WEBVTT - Apollo Chief Economist Torsten Slok Talks Energy Shock, Inflation

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio News.

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<v Speaker 2>Where pleased to welcome Torsen Slock. He is chief econmist

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<v Speaker 2>at Apollo for this macro conversation and Tordson, you heard

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<v Speaker 2>what Mike was saying about inflation expectations, and we see

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<v Speaker 2>that in some measures, what are you thinking about inflation expectations?

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<v Speaker 2>Because there's market based measures, there's also survey based measures.

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<v Speaker 2>It's not really time to worry until everything points in

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<v Speaker 2>the same direction right well, And the.

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<v Speaker 1>Key issue is that, of course headline inflation is showing

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<v Speaker 1>signs of high inflation. That makes total sense because headline

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<v Speaker 1>inflation also consists of food and of course importantly energy.

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<v Speaker 1>Call inflation expectations. We don't quite know yet what they

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<v Speaker 1>are doing. But what we do know is that when

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<v Speaker 1>you look at various other sensiment indicators, including today, we've

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<v Speaker 1>got consumer confidence also starting to go down. If you

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<v Speaker 1>look at the daily indicators for consumer sentiment from morning

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<v Speaker 1>consult is also going down for low income, middle income

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<v Speaker 1>and high income households. But the key issue at this

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<v Speaker 1>point is that if you look at the actual spending,

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<v Speaker 1>the daily for how many people travel on airplanes is

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<v Speaker 1>still good. The weekly data for red Book, same store

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<v Speaker 1>retail sales meaning what was sales in Stars last week

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<v Speaker 1>relative to the same week a year ago is actually

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<v Speaker 1>also still very strong. And what you're also seeing even

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<v Speaker 1>hotel demand on a weekly basis from Star is also

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<v Speaker 1>very strong. Both Red fire strong, the data readly strong,

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<v Speaker 1>the occupants you're ready strong. So there's a very different

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<v Speaker 1>divergence between what a consumer's saying relative to what are

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<v Speaker 1>they actually doing. So at this point, the duration of

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<v Speaker 1>the shark has simply not been long enough to actually

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<v Speaker 1>create that demand destruction that we all worry so much about, right.

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<v Speaker 2>And in fact, if you look at longer term inflation

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<v Speaker 2>expectations and you see that within University of Michigan Sentiment

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<v Speaker 2>survey today, those are well anchored.

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<v Speaker 1>Absolutely so, both on a market basis and a survey basis,

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<v Speaker 1>long term FLA inflation expectations are very very stable and

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<v Speaker 1>have not shown any signs of going up. In fact,

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<v Speaker 1>some of them have acually started to go down. So

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<v Speaker 1>exactly the FIT would mainly worry about our markets getting

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<v Speaker 1>worried about inflation becoming out of control. Maybe yes, in

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<v Speaker 1>the next year, we can call that transitory, temporary, whatever

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<v Speaker 1>we want to call it, but it's very clear is

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<v Speaker 1>saying this is absolutely something that's only here for a

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<v Speaker 1>very limited time, and then we will go back and

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<v Speaker 1>have inflation expectations at the longer run, more stable level.

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<v Speaker 3>Now, the one difference here between the Wall Street folks

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<v Speaker 3>and the Fed folks is perhaps the inflation indicators are

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<v Speaker 3>looking at CPI has been going down and it'll obviously

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<v Speaker 3>on a headline basis, go up. But PCE, even without oil,

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<v Speaker 3>has been rising, and that's the index that they follow.

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<v Speaker 3>When you listen to Fed folks. They're not talking about

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<v Speaker 3>rate increases yet, but have they pretty much wiped out

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<v Speaker 3>the idea of any rate cuts this year because the

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<v Speaker 3>Bloomberg survey today showed economistink, we're going to see a

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<v Speaker 3>rise in inflation, but we're still going to see two

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<v Speaker 3>cuts before.

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<v Speaker 2>The end of the year.

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<v Speaker 1>Absolutely. Denill was also very interesting the ECFC GO Bloomberg

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<v Speaker 1>survey was that they probabilits of recession actually went up

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<v Speaker 1>from twenty five percent to thirty percent. So we're almost

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<v Speaker 1>looking at more bifurcated distribution where either you worry a

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<v Speaker 1>lot about inflation being higher and potentially above three now

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<v Speaker 1>for a very extended period meaning at least the next

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<v Speaker 1>level quarters all alternative to people begin to worry about

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<v Speaker 1>the maybe there is a harder landing that is also

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<v Speaker 1>potentially an outcome. So that distribution tells you exactly what

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<v Speaker 1>the problem is for the fit, Namey, they worry on

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<v Speaker 1>the one hand about inflation being high, but they also

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<v Speaker 1>worry about it the label market begins to deteriorrate, including

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<v Speaker 1>of course also if AI puts up with pressure on unemployment,

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<v Speaker 1>and all those factors have of cost. The challenges for the fit,

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<v Speaker 1>namely how much should they put up weight on inflation

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<v Speaker 1>relate to how much weight should they put on the

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<v Speaker 1>risk of the labor market might begin to deteriorate over

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<v Speaker 1>the next seven months.

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<v Speaker 2>Well, let's stay with the labor market, because the job

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<v Speaker 2>of claim numbers that we got this week ticked up

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<v Speaker 2>slightly but remain pretty much in your historically low levels.

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<v Speaker 2>Is the low higher low fire market still intact and

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<v Speaker 2>at this point not an immediate source of concern.

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<v Speaker 1>Absolutely. I think it was low higher low fire because

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<v Speaker 1>of the trade wall for most of last year, and

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<v Speaker 1>now I think it's low higher low fire because of

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<v Speaker 1>the energy shock. So that's why companies are responding in

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<v Speaker 1>probably the most rational way by saying, we don't really

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<v Speaker 1>know exactly how long time the shock will last. We

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<v Speaker 1>don't know what other prices will go to. So for

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<v Speaker 1>that reason it makes sense that the labelmark continues show

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<v Speaker 1>this fairly cautious overall properties, especially as you mentioned Scarlet,

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<v Speaker 1>that jobless claims continue to be reatively low.

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<v Speaker 2>What we need to see in the jobs data, whether

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<v Speaker 2>it's high frequency data or the monthly reports, to signal

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<v Speaker 2>some kind of fed reliefs on the way.

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<v Speaker 1>Well, the key issue, of course is next Friday, and

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<v Speaker 1>particularly for fixed income more abroady, that is the most

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<v Speaker 1>important number across the board, both for rates and for credit. Namely,

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<v Speaker 1>is the economy still producing jobs or as we saw

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<v Speaker 1>last month, are we still losing jobs the way that

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<v Speaker 1>we did within ninety two thousand decline that we saw

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<v Speaker 1>in the previous month, And the key issue therefore becomes

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<v Speaker 1>the labor market data is just taking a very very prominent,

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<v Speaker 1>more important role than usual because inflation is telling us

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<v Speaker 1>to hike. But now we certainly have that the other

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<v Speaker 1>side of the dual mandate, namely label market might begin

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<v Speaker 1>to show some more cooling, especially now that immigration restrictions

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<v Speaker 1>and the label supply is also weighing down on the

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<v Speaker 1>overall out of a nonfun payroll. So that's why next

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<v Speaker 1>week is becoming very critical for thinking about what is

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<v Speaker 1>the fit going to do because so far it's been

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<v Speaker 1>easy for them in the SEP this week to just

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<v Speaker 1>say overly's up in and they also revised LOPGDP. But

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<v Speaker 1>if the label market begins to show softness, then that

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<v Speaker 1>would of course become more challenging for them.

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<v Speaker 3>I have to ask you, when I was studying economics,

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<v Speaker 3>they taught us a couple of rules. One was it's

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<v Speaker 3>never different this time and another was you can make

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<v Speaker 3>a point forecast or a time forecast, but never two

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<v Speaker 3>at the same time. But in your chart this week,

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<v Speaker 3>and this has gotten a lot of play in social media,

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<v Speaker 3>you say we're going to have a very short term

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<v Speaker 3>disturbance in the bond market and fifty years of security

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<v Speaker 3>in the Middle East that will keep down oil prices.

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<v Speaker 3>That's quite a time forecast, that's true.

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<v Speaker 1>But I think the logic really here for investors is

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<v Speaker 1>quite simple. We should all be stepping back and looking

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<v Speaker 1>at this with a much more long term perspective. Let's

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<v Speaker 1>agree that the situation we have today. It's not sustainable.

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<v Speaker 1>We cannot have this. We can discuss for how long time,

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<v Speaker 1>but we cannot have this for several years, definitely not

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<v Speaker 1>and we cannot perhaps even have it for several months.

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<v Speaker 1>And if that's the case, we should expect to have

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<v Speaker 1>some resolution. It makes sense that it's complicated for everyone

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<v Speaker 1>to figure out what is the military strategy, what's going

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<v Speaker 1>to response on both sides. But the conclusion must be

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<v Speaker 1>that from a market perspective, we're getting closer to the

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<v Speaker 1>midterm election in eight months. From that perspective, there's probably

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<v Speaker 1>also some political considerations, both in Iran and in the US.

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<v Speaker 1>That comes to the.

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<v Speaker 3>Conclusion fifty years.

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<v Speaker 1>But I do think that at the end of this

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<v Speaker 1>we will probably have a situation that is quite different

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<v Speaker 1>in the sense that we will probably have, at least

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<v Speaker 1>from the GCC side in the Middle East, probably more

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<v Speaker 1>connection with the US, probably more connection with Europe, and

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<v Speaker 1>therefore probably also more stability more broadly, relative to where

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<v Speaker 1>we were just a few months ago.

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<v Speaker 2>All right, well, I mean we have to get through

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<v Speaker 2>the fog of the current next few months in order

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<v Speaker 2>to get to that point. You did bring along a

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<v Speaker 2>chart with you this time that shows that there's a

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<v Speaker 2>lot of supply coming to market, investment grade supply. It

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<v Speaker 2>combined fourteen trillion dollars worth of supply. How did you

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<v Speaker 2>get to fourteen trillion?

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<v Speaker 1>Yeah, So the charge you look at here, it shows

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<v Speaker 1>shoes from the Treasury. They put out data for what

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<v Speaker 1>is the total amount of US treasury debt that needs

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<v Speaker 1>to be refinanced in the next twelfth months, and as

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<v Speaker 1>you can see in the yellow line, it is about

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<v Speaker 1>ten trillion dollars that needs to be refinanced. In other words,

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<v Speaker 1>uish government debt that rolls over. So this is bills,

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<v Speaker 1>this is coupons, This is across the whole curve. If

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<v Speaker 1>you now add to that two other things. On top

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<v Speaker 1>of that line, we also have two trillion in government

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<v Speaker 1>budget deficit, so that brings us to twelfth trillion. And

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<v Speaker 1>finally we're also have about two trillion in net gross

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<v Speaker 1>issuance from the hyperscalers and the banks in IG So

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<v Speaker 1>that means that the total supply of investment grade bonds

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<v Speaker 1>that are coming to the market is about twelve trillion

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<v Speaker 1>from the government and two trillion from corporates. That brings

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<v Speaker 1>you to a number that is roughly given US GDP

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<v Speaker 1>is thirty trillion, roughly fifty percent of GDP that needs

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<v Speaker 1>to be absorbed by financial markets. That's a very, very

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<v Speaker 1>the highest number we've seen in history. That's a very

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<v Speaker 1>substantial amount of bonds of investment grade credit and investment

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<v Speaker 1>grade bonds that are coming to the market. So the

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<v Speaker 1>short answer is, if we already were about inflation going

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<v Speaker 1>up because of Mike's child, with inflation expectations going up,

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<v Speaker 1>we have tariff footing up bid pressure or the price

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<v Speaker 1>of putting up boid pressure. We have a fairly strong

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<v Speaker 1>economy also putting up with pressure, and now we also

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<v Speaker 1>have significant supply coming to the market. That does bring

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<v Speaker 1>the risk that there is some upside pressure on rates

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<v Speaker 1>in the front and the long end. And there's also

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<v Speaker 1>on top of that, because of the significant increase in IGT,

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<v Speaker 1>it also upward pressure on credit spreads. That means that

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<v Speaker 1>both spreads in credit are under upward pressure for these

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<v Speaker 1>technical reasons, and also the level of yields in rates

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<v Speaker 1>is also on the upper pressure because of this supply

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<v Speaker 1>being so significant.

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<v Speaker 2>So very quickly, how are you thinking about the demand

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<v Speaker 2>dynamics then, because we already know what the supply is

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<v Speaker 2>going to be. It's there's gonna be a ton of it.

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<v Speaker 1>Well, that's why a lot of the people who spoke

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<v Speaker 1>just before we started here discussing exactly saying that this

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<v Speaker 1>is actually an interesting time to look at the level

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<v Speaker 1>of yields, especially if there is now an environment where

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<v Speaker 1>other prices might eventually come down, and especially if people

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<v Speaker 1>begin to worry about that the economy might also begin

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<v Speaker 1>to slow a bit down. If that's the case, you

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<v Speaker 1>both have a level of base rates that's higher temporarily

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<v Speaker 1>at the moment, but you also have spreads in credit

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<v Speaker 1>that's also temporarily higher. And that's just given all in

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<v Speaker 1>yield in credit, both in investment grade, but also some

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<v Speaker 1>parts of high yield that actually looks quite juicy. Software

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<v Speaker 1>has its own problems. For the rest of the high

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<v Speaker 1>yield market is actually generally also looking at yield level

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<v Speaker 1>that are at more interesting levels at the moment.

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<v Speaker 2>All Right, Tordson Slock, thank you as always for coming

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<v Speaker 2>in towards the Slock of Apollo. The chief economists at

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<v Speaker 2>the firm