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Speaker 3: Sema Shah Prince Blast Management, writing this, the potential for
Speaker 3: further equity gains may be somewhat limited from here. With
Speaker 3: valuations so stretched, a soft economic landing is a necessary
Speaker 3: backdrop to support further gains.
Speaker 1: Sema joins us now, Seema, good.
Speaker 3: Morning, Welcome, good morning, great to be here, Great to
Speaker 3: have you. When you talk about stretched valuations, are you
Speaker 3: talking about the overall market or are you talking about
Speaker 3: in video.
Speaker 4: I'm talking about Nvidia.
Speaker 5: Okay, case if you look across a broad market actually
Speaker 5: doesn't look that stretch.
Speaker 4: We're really thinking about the pockets.
Speaker 5: It's difficult at this point though, to look across and
Speaker 5: say we need to have a broadening in the rally,
Speaker 5: but that broading in the rally can only take place
Speaker 5: if there's still a sturdy economic backdrop.
Speaker 1: Now we are generally.
Speaker 5: Quite positive on it, but we are hearing more and
Speaker 5: more clients actually really worried about the economic backdrop, real concerns.
Speaker 5: I need to creep into the point that actually, when
Speaker 5: we think about risks, or we're hearing about risks, we're
Speaker 5: hearing more about what's going to happen with a hard
Speaker 5: landing than with an acceleration. And that is a very
Speaker 5: very clear shift that we've noticed in the past few weeks.
Speaker 1: And that's something that a lot of people are talking about.
Speaker 3: Morgan Stanley came out over the weekend Mike Wilson, and
Speaker 3: he said he put their three scenarios that really counter
Speaker 3: this risk. One of them is overheating. Nobody thinks that's
Speaker 3: really good to happen. One is potential liquidity risk, and
Speaker 3: he talked about treasury auctions and some of the politics
Speaker 3: of the moment.
Speaker 1: He said that the base case in terms of what potentially.
Speaker 3: Disrupts this is to your point that hard landing scenario.
Speaker 3: How important is what we get on Friday in terms
Speaker 3: of personal income, personal spending core PCE to really inform
Speaker 3: how whether that's a more realistic base case.
Speaker 5: So it's definitely important because obviously we know the consumer
Speaker 5: has been the key driver for the US economy. But
Speaker 5: you said the buzzword before, which is bifurcation. Right, So
Speaker 5: you've got the really high income households which are essentially
Speaker 5: carrying the US economy. You've got the lower income households
Speaker 5: which are maybe seeing a couple of strains, but because
Speaker 5: the job market is still very strong, there's no major
Speaker 5: job losses that they can almost continue going. And as
Speaker 5: higher income households can carry the US economy, it's really
Speaker 5: to me it's about the labor market because if you
Speaker 5: start to see those job as claims increasing, if you
Speaker 5: start to sit translating to job losses, well, then the
Speaker 5: lower income consumers can no longer I should said, the
Speaker 5: high income consumers are no longer able to sustain the
Speaker 5: US economy.
Speaker 6: And we talk a lot about what the landing will
Speaker 6: look like, we rarely talk about what the lift off
Speaker 6: after that landing looks like. So for in this environment
Speaker 6: we get this soft landing, how important is it that
Speaker 6: growth is an anemic, that it can take off again
Speaker 6: for a more stained in longer term rally.
Speaker 4: So it is really important. But going to say it'
Speaker 4: something slightly different.
Speaker 5: So when I think about the landing, we think the
Speaker 5: fun you can get a soft landing up to Q
Speaker 5: one and Q two next year. But to the point
Speaker 5: that the FED starts to cut the people who are
Speaker 5: waiting on the sideline to buy a property, and if
Speaker 5: you don't have job losses, I worry about how, you know,
Speaker 5: how does the economy react to that? You could see
Speaker 5: another takeoff and then another acceleration. So actually, I think,
Speaker 5: to me, although I know that's not what people are
Speaker 5: necessarily talking about, although the acceleration is not key at
Speaker 5: the moment, maybe as you look to twenty twenty five,
Speaker 5: that is a theme that starts to return to the market.
Speaker 6: Now, I think that's such an excellent point, Semer, because
Speaker 6: it raises this question, is is the FED going to
Speaker 6: have the opposite intended fact when they start to cut
Speaker 6: that everyone rushes to the market and all of a sudden,
Speaker 6: housing prices go up. In how policy is usually transmissioned,
Speaker 6: isn't transmission.
Speaker 4: The way it is?
Speaker 6: So does that mean If the FED starts cutting, they
Speaker 6: need to start cutting aggressively in order to make sure
Speaker 6: that it is not a housing market that takes off
Speaker 6: like crazy, that there's some incentive for supply to come
Speaker 6: back in.
Speaker 4: I think they just actually be really careful how they cut.
Speaker 5: I mean, I do believe that they need to have
Speaker 5: all of the evidence in hand before they start those
Speaker 5: rate cuts. They need to be very clear that there
Speaker 5: is the softening in the economy. They need to see
Speaker 5: that the labor market is maybe not showing clear cracks,
Speaker 5: but there is a rebalancing taking place.
Speaker 4: Otherwise they risk almost of disrupting.
Speaker 5: The economy again, and then we've been back to the
Speaker 5: same place as we were a few years ago in
Speaker 5: about twelve months or time.
Speaker 7: When it comes to the housing markets, are potentially those
Speaker 7: individuals that maybe they've wanted to upgrade to more space,
Speaker 7: but they're sitting on a three percent mortgage.
Speaker 4: What if all those people.
Speaker 7: Come into the market and then actually you have so
Speaker 7: much supply that it dilutes pricing power.
Speaker 4: Wouldn't there be almost of goldilarks for the Fed?
Speaker 5: It would be But actually, I think although the supply
Speaker 5: has increased, the amount of people who are waiting those islens,
Speaker 5: as you said, have been enjoying those three percent mortgage rates,
Speaker 5: but scared to go to buy a new property once
Speaker 5: they come flooding into the market. I actually don't think
Speaker 5: that the supply is sufficient to stop the housing market
Speaker 5: from taking off again. So I think that that is
Speaker 5: one thing that the FED really needs to keep a
Speaker 5: very close eye in order to avoid this second wave
Speaker 5: of inflation, which you look at the moment there is
Speaker 5: absolutely really no sign of. But I think it is
Speaker 5: a risk that the Fed is very aware of, which
Speaker 5: is one of the reasons why they are so careful
Speaker 5: about the timing of those cuts.
Speaker 7: You talk about history suggest that long fed passes are
Speaker 7: good for stocks, But when you look back at history
Speaker 7: and in your research, has it always been this concentrated?
Speaker 4: I mean, I look at.
Speaker 7: Peter Cheer's note today, which is kind of how you
Speaker 7: started the show. Fragility in a one stock is a
Speaker 7: stark market.
Speaker 4: It's all about Navidia. Have we ever seen anything like that?
Speaker 5: I don't think we've seen anything quite like this in
Speaker 5: a way that the tech gains are quite fundamental. I mean,
Speaker 5: there's something fundamentally driving I wouldn't compare it to the
Speaker 5: dot com but also when I look across at tech,
Speaker 5: I think think that somewhat macroagnostic. I don't think theyn
Speaker 5: necessarily relying on what's happening in the macrospace. I don't
Speaker 5: think they necessarily reliant on the FED space. I think
Speaker 5: they actually create their own demand. At some point that
Speaker 5: party will stop. It doesn't look like it's anytime soon,
Speaker 5: but at some point it will stop. That I think
Speaker 5: is a very hard part to predict.
Speaker 1: So you sound kind of bearish, What are you doing?
Speaker 5: If I sound very probably, I don't need you. I
Speaker 5: think that we should actually be slightly risk on, but
Speaker 5: not as risk on as we were about six months ago.
Speaker 5: So we do have a slight overweight to equities, but
Speaker 5: that has been pulled back a little bit because, as
Speaker 5: I said, we think that the equity gain is quite
Speaker 5: limited from here. When you start to see that slight
Speaker 5: softening and the economic baddrop, and when there is so
Speaker 5: much concentration, that sentiment is starting to get a little
Speaker 5: bit impacted, where people are getting a bit worried about
Speaker 5: how much exposure they have to these very very these
Speaker 5: high stocks within fixed income, we actually think should be
Speaker 5: back to neutral investment grade is probably the area that
Speaker 5: you want to be focused on with slightly high quality.
Speaker 4: But duration doesn't look very attractive to us.
Speaker 5: So four twenty five, especially as you was talking before
Speaker 5: about the fiscal deficit, I don't see yields coming back
Speaker 5: down too far because that term primer is going to
Speaker 5: keep thinking about the deficit.
Speaker 3: So are you just hoovering up French bonds because there's
Speaker 3: extra premium there?
Speaker 5: I hear French bonds really scare me. And the reason
Speaker 5: is this, So there is a genuine reason I think
Speaker 5: investors should be concerned about it. The discussions that are
Speaker 5: going on could really change the deficit narrative over there,
Speaker 5: fiscal discipline out the window potentially. But also, if we're
Speaker 5: a US investor, you've been looking Europe in the last
Speaker 5: couple of months saying, wow, is this real?
Speaker 4: Can this really be sustained?
Speaker 5: This political disaster at the moment, which is starting to unfold,
Speaker 5: is going to scare investors again. It's going to be like,
Speaker 5: oh where are you again? European political basket case once more.
Speaker 5: And I think that is a concern.
Speaker 8: It's like that just leaves us back with the US,
Speaker 8: that is that all this is is this just American
Speaker 8: exceptionalism two point zero when you buy just not America
Speaker 8: just because it's good, but because Europe is scary.
Speaker 5: I think the use exception is very very key here.
Speaker 5: There are pockets around the world, So it's not like
Speaker 5: it's just US market. There's Sally as an overweight. Where
Speaker 5: are we going to be focused on? It is certainly
Speaker 5: the US.
Speaker 3: That's sort of the reason why as much as people
Speaker 3: want to complain about OI the actions and OI the deficit,
Speaker 3: you can't really do that because it's OI Europe. Sema Shah,
Speaker 3: thank you so much for being with us Shaw principle
Speaker 3: as the management.
Speaker 1: Joining US now, I'm.
Speaker 3: So pleased to say, is Tamashad, CEO of a Kbwstfel Company.
Speaker 1: Tom. A lot of people have been raising.
Speaker 3: This issue about whether we're fighting the wrong war and
Speaker 3: whether maybe some of what the regulators are targeting with
Speaker 3: banks is counterproductive for the current cycle.
Speaker 1: Do you think that that's going to be in focus
Speaker 1: later this week?
Speaker 9: Well, I think first of all, with the stress test,
Speaker 9: the first thing you're going to see is that the
Speaker 9: banks are in very very good shape. Remember the stress
Speaker 9: tests were set up to look at an adverse scenario
Speaker 9: to show the marketplace that they have plenty of capital
Speaker 9: to withstand that. And we think that the conversation is
Speaker 9: going to move away from that to individual company analysis quickly,
Speaker 9: which is actually a really positive statement about how the
Speaker 9: industry has been continuing to build capital. The other thing
Speaker 9: is the industry has not only been building capital for
Speaker 9: the stress test, but the industry's been building capital get
Speaker 9: ready or basle three endgame. So that's been the big story.
Speaker 9: So I think the first box to check is that
Speaker 9: the industry is going to come out it's being very
Speaker 9: well capitalized, and then they're going to be individual companies
Speaker 9: that are pivoting in one direction or another.
Speaker 1: So there's a lot to unpack.
Speaker 3: There's a question about which banks, let's start here, are
Speaker 3: really strong and resilient, right. I mean, it's one thing
Speaker 3: to say JP Morgan and Bank of American City Group
Speaker 3: pre are going to fail. I don't think anyone is
Speaker 3: saying that they're at risk of any kind of real
Speaker 3: potential turmoil.
Speaker 1: It's really the regionals.
Speaker 3: At what point do we get to the confidence there?
Speaker 9: So there are twenty three banks in this test that's
Speaker 9: coming on Wednesday, so they start to go down into
Speaker 9: the super regional category. I think for all twenty three banks,
Speaker 9: the market's going to say they have plenty of capital.
Speaker 9: I think for the regional banks, the regional banks are
Speaker 9: still in pretty good shape, except for the ones where
Speaker 9: there might be more concern around real estate exposure for example,
Speaker 9: and you're seeing a downturn in some of their results,
Speaker 9: but large and again, I think it's very narrow as
Speaker 9: to where the concern is. Just in preparation for coming today,
Speaker 9: I was interested about dividends. I went back and looked
Speaker 9: at that there are seventy four banks that are in
Speaker 9: the KEEF Bank Index or Regional Bank index. If you
Speaker 9: look at since the beginning of last year, five of
Speaker 9: them cut or eliminated their dividend. Meanwhile, fifty four of
Speaker 9: them raised their dividends over that period. The industry is
Speaker 9: actually in really, I think, pretty good shape for the
Speaker 9: challenges that we've had, and I think that the areas
Speaker 9: of concern are generally more narrow than you would think.
Speaker 9: And then remember last year's bank failure moment was really
Speaker 9: around a liquidity crisis, and what we realized is that
Speaker 9: some banks had gotten off sides in terms of their
Speaker 9: concentrations and their deposits. I don't think that that was
Speaker 9: a broad based.
Speaker 4: Trend even so.
Speaker 6: I mean every now and again you hear of another
Speaker 6: bank that maybe isn't hedged to interest rates. The latest
Speaker 6: one was a large bank out of Japan, I think
Speaker 6: their largest agricultural bank, who was basically position for rates
Speaker 6: coming lower. Obviously that hasn't happened yet. When you hear
Speaker 6: these incidents of pockets of stress, do you think that
Speaker 6: these are still the rare bank that have been hedged
Speaker 6: against the current rate environment, or if it's higher for longer,
Speaker 6: do we hear more of this?
Speaker 1: So?
Speaker 9: I think with the focus for this conversation right now
Speaker 9: being in the US, I'll go to our Bank America upgrade,
Speaker 9: which we did recently. We have earnings models by quarter
Speaker 9: for net interest income. I think just about all of
Speaker 9: the two hundred and twenty banks we follow, nearly all
Speaker 9: are going to hit a bottom on a quarterly basis,
Speaker 9: either last quarter or this quarter. That's the reason why
Speaker 9: we upgraded Bank America is the second quarter is the
Speaker 9: inflection point, and it gets better from here. So it's
Speaker 9: all a question of timing. Let me there's another point.
Speaker 9: The five month five year, three month, five year, you'll
Speaker 9: curve spread is the most important for banks. I know
Speaker 9: that that plenty of tensions on two tens, that's not
Speaker 9: the key for the banks. It's been sixty two years
Speaker 9: since we've seen the length of time for the inversion
Speaker 9: that we've had, so all things really kind of need
Speaker 9: to do is get a little bit less bad for
Speaker 9: these banks to do a little bit better. And I
Speaker 9: think that pivot is right here right now, and these
Speaker 9: banks have a lot of bad news in them. As
Speaker 9: long as we don't get a hard landing, I think
Speaker 9: you're going to see a continuing quarterly improvement over the
Speaker 9: next four or five quarters. And also too, there are
Speaker 9: specific types of banks like more than others. But this
Speaker 9: is a great opportunity if you can look longer term.
Speaker 6: We think, I know you want to stay in the US,
Speaker 6: but I have to take you to Europe, especially given
Speaker 6: we're going to get one of the first rounds of
Speaker 6: French voting on the thirtieth. You've had the likes of
Speaker 6: JP Morgan really be courted by mccraulan saying come move
Speaker 6: to Paris in a post Brexit world. And you've seen
Speaker 6: other US banks do something similar really building up operations
Speaker 6: and talent bases in Paris. If there is political volatility,
Speaker 6: what happens.
Speaker 9: So I think it's really the big picture of what's
Speaker 9: happening with the economy. One thing I would note is
Speaker 9: over the last twelve months, banks have been the leading
Speaker 9: group in Europe. Again, there was so much bad news
Speaker 9: in these stocks, and really what you need in Europe
Speaker 9: is he needed some improvement in the rates. Negative interest
Speaker 9: rates were certainly adversely affecting the banks. Our sense, as
Speaker 9: it all comes down to what the economy is doing,
Speaker 9: we still think there's upside for the banks because the
Speaker 9: banks have done a lot to stabilize themselves over the
Speaker 9: last several years, and many of those stocks still trade
Speaker 9: at sixty percent of book value. So we think that
Speaker 9: the bigger banks are stable in Europe, and it's a
Speaker 9: question now of what's happening in the economy.
Speaker 7: Does it consider we heard last week from the FED
Speaker 7: in terms of living wills of some of the US
Speaker 7: biggest banks finding some shortcomings when it comes to likes
Speaker 7: of Bank of America City.
Speaker 9: You know, you remember that teacher in college who was
Speaker 9: always a hard greater, who never really gave out the
Speaker 9: oh this is perfect. You're all done. You don't have
Speaker 9: to do anymore. I will imagine for the rest of
Speaker 9: my career, every year there will be more work to
Speaker 9: do on a living will. Okay, And if you look
Speaker 9: at the living wills, JP Morgan had work to do,
Speaker 9: City Group had work to do. Really, these living wills
Speaker 9: were evolving with the risks of the moment. And also
Speaker 9: I would say, given last year's bank failures, the FDIC
Speaker 9: has probably sharpened their pencil on these living wills, so
Speaker 9: I would view it as as a living, breathing thing.
Speaker 9: I didn't see our view on it is the banks
Speaker 9: are going to spend more money at preparing for them,
Speaker 9: but that there was nothing devastating or really significant in
Speaker 9: what we read in the results.
Speaker 3: To say, the reason why I started by asking you
Speaker 3: are we looking at the wrong risks is because in
Speaker 3: the past couple of years, first of all, the risks
Speaker 3: that I hear about what profitability opportunities do some of
Speaker 3: these smaller banks have when they're facing off with the
Speaker 3: rush of money into private capital.
Speaker 1: That's a big question at this point.
Speaker 9: Oh, there are some tectonic plates that are moving that
Speaker 9: if you want, you got to if you want to
Speaker 9: take a step back and not look at the snapshot
Speaker 9: and look at the movie. Yes, and really what it
Speaker 9: comes down to was funding and liquidity and deposits. Banks
Speaker 9: don't fail because of capital. Banks fail because there's a
Speaker 9: bank run, and there have been very few of them
Speaker 9: in the United States. So the capital's fine, but really,
Speaker 9: what's happening in the deposit base. I think the greatest
Speaker 9: missed opportunity from last year is there's not been FDIC
Speaker 9: deposit insurance reform because it puts too much pressure on
Speaker 9: the small banks and it's encouraging market share to move
Speaker 9: up gap to the banks that have proven that they're
Speaker 9: too big to fail.
Speaker 4: And it also yeah, so that's the biggest.
Speaker 9: And then number two is when it comes to stock selection.
Speaker 9: The way that regional banks, smaller community banks earn money
Speaker 9: in the biggest banks is very different. The smaller banks
Speaker 9: have more real estate and more spread income, they are
Speaker 9: going to be slower to rebound the bigger banks have.
Speaker 9: Bank America, amongst the biggest banks, has some of the
Speaker 9: least amount of commercial real estate exposure. These bigger banks
Speaker 9: have already made the shift away from that, and that's
Speaker 9: why we are leaning in heavier on these bigger banks
Speaker 9: for the stock ideas, we think it's going to take
Speaker 9: a little bit more time for the regional banks to
Speaker 9: turn There might be.
Speaker 3: Safety and even profitability in some of the bigger banks.
Speaker 3: There isn't so much of the classic market making. And
Speaker 3: this is the other risk that people talk about liquidity
Speaker 3: risk on another level, that they're not going to be
Speaker 3: able to shepherd this amount of bond auctions into the
Speaker 3: market and allow the trading to commence with the same
Speaker 3: kind of stability that has in the past.
Speaker 4: Does that keep you.
Speaker 1: Up at night?
Speaker 4: Now you're talking about the treasury market and.
Speaker 3: The treasury of particular, given the fact that the market
Speaker 3: has swollen to such a huge part, but it's also
Speaker 3: the credit market. I hear about this with public credit
Speaker 3: as well well.
Speaker 9: What I take out of that is passive investing is
Speaker 9: at the highest degree of our lifetime and growing more
Speaker 9: and in many ways it's changing the investment business.
Speaker 4: So there are so.
Speaker 9: Many of these indices and index driven funds that so
Speaker 9: much of that, and it's impacted the liquidity of a
Speaker 9: lot of the smaller company. So if you look at
Speaker 9: a typical mid cap stock, it may have thirty five
Speaker 9: forty percent of their shares owned by passive investors. And
Speaker 9: it's happening in the credit markets as well, so when
Speaker 9: you get to individual credits, so that's pushing more of
Speaker 9: the trading into private markets away from some of the
Speaker 9: public markets, and so I think that is going to
Speaker 9: have an impact. So the way in which companies raise
Speaker 9: capital is all still evolving because there's this big private
Speaker 9: market that's grown a lot in the last four or
Speaker 9: five years.
Speaker 1: Tamashad awesome to hear from you. Thank you so much
Speaker 1: for being with us.
Speaker 10: Yes, thanks, Tavi Should of KBW.
Speaker 3: Just to get a sense of how to frame the
Speaker 3: week ahead and the path of rates going forward.
Speaker 1: Joining us Stephanie.
Speaker 3: Ross of a Wolf Research, Morgan Stanley's Vishi Cheer but Tour.
Speaker 1: Stephanie, I want to start with you.
Speaker 3: We've been talking about the auctions, we've been talking about
Speaker 3: concerns about higher rates, but you think that actually rates
Speaker 3: are expected to go somewhat lower over the next couple
Speaker 3: of weeks.
Speaker 1: Why.
Speaker 11: Yeah, So we're looking for the tenure rate to fall
Speaker 11: towards four percent and then it can trend again higher.
Speaker 11: When we start talking talking about the election and concerns
Speaker 11: around the desicits. But in the next couple of weeks
Speaker 11: we could start to see just a continuation of the
Speaker 11: softer economic momentum. We've seen that for in the past
Speaker 11: couple of prints, and that has brought ten year rates
Speaker 11: back down to four twenty six, which is certainly lower
Speaker 11: than many folks were expecting. Many folks we're expecting rates
Speaker 11: to get to five percent before they come back down.
Speaker 11: But we've just seen that softening an economic momentum, partially
Speaker 11: because there is actually a genuine deceleration in the economy. Also,
Speaker 11: seasonals tend to put downward pressure on both inflation and
Speaker 11: growth in the summer months, and we d we expect
Speaker 11: that to be the case in the next couple of prints,
Speaker 11: which will bring certainly growth expectations back down a little bit,
Speaker 11: and then inflation should continue to miss. So yeah, core
Speaker 11: PC should come in something around point one five percent
Speaker 11: in the next print. We expect that for the next
Speaker 11: couple FRIENDSHI should go outside of the build cut in September.
Speaker 3: And then after that there could be something of a
Speaker 3: sell off, a slight one at that, but still some.
Speaker 1: Modulation there from there.
Speaker 3: Visually, What about you do you agree with that that
Speaker 3: basically the data is cooperating with the bond market, cooperating
Speaker 3: with the auction schedule. Do you allow yields to continue
Speaker 3: the decline?
Speaker 12: I think the broad conturs of what we expected are
Speaker 12: very much in line with the it's definitely on there.
Speaker 12: I think the economy is clearly showing signs of dissolution,
Speaker 12: which we had expected, and you know it's it's disilleration,
Speaker 12: but not falling off the cliff. And we also, as
Speaker 12: we might talk about, we expect the core PC will
Speaker 12: not be a big surprises on Friday, and we expect
Speaker 12: to see a month or month ten based points in
Speaker 12: the core PC numbers, all of that pointing to a
Speaker 12: distilleration in growth, a distilleration in the pace of location,
Speaker 12: setting the stage for a September cut.
Speaker 6: So how much confidence did you have issue? It sounds
Speaker 6: like a lot, but just chuck me here. If it's
Speaker 6: true that we've seen the peak and yields.
Speaker 12: I think in the near term, I think we have
Speaker 12: fairly confident on the trajectory of the path of inflation
Speaker 12: or the next call it, you know, the rest of
Speaker 12: obvious year, the next three to six months. We have
Speaker 12: very high degree of confidence that information will continue to
Speaker 12: decentrate and we probably have seen the fights in rates,
Speaker 12: and I would a slight difference of view from the
Speaker 12: speaker is that we think that we've been in a
Speaker 12: fairly you know and arrange that we are really are
Speaker 12: the tight end of the range. So that tactically at
Speaker 12: this point we have neutral opending how the debate and
Speaker 12: the follow from the debate will turn out. So, but
Speaker 12: what a longer time frame, our expectation in the rates
Speaker 12: will be lower or lower. Our ten year expectation is
Speaker 12: that will be ten year treasury by second quarter of
Speaker 12: next year. We expect to see two three seventy five.
Speaker 6: Well, disagreements is what makes a market luckily. Stephanie, First
Speaker 6: of all, I have to give you immense credit for
Speaker 6: this wonderful pun now oer never, which is excellent. So
Speaker 6: you actually expect from the oer to come down finally,
Speaker 6: I mean we've been waiting for this forever, the lag
Speaker 6: that feels like it's never showed up. So you think
Speaker 6: that will finally show up in June?
Speaker 1: Why?
Speaker 11: Yes, June print is the time we're actually expecting it.
Speaker 11: We haven't been calling it for any particular month until
Speaker 11: this one. So this isn't necessarily a boy who cried
Speaker 11: wolf situation. So the reasons for this is twofold one.
Speaker 11: The seasonals go the other way very much so in
Speaker 11: the first half, and then June it flips, so we
Speaker 11: should have seasonal downward pressure on OER by a number
Speaker 11: of basis points. And then on top of that, there
Speaker 11: was a funky surge in the New York region which
Speaker 11: contributed about twelve basis points to overall OER, which is
Speaker 11: about ten basis points more than normal. So that should
Speaker 11: also put down with pressure because that's likely to go
Speaker 11: in reverse. BLS had put out some comments that it
Speaker 11: was driven by some noise within the region.
Speaker 3: So we're talking about the next couple of weeks, the
Speaker 3: next couple of months, because that's all that we can
Speaker 3: talk about.
Speaker 1: Beyond that, it starts to get very difficult to really
Speaker 1: have any visibility.
Speaker 3: And it raises this question, like we were talking about
Speaker 3: earlier with Semashov principle, that if you do get a
Speaker 3: FED rate cut, that could potentially reignite inflation, particularly in
Speaker 3: the housing market.
Speaker 1: Sephanie, I want to get your thought on that.
Speaker 3: First, you believe that based on how much pent up
Speaker 3: demand there is and the likelihood of any increase in
Speaker 3: affordability will unleash a flood of interest.
Speaker 11: Yeah, I mean this time, there's an argument to be
Speaker 11: made that it could actually be disinflationary. That's not necessarily
Speaker 11: our caller base case is that it'll probably be more
Speaker 11: neutral for housing prices generally than many expect. The reason
Speaker 11: because all of a sudden, you're going to unleash a.
Speaker 4: Lot of supply.
Speaker 11: So, yeah, the demand is still there, but now you're
Speaker 11: gonna get a lot of supply of existing, existing sales
Speaker 11: because rates are coming down, and now it's a little
Speaker 11: bit more attractive than certainly it was when mortgage rates
Speaker 11: were above seven percent. So you actually might get a
Speaker 11: more normalization in the supply demand imbalance that could actually
Speaker 11: keep prices somewhat stape.
Speaker 3: I mean, this is an argument that we've heard, right,
Speaker 3: which is it just inflationary inflationary? And everyone seems to disagree,
Speaker 3: And I guess that this is the reason why it's
Speaker 3: hard to eve engauge.
Speaker 1: What's the bigger risk right now?
Speaker 3: Is it a potential reinflation of the FED cuts or
Speaker 3: is it a potential hard landing recession. I don't have
Speaker 3: a clear answer, and Frankly, it seems like every investor
Speaker 3: who's come on this show has a.
Speaker 1: Completely different take on this. So where'd we stand on this?
Speaker 1: I mean, which is a bigger, more compelling risk.
Speaker 12: I think the you know, there is a whole host
Speaker 12: of uncertainties ahead of us. So we have a pretty
Speaker 12: clear part for the next next six months or so
Speaker 12: that the shelter in vision that Stephanie was talking about
Speaker 12: will continue to dissolve it biil we get to the
Speaker 12: same answer as definitely does perhaps in a different different approach.
Speaker 12: We look at all the leading indicators and the rent
Speaker 12: index at the Cleveland Feds rend, your vent index, and
Speaker 12: there is a clear lag and that will begin to
Speaker 12: hit for the next few months. So, you know, I
Speaker 12: think a lot really depends on what happens after. I
Speaker 12: don't think a FED cutting in September will unleash enormous
Speaker 12: amount of supply into the market. We expect to do
Speaker 12: some supply. So we think that the pace of home
Speaker 12: price appreciation will slow from about seven percent. Bare we
Speaker 12: are now to the end of the year. Our base
Speaker 12: is about two percent. It is still positive, you know,
Speaker 12: home prize appreciation, but that pace will slow. But you know,
Speaker 12: we should we should not forget that there is a
Speaker 12: huge range of uncertainty of outcomes of elections, and a
Speaker 12: larger range of uncertainty of the outcomes of the elections.
Speaker 12: So all of that is very much a front and center.
Speaker 12: So I think whatever, there's a lot of noise, and
Speaker 12: it's tough to decipher signal from noise. But or what
Speaker 12: we do clearly see is over the next three to
Speaker 12: six months, this inflation is clearly on it dislidate anymore.
Speaker 7: We're going to hear a lot of political noise this week,
Speaker 7: especially when you have this debate on Thursday.
Speaker 4: Stephanie, you write your note.
Speaker 7: The first year of a Biden VERUS Trump administration may
Speaker 7: look more similar than many expect.
Speaker 4: Why so two things.
Speaker 11: People are worried about Trump cutting off immigration, and he
Speaker 11: will very likely cut off immigration flows, especially humanitarian prole
Speaker 11: which is adding about seventy five thousand per month. The
Speaker 11: thing is, the labor market might be in much better
Speaker 11: balance by the time we get to the beginning of
Speaker 11: next year that we don't actually need all of all
Speaker 11: of those people that actually that might risk putting upward
Speaker 11: pressure on the unemployment rate. Uh So it might not
Speaker 11: actually be that as inflationary as many folks expect. And
Speaker 11: then the second is of course on tariffs, and it
Speaker 11: our base cases that the tariffs wouldn't go into effect
Speaker 11: until late twenty twenty five, maybe early twenty twenty six,
Speaker 11: So the c the the the inflationary forces of the
Speaker 11: difference in administrations might actually not pan out next year
Speaker 11: t come twenty twenty six. Of course, if we get tariffs,
Speaker 11: that would be uh a dramatic game changer between administrations
Speaker 11: and and and for sure, But for the first year,
Speaker 11: it's actually likely the the the economy might look fairly
Speaker 11: similar under both administrations.
Speaker 7: The economy might look similar, but the rhetoric will certainly
Speaker 7: look different. Uh Vishi, How are you looking at the
Speaker 7: election and how the impact could be for markets? You know,
Speaker 7: Stepanie brings up two good points, immigration and tariffs, and
Speaker 7: what happens with those we might not actually see till
Speaker 7: twenty twenty six, so.
Speaker 12: We might not really know what the how to think
Speaker 12: about elections much after that. What I would like to
Speaker 12: think about really is what are the products within especially
Speaker 12: in the fixed income space, we will perform in either
Speaker 12: case that puts us in the range of spread products broadly,
Speaker 12: So by spread products, I mean public credit, private credit,
Speaker 12: securitized credit, mortgage backed securities. We see as long as
Speaker 12: you take out that the next move by the FED
Speaker 12: is not a hike, as long as we are clear
Speaker 12: about that in the time the arrival of timing of
Speaker 12: cards arrival, how many cuts will get when they arrive,
Speaker 12: and the future course of the of the various policy
Speaker 12: options probably matter a little bit less to the spread
Speaker 12: product ingers. So that's where we think that the best
Speaker 12: Opert study lies.
Speaker 3: So just real quick, VISI, what do you think will
Speaker 3: be the low that we'll see in the next six
Speaker 3: months for the tenure.
Speaker 12: Until we'll get too close to four percent?
Speaker 3: So you guys both are on the same page about
Speaker 3: four percent, all right, Stephanie rothavelf Research, Morgan Stanley's Visita Turbature.
Speaker 1: Thank you both so much for being with us.
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