Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan, I'm a senior editor at
Speaker 1: Bloomberg and i'm La Donna Higher, across asset reporter with Bloomberg.
Speaker 1: And this week on the show, well, as my colleague
Speaker 1: Cameron Christ wrote, the Fed jest doesn't get much more
Speaker 1: hawkish than this. After raising interest rates by a quarter
Speaker 1: percentage point, policymakers are projecting the equivalent of six more
Speaker 1: such increases this year, and this comes as Russia's war
Speaker 1: with Ukraine rages on, clouding the outlook for the global economy.
Speaker 1: So what's it all mean for markets? Well, we're lucky
Speaker 1: to have two veteran FED watchers on his guests this
Speaker 1: week to sort it all out for us. But first,
Speaker 1: Fili Donna, I have to point out that we are
Speaker 1: recording this podcast on St Patrick's Day, March seven teeth
Speaker 1: And for guys like me you know of Irish descent
Speaker 1: but really have never stepped foot in Ireland, we have
Speaker 1: a few traditions on St Patrick's Day, so so let
Speaker 1: me just tell you what they are. My favorite Irish
Speaker 1: tradition is you get the whole extended Irish family together
Speaker 1: and eat Italian food. So I did that. That's that's
Speaker 1: that's one thing, spaghetti or something. Yeah. Yeah. The other
Speaker 1: thing is we tend to tell really long, rambling stories
Speaker 1: that really don't have much of a point um, but
Speaker 1: they have a lot of metaphors. So I'm gonna do
Speaker 1: that right now because I want to tell you a
Speaker 1: story about a good friend of mine. He was a
Speaker 1: photographer at the Associated Press for like thirty years. Like
Speaker 1: guy lived the life. He went to every Olympics, he
Speaker 1: photographed like every NBA Championship. Anyway, now he's retired and
Speaker 1: he's on Long Beach Island and all he does all
Speaker 1: days take pictures of birds, regrets, and the herons and
Speaker 1: and all sorts of uh seabirds, um, and they're beautiful.
Speaker 1: It's like kept me saying, you're in the endemic. But
Speaker 1: recently he took a picture over the bay. It was
Speaker 1: sunset on Barnegat Bay, and on the other side of
Speaker 1: the bay they were doing a controlled burn of the
Speaker 1: pine lands. So they were trying to burn down I
Speaker 1: guess a few acres in order to not have a
Speaker 1: bad forest fire in the pilots. And I thought, vil Donna,
Speaker 1: this is exactly what's the FED is doing right now?
Speaker 1: Controlled burn of the markets in order to avoid a
Speaker 1: major nasty, uh forest fire later on. What do you
Speaker 1: think about that? Pretty good for at least you warned us.
Speaker 1: But that is a really long winded way to get
Speaker 1: back to the FED. Yeah, yeah, it could have been
Speaker 1: more long winded. I've been known to being more long winded,
Speaker 1: as you know. I heard, I heard, actually I think
Speaker 1: it was. A strategist wrote in a note a better
Speaker 1: sort of analogy. The FED is dating without the commitment,
Speaker 1: dating without the committing something like that. I like mine better,
Speaker 1: But that's fine. Ya, you go with here. It's good,
Speaker 1: it's fine. Think I have a kill. They're gonna pick
Speaker 1: minds better. Why I want to bring in Ben Emmons.
Speaker 1: He's the managing director of Global macro Strategy at Medley Global.
Speaker 1: And we also have Edward Harrison, who's with Bloomberg's Markets
Speaker 1: team with us with us this week. So I want
Speaker 1: to welcome you both to the podcast. Thank you very much.
Speaker 1: And uh and I want to start with you because
Speaker 1: Ben's been on this show probably as many times as
Speaker 1: Rodney Dangerfield was on Johnny Carson, and uh, he gets
Speaker 1: a little bit more respect from US. But but about
Speaker 1: that many appearances, but this is your first time, so
Speaker 1: welcome to the show. I wanted to just tell our
Speaker 1: listeners a little bit about yourself, how you ended up
Speaker 1: in Bloomberg and ed. You'll be happy to know we
Speaker 1: allow a little bit of book talking on this show.
Speaker 1: So so tell us about your new newsletter too. Yes, actually,
Speaker 1: that's that's good. And by the way, I vacation every
Speaker 1: summer on LBI, so I'm probably partial to you to
Speaker 1: your story about that because I go up to Barney It.
Speaker 1: I have a good friend who has a house up there,
Speaker 1: and uh so good good story. Definitely beautiful part of
Speaker 1: the world too. By the way, Jersey gets a bad rap,
Speaker 1: but that is some of the most beautiful scenery over
Speaker 1: that ball in my opinion. So I came to Bloomberg
Speaker 1: through securitist route that started as I was a diplomat
Speaker 1: in the US Born Service. I left to go to
Speaker 1: business school, ended up in UH financial markets doing leverage
Speaker 1: finance and high yield in London. UH subsequently decided this
Speaker 1: was the Internet bubble. Why don't I get into the bubble?
Speaker 1: Went to UH some technology companies as an M and
Speaker 1: a guy and Eventually I found my way uh into
Speaker 1: back into the markets uh via writing. UH. I was
Speaker 1: writing a blog which became a newsletter called Credit write Downs,
Speaker 1: which I did for thirteen years before I came the Bloomberg.
Speaker 1: And so now I'm reanimating a newsletter called The Everything
Speaker 1: Risk and sort of the main gist of it is
Speaker 1: is that we have a very difficult macro situation in
Speaker 1: the developed economies that allows us to continuously be at
Speaker 1: risk from large uh financial large economic events and so uh,
Speaker 1: this this sort of semi crisis uh state that we're
Speaker 1: in is a result of the preconditions. UH. Much of
Speaker 1: that has to do with debt and demographics. That's my uh,
Speaker 1: that's my book talking there and I have to uh
Speaker 1: two posts that I've done thus far, but many more
Speaker 1: to coom H. I love the name of the newsletter
Speaker 1: for for a paranoid worry work like me, The Everything
Speaker 1: Risk early hits home. That's a that's a good name.
Speaker 1: And then to turn to you and to turn to
Speaker 1: this week, I was actually hoping you could sort of
Speaker 1: recap some of the takeaways from from Paul's conference this week,
Speaker 1: and I wanted to ask you why you think stocks
Speaker 1: ended up rallying so strongly after shortly after he started speaking, Yeah, sure,
Speaker 1: and again Feldana and Mike, it's great to be back.
Speaker 1: I think it is need my third or fourth time
Speaker 1: on the podcast. It's great to have this discussion. So
Speaker 1: you know yesterday that you could explain it one one
Speaker 1: or the other way. So the fat delivers is fat.
Speaker 1: There's dark plot that looks pretty hockeys. Right. All these
Speaker 1: dots are movable a significant amount, but if you really
Speaker 1: drill into it, then you can see that they match
Speaker 1: the expectations from the market, at least for this and
Speaker 1: next year. And that's just how far the market wants
Speaker 1: to look out for policy, because whatever happens in twenty four,
Speaker 1: who knows, right like it could be a recession. Who
Speaker 1: knows to spaying certain So I think that was one
Speaker 1: candalyst that the market said, Okay, this is a fat
Speaker 1: that's willing to step on the break, but not go
Speaker 1: much more beyond what we already have been pricing in
Speaker 1: about right, So there's a little reaction tending your yields
Speaker 1: on that announcement. I think there was just a slight
Speaker 1: difference between twenty three projection and when the market was
Speaker 1: at that moment, but by and large I think that
Speaker 1: was I think the key catalysts. Now coming into the meeting,
Speaker 1: we had two other tillings behind us, in which I
Speaker 1: think was a very nicely put by a colleague, John
Speaker 1: Author's today of basically had three people throwing in the
Speaker 1: towel pow right. I guess on inflation, I could gotta
Speaker 1: fight it. But just the news out of China definitely
Speaker 1: played a role, because that's a that's a different story,
Speaker 1: but can have significant effect on markets, right because if
Speaker 1: if you're gaining, is a real support of Chinese equities
Speaker 1: that spreads around the region. It's not just there, it's
Speaker 1: Hong Kong. She was significant, so that it's still over
Speaker 1: I think to the equity markets here as we went
Speaker 1: into that meeting, and then a lot of noise but
Speaker 1: cutting through it, Ukraine and Russia are moving lowly towards
Speaker 1: some sort of a cease fire at some points as
Speaker 1: these conditions are negotiated. The ft with floating it. So
Speaker 1: I think it was all a combined catalysts taking it
Speaker 1: back to the fat um now creadly they want to
Speaker 1: step on the break this year in particularly to get
Speaker 1: that infatier rate. You now down to two percent by
Speaker 1: next year two and a half to to point seven.
Speaker 1: And the market seek incredibility in that, they say, and
Speaker 1: that was the reaction the law under you curve it
Speaker 1: would autherivize have sold off quite aggressively on the Harkeys dots.
Speaker 1: It didn't because, as imagine they analyze this restrictive policy
Speaker 1: that maybe the feathers pursuing. Paul took that back and said, like,
Speaker 1: we're not reading in the business of restrictive policy. We
Speaker 1: want to get back to neutrals practically as we can.
Speaker 1: And how he said it that was too a soothing
Speaker 1: way of saying, we're taking steps. You may get to
Speaker 1: this neutral rate maybe student a half to seventy five
Speaker 1: what it is, and that's sufficient enough to get this
Speaker 1: infatier rate over time back to two percent. I think
Speaker 1: all of that together that it is relief rally, which
Speaker 1: didn't continue today. But it was a notable movie, you know. Uh.
Speaker 1: But it's a great point about the China story sort
Speaker 1: of being an underlying story there for listeners who might
Speaker 1: have missed that. I mean, I guess the big concern
Speaker 1: lately in China is that all these US listed uh
Speaker 1: Chinese companies would basically get kicked off of the exchanges
Speaker 1: for not uh complying with the auditing requirements that that
Speaker 1: the US wants, and China came out and said they're
Speaker 1: gonna make some concessions to allow that, and and there's
Speaker 1: a few other statements to to basically try to prop
Speaker 1: up the market. That and as that Golden China Golden
Speaker 1: Dragon China Index up thirty percent, I think on the
Speaker 1: day the biggest game ever, unbelievable story and it's it's
Speaker 1: a you know, I think that is sort of something
Speaker 1: that that propped up sentiment, you know, despite the FED. Um,
Speaker 1: and I'm glad you brought that up. But but let's
Speaker 1: bring you in here. Um, any other takeaways from the
Speaker 1: FED for you? And one thing I'm I'm really curious
Speaker 1: about is FED credibility. Um, they seem to have lost
Speaker 1: a lot of credibility regarding the notion of inflation being transitory.
Speaker 1: They basically come out and said, what's our bet, We're
Speaker 1: gonna take a mulligan on that. We we got that
Speaker 1: one wrong. And some of the rationality I I heard
Speaker 1: for the rally after the statement was that while they're
Speaker 1: expressing confidence that these rate hikes won't uh you know,
Speaker 1: temp us into a recession. Um. But I'm wondering how
Speaker 1: much credibility they have left and whether you know, that
Speaker 1: might be a mistake by some people to to use
Speaker 1: that as a rationale to buy. Yeah, you know, I
Speaker 1: think that what Ben was saying about the relief rally
Speaker 1: there at the end makes a lot of sense to
Speaker 1: me that, uh, there was a certain relief that uh
Speaker 1: the news is behind this. Uh, stocks world were sold.
Speaker 1: Uh so people they bought in. And now we can
Speaker 1: see how much, how much, how many legs the relief rally,
Speaker 1: how as how long this relief rally lasts. I look
Speaker 1: at this last move is sort of a regime shift. Uh.
Speaker 1: It's a regime shift basically because we're moving from the
Speaker 1: forward guidance game, uh to actual rate cuts or rate hikes,
Speaker 1: because that's the Fed's main policy tool. When rates or zero,
Speaker 1: they don't have any rate cuts or rate hikes that
Speaker 1: they can they don't have any rate cuts they can use,
Speaker 1: so they have to use forward guidance. But now that
Speaker 1: we're getting off the zero lower bound, we're moving to
Speaker 1: a different regime. And so the question for the FED was,
Speaker 1: as we moved to this regime. How much can credibility
Speaker 1: can we have in terms of meeting market expectations. I
Speaker 1: think it was interesting that Ben talked about the FED
Speaker 1: being banged on expectations, uh for what the market is
Speaker 1: looking for. They basically capitulated because if you looked at
Speaker 1: the dot plot from December two one, uh to the
Speaker 1: one that just came out, and think about the messaging
Speaker 1: in between, this is a lot more hawkish than they
Speaker 1: were speaking uh two weeks ago. So they basically have said,
Speaker 1: we're shifting from the Ford guidance game to rate hikes,
Speaker 1: and we're gonna do that by taking on the market position.
Speaker 1: We're capitulating our previous position. We're you know, waving the
Speaker 1: white flag telling everyone that we got it wrong, and
Speaker 1: we're going to take on the market position. And so
Speaker 1: the reset is now for for that. And you know
Speaker 1: I wrote about this actually a month ago. UH. Greenspan
Speaker 1: back in two thousand and three, he was concerned about
Speaker 1: the FED running out of bullets during that particular recession.
Speaker 1: And what he said is is is that he was
Speaker 1: talking to then Kansas City FED President Thomas Hoenig, and
Speaker 1: he said, be as non specific as you know how
Speaker 1: to be that was his guidance to him, and Ben
Speaker 1: Bernanki got in there and he interceded. He said, you
Speaker 1: know what, no, don't do that. Ambiguity had This is
Speaker 1: his quote exact quote. Ambiguity has its uses, but mostly
Speaker 1: in non cooperative games like poker. Monetary policy is a
Speaker 1: cooperative game. The whole point is to get financial markets
Speaker 1: on our side and for them to do some of
Speaker 1: our workforce. So that's what the FEDS doing. They're saying,
Speaker 1: you did all the work to get to the seven,
Speaker 1: we're moving to your position and as a result, now
Speaker 1: the proof is in the pudding in terms of whether
Speaker 1: we uh, you know, move to the position that you
Speaker 1: see and that's the best possible outcome that you could
Speaker 1: get for fed that was behind the curve and losing credibility. Yeah,
Speaker 1: And to me, and it reminds me when I was
Speaker 1: a kid and I'd get in trouble with my parents
Speaker 1: and they'd say, you're we're gonna ground you for the
Speaker 1: next year, and then they'd kind of softened up in
Speaker 1: a week or two. And so I wonder if that's
Speaker 1: part of it, is kind of you know, trying to
Speaker 1: influence behavior with with uh, you know, this really hawkish
Speaker 1: dot plot, whereas you know, those dots can always move
Speaker 1: down again later year if if inflation does sort of
Speaker 1: behave better than than what everyone's but then what it's
Speaker 1: doing now anyways, that you think that's part? Is there
Speaker 1: a little bit of a psychology game going on? Do
Speaker 1: you think I just feel that they have They're very
Speaker 1: concerned about, uh, disappointing the market. Uh. They want to
Speaker 1: be as transparent as possible. They tried their best to
Speaker 1: talk down the market from seven rate hikes. You know,
Speaker 1: people were upp in the anti from seven to eight
Speaker 1: to nine consecutive rate hikes, and they weren't able to
Speaker 1: do that, and so, uh, they had a decision to
Speaker 1: make when we come out, are we going to move
Speaker 1: to this new regime of rate hikes from Ford guidance
Speaker 1: with the market and and ourselves, um, not on the
Speaker 1: same page. The last time they did this in two
Speaker 1: thousand and eighteen, they were telling the market, look, we're
Speaker 1: gonna hike uh two times, We're gonna hike three times.
Speaker 1: The market didn't believe them. The market was and we're
Speaker 1: gonna hike. They're gonna hike two times, and they ended
Speaker 1: up hiking four and it was that fourth hike in
Speaker 1: December of two eighteen that caused the markets to just
Speaker 1: go bananas. So I think that that's what they want
Speaker 1: to avoid. They want to you know, give it to
Speaker 1: the market on a platter, say we're meeting your expectations,
Speaker 1: and then we can use forward guidance at the the
Speaker 1: you know, um, at the margin to sort of you know,
Speaker 1: get people to dial up or down bit depending upon
Speaker 1: the economic circumstances at the time. And I want to
Speaker 1: ask you too, maybe add on to that, and also
Speaker 1: a weigh in on the recession talk. We keep hearing
Speaker 1: about recession talk, and I wanted to ask you what
Speaker 1: you make of that idea that potentially the US could
Speaker 1: see a recession and then maybe possibly as soon as
Speaker 1: later this year or early next year. Is that likely
Speaker 1: to materialize? Yeah, I hope not. But it's something that's
Speaker 1: has really creeped into the market's narrative increasingly. Of course,
Speaker 1: everybody's zero into on the on the you curve, there
Speaker 1: are inversions appearing. If you actually look at the three
Speaker 1: monten year curve, which is what most of these recession
Speaker 1: models are based upon, that's still very steep curve. But
Speaker 1: if you discounted a year from now forward. It's it's inverted.
Speaker 1: So there's definitely expectation that we're going to hit the
Speaker 1: Ukraine version, and it has been the best predictor of
Speaker 1: future recessions. So it seems like that the bomb market
Speaker 1: is looking at this is a recession that may happen
Speaker 1: by twenty four or about something in that nature, which
Speaker 1: may also explain why there are rate cuts sort of
Speaker 1: price starting in that year. And by the way, on
Speaker 1: the on the vet Stop plot, there's one member that
Speaker 1: actually put in a rate cut in that plot for
Speaker 1: twenty four, right, so just keep that in mind to
Speaker 1: the recession talk is here. Paul of course was pushing
Speaker 1: back on that, not pushing hard like like aggressive, but
Speaker 1: basically dismissing the idea that they are the economy is
Speaker 1: way too strong. It's not, which was by the way,
Speaker 1: another reason why perhaps of markets were up like it's
Speaker 1: with Voto conference on the economy is always a really
Speaker 1: positive impact on markets, especially if the fact comes out
Speaker 1: with that sort of language. Even if their models are on,
Speaker 1: it's an important psychological factor. So do that point BacT
Speaker 1: if we're going to continue to talk about it. We
Speaker 1: know from years ago, we're going to end up with
Speaker 1: talking ourselves into this recession. People were back. Risk is
Speaker 1: taken down, savings are off, and people are careful, right,
Speaker 1: and that's something that we have to monitor. Now. Look
Speaker 1: at the shocks that we just went through with Ukraine,
Speaker 1: especially two weeks ago, is enormous if you believe on
Speaker 1: on on how global and global skill that is taking
Speaker 1: place because of oh, wheat exports for example come out
Speaker 1: of that Bombus region as well as in the Odessa region,
Speaker 1: So it all comes through the force and all the
Speaker 1: size of the of Ukraine that in itself can have
Speaker 1: a huge effect on global economy. Right. There's of food
Speaker 1: either shortages or or sky marketing food prices that is
Speaker 1: going to impact lower incomes and that's here happening here too.
Speaker 1: And now it has to be method monetary tightening. And
Speaker 1: that combination has been historically time and time again and
Speaker 1: not a predictor of recession um and the last year
Speaker 1: I guess is that that if you watch carefully with
Speaker 1: credit markets are doing, I've always found out a good
Speaker 1: leading indicator. So far, we haven't had the structures that
Speaker 1: we had say five years ago, through energy markets into
Speaker 1: the high market and spilling over the credit um. But
Speaker 1: it is to be watched there too because you know,
Speaker 1: the trading houses in modies are are really constraint in
Speaker 1: liquidity currently cannot get any access of credit. So there's
Speaker 1: something of a spill over going on that may become bigger.
Speaker 1: And as that is the case if credit really starts
Speaker 1: to like be pulled back, and there was some talk
Speaker 1: about it that companies would challenged with with issuing bonds
Speaker 1: in a certain period when the market got temporary volatile
Speaker 1: because the Ukraine that just leads to the disruption and
Speaker 1: I could lead them to again pairing back of activity
Speaker 1: and lead us to down to that path. So I
Speaker 1: think if I to take those three the you curve,
Speaker 1: you know the fact that food press and and and
Speaker 1: multi policy tightening, combined with signs some science and credit,
Speaker 1: it points to that at least going to face a
Speaker 1: significant slowdown of the economy, that's for sure. I think
Speaker 1: that's almost a given. Now we would not be to
Speaker 1: be authorized with equities here already correcting about twelve that
Speaker 1: would have been last it we've been taken back much.
Speaker 1: I think the rally is the last point yesterday was
Speaker 1: was that Relieve rally on all the uncertainties that came
Speaker 1: sort of to get over taken out briefly. But I
Speaker 1: was not about, oh, Will the economy is actually a
Speaker 1: good shape. We had mis calculate it is therefore rally
Speaker 1: so I think the market is worried that there is
Speaker 1: a risk of procession on the horizon. Yeah, it's a
Speaker 1: it's an interesting point about credit. I mean, I feel
Speaker 1: like the last time everyone freaked out about credit spreads
Speaker 1: was when oil prices were so low that all that
Speaker 1: junk energy debt was under pressure. Now you've got sort
Speaker 1: of the opposite idea. And I wonder, you know, I
Speaker 1: wonder if credit isn't maybe the signal uh as powerful
Speaker 1: of the signal as as it was in previous time.
Speaker 1: But I wanted to pick both of your brains about
Speaker 1: the notion of inflation right now. Um to me, I
Speaker 1: was never, you know, quite convinced that everyone was wrong
Speaker 1: about transitory inflation. I just thought at the length of
Speaker 1: of how long the transitory period was was off and
Speaker 1: and but by the the whole paradigm is shifted now
Speaker 1: with Will doing what it's doing, uh, China locking down
Speaker 1: some factories again, you know, fouling up supply chains again.
Speaker 1: But I'm curious how you both are thinking about inflation.
Speaker 1: Have we sort of progressed away from the supply chains
Speaker 1: uh and and sort of that big rebound and demand
Speaker 1: being the main drivers of inflation. Are we more now?
Speaker 1: And sort of the scary lingering effects of inflation with
Speaker 1: wages going up and that forcing uh costs to go up,
Speaker 1: you know, and and that cycle sort of feeding onto itself. Uh,
Speaker 1: sort of that that labor push inflation. And how are
Speaker 1: you thinking about it? Are are we in sort of
Speaker 1: as the inflation genie kind of out of the bottle
Speaker 1: now and you can't really put it back, um, regardless
Speaker 1: of whether we normalize supply chains and everything else. Yeah,
Speaker 1: I think we're definitely in a different mode right now
Speaker 1: than we were. We're not in the so called secular
Speaker 1: stagnation mode. Even Larry Summers, who's the guy who coined
Speaker 1: that phrase, would say that. And going back to Ben's
Speaker 1: comments just from before, that's one of the reasons that
Speaker 1: you see the numbers ticking up in terms of the
Speaker 1: FED model. You know, the New York Fed has a
Speaker 1: probability of US recession uh predicted by the Treasury spread,
Speaker 1: the one that Ben was talking about the three months
Speaker 1: of the ten year, and if you look at how
Speaker 1: that works out, we're right now at sort of two
Speaker 1: thousand eighteen levels. That's when the FED was forced to pivot. Uh.
Speaker 1: The numbers that you were talking about back during the
Speaker 1: shale oil days were slightly lower, but they were still concerning.
Speaker 1: That was still a concerning market. But the reason that
Speaker 1: it's like that is is there's a residual leaf that
Speaker 1: the FED may not need the seven may not be enough,
Speaker 1: and we they may have to accelerate. So the market
Speaker 1: is positioned as it is now with a rate hike
Speaker 1: at every meeting. But potentially, if we're in a new regime,
Speaker 1: as I think that we potentially are, uh, we could
Speaker 1: move to fifty basis points at any meeting. Every meeting
Speaker 1: is live, and every meetings live for or even fifty
Speaker 1: basis points from here on out. And why is it
Speaker 1: that we would be in that regime? I think it
Speaker 1: has to do with changing preferences. You know, there's the
Speaker 1: d globalization and there's also the sense that we this
Speaker 1: has gone on long enough that people they need to
Speaker 1: stock up on certain things and they have their preferences
Speaker 1: shift in terms of what they're willing to to stock
Speaker 1: up on as a result of what's happening, So that
Speaker 1: will continue the inflation genie rolling. And when that happens
Speaker 1: long enough, people they say, time out, we need to
Speaker 1: get a pay raise, we need more money, and then
Speaker 1: you get that sort of uh, that that spiral that
Speaker 1: you were talking about, Michael. So I think that we're there,
Speaker 1: and I I believe that the market is, the bond
Speaker 1: market is much more on edge about that being a
Speaker 1: problem than the equity market. And that's reflected in the
Speaker 1: very low spreads that we have between uh say, the
Speaker 1: three month and the ten year, not as much, but
Speaker 1: more so the two year and the ten year or
Speaker 1: the seven year in the tenure which is now inverted. Yeah,
Speaker 1: for both you. I wonder is you know, with all
Speaker 1: these other drivers of inflation besides low interest rates, is
Speaker 1: there a chance that you know, aggressive interest rate increases
Speaker 1: won't even solve the problem, or if they do, it's
Speaker 1: you know, the medicine will you're worse than the cure
Speaker 1: and we'll have a real the growth as a result.
Speaker 1: What do you think about that? Then? Yeah, it tends
Speaker 1: to play out the way Mike, that you have to
Speaker 1: then become really restrictive, as they say the wonkish term,
Speaker 1: but that's kind of the way to think about it.
Speaker 1: The funds ory goes far beyond where it may be neutral.
Speaker 1: And that's a bit elusive concept, but okay, let's go
Speaker 1: with it. Right that that neutral is something like to
Speaker 1: point forward to put five is its been putting out
Speaker 1: that you're you're too restrictive, and then you really you know,
Speaker 1: first of all, in the US, it will be particularly
Speaker 1: through credit. That's always how the US economy gets into
Speaker 1: that recession. If you start stiffening kzoomer credit company credit,
Speaker 1: things really slow down fast. That's what actually happened with
Speaker 1: the shutdown two years ago, right there was shutting down
Speaker 1: the economy at that an amplified effect on credit. We
Speaker 1: were immediately in a recession almost on the day that
Speaker 1: we shut down the economy. So we're now in slow
Speaker 1: grind towards that, I think, And and yeah, the point
Speaker 1: is how many rate hags are we necessary in order
Speaker 1: to get this inflation right down? Now? There's one advantage
Speaker 1: that the FAT has over other central banks in that regard,
Speaker 1: and that's the dollar, Because if you were the high
Speaker 1: rates such that you're getting a further surge in the
Speaker 1: dollar coll it that way, and let's take a look
Speaker 1: at episodes and as a as a good example of that,
Speaker 1: right when we went from fifteen up to almost the
Speaker 1: dollar or something like that. But the impact that will
Speaker 1: have on commodity prices globally, that could be a way
Speaker 1: of how the FAT can better control inflation. It doesn't
Speaker 1: even have to say strong dollar policy, but just by
Speaker 1: the nature of hiking rates that would boost the dollar,
Speaker 1: particularly against geeta and currencies. Because if you think of
Speaker 1: the other example that's playing out live is in Brazil.
Speaker 1: Now they're a center back. There has been aggressive same
Speaker 1: in Chili. Right they have taken they were much comprehemptive.
Speaker 1: Their stock markets this year are up by right then
Speaker 1: something that looked last time, and that is because the
Speaker 1: inflation rate are topping out. Its still have very elevated.
Speaker 1: But their style of multi policy is not something that
Speaker 1: we easily would do here. Much as these dog propers
Speaker 1: hockeys as you look like, it's nothing compared to what
Speaker 1: the Brazilian Central Bank is doing. You know, it's take
Speaker 1: hunt hund fifty basement hikes. Now, there's no way that
Speaker 1: we're gonna get that here. But if if the fact
Speaker 1: we're to move with the hunt on fifty base points
Speaker 1: in a short order, you know, by by June or so,
Speaker 1: we're up hundred fifty base points and in with the
Speaker 1: fat funds rate, the dollar would meaningful take off, I think,
Speaker 1: and that would be impactful maybe when on the last
Speaker 1: point on inflation as it gets more entrenched embedded. You know,
Speaker 1: if you follow the Michigan survey, you read the texts
Speaker 1: day since last year. Some in the spring of last year,
Speaker 1: they were inflation psychology started appear a number of times,
Speaker 1: and I think they got this from surveys. This is
Speaker 1: the seventies idea, right, If people got affected by inflation
Speaker 1: and started making decisions about their purchases and they slower
Speaker 1: down what it's not holding things or getting ahead of
Speaker 1: the ahead of the curve, you will, right, because they're
Speaker 1: worried about prices going up even further. So that's something
Speaker 1: to keep in mind because consumers thinking that way, it's
Speaker 1: obviously having effect on inflation long term. Because if you
Speaker 1: look at the consumer projection for inflation from the Conference
Speaker 1: Board since May, that one of your projection has been
Speaker 1: over six percent. That's been dead on where we ended
Speaker 1: up with inflation. You know, it's been one of the
Speaker 1: best predictors this time around this case. So watch those
Speaker 1: because I think if those do not come off right,
Speaker 1: and that's seems to be the case both Michigan and
Speaker 1: Conference Board one year expectations is not not stay very elevated,
Speaker 1: and the Ukraine situation leads to further shock and energy,
Speaker 1: which is very possible because of extremely tight conditions in
Speaker 1: the physical markets, then then that could have further effect
Speaker 1: on inflation long term. So that's something to think of.
Speaker 1: And I'd add on to that that uh, on top
Speaker 1: of that, you know, we should think about how did
Speaker 1: the interest rates affect the economy over the short term
Speaker 1: then versus the long term. Uh, it's just like with inflation,
Speaker 1: there's a short term effect. But we're now going back
Speaker 1: to Michael's question, we're getting into people changing their behavior
Speaker 1: and if transitory at lasts long enough, even though it's
Speaker 1: it's support, the the effects are are the the shock
Speaker 1: is transitory, the impact on people's behavior is non transitory.
Speaker 1: I would say you could see the same sort of
Speaker 1: thing in terms of when Ben talks about the FED
Speaker 1: having to jam it on. Actually when the FED first
Speaker 1: hikes rates. Companies want to lock in their their their debt,
Speaker 1: you get more expansion of credit. People they want to
Speaker 1: lock in their mortgage, so you get more activity in mortgages.
Speaker 1: You get higher uh income to the private sector, because
Speaker 1: the private sector is a net receiver of interest. So
Speaker 1: actually the initial phases are one where there's a certain
Speaker 1: impulse that is pro cyclical. Uh. The FED is actually
Speaker 1: adding in certain realms to uh, you know, to stimulus,
Speaker 1: and so they really have to jam it on in
Speaker 1: order to overcome that impact. And that's when the credit
Speaker 1: starts to deteriorate. People get locked out of credit markets,
Speaker 1: and the whole thing starts to fall apart. And that's
Speaker 1: why it's so difficult for the FED to thread that needle.
Speaker 1: What we're hoping is is that just like in the
Speaker 1: shale oil phase when Janet Yelling just stopped for a
Speaker 1: whole year, that the FED can wake up, look at
Speaker 1: the signs, see the tension, and then stop and by
Speaker 1: doing so, uh, save the economy. But there's a lot
Speaker 1: of worry, including my own worry, that they won't be
Speaker 1: able to do that. Maybe on that quick on that
Speaker 1: point that is that you know, you have to think
Speaker 1: now that the under the faith framework, right, the flexible
Speaker 1: average inflation target in FLAME framework. You know that that
Speaker 1: could be on one hand that they could do that.
Speaker 1: They could pivot faster from from as they did pre
Speaker 1: faith in twenty nineteen. They pivot it from time into easing.
Speaker 1: This may happen again to right. If you get this
Speaker 1: hikes frontloadus, we get backloaded rate cuts based on that
Speaker 1: faith framework. They switched quickly. But there is it time
Speaker 1: like here, like you have to as you say, you
Speaker 1: have to get ahead of it. Now they're put out
Speaker 1: this projection of seven hikes for this year, matching market expectation,
Speaker 1: but you have to you really do have to follow too.
Speaker 1: I think on trying to get this inflation rates stabilized
Speaker 1: that even though it will stay higher than when it
Speaker 1: was before and and for that's going to affect the economy,
Speaker 1: then based on faith, you could switch to easing in
Speaker 1: the future maybe quicker um. But we're not there. Yeah.
Speaker 1: I think this is the discussion of the recession scenario. Right.
Speaker 1: If the action of seven hikes gets inflation under control
Speaker 1: and the economy stage relatively stable with employment not too
Speaker 1: much effective, then maybe you're going to continue on a
Speaker 1: rate path high path. If not, then faiths will dictate
Speaker 1: that you should twitch the easy Yeah. And I would
Speaker 1: say the fet IS is definitely not front loaded in
Speaker 1: the way that we want them to be. I mean,
Speaker 1: if you think about what's happened over the last two
Speaker 1: months since the January meeting. The January meeting, they came
Speaker 1: out and they were basically saying our summary of economic
Speaker 1: objections in December, we're moving away from that and we're
Speaker 1: gonna be more hawkish. Then the market exploded to the seven,
Speaker 1: eight and nine times. People started talking about fifty basis points.
Speaker 1: Actually I was one of the first people to start
Speaker 1: talking about that, and the FETSI hang on way a minute,
Speaker 1: that's way too aggressive for us. And they started to
Speaker 1: dial it back, and then market expectations dialed back. Uh,
Speaker 1: and it get to the point where the expectation was
Speaker 1: for bases points and Power pretty much said that when
Speaker 1: he talked to Congress. So that's not frontloaded. So the
Speaker 1: FED talk the markets into accepting a non frontloaded policy,
Speaker 1: And to me, that means that the risk is for
Speaker 1: inflation to continue to be elevated and that the FED
Speaker 1: is going to have to jam it on belatedly, and
Speaker 1: that is where the recession risk comes into play. Then
Speaker 1: I want to ask you just to sort of help
Speaker 1: wrap things up a bit. I wanted to ask you
Speaker 1: what sort of factors are signs you're looking for for
Speaker 1: bottoming for the market. One particular idea I'm interested in
Speaker 1: is this idea that institutions have been doing a lot
Speaker 1: of the selling over the last couple of weeks. Retail
Speaker 1: investors have been buying, but the institutional selling is just
Speaker 1: overwhelmeding that retail bid. If we do see institutional selling
Speaker 1: sort of exhaust itself, could that sort of sort of
Speaker 1: help us stabilize a bit more. It could be. I mean,
Speaker 1: it's it's a it's an interesting uh the economy because
Speaker 1: party the retail flows are driven by the institutions investing
Speaker 1: that on their behalf and stock funds right on the
Speaker 1: other hand, is individuals that that take risk because of
Speaker 1: yead to believe that the economy is so boosted that
Speaker 1: from the pandemic it's not going to end in a recession.
Speaker 1: There's still a lot of hope, there's still a lot
Speaker 1: of I think by the deep mentality perhaps out there
Speaker 1: among those investors in particular and it's as long as
Speaker 1: the feat is not yet on on the course of
Speaker 1: this bounce sheet reduction, which we didn't talk much about here.
Speaker 1: But if they they're gonna do that, they're gonna have
Speaker 1: a plan. They're gonna make that aware of it at
Speaker 1: a meeting, which probably isn't May. But if there's a
Speaker 1: psychology about that too, right, people view the balance sheet
Speaker 1: of the fat and the stock market very linked to
Speaker 1: one another. If it goes up, the stock market goes up,
Speaker 1: and vice versa. So let us play a bit of
Speaker 1: a role here too, because if if that, if the
Speaker 1: fat gets aggressive, they're also as as in adding on
Speaker 1: to get ahead of the curves, as at was explaining,
Speaker 1: then I think the bottoming is going to be challenged.
Speaker 1: You know, there's there's a lot of I think still psychology,
Speaker 1: painful psychology left from twenty eighteen on that. On that part,
Speaker 1: you know, it was clear that reserves in the system
Speaker 1: were hoarded and the situation got too tight too quick
Speaker 1: by doing both balance reductions and fat and fat funds
Speaker 1: red hikes. So so I think this bottom is a
Speaker 1: bit elusive at this moment um. In addition to that,
Speaker 1: we we do deal with a geopolitical uncertainty that that
Speaker 1: does have quite unknown outcomes, including what you're seeing today. Right,
Speaker 1: these these headlines remain threatening, so we have to see that. So,
Speaker 1: I I think gets a bit of a playoff on
Speaker 1: the one hands, hope that the bid the dip is here,
Speaker 1: or people willing to do it. They think it's just
Speaker 1: over now. Right, let's let's do this because it's going
Speaker 1: to be just the same kind of major rallies before.
Speaker 1: But let's not forget that the psychology of the first
Speaker 1: bouncy and the and the and the stock market are
Speaker 1: it's actually very strong. So I wonder if the retail
Speaker 1: traders at some point also there take notice of that
Speaker 1: and say, you know what, this is maybe not so
Speaker 1: much of a bid to dip here at this moment.
Speaker 1: As we go from here, one more quick one before
Speaker 1: we get to the crazy things. I'm always thinking of
Speaker 1: our listeners who are like, listen, just get these guys
Speaker 1: to tell me what to do with my money already,
Speaker 1: you know, so here we got an aggressive FED and
Speaker 1: aggressive Russia. Uh lockdowns in China. I mean, what do
Speaker 1: you do in this scenario? Is it just to go
Speaker 1: to cash wait for the dust to settle type of
Speaker 1: scenario or quickly what would you guys do? And I
Speaker 1: know everyone's risk tolerance is different and retirement horizon is different.
Speaker 1: So let's just pretend our listener is, oh, I don't know,
Speaker 1: a a cranky uh fifty something, your old guy in
Speaker 1: New Jersey with three kids head in to college and
Speaker 1: he's he's not the most risk tolerant kind in the world.
Speaker 1: Where would you tell him? Well, you know, I would
Speaker 1: definitely say that you're you do want to raise a
Speaker 1: bit of cash to be able to redeploy it. You know,
Speaker 1: there's a stealth bear market that's going on right now.
Speaker 1: You know, even though the overall markets down ten percent,
Speaker 1: if you look beneath the surface, there's a lot of
Speaker 1: pain that's that's been had. I'm looking at some of
Speaker 1: the stocks on my screen right now. Uh, you have
Speaker 1: told Brothers down thirty two of from the fifty two
Speaker 1: week high, Lenar's down, Home, Deposts down, fed X is down,
Speaker 1: Starbucks is down. Uh you know, so Ford is down.
Speaker 1: So these are you know, real companies that make real products,
Speaker 1: and you have to ask yourself how much further down
Speaker 1: can they go? Uh? It's not about by the dip.
Speaker 1: It's about understanding the dynamics of the market and and
Speaker 1: also the real economy. At some point, these companies are
Speaker 1: going to be a buy uh both you know, from
Speaker 1: evaluation perspective, but also just from a liquidity perspective. And
Speaker 1: so I think that you you want to hold more
Speaker 1: cash to be able to leverage into those real companies
Speaker 1: when when the when the market turns, stick with the
Speaker 1: quality and not the uh, not the innovators and disruptors
Speaker 1: of the world. I guess, well, you know that's a
Speaker 1: bit more of a crap shoot. I have another list
Speaker 1: of companies. Uh there Uh you know Robin Hoods down eight. Uh.
Speaker 1: You have like Beyond Meat is down seventy three. Uh.
Speaker 1: You know, I don't think that. I mean they could
Speaker 1: go to ninety, they could go to a hundred. You
Speaker 1: never know. Uh, but are they coming back? And how
Speaker 1: quickly are they coming back? Pilot has got to eat
Speaker 1: more of those veggie burgers, I think, Mike, you know,
Speaker 1: I've never been a fan of holding cash. I've always
Speaker 1: been more about staying invested and now and as you know,
Speaker 1: I would have work a major investments firm. There was
Speaker 1: a strict discipline on on how much cash you should hold.
Speaker 1: And obviously there was for a quickly reason because clients
Speaker 1: could withdraw the money, but it was also about like, yes,
Speaker 1: cashes can be very stabilizing, infecting your portfolio if you
Speaker 1: go into a being of significant volatility. So when the
Speaker 1: invasion happened on February twenty four and you had a
Speaker 1: lot of cash from February twenty four through say the
Speaker 1: first week of March, that probably would have helped you
Speaker 1: a bit with that volatility move, but then it didn't. Right,
Speaker 1: we had actually we have the best week closing week
Speaker 1: probably coming in for the S and P since I
Speaker 1: think a number of months now. So it just tell you,
Speaker 1: like you you you don't want to be and let's
Speaker 1: say sort of levels of cash. I think that that
Speaker 1: would be really dragging on on your room run return
Speaker 1: that you try to achieve for retirement. But you know
Speaker 1: that you want to be optimistic with the cash that
Speaker 1: you have. That that's always a good idea. Um. You know,
Speaker 1: cashes is simply a volted an accid with zero volatility.
Speaker 1: It cannot really be autorized valued, right It's it doesn't
Speaker 1: have any discount factor nothing. But it is also something
Speaker 1: about pure optimism. Right, if you have too much cash,
Speaker 1: you're going to deploy it. This probably happened yesterday too.
Speaker 1: There were probably people on the sidelines looking, this is
Speaker 1: maybe a moment to do this right, And so I
Speaker 1: think you're gonna think about in that context as opposed
Speaker 1: to using cashes and acid that people something say, because
Speaker 1: it isn't unless you put that cash into a treasury bill, right,
Speaker 1: that's shadd cash equivalent. Sure, but that, as we now know,
Speaker 1: that could lose value too, especially in this scenario of
Speaker 1: a federal reserve hyaking rage vality, Will will, We'll go down.
Speaker 1: Good stuff, guys, good stuff. But now it's time for
Speaker 1: the crazy stuff. I gotta say, then get us started.
Speaker 1: What's the craziest thing you saw this week? Well, something
Speaker 1: I'm really interested in is this idea that crypto could
Speaker 1: potentially be used to skirt sanctions, which there's a lot
Speaker 1: of animals out there saying it's that's it's not really,
Speaker 1: that's not really the case. But we had a story
Speaker 1: from one of our colleagues all got care of. She
Speaker 1: wrote about a crypto forensics firm potentially having found a
Speaker 1: wallet with millions of dollars worth of crypto in it
Speaker 1: and it might be linked to sanctioned individuals and and oligarchs.
Speaker 1: And the company is called Elliptic, and they've only passed
Speaker 1: the information onto the government. And uh, he was telling us,
Speaker 1: he was telling Bloomberg News that crypto can be used
Speaker 1: to skirt sanctions. So to me, that was really interesting.
Speaker 1: That's that's pretty good, Bennet, was that your wallet? Uh?
Speaker 1: And the crazy thing I thought that, well, you know
Speaker 1: I watched Jim Cramer often on at night. You know,
Speaker 1: you've never heard of him bad, never heard of him.
Speaker 1: I know, I gotta mention this one because I thought
Speaker 1: this was crazy. So he is a bull, right if
Speaker 1: we know, checking a ball. I was like his enthusiasm.
Speaker 1: But what he said was this, he said, like and
Speaker 1: to an earlier question how the market will bottom, he said, look, everybody,
Speaker 1: I mean, everybody on the bus, on the train, in
Speaker 1: the stateium, wherever you are, just everybody has to think
Speaker 1: barish about the market. Everybody's barish, everybody's selling. Then the
Speaker 1: barcketbile bottom. That's what he said. I thought that was
Speaker 1: crazy that. You know, that's one not going to happen
Speaker 1: to you know that that's that's already mentality doesn't exist.
Speaker 1: So that was pretty crazy. All right, that was a
Speaker 1: pretty good cramer. You don't see Ben moving the hands.
Speaker 1: It's the hands that did it for me. I uh,
Speaker 1: I can almost see the sweat stains forming on your
Speaker 1: shirt there. How about your add what's the craziest thing
Speaker 1: you saw this week? Well, you know, I was gonna
Speaker 1: I was telling you, Mike, I was thinking about oil
Speaker 1: because it went up and down. But now that everyone's
Speaker 1: talking about anecdotes, my anecdote is the craziest thing I
Speaker 1: saw was a movie theater company buying a golden mining company.
Speaker 1: And the gold mining company doesn't even mine gold. For me,
Speaker 1: that is absolutely bonkers. And you know, I'm talking about
Speaker 1: a MC's acquisition. And just so you know, the gold
Speaker 1: mining company went public via a spack of course it did.
Speaker 1: If that's not crazy stuff, I don't know what it
Speaker 1: And you know what, what's such thing to me about
Speaker 1: that is it really was only a twenty eight million
Speaker 1: dollar investment. But the the amount of media that MC gets,
Speaker 1: the arned media you get for for doing that, you
Speaker 1: get all the apes back back on board with the stock.
Speaker 1: Maybe maybe it's worth that twenty million. I don't know.
Speaker 1: I don't know. Um, all right, you're you're crazy. Things
Speaker 1: were all great. I'll give you the winning crazy thing now,
Speaker 1: which is which is mine? Of course? Uh? Courtesy of
Speaker 1: and it pains me that mine always wins, filled Onna,
Speaker 1: But I mean I have to be objective about this
Speaker 1: and and and be honest. Yeah, it's not crazy how
Speaker 1: that always happens? Courtesy of the New York Post, which
Speaker 1: is we all know is the crazy Things paper of record.
Speaker 1: Elon Musk, you've heard of him, right, The world's richest
Speaker 1: man challenged Russian President Vladimir Putin to quote single combat
Speaker 1: amid the war in Ukraine, prompting the Kremlin official to
Speaker 1: fire back at the Tesla boss, calling him a quote
Speaker 1: weakling and a little devil. So must tweeted, I hereby
Speaker 1: challenge Vladimir Putin to a single combat. Steaks are Ukraine
Speaker 1: and the words Vladimir Putin and Ukraine were written in
Speaker 1: cyrillic letters used both in Russian and Ukrainian. Uh. And
Speaker 1: then he tagged Putin's official count saying do you agree
Speaker 1: to this fight? I'm not sure what single combat is.
Speaker 1: I guess I don't know. If you bring pitchforks and
Speaker 1: and uh long swords or something. But the question is ed,
Speaker 1: who are you backing in this fight? That is a
Speaker 1: good question. Who do I have back in single combat?
Speaker 1: You know, I'm gonna I'm gonna give it to Elon
Speaker 1: on this one because he's a younger guy. I think
Speaker 1: he has a little stealth to him. I'm gonna I'm
Speaker 1: gonna go with Elon, all right. You know, Putin is
Speaker 1: not judo master, but I'm not sure how serious the
Speaker 1: competition has been. When you see those videos of him
Speaker 1: uh uh knocking guys over. Definitely the craziest thing I
Speaker 1: saw this week. Ben Emmons ed Harrison. Great to have
Speaker 1: you both on the show. Really important week, and we
Speaker 1: really appreciate being able to pick your brains and I
Speaker 1: hope we can have you both back again soon. It
Speaker 1: was a delight. I really enjoyed it. Thanks, Michael, Donna
Speaker 1: would be great to be Becky, thanks for joining us.
Speaker 1: What goes up? We'll be back next week. Until then,
Speaker 1: you can find us on the Bloomberg Terminal website and
Speaker 1: app or wherever you get your podcast. We love it
Speaker 1: if you took the time to rate and review the
Speaker 1: show on Apple Podcasts. So more listeners can find us
Speaker 1: and you can find us on Twitter, follow me at Reaganonymous.
Speaker 1: Bolbonna Hierrich is at Bolbanna Hirich. You can also follow
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Speaker 1: Bloomberg Radio. What Goes Up is produced by Magnus Hendrickson.
Speaker 1: The Head of Bloomberg podcast is Francesco Levy. Thanks for listening,
Speaker 1: See you next time. M