WEBVTT - Critical Jobs Friday Paves the Path for Rate Cuts 0:00:02.400 --> 0:00:06.760 Bloomberg Audio Studios, Podcasts, radio news. 0:00:11.960 --> 0:00:15.560 This is the Bloomberg Surveillance Podcast. I'm Tom Keene along 0:00:15.600 --> 0:00:16.440 with Paul Sweeney. 0:00:16.760 --> 0:00:18.080 Join us each day for. 0:00:18.120 --> 0:00:22.800 Insight from the best in economics, finance, investment, and international relations. 0:00:23.040 --> 0:00:26.400 You can also watch the show live on YouTube. Visit 0:00:26.440 --> 0:00:30.600 the Bloomberg Podcast channel on YouTube to see the show 0:00:30.800 --> 0:00:33.879 weekday mornings from seven to ten am Eastern from our 0:00:33.920 --> 0:00:37.640 global headquarters in New York City. Subscribe to the podcast 0:00:37.760 --> 0:00:41.239 on Apple, Spotify, or anywhere else you listen and. 0:00:41.320 --> 0:00:44.199 Always I'm Bloomberg Radio, the Bloomberg. 0:00:43.800 --> 0:00:48.040 Terminal, and the Bloomberg Business app Lots going on here 0:00:48.040 --> 0:00:50.080 in particularly gold pretty through twenty three hundred. 0:00:50.080 --> 0:00:50.840 What do you make it? Gold? 0:00:51.360 --> 0:00:54.800 It's just an extraordinary here. I mean it's only three China. 0:00:54.840 --> 0:00:56.080 I'm with Rebecca Patterson. 0:00:57.000 --> 0:00:59.600 I mean Central Backs've been buying a gold channeis I 0:00:59.600 --> 0:01:00.040 guess why. 0:01:01.640 --> 0:01:03.400 We get a brief here into the blur of our 0:01:03.480 --> 0:01:08.800 labor economy over Thursday and Friday. In the markets, equities, bonds, currencies, commodities, 0:01:08.800 --> 0:01:12.759 Rebecca Pattison joins us for years with Bessemer Trust, with Bridgewater, 0:01:13.600 --> 0:01:16.200 and now about thinking about these markets. 0:01:16.480 --> 0:01:20.920 Rebecca Classic you in your note you speak of a need. 0:01:20.680 --> 0:01:25.240 For immediate humility. How do we get humility in this market? 0:01:25.600 --> 0:01:28.600 If you're Paul Sweeney and you bought Nvidia two years. 0:01:28.360 --> 0:01:33.240 Ago, well, Paul, well done. We'll start off with that 0:01:34.880 --> 0:01:37.959 right now. What I think we're seeing that's pretty interesting 0:01:38.120 --> 0:01:41.160 is some broadening of global growth. Last year was all 0:01:41.200 --> 0:01:45.240 about the US being the engine, and now with the 0:01:45.280 --> 0:01:50.400 constant stimulus efforts by China, albeit focused on manufacturing, and 0:01:50.440 --> 0:01:54.680 that's trickling into Europe, we're seeing some very small, I 0:01:54.680 --> 0:01:56.920 don't want to overplay it, but green shoots in Europe. 0:01:56.960 --> 0:02:01.000 Even German confidence data this week came out slightly better 0:02:01.040 --> 0:02:04.520 than expected. And of course in the US we're seeing 0:02:04.520 --> 0:02:07.840 a pickup in manufacturing at the margin. So when we 0:02:07.880 --> 0:02:12.079 see a broadening, what it tells us is that we're 0:02:12.120 --> 0:02:15.960 going to see some slight shifts in preferences among investors. 0:02:16.400 --> 0:02:20.280 US consumers and investors will have more confidence taking overseas risk, 0:02:20.440 --> 0:02:24.200 especially with a big valuation discount overseas versus the US. 0:02:24.520 --> 0:02:27.560 We'll tend to see more cyclical assets do well, commodities, 0:02:27.600 --> 0:02:30.320 small caps, will tend to see less liquid assets do well. 0:02:30.360 --> 0:02:33.919 Emerging markets, and we often tend to see the dollar 0:02:34.000 --> 0:02:37.680 go down in this environment as US capital goes overseas. 0:02:38.120 --> 0:02:41.320 The question I have Tom Paul is does it last 0:02:41.520 --> 0:02:43.720 and how big a move is this or is it 0:02:43.800 --> 0:02:47.120 just incremental? And that's where the humility comes in. So 0:02:47.160 --> 0:02:50.160 I still like having a lot of my capital in 0:02:50.280 --> 0:02:52.680 US markets. I think the US economy is likely to 0:02:52.680 --> 0:02:55.840 remain strong for some time. But I think if you 0:02:55.919 --> 0:02:58.960 want to make a trade looking at a month or two, 0:02:59.720 --> 0:03:02.480 take a little bit more risk overseas or in some 0:03:02.560 --> 0:03:05.400 of these areas I just mentioned. This is the moment. 0:03:06.360 --> 0:03:08.799 So, Rebecca, I'm just reading through your notes. I see 0:03:09.040 --> 0:03:10.960 a lot of discussion of China. There are a lot 0:03:10.960 --> 0:03:14.000 of investors out there. I think I'm speaking for them 0:03:14.000 --> 0:03:16.359 when they say, I just don't know what to do 0:03:16.720 --> 0:03:19.880 with China. Some people say it's uninvestable. Some folks say, 0:03:20.480 --> 0:03:22.800 you know you have to be there because of the 0:03:22.840 --> 0:03:27.560 size of the market. How do you think about it, Well, you. 0:03:27.520 --> 0:03:30.880 Know, we have a huge amount of geopolitical risk unfortunately 0:03:30.960 --> 0:03:34.680 today around China, and we don't know if that's going 0:03:34.760 --> 0:03:38.000 to be status quo, get slightly better or get a 0:03:38.000 --> 0:03:42.040 lot worse. After the election. If Trump is elected in November. 0:03:42.400 --> 0:03:45.520 Based on what he's saying during the campaign and his advisors, 0:03:45.800 --> 0:03:50.920 we could expect tougher trade relationships with China, and so 0:03:51.280 --> 0:03:54.320 that geopolitical risk you can't write off. A lot of 0:03:54.360 --> 0:03:57.400 that has to be discounted in market valuations. At this point. 0:03:57.640 --> 0:03:59.960 We know Chinese stocks, even though they're off their lows, 0:04:00.040 --> 0:04:03.880 are still cheap. We know there's stimulus partiction, particularly in 0:04:03.960 --> 0:04:07.760 infrastructure and manufacturing. But again, is it a trade or 0:04:07.800 --> 0:04:11.040 is it an investment given the geopolitical risk, I'd view 0:04:11.080 --> 0:04:13.480 it as a trade if anything, And then you can 0:04:13.520 --> 0:04:17.279 always go through proxies find companies around the world, sectors 0:04:17.279 --> 0:04:20.360 around the world that will benefit from this without having 0:04:20.400 --> 0:04:23.080 the exposure in the country. Oil is a great example. 0:04:23.200 --> 0:04:25.400 Right now oil price is going up. Part of that 0:04:25.520 --> 0:04:26.640 is demand from China. 0:04:27.200 --> 0:04:30.480 Yeah, I find the specific room demand there to be key. Rebecca. 0:04:30.520 --> 0:04:32.120 I want to go all bust iner trust and you, 0:04:32.240 --> 0:04:34.640 let's say you got a short term vision of three years. 0:04:35.240 --> 0:04:37.520 I think a lot of our people watching and listening 0:04:37.520 --> 0:04:40.560 to us have that kind of perspective. And I got 0:04:40.560 --> 0:04:43.919 to be in the markets, and I guess the basic 0:04:44.000 --> 0:04:47.600 idea is their value in index, spread it out, capture 0:04:47.640 --> 0:04:51.000 it all, even if it's some form of adjusted index 0:04:51.080 --> 0:04:55.000 fund or is this where active management and stockpicking and 0:04:55.080 --> 0:04:57.880 really trying to figure out free cash flow works out. 0:04:59.040 --> 0:04:59.240 Well. 0:04:59.279 --> 0:05:02.680 What we've seen historically, Tom, is that when we're in 0:05:02.720 --> 0:05:05.480 a period with liquidity being taken out of the market, 0:05:05.520 --> 0:05:12.279 ie central banks tightening, quantitative tightening happening, that's when you 0:05:12.320 --> 0:05:16.640 get more dispersion within securities, and so active management pays off. 0:05:16.960 --> 0:05:18.960 What we saw in the last ten years this move 0:05:19.000 --> 0:05:23.480 in passive, so passive assets actually larger than actively managed assets. 0:05:23.800 --> 0:05:26.520 That's partly a function of zero interest rates, and I 0:05:26.520 --> 0:05:29.080 think that environment is behind us and will be for 0:05:29.120 --> 0:05:31.640 a while. So I think we're in a relatively better 0:05:31.680 --> 0:05:34.800 world now and looking ahead, even if central banks cut 0:05:34.839 --> 0:05:37.119 a little, we're still not going to go back to zero. 0:05:37.520 --> 0:05:39.479 So I think we're in a relatively better place for 0:05:39.560 --> 0:05:43.919 active At the same time, there are spaces US large cap, global, 0:05:44.000 --> 0:05:50.120 large cap liquid government bond markets we're having. Some passive 0:05:50.160 --> 0:05:53.960 exposure makes sense because the fees are so low. If 0:05:53.960 --> 0:05:57.080 you can get your market beta, your market exposure cheaply, 0:05:57.560 --> 0:06:01.039 and then you can complement that with active manage, pay 0:06:01.080 --> 0:06:04.160 a higher fee, get take advantage of the dispersion that 0:06:04.200 --> 0:06:06.800 we're seeing in the markets with rice liquidity and have 0:06:06.880 --> 0:06:07.839 a barbell approach. 0:06:08.360 --> 0:06:10.880 I think what's fascinating, or Paul, is the adjustment here 0:06:10.920 --> 0:06:13.880 and the ten you're real yield two percent? Yep, that's 0:06:14.080 --> 0:06:16.640 that's like we're where we were eighteen months ago. 0:06:16.800 --> 0:06:17.320 Exactly right. 0:06:17.320 --> 0:06:19.520 We got one more squeeze, one more Rebecca, just real 0:06:19.600 --> 0:06:22.560 quick here, American exceptionalism we think about the economy, is 0:06:22.560 --> 0:06:23.760 that the thing here for you? 0:06:25.520 --> 0:06:27.760 It has been, it's going to continue to be. And 0:06:28.080 --> 0:06:30.239 part of it, I think that doesn't get enough attention 0:06:30.839 --> 0:06:31.799 is private equity. 0:06:31.880 --> 0:06:32.040 Now. 0:06:32.040 --> 0:06:34.919 I know private equity isn't crushing it right now, but 0:06:35.400 --> 0:06:38.560 the US is more than half of global private assets. 0:06:38.760 --> 0:06:40.919 And we have an ecosystem that I think is going 0:06:41.000 --> 0:06:44.240 to continue to support that that keeps capital coming into 0:06:44.279 --> 0:06:46.640 our markets. You take that plus the depth of our 0:06:46.680 --> 0:06:49.680 capital markets. You have our education system, you have a 0:06:49.680 --> 0:06:54.040 culture that supports entrepreneurship and innovation. I think that allows 0:06:54.120 --> 0:06:58.279 the US to continue to benefit, especially in technology, and 0:06:58.320 --> 0:07:00.560 I think that can propel the exceptional I'm at the 0:07:00.600 --> 0:07:03.200 margin as we look forward, it's ours to learn. 0:07:03.279 --> 0:07:06.080 Yes, got to run, Rebecca Patterson, thank you for getting 0:07:06.120 --> 0:07:11.400 us started strong. Rebecca Patterson, of course, formerly with Bridgewater Associates. 0:07:21.360 --> 0:07:23.200 Markets are going to speak here in twelve minutes with 0:07:23.280 --> 0:07:26.560 claims folding economics into what we see for rate strategy, 0:07:26.560 --> 0:07:29.320 and Megan Swiber joins us right now with the Bank 0:07:29.440 --> 0:07:32.320 of America is where let's just get the land of 0:07:32.360 --> 0:07:33.880 Bank of America visualized. 0:07:34.040 --> 0:07:36.240 Where's the ten year yield the end of this year? 0:07:36.520 --> 0:07:38.440 You know, Tom, we don't really think it's going much 0:07:38.480 --> 0:07:41.520 further down. We have it at four twenty five. So 0:07:41.680 --> 0:07:44.160 even with a FED that's lining up to cut, we 0:07:44.240 --> 0:07:46.480 still really don't think longer term rates are going to 0:07:46.640 --> 0:07:47.640 rally all that much. 0:07:47.800 --> 0:07:52.480 Folding claims. In the jobs report tomorrow, I'm sorry. I 0:07:52.520 --> 0:07:56.040 see nominal GDP well over Michael Gabe, and nominal GDP 0:07:56.200 --> 0:07:59.600 well over four percent, and I see numbers that say 0:07:59.680 --> 0:08:01.680 there's fully employed America. 0:08:01.760 --> 0:08:02.720 Is that how you see it? 0:08:02.960 --> 0:08:04.800 That's how we're looking at it, Tom, And you have 0:08:04.920 --> 0:08:07.560 a FED that's guiding the market to cut. But this 0:08:07.760 --> 0:08:10.520 real question, and what Powell was alluding to yesterday, is 0:08:10.520 --> 0:08:12.080 they really don't know the level that they're going to 0:08:12.160 --> 0:08:15.080 cut rates too. A lot of questions around what that 0:08:15.200 --> 0:08:18.240 neutral rate is. It's a really abstract concept, but it's 0:08:18.240 --> 0:08:20.880 this idea that the Fed's hiped so much already and 0:08:20.920 --> 0:08:24.800 we're really not seeing much of that cooling in economic activity, 0:08:25.120 --> 0:08:27.480 seeing a lot of great progress on the inflation front. 0:08:27.480 --> 0:08:29.800 So that's what's going to drive the cuts. But really, 0:08:29.800 --> 0:08:31.200 at the end of the day, this could be a 0:08:31.320 --> 0:08:33.640 very different cutting cycle than what we've seen in the 0:08:33.679 --> 0:08:37.359 past when the FED is cutting to really ease conditions. 0:08:37.480 --> 0:08:39.320 Well, given the FED, I mean, there's a lot of 0:08:39.320 --> 0:08:40.960 cross currents out there. One of the big ones is 0:08:40.960 --> 0:08:42.920 the labor market. We're going to get non We're going 0:08:42.960 --> 0:08:45.439 to get job as claims today, non farm payrolls tomorrow. 0:08:45.720 --> 0:08:46.800 How are you guys thinking about that? 0:08:47.280 --> 0:08:49.679 So the labor market data is important, But really, at 0:08:49.720 --> 0:08:51.679 the end of the day, when we're listening to the FED, 0:08:51.840 --> 0:08:54.360 they know that the labor market data has been really strong, 0:08:54.800 --> 0:08:57.080 and so this question about when is it time for 0:08:57.120 --> 0:09:01.360 the FED to cut really comes down to the inflation numbers. Recently, 0:09:01.400 --> 0:09:03.680 these inflation numbers have not been great for them. They're 0:09:03.720 --> 0:09:06.079 showing some signs of picking up, particularly in some of 0:09:06.120 --> 0:09:09.160 these cyclical components. So that really is what we think 0:09:09.240 --> 0:09:11.480 is going to weigh and move the needle more for 0:09:11.520 --> 0:09:13.920 the FED than necessarily some of this labor market data. 0:09:14.280 --> 0:09:16.880 Well, we started the year the WORP function on the 0:09:16.880 --> 0:09:19.640 Bloomberg terminal is suggesting maybe as many as six rate cuts. 0:09:19.720 --> 0:09:24.480 Now we're three or maybe even less than that. I know, 0:09:24.520 --> 0:09:26.240 it's kind of lost a lot of credibility with some 0:09:26.320 --> 0:09:29.280 people that were function. How do you get how many 0:09:29.320 --> 0:09:30.480 ray cuts are we going to see this year? 0:09:30.480 --> 0:09:32.280 Do you think so? House few would be of these 0:09:32.480 --> 0:09:34.720 seventy five basis points of cuts. So we see the 0:09:34.760 --> 0:09:37.560 Fed delivering that first twenty five basis point cut in June. 0:09:37.559 --> 0:09:40.360 But here's the difficulty. If they're not able to go 0:09:40.400 --> 0:09:43.400 by June, you get some questions around how close they 0:09:43.440 --> 0:09:46.280 can really begin that cutting cycle around the election season, 0:09:46.720 --> 0:09:49.520 and then you've also got base effects coming from from 0:09:50.120 --> 0:09:52.560 even just core PCE into the second half of the year. 0:09:52.720 --> 0:09:55.560 The lead guitar effects are as bad as well. Megan, 0:09:56.120 --> 0:09:59.360 let me cut to the chase here, which is I 0:09:59.400 --> 0:10:01.720 would say, no, nobody has a clue where we're going, 0:10:02.559 --> 0:10:05.720 other than in the fixed income space. Is witnessed by 0:10:05.760 --> 0:10:10.000 the real yield. We see a buoyant economy. Give us 0:10:10.040 --> 0:10:14.000 a primer on what a two year real yield. 0:10:13.880 --> 0:10:18.640 Signals ten year really yield is a nice investment opportunity 0:10:18.720 --> 0:10:21.240 for a lot of different clients, especially when we're looking 0:10:21.240 --> 0:10:24.760 at how much the equity market has rallied already. If 0:10:24.800 --> 0:10:27.720 you're worried about, you know, some of these downside states 0:10:27.720 --> 0:10:29.880 of the US economy, this is why people want to 0:10:29.920 --> 0:10:32.880 be buying duration. They want to be buying US rates. 0:10:33.360 --> 0:10:35.640 But the issue here again is that we're not seeing 0:10:35.640 --> 0:10:38.000 this very meaningful cool down in the US economy, and 0:10:38.040 --> 0:10:40.800 so rates are priced accordingly. We're having a lot of 0:10:40.840 --> 0:10:43.000 inflows into fixed income. I mean, you just look at 0:10:43.080 --> 0:10:45.240 like at ig high yield spreads. 0:10:44.880 --> 0:10:47.760 A lot of demands Bank of America. 0:10:47.880 --> 0:10:50.520 I mean, what we're seeing is very strong inflows into 0:10:50.520 --> 0:10:53.240 fixed income funds across the board, and that's really helped 0:10:53.280 --> 0:10:56.040 support this tremendous amount of treasury supply that we see 0:10:56.080 --> 0:10:59.200 coming to the market, and also investment grade credit supply. 0:10:59.520 --> 0:11:02.440 There's been a lot of demand to chase these higher yields. 0:11:02.720 --> 0:11:04.760 The real question here is just how much are we 0:11:04.800 --> 0:11:06.640 actually going to be able to see yields fall if 0:11:06.679 --> 0:11:08.640 the US economy is staying so resilient. 0:11:09.320 --> 0:11:11.760 When you and your colleagues at Bank of America, it's 0:11:11.800 --> 0:11:16.120 Merrill Lynch in my mind, I'm sticking with it. Thank you, Yeah, 0:11:16.160 --> 0:11:19.679 one of my employers, when you took me a great way. 0:11:19.720 --> 0:11:22.720 Wait a minute, when you light up the major firms, 0:11:22.760 --> 0:11:24.520 can we say you've worked for them all. 0:11:24.679 --> 0:11:27.840 And unfortunate they've all gone out of business after I've left, 0:11:28.320 --> 0:11:32.760 including Mery Lynch. So when you talk your hedge fund clients, sure, 0:11:32.840 --> 0:11:35.160 are they buying treasuries or are they shorting treasuries? 0:11:35.320 --> 0:11:38.360 It's a mix, it's a mix. So on the macro side, right, 0:11:38.400 --> 0:11:40.760 you have investors who are taking on this year that well, 0:11:40.880 --> 0:11:42.320 maybe the Fed is not going to be able to 0:11:42.320 --> 0:11:44.920 cut it all this year, and that can really trigger 0:11:45.000 --> 0:11:48.000 a lot of concerns for exactly where that very important 0:11:48.040 --> 0:11:50.640 neutral rate is for fixed income. Is it two percent 0:11:50.720 --> 0:11:53.240 real yield or is it something higher? And so that 0:11:53.320 --> 0:11:55.880 really is a very big temperature check for whether or 0:11:55.920 --> 0:11:58.559 not we can see yields continue to move higher. Is 0:11:58.600 --> 0:12:00.480 going to be the neutral and when the Fed is 0:12:00.480 --> 0:12:01.040 actually going to be. 0:12:01.040 --> 0:12:03.240 Kind of they're at the Bank of America Palace. Okay, 0:12:03.280 --> 0:12:05.480 they're having lunch. They got pizza out. 0:12:05.480 --> 0:12:10.040 Samit a Supermanian. Megan Schweiber Gabin shows up with three 0:12:10.040 --> 0:12:12.640 of his minions and all, and they're blah blah blah 0:12:12.720 --> 0:12:16.480 blah blah, and Brian moynihan walks in and what I 0:12:16.640 --> 0:12:19.200 know what Brian moynihan is going to say is, but 0:12:19.360 --> 0:12:22.360 this is what we see in the real economs. What 0:12:22.400 --> 0:12:25.120 do you forget about all the finance mumble jumble in 0:12:25.120 --> 0:12:29.760 the Georgetown financial malarkey. When you with Brian moynihan look 0:12:29.800 --> 0:12:32.600 at the real economy, don't you see a buoyant seed 0:12:32.600 --> 0:12:34.160 that's just irrefutable. 0:12:34.400 --> 0:12:35.920 We do see that in a lot of the data 0:12:35.920 --> 0:12:38.880 that we look at, our card data for examples. Just 0:12:38.960 --> 0:12:40.559 a fun part of my job is we get to 0:12:40.600 --> 0:12:42.440 actually go out and meet a lot of our corporate 0:12:42.520 --> 0:12:43.720 clients at be of a too. 0:12:43.800 --> 0:12:46.560 They meet their story so strange. 0:12:46.400 --> 0:12:49.520 Besides just the hedge fun folks, right, So you can 0:12:49.600 --> 0:12:52.240 kind of get a good temperature check from that as well. 0:12:52.280 --> 0:12:55.040 And really the story has been a story of resilience. 0:12:55.080 --> 0:12:57.600 It's been a story of still needing to find people 0:12:57.640 --> 0:13:00.280 to fill seats in the job market, and it's it 0:13:00.360 --> 0:13:01.000 is quite strung. 0:13:01.000 --> 0:13:03.240 I'll get none more in here, but the science here, Megan, 0:13:03.559 --> 0:13:06.199 is I just mad. Nineteen hundred dollars for an economy 0:13:06.240 --> 0:13:09.600 ticket to Europe, and he says the restaurants are packed. 0:13:11.360 --> 0:13:13.360 What I love about Brian moynihan tom is when you 0:13:13.440 --> 0:13:15.599 ask him in an interview, Hey Brian, where do you 0:13:15.640 --> 0:13:18.720 think rates are going? What he says our rates people, Yes, 0:13:18.960 --> 0:13:22.640 they're going to the economy is going well. Our economists say. 0:13:22.760 --> 0:13:24.839 He isn't back at Bank of bost He's very good 0:13:24.840 --> 0:13:25.080 at that. 0:13:25.200 --> 0:13:27.200 So he always gives you guys all the props. So 0:13:27.840 --> 0:13:29.880 Megan here, I mean, I think one of the concerns 0:13:29.880 --> 0:13:31.920 for a lot of folks is people are saying this 0:13:32.000 --> 0:13:35.280 FED is already behind the ball, inflation is whipped. They 0:13:35.280 --> 0:13:37.920 should be cutting now. What do you say to those folks? 0:13:38.240 --> 0:13:40.120 So the idea here is that a lot of the 0:13:40.160 --> 0:13:43.200 improvement that we've seen from the inflation backdrop so far 0:13:43.320 --> 0:13:45.839 has really been supply driven. It's been the story of 0:13:45.880 --> 0:13:49.160 the improvement in goods inflation, which was the easy part 0:13:49.160 --> 0:13:50.640 of the story. It was the part of the story 0:13:50.640 --> 0:13:52.920 that the FED knew was going to be more transitory. 0:13:53.360 --> 0:13:55.440 The big question for the FED, and what we'll see 0:13:55.440 --> 0:13:57.520 in the upcoming data prints, is whether or not we 0:13:57.640 --> 0:14:00.960 see more of this cooling and services. This is very 0:14:01.000 --> 0:14:04.440 important for inflation to come in sustainably where they want 0:14:04.440 --> 0:14:06.920 it to. So you know, certainly a lot of good 0:14:06.920 --> 0:14:09.920 progress has been made. The big question is the confidence 0:14:09.960 --> 0:14:12.000 and prediction around that staying where it is. 0:14:12.160 --> 0:14:15.400 Thirty seconds, we're all watching Final four with Megan swiber 0:14:15.840 --> 0:14:18.520 and somebody asks you, are you worried about the ballooning 0:14:18.679 --> 0:14:21.800 interest expense of the United States of America? 0:14:21.840 --> 0:14:22.120 Are you? 0:14:22.800 --> 0:14:22.880 So? 0:14:23.000 --> 0:14:25.880 This is actually a very big part of certainly how 0:14:25.880 --> 0:14:28.800 we're thinking about deficits going forward. And this is really 0:14:28.840 --> 0:14:31.560 where higher for longer can become a big problem for 0:14:31.640 --> 0:14:35.000 the largest borrower in the world. If you're seeing rates 0:14:35.040 --> 0:14:39.240 settle above a three to four percent handle, that's above 0:14:39.280 --> 0:14:41.880 where we think the long run GDP growth is of 0:14:41.920 --> 0:14:44.320 the US economy and can contribute to a lot of 0:14:44.360 --> 0:14:47.560 these financing costs. So it's a concern, especially in an 0:14:47.600 --> 0:14:49.320 environment where the head's not going to be able to 0:14:49.360 --> 0:14:50.120 cut all that much. 0:14:50.200 --> 0:14:51.840 Neature to come bring loin hand with you. 0:14:52.480 --> 0:14:54.520 We just want to hear him say well, Megan Schweibers 0:14:54.480 --> 0:14:56.960 says this exactly. Megan, thank you so much for the 0:14:57.000 --> 0:15:05.720 Bank of America Director US rates A strategy Jillian Tessa, 0:15:05.800 --> 0:15:08.400 shut up and read it. The book is simple, how 0:15:08.400 --> 0:15:13.000 to Listen when Markets Speak, And in classic Larry McDonald form, 0:15:13.080 --> 0:15:16.400 it's about yeah, the text, but also along the way 0:15:17.160 --> 0:15:21.360 vignettes do this, don't do that, little appendices and that 0:15:21.360 --> 0:15:24.600 that lead to thought provoking work. And that is a 0:15:24.680 --> 0:15:28.480 hallmark of what Larry McDonald has done for years. Everything 0:15:28.560 --> 0:15:30.960 is always interesting in the bear Trap Report. 0:15:31.080 --> 0:15:34.480 And then last year he wrote let me get the 0:15:34.560 --> 0:15:35.000 date out here. 0:15:35.040 --> 0:15:37.560 I think it was in the summer of last year. 0:15:37.760 --> 0:15:40.000 It was like an article in the New Statesman in London. 0:15:40.080 --> 0:15:44.240 It was like ten thousand words, Lawrence McDonald, these are 0:15:44.240 --> 0:15:49.400 the forces that are putting a constant bid under the market. 0:15:49.600 --> 0:15:52.520 Every once in a while you write something that is 0:15:52.640 --> 0:15:56.040 so prescient you just go, damn, I hate him. I 0:15:56.080 --> 0:15:58.840 got to read these ten thousand words. Joining us now, 0:15:58.920 --> 0:16:01.360 Lawrence McDonald, great to have. 0:16:01.280 --> 0:16:02.680 You with us. 0:16:03.080 --> 0:16:05.720 It's not that you nailed the bullmarket like your Dnni 0:16:05.800 --> 0:16:08.640 or Akampora, but you said, there's this. 0:16:08.920 --> 0:16:10.840 Wall of money out there. 0:16:11.280 --> 0:16:14.240 How does that wall of money in your acclaimed essay, 0:16:14.480 --> 0:16:18.320 how does it fold into how to Listen when market Speak? 0:16:19.760 --> 0:16:24.120 Well, you know, Tommy, think about passive investing, right and 0:16:24.240 --> 0:16:27.600 Jack bowlgels up in heaven, God bless him. But you know, 0:16:27.680 --> 0:16:31.840 the vanguard origination of passive investing. Passive invest's starting with 0:16:31.840 --> 0:16:35.480 the best of intentions, the best of intentions, but at 0:16:35.520 --> 0:16:38.800 some point passive becomes a little bit more evil because 0:16:39.440 --> 0:16:43.240 there's thirty five trillion, at least thirty five trillion time 0:16:43.320 --> 0:16:47.080 to the index S and P. And so when you 0:16:47.160 --> 0:16:50.000 have a stock like in Nvidia that's now become five 0:16:50.080 --> 0:16:53.560 percent of the S and P five five percent, and 0:16:53.640 --> 0:16:58.360 it's trading eighty percent above it's two undred day moving average. Meanwhile, 0:16:58.640 --> 0:17:01.120 you know, the energy sector as a whole is only 0:17:01.160 --> 0:17:01.800 three percent of. 0:17:01.760 --> 0:17:02.200 The S ANDP. 0:17:02.880 --> 0:17:06.440 And so what happens is at some point, too much 0:17:06.520 --> 0:17:10.239 money is in passive investing. There's not a lot of 0:17:10.280 --> 0:17:13.760 thinking behind that, and it gets very crowded in what 0:17:13.760 --> 0:17:16.160 we call herdy in other words, right like a herd, 0:17:16.520 --> 0:17:19.080 and it creates more distortions on the upside, and it 0:17:19.119 --> 0:17:21.120 will create more distortions on the downside. 0:17:21.119 --> 0:17:24.520 Okay, somebody like Cliff Astinus, who's smarter than me, you know, 0:17:24.600 --> 0:17:28.040 they're basically apoplectic about the interior dynamics of the market. 0:17:28.119 --> 0:17:30.960 Years ago with Lehman, this is what you did. And 0:17:31.440 --> 0:17:34.160 my answer is when you wake up in the morning, 0:17:34.560 --> 0:17:38.120 what does Larry McDonald apply from how to listen when 0:17:38.160 --> 0:17:40.480 markets speak over? I just want to get to the 0:17:40.600 --> 0:17:44.760 end of twenty twenty four. What's the dynamic you're using 0:17:44.840 --> 0:17:47.720 right now, Larry to analyze this market. 0:17:49.000 --> 0:17:53.280 Well, you know, as a former Lehmen trader, our first 0:17:53.280 --> 0:17:55.960 book was a New York Times bestseller and it's done 0:17:56.000 --> 0:17:58.240 pretty well. It's in about twelve languages. But I tell 0:17:58.280 --> 0:18:01.040 my wife once a month, Tom, if we sell a 0:18:01.080 --> 0:18:04.720 million books, we'll break break even on our Leman stock, right, 0:18:04.840 --> 0:18:08.080 So in other words, you know, it's it's been a 0:18:08.119 --> 0:18:12.040 long road. But the lesson from this book is that 0:18:12.520 --> 0:18:16.879 the Lehman collapsed. The response to that was a four 0:18:17.000 --> 0:18:23.000 trillion fiscal and monetary response, four trillion the response to 0:18:23.080 --> 0:18:27.119 COVID So far it has been all in about sixteen 0:18:27.240 --> 0:18:32.119 trillion fiscal and monetary. Fiscal and monetary response. So everybody's 0:18:32.160 --> 0:18:35.920 in at twenty ten to twenty twenty portfolio. In other words, 0:18:36.440 --> 0:18:40.479 everybody's in that kind of disinflation regime portfolio, which includes 0:18:40.520 --> 0:18:43.920 a lot of growth stocks. It doesn't include any hard assets, 0:18:43.960 --> 0:18:48.240 it's all financial assets. There's twenty two trillion TOM in 0:18:48.280 --> 0:18:52.680 the Nasdaq one hundred twenty two trillion, and there's very 0:18:52.680 --> 0:18:56.280 little money in real hard assets bitcoined overall. Most of 0:18:56.280 --> 0:18:59.440 the money is in what we call financial assets. It's 0:18:59.480 --> 0:19:05.080 bonds and growth stocks. But in an inflationary regime that 0:19:05.240 --> 0:19:08.679 is sustainable, and that might just happen after a sixteen 0:19:08.880 --> 0:19:14.000 trillion fiscal and monetary response, you probably need an entirely 0:19:14.040 --> 0:19:18.359 different portfolio. A twenty twenty to twy thirty portfolio is 0:19:18.359 --> 0:19:20.840 going to look a lot different, a lot different Tom 0:19:21.200 --> 0:19:23.280 than a twenty. 0:19:22.800 --> 0:19:26.840 Twentyfolio, exactly. So, Larry, the book's incidled how to listen 0:19:26.880 --> 0:19:30.439 when markets speak? Boy, what are the markets telling us 0:19:30.520 --> 0:19:31.000 right now? 0:19:33.440 --> 0:19:38.240 Well, right now, we have a tremendous amount of capital 0:19:38.760 --> 0:19:43.679 that's moved into certain spots, and volatility is low, and 0:19:43.920 --> 0:19:47.840 there are opportunities really in if you look at not 0:19:47.880 --> 0:19:49.760 just gold and silver, but look at aluminum. 0:19:49.760 --> 0:19:50.240 Look at al. 0:19:50.200 --> 0:19:55.679 CoA ol Co equity is moving I think about sixty 0:19:55.760 --> 0:19:58.639 seventy percent off the lows, right, and that's from the 0:19:58.680 --> 0:20:01.359 since the fourth quarter. And you've got oil and gas 0:20:01.400 --> 0:20:04.840 companies making new highs in the XL. So I think, 0:20:04.880 --> 0:20:07.480 what's happened with the market's telling us is that there's 0:20:07.480 --> 0:20:11.560 a migration of capital that's starting. Capital is moving from 0:20:11.840 --> 0:20:16.600 financial assets into hert assets. And if Powell is truly 0:20:16.760 --> 0:20:20.520 on this dubbish crusade in an election year as to 0:20:20.600 --> 0:20:24.000 lean a little bit dubbish relative to where inflation is, 0:20:24.560 --> 0:20:26.920 then I think the market's telling us that you want 0:20:26.920 --> 0:20:31.159 to start moving into you know, your aluminums, your coppers, 0:20:31.280 --> 0:20:33.000 and your heart asset equities. 0:20:33.359 --> 0:20:35.399 So Larry, I mean, I guess you know a lot 0:20:35.440 --> 0:20:37.119 of folks were sitting here and we're looking at this 0:20:37.200 --> 0:20:38.880 the S and P five hundred. Let's just take that 0:20:39.400 --> 0:20:44.040