Speaker 1: This is the Bloomberg Surveillance Podcast.
Speaker 2: I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz.
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Speaker 3: Jan Hatzius and a team I've read Goldman still calling
Speaker 3: for a pause at the next meeting, is saying this.
Speaker 3: Here's the latest from them. The CPI report is supportive
Speaker 3: of our call for reports at the June FMC meeting.
Speaker 3: The shelter step down, Tom looks increasingly durable, information breadth
Speaker 3: soft and somewhat further and the strength and news car
Speaker 3: prices is likely temporary.
Speaker 2: In just in the last forty eight hours, this has
Speaker 2: changed because of the misguests on housing in the United Kingdom.
Speaker 1: Completely different story, but it shows.
Speaker 2: You how humility is an order. Here, what's a key point.
Speaker 2: You have a humility at the moment, doctor Hatzias. You
Speaker 2: look at the things you've made right, the things you've
Speaker 2: made wrong. Into the first five months of twenty twenty three.
Speaker 2: What's the humility you're writing about this weekend on inflation.
Speaker 4: I would say mostly things have evolved the way we thought,
Speaker 4: at least in the labor market. For me, the labor
Speaker 4: market is really key, and the rebalancing that we're seeing
Speaker 4: there I think is very encouraging with job openings coming
Speaker 4: down and the unemployment rates still staying very low. So
Speaker 4: it's a very benign form of rebalancing. In terms of
Speaker 4: the tactics of FED policy, I would have thought a
Speaker 4: pause in March would have made sense, and we thought
Speaker 4: that was the likely outcome. But I think now a
Speaker 4: lot of humility is in order as we go into
Speaker 4: the next few months. There's obviously a lot of event risk,
Speaker 4: but I would say were reasonably well set up in
Speaker 4: terms of the disinflation process that's underway.
Speaker 2: The part of gain that's out there that you have
Speaker 2: to battle every day is on the X axis, and
Speaker 2: to me, the markets are in short term they're looking
Speaker 2: for drameda Labor day drama to October. Does Goldman Sachs
Speaker 2: extend out the X axis? The healing out of the
Speaker 2: pandemic is the things we're talking about for October twenty three.
Speaker 2: Really the things we're going to be talking about in
Speaker 2: June of twenty twenty four.
Speaker 4: Well, I think by June of twenty twenty four, I
Speaker 4: would have you know, our baseline has the rebalancing in
Speaker 4: the in the labor market completed at that point, and
Speaker 4: inflation down from right nulbu four and a half by
Speaker 4: next year, I think will be below three percent. So
Speaker 4: I do think we're going to be in a very
Speaker 4: different place in terms of the funds rate, though I
Speaker 4: would expect that will still be close to here in fact,
Speaker 4: where we are right now. I mean, our baseline forecast
Speaker 4: is that the funds rate stays at five to five
Speaker 4: and a quarter for the next a year or so.
Speaker 4: I'm you know, risks of that, certainly on the downside,
Speaker 4: I think it's much more likely that you go from
Speaker 4: five to three than that you go from five to seven. Okay,
Speaker 4: but I do think the market is overly aggressive in
Speaker 4: building in rate cuts.
Speaker 3: Let's explore that a little bit further. This was a
Speaker 3: question I got from a Bloomberg subscribe, but just moments ago,
Speaker 3: as soon as they knew that you were appearing, they said,
Speaker 3: if stock's running big over the summer because of the
Speaker 3: FED pause, the economy holds up, the debtlimit issue is sorted.
Speaker 3: What does the FED do in the fall. How would
Speaker 3: you think about that just a piece of scenario analysis.
Speaker 3: What would that mean for you?
Speaker 4: Well, I mean directionally, it would point to, you know,
Speaker 4: a higher funds rate. And obviously the market is below
Speaker 4: the current level in terms of forward pricing, so you know,
Speaker 4: holding would already be you know, would already have some
Speaker 4: impact in terms of an impulse, but you might need
Speaker 4: you know, additional hikes. That's certainly a possibility. I don't
Speaker 4: think it's you know, particularly likely. If we see going adjustment,
Speaker 4: if we see adjustment in inflation and the labor market,
Speaker 4: then there's also going to be a little bit more
Speaker 4: tolerance for easier financial conditions and stronger growth. But there's
Speaker 4: a limit to it.
Speaker 3: If forward pricing adjusts upwards towards the federal reserve? Would
Speaker 3: you consider that a tightening of policy somewhat?
Speaker 5: Is that?
Speaker 3: How you think about it?
Speaker 4: It depends on what is driven by it's if it's
Speaker 4: driven by a stronger economy, then no. If it's driven
Speaker 4: by you FED messaging that they're less willing to cut
Speaker 4: you know, relative to the market's expectation, then I would
Speaker 4: view it as a tightening.
Speaker 6: People are waiting for something big to happen because they're impatient,
Speaker 6: and they're looking for trading opportunity, And I'm curious, what
Speaker 6: is the next shoot to drop? Is it housing prices crashing?
Speaker 4: Well? Housing? I think, you know, we had declients in
Speaker 4: house prices in the second half of last year. We
Speaker 4: actually have seen some stabilization in twenty twenty three so far,
Speaker 4: so I wouldn't really expect, barring another major shock, for example,
Speaker 4: the sort of thing that John was talking about, significant
Speaker 4: further upward pressure on the funds rate, I wouldn't really
Speaker 4: expect a sharp, sharp drop in house prices from here.
Speaker 4: You know, there's still some I think erosion happening. Some
Speaker 4: of that is also because the official indices lagged behind
Speaker 4: reality somewhat, but I wouldn't expect that to be a
Speaker 4: big shot.
Speaker 6: Was the banking crisis basically resolved and now it's just
Speaker 6: sort of the slow bleed of the reality of higher
Speaker 6: yields or is there something percolating there that you're keeping
Speaker 6: an eye on as also a potential catalyst, especially if
Speaker 6: what John said does come to pass. For people price
Speaker 6: out some of those rate cuts.
Speaker 4: I mean, our view is that the banking turmoil is
Speaker 4: going to be a drag on growth. We've said about
Speaker 4: you know, forty basis points or so, you know, half
Speaker 4: a percentage point or a little less.
Speaker 3: How did you come up with that?
Speaker 1: Yeah? Can I ask there?
Speaker 3: How do you even the team come up with that
Speaker 3: forty to fifty vices points number?
Speaker 4: Well, the primary approach was to to basically look at
Speaker 4: past changes in lending conditions in the FED Senior Law
Speaker 4: Officers survey, making assumptions about where that goes, and then
Speaker 4: feeding that into our model, which also includes financial conditions,
Speaker 4: and then getting sort of the extra effect over and
Speaker 4: above what you'd normally expect in a tightening financial conditions environment.
Speaker 4: That's how we came up with it. I would say
Speaker 4: that so far what we've seen in these surveys has
Speaker 4: been less pronounced. There's been less of a tightening that
Speaker 4: we expected than we expected. And now the question is
Speaker 4: is it just delayed or are we just seeing a
Speaker 4: smaller impact. I think that's a little bit too early
Speaker 4: to tell. Also, because obviously some of these banking issues
Speaker 4: are not yet resolved. There's still pressure in the market.
Speaker 4: So the last chapter probably hasn't been written yet, but
Speaker 4: right now we're still estimating that forty basis point.
Speaker 6: What's more pernicious for this economy for it to be
Speaker 6: a slow burn, a slow tick, tick to a reduced
Speaker 6: lending of tightening credit standards, or a sudden shock.
Speaker 4: Well, a sudden shock is more pernicious because a slow burn,
Speaker 4: you know, there are a lot of other factors in
Speaker 4: the economy that can offset the slow barn, policy can
Speaker 4: react to it. So you know, clearly something that happens
Speaker 4: very suddenly in large size is much more difficult to
Speaker 4: manage if you're an economic policy maker. So I'll go
Speaker 4: with a with a quick shock here.
Speaker 2: A longer going far away, there was a guy named
Speaker 2: O'Neill and Dudley. They were at Goldman Sachs with Ed McKelvey.
Speaker 2: And there's this young whipper snapper out of Wisconsin, Madison
Speaker 2: in Germany who made his name on mortgage equity withdrawal.
Speaker 2: John Farrell brought up in the last hour the new
Speaker 2: housing dilemma. We have an America of two point six
Speaker 2: percent mortgages locked in and they're never ever going to sell.
Speaker 2: What does your team say about the housing economy of America.
Speaker 2: This is where you got your fame. Yh what does
Speaker 2: your team say now about all those people out there
Speaker 2: locked in the mortgages of their dreams.
Speaker 4: So first of all, I would say, you know, the
Speaker 4: housing bubble was really central in the pre eight economy. Obviously,
Speaker 4: it hasn't been central in the recent economy. It's been important.
Speaker 4: There has been a you know, a big boom and
Speaker 4: somewhat of a bust. And you know, mortgage equity withdrawal
Speaker 4: did pick up in twenty twenty one to levels that
Speaker 4: were appreciable I would say, not dramatic, but appreciable. And
Speaker 4: mortgage equity withdrawal coming down since the peak of that
Speaker 4: cycle has been a drag on growth. You know, I'd
Speaker 4: say specifically on the you know lock in from seven
Speaker 4: percent thirty mortgage rates versus maybe three percent or four
Speaker 4: percent that people took out the mortgage rates at I
Speaker 4: do think that is part of the sort of slow
Speaker 4: burn that that that Lisa talked about. I mean, I
Speaker 4: do think it probably at the margin reduces mobility somewhat.
Speaker 4: The research on those issues has been somewhat mixed. So
Speaker 4: that's why I'm putting this in somewhat cautious cautious terms,
Speaker 4: but I do think it probably is at the margin
Speaker 4: more negative for mobility, you know, until more time has passed.
Speaker 3: Are you're avoriding debt scene? In conversations at the moment
Speaker 3: with clients, do they want to talk about it?
Speaker 4: I talk about what what clients want to talk about.
Speaker 2: Of course, is that the solemon method of economics.
Speaker 3: Is it top of mind?
Speaker 4: Yeah, it's top of mind for for a lot of people,
Speaker 4: and you know, undoubtedly over the next few few weeks,
Speaker 4: until you know, whatever the X state is, it will
Speaker 4: remain top of mind. It probably will go you know,
Speaker 4: right up to the to the wire just looking at
Speaker 4: the political dynamics and it's still you know, unclear how
Speaker 4: exactly it's going to be resolved. Our baseline is that
Speaker 4: you know, there's going to be a resolution very close
Speaker 4: to the X state, and that you know, ultimately you
Speaker 4: do get some spending cuts of some spending caps, but
Speaker 4: we don't expect anything as large as what we have
Speaker 4: in the twenty eleventh situation.
Speaker 3: We'll have to say what that means for the outlook
Speaker 3: as well. Janhasiers at Golban, Yeah, thank you.
Speaker 2: What we know is if you go back to the
Speaker 2: Orlando Sentinel from a few years ago. You can talk
Speaker 2: about a sterling ballerina and a ballerina career that was legit.
Speaker 2: In what the parents said to Cameron Dawson is have
Speaker 2: a fallback. Her fallback has been sterling strategy for Bank
Speaker 2: of America, among others. She's at New Edge Wealth right now,
Speaker 2: their chief investment officer. Tell me about the ballet we're
Speaker 2: in right now. You know, ballet, that's a tough business.
Speaker 2: Your body falls apart, is our economy? Is our financial
Speaker 2: system falling apart?
Speaker 1: Right now?
Speaker 7: Well, the interesting thing about ballets is that they always
Speaker 7: either end in a wedding or a death. And so
Speaker 7: I think that's what we're looking at with this cycle,
Speaker 7: which is that are we going to have a recession
Speaker 7: or not? And that's why this market has been flat
Speaker 7: because we're in this world where we know the risk
Speaker 7: of recession is high, but we're not seeing the whites
Speaker 7: of the eyes of it in hard data, and that's
Speaker 7: why we continue to have this sideways chop.
Speaker 3: Do you operate with the assumption that we will get
Speaker 3: one this year?
Speaker 7: This year, I think is the operative word. It could
Speaker 7: lean more into twenty twenty four. I think the interesting
Speaker 7: thing is just at the precise moment when economists and
Speaker 7: the bond market are expecting a recession to hit those
Speaker 7: cuts to hit is when the equity market has earnings
Speaker 7: starting to reaccelerate and rebound, and that's a really big
Speaker 7: schism for this market.
Speaker 3: Have you got this tradable window, then what do you
Speaker 3: do with it between the last FED hike, even dat
Speaker 3: it was the mating before and the recession that you
Speaker 3: start to see in some of the days to pay rolls,
Speaker 3: et cetera. What do you do in that window?
Speaker 7: You probably trade on technicals, things like momentum, and you
Speaker 7: trade on positioning and sentiment. Those kinds of things can
Speaker 7: drive the market in the short term, and it's really
Speaker 7: in the medium term where the fundamentals start to matter.
Speaker 7: So when we look at that forty two hundred level,
Speaker 7: there is this risk that we move higher, and I
Speaker 7: say risk because people aren't positioned for it. That is
Speaker 7: the pain trade that we don't get above forty two
Speaker 7: and it may not be justified by the fundamentals in
Speaker 7: the medium term, but the technicals, the sentiment, positioning, could
Speaker 7: get us above that and really make it a very
Speaker 7: big pain trade.
Speaker 6: What happens though, if we don't get a catalytic event,
Speaker 6: if it's just sort of, you know, little data points
Speaker 6: that you could justify with the narrative that you desire.
Speaker 6: And this is what we've been getting for a lot
Speaker 6: of this year, and we're going to continue getting for
Speaker 6: a number of months based in what a lot of
Speaker 6: people are saying. Do markets to stay in this range?
Speaker 7: It reminds you of two thousand and six, two thousand
Speaker 7: and seven, because the writing was on the wall that
Speaker 7: things were certainly starting to weaken, yet market shrug them
Speaker 7: off because you didn't see the whites of the eyes
Speaker 7: of the weakness. The Fed had paused, and it was
Speaker 7: until two thousand and eight that we started to see
Speaker 7: unemployment tick up and really the Feds start to react
Speaker 7: to that. So there is a long precedent for these
Speaker 7: cycles simply taking a long time. It's like watching paint dry.
Speaker 7: Which is why we have to think of this in
Speaker 7: two timeframes, the short term being driven by those momentum indicators,
Speaker 7: and medium term by the actual fundamentals, the boiling.
Speaker 6: Of the frog until suddenly there is no frog that
Speaker 6: is alive and hopping. There's a question about you know,
Speaker 6: this is not two thousand and eight, and people are
Speaker 6: talking about that base in the global banks that have
Speaker 6: plenty of capital. But is this leading to some sort
Speaker 6: of fissure, some sort of seizure that is going to
Speaker 6: lead to mass evaluation drops or is it not or
Speaker 6: is it going to be something that's more akin to
Speaker 6: the recessions of your Well, I think it.
Speaker 7: Starts from your point, Jonathan all the time about how
Speaker 7: we shouldn't always just index to two thousand and eight,
Speaker 7: because just indexing to the extreme is not helpful. The
Speaker 7: reality here is that we're likely going to see some
Speaker 7: slowing in loan growth, and that typically coincides with slowing
Speaker 7: in economic activity. It should be expected that banks, small
Speaker 7: banks who have been annualizing loan growth at eight percent
Speaker 7: for the last cycle will see that slow in response
Speaker 7: to that. That will have real economic impact, and at
Speaker 7: this point it's not being priced in.
Speaker 3: I'm with you. I agree with you obviously because you
Speaker 3: agree with mat and you can come back any time
Speaker 3: to talk about people will want to benchmark to something.
Speaker 3: Though what should you benchmark too? What is the parallel
Speaker 3: right now for you?
Speaker 7: I think it's somewhere in between the twenty eighteen experience
Speaker 7: where we didn't have a recession and the FED was
Speaker 7: able to ease and there was no inflation. In that
Speaker 7: extreme of two thousand and eight, remember twenty sixteen, we
Speaker 7: got very very close to a recession. We flew very
Speaker 7: close to the sun, and we were able to avoid
Speaker 7: it in that scenario. I think that's probably a good
Speaker 7: parallel for us to say, where could the earnings risk be.
Speaker 7: We think that we have some recession, it just won't
Speaker 7: be as deep as o weight.
Speaker 2: One of the great realities of Florida right now, your
Speaker 2: Florida's everybody's been there for three cups of coffee and
Speaker 2: think they're experts. You own the high ground on Florida.
Speaker 2: Is the economy boom there legit and it is symbol
Speaker 2: of an optimism in America that we underestimate.
Speaker 7: I've always considered Florida beta on the economy because there
Speaker 7: is so much discretionary spending in Florida and it tends
Speaker 7: to have more pronounced boom bus cycles than most other states.
Speaker 7: And always when you're in a boom, there's always this
Speaker 7: notion that this time is different, It's never going to end.
Speaker 7: But I'm hearing people leave places like Miami because they're
Speaker 7: getting priced out they can't afford it. That may be
Speaker 7: the first indicators that some of this high beta flying
Speaker 7: parts of the economy are finally starting to feel the
Speaker 7: pinch of price pressure.
Speaker 2: I mentioned the Bellot at the beginning, and I look
Speaker 2: at the damage out there, and my whole thing is
Speaker 2: corporations will adapt and adjust given cards dealt That's what
Speaker 2: I see right now for a part of the standard
Speaker 2: impores five hundred not all. How's that trend going to
Speaker 2: play out this year?
Speaker 7: Well, certainly that's what we saw in the first quarter.
Speaker 7: That's how earnings came in better than expected. Saw corporations
Speaker 7: adapt and adjust and defend on the margin line. The
Speaker 7: thing that will be interesting to watch is that if
Speaker 7: inflation really does roll over and it falls, that means
Speaker 7: revenue growth is going to fall.
Speaker 1: Nomenal GDB comes in, revenue comes.
Speaker 7: In, and that usually leads to margin pressure regardless of
Speaker 7: what you do on the cost side, because you lose
Speaker 7: the incremental margin dynamic.
Speaker 2: John Honeywell with the banner across the Bloomberg years ago,
Speaker 2: all of a sudden they were doing eight percent organic
Speaker 2: revenue growth. No one had ever frame that and when
Speaker 2: they come back to six percent, not to pick on honeywell, that's.
Speaker 1: Going to be the game changer.
Speaker 3: This was great, Cameron. Thank you. Cameron Dawson of New
Speaker 3: EDH twelfth may to share with us around the table.
Speaker 3: They had a macro strategy at Academy Securities. Pete, good morning.
Speaker 3: Let's start with this one. He's more complacent right now.
Speaker 3: This market or politicians in Washington.
Speaker 8: I think the politicians in Washington, because this market, I think,
Speaker 8: is trying to figure out do we get some sort
Speaker 8: of soft landing, does this work out, do we get
Speaker 8: through a bunch of these problems or not? And I
Speaker 8: think that's we're on this potential for a large gap
Speaker 8: either direction. I think the people in DC have kind
Speaker 8: of lost the focus. There's plenty of other things we
Speaker 8: should be focusing on other than the debt ceiling, and
Speaker 8: that's just a time sink. At this point, we've.
Speaker 1: Got copper rolling over.
Speaker 2: I look carefully at the Bloomberg Commodity indexes, good mathematics, and.
Speaker 1: It's not a pretty chart.
Speaker 2: You have your firm has a wonderful Pacific RIM study ongoing.
Speaker 2: What do you see there? Is it real slow down?
Speaker 1: Yeah?
Speaker 8: I think China is having some troubles, but I think
Speaker 8: even beyond that, I really sticking to this theme that
Speaker 8: we're going from maid in China to made by China.
Speaker 8: We're across the globe. China is now trying to compete
Speaker 8: with our products, compete with our companies more than they
Speaker 8: ever did. It's something we're hearing from companies. We're running
Speaker 8: into people who are losing contracts denominated in the Chinese currency.
Speaker 8: I think that's a long going play. China's still struggling,
Speaker 8: but it's going to be at our expense as well.
Speaker 1: With the military exposure of your firm, Can you invest
Speaker 1: in Taiwan, even with the United States committing to three
Speaker 1: and indeed four military bases in the Philippines, is Taiwan uninvestable? Yeah?
Speaker 8: So I think our firm has a pretty strong view
Speaker 8: that China is not going to invade Taiwan anymore anytime soon.
Speaker 8: The defenses of Taiwan are very strong. China has learned
Speaker 8: a bunch of lessons from Russia. Having said that, there
Speaker 8: is this erosion of confidence and how we're going to
Speaker 8: be able to deal with Taiwan overtime. So I think
Speaker 8: you've got to be careful.
Speaker 6: There right now. A lot of people are cautious. We
Speaker 6: are seeing this sort of volatility come down. People getting
Speaker 6: a sense that they're just waiting for godoh, waiting for
Speaker 6: some catalyst, waiting for a sense of which direction we're
Speaker 6: going to pivot in? What are you looking for to
Speaker 6: really represent that catalyst?
Speaker 8: So I think people have been patient. They latched onto
Speaker 8: the AI story. So that's been what all the bulls
Speaker 8: have gravitated to, and it's an interesting story. There's definitely
Speaker 8: some run room there. For me, the catalyst is what
Speaker 8: happens with the banking Do we really see this slow down?
Speaker 8: And you know, when we look at that the SLEUS report,
Speaker 8: which that we would never really pay that much attention to,
Speaker 8: we do now apparently. But I think really the important
Speaker 8: thing there was it's a demand side issue, right, There's
Speaker 8: lack of demand for loans. It's not just that banks
Speaker 8: don't have deposits. So I think we're seeing the economy
Speaker 8: slow down. Jobs data, a lot of it's still good.
Speaker 8: You're seeing little bits and pieces like we're starting to
Speaker 8: see a tick up in unemployment claims. How good is
Speaker 8: that when every headline really is about layoffs? So I
Speaker 8: think there's a slow bleed. It's slowly playing into the economy,
Speaker 8: and I'm looking for either confirmation for that or that
Speaker 8: somehow we've avoided that problem.
Speaker 6: Okay, so what is that problem?
Speaker 9: Right?
Speaker 6: Because things are slowing down and this is by design,
Speaker 6: and this is sort of the difficulty where people are
Speaker 6: saying that's happening and it's a good thing. Yes, we're
Speaker 6: seeing a rise in unemployment claims. This is exactly what
Speaker 6: the FED wanted. Yes, we're seeing deceleration. Okay, great, And
Speaker 6: guess what. Companies are actually more profitable because margins are increasing,
Speaker 6: they're passing along those prices. When is it a negative?
Speaker 8: I think it's already a negative. I think one of
Speaker 8: the things is we're addressing something that was really a
Speaker 8: supply chain shock, and we're trying to use monetary policy
Speaker 8: to address the supply chain shock. So that was a problem.
Speaker 8: So we're doing the wrong things, and I think we're
Speaker 8: forgetting about all these lags. Right. It takes months and
Speaker 8: months from the person who gets let go by the
Speaker 8: time they get their severiance package and all these things
Speaker 8: to hit the economy. I think the rate hikes from
Speaker 8: last November haven't even really hit the economy, people rolling
Speaker 8: over their car loans. Everyone I talked to is looking
Speaker 8: at releasing a car after their three yearly. They're shocked
Speaker 8: by the price. They didn't have to deal with that
Speaker 8: a year ago if their lease wasn't coming due. So
Speaker 8: I think that lag is something we've all forgotten about
Speaker 8: in this real time economy.
Speaker 2: One of the quiet charts of the week were bankruptcies
Speaker 2: in the United States. I was thunderstruck how they're elevated here.
Speaker 3: It's a process. I think we're all waiting for this
Speaker 3: event boom. It's a process and you can put the
Speaker 3: pieces together. The other issue that I think a lot
Speaker 3: of people have got right now is that we had
Speaker 3: excessive monetary easing for so long, for an extended period
Speaker 3: of time, way beyond the time that we needed it,
Speaker 3: and then the feders have had to play catch up,
Speaker 3: not frontloading. I hate that language. Wasn't front loading, was backloading.
Speaker 3: They were late, and we're trying to work out what
Speaker 3: the prices we've got to pay for that as market participants.
Speaker 3: Is it just a thirty percent move on the nastak
Speaker 3: last year or is there more to come?
Speaker 8: I think there's going to be more to come. And
Speaker 8: I completely agree they were very late, which ironic, even
Speaker 8: as they were discussing rate hikes, they were still doing
Speaker 8: large scale asset purchase January twenty twenty two, so they
Speaker 8: missed a lot on that. And when I look at
Speaker 8: the banking crisis or whatever you want to call it,
Speaker 8: to me, it's very simple. Basically, during COVID, banks went
Speaker 8: from thirteen trillion to eighteen trillion, So in two years
Speaker 8: they took in five trillion dollars of assets, which is
Speaker 8: much more than the five hundred billion they normally take
Speaker 8: in at the exact worst time to find good investments.
Speaker 8: So it would not be surprising to find that some
Speaker 8: percentage of the banks were very conservative and dealt with
Speaker 8: it well, and some maybe got a little bit aggressive.
Speaker 8: And I think that's what's playing out right now. This
Speaker 8: no longer has anything to do with uninsured deposits, About
Speaker 8: what did banks do with the money when they took
Speaker 8: it in and what are they going to pay people
Speaker 8: to keep the deposits? Because I don't think anyone's really
Speaker 8: worried about their deposits defaulting. It's now, am I getting
Speaker 8: a fair rate on that? And what does this bank
Speaker 8: own on the back of that.
Speaker 3: Wow, said Pete. We could be facing what years of
Speaker 3: some of these banks just being quite unprofitable for a
Speaker 3: long time.
Speaker 8: Yeah, I think that's right. I think it's going to
Speaker 8: be a unwined period. And my big concern it's a
Speaker 8: tail risk. I don't think it happens, but the tail
Speaker 8: risk is as one comes through and their balance sheet
Speaker 8: becomes availed lable for sale, it drags prices down, bringing
Speaker 8: another one into that leg. So that domino effects. So
Speaker 8: I think that's what we've got to be regret working
Speaker 8: on the Fed's got to be very careful about hiking rates.
Speaker 8: They've got to be very careful about causing pressure on
Speaker 8: bond prices because that will, you know, basically create that
Speaker 8: domino effect.
Speaker 3: We'll be talking about this for years. Yes, mortgages sold
Speaker 3: at two percent, We'll be talking about this for decades.
Speaker 3: What people aren't going to sell their houses?
Speaker 8: Well, they do with this, you know, the running joke's
Speaker 8: been for a lot of people. Certainly last year your
Speaker 8: best asset was your mortgage.
Speaker 3: So it's like crazy things about the house. Who on
Speaker 3: earth is going to sound their house unless they're forced
Speaker 3: to move for a job or something out of their
Speaker 3: control happens. Who is voluntarily going to sound their house
Speaker 3: with a thirty year mortgage on it with the rate
Speaker 3: of two to three percent.
Speaker 8: And so that's been one of the ironies of this
Speaker 8: whole thing. Right, the home builders are doing well because
Speaker 8: they can build a new house that someone has to
Speaker 8: move in because there is the supply shortage because of
Speaker 8: this weird phenomenal about mortgages.
Speaker 6: Well, and then there's this question about financial engineering where
Speaker 6: people are going to basically just pass along this mortgage
Speaker 6: is I don't know. Taking a step back, I just
Speaker 6: wonder how much this is normal, right that you get
Speaker 6: a washed out in banks, and how much is different?
Speaker 6: How much is this something that is a unique distortion.
Speaker 3: I have no idea what normal is anymore. What's normal?
Speaker 1: We don't know what normal is.
Speaker 3: We've had a distortion for like the last ten to
Speaker 3: fifteen years.
Speaker 2: This was a calculus exercise the first and second to
Speaker 2: rud of the rate change, and Peter was way out
Speaker 2: front on.
Speaker 1: This was truly historic.
Speaker 2: If you get yields coming back in in a Steve
Speaker 2: Major way and ed Heiman way in a David Rosenberg way,
Speaker 2: does this self adjust price up, yield down?
Speaker 3: No?
Speaker 1: One's looking for that. No one's looking.
Speaker 2: You talk two to three percent mortgages, what if you
Speaker 2: get back to a three point six percent mortgage?
Speaker 8: And I just add the one thing, right, We never
Speaker 8: experienced these large scale asset purchases are QE until two
Speaker 8: thousand and eight. And I don't think we have any
Speaker 8: idea how those really affect asset prices are not so
Speaker 8: I think people like to try and convert. Oh how
Speaker 8: much Q is or QT is a basis point. I
Speaker 8: don't think we have any idea, And I think QE
Speaker 8: and QT go much more directly to asset prices. And
Speaker 8: you keep looking at the FED balance. She didn't the
Speaker 8: stock market.
Speaker 1: Steve heated about this miszono sta just stop it.
Speaker 8: Now.
Speaker 3: You know what normal is. It's when you went to
Speaker 3: the industry on Wall Street, whatever date that was exactly.
Speaker 3: That's very interesting what you believe when you first got
Speaker 3: your mortgage. I speaking of some of the airport the
Speaker 3: other day. Let me tell you about the eighties, just
Speaker 3: like I had to pay. It's always the same.
Speaker 1: Can I say thank you?
Speaker 2: I had no idea about snakes and ladders, no idea,
Speaker 2: no sense.
Speaker 1: It's history. It goes back to the India of the
Speaker 1: raj all that do.
Speaker 6: They slide down snakes back then?
Speaker 1: No, but they're scary and that's why they changed the shoots.
Speaker 3: And Americans scary for the kids forty three. They make
Speaker 3: him soft hair.
Speaker 1: Every they learned something, every single.
Speaker 3: Got soft sweet.
Speaker 1: You should come.
Speaker 3: This is what Governor Youngkin was talking about. Oh my gosh,
Speaker 3: this is what he was talking about.
Speaker 10: Suits and ladders.
Speaker 3: You know what's handling an education these days? Should that's
Speaker 3: the color safe for another time, Peter, Chair of the
Speaker 3: count Me Securities, Thank you.
Speaker 1: Set Kelsey Burrow with us right now.
Speaker 2: Fixed Income portfolio manager JP Morgan Asset Management briefing mister
Speaker 2: Diamond yesterday as he spoke to Friendcing Laqua, I look
Speaker 2: at the bond market and what I would say in equities,
Speaker 2: foreign exchanging, commodities, commodities, very weak bonds always send a message.
Speaker 2: What's the message being sent by fixed income right now?
Speaker 9: Well? I think the message being sent by fixed income
Speaker 9: is there is slower growth and slower inflation ahead. And
Speaker 9: you know, we continue to look at the yield curve
Speaker 9: and look at the signal that the yield curve is giving,
Speaker 9: which is a very inverted yield curve. You have the
Speaker 9: short rate at five percent now and you have the
Speaker 9: ten year at three point four percent, and it's saying
Speaker 9: that you know things are going to slow down. So
Speaker 9: historically what happens, our favorite yield curve is the three
Speaker 9: month bill rate versus the eighteen month forward bill rate.
Speaker 9: Now that is about two hundred basis points inverted at
Speaker 9: this point. It's the most inverted back to the nineties. Historically,
Speaker 9: when that starts to get inverted, it's about twelve months
Speaker 9: to recession. Now that inverted November of twenty twenty two.
Speaker 10: That puts you in about Q four for recession.
Speaker 3: For you in the team, we've got first right cut
Speaker 3: once September. We do September. Do you have any idea
Speaker 3: of what they come back to? Is it's still too
Speaker 3: early to make those kind of calls.
Speaker 9: We don't necessarily think they're going back to the zero
Speaker 9: lower bound, but we all we are positioned long duration,
Speaker 9: which means that we have to feel that the FED
Speaker 9: is going to be more aggressive than what's already priced
Speaker 9: into the market. So you know, you've probably heard the
Speaker 9: expression that you know, the FED takes the stairs up
Speaker 9: and then the elevator down.
Speaker 10: I like of thinking about about it like.
Speaker 9: Shoots and Ladders if you've ever played that children's game. Essentially,
Speaker 9: you know, what we expect is that when the FED
Speaker 9: does cut, they are going to be hutting fairly aggressively.
Speaker 9: And it's not because of the inflation store. We actually
Speaker 9: already see the inflation trends, the disinflationary trends fairly well
Speaker 9: in trends. We expect to see them over the course
Speaker 9: of the year. What's going to have to happen for
Speaker 9: them to actually cut rates is going to be to
Speaker 9: start to see cracks in the labor market. So you
Speaker 9: mentioned continuing claims. Continuing claims really, you know, I think
Speaker 9: is showing an important trend. So if you look at
Speaker 9: continuing claims year over year, it's up twenty five percent.
Speaker 9: That's never happened outside of recession. That's going going back
Speaker 9: all the way to the nineteen sixties.
Speaker 6: But is that enough for cracks? I mean, honestly, this
Speaker 6: is really the question. A lot of people are saying, Okay,
Speaker 6: this is what Ed's been looking for. Maybe it's a
Speaker 6: little bit above. It still is pretty low relative to history.
Speaker 6: It's coming off an incredibly historically low base. How much
Speaker 6: is this enough of a crack or does it have
Speaker 6: to be an acceleration in the regional banking crisis. Does
Speaker 6: it have to be commercial real estates, does it have
Speaker 6: to be private equity.
Speaker 9: Yeah, So what we're trying to do right now is
Speaker 9: we're trying to build a ledger, and there's things on
Speaker 9: both sides of the ledger. There are things that are
Speaker 9: saying the expansion can continue. And I think, you know,
Speaker 9: the biggest thing there, you know, is some of the
Speaker 9: data still in the labor market, we're still growing jobs
Speaker 9: around two hundred thousand, that's well above the break even rate,
Speaker 9: and as a result, the unemployment rate is still falling.
Speaker 10: But the number of things on the other.
Speaker 9: Side of the ledger that are suggesting that we should
Speaker 9: be slowing is just building and building and building now,
Speaker 9: and it's really allowing us to, you know, increase our
Speaker 9: confidence that as bond managers, what we want to be
Speaker 9: doing is staying long duration, adding curve steepeners to portfolios
Speaker 9: on opportunities you know, where the curve may tactically flatten,
Speaker 9: and staying very up in quality in terms of our
Speaker 9: credit credit quality bias.
Speaker 6: This is something that we saw with the fund flows
Speaker 6: over the past week. Global bond funds had their seventh
Speaker 6: straight week of inflows, the focus really being on develop
Speaker 6: market debt equity flows were interesting and how yield up
Speaker 6: put in there.
Speaker 10: There were outflows of the.
Speaker 6: US, there were inflows for the rest of the world,
Speaker 6: particularly China. Do you agree with this assessment the US
Speaker 6: is the weak spot, but globally risk is a little
Speaker 6: bit more appealing.
Speaker 9: Well, I do think that the stories are not the same,
Speaker 9: you know, particularly on the central bank side. On the
Speaker 9: inflation side, you have Europe inflation is really not showing
Speaker 9: any improvements, UK not showing any improvements in terms of inflation.
Speaker 9: You know, they are a little bit behind in terms
Speaker 9: of the monetary policy cycle. But I actually point to
Speaker 9: something more global, which is the commodity market. We were
Speaker 9: looking at the copper gold ratio yesterday. That's actually back
Speaker 9: down to where it was.
Speaker 10: Two years ago. So, you know, I think that.
Speaker 9: The commodity market is telling you that there may be
Speaker 9: a little bit more stress globally in terms of demand.
Speaker 9: Those investors are saying, I'm not sure there's as much
Speaker 9: demand for all of this industrial product.
Speaker 3: That tells you more about love of growth is that
Speaker 3: the call there is that what you're seeing, Yes, so
Speaker 3: maybe yield to the long end right cuts to be
Speaker 3: priced in at the front end. What does the debt
Speaker 3: scening fit into all of that? When you start talking
Speaker 3: about curves and mention T bills, I'm like, how much
Speaker 3: of that at the front end of the curve is
Speaker 3: just driven by this mess right now in Washington.
Speaker 9: So definitely there is distortions in the T bill market
Speaker 9: as a result of the debt ceiling. I mean, you
Speaker 9: have five trillion, six trillion nearly in assets and money
Speaker 9: market funds and they're all being moved around to try
Speaker 9: to adjust for this potential stress this x state that
Speaker 9: Cherry Yellen is our Treasury secretary. Yellen is putting on
Speaker 9: June first. You know, in our mind, ultimately this is
Speaker 9: just another stressor at a point where you know, the
Speaker 9: system is fairly fragile, and what we're thinking about is
Speaker 9: kind of these unintended consequences and there's a lot of
Speaker 9: operational risks that people don't understand that's going on in
Speaker 9: the background. The treasury market is the backbone of the
Speaker 9: financial system, you know, it's not just that you know
Speaker 9: we talk about is yield going up, is the eeld's
Speaker 9: going down. It's used as collateral, you know, it's used
Speaker 9: as the safe haven across the world. And so if
Speaker 9: you have a bill that is going to mature during
Speaker 9: the X state, and we do run through that X state,
Speaker 9: there's a lot of questions about how things are.
Speaker 10: Going to work.
Speaker 9: And you mentioned Jamie, you know here at Bloomberg yesterday,
Speaker 9: he's talking about the war rooms. You know, that's what
Speaker 9: everyone is looking at now, is setting up those.
Speaker 3: War Roomsacy signed your war room. Can you describe what
Speaker 3: that day might look like? I want to ask you
Speaker 3: for the probability that we're going to see that day.
Speaker 3: That would be unfair, But describe what you think that
Speaker 3: day might look like. I own an at risk maturity,
Speaker 3: whatever that one might be. That day comes, we go
Speaker 3: through it, what happens, What does that look like?
Speaker 7: Well?
Speaker 9: I do think that the money market funds are preparing
Speaker 9: for this, and that's why you're already seeing the distortions
Speaker 9: in the market.
Speaker 10: So you know, the investors that.
Speaker 9: Are needing to adjust are already making those adjustments now.
Speaker 9: But I do think, of course, the broader sentiment in
Speaker 9: the market, if we were to pass the X date
Speaker 9: and not have the money that we needed to continue
Speaker 9: to pay bills would be a fairly a stressful situation
Speaker 9: for the broader markets. I think credit spreads would widening.
Speaker 9: I think equity markets would be falling.
Speaker 10: The treasure he's rallying, and I think treasuries will be
Speaker 10: rallying similar to the experience we had in twenty eleven.
Speaker 1: Were I want to go.
Speaker 2: The US aggregate Total Return Index needs to go up
Speaker 2: twelve percent in price to get back to where it
Speaker 2: was before all this storm and thunder.
Speaker 1: Great.
Speaker 2: How long is it going to take for people to
Speaker 2: get price up yield down so they recover from the
Speaker 2: bond tobaccle of the last two years.
Speaker 10: Well, the good news is they're already getting some of that.
Speaker 1: They've gotten some of it.
Speaker 3: I'll give you that.
Speaker 2: But come on, is it quarters or are you and
Speaker 2: Bob looking out years to see a price recovery in bonds.
Speaker 9: Well, we've looked at how bonds perform once the FED
Speaker 9: has paused, and bonds handily outperformed cash once.
Speaker 10: The FED has paused.
Speaker 9: So we are looking at a situation where you know,
Speaker 9: this is the time to get invested, this is the
Speaker 9: time to lock in the yields, get them now and
Speaker 9: benefit from the capital appreciation once the Fed starts hiking.
Speaker 10: We expect that in Q four.
Speaker 3: So think you rition on what we do leave. It's
Speaker 3: the last hike seems to be the cool rite.
Speaker 10: That's it.
Speaker 3: Cassie, wonderful to getting view on things. Cassie Paraday f
Speaker 3: Jpmulkan asset management.
Speaker 2: To so many of Americans, Japan is Tokyo. There's a
Speaker 2: whole other Japan, and part of it is on the
Speaker 2: West coast, overlooking the sea to Korea and Russia. That's
Speaker 2: where Ann Marie Horden is. She is our Bloomberg G
Speaker 2: seven Finance Minister's corresponded after her most interesting interview with
Speaker 2: the Secretary of Treasury Emory Harden.
Speaker 1: The Secretary is seventy six years old.
Speaker 2: She has bulletproof economic academics as well. And what I
Speaker 2: really heard today is she's going to stay the course
Speaker 2: and serve out her term.
Speaker 1: Is that true?
Speaker 5: Yes, that is true. She said this number of times.
Speaker 5: She confirmed that with me today. I asked her a
Speaker 5: little bit of a tongue in cheek question at the
Speaker 5: very end, if she'd considered another four years if President
Speaker 5: Biden worked to win because Obviously, he has relaunched his
Speaker 5: next bid for the White House for twenty twenty four,
Speaker 5: and she laughed, But she says she enjoys doing the
Speaker 5: work and she will continue to see out this term. Obviously,
Speaker 5: her work right now, whether it's in Washington or here
Speaker 5: in Nagata, Japan, is the debt ceiling on the sidelines.
Speaker 5: This is what her peers at the G seven are
Speaker 5: very concerned with. The risks to the global economy. They're
Speaker 5: all emanating from the United States right now.
Speaker 2: Emmery, you know that each White House has a process
Speaker 2: of debate and dialogue. Where does Secretary Yellen fit into
Speaker 2: the debate and dialogue of the Biden sixteen hundred Pennsylvania Avenue.
Speaker 5: Well, when it comes to the debt ceiling, of course,
Speaker 5: the Treasury Secretary is the individual that is going to
Speaker 5: continuously update us on the X date. She said in
Speaker 5: my conversation that as we get closer to that June first,
Speaker 5: as early as June first is what she's outlined, that
Speaker 5: potentially Treasury could run out of the extraordinary measures they've
Speaker 5: been taking since January, that she will update Congress with
Speaker 5: a more precise time frame. So her team is going
Speaker 5: to be obviously communicating all of this first and foremost
Speaker 5: to the White House. And then of course we got
Speaker 5: a little bit into what happens if there were to
Speaker 5: be a default, if we go over the X date.
Speaker 5: Treasury Secretary Janet Yellen was at the Fed in twenty
Speaker 5: eleven when the Fed went through these scenarios of what
Speaker 5: Treasury was doing, and it was under the assumption then,
Speaker 5: and I've read the transcript, it was under her assumption
Speaker 5: then that Treasury would service the debt first. She says
Speaker 5: that she has not yet spoken about these paths yet
Speaker 5: with the President. It's going to be politically fraught for
Speaker 5: this administration if there is no deal and they need
Speaker 5: to decide to pay bondholders or pay recipients of Social Security.
Speaker 6: Meanwhile, John was saying that it has to get worse
Speaker 6: before it gets better. In other words, people have to
Speaker 6: care more before they can resolve anything. In Washington, DC,
Speaker 6: over at the G seven finance minister meetings. How much
Speaker 6: do they care? How much is this a focus versus
Speaker 6: people looking past this and saying the same thing that
Speaker 6: people in the markets are, which is we've seen this
Speaker 6: movie before. It always gets resolved.
Speaker 5: There's a lot of concern and angst amongst other financial
Speaker 5: ministers at the G seven, and we heard from the
Speaker 5: German finance minister. He's saying he hopes that Washington makes
Speaker 5: a matured decision. They are all also on the edge
Speaker 5: of their seat waiting to see how this plays out.
Speaker 5: And there is concern when you think about the makeup
Speaker 5: of this Congress, only about thirty three percent. NBC recently
Speaker 5: did analysis of this. Thirty three percent of lawmakers were
Speaker 5: here in twenty eleven. They witnessed that down break, they
Speaker 5: witness the pain in the market. Not a ton of
Speaker 5: a lot of these lawmakers are fresh, and Kevin McCarthy
Speaker 5: has a very difficult line to walk. I think many
Speaker 5: people are viewing that the negotiations stopped today, that the
Speaker 5: meeting stopped today is postponed for early next week. They
Speaker 5: do see that as progressed, because that means on the
Speaker 5: staff level they are working through a number of items
Speaker 5: before they want to sit down with the principles. But
Speaker 5: next week is going to be incredibly busy, and for
Speaker 5: the Treasury Secretary, she will be meeting with bank executives.
Speaker 5: She said recently she's been speaking to business leaders, but
Speaker 5: she hasn't spoken to bank executives since January, and she
Speaker 5: wants to learn from them what is going on, and
Speaker 5: potentially she wants to put some pressure on them to
Speaker 5: start calling other members of Congress because for her, she
Speaker 5: does not want to even speak out loud the contingency plans.
Speaker 5: She says, there is no good deal unless Congress lifts
Speaker 5: the debt ceiling.
Speaker 6: Amory just quickly here putting those ideas together. The concerns
Speaker 6: about the banking sector, not just with respect to them
Speaker 6: getting more excited about the bank the debt default ceiling,
Speaker 6: but also just with some of the regional banking crisis.
Speaker 6: How much is the US on a back foot relative
Speaker 6: to where it has been in the past.
Speaker 3: These G seven.
Speaker 5: Meetings, well, the US always wants to lead, especially at
Speaker 5: a G seven like this. They want to lead when
Speaker 5: it comes to China. The G seven meeting is really
Speaker 5: the prep work as well for the ministerial meeting that
Speaker 5: also be attending with President Biden in Hiroshima. And one
Speaker 5: thing we know they want to work on is this
Speaker 5: economic coersion against China. Secretary Yellen has spoke about the
Speaker 5: work that they're doing potentially on outbound investment. They're supposed
Speaker 5: to be an executive order. But this administration, the way
Speaker 5: they confront China, they want to do so in a
Speaker 5: multilateral approach. It's very difficult to make sure you're corraling
Speaker 5: all the troops when you come here and they're asking
Speaker 5: you questions, When is the US going to raise the
Speaker 5: debt ceiling?
Speaker 10: How do we know that the.
Speaker 5: Treasuries that are the underlying bedrock of the global financial
Speaker 5: system are going to be paid and secure? It does
Speaker 5: put them in a very precarious place.
Speaker 3: I MH. Wonderful conversation, fantastic job this morning. Thanks for
Speaker 3: joining us. I'm Marie Hoden. There out of the G
Speaker 3: seven meetink Open Japan.
Speaker 2: Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and
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Speaker 1: Thanks for listening. I'm Tom Keane, and this is blumber