Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
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Speaker 1: the Interview of the Day on rates. Ian Lincoln is
Speaker 1: watched across all of global Wall Street. At being on
Speaker 1: capital markets, he writes incredibly terse, dense notes on the
Speaker 1: dynamics of fixed income. He joins us this morning, I
Speaker 1: got eight ways to go here, one single sentenced. Friday
Speaker 1: you call most influential jobs report of twenty.
Speaker 2: Twenty three wide.
Speaker 3: I think that the relevance of non farm payrolls on
Speaker 3: Friday simply can't be overstated. The Fed has achieved what
Speaker 3: they wanted to, at least thus far in terms of
Speaker 3: moderating CPI. Now the question is have they overshot on
Speaker 3: the jobs front. We know that jobs are cooling, We
Speaker 3: are expecting a relatively benign The consensus, I think is
Speaker 3: one seventy for headline non farm payrolls. But we do
Speaker 3: have that joltz print and the quits rate within that
Speaker 3: is very troubling. It's now down to two point three percent,
Speaker 3: which was the average between two thousand and eighteen twenty nineteen,
Speaker 3: so we're back to kind of the pre pandemic norms.
Speaker 3: So what happens for the macro outlook if we get
Speaker 3: disappointing jobs print?
Speaker 4: What concerns you most? The number or the speed the
Speaker 4: right of change?
Speaker 3: I think that if I were given the choice between
Speaker 3: the outright level and the rate of change, I would
Speaker 3: say we're in the right We're at the right pace.
Speaker 3: We're just getting to levels that are far more concerning.
Speaker 3: So I would go with not the rate of change yet,
Speaker 3: but the outright levels.
Speaker 5: And if the levels and the rate of change suggests
Speaker 5: that the Fed's work is getting closer to being more
Speaker 5: fully accomplished, obviously there's still a long way to go.
Speaker 5: The move in the two year yesterday was suggest that
Speaker 5: that has run perhaps too far. Did we see the
Speaker 5: peak already? We hit that north of five percent, stayed
Speaker 5: there for a little bit, and now we're done.
Speaker 3: So a lot of that comes down to whether or
Speaker 3: not the FED is able to avoid cutting rates throughout
Speaker 3: the first half if twenty twenty four, even potentially avoid
Speaker 3: cutting rates until the beginning of twenty and twenty five. Now,
Speaker 3: I don't expect that that will happen, but there's a
Speaker 3: contingent in the market that thinks that higher policy rates
Speaker 3: are going to be in place for the foreseeable future.
Speaker 3: And if that's the case, we're going to see two
Speaker 3: year yields back up above five percent again, which we
Speaker 3: continue to view as a pretty attractive buying opportunity.
Speaker 5: But when we're thinking about how the FED is going
Speaker 5: to be thinking about deciding whether or not to cut
Speaker 5: rates next year, is the bar for that even higher
Speaker 5: than the bar for them to hike again, given how
Speaker 5: this that has been conditioned by the mistakes it made
Speaker 5: earlier on.
Speaker 3: That's actually a great observation. What I would say is
Speaker 3: the FED has already signaled that they plan to cut
Speaker 3: rates by one hundred bases points next year, but they're
Speaker 3: going to allow the QT to run off in the
Speaker 3: background or to continue shrinking the balance sheet. And so
Speaker 3: what they're doing is they're reframing the conversation around rate
Speaker 3: cuts being a response to a slowdown and rate cuts
Speaker 3: being a recalibration closer to normal policy rates. So I
Speaker 3: think that they've given themselves a fair amount of flexibility
Speaker 3: for the year ahead.
Speaker 1: And all anybody wants to know is for you to
Speaker 1: frame the real rate. The ten year real rate we
Speaker 1: got up to two to two point zero, I've got
Speaker 1: some numbers above that, which so the real stress is
Speaker 1: bracket the real rate right now where it could come
Speaker 1: back down to that level. We're now at a one
Speaker 1: point eight, three, eight four whatever, and then bracket up.
Speaker 1: What frame that for us?
Speaker 3: If I were to put a range on ten year
Speaker 3: real yields, I would put it at one sixty five
Speaker 3: two fifteen, and that's well within what the FED wants
Speaker 3: to see.
Speaker 1: Okay, But if the two fifteen, I don't mean interpret
Speaker 1: this is so important. If we pop to a two
Speaker 1: point fifteen, what does that do to the greater American
Speaker 1: financial system?
Speaker 3: I think that's when we start to see strains in equities,
Speaker 3: in risk assets, and it becomes a much bigger burden
Speaker 3: for the overall business community.
Speaker 4: Let's put it all together. There's clear dividing line between
Speaker 4: the kind of data this FED appreciates wants to see
Speaker 4: it's objective and what you think is undesirable. And what
Speaker 4: a sense from you is that we're creeping towards the
Speaker 4: latter and moving away from the former. Now, if that's
Speaker 4: the case, isn't the ten year treasury and you'll mind
Speaker 4: a screaming by right now?
Speaker 3: The tenuere treasury, in my mind is a screaming buy.
Speaker 3: I think that from here the path forward phenomenal tenure
Speaker 3: yield is going to be lower. For two reasons.
Speaker 1: Well, slow down, I got to take notes and screaming by.
Speaker 3: For two reasons. One, the Fed's credibility is being re
Speaker 3: established as an inflation fighter, and that will put downward
Speaker 3: pressure on break evens. And one of the reasons that
Speaker 3: real yields are where they are is because break evens
Speaker 3: haven't repriced higher. Think about Jackson Hall. They're holding the
Speaker 3: two percent inflation target. They're doing everything that they can
Speaker 3: to convince the market that they're here for the long
Speaker 3: haul in the battle with inflation. So if we believe,
Speaker 3: which we do, that there is still a six to
Speaker 3: nine month lag of monetary policy actions hitting the real economy.
Speaker 3: The second half of this year is going to be
Speaker 3: pivotal for the effectiveness of what Powell has been attempting
Speaker 3: to do.
Speaker 1: So is he saying load the boat on the ninety
Speaker 1: seven year Austrian.
Speaker 4: Not quite like that. Make some money here, and I
Speaker 4: think we've got to put some numbers on it. Difficult
Speaker 4: to do, I know, but I just want to understanding
Speaker 4: a better understanding of the direction here on what you're
Speaker 4: looking for right now? North of four percent? We got
Speaker 4: through four point thirty in the last week or so.
Speaker 4: What are you thinking about three? Could I go to
Speaker 4: a two hand or what kind of numbers are you
Speaker 4: thinking about?
Speaker 3: I think that we do get ten year yields back
Speaker 3: to three percent. I don't think it happens this year.
Speaker 3: I think that that will be a first half of
Speaker 3: twenty and twenty four event. But we can easily close
Speaker 3: in a range of three fifty to three seventy five
Speaker 3: by the end of this year.
Speaker 5: And that's not just monetary policy dependent either, it's fiscal
Speaker 5: as well. Treasury still issuing a ton of debt. We
Speaker 5: have a deficit spending that we need, that we need
Speaker 5: to fund. How does that factor into this equation.
Speaker 3: I think that what primarily sets the outright level of
Speaker 3: treasury yields are the global macros of inflation and growth.
Speaker 3: The incremental supply considerations will lead to concessions in and
Speaker 3: around the events themselves. And frankly, the market knows that
Speaker 3: there's a bunch of treasury issuance coming. We have that
Speaker 3: largely priced in. The Treasury Department has been very clear
Speaker 3: in their signaling, and still we have ten year yields
Speaker 3: at four fifteen, not five point fifty.
Speaker 1: I look at this, and I just look at what
Speaker 1: will break. Torsten Slock is out this morning with a
Speaker 1: spectacular look at aling's market has changed, and there's the
Speaker 1: debt servicing costs up up, up up, But we're also
Speaker 1: making more in our coupon up up up. Mister Slock
Speaker 1: takes it back to nineteen fifty nine that this market
Speaker 1: is out of wack. Do you sense that as well,
Speaker 1: that your world's that.
Speaker 4: Out of whack.
Speaker 3: I do think that there is a significant mismatch between
Speaker 3: the primary buyers of treasuries and the incremental players. The
Speaker 3: people who are fundamentally adding treasuries, whether it's a major
Speaker 3: central bank or an institutional investor or they're really generally
Speaker 3: starting to look at these levels as attractive buying opportunities,
Speaker 3: especially once we have some degree of clarity from the
Speaker 3: monetary policy side, the incremental investor people playing for a
Speaker 3: quick two or three week trade I think are a
Speaker 3: lot more aggressive on the bears side. So there does
Speaker 3: seem to be a fair amount of mismatch.
Speaker 4: And it's going to say and I apologize, We'll run
Speaker 4: with that headline of with diapex up at words in
Speaker 4: your mouth, But then we got financial media for you
Speaker 4: ailing a female capital mouth case.
Speaker 1: He wasn't a Jackson hole. He should have been. He
Speaker 1: would have done the thirty one mile paint Bush Divide
Speaker 1: hike goes way up in the thunder there at twelve
Speaker 1: thousand feet. Doctor Carpenter darkens the door with many years
Speaker 1: of experience at the Federal Reserve System, Seth Carpenter is
Speaker 1: with Morgan Stanley. You have to Carrell Zettner when she's
Speaker 1: not in some trout stream trying to catch trout. What
Speaker 1: is the Zetner mood? Now the Morgan Stanley recession meter.
Speaker 1: Have we just discarded recession?
Speaker 6: So I wouldn't say that we've discarded it wholesale. There's
Speaker 6: always a risk. As I like to say, bad things
Speaker 6: happen to good economies all the time, Tom, But you know,
Speaker 6: since the beginning of this hiking cycle, we've tried to
Speaker 6: say a soft landing is the most likely outcome. The
Speaker 6: economy is not going to go into recession as a
Speaker 6: base case forecast. In so far that view hit has
Speaker 6: come true. I mean it was not, I have to say,
Speaker 6: the most popular view with our clients three months ago,
Speaker 6: six months ago, nine months ago. On the other hand,
Speaker 6: things haven't slowed down quite as much as we thought
Speaker 6: it would either. Mike was talking about the GDP data.
Speaker 6: The Doward revision sort of pulls things sort of along
Speaker 6: the slowing line, but it's still a pretty punchy number.
Speaker 6: Two point one percent is above I think most people's
Speaker 6: estimate of potential growth, so we still have a ways
Speaker 6: to go. We still think there's more drag from monetary
Speaker 6: policy in the pipeline, but inflation's coming down. Job growth
Speaker 6: is slow, and we'll get another print on Friday. Our
Speaker 6: number is I think around one fifty five for private payrolls,
Speaker 6: so that'll be another tick lower in terms of job demand.
Speaker 6: We saw the Jolts data that had a market reaction
Speaker 6: as well, so things are cooling off a bit, but
Speaker 6: they're not cold.
Speaker 1: The hallmark of Morgan Stanley economics is invented by Stephen
Speaker 1: Roach and Richard Berners. Everybody fights like cats and dogs.
Speaker 1: What is the point of conversation around the desk and Stanley?
Speaker 1: What's the thing everybody's arguing about?
Speaker 6: Gosh, right now, I have to say, every corner of
Speaker 6: the world has its own quirky story. I mean, I
Speaker 6: think we for us in the US, there is definitely
Speaker 6: the slow down, the soft landing, but boy, the data
Speaker 6: are surprising to the upside, in very stark contrast. On
Speaker 6: the other side of the world, I'm always in conversation
Speaker 6: with my team in Asia China. We had come into
Speaker 6: this year pretty bullish on China. The first quarter was
Speaker 6: super strong, and now things have slowed down a great deal,
Speaker 6: and so the question is when do we get enough
Speaker 6: of a policy response from Beijing to pull things back
Speaker 6: in So that's where those are two of the main
Speaker 6: topics where we're really debating.
Speaker 5: Yeah, and we've talked about China a lot in recent
Speaker 5: weeks because it just seems like piece mail, one thing
Speaker 5: after another, they're doing things to try to stimulate that economy.
Speaker 5: Just to return to your soft landing thesis and the
Speaker 5: avoidance of a recession. Are we really talking about a
Speaker 5: recession entirely avoided or one that potentially is just pushed off,
Speaker 5: just delayed further out into the future as we think
Speaker 5: about these lagged defects kicking in in a way they
Speaker 5: have not yet full.
Speaker 6: I mean, I think that still remains a key question
Speaker 6: for us. We still think it is a recession avoided.
Speaker 6: That's been our view for a long time. The troth,
Speaker 6: though in terms of economic growth, does seem like it's
Speaker 6: got pushed off a little bit. We think things will
Speaker 6: come down further from here. And there are things besides
Speaker 6: monetary policy that are a downside risk for the rest
Speaker 6: of this year. I mean student loan moratorium that has
Speaker 6: gone away. If you look at the Treasury's daily Treasury statement,
Speaker 6: you can start to see some of those inflows going.
Speaker 6: So that could weigh things down on Ellen's team. Sarah
Speaker 6: Wolf is our consumer specialist and she's been all over
Speaker 6: student loan debt repayments as a really key downside risk
Speaker 6: for the fourth quarter. So are there still risks of
Speaker 6: a recession? Absolutely, there always are, but we don't think
Speaker 6: that's the main story. That the labor market slowing, But
Speaker 6: still resilient.
Speaker 5: Yeah, in October, that's definitely going to be something of concern.
Speaker 5: Two weeks before that though, actually, just two weeks from
Speaker 5: tomorrow is when we're on watch for United Auto Workers strike.
Speaker 5: How are you thinking about the labor movement in particular
Speaker 5: the power of these unions to ask for things is audacious,
Speaker 5: to use their own words as a forty six percent payhike.
Speaker 5: What does that signal to you about still the supply
Speaker 5: issue and the ability of workers.
Speaker 6: To demand for So, I think it's definitely something that's
Speaker 6: going to matter a lot. It's going to have We
Speaker 6: already have one strike in the books, right the screen
Speaker 6: Actor's Guild and all of that, and that's going to
Speaker 6: have an influence on Friday's jobs report, and so we're
Speaker 6: going to have to try to read what the underlying
Speaker 6: trend is and data. So I think the first part
Speaker 6: of it is going to be not to be hopefully
Speaker 6: avoid being confused by swings in the data because of
Speaker 6: if there is a strike with the auto workers, what
Speaker 6: that means for the numbers. But yeah, I mean you've
Speaker 6: got a question of how long are they on strike?
Speaker 6: How much does that disrupt production? If they are we
Speaker 6: know that the auto industry was one of the last
Speaker 6: ones to be able to catch up to supply chain disruptions.
Speaker 6: Now we're starting to see auto prices fall, so it's
Speaker 6: a real mixed bag. I think we're going to be
Speaker 6: trying to watch very very closely. We're going to pull
Speaker 6: in our equities analysts who cover the auto indus tree
Speaker 6: to see sort of where production is going. But for now,
Speaker 6: you know, I don't think it's easy for us to
Speaker 6: forecast whether or not the strike will happen your Princeton.
Speaker 1: A guy named Bernanki wrote a really important paper, Bernanki
Speaker 1: Del Negro on our Star. We missed you at Jackson Hole.
Speaker 1: Give us the carpenter our star. De Should our audience
Speaker 1: pay attention to it? Or is it economic babble distraction?
Speaker 6: It's a little bit of both. I mean, it's hard
Speaker 6: to avoid the relevance of the concept of our stars.
Speaker 6: So how high is the level of interest rates that's
Speaker 6: neither stimulating the economy nor putting a drag on it.
Speaker 6: That's got to be fundamental to everything about the economy.
Speaker 6: But in real time, at any specific point in time,
Speaker 6: knowing where that is with any precision is borderline impossible.
Speaker 6: The statistical models that lots of my academic minded colleagues
Speaker 6: use are really really, really sophisticated ways of showing off
Speaker 6: how much matthe you know. But at the end of
Speaker 6: the day is all they can do is say, we
Speaker 6: know where the current level of interustrates is. Let's just
Speaker 6: look is the economy accelerating or decelerating, and then we
Speaker 6: make an inference about whether we're above or below our star.
Speaker 6: So I don't think there's a whole lot there that
Speaker 6: you can judge for sure right now. Over time, if
Speaker 6: the Fed keeps the policy rate where it is now
Speaker 6: and the economy not only doesn't slow, but it starts to
Speaker 6: accelerate a quarter from that two quarters from now, you
Speaker 6: gotta have a view. But the same thing could be
Speaker 6: said there could be extra residual push coming on from
Speaker 6: fiscal policy. That doesn't tell you anything about the permanent
Speaker 6: level of our star. That just says, right now, there's
Speaker 6: more demands.
Speaker 1: Thank you to Peter Sheer for attendance right now, Head
Speaker 1: of Macro Strategy Academy Securities. Peter, did your journey in
Speaker 1: the markets? Did it change yesterday with a Jolts report? Not?
Speaker 7: Really, It was more or less in line with what
Speaker 7: we're looking for. Is basically the FED is looking for
Speaker 7: an excuse not to height. So they're going to be
Speaker 7: looking across a broad spectrum of data, and I think
Speaker 7: the one area that's going to disappoint is jobs. I
Speaker 7: think they are going to be downward revisions. You mentioned
Speaker 7: a bunch of other parts of the Duet report yesterday.
Speaker 7: The higher's rate continues to drop down. There's been this
Speaker 7: dichotomy that the hire's rate has been off very strangely
Speaker 7: low relative to job openings. I think that's going to
Speaker 7: catch up, so it's jobs slow down. I think the
Speaker 7: Fed's going to have the excuse to do nothing. And
Speaker 7: then it's going to become a question of you know,
Speaker 7: where all the economists, including myself, we're looking for a
Speaker 7: recession this year, going to turn out to be right
Speaker 7: or not.
Speaker 5: Okay, Well, as we talk about whether or not you
Speaker 5: turn out to be right. If the job market is
Speaker 5: slowing down, if we're starting to see the growth deterioration happen,
Speaker 5: but inflation is still too far above where the Fed
Speaker 5: would like to be, which they say still is two percent,
Speaker 5: what do they do then?
Speaker 7: I think the key word is they say is still
Speaker 7: three percent. I'm not sure it's really three percent. I
Speaker 7: think they're going to be looking for excuses to delay.
Speaker 7: So I think we get ten year yields back to
Speaker 7: four percent, and then we're going to need significant either
Speaker 7: jobs data, you know, consumer sales data, real you know
Speaker 7: inflation dat again, because they're already trying to downplace some
Speaker 7: of that saying they're seeing it finally trickle into the
Speaker 7: housing market. So I don't think they do anything if
Speaker 7: they can avoid it at all.
Speaker 4: We talked about the housing market the last couple of days.
Speaker 4: Home prices in America totally distorted by the rates of
Speaker 4: the last two years of record lows and the rates
Speaker 4: more recently a two decade highs pete. Is that something
Speaker 4: they can ignore? Can they ignore the distortions of house
Speaker 4: prices given their contribution to shelter and what might be
Speaker 4: elevated inflation for maybe the next year or.
Speaker 7: So now, I think, sadly they're going to have to. Partly,
Speaker 7: this is very location based. So when you look at
Speaker 7: where the homebuilders are doing, and they've been very successful,
Speaker 7: they're building homes and areas that people are moving to,
Speaker 7: right as people continue to leave California. Maybe Illinois's Illinois
Speaker 7: moved to other states. That's what they've been able to
Speaker 7: take advantage. So I think we're seeing a very regional economy,
Speaker 7: particularly on housing. I think the FED is just going
Speaker 7: to have to give this time for people to either
Speaker 7: get forced to move, choose to move, figure out what
Speaker 7: they're going to do with their mortgage rates. So it's problematic. Again,
Speaker 7: I think this all goes back and we're not you
Speaker 7: can ham home on this. They were so slow to react.
Speaker 7: They allowed this bubble to create itself. They should have
Speaker 7: reacted much sooner, much earlier, done much more. Unfortunately we're here,
Speaker 7: so I think this is just going to take time
Speaker 7: to play out.
Speaker 4: Unfortunately, your view sounds like high for longer. Ian Lingoln
Speaker 4: of BIMO came on this program moments ago, Pete, and
Speaker 4: he said ten year treasury yield ten year treasury screaming
Speaker 4: by He thinks yield goes down to three percent. He
Speaker 4: indicated that, and these are my words I'm paraphrasing here,
Speaker 4: but ultimately Pete, his characterization of the data was this
Speaker 4: isn't desirable. Some of this is undesirable. Maybe things have
Speaker 4: gone too far. Pete, What's the counterpoint.
Speaker 7: To that one. I'm definitely worried that he could be right.
Speaker 7: So I think we get to this four percent of
Speaker 7: the tenure, I think that's good for stocks. Then I
Speaker 7: think we actually get to three point eight percent. As
Speaker 7: we start moving lower, it becomes negative for stock because
Speaker 7: people have to start repricing in is there a potential
Speaker 7: recession risk? My outlier on the inflation story is really India.
Speaker 7: I'm watching India to see if they can generate some growth,
Speaker 7: what happens with China. So if we get in I'm
Speaker 7: not really worried about domestic inflation. I think we're seeing
Speaker 7: enough slowing down both in the goods and the services market.
Speaker 7: Inflation is not going to be domestically generated. It's going
Speaker 7: to be something happens with India or China that could
Speaker 7: set us eye off that way. So I'm kind of
Speaker 7: into an inflection point right now. I'm very comfortable yields
Speaker 7: lower down below four percent good for stocks. As they
Speaker 7: go much lower weak for stocks. Then we'll see how
Speaker 7: the data plays out.
Speaker 1: Peter Overlay on this. The Geopolitical Matrix Academy is acclaimed
Speaker 1: for putting a geopolitical tinge on my investment. Is it
Speaker 1: steady as she goes? Or do I need to worry
Speaker 1: about geopolitics in the next year.
Speaker 7: You know, I think we need to worry about geopolitics.
Speaker 7: Certainly what's going on with Russia, right, Putin clearly showed
Speaker 7: his hand when he was willing to kill the person
Speaker 7: who went against him. So don't forget what's going on
Speaker 7: between Russia and Ukraine. But for us, the real story
Speaker 7: is still China, and I think people are underestimating China's
Speaker 7: desire to start selling their own goods, their own brands
Speaker 7: and possibly denominated and wand mostly to emerging markets countries.
Speaker 7: When we sit here and examine China day, they are
Speaker 7: clearly experiencing trouble. They're going to do some things to
Speaker 7: fix that, but I think it's going to have to
Speaker 7: be pushing their brands globally.
Speaker 5: Well, Peter, to your point on China, I was really
Speaker 5: struck by the research that came out in the last
Speaker 5: twenty four hours by our own team here at Bloomberg
Speaker 5: Economics talking about China's property sector as being both too
Speaker 5: big to fail and too big to save. They say
Speaker 5: the government could the government step in and rescue the
Speaker 5: sector when looking at the options, it suggests the load
Speaker 5: would be too heavy to bear. Is China in a
Speaker 5: position right now to flex on anything.
Speaker 7: That's a great question. So how we're looking at China
Speaker 7: is I think they are going to cram down on
Speaker 7: the rips. So I think as this property sector resolves itself,
Speaker 7: they're going to try and protect what's left of the
Speaker 7: middle class, and it's going to hurt the rich. But
Speaker 7: I think those are all relatively weirdly short term problems.
Speaker 7: The real problem that they face right now is one
Speaker 7: no one really wants to produce in China. Right People
Speaker 7: are moving their production out of China. That is not
Speaker 7: going back. It's political, it's too long term, so they're
Speaker 7: not going to be this factory of the world old
Speaker 7: any longer. And clear that one, Chinese customers don't consume
Speaker 7: the way American customers consume, so their ability to develop
Speaker 7: a real domestic economy is weak. They're going to have
Speaker 7: to support that with the housing market or the real
Speaker 7: estate market there so people can spend, but they are
Speaker 7: going to have to look to selling their brands offshore.
Speaker 7: That's the only way they're going to be able to
Speaker 7: produce enough goods to keep people employed. And I also worry,
Speaker 7: and I think our geopolitical team always cautions us. Right
Speaker 7: when things are good in China, they are less likely
Speaker 7: to flex their political or military muscle. As their economy weakens,
Speaker 7: they do something like that, just like we saw Pudin
Speaker 7: do well.
Speaker 4: Pay bad folks do bad things. What kind of bad
Speaker 4: things are you thinking about?
Speaker 7: You know, I think Taiwan's off the table. It's not
Speaker 7: going to be that. But look for them maybe to
Speaker 7: flex their muscle in some other regions of the world
Speaker 7: where people care less. Look for them to continue to
Speaker 7: expand through their Belt and Road initiative, more access to ports,
Speaker 7: more access to these countries who are failing to pay
Speaker 7: on that. And I think you're going to start hearing
Speaker 7: more and more trade occurring and want and that's something
Speaker 7: people kind of I feel in our denial because we're
Speaker 7: getting a lot of anecdotal let when we talk to companies,
Speaker 7: they're being pressured to do some contracts in one it's
Speaker 7: very small mostly I said, the emerging markets. But this
Speaker 7: was not something anyone was talking about two years ago.
Speaker 7: So I think this trend is there, and I think
Speaker 7: US companies are going to have to take a real
Speaker 7: stock of Hey, do we have exposure to selling our
Speaker 7: products and emerging markets? Because China might become a real competitor,
Speaker 7: and still we deal with that well.
Speaker 4: Pet I want to talk about that just one step
Speaker 4: further domestically in China. How are US brands going to
Speaker 4: compete on the mainland in the domestic market given the
Speaker 4: kind of things that we're discussing right now.
Speaker 7: I think it's very difficult. I think everyone still has this.
Speaker 7: It's impossible not to look at a billion customers and say, Wow,
Speaker 7: if I could just reach a fraction of this, I'll
Speaker 7: do well. I think the regulatory hurdles are going to
Speaker 7: remain extremely high. I think China is not really going
Speaker 7: to be friendly, so you can go there. But I
Speaker 7: think you want to put in limited intellectual property, limited resources,
Speaker 7: because that's not the wave of the future anything. I
Speaker 7: think you're supposed to be figuring out what do we
Speaker 7: do with India? India is a much more compelling case
Speaker 7: to me right now than trying to figure out how
Speaker 7: to sell into China. Clearly, this friction is ongoing and
Speaker 7: the reluctance for them to do business with US is.
Speaker 4: Increasing, So Pey, I've got to raise this question, and
Speaker 4: forgive me for bringing single names into it. You can
Speaker 4: answer it directly if you want, you can dance around it,
Speaker 4: but it's got to be said. What does it leave Apple?
Speaker 4: What does it leave Tesla?
Speaker 7: You know, I think we're already seeing some of those
Speaker 7: companies move their supply chains develop around this, right, So
Speaker 7: they're looking at that, and I think that's been stage
Speaker 7: one of this. I think stage two is going to
Speaker 7: be how do we protect our brands in some other countries.
Speaker 7: So I'm I think companies are now maybe a little
Speaker 7: bit behind as a whole, but dealing with the China issue.
Speaker 7: And I think what they've got to get ahead of
Speaker 7: is what are we going to do with the rest
Speaker 7: of emerging markets? As China becomes potentially a competitor of
Speaker 7: low costs, you know, they're going to flood the market
Speaker 7: with their low cost, maybe lower quality goods, and that's
Speaker 7: I think what we have to be thinking about. So
Speaker 7: I think companies have done a decent job adjusting to China.
Speaker 7: I think they were slow as a whole, but that's
Speaker 7: going to be really the next phase is adjusting to
Speaker 7: Chinese competition.
Speaker 4: Before we get ahead of that, Let's get ahead of
Speaker 4: this idpig just around the corner. I've got to go
Speaker 4: to Mike McKay in a moment. Pete, what are you
Speaker 4: the team looking for from ADP today Claims Tomorrow Payrose Friday.
Speaker 7: I'm looking for weak numbers and whether it's in the
Speaker 7: headline numbers or more importantly, even the revisions, because we've
Speaker 7: seen pretty significant revisions lately that people have somewhat ignored.
Speaker 7: I think it's just going to kind of really solidify
Speaker 7: this view that we are the best for employments behind US.
Speaker 4: Peter, thank you, sir Cheer of Academy Securities joining US
Speaker 4: NATS market. It's how city of portfolio manager at all
Speaker 4: Spring Global Investments Market big deaf gags yesterday. Are you
Speaker 4: still constructive on this equity market in America?
Speaker 2: Yes, I think we'll have a strong finish to the year,
Speaker 2: maybe more moderate returns than we've had year today, but
Speaker 2: still positive return because the economy is still pretty strong.
Speaker 1: Margie, I look at where we are on free cash flow.
Speaker 1: In the heart of the matter is there's a generation
Speaker 1: of people that don't know the rate structure we're in
Speaker 1: right now. You and I have lived it. Can corporations
Speaker 1: generate free cash low and dividend growth from it in
Speaker 1: this interest rate environment.
Speaker 2: Oh yes, because I think interest rates is just a
Speaker 2: small part of their costs. If you look at companies
Speaker 2: since a financial crisis, they have restructured their balance sheet,
Speaker 2: locked up fixed rate, low rate money, and so I
Speaker 2: think they're really rather impervious to these increases in rates.
Speaker 2: I think that's one of the things that's fuzzled to FED.
Speaker 2: But I expect they'll continue to maintain profit margins.
Speaker 1: I like the idea of impervious as well. If I'm
Speaker 1: a CFO, how do I change my issue ince given
Speaker 1: this high environment? Do I extend out duration? Do I
Speaker 1: stay short? Short? Short? What do CFOs actually do in
Speaker 1: a real rate environment?
Speaker 2: Well, I think most of them have already done that.
Speaker 2: For the last five years, particularly in the high yield market,
Speaker 2: we've seen more than half of all the issuance being
Speaker 2: to extend maturities, pay off bank debt, refund or pre
Speaker 2: refund issues coming due in the next couple of years,
Speaker 2: a so called maturity wall. So I think most companies
Speaker 2: really don't have the need to borrow new money. They
Speaker 2: have enough liquidity on their books to handle their own needs.
Speaker 5: Well, when we talk about the companies and they're borrowing
Speaker 5: needs and just their financial position. Marguie, what is the
Speaker 5: default cycle actually going to look like when they to
Speaker 5: this point have remained incredibly low. There is growing calls
Speaker 5: for a soft landing. You seem to think that everything
Speaker 5: is still looking relatively strong here. Does that mean that
Speaker 5: there's not that much risk in risk of your debt?
Speaker 2: I think, particularly in the public high yield market in
Speaker 2: the US, that market is going to continue to have
Speaker 2: very very low default rates. Right now, the default rate
Speaker 2: in the US is a little over three percent. In
Speaker 2: the loan market it's higher, it's over three and a
Speaker 2: half percent because a lot of the poorer quality issues
Speaker 2: financed they are rather than the high yield market. But
Speaker 2: as I said, most high y old companies were very
Speaker 2: prudent in the last decade and they simply extended maturity
Speaker 2: and they've improved their balance sheet, and so the quality
Speaker 2: the high old market is good, and I think defaults
Speaker 2: will stay low. That's why yield spreads have stayed pretty narrow.
Speaker 4: The market. Isn't there a day of reckoning next year?
Speaker 4: If this Federal Reserve isn't cutting interest rates for those
Speaker 4: companies that pushed out that maturity will termed out their debt.
Speaker 4: Don't they have to start reissuing in twenty twenty four.
Speaker 2: I think most companies have a couple of years too
Speaker 2: before they have to worry about liquidity. So I don't
Speaker 2: think there's a real risk that companies aren't going to
Speaker 2: be able to refinance. And once again, is there access
Speaker 2: to money rather than the cost of money? I think
Speaker 2: at the margin, not that many corporations are going to
Speaker 2: need net new money because of maturities in the next year.
Speaker 4: With that in mind, if higher interest rates aren't going
Speaker 4: to buy corporates in America anytime soon, doesn't that just
Speaker 4: extend the cycle marketing keep rates high for even longer potentially?
Speaker 2: Well, I think it keeps the economic cycle going. And really,
Speaker 2: I think the puzzle has been where's the recession? And
Speaker 2: there's no recession in sight because everything in the economy
Speaker 2: in the US is really pretty well balanced. People aren't
Speaker 2: affected by this big increase in short rates. And really,
Speaker 2: right now the ten year is what four and a quarter,
Speaker 2: maybe you'll drift up to four and a half. Those
Speaker 2: aren't exactly the sort of rates that choke off economic growth.
Speaker 4: So if I've got a nice pull of cash right now.
Speaker 4: Should I be worried about the reinvestment risk and the
Speaker 4: road or should I just sit there in a two
Speaker 4: year and te bills and relax and know that rates
Speaker 4: are going to be there next time I need to
Speaker 4: reinvest that money.
Speaker 2: Well, I think it's likely that we'll see short rate well,
Speaker 2: certainly much higher than they've been for the last decade
Speaker 2: of year zero. So yes, I think they'll be much
Speaker 2: more of a return for investors short term oriented. But really,
Speaker 2: if you say the yield to say five to five
Speaker 2: and a quarter or something like that in risk create
Speaker 2: assets and the cash flow yield of corporations is maybe
Speaker 2: five and a half five and three quarters, that says
Speaker 2: to me you're better off taking the volatility and looking
Speaker 2: at equities or high yield bonds, which have a lot
Speaker 2: more to offer than short term short term rostree assets.
Speaker 4: Maggie, Thank you, Maggie Biteu of o Spring Global Investment.
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