WEBVTT - The Supply Chain And Consumer Spending

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<v Speaker 1>Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside

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<v Speaker 1>my co host Matt Miller. Every business day, we bring

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<v Speaker 1>you interviews from CEOs, market pros, and Bloomberg experts, along

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<v Speaker 1>with essential market moving news. Find the Bloomberg Markets Podcast

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<v Speaker 1>on Apple Podcasts or wherever you listen to podcasts, and

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<v Speaker 1>at Bloomberg dot com slash podcast. The Leading Economic Index

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<v Speaker 1>was released today, gave it a little bit better than

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<v Speaker 1>expected at one point one percent. Consensus was for one percent.

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<v Speaker 1>Let's get some color under the hood there. We can

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<v Speaker 1>do that with Ottoman OZL. Drum, Senior director of Economic

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<v Speaker 1>Research at the Conference Board. He got his pH d

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<v Speaker 1>in economics and Happy Valley at Penn State. So we

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<v Speaker 1>welcome Ottoman. Thanks so much for joining us here. What

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<v Speaker 1>did you see in your numbers this morning? Again a

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<v Speaker 1>little bit better than expected? Good morning. Yes, Uh, the

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<v Speaker 1>heavy I rose pretty sharply this morning. Overall, the trend

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<v Speaker 1>in the leading indicators is still pointing to a gathering

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<v Speaker 1>momentum in the economies. So uh, the expansion is to

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<v Speaker 1>continue into the first half of two. But talk to

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<v Speaker 1>us about inflation. I mean we're hearing from Senator Joe Manchin,

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<v Speaker 1>Inflation is the biggest threat. Do you see that as

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<v Speaker 1>a threat to hurt the consumer in any pullback in

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<v Speaker 1>consumer spending? Yeah, Inflation does pose one of those risks

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<v Speaker 1>in the outlook UM, and it directly affects consumers purchasing power.

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<v Speaker 1>So pull back in spending UM and consumers sort of

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<v Speaker 1>outlook on the economy has been worsening throughout the fall,

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<v Speaker 1>largely because of what's what's happening in their wallets. So

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<v Speaker 1>that does pose their risk. And the Fed of course

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<v Speaker 1>has been responding to that UM and UH trying to

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<v Speaker 1>cool down the economy and uh that will possibly bring

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<v Speaker 1>the economy back to a more sustainable but healthy growth

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<v Speaker 1>rate u UM, and we'll begin to see that in

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<v Speaker 1>the leading indicators. So Ottoman, I guess you know one

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<v Speaker 1>of the issues here is just the consumer here, and

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<v Speaker 1>we've got this oncron variant here. How do you think

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<v Speaker 1>that's gonna impact, if at all, kind of the the

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<v Speaker 1>economy in two Yeah, that's the other large risk that's

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<v Speaker 1>looming in the outlook. Uh. So COVID nineteen we were

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<v Speaker 1>already expecting winter wave. I think the omicron complicates the

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<v Speaker 1>matter a little bit more in terms of how much

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<v Speaker 1>it's going to impact. It does feel like deja vu.

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<v Speaker 1>You know, we've've been through these ways before. But I

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<v Speaker 1>think the difference now is that you know, we have

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<v Speaker 1>the vaccines uh and uh more reliable treatments. So UM,

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<v Speaker 1>you know, if the public health aspect can be contained

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<v Speaker 1>um and managed, perhaps UM you know, it doesn't pose

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<v Speaker 1>a huge economic risk for the economic outlook. UM. So

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<v Speaker 1>to the extent that UM, you know, we don't go

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<v Speaker 1>into these significant, large scale lockdowns. You know, perhaps we

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<v Speaker 1>can weather this winter wave of COVID nineteen. What are

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<v Speaker 1>you hearing about, you know, not only really expectations for

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<v Speaker 1>the next year, but three five years out, particularly in

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<v Speaker 1>the face of what could be a potential rate hike

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<v Speaker 1>or three or four in the next year. How is

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<v Speaker 1>that affecting some of the economics and consumer sentiment? UM

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<v Speaker 1>well longer longer horizon. UM. You know, we are seeing

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<v Speaker 1>kind of uh, you know, healthy robust economic growth rates,

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<v Speaker 1>especially in the US. UM. The fundamental uh sort of

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<v Speaker 1>supply demand relationship is you know, working in the US economy,

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<v Speaker 1>whether you look at consumer spending or labor markets. UM.

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<v Speaker 1>You know, if we can whether these risk in the

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<v Speaker 1>next three to five years, you know, perhaps inflation doesn't

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<v Speaker 1>become a persistent feature of the economy, and it can

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<v Speaker 1>be Uh, those risks can be can be handled so automan.

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<v Speaker 1>It seems like most shoppers are finding generally what they

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<v Speaker 1>want here for this holiday shopping season, and that's kind

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<v Speaker 1>of what the supply chain concerns. Maybe a little bit

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<v Speaker 1>on the back burner, but I'm looking at map go

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<v Speaker 1>on the Bloomberg term, and I still see lots of

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<v Speaker 1>ships stocked off the ports of Los Angeles and Savannah.

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<v Speaker 1>How big of an issue is that for you as

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<v Speaker 1>you think about your outlook. Yeah, the supply chain disruptions UM,

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<v Speaker 1>you know, have have been pushing up prices and we

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<v Speaker 1>do expect um those uh to resolve in the longer term.

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<v Speaker 1>But I think in the near term next year, we

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<v Speaker 1>will continue to see some of those bottlenecks UM and

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<v Speaker 1>the volatility and destructions in races uh partly a matter

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<v Speaker 1>of this, you know, mismatch between the supply and demand

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<v Speaker 1>and the inability to deliver on time. UM. But eventually,

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<v Speaker 1>you know, they will be resolved in the long return.

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<v Speaker 1>But I think in some sectors we are going to

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<v Speaker 1>continue to see those and I'm thinking specifically of you know,

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<v Speaker 1>motor vehicles and semiconductors used in the automobiles and so on,

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<v Speaker 1>that might take longer to resolve because you know, you

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<v Speaker 1>need more investment in those areas. All right, Ottoman, thank

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<v Speaker 1>you so much for joining us here. Ottoman also Drum,

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<v Speaker 1>Senior director of Economic Research for the Conference Board. Conference

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<v Speaker 1>Word report of their leading Economic Index for the month

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<v Speaker 1>of November came in at one point one percent positive

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<v Speaker 1>versus the consensus of one percent. So again, still some

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<v Speaker 1>positive news out there in the economy. Led by the

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<v Speaker 1>consumer supply chain. It's been an issue really since yeah,

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<v Speaker 1>the majority of this pandemic and the economic disruption and

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<v Speaker 1>then the reopening really exposed from the shortcomings in this

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<v Speaker 1>global just in time economy. Let's get the latest on

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<v Speaker 1>our supply chain issues. We can do that with Dr

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<v Speaker 1>Lisa Williams, chief executive Officer of World of EPI. Lisa,

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<v Speaker 1>thanks so much for joining us here. It seems like

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<v Speaker 1>this supply chain challenge a it's a global issue, but

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<v Speaker 1>it seems to be lingering here maybe a little bit

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<v Speaker 1>longer than some people thought. Give us your view of

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<v Speaker 1>kind of where we are on this challenge. A good morning, Paul,

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<v Speaker 1>it's a pleasure to be here. You are fought on.

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<v Speaker 1>You're right. The global crisis is laying going on more

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<v Speaker 1>than we'd like, and it's because of so many different issues,

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<v Speaker 1>one of which is of course, the variance with COVID.

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<v Speaker 1>You know, until we get COVID under control, we're going

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<v Speaker 1>to continue to see a slowdown of supply and because

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<v Speaker 1>of COVID previously there is an increase in pent up

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<v Speaker 1>demand and in some cases income, So we have a

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<v Speaker 1>shortage of product uh, slowed down supply chain, pent up demand.

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<v Speaker 1>That right there shows the core issue related to the

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<v Speaker 1>supply chain crisis. We have a port question to ask you.

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<v Speaker 1>I've been fascinated by this. We've been out several times

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<v Speaker 1>to the port of Long Beach in the part of

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<v Speaker 1>l A and interviewed those executive directors, and they continue

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<v Speaker 1>to say that things are getting better. But what we're

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<v Speaker 1>also hearing is that they're just holding out ships outside

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<v Speaker 1>the area where we're counting. So ships look like they're

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<v Speaker 1>going down, but we're just doing a better job of

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<v Speaker 1>changing the optics. What are you hearing about if things

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<v Speaker 1>actually are getting better or not. Taylor, that's a brilliant observation.

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<v Speaker 1>You are right, it's looking better, but there's still some

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<v Speaker 1>of the same core issues. There is a reduction or

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<v Speaker 1>a lack of personnel to help um drivers, truck drivers.

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<v Speaker 1>There is a shortage of trast these equipment. So it's

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<v Speaker 1>kind of a whackable problem with the port. Right It's

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<v Speaker 1>like there's a delay coming in of the ships from Asia.

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<v Speaker 1>Then once they get here, it's find the personnel and

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<v Speaker 1>the equipment to move it from the port into the warehouse.

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<v Speaker 1>So there's a multifaceted challenge that we're still trying to handle.

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<v Speaker 1>So you're right, there is a light short term improvement,

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<v Speaker 1>light short term improvement, I want to stress that, but

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<v Speaker 1>it is certainly nothing that is going to come to

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<v Speaker 1>an end or bring this crisis to a quick and

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<v Speaker 1>speedien So to that question, Lisa, what in your view

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<v Speaker 1>is probably a reasonable time frame to get back to

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<v Speaker 1>some level of normalcy in terms of supply chain. Well, Paul,

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<v Speaker 1>you know, we know this is unprecedented and because of that,

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<v Speaker 1>we can't really look to history to give as much guidance. Unfortunately,

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<v Speaker 1>it's going to depend upon getting a handle on COVID.

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<v Speaker 1>It's going to depend upon getting supplies to the ingredients

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<v Speaker 1>that we need. It's going to depend on finding the

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<v Speaker 1>right containers, not just containers in terms of cargo containers,

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<v Speaker 1>but containers for the bottle of the products that we

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<v Speaker 1>need every day. All of those different challenges of why

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<v Speaker 1>we're seeing what we're seeing. So the question is when

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<v Speaker 1>do we think we'll see an into all of those

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<v Speaker 1>different facets. I don't know, but what I do believe

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<v Speaker 1>strongly is that we will see a change around three generally,

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<v Speaker 1>assuming we can get COVID under control. But in the

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<v Speaker 1>beverage industry, I see it actually being longer. More like, wow,

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<v Speaker 1>that's that's five years away. So talk to us then

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<v Speaker 1>about giving the longevity of the timelines you just laid out,

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<v Speaker 1>Has anything changed permanently structurally within supply chain issues or

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<v Speaker 1>can we bounce back? You know, what is the new normal?

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<v Speaker 1>Look like sailors again? The new normal is going to

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<v Speaker 1>be something usual for us. Um it is we are

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<v Speaker 1>going to back back miles back because we are resilient

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<v Speaker 1>people and we have that desire. So I do believe

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<v Speaker 1>we will bounce that. The timing of that, however, it

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<v Speaker 1>could be a lot longer than any of us prefer

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<v Speaker 1>and it's gonna be again until we can get COVID

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<v Speaker 1>under control. That's like, for example, being a toy manufacturer,

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<v Speaker 1>we ship the majority of our products from Asia. Asia.

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<v Speaker 1>The largest port is the m t N. They have

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<v Speaker 1>a zero tolerance for COVID, so if one person comes

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<v Speaker 1>down with COVID, they shut things down. You can see

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<v Speaker 1>right there at the rippling effect that that's having. Then

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<v Speaker 1>once to finally do get the container on a ship,

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<v Speaker 1>it gets here, and as we just talked about, there's

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<v Speaker 1>a shortage of containers, there's a shortage of chassis, there's

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<v Speaker 1>a shortage of workers, there's a shortage of warehouse space.

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<v Speaker 1>All of that continues to the length of our supply

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<v Speaker 1>chain and adding to the supply chain crisis. So, like

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<v Speaker 1>I said, it's a multi faculted problem that we have

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<v Speaker 1>to address, but I do believe the core of it

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<v Speaker 1>is dealing with the COVID pandemic. Dr Lisa Williams, thank

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<v Speaker 1>you so much for joining us. Really appreciate getting your

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<v Speaker 1>thoughts and insights, which into a lingering, lingering economic challenge

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<v Speaker 1>for the global economy in terms of supply chain bottlenecks

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<v Speaker 1>again around the globe. Dr Lisa Williams, Chief executive Officer

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<v Speaker 1>of World of ep I. Alright, let's switch gears and

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<v Speaker 1>take a look at retail. We're just in the thick

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<v Speaker 1>rate at the very end of this holiday shopping season.

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<v Speaker 1>Lots of money being spent there. The consumer has a

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<v Speaker 1>lot of cash putting that money to work. Let's check

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<v Speaker 1>in with Andrew Rostami ahead of Citizens Pay at Citizens Bank. Andrew,

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<v Speaker 1>thanks so much for joining us here. There's a concept

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<v Speaker 1>that's I've been hearing about for the last six and

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<v Speaker 1>maybe twelve months that's a little bit new. By now

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<v Speaker 1>pay later. What does that mean to you and what

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<v Speaker 1>does that mean to the retail space? Yeah, no, thanks

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<v Speaker 1>and thanks for having me on the show here. Yeah,

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<v Speaker 1>I mean by now pay later is really about, um,

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<v Speaker 1>you know, helping a consumers spread out their payments, right,

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<v Speaker 1>and so you know, it's about taking a large purchase

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<v Speaker 1>and shopping that up into smaller payments, um, fixed monthly payments,

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<v Speaker 1>similar to what you would do maybe with the car purchase.

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<v Speaker 1>And sometimes that has no interest at all, Right, and

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<v Speaker 1>so it can be a very responsible thing for a

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<v Speaker 1>consumer and why they're rarely gravitating towards that type of product. Okay,

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<v Speaker 1>on the flip side, of that. That was interesting. Last

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<v Speaker 1>week you're the Consumer Financial Protection Bureau just asked for

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<v Speaker 1>an inquiry into some of these buy now, pay later

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<v Speaker 1>companies of just asking to make sure that consumers really

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<v Speaker 1>know what it is, Do they know their debt burden?

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<v Speaker 1>What are some of the regulatory headwinds that you see

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<v Speaker 1>though from this? Yeah, now, we we really think that's

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<v Speaker 1>a great thing that the CFPP is doing. Um, you

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<v Speaker 1>really want to make sure you're doing it responsibly, right

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<v Speaker 1>and so um a Citizens Pay. We're a fintech, but

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<v Speaker 1>we're within a regulated bank, which has been fantastic. Right,

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<v Speaker 1>So you're doing things like under writing the consumer, making

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<v Speaker 1>sure that they have the right not just credit profile,

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<v Speaker 1>but they have the right income to be able to

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<v Speaker 1>afford the purchase. You're working with the credit bureau such

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<v Speaker 1>that that dad is reported back to the bureau such

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<v Speaker 1>that all lenders can take a look at that. So

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<v Speaker 1>those are the types of things you really want to

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<v Speaker 1>make sure you're doing to put the consumer right on

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<v Speaker 1>the right footing. So, Andrew, you know, when you talk

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<v Speaker 1>to your retail clients, how are they thinking about supply

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<v Speaker 1>chain issues? Because we talked to someone in a supply

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<v Speaker 1>chain just earlier today and suggesting that this is going

0:13:32.360 --> 0:13:36.000
<v Speaker 1>to stretch well into next year and maybe even longer.

0:13:36.040 --> 0:13:39.000
<v Speaker 1>Is that what you're hearing from your customers? Yeah, it's

0:13:38.840 --> 0:13:43.400
<v Speaker 1>it absolutely has been a challenge. Obviously, some UM clients

0:13:43.520 --> 0:13:47.319
<v Speaker 1>have different UM ownership over the supply chain UM right,

0:13:47.320 --> 0:13:50.480
<v Speaker 1>based on their scale, but in general, it's it's definitely

0:13:50.520 --> 0:13:53.400
<v Speaker 1>been a challenge and UM, you know, I think the

0:13:53.480 --> 0:13:57.160
<v Speaker 1>real UM, the only real UM you know, panacea really

0:13:57.280 --> 0:13:59.839
<v Speaker 1>is just kind of finding new ways to delight the

0:14:00.000 --> 0:14:02.720
<v Speaker 1>insumer and provide growth. Right, So, in addition to providing

0:14:02.760 --> 0:14:06.880
<v Speaker 1>transparency on what shipping times may be, UM finding new

0:14:06.920 --> 0:14:10.360
<v Speaker 1>ways really to provide other types of UM you know,

0:14:10.440 --> 0:14:14.040
<v Speaker 1>purchases for those consumers UM you know, as it as

0:14:14.120 --> 0:14:17.320
<v Speaker 1>it looks like it will you know, unfortunately continue. I'm

0:14:17.320 --> 0:14:20.840
<v Speaker 1>also really curious about what you're seeing anecdotally from the consumer.

0:14:21.000 --> 0:14:27.120
<v Speaker 1>Are basket size going up because prices are higher and

0:14:27.240 --> 0:14:33.080
<v Speaker 1>we're experiencing inflation? Or are we actually buying more items

0:14:33.240 --> 0:14:35.680
<v Speaker 1>even if the prices aren't going up? Right? What what

0:14:35.880 --> 0:14:40.160
<v Speaker 1>is that telling you? Yeah, we've we've seen UM, without

0:14:40.160 --> 0:14:42.720
<v Speaker 1>going to too much detail, I mean, to spend this

0:14:42.800 --> 0:14:46.200
<v Speaker 1>year is certainly higher than last year and certainly higher

0:14:46.200 --> 0:14:49.440
<v Speaker 1>than pre pandemic. And when you look at that across categories,

0:14:50.040 --> 0:14:53.520
<v Speaker 1>it really is broad based, save one or two categories,

0:14:53.600 --> 0:14:58.240
<v Speaker 1>essentially all categories are up. We are seeing both frequency

0:14:58.760 --> 0:15:02.440
<v Speaker 1>as well as a higher ticket size in the basket.

0:15:02.760 --> 0:15:04.760
<v Speaker 1>And you know that is going back to buy now,

0:15:04.800 --> 0:15:07.800
<v Speaker 1>pay later, a point of sale financing that is what

0:15:07.880 --> 0:15:10.920
<v Speaker 1>can really support that, right, um, where you can really

0:15:10.960 --> 0:15:13.800
<v Speaker 1>make that purchase more responsibly. So we are seeing both

0:15:13.800 --> 0:15:17.000
<v Speaker 1>of those tramps, but on an inflation adjusted basis, our

0:15:17.040 --> 0:15:21.320
<v Speaker 1>basket size is still higher as the consumer actually stronger. Yeah,

0:15:21.360 --> 0:15:23.640
<v Speaker 1>I mean again from what we can see it does

0:15:23.920 --> 0:15:26.600
<v Speaker 1>you know, appear you know, to be that way. Um.

0:15:26.680 --> 0:15:29.000
<v Speaker 1>And then you know, to your point, the consumer strength

0:15:29.520 --> 0:15:33.360
<v Speaker 1>still looks pretty solid, um, right, the balance parking that's

0:15:33.400 --> 0:15:36.520
<v Speaker 1>happening that we see in deposit accounts, um, it's still

0:15:37.000 --> 0:15:40.360
<v Speaker 1>you know, you know, relatively strong, right, so it would

0:15:40.600 --> 0:15:43.800
<v Speaker 1>indicate some pretty good underlying strength in the consumer. Still

0:15:44.400 --> 0:15:46.560
<v Speaker 1>all right, Andrew, thank you so much for joining us.

0:15:46.560 --> 0:15:50.280
<v Speaker 1>Always appreciate getting your thoughts. Andrew Rostami, head of Citizens Pay.

0:15:50.960 --> 0:15:53.600
<v Speaker 1>It's part of Citizens Bank giving us the lay of

0:15:53.640 --> 0:15:59.240
<v Speaker 1>the land on all things retails. So we've got central

0:15:59.280 --> 0:16:02.280
<v Speaker 1>bankers are round the globe either raising rates as we

0:16:02.400 --> 0:16:07.120
<v Speaker 1>speak or talking about raising rates in the near future. Uh.

0:16:07.320 --> 0:16:08.960
<v Speaker 1>Yet I look at a tenure at one point three

0:16:09.000 --> 0:16:11.920
<v Speaker 1>seven with the one global central bank who's taking the

0:16:11.960 --> 0:16:17.920
<v Speaker 1>opposite of that inflation right exactly exactly. The question is

0:16:18.440 --> 0:16:20.480
<v Speaker 1>what do you do in that kind of environment on

0:16:20.520 --> 0:16:22.960
<v Speaker 1>the fixed income side of the ledger? Let's bringing in

0:16:22.960 --> 0:16:25.760
<v Speaker 1>a professional does this for a living r? J. Gallo,

0:16:26.120 --> 0:16:30.000
<v Speaker 1>Senior portfolio manager for Federated Hermes J thanks so much

0:16:30.040 --> 0:16:33.360
<v Speaker 1>for joining us here. How are you guys thinking about,

0:16:34.680 --> 0:16:38.280
<v Speaker 1>and again an environment where presumably central packers around the

0:16:38.280 --> 0:16:41.520
<v Speaker 1>world are gonna be pushing up rates? Well, good morning,

0:16:41.600 --> 0:16:46.480
<v Speaker 1>thanks for having me. We continue to believe that rates

0:16:47.000 --> 0:16:49.400
<v Speaker 1>had to go higher that the pivot that we're now

0:16:49.480 --> 0:16:53.080
<v Speaker 1>seeing at the FED and other developed country central banks

0:16:53.360 --> 0:16:57.600
<v Speaker 1>and developing countries, it was necessary. The simple fact of

0:16:57.600 --> 0:17:00.200
<v Speaker 1>the matter is the dynamic of the pandemic, the on

0:17:00.280 --> 0:17:04.480
<v Speaker 1>again off again economy, the restart, the logistical supply chain problems.

0:17:04.720 --> 0:17:06.600
<v Speaker 1>They've all added up to a level of inflation that

0:17:06.640 --> 0:17:10.200
<v Speaker 1>requires central bank attention, and now they're speaking to that

0:17:10.880 --> 0:17:14.560
<v Speaker 1>as well as acting with acceleration of the taper. There

0:17:14.560 --> 0:17:17.000
<v Speaker 1>are a lot of cross currents. Though the fiscal policy

0:17:17.119 --> 0:17:20.720
<v Speaker 1>sequentially is going to become less stimulative. The news this

0:17:20.760 --> 0:17:24.040
<v Speaker 1>morning from Senator Mansion basically bailing on the build back

0:17:24.080 --> 0:17:28.400
<v Speaker 1>better plan is another point in that direction. Um, So

0:17:28.560 --> 0:17:30.520
<v Speaker 1>I wouldn't be worried that we're about to go through

0:17:30.560 --> 0:17:34.080
<v Speaker 1>skyrocketing rates. I think that's highly unlikely. Uh. And then

0:17:34.119 --> 0:17:37.720
<v Speaker 1>the omicron slash delta wave that we're all dealing with

0:17:38.160 --> 0:17:40.840
<v Speaker 1>is another sort of bond friendly development. So you know,

0:17:41.200 --> 0:17:42.920
<v Speaker 1>it's sort of clear as mud. But I think that

0:17:43.040 --> 0:17:45.000
<v Speaker 1>the simple fact the matter is we do believe yields

0:17:45.000 --> 0:17:47.480
<v Speaker 1>will be somewhat higher than the art today, but there's

0:17:47.480 --> 0:17:50.760
<v Speaker 1>plenty of reasons not to go max short at this

0:17:50.760 --> 0:17:54.119
<v Speaker 1>point in time. Yeah, talk to us about that r J,

0:17:54.280 --> 0:17:57.760
<v Speaker 1>because it's so interesting when, as Paul was saying, the

0:17:57.840 --> 0:18:01.040
<v Speaker 1>call was two percent yields and we're down below a

0:18:01.119 --> 0:18:03.840
<v Speaker 1>one fort on the tenure and below two percent, well

0:18:03.880 --> 0:18:06.879
<v Speaker 1>below two on the thirty year. Is it that we

0:18:06.960 --> 0:18:09.359
<v Speaker 1>have a central bank who is now less tolerant of

0:18:09.400 --> 0:18:13.439
<v Speaker 1>inflation and so long term we're thinking lower growth, lower

0:18:13.480 --> 0:18:19.040
<v Speaker 1>inflation or is this some technicals. I think that there's

0:18:19.320 --> 0:18:22.280
<v Speaker 1>a number of factors out there. First of all, the

0:18:23.720 --> 0:18:27.280
<v Speaker 1>fet worked really hard to get many to accept the

0:18:27.320 --> 0:18:31.040
<v Speaker 1>idea that part of this inflation was transitory. That word

0:18:31.040 --> 0:18:34.040
<v Speaker 1>now has basically been banned. UM, So let's use a

0:18:34.080 --> 0:18:37.639
<v Speaker 1>different one that's probably not a clear clearly implying that

0:18:37.640 --> 0:18:41.520
<v Speaker 1>it would be brief episodic. I think there's something episodic

0:18:41.560 --> 0:18:45.840
<v Speaker 1>about this inflation, but that's not explaining all of it. UM.

0:18:45.880 --> 0:18:48.880
<v Speaker 1>I think the fact that the fet is is pivoted,

0:18:48.920 --> 0:18:52.800
<v Speaker 1>has pivoted in the hawkish direction, has prompted some fears

0:18:52.880 --> 0:18:55.800
<v Speaker 1>that they might overdo it. I mean, it's remarkable how

0:18:56.000 --> 0:19:00.760
<v Speaker 1>the distance between the dots and the markets imply levels

0:19:00.800 --> 0:19:03.000
<v Speaker 1>of short rates out a year or two, three years

0:19:03.000 --> 0:19:08.480
<v Speaker 1>from now. It's pretty stark. H. Obviously, there's a mixed

0:19:08.560 --> 0:19:11.240
<v Speaker 1>view on how fast the economy can grow and how

0:19:11.320 --> 0:19:15.560
<v Speaker 1>much the economy can tolerate of FED tightening cycle. Uh.

0:19:15.640 --> 0:19:18.360
<v Speaker 1>It rains to be seen. However, how this one unfold

0:19:18.760 --> 0:19:20.480
<v Speaker 1>makes it sort of tough for the bond managers of

0:19:20.520 --> 0:19:23.119
<v Speaker 1>the world. I do think there's some silver lining for

0:19:23.160 --> 0:19:25.560
<v Speaker 1>people who are afraid that they're going to experience massive

0:19:25.600 --> 0:19:28.600
<v Speaker 1>bond losses. UH. They have to remember, you've already experienced

0:19:28.680 --> 0:19:31.480
<v Speaker 1>losses on the Barkley's Aggregate, the U S Treasury Index,

0:19:31.520 --> 0:19:33.800
<v Speaker 1>they're all down one over two percent on the year.

0:19:34.480 --> 0:19:37.240
<v Speaker 1>It's quite possible as yields rise in the year to come,

0:19:38.080 --> 0:19:41.080
<v Speaker 1>I expect returns to be low, that's for sure. UM.

0:19:41.160 --> 0:19:44.000
<v Speaker 1>But some of the rising rate dynamics behind us. And

0:19:44.000 --> 0:19:46.119
<v Speaker 1>the question is where is that terminal rate? The markets

0:19:46.119 --> 0:19:48.440
<v Speaker 1>pricing at very low terminal rate. We think it's probably

0:19:48.480 --> 0:19:50.919
<v Speaker 1>a little too low. We're a little short as a result,

0:19:51.040 --> 0:19:52.920
<v Speaker 1>and that's how we're dealing with this sort of foggy

0:19:52.960 --> 0:19:56.199
<v Speaker 1>picture in front of us. R J. Are you of

0:19:56.240 --> 0:19:58.600
<v Speaker 1>the Are you in the camp that central banks perhaps

0:19:58.880 --> 0:20:05.720
<v Speaker 1>have been moving to slow on inflation? UM? I think yeah, yeah.

0:20:05.760 --> 0:20:07.399
<v Speaker 1>I think the simple fact of the matter is that

0:20:07.480 --> 0:20:12.280
<v Speaker 1>the FED in other eras, the FED wouldn't have accelerated

0:20:12.280 --> 0:20:15.640
<v Speaker 1>the taper, they would have just stopped buying bonds. Uh.

0:20:15.680 --> 0:20:18.760
<v Speaker 1>There's abundant reasons to argue that that that they should

0:20:18.760 --> 0:20:20.760
<v Speaker 1>do that, and they should have done at the last meeting.

0:20:21.000 --> 0:20:24.399
<v Speaker 1>But in the current central banking framework, the FET doesn't

0:20:24.400 --> 0:20:28.399
<v Speaker 1>like to surprise the markets. They viewed that as destabilizing. UH.

0:20:28.480 --> 0:20:31.280
<v Speaker 1>It would unsettle risk assets which have been on a tear.

0:20:32.359 --> 0:20:35.360
<v Speaker 1>So I think the FED has to move very sensitively

0:20:35.480 --> 0:20:38.959
<v Speaker 1>gingerly is probably a better word, uh in in their pivot,

0:20:39.040 --> 0:20:40.840
<v Speaker 1>and so far they've pulled it off. It's interesting that

0:20:40.920 --> 0:20:42.959
<v Speaker 1>risk assets are now struggling because I think people are

0:20:42.960 --> 0:20:45.280
<v Speaker 1>concerned about the idea of a policy error, that the

0:20:45.320 --> 0:20:47.879
<v Speaker 1>FED is going to overtighten, that their doughts are too aggressive.

0:20:48.280 --> 0:20:51.040
<v Speaker 1>Economy can't take it, like I was saying before, But yeah,

0:20:51.080 --> 0:20:53.120
<v Speaker 1>I think the central banks probably waited a little too long.

0:20:53.160 --> 0:20:57.240
<v Speaker 1>But can you blame them. The uncertainties that we face

0:20:57.400 --> 0:21:01.600
<v Speaker 1>as an economy as a society keep thing. It's hard

0:21:01.640 --> 0:21:04.680
<v Speaker 1>to charge forth with great confidence, whether you're a public

0:21:04.720 --> 0:21:08.040
<v Speaker 1>health official or a monetary policy official in the context

0:21:08.040 --> 0:21:11.480
<v Speaker 1>of a world that's changing as the pandemic continues to

0:21:10.840 --> 0:21:13.280
<v Speaker 1>to change over Now you know, r J, we just

0:21:13.320 --> 0:21:16.200
<v Speaker 1>have about thirty seconds left. When will we know when

0:21:16.240 --> 0:21:18.840
<v Speaker 1>we are past the point of having to worry about

0:21:18.840 --> 0:21:24.600
<v Speaker 1>a policy error. That's a great question. I I personally

0:21:24.600 --> 0:21:27.560
<v Speaker 1>think Chairman Powell laid out of you that if inflation

0:21:27.680 --> 0:21:32.200
<v Speaker 1>isn't materially declining mid to late next year from its

0:21:32.440 --> 0:21:35.760
<v Speaker 1>very high rates that we currently see, um, that's where

0:21:35.760 --> 0:21:38.960
<v Speaker 1>the FED might start to get more aggressive and and

0:21:39.800 --> 0:21:43.720
<v Speaker 1>the policy error judgment we'll only become apparent sort of

0:21:43.760 --> 0:21:46.160
<v Speaker 1>as it's happening. Recalled the fourth quarter of twenty team,

0:21:46.160 --> 0:21:48.480
<v Speaker 1>when the FED was tightening and the balance she was shrinking.

0:21:49.280 --> 0:21:51.359
<v Speaker 1>The stock markets were, you know, they were screaming Uncle,

0:21:51.400 --> 0:21:54.879
<v Speaker 1>they couldn't take it. Stock markets quarter, That's when the

0:21:54.880 --> 0:21:57.600
<v Speaker 1>policy error trade becomes evident. It's sort of real time,

0:21:58.160 --> 0:22:00.480
<v Speaker 1>all right. R J. Thanks so much for join Instagrams.

0:22:00.520 --> 0:22:03.719
<v Speaker 1>Appreciate getting your thoughts on the credit markets. R J. Gallop,

0:22:04.080 --> 0:22:07.520
<v Speaker 1>Senior portfolio manager for Federated Hermes, giving us his thoughts

0:22:07.600 --> 0:22:10.800
<v Speaker 1>on these credit markets. Thanks for listening to the Bloomberg

0:22:10.840 --> 0:22:14.200
<v Speaker 1>Markets podcast. You can subscribe and listen to interviews with

0:22:14.280 --> 0:22:19.080
<v Speaker 1>Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller.

0:22:19.359 --> 0:22:23.600
<v Speaker 1>I'm on Twitter at Matt Miller three. Put on fall Sweeney.

0:22:23.600 --> 0:22:26.240
<v Speaker 1>I'm on Twitter at pt Sweeney. Before the podcast. You

0:22:26.280 --> 0:22:28.680
<v Speaker 1>can always catch us worldwide at Bloomberg Radio