1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along 2 00:00:09,240 --> 00:00:13,080 Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jay Leye. We bring 3 00:00:13,119 --> 00:00:17,159 Speaker 1: you insight from the best and economics, finance, investment, and 4 00:00:17,280 --> 00:00:23,280 Speaker 1: international relations. Find Bloomberg Surveillance, an Apple podcast, SoundCloud, Bloomberg 5 00:00:23,360 --> 00:00:29,880 Speaker 1: dot Com and of course on the Bloomberg terminal. Very 6 00:00:29,960 --> 00:00:32,120 Speaker 1: very happy to catch up with Bill Winter's right now 7 00:00:32,120 --> 00:00:34,440 Speaker 1: a standard chat at Bill. We've got to start with 8 00:00:34,479 --> 00:00:37,080 Speaker 1: the topic, the story of the moment. Can you take 9 00:00:37,120 --> 00:00:39,280 Speaker 1: us inside the bank and tell us how difficult it 10 00:00:39,360 --> 00:00:42,640 Speaker 1: is right now to keep talent happy, to retain talent, 11 00:00:42,840 --> 00:00:45,960 Speaker 1: to keep stuff on your side. Yeah, it's it's it's 12 00:00:46,000 --> 00:00:48,000 Speaker 1: a big challenge. And we know that that the great 13 00:00:48,040 --> 00:00:50,919 Speaker 1: resignation is it's touching every industry, is touching every part 14 00:00:50,920 --> 00:00:54,320 Speaker 1: of the world. And we we are speculating endlessly on 15 00:00:54,320 --> 00:00:57,040 Speaker 1: on what's driving this. Is it lifestyle changes on the 16 00:00:57,080 --> 00:00:59,120 Speaker 1: back of the pandemic? Is that the fact that the 17 00:00:59,120 --> 00:01:02,240 Speaker 1: world is flushed with UH and that cash is looking 18 00:01:02,240 --> 00:01:05,440 Speaker 1: for ever greater talent thankfully for for for Santa Charter. 19 00:01:05,920 --> 00:01:09,600 Speaker 1: While we we are above the trough levels of attrition 20 00:01:09,600 --> 00:01:13,440 Speaker 1: in twenty where things really and people just so Downe 21 00:01:13,520 --> 00:01:16,039 Speaker 1: was kind of back to normal in terms of levels 22 00:01:16,040 --> 00:01:18,640 Speaker 1: of attrition. Of course, we needed to pay up, but 23 00:01:18,720 --> 00:01:21,200 Speaker 1: we've also found ways to save money in other areas, 24 00:01:21,800 --> 00:01:24,199 Speaker 1: so that net our expenses were more or less flat. 25 00:01:24,200 --> 00:01:25,920 Speaker 1: And we haven't reported our full year earnings yet, but 26 00:01:26,319 --> 00:01:27,880 Speaker 1: up to the third quarter were more or less flat 27 00:01:28,080 --> 00:01:30,480 Speaker 1: here on here and uh and I would hope that 28 00:01:30,520 --> 00:01:32,679 Speaker 1: we could continue with that trend. I find the savings 29 00:01:32,720 --> 00:01:35,560 Speaker 1: to to pay for ever more pricey talent. How sticky 30 00:01:35,800 --> 00:01:38,240 Speaker 1: are these forces right now? So? How sticky do you 31 00:01:38,240 --> 00:01:39,720 Speaker 1: think they are? I think there's a hope in a 32 00:01:39,800 --> 00:01:41,520 Speaker 1: C suite on Wall Street that this is a one 33 00:01:41,520 --> 00:01:43,800 Speaker 1: off story, payout walk away, we don't do this again 34 00:01:43,840 --> 00:01:46,040 Speaker 1: next year. How sticky do you think it is? I 35 00:01:46,080 --> 00:01:48,880 Speaker 1: think they're sticky as the profits are sticky. So it's 36 00:01:48,880 --> 00:01:51,600 Speaker 1: been an extraordinary year in in some aspects of the markets. 37 00:01:51,640 --> 00:01:53,480 Speaker 1: And you saw from from from the US banks that 38 00:01:53,520 --> 00:01:58,520 Speaker 1: have already reported the investment banking fees have have been fantastic. 39 00:01:59,040 --> 00:02:02,160 Speaker 1: Um is that going to carry on? The fixed income 40 00:02:02,200 --> 00:02:05,600 Speaker 1: businesses is also doing relatively well, but not as well 41 00:02:05,640 --> 00:02:08,000 Speaker 1: as it did during the peak of the pandemic. I 42 00:02:08,080 --> 00:02:10,120 Speaker 1: think if the profits are up, wages are gonna be up. 43 00:02:10,160 --> 00:02:12,440 Speaker 1: That's the way it works on Wall Street Bill. How 44 00:02:12,480 --> 00:02:16,760 Speaker 1: do you lift revenue? How do you lift the share price? 45 00:02:16,840 --> 00:02:20,000 Speaker 1: You've had a nice rebound here recently, you nowhere near 46 00:02:20,080 --> 00:02:23,280 Speaker 1: the pandemic level with an e M exposure that you have, 47 00:02:23,680 --> 00:02:26,960 Speaker 1: with the Hong Kong exposure that you have. What is 48 00:02:26,960 --> 00:02:31,480 Speaker 1: the strategy to jump start to growth? Yeah, that's the 49 00:02:31,520 --> 00:02:34,520 Speaker 1: big question. And like we're we are releasing our earnings 50 00:02:34,520 --> 00:02:35,919 Speaker 1: in about a month and as part of that we'll 51 00:02:35,960 --> 00:02:37,840 Speaker 1: be we'll be sharing our story with with how we 52 00:02:37,880 --> 00:02:40,720 Speaker 1: accomplish exactly that, which just a couple of bits of backdrop. 53 00:02:40,880 --> 00:02:43,320 Speaker 1: I mean, we know, on the one hand, emerging markets, 54 00:02:43,440 --> 00:02:46,720 Speaker 1: China in particular is out of favor with investors, uh 55 00:02:46,760 --> 00:02:49,680 Speaker 1: in particular with Eculit investors, so that that clearly has 56 00:02:49,720 --> 00:02:51,840 Speaker 1: an impact on our sharp price and others who have 57 00:02:51,880 --> 00:02:55,320 Speaker 1: a heavy Chinese component. On the other hand, we know 58 00:02:55,400 --> 00:02:58,000 Speaker 1: that these are the drivers of global economic growth as 59 00:02:58,040 --> 00:03:01,000 Speaker 1: we as we look at China with a with a 60 00:03:01,240 --> 00:03:03,440 Speaker 1: probably steight me about expectations with still quite a little 61 00:03:03,440 --> 00:03:06,440 Speaker 1: four percent GDP growth in the first quarter, he said, Wow, 62 00:03:06,440 --> 00:03:09,720 Speaker 1: that's that's that's pretty tough relative to the pent that 63 00:03:09,760 --> 00:03:12,360 Speaker 1: we've become accustomed to in China, but four percent is 64 00:03:12,360 --> 00:03:15,119 Speaker 1: still pretty good in the global context, and especially given 65 00:03:15,120 --> 00:03:17,320 Speaker 1: the challenges the China faced in the early part of 66 00:03:17,320 --> 00:03:19,800 Speaker 1: the year, and that will extend across Asia as we 67 00:03:19,880 --> 00:03:22,639 Speaker 1: work through the pandemic effects and the like. But overall, 68 00:03:22,840 --> 00:03:25,519 Speaker 1: the way that we lived profits is to continue to 69 00:03:25,560 --> 00:03:28,560 Speaker 1: grow as we happen. We've been growing consistently now for 70 00:03:28,600 --> 00:03:31,480 Speaker 1: several years. If we could exclude that, that that that 71 00:03:31,600 --> 00:03:33,760 Speaker 1: impact of low interest rates, which is which is a 72 00:03:33,800 --> 00:03:36,320 Speaker 1: real has a very high impact on the banking industry 73 00:03:36,320 --> 00:03:39,280 Speaker 1: and us in particularly Bill. Your website on Hong Kong, 74 00:03:39,320 --> 00:03:42,800 Speaker 1: where you are hugely predominant, says here for good great 75 00:03:43,280 --> 00:03:47,360 Speaker 1: there is no banker more qualified to tell us about 76 00:03:47,360 --> 00:03:51,000 Speaker 1: the potential move from Hong Kong to Singapore. Can you 77 00:03:51,080 --> 00:03:54,920 Speaker 1: predict western banks, the more larger commercial banks are going 78 00:03:54,960 --> 00:03:58,360 Speaker 1: to be forced to jettison Hong Kong for other geographies, 79 00:03:58,400 --> 00:04:02,280 Speaker 1: including your Singapore. I don't think so. I mean the 80 00:04:01,920 --> 00:04:04,000 Speaker 1: the the long story short as in Hong Kong has 81 00:04:04,040 --> 00:04:07,640 Speaker 1: been and is ever more so, the entry point to China. 82 00:04:07,840 --> 00:04:10,400 Speaker 1: It's it's the place that capital goes into and out 83 00:04:10,480 --> 00:04:12,560 Speaker 1: of China and as and it's very much a two 84 00:04:12,600 --> 00:04:15,720 Speaker 1: way street now. As we see, there's been massive flows 85 00:04:15,760 --> 00:04:18,000 Speaker 1: in particular into bond funds over the past couple of 86 00:04:18,040 --> 00:04:21,440 Speaker 1: years in China, in less so into equity funds that 87 00:04:21,440 --> 00:04:23,800 Speaker 1: will probably balance out over time, but there's also been 88 00:04:23,839 --> 00:04:26,360 Speaker 1: a very substantial flow of Chinese money out and that's 89 00:04:26,360 --> 00:04:28,920 Speaker 1: only going to accelerate with the advent of things like 90 00:04:29,000 --> 00:04:32,400 Speaker 1: the Wealth Connected Program, which is designed to allow Chinese 91 00:04:32,440 --> 00:04:35,839 Speaker 1: savers to to increase the proportion of their savings that 92 00:04:35,839 --> 00:04:38,040 Speaker 1: they can hold in currencies other than R and B, 93 00:04:38,520 --> 00:04:41,280 Speaker 1: and that's going through Hong Kong. So Hong Kong is 94 00:04:40,920 --> 00:04:44,120 Speaker 1: is absolutely solidified. If anything, it's I think it's in 95 00:04:44,160 --> 00:04:46,920 Speaker 1: the strongest position has ever been in terms of acting 96 00:04:46,920 --> 00:04:48,599 Speaker 1: as a gate where for capital in and out of China. 97 00:04:49,160 --> 00:04:52,160 Speaker 1: Given the flows of capital, that's a pretty good gate 98 00:04:52,200 --> 00:04:54,839 Speaker 1: way to have. The Singapore also has tremendous advantages we know, 99 00:04:54,920 --> 00:04:58,400 Speaker 1: and and Singapore is UH is trying to make itself 100 00:04:58,480 --> 00:05:01,600 Speaker 1: as attractive as possible for not just international talent but 101 00:05:01,640 --> 00:05:04,479 Speaker 1: also the regional talent and then Singaporean talent, and they're 102 00:05:04,480 --> 00:05:06,080 Speaker 1: doing a very good job of that. So yeah, a 103 00:05:06,120 --> 00:05:08,240 Speaker 1: bit of healthy competition. We figure is a is a 104 00:05:08,279 --> 00:05:10,599 Speaker 1: good thing. We as you, as you point out, have 105 00:05:10,680 --> 00:05:13,400 Speaker 1: a very substantial presence in both markets. We intend to 106 00:05:13,400 --> 00:05:16,200 Speaker 1: continue to have a substantial presence in both markets, uh 107 00:05:16,200 --> 00:05:17,760 Speaker 1: and and we'll do everything we can to make each 108 00:05:17,760 --> 00:05:20,919 Speaker 1: of them more attractive. Bill, Where's the biggest growth opportunity 109 00:05:21,000 --> 00:05:23,840 Speaker 1: for you, especially given the fact that certain companies are 110 00:05:23,839 --> 00:05:30,000 Speaker 1: thinking about diversifying supply chains globally. Yeah, the biggest source 111 00:05:30,040 --> 00:05:32,720 Speaker 1: of growth, certainly by dollars, but also pretty close to 112 00:05:32,720 --> 00:05:34,920 Speaker 1: the biggest source of growth by percent last year is China. 113 00:05:35,720 --> 00:05:37,359 Speaker 1: That will continue to be the case. Why is that? 114 00:05:37,400 --> 00:05:40,200 Speaker 1: I that that sounds counterintuitive. You know, China's under pressure, 115 00:05:40,279 --> 00:05:43,520 Speaker 1: and obviously if we if we listened to some of 116 00:05:43,560 --> 00:05:45,160 Speaker 1: the rhetoric, you think that the China was on the 117 00:05:45,200 --> 00:05:48,239 Speaker 1: way down. Actually, China is opening up. China is opening 118 00:05:48,320 --> 00:05:50,640 Speaker 1: up to the rest of the of the world, to 119 00:05:50,720 --> 00:05:52,920 Speaker 1: the rest of the region in a very substantial way. 120 00:05:52,960 --> 00:05:56,280 Speaker 1: And given the center charge role as a connector between 121 00:05:56,279 --> 00:05:58,320 Speaker 1: the markets in which we operate, obviously one of which 122 00:05:58,360 --> 00:06:01,080 Speaker 1: is China, that connect to roles is quite valuable for us. 123 00:06:01,120 --> 00:06:03,599 Speaker 1: So I would expect to continue to see China as 124 00:06:03,600 --> 00:06:08,000 Speaker 1: a as a real outsized contributor to our growth. Hong 125 00:06:08,040 --> 00:06:09,919 Speaker 1: Kong as well. The Hong Kong has coming off of 126 00:06:10,160 --> 00:06:12,520 Speaker 1: a couple of very tough years, right two thousand nineteen 127 00:06:12,520 --> 00:06:15,400 Speaker 1: civil disturbances, obviously the pandemic they hid all of us, 128 00:06:15,680 --> 00:06:18,200 Speaker 1: but then compounded by the National Security Law and some 129 00:06:18,240 --> 00:06:21,760 Speaker 1: of the the sanctions and other pressures that if at 130 00:06:21,760 --> 00:06:25,159 Speaker 1: Hong Kong, it was a tough two thousand into twenty one. 131 00:06:25,480 --> 00:06:26,960 Speaker 1: Hong Kong is now back to all of the islands 132 00:06:27,000 --> 00:06:30,120 Speaker 1: feet good strong drawing business for us, and we expect 133 00:06:30,160 --> 00:06:33,120 Speaker 1: that will kick in, obviously both leveraging the kind of 134 00:06:33,160 --> 00:06:35,280 Speaker 1: the China growth, but also in its own right, so 135 00:06:35,480 --> 00:06:36,960 Speaker 1: that part of the world is stil a real driver 136 00:06:37,040 --> 00:06:39,719 Speaker 1: for us. But you described yourself there as a connector, 137 00:06:39,720 --> 00:06:42,080 Speaker 1: and I want to touch on something, something delicate, and 138 00:06:42,080 --> 00:06:43,719 Speaker 1: I want to give you the best opportunity to talk 139 00:06:43,720 --> 00:06:47,359 Speaker 1: about it. I think increasingly it's getting more difficult looking 140 00:06:47,360 --> 00:06:49,240 Speaker 1: at where the West is going and looking where China 141 00:06:49,360 --> 00:06:51,520 Speaker 1: is going at the moment, the allegations of genocide coming 142 00:06:51,560 --> 00:06:55,120 Speaker 1: from the administration, the industrial scale human rights abuses there, 143 00:06:55,120 --> 00:06:58,200 Speaker 1: the allegations coming from the UK government, a place where 144 00:06:58,560 --> 00:07:01,039 Speaker 1: your bank is listed, Bill, do you ever feel like 145 00:07:01,040 --> 00:07:03,280 Speaker 1: you have to be a diplomat sometimes as well as 146 00:07:03,279 --> 00:07:06,120 Speaker 1: the CEO when you operate in China? And what do 147 00:07:06,120 --> 00:07:08,440 Speaker 1: you think people are missing here? You're a company with 148 00:07:08,520 --> 00:07:11,200 Speaker 1: a big presence in there. I'm sure you have to 149 00:07:11,200 --> 00:07:13,440 Speaker 1: be very careful about what you say to maintain a 150 00:07:13,520 --> 00:07:15,960 Speaker 1: presence there. At the same time you have these allegations 151 00:07:15,960 --> 00:07:19,120 Speaker 1: of genocide. Bill. That sounds like a really tough position 152 00:07:19,160 --> 00:07:22,880 Speaker 1: for a CEO to be in. How do you do it? Well, yeah, 153 00:07:22,920 --> 00:07:25,240 Speaker 1: I did. I did once and my student days want 154 00:07:25,240 --> 00:07:27,920 Speaker 1: to be a diplomat, and thankfully I I took a 155 00:07:27,920 --> 00:07:29,800 Speaker 1: different route, but mostly because I needed to pay off 156 00:07:29,840 --> 00:07:33,560 Speaker 1: my my university student loans. Thank you seem a good 157 00:07:33,600 --> 00:07:36,040 Speaker 1: way to do that. But the I don't think it 158 00:07:36,040 --> 00:07:37,400 Speaker 1: would be a great diplomat, so I won't try to 159 00:07:37,440 --> 00:07:39,400 Speaker 1: be a diplomat. What I will say is that that 160 00:07:39,480 --> 00:07:42,679 Speaker 1: the role that we play is bringing couple together, bringing 161 00:07:42,680 --> 00:07:45,560 Speaker 1: people together, bringing ideas together from all parts of the world. 162 00:07:45,600 --> 00:07:49,360 Speaker 1: And we operate in over sixty countries. Through the course 163 00:07:49,400 --> 00:07:52,640 Speaker 1: of history. Some of those countries have been in conflict 164 00:07:52,680 --> 00:07:55,200 Speaker 1: with others of those countries, some of them been in 165 00:07:55,240 --> 00:07:58,560 Speaker 1: conflict with the UK. I got I got one final question. 166 00:07:58,560 --> 00:08:01,440 Speaker 1: You're gonna run out of time here, Bill, you guys 167 00:08:01,680 --> 00:08:08,040 Speaker 1: invented diversity standard Charter Bank for decades his live diversity. 168 00:08:08,120 --> 00:08:12,040 Speaker 1: What is your strategic diversity mandate that you can teach 169 00:08:12,120 --> 00:08:16,040 Speaker 1: other executives like, I don't know what we can teach anybody. 170 00:08:16,080 --> 00:08:18,200 Speaker 1: I know what we've learned ourselves, which is that when 171 00:08:18,200 --> 00:08:20,560 Speaker 1: you have a broader range of opinions around the table, 172 00:08:20,800 --> 00:08:23,840 Speaker 1: you serve clients better, and you attract better people, and 173 00:08:23,880 --> 00:08:26,520 Speaker 1: you make better decisions. And yeah, thankfully we are in 174 00:08:26,600 --> 00:08:28,320 Speaker 1: datas as you point out with you know, because we 175 00:08:28,360 --> 00:08:31,160 Speaker 1: operate in so many different countries, We've got a workforce 176 00:08:31,160 --> 00:08:33,000 Speaker 1: that comes from those countries, and we have clients that 177 00:08:33,040 --> 00:08:36,600 Speaker 1: have very different buying patterns and in different cycles. Uh. 178 00:08:36,880 --> 00:08:38,640 Speaker 1: The key is to try to harness that and bring 179 00:08:38,640 --> 00:08:40,400 Speaker 1: as much of that to the table as you can 180 00:08:40,480 --> 00:08:42,000 Speaker 1: at any point in time. I think we do a 181 00:08:42,000 --> 00:08:44,120 Speaker 1: pretty good job of that. We know we can do better, 182 00:08:44,240 --> 00:08:46,200 Speaker 1: So I'm not sure we have anything to teach anybody, 183 00:08:46,320 --> 00:08:49,000 Speaker 1: but we're happy to share our lessons built five more 184 00:08:49,040 --> 00:08:51,240 Speaker 1: years is the answer we often get from an old colleague. 185 00:08:51,240 --> 00:08:54,120 Speaker 1: If yours Jamie Diamond when we talk about succession and 186 00:08:54,240 --> 00:08:56,000 Speaker 1: later in the bank can bail. I believe you've been 187 00:08:56,040 --> 00:08:58,360 Speaker 1: there almost seven it's it's seven years and jo and Bill? 188 00:08:58,440 --> 00:09:00,800 Speaker 1: Is that right? It's coming on? Set? Are you thinking 189 00:09:00,800 --> 00:09:02,920 Speaker 1: a little bit about succession now? Are you happy with 190 00:09:02,960 --> 00:09:04,520 Speaker 1: everything you've done or do you think it's more to 191 00:09:04,520 --> 00:09:07,400 Speaker 1: be done? Jonathan, the day you called me a forever 192 00:09:07,440 --> 00:09:09,600 Speaker 1: CEO is probably the day I should shoot the head 193 00:09:09,600 --> 00:09:11,280 Speaker 1: for the door. But no, the guy we've we've got. 194 00:09:11,400 --> 00:09:14,040 Speaker 1: We've got a task to complete here. It is not complete. 195 00:09:14,280 --> 00:09:16,600 Speaker 1: That's reflected to our share price, but also in our 196 00:09:16,600 --> 00:09:18,600 Speaker 1: own sense that that we have more that we can deliver. 197 00:09:19,040 --> 00:09:20,680 Speaker 1: I want to get this thing done and uh and 198 00:09:20,679 --> 00:09:23,960 Speaker 1: then hopefully whoever takes over from me will be will 199 00:09:24,000 --> 00:09:26,280 Speaker 1: be will be taking something that's really very good shape. 200 00:09:26,640 --> 00:09:28,800 Speaker 1: Any thoughts about going back to JP Morgan, It's that's 201 00:09:28,800 --> 00:09:31,800 Speaker 1: something you'd ever roll out Bill in the future. I 202 00:09:31,800 --> 00:09:33,400 Speaker 1: think the likelihood of that is about as low as 203 00:09:33,440 --> 00:09:35,400 Speaker 1: you could possibly get. As great as that from this, 204 00:09:35,520 --> 00:09:39,120 Speaker 1: I don't think the bell got to catch up Set. 205 00:09:39,240 --> 00:09:40,840 Speaker 1: As always, it's good to hear from you. A timely 206 00:09:40,880 --> 00:09:50,160 Speaker 1: conversation with Bill Winters have standard shout at David mel 207 00:09:50,240 --> 00:09:52,880 Speaker 1: Pass as a president of the World Bank, and we're 208 00:09:52,880 --> 00:09:56,520 Speaker 1: thrilled at Mr mel Pass could join us this morning. David, 209 00:09:56,559 --> 00:09:59,920 Speaker 1: I look at the World Bank website and you moder 210 00:10:00,120 --> 00:10:04,760 Speaker 1: lyn growth to slow. How fragile is it right now? 211 00:10:05,040 --> 00:10:09,679 Speaker 1: You and I have studied stan Fisher and other crises 212 00:10:09,720 --> 00:10:16,720 Speaker 1: as well. How close to instability and emerging markets are we? Hi, Tom, 213 00:10:16,760 --> 00:10:19,840 Speaker 1: good morning. I think that's a big challenge because as 214 00:10:19,960 --> 00:10:22,920 Speaker 1: as you slow down, the population grows are still fast 215 00:10:22,960 --> 00:10:26,280 Speaker 1: in some countries, and the if you're not getting ahead, 216 00:10:26,320 --> 00:10:28,960 Speaker 1: then the people look at it and say, what's in 217 00:10:29,000 --> 00:10:31,720 Speaker 1: it for me? And that brings that brings the physical 218 00:10:31,760 --> 00:10:34,840 Speaker 1: insecurity that we're seeing in some parts of the world. 219 00:10:35,080 --> 00:10:38,280 Speaker 1: The solution is to grow more and to get higher 220 00:10:38,559 --> 00:10:45,000 Speaker 1: per capita incomes as well as of course health programs, vaccinations, education. 221 00:10:45,640 --> 00:10:49,600 Speaker 1: All that goes with good development practices is the institutional 222 00:10:49,640 --> 00:10:53,280 Speaker 1: integrity there for you and across the street the International 223 00:10:53,360 --> 00:10:58,040 Speaker 1: Monetary Fund. Are these nations listening to you as they 224 00:10:58,080 --> 00:11:02,959 Speaker 1: struggle with some of the financial challenges they have? So 225 00:11:03,440 --> 00:11:06,240 Speaker 1: many countries do listen. But I think a big part 226 00:11:06,280 --> 00:11:10,240 Speaker 1: of the challenges the global environment. It's you know, very unequal. 227 00:11:10,320 --> 00:11:13,640 Speaker 1: People at the lower end of the income scales aren't 228 00:11:13,840 --> 00:11:17,320 Speaker 1: simply aren't doing well because the wealth is concentrating, and 229 00:11:17,360 --> 00:11:19,960 Speaker 1: so that's a big problem. You can you can put 230 00:11:20,000 --> 00:11:24,360 Speaker 1: in good, better policies in your country and still not 231 00:11:24,480 --> 00:11:28,120 Speaker 1: see much in the way of results. That's a big problem, David. 232 00:11:28,200 --> 00:11:30,960 Speaker 1: Given this backdrop where the recovery has been much slower 233 00:11:30,960 --> 00:11:33,679 Speaker 1: and more painful in the developing world, how concerning is 234 00:11:33,720 --> 00:11:36,600 Speaker 1: it that a wall of debt maturities is coming up 235 00:11:36,640 --> 00:11:40,560 Speaker 1: for a lot of these nations. This is a challenge. 236 00:11:40,679 --> 00:11:43,160 Speaker 1: You know, it was discussed in the last two years 237 00:11:43,200 --> 00:11:47,120 Speaker 1: and by the G twenty, but frankly the progress installed 238 00:11:47,160 --> 00:11:51,440 Speaker 1: on that. So as we look at nine two UH, 239 00:11:51,600 --> 00:11:55,960 Speaker 1: the the UH, the payment from the IDA countries that's 240 00:11:56,000 --> 00:11:59,480 Speaker 1: the low income countries are going to be thirty five 241 00:11:59,520 --> 00:12:04,120 Speaker 1: billion dollars. That's the payments on principle and interest, which 242 00:12:04,200 --> 00:12:07,720 Speaker 1: is way beyond the resources of the countries. That creates 243 00:12:07,760 --> 00:12:11,080 Speaker 1: added challenge because they need the money for other things 244 00:12:11,280 --> 00:12:14,640 Speaker 1: like fighting the pandemic. David, How concerning is it that 245 00:12:14,679 --> 00:12:18,280 Speaker 1: amidst this backdrop you have seen persistent dollar strength, you 246 00:12:18,360 --> 00:12:22,040 Speaker 1: have seen persistent inflation and base goods I mean basically 247 00:12:22,080 --> 00:12:25,360 Speaker 1: painted scenario for us how this transpires of the rest 248 00:12:25,400 --> 00:12:30,839 Speaker 1: of We know worldwide that inflation really subtracts from people 249 00:12:30,920 --> 00:12:33,040 Speaker 1: that are on fixed income or on the bottom end 250 00:12:33,040 --> 00:12:36,600 Speaker 1: of the income scale. And that's particularly true of developing countries. 251 00:12:36,920 --> 00:12:39,960 Speaker 1: So as the as prices go up, they just don't 252 00:12:39,960 --> 00:12:43,320 Speaker 1: have enough money for food, for the basics, for for 253 00:12:43,480 --> 00:12:46,800 Speaker 1: education and for health. You know, in in the developing world, 254 00:12:47,040 --> 00:12:51,320 Speaker 1: the education because of the school closures, education has really 255 00:12:51,400 --> 00:12:54,840 Speaker 1: slid backwards. That means the ability to read and and 256 00:12:55,080 --> 00:12:58,720 Speaker 1: UH and write and so those are concerning UH. And 257 00:12:58,800 --> 00:13:01,720 Speaker 1: that gets us to the to the end endpoint that 258 00:13:01,800 --> 00:13:06,040 Speaker 1: the if interest rate hikes start, that's going to be 259 00:13:06,160 --> 00:13:09,680 Speaker 1: really a double whammy. That inflation and the interest rates 260 00:13:10,320 --> 00:13:12,360 Speaker 1: are a challenge. I think it would be better if 261 00:13:12,360 --> 00:13:15,720 Speaker 1: the central banks looked at the capital allocation around the 262 00:13:15,720 --> 00:13:18,839 Speaker 1: world and looks for better ways to allocate so that 263 00:13:18,880 --> 00:13:21,440 Speaker 1: not all of the money goes to the biggest corporations. 264 00:13:21,520 --> 00:13:26,400 Speaker 1: Your previous story was just about Microsoft cash. David, you 265 00:13:26,480 --> 00:13:29,760 Speaker 1: are is qualified as any World Bank president in history 266 00:13:29,840 --> 00:13:34,800 Speaker 1: to look at, study and advise on dollar dynamics. Does 267 00:13:34,800 --> 00:13:37,880 Speaker 1: the World Bank in the poor countries of the world. 268 00:13:37,960 --> 00:13:41,560 Speaker 1: Just take the content of Africa's one example. How desperate 269 00:13:41,600 --> 00:13:47,400 Speaker 1: are they for a week dollar? Uh? They're The strong 270 00:13:47,480 --> 00:13:51,280 Speaker 1: dollar really puts pressure on them because their currencies weaken 271 00:13:51,360 --> 00:13:53,760 Speaker 1: and then capital doesn't want to flow to them. Plus 272 00:13:53,840 --> 00:13:57,520 Speaker 1: prices go up more than they are in the United States. UH, 273 00:13:57,640 --> 00:14:01,679 Speaker 1: So I wouldn't care drives it as desperate for a 274 00:14:01,720 --> 00:14:06,600 Speaker 1: week dollar. What they What benefits everyone is when currencies 275 00:14:06,640 --> 00:14:09,560 Speaker 1: are stable, and that starts with the dollar. Uh and 276 00:14:09,960 --> 00:14:14,079 Speaker 1: long term stability, I think is is the strongest support 277 00:14:14,440 --> 00:14:18,839 Speaker 1: for development. So the countries want that. But right now, 278 00:14:18,920 --> 00:14:23,360 Speaker 1: as we go into a probable interest rate hiking phase, uh, 279 00:14:23,400 --> 00:14:26,480 Speaker 1: that adds uh. That adds to the dollar and makes 280 00:14:26,520 --> 00:14:30,280 Speaker 1: the challenges bigger for the developing countries. As I say, 281 00:14:30,320 --> 00:14:32,840 Speaker 1: I think the world needs to look at the capital 282 00:14:32,880 --> 00:14:36,920 Speaker 1: allocation and ask why is so much of the money 283 00:14:37,440 --> 00:14:40,240 Speaker 1: going to the rich end of the scale. How do 284 00:14:40,360 --> 00:14:43,200 Speaker 1: we amend that? I mean, it's one thing to comment 285 00:14:43,320 --> 00:14:46,320 Speaker 1: on it and to identify it, but how are we 286 00:14:46,400 --> 00:14:50,840 Speaker 1: proactive for a new capital allocation? Away from buying more 287 00:14:50,920 --> 00:14:55,480 Speaker 1: apple shares? You have to think about small businesses. That 288 00:14:55,520 --> 00:14:59,760 Speaker 1: means floating rate uh money, That means uh money at 289 00:14:59,760 --> 00:15:02,600 Speaker 1: the short into the curve. But we have this oddity 290 00:15:02,720 --> 00:15:08,600 Speaker 1: where the government is supporting existing businesses, existing people and 291 00:15:08,840 --> 00:15:12,560 Speaker 1: demand and not so much the supply side. So that's 292 00:15:12,800 --> 00:15:15,920 Speaker 1: problem one. And then on the central bank side, Uh, 293 00:15:15,960 --> 00:15:19,640 Speaker 1: they're they're allocating that. You know, they have four tools, 294 00:15:19,680 --> 00:15:24,080 Speaker 1: they're only using talking about two tools that interst rate hikes. 295 00:15:24,120 --> 00:15:26,520 Speaker 1: That hurts people at the short end of the curve 296 00:15:26,600 --> 00:15:30,160 Speaker 1: because short interest rates go up first. Uh, and even 297 00:15:30,200 --> 00:15:33,440 Speaker 1: more so in developing countries. Uh. And they're also talking 298 00:15:33,440 --> 00:15:38,480 Speaker 1: about shrinking or tapering the size of the balance sheet. 299 00:15:38,880 --> 00:15:41,920 Speaker 1: There are two more tools. One is the duration of 300 00:15:42,000 --> 00:15:45,840 Speaker 1: the central bank holdings and one is regulatory policy. I 301 00:15:46,280 --> 00:15:49,240 Speaker 1: call it post monitorism. We're not really in a money 302 00:15:49,280 --> 00:15:53,680 Speaker 1: supply world. We're in a very heavily regulatory world right now. 303 00:15:53,720 --> 00:15:58,520 Speaker 1: It penalizes small businesses. So having an explicit focus by 304 00:15:58,560 --> 00:16:01,920 Speaker 1: both fiscal and monetary policy that you want to support 305 00:16:01,960 --> 00:16:06,000 Speaker 1: smaller businesses so they can help the supply chain. I 306 00:16:06,040 --> 00:16:10,520 Speaker 1: think that's critical and could help worldwide. David, given where 307 00:16:10,520 --> 00:16:13,120 Speaker 1: we are now, given that these changes will take time 308 00:16:13,160 --> 00:16:16,320 Speaker 1: to be implemented, do you think that the developing world 309 00:16:16,360 --> 00:16:19,040 Speaker 1: complex can deal with four rate hikes from the federals 310 00:16:19,080 --> 00:16:22,640 Speaker 1: are of this year. Uh. It's it's going to be 311 00:16:22,800 --> 00:16:25,920 Speaker 1: really challenging. We already see it in country after country 312 00:16:26,040 --> 00:16:29,080 Speaker 1: from the political side. You see it daily in the news. 313 00:16:29,640 --> 00:16:32,280 Speaker 1: I think it would help if the Central Bank said 314 00:16:32,440 --> 00:16:36,480 Speaker 1: what the strategy is. Uh. You know, I really think 315 00:16:36,520 --> 00:16:39,280 Speaker 1: they should be looking at the duration of their assets 316 00:16:39,360 --> 00:16:42,720 Speaker 1: and saying they'll stop buying so many assets at the 317 00:16:42,840 --> 00:16:46,640 Speaker 1: long end uh and have more of their mix be 318 00:16:46,920 --> 00:16:51,600 Speaker 1: capital favorable, small business favorable. That helps developing countries. Mr 319 00:16:51,640 --> 00:16:54,040 Speaker 1: melt Pass, thank you so much for joining us. David Melpiss, 320 00:16:54,240 --> 00:17:03,600 Speaker 1: World Bank President, Bank of America adjusting to what they 321 00:17:03,680 --> 00:17:07,040 Speaker 1: see out there from sea to shining Sea. Sevita Subermanian 322 00:17:07,119 --> 00:17:10,840 Speaker 1: joins US now US Equity and Quantitative Strategy at Bank 323 00:17:10,920 --> 00:17:13,520 Speaker 1: of America Security. Sevita, I want to go to your 324 00:17:13,600 --> 00:17:18,840 Speaker 1: latest research note where you dovetail in nicely the Subramanian 325 00:17:19,000 --> 00:17:22,119 Speaker 1: misery index. When Brian moynihan wakes up every morning, he 326 00:17:22,119 --> 00:17:26,200 Speaker 1: looks at the Subermannian misery indicator, and the reality is 327 00:17:26,320 --> 00:17:30,320 Speaker 1: you look at consumer discretionary and you look at industrial 328 00:17:31,040 --> 00:17:35,520 Speaker 1: and those are two big important sectors linked directly in 329 00:17:35,960 --> 00:17:40,159 Speaker 1: to rising labor costs. Absolutely these are two of the 330 00:17:40,200 --> 00:17:45,720 Speaker 1: most labor intensive sectors of the SMP five. But oddly enough, 331 00:17:45,840 --> 00:17:49,840 Speaker 1: these are the two sectors where analysts are forecasting all 332 00:17:49,960 --> 00:17:54,480 Speaker 1: time peaks in margins by the third quarter of this year, 333 00:17:55,240 --> 00:17:58,760 Speaker 1: which just doesn't really jive with what we're seeing in 334 00:17:58,840 --> 00:18:01,320 Speaker 1: terms of tightness in the labor market in terms of 335 00:18:01,359 --> 00:18:04,960 Speaker 1: as you pointed out, compensation expenses in almost every industry 336 00:18:05,000 --> 00:18:08,520 Speaker 1: starting to see really strong upward pressure. UM. You know, 337 00:18:08,560 --> 00:18:11,119 Speaker 1: I I think that something's got to give this year, 338 00:18:11,200 --> 00:18:13,600 Speaker 1: and it might be margins. That's where we think that 339 00:18:13,680 --> 00:18:17,800 Speaker 1: analysts are too uh too optimistic, if you will, UM. 340 00:18:17,840 --> 00:18:21,240 Speaker 1: So if you think about the corporate Misery indicator, UM, 341 00:18:21,240 --> 00:18:24,119 Speaker 1: this is an indicator that we used to track whether 342 00:18:24,200 --> 00:18:26,760 Speaker 1: margins are starting to see a squeeze and and whether 343 00:18:26,760 --> 00:18:30,240 Speaker 1: earnings are actually gonna fault. And so far, so good. 344 00:18:30,280 --> 00:18:33,439 Speaker 1: So so far, we've seen prices generally keep up with 345 00:18:33,560 --> 00:18:36,919 Speaker 1: costs um although this quarter we're starting to see that 346 00:18:37,000 --> 00:18:40,120 Speaker 1: fray a little bit. And and we've seen unit volumes 347 00:18:40,160 --> 00:18:44,359 Speaker 1: sales increase. So those three factors are the ones to watch. 348 00:18:44,359 --> 00:18:47,360 Speaker 1: And when it starts to get problematic is when prices 349 00:18:47,400 --> 00:18:51,919 Speaker 1: increased too much, demand starts to deteriorate and costs still 350 00:18:52,640 --> 00:18:55,560 Speaker 1: creep higher. And that's what we're worried about as we 351 00:18:55,600 --> 00:18:59,119 Speaker 1: move into uh, you know, subsequent quarters this year. I 352 00:18:59,119 --> 00:19:01,359 Speaker 1: think the good news says that a lot of the 353 00:19:01,400 --> 00:19:04,760 Speaker 1: sectors in the SMP five hundred have become very labor light, 354 00:19:05,080 --> 00:19:08,320 Speaker 1: like for example, you know, technology, even industrials. A lot 355 00:19:08,359 --> 00:19:11,240 Speaker 1: of these sectors have automated a lot of that labor away. 356 00:19:11,280 --> 00:19:13,119 Speaker 1: But there are still pockets of the market that we 357 00:19:13,160 --> 00:19:16,600 Speaker 1: think look dangerous from that perspective. AT did some wonderful 358 00:19:16,640 --> 00:19:18,920 Speaker 1: work over the last twelve months on the labor intensitive 359 00:19:18,960 --> 00:19:21,600 Speaker 1: the overall SMP five hundred, the change of it over 360 00:19:21,640 --> 00:19:23,480 Speaker 1: the last not just few years, but over the last 361 00:19:23,480 --> 00:19:26,959 Speaker 1: decade as well. I'm just wondering, then, the concentration of 362 00:19:27,040 --> 00:19:29,480 Speaker 1: that you've worked through that work with me at the 363 00:19:29,520 --> 00:19:32,520 Speaker 1: index level, what's the biggest challenge of the index level. 364 00:19:32,560 --> 00:19:35,160 Speaker 1: You're at forty six hundred year end on the SMP. 365 00:19:35,320 --> 00:19:39,879 Speaker 1: What gets us there? We are we might get there today? Um, 366 00:19:39,680 --> 00:19:42,800 Speaker 1: I think that, you know, I mean, here's the thing. 367 00:19:42,880 --> 00:19:45,840 Speaker 1: I think that it's hard to be long the entire 368 00:19:45,920 --> 00:19:48,760 Speaker 1: market when you've got all of the positive forces that 369 00:19:48,840 --> 00:19:52,399 Speaker 1: have been playing through be an easy monetary policy, easy 370 00:19:52,440 --> 00:19:57,160 Speaker 1: fiscal policy, super low interest rates, UM, you know, relatively 371 00:19:57,280 --> 00:20:02,919 Speaker 1: healthy balance sheets of summers corporates, you've got um, you know, 372 00:20:03,160 --> 00:20:07,000 Speaker 1: strong earnings acceleration off of a you know, global pandemic low. 373 00:20:07,400 --> 00:20:11,720 Speaker 1: All of those factors are basically slowing down. So I'm 374 00:20:11,720 --> 00:20:14,160 Speaker 1: not barish on the SMP five hundred, but I think 375 00:20:14,160 --> 00:20:16,000 Speaker 1: this is gonna be a year where we're gonna hit 376 00:20:16,040 --> 00:20:19,840 Speaker 1: that a bunch of times, and you're gonna want to 377 00:20:19,880 --> 00:20:23,200 Speaker 1: pick your spots. The way to pick where to invest 378 00:20:23,280 --> 00:20:27,320 Speaker 1: this year is very very simple. Look for free cash flow. 379 00:20:27,440 --> 00:20:31,159 Speaker 1: This is the most important factor in an environment of 380 00:20:31,560 --> 00:20:34,480 Speaker 1: tightening monetary policy. In our Qualt work, and you know, 381 00:20:34,520 --> 00:20:37,000 Speaker 1: I'm a math person, So in our Qualt work, we've 382 00:20:37,040 --> 00:20:39,720 Speaker 1: back tested all these different strategies of investing and we 383 00:20:39,840 --> 00:20:43,240 Speaker 1: found that free cash flow to enterprise value is the 384 00:20:43,560 --> 00:20:47,160 Speaker 1: single best way to pick a stock during periods during 385 00:20:47,200 --> 00:20:49,639 Speaker 1: the first year of the FED tightening cycle. So create 386 00:20:49,680 --> 00:20:53,359 Speaker 1: a Bloomberg screen, sort all your companies by free cash 387 00:20:53,359 --> 00:20:55,240 Speaker 1: flow to enterprise value, and that would be the way 388 00:20:55,280 --> 00:20:58,080 Speaker 1: I would look for opportunities. And I think, what's interesting, 389 00:20:58,280 --> 00:21:00,439 Speaker 1: if you give me one more minute on this is 390 00:21:00,480 --> 00:21:03,240 Speaker 1: that when we saw that tech route the other week, 391 00:21:03,400 --> 00:21:05,560 Speaker 1: it was just maybe, yeah, I can't keep track of time. 392 00:21:05,560 --> 00:21:08,359 Speaker 1: Maybe a week ago we saw massive down in the 393 00:21:08,640 --> 00:21:13,320 Speaker 1: in the NAS deck and UH, and then miraculously mid day, 394 00:21:13,840 --> 00:21:18,000 Speaker 1: the free cash flow opportunities within that tech benchmark grew 395 00:21:18,040 --> 00:21:21,359 Speaker 1: attractive enough for industris to start to leg back into tech. 396 00:21:21,680 --> 00:21:23,560 Speaker 1: So I think that's the type of market we're going 397 00:21:23,600 --> 00:21:26,200 Speaker 1: to be in where you have to really watch these factors, 398 00:21:26,600 --> 00:21:29,320 Speaker 1: look for free cash flow generation, and just be nimble. 399 00:21:30,040 --> 00:21:33,600 Speaker 1: Volatility is great for for markets, for active managers, and 400 00:21:33,600 --> 00:21:35,200 Speaker 1: I think that's where we're going to be this year, 401 00:21:35,320 --> 00:21:37,400 Speaker 1: which is a reason why I was a little bit 402 00:21:37,400 --> 00:21:41,200 Speaker 1: confused about your call that small cap stocks may outperform 403 00:21:41,359 --> 00:21:44,560 Speaker 1: large cap stocks considering the fact that a number of 404 00:21:44,600 --> 00:21:47,480 Speaker 1: different surveys at least have shown people are worried about 405 00:21:47,480 --> 00:21:50,239 Speaker 1: their margins more than large companies. They're worried about them 406 00:21:50,320 --> 00:21:53,720 Speaker 1: handling supply chain disruptions and labor shortages. Can you explain 407 00:21:54,000 --> 00:21:58,200 Speaker 1: why you're more bullish on these smaller consue? Absolutely, And 408 00:21:58,240 --> 00:22:02,080 Speaker 1: I mean the bottom line is that from evaluation perspective, 409 00:22:02,440 --> 00:22:05,920 Speaker 1: small caps are trading at a twenty five percent discount 410 00:22:05,960 --> 00:22:09,679 Speaker 1: to large caps historically on average they trade at a 411 00:22:09,760 --> 00:22:13,080 Speaker 1: two percent premium. You're right, Lisa, there's a lot of 412 00:22:13,080 --> 00:22:15,400 Speaker 1: stuff going on in the small cap sector that could 413 00:22:15,440 --> 00:22:18,760 Speaker 1: be negative for margins. But my view is that's priced in. 414 00:22:19,000 --> 00:22:21,920 Speaker 1: Where it's not priced in is in consumer companies and 415 00:22:22,040 --> 00:22:25,879 Speaker 1: industrial companies, where these you know, larger companies are trading 416 00:22:26,119 --> 00:22:29,120 Speaker 1: at close to all time highs in terms of evaluations. 417 00:22:29,200 --> 00:22:33,280 Speaker 1: So I think you're right that small caps aren't generally, um, 418 00:22:33,320 --> 00:22:35,919 Speaker 1: you know that great in a labor inflation environment, although 419 00:22:36,080 --> 00:22:38,040 Speaker 1: the work from our small cap team and Jill Hall 420 00:22:38,480 --> 00:22:41,960 Speaker 1: has actually indicated that small caps generally outperformed large caps 421 00:22:42,040 --> 00:22:45,359 Speaker 1: during periods of capex acceleration, uh, you know, pick up 422 00:22:45,359 --> 00:22:48,440 Speaker 1: an inflation, even the early stages of a FED hiking cycle. 423 00:22:48,800 --> 00:22:50,360 Speaker 1: So I think a lot of these things are coming 424 00:22:50,359 --> 00:22:52,520 Speaker 1: into play. And then on top of that, the grady 425 00:22:52,640 --> 00:22:56,200 Speaker 1: is small caps are super cheap right now. We haven't 426 00:22:56,240 --> 00:22:59,720 Speaker 1: seen this type of evaluation discrepancy since you know too 427 00:23:00,119 --> 00:23:02,400 Speaker 1: wasn't And if you had bought the Russell in two 428 00:23:02,400 --> 00:23:04,440 Speaker 1: thousand and short of the SMP, you would have made 429 00:23:04,440 --> 00:23:07,520 Speaker 1: a lot of alpha over the next ten years. Interesting 430 00:23:07,560 --> 00:23:09,600 Speaker 1: cal Sevita are best to you and the team as 431 00:23:09,600 --> 00:23:18,520 Speaker 1: always wonderful Cevita Superman him there of Bank America. Let's 432 00:23:18,520 --> 00:23:20,800 Speaker 1: get straight to this bond market debate. This conversation with 433 00:23:20,920 --> 00:23:24,480 Speaker 1: Kathy Jones, the chief fixed income strategist, a charge swab. Kathy, 434 00:23:24,760 --> 00:23:26,800 Speaker 1: a wonderful friend of this program. Thank you for being 435 00:23:26,800 --> 00:23:29,560 Speaker 1: with us this morning. I'm trying to work out, after 436 00:23:29,640 --> 00:23:32,560 Speaker 1: how much work we've already done year today as interest 437 00:23:32,680 --> 00:23:34,919 Speaker 1: rate hikes into this market, whether this is the beginning 438 00:23:34,960 --> 00:23:36,760 Speaker 1: of the end or the end of the beginning of 439 00:23:36,840 --> 00:23:40,760 Speaker 1: the conversation about higher interest rates. Yeah, you know, I 440 00:23:40,800 --> 00:23:45,439 Speaker 1: think we are discounting a lot. We're looking more like 441 00:23:45,520 --> 00:23:48,200 Speaker 1: three rate hikes, not four rate hikes. But I think 442 00:23:48,240 --> 00:23:51,200 Speaker 1: the focus really ought to be on the balance sheet. 443 00:23:51,480 --> 00:23:53,720 Speaker 1: You know. That was the surprise that came out of 444 00:23:53,720 --> 00:23:56,399 Speaker 1: the minute to the o MC meeting, that not only 445 00:23:56,440 --> 00:23:59,479 Speaker 1: were they poised to raise rates, but there are poised 446 00:23:59,480 --> 00:24:02,560 Speaker 1: to use the balance sheet as well. And I don't 447 00:24:02,560 --> 00:24:05,639 Speaker 1: think the markets really quite figured out how exactly the 448 00:24:05,640 --> 00:24:08,920 Speaker 1: bed's gonna do that. Um, they haven't really revealed much 449 00:24:08,960 --> 00:24:11,920 Speaker 1: to us, but that to me tells me how much 450 00:24:11,960 --> 00:24:14,679 Speaker 1: they're going to try to maneuver the long end of 451 00:24:14,680 --> 00:24:17,600 Speaker 1: the curve while raising rates at the short end. So 452 00:24:17,640 --> 00:24:21,440 Speaker 1: I think, you know, three rate hikes, not four this year, 453 00:24:21,640 --> 00:24:24,159 Speaker 1: but maybe an earlier start to the runoff of the 454 00:24:24,160 --> 00:24:27,439 Speaker 1: balance sheet, maybe as early as June or July. And 455 00:24:27,560 --> 00:24:31,959 Speaker 1: that's going to have UM. I think implications for the markets, Kathy, 456 00:24:32,160 --> 00:24:35,000 Speaker 1: very importantly, whether you look at the spread market two 457 00:24:35,000 --> 00:24:38,000 Speaker 1: STAN or some odd spread you follow every day, or 458 00:24:38,080 --> 00:24:40,560 Speaker 1: you look at the actual nominal yield or frankly the 459 00:24:40,640 --> 00:24:43,520 Speaker 1: real yield. If you're having a cup of coffee with 460 00:24:43,600 --> 00:24:47,280 Speaker 1: liz Anne Saunders and she turns you and says, where's 461 00:24:47,320 --> 00:24:52,160 Speaker 1: the pivot point, where's the fixed income yield point where 462 00:24:52,200 --> 00:24:56,199 Speaker 1: things change? What do you respond? Oh? Boy? You know 463 00:24:56,240 --> 00:24:59,080 Speaker 1: I would say if we get you know, real interest 464 00:24:59,200 --> 00:25:04,320 Speaker 1: rates in the positive territory, UM, that probably is something 465 00:25:04,440 --> 00:25:07,760 Speaker 1: that would be a pivot point for the market. But 466 00:25:08,080 --> 00:25:10,960 Speaker 1: I think that if that happens, particularly of the short 467 00:25:11,320 --> 00:25:14,600 Speaker 1: short term real rates move up, UM, we get a 468 00:25:14,640 --> 00:25:17,920 Speaker 1: pretty good size flattening of the yield curve. And that's 469 00:25:18,000 --> 00:25:20,480 Speaker 1: something the markets have to deal with. Can you predict 470 00:25:20,520 --> 00:25:22,919 Speaker 1: an inverted curve? I mean, do you have enough information 471 00:25:23,000 --> 00:25:24,919 Speaker 1: yet to go to an inversion where the two year 472 00:25:25,040 --> 00:25:29,200 Speaker 1: yield is it a higher yield than the tenure yield. Now, 473 00:25:29,240 --> 00:25:30,879 Speaker 1: I don't think so, and I think that's where the 474 00:25:30,920 --> 00:25:33,320 Speaker 1: balance sheet comes in. I think that there are ways 475 00:25:33,359 --> 00:25:35,480 Speaker 1: that the FED can probably use the balance seat to 476 00:25:35,520 --> 00:25:38,760 Speaker 1: avoid an inversion of the yield curve. So I we're 477 00:25:38,800 --> 00:25:42,000 Speaker 1: not forecasting that now or for this year or even 478 00:25:42,040 --> 00:25:44,520 Speaker 1: for next year. I think that that remains to be seen. 479 00:25:44,560 --> 00:25:47,639 Speaker 1: That wouldn't be our base case forecast. But you know, 480 00:25:47,720 --> 00:25:50,040 Speaker 1: it's a risk to the market. You see the back 481 00:25:50,160 --> 00:25:53,480 Speaker 1: end of the curve already flattening out as we talk 482 00:25:53,560 --> 00:25:56,879 Speaker 1: about FED rate hikes that haven't even materialized yet. Although 483 00:25:57,040 --> 00:25:59,480 Speaker 1: it's not just a FED rate hike that's gonna lead 484 00:25:59,680 --> 00:26:02,280 Speaker 1: to at the higher base rate on that two year yield. 485 00:26:02,320 --> 00:26:05,120 Speaker 1: I was reading a Goldman sax note as well as 486 00:26:05,240 --> 00:26:08,120 Speaker 1: Morgan Stanley talking about how much of a rate hike 487 00:26:08,560 --> 00:26:10,520 Speaker 1: the runoff of the balance sheet will count for. In 488 00:26:10,600 --> 00:26:12,800 Speaker 1: other words, is it going to be uh necessarily for 489 00:26:13,080 --> 00:26:16,040 Speaker 1: rate hikes the equivalent of that with the balance sheet 490 00:26:16,119 --> 00:26:19,000 Speaker 1: rolloff taken into effect. What's your view on that? I mean, 491 00:26:19,080 --> 00:26:21,359 Speaker 1: is this a time to buy short term rates or 492 00:26:21,400 --> 00:26:24,960 Speaker 1: do you think that it's appropriately priced based on that outlook? 493 00:26:25,000 --> 00:26:28,760 Speaker 1: Of the balance sheet. Now, the thing the short end 494 00:26:28,760 --> 00:26:31,959 Speaker 1: of the curve is probably appropriately priced um and I 495 00:26:31,960 --> 00:26:34,640 Speaker 1: think there's a little bit more room on the long end. 496 00:26:34,760 --> 00:26:39,000 Speaker 1: But we're actually telling people to start legging into a 497 00:26:39,040 --> 00:26:41,480 Speaker 1: little bit more duration. You know, we've been short duration 498 00:26:41,520 --> 00:26:45,560 Speaker 1: for forever, it seems like for the last couple of years, 499 00:26:45,560 --> 00:26:49,400 Speaker 1: and we're actually advocating starting to move into a little 500 00:26:49,440 --> 00:26:52,240 Speaker 1: bit more duration at these levels because I think the 501 00:26:52,359 --> 00:26:55,639 Speaker 1: FAT is going to have more difficulty hiking rates rapidly 502 00:26:55,760 --> 00:26:59,159 Speaker 1: than than the market believes. And and we've got slowed 503 00:26:59,160 --> 00:27:01,960 Speaker 1: down in the ECONO me coming, you know, because of 504 00:27:02,040 --> 00:27:05,240 Speaker 1: fiscal policy changes. Were already seeing some of the rollover 505 00:27:05,560 --> 00:27:10,280 Speaker 1: in certain areas of the manufacturing sector. You mentioned China 506 00:27:10,359 --> 00:27:15,520 Speaker 1: slowing down. I think that the expectation is very high 507 00:27:15,640 --> 00:27:19,040 Speaker 1: for the FED to hype rates very rapidly, and I 508 00:27:19,119 --> 00:27:20,959 Speaker 1: don't think that they'll be able to live up to that. 509 00:27:21,000 --> 00:27:25,680 Speaker 1: In Kathy olsons oise, he's gonna see it. Let Kathy 510 00:27:25,800 --> 00:27:30,240 Speaker 1: jumps that swamp. This is the Bloomberg Surveillance Podcast. Thanks 511 00:27:30,240 --> 00:27:33,560 Speaker 1: for listening. Join us live weekdays from seven to ten 512 00:27:33,640 --> 00:27:38,080 Speaker 1: am Eastern on Bloomberg Radio and on Bloomberg Television. Each 513 00:27:38,200 --> 00:27:41,919 Speaker 1: day from six to nine am for insight from the 514 00:27:41,960 --> 00:27:47,160 Speaker 1: best in economics, finance, investment, and international relations. And subscribe 515 00:27:47,200 --> 00:27:52,120 Speaker 1: to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, 516 00:27:52,200 --> 00:27:55,440 Speaker 1: and of course, on the terminal. I'm Tom Keene, and 517 00:27:55,600 --> 00:27:57,440 Speaker 1: this is Bloomberg