Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jay Leye. We bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance, an Apple podcast, SoundCloud, Bloomberg
Speaker 1: dot Com and of course on the Bloomberg terminal. Very
Speaker 1: very happy to catch up with Bill Winter's right now
Speaker 1: a standard chat at Bill. We've got to start with
Speaker 1: the topic, the story of the moment. Can you take
Speaker 1: us inside the bank and tell us how difficult it
Speaker 1: is right now to keep talent happy, to retain talent,
Speaker 1: to keep stuff on your side. Yeah, it's it's it's
Speaker 1: a big challenge. And we know that that the great
Speaker 1: resignation is it's touching every industry, is touching every part
Speaker 1: of the world. And we we are speculating endlessly on
Speaker 1: on what's driving this. Is it lifestyle changes on the
Speaker 1: back of the pandemic? Is that the fact that the
Speaker 1: world is flushed with UH and that cash is looking
Speaker 1: for ever greater talent thankfully for for for Santa Charter.
Speaker 1: While we we are above the trough levels of attrition
Speaker 1: in twenty where things really and people just so Downe
Speaker 1: was kind of back to normal in terms of levels
Speaker 1: of attrition. Of course, we needed to pay up, but
Speaker 1: we've also found ways to save money in other areas,
Speaker 1: so that net our expenses were more or less flat.
Speaker 1: And we haven't reported our full year earnings yet, but
Speaker 1: up to the third quarter were more or less flat
Speaker 1: here on here and uh and I would hope that
Speaker 1: we could continue with that trend. I find the savings
Speaker 1: to to pay for ever more pricey talent. How sticky
Speaker 1: are these forces right now? So? How sticky do you
Speaker 1: think they are? I think there's a hope in a
Speaker 1: C suite on Wall Street that this is a one
Speaker 1: off story, payout walk away, we don't do this again
Speaker 1: next year. How sticky do you think it is? I
Speaker 1: think they're sticky as the profits are sticky. So it's
Speaker 1: been an extraordinary year in in some aspects of the markets.
Speaker 1: And you saw from from from the US banks that
Speaker 1: have already reported the investment banking fees have have been fantastic.
Speaker 1: Um is that going to carry on? The fixed income
Speaker 1: businesses is also doing relatively well, but not as well
Speaker 1: as it did during the peak of the pandemic. I
Speaker 1: think if the profits are up, wages are gonna be up.
Speaker 1: That's the way it works on Wall Street Bill. How
Speaker 1: do you lift revenue? How do you lift the share price?
Speaker 1: You've had a nice rebound here recently, you nowhere near
Speaker 1: the pandemic level with an e M exposure that you have,
Speaker 1: with the Hong Kong exposure that you have. What is
Speaker 1: the strategy to jump start to growth? Yeah, that's the
Speaker 1: big question. And like we're we are releasing our earnings
Speaker 1: in about a month and as part of that we'll
Speaker 1: be we'll be sharing our story with with how we
Speaker 1: accomplish exactly that, which just a couple of bits of backdrop.
Speaker 1: I mean, we know, on the one hand, emerging markets,
Speaker 1: China in particular is out of favor with investors, uh
Speaker 1: in particular with Eculit investors, so that that clearly has
Speaker 1: an impact on our sharp price and others who have
Speaker 1: a heavy Chinese component. On the other hand, we know
Speaker 1: that these are the drivers of global economic growth as
Speaker 1: we as we look at China with a with a
Speaker 1: probably steight me about expectations with still quite a little
Speaker 1: four percent GDP growth in the first quarter, he said, Wow,
Speaker 1: that's that's that's pretty tough relative to the pent that
Speaker 1: we've become accustomed to in China, but four percent is
Speaker 1: still pretty good in the global context, and especially given
Speaker 1: the challenges the China faced in the early part of
Speaker 1: the year, and that will extend across Asia as we
Speaker 1: work through the pandemic effects and the like. But overall,
Speaker 1: the way that we lived profits is to continue to
Speaker 1: grow as we happen. We've been growing consistently now for
Speaker 1: several years. If we could exclude that, that that that
Speaker 1: impact of low interest rates, which is which is a
Speaker 1: real has a very high impact on the banking industry
Speaker 1: and us in particularly Bill. Your website on Hong Kong,
Speaker 1: where you are hugely predominant, says here for good great
Speaker 1: there is no banker more qualified to tell us about
Speaker 1: the potential move from Hong Kong to Singapore. Can you
Speaker 1: predict western banks, the more larger commercial banks are going
Speaker 1: to be forced to jettison Hong Kong for other geographies,
Speaker 1: including your Singapore. I don't think so. I mean the
Speaker 1: the the long story short as in Hong Kong has
Speaker 1: been and is ever more so, the entry point to China.
Speaker 1: It's it's the place that capital goes into and out
Speaker 1: of China and as and it's very much a two
Speaker 1: way street now. As we see, there's been massive flows
Speaker 1: in particular into bond funds over the past couple of
Speaker 1: years in China, in less so into equity funds that
Speaker 1: will probably balance out over time, but there's also been
Speaker 1: a very substantial flow of Chinese money out and that's
Speaker 1: only going to accelerate with the advent of things like
Speaker 1: the Wealth Connected Program, which is designed to allow Chinese
Speaker 1: savers to to increase the proportion of their savings that
Speaker 1: they can hold in currencies other than R and B,
Speaker 1: and that's going through Hong Kong. So Hong Kong is
Speaker 1: is absolutely solidified. If anything, it's I think it's in
Speaker 1: the strongest position has ever been in terms of acting
Speaker 1: as a gate where for capital in and out of China.
Speaker 1: Given the flows of capital, that's a pretty good gate
Speaker 1: way to have. The Singapore also has tremendous advantages we know,
Speaker 1: and and Singapore is UH is trying to make itself
Speaker 1: as attractive as possible for not just international talent but
Speaker 1: also the regional talent and then Singaporean talent, and they're
Speaker 1: doing a very good job of that. So yeah, a
Speaker 1: bit of healthy competition. We figure is a is a
Speaker 1: good thing. We as you, as you point out, have
Speaker 1: a very substantial presence in both markets. We intend to
Speaker 1: continue to have a substantial presence in both markets, uh
Speaker 1: and and we'll do everything we can to make each
Speaker 1: of them more attractive. Bill, Where's the biggest growth opportunity
Speaker 1: for you, especially given the fact that certain companies are
Speaker 1: thinking about diversifying supply chains globally. Yeah, the biggest source
Speaker 1: of growth, certainly by dollars, but also pretty close to
Speaker 1: the biggest source of growth by percent last year is China.
Speaker 1: That will continue to be the case. Why is that?
Speaker 1: I that that sounds counterintuitive. You know, China's under pressure,
Speaker 1: and obviously if we if we listened to some of
Speaker 1: the rhetoric, you think that the China was on the
Speaker 1: way down. Actually, China is opening up. China is opening
Speaker 1: up to the rest of the of the world, to
Speaker 1: the rest of the region in a very substantial way.
Speaker 1: And given the center charge role as a connector between
Speaker 1: the markets in which we operate, obviously one of which
Speaker 1: is China, that connect to roles is quite valuable for us.
Speaker 1: So I would expect to continue to see China as
Speaker 1: a as a real outsized contributor to our growth. Hong
Speaker 1: Kong as well. The Hong Kong has coming off of
Speaker 1: a couple of very tough years, right two thousand nineteen
Speaker 1: civil disturbances, obviously the pandemic they hid all of us,
Speaker 1: but then compounded by the National Security Law and some
Speaker 1: of the the sanctions and other pressures that if at
Speaker 1: Hong Kong, it was a tough two thousand into twenty one.
Speaker 1: Hong Kong is now back to all of the islands
Speaker 1: feet good strong drawing business for us, and we expect
Speaker 1: that will kick in, obviously both leveraging the kind of
Speaker 1: the China growth, but also in its own right, so
Speaker 1: that part of the world is stil a real driver
Speaker 1: for us. But you described yourself there as a connector,
Speaker 1: and I want to touch on something, something delicate, and
Speaker 1: I want to give you the best opportunity to talk
Speaker 1: about it. I think increasingly it's getting more difficult looking
Speaker 1: at where the West is going and looking where China
Speaker 1: is going at the moment, the allegations of genocide coming
Speaker 1: from the administration, the industrial scale human rights abuses there,
Speaker 1: the allegations coming from the UK government, a place where
Speaker 1: your bank is listed, Bill, do you ever feel like
Speaker 1: you have to be a diplomat sometimes as well as
Speaker 1: the CEO when you operate in China? And what do
Speaker 1: you think people are missing here? You're a company with
Speaker 1: a big presence in there. I'm sure you have to
Speaker 1: be very careful about what you say to maintain a
Speaker 1: presence there. At the same time you have these allegations
Speaker 1: of genocide. Bill. That sounds like a really tough position
Speaker 1: for a CEO to be in. How do you do it? Well, yeah,
Speaker 1: I did. I did once and my student days want
Speaker 1: to be a diplomat, and thankfully I I took a
Speaker 1: different route, but mostly because I needed to pay off
Speaker 1: my my university student loans. Thank you seem a good
Speaker 1: way to do that. But the I don't think it
Speaker 1: would be a great diplomat, so I won't try to
Speaker 1: be a diplomat. What I will say is that that
Speaker 1: the role that we play is bringing couple together, bringing
Speaker 1: people together, bringing ideas together from all parts of the world.
Speaker 1: And we operate in over sixty countries. Through the course
Speaker 1: of history. Some of those countries have been in conflict
Speaker 1: with others of those countries, some of them been in
Speaker 1: conflict with the UK. I got I got one final question.
Speaker 1: You're gonna run out of time here, Bill, you guys
Speaker 1: invented diversity standard Charter Bank for decades his live diversity.
Speaker 1: What is your strategic diversity mandate that you can teach
Speaker 1: other executives like, I don't know what we can teach anybody.
Speaker 1: I know what we've learned ourselves, which is that when
Speaker 1: you have a broader range of opinions around the table,
Speaker 1: you serve clients better, and you attract better people, and
Speaker 1: you make better decisions. And yeah, thankfully we are in
Speaker 1: datas as you point out with you know, because we
Speaker 1: operate in so many different countries, We've got a workforce
Speaker 1: that comes from those countries, and we have clients that
Speaker 1: have very different buying patterns and in different cycles. Uh.
Speaker 1: The key is to try to harness that and bring
Speaker 1: as much of that to the table as you can
Speaker 1: at any point in time. I think we do a
Speaker 1: pretty good job of that. We know we can do better,
Speaker 1: So I'm not sure we have anything to teach anybody,
Speaker 1: but we're happy to share our lessons built five more
Speaker 1: years is the answer we often get from an old colleague.
Speaker 1: If yours Jamie Diamond when we talk about succession and
Speaker 1: later in the bank can bail. I believe you've been
Speaker 1: there almost seven it's it's seven years and jo and Bill?
Speaker 1: Is that right? It's coming on? Set? Are you thinking
Speaker 1: a little bit about succession now? Are you happy with
Speaker 1: everything you've done or do you think it's more to
Speaker 1: be done? Jonathan, the day you called me a forever
Speaker 1: CEO is probably the day I should shoot the head
Speaker 1: for the door. But no, the guy we've we've got.
Speaker 1: We've got a task to complete here. It is not complete.
Speaker 1: That's reflected to our share price, but also in our
Speaker 1: own sense that that we have more that we can deliver.
Speaker 1: I want to get this thing done and uh and
Speaker 1: then hopefully whoever takes over from me will be will
Speaker 1: be will be taking something that's really very good shape.
Speaker 1: Any thoughts about going back to JP Morgan, It's that's
Speaker 1: something you'd ever roll out Bill in the future. I
Speaker 1: think the likelihood of that is about as low as
Speaker 1: you could possibly get. As great as that from this,
Speaker 1: I don't think the bell got to catch up Set.
Speaker 1: As always, it's good to hear from you. A timely
Speaker 1: conversation with Bill Winters have standard shout at David mel
Speaker 1: Pass as a president of the World Bank, and we're
Speaker 1: thrilled at Mr mel Pass could join us this morning. David,
Speaker 1: I look at the World Bank website and you moder
Speaker 1: lyn growth to slow. How fragile is it right now?
Speaker 1: You and I have studied stan Fisher and other crises
Speaker 1: as well. How close to instability and emerging markets are we? Hi, Tom,
Speaker 1: good morning. I think that's a big challenge because as
Speaker 1: as you slow down, the population grows are still fast
Speaker 1: in some countries, and the if you're not getting ahead,
Speaker 1: then the people look at it and say, what's in
Speaker 1: it for me? And that brings that brings the physical
Speaker 1: insecurity that we're seeing in some parts of the world.
Speaker 1: The solution is to grow more and to get higher
Speaker 1: per capita incomes as well as of course health programs, vaccinations, education.
Speaker 1: All that goes with good development practices is the institutional
Speaker 1: integrity there for you and across the street the International
Speaker 1: Monetary Fund. Are these nations listening to you as they
Speaker 1: struggle with some of the financial challenges they have? So
Speaker 1: many countries do listen. But I think a big part
Speaker 1: of the challenges the global environment. It's you know, very unequal.
Speaker 1: People at the lower end of the income scales aren't
Speaker 1: simply aren't doing well because the wealth is concentrating, and
Speaker 1: so that's a big problem. You can you can put
Speaker 1: in good, better policies in your country and still not
Speaker 1: see much in the way of results. That's a big problem, David.
Speaker 1: Given this backdrop where the recovery has been much slower
Speaker 1: and more painful in the developing world, how concerning is
Speaker 1: it that a wall of debt maturities is coming up
Speaker 1: for a lot of these nations. This is a challenge.
Speaker 1: You know, it was discussed in the last two years
Speaker 1: and by the G twenty, but frankly the progress installed
Speaker 1: on that. So as we look at nine two UH,
Speaker 1: the the UH, the payment from the IDA countries that's
Speaker 1: the low income countries are going to be thirty five
Speaker 1: billion dollars. That's the payments on principle and interest, which
Speaker 1: is way beyond the resources of the countries. That creates
Speaker 1: added challenge because they need the money for other things
Speaker 1: like fighting the pandemic. David, How concerning is it that
Speaker 1: amidst this backdrop you have seen persistent dollar strength, you
Speaker 1: have seen persistent inflation and base goods I mean basically
Speaker 1: painted scenario for us how this transpires of the rest
Speaker 1: of We know worldwide that inflation really subtracts from people
Speaker 1: that are on fixed income or on the bottom end
Speaker 1: of the income scale. And that's particularly true of developing countries.
Speaker 1: So as the as prices go up, they just don't
Speaker 1: have enough money for food, for the basics, for for
Speaker 1: education and for health. You know, in in the developing world,
Speaker 1: the education because of the school closures, education has really
Speaker 1: slid backwards. That means the ability to read and and
Speaker 1: UH and write and so those are concerning UH. And
Speaker 1: that gets us to the to the end endpoint that
Speaker 1: the if interest rate hikes start, that's going to be
Speaker 1: really a double whammy. That inflation and the interest rates
Speaker 1: are a challenge. I think it would be better if
Speaker 1: the central banks looked at the capital allocation around the
Speaker 1: world and looks for better ways to allocate so that
Speaker 1: not all of the money goes to the biggest corporations.
Speaker 1: Your previous story was just about Microsoft cash. David, you
Speaker 1: are is qualified as any World Bank president in history
Speaker 1: to look at, study and advise on dollar dynamics. Does
Speaker 1: the World Bank in the poor countries of the world.
Speaker 1: Just take the content of Africa's one example. How desperate
Speaker 1: are they for a week dollar? Uh? They're The strong
Speaker 1: dollar really puts pressure on them because their currencies weaken
Speaker 1: and then capital doesn't want to flow to them. Plus
Speaker 1: prices go up more than they are in the United States. UH,
Speaker 1: So I wouldn't care drives it as desperate for a
Speaker 1: week dollar. What they What benefits everyone is when currencies
Speaker 1: are stable, and that starts with the dollar. Uh and
Speaker 1: long term stability, I think is is the strongest support
Speaker 1: for development. So the countries want that. But right now,
Speaker 1: as we go into a probable interest rate hiking phase, uh,
Speaker 1: that adds uh. That adds to the dollar and makes
Speaker 1: the challenges bigger for the developing countries. As I say,
Speaker 1: I think the world needs to look at the capital
Speaker 1: allocation and ask why is so much of the money
Speaker 1: going to the rich end of the scale. How do
Speaker 1: we amend that? I mean, it's one thing to comment
Speaker 1: on it and to identify it, but how are we
Speaker 1: proactive for a new capital allocation? Away from buying more
Speaker 1: apple shares? You have to think about small businesses. That
Speaker 1: means floating rate uh money, That means uh money at
Speaker 1: the short into the curve. But we have this oddity
Speaker 1: where the government is supporting existing businesses, existing people and
Speaker 1: demand and not so much the supply side. So that's
Speaker 1: problem one. And then on the central bank side, Uh,
Speaker 1: they're they're allocating that. You know, they have four tools,
Speaker 1: they're only using talking about two tools that interst rate hikes.
Speaker 1: That hurts people at the short end of the curve
Speaker 1: because short interest rates go up first. Uh, and even
Speaker 1: more so in developing countries. Uh. And they're also talking
Speaker 1: about shrinking or tapering the size of the balance sheet.
Speaker 1: There are two more tools. One is the duration of
Speaker 1: the central bank holdings and one is regulatory policy. I
Speaker 1: call it post monitorism. We're not really in a money
Speaker 1: supply world. We're in a very heavily regulatory world right now.
Speaker 1: It penalizes small businesses. So having an explicit focus by
Speaker 1: both fiscal and monetary policy that you want to support
Speaker 1: smaller businesses so they can help the supply chain. I
Speaker 1: think that's critical and could help worldwide. David, given where
Speaker 1: we are now, given that these changes will take time
Speaker 1: to be implemented, do you think that the developing world
Speaker 1: complex can deal with four rate hikes from the federals
Speaker 1: are of this year. Uh. It's it's going to be
Speaker 1: really challenging. We already see it in country after country
Speaker 1: from the political side. You see it daily in the news.
Speaker 1: I think it would help if the Central Bank said
Speaker 1: what the strategy is. Uh. You know, I really think
Speaker 1: they should be looking at the duration of their assets
Speaker 1: and saying they'll stop buying so many assets at the
Speaker 1: long end uh and have more of their mix be
Speaker 1: capital favorable, small business favorable. That helps developing countries. Mr
Speaker 1: melt Pass, thank you so much for joining us. David Melpiss,
Speaker 1: World Bank President, Bank of America adjusting to what they
Speaker 1: see out there from sea to shining Sea. Sevita Subermanian
Speaker 1: joins US now US Equity and Quantitative Strategy at Bank
Speaker 1: of America Security. Sevita, I want to go to your
Speaker 1: latest research note where you dovetail in nicely the Subramanian
Speaker 1: misery index. When Brian moynihan wakes up every morning, he
Speaker 1: looks at the Subermannian misery indicator, and the reality is
Speaker 1: you look at consumer discretionary and you look at industrial
Speaker 1: and those are two big important sectors linked directly in
Speaker 1: to rising labor costs. Absolutely these are two of the
Speaker 1: most labor intensive sectors of the SMP five. But oddly enough,
Speaker 1: these are the two sectors where analysts are forecasting all
Speaker 1: time peaks in margins by the third quarter of this year,
Speaker 1: which just doesn't really jive with what we're seeing in
Speaker 1: terms of tightness in the labor market in terms of
Speaker 1: as you pointed out, compensation expenses in almost every industry
Speaker 1: starting to see really strong upward pressure. UM. You know,
Speaker 1: I I think that something's got to give this year,
Speaker 1: and it might be margins. That's where we think that
Speaker 1: analysts are too uh too optimistic, if you will, UM.
Speaker 1: So if you think about the corporate Misery indicator, UM,
Speaker 1: this is an indicator that we used to track whether
Speaker 1: margins are starting to see a squeeze and and whether
Speaker 1: earnings are actually gonna fault. And so far, so good.
Speaker 1: So so far, we've seen prices generally keep up with
Speaker 1: costs um although this quarter we're starting to see that
Speaker 1: fray a little bit. And and we've seen unit volumes
Speaker 1: sales increase. So those three factors are the ones to watch.
Speaker 1: And when it starts to get problematic is when prices
Speaker 1: increased too much, demand starts to deteriorate and costs still
Speaker 1: creep higher. And that's what we're worried about as we
Speaker 1: move into uh, you know, subsequent quarters this year. I
Speaker 1: think the good news says that a lot of the
Speaker 1: sectors in the SMP five hundred have become very labor light,
Speaker 1: like for example, you know, technology, even industrials. A lot
Speaker 1: of these sectors have automated a lot of that labor away.
Speaker 1: But there are still pockets of the market that we
Speaker 1: think look dangerous from that perspective. AT did some wonderful
Speaker 1: work over the last twelve months on the labor intensitive
Speaker 1: the overall SMP five hundred, the change of it over
Speaker 1: the last not just few years, but over the last
Speaker 1: decade as well. I'm just wondering, then, the concentration of
Speaker 1: that you've worked through that work with me at the
Speaker 1: index level, what's the biggest challenge of the index level.
Speaker 1: You're at forty six hundred year end on the SMP.
Speaker 1: What gets us there? We are we might get there today? Um,
Speaker 1: I think that, you know, I mean, here's the thing.
Speaker 1: I think that it's hard to be long the entire
Speaker 1: market when you've got all of the positive forces that
Speaker 1: have been playing through be an easy monetary policy, easy
Speaker 1: fiscal policy, super low interest rates, UM, you know, relatively
Speaker 1: healthy balance sheets of summers corporates, you've got um, you know,
Speaker 1: strong earnings acceleration off of a you know, global pandemic low.
Speaker 1: All of those factors are basically slowing down. So I'm
Speaker 1: not barish on the SMP five hundred, but I think
Speaker 1: this is gonna be a year where we're gonna hit
Speaker 1: that a bunch of times, and you're gonna want to
Speaker 1: pick your spots. The way to pick where to invest
Speaker 1: this year is very very simple. Look for free cash flow.
Speaker 1: This is the most important factor in an environment of
Speaker 1: tightening monetary policy. In our Qualt work, and you know,
Speaker 1: I'm a math person, So in our Qualt work, we've
Speaker 1: back tested all these different strategies of investing and we
Speaker 1: found that free cash flow to enterprise value is the
Speaker 1: single best way to pick a stock during periods during
Speaker 1: the first year of the FED tightening cycle. So create
Speaker 1: a Bloomberg screen, sort all your companies by free cash
Speaker 1: flow to enterprise value, and that would be the way
Speaker 1: I would look for opportunities. And I think, what's interesting,
Speaker 1: if you give me one more minute on this is
Speaker 1: that when we saw that tech route the other week,
Speaker 1: it was just maybe, yeah, I can't keep track of time.
Speaker 1: Maybe a week ago we saw massive down in the
Speaker 1: in the NAS deck and UH, and then miraculously mid day,
Speaker 1: the free cash flow opportunities within that tech benchmark grew
Speaker 1: attractive enough for industris to start to leg back into tech.
Speaker 1: So I think that's the type of market we're going
Speaker 1: to be in where you have to really watch these factors,
Speaker 1: look for free cash flow generation, and just be nimble.
Speaker 1: Volatility is great for for markets, for active managers, and
Speaker 1: I think that's where we're going to be this year,
Speaker 1: which is a reason why I was a little bit
Speaker 1: confused about your call that small cap stocks may outperform
Speaker 1: large cap stocks considering the fact that a number of
Speaker 1: different surveys at least have shown people are worried about
Speaker 1: their margins more than large companies. They're worried about them
Speaker 1: handling supply chain disruptions and labor shortages. Can you explain
Speaker 1: why you're more bullish on these smaller consue? Absolutely, And
Speaker 1: I mean the bottom line is that from evaluation perspective,
Speaker 1: small caps are trading at a twenty five percent discount
Speaker 1: to large caps historically on average they trade at a
Speaker 1: two percent premium. You're right, Lisa, there's a lot of
Speaker 1: stuff going on in the small cap sector that could
Speaker 1: be negative for margins. But my view is that's priced in.
Speaker 1: Where it's not priced in is in consumer companies and
Speaker 1: industrial companies, where these you know, larger companies are trading
Speaker 1: at close to all time highs in terms of evaluations.
Speaker 1: So I think you're right that small caps aren't generally, um,
Speaker 1: you know that great in a labor inflation environment, although
Speaker 1: the work from our small cap team and Jill Hall
Speaker 1: has actually indicated that small caps generally outperformed large caps
Speaker 1: during periods of capex acceleration, uh, you know, pick up
Speaker 1: an inflation, even the early stages of a FED hiking cycle.
Speaker 1: So I think a lot of these things are coming
Speaker 1: into play. And then on top of that, the grady
Speaker 1: is small caps are super cheap right now. We haven't
Speaker 1: seen this type of evaluation discrepancy since you know too
Speaker 1: wasn't And if you had bought the Russell in two
Speaker 1: thousand and short of the SMP, you would have made
Speaker 1: a lot of alpha over the next ten years. Interesting
Speaker 1: cal Sevita are best to you and the team as
Speaker 1: always wonderful Cevita Superman him there of Bank America. Let's
Speaker 1: get straight to this bond market debate. This conversation with
Speaker 1: Kathy Jones, the chief fixed income strategist, a charge swab. Kathy,
Speaker 1: a wonderful friend of this program. Thank you for being
Speaker 1: with us this morning. I'm trying to work out, after
Speaker 1: how much work we've already done year today as interest
Speaker 1: rate hikes into this market, whether this is the beginning
Speaker 1: of the end or the end of the beginning of
Speaker 1: the conversation about higher interest rates. Yeah, you know, I
Speaker 1: think we are discounting a lot. We're looking more like
Speaker 1: three rate hikes, not four rate hikes. But I think
Speaker 1: the focus really ought to be on the balance sheet.
Speaker 1: You know. That was the surprise that came out of
Speaker 1: the minute to the o MC meeting, that not only
Speaker 1: were they poised to raise rates, but there are poised
Speaker 1: to use the balance sheet as well. And I don't
Speaker 1: think the markets really quite figured out how exactly the
Speaker 1: bed's gonna do that. Um, they haven't really revealed much
Speaker 1: to us, but that to me tells me how much
Speaker 1: they're going to try to maneuver the long end of
Speaker 1: the curve while raising rates at the short end. So
Speaker 1: I think, you know, three rate hikes, not four this year,
Speaker 1: but maybe an earlier start to the runoff of the
Speaker 1: balance sheet, maybe as early as June or July. And
Speaker 1: that's going to have UM. I think implications for the markets, Kathy,
Speaker 1: very importantly, whether you look at the spread market two
Speaker 1: STAN or some odd spread you follow every day, or
Speaker 1: you look at the actual nominal yield or frankly the
Speaker 1: real yield. If you're having a cup of coffee with
Speaker 1: liz Anne Saunders and she turns you and says, where's
Speaker 1: the pivot point, where's the fixed income yield point where
Speaker 1: things change? What do you respond? Oh? Boy? You know
Speaker 1: I would say if we get you know, real interest
Speaker 1: rates in the positive territory, UM, that probably is something
Speaker 1: that would be a pivot point for the market. But
Speaker 1: I think that if that happens, particularly of the short
Speaker 1: short term real rates move up, UM, we get a
Speaker 1: pretty good size flattening of the yield curve. And that's
Speaker 1: something the markets have to deal with. Can you predict
Speaker 1: an inverted curve? I mean, do you have enough information
Speaker 1: yet to go to an inversion where the two year
Speaker 1: yield is it a higher yield than the tenure yield. Now,
Speaker 1: I don't think so, and I think that's where the
Speaker 1: balance sheet comes in. I think that there are ways
Speaker 1: that the FED can probably use the balance seat to
Speaker 1: avoid an inversion of the yield curve. So I we're
Speaker 1: not forecasting that now or for this year or even
Speaker 1: for next year. I think that that remains to be seen.
Speaker 1: That wouldn't be our base case forecast. But you know,
Speaker 1: it's a risk to the market. You see the back
Speaker 1: end of the curve already flattening out as we talk
Speaker 1: about FED rate hikes that haven't even materialized yet. Although
Speaker 1: it's not just a FED rate hike that's gonna lead
Speaker 1: to at the higher base rate on that two year yield.
Speaker 1: I was reading a Goldman sax note as well as
Speaker 1: Morgan Stanley talking about how much of a rate hike
Speaker 1: the runoff of the balance sheet will count for. In
Speaker 1: other words, is it going to be uh necessarily for
Speaker 1: rate hikes the equivalent of that with the balance sheet
Speaker 1: rolloff taken into effect. What's your view on that? I mean,
Speaker 1: is this a time to buy short term rates or
Speaker 1: do you think that it's appropriately priced based on that outlook?
Speaker 1: Of the balance sheet. Now, the thing the short end
Speaker 1: of the curve is probably appropriately priced um and I
Speaker 1: think there's a little bit more room on the long end.
Speaker 1: But we're actually telling people to start legging into a
Speaker 1: little bit more duration. You know, we've been short duration
Speaker 1: for forever, it seems like for the last couple of years,
Speaker 1: and we're actually advocating starting to move into a little
Speaker 1: bit more duration at these levels because I think the
Speaker 1: FAT is going to have more difficulty hiking rates rapidly
Speaker 1: than than the market believes. And and we've got slowed
Speaker 1: down in the ECONO me coming, you know, because of
Speaker 1: fiscal policy changes. Were already seeing some of the rollover
Speaker 1: in certain areas of the manufacturing sector. You mentioned China
Speaker 1: slowing down. I think that the expectation is very high
Speaker 1: for the FED to hype rates very rapidly, and I
Speaker 1: don't think that they'll be able to live up to that.
Speaker 1: In Kathy olsons oise, he's gonna see it. Let Kathy
Speaker 1: jumps that swamp. This is the Bloomberg Surveillance Podcast. Thanks
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