WEBVTT - Surveillance: Fed Tightening with Jones 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferroll and Lisa Brownwitz. Daily we bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:30.000 and of course on the Bloomberg terminal. Right now, the 0:00:30.080 --> 0:00:35.320 conversation of the day for people clipping coupons. Kathy Jones joined, 0:00:35.320 --> 0:00:39.800 just pianist and chief Fixed and Comes strategists at Charles Schwab. Kathy, 0:00:39.800 --> 0:00:42.880 I'm gonna cut to the chase of Bloomberg Corporate Total 0:00:42.960 --> 0:00:46.839 Return index is down eight point six percent, and I'm 0:00:46.840 --> 0:00:48.880 gonna guess I've given up two and a half years 0:00:48.880 --> 0:00:53.320 of coupon enjoying the price decline in in corporate bonds. 0:00:53.320 --> 0:00:56.240 And there's the full faith and credit story as well. 0:00:56.840 --> 0:01:00.480 The great dynamics here, and folks, this is Tuesday Dynamics 0:01:00.520 --> 0:01:04.440 on Bloomberg Surveillance with Kathy Jones. The great dynamic here, 0:01:04.560 --> 0:01:09.720 Kathy is with the rising coupon, it's okay to step 0:01:09.760 --> 0:01:14.479 in and buy even with further price erosion, because now 0:01:14.520 --> 0:01:19.400 I've got a decent coupon. Are we there? Yet yeah, 0:01:19.480 --> 0:01:23.880 I think we're getting there. So we have recently pivoted 0:01:23.920 --> 0:01:29.520 towards adding more duration to portfolios and to um being 0:01:29.760 --> 0:01:34.560 pretty outspoken about income investors finding income and things like 0:01:34.640 --> 0:01:39.320 investment great corporate bonds, preferred securities, even high yield if 0:01:39.319 --> 0:01:41.240 you're willing to take some of the risks. We prefer 0:01:41.640 --> 0:01:44.960 the upper end of high yield rather than the lower end. 0:01:45.080 --> 0:01:48.120 But all things considered, we think a lot's been priced 0:01:48.120 --> 0:01:52.120 in in this market, and we do see growth slowing 0:01:52.160 --> 0:01:54.000 down in the second half of the year a bit, 0:01:54.400 --> 0:01:56.680 and we you know, we had a brutal first quarter, 0:01:57.000 --> 0:02:00.320 so in fixed income, so we think now of time 0:02:00.360 --> 0:02:03.560 to step in and capture some of that income. I mean, 0:02:03.600 --> 0:02:07.480 you're gonna capture coupon. What's a decent corporate coupon right now? 0:02:07.960 --> 0:02:11.840 What's the yield I can expect? I think on the 0:02:12.000 --> 0:02:16.200 index sits around three point six plus, so you can 0:02:16.280 --> 0:02:19.799 be in uh, you know, in some depending on where 0:02:19.840 --> 0:02:21.880 you want to be. In investment grade, you can be 0:02:22.040 --> 0:02:25.519 three and a half up to four perhaps UM and 0:02:25.600 --> 0:02:28.760 you know, preferred you're looking at five or six. So 0:02:28.880 --> 0:02:31.680 these are pretty decent if you expect, as we do, 0:02:31.720 --> 0:02:36.079 that inflation will trend lower later in the year, those 0:02:36.120 --> 0:02:38.359 those yields and will look pretty attractive. I mean on 0:02:38.440 --> 0:02:41.600 a price basis, Lisa, I'm looking at a very famous 0:02:41.639 --> 0:02:46.320 American name with a twelve year piece of paper coupon 0:02:46.440 --> 0:02:49.960 of one in three aces the yield, and you've enjoyed 0:02:50.000 --> 0:02:53.640 a price move from one sixteen down to nineties seven. 0:02:53.680 --> 0:02:57.880 You've taken out sixteen of price to enjoy your higher yield. 0:02:58.919 --> 0:03:05.360 Bond shopping on line, we're talking Fox. I've got my 0:03:05.480 --> 0:03:09.800 Blue SMP book from pim Box. Pimp Fox on my guest, 0:03:09.840 --> 0:03:12.720 so I can look up my Boise Cascade bind. Okay, well, 0:03:12.720 --> 0:03:14.600 I'll let you do that. But Kathy, I want to 0:03:14.639 --> 0:03:16.400 go back to what Frances Donald was saying, and you 0:03:16.440 --> 0:03:19.239 really touched on that that you basically are in her camp, 0:03:19.520 --> 0:03:21.880 that you do think that inflation is going to roll over, 0:03:21.960 --> 0:03:24.400 that there is a transitory nature to this that was 0:03:24.440 --> 0:03:28.880 prolonged by the pandemic moving to the crisis, and that 0:03:28.880 --> 0:03:30.760 that was really what was going on with the conflict 0:03:31.120 --> 0:03:34.800 driven inflation that we're seeing. Do you also think the 0:03:34.880 --> 0:03:37.200 FED will not be able to raise rates and nearly 0:03:37.240 --> 0:03:39.560 as much as people are pricing in before they get 0:03:39.560 --> 0:03:43.440 concerned about growth concerns. Yeah, you know, we've been in 0:03:43.480 --> 0:03:46.080 that camp all along. I guess I should say I've 0:03:46.080 --> 0:03:48.320 been in that camp all along, and that's everybody on 0:03:48.360 --> 0:03:51.240 my team agrees with me. But um, I think that 0:03:51.280 --> 0:03:53.560 you know, the FED now has to come out then 0:03:53.720 --> 0:03:57.480 blazing declaring that they're going to conquer inflation because that's 0:03:57.520 --> 0:04:00.680 their job and I'm sure make me in it. But 0:04:00.960 --> 0:04:03.480 when fish comes to shove and we get to lower 0:04:03.520 --> 0:04:06.960 inflation and slower growth and rolling over in some of 0:04:06.960 --> 0:04:10.200 these sectors of the economy that are particularly interest very sensitive, 0:04:11.000 --> 0:04:13.240 will they really be able to follow through on that. 0:04:13.320 --> 0:04:15.520 Will they actually need to follow through on that, or 0:04:15.560 --> 0:04:17.960 can they slow down the case? Then you add in 0:04:18.120 --> 0:04:21.520 q T, which I think is being underestimated as a 0:04:21.560 --> 0:04:25.400 factor here, and um, you've got a lot of tightening 0:04:25.520 --> 0:04:29.440 in liquidity coming into the market just in the last 0:04:29.440 --> 0:04:32.400 couple of months and maybe over of course the next 0:04:32.480 --> 0:04:34.520 couple of months. So we get to the end of 0:04:34.520 --> 0:04:37.440 the year, I think the pictures that will look a 0:04:37.520 --> 0:04:39.919 lot different and the fab will be able to slow 0:04:40.000 --> 0:04:42.559 down a bit. Just quickly here, Kathy, we were talking 0:04:42.600 --> 0:04:45.000 to Francis about how she thinks we're getting close to 0:04:45.000 --> 0:04:47.200 the peak that we're going to see in tenure yields 0:04:47.200 --> 0:04:48.800 A pretty bold call when you've got the likes of 0:04:48.800 --> 0:04:51.240 credit Sueee coming out in the opposite side, say, we 0:04:51.240 --> 0:04:53.960 could see two point eight percent on the tenure because 0:04:53.960 --> 0:04:56.320 of the same thing that you just mentioned, quantity of tightening. 0:04:56.480 --> 0:04:59.640 Where do you fall on this, Yeah, I don't think 0:05:00.080 --> 0:05:03.120 TATA tightening is negative for the long end um. I 0:05:03.520 --> 0:05:06.440 don't see that supply wing on the long end. Most 0:05:06.480 --> 0:05:08.240 of it. At the short end of the curve, they've 0:05:08.240 --> 0:05:10.560 got an MBS and we don't know, you know, what 0:05:10.600 --> 0:05:13.279 they're going to do with that yet, but that's probably 0:05:13.279 --> 0:05:15.280 a lot shorter duration than it looks like on the 0:05:15.640 --> 0:05:19.360 balance sheet. So I don't think QT weighed so much 0:05:19.480 --> 0:05:21.200 on the long end of the curve. And if you 0:05:21.320 --> 0:05:24.400 go back to the last period of QT, we actually 0:05:24.400 --> 0:05:27.160 saw some curve flattening and yields fall. So I think 0:05:27.240 --> 0:05:31.400 QT is more of a liquidity drain and that's a 0:05:31.520 --> 0:05:35.280 slowing growth story. And you know, don't don't forget we're 0:05:35.320 --> 0:05:39.280 getting tightening liquidity and higher rates globally, so that can 0:05:39.400 --> 0:05:42.640 compound it on top up the war situation, where you know, 0:05:42.680 --> 0:05:44.560 we really have a lot of uncertain So, Cathy, you 0:05:44.600 --> 0:05:46.680 think that we've seen the peak so far in ten 0:05:46.720 --> 0:05:50.240 your yields, I think we're pretty close to it. So 0:05:50.480 --> 0:05:52.640 you know we're Our call for this year was around 0:05:52.640 --> 0:05:55.200 two in a quarter and the ten year ending UH 0:05:55.480 --> 0:05:57.320 to an a quarter or so on the ten year, 0:05:57.400 --> 0:06:00.560 so we think as rates move of that to what 0:06:00.560 --> 0:06:02.800 it's two and a half or above UM, we'll be 0:06:02.839 --> 0:06:06.960 extending delation. Cathy Jones, joshuav Kathy, wonderful to catch up 0:06:06.960 --> 0:06:13.720 with you as a wis. Andrew Weiss joins us to 0:06:14.080 --> 0:06:18.480 this morning, vice president at Carnegie and dommad for International Peace. Andrew, 0:06:18.520 --> 0:06:21.640 I want to talk about autocracy from the past. It's Hitler, 0:06:21.800 --> 0:06:25.400 it's Stalin. Putin has mentioned this, We have Putin, we 0:06:25.480 --> 0:06:28.400 have a massive win in Hungary with Orbon as well. 0:06:28.880 --> 0:06:33.400 How do we control, manage, or end these outcomes of 0:06:33.440 --> 0:06:38.880 autocracy as we see in Ukraine. So it's great to 0:06:38.880 --> 0:06:42.000 be here with you. Tom. I am always skeptical that 0:06:42.080 --> 0:06:46.600 the United States has within its power great ability to 0:06:46.600 --> 0:06:50.440 shift the ultimate political direction of Russia. And as much 0:06:50.480 --> 0:06:54.560 as what President Putin is doing in Ukraine is horrible, 0:06:55.120 --> 0:06:58.560 and as much as the world must level, whatever tools 0:06:58.600 --> 0:07:02.839 it has to try to slow down Russia's war in Ukraine. 0:07:03.400 --> 0:07:06.640 We need to be realistic that regime change in Russia 0:07:06.839 --> 0:07:11.640 is something that has looted Western policymakers now throughout Putin's tenure, 0:07:12.200 --> 0:07:14.920 and every day Ludie Murputin wakes up when he comes 0:07:14.960 --> 0:07:18.720 into work, he's mostly concerned about the safety and survival 0:07:18.760 --> 0:07:21.800 of his regime, and he's prepared to escalate and do 0:07:22.000 --> 0:07:25.760 things to protect himself against that threat. And that's been 0:07:25.800 --> 0:07:28.800 basically what's been animating him throughout the past two decades. 0:07:29.160 --> 0:07:32.720 If the people of Russia and the various peoples of 0:07:32.800 --> 0:07:37.080 Russia find out what's going on, will they give him 0:07:37.160 --> 0:07:42.040 support or will they walk away from Mr? Putin? We 0:07:42.120 --> 0:07:46.080 need to be careful about what Russians are willing and 0:07:46.200 --> 0:07:48.880 aren't willing to accept. And one of my colleagues at 0:07:48.960 --> 0:07:52.520 Carnegie Mosca Center wrote about this very powerfully in Russian 0:07:52.600 --> 0:07:56.600 earlier this week. Russians are living in an information vacuum, 0:07:57.040 --> 0:07:59.640 and for the most part, they are doing that by choice. 0:07:59.840 --> 0:08:03.400 They are not seeking out the truth. They don't believe 0:08:03.440 --> 0:08:06.640 that their country is responsible for atrocities or war crimes 0:08:06.640 --> 0:08:10.240 in Ukraine. And if we puncture, that information bubble, which 0:08:10.360 --> 0:08:12.960 is a big if. I'm not sure that people in 0:08:13.040 --> 0:08:16.080 Russia are prepared to take action to deal with the 0:08:16.120 --> 0:08:19.320 problem of living in a country that's ruled by Vladimir Putin. 0:08:19.400 --> 0:08:22.360 And that's just for a very simple reason. The instruments 0:08:22.400 --> 0:08:25.040 of repression that Ludimur Putin has built up over the 0:08:25.080 --> 0:08:28.640 past two decades are intimidating. They are prepared to use 0:08:28.720 --> 0:08:33.480 violence and other measures to keep Russians off the streets 0:08:33.520 --> 0:08:36.960 and to prevent political descent from spilling over into questions 0:08:36.960 --> 0:08:39.679 of how their country is ruled. And you see that 0:08:39.760 --> 0:08:43.160 level of fear among average people as well as the elite. 0:08:43.440 --> 0:08:47.160 And so for the West to be banking on either 0:08:47.320 --> 0:08:50.800 a split within the elite or bottom up pressure on 0:08:50.840 --> 0:08:53.720 the regime to take care of our putent problem, I 0:08:53.760 --> 0:08:56.880 think is is really unrealistic. The way we're going to 0:08:56.960 --> 0:08:59.720 deal with our putent problem is action by Western leaders. 0:08:59.760 --> 0:09:02.960 It's not going to come from within Russia itself. Unfortunately, 0:09:03.200 --> 0:09:05.800 where does China fit into this? Andrew given the fact 0:09:05.840 --> 0:09:08.080 that over the weekend and frankly yesterday the New York 0:09:08.080 --> 0:09:11.400 Times put out an article talking about propaganda that China 0:09:11.480 --> 0:09:13.959 has made that actually pays Vladimir Putin in a very 0:09:14.040 --> 0:09:17.960 nice light for some of the party members. So I 0:09:18.000 --> 0:09:19.960 think a lot of what China is providing right now 0:09:20.040 --> 0:09:22.840 is moral support, as you say, in the propaganda sphere, 0:09:22.960 --> 0:09:27.920 in terms of supporting Russia's lies about possible biological weapons 0:09:27.920 --> 0:09:30.240 and things like that that it claims Ukraine has, all 0:09:30.280 --> 0:09:32.920 of which is made up whole cloth. But when it 0:09:32.960 --> 0:09:36.000 comes to the ways Russian needs help right now, the 0:09:36.120 --> 0:09:39.120 main support China is going to be providing is by 0:09:39.200 --> 0:09:43.120 providing the bid on Russian oil and gas resources, which 0:09:43.200 --> 0:09:46.240 China advise on, you know, sort of at the moment 0:09:46.520 --> 0:09:51.160 of as much as it wants from Russia. The longer 0:09:51.240 --> 0:09:54.440 term problem for Russia is that China cannot be expected 0:09:54.480 --> 0:09:57.080 to be the back stop and the fiscal authority for 0:09:57.200 --> 0:10:00.800 its its government. And so as Russia comes under increase 0:10:00.880 --> 0:10:03.800 pressure from Western sanctions, it's going to be turning to 0:10:03.920 --> 0:10:06.720 China out of desperation. It's going to be looking to 0:10:06.840 --> 0:10:09.920 China to be its its savior. I'm so I would 0:10:09.960 --> 0:10:13.880 be very surprised, particularly in the technological area, which is 0:10:13.920 --> 0:10:18.080 affected by Western export controls, if Chinese firms are gonna 0:10:18.080 --> 0:10:20.760 be willing to step up and provide inputs to the 0:10:20.800 --> 0:10:25.760 Russiant industrial sector that it can't buy now from the West. Andrew, 0:10:26.120 --> 0:10:27.599 just to wrap things up, and we only have a 0:10:27.640 --> 0:10:29.600 little bit of time, what do you think the West 0:10:29.679 --> 0:10:31.680 could do to bring this to an end more quickly. 0:10:32.840 --> 0:10:34.920 I think that the West is going to keep ratcheting 0:10:35.000 --> 0:10:37.400 up sanctions. The problem isn't is that there isn't a 0:10:37.440 --> 0:10:40.600 ton of headroom left short of a full scale embargo 0:10:40.800 --> 0:10:44.000 on the Russian economy. And so if the West is prepared, 0:10:44.040 --> 0:10:47.000 for example, to cut off all imports of Russian oil 0:10:47.000 --> 0:10:49.680 and gas, which I think Germany is not willing to 0:10:49.760 --> 0:10:52.560 countenance at this point, If the West is not prepared 0:10:52.559 --> 0:10:54.520 to go to that length, I think the most likely 0:10:54.559 --> 0:10:57.480 outcomes that this more simply drags on, and over time 0:10:57.480 --> 0:11:00.640 it's likely to morph into something similar of the Balkans 0:11:00.679 --> 0:11:04.360 Wars of the nies on a much vaster scale. Andrew, 0:11:04.400 --> 0:11:06.800 we appreciate your time. It's a clinic thrill of us, Andrew. 0:11:06.800 --> 0:11:15.400 Watch that of the Econogy Endowment. It's Francis Donald, Global 0:11:15.480 --> 0:11:18.959 Chief Economists, Manual Life Investment. We're thrilled that she could 0:11:19.040 --> 0:11:21.520 join us this morning. Francis, I love what you say 0:11:21.640 --> 0:11:25.240 about Jerome Powell, He's going to be boxed in and 0:11:25.280 --> 0:11:29.920 the to distill your really good paragraphs, you're looking for 0:11:29.960 --> 0:11:36.160 a steep downturn in manufacturing. Expand on that. Every leading 0:11:36.200 --> 0:11:38.760 indicator we have of p M I S tells us 0:11:38.840 --> 0:11:42.120 they're heading lower. Frankly, every leading indicator we have of 0:11:42.160 --> 0:11:44.960 the economy tells us that it's heading sharply lower in 0:11:45.000 --> 0:11:47.920 the next six months. And that means, as you said earlier, 0:11:47.960 --> 0:11:49.920 that a lot of the information we have, like FED 0:11:50.040 --> 0:11:53.000 minutes or how data was in January or February or March, 0:11:53.360 --> 0:11:55.880 is really looking sale to me. When I look forward 0:11:55.960 --> 0:11:58.080 over what the FED is facing in the next six 0:11:58.160 --> 0:12:01.200 to nine months, We're gonna have still inflation, but their 0:12:01.200 --> 0:12:04.040 mandate focus is going to have to shift back towards 0:12:04.040 --> 0:12:07.600 the employment side of the picture as growth really softens. 0:12:07.640 --> 0:12:10.000 And that's why if you're marking to market shirt that 0:12:10.240 --> 0:12:12.600 looks like it could go eight nine times this year, 0:12:12.600 --> 0:12:16.000 if you're looking forward into what the settle facing, much 0:12:16.080 --> 0:12:18.200 more difficult to see how they're going to be able 0:12:18.240 --> 0:12:20.400 to hike either as much as they want to or 0:12:20.440 --> 0:12:23.559 the market has prices. The anti Holland horse, do they 0:12:23.559 --> 0:12:25.320 come on and say one and done if they go 0:12:25.400 --> 0:12:28.240 fifty beeps, or do they play it out, say into 0:12:28.280 --> 0:12:32.280 the summer and then go enough. That pivot probably happens 0:12:32.280 --> 0:12:34.560 closer to the end of Q two or Q three 0:12:34.559 --> 0:12:36.800 because they're gonna need cover to do it. You can't 0:12:36.840 --> 0:12:39.800 make a one eight until the data has changed. I 0:12:39.840 --> 0:12:42.320 think they may start focusing on how the nature of 0:12:42.360 --> 0:12:47.920 inflation has shifted. We're moving from COVID inflation to conflict inflation. 0:12:48.000 --> 0:12:52.160 That's a really important inflection point. It's a different composition 0:12:52.160 --> 0:12:55.120 of inflation. In mind you, it's much more damaging to 0:12:55.240 --> 0:12:57.599 growth and COVID inflation. Hey, if you didn't want to 0:12:57.640 --> 0:13:00.000 run kitchen or build a pool, or buy a used 0:13:00.040 --> 0:13:02.920 car while you just went without. With conflict inflation, we're 0:13:02.920 --> 0:13:05.160 going to see a lot more demand destruction. Even its 0:13:05.160 --> 0:13:07.880 headline inflation declined. The feed is going to have to 0:13:07.920 --> 0:13:10.319 face that full on. The prentis if we clarify the 0:13:10.360 --> 0:13:13.640 reaction function of this FED given the opportunity, given the 0:13:13.640 --> 0:13:16.680 decision a toxic one at that, to curtail inflation or 0:13:16.679 --> 0:13:20.160 safety economy from recession, which one would they choose? Well, 0:13:20.240 --> 0:13:23.480 Paula has suggested that he's more in the Volker Camp 0:13:23.480 --> 0:13:26.440 than save growth Camp. I think it's really interesting that 0:13:26.480 --> 0:13:28.640 we've moved from oh, it's gonna be the war in 0:13:28.760 --> 0:13:31.920 twenties and it's a reflation trade for years to most 0:13:31.920 --> 0:13:34.640 shops debating whether it's a technical recession or just the 0:13:34.760 --> 0:13:38.160 growth slowdown in a period of time. It does appear 0:13:38.280 --> 0:13:40.880 that the central bank is willing to sacrifice growth. That's 0:13:40.920 --> 0:13:44.679 how monetary policy effectively works. And this market telling us 0:13:44.679 --> 0:13:47.600 it's pricing and cuts over the next few years already 0:13:47.800 --> 0:13:51.240 suggests that the reaction function the FED has so far 0:13:51.320 --> 0:13:54.040 told us is that, yeah, it's willing to sacrifice growth 0:13:54.160 --> 0:13:56.880 in order to con inflation. I think that makes sense 0:13:56.960 --> 0:13:59.680 now when inflation is really high and growth feels like 0:13:59.679 --> 0:14:02.160 it's repeating, it's not gonna feel like it makes as 0:14:02.240 --> 0:14:04.760 much sense from three to six months Francis JP Morgan 0:14:04.840 --> 0:14:08.079 taking some comfort in the upcoming mechanical peak in inflation. 0:14:08.240 --> 0:14:10.360 That's a mechanical peak, Francis, Can you run us through 0:14:10.559 --> 0:14:12.640 when the base effects not to kick in the other 0:14:12.679 --> 0:14:17.640 white and when you suggest that mechanical peak inflation would develop, Oh, 0:14:17.679 --> 0:14:21.320 it's around March or April. But again, I really did 0:14:21.360 --> 0:14:23.640 take a lot of comfort in that mechanical peak. I've 0:14:23.680 --> 0:14:26.040 been in the transitory camp, even though it kind of 0:14:26.040 --> 0:14:29.680 became bad to say that because COVID inflation was always 0:14:29.680 --> 0:14:32.280 going to be transitory. But we really have to move 0:14:32.320 --> 0:14:36.840 away from the mechanical peaks and inflation towards the compositional nature. 0:14:37.160 --> 0:14:40.720 We've been complacent about the damaging impacts of inflation on 0:14:40.800 --> 0:14:44.880 growth because where inflation was coming from was not necessary goods. 0:14:45.080 --> 0:14:47.600 But this conflict inflation is going to create a much 0:14:47.640 --> 0:14:50.240 bigger drag on growth, even if it's a lower number. 0:14:50.440 --> 0:14:52.080 And that's why the FET is going to have this 0:14:52.240 --> 0:14:55.040 covered for a pivot later this year. Inflation will look 0:14:55.080 --> 0:14:57.040 a little bit better on the surface. We're all going 0:14:57.080 --> 0:14:58.680 to feel it a little bit more in our day 0:14:58.680 --> 0:15:01.680 to day lives. For TIS, I'm trying to game out 0:15:01.720 --> 0:15:03.360 forty six months from now, and you think that we're 0:15:03.400 --> 0:15:06.280 going to start to see the FED shifts stances back 0:15:06.320 --> 0:15:08.800 to something that seems more concerned about the labor market 0:15:09.120 --> 0:15:12.320 than simply inflation. How high do you expect the inflation 0:15:12.400 --> 0:15:14.920 rate to be if we do get those base effects 0:15:14.920 --> 0:15:18.560 the other way. Well, I'll give you an example. Prior 0:15:18.680 --> 0:15:22.040 to Russia's invasion of Ukraine, we had inflation and may 0:15:22.080 --> 0:15:24.440 at the bottom and the two percent range at the 0:15:24.520 --> 0:15:26.680 end of this year. Now it's closer to the four 0:15:26.760 --> 0:15:28.920 to five percent range. But when they do the same 0:15:29.040 --> 0:15:31.280 the exercise of looking out five years, when we get 0:15:31.280 --> 0:15:34.760 to three and beyond, our inflation forecast is back to two. 0:15:35.520 --> 0:15:38.040 On March sixteenth, cheer Powell was asked how much of 0:15:38.080 --> 0:15:40.760 this year's inflation do you expect to come down because 0:15:40.800 --> 0:15:43.000 of your rate heights? He said, the most important thing, 0:15:43.000 --> 0:15:45.440 he said in months, Well, we actually can't combat this 0:15:45.520 --> 0:15:47.920 year's inflation. We're trying to target the next few years. 0:15:48.120 --> 0:15:50.160 The next two years are not the problem for inflation. 0:15:50.200 --> 0:15:53.600 Inflation is a problem in two and there's very little 0:15:53.640 --> 0:15:55.760 the FED can do about it. Francis, the reason why 0:15:55.760 --> 0:15:58.080 transitory became a dirty word is because the FED got 0:15:58.080 --> 0:16:00.960 it wrong. The FED got inflation wrong on many levels 0:16:01.160 --> 0:16:03.240 in terms of what their policy was. This is the 0:16:03.280 --> 0:16:06.240 accusation in a lot of academic and frankly, market circles. 0:16:06.640 --> 0:16:09.760 Where does the credibility come from for the Federal Reserve? 0:16:09.840 --> 0:16:12.000 For them to make that pivot at a time when 0:16:12.000 --> 0:16:15.840 inflation is still four to five percent, Well, what a challenge, right, 0:16:15.840 --> 0:16:18.400 and all central banks understand that they can high rates 0:16:18.400 --> 0:16:20.000 as much as they want, it's not going to bring 0:16:20.000 --> 0:16:23.000 down energy prices. And that's why paying attention to long 0:16:23.120 --> 0:16:26.600 term inflation expectations is so key, because central banks will 0:16:26.640 --> 0:16:28.680 continue to try to convince us that they have some 0:16:28.720 --> 0:16:31.400 control over that the Lisa. This brings to question a 0:16:31.400 --> 0:16:33.680 longer term issue that I think central banks are going 0:16:33.720 --> 0:16:35.640 to have to face, which is the inflation of the 0:16:35.680 --> 0:16:37.840 next ten years looks different than the inflation of the 0:16:37.840 --> 0:16:39.960 past ten years. It's going to be focused on the 0:16:40.080 --> 0:16:43.640 globalization and E s G trends much more supply side, 0:16:43.720 --> 0:16:46.320 much more global than the inflation week saying frankly the 0:16:46.360 --> 0:16:48.680 past several decades. So there is going to come into 0:16:48.800 --> 0:16:52.600 question how much control do central banks have on future 0:16:52.680 --> 0:16:56.320 inflation post COVID inflation than they did before. Let's hope 0:16:56.360 --> 0:16:58.760 they can control that long end of the inflation curve. 0:16:58.840 --> 0:17:01.280 So far, we're still seeing the break even inverted. That's 0:17:01.320 --> 0:17:03.680 good news, but I suspect we're gonna hear a lot 0:17:03.760 --> 0:17:06.840 more comments about their extending mandate. That wouldn't surprise me. 0:17:07.040 --> 0:17:09.320 So Francis, let's put the other hand, what's the big 0:17:09.359 --> 0:17:15.080 market kill? We are moving more defensively, So I tweeted yesterday, 0:17:15.200 --> 0:17:17.760 recession or no recession on your outlook, growth is gonna 0:17:17.840 --> 0:17:21.680 slow pretty significantly, and that means moving more defensively as 0:17:21.720 --> 0:17:23.639 we head into that growth slow down. I do not 0:17:23.760 --> 0:17:26.440 believe it is entirely priced right now, and I thinke 0:17:26.480 --> 0:17:29.239 sure we could see some upside in yield, especially as 0:17:29.280 --> 0:17:32.119 we see ongoing hawk and rish from the Fed. When 0:17:32.200 --> 0:17:34.280 you look at that forty year down trend in that 0:17:34.320 --> 0:17:36.800 tenure yield, I'm a believer we can't yet break out 0:17:36.800 --> 0:17:38.840 of it. That means we're probably near the peak in 0:17:38.840 --> 0:17:41.240 this rates mooth. Then we go. Francis don't know of 0:17:41.280 --> 0:17:43.600 manual life investment management with a big colt right at 0:17:43.600 --> 0:17:49.919 the end there, Francis, thank you very much. Into the 0:17:49.960 --> 0:17:54.159 second quarter. What to do after negative eight percent and 0:17:54.240 --> 0:17:57.640 bond price after challenges for the equity market with all 0:17:57.680 --> 0:18:00.600 of us news, Sarah Hunt joins portfolio manager of the 0:18:00.600 --> 0:18:04.480 Alpine Woods. Are the real tangible effort of what do 0:18:04.520 --> 0:18:07.399 you do with a portfolio? What is the single change 0:18:07.640 --> 0:18:12.120 you've made April one. I'm not sure that we've made 0:18:12.119 --> 0:18:14.359 any single changes in April one. I mean, if you 0:18:14.400 --> 0:18:17.000 think about the larger economic backdrop which you were just 0:18:17.040 --> 0:18:20.359 discussing with commodities and everything else. You've had years of 0:18:20.400 --> 0:18:22.960 history where the O E C. D countries have basically said, 0:18:23.200 --> 0:18:24.800 we're not going to do a lot, We're gonna try 0:18:24.800 --> 0:18:26.920 to move some of this stuff like mining and oil 0:18:26.960 --> 0:18:30.120 production outside of these areas. And now this is coming 0:18:30.160 --> 0:18:32.000 back to be a real problem when you start to 0:18:32.040 --> 0:18:35.520 have geopolitical problems like we're seeing right now with Russian 0:18:35.560 --> 0:18:38.359 the Ukraine, which is just horrible, and countries now trying 0:18:38.400 --> 0:18:39.920 to figure out what do I do now that I've 0:18:39.960 --> 0:18:42.240 outsourced all of my energy production and some of the 0:18:42.280 --> 0:18:46.000 other production to other places. We had already been moving 0:18:46.040 --> 0:18:48.200 in the direction of realizing that the FED was raising 0:18:48.320 --> 0:18:51.359 rates and getting to more stable things in the portfolio, 0:18:51.440 --> 0:18:54.000 higher cash flows, better balance sheets, things of that nature. 0:18:54.320 --> 0:18:56.399 So it's not a huge change right now, but it 0:18:56.560 --> 0:18:59.480 is looking at how do we take advantage of what 0:18:59.520 --> 0:19:01.960 we think is coming in the future. And unfortunately, I 0:19:02.000 --> 0:19:04.360 don't see energy prices coming down that quickly. I don't 0:19:04.359 --> 0:19:06.560 see food prices coming down that quickly, and I think 0:19:06.600 --> 0:19:09.160 that's gonna be a real problem globally, and it's gonna 0:19:09.200 --> 0:19:11.399 be a problem ultimately for equities as well. Let's talk 0:19:11.400 --> 0:19:13.879 about where that problem is concentrated and what you're pulling 0:19:13.880 --> 0:19:17.359 back from, Sarah, can you be more specific? Well, So 0:19:17.400 --> 0:19:19.960 we added some energy towards the beginning of the year 0:19:20.000 --> 0:19:23.280 because it was clear that even before the Russia Ukraine situation, 0:19:23.560 --> 0:19:25.520 the fact that there has been a pullback in the 0:19:25.600 --> 0:19:28.480 investment in the hydrocarbon space because people are looking for 0:19:28.840 --> 0:19:31.720 newer ways to produce energy, has meant that you've seen 0:19:31.800 --> 0:19:34.399 an under investment, and as prices were starting to go up, 0:19:34.400 --> 0:19:36.159 it started to look like that could be something that 0:19:36.240 --> 0:19:39.000 was going to continue, and the Russian Ukraine situation just 0:19:39.080 --> 0:19:41.639 exacerbated that. So we added some energy in the beginning 0:19:41.640 --> 0:19:45.040 of the year. There's also places where on the technology side, 0:19:45.200 --> 0:19:48.000 you saw some stocks come down quite dramatically in the 0:19:48.080 --> 0:19:50.080 last couple of months. So we looked at some of 0:19:50.080 --> 0:19:53.720 those large franchises like Adobe that we didn't have representation, 0:19:53.920 --> 0:19:55.880 and we put some money to work there as well. 0:19:55.960 --> 0:19:57.280 What do you make in the movement a home build 0:19:57.359 --> 0:20:00.160 US Yet today it's been pretty great, So Sarah talk 0:20:00.160 --> 0:20:02.560 about the economy to eat in America. We told it's great, 0:20:02.600 --> 0:20:05.680 but the forward look, given rising interest rates, the homebuilders 0:20:05.680 --> 0:20:08.760 have been hammered. Well, I think that. I mean, we'll 0:20:08.760 --> 0:20:10.840 see how that actually plays out. But similar to some 0:20:10.880 --> 0:20:13.080 of the technology stocks getting hit very early in the 0:20:13.119 --> 0:20:16.600 year on the back of the potential of rising interest rates, um, 0:20:16.640 --> 0:20:18.560 I think that part of the problem with housing is 0:20:18.600 --> 0:20:20.760 that that playbook says that when rates go up, housing 0:20:20.800 --> 0:20:23.520 comes down. But you've had such under investment and there's 0:20:23.520 --> 0:20:27.000 such a demand for for housing, especially on the lower end, 0:20:27.240 --> 0:20:30.280 and the unintended consequences of the Great Financial Crisis making 0:20:30.640 --> 0:20:33.560 single family housing and investment class has also taken the 0:20:33.560 --> 0:20:36.440 ability for people to buy those single family houses out 0:20:36.440 --> 0:20:38.200 of the market. So I think the demand is there. 0:20:38.200 --> 0:20:41.520 The question is going to be what happens with pricing, materials, labor, 0:20:41.560 --> 0:20:43.960 All those costs are going higher. What's the best head 0:20:44.040 --> 0:20:45.960 right now? Sarah? If there is this feeling that we 0:20:46.000 --> 0:20:48.920 are heading into a slowdown, is it on the margins 0:20:49.040 --> 0:20:53.040 certain US equities? Well, I think that we go back 0:20:53.080 --> 0:20:55.320 to the fact that once again the US equity market 0:20:55.400 --> 0:20:58.160 tends to be the strongest when things are weakest globally. 0:20:58.440 --> 0:21:00.399 And I think that the U s economy, even with 0:21:00.480 --> 0:21:02.240