Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. Steve Shumaron is
Speaker 1: taking notes. Had a Multi Assis Solutions Federated MS right now, Steve,
Speaker 1: what have you changed here? I mean the dynamics now,
Speaker 1: the new genus we have this panel today, but really
Speaker 1: the economic data tomorrow, how is Federated tweaked the sixty
Speaker 1: allocation significantly. Um. You know, we've been sellers really since
Speaker 1: last September UM, and we took the opportunity with last
Speaker 1: week's rally, you know, growth and popped about ten percent
Speaker 1: and we reduced. We reduced so we're one percent overweight equities,
Speaker 1: which is you know equities right now, which is the
Speaker 1: lowest overweight time that we've had really since two thousand
Speaker 1: and eight, two thousand nine. As you know, along with
Speaker 1: Steve Off in phil Orlando, we've been one of the
Speaker 1: most bullish shops on the street really for the last
Speaker 1: decade plus UM. But we're as as low in our
Speaker 1: allocation equities as we've been, and we mirror that on
Speaker 1: the fixed income side. We are underweight almost every major
Speaker 1: category of credit, in fact, not almost every major category
Speaker 1: of credit, and that's really only the third time in
Speaker 1: the last fifteen years. Help our radio and TV audiences
Speaker 1: that are saying, okay, underweight, translate that does that mean
Speaker 1: go to cash? It does um to a certain extent.
Speaker 1: So we've been you know, our neutral allocation to cash
Speaker 1: and at sixty is roughly three. You know, we're sitting
Speaker 1: at eight, which is you know, darnier. Three times are
Speaker 1: a normal cash weight, so almost a triple levered cash
Speaker 1: on the full. But I think, you know, there's gonna
Speaker 1: be a time to buy longer dated treasuries as as
Speaker 1: the recession, which we think is more and more likely,
Speaker 1: comes into view. The problem is, I think the rally
Speaker 1: of the last couple of weeks and treasuries is still premature.
Speaker 1: I still think you're gonna have upside surprises to inflation
Speaker 1: of FED that's hawkish in a ten year that ultimately
Speaker 1: moves back to that three and a half percent rate.
Speaker 1: So we would look to add on treasuries as we move,
Speaker 1: as we saw a more because I think you're gonna
Speaker 1: want those longer dated treasuries when you get into kind
Speaker 1: of worse growth periods. But right now we think cash
Speaker 1: is king. Steve, let's take a step back and understand
Speaker 1: the framing of your parishness and put on your federal
Speaker 1: reserve suggish hat in terms of commentating, So if you
Speaker 1: said before you came on that you think that they're
Speaker 1: in the midst of the biggest policy air going back
Speaker 1: to the nineteen thirties, what exactly is their policy are? Yeah?
Speaker 1: I mean, and to Tom's point, I think it's very
Speaker 1: understandable how they got there, But I don't think this
Speaker 1: is malfeasance. But when when you woke up in March
Speaker 1: and interest rates for zero inflation was eight percent and
Speaker 1: the you know hood was still buying bonds, I don't
Speaker 1: care how you got there. That's policy here, um, and
Speaker 1: that has now forced them into a position right now
Speaker 1: where you know, they're hiking aggressively and they need to
Speaker 1: into a slowing economy. And I think what they missed,
Speaker 1: and Tom you might find this interesting, what they missed
Speaker 1: is a longer term structural change in the economy. We
Speaker 1: were in this kind of new normal, sub two percent growth,
Speaker 1: sub two percent inflation, sub two percent rate environment for
Speaker 1: a decade, new normal, if you will. And just in time,
Speaker 1: inventories are no longer just good enough, so companies are
Speaker 1: reorienting their uh their supply chains. Chinese working age population
Speaker 1: is set to decline over the next twenty years, and
Speaker 1: the US population growth is set to go from two
Speaker 1: percent growth to eight percent growth over that same period.
Speaker 1: And so and at the same time, you've you've undermined
Speaker 1: the three pillars at least for the short run of globalization.
Speaker 1: The free movement of goods really kind of peaked with
Speaker 1: the trade war, the free movement of people peaked with COVID,
Speaker 1: and the free movement of finance may have peaked with
Speaker 1: this with this kind of economic war with Russian So
Speaker 1: I think you're headed to a scenario at the other
Speaker 1: side of a recession where you have hired US growth,
Speaker 1: but it's less efficient. You're gonna get more inflation per
Speaker 1: unit of growth. That's a different world. Steve. This a
Speaker 1: lot of people would agree on, at least in the
Speaker 1: short term, but in terms of what happens next is
Speaker 1: the question and there was a belief in the market
Speaker 1: perhaps last week that the Fed would ease off on
Speaker 1: rate heikes when they saw dampening in some of the
Speaker 1: growth expectations and frankly, uh the underlying economy. We just
Speaker 1: heard from Laurid Domester of the Cleveland Federal Reserve. She
Speaker 1: doesn't see that happening, and she still sees a FED
Speaker 1: funds rate well over four percent when it comes to
Speaker 1: next year. Do you think the market is miss pricing that?
Speaker 1: Do you think that the turmoil that will ensue from
Speaker 1: that will confirm your parishness and the reason why you're
Speaker 1: not ready to go full throttle into longer duration yet. Yeah,
Speaker 1: I think the market has kind of contorted itself and
Speaker 1: had complacency multiple times over the course of the last
Speaker 1: next months where it's looking for peak inflation and peak hawkishness,
Speaker 1: which you know, and I know you guys were talking
Speaker 1: about this yesterday, But if infletion goes from eight to seven,
Speaker 1: that's not a victory lap. You really need to get
Speaker 1: that number, you know, down, even if it's not quite
Speaker 1: to two, certainly you know, pretty darn close to it.
Speaker 1: And so I think defense still has a lot of
Speaker 1: work to do in order to do that, because you've
Speaker 1: got service price inflation that's operating around eight nine on
Speaker 1: a three month basis and wages are high. For that
Speaker 1: to come down, unemployment needs to rise, and I think
Speaker 1: they're gonna have to go for some time. UM. And
Speaker 1: if they do slow, Tom, I think they're slowing because
Speaker 1: it's abundantly clear that we've got, you know, a significant
Speaker 1: decline in growth, if not an outright procession. How fast
Speaker 1: does the employment dynamic changed? Your own pulse said we
Speaker 1: have a strong economy in this testimony two cups of
Speaker 1: coffee ago. We've done a lot of work on this
Speaker 1: as part of our recession dashboard, and you can go
Speaker 1: effective on average. It's a series of indicators that we
Speaker 1: look at that I mean, there's no perfect formula to
Speaker 1: understand when a recession is coming, but there's guide trades
Speaker 1: that you can look at. You try to understand UM
Speaker 1: on average, you can go from the cycle low and
Speaker 1: claims to a recession within twelve months. We hit a
Speaker 1: cycle lowan claims three months ago. So there's no historic
Speaker 1: relationship between how strong the labor market is coming in
Speaker 1: in terms of how fast they can deteriorate. UM and
Speaker 1: so it's a fickle It's a fickle friend to rely
Speaker 1: solely on a strong labor, of course, and we may
Speaker 1: find that the excess inventory that we have this cycle
Speaker 1: was employment in certain sectors. And I think we've seen
Speaker 1: some of the tech guys already say we over hired,
Speaker 1: whether that's Amazon or or or Meta or some of
Speaker 1: the other folks that have said that. So I think, look,
Speaker 1: this idea that you're going to get through this by
Speaker 1: only making job openings this appear that's a comforting thought,
Speaker 1: but I think it's ultimately going to prove to be
Speaker 1: really optimistic. Steve. I just want to wake out something
Speaker 1: you said earlier in the interview. If people aren't familiar
Speaker 1: with your work, to hear this from you from Steve
Speaker 1: Orth from Phil Orlando, it's quite something. You know, forgive
Speaker 1: the snark, but it's like Marko Klanovitch a JP Morgan
Speaker 1: coming out this morning and going Max Bearish, you used
Speaker 1: to make fun of me for my snark around that. Stay,
Speaker 1: thank you. Stay Chevaron Federate. By way into the General
Speaker 1: Mills piece there the nine year piece. Back then it
Speaker 1: was a ten year piece at a one oh two.
Speaker 1: I'm enjoying it this morning at one and studied you'll
Speaker 1: got it right greatly. Jones here, so I can yell
Speaker 1: at her because she told me to get spawns there.
Speaker 1: She fixed income strategist at Charles Schwab, Cathy, that's the reality,
Speaker 1: not a bunch of bonds strategists talking about spreads and
Speaker 1: credit quality. People listening and watching bought a piece at
Speaker 1: par and they're enjoying it a one or eighty two
Speaker 1: like the General Mills two and a quarter of thirty one.
Speaker 1: What do you do if you own that bond, Well,
Speaker 1: you have two choices. Tom One is you hold it
Speaker 1: to maturity and it goes back to part because that's
Speaker 1: what bonds do unless there's a default, or you sell it. Now,
Speaker 1: take your tax loss and replace it with a higher
Speaker 1: yielding box, Kathy, When does the concern start to creep
Speaker 1: in that we're not seeing issueans really pick up? And
Speaker 1: then a lot of companies can choose not to now,
Speaker 1: but maybe in six months and certainly in twelve months,
Speaker 1: it'll be less of an option. Yeah, you know, I
Speaker 1: think right now, corporate balance sheets are still among the
Speaker 1: investment grade community is still pretty strong, and they don't
Speaker 1: they did load up on debt at lower yields UM.
Speaker 1: So they're in pretty good shape, but we'll probably see
Speaker 1: issuance pick up. There's always going to be a window
Speaker 1: uh oh been um. You know later on in the year,
Speaker 1: as we get into next year, that will have to
Speaker 1: be some refinancing that takes place. I think a lot
Speaker 1: of the issuance now is just waiting for yields to
Speaker 1: come back down. Do you think that they will? I mean,
Speaker 1: that's the issue. If they don't come back down, they're
Speaker 1: looking at financing costs that are double what they were
Speaker 1: potentially just a couple of years ago. How much does
Speaker 1: the need for it to come down really determine the
Speaker 1: next to fault cycle? Well, I think when you're talking
Speaker 1: about high yield are certainly bank loans UM. Then you
Speaker 1: have a problem with short rates moving up, particularly in
Speaker 1: the bank loan sector, because they adjust the durations very short,
Speaker 1: they adjust very rapidly, and for those companies which are
Speaker 1: basically junk companies UM, their cost of financing is going
Speaker 1: to jump, and that there's one reason we're not big
Speaker 1: fans of bank loans right now. I think it will
Speaker 1: also hit the low end of the high yield market,
Speaker 1: because you know, spreads have moved up a bit here,
Speaker 1: but they're probably gonna move up some more. We think
Speaker 1: there's a high risk of recession, particularly of the goes
Speaker 1: really hard and fast the way they're talking about, and
Speaker 1: that's not going to be good for the hyold market.
Speaker 1: What is the unexpected if the Fed moves seeps in
Speaker 1: July or onward. Well, I think it does translate into
Speaker 1: the FX market. Obviously, if the Fed goes, that's built
Speaker 1: into the market, and I think a fair amount of
Speaker 1: tightening is built into the market. If the Loretto Master
Speaker 1: gets her four percent next year, then I think that
Speaker 1: we're seeing an inverted yield curve. All else being equal,
Speaker 1: would be very difficult with the economic indicators rolling over
Speaker 1: to see yields move up from there, I think you've
Speaker 1: seen inverted curve, and that translates when we look at
Speaker 1: say the Japanese bond market and where the yen is
Speaker 1: and what's happening in Europe. That's going to translate into
Speaker 1: a pretty stiff global tightening cycle and that's when things break. Kathy,
Speaker 1: thank you, you wanted the best. I love hearing from you.
Speaker 1: Kathy Jones there to us. Thank you joint to get
Speaker 1: snabas founder and CEOM of ex Sante Data. You're let's
Speaker 1: start here, President a Guard, Chairman Pal, Governor Baudi. What's
Speaker 1: your number one question? Going into that a little bit
Speaker 1: later this morning, I would say what matters more growth
Speaker 1: or inflation? Right? We had a totally different cycle than
Speaker 1: we've seen for the last forty years, right, that even
Speaker 1: if we have recession fears, the central banks are a
Speaker 1: very very tricky spot, right because inflation is way above
Speaker 1: target and they can really focus on growth as much
Speaker 1: as they've done in the past. And I think if
Speaker 1: you look at what's going on in the market, right,
Speaker 1: we've we've clearly had the recession focused over the last
Speaker 1: couple of weeks, right. And nevertheless, BONDI bond deals are
Speaker 1: close to the highs. Right. It used to be the
Speaker 1: case the lesson for the last four years was as
Speaker 1: soon as there was any weakening in growth, you just
Speaker 1: had to close your eyes and by bonds. And this
Speaker 1: cycle is totally different, right, because it is an inflation
Speaker 1: cycle as opposed to just still growth cycle. I look
Speaker 1: yand it's the path of inflation. And this will be
Speaker 1: my question today to these bankers and it's a really
Speaker 1: a steam panel to say at least folks, so I
Speaker 1: really pay attention to that. YenS to me, inflation is
Speaker 1: by part and then there's an easy path down. Core
Speaker 1: comes down, and then it gets way way more difficult.
Speaker 1: Where do you perceive the level of inflation where it
Speaker 1: really becomes heavy lifting for these central bankers. Yes, I
Speaker 1: think we probably have a period where goods prices and
Speaker 1: commodity prices are gonna come down over the next year,
Speaker 1: and that really hasn't not much to do with central
Speaker 1: bank policy, right. And then the question is if the
Speaker 1: wages and the services prices stay elevated so that a
Speaker 1: drop in in those other prices don't really get the
Speaker 1: overall inflation numbers down that much, then the central banks
Speaker 1: are gonna do the heavy heavy lifting and really get tight.
Speaker 1: Don't forget we're talking about the FED having overdone it.
Speaker 1: How many months have they actually been hiking? A couple
Speaker 1: of months? We're a couple of months in here, right
Speaker 1: and uh and and that's the discussion already, right. So
Speaker 1: the real tricky bit will be if they have to
Speaker 1: go to free and then considering going to five, that's
Speaker 1: when then the pain on the economy will be well,
Speaker 1: be severe right. Right now, we're really discussing about getting
Speaker 1: to neutralish a little bit above but not really tight.
Speaker 1: It's not a volcal cycle yet, right, but that would
Speaker 1: come into play if the weights keep going, if the
Speaker 1: services prices keep going, even beyond the point where the
Speaker 1: supply issues has been fixed. Yeah, it's just real quickly
Speaker 1: here to your point. Lauramester this morning in CenTra said,
Speaker 1: the FED is just at the beginning of raising rates,
Speaker 1: and these rates going to three and a half percent
Speaker 1: by the end of this year and a little above
Speaker 1: four percent next year. Has the market adequately priced at it, No, So,
Speaker 1: so we were at the moment especially Yeah, last week
Speaker 1: we got to an extreme point where the market is
Speaker 1: actually pricing significant cuts in two thousand and twenty three, right,
Speaker 1: so essentially priced that we're gonna have a nine month
Speaker 1: tightening cycle and then we're gonna start cutting, right. So
Speaker 1: obviously the hikes are up prices bigger than its normal
Speaker 1: for a cycle, right because we're talking about fifty and
Speaker 1: seventy based upon steps. But nevertheless, we were pricing hiking
Speaker 1: cycle that was going to be essentially a year and
Speaker 1: then the cuts were going to start that I think
Speaker 1: is what's very questionable. Um, I think we're gonna have
Speaker 1: a situation where the services prices are going to be
Speaker 1: sticky and it's going to be very very hard for
Speaker 1: the FED to to switch to cutting mode. It might
Speaker 1: be the case that we're not gonna be talk about
Speaker 1: seventy five basis points forever. Maybe we're gonna go to
Speaker 1: a more slow pace of up tightening. Maybe we're gonna
Speaker 1: plateau at a high level of rights. But this notion
Speaker 1: that the FED is gonna flip from super hawkers to
Speaker 1: getting ready to cut within a year, that I think
Speaker 1: is too early. And I think we're gonna push that
Speaker 1: out and and that's not priced yet, Ian Tilson, to
Speaker 1: get your view on things, and so why it's a
Speaker 1: bit of reality check from human Extant tainst norfic that
Speaker 1: Greg Villier with us on the elections on what we learned,
Speaker 1: and I guess it was, no, it's not the first
Speaker 1: Tuesday of June. We're late in June, and he was,
Speaker 1: we had an election with some results, Greg, I want
Speaker 1: to go to what the Democrats need to do to
Speaker 1: not focus inside the Beltway and have a Democratic Party
Speaker 1: strategy across this nation. Kate Zernk in The New York
Speaker 1: Times destroyed the Democrats this weekend, saying they've simply failed
Speaker 1: to go across the nation an organization. Yeah, you would
Speaker 1: think they'd be doing a lot better time on so
Speaker 1: many issues. I think that there is a need for
Speaker 1: something more unified. Maybe the abortion issue will finally get
Speaker 1: the party together. It's given them a catalyst. But you
Speaker 1: and she and her piece are right. It's there's a
Speaker 1: lack of unity and strategy. A single sentence in your
Speaker 1: note this morning on the governor of California. What does
Speaker 1: good Mr Newsom need to do well? I think he's running.
Speaker 1: He's starting to run some ads. I think he's making
Speaker 1: noise like he may run. You know, everybody's frozen in
Speaker 1: place right now because of Joe Biden. If if Biden
Speaker 1: announces he's going to seek a second term, which I doubt,
Speaker 1: but if he does, that changes everything. If he doesn't,
Speaker 1: I think Newsome runs, and believe it or not, don't
Speaker 1: shoot the messenger here. I think Hillary Clinton may give
Speaker 1: thought to one last run. Wait what say that one
Speaker 1: more time? Greg? Yes, I can't let that. Yeah, I
Speaker 1: mean I do. There's been a lot of speculation in
Speaker 1: the last few days that if Biden doesn't run and
Speaker 1: the Democrats don't have any clear favorite, that she might
Speaker 1: hop into the RACI seventy four that makes her, you know,
Speaker 1: fairly young by today's standards, But I do I don't
Speaker 1: rule out one last run by her if Biden doesn't run. Well,
Speaker 1: there's a lot to go on that particular line of
Speaker 1: questioning Greg But I do want to go back to
Speaker 1: the task at hand for all legislators right now, which
Speaker 1: is trying to deal with inflation, which is the primary
Speaker 1: concern for a lot of investors, and social issues creeping
Speaker 1: up in terms of priorities for some voters. But is
Speaker 1: there any chance that this Congress could really take action
Speaker 1: in a material way from a legislative stance in terms
Speaker 1: of financing different kinds of programs or offsetting some of
Speaker 1: the inflationary pressures given the lack of unity, and given
Speaker 1: the polarization that you're just talking about, Logically, you would
Speaker 1: think the answer would be yes, they will. But logic
Speaker 1: does not dominate Washington. And I think that while there's
Speaker 1: a lot of talk about terrorists, a lot of talk
Speaker 1: about other programs that might help a little at the
Speaker 1: margin on inflation. I don't see it. I think I frankly,
Speaker 1: I think Ukraine is more important. And as long as
Speaker 1: this war continues, that we're gonna have high energy prices
Speaker 1: at high food prices. I think that's the bigger factor.
Speaker 1: So Greg, if that does spur some sort of recession,
Speaker 1: where is the fiscal impulse to respond, typically doing the
Speaker 1: exact wrong thing at the exact wrong time, You're going
Speaker 1: to see Congress now get very frugal, not a lot
Speaker 1: of spending Republicans will take the house. They're not. They
Speaker 1: don't want to spend a lot of money. So just
Speaker 1: when you have monetary policy tightening, you're going to see
Speaker 1: fiscal policy tightening as well. Gregg frame it for me.
Speaker 1: A Sunday evening the end of March, Lyndon Baines Johnson,
Speaker 1: overwhelmed by Vietnam, among others, said I not gonna run again.
Speaker 1: I was sitting on the couch, remember clear as a
Speaker 1: belle a nation stunt. What is Biden waiting for or
Speaker 1: does he have to wait for March of two thousand
Speaker 1: twenty four. Well, the March that you refer to with
Speaker 1: LBJ occurs on November eight here in the US. That's
Speaker 1: the election, and if the House flips, which I still
Speaker 1: think is likely. Said it is a tougher call now
Speaker 1: because of abortion, but you know that could slip as well.
Speaker 1: I think that would be the catalyst to push Biden out.
Speaker 1: It's not just his age, it's his polling numbers and
Speaker 1: the elections on November eight, Greg, we've got to talk
Speaker 1: about the other ticket, just briefly. That testament yesterday. I
Speaker 1: wouldn't you a view on this. Does that change the
Speaker 1: support that the former president gets and does that open
Speaker 1: the door a little bit wider for the governor from Florida.
Speaker 1: John June of the year two will be remembered as
Speaker 1: the month that pretty much finished off Donald Trump. It's
Speaker 1: it's not just that he may get indicted. It's not
Speaker 1: just that he has lost some altitude in the party.
Speaker 1: It's the near fact that more and more of his
Speaker 1: own supporters are telling poll takers that one terms enough,
Speaker 1: we really are not excited about him running again. And
Speaker 1: that's his own supporters who are now starting to say
Speaker 1: that that's the one to watch for show. Greg. Thank you,
Speaker 1: Jeff Investments. This is the Bloomberg Surveillance Podcast. Thanks for listening.
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Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg