Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailey. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course, on the Bloomberg Terminal. Joining me now
Speaker 1: to talk more about inflation and the outlook for the
Speaker 1: economy is Patrick Harker. He is the President of the
Speaker 1: Federal Reserve Bank of Philadelphia. And good morning to you, Pat,
Speaker 1: Thanks for joining us today. Uh, good morning, Mike. Inflation
Speaker 1: team in February, but that's not what the Fed expects
Speaker 1: going forward. The Philly Fed index that came out this
Speaker 1: month was the highest for prices paid since nineteen Do
Speaker 1: you anticipate a really, really rapid rise in prices? Is
Speaker 1: that what people in your district are telling you. Now,
Speaker 1: that's not where we're hearing across the board. We are
Speaker 1: seeing in certain pockets like manufacturing their supplied they're seeing
Speaker 1: price price pressures, but what they're not doing is planning
Speaker 1: on passing much of that along to their consumer, to
Speaker 1: their own customer. So I think it's the inflation stories complicated.
Speaker 1: As you said, we're going to see March April drop off.
Speaker 1: They were low months, obviously because we were shutting down
Speaker 1: the economy. So we're going to see a spike in inflation.
Speaker 1: But I think we're our forecasts for inflation to creep
Speaker 1: up the two and our goal is to have it
Speaker 1: hit above two percent this year. Our forecasts around two,
Speaker 1: but we don't see it running out of control. What
Speaker 1: about the idea that UM on the spending side, people
Speaker 1: are reluctant to go out. What are you hearing in Philadelphia?
Speaker 1: We're getting more jabs in arms, and yet we see
Speaker 1: personal spending decline in the month of February. It's been
Speaker 1: chopping right because the viruses UH in variable. We've had
Speaker 1: good months, bad months. We're seeing numbers rise now in
Speaker 1: this region. And so until we get through this period,
Speaker 1: we're going to see a lot of volatility in all
Speaker 1: these measures and that makes them hard to read. So
Speaker 1: for me, as a policy maker in that kind of situation,
Speaker 1: I want to hold steady, make sure we get through
Speaker 1: this period. Then we can start to normalize once we
Speaker 1: get through this. When you say get through this period,
Speaker 1: how long do you think it lasts well. Again, if
Speaker 1: you talk to epidemiologists not economists, uh, they'll say sometime
Speaker 1: in the fall, we should start to get hurt of unity.
Speaker 1: I'm a little concerned though. Some of the things we're
Speaker 1: hearing right now is vaccine hesitancy Israel. We even hear
Speaker 1: this from our healthcare contacts. Right. Healthcare workers themselves are
Speaker 1: reluctant to get the vaccine. So we need to make
Speaker 1: sure we get this vaccine into people's arms as quickly
Speaker 1: as possible. What are he's telling you about finding employees?
Speaker 1: You're you're focused now on getting unemployment down as low
Speaker 1: as you can. Some companies seem to be saying they
Speaker 1: can't find enough people. Other companies say, uh, we don't
Speaker 1: need any more people yet. It varies again by sector.
Speaker 1: In manufacturing, skilled labor is a real shortage, and we're
Speaker 1: hearing this from our contact warehousing jobs. There is a
Speaker 1: warehouse in central Pennsylvania that the starting salary for people
Speaker 1: there is twenty three dollars an hour. So again it
Speaker 1: depends a lot on the sector of the economy. Hotel, hospitality,
Speaker 1: and leisure. Some of those are having problems getting people
Speaker 1: back to work because those people have decided to switch
Speaker 1: careers to something that they think is more stable. I
Speaker 1: know that a lot of people say the FED doesn't
Speaker 1: have tools to boost employment, but you've got a new
Speaker 1: one at the Philadelphia FED to help people switch careers. Yeah. So,
Speaker 1: through our community development function at the FED and at
Speaker 1: the Philly FED, we've been doing work now for a
Speaker 1: long time on what are the skills necessary to help
Speaker 1: people get into the middle class where you don't need
Speaker 1: a four year college degree. We call those jobs opportunity occupations,
Speaker 1: jobs that pay above medium wages where you don't necessarily
Speaker 1: need a four year college degree. So we've been doing
Speaker 1: that work for a while. We we've looked at thirty
Speaker 1: three metro areas along with our colleagues of Cleveland UH
Speaker 1: and looked at these areas. We saw an average increase
Speaker 1: of about fifteen thousand dollars. That is, people with some skills,
Speaker 1: with some upskilling to get a better job and improved
Speaker 1: a lot of for themselves and their families. We then
Speaker 1: now built this tool, and this tool is meant for
Speaker 1: job seekers, employers, community colleges, and other training organizations policy
Speaker 1: makers to see what's available in their region. Let me
Speaker 1: give you two examples of what you can find. So
Speaker 1: let's say your receptionists been billed out there, Well, you
Speaker 1: have skills that you can upskill to a medical secretary
Speaker 1: and see an average, on average, an increase of twenty
Speaker 1: six percent in your salary. Or say you're in Cleveland
Speaker 1: and you're a cashier. Were all with some training you
Speaker 1: could be a customer service rate and there you could
Speaker 1: see an average increase in salary of a hundred and thirty.
Speaker 1: It's not just white collar jobs or blue collar jobs.
Speaker 1: So it's nice about these tools. You can lay out
Speaker 1: a map of what skills you need to get to
Speaker 1: get the jobs that are growing or shrinking. Can also
Speaker 1: see whether those jobs are growing or shrinking in your region. Now,
Speaker 1: I know, if I ask you about market interest rates,
Speaker 1: you'll say markets do what markets do? They go up
Speaker 1: or down. But here's what I'm Here's what I'm interested in.
Speaker 1: Is U rates have gone up, mortgage rates have gone up,
Speaker 1: car loans have gone up because the market is pushing
Speaker 1: rates high or not the FED Are people more sensitive
Speaker 1: to that when they have been so low? In other words,
Speaker 1: is it more of a risk that we see activities
Speaker 1: slow because the markets have pushed up rates some Well,
Speaker 1: let's start with business. I've not heard anybody say they're
Speaker 1: not investing because of the the rates. Just don't hear it.
Speaker 1: It's because the demand side or the uncertainty that they're facing.
Speaker 1: So we need to resolve this uncertainty so that people
Speaker 1: can make the right decisions. I'm not the consumer, maybe,
Speaker 1: but again, we're not talking about massive increases historically in
Speaker 1: rates when if you really step back, we're not. We're
Speaker 1: talking about what a hundred basis points maybe. Uh, this
Speaker 1: is historically not really something that's really affected people's decision
Speaker 1: to buy a car, maybe on the margin by home
Speaker 1: or the size of the home they get. But again,
Speaker 1: this is a good sign in some ways that rates,
Speaker 1: say the ten years, going up. We don't know exactly why,
Speaker 1: but one of the plausible reasons why is that real
Speaker 1: rates are going up. People are more optimistic about the economy,
Speaker 1: and we've been hovering a zero or negative neutral real
Speaker 1: rates for a while. So the fact that that's rising
Speaker 1: is a good sign because it shows optimism. The question
Speaker 1: I put to the chairman after the news conference that
Speaker 1: didn't quite get an answer to, I'll put to you, Uh,
Speaker 1: you mentioned real rates, and you mentioned, Uh, the long term,
Speaker 1: when do we get to that two and a half
Speaker 1: percent neutral rate that is considered the long term rate
Speaker 1: for the Fed? In other words, if you get to
Speaker 1: two thousand twenty three through through thousand twenty three and
Speaker 1: we don't see inflation out of control, do we just
Speaker 1: leave rates at zero indefinitely. Yeah, We'll have to see
Speaker 1: when we get there. I'm not sure that that would
Speaker 1: be my and I can only speak for myself, Uh,
Speaker 1: my policy prescription. I mean, if we're seeing very strong
Speaker 1: unemployment back to where we were before the pandemic, right,
Speaker 1: low inflation, great unemployment numbers, that's where we're going to
Speaker 1: get back to and so there. I mean there are
Speaker 1: some risks of keeping rates too low too long as well,
Speaker 1: and it's really a matter of bouncing off these risks.
Speaker 1: But it's very situational. I mean, you can't just make
Speaker 1: this decision right now. You really need to see the
Speaker 1: data and see how things are unfolding. Well, you talk
Speaker 1: about the risk of keeping rates too low for too
Speaker 1: low on a lot of people point to the stock
Speaker 1: market or bitcoin and say, you know, the FED is
Speaker 1: really inflating bubbles here. How much of my concern is
Speaker 1: that to you. It's something that I keep in mind
Speaker 1: all the time. That and the cost to savers. People
Speaker 1: will say on fixed income, Uh, there there's a cost.
Speaker 1: So again, this is a balancing act. We need to
Speaker 1: get the economy to recover. We need to get the
Speaker 1: economy to heal with minimal scarring. That's what was the
Speaker 1: whole goal of what we did at the FED for
Speaker 1: the past year is trying to preserve as much as
Speaker 1: we can of the infrastructure of the economy. So, you know,
Speaker 1: I think once we get through this, we can start
Speaker 1: to then think about how we normalize. Well, we get
Speaker 1: to maybe two point one percent inflation is as you forecast,
Speaker 1: or a little bit higher as some of your colleagues forecast,
Speaker 1: the market's going to start pushing up rates. And the
Speaker 1: question is is this a showdown between the markets and
Speaker 1: the FED? And will the FED blink? You've got a
Speaker 1: new uh framework to work in that you never have before.
Speaker 1: In the markets are gonna want to test it. I'm sure.
Speaker 1: Can you look through rate increases or is there is
Speaker 1: a level at which you get concerned. I mean, there's
Speaker 1: obviously a level which concerned to being some exorbitant level,
Speaker 1: But if they're within the realm of reason. I am
Speaker 1: of the camp where we stick with our framework and
Speaker 1: we let inflation run above two percent for a while,
Speaker 1: not running out of control past two percent, but above
Speaker 1: two percent for a while. That is what we've committed
Speaker 1: to with our framework, and I am committed to that
Speaker 1: as well. Well. Everybody's gonna be looking to wage inflation
Speaker 1: to tell the story of whether or not we're seeing
Speaker 1: inflation rise too quickly. In the last Beige Book, the
Speaker 1: Philadelphia sector said that wages are rising because of demand
Speaker 1: for labor the fifteen dollar minimum wage. They quoted one
Speaker 1: Philadelphia CEO is saying, is already here, are you seeing
Speaker 1: a rise in wage pressures? Yet? Yeah? Again, if you
Speaker 1: look at that warehouse in central Sylvania paying twenty three
Speaker 1: dollars an hour, they're getting their workers from somewhere, and
Speaker 1: those firms in turn respond by trying to raise wages
Speaker 1: to retain or attract new workers. So yeah, we're starting
Speaker 1: to see that, but again, it's not across the board.
Speaker 1: It's in certain sectors right now. Not a wage price spiral.
Speaker 1: I don't say it right now. I mean it could happen,
Speaker 1: but we're not. We're not seeing it running out of control. Now.
Speaker 1: Patrick Harker, thank you very much for joining us this morning.
Speaker 1: He's the president of the Philadelphia FED and reasonably optimistic
Speaker 1: Outlook there, Mike, you see that in the commentary around
Speaker 1: long term rates, reflecting the optimism, sticking to script, and
Speaker 1: I think, what you've got to do, and I know
Speaker 1: you're gonna do a great job of it over the
Speaker 1: next couple of months when we start to see the data,
Speaker 1: see who is committed to the new framework of the
Speaker 1: FED and maybe who isn't. Troy joins as natural Guysky
Speaker 1: Skybridge Capital co c IO and senior portfolio manager. It's transitory,
Speaker 1: and then you see the data, you get slapped around
Speaker 1: with Troy and you think, oh, is it? Is it
Speaker 1: trying to Troy? How do you think people will respond
Speaker 1: when we actually see the numbers over the next several months. Yeah.
Speaker 1: So I think the debate whether it's transitory or more
Speaker 1: permanent will continue to lead to elevated volatility, not only
Speaker 1: in fixed income markets, but also in equity markets, because
Speaker 1: you know, what we've seen this year so far is
Speaker 1: certainly the risks of the recovery. Another stimulus package that
Speaker 1: could have potentially not been signed by the Trump administration.
Speaker 1: Check right, a vaccine rollout that started somewhat boxes accelerated dramatically. Checked,
Speaker 1: we've now gotten almost nine percent of GDP uh in
Speaker 1: another physical steamless check. But the downside, of course is
Speaker 1: higher interest rates, higher inflation, and that's really taken some
Speaker 1: of the steam and froth out of markets. If we
Speaker 1: do is a healthy process. Where we'd certainly become more
Speaker 1: concerned is if we start seeing those higher numbers stick
Speaker 1: and that causes the FED to prematurely withdraw aggressive balance
Speaker 1: sheet expansion and money supply growth, because without you know,
Speaker 1: money supplied growth sustainably above nominal GDP, it's really hard
Speaker 1: to justify the valuations that equites are at right now,
Speaker 1: you know, somewhere around twenty one and a half twenty
Speaker 1: one point seven times earning. Let's get to the money question.
Speaker 1: Then what's the game client for Q too? For for
Speaker 1: the FED in particular use Oh yeah, no, so for us? Yeah, Now,
Speaker 1: we're we're pretty pumped about this year. You know, we're
Speaker 1: fortunately off to a really good start. And this is
Speaker 1: really one of these years where the first show bey
Speaker 1: last and the last shall be first. So, you know,
Speaker 1: some of the high performing, high flying tech and growth stories.
Speaker 1: Last year, I've really turned into duds and portfolios like
Speaker 1: ours that are more focused on value or cyclical exposures
Speaker 1: like structure credit or distress credit, which are by definition
Speaker 1: turnaround cyclical stories have done exceptionally well. Um. You know,
Speaker 1: convert upon arbitrage continues to be a strategy that's very
Speaker 1: attractive because of higher degrees of realized vutility. UM. On
Speaker 1: top of that, you have multi strategy managers like Ganlobe.
Speaker 1: They're adding material value as activist not only in in Disney,
Speaker 1: but also it Tell. And then lastly, we're very fortunate
Speaker 1: in taking a meaningful Bitcoin position towards the beginning of December,
Speaker 1: and we think that is the purest macro expression for
Speaker 1: so many things that are going on right now. So
Speaker 1: many phenomenon. One, massive money supply growth more m two
Speaker 1: than we had pre pandemic to budget deficits as far
Speaker 1: as the eye can see. Three, you have the natural
Speaker 1: dynamics the having cycle where when you artificially reduced new
Speaker 1: supply cutting in half, you tend to have a very
Speaker 1: strong bold market. And then lastly, you know what's happening
Speaker 1: in crypto now is you're aware because you guys cover
Speaker 1: it so uh accurately. Is you're going through an adoption
Speaker 1: story very similar to what happened to gold from oh
Speaker 1: six through two thirteen, and you're seeing that happen at
Speaker 1: a much more rapid pace. Is not only hedge funds,
Speaker 1: but also life insurance companies, corporate treasurers sobeign wealth fun
Speaker 1: get involved. And so you know when you when you
Speaker 1: put that all together, we think each of our themes
Speaker 1: had a reasonable probability about performing equities, but doing it
Speaker 1: with some correlation benefits, and so you know, we're we're
Speaker 1: super excited for for Q two, Troy, Let's dig into
Speaker 1: this bitcoin position. How big is a sizeable bitcoin position
Speaker 1: that you took in December? Have you adjusted it? Are
Speaker 1: you building? Are you going to reduce it? Is it
Speaker 1: active or is it a long term holding? Yes? So
Speaker 1: for us, we we it was rare. Most themes that
Speaker 1: we pursue, we we laid into and as we get
Speaker 1: more data relative to other opportunities, then we size it
Speaker 1: up over time. In this case, it was fairly clear
Speaker 1: to us that if we were there was going to
Speaker 1: be a big move, it would be somewhere in the
Speaker 1: near term, and so we needed to front load that,
Speaker 1: so we started nibbling in mid November. We bumped it
Speaker 1: up to five and a half percent at cost in December,
Speaker 1: and that's our full at cost side. So from here
Speaker 1: we're not adding any capital. We will manage the position
Speaker 1: over time. But we think we're in the sweet spot
Speaker 1: of all three of those factors in terms of money
Speaker 1: supply growth, in terms of UM near the adoption cycle,
Speaker 1: and and we're not even a year through the first having.
Speaker 1: You know, the pull markets tend to last eighteen months
Speaker 1: plus your minus during the having cycles. So for the
Speaker 1: next several months, we're gonna continue to let it appreciate.
Speaker 1: It's grown to about a thirteen percent position size to appreciation.
Speaker 1: Fortunately the rest of our it has done well to
Speaker 1: upset that. But we we look back at this, we
Speaker 1: think at the end of this year, people could potentially
Speaker 1: look back and say, um, if you had a meaningful
Speaker 1: Bitcoin position, you had a good, great year, and if
Speaker 1: you didn't, it could be much tougher to perform given
Speaker 1: all the phenomenon we were discussing in terms of chopping
Speaker 1: monetary policy raids valuations, which is very similar. Let the
Speaker 1: jump out of time, you can get that point in
Speaker 1: the second of the portfolio just how much volatility is
Speaker 1: in your portfolio right now? Yeah, So so look that
Speaker 1: that's one of the prices that you'll have to pay
Speaker 1: to have better performance in the year like this. So
Speaker 1: we typically target a forty eight percent standard deviation UM.
Speaker 1: We think this year will be somewhere between eight to
Speaker 1: twelve because of how much the bigcoin position has grown.
Speaker 1: But it's you nique opportunity where you're actually getting paid
Speaker 1: for that risk, where in many other strategies it's more
Speaker 1: difficult to get paid for taking market market altility risk.
Speaker 1: You wanted to get that final point in Troy, Oh, yeah,
Speaker 1: the final point was so it's very when when I
Speaker 1: think back over my career in the history of US
Speaker 1: managing our funds, Oh, it's very similar to oh seven,
Speaker 1: Or it could be where oh seven was a year
Speaker 1: that if you had the subprime short on you had
Speaker 1: a good, great year, and if you you didn't, it
Speaker 1: was much harder to make money as we were transitioning
Speaker 1: from you know, a housing bubble into what ultimately turned
Speaker 1: into a bear market. UM. And so that's how the
Speaker 1: years played out so far. We're not saying that definitively
Speaker 1: at the end of two thousands twenty one that that's
Speaker 1: gonna be how it plays out. But we think there's
Speaker 1: a reasonable chance that most active managers look back and say, hey,
Speaker 1: if I had a decent Bitcoin position, I had an
Speaker 1: odd year, and if I didn't, it was much more challenging.
Speaker 1: Troy unbelaivable, You've gotta come back saying, so we could
Speaker 1: tell more about this as that we had a curb
Speaker 1: Aby Bernstein, co head of investment strategist, We had a
Speaker 1: great t have you with us on the program. I
Speaker 1: want to start right here. These stories are so obvious,
Speaker 1: We've been talking about them for three months, but for
Speaker 1: some reason, it takes a while to see them play
Speaker 1: through markets cleanly. Why do you think that is? The
Speaker 1: story is under vaccines and reopening and Europe versus the
Speaker 1: United States, specifically the discussion that Lisa and I were
Speaker 1: just having Europe the news incrementally bad, the news out
Speaker 1: the United States incrementally good, and yet europe dollar held
Speaker 1: in there through much of the last couple of weeks.
Speaker 1: Until the last couple of days. Financials in Europe performed nicely.
Speaker 1: Traveling and leisure stocks have performed nicely despite what we've
Speaker 1: seen stories were all aware of. Yet we keep asking
Speaker 1: it's well known, is it well priced? Yeah, I hear
Speaker 1: you on that, But I think we have to be
Speaker 1: conscious of the fact that the vaccine alone and the
Speaker 1: COVID story alone does not tell the whole story. You know,
Speaker 1: what we think about it, Bernstein, as global investors is
Speaker 1: what are the companies that are headquartered in this region
Speaker 1: and how are those companies affected? But their slow rollout
Speaker 1: of the vaccine, and while the domestic consumer and the
Speaker 1: domestic implications are negative, many of these companies are actually exporters.
Speaker 1: Many of them are their cyclicals. And when you see
Speaker 1: the US and what we would call a great reopening,
Speaker 1: their opportunity for export is actually high. And so I
Speaker 1: think you have to look at the whole big picture
Speaker 1: in terms of the earning story. And then there's the valuation.
Speaker 1: Right as fundamental investors, when we think about the stock
Speaker 1: opportunity abroad compared to the stock opportunity in the US,
Speaker 1: the spreads have been enormous between the valuation of the
Speaker 1: US and other countries. Obviously, US growth versus US value.
Speaker 1: There's a real opportunity building for selection and whether that
Speaker 1: selection is an asset allocation in sector selection or security selection.
Speaker 1: I think it's bigger than the headlines. Jonathan, picking up
Speaker 1: on something you've just said. I think was in the
Speaker 1: data this morning, Bonast. We saw that in the e
Speaker 1: FO data. Business confidence in Germany despite what we've say,
Speaker 1: and has been picking up. The outlooks brighter. Why is
Speaker 1: the outlook brighter because what's happening to get a swear
Speaker 1: is looking better. It's not just about what you see
Speaker 1: plan out in Europe, it's the international story that's right.
Speaker 1: De carry on. I was just gonna say, that's why
Speaker 1: we're remaining committed to being a global investor. I think
Speaker 1: it totally depends on your perspective. I heard the conversation
Speaker 1: on bitcoin an hour ago and all your follow up.
Speaker 1: You know, at Bernstein we're investing for our clients for decades,
Speaker 1: not days, and we think about all the trade offs
Speaker 1: and the decisions we make. We think it's a mistake
Speaker 1: to be a US only investor, right and the geography,
Speaker 1: you're gonna have trade offs within the individual countries and
Speaker 1: their growth potential. And there's no doubt about it. Europe
Speaker 1: is really behind the US in terms of COVID today,
Speaker 1: but you have to think more long term. To your point,
Speaker 1: global businesses or headquartered there. The great reopening in the
Speaker 1: US is going to drive outcomes there materially. Alright, So
Speaker 1: what's the biggest bet right now that you see is
Speaker 1: being perhaps undervalued in a world that seems for the
Speaker 1: most part completely overvalued. Well, I'm gonna argue that active
Speaker 1: investing maybe the biggest bet that we're making. The idea
Speaker 1: that you can't just on the index. We know a
Speaker 1: look at the sp last year, SMP incredibly concentrated the
Speaker 1: top seven stocks, representing really the highest concentration we've seen
Speaker 1: in the index ever. We know what those companies are.
Speaker 1: They're all in tech. There the work from home beneficiaries,
Speaker 1: and with this great reopening, work from work is going
Speaker 1: to start to matter more. And that means cyplicals matter,
Speaker 1: That means industrials matter, that means small matters and utilities
Speaker 1: and consumer stables and value. These sectors so underperformed last year,
Speaker 1: and our theme with our clients was really balanced, Let's
Speaker 1: not get whipside trying to pivot from growth to value,
Speaker 1: value to growth. Let's maintain exposure over time, but let's
Speaker 1: be active let's make sure that security, election and focus
Speaker 1: on fundamentals is our guiding light, and that remains the
Speaker 1: case today. Well, perhaps this will be the year of
Speaker 1: active management. People have been saying this for a long time,
Speaker 1: but people are saying this time really is different based
Speaker 1: on the index construction, because we're talking active management and portfolios.
Speaker 1: Let's go back to where we started this hour. John
Speaker 1: was talking about that interview that we had with Troy
Speaker 1: Gayski of sky Bridge where he said that the key
Speaker 1: aspect of a portfolio which will be the big winner
Speaker 1: or not for one is bitcoin. Are you investing in bitcoin?
Speaker 1: We are not investing in bitcoin on behalf of our clients.
Speaker 1: When we think about outcomes for our clients, we think
Speaker 1: about number one, what is the fundamental case for the
Speaker 1: asset class, what's the return of risk and diversification story,
Speaker 1: and importantly, can we research that story with an edge.
Speaker 1: We think we've got a long way to go in
Speaker 1: the crypto space in terms of determining the edge and
Speaker 1: ultimately what the valuation should be. The influence of the
Speaker 1: individual investor is not going away. But when you look
Speaker 1: at the influence of the individual investor on bitcoin today,
Speaker 1: it's huge and it's pretty hard to predict that behavior.
Speaker 1: We feel much more confident investing in aska classes where
Speaker 1: we can base a fundamental story. So for our clients
Speaker 1: that are concerned about inflation because they're spending a lot
Speaker 1: from their portfolio, don't have wages that would be going
Speaker 1: up if we do hit an inflationary period, we think
Speaker 1: about a balanced position of inflation linked bonds and diversified
Speaker 1: real assets. Those are asked the classes that we have
Speaker 1: decades of experience in driving the fundamental story Bitcoin, we're
Speaker 1: simply not there yet, Basica. Great to catch up of
Speaker 1: a p event. Stein rob the Tip joins us now
Speaker 1: page in chief investment strategist. Ahead the global bonds, Robber,
Speaker 1: let's start there. What on earth is going on in
Speaker 1: the belly of the curve? Lisa, I think it's got
Speaker 1: to be a discussion that we need to have a
Speaker 1: whole lot more. Yeah, because honestly, people have been expecting
Speaker 1: somewhat of a decline in demand. So it's surprising that
Speaker 1: even given that John even that we saw that that
Speaker 1: really weak bid to offer, or as Tom might say
Speaker 1: a bit to NEGRONI spreads Nerony. Yeah, Tom called it.
Speaker 1: The bondmark was a bit drunk yesterday to Robert Tips
Speaker 1: back with us now paging chief investment strategists Robert, Well, know,
Speaker 1: we had a technical issue just then for a couple
Speaker 1: of seconds. I'm not sure if you heard what we
Speaker 1: were discussing, but on the seven year is the belly
Speaker 1: of the curve? What's happening there? What's the debate? The
Speaker 1: spilling go over to supply? The uncertainty, the delicate dance
Speaker 1: has taken place at the moment. Yeah, I think it's
Speaker 1: just the uncertainty about the course of the FED and
Speaker 1: the book of the Assurance. I mean the frequency with
Speaker 1: which the belly of the curve is getting hit two's, five, sevens,
Speaker 1: your cans, your threes. Uh, you know, every month, Treasury
Speaker 1: pounding those parts of the yeeld curve and massive size. Uh.
Speaker 1: You know, different parts of the curve are just taking turns,
Speaker 1: getting walloped because of the macrobackdrop. Your investors are afraid
Speaker 1: to to step up and uh, you know, evaluate what's
Speaker 1: going on in the world, and you know, you know,
Speaker 1: feel like they're lying down on the tracks ahead of
Speaker 1: the the inflation train that that everyone is expecting. I
Speaker 1: think that's that's the problem. And that's setting your point
Speaker 1: is kind of an inflection point, you know, on the
Speaker 1: curve um you know, for maximum yield volatility, given the
Speaker 1: bulk of issuance, Is it just an inflation story? Is
Speaker 1: it Fed fund story? To Robert for further down the road,
Speaker 1: you know, I think that the FED in some ways
Speaker 1: is getting buy in, and you have to dive into
Speaker 1: the old curve. But when you look at the break
Speaker 1: even at the five year point of the curve, coming
Speaker 1: up two d seventy basis points, what that tells you
Speaker 1: is people are pricing in success for the FED in
Speaker 1: terms of achieving the inflation target. Right, the market has
Speaker 1: increased yields a decent amount, and the market has its choices.
Speaker 1: It can increase the inflation expectation component of treasuries or
Speaker 1: the real yield, and the real yield is incredibly low.
Speaker 1: And that reflects in some respects uh an expectation that
Speaker 1: the Fed will remain hold keep the FED funds rate
Speaker 1: incredibly low, and all of this expectation for FED rate
Speaker 1: heights and all that. What it really is is an
Speaker 1: inflation premium in the front end of the curve. So
Speaker 1: I think, though, when you look at the critical question
Speaker 1: is is the market usually right on that front? And
Speaker 1: the answers that usually is not, and that creates usually okay,
Speaker 1: the market is usually not right on that the opportunity
Speaker 1: being by bonds. Is that what you're saying? Yes, So
Speaker 1: what what's happened the last few times that we've seen
Speaker 1: this surge in break evens like we're seeing right now,
Speaker 1: big fear of inflation in any economic recovery. We saw
Speaker 1: it in two thousand nine. You're at a peak in
Speaker 1: nominal yields. And I think that's really the challenge that
Speaker 1: investors are having as they're fleeing to all of these
Speaker 1: micro themes, whether it's your Bitcoin or your game stop
Speaker 1: or looking at deep cyclicals for the recovery, when the
Speaker 1: real variable that's going to drive their portfolios is the
Speaker 1: macro return. And the macro return profile of the bond
Speaker 1: market has improved tremendously, and we're probably, you know, within
Speaker 1: months of the beginning of the next stage of the
Speaker 1: secular bowl market in bonds. In the meantime people are
Speaker 1: looking at, you know, is that the real yield is
Speaker 1: that the break evens should be in deep cyclicals. In
Speaker 1: the meantime, break evens are telling you you're probably near
Speaker 1: cyclical peak and yields. Can you take a little bit
Speaker 1: more into what this means in terms of what you
Speaker 1: guys are doing with your investments. Have you been buying
Speaker 1: steadily tenure treasuries as they sold off at expecting yields
Speaker 1: to go much lower? Is this meaning that you should
Speaker 1: rotate into a higher quality credit? How are you rearranging
Speaker 1: based on this thesis and based on the rising yals
Speaker 1: so we've seen of late. Yeah, well, I think that
Speaker 1: the the easier trade has been uh not on the
Speaker 1: right side of the of the bond market equation, but
Speaker 1: the credit side and the recovery from COVID and and
Speaker 1: the fact of the matter is that is likely to
Speaker 1: remain the predominant uh driver and the easiest source of
Speaker 1: alpha at this part of the recovery. Usually looking a
Speaker 1: year two years after this kind of arise in rates,
Speaker 1: with the strong economy, your credit product, even though spreads
Speaker 1: have come into tighter than average levels, generally continues to
Speaker 1: perform well. The trickier part is the right side, and
Speaker 1: the market tends to go into this overdrive of extrapolating
Speaker 1: the rapid growth of the recovery stage into the indefinite future,
Speaker 1: and that's what we're looking at right now. In the
Speaker 1: reason why it's difficult to make a call whether it's
Speaker 1: over and in the my last uh privilege of being
Speaker 1: in the bonus round. You know, I suggest your next
Speaker 1: twenty base points and rates could be higher and then lower.
Speaker 1: It's because there is the stimulus hitting right now, money
Speaker 1: dropping into people's checking accounts, checks in the mail, and that,
Speaker 1: you know, sets us up for the potential for another
Speaker 1: boom in the economic data over the next three sixty days.
Speaker 1: Robert wish Tom Kane was with us because that was
Speaker 1: a reference to real yield and your appearance on Friday,
Speaker 1: and if he's watching, I'm so happy that you made
Speaker 1: that reference. Let's finish on this your point about recency
Speaker 1: bias and extrapolating gout the next couple of quarters and
Speaker 1: how that infects and shapes the long end of a
Speaker 1: bond curve tents and thirties. Do you think that's why
Speaker 1: front month crude prices punch above their weight to just
Speaker 1: that phenomenon. Well, I think that's you know, your typical
Speaker 1: commodity market phenomenal where your your short term supply constraint.
Speaker 1: It runs first through the front end of the market. Uh.
Speaker 1: And only if that bias is persistent, you know where
Speaker 1: you see it go into the back months of the curve.
Speaker 1: And obviously we're having a short term this location there. Um.
Speaker 1: I think you know, on the treasury curve, I think
Speaker 1: the the one thing that is overpriced, or those those
Speaker 1: five year tips, but that over the course next twelve
Speaker 1: to twenty four months you're likely to see a good
Speaker 1: return to to risk premium. The biggest problem investors are
Speaker 1: going to have is sticking with the markets. Uh. And
Speaker 1: you're gonna be surprised by the fact that in this
Speaker 1: environment of beds staying on hold providing a lot of accommodation,
Speaker 1: the next twelve to thirty six months, your macro markets
Speaker 1: are gonna work for you, including the bondom market likely
Speaker 1: to to outperform cash. Once we get through this last
Speaker 1: burst of economic activity, that last best come and right
Speaker 1: up might be Thank you, sir ATM Chief Investment Strategies.
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
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