Speaker 1: Let's get to Peter Cheer, head of macro strategy at
Speaker 1: Academy Securities. So Peter, thanks very much for joining us
Speaker 1: for this half hour leading up to our interview with
Speaker 1: David Melpass. So it should be good, well, inflation, I
Speaker 1: wouldn't say it's exactly peaking, but it's in the process
Speaker 1: of peaking, that's what it feels like. But the Fed
Speaker 1: doesn't seem to be ready to be patient to see
Speaker 1: what the effects of the rate hikes that they've already
Speaker 1: made will be. So we're still expecting something aggressive. You
Speaker 1: probably heard me say your Danny expects a hundred, the
Speaker 1: market expects seventy five year thoughts on that. I think
Speaker 1: we probably get seventy five. But I do think the
Speaker 1: set is kind of pushing on making a mistake because
Speaker 1: even you look at last week's CPI data was kind
Speaker 1: of royal markets. A big part of it was the
Speaker 1: housing inflation was point seven and that's based on owners
Speaker 1: equivalent rent, and I think there's just a massive lag
Speaker 1: effect when you look at any sort of contemparative contemporaneous
Speaker 1: data on the housing market. It is softening. Here mortgage
Speaker 1: rates are about six percent, so I think they risk
Speaker 1: pushing this and no matter what they do, I think
Speaker 1: they have to send a message that they want to
Speaker 1: give some time to see how markets are going to
Speaker 1: be impact from what's already been done, and that they
Speaker 1: remained data dependent. If he comes across as aggressive as
Speaker 1: he was at Jackson Hall, markets are going to be
Speaker 1: in some severe trouble. Tell me something here, Peter, I mean,
Speaker 1: ultimately is this you know? I think it was Daddy
Speaker 1: Blancheut from Duman University as a professor talking about how
Speaker 1: the FED is actually raising rates at a time when
Speaker 1: he sees inflation dissipating, accused the FED of actually then
Speaker 1: perhaps going in essentially pushing the U S economy into
Speaker 1: a deep, deep dive and saying that they were really
Speaker 1: victims of group think. Yeah, I would say along those lines.
Speaker 1: You know, there's a reason traders have stop losses, right,
Speaker 1: if you make a bad decision, you want to get
Speaker 1: stopped out. And I think if you look back, it
Speaker 1: was pretty clear we probably should have ended QUE last summer.
Speaker 1: And when they were giving reasons for keeping QUE last
Speaker 1: summers about bondmarket liquidity, etcetera. And yet bondmarket liquidity, especially
Speaker 1: in the treasury market, was better last summer than it
Speaker 1: is now. I think they miss transitory and are now
Speaker 1: making up for that. And two wrongs do not make
Speaker 1: a right. So I think we're supposed to be, as
Speaker 1: you know, Danny says, let's be a little bit cautious here,
Speaker 1: let's see how things play out. And I think we're
Speaker 1: going to find that the politicians and mainstream media are
Speaker 1: going to realize that job losses and a recession are
Speaker 1: far worse than a bit of inflation. But Peter, the
Speaker 1: FED is looking at housing market that I mean, these
Speaker 1: rents are not going to come down anytime soon, probably
Speaker 1: because I mean it's part of the nature of things.
Speaker 1: Rates are high, so nobody's buying now, and so you
Speaker 1: know people will rent and there's demand, and so the
Speaker 1: rents are going to stay high. And that's a third
Speaker 1: of CPR, So it's gonna take some time. One there's
Speaker 1: a lag effect on how they calculate the rental equivalent.
Speaker 1: They basically, I think, take about one tenth of the homes.
Speaker 1: So I they heavily understated the inflation that we're seeing
Speaker 1: on the rent a year ago, but now they're going
Speaker 1: to be overstating that for a period to come pet
Speaker 1: we're just talking about about the fet just conclude on
Speaker 1: that subject essentially by asking you whether j Pale has
Speaker 1: turned and heaven for saying this taint turned tend Pool
Speaker 1: Volca just at the wrong moment. Well, I think Jackson
Speaker 1: Hole gave him the opportunity to sound very very hockeysh
Speaker 1: there were no Q and A, there was nothing he
Speaker 1: had to respond to. I think it's gonna be a
Speaker 1: little bit more difficult, given where yields are, what we're
Speaker 1: seeing in some of the economic data and even stocks
Speaker 1: for him to sound quite as hockey. I expect he'll
Speaker 1: kind of come across a little bit doubbish here, and
Speaker 1: they're not massively but just enough to spur a little
Speaker 1: bit of a relief rally. And the other thing I'm
Speaker 1: looking for him to talk about is quantitative tightening and
Speaker 1: if they can do something to address the market's concern
Speaker 1: about needing to sell mortgage backed securities. That's been a
Speaker 1: big part of the rise in mortgage yields, which is
Speaker 1: really hit housing. So look for him maybe to say
Speaker 1: something about that where maybe quantitative tightening switches a little
Speaker 1: bit more to the treasury side of things rather than
Speaker 1: the mortgage side. It feels like we do have some
Speaker 1: residual strength in the US economy, and I'm curious how
Speaker 1: we can measure the slow down. The slowdown in housing
Speaker 1: for instance, is it prices falling, is it the number
Speaker 1: of transactions dropping general activity? Is it rents? And then
Speaker 1: when you look at the economy, it seems like both
Speaker 1: consumers and companies their balance sheets are looking okay. So
Speaker 1: I'd agree that consumers and companies the balance sheets look okay. Um,
Speaker 1: particularly investment grade companies. I'm fine with that. You look
Speaker 1: at some of the retail spending numbers, though they were
Speaker 1: okay but not great. You saw some and what's concerning
Speaker 1: me is on the retail sales, you also saw it
Speaker 1: in the jobs numbers. You're starting to see revisions to
Speaker 1: pass data. So maybe it was too optimistic and I'm
Speaker 1: stuck in this is we're really trying to figure out, Okay,
Speaker 1: where's the ball going to be? Where should we be
Speaker 1: moving to, not where we're at. And you start looking
Speaker 1: at mortgage rates, what you're seeing in the housing data,
Speaker 1: what you're seeing in terms of um confidence, whether it's builders,
Speaker 1: you look at the inventory overhangs, you start looking at
Speaker 1: the Baltic dry shipping. Things to me that are better
Speaker 1: leading indicators have all rolled over a little bit. So
Speaker 1: I think you're gonna see the So you'd rather see
Speaker 1: I mean, let's let's put it this way. You just
Speaker 1: much rather see a little patience from the Fed. That's
Speaker 1: your basic point. Yes, I think I'm really concerned. They've
Speaker 1: already gone too far, and let's not push it even further.
Speaker 1: Let's see where this things plays out. And look at housing, right,
Speaker 1: the cost of carry was negligible, inventorious, cost of carry
Speaker 1: was minimal. All those now have real cost of carry.
Speaker 1: Let's see how this goes out. Let's see how the
Speaker 1: winter plays out in Europe, because that could be a
Speaker 1: disaster economically as well. So rather than pushing this too far,
Speaker 1: let's say we've done a lot. We're going to not pause,
Speaker 1: but we're gonna be very very data dependent, and we
Speaker 1: want to see where this is playing out. And I
Speaker 1: think that's necessary to keep the economy on pace. But
Speaker 1: as the strength of the dollar been hinders or help
Speaker 1: for the US of con me you know, I think
Speaker 1: it's been good in respect that it's been driving down
Speaker 1: commodity prices since most of those trade in dollars, but
Speaker 1: I think it's going to be tough for companies who
Speaker 1: have to translate earnings back to dollars. So right now,
Speaker 1: I would say it started the summer as being good
Speaker 1: because it helped push inflation pressions down. Right now, it's
Speaker 1: about neutral. If it continues, I think people are going
Speaker 1: to be really worried about US earnings because we've moved
Speaker 1: so far in certain directions, particularly with the dollar, but
Speaker 1: also with a pretty broad sell off in equities. So
Speaker 1: if you look at the equal weight e t F
Speaker 1: for the SNP, those valuations are not high at all.
Speaker 1: Those those stocks have suffered a lot. I mean, really, um,
Speaker 1: you wonder whether or not if the FED pauses, or
Speaker 1: if it does fifty instead of seventy instead of fifty,
Speaker 1: whether or not it's just kind of unleashes revenge reversals.
Speaker 1: So what are you thinking about in that area. I'm
Speaker 1: less concerned about how much they hike and more about
Speaker 1: the messaging. And I think that the messaging is that
Speaker 1: we get a pause. I think we get a very
Speaker 1: nice relief. Rally, what I'm seeing it's we switch from
Speaker 1: over brought to oversoul that record pace two weeks ago,
Speaker 1: we felt overbought and now we feel all oversould. So yes,
Speaker 1: I think that could raise a really nice rally. But
Speaker 1: then I think we're gonna have to sit back and
Speaker 1: say what are earning is gonna look like? Where is
Speaker 1: cash flow coming from? And I keep looking at crypto.
Speaker 1: I think we get a short term bounce in crypto,
Speaker 1: but if that falls off, I think it's going to
Speaker 1: be a symbol that all these very aggressive assets that
Speaker 1: rose from almost nothing too really high could continue to
Speaker 1: go down. And yes they're down, but many are still
Speaker 1: up fift or from two years ago, so I think
Speaker 1: there's more room to fall. And if we are headed
Speaker 1: towards a nominal recession in the US, not just a
Speaker 1: real recession, but a nominal recession, which I think is
Speaker 1: a real possibility, no pun intended, we will see further
Speaker 1: pain in equity markets while yields fall. So we have
Speaker 1: not yet seen a really good risk off type moment
Speaker 1: where yields go much lower and equities fall, And I
Speaker 1: think that's going to be the final capitulation. I think
Speaker 1: we get that sometime eight to this fall. Peter, what
Speaker 1: is the deal in your view of quantitative tightening and
Speaker 1: how is it playing out with regards to liquidity in
Speaker 1: the economy itself. So I find it easier to think
Speaker 1: about quantity of easing easing first and to me, quantity
Speaker 1: of easing pushed people out the risk spectrum. So when
Speaker 1: the FED came in and bought treasuries, whether it's ten year,
Speaker 1: twenty year, or thirty year, whether they bought mortgages, it
Speaker 1: made people along the curve have three decisions. You could
Speaker 1: either take on more duration, you could take on more
Speaker 1: credit risk, or you could take on less liquid assets.
Speaker 1: And I think that pushed everyone out. And I use
Speaker 1: this example. It's called Newton's cradle, but I don't know
Speaker 1: if you've ever seen those little things that have six
Speaker 1: balls hanging on strings, and even with the one ball,
Speaker 1: it hits the first one and it's the last one
Speaker 1: that moves out. So I think that's what we saw
Speaker 1: when they were doing quantitative easing. That risk got pushed out,
Speaker 1: and you saw the cryptocurrencies of the world. You saw
Speaker 1: the arch type stops of the world really just skyrocket
Speaker 1: because there was no more risky asset for people to
Speaker 1: invest in. So that creates the opportunity. I think quantitative tightening,
Speaker 1: you're going to see the opposite, and you're gonna see
Speaker 1: people be able to move down the risk spectrum take
Speaker 1: less risk for the same returns. I don't think it's
Speaker 1: going to be quite as dramatic because one thing to
Speaker 1: remember is the set was buying ten year treasuries, thirty
Speaker 1: year treasuries, laundated mortgage backed securities. By and large, they
Speaker 1: are going to allow things to mature, so you're not
Speaker 1: going to have that duration impact, So it's not going
Speaker 1: to be quite as dramatic. But I think you're gonna
Speaker 1: see on the fifteenth of the month and the thirty
Speaker 1: month or the end of the month, because that's when
Speaker 1: treasury is mature, you'll see pressure on markets as people
Speaker 1: have to deal with that lack of liquidity. So there's
Speaker 1: still pressure on the stock market. But does the bond
Speaker 1: market look fairly well supported here with a two year
Speaker 1: yield really pushing fo Yeah, I think it's very well supported.
Speaker 1: I really think you want to own yields here. Even
Speaker 1: if the economy stabilizes, we do well and more and more.
Speaker 1: I'm looking for that big risk off move, so I
Speaker 1: do want to own treasuries. YEA. Looking at the treasury
Speaker 1: market itself, and you know, do you think it's bottomed yet.
Speaker 1: I think it's very close. And you know, we're talking
Speaker 1: and we've seen people talk about say ten percent return
Speaker 1: for the long bone of people. Well, that seems aggressive
Speaker 1: in the next month or two. But if you look
Speaker 1: at the current US long bone, the thirty year, it
Speaker 1: was issued around ninety eight cents on the dollars trading
Speaker 1: at ninety one and less than a month and a half.
Speaker 1: So that sort of potential return is there. And I
Speaker 1: think the upside is much better in the rates market
Speaker 1: right now than the downside. So yes, I want to
Speaker 1: own that. All right, Peter, we will close it. There
Speaker 1: are interesting discussion. Thanks very much for joining us here.
Speaker 1: Peter cheer, and of macro Strategy at Academy Security said