WEBVTT - Surveillance: Fed Pause with Dudley 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.039 with Jonathan Ferrell and Lisa Brownwitz Jay Lee, we bring 0:00:13.119 --> 0:00:17.119 you insight from the best and economics, financial investment, and 0:00:17.239 --> 0:00:22.400 international relations fine Bloomberg Surveillance on Apple podcast, sun Cloud, 0:00:22.800 --> 0:00:26.280 Bloomberg dot Com, and of course on the Bloomberg Terminal. 0:00:29.360 --> 0:00:31.360 I'm happy to say that joining us now is Bill Dudley, 0:00:31.360 --> 0:00:34.280 the former New York Fed President and currently Bloomberg opinion 0:00:34.320 --> 0:00:36.600 columnists and so much more. Bell great to catch up 0:00:36.600 --> 0:00:38.160 with you, sir. I just want to reflect on something 0:00:38.159 --> 0:00:41.160 we heard about five minutes ago from David Rosenberg pushing 0:00:41.200 --> 0:00:44.600 back against this idea that inflation will be stickier on 0:00:44.640 --> 0:00:46.280 the way down. Bill. I know you listen to some 0:00:46.320 --> 0:00:49.320 of that conversation. What did you make of it? I 0:00:49.400 --> 0:00:51.800 agree with Dade that inflation is going to take a 0:00:51.800 --> 0:00:54.200 longer time to corral, and people think, I mean, people 0:00:54.200 --> 0:00:57.160 are focusing so much on the improvement in goods inflation 0:00:57.240 --> 0:01:00.280 that was well expected as as a time he has 0:01:00.320 --> 0:01:03.080 opened up the composition demand shifted away from goods back 0:01:03.120 --> 0:01:05.600 to services, So of course whose prices are gonna be weaker, 0:01:05.959 --> 0:01:08.800 But services inflation is really high, and the labor market 0:01:08.880 --> 0:01:11.479 is still really tight. We're still having job gains well 0:01:11.520 --> 0:01:15.360 above what's consistent with a loosening labor market. So the 0:01:15.360 --> 0:01:17.039 Fed's got a lot of work to do. I think 0:01:17.080 --> 0:01:19.360 the big thing about what the next you know you're 0:01:19.440 --> 0:01:21.160 is gonna look like it's really it's really in the 0:01:21.160 --> 0:01:24.399 fense control. The FED is going to keep policy tight 0:01:24.480 --> 0:01:26.560 enough for long enough to get inflation back down, and 0:01:27.040 --> 0:01:29.200 you know, the outcome we get for the economy is 0:01:29.200 --> 0:01:32.400 gonna depend on how how much that actually hurts economic growth. 0:01:32.760 --> 0:01:34.280 I think there is gonna be a recession. I think 0:01:34.280 --> 0:01:37.559 it's gonna last quite a while, but it's not gonna 0:01:37.560 --> 0:01:39.720 be a dangerous recession in the sense that the FED 0:01:39.760 --> 0:01:42.520 can relent at any time uh and end that recession, 0:01:42.560 --> 0:01:45.520 which is very unusual compared to past cycles. This is 0:01:45.560 --> 0:01:48.080 not a recession that has been driven by you know, uh, 0:01:48.160 --> 0:01:50.920 financial instability. Is not gonna be a recession driven by 0:01:51.320 --> 0:01:54.440 you know, household and corporate balance sheets being over extended. 0:01:54.760 --> 0:01:57.920 It's a recession that's clearly induced by a tight Monterrey 0:01:57.960 --> 0:02:00.280 policy regime, and so the FAT can end it when 0:02:00.280 --> 0:02:02.320 they think that the time is great. Given the strength 0:02:02.320 --> 0:02:04.480 that we've continue to see in the economy, and Evan 0:02:04.560 --> 0:02:07.880 Brown of UBSS Management was talking about them seeing it 0:02:07.960 --> 0:02:10.720 sustained through the first half of next year. Do you 0:02:10.760 --> 0:02:13.680 think the FED could go even higher than you previously 0:02:13.760 --> 0:02:17.440 thought in terms of a benchmark rate, I'm thinking the 0:02:17.440 --> 0:02:19.120 peak is probably in the five to five and a 0:02:19.120 --> 0:02:21.359 half percent range. Just for what you for the point 0:02:21.360 --> 0:02:23.760 you just made that the news will probably be stronger 0:02:23.800 --> 0:02:25.560 for longer and will be very hard for the FED 0:02:25.639 --> 0:02:28.240 just to stop if we're still, you know, at an 0:02:28.280 --> 0:02:32.080 unemployed rate below four percent and underlying inflation still running 0:02:32.120 --> 0:02:34.760 you four percent or higher. So I think that it 0:02:34.840 --> 0:02:37.760 will get a series of smaller rate hikes, but that 0:02:37.800 --> 0:02:40.720 will probably push us up above above five percent. But 0:02:40.760 --> 0:02:44.079 clearly the feds of strategy here is they're stressing the 0:02:44.160 --> 0:02:47.000 longer rather than the ever higher. So I think once 0:02:47.040 --> 0:02:48.720 we get you know, five and a quarter five and 0:02:48.760 --> 0:02:51.200 a half, I think they'll they'll relent and they'll just 0:02:51.200 --> 0:02:54.760 si sit there and wait for that restrictive Monterrey policy 0:02:54.960 --> 0:02:57.840 to slow the calmy down, generate more slack in the 0:02:57.919 --> 0:03:01.280 layer market, and that will gradually put both wage inflation 0:03:01.400 --> 0:03:04.400 and services price inflation down. This is what FEDE officials 0:03:04.440 --> 0:03:06.640 have been saying, Bill, I mean, this is basically pretty 0:03:06.720 --> 0:03:08.680 much in line with what they're saying. The market is 0:03:08.720 --> 0:03:11.600 not buying it. They are still pricing in rate cuts 0:03:11.600 --> 0:03:13.760 by the end of next year. What does the FED 0:03:13.880 --> 0:03:16.760 have to see to start becoming less restrictive, And I 0:03:16.800 --> 0:03:20.320 don't mean that with respect to keeping rates where they 0:03:20.360 --> 0:03:24.400 I mean actually lowering them in a significant way. Well, 0:03:24.400 --> 0:03:26.120 they have to be highly confident that they're gonna be 0:03:26.160 --> 0:03:28.560 able to achieve their two percent inflation object doesn't mean 0:03:28.560 --> 0:03:30.240 that inflation you have to be at two percent when 0:03:30.280 --> 0:03:32.639 they finally reliant, but they have to be highly confident. 0:03:33.040 --> 0:03:35.920 Highly confidently mean means that they have to see significant 0:03:36.440 --> 0:03:39.560 slack developing in the labor market that brings down wage 0:03:39.560 --> 0:03:43.040 inflation to the three or four percent range. And they 0:03:43.080 --> 0:03:47.360 need to see the inflation pressures be much, uh, you know, 0:03:47.800 --> 0:03:51.680 much less persistent and broad as as they are today. 0:03:51.720 --> 0:03:53.560 So they need to see probably inflation in the sort 0:03:53.600 --> 0:03:56.600 of three percent range headed down, uh. And once they 0:03:56.680 --> 0:03:59.520 once they've accomplished both of those things, then maybe they 0:03:59.520 --> 0:04:01.640 can start to relent. But I think it's gonna take 0:04:01.640 --> 0:04:03.880 away some time because the commie still has a considerable 0:04:03.920 --> 0:04:07.080 for momentum, and it's it's going to be sustained by 0:04:07.240 --> 0:04:09.520 by by the past inflation that we've seen. For example, 0:04:09.640 --> 0:04:11.800 so security recipients are gonna get eight points seven percent 0:04:11.840 --> 0:04:15.840 increase in their checks come January, and they're gonna go 0:04:15.840 --> 0:04:17.520 ahead and spend a bunch of that money, and that's 0:04:17.520 --> 0:04:21.560 gonna keep moving along, and that's gonna make it hard, 0:04:21.600 --> 0:04:24.640 really fit to restrain things. But you wrote yesterday on 0:04:24.720 --> 0:04:27.479 bloom Bag Opinion that the FED shouldn't rate his inflation target. 0:04:27.880 --> 0:04:29.960 He said changing the objective now would be bad for 0:04:30.000 --> 0:04:33.120 the economy and for the central banks and credibility. But 0:04:33.160 --> 0:04:35.000 I did wonder when that will got published. I wondered 0:04:35.000 --> 0:04:37.440 why you wrote it. You've really worried that they might 0:04:37.440 --> 0:04:41.160 actually go through with that next year. Well, I wrote 0:04:41.160 --> 0:04:43.600 it because I'm being asked about it all the time, Uh, 0:04:43.640 --> 0:04:45.640 And so I thought that I should write down what 0:04:45.760 --> 0:04:48.599 I think the ant right answers. You know, the argument 0:04:48.640 --> 0:04:51.719 for raising the inflation target really sort of two potential arguments. 0:04:51.800 --> 0:04:55.200 Number one can't hit too so let's make the objective 0:04:55.279 --> 0:04:57.680 a little bit easier. That's that's obviously not a very 0:04:57.680 --> 0:04:59.920 good argument. The other arguments a little bit better, which is, 0:05:00.279 --> 0:05:02.839 we have a higher inflation target and the peak in 0:05:03.040 --> 0:05:05.120 a short term interest rates during the cycle will be higher, 0:05:05.440 --> 0:05:08.599 more room to ease when when recession hits, and so 0:05:08.640 --> 0:05:10.600 they'll be less risk of being pinned at the zero 0:05:10.720 --> 0:05:13.240 or bound for interest rates. I think that risk, though, 0:05:13.240 --> 0:05:15.920 has diminished considerably because the peak in church and rates 0:05:15.920 --> 0:05:18.200 this cycle is probably gonna be about five percent, So 0:05:18.240 --> 0:05:21.680 the Federal Reserve has plenty of ammunition to cut rates 0:05:21.800 --> 0:05:24.880 uh in environment where there where their inflation target is 0:05:24.880 --> 0:05:26.919 still two percent. So I think this idea that the 0:05:27.040 --> 0:05:30.000 zero or bound continues to be this huge risk. Uh 0:05:30.120 --> 0:05:33.039 And and there's a big constraint on Montrey policy. I 0:05:33.080 --> 0:05:35.960 think that's overstated at this point. But Bill, how concerned 0:05:35.960 --> 0:05:37.960 are you that the Fed will not have the same 0:05:37.960 --> 0:05:40.080 resolve in the middle of next year to keep rates 0:05:40.120 --> 0:05:42.560 where they are if we do see the unemployment rate 0:05:42.600 --> 0:05:47.000 going up but we do see the US entering into recession. Well, 0:05:47.040 --> 0:05:49.200 I think the Committee it will be interesting to see 0:05:49.200 --> 0:05:52.120 whether the Committee is united twelve months from now as 0:05:52.120 --> 0:05:55.120 it is today. I think Chera Paula means what he 0:05:55.160 --> 0:05:56.919 says that he because he wants to behave in a 0:05:56.920 --> 0:05:59.719 way uh, that he's not like Arthur Burns, so he 0:05:59.720 --> 0:06:02.280 doesn't have to be like pauled Loker. But whether you 0:06:02.320 --> 0:06:04.719 can keep the rest of the committee along with him. 0:06:05.040 --> 0:06:07.640 As the unemployer rate goes up and the trade offs 0:06:07.680 --> 0:06:10.760 between the two two objectives of the FED prastability and 0:06:11.160 --> 0:06:14.200 maximum sustainable employment become more in conflict with one another. 0:06:14.480 --> 0:06:16.360 So I think we don't know the answer to that. 0:06:16.760 --> 0:06:18.880 I'm hopeful that power will here in the day. I 0:06:18.920 --> 0:06:21.240 remember when inflation was sub two percent and people were 0:06:21.279 --> 0:06:23.880 talking about raising the inflation target than do you remember 0:06:23.960 --> 0:06:26.400 that you should raise it to three about because then 0:06:26.440 --> 0:06:28.480 there'd be more ambitious and people would believe they're committed 0:06:28.480 --> 0:06:30.799 to getting inflation high. Then they might hit two. Remember 0:06:30.800 --> 0:06:33.280 when they were also talking about free money and of 0:06:33.360 --> 0:06:36.360 modern monetary theory. We did that too crazy times. Bill Dudley, 0:06:36.440 --> 0:06:50.000 thank you. I appreciate it as always alongside Lisa Brabbit's 0:06:50.000 --> 0:06:52.880 Sam Jonathan Pharaoh, together with election of a bm Y 0:06:52.920 --> 0:06:54.360 and Madam. Great to have you with us in a studio. 0:06:54.400 --> 0:06:56.320 And Leah, what is more important the FED speak or 0:06:56.360 --> 0:06:58.400 the data? So so I think it's the data, and 0:06:58.480 --> 0:07:01.240 I think it's precisely the Pabor data, because the FED 0:07:01.320 --> 0:07:04.920 has explicitly targeted the labor market here as inflation has 0:07:04.960 --> 0:07:08.919 remained higher and stickier and not transitory. They've been talking 0:07:08.960 --> 0:07:12.360 about the labor market trying to get rid of job openings, 0:07:12.840 --> 0:07:16.200 the beverage curve, which is the Jolts data, and then 0:07:16.240 --> 0:07:19.040 of course you know the wage data. And I think 0:07:19.080 --> 0:07:22.400 if you don't see softness in either of those two reads, 0:07:22.520 --> 0:07:26.000 it's going to be difficult for them. Are you saying 0:07:26.040 --> 0:07:28.559 that good news is bad news in the labor market data. 0:07:28.920 --> 0:07:30.880 I hate to say that, but we're back to this world. 0:07:31.000 --> 0:07:34.760 I mean we're back to the world where a softer 0:07:35.200 --> 0:07:39.520 real economy will be more pleasing for the FED and 0:07:39.680 --> 0:07:43.080 means that whatever their target is five to five and 0:07:43.160 --> 0:07:45.800 a quarter five to five and a half is still 0:07:46.320 --> 0:07:49.080 the right target. The issue is if you get no 0:07:49.240 --> 0:07:51.600 softness in the labor market, and let's face it, we 0:07:51.680 --> 0:07:53.840 haven't seen any softness in the labor market in the 0:07:53.920 --> 0:07:57.320 aggregate data, then we're going to have to go higher 0:07:57.440 --> 0:08:00.640 because in the end, every FED hiking side goal ends 0:08:01.120 --> 0:08:04.440 when the FED funds rate is above c p I 0:08:04.720 --> 0:08:06.600 and we are not there yet. What are you thinking 0:08:06.640 --> 0:08:08.560 that Fed funds is going so we're going to get 0:08:08.680 --> 0:08:11.240 some real economic projections in the next FED meeting. At 0:08:11.280 --> 0:08:13.600 the last FED meeting where we had an SEP, which 0:08:13.680 --> 0:08:16.200 was back in September, they pushed the twenty three dot 0:08:16.240 --> 0:08:18.120 from three point eight to four point six. I think 0:08:18.160 --> 0:08:20.760 most people, assuming it goes to five is their scope 0:08:20.760 --> 0:08:23.920 for surprise. There there is some scope for it to 0:08:24.000 --> 0:08:26.280 be a little bit higher than that, just because, as 0:08:26.320 --> 0:08:29.800 I've said, the services, the services inflation is not rolling over, 0:08:29.920 --> 0:08:32.480 and the sticky services inflation is not rolling over. So 0:08:32.920 --> 0:08:37.440 while headline is and clearly the goods inflation has peaked 0:08:37.480 --> 0:08:40.480 and coming down hard services has not. And that's six 0:08:41.200 --> 0:08:43.920 c p I so I think there's room to go higher. 0:08:44.000 --> 0:08:46.360 I think as you get higher on FED funds, you're 0:08:46.440 --> 0:08:49.760 going to see a wider dispersion and you're going to 0:08:49.920 --> 0:08:52.959 see some some conversation in the f O m C 0:08:53.080 --> 0:08:54.839 about where we go from here. The I think the 0:08:54.960 --> 0:08:58.440 easy part of the hiking cycle is in a sense 0:08:58.559 --> 0:09:02.000 behind us after this December meeting, and after that you're 0:09:02.040 --> 0:09:05.319 gonna start getting some dissents. What do you think is 0:09:05.360 --> 0:09:07.240 going to be the bigger surprise for markets if we 0:09:07.320 --> 0:09:12.040 get softer than expected jobs prints or stronger, hotter than 0:09:12.120 --> 0:09:15.200 expected jobs prints. So I think the biggest surprise would 0:09:15.200 --> 0:09:17.320 be if we got hotter here. How we were having 0:09:17.800 --> 0:09:22.000 really high um and that number of announcements of of 0:09:22.240 --> 0:09:25.360 layoffs and yet and yet it's not showing up in 0:09:25.440 --> 0:09:27.840 the aggregate data at all. I mean, those those Thursday 0:09:27.880 --> 0:09:30.760 morning new claims data are hitting new lows, are you know, 0:09:30.880 --> 0:09:33.920 barely moving off of off flows. So it's not hitting 0:09:33.960 --> 0:09:35.839 the data yet. So I think if the if the 0:09:35.960 --> 0:09:39.439 numbers were hotter, it would it would be a surprise here. 0:09:40.280 --> 0:09:42.520 People are talking about short and shallow and we've been 0:09:42.520 --> 0:09:45.360 talking about this all morning. What is the consequence of 0:09:45.480 --> 0:09:47.679 this type of recession? How long will it last? We 0:09:47.760 --> 0:09:50.280 were just speaking with Bill Dudley, who agrees with the 0:09:50.360 --> 0:09:54.400 idea of a longer and shallow type of recession. Is 0:09:54.480 --> 0:09:58.520 that an okay scenario for risk assets? So that's a 0:09:58.559 --> 0:10:01.079 great question. And this goes back to the difference between 0:10:01.120 --> 0:10:04.079 the real economy and risk assets. So even in a 0:10:04.240 --> 0:10:07.760 shallow recession, you can still have SMP earnings declines of 0:10:08.880 --> 0:10:10.760 and I'll just point to a two thousand and one 0:10:10.880 --> 0:10:13.400 is a great example of that. Risk assets did not 0:10:13.600 --> 0:10:17.439 do well even with a short and shallow recession, so 0:10:17.880 --> 0:10:19.800 there is still risk here. And in the end, this 0:10:20.000 --> 0:10:24.640 year was about rates and multiple compression and and and 0:10:24.800 --> 0:10:27.880 the correlation between the you know, the bond and equity market, 0:10:28.040 --> 0:10:31.079 you know, the worst being since n one, that this 0:10:31.240 --> 0:10:34.600 is the transition year. Next year is okay, Now your 0:10:34.679 --> 0:10:36.640 rates are higher, what does it mean for the real economy? 0:10:36.840 --> 0:10:39.199 And that's I think we really have not priced in. 0:10:39.640 --> 0:10:41.719 I'm not the only one saying this, but it is 0:10:41.840 --> 0:10:44.839 true that the earnings really are too high and not 0:10:45.320 --> 0:10:51.319 essentially reflecting five basis points of tightening within ten or 0:10:51.360 --> 0:10:53.880 eleven months. I mean, we've never really hyped this fast 0:10:54.120 --> 0:10:56.120 and we haven't seen the effect yet. So that is 0:10:56.200 --> 0:10:58.040 that is down the road and that is short to come. 0:10:58.360 --> 0:11:00.760 Let's talk about leadership. Is it early to talk about 0:11:00.800 --> 0:11:02.959 potential leadership for next year or not? So in a 0:11:03.000 --> 0:11:05.640 funny way, we have started to price in a recession 0:11:05.800 --> 0:11:09.559 around June, then against September, and now we're starting to 0:11:09.679 --> 0:11:14.240 price in a recovery. We haven't even gotten to the recession. 0:11:14.679 --> 0:11:18.640 We haven't even gotten to realistic earnings numbers. So I 0:11:18.960 --> 0:11:20.960 don't think it's too early yet. I mean, there are 0:11:21.160 --> 0:11:24.400 certain sectors, there are certain companies that are just beaten 0:11:24.480 --> 0:11:27.520 down and left for dead, okay, And and that is 0:11:27.600 --> 0:11:29.920 where you can go shopping for for your stock. Like, 0:11:30.040 --> 0:11:32.160 we think the bond market is going to look much 0:11:32.200 --> 0:11:34.760 better next year simply because all the work was done 0:11:34.840 --> 0:11:37.120 this year. And historically, if you look at the ten 0:11:37.200 --> 0:11:39.559 worst starts to the year in the bond market, you 0:11:39.640 --> 0:11:41.760 have a positive year the following year. And it makes 0:11:41.800 --> 0:11:43.640 sense if you think about it. I mean, it's related 0:11:43.679 --> 0:11:46.839 to the rolling over and the and the inversion of 0:11:46.840 --> 0:11:49.240 the yell curve which you mentioned the two thousands. Some 0:11:49.320 --> 0:11:51.000 of those names were left for dead for a long 0:11:51.040 --> 0:11:53.640 long time. Can you help me understand what should be 0:11:53.760 --> 0:11:56.400 left for dead for a long long time? So speculations 0:11:56.400 --> 0:11:59.199 should be left for dead, right, So anything where it's 0:11:59.600 --> 0:12:03.360 multiple of revenue or you know that no earnings, that 0:12:03.520 --> 0:12:06.679 that will be left for dead probably forever. And I 0:12:06.720 --> 0:12:09.800 would suggest there'll be some consolidation in those areas, but 0:12:09.880 --> 0:12:12.160 that's not something to look forward to because there's many 0:12:12.240 --> 0:12:14.600 of these assets still have a ways to go. We're 0:12:14.640 --> 0:12:17.160 not there yet. Left for dead is when you're down 0:12:18.480 --> 0:12:21.480 from the peak. So if you're in a speculative asset 0:12:21.600 --> 0:12:24.839 or a speculative name and you're hoping for you know 0:12:25.240 --> 0:12:27.480 that it's going to you know, the market will stabilize 0:12:27.520 --> 0:12:30.120 one day, you actually still probably have to go on 0:12:30.160 --> 0:12:33.679 the downside. Here, what percent of the overall market cap 0:12:33.760 --> 0:12:38.320 of the SMP is that speculative sort of quadrant that's 0:12:38.360 --> 0:12:40.520 going to be left for dead? I don't like so 0:12:40.679 --> 0:12:44.199 I'd say, my I think it's about it's about ten percent. Here, 0:12:44.440 --> 0:12:46.959 it's about ten percent. I think that some of the 0:12:47.000 --> 0:12:50.080 biggest risk we've talked about this is the large cap 0:12:50.200 --> 0:12:53.360 names which are still trading at higher multiples. You know, 0:12:53.480 --> 0:12:55.600 in the end, when you get a multiple compression year 0:12:56.080 --> 0:12:58.760 and you get the ends of of the of the 0:12:58.960 --> 0:13:02.360 you know, exuberant on the valuation side, you have to 0:13:02.440 --> 0:13:05.840 bring value investors back into invest in these growth names. 0:13:05.880 --> 0:13:08.360 And some of our favorite growth names are still trading 0:13:08.360 --> 0:13:11.559 at pretty high multiples UM. And so the top the 0:13:11.679 --> 0:13:14.720 top of the market still has risk. Here you can 0:13:14.840 --> 0:13:17.520 see it and how how the overall market and the 0:13:17.600 --> 0:13:21.120 aggregate has has has traded. The Dow versus the nasdack, 0:13:21.440 --> 0:13:24.280 the Dow versus the SMP, and the SMP is overly weighted. 0:13:24.600 --> 0:13:28.079 Top ten names twenty nine of the index a lot 0:13:28.160 --> 0:13:31.120 of those names are still not cheap, and they're still expensive. 0:13:31.240 --> 0:13:33.520 I think Tom Peter to talk about the talk about 0:13:35.040 --> 0:13:38.439 but it's it does make sense though, Uh it does. 0:13:38.720 --> 0:13:40.520 I think that I think that it is a good 0:13:40.640 --> 0:13:43.800 point going forward. Then do you think that the potential 0:13:43.880 --> 0:13:46.760 for contagion is off the table considering that we still 0:13:46.840 --> 0:13:50.079 have potentially more wash out to go here? So I 0:13:50.160 --> 0:13:54.080 think there's still a risk of sovereign debt issues in Europe. 0:13:54.200 --> 0:13:56.760 I think we are not through this winter. We are 0:13:56.880 --> 0:13:59.360 not through the nat gas problem of this winter, and 0:13:59.400 --> 0:14:02.880 then after this winter there's a summer and another winter, 0:14:03.640 --> 0:14:07.079 and I think the markets very shortsighted in piecing this 0:14:07.280 --> 0:14:09.559 through and who's going to be paying for this and 0:14:09.679 --> 0:14:12.400 how it's going to be funded that these are not 0:14:12.600 --> 0:14:14.679 easy questions. And I think this is kind of an 0:14:14.720 --> 0:14:17.120 issue that's been left for dead because it's been a 0:14:17.520 --> 0:14:20.800 warmer than expected autumn in Europe and so the reserves 0:14:20.840 --> 0:14:23.640 are high. But again that's a one winter story. We 0:14:23.720 --> 0:14:26.200 don't have a plan yet moving forward, so I think 0:14:26.240 --> 0:14:28.960 there is some risk there. I think the contagion risk 0:14:29.120 --> 0:14:31.760 is lower, but not dead yet. I think that the 0:14:31.840 --> 0:14:36.600 bitcoin blow up is likely to be contained there clearly 0:14:36.720 --> 0:14:39.040 with some counterparty risk, but I don't think it was 0:14:39.080 --> 0:14:42.160 a big enough asset for it to have huge reverberation. 0:14:42.200 --> 0:14:43.800 I agree with you in Europe, have you got to 0:14:43.840 --> 0:14:46.280 think about why the reserves are where they are? Not stream, 0:14:47.040 --> 0:14:48.680 We're going to have the same ability to build up 0:14:48.680 --> 0:14:52.120 those reserves through next summer. Doesn't seem so, doesn't seem 0:14:52.160 --> 0:14:54.440 so right now? What do you do? Also in an 0:14:54.520 --> 0:14:57.840 economy where the inflation is coming from something completely out 0:14:57.880 --> 0:15:01.720 of control of central banks and even a policymakers because 0:15:01.720 --> 0:15:04.600 it's being it's getting difficult for them to source enough 0:15:04.680 --> 0:15:08.440 natural gas from enough places over the longer term with 0:15:09.120 --> 0:15:12.080 contracts that aren't necessarily ten or twenty years. They worry 0:15:12.080 --> 0:15:14.800 about expectations, They worry about a second round of effects 0:15:14.880 --> 0:15:19.720 of inflation, going into wage negotiations, those kind of things. 0:15:19.840 --> 0:15:21.520 That's a tough spot for the Europeans. It will be 0:15:21.600 --> 0:15:23.560 next year as well, based on where people think the 0:15:23.680 --> 0:15:26.560 energy market's going. Have people priced out some of that 0:15:26.720 --> 0:15:30.160 bear case though? For Europe? Based so much traded I 0:15:30.200 --> 0:15:35.600 mean how much around look, I mean the most you know, 0:15:35.720 --> 0:15:39.400 the most exposed asset over the last decade has rallied enormously. 0:15:39.560 --> 0:15:42.520 So you know, risk assets are back on and the 0:15:42.840 --> 0:15:46.360 the the recovery is getting priced in, and the question 0:15:46.600 --> 0:15:50.520 is is this a bear trap? Right? Is this too early? Um? 0:15:50.880 --> 0:15:53.520 Everybody likes picking the bottom and everybody thinks they have 0:15:53.720 --> 0:15:57.240 the turn. I just think that the net gas, the funding, 0:15:57.360 --> 0:16:00.240 the sovereign debt issue all related in Europe is not 0:16:00.440 --> 0:16:02.480 over yet. And the wage issue, as you point out, 0:16:02.520 --> 0:16:04.000 we have a wage issue here. Let's talk about the 0:16:04.040 --> 0:16:07.960 reil strike. Okay, really quiet? Well, if if if rail 0:16:08.000 --> 0:16:11.240 workers were really concerned about a deepening recession, they probably 0:16:11.280 --> 0:16:13.880 wouldn't be fighting for higher wages the West Coast. Next, 0:16:14.560 --> 0:16:17.200 That's what I'd be asking. The sports negotiations, did they 0:16:17.280 --> 0:16:19.720 break down? I wonder if you're interested in a five 0:16:19.800 --> 0:16:22.240 part dollar bond sale from Amazon at Licia, I wonder 0:16:22.240 --> 0:16:24.440 if that gets your cut? And that headline just crossing 0:16:24.480 --> 0:16:26.680 the Bloomberg Team USA? Did they get it done? Later? 0:16:27.360 --> 0:16:31.000 Did they get it done? Team USA? Such an exciting game? Yes, 0:16:31.160 --> 0:16:34.960 there we go a white man and that's conviction. She's 0:16:34.960 --> 0:16:37.480 fired up, so excited. I'm gonna yes, I'm going to 0:16:37.560 --> 0:16:43.360 say yes to joining US NAN. Please to say, is 0:16:43.360 --> 0:16:46.360 Evan Brown had a multi asset strategy at Upssset Management 0:16:46.400 --> 0:16:48.400 even always fantastic to catch up with you and the team. 0:16:48.640 --> 0:16:51.000 Let's just start with the core theme for you guys, 0:16:51.240 --> 0:16:52.840 which is that you think investors are going to be 0:16:52.840 --> 0:16:55.880 surprised by how resilient this US economy will continue to be, 0:16:56.720 --> 0:16:59.400 perhaps deep into three even you can you walk us 0:16:59.440 --> 0:17:01.680 through the y and for how long you think we 0:17:01.760 --> 0:17:07.640 might be surprised? Yeah, so, I I think the For one, 0:17:08.119 --> 0:17:10.560 we're in an environment where you still have a lot 0:17:10.600 --> 0:17:14.359 of excess savings on household balanties in aggregate, so we 0:17:14.480 --> 0:17:18.240 know that those excess savings are are dwindling somewhat for 0:17:18.680 --> 0:17:21.480 some of the lower earners, but the biggest spenders in 0:17:21.520 --> 0:17:24.200 the economy are higher earners. We still have a very 0:17:24.359 --> 0:17:28.520 tight labor market for those lower earners, lower income earners 0:17:29.000 --> 0:17:32.120 um plus. And I think this is a very big deal. 0:17:32.680 --> 0:17:35.080 A big decline in gasoline prices that's going to be 0:17:35.520 --> 0:17:38.320 a big support for the U. S consumer. You've got 0:17:38.440 --> 0:17:41.800 a Social Security adjustment, costs of living adjustment that's gonna 0:17:42.320 --> 0:17:47.520 effectively boost incomes. The States have a lot of excess 0:17:47.560 --> 0:17:52.119 savings themselves, and there's direct support for consumers coming coming 0:17:52.320 --> 0:17:54.920 through there. So, so what we're talking about is a 0:17:54.960 --> 0:17:58.400 reasonably healthy economy despite all the rate hikes that we've 0:17:58.400 --> 0:18:04.040 seen today. Can you beat a stands constructive on ann X? Yeah, 0:18:04.040 --> 0:18:07.439 I mean I think as inflation comes down, that's going 0:18:07.520 --> 0:18:10.879 to weigh somewhat on on earnings. But I think a 0:18:10.960 --> 0:18:13.240 lot of that is known, right, A lot of that 0:18:13.440 --> 0:18:17.360 even if you haven't seen analyst expectations come down as much. 0:18:17.840 --> 0:18:22.320 Everyone's talking about recession, everyone's talking about earnings coming down, 0:18:22.920 --> 0:18:26.760 and so the surprise is that they hang in there. Right. 0:18:26.800 --> 0:18:29.680 We're not talking about a boom in earnings. They're definitely 0:18:29.760 --> 0:18:33.160 coming down, but we are talking about them just I'm 0:18:33.240 --> 0:18:36.560 hanging in and at this point that's probably enough. Do 0:18:36.640 --> 0:18:39.719 you think we could see the outcome fore flipped from 0:18:39.800 --> 0:18:42.160 what people are expecting, which is a good first half 0:18:42.240 --> 0:18:46.280 and a really bad second half. It could be because 0:18:46.359 --> 0:18:50.440 I do think that the the tightness of the labor 0:18:50.520 --> 0:18:53.640 market can continue, and that's going to keep the Fed 0:18:54.119 --> 0:18:56.320 on edge. There's a lot of narrative right now that, Okay, 0:18:56.359 --> 0:19:00.040 the Fed's gonna do another fifty basis point basis and 0:19:00.160 --> 0:19:03.399 hYP and more or less be be done. But if 0:19:03.440 --> 0:19:06.479 the labor market is staying tight, then there's a bias 0:19:06.600 --> 0:19:09.760 that the FED has to you know, kind of extend 0:19:09.880 --> 0:19:13.160 to do a more a few more basis point. Can 0:19:13.240 --> 0:19:15.720 we get to a five and a half six percent 0:19:16.200 --> 0:19:20.720 expected terminal rate? I think we can, and ultimately, you know, 0:19:20.960 --> 0:19:23.160 that can be the thing that makes the economy crack 0:19:23.520 --> 0:19:25.760 down the road. But it's too early to trade that 0:19:26.359 --> 0:19:28.840 right now. What does that mean in terms of the 0:19:28.920 --> 0:19:31.600 bond trade? Given that so many people hid out in 0:19:31.640 --> 0:19:33.720 the long end, does that mean that that could be 0:19:33.920 --> 0:19:36.359 fine for now and we could see that work for 0:19:36.400 --> 0:19:38.600 another couple of months, But if we go to a 0:19:38.760 --> 0:19:42.560 five to six percent benchmark FED funds rate, all of 0:19:42.600 --> 0:19:45.880 a sudden that trade gets blown up. Yeah. I think 0:19:45.920 --> 0:19:47.760 that's I think that's right. I mean, I do think 0:19:47.760 --> 0:19:50.600 a lot of the bond rally is a result of 0:19:51.480 --> 0:19:54.840 people kind of short covering. Everyone's been short bonds for 0:19:54.880 --> 0:19:57.200 a long time. Uh. And I think a lot of 0:19:57.280 --> 0:19:59.880 it too, has been the round trip that we've seen 0:20:00.040 --> 0:20:03.800 from from the UK transitioning from fiscal stimulus coming from 0:20:03.800 --> 0:20:07.359 the Trust administration to now SUNAC and fiscal austerity. So 0:20:07.440 --> 0:20:11.800 that's putting downward pressure globally on on yields. But all 0:20:11.800 --> 0:20:14.119 of that is kind of played out and now and 0:20:14.200 --> 0:20:16.840 now we get to the point where you know, growth 0:20:16.960 --> 0:20:20.199 is okay, inflation is sticky, fed might be doing more 0:20:20.280 --> 0:20:22.680 than people expect. And then right out there you have 0:20:22.760 --> 0:20:25.760 the Bank of the Japan right which which at some 0:20:25.960 --> 0:20:28.239