Speaker 1: Welcome to the Bloomberg's Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Bramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg Terminal. Everyone reading Howard
Speaker 1: Marks read leans forward and reads a little more carefully.
Speaker 1: He is successful. He is a philanthropist, and Lisa bramwits
Speaker 1: we know for certain as a member of the board
Speaker 1: of Trustees of the Metropolitan Museum of Art, the met
Speaker 1: Gala is Howard Mark's fault. Yes, well, we actually very
Speaker 1: much appreciate it for us who have spent many, many
Speaker 1: hours at the metropolit Museum of Ark. There also is
Speaker 1: this question of investor psychology, and Howard Marks is co
Speaker 1: chair and co founder of oak Tree Capital and Frankly Uh,
Speaker 1: one of the co founders of the entire distress debt market,
Speaker 1: really understands how psychology can drive what is perhaps the
Speaker 1: best philosophy going forward, and he writes the fabulous memos
Speaker 1: UH from time to time as latest Bullmarke at Rhymes.
Speaker 1: Howard thank you so much for being with us. I
Speaker 1: want to start with trying to understand investors psychology and
Speaker 1: as a student of history, where are we right now
Speaker 1: in terms of bullish or bearish? UM. I think that
Speaker 1: UH attitudes were quite there bullish UH prior to a
Speaker 1: few months ago. UM, with the exception of a brief
Speaker 1: UH respite during the pandemic. We've been in a bullish
Speaker 1: climate since, uh, since the end of the global financial
Speaker 1: crisis in oh nine. Not wildly bullish, UH, not so certainly,
Speaker 1: not what I would call euphoria, but optimistic, and that
Speaker 1: has been crimp. Now. You know, a lot of the
Speaker 1: big name stocks are all fifty seventy eight percent. The
Speaker 1: whole market is off. I guess that probably uh from
Speaker 1: the high. So I would say that UH attitudes are
Speaker 1: more balanced today. But UH, you know, when when there's euphoria,
Speaker 1: when there's optimism, when there's greed, when there's risk tolerance
Speaker 1: and so forth, that's a very difficult climate for the
Speaker 1: value investor to find bargains. UH. So we're happier today
Speaker 1: than we were six months ago. I don't know if
Speaker 1: we're going to be happier six months from now. That
Speaker 1: is to say, that the bargains will be more pronounced,
Speaker 1: but at least the as they say, the bloom is
Speaker 1: off the rose. At a time of such incredible uncertainty,
Speaker 1: how do you position seeing value now but also preparing
Speaker 1: for seeing more value in six months. You know, one
Speaker 1: of the six tenets of Oakrias investment philosophy, which we
Speaker 1: established when we started in April of and I've never
Speaker 1: changed a word, and I believe in thoroughly, is that, uh,
Speaker 1: we're not market timers and and and that means mostly
Speaker 1: two things. We never sell to raise cash to prepare
Speaker 1: for a decline. Uh. And we never say it's cheap today,
Speaker 1: but it will be cheaper in six months, so will wait.
Speaker 1: If it's cheap today, we buy it. If it's cheaper
Speaker 1: and six months more, we buy more. Uh. And I
Speaker 1: think that that works much better than an assertion that
Speaker 1: we know where the market will be in six months.
Speaker 1: This is really important at a time when so many
Speaker 1: pensions and institutional investors have been shooting for that seven
Speaker 1: and a half to eight percent bogie. We talked about
Speaker 1: that extensively in the past five to six years, This
Speaker 1: idea that that seemed completely unachievable in an era of
Speaker 1: quantitative easing, Suddenly high yield bonds have an average yield
Speaker 1: of more than seven percent. Is this the best period
Speaker 1: that you have seen for pensions to actually hit their
Speaker 1: bogies for more than a decade. Well, I think that's
Speaker 1: right in in in in the well, of course many
Speaker 1: have hit their bogies. Uh, it just didn't look in
Speaker 1: advanced like they would. But the stock market and many
Speaker 1: other things have surprised on the upside for the last
Speaker 1: ten years. Um. But now, as you point out one
Speaker 1: of our big activities as high yield bonds, and a
Speaker 1: year ago they were yielding in the threes of percent.
Speaker 1: One deal was even done in the twos. That's not
Speaker 1: a very high yield for high yield today, as you say,
Speaker 1: they yield in the sevens. So a pension fund that
Speaker 1: needs seven or seven and a half can make use
Speaker 1: of high eel bonds and everything. You know. See when
Speaker 1: everybody gets concerned when prices decline, but if you flip
Speaker 1: that over, the flip side of price deterioration is increases
Speaker 1: in prospective returns. So now the prospective returns are on
Speaker 1: many asset classes are higher than they were just a
Speaker 1: little while ago, and Uh. Again, a much better climate
Speaker 1: for the bargain hunter. Some people would counter this by
Speaker 1: saying inflation takes a lot of the value out of
Speaker 1: those returns that basically, on a real basis you're still
Speaker 1: not getting very much. How do you counter that as
Speaker 1: a long term investor by saying, you know what, at
Speaker 1: this point, it's worth it to get higher returns, even
Speaker 1: if on a real basis it's not necessarily that much more. Well,
Speaker 1: you're right in that we're not talking about an increase
Speaker 1: in real returns. Were increasing to a man increase in
Speaker 1: nominal returns. Most most pension funds and other organizations reckon
Speaker 1: their need for return in nominal terms. Uh. But um,
Speaker 1: you know, I mean that is a challenge. Uh. And uh,
Speaker 1: nobody knows what inflation is going to do. Uh. I
Speaker 1: think I heard out of one year your previous guests
Speaker 1: say that, you know, some of the inflation factors will
Speaker 1: probably subside in the next few months, which means all
Speaker 1: things being uh, an increase in real returns. How much
Speaker 1: are you trying to game out where inflation is going
Speaker 1: to go over the next six to twelve months. Considering
Speaker 1: the fact that I know that you do not time
Speaker 1: the market or look at a sort of day to
Speaker 1: day price swing kind of issue. But this really does
Speaker 1: determine how important some of these returns will be going forward. Uh,
Speaker 1: yes it does, but uh, I don't think there's anything
Speaker 1: to be known on that subject, and I'm sure we
Speaker 1: don't know it. Uh. You know. And another uh tenant
Speaker 1: of our investment philosophy they're only six we're going to
Speaker 1: touch on two today, is that we our investment decisions
Speaker 1: that are not based on macro forecasts. Macro forecasts are
Speaker 1: very important. The only problem is they're rarely right and
Speaker 1: and uh and more importantly, uh, any one forecaster is
Speaker 1: rarely right more often than the others. So we don't
Speaker 1: make our decisions on that basis. We are what's called
Speaker 1: bottom up investors. We invest on the basis of micro,
Speaker 1: not macro companies, industry securities, and we feel there, through
Speaker 1: hard work and skill, we can get an edge. So
Speaker 1: where are some of the industry some of the areas
Speaker 1: that you're actually seeing deep value? You know, Uh, they
Speaker 1: are much more spread around than they were before. Uh.
Speaker 1: You know, some growth names are are offering much better
Speaker 1: value than they did a year or two ago. Down
Speaker 1: But you know, we continue to find opportunities throughout the
Speaker 1: investment universe. Uh. Um and UH you know, the prosaic
Speaker 1: industries are also offering good, good value. When you talk
Speaker 1: about the global investment picture, I know, over the years,
Speaker 1: especially as the US yielded less and less and yet
Speaker 1: less in real terms and phenominal terms, you looked overseas,
Speaker 1: in particular to China as a potential area of perspective return.
Speaker 1: Has that changed as yields have gone up in the
Speaker 1: US and frankly the economy has slowed so substantially in China. Well.
Speaker 1: On the one hand, we have a preference for investing
Speaker 1: in the US. UH. You know, UH, the US in
Speaker 1: most regards has the best economy in the world, and
Speaker 1: it has an excellent UH environment for rule of law,
Speaker 1: for being able to predict the outcome when uh, when
Speaker 1: various UH stakeholders rights come into conflict. That's very important
Speaker 1: to us, especially you mentioned our business in distress debt investing.
Speaker 1: That's very important if you're going to buy distress credits
Speaker 1: to be able to predict how will be treated by
Speaker 1: the law. UM. On the other hand, um uh from
Speaker 1: time to time other parts of the world all for
Speaker 1: better bargains. Uh, we have the best in the US,
Speaker 1: but the best usually doesn't come cheap. So and third,
Speaker 1: on the third hand, we like to have some diversity
Speaker 1: in our portfolio. So you know, we've been in sting
Speaker 1: in places like China and India UH in the last
Speaker 1: couple of years and and absolutely will continue to do so.
Speaker 1: When I hear people say, you know, I've made my
Speaker 1: living for the last fifty years investing in the things
Speaker 1: other people said, we're uninvestable, high yield bonds, distress dead,
Speaker 1: emerging markets, uh, etcetera. And when I hear people say
Speaker 1: that China is uninvestable to me, uninvestable says maybe there
Speaker 1: are some bargains there if if everybody else is boycotting
Speaker 1: that sector, how fully invested are you? Are you always
Speaker 1: fully invested? We strive to be fully invested. Again, we're
Speaker 1: not market timers. Market timers say, well right now we
Speaker 1: want cash. We strive to be fully invested. Our clients
Speaker 1: hire us to invest in our asset class, not to
Speaker 1: time the market. UM. And again, if better bargains arise,
Speaker 1: I'm always confident that we'll be able to raise more
Speaker 1: money to take advantage. About three years ago when we
Speaker 1: were talking about what prospective returns seemed plausible or realistic
Speaker 1: on on some sort of safe for reliable basis. You
Speaker 1: said five to five and a half percent. You have
Speaker 1: a good memory. Where are we now? I think we
Speaker 1: can make seven to seven and a half. I mean,
Speaker 1: I'm not telling you, I'm saying an institutional portfolio. At
Speaker 1: that time I was talking for the Metropolitan Museum of Art,
Speaker 1: where I chaired the Investment Community Committee, and I talked
Speaker 1: the expectation down to five five and a half as
Speaker 1: you say, or I think we came out of I
Speaker 1: think the committee as a whole came out at six. Today,
Speaker 1: I think an institution like the MET or another pension
Speaker 1: fund and downmin etcetera can make seven seven and a half.
Speaker 1: Of course, you have to be willing to go into
Speaker 1: alternatives to do it, but most people are willing. What
Speaker 1: kind of alternatives you know? The big class classes are
Speaker 1: private equity, private debt, Then there's the stress debt, there's
Speaker 1: real estate UM and UH specialized forms of an vesting UM.
Speaker 1: The important thing is not which sectors. The important thing
Speaker 1: is which manager. You know. In the public asset classes
Speaker 1: like stocks and bonds, we call them beta markets, because
Speaker 1: most of the return is determined by the performance of
Speaker 1: the market, and which manager you have means a little
Speaker 1: plus or a little minus. In the alternative markets, there
Speaker 1: isn't that gravitational pull towards the market. Return is really
Speaker 1: market to pace it. What really managers matters is whether
Speaker 1: you're manager is highly skilled and disciplined or not. And uh,
Speaker 1: that's why we call them alpha markets skill markets. Do
Speaker 1: you think that your peers are taking undue risk or
Speaker 1: not enough risk? Um? Some of each. Of course, there's
Speaker 1: a there's a disparity, you know, there's there's a range,
Speaker 1: and piers do different things. Um. The point is an
Speaker 1: area like private lending, where we're very active, has been
Speaker 1: darling in the past a decade. A lot of money
Speaker 1: and a lot of managers and a lot of funds
Speaker 1: have moved into the area. Buffett always puts it best.
Speaker 1: When the tide goes out, we find out who was
Speaker 1: swimming without a bathing suit. When when economic and financial
Speaker 1: conditions become more difficult, we find out who made good
Speaker 1: credit decisions and who made bad ones. We'll see what's
Speaker 1: the historical precedent for this moment, for this moment, Oh,
Speaker 1: you know, it's very hard to to to find one
Speaker 1: that fits exactly. Um. You know, we've never had this
Speaker 1: externality of the pandemic. There hasn't been a war going
Speaker 1: on in a long time and an important international conflict,
Speaker 1: uh with with the threats this embodies, We've never the
Speaker 1: US never had an economic rival like China before. We've
Speaker 1: never really had an economic rival since World War two. Uh.
Speaker 1: But and of course we have uh historically low interest
Speaker 1: rates we've had. We had interest rates went down by
Speaker 1: what we call two thousand basis points, that is to say,
Speaker 1: twenty percentage points from eighty two two two. Uh, and
Speaker 1: that was a big tail wind. So these conditions are
Speaker 1: are not reminiscent of any that I've lived through. But
Speaker 1: I think the important thing for your purposes and hopefully
Speaker 1: your audience's purposes, is that I think that are are
Speaker 1: taken as a whole. I think conditions are fairly normal
Speaker 1: today in terms of how you should manage your money
Speaker 1: and the risks you should take. And to me, that's
Speaker 1: the key decision. Howard, thank you so much for taking
Speaker 1: the time. Howard Marks, the co chair and co founder
Speaker 1: of oak Tree Capital. Eddie five, Bill Duntley, the former
Speaker 1: New York Fed President at with this this morning. Som
Speaker 1: has the headline of his new column, the FATS mild
Speaker 1: inflation forecasts need explaining. They do they need explaining. It
Speaker 1: is a brilliant note. I'll have it on Twitter. I'm
Speaker 1: sure John and Lisa will as well. William Dudley is
Speaker 1: a former president of New York found And of course
Speaker 1: we're writing for Bloomberger thrill that Bill Dudley could join
Speaker 1: us this morning. Bill buried in your essay on inflation
Speaker 1: is a single sentence on what it means for the
Speaker 1: labor market. April of two thousand twenty and fourteen point
Speaker 1: seven percent unemployment rate. We're at four percent at the
Speaker 1: beginning of this year. We're now down to three point
Speaker 1: six percent. I need you to explain to our listeners
Speaker 1: and viewers why it's the Fed's job to move the
Speaker 1: unemployment rate, as you state, up above four percent. Well,
Speaker 1: the labor markets the tightest basically it's ever been. And
Speaker 1: you can see that by the ratio of unfilled job
Speaker 1: relative to the number of people that are unemployed. It's
Speaker 1: that ratio is one point nine to one. UH in
Speaker 1: February was one point two to one. So we have
Speaker 1: a lavor market that's unpresidentally tight. The FED needs to
Speaker 1: loosen that up or wage pressures will accumulate and that
Speaker 1: will keep inflation above the feds two percent inflation objective.
Speaker 1: The problem the FED has is that in the past
Speaker 1: it's been very, very difficult to push the unemployment rate
Speaker 1: up meaningfully without precipitating a hard landing. That's what the
Speaker 1: FEN is going to try to do this time, but
Speaker 1: extremely difficult to do. And they haven't really been as forthcoming,
Speaker 1: I think, in their forecast as as they need to be,
Speaker 1: because if you look at their last summary of economic projections,
Speaker 1: for example, the disinflation occurred almost immaculately. Uh, the FED
Speaker 1: didn't really tighten very much. The unemployer right didn't rise,
Speaker 1: yet inflation came back to the defense two percent target,
Speaker 1: and it really beg the question what caused inflation to
Speaker 1: come down? I think the way you get inflation down
Speaker 1: is you need more slack in the U S lever market.
Speaker 1: That's not a friendly message from from the FED, but
Speaker 1: that's what's necessary at this point. And but I'll just
Speaker 1: to put some numbers on that. As you say, kill
Speaker 1: PC A year run for the FED twenty two four
Speaker 1: point one, twenty three, two point six, and unemployment three
Speaker 1: point five and then three point five again. And many
Speaker 1: people have been asking the same question, Bill, you know
Speaker 1: the chance of right now, it's this conversation about a
Speaker 1: pause in September. How are you interpreting some of that conversation.
Speaker 1: I wouldn't put too much stock on it. I think
Speaker 1: what's what's happening is the Fed's pretty convinced that they
Speaker 1: need to go into something close to neutral, and you know,
Speaker 1: expeditiously is the way that they put it um, and
Speaker 1: so that's what they're doing. The notion at some point
Speaker 1: they're gonna take it to pause and look around. Of
Speaker 1: course that's gonna happen at some point, but it's gonna
Speaker 1: be driven by the the economic data. I think that
Speaker 1: the commedy is gonna have enough momentum to keep the Fed.
Speaker 1: The Fed will keep going UH into the fall markets
Speaker 1: priced to a peak in the federal funds rate of three.
Speaker 1: I think we're gonna get to their UH pretty easily,
Speaker 1: and the Federal probably actually have to push beyond that ultimately, Bill,
Speaker 1: what kind of unemployment rate are you looking for to
Speaker 1: indicate perhaps a tightening a loosening in the very very
Speaker 1: tight labor market. Well, the Fed's on forecast is that
Speaker 1: a neutral unemployee rateing is someone two percent of aitions
Speaker 1: four percent. So I think you need to get the
Speaker 1: naployent rate up to at least four percent. The fact
Speaker 1: that we have so many unfilled jobs suggests that maybe
Speaker 1: the unemployer rate consistent with two percent inflations even higher
Speaker 1: than four percent. So I think we need at least
Speaker 1: get to four percent, and that's the problem. It's difficult
Speaker 1: to do that without participitating a full blown recession bill.
Speaker 1: Did you take any message from the fact that President
Speaker 1: Biden met with FED Chair J Powell yesterday that there
Speaker 1: was this focus on the FED being the main driver
Speaker 1: for what happens with inflation going forward and the politicization
Speaker 1: of the Federal Reserve. Well, I think Biden was actually
Speaker 1: not politicizing the FED. Is basically saying the job is
Speaker 1: to control inflation, and I'm not gonna challenge the independence
Speaker 1: of the FED to do that. In some ways, though,
Speaker 1: he's putting the burden now on the FED Reserve rather
Speaker 1: than on the administration. I viewed it as a political event,
Speaker 1: not an economic event. I don't think it changes what
Speaker 1: the federal is going to do or what the Biden
Speaker 1: administration is going to do. Bill, we had a one
Speaker 1: off medical event, a pandemic of our lifetime that got
Speaker 1: us out to fourteen point seven percent unemployment. Can we
Speaker 1: cut any central bank slack and have them extend out
Speaker 1: the X axis and just take longer to get this
Speaker 1: done to repair off of this medical event. Well, if
Speaker 1: they take longer, the risk will be that inflation will
Speaker 1: stay higher uh, and then that will start to get
Speaker 1: embedded and higher inflation expectations, which will make their job
Speaker 1: a lot more difficult. The good news for the FED
Speaker 1: right now is they're highly credible. Market participants expect the
Speaker 1: Fed will do the job and get inflation back down.
Speaker 1: Inflation expectations that the longer her term horizons are still
Speaker 1: very well anchored. If the Fed dawdles and then the
Speaker 1: risk is that inflation expectation become less well anchored, which
Speaker 1: will make it harder for the Fed to get inflation
Speaker 1: back down. But if your view hantening not softening based
Speaker 1: on coming daight to the this FED funds might end
Speaker 1: up with a full handle and maybe not three. I
Speaker 1: don't think it's changed too much. I mean the good
Speaker 1: news that the Fed has things and end today in
Speaker 1: terms of market confidence, in terms of inflation expectations being
Speaker 1: well anchored. That's that's the good news. The bad news is,
Speaker 1: I think people are understanding how difficult this job is.
Speaker 1: What do you make of this idea that they can
Speaker 1: target job opening spell jolts data which is a little
Speaker 1: bit dated, What do you make of that? Well? I
Speaker 1: think their story is is quite an optimistic one that
Speaker 1: they can take the monetary policy sufficiently to reduce the
Speaker 1: demand for labor without actually pushing up the unemployer rate.
Speaker 1: And meanfully, this is the tightest layer market I think
Speaker 1: we've ever had. Frankly, uh and it seems to me
Speaker 1: it's the type of layer market is tighter than it's
Speaker 1: ever been before that makes the job more difficult, not easier.
Speaker 1: Super hard, Bill wonder for the catch up built downtly
Speaker 1: there they form in New York Fed President on the
Speaker 1: Path Forward and a really interesting piece on the Fence
Speaker 1: inflation forecast available on Bloomberg dot com and on the
Speaker 1: Bloomberg terminal on the Bloomberg Opinion column. Here's a note
Speaker 1: from our next guest, Tom. Back in April, we Lampoon
Speaker 1: to Washington Post opinion rights effort that obtuse observation that
Speaker 1: if it were not for that done inflation, Binan's economy
Speaker 1: would be extraordinary. The writers who went on to say
Speaker 1: that Rubbin's logic was as intellectually robust as us, saying
Speaker 1: that if our grandmother had wheels, she would be a bus.
Speaker 1: That can only be the wonderful Stephen Short, founder and
Speaker 1: president of the Short Group. John his note, folks, is
Speaker 1: just the breath of fresh air within the petroleum business
Speaker 1: is Ed Morris City Group, who we just uh listen
Speaker 1: to talks about the macro economics of the moment. Stephen
Speaker 1: Short is hyper defined. Steve, let me go to the
Speaker 1: single sentence of your note of us are simply getting
Speaker 1: poorer in this commodity surge? Will that trend continue? Absolutely?
Speaker 1: Tom So, real disposable income what we have to spend
Speaker 1: as falling in ten of the past their team months
Speaker 1: because of runaway inflation. Inflation, by the way, that all
Speaker 1: the smartest people in the world spent the better part
Speaker 1: of last year doing yeomen's work, making fools of themselves
Speaker 1: every single week saying that, oh, inflation is transitory. Yes,
Speaker 1: if I don't have to eat, if I don't have
Speaker 1: to put the lights on, if I don't want to
Speaker 1: stink cool this summer. Yes, inflation not a problem. But
Speaker 1: what we're seeing now, Tom and always comes down to
Speaker 1: commodities and what we're looking at in the energy industry.
Speaker 1: Well we know that story. But what most people, especially
Speaker 1: the E. S. G. Crowd or the people that are
Speaker 1: taking the war against natural gas is the war natural
Speaker 1: gas is a war on the American consumer. So what
Speaker 1: it has done to fertilizer prices. Of course, natural gas
Speaker 1: is a key feat stock into synthetic ammonia fertilizer. So
Speaker 1: we're putting fewer seeds into the ground this spring, which
Speaker 1: means we're gonna take fewer crops out of the ground
Speaker 1: in the fall. So the inflation has not peeped, right,
Speaker 1: I mean eat on the core level. But as far
Speaker 1: as energy and food, which is all was all inflation,
Speaker 1: aspe and and Tom, this is the problem. Runaway inflation
Speaker 1: at the gas pumping out the grocery counter has been
Speaker 1: the UH lead indicator for recession of the last six
Speaker 1: recessions in the United States, beginning with Okay, Steve, I
Speaker 1: want to go to the hyper hyper detail of your
Speaker 1: note and your true expertise on distillates, Do you have
Speaker 1: any optimism we're going to invest given these higher prices? Well,
Speaker 1: as Winston Churchill once said about America, we always make
Speaker 1: the right decision after we've tried every other decision. So
Speaker 1: I'm not quite sure we're there yet here on the
Speaker 1: East Coast. Of course, what has happened well over the
Speaker 1: past three years, we've cut a refinery capacity by so
Speaker 1: that guess lene production on the East Coast has held study.
Speaker 1: But when you cut your capacity to make things out
Speaker 1: of crude oil, something has to get So while we've
Speaker 1: maintained the status call on guess line production, diesel production
Speaker 1: has fallen for to pent so right, diesel stocks for
Speaker 1: the first time ever in the East Coast are below
Speaker 1: nine million dollars. So we're looking at a dire situation
Speaker 1: in the diesel market, but we're not quite there. The
Speaker 1: smartest thing the Biden administration can do with regard to
Speaker 1: the energy crisis here in the United States is we
Speaker 1: send the Jones Act. The Jones Act requires all interstate
Speaker 1: commerce water born be tagged on American flag vessels. Well,
Speaker 1: guess what, we don't have enough American flag vessels. You
Speaker 1: need to resend the Jones Act allow diesel guestling being
Speaker 1: manufactured in Houston to put that on foreign flag vessels,
Speaker 1: to bring it around the tip of Florida and get
Speaker 1: it into the East coast. That is the smartest thing
Speaker 1: to invest in a short term fixed regard to the
Speaker 1: longer term fixed, No, there is not a political will
Speaker 1: at this point to invest in fossil fuels. Thereby, the
Speaker 1: long term structural in balance between some blind demand will remain.
Speaker 1: High prices there for have to remain. Tom Stephen, have
Speaker 1: you been surprised by how little pushback there has been
Speaker 1: on consumers with respect to reducing spending. There has been
Speaker 1: a reduction in real spending if you look generally at
Speaker 1: the trend. However, overall they continue to spend more, even
Speaker 1: as you see new records every day of gas prices. Yeah,
Speaker 1: absolutely so. Now the calculus theater has changed because we
Speaker 1: have substitutes in the market I E. I, E V S.
Speaker 1: So it used to be consumers spending would drop off
Speaker 1: from guest line prices national average hit about three dollars
Speaker 1: and sixty three dollars and eighty cents natural guest line
Speaker 1: I'm excuting guest line on the NIMEX now is trading
Speaker 1: over four dollars a gallon, So the triple A average
Speaker 1: right now is about four dollars and sixty cents national average.
Speaker 1: Given where futures are trading now, by the fourth of July,
Speaker 1: a guest LNE prices will be another twenty cents higher
Speaker 1: four dollars and eighty cents. I do have to believe,
Speaker 1: even though we've never had anything to mark this against,
Speaker 1: we will start to see that. But to you, yes,
Speaker 1: that it has been one of the positives. Consumers spending
Speaker 1: the last week came out last week, uh, stronger than expected.
Speaker 1: But the problem there is that there are we're waiting
Speaker 1: for the other shoe to drop. Because the personal savings
Speaker 1: rate plunged to four point four percent, we are well
Speaker 1: below the thirty year nonrecession mean on savings and a
Speaker 1: sixty year non recession mean on savings. In fact, savings
Speaker 1: rates now is at the lowest point since so the
Speaker 1: bottom line re leases, we've run out of all the
Speaker 1: steamless money Americans are dipping into their piggy banks. It
Speaker 1: costs more to drive to your picnics to go to
Speaker 1: the beach, so forth. So in the next quarter. Yes,
Speaker 1: I do expect to see consumer spending to tail off,
Speaker 1: which of course is a problem, giving that consumer spending
Speaker 1: these two thirds of the US economy and this therefore,
Speaker 1: this is why I'm still comfortable in saying, if the
Speaker 1: United States is not currently in recession, given these food costs,
Speaker 1: these uh energy costs, are falling income, we will be
Speaker 1: in a recession within the next six months. Stephen uses,
Speaker 1: I thank you, but um, that one was a little
Speaker 1: bit depressing. Stephen, thank you though. Anyway, Steven Schalk at
Speaker 1: the show Growth, thank you, buddy. This is not a
Speaker 1: small matter. Lean forward and listened Global Wall Street. There's
Speaker 1: a guy up in Connecticut, runs a small shop who
Speaker 1: says cash is trash. Deborah Cunningham Joint federated when she's
Speaker 1: twelve years old. She's been doing this forever. She is
Speaker 1: the absolute dean of global Liquidity markets and c I
Speaker 1: O it federated Ermes c f A, Pittsburgh, and the
Speaker 1: rest of it is well, and Debora, you go after
Speaker 1: Mr Dalio and you say cash is an asset. Discuss
Speaker 1: why cash is not trash? Well, Well, first of all,
Speaker 1: I want to know how I can get in on
Speaker 1: the trip to Vienna very in those emails. As far
Speaker 1: as you know, the cash markets at this point, as
Speaker 1: you mentioned earlier, we have been in a zero yield
Speaker 1: environment for the better part of fourteen years. Now at
Speaker 1: this point in time, it's not a healthy market. Seventeen
Speaker 1: percent isn't healthy, but seventeen basis points isn't healthy. We
Speaker 1: are now getting back to a point from an economic standpoint,
Speaker 1: where we have an inflationary environment that is above the
Speaker 1: bare minimums one and a half to to and a
Speaker 1: quarter per cent in In that environment, we need short
Speaker 1: term yields that are above that, and we are getting
Speaker 1: to that, uh to that end result. As such, your
Speaker 1: cash is now a valuable um investment that no longer
Speaker 1: is just there earning your earning safety and and you know,
Speaker 1: a minimal return. It is now not only earning safety,
Speaker 1: but also earning a viable return above where the inflationary
Speaker 1: rate is. We're getting there. We're not there yet, but
Speaker 1: certainly certainly above you know, sort of the zero bound
Speaker 1: where we have been locked for a very long rate
Speaker 1: of town and the heritage of this folks, for the
Speaker 1: Federative funds basically is a generalization. They invented the money
Speaker 1: market fund, there's something that would equival with that. But
Speaker 1: they've been doing this in owning the high ground on
Speaker 1: short term paper for years. Deborah Cunningham talked to Leaguard
Speaker 1: in the CBS. John and I were talking about should
Speaker 1: we fear these initial rate rises from any major central bank? Well,
Speaker 1: I do think the e c B, as was mentioned before,
Speaker 1: has some unique issues going on with it. Certainly Brexit
Speaker 1: complicated and you know, it was a factor that led
Speaker 1: into um some of the shortcomings of both the UK
Speaker 1: economy as well as the European economy in in broad terms.
Speaker 1: So I think that's a factor that still has to
Speaker 1: be dealt with in a way that we are not
Speaker 1: subjected to here in the United States. Having said that,
Speaker 1: when you look at those economies, yes they're not as vibrant,
Speaker 1: they're not as um fulsome and certainly from a labor
Speaker 1: market perspective, they don't have the same um you know,
Speaker 1: numbers that we have along those lines of saying strange
Speaker 1: that we have and as such there are more challenges.
Speaker 1: And yet they should not be in a negative interest
Speaker 1: rate environment. They should be at a point where there
Speaker 1: is cash you know there are cash earnings there as well.
Speaker 1: The economies for the most part are not in um
Speaker 1: any kind of danger of going into a recession, not
Speaker 1: a large not not not a large growth environment. But
Speaker 1: when you're looking at you know, sort of steady and
Speaker 1: sure you may see some setbacks as you go from
Speaker 1: you know, minus five to zero to plus five to one,
Speaker 1: but there there that that that's part of what needs
Speaker 1: to happen in order to get out of the I
Speaker 1: think part of the malaise that they have been in
Speaker 1: in addition to Brexit, has been the negative rate environment
Speaker 1: has not done healthy fixed income alternatives that we're just
Speaker 1: real quick here. I'm wondering whether they're actually seeing investors
Speaker 1: respond to this idea that cash is not trash, that
Speaker 1: it's a viable asset class and its own right with
Speaker 1: real yield. Is that something that you're seeing a creative
Speaker 1: shift away from riskier assets back into cash for the
Speaker 1: asset value. Yes, it's it's out of riskier assets, absolutely.
Speaker 1: It's also out of bank deposit assets because those um
Speaker 1: don't follow the natural market rates. They're an administered rate,
Speaker 1: and so they remain in that zero bound for the
Speaker 1: most part. Um for most banks who don't want deposits,
Speaker 1: and it's certainly something that I think is a welcome
Speaker 1: um alternative for investors that don't want to take on
Speaker 1: a lot of risk, want to maintain a lot of liquidity,
Speaker 1: keep their powder dry, yet still earn a return in
Speaker 1: the process of keeping their cash invested. Debra, looking forward
Speaker 1: to your parents in Fianna. Thanks for being with us, Debra.
Speaker 1: Kind of give that federates have makes This is the
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Speaker 1: Tom keene In. This is Bloomberg