WEBVTT - Bloomberg Surveillance TV: May 1, 2024 0:00:00.120 --> 0:00:06.800 Bloomberg Audio Studios, Podcasts, radio News. 0:00:11.640 --> 0:00:15.440 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.480 --> 0:00:18.439 with Lisa Bromwitz and am Marie Hordern. Join us each 0:00:18.520 --> 0:00:21.400 day for insight from the best in markets, economics, and 0:00:21.440 --> 0:00:24.720 geopolitics from our global headquarters in New York City. We 0:00:24.800 --> 0:00:27.440 are live on Bloomberg Television weekday mornings from six to 0:00:27.520 --> 0:00:31.040 nine am Eastern. Subscribe to the podcast on Apple, Spotify 0:00:31.200 --> 0:00:33.479 or anywhere else you listen, and as always on the 0:00:33.520 --> 0:00:37.240 Bloomberg Terminal and the Bloomberg Business app. Jonathan Pinkleer Ubs 0:00:37.280 --> 0:00:39.040 is still with us. Jonathan, We've been talking about the 0:00:39.040 --> 0:00:41.080 effort the Federal Reserve needs to go to to get 0:00:41.080 --> 0:00:43.560 inflation back down towards target. How much of that is 0:00:43.600 --> 0:00:46.320 being offset by what's happening in treasury, The amount of 0:00:46.360 --> 0:00:49.000 issients we're getting, the amount of fiscal easing we've seen. 0:00:49.760 --> 0:00:52.239 Yeah, you know, fiscal policy, you know, in our view, 0:00:52.320 --> 0:00:54.240 is a huge support to twenty twenty three. I mean, 0:00:54.240 --> 0:00:56.960 we all talked about, you know, the Biden administration programs 0:00:56.960 --> 0:01:00.200 at chipsacked the IRA and we're all watching sort of 0:01:00.240 --> 0:01:05.959 this extraordinary boom in chip manufacturing. A chip plant manufacturing construction, 0:01:06.920 --> 0:01:10.520 you know, all the related ev plant manufacturing construction. I mean, 0:01:10.560 --> 0:01:14.520 Structure's investment in twenty twenty three added roughly half a 0:01:14.560 --> 0:01:16.200 percentage point to year of year. 0:01:16.319 --> 0:01:18.680 The Q four Q for GDP said, you know, three 0:01:18.720 --> 0:01:19.360 percent GDP. 0:01:19.760 --> 0:01:21.320 You know, half a percentage point of that was the 0:01:21.319 --> 0:01:25.199 Structure's investment. Direct government spending and investment, the public sector 0:01:25.280 --> 0:01:28.000 investment add on a little bit of the deficit widening. 0:01:28.160 --> 0:01:30.559 It's a percentage point, so a third of the growth 0:01:30.560 --> 0:01:33.520 that we saw. And you know, we generally think that 0:01:33.560 --> 0:01:35.520 the government as being somewhat you know, kind of interest 0:01:35.560 --> 0:01:39.640 rates insensitive, right, so this was definitely some a thrust 0:01:39.720 --> 0:01:43.039 that the FED was forced to fight in twenty twenty 0:01:43.040 --> 0:01:46.040 three with higher rates that you know, really wasn't going 0:01:46.080 --> 0:01:49.120 to be affected by by by by monetary you keep. 0:01:49.040 --> 0:01:51.640 Saying twenty twenty three, can we talk about twenty twenty four. 0:01:51.880 --> 0:01:54.360 How sustainable is that? How much money is still being 0:01:54.400 --> 0:01:57.120 distributed every single day into the economy off the back 0:01:57.120 --> 0:01:58.520 of these programs. 0:01:58.360 --> 0:01:59.000 A lot less? 0:02:00.120 --> 0:02:01.760 I mean, if we think about it in terms of 0:02:01.760 --> 0:02:03.600 growth rates, you know, it's sort of like we moved 0:02:03.680 --> 0:02:05.840 up the level, you know, and now we've got these 0:02:05.880 --> 0:02:08.519 wider deficits and this level, but the level now is 0:02:08.600 --> 0:02:10.400 kind of staying the same for a while, and that 0:02:10.480 --> 0:02:13.960 means the impact on growth is essentially going to zero 0:02:14.000 --> 0:02:17.000 in twenty twenty four in our view, you know, And 0:02:17.040 --> 0:02:18.840 this is sort of a natural way of thinking about 0:02:18.880 --> 0:02:21.760 fiscal policy, right, you know, this is why it's countercyclical. 0:02:21.840 --> 0:02:24.760 You widen the deficit in bad times to but we've 0:02:24.840 --> 0:02:27.160 ended up sort of widening the deficit in good times 0:02:27.560 --> 0:02:29.720 we've had the growth benefit, and now we've got sort 0:02:29.720 --> 0:02:33.480 of the wider deficit and the growth impetus is sort 0:02:33.520 --> 0:02:34.600 of fading at this point. 0:02:34.800 --> 0:02:37.880 As an economist, do you think that the likelihood of 0:02:37.919 --> 0:02:40.480 the US Treasure Department more heavily weighting the issuance to 0:02:40.560 --> 0:02:44.799 T bills makes sense that basically you can basically capitalize 0:02:44.919 --> 0:02:47.760 on the demand for short term T bills T bill 0:02:47.800 --> 0:02:50.399 and chill what everyone's been talking about, and not lock 0:02:50.480 --> 0:02:52.839 in five percent yields over a longer period of time. 0:02:52.880 --> 0:02:55.160 Is that what we can infer from this announcement. 0:02:56.200 --> 0:02:59.040 So, I mean, you know, the Office of Dead Management, 0:02:59.040 --> 0:03:02.480 they are trying to minimize the interest expense for the taxpayer, 0:03:02.560 --> 0:03:05.440 you know, based on their calculations and depending upon history 0:03:05.480 --> 0:03:08.440 and how interest rates may or may not unfold, you know, 0:03:08.480 --> 0:03:12.280 you do want some mix between between bills and coupon issuance. 0:03:12.280 --> 0:03:14.359 I mean, there was a long debate pre COVID whether 0:03:14.440 --> 0:03:16.639 or not the US should turn out its debt A 0:03:16.680 --> 0:03:19.720 lot and a lot of those models actually don't say 0:03:19.880 --> 0:03:22.399 terming out the debt is really the most cost effective 0:03:22.400 --> 0:03:24.440 thing to do for the Treasury. But a lot of 0:03:24.440 --> 0:03:25.959 it's pretty uncertain too, right, I mean, it depends on 0:03:26.000 --> 0:03:29.320 the outlet for interest rates, inflation. You know, at this point, 0:03:29.520 --> 0:03:32.440 net interest payments are you know, more than defense spending. 0:03:32.480 --> 0:03:34.519 You know, you're talking three percent of nominal. 0:03:34.240 --> 0:03:35.920 GDP is just paying interest. 0:03:36.000 --> 0:03:40.000 It's almost twenty percent of federal governor government revenue. So 0:03:41.160 --> 0:03:43.160 you know, that could get a lot worse if rates 0:03:43.200 --> 0:03:45.640 stay high and inflation stays high, or it can get 0:03:45.640 --> 0:03:46.120 better if the. 0:03:46.040 --> 0:03:46.800 Fed starts cutting. 0:03:46.880 --> 0:03:48.480 I mean, in other words, on the way to frame 0:03:48.520 --> 0:03:50.120 this question is do you think that the Treasury is 0:03:50.160 --> 0:03:52.400 making a call that longer term interistrates are going to 0:03:52.480 --> 0:03:54.520 go lower? And if this isn't an opportune time to 0:03:54.520 --> 0:03:55.200 lock it in. 0:03:57.480 --> 0:04:02.200 I can't peer into Janet Yellen's and I can dry. 0:04:02.360 --> 0:04:04.560 But you know, I do think though that the Treasury 0:04:04.640 --> 0:04:06.800 is trying to balance what they're seeing on the yield curve. 0:04:06.920 --> 0:04:08.320 I mean, if that's sort of what you're getting at, 0:04:08.400 --> 0:04:10.280 and I think that's probably an appropriate thing to do 0:04:10.320 --> 0:04:11.560 for short term funding needs. 0:04:11.640 --> 0:04:11.800 Right. 0:04:12.600 --> 0:04:15.960 We certainly have seen in the money market's a reasonable 0:04:16.000 --> 0:04:18.479 appetite for bills. I mean, you can see that in 0:04:18.520 --> 0:04:20.279 all of the money that gets parked at the reverse 0:04:20.320 --> 0:04:22.920 repo facility at the FED. I mean, the money markets 0:04:22.920 --> 0:04:25.480 are still relatively a wash in cash, high levels of 0:04:25.520 --> 0:04:28.440 reserves in the banking system, so that would indicate, all 0:04:28.480 --> 0:04:31.880 else equal, that there's a lot of capacity for bill issuance. 0:04:31.920 --> 0:04:32.160 There. 0:04:32.360 --> 0:04:35.480 You talked about fiscal policy, so there's more money coming out, 0:04:35.480 --> 0:04:38.159 but there's also more people, which is propping up this 0:04:38.320 --> 0:04:42.080 economy we're witnessing. How do you see this potentially changing 0:04:42.160 --> 0:04:42.680 next year? 0:04:43.920 --> 0:04:47.000 Well, I mean, you know, I think the budget choices 0:04:47.040 --> 0:04:51.560 get hard, which is one complication, But the presidential election, 0:04:51.960 --> 0:04:55.280 you know, is a hugely consequential election for fiscal policy. 0:04:55.960 --> 0:04:58.960 You know, if we think about what's unfolding and tax policy, 0:04:59.760 --> 0:05:02.320 most to the individual side of the twenty seventeen tax 0:05:02.360 --> 0:05:06.240 cuts expires at the end of twenty twenty five, and 0:05:06.760 --> 0:05:09.080 because that's written in the current law, you know there 0:05:09.200 --> 0:05:12.640 is something that Congress and the next administration are going 0:05:12.960 --> 0:05:15.279 to want to address because otherwise it's going to be 0:05:15.320 --> 0:05:19.200 roughly a almost three trillion dollar tax increase over the 0:05:19.560 --> 0:05:23.360 subsequent ten years. The plans to pay for that are 0:05:23.640 --> 0:05:26.480 likely going to look very different comparing the Democrats to 0:05:26.520 --> 0:05:29.440 the Republicans. But that could have a huge amount of 0:05:29.600 --> 0:05:32.320 impact on fiscal policy as we look out to twenty 0:05:32.320 --> 0:05:32.760 five twenty. 0:05:32.880 --> 0:05:34.920 Secretary Yen And got a gritting on this on Capitol 0:05:34.960 --> 0:05:36.960 Hill just yesterday. I'll bring a quote up from her 0:05:37.279 --> 0:05:40.120 from her statement, we can make these investments while reducing 0:05:40.160 --> 0:05:42.520 the deficit by three trillion over a decade through a 0:05:42.520 --> 0:05:45.720 combination of smart savings and tank proposals. I want to 0:05:45.760 --> 0:05:48.839 bring in my McKee Mike Dan in Washington, you witness 0:05:48.880 --> 0:05:51.560 some of that hearing. I'm sure what'shing the tape being 0:05:51.600 --> 0:05:53.880 played back. What did you think of the proposals coming 0:05:53.880 --> 0:05:56.240 out in the administration. How do they do this? Make 0:05:56.279 --> 0:05:59.479 these investments while reduce the deficit by three trillion over 0:05:59.480 --> 0:06:01.040 a decade. 0:06:01.960 --> 0:06:04.240 They haven't put out an exact plan yet, but The 0:06:04.320 --> 0:06:07.880 important point for the administration is they do not plan 0:06:07.960 --> 0:06:11.279 to increase taxes on anyone making four hundred thousand dollars 0:06:11.320 --> 0:06:14.400 a year or less. Biden didn't mention that when he 0:06:14.480 --> 0:06:18.920 tweeted that the tax bills need to sunset because the 0:06:18.960 --> 0:06:21.880 deficit is too high. So there was a big back 0:06:21.960 --> 0:06:24.240 and forth up on the Hill about whether they would 0:06:24.279 --> 0:06:27.320 do that or not, yell and insisting they will do that. 0:06:28.200 --> 0:06:30.039 But there's going to have to be a way to 0:06:30.320 --> 0:06:34.360 make up some of the difference between the two sides, 0:06:35.400 --> 0:06:37.600 although we are going to have to also see, as 0:06:37.880 --> 0:06:41.440 Jonathan said, the results of the election, not only who's president, 0:06:41.800 --> 0:06:44.640 but who controls each House. If the Democrats are in 0:06:44.720 --> 0:06:47.760 charge of the House and send it, it's obviously easier 0:06:47.800 --> 0:06:52.080 to let the tax provisions expire. But if not, then 0:06:52.480 --> 0:06:55.440 we may end up with a real fight on our 0:06:55.480 --> 0:06:58.480 hands over how far they're willing to go. 0:06:58.600 --> 0:07:02.320 Both sides got her grilling on this because when Biden's 0:07:02.360 --> 0:07:05.080 campaign tweeted about this, he left out the fact that 0:07:05.160 --> 0:07:07.880 he wants to keep the tax cuts for families making 0:07:07.960 --> 0:07:10.720 under four hundred thousand. But my disis come down to 0:07:10.800 --> 0:07:12.320 the point that they're going to pay for this by 0:07:12.440 --> 0:07:15.200 raising taxes on everyone else above that threshold. 0:07:17.040 --> 0:07:20.760 Yes, what they've outlined in the past is that taxes 0:07:20.840 --> 0:07:23.840 go up for people above that threshold, of course, on 0:07:23.880 --> 0:07:28.040 a graduated basis, and business taxes corporate taxes will probably 0:07:28.080 --> 0:07:30.080 go up, but they won't go up to where they 0:07:30.120 --> 0:07:32.440 were before the original tax cuts. 0:07:32.480 --> 0:07:34.000 They'll go part of the way there. 0:07:34.520 --> 0:07:37.720 There was a hearing not long ago in which officials 0:07:37.840 --> 0:07:41.080 from the Biden administration were saying, look, the economy was 0:07:41.120 --> 0:07:45.800 fine with the tax We would be fine with tax 0:07:45.880 --> 0:07:48.600 rates that are a little bit lower, but not as 0:07:48.680 --> 0:07:49.640 high as they were. 0:07:49.680 --> 0:07:51.640 We don't have to go all the way back. They'll 0:07:51.680 --> 0:07:52.760 try to sell it that way. 0:07:53.280 --> 0:07:55.280 Jonathan Bingles still with us, and I am curious, Jonathan, 0:07:55.400 --> 0:07:57.520 is you listen to all these proposals, you listen to 0:07:57.600 --> 0:08:01.400 Jennie illens hearing yesterday and her speech coming later this week. 0:08:01.640 --> 0:08:05.840 How much dispersion is there about your potential outcomes for 0:08:05.880 --> 0:08:09.440 the economy based on the divergence and tax as well 0:08:09.440 --> 0:08:11.440 as tariff policy between the two candidates. 0:08:12.240 --> 0:08:12.440 Yeah. 0:08:12.480 --> 0:08:14.920 I mean we've written a fair bit on this, and 0:08:14.920 --> 0:08:18.280 it's it's a pretty big gap. I mean, you know, 0:08:18.800 --> 0:08:20.400 you know, in looking at some of the plans that 0:08:20.440 --> 0:08:23.080 have been put forward, and you know what we can 0:08:23.120 --> 0:08:28.280 glean from the campaigns. You know, it looks to us like, 0:08:28.360 --> 0:08:31.560 you know, essentially a Republican sweep. You know, so if 0:08:31.560 --> 0:08:34.400 former President Trump wins the presidency and the Republicans take 0:08:34.400 --> 0:08:36.880 both houses of Congress, that they would want to fully 0:08:36.920 --> 0:08:40.559 extend all of the tax cuts, potentially have some pay 0:08:40.600 --> 0:08:44.360 for us, but also reduced some other taxes. And you know, 0:08:44.360 --> 0:08:46.800 the Biden administration, it means what you can glean both 0:08:46.840 --> 0:08:49.680 from you know not you know, both from the president's 0:08:49.679 --> 0:08:52.600 budget prosals this year and last year. It is as 0:08:52.679 --> 0:08:54.559 Mike would say, you know, they would you know, fully 0:08:54.559 --> 0:08:57.079 extend the tax cuts for those making under households making 0:08:57.160 --> 0:08:59.880 under four hundred or potentially four hundred fifty thousand tax 0:09:00.320 --> 0:09:03.120 rise back to the old upper marginal the old marginal 0:09:03.200 --> 0:09:06.000 rates for those making over But then you could also 0:09:06.360 --> 0:09:09.120 work on corporate taxes, potentially raise the investment tax and 0:09:09.160 --> 0:09:14.120 maybe even capital gains taxes for upper income individuals. Those 0:09:14.120 --> 0:09:16.440 are very different outcomes. I mean, you really are over 0:09:16.480 --> 0:09:19.240 a ten year budget window talking about you know, trillions 0:09:19.280 --> 0:09:22.640 of dollars in differences between you know, what the deficits 0:09:22.640 --> 0:09:25.040 would look like under one set of plans or potential 0:09:25.040 --> 0:09:28.560 compromise or another. And I think we get a you know, 0:09:28.600 --> 0:09:30.760 the historical template for that is the expiration of Bush 0:09:30.760 --> 0:09:33.440 tax cuts in twenty twelve, which was very much a 0:09:33.440 --> 0:09:36.559 similar playbook. You know, the tax cuts expired for the 0:09:36.640 --> 0:09:40.640 upper income households were extended for those making under a 0:09:40.640 --> 0:09:44.080 certain threshold. So we sort of have run this playbook before, 0:09:44.120 --> 0:09:45.840 and we can see what sort of a divided government 0:09:45.840 --> 0:09:49.360 outcome might look like. But certainly the Republican wave offers 0:09:49.440 --> 0:09:50.760 a much different fiscal stance. 0:09:50.760 --> 0:09:53.640 Potentially, when does a deficit matter then economically? When is 0:09:53.679 --> 0:09:55.400 it actually a drag on the economy rather than a 0:09:55.400 --> 0:09:58.760 boost and this sort of fuel for American exceptionalism. 0:10:00.120 --> 0:10:03.439 Deficit, the deficit in some ways already matters. I mean, 0:10:03.440 --> 0:10:07.040 we saw a last fall, you know, term premium getting 0:10:07.040 --> 0:10:11.600 pushed around from the refunding announcements as we went from August, 0:10:11.760 --> 0:10:14.240 you know, through November. And I think we could also 0:10:14.320 --> 0:10:17.760 make a case that you know, we're already making choices 0:10:17.760 --> 0:10:21.800 that are difficult constrained by our you know, budget pressures, 0:10:21.800 --> 0:10:27.000 whether it's our defense spending, you know, our geopolitical posture, 0:10:27.400 --> 0:10:30.240 you know, you know, our fiscal stance and fiscal position 0:10:30.360 --> 0:10:34.199 now I think is already starting to influence policy and 0:10:34.240 --> 0:10:35.280 the choices we're making for the. 0:10:35.240 --> 0:10:37.559 Economy on this FED day. How seriously do you take 0:10:37.559 --> 0:10:39.640 proposals of eliminating the FED independence. 0:10:40.720 --> 0:10:46.600 Well, I worry. My hope is that cooler heads would prevail. 0:10:47.840 --> 0:10:50.240 You know, I think, you know, Congress obviously would play 0:10:50.240 --> 0:10:54.319 a very important role in the ability of any administration, 0:10:54.559 --> 0:10:58.720 through appointees or through legislation, to try to alter the 0:10:58.720 --> 0:11:01.560 position of the Federal Reserve system. But you know, as 0:11:01.600 --> 0:11:04.360 a former FED staffer, I think that you know, monetary 0:11:04.400 --> 0:11:07.319 policy independence is absolutely. 0:11:06.840 --> 0:11:09.839 Crucial for a well functioning. 0:11:09.360 --> 0:11:13.360 Economy, but it's mandated by Congress. Something that potentially the president, 0:11:13.800 --> 0:11:17.079 former president, which maybe the future president could do unilatery 0:11:17.080 --> 0:11:20.280 as tariffs. And he talked about this extensively in the 0:11:20.400 --> 0:11:23.240 sit down with Time magazine, and he said potentially that 0:11:23.320 --> 0:11:25.160 ring around the country that he calls it could be 0:11:25.200 --> 0:11:28.440 more than ten percent. And he says, I also don't 0:11:28.440 --> 0:11:29.600 believe that the cost. 0:11:29.480 --> 0:11:30.720 Will go up that much. 0:11:31.559 --> 0:11:35.800 How inflationary is say a ten percent or bigger terriff 0:11:35.800 --> 0:11:36.959 for all around the United States. 0:11:37.120 --> 0:11:42.040 Well, if it's on everything you know, you could imagine 0:11:42.080 --> 0:11:44.120 that you know, this is going to feed through, you know, 0:11:44.160 --> 0:11:48.680 pretty quickly and broadly to consumer prices. You know, it's 0:11:48.679 --> 0:11:52.319 really going to hinge on is it everybody is? Is 0:11:52.720 --> 0:11:54.720 it just imports from China? I mean, I think that's 0:11:54.760 --> 0:11:56.640 sort of the crucial question that we're all trying to 0:11:56.679 --> 0:11:59.080 grapple with, right whether or not they really are going 0:11:59.080 --> 0:12:01.840 to follow through with it, and whether or not, you know, 0:12:01.920 --> 0:12:04.960 Congress could have a role in stepping in. They've delegated 0:12:04.960 --> 0:12:07.600 a fair amount of trade authority to the executive branch 0:12:07.920 --> 0:12:12.640 in the US through these various provisions national security, trade protectionism, 0:12:12.600 --> 0:12:15.160 et cetera. But you know, there is also a chance 0:12:15.200 --> 0:12:17.280 that you know, Congress could weigh on this issue as 0:12:17.320 --> 0:12:21.320 well and try to limit the amount and breadth of 0:12:21.360 --> 0:12:24.280 the terriffs because it would impact other treaty arrangements that 0:12:24.320 --> 0:12:24.640 we have. 0:12:24.880 --> 0:12:27.199 He can do a ton with executive action, that's for sure. 0:12:27.240 --> 0:12:39.760 Jonathan is good to see Jonathan pingle thebias the Mosielle 0:12:39.840 --> 0:12:42.960 Davis writing quote, the FED wants to maintain optionality to 0:12:43.000 --> 0:12:46.760 ease in julyle September, but acknowledges the diminishing window, adding 0:12:46.800 --> 0:12:50.199 Twward's point to a test of five percent for ten 0:12:50.280 --> 0:12:52.920 yere yields. LL joined us. Now for more. Let's talk 0:12:52.960 --> 0:13:00.679 about those tailwinds towards five percent. Can you list them? 0:13:00.880 --> 0:13:01.920 Yeah? Yeah. 0:13:01.960 --> 0:13:05.320 We think there's a high probability and high confidence level 0:13:05.320 --> 0:13:07.600 that we hit five percent. And and part of that 0:13:07.640 --> 0:13:10.120 reason is there's three components to a nominal interest rate 0:13:10.120 --> 0:13:10.880 a ten year yield. 0:13:12.000 --> 0:13:13.360 One is your break even inflation. 0:13:13.480 --> 0:13:15.640 We see the inflation prints going higher, so break even 0:13:15.679 --> 0:13:17.000 inflation should go higher. 0:13:17.200 --> 0:13:17.880 The other one is. 0:13:17.840 --> 0:13:20.400 Your real rate or your tips, and that incorporates a 0:13:20.440 --> 0:13:23.840 couple things. It incorporates the future view of monetary policy, 0:13:24.200 --> 0:13:27.200 of which that's changing, especially with the partial pivot that 0:13:27.240 --> 0:13:29.880 we expect today. So that's higher yields there as well 0:13:29.880 --> 0:13:32.360 as the risk premium and the risk premium impacted by 0:13:32.400 --> 0:13:35.679 inflation and supply. So when you have all the components 0:13:35.679 --> 0:13:38.600 of a yield pointing towards higher yields and wirer yields, 0:13:38.600 --> 0:13:40.440 it increases the confidence level and. 0:13:40.480 --> 0:13:42.160 Probability that you get to that level. 0:13:42.200 --> 0:13:44.679 So that's how we're looking at it, and we do 0:13:44.720 --> 0:13:46.320 see a test of five percent coming up. 0:13:46.520 --> 0:13:49.640 Test is an important word. What about sustaining that level? 0:13:49.679 --> 0:13:50.760 How difficult. Might that be? 0:13:51.960 --> 0:13:54.280 That's a great question. In the short term it won't 0:13:54.320 --> 0:13:56.640 be difficult, but in the longer term it'll be difficult. 0:13:56.920 --> 0:13:58.400 You know. This is one of the things where we 0:13:58.480 --> 0:13:59.400 will be buying at. 0:13:59.240 --> 0:14:02.400 Five percent above and part of the reason is higher 0:14:02.520 --> 0:14:05.360 yield and the market discounting even higher yields than where 0:14:05.400 --> 0:14:08.600 the present is in the future in regards to forwards, 0:14:08.920 --> 0:14:12.199 higher yields will accelerate us towards the. 0:14:12.280 --> 0:14:14.240 End of a business cycle. You know. 0:14:14.280 --> 0:14:19.120 It's that reflexology of reflexivity of interest rate market. So 0:14:19.680 --> 0:14:22.720 we don't see us being sustainably above five percent, but 0:14:22.760 --> 0:14:24.560 we could go with a five and a quarter, But 0:14:24.600 --> 0:14:28.240 we do see lower rates by one year from this time. 0:14:28.680 --> 0:14:30.400 This is something we hear a lot, both on the 0:14:30.440 --> 0:14:33.400 bond and stock side. That will be buyers into weakness, right, 0:14:33.400 --> 0:14:35.560 we'll be buyers into any kind of sell off. Are 0:14:35.600 --> 0:14:37.200 you a buyer now or are you waiting for that 0:14:37.240 --> 0:14:39.760 five percent level? Are you waiting to sort of see 0:14:39.760 --> 0:14:41.880 the whites of a five percent yield's eyes? 0:14:43.080 --> 0:14:46.720 No great question. And actually last time I was on 0:14:46.760 --> 0:14:48.520 the shoal was early March, and. 0:14:50.680 --> 0:14:52.840 We at that point in time we were tactically long 0:14:52.960 --> 0:14:55.360 we switched that over that time. We are short because 0:14:55.400 --> 0:14:58.560 our confidence level and hitting five percent is increasing with 0:14:58.600 --> 0:15:01.640 the numbers that we're seeing, as well as there's other 0:15:01.680 --> 0:15:03.840 tailwinds behind getting to five percent. You know, if you 0:15:04.000 --> 0:15:07.040 have Japanese intervention, that's possible treasury bond selling. 0:15:07.400 --> 0:15:08.920 They're the highest holders. 0:15:08.560 --> 0:15:10.840 Of treasury, so they do have a lot of US 0:15:10.920 --> 0:15:13.960 dollar on hand, but if they work through that any 0:15:13.960 --> 0:15:17.480 more US dollars, they sell treasuries. Combine that with a 0:15:17.480 --> 0:15:20.200 lot of technical aspects in the market in regards to 0:15:20.720 --> 0:15:23.480 no one has any higher yield hedges on to your 0:15:23.480 --> 0:15:27.040 point in your question, so people will panic as we 0:15:27.120 --> 0:15:30.280 get there, So we think it accelerates upon itself. So 0:15:30.320 --> 0:15:32.720 we are tactically short now and we will cover that 0:15:32.760 --> 0:15:34.240 at five percent and start going along. 0:15:34.480 --> 0:15:37.720 You talk about some of the supply and demand dynamics 0:15:37.720 --> 0:15:41.160 behind this increasing conviction around five percent, You talk about 0:15:41.200 --> 0:15:43.800 the potential sellers. I want to talk about the idea 0:15:43.880 --> 0:15:46.120 of the US Treasure Department. We do get the refunding, 0:15:46.160 --> 0:15:49.520 the quarterly refunding announcement in about forty minutes time. We'll 0:15:49.520 --> 0:15:51.560 get some sort of details about how they plan to 0:15:51.600 --> 0:15:53.680 fund a deficit that is increasing how much is that 0:15:53.760 --> 0:15:56.720 plying into your call for a five percent yield. 0:15:57.840 --> 0:16:00.680 It's significant and it's not just the refining announcement of 0:16:00.680 --> 0:16:03.880 what the next auction sizes will be, but it's a 0:16:03.960 --> 0:16:07.080 cumulative effect. You know, last week we had record two years, 0:16:07.160 --> 0:16:10.880 record five years, seven years, you know, and it's the 0:16:10.960 --> 0:16:14.000 whole curve of debt that's increasing. So that will definitely 0:16:14.000 --> 0:16:16.960 have impact. And what we haven't seen in. 0:16:17.320 --> 0:16:19.720 Treasury yields is risk premium. 0:16:20.080 --> 0:16:22.200 And part of what you need risk premium for is 0:16:22.240 --> 0:16:25.240 increasing supply because it has an impact on the dollar 0:16:25.280 --> 0:16:27.320 in the long term. So you want to make sure 0:16:27.360 --> 0:16:29.760 you're getting a return and your money back and to 0:16:29.920 --> 0:16:32.960 ensure that in this environment, you need more risk premium. 0:16:33.160 --> 0:16:35.560 And we don't have risk premium in yields yet, and 0:16:35.960 --> 0:16:38.040 treasury supply would be one of the reasons why we 0:16:38.080 --> 0:16:39.000 do start getting that. 0:16:39.440 --> 0:16:43.400 Oh, do you see this competing for capital elsewhere? More specifically, 0:16:43.480 --> 0:16:46.280 is it competing for capital in credit? You seeinge any 0:16:46.280 --> 0:16:46.720 sign of that. 0:16:48.480 --> 0:16:50.800 I'm going to answer it in two parts. The immediate 0:16:50.880 --> 0:16:53.000 answer is no, no signs at all. Like look at 0:16:53.000 --> 0:16:56.200 the boeing, is ten billion in bonds being new supply 0:16:56.360 --> 0:16:59.280 bonds being issued this week and eighty billion of bids. 0:17:00.160 --> 0:17:02.360 There is a lot of cash. So even if it 0:17:02.480 --> 0:17:04.440 does compete, there's. 0:17:04.280 --> 0:17:05.720 Still so much cash there. 0:17:05.800 --> 0:17:08.320 That was eight times oversubscribed on one of the largest 0:17:08.359 --> 0:17:09.400 issues in history of. 0:17:09.720 --> 0:17:13.320 Bond issues, so there's room for it to compete. 0:17:13.359 --> 0:17:15.679 But to the second part to this question, which is 0:17:15.680 --> 0:17:18.080 a really good question, it's the reason why we see 0:17:18.160 --> 0:17:21.800 higher tips and higher real yields. When your economy is 0:17:21.840 --> 0:17:25.560 so resilient and growing so fast, what the Treasury and 0:17:25.600 --> 0:17:27.440 what the Fed has to do is take the money 0:17:27.440 --> 0:17:29.960 out of the growth economy to slow it down. And 0:17:30.000 --> 0:17:32.440 the only way you do that is by high having 0:17:32.560 --> 0:17:36.639 higher savings rates as reflected by your tips yield. So 0:17:36.720 --> 0:17:39.960 although we're at highs we haven't seen in probably fifteen 0:17:40.040 --> 0:17:42.600 years around, we haven't tested the high of last November. 0:17:42.840 --> 0:17:44.720 We're going to test that as well, but we'll probably 0:17:44.720 --> 0:17:47.239 make new fis in tips as well, because you have 0:17:47.280 --> 0:17:49.320 to take money out of the growth economy into the 0:17:49.320 --> 0:17:52.800 savings economy, and you only do that with higher real yields. 0:17:52.880 --> 0:17:55.720 I'm looking right now actually at tenure real yields, and 0:17:55.760 --> 0:17:58.120 we're looking at two point three percent, as you said, 0:17:58.200 --> 0:18:01.119 the highest since last November. As you look out, I 0:18:01.119 --> 0:18:03.560 mean there's real divide about where yields are going to 0:18:03.600 --> 0:18:05.080 end up. You said, if we get to five percent, 0:18:05.119 --> 0:18:08.479 that will expedite the sort of tumbling down to another 0:18:08.560 --> 0:18:10.800 level that's a lot lower, simply because it will slow 0:18:10.840 --> 0:18:13.880 the economy. What is that lower level? How big could 0:18:13.880 --> 0:18:17.000 that rally be? Versus say, not as much as people think, 0:18:17.160 --> 0:18:20.560 just because there isn't the same kind of disinflation that's 0:18:20.600 --> 0:18:22.480 down the pipeline in the same kind of way that 0:18:22.520 --> 0:18:23.560 there was pre pandemic. 0:18:24.720 --> 0:18:26.920 Listen our call from December and we said it on 0:18:27.920 --> 0:18:30.400 surveillance as well as we see the range of ten 0:18:30.480 --> 0:18:33.400 year yields in the US at five percent to three 0:18:33.440 --> 0:18:36.720 and a quarter. So I think a move to five 0:18:36.720 --> 0:18:39.520 and a quarter accelerates that move back to a three handle. 0:18:39.840 --> 0:18:42.240 Do we see it this year? No, highly unlikely, but 0:18:42.359 --> 0:18:45.119 Q one next year, Q two next year, it's a 0:18:45.240 --> 0:18:48.399 very real possibility that we see three against three handle, 0:18:48.440 --> 0:18:50.479 three and a half, three and a quarter. So we 0:18:50.520 --> 0:18:53.600 do see us possibly testing the lower end again, but 0:18:53.680 --> 0:18:56.040 first it takes higher yields to do that, to trigger that. 0:18:56.320 --> 0:18:58.840 Oh, you've been absolutely phenomenal this year. I say every 0:18:58.920 --> 0:19:00.919 time I catch out with you just absolutely brilliant. This 0:19:00.960 --> 0:19:03.800 was a clinic once again. Oh Davis, there of beam up. 0:19:13.240 --> 0:19:15.640 We'll begin with that top story Marcus on edge ahead 0:19:15.680 --> 0:19:18.280 of the fat decision. US Equity's closing out a difficult 0:19:18.320 --> 0:19:21.840 April with the worst day since January. To discuss Tony 0:19:21.840 --> 0:19:24.439