WEBVTT - Bloomberg Surveillance: Inflation Accelerates 0:00:05.120 --> 0:00:08.480 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.520 --> 0:00:12.360 with Jonathan Farrow and Lisa Abramowitz. Join us each day 0:00:12.400 --> 0:00:16.840 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.280 --> 0:00:22.119 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.320 --> 0:00:26.600 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.640 --> 0:00:31.000 the Bloomberg Terminal, and the Bloomberg Business app. Right now, 0:00:31.400 --> 0:00:35.440 Dana Peterson joins us chief Economist at the Conference Board 0:00:35.479 --> 0:00:38.680 to the heritage of the Conference Board, Dana, is there 0:00:38.800 --> 0:00:43.920 inflation that will affect corporations in this report or what 0:00:43.960 --> 0:00:46.320 your guestimate is for tomorrow's PPI? 0:00:47.800 --> 0:00:52.000 Well, CEOs are already complaining about inflation. They're saying the 0:00:52.040 --> 0:00:57.200 cost of doing businesses higher, from wage increases to higher 0:00:57.280 --> 0:01:00.520 interest rates, all of it's really weighing on CEOs right now. 0:01:00.600 --> 0:01:03.240 So I think some of this probably will feed through 0:01:03.320 --> 0:01:05.399 to the CPI and the PCEE over time. 0:01:05.920 --> 0:01:07.720 We will it do to fed PALAIC. I mean, it's 0:01:07.800 --> 0:01:10.400 unfair question. Mike's only on page six of a forty 0:01:10.400 --> 0:01:13.520 two page report. But Dana Peterson, do you see enough 0:01:13.520 --> 0:01:16.640 of a movement here to adjust the parlor game of 0:01:16.720 --> 0:01:19.280 March and beyond June. 0:01:19.800 --> 0:01:22.440 Well, we think that the FED probably won't start cutting 0:01:22.480 --> 0:01:25.440 rates until around June, and the key thing will be 0:01:25.520 --> 0:01:28.000 the course of inflation. The good news is that core 0:01:28.040 --> 0:01:31.399 inflation is still slowing, but the Fed also cares about 0:01:31.400 --> 0:01:33.759 the headline, and certainly, when we look in the core, 0:01:34.160 --> 0:01:36.960 if home prices are still rising month on month, that 0:01:37.000 --> 0:01:37.880 doesn't bode. 0:01:37.600 --> 0:01:38.600 Well for year on year. 0:01:38.920 --> 0:01:41.160 But the good news is that we are seeing some 0:01:41.280 --> 0:01:44.800 cooling and wage inflation overall. And when you look at 0:01:44.840 --> 0:01:47.920 home prices, or at least the existing home prices year 0:01:47.960 --> 0:01:51.120 on year, they're slowing and that's showing up certainly in 0:01:51.160 --> 0:01:54.160 the rental components of both the CPI and the PCE. 0:01:54.720 --> 0:01:56.360 Danny, can we get a little bit more detail there 0:01:56.360 --> 0:01:57.920 and just how high or low is the bar do 0:01:57.960 --> 0:02:01.320 you think to reduce interest rates Feder reserve? And is 0:02:01.360 --> 0:02:03.200 it because you think it takes longer to get to 0:02:03.280 --> 0:02:05.480 that bar or ultimately it's a bit higher than this 0:02:05.560 --> 0:02:06.480 market thinks it is. 0:02:08.160 --> 0:02:11.240 Well, I think the bar really is inflation, but it's 0:02:11.240 --> 0:02:13.120 also going to be the labor market. Does a labor 0:02:13.160 --> 0:02:16.840 market continue to cool if you take away government leisure 0:02:16.880 --> 0:02:21.320 and hospitality and healthcare, you see no gains in employment. 0:02:21.440 --> 0:02:24.800 So once those three industries run out of steam, what 0:02:24.880 --> 0:02:28.160 do you have? And also the economy in general, does 0:02:28.160 --> 0:02:30.880 the consumer stop spending and really slow? So I think 0:02:30.919 --> 0:02:34.320 if the economy slows a lot, labor market continues to slow, 0:02:34.760 --> 0:02:37.880 inflation is headed back to the two percent target. The 0:02:37.919 --> 0:02:40.960 federal feel comfortable with cutting interest rates, but it may 0:02:40.960 --> 0:02:42.600 not be in March. It maybe a little bit later 0:02:42.600 --> 0:02:43.880 this year again, around mid year. 0:02:44.120 --> 0:02:46.000 Is that one we'd expect to sit in jobless claims 0:02:46.040 --> 0:02:48.120 as well, because Danna, it's not just about CPI. This 0:02:48.160 --> 0:02:51.520 morning we've got jobless claims at two oh two, two 0:02:51.600 --> 0:02:55.200 hundred and two thousand. It's just absolutely incredible. What would 0:02:55.200 --> 0:02:57.680 you expect to see that start to inflect higher? 0:02:58.760 --> 0:02:59.040 Sure? 0:02:59.080 --> 0:03:01.239 Well, the reason why initial jobs claims are so low 0:03:01.320 --> 0:03:04.520 is that our own data say that CEOs of large 0:03:04.520 --> 0:03:07.360 companies are not looking to let people go. They're hoarding workers, 0:03:07.480 --> 0:03:10.440 holding on to people. But certainly when people are let go, 0:03:10.560 --> 0:03:15.040 it's taking them longer to find a job. So continuing 0:03:15.040 --> 0:03:17.480 claims are ticking up a little, and we do think 0:03:17.520 --> 0:03:20.000 that's going to show up more so in the unemployment rate. 0:03:20.480 --> 0:03:25.400 Are you modeling out a wage growth that sustains above inflation, 0:03:26.160 --> 0:03:29.720 and so America sees a legitimate real wage growth. 0:03:31.280 --> 0:03:36.920 Well, it is possible that wages will remain above two percent. Certainly, 0:03:36.920 --> 0:03:39.160 when we look at the gains over the last few years, yes, 0:03:39.200 --> 0:03:43.040 they were really outsized. We are seeing slowing, but you 0:03:43.080 --> 0:03:46.680 do have some industries that wages are rising, certainly in construction, 0:03:47.400 --> 0:03:50.040 in particular non residential construction, where there's a lot of 0:03:50.080 --> 0:03:53.760 impetus to build infrastructure and factories at home due to 0:03:53.760 --> 0:03:57.640 industrial policies, So you could see wages settle out at 0:03:57.640 --> 0:03:59.160 a rate that's above two percent. 0:04:00.320 --> 0:04:02.520 I looked dan at the inflation data, and I want 0:04:02.520 --> 0:04:04.320 to go back to it. You know this, John, this 0:04:04.400 --> 0:04:07.640 used to be religion. Thirty even forty years ago. PPI 0:04:07.880 --> 0:04:10.280 was just as important as CPI. That all went away. 0:04:11.000 --> 0:04:14.480 But in tomorrow's PPI report, I know it's re Jegra 0:04:14.640 --> 0:04:17.719 McKee's explained it to me three times. I flunked the quiz, 0:04:17.720 --> 0:04:23.960 the McKee quiz three times. Data final business inflation. Is 0:04:24.000 --> 0:04:26.920 it legitimate? Sure? 0:04:26.960 --> 0:04:30.880 It is absolutely. It's everything that businesses are looking at, 0:04:31.560 --> 0:04:36.560 and certainly that includes transportation costs and which are a 0:04:36.560 --> 0:04:39.840 big thing, and also services which are quite material. So 0:04:40.000 --> 0:04:42.400 even though the PPI is different now than it was, 0:04:42.520 --> 0:04:45.360 you know, ten years ago, it's still very relevant. 0:04:45.560 --> 0:04:49.279 This ties John directly into what Linda Dissel said it federated. 0:04:49.400 --> 0:04:53.280 It's about margins. If you've got that inflation impute down 0:04:53.320 --> 0:04:55.960 the income statement. What does do not forget about Apple 0:04:56.040 --> 0:04:59.039 and all that it a real American a company. I mean, 0:04:59.080 --> 0:05:01.960 what's it mean for my church and Dwight They make toothpaste? 0:05:01.960 --> 0:05:03.800 I suppose not a real American accountany it was not. 0:05:03.760 --> 0:05:06.680 A real American company. It's a luxury stock thing. But 0:05:06.880 --> 0:05:09.760 to the rest of America out there making four percent 0:05:09.839 --> 0:05:13.320 revenue growth, I'm sorry, margin erosion could be tangible. 0:05:13.440 --> 0:05:14.400 Daniel, This was brilliant. 0:05:14.440 --> 0:05:15.760 Thanks for your time to break this down with a 0:05:15.800 --> 0:05:28.920 standard pedis and there of the conference board. Erica Ajerian 0:05:29.120 --> 0:05:32.200 of UBS warning quote. Given the fourth quarter rally in 0:05:32.279 --> 0:05:35.200 the BKX and a sharp turning sentiment heading into this year, 0:05:35.560 --> 0:05:38.760 we think jender earning season may present a speed bump 0:05:38.960 --> 0:05:42.160 to the sector's recent momentum. Erica on pleace to say, 0:05:42.240 --> 0:05:44.599 joined us right now, Erica, great to catch up with you. 0:05:44.640 --> 0:05:47.039 Let's go straight to it. What is it about this earnings, 0:05:47.160 --> 0:05:48.840 this group of earnings that you think might be that 0:05:48.920 --> 0:05:49.520 speed bump. 0:05:51.600 --> 0:05:56.400 I think it's really, to use James term, rude awakening 0:05:56.480 --> 0:06:01.040 for earnings. So it's not necessarily about the abs price level, 0:06:01.360 --> 0:06:05.880 and it's not necessarily about the absolute multiple on earnings, 0:06:06.240 --> 0:06:09.160 but it's that earnings aren't going to go up. You know, 0:06:09.320 --> 0:06:12.240 as a reminder to everybody, what happened in the rally 0:06:12.400 --> 0:06:15.880 is we've priced out a negative and that negative was 0:06:15.960 --> 0:06:20.880 the unrealized bond losses on bond portfolios. As treasury yields 0:06:20.880 --> 0:06:24.120 we're shooting higher, and so now we've removed that negative. 0:06:24.560 --> 0:06:25.760 But keep in mind. 0:06:25.480 --> 0:06:29.719 That banks are actually positively rate sensitive. What that means 0:06:29.839 --> 0:06:33.440 to what's that means Jonathan, is that you know, if 0:06:33.440 --> 0:06:36.240 the FED is cut in rates, then you actually will 0:06:36.279 --> 0:06:39.679 have pressure on net interest income, especially in the front 0:06:39.720 --> 0:06:41.160 half half of the cuts. 0:06:41.760 --> 0:06:43.719 Eric, I'm looking at your coverage of the big banks, 0:06:43.760 --> 0:06:45.600 and I want to ask you about bank you don't cover, 0:06:45.640 --> 0:06:47.200 which I know is out of bounds, but I think 0:06:47.200 --> 0:06:51.720 it's really germane right now. Do you perceive the divide 0:06:52.120 --> 0:06:56.520 between twenty or thirty big banks and everybody else out 0:06:56.560 --> 0:07:01.280 there and the concern that the smaller banks of America 0:07:01.720 --> 0:07:03.599 are not in rude good health. 0:07:06.520 --> 0:07:12.280 They may not be as strong as the top twenty banks, 0:07:12.520 --> 0:07:15.640 but I think if the forward curve pans out, they 0:07:15.640 --> 0:07:18.320 will get a lot of relief in two ways. 0:07:18.760 --> 0:07:20.520 One, they'll get relief. 0:07:20.200 --> 0:07:23.360 In deposit costs, and I think what you have seen 0:07:23.600 --> 0:07:26.440 in twenty twenty three is a nice run up in 0:07:26.520 --> 0:07:29.600 deposit costs as the Fed Titan, and so they'll get 0:07:29.600 --> 0:07:32.680 relief on the funding side. The other piece of relief 0:07:32.720 --> 0:07:35.200 that those smaller banks will get is. 0:07:35.120 --> 0:07:36.520 On commercial real estate. 0:07:36.880 --> 0:07:40.160 So commercial real estate is more widely held at those 0:07:40.200 --> 0:07:43.360 smaller banks than they are those larger banks that you mentioned, Tom, 0:07:43.600 --> 0:07:47.880 and as such, you know, if interest rates are coming down, 0:07:48.120 --> 0:07:53.320 that could actually narrow the subset of potential problems as 0:07:53.360 --> 0:07:55.800 we deal with commercial real estate maturities ahead. 0:07:55.920 --> 0:07:59.000 And so to translate this to the rescue will be 0:07:59.160 --> 0:08:03.320 a lower money market yield where billions flows out of 0:08:03.400 --> 0:08:07.400 money market funds back to a more normal banking economy. 0:08:07.480 --> 0:08:09.760 Is that right correct? 0:08:09.840 --> 0:08:11.600 So I love that you hit on that. 0:08:12.000 --> 0:08:15.440 Not only will you get relief and deposit costs, but 0:08:15.560 --> 0:08:18.560 you also get that deposit flow back, so you're no 0:08:18.680 --> 0:08:22.680 longer having to as an alternative, you know, either you know, 0:08:23.120 --> 0:08:26.880 borrow wholesale at you know, pretty much fed funds, or 0:08:27.000 --> 0:08:30.200 really ratchet up what you're offering your deposit customers. 0:08:30.600 --> 0:08:32.720 Rika, what is your tel pic right now? Got into 0:08:32.800 --> 0:08:34.240 NX season. I know you think it might be a 0:08:34.240 --> 0:08:36.880 difficult moment, a difficult rocky patch, But ultimately what is 0:08:36.920 --> 0:08:37.480 the top pick? 0:08:39.440 --> 0:08:43.080 So in a difficult moment, in a rocky patch, who 0:08:43.120 --> 0:08:44.320 does the market turn to? 0:08:44.960 --> 0:08:45.880 JP? Morgan? 0:08:46.559 --> 0:08:49.520 So, as I think about the expectations that are now 0:08:49.600 --> 0:08:53.200 into the market, and as I think about the enthusiasm about, 0:08:53.559 --> 0:08:57.280 you know, having these cuts without a recession, the bank 0:08:57.360 --> 0:09:00.640 that can deliver on earnings, the bank where we're most 0:09:00.720 --> 0:09:06.240 confident those earnings expectations can be delivered is JP Morgan. 0:09:06.360 --> 0:09:08.920 JP Morgan's out. What's it up? It's like Nvidia, It's 0:09:08.920 --> 0:09:09.880 like the video. 0:09:09.880 --> 0:09:12.599 Questions relatively speaking, competitive reason. 0:09:12.440 --> 0:09:15.360 You're telling me that after massive double digit return here 0:09:15.480 --> 0:09:19.040 complete out performance, that vector just keeps on going. Erica 0:09:19.120 --> 0:09:20.400 for mister Diamond. 0:09:21.760 --> 0:09:22.640 I think so. 0:09:22.640 --> 0:09:27.760 So a couple of other data points, so from the 0:09:27.800 --> 0:09:30.960 October bottom and the b k X, JP Morgan has 0:09:31.000 --> 0:09:35.080 actually underperformed by eight percentage points. And remember what I 0:09:35.120 --> 0:09:37.439 said at the top of this segment. I said, it's 0:09:37.480 --> 0:09:40.200 not really about the you know, absolute price, It's not 0:09:40.240 --> 0:09:42.839 about the pe, it's about the E. I think that 0:09:43.080 --> 0:09:46.360 the you know, involvement in the space today is in 0:09:46.440 --> 0:09:47.280 hedge funds and. 0:09:47.240 --> 0:09:48.240 In macro funds. 0:09:48.600 --> 0:09:51.520 You know, how long onlies will actually step in and 0:09:51.600 --> 0:09:54.200 move their weight in banks is they feel more confident 0:09:54.480 --> 0:09:57.120 that the E is not just bottom but there is 0:09:57.240 --> 0:10:01.240 good news, upside potential to the E. And again, just 0:10:01.280 --> 0:10:03.560 going back to JP Morgan, I think they're just in 0:10:03.720 --> 0:10:07.080 best position to deliver that, you know, and so their 0:10:07.120 --> 0:10:09.520 performance can absolutely continue from here. 0:10:09.679 --> 0:10:11.920 Do we see mergers this year? I've been waiting twenty 0:10:11.920 --> 0:10:13.920 five years for the roll up here, not to get 0:10:13.920 --> 0:10:16.240 to where Canada is. But you know, we got what's 0:10:16.280 --> 0:10:19.360 the number, four thousand banks? Five thousand banks? How do 0:10:19.440 --> 0:10:22.200 we cut that in half? This is the year that happens. 0:10:24.360 --> 0:10:28.680 I don't think so, because it's an election year. So 0:10:29.000 --> 0:10:32.880 there is there's a little bit of a mentality here, 0:10:33.240 --> 0:10:37.920 the seller's mentality that oh wow, I got the bomb 0:10:38.000 --> 0:10:41.120 losses back in my capital as raids have come down, 0:10:41.600 --> 0:10:44.240 and now they're thinking about what the forward curve is 0:10:44.280 --> 0:10:48.680 implying and saying, Okay, my book value recovery is going 0:10:48.760 --> 0:10:51.920 to be x x higher at the end of the year, 0:10:52.440 --> 0:10:55.959 and so I want a multiple off of that. Meanwhile, 0:10:56.200 --> 0:11:00.439 the buyers are like, absolutely not. And the other part 0:11:00.520 --> 0:11:03.040 of that, and since I mentioned the election, is that 0:11:03.400 --> 0:11:06.079 you know, there has been a lot of consternation about 0:11:06.080 --> 0:11:09.559 the length of time between announcement and close. 0:11:10.120 --> 0:11:10.960 US Bank Corp. 0:11:11.040 --> 0:11:14.439 Will tell you about that consternation. And so I think 0:11:14.520 --> 0:11:18.839 that you know, smart buyers may wait until we get 0:11:18.880 --> 0:11:23.000 more clarity on leadership before they think about waiting into 0:11:23.120 --> 0:11:24.120 m and A. 0:11:23.840 --> 0:11:25.320 Went a weigh in on the politics. 0:11:25.320 --> 0:11:26.840 If you can, you alluded to it that it's twenty 0:11:26.920 --> 0:11:29.959 twenty four, it's election season. A client's asking about the 0:11:30.000 --> 0:11:33.280 regulatory backdrop going into next year off the back of 0:11:33.320 --> 0:11:35.440 who may or may not win the election this year. 0:11:35.559 --> 0:11:37.000 Is it still too early or is that something that 0:11:37.080 --> 0:11:38.000 considering already. 0:11:39.360 --> 0:11:42.360 So it's something that they're saying it's too early to 0:11:42.800 --> 0:11:45.400 price in given the many variables. 0:11:44.840 --> 0:11:48.439 That could happen between now and November. You know that being. 0:11:48.160 --> 0:11:51.280 Said, they're thinking about, you know, the banks in a 0:11:51.320 --> 0:11:55.800 positive light. If we did have a republican administration of course, 0:11:55.840 --> 0:11:57.880 a lot of investors are asking me. 0:11:57.960 --> 0:11:59.880 About the regulatory. 0:11:59.320 --> 0:12:03.280 Environment, and the thought process here is similar to twenty 0:12:03.400 --> 0:12:08.120 sixteen in that a change in administration from Democratic to 0:12:08.200 --> 0:12:13.439 Republican could potentially lead to regulatory easing, particularly now. 0:12:13.280 --> 0:12:15.640 That we do have a proposal. 0:12:15.840 --> 0:12:20.160 Out there that everybody is hoping could be at least delayed, 0:12:20.240 --> 0:12:22.920 if not softened significantly. And so if you have an 0:12:22.920 --> 0:12:27.120 administration change and you don't have those capital rules finalized yet, 0:12:27.360 --> 0:12:30.280 there's a lot of hope of not just a significant delay, 0:12:30.679 --> 0:12:34.400 you know, but also potential for reissuing. 0:12:34.760 --> 0:12:39.800 You know that that proposal it with much much, much less. 0:12:39.600 --> 0:12:42.920 Bite, and so that gives excuse me, that gives a 0:12:43.000 --> 0:12:45.800 market hope that all this capital that the banks are 0:12:45.800 --> 0:12:48.000 building up will be returned back to shareholders. 0:12:48.320 --> 0:12:48.480 You know. 0:12:48.559 --> 0:12:52.800 Additionally, the banks are trading at a forty eight percent 0:12:52.840 --> 0:12:56.200 relative pe to the broad market. 0:12:55.920 --> 0:12:58.040 Which I think is part of the current broad appeal. 0:12:58.559 --> 0:13:02.760 And as a reminder that the quote Trump monk between 0:13:02.800 --> 0:13:06.800 four four sixty and four seventeen seventy five percent, I 0:13:06.840 --> 0:13:10.400 think that's part of the thought process. You know, that 0:13:10.440 --> 0:13:13.960 the bulls are thinking about as they think about, you know, 0:13:14.440 --> 0:13:15.520 rate cards. 0:13:15.280 --> 0:13:17.439 And then a potential administration change. 0:13:17.480 --> 0:13:20.120 That's the big one to watch. The brilliant Erica Nigerian 0:13:20.120 --> 0:13:20.960 of Ubs Erica. 0:13:20.960 --> 0:13:21.320 Thank you. 0:13:26.000 --> 0:13:30.880 Michael Collins brief snow senior portfolio manager DEBT at PGIM. 0:13:31.120 --> 0:13:34.480 He watched every minute of Prudentials coverage of the Rose 0:13:34.520 --> 0:13:36.760 Bowl in the Michigan victory there a few days ago. 0:13:36.960 --> 0:13:39.160 Michael Collins, I'm going to look at the Rose Bowl 0:13:39.240 --> 0:13:42.800 here at the bond market. How will yield react off 0:13:42.800 --> 0:13:48.360 the CPI today? If we reaffirm disinflation, We're across the 0:13:48.440 --> 0:13:50.840 yield curve where we see the biggest adjustment. 0:13:51.880 --> 0:13:54.559 Yeah, Tom, Jonathan, good morning. I'm a big football fan, 0:13:54.559 --> 0:13:57.240 but I'm probably more excited about today's CPI print than 0:13:57.280 --> 0:14:00.400 I am the NFL playoff games this weekend. So, to 0:14:00.440 --> 0:14:02.760 be honest with you, tells you what a bond geek 0:14:02.840 --> 0:14:05.800 I am. But I actually think that this inflation is 0:14:06.160 --> 0:14:10.480 becoming more entrenched, Jonathan and Tom. Notwithstanding you know the 0:14:10.600 --> 0:14:13.480 big jump in freight charges we've seen as a result 0:14:13.520 --> 0:14:18.840 of geopolitical risk, but you are seeing more evidence that 0:14:18.960 --> 0:14:23.680 things like housing are starting to unravel a little bit. 0:14:23.800 --> 0:14:26.880 I think you're seeing more evidence that the big surge 0:14:26.960 --> 0:14:30.080 in multi family construction that is still to come online 0:14:30.680 --> 0:14:33.320 is going to cause rents to come down. So if 0:14:33.360 --> 0:14:36.280 you have housing at zero, you have goods already at 0:14:36.360 --> 0:14:40.240 zero or negative territory. Even if services and wages get 0:14:40.320 --> 0:14:44.960 stuck in the foes. That puts average inflation in the 0:14:45.000 --> 0:14:48.200 mid twos, right, So I think you're on that trajectory, 0:14:48.920 --> 0:14:50.560 and I think the FED is ultimately going to have 0:14:50.600 --> 0:14:51.040 to play cut. 0:14:51.160 --> 0:14:53.040 So do you monelog? I haven't answered this question in 0:14:53.080 --> 0:14:54.800 the ages, but you know I agree with you, and 0:14:54.840 --> 0:14:58.120 more importantly ed your Denny agrees with you on the 0:14:58.160 --> 0:15:02.240 surprises we may see in how disinflation? What does it 0:15:02.320 --> 0:15:04.880 do to the two's ten vanilla yield curve? I mean, 0:15:04.960 --> 0:15:08.840 right now, we've been inverted since time began, and you know, 0:15:08.920 --> 0:15:12.920 what do we do? How does that react off of 0:15:12.960 --> 0:15:13.880 today's report? 0:15:14.560 --> 0:15:16.880 Yeah, I mean the playbook, as you know, Tom, is 0:15:16.880 --> 0:15:19.520 that the curve, you know, bull steepens the front end 0:15:20.320 --> 0:15:23.280 rallies more than the rest of the curve. That's I 0:15:23.320 --> 0:15:27.120 think what's in the cards over the intermediate term, meaning 0:15:27.160 --> 0:15:31.120 over the next year or two. In the next few months, though, 0:15:31.160 --> 0:15:33.880 if you're looking to trade this, I mean, it's really 0:15:33.960 --> 0:15:36.680 tough to be long kind of that, you know, two 0:15:36.720 --> 0:15:38.920 and three and four year part of the curve, because 0:15:38.920 --> 0:15:42.200 as you know, there are a lot of rate cuts 0:15:42.240 --> 0:15:45.520 that are priced in in the near term, starting you know, 0:15:45.560 --> 0:15:48.920 as early as in two months from now, that may 0:15:48.960 --> 0:15:51.640 not come to fruition. I mean, the FED is good 0:15:52.000 --> 0:15:55.640 at waiting and watching and lagging, right. They lagged on 0:15:55.680 --> 0:15:58.440 the way up, and they are probably going to wait 0:15:58.480 --> 0:16:01.200 too long and keep rates too high for too long 0:16:01.680 --> 0:16:03.520 before they cut, and then they're going to have to 0:16:03.560 --> 0:16:08.000 cut more aggressively. So I think that's really the timing 0:16:08.080 --> 0:16:10.280 of what's going to happen. But ultimately, in two years 0:16:10.280 --> 0:16:13.280 from now, I think the curve will resume a more normal, 0:16:13.960 --> 0:16:15.040 upward sloping shape. 0:16:15.080 --> 0:16:17.000 Michael, This is a little bit of a subtle shift 0:16:17.000 --> 0:16:19.080 from you. I have been following you for a long 0:16:19.120 --> 0:16:22.840 long time. You know that you haven't been super bearish ennything, 0:16:22.880 --> 0:16:25.480 but you've been constructed on certain parts of credit. I've 0:16:25.520 --> 0:16:28.160 noticed you've lightened up recently on credit exposure. Michael, Can 0:16:28.160 --> 0:16:30.480 you tell us just exactly why and what's changed over 0:16:30.520 --> 0:16:32.880 the last few months. Is it price, is it fundamentals? 0:16:32.920 --> 0:16:33.320 What is it? 0:16:34.040 --> 0:16:37.200 You know, it's more price than fundamentals, right, if you 0:16:37.240 --> 0:16:41.080 look at the fundamentals, I mean, economy is actually doing great. 0:16:41.120 --> 0:16:43.920 It continues to surprise in terms of its resilience. I mean, 0:16:43.920 --> 0:16:47.720 it seems like the whole soft landing is happening, right. 0:16:47.760 --> 0:16:50.400 I mean, if you do have a recession, and we 0:16:50.440 --> 0:16:53.400 have a twenty five percent recession probability, which is elevated 0:16:53.440 --> 0:16:57.000 relative to historical averages, but it's not going to be 0:16:57.080 --> 0:16:57.640 hard landing. 0:16:57.680 --> 0:16:57.840 Right. 0:16:57.840 --> 0:17:01.960 The probability of this big, you know, existential credit crisis 0:17:01.960 --> 0:17:05.280 where the fault spike and you know, consumer consumers the 0:17:05.320 --> 0:17:06.240 fault and businesses go. 0:17:06.320 --> 0:17:08.000 Out, is really really low. 0:17:08.280 --> 0:17:10.719 You just don't have the leverage in the private sector 0:17:11.440 --> 0:17:15.760 to cause that impetus, right, So I think that bodes 0:17:15.800 --> 0:17:19.240 well for fundamentals. I mean, but but credit fundamentals are 0:17:19.240 --> 0:17:22.600 deteriorating on the margin, they're definitely not not improving. But 0:17:22.680 --> 0:17:25.200 it's really the price, Jonathan. I mean, if you look 0:17:25.200 --> 0:17:30.040 at what's happened with credit spreads, they snapped in dramatically 0:17:30.720 --> 0:17:33.200 through the end of last year, along with rates rallying, 0:17:33.280 --> 0:17:36.840 along with volatility coming down, along with you know, stocks 0:17:36.880 --> 0:17:39.800 going up, and they're kind of getting to the low 0:17:39.920 --> 0:17:42.840 end of their historical ranges in an environment where there's 0:17:42.880 --> 0:17:45.840 still a ton of economic and geopolitical unsergety. So I 0:17:45.840 --> 0:17:48.639 think it's more, you know, be patient here, take some 0:17:48.720 --> 0:17:52.520 chips off the table, wait for better opportunities to reload on. 0:17:52.440 --> 0:17:54.520 C So that is, does that mean clip the coupon 0:17:54.600 --> 0:17:57.960 as a general statement after a fairly robust twenty twenty. 0:17:57.720 --> 0:18:00.960 Three, yeah, I think you clipped coup and fixed income, 0:18:01.040 --> 0:18:04.560 you know, and I think you're still earning attractive yields. 0:18:04.600 --> 0:18:07.960 I think interest rates across all sectors of fixed income 0:18:08.000 --> 0:18:10.720 are going to be lower in a couple of years 0:18:10.760 --> 0:18:13.000 from now than they are today. So I think you 0:18:13.080 --> 0:18:15.920 clipped a coupon for now. Look for opportunities. If rates 0:18:15.920 --> 0:18:19.119 back up, you buy them. If credit spreads widen, you 0:18:19.200 --> 0:18:20.879 buy them. I think that's the world we're in. You 0:18:20.920 --> 0:18:23.760 have this fed backstop which you haven't had in a 0:18:23.800 --> 0:18:25.240 long time, with a men's. 0:18:25.080 --> 0:18:27.720 Respect for pgeum and all the awards you've won for 0:18:27.840 --> 0:18:31.480 total return. How do you and the team there frame 0:18:31.920 --> 0:18:35.160 the tobacco of the last three years? Do you frame 0:18:35.200 --> 0:18:37.879 that someday we'll get back to where the Bloomberg Total 0:18:37.920 --> 0:18:41.119 Return Index was in bond, that we will see true 0:18:41.320 --> 0:18:44.480 appreciation or is that a time long gone? 0:18:45.080 --> 0:18:47.919 Now it's a we're back right to where we were 0:18:47.920 --> 0:18:50.280 twenty years ago. Tom. You know, we look at you know, 0:18:50.400 --> 0:18:52.879 beginning yields, and you know the big index everybody in 0:18:52.920 --> 0:18:56.400 fixed income uses is your Bloomberg Aggregate bond index, which 0:18:56.440 --> 0:19:01.120 is yielding you know, four point six person and we 0:19:01.160 --> 0:19:02.920 are trying to beat that, right by by one to 0:19:03.000 --> 0:19:04.960 two percent. So if you just kind of do that 0:19:05.040 --> 0:19:08.480 simple math, you're you're looking at you know, mid you know, 0:19:08.560 --> 0:19:12.320 mid plus single digit type of expected returns in high 0:19:12.440 --> 0:19:17.359 quality diversified fixed income, you know, over the next five 0:19:17.440 --> 0:19:20.440 or ten years, right, that's the beginning yield on high 0:19:20.520 --> 0:19:24.360 quality fixed income is a really good predictor of ultimate returns. 0:19:24.400 --> 0:19:26.320 So the last ten years is it really has been 0:19:26.320 --> 0:19:28.960 the lost decade in fixed income. It's been more than 0:19:29.160 --> 0:19:31.280 more than two or three it's been you know, returns 0:19:31.280 --> 0:19:34.280 in the in the really low single digits. But that's 0:19:34.280 --> 0:19:37.160 behind us, right. The forward looking view on fixed income 0:19:37.280 --> 0:19:38.879 is is much more constructive. 0:19:39.119 --> 0:19:41.520 Michael Collins, you are one of the absolute best over 0:19:41.520 --> 0:19:43.440 at PAGEM. I love catching up with you, Mike Collins 0:19:43.480 --> 0:19:55.680 there of PAGEM. Thanks for being with a sir. The 0:19:55.720 --> 0:19:59.239 big container shipping giants, the merchant ship Stone are not 0:19:59.359 --> 0:20:01.680 using the Red st as they were a month of Sawagank. 0:20:01.880 --> 0:20:05.320 Let's have a delicate conversation on this right now, and 0:20:05.359 --> 0:20:10.399 it's a conversation of geography and technology. Norman Rule, Senior 0:20:10.440 --> 0:20:15.160 non Resident Advisor for Transnational Threats Project at CSIS and 0:20:15.320 --> 0:20:19.240 working for America as a former senior US intelligence official. 0:20:19.280 --> 0:20:21.199 Norman I got eight ways to go. But when I 0:20:21.240 --> 0:20:25.240 look through the literature and the zeitgeist, it's not like 0:20:25.280 --> 0:20:28.920 from Butch Cassidy, who are these guys? It's more where 0:20:28.960 --> 0:20:33.040 are these guys? Where are the drones coming from? Where 0:20:33.040 --> 0:20:39.119 are the Huti established geographically? As they attack ships in 0:20:39.200 --> 0:20:39.800 the Red Sea? 0:20:41.520 --> 0:20:45.359 Good morning HOOTHI Forces and control is generally in the 0:20:45.400 --> 0:20:49.440 western portion of Yemen, which focuses on the Red Sea 0:20:49.880 --> 0:20:53.600 and the Gulf of Aden. There are not only missiles, drones, 0:20:54.000 --> 0:20:58.520 explosive boats, and mine capabilities. They must be monitored, but 0:20:58.640 --> 0:21:02.880 the Some of these capabilities are mobile. Missile launchers are mobile. 0:21:03.000 --> 0:21:07.199 Drone sites can be trucks or or barren fields, so 0:21:07.240 --> 0:21:11.960 this requires intensive and dynamic intelligence collection. If one is 0:21:12.000 --> 0:21:15.720 to look at targeting these facilities for military action. 0:21:16.000 --> 0:21:19.280 Do we do this alone, or do we collect intelligence, 0:21:19.359 --> 0:21:24.280 particularly with who these great adversaries Saudi Arabia. 0:21:24.480 --> 0:21:28.199 The nature of US intelligence collection for military operations in 0:21:28.240 --> 0:21:32.760 this scenario would likely be done by US and British 0:21:32.800 --> 0:21:36.440