1 00:00:01,360 --> 00:00:13,160 Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. 2 00:00:13,240 --> 00:00:17,440 Speaker 1: Always with Michael McKee. Daily we bring you insight from 3 00:00:17,480 --> 00:00:22,279 Speaker 1: the best in economics, finance, investment, and international relations. Find 4 00:00:22,280 --> 00:00:26,880 Speaker 1: Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of 5 00:00:26,920 --> 00:00:33,839 Speaker 1: course on the Bloomberg Dean Curd it with us and 6 00:00:33,880 --> 00:00:36,960 Speaker 1: the stre and the state of Wall Street? How quiet 7 00:00:37,159 --> 00:00:40,800 Speaker 1: is quiet? Right now? Give us a historical I mean, 8 00:00:40,840 --> 00:00:44,560 Speaker 1: August is always quiet? Is it like worst ever? It's 9 00:00:44,560 --> 00:00:47,080 Speaker 1: a it's a considerably quiet period. When you look at 10 00:00:47,080 --> 00:00:50,479 Speaker 1: the day to day fluctuations in the SMPI um to 11 00:00:50,560 --> 00:00:52,559 Speaker 1: come across a one percent move, you gotta go back 12 00:00:52,560 --> 00:00:55,840 Speaker 1: twenty six days. It doesn't happen all that often. It's 13 00:00:55,920 --> 00:00:58,280 Speaker 1: it's pretty rare. And you know that kind of feeds 14 00:00:58,320 --> 00:01:01,440 Speaker 1: back into one, do I have to be here? A 15 00:01:01,480 --> 00:01:03,720 Speaker 1: lot of traders are asking themselves should I be here 16 00:01:03,760 --> 00:01:06,199 Speaker 1: if there's no volatility? And two, I can't get away 17 00:01:06,280 --> 00:01:10,319 Speaker 1: from the way in which the quiet markets reinforced behavior. 18 00:01:10,360 --> 00:01:13,720 Speaker 1: In other words, the chief risk officer, who's who one 19 00:01:13,760 --> 00:01:16,720 Speaker 1: of his tasks is to backbook hedge all the risk 20 00:01:16,760 --> 00:01:18,880 Speaker 1: in the book. He's looking at saying, you know, these 21 00:01:19,160 --> 00:01:22,000 Speaker 1: option prices are low, the vixes come down, but it's 22 00:01:22,000 --> 00:01:25,600 Speaker 1: still not worth it because the markets it's not worth 23 00:01:25,600 --> 00:01:30,080 Speaker 1: it to outlay premium for hedges, to spend money on 24 00:01:30,440 --> 00:01:33,800 Speaker 1: a hedge to protect myself. That's right. Some would say it's, 25 00:01:33,880 --> 00:01:37,360 Speaker 1: you know, flood insurance in a drought, right, there's it's cheap. 26 00:01:37,680 --> 00:01:39,759 Speaker 1: It's going to be a Twitter thing. That's brilliant. It's 27 00:01:39,760 --> 00:01:43,520 Speaker 1: it's cheap insurance. But it never rains. And that's what 28 00:01:43,680 --> 00:01:47,160 Speaker 1: really a concern I have is that the market's quiet 29 00:01:47,240 --> 00:01:51,800 Speaker 1: right now is it's a it's reinforcing behavior. It's basically UH. 30 00:01:51,880 --> 00:01:54,800 Speaker 1: For the folks that have been spending premium, they've been burned, 31 00:01:54,880 --> 00:01:57,960 Speaker 1: especially post breaksit is the markets levitated and now as 32 00:01:58,000 --> 00:02:00,320 Speaker 1: they've continue to go up, but but really be more 33 00:02:00,320 --> 00:02:04,800 Speaker 1: in a muted fashion, even a twelve handled vix UH 34 00:02:05,160 --> 00:02:08,000 Speaker 1: is not worth it. And that's a challenge. Within this 35 00:02:08,200 --> 00:02:12,960 Speaker 1: is the idea of framing August. We get to October 36 00:02:13,080 --> 00:02:14,760 Speaker 1: or September, and a lot gonna happen on the way. 37 00:02:14,800 --> 00:02:16,720 Speaker 1: I get that, and then you got to do your 38 00:02:16,760 --> 00:02:18,560 Speaker 1: budgets for the end of the year, figure out the 39 00:02:18,600 --> 00:02:23,880 Speaker 1: bone night payment in February. Do you just anticipate right sizing, layoffs, 40 00:02:24,360 --> 00:02:27,720 Speaker 1: firings on Wall Street? Within the quiet? I think it's 41 00:02:27,720 --> 00:02:30,200 Speaker 1: a challenging period for both the by side and the 42 00:02:30,240 --> 00:02:33,680 Speaker 1: cell side. You've got a world that deprived nominal return. 43 00:02:33,880 --> 00:02:37,200 Speaker 1: There's no interest to be had. Uh, and the markets 44 00:02:37,200 --> 00:02:39,959 Speaker 1: are increasingly efficient as well. Uh. There's just so much 45 00:02:40,000 --> 00:02:44,239 Speaker 1: capital looking after you know, even the slightest dislocation. It's 46 00:02:44,240 --> 00:02:47,080 Speaker 1: been a very challenging year or long short equity strategies 47 00:02:47,120 --> 00:02:50,160 Speaker 1: to alpha generation. But for the cell side, the folks 48 00:02:50,200 --> 00:02:54,760 Speaker 1: that make their money moving positions around this volume is 49 00:02:54,840 --> 00:02:58,520 Speaker 1: very different. Does it reaffirm? If I'm Gary Shilling or 50 00:02:58,560 --> 00:03:02,480 Speaker 1: Steve Major, itight just be I buy a bond screw 51 00:03:02,560 --> 00:03:05,400 Speaker 1: the hedging of Dean Kurnet and the puppy goes up 52 00:03:05,400 --> 00:03:08,399 Speaker 1: in price, down and yield. And if I just buy 53 00:03:08,440 --> 00:03:11,400 Speaker 1: a portfolio of Dallas and p E t f s 54 00:03:11,440 --> 00:03:15,919 Speaker 1: like say David Kotok and Cumberland Advisors, those share prices 55 00:03:15,960 --> 00:03:19,720 Speaker 1: go up as well. Why hedge? It's a great question. 56 00:03:20,400 --> 00:03:23,280 Speaker 1: What I would say is there's still lots and lots 57 00:03:23,280 --> 00:03:25,680 Speaker 1: of vulnerabilities in the world. If you look around and 58 00:03:25,680 --> 00:03:29,280 Speaker 1: you look at the way in which the financial system 59 00:03:29,760 --> 00:03:33,200 Speaker 1: has evolved. You know, starting with Europe, you've got um 60 00:03:33,280 --> 00:03:37,040 Speaker 1: just a massive growth in inflation, shortfall, a lot of 61 00:03:37,080 --> 00:03:40,840 Speaker 1: confidence in Mario Draggy, that's the you know, uh he 62 00:03:41,000 --> 00:03:43,480 Speaker 1: as a central bank leader, I think has done uh 63 00:03:43,480 --> 00:03:46,640 Speaker 1: an admiral job trying to backstop the system. But you've 64 00:03:46,680 --> 00:03:50,840 Speaker 1: got you know, significant demographic challenges there. You've got no 65 00:03:51,120 --> 00:03:54,120 Speaker 1: growth engine, very little credit channel. Um. So that's just 66 00:03:54,240 --> 00:03:56,640 Speaker 1: one area. And you know it's it's a tape together 67 00:03:56,840 --> 00:04:01,320 Speaker 1: monetary system. China, which it's interesting to watch the narrative evolve. 68 00:04:01,440 --> 00:04:03,440 Speaker 1: You know, earlier in the year, China was melting down 69 00:04:03,480 --> 00:04:06,680 Speaker 1: and that was causing havoc in in our markets as well. 70 00:04:06,720 --> 00:04:09,600 Speaker 1: And this was yelling basically saying, we gotta watch global 71 00:04:09,640 --> 00:04:12,440 Speaker 1: events as well. Well, look what's happened. The vix is 72 00:04:12,480 --> 00:04:15,800 Speaker 1: melting away, and yet the CNH is also declining. The 73 00:04:15,840 --> 00:04:18,560 Speaker 1: currency is has been weakening, but it's doing so slowly, 74 00:04:18,920 --> 00:04:21,920 Speaker 1: and so the market's convinced itself. Okay, in my list 75 00:04:21,960 --> 00:04:24,520 Speaker 1: of things to worry about, China is off the list. 76 00:04:24,720 --> 00:04:26,720 Speaker 1: I don't think that's the case at all. I think 77 00:04:26,760 --> 00:04:30,200 Speaker 1: the build up of leverage and debt in China is 78 00:04:30,240 --> 00:04:34,040 Speaker 1: something to be careful. You are the maximum Matthew sophisticated 79 00:04:34,080 --> 00:04:38,160 Speaker 1: guy we deal with. For mere mortals, do they go 80 00:04:38,240 --> 00:04:41,400 Speaker 1: to cash? That's the human emotion of the doom clue 81 00:04:41,640 --> 00:04:44,080 Speaker 1: crewe go to cash. I mean some people are right 82 00:04:44,120 --> 00:04:48,000 Speaker 1: short done cast talking about that last week. But for 83 00:04:48,120 --> 00:04:52,640 Speaker 1: mere mortals they got to participate. Is the cash flow, 84 00:04:52,720 --> 00:04:56,160 Speaker 1: the dividends, the buybacks enough to justify? It's a challenge. 85 00:04:56,240 --> 00:04:59,520 Speaker 1: It's really challenging, right the cash, it's cash is very 86 00:04:59,520 --> 00:05:02,240 Speaker 1: expensive when you you are nothing. The opportunity costs is 87 00:05:02,320 --> 00:05:04,960 Speaker 1: very high. Stocks are expensive too. It's a it's a 88 00:05:05,040 --> 00:05:07,120 Speaker 1: it's a quandary. I would say, you know, look for 89 00:05:07,240 --> 00:05:11,720 Speaker 1: most institution allocators, their business is allocating capital to risk um. 90 00:05:11,760 --> 00:05:15,040 Speaker 1: So it's really difficult to be, you know, uninvested in 91 00:05:15,080 --> 00:05:17,159 Speaker 1: the market. Let's go back thirty years and rounded down 92 00:05:17,160 --> 00:05:23,240 Speaker 1: to twenty nine August. I'm up. Can you buy now 93 00:05:23,400 --> 00:05:27,280 Speaker 1: portfolio insurance? What a point phrase that is, Dean? Can 94 00:05:27,320 --> 00:05:31,640 Speaker 1: you buy portfolio insurance to protect your up? Because you're 95 00:05:31,680 --> 00:05:34,040 Speaker 1: worried about the doom and bloom? So I would say 96 00:05:34,040 --> 00:05:37,559 Speaker 1: that if if you're looking to hedge, you can't hedge 97 00:05:37,600 --> 00:05:41,560 Speaker 1: all the time um the math of of options suggests 98 00:05:41,560 --> 00:05:46,799 Speaker 1: that they are ultimately expensive relative to what the market experiences. However, 99 00:05:47,200 --> 00:05:49,720 Speaker 1: there are times, and we would say, based on careful 100 00:05:49,760 --> 00:05:54,040 Speaker 1: macro analysis, that you can design hedges for specific reasons. 101 00:05:54,440 --> 00:05:56,839 Speaker 1: And I think you know, part of your hedging budget 102 00:05:56,960 --> 00:05:58,839 Speaker 1: might include out of the money puts on the SMP 103 00:05:58,960 --> 00:06:01,200 Speaker 1: five hundred. But you got to be more clever than 104 00:06:01,240 --> 00:06:04,479 Speaker 1: that as well. You've got to think about global disruption, 105 00:06:04,560 --> 00:06:08,039 Speaker 1: things like China, you know, setting up currencies potentially on 106 00:06:08,120 --> 00:06:10,640 Speaker 1: the c NH. What Dean Karner just said there, folks, 107 00:06:10,760 --> 00:06:14,160 Speaker 1: is the number one derivatives knowledge point. You need to know. 108 00:06:14,720 --> 00:06:18,560 Speaker 1: You can't hedge all the time because the cost of 109 00:06:18,640 --> 00:06:22,200 Speaker 1: doing the hedge accumulates, right for sure, just on a 110 00:06:22,240 --> 00:06:25,200 Speaker 1: first order, it's it's the both the quiet markets right now, 111 00:06:25,279 --> 00:06:28,040 Speaker 1: which are very difficult for hedges. And it turns out 112 00:06:28,440 --> 00:06:30,960 Speaker 1: that let's just say two thousand and eight, two tho nine, 113 00:06:31,279 --> 00:06:33,960 Speaker 1: the folks that were buying hedges in panic, we're paying 114 00:06:34,000 --> 00:06:37,880 Speaker 1: fifty seventy for the vics and even though the market 115 00:06:37,960 --> 00:06:40,839 Speaker 1: still moved around, you're paying so much for the insurance 116 00:06:40,839 --> 00:06:42,440 Speaker 1: that it turns out you lose money. One of the 117 00:06:42,560 --> 00:06:46,159 Speaker 1: charms of nac Tub with all of his brilliance on 118 00:06:46,800 --> 00:06:52,799 Speaker 1: framing the dynamics of the derivative market is making little bets. 119 00:06:53,360 --> 00:06:55,320 Speaker 1: How do you respond to people that say I want 120 00:06:55,320 --> 00:06:58,640 Speaker 1: to bet big. We've seen Mr Ackman and others challenged 121 00:06:58,680 --> 00:07:02,000 Speaker 1: by that verse. Is now seems saying I want to 122 00:07:02,040 --> 00:07:05,760 Speaker 1: buy little out of the money bets that have ginormous payoffs. Well, 123 00:07:05,800 --> 00:07:08,080 Speaker 1: I would be in a seem to lebs Camp. Especially 124 00:07:08,400 --> 00:07:12,280 Speaker 1: the way he frames this notion of anti fragile, he's 125 00:07:12,280 --> 00:07:15,560 Speaker 1: basically saying that optionality being long options, the right to 126 00:07:15,640 --> 00:07:18,280 Speaker 1: change your mind is an option, is an anti fragile 127 00:07:18,360 --> 00:07:22,040 Speaker 1: actually gains value when the system gets hit and damaged. 128 00:07:22,240 --> 00:07:24,080 Speaker 1: And there's not a lot of other assets like that. 129 00:07:24,120 --> 00:07:27,720 Speaker 1: Most of finances about shocks and the way in which 130 00:07:27,720 --> 00:07:30,200 Speaker 1: the asset prices responded the shocks. They certainly don't get. 131 00:07:30,320 --> 00:07:33,920 Speaker 1: They don't go up when shocked. Optionality, to Lebs out 132 00:07:33,960 --> 00:07:37,320 Speaker 1: of the money puts those can go up hugely in 133 00:07:37,400 --> 00:07:39,720 Speaker 1: value on a shock. About a hundred pages into his 134 00:07:39,840 --> 00:07:44,600 Speaker 1: brilliant anti fragile is the idea of a cardboard box 135 00:07:44,600 --> 00:07:46,440 Speaker 1: shipped through the mail. And the reason you have a 136 00:07:46,480 --> 00:07:50,200 Speaker 1: cardboard box is you know it's gonna ban get banged up. 137 00:07:50,560 --> 00:07:53,559 Speaker 1: If I know my portfolio is gonna get banged up, 138 00:07:54,320 --> 00:07:57,679 Speaker 1: how do you how do you right now protect yourself 139 00:07:58,080 --> 00:08:02,000 Speaker 1: with a portfolio cardboard box? Right? So I'm inclined right 140 00:08:02,000 --> 00:08:04,400 Speaker 1: now is clients asked me what should I do from 141 00:08:04,400 --> 00:08:06,320 Speaker 1: a hedging standpoint. A lot of them are focused now 142 00:08:06,320 --> 00:08:09,200 Speaker 1: out to year end. So as we think about, you know, 143 00:08:09,320 --> 00:08:11,920 Speaker 1: a a portfolio of trades out to year end, that's 144 00:08:11,960 --> 00:08:16,040 Speaker 1: a good UH way of spending option premium UM provides 145 00:08:16,080 --> 00:08:18,240 Speaker 1: good bang for the buck into a risk off. We're 146 00:08:18,240 --> 00:08:21,280 Speaker 1: thinking about different scenarios. One is the election. UM. You know, 147 00:08:21,320 --> 00:08:24,679 Speaker 1: we think that UH Trump doesn't have a strong chance 148 00:08:24,720 --> 00:08:28,880 Speaker 1: of winning, but the markets, almost in Pavlovian fashion, would 149 00:08:28,920 --> 00:08:32,040 Speaker 1: respond negatively UM. And so there's certain hedges you can 150 00:08:32,040 --> 00:08:35,560 Speaker 1: set it that are geared towards year end, specifically isolating 151 00:08:35,600 --> 00:08:38,280 Speaker 1: the election. The election is very unique in the in 152 00:08:38,320 --> 00:08:40,480 Speaker 1: the sense that it's like bregsit. It's a date on 153 00:08:40,520 --> 00:08:45,120 Speaker 1: the calendar that could have significant macro UH implications. But 154 00:08:45,200 --> 00:08:46,880 Speaker 1: we know the date, we know when it's coming, and 155 00:08:46,920 --> 00:08:50,000 Speaker 1: so you can design what they call calendar option trades 156 00:08:50,720 --> 00:08:53,000 Speaker 1: around the date. Well, you were talking about the cost 157 00:08:53,040 --> 00:08:55,760 Speaker 1: of hedging in the last segment, and Mark Chandler out 158 00:08:55,760 --> 00:08:57,880 Speaker 1: with a really smart note this morning for Brown Brother's 159 00:08:57,880 --> 00:09:01,800 Speaker 1: Hareman noting that everybody's attributing the end move to the FED, 160 00:09:02,080 --> 00:09:05,280 Speaker 1: but FED expectations have not changed for the past week 161 00:09:05,360 --> 00:09:07,920 Speaker 1: or two. And what he's suggesting, I'll run this by you, Dean, 162 00:09:08,080 --> 00:09:11,600 Speaker 1: is it um. There's a lot of maturing treasuries this 163 00:09:11,640 --> 00:09:14,640 Speaker 1: month gonna put about thirty billion dollars back into the market. 164 00:09:14,960 --> 00:09:17,520 Speaker 1: And he's noting that because of the cost of hedging 165 00:09:17,640 --> 00:09:21,560 Speaker 1: US denominated investments, that money is not going to be 166 00:09:21,640 --> 00:09:25,080 Speaker 1: coming here, it's going back home, and that's why we're 167 00:09:25,120 --> 00:09:26,840 Speaker 1: not only seeing the end but the euro and the 168 00:09:26,840 --> 00:09:29,600 Speaker 1: pounds stronger today. Yeah, I think from a flow of 169 00:09:29,640 --> 00:09:33,840 Speaker 1: funds uh standpoint, that is a is a good explanation. 170 00:09:33,920 --> 00:09:36,400 Speaker 1: You know, there's a lot of capital that came in 171 00:09:36,480 --> 00:09:39,839 Speaker 1: to buy treasuries just on the notion that and this 172 00:09:39,880 --> 00:09:43,320 Speaker 1: was capital that originated in in Japan. It came in 173 00:09:43,320 --> 00:09:45,600 Speaker 1: to buy treasuries because the yield advantage had gotten to 174 00:09:45,640 --> 00:09:49,280 Speaker 1: be uh that significant, And even when you factored in 175 00:09:49,360 --> 00:09:53,080 Speaker 1: some of the attendant currency hedging costs, there was still 176 00:09:53,120 --> 00:09:57,040 Speaker 1: an advantage that advantage has diminished quite a bit, so 177 00:09:57,160 --> 00:09:59,680 Speaker 1: you can see that UH there at least is some 178 00:10:00,400 --> 00:10:03,840 Speaker 1: uh potential that capital that's being repatriated back to Japan. 179 00:10:04,520 --> 00:10:07,600 Speaker 1: UH is a part of the stronger yeng story. And 180 00:10:08,160 --> 00:10:13,040 Speaker 1: is that hedging cost gonna continue to tighten given the 181 00:10:13,120 --> 00:10:16,080 Speaker 1: dynamics we're seeing, or do we get another opportunity, another 182 00:10:16,120 --> 00:10:18,920 Speaker 1: bite at the apple. I think what to me, what's 183 00:10:18,960 --> 00:10:23,760 Speaker 1: really interesting is this notion of globalized central bank policy. UH. 184 00:10:23,760 --> 00:10:26,600 Speaker 1: In other words, and I think the the FEDS about 185 00:10:26,600 --> 00:10:29,960 Speaker 1: face in March was this notion that we we may 186 00:10:30,840 --> 00:10:33,920 Speaker 1: want to tighten at a certain pace in trajectory, but 187 00:10:34,520 --> 00:10:37,520 Speaker 1: the weakness that's in some of our you know, main 188 00:10:37,679 --> 00:10:41,319 Speaker 1: trading partners their currencies is going to be something that 189 00:10:41,320 --> 00:10:42,920 Speaker 1: we're gonna have to start to look at as well. 190 00:10:43,240 --> 00:10:45,400 Speaker 1: So I think, you know, the FED is decided it 191 00:10:45,480 --> 00:10:48,560 Speaker 1: can't operate monetary policy and a vacuum. It's paying I 192 00:10:48,600 --> 00:10:52,920 Speaker 1: think a lot of attention to China uh specifically, but 193 00:10:52,960 --> 00:10:55,520 Speaker 1: it's it's got you know, the currency on its mind 194 00:10:55,559 --> 00:10:58,320 Speaker 1: in a way that I don't think we've seen before. 195 00:10:58,559 --> 00:11:01,679 Speaker 1: And right now again this is back to US equities. 196 00:11:01,679 --> 00:11:04,120 Speaker 1: You have this for the time being this kind of 197 00:11:04,120 --> 00:11:08,440 Speaker 1: goldilocks where the FED is in town, uh, for as 198 00:11:08,520 --> 00:11:10,240 Speaker 1: long as the market needs it to be in town. 199 00:11:10,280 --> 00:11:13,360 Speaker 1: And yet earnings UM. While this will be the fifth 200 00:11:13,360 --> 00:11:17,640 Speaker 1: straight UM year on year earnings quarter decline, first time 201 00:11:17,640 --> 00:11:20,680 Speaker 1: this happened since two thousand and eight to two tho nine, 202 00:11:21,160 --> 00:11:24,920 Speaker 1: earnings are still high and the multiple is is firm, 203 00:11:25,040 --> 00:11:27,600 Speaker 1: especially in an environment where there's just no yield to 204 00:11:27,600 --> 00:11:30,040 Speaker 1: be had in any other market, so it's it's supportive 205 00:11:30,040 --> 00:11:32,760 Speaker 1: for equities. Well, that raises the question of how high 206 00:11:32,800 --> 00:11:36,680 Speaker 1: can you go based on a central bank put You've 207 00:11:36,679 --> 00:11:40,079 Speaker 1: got everybody from Jeff good Luck to build Gross to 208 00:11:40,320 --> 00:11:44,880 Speaker 1: you know, all kinds of people saying sell now because 209 00:11:45,080 --> 00:11:48,960 Speaker 1: it's too dangerous out there. Right. I think shorting the 210 00:11:49,120 --> 00:11:53,839 Speaker 1: SMP five on valuation alone, I think it's probably not 211 00:11:54,040 --> 00:11:57,640 Speaker 1: the right way to think about putting putting the trade on. 212 00:11:57,960 --> 00:12:00,800 Speaker 1: You know, there's got to be some uh hiccup to 213 00:12:01,120 --> 00:12:04,920 Speaker 1: the risk taking environment where folks aside, Okay, look the 214 00:12:04,960 --> 00:12:08,160 Speaker 1: signals I'm getting from the central banks that have been 215 00:12:08,200 --> 00:12:11,880 Speaker 1: so dominant over the past many years, this low for 216 00:12:12,000 --> 00:12:15,000 Speaker 1: longer and essentially the way in which Bernanke calls it, 217 00:12:15,080 --> 00:12:19,840 Speaker 1: the portfolio balance channel essentially forces money into risky assets. 218 00:12:20,320 --> 00:12:23,480 Speaker 1: Uh that uh you know is really desperate to earn 219 00:12:23,520 --> 00:12:26,080 Speaker 1: some some carry. Okay, So in your library at home, 220 00:12:26,080 --> 00:12:28,480 Speaker 1: in my library, we've got Graham, Dot and Coddle from 221 00:12:28,520 --> 00:12:31,880 Speaker 1: another time and place. We've got you know, Ben Graham 222 00:12:31,920 --> 00:12:35,960 Speaker 1: and his books maybe worn buffet pontificating you and I 223 00:12:36,000 --> 00:12:39,760 Speaker 1: mentioned not seeing TALEB or the earlier. And then we 224 00:12:39,840 --> 00:12:42,960 Speaker 1: got all our economic textbooks. I would suggest those books 225 00:12:42,960 --> 00:12:46,400 Speaker 1: aren't linked. Right now, the orthodoxy of the Dean current 226 00:12:46,440 --> 00:12:50,400 Speaker 1: world is turned upside down. The orthodoxy of the Michael 227 00:12:50,440 --> 00:12:54,360 Speaker 1: McKey world is turned upside down. Let's go back twenty 228 00:12:54,440 --> 00:12:56,480 Speaker 1: thirty years and think about the way in which FED 229 00:12:56,520 --> 00:13:00,320 Speaker 1: policy interacted with the economy and with markets. Business goals 230 00:13:00,480 --> 00:13:04,200 Speaker 1: ended because inflation started, uh to peak its head out, 231 00:13:04,240 --> 00:13:05,920 Speaker 1: and then the Fed had to jump in and quote 232 00:13:05,920 --> 00:13:09,040 Speaker 1: pull away the punch and sound Tony Dwarf. Well, you 233 00:13:09,080 --> 00:13:11,080 Speaker 1: know this is this is old school, right, this is 234 00:13:11,120 --> 00:13:14,040 Speaker 1: the FED decides. Okay, we've got to you know, uh 235 00:13:14,200 --> 00:13:16,800 Speaker 1: nipties and scipient pricing pressures in the bud. We're gonna 236 00:13:16,880 --> 00:13:19,320 Speaker 1: raise the funds rate. That's going to cause the back 237 00:13:19,440 --> 00:13:21,440 Speaker 1: end of the yeld curve to sell off as well. 238 00:13:21,800 --> 00:13:24,920 Speaker 1: And then stocks viewing you know, tighter economic conditions and 239 00:13:24,960 --> 00:13:29,000 Speaker 1: the FED wanting to decelerate economic growth, stock sell off, 240 00:13:29,280 --> 00:13:32,880 Speaker 1: and so think about that. That's a positive correlation between 241 00:13:32,920 --> 00:13:35,960 Speaker 1: stock and bond prices. What you have now is quite 242 00:13:36,000 --> 00:13:38,520 Speaker 1: the opposite. You have this incredibly we were talking about 243 00:13:38,559 --> 00:13:42,240 Speaker 1: this time earlier, this incredibly negative correlation between stock and 244 00:13:42,280 --> 00:13:45,640 Speaker 1: bond prices day to day, their minus fift correlated. The 245 00:13:45,720 --> 00:13:49,360 Speaker 1: big concern I have, and we have generally macro risk advisors, 246 00:13:49,760 --> 00:13:52,160 Speaker 1: is that stock and bond prices, while they say different 247 00:13:52,160 --> 00:13:55,120 Speaker 1: things about the economy, they are ultimately linked to the 248 00:13:55,160 --> 00:13:57,800 Speaker 1: same thing, which is the FED and other central banks 249 00:13:57,800 --> 00:14:01,520 Speaker 1: have made the safe assets. Mike, would you explain to 250 00:14:01,600 --> 00:14:04,760 Speaker 1: Mr Kurnett and her break that those markets are linked 251 00:14:04,800 --> 00:14:08,839 Speaker 1: to lunch at Jackson Hall on Saturday. That's that's what 252 00:14:08,920 --> 00:14:12,000 Speaker 1: they're linked to. Jink currnet Macro risk Advisors with some 253 00:14:12,360 --> 00:14:28,440 Speaker 1: really important wisdom there. We were on yen watch all morning. 254 00:14:28,840 --> 00:14:32,640 Speaker 1: It finally did break through one hundred and has held there. 255 00:14:33,160 --> 00:14:35,400 Speaker 1: Uh and it's been a resistance point up to this point. 256 00:14:35,440 --> 00:14:38,240 Speaker 1: So maybe it is it is on with the show now. 257 00:14:39,160 --> 00:14:43,240 Speaker 1: It is unique. I mean, there's a lot of questions here. 258 00:14:43,640 --> 00:14:48,120 Speaker 1: It's like Dow ten thousand. Frankly, Mike, i'ld say it's 259 00:14:48,120 --> 00:14:51,160 Speaker 1: a bigger deal. And this is one of our listeners. 260 00:14:51,240 --> 00:14:55,240 Speaker 1: Neil said, there's a history here of of going ever stronger. Well, 261 00:14:55,240 --> 00:14:57,280 Speaker 1: once it breaks through, there's a tendency for it to 262 00:14:57,320 --> 00:15:00,960 Speaker 1: continue going. Jane Foley is a your currency strategist that 263 00:15:01,240 --> 00:15:04,520 Speaker 1: Rabble Banks. He's joining us from London, and we've talked 264 00:15:04,560 --> 00:15:06,640 Speaker 1: about the end quite a bit in the past. A 265 00:15:06,640 --> 00:15:10,240 Speaker 1: lot of people attributing this to interest rate differentials, the FED, 266 00:15:10,400 --> 00:15:14,280 Speaker 1: et cetera. But as people have noted, we're not seeing 267 00:15:14,600 --> 00:15:17,760 Speaker 1: FED expectations change, so there's got to be something else 268 00:15:17,800 --> 00:15:21,880 Speaker 1: going on here that is giving a boost to the end. Yeah, 269 00:15:21,920 --> 00:15:23,800 Speaker 1: I think you're right. I mean we can perhaps to 270 00:15:24,000 --> 00:15:25,840 Speaker 1: look at the dollar today and say, well, there's and 271 00:15:25,920 --> 00:15:28,080 Speaker 1: dollar weakness today and that may have been the trigger. 272 00:15:28,120 --> 00:15:31,200 Speaker 1: But really the underlying practice here I think around really 273 00:15:31,240 --> 00:15:33,680 Speaker 1: all about the the end, and certainly I think if 274 00:15:33,680 --> 00:15:35,400 Speaker 1: we go back to the start of the year, I 275 00:15:35,400 --> 00:15:39,160 Speaker 1: think we see something quite interesting evolving in in the end, 276 00:15:39,240 --> 00:15:41,440 Speaker 1: and that was if you were cool at the start 277 00:15:41,440 --> 00:15:42,720 Speaker 1: of the year, we had a big sell off in 278 00:15:42,960 --> 00:15:45,360 Speaker 1: stock markets and the end behaviors you would expect it 279 00:15:45,400 --> 00:15:47,600 Speaker 1: to behave. There was a lot of safe haven buying 280 00:15:47,640 --> 00:15:51,440 Speaker 1: and the end strengthened, but come February the risky assets 281 00:15:51,480 --> 00:15:55,000 Speaker 1: of stock markets were recovering. Now normally you'd see money 282 00:15:55,000 --> 00:15:56,840 Speaker 1: come back out of the end because it's a safe 283 00:15:56,840 --> 00:16:00,960 Speaker 1: haven currency, but it didn't it's say very much in 284 00:16:01,000 --> 00:16:02,960 Speaker 1: the end, and that has been a problem I think 285 00:16:02,960 --> 00:16:07,360 Speaker 1: for Japanese authorities all year. The year remained firm even 286 00:16:07,360 --> 00:16:10,800 Speaker 1: when risk as I want to do a clinic here, 287 00:16:11,160 --> 00:16:16,960 Speaker 1: when Japan intervenes, they're saying when they buy dollars and 288 00:16:17,160 --> 00:16:22,080 Speaker 1: push Japanese yen out into the system, right, and that 289 00:16:22,120 --> 00:16:25,440 Speaker 1: makes there's too many YenS. So the price weekends, which 290 00:16:25,440 --> 00:16:31,360 Speaker 1: in this case D one two. Where do they get 291 00:16:31,360 --> 00:16:34,080 Speaker 1: those dollars? When they buy dollars, who do they buy 292 00:16:34,120 --> 00:16:36,960 Speaker 1: them from? Well, I mean they have a balance, you know. 293 00:16:37,000 --> 00:16:39,520 Speaker 1: I don't think that would necessarily be the biggest problem 294 00:16:39,600 --> 00:16:41,920 Speaker 1: with them, at least not in the first round. I mean, 295 00:16:41,920 --> 00:16:45,080 Speaker 1: they would be selling in. They could they could potentially 296 00:16:45,080 --> 00:16:48,320 Speaker 1: be printing in and just buying the dollars on the market, 297 00:16:48,320 --> 00:16:52,040 Speaker 1: But the big problem for them would be what reaction 298 00:16:52,160 --> 00:16:54,800 Speaker 1: would there be from the U. S. Treasury, And given 299 00:16:54,880 --> 00:16:57,800 Speaker 1: the comments that we've had from the U. S. Treasury 300 00:16:57,840 --> 00:17:01,360 Speaker 1: in recent months, the U S wouldn't be willing to 301 00:17:01,440 --> 00:17:06,040 Speaker 1: support that type of intervention at all. Okay, I totally 302 00:17:06,080 --> 00:17:10,760 Speaker 1: agree on an international basis. On a domestic basis, you 303 00:17:10,840 --> 00:17:14,440 Speaker 1: do it sterilized or unsterilized. And folks, all you gotta 304 00:17:14,520 --> 00:17:18,280 Speaker 1: know is there's an effect of intervention, whether they do 305 00:17:18,280 --> 00:17:22,200 Speaker 1: it at or ninety or sixty seven. But but Jane 306 00:17:22,200 --> 00:17:26,679 Speaker 1: Foley helped me here with the ramifications of currency intervention 307 00:17:27,080 --> 00:17:31,080 Speaker 1: to the Japanese people and their domestic economy, Well, the 308 00:17:31,359 --> 00:17:33,520 Speaker 1: idea would be weak in the end, and therefore the 309 00:17:33,560 --> 00:17:36,920 Speaker 1: export is export more because if we think about domestic 310 00:17:36,920 --> 00:17:39,200 Speaker 1: demand or in a country like Japan ability the US 311 00:17:39,520 --> 00:17:42,880 Speaker 1: domestic demand is is hugely important. The Germans, for instance, 312 00:17:42,960 --> 00:17:45,240 Speaker 1: exported a lot more as a percentage of their GDP, 313 00:17:45,600 --> 00:17:48,560 Speaker 1: domestic AMoD is huge. But in Japan you've got a 314 00:17:48,560 --> 00:17:52,480 Speaker 1: population that is shrinking. They've got the worst aging demographics 315 00:17:52,640 --> 00:17:56,360 Speaker 1: in the developed world. The population is shrinking, and therefore 316 00:17:56,359 --> 00:17:59,680 Speaker 1: it's very difficult to keep on stimulating demands. So you 317 00:17:59,760 --> 00:18:02,400 Speaker 1: could argue them, maybe I do need to turn to exports. 318 00:18:02,440 --> 00:18:04,800 Speaker 1: But then you get into the whole conversation about a 319 00:18:04,840 --> 00:18:07,680 Speaker 1: turrency board, everybody trying to do the same thing. I 320 00:18:07,720 --> 00:18:09,879 Speaker 1: would not only take that, but I would also go 321 00:18:10,080 --> 00:18:14,640 Speaker 1: to the waiting that you would ascribe to hire interest 322 00:18:14,720 --> 00:18:18,600 Speaker 1: rates if they unilaterally intervene on yen. Is that a 323 00:18:18,680 --> 00:18:23,520 Speaker 1: legitimate concern or is Japan big enough to manage higher 324 00:18:23,560 --> 00:18:26,399 Speaker 1: interest rates as a second or third round effect. They 325 00:18:26,440 --> 00:18:28,560 Speaker 1: certainly wouldn't want to do that. They certainly didn't want 326 00:18:28,560 --> 00:18:31,959 Speaker 1: to do that. There's a lot of problems with interventions 327 00:18:32,240 --> 00:18:35,480 Speaker 1: I mentioned before, but there is a cool state the 328 00:18:35,960 --> 00:18:38,359 Speaker 1: point of view that it may not work. Jane Folly 329 00:18:38,400 --> 00:18:41,560 Speaker 1: with us. We're getting a clinic from Folly of Robbo 330 00:18:41,600 --> 00:18:47,800 Speaker 1: Bank on ramifications of a strong currency in what Japan 331 00:18:47,880 --> 00:18:50,880 Speaker 1: can do to intervene if you look at other currencies, 332 00:18:50,960 --> 00:18:54,960 Speaker 1: Jane looking back twenty years on Sterling, which has its 333 00:18:54,960 --> 00:18:58,360 Speaker 1: own soap opera right now, we're now out the massive 334 00:18:58,680 --> 00:19:02,480 Speaker 1: yend strength gets Darling really only one other time in 335 00:19:02,520 --> 00:19:04,960 Speaker 1: two decades. I'm going to call it two thousand and 336 00:19:05,000 --> 00:19:09,399 Speaker 1: twelve where we saw this equivalency. Can they jaw bone 337 00:19:09,480 --> 00:19:13,960 Speaker 1: other nations to assist in a weaker yen. I don't 338 00:19:13,960 --> 00:19:17,720 Speaker 1: think that that would work right now really, because every country, 339 00:19:17,720 --> 00:19:19,639 Speaker 1: well not every country, but every country, and they developed 340 00:19:19,640 --> 00:19:23,960 Speaker 1: world certainly is is grappling now with with very low inflation. Now, 341 00:19:24,000 --> 00:19:26,040 Speaker 1: if you want to if you want to fix your 342 00:19:26,080 --> 00:19:29,720 Speaker 1: inflation issues, your low inflation issues, then generally speaking, you 343 00:19:29,760 --> 00:19:32,480 Speaker 1: want a weak currency. If the other nations were to 344 00:19:32,560 --> 00:19:38,679 Speaker 1: agree to intervention to further to to to make the 345 00:19:38,840 --> 00:19:41,800 Speaker 1: end softer, what they do be agreeing to is a 346 00:19:41,840 --> 00:19:44,960 Speaker 1: stronger currency for themselves, and that's something that no country 347 00:19:45,000 --> 00:19:47,280 Speaker 1: in the development really wants right now. And that's going 348 00:19:47,320 --> 00:19:50,800 Speaker 1: to be the case until invent inflation pushes higher. And 349 00:19:50,840 --> 00:19:54,119 Speaker 1: that is a big issue for for the US. I mean, 350 00:19:54,440 --> 00:19:56,320 Speaker 1: US inflation might be a little bit higher than some 351 00:19:56,359 --> 00:20:00,359 Speaker 1: other countries, but it's certainly pretty soft. Until US plation 352 00:20:00,400 --> 00:20:02,440 Speaker 1: picks up. Well, the U. S. Treasury isn't going to 353 00:20:02,480 --> 00:20:05,920 Speaker 1: really want to support a significantly stronger dollar. Yeah, well, say, 354 00:20:06,920 --> 00:20:09,000 Speaker 1: they're not going to go anywhere unless they get the 355 00:20:09,040 --> 00:20:11,320 Speaker 1: US to participate. In the US isn't going to participate, 356 00:20:11,560 --> 00:20:14,480 Speaker 1: I would think, because a weaker dollar is kind of 357 00:20:14,520 --> 00:20:16,679 Speaker 1: what they want right now exactly. And you can go 358 00:20:16,720 --> 00:20:20,440 Speaker 1: back to the February g twenty. With this, there seemed 359 00:20:20,440 --> 00:20:23,360 Speaker 1: to be a lot of pressure from the US against 360 00:20:23,480 --> 00:20:26,879 Speaker 1: intervention for Japan, probably because I think the US at 361 00:20:26,880 --> 00:20:29,600 Speaker 1: that point we're beginning to see a pressure probably from 362 00:20:29,600 --> 00:20:34,000 Speaker 1: the US corporates against the dollar strength in fifteen, so 363 00:20:34,040 --> 00:20:37,280 Speaker 1: the US have have have really tried to push back 364 00:20:37,400 --> 00:20:41,480 Speaker 1: this notion that Japan needed intervention. So Japan went I 365 00:20:41,480 --> 00:20:43,959 Speaker 1: think with the with the issue that maybe that they 366 00:20:43,960 --> 00:20:49,320 Speaker 1: could have some coordinated fiscal spending instead by various other 367 00:20:49,560 --> 00:20:52,879 Speaker 1: central banks, but that one, although politically might be a 368 00:20:52,880 --> 00:20:56,120 Speaker 1: little bit easier, it certainly didn't wash either. Many countries 369 00:20:56,440 --> 00:21:01,399 Speaker 1: still maintaining this post financial crisis idea that we need 370 00:21:01,440 --> 00:21:06,359 Speaker 1: to have fiscal austerity. How do you define currency war? Well, again, 371 00:21:06,440 --> 00:21:11,000 Speaker 1: currency war is it is a symptom really of central 372 00:21:11,000 --> 00:21:13,800 Speaker 1: banks running out of policy and finding it very difficult 373 00:21:13,960 --> 00:21:19,120 Speaker 1: to to to stimulate growth and inflation. And whereas normally 374 00:21:19,160 --> 00:21:21,600 Speaker 1: in a normal environment that we just cut interest rates 375 00:21:21,880 --> 00:21:25,720 Speaker 1: once interest rates run out of steam, when they look 376 00:21:25,760 --> 00:21:28,840 Speaker 1: for other instidents and quantity of easing is one, but 377 00:21:28,880 --> 00:21:33,160 Speaker 1: a currency war is perhaps a natural byproduct of the 378 00:21:33,200 --> 00:21:37,879 Speaker 1: fact that normal central bank instruments aren't really working the 379 00:21:37,920 --> 00:21:41,960 Speaker 1: Bank of Japan calculates uh an effective exchange rate along 380 00:21:42,000 --> 00:21:48,000 Speaker 1: with the exchange ratepairs. That has not really fallen all 381 00:21:48,000 --> 00:21:50,280 Speaker 1: that much. It did drop a little bit after the 382 00:21:50,320 --> 00:21:53,720 Speaker 1: Brexit vote, but it's come back up again. So does 383 00:21:53,760 --> 00:21:57,240 Speaker 1: the Bank of Japan have the same concerns that perhaps 384 00:21:57,359 --> 00:22:00,359 Speaker 1: currency traders do about what impact this as on the 385 00:22:00,440 --> 00:22:04,680 Speaker 1: Japanese economy. Well, one of the issues that Japan has, 386 00:22:05,040 --> 00:22:08,240 Speaker 1: I mean, all countries have been concerns about their currency 387 00:22:08,240 --> 00:22:10,359 Speaker 1: and its impact on their economy, but one of the 388 00:22:10,400 --> 00:22:13,399 Speaker 1: big issues that Japan has and and and fits on 389 00:22:13,520 --> 00:22:16,120 Speaker 1: in the same is that they perhaps have less control 390 00:22:16,600 --> 00:22:19,840 Speaker 1: over their currency because people buy their currencies for safe 391 00:22:19,840 --> 00:22:22,920 Speaker 1: haven and that means that even with negative interest rates, 392 00:22:23,040 --> 00:22:27,040 Speaker 1: if people are feeling pressured or that they're wary of 393 00:22:27,280 --> 00:22:31,280 Speaker 1: political crisis, etcetera, they will buy their currency, and that 394 00:22:31,320 --> 00:22:35,320 Speaker 1: means a central bank finds it very offset those flows. 395 00:22:35,880 --> 00:22:39,800 Speaker 1: Janey on August morning, on a lazy August Tuesday. Where 396 00:22:39,800 --> 00:22:42,280 Speaker 1: are we get this news on yen? Is this a 397 00:22:42,400 --> 00:22:46,439 Speaker 1: jump condition? Is it a brutal trichet like move or 398 00:22:46,560 --> 00:22:51,400 Speaker 1: is the yen working within a measured vector where things 399 00:22:51,440 --> 00:22:55,760 Speaker 1: are normal and quiet, Which which way does that cut. 400 00:22:57,440 --> 00:22:59,280 Speaker 1: I think it very much depends on the time friend 401 00:22:59,280 --> 00:23:00,920 Speaker 1: that you're looking at. If again, if you go back 402 00:23:00,960 --> 00:23:03,200 Speaker 1: to that effective exchange rate, the Bank of Depands effective 403 00:23:03,200 --> 00:23:06,840 Speaker 1: exchange rate, although it's been strengthening this year, last year 404 00:23:06,840 --> 00:23:10,240 Speaker 1: it hit the lowest level since nine. So the Japanese yen, 405 00:23:10,560 --> 00:23:14,359 Speaker 1: on many measures, is an undervalued currency. Now that doesn't 406 00:23:14,359 --> 00:23:17,879 Speaker 1: seem to sit comfortably with this notion that the yen 407 00:23:17,960 --> 00:23:20,520 Speaker 1: strength has pushed through one d. But as it stands 408 00:23:20,520 --> 00:23:24,560 Speaker 1: on many measures, it's not overvalued, unlike the Swiss frank 409 00:23:24,840 --> 00:23:29,760 Speaker 1: which is and that alone means that intervention it's not 410 00:23:29,760 --> 00:23:32,600 Speaker 1: going to be appreciated the headline, But we've got to 411 00:23:32,640 --> 00:23:36,920 Speaker 1: translate that. That's important. Are you suggesting, miss Folly, that 412 00:23:37,119 --> 00:23:44,080 Speaker 1: at eight eight a proper value of yen is well? Again, 413 00:23:44,400 --> 00:23:47,480 Speaker 1: see when we were so used to thinking of the 414 00:23:47,560 --> 00:23:50,960 Speaker 1: Dolly yen exchange rate cross that we really must try 415 00:23:50,960 --> 00:23:54,160 Speaker 1: and think about this in terms of other cross rates. China, 416 00:23:54,240 --> 00:23:56,840 Speaker 1: for instance, is a more important trading partner to Japan 417 00:23:57,200 --> 00:23:59,600 Speaker 1: now than than the US is. So that's we should 418 00:23:59,600 --> 00:24:02,040 Speaker 1: be looking that exchange right, and perhaps it's what the 419 00:24:02,160 --> 00:24:05,720 Speaker 1: Chinese do to their currency over the next six months 420 00:24:05,720 --> 00:24:07,440 Speaker 1: of the same year. It's going to be the most 421 00:24:07,520 --> 00:24:10,399 Speaker 1: important thing to watch for the Bank of Japan and 422 00:24:10,600 --> 00:24:13,159 Speaker 1: the Ministry of Finance because that is going to be 423 00:24:13,240 --> 00:24:18,240 Speaker 1: really critical as to see how the yen really is 424 00:24:18,359 --> 00:24:20,600 Speaker 1: and how the export is in Japan. Are going to 425 00:24:20,680 --> 00:24:23,040 Speaker 1: feel how much pain they're going to feel. Yeah, I'm 426 00:24:23,040 --> 00:24:27,680 Speaker 1: looking at the price of a yen in Chinese remin 427 00:24:27,720 --> 00:24:31,840 Speaker 1: by and it gets stronger. Absolutely, and that again again 428 00:24:31,960 --> 00:24:34,639 Speaker 1: is because of the that loose peg if you like, 429 00:24:34,760 --> 00:24:38,000 Speaker 1: between the remmby and the U. S. Dollar. But that 430 00:24:38,240 --> 00:24:41,680 Speaker 1: is a real issue I think for the Japanese authorities 431 00:24:41,760 --> 00:24:45,680 Speaker 1: going going further out of China fears for its growth, 432 00:24:45,880 --> 00:24:47,800 Speaker 1: and if it does start to you allow the remmby 433 00:24:48,000 --> 00:24:50,440 Speaker 1: to fall further, that's going to be a real struggle 434 00:24:50,480 --> 00:24:52,920 Speaker 1: for the Japanese authority. So I go back to currency war. 435 00:24:52,960 --> 00:24:54,800 Speaker 1: I mean, you know what we try to do here 436 00:24:54,840 --> 00:24:57,800 Speaker 1: in surveillance focus is not just look at the major pairs. 437 00:24:57,960 --> 00:25:00,639 Speaker 1: I'm gonna assumed Jane, one out of a hundred of 438 00:25:00,680 --> 00:25:06,399 Speaker 1: our audience um doesn't follow yen ran mimbi. But the 439 00:25:06,440 --> 00:25:12,000 Speaker 1: fact is yen strength has given up what of abonomics 440 00:25:12,840 --> 00:25:15,919 Speaker 1: within that relationship? Yeah, Yeah, and it's a real problem. 441 00:25:15,960 --> 00:25:19,360 Speaker 1: And also we've got to remember it's not just the levels. 442 00:25:19,480 --> 00:25:21,600 Speaker 1: I mean, in our world we watched the levels, but 443 00:25:21,640 --> 00:25:24,000 Speaker 1: from the central banks or a treasury's point of view, 444 00:25:24,240 --> 00:25:27,640 Speaker 1: it is often the pace of the moves that is important. Now, 445 00:25:27,680 --> 00:25:31,120 Speaker 1: if this breaks through this level triggers it's a more 446 00:25:31,160 --> 00:25:34,640 Speaker 1: significant move lower. That's what's going to be really worrying 447 00:25:34,880 --> 00:25:37,600 Speaker 1: to those authorities, the pace of the move more than 448 00:25:37,640 --> 00:25:41,320 Speaker 1: the absolute measure itself. I look at this chain and 449 00:25:41,520 --> 00:25:43,200 Speaker 1: I'm gonna go back to a question answer a couple 450 00:25:43,240 --> 00:25:46,760 Speaker 1: of minutes ago. There's gotta be And I've been talking 451 00:25:46,800 --> 00:25:50,719 Speaker 1: folks for days about adjacency's with Japan. I mean, this 452 00:25:50,880 --> 00:25:54,280 Speaker 1: is it. You've got to have adjacency's if that currency 453 00:25:54,320 --> 00:25:58,880 Speaker 1: advances anymore. Well, again, there's a very important policy met 454 00:25:59,080 --> 00:26:01,240 Speaker 1: next month by the back Japan. Now, what they've said 455 00:26:01,240 --> 00:26:03,560 Speaker 1: about this policy meeting is that they want to sit 456 00:26:03,560 --> 00:26:06,480 Speaker 1: down and they want to examine the past through mechanisms 457 00:26:06,480 --> 00:26:10,560 Speaker 1: of monetary policy. Why isn't then working now? This is 458 00:26:10,640 --> 00:26:12,639 Speaker 1: this is going to be key really to see what 459 00:26:12,680 --> 00:26:14,840 Speaker 1: they decide. But there is a lot of speculation out 460 00:26:14,840 --> 00:26:18,440 Speaker 1: there that they could that's altered the parameters of monetary policy. 461 00:26:18,840 --> 00:26:22,240 Speaker 1: Right now, monetary policies all about increasing the money money supply. 462 00:26:22,800 --> 00:26:24,880 Speaker 1: Many people are saying, well, maybe that's that's not right 463 00:26:25,000 --> 00:26:28,080 Speaker 1: right now, for for for Japan, maybe instead they should 464 00:26:28,320 --> 00:26:30,800 Speaker 1: have some sort of targets to try and keep bond 465 00:26:30,840 --> 00:26:33,119 Speaker 1: deals so lower. Maybe that should be more effective. But 466 00:26:33,200 --> 00:26:35,400 Speaker 1: whatever way you look at it, whatever you think they 467 00:26:35,440 --> 00:26:37,960 Speaker 1: may do, you can come in against the constraints that 468 00:26:38,240 --> 00:26:41,040 Speaker 1: quantity vizing potentially is running out of steam when they 469 00:26:41,080 --> 00:26:44,120 Speaker 1: already owned about a third of all outstanding jgbs and 470 00:26:44,560 --> 00:26:46,800 Speaker 1: they have so many nets, so they are now a 471 00:26:46,880 --> 00:26:49,360 Speaker 1: big owner of so many of the nick I T 472 00:26:49,359 --> 00:26:53,480 Speaker 1: two five companies. Can people play this? I mean, do 473 00:26:53,520 --> 00:26:57,119 Speaker 1: you have a yen trade where you take this theory 474 00:26:57,320 --> 00:27:02,560 Speaker 1: and apply it to making money. Well, my trade really 475 00:27:02,600 --> 00:27:05,200 Speaker 1: for the last few months has been there's a significant 476 00:27:05,320 --> 00:27:09,880 Speaker 1: risk of more strength if we head into the youth elections, 477 00:27:09,880 --> 00:27:13,080 Speaker 1: if there's more political and certainty or surrounding that for 478 00:27:13,280 --> 00:27:16,640 Speaker 1: reason to buy the end as well. So there's there's 479 00:27:16,680 --> 00:27:19,159 Speaker 1: a lot of events out there to suggest that the 480 00:27:19,359 --> 00:27:22,200 Speaker 1: end could remain firm for a long time unless the 481 00:27:22,240 --> 00:27:24,480 Speaker 1: bankagep bank and pull a rabbit out of the sleeve 482 00:27:24,520 --> 00:27:27,080 Speaker 1: at its meeting next month. Jane Folly, thank you. This 483 00:27:27,119 --> 00:27:30,520 Speaker 1: has been a clinic folks on some of the ramifications 484 00:27:30,600 --> 00:27:35,120 Speaker 1: of intervention, and of course ms fully making the key 485 00:27:35,200 --> 00:27:42,119 Speaker 1: distinction between a coordinated intervention response which nobody's talking about, 486 00:27:42,640 --> 00:27:46,480 Speaker 1: in a unilateral intervention, which she stated Mr lew and 487 00:27:46,520 --> 00:27:50,399 Speaker 1: the Treasury would probably go, what what a hook saying 488 00:27:50,480 --> 00:28:03,919 Speaker 1: Peter Pan that form, That's what Mr Leu would say. 489 00:28:05,359 --> 00:28:11,000 Speaker 1: Something happened in the second quarter top to housing, when 490 00:28:11,080 --> 00:28:13,119 Speaker 1: the GDP numbers came out and they were, of course 491 00:28:13,200 --> 00:28:15,560 Speaker 1: a lot lower than people thought, one point two percent. 492 00:28:15,880 --> 00:28:18,879 Speaker 1: You looked at the chart and residential housing, which had 493 00:28:18,920 --> 00:28:22,000 Speaker 1: been rising at double digit rates, and quarter after quarter 494 00:28:22,080 --> 00:28:28,960 Speaker 1: after quarter was down six point one first subtraction from 495 00:28:29,000 --> 00:28:33,199 Speaker 1: GDP in a couple of years. Everybody wondering if that 496 00:28:33,280 --> 00:28:35,320 Speaker 1: was made because the weather was bad in the in 497 00:28:35,400 --> 00:28:37,640 Speaker 1: the second quarter, or or what's going on. We get 498 00:28:37,640 --> 00:28:42,600 Speaker 1: the first look at housing in the third quarter, which 499 00:28:42,680 --> 00:28:46,160 Speaker 1: July housing starts this morning. They are expected to be down. 500 00:28:46,600 --> 00:28:50,080 Speaker 1: Has housing rolled over? Doug Duncan is the chief economist 501 00:28:50,200 --> 00:28:53,240 Speaker 1: at Fanny May. He joins us, Now, Douga, do we 502 00:28:53,360 --> 00:28:57,520 Speaker 1: know what's happened? To housing, and we got mortgage rates 503 00:28:57,560 --> 00:29:03,120 Speaker 1: at record lows. Yeah, it's certainly not an affordability perspective problem. 504 00:29:03,160 --> 00:29:07,640 Speaker 1: From a rates perspective, there is a supply problem, UM 505 00:29:07,760 --> 00:29:11,560 Speaker 1: and the relationship of that to the to the business, 506 00:29:11,680 --> 00:29:16,160 Speaker 1: to the residential fixed investment is UM. I think driven 507 00:29:16,160 --> 00:29:20,320 Speaker 1: through two things. One is the availability and cost of 508 00:29:20,680 --> 00:29:24,400 Speaker 1: lands for development, and the second one is to increase 509 00:29:24,400 --> 00:29:27,160 Speaker 1: supply further, you're gonna have to have more skilled labor. 510 00:29:27,640 --> 00:29:31,000 Speaker 1: And actually builders are telling you the number of builders 511 00:29:31,040 --> 00:29:34,800 Speaker 1: telling you they're having our time finding skilled labors actually increasing. 512 00:29:35,240 --> 00:29:37,120 Speaker 1: If you're gonna try to increase output, you're gonna have 513 00:29:37,120 --> 00:29:39,560 Speaker 1: to have more skilled people to manage your unskilled people. 514 00:29:39,960 --> 00:29:42,600 Speaker 1: If you already had a constraint problem, it gets worse 515 00:29:42,680 --> 00:29:45,920 Speaker 1: as you try to expand further. So do we start 516 00:29:46,000 --> 00:29:48,640 Speaker 1: to see you come back here? Well, we've you know, 517 00:29:48,640 --> 00:29:52,440 Speaker 1: our theme for this year has been housing affordability constraints 518 00:29:52,560 --> 00:29:56,040 Speaker 1: as the expansion matures were really late cycle. This is 519 00:29:56,080 --> 00:30:00,240 Speaker 1: now the fourth longest economic expansion since World War Two. UM. 520 00:30:00,400 --> 00:30:03,440 Speaker 1: And there's a number of indicators in the economy that 521 00:30:03,560 --> 00:30:09,560 Speaker 1: looked pretty toppy. Autos seem to have topped. Is UH, 522 00:30:10,040 --> 00:30:14,120 Speaker 1: industrial production seems to have talked business fixed investment, which 523 00:30:14,160 --> 00:30:17,600 Speaker 1: never got very strong, UH to begin with, has been 524 00:30:17,760 --> 00:30:21,920 Speaker 1: on the move down housing as residential construction is moving 525 00:30:21,960 --> 00:30:24,640 Speaker 1: in sync with that to say that there's going to 526 00:30:24,720 --> 00:30:27,760 Speaker 1: be a recession, but certainly we're not in the camp 527 00:30:27,840 --> 00:30:31,840 Speaker 1: that suggests we've seen some robust second half. Let's come 528 00:30:31,880 --> 00:30:34,360 Speaker 1: back to industrial production and a minute in a minute, 529 00:30:34,760 --> 00:30:38,160 Speaker 1: Duck Duncan. I made a chart today comparing starts to 530 00:30:38,240 --> 00:30:42,200 Speaker 1: the combination of starts in existing homes, and it's an 531 00:30:42,240 --> 00:30:47,280 Speaker 1: extraordinary chart of our starts are less than they used 532 00:30:47,320 --> 00:30:51,680 Speaker 1: to be. What was in the oxygen in the late seventies, 533 00:30:52,600 --> 00:30:58,880 Speaker 1: in prerecession early eighties, were starts were just huge? Was it? 534 00:30:58,960 --> 00:31:03,280 Speaker 1: Was it a taxans sentive? Well, you had a couple 535 00:31:03,320 --> 00:31:07,760 Speaker 1: of things on. You had a lot less regulation for development, 536 00:31:08,440 --> 00:31:14,560 Speaker 1: um and uh, you certainly had didn't have the environmental restrictions, 537 00:31:14,560 --> 00:31:17,520 Speaker 1: for example, that you see on development today. And you 538 00:31:17,600 --> 00:31:21,360 Speaker 1: saw a run up from a slow period of building 539 00:31:21,440 --> 00:31:25,680 Speaker 1: and the set of the boomers were coming into into 540 00:31:25,720 --> 00:31:29,720 Speaker 1: their own uh in that time period as a homeowner group. 541 00:31:30,320 --> 00:31:33,640 Speaker 1: So you saw a significant boost in in demand and 542 00:31:34,040 --> 00:31:38,880 Speaker 1: a much more development friendly environment. Yeah, well, said I mean, 543 00:31:38,920 --> 00:31:42,520 Speaker 1: I agree with everything you've said. Do you, as a 544 00:31:42,560 --> 00:31:46,600 Speaker 1: policy maker in your group, I feel we need to 545 00:31:46,640 --> 00:31:51,680 Speaker 1: rekindle that boom in new home sales or is where 546 00:31:51,720 --> 00:31:56,920 Speaker 1: we are now normal? Well, I don't think we're uh. Uh. 547 00:31:57,160 --> 00:32:02,080 Speaker 1: We're at a place where you can see the construction 548 00:32:02,200 --> 00:32:04,520 Speaker 1: of starter homes in the way that you did, and 549 00:32:04,560 --> 00:32:08,880 Speaker 1: the data support that the average house size being built 550 00:32:08,920 --> 00:32:15,000 Speaker 1: today is is bigger than it was prior to the 551 00:32:15,640 --> 00:32:19,400 Speaker 1: to the Great Recession. Why is that, Well, you have 552 00:32:19,480 --> 00:32:21,160 Speaker 1: to as a builder, you have to be able to 553 00:32:21,200 --> 00:32:27,240 Speaker 1: spread the costs per square foot out uh uh at 554 00:32:27,240 --> 00:32:31,120 Speaker 1: a point that the household that you're intended household for 555 00:32:31,120 --> 00:32:38,720 Speaker 1: sale can afford it. And uh the increase in upfront 556 00:32:38,760 --> 00:32:44,520 Speaker 1: development cost has made uh has driven to larger house sizes. 557 00:32:44,720 --> 00:32:49,320 Speaker 1: In addition to the fact that the expansion or that 558 00:32:49,560 --> 00:32:54,520 Speaker 1: the policy response to the downturn was more beneficial to 559 00:32:55,280 --> 00:32:58,240 Speaker 1: households that Horror had more assets, that were wealthier or 560 00:32:58,320 --> 00:33:02,840 Speaker 1: had higher income and their demand was activated first. So 561 00:33:02,880 --> 00:33:06,200 Speaker 1: he had a combination of the cost of production uh 562 00:33:06,240 --> 00:33:10,360 Speaker 1: and the distribution of income that led to the larger 563 00:33:10,400 --> 00:33:13,200 Speaker 1: home production. DOUG. When you look at the housing starts numbers, 564 00:33:13,440 --> 00:33:15,479 Speaker 1: I'm looking at some of the breakdowns here, single family 565 00:33:15,880 --> 00:33:18,880 Speaker 1: half a percent, multifamily up five percent. So to a 566 00:33:18,920 --> 00:33:22,560 Speaker 1: certain extent, this is partly the volatility of multifamily. But 567 00:33:23,400 --> 00:33:25,680 Speaker 1: for the past four months we have seen starts coming 568 00:33:25,680 --> 00:33:30,200 Speaker 1: in stronger than analysts forecast. Yeah, we're we're not in 569 00:33:30,240 --> 00:33:34,600 Speaker 1: the camp that's UH forecasting a downturn. Yet we're we've 570 00:33:34,600 --> 00:33:39,520 Speaker 1: been continually in the camp that's gradual up trend in 571 00:33:39,280 --> 00:33:43,720 Speaker 1: UH in this starts UH numbers and that this supports 572 00:33:43,800 --> 00:33:46,320 Speaker 1: that view, you know. To go back to something Tom 573 00:33:46,400 --> 00:33:49,320 Speaker 1: was saying about his favorite chart. A couple of other 574 00:33:49,320 --> 00:33:51,960 Speaker 1: ways to look at this is if you look at 575 00:33:52,000 --> 00:33:56,440 Speaker 1: the number of single family starts per thousand population, that 576 00:33:56,680 --> 00:33:59,800 Speaker 1: part of construction is only back to the trough of 577 00:33:59,800 --> 00:34:03,560 Speaker 1: the prior to recessions. So that's one sense that we're 578 00:34:03,600 --> 00:34:05,680 Speaker 1: way out of whack. The second we have looking at 579 00:34:05,720 --> 00:34:10,000 Speaker 1: it is at sales. If you chart the existing home 580 00:34:10,040 --> 00:34:14,040 Speaker 1: sales per new home sale in bill way off of 581 00:34:14,080 --> 00:34:16,880 Speaker 1: its long term average, and that's a very stable number 582 00:34:16,920 --> 00:34:19,680 Speaker 1: at about five point five to one. Right now it's 583 00:34:19,719 --> 00:34:22,799 Speaker 1: about eight point five to one, and I see a 584 00:34:22,840 --> 00:34:28,120 Speaker 1: good housing number relatively, but c P I there's just 585 00:34:28,200 --> 00:34:31,359 Speaker 1: no inflation there off of this one's work, yields come in, Mike, 586 00:34:31,920 --> 00:34:35,440 Speaker 1: we're now in four basis points one point five one percent. 587 00:34:35,520 --> 00:34:38,839 Speaker 1: The two year grinds lower point six eight five five. 588 00:34:38,880 --> 00:34:40,359 Speaker 1: I don't want to make a big deal about it, 589 00:34:40,920 --> 00:34:43,319 Speaker 1: but Doug duncan, I mean, I, Mike, I haven't heard 590 00:34:43,360 --> 00:34:46,319 Speaker 1: this question on this show in days. What's the FED 591 00:34:46,400 --> 00:34:49,560 Speaker 1: do in September? We don't think they do anything. We 592 00:34:49,600 --> 00:34:52,040 Speaker 1: actually don't have the FED doing anything until next June. 593 00:34:52,560 --> 00:34:55,879 Speaker 1: That's not the that's not the marketing census right now, 594 00:34:55,920 --> 00:34:58,120 Speaker 1: but we don't. We see if you look at that 595 00:34:58,200 --> 00:35:01,000 Speaker 1: CPI number that the only things that are driving that 596 00:35:01,160 --> 00:35:04,560 Speaker 1: CPI number up at all are housing, and that's partly 597 00:35:04,560 --> 00:35:07,520 Speaker 1: because of the supply problem, which is driving real prices 598 00:35:07,560 --> 00:35:11,719 Speaker 1: and real rents up, and healthcare. So there's that. If 599 00:35:11,719 --> 00:35:14,480 Speaker 1: the FED raises rate, it's not because of inflation. It's 600 00:35:14,480 --> 00:35:17,400 Speaker 1: because they want to get a little more lost before 601 00:35:17,480 --> 00:35:20,480 Speaker 1: the nextra session, So they've cut somewhere to go. The 602 00:35:20,520 --> 00:35:25,040 Speaker 1: housing CPI number Housing up three tents. Uh. The o 603 00:35:25,200 --> 00:35:27,480 Speaker 1: E R. The way that you know they're they're converted 604 00:35:27,560 --> 00:35:30,440 Speaker 1: equipment rental, Yeah, own equivalent rent Uh. The way they 605 00:35:30,480 --> 00:35:33,960 Speaker 1: convert it for the CPI is up three tents, so yes, uh, 606 00:35:34,000 --> 00:35:38,480 Speaker 1: we're seeing stronger inflation in housing. The big declin seems 607 00:35:38,520 --> 00:35:42,080 Speaker 1: to be this month that pushed CPI lower was energy 608 00:35:42,120 --> 00:35:46,960 Speaker 1: down one point six percent. The bottom line though, is 609 00:35:47,040 --> 00:35:50,280 Speaker 1: that consumer prices aren't rising, so the Fed doesn't seem 610 00:35:50,320 --> 00:35:53,879 Speaker 1: to have any need to get out in front of inflation. Yeah, 611 00:35:53,920 --> 00:35:59,719 Speaker 1: we're we'd be surprised if they raised in UH in September. 612 00:35:59,800 --> 00:36:02,319 Speaker 1: If if they got strong numbers at the beginning of 613 00:36:02,320 --> 00:36:06,160 Speaker 1: the fourth quarter before the December then they might well 614 00:36:06,200 --> 00:36:08,960 Speaker 1: move in December. Their itching to move, but they don't. 615 00:36:09,160 --> 00:36:11,560 Speaker 1: They haven't filed the driver and they certainly haven't convinced 616 00:36:11,600 --> 00:36:16,719 Speaker 1: the markets. But Doug, I'm looking at core CPI. They 617 00:36:16,760 --> 00:36:19,160 Speaker 1: came down to tick from last month. Granted it's just 618 00:36:19,200 --> 00:36:23,080 Speaker 1: one data point and continuum, but if we all agree 619 00:36:23,200 --> 00:36:28,360 Speaker 1: the theory is overshoot inflation to support and reflate economy. 620 00:36:28,760 --> 00:36:32,360 Speaker 1: Do you see any indication we're overshooting now? With a 621 00:36:32,400 --> 00:36:36,600 Speaker 1: possible exception of service sector inflation is a little bit elevated. 622 00:36:37,320 --> 00:36:40,480 Speaker 1: I don't um, you know, because some people will cite 623 00:36:40,480 --> 00:36:44,040 Speaker 1: the reason increase in UH in income in the labor report. 624 00:36:44,120 --> 00:36:46,799 Speaker 1: But if you go back to the two thousand to 625 00:36:47,000 --> 00:36:50,360 Speaker 1: I mean to World War two out to two thousand, 626 00:36:51,160 --> 00:36:54,120 Speaker 1: average increase in that income numbers about three percent. We're 627 00:36:54,160 --> 00:36:57,160 Speaker 1: only at two point six and this is the what 628 00:36:57,280 --> 00:37:00,080 Speaker 1: the seventh year of this expansion. I don't see it. 629 00:37:00,800 --> 00:37:03,760 Speaker 1: The New York Fed President Tom is on Fox Business 630 00:37:03,760 --> 00:37:06,160 Speaker 1: Network their turn for an interview with him. Bill Dudley 631 00:37:06,239 --> 00:37:09,279 Speaker 1: says that they are edging closer to the time for 632 00:37:09,320 --> 00:37:11,680 Speaker 1: a rate hike, but they probably don't have to do 633 00:37:11,719 --> 00:37:15,480 Speaker 1: a lot of tightening over time, so that gives to 634 00:37:15,520 --> 00:37:18,400 Speaker 1: that idea of vector versus one off. Here's the headline. 635 00:37:18,600 --> 00:37:21,919 Speaker 1: Dudley says that a September rate hike is possible. See 636 00:37:21,920 --> 00:37:24,799 Speaker 1: who's channeling Doug dunk I'm not I'm not sure the 637 00:37:24,800 --> 00:37:28,120 Speaker 1: market's going to buy that. But before we let you go, Doug, 638 00:37:28,160 --> 00:37:31,560 Speaker 1: since your expertise is housing, we are seeing prices go 639 00:37:31,680 --> 00:37:34,640 Speaker 1: up on a on a rent basis because that's the 640 00:37:34,640 --> 00:37:37,839 Speaker 1: way the government calculates it. But in general, what are 641 00:37:37,920 --> 00:37:42,600 Speaker 1: house prices doing? Are Are we seeing a healthy level 642 00:37:43,040 --> 00:37:46,480 Speaker 1: of price increases? House prices for the last four years 643 00:37:46,480 --> 00:37:50,399 Speaker 1: have been increasing at about three to four times their 644 00:37:50,520 --> 00:37:54,800 Speaker 1: normal inflation adjusted rate of increase. It's because there's simply 645 00:37:54,840 --> 00:37:58,040 Speaker 1: a lack of supply. That's both on the rental side 646 00:37:58,160 --> 00:38:01,160 Speaker 1: and on the own side. So the apartment buildings which 647 00:38:01,239 --> 00:38:05,520 Speaker 1: were up in terms of starts this morning um are 648 00:38:05,560 --> 00:38:08,080 Speaker 1: being built in the Class A, that is the high 649 00:38:08,120 --> 00:38:12,200 Speaker 1: rent category. Nothing's being built in Class C. So if 650 00:38:12,239 --> 00:38:16,320 Speaker 1: you're a new household forms you're going in and paying 651 00:38:16,840 --> 00:38:20,040 Speaker 1: above what would have been a normal cyclical rent. That 652 00:38:20,080 --> 00:38:22,600 Speaker 1: means you're saving less to buy. But on the on 653 00:38:22,640 --> 00:38:26,600 Speaker 1: the builders side or the own side, the constructions all 654 00:38:26,640 --> 00:38:29,480 Speaker 1: taking in larger, higher priced homes, not in the starter 655 00:38:29,560 --> 00:38:34,359 Speaker 1: homes to have this cyclical relationship. Never enough time, Doug 656 00:38:34,440 --> 00:38:36,200 Speaker 1: Don can thank you so much. It's any me. This 657 00:38:36,320 --> 00:38:49,840 Speaker 1: morning to your yield was a point six nine, and 658 00:38:49,920 --> 00:38:53,760 Speaker 1: after Dudley and after these numbers it's a point seven three. 659 00:38:54,239 --> 00:38:57,360 Speaker 1: That's a sizeable move. Mike McKee, what's the goodness you 660 00:38:57,440 --> 00:39:02,759 Speaker 1: see there? Well, the goodness is that we're getting the 661 00:39:02,880 --> 00:39:06,440 Speaker 1: kind of rates that perhaps Bill Dudley thinks, well, we're 662 00:39:06,440 --> 00:39:08,680 Speaker 1: still very low, but things are more appropriate a lot 663 00:39:08,680 --> 00:39:10,920 Speaker 1: of people think would be more appropriate for the economy 664 00:39:10,920 --> 00:39:13,000 Speaker 1: that we have. You look at the industrial production numbers, 665 00:39:13,440 --> 00:39:17,440 Speaker 1: and the manufacturing numbers were up a healthy half percent 666 00:39:18,440 --> 00:39:20,880 Speaker 1: after three tenths in June. So what you're seeing is, 667 00:39:21,320 --> 00:39:24,200 Speaker 1: remember we saw that big question about manufacturing earlier in 668 00:39:24,239 --> 00:39:27,279 Speaker 1: the year, and everybody said, well, did we are we 669 00:39:27,440 --> 00:39:31,080 Speaker 1: entering recession? And that seems to be emphatically answered no. 670 00:39:31,200 --> 00:39:34,200 Speaker 1: There was this big draw down of inventories and so 671 00:39:34,360 --> 00:39:37,400 Speaker 1: companies weren't making stuff, but now they're back to making it. 672 00:39:37,640 --> 00:39:41,160 Speaker 1: Martin Haggerty with black Rock synthesizing all this with the 673 00:39:41,600 --> 00:39:46,040 Speaker 1: mystery known as inflation link linked bonds. Martin, all the 674 00:39:46,120 --> 00:39:49,040 Speaker 1: numbers to they are pretty good, and yet inflation is 675 00:39:49,200 --> 00:39:54,239 Speaker 1: quite essent. Why can't prices lift if we're getting okay 676 00:39:54,280 --> 00:39:58,279 Speaker 1: American economic data? That's a very good question, Tom. I 677 00:39:58,320 --> 00:40:01,839 Speaker 1: think the the sort of underlying components of to day 678 00:40:02,200 --> 00:40:06,919 Speaker 1: data painting a pretty diverse picture. Where we've obviously had 679 00:40:07,160 --> 00:40:10,320 Speaker 1: a significant appreciation of the dollar over the past eighteen 680 00:40:10,360 --> 00:40:12,480 Speaker 1: months sort of leading up until the beginning of two 681 00:40:12,520 --> 00:40:15,680 Speaker 1: thousand and sixteen, which continues to weigh on the goods 682 00:40:15,680 --> 00:40:18,319 Speaker 1: component of the economy. And you guys talked about it 683 00:40:18,320 --> 00:40:21,600 Speaker 1: in the prelude about sort of softer manufacturing data build 684 00:40:21,680 --> 00:40:24,400 Speaker 1: up of inventories that need to be worked down, and 685 00:40:24,520 --> 00:40:28,879 Speaker 1: that is obviously casting a pull over goods inflation. What 686 00:40:28,960 --> 00:40:34,360 Speaker 1: we are seeing is reasonably healthy services inflation with the 687 00:40:34,400 --> 00:40:38,759 Speaker 1: exception of today's data. So going into this morning's CPI forecasts, 688 00:40:39,320 --> 00:40:43,719 Speaker 1: the market's expectation for course cp I was something in 689 00:40:43,760 --> 00:40:47,120 Speaker 1: the vicinity of a zero point one five month over 690 00:40:47,200 --> 00:40:49,720 Speaker 1: month print that would have rounded up to zero point two, 691 00:40:50,000 --> 00:40:52,960 Speaker 1: and we missed to the downside of that by about 692 00:40:52,960 --> 00:40:56,000 Speaker 1: point six of a percent, and about being a part 693 00:40:56,000 --> 00:40:59,320 Speaker 1: in point six of a percent, And looking at the 694 00:41:00,040 --> 00:41:03,360 Speaker 1: rationale for that miss or the reasons behind the miss, 695 00:41:03,239 --> 00:41:07,239 Speaker 1: it basically came from two components affairs which showed a 696 00:41:07,320 --> 00:41:12,520 Speaker 1: decline in July of five and rent away from home 697 00:41:12,640 --> 00:41:15,799 Speaker 1: sorry or lodging away from home hotels, which showed a 698 00:41:15,920 --> 00:41:19,319 Speaker 1: decline of around two point five or two point nine. 699 00:41:20,360 --> 00:41:23,640 Speaker 1: So the volatility or the miss was driven by a 700 00:41:23,680 --> 00:41:28,279 Speaker 1: couple of very very very volatile components. And as we've 701 00:41:28,280 --> 00:41:31,800 Speaker 1: had this conversation in the past around previous CPI prints, 702 00:41:32,160 --> 00:41:34,719 Speaker 1: we like to look at inflation or break down the 703 00:41:34,719 --> 00:41:38,880 Speaker 1: inflation data into the low volatility and high volatility component. 704 00:41:39,440 --> 00:41:44,400 Speaker 1: The high vault today can continue to decline given the 705 00:41:44,840 --> 00:41:49,200 Speaker 1: measures that I that I alluded to, um affairs and 706 00:41:49,840 --> 00:41:53,800 Speaker 1: lodging away from home. However, the low vall components continued 707 00:41:53,880 --> 00:41:57,200 Speaker 1: to go up. You know, we had a reasonable build 708 00:41:57,320 --> 00:42:01,400 Speaker 1: in medical services inflation, which speaks to the underlying strength 709 00:42:01,440 --> 00:42:04,120 Speaker 1: within that industry and the tightness of those labor markets, 710 00:42:04,200 --> 00:42:08,640 Speaker 1: driving services inflation higher within the medical care space. So 711 00:42:08,760 --> 00:42:12,399 Speaker 1: our low val component kicked up and our high valt 712 00:42:12,440 --> 00:42:17,520 Speaker 1: component picked down, which we think for the aggregated inflation indices, 713 00:42:18,320 --> 00:42:20,799 Speaker 1: they tend to go where the low val components go, 714 00:42:21,440 --> 00:42:26,480 Speaker 1: And so we're still reasonably constructive that you're over your 715 00:42:26,640 --> 00:42:30,000 Speaker 1: core inflation will end two thousand and sixteen somewhere in 716 00:42:30,000 --> 00:42:33,480 Speaker 1: the vicinity of two point three, and given the recent 717 00:42:33,560 --> 00:42:38,160 Speaker 1: declines in the dollar, potentially maybe even a tad but 718 00:42:38,320 --> 00:42:40,680 Speaker 1: higher than that. When you look at the numbers today, 719 00:42:41,040 --> 00:42:47,040 Speaker 1: you don't see much besides energy that really signals falling prices. 720 00:42:47,440 --> 00:42:52,160 Speaker 1: So when you take that out of the equation, how 721 00:42:52,200 --> 00:42:56,800 Speaker 1: fast do you think inflation accelerates. That will obviously depend 722 00:42:56,840 --> 00:42:59,440 Speaker 1: on the pace of the elimination of flak in the 723 00:42:59,520 --> 00:43:02,759 Speaker 1: labor mark it, which we're starting to see signs that 724 00:43:02,760 --> 00:43:05,120 Speaker 1: that wage growth is continuing to pick up as the 725 00:43:05,200 --> 00:43:08,160 Speaker 1: unemployment rate continues to go down. We don't believe that 726 00:43:08,239 --> 00:43:11,080 Speaker 1: the Phillips curve is flat, and we will continue to 727 00:43:11,120 --> 00:43:14,680 Speaker 1: see an uptick in wages that should be enough to 728 00:43:14,719 --> 00:43:19,920 Speaker 1: provide positive momentum towards inflation. Again on the higher volatility 729 00:43:19,920 --> 00:43:24,080 Speaker 1: components that are heavily influenced by commodity prices as well 730 00:43:24,160 --> 00:43:27,560 Speaker 1: as as the dollar, I think the base effects are 731 00:43:27,560 --> 00:43:30,680 Speaker 1: going to be positive going into urine, which should push 732 00:43:30,760 --> 00:43:32,960 Speaker 1: the year on your prints, as I said, up towards 733 00:43:33,360 --> 00:43:36,719 Speaker 1: two point three um after today's print of two point two, 734 00:43:36,960 --> 00:43:40,240 Speaker 1: with potentially risks to the high side, but that definitely 735 00:43:40,280 --> 00:43:43,840 Speaker 1: does depend on the path of dollar and commodities going 736 00:43:43,880 --> 00:43:46,879 Speaker 1: into into the end of the year. And now go ahead, 737 00:43:46,880 --> 00:43:49,840 Speaker 1: please Martin, please no. I think you know the inflation 738 00:43:49,880 --> 00:43:52,279 Speaker 1: market has had a couple of interesting developments over the 739 00:43:52,360 --> 00:43:55,560 Speaker 1: last twenty four hours. In fact, I would extrapolate that 740 00:43:55,600 --> 00:43:58,319 Speaker 1: thought to markets as a whole, where we obviously had 741 00:43:58,320 --> 00:44:02,239 Speaker 1: the CPI data released the morning, but I think John 742 00:44:02,280 --> 00:44:06,520 Speaker 1: Williams has published letter yesterday afternoon. It's extremely thought provoking. 743 00:44:06,960 --> 00:44:09,080 Speaker 1: As we approached Jackson Hole at the end of the 744 00:44:09,120 --> 00:44:12,600 Speaker 1: month in terms of what is the potential path of 745 00:44:12,719 --> 00:44:14,880 Speaker 1: fit policy for the future. We're gonna have to come 746 00:44:14,880 --> 00:44:18,439 Speaker 1: back and talk about that with Martin, because um, this 747 00:44:18,520 --> 00:44:21,400 Speaker 1: is uh, well, well if we have time today, but 748 00:44:21,600 --> 00:44:23,520 Speaker 1: we'll have to get you back, go, get you back on. 749 00:44:23,680 --> 00:44:26,279 Speaker 1: This is brilliant, This is gonna be It's gonna be 750 00:44:26,280 --> 00:44:28,520 Speaker 1: a huge issue out in Jackson Hall. It seems the 751 00:44:28,520 --> 00:44:30,640 Speaker 1: ft is beginning some sort of rethink here. Yeah, we 752 00:44:30,719 --> 00:44:33,960 Speaker 1: gotta get Martin Agady on with black Rock as well. 753 00:44:35,880 --> 00:44:39,960 Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and 754 00:44:40,000 --> 00:44:45,440 Speaker 1: listen to interviews on iTunes, SoundCloud, or whichever podcast platform 755 00:44:45,520 --> 00:44:49,600 Speaker 1: you prefer. I'm on Twitter at Tom Keane. Michael McKee 756 00:44:49,680 --> 00:44:53,239 Speaker 1: is at Economy before the podcast. You can always catch 757 00:44:53,320 --> 00:45:00,600 Speaker 1: us worldwide. I'm Bloomberg Radio.