WEBVTT - Munis, Infrastructure, and Baby Bonds 0:00:00.120 --> 0:00:04.360 Bloomberg is now on your dashboard with Apple CarPlay and 0:00:04.360 --> 0:00:08.160 Android Auto. It gives you access to every Bloomberg podcast, 0:00:08.280 --> 0:00:11.560 live audio feeds from Bloomberg Radio, print stories from Bloomberg 0:00:11.640 --> 0:00:14.920 News in audio form, and the latest headlines of the 0:00:14.920 --> 0:00:18.640 click of a button with Bloomberg News. Now it's free 0:00:18.680 --> 0:00:21.439 with the latest version of the Bloomberg Business App. That's 0:00:21.680 --> 0:00:24.400 the Bloomberg Business App. Get it on your phone in 0:00:24.440 --> 0:00:27.760 the Apple App Store or on Google Play. Just download 0:00:27.800 --> 0:00:30.560 the app, connect your phone to your car and get started, 0:00:30.960 --> 0:00:34.400 and it's all presented by our sponsor, Interactive Brokers. 0:00:35.400 --> 0:00:38.600 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney. Alongside 0:00:38.640 --> 0:00:39.800 my co host Matt Miller. 0:00:40.200 --> 0:00:44.159 Every business day we bring you interviews from CEOs, market pros, 0:00:44.320 --> 0:00:48.160 and Bloomberg experts, along with essential market movin news. 0:00:48.720 --> 0:00:51.839 Find the Bloomberg Markets Podcast called Apple Podcasts or wherever 0:00:51.960 --> 0:00:55.080 you listen to podcasts, and at Bloomberg dot Com slash podcast. 0:00:55.600 --> 0:00:59.040 We're to join right now by Sean McCarthy, CEO at 0:00:59.120 --> 0:01:01.400 Build America Jews. Shawan, thanks so much for joining us. 0:01:01.400 --> 0:01:03.640 Thanks much for putting us up in your building. 0:01:03.640 --> 0:01:05.720 Here you Jen and Paul. It's really great to have 0:01:05.760 --> 0:01:08.280 you here. We're thrilled to be the host. 0:01:08.200 --> 0:01:13.959 One of the big stories today, Charlie Munger passing any experiences, 0:01:13.959 --> 0:01:16.360 any thoughts there. You've been in this business a long time, 0:01:16.440 --> 0:01:16.680 you know. 0:01:17.840 --> 0:01:21.920 Charlie Munger was one of the great credit thinkers really 0:01:21.920 --> 0:01:25.720 in the history of credit thinking. Last night I actually 0:01:25.800 --> 0:01:29.920 reread an essay that he gave. He wrote in when 0:01:29.959 --> 0:01:31.839 he was in his late sixties, and then we wrote 0:01:31.840 --> 0:01:34.039 when he was eighty one. It's called the Psychology of 0:01:34.120 --> 0:01:38.720 Human Misjudgment. He essentially articulates twenty five ways that people 0:01:38.720 --> 0:01:42.360 convince themselves to make the wrong decision. It's excellent. I'd 0:01:42.400 --> 0:01:44.480 I recommend. I'm sure you can get it right online, 0:01:44.520 --> 0:01:47.119 but I mean it just it shows how brilliant an 0:01:47.120 --> 0:01:48.040 individual he was. 0:01:48.200 --> 0:01:48.720 Absolutely. 0:01:49.000 --> 0:01:49.200 Yeah. 0:01:49.240 --> 0:01:51.320 But the stories we're seeing in the reporting today is 0:01:51.360 --> 0:01:52.720 really I think bring that to life for. 0:01:52.640 --> 0:01:53.200 A lot of people. 0:01:53.280 --> 0:01:56.880 All right, Build American Mutual here, tell us about your business. 0:01:57.640 --> 0:01:59.760 Tell us about really explain to our listeners kind of 0:01:59.760 --> 0:02:02.720 really what you do. How you guys are integrated into 0:02:02.760 --> 0:02:04.560 the municipal bond market in this country. 0:02:04.640 --> 0:02:09.520 Sure so. Build American Mutual is an insurance company that 0:02:09.760 --> 0:02:15.000 guarantees municipal bonds. And so essentially what we do is 0:02:15.040 --> 0:02:19.240 we act like a parent. If you you know, if 0:02:19.320 --> 0:02:22.320 you have your kids and they get a student loan 0:02:22.440 --> 0:02:25.240 and you need to co sign for that student loan, 0:02:25.280 --> 0:02:26.960 you want them to get a job and pay it back. 0:02:27.600 --> 0:02:32.680 Our job is if they fail to make that particular payment, 0:02:32.800 --> 0:02:36.440 that we make that payment for them. So our job 0:02:36.520 --> 0:02:40.680 is to sort of make bonds more secure by being 0:02:40.760 --> 0:02:43.960 double A rated or we're double A rated by Standard 0:02:44.000 --> 0:02:47.840 and Poors, and in doing that, we create greater stability 0:02:47.840 --> 0:02:51.640 in the market for the bonds, less volatility in terms 0:02:51.639 --> 0:02:56.880 of how they fluctuate. And we provide credit diligence which 0:02:56.919 --> 0:03:00.840 we share for free on our website. They're called credit profiles, 0:03:01.040 --> 0:03:04.000 a description of each deal that we underwrite, and we 0:03:04.080 --> 0:03:06.480 update that annually and it's just available as a service 0:03:06.560 --> 0:03:08.320 because we're a mutual insurance company. 0:03:08.560 --> 0:03:11.480 I love that analogy the parents of the bond market 0:03:11.440 --> 0:03:14.000 and keeping all the kids in line. But now let 0:03:14.000 --> 0:03:16.960 me ask you what's the demand for insurance in this 0:03:17.000 --> 0:03:18.600 particular type of market. 0:03:18.880 --> 0:03:22.839 So if you think about what the insurable market would be, 0:03:23.120 --> 0:03:27.400 it's not you know, for the Great Recession, municipal bonds 0:03:27.560 --> 0:03:31.160 were guaranteed up to about sixty percent of the total market, 0:03:31.160 --> 0:03:34.160 which would have been about over eighty percent of what 0:03:34.240 --> 0:03:36.560 could be insurable. So if you look at the market 0:03:36.760 --> 0:03:39.560 as a whole and you think that, you know, triple 0:03:39.600 --> 0:03:43.680 A bonds won't use bond insurance, and there are certain 0:03:43.720 --> 0:03:45.880 credits that are non investment grade or outside of the 0:03:46.000 --> 0:03:51.800 underwriting appetite of ourselves or the industry. What's left in 0:03:51.840 --> 0:03:54.760 the middle are insurable transactions. And in that area, about 0:03:54.760 --> 0:03:57.800 twenty five percent of the bonds are insurance. So that's 0:03:57.880 --> 0:04:00.600 quite a bit. That's quite a big growth. It's about 0:04:00.600 --> 0:04:04.120 a thirty percent growth since COVID started in terms of 0:04:04.160 --> 0:04:05.920 how much market penetration there is. 0:04:06.480 --> 0:04:09.720 And so does that change pre COVID the post COVID yeses. 0:04:09.920 --> 0:04:13.960 So investors demand more insurance, more guarantees, more stability. 0:04:14.120 --> 0:04:17.479 Now they're using bond insurance more than they did before. 0:04:17.520 --> 0:04:19.240 And so there's a number of things that bond insurance 0:04:19.279 --> 0:04:23.560 really does. It provides. Not only is it providing the 0:04:23.920 --> 0:04:26.840 default protection which I described as you, you know, standing 0:04:26.839 --> 0:04:30.920 behind your children and their student loans, but it also 0:04:31.640 --> 0:04:36.279 provides a stability in the market, and it provides a 0:04:36.360 --> 0:04:38.800 security so that you may not have the time to 0:04:38.880 --> 0:04:42.840 understand small or complex credits. We're guaranteeing them and then 0:04:42.920 --> 0:04:46.719 essentially what that means is we're promising to pay timely 0:04:46.760 --> 0:04:49.520 payment of principle and interest on that bond when it's due. 0:04:49.960 --> 0:04:52.599 So there's different than other forms of insurance, which once 0:04:52.640 --> 0:04:55.159 you file a claim and there's a negotiation, we pay 0:04:55.200 --> 0:04:57.640 immediately and then we mitigate later, which is one of 0:04:57.680 --> 0:05:01.359 the strengths and why in individual investors count on the 0:05:01.400 --> 0:05:02.919 strength of a financial guarantee. 0:05:03.160 --> 0:05:05.120 Can you give us a sense of what the sentiment 0:05:05.240 --> 0:05:07.880 is that you're experiencing in this market, and it's kind 0:05:07.880 --> 0:05:10.359 of like a pre and post COVID question, but also 0:05:10.680 --> 0:05:13.760 is there some key lesson about investor psychology as we 0:05:13.800 --> 0:05:15.920 started off talking about at the beginning of this segment, 0:05:15.960 --> 0:05:17.839 that you'd want to say that you've noticed. 0:05:18.120 --> 0:05:20.279 So I'd say two things. One is interest rates have 0:05:20.279 --> 0:05:23.320 gone up a lot, so the primary market, meaning the 0:05:24.920 --> 0:05:28.560 overall volume in the market for new issue has been 0:05:28.760 --> 0:05:32.520 lower for the last two or three years. That being said, 0:05:32.640 --> 0:05:35.080 the new money portion, the portion of the market that's 0:05:35.279 --> 0:05:41.480 just building new projects, new schools, new roads, this year 0:05:41.520 --> 0:05:44.200 will be its second highest year ever twenty twenty two 0:05:45.320 --> 0:05:47.960 was the highest, but there are no more refinancings if 0:05:48.000 --> 0:05:51.520 you just think about it. With interest rates going up, 0:05:51.800 --> 0:05:55.520 the concept of saving money by refinancing that bond has 0:05:55.560 --> 0:05:57.159 gone away. And that was about a third of the 0:05:57.160 --> 0:06:00.440 market historically. So that's one thing. But if you look 0:06:00.480 --> 0:06:03.360 at the sentiment in the market overall, a good example 0:06:03.360 --> 0:06:06.520 would be this last election in twenty twenty three, there 0:06:06.560 --> 0:06:10.120 were seventy percent of all bond issues that were on 0:06:10.200 --> 0:06:13.720 the ballot were approved, So that was sixty billion dollars 0:06:13.720 --> 0:06:15.880 worth of new transactions that are going to come to 0:06:15.880 --> 0:06:19.240 the market just from the twenty twenty three elections. So 0:06:19.279 --> 0:06:21.560 now we look at the credits generally and we think ourselves. 0:06:21.640 --> 0:06:24.599 Two things have happened since COVID. One is the federal 0:06:24.640 --> 0:06:27.240 government stepped in and gave an awful lot of money 0:06:27.520 --> 0:06:30.040 to all kinds of communities, and some of that money 0:06:30.080 --> 0:06:32.880 still is being spent by them. It sort of explains 0:06:32.880 --> 0:06:36.360 in one way why the bipartisan Infrastructure Bill has not 0:06:36.400 --> 0:06:42.040 actually been drawn on a lot, because the really most 0:06:42.120 --> 0:06:48.560 municipalities survived well through that crisis of the pandemic, and 0:06:49.279 --> 0:06:51.360 part of that was that they went into the pandemic 0:06:51.520 --> 0:06:54.280 being strong. I mean, you know, so you think three 0:06:54.400 --> 0:06:58.160 or four years ago, there was lots of you know, 0:06:58.240 --> 0:07:01.120 all the coffers were filled at most municipality. So now 0:07:01.200 --> 0:07:03.240 what we're looking at is to see what happens as 0:07:03.279 --> 0:07:05.800 the rest of the money that they've been given runs out, 0:07:05.800 --> 0:07:09.120 and what is the real environment for what's going to 0:07:09.200 --> 0:07:13.240 happen to municipal credits going forward. In terms of an 0:07:13.240 --> 0:07:14.960 operational standpoint. 0:07:14.520 --> 0:07:17.640 Who decides whether a bond is insured? Is it the 0:07:17.680 --> 0:07:20.480 issuer the underwriter who decides it. 0:07:20.840 --> 0:07:26.600 So nobody uses us unless we save the money. So 0:07:26.600 --> 0:07:30.080 so when when you're issuing your bond, the underwriters on 0:07:30.160 --> 0:07:33.400 the desk first, the financial advisors who advise the municipalities, 0:07:33.480 --> 0:07:37.560 we'll say you should consider bond insurance. We'll underwrite the 0:07:37.600 --> 0:07:41.320 transactions as the market. As the time comes to bring 0:07:41.360 --> 0:07:43.960 the deal to market, they'll look at it and say, well, 0:07:44.000 --> 0:07:47.000 how much is BAM charging and how much are we 0:07:47.040 --> 0:07:50.400 going to save as a municipality. So that's really the 0:07:50.440 --> 0:07:52.400 decision that's made right at the time in the market. 0:07:52.440 --> 0:07:55.720 So when markets are more volatile, bond insurance is used more. 0:07:57.040 --> 0:08:00.160 When markets are more more stable and people have the time, 0:08:00.240 --> 0:08:02.520 or when volumes are lower and more time to take 0:08:02.520 --> 0:08:04.040 a look at the credits and may say I'll just 0:08:04.120 --> 0:08:06.120 take take that bond without the insurance. 0:08:06.880 --> 0:08:09.760 It's interesting because one thing I'm wondering is about how 0:08:09.880 --> 0:08:12.840 the election next year, the US presidential election, is going 0:08:12.920 --> 0:08:16.400 to impact demand for this kind of insurance. I mean, 0:08:16.600 --> 0:08:19.520 already we're expecting maybe to market volatility with the FED 0:08:19.600 --> 0:08:22.240 shifting direction, but how does the election figure into that. 0:08:22.520 --> 0:08:25.680 So, so two things to remember. First of all, you know, 0:08:26.560 --> 0:08:31.000 people look to the federal government's role in infrastructure and 0:08:31.040 --> 0:08:34.080 it's it's the big stuff, you know, So it's you know, 0:08:34.160 --> 0:08:37.560 it's I ninety five and the Hoover Dam and big 0:08:37.559 --> 0:08:39.720 things that are done at a federal level. But you know, 0:08:39.800 --> 0:08:42.600 eighty ninety percent of what you think of as infrastructure 0:08:42.640 --> 0:08:44.800 is done at the state and local governmental level. So 0:08:46.080 --> 0:08:49.360 these things are issued by you know, towns and cities, 0:08:49.840 --> 0:08:54.400 and that's really the fundamental component. So if you look 0:08:54.440 --> 0:08:56.200 at what's going to happen in the election next year, 0:08:56.720 --> 0:09:00.360 it's really a function that resides at the state and 0:09:00.400 --> 0:09:03.520 local governmental level in terms of how the markets are 0:09:03.520 --> 0:09:06.600 going to move, and you know, what happens to interest 0:09:06.679 --> 0:09:10.559 rates overall will affect you know, volume, and whether there's 0:09:10.600 --> 0:09:13.840 a prospect of refinancing says interest rates start to decline 0:09:13.840 --> 0:09:17.360 as our prior a speaker was advocated. 0:09:17.400 --> 0:09:20.640 But I've been told by municipal bond folks that municipalities 0:09:21.000 --> 0:09:23.720 issue when they need to, not when the market's great. 0:09:23.840 --> 0:09:26.320 So I mean that's that's true. 0:09:27.280 --> 0:09:28.920 So think about what's happened. They have a lot of 0:09:28.920 --> 0:09:32.360 money volume spin down because they have had they haven't 0:09:32.360 --> 0:09:37.280 had to issue. But remember there's this whole incredibly pent 0:09:37.400 --> 0:09:43.520 up demand for rebuilding and creating new projects. And so 0:09:44.080 --> 0:09:45.720 the things to really watch for if I was an 0:09:45.760 --> 0:09:48.240 investor on the other side, is to say, Okay, what's 0:09:48.280 --> 0:09:50.760 going to happen to interest what does high interest rates 0:09:50.880 --> 0:09:53.800 do to municipalities? Well, what is it due to mortgage rates? 0:09:54.120 --> 0:09:56.520 What is it then do to commercial real estate values? 0:09:56.559 --> 0:10:00.800 What is it due to residential mortgage values? Those are 0:10:00.840 --> 0:10:04.480 some of the key underpinning issues that are that that 0:10:04.559 --> 0:10:06.559 move credits good batter indifferent. 0:10:06.600 --> 0:10:08.960 Okay, great stuff, Shan, Thanks so much for joining us. 0:10:08.960 --> 0:10:12.640 Sean McCarthy, he's the CEO of Build America. Uh, these 0:10:12.640 --> 0:10:14.960 are the offices we're hanging out in today, so we appreciate, 0:10:15.120 --> 0:10:18.200 Uh you hosting us here Sean McCarthy, CEO of Build 0:10:18.240 --> 0:10:18.960 American Mutually. 0:10:20.120 --> 0:10:23.520 You're listening to the teenth Ken's our live program, Bloomberg 0:10:23.559 --> 0:10:26.920 Markets weekdays at ten am Eastern on Bloomberg dot Com, 0:10:27.000 --> 0:10:30.160 the iHeartRadio app, and the Bloomberg Business App, or listen 0:10:30.240 --> 0:10:32.520 on demand wherever you get your podcasts. 0:10:34.000 --> 0:10:35.200 Let's go right now to our next guest. 0:10:35.200 --> 0:10:40.160 Pria Misra, Portfolio Manager, JP Morgan Asset Management, joins us 0:10:40.160 --> 0:10:43.600 here via zoom Nor. I mean, Priya, what do you 0:10:43.640 --> 0:10:46.120 make of what's happened in the rate market just in 0:10:46.160 --> 0:10:48.320 the last you know, I'm gonna say just a month 0:10:48.320 --> 0:10:50.599 in November. Boy, we've had you know, most of the 0:10:50.679 --> 0:10:52.520 yield curve was sitting right around five percent, and now 0:10:52.559 --> 0:10:54.720 we've got the ten year you know at four and 0:10:54.720 --> 0:10:55.480 a quarter percent. 0:10:55.559 --> 0:10:57.040 That's some move. What do you make of it? 0:10:58.000 --> 0:11:01.480 Sure, it's mean very volatile, pretty vicious. So I think 0:11:01.559 --> 0:11:04.360 if you go back a little bit September October, we 0:11:04.400 --> 0:11:06.880 saw a pretty big move higher in rates right from 0:11:06.920 --> 0:11:09.000 that four and a quarter all the way up to 0:11:09.040 --> 0:11:11.200 five percent. I think it was a perfect storm of 0:11:11.240 --> 0:11:14.880 stronger data, hawkish fed, more supply. I actually think the 0:11:14.880 --> 0:11:18.040 buyers got nervous. What we've seen over the last month 0:11:18.320 --> 0:11:20.400 is a reversal of all of this. So you had 0:11:20.400 --> 0:11:22.880 the US Treasury saying, well, maybe not as much long 0:11:22.920 --> 0:11:25.520 in supply. You had economic data which is slowing. I 0:11:25.559 --> 0:11:27.680 think we are going to debate for a while whether 0:11:27.800 --> 0:11:30.520 softlining or hard landing. But it's clear that the economic 0:11:30.600 --> 0:11:33.520 data is moderating, both inflation as well as growth. And 0:11:33.559 --> 0:11:36.199 then importantly in the last few weeks we've heard from 0:11:36.200 --> 0:11:38.040 the FED, and I would say in the last two 0:11:38.120 --> 0:11:40.679 days we've heard from the Fed very clearly that the 0:11:40.760 --> 0:11:43.520 hiking cycle seems to be behind us. Were end of cycle, 0:11:43.960 --> 0:11:46.840 and I think the market's now running ahead with what's next. 0:11:46.920 --> 0:11:50.440 When do the cuts start to come. So I think 0:11:50.440 --> 0:11:52.280 that the move in rates, you know, it was a 0:11:52.640 --> 0:11:55.880 technical lead move. I think beyond four forty on tens, 0:11:55.960 --> 0:11:58.320 that move was very fast. Up to five I think 0:11:58.320 --> 0:12:00.880 we've retraced it now. I think we're going to settle 0:12:00.920 --> 0:12:04.840 into a range, you know, three and three quarters or 0:12:04.840 --> 0:12:07.240 maybe four percent to four and a half or three 0:12:07.240 --> 0:12:09.079 and three quarters to four and a quarter. I think 0:12:09.120 --> 0:12:11.640 that's the ten year range as long as we're in 0:12:11.640 --> 0:12:14.719 a soft landing. If things deteriorate some more, and we're 0:12:14.760 --> 0:12:17.040 talking about the FED having to cut a lot sooner 0:12:17.120 --> 0:12:19.200 or a lot more than what's priced in, and I 0:12:19.200 --> 0:12:21.360 think there's a decent chance of that at that point, 0:12:21.440 --> 0:12:24.000 then the tenure could absolutely go closer to three percent. 0:12:24.040 --> 0:12:26.760 But I think that the data right now suggests more 0:12:26.800 --> 0:12:29.760 soft landing, and I think that's essentially what has gotten 0:12:29.800 --> 0:12:32.240 priced And so it's been a very quick move because 0:12:32.240 --> 0:12:34.320 it was a very quick move up to five percent, 0:12:34.520 --> 0:12:36.959 and I think now we can sort of consolidate in 0:12:37.000 --> 0:12:39.199 this you know, close to four percent range. 0:12:41.640 --> 0:12:43.440 You know, I want to ask you about the speed 0:12:43.480 --> 0:12:45.920 of this move. I mean, it really is breathtaking. And 0:12:46.240 --> 0:12:49.600 one question that niggles at me is what's the risk 0:12:49.800 --> 0:12:51.520 that people have got it wrong here? 0:12:53.920 --> 0:12:56.120 So I think there are a few assumptions in the 0:12:56.120 --> 0:12:58.200 market right now. Things are slowing, and I think the 0:12:58.240 --> 0:13:01.640 assumption is that we're slowing to trend and we won't 0:13:01.720 --> 0:13:04.439 slow any further. I think it's an open question. There 0:13:04.440 --> 0:13:08.240 are cracks we're seeing. These cracks could absolutely deepen. So 0:13:08.280 --> 0:13:11.200 when you talk about the you know, what could go wrong, Well, 0:13:11.240 --> 0:13:13.959 things could slow into a recession. And that's why I'm 0:13:14.000 --> 0:13:16.560 looking at every data point and digging into all of 0:13:16.600 --> 0:13:19.440 the details. I think aggregate data is useful, but we 0:13:19.520 --> 0:13:21.800 have to look at the distribution because I think, you know, 0:13:21.800 --> 0:13:23.600 when the cost of capital is high, there's a big 0:13:23.600 --> 0:13:25.600 difference between the haves and the have nots, and I 0:13:25.600 --> 0:13:27.679 think it's going to be important to look at all 0:13:27.720 --> 0:13:29.840 of that. So I think that could be one assumption. 0:13:30.120 --> 0:13:33.520 The other assumption in the last few days has has 0:13:34.000 --> 0:13:37.240 become when does the FED start to cut can they? 0:13:37.320 --> 0:13:41.360 I think the soft landing predicates on the FED easing soon, 0:13:41.800 --> 0:13:44.640 and the assumption there is that inflation is has declined 0:13:44.679 --> 0:13:47.280 and it's going to decline to two percent quickly. I 0:13:47.360 --> 0:13:49.920 think that could be a big assumption. That could be 0:13:49.960 --> 0:13:53.680 that the actual data could show that inflation may be stolen. 0:13:54.000 --> 0:13:57.400 I think the last mile of inflation is you know, 0:13:57.440 --> 0:14:00.920 there's there's some FED rhetoric that could be hargh and 0:14:01.000 --> 0:14:03.400 so I think even if things start to slow down 0:14:03.720 --> 0:14:06.800 and inflation stalls at two and a half or two 0:14:06.880 --> 0:14:09.440 and three quarters and the FED says, well, we're not 0:14:09.520 --> 0:14:12.440 at target and so we can't cut rates preemptively, I 0:14:12.440 --> 0:14:15.000 think that could be an assumption which puts the soft 0:14:15.080 --> 0:14:18.480 landing narrative at risk, so there's a lot, and then 0:14:18.520 --> 0:14:21.520 your financial conditions ease a lot, which they've been easing 0:14:21.520 --> 0:14:24.200 in the last few weeks. You could have the FED saying, well, 0:14:24.480 --> 0:14:26.400 we didn't want them to tighten too much, but now 0:14:26.400 --> 0:14:29.200 they're easing too much. So I think this dance between 0:14:29.200 --> 0:14:32.840 financial conditions and the Fed that also can go the 0:14:32.920 --> 0:14:35.880 other way if the Fed thinks the easing is too much. 0:14:36.240 --> 0:14:39.120 So it's a bit tenuous. I do think we're in 0:14:39.160 --> 0:14:41.880 the midst of the former year end rally, but I 0:14:41.920 --> 0:14:44.720 think as we start next year, we have to say 0:14:44.800 --> 0:14:47.600 your questions well put, because I think a lot of 0:14:47.640 --> 0:14:50.040 these assumptions could come could be challenged. 0:14:52.880 --> 0:14:55.160 So pre on the yield curve, here where do you 0:14:55.200 --> 0:14:58.480 see the most opportunity? 0:14:58.800 --> 0:15:00.360 So I have to say, as much as I like 0:15:00.560 --> 0:15:02.920 to position for a steepener, and we have a bit 0:15:02.960 --> 0:15:07.160 of a steepening bias in our portfolio, I think it 0:15:07.160 --> 0:15:10.480 it does depend on the FED starting to cut rates soon. 0:15:11.040 --> 0:15:13.840 So I think the curve actually need not do a 0:15:13.840 --> 0:15:16.640 whole lot in the near term. I think duration might 0:15:16.640 --> 0:15:18.800 be a better trade than the curve. I think longer 0:15:18.840 --> 0:15:21.920 turf the curve. Longer term the curve should steepen as 0:15:21.960 --> 0:15:24.360 the FED cuts rates. You know, you should have a 0:15:24.400 --> 0:15:28.920 more normal uput sloping yield curve. But we're not close 0:15:28.960 --> 0:15:31.960 to the FED target on inflation, and I think they're 0:15:31.960 --> 0:15:34.720 going to be reluctant to cut rates soon, so I 0:15:34.720 --> 0:15:36.520 think the steepening is going to run out of steam. 0:15:36.560 --> 0:15:38.560 It's s deepened a lot in the last couple of days. 0:15:38.880 --> 0:15:41.440 I think if we get we have key data points 0:15:41.440 --> 0:15:43.240 coming up in a FED meeting, so the next few 0:15:43.280 --> 0:15:46.320 weeks could steep and then I think we'll stall out. 0:15:46.760 --> 0:15:49.280 And I would prefer being long duration here. I think 0:15:49.400 --> 0:15:52.840 tens north of four percent are cheap rail rates. Ten 0:15:52.920 --> 0:15:55.800 year rail rates above two percent, I would argue that's 0:15:55.840 --> 0:16:00.560 a better risk reward than you know positioning for the 0:16:00.640 --> 0:16:03.040 curve one way or the other. But longer term, I 0:16:03.080 --> 0:16:03.960 think it should steepen. 0:16:06.840 --> 0:16:09.840 You know, we're looking at some price data coming out tomorrow, 0:16:09.880 --> 0:16:11.440 and I wondered if you could talk a little bit 0:16:11.440 --> 0:16:14.720 about what your own expectations are and then what are 0:16:14.760 --> 0:16:17.680 the risks that inflation doesn't come down as quickly as 0:16:17.680 --> 0:16:18.440 the FED would like? 0:16:19.960 --> 0:16:22.920 Sure, So I mean when I decomposed the move in 0:16:22.920 --> 0:16:27.680 inflation higher, they were supply issues and they were demand issues, 0:16:27.960 --> 0:16:30.560 the supply ones. I have a lot of conviction those 0:16:30.600 --> 0:16:34.400 issues have largely been resolved time. I mean, people spend 0:16:34.440 --> 0:16:36.960 a lot of time thinking about supply chain issues, and 0:16:37.040 --> 0:16:40.280 so I think that the base effect commodities are coming off, 0:16:40.800 --> 0:16:44.120 and so I think we have conviction that inflation's coming 0:16:44.120 --> 0:16:48.080 down from the supply side. Even labor force participation, which 0:16:48.120 --> 0:16:52.040 is a labor market supply technical has you know, did 0:16:52.120 --> 0:16:55.240 move positive on the demand side. You know, I think 0:16:55.280 --> 0:16:57.560 there has been some improvement on the demand side. Growth 0:16:57.640 --> 0:17:00.320 is absolutely slowing. Fourth quarter is probably in a one 0:17:00.360 --> 0:17:04.119 percent type GDP range, and that should put somewhat downward 0:17:04.160 --> 0:17:08.320 pressure on inflation. But there are other components. Housing it's 0:17:08.400 --> 0:17:11.919 a well documented lag in terms of how quickly housing 0:17:11.960 --> 0:17:14.960 inflation can come down, and the labor market is still tight. 0:17:15.400 --> 0:17:18.320 So I think while I do expect over the next 0:17:18.440 --> 0:17:21.000 year or two inflation to head closer to two percent, 0:17:21.480 --> 0:17:24.359 I think the speed in which it has declined this year, 0:17:24.720 --> 0:17:27.159 we might be a bit disappointed. To your question on 0:17:27.240 --> 0:17:29.240 what's the risk, I think the risk might be not 0:17:29.359 --> 0:17:32.679 so much for tomorrow. I think we probably see another decline, 0:17:32.960 --> 0:17:35.000 But I would say the risks are really asymmetric. The 0:17:35.040 --> 0:17:37.720 market is not going to like any upside risk to 0:17:37.800 --> 0:17:41.920 inflation because that puts this whole question of the FED easing, 0:17:43.119 --> 0:17:46.840 you know, making policy less restrictive. It throws that into 0:17:46.960 --> 0:17:49.440 question because the FED is very clear they want inflation 0:17:49.480 --> 0:17:52.120 close to two percent or not at two So any 0:17:52.200 --> 0:17:55.119 upside risk to inflation I think will not be taken 0:17:55.200 --> 0:17:58.919 kindly by any market. Frankly, and I think with a 0:17:58.960 --> 0:18:02.880 tight labor market, with wages still above levels that would 0:18:02.880 --> 0:18:05.760 be consistent with two percent inflation, I think the risks 0:18:05.760 --> 0:18:08.520 are still somewhat to the upside, more from a demand, 0:18:09.960 --> 0:18:11.600 you know, rather than a supply perspective. 0:18:11.640 --> 0:18:12.600 On relation. 0:18:14.640 --> 0:18:17.000 Super you mentioned the labor market's still tight. Here we 0:18:17.040 --> 0:18:20.000 have a unemployment rate of three point nine percent. Where 0:18:20.000 --> 0:18:23.360 do you think that FED would be comfortable seeing that go? 0:18:25.400 --> 0:18:28.000 So the Fed's forecast for inflation at the end of 0:18:28.720 --> 0:18:31.800 next year is four point one, which is actually very 0:18:31.800 --> 0:18:35.679 close to nahru or their estimate of the long run 0:18:35.840 --> 0:18:39.359 level of unemployment. But you asked about comfort, which I 0:18:39.359 --> 0:18:41.240 think what you're writing to get at is at what 0:18:41.359 --> 0:18:44.479 level do they get nervous about a recession or too 0:18:44.560 --> 0:18:46.520 much of a slowdown and they start to cut rates, 0:18:46.680 --> 0:18:50.360 and I would say it needs to be somewhat higher 0:18:50.359 --> 0:18:52.399 than that four point one percent. I think closer to 0:18:52.480 --> 0:18:56.040 five percent would make them uncomfortable because that's far off 0:18:56.440 --> 0:19:01.000 away from nehru. It would put downward pressure on inflation, 0:19:01.160 --> 0:19:04.680 and they certainly don't want to overshoot on inflation below 0:19:04.720 --> 0:19:07.560 two percent. And so, you know, I think if we 0:19:07.640 --> 0:19:10.480 get north of four and a half, you'll start to 0:19:10.520 --> 0:19:13.359 see some nervousness building and the FED that the labor 0:19:13.359 --> 0:19:16.040 market may be slowing faster. But again, I would look 0:19:16.040 --> 0:19:18.640 at details. If it's a rise in the unemployment rate 0:19:18.680 --> 0:19:22.000 because of participation, that's actually good news. I means people 0:19:22.000 --> 0:19:23.960 are coming back to the labor force. If it is 0:19:24.000 --> 0:19:27.040 a rise in the unemployment rate because payroll growth is 0:19:27.080 --> 0:19:30.240 slowing and we're running negative payroll growth, I think that 0:19:30.680 --> 0:19:33.000 you know, a number in that four and a half 0:19:33.040 --> 0:19:36.080 to five range, I think what is something the FED 0:19:36.119 --> 0:19:38.760 would be concerned and I think then they might be 0:19:38.880 --> 0:19:41.080 more open to cutting rates. 0:19:43.720 --> 0:19:45.679 You know, it's interesting to talk about a little bit 0:19:45.720 --> 0:19:47.960 more about the labor market because it's been through such 0:19:47.960 --> 0:19:51.560 an enormous ride this year, not just the persistently low 0:19:51.640 --> 0:19:55.240 levels of unemployment, but we're seeing so much union activity, 0:19:55.560 --> 0:20:00.320 activity amongst labor groups to look for higher wages, winning 0:20:00.400 --> 0:20:03.399 those winning those fights, as Norah was pointing out, and 0:20:03.680 --> 0:20:07.000 talk about GM earlier, and you know, I wonder if 0:20:07.040 --> 0:20:09.399 these higher prices are really just going to start to 0:20:09.440 --> 0:20:13.679 get entrenched, how quickly you know, how easy it'll be to, 0:20:14.080 --> 0:20:18.119 you know, convince people that the inflation is really going 0:20:18.119 --> 0:20:19.960 to be headed in the right direction when we've seen 0:20:20.040 --> 0:20:23.440 so many victories in the labor market, right. 0:20:23.480 --> 0:20:25.720 I think when the labor market is tight, you start 0:20:25.760 --> 0:20:28.719 to see wage pressure. We saw it in certain industries 0:20:29.160 --> 0:20:31.840 in the last two years. You're seeing it in others. 0:20:31.680 --> 0:20:34.840 As you brought up through the union side, I will say, 0:20:34.880 --> 0:20:39.880 as inflation comes down, real wage growth for the household 0:20:39.920 --> 0:20:43.360 sector has improved tremendously this year. In fact, I think 0:20:43.400 --> 0:20:47.400