Speaker 1: This is the Bloomberg Surveillance Podcast.
Speaker 2: I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz.
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Speaker 3: Laurie Cavasena joins us now at a US equity strategy
Speaker 3: at RBC Capital Markets. Lurie, wonderful to start the week with.
Speaker 3: You were just reading a note from Barclay's and they
Speaker 3: said this, we don't see the tech centric rally broadening
Speaker 3: to the rest of the s and P five hundred.
Speaker 3: We've got bank earnings on Friday. Do you see that
Speaker 3: rally broadening out?
Speaker 4: Well, thanks for having me as always, and look, I
Speaker 4: think this market wants to broaden out. We've seen the
Speaker 4: small cap part of the market make several attempts to
Speaker 4: fight back.
Speaker 5: We have looked at.
Speaker 4: Financials earning provisions as well, in particular, and we're seeing
Speaker 4: that they're generally negative. Carecord been getting a little bit
Speaker 4: less negative, same thing on energy.
Speaker 5: When we look across the S and P, most sectors.
Speaker 4: Are in recovery mode in terms of earning sentiment, which
Speaker 4: means their rate of upward revisions has either flipped from
Speaker 4: negative to positive or they are starting to get less negative.
Speaker 5: So I think this is a market that has really done.
Speaker 4: Well in the backs of the tech sector of kind
Speaker 4: of the broader timt face so far this year for
Speaker 4: good reasons. But I do think that, especially from the
Speaker 4: earning's perspective, there are some healthy undercurrents going on in
Speaker 4: other parts of the market as well.
Speaker 1: Laurie, I'm looking over the weekend.
Speaker 2: I thought there's a lot of really good equity zeitgeist
Speaker 2: as we get ready for the Roulette Wheels starting Friday
Speaker 2: with JP Morgan. And the answer I see is a
Speaker 2: massive strategy strategist bet that's pretty darn negative. Is that
Speaker 2: what you observe out there? There's a pretty gloomy strategist
Speaker 2: tone forward.
Speaker 4: I think so, And you know we've talked about this before.
Speaker 4: My target is forty two to fifty on the S
Speaker 4: and P. I've pointed to potential to upside the forty
Speaker 4: four hundred and forty six hundred three of our models
Speaker 4: are verret three of our models are bullets. The forty
Speaker 4: two to fifty is is splitting the difference. But even
Speaker 4: in that context, Tom and I tell people, you know,
Speaker 4: I personally feel pretty neutral. I don't feel like the
Speaker 4: market's been crazy. I do see the potential for someome upside,
Speaker 4: but this is a December thirty first game, so any
Speaker 4: incremental upside you might get some.
Speaker 5: Profit taking all of that.
Speaker 4: Tom, people keep telling me I'm one of the big
Speaker 4: bulls out there on the street, and I just kind
Speaker 4: of laugh. But I think the reality is that there's
Speaker 4: been this view that the earnings expectations are too.
Speaker 5: High, need to calm down the comble markets. I don't
Speaker 5: you know. We could walk through that later.
Speaker 4: But I think that you know interprets how stock prices, discounts,
Speaker 4: stuff like that in advance, and did it last year.
Speaker 4: But I also think that this is a unique moment
Speaker 4: in history, and so if we do have a recession,
Speaker 4: I think we were all talking about it last year.
Speaker 4: Is technical in nature. I do think the market has
Speaker 4: the ability to focus on the bigger picture and might
Speaker 4: not be as damaged by that as some assume.
Speaker 2: Give us two attributes when you screen for quality in
Speaker 2: mid cap small cap I get it. I can screen
Speaker 2: for quality in the world of Apple, But how do
Speaker 2: you screen for quality in mid caps?
Speaker 4: I think it gets supper when you get down into
Speaker 4: the small MidCap space. One thing we talked to a
Speaker 4: lot of clients about is healthcare and technology.
Speaker 5: That's where a lot of your.
Speaker 4: Loss makers are sitting in the rustle two thousands. So
Speaker 4: if you were to screen in small caps, say on
Speaker 4: positive negative earners, things like that, are we especially on
Speaker 4: about positive negative earners, You're going to come away with
Speaker 4: the idea that technology is a low quality sector, that
Speaker 4: healthcare is a low quality sector. Sometimes, you know, we
Speaker 4: see that. Investors are like, Okay, fine, that's just what
Speaker 4: the data is. We like these factors over time, let's
Speaker 4: just let that work in the filter. But right now,
Speaker 4: there's a more nuanced discussion happening in the small cap space,
Speaker 4: which is that if we're going to have sort of
Speaker 4: a subpar economic recovery next year, the DDP stats and
Speaker 4: even for twenty twenty five are both comfortably below two percent,
Speaker 4: which is the long term trend and a subpar economic backdrop,
Speaker 4: you want to buy growth stocks. So people are having
Speaker 4: to look at things like tech and biotech and healthcare
Speaker 4: and say, okay, our losses is that necessarily low quality?
Speaker 4: Not necessarily You really have to do it more from
Speaker 4: an art than science perspective, take into account the data,
Speaker 4: but also taken to the long term, long term growth dynamics,
Speaker 4: Lori out of management team.
Speaker 5: It's something else you have to look at in small
Speaker 5: cap as well.
Speaker 6: Laurie, how much do you push back against people who
Speaker 6: say that stocks are just ignoring this feeling in bonds
Speaker 6: that perhaps we're underpricing the risk. The fit has to
Speaker 6: go a lot further, that the real neutral rate is
Speaker 6: significantly higher, and as you can see the real yield
Speaker 6: go higher, you're not seeing that commensurate sell off even
Speaker 6: in small pats. How do you rebut that?
Speaker 4: So it's interesting, Lisa, and sort of my late June
Speaker 4: early July conversations with US based investors, they keep asking
Speaker 4: me about balance sheets, and I think that's really where
Speaker 4: the interest rate discussion intersects with the ability of companies.
Speaker 5: To manage through this higher rate environment.
Speaker 4: And we talk to people about how I think only
Speaker 4: two percent of SMP companies have an effected or have
Speaker 4: an average weighted maturity of under two years and the
Speaker 4: rustle two thousand even it's less than ten percent. So
Speaker 4: we have a lot of other metrics we take people through. Right, so,
Speaker 4: long term debt has risen, short term debt has come down.
Speaker 4: What does six versus variable look like? And what we
Speaker 4: come away with is the idea that a higher interest
Speaker 4: rate isn't as damaging to companies and their balance sheets
Speaker 4: and their ability to manage their cash flows now.
Speaker 5: As it was in the past.
Speaker 4: And I think that investors and portfolio managers who are
Speaker 4: really deep in the weed are trying to wrap their
Speaker 4: head around that issue. This seems to me, this higher
Speaker 4: straight environment like another one of these like five or
Speaker 4: six things since twenty eighteen, that's you know, a hurdle.
Speaker 4: It's a challenge, but it's something that companies seem like
Speaker 4: they're able to manage through so far. And that's giving
Speaker 4: at least some of the investors I speak with some comfort.
Speaker 6: Does that mean, Laurie that right now FED policy is
Speaker 6: not as restrictive as people think, and that in order
Speaker 6: to bring inflation lower to truly their goal, they have
Speaker 6: to go significantly higher because those higher rates aren't as
Speaker 6: damaging to some of these companies.
Speaker 5: I think that higher for longer is still what I hear.
Speaker 4: I will tell you pre SBB, I have evaluation model
Speaker 4: replug in interest rates GDP, tenure yields that sort of
Speaker 4: stuff inflation rates as well. Pre SVB, everyone wanted me
Speaker 4: to run that model at six and seven percent and
Speaker 4: see what kind of pestimate was spit out. I don't
Speaker 4: get those requests anymore. We've got I think five three
Speaker 4: five baked in the model right now, and people are
Speaker 4: pretty content to sort of use that as a general
Speaker 4: kind of rough bogie for the end of this year.
Speaker 4: We've got some cuts baked in for the end of
Speaker 4: next year. People seem pretty sanguine about that. I think
Speaker 4: in general, investors want the inflation fight.
Speaker 5: To be one and if you go back to the
Speaker 5: debt ceilingly sign Awa've it.
Speaker 4: Talked about this in quite a bit, but I think
Speaker 4: one of the reasons why the market didn't collapse around
Speaker 4: that is I do think the equity market was on
Speaker 4: McCarthy's side and wanted spending to be ranked in so
Speaker 4: ultimately infreation could be brought back down to more reasonable
Speaker 4: kind of levels. I think that calculus at least on
Speaker 4: the equity side of the business. I can't really speak
Speaker 4: so much for fixed income investors, but I think a
Speaker 4: lot of the equity pms I talked to they want
Speaker 4: that inflation fight to be one so they're willing to
Speaker 4: tolerate no another hiker two higher for longer.
Speaker 3: Lorie, just the thirty second tis if you can. I've
Speaker 3: got an article set to one side for reading later
Speaker 3: this evening. It's Embarren's over the weekend. I saw the
Speaker 3: headlines your name, and it said something like, it's kind
Speaker 3: of like the nineteen forties. What's the takeaway?
Speaker 4: So, in nineteen forty five we had a recession that
Speaker 4: the stock market completely ignored. It was a technical recession
Speaker 4: that occurred because of a transition from a wartime economy
Speaker 4: to a peacetime economy. Underline economy was still okay, but
Speaker 4: you had a massive withdrawal of government support back then
Speaker 4: in terms of fiscal very very analogous for what we're
Speaker 4: going through today, and a lot of the rhetoric we've
Speaker 4: heard about recession over the past year. I think that's
Speaker 4: one of the reasons why equity markets have been so resilient.
Speaker 4: This underlying economy is still in pretty good shape and
Speaker 4: people really understand.
Speaker 5: What's happening here.
Speaker 3: Looking forward to wadding the article a little bit later, Laurie,
Speaker 3: thanks for famin us to kick off the training week.
Speaker 3: LORI canvasiting there of RBC on the week ahead.
Speaker 2: Bruce Casman, first in his class on reflation at Columbia
Speaker 2: a few years ago, joins us. Right now, Bruce, is
Speaker 2: a question out of the time of green Span, but
Speaker 2: here we are. People will go OMG China deflation. Can
Speaker 2: we import deflation? Can we import deflation from China? Or
Speaker 2: on a global slowdown basis?
Speaker 7: I think we can definitely import deflation and goods pricing,
Speaker 7: and I think there is definitely a force at work
Speaker 7: which is related to China downshifting the wand going down
Speaker 7: and perhaps more powerfully simply the unwind of goods price
Speaker 7: pressures in a world in which manufacturing has been contracting.
Speaker 7: So I think goods pricing is not going to deflate,
Speaker 7: but there's a deflationary impulse. I think the problem is
Speaker 7: that other things are going to be blunting that downward
Speaker 7: movement and keeping core inflation on an underlying basis probably
Speaker 7: around three percent, perhaps a little higher in the US
Speaker 7: and globally as well.
Speaker 1: Are we beyond the pandemic.
Speaker 7: I think we are hopefully by on the pandemic from
Speaker 7: the point of view of its impact on behavior, But
Speaker 7: there is reverberations from this which are powerful and profound.
Speaker 7: I think what you're seeing in the US, for example,
Speaker 7: right now, is in the employment report a moderation in
Speaker 7: some of the post pandemic recovery sectors, leisure and hospitality
Speaker 7: perhaps being the most notable. But I don't think that
Speaker 7: transition and that decline and growth of jobs is a
Speaker 7: sign of shifting from strength to weakness. I think it's
Speaker 7: a sign of shifting from strength to more normalization. I
Speaker 7: think it'd be a mistake to use the normal business
Speaker 7: cycle dynamics in try to attribute that to the move
Speaker 7: towards an early start of a US recession.
Speaker 6: One consistent aspect of both the ADP and the Jobs
Speaker 6: report was the strength in the wage figure that was
Speaker 6: far beyond what the FED would like to see. And
Speaker 6: this comes in the heels of people worried not about
Speaker 6: the year over year comps so to do see coming
Speaker 6: down because of rents and because of used cars and
Speaker 6: things of that nature, but because there is this wage
Speaker 6: pressure underlying some of this strength and some of this
Speaker 6: ongoing inflation. How much are you factoring that into how
Speaker 6: high real rates neutral rates truly are.
Speaker 7: So I would be a little bit hesitant to put
Speaker 7: a lot of weight on the swings at average hourly earnings,
Speaker 7: which went down sharply earlier this year and have bounced
Speaker 7: back up. But I do think wage inflation in the
Speaker 7: US is running above four percent on an annualized basis.
Speaker 7: That's too high to be consistent with getting inflation down
Speaker 7: into the mid twies. I would not argue that wage
Speaker 7: inflation is the primary driver of US inflation, though I
Speaker 7: think there's an issue here of tight labor markets. There's
Speaker 7: an issue here of psychology having shifted, and I think
Speaker 7: the interaction of those things, in the absence of a
Speaker 7: slide into recession or something like that, is just going
Speaker 7: to blunt some of these unwines that are happening here,
Speaker 7: and we shouldn't ignore that as well. Running inflation at
Speaker 7: the core five percent this year, I think we're going
Speaker 7: to slide below four, but I don't think we're going
Speaker 7: to slide on a sustained basis below three.
Speaker 6: How long is it going to take to get there?
Speaker 6: Below three.
Speaker 7: I think it's going to take a recession to get there.
Speaker 7: I think you have to hit pricing power pretty hard.
Speaker 7: I think it's a mistake to think that the primary
Speaker 7: thing you need to do is create unemployment. What you
Speaker 7: need to do is hit pricing power. Unfortunately, when you
Speaker 7: do that, you change labor market behavior and the unemployment
Speaker 7: rate will go up alongside it.
Speaker 6: A rates restrictive enough right now where they are to
Speaker 6: induce some sort of recession.
Speaker 7: I don't know, it might be. I don't think the
Speaker 7: Fed's going to wait around, though, and I think in
Speaker 7: our forecast of the Fed boiling the frog, they don't wait.
Speaker 7: They continue leaning against this. They tighten again in July
Speaker 7: and possibly more later this year, and by time they're done,
Speaker 7: rates will be high enough with a lag to create
Speaker 7: a recession, probably sometime in twenty four.
Speaker 2: Is your study, doctor Casmin that the modern FED will
Speaker 2: react to higher interest rates?
Speaker 3: Do they?
Speaker 1: Actually?
Speaker 2: You know, if we breach through and we start talking
Speaker 2: a six percent level for early ages, whatever it is,
Speaker 2: if we get a higher interrast rate structure, does a
Speaker 2: central bank respond well?
Speaker 7: I think when you look at the move up in
Speaker 7: ten year olds we've been seeing in the last month
Speaker 7: or eight weeks. I think some of that is a
Speaker 7: tightening in financial conditions as we reprice the FED, but
Speaker 7: some of it is also taking out recession risk, and
Speaker 7: you can see more broadly financial conditions moving up, and
Speaker 7: I think in that environment it's very hard for the
Speaker 7: FED to look at that and say, Okay, this is
Speaker 7: lags in the monetary transmission mechanism and we can be
Speaker 7: patient against that backdrop. So I think the FED is,
Speaker 7: as you can see, struggling to figure out where is
Speaker 7: the right degree of restrictiveness in this economy. It's probably
Speaker 7: going to be moving too much, at least in the
Speaker 7: context of trying to preserve an expansion because of the
Speaker 7: inflation news, and that's eventually going to take us down.
Speaker 7: I think it's just really hard right now to get
Speaker 7: the timing and to be too cute about the level
Speaker 7: of race that's going to end this cycle that's dead on.
Speaker 2: And I thought about this over the weekend, Bruce, Are
Speaker 2: we asking too much of our central banks? By definition
Speaker 2: they don't get the timing right. I think this is
Speaker 2: this absurdity that they're going to nail. Plus our mind
Speaker 2: has fourteen days a turn in the macro climate is absurd.
Speaker 7: Well, I think we're in a really difficult macro environment
Speaker 7: in terms of getting right the inflation dynamics, the appropriate
Speaker 7: level of what rates are. But I think the fundamentals
Speaker 7: here are relatively straightforward. This economy is resilient, it has
Speaker 7: elevated inflation, and I think the chances of delivering a
Speaker 7: soft landing here are pretty small. So there's every reason
Speaker 7: for the FED to try to calibrate and try to
Speaker 7: deliver that kind of outcome. But ultimately I don't think
Speaker 7: it's going to be successful, And ultimately I do think
Speaker 7: we're going to need a recession. It's a question of
Speaker 7: getting the timing right, getting the rate path right, which
Speaker 7: I think everybody should realize is hard. People are put
Speaker 7: forecasting recessions starting this quarter. People have been very confident
Speaker 7: about forecasting recession. Forecasting a break in the economy like
Speaker 7: that is just not that easy to do. There's also
Speaker 7: a question to understand that.
Speaker 6: There's also a question, Bruce, about what the trigger could
Speaker 6: be of some sort of recession. And I was thinking
Speaker 6: a lot about geopolitics over the weekend with Yellen in China.
Speaker 6: How closely are you watching the price of rare metals
Speaker 6: of some of these sort of tit for tat focused
Speaker 6: areas of chips and the instruments the commodity is required
Speaker 6: to supply said chips.
Speaker 7: I think it's very unlikely that that dynamics specifically will
Speaker 7: be the catalyst for recession. But I think your point
Speaker 7: is really important, which is, recessions are about the FED.
Speaker 7: Recessions are about the vulnerabilities of the US private sector,
Speaker 7: and recessions are about shocks. Oftentimes those shocks are in
Speaker 7: the commodity space and energy specifically, And I think it's
Speaker 7: quite reasonable to say that the next session will not
Speaker 7: only be about the FED hiking rates, but it'll be
Speaker 7: about some shock that hits us Again. Shocks are not
Speaker 7: easy to anticipate, both in terms of when they hit
Speaker 7: and exactly where they hit.
Speaker 6: How do you measure the vulnerability then of a financial
Speaker 6: system to a potential shock, because that really is the
Speaker 6: key to how deep the recession may be.
Speaker 7: So I think vulnerability is broad. It's vulnerability in the
Speaker 7: financial sector, and as we well know, we've got banking
Speaker 7: sector stress and credit tightening that's going on. We're not
Speaker 7: seeing that spill over to the broader financial space and
Speaker 7: I think that's important. But vulnerability is also about where
Speaker 7: the private sector is, and this is one of the
Speaker 7: reverberations of the pandemic is how healthy the US and
Speaker 7: global private sector is, both on the household and business
Speaker 7: sector side. That doesn't mean they're going to be a
Speaker 7: strong engine for growth, but I think they're going to
Speaker 7: be our buffers against the potential for a break, at
Speaker 7: least for the near term.
Speaker 3: Bruce Love catching up with you, sir. Good to hear
Speaker 3: from you as always, Broce Casman of JP Morgan now
Speaker 3: Alifia Dorojuana the manage director Rock Creek Groof and if
Speaker 3: you're wonderful to catch up with you. Big rally year. Today,
Speaker 3: we've talked to a couple of people about whether they
Speaker 3: think it continues, can it broaden out? I was looking
Speaker 3: at your notes and you are saying remain overweight US,
Speaker 3: underweight em short term positive view on Europe. Let's start
Speaker 3: with the US and break it down that way. Why
Speaker 3: remain overweight the US after big games already this year?
Speaker 8: Yeah, Look, I think investors have been investing, as you mentioned,
Speaker 8: in a new regime from the last ten years. Right,
Speaker 8: we're in the higher rates, higher inflation, for longer. But
Speaker 8: if you look at equity markets, while we're cautious on
Speaker 8: equities in general after a very strong first half, what's
Speaker 8: going to break the equity markets? You know? I think
Speaker 8: consumer spending is something that we're looking at very closely
Speaker 8: to see if that's what break equity breaks equity markets.
Speaker 8: But I think we also have to remember that within
Speaker 8: the equity markets, the bull market this year has been
Speaker 8: driven by eight mega cap stocks. It's more than seventy
Speaker 8: percent greater cumulative return in the top eight stocks versus
Speaker 8: the rest of the Russell two thousand year to date
Speaker 8: seems immune to that action.
Speaker 5: When does the party stop?
Speaker 2: Alifia, I want you to take a long term view.
Speaker 1: Let's be honest.
Speaker 2: If your leader, Miss Beschloss went to Marrakesh in the
Speaker 2: IMF meeting, people would just simply stop to know her
Speaker 2: opinion on the linkage of the global economy and hydrocarbons.
Speaker 2: When you guys look out to a three to five
Speaker 2: year look, do you have the gloom of the IMF?
Speaker 2: Do you share their view of tepid global growth?
Speaker 8: I think growth is going to happen in particular niche
Speaker 8: sectors and areas, So we are investing quite a bit
Speaker 8: right now. In alternatives, it continues to be very interesting.
Speaker 8: Investors can take advantage of those secular long term trends
Speaker 8: US Europe emerging markets. You see tailwinds from the IRA
Speaker 8: and climate infrastructure projects. You see huge innovation in AI.
Speaker 8: You see things happening in agriculture, technology, healthcare, data centers,
Speaker 8: as you mentioned, companies producing renewable fuels for rails, terminals, livestock.
Speaker 8: There are so many interesting investment opportunities today, but they
Speaker 8: are not going to necessarily make you money in the
Speaker 8: next three months.
Speaker 6: How do you sort of navigate the idea of being
Speaker 6: less positive over the next three months, but very positive,
Speaker 6: particularly about the US over the longer term. How do
Speaker 6: you tell and communicate that message to investors who are
Speaker 6: not looking to day trade.
Speaker 8: You know, we manage very institutional portfolios for endowments and foundations,
Speaker 8: and they are long term investors. They want their endowment
Speaker 8: to be there for the next fifty hundred years so
Speaker 8: they can continue doing the good work that they do,
Speaker 8: and so diversification in an institutional portfolio is key, especially
Speaker 8: in this type of uncertain environment. Think about it, just
Speaker 8: in the public equities market. If you had taken a
Speaker 8: very singular view of small cap stocks, you would be
Speaker 8: missing out entirely on the first half of this year's rally.
Speaker 8: So you have to be diversified, we think, but you
Speaker 8: also have to look long term and start to plant
Speaker 8: the seeds now for those areas that are going to
Speaker 8: really be your biggest return drivers in ten years.
Speaker 6: It feels like diversification is changing the meaning of it,
Speaker 6: and the people who we talk to used to be
Speaker 6: in stocks and bonds, and now it means private credit,
Speaker 6: private debt, some other private equity, other aspects real estate
Speaker 6: that really are coming to the fore becoming more mainstream
Speaker 6: and have been over the past couple of decades. But
Speaker 6: from your vantage point, how has the idea of diversification shifted?
Speaker 8: You know, that's a great question. And again the flip
Speaker 8: side is that there's a lot of money chasing some
Speaker 8: of those opportunities that you set as well, right, So
Speaker 8: you know, I wouldn't say that we want to just
Speaker 8: run into diversification for the sake of diversification, but it
Speaker 8: has changed because in any particular period of time over
Speaker 8: the last ten, fifteen, twenty years, you've seen one of
Speaker 8: those asset classes really be able to drive returns in
Speaker 8: your portfolio even today fixed income, right, there's a spread
Speaker 8: between shorter term and longer term bonds about one to
Speaker 8: one and a half percent. Maybe you can do something
Speaker 8: there eke out a little return and fixed income even today.
Speaker 8: So diversification means something different today because I think that
Speaker 8: if you don't have allocations cross different asset classes, you
Speaker 8: will end up getting in a hole in a certain
Speaker 8: period of time during the market, and then it's very
Speaker 8: difficult to climb back out. And again we're looking longer term.
Speaker 8: We want our endowments to be there in ten, fifteen,
Speaker 8: twenty years.
Speaker 3: Well, let's talk about something longer term. Just finally, the
Speaker 3: geographic diversification Japan. Japan's getting it done yet today tough week,
Speaker 3: more recently over the last five sessions or so. But Ifia,
Speaker 3: where are you on that country? We're hearing a lot
Speaker 3: of people say they're starting to get interested.
Speaker 8: You know. Japan's funny. I think over the last twenty
Speaker 8: years that we've been investing, there's been fits and starts
Speaker 8: in Japan, And the question is can Japan really start
Speaker 8: to change their economy, change the demographics, and really get
Speaker 8: out of the disinflationary environment that they have had over
Speaker 8: the last ten years. If they can do all of that,
Speaker 8: then there's a chance for Japan to continue on this path.
Speaker 8: But I think it remains to be on you know,
Speaker 8: it remains I think a question on whether they can
Speaker 8: actually get those things done. And in the meantime, it
Speaker 8: is a stock pickers market, probably more so in Japan
Speaker 8: than in the US emerging markets today. If you look
Speaker 8: at the dispersion, for example, in the US equity markets,
Speaker 8: there's more dispersion on a single stock level in the
Speaker 8: Japanese market today. So from a stock piggers market, it's
Speaker 8: great right now. I think longer term we're going to
Speaker 8: have to see whether there's some fundamental changes in the economy.
Speaker 3: Nick Kay, Yeah, today of twenty three percent, it's not
Speaker 3: bad of Reck Craik.
Speaker 2: The calendar of the xaxis and what we're going to
Speaker 2: do about it. Seriously about price of bonds. Gnnededi Goldberg
Speaker 2: joins head of US rights Strategy at TED Securities. Gonnedy
Speaker 2: I want to go to the outcome of this, which
Speaker 2: is TED Securities reaffirms with a vengeance curve inversion, and
Speaker 2: we could even get out to a steeper curve in
Speaker 2: version down the road. What is the process that gets
Speaker 2: us to a deeper inversion?
Speaker 9: Thanks for having me well, I do think that front
Speaker 9: end rates remaining quite elevated for a while is what's
Speaker 9: going to get us there. I wouldn't be surprised to
Speaker 9: see it. It's been one of the most painful trades
Speaker 9: this year. I can't tell you the number of clients
Speaker 9: who have tried to enter a curve steepeners here and
Speaker 9: actually haven't been able to hold onto that trade just
Speaker 9: because they're very expensive. From a carrion role perspective. What
Speaker 9: you can see is the front end of the curve
Speaker 9: continuing to actually move a little bit higher as the
Speaker 9: market has capitulated to the FEDS view of slightly higher
Speaker 9: for slightly longer. And that's very painful for the two
Speaker 9: to five year part of the curve. That's going to
Speaker 9: keep pushing up two to five year rates and in
Speaker 9: my mind, could keep the curve actually very very deeply
Speaker 9: inverted for at least the next couple of months. And
Speaker 9: I can tell you know, the steepening typically starts about
Speaker 9: three to six months before the first cut, at least
Speaker 9: that's what our research shows market right now is pricing
Speaker 9: in a cut. Actually, even after US we've got ours
Speaker 9: our first cut penciled in for March of twenty twenty four,
Speaker 9: the markets all the way in May of twenty twenty four,
Speaker 9: they're not looking for a cut anytime soon.
Speaker 6: Gnati, is that including some sort of trauma to the
Speaker 6: financial system? Are you basically plotting in this idea that
Speaker 6: there's going to be some catalyst to that downturn that's
Speaker 6: going to prompt the cuts, And that's sort of the
Speaker 6: reason why you expect the deeper and sooner cuts than
Speaker 6: the West of.
Speaker 9: Wall Street correct. Typically, you do have higher rates acting
Speaker 9: in some unexpected way. We saw that back in March
Speaker 9: with the SVB crisis. I wouldn't be surprised to see
Speaker 9: more tremors in the months ahead. I don't think the
Speaker 9: market is looking ahead and realizing that higher rates a
Speaker 9: real high cost of cash, you know, five percent is
Speaker 9: not exactly cheap at this point. That tends to put
Speaker 9: some downward pressure on the growth momentum that could actually
Speaker 9: push the US economy into recession over time. I do
Speaker 9: think people underestimate how much that can create shocks in
Speaker 9: the economy over the course of the coming year. I
Speaker 9: don't think we're quite pricing that in just yet.
Speaker 6: Let's say we don't get any shocks, Gannadi. Let's say
Speaker 6: that they is truly more resilient to higher rates than
Speaker 6: anyone previously imagined, and that companies continue to, as Tom
Speaker 6: would say, adapt and adjust. Then how high should rates
Speaker 6: go and how high should they stay for a longer
Speaker 6: period of time?
Speaker 9: Well, I think what you're describing right now is the
Speaker 9: nightmare scenario for the FED. You know, they think that
Speaker 9: they're right near the terminal rate. They're actually dancing around
Speaker 9: where exactly they want to dial into on the terminal
Speaker 9: funds rate. If you know, inflation continues to rage, if
Speaker 9: there's no real impact on the economy, higher much higher
Speaker 9: at that point, and that would be very, very scary.
Speaker 9: And honestly, the higher you push rates like that, the
Speaker 9: more likely you want to get downside shocks to the economy,
Speaker 9: to the financial system. You know, something the on par
Speaker 9: with what we saw with SVB good on if people like.
Speaker 2: You talk about the economic consequences of price down yield up.
Speaker 2: I mentioned the Bloomberg Total Return and Aggregate Index here earlier.
Speaker 2: It hasn't breached through to new price lows. But nevertheless
Speaker 2: it's on the cusp. If we get bonds to go
Speaker 2: down in price up and yield on an aggregate, do
Speaker 2: we get gamma. Do they have an accelerative behavioral tendency
Speaker 2: like equities where it picks up steam.
Speaker 9: Well, you saw that back last year, where investors are
Speaker 9: looking at their bond portfolio and saying, well, what is this.
Speaker 9: I thought that these bonds are safe, you know, I
Speaker 9: don't think they were supposed to lose value, and they
Speaker 9: were down a very substantial at some point last year,
Speaker 9: they were down quite substantially. If that happens again this year,
Speaker 9: certainly you can have investors actually selling out interestingly enough.
Speaker 9: The rates are now attractive enough where a lot of
Speaker 9: investors who are you know, really looking at the bond
Speaker 9: market and saying, you know, these yields are quite attractive,
Speaker 9: even if they back up a little bit more, Even
Speaker 9: if I'm down a little bit on my Barbin portfolio,
Speaker 9: I'm looking ahead to the next one year or two years.
Speaker 9: And that's why actually this year, despite the fact that
Speaker 9: the aggregate index hasn't done much, you've seen tons and
Speaker 9: tons of inflows. You've seen over one hundred and twenty
Speaker 9: billion dollars flowing into the fixed income space overall, and
Speaker 9: really not a lot of outflows. So I don't know
Speaker 9: if there's necessarily that kind of moment that happens with
Speaker 9: fixed income this year.
Speaker 1: Good Nattie, I just find it fascinating. What's your ten
Speaker 1: yere yield call? Quickly? Here, what's a ten year yield call?
Speaker 9: Well, as we're heading into the end of the year,
Speaker 9: we do think things start to slow down. The consumer
Speaker 9: starts to slow, labor markets are to slow. So we're
Speaker 9: looking for three and a quarter on tenure rates by
Speaker 9: the end of the year.
Speaker 3: Gotta do appreciate it. Got to go back that of
Speaker 3: Ted Securities.
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