WEBVTT - Surveillance: Fed Surprises With Dudley 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa A. Brawnowitz Jaily. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:22.440 international relations. To find Bloomberg Surveillance on Apple podcast, Suncloud, 0:00:22.840 --> 0:00:26.280 Bloomberg dot Com and of course on the Bloomberg Terminal. 0:00:29.600 --> 0:00:32.400 And two thousand twenty one for William Dudley has really 0:00:32.440 --> 0:00:35.080 done something in former New York Fed President, and we 0:00:35.159 --> 0:00:37.839 are honored that he's been writing and writing a series 0:00:38.240 --> 0:00:43.600 of intelligent essays, controversial essays for Bloomberg Opinion. Bill Dudley. 0:00:43.640 --> 0:00:45.640 It it's not my chart of the year, but if 0:00:45.680 --> 0:00:50.200 I take log tenure yield and Stan Fisher has always 0:00:50.240 --> 0:00:55.200 been great about the percentage change moving yield, if we 0:00:55.360 --> 0:01:00.440 get the Dudley yield moves, these are huge percentage change 0:01:00.480 --> 0:01:06.360 shocks of this low base. Is that important? I would 0:01:06.440 --> 0:01:08.360 argue that the presented change obviously is going to be 0:01:08.400 --> 0:01:11.120 more elevated when you're very close to zero. So I 0:01:11.120 --> 0:01:13.520 think it's really the magnitude of the move rather than 0:01:13.560 --> 0:01:16.240 the percentage change that's really important. If the Fed boot 0:01:16.319 --> 0:01:18.040 raises short term rates to one and a half or 0:01:18.040 --> 0:01:20.520 two and al percent, that's still very low and environment 0:01:20.560 --> 0:01:24.760 where inflation is running above. Bill, help us ound with 0:01:24.840 --> 0:01:27.640 the playbook for next week. The extra surprise, the additional surprise, 0:01:27.680 --> 0:01:30.520 the essence of your pace this morning. Do you expect 0:01:30.520 --> 0:01:32.760 to see in the summary of economic projections beyond the 0:01:32.760 --> 0:01:36.840 forecast into the dot plow? What are you looking for? Bill? Well, 0:01:36.840 --> 0:01:38.880 the Fed is obviously changing their view on what's the 0:01:38.920 --> 0:01:42.800 appropriate monetary policy. I mean, this is a pretty remarkable meeting. 0:01:42.840 --> 0:01:45.560 After announcing the taper, they're going to accelerate the taper. 0:01:45.920 --> 0:01:48.240 So that's an admission that the Fed Reserve was wrong 0:01:48.720 --> 0:01:50.840 and as a as as part of that process, they're 0:01:50.840 --> 0:01:53.640 gonna have to revise their economic forecast, and I'll be 0:01:53.920 --> 0:01:57.080 summarizing the summary of economic projections. I think you're going 0:01:57.160 --> 0:02:01.840 to see is higher inflation, for a tighter labor market, 0:02:02.160 --> 0:02:05.720 and most importantly, much more tightening from the Fed in 0:02:06.040 --> 0:02:12.280 the forecast rising, which extends from last time the Fed 0:02:12.680 --> 0:02:17.280 meeting forecast for federal fundrate was one cent. That's below 0:02:17.320 --> 0:02:20.040 what the Fed fuses neutral. This time, I think they're 0:02:20.080 --> 0:02:21.600 gonna at least get to neutral by the end of 0:02:23.000 --> 0:02:25.000 So you're gonna get earlier rate hikes and more rate 0:02:25.080 --> 0:02:27.680 hikes within their forecast. What's the significance of that, just 0:02:27.720 --> 0:02:30.000 in terms of how quick this cycle will be bill 0:02:30.280 --> 0:02:32.880 how short it might be. Well, I think it really 0:02:32.919 --> 0:02:35.560 all depends on how financial markets react to that. I mean, right, 0:02:35.680 --> 0:02:38.000 so far, people have been very comfortable with the Fed 0:02:38.360 --> 0:02:41.400 beginning to remove mon entary policy accommodation. You see a 0:02:41.480 --> 0:02:43.960 tenure treasury yields are still a very local and one 0:02:43.960 --> 0:02:46.200 and a half percent. You see the stock market within 0:02:46.280 --> 0:02:48.600 a you know, a whisker of its all time high. 0:02:48.919 --> 0:02:51.280 So it really depends on how financial markets react to 0:02:51.400 --> 0:02:54.040 the FIT tightening. I think there is a prospect for 0:02:54.400 --> 0:02:57.040 a bit of a surprise, a bit of discomfort by market. 0:02:57.200 --> 0:02:58.679 I think the feder reserve is going to do more 0:02:59.240 --> 0:03:01.760 than what's currently priced in. You look at you're at 0:03:01.880 --> 0:03:04.440 the futures market, people are saying that the peak and 0:03:04.480 --> 0:03:06.680 the Federal fundrate and the cycle is only going about 0:03:06.680 --> 0:03:09.760 me about one and a half cent. That's well below 0:03:09.800 --> 0:03:12.560 what the Fed and selves deem as neutral and well 0:03:12.600 --> 0:03:15.600 below what the FIT is likely to write down next week. 0:03:15.840 --> 0:03:18.480 But when you talk about the financial markets reaction, I 0:03:18.520 --> 0:03:20.720 think of the yield curve and how it's been flattening 0:03:20.800 --> 0:03:24.120 some people saying that it indicates a market expectation for 0:03:24.160 --> 0:03:27.480 a policy error. Should the Fed high rates as much 0:03:27.480 --> 0:03:30.040 as three times next year, which you think probably should 0:03:30.040 --> 0:03:32.440 be a base case scenario. What's your read on the 0:03:32.560 --> 0:03:35.920 leield curve. Well, I'm not really sure why the yield 0:03:35.960 --> 0:03:38.400 curs are doing what it's doing. I mean, one possibility 0:03:38.480 --> 0:03:40.840 is that the quantitative easy in the fifth purchases of 0:03:40.880 --> 0:03:43.480 assets are just pushing down long term yields if people 0:03:43.520 --> 0:03:46.480 don't want to hold deposits of commercial banks in their 0:03:46.520 --> 0:03:49.360 searching searching out higher yielding assets. So we may have 0:03:49.400 --> 0:03:53.360 a bit of a bond bubble just caused by quantitative easing. Obviously, 0:03:53.400 --> 0:03:56.360 as the quantity of easing process is run down, and 0:03:56.360 --> 0:03:59.240 I would imagine bonnyels will will retreat to a more 0:03:59.280 --> 0:04:02.240 normal I do think the tenure treasure yield at one 0:04:02.480 --> 0:04:05.800 percent environment where inflation is running five or six percent 0:04:06.000 --> 0:04:09.680 is very hard to explain in the current circumstances, Bill, 0:04:09.720 --> 0:04:13.360 can you elaborate a bond bubble from quantitative easing? What 0:04:13.560 --> 0:04:16.800 that means in terms of the threshold of when people 0:04:17.000 --> 0:04:20.400 reap price bond yields. According to the Fed backing away 0:04:20.440 --> 0:04:24.000 from some of their purchases. Well, I think the you 0:04:24.000 --> 0:04:25.800 know it's gonna it could take a wild for this 0:04:25.880 --> 0:04:28.000 to playoff, because remember, the Fed is still adding to 0:04:28.080 --> 0:04:30.120 his balance sheet even as we speak, and the taper 0:04:30.240 --> 0:04:32.880 it won't be finished until the March flone C meeting, 0:04:33.240 --> 0:04:34.760 and even after that will be quite a bit of 0:04:34.800 --> 0:04:37.400 time before the Fed Reserve begins to shrink their balance sheet. 0:04:37.440 --> 0:04:40.160 Only after they've lifted off and raised short term interest 0:04:40.240 --> 0:04:42.719 rates to say one to two percent, will start to 0:04:42.720 --> 0:04:45.360 shrink or balance sheet. So the effects of quantitative easy 0:04:45.360 --> 0:04:47.840 and could linger for quite some time. I do think 0:04:47.839 --> 0:04:51.320 the bond market is going to be uh disturbed by 0:04:51.360 --> 0:04:53.320 the fact that the peak and the Federal funds raise 0:04:53.400 --> 0:04:55.200 is likely to be quite a bit higher than was priced, 0:04:55.200 --> 0:04:57.960 and that in a self a way, I think I'm bondus, 0:04:58.600 --> 0:05:00.800 but I want to get all stuff in open on you. 0:05:01.120 --> 0:05:06.200 Are we practicing monetary theory? Are we practicing modern monetary theory? 0:05:06.240 --> 0:05:08.240 I need to get you in trouble this morning. Help 0:05:08.279 --> 0:05:11.320 me here are we doing it? I don't think. I 0:05:11.320 --> 0:05:13.320 don't think so in the sense that I don't think 0:05:13.320 --> 0:05:15.240 the Center Reserve is just saying whatever you want to 0:05:15.279 --> 0:05:17.640 do on the cystal side, We're going to monetize that debt. 0:05:18.360 --> 0:05:20.120 It feels like that a little bit because of the 0:05:20.200 --> 0:05:23.280 quantitative easing program. But remember the quantitative easing program was 0:05:23.360 --> 0:05:26.479 undertaken because short term interest rates were at zero and 0:05:26.520 --> 0:05:29.200 that the said wanted to add monetary accommodation. The only 0:05:29.200 --> 0:05:31.360 way they could do it was by this these other means. 0:05:31.760 --> 0:05:34.679 So I think we're you know, it's more resembling monitor 0:05:34.800 --> 0:05:36.520 monetary theory than what we've done in the past, But 0:05:36.520 --> 0:05:38.240 I don't think we're quite there yet. They were lucky 0:05:38.240 --> 0:05:40.279 to have you with us this morning. Just fantastic, and 0:05:40.320 --> 0:05:43.000 so far this year you've been right in more ways 0:05:43.040 --> 0:05:45.479 than one. Built Downtly there be former New York Fed 0:05:45.480 --> 0:05:55.000 president and Bloomberg opinion columnist. Let's talk about this market 0:05:55.000 --> 0:05:58.719 with Ding kind of founder and CEO of Macro Risk Advices, Dan, 0:05:58.960 --> 0:06:03.279 your words, risk free asset, the bedrock of financial markets 0:06:03.760 --> 0:06:07.360 looks unwell, Dean, what do you mean by that? I 0:06:07.400 --> 0:06:11.719 would actually say it's um displaying signs of chaos. Um. 0:06:11.800 --> 0:06:14.080 You know, if you look at we all studied the VIX, 0:06:14.080 --> 0:06:18.440 and the VIX was on the move up down, traveled 0:06:18.480 --> 0:06:21.640 quite a bit this last week. UM, but so many, 0:06:22.200 --> 0:06:24.480 so much of this whole risk equation, it's priced off 0:06:24.560 --> 0:06:28.520 the risk free asset class. And I would just argue that, um, 0:06:28.560 --> 0:06:30.960 it's really not risk free. It might be from a 0:06:31.000 --> 0:06:34.640 regulatory standpoint or for how pension funds allocate to risk, 0:06:35.080 --> 0:06:38.040 how they think about their portfolios. But here's an asset 0:06:38.040 --> 0:06:40.880 class that number one is moving around, it's on, it's 0:06:40.880 --> 0:06:44.160 displaying a lot of volatility UM, and it's fundamentals are 0:06:44.200 --> 0:06:47.760 going through a regime shift that is deteriorating. UM. You know, 0:06:47.800 --> 0:06:51.359 if we think about a default in the typical sense 0:06:51.400 --> 0:06:56.159 of a credit bearing bond, uh inflation is effectively a 0:06:56.200 --> 0:06:59.800 default of creeping default for a risk free security. And 0:06:59.800 --> 0:07:03.760 that really what we're seeing, right that the bedrock of 0:07:03.800 --> 0:07:07.479 everything is rooting in terms of its fundamental outlook. And 0:07:07.600 --> 0:07:09.800 you know, when I step back and I look at this, 0:07:09.960 --> 0:07:12.640 this shot heard around the world the last week, the 0:07:12.960 --> 0:07:15.880 four percent draw down, which was in a lot of 0:07:15.880 --> 0:07:21.040 ways so meaningful because it encapsulated so many asset classes. Crude, yeah, 0:07:21.920 --> 0:07:25.440 cryptocurrency so much. You know, underneath the surface of it 0:07:25.520 --> 0:07:29.080 is a risk free market that's displaying a lot of fertility. 0:07:29.120 --> 0:07:31.080 And I just think it's something we have to pay 0:07:31.080 --> 0:07:32.960 a lot of attention to. We've seen the Vix come 0:07:33.000 --> 0:07:38.480 in UH dean constructively come in thirteen big figures. Most 0:07:38.520 --> 0:07:41.640 of us have a collective memory of nirvana of the 0:07:41.720 --> 0:07:46.360 Vix of A twelve, thirteen, A fourteen. Where's the new 0:07:46.440 --> 0:07:50.920 nirvana right now for the Vix? Is it a twenty level? Well? 0:07:50.960 --> 0:07:54.600 I think that you can argue that the floor has 0:07:54.640 --> 0:07:56.760 gone up a little bit. Um, you know, I like 0:07:56.800 --> 0:08:00.400 to say, especially these days markets and especially Volatila with 0:08:00.400 --> 0:08:02.720 with beam stocks and so forth, it's a never say 0:08:02.800 --> 0:08:05.760 never business. What you thought was achievable, both to the 0:08:05.840 --> 0:08:08.800 high side and the low side, um, just don't count 0:08:08.800 --> 0:08:11.600 on it. But that I would say that the floor 0:08:11.680 --> 0:08:15.560 has probably moved up from perhaps sixteen to eighteen. I 0:08:15.600 --> 0:08:20.239 think this last UH spasm in markets was was pretty meaningful, 0:08:20.360 --> 0:08:24.840 especially relative to the slight the modest degree of draw down. 0:08:25.280 --> 0:08:27.240 There was a lot of trepidation, and I think the 0:08:27.240 --> 0:08:31.040 trepidation comes from the sense that we almost got hit 0:08:31.080 --> 0:08:34.320 on two fronts at once. One the growth shock, which 0:08:34.320 --> 0:08:37.080 I think the markets working its way past perhaps omicrons 0:08:37.120 --> 0:08:40.080 not what we thought it was going to be. But second, 0:08:40.120 --> 0:08:42.320 and you guys alluded to it. We we get this 0:08:42.360 --> 0:08:46.920 inflation data on Friday. This is an ongoing, UH source 0:08:46.960 --> 0:08:51.280 of uncertainty for markets, and you know, it's potentially very disruptive. Again, 0:08:51.320 --> 0:08:55.040 the FED fighting inflation from above is just worlds apart 0:08:55.080 --> 0:08:58.360 from the FED fighting inflation from below, which it's really 0:08:58.400 --> 0:09:01.559 done for the entirety of the the post crisis period. Dean, 0:09:01.600 --> 0:09:04.480 There's a consensus emerging in markets that the more inflation 0:09:04.720 --> 0:09:07.280 data runs hot now and the more near term inflation 0:09:07.320 --> 0:09:10.880 expectations rise, the lower they go over the long term. 0:09:10.920 --> 0:09:12.680 And this is the flattening yield curve, and this is 0:09:12.679 --> 0:09:16.120 in the inflation expectations. Do you think that that is wrong? 0:09:16.280 --> 0:09:18.560 Do you think that anything in the near term data 0:09:18.600 --> 0:09:23.360 could shake that consensus. That's a really great and open question. 0:09:23.480 --> 0:09:25.000 And you know, as we look at the yold curve 0:09:25.040 --> 0:09:29.280 flattening this year, UH, it's very different from let's say, 0:09:29.320 --> 0:09:33.280 the flattening in two thousand seventeen, which was extremely low 0:09:33.360 --> 0:09:36.680 VIX environment a nine or ten VIS and a move 0:09:36.720 --> 0:09:40.240 index the rate volatility VIX that hovered an all time 0:09:40.280 --> 0:09:42.800 lows as well. This is much different. This is this 0:09:42.880 --> 0:09:45.520 is tightening because you have to versus twenty seven team, 0:09:45.520 --> 0:09:48.360 which is tightening because you can to the curve and 0:09:48.480 --> 0:09:51.560 especially the back end. Well, I'm just not convinced that 0:09:51.600 --> 0:09:54.720 as we tighten and if the FED gets off zero, 0:09:54.800 --> 0:09:58.520 it completes the taper and starts to initiate urns of tightening. 0:09:59.040 --> 0:10:00.960 I'm not even sure that packing goes up. And I 0:10:01.000 --> 0:10:04.040 think this will ultimately scare the FED quite a bit 0:10:04.440 --> 0:10:07.120 um as it did in late eighteen early nineteen, and 0:10:07.160 --> 0:10:09.199 so you just have to wonder how far we're going 0:10:09.200 --> 0:10:12.440 to get in the tightening cycle. Um, I just don't 0:10:12.480 --> 0:10:15.480 see it ultimately impounding itself into the long end of 0:10:15.480 --> 0:10:19.319 the curve. Being ready thoughtful stuff as always, brilliant. Love 0:10:19.360 --> 0:10:26.959 catching up with Dinka at Macro Risk Advices, joining us 0:10:27.000 --> 0:10:30.640 now by chance. Gig Gronville, Senior Scholar, JOHNS. Hopkins Center 0:10:30.679 --> 0:10:33.800 for Health Security, g G. One of the important points 0:10:33.800 --> 0:10:37.760 in the now beginning three year ordeal of your profession 0:10:38.080 --> 0:10:43.800 this pandemic. What is the significance of the FISER announcement. Yeah, 0:10:43.840 --> 0:10:46.400 this is based on one study and there are going 0:10:46.440 --> 0:10:49.440 to be many more over the coming weeks. That shows 0:10:49.480 --> 0:10:53.880 that even though there is a significant degradation of vaccine um, 0:10:54.040 --> 0:10:59.520 potential vaccine efficacy from in response to Amicon that there 0:10:59.720 --> 0:11:02.520 is for some protection. It's not a complete escape, and 0:11:02.559 --> 0:11:06.840 so it's going to likely be boosted by having a booster, 0:11:06.960 --> 0:11:09.520 by having a third dose. The Prime Minister will be 0:11:09.520 --> 0:11:11.680 grilled this morning in one part of that in the 0:11:11.760 --> 0:11:14.400 United Kingdom, and I would auditorialize it. It seems to 0:11:14.400 --> 0:11:16.920 be a lot more chaotic over here than even the 0:11:17.040 --> 0:11:21.320 gentle chaos of America is. On vaccine passports, in the 0:11:21.400 --> 0:11:25.840 vaccine restrictions of the unvaccinated, I should say in Germany, 0:11:26.080 --> 0:11:31.120 does that work? The vaccine passports work? I think they 0:11:31.320 --> 0:11:35.760 anything that can boost vaccine uptake get people vaccinated. We 0:11:35.800 --> 0:11:38.240 still don't know whether to doses is going to be 0:11:38.400 --> 0:11:42.199 enough to prevent severe disease um keep people out of 0:11:42.200 --> 0:11:44.680 the hospital. Maybe it will be enough to prevent even 0:11:45.080 --> 0:11:47.480 less severe disease. We just don't know yet. We were 0:11:47.480 --> 0:11:50.040 going to have to see for what real world data 0:11:50.160 --> 0:11:53.000 is like. But yes, I mean anything that can get 0:11:53.000 --> 0:11:56.600 people to h to get vaccinated, I'm for as honest. 0:11:56.679 --> 0:11:59.560 They have a choice to not get vaccinated, even if 0:11:59.600 --> 0:12:04.559 it's eight inconvenient. This Fighter and BioNTech News really highlights 0:12:04.720 --> 0:12:08.200 the sort of controversy around boosters and the possible need 0:12:08.280 --> 0:12:11.800 to continue distributing them. A lot of disagreement even among 0:12:11.840 --> 0:12:15.959 medical professionals about the importance for healthy individuals to get boosters. 0:12:16.200 --> 0:12:18.920 Do you think that data like this actually edifies the 0:12:19.000 --> 0:12:22.760 case for requiring this as yet another course in the 0:12:22.840 --> 0:12:26.480 normal course of action with vaccines? Yeah, I mean, we'll 0:12:26.480 --> 0:12:28.160 have to see what there's going to be more data 0:12:28.200 --> 0:12:31.760 that's coming, But it does indicate that getting that third 0:12:31.800 --> 0:12:34.720 dose might be much more important than just a nice 0:12:34.760 --> 0:12:37.640 to have. It might be quite necessary for certain groups 0:12:37.640 --> 0:12:41.240 in particular, UM, people who are more vulnerable to covid 0:12:41.559 --> 0:12:44.640 um even before you know, older people, people who are 0:12:44.960 --> 0:12:48.120 compromised UM. So it might be, uh, it might be 0:12:48.160 --> 0:12:51.800 something that is becomes part of the vaccine. It's just 0:12:51.880 --> 0:12:54.760 a three dose vaccine. Dr Runville. Do you expect a 0:12:54.840 --> 0:12:57.120 time when we're always just getting shot up with different 0:12:57.240 --> 0:12:59.920 vaccines to try to adjust to the different variants The 0:13:00.000 --> 0:13:03.000 idea that we're going to be getting vaccinated as frequently 0:13:03.080 --> 0:13:04.920 as we have been over the past couple of years. 0:13:06.600 --> 0:13:08.560 We will have to see. I mean, in general, there 0:13:08.679 --> 0:13:11.560 is no disease that's good to get UM. So I 0:13:11.600 --> 0:13:13.840 think it would be nice to have more vaccines for 0:13:14.000 --> 0:13:17.200 other things that we suffer from. But um, but we'll 0:13:17.240 --> 0:13:20.360 have to see. I hope that we can vaccinate more 0:13:20.400 --> 0:13:22.520 people in the world and we can stop this, uh, 0:13:22.760 --> 0:13:27.240 this this variant sequence. And John with Amadanzo yesterday is 0:13:27.280 --> 0:13:30.080 he reviewed It was a wonderful professional review of the 0:13:30.120 --> 0:13:33.599 efficacy of the booster. You wonder if that changes with 0:13:33.720 --> 0:13:35.800 this announcement. Yeah, it's worth pointing out though, Tom, what 0:13:35.840 --> 0:13:39.160 we're talking about almost exclusively its vaccine escape and jj 0:13:39.280 --> 0:13:42.000 that was only one question of three questions that we 0:13:42.040 --> 0:13:44.719 want to answer it. How contagious was this variant? How 0:13:44.760 --> 0:13:47.719 severe was this variant? Aside from whether it escapes the 0:13:47.800 --> 0:13:49.599 vaccines or not. What have we learned about that? J 0:13:49.760 --> 0:13:54.120 j UM. There are some indications that are positive that 0:13:54.200 --> 0:13:57.079 it might be less severe. But I think we really 0:13:57.120 --> 0:13:59.800 need to hold off and see, Um, we have a 0:14:00.040 --> 0:14:04.079 from population that has a different vaccination coverage in this 0:14:04.200 --> 0:14:07.240 in this country, we have a different spread of delta 0:14:07.320 --> 0:14:10.960 in this country. I think it's best to wait for 0:14:11.000 --> 0:14:14.200 some more data before saying, oh, it's a mild a 0:14:14.240 --> 0:14:16.960 mild variant, because I think some people are saying that 0:14:17.320 --> 0:14:19.720 and we just don't have enough information to say that 0:14:19.800 --> 0:14:23.200 yet don't do. We appreciate your insight as always. What timely? 0:14:23.440 --> 0:14:26.080 What a timely conversation as well? G. G. Gronville. There 0:14:26.320 --> 0:14:35.880 of Johns Hopkins, the most well known west Ham supporter 0:14:36.040 --> 0:14:38.000 in the city of London, now with Hong Kong and 0:14:38.080 --> 0:14:40.720 now in the city of London. Briefly Steve Major, Global 0:14:40.800 --> 0:14:44.000 head of Fixed Income Research at HSBC. Steve, as part 0:14:44.040 --> 0:14:45.720 of the exchange to get you to talk about bonds, 0:14:45.720 --> 0:14:47.280 I promised we'll talk about west Ham. Do you want 0:14:47.280 --> 0:14:51.080 to start there? What a performance this season? All that 0:14:51.160 --> 0:14:54.360 matters is that we're above Arsenal and Tottenham. Hopefully it'll 0:14:54.400 --> 0:14:57.880 be Chelsea as well soon beat and Chausa. Over the weekend, Steve, 0:14:57.880 --> 0:14:59.760 where's this coming from? How much money if that to 0:14:59.760 --> 0:15:01.160 spend to do this? I was trying to explain it 0:15:01.200 --> 0:15:03.960 to Tom over the weekend that this is a West 0:15:04.120 --> 0:15:07.120 London club Chausea with a ton of money going up 0:15:07.120 --> 0:15:10.280 against an East London club west Ham with less money. 0:15:10.320 --> 0:15:15.120 How are they getting this done? There's hard work, good organization, 0:15:15.440 --> 0:15:18.960 They've they've signed some good players. Um, it's not just 0:15:19.040 --> 0:15:21.520 about buying the best players in the world, because as 0:15:21.560 --> 0:15:23.880 you can see at PS g and at Man United. 0:15:23.920 --> 0:15:26.280 It doesn't work. You have to have a structure and 0:15:26.360 --> 0:15:30.400 a method of framework, like forecasting bonds. Well, it's forecast 0:15:30.400 --> 0:15:32.960 bonds right now on tens year and that's the call 0:15:33.120 --> 0:15:35.200 one fifty year and next year, then this move, this 0:15:35.360 --> 0:15:38.040 quired pass towards one percent, the bit of a tweak 0:15:38.120 --> 0:15:41.080 in the last week or so. Just run us through it. Yeah. 0:15:41.080 --> 0:15:44.800 The thing about the forecast, John, And as you know, 0:15:44.840 --> 0:15:47.240 it's a it's a point testament. It's a thankless task. 0:15:47.800 --> 0:15:52.640 I mean successful forecasting. It's like the Kinzie and Beauty contest. 0:15:53.000 --> 0:15:55.680 You're actually trying to forecast what everybody else is thinking. 0:15:56.120 --> 0:15:58.760 So what I think personally doesn't matter that much. Is 0:15:58.800 --> 0:16:02.240 it's whether I can correctly estimate what everybody else is 0:16:02.240 --> 0:16:05.560 thinking at that point in time. And we've only got 0:16:05.600 --> 0:16:08.480 one number to play with. So so for us, one 0:16:08.640 --> 0:16:12.800 fifty for the ten year treasury is reasonable going into 0:16:12.920 --> 0:16:15.600 next year because that there's now a floor for rates, 0:16:15.680 --> 0:16:18.720 because the Fed has this hawk ish bias, and that 0:16:19.120 --> 0:16:22.680 it's possible that they're going to hike. We've got forecasts 0:16:22.720 --> 0:16:25.720 for rate hikes. I'll believe each hike when I see it, 0:16:25.840 --> 0:16:30.440 and that's been my view through throughout this UM. So 0:16:30.520 --> 0:16:32.880 the one percent call, we've pushed it into two thousand 0:16:32.920 --> 0:16:37.080 and twenty three because we think that if and when 0:16:37.120 --> 0:16:40.240 they start to hike, they won't get very far. And 0:16:40.480 --> 0:16:43.320 we're not in the business of forecasting policy errors. If 0:16:43.360 --> 0:16:46.000 it's so obvious that rates would be hiked and then 0:16:46.040 --> 0:16:49.000 cut afterwards, the central brank will presumably just not do 0:16:49.200 --> 0:16:53.320 very much. So so so to me, it's it's really 0:16:53.360 --> 0:16:55.800 really difficult to believe that rates are going to get 0:16:55.840 --> 0:16:59.720 anywhere near the levels reached in the last cycle. And 0:17:00.160 --> 0:17:02.960 when you look at the terminal rate like that, it's 0:17:03.000 --> 0:17:06.040 probably going to have a one handle. And that's why 0:17:06.280 --> 0:17:09.480 one in the longer run is more like the fair 0:17:09.560 --> 0:17:12.960 value your treasurers. I would love to have dinner Steve 0:17:13.119 --> 0:17:15.800 with you and Bill Dudley, a former FED president of 0:17:15.840 --> 0:17:18.760 the New York Office of the Federal Reserve. He has 0:17:18.800 --> 0:17:22.040 been talking about how the end rate for the FED 0:17:22.119 --> 0:17:24.840 could be three or four percent based on how hot 0:17:24.880 --> 0:17:28.400 the economy is, based on how high inflation has been 0:17:28.520 --> 0:17:32.600 and will likely be. What would you say to him, Well, 0:17:32.600 --> 0:17:35.360 I get very few invitations, Lisa, so thanks very much. 0:17:36.040 --> 0:17:40.119 Next week or the week after that, it would be 0:17:40.160 --> 0:17:43.720 interesting to know the basis of that. And look, we 0:17:43.760 --> 0:17:46.520 have to respect his opinion, but that it would be 0:17:46.520 --> 0:17:49.280 interesting to see how we get to three or four 0:17:49.880 --> 0:17:54.960 And has this calculation included the sensitivity of the economy 0:17:55.000 --> 0:17:58.560 to the amount of debt, and has it included global 0:17:58.640 --> 0:18:02.840 factors about the to see direction in China or Europe 0:18:02.920 --> 0:18:05.720 and Japan. I mean, does anybody watching this at the 0:18:05.760 --> 0:18:08.639 moment think that China is going to height rates or 0:18:08.840 --> 0:18:13.120 or the ECB or Bank of Japan. So so presumably 0:18:13.520 --> 0:18:17.879 we need to incorporate the longer term structural variables like 0:18:18.040 --> 0:18:22.439 the debt overhangs, demographics, distribution of wealth, technology, and we 0:18:22.480 --> 0:18:25.440 need to think globally and once we've done that, and 0:18:25.480 --> 0:18:27.280 I'd like to hear how it's possible to get to 0:18:27.359 --> 0:18:30.720 three or four percent, because on our reckoning, that's going 0:18:30.800 --> 0:18:33.080 to be very difficult. Some people say this time is 0:18:33.119 --> 0:18:36.200 slightly different, stive because of the money that was basically 0:18:36.240 --> 0:18:38.960 printed by so many economies by the fact that people 0:18:39.000 --> 0:18:42.120 got checks directly they are spending those checks, and you're 0:18:42.160 --> 0:18:45.680 seeing the consumer spending component of the economy absolutely surged, 0:18:45.720 --> 0:18:48.600 certainly in the United States. Why is that not enough 0:18:48.960 --> 0:18:51.320 given where inflation is given the read that we're expected 0:18:51.320 --> 0:18:54.320 on Friday, given wages to get us over the hump 0:18:54.440 --> 0:18:58.360 of the demographics that you speak. Yeah, So, first of all, 0:18:58.359 --> 0:19:01.480 I think there's some double counting on these money supply estimates. 0:19:02.200 --> 0:19:04.400 A lot of the money that has been created through 0:19:04.440 --> 0:19:08.399 the que is anyway stuck in banks. It exists as reserves, 0:19:08.640 --> 0:19:10.560 So it depends on your definition of money supply. I 0:19:10.560 --> 0:19:12.520 don't think it's gone up. Actually depends on how you 0:19:12.520 --> 0:19:15.040 measure it. The other thing is the fiscal impulse of 0:19:15.040 --> 0:19:17.360 two thousand and twenty one goes into reverse in two 0:19:17.400 --> 0:19:21.200 thousand and twenty two. So a rational expectations view of 0:19:21.240 --> 0:19:23.920 all of this would say, let's be careful. This isn't 0:19:23.960 --> 0:19:27.320 free money. Someone has to pay for it. The the 0:19:27.320 --> 0:19:30.960 the U. S Government has has effectively borrowed from the 0:19:31.080 --> 0:19:35.440 children to pay their parents. And if anyone thinks that's clever, 0:19:35.560 --> 0:19:39.600 then then fine. But I don't get it. Um it 0:19:39.680 --> 0:19:44.080 was a huge bridge to tomorrow, but it doesn't look 0:19:44.200 --> 0:19:46.840 very stimulant. It's not gonna be stimulative when we get 0:19:46.840 --> 0:19:50.200 into two thousand two. Steve Major Deutsche Bank frames out 0:19:50.240 --> 0:19:53.000 through George Sarah Ellis and their FX desk not a 0:19:53.080 --> 0:19:56.439 curve in version, but a possibility of one. Do you 0:19:56.440 --> 0:19:59.560 have a scenario call where two year goes out and 0:19:59.600 --> 0:20:03.800 goes a above the one fifty level on your tenure call. Yeah. 0:20:03.920 --> 0:20:06.639 Part of the reason for our recent forecast was because 0:20:06.720 --> 0:20:10.520 the two year treasury one year forward was trading at 0:20:10.560 --> 0:20:13.200 one twenty at the end of last week, and so 0:20:13.400 --> 0:20:15.440 the forwards have got a lot of cover for those 0:20:15.480 --> 0:20:18.480 great hikes. And in fact, in the forwards there is 0:20:18.480 --> 0:20:21.680 an inversion already if you go out to ten year plus. 0:20:21.680 --> 0:20:24.120 If you go one year two year forward for the 0:20:24.240 --> 0:20:27.040 tense thirties you get you can see an inversion if 0:20:27.040 --> 0:20:28.560 you if you look at a chart for the last 0:20:28.600 --> 0:20:31.600 thirty or forty years, inversions only happened two or three times, 0:20:32.119 --> 0:20:35.800 so so so to me, I'd be fading that move. 0:20:36.359 --> 0:20:39.159 And what we've been doing is looking at steepeners in 0:20:39.240 --> 0:20:42.320 the ultralong segment and you get paid in terms of 0:20:42.359 --> 0:20:45.440 carry and roll, and that they have they haven't gone 0:20:45.440 --> 0:20:47.359 wrong in the last few weeks, so that they've actually 0:20:47.359 --> 0:20:51.920 been holding steady. So so I think fading the inversion 0:20:51.960 --> 0:20:55.280 is important, um. And we have to look at the forwards. 0:20:55.520 --> 0:20:57.879 As I say that two year rate is already pretty 0:20:57.920 --> 0:21:01.199 high in the forwards, and we had hawkish surprise in 0:21:01.280 --> 0:21:05.959 June followed by by a big hawkish surprise in September, 0:21:06.560 --> 0:21:09.720 and next week some people are calling for an even 0:21:09.760 --> 0:21:15.240 bigger hawkish surprise. I say, once bitten twice shy okay. 0:21:15.240 --> 0:21:18.720 So this is really important, Steve Major, as we go 0:21:18.760 --> 0:21:21.240 into the sophistication of your market, which is to look 0:21:21.280 --> 0:21:23.479 to the future. If you were having a cup of 0:21:23.480 --> 0:21:27.240 coffee this morning with Jerome Powell, how do you explain 0:21:27.280 --> 0:21:33.400 the forwards to him to frame his press conference December? Well, 0:21:33.440 --> 0:21:37.320 he gets it, and I guess um he also gets 0:21:37.520 --> 0:21:40.840 the Maradonna effect, so he could he could talk to 0:21:40.960 --> 0:21:43.600 the Bank of England governor, the current one and the 0:21:43.640 --> 0:21:46.960 previous ones to talk about that. The Maradonna effect to 0:21:47.200 --> 0:21:53.440 non football fans is using your credibility to drive the expectations, 0:21:53.800 --> 0:21:57.119 maybe maybe getting a hawkish just when inflation is about 0:21:57.119 --> 0:22:00.000 to crash around there is is a way of tightening 0:22:00.080 --> 0:22:03.119