Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
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Speaker 1: a joy. It's a joy always to speak to Claudiasm.
Speaker 1: She's founder of some consulting, Bloomberg opinion columnists and formal
Speaker 1: Federal Reserve economists. But far more when you're that young
Speaker 1: and you come out of Michigan and you're codified with
Speaker 1: the rule in your name, there's very few people in
Speaker 1: the economics game they can say that, Claudia, where did
Speaker 1: the same rule come from? Was that a paper you
Speaker 1: did in your spare time on a trip to Europe
Speaker 1: and said, I think I'm going to come up with
Speaker 1: a rule. How did the Sam rule get invented?
Speaker 2: The reason the Sam rule exists is it was part
Speaker 2: of a policy proposal. I had to automatically send out
Speaker 2: stimulus checks during a recession and to calibrate how much
Speaker 2: you send out how often, So it really was a
Speaker 2: sidebar to the policy proposal. It's turned out to be
Speaker 2: considered relatively useful to people watching recessions, but that was
Speaker 2: never the.
Speaker 1: Right point of it. The heritage of Michigan with Betsy
Speaker 1: Stevenson and others there with Claudia some the Sam rules
Speaker 1: now full front and center. Kolbe Smith writing it up
Speaker 1: in the Ft ten days ago. How many states are
Speaker 1: in recession based on the Claudia Sam rule.
Speaker 2: Right, Well, there's different ways you can calculate it at
Speaker 2: the state level, but somewhere around ten or less states
Speaker 2: are in a place where their unemployment rate at the
Speaker 2: state level has risen more than a half a percentage point.
Speaker 2: So that's kind of the rule at the national level.
Speaker 2: We're not calibrated at the state level. And yet I
Speaker 2: think it's a good exercise to look under the hood
Speaker 2: and see how various states are doing in terms of
Speaker 2: their unemployment. And a big one within that group that has,
Speaker 2: you know, this higher increase in unemployment is California, and
Speaker 2: that's a that's a big state.
Speaker 3: If you do look at some of these pockets of pain,
Speaker 3: and then you look at the overall aggregate, Does it
Speaker 3: make the overall aggregate look worse or better? Because some
Speaker 3: of the increase that we've seen in unemployment have really
Speaker 3: been driven by a few pockets of pain, right, And that's.
Speaker 2: The thing to look at. In a state like California,
Speaker 2: there's been some very specific areas of distress. So you
Speaker 2: think about the tech sector, which is important to California's economy.
Speaker 2: And the question now is where we see these pockets
Speaker 2: of stress, do they spread? Do they resolve themselves kind
Speaker 2: of locally? And right now that is we can't know
Speaker 2: that yet, but that's something to be watching. Is that
Speaker 2: spread that will could eventually push the whole economy into
Speaker 2: a recession.
Speaker 3: A lot of people have said that we can't necessarily
Speaker 3: get a recession and we can't necessarily get an employment
Speaker 3: creeping that much high. If you have consumer spending where
Speaker 3: it is, you say, it's not a mystery. So what
Speaker 3: is this non mystery telling you in terms of how
Speaker 3: long it can continue?
Speaker 1: Right?
Speaker 2: So it was really careful when we look at various
Speaker 2: numbers to understand who's actually measured and how they're put together.
Speaker 2: Something like GDP, something like personal consumption expenditures that we
Speaker 2: look at that's reflecting mainly a lot of high income
Speaker 2: individuals who are spending, whereas we look at something like
Speaker 2: the unemployment rate, everybody counts equally, So I think it's
Speaker 2: where GDP there's like this tension between consumers keep spending
Speaker 2: and spending. But that's in a setting where these data
Speaker 2: tell us a lot more about someone like Elon Musk
Speaker 2: than they do a Walmart cashier. Right, So we have
Speaker 2: to be a little careful how the data are construction.
Speaker 2: And I think that's why the unemployment rate, which is
Speaker 2: a much more egalitarian measure of what's going on, that's
Speaker 2: a good way to look and that looks strong too.
Speaker 1: Claudia, I'm so glad you brought up California. I was
Speaker 1: gonnaware of this, folks. I mean, I know California's ormuson.
Speaker 1: I thought list it was maybe the sixth or seventh
Speaker 1: global economy if you take it by itself. I'm wrong,
Speaker 1: it's the fourth. It's the United States, folks, China, Japan,
Speaker 1: and then the fourth economy would be California taken by itself.
Speaker 1: I mean, I think the financial media and frankly much
Speaker 1: of economics, Claudia gets us totally wrong. They're these dominant
Speaker 1: states that are all Florida, California, maybe New York, and
Speaker 1: I'll let you decide the others Texas clearly, but are
Speaker 1: those three states not in recession while others struggle? Is
Speaker 1: is there something to size in America that gives us
Speaker 1: a better stability.
Speaker 2: It's really a mixed bag at this point. Again, we're
Speaker 2: trying to figure out is the weakness contained or has
Speaker 2: it started spreading. California is the biggest one that's up
Speaker 2: in a it's unemployment race in employment rates have risen notably.
Speaker 1: I look, Claudia at the FED meeting turned to that
Speaker 1: if we could, and the shock and all of it.
Speaker 1: We had two major economists say, okay, well then why
Speaker 1: didn't they just raise rates? Were you surprised that after
Speaker 1: the verbiage they just didn't raise rates in an Arthur
Speaker 1: Burns kind of way?
Speaker 2: I was, though, I'll give him credit, this is the
Speaker 2: most hawkish pause I could have imagined, right going out
Speaker 2: and saying we're going to have two more rate increases.
Speaker 2: That's likely, not likely, just means that people are putting
Speaker 2: fifty percent or greater odds on needing to raise rates.
Speaker 2: So it's not necessarily a done deal. I'm sure there
Speaker 2: was a robust debate at this meeting about what the
Speaker 2: policy chain should be, but wow, that really that summary
Speaker 2: of economic projection is really, you know, nailed it home.
Speaker 2: We're going to raise and it should have been a
Speaker 2: really clear signal forget about the chance of cutting this year.
Speaker 3: It wasn't, Claudia, And what you hear is, yes, perhaps
Speaker 3: people aren't necessarily pricing in rate cuts, but as we
Speaker 3: heard from Ben Laidler, people are fighting the Fed. They
Speaker 3: continue to disbelieve that they're going to raise rates once
Speaker 3: even twice, especially not twice more this year, and that
Speaker 3: they're probably done for the cycle. Stuart Heiser saying that
Speaker 3: this is one of the biggest risks to the melt
Speaker 3: up that he sees continuing. All things being equal, what's
Speaker 3: your probability that you assigned to the FED being able
Speaker 3: to go once or twice more based on what you
Speaker 3: were just saying. Unemployment probably the best gauge of how
Speaker 3: strong the economy is, and it still is pretty good.
Speaker 2: Right, But that's all the more reason in the FED
Speaker 2: size to raise rates, right, and inflation has proved sticky, right,
Speaker 2: I mean the signal July could be it's a live meeting,
Speaker 2: we could raise again. Then they have a month of
Speaker 2: data between now and the July meeting, Like what are
Speaker 2: they really gonna learn that they didn't know already? So
Speaker 2: I take them at their word for at least that
Speaker 2: first increase, But again, this has got to be hanging
Speaker 2: on a knife's edge because otherwise just raise rates, Like
Speaker 2: what are they waiting for if they think that's necessary.
Speaker 2: I still think that they're going to keep on to
Speaker 2: the holding the rates high, and inflation is just too
Speaker 2: high for them to be that comfortable to cut.
Speaker 3: Which is one reason why people are really curious to
Speaker 3: hear what Ja Palla has to say. He's heading to
Speaker 3: Capitol Hill Wednesday, Tomorrow and Thursday, and he's going to
Speaker 3: be testifying for first time since the banking crisis kind
Speaker 3: of arose. How much do you expect him to double
Speaker 3: down and to say, you know what, you guys are
Speaker 3: getting it wrong. We're going to raise rates further. You
Speaker 3: can't just rally into strength and expect us to do
Speaker 3: nothing right.
Speaker 2: And I think, you know, reading the monetary policy report
Speaker 2: that goes along with you know, when he testifies, it
Speaker 2: certainly has that flavor. You know, there are boxes on
Speaker 2: how we think about what's happened in the banking sector.
Speaker 2: They still are very I mean they're lying, this is
Speaker 2: very isolated, This doesn't have anything to do with interest
Speaker 2: rate policy. I mean, I think you can see in
Speaker 2: that report the same emphasizing these same points. So, like
Speaker 2: you said, doubling down on what he's already said. And
Speaker 2: I don't think, I mean, he's not going to want
Speaker 2: to go so far from that script because they really
Speaker 2: did want this to be hawkish.
Speaker 1: Claudie. One final question, what's our history of guessing or
Speaker 1: gaming or judging the trend and the second derivative of disinflation?
Speaker 1: Do we get that right? Ever?
Speaker 2: Really? I mean, and there's if you go with the
Speaker 2: historical record, I mean, within a reasonable amount of time
Speaker 2: facing this disinflationary cycle, how to do enough?
Speaker 1: How not to do enough?
Speaker 2: Because again, this is not Volkar Fed that walked in
Speaker 2: and said we want this and we want it now,
Speaker 2: So there isn't much to compare it to. I mean, frankly,
Speaker 2: the Fed's forecast, especially in the out years, it's like, wow,
Speaker 2: that's pretty optimistic. And yet they could pull this off.
Speaker 2: I mean, there's still signs of it, but I think
Speaker 2: they're gonna be very cautious in stepping back even if
Speaker 2: inflation starts to fall.
Speaker 1: I mean, it's really really, it's really really important here
Speaker 1: and I guess that comes down to the disinflation trend.
Speaker 1: And in housing, we get housing data today Pantheon folks,
Speaker 1: and this was a wonderful article over the weekend. They
Speaker 1: were just blistering that the housing confidence in housing certitude
Speaker 1: claudiusom is just wrong, harsh language. They said, housing in America,
Speaker 1: the hope of it is divorced from reality. Have we
Speaker 1: can become too complacent about the ramifications in real estate
Speaker 1: of these high interest rates, waiting and hoping for that disinflation, right?
Speaker 2: Well, I mean housing is one of the primary sectors
Speaker 2: that the FED should be working through to get to
Speaker 2: the real economy. I mean, that's one of the most
Speaker 2: interest rate sensitive sectors and it's been I mean we've
Speaker 2: seen initially a lot of optimism pulled out and now
Speaker 2: maybe more put back into the market. And as with
Speaker 2: all of these pieces, the FED cannot move the economy
Speaker 2: on a dime.
Speaker 1: Right.
Speaker 2: There's a lot of of going on in the pieces,
Speaker 2: but that's a primary transmission mechanism into the rest of
Speaker 2: the economy.
Speaker 1: Claudia, thank you so much and congratulations on the amount
Speaker 1: of work we see on the some rule out there
Speaker 1: in this third quarter now third quarter almost almost third
Speaker 1: quarter of twenty twenty three, Claudia, Sam of some research
Speaker 1: in the equity space. We've really focused on this this
Speaker 1: morning because we've listened to you on radio and television
Speaker 1: and you want to know equity opinion around equity's bonds, currencies, commodities.
Speaker 1: Mister Kronnert is equity strategists and managing director at City Group,
Speaker 1: where Thrillty could join us this morning. Scott Kronter, what
Speaker 1: a strange time. I want you to describe right now
Speaker 1: how you address in writing fear of missing out? Where
Speaker 1: is that in an equity strategy right now?
Speaker 4: Well, where it is right now is in the performance
Speaker 4: games you've seen in this tech growth component of large
Speaker 4: cap equities, and it's also increasingly showing up in a
Speaker 4: lot of our positioning data. So over the weekend, our
Speaker 4: quant colleagues pointed out that looking at the future's positioning,
Speaker 4: it's about as bullish as you've seen since the global
Speaker 4: financial crisis. So there certainly has been a crowding in
Speaker 4: effect underway. As this Nasdaq led rally is really kicked in.
Speaker 1: I am my head is spinning because I'll see on
Speaker 1: a given day, the bet is negative, the bet is caution,
Speaker 1: the bet is woe as me. We're all going to die,
Speaker 1: the bull market's going to end. And then you just
Speaker 1: said the bet is actually that people are very bullish.
Speaker 1: You can't have it both ways, which is it?
Speaker 4: Well, the starting point is the fear that was kicking
Speaker 4: in last year is the FED peak hawkishness was kicking in,
Speaker 4: and we were really concerned about recession risk. So you
Speaker 4: went into this year with probably a little bit more
Speaker 4: concerned positioning related to this megacap growth coport, which felt
Speaker 4: the impact of the of the multiple compression last year. Heck,
Speaker 4: we're using this four thousand target that we can get
Speaker 4: to the same target we used start of the year.
Speaker 4: Start of the year we looked bullish versus the futures
Speaker 4: implied positioning. Midyear we're hanging on to this target. Now
Speaker 4: we're looking bearish. So you know, there has been a
Speaker 4: pretty good seesaw a work here. I think the point
Speaker 4: we're making is is that what comes with this price
Speaker 4: action is an implicit expectation around fundamental follow through. And
Speaker 4: our concern quite simply is in the shorter term for
Speaker 4: all of the AIU four you kicking in, the higher
Speaker 4: you go now, the higher the implicit expectations you set
Speaker 4: up for. And that just sets a pretty high bar
Speaker 4: going into the Q two reporting period.
Speaker 3: So you think that this is going to be an
Speaker 3: earnings led decline because we're going to see some sort
Speaker 3: of declined to get down to your target of four
Speaker 3: thousand before going up to where you see it eventually
Speaker 3: ending up, which is around where we are right now.
Speaker 3: So is that really going to be the catalyst big
Speaker 3: tech earnings reports that disappoint I think we're going.
Speaker 4: To find across the board. I mean, every company in
Speaker 4: the country better have an AI strategy that they're talking about.
Speaker 4: As you go into Q two a reporting period, the
Speaker 4: issue is going to be to what degree does that
Speaker 4: show up in fundamentals. And it wasn't that long ago
Speaker 4: that we were thinking AI was sort of a twenty
Speaker 4: five event. It's been pulled forward for to see if
Speaker 4: some of the big tech names of late. I just
Speaker 4: think that what we're going to run into is this
Speaker 4: disconnect with how hard the market is run versus where
Speaker 4: earnings expectations are. We started the year two thirteen for
Speaker 4: twenty twenty three earnings. We're up to two fifteen now,
Speaker 4: and so are our call around earnings. Resilience has been
Speaker 4: very solid here. It's just a question of to what
Speaker 4: degree a lot of expectations are being priced in, perhaps
Speaker 4: too quickly.
Speaker 3: So you think the people who think the FED is
Speaker 3: going to be the killer of this rally are overstating
Speaker 3: things that there's going to be some sort of additional
Speaker 3: rate hike or two and perhaps stick your inflation. That
Speaker 3: could really underline some of evaluations that have gotten baked
Speaker 3: in here. Do you dismiss that?
Speaker 4: Well, I think that's part of the part of the equation, right,
Speaker 4: So we're kind of coming at it more fundamentally based.
Speaker 4: But to your point least, I mean, you're still looking
Speaker 4: at at a FED that it's going to need to
Speaker 4: see a little bit stronger deceleration and inflation metrics to
Speaker 4: feel comfortable changing tune again here city the house view
Speaker 4: is another one or two hikes, and we're looking at
Speaker 4: a FED fund's futures curve that is quickly right sized
Speaker 4: over the past couple of months and is now pretty comfortable.
Speaker 4: You're looking at a five percent FED funds level into
Speaker 4: the end of the year. So every step we go
Speaker 4: in terms of nudging up targets for the SMP, you
Speaker 4: still have to compare that to the return on cash.
Speaker 4: It's a pretty interesting trade off that investors are facing
Speaker 4: right now on this, but there's no doubt in our
Speaker 4: mind that a higher for longer FED higher than expected
Speaker 4: versus two months ago. The interest rate backdrop, all of
Speaker 4: this plays into a an ernie sorry, an interest rate
Speaker 4: tailwind that does keep somewhat of a lid on where
Speaker 4: valuations can go.
Speaker 1: Where's lid on valuations three years out, five years out.
Speaker 1: I'm not talking about buying hold Scott Chriner, But you've
Speaker 1: been doing this long enough to know the percentage of
Speaker 1: money that's in the game for what for the financial
Speaker 1: media is long long term like thirty six months. How
Speaker 1: do you scope thirty six months given all the angst
Speaker 1: that's out there.
Speaker 4: So it's not easy to do tom clearly. So the
Speaker 4: way we've kind of come at it. Heck, a year
Speaker 4: or so ago, we were saying, hey, geopolitical risk premium
Speaker 4: is going to knock a couple of multiple turns off
Speaker 4: the SMP. Now we're looking at this disconnect with how
Speaker 4: you're going to value growth versus cyclicals and defenses within
Speaker 4: the market. The way we're thinking about it is that
Speaker 4: what's happening under the surface and this is going to
Speaker 4: be a direct AI and an indirect AI influence the
Speaker 4: opportunity for productivity improvement across the S and P five
Speaker 4: hundred in broader equity on the economic landscape here in
Speaker 4: the US, we think is going to get really interesting here.
Speaker 4: So longer term, we're pretty comfortable the market can hold
Speaker 4: a higher valuation. Purtsey a megacap growth and tech, but
Speaker 4: also because the rest of the market is going to
Speaker 4: prove out that it's less cyclical than historically perceived. And
Speaker 4: I think AI, in addition to other forms of technology
Speaker 4: that have aided and embedded productivity improvements, end up underscoring
Speaker 4: a higher valuation than many investors have gotten comfortable with.
Speaker 4: So from our view, this is all timing. We think
Speaker 4: we've run pretty hard. We need to digest the move.
Speaker 4: But the setup here is we navigate this recession risk
Speaker 4: in the second half of this year is for is
Speaker 4: higher for longer coming out the other side.
Speaker 1: Scott Croner, thank you so much for the brief with
Speaker 1: City Group. If you're a retail investor in your a
Speaker 1: yield hog, you're looking at a twenty year duration, thirty
Speaker 1: year unibond, whatever it may be, to grab that yield,
Speaker 1: and you have been absolutely slammed over the last twenty
Speaker 1: four months of Bloomberg total Return Index down anywhere from
Speaker 1: thirteen to fifteen to seventeen percent, an end of the
Speaker 1: great bond party. Megan Swivers extremely acute at this with
Speaker 1: Georgetown Finance and Mathematics, director of US Rates Strategy at
Speaker 1: Bank of America as well. I'm going to start with
Speaker 1: the basic retail question. It was up, up and away
Speaker 1: for ten years, fifteen years, whatever, we got absolutely slammed,
Speaker 1: priced down, let's say fifteen percent to be kind, We've come.
Speaker 5: Back a little bit now what Yeah, Tom, I think
Speaker 5: this is really the question on everyone's mind right now.
Speaker 5: You know, you have yields at relatively attractive levels, but
Speaker 5: is now the time to be buying? And what history
Speaker 5: tells us is that you really need to wait until
Speaker 5: that final fed hike of the cycle to feel more
Speaker 5: comfortable and confident in going long duration. At this point,
Speaker 5: and what we see from investors. The survey that we
Speaker 5: conducted at ba A. One of them is this Global
Speaker 5: FX and Rate Sentiment Survey, which is a really cool
Speaker 5: survey of global benchmark investors, has a pretty long history
Speaker 5: two decades or so, and that tells us that right
Speaker 5: now investors have more confidence being long uvest duration than
Speaker 5: they have really at any point in time during that survey.
Speaker 1: Give us some maturity time on this, I mean, let's
Speaker 1: frame this out. The FED is at the two year space,
Speaker 1: The belly of the curve is five to seven years
Speaker 1: long duration. Does that click in at ten years or
Speaker 1: is it a different maturity?
Speaker 5: I mean, you can think of it across the curve.
Speaker 6: Really.
Speaker 5: What you see though, and what we've been guiding investors tours,
Speaker 5: is when you're talking about long duration, talking further out
Speaker 5: the curve, ten year, thirty year rates, and those are
Speaker 5: more limited in terms of how much they can increase
Speaker 5: on the back of the FED continuing to hike versus
Speaker 5: the front end of the curve will be pulled higher
Speaker 5: with the FED delivering more rate hikes likely.
Speaker 1: I The problem I have with this is everybody likes
Speaker 1: to talk spread market and all these other professional distractions.
Speaker 1: I get it. Everybody read for Bosi. I'm dazzled. Forget
Speaker 1: about it. The fact is bonds went down fifteen percent
Speaker 1: just as a round number one hundred became part became
Speaker 1: eighty five. That's all there is to it. We've come
Speaker 1: back a little bit to eighty seven, eighty eight, ninety,
Speaker 1: whatever that number is. Are you, as a bond investor
Speaker 1: investing for total return or someone somewhere out there you
Speaker 1: get back to what we remember? Or is this the
Speaker 1: new level we're dealing with?
Speaker 5: I mean to me, Tom, the answer to that question
Speaker 5: comes down to the inflation outlook, and right now, if
Speaker 5: you look at market price and kind of following up
Speaker 5: on the prior segment here, the market has a lot
Speaker 5: of confidence that the Fed's going to be able to
Speaker 5: see infleetion back down to two percent in a year.
Speaker 5: And if indeed that is the trajectory, then you want
Speaker 5: to get price on the exactly you're going to be
Speaker 5: able to see the FED cut alongside that.
Speaker 1: The other thing you say in your research note is issuance.
Speaker 1: And this is where all my radars, Lise and I
Speaker 1: talk about this all the time. What are CFOs going
Speaker 1: to do in this milieu. I mean to me, you know,
Speaker 1: there's going to be the big guys call up to
Speaker 1: make four phone calls, including the Bank of America, and
Speaker 1: they sell a gazillion bonds. But is a total What
Speaker 1: will CFOs do on issuance? Yeah?
Speaker 5: I think that that is another important question here, And
Speaker 5: on the back of this repositioning that we've seen from
Speaker 5: investors more broadly, what you have Treasury doing now that
Speaker 5: we're beyond the debt limit is increasing issuance. This first
Speaker 5: wave is going to be in bills pretty easily absorbed
Speaker 5: because if you look at the Fed's overnight reverse reboat facility,
Speaker 5: you got a lot of cash sitting on the sidelines.
Speaker 5: They can go out and buy that. But the question here,
Speaker 5: right is this longer duration stuff ten years and out.
Speaker 5: Who are the marginal buyers of that going to be?
Speaker 5: And I think at the end of the day, that's
Speaker 5: another risk to this very consensus view in the market
Speaker 5: that we currently see, which is wanting to be launderation
Speaker 5: at these But.
Speaker 1: The consensus view, folks, to frame this as simply as
Speaker 1: we can, You're going to look out to ten years,
Speaker 1: which seems forever away. Two thousand and thirty three two
Speaker 1: thousand and thirty four. You're going to buy it and
Speaker 1: you're going to clip the coupon. If the price goes down,
Speaker 1: you've still got the coupon to carry to help you.
Speaker 1: But the hope and prayer of the market now the
Speaker 1: consensus is price up along with that to a really
Speaker 1: pretty significant total return.
Speaker 5: Right, that's exactly right. And again, you know, if the
Speaker 5: Fed is able to see the inflation levels that the
Speaker 5: market expects at this point, it makes sense for the
Speaker 5: Fed to get towards a more neutral policy rate sett
Speaker 5: and call it two and a half three percent, which
Speaker 5: means that you're going to have downward pressure on those
Speaker 5: yields at the back end. But really the challenging thing
Speaker 5: and the risky thing for investors is is stickier inflation.
Speaker 5: And currently the Fed really doesn't have a lot of
Speaker 5: confidence in their forecasts. We don't think that they're going
Speaker 5: to stop hiking until they see core CPI coming closer
Speaker 5: to two tenths one tenth of a percent. You're at
Speaker 5: four tenths.
Speaker 1: So what's your ten years call year end or one
Speaker 1: year up, whichever way you frame that.
Speaker 5: Yeah, so year end we have three point fifty, so
Speaker 5: a bit lower than the levels that we're currently sitting at,
Speaker 5: and that is really due in part to the fact
Speaker 5: that we're going to be beyond the fed's final rate
Speaker 5: hike of the cycle, and you're going to have more
Speaker 5: conviction on what the inflation at look will be. But
Speaker 5: in general, we're not expecting this very massive fall in rates.
Speaker 5: It's it's looking near term like you're pretty much going
Speaker 5: to be sitting in this range between three twenty five three.
Speaker 1: So I don't know if you get into portfolio construction.
Speaker 1: I got like gateways to go here folks with the
Speaker 1: Megan Swineber. But the answer here is it's real simple.
Speaker 1: Do you single point, do you barbell or do you
Speaker 1: ladder out maturities if you're scared stiff with the stock market?
Speaker 5: Yeah, and that's the that's the important point here too.
Speaker 5: Rates duration and portfolios is the world's risk off asset,
Speaker 5: and if you have more of this pressure here on
Speaker 5: the equity market, you're more inclined to see rates be
Speaker 5: that buffer, be that hedge. A key point here though,
Speaker 5: is whether or not we're going to see this recession
Speaker 5: that many economists we're calling for at the at the
Speaker 5: start of the year. The data has been so resilient, right,
Speaker 5: The US economy is just a lot more resilient than
Speaker 5: what the FED what economists. More broadly, we're ultimately giving
Speaker 5: it credit for, which limits how much you can really
Speaker 5: see the equity market fall and rates fall alongside it.
Speaker 1: I got to go out to the long term space.
Speaker 1: It's great when you see Apple Computer put out a
Speaker 1: thirty year piece or whatever, and you know it's sold
Speaker 1: in two seconds as well. What is the plus minus
Speaker 1: of long, long duration, full faith and credit right now?
Speaker 5: Yeah, yeah, you know, I think you have to be
Speaker 5: a little bit more humble about how far rates can fall.
Speaker 5: The FED when they were implementing the flexible average inflation
Speaker 5: targeting strategy, a big part of that, right was being
Speaker 5: able to see nominal rates move higher, be able to
Speaker 5: build in some buffer when they're cutting. So I think
Speaker 5: that the probability that the FED cuts down to the
Speaker 5: zero lower bound is more limited here. You probably have
Speaker 5: to think that that in a FED cutting cycle, when
Speaker 5: we're in more this mild recession, it's closer to two
Speaker 5: and a half percent than it is falling all the
Speaker 5: way back down to zero.
Speaker 1: I mean, I'm looking here, and you know, it's amazing
Speaker 1: how this is the trap, folks. You gotta be careful here.
Speaker 1: As many of you know, I bought the one hundred
Speaker 1: year Austria. It's like now in ninety seven, I'm down
Speaker 1: seventy percent in that piece right now and it's off,
Speaker 1: it's on the mat. I mean, even with some of
Speaker 1: the constructive things of Europe or whatever, the Austrian ninety
Speaker 1: seven year piece is still it hasn't come up as
Speaker 1: that's a trap you're talking about on a less you know, inflammatory.
Speaker 5: Basis exactly, And I mean I think near term you
Speaker 5: have more potential for the front end to be more
Speaker 5: viotal move higher. With the Fed continuing hike. You see
Speaker 5: the market only pricing about another twenty five basis point
Speaker 5: hike over the next several months. If they deliver on
Speaker 5: two more, which is our base case call, you're going
Speaker 5: to see more upward pressure on the front end of
Speaker 5: the curve. So we think that investors who've really been
Speaker 5: positioned for the end of the hiking cycle, which is
Speaker 5: curve seepeners long duration, you need to be careful here.
Speaker 5: And I think a good way to hedge this is
Speaker 5: to push back on what the market's prices.
Speaker 1: The way to hedge it is to buy Nvidio right.
Speaker 5: I can't comment on that.
Speaker 1: She's Megan Sweibers, thank you for compliance for Bank of America.
Speaker 1: Sometimes I and very often, there can be a book
Speaker 1: of the summer or the book of the year, and
Speaker 1: it's just for whatever reason in the time, King blur,
Speaker 1: I blow it. I blew it. With Sebastian Page's phenomenal
Speaker 1: Beyond Diversification, I'm going to give them the highest regard
Speaker 1: on this. This is the most important adult Wall Street
Speaker 1: book since Richard Bernstein's classic volume on value and growth.
Speaker 1: I can't say enough about it. Every time I look
Speaker 1: at it, I'm blown away by the acuity. Joining us
Speaker 1: this morning, the author of Beyond Diversification, Sebastian Page, shingles
Speaker 1: out at t row Price. Sebastian, I'm going to get
Speaker 1: right to it. You talk about quack remedies. What's the
Speaker 1: quackness of asset allocation in twenty twenty three.
Speaker 7: Tom, it's we're going through a regime shift in asset allocation.
Speaker 7: You know, this is a critical time in capital markets history.
Speaker 7: In my mind, after forty years of declining rates, we
Speaker 7: finally made a higher high end rate and we've wiped
Speaker 7: out seventeen trillion in negative yielding debt. This begs the
Speaker 7: question what do we do with asset allocation? Both tactically
Speaker 7: how we navigate this regime shift, and that's been very confusing,
Speaker 7: but also structurally the sixty forty. You often ask that
Speaker 7: question on your show. I think the sixty forty needs
Speaker 7: to be modernized. I think of the forty we should
Speaker 7: add maybe fifteen to twenty percent in different alternatives and
Speaker 7: look for equity protection strategies and so rethink diversification. This
Speaker 7: is a critical time for doing this, Tom.
Speaker 1: This is really important. And folks, this is with the
Speaker 1: sharp ratio, with a risk free rate finally back to normal,
Speaker 1: and the Sebastian page religion is you know what, folks,
Speaker 1: that was a nice fifteen year gift. We're back to normal.
Speaker 1: We can't go out and find private equity. We're not Blackstone,
Speaker 1: we're not KKR, et cetera. Sebastian page. How do our
Speaker 1: listeners and viewers participate in the Sebastian page fifty fifteen? Whatever?
Speaker 1: The rest is an alternative.
Speaker 7: You know, liquid alternatives are interesting if you know how
Speaker 7: to select them. It really matters how you define liquid alternatives,
Speaker 7: but investment strategies that focus on relative value that have
Speaker 7: less of the traditional market exposure are also available in
Speaker 7: liquid forms. But it also calls for rethinking how you
Speaker 7: navigate markets tactically, how you protect for the downside. In
Speaker 7: a nutshell, Tom, the big question for the sixty forty
Speaker 7: is what is the role of duration or treasuries when
Speaker 7: we get interest rate shocks. Now, to be clear, we
Speaker 7: just had a five hundred basis points shock from the Fed.
Speaker 7: We're not getting another one. In fact, we've been adding
Speaker 7: duration back into our portfolios. But it's a critical question
Speaker 7: if you look out five ten years, what is going
Speaker 7: to be the volatility of interest rates, what is going
Speaker 7: to be the volatility of inflation? And how do you
Speaker 7: position your portfolio for those types of regimes. And this
Speaker 7: goes for things like hedged equity strategies. It calls for
Speaker 7: things like real asset equity strategies. You know, stocks that
Speaker 7: we kind of didn't really like for the last ten
Speaker 7: years pre pandemic, right when inflation was below two percent,
Speaker 7: but energy companies, real estate investment trusts, metals and mining
Speaker 7: precious metals and so on, strategies that have a levered
Speaker 7: response to inflation shocks. This is all part of the
Speaker 7: new regime for the next five to ten years.
Speaker 3: Well, how much is this regime changing in real time?
Speaker 3: There was a time, perhaps I don't know, five months ago,
Speaker 3: when people thought that tech stocks were the most interest
Speaker 3: rate sensitive, and yet we've seen yields rise and tech
Speaker 3: rally in tandem. Is that connection also broken? Is that
Speaker 3: diversification in these two areas perhaps different than it was
Speaker 3: just five months ago.
Speaker 7: Yeah, Look, in the short run, say, I think six
Speaker 7: to twelve months, we're navigating threacherous waters. I think the
Speaker 7: narrative around growth stocks has been driven by different factors. Lisa, Yes,
Speaker 7: this correlation seems to have broken a little bit, but
Speaker 7: there's also an underlying narrative of yeah, okay, we're pretty
Speaker 7: close to peak rates. Those big tech companies have shown
Speaker 7: that they're focused on efficiency, and then, of course, you know,
Speaker 7: you see positive surprises on cloud revenues, positive surprises on
Speaker 7: digital advertising, and then you hit sort of another kind
Speaker 7: of regime shift in AI. And that's really been part
Speaker 7: of the story, and you've covered it at length in
Speaker 7: your show. But you know, AI's been around for a
Speaker 7: long time. It just seems like the large language models
Speaker 7: and the chat GPT are kind of yet another regime
Speaker 7: shift we're going through, and that's all part of the
Speaker 7: value versus growth equation. Lisa. We went back to neutral
Speaker 7: in our portfolios were value all of last year and
Speaker 7: we benefited from that. Now we're basically back to neutral
Speaker 7: between growth and value. We don't want to be underweight
Speaker 7: if the AI bubble quote unquote if you will is
Speaker 7: kind of like nineteen ninety eight, right, So we'd rather
Speaker 7: be at neutral right now.
Speaker 1: Semester Page, Thank you so much for joining us today
Speaker 1: with tro Price there. I can't say enough, particularly for
Speaker 1: pros about beyond diversification, hugely, hugely thought provoking. The Secretary
Speaker 1: of State in Beijing getting off the airplane sort of
Speaker 1: like the way Terry Hayes gets off the airplane at
Speaker 1: Reagan here back when he's coming in from Dallas DFW.
Speaker 1: He's founder of Benjia Policy and joins us this morning.
Speaker 1: Terry just you know the basic idea of the shock
Speaker 1: of the Secretary of State of the United States at
Speaker 1: any country being shown or greeted to the country like
Speaker 1: he's coming out of Reagan. You know what it's like.
Speaker 1: You got to get from Gate ten over to gate
Speaker 1: three quickly and your luggage is on the way was accomplished.
Speaker 6: And those that Reagan know the infamous skate thirty five x,
Speaker 6: and that was kind of what it.
Speaker 1: Was there too.
Speaker 6: What was accomplished was the ability of both countries to
Speaker 6: say that they are continuing to communicate, that that is
Speaker 6: calculated by both sides, is having the effect of diminishing
Speaker 6: tensions somewhat, I argued before the meeting, and would still
Speaker 6: argue that that's largely illusory. Uh. You know, my takeaways
Speaker 6: really are simply that China sees the United States business community,
Speaker 6: as you know, as its friend geopolitically and will continue
Speaker 6: to try to push that relationship that the United did.
Speaker 6: That China also is pushing the United States to what
Speaker 6: they call recalibrate its its relationship in Asia, in other words,
Speaker 6: kind of back off and and and agree that Asia
Speaker 6: should be as Lake entirely, which is an absurd proposition
Speaker 6: to the many countries who are our allies there. Thirdly,
Speaker 6: there's no military communications. And fourthly, there's no mention of
Speaker 6: Ukraine or Iran for that matter. So we've got communication,
Speaker 6: but we don't have a lot of communication, and We
Speaker 6: certainly on either side, don't have anything to show Terry.
Speaker 3: This is the political tension right now. Perhaps it was
Speaker 3: a win for President Biden in terms of not escalating
Speaker 3: any tensions further creating some sort of open lines of communication.
Speaker 3: Was it a win when it comes to the politics
Speaker 3: domestically of a nation very much growing hawkish on China
Speaker 3: and some with some calling for some sort of decoupling
Speaker 3: which this president has pushed back against.
Speaker 6: Well, you know, I agree that normalization of communications is
Speaker 6: a win for President Biden. Regardless, I think that's very true.
Speaker 6: At the same time, you know, we don't get much
Speaker 6: more than that, you know, not much has been gotten. Secondly,
Speaker 6: you know, my contention would be that the United States
Speaker 6: policy towards China actually started to flip in say twenty sixteen,
Speaker 6: twenty seventeen, even before Trump became president. And it is
Speaker 6: among the most bipartisan and probably the most bipartisan policy
Speaker 6: area that we've gotten Washington. So that's not going to
Speaker 6: change either. The vast majority of Washington wants communication with China.
Speaker 6: The vast majority of Washington also does not want a
Speaker 6: situation where we're where we're either getting rid of our
Speaker 6: own geopolitical interests or putting our allies in more peril
Speaker 6: as a result of that. One of the lines, we're
Speaker 6: not doing that right now.
Speaker 3: One of the lines from Tony Blinken's press conference after
Speaker 3: the meeting really stuck out, at least in a lot
Speaker 3: of the talk shows over the weekend and yesterday. He said,
Speaker 3: we remain committed to our China policy with the three Communicates,
Speaker 3: the Taiwan Relation Acts, the sixth Assurances, we do not
Speaker 3: support Taiwan's independence. We've made it clear that we oppose
Speaker 3: any unilateral change changes to the status quo by either side.
Speaker 3: Is that controversial, terry and how is it being sort
Speaker 3: of spun the day after?
Speaker 6: Well, it shouldn't be controversial, because what Secretary of Lincoln
Speaker 6: is doing there is really underscoring that United States policy
Speaker 6: since nineteen seventy nine in the Taiwan Relations Act, remains
Speaker 6: the policy of the United States government, and there's been
Speaker 6: a lot of concern, a lot of understanding and misunderstanding
Speaker 6: around that over the past few years that frankly have
Speaker 6: been aided and abedded by both President Trump and President
Speaker 6: Biden in past statements. So you know what Biden's trier
Speaker 6: e sees me. What Lincoln's trying to do is put
Speaker 6: a floor under that by saying, look, our policy is
Speaker 6: as it was, as it was and it continues to be.
Speaker 6: Make no mistake about that. Clarity is good, Jerry.
Speaker 1: I want to link this to our economics and our
Speaker 1: corporate relationships with China. Captain Mann is at the Bank
Speaker 1: of England. She's one of the great American international economists,
Speaker 1: and Kathy Man of MIT and Brandie makes very clear
Speaker 1: that we have a codependency with China. We need them economically, economically,
Speaker 1: they need us. She owns the high ground on the
Speaker 1: transpecific codependency. What is the relationship in these discussions in
Speaker 1: your Washington when they observe Tim Cook living that codependency
Speaker 1: at Apple and bipartisan presidents saying no, we don't want
Speaker 1: to do that. How's that work?
Speaker 6: Well, then you know the vast majority of Washington understands
Speaker 6: the codependency. You know, frankly doesn't want to upset it.
Speaker 1: I find the.
Speaker 6: I find the whole war of rhetoric here, whether it's
Speaker 6: decoupling or de risking or anything else, to be a
Speaker 6: little overblown. On the street. You know, nobody's talking about
Speaker 6: removing Americans or American business from China. What China is
Speaker 6: trying to do at the same simultaneously, though, is trying
Speaker 6: to attract and continue to have in American business and
Speaker 6: American investment, while at the same time making the terms
Speaker 6: under which non China investment will exist to be more
Speaker 6: onerous than it already has been. Yeah, but I don't
Speaker 6: see the United States as trying to take that away.
Speaker 1: Terry Hanks, Thank you so much with Penjia policy. Subscribe
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Speaker 1: term No. Thanks for listening. I'm Tom Keen, and this
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