WEBVTT - Dollar Will Likely Resume Weakening Trend: BBH's Chandler 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg P and L Podcast. I'm Pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg P M L 0:00:20.840 --> 0:00:32.320 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Are 0:00:32.320 --> 0:00:35.839 we seeing the beginnings of perhaps a dollar rebound? Here? 0:00:35.880 --> 0:00:39.240 To talk about? That is Mark Chandler, Global head of 0:00:39.280 --> 0:00:42.800 Currency Strategy at Brown Brothers Harriman. And Mark, you join 0:00:42.960 --> 0:00:45.239 us on a great day because we're finally getting a 0:00:45.280 --> 0:00:49.000 breather from the great weakening of the green back. We're 0:00:49.000 --> 0:00:52.200 seeing a little bit of a rebound against comparable currencies. 0:00:52.280 --> 0:00:56.080 Do you think this signals the beginning of a larger turnaround? 0:00:57.240 --> 0:00:59.000 At least I wish it did, but I'm afraid it 0:00:59.040 --> 0:01:01.560 probably doesn't. So far are the dollars bounce here has 0:01:01.600 --> 0:01:04.520 been fairly shallow, and it comes after it, like you say, 0:01:04.560 --> 0:01:07.119 after several days that little hammering, you know, the dollars 0:01:07.120 --> 0:01:11.320 and falling quite sharply, Uh, not quite, but almost uninterrupted 0:01:11.319 --> 0:01:13.200 since the middle of December. And so I think today 0:01:13.240 --> 0:01:16.040 we're seeing just you know, we had followed through dollars 0:01:16.040 --> 0:01:20.039 selling yesterday when the US markets are closed, if done incentrating, 0:01:20.040 --> 0:01:21.280 and I think that this is just sort of what 0:01:21.319 --> 0:01:24.360 I call it, maybe even a dead cat bound. So Mark, 0:01:24.400 --> 0:01:26.720 can you just give us a sense of what's driven 0:01:26.800 --> 0:01:29.320 in the dollar, what's driving the dollar weakness? I mean 0:01:29.319 --> 0:01:32.759 that you have certainly the euro strength, you have global growth, 0:01:32.840 --> 0:01:35.959 it's accelerated in other regions more than in the US. 0:01:36.120 --> 0:01:39.920 But what's the main factor of people should be looking at. Yeah, 0:01:39.959 --> 0:01:42.399 Lucy asked me the two million dollar question, because Frank 0:01:42.520 --> 0:01:45.160 I was in the camp that thought that wider interest 0:01:45.240 --> 0:01:48.080 rate differentials with the FED tightening, the tax cuts in 0:01:48.120 --> 0:01:51.120 the US, UH, the attractiveness that through the de regulation, 0:01:51.200 --> 0:01:54.160 attractiveness of the US as a point for investment. We've 0:01:54.200 --> 0:01:56.680 got inflation expectations driving all these things that I think 0:01:56.760 --> 0:01:59.280 should be good for the dollar. And if not. And 0:01:59.360 --> 0:02:00.920 so when I talk of people and trying to listen 0:02:00.960 --> 0:02:02.920 to why they are saying that they think the euro 0:02:03.040 --> 0:02:06.320 is going up, primarily is it more the Euro going 0:02:06.400 --> 0:02:09.880 up than perhaps other currencies going up? And they say 0:02:09.919 --> 0:02:13.480 that many people think that the ECB is close to 0:02:13.720 --> 0:02:17.440 exiting its monetary policy, and as you know, the ECB's 0:02:17.480 --> 0:02:20.080 papering this year, it went down from sixty billion a 0:02:20.160 --> 0:02:24.200 month asset purchases in the last nine months of last year, 0:02:24.440 --> 0:02:27.680 claim them a half to thirty billion months this year. 0:02:28.240 --> 0:02:30.840 And some other officials talking over the weekends sound kind 0:02:30.880 --> 0:02:33.400 of hawkish, talking about the sequence of events and maybe 0:02:33.480 --> 0:02:38.480 raising interest rates before the market previously anticipated. Mark Chandler, 0:02:38.720 --> 0:02:42.840 is a lower value US dollar better for US equities. 0:02:44.800 --> 0:02:46.359 I hear what you're saying to him. I know a 0:02:46.400 --> 0:02:48.359 lot of people think so because they think that the 0:02:48.400 --> 0:02:51.320 logical on something like this, Uh, the weaker dollar means 0:02:51.360 --> 0:02:54.720 that US can export more, and when the US exports more, 0:02:54.919 --> 0:02:58.480 those foreign currency it gets can then be translated into 0:02:58.520 --> 0:03:02.280 greater dollars boost earn And it sounds all reasonable and everything. 0:03:02.280 --> 0:03:04.160 But I think they'll find plenty of time when the 0:03:04.240 --> 0:03:07.720 US dollar was strong and corporate America was still reporting 0:03:07.840 --> 0:03:11.240 record profits. You know, the corporate earning seasons kicking off 0:03:11.240 --> 0:03:14.960 formerly this week, and people are expecting strong earnings. Last year, 0:03:15.320 --> 0:03:18.400 the dollar fell and corporate earnings look to be up, 0:03:18.560 --> 0:03:22.440 say something like twelve year over year. When the bigger picture, 0:03:22.440 --> 0:03:24.400 I think that for me, the reason I'm not fully 0:03:24.400 --> 0:03:28.240 aboard that kind of view. Is that the US is 0:03:28.280 --> 0:03:32.960 not service foreign markets primarily by exportings. Building locally, selling 0:03:32.960 --> 0:03:34.960 locally is really the key, and so a lot of 0:03:35.040 --> 0:03:38.600 US businesses are the export and build locally. They also 0:03:38.640 --> 0:03:41.840 when they build locally, incur local costs, so they'll have 0:03:41.880 --> 0:03:44.600 to pay those German workers higher wages or those check 0:03:44.640 --> 0:03:48.360 workers higher wages, and so that offset some of the 0:03:48.760 --> 0:03:51.720 beneficial impact I think. But in general, I think the 0:03:51.760 --> 0:03:54.960 best level for the dollar actually attend. It turns out 0:03:54.960 --> 0:03:57.120 that a strong dollar that is backed by a strong 0:03:57.160 --> 0:04:00.640 economy is actually good for corporate America. It so, having 0:04:00.680 --> 0:04:03.320 said that, should we look for higher prices for energy 0:04:03.360 --> 0:04:07.840 and commodities such as gold. Yeah, I hear what you're 0:04:07.880 --> 0:04:09.400 saying there, and I do think that because a lot 0:04:09.400 --> 0:04:11.800 of these commands are price in dollars, like gold or oil. 0:04:12.200 --> 0:04:13.960 When the dollar was falling out of bed over the 0:04:14.040 --> 0:04:17.400 last several weeks, we did see upward pressure on commodities, 0:04:17.600 --> 0:04:20.520 and today, of course it's the opposite. Softer dollar, softer gold, 0:04:20.560 --> 0:04:24.320 softer iron ore, softer base metals, softer oil. I'm just 0:04:24.400 --> 0:04:26.480 not sure that that is some of the hanguans hat 0:04:26.560 --> 0:04:28.240 On I think if you think the dollar is going 0:04:28.279 --> 0:04:31.559 to fall, should be short to dollar in various times 0:04:31.560 --> 0:04:35.160 a way long point equities, for example, are long foreign bonds. 0:04:35.200 --> 0:04:36.640 But if you think that, if you if you have 0:04:36.680 --> 0:04:38.680 a view on commodities, I would trade that. I think 0:04:38.680 --> 0:04:40.560 it were best served by training as close to our 0:04:40.640 --> 0:04:45.359 views as possible. Mark. You know, it seems increasingly like 0:04:45.520 --> 0:04:49.080 the consensus trade the dollar will weaken more, and I'm wondering, 0:04:49.400 --> 0:04:54.520 what's the risk scenario that upends that. Yeah, well, the 0:04:54.600 --> 0:04:56.360 risk scenario is really what I've been still counting on, 0:04:56.440 --> 0:04:59.240 and that that is that continued to interest rate increases 0:04:59.240 --> 0:05:02.520 by the Stuttlers. And by that I mean it's it's 0:05:02.560 --> 0:05:05.279 kind of interesting what happens. So if you are a 0:05:05.839 --> 0:05:08.320 that that interest rate differential, I think is the incentive 0:05:08.360 --> 0:05:12.839 structure that investors monitor closely, and with the incentive structure 0:05:12.880 --> 0:05:16.360 telling you is that you're paid to be long U 0:05:16.400 --> 0:05:19.120 S dollars by an increasing amount. And I don't think 0:05:19.160 --> 0:05:21.800 that the ECB raises interest rates this year. I don't 0:05:21.839 --> 0:05:23.760 think the b o J raises interest rates this year. 0:05:23.800 --> 0:05:26.560 I think they were still at least a year, perhaps 0:05:26.720 --> 0:05:28.599 maybe a year and a half to two years away 0:05:28.640 --> 0:05:31.680 from this divergence peaking, and so I would still say 0:05:31.720 --> 0:05:33.640 the federal reserves, like the raised interest rates, it's going 0:05:33.720 --> 0:05:36.480 to cost people an increasing amount to be short of 0:05:36.560 --> 0:05:39.840 the US dollar mark. Chandler, can you give us your 0:05:39.880 --> 0:05:42.080 thoughts on the value of the Chinese you want to 0:05:42.120 --> 0:05:46.280 remember and what the Chinese government's long term plan is 0:05:46.320 --> 0:05:49.240 for the currency. Well, I don't know if I can 0:05:49.279 --> 0:05:51.080 tell you what the government's long term planet. I know 0:05:51.120 --> 0:05:53.240 they want to be more international, but I think that 0:05:53.320 --> 0:05:54.960 they have a lot of stumbling blocks. So the big 0:05:55.000 --> 0:05:57.880 news over the weekend realier yesterday was when the Bundesbank 0:05:58.200 --> 0:06:01.400 official indicated that the them in Central Bank had put 0:06:01.600 --> 0:06:04.800 R and B in reserves, and the shortly thereafter the 0:06:04.920 --> 0:06:07.000 French announces that they had already done the same thing. 0:06:07.400 --> 0:06:11.080 It's not so surprising. About about six months ago or so, 0:06:11.200 --> 0:06:14.960 June of last year, the ECB itself announced that they 0:06:15.000 --> 0:06:18.240 had bought about five million euros worth of Chinese R 0:06:18.320 --> 0:06:22.440 and B to put in reserves, and interestingly interestingly they 0:06:22.480 --> 0:06:25.240 said that they reduced their dollar holdings to buy China. 0:06:25.400 --> 0:06:28.080 But we gotta keep this in perspective. There are something 0:06:28.200 --> 0:06:32.880 on the magnitude of eleven point four tillion dollars of reserves, 0:06:33.560 --> 0:06:37.600 the Chinese juan makes up about about a hundred and 0:06:37.680 --> 0:06:41.400 seven million dollars excuse me, a hundred and seven billion 0:06:41.440 --> 0:06:46.000 dollars very small, it's it's about one percent of global reserves. 0:06:46.000 --> 0:06:49.280 This is not the beginning of the Chinese want replacing 0:06:49.320 --> 0:06:52.960 the dollar. Chinese officials themselves recognize that, and they seem 0:06:52.960 --> 0:06:56.800 to be more circumspect about the role of China, and 0:06:57.000 --> 0:06:58.920 they have really more strategic view. While I hear a 0:06:58.960 --> 0:07:01.640 lot of people talking about about China and the end 0:07:01.680 --> 0:07:03.880 of the petro dollar at the beginning of a petro 0:07:04.160 --> 0:07:07.760 R and B the launching, eventually they stay of a 0:07:08.520 --> 0:07:11.440 of an R and B denominated oil contract. People are 0:07:11.760 --> 0:07:13.760 people in the private sector in the market. I talked 0:07:13.760 --> 0:07:16.320 about the dollar is gonna be replaced, but I find 0:07:16.360 --> 0:07:19.520 that sometimes a price action influenced the news, and sometimes 0:07:19.520 --> 0:07:21.960 the news impacts the price action. This is one of 0:07:21.960 --> 0:07:24.720 the times I think a following dollar is getting all 0:07:24.720 --> 0:07:28.120 these kind of like conspiracy series and how the dollar 0:07:28.160 --> 0:07:30.960 is going to be dethroned out of the woodwork these ideas, 0:07:31.040 --> 0:07:33.040 and I think that the R and B is nowhere close. 0:07:33.080 --> 0:07:35.360 The dollar makes up about sixty three percent of the 0:07:35.360 --> 0:07:37.680 world reserves, the R and B a little bit more 0:07:37.680 --> 0:07:40.120 than one percent. All right, thanks for putting it into 0:07:40.200 --> 0:07:42.480 perspective for us. Mark Chandler is the global head of 0:07:42.520 --> 0:08:00.440 Currency Strategy at Brown Brothers Harriman. The question of need, 0:08:00.480 --> 0:08:03.080 does anyone really need an suv that goes from zero 0:08:03.120 --> 0:08:05.480 to sixty and three point six seconds or can do 0:08:05.520 --> 0:08:08.200 a hundred and ninety miles per hour? Does anyone need 0:08:08.280 --> 0:08:12.960 six hundred and forty one horses streaming behind them? It 0:08:13.120 --> 0:08:15.320 is in yellow or and can be in yellow, and 0:08:15.520 --> 0:08:19.200 it is the new Lamborghini suv. It is called the 0:08:19.360 --> 0:08:23.040 Rusts and it joined now by the global Chief Executive 0:08:23.120 --> 0:08:27.560 of Automobile Lamborghini is Stefano Domenicali. Thank you for being 0:08:27.560 --> 0:08:30.840 here in our studio as much appreciated. What was the 0:08:31.160 --> 0:08:36.079 thinking behind the creation of the auras, Because there are 0:08:36.200 --> 0:08:42.160 already a variety of high luxury SUVs, even from the 0:08:42.240 --> 0:08:46.000 likes of Bentley and the likes of Audi and so on, 0:08:46.080 --> 0:08:49.720 that you could call luxury. What inspired the Lamborghini brand 0:08:49.760 --> 0:08:52.400 to want to make their mark in this market? Well, 0:08:52.440 --> 0:08:55.160 I would say that the inspiration came from the knowledge 0:08:55.160 --> 0:08:58.679 of the market. We as Lamborghini had a superspore brand 0:08:58.720 --> 0:09:01.760 and that's pretty clear and that will be always in 0:09:01.800 --> 0:09:04.680 the future. But we reckoned that the market in the 0:09:05.120 --> 0:09:08.440 suv segment is rowing all around the world and there 0:09:08.480 --> 0:09:12.200 was a perfect occasion to enlarge the portfolio offer to 0:09:12.280 --> 0:09:14.200 the customer because the end of the day, we were 0:09:14.200 --> 0:09:18.000 talking about product or cars or looks really good at 0:09:18.040 --> 0:09:22.880 are not necessary to have. It's a status. It's something 0:09:22.920 --> 0:09:24.880 that you want to have because you want position yourself 0:09:24.880 --> 0:09:27.520 in a certain way. So we saw the potential will 0:09:27.559 --> 0:09:29.800 be different also in this segment. That's the reason why 0:09:30.040 --> 0:09:32.520 we start this kind of a new project. Okay, so 0:09:32.559 --> 0:09:37.240 when we talk about necessity, how much as cost in 0:09:37.240 --> 0:09:39.839 in in hearing other states will be around two hundred 0:09:40.559 --> 0:09:43.760 dollars and and then of course the least price is 0:09:43.840 --> 0:09:46.800 a discussion because I know the market of the United 0:09:46.840 --> 0:09:49.280 States is mainly working on that, and I think we're 0:09:49.280 --> 0:09:51.480 gonna have a great offer. I get it to portune 0:09:51.480 --> 0:09:54.960 to give to our customer. Here, which country or where 0:09:54.960 --> 0:09:57.440 where do you think that most of the customers for 0:09:57.520 --> 0:10:02.080 this particular vehicle will come from? We say they the 0:10:02.200 --> 0:10:04.760 success of this after the first couple of weeks, when 0:10:04.760 --> 0:10:07.240 we launch, the car is normals all around the world. 0:10:07.480 --> 0:10:10.880 What is incredible is to see that the real question 0:10:10.880 --> 0:10:13.880 that we need to answer is how many non Lamborghinea 0:10:13.920 --> 0:10:16.200 customs we're gonna buy the new U s V Because, 0:10:16.200 --> 0:10:19.560 of course, as you know today, the our normal customer, 0:10:19.600 --> 0:10:22.560 if I may say normal, don't use that car every day. 0:10:22.600 --> 0:10:24.720 But with the new supers, they're going to use that 0:10:24.800 --> 0:10:28.240 Carla therefore is not only having the add that the 0:10:28.400 --> 0:10:32.120 one by one customer that are already in the Lamborghini family, 0:10:32.280 --> 0:10:34.400 but that the interesting thing will be to see how 0:10:34.440 --> 0:10:39.679 many potential customers will come from other branch because it 0:10:39.720 --> 0:10:42.480 would be may be interested to see our car. They 0:10:42.520 --> 0:10:45.240 love our design, they love our performance, they love to 0:10:45.240 --> 0:10:48.360 be connected with the Lamborghinia families. So the real question 0:10:48.400 --> 0:10:51.120 would be how many process we're gonna be able to 0:10:51.160 --> 0:10:53.160 catch in the future. And this is something that at 0:10:53.240 --> 0:10:56.000 least for after the first couple of weeks of the 0:10:56.040 --> 0:10:58.560 first launch around the world, we see there is a 0:10:58.600 --> 0:11:02.680 lot of attention. I note that you can customize this 0:11:03.120 --> 0:11:06.840 almost every way you can imagine, right, fourteen exterior colors 0:11:06.880 --> 0:11:11.240 to choose from, fifteen interior leather options, head rest you 0:11:11.280 --> 0:11:14.160 can get them embossed with the raging bull logo. I mean, 0:11:14.559 --> 0:11:18.560 just customization seems to be the real The real deal 0:11:18.640 --> 0:11:23.240 here is um UH is the factory that is building 0:11:23.240 --> 0:11:27.280 these in san Agata. Is that fact You're going to 0:11:27.360 --> 0:11:29.600 do all the customization or does that get farmed out? 0:11:30.080 --> 0:11:32.720 It will be done all in Santega the Bolognese in Italy. 0:11:32.720 --> 0:11:35.280 We were close to Bologna. There was a big challenge 0:11:35.320 --> 0:11:38.160 because in one year, just one year, we built a 0:11:38.240 --> 0:11:41.320 completely new line of assembly. We double the dimension of 0:11:41.360 --> 0:11:43.800 a factor. We hired more of a hundred people to 0:11:43.880 --> 0:11:46.040 make sure that this was possible to do it. That 0:11:46.040 --> 0:11:48.439 that is why we we use the claim since we 0:11:48.520 --> 0:11:51.040 made it possible for the launch of this vehicle. Because 0:11:51.080 --> 0:11:53.240 you know, if you think what was Lamborghini just a 0:11:53.240 --> 0:11:55.000 couple of years ago, No, when I would have thought 0:11:55.040 --> 0:11:58.720 it was possible. Therefore, the personalization is a very important 0:11:58.720 --> 0:12:00.640 item for our custom and that will be done by us. 0:12:00.840 --> 0:12:04.160 So I'm seeing a headline crossing the Bloomberg today that Ferrari, 0:12:04.400 --> 0:12:09.000 a competitor of yours, is planning to make an electric supercar. 0:12:09.360 --> 0:12:14.640 Um I'm wondering is that in your future? Well, in Uh, 0:12:14.679 --> 0:12:17.520 I would say September, we launched the third Millennium Project. 0:12:17.760 --> 0:12:20.400 It was a car that we presented together with the 0:12:20.559 --> 0:12:23.320 m I T in Boston. Because we have our research 0:12:23.480 --> 0:12:26.520 that is making sure that we are also ahead in 0:12:26.559 --> 0:12:29.000 that respect. So we have already launched that idea on 0:12:29.000 --> 0:12:32.160 our side, and I think that is natural, that is 0:12:32.200 --> 0:12:35.480 logical to also to be a trend setter in the 0:12:35.679 --> 0:12:38.160 in this in this new dimension. But when could that 0:12:38.280 --> 0:12:42.280 car actually be marketed, I would say, realistically speaking after 0:12:42.720 --> 0:12:46.640 in the second part of the two in that range 0:12:46.679 --> 0:12:48.400 will be ready, I think, because we need to be 0:12:48.520 --> 0:12:52.079 current with a couple of elements in that respect. First 0:12:52.080 --> 0:12:56.760 of all, the performance of a supersport car has to 0:12:56.800 --> 0:12:59.520 be there. We need to consider the usual our car 0:13:00.080 --> 0:13:02.760 cost of it. Of course, the affordability of this technology 0:13:02.960 --> 0:13:06.199 is another element that is very important, and we're gonna 0:13:06.240 --> 0:13:08.679 be there as a second step. We don't have to 0:13:08.720 --> 0:13:12.600 forget today we are, let's say, using the normal combustion engine. 0:13:12.880 --> 0:13:16.480 We're gonna be using the abrilization as a second step 0:13:16.520 --> 0:13:19.360 before arriving through dilectrification. So there is still a lot 0:13:19.400 --> 0:13:21.320 of rooms to do, a lot of work to be done, 0:13:21.440 --> 0:13:23.520 but for sure the trend is there. And we're gonna 0:13:23.800 --> 0:13:27.680 be there for the future superspokeer models with the aabrilization model. 0:13:27.920 --> 0:13:31.000 What's the trend for Lamborghini any chance of spinning it 0:13:31.040 --> 0:13:35.360 off from VW But currently you have you have a cousin, right, 0:13:35.360 --> 0:13:37.040 I mean, how do you could call like a cousin 0:13:37.600 --> 0:13:40.400 using their V eight in this new uh in this 0:13:40.520 --> 0:13:43.720 new SUV spin off in the works. Maybe something that 0:13:43.760 --> 0:13:45.920 I cannot answer to be honest, because it's not me. 0:13:46.040 --> 0:13:49.760 That's I'm I need to report to our shareholders, my 0:13:49.880 --> 0:13:51.720 duty or our uses will make sure that we are 0:13:51.760 --> 0:13:53.880 bringing up the brand in the right way that we can. 0:13:54.280 --> 0:13:56.400 We are growing, we need to make sure that we 0:13:56.240 --> 0:13:58.440 are we are profitable enough. We need to make sure 0:13:58.480 --> 0:14:01.160 that we have we are strong enough with good product 0:14:01.200 --> 0:14:03.440 portfolio in the future, and then the show will make 0:14:03.440 --> 0:14:05.760 their decision. I'm pretty sure that they are proud of 0:14:05.800 --> 0:14:08.839 having us in their in their portfolio together. But this 0:14:08.920 --> 0:14:10.839 is you know, what we have to do, make sure 0:14:10.880 --> 0:14:14.320 that we are doing a good job. Stefano Domenicali thank 0:14:14.320 --> 0:14:16.560 you so much for joining us, his global chief executive 0:14:16.559 --> 0:14:21.920 officer of automobile Lamborghini based in Bologna, Italy. Thank you 0:14:21.920 --> 0:14:24.120 so much. For being with us and uh we look 0:14:24.160 --> 0:14:28.119 forward to uh each getting our own personal suv Lamborghini 0:14:28.200 --> 0:14:45.200 in the Maile. Now kidding right now, it seems like 0:14:45.480 --> 0:14:49.200 kind of a tenuous time in US government pond markets. 0:14:49.240 --> 0:14:53.000 You have a government deficit in the United States is 0:14:53.000 --> 0:14:56.280 expected to blossom over the next few years. You have 0:14:56.680 --> 0:15:01.160 a potential government shutdown, and yet yields are actually dipping lower. 0:15:01.200 --> 0:15:03.600 Today here to talk about what's going on and how 0:15:03.640 --> 0:15:07.600 investorship position is. Ira Jersey, chief US interest rate strategist 0:15:07.680 --> 0:15:11.320 for Bloomberg Intelligence. I want to just start with a 0:15:11.440 --> 0:15:16.120 question about the government shutdown. Why our markets completely ignoring 0:15:16.160 --> 0:15:19.680 this even as the rhetoric gets amped up yet again 0:15:19.840 --> 0:15:22.160 that Congress will not come to a deal. Well, I 0:15:22.360 --> 0:15:24.920 think there's a few things about government shutdowns that kind 0:15:24.920 --> 0:15:27.720 of get misconstrued by the general public. I mean, the 0:15:27.760 --> 0:15:30.680 first is that a short term government shutdown, someone that 0:15:30.840 --> 0:15:32.560 lasts just a couple of days or even a week 0:15:33.040 --> 0:15:36.760 um really does not have any significant economic implications. And 0:15:36.840 --> 0:15:38.960 there are a lot of portions of the government that's 0:15:39.000 --> 0:15:41.440 still stay open. So for example, the bondmark, it's not 0:15:41.480 --> 0:15:44.680 going to care about it because UM government securities are 0:15:44.680 --> 0:15:46.680 still going to get paid. Coupon payments are still going 0:15:46.720 --> 0:15:48.200 to be made. Things like that, the I R. S 0:15:48.200 --> 0:15:51.920 stays open, so income still comes in the Federal Reserve, 0:15:51.920 --> 0:15:54.240 and the Treasury Department or portions of the Treasury Department 0:15:54.240 --> 0:15:57.160 remain open, so coupons get paid. So this isn't a 0:15:57.400 --> 0:16:00.800 kind of debt Eventum, a very long term government shutdowns, 0:16:00.840 --> 0:16:03.200 so one that lasts several weeks or a month that 0:16:03.280 --> 0:16:05.760 could have some economic implications because of the lack of 0:16:05.800 --> 0:16:09.080 government spending and the like, um, that that could occur. 0:16:09.160 --> 0:16:11.280 So you do see that when when in a few 0:16:11.280 --> 0:16:13.240 periods that you've had long term government shutdowns, you have 0:16:13.280 --> 0:16:17.200 seen little blips that that affect the um, that affect 0:16:17.320 --> 0:16:20.640 the growth. But um, you know, we're not expecting necessarily 0:16:20.640 --> 0:16:23.280 a long one now, So I think that um, any 0:16:23.280 --> 0:16:24.960 government shutdown in this case is just going to be 0:16:25.040 --> 0:16:27.920 completely ignored by most markets. All right, right, can you 0:16:27.960 --> 0:16:32.280 speak about treasury inflation protected securities and their use in 0:16:32.400 --> 0:16:37.520 people's portfolios. Yeah. I think for for a lot of investors, 0:16:37.560 --> 0:16:41.440 the ideas is that okay, inflation might be higher than 0:16:41.920 --> 0:16:44.520 UM in the in the future, and because of that, 0:16:44.560 --> 0:16:47.240 I'd like to get some some hedges and protections for that, 0:16:47.320 --> 0:16:51.080 so they buy treasury inflation protected securities. The problem with 0:16:51.400 --> 0:16:54.640 just going out and buying UM tips, whether it's a 0:16:54.680 --> 0:16:58.720 thousand dollars or a couple of ten thousand dollars, doesn't matter. M. 0:16:58.880 --> 0:17:00.880 The problem is is that you're you're still have a 0:17:00.880 --> 0:17:03.680 lot of interest rate risk that are embedded in these instruments. 0:17:03.720 --> 0:17:06.960 So when you buy a tip security, you're receiving what's 0:17:06.960 --> 0:17:08.880 called the real yield, so the yield on the tip 0:17:09.240 --> 0:17:12.879 plus inflation. Now, the problem is is that when inflation 0:17:12.960 --> 0:17:17.440 goes up, then yields usually go up much faster than 0:17:17.880 --> 0:17:21.680 um UH than inflation. So let's imagine a situation where 0:17:21.920 --> 0:17:24.159 suddenly we think inflation next year is going to be 0:17:24.160 --> 0:17:27.920 five percent from say two percent today. UM you say, okay, 0:17:27.920 --> 0:17:29.640 well let me buy tips because I'm going to get 0:17:29.640 --> 0:17:32.640 three percent. The problem is is that an environment like that, 0:17:33.520 --> 0:17:35.960 yields might sell off a hundred basis points and then 0:17:36.000 --> 0:17:39.600 there's UH interest rate risk embedded in these securities, and 0:17:39.760 --> 0:17:43.080 that's what we call duration. So that's the effect on 0:17:43.359 --> 0:17:46.600 price by changes and yield. So a hundred basis point 0:17:46.640 --> 0:17:49.680 increase in UH in yields on a ten year tip, 0:17:49.960 --> 0:17:53.119 you wind up losing eight percent of your of your 0:17:53.160 --> 0:17:55.680 dollar value of that of that tip. So if you 0:17:55.760 --> 0:17:58.280 just do that math, eight percent minus three percent means 0:17:58.280 --> 0:18:02.600 you lose five percent, even with inflation increasing quite a lot. 0:18:02.680 --> 0:18:04.719 So so there's a lot of interest rate risk embedded 0:18:04.720 --> 0:18:07.600 in this. So the way that you really hedge inflation 0:18:07.800 --> 0:18:10.160 is by buying a tip and then hedging out your 0:18:10.240 --> 0:18:13.399 interest rate risk. So I'm looking right now at the 0:18:13.480 --> 0:18:16.160 I shares Tips E t F and I'm just looking 0:18:16.160 --> 0:18:19.159 at the total assets it has increased since the end 0:18:19.160 --> 0:18:23.600 of about I don't know, three million dollars or so 0:18:24.160 --> 0:18:27.320 with respect to assets under management. So a lot of 0:18:27.320 --> 0:18:30.960 people have been going into tips as a proxy for 0:18:31.320 --> 0:18:35.000 hedging against inflation. And I'm just wondering, do you think 0:18:35.160 --> 0:18:38.760 that all the people buying these securities understand the rate 0:18:38.840 --> 0:18:41.639 risk that they're assuming. Well, I'm not convinced that all 0:18:41.680 --> 0:18:43.440 of them do. And that's one of the reasons why 0:18:43.440 --> 0:18:46.600 I think it's important to understand the interest rate risk 0:18:46.680 --> 0:18:49.879 that you're taking by buying tips. Um. Now that being said, 0:18:50.040 --> 0:18:52.520 if you if you're buying tips because you think yields 0:18:52.520 --> 0:18:55.640 are too high and yields might go down, but you're 0:18:56.080 --> 0:18:57.320 you know, but you think that there might be a 0:18:57.320 --> 0:18:59.840 little bit of of inflation along the way than than 0:19:00.040 --> 0:19:03.080 maybe there's a place in your portfolio for that. But um. 0:19:03.200 --> 0:19:06.000 But I think in general people think, oh, Treasury inflation 0:19:06.000 --> 0:19:09.840 protected securities, inflation goes up there for you know, I'll 0:19:09.880 --> 0:19:12.320 make money in this. That's not necessarily the case in 0:19:12.359 --> 0:19:14.440 the in the short term. If you buy a tip 0:19:14.480 --> 0:19:17.719 today and you hold it to maturity, you'll make fifty 0:19:17.720 --> 0:19:19.880 basis points like a ten on a ten year tip 0:19:20.119 --> 0:19:23.359 fifty basis points plus inflation um. But if you don't 0:19:23.400 --> 0:19:26.760 hold it to maturity, or you hold a constant maturity 0:19:26.840 --> 0:19:29.920 instrument like an et F for like a mutual fund 0:19:29.960 --> 0:19:33.120 that that tracks tips um, you do take a lot 0:19:33.160 --> 0:19:35.359 of interest rate exposure and risk, and I think that 0:19:35.359 --> 0:19:37.679 that's something that you might see unwind if you do 0:19:37.840 --> 0:19:40.240 get a very big sell off in in rates. We're 0:19:40.240 --> 0:19:42.040 not expecting that, but at the same time, that's a 0:19:42.200 --> 0:19:45.080 that's definitely a risk that you're taking. Are maybe talk 0:19:45.160 --> 0:19:49.000 about risk, but have it related to perhaps hedges on 0:19:49.200 --> 0:19:53.040 Fannie May and the Freddie mac paper. Yeah. So one 0:19:53.080 --> 0:19:55.400 of the things that that we've noted in the rates 0:19:55.440 --> 0:19:57.800 market over the last over the last couple of months 0:19:57.800 --> 0:20:01.320 is just like the VIX being at at multi year lows. 0:20:01.359 --> 0:20:04.720 So is interest rate volatility. Applied volatility on options on 0:20:04.800 --> 0:20:08.600 different interest rate products is exceptionally low, and I think 0:20:08.640 --> 0:20:12.000 a part of that, at least uh UM. A portion 0:20:12.040 --> 0:20:14.000 of the reason for that is that Fannie Mae and 0:20:14.040 --> 0:20:16.720 Freddie Max's portfolios, which used to be one point for 0:20:17.000 --> 0:20:21.080 trillion dollars are are about a third of that today, 0:20:21.480 --> 0:20:25.520 And because they're UM because they are no longer hedging 0:20:25.920 --> 0:20:29.160 things like prepayment risks of people repaying their mortgages early 0:20:29.200 --> 0:20:31.480 and things like that. They used to do that with 0:20:31.600 --> 0:20:34.119 options on interest rate products and they no longer have 0:20:34.240 --> 0:20:36.840 to do that in the same size that they did UM. 0:20:36.880 --> 0:20:39.800 So because of that, I think interest rate UM volatility 0:20:39.880 --> 0:20:42.280 is much lower than it would be normally UM. And 0:20:42.320 --> 0:20:44.880 also that the FED now has picked up a lot 0:20:44.880 --> 0:20:47.000 of that ownership and the FED doesn't hedge at all. 0:20:47.400 --> 0:20:50.919 But as the FED unwinds their portfolio, it's very likely 0:20:51.000 --> 0:20:55.200 that banks and other other buyers of mortgages might actually 0:20:55.200 --> 0:20:57.919 start to buy volatility a little bit more. Thank you 0:20:58.040 --> 0:21:01.200 very much. I read Jersey very interesting interest rate strategist 0:21:01.240 --> 0:21:06.360 for Bloomberg Intelligence, giving us some details about treasury inflation 0:21:06.440 --> 0:21:10.240 protected securities and the lack of hedging that seems to 0:21:10.280 --> 0:21:12.199 be going on at least when it comes to Fannie 0:21:12.200 --> 0:21:29.479 Mae and Freddie mac that's agency back paper right now. 0:21:29.520 --> 0:21:32.199 I want to turn our attention to a letter that 0:21:32.359 --> 0:21:36.760 black Rock sent to a number of corporate executives today. 0:21:37.000 --> 0:21:40.919 This according to the New York Times Deal Book uh section. 0:21:41.000 --> 0:21:44.439 It's sort of interesting and highlights how black Rock is 0:21:44.480 --> 0:21:49.280 increasingly aware of the actions of corporations that they invest 0:21:49.320 --> 0:21:52.240