1
00:00:05,120 --> 00:00:09,200
Speaker 1: Welcome to the Bloomberg's Surveillance Podcast. I'm Tom Keane. Along

2
00:00:09,200 --> 00:00:13,200
Speaker 1: with Jonathan Ferrell and Lisa Bramowitz. Daily we bring you

3
00:00:13,280 --> 00:00:18,600
Speaker 1: insight from the best and economics, finance, investment, and international relations.

4
00:00:18,960 --> 00:00:23,759
Speaker 1: Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,

5
00:00:23,920 --> 00:00:31,520
Speaker 1: and of course on the Bloomberg Terminal. Everyone reading Howard

6
00:00:31,600 --> 00:00:36,000
Speaker 1: Marks read leans forward and reads a little more carefully.

7
00:00:36,080 --> 00:00:39,840
Speaker 1: He is successful. He is a philanthropist, and Lisa bramwits

8
00:00:40,040 --> 00:00:41,800
Speaker 1: we know for certain as a member of the board

9
00:00:41,800 --> 00:00:45,520
Speaker 1: of Trustees of the Metropolitan Museum of Art, the met

10
00:00:45,600 --> 00:00:49,199
Speaker 1: Gala is Howard Mark's fault. Yes, well, we actually very

11
00:00:49,280 --> 00:00:51,320
Speaker 1: much appreciate it for us who have spent many, many

12
00:00:51,320 --> 00:00:53,800
Speaker 1: hours at the metropolit Museum of Ark. There also is

13
00:00:53,800 --> 00:00:56,280
Speaker 1: this question of investor psychology, and Howard Marks is co

14
00:00:56,400 --> 00:00:59,200
Speaker 1: chair and co founder of oak Tree Capital and Frankly Uh,

15
00:00:59,440 --> 00:01:02,400
Speaker 1: one of the co founders of the entire distress debt market,

16
00:01:02,600 --> 00:01:07,280
Speaker 1: really understands how psychology can drive what is perhaps the

17
00:01:07,319 --> 00:01:10,080
Speaker 1: best philosophy going forward, and he writes the fabulous memos

18
00:01:10,560 --> 00:01:13,039
Speaker 1: UH from time to time as latest Bullmarke at Rhymes.

19
00:01:13,080 --> 00:01:15,120
Speaker 1: Howard thank you so much for being with us. I

20
00:01:15,160 --> 00:01:18,520
Speaker 1: want to start with trying to understand investors psychology and

21
00:01:18,560 --> 00:01:21,360
Speaker 1: as a student of history, where are we right now

22
00:01:21,480 --> 00:01:26,360
Speaker 1: in terms of bullish or bearish? UM. I think that

23
00:01:26,840 --> 00:01:33,360
Speaker 1: UH attitudes were quite there bullish UH prior to a

24
00:01:33,400 --> 00:01:36,800
Speaker 1: few months ago. UM, with the exception of a brief

25
00:01:37,319 --> 00:01:41,959
Speaker 1: UH respite during the pandemic. We've been in a bullish

26
00:01:42,000 --> 00:01:45,880
Speaker 1: climate since, uh, since the end of the global financial

27
00:01:45,920 --> 00:01:50,520
Speaker 1: crisis in oh nine. Not wildly bullish, UH, not so certainly,

28
00:01:50,520 --> 00:01:54,640
Speaker 1: not what I would call euphoria, but optimistic, and that

29
00:01:54,760 --> 00:01:58,440
Speaker 1: has been crimp. Now. You know, a lot of the

30
00:01:58,520 --> 00:02:03,320
Speaker 1: big name stocks are all fifty seventy eight percent. The

31
00:02:03,400 --> 00:02:08,080
Speaker 1: whole market is off. I guess that probably uh from

32
00:02:08,080 --> 00:02:12,000
Speaker 1: the high. So I would say that UH attitudes are

33
00:02:12,000 --> 00:02:17,919
Speaker 1: more balanced today. But UH, you know, when when there's euphoria,

34
00:02:17,960 --> 00:02:21,440
Speaker 1: when there's optimism, when there's greed, when there's risk tolerance

35
00:02:21,720 --> 00:02:25,080
Speaker 1: and so forth, that's a very difficult climate for the

36
00:02:25,280 --> 00:02:31,160
Speaker 1: value investor to find bargains. UH. So we're happier today

37
00:02:31,160 --> 00:02:32,840
Speaker 1: than we were six months ago. I don't know if

38
00:02:32,840 --> 00:02:34,920
Speaker 1: we're going to be happier six months from now. That

39
00:02:35,040 --> 00:02:37,200
Speaker 1: is to say, that the bargains will be more pronounced,

40
00:02:37,360 --> 00:02:39,600
Speaker 1: but at least the as they say, the bloom is

41
00:02:39,639 --> 00:02:42,560
Speaker 1: off the rose. At a time of such incredible uncertainty,

42
00:02:42,880 --> 00:02:46,520
Speaker 1: how do you position seeing value now but also preparing

43
00:02:46,840 --> 00:02:50,119
Speaker 1: for seeing more value in six months. You know, one

44
00:02:50,120 --> 00:02:52,720
Speaker 1: of the six tenets of Oakrias investment philosophy, which we

45
00:02:52,840 --> 00:02:55,519
Speaker 1: established when we started in April of and I've never

46
00:02:55,639 --> 00:02:59,520
Speaker 1: changed a word, and I believe in thoroughly, is that, uh,

47
00:03:00,000 --> 00:03:04,040
Speaker 1: we're not market timers and and and that means mostly

48
00:03:04,080 --> 00:03:09,200
Speaker 1: two things. We never sell to raise cash to prepare

49
00:03:09,240 --> 00:03:12,720
Speaker 1: for a decline. Uh. And we never say it's cheap today,

50
00:03:12,720 --> 00:03:14,640
Speaker 1: but it will be cheaper in six months, so will wait.

51
00:03:14,800 --> 00:03:16,880
Speaker 1: If it's cheap today, we buy it. If it's cheaper

52
00:03:16,880 --> 00:03:20,080
Speaker 1: and six months more, we buy more. Uh. And I

53
00:03:20,120 --> 00:03:23,720
Speaker 1: think that that works much better than an assertion that

54
00:03:23,800 --> 00:03:25,800
Speaker 1: we know where the market will be in six months.

55
00:03:25,919 --> 00:03:27,799
Speaker 1: This is really important at a time when so many

56
00:03:27,840 --> 00:03:30,680
Speaker 1: pensions and institutional investors have been shooting for that seven

57
00:03:30,680 --> 00:03:32,760
Speaker 1: and a half to eight percent bogie. We talked about

58
00:03:32,800 --> 00:03:35,880
Speaker 1: that extensively in the past five to six years, This

59
00:03:36,000 --> 00:03:38,960
Speaker 1: idea that that seemed completely unachievable in an era of

60
00:03:39,000 --> 00:03:43,000
Speaker 1: quantitative easing, Suddenly high yield bonds have an average yield

61
00:03:43,040 --> 00:03:45,880
Speaker 1: of more than seven percent. Is this the best period

62
00:03:45,960 --> 00:03:48,680
Speaker 1: that you have seen for pensions to actually hit their

63
00:03:48,680 --> 00:03:52,240
Speaker 1: bogies for more than a decade. Well, I think that's

64
00:03:52,320 --> 00:03:56,080
Speaker 1: right in in in in the well, of course many

65
00:03:56,120 --> 00:03:59,880
Speaker 1: have hit their bogies. Uh, it just didn't look in

66
00:04:00,040 --> 00:04:02,960
Speaker 1: advanced like they would. But the stock market and many

67
00:04:03,000 --> 00:04:05,520
Speaker 1: other things have surprised on the upside for the last

68
00:04:05,520 --> 00:04:09,760
Speaker 1: ten years. Um. But now, as you point out one

69
00:04:09,800 --> 00:04:14,320
Speaker 1: of our big activities as high yield bonds, and a

70
00:04:14,400 --> 00:04:18,839
Speaker 1: year ago they were yielding in the threes of percent.

71
00:04:19,360 --> 00:04:21,640
Speaker 1: One deal was even done in the twos. That's not

72
00:04:21,720 --> 00:04:24,480
Speaker 1: a very high yield for high yield today, as you say,

73
00:04:24,520 --> 00:04:26,960
Speaker 1: they yield in the sevens. So a pension fund that

74
00:04:27,040 --> 00:04:30,400
Speaker 1: needs seven or seven and a half can make use

75
00:04:30,560 --> 00:04:35,279
Speaker 1: of high eel bonds and everything. You know. See when

76
00:04:35,600 --> 00:04:39,800
Speaker 1: everybody gets concerned when prices decline, but if you flip

77
00:04:39,880 --> 00:04:44,320
Speaker 1: that over, the flip side of price deterioration is increases

78
00:04:44,400 --> 00:04:47,960
Speaker 1: in prospective returns. So now the prospective returns are on

79
00:04:48,080 --> 00:04:51,400
Speaker 1: many asset classes are higher than they were just a

80
00:04:51,400 --> 00:04:55,440
Speaker 1: little while ago, and Uh. Again, a much better climate

81
00:04:55,480 --> 00:04:58,040
Speaker 1: for the bargain hunter. Some people would counter this by

82
00:04:58,040 --> 00:05:01,360
Speaker 1: saying inflation takes a lot of the value out of

83
00:05:01,400 --> 00:05:03,960
Speaker 1: those returns that basically, on a real basis you're still

84
00:05:04,000 --> 00:05:06,640
Speaker 1: not getting very much. How do you counter that as

85
00:05:06,640 --> 00:05:09,280
Speaker 1: a long term investor by saying, you know what, at

86
00:05:09,320 --> 00:05:12,400
Speaker 1: this point, it's worth it to get higher returns, even

87
00:05:12,440 --> 00:05:17,120
Speaker 1: if on a real basis it's not necessarily that much more. Well,

88
00:05:17,320 --> 00:05:20,400
Speaker 1: you're right in that we're not talking about an increase

89
00:05:20,440 --> 00:05:23,000
Speaker 1: in real returns. Were increasing to a man increase in

90
00:05:23,000 --> 00:05:27,640
Speaker 1: nominal returns. Most most pension funds and other organizations reckon

91
00:05:27,720 --> 00:05:32,360
Speaker 1: their need for return in nominal terms. Uh. But um,

92
00:05:32,400 --> 00:05:36,840
Speaker 1: you know, I mean that is a challenge. Uh. And uh,

93
00:05:36,960 --> 00:05:41,240
Speaker 1: nobody knows what inflation is going to do. Uh. I

94
00:05:41,279 --> 00:05:45,200
Speaker 1: think I heard out of one year your previous guests

95
00:05:45,520 --> 00:05:49,000
Speaker 1: say that, you know, some of the inflation factors will

96
00:05:49,240 --> 00:05:53,039
Speaker 1: probably subside in the next few months, which means all

97
00:05:53,120 --> 00:05:57,080
Speaker 1: things being uh, an increase in real returns. How much

98
00:05:57,080 --> 00:06:00,360
Speaker 1: are you trying to game out where inflation is going

99
00:06:00,400 --> 00:06:03,000
Speaker 1: to go over the next six to twelve months. Considering

100
00:06:03,040 --> 00:06:04,559
Speaker 1: the fact that I know that you do not time

101
00:06:04,600 --> 00:06:06,560
Speaker 1: the market or look at a sort of day to

102
00:06:06,640 --> 00:06:09,520
Speaker 1: day price swing kind of issue. But this really does

103
00:06:09,600 --> 00:06:15,160
Speaker 1: determine how important some of these returns will be going forward. Uh,

104
00:06:15,560 --> 00:06:19,919
Speaker 1: yes it does, but uh, I don't think there's anything

105
00:06:20,279 --> 00:06:22,520
Speaker 1: to be known on that subject, and I'm sure we

106
00:06:22,520 --> 00:06:26,920
Speaker 1: don't know it. Uh. You know. And another uh tenant

107
00:06:26,920 --> 00:06:29,080
Speaker 1: of our investment philosophy they're only six we're going to

108
00:06:29,080 --> 00:06:33,000
Speaker 1: touch on two today, is that we our investment decisions

109
00:06:33,000 --> 00:06:37,039
Speaker 1: that are not based on macro forecasts. Macro forecasts are

110
00:06:37,120 --> 00:06:40,840
Speaker 1: very important. The only problem is they're rarely right and

111
00:06:40,839 --> 00:06:46,839
Speaker 1: and uh and more importantly, uh, any one forecaster is

112
00:06:47,000 --> 00:06:50,680
Speaker 1: rarely right more often than the others. So we don't

113
00:06:51,120 --> 00:06:53,400
Speaker 1: make our decisions on that basis. We are what's called

114
00:06:53,400 --> 00:06:57,040
Speaker 1: bottom up investors. We invest on the basis of micro,

115
00:06:57,240 --> 00:07:02,080
Speaker 1: not macro companies, industry securities, and we feel there, through

116
00:07:02,160 --> 00:07:04,320
Speaker 1: hard work and skill, we can get an edge. So

117
00:07:04,480 --> 00:07:07,240
Speaker 1: where are some of the industry some of the areas

118
00:07:07,320 --> 00:07:11,760
Speaker 1: that you're actually seeing deep value? You know, Uh, they

119
00:07:11,800 --> 00:07:16,720
Speaker 1: are much more spread around than they were before. Uh.

120
00:07:17,000 --> 00:07:22,600
Speaker 1: You know, some growth names are are offering much better

121
00:07:22,680 --> 00:07:26,000
Speaker 1: value than they did a year or two ago. Down

122
00:07:27,320 --> 00:07:33,040
Speaker 1: But you know, we continue to find opportunities throughout the

123
00:07:33,680 --> 00:07:39,560
Speaker 1: investment universe. Uh. Um and UH you know, the prosaic

124
00:07:39,600 --> 00:07:44,160
Speaker 1: industries are also offering good, good value. When you talk

125
00:07:44,200 --> 00:07:47,000
Speaker 1: about the global investment picture, I know, over the years,

126
00:07:47,080 --> 00:07:49,680
Speaker 1: especially as the US yielded less and less and yet

127
00:07:49,760 --> 00:07:53,360
Speaker 1: less in real terms and phenominal terms, you looked overseas,

128
00:07:53,360 --> 00:07:57,360
Speaker 1: in particular to China as a potential area of perspective return.

129
00:07:57,720 --> 00:08:00,200
Speaker 1: Has that changed as yields have gone up in the

130
00:08:00,280 --> 00:08:04,080
Speaker 1: US and frankly the economy has slowed so substantially in China. Well.

131
00:08:04,120 --> 00:08:06,360
Speaker 1: On the one hand, we have a preference for investing

132
00:08:06,360 --> 00:08:11,480
Speaker 1: in the US. UH. You know, UH, the US in

133
00:08:11,640 --> 00:08:14,680
Speaker 1: most regards has the best economy in the world, and

134
00:08:14,760 --> 00:08:19,880
Speaker 1: it has an excellent UH environment for rule of law,

135
00:08:20,120 --> 00:08:24,400
Speaker 1: for being able to predict the outcome when uh, when

136
00:08:25,120 --> 00:08:29,760
Speaker 1: various UH stakeholders rights come into conflict. That's very important

137
00:08:29,800 --> 00:08:33,079
Speaker 1: to us, especially you mentioned our business in distress debt investing.

138
00:08:33,120 --> 00:08:35,600
Speaker 1: That's very important if you're going to buy distress credits

139
00:08:35,760 --> 00:08:38,400
Speaker 1: to be able to predict how will be treated by

140
00:08:38,440 --> 00:08:44,440
Speaker 1: the law. UM. On the other hand, um uh from

141
00:08:44,480 --> 00:08:46,960
Speaker 1: time to time other parts of the world all for

142
00:08:47,040 --> 00:08:50,400
Speaker 1: better bargains. Uh, we have the best in the US,

143
00:08:50,520 --> 00:08:54,240
Speaker 1: but the best usually doesn't come cheap. So and third,

144
00:08:54,400 --> 00:08:56,960
Speaker 1: on the third hand, we like to have some diversity

145
00:08:57,000 --> 00:09:00,280
Speaker 1: in our portfolio. So you know, we've been in sting

146
00:09:00,280 --> 00:09:03,320
Speaker 1: in places like China and India UH in the last

147
00:09:03,360 --> 00:09:06,920
Speaker 1: couple of years and and absolutely will continue to do so.

148
00:09:07,280 --> 00:09:10,319
Speaker 1: When I hear people say, you know, I've made my

149
00:09:10,400 --> 00:09:13,320
Speaker 1: living for the last fifty years investing in the things

150
00:09:13,360 --> 00:09:16,920
Speaker 1: other people said, we're uninvestable, high yield bonds, distress dead,

151
00:09:16,960 --> 00:09:21,880
Speaker 1: emerging markets, uh, etcetera. And when I hear people say

152
00:09:21,880 --> 00:09:26,400
Speaker 1: that China is uninvestable to me, uninvestable says maybe there

153
00:09:26,400 --> 00:09:29,520
Speaker 1: are some bargains there if if everybody else is boycotting

154
00:09:29,559 --> 00:09:32,640
Speaker 1: that sector, how fully invested are you? Are you always

155
00:09:32,640 --> 00:09:36,280
Speaker 1: fully invested? We strive to be fully invested. Again, we're

156
00:09:36,320 --> 00:09:38,840
Speaker 1: not market timers. Market timers say, well right now we

157
00:09:38,880 --> 00:09:43,200
Speaker 1: want cash. We strive to be fully invested. Our clients

158
00:09:43,280 --> 00:09:45,920
Speaker 1: hire us to invest in our asset class, not to

159
00:09:46,000 --> 00:09:51,199
Speaker 1: time the market. UM. And again, if better bargains arise,

160
00:09:51,280 --> 00:09:54,040
Speaker 1: I'm always confident that we'll be able to raise more

161
00:09:54,040 --> 00:09:57,360
Speaker 1: money to take advantage. About three years ago when we

162
00:09:57,360 --> 00:10:02,000
Speaker 1: were talking about what prospective returns seemed plausible or realistic

163
00:10:02,440 --> 00:10:05,840
Speaker 1: on on some sort of safe for reliable basis. You

164
00:10:05,840 --> 00:10:07,600
Speaker 1: said five to five and a half percent. You have

165
00:10:07,640 --> 00:10:10,240
Speaker 1: a good memory. Where are we now? I think we

166
00:10:10,280 --> 00:10:14,040
Speaker 1: can make seven to seven and a half. I mean,

167
00:10:14,240 --> 00:10:17,360
Speaker 1: I'm not telling you, I'm saying an institutional portfolio. At

168
00:10:17,400 --> 00:10:20,600
Speaker 1: that time I was talking for the Metropolitan Museum of Art,

169
00:10:20,640 --> 00:10:24,280
Speaker 1: where I chaired the Investment Community Committee, and I talked

170
00:10:24,400 --> 00:10:27,319
Speaker 1: the expectation down to five five and a half as

171
00:10:27,360 --> 00:10:29,920
Speaker 1: you say, or I think we came out of I

172
00:10:29,920 --> 00:10:32,640
Speaker 1: think the committee as a whole came out at six. Today,

173
00:10:32,760 --> 00:10:36,920
Speaker 1: I think an institution like the MET or another pension

174
00:10:36,960 --> 00:10:40,160
Speaker 1: fund and downmin etcetera can make seven seven and a half.

175
00:10:40,200 --> 00:10:41,760
Speaker 1: Of course, you have to be willing to go into

176
00:10:41,800 --> 00:10:45,040
Speaker 1: alternatives to do it, but most people are willing. What

177
00:10:45,160 --> 00:10:52,000
Speaker 1: kind of alternatives you know? The big class classes are

178
00:10:52,080 --> 00:10:55,200
Speaker 1: private equity, private debt, Then there's the stress debt, there's

179
00:10:55,240 --> 00:11:01,880
Speaker 1: real estate UM and UH specialized forms of an vesting UM.

180
00:11:02,080 --> 00:11:05,280
Speaker 1: The important thing is not which sectors. The important thing

181
00:11:05,360 --> 00:11:09,160
Speaker 1: is which manager. You know. In the public asset classes

182
00:11:09,200 --> 00:11:12,080
Speaker 1: like stocks and bonds, we call them beta markets, because

183
00:11:12,120 --> 00:11:16,000
Speaker 1: most of the return is determined by the performance of

184
00:11:16,040 --> 00:11:18,839
Speaker 1: the market, and which manager you have means a little

185
00:11:18,840 --> 00:11:22,120
Speaker 1: plus or a little minus. In the alternative markets, there

186
00:11:22,160 --> 00:11:25,640
Speaker 1: isn't that gravitational pull towards the market. Return is really

187
00:11:25,720 --> 00:11:30,440
Speaker 1: market to pace it. What really managers matters is whether

188
00:11:30,480 --> 00:11:36,040
Speaker 1: you're manager is highly skilled and disciplined or not. And uh,

189
00:11:36,080 --> 00:11:38,840
Speaker 1: that's why we call them alpha markets skill markets. Do

190
00:11:38,880 --> 00:11:41,079
Speaker 1: you think that your peers are taking undue risk or

191
00:11:41,120 --> 00:11:45,640
Speaker 1: not enough risk? Um? Some of each. Of course, there's

192
00:11:45,640 --> 00:11:48,680
Speaker 1: a there's a disparity, you know, there's there's a range,

193
00:11:48,800 --> 00:11:53,600
Speaker 1: and piers do different things. Um. The point is an

194
00:11:53,640 --> 00:11:58,160
Speaker 1: area like private lending, where we're very active, has been

195
00:11:58,840 --> 00:12:02,800
Speaker 1: darling in the past a decade. A lot of money

196
00:12:02,800 --> 00:12:04,600
Speaker 1: and a lot of managers and a lot of funds

197
00:12:04,600 --> 00:12:08,600
Speaker 1: have moved into the area. Buffett always puts it best.

198
00:12:08,800 --> 00:12:10,599
Speaker 1: When the tide goes out, we find out who was

199
00:12:10,600 --> 00:12:14,600
Speaker 1: swimming without a bathing suit. When when economic and financial

200
00:12:14,640 --> 00:12:17,880
Speaker 1: conditions become more difficult, we find out who made good

201
00:12:17,880 --> 00:12:20,640
Speaker 1: credit decisions and who made bad ones. We'll see what's

202
00:12:20,640 --> 00:12:25,800
Speaker 1: the historical precedent for this moment, for this moment, Oh,

203
00:12:25,840 --> 00:12:28,760
Speaker 1: you know, it's very hard to to to find one

204
00:12:28,840 --> 00:12:34,200
Speaker 1: that fits exactly. Um. You know, we've never had this

205
00:12:34,320 --> 00:12:38,600
Speaker 1: externality of the pandemic. There hasn't been a war going

206
00:12:38,679 --> 00:12:42,880
Speaker 1: on in a long time and an important international conflict,

207
00:12:43,559 --> 00:12:46,880
Speaker 1: uh with with the threats this embodies, We've never the

208
00:12:46,960 --> 00:12:50,760
Speaker 1: US never had an economic rival like China before. We've

209
00:12:50,800 --> 00:12:55,600
Speaker 1: never really had an economic rival since World War two. Uh.

210
00:12:55,600 --> 00:13:00,000
Speaker 1: But and of course we have uh historically low interest

211
00:13:00,160 --> 00:13:02,800
Speaker 1: rates we've had. We had interest rates went down by

212
00:13:02,880 --> 00:13:05,120
Speaker 1: what we call two thousand basis points, that is to say,

213
00:13:05,120 --> 00:13:11,320
Speaker 1: twenty percentage points from eighty two two two. Uh, and

214
00:13:11,400 --> 00:13:14,800
Speaker 1: that was a big tail wind. So these conditions are

215
00:13:16,320 --> 00:13:19,760
Speaker 1: are not reminiscent of any that I've lived through. But

216
00:13:19,880 --> 00:13:23,120
Speaker 1: I think the important thing for your purposes and hopefully

217
00:13:23,160 --> 00:13:26,680
Speaker 1: your audience's purposes, is that I think that are are

218
00:13:28,520 --> 00:13:33,320
Speaker 1: taken as a whole. I think conditions are fairly normal

219
00:13:33,400 --> 00:13:36,439
Speaker 1: today in terms of how you should manage your money

220
00:13:36,520 --> 00:13:39,040
Speaker 1: and the risks you should take. And to me, that's

221
00:13:39,080 --> 00:13:41,880
Speaker 1: the key decision. Howard, thank you so much for taking

222
00:13:41,880 --> 00:13:44,640
Speaker 1: the time. Howard Marks, the co chair and co founder

223
00:13:44,720 --> 00:13:53,880
Speaker 1: of oak Tree Capital. Eddie five, Bill Duntley, the former

224
00:13:53,880 --> 00:13:56,120
Speaker 1: New York Fed President at with this this morning. Som

225
00:13:56,120 --> 00:13:58,360
Speaker 1: has the headline of his new column, the FATS mild

226
00:13:58,440 --> 00:14:02,920
Speaker 1: inflation forecasts need explaining. They do they need explaining. It

227
00:14:03,040 --> 00:14:05,319
Speaker 1: is a brilliant note. I'll have it on Twitter. I'm

228
00:14:05,320 --> 00:14:08,199
Speaker 1: sure John and Lisa will as well. William Dudley is

229
00:14:08,200 --> 00:14:10,240
Speaker 1: a former president of New York found And of course

230
00:14:10,240 --> 00:14:12,880
Speaker 1: we're writing for Bloomberger thrill that Bill Dudley could join

231
00:14:13,000 --> 00:14:16,920
Speaker 1: us this morning. Bill buried in your essay on inflation

232
00:14:17,800 --> 00:14:20,320
Speaker 1: is a single sentence on what it means for the

233
00:14:20,440 --> 00:14:24,560
Speaker 1: labor market. April of two thousand twenty and fourteen point

234
00:14:24,640 --> 00:14:28,040
Speaker 1: seven percent unemployment rate. We're at four percent at the

235
00:14:28,080 --> 00:14:30,240
Speaker 1: beginning of this year. We're now down to three point

236
00:14:30,560 --> 00:14:34,400
Speaker 1: six percent. I need you to explain to our listeners

237
00:14:34,520 --> 00:14:38,160
Speaker 1: and viewers why it's the Fed's job to move the

238
00:14:38,280 --> 00:14:43,840
Speaker 1: unemployment rate, as you state, up above four percent. Well,

239
00:14:43,920 --> 00:14:46,400
Speaker 1: the labor markets the tightest basically it's ever been. And

240
00:14:46,440 --> 00:14:48,720
Speaker 1: you can see that by the ratio of unfilled job

241
00:14:48,760 --> 00:14:51,120
Speaker 1: relative to the number of people that are unemployed. It's

242
00:14:51,520 --> 00:14:54,760
Speaker 1: that ratio is one point nine to one. UH in

243
00:14:54,840 --> 00:14:57,040
Speaker 1: February was one point two to one. So we have

244
00:14:57,080 --> 00:15:00,800
Speaker 1: a lavor market that's unpresidentally tight. The FED needs to

245
00:15:00,840 --> 00:15:03,920
Speaker 1: loosen that up or wage pressures will accumulate and that

246
00:15:04,000 --> 00:15:07,080
Speaker 1: will keep inflation above the feds two percent inflation objective.

247
00:15:07,600 --> 00:15:09,400
Speaker 1: The problem the FED has is that in the past

248
00:15:09,440 --> 00:15:11,960
Speaker 1: it's been very, very difficult to push the unemployment rate

249
00:15:12,040 --> 00:15:15,920
Speaker 1: up meaningfully without precipitating a hard landing. That's what the

250
00:15:16,000 --> 00:15:17,360
Speaker 1: FEN is going to try to do this time, but

251
00:15:17,440 --> 00:15:20,920
Speaker 1: extremely difficult to do. And they haven't really been as forthcoming,

252
00:15:20,960 --> 00:15:23,880
Speaker 1: I think, in their forecast as as they need to be,

253
00:15:23,880 --> 00:15:27,120
Speaker 1: because if you look at their last summary of economic projections,

254
00:15:27,120 --> 00:15:32,000
Speaker 1: for example, the disinflation occurred almost immaculately. Uh, the FED

255
00:15:32,080 --> 00:15:34,840
Speaker 1: didn't really tighten very much. The unemployer right didn't rise,

256
00:15:35,360 --> 00:15:38,560
Speaker 1: yet inflation came back to the defense two percent target,

257
00:15:38,600 --> 00:15:42,000
Speaker 1: and it really beg the question what caused inflation to

258
00:15:42,000 --> 00:15:44,400
Speaker 1: come down? I think the way you get inflation down

259
00:15:44,440 --> 00:15:46,080
Speaker 1: is you need more slack in the U S lever market.

260
00:15:46,520 --> 00:15:49,040
Speaker 1: That's not a friendly message from from the FED, but

261
00:15:49,080 --> 00:15:51,000
Speaker 1: that's what's necessary at this point. And but I'll just

262
00:15:51,000 --> 00:15:52,920
Speaker 1: to put some numbers on that. As you say, kill

263
00:15:52,960 --> 00:15:55,360
Speaker 1: PC A year run for the FED twenty two four

264
00:15:55,400 --> 00:15:58,360
Speaker 1: point one, twenty three, two point six, and unemployment three

265
00:15:58,360 --> 00:16:00,920
Speaker 1: point five and then three point five again. And many

266
00:16:00,920 --> 00:16:03,040
Speaker 1: people have been asking the same question, Bill, you know

267
00:16:03,080 --> 00:16:05,200
Speaker 1: the chance of right now, it's this conversation about a

268
00:16:05,240 --> 00:16:09,040
Speaker 1: pause in September. How are you interpreting some of that conversation.

269
00:16:10,720 --> 00:16:12,840
Speaker 1: I wouldn't put too much stock on it. I think

270
00:16:12,880 --> 00:16:15,080
Speaker 1: what's what's happening is the Fed's pretty convinced that they

271
00:16:15,080 --> 00:16:17,480
Speaker 1: need to go into something close to neutral, and you know,

272
00:16:17,920 --> 00:16:21,160
Speaker 1: expeditiously is the way that they put it um, and

273
00:16:21,240 --> 00:16:23,760
Speaker 1: so that's what they're doing. The notion at some point

274
00:16:23,800 --> 00:16:25,680
Speaker 1: they're gonna take it to pause and look around. Of

275
00:16:25,720 --> 00:16:27,800
Speaker 1: course that's gonna happen at some point, but it's gonna

276
00:16:27,800 --> 00:16:30,560
Speaker 1: be driven by the the economic data. I think that

277
00:16:30,640 --> 00:16:33,840
Speaker 1: the commedy is gonna have enough momentum to keep the Fed.

278
00:16:34,880 --> 00:16:38,720
Speaker 1: The Fed will keep going UH into the fall markets

279
00:16:38,720 --> 00:16:40,880
Speaker 1: priced to a peak in the federal funds rate of three.

280
00:16:41,600 --> 00:16:44,200
Speaker 1: I think we're gonna get to their UH pretty easily,

281
00:16:44,520 --> 00:16:47,400
Speaker 1: and the Federal probably actually have to push beyond that ultimately, Bill,

282
00:16:47,440 --> 00:16:49,600
Speaker 1: what kind of unemployment rate are you looking for to

283
00:16:49,640 --> 00:16:53,240
Speaker 1: indicate perhaps a tightening a loosening in the very very

284
00:16:53,280 --> 00:16:56,880
Speaker 1: tight labor market. Well, the Fed's on forecast is that

285
00:16:57,480 --> 00:17:00,280
Speaker 1: a neutral unemployee rateing is someone two percent of aitions

286
00:17:00,320 --> 00:17:01,760
Speaker 1: four percent. So I think you need to get the

287
00:17:01,840 --> 00:17:04,760
Speaker 1: naployent rate up to at least four percent. The fact

288
00:17:04,840 --> 00:17:07,840
Speaker 1: that we have so many unfilled jobs suggests that maybe

289
00:17:08,240 --> 00:17:11,760
Speaker 1: the unemployer rate consistent with two percent inflations even higher

290
00:17:11,800 --> 00:17:14,400
Speaker 1: than four percent. So I think we need at least

291
00:17:14,400 --> 00:17:17,280
Speaker 1: get to four percent, and that's the problem. It's difficult

292
00:17:17,280 --> 00:17:20,080
Speaker 1: to do that without participitating a full blown recession bill.

293
00:17:20,119 --> 00:17:22,320
Speaker 1: Did you take any message from the fact that President

294
00:17:22,359 --> 00:17:24,920
Speaker 1: Biden met with FED Chair J Powell yesterday that there

295
00:17:25,040 --> 00:17:28,639
Speaker 1: was this focus on the FED being the main driver

296
00:17:28,920 --> 00:17:32,000
Speaker 1: for what happens with inflation going forward and the politicization

297
00:17:32,600 --> 00:17:36,360
Speaker 1: of the Federal Reserve. Well, I think Biden was actually

298
00:17:36,400 --> 00:17:39,280
Speaker 1: not politicizing the FED. Is basically saying the job is

299
00:17:39,280 --> 00:17:42,560
Speaker 1: to control inflation, and I'm not gonna challenge the independence

300
00:17:42,560 --> 00:17:44,840
Speaker 1: of the FED to do that. In some ways, though,

301
00:17:44,840 --> 00:17:47,280
Speaker 1: he's putting the burden now on the FED Reserve rather

302
00:17:47,280 --> 00:17:50,480
Speaker 1: than on the administration. I viewed it as a political event,

303
00:17:50,520 --> 00:17:53,439
Speaker 1: not an economic event. I don't think it changes what

304
00:17:53,480 --> 00:17:55,800
Speaker 1: the federal is going to do or what the Biden

305
00:17:55,800 --> 00:17:58,400
Speaker 1: administration is going to do. Bill, we had a one

306
00:17:58,440 --> 00:18:02,880
Speaker 1: off medical event, a pandemic of our lifetime that got

307
00:18:02,920 --> 00:18:06,639
Speaker 1: us out to fourteen point seven percent unemployment. Can we

308
00:18:06,720 --> 00:18:10,760
Speaker 1: cut any central bank slack and have them extend out

309
00:18:10,800 --> 00:18:14,639
Speaker 1: the X axis and just take longer to get this

310
00:18:14,800 --> 00:18:20,080
Speaker 1: done to repair off of this medical event. Well, if

311
00:18:20,119 --> 00:18:22,960
Speaker 1: they take longer, the risk will be that inflation will

312
00:18:22,960 --> 00:18:25,720
Speaker 1: stay higher uh, and then that will start to get

313
00:18:25,720 --> 00:18:28,520
Speaker 1: embedded and higher inflation expectations, which will make their job

314
00:18:28,560 --> 00:18:30,680
Speaker 1: a lot more difficult. The good news for the FED

315
00:18:30,800 --> 00:18:34,159
Speaker 1: right now is they're highly credible. Market participants expect the

316
00:18:34,160 --> 00:18:36,240
Speaker 1: Fed will do the job and get inflation back down.

317
00:18:36,560 --> 00:18:39,640
Speaker 1: Inflation expectations that the longer her term horizons are still

318
00:18:39,840 --> 00:18:42,440
Speaker 1: very well anchored. If the Fed dawdles and then the

319
00:18:42,520 --> 00:18:45,600
Speaker 1: risk is that inflation expectation become less well anchored, which

320
00:18:45,640 --> 00:18:47,520
Speaker 1: will make it harder for the Fed to get inflation

321
00:18:47,560 --> 00:18:50,680
Speaker 1: back down. But if your view hantening not softening based

322
00:18:50,680 --> 00:18:52,960
Speaker 1: on coming daight to the this FED funds might end

323
00:18:53,040 --> 00:18:56,480
Speaker 1: up with a full handle and maybe not three. I

324
00:18:56,480 --> 00:18:58,360
Speaker 1: don't think it's changed too much. I mean the good

325
00:18:58,359 --> 00:19:00,960
Speaker 1: news that the Fed has things and end today in

326
00:19:01,040 --> 00:19:03,880
Speaker 1: terms of market confidence, in terms of inflation expectations being

327
00:19:03,880 --> 00:19:06,919
Speaker 1: well anchored. That's that's the good news. The bad news is,

328
00:19:06,920 --> 00:19:09,520
Speaker 1: I think people are understanding how difficult this job is.

329
00:19:09,960 --> 00:19:11,520
Speaker 1: What do you make of this idea that they can

330
00:19:11,520 --> 00:19:14,880
Speaker 1: target job opening spell jolts data which is a little

331
00:19:14,880 --> 00:19:17,639
Speaker 1: bit dated, What do you make of that? Well? I

332
00:19:17,680 --> 00:19:20,679
Speaker 1: think their story is is quite an optimistic one that

333
00:19:20,720 --> 00:19:24,119
Speaker 1: they can take the monetary policy sufficiently to reduce the

334
00:19:24,160 --> 00:19:27,320
Speaker 1: demand for labor without actually pushing up the unemployer rate.

335
00:19:27,320 --> 00:19:29,960
Speaker 1: And meanfully, this is the tightest layer market I think

336
00:19:30,000 --> 00:19:32,800
Speaker 1: we've ever had. Frankly, uh and it seems to me

337
00:19:32,840 --> 00:19:34,560
Speaker 1: it's the type of layer market is tighter than it's

338
00:19:34,560 --> 00:19:38,120
Speaker 1: ever been before that makes the job more difficult, not easier.

339
00:19:38,800 --> 00:19:41,119
Speaker 1: Super hard, Bill wonder for the catch up built downtly

340
00:19:41,160 --> 00:19:43,199
Speaker 1: there they form in New York Fed President on the

341
00:19:43,200 --> 00:19:45,960
Speaker 1: Path Forward and a really interesting piece on the Fence

342
00:19:46,000 --> 00:19:48,840
Speaker 1: inflation forecast available on Bloomberg dot com and on the

343
00:19:48,840 --> 00:19:56,360
Speaker 1: Bloomberg terminal on the Bloomberg Opinion column. Here's a note

344
00:19:56,359 --> 00:19:59,080
Speaker 1: from our next guest, Tom. Back in April, we Lampoon

345
00:19:59,119 --> 00:20:03,080
Speaker 1: to Washington Post opinion rights effort that obtuse observation that

346
00:20:03,160 --> 00:20:05,920
Speaker 1: if it were not for that done inflation, Binan's economy

347
00:20:05,960 --> 00:20:08,480
Speaker 1: would be extraordinary. The writers who went on to say

348
00:20:08,600 --> 00:20:12,600
Speaker 1: that Rubbin's logic was as intellectually robust as us, saying

349
00:20:12,640 --> 00:20:15,760
Speaker 1: that if our grandmother had wheels, she would be a bus.

350
00:20:16,359 --> 00:20:19,840
Speaker 1: That can only be the wonderful Stephen Short, founder and

351
00:20:19,920 --> 00:20:23,359
Speaker 1: president of the Short Group. John his note, folks, is

352
00:20:23,440 --> 00:20:26,439
Speaker 1: just the breath of fresh air within the petroleum business

353
00:20:26,800 --> 00:20:30,480
Speaker 1: is Ed Morris City Group, who we just uh listen

354
00:20:30,520 --> 00:20:34,000
Speaker 1: to talks about the macro economics of the moment. Stephen

355
00:20:34,119 --> 00:20:38,080
Speaker 1: Short is hyper defined. Steve, let me go to the

356
00:20:38,160 --> 00:20:42,719
Speaker 1: single sentence of your note of us are simply getting

357
00:20:42,840 --> 00:20:49,120
Speaker 1: poorer in this commodity surge? Will that trend continue? Absolutely?

358
00:20:49,160 --> 00:20:52,040
Speaker 1: Tom So, real disposable income what we have to spend

359
00:20:52,320 --> 00:20:55,280
Speaker 1: as falling in ten of the past their team months

360
00:20:55,320 --> 00:20:59,119
Speaker 1: because of runaway inflation. Inflation, by the way, that all

361
00:20:59,160 --> 00:21:02,960
Speaker 1: the smartest people in the world spent the better part

362
00:21:02,960 --> 00:21:05,960
Speaker 1: of last year doing yeomen's work, making fools of themselves

363
00:21:06,000 --> 00:21:10,440
Speaker 1: every single week saying that, oh, inflation is transitory. Yes,

364
00:21:10,520 --> 00:21:11,879
Speaker 1: if I don't have to eat, if I don't have

365
00:21:11,920 --> 00:21:13,359
Speaker 1: to put the lights on, if I don't want to

366
00:21:13,359 --> 00:21:17,240
Speaker 1: stink cool this summer. Yes, inflation not a problem. But

367
00:21:17,359 --> 00:21:19,679
Speaker 1: what we're seeing now, Tom and always comes down to

368
00:21:19,720 --> 00:21:22,720
Speaker 1: commodities and what we're looking at in the energy industry.

369
00:21:22,840 --> 00:21:25,959
Speaker 1: Well we know that story. But what most people, especially

370
00:21:26,000 --> 00:21:28,000
Speaker 1: the E. S. G. Crowd or the people that are

371
00:21:28,080 --> 00:21:30,919
Speaker 1: taking the war against natural gas is the war natural

372
00:21:30,920 --> 00:21:33,879
Speaker 1: gas is a war on the American consumer. So what

373
00:21:34,000 --> 00:21:37,200
Speaker 1: it has done to fertilizer prices. Of course, natural gas

374
00:21:37,240 --> 00:21:40,679
Speaker 1: is a key feat stock into synthetic ammonia fertilizer. So

375
00:21:40,720 --> 00:21:44,000
Speaker 1: we're putting fewer seeds into the ground this spring, which

376
00:21:44,000 --> 00:21:46,320
Speaker 1: means we're gonna take fewer crops out of the ground

377
00:21:46,760 --> 00:21:50,560
Speaker 1: in the fall. So the inflation has not peeped, right,

378
00:21:50,640 --> 00:21:52,840
Speaker 1: I mean eat on the core level. But as far

379
00:21:52,880 --> 00:21:56,240
Speaker 1: as energy and food, which is all was all inflation,

380
00:21:56,280 --> 00:22:01,119
Speaker 1: aspe and and Tom, this is the problem. Runaway inflation

381
00:22:01,359 --> 00:22:04,200
Speaker 1: at the gas pumping out the grocery counter has been

382
00:22:04,440 --> 00:22:09,000
Speaker 1: the UH lead indicator for recession of the last six

383
00:22:09,040 --> 00:22:12,560
Speaker 1: recessions in the United States, beginning with Okay, Steve, I

384
00:22:12,600 --> 00:22:15,240
Speaker 1: want to go to the hyper hyper detail of your

385
00:22:15,280 --> 00:22:19,800
Speaker 1: note and your true expertise on distillates, Do you have

386
00:22:19,920 --> 00:22:26,600
Speaker 1: any optimism we're going to invest given these higher prices? Well,

387
00:22:26,640 --> 00:22:29,719
Speaker 1: as Winston Churchill once said about America, we always make

388
00:22:29,760 --> 00:22:32,719
Speaker 1: the right decision after we've tried every other decision. So

389
00:22:33,040 --> 00:22:36,439
Speaker 1: I'm not quite sure we're there yet here on the

390
00:22:36,440 --> 00:22:39,840
Speaker 1: East Coast. Of course, what has happened well over the

391
00:22:39,880 --> 00:22:44,359
Speaker 1: past three years, we've cut a refinery capacity by so

392
00:22:44,440 --> 00:22:48,280
Speaker 1: that guess lene production on the East Coast has held study.

393
00:22:48,320 --> 00:22:50,680
Speaker 1: But when you cut your capacity to make things out

394
00:22:50,680 --> 00:22:53,640
Speaker 1: of crude oil, something has to get So while we've

395
00:22:53,680 --> 00:22:57,480
Speaker 1: maintained the status call on guess line production, diesel production

396
00:22:57,600 --> 00:23:01,040
Speaker 1: has fallen for to pent so right, diesel stocks for

397
00:23:01,080 --> 00:23:03,720
Speaker 1: the first time ever in the East Coast are below

398
00:23:03,840 --> 00:23:08,040
Speaker 1: nine million dollars. So we're looking at a dire situation

399
00:23:08,200 --> 00:23:11,240
Speaker 1: in the diesel market, but we're not quite there. The

400
00:23:11,359 --> 00:23:14,879
Speaker 1: smartest thing the Biden administration can do with regard to

401
00:23:15,359 --> 00:23:18,639
Speaker 1: the energy crisis here in the United States is we

402
00:23:18,760 --> 00:23:22,720
Speaker 1: send the Jones Act. The Jones Act requires all interstate

403
00:23:22,760 --> 00:23:27,520
Speaker 1: commerce water born be tagged on American flag vessels. Well,

404
00:23:27,520 --> 00:23:30,600
Speaker 1: guess what, we don't have enough American flag vessels. You

405
00:23:30,640 --> 00:23:34,760
Speaker 1: need to resend the Jones Act allow diesel guestling being

406
00:23:34,800 --> 00:23:38,440
Speaker 1: manufactured in Houston to put that on foreign flag vessels,

407
00:23:38,560 --> 00:23:41,280
Speaker 1: to bring it around the tip of Florida and get

408
00:23:41,280 --> 00:23:44,160
Speaker 1: it into the East coast. That is the smartest thing

409
00:23:44,200 --> 00:23:47,879
Speaker 1: to invest in a short term fixed regard to the

410
00:23:47,960 --> 00:23:50,920
Speaker 1: longer term fixed, No, there is not a political will

411
00:23:51,080 --> 00:23:54,879
Speaker 1: at this point to invest in fossil fuels. Thereby, the

412
00:23:54,960 --> 00:23:58,639
Speaker 1: long term structural in balance between some blind demand will remain.

413
00:23:58,920 --> 00:24:01,960
Speaker 1: High prices there for have to remain. Tom Stephen, have

414
00:24:02,040 --> 00:24:05,040
Speaker 1: you been surprised by how little pushback there has been

415
00:24:05,040 --> 00:24:08,080
Speaker 1: on consumers with respect to reducing spending. There has been

416
00:24:08,359 --> 00:24:11,199
Speaker 1: a reduction in real spending if you look generally at

417
00:24:11,240 --> 00:24:14,879
Speaker 1: the trend. However, overall they continue to spend more, even

418
00:24:14,960 --> 00:24:19,600
Speaker 1: as you see new records every day of gas prices. Yeah,

419
00:24:19,640 --> 00:24:22,800
Speaker 1: absolutely so. Now the calculus theater has changed because we

420
00:24:22,880 --> 00:24:25,720
Speaker 1: have substitutes in the market I E. I, E V S.

421
00:24:26,160 --> 00:24:28,640
Speaker 1: So it used to be consumers spending would drop off

422
00:24:28,640 --> 00:24:31,800
Speaker 1: from guest line prices national average hit about three dollars

423
00:24:31,840 --> 00:24:35,160
Speaker 1: and sixty three dollars and eighty cents natural guest line

424
00:24:35,200 --> 00:24:37,480
Speaker 1: I'm excuting guest line on the NIMEX now is trading

425
00:24:37,520 --> 00:24:41,480
Speaker 1: over four dollars a gallon, So the triple A average

426
00:24:42,080 --> 00:24:45,200
Speaker 1: right now is about four dollars and sixty cents national average.

427
00:24:45,520 --> 00:24:48,280
Speaker 1: Given where futures are trading now, by the fourth of July,

428
00:24:48,760 --> 00:24:51,399
Speaker 1: a guest LNE prices will be another twenty cents higher

429
00:24:51,440 --> 00:24:54,040
Speaker 1: four dollars and eighty cents. I do have to believe,

430
00:24:54,080 --> 00:24:57,480
Speaker 1: even though we've never had anything to mark this against,

431
00:24:57,880 --> 00:25:00,440
Speaker 1: we will start to see that. But to you, yes,

432
00:25:00,520 --> 00:25:03,040
Speaker 1: that it has been one of the positives. Consumers spending

433
00:25:03,080 --> 00:25:06,360
Speaker 1: the last week came out last week, uh, stronger than expected.

434
00:25:06,680 --> 00:25:09,159
Speaker 1: But the problem there is that there are we're waiting

435
00:25:09,160 --> 00:25:11,880
Speaker 1: for the other shoe to drop. Because the personal savings

436
00:25:12,080 --> 00:25:15,280
Speaker 1: rate plunged to four point four percent, we are well

437
00:25:15,320 --> 00:25:18,000
Speaker 1: below the thirty year nonrecession mean on savings and a

438
00:25:18,080 --> 00:25:21,719
Speaker 1: sixty year non recession mean on savings. In fact, savings

439
00:25:21,840 --> 00:25:25,639
Speaker 1: rates now is at the lowest point since so the

440
00:25:25,640 --> 00:25:27,879
Speaker 1: bottom line re leases, we've run out of all the

441
00:25:27,920 --> 00:25:31,320
Speaker 1: steamless money Americans are dipping into their piggy banks. It

442
00:25:31,400 --> 00:25:33,840
Speaker 1: costs more to drive to your picnics to go to

443
00:25:33,840 --> 00:25:36,760
Speaker 1: the beach, so forth. So in the next quarter. Yes,

444
00:25:36,840 --> 00:25:40,160
Speaker 1: I do expect to see consumer spending to tail off,

445
00:25:40,320 --> 00:25:43,760
Speaker 1: which of course is a problem, giving that consumer spending

446
00:25:43,760 --> 00:25:46,680
Speaker 1: these two thirds of the US economy and this therefore,

447
00:25:46,720 --> 00:25:48,879
Speaker 1: this is why I'm still comfortable in saying, if the

448
00:25:49,000 --> 00:25:53,080
Speaker 1: United States is not currently in recession, given these food costs,

449
00:25:53,320 --> 00:25:57,080
Speaker 1: these uh energy costs, are falling income, we will be

450
00:25:57,359 --> 00:25:59,920
Speaker 1: in a recession within the next six months. Stephen uses,

451
00:26:00,040 --> 00:26:02,800
Speaker 1: I thank you, but um, that one was a little

452
00:26:02,800 --> 00:26:05,959
Speaker 1: bit depressing. Stephen, thank you though. Anyway, Steven Schalk at

453
00:26:06,000 --> 00:26:14,960
Speaker 1: the show Growth, thank you, buddy. This is not a

454
00:26:15,080 --> 00:26:18,800
Speaker 1: small matter. Lean forward and listened Global Wall Street. There's

455
00:26:18,800 --> 00:26:22,040
Speaker 1: a guy up in Connecticut, runs a small shop who

456
00:26:22,040 --> 00:26:26,520
Speaker 1: says cash is trash. Deborah Cunningham Joint federated when she's

457
00:26:26,560 --> 00:26:29,959
Speaker 1: twelve years old. She's been doing this forever. She is

458
00:26:30,080 --> 00:26:34,240
Speaker 1: the absolute dean of global Liquidity markets and c I

459
00:26:34,320 --> 00:26:37,480
Speaker 1: O it federated Ermes c f A, Pittsburgh, and the

460
00:26:37,520 --> 00:26:40,359
Speaker 1: rest of it is well, and Debora, you go after

461
00:26:40,520 --> 00:26:45,119
Speaker 1: Mr Dalio and you say cash is an asset. Discuss

462
00:26:45,200 --> 00:26:49,760
Speaker 1: why cash is not trash? Well, Well, first of all,

463
00:26:49,880 --> 00:26:51,639
Speaker 1: I want to know how I can get in on

464
00:26:51,840 --> 00:26:57,000
Speaker 1: the trip to Vienna very in those emails. As far

465
00:26:57,080 --> 00:27:00,160
Speaker 1: as you know, the cash markets at this point, as

466
00:27:00,200 --> 00:27:03,359
Speaker 1: you mentioned earlier, we have been in a zero yield

467
00:27:03,520 --> 00:27:06,840
Speaker 1: environment for the better part of fourteen years. Now at

468
00:27:06,840 --> 00:27:09,320
Speaker 1: this point in time, it's not a healthy market. Seventeen

469
00:27:09,359 --> 00:27:12,639
Speaker 1: percent isn't healthy, but seventeen basis points isn't healthy. We

470
00:27:12,680 --> 00:27:15,440
Speaker 1: are now getting back to a point from an economic standpoint,

471
00:27:15,480 --> 00:27:18,959
Speaker 1: where we have an inflationary environment that is above the

472
00:27:18,960 --> 00:27:21,240
Speaker 1: bare minimums one and a half to to and a

473
00:27:21,359 --> 00:27:25,680
Speaker 1: quarter per cent in In that environment, we need short

474
00:27:25,760 --> 00:27:27,959
Speaker 1: term yields that are above that, and we are getting

475
00:27:28,160 --> 00:27:32,000
Speaker 1: to that, uh to that end result. As such, your

476
00:27:32,040 --> 00:27:36,800
Speaker 1: cash is now a valuable um investment that no longer

477
00:27:37,160 --> 00:27:42,560
Speaker 1: is just there earning your earning safety and and you know,

478
00:27:42,600 --> 00:27:46,280
Speaker 1: a minimal return. It is now not only earning safety,

479
00:27:46,640 --> 00:27:50,879
Speaker 1: but also earning a viable return above where the inflationary

480
00:27:50,960 --> 00:27:53,480
Speaker 1: rate is. We're getting there. We're not there yet, but

481
00:27:53,680 --> 00:27:57,440
Speaker 1: certainly certainly above you know, sort of the zero bound

482
00:27:57,840 --> 00:28:00,200
Speaker 1: where we have been locked for a very long rate

483
00:28:00,200 --> 00:28:01,840
Speaker 1: of town and the heritage of this folks, for the

484
00:28:01,880 --> 00:28:06,160
Speaker 1: Federative funds basically is a generalization. They invented the money

485
00:28:06,200 --> 00:28:08,399
Speaker 1: market fund, there's something that would equival with that. But

486
00:28:08,440 --> 00:28:10,480
Speaker 1: they've been doing this in owning the high ground on

487
00:28:10,520 --> 00:28:14,160
Speaker 1: short term paper for years. Deborah Cunningham talked to Leaguard

488
00:28:14,240 --> 00:28:17,160
Speaker 1: in the CBS. John and I were talking about should

489
00:28:17,240 --> 00:28:23,080
Speaker 1: we fear these initial rate rises from any major central bank? Well,

490
00:28:23,160 --> 00:28:25,280
Speaker 1: I do think the e c B, as was mentioned before,

491
00:28:25,359 --> 00:28:28,480
Speaker 1: has some unique issues going on with it. Certainly Brexit

492
00:28:28,800 --> 00:28:31,680
Speaker 1: complicated and you know, it was a factor that led

493
00:28:31,840 --> 00:28:35,000
Speaker 1: into um some of the shortcomings of both the UK

494
00:28:35,200 --> 00:28:39,120
Speaker 1: economy as well as the European economy in in broad terms.

495
00:28:39,440 --> 00:28:41,400
Speaker 1: So I think that's a factor that still has to

496
00:28:41,480 --> 00:28:43,000
Speaker 1: be dealt with in a way that we are not

497
00:28:43,360 --> 00:28:46,760
Speaker 1: subjected to here in the United States. Having said that,

498
00:28:47,200 --> 00:28:50,520
Speaker 1: when you look at those economies, yes they're not as vibrant,

499
00:28:50,600 --> 00:28:54,320
Speaker 1: they're not as um fulsome and certainly from a labor

500
00:28:54,440 --> 00:28:57,400
Speaker 1: market perspective, they don't have the same um you know,

501
00:28:57,600 --> 00:29:00,000
Speaker 1: numbers that we have along those lines of saying strange

502
00:29:00,120 --> 00:29:03,200
Speaker 1: that we have and as such there are more challenges.

503
00:29:03,600 --> 00:29:07,000
Speaker 1: And yet they should not be in a negative interest

504
00:29:07,120 --> 00:29:10,440
Speaker 1: rate environment. They should be at a point where there

505
00:29:10,560 --> 00:29:13,400
Speaker 1: is cash you know there are cash earnings there as well.

506
00:29:13,520 --> 00:29:16,959
Speaker 1: The economies for the most part are not in um

507
00:29:17,080 --> 00:29:20,040
Speaker 1: any kind of danger of going into a recession, not

508
00:29:20,240 --> 00:29:24,000
Speaker 1: a large not not not a large growth environment. But

509
00:29:24,320 --> 00:29:26,120
Speaker 1: when you're looking at you know, sort of steady and

510
00:29:26,280 --> 00:29:29,480
Speaker 1: sure you may see some setbacks as you go from

511
00:29:29,680 --> 00:29:32,960
Speaker 1: you know, minus five to zero to plus five to one,

512
00:29:33,560 --> 00:29:36,760
Speaker 1: but there there that that that's part of what needs

513
00:29:36,840 --> 00:29:39,800
Speaker 1: to happen in order to get out of the I

514
00:29:39,880 --> 00:29:42,280
Speaker 1: think part of the malaise that they have been in

515
00:29:42,360 --> 00:29:45,280
Speaker 1: in addition to Brexit, has been the negative rate environment

516
00:29:45,760 --> 00:29:49,160
Speaker 1: has not done healthy fixed income alternatives that we're just

517
00:29:49,240 --> 00:29:51,960
Speaker 1: real quick here. I'm wondering whether they're actually seeing investors

518
00:29:52,040 --> 00:29:54,880
Speaker 1: respond to this idea that cash is not trash, that

519
00:29:54,960 --> 00:29:57,360
Speaker 1: it's a viable asset class and its own right with

520
00:29:57,520 --> 00:30:00,880
Speaker 1: real yield. Is that something that you're seeing a creative

521
00:30:00,920 --> 00:30:04,680
Speaker 1: shift away from riskier assets back into cash for the

522
00:30:04,800 --> 00:30:09,880
Speaker 1: asset value. Yes, it's it's out of riskier assets, absolutely.

523
00:30:10,280 --> 00:30:14,520
Speaker 1: It's also out of bank deposit assets because those um

524
00:30:14,800 --> 00:30:18,800
Speaker 1: don't follow the natural market rates. They're an administered rate,

525
00:30:18,920 --> 00:30:21,440
Speaker 1: and so they remain in that zero bound for the

526
00:30:21,520 --> 00:30:24,320
Speaker 1: most part. Um for most banks who don't want deposits,

527
00:30:24,640 --> 00:30:27,560
Speaker 1: and it's certainly something that I think is a welcome

528
00:30:28,200 --> 00:30:31,960
Speaker 1: um alternative for investors that don't want to take on

529
00:30:32,080 --> 00:30:35,240
Speaker 1: a lot of risk, want to maintain a lot of liquidity,

530
00:30:35,440 --> 00:30:38,760
Speaker 1: keep their powder dry, yet still earn a return in

531
00:30:38,880 --> 00:30:42,240
Speaker 1: the process of keeping their cash invested. Debra, looking forward

532
00:30:42,240 --> 00:30:44,560
Speaker 1: to your parents in Fianna. Thanks for being with us, Debra.

533
00:30:44,680 --> 00:30:47,840
Speaker 1: Kind of give that federates have makes This is the

534
00:30:47,880 --> 00:30:52,520
Speaker 1: Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays

535
00:30:52,600 --> 00:30:56,000
Speaker 1: from seven to ten am Eastern on Bloomberg Radio and

536
00:30:56,160 --> 00:30:59,840
Speaker 1: on Bloomberg Television each day from six to nine am

537
00:31:00,480 --> 00:31:04,200
Speaker 1: for insight from the best in economics, finance, investment, and

538
00:31:04,360 --> 00:31:10,840
Speaker 1: international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,

539
00:31:11,040 --> 00:31:14,600
Speaker 1: Bloomberg dot com, and of course on the terminal. I'm

540
00:31:14,680 --> 00:31:17,280
Speaker 1: Tom keene In. This is Bloomberg