WEBVTT - Border Bombshell 0:00:13.560 --> 0:00:16.320 Hello, and welcome to What Goes Up, a Bloomberg Weekly 0:00:16.360 --> 0:00:19.919 Markets podcast. I'm Sarah Pontza, a markets reporter on the 0:00:19.960 --> 0:00:23.240 Cross Asset team, and I'm Mike Reagan, a senior editor 0:00:23.320 --> 0:00:26.200 on the Markets team here at Bloomberg. This week on 0:00:26.239 --> 0:00:29.440 the show, President Trump threw a bombshell into markets at 0:00:29.440 --> 0:00:32.639 the end of the week by announcing tariffs on Mexico 0:00:32.840 --> 0:00:35.559 if the country does not prevent the flow of illegal 0:00:35.600 --> 0:00:38.440 immigrants into the United States. And this comes at a 0:00:38.520 --> 0:00:41.879 time when US and China still seem no closer on 0:00:41.960 --> 0:00:45.440 reaching a trade deal between themselves, so trade is still 0:00:45.440 --> 0:00:48.080 dominating the headlines. One of our guests will walk us 0:00:48.080 --> 0:00:51.279 through how to actually trade a trade war. And the 0:00:51.280 --> 0:00:53.400 bonds rally has kind of taken on a mind of 0:00:53.440 --> 0:00:55.920 its own. Has it gone too far or our tenure 0:00:55.960 --> 0:00:59.320 treasury yield now headed towards to And of course we'll 0:00:59.360 --> 0:01:02.440 close out the episode with our tradition the Craziest thing 0:01:02.520 --> 0:01:05.479 I saw in markets this week, But first we'll talk 0:01:05.520 --> 0:01:08.360 about President Trump and his threats to place tariffs on 0:01:08.440 --> 0:01:10.920 Mexico if they do not stop the flow of illegal 0:01:10.920 --> 0:01:14.160 immigrants into the country. Here to talk about it is 0:01:14.280 --> 0:01:18.840 Brian Chappata, a Bloomberg opinion columnist who focuses on fixed 0:01:18.840 --> 0:01:21.440 income markets. Welcome to the show, Brian, Thanks for having 0:01:21.440 --> 0:01:24.880 me so, Brian. The sort of knee jerk reaction to 0:01:25.000 --> 0:01:28.720 this new threat of tariffs on Mexico was very much 0:01:28.800 --> 0:01:33.199 risk off. We saw a rally in bonds, steep sell 0:01:33.200 --> 0:01:37.640 off in stocks, um interest rates obviously going much lower 0:01:37.840 --> 0:01:41.440 that two on the tenure really coming into focus next, 0:01:41.840 --> 0:01:45.360 is the market re overreacting here considering that President Trump 0:01:45.400 --> 0:01:47.320 has been known to sort of bluff or at least 0:01:47.360 --> 0:01:49.440 change his mind in the past. Well, I think the 0:01:49.480 --> 0:01:52.240 market is very confused right now because you had these 0:01:52.440 --> 0:01:56.360 China trade war possibilities, and that was sort of well telegraphed, 0:01:56.400 --> 0:01:58.880 but Mexico sort of came out of nowhere. There was 0:01:58.960 --> 0:02:01.800 an agreement la utually in place the U S. M 0:02:01.880 --> 0:02:05.520 c A. And there's this question of Okay, if there's 0:02:05.520 --> 0:02:08.840 a deal in place and you could still arbitrarily throw 0:02:08.919 --> 0:02:12.800 some tariffs onto a country, what does this mean for 0:02:13.000 --> 0:02:15.480 the China front? So now you're fighting a two front 0:02:15.840 --> 0:02:19.200 trade war, and the question becomes, at what point will 0:02:19.280 --> 0:02:23.440 this just completely mess up global supply chains, the overall 0:02:23.560 --> 0:02:26.839 markets and ultimately the U S economy, and that's when 0:02:26.880 --> 0:02:28.679 you start to get a risk off. You start to 0:02:28.840 --> 0:02:31.160 see a lot of people buy up treasuries. It's certainly 0:02:31.160 --> 0:02:34.680 messing up a lot of weekends for financial journalists and traders. 0:02:34.680 --> 0:02:37.280 I mentioned at least, but Brian so so much of 0:02:37.320 --> 0:02:41.520 the pricing in the bond market revolves around inflation and 0:02:41.639 --> 0:02:45.799 what people are expecting for inflation going forward. Now, obviously 0:02:46.520 --> 0:02:49.839 a new round of tariffs on Mexico while we're still 0:02:49.880 --> 0:02:53.560 waiting for the goods from China to arrive on the boats. 0:02:53.760 --> 0:02:57.720 With those that new set of tariffs, UM, the implication 0:02:57.800 --> 0:03:02.320 obviously is that at least some of these UH expenses 0:03:02.360 --> 0:03:05.760 from the tariffs will be passed on to consumers, which 0:03:05.880 --> 0:03:10.280 should have uh an inflationary effect. But yet the bond 0:03:10.320 --> 0:03:14.320 market is reacting as if it's expecting less inflation going forward. 0:03:14.480 --> 0:03:17.080 Could you sort of walk us through what the bond 0:03:17.120 --> 0:03:20.840 market is thinking and why traders seem to think the 0:03:20.880 --> 0:03:23.600 Fed's next move will be even more aggressive cuts rather 0:03:23.639 --> 0:03:26.519 than a rate hike to respond to higher prices. Yeah, well, 0:03:26.560 --> 0:03:29.519 I think this definitely is not the kind of price 0:03:29.600 --> 0:03:32.880 increases and inflation that the FED wants to see. It 0:03:32.919 --> 0:03:36.400 should be more of an organic, natural thing fueled by 0:03:36.760 --> 0:03:39.880 you know, wage gains and general economic growth. And this 0:03:39.960 --> 0:03:42.800 is more of a one time hit as a result 0:03:43.080 --> 0:03:47.080 of this policy from the Trump administration. So I think 0:03:47.160 --> 0:03:51.080 it's sort of a trade off between inflation and growth, 0:03:51.280 --> 0:03:53.960 and I think the bond market is saying this is 0:03:54.000 --> 0:03:56.800 going to be a bigger hit on economic growth, and 0:03:56.840 --> 0:03:59.960 the FED will look through this idea that prices are 0:04:00.040 --> 0:04:03.480 going up because of these tariffs on China and on Mexico, 0:04:03.920 --> 0:04:06.480 and that's why you're seeing the possibility of a rape cut. 0:04:06.640 --> 0:04:10.760 Although to be fair, uh, various FED officials, including Neil Kashkari, 0:04:11.000 --> 0:04:14.120 one of the more dovish among the FED officials throughout 0:04:14.120 --> 0:04:17.120 the country, uh, sort of says we're okay where we 0:04:17.120 --> 0:04:19.400 are right now. We don't need to do anything. We're 0:04:19.440 --> 0:04:22.080 likely to hear that word transitory again, just a different 0:04:22.080 --> 0:04:24.280 meaningless time. Yeah. I mean there's so many I mean 0:04:24.320 --> 0:04:27.880 everyone's sort of playing game theory with with the tariffs, 0:04:27.920 --> 0:04:32.159 and obviously President Trump has been very actively going against 0:04:32.160 --> 0:04:33.919 the Feds, saying if we all I only got some 0:04:34.000 --> 0:04:36.040 FED help, we'd be doing even better than we are 0:04:36.160 --> 0:04:38.560 right now. And China is gonna get all the stimulus 0:04:38.560 --> 0:04:41.400 and I'm not gonna get anything. So there's a bit 0:04:41.400 --> 0:04:43.920 of game theory potentially going on. I'm not sure if 0:04:43.960 --> 0:04:47.560 that's exactly the motivation here. I mean tying uh, these 0:04:47.680 --> 0:04:50.679 Mexico tariffs to immigration is sort of out of left 0:04:50.720 --> 0:04:54.040 field and kind of bizarre. Frankly, Uh, it feels a 0:04:54.040 --> 0:04:57.920 little arbitrary. And it's unclear exactly whether you know when 0:04:57.920 --> 0:05:00.240 the five percent goes to ten percent. I mean, there 0:05:00.240 --> 0:05:03.560 are dates, but when you know Mexico does enough for 0:05:03.640 --> 0:05:05.680 Trump to say, Okay, we don't need to tear a 0:05:05.760 --> 0:05:08.920 few anymore is very unclear. And now let's turn our 0:05:08.960 --> 0:05:12.279 attention to the other trade war that's been dominating headlines, 0:05:12.440 --> 0:05:16.320 the tensions between the US and China, and joining us 0:05:16.360 --> 0:05:20.000 to break it all down is Lorie Calvacina, the head 0:05:20.200 --> 0:05:24.200 US equity strategist at RBC UM also spent some time 0:05:24.200 --> 0:05:26.960 at Credit Swiss if I'm not mistaken, and uh, Sarah 0:05:27.000 --> 0:05:31.200 a graduate of the University of Virginia. So congratulations to 0:05:31.240 --> 0:05:34.800 that basketball team. We're all begrudgingly saying congratulations, but we're 0:05:34.800 --> 0:05:36.840 really happy for you. I'm happy I went to the 0:05:36.920 --> 0:05:39.680 University of Delaware, which is actually a knockoff of uv A, 0:05:39.800 --> 0:05:43.320 Like they literally copied the campus at Delaware. So this 0:05:43.400 --> 0:05:45.720 is like as close to a national championship as I'm 0:05:45.720 --> 0:05:50.520 gonna get, I think. So I'm happy, We're We're excited, Lori. 0:05:50.800 --> 0:05:53.000 You guys actually put out a report this week called 0:05:53.240 --> 0:05:55.599 how to Trade a Trade War, twenty one pages long, 0:05:56.080 --> 0:05:59.800 very in depth. You guys went through every single or 0:05:59.839 --> 0:06:02.560 an is called transcript from the last season. You also 0:06:02.760 --> 0:06:06.600 surveyed your guys company analysts. How can you actually go 0:06:06.640 --> 0:06:10.400 about it? It's clearly not that simple. It's very very tough. 0:06:10.440 --> 0:06:13.359 And I think what's complicated matters is right after that 0:06:13.400 --> 0:06:15.520 initial Trump tweet a few weeks ago, we felt like 0:06:15.600 --> 0:06:17.560 people were in denial. They just didn't want to think 0:06:17.600 --> 0:06:20.000 about it. They said, Okay, these this escalation isn't actually 0:06:20.000 --> 0:06:21.839 going to go through on Friday, And then it did, 0:06:22.440 --> 0:06:25.880 and then people were sort of in a state of shock, saying, Okay, 0:06:25.920 --> 0:06:28.960 well there's this window, it's probably not actually gonna happen. 0:06:29.440 --> 0:06:31.600 And guess what you know last week it felt like 0:06:31.640 --> 0:06:34.600 the middle of last week clients were saying, we actually 0:06:34.640 --> 0:06:36.520 have to figure out how to position for this in 0:06:36.520 --> 0:06:39.560 our portfolios and so we went to our analysts. We 0:06:39.600 --> 0:06:41.680 gave them about twenty four hours and we said, you've 0:06:41.680 --> 0:06:44.599 had some time to think about this. Within your industry, 0:06:44.640 --> 0:06:46.720 what would you buy and what would you sell? What's 0:06:46.760 --> 0:06:49.680 most at most at risk, what's least at risk. We 0:06:49.760 --> 0:06:52.839 really wanted to understand, as the news ebbs and flows, 0:06:53.440 --> 0:06:55.479 what are the both sides of the trade. Just let's 0:06:55.520 --> 0:06:58.320 have these lists ready to go. We also asked the 0:06:58.360 --> 0:07:01.159 analysts to just standardize our thoughts and really we tried 0:07:01.200 --> 0:07:03.359 to assess their gut feel. I think investors right now 0:07:03.440 --> 0:07:05.920 they want hard data, they want hard numbers. I don't 0:07:05.960 --> 0:07:08.840 think it's possible to get them yet. And we just said, 0:07:09.000 --> 0:07:10.720 what's going to be the impact to demand, what's going 0:07:10.760 --> 0:07:13.120 to be the impact margins? And when we did that, 0:07:13.160 --> 0:07:15.880 we found that we actually had some very clear sector 0:07:16.000 --> 0:07:19.120 and industry takeaways. There were some very clear leans and 0:07:19.200 --> 0:07:22.040 tilts that we saw develop. We cross referenced that with 0:07:22.080 --> 0:07:25.000 some work we did analyzing transcripts, and we we literally 0:07:25.040 --> 0:07:28.360 went through all five hundred transcripts through the last three 0:07:28.400 --> 0:07:32.760 reporting season. So much time, so much time. This is 0:07:32.760 --> 0:07:34.520 not something we all did last week. This is something 0:07:34.600 --> 0:07:37.080 we do every reporting season, but We've been characterizing what 0:07:37.160 --> 0:07:39.560 companies say on trade, and we had like six or 0:07:39.600 --> 0:07:41.680 seven different categories, and we said, let's just put those 0:07:41.720 --> 0:07:45.360 into two basic categories, good and bad. And when we 0:07:45.400 --> 0:07:47.840 did that, we found that the sector takeaways pretty much 0:07:47.920 --> 0:07:50.320 lined up with what our analysts thought. I feel like 0:07:50.400 --> 0:07:55.720 everybody is sort of looking at the UH sales and 0:07:55.760 --> 0:07:58.679 revenue exposure to China, and you don't hear much about 0:07:58.720 --> 0:08:01.680 the cost exposure. UH. You know what what companies are 0:08:01.680 --> 0:08:03.800 importing from China? Is that data sort of harder to 0:08:03.840 --> 0:08:06.040 come by, harder to quin There's a reason everybody is 0:08:06.120 --> 0:08:09.080 running those revenue numbers because it's it's in footnotes and 0:08:09.120 --> 0:08:12.640 financial statements. The cost estimates are not and so that's 0:08:12.680 --> 0:08:14.760 why you don't see it. We actually made a purposeful 0:08:14.760 --> 0:08:16.720 decision not to look at that revenue data. We know 0:08:16.760 --> 0:08:19.560 everybody's looking at that. We know largely you're talking about 0:08:19.560 --> 0:08:22.280 semis and technology when you're talking about companies that list 0:08:22.360 --> 0:08:25.480 direct China exposure. We think everybody knows about that. I mean, 0:08:25.520 --> 0:08:27.800 what was interesting to me is that as we went 0:08:27.800 --> 0:08:32.120 through the different sectors, it was very clear consumer discretionary, industrials, 0:08:32.120 --> 0:08:34.880 tech and materials are really the most at risk areas, 0:08:35.280 --> 0:08:37.880 wasn't too much of a difference in terms of impact 0:08:37.960 --> 0:08:41.400 on margins and impact on demand. Analysts answered those questions 0:08:41.480 --> 0:08:45.280 largely the same um areas that were more immune communication services, 0:08:45.440 --> 0:08:49.400 utilities rates just no real direct exposure. Everything else was 0:08:49.480 --> 0:08:53.120 somewhere in the middle. We've heard about the macro tradebook before, 0:08:53.200 --> 0:08:55.040 the playbook, you could call it, and a lot of 0:08:55.040 --> 0:08:57.880 people have said, Okay, go into small caps, get out 0:08:57.880 --> 0:09:01.240 of emerging markets, get out of China, get out of semiconductors. 0:09:01.640 --> 0:09:04.640 This week we actually kind of saw the opposite. I 0:09:04.679 --> 0:09:08.000 thought it was pretty amazing that we saw emerging markets, 0:09:08.040 --> 0:09:12.240 we saw China, we saw semiconductors actually outperforming in small 0:09:12.280 --> 0:09:15.320 caps underperforming. Is it the idea that maybe you need 0:09:15.360 --> 0:09:17.520 to get a little more granular, a little bit more micro, 0:09:17.960 --> 0:09:20.360 or is it the idea that right now investors are 0:09:20.400 --> 0:09:22.520 just still unsure of what to do well. I think 0:09:22.520 --> 0:09:25.680 it's a question of applying the risk and factoring in 0:09:25.720 --> 0:09:28.040 the risk two different parts of the market at different 0:09:28.040 --> 0:09:30.360 points in time, and I think the semiconductor one has 0:09:30.400 --> 0:09:32.760 been a really obvious one for a very long time. 0:09:32.800 --> 0:09:34.199 If you want to go in and run a screen 0:09:34.320 --> 0:09:37.000 just looking at Chinese revenue exposure. You're gonna get a 0:09:37.000 --> 0:09:38.920 big list of semi companies and everybody knows that, and 0:09:38.960 --> 0:09:41.760 everyone was doing that analysis back in the fall. Now 0:09:41.800 --> 0:09:43.960 I think people are starting to look at the retailers 0:09:44.000 --> 0:09:47.280 which are really more affected by List four UM, and 0:09:47.800 --> 0:09:50.360 nobody really had that on their their time horizon. Nobody 0:09:50.400 --> 0:09:53.559 really thought that was even up within the realm of possibility. 0:09:53.840 --> 0:09:56.240 So that's where all the focus is right now. One 0:09:56.280 --> 0:09:59.680 thing I find interesting in your recent reports your neutral 0:10:00.240 --> 0:10:03.679 as far as small caps versus large caps. And I'm 0:10:03.679 --> 0:10:05.440 interested in this because I've been on TV a few 0:10:05.440 --> 0:10:08.640 times when the market's really bad and the anchor will say, well, 0:10:08.679 --> 0:10:11.440 small caps are doing worse than large caps. You know, 0:10:11.480 --> 0:10:14.120 aren't they immune to the trade war? And my answer 0:10:14.200 --> 0:10:17.040 is always like, well, they are immune to a strong dollar. 0:10:17.520 --> 0:10:19.760 But if you look at the makeup of small caps, 0:10:19.760 --> 0:10:21.840 I mean a lot of banks, a lot of consumer 0:10:21.880 --> 0:10:27.120 discretionary at risk to import costs, UM obviously higher beta, 0:10:27.160 --> 0:10:29.319 and small caps so when the market goes down, they're 0:10:29.320 --> 0:10:31.120 going to go down a little bit more. I mean, 0:10:31.160 --> 0:10:33.040 can you give me a smarter answer than that? Well, 0:10:33.080 --> 0:10:35.400 the so I I spent about seven years as a 0:10:35.440 --> 0:10:38.319 small cap strategy in the past, and and I can 0:10:38.360 --> 0:10:40.720 tell you that they're They're kind of two issues that 0:10:40.800 --> 0:10:43.280 small caps are always in the epicenter of. One is 0:10:43.600 --> 0:10:46.000 their risk on or risk off, So bad news generally 0:10:46.040 --> 0:10:48.800 small caps go down, but then sometimes they benefit in 0:10:48.840 --> 0:10:51.160 a more fundamental way, and they don't always get credit 0:10:51.200 --> 0:10:54.200 for that. I think it's even more complicated right now. Yes, 0:10:54.240 --> 0:10:56.760 small caps are more domestic, so things like the small 0:10:56.760 --> 0:10:59.800 cap banks really no exposure to the trade war unless 0:10:59.800 --> 0:11:03.319 we get pulled into a recession um. But other than 0:11:03.360 --> 0:11:06.640 that they should be fine. Retailers are more complicated because 0:11:06.640 --> 0:11:08.680 they have margin pressures, and it goes back to these 0:11:08.679 --> 0:11:11.120 cost pressures that we can't really measure, we can't really 0:11:11.160 --> 0:11:14.040 screen for. But what we know is that smaller companies 0:11:14.080 --> 0:11:17.200 in any sector have less scale, They have less bargaining power, 0:11:17.520 --> 0:11:20.280 they have less of an ability to manage issues like this. 0:11:20.360 --> 0:11:24.080 They can't manage their supply coins changed quite as deftly 0:11:24.120 --> 0:11:26.040 as the big cap companies, and I think that's what's 0:11:26.080 --> 0:11:28.480 hurting them right now. Another thing I caught my eyes. 0:11:28.679 --> 0:11:32.640 You have a preference for financials energy and financials energies 0:11:32.679 --> 0:11:35.600 one story, but I'm kind of surprised that financials giving 0:11:35.640 --> 0:11:37.960 our our guy Brian here has been writing about this 0:11:38.080 --> 0:11:42.960 panic buying and treasuries. I mean, uh, flat inverted yield curves. Uh. 0:11:43.360 --> 0:11:45.400 You know, intuitively you would think would be bad for 0:11:45.520 --> 0:11:47.520 net interest margins at financials. So what are you saying 0:11:47.559 --> 0:11:51.319 there to Carl. So we think the yield curve, it's 0:11:51.360 --> 0:11:53.280 when it really hurts the banks. We think it's more 0:11:53.280 --> 0:11:55.520 about the economic signal that it's sending, and we tell 0:11:55.559 --> 0:11:57.920 people continue to look at the preponderance of the evidence. 0:11:57.920 --> 0:12:00.360 The yield curve is one signal. Um, we don't think 0:12:00.360 --> 0:12:02.480 the U S economy is going to tip into recession 0:12:02.520 --> 0:12:04.760 this year, but we do admit and acknowledge that it's 0:12:04.760 --> 0:12:07.920 an anchor, it's an overhang, it's a problem. Um. We 0:12:08.120 --> 0:12:11.240 like the valuation story and financials. We like the fact 0:12:11.240 --> 0:12:14.320 that investors are starting to to really struggle to find 0:12:14.320 --> 0:12:16.920 more defensive places to hide in the market. Healthcare has 0:12:16.920 --> 0:12:19.400 really broken down as a defensive proxy. So we think 0:12:19.400 --> 0:12:21.840 the relative immunity of something like the trade war and 0:12:21.840 --> 0:12:25.040 the financials could actually benefit them. But but the the 0:12:25.120 --> 0:12:27.640 yield curve is definitely a problem. That's a good segue 0:12:27.679 --> 0:12:30.120 in you Brian the yield curve is inverted again, We're 0:12:30.160 --> 0:12:33.199 all gonna die, right, that's the signal again? Do I 0:12:33.240 --> 0:12:35.920 have it right? So? What what tell us about what 0:12:35.960 --> 0:12:37.840 you've been writing? You you had a piece talking about 0:12:37.880 --> 0:12:41.199 this panic buying and treasuries. But it doesn't sound like 0:12:41.280 --> 0:12:43.840 you think it's been overdone. That you think these yields 0:12:43.840 --> 0:12:46.760 are lower for longer. To use a catch phrase from 0:12:46.840 --> 0:12:48.440 from a few years ago, I mean, is that where 0:12:48.480 --> 0:12:51.280 we are again. We're back to this permanent low yield environment. 0:12:51.280 --> 0:12:53.440 I mean it feels like that's sort of the end game, 0:12:53.520 --> 0:12:56.120 no matter how you spin it, right. I mean, there's 0:12:56.160 --> 0:13:00.559 been so much build up of debt across the world. Uh, 0:13:00.600 --> 0:13:04.920 you know, economy has become so financialized, everyone's exposed to equities. 0:13:05.240 --> 0:13:07.800 I mean, the only way to sort of keep all 0:13:07.840 --> 0:13:11.800 of this going without some sort of major problem is 0:13:11.880 --> 0:13:14.520 by keeping yields low. And that's what we've seen in 0:13:14.600 --> 0:13:17.520 Japan for a long time. It's what we've seen in 0:13:17.559 --> 0:13:20.440 Europe and in the US. The Fed was able to 0:13:20.480 --> 0:13:23.959 get several rate hikes off, but ultimately they're going to 0:13:24.040 --> 0:13:26.680 have the lower rates again at some point, and so 0:13:27.080 --> 0:13:28.960 it is a concern. I mean, I think that in 0:13:29.000 --> 0:13:33.040 the short term, the rally has gone quite far. Jeff 0:13:33.040 --> 0:13:36.080 Gunlack came out on Twitter and said, you know, we've 0:13:36.120 --> 0:13:38.680 seen the top people are gonna sort of have buyers 0:13:38.760 --> 0:13:41.960 remorse now, um, and I think that's probably right. I mean, 0:13:42.040 --> 0:13:44.520 the tenure yield is below the lower bound of the 0:13:44.520 --> 0:13:47.839 FED funds rate. So if the Fed's gonna stay on hold, Uh, 0:13:47.880 --> 0:13:49.680 it doesn't look what are you doing quite so good? 0:13:49.720 --> 0:13:51.800 What are you doing at you know, to twenty? But 0:13:52.320 --> 0:13:55.319 it's it's sort of feels like we're in this environment 0:13:55.360 --> 0:13:58.160 where the Fed's not going to raise anymore. That's for sure, 0:13:58.600 --> 0:14:01.079 they might cut at some point in the next two years, 0:14:01.240 --> 0:14:03.000 and so bond traders are trying to get ahead of 0:14:03.040 --> 0:14:05.839 this and that's why you see the long end rally 0:14:05.920 --> 0:14:08.559 and the curve invert. How much dispersion do you actually 0:14:08.559 --> 0:14:10.520 see in Wall Street views right now, because I know 0:14:10.600 --> 0:14:12.959 you look at Bank of America, they're calling for yields 0:14:13.000 --> 0:14:15.800 potentially to fall to two point out five on the tenure. 0:14:16.000 --> 0:14:19.200 Then you mentioned Jeff Gunlack, I know, Macro Risk Advisors, 0:14:19.200 --> 0:14:20.760 a couple of other shops have come out and said, 0:14:21.000 --> 0:14:22.960 we are going to see a popping interest rates. We 0:14:23.040 --> 0:14:25.720 can't stay around two point two. I mean, are you 0:14:25.800 --> 0:14:28.160 just seeing a lot of different opinions at this point 0:14:28.200 --> 0:14:30.560 in time. I mean, I think it's pretty universal right 0:14:30.600 --> 0:14:34.760 now that everyone's coming down because they're following the market. Um, 0:14:34.880 --> 0:14:38.240 that's for sure. That it seems like, especially among economists, 0:14:38.280 --> 0:14:43.160 there's a major reluctance to capitulate and say we're heading 0:14:43.200 --> 0:14:45.680 back down towards two percent when it seemed very clear 0:14:45.720 --> 0:14:48.720 that we were headed towards three and possibly even four percent. 0:14:49.720 --> 0:14:55.800 But among the fixed income treasuries interest rates strategists specifically, 0:14:56.240 --> 0:14:58.360 there is a feeling that we're sort of stuck in 0:14:58.400 --> 0:15:01.360 a range. We've sort of seen the top for this 0:15:01.480 --> 0:15:04.160 cycle back in October and November when the yield was 0:15:04.560 --> 0:15:08.280 three point two three point five per cent um. So, 0:15:08.600 --> 0:15:10.600 you know, I guess we'll sort of see what happens here. 0:15:10.640 --> 0:15:13.960 But I think the uh, the move is definitely lower 0:15:14.000 --> 0:15:31.720 now now. Laurie, Obviously a big part of this move 0:15:31.760 --> 0:15:34.800 into bonds is likely people getting a little spooked at 0:15:34.880 --> 0:15:37.520 at the stock market. Uh. You wrote recently that you 0:15:37.560 --> 0:15:40.880 do think people will come in and quote unquote by 0:15:40.920 --> 0:15:43.840 the dip to use uh everyone's favorite catchphrase. But we're 0:15:43.880 --> 0:15:46.280 not quite there yet. What sort of downside do you 0:15:46.360 --> 0:15:48.840 think we need for to bring in those dip buyers 0:15:48.880 --> 0:15:51.160 and will it require a catalyst? You know, what, will 0:15:51.200 --> 0:15:53.840 it be a midnight tweet from a certain president to 0:15:53.880 --> 0:15:56.720 do it? What evaluations? What, what would cause that dip 0:15:56.760 --> 0:15:59.160 buying instinct to kick in? Well, well, I think that 0:15:59.440 --> 0:16:01.360 I don't think we're going to get there on valuation. 0:16:01.440 --> 0:16:04.000 Our valuation model has been pretty stretched and it's getting 0:16:04.000 --> 0:16:06.120 a little bit better, but we're kind of nowhere near 0:16:06.200 --> 0:16:08.560 cheap territory yet. So I think that's off the table 0:16:08.600 --> 0:16:11.400 as the catalyst to get people back in. I do 0:16:11.520 --> 0:16:14.840 think you have to look back at history to some extent, 0:16:15.440 --> 0:16:19.640 and if you go back to we had these ferocious 0:16:19.720 --> 0:16:21.840 rallies off the bottom, but they had these you know, 0:16:21.880 --> 0:16:24.680 sort of different periods of consolidation that we're sparked by 0:16:24.720 --> 0:16:26.200 different things, and a lot of them went down to 0:16:26.240 --> 0:16:29.240 about ten And that seems to be the line in 0:16:29.280 --> 0:16:32.680 the sand where within the context of recovery, the market says, Okay, 0:16:32.680 --> 0:16:35.440 if we go any farther, we're pricing in a growth scare, 0:16:35.480 --> 0:16:38.640 We're pricing in a really dire economic scenario. I think 0:16:38.640 --> 0:16:42.320 you watched that ten percent markets around fifty this time around. 0:16:42.760 --> 0:16:46.160 My sense is there investors will say, Okay, we're not 0:16:46.240 --> 0:16:48.440 in the recession camp. This has probably gone too far, 0:16:48.480 --> 0:16:50.840 and that's what where they'll step back in now. Hypothetically, 0:16:50.960 --> 0:16:53.000 if the data deteriorates, you know, we're looking at the 0:16:53.000 --> 0:16:55.720 I s M numbers, get some close to fifty that 0:16:55.920 --> 0:17:01.040 you know lyne in the sand between contraction and expansion. Uh, 0:17:01.160 --> 0:17:03.920 if you have a ten percent equity dip and a 0:17:04.000 --> 0:17:06.080 sub fifty I s M, I mean, is is the 0:17:06.119 --> 0:17:09.560 same whole true? And and maybe some other disturbing economic data. 0:17:09.680 --> 0:17:11.960 I think if the ten percent doesn't hold and you 0:17:12.000 --> 0:17:15.480 get deteriorating economic data in a significant way, that says, okay, 0:17:15.680 --> 0:17:18.120 the recession issue was back on the table for this year. 0:17:18.440 --> 0:17:21.119 You're looking at type decline. I mean, that's what we 0:17:21.240 --> 0:17:24.880 basically saw happen on the December lows, and that's that's 0:17:24.880 --> 0:17:27.760 pretty close to what your average recessionary drop is peaked 0:17:27.760 --> 0:17:30.119 a trough. Is that what the bond market is pricing 0:17:30.160 --> 0:17:33.000 in mil Brian, I mean the idea of low growth, 0:17:33.119 --> 0:17:36.320 low inflation. Obviously the market is now looking for a 0:17:36.400 --> 0:17:39.000 FED rate cut. Yeah, I mean I think that's going 0:17:39.080 --> 0:17:41.800 to be the real big that that that's sort effectively 0:17:41.920 --> 0:17:45.840 bond traders are sort of daring the Fed to do 0:17:46.119 --> 0:17:47.920 a rate cut, And I mean, I think that if 0:17:47.920 --> 0:17:51.800 the data comes in week, the Fed will respond. But 0:17:52.440 --> 0:17:55.160 I don't think that the Fed really wants to sort 0:17:55.200 --> 0:17:58.679 of let the market steer its direction, at least throughout 0:17:58.720 --> 0:18:01.639 the rest of this year. I think seems like a 0:18:01.680 --> 0:18:05.400 reasonable time when the Fed may start to see signs 0:18:05.480 --> 0:18:08.439 of weakness and reason to sort of start start dropping 0:18:08.520 --> 0:18:11.639 rates a little bit in hopes of this fabled soft 0:18:11.720 --> 0:18:15.760 landing um. But I think they're really really going to 0:18:15.800 --> 0:18:17.520 try to look through We sort of saw that most 0:18:17.560 --> 0:18:21.080 recently with the sort of transitory comments on inflation. People 0:18:21.080 --> 0:18:23.879 were expecting that the Fed was going to change its tune, 0:18:24.240 --> 0:18:28.080 noticed that inflation was missing two percent constantly and acknowledge that. 0:18:28.160 --> 0:18:31.000 But j Pollo did not want to go there. Now 0:18:31.080 --> 0:18:34.480 another commun out out this week, Brian is Uh and 0:18:34.520 --> 0:18:37.360 I think this stems from Bloomberg Television sent a bunch 0:18:37.400 --> 0:18:40.040 of people out to PIMCO in southern California. I'm not 0:18:40.080 --> 0:18:42.879 saying I'm jealous that, you know, some people got to 0:18:42.880 --> 0:18:44.960 go to California. I'm not saying I'm not jealous either, 0:18:45.080 --> 0:18:47.080 But but they came back with an interesting story, and 0:18:47.160 --> 0:18:50.199 that is that Pimco has gotten pretty bearish on credit, 0:18:50.320 --> 0:18:53.920 but walk us through they're thinking on why they're they're 0:18:53.960 --> 0:18:56.879 sort of getting a little scared about the credit markets. Yeah, So, 0:18:56.920 --> 0:19:00.159 I mean, I respect pimco uh and their investor is 0:19:00.160 --> 0:19:03.160 a ton and I think they're right to point out that. 0:19:03.240 --> 0:19:05.159 I think they said that the corporate credit was the 0:19:05.240 --> 0:19:08.119 riskiest that they've ever seen or to some extent, and 0:19:08.160 --> 0:19:11.840 that cells we're gonna have a bunch of losses when 0:19:11.880 --> 0:19:15.720 the cycle turns, and that's true, but it's also not 0:19:15.840 --> 0:19:19.040 exactly the most novel point of view that we've ever seen, right. 0:19:19.040 --> 0:19:21.639 I mean, we know that triple b's now make up 0:19:21.760 --> 0:19:25.520 three trillion dollars worth of the investment grade index. That's 0:19:25.520 --> 0:19:28.800 a lot, and companies have gone down the credit scale 0:19:29.080 --> 0:19:31.800 in order to you know, lock in you know a 0:19:31.840 --> 0:19:34.720 lot of debt, but also you know expand, and that's 0:19:34.760 --> 0:19:37.080 like one way they can do that. And Cellos are 0:19:37.119 --> 0:19:39.199 two thirds of the market, so obviously they are going 0:19:39.240 --> 0:19:41.840 to take the majority of the losses. So I mean, 0:19:42.040 --> 0:19:44.560 I think that they are barish, but they're also sort 0:19:44.600 --> 0:19:47.760 of just more broadly acknowledging that things are probably gonna 0:19:47.800 --> 0:19:50.840 get tougher from here on out. We're a decade into 0:19:50.920 --> 0:19:54.639 the expansion, and you know, everyone keeps saying we're in 0:19:54.680 --> 0:19:57.840 the eighthitting or the night fitting or ex tratings or 0:19:57.880 --> 0:20:02.119 whatever like. Ultimately, at some point they're gonna be right, 0:20:02.160 --> 0:20:03.679 and they have got three to five year outlooks, so 0:20:03.720 --> 0:20:06.000 they say, you know, the next three to five years, 0:20:06.080 --> 0:20:08.959 we're probably gonna end the game, and uh, you know, 0:20:09.280 --> 0:20:11.760 something's gonna turn and things are not going to be 0:20:11.840 --> 0:20:14.840 so rosy for just plowing into whatever has the highest deal. 0:20:14.960 --> 0:20:16.520 You know, it's funny. I feel like I've read about 0:20:16.600 --> 0:20:19.600 ten different obituaries for the credit cycle over the last 0:20:19.680 --> 0:20:23.159 five years, and recession is always two years away and 0:20:23.160 --> 0:20:26.760 it hasn't happened. But Laurie, Uh, you know, obviously the thinking, 0:20:27.000 --> 0:20:29.280 the traditional thinking is that the credit markets sort of 0:20:29.640 --> 0:20:33.040