WEBVTT - Surveillance: Slight Hope for '23, says Yu 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance podcast name Tom Keene. Along 0:00:09.200 --> 0:00:12.720 with the Jonathan Ferrill and Lisa are Brownwitz Jaylie, we 0:00:12.840 --> 0:00:16.760 bring you insight from the best an economics, finance, investment 0:00:17.079 --> 0:00:22.440 and international relations. Fine Bloomberg Surveillance, an Apple podcast, SoundCloud, 0:00:22.800 --> 0:00:29.520 Bloomberg dot Com, and of course I'm the Bloomberg terminal. Jeff, 0:00:29.560 --> 0:00:32.000 you joined us now seeing a strategist at B and 0:00:32.080 --> 0:00:34.120 Y Melon no secret that one of my favorite foreign 0:00:34.159 --> 0:00:36.680 exchange guests for the best part of a decade plus 0:00:36.680 --> 0:00:39.800 in London is Jeff. Jeff is great to see you. Likewise, 0:00:39.840 --> 0:00:41.960 pleasures be here. The title of your out looks Stepping 0:00:42.000 --> 0:00:44.440 Back from the Brink, is that what we're doing. We 0:00:44.479 --> 0:00:46.440 are stepping back from the brink. And as you mentioned, 0:00:46.760 --> 0:00:49.879 it's it's amazing that would fall it where not falling, 0:00:50.000 --> 0:00:52.080 and I'm stepping back. And given the amount of tightening 0:00:52.280 --> 0:00:55.600 that's gone through and heading into next year, the general 0:00:55.680 --> 0:00:58.960 viewers of probably every reason to be slightly hopeful as well, 0:00:59.040 --> 0:01:01.440 especially with the China News coming through five hundred basis 0:01:01.480 --> 0:01:04.319 points of tightening within a year. What is it nine 0:01:04.400 --> 0:01:07.440 months worth of ten eleven? Whatever it is, Jeff, that 0:01:07.480 --> 0:01:09.880 hasn't hit yet. What's the price we've got to pay 0:01:09.920 --> 0:01:12.520 for that? But it's five points of tightening against how 0:01:12.600 --> 0:01:15.080 much in leverage? Right? How much in terms of shadow leverage? 0:01:15.080 --> 0:01:16.920 Where was the financial system in two thousand and two 0:01:16.959 --> 0:01:19.399 thousand and nine? Where's the financial system now? And one 0:01:19.480 --> 0:01:23.360 keyword here regulation? Where was regulation or where should it 0:01:23.440 --> 0:01:26.479 have been heading into the GFC and whereas it now? 0:01:26.560 --> 0:01:28.800 So I think now those are the things which on 0:01:28.840 --> 0:01:31.800 the upside you could say it inhibited any potential rallies. 0:01:32.000 --> 0:01:33.960 To the downside, it actually prevents things. Do you think 0:01:34.000 --> 0:01:36.280 the price we pay for this then is just down 0:01:36.360 --> 0:01:39.240 draft in the SMP five hundred, we've had five hundred 0:01:39.240 --> 0:01:42.000 basis points of tiening, they've leried on QT on top 0:01:42.040 --> 0:01:44.120 of that, and we walk away. Now on the contrary, 0:01:44.160 --> 0:01:45.720 the price we pay for this is going to be 0:01:45.760 --> 0:01:48.520 in a sustained and structural inflation. A lot of things, 0:01:48.720 --> 0:01:50.800 those returns, you know, the easy money, you know, the 0:01:50.840 --> 0:01:54.880 low risk premier uh, the great moderation which enabled all 0:01:54.920 --> 0:01:57.040 of that we've had in twenty years now, that isn't 0:01:57.040 --> 0:01:59.360 coming back anytime soon. So what does it mean to 0:01:59.360 --> 0:02:01.600 step back the brink? Then? Because it doesn't sound like 0:02:01.640 --> 0:02:04.720 we're going to some lovely place. Well even so, you know, 0:02:04.760 --> 0:02:06.760 if you look at you know where we are. You know, 0:02:06.760 --> 0:02:09.440 for the US economy of the Eurozone economy next year 0:02:09.960 --> 0:02:12.760 is still a chance of recession, absolutely right, but probably 0:02:12.960 --> 0:02:16.400 best in a mild one, both in the U S 0:02:16.400 --> 0:02:18.520 and the Eurozone of course, and how the award develops 0:02:18.480 --> 0:02:21.200 is going to calibrate that to um. In China, clearly 0:02:21.240 --> 0:02:23.320 there's going to be a growth push. But just going 0:02:23.360 --> 0:02:26.880 back to the inflation view, the stagflation problems that we've 0:02:26.919 --> 0:02:28.880 seen this year, they're not going to go away anytime soon, 0:02:28.960 --> 0:02:30.720 and there's going to be a nasty inflation sting in 0:02:30.760 --> 0:02:33.080 the tell Whichina is reopening. Well, Jeff, this is to 0:02:33.120 --> 0:02:36.200 me a really interesting question because people talk about recession 0:02:36.200 --> 0:02:39.600 as though that's a negative case for the economy, but 0:02:39.680 --> 0:02:42.440 how much is that Actually the best case scenario is 0:02:42.440 --> 0:02:45.920 if we get a recession sooner that actually accelerates this 0:02:45.960 --> 0:02:49.520 process of disinflation and gets us to the end quicker. 0:02:49.880 --> 0:02:51.720 So for center backs, and I think the ECB is 0:02:51.720 --> 0:02:54.440 a good example of this. You know, they present a 0:02:54.560 --> 0:02:58.000 headline scenario baseline scenario than an alternative and scenario, right, 0:02:58.280 --> 0:03:00.560 depending on the wall. So from their point of view, 0:03:01.040 --> 0:03:05.600 they looked at an alternative scenario where you in in 0:03:06.040 --> 0:03:08.480 June and March. You know, they're looking at growth contraction 0:03:08.520 --> 0:03:10.520 of two percent or the headline. Okay, that's sure, we're 0:03:10.520 --> 0:03:12.240 going to drive down growth, but no, it's not. That's 0:03:12.360 --> 0:03:15.080 very stagflationary, right, So you've got to calibrate this very 0:03:15.160 --> 0:03:18.079 very carefully. They certainly want moderation. That's what the BOE 0:03:18.280 --> 0:03:22.040 you know, has signaled no two years of household income contraction. Sure, friends, 0:03:22.200 --> 0:03:24.639 you know Backham John are telling you know the situation 0:03:24.639 --> 0:03:27.840 of the housing market now the life So Governor Bailey 0:03:27.880 --> 0:03:30.040 and the MPC they thought that was necessary, but not 0:03:30.080 --> 0:03:32.600 too much. So there's a delicate range there and we 0:03:32.639 --> 0:03:34.120 think we're going to be in the okay side of that. Right, 0:03:34.200 --> 0:03:37.000 So next week be away, ECB, feder Reserve, CPI one 0:03:37.040 --> 0:03:38.560 more event you've got to look at. Now, Sam bank 0:03:38.600 --> 0:03:41.760 Man Freed, it's willing to testify on the thirteenth. He's 0:03:41.760 --> 0:03:43.920 come out with a couple of tweets months ago. I'll 0:03:43.920 --> 0:03:45.800 share some of them with you. I still do not 0:03:45.920 --> 0:03:48.880 have access to much of my data, professional or personal. 0:03:49.160 --> 0:03:50.560 So there is a limit to what I will be 0:03:50.640 --> 0:03:52.480 able to say, and I won't be as helpful as 0:03:52.520 --> 0:03:54.640 i'd like, but as the committee still thinks it would 0:03:54.680 --> 0:03:57.200 be useful, I am willing to testify on the thirteenth. 0:03:57.520 --> 0:03:59.120 At least. She goes on to say, I will try 0:03:59.160 --> 0:04:01.360 to be helpful during the hearing and to shed what 0:04:01.560 --> 0:04:04.160 light I can on the following f t x US 0:04:04.280 --> 0:04:08.280 is solvency and American customers pathways that could return value 0:04:08.360 --> 0:04:11.200 to use as internationally what I think led to the 0:04:11.240 --> 0:04:14.520 crash and my own failings. And he rounds things out 0:04:14.520 --> 0:04:16.840 by saying the following I had thought of myself as 0:04:16.839 --> 0:04:20.760 a model CEO who wouldn't become lazy or disconnected, which 0:04:20.800 --> 0:04:23.240 made it that much more destructive when I did. I'm sorry. 0:04:23.560 --> 0:04:26.120 Hopefully people can learn from the difference between who I 0:04:26.240 --> 0:04:29.799 was and who I could have been, whatever that means. 0:04:29.960 --> 0:04:33.120 So we're looking ahead to next week. To me, and 0:04:33.160 --> 0:04:36.440 this is my layman's interpretation, trying to paint this as 0:04:36.480 --> 0:04:40.520 incompetence or a failure in terms of what he came 0:04:40.560 --> 0:04:43.560 through on, rather than some sort of malfeasance. I'm curious 0:04:43.600 --> 0:04:46.400 about what kind of legal input he's gotten, given that 0:04:46.440 --> 0:04:47.960 he's been talking a lot more than they would like. 0:04:48.279 --> 0:04:50.160 You're not alone, Shiney bast is going to join us 0:04:50.160 --> 0:04:51.880 little bit later this morning, looking forward to that, and 0:04:52.000 --> 0:04:53.080 Marie is going to be with us here in the 0:04:53.080 --> 0:04:54.600 studio in New York to break down what you can 0:04:54.640 --> 0:04:56.280 look forward to next week. Jeff, I want to come 0:04:56.279 --> 0:04:58.280 to you. We started this conversation talking about a lack 0:04:58.320 --> 0:05:02.040 of leverage. Maybe at lack of leverage in the traditional places. 0:05:02.640 --> 0:05:04.839 Is the leverage ou swhere that maybe we can't see 0:05:05.320 --> 0:05:07.880 in the way that we can and say, public markets 0:05:07.880 --> 0:05:10.560 and equities, household banage, she's corporate bannag, she's that kind 0:05:10.560 --> 0:05:12.800 of thing. And also private markets as well. If I 0:05:12.800 --> 0:05:16.919 think about the asallocation views over the last few years 0:05:17.400 --> 0:05:19.320 with my previous and the hats on for example, the 0:05:19.760 --> 0:05:24.240 increased watings and private equity into alternatives with that maturity 0:05:24.320 --> 0:05:26.400 premium right now where you lock things in for ten 0:05:26.440 --> 0:05:31.360 to thirteen years or beyond and then clip that longevity coupon. 0:05:31.440 --> 0:05:33.040 You know when rates are very very low, you know 0:05:33.120 --> 0:05:36.200 that still may come to the four you know BIS 0:05:36.279 --> 0:05:38.960 talking about shadow lending, etcetera, etcetera. So yeah, that pitfalls 0:05:38.960 --> 0:05:41.960 out there still. Effects strategists have been coming on and 0:05:41.960 --> 0:05:44.760 talking about the housing market as underpinning a lot of 0:05:44.800 --> 0:05:47.320 their cars. Which housing markets are most vulnerable? Are you 0:05:47.360 --> 0:05:50.960 as well? So yes, Nordics and the Enterpollion's right, So 0:05:51.000 --> 0:05:52.840 if you look at Australia, you know right now, if 0:05:52.880 --> 0:05:56.560 you compare Australia to New Zealand, New Zealand's basically saying, yes, 0:05:56.600 --> 0:05:58.360 we have a housing market issue as well, but the 0:05:58.440 --> 0:06:01.440 labor market is so tight, income growth is so strong 0:06:01.480 --> 0:06:03.040 that they're not worried about it. They're probably the only 0:06:03.040 --> 0:06:04.680 G ten central banks that can hype more than their 0:06:04.720 --> 0:06:06.880 their five and a half, and I wouldn't rule out six, 0:06:07.040 --> 0:06:08.960 whereas the ib A saying and they might be wrong 0:06:08.960 --> 0:06:12.200 on this given the China situation, but income growth is slowing, 0:06:12.440 --> 0:06:15.200 job markets is slowing, so that means wage growth can't 0:06:15.200 --> 0:06:18.000 offset high mortgage rates UK. You know, that's a well 0:06:18.080 --> 0:06:21.719 known story. Sweden is going to be interesting because finding 0:06:21.960 --> 0:06:24.520 ing there's the governor is leaving the overlap with greenspan 0:06:24.600 --> 0:06:26.240 for a month, right, that's how long he's been around 0:06:26.320 --> 0:06:30.880 US government. It is, But the new governor is was 0:06:31.600 --> 0:06:34.680 is current head of the Swedish Financial Services Authority knows 0:06:34.680 --> 0:06:36.400 you know, where the issues are in the housing market, 0:06:36.640 --> 0:06:39.320 so the risks but also the reforms needed. So you know, 0:06:39.400 --> 0:06:41.640 that's where things can really come off. What does Canada 0:06:41.640 --> 0:06:44.479 fit in? So you know Canada as well. So when 0:06:44.520 --> 0:06:47.440 you are seeing a mortgage roads already seeing the BOC, 0:06:47.600 --> 0:06:49.360 you know, start to shift to the softer side. We 0:06:49.760 --> 0:06:53.159 saw initially in a Canada being like a high beta proxy, 0:06:53.240 --> 0:06:55.400 you know, to the US. Whatever the Fed's going to do, 0:06:55.600 --> 0:06:57.599 Canada and Mexico you know, will follow as well. But 0:06:57.640 --> 0:07:00.160 now we're clearly seeing that divergence UM and and off 0:07:00.200 --> 0:07:03.159 flow monitor and flotos for example, seeing clients diverge as well, 0:07:03.200 --> 0:07:05.000 and they're not owning the cab right now. Jeff, this 0:07:05.080 --> 0:07:07.080 was great. It always says, it's great to have you 0:07:07.120 --> 0:07:09.840 with the same in New York, Jeff. You b Y 0:07:09.920 --> 0:07:23.320 Melon joining us now as somebody who has been absolutely 0:07:23.360 --> 0:07:25.640 amazing on all things having to do with the US 0:07:25.680 --> 0:07:28.360 economy from her experience at Bank of America now at 0:07:28.480 --> 0:07:32.240 MasterCard Economics Institute where she's chief US economist. Michelle Meyer 0:07:32.320 --> 0:07:34.680 joining us here in studio. Michelle, fabulous to have you 0:07:34.760 --> 0:07:37.200 with us. What's your take on these numbers? Well, I 0:07:37.200 --> 0:07:40.760 think it says Mike summarized clearly there's still producer price 0:07:40.800 --> 0:07:45.040 inflation pressures, but you're seeing it different by category. So 0:07:45.080 --> 0:07:47.640 there's some relief in terms of some of the commodity 0:07:47.720 --> 0:07:50.080 price pressure that was a big part of the story 0:07:50.160 --> 0:07:53.200 earlier in the year. But there's still that lingering pressure 0:07:53.240 --> 0:07:55.480 that's happening more on the services side, and that's something 0:07:55.520 --> 0:07:57.960 that's very very clear on the consumer side too. We'll 0:07:57.960 --> 0:08:01.120 presumably see that to some extent. It's CPI next week. 0:08:01.160 --> 0:08:04.800 This differential between core goods inflation, which is coming down 0:08:04.840 --> 0:08:08.400 in part because those producer prices are also coming down, um, 0:08:08.400 --> 0:08:11.800 but services inflation, which remains a lot stickier. Does this 0:08:11.920 --> 0:08:14.000 data point to a recession in the US in the 0:08:14.000 --> 0:08:16.400 first half next year. I don't think so. I mean, 0:08:16.440 --> 0:08:18.640 one of the things that we've been pretty clear on 0:08:18.800 --> 0:08:22.120 is that we don't think a recession is inevitable by 0:08:22.120 --> 0:08:24.480 any means. I mean, I think, you know, looking at 0:08:24.600 --> 0:08:27.240 the data that we are examining on a regular basis, 0:08:27.280 --> 0:08:31.560 and consumer has purchasing power. They've had purchasing power throughout 0:08:31.720 --> 0:08:35.440 the year, and I think people underestimated the resolve of 0:08:35.480 --> 0:08:38.880 the US consumer to spend, the desire to spend, and 0:08:38.920 --> 0:08:42.280 the ability to spend and that's still here. Okay, so 0:08:42.320 --> 0:08:44.880 you moved to the suburbs. You understand this. Everybody drives 0:08:44.920 --> 0:08:46.360 around and when you have to fill up your car 0:08:46.400 --> 0:08:48.960 and you actually get a lower price, you generally have 0:08:49.080 --> 0:08:51.280 more money in your in your account. So how much 0:08:51.679 --> 0:08:55.160 is the decline in gasoline prices perversely going to fuel 0:08:55.320 --> 0:08:58.360 ongoing inflation for longer than people previously expected. Well, I 0:08:58.440 --> 0:08:59.960 might not be the best person to answer that because 0:09:00.000 --> 0:09:05.120 we moved electric, but sorry, car in general, that's exactly right, 0:09:05.200 --> 0:09:08.080 which is that you know, it's something that's tangible, and 0:09:08.120 --> 0:09:11.120 it's not just gasoline, it's also food as well. That's 0:09:11.120 --> 0:09:13.360 a big part of this story, which is you walk 0:09:13.400 --> 0:09:15.319 into a grocery store, you buy, you know, kind of 0:09:15.360 --> 0:09:18.120 the same type of items every week, and you see 0:09:18.160 --> 0:09:21.320 those price differentials. So there's still those dynamics, these kind 0:09:21.320 --> 0:09:23.000 of cross currents. On the one hand, quite a lot 0:09:23.000 --> 0:09:25.520 of nice relief from lower gas prices. On the other hand, 0:09:25.559 --> 0:09:30.920 food price inflation remains high and problematic. Interestingly enough, we 0:09:31.000 --> 0:09:33.920 do have a number here. Gasoline Price Index fell six 0:09:34.760 --> 0:09:38.760 in the PPI in November, so a significant decline there, which, 0:09:38.800 --> 0:09:41.080 of course the Biden administration has been waving like a 0:09:41.120 --> 0:09:45.880 flag recently to get people to figure that out. But uh, 0:09:46.120 --> 0:09:50.280 final demand goods thirty eight point one in the index 0:09:50.320 --> 0:09:54.160 for fresh and dry vegetables, So food prices are still 0:09:54.200 --> 0:09:56.080 going up. Yeah, people can feel that when they go 0:09:56.120 --> 0:09:59.280 to the grocery stores and it's definitely impeding pricing power there. 0:09:59.320 --> 0:10:01.439 But all of the is really confusing. It's a muddle, 0:10:01.480 --> 0:10:03.640 and that's the reason why people believe in this recession, 0:10:04.160 --> 0:10:07.400 and yet it doesn't seem to be feeding into this data. 0:10:07.800 --> 0:10:11.520 Do you buy into this massive disinflationary kind of feel 0:10:11.920 --> 0:10:14.440 that people are basically pricing into the dip and rip 0:10:14.480 --> 0:10:16.920 scenario that John was talking about. So one thing that 0:10:16.960 --> 0:10:19.640 we've seen in our data is that in this holiday 0:10:19.640 --> 0:10:23.680 shopping season, consumers are more promotional based than we've seen 0:10:24.080 --> 0:10:26.920 certainly in the last two holiday season. So when we 0:10:26.960 --> 0:10:29.320 look at our daily data, we saw you know a 0:10:29.320 --> 0:10:31.840 bit of us softening at the end of October early November, 0:10:31.880 --> 0:10:33.960 and then this big surge of activity into the Black 0:10:34.000 --> 0:10:36.679 Friday perry, particularly for things like apperil, which was really 0:10:36.679 --> 0:10:40.120 really strong. So I think consumers are being targeted there 0:10:40.120 --> 0:10:43.080 being you know, cognizant of how they're spending where they're 0:10:43.080 --> 0:10:47.160 spending what they're spending on UM, and relative inflation is 0:10:47.160 --> 0:10:49.920 playing a role, relative interest rates are playing a role. 0:10:50.240 --> 0:10:53.000 So there's, you know, a consumer that's aware of these 0:10:53.080 --> 0:10:55.440 headwinds that they've been facing throughout the year, and they're 0:10:55.480 --> 0:10:58.800 navigating it um But I think they've navigated a whole 0:10:58.840 --> 0:11:01.360 lot better than people had and them credit for. Right now, 0:11:01.400 --> 0:11:04.600 we're looking at a potential for the FED getting a 0:11:04.640 --> 0:11:07.680 soft landing. Just like they said, what does that mean 0:11:07.760 --> 0:11:10.520 in terms of how high rates should go, Well, it 0:11:10.520 --> 0:11:12.880 seems very clear they're not done hiking UM. So in 0:11:12.920 --> 0:11:15.840 the upcoming meeting next week, the expectations for another fifty 0:11:15.840 --> 0:11:18.679 basis point have hikes, which makes sense. That is a 0:11:18.760 --> 0:11:22.080 slowdown in the cadence of hikes. So they're clearly starting 0:11:22.120 --> 0:11:24.920 to see some signs that their monetary policy hikes, that 0:11:24.920 --> 0:11:27.760 it's transmitting into the economy. It's making a difference obviously 0:11:27.760 --> 0:11:29.720 in the housing market, it is in some of the 0:11:29.720 --> 0:11:33.240 good sectors. You're obvious you're seeing those those those ramifications 0:11:33.280 --> 0:11:36.080 as well. But I think that the next step after 0:11:36.120 --> 0:11:38.640 this will be that the FED continues to move up, 0:11:38.679 --> 0:11:41.400 but they do so a little bit slower. They're trying 0:11:41.440 --> 0:11:45.240 to monitor how the economy is reacting to those hikes, 0:11:45.280 --> 0:11:47.760 and they are seeing dynamics in the inflation data that 0:11:47.800 --> 0:11:51.120 also is presumably encouraging, right, the fact that core goods 0:11:51.160 --> 0:11:53.240 is coming down. We'll see what o we are does 0:11:53.280 --> 0:11:55.679 next week. That's going to be really important as well. Meanwhile, 0:11:55.679 --> 0:11:58.640 people are still poising in rate cuts, Mike, well, some 0:11:58.679 --> 0:12:01.040 people in the markets are, but interesting, Bloomberg has just 0:12:01.080 --> 0:12:04.680 done a survey of economists and the majority of economists 0:12:04.679 --> 0:12:06.640 think that the FED will now go to five percent, 0:12:07.000 --> 0:12:09.440 but they also think that the FED will keep it 0:12:09.520 --> 0:12:12.319 at five percent for the entire year, which is a 0:12:12.360 --> 0:12:15.040 little bit different than what you're getting in the futures market. 0:12:15.160 --> 0:12:17.360 So we'll see if those two converge, you know, and 0:12:17.360 --> 0:12:19.320 then a lot of people think that whatever the Fed 0:12:19.360 --> 0:12:20.719 does is going to be enough to bring us back 0:12:20.760 --> 0:12:23.920 down to where we were before. Do you buy that? Yeah? 0:12:24.040 --> 0:12:25.720 So you know, one of the things that we we 0:12:25.800 --> 0:12:29.679 just published our economic piece um this week, and one 0:12:29.679 --> 0:12:32.079 of the themes there is this idea of a rebalancing 0:12:32.240 --> 0:12:35.520 or normalization. So part of what's happening still in the 0:12:35.559 --> 0:12:38.200 economy next year, which the FED is trying to engineer, 0:12:38.720 --> 0:12:41.319 is a normalization of parts of the economy that we're 0:12:41.320 --> 0:12:44.120 in an excess. So think about the labor market. Um, 0:12:44.280 --> 0:12:46.480 should you have all these job openings relative to the 0:12:46.520 --> 0:12:49.760 number of unemployed. No, they want to cool that down, 0:12:49.760 --> 0:12:52.720 they want to normalize it. Um. Some parts of the 0:12:52.760 --> 0:12:54.719 economy they need to do more than normalizing, which is 0:12:54.760 --> 0:12:57.000 housing where you've had a lot of accesses bill that 0:12:57.000 --> 0:12:58.920 they want to try to correct for and prevent a 0:12:58.960 --> 0:13:01.960 bigger shock into the future. So I think it's this 0:13:02.240 --> 0:13:07.520 rebalancing that's been you know, kind of desired throughout two 0:13:07.840 --> 0:13:09.920 which is what the FED was, you know, trying to 0:13:09.960 --> 0:13:12.880 achieve with higher interest rates, andree is going to be 0:13:12.920 --> 0:13:15.120 a story of those outcomes in our In our view, 0:13:15.320 --> 0:13:17.280 what's the outcome in housing? I know you've been terrific 0:13:17.320 --> 0:13:19.280 on this for years. Do you think that we're in 0:13:19.400 --> 0:13:22.880 for a pretty protracted and deep downturn in terms of prices. 0:13:23.400 --> 0:13:26.160 I think housing is in for some real challenges ahead. 0:13:26.280 --> 0:13:29.359 I do, because when you look at how much affordability 0:13:29.400 --> 0:13:32.640 has changed, it's it's huge. It's been a big, big 0:13:32.679 --> 0:13:36.600 shock because home prices ran well above income for a 0:13:36.679 --> 0:13:40.560 period of time, which was facilitated by these extraordinarily low 0:13:40.679 --> 0:13:44.400 rates for the extended period presumably too long um and 0:13:44.400 --> 0:13:46.760 that created this big imbalance. So we're already seeing home 0:13:46.800 --> 0:13:50.079 sales fall sharply. Home prices are starting to fall in 0:13:50.120 --> 0:13:52.000 a month a month basis, and it's particularly in some 0:13:52.080 --> 0:13:55.120 areas like San Francisco. It's fast. So I think there's 0:13:55.160 --> 0:13:56.800 more to come and just quickly here. Is it going 0:13:56.840 --> 0:13:58.760 to be comparable to two in terms of the scope 0:13:58.760 --> 0:14:01.079 of the declines. I don't think it will because you 0:14:01.120 --> 0:14:03.400 won't have the degree of ario, so you won't have 0:14:03.480 --> 0:14:07.080 that force selling which creates a heavy price discounting. Michelle Meyer, 0:14:07.120 --> 0:14:08.800 thank you so much for being here, and have a 0:14:08.800 --> 0:14:13.559 wonderful holiday season. Michelle Meyer of the MasterCard Economics Institute. 0:14:14.000 --> 0:14:20.280 Always great to get that insight. Looking ahead to next week, 0:14:20.320 --> 0:14:23.880 it's Cathy Jones, Chief Fixed Incomes Strategistic swab Canthy. Let's 0:14:23.880 --> 0:14:26.080 start with the Federal Reserve. It seems to me that 0:14:26.080 --> 0:14:28.720 at the moment we're focused on the way the chairman 0:14:28.760 --> 0:14:33.080 frames risk management, whether there is a focus on overtightening 0:14:33.200 --> 0:14:36.840 or UNDERTIGHTENINGE. What do you think the biggest risk is 0:14:36.880 --> 0:14:41.800 for this Federal Reserve. I think the biggest risk is 0:14:41.840 --> 0:14:45.240 if they under tighten because they've sent such a strong 0:14:45.400 --> 0:14:49.280 message about needing to get inflation down before they make 0:14:49.360 --> 0:14:52.600 any other changes that that's the number one priority. I 0:14:52.640 --> 0:14:55.640 think they have to continue to send that message. The 0:14:55.760 --> 0:14:58.880 risk is though, that they probably will overtighten, and you know, 0:14:58.880 --> 0:15:01.160 we'll get a recession and things will break down. But 0:15:01.240 --> 0:15:04.280 I don't think that they can afford to not continue 0:15:04.320 --> 0:15:07.440 to send that message. Kathy, how does that inform your 0:15:07.520 --> 0:15:09.760 view of whether to go along some of these longer 0:15:09.840 --> 0:15:14.120 duration bonds ten year, thirty year notes versus perhaps pair back, 0:15:14.520 --> 0:15:19.320 especially after the enthusiasm we've seen of late. Yeah, you know, Lisa, 0:15:19.360 --> 0:15:22.320 we were pretty enthusiastic a while back about where when 0:15:22.880 --> 0:15:26.360 your tenure yields hit four percent clause, they're pretty enthusiastic 0:15:26.400 --> 0:15:30.680 about extending duration. We still like extending duration on rallies 0:15:31.120 --> 0:15:35.720 are increases in yield going forward, but I think we're 0:15:35.720 --> 0:15:37.440 going to have to have a rough ride here over 0:15:37.480 --> 0:15:39.920 the near term because so much good news has been 0:15:39.960 --> 0:15:42.720 priced into the market. But our long term view is 0:15:42.760 --> 0:15:45.480 that the tenure yields can follow as far as three 0:15:45.560 --> 0:15:49.360 percent this coming year, So we will use those that 0:15:49.600 --> 0:15:52.560 moves up and yield to extenduration. Cathy, you said that 0:15:52.600 --> 0:15:56.440 the biggest risk is under tightening, not overtightening. How much 0:15:56.480 --> 0:15:59.000 do you get pushed back? Is this basically not the 0:15:59.080 --> 0:16:03.240 consensus anymore? Are as people believe in this disinflationary story 0:16:03.280 --> 0:16:07.680 that will pick up steam throughout three Well, we're in 0:16:07.680 --> 0:16:10.960 the disinflation can um. I think the problem is that 0:16:11.120 --> 0:16:14.320 because of the legs that are involved, it will take 0:16:14.360 --> 0:16:17.160 time to feat its way through and the market. When 0:16:17.160 --> 0:16:19.160 I look at the shorter end of the market, it's 0:16:19.160 --> 0:16:22.840 already discounted a re rated what the feed's going to do. 0:16:23.520 --> 0:16:27.120 And given that financial conditions haven't tightened or as much 0:16:27.200 --> 0:16:30.680 or they've loosened over the last couple of months. Um, 0:16:30.720 --> 0:16:33.640 I think that the risk is that the Fed has 0:16:33.680 --> 0:16:37.280 to push back against that, and if they don't overtighten, 0:16:38.080 --> 0:16:40.520 then we're going to see inflation kind of bounce back 0:16:40.560 --> 0:16:42.480 again at the end of next year. So, Kathy, can 0:16:42.480 --> 0:16:44.240 we put some numbers on this? The Federal Reserve in 0:16:44.240 --> 0:16:47.600 their last projections from September they get updated next week. 0:16:47.640 --> 0:16:50.240 Of course, have p C a co PC at three 0:16:50.240 --> 0:16:52.680 point one at the end of twenty three, two point 0:16:52.720 --> 0:16:56.160 three at twenty four as party, because I think twenty 0:16:56.200 --> 0:16:59.120 three is hard enough. Where are you for three? There? 0:16:59.160 --> 0:17:02.800 At three point one? Yeah, I think we can get 0:17:02.840 --> 0:17:06.320 close to the three and a half area. UM. It 0:17:06.440 --> 0:17:09.560 depends really on wage growth and how quickly that starts 0:17:09.600 --> 0:17:13.240 to decline. They're starting to see some hints that it's declining, 0:17:13.320 --> 0:17:16.159 but not as much as anticipated I think at this 0:17:16.240 --> 0:17:19.040 stage of the cycle. So we'll probably have to push 0:17:19.080 --> 0:17:20.719 that out and say about three and a half at 0:17:20.720 --> 0:17:22.480 the end of next year. So just to be super clear, 0:17:22.520 --> 0:17:24.119 that glide path to three and a half, does that 0:17:24.160 --> 0:17:29.240 include a recession to get there? Probably? Yeah? Yeah, Well, 0:17:29.359 --> 0:17:31.760 we think risk of recession is very high. You know 0:17:31.840 --> 0:17:36.119 the indicators from the inverted yield curve to um, you 0:17:36.160 --> 0:17:38.719 know the leading indicators. I mean, I could go a 0:17:38.720 --> 0:17:42.880 long list. Here are things that are rolling over housing, etcetera. 0:17:43.320 --> 0:17:45.480 We do think a recession is pretty high risk. So 0:17:45.480 --> 0:17:47.840 it's important because I'm really interested in how you interpret 0:17:47.920 --> 0:17:50.600 their reaction function. If if they're gliding part fist down 0:17:50.640 --> 0:17:52.399 to three point one and you think three and a 0:17:52.440 --> 0:17:54.960 half year and next year you've got a recession in 0:17:55.000 --> 0:17:57.800 the mix as well, are they cutting in twenty three? 0:17:57.800 --> 0:18:01.560 In that world? I think they could at the end 0:18:01.600 --> 0:18:04.320 of next year. I think it's reasonable that if we 0:18:04.400 --> 0:18:08.679 are in a you know, distinctly clear recession and inflation 0:18:08.880 --> 0:18:11.359 is pretty close to three and a half four pc, 0:18:11.720 --> 0:18:14.160 they could at the end of next year. But again, 0:18:14.280 --> 0:18:17.600 I think the playbook here is the Volker FED. You know, 0:18:17.640 --> 0:18:20.600 we've heard this over and over again that Paul doesn't 0:18:20.640 --> 0:18:23.800 want to be the Arthur Burns of his generation. He 0:18:23.920 --> 0:18:26.639 wants to be the Volker of his generation. So I 0:18:26.680 --> 0:18:29.240 think that they'll try to manage it to avoid a 0:18:29.320 --> 0:18:32.600 deep recession. But I think if the choice is recession 0:18:32.720 --> 0:18:37.119 versus inflation, the choice will be recession. When when history 0:18:37.119 --> 0:18:39.640 books look back, Kathy, do you think that they will 0:18:39.680 --> 0:18:42.720 agree with Harvard University professor Jeremy Stein, formerly on the 0:18:42.720 --> 0:18:46.080 Federal Reserve, who says that it is astonishing that we 0:18:46.160 --> 0:18:48.720 haven't seen a financial system blow up. That if you 0:18:48.720 --> 0:18:50.240 had said a couple of years ago that you would 0:18:50.240 --> 0:18:53.040 have had consecutive seventy five basis point rate hikes, you 0:18:53.080 --> 0:18:54.960 would have said it would have been financial armageddon. The 0:18:55.000 --> 0:18:57.880 fact that we haven't is testimony to what the FED 0:18:57.960 --> 0:19:03.080 has done. Can we actually say at already, well maybe 0:19:03.080 --> 0:19:04.919 a little too soon to say we won't have some 0:19:05.000 --> 0:19:07.320 blow up somewhere, but I would say that that, you know, 0:19:07.400 --> 0:19:10.119 the strength of the banking sector is really what's helped 0:19:10.160 --> 0:19:12.159 us out this time, and that's an outdoor of all 0:19:12.200 --> 0:19:15.880 the regulations from the Great Financial Crisis, where we look 0:19:16.000 --> 0:19:19.359 for potential problems in the private markets. And you know, 0:19:19.480 --> 0:19:22.879 we've talked about this for months now, because of the 0:19:22.920 --> 0:19:26.600 build up of debt in the private credit area, that's 0:19:26.680 --> 0:19:29.359 where we would look for problems, so more simply because 0:19:29.400 --> 0:19:31.720 there's black and well quitted, a huge amount of leverage, 0:19:31.720 --> 0:19:35.480 and that's where the deterioration of lending standards really took place. 0:19:36.119 --> 0:19:38.479 Cathy Jones greed to catch up as always of cha 0:19:38.600 --> 0:19:51.439 Swab looking ahead to next week. Matt Miller joins us 0:19:51.440 --> 0:19:53.159 in the studio. This is cool, Matt. We've got a 0:19:53.200 --> 0:19:54.960 couple of things to do. Need to work out what 0:19:55.000 --> 0:19:57.320 on earth is going on in Germany. Winters arrived, I'm 0:19:57.320 --> 0:19:59.560