1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 2 00:00:09,240 --> 00:00:13,200 Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailey. We bring you 3 00:00:13,280 --> 00:00:18,600 Speaker 1: insight from the best and economics, finance, investment, and international relations. 4 00:00:18,960 --> 00:00:23,840 Speaker 1: Find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot Com, 5 00:00:23,920 --> 00:00:29,680 Speaker 1: and of course, on the Bloomberg Terminal. Joining me now 6 00:00:29,720 --> 00:00:33,559 Speaker 1: to talk more about inflation and the outlook for the 7 00:00:33,600 --> 00:00:36,920 Speaker 1: economy is Patrick Harker. He is the President of the 8 00:00:37,000 --> 00:00:40,080 Speaker 1: Federal Reserve Bank of Philadelphia. And good morning to you, Pat, 9 00:00:40,080 --> 00:00:44,080 Speaker 1: Thanks for joining us today. Uh, good morning, Mike. Inflation 10 00:00:44,159 --> 00:00:47,640 Speaker 1: team in February, but that's not what the Fed expects 11 00:00:47,800 --> 00:00:51,159 Speaker 1: going forward. The Philly Fed index that came out this 12 00:00:51,280 --> 00:00:56,120 Speaker 1: month was the highest for prices paid since nineteen Do 13 00:00:56,160 --> 00:01:00,080 Speaker 1: you anticipate a really, really rapid rise in prices? Is 14 00:01:00,080 --> 00:01:02,800 Speaker 1: that what people in your district are telling you. Now, 15 00:01:02,880 --> 00:01:05,240 Speaker 1: that's not where we're hearing across the board. We are 16 00:01:05,280 --> 00:01:10,280 Speaker 1: seeing in certain pockets like manufacturing their supplied they're seeing 17 00:01:10,400 --> 00:01:15,800 Speaker 1: price price pressures, but what they're not doing is planning 18 00:01:15,800 --> 00:01:18,679 Speaker 1: on passing much of that along to their consumer, to 19 00:01:18,800 --> 00:01:22,760 Speaker 1: their own customer. So I think it's the inflation stories complicated. 20 00:01:23,000 --> 00:01:25,360 Speaker 1: As you said, we're going to see March April drop off. 21 00:01:26,000 --> 00:01:28,720 Speaker 1: They were low months, obviously because we were shutting down 22 00:01:28,760 --> 00:01:31,319 Speaker 1: the economy. So we're going to see a spike in inflation. 23 00:01:31,760 --> 00:01:34,360 Speaker 1: But I think we're our forecasts for inflation to creep 24 00:01:34,440 --> 00:01:36,160 Speaker 1: up the two and our goal is to have it 25 00:01:36,640 --> 00:01:39,520 Speaker 1: hit above two percent this year. Our forecasts around two, 26 00:01:40,680 --> 00:01:43,840 Speaker 1: but we don't see it running out of control. What 27 00:01:43,920 --> 00:01:47,280 Speaker 1: about the idea that UM on the spending side, people 28 00:01:47,319 --> 00:01:50,960 Speaker 1: are reluctant to go out. What are you hearing in Philadelphia? 29 00:01:51,120 --> 00:01:54,280 Speaker 1: We're getting more jabs in arms, and yet we see 30 00:01:54,960 --> 00:01:59,000 Speaker 1: personal spending decline in the month of February. It's been 31 00:01:59,080 --> 00:02:03,400 Speaker 1: chopping right because the viruses UH in variable. We've had 32 00:02:03,680 --> 00:02:07,560 Speaker 1: good months, bad months. We're seeing numbers rise now in 33 00:02:07,640 --> 00:02:11,840 Speaker 1: this region. And so until we get through this period, 34 00:02:11,840 --> 00:02:14,440 Speaker 1: we're going to see a lot of volatility in all 35 00:02:14,520 --> 00:02:17,320 Speaker 1: these measures and that makes them hard to read. So 36 00:02:17,440 --> 00:02:20,560 Speaker 1: for me, as a policy maker in that kind of situation, 37 00:02:21,040 --> 00:02:23,480 Speaker 1: I want to hold steady, make sure we get through 38 00:02:23,520 --> 00:02:27,160 Speaker 1: this period. Then we can start to normalize once we 39 00:02:27,240 --> 00:02:29,880 Speaker 1: get through this. When you say get through this period, 40 00:02:29,880 --> 00:02:32,880 Speaker 1: how long do you think it lasts well. Again, if 41 00:02:32,880 --> 00:02:36,880 Speaker 1: you talk to epidemiologists not economists, uh, they'll say sometime 42 00:02:36,919 --> 00:02:40,160 Speaker 1: in the fall, we should start to get hurt of unity. 43 00:02:40,360 --> 00:02:42,239 Speaker 1: I'm a little concerned though. Some of the things we're 44 00:02:42,280 --> 00:02:47,080 Speaker 1: hearing right now is vaccine hesitancy Israel. We even hear 45 00:02:47,120 --> 00:02:51,639 Speaker 1: this from our healthcare contacts. Right. Healthcare workers themselves are 46 00:02:51,720 --> 00:02:53,720 Speaker 1: reluctant to get the vaccine. So we need to make 47 00:02:53,760 --> 00:02:57,239 Speaker 1: sure we get this vaccine into people's arms as quickly 48 00:02:57,280 --> 00:03:02,639 Speaker 1: as possible. What are he's telling you about finding employees? 49 00:03:02,680 --> 00:03:06,240 Speaker 1: You're you're focused now on getting unemployment down as low 50 00:03:06,280 --> 00:03:09,079 Speaker 1: as you can. Some companies seem to be saying they 51 00:03:09,080 --> 00:03:13,480 Speaker 1: can't find enough people. Other companies say, uh, we don't 52 00:03:13,480 --> 00:03:17,480 Speaker 1: need any more people yet. It varies again by sector. 53 00:03:18,080 --> 00:03:23,160 Speaker 1: In manufacturing, skilled labor is a real shortage, and we're 54 00:03:23,200 --> 00:03:26,560 Speaker 1: hearing this from our contact warehousing jobs. There is a 55 00:03:26,600 --> 00:03:30,520 Speaker 1: warehouse in central Pennsylvania that the starting salary for people 56 00:03:30,560 --> 00:03:33,320 Speaker 1: there is twenty three dollars an hour. So again it 57 00:03:33,360 --> 00:03:37,360 Speaker 1: depends a lot on the sector of the economy. Hotel, hospitality, 58 00:03:37,400 --> 00:03:41,200 Speaker 1: and leisure. Some of those are having problems getting people 59 00:03:41,440 --> 00:03:44,000 Speaker 1: back to work because those people have decided to switch 60 00:03:44,120 --> 00:03:48,400 Speaker 1: careers to something that they think is more stable. I 61 00:03:48,440 --> 00:03:51,120 Speaker 1: know that a lot of people say the FED doesn't 62 00:03:51,120 --> 00:03:53,360 Speaker 1: have tools to boost employment, but you've got a new 63 00:03:53,360 --> 00:03:58,200 Speaker 1: one at the Philadelphia FED to help people switch careers. Yeah. So, 64 00:03:58,400 --> 00:04:02,000 Speaker 1: through our community development function at the FED and at 65 00:04:02,000 --> 00:04:04,120 Speaker 1: the Philly FED, we've been doing work now for a 66 00:04:04,120 --> 00:04:07,640 Speaker 1: long time on what are the skills necessary to help 67 00:04:07,680 --> 00:04:10,800 Speaker 1: people get into the middle class where you don't need 68 00:04:10,920 --> 00:04:14,720 Speaker 1: a four year college degree. We call those jobs opportunity occupations, 69 00:04:15,000 --> 00:04:18,120 Speaker 1: jobs that pay above medium wages where you don't necessarily 70 00:04:18,160 --> 00:04:20,680 Speaker 1: need a four year college degree. So we've been doing 71 00:04:20,720 --> 00:04:22,679 Speaker 1: that work for a while. We we've looked at thirty 72 00:04:22,680 --> 00:04:25,960 Speaker 1: three metro areas along with our colleagues of Cleveland UH 73 00:04:26,000 --> 00:04:28,960 Speaker 1: and looked at these areas. We saw an average increase 74 00:04:28,960 --> 00:04:31,919 Speaker 1: of about fifteen thousand dollars. That is, people with some skills, 75 00:04:31,920 --> 00:04:35,560 Speaker 1: with some upskilling to get a better job and improved 76 00:04:35,560 --> 00:04:38,200 Speaker 1: a lot of for themselves and their families. We then 77 00:04:38,360 --> 00:04:40,440 Speaker 1: now built this tool, and this tool is meant for 78 00:04:40,720 --> 00:04:45,760 Speaker 1: job seekers, employers, community colleges, and other training organizations policy 79 00:04:45,800 --> 00:04:49,200 Speaker 1: makers to see what's available in their region. Let me 80 00:04:49,200 --> 00:04:51,320 Speaker 1: give you two examples of what you can find. So 81 00:04:51,400 --> 00:04:53,680 Speaker 1: let's say your receptionists been billed out there, Well, you 82 00:04:53,720 --> 00:04:56,920 Speaker 1: have skills that you can upskill to a medical secretary 83 00:04:57,360 --> 00:04:59,960 Speaker 1: and see an average, on average, an increase of twenty 84 00:05:00,080 --> 00:05:04,120 Speaker 1: six percent in your salary. Or say you're in Cleveland 85 00:05:04,120 --> 00:05:06,279 Speaker 1: and you're a cashier. Were all with some training you 86 00:05:06,320 --> 00:05:09,000 Speaker 1: could be a customer service rate and there you could 87 00:05:09,000 --> 00:05:11,839 Speaker 1: see an average increase in salary of a hundred and thirty. 88 00:05:13,040 --> 00:05:15,200 Speaker 1: It's not just white collar jobs or blue collar jobs. 89 00:05:15,279 --> 00:05:17,440 Speaker 1: So it's nice about these tools. You can lay out 90 00:05:17,440 --> 00:05:19,839 Speaker 1: a map of what skills you need to get to 91 00:05:19,920 --> 00:05:22,680 Speaker 1: get the jobs that are growing or shrinking. Can also 92 00:05:22,720 --> 00:05:26,480 Speaker 1: see whether those jobs are growing or shrinking in your region. Now, 93 00:05:26,839 --> 00:05:29,360 Speaker 1: I know, if I ask you about market interest rates, 94 00:05:29,360 --> 00:05:31,680 Speaker 1: you'll say markets do what markets do? They go up 95 00:05:31,760 --> 00:05:35,320 Speaker 1: or down. But here's what I'm Here's what I'm interested in. 96 00:05:35,560 --> 00:05:38,680 Speaker 1: Is U rates have gone up, mortgage rates have gone up, 97 00:05:38,760 --> 00:05:41,440 Speaker 1: car loans have gone up because the market is pushing 98 00:05:41,520 --> 00:05:44,360 Speaker 1: rates high or not the FED Are people more sensitive 99 00:05:44,440 --> 00:05:47,279 Speaker 1: to that when they have been so low? In other words, 100 00:05:47,440 --> 00:05:49,800 Speaker 1: is it more of a risk that we see activities 101 00:05:49,839 --> 00:05:53,560 Speaker 1: slow because the markets have pushed up rates some Well, 102 00:05:53,720 --> 00:05:56,520 Speaker 1: let's start with business. I've not heard anybody say they're 103 00:05:56,520 --> 00:05:59,599 Speaker 1: not investing because of the the rates. Just don't hear it. 104 00:06:00,400 --> 00:06:04,520 Speaker 1: It's because the demand side or the uncertainty that they're facing. 105 00:06:04,560 --> 00:06:07,279 Speaker 1: So we need to resolve this uncertainty so that people 106 00:06:07,360 --> 00:06:11,919 Speaker 1: can make the right decisions. I'm not the consumer, maybe, 107 00:06:12,160 --> 00:06:15,000 Speaker 1: but again, we're not talking about massive increases historically in 108 00:06:15,120 --> 00:06:18,080 Speaker 1: rates when if you really step back, we're not. We're 109 00:06:18,080 --> 00:06:22,200 Speaker 1: talking about what a hundred basis points maybe. Uh, this 110 00:06:22,279 --> 00:06:26,520 Speaker 1: is historically not really something that's really affected people's decision 111 00:06:26,560 --> 00:06:29,800 Speaker 1: to buy a car, maybe on the margin by home 112 00:06:29,920 --> 00:06:32,080 Speaker 1: or the size of the home they get. But again, 113 00:06:32,120 --> 00:06:34,679 Speaker 1: this is a good sign in some ways that rates, 114 00:06:35,000 --> 00:06:38,280 Speaker 1: say the ten years, going up. We don't know exactly why, 115 00:06:39,040 --> 00:06:42,760 Speaker 1: but one of the plausible reasons why is that real 116 00:06:42,839 --> 00:06:46,400 Speaker 1: rates are going up. People are more optimistic about the economy, 117 00:06:46,600 --> 00:06:49,719 Speaker 1: and we've been hovering a zero or negative neutral real 118 00:06:49,800 --> 00:06:52,320 Speaker 1: rates for a while. So the fact that that's rising 119 00:06:52,760 --> 00:06:56,719 Speaker 1: is a good sign because it shows optimism. The question 120 00:06:56,760 --> 00:06:59,080 Speaker 1: I put to the chairman after the news conference that 121 00:06:59,240 --> 00:07:02,040 Speaker 1: didn't quite get an answer to, I'll put to you, Uh, 122 00:07:02,200 --> 00:07:06,400 Speaker 1: you mentioned real rates, and you mentioned, Uh, the long term, 123 00:07:06,440 --> 00:07:08,359 Speaker 1: when do we get to that two and a half 124 00:07:08,440 --> 00:07:12,560 Speaker 1: percent neutral rate that is considered the long term rate 125 00:07:12,640 --> 00:07:14,240 Speaker 1: for the Fed? In other words, if you get to 126 00:07:14,280 --> 00:07:17,560 Speaker 1: two thousand twenty three through through thousand twenty three and 127 00:07:17,640 --> 00:07:19,960 Speaker 1: we don't see inflation out of control, do we just 128 00:07:20,040 --> 00:07:23,760 Speaker 1: leave rates at zero indefinitely. Yeah, We'll have to see 129 00:07:23,760 --> 00:07:26,960 Speaker 1: when we get there. I'm not sure that that would 130 00:07:26,960 --> 00:07:29,720 Speaker 1: be my and I can only speak for myself, Uh, 131 00:07:29,840 --> 00:07:33,480 Speaker 1: my policy prescription. I mean, if we're seeing very strong 132 00:07:33,880 --> 00:07:36,720 Speaker 1: unemployment back to where we were before the pandemic, right, 133 00:07:36,840 --> 00:07:40,640 Speaker 1: low inflation, great unemployment numbers, that's where we're going to 134 00:07:40,680 --> 00:07:43,280 Speaker 1: get back to and so there. I mean there are 135 00:07:43,320 --> 00:07:46,040 Speaker 1: some risks of keeping rates too low too long as well, 136 00:07:46,080 --> 00:07:49,160 Speaker 1: and it's really a matter of bouncing off these risks. 137 00:07:49,160 --> 00:07:52,280 Speaker 1: But it's very situational. I mean, you can't just make 138 00:07:52,320 --> 00:07:54,480 Speaker 1: this decision right now. You really need to see the 139 00:07:54,600 --> 00:07:57,800 Speaker 1: data and see how things are unfolding. Well, you talk 140 00:07:57,840 --> 00:07:59,840 Speaker 1: about the risk of keeping rates too low for too 141 00:07:59,880 --> 00:08:01,320 Speaker 1: low on a lot of people point to the stock 142 00:08:01,360 --> 00:08:04,400 Speaker 1: market or bitcoin and say, you know, the FED is 143 00:08:04,440 --> 00:08:07,680 Speaker 1: really inflating bubbles here. How much of my concern is 144 00:08:07,720 --> 00:08:11,880 Speaker 1: that to you. It's something that I keep in mind 145 00:08:11,920 --> 00:08:15,720 Speaker 1: all the time. That and the cost to savers. People 146 00:08:15,720 --> 00:08:18,680 Speaker 1: will say on fixed income, Uh, there there's a cost. 147 00:08:18,720 --> 00:08:21,200 Speaker 1: So again, this is a balancing act. We need to 148 00:08:21,240 --> 00:08:23,840 Speaker 1: get the economy to recover. We need to get the 149 00:08:23,840 --> 00:08:27,400 Speaker 1: economy to heal with minimal scarring. That's what was the 150 00:08:27,440 --> 00:08:29,720 Speaker 1: whole goal of what we did at the FED for 151 00:08:29,760 --> 00:08:32,760 Speaker 1: the past year is trying to preserve as much as 152 00:08:32,800 --> 00:08:36,280 Speaker 1: we can of the infrastructure of the economy. So, you know, 153 00:08:36,360 --> 00:08:39,240 Speaker 1: I think once we get through this, we can start 154 00:08:39,280 --> 00:08:44,000 Speaker 1: to then think about how we normalize. Well, we get 155 00:08:44,040 --> 00:08:47,880 Speaker 1: to maybe two point one percent inflation is as you forecast, 156 00:08:47,960 --> 00:08:50,559 Speaker 1: or a little bit higher as some of your colleagues forecast, 157 00:08:50,640 --> 00:08:52,959 Speaker 1: the market's going to start pushing up rates. And the 158 00:08:53,080 --> 00:08:55,760 Speaker 1: question is is this a showdown between the markets and 159 00:08:55,760 --> 00:08:57,760 Speaker 1: the FED? And will the FED blink? You've got a 160 00:08:57,800 --> 00:09:02,240 Speaker 1: new uh framework to work in that you never have before. 161 00:09:02,240 --> 00:09:05,079 Speaker 1: In the markets are gonna want to test it. I'm sure. 162 00:09:05,720 --> 00:09:08,719 Speaker 1: Can you look through rate increases or is there is 163 00:09:08,760 --> 00:09:12,280 Speaker 1: a level at which you get concerned. I mean, there's 164 00:09:12,320 --> 00:09:15,960 Speaker 1: obviously a level which concerned to being some exorbitant level, 165 00:09:16,320 --> 00:09:21,240 Speaker 1: But if they're within the realm of reason. I am 166 00:09:21,280 --> 00:09:24,920 Speaker 1: of the camp where we stick with our framework and 167 00:09:25,120 --> 00:09:27,360 Speaker 1: we let inflation run above two percent for a while, 168 00:09:27,440 --> 00:09:29,760 Speaker 1: not running out of control past two percent, but above 169 00:09:29,800 --> 00:09:32,480 Speaker 1: two percent for a while. That is what we've committed 170 00:09:32,480 --> 00:09:34,360 Speaker 1: to with our framework, and I am committed to that 171 00:09:34,440 --> 00:09:37,880 Speaker 1: as well. Well. Everybody's gonna be looking to wage inflation 172 00:09:37,920 --> 00:09:40,120 Speaker 1: to tell the story of whether or not we're seeing 173 00:09:40,160 --> 00:09:42,920 Speaker 1: inflation rise too quickly. In the last Beige Book, the 174 00:09:42,920 --> 00:09:46,800 Speaker 1: Philadelphia sector said that wages are rising because of demand 175 00:09:46,840 --> 00:09:49,679 Speaker 1: for labor the fifteen dollar minimum wage. They quoted one 176 00:09:50,280 --> 00:09:54,679 Speaker 1: Philadelphia CEO is saying, is already here, are you seeing 177 00:09:54,720 --> 00:09:58,200 Speaker 1: a rise in wage pressures? Yet? Yeah? Again, if you 178 00:09:58,240 --> 00:10:01,120 Speaker 1: look at that warehouse in central Sylvania paying twenty three 179 00:10:01,120 --> 00:10:04,200 Speaker 1: dollars an hour, they're getting their workers from somewhere, and 180 00:10:04,320 --> 00:10:08,400 Speaker 1: those firms in turn respond by trying to raise wages 181 00:10:08,480 --> 00:10:11,640 Speaker 1: to retain or attract new workers. So yeah, we're starting 182 00:10:11,679 --> 00:10:13,520 Speaker 1: to see that, but again, it's not across the board. 183 00:10:13,559 --> 00:10:16,600 Speaker 1: It's in certain sectors right now. Not a wage price spiral. 184 00:10:17,760 --> 00:10:20,160 Speaker 1: I don't say it right now. I mean it could happen, 185 00:10:20,240 --> 00:10:23,160 Speaker 1: but we're not. We're not seeing it running out of control. Now. 186 00:10:23,880 --> 00:10:26,280 Speaker 1: Patrick Harker, thank you very much for joining us this morning. 187 00:10:26,280 --> 00:10:31,440 Speaker 1: He's the president of the Philadelphia FED and reasonably optimistic 188 00:10:31,480 --> 00:10:35,160 Speaker 1: Outlook there, Mike, you see that in the commentary around 189 00:10:35,160 --> 00:10:37,839 Speaker 1: long term rates, reflecting the optimism, sticking to script, and 190 00:10:37,880 --> 00:10:39,199 Speaker 1: I think, what you've got to do, and I know 191 00:10:39,240 --> 00:10:40,560 Speaker 1: you're gonna do a great job of it over the 192 00:10:40,559 --> 00:10:42,559 Speaker 1: next couple of months when we start to see the data, 193 00:10:43,040 --> 00:10:44,960 Speaker 1: see who is committed to the new framework of the 194 00:10:45,000 --> 00:10:53,560 Speaker 1: FED and maybe who isn't. Troy joins as natural Guysky 195 00:10:53,600 --> 00:10:57,960 Speaker 1: Skybridge Capital co c IO and senior portfolio manager. It's transitory, 196 00:10:58,000 --> 00:10:59,840 Speaker 1: and then you see the data, you get slapped around 197 00:10:59,840 --> 00:11:01,960 Speaker 1: with Troy and you think, oh, is it? Is it 198 00:11:02,000 --> 00:11:03,720 Speaker 1: trying to Troy? How do you think people will respond 199 00:11:03,720 --> 00:11:06,960 Speaker 1: when we actually see the numbers over the next several months. Yeah. 200 00:11:07,000 --> 00:11:10,800 Speaker 1: So I think the debate whether it's transitory or more 201 00:11:10,840 --> 00:11:14,240 Speaker 1: permanent will continue to lead to elevated volatility, not only 202 00:11:14,240 --> 00:11:16,920 Speaker 1: in fixed income markets, but also in equity markets, because 203 00:11:17,200 --> 00:11:19,000 Speaker 1: you know, what we've seen this year so far is 204 00:11:19,440 --> 00:11:23,800 Speaker 1: certainly the risks of the recovery. Another stimulus package that 205 00:11:23,880 --> 00:11:26,520 Speaker 1: could have potentially not been signed by the Trump administration. 206 00:11:26,679 --> 00:11:31,959 Speaker 1: Check right, a vaccine rollout that started somewhat boxes accelerated dramatically. Checked, 207 00:11:32,360 --> 00:11:35,840 Speaker 1: we've now gotten almost nine percent of GDP uh in 208 00:11:35,840 --> 00:11:39,079 Speaker 1: another physical steamless check. But the downside, of course is 209 00:11:39,160 --> 00:11:42,680 Speaker 1: higher interest rates, higher inflation, and that's really taken some 210 00:11:42,760 --> 00:11:44,839 Speaker 1: of the steam and froth out of markets. If we 211 00:11:44,960 --> 00:11:48,079 Speaker 1: do is a healthy process. Where we'd certainly become more 212 00:11:48,120 --> 00:11:50,920 Speaker 1: concerned is if we start seeing those higher numbers stick 213 00:11:51,640 --> 00:11:55,920 Speaker 1: and that causes the FED to prematurely withdraw aggressive balance 214 00:11:55,920 --> 00:11:59,160 Speaker 1: sheet expansion and money supply growth, because without you know, 215 00:11:59,240 --> 00:12:03,240 Speaker 1: money supplied growth sustainably above nominal GDP, it's really hard 216 00:12:03,280 --> 00:12:05,959 Speaker 1: to justify the valuations that equites are at right now, 217 00:12:06,080 --> 00:12:08,160 Speaker 1: you know, somewhere around twenty one and a half twenty 218 00:12:08,160 --> 00:12:11,800 Speaker 1: one point seven times earning. Let's get to the money question. 219 00:12:11,840 --> 00:12:15,520 Speaker 1: Then what's the game client for Q too? For for 220 00:12:15,840 --> 00:12:20,160 Speaker 1: the FED in particular use Oh yeah, no, so for us? Yeah, Now, 221 00:12:20,200 --> 00:12:22,439 Speaker 1: we're we're pretty pumped about this year. You know, we're 222 00:12:22,480 --> 00:12:24,640 Speaker 1: fortunately off to a really good start. And this is 223 00:12:24,679 --> 00:12:26,920 Speaker 1: really one of these years where the first show bey 224 00:12:27,000 --> 00:12:29,120 Speaker 1: last and the last shall be first. So, you know, 225 00:12:29,200 --> 00:12:32,480 Speaker 1: some of the high performing, high flying tech and growth stories. 226 00:12:32,600 --> 00:12:35,520 Speaker 1: Last year, I've really turned into duds and portfolios like 227 00:12:35,559 --> 00:12:38,440 Speaker 1: ours that are more focused on value or cyclical exposures 228 00:12:38,480 --> 00:12:42,400 Speaker 1: like structure credit or distress credit, which are by definition 229 00:12:42,440 --> 00:12:46,480 Speaker 1: turnaround cyclical stories have done exceptionally well. Um. You know, 230 00:12:46,559 --> 00:12:49,679 Speaker 1: convert upon arbitrage continues to be a strategy that's very 231 00:12:49,679 --> 00:12:53,640 Speaker 1: attractive because of higher degrees of realized vutility. UM. On 232 00:12:53,760 --> 00:12:57,240 Speaker 1: top of that, you have multi strategy managers like Ganlobe. 233 00:12:57,240 --> 00:13:01,439 Speaker 1: They're adding material value as activist not only in in Disney, 234 00:13:01,440 --> 00:13:04,680 Speaker 1: but also it Tell. And then lastly, we're very fortunate 235 00:13:04,800 --> 00:13:09,080 Speaker 1: in taking a meaningful Bitcoin position towards the beginning of December, 236 00:13:09,480 --> 00:13:12,400 Speaker 1: and we think that is the purest macro expression for 237 00:13:12,480 --> 00:13:14,400 Speaker 1: so many things that are going on right now. So 238 00:13:14,440 --> 00:13:19,400 Speaker 1: many phenomenon. One, massive money supply growth more m two 239 00:13:19,400 --> 00:13:23,040 Speaker 1: than we had pre pandemic to budget deficits as far 240 00:13:23,080 --> 00:13:25,600 Speaker 1: as the eye can see. Three, you have the natural 241 00:13:25,679 --> 00:13:29,240 Speaker 1: dynamics the having cycle where when you artificially reduced new 242 00:13:29,240 --> 00:13:31,439 Speaker 1: supply cutting in half, you tend to have a very 243 00:13:31,440 --> 00:13:35,080 Speaker 1: strong bold market. And then lastly, you know what's happening 244 00:13:35,080 --> 00:13:37,440 Speaker 1: in crypto now is you're aware because you guys cover 245 00:13:37,480 --> 00:13:42,000 Speaker 1: it so uh accurately. Is you're going through an adoption 246 00:13:42,080 --> 00:13:44,679 Speaker 1: story very similar to what happened to gold from oh 247 00:13:44,800 --> 00:13:47,960 Speaker 1: six through two thirteen, and you're seeing that happen at 248 00:13:47,960 --> 00:13:50,800 Speaker 1: a much more rapid pace. Is not only hedge funds, 249 00:13:50,800 --> 00:13:54,679 Speaker 1: but also life insurance companies, corporate treasurers sobeign wealth fun 250 00:13:55,440 --> 00:13:57,360 Speaker 1: get involved. And so you know when you when you 251 00:13:57,400 --> 00:13:59,800 Speaker 1: put that all together, we think each of our themes 252 00:13:59,800 --> 00:14:03,560 Speaker 1: had a reasonable probability about performing equities, but doing it 253 00:14:03,600 --> 00:14:06,360 Speaker 1: with some correlation benefits, and so you know, we're we're 254 00:14:06,360 --> 00:14:10,560 Speaker 1: super excited for for Q two, Troy, Let's dig into 255 00:14:10,600 --> 00:14:13,840 Speaker 1: this bitcoin position. How big is a sizeable bitcoin position 256 00:14:14,080 --> 00:14:16,520 Speaker 1: that you took in December? Have you adjusted it? Are 257 00:14:16,600 --> 00:14:18,800 Speaker 1: you building? Are you going to reduce it? Is it 258 00:14:18,840 --> 00:14:21,600 Speaker 1: active or is it a long term holding? Yes? So 259 00:14:21,720 --> 00:14:24,520 Speaker 1: for us, we we it was rare. Most themes that 260 00:14:24,560 --> 00:14:27,360 Speaker 1: we pursue, we we laid into and as we get 261 00:14:27,400 --> 00:14:30,640 Speaker 1: more data relative to other opportunities, then we size it 262 00:14:30,720 --> 00:14:33,080 Speaker 1: up over time. In this case, it was fairly clear 263 00:14:33,080 --> 00:14:35,160 Speaker 1: to us that if we were there was going to 264 00:14:35,240 --> 00:14:37,000 Speaker 1: be a big move, it would be somewhere in the 265 00:14:37,040 --> 00:14:39,440 Speaker 1: near term, and so we needed to front load that, 266 00:14:39,640 --> 00:14:43,040 Speaker 1: so we started nibbling in mid November. We bumped it 267 00:14:43,120 --> 00:14:45,520 Speaker 1: up to five and a half percent at cost in December, 268 00:14:45,760 --> 00:14:48,000 Speaker 1: and that's our full at cost side. So from here 269 00:14:48,000 --> 00:14:51,280 Speaker 1: we're not adding any capital. We will manage the position 270 00:14:51,320 --> 00:14:53,760 Speaker 1: over time. But we think we're in the sweet spot 271 00:14:53,760 --> 00:14:55,760 Speaker 1: of all three of those factors in terms of money 272 00:14:55,760 --> 00:14:59,680 Speaker 1: supply growth, in terms of UM near the adoption cycle, 273 00:14:59,800 --> 00:15:02,360 Speaker 1: and and we're not even a year through the first having. 274 00:15:02,440 --> 00:15:04,720 Speaker 1: You know, the pull markets tend to last eighteen months 275 00:15:04,760 --> 00:15:07,120 Speaker 1: plus your minus during the having cycles. So for the 276 00:15:07,160 --> 00:15:09,600 Speaker 1: next several months, we're gonna continue to let it appreciate. 277 00:15:10,000 --> 00:15:13,320 Speaker 1: It's grown to about a thirteen percent position size to appreciation. 278 00:15:13,480 --> 00:15:15,880 Speaker 1: Fortunately the rest of our it has done well to 279 00:15:16,040 --> 00:15:18,440 Speaker 1: upset that. But we we look back at this, we 280 00:15:18,520 --> 00:15:20,920 Speaker 1: think at the end of this year, people could potentially 281 00:15:20,960 --> 00:15:23,640 Speaker 1: look back and say, um, if you had a meaningful 282 00:15:23,640 --> 00:15:26,160 Speaker 1: Bitcoin position, you had a good, great year, and if 283 00:15:26,160 --> 00:15:28,640 Speaker 1: you didn't, it could be much tougher to perform given 284 00:15:28,680 --> 00:15:31,320 Speaker 1: all the phenomenon we were discussing in terms of chopping 285 00:15:31,360 --> 00:15:36,000 Speaker 1: monetary policy raids valuations, which is very similar. Let the 286 00:15:36,040 --> 00:15:38,440 Speaker 1: jump out of time, you can get that point in 287 00:15:38,480 --> 00:15:42,440 Speaker 1: the second of the portfolio just how much volatility is 288 00:15:42,480 --> 00:15:45,680 Speaker 1: in your portfolio right now? Yeah, So so look that 289 00:15:45,680 --> 00:15:47,800 Speaker 1: that's one of the prices that you'll have to pay 290 00:15:48,240 --> 00:15:50,320 Speaker 1: to have better performance in the year like this. So 291 00:15:50,600 --> 00:15:54,080 Speaker 1: we typically target a forty eight percent standard deviation UM. 292 00:15:54,080 --> 00:15:55,960 Speaker 1: We think this year will be somewhere between eight to 293 00:15:56,000 --> 00:15:58,600 Speaker 1: twelve because of how much the bigcoin position has grown. 294 00:15:59,000 --> 00:16:02,120 Speaker 1: But it's you nique opportunity where you're actually getting paid 295 00:16:02,160 --> 00:16:04,960 Speaker 1: for that risk, where in many other strategies it's more 296 00:16:05,000 --> 00:16:08,520 Speaker 1: difficult to get paid for taking market market altility risk. 297 00:16:08,720 --> 00:16:10,480 Speaker 1: You wanted to get that final point in Troy, Oh, yeah, 298 00:16:10,640 --> 00:16:12,840 Speaker 1: the final point was so it's very when when I 299 00:16:12,840 --> 00:16:15,120 Speaker 1: think back over my career in the history of US 300 00:16:15,160 --> 00:16:18,480 Speaker 1: managing our funds, Oh, it's very similar to oh seven, 301 00:16:18,680 --> 00:16:20,520 Speaker 1: Or it could be where oh seven was a year 302 00:16:20,560 --> 00:16:23,160 Speaker 1: that if you had the subprime short on you had 303 00:16:23,200 --> 00:16:26,000 Speaker 1: a good, great year, and if you you didn't, it 304 00:16:26,080 --> 00:16:28,479 Speaker 1: was much harder to make money as we were transitioning 305 00:16:28,840 --> 00:16:31,640 Speaker 1: from you know, a housing bubble into what ultimately turned 306 00:16:31,640 --> 00:16:33,960 Speaker 1: into a bear market. UM. And so that's how the 307 00:16:34,080 --> 00:16:37,520 Speaker 1: years played out so far. We're not saying that definitively 308 00:16:37,720 --> 00:16:39,720 Speaker 1: at the end of two thousands twenty one that that's 309 00:16:39,720 --> 00:16:41,400 Speaker 1: gonna be how it plays out. But we think there's 310 00:16:41,400 --> 00:16:44,920 Speaker 1: a reasonable chance that most active managers look back and say, hey, 311 00:16:45,240 --> 00:16:47,240 Speaker 1: if I had a decent Bitcoin position, I had an 312 00:16:47,320 --> 00:16:49,880 Speaker 1: odd year, and if I didn't, it was much more challenging. 313 00:16:50,160 --> 00:16:52,520 Speaker 1: Troy unbelaivable, You've gotta come back saying, so we could 314 00:16:52,520 --> 00:17:01,400 Speaker 1: tell more about this as that we had a curb 315 00:17:01,760 --> 00:17:04,680 Speaker 1: Aby Bernstein, co head of investment strategist, We had a 316 00:17:04,680 --> 00:17:06,399 Speaker 1: great t have you with us on the program. I 317 00:17:06,440 --> 00:17:09,120 Speaker 1: want to start right here. These stories are so obvious, 318 00:17:09,400 --> 00:17:11,000 Speaker 1: We've been talking about them for three months, but for 319 00:17:11,040 --> 00:17:12,800 Speaker 1: some reason, it takes a while to see them play 320 00:17:12,800 --> 00:17:17,399 Speaker 1: through markets cleanly. Why do you think that is? The 321 00:17:17,440 --> 00:17:20,440 Speaker 1: story is under vaccines and reopening and Europe versus the 322 00:17:20,480 --> 00:17:23,239 Speaker 1: United States, specifically the discussion that Lisa and I were 323 00:17:23,280 --> 00:17:25,600 Speaker 1: just having Europe the news incrementally bad, the news out 324 00:17:25,640 --> 00:17:28,280 Speaker 1: the United States incrementally good, and yet europe dollar held 325 00:17:28,320 --> 00:17:30,120 Speaker 1: in there through much of the last couple of weeks. 326 00:17:30,160 --> 00:17:33,480 Speaker 1: Until the last couple of days. Financials in Europe performed nicely. 327 00:17:33,560 --> 00:17:36,560 Speaker 1: Traveling and leisure stocks have performed nicely despite what we've 328 00:17:36,600 --> 00:17:39,679 Speaker 1: seen stories were all aware of. Yet we keep asking 329 00:17:39,680 --> 00:17:43,160 Speaker 1: it's well known, is it well priced? Yeah, I hear 330 00:17:43,200 --> 00:17:44,720 Speaker 1: you on that, But I think we have to be 331 00:17:44,800 --> 00:17:48,359 Speaker 1: conscious of the fact that the vaccine alone and the 332 00:17:48,440 --> 00:17:51,320 Speaker 1: COVID story alone does not tell the whole story. You know, 333 00:17:51,320 --> 00:17:54,320 Speaker 1: what we think about it, Bernstein, as global investors is 334 00:17:54,320 --> 00:17:57,040 Speaker 1: what are the companies that are headquartered in this region 335 00:17:57,240 --> 00:18:01,280 Speaker 1: and how are those companies affected? But their slow rollout 336 00:18:01,280 --> 00:18:04,159 Speaker 1: of the vaccine, and while the domestic consumer and the 337 00:18:04,240 --> 00:18:08,880 Speaker 1: domestic implications are negative, many of these companies are actually exporters. 338 00:18:09,200 --> 00:18:11,880 Speaker 1: Many of them are their cyclicals. And when you see 339 00:18:11,920 --> 00:18:15,000 Speaker 1: the US and what we would call a great reopening, 340 00:18:15,280 --> 00:18:19,080 Speaker 1: their opportunity for export is actually high. And so I 341 00:18:19,119 --> 00:18:21,080 Speaker 1: think you have to look at the whole big picture 342 00:18:21,119 --> 00:18:24,240 Speaker 1: in terms of the earning story. And then there's the valuation. 343 00:18:24,520 --> 00:18:27,920 Speaker 1: Right as fundamental investors, when we think about the stock 344 00:18:28,000 --> 00:18:31,960 Speaker 1: opportunity abroad compared to the stock opportunity in the US, 345 00:18:32,080 --> 00:18:35,960 Speaker 1: the spreads have been enormous between the valuation of the 346 00:18:36,080 --> 00:18:40,439 Speaker 1: US and other countries. Obviously, US growth versus US value. 347 00:18:40,560 --> 00:18:44,480 Speaker 1: There's a real opportunity building for selection and whether that 348 00:18:44,600 --> 00:18:48,960 Speaker 1: selection is an asset allocation in sector selection or security selection. 349 00:18:49,440 --> 00:18:51,840 Speaker 1: I think it's bigger than the headlines. Jonathan, picking up 350 00:18:51,880 --> 00:18:53,440 Speaker 1: on something you've just said. I think was in the 351 00:18:53,520 --> 00:18:56,080 Speaker 1: data this morning, Bonast. We saw that in the e 352 00:18:56,160 --> 00:18:59,960 Speaker 1: FO data. Business confidence in Germany despite what we've say, 353 00:19:00,080 --> 00:19:02,320 Speaker 1: and has been picking up. The outlooks brighter. Why is 354 00:19:02,320 --> 00:19:04,359 Speaker 1: the outlook brighter because what's happening to get a swear 355 00:19:04,720 --> 00:19:06,600 Speaker 1: is looking better. It's not just about what you see 356 00:19:06,600 --> 00:19:11,160 Speaker 1: plan out in Europe, it's the international story that's right. 357 00:19:11,760 --> 00:19:15,560 Speaker 1: De carry on. I was just gonna say, that's why 358 00:19:15,560 --> 00:19:18,880 Speaker 1: we're remaining committed to being a global investor. I think 359 00:19:18,880 --> 00:19:21,919 Speaker 1: it totally depends on your perspective. I heard the conversation 360 00:19:21,960 --> 00:19:24,399 Speaker 1: on bitcoin an hour ago and all your follow up. 361 00:19:24,720 --> 00:19:27,639 Speaker 1: You know, at Bernstein we're investing for our clients for decades, 362 00:19:27,840 --> 00:19:30,240 Speaker 1: not days, and we think about all the trade offs 363 00:19:30,280 --> 00:19:32,879 Speaker 1: and the decisions we make. We think it's a mistake 364 00:19:32,960 --> 00:19:36,200 Speaker 1: to be a US only investor, right and the geography, 365 00:19:36,240 --> 00:19:39,840 Speaker 1: you're gonna have trade offs within the individual countries and 366 00:19:39,920 --> 00:19:42,840 Speaker 1: their growth potential. And there's no doubt about it. Europe 367 00:19:42,960 --> 00:19:46,000 Speaker 1: is really behind the US in terms of COVID today, 368 00:19:46,840 --> 00:19:49,119 Speaker 1: but you have to think more long term. To your point, 369 00:19:49,520 --> 00:19:53,199 Speaker 1: global businesses or headquartered there. The great reopening in the 370 00:19:53,320 --> 00:19:57,919 Speaker 1: US is going to drive outcomes there materially. Alright, So 371 00:19:57,960 --> 00:20:00,080 Speaker 1: what's the biggest bet right now that you see is 372 00:20:00,119 --> 00:20:02,720 Speaker 1: being perhaps undervalued in a world that seems for the 373 00:20:02,760 --> 00:20:07,320 Speaker 1: most part completely overvalued. Well, I'm gonna argue that active 374 00:20:07,359 --> 00:20:10,440 Speaker 1: investing maybe the biggest bet that we're making. The idea 375 00:20:10,560 --> 00:20:12,879 Speaker 1: that you can't just on the index. We know a 376 00:20:12,880 --> 00:20:17,359 Speaker 1: look at the sp last year, SMP incredibly concentrated the 377 00:20:17,400 --> 00:20:21,720 Speaker 1: top seven stocks, representing really the highest concentration we've seen 378 00:20:21,720 --> 00:20:24,720 Speaker 1: in the index ever. We know what those companies are. 379 00:20:24,760 --> 00:20:28,000 Speaker 1: They're all in tech. There the work from home beneficiaries, 380 00:20:28,440 --> 00:20:32,120 Speaker 1: and with this great reopening, work from work is going 381 00:20:32,160 --> 00:20:35,320 Speaker 1: to start to matter more. And that means cyplicals matter, 382 00:20:35,480 --> 00:20:39,440 Speaker 1: That means industrials matter, that means small matters and utilities 383 00:20:39,440 --> 00:20:45,120 Speaker 1: and consumer stables and value. These sectors so underperformed last year, 384 00:20:45,600 --> 00:20:49,359 Speaker 1: and our theme with our clients was really balanced, Let's 385 00:20:49,359 --> 00:20:53,000 Speaker 1: not get whipside trying to pivot from growth to value, 386 00:20:53,080 --> 00:20:57,240 Speaker 1: value to growth. Let's maintain exposure over time, but let's 387 00:20:57,280 --> 00:21:01,159 Speaker 1: be active let's make sure that security, election and focus 388 00:21:01,240 --> 00:21:05,320 Speaker 1: on fundamentals is our guiding light, and that remains the 389 00:21:05,359 --> 00:21:08,800 Speaker 1: case today. Well, perhaps this will be the year of 390 00:21:08,800 --> 00:21:10,920 Speaker 1: active management. People have been saying this for a long time, 391 00:21:11,160 --> 00:21:13,639 Speaker 1: but people are saying this time really is different based 392 00:21:13,640 --> 00:21:17,639 Speaker 1: on the index construction, because we're talking active management and portfolios. 393 00:21:17,760 --> 00:21:19,800 Speaker 1: Let's go back to where we started this hour. John 394 00:21:19,840 --> 00:21:21,800 Speaker 1: was talking about that interview that we had with Troy 395 00:21:21,840 --> 00:21:25,040 Speaker 1: Gayski of sky Bridge where he said that the key 396 00:21:25,119 --> 00:21:27,679 Speaker 1: aspect of a portfolio which will be the big winner 397 00:21:28,080 --> 00:21:32,000 Speaker 1: or not for one is bitcoin. Are you investing in bitcoin? 398 00:21:33,320 --> 00:21:36,280 Speaker 1: We are not investing in bitcoin on behalf of our clients. 399 00:21:36,280 --> 00:21:38,920 Speaker 1: When we think about outcomes for our clients, we think 400 00:21:38,920 --> 00:21:41,919 Speaker 1: about number one, what is the fundamental case for the 401 00:21:41,960 --> 00:21:45,720 Speaker 1: asset class, what's the return of risk and diversification story, 402 00:21:45,880 --> 00:21:50,119 Speaker 1: and importantly, can we research that story with an edge. 403 00:21:50,359 --> 00:21:51,919 Speaker 1: We think we've got a long way to go in 404 00:21:51,960 --> 00:21:55,720 Speaker 1: the crypto space in terms of determining the edge and 405 00:21:55,920 --> 00:21:59,320 Speaker 1: ultimately what the valuation should be. The influence of the 406 00:21:59,359 --> 00:22:02,400 Speaker 1: individual investor is not going away. But when you look 407 00:22:02,440 --> 00:22:05,359 Speaker 1: at the influence of the individual investor on bitcoin today, 408 00:22:05,720 --> 00:22:09,400 Speaker 1: it's huge and it's pretty hard to predict that behavior. 409 00:22:09,720 --> 00:22:13,080 Speaker 1: We feel much more confident investing in aska classes where 410 00:22:13,119 --> 00:22:16,120 Speaker 1: we can base a fundamental story. So for our clients 411 00:22:16,119 --> 00:22:19,240 Speaker 1: that are concerned about inflation because they're spending a lot 412 00:22:19,280 --> 00:22:22,520 Speaker 1: from their portfolio, don't have wages that would be going 413 00:22:22,600 --> 00:22:25,320 Speaker 1: up if we do hit an inflationary period, we think 414 00:22:25,359 --> 00:22:30,120 Speaker 1: about a balanced position of inflation linked bonds and diversified 415 00:22:30,160 --> 00:22:33,119 Speaker 1: real assets. Those are asked the classes that we have 416 00:22:33,280 --> 00:22:37,560 Speaker 1: decades of experience in driving the fundamental story Bitcoin, we're 417 00:22:37,560 --> 00:22:40,560 Speaker 1: simply not there yet, Basica. Great to catch up of 418 00:22:40,680 --> 00:22:48,040 Speaker 1: a p event. Stein rob the Tip joins us now 419 00:22:48,119 --> 00:22:51,520 Speaker 1: page in chief investment strategist. Ahead the global bonds, Robber, 420 00:22:51,600 --> 00:22:54,280 Speaker 1: let's start there. What on earth is going on in 421 00:22:54,320 --> 00:22:56,199 Speaker 1: the belly of the curve? Lisa, I think it's got 422 00:22:56,200 --> 00:22:57,800 Speaker 1: to be a discussion that we need to have a 423 00:22:57,800 --> 00:23:02,560 Speaker 1: whole lot more. Yeah, because honestly, people have been expecting 424 00:23:02,880 --> 00:23:06,119 Speaker 1: somewhat of a decline in demand. So it's surprising that 425 00:23:06,320 --> 00:23:09,720 Speaker 1: even given that John even that we saw that that 426 00:23:09,800 --> 00:23:13,520 Speaker 1: really weak bid to offer, or as Tom might say 427 00:23:13,600 --> 00:23:16,359 Speaker 1: a bit to NEGRONI spreads Nerony. Yeah, Tom called it. 428 00:23:16,480 --> 00:23:18,920 Speaker 1: The bondmark was a bit drunk yesterday to Robert Tips 429 00:23:18,960 --> 00:23:22,480 Speaker 1: back with us now paging chief investment strategists Robert, Well, know, 430 00:23:22,520 --> 00:23:24,240 Speaker 1: we had a technical issue just then for a couple 431 00:23:24,280 --> 00:23:25,679 Speaker 1: of seconds. I'm not sure if you heard what we 432 00:23:25,680 --> 00:23:28,320 Speaker 1: were discussing, but on the seven year is the belly 433 00:23:28,320 --> 00:23:31,200 Speaker 1: of the curve? What's happening there? What's the debate? The 434 00:23:31,320 --> 00:23:35,120 Speaker 1: spilling go over to supply? The uncertainty, the delicate dance 435 00:23:35,160 --> 00:23:38,560 Speaker 1: has taken place at the moment. Yeah, I think it's 436 00:23:38,600 --> 00:23:41,320 Speaker 1: just the uncertainty about the course of the FED and 437 00:23:41,440 --> 00:23:44,520 Speaker 1: the book of the Assurance. I mean the frequency with 438 00:23:44,600 --> 00:23:48,919 Speaker 1: which the belly of the curve is getting hit two's, five, sevens, 439 00:23:49,320 --> 00:23:53,119 Speaker 1: your cans, your threes. Uh, you know, every month, Treasury 440 00:23:53,200 --> 00:23:57,240 Speaker 1: pounding those parts of the yeeld curve and massive size. Uh. 441 00:23:57,280 --> 00:24:00,320 Speaker 1: You know, different parts of the curve are just taking turns, 442 00:24:00,800 --> 00:24:05,560 Speaker 1: getting walloped because of the macrobackdrop. Your investors are afraid 443 00:24:05,640 --> 00:24:11,200 Speaker 1: to to step up and uh, you know, evaluate what's 444 00:24:11,240 --> 00:24:14,359 Speaker 1: going on in the world, and you know, you know, 445 00:24:14,400 --> 00:24:16,480 Speaker 1: feel like they're lying down on the tracks ahead of 446 00:24:16,520 --> 00:24:21,159 Speaker 1: the the inflation train that that everyone is expecting. I 447 00:24:21,160 --> 00:24:23,600 Speaker 1: think that's that's the problem. And that's setting your point 448 00:24:24,080 --> 00:24:26,520 Speaker 1: is kind of an inflection point, you know, on the 449 00:24:26,560 --> 00:24:31,119 Speaker 1: curve um you know, for maximum yield volatility, given the 450 00:24:31,160 --> 00:24:33,440 Speaker 1: bulk of issuance, Is it just an inflation story? Is 451 00:24:33,520 --> 00:24:36,160 Speaker 1: it Fed fund story? To Robert for further down the road, 452 00:24:37,480 --> 00:24:41,439 Speaker 1: you know, I think that the FED in some ways 453 00:24:41,640 --> 00:24:43,879 Speaker 1: is getting buy in, and you have to dive into 454 00:24:43,960 --> 00:24:46,400 Speaker 1: the old curve. But when you look at the break 455 00:24:46,480 --> 00:24:48,640 Speaker 1: even at the five year point of the curve, coming 456 00:24:48,720 --> 00:24:52,280 Speaker 1: up two d seventy basis points, what that tells you 457 00:24:52,440 --> 00:24:55,800 Speaker 1: is people are pricing in success for the FED in 458 00:24:55,920 --> 00:25:00,720 Speaker 1: terms of achieving the inflation target. Right, the market has 459 00:25:00,840 --> 00:25:04,200 Speaker 1: increased yields a decent amount, and the market has its choices. 460 00:25:04,240 --> 00:25:08,720 Speaker 1: It can increase the inflation expectation component of treasuries or 461 00:25:08,760 --> 00:25:12,280 Speaker 1: the real yield, and the real yield is incredibly low. 462 00:25:12,840 --> 00:25:17,280 Speaker 1: And that reflects in some respects uh an expectation that 463 00:25:17,320 --> 00:25:20,600 Speaker 1: the Fed will remain hold keep the FED funds rate 464 00:25:20,640 --> 00:25:24,280 Speaker 1: incredibly low, and all of this expectation for FED rate 465 00:25:24,359 --> 00:25:26,280 Speaker 1: heights and all that. What it really is is an 466 00:25:26,280 --> 00:25:29,479 Speaker 1: inflation premium in the front end of the curve. So 467 00:25:31,119 --> 00:25:33,760 Speaker 1: I think, though, when you look at the critical question 468 00:25:33,840 --> 00:25:36,159 Speaker 1: is is the market usually right on that front? And 469 00:25:36,480 --> 00:25:43,200 Speaker 1: the answers that usually is not, and that creates usually okay, 470 00:25:43,200 --> 00:25:45,720 Speaker 1: the market is usually not right on that the opportunity 471 00:25:45,840 --> 00:25:48,879 Speaker 1: being by bonds. Is that what you're saying? Yes, So 472 00:25:48,960 --> 00:25:52,080 Speaker 1: what what's happened the last few times that we've seen 473 00:25:52,119 --> 00:25:54,920 Speaker 1: this surge in break evens like we're seeing right now, 474 00:25:55,040 --> 00:25:58,000 Speaker 1: big fear of inflation in any economic recovery. We saw 475 00:25:58,040 --> 00:26:00,879 Speaker 1: it in two thousand nine. You're at a peak in 476 00:26:00,960 --> 00:26:04,159 Speaker 1: nominal yields. And I think that's really the challenge that 477 00:26:04,240 --> 00:26:07,640 Speaker 1: investors are having as they're fleeing to all of these 478 00:26:07,680 --> 00:26:11,200 Speaker 1: micro themes, whether it's your Bitcoin or your game stop 479 00:26:11,920 --> 00:26:15,919 Speaker 1: or looking at deep cyclicals for the recovery, when the 480 00:26:15,960 --> 00:26:18,639 Speaker 1: real variable that's going to drive their portfolios is the 481 00:26:18,680 --> 00:26:22,000 Speaker 1: macro return. And the macro return profile of the bond 482 00:26:22,080 --> 00:26:27,119 Speaker 1: market has improved tremendously, and we're probably, you know, within 483 00:26:27,240 --> 00:26:30,040 Speaker 1: months of the beginning of the next stage of the 484 00:26:30,160 --> 00:26:33,640 Speaker 1: secular bowl market in bonds. In the meantime people are 485 00:26:33,680 --> 00:26:35,480 Speaker 1: looking at, you know, is that the real yield is 486 00:26:35,480 --> 00:26:38,720 Speaker 1: that the break evens should be in deep cyclicals. In 487 00:26:38,720 --> 00:26:41,800 Speaker 1: the meantime, break evens are telling you you're probably near 488 00:26:41,920 --> 00:26:45,880 Speaker 1: cyclical peak and yields. Can you take a little bit 489 00:26:45,880 --> 00:26:48,119 Speaker 1: more into what this means in terms of what you 490 00:26:48,160 --> 00:26:50,960 Speaker 1: guys are doing with your investments. Have you been buying 491 00:26:51,040 --> 00:26:55,119 Speaker 1: steadily tenure treasuries as they sold off at expecting yields 492 00:26:55,119 --> 00:26:57,520 Speaker 1: to go much lower? Is this meaning that you should 493 00:26:57,600 --> 00:27:02,600 Speaker 1: rotate into a higher quality credit? How are you rearranging 494 00:27:02,880 --> 00:27:05,120 Speaker 1: based on this thesis and based on the rising yals 495 00:27:05,119 --> 00:27:08,000 Speaker 1: so we've seen of late. Yeah, well, I think that 496 00:27:08,119 --> 00:27:12,760 Speaker 1: the the easier trade has been uh not on the 497 00:27:12,880 --> 00:27:16,159 Speaker 1: right side of the of the bond market equation, but 498 00:27:16,200 --> 00:27:19,159 Speaker 1: the credit side and the recovery from COVID and and 499 00:27:19,200 --> 00:27:21,240 Speaker 1: the fact of the matter is that is likely to 500 00:27:21,240 --> 00:27:25,560 Speaker 1: remain the predominant uh driver and the easiest source of 501 00:27:25,560 --> 00:27:28,840 Speaker 1: alpha at this part of the recovery. Usually looking a 502 00:27:28,920 --> 00:27:31,600 Speaker 1: year two years after this kind of arise in rates, 503 00:27:31,600 --> 00:27:35,119 Speaker 1: with the strong economy, your credit product, even though spreads 504 00:27:35,119 --> 00:27:38,359 Speaker 1: have come into tighter than average levels, generally continues to 505 00:27:38,400 --> 00:27:41,800 Speaker 1: perform well. The trickier part is the right side, and 506 00:27:41,840 --> 00:27:46,000 Speaker 1: the market tends to go into this overdrive of extrapolating 507 00:27:46,480 --> 00:27:50,800 Speaker 1: the rapid growth of the recovery stage into the indefinite future, 508 00:27:51,080 --> 00:27:52,919 Speaker 1: and that's what we're looking at right now. In the 509 00:27:52,960 --> 00:27:56,280 Speaker 1: reason why it's difficult to make a call whether it's 510 00:27:56,359 --> 00:28:02,080 Speaker 1: over and in the my last uh privilege of being 511 00:28:02,080 --> 00:28:04,440 Speaker 1: in the bonus round. You know, I suggest your next 512 00:28:04,440 --> 00:28:07,199 Speaker 1: twenty base points and rates could be higher and then lower. 513 00:28:07,760 --> 00:28:11,000 Speaker 1: It's because there is the stimulus hitting right now, money 514 00:28:11,080 --> 00:28:14,840 Speaker 1: dropping into people's checking accounts, checks in the mail, and that, 515 00:28:15,040 --> 00:28:17,439 Speaker 1: you know, sets us up for the potential for another 516 00:28:18,240 --> 00:28:21,040 Speaker 1: boom in the economic data over the next three sixty days. 517 00:28:21,240 --> 00:28:23,000 Speaker 1: Robert wish Tom Kane was with us because that was 518 00:28:23,000 --> 00:28:25,320 Speaker 1: a reference to real yield and your appearance on Friday, 519 00:28:25,640 --> 00:28:27,800 Speaker 1: and if he's watching, I'm so happy that you made 520 00:28:27,800 --> 00:28:31,800 Speaker 1: that reference. Let's finish on this your point about recency 521 00:28:31,840 --> 00:28:36,000 Speaker 1: bias and extrapolating gout the next couple of quarters and 522 00:28:36,040 --> 00:28:38,400 Speaker 1: how that infects and shapes the long end of a 523 00:28:38,440 --> 00:28:40,920 Speaker 1: bond curve tents and thirties. Do you think that's why 524 00:28:41,000 --> 00:28:43,600 Speaker 1: front month crude prices punch above their weight to just 525 00:28:43,680 --> 00:28:49,080 Speaker 1: that phenomenon. Well, I think that's you know, your typical 526 00:28:49,320 --> 00:28:52,800 Speaker 1: commodity market phenomenal where your your short term supply constraint. 527 00:28:52,840 --> 00:28:55,680 Speaker 1: It runs first through the front end of the market. Uh. 528 00:28:55,720 --> 00:28:59,160 Speaker 1: And only if that bias is persistent, you know where 529 00:28:59,160 --> 00:29:01,000 Speaker 1: you see it go into the back months of the curve. 530 00:29:01,080 --> 00:29:05,520 Speaker 1: And obviously we're having a short term this location there. Um. 531 00:29:05,560 --> 00:29:09,040 Speaker 1: I think you know, on the treasury curve, I think 532 00:29:09,080 --> 00:29:12,920 Speaker 1: the the one thing that is overpriced, or those those 533 00:29:12,960 --> 00:29:15,440 Speaker 1: five year tips, but that over the course next twelve 534 00:29:15,520 --> 00:29:18,200 Speaker 1: to twenty four months you're likely to see a good 535 00:29:18,200 --> 00:29:21,720 Speaker 1: return to to risk premium. The biggest problem investors are 536 00:29:21,720 --> 00:29:24,840 Speaker 1: going to have is sticking with the markets. Uh. And 537 00:29:24,840 --> 00:29:26,760 Speaker 1: you're gonna be surprised by the fact that in this 538 00:29:26,920 --> 00:29:30,080 Speaker 1: environment of beds staying on hold providing a lot of accommodation, 539 00:29:30,720 --> 00:29:33,760 Speaker 1: the next twelve to thirty six months, your macro markets 540 00:29:33,800 --> 00:29:36,280 Speaker 1: are gonna work for you, including the bondom market likely 541 00:29:36,360 --> 00:29:39,240 Speaker 1: to to outperform cash. Once we get through this last 542 00:29:39,240 --> 00:29:42,320 Speaker 1: burst of economic activity, that last best come and right 543 00:29:42,440 --> 00:29:46,200 Speaker 1: up might be Thank you, sir ATM Chief Investment Strategies. 544 00:29:46,720 --> 00:29:50,480 Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join 545 00:29:50,600 --> 00:29:53,920 Speaker 1: us live weekdays from seven to ten am Eastern on 546 00:29:54,040 --> 00:29:58,280 Speaker 1: Bloomberg Radio and on Bloomberg Television each day from six 547 00:29:58,400 --> 00:30:03,240 Speaker 1: to nine am for insight from the best in economics, finance, investment, 548 00:30:03,400 --> 00:30:08,400 Speaker 1: and international relations. And subscribe to the Surveillance podcast on 549 00:30:08,480 --> 00:30:12,320 Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course, on 550 00:30:12,440 --> 00:30:16,560 Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg.