WEBVTT - Surveillance: Tipp Says Yields Have Peaked 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa Brownwitz Jay Leye. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance, an Apple podcast, Suncloud, Bloomberg 0:00:23.360 --> 0:00:29.280 dot Com and of course on the Bloomberg terminal. Markey 0:00:29.320 --> 0:00:31.680 the Town joined this now Faga Bust the management Senior 0:00:31.880 --> 0:00:34.440 port folio manager Mark. I'll start with a question I 0:00:34.440 --> 0:00:36.880 started this morning with with Lisa. You'll ten ure yield 0:00:36.880 --> 0:00:41.440 one eight. Why we downhead? Uh, Well, I think we're 0:00:41.479 --> 0:00:45.239 down here because the treasury curve is really, i think 0:00:45.320 --> 0:00:47.720 kept suppressed by what the FETE is going. They anchored 0:00:47.760 --> 0:00:50.360 short rates low, they've been really buying a lot of 0:00:50.360 --> 0:00:54.440 the longer duration UH treasury bonds long term and so 0:00:54.560 --> 0:00:57.640 really there's no place with the demand for treasury securities 0:00:57.640 --> 0:00:59.360 to go except the middle part. So you see a 0:00:59.360 --> 0:01:01.360 lot of express seeing of emotion in the middle park. 0:01:01.600 --> 0:01:05.520 I think it shows people are worried about inflation, yes, 0:01:05.600 --> 0:01:07.520 but they're also worried about what if you called me 0:01:07.600 --> 0:01:11.240 slows down from deceleration or from COVID. Also, it is 0:01:11.360 --> 0:01:13.319 high as he pointed out, compared to guilds and the 0:01:13.360 --> 0:01:16.679 rest of the world, the dollars stabilized. So really attenduere 0:01:16.920 --> 0:01:20.679 one thirty plus or minus looks like a pretty decent investment. So, Markie, 0:01:21.000 --> 0:01:24.039 based on your view if this perhaps has driven by 0:01:24.080 --> 0:01:26.040 what the Federal Reserve is doing, based in the fact 0:01:26.040 --> 0:01:28.560 that you could see foreign buying, do you count on 0:01:28.760 --> 0:01:32.000 yields remaining around here for the foreseeable future when you decide, 0:01:32.200 --> 0:01:36.120 you know what equities still look like A bye yes, 0:01:37.040 --> 0:01:40.880 number one, Because Sharon Powis told us so. He thinks 0:01:40.920 --> 0:01:45.400 inflation is transitory. He wants to lengthen out that period 0:01:45.400 --> 0:01:47.880 where we look at even reducing the amount of purchases 0:01:47.880 --> 0:01:50.840 they're doing with treasuries and mortgages. So I believe what 0:01:50.880 --> 0:01:53.400 he says. They have the power to do that, And 0:01:53.480 --> 0:01:55.760 I think he's holding his breath when he thinks about 0:01:55.760 --> 0:01:59.000 what if we very slight and taper and we see 0:01:59.040 --> 0:02:01.200 some explosion in the marketplace. So I think they don't 0:02:01.200 --> 0:02:03.760 want to see that. They're going to keep on this course. Uh, 0:02:03.880 --> 0:02:07.080 what they think about inflation coming down is more important 0:02:07.120 --> 0:02:09.400 than what the market things, and also their other goal 0:02:09.400 --> 0:02:11.720 of employment. They still claim that there's a lot of 0:02:11.760 --> 0:02:14.000 slack in the labor market, so that gives them a 0:02:14.000 --> 0:02:16.480 lot of pace even if inflation isn't really doing what 0:02:16.520 --> 0:02:18.880 they'd like it to do. How important have earning season 0:02:18.960 --> 0:02:22.840 been this year? Well, I think they've shown what people 0:02:22.919 --> 0:02:25.880 expected are very very strong in the first quarter, and 0:02:25.919 --> 0:02:28.840 I think we may once again be surprised in the 0:02:28.880 --> 0:02:32.000 second quarter to see earns being much stronger than maybe 0:02:32.080 --> 0:02:33.600 we might have thought. We might have looked for a 0:02:33.639 --> 0:02:36.320 little bit of margin pressure, and my feeling is we're 0:02:36.320 --> 0:02:40.280 going to see companies continue to operate with less their 0:02:40.320 --> 0:02:43.920 sales are going up, they maintain their their labor force costs, 0:02:43.919 --> 0:02:46.760 either through productivity or just not hiring. So I think 0:02:46.760 --> 0:02:49.680 we may have another very pleasant surprise um in the 0:02:49.720 --> 0:02:52.480 second quarters. You start to roll that out, not just 0:02:52.560 --> 0:02:54.560 over the course of this earning season, but really since 0:02:54.680 --> 0:02:57.080 last earning season mid March, we've seen the Russell two 0:02:57.120 --> 0:02:59.679 thousand down about seven percent from its peak, and over 0:02:59.720 --> 0:03:02.160 the same time, the NAZAC one hundred is up about 0:03:02.880 --> 0:03:04.600 over that time. What do you want to do with 0:03:04.639 --> 0:03:07.840 small caps now, Well, I think that's the thing you 0:03:07.880 --> 0:03:11.320 see also in ASDAC it was very very large. Uh, 0:03:11.400 --> 0:03:14.359 you might say high growing safety kind of stalks the 0:03:14.480 --> 0:03:17.760 thing they have so far outpaced the rest of the market. 0:03:18.280 --> 0:03:20.800 Good example was the airlines which you cited, and I 0:03:20.800 --> 0:03:23.520 think that's typical. Lots of stock, small cap or even 0:03:23.560 --> 0:03:26.360 some larger are really down from their peak in March. 0:03:26.480 --> 0:03:29.880 By ten fifteen, they've even and I think that shows 0:03:29.880 --> 0:03:32.240 that mixture is people want to be in the market, 0:03:32.240 --> 0:03:34.920 but they want something safe, so they keep sticking with 0:03:34.960 --> 0:03:37.040 the thangs and things keep going up, and the rest 0:03:37.080 --> 0:03:39.680 of the market seems to be churning around small cap, 0:03:39.760 --> 0:03:42.800 MidCap or even large camp market just quickly and finally 0:03:42.840 --> 0:03:44.520 even I've got a chat about this in the past, 0:03:44.600 --> 0:03:46.160 just how much sick the countity is left in this 0:03:46.200 --> 0:03:50.280 credit market. Does the cycle matter anymore to what's going on? No, 0:03:50.400 --> 0:03:52.160 I don't think we have a cycle anymore. I think 0:03:52.160 --> 0:03:54.280 the FED determines that were on a you might say, 0:03:54.280 --> 0:03:57.520 a secular path of low growth around the very very 0:03:57.600 --> 0:04:01.080 low range of meals what a cool market. We've got 0:04:01.080 --> 0:04:03.080 to follow up on that another time. You know, I'm 0:04:03.120 --> 0:04:05.880 fascinated by this call of yours. MARKT. Bittel of Wells 0:04:05.880 --> 0:04:14.080 Fargo MESA Management, Senior portfolio Managers patent fixed income. Chief 0:04:14.120 --> 0:04:17.400 investment strategist ahead of Global Bonds, Rob Steve Major of 0:04:17.520 --> 0:04:19.839 hsp C says we cannot afford higher rates, that this 0:04:19.960 --> 0:04:22.000 might be the cycle peak for the yield curve already. 0:04:22.240 --> 0:04:25.320 What do you say, Yeah, I think we have seen 0:04:25.400 --> 0:04:28.400 the peak in rage probably for the cycle. There could 0:04:28.440 --> 0:04:32.160 be another twin peak later on UM, but I think 0:04:32.480 --> 0:04:36.240 that is one of the underpinnings of the long term decline, 0:04:36.400 --> 0:04:40.679 secular decline in rates, aging demographics and high debt burdens 0:04:41.520 --> 0:04:44.440 that economies that are incredibly indebted, and there's been a 0:04:44.440 --> 0:04:48.839 secular rise in debt to GDP ratios across UH the 0:04:48.880 --> 0:04:52.599 developed world, and the upshot of that is you simply 0:04:52.600 --> 0:04:55.200 cannot afford the higher interest rates that you had before. 0:04:55.240 --> 0:04:57.520 So I think it's entirely reasonable to expect we're going 0:04:57.560 --> 0:04:59.839 to get a lower peak for rates in the cycle 0:04:59.880 --> 0:05:02.760 that last time, and we've probably already seen it. Bro, 0:05:03.520 --> 0:05:05.240 Is that consensus at this point? I mean, that's a 0:05:05.240 --> 0:05:07.960 pretty bold call that you and Steve Major over HSPC 0:05:08.000 --> 0:05:10.440 are making that we have seen the peak in ten 0:05:10.520 --> 0:05:13.880 year treasure yields for this economic cycle. Are people prepared 0:05:13.880 --> 0:05:17.560 for that? Yeah? Well, it isn't him. It is. If 0:05:17.600 --> 0:05:21.360 you ask forecasters, and forecasters have been consistently to barish 0:05:21.400 --> 0:05:23.120 on the market, they would say, no, you know you're 0:05:23.120 --> 0:05:26.279 gonna see two per cent or what have you. Um, 0:05:26.320 --> 0:05:29.520 And that's that's entirely reasonable given the economic picture that 0:05:29.520 --> 0:05:31.520 that you're looking at. But if you look at the market, 0:05:31.560 --> 0:05:34.440 you look at the price action in the market, you're 0:05:34.440 --> 0:05:38.480 seeing something that you haven't seen for for decades or 0:05:38.520 --> 0:05:41.080 even hundreds of years, which is an interest rate cycle 0:05:41.560 --> 0:05:44.520 that runs almost exclusively through the front end of the 0:05:44.560 --> 0:05:48.000 Yeok curve. So when you're on the gold standard, there 0:05:48.080 --> 0:05:51.880 was faith that the central bank would control inflation because 0:05:52.200 --> 0:05:54.560 the fiscal could not get out of control. The back 0:05:54.640 --> 0:05:56.840 end of the Yolk curve would be relatively stable as 0:05:56.880 --> 0:06:00.400 short rates would go up and down, And you didn't 0:06:00.400 --> 0:06:04.200 see that. You didn't see that. In when there was 0:06:04.240 --> 0:06:06.680 a fear of the Fed raising rates, the entire yield 0:06:06.720 --> 0:06:09.520 curb went up. But what we've seen this time with 0:06:09.560 --> 0:06:11.560 the dot plot and the dot plot I think has 0:06:11.560 --> 0:06:13.760 been a nuisance for the Fed for a long time 0:06:13.839 --> 0:06:15.599 in a lot of ways, or at least for people 0:06:15.600 --> 0:06:18.840 trying to explain what's going on there. But seeing those 0:06:18.880 --> 0:06:22.360 scenarios where if you have high inflation, the FED is 0:06:22.360 --> 0:06:26.320 going to get into action. The you already have a 0:06:26.400 --> 0:06:29.760 large swath of the participants at that meeting that are 0:06:29.760 --> 0:06:32.359 ready to go uh. And what you saw on the 0:06:32.360 --> 0:06:34.520 back end was the markets that are you know, we 0:06:34.640 --> 0:06:39.080 have faith that in a overheating scenario, the feed is 0:06:39.080 --> 0:06:41.919 going to contain inflation and therefore long range do not 0:06:42.080 --> 0:06:45.200 need to go up. And in fact, if the Fed 0:06:45.960 --> 0:06:48.599 is a balanced group, and up until this point, I 0:06:48.600 --> 0:06:51.080 think market had been leaning towards they're gonna stay on 0:06:51.200 --> 0:06:54.240 hold too long and let inflation get away. If this 0:06:54.320 --> 0:06:56.760 is a balanced group, that we're gonna have lower growth 0:06:57.000 --> 0:06:59.360 than we expected six months ago in the long run, 0:06:59.560 --> 0:07:01.560 and you're gonna have lower rates in the long run. 0:07:01.920 --> 0:07:04.320 Talking about lower growth, let's talk about real yields. We're 0:07:04.360 --> 0:07:06.520 sitting in the ballpark of negative a hundred and five 0:07:06.560 --> 0:07:10.720 basis points. Will they go even more deeply negative? Well, 0:07:10.760 --> 0:07:12.760 I think the thing that people have to wrap their 0:07:12.760 --> 0:07:16.040 mind around is you're kind of in a a new 0:07:16.080 --> 0:07:20.200 permanent area for real rates. I mean in in UH. 0:07:20.280 --> 0:07:23.200 In my view, the FED funds rate is just about zero. Now. 0:07:23.480 --> 0:07:25.560 The peak of the last cycle was around two and 0:07:25.640 --> 0:07:29.120 three eights. The peak this cycle will probably be significantly 0:07:29.160 --> 0:07:32.320 lower than that because of these secular fundamentals. And if 0:07:32.320 --> 0:07:34.600 you're gonna be averaging a FED funds rate that's maybe 0:07:34.600 --> 0:07:37.960 a half percent or one percent or less, the cash 0:07:38.080 --> 0:07:40.880 rate in real terms is going to be significantly negative 0:07:41.080 --> 0:07:43.240 the vast majority of the time. And you have to 0:07:43.240 --> 0:07:47.160 get used to seeing a negative real yield term structure, 0:07:48.200 --> 0:07:50.000 So yields are going to be in these lower range. 0:07:50.120 --> 0:07:52.040 You know, when things are really bad, maybe the tenure 0:07:52.080 --> 0:07:54.920 rallies to a half percent, And as we're seeing, if 0:07:54.920 --> 0:07:58.520 the economy is searing hot and inflation is soaring, you 0:07:58.600 --> 0:08:01.000 might get a two percent ten youre uh. And if 0:08:01.040 --> 0:08:03.480 that's the case and inflation on average is two percent 0:08:03.560 --> 0:08:05.960 on the CBI, there's gonna be a lot of negative 0:08:06.040 --> 0:08:08.440 real yields. So if some bunts there robs, so let's 0:08:08.440 --> 0:08:10.440 put a boone on this, or we start this conversation 0:08:10.440 --> 0:08:12.040 by asking you whether you think we've seen a cycle 0:08:12.080 --> 0:08:15.240 peak and yields you suggested we had. I want to 0:08:15.280 --> 0:08:17.760 just really make it clear why your positioned on credit 0:08:18.200 --> 0:08:20.920 and how it relates to that view on shorts and 0:08:21.000 --> 0:08:24.640 making that cycle cool already right. Well, I think, you know, 0:08:24.680 --> 0:08:27.800 what we've typically seen is that you get an economic recovery, 0:08:27.840 --> 0:08:30.840 have a big tightening and spreads, but as that economic 0:08:30.920 --> 0:08:35.840 recovery progresses, that spreads tend to stay fairly narrow, and 0:08:35.840 --> 0:08:38.880 that that's likely to be the case this time. UM. Now, 0:08:38.960 --> 0:08:41.520 the one thing we haven't talked about is that taper, 0:08:41.960 --> 0:08:46.880 and I think, um, you know, uh, summers are a 0:08:47.160 --> 0:08:52.520 difficult period for the market, and UM, what we're kind 0:08:52.520 --> 0:08:54.800 of setting up for right now is to get to August, 0:08:54.880 --> 0:08:57.000 have interest rates pretty low, and have the FED coming 0:08:57.040 --> 0:09:00.160 and shock the market with their taper announcement. So you know, 0:09:00.200 --> 0:09:02.440 I think, you know, this is going to be a 0:09:02.480 --> 0:09:06.400 transition year. That's been our view all year, where rates 0:09:06.480 --> 0:09:09.400 are cresting. I think we have seen the highs, but 0:09:09.440 --> 0:09:12.280 it's not going to be a completely smooth ride as 0:09:12.320 --> 0:09:14.760 we go forward, and that will jar credit a bit 0:09:14.800 --> 0:09:17.560 as we go through. UM. But in general, looking twelve 0:09:17.640 --> 0:09:19.559 to twenty four months out, I think you're going to 0:09:19.640 --> 0:09:23.160 get some additional outperformance from credit. And the surprising thing 0:09:23.600 --> 0:09:26.640 that we've been saying, uh and and believe to be 0:09:26.679 --> 0:09:28.880 the case twelve to twenty four months out is that 0:09:29.000 --> 0:09:32.920 the yield the rolldown factoration portion of the bond market 0:09:33.000 --> 0:09:36.319 is also going to contribute, and people staying at their 0:09:36.320 --> 0:09:39.600 strategic as allocations are probably gonna get the best results. 0:09:40.200 --> 0:09:42.720 A lot of people watching the show have probably thought 0:09:42.720 --> 0:09:45.920 it has become bond show today because that has been 0:09:45.920 --> 0:09:48.120 where the entire focus has been. But that's where the 0:09:48.120 --> 0:09:50.520 focus has been for equities to And when you say 0:09:50.520 --> 0:09:53.960 that monetary policy may be executed entirely on the front 0:09:54.040 --> 0:09:56.240 end during this cycle, it makes me think that we're 0:09:56.240 --> 0:09:58.840 going to see a much flatter yield curve going forward. 0:09:58.880 --> 0:10:01.160 If that is the case, which is a bad thing 0:10:01.480 --> 0:10:03.480 for banks, which has been a big call for a 0:10:03.520 --> 0:10:06.000 lot of equity investors. Is that what you're saying that 0:10:06.040 --> 0:10:11.400 we've already seen the peak in yield curve steepening? Yeah? 0:10:11.440 --> 0:10:15.000 I think so. Yeah. I mean if um, uh, you know, 0:10:15.120 --> 0:10:17.480 long rates on the tenure are going to be peaking, 0:10:17.559 --> 0:10:20.280 you know, sub two percent bouncing around in this area. 0:10:20.880 --> 0:10:25.360 Typically financials they like to see higher yields. Uh and um, 0:10:25.840 --> 0:10:28.280 you know that doesn't look to be in the cards. 0:10:28.280 --> 0:10:30.840 It looks like you're going to have stability. The one 0:10:30.920 --> 0:10:34.080 thing that the credit cycle has going for it, and 0:10:34.080 --> 0:10:37.839 that would include financials is the really good asset performance. 0:10:38.320 --> 0:10:41.600 There are concerns about asset quality as at the early 0:10:41.640 --> 0:10:44.560 stages of the crisis, and I think a lot of 0:10:44.559 --> 0:10:47.000 those concerns, you know, are falling by the wayside as 0:10:47.000 --> 0:10:49.640 we go forward, as we get information you know from 0:10:49.679 --> 0:10:52.960 the bank's going on here. So I think the underlying 0:10:53.000 --> 0:10:58.199 fundamentals of an expanding economy of corporations that have liquefied, 0:10:58.520 --> 0:11:01.720 that are able to roll out down, extend of maturities 0:11:01.760 --> 0:11:05.040 out uh, you know, continues to provide a background where 0:11:05.040 --> 0:11:08.280 there a lot of opportunities across the credit spectrum from 0:11:08.320 --> 0:11:12.360 you know, local and hard currency, emerging markets, UH, invest 0:11:12.440 --> 0:11:15.319 regrading and how your proper bonds as well as structural products. 0:11:16.000 --> 0:11:18.440 Rob going to catch up. I love the team of PGM. 0:11:18.440 --> 0:11:20.920 It always come out with a call, a proper call, 0:11:21.080 --> 0:11:23.320 Robert Tip of PGM. Rob going to hear from your mate. 0:11:23.559 --> 0:11:29.920 Good to see you too. Let's turn to David Page 0:11:29.920 --> 0:11:32.920 of Acts for Investment Managers, the head of macro Economic staates. 0:11:32.960 --> 0:11:34.960 Let's start there. Just your response to the data, not 0:11:35.040 --> 0:11:38.640 just this morning, but through this week. So I think 0:11:38.679 --> 0:11:40.680 you've got a very mixed bag. I mean, the consumer 0:11:40.760 --> 0:11:44.320 thankfully actually coming through reasonably solidly here, but we have 0:11:44.440 --> 0:11:47.760 seen a relatively week months and months quarter across Q 0:11:47.960 --> 0:11:50.320 two after we've seen that obviously, that huge surge come 0:11:50.400 --> 0:11:53.280 through in March. What caught our eye over the last 0:11:53.280 --> 0:11:56.360 week has been the drop in weekly consumer confidence as well. 0:11:56.559 --> 0:11:59.800 We've seen the fastest retracement in consumer confidence over the 0:12:00.080 --> 0:12:02.719 three weeks than we've seen since last December. So there's 0:12:02.760 --> 0:12:05.199 a really mixed bag here. Yes, you're seeing price pressures 0:12:05.280 --> 0:12:08.280 come through, but those we recognize to be frictions to 0:12:08.280 --> 0:12:12.000 the economy, not something that's that's necessarily reflecting strong demand. 0:12:12.080 --> 0:12:14.360 That's something that's actually sort of a headwind to growth 0:12:14.400 --> 0:12:17.160 if you like. You've had industrial production a little bit 0:12:17.160 --> 0:12:20.200 softer than expected, manufacturing dipping again for the second time 0:12:20.240 --> 0:12:23.280 in the quater um, and some of the surveys, you know, 0:12:23.320 --> 0:12:27.079 Empire State survey yesterday, through the Roof series high others 0:12:27.120 --> 0:12:28.640 just starting to come off a little bit. And we 0:12:28.679 --> 0:12:30.640 think back to that non manufacturing I s M which 0:12:30.679 --> 0:12:33.920 also included a sharp drop in the employment number. And 0:12:33.960 --> 0:12:36.160 there are some pretty mixed messages come through here. Now. 0:12:36.160 --> 0:12:38.480 I think you know the backdrop is Q two GDP 0:12:38.640 --> 0:12:40.800 number looked pretty solid we've been looking for a cent 0:12:40.840 --> 0:12:43.120 annualized for some time. We'll find tune on the back 0:12:43.120 --> 0:12:45.520 of these numbers, but it looks pretty consistent in that area. 0:12:45.800 --> 0:12:47.400 But I think that it's going to be slightly more 0:12:47.480 --> 0:12:49.959 challenging for Q three UM, and that's one of the 0:12:50.000 --> 0:12:51.640 things that it's going to be watching when it thinks 0:12:51.679 --> 0:12:53.720 about sort of trying to send that signal as to 0:12:53.800 --> 0:12:56.040 just when it will be watching. As you say, it's 0:12:56.040 --> 0:12:57.640 really hard to read the data. It's really hard to 0:12:57.640 --> 0:12:59.160 read what it should mean for the body market two 0:12:59.240 --> 0:13:01.440 yield to higher by a couple of basis points one 0:13:01.520 --> 0:13:03.200 or two through the curve here. But on the week 0:13:03.760 --> 0:13:06.240 we've had that hot CPI, that hot PPI, that hot 0:13:06.280 --> 0:13:08.840 retail sales, print and yield are still lower on the 0:13:08.880 --> 0:13:11.920 week a little bit earlier today. In fact, thirty minutes ago, 0:13:11.960 --> 0:13:13.640 we asked Robert Tip of p JIM whether he thinks 0:13:13.679 --> 0:13:16.160 we've seen a cycle peak in yields. Take a listen 0:13:16.240 --> 0:13:18.760 to what rob had to say. I think we have 0:13:18.880 --> 0:13:21.959 seen the peak in rage probably for the cycle. That 0:13:22.040 --> 0:13:25.960 could be another twin peak later on, but I think 0:13:26.320 --> 0:13:29.480 that is one of the underpinnings of the long term 0:13:29.520 --> 0:13:33.880 decline secular decline in raids aging demographics and had that 0:13:34.080 --> 0:13:37.440 burdens deva page. Your reaction to that sound that response 0:13:37.440 --> 0:13:40.079 from Robert Tip of PGM. You know, I think that's 0:13:40.080 --> 0:13:42.160 probably a little bit pessimistic for the outlook for gross 0:13:42.160 --> 0:13:43.640 and I think one of the key issues here is 0:13:43.640 --> 0:13:45.679 going to be what comes through in terms of spending. 0:13:45.720 --> 0:13:48.200 We are expecting to see a very large stimulus package 0:13:48.200 --> 0:13:50.959 come through. Its not being as easy as Biden perhaps 0:13:51.000 --> 0:13:53.680 thought it might have been, but we are expecting to 0:13:53.720 --> 0:13:58.400 see in September the government actually put some significant spending 0:13:58.440 --> 0:14:00.440 programs in which we think are going to lift potential 0:14:00.440 --> 0:14:03.000 growth for the US going further forwards. It's not a 0:14:03.040 --> 0:14:06.199 deficit finance argument. This is something that we think is 0:14:06.200 --> 0:14:08.839 actually money going where it needs to go in the 0:14:08.960 --> 0:14:10.319 U S where it's not gone for some time. And 0:14:10.320 --> 0:14:12.280 I think that's going to support the outlook if we 0:14:12.360 --> 0:14:14.160 take a step back and think what the Fed things. 0:14:14.360 --> 0:14:16.079 The Fed things that the terminal rate for the Fed 0:14:16.160 --> 0:14:18.439 funds is two and a half per cent. Now, okay, 0:14:18.480 --> 0:14:20.720 we could have an argument around that twenty five basis 0:14:20.720 --> 0:14:24.200 points either side quite comfortably, but it's unusual to see 0:14:24.600 --> 0:14:28.440 bond yields topping out at such a low level. If 0:14:28.520 --> 0:14:30.240 we think that the terminal rate is going to be 0:14:30.320 --> 0:14:32.560 at noce of two percent, and I think certainly as 0:14:32.560 --> 0:14:34.200 time goes by and as we get close to that 0:14:34.240 --> 0:14:35.960 point where we are going to see the FED tightening, 0:14:35.960 --> 0:14:38.760 and we think that happens in three and not any 0:14:38.800 --> 0:14:41.400 time later, So you get closer to that than there's 0:14:41.400 --> 0:14:43.240 ten yields and the two yelds are all going to 0:14:43.320 --> 0:14:45.400 start to respect these rates going higher. So I think 0:14:45.440 --> 0:14:48.120 it's it's up to our minds. We're expecting to see 0:14:48.400 --> 0:14:51.720 yields rising. We think, you know, back to one seventy 0:14:51.760 --> 0:14:53.720 five by the end of this year is likely, or 0:14:53.800 --> 0:14:55.760 I think it could be quite a long summer. But 0:14:55.840 --> 0:14:57.720 I think we'll see them climb higher than that as 0:14:57.720 --> 0:14:59.560 we move over the next year or so. So what's 0:14:59.600 --> 0:15:01.680 the decide thing factor? Here? Is what I'm hearing from you, 0:15:01.760 --> 0:15:04.360 that it's more important to look at Washington d C 0:15:04.640 --> 0:15:06.880 and what plan they might pass, and any of the 0:15:06.920 --> 0:15:09.960 incoming data of it come in for the most part 0:15:10.080 --> 0:15:13.840 harder than expected, or have been for the past few weeks. Now, 0:15:13.840 --> 0:15:16.320 I think what we've seen from d C is going 0:15:16.320 --> 0:15:19.280 to give the economy a significant rebound across the course 0:15:19.320 --> 0:15:21.960 of this year, and we've been tailoring how our forecast 0:15:21.960 --> 0:15:24.840 a little bit lower, we think six point four one, 0:15:24.960 --> 0:15:27.520 but by and larger. Seeing a very strong rebound comes through, 0:15:27.720 --> 0:15:29.720 you're going to see the economy move into a position 0:15:29.720 --> 0:15:32.400 of excess demand, and that's something that that ultimately is 0:15:32.440 --> 0:15:34.920 going to govern how the Federal Reserve moves. I think 0:15:34.920 --> 0:15:37.760 when we look to the longer term, there are questions 0:15:37.800 --> 0:15:40.520 about whether or not there's there's scarring in the economy, 0:15:40.880 --> 0:15:43.360 um just how much readjustment the economy is going to 0:15:43.400 --> 0:15:45.360 have to take to get to get over this pandemic. 0:15:45.560 --> 0:15:47.560 But I think that's where you start looking at those 0:15:47.560 --> 0:15:49.880 longer term spending plans and you think, well, yes, there 0:15:49.920 --> 0:15:52.680 could be some downside, but there's possibly some upside coming 0:15:52.680 --> 0:15:55.200 through from here as well. So I think DC is 0:15:55.240 --> 0:15:57.200 important for the longer term, but I think in terms 0:15:57.200 --> 0:15:59.360 of what we're likely to see from the Fed and 0:15:59.440 --> 0:16:01.840 what we're like from the economy of the next six months, 0:16:01.880 --> 0:16:04.440 the stimulus that's been injected into the economy already is 0:16:04.480 --> 0:16:07.960 a key feature here, but from markets will always before 0:16:08.040 --> 0:16:12.240 looking DEVI page of acts Investor Management, Dave, You've got 0:16:12.320 --> 0:16:19.360 to catch ups on this data. Jonathan Miller has been 0:16:19.360 --> 0:16:22.360 covering this industry for decades at Miller Samuel, He's the 0:16:22.360 --> 0:16:25.760 president and chief executive officer, with incredible data and insight 0:16:25.840 --> 0:16:29.640 into the trends. Do we have housing shortage at this 0:16:29.760 --> 0:16:32.640 point in the big cities given that we're starting to 0:16:32.640 --> 0:16:34.800 see a little bit of interest or is there still 0:16:34.840 --> 0:16:38.400 a massive glut that needs to get filled. I actually 0:16:38.400 --> 0:16:41.920 think it's somewhere in between. Uh So, for example, in 0:16:42.040 --> 0:16:46.600 New York, we saw since January when we had near 0:16:46.640 --> 0:16:51.200 record inventory, we've seen inventory fall about I think the 0:16:51.240 --> 0:16:54.200 way to look at urban markets around the country is 0:16:54.240 --> 0:16:56.720 that the suburbs got all the attention. That's where the 0:16:56.760 --> 0:17:00.160 outbound migration was initially, and so I would look at 0:17:00.200 --> 0:17:04.399 the city's I'm not saying we returned exactly to normal, 0:17:04.480 --> 0:17:09.560 but clearly elevated inventory levels are coming down and we're 0:17:09.600 --> 0:17:13.760 seeing it's clearly not as tight as the suburbs are 0:17:13.800 --> 0:17:17.240 at record lows or surrounding New York and other markets 0:17:17.240 --> 0:17:20.920 that we cover. But if we're seeing inventory really fall 0:17:21.080 --> 0:17:26.040 sharply in the cities as well, because demand purchase activity 0:17:26.200 --> 0:17:31.920 has skyrocketed from year ago levels, which was the lockdown period. 0:17:32.200 --> 0:17:35.480 But even when we compare two years ago, same period 0:17:35.880 --> 0:17:38.800 we're looking at, for example, in Manhattan, sales are up 0:17:38.840 --> 0:17:44.520 about over uh second quarter two thousand nineteen numbers. But Jonathan, 0:17:44.560 --> 0:17:46.399 that's because everybody wants a deal. Have we seen the 0:17:46.400 --> 0:17:48.760 bottom and prices or is these all the bottom feeders 0:17:48.800 --> 0:17:51.879 coming in to try to pick up things cheap? I 0:17:52.320 --> 0:17:54.960 think the window is just about closed on that. If 0:17:54.960 --> 0:17:58.000 you look in an you know, at the aggregate numbers, 0:17:58.359 --> 0:18:03.760 you're really talking about market that's within three it's about 0:18:03.760 --> 0:18:06.320 three to five cent per cent below what it was 0:18:06.760 --> 0:18:09.359 in the same period two years ago, which would be 0:18:09.440 --> 0:18:14.920 the pre COVID sort of benchmark. And uh, but that 0:18:14.920 --> 0:18:18.919 that is really compressing. One thing about the city cities 0:18:18.960 --> 0:18:21.640 in general, is that rental markets are generally hit much 0:18:21.640 --> 0:18:26.679 harder than purchase markets because renters are more you know, 0:18:27.000 --> 0:18:29.119 more flexible, they're not they don't have to sell a 0:18:29.200 --> 0:18:32.680 property during a global pandemic. And what we're also seeing 0:18:32.680 --> 0:18:36.919 at the same time is in Manhattan specifically, we're seeing 0:18:37.520 --> 0:18:40.600 new leasing activity for the last three months has been 0:18:40.640 --> 0:18:43.920 at all time record levels, and so what that's doing 0:18:44.040 --> 0:18:48.400 is burning off the significant inventory and actually in some 0:18:48.480 --> 0:18:50.479 segments of the rental market. I'm not trying to be 0:18:50.600 --> 0:18:53.919 sort of sensational here, but we're actually seeing bidding wars 0:18:54.040 --> 0:18:58.920 on rental properties starting to emerge, which is highly unusual. Jonathan, 0:18:58.960 --> 0:19:01.520 You're making me so glad resigned my lease when I did, 0:19:01.560 --> 0:19:03.280 because when I did it back in the spring, I 0:19:03.320 --> 0:19:05.280 got a couple of months off, I got my rent 0:19:05.359 --> 0:19:07.840 monthly rate lower. If I were to do that now, 0:19:07.920 --> 0:19:09.239 or if I were to try to do that now, 0:19:09.280 --> 0:19:10.960 they'd send me out the door because someone else is 0:19:10.960 --> 0:19:13.159 willing to pay more. And I live down in the 0:19:13.160 --> 0:19:15.920 financial district. It's gotten a lot busier over the past 0:19:15.920 --> 0:19:18.800 couple of months. But are people like me where they 0:19:18.800 --> 0:19:21.840 want to live kind of close to offices, close to 0:19:22.040 --> 0:19:24.320 the places that they work, or has COVID changed that. 0:19:24.359 --> 0:19:26.919 Are we seeing the places even within the city that 0:19:27.000 --> 0:19:31.680 people want to habit eate different? Right? Right? Right? So 0:19:31.760 --> 0:19:34.200 that's a that's an excellent point. And we're actually seeing 0:19:34.560 --> 0:19:38.359 Wall Street firms, a number of the big ones basically 0:19:38.400 --> 0:19:41.480 say come back to work five days a week, uh, 0:19:41.920 --> 0:19:45.199 you know, and they're sort of, uh, sort of ahead 0:19:45.200 --> 0:19:48.119 of the pack. Uh. One of the one of the 0:19:48.160 --> 0:19:50.440 things we have to sort out is I think we're 0:19:50.440 --> 0:19:53.639 going to have perfect callbacks for employees are going to 0:19:53.760 --> 0:19:57.240 really ratchet up beginning in September and throughout the fall, 0:19:57.720 --> 0:19:59.600 and that's going to breathe a lot of oxygen and 0:19:59.760 --> 0:20:04.200 just level retail. And right now, as I always say, 0:20:04.240 --> 0:20:07.919 we're at peaks zoom, we're really you know that everything is, 0:20:08.080 --> 0:20:12.240 everything is sort of being recalibrated. Um. One thing that 0:20:12.440 --> 0:20:15.960 really I think is a misunderstanding too, is that work 0:20:16.080 --> 0:20:21.119