Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Joining us now the former NEC director and IBM Vice
Speaker 2: chair Gary Kirk. Gary, good morning, good.
Speaker 3: To see you, Good to see you. Thanks for having You've.
Speaker 2: Been following the debate. I wonder your reaction, you know,
Speaker 2: Kevin Wash well, what is everyone getting wrong? And I
Speaker 2: say everyone, I mean the consensus for you on their
Speaker 2: reaction to that news conference last Wednesday.
Speaker 4: I'm not going to characterize as anyone's getting anything wrong
Speaker 4: or anything anyone's getting it right. What I'm going to
Speaker 4: characterize this as Kevin is a masterful student of the market.
Speaker 3: Kevin has been at the FED before.
Speaker 4: He understands the limited toolbox, but the effective toolbox that
Speaker 4: the FED has.
Speaker 3: What Kevin is.
Speaker 4: Doing right now, and I think people don't like this,
Speaker 4: is Kevin is reverting the FED to the historic norms
Speaker 4: of what the FED did. We, unfortunately, as newscasters or
Speaker 4: as market makers or as traders, we got spoiled from
Speaker 4: the eight period on. From eight period on, the FED
Speaker 4: has been an open box. They've been completely transparent. They
Speaker 4: have not done anything that you wouldn't know they would
Speaker 4: do hours or weeks or months before they did it,
Speaker 4: and the market became addicted to knowing what the FED
Speaker 4: was going to do.
Speaker 3: What Kevin is doing right now.
Speaker 4: He's trying to get the market off the addiction of me,
Speaker 4: the FED chairman and the FED board having to tell
Speaker 4: you what we're going to do, and.
Speaker 3: You the market and you participants.
Speaker 4: You should go and participate however you think it makes
Speaker 4: sense for you and wherever you think the opportunities are.
Speaker 3: This is a tough transition.
Speaker 4: People liked having the answers to the quiz before they
Speaker 4: took the test.
Speaker 2: So there's a market's question. I also think there's an
Speaker 2: economics question that needs to be addressed. The issue for us,
Speaker 2: I think is less about the lack of guidance, less
Speaker 2: about having the answers before the test, more about you've
Speaker 2: got an inflation problem, why you're not doing anything about it,
Speaker 2: which essentially was the Mike mckeak question in the news conference.
Speaker 2: Why are you waiting? What are you waiting for? Without
Speaker 2: giving us any real clarity on the preferred tool, why
Speaker 2: they're waiting, whether they're carry on waiting, and at the
Speaker 2: same time telling us to believe them that I do
Speaker 2: something about inflation. I think the economic question is the
Speaker 2: difficult one. To answer.
Speaker 3: Chairman Worrish is going out of his way.
Speaker 4: I mean he's literally going out of his way to
Speaker 4: tell you he is an inflation fighter, that the stable
Speaker 4: price mandate and the two percent inflation guide is his
Speaker 4: bell weather, and he's going there.
Speaker 3: He has limited tools to get there, as we know.
Speaker 4: In fact, he has said in the speech, I have
Speaker 4: two tools to help us get there. I can raise
Speaker 4: rates or I can sell down the balance sheet. Those
Speaker 4: are his two tools. Raising rates, as we know, will
Speaker 4: affect the overnight rate the Fed Fund. That has very
Speaker 4: little effect on the economy as a whole. The real
Speaker 4: effect on the economy is, let's say, let's call it
Speaker 4: a five to ten year bucket. That's where most people borrow.
Speaker 4: That's where consumers borrow. That's where credit cards are, and
Speaker 4: that's where student loans are, that's where automobile loans.
Speaker 3: Are, that's where mortgages are. Kevin knows that.
Speaker 4: What he's also telling you is right now, the market
Speaker 4: is doing its own work in steepening the yield curve.
Speaker 4: So in less than a year we have gone from
Speaker 4: a twos tens interest rate curve inverted about twenty basis
Speaker 4: points to positive forty basis points. We've moved sixty basis
Speaker 4: points in two tens rates. So Kevin is saying, look,
Speaker 4: the market is doing my job. They're making the ability
Speaker 4: to borrow money out on the curve more and more expensive,
Speaker 4: and it's going to continue to get more expensive. If
Speaker 4: I raise FED funds, yes, I can raise FED funds,
Speaker 4: I'm not sure that has the effect. I think what
Speaker 4: he would probably prefer to do is he'd prefer to
Speaker 4: sell down the balance sheet, which again would put more
Speaker 4: supply in the market, which would steep in the yield curve.
Speaker 3: But the market's doing that for him right now.
Speaker 4: So being in that chair for less than two months
Speaker 4: or about two months, but he happened to come in
Speaker 4: a funny time where a week and a half after
Speaker 4: he came in he had his first meeting, Then thirty
Speaker 4: days later he had a second meeting. He then tells
Speaker 4: you nothing happened in those thirty days. He's sitting here
Speaker 4: and I think he's a value waiting where he wants
Speaker 4: to be. He's lucky on the schedule. He doesn't have
Speaker 4: an August meeting. He does have Jackson Hole. He could
Speaker 4: tell us what's going on in Jackson Hole.
Speaker 3: So I think.
Speaker 4: Kevin wanted to probably get through those first two meetings
Speaker 4: make it clear to the market that he is an
Speaker 4: inflation fighter, make it clear to everyone who's watching that
Speaker 4: the market is doing much of what he would have
Speaker 4: tried to get accomplished early, and to have the month
Speaker 4: of August before the September meeting to come out and
Speaker 4: deliver a relatively baked plan. In his mind, He's not
Speaker 4: going to give you the baked plan, but he himself
Speaker 4: will have a highly baked plan.
Speaker 1: Do you think that the selloff in the long end
Speaker 1: of the yield curve is by design that what he
Speaker 1: saw after the FED meeting with thirty year rates going
Speaker 1: to the highest level since two thousand and seven, was
Speaker 1: a good thing.
Speaker 3: It's doing Kevin's jobs for him.
Speaker 4: At the end of the day, if you want to
Speaker 4: slow down the economy and you want to tamp inflation,
Speaker 4: you have to make the cost of money more expensive.
Speaker 4: So if the thirty year rates weren't up, which they did,
Speaker 4: tenure rates went up in the front end of the
Speaker 4: curve basically stayed the same, which means we had a
Speaker 4: curve steepener. You are accomplishing what a FED chair would
Speaker 4: want to accomplish if you're trying to tamp down inflation
Speaker 4: and moderate I don't think it's just Kevin that's doing that.
Speaker 4: I mean, Kevin's being very realistic to what the environment
Speaker 4: is today. He knows the treasury barrings are going up
Speaker 4: every year. He also knows there's this enormous amount of
Speaker 4: need for debt in the AI compute data center world,
Speaker 4: where we're talking about potentially now the trillion dollars of
Speaker 4: issuance going on in the market day. The market is
Speaker 4: finding a home to clear these bonds. It's also raising
Speaker 4: longer term rates, it's putting.
Speaker 3: More risk premium into the curve.
Speaker 4: All things that Kevin is probably happy are happening without
Speaker 4: him having to do anything.
Speaker 1: Scott Bussett did something over the weekend, and I wonder
Speaker 1: how related you see this as the idea that there
Speaker 1: was a coordinated intervention In the end, some people are
Speaker 1: speculating it's because the Japanese financement is story with selling
Speaker 1: treasuries to finance their unilateral intervention and their currency and
Speaker 1: this could potentially help support US yields from going much higher.
Speaker 1: Do you believe there is any coordination between the two.
Speaker 3: Well, we know that the US and Japan court. I
Speaker 3: think no one's no one's a.
Speaker 1: Thirty year yields in the US and potentially what happened.
Speaker 4: I think there are multiple factors and why the US
Speaker 4: would have got involved in an intervention. Obviously the rate
Speaker 4: the trades that would force people into transactions where they
Speaker 4: may be selling US securities to buy at home.
Speaker 3: It also has to do trade balances.
Speaker 4: Remember, we've got administration that is fixated on trade deficits,
Speaker 4: so to the extent that you know, foreign products come
Speaker 4: into the United States below what we think is a
Speaker 4: market clearing price, or our products are extraordinarly expensive to
Speaker 4: someone that would we would like to sell to. There's
Speaker 4: a way to try and equal out the trade deficit
Speaker 4: the trade balance with the country as well. So I
Speaker 4: don't think it's a single factor model. I think when
Speaker 4: Scott Besson gets the phone call from the bank in Japan,
Speaker 4: he's evaluating all of these factories. He's evaluating what's going
Speaker 4: on in supplied demand of treasuries from foreigners, what's going
Speaker 4: on in the trade market, what's going on with the
Speaker 4: trade deficits, specifically with Japan, And each one of those
Speaker 4: has a different input into the equation to go ahead
Speaker 4: and move forward.
Speaker 2: No investant, it might have been the one that made
Speaker 2: the call, you know, sort of laser focused on these issues.
Speaker 1: Well, he has had an experience with that with the
Speaker 1: Bank of England, so why not bring it over to Japan.
Speaker 2: How frangile is the bank drop for markets right now?
Speaker 2: All these little things going on, tension in Japan, situational awareness,
Speaker 2: that fund getting into a bit of trouble in the
Speaker 2: last week too. How fragile do you think the bankdrop is?
Speaker 4: I don't know if the mark if I'd call it fragile,
Speaker 4: I would say we have as much instability or balls up.
Speaker 3: In the air as we've had.
Speaker 4: I mean, usually there's one or two driving factors in
Speaker 4: the market. Today, we've got a myriad of factors. You know,
Speaker 4: we've got the war going on, We've got the price
Speaker 4: of oil going on, we've got the major capex AI.
Speaker 3: Investment going on.
Speaker 4: And the question is you've taken some of the largest
Speaker 4: companies in America that historically have owned intellectual property and
Speaker 4: we're massive free cash flow generators, and then they recirculated
Speaker 4: that cash into the market, either by buying assets, buying
Speaker 4: other things, returning dividends, buying back shares. You've taken those
Speaker 4: companies and you've now made them huge, huge asset gathers,
Speaker 4: huge asset builders, and they're no longer creating free cash flow.
Speaker 4: In fact, it's the first time I can remember in
Speaker 4: the history of an earning's call of some of these
Speaker 4: largest companies when they're talking about we will stay positive
Speaker 4: on free cash flow. It's hard to understand that these
Speaker 4: are companies that we're producing tens of billions of dollars
Speaker 4: a quarter in free cash flow. So the market's digesting
Speaker 4: that we went through the software scare versus the AI scare.
Speaker 4: Markets digesting that we're trying to figure out where all
Speaker 4: these pieces come together. So there's an enormous amount of
Speaker 4: instability in the market at the same time rates are
Speaker 4: going up. But the consumer, we know the consumer continues
Speaker 4: to spend, spend, and spend. So even when you look
Speaker 4: at the GDP numbers, the strongest pieces in there are
Speaker 4: the consumer spending. Now, we could even go further. We
Speaker 4: know the consumer is spending, but we also know that's
Speaker 4: a bit of a bifurcated event. We know that the
Speaker 4: wealthier consumers in this country are consuming at extraordinary high levels,
Speaker 4: and we know that the low end consumer is barely
Speaker 4: getting by, and this is one of the dilemmas that
Speaker 4: everyone's trying to deal with. And how does this filter
Speaker 4: through markets? I think all of these pieces of instability
Speaker 4: are out there, and look, markets can handle one or
Speaker 4: two pieces of instability. They start to fail when it's
Speaker 4: three four and five, and they really fail when it's
Speaker 4: three four and five and they're totally out of their control.
Speaker 4: Or the answer is six to twelve to eighteen months off.
Speaker 2: And that's what I'm trying to work out. How close
Speaker 2: now we So you've got a massive competition for capital
Speaker 2: you want circulate that really well, You've had a huge
Speaker 2: to trade shock at the energy market that's hitting Japan
Speaker 2: when they've already got a frenchile backdrop. On top of that,
Speaker 2: there's evidence of leverage building up in places like South
Speaker 2: Korea and hedge funds blowing up. And I wanted to
Speaker 2: go back to the very beginning of this conversation whether
Speaker 2: now is a good time to go back to the
Speaker 2: old world of reducing forward guidance in the handholding POSTGFC
Speaker 2: at central banks. How difficult will that mission be?
Speaker 3: I don't think it's difficult.
Speaker 4: Like I said, we've been trained since two thousand and
Speaker 4: eight to today to expect the FED to telegraph and
Speaker 4: for a guy prior to two thousand and eight, when
Speaker 4: I was trading for a living and running bigging trading desks,
Speaker 4: we did not know when the FED was going to move.
Speaker 4: There were surprise meetings after surprise meetings, after surprise meetings.
Speaker 4: You know, the FED doesn't have to wait for a
Speaker 4: scheduled meeting to cut or raise industrates. Now they have
Speaker 4: not done it really since the I guess they did
Speaker 4: in COVID. The last time they did it was twenty twenty.
Speaker 4: We had one hundred basis point cut on a Sunday
Speaker 4: evening in COVID, if you remember. But we've now guid
Speaker 4: in this point where the market insists not only there
Speaker 4: be a meeting, there'll be a meeting with a press conference.
Speaker 4: You can't have actions that there's a meeting with a
Speaker 4: press conference. I think the chair is trying to say, no,
Speaker 4: I have a job to do. We will meet whenever
Speaker 4: necessary to raise or lower rates. We will meet whenever
Speaker 4: necessary to do any action we need to do based
Speaker 4: on what's going on in the environment, not based on
Speaker 4: the schedule that I put out eighteen months in the air.
Speaker 2: Let's bringing the discipline back to capitalism and financial markets.
Speaker 2: I'm not averse to that at all, Just trying to
Speaker 2: work out the consequences of making the switch when you've
Speaker 2: been feasting gone easy money and forward guidance for fifteen
Speaker 2: sixteen years and knowing they're always going to be there
Speaker 2: to have your back and step in whenever there's a problem,
Speaker 2: and they'll off fee the guidance and so you're the
Speaker 2: way you put it, they'll give you the answers to
Speaker 2: the quiz before you sit the test. Wall Street's feasted
Speaker 2: on that.
Speaker 3: For years they have.
Speaker 2: That's why I use the word French out how much
Speaker 2: fragility is in the system that needs to be unwound
Speaker 2: as we make that transition back to the world.
Speaker 3: I don't think there's as much fragility as you think.
Speaker 4: Like I said, most of my career trading I had
Speaker 4: the opposite world.
Speaker 2: You had the two way discipline you HaDin.
Speaker 3: I had to be disciplined.
Speaker 4: I had to assume when I went home with the
Speaker 4: position or I made a price for something. And I
Speaker 4: ran a big mortgage business for a while. Man ran
Speaker 4: a big treasury business for a while, ran a big
Speaker 4: at christ business. I had to assume that the FED
Speaker 4: could meet any moment and change policy, and were we
Speaker 4: trading appropriately? We're we're managing risk appropriately instead of saying, oh,
Speaker 4: I don't have to worry about because that there's a
Speaker 4: FED put or rates can't change until September something. Now,
Speaker 4: because there's no FED meeting, maybe they'll say something in
Speaker 4: Jackson Hall. So I'll manage my risk up till the
Speaker 4: Jackson Hole meeting. I'll wait for that, then I'll manage
Speaker 4: my risk differently after that.
Speaker 3: That's not the way markets should work.
Speaker 4: The markets should manage themselves in a way that anything
Speaker 4: is possible on any given day.
Speaker 2: I hope we got back to that world. I just
Speaker 2: know that when the guard tried that, we're not here
Speaker 2: to close breads. Look God quickly closed spreads straight afterwards. Right.
Speaker 2: It's difficult to make the transition.
Speaker 1: The question, and I think you're alluding to it, John,
Speaker 1: how much has the financial market changed and debt built
Speaker 1: up under the old regime that has to be unwound
Speaker 1: in a period of a new regime that potentially is
Speaker 1: much less transparent but allows markets to do their things.
Speaker 4: Did you write the pace, Gary, I did not write
Speaker 4: these that said, you know, there are an enormous amount
Speaker 4: of hedging tools today. So as you see debt move
Speaker 4: up and you see the private credit markets explosed, which
Speaker 4: has been very helpful.
Speaker 3: You know, you can head your interest rate exposure.
Speaker 4: You can't hedge your credit exposure as much, but heaving
Speaker 4: underlying interest rate exposure happens to be one of the
Speaker 4: most developed markets in the world. You can hedge interest
Speaker 4: rate exposure in almost virtually every currency that we issue
Speaker 4: bonds in today, So managing interest rate exposure is not hard.
Speaker 4: Now people have historically said, well I know exactly what
Speaker 4: the Fed's going to do.
Speaker 3: I don't need to manage this.
Speaker 4: That's probably not a good outcome. It's probably a better
Speaker 4: outcome when people will look at their risk and say,
Speaker 4: my interest rate risk is x AM I happy with
Speaker 4: that or not not? Oh, I don't really care because
Speaker 4: the Fed's got my back.
Speaker 2: Gary cond toalt you all day. I appreciate it, Thank you,
Speaker 2: Thank you very much. Gary Conere, the IBM Vice chair