Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Farrell and Lisa Brawnowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com,
Speaker 1: and of course, on the Bloomberg terminal. Right now, it
Speaker 1: is always good to speak to any of our busy
Speaker 1: politicians in Washington. To do with two days in a
Speaker 1: row is a rare treat from the second District of Arkansas.
Speaker 1: French Hill, French Hill, it's your fault. Arkansas has the
Speaker 1: snowiest uh February like ever, like back to when the
Speaker 1: Hill family came over the border in eighteen twelve or
Speaker 1: whatever it was. What's the snow like in Arkansas? And
Speaker 1: what are you gonna do about it? To fix it? Well, bye, Gollway.
Speaker 1: It's all the responsibility of the politicians in Washington caused
Speaker 1: the snow fifteen to seventeen inches here in central Arkansas,
Speaker 1: and our highways are clear, but our neighborhoods are still
Speaker 1: piled up East Coast style snow. But I've been shoveling
Speaker 1: and doing the best I can yeah, I know it's
Speaker 1: Republicans shovel Democrats calling the snow plow. Okay, let's move
Speaker 1: on from their French hill. We saw yesterday the game
Speaker 1: stop hearings. I noticed the Washington Post this morning gives
Speaker 1: it essentially zero play. What happens next after that testimony, Well, first,
Speaker 1: I think Mr Tinev, the CEO and Robin Hood Market
Speaker 1: certainly apologized for the fact that they had inadequate collateral
Speaker 1: and deposit with their clearing firms and DTCC the depository Trust,
Speaker 1: which then put their customers in a bad position in
Speaker 1: the midst of a bubble that was a key element
Speaker 1: in terms of the equity market plumbing. I thought the
Speaker 1: earring demonstrated that it worked as we expected to. But
Speaker 1: I think Maxine Waters, our chairman of House Financial Services,
Speaker 1: going to have additional capital to markets hearings, and from
Speaker 1: the discussion yesterday Tom, I think she'll focus on payment
Speaker 1: for order flow, also reassess short selling. What have been
Speaker 1: the changes since the two thousand thousand ten changes. Congressmen,
Speaker 1: how concerned are you about the environment, the broader environment
Speaker 1: that's led to this type of speculation about the fact
Speaker 1: that people have money as well as the apparent lack
Speaker 1: of risk prompted by the Federal Reserve. Well, let's start
Speaker 1: with that, which is zero interest rates in the Federal Reserve,
Speaker 1: accommodative policy, and household savings at the highest rate it's
Speaker 1: been in decades. This prompts people to reach out and
Speaker 1: take risk, just as you've been discussing the last a
Speaker 1: few minutes. But the key thing for I think robin
Speaker 1: Hood investors are we all know that investing is caveat inmptour,
Speaker 1: but does robin hood have the support for the those
Speaker 1: new entrance to the investing market. Are they have the
Speaker 1: skills and communication on their platform to educate customers. I've
Speaker 1: been in this business for four decades and the paternalistic
Speaker 1: aspect of coaching and monitoring accounts on margin, on the
Speaker 1: use of options on small dollar stocks are all fundamental
Speaker 1: to retail investment brokerage. Is that really being adequately handled
Speaker 1: on an app based platform like robin Hood. That was
Speaker 1: a key thing we talked about. Brilliantly said from the
Speaker 1: gentleman from the Delta Bank and Trust company, Lisa. What
Speaker 1: I think is so important here is this strange phrase
Speaker 1: due diligence in the old days there was a respect
Speaker 1: for it, and then to be honest, technology took over.
Speaker 1: How do you do due diligence given modern technology? Well,
Speaker 1: and that's exactly what Congressman was talking. Congressman Hill is
Speaker 1: talking about this paternalistic attitude, which is actually part of
Speaker 1: what the robin Hood crowd is rebelling against. And so
Speaker 1: that balance. How do you ensure earth that you give
Speaker 1: people access to this dynamism, to this explosion and asset
Speaker 1: prices that has been fueled by the environment that you're
Speaker 1: talking about, while giving them the correct due diligence. That's complicated. Well,
Speaker 1: I think he should enhance his website, asked him yesterday.
Speaker 1: Does he have a call center? And the average robin
Speaker 1: Hood an investor does not have someone to call during
Speaker 1: the business day. It's all done by email to their account,
Speaker 1: and that's inadequate in tough times. The call centers that
Speaker 1: robin Hood apparently are only granted to those with some
Speaker 1: extreme option approval by the firm. And I believe the
Speaker 1: CEO committed yesterday to much better consumer communication, and he
Speaker 1: made a comment about his consumer education on his platform.
Speaker 1: But look, we all know that granting someone margin, granting
Speaker 1: someone option authority is a tough job just to do
Speaker 1: by algorithm based on the boxes checked by a customer
Speaker 1: complishment before we let you go can scathellical question. It's
Speaker 1: not actually aimed at you personally, who obviously understands the
Speaker 1: financial industry inside out these hearings, how can we make
Speaker 1: them better? Do you think they would be better if
Speaker 1: they were closed door? And I'm here's a journalist talking
Speaker 1: about less transparency. But it just seems to me that
Speaker 1: sometimes these hearings become theater and lawmakers, your colleagues, turn
Speaker 1: around and make it that they might have some pre
Speaker 1: existing bias, some songa dance, They want to clip the
Speaker 1: video and send it out to constituents. How do we
Speaker 1: make this better, more useful? Well, that tone is said
Speaker 1: at the top by the committee chairman, Maxine Waters in
Speaker 1: this case loves click bait, and she also loves Jonathan
Speaker 1: to use the full committee. Here's the way to do this,
Speaker 1: in my view, if you use the Subcommittee on Capitol Markets,
Speaker 1: which is believe chaired by Brad Sherman, you have a
Speaker 1: smaller number of people. You can spend the same amount
Speaker 1: of time, but you can multiple rounds of questions and
Speaker 1: it's a way to have a much more constructive dialogue
Speaker 1: on Capitol Hill, but our chair has elected not to
Speaker 1: do that in some of these high profile matters. And John,
Speaker 1: that's brilliant. That's like the subcommittee we have here where
Speaker 1: you and Lisa tell me to shut up. If you
Speaker 1: if you look at the UK and I'll bring it.
Speaker 1: The House Financial Services Committee is one thing. In the
Speaker 1: UK we have the Treasury Select Committee and it is
Speaker 1: a smaller room, it's a smaller setting, and it seems
Speaker 1: to be a little bit more direct, and I think
Speaker 1: that's what the congressman is alluding to. Congressman is great
Speaker 1: to catch up, come back soon, always great to catch
Speaker 1: up this Republican from Arkansas. Right now, Ellen Santner joins
Speaker 1: us with Morgan Stanley, their chief US economists, out with
Speaker 1: a bombshell report and adjustment. I believe it was yesterday
Speaker 1: looking for as John mentioned, six and a half percent
Speaker 1: and even seven percent GDP depending on where you measurement.
Speaker 1: But what's so important here is what Stephen Roach invented
Speaker 1: it Morgan Stanley, which is everybody feeds off everybody else's research. Ellen,
Speaker 1: your secret weapon on the pandemic is Matthew Harrison, he's
Speaker 1: definitive in biotech. And matt Harrison is telling you he's
Speaker 1: seeing better vaccination numbers. Yeah, better vaccination numbers. We're getting
Speaker 1: shots and arms at a greater rate. Hospitalization rates coming down,
Speaker 1: death counts are coming down. That's what households really care about.
Speaker 1: And that's what gives them the confidence, uh to show
Speaker 1: in the surveys that we send out of households, UH
Speaker 1: that they want to get out there, they want to
Speaker 1: return to you know, put the word normal in quotes.
Speaker 1: Whatever that means to each person is different, but they
Speaker 1: want to get out there right. And maybe it's just
Speaker 1: coming out of this bad winter. But we've got the
Speaker 1: ingredients there to make that happen. And for those of
Speaker 1: you on radio and TV, this is really important. We
Speaker 1: discover these economists before they're a chief economist, a fancy
Speaker 1: title like Ellen has and Ellen Sander was discovered with
Speaker 1: a cute consumer analysis years ago. Ellen, does this devolve
Speaker 1: this six and seven percent g DP? Does it devolve
Speaker 1: into a consumption boom? Uh? Yeah, so that's what So
Speaker 1: when you think about the forecast for the U. S economy,
Speaker 1: right has to be about the consumer because that's the
Speaker 1: lion's share of the economy. Um. But you don't just
Speaker 1: have the consumer this time, right, You've got fiscal stimulus
Speaker 1: behind it, so you've got a lot of buying power
Speaker 1: out there, UM with pent up demand that continues to build.
Speaker 1: And so the biggest delta for the economy this year
Speaker 1: is what the consumer does as we're able to move
Speaker 1: more freely around the economy. Now, that also points to
Speaker 1: the greatest risk is that you know, confidence is rising
Speaker 1: there telling us in our surveys they want to get
Speaker 1: out and do things. And you know, historically and you
Speaker 1: know this, Tom, sometimes we can say we feel one way,
Speaker 1: we do something else. You know that that is a risk.
Speaker 1: And if that's the case, then you see the savings
Speaker 1: right in the US just remain really really elevated this year.
Speaker 1: And you don't see that calm down as people start
Speaker 1: to been ellen. When did the unemployment numbers start to
Speaker 1: matter again? So the unemployment numbers, uh, you know, we're
Speaker 1: looking at two different ones right now. And I know
Speaker 1: we've discussed this in the past. So you've got um,
Speaker 1: you know, the six plus percent on the uh, you know,
Speaker 1: unemployment rate that's the most widely reported that's the traditional
Speaker 1: measure that we use, UM, but you're closer to around
Speaker 1: ten and a half percent for that underlying unemploy unemployment
Speaker 1: rate that you take into account all the measurement issues. Um,
Speaker 1: we do get impro improvement in the unemployment rate this year,
Speaker 1: but if we think about them that broader measure, the
Speaker 1: underemployment measure, the ten and a half percent comes down
Speaker 1: to six and a quarter by the end of the
Speaker 1: year on our estimates. So it's it's a four percentage
Speaker 1: points is a huge amount of improvement. That's still a
Speaker 1: really high unemployment rate by the end of the year. UM.
Speaker 1: So you've got a lot of that pent up demand
Speaker 1: coming through at a time when we still got supply constraints,
Speaker 1: especially on the labor side. And that's what plays into
Speaker 1: some of the inflation forecast for inflation to rise. And
Speaker 1: can you imagine the news conference at the Federal Reserve
Speaker 1: as they see six and a half percent GDP growth
Speaker 1: this year and start to look at five next year,
Speaker 1: what does that look like? Yeah, so I think it's
Speaker 1: it's a it's an evolution, right. So even at the
Speaker 1: March So at the March of Onese meeting, they're gonna
Speaker 1: have to revise upward their forecast. And some of that
Speaker 1: is just because growth is going to be tracking so
Speaker 1: much higher already in the first quarter because of the
Speaker 1: stimulus checks that came through uh in that bill that
Speaker 1: was passed in December. But they may not pull in
Speaker 1: forecast fully for what might be coming right around that
Speaker 1: time of this next fiscal stimulus package. So most likely
Speaker 1: then at the June meeting they would have to revise
Speaker 1: upward their forecasts again UH. And then most likely only
Speaker 1: by September, when their forecasts continue to track behind the economy,
Speaker 1: and this is what we normally see each year, they
Speaker 1: play catch up by revising higher um. But here's the thing,
Speaker 1: it's the unemployment rate that matter for them. UH. And
Speaker 1: even though we have inflation rising and reaching above two
Speaker 1: percent by the end of the year, UH, that's not
Speaker 1: good enough, and especially not in the context of a
Speaker 1: six plus percent underlying unemployment rate. Well, Tom, this is
Speaker 1: the story the forecast for the Fed right now and
Speaker 1: the degree they need to raise those forecasts four point
Speaker 1: two percent real GDP year on year twenty two three
Speaker 1: two percent. Compare and contrast the Fed with Morgan Stanley.
Speaker 1: Right now, the gap is this one gap? Is this white?
Speaker 1: And John? As you mentioned, there's speeches next week. I'm sorry,
Speaker 1: there's going to be a sentence here, a sentence there.
Speaker 1: So how do we navigate that FED speak Helen? When
Speaker 1: you start to get those cracks not from the governors,
Speaker 1: not from the core of the FED pal Clarida, who
Speaker 1: we hear from next week, but from the FED presidents
Speaker 1: who start to look around and see what you see,
Speaker 1: which is better growth. Yees. So I think we'll see
Speaker 1: more of them speaking out and and speaking their mind,
Speaker 1: but they'll they'll temper it right. So it's gonna be
Speaker 1: very obvious that they're seeing better growth, but it's still
Speaker 1: going to be obvious to them. They're still uncertainly around
Speaker 1: how the vaccine will out, will progress, will they be
Speaker 1: hiccups there? So we're still you know, the cloud of
Speaker 1: COVID will be thinning as we get into the middle
Speaker 1: of the year, um, but we're still going to be
Speaker 1: under it. Uh. And so they'll acknowledge better, they acknowledge
Speaker 1: the better growth, but that we're just not there on
Speaker 1: the labor market. So, I mean, they've they've got a
Speaker 1: lot of cover here, um to explain that we're still
Speaker 1: not anywhere near that significant improvement um that they say
Speaker 1: that they're looking for now. That applies to grate heights,
Speaker 1: um for some of them, that does apply to tapering
Speaker 1: the balance sheet as well. But we do think um
Speaker 1: that by the middle of the year, with again with
Speaker 1: the cloud of COVID really thinking then um, that more
Speaker 1: of them will be talking about balance sheet tapering could
Speaker 1: be on the horizon because at some point you don't
Speaker 1: need the titan policy, but you at least need to
Speaker 1: take your foot off the gas pedal, um. And that
Speaker 1: will start when they decided to start tapering, and we
Speaker 1: think that tapering begins in the beginning of next year. Ellen.
Speaker 1: We also are going to be hearing next week from
Speaker 1: Jenny Ellen on Monday, And there is a big question,
Speaker 1: she said yesterday and in interview, the price of doing
Speaker 1: too little is much larger than the price of doing
Speaker 1: something big. How concerned are you about the price of
Speaker 1: higher inflation that perhaps is much beyond what people are
Speaker 1: expecting right now. So I think the risk there, of course,
Speaker 1: is that it rises more so than what the Fed
Speaker 1: can stomach. I mean, we have the highest inflation forecasts
Speaker 1: on the street, and it's still not enough to trigger
Speaker 1: rate hikes in our view before the third quarter of three. Um,
Speaker 1: of course we can get that wrong. Could be that
Speaker 1: there's more supply constraints that last longer. There's a lot
Speaker 1: of flow through from the dollar that we're seeing pushing
Speaker 1: import prices higher, and those tend to be their flow
Speaker 1: and lasting movements. But the FED is there. They'd rather
Speaker 1: fight that battle. Uh and Janet Yellen knows good and
Speaker 1: well what the Fed can do. They'd rather fact fight
Speaker 1: that battle of pushing down inflation if they need to,
Speaker 1: rather than continuing this multi decade battle trying to pision inflation. Ell,
Speaker 1: when you're channeling your inner Mario Draggy, I mean you're
Speaker 1: going out to twenty three. And as you know, when
Speaker 1: the facts change, the news changes, and the actions of
Speaker 1: people change. What do you perceive to be the verbal
Speaker 1: path for institutional officers that demand market stability? Is they
Speaker 1: stagger to year two thousand, twenty three. They're gonna be
Speaker 1: walking on glass. They will be walking on glass. And
Speaker 1: that is the big one of the biggest debates out there.
Speaker 1: They are hell bent on fighting any financial stability with
Speaker 1: macailpredentcial tools. Sometimes I think about macro predential tools. As
Speaker 1: you know, isn't a financial um stability like a frog
Speaker 1: in boiling water. All right, so everything feels fine, everything
Speaker 1: feels fine, everything goes fine. Then oh my god, nothing's fine.
Speaker 1: And so can Michael podentcial tools really exactly well, so well,
Speaker 1: they recognize it fast enough, and so that's the biggest day.
Speaker 1: They are certain that they can battle it fast enough
Speaker 1: and that they've got the tools necessary to battle it.
Speaker 1: Um But you've got to step in with things like
Speaker 1: rate hikes even if to get into the cracks. If right,
Speaker 1: you've got a labor market that's tight. You see, you're
Speaker 1: running a high pressure economy. If those inflationary pressures are
Speaker 1: coming through, you must be a maximum employment and so
Speaker 1: you would be raising rates in that environment, and the
Speaker 1: market would be asking you to raise rates in that environment.
Speaker 1: The problem is if it comes way sooner than expected
Speaker 1: and the market that markets expect, and you get a
Speaker 1: very very violent and volatile move in rates. And that's
Speaker 1: the conversation right now. And I'm fantastic to catch up.
Speaker 1: And is that up the chief economist right now? Robert
Speaker 1: Miller joint just Bob Miller from black Rock head of
Speaker 1: America's fundamental fixed income. That's an important position on the
Speaker 1: speed of change. Bob Miller, I love your note where
Speaker 1: you say events are moving rapidly and the FED isn't.
Speaker 1: When does the FED blink? Great question, Tom, Um. The
Speaker 1: conversation you guys are having preceding the most recent break
Speaker 1: would suggest that we're reading off each other's notes. Um,
Speaker 1: I think it's coming. I don't think it's coming immediately. Um,
Speaker 1: it's certainly not next week at the testimony in front
Speaker 1: of Congress, but we think that at the March MC,
Speaker 1: the SEP that has delivered the state of the economic
Speaker 1: projections that are delivered, where are going Our our expectation,
Speaker 1: as you three, for unemployment for twenty one is going
Speaker 1: to be marked down at four point eight, so approaching
Speaker 1: the four point one longer run rate, and four PC
Speaker 1: is going to be marked up to one point nine,
Speaker 1: approaching the two percent target. So our our simple conclusion
Speaker 1: from this that the FED is going to find it
Speaker 1: more and more difficult as Mark in April pass to
Speaker 1: continue to differ the discussion of recalibration of policy. So,
Speaker 1: as you guys have said, there's massive pistol in the
Speaker 1: system now likely more coming relatively soon with the one
Speaker 1: point nine package from the Biden administration UH potentially followed
Speaker 1: by infrastructure later this year. But the dual policy impulse
Speaker 1: is just epic at the moment, at a time when
Speaker 1: vaccine rollout is proceeding at a very good pace. We're
Speaker 1: now running, on average about fifty million a month, and
Speaker 1: that could easily become sixty million a month. So think
Speaker 1: about what that implies for just two months forward. And secondly,
Speaker 1: the weather is about to turn warm. I know it
Speaker 1: sounds um mundane, but it matters right, and we're four
Speaker 1: weeks away from warmer weather that will allow people to
Speaker 1: get outside. So I think you're going to see this
Speaker 1: just a monumental amount of pensive demand unleashed in the
Speaker 1: next couple of months. And it's gonna make it hard
Speaker 1: for the PAD to say that substantial further progress their
Speaker 1: phrase for what's necessary to consider recalibrating quantitative easing, the
Speaker 1: substantial further progress has not occurred. I think it's coming.
Speaker 1: It's probably gonna take a month or two. We need
Speaker 1: a clinic on duration risk, and I'd like you to
Speaker 1: offer that to us right now. Talk to us about
Speaker 1: duration risk, what it is and how you're thinking about
Speaker 1: it at the moment. But you know, Jonathan, I think
Speaker 1: one one way to see to us this is the
Speaker 1: fet IS really not your friend if you're a bond investor,
Speaker 1: after after forty years of kind of being your friend.
Speaker 1: And we've been talking about this since the adoption of
Speaker 1: the average Inflation Targeting Framework last summer. UM that was
Speaker 1: that was revealed at the August um uh Jackson Hole.
Speaker 1: But um, you know, the fet IS is explicitly telling
Speaker 1: you they're going to target inflation at two percent and
Speaker 1: they're going to be willing to allow it to run
Speaker 1: above UM. That's a very different regime than we've been
Speaker 1: in for the prior board decade. So I think you
Speaker 1: have to you know, when you're looking at long duration
Speaker 1: nominal bonds, UM, you've got to be pretty careful that
Speaker 1: you're being adequately compensated for both UM inflation risks from
Speaker 1: the normal ciplical economy, which which frankly aren't haven't been
Speaker 1: particularly um uh you know, robust in the last couple
Speaker 1: of decades. But nonetheless, the central Bank is telling you
Speaker 1: that they're now going to target higher inflation. So I
Speaker 1: think it I think it really matters and and it
Speaker 1: calls into question the willing you know that the comfort
Speaker 1: in holding longer and phenomenal bombs and relatively well yield Bob,
Speaker 1: the FED is not your friend. And yet don't fight
Speaker 1: the Fed. I mean, these are the sort of contradictory
Speaker 1: messages that we're hearing at a time when yes, the
Speaker 1: FED would like to see inflation run hot, but the
Speaker 1: Fed's balance sheet rose to a new record high in
Speaker 1: the week ended yesterday, to seven point five six trillion dollars.
Speaker 1: I mean, how much will they say involved to suppress
Speaker 1: borrowing costs, to allow this fiscal impulse to gain control
Speaker 1: and to be a friend frankly to bond markets regardless
Speaker 1: of inflation. Well least I think that the FED is
Speaker 1: your friend depends upon the asset class you're talking about.
Speaker 1: I think I think don't fight the Fed is still
Speaker 1: a rule number one in terms of risk assets UM
Speaker 1: and and and certainly supportive for the cyclical outlook. UM.
Speaker 1: That said, they have adjusted their reaction function in a
Speaker 1: way that makes them less quote unquote friendly for long
Speaker 1: duration and you know bond manager so, but I think
Speaker 1: they have to differentiate between what what asset classes you're
Speaker 1: talking about? That messages no longer. It's simply blunt as
Speaker 1: as it used to be. You know, the size of
Speaker 1: the balance. She is going to continue to grow. Um
Speaker 1: it's it's gonna it's gonna start to grow at a
Speaker 1: slower pace sometimes in the next few months. You know.
Speaker 1: Think about this, that the the bonds twenty billion bonds
Speaker 1: a month that they're currently buying, between treasuries and mortgages,
Speaker 1: UM is in order to scale that down over time,
Speaker 1: they want to go really slowly. They certainly want to
Speaker 1: avoid the two thousand and thirteen experience. So our expectation
Speaker 1: has been they'll dial up back like ten billion a
Speaker 1: month right over the core in the year. Well, if
Speaker 1: you're going to dial back over the course of the
Speaker 1: year and in the middle of two you so we
Speaker 1: expect the output gap in the US economy to close
Speaker 1: this summer, and as new Secretary of Treasure Yelling said
Speaker 1: recently with the with the upcoming Crystal Package, she expects
Speaker 1: that we could achieve full employment in two thousand two.
Speaker 1: If you close those two gaps, you still want to
Speaker 1: be buying a lot of bonds. So to our our
Speaker 1: point is we need to slow the rate of purchase
Speaker 1: relatively soon, so that they can do it over a
Speaker 1: long time rise and not be buying bonds when we've
Speaker 1: achieved full employment. Um Interest rates are a totally different story, right,
Speaker 1: that's the tide to the inplacment outlook and that the
Speaker 1: average inplace framework. So they've they've driven a wedge between
Speaker 1: rates and to E. I think appropriately so. But the
Speaker 1: guidance around to E needs to change sometime in the
Speaker 1: next couple of months. But this conversation is too important.
Speaker 1: Can you do me a favor? Just hold the line.
Speaker 1: We'll bring you back in just a couple of minutes. Time.
Speaker 1: Prob Miler that Black Rock head of America's Fund of
Speaker 1: until fixed income and bias there to go to the
Speaker 1: gentleman from Columbia University. I'm gonna really listen to the
Speaker 1: vice chairman John for that one single sentence of nuance
Speaker 1: of how they adapt to a five or six percent
Speaker 1: run rate real g d P A nominal rate of
Speaker 1: what six seven eight percent gdpis treasure yield to the
Speaker 1: breaking out to Let's bring in roberts patim chief investment strategist. Rob.
Speaker 1: I've got one question to kick things off. When does
Speaker 1: roberts Hip become a buyer at the long game now
Speaker 1: tens on thirties, one, etcetera. Yeah, well, this is a
Speaker 1: great environment, and I like answering that question when we've
Speaker 1: crossed above fair value in terms of yield, and I
Speaker 1: think in terms of the long term outlook, I can't
Speaker 1: tell you that's today, if it's tomorrow, or if it's
Speaker 1: gonna be the fourth quarter, but I think we've clearly
Speaker 1: topped the value in terms of treasury yields. What's going
Speaker 1: on here? It kind of looks like a behavioral financista
Speaker 1: where people are looking at these rapid rates of growth.
Speaker 1: They're looking at a few of the high prints and
Speaker 1: CPI and pc that we saw back in the spring summer,
Speaker 1: and they're extrapolating that into the future, and they're pricing
Speaker 1: in a string of fed rate heights that is unlikely
Speaker 1: to be a sensible central scenario. And uh So, I
Speaker 1: don't know whether we're going to get up to one
Speaker 1: fifty or even maybe higher, you know, if you get
Speaker 1: another infrastructure bill coming through. But I think we've already
Speaker 1: topped our value, and that means that looking out, you know,
Speaker 1: five years, in terms of return, bonds are going to
Speaker 1: be likely to end about performing cash. So what have
Speaker 1: you been doing in the first couple of months this year?
Speaker 1: Is all this craziness has been gone on around you? Yeah,
Speaker 1: we have to try to stay with what makes sense,
Speaker 1: what's easy, what's doable. And there's a good balance in
Speaker 1: the market between the economy doing well and spreads coming in.
Speaker 1: Picking up yield in spread product across a range of
Speaker 1: sectors while steering clear of any of the names of
Speaker 1: the sectors that are gonna be having problems, and that
Speaker 1: area of activity in bond portfolio management, the sector allocation
Speaker 1: security selection is a higher information ratio, higher hit ratio,
Speaker 1: a better area to focus anyhow um, but the rate
Speaker 1: side is going to drive returns on over the long term.
Speaker 1: And I think what you've had, frankly in the crash
Speaker 1: of the COVID nine team a good offset between interest
Speaker 1: rate and spread risk, where to the extent that people
Speaker 1: were losing on the spread side in bonds, they were
Speaker 1: making money on the interest rate side. In the recovery
Speaker 1: that we've had, Yeah, you've had some increase in yields,
Speaker 1: but you've had a massive compression and spread what's the
Speaker 1: bottom line. Bonds have done well and looking forward. You know,
Speaker 1: the next two to four years, you're not going to
Speaker 1: get that much spread compression, but you will get income
Speaker 1: from spread product, and so that will help. But I
Speaker 1: think what you're gonna get now looking to to four
Speaker 1: years ahead is a realization that we're not going to
Speaker 1: do six percent GDP for the next five years, that
Speaker 1: after this money flows through the system, there's going to
Speaker 1: be a slowing down and the government markets are going
Speaker 1: to have to mark to market that these fed rate
Speaker 1: hikes are not going to happen at anything near the
Speaker 1: pace it's priced in, and that's gonna be in positive returns.
Speaker 1: So I'm just trying to pass through. There's a lot there,
Speaker 1: and I want to unpack it. With respect to the
Speaker 1: treasure yield, I'm just curious. You're saying that we are
Speaker 1: beyond fair value, but it didn't seem like you're necessarily
Speaker 1: going all in. You're talking long term, short term, how
Speaker 1: high can we go and how much could it potentially
Speaker 1: challenge the flight into risky credit that we've seen year
Speaker 1: to date. Right So so I can't tell you that obviously,
Speaker 1: and but I can take a stab at it please.
Speaker 1: And but what we've seen right from from that period
Speaker 1: exactly a year ago February, the hundred basis points springs
Speaker 1: swinging rates from thirty to one thirty. That spect out
Speaker 1: the whole future from the worst scenario to the best scenario.
Speaker 1: That was likely at that time. But since that time,
Speaker 1: we've had Washington d Cgo Democrat. We've seen that they're
Speaker 1: able to spend money. We've seen vaccines developed, uh much
Speaker 1: to a greater extent than anyone would have guessed. I
Speaker 1: would imagine in a time frame not not imaginable, but
Speaker 1: more important than any of that, we have seen people
Speaker 1: take the money that they get from the government and
Speaker 1: their income and spend it like mad. So we're a
Speaker 1: few percentage points elevated and unemployment, but we're at record
Speaker 1: retail sales, so the market has to price in that psyche,
Speaker 1: and I think, you know, we're in the zone. I
Speaker 1: would think that unless we get some other breakout and
Speaker 1: the economic activity, you're not going to top one fifty
Speaker 1: on the tenure. It will be very difficult to see
Speaker 1: if we do top one fifty, to see that sustained.
Speaker 1: So I think we're basically in that last twenty five
Speaker 1: basis points. Roeber tip, I'm gonna go back to dive
Speaker 1: into the business at first Boston. And what I find
Speaker 1: fascinating is all the MATHA Berkeley doesn't matter. It's what
Speaker 1: corporations do when yields back up like this? What does
Speaker 1: supply do? What does CFO do? CFOs chief financial officers?
Speaker 1: What do they do when yields back up? Well, CFOs,
Speaker 1: fortunately for the market, already did it. You know, raise money, right,
Speaker 1: That's what they do is when they're nervous, they raise
Speaker 1: money to make sure they survive. Then when things are
Speaker 1: looking better and rates are low, they raise some more
Speaker 1: money in case they need it for a strategic acquisition.
Speaker 1: And a lot of that's happened, and we've had some
Speaker 1: drop off and issuance. Uh So I think the supply
Speaker 1: is going to be manageable. On the corporate side, I
Speaker 1: think there are signs of accesses in the market. There's
Speaker 1: a lot of liquidity slashing around uh And the problems
Speaker 1: that the Fed UM and these central banks are gonna
Speaker 1: have is not going to be that they're going to
Speaker 1: create systemic inflation, because inflation underlying measures, I think are
Speaker 1: already showing a tendency after bursts of activity, to come
Speaker 1: right back down. And the same as trou on the
Speaker 1: retail sales side. But I think while these central banks
Speaker 1: are shooting for these unreasonably high inflation targets and creating
Speaker 1: very buoyant markets, that that's gonna be the problem. The
Speaker 1: game stops and all of these phenomena that pop up
Speaker 1: that make them nervous. They're creating systemic risk. Robby sound
Speaker 1: like a treasury bobby and not a tries to rebuyd
Speaker 1: I'm just trying to reconcile it. Or in the last time,
Speaker 1: everything I said is I want to buy treasuries and
Speaker 1: it's just something holding you back. Yeah. I mean if
Speaker 1: you told me I had to do one trade right
Speaker 1: now for the next two years, it would be long duration, right,
Speaker 1: it would be long fixed in conversus cash on a
Speaker 1: diversified basis. Uh. If you said, well, you know, do
Speaker 1: you want to go to a maximum position here? You
Speaker 1: want to wait to they see raids crest or something
Speaker 1: like that, I think you'd have to go with that
Speaker 1: because the economy has a lot of momentum. Even just
Speaker 1: this retail sales number we saw this week was spectacular, right,
Speaker 1: So you don't want to underestimate reality. But at the
Speaker 1: same time, what's going on in the markets. As you
Speaker 1: can see, it's extrapolating this pace of growth too far
Speaker 1: in the future. And we saw this exact phenomena play
Speaker 1: out where the Trump victory people priced in a new
Speaker 1: reality of high growth a three ten your note. By
Speaker 1: the end of twenty nineteen, that was all over. Uh
Speaker 1: so may or maye out of made uh make America
Speaker 1: great again, But it made bonds great again. And right
Speaker 1: now this rise and yields to one a quarter or
Speaker 1: whether it's one fifty, is built back bonds better. Right
Speaker 1: we're in a zone where they're attractive. And two years
Speaker 1: from now it's going to be like a lot of
Speaker 1: this optimism I think never happened. You're gonna be back
Speaker 1: at the secular fundamentals of Asian demographics and PERNICI justly
Speaker 1: more inflation. At least it is looking forward time. In
Speaker 1: that conversation with you, Robert, tis great to cash up.
Speaker 1: We hold up, Robert Tip, patm Chief investment Strategist. Thank you, Seth.
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