Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
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Speaker 2: Terminal and the Bloomberg Business App. Jake Peloski of TPW
Speaker 2: Advisory thinks the Raley can extend right in this We
Speaker 2: are optimistic not only about twenty four, but the out
Speaker 2: years as well, twenty five, twenty six. Our analog remains
Speaker 2: the US nineteen ninety five to nineteen ninety nine period.
Speaker 2: The differences this time it's global. Jay joins us right now, Jacob,
Speaker 2: morning to you.
Speaker 3: Good morning, John.
Speaker 2: Just the economy data in China back some of that
Speaker 2: up this morning.
Speaker 3: It sure does, John, I mean, I think it's clear
Speaker 3: to us at least that, and it's not only the data, right.
Speaker 3: We wrote a piece on Friday, our Friday musing is
Speaker 3: called listen to stocks, not vox, and we want to
Speaker 3: pay attention to what the markets are telling us. And
Speaker 3: it's not just stocks, it's also credit outperforming the AG
Speaker 3: in its commodities, and commodities I think right now are
Speaker 3: the big tell commodities. And it's not just energy, it's
Speaker 3: not just gold, it's not just copper, it's all of it.
Speaker 1: It's ag it's all.
Speaker 3: Breaking out, and that is telling us that there is
Speaker 3: an opportunity in that the global economy, as we've been
Speaker 3: saying since the fall, is early cycle.
Speaker 2: Soft commodities as well in cocob. But a lot of
Speaker 2: people might say that's a supply side story, not demand.
Speaker 2: How would you frame it.
Speaker 3: I would frame it as both, and that's perfect. It's
Speaker 3: bull supply side as well as demand side. And the
Speaker 3: fact is that most people have not been investing in
Speaker 3: commodities and the demand has been weak. They've been okay,
Speaker 3: and now we're coming into a point where that lack
Speaker 3: of investment, which can't be made.
Speaker 1: Up quickly, is going to bite.
Speaker 3: At the same time as a global economy, we think
Speaker 3: is setting up for a considerable period of good economic news,
Speaker 3: and that combination in the fact that very few people
Speaker 3: are invested there. Very few people understand that commodities are
Speaker 3: the best performing acid class in the world year to date.
Speaker 1: Everyone wants to.
Speaker 3: Talk to Mag seven, Mag seven, Mag six, Mag five
Speaker 3: commodities people. It's really basic. It's supply and demand. You
Speaker 3: don't have to figure out AI. It's just simply buying
Speaker 3: the stuff that people still use.
Speaker 1: How much this hinge on China.
Speaker 3: Though obviously not very much, because China has been been
Speaker 3: a weak story and commodities have done well. Markets move first,
Speaker 3: That's the thing that we have to remember. They're forward looking.
Speaker 3: Discounting mechanisms say no more than you me even you John,
Speaker 3: and therefore they move first. And so commodities are, you know,
Speaker 3: your world's best performing acid class when now people are
Speaker 3: just starting to think about China. Okay, PMI is better
Speaker 3: than expected. JP Morgan last week raised their Q one
Speaker 3: GDP estimate to six point six percent. Okay, so you're
Speaker 3: talking about the second biggest economy in the world looking
Speaker 3: like it's starting to pick up, and that is obviously
Speaker 3: bullish for lots of things, including commodities.
Speaker 2: A phrase we heard repeatedly I think over the last
Speaker 2: year regarding that region that part of the world was uninvestable,
Speaker 2: and I guess the cafe around that is it depends
Speaker 2: what you're investing in to get exposure to it. There's
Speaker 2: a great quote in your recent note and I'm going
Speaker 2: to share it with our road against some one of
Speaker 2: your thoughts on it. We note the discrepancy between the
Speaker 2: China tech stack one that will increasingly have all of
Speaker 2: China to dominate. That's a really important line. Can you
Speaker 2: just build that out a little bit more?
Speaker 3: Yeah, first off, on that uninvestable line, I also wrote
Speaker 3: a couple months ago, pro tip when you hear uninvestable,
Speaker 3: invest So that's point A because it can't get any worse.
Speaker 3: Can't get any worse th investable. But yeah, I think
Speaker 3: this point about the tech stack is really really interesting.
Speaker 3: There are a lot of things setting up to create
Speaker 3: a big opportunity. And what's remembered that markets have already
Speaker 3: moved in the US in tech, etc. So we want
Speaker 3: to be looking for the new areas of opportunity and
Speaker 3: that's why that multi year positive framework allows us to
Speaker 3: go from point A to point B to point C,
Speaker 3: et cetera. And that's what we've been doing in our
Speaker 3: model portfolios the tech stack story. Look, we've been trying
Speaker 3: to freeze China out of the advanced technology. We're doing
Speaker 3: a pretty good job. They've got the message they have
Speaker 3: to build their own. They're now turning around saying, okay, fine,
Speaker 3: you can't play in our tech space. And therefore the
Speaker 3: question is, right now, do you want to be invested
Speaker 3: in a market of one point four billion people growing
Speaker 3: at six percent per annum, with an e commerce market
Speaker 3: that's double the size of the US, ten times the
Speaker 3: size of Japan, and trades at a seventy percent discount.
Speaker 3: Allibaba trades at eight times earnings, Tencent trades at fourteen
Speaker 3: times earnings, China overall trades at nine times earnings. Okay,
Speaker 3: no one owns it. It's like, I think it's a
Speaker 3: really interesting story. In the segue, you know, flip your
Speaker 3: mag seven into k Web, which is the China tech
Speaker 3: etf k Web can double and double again and still
Speaker 3: not get to the level it was in in twenty
Speaker 3: twenty one, John twenty five to fifty. The twenty twenty
Speaker 3: one high was one hundred and one dollars. I mean
Speaker 3: that to me is a no brainer, and we you know,
Speaker 3: full disclosure we own it.
Speaker 2: Pet chiev Academy is going to join us later in
Speaker 2: the program. In the next hour. He's put the emphsis
Speaker 2: on made by China. How important is that phrase going
Speaker 2: to be in years to come?
Speaker 3: Yeah, I mean, I think we're big believers. Our name
Speaker 3: and our firm TPW stands for tripole the world. Our
Speaker 3: whole thesis, our framework is regional integration in the three
Speaker 3: main regions of Asia, Europe and the Americas. All of
Speaker 3: this stuff is happening kind of as one would expect.
Speaker 3: Supply chain, regionalization, tech stack independent development. Everyone needs AI,
Speaker 3: everyone needs the climate proof everyone needs a semi, everyone
Speaker 3: needs electric vehicles and batteries, and these are the things
Speaker 3: that are driving that regional integration. And look, I think
Speaker 3: China is in a much stronger position than people give
Speaker 3: it credit for because the region that they're in that
Speaker 3: they're going to dominate is asion Azion is the biggest,
Speaker 3: fastest growing region and will be for the next ten years.
Speaker 4: It's striking that you have such conviction in China when
Speaker 4: what we continue to hear from Washington is that they're
Speaker 4: just going to up the ante. Right now, they're wighing
Speaker 4: whether or not they're going to sanction the chip makers
Speaker 4: around wallways entire production. How much does that concern you?
Speaker 3: Yeah, No, there's a race, right, there's a race going on.
Speaker 3: China's racing to get itself kind of independent, and we're
Speaker 3: racing to freeze them out of this stuff. And I
Speaker 3: think the point that we see is that the US
Speaker 3: trying to freeze China is already in the price. Everybody
Speaker 3: who doesn't want to invest in China because they're worried
Speaker 3: about US sanctions is already gone, long gone, and they're
Speaker 3: not going to come in. Fine, we don't need them
Speaker 3: to come in again. K Web can double and double again.
Speaker 3: I'll just take the first double from twenty six to
Speaker 3: fifty and weave the second double to somebody else.
Speaker 4: So a sixty percent tariff wall for Chinese imports doesn't matter.
Speaker 3: Oh yeah, sure it will matter. Markets will sell off
Speaker 3: depending on where we go between now and then.
Speaker 4: But I mean, if China is going to build within
Speaker 4: their own achon.
Speaker 3: Yeah, I mean I would look at what China's done
Speaker 3: over the last thirty or forty years, and I don't
Speaker 3: think we'd want to bet against their ability to kind
Speaker 3: of construct what they need to construct.
Speaker 2: So when everyone else said an investable, you go bullish
Speaker 2: when you say no brainer. Does that make you uncomfortable?
Speaker 2: What are the risk factors you would acknowledge exists around
Speaker 2: this bullish thesis for China?
Speaker 1: Yeah, fairly.
Speaker 3: What Amory said is one, if we come out if
Speaker 3: the former president wins, which, as I've said on the show,
Speaker 3: I believe Biden will win on the landslide. But if
Speaker 3: the former president were to win and we're to implement
Speaker 3: the tariff structures that he's talked about, that's clearly going
Speaker 3: to set the Chinese market back. But by the same token,
Speaker 3: as we advance to that point in time, China's own
Speaker 3: internal dynamics theoretically should get better, right, The property market
Speaker 3: should be better dealt with the focus on domestic consumption,
Speaker 3: should be moving further down the road. So it's not
Speaker 3: a zero sum and how that all plays out, you know.
Speaker 3: I mean, we have the ability to change our mind
Speaker 3: and to adjust our positions, and so we'll look at
Speaker 3: that when the time comes. But I mean that to
Speaker 3: me is a big worry because I think everything else
Speaker 3: is in the price Ali Baba, And no, it doesn't
Speaker 3: grow as much as it as it did before but
Speaker 3: as the prior guest said, same is happening in the
Speaker 3: US tech space. Earnings acceleration is coming down, same as
Speaker 3: in Ali Baba. The other point is that these companies
Speaker 3: in China are just like the US companies. They're cash
Speaker 3: making machines, they are buying backstock, they are paying dividends,
Speaker 3: and so you know, eight nine times earnings. I think
Speaker 3: the risk reward is some of the best in the
Speaker 3: world because the risk is already in the price and
Speaker 3: the reward is starting to materialize.
Speaker 2: I'm sure this morning you've managed to convert a few
Speaker 2: non believers for a tactical trade. What's interesting about your call.
Speaker 2: It's not just tactical. It's not twenty twenty four, it's
Speaker 2: twenty twenty five, it's twenty twenty six. Why is this
Speaker 2: being extrapolated out. It doesn't sound like this late cycle
Speaker 2: story from your standpoint. It feels much much longer term.
Speaker 3: Yeah, exactly, John. And you know, we put out a
Speaker 3: piece our twenty twenty four outlook back in the beginning
Speaker 3: of November, so five months ago. The title was surprise Surprise.
Speaker 3: We had four macro surprises, lower inflation sooner than expected,
Speaker 3: better productivity, growth, return the stability in early cycle. All
Speaker 3: those are playing out, in particular the return to stability argument.
Speaker 3: Look at the vics, look at the move, look at
Speaker 3: the FED. With all respect to the lineup of FED speakers,
Speaker 3: I pay virtually no attention to that anymore.
Speaker 2: That is not the We've just had an eight minute
Speaker 2: conversation and that's how long it took to mention the
Speaker 2: FEDER reserve in your whole fasis.
Speaker 1: Ye, that's exactly right. Way is that because it doesn't matter.
Speaker 3: The important thing is that the FED and markets are
Speaker 3: in sync after being out of sync. Right six rate
Speaker 3: cuts in December now and FED at three. Now we're
Speaker 3: both at three and guess what that happened without a
Speaker 3: ripple of market on ease. And that tells me that
Speaker 3: that's one of the things that tells me that this
Speaker 3: market is a strong market. And so we have, in
Speaker 3: our view, were early cycle. We've made a return to stability.
Speaker 3: The FED is our friend now right can cut as
Speaker 3: you were talking about with labor worries. The FED is
Speaker 3: our friend. The rest of the world is picking up.
Speaker 3: And so we look at twenty twenty three to twenty
Speaker 3: twenty seven that that body of time as being very
Speaker 3: much akin to nineteen ninety five to nineteen ninety nine,
Speaker 3: where you had productivity inspired growth, you had lower inflation,
Speaker 3: you had good earnings growth. The difference, as you quoted,
Speaker 3: is that this time it's global, and it's global because
Speaker 3: of this tripole, the world materializing and the fact that
Speaker 3: everybody has to spend on AI, on climate, on semis,
Speaker 3: on electric vehicles, and so you're getting, in our view,
Speaker 3: a much more stable globe because you're not dependent on
Speaker 3: the Chinese consumer or on the US. You now have
Speaker 3: three centers that are going to be growing independently of
Speaker 3: each other. And so really the question is who balances
Speaker 3: best private and public sector because you need both because
Speaker 3: these are huge, huge investments, right, these are game changing investments,
Speaker 3: and so who manages that best. And that's one of
Speaker 3: the reasons why we like Europe and you and I've
Speaker 3: been talking about this for years, but Europe has more
Speaker 3: experience than any region and getting everybody around the same page.
Speaker 3: One can argue they do it well, it takes too long.
Speaker 3: But you know, look at the US and Congress, right,
Speaker 3: not really an example of great governance, and look at
Speaker 3: China stumbling after a really good run. So I look
Speaker 3: at Azion in China dominates Azion, the fastest growing region
Speaker 3: of the world. We want to play there. We look
Speaker 3: at Europe integrating, being and being forced by conflict to integrate, right,
Speaker 3: multiple countries spending together, raising debt together, so you're going
Speaker 3: to see that capital market integration. And then we look
Speaker 3: here in the Americas and we see Mexico, which again
Speaker 3: you know, we've been overweight and invested in for two
Speaker 3: years because it is the flagship for the tripol the
Speaker 3: World thesis, you know, the biggest beneficiary of what's going
Speaker 3: on in the Americas. We're invested in Poland you and
Speaker 3: I talked about that last time for the European thesis
Speaker 3: as well. Yeah, and we're invested in China for the
Speaker 3: Asian thesis and self to us, uh, it's an exciting
Speaker 3: blue sky period ahead and the fact that most people
Speaker 3: are not there. People have kind of gotten onto the
Speaker 3: tactical trade. I mean, you know, twenty one weeks, if
Speaker 3: you're not on the tactical trade, you're probably not working anymore.
Speaker 3: But you know, to us, the good news is that
Speaker 3: we are you know, we we we see the process
Speaker 3: moving for multiple years and we're still early in that
Speaker 3: and others are going to come behind us. We're already
Speaker 3: double weighted commodities and we have been for six months,
Speaker 3: and so we're you know, we're just moving from point
Speaker 3: A to point being onward.
Speaker 2: This is some super bolish stuff. Just remind me never
Speaker 2: to book you for FED. Decision done, okay, He Piloski
Speaker 2: TVW Pina chiev Academy Security, saying he's ready for a rotation.
Speaker 2: He writes this, I'm so sick of hearing about the
Speaker 2: maximum FAB four or whatever it's words, not mine, and
Speaker 2: that it is time at the time of the twenty
Speaker 2: second old time high for the S and P five hundred,
Speaker 2: I'm looking for anything to stand me away from that.
Speaker 2: The Russell two thousand Suddody outperforming is interesting. Patreons is
Speaker 2: around the table for more pink and mornings here.
Speaker 1: Good morning.
Speaker 2: Is it more than just interesting? Is it a real deal?
Speaker 1: You know?
Speaker 5: I'm not one hundred percent sure because I've been kind
Speaker 5: of thinking about this. Marketers as really AI, anything that's
Speaker 5: kind of been deputized into AI has been driving the market.
Speaker 5: But for the last week, all of a sudden, the
Speaker 5: Russell two thousands a little bit better. I've liked the
Speaker 5: energy sector in particular, and I'm wondering how people are
Speaker 5: starting to say, maybe banking's okay, commercial real estate, your
Speaker 5: biotech sad is ups and downs, So we could see
Speaker 5: a rotation. Unfortunately, I think this time, unlike November where
Speaker 5: we saw the rotation with strong gains for both, this
Speaker 5: time I think we might get tepic gains in the
Speaker 5: Rustle two thousand and a small pullback in the Nasdaq
Speaker 5: one hundred.
Speaker 2: Yeah, your words, and I think they're interesting, they're important
Speaker 2: power for words. It's the rotation more about losing less
Speaker 2: or making more, which one is it.
Speaker 5: I think it's going to be about losing less right now.
Speaker 5: I think where a lot of the froth is, where
Speaker 5: things are overextended, is really in that Nasdaq one hundred
Speaker 5: types stocks, and if you look at it, it's really
Speaker 5: unchanged in about a month month and a half, so
Speaker 5: it keeps coming up and maybe it's a new hire,
Speaker 5: but barely unlike maybe the S and P. So I
Speaker 5: think there's room for that to kind of top a
Speaker 5: little bit. As people question have we overextended on AI?
Speaker 3: Listen?
Speaker 1: AI is going to drive the future.
Speaker 5: The questions to me are are you getting enough value
Speaker 5: at today's technology level, at today's pricing, and I'm not
Speaker 5: sure everyone's getting that. So if you see a pullback there,
Speaker 5: it's going to be the Russell two thousand plus. People
Speaker 5: are looking where to put money that's not at all
Speaker 5: time highs or really high pe ratios.
Speaker 4: I'll ask a question too that I asked the Lord Calvacina,
Speaker 4: who is seeing potentially the signs as well of a rotation.
Speaker 4: We've had so many rotationary false starts. What makes you
Speaker 4: have the conviction that you think this could be it?
Speaker 5: Well again, I think we go back to the fall.
Speaker 5: We had a twenty two percent rise in the Russell
Speaker 5: two thousand versus eleven in Nasdaq one hundred, so that's
Speaker 5: ten percent out performance. That's the sort of thing I'm
Speaker 5: looking at. I think people are getting tired with the
Speaker 5: same story. Okay, I've already fully committed to AI. Where
Speaker 5: am I going to put my new money? And you
Speaker 5: start looking for value, you start putting money elsewhere. You've
Speaker 5: seen energy do very well, mining is doing well, so
Speaker 5: I think that starts leading the way. If banks can stabilize.
Speaker 5: When we get bank earnings next week, the regionals do well,
Speaker 5: that really pushes nicely there, and that's where I think
Speaker 5: drives it.
Speaker 4: Ja Plowski was also talking about energy, you like mining,
Speaker 4: He also liked soft commodities like agriculture. So you're just
Speaker 4: see the entire commodity landscape push higher, you know.
Speaker 5: I'm more in the hard commodities. I think me energy
Speaker 5: has been really the big focus because how I've been
Speaker 5: looking at it is it feels like we're finally understanding
Speaker 5: if we want sustainable energy, we have to build up
Speaker 5: sustainable energy more rapidly. So that's going to require a
Speaker 5: lot of commodities. But we also, for the first time,
Speaker 5: I think, understand we need real traditional energy for the
Speaker 5: next twenty thirty years, so that's going to be built out.
Speaker 5: So that's why I think that hard commodity energy is better.
Speaker 5: I'm not as sure about the egg stuff, though I
Speaker 5: would not touch Coco for example.
Speaker 2: Are you doing this through equity exposure or directly through
Speaker 2: the commodity market, which we want?
Speaker 1: I prefer the equities.
Speaker 5: I think again, our story for the last two to
Speaker 5: three years has really been that the energy companies of
Speaker 5: the future are the energy.
Speaker 1: Companies of today.
Speaker 5: People kind of toss them out the window A few
Speaker 5: years ago and saying, Oh, it's all going to be
Speaker 5: about wind farms. It's all going to be about this,
Speaker 5: And people are realizing the traditional energy companies have the
Speaker 5: resources to provide energy today, but the skills to figure
Speaker 5: out how to provide energy in the future.
Speaker 1: I think that's where the big bet is.
Speaker 2: Still starting to see that. In March, start to see
Speaker 2: energy pitcomp I think by about ten percent, really solid
Speaker 2: month against for energy stocks on the SMP. Likewise, on
Speaker 2: the banks as well, You've got an interesting take on
Speaker 2: a federal reserve. We've heard echoes of this over the
Speaker 2: last week following Shairman Powe. Well, they haven't officially changed
Speaker 2: their target. They seem to be willing to ease monetary
Speaker 2: policy even while inflation remains closer to three percent than two.
Speaker 2: What is one hundred banks is points between friends? What
Speaker 2: does it change in this market?
Speaker 5: So I don't think it changes that much. I think again,
Speaker 5: we saw the market priced out. I think we started
Speaker 5: the year at six rate cuts, we went down to
Speaker 5: as low as two and a half, and the market
Speaker 5: did fine because it's all about growth. So I think
Speaker 5: we can manage around that. But I think there is
Speaker 5: a little bit of froth, and maybe it's deserved.
Speaker 1: As you see, Powell kind of.
Speaker 5: Shift is narrative to things that allow him to cut. Right,
Speaker 5: No one's talking about the market doing the work for him,
Speaker 5: remember back in November when yields were high. Now the
Speaker 5: market's undone all the work for him, and no one
Speaker 5: wants to talk about that.
Speaker 1: So it feels to.
Speaker 5: Me they're constantly looking to pivot to some excuse to
Speaker 5: be easy, which I understand. If you're the person in
Speaker 5: charge of the FED, you probably don't want to be
Speaker 5: the one who drives us into recessions, so you're probably
Speaker 5: slightly biased easy. And now he's figured out a new
Speaker 5: rationale for that.
Speaker 2: Do you think the FED is actually working against the
Speaker 2: market or other The market's working against the Fed because
Speaker 2: the FED seems comfortable with stocks at all time highs
Speaker 2: and credit spreads that are super tight.
Speaker 5: You know, I think we're okayish right now. I think
Speaker 5: there's kind of a decent balance, right. No one's going crazy.
Speaker 5: We're not talking about four or five cuts this year.
Speaker 5: I think we are rightly saying it's probably the end of.
Speaker 1: The hiking cycle.
Speaker 5: Though having said that, right as some of this data
Speaker 5: comes through and if I'm right on some of the commodities,
Speaker 5: we might see a bit of a resurgence. And the
Speaker 5: other topic that's coming up a lot is as we're saying, oh,
Speaker 5: inflation's coming down, I think people are questioning, did we
Speaker 5: ever really managed to monitor rout inflation for the last
Speaker 5: three year? Are we heavily understating because you go into
Speaker 5: the stores and it doesn't look like things are up
Speaker 5: three or four percent parandum. It looks like they're up
Speaker 5: ten percent perandum. So I think people are questioning some
Speaker 5: of the actual starting level from this decline.
Speaker 4: If the feed is trying to find any excuse, to
Speaker 4: your point, potentially to cut, what could they use, say
Speaker 4: in June, say they really want to cut in June,
Speaker 4: but inflation is still on this path where it's not
Speaker 4: exactly where they want to be that the end of
Speaker 4: last year, but it is moderating.
Speaker 1: Is that enough?
Speaker 5: I think it could be enough, because I think one
Speaker 5: they'll just say, listen, it's long lag times and we've
Speaker 5: got to get a little bit ahead of this. And
Speaker 5: I think behind the scenes, if they can avoid cutting
Speaker 5: in September and November, right into the meat of the election,
Speaker 5: they prefer to do that, So I think you're.
Speaker 1: Much better off.
Speaker 5: If you want to get two cuts done early this year,
Speaker 5: you do it June July. Let the markets kind of
Speaker 5: adapt with that, and then the next one maybe comes
Speaker 5: in December if we're still there.
Speaker 4: John asked a question earlier to a lot of our guests,
Speaker 4: what's more important the payrolls number on Friday or inflation
Speaker 4: next week.
Speaker 1: I think it's ultimately the payrolls.
Speaker 5: I think the market's been driven much more by the
Speaker 5: growth in the economy, and really it's both the spending
Speaker 5: on AI. Our companies benefiting from AI, are the AI
Speaker 5: companies growing as a competitive.
Speaker 1: And so we've had it FED. I think for the FED,
Speaker 1: it's probably going to be the job's number. I think
Speaker 1: they have to look at that. But even then I
Speaker 1: think they're.
Speaker 5: In the mode that they are going to close their
Speaker 5: eyes and say, you know, it's all good enough.
Speaker 1: We can cut once or twice.
Speaker 2: It's funny you say that, because that was my sense
Speaker 2: of things as well, asking the question, that's not the answer,
Speaker 2: I go the Answerrinke still repeatedly was that CPM is important.
Speaker 2: At ho Senni of Columbia Thread and a mat or
Speaker 2: was with it's just moms agum, and he was talking
Speaker 2: up CPM be more important than paying rolls for the
Speaker 2: next several months, maybe even the next few courses. What
Speaker 2: I'm hearing from Chairman Powell is that he could be
Speaker 2: willing to move earlier if you see something happen with
Speaker 2: a labor market and deterioration. What do you make of that,
Speaker 2: just in terms of the shift in emphasis, if we
Speaker 2: can indeed called it a shift, you.
Speaker 5: Know, one of our theories coming into this year had
Speaker 5: been that in twenty twenty three he was happy to
Speaker 5: cause a recession. I don't think it was his first choice.
Speaker 5: But if you got a recession, that's fine. There is
Speaker 5: no way he wants to create a recessionary election year
Speaker 5: because that almost hands the accumbani loss. So I think
Speaker 5: he is going to be much more cautious about creating
Speaker 5: a recessionary and that's where I think the balance is
Speaker 5: tipped this year or too. It's much more about jobs
Speaker 5: and far less about inflation.
Speaker 2: You introduced politics. You think he's worried about the incumbonent losing.
Speaker 5: I think he wants to be as independent of causing
Speaker 5: an election result as.
Speaker 1: He possibly can.
Speaker 5: Okay, and so keeping the economy on a steady flow
Speaker 5: and not turning into recession is probably better.
Speaker 2: For him thinking about politics, so he doesn't have to
Speaker 2: think about politics.
Speaker 4: Kind Of okay, Well, your timeline basically says they need
Speaker 4: to move so they don't look like they care about politics.
Speaker 4: But the fact that they would be moving so they
Speaker 4: don't look like they care about politics, they do care
Speaker 4: about politics.
Speaker 1: You know, it's probably pretty.
Speaker 5: Hard when one you've got Elizabeth Warren writing letters the president,
Speaker 5: your boss is the president, and then you've got the
Speaker 5: former president who is very active on social media and
Speaker 5: happy to point out any problems. So get this out
Speaker 5: of the way, bear the pain, and hopefully fingers crossed,
Speaker 5: have to do nothing September November and let politics take
Speaker 5: care of itself.
Speaker 2: So big part of this conversation where we started it
Speaker 2: was the big rotation and whether it is about making
Speaker 2: more or losing less, and you said potentially it's about
Speaker 2: losing less, which should prompt the next question, what part
Speaker 2: of the market right now? Which part of the market
Speaker 2: do you think is most vulnerable? Because the way we're
Speaker 2: set up right now in commodity markets, we've got things
Speaker 2: that are multi year highs. Gold this at an all
Speaker 2: time high. In credit, high yield spreads are at multi
Speaker 2: year tights, equities at record highs. What do you think
Speaker 2: is vulnerable at the moment where the loss is going
Speaker 2: to be.
Speaker 5: So, I think it's going to come really from the
Speaker 5: oh performers. So I think the NAZAQ one hundred is
Speaker 5: the most susceptible you're gonna have. Some of the individual
Speaker 5: stocks we're now on individual stocks, they trade leverage gtfs,
Speaker 5: which seems insane to me why we would have a
Speaker 5: single stock leverage GDF. Yet it's there. I think it's
Speaker 5: over two billion dollars in market caps. So people are
Speaker 5: trading this.
Speaker 2: There because people want it.
Speaker 5: Yeah, and it seems a bit like memes stock type stuff.
Speaker 5: So I think your mem stock, however you pronounce it.
Speaker 5: But I think those things start pulling back a little bit,
Speaker 5: the overall market can do well.
Speaker 1: I think credit's fine. I think credit's very good.
Speaker 5: I do think, separate from everything else, people should be
Speaker 5: allocating more to whether it's credit in terms of munis
Speaker 5: agency debt, corporate debt than treasuries. I think if you're
Speaker 5: running a big bond portfolio, I like the extra spread
Speaker 5: that you're getting and you have technically better governance at
Speaker 5: these entities than now you.
Speaker 1: Do out of DC.
Speaker 2: Interesting, you're gonna stick with us. That raised the question
Speaker 2: about treasuries will hit a little bit later. From the program,
Speaker 2: Pitt chair of Academy Securities, former n WIYE FED president
Speaker 2: Bill Dudley is saying another bank rum could happen. Right
Speaker 2: in this regulators have been focused primarily on increasing loss
Speaker 2: absorbing capital at the largest US financial institutions. Much less
Speaker 2: attention has been paid to the problem that precipitated last
Speaker 2: Springs banking crisis, vulnerability to sudden depositor withdrawals. A place
Speaker 2: to say that Bill is now with us for more.
Speaker 2: So Bill, let's start there and then we can sort
Speaker 2: of lean into monitoring policy as the conversation progresses. Let's
Speaker 2: start with the stress of the Spring of twenty twenty three,
Speaker 2: twelve months ago. What was behind that and what haven't
Speaker 2: we done to address it?
Speaker 6: Well, the problem was that one bank, Silicon Valley Bank,
Speaker 6: which was very poorly managed, failed, But the problem was
Speaker 6: the contagent that's then generated a whole bunch of other banks.
Speaker 6: And what we saw at the time was that the
Speaker 6: positive outflows were much faster than anyone had anticipated.
Speaker 7: Its most rapid.
Speaker 6: Demise of a bank that we've ever seen in terms
Speaker 6: of money going out the door. The regulators have been
Speaker 6: focusing on increasing capital on the biggest banks. They have
Speaker 6: not been focusing on how to deal with that contagent problem.
Speaker 6: We need to really build up the FED slender of
Speaker 6: last resort functions so it's credible to unsure depositors so
Speaker 6: they don't run. And one way to do that is
Speaker 6: to require banks to pledge claudel to the window, to
Speaker 6: the disco window of the FED, equal to all their
Speaker 6: runnable liabilities.
Speaker 7: So if undersure the polsers know that's the case, they
Speaker 7: don't really have a reason to run.
Speaker 6: It's a contagion issue that I think which was so
Speaker 6: striking and powerful that we need to address.
Speaker 7: That was evident last March.
Speaker 2: Don't you think the keys to answer that question though
Speaker 2: at the FED or they have sweat. I'm thinking more
Speaker 2: about depositive insurance. Is that something we need to change
Speaker 2: and maybe changed quickly.
Speaker 6: Well, you could raise deposit insurance, but that's the first
Speaker 6: of all going to require congressional legislation.
Speaker 7: The other problem with deposit.
Speaker 6: Insurance raising is is It basically increases what caud is
Speaker 6: called moral hazard.
Speaker 7: People are going to be less careful. You know, we
Speaker 7: saw during.
Speaker 6: This S and L crisis that banks, you know s
Speaker 6: andls with lots of insured deposits go out and takes
Speaker 6: lots lots of crazy risks.
Speaker 7: So I think the addressing.
Speaker 6: Contagens through the window last resort function, I think is
Speaker 6: a better way to go to guard against that kind
Speaker 6: of risk taking.
Speaker 5: Yeah, my question, I guess would be, well, the FED
Speaker 5: is somewhat reactionary. My sense is they are much they
Speaker 5: learned from two thousand and seven two thousand and eight
Speaker 5: to act more aggressively, much more quickly. Does that kind
Speaker 5: of fix the problem or should there be more being
Speaker 5: done preemptively.
Speaker 7: I like to fix.
Speaker 6: Problems excellent, rather than after the fact that we saw
Speaker 6: a very awkward result in March twenty twenty three when
Speaker 6: we had this issue of the systemic risk exception that
Speaker 6: could only be voked after a bank failed.
Speaker 7: To ensure all the depositors.
Speaker 6: So the Janney Yellen and Jay Power are basically saying
Speaker 6: the banks are strong and resilient, but they couldn't actually
Speaker 6: guarantee that all bank, all deposits would be insured because
Speaker 6: it only can be invoked after a bank fails, and.
Speaker 7: Only on a case by case basis.
Speaker 6: This is a way of reassuring people that Solvment Bank
Speaker 6: is not going to be subject to.
Speaker 7: Run that deplete its cash.
Speaker 6: You know, basically reads who right people run is it's
Speaker 6: very inexpensive to run. It doesn't cost very much to run,
Speaker 6: and you really run if there's some risks that.
Speaker 7: You're not going to be paid off.
Speaker 6: Banks have enough collateral pledge to the window to cover
Speaker 6: all their runable deposits and there's no reason to run,
Speaker 6: and you serve.
Speaker 7: Damp and down the risk of containing right at the start.
Speaker 1: Has there any risk?
Speaker 5: We've pushed a little bit too far in terms of
Speaker 5: some of the regulations where we're forcing banks to have
Speaker 5: more and more treasuries, which did cast some of the
Speaker 5: problems in Silicon Valley Bank, but it's also really turned
Speaker 5: the private credit into three around where that's where more
Speaker 5: and more people are turning to as banks are somewhat
Speaker 5: restricted or uncomfortable with the current regulations.
Speaker 7: Well, you're on a very important point.
Speaker 6: One way you could respond to what you saw in
Speaker 6: March of twenty twenty three is dramatically raise the liquidity
Speaker 6: buffers that banks have to hold. But if you do that,
Speaker 6: then they have to hold a lot more securities, can
Speaker 6: make less loans, they become less like banks. They can't
Speaker 6: perform their intermedion interreachion role. So I think, you know,
Speaker 6: piling on more and more regulation on banks it's not
Speaker 6: really the way to go because it makes banks less competitive.
Speaker 7: As you noted with the non bank financial sector Bell.
Speaker 4: The deregulation of twenty eighteen have a meaningful impact on
Speaker 4: the failure of the likes of SVB.
Speaker 6: Well, if SVB would have been much tightly more tightly regulated,
Speaker 6: if you had had the rollback in terms of the size,
Speaker 6: you know, the acid size, where you were subject to
Speaker 6: tougher prudential regulations.
Speaker 7: So that contributed.
Speaker 6: But I think the big surprise to people was how
Speaker 6: fast this all happened. You know, it's taken in several
Speaker 6: weeks for a bank to go from trouble to actually fail.
Speaker 7: To look on Valley Bank, it was a couple of
Speaker 7: days and they were gone.
Speaker 2: Bill, let's do a sprinkill of monetary policy as well.
Speaker 2: Add that to the recipe. Can I talk to you
Speaker 2: about everything else, because we're talking about bank crisis, and
Speaker 2: I'm just seeing equity markets at all time highs and
Speaker 2: credit spreads and MOTIEA tights. How do you think this
Speaker 2: FMC is thinking about what's happening with financial conditions beyond
Speaker 2: just what they look at looking at equity markets, looking
Speaker 2: at high yield spreads. Because when you hear the chairman
Speaker 2: talk about financial conditions, he says they're tight. When you
Speaker 2: hear market participants talk about them, Bill, they say something else.
Speaker 6: I was surprised by his answer at the press conference
Speaker 6: to the question about financial conditions. He didn't you really
Speaker 6: didn't really want to talk about financial conditions, where in
Speaker 6: the past he's talked about financial positions a lot, and
Speaker 6: he actually implied that the financial divisions were still tight.
Speaker 7: I don't see that stock market's up very dramatically. Credit spreads,
Speaker 7: their narrow bondils are down, mortgan rates are down.
Speaker 6: Since the end of October, we've had a dramatic eating
Speaker 6: and financial conditions.
Speaker 7: So right now there's a.
Speaker 6: Bit of a battle going on the long legs of
Speaker 6: monetary policy versus the.
Speaker 7: Easing of financial conditions.
Speaker 6: And you know, if you're trying to figure out what
Speaker 6: the impulse of Madre policy right now is you have
Speaker 6: to figure out.
Speaker 7: What the balance is between those two things.
Speaker 6: My personal opinion is Madre policy is not really exerting
Speaker 6: that much restraint on the economy, and that's why the
Speaker 6: Fed has been on this path of being having to
Speaker 6: stay higher for longer. And you know, I think another
Speaker 6: aspect of it is that you know, so called our
Speaker 6: star and the neutral mandreary policy rates probably higher than
Speaker 6: what the Fed officials are assuming. It's very interesting to
Speaker 6: me is the FED thinks that the fund federal fund
Speaker 6: rates is going to go all the way back to
Speaker 6: two point six percent.
Speaker 7: That's their ready rejection in the long run.
Speaker 6: But if you look at the market expectations of where
Speaker 6: interest rates are going to go, they have them coming
Speaker 6: down to.
Speaker 7: About three point six percent.
Speaker 6: So the one hundred basic point gap between the where
Speaker 6: the market thinks the Fed is heading and where the
Speaker 6: Fed things that are sitting.
Speaker 7: And in this case, the Fed is actually a lot more.
Speaker 6: Optimistic about the scope for rate cuts over the next
Speaker 6: few years.
Speaker 2: Yep. Three six in climate, some people talking about four bill.
Speaker 2: This is wonderful. Thank you to a great pace on
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