WEBVTT - Surveillance: Yellen on China & Recession Risk 0:00:05.080 --> 0:00:08.920 This is the Bloomberg Surveillance podcast. I'm Lisa A. Bromoids, 0:00:08.920 --> 0:00:11.879 along with Tom Keen and Jonathan Ferrow. Join us each 0:00:11.960 --> 0:00:15.760 day for insight from the best in economics, geopolitics, finance 0:00:15.800 --> 0:00:19.480 and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 0:00:19.600 --> 0:00:22.840 Spotify and anywhere you get your podcasts, and always on 0:00:22.880 --> 0:00:26.440 Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business app. 0:00:26.800 --> 0:00:31.040 That conversation can commence Right now Bloomberg's Amrie Horton sitting 0:00:31.040 --> 0:00:33.880 down with the Treasury Secretary Janet Yell, and Amrie I 0:00:33.920 --> 0:00:34.440 would see you. 0:00:35.680 --> 0:00:37.599 Thanks so much, John Yea, We're very pleased to be 0:00:38.120 --> 0:00:41.279 joined by Jersury Secretary Janet Yellen. You join us now 0:00:41.320 --> 0:00:43.640 from India where you're meeting your counterparts. It's the G 0:00:43.760 --> 0:00:47.240 twenty finance ministers and Central Bank Governor's meeting. And really 0:00:47.280 --> 0:00:49.720 the cloud around this meeting is the fresh data we 0:00:49.760 --> 0:00:52.879 got out of China today. Beijing slowing momentum in their 0:00:52.920 --> 0:00:57.120 growth city is talking about the growth target being at risk. 0:00:57.400 --> 0:01:00.240 I'd like to start Treasury Secretary with the fact of 0:01:00.280 --> 0:01:03.160 whether you think this means there could be an increased 0:01:03.200 --> 0:01:04.440 chance of a US recession. 0:01:05.040 --> 0:01:09.720 Well, you're talking about the slow growth number from China, 0:01:09.880 --> 0:01:11.039 Is that right, Anne Marie? 0:01:11.959 --> 0:01:14.720 Yes, correct, So I think. 0:01:14.720 --> 0:01:21.800 China has seen slower growth than they expected upon opening 0:01:21.959 --> 0:01:28.840 up from COVID. Consumer spending has been relatively weak. It 0:01:28.880 --> 0:01:33.600 looks like consumers are more focused on building back their 0:01:33.720 --> 0:01:38.480 savings buffers, and so growth has been slow in As 0:01:38.520 --> 0:01:43.399 you know, youth unemployment is quite high there. So I 0:01:43.440 --> 0:01:49.280 think the Chinese are concerned about sluggish growth in their economy. 0:01:49.800 --> 0:01:52.440 But what does this mean for US growth and global 0:01:52.480 --> 0:01:55.480 growth overall? Is the soft landing in the United States 0:01:55.480 --> 0:01:57.240 sill your base case scenario? 0:01:57.880 --> 0:02:03.160 Well, many countries do to depend on strong Chinese growth 0:02:03.840 --> 0:02:08.600 to promote growth in their own economies, particularly countries in Asia, 0:02:09.160 --> 0:02:14.680 and slow growth in China can have some negative spillovers. 0:02:15.560 --> 0:02:19.959 For the United States, growth is slowed, but our labor 0:02:20.040 --> 0:02:26.000 market continues to be quite strong. I don't expect a recession. 0:02:27.120 --> 0:02:31.080 I think that we're on a good path to bringing 0:02:31.160 --> 0:02:36.880 inflation down. The most recent inflation data we're quite encouraging 0:02:37.639 --> 0:02:42.679 that we're making progress on getting inflation down. But as 0:02:42.760 --> 0:02:47.080 I'd hoped and expected that would occur in the context 0:02:47.160 --> 0:02:51.240 of a strong labor market, and we continue to see 0:02:51.280 --> 0:02:55.600 that the libor market's the fact the labor market's been 0:02:55.639 --> 0:03:01.440 so strong has encouraged more primate people to enter the 0:03:01.560 --> 0:03:05.399 labor force into work, and that's helped take a bit 0:03:05.440 --> 0:03:09.480 of the heat out of the labor market. The fact 0:03:09.560 --> 0:03:15.280 that growth overall has slowed after we enjoyed a rapid recovery, 0:03:15.639 --> 0:03:20.600 that's normal, but it's also led to some reduction in 0:03:21.760 --> 0:03:27.959 the desire of firms to hire. Still lots of job openings, 0:03:28.040 --> 0:03:34.480 but wage growth is moderating and inflation is subsiding. So 0:03:34.960 --> 0:03:37.720 I think we're in a good path on the United States. 0:03:38.120 --> 0:03:40.600 Okay, So it sounds like soft landing is your base case, 0:03:40.680 --> 0:03:42.400 and you don't think we're going to see a recession. 0:03:42.840 --> 0:03:45.400 Yesterday when you were speaking to reporters, you talked about 0:03:45.440 --> 0:03:49.120 this de escalation with China, and you rolled out lifting 0:03:49.280 --> 0:03:52.640 tariffs as part of this de escalation with Beijing. 0:03:52.920 --> 0:03:54.240 So what is on the table? 0:03:54.640 --> 0:03:57.400 You know, several years have gone by in which we've 0:03:57.480 --> 0:04:03.720 had COVID lockdowns, especially in China, and very limited contact 0:04:04.320 --> 0:04:10.280 between senior officials in the United States in China, and 0:04:10.320 --> 0:04:14.440 we now have a new economic team in China that 0:04:15.400 --> 0:04:20.039 we need to establish relationships with We need to get 0:04:20.040 --> 0:04:24.560 our relationship back in a more stable place, put a 0:04:24.600 --> 0:04:29.440 floor under it, and try to promote better understanding between 0:04:29.480 --> 0:04:34.800 our countries. So I recently made a trip met with 0:04:35.080 --> 0:04:42.360 a number of Chinese officials, including the new economic team. There, 0:04:43.200 --> 0:04:48.320 we had very candid discussions. Each side raised a series 0:04:48.400 --> 0:04:54.440 of concerns. Chinese certainly mentioned their concern with the tariffs 0:04:54.440 --> 0:04:59.760 that we have in place, but we had constructive conversations, 0:05:00.400 --> 0:05:08.600 deepened our understanding of the economic situation and of our concerns, 0:05:08.640 --> 0:05:12.839 were able to address them and agree that there are 0:05:12.839 --> 0:05:18.560 a broad range of global challenges, particularly debt and climate change, 0:05:18.920 --> 0:05:22.599 that affect the entire global economy that we need to 0:05:22.680 --> 0:05:27.440 work on jointly, and I'm hopeful we'll be able to 0:05:27.520 --> 0:05:33.800 do that more successfully. On tariffs, you know, we put 0:05:33.880 --> 0:05:40.040 tariffs in place on China because we had underlying concerns 0:05:40.440 --> 0:05:47.839 about unfair trade practices, particularly those affecting intellectual property and 0:05:47.960 --> 0:05:54.320 technology transfer, and those concerns really have not been addressed. 0:05:55.640 --> 0:06:00.760 We're undergoing a four year required review of tariff and 0:06:01.000 --> 0:06:05.960 of course China also retaliated putting tariffs in place on us. 0:06:07.360 --> 0:06:09.760 We have to see what comes out of the four 0:06:09.880 --> 0:06:15.880 year review. But I would emphasize that really the underlying 0:06:16.040 --> 0:06:20.080 concerns we have have not yet been addressed, and we 0:06:20.240 --> 0:06:22.400 need to work on that going forward. 0:06:23.279 --> 0:06:26.039 But when you're looking at de escalating, we're trying to 0:06:26.040 --> 0:06:27.880 figure out what we'll be left on the table, because 0:06:27.920 --> 0:06:30.160 what it feels right now is the administration is actually 0:06:30.240 --> 0:06:32.760 just amping up when it comes to potential tit for 0:06:32.839 --> 0:06:36.680 tat with Beijing. There is the outbound Executive Order that 0:06:36.720 --> 0:06:38.280 potentially we could see as soon as the end of 0:06:38.400 --> 0:06:39.440 July or this summer. 0:06:39.760 --> 0:06:41.800 Could that be a place pulling. 0:06:41.480 --> 0:06:44.320 A punch from the outbound Executive order, maybe making that 0:06:44.400 --> 0:06:45.720 a little bit more toned down. 0:06:46.120 --> 0:06:48.800 Could that be a place you could de escalate with Beijing. 0:06:49.880 --> 0:06:52.120 Well, first of all, I want to say that what 0:06:52.160 --> 0:06:56.279 we're doing is not TIT for tet. What we're doing 0:06:56.640 --> 0:07:03.960 is putting in place controls that are designed to protect 0:07:04.240 --> 0:07:10.840 US national security and in some cases to address fundamental 0:07:11.000 --> 0:07:17.120 human rights abuses. And we do intend to protect our 0:07:17.240 --> 0:07:23.440 national security. We have export controls that play an important 0:07:23.560 --> 0:07:27.680 role in accomplishing that, and what I try to explain 0:07:27.760 --> 0:07:34.520 to our Chinese counterparts is that our desire is to 0:07:34.680 --> 0:07:44.120 make these US policies clearly national security focused, transparent and narrow, 0:07:45.200 --> 0:07:51.280 that we're not attempting to stifle economic progress in China 0:07:51.400 --> 0:07:56.480 that we have and want to continue to have deep 0:07:56.560 --> 0:08:00.640 economic ties. After all, this year are trade aid has 0:08:00.720 --> 0:08:07.720 reached almost seven hundred billion dollars. The national security concern 0:08:07.880 --> 0:08:09.320 the economic. 0:08:09.120 --> 0:08:11.760 Madame Secretary of the National Security concerns are so important. 0:08:11.840 --> 0:08:15.520 Jake Sullivan called for this outbound of executive order two 0:08:15.680 --> 0:08:16.239 years ago. 0:08:16.400 --> 0:08:18.600 Why is it taking the administration so long? 0:08:19.520 --> 0:08:24.840 So we are looking carefully at outbound investment controls, and 0:08:25.360 --> 0:08:29.960 they would serve as a complement to the export controls 0:08:30.400 --> 0:08:35.040 that we have in place to make sure that we've 0:08:35.120 --> 0:08:40.199 covered all the channels by which technologies can be transferred 0:08:40.240 --> 0:08:45.320 to China that we think pose national security concerns. I 0:08:45.440 --> 0:08:49.440 explained to my Chinese counterparts that if we go forward 0:08:49.559 --> 0:08:53.800 with these, they would indeed be narrowly targeted. They would 0:08:53.840 --> 0:09:01.200 focus on a few sectors, in particular semiconductors, quantum and 0:09:01.679 --> 0:09:08.560 artificial intelligence. That they would contain a combination of notification 0:09:08.840 --> 0:09:18.200 requirements and in very narrowly scoped portions of these sectors prohibitions. 0:09:18.520 --> 0:09:23.000 But these would not be broad controls. That would affect 0:09:23.440 --> 0:09:29.560 US investment broadly in China, or in my opinion, have 0:09:29.800 --> 0:09:36.760 a fundamental impact on affecting the investment climate for China. 0:09:37.200 --> 0:09:40.479 So these would be national security focused. 0:09:41.320 --> 0:09:42.840 It sounds like it's already done. 0:09:42.960 --> 0:09:46.120 Is the administration have it finished and is just waiting 0:09:46.120 --> 0:09:47.520 for a good time to release it. 0:09:48.400 --> 0:09:50.280 We want to make sure if we do this, that 0:09:50.400 --> 0:09:54.120 we get it right, and we've been working on the details. 0:09:54.800 --> 0:09:57.480 If we do go ahead, and there. 0:09:57.400 --> 0:10:00.480 Is a good chance that we will, that we would 0:10:00.520 --> 0:10:04.840 put out along with the executive Order and notice of 0:10:05.360 --> 0:10:09.480 proposed rulemaking so that the public would have a chance 0:10:09.880 --> 0:10:16.120 to comment on these proposed controls, and we would receive 0:10:16.200 --> 0:10:21.640 a wide range of public input before finalizing anything that 0:10:21.760 --> 0:10:22.240 we do. 0:10:23.760 --> 0:10:25.920 Madame Secretary, you obviously have a lot on your plate 0:10:25.960 --> 0:10:29.360 when it comes to re engaging with China and your discussions. 0:10:29.440 --> 0:10:32.640 They're just off this trip from Beijing. I'm curious how 0:10:32.679 --> 0:10:36.320 difficult the dialogue is going to continue to be after 0:10:36.360 --> 0:10:42.479 the revelations about the Chinese hacking of your colleague, Secretary 0:10:42.520 --> 0:10:43.320 Gina Romundo. 0:10:44.640 --> 0:10:51.000 So I do have concerns about hacking of US government 0:10:51.080 --> 0:10:56.680 officials or private individuals or companies, and I know the 0:10:56.800 --> 0:11:03.360 United States has expressed those concerns, but we intend to 0:11:03.400 --> 0:11:10.400 continue to deepen our discussions with China to increase our engagement. 0:11:11.280 --> 0:11:18.400 It's especially important to explain what our motivation is to 0:11:18.480 --> 0:11:25.599 avoid misunderstandings that can lead to necessary, unnecessary and dangerous escalation. 0:11:26.720 --> 0:11:34.959 President Chi and President Biden agreed in Bali that senior officials, 0:11:35.000 --> 0:11:42.560 including those in economics, should interact more regularly, and I 0:11:42.600 --> 0:11:46.480 think an outcome of my trip there was that we 0:11:46.520 --> 0:11:50.440 will have deeper ongoing engagement at all levels. 0:11:51.120 --> 0:11:53.400 When did you learn about the China email hockey. 0:11:53.400 --> 0:11:55.200 I'm curious if you had a chance to maybe bring 0:11:55.280 --> 0:11:57.080 this up on your trip to Beijing. 0:11:58.360 --> 0:12:02.000 I believe I did not know about that in Beijing. 0:12:03.000 --> 0:12:05.479 Wasn't one of the things that we discussed. 0:12:05.880 --> 0:12:08.280 I also want to ask about what's happening on the ground, 0:12:08.360 --> 0:12:10.600 something that I know is very important to you, and 0:12:10.640 --> 0:12:14.840 this comes to debt relief of these developing countries. There 0:12:14.920 --> 0:12:18.719 has been this push from the US administration to use 0:12:18.760 --> 0:12:23.480 the Zambia principle for other countries like Ghana, but that's 0:12:23.559 --> 0:12:24.480 not getting. 0:12:24.160 --> 0:12:26.640 The broad support it needs in India. On the ground. 0:12:26.760 --> 0:12:30.880 Amongst other G twenty finance ministers is China the hold 0:12:30.960 --> 0:12:31.360 up here? 0:12:32.200 --> 0:12:38.000 Well, we designed the G twenty designed something called the 0:12:38.040 --> 0:12:42.920 Common Framework, which is a set of trough principles and 0:12:43.559 --> 0:12:48.440 processes to deal with unsustainable DIBt situations. 0:12:49.120 --> 0:12:51.079 And we would like. 0:12:51.080 --> 0:12:55.360 To see countries that apply to use the Common Framework 0:12:55.880 --> 0:13:01.480 get rapid relief from their dit that they need in 0:13:01.600 --> 0:13:05.320 order to grow and be able to attract investment and 0:13:05.480 --> 0:13:11.400 undertake IMF programs that can help to stabilize their economies. 0:13:11.920 --> 0:13:16.240 And the few cases that have applied to use the 0:13:16.320 --> 0:13:21.920 Common Framework, including Zambia, have taken far too long. The 0:13:22.040 --> 0:13:26.079 process has been onerous and it's taken a very long 0:13:26.200 --> 0:13:30.560 time to get debt relief. We are pleased that China 0:13:30.640 --> 0:13:34.720 has become China, after all, is a major creditor of 0:13:34.800 --> 0:13:40.000 these countries. We have been anxious to see China move 0:13:40.080 --> 0:13:46.320 more quickly and take a more constructive attitude. Participating in 0:13:46.360 --> 0:13:52.599 these debt relief talks and getting agreement on Zambia is 0:13:52.640 --> 0:13:58.000 an important step. China has also been helpful in Ghana, 0:13:58.120 --> 0:14:03.680 the case of Ghana and Sri Lanka, and I'm hopeful 0:14:03.880 --> 0:14:08.520 that we'll be able going forward to make more rapid progress. 0:14:09.240 --> 0:14:13.400 I should emphasize the dead issue is one that concerns 0:14:13.440 --> 0:14:18.200 the entire g twinning and we are united in wanting 0:14:18.280 --> 0:14:23.560 to see this framework work more effectively and it is 0:14:23.600 --> 0:14:25.760 a priority for India as well. 0:14:26.120 --> 0:14:28.720 Madam Secretary, thank you so much for your time today 0:14:28.760 --> 0:14:32.000 live from India at the G twenty Finance Ministers and 0:14:32.080 --> 0:14:34.680 Central Bank Governors meeting. And safe travels to you as 0:14:34.680 --> 0:14:36.360 I know you're heading off to Vietnam next. 0:14:47.240 --> 0:14:49.360 Let's push it out and talk about a federal reserve 0:14:49.560 --> 0:14:51.800 for July and beyond. The former FED Vice Chair Richard 0:14:51.800 --> 0:14:54.800 Clarda saying market bets for rat cut in March makes sense. 0:14:55.120 --> 0:14:58.160 JP Morgan's Calsi Barra writes in this raightcuts will need 0:14:58.240 --> 0:15:00.320 to be preceded by a more material way can get 0:15:00.360 --> 0:15:03.200 the labor market tom while we are seeing softening under 0:15:03.240 --> 0:15:05.760 the surface, we will need to see a further slow 0:15:05.760 --> 0:15:08.720 in job creation or a sharp pick up in layoffs 0:15:08.760 --> 0:15:11.600 the cause the FED to shift away from the concept 0:15:11.680 --> 0:15:12.960 of higher for longer. 0:15:13.240 --> 0:15:17.000 Joining us now, Kelsey Barrow fixed income portfolio manager that 0:15:17.040 --> 0:15:20.120 barely describes your duties with some Michael over JP Morgan 0:15:20.160 --> 0:15:23.920 Asset Management. Boy, Am I glad you're here. First of all, 0:15:24.160 --> 0:15:30.120 have you people changed tone, duration stability, the Fabosi curve 0:15:30.680 --> 0:15:33.040 out rather Fobosi out there. You'll give all the different 0:15:33.080 --> 0:15:37.040 metrics you use. Have you changed that view given the 0:15:37.080 --> 0:15:38.880 news flow of the last ten days. 0:15:39.120 --> 0:15:41.880 So I think the biggest data point that is impacting 0:15:41.920 --> 0:15:45.640 our view has been the recent inflation data. I think 0:15:45.680 --> 0:15:49.720 what we've seen there is increased confidence that inflation is 0:15:49.840 --> 0:15:53.800 coming down, and it's coming down faster than the FED projects. 0:15:53.920 --> 0:15:56.440 The FED has a forecast of three point nine percent 0:15:56.520 --> 0:15:58.760 for core PC by the end of the year. We 0:15:58.800 --> 0:16:00.640 think they're going to get there, and we're going and 0:16:00.680 --> 0:16:02.720 they're going to go even further. Inflation is going to 0:16:02.760 --> 0:16:05.880 move down even further. So for us, what we're seeing 0:16:06.040 --> 0:16:08.000 is the FED is going to be able to pause 0:16:08.040 --> 0:16:10.520 and it's going to be a function of this inflation 0:16:10.640 --> 0:16:14.240 data coming down faster than the FED projects. 0:16:14.760 --> 0:16:18.360 Look at this and I say, Okay, what's the tactical response, 0:16:19.040 --> 0:16:22.760 like do you barbell, do you ladder? Do you shift 0:16:22.840 --> 0:16:26.720 your ladder out picking up greater duration? What's the do 0:16:27.320 --> 0:16:27.880 right now? 0:16:28.520 --> 0:16:31.600 So we've been looking at the fixed income market this year. 0:16:31.680 --> 0:16:34.200 It was a great trying to frush at Bob's watching, So. 0:16:34.880 --> 0:16:36.640 A great question. I think all morning. 0:16:36.680 --> 0:16:40.200 I've been hearing you guys debate soft landing or hard landing, right, 0:16:40.240 --> 0:16:42.200 and what does that mean for fixed income? Well, the 0:16:42.240 --> 0:16:45.920 good news is is that regardless of a soft landing 0:16:46.120 --> 0:16:48.200 or a hard landing, if the FED is at the 0:16:48.320 --> 0:16:51.280 end of the cycle, bonds are going to outperform. So 0:16:51.320 --> 0:16:54.080 you look at the last seven rate hiking cycles, including 0:16:54.120 --> 0:16:56.840 the ones which were soft landings, that's nineteen eighty four 0:16:57.440 --> 0:17:00.880 and nineteen ninety five. In all of those scenarios, over 0:17:00.920 --> 0:17:05.200 the next two years, cumulatively, bonds outperformed cash or three 0:17:05.240 --> 0:17:08.320 month te bills by an average rate of thirteen percent. 0:17:08.680 --> 0:17:10.639 So we can disagree about if it's going to be 0:17:10.720 --> 0:17:13.560 a hard landing or a soft landing, but what we 0:17:13.680 --> 0:17:17.080 can agree upon is getting an allocation to core fixed 0:17:17.119 --> 0:17:20.840 income at this time is the appropriate positioning for an 0:17:20.960 --> 0:17:23.440 end of cycle time for the FED to pause. 0:17:23.560 --> 0:17:25.919 Matt hombachmore ca and Stanley agrees with you, says Bonnie, 0:17:25.920 --> 0:17:28.000 Dips and bonds. Can we talk about the potential limits 0:17:28.000 --> 0:17:31.680 of a rally. Some people think maybe yields won't fall 0:17:31.760 --> 0:17:34.359 that far that quick. I know that you and the 0:17:34.400 --> 0:17:36.720 team are looking potentially for three percent across the whole curve. 0:17:37.040 --> 0:17:39.320 Can you help people who are listening to this right 0:17:39.359 --> 0:17:41.679 now make sense of that? So right now the two 0:17:41.760 --> 0:17:43.800 years at four seventy two, and you think it's potential 0:17:43.840 --> 0:17:46.160 to get down to three point zero, the ten years 0:17:46.160 --> 0:17:48.840 at three seventy seven to thirty years at about three ninety, 0:17:48.880 --> 0:17:50.840 can you just walk us through how you're thinking about that. 0:17:51.320 --> 0:17:51.520 Yeah. 0:17:51.560 --> 0:17:53.320 To us, what we're seeing is not that there are 0:17:53.320 --> 0:17:55.920 limits to the rally. There's actually limits to the selloff. 0:17:56.200 --> 0:17:58.240 So if you look at the ten year yield so 0:17:58.440 --> 0:18:01.719 far ye're to date, it's not able to sustainably trade 0:18:01.760 --> 0:18:04.320 above four percent. So if you look back, we had 0:18:04.320 --> 0:18:06.520 a peek at four and a quarter in Q four 0:18:06.560 --> 0:18:09.520 of last year. We tried to retest that four percent 0:18:09.640 --> 0:18:12.320 level in Q one of this year. It failed. We 0:18:12.400 --> 0:18:15.320 then tried to retest four percent again in Q two 0:18:15.760 --> 0:18:18.479 that also failed. So what we're seeing is that there 0:18:18.480 --> 0:18:22.200 are limits to how high longer dated yields can trade, 0:18:22.240 --> 0:18:24.480 and to us, that's a signal that we are later 0:18:24.560 --> 0:18:27.080 in the cycle. The FED does have limits to how 0:18:27.119 --> 0:18:30.880 far they can go, and that is reflecting in this 0:18:31.080 --> 0:18:33.600 very historic yield curb in version that we currently see. 0:18:33.680 --> 0:18:36.760 So later cycle, considering end of cycle by core fixed income. 0:18:36.800 --> 0:18:39.800 Treasury's rarely got that. Why a high yield spreads near 0:18:39.840 --> 0:18:40.480 the ties. 0:18:40.200 --> 0:18:40.640 Of the year. 0:18:41.400 --> 0:18:45.080 Yeah, So it has been a grind tighter for credit 0:18:45.480 --> 0:18:48.280 in general. And so we've been looking with our high 0:18:48.320 --> 0:18:50.680 yield analyst about what is going on, and there are 0:18:50.760 --> 0:18:51.560 certainly a lot. 0:18:51.440 --> 0:18:52.280 Of cross currents. 0:18:52.280 --> 0:18:54.560 So if you look across the sectors, right, you're hearing 0:18:54.600 --> 0:18:57.560 different things across every sector. Every sector is kind of 0:18:57.600 --> 0:19:01.199 operating in its own little cycle. From the chemicals or 0:19:01.240 --> 0:19:04.320 technology in high yield not so great, right, then you 0:19:04.400 --> 0:19:07.520 hear from leisure and hospitality and people can't stop traveling. 0:19:07.640 --> 0:19:10.800 Everyone on my Instagram is in Europe this summer. I mean, 0:19:10.880 --> 0:19:11.600 it's incredible. 0:19:11.680 --> 0:19:12.680 That's funny, mind too. 0:19:13.040 --> 0:19:13.560 There you go. 0:19:14.359 --> 0:19:18.119 And so what we're seeing ultimately though, is that in 0:19:18.160 --> 0:19:21.760 the absence of a material weakening in the labor market, 0:19:22.040 --> 0:19:24.720 you're seeing that people just want to get that spread 0:19:25.040 --> 0:19:26.879 and they just want to get that yield. 0:19:27.160 --> 0:19:28.200 And on top of that. 0:19:28.119 --> 0:19:30.680 We've had very little issuance in the high old market, 0:19:30.720 --> 0:19:33.600 so the technicals are really there for that grind tighter. 0:19:33.920 --> 0:19:36.359 And what we found historically is that high old spreads 0:19:36.400 --> 0:19:39.200 really don't blow out until the recession is actually here, 0:19:39.600 --> 0:19:42.959 so this move is not really that unusual, but it 0:19:43.000 --> 0:19:44.199 really has been a grind. 0:19:44.400 --> 0:19:46.280 Do you still see a recession though? I mean, is 0:19:46.320 --> 0:19:49.200 it incompatible to see the strength that we're seeing that's 0:19:49.320 --> 0:19:52.639 underpinning this euphoria that we felt last week and the 0:19:52.680 --> 0:19:56.199 tighter spreads, as John was mentioning, is that compatible with 0:19:56.320 --> 0:19:58.520 a steadied grind lower in inflation? 0:19:59.280 --> 0:20:02.119 So we do see a recession still in the horizon. 0:20:02.880 --> 0:20:05.600 We have seen strong labor markets, but it's really important 0:20:05.600 --> 0:20:09.159 to understand that the labor market is a lagging indicator. 0:20:09.240 --> 0:20:12.440 So the unemployment rate bottoms right as the recession starts, 0:20:12.640 --> 0:20:14.920 and the unemployment rate doesn't peak. 0:20:14.680 --> 0:20:16.240 Until a recession is ending. 0:20:16.560 --> 0:20:19.800 So what we're looking at is the leading indicators, things 0:20:19.920 --> 0:20:23.440 like gross domestic income, which is softening below the surface, 0:20:23.560 --> 0:20:27.560 hours worked within the labor report which is also softening. 0:20:27.800 --> 0:20:30.439 And we're saying the five hundred basis points of rate 0:20:30.560 --> 0:20:34.000 hikes that have already occurred, they're not behind us, they're 0:20:34.080 --> 0:20:35.600 still impacting the economy. 0:20:35.640 --> 0:20:38.240 With John's point, we're seeing spreads right now in hiled 0:20:38.240 --> 0:20:40.480 bonds at the tightest levels going back to April of 0:20:40.520 --> 0:20:43.480 twenty twenty two. This has been an incredible grind. If 0:20:43.480 --> 0:20:45.399 credit is a leading indicator, is saying that we're not 0:20:45.440 --> 0:20:46.760 going to get a recession, We're not going to get 0:20:46.760 --> 0:20:49.160 a default cycle, and all systems ago when you look 0:20:49.200 --> 0:20:52.000 at sucks and where they are. So from your vantage point, 0:20:52.040 --> 0:20:55.119 do you reset and start to allocate a little bit 0:20:55.160 --> 0:20:57.560 more to risk your sectors than say a couple of 0:20:57.600 --> 0:21:01.280 months ago, when a lot of people Jet included saw 0:21:01.800 --> 0:21:03.720 a more imminent recession on the horizon. 0:21:03.920 --> 0:21:07.080 So where I would disagree is credit being a leading indicator. 0:21:07.280 --> 0:21:10.760 In fact, credit highield spreads don't actually tend to blow 0:21:10.800 --> 0:21:13.600 out until the recession is actually upon us. So just 0:21:13.680 --> 0:21:16.480 because risk assets are doing well now doesn't mean that 0:21:16.520 --> 0:21:20.160 a recession isn't on the horizon. So for us, what 0:21:20.200 --> 0:21:23.840 we're doing is we're for focusing on a high quality 0:21:23.880 --> 0:21:25.000 fixing come portfolio. 0:21:25.160 --> 0:21:27.159 So that's investment grade over high yield. 0:21:27.440 --> 0:21:30.879 Another sector we really like right now, agency mortgage backed securities. 0:21:31.160 --> 0:21:34.240 You can get very attractive valuations there. You get a 0:21:34.280 --> 0:21:36.400 lot of the spread without a lot of the risk. 0:21:36.760 --> 0:21:39.160 Kelsey. Most people in the equity space think the bomb 0:21:39.160 --> 0:21:41.280 markets three guys in a room with the slide rule 0:21:41.680 --> 0:21:43.760 and the fact that the opposite is true. It's much bigger, 0:21:43.880 --> 0:21:44.680 much deeper, etc. 0:21:44.960 --> 0:21:45.400 But at the. 0:21:45.400 --> 0:21:50.439 Margin, bonds can move off equity valuations. Are bonds competing 0:21:50.480 --> 0:21:55.600 now with equities? Are people buying particularly credit corporate quality 0:21:55.720 --> 0:21:58.600 bonds versus owning equities? Now do you observe that? 0:21:58.920 --> 0:22:02.760 Yeah, we absolutely do observe that. So what we're seeing 0:22:02.880 --> 0:22:07.080 is that people are taking this opportunity to pick up 0:22:07.160 --> 0:22:10.440 the yields that are historically attractive. So if you look back, 0:22:10.520 --> 0:22:13.640 real yields, for an example, are at their highest level 0:22:13.720 --> 0:22:16.719 in fifteen or twenty years, and this is not an 0:22:16.760 --> 0:22:20.760 opportunity that comes around very often, particularly in an era 0:22:20.920 --> 0:22:23.560 where the Fed has had to go to the zero 0:22:23.640 --> 0:22:25.720 lower bound multiple times in the last few decade. 0:22:25.760 --> 0:22:27.360 What are you guys going to say an issuance? I mean, 0:22:27.400 --> 0:22:29.879 I mean, I know you take the call that Bob Michael. 0:22:30.800 --> 0:22:32.880 What they do, folks, is when the issue bonds, here's 0:22:32.920 --> 0:22:35.479 some big fancy company. They call four people and one 0:22:35.520 --> 0:22:38.480 of them's Bob Michael. He's out at lunch watch in Liverpool. 0:22:38.840 --> 0:22:41.080 So you get the phone call. Are you getting phone 0:22:41.119 --> 0:22:42.800 calls about bond issuance right now? 0:22:43.080 --> 0:22:43.440 We are? 0:22:43.840 --> 0:22:46.320 So there is a little bit of a bifurcation between 0:22:46.359 --> 0:22:49.120 the markets. So, as I mentioned, high yield has been 0:22:49.280 --> 0:22:52.159 a market that has not had very much issuance. On 0:22:52.200 --> 0:22:55.320 the other hand, you have investment grade market. It's fully 0:22:55.400 --> 0:22:58.719 open and there is issuance taking place. 0:22:59.520 --> 0:23:01.840 Kessie Love it as always Cassie Power of the of 0:23:01.920 --> 0:23:03.680 JP Morkan Asset Management. 0:23:08.560 --> 0:23:12.560 Joining us. Now I've experienced David balin Cio at City 0:23:13.080 --> 0:23:16.760 Global Wealth. David is not that we've been here before. 0:23:16.880 --> 0:23:20.560 To me, it's absolutely original. But what is the character 0:23:20.920 --> 0:23:22.040 of this bullmarket? 0:23:22.240 --> 0:23:24.480 Well, it's a bull market I think born of a 0:23:24.560 --> 0:23:28.000 variety of things. Number one, a lot of exceeding expectations. 0:23:28.040 --> 0:23:30.800 You know, we had started the year expecting that there'd 0:23:30.800 --> 0:23:33.359 be an energy crisis in Europe that didn't happen. The 0:23:33.400 --> 0:23:36.040 banking crisis, you know that you've discussed this morning, didn't 0:23:36.080 --> 0:23:39.080 turn out to be a banking crisis. Growth turned out 0:23:39.119 --> 0:23:42.360 to be better than expected. And ultimately what we saw 0:23:42.520 --> 0:23:45.399 is really, you know, inflation coming down meaningfully. And I 0:23:45.440 --> 0:23:47.639 think it's very hard to make the argument the next 0:23:47.720 --> 0:23:49.800 year inflation goes up, Oh, will the source of that be? 0:23:50.320 --> 0:23:52.919 The last remnants of inflation really are in the area 0:23:52.920 --> 0:23:55.760 of housing and of rental costs and we see that, 0:23:55.800 --> 0:23:57.439 you know, it is possible for us to get to 0:23:57.480 --> 0:23:58.920 it a two to two and a half percent inflation 0:23:59.000 --> 0:24:01.960 rate in twenty two twenty four. Now you take all 0:24:02.000 --> 0:24:04.520 of that mix and you think about where we started 0:24:04.560 --> 0:24:08.240 the year from investor positioning, we had huge bear short positions, 0:24:08.320 --> 0:24:10.560 much worse than we saw in two thousand and eight. 0:24:10.640 --> 0:24:13.040 In two thousand and nine, and we had one point 0:24:13.080 --> 0:24:16.000 twenty five trillion dollars of money sitting in money market funds, 0:24:16.280 --> 0:24:18.479 of people waiting to invest or at least thinking they 0:24:18.480 --> 0:24:21.080 were waiting to invest. And then ultimately what happened, We 0:24:21.119 --> 0:24:24.080 had this innovative moment where you know, all of a sudden, 0:24:24.119 --> 0:24:26.760 the talk we came about artificial intelligence and the impact 0:24:26.760 --> 0:24:29.960