WEBVTT - Bob Michele Talks Second Quarter Markets, Third Quarter Outlook

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio News.

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<v Speaker 2>Bob Michael at JP Morgan, We're going to try to

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<v Speaker 2>get him in here.

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<v Speaker 3>You have an outlook out there, and I see an

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<v Speaker 3>outlook of price up, yield down.

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<v Speaker 2>Is that the outlook at JP Morgan.

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<v Speaker 1>Yes, it is. We're off to a fantastic start for

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<v Speaker 1>the third quarter, probably not a repeat of the second

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<v Speaker 1>quarter with all the volatility, but some expectation of the

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<v Speaker 1>Fed bringing rates down by the end of the year.

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<v Speaker 3>Is in the bond world is there fear of missing out?

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<v Speaker 3>Is there fomo among bon buyers?

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<v Speaker 1>We're starting to feel that now there are more and

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<v Speaker 1>more conversations with clients who are in cash looking for

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<v Speaker 1>an opportunity to get into the bond market and trying

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<v Speaker 1>to figure out where in the bond market to go.

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<v Speaker 1>There's still a ton of ton of money in market,

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<v Speaker 1>money market funds and in cash accounts, depositives, checking accounts,

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<v Speaker 1>savings accounts. The last time we looked at was over

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<v Speaker 1>twenty one trillion dollars, which was a new high.

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<v Speaker 2>Bob.

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<v Speaker 4>We saw earlier in the Europe a move of capital

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<v Speaker 4>out of the US into other markets, notably the European

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<v Speaker 4>equity markets. And they're outperforming the US equity markets. Have

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<v Speaker 4>we seen that in a fixed income world.

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<v Speaker 1>As well, We actually haven't. There's been a lot of

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<v Speaker 1>discussion about it, a lot of conversation. There was a

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<v Speaker 1>bit of a pause in the end of April start

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<v Speaker 1>of May where foreign investors who would typically put money

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<v Speaker 1>to work in the US bond market just stopped. And

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<v Speaker 1>then it started up again, and we've seen no selling

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<v Speaker 1>of US fixed income assets and reallocation overseas. What we

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<v Speaker 1>have seen is rethinking whether they want the dollar exposure

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<v Speaker 1>to go along with that. Most now are taking some

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<v Speaker 1>dollar exposure, but hedging some back to their base currency.

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<v Speaker 4>Bloomberg Dollar Index you bring it up, the Bloomberg dollar

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<v Speaker 4>inexus down almost ten percent this year. We don't see

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<v Speaker 4>that very often, do we.

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<v Speaker 2>What do you make of it?

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<v Speaker 1>For us? It's a reflection of an overcrowded Overbaugh trade, Okay,

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<v Speaker 1>where coming into this year everyone wondered, how is the

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<v Speaker 1>dollar up there so high? What's keeping it up there?

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<v Speaker 1>And it kept going and then there was a catalyst

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<v Speaker 1>and reason to diversify out of dollars. We think actually

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<v Speaker 1>there's another five percent move in the Dollar index lower.

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<v Speaker 2>I modeled it today.

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<v Speaker 3>I did not use Fibonacci's which I really don't believe in,

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<v Speaker 3>and I came with a further decline of bbdxy of

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<v Speaker 3>six point three percent total fourteen to fifteen percent down,

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<v Speaker 3>and that takes it back to that range that we're at.

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<v Speaker 3>You're in meetings with lots of foreigners using JP Morgan

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<v Speaker 3>for wisdom on American full faith and credit? Do you

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<v Speaker 3>see any tendency that they want to walk away at

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<v Speaker 3>the margin of a belief to own and at the

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<v Speaker 3>margin by acquire our bills, notes and bonds?

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<v Speaker 1>None whatsoever. There is no concern about the full faith

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<v Speaker 1>and credit of the US Treasury. There was a bit

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<v Speaker 1>of a pause on the amount of supply. Would it

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<v Speaker 1>be too much? But there was a lot of conversation

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<v Speaker 1>about looking for an alternate. Do we have to have

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<v Speaker 1>everything in dollar assets? Isn't there something else that could

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<v Speaker 1>act as a calm in the storm to treasuries and dollars.

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<v Speaker 1>I think that's why you've seen gold, and we should

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<v Speaker 1>see continued support of gold. We should also pay attention

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<v Speaker 1>to what's going on in CenTra Portugal this week, where

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<v Speaker 1>the ECB has some pressure.

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<v Speaker 2>Not there exactly, I mean do.

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<v Speaker 1>You know what I wish I was there. I wouldn't

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<v Speaker 1>be surprised if Breese is there, But it's an opportunity

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<v Speaker 1>unity for them to try to establish more of a

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<v Speaker 1>leadership role here.

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<v Speaker 3>When you were studying Greek and Latin at Penn, I'm

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<v Speaker 3>sure you looked at the X axis, probably in all

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<v Speaker 3>three languages. But the answer is, Okay, they want to

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<v Speaker 3>buy us, but they adjusted their maturity perspective because of

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<v Speaker 3>all the fun and games we're going through.

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<v Speaker 1>By and large, the investors we deal with where we've

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<v Speaker 1>seen a lot of clothes from wealth management channels and

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<v Speaker 1>total return investors has always been the intermediate part of

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<v Speaker 1>the curve. The long end of the curve is really

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<v Speaker 1>owned by pension funds and insurance companies, and they're far

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<v Speaker 1>more strategic and where and how they invest, and they

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<v Speaker 1>have certain trigger levels depending on their estimate of liabilities.

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<v Speaker 1>I would say they've been pretty steady investors. In the

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<v Speaker 1>current environment, it feels like there's no sponsorship for the

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<v Speaker 1>long end of the curve. Usually get that when you

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<v Speaker 1>have the FED bringing down rates. Let's not forget when

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<v Speaker 1>we get to the point in the cycle, hopefully years

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<v Speaker 1>from now, when the FED is hiking rates, then curve

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<v Speaker 1>flatteners will be in vogue again, and then there will

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<v Speaker 1>be buying at the long end.

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<v Speaker 2>Paul, can I help this morning? Please? Price up, yield down,

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<v Speaker 2>pretium octum, preventu's diminutum. Oh my goodness, Latin. Okay, that's

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<v Speaker 2>what Michael. He goes out on the floor when the

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<v Speaker 2>world's blown up.

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<v Speaker 4>JP Morgan, I'm a big fan of Vatican two, which

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<v Speaker 4>get away with Len's that Google translator.

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<v Speaker 2>I'm sure exactly, Bob.

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<v Speaker 4>How much credit risk do we take here? I think

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<v Speaker 4>I'm not hearing anybody talk about recession, so shouldn't I

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<v Speaker 4>be taking some credit risk here?

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<v Speaker 1>Absolutely, you get concerned about credit risk when you think

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<v Speaker 1>you're headed into recession. It makes sense. Recession by definition

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<v Speaker 1>is lower corporate at profitability. The most levered companies have

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<v Speaker 1>to go some sort of restructuring. Defaults go up, you

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<v Speaker 1>get widespread de risking because everyone's concerned where the defaults

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<v Speaker 1>could occur. We've been trained every other time there's a

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<v Speaker 1>backup in credit spreads, you buy it if there's no recession.

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<v Speaker 1>And we saw that earlier when credit spreads got to

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<v Speaker 1>about four point fifty on high yield, and then suddenly

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<v Speaker 1>there was a break in tariffs and probabilities of recession

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<v Speaker 1>went down, and suddenly here we are through three hundred

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<v Speaker 1>basis points on high yield.

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<v Speaker 4>All right, you're CIO and head of Global Fixed Income,

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<v Speaker 4>Currency and Commodities Group, to t ask you about commodities,

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<v Speaker 4>gold hiring.

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<v Speaker 2>What are we doing with gold here?

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<v Speaker 4>Why are we all not owning gold?

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<v Speaker 1>Well, actually, we think you should. We think of all

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<v Speaker 1>the options for an alternate safe haven, a counterbalance to risk.

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<v Speaker 1>Treasuries are out there, our high quality bonds are out there,

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<v Speaker 1>Investors are adding those. Gold is another one of those

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<v Speaker 1>generally accepted vehicles we expect to see more buying.

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<v Speaker 4>I mean, it's just amazing. What's going on? Is that

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<v Speaker 4>just Chinese banks and Chinese consumers buying it? Is there

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<v Speaker 4>something else going on with gold?

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<v Speaker 1>No, it's developed market. Central banks have been adding to

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<v Speaker 1>their gold reserves, Its wealth management platforms have been talking

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<v Speaker 1>to clients about holding some gold. It's not only a

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<v Speaker 1>safe haven, it's also a reasonably good hedge against inflation.

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<v Speaker 1>And just in case we get into next year and

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<v Speaker 1>suddenly all the liquidity in the system gets ignited and

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<v Speaker 1>inflation rears it's ugly head again and stays, then gold

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<v Speaker 1>will be a pretty good hedge.

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<v Speaker 3>Bob, I'm doing it. I mean, this is the way

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<v Speaker 3>we roll with the Michael and JP marketing. Good morning

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<v Speaker 3>in your commute across the nation. Good morning ninety two

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<v Speaker 3>nine FM in Boston.

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<v Speaker 2>We did a lot of.

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<v Speaker 3>Linear regression of the Bloomberg Corporate Total Return Index get

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<v Speaker 3>a little more yield, and I went back thirty years

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<v Speaker 3>and it's stunning, the recovery off the gloom of a

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<v Speaker 3>couple of years ago in price. It's appening. You guys, Neil,

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<v Speaker 3>do you envision in your head that with price and

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<v Speaker 3>you know, making the coupon, we will get back on

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<v Speaker 3>trend of a wonderful linear trend from about two thousand

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<v Speaker 3>and three straight up. That will get price up, back

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<v Speaker 3>on trend that we knew before the tobacco.

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<v Speaker 1>It feels like it. It feels like we're first of all,

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<v Speaker 1>in an interest rate environment that will have yield to it.

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<v Speaker 1>We're not going back to zero percent interest rates. I

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<v Speaker 1>don't know if the Fed brings rates down to three percent,

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<v Speaker 1>maybe three and a half, but somewhere in the threes

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<v Speaker 1>puts treasur right close to four and puts credit close

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<v Speaker 1>to five percent, which is kind of where we are.

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<v Speaker 1>That's a pretty good level to be a holder of

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<v Speaker 1>high quality corporate.

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<v Speaker 3>There's job in Manhattan internship with bout Michael and JP work.

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<v Speaker 2>It's like, you know you're working six days a week.

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<v Speaker 2>Doesn't you just throw a fobosi at him? Because none

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<v Speaker 2>of these kids remember like a normal yield market.

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<v Speaker 1>So we now call them analysts. We don't call them interns.

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<v Speaker 1>Their summer analysts and prove that. And then they come.

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<v Speaker 1>They come prepared far more than I ever remember. They

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<v Speaker 1>they come with a level of knowledge of markets and

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<v Speaker 1>how the financial system works that probably took me five

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<v Speaker 1>years to get there.

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<v Speaker 3>The great L Hunt used to lecture at your Pennsylvania

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<v Speaker 3>and Al told me once, he said, Tom, you're in

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<v Speaker 3>the classroom in every single person there, it's smarter.

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<v Speaker 2>Than all was thirty or thirty five.

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<v Speaker 1>Yeah, and you know what, there's a lot of truth

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<v Speaker 1>to that. They know it.

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<v Speaker 2>Exactly. Not in terns. They're called analysts now here, summer analysts. Noted.

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<v Speaker 4>Thanks, Okay, what is our fetter reserve thinking these days?

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<v Speaker 1>Bob?

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<v Speaker 4>I mean they could probably just give themselves a nice

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<v Speaker 4>pat on the back and say we've engineered a nice

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<v Speaker 4>soft landing. We've weathered some of the uncertainty from tariff's.

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<v Speaker 4>Inflation seems okay, the economy okay, it's slowing, but it's

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<v Speaker 4>still there. They do anything.

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<v Speaker 1>They're thinking, how fast can I get out of here

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<v Speaker 1>and go to the beach? I'll I promise I'll come

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<v Speaker 1>back after Labor Day. That gives me a couple of

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<v Speaker 1>weeks to look at the data, see how the US

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<v Speaker 1>economy survived.

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<v Speaker 2>This summer.

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<v Speaker 1>We'll have more clarity on the one big beautiful bill,

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<v Speaker 1>We'll have clarity on tariffs. Hopefully we'll start to gauge

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<v Speaker 1>the impact to the labor market and two prices. Then

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<v Speaker 1>we can make a decision whether we can and should

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<v Speaker 1>bring rates down in September or whether we stay in

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<v Speaker 1>track for December.

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<v Speaker 2>Let's go back to your outlook. What is the anside?

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<v Speaker 3>I think of Jamie's great annual letter, which I really

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<v Speaker 3>advocate folks as a long read, and there's four or

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<v Speaker 3>five sixteens.

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<v Speaker 2>What's a theme secondary within your mid year outlook? It

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<v Speaker 2>deserves note well.

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<v Speaker 1>I think within that is a view that we're heading

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<v Speaker 1>into an environment that's more normal that existed pre great

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<v Speaker 1>financial crisis when there is a demand for capital because

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<v Speaker 1>there's a productive use for capital, and there will be

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<v Speaker 1>a cost for that capital and it won't be zero.

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<v Speaker 1>Does that mean the FED funds rate belongs about where

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<v Speaker 1>that first dot was that the FED put out in

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<v Speaker 1>twenty twelve, four and a quarter percent Maybe could be

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<v Speaker 1>Get ready for that. Get ready for markets where you

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<v Speaker 1>could see a surge in inflation that Fed may have

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<v Speaker 1>to go to six percent, and they may have to,

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<v Speaker 1>you know, apply a little stim us and go down

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<v Speaker 1>to three percent. I think that's the market we're headed for,

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<v Speaker 1>and I think that's an exciting market.

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<v Speaker 4>Do we ever have to worry about deficits and national debt?

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<v Speaker 4>I'm looking at the negotiations going on down to Washington

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<v Speaker 4>right now. We're all seeing, you know, talking about two

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<v Speaker 4>three four trillion dollars of depthitts coming out of this

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<v Speaker 4>budget plan. We ver have to worry about that? I mean,

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<v Speaker 4>you're the front lines of the fixed andcome markets. Set,

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<v Speaker 4>how do you think about that?

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<v Speaker 2>We should?

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<v Speaker 1>And I think we all have a sense of righteous

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<v Speaker 1>indignation because every month we go home and rebalance our

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<v Speaker 1>checkbook and pay bills, and it seems like our government

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<v Speaker 1>doesn't have to. But the reality is we're watching deficits

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<v Speaker 1>go up globally. We're now seeing Europe starting to borrow

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<v Speaker 1>and spend and it seems to be the generally accepted

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<v Speaker 1>principle that government should be allowed to borrow and spend,

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<v Speaker 1>and you appoint central bankers which will help underwrite that.

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<v Speaker 1>Bob Minake is spending.

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<v Speaker 2>Generous time with you. Thank you so much. Mister Michael

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<v Speaker 2>is with JP Morgan. Get their outlook from the analyst

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<v Speaker 2>at JP Morgan.