WEBVTT - Surveillance: Economic Malaise with Harvey 0:00:00.120 --> 0:00:03.800 If you enjoy the Bloomberg Surveillance podcast, check out our 0:00:03.880 --> 0:00:08.959 new daily news program, the Bloomberg Daybreak Podcast. It gives 0:00:09.039 --> 0:00:12.840 you the day's top stories with context in just fifteen minutes. 0:00:13.240 --> 0:00:16.000 Look for it in your podcast feed by six am 0:00:16.160 --> 0:00:20.280 Eastern every morning. Subscribe on Apple, Spotify and anywhere else 0:00:20.400 --> 0:00:23.799 you get your podcasts, and stay tuned for a sample 0:00:23.880 --> 0:00:27.400 of today's edition of Bloomberg Daybreak at the very end 0:00:27.600 --> 0:00:36.040 of this podcast. This is the Bloomberg Surveillance Podcast. I'm 0:00:36.080 --> 0:00:40.120 Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join 0:00:40.240 --> 0:00:44.400 us each day for insight from the best and economics, geopolitics, 0:00:44.400 --> 0:00:45.520 finance and investment. 0:00:45.920 --> 0:00:48.440 Subscribe to Bloomberg Surveillance. 0:00:47.880 --> 0:00:53.000 On demand on Apple, Spotify and anywhere you get your podcasts, 0:00:53.040 --> 0:00:56.920 and always on Bloomberg dot Com, the Bloomberg Terminal, and 0:00:56.960 --> 0:00:58.440 the Bloomberg Business App. 0:00:58.560 --> 0:01:01.360 July fourteenth, That is Why, and Jacob Mordon kicks off 0:01:01.360 --> 0:01:04.040 the earning season Apple and the Likes later in the 0:01:04.040 --> 0:01:06.840 month of July twenty eighth will come out with some 0:01:06.920 --> 0:01:09.480 of those earnings. Your emphasis on that is an important one. 0:01:09.600 --> 0:01:11.600 Chris Harvey wasn't a KEM major, but he was a 0:01:11.680 --> 0:01:14.240 bucknell which is like the Buckneil bubble. All you do 0:01:14.280 --> 0:01:16.800 is study financiers here because the winters are so cold. 0:01:17.080 --> 0:01:20.520 He joins US now Equity Strategy at Wells Fargo. Your note, 0:01:20.640 --> 0:01:27.200 Chris is absolutely brilliant about thinking back to nineteen ninety eight, 0:01:27.319 --> 0:01:30.679 ninety nine into two thousand and two thousand and one 0:01:31.000 --> 0:01:34.679 tech the analog of looking back. What's the number one 0:01:34.720 --> 0:01:38.520 message in your study of this tech bubble versus that 0:01:38.680 --> 0:01:39.360 tech bubble? 0:01:39.600 --> 0:01:42.640 So the number one issue is tech is not going 0:01:42.680 --> 0:01:44.600 to roll over. The major theme is not going to 0:01:44.680 --> 0:01:47.600 roll over until you crack the economy. That's what happened 0:01:47.640 --> 0:01:50.440 back in ninety nine. That's like what's going to happen now. 0:01:50.600 --> 0:01:52.920 And I don't think you cracked the economy until the 0:01:52.960 --> 0:01:55.720 FED gets more aggressive, and so we'll have some wiggles. 0:01:55.720 --> 0:01:57.480 I think we'll have a pull back in the market, 0:01:57.640 --> 0:02:00.160 we'll have a pullback in big tech, but that for 0:02:00.240 --> 0:02:03.680 all theme is still in place, and not until the 0:02:03.720 --> 0:02:08.160 economy breaks do we really think about that trend breaking. 0:02:08.320 --> 0:02:12.160 Is tech in a set of individual companies you study 0:02:12.240 --> 0:02:14.800 at Wells Fargo or is it this a morphous sector 0:02:14.880 --> 0:02:18.840 blob up there like a nineteen fifty sci fi movie. 0:02:19.880 --> 0:02:23.160 We do study tech, we do study individual companies, but 0:02:23.360 --> 0:02:25.760 what we do is we focus in on a lot 0:02:26.120 --> 0:02:27.880 on the uber what we call the uber cap or 0:02:27.919 --> 0:02:30.320 the top fifty names. You can look at one or 0:02:30.320 --> 0:02:32.639 two names and that's great, but that doesn't give you 0:02:32.680 --> 0:02:34.720 a trend. And we look at the uber caps because 0:02:35.280 --> 0:02:38.160 as you go across capitalization, small cap, MidCap, large cap, 0:02:38.200 --> 0:02:40.600 they all have characteristics, and the uber caps are the 0:02:40.680 --> 0:02:43.799 ones that really have that AI exposure, that tech exposure. 0:02:44.040 --> 0:02:46.640 And again going back to nineteen ninety nine, that's one 0:02:46.639 --> 0:02:48.480 of the things that we did see. We saw that 0:02:48.639 --> 0:02:51.440 uber cap out performance, we saw that tech oup performance, 0:02:51.639 --> 0:02:54.160 and before all that, we saw the economy and the 0:02:54.160 --> 0:02:55.880 old economy stocks roll over. 0:02:56.200 --> 0:02:57.960 You said something I want to pick up on. You 0:02:58.000 --> 0:03:00.679 don't crack the economy until the FED gets more aggressive. 0:03:01.040 --> 0:03:03.160 Are you saying the FED hasn't gotten aggressive? 0:03:03.720 --> 0:03:06.320 They said the FED has gotten aggressive. But I think 0:03:06.360 --> 0:03:08.919 we can all agree that the economy is a lot 0:03:09.000 --> 0:03:12.280 less interestrate sensitive than we thought. The way we're characterizing 0:03:12.320 --> 0:03:15.200 the economy is an economic malaise. We did think we 0:03:15.200 --> 0:03:18.799 were going to We thought the probability of recession spiked 0:03:18.919 --> 0:03:20.960 with the banking crisis, but now we think that's come 0:03:21.000 --> 0:03:24.040 back down, and so we're really looking at an economic 0:03:24.080 --> 0:03:27.520 malaise more or less than a recession on the horizon. Right, 0:03:27.600 --> 0:03:30.480 the consumer is still okay, still has cash on the 0:03:30.480 --> 0:03:33.119 balance sheet, eating through their savings, but still has savings. 0:03:33.360 --> 0:03:36.640 Corporations still have plenty of savings. Balance sheets are much better, 0:03:36.920 --> 0:03:39.160 and so really you need some sort of shock to 0:03:39.240 --> 0:03:41.880 get us into a recession. We need a lot more time. 0:03:42.200 --> 0:03:44.320 This is taking a lot longer than we expect, and 0:03:44.360 --> 0:03:46.600 I think it will take a lot longer than we expect. 0:03:46.760 --> 0:03:49.480 Do you think that the amount that people are willing 0:03:49.520 --> 0:03:53.200 to pay for goods will come down, that there will 0:03:53.240 --> 0:03:56.400 start to be some consumer pushback at a time when 0:03:56.440 --> 0:03:58.720 we just heard FedEx. Yes, you're seeing volumes down, but 0:03:58.760 --> 0:04:01.720 there's still increasing prices more than expected. And that is 0:04:01.760 --> 0:04:04.080 a theme across a lot of different industries. 0:04:04.360 --> 0:04:06.720 So I may go off on a little bit of 0:04:06.720 --> 0:04:09.160 a tangent if I do, just pulling back in because I. 0:04:09.120 --> 0:04:12.200 Talk about don't worry, it'll lot care about it. 0:04:12.720 --> 0:04:14.760 So I talk about the consumer a lot. And if 0:04:14.760 --> 0:04:17.440 you think about the US consumer, the US consumer has 0:04:17.440 --> 0:04:19.400 been buying, and I'll exaggerate a little bit since he 0:04:19.480 --> 0:04:21.920 or she was five years old. Right, it's a very 0:04:21.960 --> 0:04:24.960 savvy consumer. We've been spending a lot of money. We 0:04:25.080 --> 0:04:27.840 know when there's utility. And what I'm seeing is the 0:04:27.880 --> 0:04:30.240 US consumer has been pulling back. They've been pulling back 0:04:30.279 --> 0:04:32.760 on goods. They're not finding a lot of utility there. 0:04:32.920 --> 0:04:35.479 If you look at at real retail sales, if you 0:04:35.520 --> 0:04:38.360 look at at retail sales in general, it's not as 0:04:38.400 --> 0:04:40.720 strong as you would have expected. You are seeing if 0:04:40.800 --> 0:04:43.200 you go to the walmarts and the targets, you are 0:04:43.240 --> 0:04:46.520 seeing a trade down. The US consumer's behavior has changed, 0:04:46.640 --> 0:04:48.279 and I think the US consumer is a lot more 0:04:48.320 --> 0:04:49.839 savvy than we give here or she. 0:04:49.920 --> 0:04:52.960 Credit for going forward? Then do you think we have 0:04:53.040 --> 0:04:57.480 seen this rolling recession in certain areas that offset something 0:04:57.520 --> 0:04:59.159 that's deeper than an economic blaze? 0:04:59.279 --> 0:05:00.920 Regardless of what FED does. 0:05:00.880 --> 0:05:03.359 They are cracking certain segments of the economy and others 0:05:03.360 --> 0:05:06.320 continue to chug along because of different advancements and less 0:05:06.360 --> 0:05:07.400 interest rate sensitivity. 0:05:08.360 --> 0:05:10.320 You really hit on a great point, and this is 0:05:10.320 --> 0:05:12.480 something we talk about in the office a lot. You 0:05:12.520 --> 0:05:15.080 can't paid to this economy with one brush, and you 0:05:15.200 --> 0:05:19.640 are seeing kind of a it's a very heterogeneous economy 0:05:19.920 --> 0:05:22.800 and market. You're seeing certain sectors that have already rolled 0:05:22.800 --> 0:05:25.719 over and are beginning to improve. You're seeing other sectors 0:05:25.760 --> 0:05:28.000 that are beginning to roll over for the first time 0:05:28.040 --> 0:05:30.159 in a while. And so one of the things that's 0:05:30.200 --> 0:05:32.640 causing this to be in economic delays is there's not 0:05:33.720 --> 0:05:34.839 it's not synchronous. 0:05:34.920 --> 0:05:35.200 Right. 0:05:35.440 --> 0:05:38.440 The economy is very very If you look at a 0:05:38.520 --> 0:05:41.919 housing market, the housing market, the new issue market or 0:05:41.920 --> 0:05:44.040 the new market is very strong, but the old one 0:05:44.120 --> 0:05:46.159 is three and thirty. I'm not going to leave my 0:05:46.200 --> 0:05:48.839 house because I have a thirty year mortgage at three percent. 0:05:49.279 --> 0:05:53.400 Very different. If you look at some of the construction spending, manufacturing, warehousing, 0:05:53.440 --> 0:05:56.120 it's through the roof, but other parts of housing and 0:05:56.160 --> 0:05:58.960 construction are begin to roll over. So again, I think 0:05:59.000 --> 0:06:00.920 you hit on a very important point. Is something that 0:06:01.480 --> 0:06:03.960 we really have been diving into and it's it's hard 0:06:04.000 --> 0:06:08.479 to kind of disentangle. But this economy is not it's 0:06:08.560 --> 0:06:11.840 not really synced up and you cannot paint it with 0:06:12.000 --> 0:06:14.200 one brush, which is why the economy has been a 0:06:14.200 --> 0:06:16.640 lot more durable than a lot of people have expected. 0:06:16.720 --> 0:06:18.440 And a huge seam of the program this lack of 0:06:18.480 --> 0:06:20.240 aggregation right now is tangible. 0:06:20.480 --> 0:06:21.840 I want to point out one thing you can do. 0:06:21.880 --> 0:06:23.960 This off the Bloomberg folks, the Bloomberg terminal and the 0:06:23.960 --> 0:06:28.320 description screen toes JP. Morgan is owned by institutional seventy 0:06:28.320 --> 0:06:32.159 five percent. Apple is owned sixty one percent. I know 0:06:32.200 --> 0:06:35.000 you don't want to talk individual securities here, but you 0:06:35.000 --> 0:06:37.400 know what was me, Big Tech to the Moon. We're 0:06:37.440 --> 0:06:40.239 all going to die, except can I make the statement 0:06:40.279 --> 0:06:42.440 big Tech is under owned by institutions? 0:06:42.600 --> 0:06:45.279 I would agree with that one hundred percent. And what 0:06:44.560 --> 0:06:47.120 I what I would say is we do a lot 0:06:47.120 --> 0:06:49.360 of positioning work, and in our position work, what we've 0:06:49.400 --> 0:06:53.400 seen for years is the Byside community is underweight tech, 0:06:53.760 --> 0:06:57.120 but it's mainly underweight Apple and Microsoft. We were talking 0:06:57.160 --> 0:07:00.840 about this in the office five years ago, kind of 0:07:00.880 --> 0:07:03.640 a flip title, but we entitled the Return of the Mac. 0:07:03.960 --> 0:07:06.520 And what we had seen back five years ago is 0:07:06.560 --> 0:07:10.800 a very big underweight, an exceptional underweight in Apple that's 0:07:10.880 --> 0:07:13.840 never closed. And what we're seeing is one of the 0:07:13.840 --> 0:07:15.920 things that that's giving us pause andive. I think one 0:07:15.960 --> 0:07:18.920 of the things that's pushing the market is this underweight 0:07:18.960 --> 0:07:21.680 in uber caps in Apple and Microsoft and a few 0:07:21.720 --> 0:07:23.440 of the others, so I would agree with you. What 0:07:23.760 --> 0:07:26.840 you're saying is the institutions are much much more underweight. 0:07:27.080 --> 0:07:29.800 Branda John from Italy emails in and he says, get 0:07:29.840 --> 0:07:32.640 a new SPX quote from Chris Harvey here forty two hundred? 0:07:32.640 --> 0:07:33.440 Can you lift it up? 0:07:33.560 --> 0:07:36.480 Come on, I gonna make some news. 0:07:37.080 --> 0:07:39.440 Here's what I say. So are you in target? But hey, 0:07:39.480 --> 0:07:41.560 no one's watching go so. 0:07:41.560 --> 0:07:44.119 Our forty two are your on price targets for two hundred? 0:07:44.240 --> 0:07:46.760 At the end of last year, we also had a 0:07:46.800 --> 0:07:49.920 soft landing target that was forty four hundred. Right, we 0:07:50.000 --> 0:07:53.560 cannot two targets. 0:07:54.040 --> 0:07:56.840 Do you have a Harkwark target? If we get a. 0:07:56.800 --> 0:08:03.600 Horkwarks, I can't give you forty five hundred. But this 0:08:03.640 --> 0:08:05.680 is why we go back to it's about the economy. 0:08:05.720 --> 0:08:09.280 Because I can make certain adjustments, I can change my estimates, 0:08:09.280 --> 0:08:11.440 but really do I have a lot of confidence in that? 0:08:11.720 --> 0:08:11.880 No? 0:08:12.200 --> 0:08:13.880 But what I have a lot of confidence in is 0:08:14.160 --> 0:08:16.560 it's really about the economy. The major trends is not 0:08:16.560 --> 0:08:18.080 gonna break until the economy breaks. 0:08:18.160 --> 0:08:20.120 Chris Harvey Wells Frio. 0:08:30.120 --> 0:08:33.640 Francis Donald is a manual Life global chief economist and 0:08:33.679 --> 0:08:37.040 strategist she's very good at rining blistering bullet points to 0:08:37.160 --> 0:08:39.440 cut to the chase. We're gonna cut to the chase, 0:08:39.920 --> 0:08:43.120 which is, we all know the US is way out 0:08:43.160 --> 0:08:46.440 front on inflation versus what we saw in United Kingdom 0:08:46.480 --> 0:08:49.920 today and even Europe Japan being the oddity as well. 0:08:50.480 --> 0:08:52.680 And you look at the non linearity here. You picked 0:08:52.679 --> 0:08:55.720 the point three percent. The answer is core inflation's coming down. 0:08:55.760 --> 0:08:58.200 There's a little bit of a vector in place. But 0:08:58.320 --> 0:09:00.439 you say the path to two percent, it's going to 0:09:00.480 --> 0:09:01.040 be brutal. 0:09:01.360 --> 0:09:03.800 Well, the path to three percent is probably going to 0:09:03.800 --> 0:09:05.880 be quite easy. We'll be there in the next couple 0:09:05.880 --> 0:09:08.200 of months, and then a lot of people will claim bakery. 0:09:08.640 --> 0:09:10.400 Yeah, for sure, and I don't see it. 0:09:10.520 --> 0:09:13.200 Well, a huge element of this is base effects that 0:09:13.240 --> 0:09:15.160 are coming through. That's just a big part of it. 0:09:16.240 --> 0:09:18.240 But you do point out something really critical, which is 0:09:18.280 --> 0:09:20.520 that if we talk in a year over year, inflation 0:09:20.679 --> 0:09:23.560 is healing. But for most Americans and in fact global 0:09:23.559 --> 0:09:26.719 citizens of the world, their price pressures are not coming down. 0:09:26.760 --> 0:09:30.720 They're still paying substantially more than they did several years 0:09:30.760 --> 0:09:33.200 ago and are still going to have that embedded view 0:09:33.200 --> 0:09:36.959 that prices are substantially higher. And that's why these central banks, 0:09:37.280 --> 0:09:40.040 the FED, the Banks Canada, the Reserve Bank of Australia, 0:09:40.080 --> 0:09:44.960 the BOE cannot cannot imply that rate cuts are coming. 0:09:45.080 --> 0:09:48.120 If they do that, we will see a reinflation of 0:09:48.120 --> 0:09:50.679 inflation or reinflation of inflation expectations. 0:09:50.800 --> 0:09:54.280 But they've basically said that, and you're still seeing a 0:09:54.360 --> 0:09:56.760 group of people say inflation is going to be hotter 0:09:56.800 --> 0:09:59.520 for longer. They don't have what it takes to actually 0:09:59.600 --> 0:10:03.120 come through with these expectations. So at this point, if 0:10:03.160 --> 0:10:06.160 they don't raise rates further, will they lose the battle 0:10:06.160 --> 0:10:06.680 with inflation? 0:10:07.120 --> 0:10:10.000 Well, no, because a big segment of inflation is not 0:10:10.080 --> 0:10:13.880 coming from interst rate sensitive sectors. Yes, some portion of 0:10:13.880 --> 0:10:16.200 it is. But we are in a new paradigm in 0:10:16.240 --> 0:10:18.680 which inflation is being driven I know, we've said it 0:10:18.720 --> 0:10:22.440 for years now, more by global morse by supply side factors. 0:10:22.679 --> 0:10:23.840 So as we move. 0:10:23.640 --> 0:10:25.760 Forward, and this is why you know this year is interesting, 0:10:25.800 --> 0:10:28.040 The July meeting is interesting, But what keeps me up 0:10:28.080 --> 0:10:30.760 at night is twenty twenty four and onwards, because we're 0:10:30.760 --> 0:10:33.400 heading into an environment where two to three percent inflation 0:10:33.480 --> 0:10:35.800 in our view, will become the norm and central banks 0:10:35.840 --> 0:10:37.839 are going to have to make a decision. Do they 0:10:37.880 --> 0:10:41.120 continue to launch us into recessions or lower growth in 0:10:41.200 --> 0:10:43.360 order to put us towards two percent, or do they 0:10:43.440 --> 0:10:46.240 admit that the nature of inflation is changing and two 0:10:46.320 --> 0:10:48.240 to three percent is more what we're going to be 0:10:48.240 --> 0:10:48.680 looking at. 0:10:48.760 --> 0:10:50.760 This is so important and there's a lot to unpack 0:10:50.800 --> 0:10:53.080 within this. If two to three percent becomes three to 0:10:53.120 --> 0:10:55.520 four percent, how do they make sure it stays within 0:10:55.559 --> 0:10:58.760 a certain range and keep their credibility? Are you saying 0:10:59.040 --> 0:11:01.079 that it would be a mistake for this Fed to 0:11:01.160 --> 0:11:03.120 reserve to go to five and a half or even 0:11:03.160 --> 0:11:06.040 six percent in terms of a FED funds rate in 0:11:06.120 --> 0:11:09.240 order to bring inflation down faster, because all they would 0:11:09.240 --> 0:11:12.480 do would be to torpedo the economic growth without necessarily 0:11:12.559 --> 0:11:13.600 changing that paradigm. 0:11:13.920 --> 0:11:16.320 What I'm saying is that it's a mistake to ask 0:11:16.400 --> 0:11:19.760 central banks to solve inflation all by themselves. That is 0:11:19.760 --> 0:11:22.079 the nature of inflation changes. We have to have some 0:11:22.080 --> 0:11:25.720 hard conversations about what we're asking global central bankers to do. Now, 0:11:25.800 --> 0:11:27.480 the FED has a little bit of an out because 0:11:27.480 --> 0:11:29.760 it has a dual mandate. It can look towards the 0:11:29.760 --> 0:11:31.880 employment side of the picture, which, by the way, they're 0:11:31.880 --> 0:11:33.360 going to have to change the metrics they look at 0:11:33.400 --> 0:11:34.240 in order to do that. 0:11:34.400 --> 0:11:35.079 There are other. 0:11:34.880 --> 0:11:38.559 Central banks that have single mandates that are only targeting inflation. 0:11:38.920 --> 0:11:40.960 Those central banks are going to have to say, what 0:11:41.200 --> 0:11:43.839 is the cost of two percent? Now that the nature 0:11:43.880 --> 0:11:45.079 of inflation is changing. 0:11:45.240 --> 0:11:51.200 If you see the disinflationary trajectory you're outlining assumed be 0:11:51.960 --> 0:11:55.920 serious disinflation, what does as a labor component non firm 0:11:56.000 --> 0:11:58.080 payrolls do I mean we have people that come on 0:11:58.600 --> 0:12:02.680 that suggests we could see abrupt decline in non farm payrolls. 0:12:02.679 --> 0:12:03.240 Do you buy it? 0:12:04.040 --> 0:12:06.240 Here's the issue with the employment data. Now, in the 0:12:06.280 --> 0:12:08.200 past we would look at non farm payrolls as a 0:12:08.200 --> 0:12:10.520 good indicator. We look at the unemployment rate, which of 0:12:10.559 --> 0:12:14.520 course is what the federals. I am looking at weekly 0:12:14.800 --> 0:12:18.040 hours worked, among other indicators. And the reason for that 0:12:18.160 --> 0:12:19.960 is we have companies that have been very clear they 0:12:20.000 --> 0:12:23.120 are still scarred by the labor shortages that have persisted 0:12:23.160 --> 0:12:25.960 over the past several years. They will attempt to cut costs, 0:12:26.120 --> 0:12:28.760 likely in ways that are not laying people off. But 0:12:28.800 --> 0:12:30.800 what we're likely to see is you stay employed, you 0:12:30.800 --> 0:12:33.040 get to check that box. But the amount of hours 0:12:33.080 --> 0:12:36.040 that you're asked to work decline. Now, weekly hours is 0:12:36.080 --> 0:12:38.400 already back to pre COVID levels. And yet I hear 0:12:38.440 --> 0:12:40.559 all the time, but the labor market's on fire. Well 0:12:40.600 --> 0:12:42.760 not if you look at the actual amount of labor 0:12:42.800 --> 0:12:46.360 being consumed in this environment. The unemployment rate is still 0:12:46.400 --> 0:12:49.560 going to be probably rising very slowly. We don't actually 0:12:49.600 --> 0:12:52.439 have it going above five percent even in a recession. 0:12:52.720 --> 0:12:55.600 But the amount of labor consumed is going to be lower. 0:12:55.640 --> 0:12:57.200 This is why our metrics have to broaden. 0:12:57.400 --> 0:13:02.160 Lisa mentioned earlier something we've talked about in surveillance for quarters. 0:13:02.200 --> 0:13:05.240 I would say, now, which is a solution as patients 0:13:05.240 --> 0:13:07.960 and expansion of the X axis where they stay higher 0:13:07.960 --> 0:13:08.600 for longer. 0:13:08.960 --> 0:13:10.160 To me, that's just it's a. 0:13:10.120 --> 0:13:13.480 More efficacious move than to worry about twenty five to 0:13:13.520 --> 0:13:14.600 fifty beeps up down. 0:13:14.640 --> 0:13:15.200 Do you buy that? 0:13:15.280 --> 0:13:18.080 Absolutely well? The solution to most things is patients, Tom 0:13:18.120 --> 0:13:20.160 and Lisa, I agree with you on that one. So 0:13:20.200 --> 0:13:23.000 when we discuss our forecasts, yes we have penciled in 0:13:23.040 --> 0:13:25.319 one more rate hike for July, but what we spend 0:13:25.400 --> 0:13:27.560 much more time thinking about is the response to the 0:13:27.600 --> 0:13:29.920 next recession. And at this point, what we're looking at 0:13:29.920 --> 0:13:32.800 in twenty twenty four is yes, the central banks do cut, 0:13:32.840 --> 0:13:35.480 the Federal Reserve does cut, but only towards what they 0:13:35.600 --> 0:13:38.839 view as neutral, that they don't actually go into easing territory. 0:13:39.000 --> 0:13:41.680 They stay restrictive, And of course that brings a question 0:13:41.720 --> 0:13:43.480 that I know you love to ask on this, what 0:13:43.720 --> 0:13:46.080 the heck is neutral? That we don't know for sure? 0:13:46.400 --> 0:13:49.280 When you talk about the resilience in the face of 0:13:49.320 --> 0:13:51.720 the rate hikes and the lack of interest rate sensitivity 0:13:51.720 --> 0:13:54.280 in certain areas, what do you make of the fact 0:13:54.440 --> 0:13:56.959 that markets have continued to rally, that we've erased all 0:13:56.960 --> 0:13:59.480 of the losses incurred since the beginning of the raid hikes, 0:14:00.040 --> 0:14:02.120 and that we've seen to your yields rise by one 0:14:02.200 --> 0:14:04.920 hundred basis points in the past month and a half. 0:14:05.240 --> 0:14:07.720 I think you use the word reckoning earlier, which is 0:14:07.760 --> 0:14:10.960 I think an important moment. We have historically, for my 0:14:11.160 --> 0:14:14.319 entire career, believed that as you face a recession, central 0:14:14.360 --> 0:14:17.760 banks respond, and indeed, you know, my job on the byside, 0:14:17.800 --> 0:14:20.040 working for an asset manager is to input our forecast 0:14:20.080 --> 0:14:21.880 to see what different asset classes are going to do 0:14:22.200 --> 0:14:24.040 in a recession. We start saying Okay, there's going to 0:14:24.080 --> 0:14:27.360 be an opportunity for equities for fixed income throughout this. 0:14:27.680 --> 0:14:31.040 But when we start modeling recessions without material rate cuts 0:14:31.160 --> 0:14:33.320 or with less rate cuts, then we actually see a 0:14:33.400 --> 0:14:36.440 very different asset class return. It is not a standard 0:14:36.440 --> 0:14:39.040 recession playbook. So what I think is happening now is 0:14:39.040 --> 0:14:41.920 a market that's coming to that realization that recession or 0:14:42.240 --> 0:14:45.120 bank failures does not equal rate cuts. This is a 0:14:45.160 --> 0:14:47.000 paradigm change from how we've looked at things. 0:14:47.000 --> 0:14:49.480 So why is there such a resilience right if that's 0:14:49.520 --> 0:14:52.080 not going to be rate cuts to the rescue? Is 0:14:52.120 --> 0:14:55.040 that reckoning going to be lower or is it going 0:14:55.080 --> 0:14:57.840 to be that Maybe this economy just isn't interest rate 0:14:57.920 --> 0:14:59.560 sensitive in the way many people expect it. 0:14:59.600 --> 0:15:01.400 There is an element of that, and there's certainly no 0:15:01.440 --> 0:15:02.800 shortage of soft landing. 0:15:02.920 --> 0:15:03.080 Now. 0:15:03.080 --> 0:15:04.720 The issue I have with that and why I think 0:15:04.760 --> 0:15:07.480 there's a disconnect right now between equities which are being 0:15:07.560 --> 0:15:09.840 distorted by the AI story. There's no question about that, 0:15:09.880 --> 0:15:13.280 and fundamentals is that every single leading indicator of a 0:15:13.320 --> 0:15:17.640 recession is flashing red. Deeply read Lisa like flashing red. 0:15:17.800 --> 0:15:19.440 So even if I say to my team, okay, I 0:15:19.440 --> 0:15:22.400 want you to have cut in half those indicators. Is 0:15:22.400 --> 0:15:25.080 it still a recession? The answer is yes. So if 0:15:25.080 --> 0:15:26.960 you want to make the point that it's a soft landing, 0:15:27.040 --> 0:15:29.840 you have to discredit the bulk of indicators that have 0:15:30.040 --> 0:15:31.320 traditionally told us a recession. 0:15:31.320 --> 0:15:32.080 And you can do that. 0:15:32.240 --> 0:15:34.120 And there are some strategists that have made very good 0:15:34.120 --> 0:15:37.120 points about excess savings and labor shortages, but I'm not 0:15:37.200 --> 0:15:39.720 quite there yet. So a recession ahead means there's a 0:15:39.760 --> 0:15:43.119 disconnect between prices and fundamentals. That's when we make money, Lisa. 0:15:42.960 --> 0:15:47.520 Thirty seconds quick. Is a stock market disassociated from your 0:15:47.560 --> 0:15:49.000 cautious economic. 0:15:48.720 --> 0:15:51.600 View, Yes, but that's okay. We have tactical time frames, 0:15:51.640 --> 0:15:54.320 medium time frames. Macro is not everything all of the 0:15:54.360 --> 0:15:57.360 time as much time. As much as I would like 0:15:57.680 --> 0:15:59.840 macro to be the driver, sometimes you have to trade 0:15:59.840 --> 0:16:03.840 off momentum, technicals and sentiment. If you're a tactical portfolio manager, 0:16:03.880 --> 0:16:06.040 that's the moment and recession may still be a couple 0:16:06.120 --> 0:16:08.800 months away, So sometimes there's a disconnect depending on your 0:16:08.800 --> 0:16:10.360 time frame. That's also an opportunity. 0:16:10.480 --> 0:16:11.560 Francis, thank you so much. 0:16:11.560 --> 0:16:14.240 Francis Donald with us with the manual life of Montre 0:16:14.360 --> 0:16:16.160 and Manual Life Investment Management. 0:16:16.240 --> 0:16:18.400 I should say as well. 0:16:22.520 --> 0:16:24.720 By amandam Line, I'm head of macro credit research at 0:16:24.720 --> 0:16:28.520 Blackrock joining us now, Amanda, how much more restrictive do 0:16:28.920 --> 0:16:31.400 five percent rates get as time goes on? 0:16:32.160 --> 0:16:34.920 Well, thank you Lisa and Tom for having me. Good morning. Look, 0:16:34.920 --> 0:16:36.480 I think it's a challenging. 0:16:36.160 --> 0:16:40.160 Environment for a large subset of the corporate credit universe, 0:16:40.560 --> 0:16:44.400 specifically the subset that has a large exposure to floating 0:16:44.440 --> 0:16:47.640 rate debt. And you know right now, we've already seen, 0:16:47.680 --> 0:16:50.160 as you well know, the all in cost of debt 0:16:50.240 --> 0:16:53.640 for the leverage loan universe double more than double actually 0:16:53.680 --> 0:16:56.360 since the first quarter of twenty twenty two. And the 0:16:56.400 --> 0:16:59.320 signaling that we receive from central banks, both the FED 0:16:59.440 --> 0:17:02.200 and the ECB is that there's probably more room to 0:17:02.280 --> 0:17:05.360 run there, and President Leguard was very clear on that 0:17:05.480 --> 0:17:08.360 in her press conference recently. So I think that there's 0:17:08.440 --> 0:17:11.399 more upward pressure. But as you noted at the start, 0:17:11.680 --> 0:17:14.879 I think whether we get an extra twenty five or 0:17:14.920 --> 0:17:19.200 fifty basis points from here is probably less relevant than 0:17:19.240 --> 0:17:22.320 the amount of time that we stay in this kind 0:17:22.320 --> 0:17:26.240 of higher cost of capital environment. Because corporates are looking 0:17:26.280 --> 0:17:29.840 at these upcoming maturity walls, which yes they are in 0:17:30.160 --> 0:17:33.560 mostly twenty twenty five, but that will need to be 0:17:33.600 --> 0:17:37.080 addressed sooner rather than later. And for those corporates, we're 0:17:37.080 --> 0:17:40.719 not really expecting any sort of relief, certainly not in 0:17:40.760 --> 0:17:41.480 the form. 0:17:41.320 --> 0:17:44.800 Of rate cuts. And I think actually, if you look at. 0:17:44.680 --> 0:17:46.679 Where the all in yields are and a lot of 0:17:46.720 --> 0:17:49.920 the subsets of the corporate credit market, the risk free 0:17:49.960 --> 0:17:52.760 rate has done a lot of that heavy lifting, and 0:17:52.880 --> 0:17:57.280 spreads are fairly contained, and so there's probably some room 0:17:57.320 --> 0:17:58.760 for spreads even too high. 0:17:59.000 --> 0:18:00.800 There's a lot of math to mat You get that 0:18:00.920 --> 0:18:05.200 from Milando line, Amanda, let me cut to the chase. Finally, 0:18:05.240 --> 0:18:08.960 we have a risk free rate. William Sharp is happy 0:18:09.000 --> 0:18:11.560 we got a risk free rate. And then you've got 0:18:11.600 --> 0:18:15.120 spreads up. And Lisa's pointed out how narrow spreads are. 0:18:15.840 --> 0:18:20.520 What are the ramifications if the actual yield in an 0:18:20.560 --> 0:18:25.920 aggregate corporate space widens out, what actually happens to our 0:18:25.960 --> 0:18:27.280 listeners and viewers. 0:18:27.560 --> 0:18:30.879 I think the first order implication is that you uptick 0:18:30.880 --> 0:18:34.520 in financial distress, and you're already seeing that in the 0:18:34.560 --> 0:18:38.040 default rates. For example, in the US market, the leverage 0:18:38.119 --> 0:18:41.800 loan default rate is outpacing the high old bond default 0:18:41.880 --> 0:18:45.399 rate by the largest magnitude since the data on the 0:18:45.440 --> 0:18:48.520 Moody series that we use began in nineteen ninety six, 0:18:48.920 --> 0:18:52.359 and realistically over the past two decades, there have been 0:18:52.560 --> 0:18:56.360