240 If anyone's out there at But what was the multiple 0:04:20.279 --> 0:04:22.679 of the average salary compared to what it is now? 0:04:22.920 --> 0:04:23.600 It's ridiculous. 0:04:23.680 --> 0:04:27.800 Now, look, look these are different times. But on the 0:04:27.839 --> 0:04:31.920 other hand, I think the real abnormality was the period 0:04:31.960 --> 0:04:37.280 since two thousand and eight through the pandemic until really 0:04:37.640 --> 0:04:40.680 two and twenty two when the Feds had to start 0:04:40.800 --> 0:04:44.799 raising interest rates. But look, I think inflation's coming down. 0:04:44.960 --> 0:04:49.120 I think you were talking about Powell. I think Palell's 0:04:49.160 --> 0:04:51.760 going to talk hawkish, but when you really listen to 0:04:51.839 --> 0:04:54.680 the message, I think he's going to agree with John Williams, 0:04:54.720 --> 0:04:57.520 the president of the Federal Reserve Bank of New York, 0:04:57.600 --> 0:05:00.440 and say, you know what we have. We are making 0:05:00.440 --> 0:05:02.920 progress on inflation, and if we continue to do that, 0:05:03.240 --> 0:05:05.200 we're going to have to lower interest rates next year. 0:05:05.480 --> 0:05:07.719 You think he will entertain that conversation at just the 0:05:07.800 --> 0:05:10.599 idea that you don't want real rates to get more restricted, 0:05:10.720 --> 0:05:11.880 you want to keep them consistent. 0:05:12.720 --> 0:05:16.479 I do. I think John Williams is very influential at 0:05:16.480 --> 0:05:20.280 the FED, and I think he and Powell tends to 0:05:21.160 --> 0:05:24.719 talk to each other quite a bit, and Williams tends 0:05:24.760 --> 0:05:28.880 to be sort of the theoretician and Pollows the pragmatist 0:05:28.960 --> 0:05:33.159 that implements policy. Look, they can't really afford to see 0:05:33.160 --> 0:05:35.880 this bond You'll keep going up, so they've got to 0:05:35.920 --> 0:05:37.960 calm the bond market down. And I think they're going 0:05:38.040 --> 0:05:42.000 to have to concede or acknowledge that inflation has come down. 0:05:42.000 --> 0:05:45.360 Look that the CPI excluding shelter is up only two 0:05:45.400 --> 0:05:47.720 percent on a euro of your basis. In July, the 0:05:47.760 --> 0:05:51.320 CPI core excluding shelter is up two and a half percent. 0:05:51.360 --> 0:05:53.520 We're under two percent. All we have to do is 0:05:53.560 --> 0:05:55.640 wait for shelter inflation to come down. And we know 0:05:55.720 --> 0:05:56.400 it's coming down. 0:05:56.520 --> 0:05:58.680 But ed, where is the neutral rate then? 0:05:58.760 --> 0:06:01.200 Once we get to that, too said, and how high 0:06:01.360 --> 0:06:04.240 can it be to still allow the stock market reality 0:06:04.320 --> 0:06:05.000 that you're predicting. 0:06:06.200 --> 0:06:07.599 I have to tell you, you know, I wrote a 0:06:07.600 --> 0:06:11.600 book on my experiences for forty years back in twenty eighteen, 0:06:12.080 --> 0:06:14.080 and one of the conclusions I came to is I 0:06:14.080 --> 0:06:16.600 don't really understand the neutral rate the real rate. It's 0:06:17.080 --> 0:06:21.200 a theoretical construct. Nobody, it's not something you can observe. 0:06:22.000 --> 0:06:25.240 I'm sort of an empiricist. I do follow the data. 0:06:25.680 --> 0:06:28.080 I'm data dependent like the FED, and I think what 0:06:28.200 --> 0:06:30.599 it demonstrates is that the real rate is higher in 0:06:30.640 --> 0:06:33.880 the sense that the economy has been able to withstand 0:06:33.920 --> 0:06:36.560 these kind of levels of interest rates, which we really 0:06:36.640 --> 0:06:38.960 haven't seen in over a decade. 0:06:39.320 --> 0:06:42.720 Right now, we're all bond market dependent, aren't we Thank you, sir, 0:06:42.920 --> 0:06:45.719 always good thinking at Jah Danny, who, of course decades 0:06:45.760 --> 0:07:00.400 ago coin that phrase bond vigilancees Kelsi Parichoe just now, 0:07:00.440 --> 0:07:04.000 fixed income portfolio manager over JP Morgan Esset Management, Cassie, 0:07:04.040 --> 0:07:06.000 good morning, good morning. We're not going to talk about 0:07:06.000 --> 0:07:07.600 the house in market. Don't worry, We're going to talk 0:07:07.640 --> 0:07:08.440 about your bond market. 0:07:08.480 --> 0:07:08.680 Cool. 0:07:08.800 --> 0:07:11.600 We know you've been pretty bullish on fixed income. We've 0:07:11.600 --> 0:07:13.280 caught up with Bob and yourself a few times over 0:07:13.320 --> 0:07:15.080 the last few months. We've been looking for three percent 0:07:15.280 --> 0:07:17.720 right the way through the curve. This bond market's moved 0:07:17.720 --> 0:07:20.000 against you. Is this a buy now? And why is 0:07:20.040 --> 0:07:20.400 it a buy? 0:07:20.760 --> 0:07:24.400 Yeah, so the market has moved higher over the course 0:07:24.400 --> 0:07:27.560 of the month. It feels like bond buyers has essentially 0:07:27.600 --> 0:07:28.520 gone off to vacation. 0:07:29.080 --> 0:07:31.120 But we do view this as a buy. 0:07:31.640 --> 0:07:35.560 And the list of items that the consumer is going 0:07:35.600 --> 0:07:37.680 to need to deal with when they get back from 0:07:37.720 --> 0:07:40.200 their holidays and they look at their bills, I mean, 0:07:40.240 --> 0:07:43.520 the list is really growing. So for instance, we're coming 0:07:43.560 --> 0:07:47.800 back to the fall, student loan payments are restarting. Mortgage rates, 0:07:47.800 --> 0:07:50.000 as you just mentioned, are at their highest level since 0:07:50.000 --> 0:07:53.760 two thousand and one, you have people in California, Alabama, 0:07:53.840 --> 0:07:55.960 and Georgia who deferre their taxes who now need to 0:07:56.080 --> 0:07:59.320 make do on that. Credit card balances are also rising, 0:08:00.160 --> 0:08:03.120 that interest expenses on that are rising as well. So 0:08:03.440 --> 0:08:05.640 when I look at things like the retail sales report, 0:08:05.680 --> 0:08:09.280 which is an inherently very volatile number, what I see 0:08:09.400 --> 0:08:12.080 is a pull forward of consumption, a lot of fun 0:08:12.160 --> 0:08:15.360 this summer, and we're getting to the point where some 0:08:15.400 --> 0:08:16.880 of that fun has has run out. 0:08:16.920 --> 0:08:19.960 In fact, you know, we talk about the tailor swift tour, 0:08:20.040 --> 0:08:22.880 the errors tour. She's going abroad. You know, the US 0:08:22.880 --> 0:08:24.720 economy is going to have to make it on their own. 0:08:25.160 --> 0:08:28.160 Right, Okay, all right, So putting Taylor Swift in the 0:08:28.360 --> 0:08:32.920 swift or tailwind into the US economy aside, how much 0:08:32.960 --> 0:08:36.000 conviction do you have about what's behind the move that 0:08:36.040 --> 0:08:38.240 we have seen other than just everyone's on vacation. 0:08:38.640 --> 0:08:41.800 Yeah, So we've been looking back at the end of 0:08:41.920 --> 0:08:45.480 prior rate hiking cycles. So two thousand, two thousand and six, 0:08:45.600 --> 0:08:48.160 nineteen ninety five. What we've found in that all of 0:08:48.200 --> 0:08:51.600 those scenarios when the FED stops, everybody thinks. 0:08:51.360 --> 0:08:52.840 That we've engineered a soft landing. 0:08:53.000 --> 0:08:54.960 If you go back and you look back at two thousand, 0:08:54.960 --> 0:08:56.840 two thousand and one, two thousand and six, two thousand 0:08:56.840 --> 0:08:59.560 and seven, we were talking about the exact same things 0:09:00.080 --> 0:09:03.120 off landing. We weren't sure if policy was tight enough. 0:09:03.280 --> 0:09:06.160 It looked like the FED had done it, okay, So 0:09:06.360 --> 0:09:09.319 now we're trying to assess is this another soft landing 0:09:09.600 --> 0:09:12.280 or is this potentially a false signal. And then there's 0:09:12.320 --> 0:09:15.560 a couple things that we're seeing now that indicate to 0:09:15.640 --> 0:09:17.840 us that, you know, things may get a little bit 0:09:17.880 --> 0:09:20.640 more tricky as we move into the balance of the year. 0:09:21.240 --> 0:09:24.120 Things that didn't happen in the nineteen ninety five cycle, 0:09:24.200 --> 0:09:26.720 for example, and that's I use nineteen ninety five because 0:09:26.720 --> 0:09:29.440 that's the benchmark, right, everyone uses that as the example 0:09:29.480 --> 0:09:32.040 of the perfect example of a soft landing. Well, in 0:09:32.120 --> 0:09:34.920 nineteen ninety five, the three month tenure yield curve, it 0:09:35.000 --> 0:09:39.040 never inverted in nineteen ninety five, Credit credit credit in 0:09:39.080 --> 0:09:41.600 the H eight data from the commercial banks that you 0:09:41.640 --> 0:09:45.480 look at on Friday at four fifteen never contracted, right, 0:09:45.640 --> 0:09:47.480 and right now it's in contraction already. 0:09:48.120 --> 0:09:48.320 Right. 0:09:49.040 --> 0:09:51.680 All of these things are said suggesting to us that 0:09:51.760 --> 0:09:54.600 policy is actually restrictive. We need to give it time. 0:09:54.679 --> 0:09:56.880 In fact, policy really has only been tight for a 0:09:56.880 --> 0:09:57.560 few quarters. 0:09:57.679 --> 0:09:59.440 So how aggressively are you buying right now? 0:10:00.040 --> 0:10:02.720 I think this is absolutely a time to be buying 0:10:02.800 --> 0:10:03.880 fixed income. 0:10:04.440 --> 0:10:06.680 Sarah, have you increased your purchases recently? Have you been 0:10:06.760 --> 0:10:07.880 aggressively increasing? 0:10:08.559 --> 0:10:11.120 We have been using a dial across the whole year. 0:10:11.240 --> 0:10:13.719 Right We've had a view that the FED would get 0:10:13.720 --> 0:10:16.480 to around five percent, they would be able to pause, 0:10:16.720 --> 0:10:18.920 and over that time we want to be increasing our 0:10:18.960 --> 0:10:22.880 allocation to fixed income for the diversification and for the income. 0:10:23.360 --> 0:10:24.520 That's what we've been doing. 0:10:24.600 --> 0:10:28.520 We continue to do that as we see new highs 0:10:28.520 --> 0:10:31.720 and yields, and it's new highs. But I would also 0:10:31.760 --> 0:10:34.480 point out the fact that four thirty three was the 0:10:34.520 --> 0:10:36.880 intro day high for tens, four forty two is the 0:10:36.880 --> 0:10:40.040 inter jay high for thirties. We've been able to hold 0:10:40.080 --> 0:10:41.880 off on those levels. We've been able to back off 0:10:41.920 --> 0:10:42.439 those levels. 0:10:42.480 --> 0:10:44.280 So fairly encouraging there. 0:10:44.600 --> 0:10:47.280 Let's go back to last October. What's different about that 0:10:47.360 --> 0:10:48.480 sell of than what's. 0:10:48.280 --> 0:10:50.640 Handling here last October? 0:10:50.720 --> 0:10:52.640 Last October, when we hit those levels that we just 0:10:52.679 --> 0:10:55.280 described on a ten year what's different about this moment. 0:10:55.360 --> 0:10:58.360 The spantamics behind the move now compared to back then, Well, I. 0:10:58.280 --> 0:11:00.719 Think the most striking thing is that the terminal rate 0:11:00.760 --> 0:11:04.840 pricing has essentially remained unchanged right so it's been static 0:11:04.960 --> 0:11:08.560 around five point four percent, so really no movement there. 0:11:08.600 --> 0:11:10.719 The market is very comfortable with the terminal rate. 0:11:10.920 --> 0:11:14.160 I think if we were really if we really believed 0:11:14.280 --> 0:11:17.040 that these policy rates were not making an impact on 0:11:17.080 --> 0:11:19.960 the economy and that no one was bothered by seven 0:11:20.000 --> 0:11:22.640 percent mortgage rates, then the market should be pricing. 0:11:22.440 --> 0:11:24.800 A lot higher of a terminal rate, and it's not. 0:11:25.520 --> 0:11:29.800 Also, if the market truly believed that policy wasn't restrictive, inflation, 0:11:29.880 --> 0:11:31.000 break even should. 0:11:30.679 --> 0:11:33.720 Be taking off right now. They're not. So that's the difference. 0:11:33.880 --> 0:11:36.800 In October of last year, they hadn't done enough yet 0:11:37.280 --> 0:11:39.080 it was still clear we hadn't done enough. 0:11:39.120 --> 0:11:40.760 I think we're in a different place now. 0:11:40.800 --> 0:11:42.600 It's a massive difference, And I would say a key 0:11:42.679 --> 0:11:45.800 dynamic we haven't discussed yet is a supply story that 0:11:45.960 --> 0:11:47.440 wasn't discussed in October. 0:11:47.520 --> 0:11:49.120 It is being discussed now. 0:11:49.440 --> 0:11:51.640 Does that change the way we should think about fixed 0:11:51.679 --> 0:11:54.640 income and treasury specifically at the long runded a curve. 0:11:55.000 --> 0:11:58.600 Yeah, so there is more supply. Normally demand comes in 0:11:58.640 --> 0:12:01.400 to match apply. I think we are still seeing that, right. 0:12:02.040 --> 0:12:05.920 It may be at a slightly incrementally higher yield to 0:12:06.000 --> 0:12:08.760 meet that demand, but we are still seeing that. 0:12:08.960 --> 0:12:09.120 You know. 0:12:09.120 --> 0:12:10.640 One of the things that I've been looking at two 0:12:10.720 --> 0:12:12.440 things I've been keeping my eye on to see if 0:12:12.440 --> 0:12:15.440 there's some dislocation in the cash markets. One is swap spreads, 0:12:15.760 --> 0:12:19.439 So how are cash bonds cash treasury bonds trading to 0:12:19.880 --> 0:12:23.040 the swap market. And then the other thing is primary 0:12:23.120 --> 0:12:26.200 dealer holdings. If there was a really big issue taking 0:12:26.240 --> 0:12:29.680 down this supply, if people weren't interested, we would see 0:12:29.720 --> 0:12:32.680 those primary dealer holdings really start to ramp up. We've 0:12:32.720 --> 0:12:37.559 actually seen fairly good takedown at the auctions. Indirect buying 0:12:37.679 --> 0:12:41.560 has continued to increase, so there are people, stronger hands 0:12:41.559 --> 0:12:44.840 that are taking the yields at these levels, just real quickly. 0:12:45.200 --> 0:12:48.160 Given the fact that spreads on high yield have remained 0:12:48.160 --> 0:12:49.880 incredibly tight, how rich do you think that is? 0:12:51.240 --> 0:12:55.080 I would be very cautious with spreads in high yields 0:12:55.080 --> 0:12:58.360 in the low four hundreds. Here, this is a pricing 0:12:58.440 --> 0:13:02.160 that is perfectly priced for the soft landing, and when 0:13:02.160 --> 0:13:04.520 you look at the upside downside, how much tighter can 0:13:04.559 --> 0:13:06.760 you go versus how much wider. 0:13:06.320 --> 0:13:07.400 Can you go? On spreads? 0:13:07.600 --> 0:13:11.040 I mean to me that asymmetry is very, very obvious. 0:13:11.240 --> 0:13:13.199 It's obvious in high yield. I think it's obvious in 0:13:13.440 --> 0:13:15.360 the pricing of the economy, and I think it's also 0:13:15.400 --> 0:13:17.880 obvious in bond markets. How much higher can you go? 0:13:18.040 --> 0:13:20.400 Maybe a little bit, how much lower can we go? 0:13:20.720 --> 0:13:22.240 When the Fed starts cutting. 0:13:22.040 --> 0:13:25.040 A lot basically near the tights of the year, which 0:13:25.080 --> 0:13:28.000 is phenomenal it is, it's really phenomenal for everyone. 0:13:28.120 --> 0:13:29.640 Since talking about this breakdown. 0:13:29.280 --> 0:13:31.360 In the equity market, I can go through the levels 0:13:31.360 --> 0:13:33.640 for you just briefly. On the S and P five hundred, 0:13:33.840 --> 0:13:36.880 we're down five percent from the interday highs in July. 0:13:37.040 --> 0:13:39.040 Then that's that one hundred down something like eight percent 0:13:39.400 --> 0:13:41.520 from the interday highs in July. Given the move we've 0:13:41.520 --> 0:13:43.040 seen in the bond market. If I just said there's 0:13:43.040 --> 0:13:45.360 your bond market move, guess what's happened to stocks, I 0:13:45.360 --> 0:13:47.280 think you go beyond five percent. If I said guess 0:13:47.280 --> 0:13:49.240 what's happened to high yield, I'm not sure you'd guess 0:13:49.280 --> 0:13:50.760 we're near the tights of the year. 0:13:50.920 --> 0:13:54.400 Everyone would probably say this points to a market that's 0:13:54.400 --> 0:13:56.959 strugging off and saying Edi Ardeni is right and this 0:13:57.000 --> 0:13:58.560 is the new normal and it's just fine. 0:13:58.679 --> 0:14:01.000 Kelsey, good to see you for the update. Thank you, 0:14:01.080 --> 0:14:08.480 Cassey bar of JP Morgan. Well. 0:14:08.520 --> 0:14:12.200 Sheila Kayalu, senior equity research analyst at Jeffries, joins to 0:14:12.280 --> 0:14:15.040 actually answer the question that we keep speculating on with 0:14:15.160 --> 0:14:19.920 absolutely uneducated impressions of the tickets being really pricey. Our 0:14:20.040 --> 0:14:22.520 ticket price is going down as much as the US 0:14:22.600 --> 0:14:24.200 CPI report seems to suggest. 0:14:24.680 --> 0:14:27.800 Yeah, the CPI report seems to suggest ticket prices are 0:14:27.840 --> 0:14:32.320 going down, but that is only through not necessarily encompassing 0:14:32.360 --> 0:14:35.400 all the venues that folks could buy tickets through. But 0:14:35.840 --> 0:14:38.120 you know, over the long term, as we actually look 0:14:38.160 --> 0:14:40.600 at ticket prices, they actually. 0:14:40.240 --> 0:14:43.680 Have not been increasing. So it's still great value. 0:14:43.760 --> 0:14:46.480 Even though it's no longer four hundred dollars to get 0:14:46.520 --> 0:14:48.200 from the East coast to the west coast, and it 0:14:48.280 --> 0:14:50.120 might be seven hundred dollars and that seems like a 0:14:50.120 --> 0:14:53.600 big increase. There's no other way to simply do it. So, yes, 0:14:54.240 --> 0:14:57.480 ticket prices have not really been increasing over the long 0:14:57.560 --> 0:14:59.880 term as much as people expect. And when we look 0:14:59.880 --> 0:15:03.880 at the industry overall, you know, we're expecting ticket princes 0:15:03.920 --> 0:15:06.600 to be about fifteen percent above twenty nineteen levels in 0:15:06.640 --> 0:15:11.240 twenty twenty three and basically flatish year over year in 0:15:11.320 --> 0:15:13.360 twenty twenty four, so not much of an increase. 0:15:13.400 --> 0:15:15.480 And what we're seeing in the airline market right. 0:15:15.400 --> 0:15:19.360 Now is a dichotomy between domestic bears and international affairs, 0:15:19.400 --> 0:15:23.800 where domestic bears are actually seeing declines and sequential declines 0:15:23.800 --> 0:15:26.640 as we head into Q three, just given demands softness 0:15:26.640 --> 0:15:29.920 there and we could talk more about that, but international 0:15:29.960 --> 0:15:33.240 continues to be up robustly twenty five percent or so 0:15:33.920 --> 0:15:36.840 versus twenty nineteen levels, so much more strength than international 0:15:36.880 --> 0:15:39.840 strength travel and bears is what we're seeing. 0:15:40.200 --> 0:15:41.280 Bear with me for a second. 0:15:41.320 --> 0:15:43.760 I want to get a little granular, because domestic fares 0:15:43.800 --> 0:15:46.680 might be coming down in general and international fares may 0:15:46.680 --> 0:15:49.880 not be. There is an issue about where domestically is 0:15:49.920 --> 0:15:54.800 this a question of vacationers seeing prices go up significantly 0:15:54.960 --> 0:15:57.720 and business travel, which hasn't come back to the same 0:15:57.800 --> 0:16:01.040 degree not necessarily seeing that same kind of pressure. So 0:16:01.360 --> 0:16:03.600 some of the sort of mid tier cities that aren't 0:16:03.600 --> 0:16:06.640 as much vacation destination are the ones where prices are 0:16:06.680 --> 0:16:07.160 going down. 0:16:08.360 --> 0:16:11.400 Yeah, it's really interesting because I think a lot of 0:16:11.440 --> 0:16:16.040 the uncertainty is out of you know, the macro economic factors. 0:16:16.080 --> 0:16:17.840 I think we could all agree it's pretty much a 0:16:17.840 --> 0:16:20.520 soft landing and not a hard landing. So why are 0:16:20.560 --> 0:16:24.040 we seeing this yield softness in domestic markets or is 0:16:24.040 --> 0:16:26.760 it just specific markets that are seeing it? Because corporate's 0:16:26.760 --> 0:16:30.680 stagnating at eighty five percent, so maybe post pandemic, there's 0:16:30.760 --> 0:16:33.320 different features that are going on in different cities. So 0:16:33.880 --> 0:16:37.360 you know, somebody in Ohio might not be necessarily commuting 0:16:37.400 --> 0:16:40.040 back to Chicago, and January Southwest Side died that as 0:16:40.040 --> 0:16:42.880 an example of a route that's no longer fulfilled as 0:16:42.920 --> 0:16:45.400 much as one would expect. So that's on the corporate 0:16:45.440 --> 0:16:49.200 demand stagnating and also changing travel trends. And what we're 0:16:49.200 --> 0:16:52.720 seeing in the US market as well is there's domestic 0:16:52.800 --> 0:16:57.520 capacity typness right now, but we're expecting domestic capacity to 0:16:57.560 --> 0:17:00.160 increase at a seven percent rate from twenty twenty two 0:17:00.240 --> 0:17:02.760 to twenty twenty five. So I think forty four hundred 0:17:02.800 --> 0:17:06.000 aircraft going to about five thousand plus over the next 0:17:06.080 --> 0:17:08.679 three years, and that's double the rate of air traffic. 0:17:08.800 --> 0:17:11.760 So what's flooding the market with capacity right now is 0:17:11.800 --> 0:17:15.479 also the low cost carriers like Frontier and Spirit, and 0:17:15.560 --> 0:17:18.040 so that might be causing the pricing softness as well 0:17:18.080 --> 0:17:21.159 as everybody adds to these same domestic routes instead of 0:17:21.200 --> 0:17:22.280 creating new markets. 0:17:22.400 --> 0:17:24.800 If prices go down, does that mean that the experience 0:17:24.800 --> 0:17:25.560 gets even worse? 0:17:28.080 --> 0:17:31.720 Not necessarily, but obviously, you know, what we're seeing is 0:17:31.760 --> 0:17:36.800 also an increase in the cost sided the equation, whether that's. 0:17:37.040 --> 0:17:39.200 Jet fuel is up significantly since. 0:17:39.040 --> 0:17:41.919 May, and obviously labor agreements are calling for a thirty 0:17:41.920 --> 0:17:46.399 percent salary increases or so. So yes, one would that 0:17:46.640 --> 0:17:49.120 if prices are going down, your revenues are going down 0:17:49.119 --> 0:17:51.080 and your costs are going up, your margins are getting 0:17:51.119 --> 0:17:54.679 squeezed as an airline, and the customer experience might. 0:17:54.600 --> 0:17:57.080 Be impacted by that, which raises this question, Sheila, And 0:17:57.119 --> 0:17:59.720 it's something that I've been asking myself. At what point 0:17:59.840 --> 0:18:01.880 is it not worth flying anymore? Or is it worth 0:18:01.920 --> 0:18:05.840 sort of readjusting vacations to try to drive places or 0:18:06.320 --> 0:18:07.640 have some sort of alternative. 0:18:07.760 --> 0:18:09.240 Are you seeing any kind. 0:18:09.119 --> 0:18:13.240 Of exhaustion after two years of YOLO and two years 0:18:13.320 --> 0:18:16.720 of pandemic revenge spending and revenge traveling. Is there any 0:18:16.760 --> 0:18:19.520 exhaustion to shift away from this boom that we've seen 0:18:19.520 --> 0:18:23.080 in the airline industry that is driven so much of 0:18:23.119 --> 0:18:24.639 the gains across the board. 0:18:26.160 --> 0:18:30.560 Not necessarily. I mean, we're still bullish on the certain. 0:18:30.240 --> 0:18:33.280 Airlines such as Delta where they have a premium offering 0:18:33.359 --> 0:18:37.320 an international focus, and that premium offering is really holding 0:18:37.359 --> 0:18:40.200 on to you know, that pricing that experience. 0:18:40.240 --> 0:18:41.560 People are paying up for that. 0:18:42.480 --> 0:18:47.000 So and they're also expanding with their sky Miles program 0:18:47.040 --> 0:18:49.720 and their American Express credit card, so they're providing a 0:18:49.720 --> 0:18:52.400 little bit more of a lifestyle, expanding beyond just being 0:18:52.880 --> 0:18:53.560 an airline. 0:18:53.640 --> 0:18:55.880 So not necessarily, so can. 0:18:55.800 --> 0:18:58.320 We just lean into that American Express thing? We also 0:18:58.359 --> 0:19:02.840 that's another hot debate on surveillance about whether the lounge 0:19:03.119 --> 0:19:07.200 is increasingly becoming a perk for credit card owners and 0:19:07.320 --> 0:19:11.200 less about people who actually fly around on the planes. 0:19:11.280 --> 0:19:13.960 Is that basically where this is going and how lucrative 0:19:14.040 --> 0:19:18.080 actually is this at a time where people are crowding 0:19:18.200 --> 0:19:21.159 into the lounge and trying to eat as much as 0:19:21.160 --> 0:19:22.720 they can and drink as much as they can before 0:19:22.760 --> 0:19:23.520 they get on the planes. 0:19:25.760 --> 0:19:26.840 Well, if you think. 0:19:26.680 --> 0:19:29.040 About it, the airline industry, they trade at about a 0:19:29.160 --> 0:19:32.840 sixty percent discount to the market, so about five to 0:19:32.920 --> 0:19:33.879 six times Vada. 0:19:34.720 --> 0:19:36.720