WEBVTT - Surveillance: Recession Forecast Loh 0:00:05.120 --> 0:00:08.480 This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:08.520 --> 0:00:12.319 with Jonathan Farrell and Lisa Abramowitz. Join us each day 0:00:12.400 --> 0:00:16.840 for insight from the best an economics, geopolitics, finance and investment. 0:00:17.280 --> 0:00:22.119 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.320 --> 0:00:26.600 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.640 --> 0:00:29.800 the Bloomberg Terminal and the Bloomberg Business App. 0:00:29.920 --> 0:00:32.519 Marvin Love joins US now sceney global macro strategist to 0:00:32.520 --> 0:00:34.280 State Street. Marvin, wonderful to have you with us on 0:00:34.320 --> 0:00:36.319 a program. Tom, want us to talk about the note 0:00:36.360 --> 0:00:39.080 from Selfgen's Kit Jookes this morning. He said, this US 0:00:39.200 --> 0:00:42.720 data will dominate sentiment and will probably deliver solid retail sales, 0:00:42.840 --> 0:00:46.400 decent industrial production. The debt limit remains a major issue, 0:00:46.440 --> 0:00:50.360 but for now, evidence of recession is missing. Marvin, Is 0:00:50.440 --> 0:00:52.440 recession evidence missing right now? For you? 0:00:53.760 --> 0:00:56.639 Yeah, I mean it's certainly not clear. I still think 0:00:56.680 --> 0:00:59.960 that a recession is unfortunately someone unavoidable after the banking 0:01:00.480 --> 0:01:02.520 a situation, and you know, we're waiting for that to 0:01:02.520 --> 0:01:05.440 make its way through the economy. But the consumers still strong, 0:01:05.560 --> 0:01:08.120 jobs are still of you know, robust based on the 0:01:08.160 --> 0:01:10.520 latest numbers, and inflation is proving sticky. 0:01:11.400 --> 0:01:14.160 I look, Marvin, at the inflation proving sticky, and yet 0:01:14.160 --> 0:01:17.959 there's a single headline from home depot. Granted it's a commodity, 0:01:18.080 --> 0:01:21.560 Granted it's volatile, but lumber deflation. Are we going to 0:01:21.600 --> 0:01:22.960 see more headlines like that? 0:01:24.160 --> 0:01:24.480 You know what? 0:01:25.080 --> 0:01:27.240 Probably, you know, the good, the good side of things 0:01:27.080 --> 0:01:30.600 has been a bit more volatile in this discussion. You know, 0:01:30.640 --> 0:01:33.080 it does come down to services wages in this economy, 0:01:33.440 --> 0:01:36.640 and that's really where the FED is focused on. And 0:01:36.680 --> 0:01:39.039 it is the stickiest of the sticky, if you will, 0:01:39.120 --> 0:01:41.160 parts of the incation discussion. 0:01:41.640 --> 0:01:43.600 But on a global basis, I mean I looked at 0:01:43.600 --> 0:01:47.200 copper very carefully this morning. I looked at Newcastle coal 0:01:47.280 --> 0:01:50.720 and Australia folks, this is north of Peth, and you know, 0:01:50.760 --> 0:01:54.200 I look at these commodities and effect is they're rolling over, 0:01:54.440 --> 0:01:57.360 indicative of a slowing China, maybe a misguess on the 0:01:57.400 --> 0:02:01.440 Pacific rim. How do you fold that into your investment allocation? 0:02:02.000 --> 0:02:04.720 It stays strung, Yeah, I mean, I mean, for sure 0:02:04.840 --> 0:02:08.519 it is signs that you've got growth problems that are 0:02:08.960 --> 0:02:11.400 starting to emerge as we go through you know, the 0:02:11.680 --> 0:02:14.160 one year anniversy of this aggressive Titan cycle. Within the 0:02:14.200 --> 0:02:19.560 developed markets, those recessionary signals are are all over the place. 0:02:20.120 --> 0:02:22.160 It is this kind of one slice of the American 0:02:22.200 --> 0:02:25.720 consumer that's making it harder to play. But I think 0:02:25.760 --> 0:02:29.799 if you can look past the timing of this consumer, 0:02:29.880 --> 0:02:32.920 which again with some of these retail earnings, with some 0:02:33.040 --> 0:02:35.720 of this data that's coming out softer, you do get 0:02:35.760 --> 0:02:39.080 to a much slower growth type of discussion. And you know, 0:02:39.120 --> 0:02:42.000 if you're willing to put those investments in place, they're 0:02:42.040 --> 0:02:42.520 out there. 0:02:42.960 --> 0:02:45.160 Do you think that this is disinflationary to the degree 0:02:45.200 --> 0:02:47.480 that would give a bit of a reprieve to the Fed, 0:02:47.680 --> 0:02:50.200 especially if the stress that we're seeing in the banking 0:02:50.200 --> 0:02:53.480 sector is there is real, but a slow burn that 0:02:53.520 --> 0:02:55.880 isn't going to necessitate some sort of real response. 0:02:56.800 --> 0:02:57.440 Yeah, for sure. 0:02:57.480 --> 0:03:00.200 So I definitely am in the camp that this had 0:03:00.240 --> 0:03:02.200 a tightening that I expect in the second half of 0:03:02.200 --> 0:03:05.120 the year is going to have a bigger impact on 0:03:05.160 --> 0:03:06.959 the economy than you know, maybe some of these risk 0:03:06.960 --> 0:03:09.440 assess are saying, particularly on the default side of things, 0:03:09.480 --> 0:03:14.440 particularly on just overall loan growth slowing, and you do 0:03:14.520 --> 0:03:18.440 get a more disinflationary type of world. Once we get there, 0:03:18.880 --> 0:03:21.080 it's you know, the timing is really hard. It's not 0:03:21.120 --> 0:03:24.240 really the expertise of global macro to pick one month 0:03:24.280 --> 0:03:27.359 over another. But you know, going into twenty twenty four, 0:03:27.400 --> 0:03:30.760 I think that those headwinds seem much stiffer. 0:03:30.960 --> 0:03:33.880 Where's the death healing debate on your radar? Are you 0:03:34.000 --> 0:03:36.720 excited to wake up every morning to get a sense 0:03:36.760 --> 0:03:40.360 of the machinations between the different discussion points that the 0:03:40.400 --> 0:03:41.000 two parties have. 0:03:42.080 --> 0:03:44.560 You know what, if you talk to my coworkers, they 0:03:44.560 --> 0:03:47.760 would say, I get overly excited about it. So yeah, 0:03:48.280 --> 0:03:51.560 I certainly do think that the market is a bit 0:03:51.960 --> 0:03:55.120 sanguine about it this time, particularly given the volatility on 0:03:55.240 --> 0:03:56.560 the deficit side of things. 0:03:56.560 --> 0:03:57.960 It's just a lot harder. 0:03:57.720 --> 0:03:59.720 To pick the date when we're going to run out 0:03:59.720 --> 0:04:02.480 of money, and that really creates a problem for Washington, 0:04:02.680 --> 0:04:05.160 which seems to need that impetus to get things moving. 0:04:05.680 --> 0:04:09.560 I'm also very cognizant of the amount of reserves that 0:04:09.600 --> 0:04:13.040 moves around once we get the deal, and that in 0:04:13.080 --> 0:04:16.840 and of itself creates more challenges for bank deposits, at 0:04:16.960 --> 0:04:19.479 least in the in the short term, potentially in the 0:04:19.520 --> 0:04:21.599 intermediate term kind of just given how the shape of 0:04:21.600 --> 0:04:25.400 all these short term curves are somewhat inverted at this. 0:04:25.400 --> 0:04:27.960 Point, Marvin, Let's say we knew the X state was 0:04:28.160 --> 0:04:32.160 June one, June first, would there be a different practical 0:04:32.640 --> 0:04:35.240 X state, a deadline that we had to really come 0:04:35.279 --> 0:04:37.880 to an agreement on to pass the legislation needed to 0:04:38.000 --> 0:04:41.839 ultimately skip the dreadful outcomes that most people are predicting 0:04:41.960 --> 0:04:43.360 if we do go through that X state. 0:04:44.279 --> 0:04:46.960 Yeah, I think there would be a greater sense of urgency. 0:04:47.000 --> 0:04:49.919 For sure. We are running out of time very very quickly. 0:04:50.200 --> 0:04:53.120 You know, the President is still apparently going to the 0:04:53.120 --> 0:04:57.320 G seven. So you know, again the litany of of 0:04:57.320 --> 0:05:00.159 of conversations that are coming out of Washington show and 0:05:00.200 --> 0:05:03.280 degrees of concern, and that in and of itself is 0:05:03.320 --> 0:05:05.440 a concern when you're talking about a date to two 0:05:05.480 --> 0:05:06.000 weeks away. 0:05:07.040 --> 0:05:08.880 How you get how you get. 0:05:08.720 --> 0:05:12.119 There is really some sort of hopefully acknowledgment that June 0:05:12.120 --> 0:05:14.160 first is a date that we should focus on in 0:05:14.200 --> 0:05:17.120 a temporary agreement to get us past or else, you know, 0:05:17.120 --> 0:05:19.320 we go into territory that we've never been before. 0:05:19.360 --> 0:05:21.039 I thought you had done them. Movin just got trigger 0:05:21.080 --> 0:05:25.960 happy on the sun of the I just hit the gap. Yeah, 0:05:27.480 --> 0:05:29.279 it's nice straight, I'm worse than you, mama. 0:05:29.360 --> 0:05:35.600 Thank you. Really important here, I think to look at 0:05:35.640 --> 0:05:38.600 the retail data, rip it apart and someone that can 0:05:38.640 --> 0:05:40.760 do that, of course as a general lady from Pimco. 0:05:41.360 --> 0:05:44.400 And this really is the question, especially after we were 0:05:44.400 --> 0:05:48.080 talking about a discretionary recession, are we seeing that in 0:05:48.200 --> 0:05:50.360 the data? Joining us someone who is someone who focuses 0:05:50.400 --> 0:05:53.920 on this all day, every day, Tiffany Wilding, economist at Pimco, 0:05:54.240 --> 0:05:56.839 five point thirty am their local time. Thank you for 0:05:56.920 --> 0:06:00.280 waking up and keeping Eastern times the Jacob partake. But 0:06:00.320 --> 0:06:03.240 I'm curious, Tiffany, from your vantage point, are you seeing 0:06:03.320 --> 0:06:07.080 signs of some sort of discretionary recession or is that premature? 0:06:08.960 --> 0:06:11.080 Yeah? Well, I mean I do think that the consumer 0:06:11.200 --> 0:06:14.200 some of the momentum in consumption has decelerated since the 0:06:14.200 --> 0:06:17.520 beginning of the year. So, you know, the first quarter 0:06:17.640 --> 0:06:21.160 was extremely strong in terms of consumption growth over three percent, 0:06:21.720 --> 0:06:23.360 you know, but a lot of that, as we know, 0:06:23.680 --> 0:06:26.080 if we look at the sequential monthly data, it was 0:06:26.120 --> 0:06:29.040 really boosted by warm weather in January, and then we 0:06:29.080 --> 0:06:31.559 saw deceleration in March, and it looks like we're getting 0:06:31.560 --> 0:06:33.360 a little bit of a pop back. But as as 0:06:33.360 --> 0:06:36.360 Michael suggested, there's probably some noise around Mother's Day here, 0:06:36.400 --> 0:06:39.000 so you kind of have to smooth that over, you know. 0:06:39.000 --> 0:06:42.400 So we would suggest you are seeing some decline or 0:06:42.880 --> 0:06:47.360 you know, growth deceleration in consumption. But overall, you know, 0:06:47.400 --> 0:06:50.000 as as was said, the consumers are hanging in there, 0:06:50.040 --> 0:06:51.680 you know, and of course that's also going to be 0:06:51.880 --> 0:06:53.560 a function of the labor market, you know, and it 0:06:53.600 --> 0:06:55.480 is still it is still reasonably strong. 0:06:56.279 --> 0:06:58.479 Hanging in there and willing to pay the prices that 0:06:58.560 --> 0:07:00.880 are being demanded are two different things. Is there a 0:07:01.000 --> 0:07:04.000 sense that there really is starting to be some pushback 0:07:04.000 --> 0:07:07.920 to the inflation that's being borne out in consumers pocketbooks 0:07:08.000 --> 0:07:11.360 and in the fattening margins of profits at companies. 0:07:12.960 --> 0:07:15.400 Yeah, well so, I mean we're definitely starting to hear 0:07:15.720 --> 0:07:18.520 more of that coming from you know, the various earnings 0:07:18.520 --> 0:07:21.200 releases from some of the consumer companies. You know, they're 0:07:21.240 --> 0:07:24.320 saying obviously that consumers are a little bit more price 0:07:24.360 --> 0:07:27.400 sensitive in various categories. I would say, when when I 0:07:27.440 --> 0:07:30.680 look at the macro data, you know, I don't see 0:07:30.680 --> 0:07:33.280 it as much and of course we need more macro data. 0:07:33.280 --> 0:07:34.960 You know, we're starting to see these trends at the 0:07:34.960 --> 0:07:37.120 company level, they're noticing it, you know. Then note it 0:07:37.120 --> 0:07:38.840 will come out with the macro data with a lag, 0:07:39.400 --> 0:07:41.960 you know. But but overall, I would say inflation is 0:07:42.000 --> 0:07:46.040 actually still you know, still reasonably robust. I mean, obviously 0:07:46.120 --> 0:07:48.680 at five percent or more, it's over the FEDS target. 0:07:48.960 --> 0:07:51.280 You know, we do expect it to come down, but 0:07:51.320 --> 0:07:53.720 it's been I think it's been continues to be stickier 0:07:53.800 --> 0:07:54.480 than expected. 0:07:55.080 --> 0:07:57.480 Tiffany, I'm I need to ask you this because in 0:07:57.520 --> 0:07:59.840 the equity market, I've been looking at the slow motion 0:08:00.080 --> 0:08:03.480 convergence of moving averages down to what Lisa and I 0:08:03.560 --> 0:08:06.560 call a snooze fest. I got the same thing in 0:08:06.600 --> 0:08:09.600 the bond market. If I look at the two year yield, 0:08:10.200 --> 0:08:14.840 there's a tenC weed see two bases point differential in 0:08:14.920 --> 0:08:18.520 the three moving averages I use. Does your own Powell 0:08:18.520 --> 0:08:22.480 call that a success? To see the lethargy the boredom 0:08:22.560 --> 0:08:26.040 within the bond market described by the two year yield? 0:08:28.680 --> 0:08:31.200 Well, you know, I you know, I do think that 0:08:31.240 --> 0:08:33.880 the bond market does listen to the Fed. You know, 0:08:33.920 --> 0:08:36.480 I think sometimes commentators like to look at, you know, 0:08:36.559 --> 0:08:40.040 just the forward curve, which is which does suggest you know, 0:08:40.080 --> 0:08:43.280 a significant probability that rates will be lower by the 0:08:43.400 --> 0:08:45.760 end of the year, to suggest that, you know, the 0:08:45.760 --> 0:08:48.360 markets aren't listening to the Fed. I do think the 0:08:48.400 --> 0:08:50.600 markets are listening to the Fed. But I just think 0:08:50.600 --> 0:08:53.079 the markets probably have you know there in terms of 0:08:53.120 --> 0:08:56.440 their distribution of risks, they assign more downside risk the 0:08:56.480 --> 0:09:00.199 economic outlook than the Federal Reserve does. If you take 0:09:00.240 --> 0:09:04.240 a historical look at banking sector crises and stresses defined 0:09:04.280 --> 0:09:07.240 by you know, thirty percent drops on average and banking shares, 0:09:07.280 --> 0:09:10.680 you do see tendencye the economy decelerating after that, you 0:09:10.720 --> 0:09:13.560 know that'll that'll of course come to tighter credit conditions 0:09:13.559 --> 0:09:14.800 for consumers and households. 0:09:14.840 --> 0:09:17.920 What do you hear from then, your PIMCO portfolio managers, 0:09:17.960 --> 0:09:20.959 without giving away the crown jewels, what does Pimco say 0:09:21.600 --> 0:09:25.920 about the dynamics in this banking crisis in agency paper? 0:09:28.360 --> 0:09:31.360 Yeah, well, of course there's some you know, banks that 0:09:31.640 --> 0:09:34.400 failed obviously held you know, they held a lot of 0:09:34.400 --> 0:09:37.000 treasuries as well as agencies. You know obviously that won't 0:09:37.000 --> 0:09:39.280 need to be sold. We think that's probably priced into 0:09:39.320 --> 0:09:42.679 the market, though there's a pretty good understanding of exactly 0:09:42.720 --> 0:09:45.559 what that is, you know, in terms of the how 0:09:45.640 --> 0:09:47.880 much it is, you know, And obviously the Federal Reserve 0:09:47.960 --> 0:09:50.720 is also shrinking its portfolio, you know. But on the 0:09:50.720 --> 0:09:53.800 other side of that, you don't have a refinancing wave 0:09:54.200 --> 0:09:57.000 because interest rates are so high. So overall we think 0:09:57.040 --> 0:09:59.480 it's it's priced in. We actually like agency nbs, and 0:09:59.520 --> 0:10:02.880 we think that they actually provide pretty good value right now, 0:10:02.920 --> 0:10:05.240 just because volatility has been high and the level of 0:10:05.240 --> 0:10:07.880 interest rates are high, and those things can mean revert 0:10:07.880 --> 0:10:08.560 back down. 0:10:08.640 --> 0:10:11.960 As we prepare for a slew of retail earnings, particularly 0:10:12.000 --> 0:10:15.760 tomorrow with respect to Target and then Walmart, do we 0:10:15.800 --> 0:10:18.640 get a sense that perhaps people are too barish, that 0:10:18.720 --> 0:10:22.360 home Depot was an outlier, and that otherwise, to your point, 0:10:22.559 --> 0:10:25.439 the consumers are still spending and they can keep borrowing 0:10:25.480 --> 0:10:26.000 to do so. 0:10:28.120 --> 0:10:28.400 Well. 0:10:28.840 --> 0:10:31.040 I mean, so the data that we got some credit 0:10:31.120 --> 0:10:34.199 data from the Federal Reserve, which did look like there 0:10:34.240 --> 0:10:39.320 was some reduction in credit card there was a deterioration 0:10:39.520 --> 0:10:42.040 in credit card loans and things like that in the 0:10:42.040 --> 0:10:44.160 first quarter, you know, So I do think there are 0:10:44.160 --> 0:10:46.959 consumers out there that are feeling pain, and I do 0:10:47.000 --> 0:10:49.240 think banks are tightening credit conditions. 0:10:49.640 --> 0:10:49.800 You know. 0:10:49.840 --> 0:10:52.720 The other piece of this obviously is just demand for credit, 0:10:53.240 --> 0:10:56.240 and demand for credit is also falling just because rates 0:10:56.280 --> 0:10:59.600 are so high. You obviously it's more expensive to take 0:10:59.600 --> 0:11:01.640 out loans, et cetera. So you know, all of this 0:11:01.760 --> 0:11:04.720 to me is suggestive that you know, monetary policy is working. 0:11:05.440 --> 0:11:08.280 You know, the consumer, you know, ultimately it is they 0:11:08.280 --> 0:11:11.000 are getting squeeze, some of the lower income consumers more 0:11:11.000 --> 0:11:13.600 so than others, you know, and you are seeing some 0:11:13.679 --> 0:11:16.440 deceleration in credit growth as a result of of the 0:11:16.520 --> 0:11:17.320 current environment. 0:11:17.440 --> 0:11:20.520 So as you put this all together, is inflation decelerating 0:11:20.800 --> 0:11:23.599 enough to really get the FED where they want? Or 0:11:23.600 --> 0:11:26.520 are we looking at a sort of higher inflation but 0:11:26.640 --> 0:11:29.600 also higher growth kind of area for a longer period 0:11:29.640 --> 0:11:30.000 of time. 0:11:31.720 --> 0:11:33.640 Yeah, I mean, I think that's yet to be seen. 0:11:34.360 --> 0:11:36.040 You know, as I as I mentioned, we do think 0:11:36.080 --> 0:11:39.360 this banking sector stress is going to impact the economy. 0:11:39.360 --> 0:11:42.280 It's going to slow things down. Higher interest rates take 0:11:42.360 --> 0:11:45.360 time to work their way through the economy with a lag. 0:11:45.800 --> 0:11:49.000 And you know, I would even say inflation even lags 0:11:49.080 --> 0:11:53.480 you know, activity momentum, so growth, So you know, we 0:11:53.559 --> 0:11:56.240 I think we're seeing these lags start to play out. 0:11:56.320 --> 0:11:59.400 You are, you have seen inflation decelerate. It's probably going 0:11:59.480 --> 0:12:02.920 to continue to decelerate given the monetary policy restriction that's 0:12:02.960 --> 0:12:05.200 in place and the Federal Reserve, you know, just needs 0:12:05.200 --> 0:12:07.080 to be patient, as does markets just needs to be 0:12:07.160 --> 0:12:08.040 patient to see that. 0:12:08.840 --> 0:12:09.000 You know. 0:12:09.040 --> 0:12:12.280 So we think inflation does decelerate to three percent core 0:12:12.480 --> 0:12:15.400 CPI for example, by your end three to three and 0:12:15.400 --> 0:12:17.760 a half, you know, but obviously that's still above target. 0:12:18.000 --> 0:12:20.960 There's still some sticky trends and inflation, you know, but 0:12:21.040 --> 0:12:24.440 ultimately the Fed probably will be successful in getting it back. 0:12:24.720 --> 0:12:26.199 The question is, you know how you know, how big 0:12:26.240 --> 0:12:27.560 of a recession do they need to do that? 0:12:27.640 --> 0:12:30.880 I think, thank you, Tiffany will greatly appreciate it. 0:12:30.920 --> 0:12:44.400 With pim Core, Lindsey Rosena of Paging Fixed Income wang 0:12:44.440 --> 0:12:46.760 in on the market reaction right in the following there's 0:12:46.760 --> 0:12:48.640 a kink and the tea bill curve around the next 0:12:48.720 --> 0:12:51.720 day with one hundred basis points of extra yield. If 0:12:51.760 --> 0:12:54.360 we don't get a resolution, we're just kicking the can 0:12:54.480 --> 0:12:57.480 down the road and not eliminating the problem. This makes 0:12:57.520 --> 0:12:59.960 the T bill market tom a challenging plan. 0:13:00.559 --> 0:13:04.000 To be really good note from someone who really qualified 0:13:04.000 --> 0:13:05.679 to talk about this, and of course, with all the 0:13:05.760 --> 0:13:08.480 hierarchy of PGM and the excellence they've done over the years, 0:13:08.520 --> 0:13:12.240 Miss Rosner joins us. At right now, Lindsay, the note 0:13:12.280 --> 0:13:16.440 really goes to the opportunity that's out there. What is 0:13:16.480 --> 0:13:20.800 the opportunity given a discontinuous function in the three month 0:13:20.880 --> 0:13:23.280 T bill? How do you play it? Right? 0:13:23.600 --> 0:13:25.679 I think the answer is you you don't play it. 0:13:26.440 --> 0:13:28.720 There's so much talk right now about getting this extra 0:13:28.760 --> 0:13:31.880 one hundred basis points, but if you think about it 0:13:32.040 --> 0:13:35.480 the downside, if we actually do have a default, which 0:13:35.520 --> 0:13:39.120 we think happens with a five percent probability, one hundred 0:13:39.120 --> 0:13:42.480 basis points is just not good enough upside downside analysis. 0:13:42.720 --> 0:13:45.240 So for us, it's skip the games in the front 0:13:45.360 --> 0:13:47.760 end of the curve and get more into the intermediate 0:13:47.840 --> 0:13:50.680 duration space where you can take advantage of doing the 0:13:50.720 --> 0:13:51.560 right kind of things. 0:13:52.000 --> 0:13:54.280 I mean, what's so important here, lindsay, And this is 0:13:54.280 --> 0:13:57.080 to the elasticity or responsiveness of the belly of the 0:13:57.120 --> 0:14:00.520 curve five to seven years I'll call it as well. Well, then, 0:14:00.559 --> 0:14:02.840 what's the opportunity there? How do you play that? 0:14:04.080 --> 0:14:06.240 I think there are a lot of opportunities and you 0:14:06.280 --> 0:14:08.960 can go kind of any which way you want. So 0:14:09.160 --> 0:14:11.200 if you want to be more conservative, you want to 0:14:11.200 --> 0:14:15.400 stay more investment grade, great opportunities and agency mortgage back securities, 0:14:15.640 --> 0:14:18.680 even commercial mortgage backed securities, if you stay high quality 0:14:19.080 --> 0:14:21.400 on top of the cap structure trip as with a 0:14:21.400 --> 0:14:24.120 lot of credit enhancement, there's good stuff to do in 0:14:24.120 --> 0:14:26.760 an investment grade space, a lot of opportunity there. But 0:14:26.800 --> 0:14:29.480 if you want to seek more risk, go for more yield. 0:14:29.760 --> 0:14:33.120 There are idiosyncratic opportunities in high yield. So you've got 0:14:33.200 --> 0:14:35.560 kind of a diner menu of options in the middle 0:14:35.600 --> 0:14:37.760 of the curve, and you don't have to get stuck 0:14:37.760 --> 0:14:40.320 in this noise or the anxiety that you all were 0:14:40.360 --> 0:14:42.680 speaking of in the very front end of the curve 0:14:43.040 --> 0:14:45.800 that is really hard to play. And the big problem 0:14:45.920 --> 0:14:48.360 is is that if the debt ceiling, if the quick 0:14:48.400 --> 0:14:52.400 solution is prioritization, that's just kicking the problem a couple 0:14:52.800 --> 0:14:55.280 a month, two months down the road, you're going to 0:14:55.280 --> 0:14:57.280 be right back in it. And so if you thought 0:14:57.280 --> 0:14:59.640 you did something cute and you bought T bills two 0:14:59.720 --> 0:15:02.160 months out, well you may now be back at the 0:15:02.280 --> 0:15:04.320 X state before you know it, and it's just not 0:15:04.360 --> 0:15:05.240 a game worth playing. 0:15:06.040 --> 0:15:09.400 Okay. That said, if this, let's say, gets resolved, do 0:15:09.520 --> 0:15:11.520 you then get more risk on do you start to 0:15:11.560 --> 0:15:14.240 get more aggressive in other areas that go beyond just 0:15:14.240 --> 0:15:15.600 simply the idiosyncratic trades? 0:15:17.000 --> 0:15:20.480 So we go back to with your prior catch you're asking, Okay, 0:15:20.440 --> 0:15:23.960 it just gets resolved, what's next? And what's next is 0:15:23.960 --> 0:15:25.960 we go back to what we were concerned about, which 0:15:26.080 --> 0:15:28.400 is we still have the central banks across the globe 0:15:28.400 --> 0:15:30.880 that are trying to fight inflation, and they're parts of 0:15:30.920 --> 0:15:33.760 the globe where we still have double digit inflation. So 0:15:34.040 --> 0:15:37.000 this battle isn't over, and we need to think about 0:15:37.080 --> 0:15:39.560 how does the curve respond. Right now, we all know 0:15:39.640 --> 0:15:41.920 that there's a significant amount of cuts priced in in 0:15:41.960 --> 0:15:43.560 the US, for example, at the end. 0:15:43.440 --> 0:15:43.920 Of the year. 0:15:44.400 --> 0:15:47.480 How does that work out moving forward? And so we 0:15:47.560 --> 0:15:50.240 go back to inflation watch. We get out of debt 0:15:50.280 --> 0:15:52.600 ceiling watch, and we move back to inflation watch and 0:15:52.680 --> 0:15:55.840 figuring out is a recession happening, will it be a 0:15:55.880 --> 0:15:59.200 soft landing? And in that scenario, it still isn't yet 0:15:59.320 --> 0:16:00.360 green light going. 0:16:00.800 --> 0:16:03.280 We've been talking about that Bank of America fund manager survey, 0:16:03.320 --> 0:16:06.120 and one aspect of it was the allocations to bonds 0:16:06.120 --> 0:16:08.120 are the biggest going back to two thousand and nine. 0:16:08.200 --> 0:16:11.320 This is the latest one from May. How much does 0:16:11.360 --> 0:16:13.240 that give you a sense that things are crowded in 0:16:13.240 --> 0:16:16.160 the duration trade? Basically this idea that longer term, there 0:16:16.200 --> 0:16:18.440 is a confidence that we're going to be low inflation, 0:16:18.600 --> 0:16:21.960 low rate kind of you know, trading the same way 0:16:22.000 --> 0:16:23.840 that we were over the past few decades. 0:16:24.960 --> 0:16:27.960 I think what we've got here are some big shifts 0:16:28.320 --> 0:16:31.960 in asset allocation or portfolio allocation. Forever there was a 0:16:31.960 --> 0:16:35.520 discussion of the sixty forty sixty forty is not really working. 0:16:36.280 --> 0:16:38.200 If you have a move to this fifty to fifty 0:16:38.280 --> 0:16:41.440 or even more fixed income, that then tells you that 0:16:41.480 --> 0:16:44.560 these flows make sense and they are stickier than one 0:16:44.600 --> 0:16:47.840 may think. Also, as we've been saying all year, you've 0:16:47.880 --> 0:16:50.560 got income and fixed income, this isn't a place that 0:16:50.600 --> 0:16:53.120 you just park it because you're scared. There's a lot 0:16:53.160 --> 0:16:55.640 to earn here, and so I think that movement into 0:16:55.720 --> 0:16:58.400 fixed income is well founded. I'm obviously biased as a 0:16:58.440 --> 0:17:00.600 fixed income manager, but I think it makes a lot 0:17:00.600 --> 0:17:02.760 of sense now and it didn't make much sense for 0:17:02.760 --> 0:17:03.520 a very long time. 0:17:03.680 --> 0:17:06.320 Do you think the allocations are just generally increasing in 0:17:06.359 --> 0:17:10.440 a structural manner to fixed income and decreasing to equity 0:17:10.480 --> 0:17:11.680 so that it might be more of a fifty to 0:17:11.760 --> 0:17:13.600 fifty kind of new portfolio. 0:17:14.920 --> 0:17:17.480 I think time will tell. I do think it's moving 0:17:17.560 --> 0:17:19.800 in that direction, and I think that direction makes a 0:17:19.840 --> 0:17:20.439 lot of sense. 0:17:21.119 --> 0:17:23.920 Lindsay, go to wrap it up there, Alice Enjoy. You're inside, 0:17:23.920 --> 0:17:25.760 particularly on the debt sating, you know, for once Urction 0:17:25.880 --> 0:17:28.440 having some intelligent conversations Tom on the debt stalend this morning, 0:17:28.640 --> 0:17:30.760 Lindsay rose to the on the bond mal ket. 0:17:34.680 --> 0:17:36.280 Right now in Washington, and we're going to try to 0:17:36.280 --> 0:17:39.399 take a different spin here. Isaac Multanski joins this, director 0:17:39.440 --> 0:17:44.720 of policy research at bt IG. Exquisitely good on the 0:17:45.240 --> 0:17:48.479 distill it of when we're done with this, Isaac, first question, 0:17:49.000 --> 0:17:52.600 the morning after this is fixed, what happens. 0:17:52.400 --> 0:17:54.639 We go on to fight about other things, you know, 0:17:54.720 --> 0:17:57.280 then the morning after then we're going to refocus on 0:17:57.320 --> 0:18:01.600 whatever the next big legislative deadline, and that baby, the 0:18:01.640 --> 0:18:03.960 spending bill at the end of September, maybe the farm dell. 0:18:04.240 --> 0:18:06.800 But when we get this off the table, I think 0:18:06.840 --> 0:18:09.960 the market can go back to worrying about everything else 0:18:10.520 --> 0:18:13.159 because the debt ceiling is so important. 0:18:13.240 --> 0:18:15.800 All right, Look, Isaac, and this goes back, folks, to 0:18:16.320 --> 0:18:19.560 Pete Peterson, the gentleman from Nebraska who called me up, 0:18:19.680 --> 0:18:22.240 is quite elderly at the time, and he and I 0:18:22.320 --> 0:18:26.280 talked about his ageless concern, Isaac, where the former Secretary 0:18:26.320 --> 0:18:30.080 of Commerce made clear he was forever worried about this debt. 0:18:30.119 --> 0:18:35.760 Peterson Foundation publishes that CBO interest expense over the next 0:18:35.800 --> 0:18:38.480 ten years will go from six hundred and forty billion 0:18:39.040 --> 0:18:43.919 to one point four trillion dollars. That's the interest expense. 0:18:44.680 --> 0:18:48.720 Every American knows. That's nuts. Why shouldn't we be concerned 0:18:48.720 --> 0:18:49.240 about this? 0:18:50.760 --> 0:18:54.879 We absolutely should. We absolutely should. But DC hasn't. Is 0:18:55.000 --> 0:18:58.159 an inability to focus on the long term, right. We 0:18:58.240 --> 0:19:02.320 are focused definitionally on short termism. And even when we 0:19:02.400 --> 0:19:06.360 have these discussions regarding the debt ceiling and maybe spending, 0:19:06.560 --> 0:19:10.880 we've already taken off the table talks about addressing long 0:19:10.960 --> 0:19:14.040 term entitlement reform, which as we know, is one of 0:19:14.080 --> 0:19:16.840 the larger drivers of our debt. And so we've also 0:19:17.080 --> 0:19:20.159 taken off the table defense spending and other items. And 0:19:20.200 --> 0:19:23.440 so when you start with so many sacred cows, it's 0:19:23.440 --> 0:19:26.600 impossible to actually get anywhere over the long term. So 0:19:26.640 --> 0:19:30.000 the most we can hope for Tom from these negotiations 0:19:30.440 --> 0:19:32.919 is just not shooting ourselves in the foot with a 0:19:33.080 --> 0:19:36.080 technical default and having to go through the mess of 0:19:36.160 --> 0:19:39.840 prioritization and whatever else may come from not doing the 0:19:39.840 --> 0:19:41.560 basic job of lifting the debt. 0:19:41.359 --> 0:19:43.359 Sealing, Isaac, I'd love you to build on what Wendy 0:19:43.359 --> 0:19:46.320 Schiller was talking about at Brown University earlier this morning 0:19:46.359 --> 0:19:49.920 when she said that in our ultrapolarized world, she expects 0:19:49.920 --> 0:19:52.520 things to sort of be a repeat of twenty eleven 0:19:52.680 --> 0:19:55.560 in a bit, but with a less satisfying legislative solution, 0:19:55.880 --> 0:20:00.359