Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa brown Witz. Daily we bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg
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Speaker 1: A joy to have Michael Wilson with this. Mike Wilson
Speaker 1: with Midwest Academics out of Michigan and Northwestern legendary of
Speaker 1: Morgan Stanley, and he joins us now for an update.
Speaker 1: I love what you say, Mike Wilson about the alpha
Speaker 1: in the beta. This is not options dynamics, folks, delta, gamma,
Speaker 1: all the other Greek malarchy we talked about, Mike Wilson.
Speaker 1: It's about relative performance versus absolute performance. Parts that yeah, well,
Speaker 1: thanks Tom. I mean, look, I think that's what this
Speaker 1: year is going to be about. Last year, you know,
Speaker 1: we're obviously in the midst of the pandemic, the lockdown,
Speaker 1: that the economy was falling apart, and of course stocks
Speaker 1: discounted the recovery and it was really a beta trade,
Speaker 1: meaning everything kind of went up together because everything had
Speaker 1: got crushed at the same time. Now it's about, okay, well,
Speaker 1: where can I find the sort of needles in the haystack?
Speaker 1: The stocks that are there, are companies are gonna really
Speaker 1: outperform as we reopen. And oh, by the way, there's
Speaker 1: gonna be some losers as that happens to right, There's
Speaker 1: gonna be a wall of share shift as we go
Speaker 1: back to normal. There's gonna be cost pressures. You were
Speaker 1: just talking about the inflation trade, something we've been on
Speaker 1: for quite a while. That's going to create some cost
Speaker 1: pressures for many businesses. So so we want to take
Speaker 1: advantage of that. We want to take advantage of the
Speaker 1: companies that can benefit from that environment and then try
Speaker 1: to avoid those that are gonna be going to be
Speaker 1: punished by that. And then it's just it's individual stocks
Speaker 1: with the Morgan Stanley research combine. You say the haystack,
Speaker 1: what are the sectors in the haystack? You know, we
Speaker 1: were just talking about when it's the banks, right, So
Speaker 1: we've we've been on the rate trade for a while,
Speaker 1: we've been on the reslation trade for a while, and
Speaker 1: we think, look, let's let's take advantage of that. I mean,
Speaker 1: there are going to be companies that benefits from higher
Speaker 1: rates and higher commodity prices, so materials, metals and mining, obviously,
Speaker 1: the banks, um clearly some of the cehtical parts of
Speaker 1: technology that you know have benefit the benefit front reopening
Speaker 1: of an economy. Maybe the industrial sectors we get an
Speaker 1: infrastructure buill those are gonna be areas from a sector standpoint,
Speaker 1: they could do quite well. Let's just build on the
Speaker 1: year and coal thirty nine hundred. I imagine you filled
Speaker 1: a lot of calls and they say to you, Mike,
Speaker 1: thirty nine hundred, why haven't you lifted to your price target?
Speaker 1: Is this just down to the member waitings, the sector
Speaker 1: wait things, just the mechanics of the makeup of an
Speaker 1: index like the SMP five D. Yeah, I mean, let'
Speaker 1: let's talk about the SMP itself. That it's really a
Speaker 1: large kind of growth index, John, as you know, and
Speaker 1: I mean, those tonics have done terrifically well over the
Speaker 1: last decade, and part of that story has been the
Speaker 1: fact that rates have come down. Right, they're they're great businesses,
Speaker 1: but they've looked they've been over valued because rates are
Speaker 1: been repressed and that's changing now. Well, then their multiples
Speaker 1: are going to come down, probably more perhaps than what
Speaker 1: the earnings can offset. So good, I'm still feel really
Speaker 1: good about that target. A year end. We have a
Speaker 1: bowl case of where do you want fifty? Okay, fine, um,
Speaker 1: but that's not the story. The story is what's going
Speaker 1: on underneath the surface. I mean you mentioned it earlier.
Speaker 1: Some of the medals of mounting stacks, some of the
Speaker 1: bank stacks that are really doing well. These are the
Speaker 1: these are the opportunities for portfolio managed to find what
Speaker 1: I've really enjoyed in the last couple of ways. Catching
Speaker 1: up with you guys, and Morgan Stanley is just putting
Speaker 1: all the pieces together. Allen setting the last week of
Speaker 1: Morgan Stanley talking up five percent GDP growth next year,
Speaker 1: six and a half percent this year. I imagine a
Speaker 1: Matt hornback high yields call is in there as well. Mike.
Speaker 1: Can you just put it all together for us, join
Speaker 1: the dots between the different calls coming from the bank
Speaker 1: at the moment. Yeah, I mean, the macro team has
Speaker 1: really been in sync over the last twelve months. I mean,
Speaker 1: because the pieces have come together, and you know, Ellen's
Speaker 1: calling the economy, mets calling rates are call on kind
Speaker 1: of the sector dispersion and rotation that's been going on.
Speaker 1: It's all part of the same narrative, and it goes
Speaker 1: back to almost a year ago. Now it seems it
Speaker 1: seems like it was yesterday, but a year ago, you know,
Speaker 1: we're talking about this regime shift as we move from
Speaker 1: a monetary policy dominant regime to a fiscal policy dominant regime.
Speaker 1: And it's clear now that that's what's happening. What does
Speaker 1: that mean. It needs to higher velocity economy, it means
Speaker 1: higher nominal GDP, it means inflation, and those are things
Speaker 1: that are going to change what works going forward. So
Speaker 1: within the churn, the churn can be nice and it
Speaker 1: can be uh, for example, a hot tub, or it
Speaker 1: can be the ocean where you're getting smashed against the
Speaker 1: shore and there's a question about how much leverage there
Speaker 1: is beneath the surface. It's going to lead to some
Speaker 1: pretty violent moves. Mike, what's your sense of how much
Speaker 1: leverage has been pushed out of the system or how
Speaker 1: much has been built up in preparation for a relatively
Speaker 1: violent churn over the next few months. Well, that's right.
Speaker 1: I mean, I think one of the one of the
Speaker 1: things that we're not that comfortable with at the moment.
Speaker 1: To be honest, it's been a really a one way
Speaker 1: risk market. Okay, there hasn't been a lot two way risk.
Speaker 1: We had that little you know, snaphoo in January, some
Speaker 1: shortcovering and some de leveraging that went on. But we're
Speaker 1: right back to those high leverage areas. When I say
Speaker 1: high leverage, I mean across both the institutional world and
Speaker 1: the retail world. We've rarely seen leverage as high and
Speaker 1: that can't bite both ways. And so the wild cards
Speaker 1: and me is, let's send that we go into the
Speaker 1: reopening phase, which it looks like it's gonna be sooner
Speaker 1: rather than later. Some of these cost pressures arise. We
Speaker 1: do have supply chain issues. You know, this event in
Speaker 1: Texas with the weather is not helping that, by the way,
Speaker 1: so we could have margin pressure, we could have rates
Speaker 1: go up more quickly than people are anticipating in evaluations.
Speaker 1: So so I think that leverage will will create more
Speaker 1: two way risk, will create some more volatility in the marketplace,
Speaker 1: and by the way, we'll create some opportunities in the
Speaker 1: areas that we do like That's exactly what I was
Speaker 1: going to say, how do you use that? How are
Speaker 1: you preparing to jump on that with respect to specific
Speaker 1: market calls. Well, we're advising clients right now to probably
Speaker 1: take their leverage down. And we think people have leverage
Speaker 1: that's too high that it looks things are. And even then,
Speaker 1: the things that we like right now there are a
Speaker 1: bit of ahead of themselves. And we wouldn't be surprised
Speaker 1: if we had another surprise over the court the next
Speaker 1: thirty five days and we get a bigger correction, and
Speaker 1: and so it's like run lower risk right now. That's
Speaker 1: that's and and then let's take advantage of the drawdown
Speaker 1: like we got in January, or like some of the
Speaker 1: drawing after got last year. Mike fantasticic catchups, great work
Speaker 1: as always, Matt Wilson, that Morgus, Downey Cio and Chafe
Speaker 1: us equity strategists. Megan Green joins us right now. Harvard
Speaker 1: County School Senior Fellow. Megan. There's all this debate about economics,
Speaker 1: and we all toss around ratios like productivity three ratio
Speaker 1: six unit idea, and then there's a strange thing, the
Speaker 1: output gap. Do we really have knowledge of where these
Speaker 1: relationships are these ratios. Given the pandemic we look, we
Speaker 1: never really know where the output gap is because it's
Speaker 1: predicated on this idea of potential growth, and measuring potential
Speaker 1: growth is much more of an art than a science
Speaker 1: at the best of times, let alone in a crisis
Speaker 1: is But I would also argue that this idea of
Speaker 1: potential growth, this equilibrium that the economy is naturally going
Speaker 1: to come back to, might be a bit and antiquate. Antiquated.
Speaker 1: I mean, in economics we believe in equilibria. Um usually
Speaker 1: there's just one. But we've all spent the past year
Speaker 1: looking at eideline epidemiological models. And the hard scientists don't
Speaker 1: view the world this way. They look at the world
Speaker 1: very differently, thinking, you know what, there is no actual
Speaker 1: equilibrium that we know about at the beginning. Instead, we're
Speaker 1: gonna look at actors, use agent based models to see
Speaker 1: how they respond to things, use machine learning to build
Speaker 1: models around that, and figure out what the outcome is.
Speaker 1: And so I think this debate about the output gap
Speaker 1: based on some kind of equilibrium is probably missing the point.
Speaker 1: And you know, we economists, we we assume that they
Speaker 1: are very intelligent actors in a very simple world, and
Speaker 1: I think scientists have have a very different view of
Speaker 1: the world. They assume they're very simple people in a
Speaker 1: complex world, and there's a lot that we could probably
Speaker 1: learn from them. Economics. Okay, well, what's the timeline here?
Speaker 1: What are we getting wrong right now about the X axis?
Speaker 1: We're talking about this across the simulcast all morning, the
Speaker 1: guestimates out to June, the guestimates out to September. Do
Speaker 1: you have a belief in the X axis right now
Speaker 1: or is that a mystery as well? Look, I think
Speaker 1: everything is a mystery at the moment. This isn't a
Speaker 1: typical kind of downturn and it won't be a typical
Speaker 1: kind of recovery at all. And as I've been saying
Speaker 1: since the beginning of this virus, the virus is going
Speaker 1: to dictate everything and we'll be determining prices and quantities
Speaker 1: and so uh, you know, it's it's actually the epidemiological
Speaker 1: data that's much more important than the economic data at
Speaker 1: the moment. So make a reason people were gravitating towards
Speaker 1: the output gap that we're trying to assess how big
Speaker 1: this package was down in day say, and perhaps whether
Speaker 1: it was too big. So what's the best way of
Speaker 1: assessing that size too big, too small? So I don't
Speaker 1: think we should think of this package as a stimulus
Speaker 1: at all. It's it's unfortunately been deemed that, but I
Speaker 1: think we should think of it as cataxtrophe mitigation. And
Speaker 1: so the point isn't to figure out the size of
Speaker 1: the whole, to measure how big it is and how
Speaker 1: much dirt we need to fill it in. The point
Speaker 1: is to get dirt out to those most vulnerable um
Speaker 1: so that we can protect them, and then in the
Speaker 1: next stage think about trying to provide a stimulus so
Speaker 1: that we can get on our way to recovery. And
Speaker 1: in this sense, I think the next package is almost
Speaker 1: the more important one. If you want to think about
Speaker 1: potential growth, or if you want to consider there might
Speaker 1: be multiple equilibria and we're trying to end up on
Speaker 1: a better one. The next package, the build back better package,
Speaker 1: is the one that's going to do that. So what
Speaker 1: do you think that package specifically mag and should look like.
Speaker 1: I think it should be full of public investments. I mean,
Speaker 1: it doesn't matter if you believe in secular stagnation or not.
Speaker 1: If you think that we've had low growth, low inflation,
Speaker 1: low rates for so long because of supply side issues
Speaker 1: or demand side issues. The is one thing that fixes
Speaker 1: both of those issues, and that's public investment. So, you know,
Speaker 1: a massive infrastructure spending program that's green in nature, I
Speaker 1: think is an absolute no brainer, and a lot of
Speaker 1: money should be behind that before we get there. Megan,
Speaker 1: i'd love your assessment of the efficiency of this one
Speaker 1: point nine trillion dollar package. Greg Valier was talking about
Speaker 1: that Wall Street Journal op ed talking about the pork
Speaker 1: built into this plan. Do you have a sense of
Speaker 1: whether that's actually the case or whether there is a
Speaker 1: sort of sense behind each dollar and sort of a
Speaker 1: firepower behind it. So I think there is firepower behind
Speaker 1: you know, purely based on the size. Is every dollar
Speaker 1: perfectly allocated? Absolutely not. But we've already learned in this
Speaker 1: crisis and the previous crisis that we don't have great
Speaker 1: tools for ferreting out exactly who needs how much money
Speaker 1: and getting it to them, And so the idea is
Speaker 1: you just get out a lot quickly. It's not particularly targeted.
Speaker 1: It could be more targeted, certainly, and it doesn't includ
Speaker 1: of things like automatic stabilizers, which I wish it did,
Speaker 1: so that you took the politics out of this process
Speaker 1: a little bit, and it was all based on what's
Speaker 1: actually happening in the economy. Um. But the idea isn't
Speaker 1: to fill in the hole perfectly, We're we're clearly over
Speaker 1: doing it on filling in the hole. But that's okay,
Speaker 1: because the point is just to get money to the
Speaker 1: most vulnerable businesses and individuals. But Megan, what about people
Speaker 1: who look at the savings rate the fact that it's
Speaker 1: climbed so incredibly high. Yes, this gives people firepower arguably
Speaker 1: when the economy does reopen. But does this indicate to
Speaker 1: you that people are not going to necessarily get this
Speaker 1: money out into the economy right away, and then it's
Speaker 1: not as efficient and that perhaps the people who are
Speaker 1: getting it aren't the people who need it the most.
Speaker 1: So that that's where I think this might be targeted
Speaker 1: a little better towards those with lower incomes or no incomes, certainly,
Speaker 1: rather than a check going to everyone, which I wouldn't advise.
Speaker 1: But that being said, I think that the savings rate
Speaker 1: is a little bit misleading because it doesn't consider all
Speaker 1: the forebearing that we have um at the moment, and
Speaker 1: so the savings three has skyrocketed, so has household debt actually,
Speaker 1: and you have to consider that what bills finally come do,
Speaker 1: which many of them aren't because the forbearance, a lot
Speaker 1: of the savings are going to have to be plowed
Speaker 1: into that. Megan, part of your charm is folding politics
Speaker 1: into your economics. Mit Rochelle was on Friday from Florida,
Speaker 1: where houses are being sold in twelve minutes. I mean,
Speaker 1: clearly the benefits are being skewed across different income levels.
Speaker 1: Do you have any confidence at all that Washington has
Speaker 1: a political will to actually get money to those that
Speaker 1: really need it? So I think, you know, from a
Speaker 1: macro sence, absolutely, If you just look at who the
Speaker 1: administration has hired on the on the domestic side, it's
Speaker 1: a load of labor economists, and that's because there is
Speaker 1: a real concern about income and wealth inequality in the US.
Speaker 1: So I do think in a big sense the Biden
Speaker 1: administration and does want to do something about this. But
Speaker 1: as I said, you know, we don't have great tools
Speaker 1: for figuring out how to get money specifically to those
Speaker 1: who needed the most. Um and what you mentioned in
Speaker 1: the housing market, I mean that's clearly a result of
Speaker 1: central bank policy, and that's the fed UH mortgages cars.
Speaker 1: Those markets have been on fire because RS are so
Speaker 1: incredibly low, and you know, I think they will be
Speaker 1: for a very long time, but I think we can
Speaker 1: can continue to see those markets do well. Mag and
Speaker 1: good to hey from you. Thanks for joining us this
Speaker 1: Monday morning, make and green that at the Hobbit Kennedy
Speaker 1: school Sania Fellow right now in the change landscape of
Speaker 1: this virus, this pandemic and all the good news we're
Speaker 1: observing when we look at hospitalizations and the improved statistics
Speaker 1: of death. Is Joshua Sharfstein's with Johns Hopkins Bloomberg School
Speaker 1: of Public Health. Mr Bloomberg, of course a philanthropist, is
Speaker 1: engineering school at John's Hopkins and all of j h
Speaker 1: U and of course founder of Bloomberg LP in this
Speaker 1: radio and TV property as well, Joshra Sharfstein, I get
Speaker 1: upset when I hear the media talk about her herd
Speaker 1: immunity and simplistic phrases. You and I know it's some
Speaker 1: really interesting differential equations. Explain how prose like you take
Speaker 1: the fancy math of diff e Q and get us
Speaker 1: to where her immunity clicks in. Well, I think they're
Speaker 1: models of her immunity, and then there's the reality of
Speaker 1: her immunity, and so people can estimate when we think
Speaker 1: her immunity might kick in and what that means for people,
Speaker 1: But then we really have to see it because those
Speaker 1: models are generally based on assumptions. I think one of
Speaker 1: the key important points to remember about her immunity is
Speaker 1: that you can have generally herd immunity, meaning that cases
Speaker 1: really don't have a good opportunity to keep spreading. But
Speaker 1: then you have communities where there's a lot of vulnerability.
Speaker 1: People have an been vaccinated and a few people have
Speaker 1: gotten infected that could wind up with pretty serious outbreaks
Speaker 1: as well as hospitalizations and deaths. So general herd immunity
Speaker 1: can leave some serious pockets. And then the second question
Speaker 1: is you know what will it really take and that
Speaker 1: may depend on how these variants behave and other factors
Speaker 1: we don't know about. And one of the factors is
Speaker 1: the virulence of whatever you're talking about. Have you changed
Speaker 1: your perception of how virulent this vaccine is, this this
Speaker 1: virus is rather given the new variants that are out there, well,
Speaker 1: there is certainly some evidence that some of the new
Speaker 1: variants may be more lethal, but it doesn't appear to be,
Speaker 1: you know, fundamentally changing the epidemiology of the of the
Speaker 1: virus so far in the United States. So right now
Speaker 1: the cases are coming down, hospitalizations are coming down, deaths
Speaker 1: are coming down. But we know with five hundred thousand
Speaker 1: people who have died, just how serious this pandemic is,
Speaker 1: and we can't let up. We have to keep pushing
Speaker 1: it down, um, so that we can really minimize the
Speaker 1: chance we get in trouble with variants or any other
Speaker 1: kind of problem. Professor, do you think we are understanding
Speaker 1: the vaccine at all? I think the vaccine is pretty
Speaker 1: awesome really. I mean, if you think about it, that
Speaker 1: within a year we have um incredibly effective vaccines with
Speaker 1: very strong safety records, and you see now the data
Speaker 1: from Israel's showing staggering declines and risk for people who
Speaker 1: have been vaccinated. I think that there's no reason to
Speaker 1: undersell the vaccine. But we shouldn't think that. You know,
Speaker 1: in a week after you know that everything is going
Speaker 1: to be fine, there are a lot of risks out there. UM.
Speaker 1: The way I'm telling people, as you know that list
Speaker 1: of things that you want to do when this is
Speaker 1: all over. You can't do them all today, you know.
Speaker 1: But if you've been vaccinated and you're you're through that period,
Speaker 1: there's probably some things on that list you may be
Speaker 1: able to do. Well. Don't you think it would be
Speaker 1: more optimal so to speak, to tell people who have
Speaker 1: had the vaccine that they can do the things on
Speaker 1: the list. Wouldn't that be a better way of selling
Speaker 1: this vaccine, So actually encourage people to go and get
Speaker 1: it by saying to them that you can't start to
Speaker 1: return to normal once you've had it. Well, I think
Speaker 1: you you can say you can start to return to normal.
Speaker 1: I think that some people are really itching to be
Speaker 1: able to say it's all done. You know, you're done,
Speaker 1: and that's not really a great message for for for
Speaker 1: everyone right now. But you, I think can say, for example,
Speaker 1: that people have been vaccine, you can get together for dinner.
Speaker 1: You know, you can go see your grandkids. You know,
Speaker 1: perhaps depending on the situation, with a few modifications, but
Speaker 1: a lot closer than you were before. So you know,
Speaker 1: I'm fielding these questions every day from people and they're
Speaker 1: just amaze when I start to tell them yes, after
Speaker 1: a year of telling them now it has a psychological impact.
Speaker 1: I would say everyone, particularly younger kids, who have seen
Speaker 1: this as the majority or a significant portion of their
Speaker 1: life going forward. What's the time frame that you see
Speaker 1: at this point, given the vaccinations available, where you expect
Speaker 1: anybody to be able to go to their local drug
Speaker 1: store or say a stadium and get vaccinated. You know,
Speaker 1: I would I defer to the estimates of the federal government.
Speaker 1: I think they're they're talking about the summer for adults
Speaker 1: more or less for that. Obviously, it's going to take
Speaker 1: longer for kids because the studies have to be done.
Speaker 1: But um, I think we're going to see that this
Speaker 1: is going to turn from an excess demand situation pretty quickly.
Speaker 1: I mean in in you know, in a matter of
Speaker 1: weeks or a couple of months, to a vaccine acceptance
Speaker 1: situation where we really are going to be waiting for
Speaker 1: people to get ready for vaccination. And we need to
Speaker 1: start that process now, offering vaccines, answering questions, doing mobile teams.
Speaker 1: You know, there's there's vast inequity in access to vaccination
Speaker 1: right now, and we should be fixing that because that's
Speaker 1: going to turn in to the most important endgame for
Speaker 1: this virus. Conversations like this are important, Joshua. We appreciate
Speaker 1: it's on this morning. Thank you so, Joshua Shastain that
Speaker 1: of Jones Help Kids, dianel over the jpmorganist management where
Speaker 1: the real focus on emerging markets joins us UH this morning, Diana,
Speaker 1: I want to look in your research notes at the
Speaker 1: distinctions involved. You can't buy em blind. You can't buy
Speaker 1: big developed countries blind either. What are the distinctions right
Speaker 1: now of placing capital in emerging markets? So right now,
Speaker 1: the big driver and they're seeing that playing out as
Speaker 1: well in developed markets is actually growth. UM. The vaccine
Speaker 1: rollout has been a very big focus on the markets,
Speaker 1: and I think there is growing confidence now as the
Speaker 1: pace accelerates and you have more vaccine candidates coming into play,
Speaker 1: that this is going to be done in a sustained
Speaker 1: manner and in some cases we might even see the
Speaker 1: openings of the economies as early as Q two, full
Speaker 1: reopenings in places like the US, the UK, markets like
Speaker 1: Israel where they're fire runs to the curve. So in
Speaker 1: emerging markets, very similar stories are playing out. UM. The
Speaker 1: focus has very much been on focusing on those economies
Speaker 1: where a rollout of vaccine has been credible and it's
Speaker 1: actually well ankered. Um So you look at somewhere like Chile,
Speaker 1: Chile stands out amongst the latter and actually amongst broader
Speaker 1: E margin markets as being one that's really ahead of
Speaker 1: the curve rolling out vaccines and that's actually traded well.
Speaker 1: Bringing a story with Turkey, so Joan, I know you're
Speaker 1: a great student. That's what's so important here is a maturity,
Speaker 1: the maturation rather of emerging market bonds, the size of
Speaker 1: scope to scale to the commodity e M nations have
Speaker 1: a greater, more sophisticated bond pool to play with. Um So,
Speaker 1: by and large commodity exporters tend to have more issuance.
Speaker 1: Um they're larger economies, so that's not unexpected. But then
Speaker 1: um so those two those that side of things is
Speaker 1: actually a positive for them in that liquidity is not
Speaker 1: necessarily an issue. But actually where we're seeing interesting opportunities
Speaker 1: right now is in the smaller idiosyncratic stories within emerging
Speaker 1: markets are those are markets that have less beta to
Speaker 1: what's happening in coreates and are less likely to be
Speaker 1: impacted by the big duration move that we're seeing in
Speaker 1: the US Diana. So much of the emerging markets call
Speaker 1: has hinged on the weaker dollar consensus. And here we
Speaker 1: have a growing number of naysayers who argue that you
Speaker 1: have American exceptionalism, that basically you have an economy that's
Speaker 1: going to break away and accelerated a faster clip because
Speaker 1: of the vaccination schedule and because of the fiscal support
Speaker 1: and stimulus that the Congress is passing. How much does
Speaker 1: that disrupt your thesis, disrupt your argument that you need
Speaker 1: to go into emerging markets debt in order to get
Speaker 1: any yield. So so far, what we've seen this year
Speaker 1: is most markets have actually been from a total return perspective,
Speaker 1: most markets have been dragged higher in yields um as
Speaker 1: treasuries have moved. However, spreads have held up quite well
Speaker 1: in e M and the big distinction up until now
Speaker 1: has been the move higher has been led by brake events.
Speaker 1: What we saw last week is somewhat concerning for the
Speaker 1: outlook going forward, where it's no longer a break even
Speaker 1: lead repricing of rates that we're seeing in the US,
Speaker 1: it's actually being led by real rates um and that's
Speaker 1: actually something that we think The FED is likely to
Speaker 1: be more sensitive too, because not only are we seeing
Speaker 1: that spilling over to e M, we're also seeing that
Speaker 1: impact in US markets. So you see mortgage rates are
Speaker 1: starting to rise. Um, we had the biggest rise in
Speaker 1: US mortgage rates that we've seen since August last year. Well,
Speaker 1: the economy is looking promising, the recovery is still at
Speaker 1: the early stages, and it's still quite fragile, So we
Speaker 1: do think the FED is going to want to lean
Speaker 1: against this. Wait. Hold on a second, Diana, this is important.
Speaker 1: Are you saying that a key component of your emerging
Speaker 1: markets call is a belief in faith in the Federal
Speaker 1: Reserve to come in buy more longer duration bonds to
Speaker 1: suppress yields if you start seeing real yields continue to rise, No,
Speaker 1: that's not what I'm saying at all. What I'm saying
Speaker 1: is if it's rates moving higher because growth is picking
Speaker 1: up globally and it's an orderly reprice seeing higher of
Speaker 1: rates both real rates and break events, that's a good
Speaker 1: environment for EM because growth is what matters, and exports
Speaker 1: from emerging markets are a key driver of returns. However,
Speaker 1: if we see rates markets running ahead of what we're
Speaker 1: seeing in the data, then that becomes a concern. And
Speaker 1: I think right now where we are, the data is
Speaker 1: not their market surprising in a stimulus that hasn't yet
Speaker 1: been approved. So that's the big distinction. We actually need
Speaker 1: to see that growth being realized and we need to
Speaker 1: see that inflation being realized. And that's something the FED
Speaker 1: has been quite key in reiterating time and again that
Speaker 1: it's actually realized core PC that they're focused on downal
Speaker 1: Let's said on the feed just for a moment, then
Speaker 1: share and power tomorrow advice check claratory in the mix
Speaker 1: as well. If there's some kind of intervention, it's usually verbal. First.
Speaker 1: Do you expect any actual real action of the back
Speaker 1: of that. It's probably too early for them to do
Speaker 1: anything more. So I think they'll want to sequence the
Speaker 1: tools that they used to talk to markets and to
Speaker 1: communicate with markets. So this week we have a raft
Speaker 1: of speakers coming in, starting with today where we'll see
Speaker 1: the first speaker, and tomorrow where we have GERALN. Powell speaking.
Speaker 1: I think verbal intervention is going to be key. Um,
Speaker 1: we already had your own Power speaking in previous weeks
Speaker 1: reiterating the messages. So it will be key to see
Speaker 1: them doubling down on that message that while the outlook
Speaker 1: is looking better, the economy is far from a strong
Speaker 1: enough footing for them to be easy and back on
Speaker 1: accommodation um and I think if markets still continue to
Speaker 1: price in or accelerate too fast, then it's likely that
Speaker 1: we might see more tools coming to play. Tom. This
Speaker 1: is the issue at the moment, isn't it. A couple
Speaker 1: of weeks ago, if you'd asked me about cham and
Speaker 1: Power would have said us down script, nothing new. Look
Speaker 1: at the moment we've seen in the last week alone,
Speaker 1: it was a struggle to break one twenty for about
Speaker 1: a minute three through one thirty, and now people talking
Speaker 1: one fifty in the very nettime future. I haven't done
Speaker 1: the tannical work above at one point three six, but John,
Speaker 1: I'll make it clear the one person I'm watching and
Speaker 1: the speaker than this week is Richard Clata had a
Speaker 1: Columbia Economics, truly one of our great academics on monetary theory.
Speaker 1: If there's one person who's going to say one sentence,
Speaker 1: it's going to be Richard Claire. He has provided the
Speaker 1: guidance for financial markets, that's for sure, over the last
Speaker 1: couple of years, there's maybe Chairman Palet's fumbled things just
Speaker 1: a little bit. Danny, do you have a number of
Speaker 1: mind where we get to on the nominal yield on
Speaker 1: a ten year that starts to infect risk assets elsewhere?
Speaker 1: It's not one thirty six and we see an equities
Speaker 1: gap below. Now is there something a little bit higher
Speaker 1: or are we there? So? I think the technical charges
Speaker 1: have been plugging one thirty eight as a key level
Speaker 1: um and it's not surprising that as we approach that
Speaker 1: we're starting to see a bit of a spill over
Speaker 1: into other financial assets, which the FED will be watching closely.
Speaker 1: But I think one fifty is also another one to
Speaker 1: watch because that's the point where the tenure yield is
Speaker 1: equivalent to the SMP dividend yield. And so for people
Speaker 1: who have been saying, why would I want to buy
Speaker 1: fixed income when the yield I'm getting from equities is
Speaker 1: much higher than becomes a different conversation where fixed income
Speaker 1: is actually yielding enough and still providing you the ballast
Speaker 1: in the in the extent that we see any growth
Speaker 1: drawdowns coming forward um to be meaningful in a portfolio. Again,
Speaker 1: So I think one fifty is going to be the
Speaker 1: next level that we're watching very closely. Diana. I'm sitting
Speaker 1: here and thinking about what you have been saying, and
Speaker 1: I'm struggling with one aspect the idea. Yes, the data
Speaker 1: has not been showing the growth that perhaps markets are
Speaker 1: pricing in. But markets are forward looking and they are
Speaker 1: looking to the reopening of the economy and the expectation
Speaker 1: of the stimulus being passed. What if the FED is wrong?
Speaker 1: What if the FED buys a whole host of longer
Speaker 1: duration bonds and allows risk acids to keep going up,
Speaker 1: and that reflation that everyone is talking about comes back
Speaker 1: online and that growth, I mean, does that increase the
Speaker 1: chances that the Fed will have to hike much more
Speaker 1: rapidly on the back end. So for the Fed to
Speaker 1: change their conversation around UM when they'll start hiking, you
Speaker 1: need to see inflation come meing in and staying elevated
Speaker 1: for a sustained period. We already got guidance previously from
Speaker 1: Clarida that a sustained period means twelve months. So it's
Speaker 1: very difficult for marked for me to see the Fed
Speaker 1: in the next twelve months starting to hike rates. UM
Speaker 1: they might signal that they will be rolling back on
Speaker 1: some of their purchases. Before that, we'd expected that to
Speaker 1: happen in Q four as as September, but if the
Speaker 1: economic data looks promising, they might start preparing the markets
Speaker 1: for that move. But in terms of hiking, I think
Speaker 1: we need to see realized inflation above target for a
Speaker 1: sustained period of time, and that's really not yet where
Speaker 1: we are. Danna, always great to catch shop with you.
Speaker 1: Thank you time, Dana of Jack Morgan as Management. Thank
Speaker 1: you Dinaker to say it. This is the Bloomberg Surveillance Podcast.
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