WEBVTT - Surveillance: Forget About Fed Cut, says Sahm 0:00:05.120 --> 0:00:08.480 This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:08.520 --> 0:00:12.319 with Jonathan Farrow and Lisa Abramowitz. Join us each day 0:00:12.400 --> 0:00:16.840 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.280 --> 0:00:22.079 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.320 --> 0:00:26.600 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.640 --> 0:00:30.240 the Bloomberg Terminal, and the Bloomberg Business app. This is 0:00:30.280 --> 0:00:33.360 a joy. It's a joy always to speak to Claudiasm. 0:00:33.560 --> 0:00:37.640 She's founder of some consulting, Bloomberg opinion columnists and formal 0:00:37.800 --> 0:00:41.600 Federal Reserve economists. But far more when you're that young 0:00:41.800 --> 0:00:44.960 and you come out of Michigan and you're codified with 0:00:45.040 --> 0:00:47.800 the rule in your name, there's very few people in 0:00:47.840 --> 0:00:51.479 the economics game they can say that, Claudia, where did 0:00:51.479 --> 0:00:53.960 the same rule come from? Was that a paper you 0:00:54.000 --> 0:00:56.800 did in your spare time on a trip to Europe 0:00:56.800 --> 0:00:58.080 and said, I think I'm going to come up with 0:00:58.080 --> 0:01:00.720 a rule. How did the Sam rule get invented? 0:01:02.120 --> 0:01:04.440 The reason the Sam rule exists is it was part 0:01:04.480 --> 0:01:07.520 of a policy proposal. I had to automatically send out 0:01:07.560 --> 0:01:12.080 stimulus checks during a recession and to calibrate how much 0:01:12.120 --> 0:01:14.800 you send out how often, So it really was a 0:01:14.920 --> 0:01:18.399 sidebar to the policy proposal. It's turned out to be 0:01:18.560 --> 0:01:22.720 considered relatively useful to people watching recessions, but that was 0:01:22.800 --> 0:01:23.600 never the. 0:01:23.680 --> 0:01:26.240 Right point of it. The heritage of Michigan with Betsy 0:01:26.240 --> 0:01:29.520 Stevenson and others there with Claudia some the Sam rules 0:01:29.560 --> 0:01:32.040 now full front and center. Kolbe Smith writing it up 0:01:32.040 --> 0:01:36.080 in the Ft ten days ago. How many states are 0:01:36.120 --> 0:01:39.440 in recession based on the Claudia Sam rule. 0:01:40.120 --> 0:01:42.360 Right, Well, there's different ways you can calculate it at 0:01:42.360 --> 0:01:45.920 the state level, but somewhere around ten or less states 0:01:45.920 --> 0:01:48.480 are in a place where their unemployment rate at the 0:01:48.520 --> 0:01:52.120 state level has risen more than a half a percentage point. 0:01:52.240 --> 0:01:54.080 So that's kind of the rule at the national level. 0:01:54.200 --> 0:01:57.080 We're not calibrated at the state level. And yet I 0:01:57.120 --> 0:01:59.320 think it's a good exercise to look under the hood 0:01:59.360 --> 0:02:02.040 and see how various states are doing in terms of 0:02:02.080 --> 0:02:06.480 their unemployment. And a big one within that group that has, 0:02:06.640 --> 0:02:09.960 you know, this higher increase in unemployment is California, and 0:02:09.960 --> 0:02:11.200 that's a that's a big state. 0:02:11.480 --> 0:02:13.360 If you do look at some of these pockets of pain, 0:02:13.520 --> 0:02:15.800 and then you look at the overall aggregate, Does it 0:02:15.880 --> 0:02:20.200 make the overall aggregate look worse or better? Because some 0:02:20.240 --> 0:02:23.680 of the increase that we've seen in unemployment have really 0:02:23.680 --> 0:02:28.200 been driven by a few pockets of pain, right, And that's. 0:02:28.040 --> 0:02:30.160 The thing to look at. In a state like California, 0:02:30.280 --> 0:02:33.720 there's been some very specific areas of distress. So you 0:02:33.720 --> 0:02:37.600 think about the tech sector, which is important to California's economy. 0:02:37.639 --> 0:02:40.240 And the question now is where we see these pockets 0:02:40.240 --> 0:02:43.920 of stress, do they spread? Do they resolve themselves kind 0:02:43.960 --> 0:02:47.640 of locally? And right now that is we can't know 0:02:47.760 --> 0:02:50.360 that yet, but that's something to be watching. Is that 0:02:50.560 --> 0:02:54.359 spread that will could eventually push the whole economy into 0:02:54.440 --> 0:02:55.040 a recession. 0:02:55.200 --> 0:02:56.919 A lot of people have said that we can't necessarily 0:02:56.919 --> 0:02:59.160 get a recession and we can't necessarily get an employment 0:02:59.200 --> 0:03:02.360 creeping that much high. If you have consumer spending where 0:03:02.360 --> 0:03:04.480 it is, you say, it's not a mystery. So what 0:03:04.560 --> 0:03:06.960 is this non mystery telling you in terms of how 0:03:07.040 --> 0:03:08.160 long it can continue? 0:03:09.000 --> 0:03:09.160 Right? 0:03:09.200 --> 0:03:11.200 So it was really careful when we look at various 0:03:11.280 --> 0:03:14.720 numbers to understand who's actually measured and how they're put together. 0:03:15.160 --> 0:03:18.720 Something like GDP, something like personal consumption expenditures that we 0:03:18.800 --> 0:03:23.320 look at that's reflecting mainly a lot of high income 0:03:23.560 --> 0:03:26.520 individuals who are spending, whereas we look at something like 0:03:26.560 --> 0:03:30.160 the unemployment rate, everybody counts equally, So I think it's 0:03:30.160 --> 0:03:33.680 where GDP there's like this tension between consumers keep spending 0:03:33.720 --> 0:03:37.240 and spending. But that's in a setting where these data 0:03:37.280 --> 0:03:39.640 tell us a lot more about someone like Elon Musk 0:03:39.680 --> 0:03:42.240 than they do a Walmart cashier. Right, So we have 0:03:42.320 --> 0:03:45.120 to be a little careful how the data are construction. 0:03:45.240 --> 0:03:47.680 And I think that's why the unemployment rate, which is 0:03:47.720 --> 0:03:52.240 a much more egalitarian measure of what's going on, that's 0:03:52.280 --> 0:03:54.480 a good way to look and that looks strong too. 0:03:55.240 --> 0:03:57.440 Claudia, I'm so glad you brought up California. I was 0:03:57.480 --> 0:04:00.480 gonnaware of this, folks. I mean, I know California's ormuson. 0:04:00.560 --> 0:04:02.680 I thought list it was maybe the sixth or seventh 0:04:03.720 --> 0:04:06.440 global economy if you take it by itself. I'm wrong, 0:04:07.080 --> 0:04:12.680 it's the fourth. It's the United States, folks, China, Japan, 0:04:13.560 --> 0:04:17.760 and then the fourth economy would be California taken by itself. 0:04:18.200 --> 0:04:21.280 I mean, I think the financial media and frankly much 0:04:21.320 --> 0:04:25.880 of economics, Claudia gets us totally wrong. They're these dominant 0:04:26.040 --> 0:04:30.039 states that are all Florida, California, maybe New York, and 0:04:30.440 --> 0:04:33.640 I'll let you decide the others Texas clearly, but are 0:04:33.680 --> 0:04:38.200 those three states not in recession while others struggle? Is 0:04:38.200 --> 0:04:41.400 is there something to size in America that gives us 0:04:41.440 --> 0:04:42.479 a better stability. 0:04:43.480 --> 0:04:45.800 It's really a mixed bag at this point. Again, we're 0:04:45.839 --> 0:04:49.280 trying to figure out is the weakness contained or has 0:04:49.320 --> 0:04:52.280 it started spreading. California is the biggest one that's up 0:04:52.320 --> 0:04:57.440 in a it's unemployment race in employment rates have risen notably. 0:04:58.440 --> 0:05:00.520 I look, Claudia at the FED meeting turned to that 0:05:00.640 --> 0:05:02.560 if we could, and the shock and all of it. 0:05:02.600 --> 0:05:06.400 We had two major economists say, okay, well then why 0:05:06.440 --> 0:05:10.479 didn't they just raise rates? Were you surprised that after 0:05:10.520 --> 0:05:13.600 the verbiage they just didn't raise rates in an Arthur 0:05:13.600 --> 0:05:14.600 Burns kind of way? 0:05:15.760 --> 0:05:18.159 I was, though, I'll give him credit, this is the 0:05:18.200 --> 0:05:21.720 most hawkish pause I could have imagined, right going out 0:05:21.760 --> 0:05:23.880 and saying we're going to have two more rate increases. 0:05:23.920 --> 0:05:27.080 That's likely, not likely, just means that people are putting 0:05:27.520 --> 0:05:30.880 fifty percent or greater odds on needing to raise rates. 0:05:30.920 --> 0:05:33.279 So it's not necessarily a done deal. I'm sure there 0:05:33.320 --> 0:05:36.160 was a robust debate at this meeting about what the 0:05:36.200 --> 0:05:41.279 policy chain should be, but wow, that really that summary 0:05:41.279 --> 0:05:44.280 of economic projection is really, you know, nailed it home. 0:05:44.839 --> 0:05:46.400 We're going to raise and it should have been a 0:05:46.400 --> 0:05:50.400 really clear signal forget about the chance of cutting this year. 0:05:50.720 --> 0:05:53.440 It wasn't, Claudia, And what you hear is, yes, perhaps 0:05:53.440 --> 0:05:55.960 people aren't necessarily pricing in rate cuts, but as we 0:05:56.000 --> 0:05:58.280 heard from Ben Laidler, people are fighting the Fed. They 0:05:58.320 --> 0:06:01.080 continue to disbelieve that they're going to raise rates once 0:06:01.200 --> 0:06:05.039 even twice, especially not twice more this year, and that 0:06:05.040 --> 0:06:08.200 they're probably done for the cycle. Stuart Heiser saying that 0:06:08.279 --> 0:06:10.479 this is one of the biggest risks to the melt 0:06:10.560 --> 0:06:13.960 up that he sees continuing. All things being equal, what's 0:06:14.120 --> 0:06:16.960 your probability that you assigned to the FED being able 0:06:16.960 --> 0:06:19.760 to go once or twice more based on what you 0:06:19.800 --> 0:06:23.200 were just saying. Unemployment probably the best gauge of how 0:06:23.200 --> 0:06:25.760 strong the economy is, and it still is pretty good. 0:06:26.520 --> 0:06:28.440 Right, But that's all the more reason in the FED 0:06:28.520 --> 0:06:34.120 size to raise rates, right, and inflation has proved sticky, right, 0:06:34.120 --> 0:06:36.440 I mean the signal July could be it's a live meeting, 0:06:36.480 --> 0:06:39.840 we could raise again. Then they have a month of 0:06:39.960 --> 0:06:43.120 data between now and the July meeting, Like what are 0:06:43.160 --> 0:06:46.520 they really gonna learn that they didn't know already? So 0:06:46.640 --> 0:06:49.080 I take them at their word for at least that 0:06:49.200 --> 0:06:53.239 first increase, But again, this has got to be hanging 0:06:53.320 --> 0:06:56.800 on a knife's edge because otherwise just raise rates, Like 0:06:56.800 --> 0:06:59.120 what are they waiting for if they think that's necessary. 0:06:59.360 --> 0:07:02.000 I still think that they're going to keep on to 0:07:02.160 --> 0:07:05.040 the holding the rates high, and inflation is just too 0:07:05.160 --> 0:07:08.039 high for them to be that comfortable to cut. 0:07:08.160 --> 0:07:09.920 Which is one reason why people are really curious to 0:07:09.920 --> 0:07:11.560 hear what Ja Palla has to say. He's heading to 0:07:11.600 --> 0:07:14.600 Capitol Hill Wednesday, Tomorrow and Thursday, and he's going to 0:07:14.600 --> 0:07:18.200 be testifying for first time since the banking crisis kind 0:07:18.200 --> 0:07:20.040 of arose. How much do you expect him to double 0:07:20.080 --> 0:07:22.360 down and to say, you know what, you guys are 0:07:22.400 --> 0:07:25.120 getting it wrong. We're going to raise rates further. You 0:07:25.160 --> 0:07:27.640 can't just rally into strength and expect us to do 0:07:27.680 --> 0:07:29.360 nothing right. 0:07:29.360 --> 0:07:31.880 And I think, you know, reading the monetary policy report 0:07:31.920 --> 0:07:34.560 that goes along with you know, when he testifies, it 0:07:34.640 --> 0:07:38.000 certainly has that flavor. You know, there are boxes on 0:07:38.360 --> 0:07:42.640 how we think about what's happened in the banking sector. 0:07:42.720 --> 0:07:45.280 They still are very I mean they're lying, this is 0:07:45.360 --> 0:07:47.880 very isolated, This doesn't have anything to do with interest 0:07:47.960 --> 0:07:50.440 rate policy. I mean, I think you can see in 0:07:50.480 --> 0:07:54.120 that report the same emphasizing these same points. So, like 0:07:54.160 --> 0:07:57.280 you said, doubling down on what he's already said. And 0:07:57.360 --> 0:07:59.840 I don't think, I mean, he's not going to want 0:07:59.880 --> 0:08:02.239 to go so far from that script because they really 0:08:02.280 --> 0:08:03.560 did want this to be hawkish. 0:08:03.680 --> 0:08:08.280 Claudie. One final question, what's our history of guessing or 0:08:08.360 --> 0:08:14.280 gaming or judging the trend and the second derivative of disinflation? 0:08:15.120 --> 0:08:16.440 Do we get that right? Ever? 0:08:19.240 --> 0:08:22.080 Really? I mean, and there's if you go with the 0:08:22.200 --> 0:08:25.520 historical record, I mean, within a reasonable amount of time 0:08:25.960 --> 0:08:30.440 facing this disinflationary cycle, how to do enough? 0:08:30.480 --> 0:08:31.360 How not to do enough? 0:08:31.360 --> 0:08:33.360 Because again, this is not Volkar Fed that walked in 0:08:33.400 --> 0:08:35.920 and said we want this and we want it now, 0:08:36.320 --> 0:08:39.640 So there isn't much to compare it to. I mean, frankly, 0:08:39.679 --> 0:08:42.439 the Fed's forecast, especially in the out years, it's like, wow, 0:08:42.480 --> 0:08:47.520 that's pretty optimistic. And yet they could pull this off. 0:08:47.920 --> 0:08:50.199 I mean, there's still signs of it, but I think 0:08:50.200 --> 0:08:54.199 they're gonna be very cautious in stepping back even if 0:08:54.320 --> 0:08:55.640 inflation starts to fall. 0:08:56.200 --> 0:08:59.559 I mean, it's really really, it's really really important here 0:08:59.559 --> 0:09:03.120 and I guess that comes down to the disinflation trend. 0:09:03.240 --> 0:09:07.440 And in housing, we get housing data today Pantheon folks, 0:09:07.440 --> 0:09:10.679 and this was a wonderful article over the weekend. They 0:09:11.040 --> 0:09:15.480 were just blistering that the housing confidence in housing certitude 0:09:15.480 --> 0:09:20.960 claudiusom is just wrong, harsh language. They said, housing in America, 0:09:21.320 --> 0:09:24.680 the hope of it is divorced from reality. Have we 0:09:24.720 --> 0:09:28.040 can become too complacent about the ramifications in real estate 0:09:28.360 --> 0:09:34.640 of these high interest rates, waiting and hoping for that disinflation, right? 0:09:34.679 --> 0:09:37.760 Well, I mean housing is one of the primary sectors 0:09:37.760 --> 0:09:39.720 that the FED should be working through to get to 0:09:39.760 --> 0:09:41.800 the real economy. I mean, that's one of the most 0:09:41.800 --> 0:09:46.880 interest rate sensitive sectors and it's been I mean we've 0:09:46.960 --> 0:09:50.840 seen initially a lot of optimism pulled out and now 0:09:50.960 --> 0:09:54.280 maybe more put back into the market. And as with 0:09:54.480 --> 0:09:57.680 all of these pieces, the FED cannot move the economy 0:09:57.720 --> 0:09:58.240 on a dime. 0:09:58.840 --> 0:09:58.960 Right. 0:09:59.320 --> 0:10:02.120 There's a lot of of going on in the pieces, 0:10:02.160 --> 0:10:05.160 but that's a primary transmission mechanism into the rest of 0:10:05.160 --> 0:10:05.839 the economy. 0:10:06.120 --> 0:10:09.839 Claudia, thank you so much and congratulations on the amount 0:10:09.920 --> 0:10:12.760 of work we see on the some rule out there 0:10:12.880 --> 0:10:16.600 in this third quarter now third quarter almost almost third 0:10:16.640 --> 0:10:20.840 quarter of twenty twenty three, Claudia, Sam of some research 0:10:31.160 --> 0:10:33.640 in the equity space. We've really focused on this this 0:10:33.679 --> 0:10:36.400 morning because we've listened to you on radio and television 0:10:36.440 --> 0:10:41.240 and you want to know equity opinion around equity's bonds, currencies, commodities. 0:10:41.280 --> 0:10:45.280 Mister Kronnert is equity strategists and managing director at City Group, 0:10:45.280 --> 0:10:48.280 where Thrillty could join us this morning. Scott Kronter, what 0:10:48.400 --> 0:10:52.360 a strange time. I want you to describe right now 0:10:52.480 --> 0:10:57.640 how you address in writing fear of missing out? Where 0:10:57.720 --> 0:11:00.000 is that in an equity strategy right now? 0:11:00.000 --> 0:11:04.160 Well, where it is right now is in the performance 0:11:04.200 --> 0:11:07.559 games you've seen in this tech growth component of large 0:11:07.600 --> 0:11:11.800 cap equities, and it's also increasingly showing up in a 0:11:11.800 --> 0:11:15.200 lot of our positioning data. So over the weekend, our 0:11:15.280 --> 0:11:18.360 quant colleagues pointed out that looking at the future's positioning, 0:11:18.360 --> 0:11:21.760 it's about as bullish as you've seen since the global 0:11:21.800 --> 0:11:26.040 financial crisis. So there certainly has been a crowding in 0:11:26.120 --> 0:11:30.800 effect underway. As this Nasdaq led rally is really kicked in. 0:11:31.320 --> 0:11:33.840 I am my head is spinning because I'll see on 0:11:33.880 --> 0:11:37.800 a given day, the bet is negative, the bet is caution, 0:11:38.080 --> 0:11:40.400 the bet is woe as me. We're all going to die, 0:11:40.600 --> 0:11:43.480 the bull market's going to end. And then you just 0:11:43.520 --> 0:11:46.440 said the bet is actually that people are very bullish. 0:11:46.920 --> 0:11:49.040 You can't have it both ways, which is it? 0:11:50.040 --> 0:11:53.440 Well, the starting point is the fear that was kicking 0:11:53.480 --> 0:11:56.600 in last year is the FED peak hawkishness was kicking in, 0:11:57.040 --> 0:12:00.720 and we were really concerned about recession risk. So you 0:12:00.760 --> 0:12:03.280 went into this year with probably a little bit more 0:12:03.320 --> 0:12:08.880 concerned positioning related to this megacap growth coport, which felt 0:12:08.920 --> 0:12:12.480 the impact of the of the multiple compression last year. Heck, 0:12:12.600 --> 0:12:14.840 we're using this four thousand target that we can get 0:12:14.840 --> 0:12:17.240 to the same target we used start of the year. 0:12:17.760 --> 0:12:22.080 Start of the year we looked bullish versus the futures 0:12:22.080 --> 0:12:25.920 implied positioning. Midyear we're hanging on to this target. Now 0:12:25.960 --> 0:12:28.960 we're looking bearish. So you know, there has been a 0:12:29.360 --> 0:12:32.120 pretty good seesaw a work here. I think the point 0:12:32.160 --> 0:12:35.920 we're making is is that what comes with this price 0:12:36.000 --> 0:12:40.240 action is an implicit expectation around fundamental follow through. And 0:12:40.480 --> 0:12:44.120 our concern quite simply is in the shorter term for 0:12:44.280 --> 0:12:47.480 all of the AIU four you kicking in, the higher 0:12:47.559 --> 0:12:50.720 you go now, the higher the implicit expectations you set 0:12:50.800 --> 0:12:52.439 up for. And that just sets a pretty high bar 0:12:52.559 --> 0:12:54.240 going into the Q two reporting period. 0:12:54.840 --> 0:12:56.000 So you think that this is going to be an 0:12:56.040 --> 0:12:58.680 earnings led decline because we're going to see some sort 0:12:58.720 --> 0:13:01.040 of declined to get down to your target of four 0:13:01.040 --> 0:13:04.080 thousand before going up to where you see it eventually 0:13:04.240 --> 0:13:06.439 ending up, which is around where we are right now. 0:13:06.559 --> 0:13:08.800 So is that really going to be the catalyst big 0:13:08.880 --> 0:13:11.959 tech earnings reports that disappoint I think we're going. 0:13:11.920 --> 0:13:14.679 To find across the board. I mean, every company in 0:13:14.720 --> 0:13:17.720 the country better have an AI strategy that they're talking about. 0:13:17.720 --> 0:13:20.160 As you go into Q two a reporting period, the 0:13:20.200 --> 0:13:22.480 issue is going to be to what degree does that 0:13:22.600 --> 0:13:25.760 show up in fundamentals. And it wasn't that long ago 0:13:25.800 --> 0:13:27.760 that we were thinking AI was sort of a twenty 0:13:27.800 --> 0:13:30.800 five event. It's been pulled forward for to see if 0:13:30.840 --> 0:13:33.440 some of the big tech names of late. I just 0:13:33.480 --> 0:13:35.560 think that what we're going to run into is this 0:13:35.679 --> 0:13:39.280 disconnect with how hard the market is run versus where 0:13:39.280 --> 0:13:43.200 earnings expectations are. We started the year two thirteen for 0:13:43.559 --> 0:13:46.160 twenty twenty three earnings. We're up to two fifteen now, 0:13:47.240 --> 0:13:51.240 and so are our call around earnings. Resilience has been 0:13:51.440 --> 0:13:54.240 very solid here. It's just a question of to what 0:13:54.320 --> 0:13:57.960 degree a lot of expectations are being priced in, perhaps 0:13:57.960 --> 0:13:58.560 too quickly. 0:13:59.440 --> 0:14:01.440 So you think the people who think the FED is 0:14:01.480 --> 0:14:04.520 going to be the killer of this rally are overstating 0:14:04.559 --> 0:14:06.600 things that there's going to be some sort of additional 0:14:06.640 --> 0:14:10.240 rate hike or two and perhaps stick your inflation. That 0:14:10.320 --> 0:14:14.040 could really underline some of evaluations that have gotten baked 0:14:14.040 --> 0:14:15.520 in here. Do you dismiss that? 0:14:16.520 --> 0:14:19.280 Well, I think that's part of the part of the equation, right, 0:14:19.360 --> 0:14:21.920 So we're kind of coming at it more fundamentally based. 0:14:22.040 --> 0:14:24.080 But to your point least, I mean, you're still looking 0:14:24.120 --> 0:14:26.480 at at a FED that it's going to need to 0:14:26.480 --> 0:14:31.080 see a little bit stronger deceleration and inflation metrics to 0:14:31.120 --> 0:14:34.680 feel comfortable changing tune again here city the house view 0:14:34.720 --> 0:14:37.640 is another one or two hikes, and we're looking at 0:14:37.640 --> 0:14:40.400 a FED fund's futures curve that is quickly right sized 0:14:40.440 --> 0:14:43.280 over the past couple of months and is now pretty comfortable. 0:14:43.360 --> 0:14:46.520 You're looking at a five percent FED funds level into 0:14:46.520 --> 0:14:49.920 the end of the year. So every step we go 0:14:50.080 --> 0:14:53.360 in terms of nudging up targets for the SMP, you 0:14:53.400 --> 0:14:56.240 still have to compare that to the return on cash. 0:14:56.520 --> 0:14:59.120 It's a pretty interesting trade off that investors are facing 0:14:59.200 --> 0:15:01.280 right now on this, but there's no doubt in our 0:15:01.320 --> 0:15:04.960 mind that a higher for longer FED higher than expected 0:15:05.960 --> 0:15:09.800 versus two months ago. The interest rate backdrop, all of 0:15:09.840 --> 0:15:15.160 this plays into a an ernie sorry, an interest rate 0:15:15.240 --> 0:15:18.840 tailwind that does keep somewhat of a lid on where 0:15:18.920 --> 0:15:20.000 valuations can go. 0:15:20.280 --> 0:15:24.600 Where's lid on valuations three years out, five years out. 0:15:24.640 --> 0:15:26.960 I'm not talking about buying hold Scott Chriner, But you've 0:15:26.960 --> 0:15:29.720 been doing this long enough to know the percentage of 0:15:29.880 --> 0:15:33.520 money that's in the game for what for the financial 0:15:33.600 --> 0:15:37.560 media is long long term like thirty six months. How 0:15:37.560 --> 0:15:40.840 do you scope thirty six months given all the angst 0:15:41.000 --> 0:15:41.760 that's out there. 0:15:43.120 --> 0:15:46.440 So it's not easy to do tom clearly. So the 0:15:46.480 --> 0:15:48.680 way we've kind of come at it. Heck, a year 0:15:48.760 --> 0:15:51.480 or so ago, we were saying, hey, geopolitical risk premium 0:15:51.520 --> 0:15:53.280 is going to knock a couple of multiple turns off 0:15:53.280 --> 0:15:56.320 the SMP. Now we're looking at this disconnect with how 0:15:56.400 --> 0:15:59.720 you're going to value growth versus cyclicals and defenses within 0:15:59.760 --> 0:16:02.960 the market. The way we're thinking about it is that 0:16:04.000 --> 0:16:07.480 what's happening under the surface and this is going to 0:16:07.480 --> 0:16:11.360 be a direct AI and an indirect AI influence the 0:16:11.440 --> 0:16:15.800 opportunity for productivity improvement across the S and P five 0:16:15.880 --> 0:16:19.160 hundred in broader equity on the economic landscape here in 0:16:19.200 --> 0:16:22.480 the US, we think is going to get really interesting here. 0:16:22.520 --> 0:16:26.600 So longer term, we're pretty comfortable the market can hold 0:16:26.680 --> 0:16:30.480 a higher valuation. Purtsey a megacap growth and tech, but 0:16:30.640 --> 0:16:33.560 also because the rest of the market is going to 0:16:33.600 --> 0:16:38.480 prove out that it's less cyclical than historically perceived. And 0:16:38.640 --> 0:16:42.400 I think AI, in addition to other forms of technology 0:16:42.720 --> 0:16:46.880 that have aided and embedded productivity improvements, end up underscoring 0:16:46.960 --> 0:16:50.280 a higher valuation than many investors have gotten comfortable with. 0:16:50.720 --> 0:16:52.960 So from our view, this is all timing. We think 0:16:53.000 --> 0:16:55.240 we've run pretty hard. We need to digest the move. 0:16:55.680 --> 0:16:58.480 But the setup here is we navigate this recession risk 0:16:58.520 --> 0:17:00.920 in the second half of this year is for is 0:17:01.000 --> 0:17:02.840 higher for longer coming out the other side. 0:17:03.000 --> 0:17:04.879 Scott Croner, thank you so much for the brief with 0:17:05.000 --> 0:17:12.720 City Group. If you're a retail investor in your a 0:17:12.800 --> 0:17:15.520 yield hog, you're looking at a twenty year duration, thirty 0:17:15.560 --> 0:17:19.520 year unibond, whatever it may be, to grab that yield, 0:17:19.560 --> 0:17:22.800 and you have been absolutely slammed over the last twenty 0:17:22.840 --> 0:17:26.560 four months of Bloomberg total Return Index down anywhere from 0:17:26.560 --> 0:17:30.159 thirteen to fifteen to seventeen percent, an end of the 0:17:30.200 --> 0:17:35.000 great bond party. Megan Swivers extremely acute at this with 0:17:35.119 --> 0:17:39.199 Georgetown Finance and Mathematics, director of US Rates Strategy at 0:17:39.200 --> 0:17:42.080 Bank of America as well. I'm going to start with 0:17:42.119 --> 0:17:45.280 the basic retail question. It was up, up and away 0:17:45.359 --> 0:17:50.000 for ten years, fifteen years, whatever, we got absolutely slammed, 0:17:50.240 --> 0:17:54.560 priced down, let's say fifteen percent to be kind, We've come. 0:17:54.400 --> 0:17:57.920 Back a little bit now what Yeah, Tom, I think 0:17:57.920 --> 0:18:00.600 this is really the question on everyone's mind right now. 0:18:00.640 --> 0:18:03.399 You know, you have yields at relatively attractive levels, but 0:18:03.520 --> 0:18:07.000 is now the time to be buying? And what history 0:18:07.119 --> 0:18:09.840 tells us is that you really need to wait until 0:18:09.840 --> 0:18:12.920 that final fed hike of the cycle to feel more 0:18:12.920 --> 0:18:15.919 comfortable and confident in going long duration. At this point, 0:18:16.480 --> 0:18:18.960 and what we see from investors. The survey that we 0:18:19.040 --> 0:18:21.640 conducted at ba A. One of them is this Global 0:18:21.720 --> 0:18:24.520 FX and Rate Sentiment Survey, which is a really cool 0:18:24.560 --> 0:18:28.200 survey of global benchmark investors, has a pretty long history 0:18:28.200 --> 0:18:31.359 two decades or so, and that tells us that right 0:18:31.400 --> 0:18:36.160 now investors have more confidence being long uvest duration than 0:18:36.200 --> 0:18:38.480 they have really at any point in time during that survey. 0:18:38.560 --> 0:18:40.760 Give us some maturity time on this, I mean, let's 0:18:40.760 --> 0:18:43.240 frame this out. The FED is at the two year space, 0:18:43.680 --> 0:18:46.080 The belly of the curve is five to seven years 0:18:46.960 --> 0:18:49.399 long duration. Does that click in at ten years or 0:18:49.440 --> 0:18:50.600 is it a different maturity? 0:18:51.200 --> 0:18:53.320 I mean, you can think of it across the curve. 0:18:53.560 --> 0:18:53.840 Really. 0:18:53.880 --> 0:18:57.880 What you see though, and what we've been guiding investors tours, 0:18:58.040 --> 0:19:00.880 is when you're talking about long duration, talking further out 0:19:00.920 --> 0:19:04.000 the curve, ten year, thirty year rates, and those are 0:19:04.119 --> 0:19:07.160 more limited in terms of how much they can increase 0:19:07.240 --> 0:19:10.520 on the back of the FED continuing to hike versus 0:19:10.600 --> 0:19:13.240 the front end of the curve will be pulled higher 0:19:13.280 --> 0:19:16.480 with the FED delivering more rate hikes likely. 0:19:17.000 --> 0:19:20.160 I The problem I have with this is everybody likes 0:19:20.160 --> 0:19:23.159 to talk spread market and all these other professional distractions. 0:19:23.200 --> 0:19:26.560 I get it. Everybody read for Bosi. I'm dazzled. Forget 0:19:26.640 --> 0:19:29.760 about it. The fact is bonds went down fifteen percent 0:19:30.280 --> 0:19:33.560 just as a round number one hundred became part became 0:19:33.680 --> 0:19:36.360 eighty five. That's all there is to it. We've come 0:19:36.400 --> 0:19:38.920 back a little bit to eighty seven, eighty eight, ninety, 0:19:39.119 --> 0:19:43.000 whatever that number is. Are you, as a bond investor 0:19:43.160 --> 0:19:47.679 investing for total return or someone somewhere out there you 0:19:47.720 --> 0:19:50.199 get back to what we remember? Or is this the 0:19:50.240 --> 0:19:51.520 new level we're dealing with? 0:19:52.000 --> 0:19:54.280 I mean to me, Tom, the answer to that question 0:19:54.359 --> 0:19:57.440 comes down to the inflation outlook, and right now, if 0:19:57.480 --> 0:19:59.439 you look at market price and kind of following up 0:19:59.480 --> 0:20:02.240 on the prior segment here, the market has a lot 0:20:02.280 --> 0:20:04.600 of confidence that the Fed's going to be able to 0:20:04.640 --> 0:20:07.760 see infleetion back down to two percent in a year. 0:20:08.359 --> 0:20:11.680 And if indeed that is the trajectory, then you want 0:20:11.680 --> 0:20:15.159 to get price on the exactly you're going to be 0:20:15.280 --> 0:20:17.119 able to see the FED cut alongside that. 0:20:18.480 --> 0:20:21.119 The other thing you say in your research note is issuance. 0:20:21.160 --> 0:20:23.199 And this is where all my radars, Lise and I 0:20:23.280 --> 0:20:26.439 talk about this all the time. What are CFOs going 0:20:26.480 --> 0:20:29.199 to do in this milieu. I mean to me, you know, 0:20:29.680 --> 0:20:31.240 there's going to be the big guys call up to 0:20:31.320 --> 0:20:34.159 make four phone calls, including the Bank of America, and 0:20:34.200 --> 0:20:37.359 they sell a gazillion bonds. But is a total What 0:20:37.440 --> 0:20:39.560 will CFOs do on issuance? Yeah? 0:20:39.600 --> 0:20:42.160 I think that that is another important question here, And 0:20:42.280 --> 0:20:44.920 on the back of this repositioning that we've seen from 0:20:44.920 --> 0:20:48.320 investors more broadly, what you have Treasury doing now that 0:20:48.320 --> 0:20:51.879 we're beyond the debt limit is increasing issuance. This first 0:20:51.920 --> 0:20:54.680 wave is going to be in bills pretty easily absorbed 0:20:54.680 --> 0:20:57.360 because if you look at the Fed's overnight reverse reboat facility, 0:20:57.560 --> 0:20:59.360 you got a lot of cash sitting on the sidelines. 0:20:59.400 --> 0:21:01.920 They can go out and buy that. But the question here, 0:21:02.040 --> 0:21:04.439 right is this longer duration stuff ten years and out. 0:21:05.160 --> 0:21:07.480 Who are the marginal buyers of that going to be? 0:21:07.560 --> 0:21:08.920 And I think at the end of the day, that's 0:21:08.960 --> 0:21:11.840 another risk to this very consensus view in the market 0:21:11.880 --> 0:21:14.760 that we currently see, which is wanting to be launderation 0:21:14.840 --> 0:21:15.560 at these But. 0:21:15.520 --> 0:21:19.040 The consensus view, folks, to frame this as simply as 0:21:19.040 --> 0:21:21.960 we can, You're going to look out to ten years, 0:21:22.000 --> 0:21:24.760