WEBVTT - Surveillance: Rate Impact with Berro 0:00:00.080 --> 0:00:02.840 We bring you news and analysis every day on the 0:00:02.880 --> 0:00:06.840 Bloomberg Surveillance Podcast. But now you can get the latest 0:00:06.880 --> 0:00:11.639 news on demand whenever you want. Subscribe to Bloomberg News 0:00:11.640 --> 0:00:14.400 Now to get the latest headlines at the click of 0:00:14.440 --> 0:00:18.880 a button. Get informed on your schedule. You can listen 0:00:18.960 --> 0:00:22.680 and subscribe to Bloomberg News Now on the Bloomberg Business App, 0:00:22.760 --> 0:00:27.720 Bloomberg dot Com plus Apple, Spotify, and anywhere else you 0:00:27.800 --> 0:00:37.440 get your podcasts. Search Bloomberg News Now and subscribe today. 0:00:37.800 --> 0:00:41.160 This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:41.200 --> 0:00:45.000 with Jonathan Farrow and Lisa Abramowitz. Join us each day 0:00:45.040 --> 0:00:49.520 for insight from the best and economics, geopolitics, finance and investment. 0:00:49.960 --> 0:00:54.760 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:55.000 --> 0:00:59.280 anywhere you get your podcasts and always on Bloomberg dot Com, 0:00:59.320 --> 0:01:04.160 the Bloomberg Criminal and the Bloomberg Business App. Kelsey Barrel 0:01:04.319 --> 0:01:06.160 is probably gonna walk off the stage. Why don't you 0:01:06.200 --> 0:01:08.039 got something to read here? John? I'm sorry I lost 0:01:08.040 --> 0:01:10.800 the scriptures last night so hard. We're going to go 0:01:10.840 --> 0:01:13.280 into this and right now for Global Wall Street, We're 0:01:13.280 --> 0:01:15.440 gonna freeze time. We're gonna get through this for Bob 0:01:15.480 --> 0:01:17.880 Michael and Kelsey Barrow, because they're the real deal. They're 0:01:18.000 --> 0:01:21.320 JP Morgan Asset Management, And we're going to ask a 0:01:21.360 --> 0:01:25.039 really delicate inside baseball question. So she can go back 0:01:25.080 --> 0:01:29.640 to the new skyscraper on Park Avenue explain without addressing 0:01:29.920 --> 0:01:33.399 your bank, your business. Mister Diamond would say, that's appropriate. 0:01:33.880 --> 0:01:37.640 The decisions being made right now of my bond losses, 0:01:37.840 --> 0:01:41.119 I have to mark to market versus I can hide 0:01:41.160 --> 0:01:42.199 them somewhere else. 0:01:42.520 --> 0:01:46.080 Go right, So we've been talking about the losses in 0:01:46.120 --> 0:01:48.400 the bond market. I think it is important to put 0:01:48.400 --> 0:01:53.160 into context though the majority of the pain was last year, right, 0:01:53.200 --> 0:01:55.680 the US AD was down thirteen percent last year, down 0:01:55.720 --> 0:02:00.800 two percent this year, But more recently we have seen 0:02:00.840 --> 0:02:04.000 this backup in yields and this pain that's coming now. 0:02:04.080 --> 0:02:06.440 I think the reason why the. 0:02:06.400 --> 0:02:08.440 Stress in the banks has been a little bit less 0:02:08.800 --> 0:02:12.400 acute this time around than in March is because of 0:02:12.440 --> 0:02:16.760 the BTFP program. So the Bank Term Funding Program close 0:02:17.120 --> 0:02:20.920 not exactly though, so BTFP. The Fed put that in 0:02:20.960 --> 0:02:23.280 place in March, and I think if there's one thing 0:02:23.320 --> 0:02:26.800 that really was crucial to turning the markets around at 0:02:26.840 --> 0:02:30.440 a point where we were very stressed, We were very uncertain. 0:02:30.440 --> 0:02:32.200 About how things would go in the future. 0:02:32.520 --> 0:02:36.919 That BTFP program was important because banks can now pledge 0:02:36.960 --> 0:02:40.560 those treasury securities and even though they have a price 0:02:40.639 --> 0:02:43.960 in the marketplace of seventy or eighty dollars, they can 0:02:44.000 --> 0:02:47.600 be pledged at par So there's been this stabilization factor 0:02:48.320 --> 0:02:51.160 that was not there back during the March crisis. 0:02:51.240 --> 0:02:54.520 So we're saying, is these unrealized losses get greater, they 0:02:54.560 --> 0:02:55.200 matter less. 0:02:56.280 --> 0:02:58.520 They are mattering less right now. 0:02:59.480 --> 0:03:01.560 I think there is still stress though. 0:03:01.919 --> 0:03:03.560 This is not the end of the story. 0:03:03.680 --> 0:03:06.720 Right even though this facility is in place, people are 0:03:06.800 --> 0:03:09.200 using it, there's one hundred and eight billion in the facility, 0:03:09.560 --> 0:03:12.560 there still is going to be pressure on margins. You know, 0:03:12.639 --> 0:03:15.760 it's not only about the mark to market losses, but 0:03:15.840 --> 0:03:20.240 it's about the fact that net interest margins are under pressure. 0:03:20.600 --> 0:03:24.720 So you know, as an investor in financials, you do 0:03:24.840 --> 0:03:30.040 need to be very cautious about where you're investing, understanding 0:03:30.080 --> 0:03:32.480 the portfolios and the balance sheets of the banks that 0:03:33.360 --> 0:03:37.600 you are investing in, and being aware of the game changer. 0:03:37.720 --> 0:03:39.960 That was the way the FED reacted back in March. 0:03:40.080 --> 0:03:43.240 The bank's ability to finance, the economy curtailed by the 0:03:43.320 --> 0:03:45.400 dynamics we're talking about. Are they constrained? 0:03:45.560 --> 0:03:45.760 Yeah. 0:03:45.760 --> 0:03:47.960 So if you look at the H eight data, and 0:03:48.000 --> 0:03:50.360 I love to look at this every single week on Fridays, 0:03:50.400 --> 0:03:52.280 I'm looking at Lisa because I know she looks at 0:03:52.320 --> 0:03:55.640 it too, what you're going to see is that credit 0:03:55.760 --> 0:03:58.600 has been contracting in the economy. If you look at 0:03:58.600 --> 0:04:01.560 CNI lending over the last three and six months, it's negative. 0:04:02.120 --> 0:04:04.960 If you look at the Senior Loan Officer Survey, it's 0:04:05.000 --> 0:04:08.880 showing that there is tightness in credit conditions. And like 0:04:08.920 --> 0:04:11.880 you mentioned, Lisa, this is exactly what the FED wanted, right, 0:04:12.360 --> 0:04:17.520 They want to engineer tighter financial conditions. So I disagree 0:04:17.560 --> 0:04:20.720 with the quote from Goulesby that he doesn't know where 0:04:20.720 --> 0:04:22.800 this is coming from. I really do think that the 0:04:22.960 --> 0:04:27.840 stems from the September FOMC meeting and the dot plot. Sure, 0:04:27.960 --> 0:04:31.400 they shill still showed cuts next year, but what they 0:04:31.520 --> 0:04:34.680 showed is a real policy rate that actually goes up 0:04:34.920 --> 0:04:37.960 by fifty basis points next year. That is a very 0:04:38.440 --> 0:04:41.640 HAWKUS message and the market is still trying to digest 0:04:41.720 --> 0:04:42.359 that right now. 0:04:42.520 --> 0:04:45.359 So if we're talking game theory, this is basically the idea. 0:04:45.400 --> 0:04:48.120 From your perspective, it sounds like that the FED is 0:04:48.160 --> 0:04:51.960 trying to signal hawkishness they can engineer the landing so 0:04:52.000 --> 0:04:55.000 that then they can reverse course and cut rates. How 0:04:55.000 --> 0:04:58.000 do you respond then to people, including what we heard 0:04:58.000 --> 0:05:01.120 from Delip saying over at PGYM, there is a structural 0:05:01.240 --> 0:05:03.360 change in the bond market where some of the long 0:05:03.400 --> 0:05:06.360 standing price and sensitive buyers are no longer there. 0:05:07.400 --> 0:05:09.840 So there has been a big repricing. And I think 0:05:09.839 --> 0:05:12.000 this is why you need to look at this not 0:05:12.040 --> 0:05:15.360 just from an emotional perspective, not just from you know, 0:05:15.400 --> 0:05:18.920 the ping pong narrative, but also from a logical perspective. 0:05:19.200 --> 0:05:22.680 You know, what do valuations look right like right now? 0:05:22.720 --> 0:05:25.920 And what are the guardrails to those valuations. Look at 0:05:25.960 --> 0:05:28.600 the five year five year real yield right now, it's 0:05:28.680 --> 0:05:32.880 around two point three percent. That is the same or 0:05:32.920 --> 0:05:35.720 the average rate that the five year five year real 0:05:35.760 --> 0:05:38.320 yield was from two thousand and three to two thousand 0:05:38.360 --> 0:05:41.960 and seven. So we've already repriced not just to the 0:05:42.000 --> 0:05:44.960 pre COVID levels, but to the pre GFC levels. 0:05:45.000 --> 0:05:47.080 So regime shift has really already happened. 0:05:47.279 --> 0:05:50.440 In our view, it's actually an overshoot it, but it's 0:05:50.480 --> 0:05:51.239 already happened. 0:05:51.320 --> 0:05:53.479 Although I will just push back and I know that 0:05:53.520 --> 0:05:56.040 you've been bullish on treasuries and talking about going back 0:05:56.080 --> 0:05:59.760 down to three percent. Have you reconsidered that call at all, 0:06:00.120 --> 0:06:02.560 especially in light of some of these structural changes. Yes, 0:06:02.600 --> 0:06:05.280 we can talk about inflation, but towards the slock of 0:06:05.279 --> 0:06:08.800 apologies putting out treasury auction sizes will increase on average 0:06:08.839 --> 0:06:12.159 twenty three percent in twenty twenty four. We have evidence 0:06:12.320 --> 0:06:13.880 that a lot of the central banks around the world 0:06:13.960 --> 0:06:17.400 traditional buyers are no longer buying. Doesn't this change your 0:06:17.440 --> 0:06:18.680 outlook more materially? 0:06:19.000 --> 0:06:23.040 So the technicals do matter, particularly in the shorter term horizons, 0:06:23.240 --> 0:06:26.760 but we do think ultimately the fundamentals and the valuations 0:06:27.040 --> 0:06:31.559 are going to weigh over those technicals. 0:06:30.960 --> 0:06:33.000 Over the medium term. Inflation. 0:06:33.240 --> 0:06:35.840 Right now, the three month runrate on core PC is 0:06:35.920 --> 0:06:37.320 two point one six percent. 0:06:37.680 --> 0:06:39.360 I mean, we're at the FEDS target. 0:06:39.560 --> 0:06:42.360 We're not in the nineteen seventies in the nineteen eighties 0:06:42.360 --> 0:06:45.320 here in terms of the economic growth environment or the 0:06:45.360 --> 0:06:48.919 inflation environment. I think that there has been a buyer 0:06:49.040 --> 0:06:50.520 strike cut. 0:06:50.360 --> 0:06:52.680 To the chase they're fighting. The last war is that 0:06:52.720 --> 0:06:56.120 what you're saying. You're having coffee with Mike Feroli over 0:06:56.120 --> 0:06:59.440 at JP Morgan. Can you guys agree Goolesby and the 0:06:59.440 --> 0:07:01.120 rest of them are fighting the last war. 0:07:01.600 --> 0:07:05.160 Yeah, they're fighting inflation that I think is already clearly 0:07:05.200 --> 0:07:09.400 coming down. And I understand why they're going to wait 0:07:09.880 --> 0:07:13.960 until it's painfully obvious. But in my mind that only 0:07:14.120 --> 0:07:18.320 just reinforces the risk that hard landing should be much 0:07:18.360 --> 0:07:20.960 more of a higher probability than soft landing, because the 0:07:21.000 --> 0:07:24.400 FED is telling you, they're telling you we're not going 0:07:24.440 --> 0:07:28.240 to stop until it's painfully obvious that the economy can't 0:07:28.240 --> 0:07:30.160 handle it, and the housing market. You look at the 0:07:30.200 --> 0:07:33.080 mortgage application data from yesterday, it clearly. 0:07:32.760 --> 0:07:33.480 Can't handle it. 0:07:34.360 --> 0:07:36.240 We think that the economy is not going to be 0:07:36.240 --> 0:07:37.960 able to handle these rates, but the FED is going 0:07:38.000 --> 0:07:39.000 to be the last to admit that. 0:07:39.480 --> 0:07:46.800 Cassie Power that f Jpmokan Asset Managements Sarah Hunt joined 0:07:46.800 --> 0:07:48.480 just now. Chief Market is trying to just to Aupine 0:07:48.480 --> 0:07:50.840 sexon Woods. Sarah, good morning, good I always got to 0:07:50.920 --> 0:07:52.160 energy with you at the end of the interview. We 0:07:52.200 --> 0:07:54.760 should go there at the stop. Crude was dreadful yesterday 0:07:54.880 --> 0:07:57.840 down almost six percent. I know that things at Cushing 0:07:57.880 --> 0:08:00.520 looking a little bit better on the stock past side 0:08:00.560 --> 0:08:03.280 of things. Gasoline demand really softest well, based on a 0:08:03.320 --> 0:08:04.960 recent read. What do you make of the recent moves? 0:08:05.400 --> 0:08:07.240 Well, I think I mean we talked about this last time. 0:08:07.280 --> 0:08:10.720 If crude prices rise really quickly, then gasoline prices come 0:08:10.800 --> 0:08:12.520 up commensurately, and then all of a sudden you do 0:08:12.560 --> 0:08:14.280 have a backing down and demand. And I think part 0:08:14.280 --> 0:08:16.520 of it was the demand numbers on gasoline. I think 0:08:16.560 --> 0:08:18.480 part of it is also sort of the parallel to 0:08:18.520 --> 0:08:21.040 the bond market, which is, all of a sudden, the 0:08:21.080 --> 0:08:22.960 market's going well, if we do have a recession or 0:08:23.000 --> 0:08:25.200 if the world is slowing down, then crude prices may 0:08:25.240 --> 0:08:27.000 be too high. And part of the reason they're highest 0:08:27.040 --> 0:08:29.040 because the statutis have taken some off the market. It's 0:08:29.040 --> 0:08:32.280 not just a problem of higher demand and not enough supply. 0:08:32.520 --> 0:08:34.400 But I think the supply side is going to stay 0:08:34.440 --> 0:08:37.080 somewhat restricted, and I think that's really going to ultimately 0:08:37.120 --> 0:08:39.240 be the longer term story. But you are going to 0:08:39.280 --> 0:08:41.560 have these convulsive moves, and the stacks haven't caught up, 0:08:41.800 --> 0:08:43.559 not all of them anyway. To the higher prices and 0:08:43.640 --> 0:08:46.160 crude anyway, So I think that there is still some 0:08:46.320 --> 0:08:48.120 room in there, but it is going to be a 0:08:48.200 --> 0:08:49.079 volatile trade. 0:08:49.440 --> 0:08:52.760 I'm calling this never ever Thursday because I'm looking at 0:08:52.840 --> 0:08:56.559 bond charts that I've never ever thought about or imagined 0:08:56.679 --> 0:09:01.040 or visualized mathematically. Folks, this is truly without ache. This 0:09:01.080 --> 0:09:06.280 is truly original territory. How do equity participants react never 0:09:06.480 --> 0:09:08.120 ever thing's in the bond market. 0:09:08.720 --> 0:09:11.440 Well, I think it's problematic for the equity markets that 0:09:11.440 --> 0:09:13.920 you're having such convulsive moves in the bond markets. And 0:09:13.960 --> 0:09:16.520 I think that part of the issue with equities has 0:09:16.559 --> 0:09:18.719 always been if rates do stay higher, what are we 0:09:18.800 --> 0:09:21.559 discounting those cash flows at I don't disagree that technology 0:09:21.600 --> 0:09:23.240 is one of the places that will actually do well 0:09:23.559 --> 0:09:25.520 even in a higher rate environment, because you've got that 0:09:25.559 --> 0:09:27.520 stability of earnings and they've also got a lot of 0:09:27.520 --> 0:09:29.640 cash on their balance sheets. But I think that the 0:09:29.720 --> 0:09:31.600 question of what everybody else is going to do and 0:09:31.640 --> 0:09:35.040 how that's going to impact people's balance sheets. Corporations in Europe. 0:09:35.040 --> 0:09:36.719 I read a story this morning on Bloomberg that said 0:09:36.720 --> 0:09:39.880 the corporations in Europe are finally back breaking down and 0:09:40.080 --> 0:09:42.120 issuing bonds at higher rates than they would have a 0:09:42.160 --> 0:09:44.720 year ago. So are people starting to accept that? And 0:09:44.720 --> 0:09:47.280 if so, that's going to take some of the money 0:09:47.280 --> 0:09:48.839 out of the income statement because they're going to be 0:09:48.880 --> 0:09:50.679 paying higher price. So I think that some of that 0:09:50.760 --> 0:09:52.760 is going to impact the earnings for next year. And 0:09:52.800 --> 0:09:55.280 that's still what I don't think is really reflected through 0:09:55.280 --> 0:09:55.680 next year. 0:09:55.800 --> 0:09:58.840 The heart and soul of this is Q four into 0:09:58.920 --> 0:10:02.600 next year. Do you go with a diversified virtual index 0:10:02.679 --> 0:10:06.840 fund tight our squared approach or are you active and 0:10:07.120 --> 0:10:10.960 take a less diversification approach, which is I got my 0:10:10.960 --> 0:10:12.560 own opinion, But which do you think? 0:10:12.760 --> 0:10:15.600 I think active? I mean that's also active, more narrow, 0:10:15.760 --> 0:10:18.120 more narrow, and also looking at where you think there 0:10:18.200 --> 0:10:21.000 might be some vulnerability, which indexes can't really do right 0:10:21.040 --> 0:10:23.320 because they are going to rebalance the way they rebalance, 0:10:23.360 --> 0:10:25.200 and I think that there are some places that are 0:10:25.200 --> 0:10:26.439 going to continue to be vulnerable. 0:10:26.520 --> 0:10:28.800 Do you think the Pond sell off has been coherent 0:10:28.840 --> 0:10:30.600 with the other moves that we've seen in the markets. 0:10:32.160 --> 0:10:34.199 You know, it's so hard on these very short term 0:10:34.200 --> 0:10:36.200 moves to figure out is this a technical problem? Is 0:10:36.200 --> 0:10:38.120 this a quant problem? Is where is this coming from? 0:10:38.240 --> 0:10:39.679 Or where are these moves coming from and I think 0:10:39.679 --> 0:10:42.400 it's very difficult to parse that out and say how 0:10:42.440 --> 0:10:44.360 it interacts. But I do think that there are large 0:10:44.400 --> 0:10:47.320 positioning changes, and when those happen, it's not always easy 0:10:47.320 --> 0:10:49.240 to see. I mean, there's questions about whether or not 0:10:49.320 --> 0:10:51.600 the boj was intervening right because the yen went through, 0:10:51.760 --> 0:10:53.680 and was what did that happen? Or was that just 0:10:53.720 --> 0:10:56.160 a technical level that everybody said, oh, one fifty, we're getting. 0:10:55.960 --> 0:10:57.959 So close, we have to do something. So I'm not. 0:10:57.920 --> 0:11:00.560 Really sure on those very short term moves go together, 0:11:00.760 --> 0:11:02.960 but longer term they will start to make more sense. 0:11:03.000 --> 0:11:05.319 Although you know, you've had correlations that are very different 0:11:05.320 --> 0:11:07.280 over the last couple of years than normal, so make 0:11:07.320 --> 0:11:08.560 more sense as a relative term. 0:11:08.600 --> 0:11:11.320 The reason why I ask that is because if yields 0:11:11.320 --> 0:11:13.480 stay at levels that we're seeing right now, if there 0:11:13.520 --> 0:11:16.240 is something fundamental behind this or even structural when it 0:11:16.280 --> 0:11:20.360 comes to price sensitive buyers newly priced sensitive buyers, how 0:11:20.400 --> 0:11:22.720 much does that change the equation for you in the 0:11:23.040 --> 0:11:25.400 equity sphere, I mean, aside from oil, aside from some 0:11:25.440 --> 0:11:29.280 of these specific bets, is there a rethink about the 0:11:29.520 --> 0:11:33.439 value proposition with some of the overweights you've had to equities. 0:11:33.760 --> 0:11:35.320 Well, I think that you've been seeing that for the 0:11:35.360 --> 0:11:37.240 last two years, right since or the last year and 0:11:37.280 --> 0:11:39.320 a half, since the FED started raising rates. The question 0:11:39.360 --> 0:11:41.720 has been with their bonds. Right, where am I going 0:11:41.760 --> 0:11:43.960 with that? Because I'm now putting them back in a portfolio. 0:11:44.120 --> 0:11:46.760 When you talk about the big price erosion from the 0:11:46.840 --> 0:11:49.600 lows when the tenure was sitting at basically twenty basis 0:11:49.600 --> 0:11:52.199 points the fact that we're now up at levels that. 0:11:52.160 --> 0:11:52.839 Are over four. 0:11:53.400 --> 0:11:55.400 I think people have been looking at that the whole time, 0:11:55.440 --> 0:11:57.080 But the problem is that as they've been adding the 0:11:57.080 --> 0:11:59.160 whole time, the prices have been coming down. So there's 0:11:59.200 --> 0:12:02.400 a little bit of scorched earth on the bond side too, 0:12:02.440 --> 0:12:04.880 because people have lost money in bonds and in ways 0:12:04.880 --> 0:12:06.839 that they hadn't in the last couple in the last 0:12:06.920 --> 0:12:10.120 several decades. So I think that there is absolutely room 0:12:10.160 --> 0:12:13.200 for fixed income in people's portfolios. They are putting it back, 0:12:13.440 --> 0:12:16.720 but that was traditionally where you had some participation anyway, 0:12:17.000 --> 0:12:19.280 and I think that higher rates make that something that 0:12:19.320 --> 0:12:22.720 people look at more seriously, especially as duration starts to 0:12:22.720 --> 0:12:24.520 look a little higher priced than it was because you. 0:12:24.520 --> 0:12:27.400 Were sitting high. 0:12:26.840 --> 0:12:28.480 Rates on the low end, but on the short end, 0:12:28.520 --> 0:12:29.960 but not on the long end, and that's starting to 0:12:30.000 --> 0:12:32.400 change a little bit, not necessarily for the best for everyone. 0:12:32.600 --> 0:12:35.360 Just pulled up a quick shart average FED funds going 0:12:35.520 --> 0:12:38.680 back to the seventies averages four ninety three. I know 0:12:38.720 --> 0:12:41.719 that's skewed by decade of zero, but the average is 0:12:41.760 --> 0:12:44.560 four ninety three. Is anything on a long bond close 0:12:44.600 --> 0:12:46.880 to five percent just to screaming buy based on history? 0:12:46.920 --> 0:12:48.400 Or can you tell me that things are going to 0:12:48.400 --> 0:12:51.000 be markedly different over the next couple of decades. 0:12:51.400 --> 0:12:53.800 Well, I think if governments hadn't indebted themselves to the 0:12:53.840 --> 0:12:55.840 extent that they have, then you could look at some 0:12:55.920 --> 0:12:57.880 of those numbers and say we should have higher rates 0:12:57.920 --> 0:12:59.840 on the long end, because that was also more historic. 0:13:00.080 --> 0:13:02.840 But if I think about what that's going to cost governments, 0:13:03.120 --> 0:13:04.880 I have to wonder whether or not they can keep 0:13:05.120 --> 0:13:08.000 we can keep collectively keep rates that high. And I'm 0:13:08.040 --> 0:13:11.040 not sure that we can control the long end as much. 0:13:11.080 --> 0:13:12.840 But I do think that going back to what we 0:13:12.960 --> 0:13:14.840 used to think of as more normalized, it's a little 0:13:14.840 --> 0:13:17.680 bit difficult given the fact that we've got this massive 0:13:17.679 --> 0:13:20.000 amount of government balance sheet that we didn't have twenty 0:13:20.080 --> 0:13:20.400 years sgo. 0:13:20.600 --> 0:13:22.559 This is a big question. It's difficult to answer, but 0:13:22.640 --> 0:13:25.320 what is normal the last ten years, the ten years 0:13:25.320 --> 0:13:27.240 before that? When we say things like normal, what is 0:13:27.280 --> 0:13:28.440 normal that's going to be? 0:13:28.480 --> 0:13:30.400 I think one of the biggest issues playing out going 0:13:30.440 --> 0:13:33.920 forward is the more normal what happened after the Great 0:13:33.920 --> 0:13:36.000 Financial Crisis and now that we've gotten this level of 0:13:36.080 --> 0:13:38.160 balance sheets for governments, do we just stay here and 0:13:38.280 --> 0:13:40.120 every time we have a problem we just keep adding 0:13:40.120 --> 0:13:42.600 to them. And does that break something eventually or do 0:13:42.640 --> 0:13:44.520 we go back to something that was before that? And 0:13:44.559 --> 0:13:46.080 I don't know what the answer is, And I think 0:13:46.120 --> 0:13:47.720 that that tension is part of what's going to be 0:13:47.720 --> 0:13:49.880 playing out going forward in both the bond and the 0:13:49.880 --> 0:13:52.000 equity markets, because it definitely had an effect on the 0:13:52.000 --> 0:13:54.000 equity markets as well. You can't say that it didn't 0:13:54.040 --> 0:13:55.080 with multiples where they are right now. 0:13:55.080 --> 0:13:56.600 You can feel that tension at the moment because you 0:13:56.600 --> 0:13:58.400 get these yields that people have been wanting for a 0:13:58.440 --> 0:14:00.520 long long time lease and there is just that refusal 0:14:00.559 --> 0:14:03.160 to jump in. Sara Hunt, chief Market Strategies to Alpine 0:14:03.200 --> 0:14:04.000 sexon book. 0:14:13.440 --> 0:14:16.760 Joining us hugely qualified. Peter Scheer had a macro Strategy 0:14:17.120 --> 0:14:21.560 Academy Securities. He's enjoyed these kind of moves before Bank 0:14:21.600 --> 0:14:25.120 of America before they blew it up. Bob Sinch in 0:14:25.200 --> 0:14:29.080 Foreign Exchange really experienced. And a guy Ryan heard, a 0:14:29.080 --> 0:14:32.200 guy named David Goldman who was in my book. David 0:14:32.240 --> 0:14:35.160 Goldman told me, once look at the tranches, and you 0:14:35.280 --> 0:14:38.280 nail this in your note, and everybody's looking at worry 0:14:38.360 --> 0:14:42.040 read distress South African ran blah blah blah, and the 0:14:42.160 --> 0:14:47.280 David Goldman tranch is the quality stuff up here? You 0:14:47.440 --> 0:14:52.480 write about previously deemed safe assets. How close are we 0:14:52.840 --> 0:14:57.960 are we to those better tranches of credit being previously 0:14:58.080 --> 0:14:59.560 deemed safe assets? 0:14:59.720 --> 0:15:01.680 Yes? And you know, I've always looked at this world 0:15:01.720 --> 0:15:03.880 of you know, you've got high yield than IG and 0:15:03.920 --> 0:15:06.880 treasure has always been that safe asset, super safe, And 0:15:06.920 --> 0:15:08.920 it feels like something's cracking. I think this time we're 0:15:08.920 --> 0:15:10.120 going to be okay. I think we're going to get 0:15:10.120 --> 0:15:12.120 the ten year back below four forty because we're going 0:15:12.200 --> 0:15:15.600 to see kind of a really quick gap lower in 0:15:15.680 --> 0:15:17.800 yields as data comes up weak. But I do think 0:15:17.840 --> 0:15:20.160 something is cracked. And for the first time in my lifetime, 0:15:20.160 --> 0:15:22.880 people are actually questioning the trajectory of where treasuries are 0:15:22.880 --> 0:15:24.840 going to be. And that is very concerning to me 0:15:24.960 --> 0:15:28.120 because every financial bubble that we've ever had has always 0:15:28.120 --> 0:15:30.280 come when it's a safe asset that breaks. It's never 0:15:30.320 --> 0:15:33.400 the risky assets. It's when a safe asset breaks. And 0:15:33.440 --> 0:15:35.320 we had a whiff of that in the past kind 0:15:35.320 --> 0:15:35.960 of week or two. 0:15:36.160 --> 0:15:38.200 It was a test yesterday, though, and I think the 0:15:38.280 --> 0:15:41.240 test is always for developed markets, when bad things happen 0:15:41.280 --> 0:15:44.680 to we buy treasuries. Something negative happened, We've got a 0:15:44.720 --> 0:15:48.000 soft ADP report for whatever that's worth. We bought treasuries. 0:15:48.280 --> 0:15:50.280 Isn't that a decent stress test just to understand that 0:15:50.320 --> 0:15:52.920 if things do go south in the economy, this still works. 0:15:53.000 --> 0:15:53.120 You know. 0:15:53.160 --> 0:15:54.600 I think there's a lot of ebbs and flows. So 0:15:54.640 --> 0:15:57.360 everyone got so barish on treasuries. People were piling into it. 0:15:57.440 --> 0:15:59.240 People have tried to buy treasures. I've liked them since 0:15:59.240 --> 0:16:02.240 four to twenty five, four forty so people were very reluctant. 0:16:02.600 --> 0:16:04.880 So we finally had a bit of that capitulation trade. 0:16:05.000 --> 0:16:06.920 Right now. I think as weak data comes out, we're 0:16:06.920 --> 0:16:09.000 going to see treasure yields go lower, and then we're 0:16:09.000 --> 0:16:10.720 going to get back to thinking, Okay, what is really 0:16:10.760 --> 0:16:12.880 the long term trade? And I think that's probably now 0:16:12.960 --> 0:16:13.640 higher yields. 0:16:13.880 --> 0:16:16.400 You think there's a limit to how much bonds can rally, 0:16:16.480 --> 0:16:18.280 yields can fall on negative data? 0:16:18.680 --> 0:16:21.560 I think right now, Yes, I think this overlying fear 0:16:21.640 --> 0:16:25.960 that DC no longer cares about our debt trajectory is problematic. 0:16:26.040 --> 0:16:28.800 I think if you look at the US as a creditor, 0:16:29.040 --> 0:16:30.600 we don't seem to care about the debt. We don't 0:16:30.600 --> 0:16:32.800 seem to even necessarily want to pay the debt. There's 0:16:32.880 --> 0:16:35.360 all these kind of weird messages coming out of DC, 0:16:35.480 --> 0:16:36.920 and I think that's going to weigh on the market. 0:16:37.080 --> 0:16:39.920 When you said that the longer term trade is higher yields, 0:16:40.360 --> 0:16:41.520 how much higher? 0:16:41.600 --> 0:16:41.760 Right? 0:16:41.800 --> 0:16:44.400 And what are we talking about at a time when 0:16:44.400 --> 0:16:46.320 you say that something has cracked, that the sell off 0:16:46.320 --> 0:16:48.840 that we've seen so far has something sort of damaging 0:16:48.880 --> 0:16:49.480 inherent in it. 0:16:49.960 --> 0:16:51.520 So I think you're right. When we were talking about 0:16:51.520 --> 0:16:53.200 no one could figure out why we kept moving wider 0:16:53.240 --> 0:16:55.160 every day, right, Yields kept going higher and higher. So 0:16:55.200 --> 0:16:56.720 there is I think a lot of things at motion. 0:16:56.800 --> 0:16:59.080 You have China no longer buying treasuries. I think you've 0:16:59.080 --> 0:17:01.240 got our supply issue. The only thing I think that 0:17:01.240 --> 0:17:04.280 it's really going to prevent treasuries from next year breaking 0:17:04.280 --> 0:17:06.960 about five percent or higher is DC kind of getting 0:17:07.000 --> 0:17:09.440 its act together, starting to put forward budgets, starting to 0:17:09.440 --> 0:17:14.080 put forward something that resembles, you know, fiscal responsibility. If 0:17:14.119 --> 0:17:16.359 we don't get that, I think people are losing faith 0:17:16.359 --> 0:17:18.199 in that, and that's really problematic. 0:17:18.400 --> 0:17:20.119 But when you say that basically we're going to get 0:17:20.119 --> 0:17:22.560 a drift lower and then when people start to understand 0:17:22.560 --> 0:17:25.440 that they're going to go higher again, isn't there sort 0:17:25.480 --> 0:17:27.720 of a self limiting feature to this? You said, you know, 0:17:27.840 --> 0:17:30.960 something cracked in terms of where we were going, the 0:17:31.000 --> 0:17:33.240 speed we were moving. Aren't we going to get some 0:17:33.280 --> 0:17:36.240 sort of bigger financial accident like everyone's been saying, if 0:17:36.240 --> 0:17:38.320 we lead to you know, yields of five percent on 0:17:38.359 --> 0:17:40.200 the tenure on a persistent basis. 0:17:40.080 --> 0:17:42.199 I don't think we get a financial accident necessarily. It 0:17:42.240 --> 0:17:43.960 depends on how rapid it is. So one I think 0:17:43.960 --> 0:17:45.639 we get back to that four forty. I don't think 0:17:45.640 --> 0:17:47.560 we get back to four percent because, like you say, 0:17:47.560 --> 0:17:50.160 we've had this experience. I think it's a six month 0:17:50.160 --> 0:17:52.359 to a year long experiment where we start seeing what 0:17:52.359 --> 0:17:54.639 happens with the election, what the trajectory of the debt is. 0:17:54.640 --> 0:17:56.560 If people lose faith in that, then I think you 0:17:56.600 --> 0:17:59.199 go rapidly above five point fifty. You start testing that, 0:17:59.560 --> 0:18:01.120 and that's where you get the force selling. The reason 0:18:01.200 --> 0:18:04.359 I'm always concerned about safe assets is twofold one people 0:18:04.400 --> 0:18:06.960 own them in huge size and their portfolios because they 0:18:06.960 --> 0:18:09.600 were never worried about losses. If you start worrying about losses, 0:18:09.800 --> 0:18:11.960 that causes force selling. And the other part is what 0:18:12.000 --> 0:18:13.919