WEBVTT - Surveillance: Equity Top with Kaiser 0:00:05.080 --> 0:00:08.280 This is the Bloomberg Surveillance Podcast. I'm Lisa A. 0:00:08.320 --> 0:00:11.640 Bromoids, along with Tom Keen and Jonathan Ferrell, join us 0:00:11.680 --> 0:00:15.280 each day for insight from the best in economics, geopolitics, 0:00:15.320 --> 0:00:16.440 finance and investment. 0:00:16.760 --> 0:00:19.239 Subscribe to Bloomberg Surveillance on demand. 0:00:19.000 --> 0:00:22.200 On Apple, Spotify and anywhere you get your podcasts, and 0:00:22.320 --> 0:00:25.279 always on Bloomberg dot Com, the Bloomberg Terminal, and the 0:00:25.280 --> 0:00:26.440 Bloomberg Business App. 0:00:26.720 --> 0:00:28.600 Joining us around a table here in the studio, Stuart 0:00:28.640 --> 0:00:31.479 Kayes at ahead of US Secrety trading strategy over a city. 0:00:31.560 --> 0:00:34.840 Good morning, Stewart, Good morning. How long can Goldilocks last? 0:00:35.080 --> 0:00:39.360 Hsb's question, not mine, HSBC just asking that question seconds ago. 0:00:39.600 --> 0:00:42.360 They say, continued disinflation and stronger than expected growth in 0:00:42.440 --> 0:00:45.800 many DMS argues for a continued risk on stance, does it? 0:00:47.040 --> 0:00:48.479 I think in general with those I think, you know, 0:00:48.479 --> 0:00:50.320 a big picture. If the labor market in the US 0:00:50.320 --> 0:00:52.720 remains strong and course CPI continues to ease, I think 0:00:52.720 --> 0:00:55.040 that's a good backdrop, you know, for risk assets. I 0:00:55.040 --> 0:00:57.720 think the issue we're having now is frankly, expectations. You know, 0:00:57.760 --> 0:00:59.720 if you look at what's happened over the last month, 0:00:59.760 --> 0:01:02.800 you had a reasonably solid earning season, but the average 0:01:02.800 --> 0:01:05.759 stock that b EPs was unchanged on the day. You had, 0:01:05.880 --> 0:01:08.640 you know, a solid payrolls report, the market traded off. 0:01:08.640 --> 0:01:11.200 You had an easy inflation print, and the market was flat. 0:01:11.319 --> 0:01:13.240 So yeah, I mean, there's a lot of good news 0:01:13.240 --> 0:01:14.679 out there, but the market I think has become a 0:01:14.680 --> 0:01:16.440 little callous to it, which is kind of not good 0:01:16.440 --> 0:01:17.000 for risk reward. 0:01:17.040 --> 0:01:19.200 In review, Michael harn had talked about this Lisa over 0:01:19.240 --> 0:01:21.640 at BFVA and the fund manager survey. Their line was 0:01:21.680 --> 0:01:24.640 basically bear positioning was strong tail went for risk assets 0:01:24.680 --> 0:01:27.000 in the first half, not the case in the second half. 0:01:27.040 --> 0:01:29.600 Their fund manager survey. You mentioned it yesterday at least 0:01:29.600 --> 0:01:31.319 bearish since February of last year. 0:01:31.400 --> 0:01:33.679 Yeah, cash allocations coming down, and we heard that to 0:01:33.680 --> 0:01:34.240 start the show. 0:01:34.319 --> 0:01:35.679 Basically, take the cash. 0:01:35.720 --> 0:01:37.760 You might as well put it into risk, because why not, 0:01:37.840 --> 0:01:39.959 you might as well get the upside surprise if the 0:01:40.000 --> 0:01:41.120 economy is strong. 0:01:41.000 --> 0:01:43.000 You put it into tech. At the start of the year, 0:01:43.040 --> 0:01:45.119 you did do it, and the other people didn't. There 0:01:45.240 --> 0:01:47.920 was that pool of negativity to feed on to drive 0:01:47.960 --> 0:01:50.880 tech higher. After a brutal year in twenty twenty two, 0:01:51.160 --> 0:01:52.480 are you sticking with that trade. 0:01:53.120 --> 0:01:55.480 You know, it's a tough call right here. I think yes, 0:01:55.840 --> 0:01:57.760 as a base case, we still like tech and growth. 0:01:57.760 --> 0:01:59.680 We still think that can work because we do ultimately 0:01:59.720 --> 0:02:02.360 expect you know, the labor market data to begin to weekend, 0:02:02.360 --> 0:02:04.160 and I think in that environment, that's kind of where 0:02:04.200 --> 0:02:06.200 you want to sit. Obviously, the last month has been 0:02:06.200 --> 0:02:08.800 pretty tough for that trade, particularly because yields have risen, 0:02:08.880 --> 0:02:11.560 you know, pretty sharply, and that's impacted tech I think 0:02:11.600 --> 0:02:14.560 more than other sectors. And also this expectation story. If 0:02:14.720 --> 0:02:17.040 you're worried about high expectations, you know, that's clearly very 0:02:17.040 --> 0:02:19.360 acute in the tech space. So I think you are 0:02:19.400 --> 0:02:22.480 fighting expectations, you're fighting performance, and right now you're fighting 0:02:22.520 --> 0:02:25.440 higher yields. But if you do think economy can weaken 0:02:25.520 --> 0:02:27.760 and that should hopefully put a cap on yields, that 0:02:27.840 --> 0:02:29.480 I think tech is a place that you want to 0:02:29.480 --> 0:02:31.800 be in that case. But certainly the past month has 0:02:31.840 --> 0:02:33.280 been been a tough ride for us. 0:02:33.360 --> 0:02:36.280 Can we just talk about quickly just pause cash on 0:02:36.320 --> 0:02:38.720 the sidelines. This is sort of the misnomer that everyone 0:02:38.800 --> 0:02:41.000 keeps talking about, Oh, there's so much cash in the sidelines. 0:02:41.000 --> 0:02:43.640 All these people who aren't invested. Cash is great for 0:02:43.680 --> 0:02:45.800 some people if they're earning five percent. So at what 0:02:45.919 --> 0:02:48.200 point can we say the cash in the sidelines has 0:02:48.200 --> 0:02:48.799 been used up? 0:02:49.360 --> 0:02:50.960 I think it's a great question. If you look at 0:02:51.000 --> 0:02:53.640 retail money market balances, those are up six hundred billion 0:02:53.680 --> 0:02:56.040 dollars since April of last year. Six hundred billion is 0:02:56.040 --> 0:02:58.120 a big number, right, you know, But to your point, 0:02:58.160 --> 0:03:00.440 you're you're equipping a five percent coupon on that, and 0:03:00.480 --> 0:03:02.519 clearly not all of that six hundred will go into cash. 0:03:02.560 --> 0:03:04.359 A lot of that's probably come out of traditional bank 0:03:04.400 --> 0:03:06.800 accounts and got into money market funds to get that yield. 0:03:06.880 --> 0:03:09.519 So I think the question is to release that money. 0:03:09.560 --> 0:03:12.799 What has to happen, right, Either you need to get 0:03:12.880 --> 0:03:16.240 yields lower so that five percent isn't as attractive, or 0:03:16.280 --> 0:03:18.320 you need to have equities continue to perform the way 0:03:18.320 --> 0:03:20.400 they are and you get sort of a fomo you 0:03:20.400 --> 0:03:22.840 know situation on the equity side. It does feel like 0:03:22.840 --> 0:03:24.520 equities are topping out a little bit, so I think 0:03:24.520 --> 0:03:26.560 I think it's going to be hard to dislodge that money. 0:03:26.840 --> 0:03:29.720 To the sentiment point, at what point do losses become 0:03:29.760 --> 0:03:32.880 self fulfilling? At what point do losses spur a question 0:03:32.960 --> 0:03:36.200 to this whole goldilocks to John's point and FOMO feel 0:03:36.360 --> 0:03:38.720 that we were hearing about for the past couple of months. 0:03:39.040 --> 0:03:41.560 Look, I mean, if equities start to move a little 0:03:41.600 --> 0:03:43.280 bit lower, yeah, that's going to a dense sentiment. I 0:03:43.280 --> 0:03:45.000 don't think there's any way around that. You know, tech 0:03:45.040 --> 0:03:47.240 has performed Polard, but frankly, the SMP isn't that far 0:03:47.280 --> 0:03:50.520 off off its high. So, you know, it's interesting last year, 0:03:50.560 --> 0:03:52.960 in a high volatility environment, the moves we've seen recently 0:03:53.000 --> 0:03:55.160 would have not you know, not really registered, right. But 0:03:55.680 --> 0:03:58.320 July was the lowest realized volatility months that we've seen 0:03:58.360 --> 0:04:01.000 since December of twenty nineteen. So you get into August, 0:04:01.040 --> 0:04:02.680 you get at a little bit of a blip and 0:04:02.760 --> 0:04:05.160 it feels I think a little more painful. But yeah, 0:04:05.200 --> 0:04:06.839 I think you know, one of the things we were 0:04:06.880 --> 0:04:08.440 a little bit worried about is, you know, a lot 0:04:08.440 --> 0:04:10.800 of folks were very defensive and hedging earlier in the year. 0:04:11.280 --> 0:04:13.600 That hedging did not work out. It cost a lot 0:04:13.600 --> 0:04:15.920 of money in terms of premium paid. The market is 0:04:15.920 --> 0:04:18.680 probably less well hedged today, you know, than it was 0:04:18.760 --> 0:04:20.760 probably three months ago. So to your point, there if 0:04:20.800 --> 0:04:22.560 we do get some losses, the market is going to 0:04:22.560 --> 0:04:24.240 be a little more surprised by it, or probably a 0:04:24.240 --> 0:04:25.880 little more disrupted by it than it might have been 0:04:25.920 --> 0:04:26.560 earlier this year. 0:04:26.640 --> 0:04:29.839 Let's finish on where the negativity is now. It's in China. 0:04:30.720 --> 0:04:32.680 Everybody that comes on this show is so downbeat on 0:04:32.720 --> 0:04:34.800 what's happening in the country at the moment. The dates 0:04:34.839 --> 0:04:36.560 is bad. The date that you can see, you're not 0:04:36.560 --> 0:04:37.720 going to see much more of it on the youth 0:04:37.760 --> 0:04:40.279 unemployment side. I've got no idea when that changes. The 0:04:40.360 --> 0:04:43.640 data this week basically led to a policy response by 0:04:43.640 --> 0:04:45.560 the Chinese central banks cut rates by the most I 0:04:45.560 --> 0:04:48.600 think since twenty twenty. This is typically the time to 0:04:48.720 --> 0:04:51.800 lean in, to lean into Chinese equities. When people are 0:04:51.839 --> 0:04:54.840 so down beat on what's happening, there is this that 0:04:54.920 --> 0:04:56.080 time you. 0:04:56.080 --> 0:04:58.000 Know, we're not there yet, you know, I think I think, 0:04:58.040 --> 0:05:00.800 at least me personally, you know, we're pretty co on China. 0:05:00.800 --> 0:05:03.040 But like I think, there's three aspects of the China story. 0:05:03.040 --> 0:05:06.680 There's two weeks ago, everybody was celebrating China's exporting deflation. 0:05:06.800 --> 0:05:08.520 This is going to help the FED, right, But that 0:05:08.640 --> 0:05:10.359 sort of ignored the flip side of it, which is 0:05:10.400 --> 0:05:13.240 you're losing a global growth impulse. This week, the discussion 0:05:13.320 --> 0:05:15.560 is much more about the growth side and to what 0:05:15.600 --> 0:05:18.440 you were discussing earlier, which is a sentiment issue. And 0:05:18.480 --> 0:05:20.560 I think the sentiment issue, frankly, is what's going to 0:05:20.640 --> 0:05:22.880 keep people out a little bit. You know, foreign investors. 0:05:23.160 --> 0:05:25.000 I think we're we're not happy with how they were 0:05:25.000 --> 0:05:26.880 treated by China over the last couple of years, and 0:05:26.880 --> 0:05:28.680 I think it's going to make money, you know, kind 0:05:28.680 --> 0:05:31.440 of slow to re engage in that space. So I think, 0:05:31.600 --> 0:05:33.800 to me, the sentiment is very hard to predict. The 0:05:33.800 --> 0:05:35.960 growth versus inflation trade off, I think really just has 0:05:36.000 --> 0:05:37.800 to do with what the market narrative is at any 0:05:37.800 --> 0:05:38.680 given point in time. 0:05:38.800 --> 0:05:39.599 Right, you know, if. 0:05:39.600 --> 0:05:41.640 Two weeks ago was an inflation narrative, it's good. Now 0:05:41.640 --> 0:05:43.800 it's a growth narrative, it's a little bit bad. But 0:05:44.200 --> 0:05:47.360 I think we're we're generally, you know, being fairly cautious 0:05:47.360 --> 0:05:49.960 about about putting money into China. The flows that we've 0:05:49.960 --> 0:05:52.920 seen are much more options based, high payout type stuff, 0:05:52.960 --> 0:05:55.480 you know, limited risk, you know, you know type flow 0:05:55.520 --> 0:05:58.120 is going into China. We've discussed this in the past. 0:05:58.200 --> 0:06:00.000 If the evolution to that Chinese trade this year is 0:06:00.040 --> 0:06:01.560 and you know, or over the last twelve months have 0:06:01.640 --> 0:06:03.839 been very, very fascinating, and right now I think people 0:06:03.880 --> 0:06:06.000 are a a little bit cautious to put under to work. 0:06:06.080 --> 0:06:08.359 There's a question about whether or not put money to 0:06:08.440 --> 0:06:11.599 work in Chinese equities. There's another about the read through 0:06:11.600 --> 0:06:14.880 effect in the United States for companies that are leveraged 0:06:14.920 --> 0:06:16.880 to China. And then just more broadly, I think about 0:06:16.880 --> 0:06:20.120 the fact that this wealth manager mispayments on several of 0:06:20.120 --> 0:06:22.479 its products, that you're dealing with a housing market that 0:06:22.520 --> 0:06:24.799 doesn't see a light at the end of the tunnel. 0:06:25.040 --> 0:06:28.200 At what point does that have contagion that percolates outside 0:06:28.200 --> 0:06:28.640 of China. 0:06:29.040 --> 0:06:31.720 It's a good question because you know, I think initially 0:06:31.839 --> 0:06:34.560 or stage two or three of the China trade was 0:06:34.600 --> 0:06:36.080 I'm going to own Europe and I'm going to own 0:06:36.160 --> 0:06:39.039 luxury goods that sell into the China consumer. Right So 0:06:39.240 --> 0:06:41.159 you know, certainly those type of stocks would be under 0:06:41.160 --> 0:06:43.599 a little bit of pressure given the lack of spending 0:06:43.640 --> 0:06:46.400 growth that we're seeing in China. So yeah, it gets 0:06:46.440 --> 0:06:48.919 an impact. If you look at the foreign direct investment 0:06:48.920 --> 0:06:50.839 in China, it's come off a little bit us companies 0:06:50.880 --> 0:06:53.000 are clearly not putting money, you know, directly in there 0:06:53.360 --> 0:06:55.400 for luxury goods, and you'd probably throw Apple on into 0:06:55.440 --> 0:06:55.960 that category. 0:06:55.960 --> 0:06:56.800 In Tesla as well. 0:06:57.080 --> 0:07:00.240 You know, the domestic demand has been ahead wind, so yeah, 0:07:00.279 --> 0:07:01.960 it's it is a risk, and I think that just 0:07:02.040 --> 0:07:04.760 gets into this global growth narrative of when does the 0:07:04.920 --> 0:07:07.560 benefit on the inflation side get out weighed by the 0:07:07.640 --> 0:07:09.200 sort of detriment on the growth side. 0:07:09.320 --> 0:07:11.720 Well said, I'm just looking at Target on my screen 0:07:11.760 --> 0:07:14.400 right now, slightly distracted. It's by by eight point five 0:07:14.400 --> 0:07:16.440 percent at the back of this. Do you those one 0:07:16.440 --> 0:07:18.520 of those stories if you told me the earnings before 0:07:18.520 --> 0:07:20.240 they came out and then said, guess what the stock 0:07:20.280 --> 0:07:21.680 price is going to do, I'd be like, we they've 0:07:21.680 --> 0:07:24.160 cut the outlook on profits, so that's not great, that's right, 0:07:24.200 --> 0:07:26.240 but it'll be like this second quarter reband for profit. 0:07:26.560 --> 0:07:29.240 I personally think this is just where where the expectations 0:07:29.240 --> 0:07:30.840 have been set, because if you look at those shares, 0:07:30.880 --> 0:07:33.560 they're down considerably on the year. So at a certain point, 0:07:33.720 --> 0:07:36.800 if they're not hemorrhaging money and throwing all in, you know, 0:07:36.840 --> 0:07:39.800 some negative news, I guess it's positive. I can't really 0:07:39.840 --> 0:07:40.480 read it any other way? 0:07:40.640 --> 0:07:41.800 What can I learn from a MAF like that. 0:07:41.920 --> 0:07:44.280 Well, the thing is you say Target. If you said Tarja, 0:07:44.600 --> 0:07:47.480 it would be much more be much more understandable of 0:07:47.480 --> 0:07:49.160 the type of move. But look, this is the important 0:07:49.200 --> 0:07:51.320 part earnings, right, It's what happens with the consumer. 0:07:51.880 --> 0:07:55.160 Santaturists over in China. Couldn't they taj out of out 0:07:55.160 --> 0:07:57.800 of the mh some kind of collap What you said? 0:07:57.840 --> 0:07:58.960 Did you say this how syncs? 0:07:59.560 --> 0:08:02.680 No, you're the one that they sell. I know, the 0:08:02.720 --> 0:08:05.680 soap that goes on saying so I can affirm that nice. 0:08:05.760 --> 0:08:07.160 Okay news you need to know. 0:08:07.640 --> 0:08:14.120 To see city. Thank you? Thank you kinda right. The 0:08:14.160 --> 0:08:16.120 guess that comes on this show, they're like thank you. 0:08:16.200 --> 0:08:18.840 Yeah, I think I think I'm going to run away. 0:08:18.600 --> 0:08:32.280 Now, thank you, and I'm kind of sorry. Let's turn 0:08:32.320 --> 0:08:35.120 to Greg Peters, co c I of PGIM Fixed Income 0:08:35.160 --> 0:08:37.120 Greg Joints. Just now, Greg, not to talk about what's 0:08:37.120 --> 0:08:39.400 happening with Target, t j X, and Walmart, to talk 0:08:39.440 --> 0:08:41.480 about this bond market. Greg. A question that we've asked 0:08:41.480 --> 0:08:44.200 all week, and we've got a different perspective from different people. 0:08:44.600 --> 0:08:47.000 What is behind this bond market move? Greg, of the 0:08:47.040 --> 0:08:47.600 last month. 0:08:48.720 --> 0:08:52.400 Yeah, So I was listening to your rep artee, you know, 0:08:52.440 --> 0:08:55.400 before you came over to me, and I think I 0:08:55.440 --> 0:08:57.440 have a very different narrative than the one that you 0:08:57.520 --> 0:08:58.360 were just talking about. 0:08:58.360 --> 0:08:59.360 I think it's about growth. 0:09:00.679 --> 0:09:04.960 You know, the FED has raised interest rates, inflation is 0:09:05.000 --> 0:09:06.120 coming under control. 0:09:06.600 --> 0:09:08.079 Are they done? I don't know. 0:09:08.160 --> 0:09:12.240 There's probably some more room left to move higher. But 0:09:12.679 --> 0:09:16.880 it's the underlying growth element that has driven the bond 0:09:16.960 --> 0:09:20.280 market in my estimation, as it's about the shape of 0:09:20.280 --> 0:09:23.240 the curve, right, So if you believe that inflation is 0:09:23.240 --> 0:09:26.880 going to remain relatively high, the economy is strong and stable, 0:09:27.400 --> 0:09:30.679 then the curve has to start to normalize, and what 0:09:30.720 --> 0:09:33.439 that means is that back end rates have to move 0:09:33.520 --> 0:09:35.920 higher as a consequence. So to me, it's all about 0:09:35.960 --> 0:09:40.840 this strength and economic activity and sure, inflation you know, 0:09:40.960 --> 0:09:44.960 remains you know, above above trend, but it's really the 0:09:45.000 --> 0:09:45.640 growth story. 0:09:45.880 --> 0:09:48.480 But if you take a look at that implication, there's 0:09:48.559 --> 0:09:51.960 some broader market consequences to this. First of all, it 0:09:52.040 --> 0:09:55.280 means that the yield curve is normalizing up, not down 0:09:55.360 --> 0:09:57.880 to three percent, and that means that we could have 0:09:58.400 --> 0:10:01.240 higher rates for longer at a time, or this economy 0:10:01.280 --> 0:10:05.559 can keep chugging along despite rates where they are. Can 0:10:05.679 --> 0:10:09.000 the credit markets sustain a five percent or four and 0:10:09.000 --> 0:10:11.000 a half percent long term. 0:10:10.760 --> 0:10:11.880 Based treasure yield? 0:10:12.200 --> 0:10:15.400 Does that wreck some of the math behind the credit 0:10:15.400 --> 0:10:16.960 bed Well. 0:10:16.880 --> 0:10:17.400 Yes and no. 0:10:17.559 --> 0:10:20.080 So I mean I think the economy can handle higher 0:10:20.080 --> 0:10:23.079 interest rates. I think that has been the mistake that 0:10:23.480 --> 0:10:27.920 many investor has made, myself included the underlying strengthen the 0:10:27.960 --> 0:10:30.800 economy and the ability to handle higher rates and the 0:10:30.880 --> 0:10:33.960 benefit of higher rates that you're seeing visa via the consumer. 0:10:34.400 --> 0:10:37.920 But you're quite right, Lisa, there's been so many capital structures, 0:10:37.960 --> 0:10:42.559 whether it's in commercial real estate, whether it's in credit, 0:10:42.840 --> 0:10:45.920 that have been built on the backs of extremely low 0:10:46.000 --> 0:10:46.680 interest rates. 0:10:46.720 --> 0:10:48.040 So as interest rates. 0:10:47.800 --> 0:10:51.720 Remain at the high higher level here, then a lot 0:10:51.760 --> 0:10:58.160 of those capital structures really can't withstand that environment. So 0:10:58.360 --> 0:11:02.160 as a consequence, I think we're in this stronger growth environment, 0:11:02.520 --> 0:11:06.199 but at the same time we will see above trend 0:11:07.280 --> 0:11:10.840 default and distress activity as a lot of these companies 0:11:11.040 --> 0:11:13.080 really just are unable to. 0:11:15.360 --> 0:11:18.360 Be a going concern with the higher rate environment. 0:11:18.480 --> 0:11:20.480 One thing we keep hearing Craig is a number of 0:11:20.480 --> 0:11:23.199 investors say they're leading into duration because you might as well. 0:11:23.240 --> 0:11:25.679 Lock in yields where they are getting four point two 0:11:25.720 --> 0:11:28.080 percent for ten years looks pretty good relative to what 0:11:28.120 --> 0:11:30.360 you used to be able to get. Are you saying 0:11:30.360 --> 0:11:33.600 that there is more normalization to be had if we 0:11:33.720 --> 0:11:37.040 are going to create a more flat or more normalized 0:11:37.320 --> 0:11:37.920 yield curve. 0:11:39.400 --> 0:11:41.719 Yes, and that's what we've been saying, and I've been 0:11:41.800 --> 0:11:44.679 arguing that for the past six months, as I think 0:11:44.720 --> 0:11:47.840 it's too early to lock in duration. If you believe 0:11:47.880 --> 0:11:51.800 that the economy you know, is entering a soft landing, 0:11:51.840 --> 0:11:54.880 no landing, whatever landing you want to assign to it, 0:11:55.200 --> 0:11:58.679 that means rates have to move higher, not lower. And 0:11:58.760 --> 0:12:03.000 so yeah, the FED might modulate a little on the 0:12:03.040 --> 0:12:06.480 margin take rates down, but not as much as in 0:12:06.520 --> 0:12:10.000 the price right, and so for me rates are higher. 0:12:10.320 --> 0:12:13.520 I don't see any rush to lock in duration at 0:12:13.520 --> 0:12:17.080 this point. We're leaning against that and have been leaning 0:12:17.120 --> 0:12:20.560 against that for quite some time. So we're still short duration. 0:12:21.720 --> 0:12:26.160 As once again it's growth, Lisa. 0:12:25.679 --> 0:12:27.800 I see me taking that position, Greg, Not because you 0:12:27.840 --> 0:12:30.600 think we're going ten twenty basis points high than where 0:12:30.640 --> 0:12:32.640 we are. It must be bigger than that. What kind 0:12:32.640 --> 0:12:34.000 of numbers do you think we can get to? 0:12:35.280 --> 0:12:37.160 I don't know, there's been a big move already, right, 0:12:37.160 --> 0:12:39.000 So I don't want to get greedy either, But I 0:12:39.040 --> 0:12:41.960 think on balance, the tendency will be for higher rates, 0:12:42.040 --> 0:12:45.559 not lower rates. And so you know, we've been kind 0:12:45.559 --> 0:12:48.200 of talking about this range of you know, four to 0:12:48.320 --> 0:12:51.000 four and a half, but the truth of the matter 0:12:51.160 --> 0:12:54.720 is it's leaning against the forwards and what's in the price, 0:12:54.880 --> 0:12:57.240 and what's in the price in the forward. 0:12:56.800 --> 0:13:01.600 Space it continued rate cuts in a lower yield environment. 0:13:01.800 --> 0:13:03.840 So that's kind of what we're leaning against more than 0:13:03.920 --> 0:13:07.160 kind of making in the call and where rates ultimately 0:13:07.200 --> 0:13:10.440 settle out. But it's the tendency for rates to be 0:13:10.559 --> 0:13:14.240 higher that I think most investors are missing. As the 0:13:14.240 --> 0:13:18.720 regime that we were in pre pandemic is gone, it's different, 0:13:18.800 --> 0:13:21.520 and I think the rate regime is different as a consequence, 0:13:21.559 --> 0:13:24.960 and I don't think investors have accepted that reality or 0:13:25.040 --> 0:13:28.920 accepted the reality that the FED also can't easily and 0:13:28.960 --> 0:13:31.880 readily cut interest rates like they did in the past. 0:13:32.080 --> 0:13:33.800 So, Greg, what I hear then is just another way 0:13:33.840 --> 0:13:36.120 of saying, don't worry about the reinvestment risk of sitting 0:13:36.120 --> 0:13:37.200 at the front end. Is that right? 0:13:38.559 --> 0:13:38.800 Yeah? 0:13:38.840 --> 0:13:41.400 To a degree, I mean, I think cash rates are 0:13:41.400 --> 0:13:45.080 really quite attractive here. I think that's inducing investors to 0:13:45.160 --> 0:13:48.720 take risk off the table, not lean into it. On 0:13:48.760 --> 0:13:53.079 the credit side of the aisle, there's tremendous opportunity across 0:13:53.080 --> 0:13:56.160 the global credit markets. A lot of that opportunity, though, 0:13:56.240 --> 0:14:00.439 is in safe type of allocation. So whether it's end 0:14:01.000 --> 0:14:04.960 type of credit, whether it's structure products, these are safe 0:14:05.000 --> 0:14:06.840 bets where you earn a. 0:14:06.640 --> 0:14:08.120 Tremendous amount of carry. 0:14:08.559 --> 0:14:11.560 You don't have to dip down into triple c's take 0:14:11.600 --> 0:14:14.520 a lot of duration or credit risk, and so take 0:14:14.559 --> 0:14:17.160 what the markets are giving you, and what the market 0:14:17.240 --> 0:14:20.760 is giving you is really quite quite attractive here. 0:14:20.800 --> 0:14:22.800 So we're extremely. 0:14:22.200 --> 0:14:25.480 Bullish on the US economy kind of on a long 0:14:25.600 --> 0:14:28.960 term basis. We're very bullish on fixed income as well. 0:14:29.320 --> 0:14:31.720 But you don't have to take a lot of risk 0:14:31.800 --> 0:14:34.520 in order to be successful. And I think that's the 0:14:34.560 --> 0:14:36.160 important message that I want to leave. 0:14:36.680 --> 0:14:39.560 Message receaved a clinic, Greg, Thank you, sir, Greg paid 0:14:39.640 --> 0:14:41.320 us they have paygim fixed income. 0:14:46.840 --> 0:14:49.720 Carcadonna has been brilliant on this point. Chief you as 0:14:50.200 --> 0:14:53.560 economist at BNP Pariba who has been talking about how 0:14:53.640 --> 0:14:55.920 he will expect inflation to keep coming down, which it 0:14:55.960 --> 0:14:59.600 has this year, and that there can be some relief 0:14:59.720 --> 0:15:02.160 from the FED to move away. Carl joins us. Now 0:15:02.200 --> 0:15:04.760 I'm so pleased to say a good front of the show, Carl. 0:15:04.880 --> 0:15:07.280 What's your take on the resilience? Just starting with the 0:15:07.280 --> 0:15:09.040 housing market that we continue to see. 0:15:08.840 --> 0:15:12.640 There well as we look at this morning's numbers, I 0:15:12.680 --> 0:15:16.320 think when housing starts tell you one story and housing 0:15:16.360 --> 0:15:19.240 permits tell you a slightly different story, permits are the 0:15:19.280 --> 0:15:21.360 ones you're supposed to trust, because housing starts can be 0:15:21.480 --> 0:15:24.920 very volatile due to weather and other types of factors 0:15:24.960 --> 0:15:28.760 that custom choppiness. On a month to month basis, housing 0:15:28.840 --> 0:15:32.320 data have been in a pretty sour environment for the 0:15:32.400 --> 0:15:37.240 last several quarters. The pace of decline is slowing, but 0:15:37.280 --> 0:15:39.880 with affordability as low as it is and mortgage rates 0:15:39.960 --> 0:15:44.360 hitting new highs on a daily basis almost I think 0:15:44.400 --> 0:15:47.480 these are some real constraints going forward. Of course, the 0:15:47.800 --> 0:15:52.880 inventory shortages that you highlighted are a big factor supporting activity, 0:15:52.960 --> 0:15:58.600 especially encouraging new construction. But even yesterday in the home 0:15:58.600 --> 0:16:03.200 builder sentiment survey that buyer traffic prospective buyer traffic is 0:16:03.280 --> 0:16:07.240 extremely low and home builder sentiment declining for the first 0:16:07.240 --> 0:16:07.840 time this year. 0:16:07.960 --> 0:16:10.360 So straplight that into retail sales, are you saying that 0:16:10.400 --> 0:16:13.800 you're seeing similar signs that it cannot continue to have 0:16:14.040 --> 0:16:16.520 the same kind of robust gains and consumer spending that 0:16:16.560 --> 0:16:17.000 we've seen. 0:16:18.520 --> 0:16:23.480 Well, Lisa, I see some significant headwinds emerging for retail 0:16:23.520 --> 0:16:26.320 sales and consumption more broadly in the back half of 0:16:26.360 --> 0:16:30.320 this year. Now, as we dissected yesterday's retail sales data 0:16:30.320 --> 0:16:33.920 for July, and maybe Amazon Prime Day helped to support 0:16:33.920 --> 0:16:37.120 the numbers and whatnot, but as we went into the details, 0:16:37.160 --> 0:16:40.640 it looked like discretionary spending was particularly strong. So the 0:16:40.760 --> 0:16:44.280 sporting goods, hobby, leisure, restaurants and bars, all the things 0:16:44.360 --> 0:16:46.400 you would spend on if you have extra cash in 0:16:46.440 --> 0:16:50.320 your pocket. Those categories were actually the strongest categories in 0:16:50.400 --> 0:16:53.600 the report. So things are on a solid footing in 0:16:53.640 --> 0:16:56.000 the month of July at least, But as we go 0:16:56.040 --> 0:16:58.040 into the back half of the year, we know that 0:16:58.560 --> 0:17:02.600 labor activity is slow, We know that income generation from 0:17:02.680 --> 0:17:06.960 labor activity is decelerating as well. We have student loan 0:17:07.000 --> 0:17:10.520 payments resuming in October, so there's questions whether people will 0:17:10.520 --> 0:17:13.560 immediately jump back into paying those loans or not, but 0:17:13.840 --> 0:17:16.439 with an annualized price tag of about one hundred billion dollars, 0:17:16.840 --> 0:17:20.320 it could have a very significant consequence, even if it 0:17:20.359 --> 0:17:23.119 isn't fully felt in the initial months. You have a 0:17:23.160 --> 0:17:25.920 potential government shutdown coming in the back half of the year. 0:17:26.359 --> 0:17:29.840 And also all those excess savings generated during the pandemic 0:17:30.400 --> 0:17:35.879 have been getting spent at a pretty healthy clip, whereas 0:17:35.880 --> 0:17:40.119 we think the kind of excess savings will be fully 0:17:40.160 --> 0:17:42.560 exhausted by the end of the year, And as we 0:17:42.600 --> 0:17:46.000 look by income quintile, we can see really the lowest 0:17:46.240 --> 0:17:50.119 three quintiles that's a significant share of the population. The 0:17:50.119 --> 0:17:53.359 lowest three quintiles have basically exhausted those savings already, which 0:17:53.359 --> 0:17:57.320 should mean more price sensitivity among consumers, which helps on 0:17:57.359 --> 0:17:59.960 the inflation side, but also a slower pace of conser 0:18:00.000 --> 0:18:03.200 ssumption as well. Not there as of July, but that's 0:18:03.200 --> 0:18:04.560 something we're watching for in the back half. 0:18:04.600 --> 0:18:06.800 People have been saying this for a while, and then 0:18:06.840 --> 0:18:10.000 you see house after house push out their forecast for 0:18:10.080 --> 0:18:12.880 recession and say, well, maybe it's not happening as soon 0:18:13.040 --> 0:18:15.280 as we thought. Can you give us a sense of 0:18:15.480 --> 0:18:19.560 what gives someone conviction that it will eventually happen, even 0:18:19.640 --> 0:18:23.239 though month after month everyone had expected some of these 0:18:23.280 --> 0:18:25.560 consumers to run out of cash by midyear. Now at 0:18:25.600 --> 0:18:27.520 the end of the year, maybe it's early next year, 0:18:28.160 --> 0:18:30.480