Speaker 1: Welcome to the Bloomberg surveillance podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailey. We bring you
Speaker 1: insight from the best and economics, finance, investment and international relations.
Speaker 1: Find Bloomberg surveillance on Apple podcast, Suncloud, Bloomberg Dot Com and,
Speaker 1: of course, on the Bloomberg terminal. Kathy changes hits away
Speaker 1: and she's not Kathy staying with us that way. I'm
Speaker 1: not coming to you on that, Kathy. We all want
Speaker 1: to know. A ten year, three, three fifty, a two
Speaker 1: year approaching four, Kathy, these big buys. Either one of
Speaker 1: them for you. Well, we like extending duration here. I
Speaker 1: think it's unsustainable to have the Fed hiking rates at
Speaker 1: a very rapid rate, doing qt with, you know, the
Speaker 1: economy slowing. We've had six months of declining ALII, which
Speaker 1: the housing market decline. Uh. These are unsustainable trends. At
Speaker 1: some stage of the game the FAD will have to
Speaker 1: shift and or, you know, we're just going to go
Speaker 1: into a deeper recession than we may already be in.
Speaker 1: And so we do like expanding duration. Albeit yeah, rates
Speaker 1: could continue to move up, but I think all we're
Speaker 1: getting is a deeper and deeper in version of the
Speaker 1: ill curve here. And, Kathy, this cold and extended duration
Speaker 1: ultimately has to be a call on economy rolling over.
Speaker 1: Do you have an idea of the pain threshold the
Speaker 1: Fed is willing to go through? Well, I did mention
Speaker 1: pain for households and businesses last time and I think
Speaker 1: there's a willingness to let it continue and and worsen,
Speaker 1: particularly Um. I think the Fed wants to see unemployment rise.
Speaker 1: They won't say that out loud, but I think they
Speaker 1: want to see Um Labor conditions not as tight as
Speaker 1: the way that they'll put it, and they want to
Speaker 1: see wages slow down. Right now, average hour learning is
Speaker 1: running at five point two percent a year over year.
Speaker 1: It's leveled off, it's stabilized, but we haven't seen it
Speaker 1: decline and I think their comfort zone is closer to
Speaker 1: three percent in terms of wage gains than five percent.
Speaker 1: So that is probably what you know. They're willing to tolerate. Um.
Speaker 1: The question is whether you know whether risk assets can
Speaker 1: tolerate that sort of pain. Cathy, do care about the
Speaker 1: DUB plot? Well, we have to write because I put
Speaker 1: it out there, UM, but it's a moving target. I
Speaker 1: just look at it as a moment in time. Guesses.
Speaker 1: I'm not going to take it too seriously. I think
Speaker 1: it's a messaging tool. Um, simply the FAD will show
Speaker 1: that they want of hype grades and keep them there
Speaker 1: for a long time. But it's a moving target. Kathy,
Speaker 1: I asked this because there's a question about the credibility
Speaker 1: of this Fedu reserve, the credibility that they're actually coming
Speaker 1: up with a thesis that they can follow through on,
Speaker 1: versus just following the market and doing what the market
Speaker 1: is dictated day. How much has that shifted your view
Speaker 1: of how to operate and how much volatility is going
Speaker 1: to be injected in these markets at a time when
Speaker 1: the feed is not leading anymore, it is apparently following
Speaker 1: much more with the markets already doing. Yeah, I think
Speaker 1: the fat is in a position now actually following the
Speaker 1: inflation data, and we know the inflations are lagging indicator.
Speaker 1: We know that monetary policy works with the leg and
Speaker 1: so they've shifted instead of saying, Hey, we're on top
Speaker 1: of this, you know, we're we're taking action, we've got
Speaker 1: qt on top of a rapid tightening cycle. Um, they
Speaker 1: shifted instead of saying, okay, we know that what we're
Speaker 1: doing will make progress in the future, to reacting to
Speaker 1: numbers that are coming out today, and that's why the
Speaker 1: risk is for a deeper and deeper slowdown in the economy,
Speaker 1: and this is compounded globally. You know, we're seeing this
Speaker 1: all over the world and that that makes it even
Speaker 1: more of a problem for people who are trying to
Speaker 1: look forward and look at what the is saying versus
Speaker 1: what the fet is doing. How much conviction do you have, Kathy?
Speaker 1: You are saying it is a good time to go
Speaker 1: into duration, and how much conviction do you have that?
Speaker 1: We've seen the highs were at some of the higher
Speaker 1: levels for longer term treasuries at a time when you're
Speaker 1: questioning whether or not we're actually already in a recession,
Speaker 1: let alone headed for one? You know, we feel pretty
Speaker 1: confident in moving out the curb. We're not all in buying,
Speaker 1: you know, thirty year bonds or ten year bonds here,
Speaker 1: but we do think that it's unsustainable. We're starting to
Speaker 1: see credit spreads widen't a bit, the straints in the economy,
Speaker 1: the strains in the marketplace. Liquidity isn't what it used
Speaker 1: to be, and so you feel pretty confident that this
Speaker 1: is the time to start taking advantage of yields where
Speaker 1: you can lock in, you know, an investment grade portfolio
Speaker 1: right now. You can lock at fortified percent yields without
Speaker 1: taking a tremendous amount of duration risk. We think that
Speaker 1: that's a good alternative compared to some of the other
Speaker 1: asset classes out there. Kathy, thank you. They're putting in
Speaker 1: Kathy John's a child swap on the bond market. Christopher Ryan,
Speaker 1: partner had a technical mat try strategistic to take us
Speaker 1: some bad company. Great Co Chris. I mean, we're so
Speaker 1: close three. I think we came even closer than that.
Speaker 1: When next, I guess? And just the B L J blank. Well,
Speaker 1: I think they have to. I mean when you look
Speaker 1: at yields around the world, US tends, as we mentioned,
Speaker 1: our three fifty three. This morning German tens are basically
Speaker 1: two percent. We've seen UK tens absolutely run away and
Speaker 1: we sit here and Japanese tenure yields are Bass points.
Speaker 1: I'm just not sure how much longer the B O
Speaker 1: j can sustain this cap on yield without losing total
Speaker 1: control of the end. So we like dollar yen higher until, frankly,
Speaker 1: someone breaks, and I think that's the B O j.
Speaker 1: So whether that's one fifty or one fifty five or
Speaker 1: some other level, Um, I think we're on a collision
Speaker 1: course here that ends with B o j capitulating, raising
Speaker 1: the cap on yields to get more in step with
Speaker 1: what we're seeing a around the world. And Chris, if
Speaker 1: you've thought much about how the dominoes fall from that,
Speaker 1: if that headline drop that they stepped away from your control,
Speaker 1: what it makes for Buns, what it makes to try
Speaker 1: to race? I mean I think the initial reaction is
Speaker 1: maybe you then you get your blow off in yield.
Speaker 1: But our experience just has been, I think the historical
Speaker 1: experience has been, bond yields tend to go up until
Speaker 1: something breaks, and that's why I just don't think that
Speaker 1: we're done here yet on yields. Our view on yields
Speaker 1: has simply been they're going to remain stickier and higher
Speaker 1: than the consensus believes until there's an accident, and I'm
Speaker 1: not convinced we've quite seen that accident yet. And the
Speaker 1: accident comes with longer term yields rising in addition to
Speaker 1: short term yields. Possibly what you're talking about with the
Speaker 1: yield curve control being abandoned in the bank Japan and
Speaker 1: the ripple effects through the rest of the world. What
Speaker 1: kind of downside are you looking at? How do you
Speaker 1: sort of hedge against that scenario at a time when
Speaker 1: it could take a lot longer than people could afford
Speaker 1: to keep that position on? Well, I think it just
Speaker 1: speaks to our overall positioning here, which is placed ball,
Speaker 1: go slow, be prudent. Caution is still the word of
Speaker 1: the day and you know, where you really see, at
Speaker 1: least the impact of yields is on what the leadership
Speaker 1: framework of this market looks like. You have yields up
Speaker 1: and utilities continue to dominate. So I look at that
Speaker 1: as a very lead cycle message. You know, when you
Speaker 1: look at the top of the market, the big stocks,
Speaker 1: the big weights, the one everyone owns right, a lot
Speaker 1: of those are already below where they were in June,
Speaker 1: whether it's Google or whether it's Microsoft. So you know,
Speaker 1: you see the impact of yields continuing to hit Tech
Speaker 1: Um and I think that's going to remain the story
Speaker 1: until yields peak, which I just don't think's here. So
Speaker 1: when you look out to what's going to happen in
Speaker 1: the next couple of months. What I'm wrapping my head
Speaker 1: around is what's the downside here, right? I mean an accident?
Speaker 1: How does that ripple through a market when people are
Speaker 1: saying there isn't the same kind of leverage, you're not
Speaker 1: seeing the fragility in banks. You have a much more
Speaker 1: stable base of consumers and their savings and corporate savings.
Speaker 1: So that's the reason why you have this bid, you
Speaker 1: have this range. What's going to break that? Will anything
Speaker 1: or is that so going to be the reality? You know,
Speaker 1: I think that's unclear. The narrative or the consensus is
Speaker 1: that there's no ice to banks or that consumers are
Speaker 1: in better shape than we've seen. But I'm gonna let
Speaker 1: the market be the judge of that. When I look
Speaker 1: kind of a different pockets around the world, I could
Speaker 1: show you plenty of weak consumer stocks that would suggest,
Speaker 1: Um that the market might have a very different opinion
Speaker 1: of that. Are Plenty of weak bank stocks that would
Speaker 1: suggest the market has a different opinion to that. So
Speaker 1: we let the market kind of dictate that. What I
Speaker 1: think is most important for investors is, you know, the
Speaker 1: debate on the street is okay, SMP gonna, you know,
Speaker 1: revisit or retest or undercut the Jew lows. And the
Speaker 1: only thing I would add to that conversation is a
Speaker 1: lot of important stocks already have right when we talk
Speaker 1: about the top of the market, Microsoft has, Google has
Speaker 1: Um Meta is back to where it was at the
Speaker 1: covid loans right. So kind of go down the line
Speaker 1: and a lot of big names, a lot of big
Speaker 1: weights have already, I think, started to reflect that risk.
Speaker 1: Chris lost decades on, unheard of. You can have much
Speaker 1: thought to that. That's so recently. When it comes to
Speaker 1: the UITY market, it's it's funny that that you mentioned that, Jonathan.
Speaker 1: Earlier in the year we wrote something to the effect of,
Speaker 1: you know, the most provocative thing we could say is
Speaker 1: not that the SMP is going to go a ton lower,
Speaker 1: because I think everyone was pretty bearish, but that the
Speaker 1: SMP is not going to make much progress for a
Speaker 1: long period of time. And that's a view that that
Speaker 1: that that we've kind of embraced here as you kind
Speaker 1: of make this transition from que e to qt. I
Speaker 1: think at a minimum, when you look at the very
Speaker 1: liquidity sensitive assets out there, new I P O, s, bitcoin,
Speaker 1: high multiple software stocks. I think those things are done
Speaker 1: as your leadership. For a very, very long time that's
Speaker 1: been our view that remains our view. So I think
Speaker 1: when you look at those, uh, you know, very speculative
Speaker 1: corners of the market, they are saying, even if the
Speaker 1: SMP loads are in here, there is no new liquidity
Speaker 1: cycle in front of us. The reason I bring this up,
Speaker 1: and I imagine it's the reason you're thinking about it too,
Speaker 1: is that we've just blown up a decade of Quei
Speaker 1: forever and serve and I just struggle, Chris, and we're
Speaker 1: living this in real time. I just struggle to understand
Speaker 1: why twelve months of race and interest rates in turn
Speaker 1: a bit of cute and then we go back to
Speaker 1: where we were before. These are big moves. It's not
Speaker 1: just the Fed, it seems to be pretty much everyone,
Speaker 1: with the exception of, say, the B O J. I mean,
Speaker 1: why would it take just twelve months to reverse ten
Speaker 1: years of that? And then the consequences are, oh yeah,
Speaker 1: we just got back to the old playbook in about
Speaker 1: six nages. I'm with you, I think, to kind of
Speaker 1: maybe use a little bit of a cliche this, this
Speaker 1: does look and feel like regime change, and I think
Speaker 1: that the one chart of the one exhument that speaks
Speaker 1: to that, it's on the Bloomberg terminal, is that dollar
Speaker 1: value of negative yielding debt. You know, we went from
Speaker 1: eighteen trillion dollars of negative building debt as recently as
Speaker 1: a year ago. It's down to about one trillion dollars today.
Speaker 1: So if you're looking for regime change, I think there's
Speaker 1: no better exhibit of it than that. Is this a
Speaker 1: resume change when it comes to nominal yield or is
Speaker 1: this a regime change when it comes to real yields?
Speaker 1: Are we going to see real yields continue to climb
Speaker 1: as people price in a very different response from central banks? Well,
Speaker 1: it's both. And I think the thing about real yields
Speaker 1: right it's it's it's Um it's somewhat fashionable to say
Speaker 1: that that that really yields are positive or that, you know,
Speaker 1: really yield are above one percent, but not not really.
Speaker 1: I mean the Fed funds rate is still well below
Speaker 1: the rate of inflation. So in kind of in any
Speaker 1: practical sense for savers, really ills are not positive here yet.
Speaker 1: So I think ultimately, as we've seen in every single
Speaker 1: cycle going back the last fifty years, the Fed funds
Speaker 1: rate will overcome the rate of inflation. That's when the
Speaker 1: Fed has done enough, and I think there's certainly time
Speaker 1: before we get there. Lisa, are people position for what
Speaker 1: you're expecting, Chris, this sort of accident or something breaking? No,
Speaker 1: I think you know. When you look at what positioning
Speaker 1: looks like, there is a decade of residual positioning at
Speaker 1: the top of the market, the big weights that have
Speaker 1: been so reliable for so long and kind of our
Speaker 1: viuew is again. Whether it's market up or market down,
Speaker 1: that's actually less important. What's more important here is this
Speaker 1: massive leadership change that we've seen. I'm very reminded of
Speaker 1: in two thousand two, when the NASDACK bottomed in October.
Speaker 1: Bow Two right in bottomed with everything in October vow two.
Speaker 1: It continued to underperform for the next four years. So
Speaker 1: your price low in NASDAC, I don't think, will be
Speaker 1: your price low in relative performance. That is the big
Speaker 1: takeaway from us. The leadership picture has changed dramatically here. Interesting. Hi, Chris,
Speaker 1: great cold on the end, buddy, and I'm sorry for,
Speaker 1: like you, I'll never laugh again. I Will Christopherry let's
Speaker 1: just take it. Let's get straight to relation of a
Speaker 1: in the head of equities and Capital Market Advisory at
Speaker 1: Ben why? Madam Mouth Management, Alicia, how big is the
Speaker 1: risk that we're heading back towards something like thirty? Look,
Speaker 1: I think it's it's a, you know, fifty percent odds
Speaker 1: on that. We go there simply because, all you're the
Speaker 1: the equity market has really been following the bond market
Speaker 1: here and as tenure yields move higher and push through
Speaker 1: three point point five percent, that's our trigger for another
Speaker 1: move lower from here. So in thirty nine hundred couldn't hold,
Speaker 1: which was sort of that last vestige of support where
Speaker 1: there was a lot of supply and a lot of
Speaker 1: trading previously. Technically, when that didn't hold, you know, it
Speaker 1: was just kind of clear that as you move on
Speaker 1: yields up, the equity markets are going lower, and and
Speaker 1: really for good reason, because the top of the market,
Speaker 1: or high growth and tech stocks, where the valuations will
Speaker 1: come down as yields move higher. So it's a neat
Speaker 1: little equation. Unfortunately it's playing out uh, and that opens
Speaker 1: up downside from here. But as you say that that
Speaker 1: three sixty six, the June seventeenth below is not that
Speaker 1: far away from here. It's not. It's not a heroic
Speaker 1: call to say that. Anymore, are we pricing in the
Speaker 1: weakness that we're hearing from the likes of Ford, from
Speaker 1: the likes of fed x that already are starting to
Speaker 1: sound some profit warnings? So so, in an interesting way,
Speaker 1: your conversation about. How does this conversation change right? How
Speaker 1: do we move higher from here? It is our view
Speaker 1: that the way the equity market can climb out of
Speaker 1: this hole, but it's kind of got it and gotten
Speaker 1: itself in, is for estimates to finally come down and
Speaker 1: and for realistically to price in the slowdown and growth,
Speaker 1: because it's all been driven by yields. Even now, even now,
Speaker 1: estimates are holding in there. You know, the forward twelve
Speaker 1: month on the SMP is something like seventeen times and
Speaker 1: if you take energy out of it it's nineteen times.
Speaker 1: That is not a cheap market and it's not a
Speaker 1: market reflecting a slowdown and growth. That has to happen
Speaker 1: and I think if you realistically reset growth expectations and
Speaker 1: earnings then you can begin to bottom. But until that
Speaker 1: happens wholesale, then I think we're sort of stuck in
Speaker 1: this purgatory for a while. So this is the part
Speaker 1: of the conversation where equity strategists wear their bond hats,
Speaker 1: because it's all about rates and this is what we've
Speaker 1: been seeing for a long time, and so you have
Speaker 1: to come up with a call whether we're getting to
Speaker 1: peak hawkishness, whether people already pricing in more than the
Speaker 1: Fed could potentially do. Do you have a call on that?
Speaker 1: Is that something that you want to game out, or
Speaker 1: is there some kind of relative trade that seems a
Speaker 1: little bit more insulated from those macro guessing games? UH,
Speaker 1: great question. I think that the risk is actually two
Speaker 1: more hawkishness here, simply because, if you think about uh,
Speaker 1: that that CPI print was pretty devastating for the Fed
Speaker 1: dot plots, I think, and for the terminal rate on
Speaker 1: the Fed funds Um so that likely goes higher. If
Speaker 1: that goes higher, multiples get compressed further. But that hasn't
Speaker 1: happened yet. So I think there is some thought that
Speaker 1: we're getting to pe caucushness, but that's not going to
Speaker 1: move the market now. It's the earnings that are going
Speaker 1: to move the market and a realistic reset of where
Speaker 1: we're going in this. So yes, there are relative valuations. Look,
Speaker 1: in the end, this is a short duration market. It
Speaker 1: has been a short duration market, same in equities and
Speaker 1: not just in bonds. So we still like that. Utilities
Speaker 1: are fine, some staples are fine, safety is fine. We
Speaker 1: love real assets. We we are, you know, allocating our
Speaker 1: clients to real assets because we do think we are
Speaker 1: in a regime change where inflation remains higher for longer
Speaker 1: and rates remain higher for longer as a result. And
Speaker 1: all you have to do is listen to some of
Speaker 1: the workers strikes that are going on out there, what
Speaker 1: happened with the rail strike. I mean, these are huge
Speaker 1: wage increases. This will is a change for the economy
Speaker 1: and the rates we're going are going to reflect reflect
Speaker 1: that going forward. I don't think we're going back to
Speaker 1: a world where you have, you know, one percent yields
Speaker 1: on the ten year and let's have a party of by,
Speaker 1: you know, high growth and they're earning tech stocks. So
Speaker 1: we're still in that short duration world. And to your question,
Speaker 1: our bonds an alternative, not on the long end, but
Speaker 1: on the short end. They certainly are doing better. And
Speaker 1: whether a four percent yield on a two year is
Speaker 1: fully reflecting inflation on a real basis. It is not,
Speaker 1: but it's sure of a lot better than losing money
Speaker 1: in the equity market and sh just quickly. What's your
Speaker 1: time and rising for all of this. It's so well
Speaker 1: put together. When you start thinking about these issues sticking
Speaker 1: with us for longer. How much long are we talking? Years?
Speaker 1: We talked five, ten, what is it? So look, I
Speaker 1: was trained as a historian and I look at things
Speaker 1: in big picture ways. In the short term, I think
Speaker 1: we get a nice bump coming out of the election. Okay,
Speaker 1: mid year. Elections are notoriously difficult leading up to it
Speaker 1: and you never lose money in the twelve month after
Speaker 1: the election since so we likely have a rally coming
Speaker 1: out of the election and it could be sustainable because
Speaker 1: we'll get to that peak nastiness heading into it. Right
Speaker 1: we have terrible seasonality. Now better seasonality, but at the
Speaker 1: end of the year. So we're optimistic for how this
Speaker 1: year can stabilize and move higher. Looking forward, I think
Speaker 1: you have to have a more intellectual view of where
Speaker 1: yields can be and where the market is and where
Speaker 1: we can grow, and one of my favorite things to
Speaker 1: do is just look at you know, the top ten
Speaker 1: stocks of the SMP or the top ten stocks of
Speaker 1: the Dow the beginning of every decade to see the
Speaker 1: change of where capital is being allocated and what the
Speaker 1: growth companies are. And I think you can make a
Speaker 1: good case that some of these large pap tech is
Speaker 1: where the risk is here. Let's just avoid the down,
Speaker 1: you know, just stick to the SPENCOURAGE, encourage. Honestly, you know,
Speaker 1: one of the best relation events we management. It's the
Speaker 1: housing market very much in the forefront as we watch
Speaker 1: yields rise because mortgage rates have been climbing so significantly.
Speaker 1: And there's no one better to speak to this to
Speaker 1: Jonathan Miller, who has decades studying the industry, President CEO
Speaker 1: of Miller Samuel. He always puts out these fantastic reports
Speaker 1: that gives these real deep dives into what's actually happening
Speaker 1: on the ground. And we're talking about the pain. We're
Speaker 1: talking about home builder sentiment rolling over yesterday. We're talking
Speaker 1: about what it means to have a mortgage rate at
Speaker 1: six percent and you are still seeing bidding wars. Are
Speaker 1: we underestimating the demand, the strength in this housing market?
Speaker 1: Absolutely before the Fed was raising rates, bidding wars in
Speaker 1: most of the markets we cover across the country where
Speaker 1: somewhere in the neighborhood of of all transactions, southern California
Speaker 1: was two thirds of transactions. Uh, there's still bidding wars now.
Speaker 1: So it's just much more muted. Uh. I think the
Speaker 1: the narrative is that, you know, you can hear crickets
Speaker 1: and that is not the case. It's just not what
Speaker 1: it was and what it wasn't sustainable. But how much
Speaker 1: are we speaking about idiosyncratic markets right? I mean the
Speaker 1: market in Connecticut, for example, very different than the market
Speaker 1: in Phoenix, Arizona, or the market in San Francisco? How
Speaker 1: much are we seeing potholes where you are seeing wholesale
Speaker 1: declines and prices in some areas, particularly the sun belt darlings,
Speaker 1: whereas other areas are holding in more significantly? I think
Speaker 1: the the chatter on pricing is more about sellers cutting
Speaker 1: asking prices more than wholesale price declines throughout a region. Uh,
Speaker 1: you know, in aggregate in these regions, uh, because inventory
Speaker 1: is so low, even with the increases that we've seen,
Speaker 1: there's a fairly firm underpinning under price. It's certainly you know,
Speaker 1: I'm not saying we're not looking at some sort of
Speaker 1: price decline a couple quarters out or, you know, sometime
Speaker 1: in but I don't. I don't see this as a
Speaker 1: correction scenario because the market was wildly overweighted on the
Speaker 1: demand side going into this and inventory was literally obliterated.
Speaker 1: You know, a typical market, sub market, might have two
Speaker 1: hundred listings just before the Fed rate increases. In beginning
Speaker 1: a year there might have been ten listings, twelve listings.
Speaker 1: Now there's fifty. It's still sevent below. I mean that's
Speaker 1: sort of the scenario we're seeing Um in the different
Speaker 1: markets that we cover. But just to push back, we're
Speaker 1: seeing the just the volume of sales drop off a
Speaker 1: cliff and a lot of times that's a precursor to
Speaker 1: price drops that are more substantial. Right, it really is
Speaker 1: a matter of where people are willing to transact, especially
Speaker 1: if they're all in borrowing costs arising by hundreds of
Speaker 1: dollars a month. I mean, at what point does that
Speaker 1: housing the sales slowdown translate into something materially in price? Yeah,
Speaker 1: so typically there's an average of about a fifteen month
Speaker 1: lag between Um sales, sales correction and some kind of
Speaker 1: price decline. I think what many people get wrong in
Speaker 1: a market pivot like this is the scenario is external event.
Speaker 1: Sales activity falls than inventory rises and then, because there's
Speaker 1: more supplied, prices correct. But how thing prices are sticky
Speaker 1: on the downside, that they take longer to fall than
Speaker 1: they do to rise, and we're in that sort of
Speaker 1: discovery period right now. But what's different is that supply
Speaker 1: in general is still relatively low as compared to historical norms. Jonathan,
Speaker 1: you're talking about how just because rent increases are slowing
Speaker 1: down doesn't mean they're you're going to see a decline
Speaker 1: in rents, and you've talked before how rents typically are
Speaker 1: pretty sticky, that they don't go down that much. Does
Speaker 1: that mean that the transmission mechanism of mortgage rates where
Speaker 1: they are are, is going to be largely ineffective at
Speaker 1: bringing down some of the base costs like rents, like
Speaker 1: housing prices, that people are imagining as the case right
Speaker 1: I I think you know, housing is about CPI and
Speaker 1: its owner's equivalent rent. It's not, you know, any kind
Speaker 1: of correction in housing prices is gonna bear a little
Speaker 1: impact on our limited impact on inflation, because its owner's
Speaker 1: equivalent rent. Um. And effectively what's been happening is if
Speaker 1: you have a slow down in the sales market, Um uh,
Speaker 1: and largely because of the loss of affordability, with a
Speaker 1: spike and mortgage rates. Mortgage rates are literally double what
Speaker 1: they were at the end of December, and the scenario
Speaker 1: ends up, Um uh, you're pushing those people into the
Speaker 1: rental market, which is already tight, which keeps rent elevated,
Speaker 1: which makes me worry that the that the Fed path
Speaker 1: is going to be longer than we think in terms
Speaker 1: of pressing rates higher. How high could mortgage rates go
Speaker 1: in your view? Uh, who knows? I'M NOT UM. It's funny.
Speaker 1: About a year ago I was basically saying that rates
Speaker 1: should be in the in the fives. That would be
Speaker 1: a more normalized market. Maybe the sixes. Um, I'm skeptical
Speaker 1: that they can. They can leave the sixes, but but
Speaker 1: I still think there's some upward movement going forward. Um.
Speaker 1: There's no barring a recession. I mean, you know the
Speaker 1: idea that, um, the Fed is taking a baseball back
Speaker 1: to the economy is, Um something that has to factor
Speaker 1: in housing, since it's so large, and I'm not sure
Speaker 1: if that's going to be effective just because of the
Speaker 1: owner's equivalent rent calcula driving rent are keeping rent high.
Speaker 1: The opposite of rising rent is not falling rent, it's
Speaker 1: stabilizing rent, in my view, and the only thing that's
Speaker 1: going to bring rents down is going to be some
Speaker 1: sort of profession, at least at this point. Jonathan, twenty seconds.
Speaker 1: Have we overdone the back to cities trend or is
Speaker 1: that going to continue? I think it's stays where it is.
Speaker 1: Pretty it's pretty close to that. Uh, this is this
Speaker 1: is not returning to the mean sort of scenario. We've
Speaker 1: been working from home too long for this pattern to
Speaker 1: go away. Jonathan Miller of Miller Samuel. Thank you so
Speaker 1: much for being with us. I always love speaking with you.
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