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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 3: Joining us now around the table, Oksana Aronoff of JP
Speaker 3: Morgan Asset Management, Oxana, thank you so much for joining us.
Speaker 3: You just heard from Katy. They're talking about the markets
Speaker 3: pricing in this Trump trade. When you look at the
Speaker 3: rise in yields, is that economics or do you think
Speaker 3: it's politics?
Speaker 4: So I want to start answering that question actually by
Speaker 4: zooming out a little bit, because we spend a lot
Speaker 4: of time in markets trying to predict rates. Obviously that's
Speaker 4: a backbone on the market, whether you're talking about bonds
Speaker 4: or stocks. But the reality is that when we look
Speaker 4: at the history of how good is the market consensus
Speaker 4: provided by will work at predicting where the ten year
Speaker 4: will be, It's actually pretty terrible. How good is the
Speaker 4: FED at predicting where the FED funds will be? It's
Speaker 4: actually pretty terrible because if you look at their dot
Speaker 4: plot in an extreme example, in twenty twenty, they expected
Speaker 4: the FED funds to stay at zero through most of
Speaker 4: twenty twenty three. So with these things in mind, and
Speaker 4: by the way, even when you know what the Fed
Speaker 4: is going to do, and they do it like cut
Speaker 4: fifty base points earlier this year, which seemed kind of
Speaker 4: unnecessary given the strength of the economy, but they did it.
Speaker 4: What has happened to the long end of the curve?
Speaker 4: Against the calls of extending duration, the end of the
Speaker 4: the longer end of the curve moved up with seventy
Speaker 4: basis points. So all of this to say that I
Speaker 4: think everyone needs to have a little bit of humility
Speaker 4: and really focus on the economy and the data. And
Speaker 4: Powell himself said last week that look, we're not going
Speaker 4: to prejudge anything. We're going to be really looking at
Speaker 4: the data. And I think that a lot of what's
Speaker 4: in the mix right now with the new administration coming
Speaker 4: in is potentially short term at least looks quite inflationary,
Speaker 4: and that means, you know, possibly higher longer term rates,
Speaker 4: which of course are also looking at the state of
Speaker 4: our balance sheet. And that process started way before the election.
Speaker 4: We'd been saying that. Look, look, regardless of who occupies
Speaker 4: the White House in January, there is really no focus
Speaker 4: on fiscal spending. I mean, everyone wants the accountability in theory,
Speaker 4: but everyone wants.
Speaker 3: To spend on the one percent on the ten yure.
Speaker 4: So if you look at what the market is currently
Speaker 4: pricing in for the Fed Funds rate, we have about
Speaker 4: a three percent rate by the end of next year. Historically,
Speaker 4: the spread between Fed funds and the ten year Treasury
Speaker 4: is around one hundred and seventy five basis points. So
Speaker 4: you do the math. So even if markets expectations come
Speaker 4: true and we have a two point nine three percent
Speaker 4: Fed Funds this time next year, is a five ten
Speaker 4: year more likely or a four percent ten year more
Speaker 4: likely or a three percent tenure right, So if you
Speaker 4: believe in a positively sloping curve, that tenure is going
Speaker 4: to be likely higher as opposed to lower. Not to
Speaker 4: mention all of the longer term issues, that are inflationary
Speaker 4: that we can talk about, but that's just the math. Now,
Speaker 4: what will actually happen. Your guess is as good as
Speaker 4: mine again, and that's why we do not pin the
Speaker 4: fortune of our process on the directionality rates. And maybe
Speaker 4: that's why we've actually outperformed strategies that track indicase in
Speaker 4: fixed income by fourteen to sixteen percent over these last
Speaker 4: very volatile three years in fixed income, which is a
Speaker 4: lifetime of return I'm fixed income frankly.
Speaker 5: Well to that point before we've gotten the fifty basis
Speaker 5: points of cuts and yields move higher. So many people
Speaker 5: have talked about the reinvestment risk in this market that
Speaker 5: you need to be going into bonds because yields will
Speaker 5: come lower. What psychological impact has it had for investors
Speaker 5: for that not to play out? And how real still
Speaker 5: at that moment is this reinvestment risk if there is
Speaker 5: some potential for yields to go higher from here.
Speaker 4: So right now, as we look out and it seems
Speaker 4: that a higher for longer environment is more likely, and
Speaker 4: the FED is going to be looked looking at the
Speaker 4: data and to the extent that that data continues to
Speaker 4: be strong, and we possibly see even an uptick in inflation,
Speaker 4: they may stop cutting or even take some of those
Speaker 4: cuts back. So we definitely believe there's nothing wrong with
Speaker 4: cutting or not cutting, clipping that coupon at the front
Speaker 4: end of the curve, and that's been the right tread.
Speaker 4: And so we like things like high quality corporate floaters.
Speaker 4: They still give you a yield above traditional kind of
Speaker 4: front end money market type yields and incredibly high quality
Speaker 4: to levels at kind of what's happening in the lower
Speaker 4: credit market, because that same thinking has pushed people out
Speaker 4: into lower rated, you know, junk created parts of the market.
Speaker 4: You have high healed spreads today sitting at two hundred
Speaker 4: and eighty five base points over treasuries. It is extremely
Speaker 4: rare to see a spread inside of two seventy. This
Speaker 4: is incredibly tight. And the last time we saw spreads
Speaker 4: in these levels at these levels were just before the
Speaker 4: JFC and just before kind of the bubble burst in
Speaker 4: the late nineties early two thousands. Not to say that
Speaker 4: we're heading there, but to say that, look, these valuations
Speaker 4: are definitely pushing against historic yeah, ig.
Speaker 5: Even more so. Seventy four ish, I think is to
Speaker 5: spread at the moment tightest level since nineteen ninety eight.
Speaker 5: John likes to ask this question. He's not here, so
Speaker 5: I'll do it for him. Are we heading into an
Speaker 5: environment where you could see yields on credit on IG
Speaker 5: below that of treasuries?
Speaker 4: So again, we've we've seen a lot of unprecedented things
Speaker 4: unfold here. I would point out that the yield on
Speaker 4: double b's, which is the higher tier of high yield,
Speaker 4: versus the yield on three month treasuries right now within
Speaker 4: hair's kind of distance of each other. So why would
Speaker 4: you buy that junk rated right with a six handle
Speaker 4: on it on it or a high five handle on
Speaker 4: it where you can get basically that risk free in
Speaker 4: three months to emails?
Speaker 6: Right?
Speaker 4: So, and if there should be a revaluation tomorrow, which
Speaker 4: we think is very likely because to your point, IG
Speaker 4: is quite tight and about half of it is triple
Speaker 4: be rated. So you have this enormous cloud hanging over
Speaker 4: the high yield market, and you've got names like following
Speaker 4: like paramount Right. I don't really have an opinion of them,
Speaker 4: but you are reading headlines around their credit quality. Are
Speaker 4: they going to drop into the highield index that has
Speaker 4: very serious ramifications for valuations?
Speaker 2: There?
Speaker 4: So at the end of the day, investors always have
Speaker 4: to ask themselves a question of what is priced in?
Speaker 4: And do I want to just let an index drag
Speaker 4: me through the experience of this repricing, whether it's caused
Speaker 4: by just higher for longer, whether it's caused by a
Speaker 4: slowing of the account, whatever it is, or do you
Speaker 4: want to have an active management approach that can actually
Speaker 4: take advantage of these different valuations. To your point about
Speaker 4: investment grade, one of the cheapest trades out there right
Speaker 4: now is buying protection on credit via selling it on
Speaker 4: investment grade cheap forty to fifty base points all time,
Speaker 4: kind of low cost, and we're taking advantage of that.
Speaker 4: But that's not the sort of thing you'll see in
Speaker 4: a market risk driven strategy.
Speaker 6: You say that credit is expensive and there are a
Speaker 6: number of risks out there. I look at the Bloomberg
Speaker 6: Corporate bond oas it's the lowest seventy four basis points.
Speaker 6: It is the lowest in a century. What is the
Speaker 6: biggest risk If we're sitting around this desk every day
Speaker 6: talking about US exceptional and the fund flows that will
Speaker 6: come in here, the FDI that will come in here,
Speaker 6: the migration, not just migration to the dollar, but the
Speaker 6: sheer flowed the dollar has been immense, So what is
Speaker 6: it the challenges credit?
Speaker 4: Then, So it's interesting you mentioned flow to the dollars.
Speaker 4: So if you look at assets coming into the US ten, twelve,
Speaker 4: fifteen years ago, we're overwhelmingly going into treasuries and credit. Yes,
Speaker 4: today they're overwhelmingly going into equities. So there is incrementally
Speaker 4: less dollars going into the dollar or less money going
Speaker 4: into the dollar on the credit side. And when I
Speaker 4: talk about and when you talk about you know, pricing
Speaker 4: being very tight, spreads being very tight, it doesn't mean
Speaker 4: we are expecting a recesion. The economy appears to be strong.
Speaker 4: But the problem is when something is priced for perfection,
Speaker 4: it takes anything other than perfection to move that price.
Speaker 4: And lower rate of credit is notoriously volatile, right, So
Speaker 4: just this higher for longer environment. If it doesn't materialize
Speaker 4: that the FED gets us to you know, high twos
Speaker 4: and we have to live here longer, that's a problem
Speaker 4: for cash strap junk rated companies.
Speaker 6: Give us your opinion. Steve Shoodo was with Danny and
Speaker 6: I last week and we were talking about, oh, it'll be
Speaker 6: the bond vigilantes that will restrain the fiscal largeess of Washington.
Speaker 6: They will retire it will be nineteen ninety five and
Speaker 6: stay sort of linked onto the desting one. There aren't
Speaker 6: very many bond vigilantes left, So contextualize us for us.
Speaker 6: Do you believe that you know he talks about a
Speaker 6: migration to other markets with Danny and myself. Do you
Speaker 6: think bob vigilantes can be reborn? Are?
Speaker 7: There?
Speaker 6: Are? There so few of them?
Speaker 4: So again, I like to stick to the facts and
Speaker 4: the data, and we know that where does the demand
Speaker 4: for treasuries come from? Overwhelmingly it comes from the FED,
Speaker 4: comes from US commercial banks, and it comes from foreign investors.
Speaker 4: The feedest kittyeing. US commercial banks can I get rid
Speaker 4: of their treasury holding fast enough. And foreign investors are
Speaker 4: dominated by China, China and Japan, and China, of course
Speaker 4: we know the issues around their relationship there. There are
Speaker 4: not enough stores of value in the world, so China
Speaker 4: has continued to buy our treasuries, but at a smaller,
Speaker 4: lesser pace. So the major sources of demand for treasuries
Speaker 4: are not what they used to be, and therefore we're
Speaker 4: seeing some weaker auctions and so I can't speak to
Speaker 4: the bond vigilantes, but we are certainly seeing some underpinnings
Speaker 4: that are in the process of change. And these things
Speaker 4: always happen slowly and then suddenly, and so that's been
Speaker 4: part of the reason why we've seen the long end
Speaker 4: of the curve migrate higher, along with better growth prospects,
Speaker 4: perhaps a return of inflation. You know, on balance, probably
Speaker 4: not back to nine percent, but somewhat of a return
Speaker 4: to of inflation. All these things that are going to
Speaker 4: be are not going to allow the tenure to move
Speaker 4: significantly lower in the absence of some exist adrena's shock
Speaker 4: that comes out of nowhere that we cannot see obviously,
Speaker 4: but that's why we have high quality allocations and portfolios.
Speaker 3: Ox on Off Jonathan was here. He'd called a clinic
Speaker 3: and a He's disappointed he missed this. Thank you so
Speaker 3: much for your time this Weeking Oksana aaronof Air of
Speaker 3: JP Morgan Asset Management. Neil Rigison of ADP joins us.
Speaker 3: Now she's looking forward to all of us and maybe
Speaker 3: also playing a little bit scenario analysis when it comes
Speaker 3: to twenty twenty five. Let's just start the week off.
Speaker 1: What are you looking most forward to you know, I'm
Speaker 1: looking at CPI because it's going to be so important
Speaker 1: for how the Fed conducts itself over the remainder of
Speaker 1: twenty twenty four. But I think the sleeper of the
Speaker 1: week is initial jobless claims. Here's why we saw a
Speaker 1: really negative private sector print from the BOS for October.
Speaker 1: So we should see some indication in this high frequency
Speaker 1: data that companies are laying off. We haven't yet. It's
Speaker 1: still super low, and that's an indication that the BLS
Speaker 1: number may be revised higher, or that the labor market
Speaker 1: looks a bit stronger than that last report would suggest.
Speaker 5: It's a really good point. It was the government sector
Speaker 5: that added to jobs last time around, so in this
Speaker 5: scenario where you don't see that coming through. Can we
Speaker 5: also go back to this thing of okay, the last
Speaker 5: month's data, it was all weird. It was hurricanes, it
Speaker 5: was strikes. We basically have to discount it all.
Speaker 1: I think there are some threads that we can hang
Speaker 1: our hats on. This very low initial job will claims
Speaker 1: number that's high frequency is one of them. We're seeing
Speaker 1: strengthen the labor market at ADP. There was hiring in
Speaker 1: the Jolts Report also coming out of BLS, so there
Speaker 1: are some hangars we can use, but definitely we want
Speaker 1: to look towards the future to see if there's evidence
Speaker 1: of weakness. And then coming back to that CPI print
Speaker 1: super important looking at services and the role that labor
Speaker 1: market will play in pushing up or restraining service sector
Speaker 1: inflation going forward, that's going to be very important.
Speaker 5: Well, in the spirit of looking for it's a twenty
Speaker 5: twenty five where the outlook is just so uncertain. We
Speaker 5: don't have any great economic models for what adding seven
Speaker 5: and three quarters of into the US deficit will mean.
Speaker 5: Does the FED need to start talking about scenarios? Do
Speaker 5: they need to start laying out different futures that they
Speaker 5: might face, or should they continue with the line we
Speaker 5: need to wait and see.
Speaker 1: I think the FED is always looking at scenario so
Speaker 1: I don't think this is a net new policy. I mean,
Speaker 1: they have four hundred economists. They have to do something
Speaker 1: with their time.
Speaker 5: So I think.
Speaker 2: CINEO analysis is the Salthius Joe.
Speaker 6: At Washington common inflicted coit if you.
Speaker 1: Go, scenario analysis is bill it hardcore into their policy framework.
Speaker 1: What I think it's going to be very important for
Speaker 1: a data dependent FED is to have a consistent framework,
Speaker 1: and that's the task of the next few months is
Speaker 1: to reevaluate that time framework. It's time. The last time
Speaker 1: they revisited it was in twenty twenty. It was a
Speaker 1: different inflation picture than now. They have to kind of
Speaker 1: rejigger that framework to fit the scenario that they're in
Speaker 1: right now. This idea that inflation may bounce back, it
Speaker 1: might be a little bumpy, and that trajectory is very
Speaker 1: different than too low inflation what we had going into
Speaker 1: the pandemic.
Speaker 6: The narrative iron tires. We will know incrementally. You know
Speaker 6: whether it's twenty percent, thirty percent, and that could be
Speaker 6: on your it could be on your allies, not your enemies,
Speaker 6: on your enemies or perceived enemies. It's China sixty percent currently,
Speaker 6: it's two percent on the trade weighted assets that are
Speaker 6: imported into the United States of America. That is going
Speaker 6: to go potentially to twenty percent of the imports into
Speaker 6: the United States of America extrapolated not for me in
Speaker 6: terms of potential inflation, but most of the drag on growth.
Speaker 1: Right, So the US is benefited in this soft landing
Speaker 1: outlook that looks like we're still on that trajectory from
Speaker 1: a very steady global picture. The IMF has called global
Speaker 1: the global economy underwhelming but steady, so it's not been
Speaker 1: a headwind. It has hasn't been a tailwind. Tariffs could
Speaker 1: change that event, whether global growth becomes that a tailwind
Speaker 1: or a headwind in the short term versus the medium term,
Speaker 1: versus the long term. Those are all scenarios that have
Speaker 1: to be penciled in. But it's really important that people
Speaker 1: remember that the administration during the first Trump term had
Speaker 1: a product out out out out of list, a product
Speaker 1: exclusion list. Yes, it wasn't a car across a board tariffs.
Speaker 1: The carve outs matter and they'll continue to matter as
Speaker 1: we go to these bigger, more macro tariff policy implementations.
Speaker 1: What's on that list? And until we know what the
Speaker 1: product exclusion list looks like, we can't really handicap what's
Speaker 1: going to happen with the economy.
Speaker 6: I saw some pretty good articles over the weekend talking
Speaker 6: about Canada and obviously the amount of energy that's imported
Speaker 6: from Canada, you know, and again that would be one
Speaker 6: of your closestylists. It's certainly one of your closest trading partners.
Speaker 6: As you look at the fiscal kind of narrative, and
Speaker 6: this was one of the big stories and one of
Speaker 6: the big things that we wrote about going into the election.
Speaker 6: On the Harrison is going to be just under four
Speaker 6: trillion dollars under Donald Trump if everybody gets a tax cut,
Speaker 6: literally you get a tax cut, you get a tax cut,
Speaker 6: you get a tax cut. I can't remember where that
Speaker 6: came from. I think it's right, Maya McGinnis on yourself,
Speaker 6: but on a signing more serious note, that is a
Speaker 6: definicit of seven point seventy five trillion dollars. We're not
Speaker 6: going to get everything that he promised, are we Again
Speaker 6: you talk about the car btes. But it's also good
Speaker 6: about what he's going to have to walk back from
Speaker 6: a tax perspective.
Speaker 1: Now, what's said on the campaign trail and was actually
Speaker 1: done in DC. As someone who spent almost twenty years
Speaker 1: in DC and several of those years as a government economist,
Speaker 1: like trying to translate that policy into legislation into law,
Speaker 1: they're very different things. The sausage making is real. Democracy
Speaker 1: is hard, and putting it all together means that what
Speaker 1: you say and what actually is done. Is very different
Speaker 1: that being said.
Speaker 6: You know, when you.
Speaker 1: Look at the big picture, whoever, you know, the path
Speaker 1: forward is with a very stable US economy. But the
Speaker 1: big dragon, the big it's not even an elephant anymore.
Speaker 1: The big dragon in the room is the fiscal deficit.
Speaker 1: No one talked about that on the king page Tree.
Speaker 1: It was not issue. Nobody wants to talk about it
Speaker 1: because it's such a big dragon to slay. And so
Speaker 1: that's a problem not just in the United States. It's
Speaker 1: a problem throughout the world. And it is a problem
Speaker 1: that could reignite inflation by crowding out investment and crowding
Speaker 1: out the ease of capital allocation to other parts.
Speaker 3: Of the world, which leads to a blow.
Speaker 1: A capacity productivity, which lowers grows. So it is an issue.
Speaker 3: Paying off your debts doesn't win elections. Could we potentially
Speaker 3: though it win's economy. There is attention there. Could we
Speaker 3: maybe be on the downward trajectory of this idea then
Speaker 3: of US exceptionalism.
Speaker 1: I don't think we're there. I think there is plenty
Speaker 1: in the US that keeps the strong growth narrative alive,
Speaker 1: but we can't take it for granted. Productivity is lower
Speaker 1: now than it was going into the pandemic. That's worker productivity,
Speaker 1: and the way this country grows, the way it's always grown,
Speaker 1: is when there are more workers and those workers become
Speaker 1: more productive. And we know that there's plenty of technology
Speaker 1: out there that could make the US worker more productive.
Speaker 1: The question is will it get translated through the capital
Speaker 1: markets into the companies, especially the small and medium enterprises
Speaker 1: that need to see that productivity enhancement with their workforce.
Speaker 1: That's a big open question. And also the interest rates
Speaker 1: we have to pay to move that capital is a
Speaker 1: big open question, and fiscal debt could affect those rates.
Speaker 3: The real sausage making Washington and the financial markets. Neila
Speaker 3: Ridgison of ADP and also Bloomberg contributor, thank you so
Speaker 3: much for joining us this morning. Plenty of data and
Speaker 3: fedspee gundeck this week, including remarks from FED Chair j
Speaker 3: Powell on Thursday, just one week after the FMC cut
Speaker 3: rates by another twenty five basis points, former Obama economic
Speaker 3: advisor Jason Furman writing, this monetary policy is going from
Speaker 3: very contractortory to reasonably contractionary. This makes sense given that
Speaker 3: inflation risks are much lower than before, but we are
Speaker 3: still higher than recession risks. I expect another cut in December,
Speaker 3: but core PCE inflation is likely to rise, making a
Speaker 3: continued process of cuts at every meeting difficult. Jason Furman
Speaker 3: of the Harvard Kennedy School joins us. Now, Jason, thank
Speaker 3: you so much for your time. I know you're looking
Speaker 3: at potentially this cut in December, but give us some
Speaker 3: clues on what the heck twenty twenty five is going
Speaker 3: to look like when policy can be vastly different that
Speaker 3: this Fed needs to recalibrate for.
Speaker 7: Yeah, first, separate from anything related to policy changes coming
Speaker 7: from Donald Trump. We're probably going to end the year
Speaker 7: with a core PCEE inflation, right, is something like two
Speaker 7: point eight percent. That's usually your best bet for what
Speaker 7: inflation is going to be going forward. Then you add
Speaker 7: to that some fiscal expansion, some tariffs. We don't know
Speaker 7: the magnitudes of those, but they both push in the
Speaker 7: same direction. You're adding even more to inflationary pressures. I
Speaker 7: think that's going to make it hard for the FED
Speaker 7: to continue its process of rate cuts at anything like
Speaker 7: in every meeting pace next year, maybe every other meeting
Speaker 7: at best, with an exception, if the economy starts to weaken,
Speaker 7: they'll be there. But absent that we have strong growth,
Speaker 7: we have high inflation. Hard to keep.
Speaker 5: Cutting, hang on, Jason, So save for their cutting bias,
Speaker 5: should they even be cutting in December? Does that even
Speaker 5: make sense with the environment that you just laid out.
Speaker 7: Yeah, you know, interest rates will still be contractionary after
Speaker 7: one more cut. In some sense, the way the Fed
Speaker 7: operates is they always wait longer so until they're really sure,
Speaker 7: and then they start a continuous process of change. And
Speaker 7: that's where they are now. I think it would be
Speaker 7: too shocking to the system to pull that one back.
Speaker 7: Would almost also look a little bit political. But yeah,
Speaker 7: after December, they need to take a hard look at
Speaker 7: the data. And I don't think it's going to say,
Speaker 7: you know, keep cutting.
Speaker 5: If we can go to that environment where you have
Speaker 5: higher yields and a stronger dollar because of whatever the
Speaker 5: Trump policies are. But because they're not cutting every single meeting,
Speaker 5: that means you globally have tighter financial conditions and maybe
Speaker 5: force rate cuts elsewhere, which again feeds this feedback loop
Speaker 5: of stronger dollar, higher yields in the US. Jason, what
Speaker 5: is the likelihood of that type of global environment where
Speaker 5: you do get this sort of doom loop with rate differentials.
Speaker 7: Look, in some ways, a weaker currency is useful to
Speaker 7: a lot of countries around the world which are struggling
Speaker 7: with demand. The higher dollar and a CeNSE is shifting demand,
Speaker 7: you know, from the United States to those countries. So
Speaker 7: in some ways that's going to help with the global equalization.
Speaker 7: But Europe is in just a very different places than
Speaker 7: US right now. They have really weak growth. We have
Speaker 7: really strong growth. That means monetary policy should be different
Speaker 7: in those two economies.
Speaker 6: Jason, good morning. You wrote in the Journal in September
Speaker 6: time that Trump often listened to sensible advisors and walked
Speaker 6: away from some terrible economic policies as a president. What
Speaker 6: do you think he will walk away from memories and
Speaker 6: making this point that he's watching the batting markets, He's
Speaker 6: on Twitter and social he's watching everything. What's the worst
Speaker 6: policy that he will walk away from from the campaign trail?
Speaker 7: My guess is that, well, first of all, interfering heavily
Speaker 7: with the federal Reserve, I think he'll walk away from that.
Speaker 7: The market would punish that very severely. Second, I hope
Speaker 7: he walks away from across the board tariffs on every
Speaker 7: country in the world. The you know, on the one hand,
Speaker 7: he does have a deep seated belief in that. On
Speaker 7: the other that would just be really destructive to the
Speaker 7: US economy. And where I don't think market will put
Speaker 7: much pressure though, is on fiscal expansion. Do I think
Speaker 7: he could do you know, the eight trillion dollars he
Speaker 7: proposed on the campaign. Probably not. Do I think he
Speaker 7: could add five trillion dollars to the deficit without tanking
Speaker 7: the market? Absolutely? Yes, And so it's that fiscal expansion
Speaker 7: that I think is the most likely to make it
Speaker 7: through the screen.
Speaker 6: I'm curious what you define as tanking the market. My
Speaker 6: inbox is littered with five percent. It's like a number
Speaker 6: that keeps ringing up on a cash register at the
Speaker 6: moment on the bond yields. So so just told me
Speaker 6: through that.
Speaker 7: Yeah, look, we get to five percent on the ten
Speaker 7: year I think that will get attention probably from the
Speaker 7: President and if not from you know, four Republicans and
Speaker 7: the at least four Republicans in the Senate. That's what
Speaker 7: our fiscal conversation to date. You know, we had too
Speaker 7: much deficit increase over the last four years. Harris was
Speaker 7: proposing too little deficit increase. Both are a part of this,
Speaker 7: but part of why they have is that interest rates
Speaker 7: have allowed it and the bond markets have allowed it.
Speaker 7: You know, let's see if the bond market vigilantes come
Speaker 7: back when they start hearing about these multi trillion dollar
Speaker 7: deficit increases.
Speaker 3: Well, Larry Summers was saying that maybe it's going to
Speaker 3: be up to the bond market to educate lawmakers in Washington,
Speaker 3: d C. Do you think that's what forces Washington to
Speaker 3: coalesce around actually being a little bit more disciplined when
Speaker 3: it comes to the US trajectory the fiscal health.
Speaker 7: Yeah, I think that's pretty much the main thing that
Speaker 7: could get people's attention. I would have thought that the
Speaker 7: Social Security and Medicare trust funds being exhausted within a
Speaker 7: decade would get people's attention. I would have thought, you know,
Speaker 7: nearly two trillion dollar deficit at a time when the
Speaker 7: economy is really quite good would get people's attention. But
Speaker 7: those haven't. So yeah, I think we need the market
Speaker 7: at this point.
Speaker 3: So that's basically a Liz Trust moment. Is there were
Speaker 3: a timeline Jason that you think this could happen. I
Speaker 3: mean with a publican trifecta nearly once we get the
Speaker 3: results of the House, do you think it can happen
Speaker 3: in twenty twenty five.
Speaker 7: It can always happen, but it could always not happen.
Speaker 7: And I realized that's super unhelpful. But it's not like
Speaker 7: there's some mathematical link between here's the quantity of deficit
Speaker 7: and debt and here's some discontinuous change in interest rates.
Speaker 7: Markets are trying to assess not just where the deficit
Speaker 7: and debt are, but where they feel policymakers could go
Speaker 7: or would go with it with future actions. I think
Speaker 7: with Liz Trust it was the sense that she was
Speaker 7: just completely recklessly ignoring any sense of discipline around this
Speaker 7: that then interacted with a set of quirks around insurance companies,
Speaker 7: regulation and the like. Things like that are hard to
Speaker 7: spot in advance, but yeah, that's what I would be
Speaker 7: worried about if someone picked the unlikely event that someone
Speaker 7: picked me to be Donald Trump's Treasury secretary.
Speaker 3: I'd hate to say that too, but it's a very
Speaker 3: unlikely event. But former Obama economic advisor Jason Furman, thank
Speaker 3: you so, MU much for joining us in your time
Speaker 3: this Monday morning.
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