Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: For Global Wall Street.
Speaker 3: Now, this is a tree his public service to America
Speaker 3: at the White House for President Trump, Joseph Flifornia.
Speaker 4: Jones joins us.
Speaker 3: But what you don't know, and probably President Trump didn't
Speaker 3: know he was at Deutsche Bank years ago and the
Speaker 3: combine that melded economics into fixed income. We're thrilled he
Speaker 3: could be with us today with parchment from Vassar and
Speaker 3: some work at New York University as well. Okay, I
Speaker 3: got to get this out of the way right now.
Speaker 3: I saw Gold and Sachs treatment and they look at
Speaker 3: four point six to zero ten years a pivot point. Okay,
Speaker 3: we're there, and we're there quickly. Do you have in
Speaker 3: your head a ten year yield where the system unravels?
Speaker 1: No, but I do think rates are going higher Tom,
Speaker 1: for a whole host of factors. Higher inflation risk, premium
Speaker 1: they need at some point for treasure to raise more supply,
Speaker 1: and the fact that the market has really only priced
Speaker 1: it's about one tightening, and I could see potentially a
Speaker 1: series of tightening, so yields go higher.
Speaker 3: Okay, Paul's got eight questions. I'm going to get this
Speaker 3: one in quickly here.
Speaker 4: If yields go higher, price down, it can be ambiguous
Speaker 4: good or bad or zag and posin say you're going
Speaker 4: to see a higher wage, a higher real wage.
Speaker 3: Do you buy that optimism or is it going to
Speaker 3: be stress?
Speaker 1: It's possible, I mean the AI the productivity story could
Speaker 1: translate into much higher wages. The corporate share of income
Speaker 1: is high, so hopefully at some point that does flow
Speaker 1: to workers. I was very bullish on the economy, and
Speaker 1: we was talking in my prior role of a disinflationary boom,
Speaker 1: which seems very reasonable until the Middle East War started,
Speaker 1: because I think that completely changed the dynamics. So yes,
Speaker 1: I'm bullish on I was bullish on growth in terms
Speaker 1: of being lower in non inflationary and rates coming down
Speaker 1: in the FED easing. All that's kind of thrown by
Speaker 1: the wayside. In terms of what level of yields crack
Speaker 1: the system, we don't really know. It's really a liquidity
Speaker 1: and confidence story. Could be four seventy five on tens,
Speaker 1: it could be five percent on tens, and there's so
Speaker 1: many other dynamics up playing. As you're well aware, the
Speaker 1: narrowness of the market, the equity market has been a
Speaker 1: handful of companies, and at some point, you know that
Speaker 1: exuberance may itself be stretched. So if if it's tightening,
Speaker 1: financial conditions suddenly tighten risk appetite changes, then it could
Speaker 1: unravel quickly.
Speaker 5: Joe and your notes, you say inflation is a problem.
Speaker 5: I think most of our viewers and listeners would agree
Speaker 5: with you.
Speaker 2: How long is it going to be a problem?
Speaker 1: Do you think that's a great question? I mean, when's
Speaker 1: the war going to end? And how quickly can these
Speaker 1: bottlenecks stop. I mean the way to think of this
Speaker 1: is it's too many COVID, and I think that's what
Speaker 1: most investors don't understand, which makes me think yields go
Speaker 1: higher when I say many COVID, there's major supply chain disruptions.
Speaker 1: It's not just energy, it's NITROGENU relates to fertilizer, different
Speaker 1: material to go into. Plastics are the sensitive commodities. And
Speaker 1: what we learned during COVID is you just can't turn
Speaker 1: wells off. You just can't shut this on a much
Speaker 1: much smaller scale, but you can't just turn the system
Speaker 1: off and like a light switch, automatically goes back and
Speaker 1: the market is I don't think the bond market isn't
Speaker 1: fully appreciative of that.
Speaker 3: Joe Varna, SMBC and Eco Securities totally could be with
Speaker 3: us at youday and we continue here. I guess with
Speaker 3: the arch idea and you live this at the White House.
Speaker 3: This is a president who likes joint stimuli all the time.
Speaker 3: We've got a nominal GDP pop in five percent plus
Speaker 3: persistently there, we've got you know, inflation well above the
Speaker 3: FED target and all that are we just living in
Speaker 3: a new stimulus driven miliu and it goes until it goes.
Speaker 1: We might tom But if that's the case, then you
Speaker 1: know inflation expectations need to be reset and you need
Speaker 1: a higher term structure rates to reflect the environment.
Speaker 2: You just describe. So it's either one or the other.
Speaker 1: Either the economy is going to produce non inflationary growth
Speaker 1: and eventually the FED can get rates to neutral or
Speaker 1: right that works.
Speaker 2: Were in a regime where.
Speaker 1: You've got rising debt to GDP, higher inflation relative to
Speaker 1: where the fedce carriot is and that would be in
Speaker 1: the Fed's not cutting and that's a higher rate region.
Speaker 3: Do you perceive that model is one hundred basis point shift? Sorry,
Speaker 3: folks jargon a one percentage point shift up in the
Speaker 3: curve or could it be more sixties like and be
Speaker 3: a real shift into Provoker.
Speaker 1: Well, in the sixties is very as you know, Tom's
Speaker 1: very gradual, yet cyclical. The floor on inflation saw higher
Speaker 1: cyclical floors as you move through the sixties into the seventies.
Speaker 1: Best guess it's the latter that it would be like
Speaker 1: maybe let's say one hundred basis points repricing. It's a
Speaker 1: nice round number, but you know, could it be something longer?
Speaker 2: It's possible.
Speaker 1: I mean, in the last couple of years inflation is
Speaker 1: running about seventy five basis point above the Fed's target.
Speaker 1: We're going to go higher than that in the next
Speaker 1: few months. When could it end?
Speaker 2: Maybe by the fall, We'll see, I.
Speaker 1: Mean, how I guess, question is how disinflationary is AI
Speaker 1: in the short term may actually be contributing to the
Speaker 1: problems we have to the data center build out and
Speaker 1: energy usage. Longer term is probably disinflationary.
Speaker 5: We've got a new FED chairman, presumably he feels a
Speaker 5: little pressure to get rates down, but boy, the data
Speaker 5: does great.
Speaker 3: Question, Paul, We're going to make some news. Here are
Speaker 3: you interviewing for a position at the FED.
Speaker 2: No, I'm not interviewing for the position at the FED.
Speaker 3: No.
Speaker 1: By the way, the UH and I've gotten to know them.
Speaker 1: I think they're a bunch of Fed people. That was
Speaker 1: one cool thing about the job. There's a lot of
Speaker 1: super talented people there. Kevin worsh will do a great job.
Speaker 2: I'm very confident of that.
Speaker 1: However, I don't see how Kevin's going to make a
Speaker 1: plausible case for raycuts.
Speaker 2: Yeah, it just is just not there.
Speaker 1: And if the market continues to price tightening, maybe he
Speaker 1: just pushes back against the committee that's certainly becoming, at
Speaker 1: least on from the President's more hawkish. Maybe he pushes
Speaker 1: back a bit, gets it more center, and then kind
Speaker 1: of hope for the best. Things may be unfold in
Speaker 1: a positive way in the back half of the year.
Speaker 1: But right now, look at like the Price is Paid
Speaker 1: series in the isms. The New York Fed's got this
Speaker 1: global pressure supply index. Not sure exactly how they put
Speaker 1: it together, but the picture certainly shows these supply chain disruptions.
Speaker 2: That's all pro inflation in the system.
Speaker 5: Again, is this a inflation, I don't know. It just
Speaker 5: feels stickier to me than just a bit sticky.
Speaker 1: Well, well, you could see if you look at like
Speaker 1: the San Francisco Fed, they've got the acyclical and cyclical
Speaker 1: price trends. You look at the Atlanta fit sticky price index, Yeah,
Speaker 1: you're seeing it absolutely sticky. And by the way, it's
Speaker 1: been above trend, so you know, we've been well above
Speaker 1: two and a lot of these components, the supercre that
Speaker 1: the former chair Jay Powell likes looking at running about
Speaker 1: three and a half percent, definitely sticky.
Speaker 5: So, I mean there's nothing the FED can do, right,
Speaker 5: I mean's.
Speaker 1: Nothing the Fed can do other than at some point
Speaker 1: potentially raise rates, try to slow demand. And the problem
Speaker 1: with raising rates to slow demand to bring inflation back
Speaker 1: to target, which right now it's probably going to be
Speaker 1: at least a point, if not a point and a
Speaker 1: half above target is generally a recession.
Speaker 2: The question is does the FED want to do that?
Speaker 1: If it doesn't want to do that, they implicitly change
Speaker 1: their target. You're going to be in a world then
Speaker 1: where rates are higher, You're gonna have a steeper urb
Speaker 1: and higher yields.
Speaker 3: Real treat for you across this nation and worldwide. Joseph
Speaker 3: Livornia with us today with this SMBC Nico here with
Speaker 3: his service to the nation in the first Trump administration,
Speaker 3: lots of good work, including serious fixed income chaps with
Speaker 3: Deutsche Bank a number of years ago, also with the
Speaker 3: American First Policy Institute. What happens to the world you
Speaker 3: parachuted into after the president?
Speaker 2: When you say that, you mean after the midterms, not
Speaker 2: thank you.
Speaker 3: I should have made that clear, No, after his term?
Speaker 3: How does Trumpism carry forward? After what you witnessed in
Speaker 3: the hallways?
Speaker 1: The shift, There's been a real shift in the base, Tom,
Speaker 1: I mean, look at the polling numbers, and not a
Speaker 1: lot of very good pollsters. Richard Barris of the Big
Speaker 1: Day to Poll, the People's Pundit actually is an excellent polster.
Speaker 1: There's some others out there, and it does show a
Speaker 1: huge compositional shift in the base where a lot of
Speaker 1: independence and others are not identified.
Speaker 3: Do you have Tom show that list? Well?
Speaker 1: Yeah, well, and she made a very good point, and
Speaker 1: he's sort of these posters a sort of an inside club.
Speaker 1: But yes, New York Times SIENA poll accurately now reflects
Speaker 1: what's happening at the moment, because you've got this affordability
Speaker 1: issue that that is a problem. I'm not sure exactly
Speaker 1: what happens. I mean, I don't want to say too much,
Speaker 1: but I understand that.
Speaker 3: But I've never said this, Paul. Are we out there somewhere?
Speaker 3: I sound like a Linda Renstad song. Out there somewhere?
Speaker 3: Is the dreaded a word involved austerity?
Speaker 1: No? I don't think we're going to get austerity. No,
Speaker 1: because as you know, neither party wants to actually do anything,
Speaker 1: and you know they didn't want to do it when
Speaker 1: we had Simpson Bowls over a dozen years ago, and
Speaker 1: right now, unless the bond market or the financial markets
Speaker 1: put the pressure point on there, there isn't going to
Speaker 1: be a resolution, which comes back to like you ask
Speaker 1: about Iran, which to me is a very important, obviously development.
Speaker 1: I'm stating the obvious. But where's the pressure point for
Speaker 1: the president? Is it six dollars gassling prices? Seven dollars
Speaker 1: gasoline prices? I mean, certainly, with the stock market at
Speaker 1: all time record highs and rates still relatively low, there
Speaker 1: isn't really a pressure point for the president necessarily to
Speaker 1: make a strong decision. So maybe just the option is
Speaker 1: just waiting and seeing maybe there's some sort of change
Speaker 1: in leadership somehow, by luck or whatever it might be.
Speaker 1: But you just sit and wait and these things just
Speaker 1: drag on. But again, in that world, as inflation's moving up,
Speaker 1: your real funds rate is shrinking, and that by that metric,
Speaker 1: monetary policy is easing equity markets, high credit spreads are tight.
Speaker 1: I mean, there's a lot of financial stimulus that's offsetting
Speaker 1: this mildly higher interest rate story we're seeing.
Speaker 5: And on the interest rate story, I guess when we
Speaker 5: think back to the tariffs last year, a lot of
Speaker 5: folks on Wall Street were saying, boy, four point fifty
Speaker 5: on the tenure put some pressure on the White House,
Speaker 5: and they kind of started to back away a little
Speaker 5: bit from some of their initial tariff discussions.
Speaker 2: Boy, we've blown through that. But SMP was down fifteen percent.
Speaker 1: Yeah, let's not forget s ANDP was down fifteen percent,
Speaker 1: and then President quickly pivoted and the market of rally
Speaker 1: and we basically repeated the same thing this past year.
Speaker 3: But that's the key observation. And you know, I don't
Speaker 3: need the inside it from the White House. It's rude,
Speaker 3: but the fact is he is completely beholden to the
Speaker 3: stock market. Is it just simple that way, thinking somewhere
Speaker 3: Secretary Bessen or under Secretary Lavregna walks in on the
Speaker 3: yellow couch and says, hey, stupid, the Dow's down.
Speaker 1: No, I think the secretary does a great job giving
Speaker 1: the president advice, and the President certainly seeks his counsel,
Speaker 1: and he I think is a great voice of reason
Speaker 1: given his given his track record. But you know, the
Speaker 1: secretary is just one person, and the President listens to
Speaker 1: a bunch of different people. He's got his own instincts
Speaker 1: and behaves in a way that he thinks is.
Speaker 2: The right move.
Speaker 1: But certainly the stock market tom is a dominant driver,
Speaker 1: and if the stock market were to correct any meaningful amount,
Speaker 1: that would impact policy both, probably more foreign policy wise.
Speaker 1: I'm not sure what we can do domestically at this point,
Speaker 1: given the midterms of so close.
Speaker 5: And the consumer. The consumer seems to be hanging in there.
Speaker 5: I mean, we can never underestimate, it seems the US
Speaker 5: consumer here. I know, we've got that case shaped economy
Speaker 5: and the different people are behaving differently, but the consumer
Speaker 5: generally seems to be pretty such.
Speaker 1: Consumer's holding in well. I mean that you get the
Speaker 1: refund numbers aren't. We'll see what happens. They've not been
Speaker 1: as big as I would have guessed, or as big
Speaker 1: as I think what Treasury might have been assuming. But
Speaker 1: the refunds are helping a little bit. Of course, they're
Speaker 1: going to pay for higher gas prices, higher energy costs.
Speaker 2: That's been an offset.
Speaker 1: And aggregate, Yes, the consumer's done well, and it reflects
Speaker 1: the fact that if you have a job, you're doing
Speaker 1: reasonably well. Certainly, we're an environment where there's not been
Speaker 1: a tremendous amount of job growth, but it's been positive enough,
Speaker 1: and income growth nominally has been strong enough to keep
Speaker 1: spending going.
Speaker 2: And as you know, the build out on AI.
Speaker 1: And the spending by the hyperscalers has been massive, and
Speaker 1: that's been a huge driver of growth. If you look
Speaker 1: at the contributions table in GDP, about a third of
Speaker 1: output in the last year has been AI related.
Speaker 2: And that's the direct effect.
Speaker 1: Of course, there's all these indirect effects through higher equity prices,
Speaker 1: well effects, things of that sort.
Speaker 3: Yeah, I'm looking here. I just went log standard and
Speaker 3: poors five hundred. I'm doing this for President Trump. I'm
Speaker 3: doing the you know, the huge boom coming out of
Speaker 3: COVID for whatever reason, stimulus, whatever, whichever president. I got
Speaker 3: a correction out point eight standard divitions up in a
Speaker 3: way of negative twenty one percent. I got a correction
Speaker 3: of negative twenty seven percent before the Edgyard Denny call
Speaker 3: with Alfra A Kompora.
Speaker 4: I'm only out one point.
Speaker 3: Three standard deviations in this crazy boom economy. I mean,
Speaker 3: we really haven't had a bear market of substance that stay.
Speaker 4: We go down and we come right back. That's our
Speaker 4: new addiction.
Speaker 1: Yes, yes, here's the thing though, Tom, this is the
Speaker 1: hard part is if you look at the earnings revisions
Speaker 1: or the innings beats in the first quarter, it looks
Speaker 1: like a right angle. So I mean again the question
Speaker 1: is how sustainable is it. It's probably not long term sustainable.
Speaker 1: I like what Paul Tudor Jones had said I talked about,
Speaker 1: you know, you sort of have to kind of be
Speaker 1: in it. Even though it looks a bit frothy, they
Speaker 1: still have some room to run. Of course, he's a
Speaker 1: phenomenal investor and been able to time things. But yeah,
Speaker 1: I mean this could go another six months, you could
Speaker 1: go another several years if we just don't know.
Speaker 5: How do you think about the other part for the
Speaker 5: FED is the labor market. Again, it seems like it
Speaker 5: is a no higher, no fire kind of That's fine.
Speaker 2: It seems that way.
Speaker 1: Labor market does seem to be strengthening a little bit
Speaker 1: relative to where we were last year. It is still
Speaker 1: more or less no higher, no fire. I mean, take
Speaker 1: healthcare out. You don't have a whole lot of job
Speaker 1: growth for the FED to cut rates, though, just because
Speaker 1: that was the dominant narrative for quite some time. There
Speaker 1: us to be labor market deterioration, which means unemployment rate
Speaker 1: is kind of gapping higher. It's been a very slow,
Speaker 1: kind of monotonic rise in the unemployment rate. If it
Speaker 1: starts to go up, if it's four to three, and
Speaker 1: if it goes next month to four to five, and
Speaker 1: then four eight and then five to one, they'll actually
Speaker 1: probably be cutting I don't see that, but that's that's
Speaker 1: what it would take.
Speaker 2: It take real deterioration.
Speaker 3: Care. Do you have Knicks tickets?
Speaker 2: No, I don't.
Speaker 1: My kids actually are are Pistons fans, so there you go,
Speaker 1: which I was actually happy they sort of lost so
Speaker 1: I don't have to take them to a Knicks game,
Speaker 1: because because then my wife would want to go, and
Speaker 1: it's you know, it's absorbitive. It's a small fortune for
Speaker 1: a family of four.
Speaker 3: Yes, there you go. He's bar able to do the
Speaker 3: deuce now that we able to Detroit. He's okay with
Speaker 3: doing this now that he knows there's two other Knicks fans,
Speaker 3: Pistons fans in there. Joseph Flavornia, father of Pistons fans,
Speaker 3: Thank you so much, that said me.
Speaker 4: Se