WEBVTT - Bloomberg Surveillance TV: September 5, 2024 0:00:00.120 --> 0:00:06.800 Bloomberg Audio Studios, Podcasts, radio News. 0:00:11.640 --> 0:00:15.440 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.480 --> 0:00:18.680 with Lisa Bromwitz and Amrie Hordern. Join us each day 0:00:18.720 --> 0:00:22.280 for insight from the best in markets, economics, and geopolitics 0:00:22.400 --> 0:00:24.920 from our global headquarters in New York City. We are 0:00:24.920 --> 0:00:27.680 live on Bloomberg Television weekday mornings from six to nine 0:00:27.720 --> 0:00:31.280 am Eastern. Subscribe to the podcast on Apple, Spotify or 0:00:31.320 --> 0:00:33.960 anywhere else you listen, and as always on the Bloomberg 0:00:34.040 --> 0:00:36.879 Terminal and the Bloomberg Business App. Let's talk about one 0:00:36.880 --> 0:00:38.760 of the issues that's band to come up next week, 0:00:38.800 --> 0:00:41.200 two key data points ahead of the Fed September decision, 0:00:41.280 --> 0:00:44.880 kicking off with payrolls tomorrow and CPI next Wednesday. Housing 0:00:44.960 --> 0:00:47.720 costs remaining a top concern for many, including the former 0:00:47.760 --> 0:00:50.960 Secretary of Housing and Urban Development, Sewan Donovan. Shawn is 0:00:50.960 --> 0:00:53.760 the current president and CEO of Enterprise Community Partners and 0:00:53.880 --> 0:00:56.200 joins us now. Shann co Montor Joe agreed to be 0:00:56.280 --> 0:00:58.120 with you. Thank you very much for coming on the program. 0:00:58.200 --> 0:01:00.640 Let's just talk about the scale of the affordability crisis 0:01:00.640 --> 0:01:02.280 that you've been talking about for Want and we've been 0:01:02.360 --> 0:01:06.080 living through. We finally coming out the other side of this, I. 0:01:06.040 --> 0:01:08.960 Don't think so, And in fact, it's getting worse in places. 0:01:09.720 --> 0:01:12.240 I've been doing this work a long time, about thirty years, 0:01:12.720 --> 0:01:16.679 and I think what is different is really two big things. First, 0:01:16.920 --> 0:01:19.560 it is a problem that is deeper than it's ever been. 0:01:19.840 --> 0:01:23.200 We have the biggest rent increases we've ever seen. We 0:01:23.319 --> 0:01:25.920 have a doubling in what it costs to buy a 0:01:25.920 --> 0:01:28.000 home in the country in the last few years. But 0:01:28.040 --> 0:01:30.600 the problem is also everywhere now. It used to be 0:01:30.640 --> 0:01:32.720 on the coasts, it used to be in our bigger cities. 0:01:32.880 --> 0:01:35.399 I was in Boise, Idaho last week, and they have 0:01:35.400 --> 0:01:38.480 a housing crisis there, and so it really is everywhere. 0:01:38.520 --> 0:01:42.399 It's also driving our economic challenges in a way that 0:01:42.440 --> 0:01:46.320 I've never seen nationally. Our inflation problem is a housing problem. 0:01:46.400 --> 0:01:49.680 Now you have companies who can't attract workers, and it's 0:01:49.720 --> 0:01:52.840 driving down economic growth. Half of all our renters in 0:01:52.840 --> 0:01:56.640 the country are paying more than thirty percent of their income, 0:01:56.680 --> 0:01:59.840 which is unaffordable. That's eight thousand dollars a year they 0:01:59.840 --> 0:02:03.400 can be putting toward groceries, consumer demand, and so it 0:02:03.480 --> 0:02:06.800 really is at a different scale and it's in our 0:02:06.880 --> 0:02:10.760 presidential campaign right now. Thirty three governors across the country 0:02:11.080 --> 0:02:13.760 talked about housing affordability in their State of the State address. 0:02:13.880 --> 0:02:16.600 So it really is a different crisis than I've ever seen, 0:02:16.919 --> 0:02:21.280 and it is moderating from COVID, but at a level 0:02:21.400 --> 0:02:23.720 that is unlike anything we've ever seen. 0:02:23.760 --> 0:02:25.320 I'll ask a dumb question. You can give me a 0:02:25.360 --> 0:02:28.000 complex oce we two hundred banks. This points away from 0:02:28.160 --> 0:02:30.320 solving this crisis a few rant cuts. 0:02:30.840 --> 0:02:35.360 Absolutely not, because we are seven million housing units short 0:02:35.480 --> 0:02:38.680 of what we need. This is a supply problem, not 0:02:39.120 --> 0:02:42.799 just a rapes problem, and that means we've got to 0:02:42.840 --> 0:02:45.880 take action in many, many different ways, both on demand 0:02:45.960 --> 0:02:46.680 and on supply. 0:02:46.880 --> 0:02:49.200 When you listen to the campaign trails, both of these 0:02:49.240 --> 0:02:52.160 individuals sound populist in nature when they talk about the 0:02:52.160 --> 0:02:54.760 housing market. Kamala Harris saying first time buyers can get 0:02:54.760 --> 0:02:58.560 twenty five thousand dollars a benefit to help them. Don't 0:02:58.600 --> 0:03:01.560 you think that would exacerbate the problem we're seeing right now? 0:03:02.520 --> 0:03:07.440 Let's be clear, Harris's plan does both. It focuses on supply, 0:03:08.000 --> 0:03:10.919 it looks at over regulation, it looks at the need 0:03:11.040 --> 0:03:15.480 to encourage states and locals even require them to build more. 0:03:16.440 --> 0:03:19.560 But we also have to recognize that for a family, 0:03:20.200 --> 0:03:24.200 the real struggles are for families who can't even put 0:03:24.240 --> 0:03:26.560 food on the tab. We have a record homelessness crisis, 0:03:26.600 --> 0:03:29.200 and so we do need to figure out how to 0:03:29.240 --> 0:03:32.200 help people afford housing more. We're never going to bring 0:03:32.240 --> 0:03:34.639 that cost of housing down enough that most people can 0:03:34.680 --> 0:03:37.520 afford a decent place to live, right So, and that's 0:03:37.600 --> 0:03:40.000 really you have to have a balanced program. 0:03:40.080 --> 0:03:42.520 It also doesn't matter what Trump or Harris say, because 0:03:42.520 --> 0:03:44.680 this will be done in Congress. How could you see 0:03:44.720 --> 0:03:48.360 potentially a divided Congress get to any resolution on something 0:03:48.480 --> 0:03:48.960 like housing. 0:03:49.320 --> 0:03:52.000 Well, this is what's so interesting about the way the 0:03:52.040 --> 0:03:55.000 politics have changed on housing. I said earlier thirty three 0:03:55.040 --> 0:03:58.720 different governors. I've been in Boise, Idaho, and Montana the 0:03:58.800 --> 0:04:04.000 last few months. Red states, Blue states. Give you another example. 0:04:04.360 --> 0:04:06.040 We had a tax bill that made it through the 0:04:06.080 --> 0:04:10.920 House of Representatives overwhelmingly the most bipartisan thing I think seen. 0:04:11.400 --> 0:04:14.080 There was a significant increase in the Low income housing 0:04:14.120 --> 0:04:17.840 tax credit, the best public private investment vehicle. We have 0:04:18.360 --> 0:04:21.279 to build more affordable housing in the country. And so 0:04:22.000 --> 0:04:24.320 I think this really is a moment different from what 0:04:24.320 --> 0:04:27.039 we've seen in the past where there is bipartisan support 0:04:27.320 --> 0:04:29.960 around housing, and I think in the tax negotiations next year, 0:04:29.960 --> 0:04:32.560 you're going to see a big increase in the loan 0:04:32.560 --> 0:04:33.880 income housing tax credits. 0:04:33.920 --> 0:04:37.560 As policy discussions continue, and presumably we'll take some time 0:04:38.120 --> 0:04:40.480 join back to John's point, if the Fetter reserve cuts 0:04:40.480 --> 0:04:42.720 by two hundred basis points in the next twelve months, 0:04:43.040 --> 0:04:46.680 will that make the home affordability crisis worse or better? 0:04:47.720 --> 0:04:51.800 It will definitely help. It will make Obviously, rates are 0:04:51.839 --> 0:04:54.320 a critical thing, not just for home buyers but for 0:04:54.400 --> 0:04:58.839 builders out there, and so that will be important. But 0:04:58.920 --> 0:05:00.880 I want to go back to the fund mental problem. 0:05:01.360 --> 0:05:04.679 For many, many years, we've been lagging on building housing, 0:05:05.200 --> 0:05:09.120 and the supply problem has got to be focused on 0:05:09.240 --> 0:05:10.040 if we're really going. 0:05:09.960 --> 0:05:10.760 To get to the solution. 0:05:10.880 --> 0:05:12.880 You talked about how this is a problem that's widespread, 0:05:12.880 --> 0:05:15.600 and you talked about US cities, but it's widespread globally, 0:05:15.920 --> 0:05:18.760 and actually cities across the world are dealing with this 0:05:18.800 --> 0:05:21.240 affordability crisis. And a lot of people are saying it's 0:05:21.279 --> 0:05:24.039 because of how low rates got and because a lot 0:05:24.080 --> 0:05:27.680 of people could leverage up their home home purchases and 0:05:27.760 --> 0:05:30.360 thus lead to higher prices. 0:05:30.680 --> 0:05:32.680 Why won't lower rates just do that? 0:05:32.760 --> 0:05:36.360 Again, we've already seen home builders building as fast as 0:05:36.360 --> 0:05:38.280 they have in a very long time, during the pandemic, 0:05:38.360 --> 0:05:41.640 during high rate time, So what's to say that they're 0:05:41.680 --> 0:05:42.520 going to keep. 0:05:42.400 --> 0:05:47.320 Up Because we have to recognize that housing is a 0:05:47.360 --> 0:05:51.680 financial instrument, but you can't build it if you don't 0:05:51.680 --> 0:05:56.359 allow zoning to build that. So in a neighborhood where 0:05:56.520 --> 0:06:00.160 a community is saying, not in my backyard, I don't 0:06:00.000 --> 0:06:04.040 want any more housing, there are different measures of it. 0:06:04.080 --> 0:06:06.920 Harris's plan says she would add three million units. Our 0:06:07.040 --> 0:06:11.680 numbers are for real affordability. We have seven million units shortage. 0:06:11.839 --> 0:06:16.000 So rates are just a piece of the issue. But fundamentally, 0:06:16.360 --> 0:06:19.320 what we allow to be built and how we for 0:06:19.440 --> 0:06:21.880 the lowest income people, how we support them to do 0:06:21.920 --> 0:06:23.279 that is critically important. 0:06:23.360 --> 0:06:25.719 You're an expert in this with a lot of experience, 0:06:25.720 --> 0:06:27.600 a lot more than anyone around this type of that's 0:06:27.680 --> 0:06:30.839 for sure. Harris is offering two things. Wants to incentivize 0:06:30.880 --> 0:06:33.560 building but also support buying. And I think we all 0:06:33.640 --> 0:06:35.880 understand there is a mismatch in the time arizon for 0:06:35.880 --> 0:06:38.560 those two policies to bear fruit. You can support buying 0:06:38.560 --> 0:06:41.560 that works immediately. The supply issue is going to take 0:06:41.640 --> 0:06:43.560 years to play out in the near term. Don't you 0:06:43.680 --> 0:06:45.880 risk higher prices with these kind of policies. 0:06:46.839 --> 0:06:50.800 You have some risk, but understand, for a family that 0:06:51.279 --> 0:06:55.799 is right now spending half of their income towards rent 0:06:55.920 --> 0:07:00.200 or to own something, that increased support might mean they 0:07:00.200 --> 0:07:02.640 put more food on the table, it might mean that 0:07:02.720 --> 0:07:06.240 they do other things to support their family. So it 0:07:06.279 --> 0:07:08.680 has some effect, and there is some risk to what 0:07:08.680 --> 0:07:11.280 you're talking about. But at the end of the day, 0:07:11.560 --> 0:07:13.400 we know we have to do both. We have to 0:07:13.440 --> 0:07:16.080 support supply and demand. And I do think what's exciting 0:07:16.160 --> 0:07:19.160 right now is you have a consensus around the country 0:07:20.000 --> 0:07:22.840 on Democrat for Democrats and Republicans that we have to 0:07:22.880 --> 0:07:24.920 build more. Here in New York, we have a city 0:07:24.920 --> 0:07:28.360 of Yes proposal. In Montana, they just passed the legislation 0:07:28.480 --> 0:07:33.200 that says cities can't restrict housing development in certain ways. 0:07:33.240 --> 0:07:36.640 So that is a growing moment, and you're right, it 0:07:36.680 --> 0:07:39.000 will take time, so we better get started. 0:07:39.280 --> 0:07:41.280 How long has this problem been building for? Maybe we 0:07:41.360 --> 0:07:44.200 can finish here and just give you a big picture opportunity. 0:07:44.760 --> 0:07:46.520 You were part of the government coming down at the 0:07:46.720 --> 0:07:51.720 financial crisis the housing crisis A nine were the problems 0:07:51.760 --> 0:07:54.800 now where the states plants it back then? The lack 0:07:54.800 --> 0:07:56.920 of supply how connected to these two issues. 0:07:57.040 --> 0:07:57.400 So what I. 0:07:57.360 --> 0:08:01.720 Would say is this has been a chronic problem over decades. 0:08:01.760 --> 0:08:04.720 Housing affordability has been getting worse for probably fifty years 0:08:04.760 --> 0:08:09.080 in this country, but it's really become an acute crisis 0:08:09.120 --> 0:08:12.440 through COVID. COVID gave it a jolt of adrenaline in 0:08:12.480 --> 0:08:15.560 terms of making the problem worse. I want to go 0:08:15.600 --> 0:08:18.840 back even before the Obama administration, given that we're on 0:08:18.880 --> 0:08:21.840 Bloomberg TV. I was Mike Bloomberg's Housing commissioner here in 0:08:21.840 --> 0:08:24.320 New York City and this was a huge focus for us. 0:08:24.360 --> 0:08:27.760 It's taking old industrial areas rezoning them. Right now, we 0:08:27.840 --> 0:08:30.800 have a billion square feet of empty office space around 0:08:30.840 --> 0:08:35.240 the country. That's an opportunity to really think about. So absolutely, 0:08:35.280 --> 0:08:37.600 this is a problem that's been building, but it is 0:08:37.840 --> 0:08:40.880 different now in terms of what we saw during COVID. 0:08:41.120 --> 0:08:44.240 People are demanding those people who used to work in 0:08:44.240 --> 0:08:47.000 an office, they're now working at home. They're demanding more 0:08:47.000 --> 0:08:49.800 space at home, and so we have a demand that's 0:08:49.840 --> 0:08:53.640 grown enormously during COVID that we have to meet. 0:08:53.920 --> 0:08:55.680 This was SAFSMA and we look forward to doing again 0:08:55.720 --> 0:08:58.319 with you. Thank you, place are appreciate it. Shown town 0:08:58.360 --> 0:09:11.640 of in the eventiprise community. Kate Alhillo of Russell Investments 0:09:11.679 --> 0:09:14.880 saying the inflation problem is largely solved at this stage. 0:09:14.960 --> 0:09:17.560 Expect we'll hit the two percent inflation target in early 0:09:17.559 --> 0:09:20.280 twenty five. The Fed has the space to be aggressive 0:09:20.320 --> 0:09:23.200 if needed on rates. We still expect a self landing, 0:09:23.200 --> 0:09:25.960 but we can't rule out the possibility of a recession. 0:09:26.160 --> 0:09:28.640 Kate joins surround the table. Kate, good monitor. You great 0:09:28.640 --> 0:09:30.280 to be here, Thanks for joining us. Let's start with 0:09:30.320 --> 0:09:32.360 payrolls tomorrow morning and the data through the next hour 0:09:32.440 --> 0:09:34.439 or so. What even the team looking for. 0:09:34.800 --> 0:09:38.320 Well, we're looking for a beat on what we saw 0:09:38.440 --> 0:09:42.040 certainly in July, and something close to the one sixty 0:09:42.400 --> 0:09:45.240 five range. And if we get something, you're close out. 0:09:45.280 --> 0:09:48.240 We think the market is pretty powersitive. Continue to see 0:09:48.240 --> 0:09:51.719 some of this brightening out. Any chance that we are 0:09:51.840 --> 0:09:54.520 below one twenty, below one hundred, that's where you start 0:09:54.559 --> 0:09:56.120 to see some material volatility. 0:09:56.200 --> 0:09:57.760 So good news is good news, and band news is 0:09:57.760 --> 0:10:00.160 definitely really bad. Band news. Talk to me about that 0:10:00.160 --> 0:10:01.120 would leaves the bone market. 0:10:01.320 --> 0:10:03.360 So yeah, so I think again, I don't think the 0:10:03.360 --> 0:10:06.880 bond market's moving tremendously unless you see the labor market 0:10:06.920 --> 0:10:10.040 really start to show more signals of a weakening versus 0:10:10.080 --> 0:10:13.040 a normalization, and then you know, potentially you start the 0:10:13.120 --> 0:10:16.080 recession discussion to be more prominent. We're not there yet, 0:10:16.280 --> 0:10:18.319 but if you start to see some challenging prints in 0:10:18.400 --> 0:10:20.600 terms of labor, that's where you start to see some movement. 0:10:20.800 --> 0:10:22.080 This is really interesting to me. 0:10:22.440 --> 0:10:25.520 You think it's an asymmetric response that essentially people are 0:10:25.520 --> 0:10:27.880 not going to unwind what we've seen in terms of 0:10:27.880 --> 0:10:29.160 the rally and the bond market. 0:10:29.600 --> 0:10:31.839 What gives you that conviction? Yeah, well, I'd say a 0:10:31.880 --> 0:10:32.280 couple things. 0:10:32.320 --> 0:10:34.240 First, I think the first hundred basis points of cuts, 0:10:34.240 --> 0:10:36.079 whether it happens this year it kind of drips into 0:10:36.160 --> 0:10:39.360 next year, is kind of easy to get to the 0:10:39.400 --> 0:10:41.320 two hundred or so that's being priced in through the 0:10:41.400 --> 0:10:44.040 end of next year. That's where you might see some 0:10:44.160 --> 0:10:47.640 movement still, but you still end up having the terminal rate. 0:10:47.679 --> 0:10:50.120 You still a while to go to get there. So again, 0:10:50.160 --> 0:10:52.680 I think if you get some good news the labor 0:10:52.679 --> 0:10:55.200 market is more normalizing July was maybe a little bit 0:10:55.240 --> 0:10:57.560 of a misshoot, but the FED is still moving to 0:10:57.600 --> 0:11:00.000 focus on the labor market and not inflation that you 0:11:00.120 --> 0:11:03.080 don't end up seeing a big shift back up in 0:11:03.160 --> 0:11:06.439 rates because we know that the direction is pretty clear. 0:11:06.720 --> 0:11:09.320 We were talking about the incredible volatility of markets at 0:11:09.320 --> 0:11:12.000 a time where there are so many unknowns and they're 0:11:12.040 --> 0:11:14.960 just as this feeling that one data point could really 0:11:15.040 --> 0:11:18.080 tip the scales in a pretty significant way. Do you 0:11:18.120 --> 0:11:21.960 basically view bad news as being a buying opportunity? I mean, 0:11:22.000 --> 0:11:25.440 if you end up seeing a negative, some really problematic print, 0:11:25.840 --> 0:11:27.920 can you say, look, you look at the fundamentals, you 0:11:28.000 --> 0:11:30.040 look at these companies that are performing pretty well. 0:11:30.559 --> 0:11:32.880 Oh, right, time to buy. Yeah. I mean, I'd say 0:11:33.000 --> 0:11:33.600 a couple of things. 0:11:33.600 --> 0:11:35.680 It's great to actually see volatility back in the market 0:11:35.720 --> 0:11:37.640 and the market reacting. I think the challenge is it's 0:11:37.640 --> 0:11:42.000 overreacting to single points or news, and so we're staying 0:11:42.000 --> 0:11:44.760 pretty close to home in terms of our strategic allocations. 0:11:44.800 --> 0:11:47.600 If we see those overreactions, we are leaning into them. 0:11:47.840 --> 0:11:50.480 It tends to be more as trimming our winners. Even 0:11:50.559 --> 0:11:53.559 when rates have moved up over the moved down over 0:11:53.559 --> 0:11:56.120 the past period, we've been trimming. If we see a 0:11:56.160 --> 0:11:58.600 big self, we'll be leaning in. But I think it's 0:11:58.640 --> 0:12:01.480 more because the over reaction that we're seeing from the markets, 0:12:01.520 --> 0:12:04.000 because of the volatility and the uncertainty. The market is 0:12:04.000 --> 0:12:05.600 still trying to find kind of the narrative. 0:12:05.760 --> 0:12:07.920 Would you say, trimming in the bond space and then 0:12:07.920 --> 0:12:08.880 we'll go to the sock space. 0:12:08.960 --> 0:12:09.120 Yeah. 0:12:09.160 --> 0:12:11.400 Are you basically saying that the market is posted in 0:12:11.480 --> 0:12:12.319 too many rate cuts? 0:12:12.720 --> 0:12:16.520 Yeah, So we think that the magnitude right now is 0:12:16.720 --> 0:12:18.880 at the point where it's probably as much as it's 0:12:18.880 --> 0:12:20.800 going to go unless we start to see a recession 0:12:21.160 --> 0:12:23.160 theme start to pick up. So we have started to 0:12:23.160 --> 0:12:25.160 trim some of our duration positioning. 0:12:24.920 --> 0:12:25.079 You know. 0:12:25.160 --> 0:12:27.640 Connoscent Bloomberg Opinion. Love Connoscent. 0:12:27.679 --> 0:12:28.000 It's great. 0:12:28.080 --> 0:12:30.319 Check out this tweet. If the FED was unburdened by 0:12:30.320 --> 0:12:33.440 what has been get it fantastic, And if the FED 0:12:33.480 --> 0:12:35.360 had a blank sheet of paper to begin with, they'd 0:12:35.360 --> 0:12:37.680 probably set FED funds around four percent instead of where 0:12:37.679 --> 0:12:40.360 we are right now. Instead of this performative channel from 0:12:40.440 --> 0:12:42.360 various people about the signal that AT's send if they 0:12:42.360 --> 0:12:44.720 cut by twenty five or fifty in the anchoring to 0:12:44.800 --> 0:12:47.320 five twenty five to five fifty. Can we play that game? 0:12:47.360 --> 0:12:49.520 Just some scenario analysis. If we were to have a 0:12:49.559 --> 0:12:51.800 blank sheet of paper the Federal Reserve, what would the 0:12:51.880 --> 0:12:52.520 rate be today? 0:12:54.840 --> 0:12:56.079 Four twenty five four fifty. 0:12:56.240 --> 0:12:58.560 Yeah, so we're about one hundred basis points off side 0:12:58.559 --> 0:12:58.800 of the. 0:12:58.720 --> 0:13:00.640 Fat, Yeah, which is why I say the first hundred 0:13:00.640 --> 0:13:02.720 basis points is easy to get to, so you don't 0:13:02.720 --> 0:13:04.880 see as much movement. It's the stuff further out that 0:13:04.880 --> 0:13:06.439 we're still trying to figure out in the magnitude of 0:13:06.440 --> 0:13:07.000 how far they get. 0:13:07.040 --> 0:13:08.800 We've heard that number a few times, haven't we That 0:13:08.880 --> 0:13:10.920 maybe there are one hundred basis points off side. So 0:13:10.960 --> 0:13:13.280 it's to Conn's point, what is this performative chatter about 0:13:13.400 --> 0:13:16.800 the signaling from twenty five versus fifty? If you're off side, 0:13:17.000 --> 0:13:18.920 get a move on and just say you're off side. 0:13:19.280 --> 0:13:22.120 Isn't the FED and this isn't meant as a pejorative, 0:13:22.320 --> 0:13:24.800 but isn't the FED essentially a performative instrument. Isn't it 0:13:24.840 --> 0:13:26.880 sort of the signal that that they give. 0:13:26.760 --> 0:13:28.080 To markets they behave that way? 0:13:28.160 --> 0:13:28.360 Yeah? 0:13:28.400 --> 0:13:30.560 Well, and so at a certain point, and that really 0:13:30.600 --> 0:13:33.400 goes to this question of how do you trim positioning? 0:13:34.160 --> 0:13:37.000 How do you understand whether they're on a trajectory that's 0:13:37.080 --> 0:13:39.720 much steeper kin to what Adol Husaini was talking about, 0:13:39.720 --> 0:13:43.080 where they could go back to zero versus between three 0:13:43.160 --> 0:13:43.800 and four percent. 0:13:45.160 --> 0:13:47.280 Yeah, and I think that that's where you don't make 0:13:47.320 --> 0:13:49.719 any kind of severe moves because there is a lot 0:13:49.720 --> 0:13:53.080 of uncertainty and try to take advantage of the volatility. 0:13:53.440 --> 0:13:55.560 Okay, this is awesome, busy twenty four eyes I had 0:13:55.600 --> 0:13:57.280 for you in the thing. Thanks for dropping by, Thank you, 0:13:57.400 --> 0:14:01.640 thank you, Katy Ahila there of Russell invests at al Husaini. 0:14:01.679 --> 0:14:04.360 If Columbia thread needle writing, the FED put is back. 0:14:04.600 --> 0:14:06.800 One of the key unknowns is how the economy will 0:14:06.840 --> 0:14:09.839 respond to the FED executing rate cuts. If the past 0:14:09.840 --> 0:14:12.400 through of cuts into the rear economy is slow, the 0:14:12.480 --> 0:14:15.160 FED may find it south behind the curve once again, 0:14:15.240 --> 0:14:16.880 as with the surround the table for more ED. Good 0:14:16.920 --> 0:14:17.760 morning and welcome back. 0:14:17.800 --> 0:14:18.520 Hey fantastic. 0:14:18.640 --> 0:14:20.720 You said in your recent note the market pricing masks 0:14:20.720 --> 0:14:24.320 a broad distribution of outcomes. How wide are the range 0:14:24.360 --> 0:14:25.560 of outcomes right now? 0:14:25.680 --> 0:14:28.960 Yeah, I mean it's striking if you look ahead, you know, 0:14:29.000 --> 0:14:31.320 we're starting to praise well in access of one hundred 0:14:31.320 --> 0:14:33.800 basis points this year, and if you look into the 0:14:33.920 --> 0:14:37.400 end of next year, the probability that that funds managers 0:14:37.400 --> 0:14:40.240 to stay around four percent is closed to zero. So 0:14:40.280 --> 0:14:43.880 it's a fantastically broad distribution at the moment and getting 0:14:43.920 --> 0:14:44.640 brighter every week. 0:14:44.720 --> 0:14:46.760 And as a feeling, it wouldn't take much weak economic 0:14:46.840 --> 0:14:49.360 data to really amplify some of those bets that if 0:14:49.400 --> 0:14:52.200 we drop to one hundred k tomorrow morning, at unemployment 0:14:52.240 --> 0:14:54.720 stays at four point three percent, we start pricing in 0:14:54.760 --> 0:14:57.400 a series of fifty pases point cuts. So if you're 0:14:57.400 --> 0:14:59.720 facing these kind of outcomes and the range is like 0:15:00.200 --> 0:15:01.920 one you can drive a truck through it, do you 0:15:02.040 --> 0:15:04.520 chase this bull market rabby, what do you do with this? 0:15:06.680 --> 0:15:08.360 Or I think we've had a really strong valuy so 0:15:08.400 --> 0:15:11.800 far this year. I think what we want to do 0:15:12.040 --> 0:15:14.360 is take stock that the starting level of yields is 0:15:14.360 --> 0:15:19.200 still quite attractive, that the curve is likely to continue 0:15:19.240 --> 0:15:23.160 to steep in versus wood markets expect and so that 0:15:23.160 --> 0:15:25.240 gives us a little bit of juice. At the same time, 0:15:25.240 --> 0:15:26.560 I don't think you want to be maxed out. I 0:15:26.600 --> 0:15:27.880 think you want to leave a little bit of dry 0:15:27.880 --> 0:15:30.680 powder for an environment where the data manages to surprise 0:15:30.720 --> 0:15:31.560 us to the upside. 0:15:31.640 --> 0:15:33.520 I was struck by the fact that you hear the 0:15:33.600 --> 0:15:36.440 likes of Howard Mark saying that the neutral rate in 0:15:36.480 --> 0:15:38.960 this new environment is something like three to four percent. 0:15:39.000 --> 0:15:42.760 But if you look at this wide spectrum of potential outcomes, 0:15:42.800 --> 0:15:46.080 you actually see an average rate below three percent by 0:15:46.160 --> 0:15:50.280 twenty twenty six. Do you think that that's maybe overestimating 0:15:50.280 --> 0:15:52.880 the chance the FED really does get down to close 0:15:52.920 --> 0:15:53.920 to zero again. 0:15:55.520 --> 0:15:58.760 Well, I think there's a there's really strong probability that 0:15:58.760 --> 0:16:01.920 that happens in the coming years. Right that the data 0:16:02.120 --> 0:16:05.720 deteriorates to the point where unemployment starts to feed on itself, 0:16:05.720 --> 0:16:09.200 you get those recessionary dynamics in that environment. The odds 0:16:09.240 --> 0:16:11.200 that the FED funds rate goes to zero, I think 0:16:11.280 --> 0:16:14.560 is exceptionally high, and FED research does continue to point 0:16:14.600 --> 0:16:18.560 to that probability being high in the coming decades. Will 0:16:18.560 --> 0:16:20.320 it happen in the course of the next twelve to 0:16:20.320 --> 0:16:23.400 twenty four months? Is anybody you's bet we have a 0:16:23.640 --> 0:16:25.920 significant amount of fiscal uncertainty on the flip side of 0:16:25.920 --> 0:16:30.360 the selection that that may forestall a recession. But if 0:16:30.400 --> 0:16:33.440 the dynamics are there, FED funds going back to zero, 0:16:33.600 --> 0:16:35.640 I think is very a very reasonable assumption. 0:16:35.760 --> 0:16:39.160 There's a pretty profound sort of extrapolation that I'm feeling 0:16:39.160 --> 0:16:42.360 from you, which is said, essentially, this is not a 0:16:42.400 --> 0:16:45.520 different environment than pre pandemic. That essentially, this is not 0:16:45.680 --> 0:16:49.000 a more inflationary time than we were in twenty nineteen 0:16:49.000 --> 0:16:51.040 in twenty eighteen. And this flies in the face of 0:16:51.040 --> 0:16:53.680 what a lot of investors are saying, including some pretty 0:16:53.680 --> 0:16:55.720 big ones. Can you explain why you think so? 0:16:56.640 --> 0:16:56.880 Yeah. 0:16:56.880 --> 0:17:01.440 Look, I think the large part of the inflation story 0:17:01.840 --> 0:17:04.640 again just goes back all the way to the mid nineties, 0:17:05.119 --> 0:17:09.679 is driven by anchored inflation expectations. We've run this massive 0:17:09.720 --> 0:17:11.439 experiment on the course of the past three years, the 0:17:11.440 --> 0:17:14.560 extent to which those inflation expectations form a center of 0:17:14.560 --> 0:17:18.479 gravity that pulls inflation towards two percent, and I think 0:17:18.520 --> 0:17:22.360 it's played out really well. It's underscored the Fed's credibility 0:17:22.359 --> 0:17:25.840 in maintaining that level. I don't see any reason why 0:17:26.040 --> 0:17:30.960 inflation should be different going forward unless the FED strategy changes. Inflation, 0:17:31.040 --> 0:17:33.360 at the end of the day, is a financial variable 0:17:33.400 --> 0:17:34.240 determined by the FED. 0:17:34.880 --> 0:17:36.959 If the FED cuts by fifty basis points, and then 0:17:37.040 --> 0:17:39.240 fifty basis points again at a time where the economy 0:17:39.280 --> 0:17:41.840 is not falling off a cliff, isn't that the variable 0:17:41.840 --> 0:17:44.080 that could cause a higher inflationary environment. 0:17:44.600 --> 0:17:47.160 We're going to find out, right, if in fact that 0:17:47.280 --> 0:17:50.240 neutral rate is closer to four percent, that means the 0:17:50.280 --> 0:17:52.280 economy is going to be very sensitive to rate cuts 0:17:52.720 --> 0:17:55.080 straight out of the gate. Right, one hundred basic points 0:17:55.119 --> 0:17:58.919 of cuts could significantly accelerate growth, could put upside pressure 0:17:59.000 --> 0:18:01.399 on inflation, and then we're not going to get you know, 0:18:01.480 --> 0:18:03.919 FED funds below three three and a half percent in 0:18:03.920 --> 0:18:05.240 the coming twenty four months. 0:18:05.960 --> 0:18:06.879 This is a key unknown. 0:18:07.080 --> 0:18:09.359 We just don't know at the stage, given how much 0:18:09.520 --> 0:18:11.520 flux we've had in the course of the past through three years. 0:18:11.520 --> 0:18:13.679 And please to add a settle this because you have 0:18:13.720 --> 0:18:16.399 to realize how finely balanced things aren't going against tomorrow morning. 0:18:16.920 --> 0:18:19.639 We're one bad jobs print away from pricing at a 0:18:19.680 --> 0:18:21.920 series of fifty basis point cuts and one good one 0:18:21.960 --> 0:18:23.879 away from reversing a lot of what we've priced in 0:18:23.880 --> 0:18:24.840 over the last few weeks. 0:18:25.400 --> 0:18:29.320 And essentially, what we don't know is what the responsive 0:18:29.359 --> 0:18:32.440 markets will do to the underlying economy. We keep talking 0:18:32.480 --> 0:18:35.359 about how this isn't a very interst rate sensitive economy, 0:18:35.359 --> 0:18:38.200 as many people expected on the way up. What's to 0:18:38.240 --> 0:18:39.440 say it will be on the way down? 0:18:39.680 --> 0:18:42.720 Should I fear the disinversion? Can we finish there? When 0:18:42.720 --> 0:18:45.280 the curve starts to normalize and you get this bull statner, 0:18:45.440 --> 0:18:47.840 typically that means bad things are about to or are 0:18:47.840 --> 0:18:50.240 happening in the US economy. The rate cycle is just 0:18:50.280 --> 0:18:53.080