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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business app.

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Speaker 3: Sema Shah Prince Blast Management, writing this, the potential for

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Speaker 3: further equity gains may be somewhat limited from here. With

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Speaker 3: valuations so stretched, a soft economic landing is a necessary

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Speaker 3: backdrop to support further gains.

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Speaker 1: Sema joins us now, Seema, good.

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Speaker 3: Morning, Welcome, good morning, great to be here, Great to

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Speaker 3: have you. When you talk about stretched valuations, are you

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Speaker 3: talking about the overall market or are you talking about

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Speaker 3: in video.

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Speaker 4: I'm talking about Nvidia.

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Speaker 5: Okay, case if you look across a broad market actually

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Speaker 5: doesn't look that stretch.

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Speaker 4: We're really thinking about the pockets.

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Speaker 5: It's difficult at this point though, to look across and

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Speaker 5: say we need to have a broadening in the rally,

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Speaker 5: but that broading in the rally can only take place

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Speaker 5: if there's still a sturdy economic backdrop.

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Speaker 1: Now we are generally.

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Speaker 5: Quite positive on it, but we are hearing more and

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Speaker 5: more clients actually really worried about the economic backdrop, real concerns.

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Speaker 5: I need to creep into the point that actually, when

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Speaker 5: we think about risks, or we're hearing about risks, we're

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Speaker 5: hearing more about what's going to happen with a hard

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Speaker 5: landing than with an acceleration. And that is a very

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Speaker 5: very clear shift that we've noticed in the past few weeks.

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Speaker 1: And that's something that a lot of people are talking about.

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Speaker 3: Morgan Stanley came out over the weekend Mike Wilson, and

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Speaker 3: he said he put their three scenarios that really counter

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Speaker 3: this risk. One of them is overheating. Nobody thinks that's

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Speaker 3: really good to happen. One is potential liquidity risk, and

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Speaker 3: he talked about treasury auctions and some of the politics

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Speaker 3: of the moment.

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Speaker 1: He said that the base case in terms of what potentially.

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Speaker 3: Disrupts this is to your point that hard landing scenario.

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Speaker 3: How important is what we get on Friday in terms

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Speaker 3: of personal income, personal spending core PCE to really inform

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Speaker 3: how whether that's a more realistic base case.

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Speaker 5: So it's definitely important because obviously we know the consumer

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Speaker 5: has been the key driver for the US economy. But

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Speaker 5: you said the buzzword before, which is bifurcation. Right, So

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Speaker 5: you've got the really high income households which are essentially

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Speaker 5: carrying the US economy. You've got the lower income households

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Speaker 5: which are maybe seeing a couple of strains, but because

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Speaker 5: the job market is still very strong, there's no major

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Speaker 5: job losses that they can almost continue going. And as

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Speaker 5: higher income households can carry the US economy, it's really

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Speaker 5: to me it's about the labor market because if you

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Speaker 5: start to see those job as claims increasing, if you

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Speaker 5: start to sit translating to job losses, well, then the

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Speaker 5: lower income consumers can no longer I should said, the

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Speaker 5: high income consumers are no longer able to sustain the

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Speaker 5: US economy.

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Speaker 6: And we talk a lot about what the landing will

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Speaker 6: look like, we rarely talk about what the lift off

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Speaker 6: after that landing looks like. So for in this environment

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Speaker 6: we get this soft landing, how important is it that

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Speaker 6: growth is an anemic, that it can take off again

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Speaker 6: for a more stained in longer term rally.

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Speaker 4: So it is really important. But going to say it'

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Speaker 4: something slightly different.

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Speaker 5: So when I think about the landing, we think the

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Speaker 5: fun you can get a soft landing up to Q

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Speaker 5: one and Q two next year. But to the point

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Speaker 5: that the FED starts to cut the people who are

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Speaker 5: waiting on the sideline to buy a property, and if

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Speaker 5: you don't have job losses, I worry about how, you know,

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Speaker 5: how does the economy react to that? You could see

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Speaker 5: another takeoff and then another acceleration. So actually, I think,

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Speaker 5: to me, although I know that's not what people are

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Speaker 5: necessarily talking about, although the acceleration is not key at

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Speaker 5: the moment, maybe as you look to twenty twenty five,

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Speaker 5: that is a theme that starts to return to the market.

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Speaker 6: Now, I think that's such an excellent point, Semer, because

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Speaker 6: it raises this question, is is the FED going to

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Speaker 6: have the opposite intended fact when they start to cut

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Speaker 6: that everyone rushes to the market and all of a sudden,

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Speaker 6: housing prices go up. In how policy is usually transmissioned,

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Speaker 6: isn't transmission.

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Speaker 4: The way it is?

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Speaker 6: So does that mean If the FED starts cutting, they

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Speaker 6: need to start cutting aggressively in order to make sure

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Speaker 6: that it is not a housing market that takes off

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Speaker 6: like crazy, that there's some incentive for supply to come

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Speaker 6: back in.

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Speaker 4: I think they just actually be really careful how they cut.

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Speaker 5: I mean, I do believe that they need to have

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Speaker 5: all of the evidence in hand before they start those

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Speaker 5: rate cuts. They need to be very clear that there

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Speaker 5: is the softening in the economy. They need to see

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Speaker 5: that the labor market is maybe not showing clear cracks,

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Speaker 5: but there is a rebalancing taking place.

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Speaker 4: Otherwise they risk almost of disrupting.

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Speaker 5: The economy again, and then we've been back to the

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Speaker 5: same place as we were a few years ago in

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Speaker 5: about twelve months or time.

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Speaker 7: When it comes to the housing markets, are potentially those

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Speaker 7: individuals that maybe they've wanted to upgrade to more space,

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Speaker 7: but they're sitting on a three percent mortgage.

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Speaker 4: What if all those people.

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Speaker 7: Come into the market and then actually you have so

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Speaker 7: much supply that it dilutes pricing power.

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Speaker 4: Wouldn't there be almost of goldilarks for the Fed?

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Speaker 5: It would be But actually, I think although the supply

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Speaker 5: has increased, the amount of people who are waiting those islens,

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Speaker 5: as you said, have been enjoying those three percent mortgage rates,

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Speaker 5: but scared to go to buy a new property once

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Speaker 5: they come flooding into the market. I actually don't think

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Speaker 5: that the supply is sufficient to stop the housing market

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Speaker 5: from taking off again. So I think that that is

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Speaker 5: one thing that the FED really needs to keep a

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Speaker 5: very close eye in order to avoid this second wave

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Speaker 5: of inflation, which you look at the moment there is

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Speaker 5: absolutely really no sign of. But I think it is

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Speaker 5: a risk that the Fed is very aware of, which

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Speaker 5: is one of the reasons why they are so careful

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Speaker 5: about the timing of those cuts.

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Speaker 7: You talk about history suggest that long fed passes are

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Speaker 7: good for stocks, But when you look back at history

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Speaker 7: and in your research, has it always been this concentrated?

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Speaker 4: I mean, I look at.

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Speaker 7: Peter Cheer's note today, which is kind of how you

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Speaker 7: started the show. Fragility in a one stock is a

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Speaker 7: stark market.

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Speaker 4: It's all about Navidia. Have we ever seen anything like that?

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Speaker 5: I don't think we've seen anything quite like this in

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Speaker 5: a way that the tech gains are quite fundamental. I mean,

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Speaker 5: there's something fundamentally driving I wouldn't compare it to the

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Speaker 5: dot com but also when I look across at tech,

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Speaker 5: I think think that somewhat macroagnostic. I don't think theyn

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Speaker 5: necessarily relying on what's happening in the macrospace. I don't

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Speaker 5: think they necessarily reliant on the FED space. I think

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Speaker 5: they actually create their own demand. At some point that

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Speaker 5: party will stop. It doesn't look like it's anytime soon,

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Speaker 5: but at some point it will stop. That I think

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Speaker 5: is a very hard part to predict.

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Speaker 1: So you sound kind of bearish, What are you doing?

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Speaker 5: If I sound very probably, I don't need you. I

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Speaker 5: think that we should actually be slightly risk on, but

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Speaker 5: not as risk on as we were about six months ago.

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Speaker 5: So we do have a slight overweight to equities, but

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Speaker 5: that has been pulled back a little bit because, as

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Speaker 5: I said, we think that the equity gain is quite

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Speaker 5: limited from here. When you start to see that slight

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Speaker 5: softening and the economic baddrop, and when there is so

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Speaker 5: much concentration, that sentiment is starting to get a little

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Speaker 5: bit impacted, where people are getting a bit worried about

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Speaker 5: how much exposure they have to these very very these

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Speaker 5: high stocks within fixed income, we actually think should be

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Speaker 5: back to neutral investment grade is probably the area that

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Speaker 5: you want to be focused on with slightly high quality.

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Speaker 4: But duration doesn't look very attractive to us.

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Speaker 5: So four twenty five, especially as you was talking before

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Speaker 5: about the fiscal deficit, I don't see yields coming back

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Speaker 5: down too far because that term primer is going to

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Speaker 5: keep thinking about the deficit.

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Speaker 3: So are you just hoovering up French bonds because there's

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Speaker 3: extra premium there?

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Speaker 5: I hear French bonds really scare me. And the reason

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Speaker 5: is this, So there is a genuine reason I think

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Speaker 5: investors should be concerned about it. The discussions that are

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Speaker 5: going on could really change the deficit narrative over there,

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Speaker 5: fiscal discipline out the window potentially. But also, if we're

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Speaker 5: a US investor, you've been looking Europe in the last

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Speaker 5: couple of months saying, wow, is this real?

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Speaker 4: Can this really be sustained?

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Speaker 5: This political disaster at the moment, which is starting to unfold,

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Speaker 5: is going to scare investors again. It's going to be like,

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Speaker 5: oh where are you again? European political basket case once more.

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Speaker 5: And I think that is a concern.

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Speaker 8: It's like that just leaves us back with the US,

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Speaker 8: that is that all this is is this just American

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Speaker 8: exceptionalism two point zero when you buy just not America

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Speaker 8: just because it's good, but because Europe is scary.

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Speaker 5: I think the use exception is very very key here.

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Speaker 5: There are pockets around the world, So it's not like

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Speaker 5: it's just US market. There's Sally as an overweight. Where

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Speaker 5: are we going to be focused on? It is certainly

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Speaker 5: the US.

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Speaker 3: That's sort of the reason why as much as people

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Speaker 3: want to complain about OI the actions and OI the deficit,

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Speaker 3: you can't really do that because it's OI Europe. Sema Shah,

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Speaker 3: thank you so much for being with us Shaw principle

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Speaker 3: as the management.

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Speaker 1: Joining US now, I'm.

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Speaker 3: So pleased to say, is Tamashad, CEO of a Kbwstfel Company.

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Speaker 1: Tom. A lot of people have been raising.

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Speaker 3: This issue about whether we're fighting the wrong war and

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Speaker 3: whether maybe some of what the regulators are targeting with

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Speaker 3: banks is counterproductive for the current cycle.

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Speaker 1: Do you think that that's going to be in focus

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Speaker 1: later this week?

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Speaker 9: Well, I think first of all, with the stress test,

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Speaker 9: the first thing you're going to see is that the

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Speaker 9: banks are in very very good shape. Remember the stress

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Speaker 9: tests were set up to look at an adverse scenario

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Speaker 9: to show the marketplace that they have plenty of capital

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Speaker 9: to withstand that. And we think that the conversation is

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Speaker 9: going to move away from that to individual company analysis quickly,

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Speaker 9: which is actually a really positive statement about how the

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Speaker 9: industry has been continuing to build capital. The other thing

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Speaker 9: is the industry has not only been building capital for

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Speaker 9: the stress test, but the industry's been building capital get

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Speaker 9: ready or basle three endgame. So that's been the big story.

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Speaker 9: So I think the first box to check is that

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Speaker 9: the industry is going to come out it's being very

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Speaker 9: well capitalized, and then they're going to be individual companies

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Speaker 9: that are pivoting in one direction or another.

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Speaker 1: So there's a lot to unpack.

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Speaker 3: There's a question about which banks, let's start here, are

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Speaker 3: really strong and resilient, right. I mean, it's one thing

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Speaker 3: to say JP Morgan and Bank of American City Group

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Speaker 3: pre are going to fail. I don't think anyone is

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Speaker 3: saying that they're at risk of any kind of real

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Speaker 3: potential turmoil.

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Speaker 1: It's really the regionals.

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Speaker 3: At what point do we get to the confidence there?

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Speaker 9: So there are twenty three banks in this test that's

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Speaker 9: coming on Wednesday, so they start to go down into

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Speaker 9: the super regional category. I think for all twenty three banks,

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Speaker 9: the market's going to say they have plenty of capital.

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Speaker 9: I think for the regional banks, the regional banks are

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Speaker 9: still in pretty good shape, except for the ones where

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Speaker 9: there might be more concern around real estate exposure for example,

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Speaker 9: and you're seeing a downturn in some of their results,

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Speaker 9: but large and again, I think it's very narrow as

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Speaker 9: to where the concern is. Just in preparation for coming today,

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Speaker 9: I was interested about dividends. I went back and looked

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Speaker 9: at that there are seventy four banks that are in

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Speaker 9: the KEEF Bank Index or Regional Bank index. If you

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Speaker 9: look at since the beginning of last year, five of

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Speaker 9: them cut or eliminated their dividend. Meanwhile, fifty four of

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Speaker 9: them raised their dividends over that period. The industry is

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Speaker 9: actually in really, I think, pretty good shape for the

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Speaker 9: challenges that we've had, and I think that the areas

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Speaker 9: of concern are generally more narrow than you would think.

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Speaker 9: And then remember last year's bank failure moment was really

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Speaker 9: around a liquidity crisis, and what we realized is that

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Speaker 9: some banks had gotten off sides in terms of their

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Speaker 9: concentrations and their deposits. I don't think that that was

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Speaker 9: a broad based.

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Speaker 4: Trend even so.

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Speaker 6: I mean every now and again you hear of another

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Speaker 6: bank that maybe isn't hedged to interest rates. The latest

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Speaker 6: one was a large bank out of Japan, I think

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Speaker 6: their largest agricultural bank, who was basically position for rates

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Speaker 6: coming lower. Obviously that hasn't happened yet. When you hear

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Speaker 6: these incidents of pockets of stress, do you think that

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Speaker 6: these are still the rare bank that have been hedged

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Speaker 6: against the current rate environment, or if it's higher for longer,

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Speaker 6: do we hear more of this?

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Speaker 1: So?

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Speaker 9: I think with the focus for this conversation right now

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Speaker 9: being in the US, I'll go to our Bank America upgrade,

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Speaker 9: which we did recently. We have earnings models by quarter

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Speaker 9: for net interest income. I think just about all of

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Speaker 9: the two hundred and twenty banks we follow, nearly all

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Speaker 9: are going to hit a bottom on a quarterly basis,

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Speaker 9: either last quarter or this quarter. That's the reason why

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Speaker 9: we upgraded Bank America is the second quarter is the

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Speaker 9: inflection point, and it gets better from here. So it's

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Speaker 9: all a question of timing. Let me there's another point.

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Speaker 9: The five month five year, three month, five year, you'll

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Speaker 9: curve spread is the most important for banks. I know

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Speaker 9: that that plenty of tensions on two tens, that's not

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Speaker 9: the key for the banks. It's been sixty two years

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Speaker 9: since we've seen the length of time for the inversion

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Speaker 9: that we've had, so all things really kind of need

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Speaker 9: to do is get a little bit less bad for

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Speaker 9: these banks to do a little bit better. And I

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Speaker 9: think that pivot is right here right now, and these

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Speaker 9: banks have a lot of bad news in them. As

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Speaker 9: long as we don't get a hard landing, I think

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Speaker 9: you're going to see a continuing quarterly improvement over the

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Speaker 9: next four or five quarters. And also too, there are

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Speaker 9: specific types of banks like more than others. But this

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Speaker 9: is a great opportunity if you can look longer term.

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Speaker 6: We think, I know you want to stay in the US,

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Speaker 6: but I have to take you to Europe, especially given

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Speaker 6: we're going to get one of the first rounds of

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Speaker 6: French voting on the thirtieth. You've had the likes of

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Speaker 6: JP Morgan really be courted by mccraulan saying come move

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Speaker 6: to Paris in a post Brexit world. And you've seen

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Speaker 6: other US banks do something similar really building up operations

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Speaker 6: and talent bases in Paris. If there is political volatility,

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Speaker 6: what happens.

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Speaker 9: So I think it's really the big picture of what's

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Speaker 9: happening with the economy. One thing I would note is

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Speaker 9: over the last twelve months, banks have been the leading

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Speaker 9: group in Europe. Again, there was so much bad news

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Speaker 9: in these stocks, and really what you need in Europe

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Speaker 9: is he needed some improvement in the rates. Negative interest

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Speaker 9: rates were certainly adversely affecting the banks. Our sense, as

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Speaker 9: it all comes down to what the economy is doing,

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Speaker 9: we still think there's upside for the banks because the

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Speaker 9: banks have done a lot to stabilize themselves over the

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Speaker 9: last several years, and many of those stocks still trade

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Speaker 9: at sixty percent of book value. So we think that

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Speaker 9: the bigger banks are stable in Europe, and it's a

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Speaker 9: question now of what's happening in the economy.

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Speaker 7: Does it consider we heard last week from the FED

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Speaker 7: in terms of living wills of some of the US

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Speaker 7: biggest banks finding some shortcomings when it comes to likes

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Speaker 7: of Bank of America City.

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Speaker 9: You know, you remember that teacher in college who was

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Speaker 9: always a hard greater, who never really gave out the

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Speaker 9: oh this is perfect. You're all done. You don't have

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Speaker 9: to do anymore. I will imagine for the rest of

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Speaker 9: my career, every year there will be more work to

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Speaker 9: do on a living will. Okay, And if you look

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Speaker 9: at the living wills, JP Morgan had work to do,

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Speaker 9: City Group had work to do. Really, these living wills

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Speaker 9: were evolving with the risks of the moment. And also

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Speaker 9: I would say, given last year's bank failures, the FDIC

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Speaker 9: has probably sharpened their pencil on these living wills, so

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Speaker 9: I would view it as as a living, breathing thing.

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Speaker 9: I didn't see our view on it is the banks

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Speaker 9: are going to spend more money at preparing for them,

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Speaker 9: but that there was nothing devastating or really significant in

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Speaker 9: what we read in the results.

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Speaker 3: To say, the reason why I started by asking you

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Speaker 3: are we looking at the wrong risks is because in

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Speaker 3: the past couple of years, first of all, the risks

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Speaker 3: that I hear about what profitability opportunities do some of

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Speaker 3: these smaller banks have when they're facing off with the

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Speaker 3: rush of money into private capital.

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Speaker 1: That's a big question at this point.

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Speaker 9: Oh, there are some tectonic plates that are moving that

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Speaker 9: if you want, you got to if you want to

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Speaker 9: take a step back and not look at the snapshot

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Speaker 9: and look at the movie. Yes, and really what it

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Speaker 9: comes down to was funding and liquidity and deposits. Banks

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Speaker 9: don't fail because of capital. Banks fail because there's a

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Speaker 9: bank run, and there have been very few of them

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Speaker 9: in the United States. So the capital's fine, but really,

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Speaker 9: what's happening in the deposit base. I think the greatest

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Speaker 9: missed opportunity from last year is there's not been FDIC

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Speaker 9: deposit insurance reform because it puts too much pressure on

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Speaker 9: the small banks and it's encouraging market share to move

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Speaker 9: up gap to the banks that have proven that they're

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Speaker 9: too big to fail.

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Speaker 4: And it also yeah, so that's the biggest.

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Speaker 9: And then number two is when it comes to stock selection.

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Speaker 9: The way that regional banks, smaller community banks earn money

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Speaker 9: in the biggest banks is very different. The smaller banks

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Speaker 9: have more real estate and more spread income, they are

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Speaker 9: going to be slower to rebound the bigger banks have.

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Speaker 9: Bank America, amongst the biggest banks, has some of the

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Speaker 9: least amount of commercial real estate exposure. These bigger banks

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Speaker 9: have already made the shift away from that, and that's

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Speaker 9: why we are leaning in heavier on these bigger banks

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Speaker 9: for the stock ideas, we think it's going to take

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Speaker 9: a little bit more time for the regional banks to

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Speaker 9: turn There might be.

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Speaker 3: Safety and even profitability in some of the bigger banks.

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Speaker 3: There isn't so much of the classic market making. And

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Speaker 3: this is the other risk that people talk about liquidity

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Speaker 3: risk on another level, that they're not going to be

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Speaker 3: able to shepherd this amount of bond auctions into the

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Speaker 3: market and allow the trading to commence with the same

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Speaker 3: kind of stability that has in the past.

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Speaker 4: Does that keep you.

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Speaker 1: Up at night?

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Speaker 4: Now you're talking about the treasury market and.

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Speaker 3: The treasury of particular, given the fact that the market

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Speaker 3: has swollen to such a huge part, but it's also

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Speaker 3: the credit market. I hear about this with public credit

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Speaker 3: as well well.

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Speaker 9: What I take out of that is passive investing is

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Speaker 9: at the highest degree of our lifetime and growing more

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Speaker 9: and in many ways it's changing the investment business.

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Speaker 4: So there are so.

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Speaker 9: Many of these indices and index driven funds that so

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Speaker 9: much of that, and it's impacted the liquidity of a

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Speaker 9: lot of the smaller company. So if you look at

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Speaker 9: a typical mid cap stock, it may have thirty five

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Speaker 9: forty percent of their shares owned by passive investors. And

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Speaker 9: it's happening in the credit markets as well, so when

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Speaker 9: you get to individual credits, so that's pushing more of

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Speaker 9: the trading into private markets away from some of the

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Speaker 9: public markets, and so I think that is going to

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Speaker 9: have an impact. So the way in which companies raise

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Speaker 9: capital is all still evolving because there's this big private

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Speaker 9: market that's grown a lot in the last four or

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Speaker 9: five years.

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Speaker 1: Tamashad awesome to hear from you. Thank you so much

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Speaker 1: for being with us.

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Speaker 10: Yes, thanks, Tavi Should of KBW.

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Speaker 3: Just to get a sense of how to frame the

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Speaker 3: week ahead and the path of rates going forward.

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Speaker 1: Joining us Stephanie.

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Speaker 3: Ross of a Wolf Research, Morgan Stanley's Vishi Cheer but Tour.

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Speaker 1: Stephanie, I want to start with you.

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Speaker 3: We've been talking about the auctions, we've been talking about

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Speaker 3: concerns about higher rates, but you think that actually rates

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Speaker 3: are expected to go somewhat lower over the next couple

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Speaker 3: of weeks.

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Speaker 1: Why.

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Speaker 11: Yeah, So we're looking for the tenure rate to fall

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Speaker 11: towards four percent and then it can trend again higher.

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Speaker 11: When we start talking talking about the election and concerns

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Speaker 11: around the desicits. But in the next couple of weeks

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Speaker 11: we could start to see just a continuation of the

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Speaker 11: softer economic momentum. We've seen that for in the past

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Speaker 11: couple of prints, and that has brought ten year rates

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Speaker 11: back down to four twenty six, which is certainly lower

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Speaker 11: than many folks were expecting. Many folks we're expecting rates

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Speaker 11: to get to five percent before they come back down.

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Speaker 11: But we've just seen that softening an economic momentum, partially

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Speaker 11: because there is actually a genuine deceleration in the economy. Also,

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Speaker 11: seasonals tend to put downward pressure on both inflation and

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Speaker 11: growth in the summer months, and we d we expect

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Speaker 11: that to be the case in the next couple of prints,

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Speaker 11: which will bring certainly growth expectations back down a little bit,

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Speaker 11: and then inflation should continue to miss. So yeah, core

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Speaker 11: PC should come in something around point one five percent

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Speaker 11: in the next print. We expect that for the next

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Speaker 11: couple FRIENDSHI should go outside of the build cut in September.

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Speaker 3: And then after that there could be something of a

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Speaker 3: sell off, a slight one at that, but still some.

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Speaker 1: Modulation there from there.

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Speaker 3: Visually, What about you do you agree with that that

431
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Speaker 3: basically the data is cooperating with the bond market, cooperating

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Speaker 3: with the auction schedule. Do you allow yields to continue

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Speaker 3: the decline?

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Speaker 12: I think the broad conturs of what we expected are

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Speaker 12: very much in line with the it's definitely on there.

436
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Speaker 12: I think the economy is clearly showing signs of dissolution,

437
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Speaker 12: which we had expected, and you know it's it's disilleration,

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Speaker 12: but not falling off the cliff. And we also, as

439
00:19:34,560 --> 00:19:37,280
Speaker 12: we might talk about, we expect the core PC will

440
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Speaker 12: not be a big surprises on Friday, and we expect

441
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Speaker 12: to see a month or month ten based points in

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Speaker 12: the core PC numbers, all of that pointing to a

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Speaker 12: distilleration in growth, a distilleration in the pace of location,

444
00:19:49,480 --> 00:19:52,120
Speaker 12: setting the stage for a September cut.

445
00:19:52,640 --> 00:19:54,639
Speaker 6: So how much confidence did you have issue? It sounds

446
00:19:54,640 --> 00:19:57,400
Speaker 6: like a lot, but just chuck me here. If it's

447
00:19:57,440 --> 00:19:59,280
Speaker 6: true that we've seen the peak and yields.

448
00:20:00,320 --> 00:20:02,520
Speaker 12: I think in the near term, I think we have

449
00:20:02,760 --> 00:20:05,720
Speaker 12: fairly confident on the trajectory of the path of inflation

450
00:20:06,160 --> 00:20:08,720
Speaker 12: or the next call it, you know, the rest of

451
00:20:09,200 --> 00:20:11,119
Speaker 12: obvious year, the next three to six months. We have

452
00:20:11,200 --> 00:20:14,720
Speaker 12: very high degree of confidence that information will continue to

453
00:20:14,760 --> 00:20:20,320
Speaker 12: decentrate and we probably have seen the fights in rates,

454
00:20:20,320 --> 00:20:23,560
Speaker 12: and I would a slight difference of view from the

455
00:20:23,880 --> 00:20:26,280
Speaker 12: speaker is that we think that we've been in a

456
00:20:26,320 --> 00:20:28,399
Speaker 12: fairly you know and arrange that we are really are

457
00:20:28,440 --> 00:20:32,360
Speaker 12: the tight end of the range. So that tactically at

458
00:20:32,359 --> 00:20:36,520
Speaker 12: this point we have neutral opending how the debate and

459
00:20:36,560 --> 00:20:39,879
Speaker 12: the follow from the debate will turn out. So, but

460
00:20:40,320 --> 00:20:43,000
Speaker 12: what a longer time frame, our expectation in the rates

461
00:20:43,000 --> 00:20:46,199
Speaker 12: will be lower or lower. Our ten year expectation is

462
00:20:46,240 --> 00:20:49,760
Speaker 12: that will be ten year treasury by second quarter of

463
00:20:49,800 --> 00:20:52,200
Speaker 12: next year. We expect to see two three seventy five.

464
00:20:52,960 --> 00:20:56,480
Speaker 6: Well, disagreements is what makes a market luckily. Stephanie, First

465
00:20:56,480 --> 00:20:58,000
Speaker 6: of all, I have to give you immense credit for

466
00:20:58,040 --> 00:21:03,520
Speaker 6: this wonderful pun now oer never, which is excellent. So

467
00:21:03,560 --> 00:21:06,359
Speaker 6: you actually expect from the oer to come down finally,

468
00:21:06,720 --> 00:21:08,879
Speaker 6: I mean we've been waiting for this forever, the lag

469
00:21:09,200 --> 00:21:11,240
Speaker 6: that feels like it's never showed up. So you think

470
00:21:11,240 --> 00:21:13,439
Speaker 6: that will finally show up in June?

471
00:21:13,680 --> 00:21:14,000
Speaker 1: Why?

472
00:21:14,320 --> 00:21:16,600
Speaker 11: Yes, June print is the time we're actually expecting it.

473
00:21:16,640 --> 00:21:19,680
Speaker 11: We haven't been calling it for any particular month until

474
00:21:19,720 --> 00:21:22,520
Speaker 11: this one. So this isn't necessarily a boy who cried

475
00:21:22,560 --> 00:21:25,439
Speaker 11: wolf situation. So the reasons for this is twofold one.

476
00:21:25,480 --> 00:21:27,639
Speaker 11: The seasonals go the other way very much so in

477
00:21:27,680 --> 00:21:29,560
Speaker 11: the first half, and then June it flips, so we

478
00:21:29,560 --> 00:21:31,920
Speaker 11: should have seasonal downward pressure on OER by a number

479
00:21:31,960 --> 00:21:33,920
Speaker 11: of basis points. And then on top of that, there

480
00:21:34,040 --> 00:21:36,840
Speaker 11: was a funky surge in the New York region which

481
00:21:36,840 --> 00:21:42,399
Speaker 11: contributed about twelve basis points to overall OER, which is

482
00:21:42,400 --> 00:21:44,560
Speaker 11: about ten basis points more than normal. So that should

483
00:21:44,560 --> 00:21:46,480
Speaker 11: also put down with pressure because that's likely to go

484
00:21:46,520 --> 00:21:49,879
Speaker 11: in reverse. BLS had put out some comments that it

485
00:21:49,920 --> 00:21:52,320
Speaker 11: was driven by some noise within the region.

486
00:21:52,520 --> 00:21:54,520
Speaker 3: So we're talking about the next couple of weeks, the

487
00:21:54,520 --> 00:21:56,239
Speaker 3: next couple of months, because that's all that we can

488
00:21:56,280 --> 00:21:56,720
Speaker 3: talk about.

489
00:21:56,840 --> 00:21:59,160
Speaker 1: Beyond that, it starts to get very difficult to really

490
00:21:59,200 --> 00:22:00,000
Speaker 1: have any visibility.

491
00:22:00,480 --> 00:22:03,280
Speaker 3: And it raises this question, like we were talking about

492
00:22:03,280 --> 00:22:06,000
Speaker 3: earlier with Semashov principle, that if you do get a

493
00:22:06,000 --> 00:22:10,280
Speaker 3: FED rate cut, that could potentially reignite inflation, particularly in

494
00:22:10,359 --> 00:22:11,240
Speaker 3: the housing market.

495
00:22:11,480 --> 00:22:12,960
Speaker 1: Sephanie, I want to get your thought on that.

496
00:22:13,119 --> 00:22:15,679
Speaker 3: First, you believe that based on how much pent up

497
00:22:15,680 --> 00:22:19,520
Speaker 3: demand there is and the likelihood of any increase in

498
00:22:19,560 --> 00:22:22,440
Speaker 3: affordability will unleash a flood of interest.

499
00:22:22,800 --> 00:22:24,560
Speaker 11: Yeah, I mean this time, there's an argument to be

500
00:22:24,600 --> 00:22:26,800
Speaker 11: made that it could actually be disinflationary. That's not necessarily

501
00:22:26,800 --> 00:22:29,640
Speaker 11: our caller base case is that it'll probably be more

502
00:22:29,680 --> 00:22:33,920
Speaker 11: neutral for housing prices generally than many expect. The reason

503
00:22:34,000 --> 00:22:35,480
Speaker 11: because all of a sudden, you're going to unleash a.

504
00:22:35,480 --> 00:22:36,000
Speaker 4: Lot of supply.

505
00:22:36,400 --> 00:22:38,600
Speaker 11: So, yeah, the demand is still there, but now you're

506
00:22:38,600 --> 00:22:41,560
Speaker 11: gonna get a lot of supply of existing, existing sales

507
00:22:41,600 --> 00:22:44,000
Speaker 11: because rates are coming down, and now it's a little

508
00:22:44,000 --> 00:22:46,200
Speaker 11: bit more attractive than certainly it was when mortgage rates

509
00:22:46,200 --> 00:22:49,240
Speaker 11: were above seven percent. So you actually might get a

510
00:22:49,640 --> 00:22:53,159
Speaker 11: more normalization in the supply demand imbalance that could actually

511
00:22:53,240 --> 00:22:54,600
Speaker 11: keep prices somewhat stape.

512
00:22:54,800 --> 00:22:56,400
Speaker 3: I mean, this is an argument that we've heard, right,

513
00:22:56,400 --> 00:22:59,560
Speaker 3: which is it just inflationary inflationary? And everyone seems to disagree,

514
00:22:59,560 --> 00:23:01,440
Speaker 3: And I guess that this is the reason why it's

515
00:23:01,440 --> 00:23:02,280
Speaker 3: hard to eve engauge.

516
00:23:02,600 --> 00:23:04,040
Speaker 1: What's the bigger risk right now?

517
00:23:04,320 --> 00:23:07,320
Speaker 3: Is it a potential reinflation of the FED cuts or

518
00:23:07,400 --> 00:23:10,280
Speaker 3: is it a potential hard landing recession. I don't have

519
00:23:10,320 --> 00:23:12,639
Speaker 3: a clear answer, and Frankly, it seems like every investor

520
00:23:12,680 --> 00:23:14,320
Speaker 3: who's come on this show has a.

521
00:23:14,200 --> 00:23:17,000
Speaker 1: Completely different take on this. So where'd we stand on this?

522
00:23:17,080 --> 00:23:19,680
Speaker 1: I mean, which is a bigger, more compelling risk.

523
00:23:21,280 --> 00:23:24,560
Speaker 12: I think the you know, there is a whole host

524
00:23:24,560 --> 00:23:26,760
Speaker 12: of uncertainties ahead of us. So we have a pretty

525
00:23:26,760 --> 00:23:29,399
Speaker 12: clear part for the next next six months or so

526
00:23:29,880 --> 00:23:32,440
Speaker 12: that the shelter in vision that Stephanie was talking about

527
00:23:32,600 --> 00:23:34,600
Speaker 12: will continue to dissolve it biil we get to the

528
00:23:34,640 --> 00:23:38,919
Speaker 12: same answer as definitely does perhaps in a different different approach.

529
00:23:39,520 --> 00:23:42,040
Speaker 12: We look at all the leading indicators and the rent

530
00:23:42,080 --> 00:23:45,560
Speaker 12: index at the Cleveland Feds rend, your vent index, and

531
00:23:46,160 --> 00:23:48,040
Speaker 12: there is a clear lag and that will begin to

532
00:23:48,119 --> 00:23:51,600
Speaker 12: hit for the next few months. So, you know, I

533
00:23:51,640 --> 00:23:55,080
Speaker 12: think a lot really depends on what happens after. I

534
00:23:55,119 --> 00:24:00,639
Speaker 12: don't think a FED cutting in September will unleash enormous

535
00:24:00,680 --> 00:24:02,760
Speaker 12: amount of supply into the market. We expect to do

536
00:24:02,880 --> 00:24:05,600
Speaker 12: some supply. So we think that the pace of home

537
00:24:05,640 --> 00:24:09,200
Speaker 12: price appreciation will slow from about seven percent. Bare we

538
00:24:09,280 --> 00:24:11,320
Speaker 12: are now to the end of the year. Our base

539
00:24:11,520 --> 00:24:14,199
Speaker 12: is about two percent. It is still positive, you know,

540
00:24:14,680 --> 00:24:18,479
Speaker 12: home prize appreciation, but that pace will slow. But you know,

541
00:24:18,920 --> 00:24:21,359
Speaker 12: we should we should not forget that there is a

542
00:24:21,520 --> 00:24:25,280
Speaker 12: huge range of uncertainty of outcomes of elections, and a

543
00:24:25,359 --> 00:24:28,720
Speaker 12: larger range of uncertainty of the outcomes of the elections.

544
00:24:28,960 --> 00:24:32,080
Speaker 12: So all of that is very much a front and center.

545
00:24:32,400 --> 00:24:35,919
Speaker 12: So I think whatever, there's a lot of noise, and

546
00:24:35,960 --> 00:24:39,800
Speaker 12: it's tough to decipher signal from noise. But or what

547
00:24:39,880 --> 00:24:42,320
Speaker 12: we do clearly see is over the next three to

548
00:24:42,359 --> 00:24:46,320
Speaker 12: six months, this inflation is clearly on it dislidate anymore.

549
00:24:46,640 --> 00:24:49,080
Speaker 7: We're going to hear a lot of political noise this week,

550
00:24:49,200 --> 00:24:50,840
Speaker 7: especially when you have this debate on Thursday.

551
00:24:50,840 --> 00:24:52,280
Speaker 4: Stephanie, you write your note.

552
00:24:52,040 --> 00:24:54,160
Speaker 7: The first year of a Biden VERUS Trump administration may

553
00:24:54,160 --> 00:24:56,520
Speaker 7: look more similar than many expect.

554
00:24:56,880 --> 00:24:58,480
Speaker 4: Why so two things.

555
00:24:58,480 --> 00:25:01,720
Speaker 11: People are worried about Trump cutting off immigration, and he

556
00:25:01,880 --> 00:25:04,760
Speaker 11: will very likely cut off immigration flows, especially humanitarian prole

557
00:25:04,800 --> 00:25:06,879
Speaker 11: which is adding about seventy five thousand per month. The

558
00:25:06,960 --> 00:25:09,040
Speaker 11: thing is, the labor market might be in much better

559
00:25:09,080 --> 00:25:10,639
Speaker 11: balance by the time we get to the beginning of

560
00:25:10,640 --> 00:25:12,359
Speaker 11: next year that we don't actually need all of all

561
00:25:12,400 --> 00:25:15,280
Speaker 11: of those people that actually that might risk putting upward

562
00:25:15,280 --> 00:25:17,639
Speaker 11: pressure on the unemployment rate. Uh So it might not

563
00:25:17,680 --> 00:25:20,040
Speaker 11: actually be that as inflationary as many folks expect. And

564
00:25:20,040 --> 00:25:22,159
Speaker 11: then the second is of course on tariffs, and it

565
00:25:22,440 --> 00:25:24,600
Speaker 11: our base cases that the tariffs wouldn't go into effect

566
00:25:24,680 --> 00:25:27,600
Speaker 11: until late twenty twenty five, maybe early twenty twenty six,

567
00:25:27,960 --> 00:25:30,760
Speaker 11: So the c the the the inflationary forces of the

568
00:25:30,800 --> 00:25:34,080
Speaker 11: difference in administrations might actually not pan out next year

569
00:25:34,400 --> 00:25:36,560
Speaker 11: t come twenty twenty six. Of course, if we get tariffs,

570
00:25:36,760 --> 00:25:40,000
Speaker 11: that would be uh a dramatic game changer between administrations

571
00:25:40,040 --> 00:25:41,880
Speaker 11: and and and for sure, But for the first year,

572
00:25:41,920 --> 00:25:44,640
Speaker 11: it's actually likely the the the economy might look fairly

573
00:25:44,680 --> 00:25:46,000
Speaker 11: similar under both administrations.

574
00:25:46,000 --> 00:25:48,320
Speaker 7: The economy might look similar, but the rhetoric will certainly

575
00:25:48,320 --> 00:25:51,600
Speaker 7: look different. Uh Vishi, How are you looking at the

576
00:25:51,720 --> 00:25:55,119
Speaker 7: election and how the impact could be for markets? You know,

577
00:25:55,160 --> 00:25:58,320
Speaker 7: Stepanie brings up two good points, immigration and tariffs, and

578
00:25:58,880 --> 00:26:01,320
Speaker 7: what happens with those we might not actually see till

579
00:26:01,320 --> 00:26:04,080
Speaker 7: twenty twenty six, so.

580
00:26:04,640 --> 00:26:07,359
Speaker 12: We might not really know what the how to think

581
00:26:07,400 --> 00:26:09,720
Speaker 12: about elections much after that. What I would like to

582
00:26:09,720 --> 00:26:13,800
Speaker 12: think about really is what are the products within especially

583
00:26:13,840 --> 00:26:16,720
Speaker 12: in the fixed income space, we will perform in either

584
00:26:16,800 --> 00:26:20,720
Speaker 12: case that puts us in the range of spread products broadly,

585
00:26:20,840 --> 00:26:24,359
Speaker 12: So by spread products, I mean public credit, private credit,

586
00:26:24,640 --> 00:26:29,200
Speaker 12: securitized credit, mortgage backed securities. We see as long as

587
00:26:29,200 --> 00:26:31,320
Speaker 12: you take out that the next move by the FED

588
00:26:31,440 --> 00:26:33,800
Speaker 12: is not a hike, as long as we are clear

589
00:26:33,840 --> 00:26:38,119
Speaker 12: about that in the time the arrival of timing of

590
00:26:38,119 --> 00:26:40,640
Speaker 12: cards arrival, how many cuts will get when they arrive,

591
00:26:41,200 --> 00:26:45,560
Speaker 12: and the future course of the of the various policy

592
00:26:45,600 --> 00:26:49,320
Speaker 12: options probably matter a little bit less to the spread

593
00:26:49,320 --> 00:26:51,520
Speaker 12: product ingers. So that's where we think that the best

594
00:26:51,520 --> 00:26:52,440
Speaker 12: Opert study lies.

595
00:26:52,840 --> 00:26:55,880
Speaker 3: So just real quick, VISI, what do you think will

596
00:26:55,880 --> 00:26:58,400
Speaker 3: be the low that we'll see in the next six

597
00:26:58,480 --> 00:26:59,960
Speaker 3: months for the tenure.

598
00:27:01,680 --> 00:27:03,160
Speaker 12: Until we'll get too close to four percent?

599
00:27:03,720 --> 00:27:05,480
Speaker 3: So you guys both are on the same page about

600
00:27:05,480 --> 00:27:09,520
Speaker 3: four percent, all right, Stephanie rothavelf Research, Morgan Stanley's Visita Turbature.

601
00:27:09,600 --> 00:27:11,320
Speaker 1: Thank you both so much for being with us.

602
00:27:12,200 --> 00:27:15,760
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603
00:27:15,800 --> 00:27:19,120
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604
00:27:19,160 --> 00:27:22,119
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605
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606
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607
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