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Speaker 2: We're thrilled did Is Taylor drops here? Our surveillance Swift
Speaker 2: correspondent Amy was Silverman joining us today. But the timing
Speaker 2: you're so important, I'm not going to give you any
Speaker 2: Taylor chat much today. Amy, She's had a derriv of
Speaker 2: strategy RBC. What did do the cross moment say about
Speaker 2: this moment for America?
Speaker 3: Well, look, the last time I came, Tom, we talked
Speaker 3: a little bit about the left tail and the right tail,
Speaker 3: and you know, part of our conversation was that I
Speaker 3: still felt like investors were more worried about that right tail.
Speaker 4: Here we are with over.
Speaker 3: With markets at all time highs SKEW is relatively low.
Speaker 3: You know, all the hedges that had been placed were
Speaker 3: not monetized because the markets kept going up. And when
Speaker 3: I talked to investors, they say, this just feels like
Speaker 3: the most reluctant rally.
Speaker 2: Roman Friedman, NYU I think he's very controversial. In economics,
Speaker 2: he would say the rehedge will kill you. Inside baseball,
Speaker 2: we've had this bull market, the hedges weren't monetized. They
Speaker 2: got to go out and rehedge. Can they rehedge opportunistically here?
Speaker 3: They certainly can. And of course, because everything's come in
Speaker 3: from a volatility perspective, it's not that expensive. But the
Speaker 3: reality is nobody's going to because markets are very short.
Speaker 5: Very I love it, yeah.
Speaker 3: Because because you know, when you're burned once twice, then
Speaker 3: shame on you. And so you know, you see it
Speaker 3: in some aspects of the market. You do see it
Speaker 3: in goal, but you don't see it as much in
Speaker 3: VIX and you don't see it as much in s
Speaker 3: and p hedges because that concentration risk keeps pushing the
Speaker 3: right tail to be more the fear than.
Speaker 6: The left hand.
Speaker 2: Can I editorialize from one Sweeney and Keene, we are
Speaker 2: so lucky, we're not running.
Speaker 5: Money running out.
Speaker 6: So are your clients looking to buy protection or is
Speaker 6: it or not? Because again I look at a VIX.
Speaker 6: That's the only thing I kind of look at because
Speaker 6: I'm simple and I don't see a lot of fear
Speaker 6: out there, So what are you seeing on your desk?
Speaker 3: So I will tell you post Liberation Day, we did
Speaker 3: have that big rally, and investors did hedge, and a
Speaker 3: lot of it was longer term, so a lot of
Speaker 3: it was for that September FOMC and then when that
Speaker 3: came and went not in the direction they had hoped
Speaker 3: from a hedging perspective, none of that premium was rolled.
Speaker 3: What investors tell me right now is they're looking at
Speaker 3: alternate venues, so that could be you know, call options
Speaker 3: on gold. Even though that's run too, they at least
Speaker 3: feel like it's a little bit less correlated. And then
Speaker 3: what they're waiting for is and I'm interested in what
Speaker 3: consensus is here, but I think if we get any
Speaker 3: sort of five to ten percent draw down, investors are
Speaker 3: actually going to buy that dip still. It's actually that's
Speaker 3: why I think you get this market that feels nosebleed,
Speaker 3: and yet we're still doing that retail chase.
Speaker 2: So in the Greek letter, someone that I look at, folks,
Speaker 2: this is from aerospace engineering, is THETA, which is time
Speaker 2: guessing the time function, measuring the time function on the
Speaker 2: X axis. Can you do of theta study now or
Speaker 2: with a shutdown, no jobs report, all the other distractions
Speaker 2: tailors drop. You can't measure out on the X axis
Speaker 2: right now? Is that what this is really about?
Speaker 5: Yes?
Speaker 3: And no? And you know what I would say, Tom,
Speaker 3: in terms of THETA it's good from the perspective of
Speaker 3: if you were selling that Volatiley premium low as it
Speaker 3: is because everything's been can kicked. It's good for someone
Speaker 3: who's just writing it out right because all the event
Speaker 3: risk has now been pushed out. The question and options
Speaker 3: is always a timing question. Right now, the options market
Speaker 3: is pricing that we will get a resolution before the October.
Speaker 2: I'm going to get one more nerd question in here
Speaker 2: with Amy with Silverman RBC, Good morning across the nation,
Speaker 2: Good morning Global and American Wall Street. We're thrilled you
Speaker 2: whether where they work at Princeton and all that she's
Speaker 2: done for the Royal Bank of Canada. Amy, was Silverman
Speaker 2: really treasured here as well? What tal Love would say,
Speaker 2: fooled by randomness is forget about all this pro Wall
Speaker 2: Street thing. Look at the hedge fund report from Catherine
Speaker 2: Burton yesterday, the non performance of hedge funds. Tala would say,
Speaker 2: you can't figure it out, you take little bits of
Speaker 2: money and go way out, THEATA way out and buy
Speaker 2: the bet you want to bet.
Speaker 5: Is that efficacious?
Speaker 2: Now?
Speaker 3: Look, and there are tail funds that do that. And
Speaker 3: it's a function of why do we go so far
Speaker 3: up because we don't know exactly when the timing is,
Speaker 3: but we do feel like that reckoning could occur, and
Speaker 3: of course it's not that expensive. But again, markets are
Speaker 3: very short term. We just got burned on the September
Speaker 3: FMC not going your way, and you place those hedges
Speaker 3: and now you're dragging a little on something that's ripped.
Speaker 3: It's very hard to talk people into stuff like that, nerd.
Speaker 2: Folks, But I just tell you you're getting a window
Speaker 2: here into the real world. Jordan Rochester over at Namura,
Speaker 2: you can't miszoo. Excuse me, miszoo. You can't even understand
Speaker 2: his report. It's just Greek to.
Speaker 5: Make too much Greek there.
Speaker 6: Yeah, Amy, who who your typical clients on your desk?
Speaker 6: Are they hedge funds? Are they long only funds? Who's
Speaker 6: a typical client of yours that really wants to talk
Speaker 6: about options and hedging and that type of thing.
Speaker 3: Yeah, I would say it's a good mix So there's
Speaker 3: long only as asset managers, there's pensions, and then there's
Speaker 3: hedge funds. I'll tell you know, hedge funds can be
Speaker 3: a little bit more nimble and what they do, and
Speaker 3: what we've seen a lot of them do is rent
Speaker 3: the small cap rally, so you know, they don't want
Speaker 3: to go all in. So you're seeing a lot of
Speaker 3: these IWM call spreads, which on an absolute level have
Speaker 3: actually done fine because they're saying, we don't want to wait,
Speaker 3: we don't want to sit on this concentration risk. When
Speaker 3: we do see some sort of spread whining. In that case,
Speaker 3: it was a volatility spread between IWM and q's let's
Speaker 3: take advantage of that. So you are seeing nimbleness from
Speaker 3: the community that can do it. I think it's a
Speaker 3: little bit of a struggle, you know, for the long only. However,
Speaker 3: if they've been in the right handful of names, uh,
Speaker 3: they've done okay. And if they haven't, that that drag
Speaker 3: is quite painful.
Speaker 5: Dumb question of the day.
Speaker 6: Do your clients want to hedge their fixed income portfolios
Speaker 6: as well? And if so, how do they do that?
Speaker 3: They certainly do, That just wouldn't be my Alley and
Speaker 3: the sense that we only focus on equities. Okay, but
Speaker 3: I will tell you there's been a lot of translation
Speaker 3: because there's so many liquid fixed income proxies, So an
Speaker 3: HyG or a TLT, you're seeing fixed income focused hedge
Speaker 3: funds and asset managers actually traffic more in equity derivatives
Speaker 3: because there is a decent amount of liquidity in these
Speaker 3: proxy ETFs.
Speaker 6: On the equity side, do they hedge with ETFs?
Speaker 5: And so how do they? How are ETFs? How's that
Speaker 5: change your world?
Speaker 3: I mean for us, it's changed for the better because
Speaker 3: I just feel like there's more tools in our toolbox.
Speaker 3: You know, twenty years ago, I couldn't say, hey, go
Speaker 3: out and buy an HyG so the high yield proxy
Speaker 3: ETF foot spread you wouldn't get that liquidity nowadays, especially
Speaker 3: because I think the end of the day, everything is
Speaker 3: rates focused, no matter if you're a tourist or you're
Speaker 3: specializing in it. Thank you use these as something that
Speaker 3: you would do instead of CDX, and it's relatively liquid
Speaker 3: and it gives you timing.
Speaker 2: So with that brilliant phrase which I totally agree with
Speaker 2: from Painful Losses, can I suggest that part of the
Speaker 2: rates focus is what's driving MEG seven higher, which is
Speaker 2: a recalculation of their cash flows in terminal.
Speaker 5: Value one hundred percent.
Speaker 3: And you know, the one thing I'll say, the big
Speaker 3: change to me post COVID is you can't rely on
Speaker 3: these traditional correlations, right, you can't rely on your heads
Speaker 3: just being a sixty to forty portfolio. I think MAG
Speaker 3: seven changed a lot of that. And then you look
Speaker 3: at the intercorrelation between MAG seven which has then relatively low,
Speaker 3: and people are scratching their heads and they say, how
Speaker 3: is it that you're all integrated into each other's supply
Speaker 3: chains that yet this correlation isn't that high. And so
Speaker 3: I do think that's why you're seeing these different expressions
Speaker 3: of hedges Tom that weren't necessarily the case five years ago.
Speaker 2: I mean it was silver an RBC with this extended conversation,
Speaker 2: a treat on it. On Jobs Day Friday at a
Speaker 2: thirty Claudia sum will be with us. We're honored to
Speaker 2: have doctor Sam with us today. So within the MAG
Speaker 2: seven and all that, there's a recalculation here. How do
Speaker 2: you take the fundamental story and how does that look
Speaker 2: like when you look at it? Can you look at
Speaker 2: the cross moments of Microsoft. I mean, what do they
Speaker 2: look like?
Speaker 3: Absolutely?
Speaker 5: So.
Speaker 3: One thing I'll tell you is when we were looking,
Speaker 3: you know, basically four or five years ago, at this
Speaker 3: point when the AI news was slowly starting to become
Speaker 3: part of the conversation. The first time you really saw
Speaker 3: that bullish element was in Nvidia calls. So they started
Speaker 3: to skew invert. All that means is the call option
Speaker 3: bid became so vast relative to the put option bid.
Speaker 3: Before that happened, the only time we saw that level
Speaker 3: of exuberance was in the meme stocks. And when people
Speaker 3: saw it on the meme stocks, they said, this is
Speaker 3: a tempest and a teapot. This isn't going to happen
Speaker 3: on bigger names. And then guess what it happened on
Speaker 3: all the Mag seven names. And so now the market
Speaker 3: has really start to pay attention to the Mag seven
Speaker 3: cross moments because they determine the cross moments of the
Speaker 3: entire index. You know, this is twenty five to fifty
Speaker 3: percent depending on your index, and you have to watch it.
Speaker 5: The cross moments.
Speaker 2: Folks are starting with variants, the different dynamics of the moment.
Speaker 2: For example, kretosis is the fungus Lisa Matteo's daughter.
Speaker 5: Has between her toes.
Speaker 2: It's also I think it's the third cross moment or mesocrtatic, leptokritatic,
Speaker 2: something like that. Paul Amy did.
Speaker 5: Better on this than me, exactly.
Speaker 6: A talk to us about liquidity in your marketplace. If
Speaker 6: you come up with a nice strategy for your client
Speaker 6: and that actually get executed efficiently in the markets today,
Speaker 6: how has it liquidity changed in the future As an
Speaker 6: options market it you.
Speaker 3: Know, it's been incredible. So first, liquidity depending on what
Speaker 3: you're trading, your standard suite of indices or mag seven,
Speaker 3: what have you highly liquid from an options perspective. The
Speaker 3: second thing I would say is we've had a lot
Speaker 3: of duration shrinkage, so the folks.
Speaker 5: That creation shrink.
Speaker 3: Yes, duration, so the tenors of the options that are traded.
Speaker 3: And this is a huge theme for us. It used
Speaker 3: to be that one month was your short duration, and
Speaker 3: then it used to be one week, and then Cibo
Speaker 3: came out with a lot of zero day to x
Speaker 3: rate and that's been the duration. So things happened very
Speaker 3: rapidly in our markets. But at the same time, guys,
Speaker 3: we also get less of a signal, so you know
Speaker 3: that GPS that used to give you maybe one thousand
Speaker 3: feet to make that left turn, we're getting like a
Speaker 3: day now because you don't see people place those bets
Speaker 3: until one day before. So I as a strategist can't
Speaker 3: on the one day paper that I.
Speaker 2: Don't understand if you get a jump condition one way
Speaker 2: or the other, how does that affect mere mortals out
Speaker 2: there with a long term horizon of one week or
Speaker 2: one month?
Speaker 3: You know, That's why if you look back to what
Speaker 3: I would consider crises, so where the market kind of
Speaker 3: gives you these one two standard divation moves, the velocity
Speaker 3: tom is much faster. So think back to April twenty
Speaker 3: twenty four, think back to Liberation Day this year. The
Speaker 3: velocity of those moves up and down, that's a really
Speaker 3: sharp V.
Speaker 5: Can I go full NERD to end? So it's slew rates.
Speaker 5: That's what you do.
Speaker 2: You take electrical engineering folks and bring You're sitting in
Speaker 2: a classroom with Princeton and you're going, why am I
Speaker 2: in an engineering course? If I'm looking at finance, it's
Speaker 2: about slur rates? Are the slur rates for our four
Speaker 2: to oh one k the same as they used to be?
Speaker 3: I think in the sense that if you're if you
Speaker 3: have a four oh one K, you're supposed to kind
Speaker 3: of close your eyes and not worry about it. So
Speaker 3: in that sense, if you're a long term investor, I
Speaker 3: don't think it really changes anything. However, if you're us
Speaker 3: and you live and breathe this day day at, day
Speaker 3: in and day out, and then you know you're someone
Speaker 3: on the other side who's got a quarter end to
Speaker 3: worry about or month in Mars, it does become a
Speaker 3: little bit problematic because you do have these potholes, you know,
Speaker 3: I like driving Analoga's even though I don't drive, and like,
Speaker 3: there's a lot more potholes that could happen than when
Speaker 3: the Tenors were a lot longer.
Speaker 2: Rockton's daughter has Taylor coming in new from Target today.
Speaker 2: Target's promise they'll deliver it today. How will the.
Speaker 5: Silverman House consume the new Tailor.
Speaker 3: Tom I have sixteen tickets to the Tailor Swafe release
Speaker 3: party tonight, Wow for for my seven year old and
Speaker 3: my eleven year old and their friends. So I'm you're
Speaker 3: welcome to go. You're old, go get a movie theater
Speaker 3: where they I don't even know at this point, but everyonce.
Speaker 3: There's a lot of glitter involved in nail art and tattoos.
Speaker 3: So I'm getting ready. I might need a drink before then.
Speaker 5: Your offspring address appropriately.
Speaker 3: They've been planning this outfit, you know, it's part of
Speaker 3: this is part of the arc.
Speaker 5: So what are you smiling about over there?
Speaker 4: He's right.
Speaker 5: The girl's plan for this were very like, very cool.
Speaker 2: That is, so they all go to a movie theater
Speaker 2: and there's a video of something.
Speaker 3: I believe she's got some you know, behind the scenes.
Speaker 3: I don't know, but that's my guest Beatles.
Speaker 5: I think it's a same you were.
Speaker 6: I mean, I haven't seen anything like.
Speaker 2: This that's brilliant, and that the only equivalent was Beatlestone's
Speaker 2: nineteen sixty four.
Speaker 5: Yeah, I will say this, folks.
Speaker 2: And I listened on the headphones. I previewed all those
Speaker 2: songs to give you the songs. Amy called up and said,
Speaker 2: I'm not coming on unless you do all Taylor, and
Speaker 2: it's all out of Virginia Beach. There are these miracle
Speaker 2: people in Virginia Peach, John Haynes, a giant named Serban
Speaker 2: Ganeo who's very private, and Taylor's albums are manufactured essentially
Speaker 2: by three geniuses in Virginia Beach and the sound when
Speaker 2: you put it on, She's nobody sparing a penny here.
Speaker 2: It's world class. It's world class fidelity.
Speaker 5: Amy was sober. Thank you so much. Stay with us.
Speaker 2: More from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
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Speaker 2: Our conversation of the Day on the American economy, Claudia
Speaker 2: sam joins us chief economists at New Century Advisors.
Speaker 5: Normally jobs day. What do you think, Dad, No, we're
Speaker 5: not going to do that.
Speaker 2: She's out of Michigan with all of her front rate
Speaker 2: Federal Reserve academics, doctor somem not in a recession, but
Speaker 2: on the spirit.
Speaker 5: Of the American economy.
Speaker 2: Claudia got a great line which alludes to my book
Speaker 2: years Ago, which is a steal from Ken Rogoff. Are
Speaker 2: we flying on one engine? You say we're not. You say
Speaker 2: we have impaired vision. Define America's impaired vision? Right?
Speaker 4: Well, I mean this is the time where we come
Speaker 4: together every month and wait to find out the latest,
Speaker 4: the best reading that we have on what's happened in
Speaker 4: the labor market, and we don't have it today, Like
Speaker 4: we're not going to have that discussion. So that's to me,
Speaker 4: we're not flying blind. There's a lot of information about
Speaker 4: the economy that we're getting, you know, even as the
Speaker 4: federal government has shut down, but we're missing a really
Speaker 4: important piece of information. So our vision is impaired. And
Speaker 4: what's really frustrating is the September employment report exists right like,
Speaker 4: these numbers are sitting there. It's just because the workers
Speaker 4: who would normally put that up weren't deemed essential. You know,
Speaker 4: we're just speculating connection, and that's really unfortunate.
Speaker 2: On a news basis, Doctor some does a president of
Speaker 2: the United States get briefed on the numbers that exist
Speaker 2: that we don't see.
Speaker 4: Given the timing of the shutdown, it should not have
Speaker 4: made its way all the way to the president. Typically
Speaker 4: the president also the FED chair would see this employment
Speaker 4: report the night before, so Thursday night and the government
Speaker 4: shutdown on Wednesday. But again, but it is the choice
Speaker 4: of the White House at the end of the day.
Speaker 4: Who are the essential federal workers. So it is a
Speaker 4: choice of the White House as to whether or not
Speaker 4: we have these data this morning or not.
Speaker 5: All right, Claudia.
Speaker 6: In the absence of the government data, maybe a little
Speaker 6: bit more attention is focused on the ADP employment number.
Speaker 6: A decline of thirty two thousand in September and a
Speaker 6: downwardly revised decline of three thousand in August. I think
Speaker 6: that caught some people by surprise. How did you look
Speaker 6: at that number?
Speaker 2: Right?
Speaker 4: So absolutely we should be looking at the private sector numbers.
Speaker 4: ADP often gets a lot of interest and attention. One
Speaker 4: thing that ADP does is in September, it's a time
Speaker 4: where they update their model to help them take you know,
Speaker 4: the what they're looking at are the clients of ADP.
Speaker 4: They're a large payroll processor, but they don't process every
Speaker 4: payroll in the country, and so they need to use
Speaker 4: data from the pure of labor statistics to take their
Speaker 4: client data and make it more representative all you know,
Speaker 4: all payrolls, all businesses. And unfortunately that happens in September.
Speaker 4: So and they told us in the press release that
Speaker 4: updating their model that actually shaved a good bit off
Speaker 4: of their September and also their their August numbers, So
Speaker 4: I think it's important. In the release they stress that,
Speaker 4: you know, even after they did the benchmark revision pulled
Speaker 4: in their new data, the trend was unchanged, right, So
Speaker 4: they are seeing a slowing in job creation. But I
Speaker 4: think if you look at the headline numbers that ADP printed,
Speaker 4: you might be like, oh, wow, the slowing is really
Speaker 4: picking up, right, that sign of detrioration that we're all
Speaker 4: so worried about and watching for, and even ADP in
Speaker 4: their release that was not the way they interpret their data.
Speaker 4: So it was just another market like, you know, job
Speaker 4: creation is really slow, and that feeds this narrative of
Speaker 4: the downside risk.
Speaker 2: Claudia sim with this. So we're getting briefed here, and
Speaker 2: of course we do better with Claudia some Governor Myron
Speaker 2: will be with us at nine point thirty two this morning,
Speaker 2: that is scheduled.
Speaker 5: Claudia, back in your ute.
Speaker 2: I'm sure at Michigan you were doing the University of
Speaker 2: Michigan's research seminar and quantitative economics the Michigan State output gap.
Speaker 2: Can we measure the output gap that Myron of Harvard
Speaker 2: is so fired up.
Speaker 4: About well output gaps are any measure of slack. Slack
Speaker 4: frankly is going to be an estimate, right, You're going
Speaker 4: to need a model, You're going to need to make
Speaker 4: a lot of assumptions. So we can certainly have differences
Speaker 4: of opinion about how those are put together, but you
Speaker 4: know the ingredients of because at the end of the day,
Speaker 4: the thing that we don't observe we get measures of,
Speaker 4: say GDP growth, These are estimates, they get revised, but
Speaker 4: we can go out and measure that. The thing that's
Speaker 4: important for the gap is you have to get an
Speaker 4: estimate of what's potential, like what's the best we could
Speaker 4: be doing. And that's the piece that you know, you
Speaker 4: can have discussions and changes. Big changes in immigration like
Speaker 4: that can affect what potential output is, big changes in
Speaker 4: technology and productivity that can affect what potential output is.
Speaker 4: So you know, I think it's it's an art more
Speaker 4: like science to get at those but you know that
Speaker 4: these measures of slacker are really important. And I will
Speaker 4: mention bringing it back to today and the data we're missing.
Speaker 4: The big thing that we don't have from the private sectors.
Speaker 4: We don't have a measure of slack in the labor market.
Speaker 4: The unemployment rate is one of those you know, fits
Speaker 4: in that measure of like workers looking for work that
Speaker 4: don't have it versus workers who do have work.
Speaker 6: Claudia, what do we know now with a little bit
Speaker 6: of experience here about the closing of the southern border
Speaker 6: and that's impact on the US labor force? Uh?
Speaker 4: The the immigration statistics, you know, we what we need
Speaker 4: are the information from the federal government on the you know,
Speaker 4: unauthorized immigration in the country, the deportations. I mean, there
Speaker 4: are there are data that are published. I think some
Speaker 4: of those have been more lagged than in the past,
Speaker 4: but it really is our population estimates, which the immigration
Speaker 4: is just one piece into it. They tend to come
Speaker 4: with very long lags. So I think this because policy
Speaker 4: has changed so much and so rapidly that there's both
Speaker 4: you know, reporting, the reporting lags, and then just putting
Speaker 4: all the pieces together. So I think this we know
Speaker 4: the direction, Like we can sign this in terms of
Speaker 4: like immigration has slowed down dramatically, but to get really
Speaker 4: precise and particularly in these decompositions of like oh well,
Speaker 4: job creation is down to twenty thousand, you know, is
Speaker 4: this high or is it low? What's the break even?
Speaker 7: Right?
Speaker 4: Those very precise calculations. We just don't have the input
Speaker 4: data to make you know those fine points, and we
Speaker 4: probably won't for some time.
Speaker 6: And Claudia, just away from the labor discussion for a moment.
Speaker 6: The other side of the FED discussion is inflation. What's
Speaker 6: your view of inflation right now in this economy?
Speaker 4: Right Well, inflation is elevated. It's it's and it has
Speaker 4: been elevated for some time. I think it's in the
Speaker 4: space of it's still a problem. Three percent inflation is
Speaker 4: still higher than what people have been used to, particularly
Speaker 4: before the pandemic, and the longer it last, it does
Speaker 4: add up, right, and so it's a problem. I wouldn't
Speaker 4: put wouldn't assign it being an acute problem, and I
Speaker 4: think there are reasons to expect it to come to
Speaker 4: come down.
Speaker 3: Now.
Speaker 4: On inflation, I think this is a place where we
Speaker 4: really are much more flying blind. If the federal government
Speaker 4: stays closed, we do not have as much data to
Speaker 4: here watching this, Claude, You've.
Speaker 5: Got to run. I can't wait to have you on
Speaker 5: for a real jobs Day again.
Speaker 2: Doctor Sam has been one of our foundation supporters here
Speaker 2: her academics at New Century Advisor, of course iconic on
Speaker 2: measuring slowdowns in America.
Speaker 5: Stay with us.
Speaker 2: More from Bloomberg Surveillance coming up after this.
Speaker 1: This is the Bloomberg Surveillance Podcast. Listen live each weekday
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Speaker 5: Priam is isery here on a jobs day? Folks? It's
Speaker 5: a non jobs day.
Speaker 2: But as pri as you and I were talking, the
Speaker 2: dynamics of full faith and credit is price up and
Speaker 2: yield down?
Speaker 5: What's the x axislo like? When is the when of lower?
Speaker 8: Yields have been declining in the last few months. You know,
Speaker 8: if you compare it to say where we were at
Speaker 8: the start of the year or even after Liberation Day,
Speaker 8: when the concern was inflation may skyrocket, the Fed may
Speaker 8: not be able to cut at all. They may be
Speaker 8: the Cell America trade. What happens to the deficit? So
Speaker 8: that's how the tenure got above four and a half?
Speaker 9: Why has it come down?
Speaker 8: Well, inflation has not picked up as much, So I
Speaker 8: think that's allowing the FED to at least reduce the
Speaker 8: level of restriction, and the deficit is marginally better because
Speaker 8: we are statif as we've heard this, the tariff revenues
Speaker 8: are improving the deficit, not the long run entitlement issue,
Speaker 8: but at least near terms, So you know, I think
Speaker 8: three seventy five to four and a quarter is our
Speaker 8: range for now, so it is below where we are
Speaker 8: right now.
Speaker 9: We like owning duration. One of the things.
Speaker 8: The reason we like it is even though you're in
Speaker 8: that range, there's asymmetry, meaning there's more of a case
Speaker 8: of rates to fall if you get either permanent lay
Speaker 8: offs due to the shutdown or a slowing in you know,
Speaker 8: the job market continues. There's a nonlinearity. I know, Tom,
Speaker 8: you like to talk about nonlinearities in the job market.
Speaker 8: Typically in the uneployment rate starts to go up and
Speaker 8: goes up much faster. So for that asymmetry, we like
Speaker 8: going in too.
Speaker 2: So silent controller and put me in the time out here.
Speaker 2: I didn't introduce ms Messer correctly. Premium miser folks, corplus
Speaker 2: fund at G. People are going to asset management.
Speaker 6: Very good the markets seem to be ignoring a shutdown,
Speaker 6: it seems like, and is that something that is reasonable
Speaker 6: from your perspective, given what's what could happen? I guess so.
Speaker 8: Historically shutdowns have been a bit of political theater, so
Speaker 8: the market ignores it. President trum signed something in law
Speaker 8: saying that they will be in twenty nineteen, saying.
Speaker 9: That people will get back paid.
Speaker 8: So you don't get paid whether you're working or four load,
Speaker 8: but you will get paid at some point. If it's
Speaker 8: a short shutdown, I think it's fine for the market
Speaker 8: to ignore it. Why it could be a little bit
Speaker 8: different this time is we've not historically heard during a
Speaker 8: shutdown that the administration may actually have permanent layoffs. Now
Speaker 8: maybe it's a negotiating stance, but if it actually results
Speaker 8: in permanent layoffs, I think the market's not going to
Speaker 8: ignore it.
Speaker 9: And the other one is how long does it last.
Speaker 8: You know, if it's a short shut down, you don't
Speaker 8: really miss a paycheck, it's okay. You start to miss
Speaker 8: one or two paychecks, the military starts to not get paid.
Speaker 8: They're putting their lives on the line. I think then
Speaker 8: the market's going to say, okay, Congress has to get
Speaker 8: their act together. I think then the market will start
Speaker 8: to increase risk premiums and you'll see an impact in rates,
Speaker 8: and you'll see an impact in the agree market.
Speaker 6: All right, So we're not getting the nonfarm payroll data today,
Speaker 6: but neither is the FED. I'm assuming unless they get
Speaker 6: some little somebody's passes them a note under the desk.
Speaker 6: So they're kind of flying blind a little bit too.
Speaker 6: So how does that if we go a week or
Speaker 6: two and they're not getting the data that they need
Speaker 6: because they are data dependent, how do you think.
Speaker 5: The FED has How does that impact the FED?
Speaker 7: Either? Right?
Speaker 8: Great point, because this FED has set time and time
Speaker 8: again that they are data dependent. They don't want to
Speaker 8: rely on a model, they want to base it on data.
Speaker 8: But you know, payrolls is a very important data release,
Speaker 8: so is claim, so is CPI. But if we don't
Speaker 8: have that, we look at what we call second tier
Speaker 8: data releases. And on the labor market, I actually think
Speaker 8: there's been a remarkable amount of consistency. We're not seeing
Speaker 8: the layoffs, but we are seeing low hiring, whether it's surveys,
Speaker 8: whether it's you know, actual hiring trends in the last
Speaker 8: few months. So I think the FED looks at the
Speaker 8: totality of the data and says there's some risks to
Speaker 8: the labor market building. This is why they cut in September.
Speaker 8: The risk management argument. I think you can make that
Speaker 8: case for an October cut as well. I think given
Speaker 8: that BLS is not collecting data, we shouldn't really expect
Speaker 8: a very reliable, you know, October payroll report as well.
Speaker 8: So I think this might be for the next few months.
Speaker 8: They're going to have to look at a lot of
Speaker 8: other data. I think given the starting point, we're at
Speaker 8: four and a quarter on FED ones, they can cut
Speaker 8: a few more times before it starts to get difficult
Speaker 8: for them because now you're in the vicinity of neutral.
Speaker 8: Now you need a much better credible sense of data.
Speaker 5: How do you respond? And I believe Governor Myron sy
Speaker 5: help me here. We got Governor Myron in.
Speaker 2: The nine o'clock hour. I think, how do There's a
Speaker 2: rangy debate, fabulous to moralic article in Bloomberg yesterday on
Speaker 2: the neutral rate. The plug ins of the tailor rule
Speaker 2: in that it's tangential to what you do, but when
Speaker 2: you synthesize Ferulean chasm in and prea misra. Is there
Speaker 2: anything we can believe it in the neutral rate or
Speaker 2: is it just the fog out there?
Speaker 5: You just see the fog, the fog on Park Avenue.
Speaker 2: Yeah, comes down, sure, and you know it avoids the
Speaker 2: JP market building special fog removerent is.
Speaker 5: A very nice fog in our neutral rate analysis.
Speaker 8: So there is always large amounts of uncertainty around the
Speaker 8: neutral rate.
Speaker 9: It does move with structural reasons.
Speaker 8: So there's been this argument for the last few years
Speaker 8: of the neutral rate is higher because corporate and business balance,
Speaker 8: it's are better that there's more fiscal expansion, and then
Speaker 8: Governor Myron is making the point that actually it's going
Speaker 8: down because of tariffs and lower immigration. I think we're
Speaker 8: not going to know, But what I am taking away
Speaker 8: from that is whether it's three or two and a
Speaker 8: half at funds, is it four and a quarter? You're
Speaker 8: not hearing much from people saying actually, policy is not restrictive.
Speaker 8: I think this will be the key question next day
Speaker 8: of the fact that's three four times they get into
Speaker 8: the vicinity of neutral, which I would say is two
Speaker 8: and a half to three and a half. That's how
Speaker 8: we're thinking about it, and so they can still cut
Speaker 8: for now and then watch to see how do different
Speaker 8: parts of the economy respond to interest rates. That's going
Speaker 8: to be the best metric of how neutral how restrictive
Speaker 8: are rates, And it's going to vary. If you're in
Speaker 8: AI investment and may not be that restrictive. Housing it's
Speaker 8: very restrictive.
Speaker 5: Also.
Speaker 2: Three stooges monetary policy step by steps exactly.
Speaker 6: If I'm a credit analyst in the Core plus bond fund,
Speaker 6: so I haven't even bothered to get from my cubicle,
Speaker 6: go to your corner office and it's you ideas, are
Speaker 6: you open to taking credit risk?
Speaker 7: Oh?
Speaker 8: Absolutely, so we do like credit risk. We think we're
Speaker 8: in a subtrend growth environment one to two percent. So
Speaker 8: you know, the overall macro pictures positive for risk. Company
Speaker 8: fundamentals look fabulous. I mean a few months ago I
Speaker 8: was nervous that do company margins come down because they
Speaker 8: absorb tariffs. We haven't seen that they've absorbed tariffs and
Speaker 8: they've managed to keep margins high. So company fundamentals are strong.
Speaker 8: But here's why I need to talk to the analysts
Speaker 8: all the time. Dispersion is increasing, whether it's securitized credit,
Speaker 8: whether it's investment grade credit with the LBO risk, whether
Speaker 8: it's high yield. You are seeing some defaults. So we
Speaker 8: need the analysts, We need the research to do the work,
Speaker 8: not just at the broad sector level, but at the
Speaker 8: company level, and then tell us this is what you overweight,
Speaker 8: and importantly, this is what you underweight.
Speaker 2: Can I beg We'll give you three segments, will blow
Speaker 2: out an hour. I want you to come here, the
Speaker 2: guy that's wor guy of the woman walking into your office,
Speaker 2: as Paul brilliantly describes who's looking at private credit. The
Speaker 2: shadows there, the new CMBs tranches and all that. Bring
Speaker 2: that mathematical beast with you. The two of you together
Speaker 2: would be a real surveillance street. That would be really great.
Speaker 9: I like that.
Speaker 8: Yeah, I think I like that you bring up CMBs
Speaker 8: because there you don't just have to look at the collateral.
Speaker 8: If you look at the collateral, the servicer, the structure,
Speaker 8: and see which tranch you're buying.
Speaker 9: So it requires a lot of work.
Speaker 2: We're going to make that happen. I think Eric still
Speaker 2: he lost so much money last night in the game.
Speaker 2: I'm not sure he's listening.
Speaker 5: Priam Israel had a non jobs they thank you so much.
Speaker 5: She is with JP Morgan Asset Management. Stay with us.
Speaker 2: More from Bloomberg Surveillance coming up after this.
Speaker 1: This is the Bloomberg Surveillance Podcast. Listen live each weekday
Speaker 1: starting at an am Eastern on Applecarplay and Android Auto
Speaker 1: with the Bloomberg Business app. You can also watch us
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Speaker 2: The last time Tiffany Wilding was on, Folks, she was riveting.
Speaker 2: I cannot it's a blur, folks like Paul and I
Speaker 2: staggered from guests to guests, But I had the clearest
Speaker 2: memory that she just absolutely nailed the tension out there. Yeah,
Speaker 2: is witnessed by price and yield in.
Speaker 5: The American and absolutely.
Speaker 6: Tiffany Wilding joins us. She's an econmress for North America
Speaker 6: for Pimco. Tiffany, were not getting the economic data that
Speaker 6: we're used to getting that the market kind of feeds
Speaker 6: off of. So let me ask you to step back
Speaker 6: and just kind of give us your thirty thousand foot
Speaker 6: view that you share with your clients these days about
Speaker 6: this US economy.
Speaker 7: Yeah, well, so, yeah, I think taking a step back
Speaker 7: what we've noticed is that the economy is behaving, you know,
Speaker 7: somewhat differently than I think most people expected, just given
Speaker 7: the veryious policy pivots that the Trump administration is implemented.
Speaker 7: So obviously we've gotten really large tariff increases, we have
Speaker 7: immigration policy, U turns, we have various other things, And
Speaker 7: I think the surprising thing for many is that, you know,
Speaker 7: the manifestation of those policy changes in the economy would
Speaker 7: be through price level adjustments. And I think what we're
Speaker 7: seeing as we go through the year and we're gaining
Speaker 7: more information, is that companies aren't necessarily increasing prices by
Speaker 7: as much as people expected. They are doing it on
Speaker 7: the margin, but they're also trying to reduce costs. And
Speaker 7: part of the way that they're reducing costs is they're
Speaker 7: just maintaining their labor costs, so they're even trying to
Speaker 7: actually reduce labor costs. So we've seen a pretty material
Speaker 7: deceleration in labor market activity this year. We think that
Speaker 7: part of the reason why they're choosing to do this
Speaker 7: is that you have clashing forces. You have this immigration
Speaker 7: you turn, there's less labor supply, less people coming into
Speaker 7: the labor market, but you also have this technology boom,
Speaker 7: that's also that's happening in the background, and so they're
Speaker 7: trying to figure out how can we save money through
Speaker 7: implementation of technology, and we think that's also having an
Speaker 7: effect here. So I think that's why you're seeing more
Speaker 7: concern at a federal Reserve officials more recently. We think
Speaker 7: it's why they, you know, lowered took the first step
Speaker 7: to start lowering interest rates again in September, and ultimately
Speaker 7: we think that will be a reason for them to
Speaker 7: cut a couple more times this year as that labor
Speaker 7: market stays weak. But you know, twenty twenty six I
Speaker 7: think does look a lot better as you get some
Speaker 7: more of the one big beautiful bill stimulus that's you know,
Speaker 7: that's hitting the economy to offset all of this.
Speaker 6: Yeah, that's kind of where I wanted to go, Tiffany
Speaker 6: about twenty twenty six and the tax cuts, the credits,
Speaker 6: those things that were in fact included in that tax bill.
Speaker 6: Are you putting that into your model in twenty twenty
Speaker 6: six as a driver of this economy.
Speaker 7: Yeah, I mean so if you look at you know,
Speaker 7: the tax cuts were retroactive, which is which means means
Speaker 7: that you know, both businesses and households will get a
Speaker 7: one time larger check. You're seeing that in the business
Speaker 7: tax data already that the Treasury publishes, but you're also
Speaker 7: going to see it when consumers, when households file for
Speaker 7: refunds early next year. The refund checks are going to
Speaker 7: be large, especially those households that work jobs that where
Speaker 7: they work overtime. Any tax is paid in twenty twenty
Speaker 7: five on overtime is basically going to be rebated back
Speaker 7: to them at the beginning of twenty twenty six. So
Speaker 7: that's going to be a pretty large refund check. In
Speaker 7: addition to the enhanced child tax credits, et cetera. So
Speaker 7: we think that will help. It's a one time thing
Speaker 7: for sure, you know, in terms of the retroactiveness of it,
Speaker 7: but it will help to sort of bridge the economy
Speaker 7: through this period of weakness we think, you know, as
Speaker 7: you know, as you have the tariffs that are also
Speaker 7: starting to bite.
Speaker 2: Our global technical director wants to know if he can
Speaker 2: you know the rebate he's going to get for overtime.
Speaker 5: Yeah, I mean, you know, is that incoming boom boom.
Speaker 2: I think that's going to be a brilliant Tiffany Wilding
Speaker 2: with us with Pimco. Tiffany I just brought up Atlanta
Speaker 2: GDP now three point eight four to two percent. I
Speaker 2: did a regression back to the end of twenty twenty
Speaker 2: two the Yardnni and Campora low and the answer is
Speaker 2: where plus a solid one point two standard deviations. We've
Speaker 2: been there. This is a third time. I mean, is
Speaker 2: that a one off kind of boom? Do you think
Speaker 2: it just pulls back or do we just completely misjudge
Speaker 2: this sustained real GDP is Tarsan slock of Apollo mentioned
Speaker 2: earlier this week.
Speaker 7: Yeah, well, I think we've gotten we got really good
Speaker 7: news with the recent revisions to second quarter GDP, which
Speaker 7: also included you know what the BEA calls annual benchmark revisions,
Speaker 7: and they kind of knew data that's more complete that
Speaker 7: is included in that. And one of the big things
Speaker 7: that was revised higher was the savings rate over the
Speaker 7: last several years. So it just suggests that, you know,
Speaker 7: consumers have a bigger buffer here. We've been talking about
Speaker 7: this sort of K shaped economy now for a couple
Speaker 7: of years where you have you know, higher end consumers
Speaker 7: that have you know, higher wealth as a result of
Speaker 7: increasing housing prices and equity markets since the pandemic, et cetera.
Speaker 7: And so you have consumers that have a bigger buffer
Speaker 7: coming into this period, and that argues for them just
Speaker 7: to be more resilient. We think that the resilience and
Speaker 7: the consumer that you're seeing is related to that. You know, ultimately,
Speaker 7: we think you still will see some slow down in
Speaker 7: the fourth quarter, but yeah, the consumer looks better, Tiffany.
Speaker 5: I'm sorry, it wasn't focused there.
Speaker 2: Amory Horning just came up to our gorgeous studio and
Speaker 2: placed your New York Yankees jacket like the one Lisa
Speaker 2: has on the glass. Wow, Tiffany said, I was a rattle. Tiffany,
Speaker 2: I got an average line and that regression of Atlanta GDP.
Speaker 2: Now the average line back to the Denny and Compori
Speaker 2: stock market low October twenty twenty two, Ready, Paul, two
Speaker 2: point six percent?
Speaker 5: Yeah is average? Yeah?
Speaker 2: Have we just misjudged, Tiffany the boom that we're in
Speaker 2: because of technology.
Speaker 5: Yeah?
Speaker 7: Well, so, I think that you're absolutely right. Growth has
Speaker 7: been since the pandemic closer to two and a half
Speaker 7: to three percent. But we think one of the reasons
Speaker 7: why that's happening is because you've all over that period,
Speaker 7: you also had an immigration boom that was happening, and
Speaker 7: that people come into the country, they consume, They not
Speaker 7: only work, but they consume, and so you had those
Speaker 7: inflows that were also resulting in higher growth performance. So
Speaker 7: we do think that part of the reason why growth
Speaker 7: was so elevated in that period that is coming off
Speaker 7: now as you have a U turn in that policy.
Speaker 7: So we think the underlying level of growth in the
Speaker 7: US economy has stepped down from that two and a
Speaker 7: half to three percent pace, you know, to something closer
Speaker 7: to two percent where we were pre pandemic, you know.
Speaker 7: And then I think that broader question is how much
Speaker 7: is you know, the technology related investment trends that we're
Speaker 7: seeing associated with AI. How much room does that have
Speaker 7: to run? And how much of a boost could we
Speaker 7: have from that? And we think that there is some
Speaker 7: room for that to run. It does look like we're
Speaker 7: in the early stages of that. Even though the equity
Speaker 7: markets have have been trading that theme for quite some time.
Speaker 7: The actual investment that we're getting in terms of data centers,
Speaker 7: you know, and the hard investments, we think that is
Speaker 7: actually just kind of more in the early days here,
Speaker 7: so that has some more room to run.
Speaker 5: Tiffany well, and thank you so much.
Speaker 2: Love when you come on, I kind of thank you
Speaker 2: North America, pim Co, just absolutely brilliant.
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