WEBVTT - Surveillance: Fed Distractions with Donald 0:00:05.080 --> 0:00:08.440 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.480 --> 0:00:12.320 with Jonathan Faroll and Lisa Abramowitz. Join us each day 0:00:12.360 --> 0:00:16.800 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.239 --> 0:00:22.000 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.239 --> 0:00:26.560 anywhere you get your podcasts, and always I'm Bloomberg dot Com, 0:00:26.600 --> 0:00:30.280 the Bloomberg Terminal, and the Bloomberg Business App. Well, let's 0:00:30.280 --> 0:00:32.440 get straight to it. This. Francis Donald be Global Chief 0:00:32.440 --> 0:00:36.760 Economists and Strategist at Manulife Investment Management. Francis an easy one. 0:00:37.040 --> 0:00:41.000 What did you make of that? That's not an easy one, John, 0:00:41.120 --> 0:00:43.479 because there's a lot of parcel through there. But the 0:00:43.560 --> 0:00:45.800 main takeaway for me is, yes, we could talk about 0:00:45.920 --> 0:00:48.559 terminal rate estimates and the pace of hikes, but what 0:00:48.640 --> 0:00:52.240 I'm hearing is just more data dependence and myopic. Data 0:00:52.280 --> 0:00:55.640 dependence can always be dangerous, but it is particularly problematic 0:00:55.680 --> 0:01:00.160 in an environment where we have weather distortion, seasonal adjustment distortion, 0:01:00.600 --> 0:01:04.160 low survey responses. We are in data that is really 0:01:04.360 --> 0:01:07.440 having trouble setting us a clear signal, at least over 0:01:07.480 --> 0:01:09.440 the long term, and I'm concerned that We're going to 0:01:09.480 --> 0:01:11.959 see markets that are overreacting to data points that of 0:01:12.000 --> 0:01:15.360 false decision, and potentially even a central bank that's moving 0:01:15.400 --> 0:01:19.000 too quickly and making big policy changes even via communication 0:01:19.280 --> 0:01:20.880 off of data that I think is going to be 0:01:21.240 --> 0:01:23.679 very bumpy in the next three to six months. Francis, 0:01:23.680 --> 0:01:27.440 with a shock that we saw yesterday, does disinflation come 0:01:27.480 --> 0:01:31.600 to the rescue? Can we get a rapidity of sharply 0:01:31.840 --> 0:01:36.120 lower inflation? You know, I think the FED may not 0:01:36.160 --> 0:01:40.760 be focused on specifically some of those traditional inflation measures, 0:01:40.800 --> 0:01:43.800 but that rise we've seen in inflation expectations and market 0:01:43.800 --> 0:01:46.440 based measures, that's what's keeping me up at night. That 0:01:46.560 --> 0:01:49.400 is moving in the wrong direction. Now it's countered by 0:01:49.480 --> 0:01:53.640 inflation expectations among consumers that are still going lower, and 0:01:53.760 --> 0:01:56.240 I'm hoping that the FED is focusing on those long 0:01:56.320 --> 0:01:59.080 term inflation expectations, which are coming down quite a bit. 0:01:59.680 --> 0:02:02.560 One of my bigger concerns is this summer, we're probably 0:02:02.600 --> 0:02:05.520 going to lose some of the disinflation momentum that's largely 0:02:05.560 --> 0:02:08.160 going to be base effects. So this downward momentum that 0:02:08.200 --> 0:02:10.240 we've seen is probably going to stall. That's when we're 0:02:10.240 --> 0:02:12.720 going to start hearing those words like stagflation come back, 0:02:13.040 --> 0:02:16.080 and if we haven't seen some slowdown in jobs by then, 0:02:16.160 --> 0:02:18.440 a feed that's going to stay hawkish through the summer 0:02:18.760 --> 0:02:22.400 after what was rot yesterday? Is it walk it back Wednesday? 0:02:22.480 --> 0:02:24.040 I mean, do you see come out today to the 0:02:24.080 --> 0:02:28.960 house and change the tune a little bit. The only 0:02:29.040 --> 0:02:30.960 way we're going to walk back this pricing for the 0:02:31.000 --> 0:02:33.200 March meeting is what we see in the jobs data 0:02:33.240 --> 0:02:35.120 in the next few days. And when I say jobs data, 0:02:35.160 --> 0:02:37.919 I mean we've got jobless claims, we've got job openings, 0:02:37.919 --> 0:02:42.240 we've got challengers, ADP, NFP. It's a variable buffet of 0:02:42.360 --> 0:02:44.680 jobs data that's going to be coming through, and no 0:02:44.919 --> 0:02:47.440 one number is going to be I think more important 0:02:47.480 --> 0:02:50.680 than the sum of those stories, especially in an environment 0:02:50.680 --> 0:02:52.760 where we're really trying to dig deeper. We got to 0:02:52.800 --> 0:02:55.240 look at private sector jobs data right now, people looking 0:02:55.280 --> 0:02:58.280 at job postings on things like LinkedIn, And indeed, if 0:02:58.280 --> 0:02:59.760 you want to understand what the feed is going to 0:02:59.800 --> 0:03:01.640 be doing a year or two years from now, which 0:03:01.720 --> 0:03:03.600 I think is even more important than the March meeting, 0:03:03.800 --> 0:03:05.720 you've got to be looking at all of the data 0:03:05.760 --> 0:03:09.160 available and really making sure that you understand the comprehensive 0:03:09.200 --> 0:03:12.280 story behind it. Francis, I understand what a bind freedhair J. 0:03:12.400 --> 0:03:14.680 Powell is and how unique this moment is, and yet 0:03:14.840 --> 0:03:18.400 the flip flopping of his messages is jarring. It's starring 0:03:18.480 --> 0:03:20.440 for markets, and it's starring for people who are trying 0:03:20.480 --> 0:03:23.120 to get a sense of what the compass is for 0:03:23.120 --> 0:03:25.360 this feder reserve. Do you think that that in and 0:03:25.360 --> 0:03:30.480 of itself is detrimental or advantageous given that that uncertainty 0:03:30.560 --> 0:03:34.320 actually creates some of the market conditions that are potentially 0:03:34.320 --> 0:03:37.680 tighter than they'd otherwise be. Well, it certainly makes our 0:03:37.760 --> 0:03:39.880 job a heart or at Lisa because instead of saying, well, 0:03:39.880 --> 0:03:42.040 they've provided forward guidance and we can kind of rest 0:03:42.040 --> 0:03:43.880 on all laurels for six months. We have to be 0:03:43.920 --> 0:03:45.839 a lot more flexible when it comes to the data 0:03:45.880 --> 0:03:48.040 that's coming in. But there is a lot of short 0:03:48.160 --> 0:03:51.720 termism in this industry and financial media. When you're an economist, 0:03:51.800 --> 0:03:54.120 you're always looking for what is the next big story 0:03:54.120 --> 0:03:57.240 and I don't want to miss that inflection point. But problematically, 0:03:57.240 --> 0:03:58.920 we have a lot of data that's moving, you know, 0:03:58.960 --> 0:04:02.200 two steps forward, one back. It's getting dangerous to extrapolate 0:04:02.400 --> 0:04:04.760 too far in the future. We have portfolios that are 0:04:04.800 --> 0:04:06.880 training technically and they need to be moving off of that. 0:04:07.000 --> 0:04:09.280 But if you're a longer term investor, a lot of 0:04:09.320 --> 0:04:12.040 this is noise that's distracting from the signal you need 0:04:12.080 --> 0:04:14.480 to be focusing twelve to eighteen months or even in 0:04:14.520 --> 0:04:17.200 some cases, we have to produce five year forecasts to 0:04:17.240 --> 0:04:19.840 tell us where our strategic portfolio should be positioned over 0:04:19.880 --> 0:04:22.320 the very long term. And so some of this focus 0:04:22.360 --> 0:04:24.000 on the FED moving back and forth in a month 0:04:24.040 --> 0:04:26.880 to month basis. It's not valuable to investors, and sometimes 0:04:26.880 --> 0:04:29.840 it can actually be distracting in some cases even dangerous. 0:04:29.920 --> 0:04:31.760 Where do you think the market is getting the economy 0:04:31.800 --> 0:04:35.039 wrong right now? I'm not sure the market's getting the 0:04:35.040 --> 0:04:37.600 economy wrong. Again, it depends on your time frame. So 0:04:37.800 --> 0:04:41.240 Q one is certainly much stronger than many people expected. 0:04:41.279 --> 0:04:44.159 That consumer is holding in strong. But the challenge comes 0:04:44.160 --> 0:04:45.479 back to, and I've heard a lot of your guests 0:04:45.520 --> 0:04:48.000 talk about this, where are we going to be down 0:04:48.320 --> 0:04:51.240 the road? And it is very difficult to discount the 0:04:51.240 --> 0:04:54.120 probability of a recession twelve to eighteen months from now. 0:04:54.240 --> 0:04:56.360 So if we're talking about the next three months, sure 0:04:56.400 --> 0:04:58.720 there's no problem in saying this economy is stronger than 0:04:58.760 --> 0:05:01.240 we expected in November December. But if you want to 0:05:01.320 --> 0:05:04.560 argue for no recession, you have to discount almost every 0:05:04.600 --> 0:05:08.359 single leading indicator that has very reliably predicted a recession 0:05:08.480 --> 0:05:10.839 later in the year or twelve to eighteen months. You 0:05:10.880 --> 0:05:12.799 can try to do that. We have a very different 0:05:12.880 --> 0:05:16.040 labor market, we have excess savings, but for my view, 0:05:16.120 --> 0:05:18.400 it's a very hard sell. One thing you can say 0:05:18.720 --> 0:05:20.760 is that the leads and lags in this economy may 0:05:20.760 --> 0:05:23.360 be different than what we've previously expected. But I would 0:05:23.400 --> 0:05:25.679 just really focus on your timelines. Are you talking about 0:05:25.680 --> 0:05:27.880 the economy in the next three months solid or are 0:05:27.920 --> 0:05:29.800 you talking about the eighteen months outlook. I think a 0:05:29.800 --> 0:05:32.120 lot of strategists, including myself, you need to work on 0:05:32.279 --> 0:05:34.760 really being clear about their timelines for their forecast friends 0:05:34.800 --> 0:05:36.880 to send that degree of confidence around each timeline. Do 0:05:36.880 --> 0:05:38.720 you have more confidence about where we'll be in six 0:05:38.760 --> 0:05:43.320 months than maybe where we'll be next week after CPI? Oh, absolutely, 0:05:43.440 --> 0:05:45.560 And I think that's actually the game is what does 0:05:45.600 --> 0:05:48.320 the economy look like twelve to eighteen months from now? 0:05:48.320 --> 0:05:50.000 Actually I'm concerned about that. I think it's going to 0:05:50.040 --> 0:05:52.520 look a little more stagflationary than we'd be comfortable with. 0:05:52.760 --> 0:05:55.440 I'm less concerned about a technical recession. We know the 0:05:55.480 --> 0:05:58.760 playbook to trade recessions, we know what those look like historically. 0:05:59.000 --> 0:06:01.240 I'm more concerned about eighteen months from now. We've been 0:06:01.240 --> 0:06:04.279 in a very slow growth environment for a pretty extended 0:06:04.320 --> 0:06:06.839 period of time, and we have inflation stuck around three 0:06:06.880 --> 0:06:09.920 to four percent, and problematically, in the inflation that's rested 0:06:10.040 --> 0:06:12.279 in the system that's still there is likely to be 0:06:12.400 --> 0:06:15.159 less interest rate sensitive than the inflation that we've managed 0:06:15.200 --> 0:06:17.960 to kind of dissipate over this period of time. So 0:06:18.000 --> 0:06:20.680 this word stagflation, there's lots of ways to define it, 0:06:20.680 --> 0:06:22.440 There's lots of ways people can talk about it. I 0:06:22.520 --> 0:06:24.320 think that's going to be more of a theme for 0:06:24.400 --> 0:06:26.200 us moving forward than we thought it was going to 0:06:26.279 --> 0:06:29.080 be even just a few months ago. Francis wonderful as 0:06:29.080 --> 0:06:31.240 always to get your perspective. Great to see if francis 0:06:31.279 --> 0:06:45.640 down at there of Manualife Investment Management. We're lucky this 0:06:45.680 --> 0:06:47.919 morning we've got Cassie Barrow from JP Malkin with us. Now. 0:06:48.000 --> 0:06:50.160 Kelsie thought she'd get a clean slate come here to 0:06:50.200 --> 0:06:52.400 speak on behalf of Bob Michael and the team. Then 0:06:52.440 --> 0:06:54.760 Bob Michael got in there first and said this to focus. 0:06:54.839 --> 0:06:56.760 Like Cassie, I've got no idea what this is about. 0:06:57.320 --> 0:06:59.640 But here's the quote from him. He thinks that if 0:06:59.640 --> 0:07:02.440 we go back to fifty, it would be pretty confusing 0:07:02.480 --> 0:07:04.720 to the market. I hope they don't do it. I 0:07:04.760 --> 0:07:06.800 hope they're willing to run a string at twenty five 0:07:06.880 --> 0:07:10.120 basis point increases. Now, Kelsey, thanks for being with us. 0:07:10.280 --> 0:07:14.440 The chairmans open the door to fifty. How problematic is there? Yeah, 0:07:14.480 --> 0:07:16.480 So if you think about the way that Powell has 0:07:16.480 --> 0:07:21.120 been communicating about getting restrictive right, there's three dimensions to that. 0:07:21.440 --> 0:07:24.920 There's the pace, there's the level, and then there's the duration. 0:07:25.360 --> 0:07:29.160 And what Powell has been doing for months now is saying, Okay, 0:07:29.200 --> 0:07:31.720 we've hiked a lot, and so don't worry about the 0:07:31.760 --> 0:07:34.320 pace so much. It's about the level that we get 0:07:34.400 --> 0:07:37.360 to and the duration at which we stay at that 0:07:37.400 --> 0:07:41.560 restrictive level. Yesterday he essentially threw that out the window. 0:07:41.840 --> 0:07:45.200 That is confusing, And I think the key takeaway is 0:07:45.200 --> 0:07:47.920 that if we are going to consider re accelerating to 0:07:48.040 --> 0:07:51.800 fifty based on the data and they are very data dependent. 0:07:52.160 --> 0:07:54.720 The risk of a hard landing does go up in 0:07:54.720 --> 0:07:58.160 that scenario, and the yield curve is telling you as much. 0:07:58.400 --> 0:08:01.560 What we saw yesterday twelve basis points higher on the 0:08:01.560 --> 0:08:05.320 two year flat on the ten year break evens narrower. 0:08:05.720 --> 0:08:08.680 The yield curve twos tends getting to minus one hundred. 0:08:08.880 --> 0:08:11.760 That is the risk of overtightening that the bond market 0:08:11.800 --> 0:08:14.360 is picking up on. And that's also why you're seeing 0:08:14.560 --> 0:08:17.560 very sticky resistance on tens at four percent, which is 0:08:17.600 --> 0:08:21.120 something we've been watching and saying, Yeah, people are interested 0:08:21.200 --> 0:08:24.400 at bonds even in this repricing. The yields are there, 0:08:24.560 --> 0:08:27.560 and the diversification benefits are going to become even more 0:08:27.640 --> 0:08:32.160 important if the FED is going towards that hard landing 0:08:32.160 --> 0:08:35.320 Scenariomas agrees with Mike Lee writes this morning about the 0:08:35.320 --> 0:08:38.960 importance of the level we're at right now. Does that 0:08:39.160 --> 0:08:43.400 level indicate restriction? Does that level indicrate not the drama 0:08:43.480 --> 0:08:47.120 of super restrictive, but that we're finally at levels that 0:08:47.400 --> 0:08:50.960 really click in. Well, this is obviously the debate. Now 0:08:51.000 --> 0:08:53.640 we think that we are getting to level levels that 0:08:53.679 --> 0:08:56.840 are sufficiently restrictive. So last year the thing that I 0:08:56.960 --> 0:08:59.600 was always quoting was the real Fed funds rate, so 0:08:59.640 --> 0:09:02.480 saying the Fed wasn't going to stop hiking until the 0:09:02.520 --> 0:09:05.680 real Fed funds rate turned positive. So essentially you needed 0:09:05.720 --> 0:09:08.679 the Fed funds rate to move above the level of inflation. 0:09:08.960 --> 0:09:11.640 We are making progress on that. You know, if you 0:09:11.640 --> 0:09:14.480 look at COREPC, it's around four point six percent. The 0:09:14.520 --> 0:09:17.720 Fed is now expected to get to five maybe five 0:09:17.760 --> 0:09:20.479 and a half. That's going to be a significantly positive 0:09:21.080 --> 0:09:23.679 real Fed funds rate. And I think we have to 0:09:23.720 --> 0:09:27.120 think about the way in which policy impacts the economy. 0:09:27.400 --> 0:09:32.160 It impacts housing first, then manufacturing, then consumer and labor, 0:09:32.280 --> 0:09:35.880 and it's actually playing out in that traditional way. Housing 0:09:36.000 --> 0:09:39.840 home prices have been deflating for six straight months. Business 0:09:39.840 --> 0:09:43.840 investment is starting to rolling over. Now what's only left 0:09:44.040 --> 0:09:47.000 is the consumer in the labor market. It just takes time. 0:09:47.400 --> 0:09:50.880 We have the patients as long term investors that the 0:09:50.960 --> 0:09:53.200 FED may not have the luxury of having. In this moment, 0:09:53.440 --> 0:09:55.079 I was going to say, perhaps patients that the Fed 0:09:55.160 --> 0:09:57.199 doesn't have. Right now, I'm looking at a ten year 0:09:57.240 --> 0:09:59.760 yields of about four percent just under that, and you're 0:09:59.760 --> 0:10:03.360 talking talking about value in bonds. Are yields at this 0:10:03.480 --> 0:10:06.760 level on the longer term debt instruments pricing in a 0:10:06.800 --> 0:10:10.440 soft landing of sorts with rates remaining higher for longer 0:10:10.559 --> 0:10:14.360 and no crash. Well, I think that with the yield 0:10:14.360 --> 0:10:18.720 curve this inverted, you are looking at a rates market 0:10:18.800 --> 0:10:21.880 that is suggesting the risk of hard landing is rising. Now, 0:10:21.880 --> 0:10:24.520 where I think the discontinuity is is really more in 0:10:24.559 --> 0:10:27.760 the spread market, so in credit, so spreads are still 0:10:28.080 --> 0:10:32.400 on the narrow end of the recent ranges end of history, 0:10:32.720 --> 0:10:35.679 So that's where I would say more of the complacency is. 0:10:35.880 --> 0:10:38.560 But I think in the rates market itself, I think 0:10:38.600 --> 0:10:42.440 you are seeing the risk of overtightening playing through within 0:10:42.559 --> 0:10:45.240 the very inverted yield curve. I guess, to put this 0:10:45.320 --> 0:10:47.840 another way, there's a feeling that even if we get 0:10:47.920 --> 0:10:51.520 some sort of recession or some sort of landing, aside 0:10:51.559 --> 0:10:53.400 from the no landing idea that people were talking about 0:10:53.400 --> 0:10:55.520 for a while, that we're going to have higher rates 0:10:55.559 --> 0:10:58.880 for longer, and that is a persistent theme regardless of 0:10:58.920 --> 0:11:01.079 even a crash. Do you agree with that? Do you 0:11:01.120 --> 0:11:03.680 think that if the FED does crash the economy, we 0:11:03.720 --> 0:11:06.320 will still end up with higher terminal rates for a 0:11:06.360 --> 0:11:08.640 longer period of time. Yeah, so we do think that 0:11:08.679 --> 0:11:11.640 we're in a new regime, and the starting point of 0:11:11.679 --> 0:11:14.520 that new regime was the fact that this is the 0:11:14.559 --> 0:11:18.000 first hiking cycle in thirty years, that the peak of 0:11:18.040 --> 0:11:21.600 that hiking cycle is higher than the prior one. Right, 0:11:21.640 --> 0:11:25.360 So we were having higher or lower highs and lower 0:11:25.400 --> 0:11:28.600 lows for thirty years. That's the bull market of fixed income. 0:11:28.880 --> 0:11:31.240 We are now going in the opposite direction. So this 0:11:31.360 --> 0:11:33.680 is a meaningful shift because the next time that the 0:11:33.720 --> 0:11:35.960 FED cuts, we don't think it's going to be back 0:11:35.960 --> 0:11:39.280 to the zero lower bound. So there is some changes 0:11:39.320 --> 0:11:42.280 that are happening here, but those are slow moving. They're 0:11:42.360 --> 0:11:46.360 still going to be cyclical shifts in yields throughout our 0:11:46.880 --> 0:11:50.360 broader structural view that we could be entering into a 0:11:50.400 --> 0:11:53.760 phase of higher highs and higher lows. Let's pick up 0:11:53.760 --> 0:11:55.600 on that, because Bob's given it a lot of thought 0:11:55.600 --> 0:11:58.000 as well. Calcum in the team. Are you thinking about 0:11:58.080 --> 0:12:01.000 repeated cycles of that for the next couple of decades. 0:12:01.000 --> 0:12:03.320 It's the reason to believe we've got tailwinds for it. 0:12:04.000 --> 0:12:07.760 There are some reasons to believe, and obviously these are 0:12:07.840 --> 0:12:11.600 are very abstract topics. Things that we're not going to 0:12:11.640 --> 0:12:15.720 know until very very far into hindsight, but there are 0:12:15.800 --> 0:12:20.199 tailwinds as it relates to demographics. Here, we think that 0:12:20.320 --> 0:12:26.760 inflation structurally is not necessarily going to struggle as much 0:12:26.800 --> 0:12:28.680 to get to that two percent level. So if you 0:12:28.720 --> 0:12:33.440 think about pre or pre COVID, but post GFC, it 0:12:33.520 --> 0:12:35.840 was very hard for the FED to achieve two percent 0:12:35.920 --> 0:12:38.400 core PC. In fact, on average it was about one 0:12:38.440 --> 0:12:40.120 and a half percent, So we were remissing it to 0:12:40.120 --> 0:12:42.720 the downside by about fifty basis points all the time. 0:12:43.360 --> 0:12:46.640 Now I think you can say maybe things have started 0:12:46.679 --> 0:12:51.720 to shift because of deglobalization, because of other factors, that 0:12:51.800 --> 0:12:53.960 it will be easier for the FED to get to 0:12:53.960 --> 0:12:56.760 that two percent. You know, we're not suggesting a materially 0:12:56.880 --> 0:12:59.960 higher regime for inflation and rates, but it is one 0:13:00.120 --> 0:13:02.120 that is shifting over time. Could be the last thirty 0:13:02.160 --> 0:13:05.200 years in reverse. Take here, this a magical coming from 0:13:05.240 --> 0:13:09.080 the team, Cassie Bob. The call here is you guys 0:13:09.080 --> 0:13:12.000 aren't leverage players, but there's a huge part of the 0:13:12.280 --> 0:13:17.800 alternative investment in fixed income market that is usual utilizing leverage. 0:13:17.840 --> 0:13:20.720 Here did they get hammered yesterday? Is there a misuse 0:13:20.760 --> 0:13:24.880 of leverage? Right now. So I think the strength of 0:13:24.920 --> 0:13:27.880 the move and choose yesterday clearly shows that some people 0:13:27.880 --> 0:13:32.120 were off sides and there are positions that needed to 0:13:32.160 --> 0:13:39.680 be to be cleaned out. How's the Austria Bob doing, Cassie, 0:13:39.679 --> 0:13:41.520 you know what, that's the perfect place to leave it, 0:13:41.679 --> 0:13:49.840 Cassie barrow King asset management. That was golden And Alicia 0:13:49.880 --> 0:13:52.360 Levine with us right now being why melon she's over there. 0:13:52.360 --> 0:13:54.440 It's like the bradmon Kim was on her. Well you 0:13:54.440 --> 0:13:57.840 were talking, show us to jump in, jump in respond 0:13:57.840 --> 0:13:59.880 to what we were talking about. This hurt. Look. I 0:14:00.679 --> 0:14:03.199 think what Powell did yesterday was the right thing to do. 0:14:03.280 --> 0:14:06.360 The data has been hot, and if he didn't put 0:14:06.400 --> 0:14:11.280 fifty on the table, it then threatens a further loosening 0:14:11.360 --> 0:14:16.280 of financial conditions, which will un anchor inflation expectation. So 0:14:16.320 --> 0:14:18.319 he had to put it on the table. I actually 0:14:18.360 --> 0:14:19.880 think it was the right thing to do. But now 0:14:19.880 --> 0:14:22.280 the problem is he's locked in because if they don't 0:14:22.320 --> 0:14:25.520 go fifty right, it's been a series of locking in. 0:14:26.000 --> 0:14:28.680 The FED talks too much. I have thought that throughout 0:14:28.680 --> 0:14:31.280 this whole cycle there's too much talking, too much talk 0:14:31.280 --> 0:14:35.640 of disinflation. Eight weeks ago thirteen times, but in the end, 0:14:35.680 --> 0:14:37.920 by putting fifty on the table in the near term, 0:14:37.960 --> 0:14:39.760 they're almost forced to go through it. I think a 0:14:39.840 --> 0:14:42.440 two hundred number on Friday would do it. I want 0:14:42.440 --> 0:14:44.800 to pick up on Lisa's think of this morning so far. 0:14:44.960 --> 0:14:47.040 If two hundred k gets it done, it's a pretty 0:14:47.080 --> 0:14:51.240 low bar. Was stock so resilient? That is confounding and 0:14:51.320 --> 0:14:54.440 the question of the year, And to your point, why 0:14:54.520 --> 0:14:57.720 was Nazak leading yesterday? So let's just point out that 0:14:57.800 --> 0:15:01.520 even after the price action yesterday, stocks were where they 0:15:01.560 --> 0:15:07.320 were on Thursday, and the disconnect between the bond volatility 0:15:07.320 --> 0:15:10.080 and what's happening in the stock market is ever widening 0:15:10.120 --> 0:15:12.840 this year. In year to date in twenty twenty three, 0:15:13.080 --> 0:15:17.680 the market has been remarkably resilient, as have credit spreads, 0:15:17.800 --> 0:15:20.360 as you've just talked about, which is what's holding up 0:15:20.360 --> 0:15:22.680 the market here. So I think what the market is 0:15:22.720 --> 0:15:25.640 seeing is that ultimately that ten years having a hard 0:15:25.640 --> 0:15:30.320 time over four percent, and ultimately the ten years going 0:15:30.400 --> 0:15:32.760 to move lower because a slowdown will be coming. The 0:15:32.760 --> 0:15:35.160 Fed's going to wind up pushing us into recession. So 0:15:35.200 --> 0:15:37.080 I get a lot of hate mail about being too gloomy, 0:15:37.080 --> 0:15:38.800 and people who think that I always a glass half 0:15:38.800 --> 0:15:40.160 empty in just you know, I should go have a 0:15:40.200 --> 0:15:42.600 little bit more fun. And so some people will say that, 0:15:42.760 --> 0:15:44.960 you know, if you take a look at what's been 0:15:45.000 --> 0:15:47.880 going on, trying and let's try to look at the 0:15:47.920 --> 0:15:51.400 bright side, maybe stocks and credit spreads are seeing a 0:15:51.440 --> 0:15:54.720 picture that you know, the rate volatility isn't Maybe there 0:15:54.840 --> 0:15:57.600 is this resilience. Maybe that strength is you know, going 0:15:57.600 --> 0:15:59.760 to carry through even if rates do go up to 0:15:59.840 --> 0:16:02.560 six percent. Do you buy that? So I do buy 0:16:02.560 --> 0:16:07.720 the thought that the economy appears to be less sensitive 0:16:07.920 --> 0:16:10.920 to rate hikes than originally thought. I mean, we are 0:16:10.960 --> 0:16:14.000 now at four fifty four, seventy five and twelve months. 0:16:14.680 --> 0:16:19.760 Whither the crisis, whither the great knock on effects? We're nowhere, okay, 0:16:19.800 --> 0:16:21.640 And I think that surprised a lot of us who've 0:16:21.640 --> 0:16:24.600 seen other rate cycles here. So that has to do 0:16:24.680 --> 0:16:26.760 with the fact that most of mortgages are fixed rate 0:16:26.760 --> 0:16:29.240 at three percent. People are making the spread on a 0:16:29.680 --> 0:16:34.040 five percent six months treasury right, so they're actually making 0:16:34.080 --> 0:16:37.800 money on this trade. But even if the economy is 0:16:37.840 --> 0:16:40.480 less resilient, the FED will probably have to go higher 0:16:40.520 --> 0:16:43.600 and will eventually work. It's just going to take longer. 0:16:43.960 --> 0:16:48.200 The data and the real economy continues to be fairly strong. 0:16:48.520 --> 0:16:51.360 You're seeing weakening in certain parts of the economy such 0:16:51.360 --> 0:16:55.120 as housing. Clearly commercial real estate is at risk. That's 0:16:55.160 --> 0:16:58.160 flashing a warning sign here, But that's really the beginning 0:16:58.200 --> 0:17:00.640 of it. It just hasn't happened yet. As long as 0:17:00.720 --> 0:17:03.840 labor is strong and as long as workers are getting 0:17:03.880 --> 0:17:07.200 wage increases, which they are, you can keep this going further. 0:17:07.440 --> 0:17:09.359 So what do you do with the idea of a 0:17:09.400 --> 0:17:11.679 six percent FED funds rate? What do you do with 0:17:11.720 --> 0:17:14.280 a fifty basis point rate hike on March twenty second? 0:17:14.359 --> 0:17:17.159 How does that change what you buy? So it's a 0:17:17.200 --> 0:17:20.359 really interesting things. So far cyclicals this year have worked, 0:17:20.400 --> 0:17:22.960 as have growth, right, and I think that begins to 0:17:23.080 --> 0:17:24.840 change a little bit. You have to think of this 0:17:25.000 --> 0:17:27.520 as if the FED has to go to six percent 0:17:27.680 --> 0:17:29.879 or even higher. It's not our base case, but you 0:17:29.960 --> 0:17:31.760 have to start opening your mind to the fact that 0:17:31.800 --> 0:17:35.720 it could happen. Then you start having to see a 0:17:35.760 --> 0:17:38.000 recession by the end of the year or even into 0:17:38.000 --> 0:17:40.480 twenty twenty four. The confounding part of this year is 0:17:40.480 --> 0:17:43.680 that the recession hasn't happened yet, and it's very hard 0:17:43.720 --> 0:17:46.280 to predict with the strength we see in other sectors 0:17:46.280 --> 0:17:48.560 such as the service sector, which continues to hold up 0:17:48.560 --> 0:17:51.880 the economy, but you have to expect it within let's say, 0:17:51.880 --> 0:17:54.760 the next twelve months. And with that you do start 0:17:54.960 --> 0:17:59.119 asking the question, will cyclicals continue to outperform? And and 0:17:59.560 --> 0:18:01.960 that's really where you have to go with this, because 0:18:02.080 --> 0:18:05.160 the defensive stocks have been terrible this year, right Healthcare 0:18:05.160 --> 0:18:08.120 has been tough, staples have been tough, utilities have been tough, 0:18:08.160 --> 0:18:10.919 and the cyclicals have ripped. So the question is what 0:18:11.080 --> 0:18:13.919 happens if the recession really starts to be priced in. 0:18:14.240 --> 0:18:17.640 I'm not going to mince on International Women's Day. There 0:18:17.640 --> 0:18:20.159 are many women that have provide leadership, and you have 0:18:20.280 --> 0:18:24.960 with bulletproof mathematics and education. I mean, your path here 0:18:25.119 --> 0:18:28.080 was painful in terms of like lean over the desk. 0:18:28.680 --> 0:18:31.840 Right now, we are at a moment where we've got 0:18:32.240 --> 0:18:36.360 massive first and second derivative moves and it comes down 0:18:36.400 --> 0:18:40.240 to not seeing Teleb's math. The gravity's back, and as 0:18:40.240 --> 0:18:42.480 Talleb says, you got to have skin in the game, 0:18:42.840 --> 0:18:45.280 which means all the shadows are out there, all the 0:18:45.320 --> 0:18:47.680 worries are out there and you study it on a 0:18:47.760 --> 0:18:50.560 tail with the Plassant distribution. We're not going to go 0:18:50.600 --> 0:18:53.680 into the math this morning, but no, I'm not. I'm 0:18:53.680 --> 0:18:55.639 not going to go into the math this morning. But 0:18:55.800 --> 0:18:59.280 are we there now where we've got legitimate tail risk 0:18:59.600 --> 0:19:03.919 of his Hilarion would say, the unknown unknowns out there, Yes, 0:19:04.160 --> 0:19:07.480 we do. We've always thought that simply because we don't 0:19:07.520 --> 0:19:10.560 think you get out of a rate cycle that quickly. 0:19:10.920 --> 0:19:14.080 I think what's unspoken in this conversation today is the 0:19:14.160 --> 0:19:17.200 debt ceiling that could change what the FED does rather 0:19:17.280 --> 0:19:20.720 remarkably and rather quickly as well, and the fact that 0:19:20.880 --> 0:19:24.119 the US hasn't had a recession in the third year 0:19:24.640 --> 0:19:28.560 of a presidential term because it's an election cycle coming up. 0:19:28.960 --> 0:19:31.760 What happens to the pressure on Powell? If we actually 0:19:31.800 --> 0:19:34.200 get that recession by the end of the year, can 0:19:34.240 --> 0:19:37.679 he finish the job? I don't think Powell's burns yet. 0:19:38.000 --> 0:19:40.600 The question is will he be burns in the future. 0:19:40.960 --> 0:19:44.240 I think for now Powell's sticking to the Volker playbook, 0:19:44.400 --> 0:19:46.639 and I think he's doing a pretty good job at it. 0:19:46.920 --> 0:19:50.119 The question is, if we get that recession, if your 0:19:50.200 --> 0:19:53.399 unemployment rate goes to three point eight percent from here, 0:19:53.640 --> 0:19:56.080 which doesn't feel like a lot. You'll begin and he'll 0:19:56.119 --> 0:19:57.920 be getting pressure from the right and the left. You're 0:19:57.920 --> 0:20:00.159 just much more diplomatic than I am. Als going to 0:20:00.200 --> 0:20:02.000 stick with a selection of aiding net fam ymn it. 0:20:12.359 --> 0:20:15.360 You should point out that, well, an International Woman's Day. 0:20:15.400 --> 0:20:17.399 You can be a reporter who says I got a 0:20:17.440 --> 0:20:21.240 fancy degree from Chicago, but I know nothing about bonds, 0:20:21.280 --> 0:20:26.280 and through sheer inspiration and perspiration you learn about bonds. 0:20:26.640 --> 0:20:29.560 What was it like, Lisa Brand was your first day 0:20:29.880 --> 0:20:33.200 in the bond world? Well, it was in two thousand 0:20:33.240 --> 0:20:35.640 and seven in August, when the commercial paper market was freezing. 0:20:36.280 --> 0:20:41.080 Definitely a moment of real tension and drama that people 0:20:41.080 --> 0:20:44.120 don't associate with bonds. Did you just pile up fifteen 0:20:44.160 --> 0:20:47.280 books around you and just read FABOZI cover to cover 0:20:47.359 --> 0:20:49.480 and the rest of it. No. I called traders and 0:20:49.640 --> 0:20:52.679 a number of them cursed and hung up, because that 0:20:52.760 --> 0:20:55.120