WEBVTT - JPMorgan's Bob Michele Talks Interest Rates 0:00:02.520 --> 0:00:07.040 Bloomberg Audio Studios, podcasts, radio news. 0:00:07.840 --> 0:00:10.200 We are advantage in particularly that we're not under the 0:00:10.200 --> 0:00:13.480 time pressure of the feddicides to have someone that's been 0:00:13.480 --> 0:00:17.280 a foundation of our thinking about our central bank and 0:00:17.480 --> 0:00:20.520 Bill's notes and bombs. Boy Michael joins us now CIO, 0:00:21.079 --> 0:00:25.520 head of GFIICC. 0:00:26.079 --> 0:00:30.040 Global Fixed Income, Currency and Commodities. Got it all, got 0:00:30.080 --> 0:00:30.520 them all. 0:00:31.280 --> 0:00:33.680 He attended every restaurant in the new building and they 0:00:33.720 --> 0:00:38.279 came mat Hoarium, JP Morgan Investment Management. Do you know 0:00:38.479 --> 0:00:41.040 what worst strategy is yet. 0:00:41.960 --> 0:00:45.080 Other than to set up task forces, it's not clear 0:00:45.600 --> 0:00:46.240 will it take. 0:00:46.360 --> 0:00:50.040 Based on the history of central bankers. Powell, for example. 0:00:50.400 --> 0:00:53.240 We think his hand will be for sooner than he 0:00:53.440 --> 0:00:56.800 likes it. Clearly, by having the task force come back 0:00:57.160 --> 0:00:59.800 at year end, he wants to glide into twenty twenty 0:00:59.840 --> 0:01:03.280 seven without having to do much. But the markets move, 0:01:03.360 --> 0:01:08.160 the economy moves, the summers tend to be a crucible 0:01:08.240 --> 0:01:12.000 of intensity, So we think by the September meeting he's 0:01:12.040 --> 0:01:13.240 going to have a plan. 0:01:13.400 --> 0:01:15.480 I gotta get I gotta get this, and it's too important. 0:01:15.520 --> 0:01:19.760 Paul's got a million smart questions. I'm assuming James Diamond 0:01:20.080 --> 0:01:24.080 hates task forces with a passion. What do you expect 0:01:24.120 --> 0:01:27.319 to get out of a task force plural from the Fed? 0:01:28.640 --> 0:01:31.759 Well, it depends who's leading them and who's on them. 0:01:32.080 --> 0:01:36.400 I think they'll come back with very thoughtful ideas. In 0:01:36.440 --> 0:01:39.480 the end, you don't set up task forces unless you 0:01:39.520 --> 0:01:44.080 already know the answer. So he knows the answer. It's 0:01:44.200 --> 0:01:46.560 just a matter of seeing if he can pin it 0:01:46.600 --> 0:01:49.120 on the task force or just go ahead and say 0:01:49.160 --> 0:01:50.880 do it this way runs it folks. 0:01:50.920 --> 0:01:54.280 So you've just heard there absolutely perfect, Tom. 0:01:54.280 --> 0:01:55.960 I don't want to say Bob is old here, but 0:01:56.160 --> 0:01:58.600 let's just say he's been around the block once or twice. 0:01:58.640 --> 0:02:01.640 Look at this note, This bond market looks fair value. 0:02:01.680 --> 0:02:04.200 We expect a ten year US treasury to trade between 0:02:04.520 --> 0:02:07.560 four and one eighth and four and five aays he's 0:02:07.640 --> 0:02:11.720 quoting fraction. I mean, who does that anymore? But Bob 0:02:11.760 --> 0:02:14.079 Michael talk to us about that ten year. I mean, 0:02:14.480 --> 0:02:16.560 it feels like we are where we are, and that's 0:02:16.639 --> 0:02:20.360 kind of where the market feels pretty comfortable here. What 0:02:20.360 --> 0:02:23.560 do we do here with rates here where they are? 0:02:23.680 --> 0:02:25.839 Well, in two and a half months, we went from 0:02:25.880 --> 0:02:30.400 three ninety too close to four seventy and both of 0:02:30.440 --> 0:02:33.360 those proved to be extremes. We're somewhere in the middle. 0:02:33.840 --> 0:02:38.160 We're pricing in one, possibly two FED rate hikes. I 0:02:38.200 --> 0:02:41.400 think four and five eighths covers you for two rate hikes. 0:02:41.560 --> 0:02:43.480 I think when you get down to four and an 0:02:43.480 --> 0:02:46.480 eighth probably you don't have enough yield in the market 0:02:46.520 --> 0:02:49.399 to cover you for a rate hiker two. So we're 0:02:49.440 --> 0:02:53.480 saying the bond market looks pretty good right now. It 0:02:53.680 --> 0:02:57.160 has a repricing. The FED if they come in and 0:02:57.280 --> 0:03:01.080 lean into growth and inflation pressures, they don't need to 0:03:01.200 --> 0:03:04.239 do a lot. Maybe one or two maintenance hikes. Join 0:03:04.280 --> 0:03:06.120 the other central banks, but that's about it. 0:03:06.760 --> 0:03:08.560 How much credit risk are you taking these days? 0:03:09.160 --> 0:03:12.959 We're taking a lot. We've had our investment quarterly. Last 0:03:12.960 --> 0:03:17.480 week we tried, as bond investors do, to poke holes 0:03:17.520 --> 0:03:20.360 in the economy and I prove that either it's about 0:03:20.400 --> 0:03:24.079 to collapse or melt up in a fireball of growth 0:03:24.080 --> 0:03:28.120 and inflation. And instead what we saw is that businesses 0:03:28.200 --> 0:03:32.359 are rationally putting together capex plans. There's a lot going on. 0:03:32.680 --> 0:03:36.560 When we think about sovereigns away from the US, they're 0:03:36.600 --> 0:03:41.720 also thinking about investing. Everyone wants energy security, everyone wants 0:03:41.760 --> 0:03:45.040 defense of their borders. Everyone has to invest in AI. 0:03:45.480 --> 0:03:48.160 So these are things that will keep the underlying trend 0:03:48.240 --> 0:03:49.800 rate of the global economy going. 0:03:50.120 --> 0:03:52.840 Does that include emerging markets as well? 0:03:53.000 --> 0:03:56.760 Well? Emerging markets are the pleasant surprise of the year 0:03:56.920 --> 0:04:01.040 so far. Here as yet another shot that they survive. 0:04:01.160 --> 0:04:04.360 They survive the FEDS five hundred and twenty five basis 0:04:04.360 --> 0:04:09.600 point rate hikes never happened before, they survive COVID, and 0:04:09.680 --> 0:04:14.160 now they're surviving an oil shot. It's a little bit 0:04:14.240 --> 0:04:19.039 more nuanced. We had owned the energy exporters. We've now 0:04:19.120 --> 0:04:22.600 gone back to the importers. But when you look at 0:04:22.600 --> 0:04:26.640 the way China was able to cut imports of oil 0:04:26.920 --> 0:04:30.880 and repurpose how they get energy, it tells us that 0:04:30.960 --> 0:04:34.960 the emerging markets are maybe have developed faster than we 0:04:35.000 --> 0:04:38.480 want to give the term emerging markets credit for well, it's. 0:04:38.320 --> 0:04:41.560 Across America and worldwide. Bob Michael of JP Morgan here 0:04:42.160 --> 0:04:44.839 perspective from Bill's notes and bonds, of course, dragging it 0:04:44.880 --> 0:04:47.280 over to the equity markets as well. So I skimmed 0:04:47.279 --> 0:04:51.240 FAROLEI Weekly Prospects comes out every Friday evening. I've got 0:04:51.279 --> 0:04:53.240 a pause with the beverage of my choice. Paul to 0:04:53.600 --> 0:04:57.280 read Faroli on a team and what to say, And 0:04:57.320 --> 0:04:59.559 I'm sorry, it's a pretty balanced view, and I'm hearing 0:04:59.560 --> 0:05:02.960 from you a balance view. Bill Ackman is out today 0:05:03.360 --> 0:05:07.040 with the retreat of a plus plus plus on Hyperscalers. 0:05:07.480 --> 0:05:11.000 From a guy out of unit credit in Slovenia is well, 0:05:11.040 --> 0:05:15.640 there's all this heat, this ferment, this smoke and mirrors 0:05:15.760 --> 0:05:19.440 debate about AI. You guys are doing business in it. 0:05:19.720 --> 0:05:24.279 How are the bonds, the debt of AI hyperscalers being 0:05:24.360 --> 0:05:26.320 digested by the public. 0:05:26.720 --> 0:05:30.400 Well, so far they've been digested pretty well. I think 0:05:30.440 --> 0:05:34.599 we've all seen when a new technology revolution comes along, 0:05:34.920 --> 0:05:37.200 it's not all over in one or two years. It 0:05:37.240 --> 0:05:40.080 tends to run for a decade, and the first half 0:05:40.120 --> 0:05:43.800 of that decade is where the capex gets invested in. 0:05:43.839 --> 0:05:47.000 The second half is where you get the payback. The 0:05:47.279 --> 0:05:50.719 hyperscalers have very pristine balance sheets, so the amount of 0:05:50.760 --> 0:05:55.560 debt that they're adding is hardly noticeable on their leverage metrics. 0:05:55.600 --> 0:05:57.440 Do you look at them as a trunch now, an 0:05:57.440 --> 0:06:01.279 initial gazillion dollar trunch, and there'll be a second one 0:06:01.320 --> 0:06:03.760 into twenty seven and a third even Is it going 0:06:03.839 --> 0:06:07.640 to stagger forward twenty year, twenty year, twenty down the road. 0:06:08.120 --> 0:06:11.120 Well, you look at what some of them have raised, 0:06:11.760 --> 0:06:14.880 and you wonder where it is other than sitting in 0:06:15.120 --> 0:06:19.080 cash or some sort of short duration account, because they 0:06:19.080 --> 0:06:22.599 aren't fully spent yet. So yeah, it's possible they'll be 0:06:22.720 --> 0:06:25.680 back next year. I think they have to start spending 0:06:25.760 --> 0:06:28.760 what they've raised so far, and that takes some time. 0:06:29.560 --> 0:06:32.839 Pat do you think about all this technology debt coming 0:06:32.839 --> 0:06:36.600 to the marketplace, because this is these companies haven't historically 0:06:36.640 --> 0:06:39.920 been in your market raising capital, but it seems to 0:06:39.920 --> 0:06:41.360 have been well received so far. 0:06:42.120 --> 0:06:45.960 We're impressed because certainly you get warried that trillions of 0:06:46.000 --> 0:06:49.400 dollars of debt could overwhelm the market. When we look 0:06:49.440 --> 0:06:55.440 at the Bloomberg Aggregate bond index, it's forty trillion, So 0:06:55.760 --> 0:06:58.680 a couple trillion here is not a lot of money. 0:06:58.760 --> 0:07:02.200 It's maybe about five percent, and that couple trillion will 0:07:02.240 --> 0:07:05.120 come in over three or four years. We've also been 0:07:05.120 --> 0:07:09.840 impressed about how intelligent the hyperscalars have been. They've diversified 0:07:09.880 --> 0:07:13.800 across markets. They've issued some in Euros, some in Conada dollars, 0:07:13.880 --> 0:07:17.120 there will be some in Mexico Peso, and some in 0:07:17.240 --> 0:07:20.840 Japanese yet, and then they've gone to some hybrid structures 0:07:21.400 --> 0:07:23.000 to finance the data centers. 0:07:23.320 --> 0:07:29.200 So JP Morgan gets five hundred thousand applications for summer rules, 0:07:29.400 --> 0:07:32.720 Oh wow, and they weeded out with an acceptance rate 0:07:33.200 --> 0:07:37.880 frankly under one percent to four thousand summer interns. Bob 0:07:37.960 --> 0:07:40.840 Michael's got to wander into a room with a bunch 0:07:40.840 --> 0:07:45.120 of emotional, really really smart, really competent kids. What's your 0:07:45.120 --> 0:07:47.239 first message to them? 0:07:47.440 --> 0:07:52.320 My first message is the way to differentiate yourself is 0:07:52.360 --> 0:07:56.120 to make use of the current tools that are available 0:07:56.160 --> 0:07:59.600 in the marketplace. That you know, the senior investors in 0:07:59.600 --> 0:08:03.160 the platt form aren't really that skilled at so AI 0:08:03.360 --> 0:08:06.040 is one. When I came into the industry, it was 0:08:06.120 --> 0:08:10.840 electronic spreadsheets. Do that, and secondly, observe what's going on. 0:08:11.240 --> 0:08:15.240 You'll see who the leaders are and the traits that 0:08:15.920 --> 0:08:20.160 are characteristic of them. You'll also see people who you 0:08:20.240 --> 0:08:24.400 feel well because of their characteristics and traits, they're being 0:08:24.440 --> 0:08:27.600 held back. So keep your eyes open and observe. 0:08:27.760 --> 0:08:30.240 I really emphasize the last thing you just said is 0:08:30.320 --> 0:08:33.480 forget about trying to find wonderful people like Kelsey Barrow. 0:08:33.880 --> 0:08:36.240 It is just an idea, figure out the people that 0:08:36.280 --> 0:08:39.320 aren't getting it done. That's the biggest lesson from an intern. 0:08:39.640 --> 0:08:42.120 You didn't mention this that part of the training of 0:08:42.120 --> 0:08:46.640 the jpborg an intern is to master the Bloomberg Professional Service. 0:08:46.840 --> 0:08:52.600 Of course, to nail technology. Okay, we do send them 0:08:52.600 --> 0:08:53.520 for training. 0:08:54.880 --> 0:08:57.520 Every day, coming to Bob Michael lecturing on the Bloomberg 0:08:57.600 --> 0:09:01.600 terminal to interns. The chairums at JP Morgan he drives 0:09:01.720 --> 0:09:04.720 all a fixed income for the bank.