WEBVTT - Surveillance: Market Attitudes with Marks (Podcast) 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg's Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferrell and Lisa Bramowitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.759 Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:31.520 and of course on the Bloomberg Terminal. Everyone reading Howard 0:00:31.600 --> 0:00:36.000 Marks read leans forward and reads a little more carefully. 0:00:36.080 --> 0:00:39.840 He is successful. He is a philanthropist, and Lisa bramwits 0:00:40.040 --> 0:00:41.800 we know for certain as a member of the board 0:00:41.800 --> 0:00:45.520 of Trustees of the Metropolitan Museum of Art, the met 0:00:45.600 --> 0:00:49.199 Gala is Howard Mark's fault. Yes, well, we actually very 0:00:49.280 --> 0:00:51.320 much appreciate it for us who have spent many, many 0:00:51.320 --> 0:00:53.800 hours at the metropolit Museum of Ark. There also is 0:00:53.800 --> 0:00:56.280 this question of investor psychology, and Howard Marks is co 0:00:56.400 --> 0:00:59.200 chair and co founder of oak Tree Capital and Frankly Uh, 0:00:59.440 --> 0:01:02.400 one of the co founders of the entire distress debt market, 0:01:02.600 --> 0:01:07.280 really understands how psychology can drive what is perhaps the 0:01:07.319 --> 0:01:10.080 best philosophy going forward, and he writes the fabulous memos 0:01:10.560 --> 0:01:13.039 UH from time to time as latest Bullmarke at Rhymes. 0:01:13.080 --> 0:01:15.120 Howard thank you so much for being with us. I 0:01:15.160 --> 0:01:18.520 want to start with trying to understand investors psychology and 0:01:18.560 --> 0:01:21.360 as a student of history, where are we right now 0:01:21.480 --> 0:01:26.360 in terms of bullish or bearish? UM. I think that 0:01:26.840 --> 0:01:33.360 UH attitudes were quite there bullish UH prior to a 0:01:33.400 --> 0:01:36.800 few months ago. UM, with the exception of a brief 0:01:37.319 --> 0:01:41.959 UH respite during the pandemic. We've been in a bullish 0:01:42.000 --> 0:01:45.880 climate since, uh, since the end of the global financial 0:01:45.920 --> 0:01:50.520 crisis in oh nine. Not wildly bullish, UH, not so certainly, 0:01:50.520 --> 0:01:54.640 not what I would call euphoria, but optimistic, and that 0:01:54.760 --> 0:01:58.440 has been crimp. Now. You know, a lot of the 0:01:58.520 --> 0:02:03.320 big name stocks are all fifty seventy eight percent. The 0:02:03.400 --> 0:02:08.080 whole market is off. I guess that probably uh from 0:02:08.080 --> 0:02:12.000 the high. So I would say that UH attitudes are 0:02:12.000 --> 0:02:17.919 more balanced today. But UH, you know, when when there's euphoria, 0:02:17.960 --> 0:02:21.440 when there's optimism, when there's greed, when there's risk tolerance 0:02:21.720 --> 0:02:25.080 and so forth, that's a very difficult climate for the 0:02:25.280 --> 0:02:31.160 value investor to find bargains. UH. So we're happier today 0:02:31.160 --> 0:02:32.840 than we were six months ago. I don't know if 0:02:32.840 --> 0:02:34.920 we're going to be happier six months from now. That 0:02:35.040 --> 0:02:37.200 is to say, that the bargains will be more pronounced, 0:02:37.360 --> 0:02:39.600 but at least the as they say, the bloom is 0:02:39.639 --> 0:02:42.560 off the rose. At a time of such incredible uncertainty, 0:02:42.880 --> 0:02:46.520 how do you position seeing value now but also preparing 0:02:46.840 --> 0:02:50.119 for seeing more value in six months. You know, one 0:02:50.120 --> 0:02:52.720 of the six tenets of Oakrias investment philosophy, which we 0:02:52.840 --> 0:02:55.519 established when we started in April of and I've never 0:02:55.639 --> 0:02:59.520 changed a word, and I believe in thoroughly, is that, uh, 0:03:00.000 --> 0:03:04.040 we're not market timers and and and that means mostly 0:03:04.080 --> 0:03:09.200 two things. We never sell to raise cash to prepare 0:03:09.240 --> 0:03:12.720 for a decline. Uh. And we never say it's cheap today, 0:03:12.720 --> 0:03:14.640 but it will be cheaper in six months, so will wait. 0:03:14.800 --> 0:03:16.880 If it's cheap today, we buy it. If it's cheaper 0:03:16.880 --> 0:03:20.080 and six months more, we buy more. Uh. And I 0:03:20.120 --> 0:03:23.720 think that that works much better than an assertion that 0:03:23.800 --> 0:03:25.800 we know where the market will be in six months. 0:03:25.919 --> 0:03:27.799 This is really important at a time when so many 0:03:27.840 --> 0:03:30.680 pensions and institutional investors have been shooting for that seven 0:03:30.680 --> 0:03:32.760 and a half to eight percent bogie. We talked about 0:03:32.800 --> 0:03:35.880 that extensively in the past five to six years, This 0:03:36.000 --> 0:03:38.960 idea that that seemed completely unachievable in an era of 0:03:39.000 --> 0:03:43.000 quantitative easing, Suddenly high yield bonds have an average yield 0:03:43.040 --> 0:03:45.880 of more than seven percent. Is this the best period 0:03:45.960 --> 0:03:48.680 that you have seen for pensions to actually hit their 0:03:48.680 --> 0:03:52.240 bogies for more than a decade. Well, I think that's 0:03:52.320 --> 0:03:56.080 right in in in in the well, of course many 0:03:56.120 --> 0:03:59.880 have hit their bogies. Uh, it just didn't look in 0:04:00.040 --> 0:04:02.960 advanced like they would. But the stock market and many 0:04:03.000 --> 0:04:05.520 other things have surprised on the upside for the last 0:04:05.520 --> 0:04:09.760 ten years. Um. But now, as you point out one 0:04:09.800 --> 0:04:14.320 of our big activities as high yield bonds, and a 0:04:14.400 --> 0:04:18.839 year ago they were yielding in the threes of percent. 0:04:19.360 --> 0:04:21.640 One deal was even done in the twos. That's not 0:04:21.720 --> 0:04:24.480 a very high yield for high yield today, as you say, 0:04:24.520 --> 0:04:26.960 they yield in the sevens. So a pension fund that 0:04:27.040 --> 0:04:30.400 needs seven or seven and a half can make use 0:04:30.560 --> 0:04:35.279 of high eel bonds and everything. You know. See when 0:04:35.600 --> 0:04:39.800 everybody gets concerned when prices decline, but if you flip 0:04:39.880 --> 0:04:44.320 that over, the flip side of price deterioration is increases 0:04:44.400 --> 0:04:47.960 in prospective returns. So now the prospective returns are on 0:04:48.080 --> 0:04:51.400 many asset classes are higher than they were just a 0:04:51.400 --> 0:04:55.440 little while ago, and Uh. Again, a much better climate 0:04:55.480 --> 0:04:58.040 for the bargain hunter. Some people would counter this by 0:04:58.040 --> 0:05:01.360 saying inflation takes a lot of the value out of 0:05:01.400 --> 0:05:03.960 those returns that basically, on a real basis you're still 0:05:04.000 --> 0:05:06.640 not getting very much. How do you counter that as 0:05:06.640 --> 0:05:09.280 a long term investor by saying, you know what, at 0:05:09.320 --> 0:05:12.400 this point, it's worth it to get higher returns, even 0:05:12.440 --> 0:05:17.120 if on a real basis it's not necessarily that much more. Well, 0:05:17.320 --> 0:05:20.400 you're right in that we're not talking about an increase 0:05:20.440 --> 0:05:23.000 in real returns. Were increasing to a man increase in 0:05:23.000 --> 0:05:27.640 nominal returns. Most most pension funds and other organizations reckon 0:05:27.720 --> 0:05:32.360 their need for return in nominal terms. Uh. But um, 0:05:32.400 --> 0:05:36.840 you know, I mean that is a challenge. Uh. And uh, 0:05:36.960 --> 0:05:41.240 nobody knows what inflation is going to do. Uh. I 0:05:41.279 --> 0:05:45.200 think I heard out of one year your previous guests 0:05:45.520 --> 0:05:49.000 say that, you know, some of the inflation factors will 0:05:49.240 --> 0:05:53.039 probably subside in the next few months, which means all 0:05:53.120 --> 0:05:57.080 things being uh, an increase in real returns. How much 0:05:57.080 --> 0:06:00.360 are you trying to game out where inflation is going 0:06:00.400 --> 0:06:03.000 to go over the next six to twelve months. Considering 0:06:03.040 --> 0:06:04.559 the fact that I know that you do not time 0:06:04.600 --> 0:06:06.560 the market or look at a sort of day to 0:06:06.640 --> 0:06:09.520 day price swing kind of issue. But this really does 0:06:09.600 --> 0:06:15.160 determine how important some of these returns will be going forward. Uh, 0:06:15.560 --> 0:06:19.919 yes it does, but uh, I don't think there's anything 0:06:20.279 --> 0:06:22.520 to be known on that subject, and I'm sure we 0:06:22.520 --> 0:06:26.920 don't know it. Uh. You know. And another uh tenant 0:06:26.920 --> 0:06:29.080 of our investment philosophy they're only six we're going to 0:06:29.080 --> 0:06:33.000 touch on two today, is that we our investment decisions 0:06:33.000 --> 0:06:37.039 that are not based on macro forecasts. Macro forecasts are 0:06:37.120 --> 0:06:40.840 very important. The only problem is they're rarely right and 0:06:40.839 --> 0:06:46.839 and uh and more importantly, uh, any one forecaster is 0:06:47.000 --> 0:06:50.680 rarely right more often than the others. So we don't 0:06:51.120 --> 0:06:53.400 make our decisions on that basis. We are what's called 0:06:53.400 --> 0:06:57.040 bottom up investors. We invest on the basis of micro, 0:06:57.240 --> 0:07:02.080 not macro companies, industry securities, and we feel there, through 0:07:02.160 --> 0:07:04.320 hard work and skill, we can get an edge. So 0:07:04.480 --> 0:07:07.240 where are some of the industry some of the areas 0:07:07.320 --> 0:07:11.760 that you're actually seeing deep value? You know, Uh, they 0:07:11.800 --> 0:07:16.720 are much more spread around than they were before. Uh. 0:07:17.000 --> 0:07:22.600 You know, some growth names are are offering much better 0:07:22.680 --> 0:07:26.000 value than they did a year or two ago. Down 0:07:27.320 --> 0:07:33.040 But you know, we continue to find opportunities throughout the 0:07:33.680 --> 0:07:39.560 investment universe. Uh. Um and UH you know, the prosaic 0:07:39.600 --> 0:07:44.160 industries are also offering good, good value. When you talk 0:07:44.200 --> 0:07:47.000 about the global investment picture, I know, over the years, 0:07:47.080 --> 0:07:49.680 especially as the US yielded less and less and yet 0:07:49.760 --> 0:07:53.360 less in real terms and phenominal terms, you looked overseas, 0:07:53.360 --> 0:07:57.360 in particular to China as a potential area of perspective return. 0:07:57.720 --> 0:08:00.200 Has that changed as yields have gone up in the 0:08:00.280 --> 0:08:04.080 US and frankly the economy has slowed so substantially in China. Well. 0:08:04.120 --> 0:08:06.360 On the one hand, we have a preference for investing 0:08:06.360 --> 0:08:11.480 in the US. UH. You know, UH, the US in 0:08:11.640 --> 0:08:14.680 most regards has the best economy in the world, and 0:08:14.760 --> 0:08:19.880 it has an excellent UH environment for rule of law, 0:08:20.120 --> 0:08:24.400 for being able to predict the outcome when uh, when 0:08:25.120 --> 0:08:29.760 various UH stakeholders rights come into conflict. That's very important 0:08:29.800 --> 0:08:33.079 to us, especially you mentioned our business in distress debt investing. 0:08:33.120 --> 0:08:35.600 That's very important if you're going to buy distress credits 0:08:35.760 --> 0:08:38.400 to be able to predict how will be treated by 0:08:38.440 --> 0:08:44.440 the law. UM. On the other hand, um uh from 0:08:44.480 --> 0:08:46.960 time to time other parts of the world all for 0:08:47.040 --> 0:08:50.400 better bargains. Uh, we have the best in the US, 0:08:50.520 --> 0:08:54.240 but the best usually doesn't come cheap. So and third, 0:08:54.400 --> 0:08:56.960 on the third hand, we like to have some diversity 0:08:57.000 --> 0:09:00.280 in our portfolio. So you know, we've been in sting 0:09:00.280 --> 0:09:03.320 in places like China and India UH in the last 0:09:03.360 --> 0:09:06.920 couple of years and and absolutely will continue to do so. 0:09:07.280 --> 0:09:10.319 When I hear people say, you know, I've made my 0:09:10.400 --> 0:09:13.320 living for the last fifty years investing in the things 0:09:13.360 --> 0:09:16.920 other people said, we're uninvestable, high yield bonds, distress dead, 0:09:16.960 --> 0:09:21.880 emerging markets, uh, etcetera. And when I hear people say 0:09:21.880 --> 0:09:26.400 that China is uninvestable to me, uninvestable says maybe there 0:09:26.400 --> 0:09:29.520 are some bargains there if if everybody else is boycotting 0:09:29.559 --> 0:09:32.640 that sector, how fully invested are you? Are you always 0:09:32.640 --> 0:09:36.280 fully invested? We strive to be fully invested. Again, we're 0:09:36.320 --> 0:09:38.840 not market timers. Market timers say, well right now we 0:09:38.880 --> 0:09:43.200 want cash. We strive to be fully invested. Our clients 0:09:43.280 --> 0:09:45.920 hire us to invest in our asset class, not to 0:09:46.000 --> 0:09:51.199 time the market. UM. And again, if better bargains arise, 0:09:51.280 --> 0:09:54.040 I'm always confident that we'll be able to raise more 0:09:54.040 --> 0:09:57.360 money to take advantage. About three years ago when we 0:09:57.360 --> 0:10:02.000 were talking about what prospective returns seemed plausible or realistic 0:10:02.440 --> 0:10:05.840 on on some sort of safe for reliable basis. You 0:10:05.840 --> 0:10:07.600 said five to five and a half percent. You have 0:10:07.640 --> 0:10:10.240 a good memory. Where are we now? I think we 0:10:10.280 --> 0:10:14.040 can make seven to seven and a half. I mean, 0:10:14.240 --> 0:10:17.360 I'm not telling you, I'm saying an institutional portfolio. At 0:10:17.400 --> 0:10:20.600 that time I was talking for the Metropolitan Museum of Art, 0:10:20.640 --> 0:10:24.280 where I chaired the Investment Community Committee, and I talked 0:10:24.400 --> 0:10:27.319 the expectation down to five five and a half as 0:10:27.360 --> 0:10:29.920 you say, or I think we came out of I 0:10:29.920 --> 0:10:32.640 think the committee as a whole came out at six. Today, 0:10:32.760 --> 0:10:36.920 I think an institution like the MET or another pension 0:10:36.960 --> 0:10:40.160 fund and downmin etcetera can make seven seven and a half. 0:10:40.200 --> 0:10:41.760 Of course, you have to be willing to go into 0:10:41.800 --> 0:10:45.040 alternatives to do it, but most people are willing. What 0:10:45.160 --> 0:10:52.000 kind of alternatives you know? The big class classes are 0:10:52.080 --> 0:10:55.200 private equity, private debt, Then there's the stress debt, there's 0:10:55.240 --> 0:11:01.880 real estate UM and UH specialized forms of an vesting UM. 0:11:02.080 --> 0:11:05.280 The important thing is not which sectors. The important thing 0:11:05.360 --> 0:11:09.160 is which manager. You know. In the public asset classes 0:11:09.200 --> 0:11:12.080 like stocks and bonds, we call them beta markets, because 0:11:12.120 --> 0:11:16.000 most of the return is determined by the performance of 0:11:16.040 --> 0:11:18.839 the market, and which manager you have means a little 0:11:18.840 --> 0:11:22.120 plus or a little minus. In the alternative markets, there 0:11:22.160 --> 0:11:25.640 isn't that gravitational pull towards the market. Return is really 0:11:25.720 --> 0:11:30.440 market to pace it. What really managers matters is whether 0:11:30.480 --> 0:11:36.040 you're manager is highly skilled and disciplined or not. And uh, 0:11:36.080 --> 0:11:38.840 that's why we call them alpha markets skill markets. Do 0:11:38.880 --> 0:11:41.079 you think that your peers are taking undue risk or 0:11:41.120 --> 0:11:45.640 not enough risk? Um? Some of each. Of course, there's 0:11:45.640 --> 0:11:48.680 a there's a disparity, you know, there's there's a range, 0:11:48.800 --> 0:11:53.600 and piers do different things. Um. The point is an 0:11:53.640 --> 0:11:58.160 area like private lending, where we're very active, has been 0:11:58.840 --> 0:12:02.800 darling in the past a decade. A lot of money 0:12:02.800 --> 0:12:04.600 and a lot of managers and a lot of funds 0:12:04.600 --> 0:12:08.600 have moved into the area. Buffett always puts it best. 0:12:08.800 --> 0:12:10.599 When the tide goes out, we find out who was 0:12:10.600 --> 0:12:14.600 swimming without a bathing suit. When when economic and financial 0:12:14.640 --> 0:12:17.880 conditions become more difficult, we find out who made good 0:12:17.880 --> 0:12:20.640 credit decisions and who made bad ones. We'll see what's 0:12:20.640 --> 0:12:25.800 the historical precedent for this moment, for this moment, Oh, 0:12:25.840 --> 0:12:28.760 you know, it's very hard to to to find one 0:12:28.840 --> 0:12:34.200 that fits exactly. Um. You know, we've never had this 0:12:34.320 --> 0:12:38.600 externality of the pandemic. There hasn't been a war going 0:12:38.679 --> 0:12:42.880 on in a long time and an important international conflict, 0:12:43.559 --> 0:12:46.880 uh with with the threats this embodies, We've never the 0:12:46.960 --> 0:12:50.760 US never had an economic rival like China before. We've 0:12:50.800 --> 0:12:55.600 never really had an economic rival since World War two. Uh. 0:12:55.600 --> 0:13:00.000 But and of course we have uh historically low interest 0:13:00.160 --> 0:13:02.800 rates we've had. We had interest rates went down by 0:13:02.880 --> 0:13:05.120 what we call two thousand basis points, that is to say, 0:13:05.120 --> 0:13:11.320 twenty percentage points from eighty two two two. Uh, and 0:13:11.400 --> 0:13:14.800 that was a big tail wind. So these conditions are 0:13:16.320 --> 0:13:19.760 are not reminiscent of any that I've lived through. But 0:13:19.880 --> 0:13:23.120 I think the important thing for your purposes and hopefully 0:13:23.160 --> 0:13:26.680 your audience's purposes, is that I think that are are 0:13:28.520 --> 0:13:33.320 taken as a whole. I think conditions are fairly normal 0:13:33.400 --> 0:13:36.439 today in terms of how you should manage your money 0:13:36.520 --> 0:13:39.040 and the risks you should take. And to me, that's 0:13:39.080 --> 0:13:41.880 the key decision. Howard, thank you so much for taking 0:13:41.880 --> 0:13:44.640 the time. Howard Marks, the co chair and co founder 0:13:44.720 --> 0:13:53.880 of oak Tree Capital. Eddie five, Bill Duntley, the former 0:13:53.880 --> 0:13:56.120 New York Fed President at with this this morning. Som 0:13:56.120 --> 0:13:58.360 has the headline of his new column, the FATS mild 0:13:58.440 --> 0:14:02.920 inflation forecasts need explaining. They do they need explaining. It 0:14:03.040 --> 0:14:05.319 is a brilliant note. I'll have it on Twitter. I'm 0:14:05.320 --> 0:14:08.199 sure John and Lisa will as well. William Dudley is 0:14:08.200 --> 0:14:10.240 a former president of New York found And of course 0:14:10.240 --> 0:14:12.880 we're writing for Bloomberger thrill that Bill Dudley could join 0:14:13.000 --> 0:14:16.920 us this morning. Bill buried in your essay on inflation 0:14:17.800 --> 0:14:20.320 is a single sentence on what it means for the 0:14:20.440 --> 0:14:24.560 labor market. April of two thousand twenty and fourteen point 0:14:24.640 --> 0:14:28.040 seven percent unemployment rate. We're at four percent at the 0:14:28.080 --> 0:14:30.240 beginning of this year. We're now down to three point 0:14:30.560 --> 0:14:34.400 six percent. I need you to explain to our listeners 0:14:34.520 --> 0:14:38.160 and viewers why it's the Fed's job to move the 0:14:38.280 --> 0:14:43.840 unemployment rate, as you state, up above four percent. Well, 0:14:43.920 --> 0:14:46.400 the labor markets the tightest basically it's ever been. And 0:14:46.440 --> 0:14:48.720 you can see that by the ratio of unfilled job 0:14:48.760 --> 0:14:51.120 relative to the number of people that are unemployed. It's 0:14:51.520 --> 0:14:54.760 that ratio is one point nine to one. UH in 0:14:54.840 --> 0:14:57.040 February was one point two to one. So we have 0:14:57.080 --> 0:15:00.800 a lavor market that's unpresidentally tight. The FED needs to 0:15:00.840 --> 0:15:03.920 loosen that up or wage pressures will accumulate and that 0:15:04.000 --> 0:15:07.080 will keep inflation above the feds two percent inflation objective. 0:15:07.600 --> 0:15:09.400 The problem the FED has is that in the past 0:15:09.440 --> 0:15:11.960 it's been very, very difficult to push the unemployment rate 0:15:12.040 --> 0:15:15.920 up meaningfully without precipitating a hard landing. That's what the 0:15:16.000 --> 0:15:17.360 FEN is going to try to do this time, but 0:15:17.440 --> 0:15:20.920 extremely difficult to do. And they haven't really been as forthcoming, 0:15:20.960 --> 0:15:23.880 I think, in their forecast as as they need to be, 0:15:23.880 --> 0:15:27.120 because if you look at their last summary of economic projections, 0:15:27.120 --> 0:15:32.000 for example, the disinflation occurred almost immaculately. Uh, the FED 0:15:32.080 --> 0:15:34.840 didn't really tighten very much. The unemployer right didn't rise, 0:15:35.360 --> 0:15:38.560 yet inflation came back to the defense two percent target, 0:15:38.600 --> 0:15:42.000 and it really beg the question what caused inflation to 0:15:42.000 --> 0:15:44.400 come down? I think the way you get inflation down 0:15:44.440 --> 0:15:46.080 is you need more slack in the U S lever market. 0:15:46.520 --> 0:15:49.040 That's not a friendly message from from the FED, but 0:15:49.080 --> 0:15:51.000 that's what's necessary at this point. And but I'll just 0:15:51.000 --> 0:15:52.920 to put some numbers on that. As you say, kill 0:15:52.960 --> 0:15:55.360 PC A year run for the FED twenty two four 0:15:55.400 --> 0:15:58.360 point one, twenty three, two point six, and unemployment three 0:15:58.360 --> 0:16:00.920 point five and then three point five again. And many 0:16:00.920 --> 0:16:03.040 people have been asking the same question, Bill, you know 0:16:03.080 --> 0:16:05.200 the chance of right now, it's this conversation about a 0:16:05.240 --> 0:16:09.040 pause in September. How are you interpreting some of that conversation. 0:16:10.720 --> 0:16:12.840 I wouldn't put too much stock on it. I think 0:16:12.880 --> 0:16:15.080 what's what's happening is the Fed's pretty convinced that they 0:16:15.080 --> 0:16:17.480 need to go into something close to neutral, and you know, 0:16:17.920 --> 0:16:21.160 expeditiously is the way that they put it um, and 0:16:21.240 --> 0:16:23.760 so that's what they're doing. The notion at some point 0:16:23.800 --> 0:16:25.680 they're gonna take it to pause and look around. Of 0:16:25.720 --> 0:16:27.800 course that's gonna happen at some point, but it's gonna 0:16:27.800 --> 0:16:30.560 be driven by the the economic data. I think that 0:16:30.640 --> 0:16:33.840 the commedy is gonna have enough momentum to keep the Fed. 0:16:34.880 --> 0:16:38.720 The Fed will keep going UH into the fall markets 0:16:38.720 --> 0:16:40.880 priced to a peak in the federal funds rate of three. 0:16:41.600 --> 0:16:44.200 I think we're gonna get to their UH pretty easily, 0:16:44.520 --> 0:16:47.400 and the Federal probably actually have to push beyond that ultimately, Bill, 0:16:47.440 --> 0:16:49.600 what kind of unemployment rate are you looking for to 0:16:49.640 --> 0:16:53.240 indicate perhaps a tightening a loosening in the very very 0:16:53.280 --> 0:16:56.880 tight labor market. Well, the Fed's on forecast is that 0:16:57.480 --> 0:17:00.280 a neutral unemployee rateing is someone two percent of aitions 0:17:00.320 --> 0:17:01.760 four percent. So I think you need to get the 0:17:01.840 --> 0:17:04.760 naployent rate up to at least four percent. The fact 0:17:04.840 --> 0:17:07.840 that we have so many unfilled jobs suggests that maybe 0:17:08.240 --> 0:17:11.760 the unemployer rate consistent with two percent inflations even higher 0:17:11.800 --> 0:17:14.400 than four percent. So I think we need at least 0:17:14.400 --> 0:17:17.280 get to four percent, and that's the problem. It's difficult 0:17:17.280 --> 0:17:20.080 to do that without participitating a full blown recession bill. 0:17:20.119 --> 0:17:22.320 Did you take any message from the fact that President 0:17:22.359 --> 0:17:24.920 Biden met with FED Chair J Powell yesterday that there 0:17:25.040 --> 0:17:28.639 was this focus on the FED being the main driver 0:17:28.920 --> 0:17:32.000 for what happens with inflation going forward and the politicization 0:17:32.600 --> 0:17:36.360 of the Federal Reserve. Well, I think Biden was actually 0:17:36.400 --> 0:17:39.280 not politicizing the FED. Is basically saying the job is 0:17:39.280 --> 0:17:42.560 to control inflation, and I'm not gonna challenge the independence 0:17:42.560 --> 0:17:44.840 of the FED to do that. In some ways, though, 0:17:44.840 --> 0:17:47.280 he's putting the burden now on the FED Reserve rather 0:17:47.280 --> 0:17:50.480 than on the administration. I viewed it as a political event, 0:17:50.520 --> 0:17:53.439 not an economic event. I don't think it changes what 0:17:53.480 --> 0:17:55.800 the federal is going to do or what the Biden 0:17:55.800 --> 0:17:58.400 administration is going to do. Bill, we had a one 0:17:58.440 --> 0:18:02.880 off medical event, a pandemic of our lifetime that got 0:18:02.920 --> 0:18:06.639 us out to fourteen point seven percent unemployment. Can we 0:18:06.720 --> 0:18:10.760 cut any central bank slack and have them extend out 0:18:10.800 --> 0:18:14.639 the X axis and just take longer to get this 0:18:14.800 --> 0:18:20.080 done to repair off of this medical event. Well, if 0:18:20.119 --> 0:18:22.960 they take longer, the risk will be that inflation will 0:18:22.960 --> 0:18:25.720 stay higher uh, and then that will start to get 0:18:25.720 --> 0:18:28.520 embedded and higher inflation expectations, which will make their job 0:18:28.560 --> 0:18:30.680 a lot more difficult. The good news for the FED 0:18:30.800 --> 0:18:34.159 right now is they're highly credible. Market participants expect the 0:18:34.160 --> 0:18:36.240 Fed will do the job and get inflation back down. 0:18:36.560 --> 0:18:39.640 Inflation expectations that the longer her term horizons are still 0:18:39.840 --> 0:18:42.440 very well anchored. If the Fed dawdles and then the 0:18:42.520 --> 0:18:45.600 risk is that inflation expectation become less well anchored, which 0:18:45.640 --> 0:18:47.520 will make it harder for the Fed to get inflation 0:18:47.560 --> 0:18:50.680 back down. But if your view hantening not softening based 0:18:50.680 --> 0:18:52.960 on coming daight to the this FED funds might end 0:18:53.040 --> 0:18:56.480 up with a full handle and maybe not three. I 0:18:56.480 --> 0:18:58.360 don't think it's changed too much. I mean the good 0:18:58.359 --> 0:19:00.960 news that the Fed has things and end today in 0:19:01.040 --> 0:19:03.880 terms of market confidence, in terms of inflation expectations being 0:19:03.880 --> 0:19:06.919 well anchored. That's that's the good news. The bad news is, 0:19:06.920 --> 0:19:09.520 I think people are understanding how difficult this job is. 0:19:09.960 --> 0:19:11.520 What do you make of this idea that they can 0:19:11.520 --> 0:19:14.880 target job opening spell jolts data which is a little 0:19:14.880 --> 0:19:17.639 bit dated, What do you make of that? Well? I 0:19:17.680 --> 0:19:20.679 think their story is is quite an optimistic one that 0:19:20.720 --> 0:19:24.119 they can take the monetary policy sufficiently to reduce the 0:19:24.160 --> 0:19:27.320 demand for labor without actually pushing up the unemployer rate. 0:19:27.320 --> 0:19:29.960 And meanfully, this is the tightest layer market I think 0:19:30.000 --> 0:19:32.800 we've ever had. Frankly, uh and it seems to me 0:19:32.840 --> 0:19:34.560 it's the type of layer market is tighter than it's 0:19:34.560 --> 0:19:38.120 ever been before that makes the job more difficult, not easier. 0:19:38.800 --> 0:19:41.119 Super hard, Bill wonder for the catch up built downtly 0:19:41.160 --> 0:19:43.199 there they form in New York Fed President on the 0:19:43.200 --> 0:19:45.960 Path Forward and a really interesting piece on the Fence 0:19:46.000 --> 0:19:48.840 inflation forecast available on Bloomberg dot com and on the 0:19:48.840 --> 0:19:56.360 Bloomberg terminal on the Bloomberg Opinion column. Here's a note 0:19:56.359 --> 0:19:59.080 from our next guest, Tom. Back in April, we Lampoon 0:19:59.119 --> 0:20:03.080 to Washington Post opinion rights effort that obtuse observation that 0:20:03.160 --> 0:20:05.920 if it were not for that done inflation, Binan's economy 0:20:05.960 --> 0:20:08.480 would be extraordinary. The writers who went on to say 0:20:08.600 --> 0:20:12.600 that Rubbin's logic was as intellectually robust as us, saying 0:20:12.640 --> 0:20:15.760 that if our grandmother had wheels, she would be a bus. 0:20:16.359 --> 0:20:19.840 That can only be the wonderful Stephen Short, founder and 0:20:19.920 --> 0:20:23.359 president of the Short Group. John his note, folks, is 0:20:23.440 --> 0:20:26.439 just the breath of fresh air within the petroleum business 0:20:26.800 --> 0:20:30.480 is Ed Morris City Group, who we just uh listen 0:20:30.520 --> 0:20:34.000 to talks about the macro economics of the moment. Stephen 0:20:34.119 --> 0:20:38.080 Short is hyper defined. Steve, let me go to the 0:20:38.160 --> 0:20:42.719 single sentence of your note of us are simply getting 0:20:42.840 --> 0:20:49.120 poorer in this commodity surge? Will that trend continue? Absolutely? 0:20:49.160 --> 0:20:52.040 Tom So, real disposable income what we have to spend 0:20:52.320 --> 0:20:55.280 as falling in ten of the past their team months 0:20:55.320 --> 0:20:59.119 because of runaway inflation. Inflation, by the way, that all 0:20:59.160 --> 0:21:02.960 the smartest people in the world spent the better part 0:21:02.960 --> 0:21:05.960 of last year doing yeomen's work, making fools of themselves 0:21:06.000 --> 0:21:10.440 every single week saying that, oh, inflation is transitory. Yes, 0:21:10.520 --> 0:21:11.879 if I don't have to eat, if I don't have 0:21:11.920 --> 0:21:13.359 to put the lights on, if I don't want to 0:21:13.359 --> 0:21:17.240 stink cool this summer. Yes, inflation not a problem. But 0:21:17.359 --> 0:21:19.679 what we're seeing now, Tom and always comes down to 0:21:19.720 --> 0:21:22.720 commodities and what we're looking at in the energy industry. 0:21:22.840 --> 0:21:25.959 Well we know that story. But what most people, especially 0:21:26.000 --> 0:21:28.000 the E. S. G. Crowd or the people that are 0:21:28.080 --> 0:21:30.919 taking the war against natural gas is the war natural 0:21:30.920 --> 0:21:33.879 gas is a war on the American consumer. So what 0:21:34.000 --> 0:21:37.200 it has done to fertilizer prices. Of course, natural gas 0:21:37.240 --> 0:21:40.679 is a key feat stock into synthetic ammonia fertilizer. So 0:21:40.720 --> 0:21:44.000 we're putting fewer seeds into the ground this spring, which 0:21:44.000 --> 0:21:46.320 means we're gonna take fewer crops out of the ground 0:21:46.760 --> 0:21:50.560 in the fall. So the inflation has not peeped, right, 0:21:50.640 --> 0:21:52.840 I mean eat on the core level. But as far 0:21:52.880 --> 0:21:56.240 as energy and food, which is all was all inflation, 0:21:56.280 --> 0:22:01.119 aspe and and Tom, this is the problem. Runaway inflation 0:22:01.359 --> 0:22:04.200 at the gas pumping out the grocery counter has been 0:22:04.440 --> 0:22:09.000 the UH lead indicator for recession of the last six 0:22:09.040 --> 0:22:12.560 recessions in the United States, beginning with Okay, Steve, I 0:22:12.600 --> 0:22:15.240 want to go to the hyper hyper detail of your 0:22:15.280 --> 0:22:19.800 note and your true expertise on distillates, Do you have 0:22:19.920 --> 0:22:26.600 any optimism we're going to invest given these higher prices? Well, 0:22:26.640 --> 0:22:29.719 as Winston Churchill once said about America, we always make 0:22:29.760 --> 0:22:32.719 the right decision after we've tried every other decision. So 0:22:33.040 --> 0:22:36.439 I'm not quite sure we're there yet here on the 0:22:36.440 --> 0:22:39.840 East Coast. Of course, what has happened well over the 0:22:39.880 --> 0:22:44.359 past three years, we've cut a refinery capacity by so 0:22:44.440 --> 0:22:48.280 that guess lene production on the East Coast has held study. 0:22:48.320 --> 0:22:50.680 But when you cut your capacity to make things out 0:22:50.680 --> 0:22:53.640 of crude oil, something has to get So while we've 0:22:53.680 --> 0:22:57.480 maintained the status call on guess line production, diesel production 0:22:57.600 --> 0:23:01.040 has fallen for to pent so right, diesel stocks for 0:23:01.080 --> 0:23:03.720 the first time ever in the East Coast are below 0:23:03.840 --> 0:23:08.040 nine million dollars. So we're looking at a dire situation 0:23:08.200 --> 0:23:11.240 in the diesel market, but we're not quite there. The 0:23:11.359 --> 0:23:14.879 smartest thing the Biden administration can do with regard to 0:23:15.359 --> 0:23:18.639