WEBVTT - Less-Liquid Credit Markets Are Pushing Traders to CDX: 0:00:02.640 --> 0:00:05.560 Welcome to the Bloomberg Penil podcast and Paul Sweeney, along 0:00:05.600 --> 0:00:08.080 with my co host Lisa Brahma, each day we bring 0:00:08.119 --> 0:00:10.600 you the most noteworthy and useful interviews for you and 0:00:10.760 --> 0:00:13.280 your money, Whether at the grocery store or the trading floor. 0:00:13.400 --> 0:00:16.599 Find a Bloomberg Penil podcast on Apple podcast or wherever 0:00:16.640 --> 0:00:21.040 you listen to podcasts, as well as at Bloomberg dot com. 0:00:21.040 --> 0:00:25.160 Earlier today, UBS CEO Sergio er Maati sounded the alarm 0:00:25.239 --> 0:00:29.320 on fresh monetary easing, just as European policymakers appear poised 0:00:29.320 --> 0:00:33.320 to deliver yet another helping of stimulus to the markets 0:00:33.320 --> 0:00:36.080 that are expecting them. He was speaking with Bloomberg Television 0:00:36.159 --> 0:00:38.360 asked whether he is concerned that we may be headed 0:00:38.400 --> 0:00:41.760 towards bubble territory. Take a listen. Well, you know, I 0:00:41.760 --> 0:00:44.159 think that you can see in the second in the 0:00:44.200 --> 0:00:48.080 second quarter, yes, asset prices went top, but it's not 0:00:48.479 --> 0:00:52.040 really correlated with investor sentiment and which is in my 0:00:52.120 --> 0:00:56.640 point of view, of course, a very dangerous development. And 0:00:57.040 --> 0:00:59.800 the only good things is that we observe is that 0:01:00.000 --> 0:01:03.680 hash balances with clients is very high. Uh. What they 0:01:03.720 --> 0:01:05.679 say is that they are willing to step into the 0:01:05.720 --> 0:01:09.640 market if there is a major correction. But you know, 0:01:10.000 --> 0:01:13.840 hasset levels at such high level are are not necessarily 0:01:13.840 --> 0:01:17.440 correlated with investor sentiments. So this raises a question, are 0:01:17.520 --> 0:01:20.760 we seeing bubbles starting to form joining us now? Mike Buchanan, 0:01:20.800 --> 0:01:24.360 Deputy Chief investment Officer at Western Asset Management Co. Which 0:01:24.360 --> 0:01:27.360 oversees about four dred and thirty billion dollars and focuses 0:01:27.480 --> 0:01:32.080 on fixed income investing. Mike, you have decades of experience 0:01:32.160 --> 0:01:36.000 dating back to focused on credit markets. Do you see 0:01:36.480 --> 0:01:41.560 excesses starting to form that are looking a little bubble ishous? Um? 0:01:41.959 --> 0:01:44.800 You know, I think when you look at the developed 0:01:44.880 --> 0:01:49.560 credit markets, UM, we're not yet seeing those telltale signs 0:01:49.600 --> 0:01:52.520 that that signal an end in the cycle or even 0:01:52.600 --> 0:01:55.280 the you know kind of the the approaching doom and 0:01:55.360 --> 0:02:00.560 turning point in the cycle. Obviously, performance UM and just 0:02:00.640 --> 0:02:04.320 the longevity of this rally UM does make you anxious. 0:02:04.320 --> 0:02:07.520 It makes you nervous. But when we look at you know, 0:02:07.520 --> 0:02:09.560 a lot of the metrics that we try to track, 0:02:09.720 --> 0:02:12.079 the signal you know, what is this market going to 0:02:12.160 --> 0:02:15.720 look like fundamentally six months from now, a year from now, 0:02:16.080 --> 0:02:20.480 We're not really seeing a lot of evidence that suggesting UM, 0:02:20.720 --> 0:02:25.200 you know, bubble like territory. So, Mike, as we think 0:02:25.240 --> 0:02:28.040 about if not bubble like territory, just kind of maybe 0:02:28.040 --> 0:02:29.680 going the other way a little bit. I'm just thinking 0:02:29.720 --> 0:02:33.280 about the global economic outlook. UM. Europe continues to be 0:02:33.400 --> 0:02:36.840 very unsettled, with some real weakness developing even in Germany 0:02:37.080 --> 0:02:39.320 and Brexit probably not going to be helpful. They're China 0:02:39.400 --> 0:02:42.480 slowing but still very positive, and even the US slowing 0:02:42.520 --> 0:02:44.959 a little bit. So as you think about the US market, 0:02:45.000 --> 0:02:48.000 given some of our big trading partners, is recession in 0:02:48.160 --> 0:02:52.800 your outlook for maybe the back half of it's not? UM, 0:02:53.080 --> 0:02:55.520 we actually think that UM, we're in a in a 0:02:55.560 --> 0:02:57.880 little bit when you think of all these fixed income 0:02:57.919 --> 0:03:01.280 spread sectors and you think about the global economy, we're 0:03:01.320 --> 0:03:05.760 in somewhat of an ideal situation UM in that growth 0:03:05.960 --> 0:03:10.080 is slow UM yet positive, and even in Europe, where 0:03:10.200 --> 0:03:13.120 UM there are some real challenges. Obviously you've got the 0:03:13.160 --> 0:03:16.200 e c B providing a lot of accommodation to keep 0:03:16.280 --> 0:03:19.400 things moving along. And we would argue that expectations are 0:03:19.440 --> 0:03:22.480 so low in Europe that you're likely to see some 0:03:22.600 --> 0:03:26.400 improvement just based on very very low expectations. So the 0:03:26.480 --> 0:03:30.120 idea of a very slow growth economic backdrop with an 0:03:30.160 --> 0:03:34.600 inflation outlook UM that is certainly challenged UM in terms 0:03:34.600 --> 0:03:38.400 of achieving most central bank targets that should keep rates 0:03:38.480 --> 0:03:43.320 pinned at these very or relatively low levels UM. And 0:03:43.320 --> 0:03:44.920 then the flip side is, you know, I think you 0:03:44.920 --> 0:03:47.080 look at a lot of the fundamentals in these spread 0:03:47.160 --> 0:03:51.880 sectors and they look reasonably healthy to us. So uh 0:03:51.920 --> 0:03:54.600 we we we think that that the market can continue 0:03:54.800 --> 0:03:57.280 in the direction that it's been more recently, where it's 0:03:57.640 --> 0:04:00.400 you know, not dramatic performance from here, but more of 0:04:00.440 --> 0:04:03.000 a carry trade. And that's really the strategies that we 0:04:03.080 --> 0:04:06.880 have echoed throughout our fixed income portfolios. So if it's 0:04:06.880 --> 0:04:08.400 a carry trade, that means you want to go to 0:04:08.440 --> 0:04:10.760 the assets that have the biggest carry. I'm looking right 0:04:10.760 --> 0:04:14.440 now at how your bonds returning ten percent so far 0:04:14.640 --> 0:04:17.440 year to date, even if they don't deliver that much more, 0:04:17.440 --> 0:04:19.479 it's a pretty good year. Are you saying to people 0:04:19.880 --> 0:04:23.800 buy high yield by emerging markets. Yeah, I think you've 0:04:23.800 --> 0:04:27.320 got to be careful about UM where you're getting your carry, 0:04:27.680 --> 0:04:30.440 And certainly this isn't a time to be greedy with 0:04:30.480 --> 0:04:33.359 the carry trade. We think you can. UM, there's certainly 0:04:33.400 --> 0:04:36.719 parts of those markets that you mentioned that are that 0:04:36.760 --> 0:04:40.640 are still appealing. UM. I would say with with high yield, 0:04:40.839 --> 0:04:45.160 our focus really has been on individual issue or selection. 0:04:45.240 --> 0:04:47.200 We still think there's some you know, even if the 0:04:47.200 --> 0:04:51.640 markets yielding now inside of six percent, we're still finding 0:04:51.760 --> 0:04:53.240 in that sort of five and a half six and 0:04:53.279 --> 0:04:56.720 a half percent range, some pretty good opportunities that fundamentally 0:04:56.880 --> 0:05:00.159 and are moving in the right direction, they have the 0:05:00.279 --> 0:05:04.400 right trajectory. UM in emerging markets, UH, probably being a 0:05:04.400 --> 0:05:07.920 little more selective there, we think just emerging market rates 0:05:08.080 --> 0:05:11.800 in general are one of the better opportunities, so you 0:05:11.839 --> 0:05:15.160 can even hedge out the currency risk by local bonds 0:05:15.760 --> 0:05:18.960 and take advantage of We think it's it's more of 0:05:19.000 --> 0:05:21.200 a secular trend. If you think about what's happened in 0:05:21.320 --> 0:05:25.479 developing markets UM with inflation where it is, with the 0:05:25.520 --> 0:05:30.040 trend in real rates going lower, UM, emerging market local 0:05:30.080 --> 0:05:32.719 still looks pretty compelling. So we think there's opportunity there. 0:05:32.800 --> 0:05:35.800 When you talk about specific credit selection, I'm struck by 0:05:36.160 --> 0:05:39.279 volumes in the higher bond market, how much trading there is, 0:05:39.320 --> 0:05:41.919 and it's actually fallen so far. You're to date to 0:05:42.000 --> 0:05:45.919 the lowest, and I'm wondering how difficult is it for 0:05:46.000 --> 0:05:51.760 you to execute some of your company specific views. Yeah, 0:05:51.760 --> 0:05:54.760 that's a that's a great observation and I think it's accurate. 0:05:54.800 --> 0:05:58.440 I mean, liquidity, uh, and trading is definitely you know, 0:05:58.520 --> 0:06:01.600 is it is it the summer, There's probably some contribution 0:06:01.760 --> 0:06:05.200 coming from that. It's been a good year. UM. You know, 0:06:05.320 --> 0:06:09.400 the volumes have definitely slowed down, UM, but it is 0:06:09.440 --> 0:06:11.719 still I mean, we we ran run a very big 0:06:12.120 --> 0:06:14.359 investment grade book, a very big high old book and 0:06:14.440 --> 0:06:18.479 loan book, and we are still able to effectuate the 0:06:18.480 --> 0:06:21.680 trades that we need to. UM. A little more challenging 0:06:21.720 --> 0:06:24.560 for our traders, takes a little more patients, UM, but 0:06:24.560 --> 0:06:26.880 we're still getting the things done that that we need to. 0:06:27.080 --> 0:06:29.160 But I think you just got to be a little 0:06:29.200 --> 0:06:31.600 more careful and have a little more forethought and how 0:06:31.640 --> 0:06:35.040 you want to execute those and and be patient. UM. 0:06:35.160 --> 0:06:37.560 I also think the idea that you can headge your 0:06:37.600 --> 0:06:41.520 portfolio with UM not only c d X, which is 0:06:41.560 --> 0:06:45.280 the portfolio product for these markets, but also options on 0:06:45.320 --> 0:06:49.920 cd X. Those markets have become extremely liquid. Those allow 0:06:50.040 --> 0:06:53.599 us to take risk off and put risk on opportunistically 0:06:53.720 --> 0:06:58.880 without having to execute in cash bonds all the time. So, Mike, 0:06:58.920 --> 0:07:01.919 just real quickly, I'm looking at your third quarter global outlook. 0:07:01.920 --> 0:07:04.880 You've got this great graphic here about relative value by region. 0:07:05.080 --> 0:07:08.599 Where globally are you seeing the best value right now? Well, 0:07:08.680 --> 0:07:11.320 I think you know, hinted at one of these, but 0:07:11.320 --> 0:07:15.680 but outside of developed markets, in the emerging markets, UM, 0:07:15.760 --> 0:07:18.840 we think that's an attractive area for US. We've we've 0:07:18.880 --> 0:07:26.880 been bullish there. Specifically, I would say Indonesia, Russia, Brazil, UM, Mexico, 0:07:27.160 --> 0:07:30.520 those are probably are you know, top picks within emerging markets. 0:07:30.520 --> 0:07:34.000 And again what we would say is just taking advantage 0:07:34.080 --> 0:07:37.880 of high local rates. There is something that UM we 0:07:37.920 --> 0:07:42.120 think is is a is a really attractive risk reward relationship. UM. 0:07:42.160 --> 0:07:46.480 I think broadly staying in the US, where the economy 0:07:46.560 --> 0:07:50.960 is is a little healthier. UM, you've got interest rate policy, 0:07:51.000 --> 0:07:54.240 you've got uh the central bank policy that is clearly 0:07:54.720 --> 0:07:58.720 pivoted towards a more dovish stance. UM. So we think 0:07:58.760 --> 0:08:01.360 that's an area where we're going to have a US 0:08:01.440 --> 0:08:05.760 biased portfolio. Mike, Thanks so thank you so much. Mike Buchanan, 0:08:05.960 --> 0:08:10.120 Deputy Chief Investment Officer for Western Asset Management. We appreciate 0:08:10.120 --> 0:08:13.000 you coming on. Based in Pasadena, California. They are really 0:08:13.000 --> 0:08:27.360 one of the big the experts on the fixed income markets. Well, 0:08:27.440 --> 0:08:32.160 tomorrow's special counsel, Robert Mueller, will testify before to congressional committees. 0:08:32.160 --> 0:08:34.440 The question I think on most people's minds is will 0:08:34.520 --> 0:08:37.040 he have any new information that was not contained in 0:08:37.080 --> 0:08:39.880 the his report? To give us a sense of what 0:08:39.960 --> 0:08:43.400 we might see tomorrow, we welcome Michael Zelden, Michael's former 0:08:43.440 --> 0:08:47.400 federal prosecutor and was actually Robert Mueller's former special assistant 0:08:47.440 --> 0:08:50.000 at the Department of Justice, and Michael is currently a 0:08:50.120 --> 0:08:53.600 c and and legal analysts based on Washington, d C. Michael, 0:08:53.600 --> 0:08:56.640 thanks so much for joining us again. You were Robert 0:08:56.720 --> 0:09:00.920 Mueller's special assistant at the Department of Justice, know him well. 0:09:01.400 --> 0:09:06.840 Do you expect him to disclose any new material information tomorrow? Well, 0:09:07.200 --> 0:09:12.920 new is the keyword, because first, no, in a simple answer, 0:09:13.640 --> 0:09:16.400 because I think he has said plainly that he's going 0:09:16.440 --> 0:09:19.960 to stick to the report. But new, yes, in the 0:09:20.000 --> 0:09:23.000 sense that I don't believe many people have read his report, 0:09:23.160 --> 0:09:26.240 so it will be new to them if they tune in, 0:09:26.600 --> 0:09:29.480 So the information will be that information which has already 0:09:29.520 --> 0:09:32.720 been put out there, but because most people haven't read it, 0:09:32.880 --> 0:09:35.960 I think it'll be new news to them. And that's 0:09:36.000 --> 0:09:38.679 the hope I think of the committee and having him 0:09:38.720 --> 0:09:42.360 testify orally too, if you will watch the movie rather 0:09:42.360 --> 0:09:45.439 than read the books. Well, Michael, there's some controversy this 0:09:45.520 --> 0:09:48.320 morning with Democrats pushing back in a Department of Justice 0:09:48.320 --> 0:09:51.160 recommendation to Bob Mueller to stick to the script, to 0:09:51.200 --> 0:09:53.680 stick to what's in the report. But this comes as 0:09:54.200 --> 0:09:57.760 Uhbert Mueller actually asked them for guidance. Why would he 0:09:57.840 --> 0:10:01.840 do that? Well, in the report word itself, before it 0:10:01.920 --> 0:10:06.320 was released, there was information that was blacked out redacted 0:10:06.640 --> 0:10:10.880 is the word, and that involved ongoing cases cases of 0:10:10.960 --> 0:10:17.640 personal individuals, privacy rights, and some executive privilege related materials. 0:10:17.920 --> 0:10:21.160 And so what Mueller said is, we worked out a 0:10:21.240 --> 0:10:25.400 deal in terms of transmitting this report between the Justice 0:10:25.440 --> 0:10:30.040 Department and Congress around these things, these redactions. Do you 0:10:30.080 --> 0:10:32.079 want me to stick to that or am I free 0:10:32.120 --> 0:10:36.080 to go beyond that which has been previously redacted? And 0:10:36.080 --> 0:10:39.680 the Justpartment said, no, stick to our previous agreement. The 0:10:39.720 --> 0:10:42.959 stuff that has been redacted should remain redacted. And you 0:10:43.000 --> 0:10:45.880 shouldn't testify to it. So I think that's what the 0:10:46.040 --> 0:10:49.600 essence of that letter was. So, Michael, if under questioning 0:10:49.960 --> 0:10:53.559 tomorrow Mr Mueller's asked questions that are not included in 0:10:53.559 --> 0:10:56.280 the report, maybe outside the purview of the actual report, 0:10:56.360 --> 0:10:58.720 but he does know the answer, is he just going 0:10:58.800 --> 0:11:02.880 to plead the fifth or just say I can't comment. Well, 0:11:02.920 --> 0:11:07.160 he's free to speak to whatever he knows. He is 0:11:07.200 --> 0:11:10.200 not a d J employee, and as long as it 0:11:10.240 --> 0:11:17.560 does not involve privacy protected, executive privilege or ongoing investigation matters, 0:11:17.600 --> 0:11:20.440 he's free to offer his opinion. So, for example, in 0:11:20.440 --> 0:11:23.440 a silly hypothetical, if they asked him, Bob, what is 0:11:23.480 --> 0:11:26.720 your favorite color that's not in the report, He's free 0:11:26.760 --> 0:11:30.560 to say whatever his favorite color is. But if they 0:11:30.600 --> 0:11:34.960 ask him, what is your opinion on whether or not 0:11:35.040 --> 0:11:38.920 you would have indicted the president but for the Office 0:11:38.920 --> 0:11:42.360 of Legal Counsel opinion that's not exactly in the report. 0:11:42.640 --> 0:11:45.640 That's something he has knowledge of, and he is free 0:11:45.679 --> 0:11:49.160 to answer that. I don't think he will, but Justice 0:11:49.200 --> 0:11:53.200 forman cannot prevent him from offering his opinion about what 0:11:53.360 --> 0:11:56.360 is in his report. Michael, have you read the report? 0:11:56.840 --> 0:11:59.520 Of course, yes, okay, So what do you think is 0:11:59.600 --> 0:12:04.800 the most shocking or sensational aspect that you think the 0:12:04.840 --> 0:12:07.959 Democrats should home in on that perhaps people aren't as 0:12:08.000 --> 0:12:11.600 aware of. Well, the fact there are two parts of 0:12:11.600 --> 0:12:15.920 the port of course, there's the intelligence version, Volume one, 0:12:16.120 --> 0:12:19.720 and that talks about collusion and conspiracy. And in that 0:12:20.360 --> 0:12:23.160 what I think Adam Schiff and the Democrats on the 0:12:23.160 --> 0:12:27.319 House Intelligence Committee want to get out is that even 0:12:27.360 --> 0:12:32.120 though Mueller found no evidence of criminal conspiracy, he did 0:12:32.360 --> 0:12:39.400 find a very willing Trump White campaign to receive help 0:12:39.679 --> 0:12:42.920 from foreign countries. I think that's what the Democrats want 0:12:43.000 --> 0:12:45.959 to get out. On the intelligence side. The Republicans want 0:12:46.000 --> 0:12:48.280 to push back and say, yes, but there was no 0:12:48.400 --> 0:12:53.680 criminal conspiracy hence no collusion. On the House Judiciary side. 0:12:53.760 --> 0:12:57.880 Volume two, Mueller's, you know, sort of in under pound 0:12:57.880 --> 0:13:01.600 guerilla line in the report is is if I could 0:13:01.640 --> 0:13:05.120 have exonerated the president of criminal wrongdoing, I would have 0:13:05.280 --> 0:13:08.160 done so. But I couldn't. And I think what the 0:13:08.200 --> 0:13:11.920 Democrats want to drive home is why couldn't you? What 0:13:12.080 --> 0:13:16.320 was it? What behavior did Trump engage in that you 0:13:16.520 --> 0:13:21.160 felt could implicate criminal behavior? And have him go through 0:13:21.200 --> 0:13:27.199 the report almost section by section where the report indicates 0:13:27.280 --> 0:13:31.520 that Trump told McGann to fire Mueller, where Trump told 0:13:31.920 --> 0:13:36.520 Sessions to tell Mueller not to investigate Trump. Those sort 0:13:36.559 --> 0:13:40.800 of things are that which the Democrats want to drive 0:13:40.880 --> 0:13:43.920 home UM as important as it is to their to 0:13:44.040 --> 0:13:47.160 their message. The Republicans want to again push back and 0:13:47.200 --> 0:13:54.679 say yes but no, no criminal behavior. And bar and Rosenstein, 0:13:54.760 --> 0:13:57.880 the deputy Turney General and Attorney general at the time, 0:13:58.320 --> 0:14:03.760 UM found no criminal offense. So, Michael, from a legal perspective, 0:14:03.880 --> 0:14:06.480 do you think anything can come out of the hearing 0:14:06.520 --> 0:14:10.800 tomorrow that could advance UM those in Congress that want 0:14:10.840 --> 0:14:14.400 to move forward with impeachment. Well, it depends on how 0:14:15.200 --> 0:14:19.640 well Mueller tells the story that he has written down. 0:14:19.920 --> 0:14:24.320 His story in his report is really rather compelling with 0:14:24.400 --> 0:14:29.840 respect to the obstructive acts or the attempted obstructive acts 0:14:29.960 --> 0:14:33.360 that he found Trump to have engaged in. If he 0:14:33.400 --> 0:14:38.760 can tell that story coherently in in movie like UM Dialogue, 0:14:39.400 --> 0:14:41.560 and people hear it for the first time, they may 0:14:41.600 --> 0:14:45.960 have an oh my moment in their appreciation of what 0:14:46.160 --> 0:14:49.240 it is that Mueller found in his report. If he's 0:14:49.440 --> 0:14:53.320 very legalistic and and and not a very compelling witness, 0:14:53.440 --> 0:14:57.080 and sticks very much to yes and no answers. I 0:14:57.080 --> 0:14:59.760 don't think this advances the ball in any way, which 0:15:00.120 --> 0:15:03.440 it seems like it might be his tact based on 0:15:03.640 --> 0:15:07.000 his reluctance, right, I mean, why is he so reluctant 0:15:07.000 --> 0:15:10.680 to testify. He's a reluctant human being. You know, all 0:15:10.720 --> 0:15:13.440 the years that I worked with him, what we used 0:15:13.440 --> 0:15:15.880 to say about Bob all the time was he was 0:15:15.920 --> 0:15:19.520 first and foremost a marine. He would asked questions, he 0:15:19.600 --> 0:15:23.360 gave answers to those questions. He didn't elaborate, he didn't 0:15:23.400 --> 0:15:26.640 offer opinions. And that's the way he if you watch 0:15:26.720 --> 0:15:29.400 his testimony over the years when he was in the 0:15:29.480 --> 0:15:34.400 FBI and otherwise, he is a very reluctant witness. He 0:15:34.520 --> 0:15:38.960 is very different than Jim Comey, who talks, you know, 0:15:39.240 --> 0:15:43.440 quite fluent, fluently with the media. That's not Bob. And 0:15:43.480 --> 0:15:47.200 so I think that you'll find here that same reticent 0:15:47.440 --> 0:15:52.200 personality coming through in the testimony. The only exception to that, 0:15:52.240 --> 0:15:57.600 potentially is if the Republicans started attacking his integrity or 0:15:57.600 --> 0:16:02.360 the integrity of his team. The angry Democrats mantra that 0:16:02.400 --> 0:16:05.240 we hear a lot. He may take offense at that 0:16:05.360 --> 0:16:09.920 and there you may see some you know, emotion. Yeah, 0:16:10.440 --> 0:16:12.320 Michael Zelden, thank you so much for being with us. 0:16:12.880 --> 0:16:16.480 Very illuminating. Michael Zelden, former federal prosecutor as well as 0:16:16.560 --> 0:16:20.480 Robert Mueller's former special assistant while at the Department of Justice, 0:16:20.720 --> 0:16:25.040 currently a CNN legal analysts, joining us from Washington, d C. 0:16:25.240 --> 0:16:29.080 We will be taking those hearings tomorrow throughout the day 0:16:29.320 --> 0:16:32.160 as we hear what Robert Mueller has to say and 0:16:32.240 --> 0:16:35.280 what the Democrats and Republicans how they try to frame 0:16:35.640 --> 0:16:49.840 the report. We're getting a slew of economic data throughout 0:16:49.880 --> 0:16:53.200 the week from nations around the world. In the US, 0:16:53.320 --> 0:16:56.760 we got today US previously owned home sales, and we're 0:16:56.760 --> 0:16:59.440 gonna get of course, the GDP numbers on Friday. Joining 0:16:59.520 --> 0:17:02.000 us here to talk about what we can expect and 0:17:02.040 --> 0:17:04.879 how to understand what we're getting in terms of some 0:17:05.000 --> 0:17:07.720 of these economic data points, Constance Hunter, we are so 0:17:07.760 --> 0:17:09.640 glad to have you here with us in our Bloomberg 0:17:09.640 --> 0:17:14.120 inter Active Broker Studios. Constants is chief Economistic KPMG. So 0:17:14.240 --> 0:17:16.439 let's start with the data that we have, which is 0:17:16.440 --> 0:17:20.120 the previously owned home sales which declined more than expected 0:17:20.200 --> 0:17:23.480 in June, where are we in terms of the US 0:17:23.560 --> 0:17:27.359 housing market. So to set the stage, we've actually had 0:17:27.520 --> 0:17:32.160 five quarters of negative real estate investment, and uh, that 0:17:32.359 --> 0:17:36.720 is usually a sign that your expansion is coming to 0:17:36.800 --> 0:17:39.359 an end. It's one of the many signals that economists 0:17:39.359 --> 0:17:42.719 look at when they think is an inflation coming? Right, 0:17:42.760 --> 0:17:45.320 And obviously the one that people know about most is 0:17:45.440 --> 0:17:47.880 the yield curve in version, But this is another one 0:17:47.920 --> 0:17:51.000 that economists have in their arsenal. And so it's a 0:17:51.000 --> 0:17:55.879 puzzle because usually it is it's a leading indicator. Jobs 0:17:55.880 --> 0:17:58.520 are a concurrent indicator. But we've seen such a robust 0:17:58.600 --> 0:18:03.159 jobs market that it is a puzzle. And and so 0:18:03.200 --> 0:18:05.399 if we look at other factors around housing, right we 0:18:05.400 --> 0:18:08.960 look at the affordability index. It's long term average is four. 0:18:09.280 --> 0:18:12.400 We're above a hundred and fifty. So it's a puzzle. 0:18:12.640 --> 0:18:15.840 And I think the puzzle comes down to supply and 0:18:16.240 --> 0:18:21.240 enough um lower priced homes that it actually makes it 0:18:21.280 --> 0:18:23.840 possible for first time homebuyers to join the market. Now, 0:18:23.880 --> 0:18:26.080 we did see an uptick in first time homebuyers, it 0:18:26.119 --> 0:18:30.359 went from thirty two percent. But but this this sluggish 0:18:30.400 --> 0:18:32.159 housing market is a bit of a puzzle, and I 0:18:32.200 --> 0:18:36.240 think it's one of the factors, even though Powell hasn't 0:18:36.320 --> 0:18:37.919 cited it. I think it is one of the factors 0:18:37.960 --> 0:18:40.600 in the back of the minds of economists at the 0:18:40.680 --> 0:18:43.320 Federal Reserve System thinking about doesn't make sense to have 0:18:43.359 --> 0:18:46.280 this insurance rate cut. So let's let's go there. Since 0:18:46.320 --> 0:18:49.520 we're having to fed on the feet meeting. Um, you know, 0:18:49.720 --> 0:18:52.440 kind of question of an insurance cut or preemptive cut. 0:18:52.800 --> 0:18:54.640 Give us your thoughts about that. Is it are they 0:18:54.840 --> 0:18:57.199 is it effective? What's the cost associated with that? All 0:18:57.240 --> 0:18:59.240 all that kind of thing. Well, yeah, and Paul, you 0:18:59.280 --> 0:19:01.360 bring up a good point, what is the cost? So 0:19:01.560 --> 0:19:03.760 insurance is really good to have, but we all know 0:19:03.840 --> 0:19:07.199 it's not free, right, So there is a cost um, 0:19:07.280 --> 0:19:10.479 and especially the closer we are to the zero lower bound, 0:19:10.600 --> 0:19:13.960 that cost goes up, right because there if they they 0:19:14.000 --> 0:19:16.720 they have so much arsenal, and if they're using it 0:19:16.800 --> 0:19:18.960 up now and it doesn't work, then they have less 0:19:19.080 --> 0:19:21.959 arsenal to use later. But if we look back, so 0:19:22.000 --> 0:19:26.679 there's two UH parallel situations from the nineties. So the 0:19:26.760 --> 0:19:32.320 first is from UH nineteen four and ninety four. The 0:19:32.320 --> 0:19:34.600 FED heights in November seventy five basis points in the 0:19:34.640 --> 0:19:37.000 market wasn't expecting that. They weren't sure if we were 0:19:37.000 --> 0:19:39.520 gonna get twenty five or fifty. Greenspan surprised with a 0:19:39.600 --> 0:19:43.240 seventy five basis point rate increase, and if you recall 0:19:43.680 --> 0:19:46.040 a mirror four weeks later, we started to have the 0:19:46.040 --> 0:19:49.320 Tequila crisis at the end of nineteen four that bled 0:19:49.320 --> 0:19:53.160 into n We ended up bailing out the Mexican because 0:19:53.200 --> 0:19:56.280 of the Mexican bond crisis and sorry, thank you for 0:19:56.280 --> 0:19:59.480 for everybody for for those everybody got threw up their 0:19:59.480 --> 0:20:06.560 hands into the part. They probably did that too. So 0:20:06.920 --> 0:20:09.720 the FED did some preemptive cuts or some insurance cuts 0:20:09.720 --> 0:20:14.280 because it was external turbulence, uh, and it worked. Then 0:20:14.480 --> 0:20:18.399 fast forward to we've had the Asian financial crisis that 0:20:18.560 --> 0:20:23.120 sort of bled into the Russian default and devaluation, which 0:20:23.240 --> 0:20:26.440 caused a bunch of purchasing of off the run treasuries, 0:20:27.119 --> 0:20:31.320 which was not what long term capital management had planned for. 0:20:32.000 --> 0:20:35.240 And so in conjunction with with the long term capital 0:20:35.240 --> 0:20:39.879 management liquidity squeeze, the FED did another set of almost 0:20:39.920 --> 0:20:41.640 a hundred basis points over the course of a year 0:20:41.720 --> 0:20:45.040 preemptive cuts, and that allowed us to continue the expansion 0:20:45.080 --> 0:20:46.880 to two thousand and one and right now, what we're 0:20:46.920 --> 0:20:50.119 seeing is if you look at different indicators like the 0:20:50.200 --> 0:20:53.040 yield curve that you talked about, it seems like markets 0:20:53.119 --> 0:20:56.879 believe that the Federal Reserve will effectively stave off a 0:20:56.960 --> 0:21:00.639 near term recession with the expected three rate us UH 0:21:00.800 --> 0:21:02.800 that is currently being priced into the market. Do you 0:21:02.840 --> 0:21:05.760 agree with that, Yeah, and economists broadly agree with that. 0:21:05.880 --> 0:21:08.840 So the National Association for Business Economics NAME did a 0:21:08.880 --> 0:21:12.719 survey UH recently and the percentage of people who expect 0:21:12.720 --> 0:21:15.199 a recession has great in the second half of this year, 0:21:15.240 --> 0:21:19.200 has greatly diminished from about twelve and then in the 0:21:19.240 --> 0:21:22.360 first half of it's diminished, and so now people are 0:21:22.359 --> 0:21:25.520 betting on second half of So people don't think we're 0:21:25.560 --> 0:21:28.840 going to avoid a recession altogether, or at least that's 0:21:28.840 --> 0:21:31.920 not what the most recent NAME survey shows, but they 0:21:31.920 --> 0:21:35.479 do think it's going to prolong the expansion, and of 0:21:35.520 --> 0:21:38.600 course that is that is, you know, consistent with the 0:21:38.600 --> 0:21:42.000 Fed's mandate right try to get maximum employment and full 0:21:42.200 --> 0:21:45.280 full GDP as long as possible. How concerned are you 0:21:45.280 --> 0:21:50.800 about manufacturing globally continues to be sluggish, certainly versus the consumer. 0:21:51.359 --> 0:21:53.199 When is that going to become a real problem for 0:21:53.200 --> 0:21:56.520 where the US. For per se, well, I think it's 0:21:56.520 --> 0:22:00.320 already somewhat of a problem for US in that UM 0:22:00.359 --> 0:22:03.480 we're seeing the manufacture of the regional FED manufacturing indicries 0:22:03.560 --> 0:22:07.439 more or less b be somewhat weak UM with somewhat 0:22:07.480 --> 0:22:09.240 mixed in the in the latest that have come out. 0:22:09.280 --> 0:22:13.040 But but globally that manufacturing cycle is really important and 0:22:13.080 --> 0:22:15.040 it bleeds over into services. But if you see what 0:22:15.119 --> 0:22:18.000 GETA Gopinath talked about this morning when the IMF released 0:22:18.040 --> 0:22:20.800 its report, they have a whole chapter on this diversion 0:22:20.840 --> 0:22:25.919 between UH, the services economy and the trade economy, and 0:22:25.960 --> 0:22:29.119 we see that divergent also divergence also in price indusease. Right, 0:22:29.119 --> 0:22:33.600 so the services prices are well in line with UM, 0:22:33.720 --> 0:22:35.600 the Fed's goal of two percent, they're out or above 0:22:35.640 --> 0:22:38.439 two percent, whereas it's good prices that are really dragging 0:22:38.480 --> 0:22:41.480 down the overall index. So this is a dichotomy that 0:22:41.800 --> 0:22:44.960 UM has so far hasn't affected the broad economy, but 0:22:45.040 --> 0:22:49.520 certainly has the potential to bleed into the broader economy. Constanta, 0:22:49.560 --> 0:22:51.320 thank you so much for joining us. Constance is a 0:22:51.359 --> 0:22:54.560 chief economist for KPMG based here in New York City, 0:22:54.640 --> 0:22:58.840 joining us in our Bloomberg Interactive Broker studio. One thing. 0:22:58.920 --> 0:23:01.920 I'm just I'm still thinking about the housing market. I'm 0:23:01.960 --> 0:23:07.960 just buy sell um. I'm an owner, so that I 0:23:07.960 --> 0:23:11.359 do have invested interest full disclosure. But I do have 0:23:11.400 --> 0:23:14.080 to wonder how much the weakness is due to a 0:23:14.160 --> 0:23:16.560 lack of foreign investment in the United States. Are falling 0:23:16.640 --> 0:23:20.440 investment from the from Europe and China? I don't know. 0:23:20.080 --> 0:23:22.760 I just I mean, certainly in big cities, well, certainly 0:23:22.800 --> 0:23:25.040 New York City. I mean, a lot of these mega 0:23:25.119 --> 0:23:26.960 high rises that we see in mid midtown have been 0:23:27.240 --> 0:23:32.479 you know, occupied primarily primarily by overseas customers, and so 0:23:32.520 --> 0:23:34.840 it's just been propping up the high end of the market. 0:23:34.880 --> 0:23:36.880 So I'm not sure if it's your side of the market, 0:23:36.680 --> 0:23:40.159 don't know. Probably you're right, You're totally down there. This 0:23:40.320 --> 0:23:57.479 is Bloomberg earlier today, Boris Johnson, the public face of 0:23:57.520 --> 0:24:00.760 the Brexit campaign. One of the content has to succeed 0:24:00.800 --> 0:24:05.200 Theresa May is British Prime Minister, maybe taking the country 0:24:05.240 --> 0:24:08.240 closer to a no deal brexit. That's according to Moody's. 0:24:08.240 --> 0:24:11.000 We want to get some insight from our Bloomberg opinion columnists. 0:24:11.480 --> 0:24:14.720 Terra's Raphael joining us now from London, Bloomberg opinion editor 0:24:14.800 --> 0:24:19.439