Speaker 1: This is the Bloomberg Surveillance Podcast.
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Speaker 2: Where this seth Carpenter at, the chief global economist at
Speaker 2: Morgan Stanley. Is this just about in our start? Are
Speaker 2: we all John Williams this morning and we're readjusting? I
Speaker 2: clared it with me last week at a Bloomberg event.
Speaker 2: At two point zero percent is not two point six percent?
Speaker 2: I mean, are we really talking, as Mike aludes tou
Speaker 2: there about a new inflation regime?
Speaker 3: I think you want to separate out a couple of things.
Speaker 3: One is the new inflation regime, and there if you're
Speaker 3: comparing it to where we were from the financial crisis
Speaker 3: through COVID to say, yes, right, the FED was consistently
Speaker 3: missing it's inflation target to the downside.
Speaker 4: I call it a quarter percentage point.
Speaker 3: We're above, clearly above target now and over the next
Speaker 3: several years they want to bring it down, but I'm
Speaker 3: not sure they want to go back to the old
Speaker 3: days of you know, being below two percent on a
Speaker 3: regular basis. So if they're going to be averaging a
Speaker 3: little higher during expansions, call it a tenth or two above.
Speaker 3: You know, you're talking about twenty five to fifty basis
Speaker 3: points high inflation, so that's got to be there. I
Speaker 3: don't think we're talking about the difference between two percent
Speaker 3: inflation and three percent of I.
Speaker 2: Want to tell you on radio on television where we're
Speaker 2: heading here, what half are we have. We have Dark
Speaker 2: Carpenter with this on the broader economics of this moment.
Speaker 2: Ira Jersey schedule to join us just exquisite here on
Speaker 2: fixed income dynamics, and then we do even better. Mark
Speaker 2: Cabana is going to darken the door. Who's just expert
Speaker 2: on your world about you know, the different tranches of
Speaker 2: the auctions.
Speaker 5: I want to dig into what the implications are of
Speaker 5: this announcement sas and to me, I'm looking at the
Speaker 5: idea that they're really going to force the front end
Speaker 5: to a lot of the heavy lifting here. Does that
Speaker 5: pose a greater risk than people realize.
Speaker 3: So my view is no, the way I would think
Speaker 3: about it. There was a speculation that back and forth
Speaker 3: a little bit earlier, did the Treasury just react to
Speaker 3: the market. And I think you want to remember that
Speaker 3: the folks there at Treasury, Josh Frost, the assistant secretary,
Speaker 3: the career staff in debt management, they have a structure now,
Speaker 3: they have a framework for how to think about what
Speaker 3: to issue, and they're looking at what is the market
Speaker 3: saying about where the market wants to pay up and
Speaker 3: where the market's demanding a discount, and at the margin,
Speaker 3: they'll lean a little bit more to where the market
Speaker 3: wants the paper and lean a little bit away from
Speaker 3: the place where the market's pulling back. And we've seen
Speaker 3: over the past several months a big sell off in
Speaker 3: the long end. It showed up, you know, in models
Speaker 3: speak and the term premium, and they're paying attention to that.
Speaker 3: It's not that one week to the next, or one
Speaker 3: month to the next, or even one quar to the next,
Speaker 3: is it sustained.
Speaker 5: What we are seeing is very much a strong move
Speaker 5: on the long end in that thirty year yield plunging
Speaker 5: back below five percent. As we were talking about do
Speaker 5: you think I think that this indicates that really what
Speaker 5: we're seeing in yields is entirely a supply driven story
Speaker 5: more than anything in terms of an economic read on
Speaker 5: strength and inflation in the US.
Speaker 3: So no, it's so hard depending on any single thing.
Speaker 3: When I talk to our clients here in New York,
Speaker 3: in London, around the world who are trading in treasuries,
Speaker 3: there are a whole set of different narratives, one of
Speaker 3: which has been supplied. People have been worrying about the deficit,
Speaker 3: which is exactly why Secretary Yellen came out and said
Speaker 3: it's not the deficit. People are worrying about stronger growth.
Speaker 3: Q three GDP data was very strong, There's no two
Speaker 3: ways about it, and so that contributed to it. Other
Speaker 3: people are worrying about is there going to be a
Speaker 3: pullback from risk by global investors.
Speaker 4: Other people are looking at the back of Japan.
Speaker 3: We just had that meeting right where they effectively de
Speaker 3: facto got rid of yield crop control. So it's not
Speaker 3: just one single thing, it's everything coming together.
Speaker 5: So what's your compass at a time where we're expecting
Speaker 5: the FED to come out today too in varying shades
Speaker 5: of we have no idea and we will see just
Speaker 5: along with you, what is your guiding loadstar.
Speaker 3: So we're trying to figure out, along with the Fed,
Speaker 3: sort of what's going on with the economy. The strong
Speaker 3: Q three data and notwithstanding there are some signs of
Speaker 3: the economy slowing down. The last jobs report super strong,
Speaker 3: but if you look at the trend over the past
Speaker 3: eighteen month, clear downward trend. If you look at the
Speaker 3: GDP data, consumption spending holding in, but a lot of
Speaker 3: the strength was in inventories. Capex was not very strong
Speaker 3: at all, and so we are seeing that slowing. And
Speaker 3: so what we think is the Feds look in the
Speaker 3: same data we are. They're driving by feel a little
Speaker 3: bit and they're not going to hike today. We don't
Speaker 3: think they're going to hike in December because inflation just
Speaker 3: keeps undershooting their own forecast for where they thought inflation
Speaker 3: was going to be this year.
Speaker 2: What does the job dynamic look like with an ellen
Speaker 2: Zetner's sub one percent Q four GDP.
Speaker 3: Well, I think there This is where we want to
Speaker 3: keep in mind that there's so many swings from one
Speaker 3: quarter the next to some of the spending data. Like
Speaker 3: I said, the inventory, the numbers, that was never going
Speaker 3: to be the primary driver.
Speaker 1: So she starts giving you gloom on the job economy.
Speaker 4: Not at all.
Speaker 3: I will say that we have a Morgan Stanley Ellen
Speaker 3: and I and the rest of the team have been
Speaker 3: consistent from the beginning of this hiking cycle to say,
Speaker 3: the Fed's gonna hike, They're going to bring down inflation,
Speaker 3: but we are not going into recession.
Speaker 4: It is not doing gloom.
Speaker 2: Well, she's expert on the American consumer. What is Zenner
Speaker 2: when she gets fired up?
Speaker 1: You know she does.
Speaker 2: When Zender gets fired up about the American consumer, what
Speaker 2: is she saying?
Speaker 3: Lots of things, but in particular, one of the key
Speaker 3: risks that maybe people are overlooking for why there should
Speaker 3: be a slowdown in the fourth quarter is student loans. Right,
Speaker 3: there is a moratorium on student loans that's been lifted.
Speaker 3: We're starting to see that payback starting to happen, and
Speaker 3: that has to crimp consumer disposable incomes.
Speaker 4: That matters durable goods.
Speaker 6: Right.
Speaker 4: Interest rates are high, credit card rates are high.
Speaker 3: People financing cars and other things, it's just costing more
Speaker 3: and so they'll pull back on the spending.
Speaker 1: It just extraorded her. Seth Carpenter, thank you so much,
Speaker 1: really really appreciate it.
Speaker 2: With Morgan's stay, he writes piercing notes for Bank of America.
Speaker 1: There's no other way to put it. Out of US
Speaker 1: rates strategy, He's aged in the.
Speaker 2: Last ten minutes. Mark Cabana joins us this morning. So
Speaker 2: I'm like refunding, so what, I don't care. Everybody's in
Speaker 2: a ladder. It comes out, and to me it was
Speaker 2: sort of I don't you know, I really don't care.
Speaker 2: Jenny Allen said, we're gonna do short paper. Yeah, we're
Speaker 2: gonna do long paper. But we're the United States. Our
Speaker 2: listeners are viewers who are not sophisticated. Do they need
Speaker 2: to fear the fiscal system of America?
Speaker 7: No, you shouldn't fear the fiscal system because the US
Speaker 7: economy is still going to be very robust.
Speaker 8: There will be buyers for treasury paper.
Speaker 7: It's just a matter of at what level will they
Speaker 7: step in, And we've had a relative lack of buying recently,
Speaker 7: but that's meant that yields have had to adjust, and
Speaker 7: as they've adjusted, that should incentivize more investors to think
Speaker 7: about owning bonds and we do think that rates are
Speaker 7: going to keep rising or they're going to stay elevated. Really,
Speaker 7: until you see one of two things. Number One, until
Speaker 7: you see the macro data slow, we don't think that
Speaker 7: you've really seen that yet. Or two until you see
Speaker 7: d risking, until you see investors who think, you know
Speaker 7: what rates are kind of high, really yields almost a
Speaker 7: two and a half percent at the tenure point. That's
Speaker 7: a decent own and maybe I should think about de
Speaker 7: risking in my portfolio.
Speaker 1: This is such a valuable conversation.
Speaker 2: Then I got to get to what we see on
Speaker 2: balance sheets right now, mark to market and the rest
Speaker 2: of it in bonds.
Speaker 1: But let's stay on this theme right now of our new.
Speaker 9: Higher yield regime. How far out are you in the longer?
Speaker 9: I mean, if take any given yield, any given spread,
Speaker 9: is there a cabana one year, is it a cabana
Speaker 9: three years? How do you see the regime of longer?
Speaker 7: Well, we just think that rates are going to have
Speaker 7: to stay higher for longer. Not to reiterate the Fed mantra,
Speaker 7: but we really believe it because we've seen an economy
Speaker 7: that's been so resilient in the face of relatively elevated
Speaker 7: interest rates. And as long as that happens, that just
Speaker 7: is going to mean that the f it doesn't have
Speaker 7: to cut for a while. Now, when I think about longer,
Speaker 7: I personally think about five years plus.
Speaker 1: Oh wow, okay, my attention.
Speaker 7: Just because you know, most investors who really focus on
Speaker 7: liquidity and liquidity management, they think generally two years, three years.
Speaker 7: But when I think about intermediate to long end, I
Speaker 7: think about five years plus.
Speaker 2: Okay, And I'm going to invent this phrase right now.
Speaker 2: I haven't seen it anywhere else. I want to copyright
Speaker 2: on this.
Speaker 1: If you use it. Is it normal for longer?
Speaker 2: Is that really what we're talking about, is we're back
Speaker 2: to a normal rate regime.
Speaker 7: Well, it's certainly we're back to a regime that looks
Speaker 7: a lot more similar to the pre financial crisis than
Speaker 7: the post financial crisis.
Speaker 1: You've got a five year window on that. So what
Speaker 1: maturity do you buy?
Speaker 2: I'm in cash, I'm really comfortable at Bank of America.
Speaker 2: What maturre do you buy given a five year normal
Speaker 2: for longer view?
Speaker 7: Well, it really depends upon what your overall investment horizon
Speaker 7: is and where your preferences are. We think that if
Speaker 7: you're focused at the front end, you probably we want
Speaker 7: to be neutral to slightly overweight your benchmark. And if
Speaker 7: you're a more long term investor, we think that you
Speaker 7: at best want to be neutral right now, and you
Speaker 7: want to stay neutral until you see those signs of
Speaker 7: feedback that tell you that higher interest rates are finally
Speaker 7: slowing the economy, not just one data point here or there,
Speaker 7: but in the tier one stuff in labor more clearly
Speaker 7: an inflation. You want to stay neutral until you see
Speaker 7: those signs, or until you believe that there's a clearer
Speaker 7: and more definitive negative feedback from risk assets, which I
Speaker 7: don't think that we have really seen sufficiently yet.
Speaker 2: I love to bust Brian moynihan's chops because he, like
Speaker 2: no other CEO, quotes his research staff and I'll go
Speaker 2: blah blah blah about Bonzi and his own Cabana says,
Speaker 2: So let's get the report from Cabana that you would
Speaker 2: give to Brian.
Speaker 1: Moynihan right now.
Speaker 2: I got balance sheets, nationwide, mark to market I get,
Speaker 2: and I got everything else with massive bond losses, priced down,
Speaker 2: yield up. Should our listeners and viewers be afraid of
Speaker 2: this non marked market garbage on balance sheets.
Speaker 7: Well, I think you're talking about bank balance sheets, and
Speaker 7: we do appreciate that. Brian reads our research. He's a
Speaker 7: staunch supporter, and we really do appreciate that. We think
Speaker 7: that what banks are doing right now is that they
Speaker 7: are really prizing liquidity. They really want to hold as
Speaker 7: much liquidity as possible. They're choosing to hold cash, they're
Speaker 7: keeping reserves with the FED, and they're not buying bonds,
Speaker 7: they're not buying treasuries or mortgages, and they're prizing liquidity
Speaker 7: because they know that they need to meet their outflow needs.
Speaker 7: They know that their securities book is not particularly liquid
Speaker 7: because it's so low in value. You don't want to
Speaker 7: sell and realize the loss. We saw what happened with
Speaker 7: some of the regional band.
Speaker 6: So what do you do?
Speaker 1: This is the key thing.
Speaker 8: So what do you do if you're a bank?
Speaker 1: What do you do if your bank?
Speaker 2: If you've got all this out there and you don't
Speaker 2: want to sell, just like you said, but things can happen,
Speaker 2: things can change.
Speaker 1: How do you process that reality?
Speaker 7: If you're a bank, what you're doing right now as
Speaker 7: you're holding that is the game. That's why the Fed
Speaker 7: shrunk their balance sheet through QT by a trillion dollars,
Speaker 7: and you've seen bank cash holdings not move down very
Speaker 7: much at all. They are bidding up on the liability
Speaker 7: side of the balance sheet. They're issuing CDs, time deposits, etc.
Speaker 7: To take in more money because they're seeing retail outflows.
Speaker 7: And then they're holding cash and they're going to continue
Speaker 7: to do that until they see signs that the economy
Speaker 7: is turning, until they know that their loan growth is
Speaker 7: really slowed down and maybe negative on a year over
Speaker 7: year six month average or whatnot. And they're gonna wait
Speaker 7: until the economy slows more meaningfully to extend out the
Speaker 7: curve and buy those bonds. Right now, banks are not
Speaker 7: buying duration. They've been shrinking their treasury and agency holdings,
Speaker 7: and they're going to wait to add duration until they
Speaker 7: see definitive signs that the economy is turned. And so again,
Speaker 7: what banks are doing right now, it's holding out liquidity
Speaker 7: because that is the most valuable thing that they seem
Speaker 7: to believe that what.
Speaker 2: Does holding out liquidity mean for mere mortals that can't
Speaker 2: hold out liquidity? Small business? Torsten Slocke at Apollo talks
Speaker 2: about ten percent small business loans as well. I saw
Speaker 2: a thirty one percent charge card the other day. It
Speaker 2: wasn't Bank of America, of.
Speaker 1: Course, thirty one percent charge card interest rate the other day.
Speaker 4: What does the public.
Speaker 2: Do given price down, yield up banks saying I'm scared stiff,
Speaker 2: I got a whole cash.
Speaker 8: Look, it's a tough time to be a borrower. I
Speaker 8: think we know that, right.
Speaker 7: It's tough time to move, it's a tough time to
Speaker 7: buy a home, it's a tough time to be a
Speaker 7: business if you need a loan. And that's exactly what
Speaker 7: monetary policy is trying to do, right, It's trying to
Speaker 7: slow down activity by reducing demand for loans and borrowing.
Speaker 7: And so if you're a small business and you do
Speaker 7: need a loan, well you need to think about, Okay,
Speaker 7: what other liquidity sources do I have? Can I draw
Speaker 7: on any other type of liquidity? And then you've got
Speaker 7: to ask yourself do I really need to expand? Do
Speaker 7: I need to make that next investment? And you got
Speaker 7: to make sure that you can clear a much higher
Speaker 7: hurdle rate in order to justify those costs.
Speaker 8: That's how monetary policy works.
Speaker 7: It should slow down activity through the lending channel, and
Speaker 7: to some extent we're seeing that, but it hasn't happened,
Speaker 7: I think to the extent of the FED, like Mark.
Speaker 2: Commander, thank you so much. With the Bank of America
Speaker 2: joining us now to begin strong on this day of
Speaker 2: a Federal Reserve meeting is Dominic Constem. He's head of
Speaker 2: macro strategy at Mosile Americas. For years literally iconic Credit
Speaker 2: Suite were thrilled that doctor Constem could join us today. Dominica,
Speaker 2: I give you the phrase super restrictive. Is Jerome Powell's
Speaker 2: FED combined with market action a super restrictive FED.
Speaker 10: Well, yeah, in the context of the sustainability of the
Speaker 10: US consumer, and if you like the overhang of debts
Speaker 10: refinancing in the corporate sector really beginning in twenty twenty five,
Speaker 10: you know, clearing the front end is super restrictive, and
Speaker 10: it's going to have to get first quite aggressively. As
Speaker 10: some stage that the issue is a timing, and you
Speaker 10: know that timing has been pushed out because the consumer
Speaker 10: who's got great balance sheet, has decided that even as
Speaker 10: they spent all their fiscal excess that they were given
Speaker 10: after COVID, they're deciding to leverage up even with interest
Speaker 10: rates as high as they are, but they can do
Speaker 10: that because of the balance sheet, So that kind of
Speaker 10: delays the impact of this super restrictiveness, which is kind
Speaker 10: of a bit of a conungrum for the Fed.
Speaker 4: So that's the.
Speaker 1: Price for longer, not higher for longer, but just longer.
Speaker 2: What is the cost did your own power of a
Speaker 2: longer strategy at these levels?
Speaker 10: Well, I think what's happened in the last couple of
Speaker 10: months really has been that the Fed has decided that,
Speaker 10: you know, because effectively they are super restrictive, they didn't
Speaker 10: want to keep on pushing up short rates, you know,
Speaker 10: don't not quickly go to six percent. So they've emphasized
Speaker 10: this idea that they're just going to hold at a high.
Speaker 6: Level for that much longer.
Speaker 10: But ironically that directly feeds into a sell off in
Speaker 10: the back end, the idea that what we call term premium,
Speaker 10: this risk premium that's short rates you end up being
Speaker 10: higher than the equivalent tenor of a longer dated treasury.
Speaker 10: That's term premium that gets priced into the market, which
Speaker 10: is why you've had this enormous sort of bare steepening
Speaker 10: going on with the tens going up to close to
Speaker 10: five percent thirties, nifiing the corter, et cetera. And in
Speaker 10: a way that that's not a bad thing if you
Speaker 10: want to slow the economy, but because that will undermine
Speaker 10: and is undermining risk assets, and it will help to
Speaker 10: tighten financial conditions overall.
Speaker 6: So that's the impact of what the Fed is doing.
Speaker 10: There is a risk though, that they run because you
Speaker 10: get people concerned about the as you mentioned earlier, the
Speaker 10: refinancing of the Treasury. You know, when they decide to
Speaker 10: issue longer dated debts that now it is coming in
Speaker 10: at much higher interest rates, and you start worrying about
Speaker 10: a vicious circle where if you can't reduce a debt
Speaker 10: so through spending cuts, well you've got another problem because
Speaker 10: your interest service costs are going up at the same time.
Speaker 10: And that's kind of get people worried about this idea
Speaker 10: that Treasury isn't going to be able to sustainably fund
Speaker 10: itself down the road, particularly when you get those sort
Speaker 10: of you know, bigger issues coming up, the structural issues
Speaker 10: coming up that will mean higher deficits.
Speaker 5: There's always been a sort of uncomfortable tension, especially now
Speaker 5: between the Treasury Department and the Federal Reserve, especially because
Speaker 5: the Treasury Department is helmed by the one and only
Speaker 5: Janet Yellen who used to head the FED.
Speaker 11: How much is a treasure you're going to.
Speaker 5: Try to game out the market and kind of give
Speaker 5: a helping hand to the Fed by not concentrating some
Speaker 5: of those debt sales in the longer end, sell tea
Speaker 5: bills and hold a pad and wait for things to normalize.
Speaker 10: Well, I mean, it's obviously a great question and issue.
Speaker 10: I mean, strictly speaking, I don't think Treasury really should
Speaker 10: gain things too much. You know, they're not really traders
Speaker 10: as such, and if they were, then you know, maybe
Speaker 10: God help us. I mean, the idea I think is is,
Speaker 10: you know, you do have rollover risk, so you know,
Speaker 10: no one really knows how quickly long term rates might
Speaker 10: might reverse, even if we go into some slowing you know,
Speaker 10: where is this sort of mutual rate It might you know,
Speaker 10: might be higher and maybe ten years trading around you know, five.
Speaker 6: Percent is the sort of new norm.
Speaker 10: So I think it wouldn't be appropriate for the Treasury
Speaker 10: to really try and game the markets or a near
Speaker 10: term and sort of second guests that short term rates
Speaker 10: are going to come crashing down and they'll be able
Speaker 10: to refinance themselves down the road by extending maturity later.
Speaker 10: So I think they'll they'll probably extend the duration. I
Speaker 10: think the estimates are kind of you know, you know,
Speaker 10: seem about right, this sort of one hundred and fourteen
Speaker 10: billion and putting it in coupons. And because of the
Speaker 10: announcement we had earlier in the week, they can cut
Speaker 10: bill supply bits. So that's our expectation and no gaining
Speaker 10: of it.
Speaker 5: Basically, a lot of people expect this to be a
Speaker 5: boring meeting, sibad or Jappa calling it a placeholder, Steven
Speaker 5: Linder saying, how many ways can you say we'll see?
Speaker 5: I mean, this is basically going to be a holding
Speaker 5: kind of pattern. And yet we see a dissonance growing
Speaker 5: where the market sees and escalating's chance of excelling, reaccelerating inflation.
Speaker 11: At the same time that the Feds kind of seeming.
Speaker 5: To subtly agree with Janet Yella and saying that yields
Speaker 5: are going to go back down.
Speaker 11: Do you think they're going to bridge that gap today?
Speaker 10: Well, they could do. I mean they've always got the
Speaker 10: option to. I mean that there are a couple of
Speaker 10: interesting things going on. I mean, obviously this sell off
Speaker 10: in the long end is very interesting, and I think
Speaker 10: they can definitely address that in the conference call and
Speaker 10: basically say that's doing some of the work for them
Speaker 10: and be a bit more optimistic. They can also be actually,
Speaker 10: even though inflation has been a bit sticky on the
Speaker 10: very latest prints, they could be a bit more optimistic
Speaker 10: on that. We've done some background analysis on that, and
Speaker 10: the reason why inflation has been a bit stick is
Speaker 10: it's really been on the demand side, less on the
Speaker 10: supply side type thing. And I think that's encouraging because
Speaker 10: that's something a little bit more understandable and sort of
Speaker 10: indicative that, you know, the underlying trend lower is still
Speaker 10: in place for inflation, and obviously the global inflation picture
Speaker 10: has been looking a bit better, so I think they
Speaker 10: can basically, you know, I don't think it'll be an
Speaker 10: uninteresting meeting or press conference. It's just really a question
Speaker 10: of how far power wants to go down the road
Speaker 10: and try and sort of reassure markets. One interesting thing
Speaker 10: I always think is that you know, to what extent
Speaker 10: to the FED really anticipate or understand that their actions
Speaker 10: at the September meeting was going to lead to this
Speaker 10: sort of you know, near one hundred base on itseel
Speaker 10: off in the long end. I mean, it's been quite dramatic,
Speaker 10: And did they really expect that way?
Speaker 2: Yes, this is a question dominic and why this is
Speaker 2: outside your remit. But we've known each other for years,
Speaker 2: So I'm going to go from the macro of constant
Speaker 2: to commercial banking. Bernanky taught us at Princeton that financial
Speaker 2: structure and strength matters. I'm looking at the technical construct
Speaker 2: of the American banking system and.
Speaker 1: I don't like what I see.
Speaker 2: Should the FED fold in what's happening to the banks
Speaker 2: right now? Should they today pay attention in their meetings
Speaker 2: to the weakness that we see in commercial banking equity prices?
Speaker 6: Absolutely?
Speaker 10: And I think the thing that so many people miss
Speaker 10: is they think that banks are kind of less important
Speaker 10: now than they were before because of alternative banking, you know, fintech,
Speaker 10: private equity, you know, other forms of leverage if you like,
Speaker 10: in the system that they people think seem to think,
Speaker 10: you know, credit is created elsewhere. Credit is that there's
Speaker 10: something called outside money, which is a central bank, and
Speaker 10: they start the credit creation process there's in something called
Speaker 10: inside money, which is the banking system, and they continue
Speaker 10: the credit creation process. And to be honest, that pretty
Speaker 10: much is where how credit is created. Money it can
Speaker 10: only be created by the FED and the banks to
Speaker 10: the bank multiplier. It cannot be created by private equity.
Speaker 10: They have to get their leverage from somewhere. And so
Speaker 10: I think you always have to go to the banking system,
Speaker 10: and you always have to focus on if the banks
Speaker 10: are kind of doing their job, even if the leverage
Speaker 10: overrule in the system is getting higher and higher, and
Speaker 10: the relatives of the banks, they're the ultimate ones who
Speaker 10: if they pull the plug, let alone the FED putting
Speaker 10: the plug, then the whole kind of system can start
Speaker 10: to implode.
Speaker 6: So I do think it's very important.
Speaker 10: What's happening in the banks, and I think it's a
Speaker 10: big concern that obviously lending is slowing down. There is
Speaker 10: obviously regulation and there's some credit some cattle restrictions taking place,
Speaker 10: but that's all part of the cycle. And as long
Speaker 10: as the FED is there to pick up the pieces
Speaker 10: at the end of it, we're fine.
Speaker 6: But those pieces will need to be picked up.
Speaker 2: You sound like Alan Meltzer, the late Great Alan Meltzer,
Speaker 2: lender of letters. Who are dom I got thirty seconds?
Speaker 2: Are you concerned the massive shift from deposits to money
Speaker 2: market funds? Is that going to destabilize the system.
Speaker 10: Well, it's been a challenge, but to be fair, that
Speaker 10: TGA build up that the Treasury has done has actually
Speaker 10: come at the expense a lot of the money market
Speaker 10: funds and the repo there. So I think, you know,
Speaker 10: the Fed has actually managed this process relatively well with
Speaker 10: the help of the Treasury rebuilding TJA with all that
Speaker 10: bill issuance, so you know, you know, it's it's a
Speaker 10: relatively orderly process, but it's obviously something that you've got
Speaker 10: to keep watching. You don't want excess reserves to get
Speaker 10: too low in the banking system.
Speaker 1: Is that to Constant? Thank you so much, Dominic Constant
Speaker 1: with the Missouri Are they just a terrific brief Therey.
Speaker 2: Joining US doctor Wynn Thinn, global head of Currency Strategy
Speaker 2: around brothers Harriman win Thin. You were at the altar
Speaker 2: of Robert Mundel at Columbia who invented our international currency dynamics.
Speaker 2: Is there a theory to what Japan is doing? Are
Speaker 2: they making up original theory?
Speaker 12: Well, first of all, thanks, thanks, as always a pleasure
Speaker 12: to appear here with you guys. To me, it's an experiment,
Speaker 12: it's an ongoing experiment. You know, Japan has been fighting
Speaker 12: deflation for decades and they've thrown everything at the wall
Speaker 12: to see what sticks. The latest iteration was negative rates
Speaker 12: and he locor control and by hooker, by crooked, it's
Speaker 12: it's finally getting out of deflation. It's obviously the positive
Speaker 12: makers are very nervous there getting you know, starting these
Speaker 12: poses is the easy part. Getting out of them is
Speaker 12: always the hard part. We saw the FED struggle with
Speaker 12: getting out of q back after a great financial crisis.
Speaker 6: So what we've been seeing.
Speaker 12: Unfold over the last year is just a really haphazard
Speaker 12: so again throwing stuff at the wall to see what works.
Speaker 12: It's been again more out of fear and concern than
Speaker 12: anything else. They don't want to upset the opera card
Speaker 12: that the recovery is, by many measures, you know, quite
Speaker 12: modest and vulnerable, and so that's what we're seeing. I
Speaker 12: do think that that Japan will exit accommodations fully in early.
Speaker 6: Times, and by that I mean a ray hike.
Speaker 2: Why should our why should our viewers and listeners care
Speaker 2: in the Western world, it just seems to be removed
Speaker 2: and over there. For example, comparing the yuan the ren
Speaker 2: menbi in China to Japanese. Yeah, and even with we
Speaker 2: you want versus a dollar, it's studying how weak the Japanese.
Speaker 1: Yen is versus ren memby. Why do I care in America?
Speaker 12: Well, I think, as you guys pointed out just earlier
Speaker 12: in the segment, Japanese investors have been have been basically
Speaker 12: leaving Japan and chasing yield and returns elsewhere. And that's
Speaker 12: because of the zero rate interest policy and heal com control.
Speaker 12: Domestic eiels aren't attractive enough. So we've seen massive capital
Speaker 12: outflows of Japan over the last years, if not decades.
Speaker 12: If we get that infection point where things change and
Speaker 12: actually rates are allowed to go back to market based levels,
Speaker 12: I think the fear of at least in Japan and others,
Speaker 12: is that that wave of capital will come back from
Speaker 12: crashing back. And already seen announcements some of the Japanese
Speaker 12: life insurers that they planned the second half of this
Speaker 12: fiscal year to underweight foreign investments, foreign bonds and overweight
Speaker 12: jgb's in anticipation of normalization. So there's also the capital
Speaker 12: flow stories that I think, you know, coming in a
Speaker 12: time when we don't know what the Fed's doing, we
Speaker 12: don't know what's going on in Europe with the Middle East.
Speaker 12: It's just another sort of added uncertainty that Marcus had
Speaker 12: that jests and I think that's what I think investors
Speaker 12: in general are worried about.
Speaker 5: It's almost deliberate ambiguity. Is deliberate ambiguity by the Bank
Speaker 5: of Japan going to actually create some sort of soft
Speaker 5: gradual increase in yields and some sort of controlled departure
Speaker 5: from yaled curve control.
Speaker 12: Yeah, yeah, at least I think that's what we're seeing.
Speaker 12: In fact, in my opinion, Yeald curve control is dead.
Speaker 12: It's deader than Elvis right now, as far as I
Speaker 12: can tell, they've they've introduced this ambiguity where it's now
Speaker 12: one percent is now reference point.
Speaker 6: Who knows what that means.
Speaker 12: So the market will will prod and tested the Bank
Speaker 12: of Japan not just on heels but also on the
Speaker 12: dollary in and it's gonna be a cat and mouse game.
Speaker 12: But really, for all intents and purposes, jgbills are going up.
Speaker 6: They have been going up.
Speaker 12: They will continue go up. We'll go above that one
Speaker 12: percent sort of reference point within days, and you know
Speaker 12: the upside I think natural sort of target for the markets.
Speaker 12: Where we go from there well dependent what's going on
Speaker 12: in other global market, especially US treasuries. But again, this
Speaker 12: is normal. This is you know, we've been it's very
Speaker 12: what I would say, an abnormal period. And it's been
Speaker 12: going on for decades in Japan of zero rates, negative rates,
Speaker 12: year clear control and it's abnormal. And I think that
Speaker 12: they're trying to exit that, but are obviously very very
Speaker 12: scared of the ramification at least.
Speaker 1: Some moments ago, the d X y unraveling.
Speaker 2: Right now one oh six point ninety one, we're really
Speaker 2: buttressed up here against the one oh seven on DXY
Speaker 2: and is clearly yet led by en dynamics. And this
Speaker 2: goes like the banking stocks. I'm sorry, you just have
Speaker 2: to look at the Bloomberg screen and it's screaming a
Speaker 2: certain level of tension out there this morning without being
Speaker 2: you know, a toxic brew of gloom.
Speaker 1: I mean, it's just the markets.
Speaker 2: Are speaking before this FED meeting, and it's not all
Speaker 2: the managed message of the elites.
Speaker 11: When to that point.
Speaker 5: How disruptive is the fact that the dollar has continued
Speaker 5: to strengthen and not weaken as so many people thought
Speaker 5: this year.
Speaker 12: Well and for the for the US, it's good because
Speaker 12: the stronger currency helps to limit important inflation. What we
Speaker 12: were seeing particularly stress is with emerging markets, especially in Asia,
Speaker 12: that's being double whemmed by the yen, n by the dollar.
Speaker 12: But basically we've seen many many emerging market center banks
Speaker 12: intervene to help support their own currency. We've seen surprise
Speaker 12: rate hikes, we saw that from Indonesia last month, and
Speaker 12: we've also seen countries that are cutting weights slow. They're
Speaker 12: easy because the currencies are coming under pressure. So it's
Speaker 12: to me it's really a toxic root for emerging markets.
Speaker 12: That is a height height money conditions in the US,
Speaker 12: slowing global growth slow in China, and easing cycles in
Speaker 12: emerging markets, and that's all to be a very toxic
Speaker 12: row for emerging market currency.
Speaker 5: You should have seen Tom King's face when you said
Speaker 5: toxic brew. His ears perked up and he was fully.
Speaker 2: Into Robert Mondel used to say, Robert Mandel would be
Speaker 2: in a lecture and he say, look, you know the
Speaker 2: Mundell triangulation and in partically ununified currency.
Speaker 1: It's one big time.
Speaker 5: This is a difficult time because people have been throwing
Speaker 5: around people have it thrown around where it's like toxic
Speaker 5: brew for quite a while. And yet we have been
Speaker 5: in a sort of uneasy equilibrium all year that's really
Speaker 5: been tapped off by a US dynamism.
Speaker 11: You go, what do you mean?
Speaker 2: I don't think it's been an an easy equilibrium. I
Speaker 2: think the markets are talking here. You know, I'm going
Speaker 2: back and forth, Doug cass here on the banks, you
Speaker 2: can rationalize.
Speaker 1: Us all you want. Yen one Fifty's why we're talking
Speaker 1: to win thin.
Speaker 11: So win way in on that.
Speaker 5: Are things breaking down in a more material way that'll
Speaker 5: lead to more traumatic moves in effects.
Speaker 12: Well, I think was the main driver that's really taking
Speaker 12: anyone by surprise. This is the continued strength of the
Speaker 12: US economy and by that extension the US.
Speaker 6: Dollar, the FED and all that.
Speaker 12: I'm of the opinion that the Fed will probably get
Speaker 12: us into a recession next year. But I don't look
Speaker 12: for anything quote unquote break by break, we mean like
Speaker 12: a financial crisis, banking crisis some sort. We had to
Speaker 12: scare back in March with SVB but we found that was,
Speaker 12: you know, to me, an idiosyncratic.
Speaker 6: Situation with SVB and signature.
Speaker 12: So to me, you know, all the stress tests suggest
Speaker 12: that that the global financials remains fairly resilient.
Speaker 6: Now look, that's like we all know that.
Speaker 12: That doesn't mean you know, a whole lot when when
Speaker 12: when push comes to show. But I do think that
Speaker 12: we are sorting this post gred financial crisis uh so
Speaker 12: situation where yes, the institutions and and overseers and regulators
Speaker 12: are all sort of on the same page and and
Speaker 12: hopefully uh willing and able to head off a crisis. Now,
Speaker 12: well we see pockets of stress. You know, we've had
Speaker 12: frontier markets blowing up, emerging markets or Canade remain in
Speaker 12: the stress look UK, uh Europe or into recession. But
Speaker 12: you know, nothing again, nothing sort of broken.
Speaker 6: This is sort of a normal thing.
Speaker 5: I used.
Speaker 12: I'll leave this, you know with the final thought is that,
Speaker 12: let's say, normal sort of situation terms of down town
Speaker 12: going too faster in the US, that's hiking, We're gonna slow,
Speaker 12: we maybe go into recession, but then the whole cycle
Speaker 12: starts over.
Speaker 6: It's not something to worry about.
Speaker 1: I've got to leave it there. Doctor, Thank you so much,
Speaker 1: he says Brown Brothers Harriman.
Speaker 5: There's been an issue in the US side of things,
Speaker 5: first of all how deeply the US troops will get involved,
Speaker 5: but also how much aid can actually get passed to
Speaker 5: go towards supporting both Israel and Ukraine, which no one
Speaker 5: is talking about. Jennifer Flytt and covering all of this
Speaker 5: fantastic guests to really analyze it for US head of
Speaker 5: US Government Affairs at INVESCO, Jennifer, what do you make
Speaker 5: of this split that we've seen with the House proposing
Speaker 5: a separate bill to fund Israel that yesterday President Biden said, Vito.
Speaker 13: Right, he issued a veto threat. That's correct. Yesterday. We're
Speaker 13: going to see what the House can do. I think
Speaker 13: it's still an open question if they have.
Speaker 14: The support because they have paired the Israeli funding with
Speaker 14: an offset.
Speaker 13: That directly sort of impacts.
Speaker 14: That Inflation Reduction Act and of the irs, and so
Speaker 14: they will lose the vast majority of Democrats. Could they
Speaker 14: gain a couple while they lose a few of their
Speaker 14: own Republicans?
Speaker 13: I think that's the question, and we'll see that play
Speaker 13: out on Thursday.
Speaker 5: What does it tell you about the nature of funding agreements.
Speaker 5: If funding Israel comes at the expense of cutting the
Speaker 5: agency served with collecting taxes, well, first.
Speaker 14: I would say this is an opening salvo for the
Speaker 14: House because they will have to negotiate no matter what
Speaker 14: with the Senate. Schumer has the majority leader in the Senate,
Speaker 14: has already stated that this is dead on arrival, so
Speaker 14: there is an expectation that there will be further negotiation.
Speaker 14: But when it comes to offsets, this is a reflection
Speaker 14: of what is happening in America right now with regard
Speaker 14: to our own domestic debt our, own deficits that.
Speaker 13: We're running right now.
Speaker 14: And that's what Republicans and their districts really feel a
Speaker 14: need to answer to.
Speaker 2: Jennifer. I believe it is November first. Count it down
Speaker 2: sixteen days to November seventeenth. It's been left in the debris.
Speaker 2: We've forgotten about November seventeenth. Give us a brief of
Speaker 2: the importance of November seventeenth inside the Beltleigh.
Speaker 13: It is coming upon us very quickly. That is an
Speaker 13: excellent point and it is not lost on most members. Also,
Speaker 13: most members that.
Speaker 14: Want to get Ukraine funding through the House, Republican and
Speaker 14: Democratic members and the Continuing Resolution, which is that stop
Speaker 14: gap that runs out on November seventeenth that has to
Speaker 14: be extended. The Ukraine funding may have to ride on
Speaker 14: that continuing resolution. However, they work it out and we'll
Speaker 14: see that over the next week. They're currently drafting another
Speaker 14: continuing resolution in the House.
Speaker 5: Jennifer, there's real dissonance and a headline Stiffe been reading
Speaker 5: and I am trying to square them.
Speaker 11: I'd love your help.
Speaker 5: Basically, on one side, you see the fight that's escalating
Speaker 5: in Congress, it's escalating with the White House over how
Speaker 5: to get financing to back these efforts. And then on
Speaker 5: the other hand, we're talking about US troops potentially being
Speaker 5: in Gaza indefinitely after the war to keep some sort
Speaker 5: of peace. What is the appetite in the United States
Speaker 5: to have a protracted role in some of these conflicts
Speaker 5: that seem pretty intractable right now?
Speaker 13: That's right.
Speaker 15: I think there are a number of steps though that
Speaker 15: we have to get to first, right because US troops
Speaker 15: are in the region, of course, they are in Iraq
Speaker 15: there in Yemen. This was discussed a little bit at
Speaker 15: the hearing yesterday with Secretary of Blincoln and Secretary of
Speaker 15: defense Austin.
Speaker 13: They have been attacked over the last week two weeks.
Speaker 14: They have had to retaliate in those attacks, and the
Speaker 14: expectation is to deter further escalation.
Speaker 13: That I think is the immediate issue before we get
Speaker 13: to the longer term issues in Gaza. Israel is able
Speaker 13: to contain that area.
Speaker 5: There's also a really short term kind of issue with
Speaker 5: respect to President Biden's approval rating in some of the
Speaker 5: swing states. And there was a poll that recently came
Speaker 5: out that more than fifty percent of Muslim Americans used
Speaker 5: to support President Biden and now a fewer than twenty
Speaker 5: percent currently do. How significantly is this going to color
Speaker 5: the entire debate next year?
Speaker 13: That's an excellent point.
Speaker 14: I think the tension there within the Democrat Democratic Party
Speaker 14: and seeing some of those polls, but even seeing the.
Speaker 13: Streets right, I mean, we've seen the protrust.
Speaker 16: Across America, not just among Arab and Muslim Americans, but
Speaker 16: also with young people, young progressives on college campuses, and
Speaker 16: they do see that as a threat.
Speaker 14: So how they're going to diplomatically work within their own
Speaker 14: party and their own voters.
Speaker 13: I think we're starting to see that play out.
Speaker 1: Jennifer Thank you so much.
Speaker 2: Jennifer flintne with this with Invesco there on Washington and
Speaker 2: the war in the Eastern Mediterranean. Subscribe to the Bloomberg
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Speaker 1: Thanks for listening. I'm Tom Keen, and this is Bloomberg