Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: Terminal and the Bloomberg Business app. Mohammed's with us around
Speaker 2: the table. Mhammeed caa mornet here. Good morning, John, it's
Speaker 2: going to see I won't ask you if you can
Speaker 2: get an auto loan from Bank for America. I will
Speaker 2: talk to you about what we've been writing about, though extensively,
Speaker 2: and I think the rest of the street is catching on.
Speaker 2: I think the rest of the media is catching on
Speaker 2: as well. The amount of times we've all read articles
Speaker 2: over the last few days talking about US exceptionalism. This
Speaker 2: is something you've been touching on. What are the sources
Speaker 2: of it, Muhammad? And how durable do you think they are?
Speaker 3: I think you have two sets of sources that speak
Speaker 3: to us exceptionalism. One is the inherent attributes of the US.
Speaker 3: It is more flexible, it is benefiting from the higher
Speaker 3: labor force participation, it is more entrepreneurial. And then there's
Speaker 3: a second element, which is policy. It's been running a
Speaker 3: very very loose fiscal policy. We're running deficits of seven
Speaker 3: percent when unemployment is under four percent. That is unthinkable,
Speaker 3: but it's happening. But also importantly, the US is investing
Speaker 3: in the drivers of tomorrow's growth and it's way ahead
Speaker 3: of other countries in that. And I think if you
Speaker 3: put all that together, you get this incredible engine that
Speaker 3: drives exceptionalism.
Speaker 2: How sustainable to youth in the second element is policy.
Speaker 3: So I think it is more sustainable than people realize,
Speaker 3: but there is a limit to it. Look, this can
Speaker 3: be derailed by one of two things. Oil at one
Speaker 3: ten or a FED that's too tight. Those are these
Speaker 3: two things. And if they come together, which is a
Speaker 3: possibility the geopoliticist gets worse, then you could do ail
Speaker 3: US growth.
Speaker 4: You wrote about this just in terms of the pressures
Speaker 4: of what's going on with the Middle East and the
Speaker 4: potential increasing commodity prices on the heels of that. One
Speaker 4: kind of theme we've heard is that Europe will be
Speaker 4: hit much harder than the US. You're saying, maybe so,
Speaker 4: but it doesn't mean that the US is immune. Can
Speaker 4: you elaborate?
Speaker 5: So?
Speaker 3: I think the US dominates in relative space. It dominates
Speaker 3: almost regardless of what the global scenario is. But in
Speaker 3: absolute space, the US has dominated so far, and for
Speaker 3: the US to continue to dominate, we need to avoid
Speaker 3: really high energy prices, and we need to avoid another
Speaker 3: policy mistake, so it will dominate in relative space for
Speaker 3: a very long time.
Speaker 4: This goes to the question that ECB board members were
Speaker 4: talking about, which is that they might not be able
Speaker 4: to cut rates because of geopolitics. Do you think that
Speaker 4: this sort of one two punch is looking more likely
Speaker 4: for the Federal Reserve as well, that they will keep
Speaker 4: rates higher for longer in response to higher commodity prices,
Speaker 4: even at a time of a potential shock that could
Speaker 4: curtail growth.
Speaker 3: So, Lisa, this is a great question because I think
Speaker 3: most people, not everybody, most people on your show have
Speaker 3: now agreed that the last mile of inflation is going
Speaker 3: to be complicated, that inflation's most sticky. Where there's massive
Speaker 3: disagreement is what the FED should do and what the
Speaker 3: FED will do. Right, there's massive disagreement that those who
Speaker 3: think the FED should hike. You had the UBS today
Speaker 3: showing six percent that those who think like me, the
Speaker 3: FED should maintain its course and cut twice this year
Speaker 3: by twenty five basis points. Now, why are we all
Speaker 3: over the place. It's because we disagree on what our
Speaker 3: star is. We disagree on what the white inflation target is,
Speaker 3: and therefore we disagree on how the FED can best
Speaker 3: meet as dual mandate. So this is where it's going
Speaker 3: to play out over the next year. In order to
Speaker 3: predict the FED. If you think that we remain data dependent,
Speaker 3: which they are today because they got so embarrassed by
Speaker 3: what happened twenty twenty one, then the FED will not cut. If, however,
Speaker 3: like me, hope that they will go from excessive data
Speaker 3: dependency to also having a macro framework in their head
Speaker 3: and looking forward, then they would cut. And that's what
Speaker 3: we're going to see play out in the next few months.
Speaker 6: But if they are data dependent and you see inflation,
Speaker 6: we had hot retail sales yesterday, and they do, and
Speaker 6: they do start to get more concerned about inflation. Is
Speaker 6: it not just they're not going to cut like the ubs? Note,
Speaker 6: do you think they could hike?
Speaker 3: Look inflation. If inflation gets much worse, they could hike.
Speaker 3: But I think if they do hike, we're going to
Speaker 3: have a regional banking crisis. We're going to have all
Speaker 3: sorts of damage in the marketplace. And I think that
Speaker 3: is at the back of the head. So I think
Speaker 3: the likelihood of them hiking is low. Is it zero?
Speaker 5: No?
Speaker 3: They could.
Speaker 2: What's the difference between them hiking twenty five basis points
Speaker 2: and just hold them for the rest of the year.
Speaker 2: How big is twenty five basis points?
Speaker 3: The minute that hack twenty five basis points, they open
Speaker 3: the way to hiking more. That's the difference we're going
Speaker 3: to see today. Chair Pal is going to try, I think,
Speaker 3: to do exactly what he did earlier, which is maintained
Speaker 3: maximum optionality. On the one hand, I think he's going
Speaker 3: to basically say the inflation story has not fundamentally changed,
Speaker 3: and he's going to probably use the word fundamentally. On
Speaker 3: the other hand, he's going to say, well, we need
Speaker 3: more evidence to know what we're doing, and he's going
Speaker 3: to keep his options open, and that's what he's going
Speaker 3: to keep doing for a while.
Speaker 2: Is it too early to move away from bumps in
Speaker 2: the road? Three bumps in the road.
Speaker 3: I would have moved away a long time ago, but
Speaker 3: then probably will maintain the bumps in the road.
Speaker 4: You talk about all the disagreements, and I'm still sitting
Speaker 4: here thinking about what fe Williams, New York Fetcher william
Speaker 4: said when he said, you know, we're not really thinking
Speaker 4: about the target. We're just kind of playing it by
Speaker 4: year and taking the data.
Speaker 2: And you talked about how the biggest debate.
Speaker 4: Among you and your colleagues really is where is the endpoint?
Speaker 4: It basically is the destination is the biggest issue. What
Speaker 4: gives you confidence in your goal of the destination that
Speaker 4: makes you think that they should just sort of adopt
Speaker 4: some kind of belief and go with it rather than
Speaker 4: just kind of live in the marass that we're living
Speaker 4: in of just complete confusion.
Speaker 3: So confidence, I don't have, hope I have Okay, I
Speaker 3: mean there's a definitely confidence and hope. You know, they
Speaker 3: do have a deal mandate. They do understand how exceptional
Speaker 3: US economic performance has been. That proud of it, it's incredible.
Speaker 3: I mean, you opened up with how depressing it is
Speaker 3: that we've had two days of massive losses. If I
Speaker 3: had come here in December and said to you all
Speaker 3: the market is going to reprice fed cuts from seven
Speaker 3: to under two and the S and P would be
Speaker 3: up six percent in a prop what would you have
Speaker 3: said to me, you're nuts. Were still up six percent
Speaker 3: on the SNP, right, we were up ten percent in
Speaker 3: the first quarter. So to go back to your question,
Speaker 3: I don't have confidence. I have hope. That's what I have.
Speaker 3: Hope that they'll understand that they need to get away
Speaker 3: from this excessive data dependence. They need to look forward,
Speaker 3: and they.
Speaker 1: Need to have a view.
Speaker 3: You know, they're being pressed hard on tell us what
Speaker 3: you view with and at some point they're gonna have
Speaker 3: to live on that now. You know. President Williams has said,
Speaker 3: you know, think about the target. You're going to hear
Speaker 3: this term longer term. Come in every time to talk
Speaker 3: about the inflation target. Yes, it's our longer term inflation target, yeah, right,
Speaker 3: or medium term inflation target. And that's the way they're
Speaker 3: going to do it. They're not going to come out
Speaker 3: with some massive statement. They're just going to start offer
Speaker 3: skating what exactly is meant by a target?
Speaker 2: Can you imagine if Chairman Pound came out this afternoon
Speaker 2: he said I don't have confidence, I have hope. Can
Speaker 2: you imagine how that would go down with financial markets?
Speaker 4: You know what people would clap, They would say, finally,
Speaker 4: you're telling us of.
Speaker 2: Days type stuff. You know, I don't have confidence, I
Speaker 2: have hope. I'm really close to say that, Johning us.
Speaker 2: Now around the table, it's David Hart, the CEO of PGM.
Speaker 2: David Camonicsy, sir, good morning, it's supposed to be with you.
Speaker 2: Thank you very much for being with us. I want
Speaker 2: to pick up on Shinati's comments at the end that
Speaker 2: the prospective money coming out of money market funds and
Speaker 2: Mike writing gas sway, are you beginning to see that
Speaker 2: trend develop?
Speaker 1: You know, Jath, we are seeing that.
Speaker 7: We've seen that really for the last six months, but
Speaker 7: it's been in small, small pieces. But I do think
Speaker 7: it's beginning to pick up pick up steam.
Speaker 1: And some of the reasons are obvious. You know.
Speaker 7: Certainly, I'm at a higher level of interest rates relative
Speaker 7: to money market funds, and as we begin to see
Speaker 7: rates peak and then decline duration begins to look a
Speaker 7: little bit more more attractive. But there are two other
Speaker 7: things that are going on which are at least as important.
Speaker 7: One is that the big pension funds with higher rates
Speaker 7: are actually better funded and so they actually are using
Speaker 7: this as a chance to de risk, and that means
Speaker 7: for them they are moving money into fixed income.
Speaker 1: And the second is.
Speaker 7: That you know, we have the continued demographic trends going on,
Speaker 7: not just in this country but around the world, and
Speaker 7: retirees need income. So we are in the process now
Speaker 7: of this huge shift from accumulation products to decumulation and
Speaker 7: income products, and those need fixed income. So if you
Speaker 7: take the kind of short term shift, you add to
Speaker 7: them two structural shifts. We think over the next three years,
Speaker 7: we really are going to see bonds are back.
Speaker 2: This sounds like a new regiame. And I'm going to
Speaker 2: give you obtain a bit of a shouts out because
Speaker 2: you're a modest man. My Cullings, Greg paid is rubbitt
Speaker 2: SIP just absolutely phenomenal pre pandemic really defining that bond
Speaker 2: market regime of yester year. Can you talk to me
Speaker 2: about how different this regime is going to be compared
Speaker 2: to that.
Speaker 7: We think it will be different, and you're right, they
Speaker 7: were right on the lower for longer, for quite a
Speaker 7: long time in that, and then more recently our call
Speaker 7: has actually been that we're going to be higher. So
Speaker 7: if you go back six months, we were very early
Speaker 7: to the hey, we're looking at kind of two cuts
Speaker 7: for twenty four when the market was pricing in seven,
Speaker 7: and we held with that view, and the market's.
Speaker 1: Kind of come back to us at this point.
Speaker 7: So we pride ourselves on taking I think, considered non
Speaker 7: consensus views that are long term in nature rather than
Speaker 7: simply trading views. And I think that we've made a
Speaker 7: very good job on those. And I will say that
Speaker 7: in order to do that, you need a culture that
Speaker 7: supports people to take those non consensus views even during
Speaker 7: times when.
Speaker 1: They don't look so ripe.
Speaker 7: And many organizations have a hard time doing that, and
Speaker 7: we're proud of our culture to do it.
Speaker 4: To rip up the script just quickly, because I have
Speaker 4: got Tom Keene's shadow over me and all of these
Speaker 4: banking earnings that come out, with compensation expenses coming up,
Speaker 4: is it getting harder to recruit and keep that kind
Speaker 4: of talent?
Speaker 1: No question, It is.
Speaker 7: I mean, if you look just over the last twenty years,
Speaker 7: you would say that many of the functions and things
Speaker 7: that used to be done in the investment banks are
Speaker 7: now being done on the buy side. I mean, I
Speaker 7: have more than one hundred and thirty credit analysts.
Speaker 1: You would never have seen that before.
Speaker 7: All of that would have been done by Golden Sachs
Speaker 7: and Morgan Stanley and we would have bought research from them.
Speaker 1: So the actual value.
Speaker 7: Chain continues to move from the cell side to the buyside.
Speaker 7: And that's a trend that I don't think is going
Speaker 7: to change, and that of course puts a lot of
Speaker 7: pressure on those of us on the buy side because
Speaker 7: we do need to move our compensation levels up in
Speaker 7: step with that. So the war for talent is very
Speaker 7: real and very practical.
Speaker 1: For us day to day.
Speaker 4: So artificial intelligence, how do you use that? And I'm
Speaker 4: really I'm diverging here. I was going to talk about
Speaker 4: bos being back, but this is fascinating.
Speaker 2: Today talking about Greg paid his bonus.
Speaker 4: Okay, well you can go there next and talk about
Speaker 4: the winebar. But I am curious about this idea of
Speaker 4: how you make things more efficient to reduce costs while
Speaker 4: continuing to prioritize this talent. I mean, how do you
Speaker 4: see that playing out or do you think that some
Speaker 4: of the gains of productivity are overstated and that it
Speaker 4: really just comes down to talent and people who can
Speaker 4: do the job best.
Speaker 7: So I think that we are in the midst of
Speaker 7: a game changer on technology in asset management. Over the
Speaker 7: last decade, technology has mostly been about can we automate things?
Speaker 7: Can we get more efficient at things? And so it
Speaker 7: has been a bit of a cost play. That's not
Speaker 7: where the game is today. Technology now is allowing us
Speaker 7: to move data to the cloud and then to do
Speaker 7: things with artificial intelligence that we never could do before,
Speaker 7: and so it now is actually being used by our investors,
Speaker 7: it's actually being used by the frontline to make decisions.
Speaker 7: That's a very different use of technology that it was before,
Speaker 7: and I think that's very exciting. But it means that
Speaker 7: we are needing to significantly up our game on the
Speaker 7: use of technology and making sure that we're employing some
Speaker 7: of these latest uses of it in our actual investment process,
Speaker 7: as well as trying to get more efficient in some
Speaker 7: of the back office functions. But that's different for the industry.
Speaker 6: So you're saying it's making you more efficient, but not
Speaker 6: that it means you need a leaner team.
Speaker 7: It means that the quality of jobs that we have
Speaker 7: will actually be better because we will take a bunch
Speaker 7: of things that are kind of fairly wrote and we'll
Speaker 7: be able to do that much more efficiently with technology.
Speaker 7: And then we will be able to augment our portfolio
Speaker 7: managers with technology so that they're actually making better investment decisions.
Speaker 7: And that's what they want to focus on anyway. So
Speaker 7: the more I can focus them on the higher value topics,
Speaker 7: the better and happier they are through the use of technology.
Speaker 6: When you look at AI and inflation, well let's come
Speaker 6: back to the US.
Speaker 2: We're coming back to.
Speaker 6: Sorry, that's my view, isn't it an outlook for the
Speaker 6: economy is weak inflation? But is that the rest of
Speaker 6: the economy or also as well in the United States
Speaker 6: where we see continuosly hot day.
Speaker 7: So the big story that I think doesn't really get
Speaker 7: reported enough is that the world has never been, at
Speaker 7: least in the last couple of years, more divergent in
Speaker 7: their views of growth. So spending time in Europe, I
Speaker 7: would say, actually, the UK is in a technical recession
Speaker 7: right now.
Speaker 1: You spend time in.
Speaker 7: Germany, boy, growth is really hard to come by, and
Speaker 7: it's not looking so terrific and continues to be a worry,
Speaker 7: but it's come down a lot and is related to
Speaker 7: mostly to energy prices. You move to the US and
Speaker 7: actually growth is higher than most people thought. Their labor
Speaker 7: market is in excellent shape, and growth appears and productivity
Speaker 7: appears to be better.
Speaker 1: Inflation is higher and rates are higher.
Speaker 7: I just spent last week in Japan, and you know,
Speaker 7: it's fascinating. After literally thirty years of trying to get
Speaker 7: inflation to go again, it's a beautiful spring week. The
Speaker 7: cherry blossoms were out, and there is a spring in
Speaker 7: the Japanese stout. They finally have inflation coming back, They
Speaker 7: have productivity and members that look better, They have some growth,
Speaker 7: and so the stock market is an all time high
Speaker 7: and you feel an optimism in Japan.
Speaker 1: We saw the numbers come out of China.
Speaker 7: So China continues to push on manufacturing in order to get.
Speaker 1: Their economy going.
Speaker 7: I think all of us wish that they had the
Speaker 7: tools to get domestic personal consumption going, because that's really
Speaker 7: the rebalancing that they need.
Speaker 1: In their economy.
Speaker 7: The way they're going right now is just going to
Speaker 7: flood the world with cheaper manufacturing goods, which is, you know,
Speaker 7: maybe going to export deflation back to kind.
Speaker 1: Of five years ago.
Speaker 7: But it's not the balancing that we would hope. And
Speaker 7: I think that if they could get their domestic consumption going,
Speaker 7: it would be good for the Chinese people, good for
Speaker 7: the Chinese economy, and better.
Speaker 1: For the world economy.
Speaker 7: So the reason we come to weakflation to come to
Speaker 7: your question is that the world is very different. But
Speaker 7: when you put all of that together, growth is going
Speaker 7: too slow from what it has been, and we are
Speaker 7: going to have higher inflation we believe for longer and
Speaker 7: higher rates, and that's where you get the weak flation
Speaker 7: piece of it. And it's very different from stagflation, where
Speaker 7: obviously the labor market is in bad shape. We think
Speaker 7: the labor market is pretty strong.
Speaker 2: There's a ton to impact that. I want to unpack
Speaker 2: the China piece of it just a little bit, focus
Speaker 2: on that. That growth model at the moment is controversial.
Speaker 2: It's getting old of the wrong kind of attention from
Speaker 2: policymakers worldwide, particularly here in the United States, and there
Speaker 2: is talk of maybe even more policies going against China
Speaker 2: from the United States. Secretary Evan's been talking about that
Speaker 2: over the last week. Does that make it harder for
Speaker 2: you to run a global business? Is it more difficult
Speaker 2: now than it used to be?
Speaker 1: Yes, it certainly is.
Speaker 7: And I think many of us are headed down to
Speaker 7: the IMF meetings this week, and I think that one
Speaker 7: of the big topics is going to be what are
Speaker 7: the impacts of the new Chinese economy and what will
Speaker 7: the US administration.
Speaker 1: Do in response to that.
Speaker 7: I will say, having spent a week in Japan, that
Speaker 7: the country that is the number one beneficiary of the
Speaker 7: tension between the US and China is Japan. When I
Speaker 7: was there, there were three companies launching new chip manufacturing
Speaker 7: centers there, There was companies that wanted to invest more
Speaker 7: in Japan. And so Japan has actually taken on a
Speaker 7: role in Europe, in Asia and in a Pan Asia
Speaker 7: trade book that they didn't have before. And the other
Speaker 7: thing that's happened is that the security alliances have come together,
Speaker 7: I think faster than any of us would have thought.
Speaker 1: When I spend time with.
Speaker 7: Folks in both the diplomatic and security world. There the
Speaker 7: coming together of Japan, of South Korea, now of the
Speaker 7: Philippines and Australia is creating a stronger.
Speaker 1: Alliance than we had before.
Speaker 7: And so you know, these kinds of reverse powerful impacts
Speaker 7: that we have are hard to predict, but they do
Speaker 7: change those supply changes quite a lot.
Speaker 2: You've mentioned Japan a few times. He visited that it
Speaker 2: was not the business. Then what are you up to
Speaker 2: in Japan?
Speaker 7: So we are one of the largest foreign asset managers
Speaker 7: in Japan. We absolutely believe that it's a critical country. Obviously,
Speaker 7: if you just look at where is the money around
Speaker 7: the world, Japan remains one of the wealthiest and highest
Speaker 7: savings places, so there's a lot of money to manage.
Speaker 2: It's that money coming home.
Speaker 7: So the money is coming home to some extent, but
Speaker 7: also foreign money, as I mentioned, is going in both
Speaker 7: portfolio flows and FDI, which again is a fairly new storage.
Speaker 2: It's a massive change. Apollos Torston slock with this to say,
Speaker 2: the strong tail wind from easy financial conditions continues to
Speaker 2: boost inflation and growth, including consumer spending. In March, given
Speaker 2: the ongoing re acceleration in the economy, the FED will
Speaker 2: not cut interest rates in twenty twenty four, Apollos Torston
Speaker 2: slock Is with this around of table, Torston, it's been
Speaker 2: quite a cool and I imagine you're feeling better about
Speaker 2: that called over the last week or so well.
Speaker 5: I think that what is happening is that when they're
Speaker 5: fit pivoted, after having said for two years rates are
Speaker 5: going up, up, up, now they're actually saying rates are
Speaker 5: going down. And they're still saying rates are going down
Speaker 5: when that change came at the November one FMC meeting.
Speaker 5: Since then, there's some peers up ten trillion dollars. In
Speaker 5: other words, to tailwind to wealth in the household sector,
Speaker 5: the tailwind to wealth for corporates, and therefore the tilwind
Speaker 5: to consumption to capis is really not surprising that non
Speaker 5: found payer rules for the last three months has been strong.
Speaker 5: It's not surprising retails has has been strong, and therefore
Speaker 5: it's also not surprise that inflation has been strong, and
Speaker 5: I think that deal will continue for the next several quarters.
Speaker 2: You're not lonely joining you, I think sock Gen and
Speaker 2: Stephen Gallagher in the last couple of days now saying
Speaker 2: no cuts. In twenty four even mattless Eli, a Deutsche
Speaker 2: Bank saying one cut December. Likewise from Mike Gapano for
Speaker 2: a Bank for America. What's interesting about the way you
Speaker 2: frame it is you put a lot of this on looser,
Speaker 2: easy financial conditions. When you speak to the Fed, they
Speaker 2: say financial conditions are tight, not loose, even with stocks
Speaker 2: close to all time highs and credit spreads really tight.
Speaker 2: So what are you saying that then are So.
Speaker 5: That's really important because that discussion splits into two things. Namely,
Speaker 5: if you look only at rates and the level of
Speaker 5: the FIT funds rate at five and a half, that
Speaker 5: is certainly above most estimates of our star, meaning the
Speaker 5: long run equilibrium interest rate for the economy, which normally
Speaker 5: the FIT would say is two and a half. So
Speaker 5: looking at rates on their own in your old school
Speaker 5: is element models in the economics literature, you will look
Speaker 5: at that and say, hey, you have that exactly.
Speaker 1: Monetary policy is tight.
Speaker 5: But what has happened is that has been completely neutralized
Speaker 5: and offset by the rise in the dark market, the
Speaker 5: rally in IG in high yield and loans, the incredibly
Speaker 5: increase we've seen issuance in ITG also in high yield
Speaker 5: and likewise, IPO and m and a activity coming back.
Speaker 5: So you have on the one hand, yes, it's true
Speaker 5: that your old school textbook model tells you the rates
Speaker 5: are higher than where they will be in the long run. Namely,
Speaker 5: five and a half is bigger than two and a half,
Speaker 5: so that seal shoe policy is tight. But that's completely
Speaker 5: being more than offset by a dramatic tailwind.
Speaker 1: You could call it a sugar.
Speaker 5: High coming from the easy and financial conditions, lifting the
Speaker 5: wealth component for households, that is boosting consumption. Therefore you
Speaker 5: see increases of course in travel, restaurants, airplanes, everything when
Speaker 5: you come to hotels, concerts, sporting events as a huge
Speaker 5: taill with consumer services, and that's why super coinflation is
Speaker 5: accelerating so quickly at the moment.
Speaker 4: Essentially, are you saying that it was a policy error
Speaker 4: for Fetcher Reserve chair Powell to talk about in December
Speaker 4: the potential for cutting rates.
Speaker 5: See, I don't think this was the intention. I think
Speaker 5: the intention was to take the text book out and say, well,
Speaker 5: when we run Tailor rolls and Phillips curve, we get
Speaker 5: that it only is rates as John is saying, that matters,
Speaker 5: and they did not have the intention of lifting financial
Speaker 5: conditions and boosting the stock market as much as they
Speaker 5: remember this. And P is up twenty five percent since
Speaker 5: November the first, and the market cap of this in
Speaker 5: P is about forty four trillion, so that brings us
Speaker 5: roughly around ten eleven trillion additional increase in wealth for
Speaker 5: the household sector. I don't think this was the intention
Speaker 5: to generate this wealth increase. It just happens to be
Speaker 5: what I've described as sugar high that is now lifting
Speaker 5: for several quarters because we can't have this twenty five
Speaker 5: twenty five percent, but for several quarters we'll get that
Speaker 5: tailwind where consumers will say, well, my balance, it looks
Speaker 5: a lot better, probably better than it's done, meaning for
Speaker 5: the household sector, than it's done for a long long time.
Speaker 5: And as a result of that, consumption is getting a
Speaker 5: huge tailwind. As the data yesterday was showing.
Speaker 1: This race is a question.
Speaker 4: Of what happens if the market starts to completely agree
Speaker 4: with you and make in no rate cuts this year.
Speaker 4: Does that curtail some of the sugar high. We're already
Speaker 4: starting to see some people on Wall Street wonder, okay,
Speaker 4: are we going to see yield where they are bite
Speaker 4: into equity valuation slow some of the capital markets activity.
Speaker 1: Do you believe that too? Absolutely?
Speaker 5: So. I do think that the rate hikes that we
Speaker 5: have had, and the five and a half higher than
Speaker 5: two and a half, it is already biting hot on
Speaker 5: highly levered consumer balance sheets, highly levered corporate balance sheets,
Speaker 5: and also hard on banks, in particularly on regional banks.
Speaker 5: So the consequence of this is that we still have
Speaker 5: the negative effects of the transmission mechanism. Margarry policy is
Speaker 5: still working, it's just only working on those balances that
Speaker 5: have a lot of debt. And therefore we are working
Speaker 5: through that process. And as that sugar high starts to fade,
Speaker 5: if the stock market doesn't continue to go up, you
Speaker 5: will eventually get that effect to begin to dominate, and
Speaker 5: that's probably what we get in twenty twenty five, when
Speaker 5: you ultimately will then get the risk of a harder landing.
Speaker 5: But for now, the economy is certainly riding the wave
Speaker 5: of the increase in the stock market and crypture prices
Speaker 5: and home prices and cash flows in fixed income because
Speaker 5: of all in yields being so high, being probably higher
Speaker 5: than they've been for decades, that's very supportive for the
Speaker 5: household balance sheet.
Speaker 2: So just to mind. This really confusing. If we start
Speaker 2: to believe there will be no cuts, that will be cut.
Speaker 5: Well, eventually, the FED has the goal of getting inflation
Speaker 5: back to two percent, and inflation is not a two
Speaker 5: percent If you look at the three month annualized change
Speaker 5: in super COO, inflation is eight percent. So the trend
Speaker 5: in particularly in SUPERCOT is really not the Fed's friend here.
Speaker 5: So the worry is it might take a lot longer
Speaker 5: to get down to two percent, so that fight against
Speaker 5: inflation is not over. And the consequence of that is
Speaker 5: that we may get the market environment for twenty twenty
Speaker 5: two to come back, because in twenty twenty two we
Speaker 5: had stocks down, rates higher, and obviously this was not
Speaker 5: good for markets and for your sixty to forty portfolio,
Speaker 5: and that environment is at risk of coming back if
Speaker 5: we're not done fighting.
Speaker 1: Inflation first, and what about hikes.
Speaker 6: People are actually starting to talk about this.
Speaker 5: I think, and this is of course in your world.
Speaker 5: I think that the ligra of that is still relatively low,
Speaker 5: because there's just so many complications in doing that and
Speaker 5: in saying well, we were wrong and now rates are
Speaker 5: not going down, our rates are going up again. There's
Speaker 5: also some challenges with the basic effas of inflation, some
Speaker 5: more technical things about we got to go with it
Speaker 5: in July, otherwise it'll be in December or next year.
Speaker 5: Because we have the basic fake there's very supportive for
Speaker 5: inflation for the second half of this year. So it's
Speaker 5: also going to be quite challenging for the FIT to
Speaker 5: get all that in place in time to turn things
Speaker 5: around and say maybe we need another high go too.
Speaker 5: I think they were rather from a transmission making this
Speaker 5: in perspective key brates higher for a little bit longer,
Speaker 5: maybe one two quarters, and then achieve their goal of
Speaker 5: getting the economy and inflation to slow down.
Speaker 2: So you don't think if we get too soft prints
Speaker 2: on inflation, we end up with a cut in July.
Speaker 5: See, but I don't see whether those soft friends should
Speaker 5: be coming from retails yes yesterday, I mean super core
Speaker 5: inflation and shelter time inflation is showing signs of coming
Speaker 5: down much slower than what anyone expected. And if I
Speaker 5: look at my Bloomberg screen at ism price is paid,
Speaker 5: you also get that that's also beginning to accelerate. So
Speaker 5: even goods inflation, which went through the roller coaster of
Speaker 5: being no problem, a big problem and no problem again.
Speaker 5: And now goods inflation, including with energy and oil, you
Speaker 5: have that good inflation is at risk of also providing
Speaker 5: some lift to inflation.
Speaker 2: To be honest toast them, was a reaction function question,
Speaker 2: not a forecast question. So let's just assume we do
Speaker 2: get that data. Do two soft prints lead to a
Speaker 2: cut given how much they've seemed to want to cut
Speaker 2: still at the Federal Reserve.
Speaker 5: So let's turn that around and say, if they do
Speaker 5: absolutely want to card in June or July, we will
Speaker 5: need some very very dramatic slow down in inflation in
Speaker 5: the next several months.
Speaker 2: Absolutely, Okay, Tilston, this was great, just really really smart.
Speaker 2: Tolston's slock of Apollo feeling much much better about its
Speaker 2: call for no interest rate cuts in twenty twenty four.
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