1 00:00:06,230 --> 00:00:09,689 Speaker 1: Welcome to COVID Time, a podcast series on Markets and 2 00:00:09,699 --> 00:00:13,869 Speaker 1: Economies from Devious Group research. I'm Tambe, chief economist. Welcome 3 00:00:13,880 --> 00:00:18,760 Speaker 1: you to our 102nd episode today. It's time to take 4 00:00:18,770 --> 00:00:21,049 Speaker 1: a deep dive in the world of global fixed income 5 00:00:21,059 --> 00:00:26,399 Speaker 1: macro from debt ceiling to the forthcoming tsunami of treasury issuances, 6 00:00:26,409 --> 00:00:29,700 Speaker 1: funding conditions to fed rates and quantitative tightening. There's a 7 00:00:29,709 --> 00:00:30,979 Speaker 1: lot to chew on. 8 00:00:31,530 --> 00:00:35,319 Speaker 1: Our guest is an absolute expert on these issues. Musta 9 00:00:35,700 --> 00:00:39,000 Speaker 1: Chori has held senior positions at several leading firms including 10 00:00:39,009 --> 00:00:43,009 Speaker 1: voya Investments, Deutsche Bank, Bear Sterns and Freddie Mac. He 11 00:00:43,020 --> 00:00:46,419 Speaker 1: has a wealth of knowledge and expertise on trading research 12 00:00:46,430 --> 00:00:46,520 Speaker 1: and 13 00:00:46,598 --> 00:00:49,990 Speaker 1: proportio management of G 10 macro rates, mortgage backed securities 14 00:00:50,000 --> 00:00:53,540 Speaker 1: and derivatives. Most recently, Mustafa was the head of rates, 15 00:00:53,549 --> 00:00:56,759 Speaker 1: effects and derivatives at Y investments where he was part 16 00:00:56,770 --> 00:00:59,520 Speaker 1: of a team that managed more than $40 billion in 17 00:00:59,529 --> 00:01:03,909 Speaker 1: institutional fixed income portfolios. Must chori a warm welcome to 18 00:01:03,919 --> 00:01:04,370 Speaker 1: Cope Time. 19 00:01:05,980 --> 00:01:10,768 Speaker 2: Thanks for having me on your show and congratulations on 20 00:01:10,779 --> 00:01:14,690 Speaker 2: uh more than 100 100th episode at this point. 21 00:01:15,529 --> 00:01:17,779 Speaker 1: Thanks very much. And you know, we've been talking about 22 00:01:17,790 --> 00:01:19,830 Speaker 1: having you on for a long, long time. So I'm 23 00:01:19,839 --> 00:01:22,839 Speaker 1: finally glad that between your busy schedule and travel, you 24 00:01:22,849 --> 00:01:25,080 Speaker 1: manage to squeeze in some time for us, but I 25 00:01:25,089 --> 00:01:26,839 Speaker 1: will take full advantage of that one. So I have 26 00:01:26,849 --> 00:01:31,000 Speaker 1: lots of questions for you. So, uh let's uh, start 27 00:01:31,010 --> 00:01:35,019 Speaker 1: with the recently quote unquote concluded debt ceiling matter. Looks 28 00:01:35,029 --> 00:01:37,910 Speaker 1: like we're done for a couple of years. What should 29 00:01:37,919 --> 00:01:40,989 Speaker 1: we take away from this drama? And what about the 30 00:01:41,000 --> 00:01:43,139 Speaker 1: eventual resolution that we have right now? 31 00:01:44,650 --> 00:01:48,220 Speaker 2: Uh I think the drama ended a lot better than 32 00:01:48,230 --> 00:01:53,680 Speaker 2: I had anticipated. Uh I had, I was uh deeply 33 00:01:53,989 --> 00:01:54,980 Speaker 2: uh uh 34 00:01:56,239 --> 00:02:01,160 Speaker 2: uh uh uh uh part of our observing 2011 and 35 00:02:01,169 --> 00:02:06,120 Speaker 2: 2013 drama and that those both of those ended with 36 00:02:06,129 --> 00:02:09,149 Speaker 2: a lot of volatility and anxiety, et cetera this time around. 37 00:02:09,490 --> 00:02:13,220 Speaker 2: Uh It clearly shows some maturity among the key players 38 00:02:13,649 --> 00:02:19,008 Speaker 2: and so it ended without too much shock. Uh in 39 00:02:19,020 --> 00:02:21,490 Speaker 2: the market 2011 was really ugly 40 00:02:21,860 --> 00:02:25,559 Speaker 2: uh with even rating agencies not knowing what to do 41 00:02:25,869 --> 00:02:29,529 Speaker 2: um downgraded right in the middle of the whole drama. 42 00:02:29,538 --> 00:02:33,199 Speaker 2: This time, rating agencies away from everything. So I, I 43 00:02:33,210 --> 00:02:37,570 Speaker 2: very encouraged by uh the maturity shown by the players. 44 00:02:37,580 --> 00:02:40,029 Speaker 2: Uh what will happen politically. I don't know, there will 45 00:02:40,038 --> 00:02:43,649 Speaker 2: be some turmoil probably in, within individual parties, probably in 46 00:02:43,660 --> 00:02:45,770 Speaker 2: the Republican Party, but that's a different story. 47 00:02:46,570 --> 00:02:49,800 Speaker 1: So you wouldn't say there was any winner or loser. 48 00:02:49,809 --> 00:02:52,440 Speaker 1: This seems like possibly the best of all worlds, a 49 00:02:52,449 --> 00:02:53,759 Speaker 1: bit of a win, win for everybody. 50 00:02:54,710 --> 00:03:01,119 Speaker 2: Well, winner clearly is Biden administration uh in the deal, it, 51 00:03:01,130 --> 00:03:07,020 Speaker 2: they got a much better deal than uh initially anticipated 52 00:03:07,479 --> 00:03:10,679 Speaker 2: and the Republicans, the G O P got a worse 53 00:03:10,690 --> 00:03:14,759 Speaker 2: deal than what they were significantly worse deal than relative 54 00:03:14,770 --> 00:03:18,429 Speaker 2: to what they were asking for. Um And Biden also 55 00:03:18,440 --> 00:03:19,580 Speaker 2: got two years, 56 00:03:19,990 --> 00:03:23,500 Speaker 2: uh time got the and so it don't come up 57 00:03:23,508 --> 00:03:26,559 Speaker 2: until after the next uh coming election. 58 00:03:27,250 --> 00:03:35,089 Speaker 2: So uh winner clearly uh is Biden administration. But as individuals, 59 00:03:35,100 --> 00:03:39,179 Speaker 2: both uh speaker mccarty and President Biden won for their 60 00:03:39,190 --> 00:03:40,160 Speaker 2: personal carriers. 61 00:03:41,210 --> 00:03:43,940 Speaker 1: The uh most of all we are having this discussion 62 00:03:43,949 --> 00:03:47,240 Speaker 1: on the sixth of June. I remember a couple of 63 00:03:47,250 --> 00:03:50,160 Speaker 1: weeks ago, Janet Yellen saying by the first week of June, 64 00:03:50,169 --> 00:03:53,470 Speaker 1: the treasury would be basically out of cash. Um So 65 00:03:53,479 --> 00:03:55,529 Speaker 1: even though the deal has worked out, they need to 66 00:03:55,539 --> 00:03:59,289 Speaker 1: replenish their cash balances. And we're hearing all these astronomical 67 00:03:59,300 --> 00:04:01,399 Speaker 1: numbers about how they have to issue like a trillion 68 00:04:01,410 --> 00:04:04,690 Speaker 1: dollars worth of treasury. And it could have some seismically 69 00:04:04,699 --> 00:04:07,949 Speaker 1: destabilizing impact on the market. What are your views on this? 70 00:04:09,160 --> 00:04:12,589 Speaker 2: Um I don't think it's uh it will be destabilizing 71 00:04:12,600 --> 00:04:18,250 Speaker 2: but it will be important and probably will provide opportunities 72 00:04:18,260 --> 00:04:23,630 Speaker 2: for investors. I think that um they will probably target 73 00:04:23,980 --> 00:04:30,018 Speaker 2: replenishing the PGA that uh uh the uh the treasury's 74 00:04:30,029 --> 00:04:34,659 Speaker 2: account in the Federal Reserve to about 500 billion from 75 00:04:34,670 --> 00:04:36,230 Speaker 2: near zero at this point. 76 00:04:36,600 --> 00:04:41,209 Speaker 2: And so 500 billion plus the ongoing funding needs uh 77 00:04:41,420 --> 00:04:45,260 Speaker 2: could get to a trillion dollars. Uh I think that 78 00:04:45,488 --> 00:04:48,570 Speaker 2: the the treasury will uh focus more on the short 79 00:04:48,579 --> 00:04:52,329 Speaker 2: end of the curve because there is uh the biggest challenge. 80 00:04:52,579 --> 00:04:56,040 Speaker 2: Uh challenge will not be selling the E bills. I 81 00:04:56,049 --> 00:04:59,709 Speaker 2: think there will be enough demand for, for T bills 82 00:04:59,720 --> 00:05:03,690 Speaker 2: just because uh of the higher rates and transition from 83 00:05:03,700 --> 00:05:06,149 Speaker 2: bank deposits to money market funds. 84 00:05:06,690 --> 00:05:11,219 Speaker 2: I think the, the challenge uh would be uh 85 00:05:12,178 --> 00:05:17,899 Speaker 2: not to disturb the reserve bank reserve positions as much 86 00:05:18,029 --> 00:05:23,599 Speaker 2: and try to take away from the revers of uh 87 00:05:23,940 --> 00:05:28,220 Speaker 2: the book of business, the rev reversible funding uh that 88 00:05:28,230 --> 00:05:32,899 Speaker 2: the fed has so the, the slight cheapening or some 89 00:05:32,910 --> 00:05:37,239 Speaker 2: cheapening in T bills will be healthy because that will 90 00:05:37,250 --> 00:05:37,940 Speaker 2: allow 91 00:05:38,369 --> 00:05:42,450 Speaker 2: uh money market funds to switch from reverse people positions 92 00:05:42,459 --> 00:05:46,579 Speaker 2: within the feds that uh with the fed to buying 93 00:05:46,589 --> 00:05:50,940 Speaker 2: G bills uh without fed, having to shrink the bank 94 00:05:50,950 --> 00:05:54,779 Speaker 2: reserves too much. Uh My biggest worry is that uh 95 00:05:54,790 --> 00:06:00,079 Speaker 2: the system is not uh ready to handle large sudden 96 00:06:00,089 --> 00:06:03,399 Speaker 2: changes in bank bank reserves and we can come to that. 97 00:06:03,410 --> 00:06:06,539 Speaker 2: Uh This is a whole lot, whole topic by itself. 98 00:06:06,839 --> 00:06:11,969 Speaker 2: Uh But, but uh it was a bit cheaper and 99 00:06:11,980 --> 00:06:15,190 Speaker 2: it uh and an opportunity probably to buy T bills. 100 00:06:16,220 --> 00:06:20,040 Speaker 1: Would you uh consider the possibility that that half a trillion, 101 00:06:20,049 --> 00:06:22,549 Speaker 1: which is above the sort of the target balance that 102 00:06:22,559 --> 00:06:25,750 Speaker 1: they absorb uh because they need to spend, but they 103 00:06:25,760 --> 00:06:27,469 Speaker 1: go ahead and spend it immediately and the cash then 104 00:06:27,480 --> 00:06:29,059 Speaker 1: just goes back to the economy within a month or 105 00:06:29,070 --> 00:06:29,349 Speaker 2: two. 106 00:06:31,730 --> 00:06:32,510 Speaker 2: Um 107 00:06:33,428 --> 00:06:36,109 Speaker 2: The uh go goes back. Uh 108 00:06:37,769 --> 00:06:41,660 Speaker 2: uh I am uh I'm, I'm not totally sure they, 109 00:06:41,670 --> 00:06:46,479 Speaker 2: uh the uh that's, I, I don't know there is any, 110 00:06:46,488 --> 00:06:52,489 Speaker 2: anything that the, that was uh pending or postponed in 111 00:06:52,500 --> 00:06:58,359 Speaker 2: terms of spending. Uh There, there were some coupon payments 112 00:06:58,369 --> 00:07:01,159 Speaker 2: to some trust funds, et cetera. That was the only 113 00:07:01,170 --> 00:07:04,779 Speaker 2: extraordinary matter that the treasury did in the last 114 00:07:05,709 --> 00:07:07,359 Speaker 2: 5.5 months or so. 115 00:07:07,980 --> 00:07:10,820 Speaker 2: So I'm not sure that, that, that itself will be 116 00:07:10,829 --> 00:07:15,250 Speaker 2: very stimulated because the cap will go to the uh 117 00:07:15,299 --> 00:07:17,750 Speaker 2: on the a the asset side of the pet balance 118 00:07:17,760 --> 00:07:20,309 Speaker 2: which will not increase as well. It will just be 119 00:07:20,320 --> 00:07:24,700 Speaker 2: a rebalancing. They're not seeing a huge um stimulus to 120 00:07:24,709 --> 00:07:26,929 Speaker 2: the economy just from that cash. It's more of a 121 00:07:26,940 --> 00:07:32,880 Speaker 2: valuation between bills. Um And uh also the reverse repo 122 00:07:32,890 --> 00:07:35,708 Speaker 2: rates as well as the um 123 00:07:36,649 --> 00:07:40,070 Speaker 2: uh the banks having enough reserve. That's the biggest question, 124 00:07:40,880 --> 00:07:45,200 Speaker 1: correct. Um So Mustafa, you said earlier that there is this, 125 00:07:45,209 --> 00:07:45,609 Speaker 1: you know, 126 00:07:46,329 --> 00:07:50,630 Speaker 1: need for replenishing the target balances. And then uh we're 127 00:07:50,640 --> 00:07:52,640 Speaker 1: gonna have this large insurance which may or may not 128 00:07:52,649 --> 00:07:56,459 Speaker 1: have a establishing impact with the question mark around reserves. 129 00:07:56,470 --> 00:07:59,880 Speaker 1: But who is going to buy this? Um Are we 130 00:07:59,890 --> 00:08:04,209 Speaker 1: talking about non-bank financial institutions with a substantial need for 131 00:08:04,220 --> 00:08:07,720 Speaker 1: short term securities or who else is out there are 132 00:08:07,730 --> 00:08:10,290 Speaker 1: a large demand internationally. What's your sense of the investor 133 00:08:10,299 --> 00:08:11,779 Speaker 1: base that will pick up this issue? 134 00:08:13,570 --> 00:08:16,519 Speaker 2: I think that will, that will be an increasing challenge 135 00:08:16,529 --> 00:08:22,730 Speaker 2: to sell treasuries. Uh Right now, the uh the cushion 136 00:08:22,739 --> 00:08:24,820 Speaker 2: between the H two L A, the H T L 137 00:08:24,829 --> 00:08:28,540 Speaker 2: A cushion for banks is fairly tight. So we might 138 00:08:28,549 --> 00:08:33,200 Speaker 2: see banks try to buy more bills and uh take 139 00:08:33,210 --> 00:08:37,349 Speaker 2: uh get out of uh reduce some of the other 140 00:08:37,359 --> 00:08:41,679 Speaker 2: longer duration assets, et cetera. Uh Just because they trust 141 00:08:41,690 --> 00:08:42,358 Speaker 2: a lot of 142 00:08:43,000 --> 00:08:46,618 Speaker 2: changes are coming in terms of banks uh managing their 143 00:08:46,630 --> 00:08:50,789 Speaker 2: balance sheets as well. Uh I also think that investors 144 00:08:50,799 --> 00:08:54,848 Speaker 2: in general, uh this is an uh for them to 145 00:08:54,859 --> 00:08:55,650 Speaker 2: remain a 146 00:08:56,549 --> 00:09:00,400 Speaker 2: remain more, having a higher rate in cash and using 147 00:09:00,520 --> 00:09:05,339 Speaker 2: bills uh would be uh would be another source of 148 00:09:05,349 --> 00:09:09,900 Speaker 2: um buyers in the in the bills market. But over, 149 00:09:09,909 --> 00:09:13,059 Speaker 2: over a, over a longer horizon, there is a big 150 00:09:13,070 --> 00:09:16,650 Speaker 2: challenge for buyers for treasuries. Uh whether it's foreign central 151 00:09:16,659 --> 00:09:24,119 Speaker 2: banks um or banking system, the traditional buyers are uh 152 00:09:25,049 --> 00:09:30,468 Speaker 2: are slowly going to drift away from us treasuries. Uh 153 00:09:30,479 --> 00:09:35,169 Speaker 2: given the size that's coming, not just this replenishment, but 154 00:09:35,179 --> 00:09:39,319 Speaker 2: just the fiscal expansion that's expe expected over the next 155 00:09:39,330 --> 00:09:43,299 Speaker 2: two years that uh selling would be a big problem. 156 00:09:43,559 --> 00:09:45,979 Speaker 2: So in that context, I do, I also think that 157 00:09:45,989 --> 00:09:48,699 Speaker 2: the Q T, uh, they'll have to stop Q T 158 00:09:48,710 --> 00:09:49,559 Speaker 2: fairly soon. 159 00:09:50,609 --> 00:09:52,130 Speaker 1: Ok. I was gonna ask you a question at the 160 00:09:52,140 --> 00:09:53,789 Speaker 1: very end of the podcast and I will ask you 161 00:09:53,799 --> 00:09:55,760 Speaker 1: that question, but just as an early favor. So it 162 00:09:55,770 --> 00:09:58,190 Speaker 1: sounds like you are not particularly bullish to fix and 163 00:09:58,200 --> 00:09:58,859 Speaker 1: come out luck. 164 00:10:00,849 --> 00:10:03,539 Speaker 2: Uh, I am more. Um, 165 00:10:04,260 --> 00:10:08,659 Speaker 2: I'm not particularly bullish at all, uh, in general in 166 00:10:08,669 --> 00:10:12,869 Speaker 2: terms of duration, in terms of, uh rates. But within 167 00:10:12,880 --> 00:10:17,429 Speaker 2: the fixed income, there are areas where there is value and, 168 00:10:17,440 --> 00:10:19,630 Speaker 2: but generally, I think that the fed will have to 169 00:10:19,640 --> 00:10:24,359 Speaker 2: come back after the skip in this week's meeting, but 170 00:10:24,369 --> 00:10:26,299 Speaker 2: uh they will have to come back and hide quite 171 00:10:26,309 --> 00:10:26,650 Speaker 2: a bit. 172 00:10:27,390 --> 00:10:29,630 Speaker 1: All right. Hold on to that thought, we will get 173 00:10:29,640 --> 00:10:32,280 Speaker 1: a deeper into that later. But before we go in 174 00:10:32,289 --> 00:10:36,419 Speaker 1: that direction, I just wanted to ask you your overall sense, 175 00:10:36,429 --> 00:10:39,460 Speaker 1: you know, given this debt ceiling saga and the fact 176 00:10:39,469 --> 00:10:43,250 Speaker 1: that us fiscal debt GDP ratio is, you know, in 177 00:10:43,260 --> 00:10:44,739 Speaker 1: triple digit territory, 178 00:10:45,460 --> 00:10:51,679 Speaker 1: w what would allow for a political consensus to fiscal 179 00:10:51,690 --> 00:10:55,520 Speaker 1: consolidation or is it just hopeless regardless of Republicans or Democrats, 180 00:10:55,530 --> 00:11:00,450 Speaker 1: we will not see meaningful fiscal consolidation in years if 181 00:11:00,460 --> 00:11:01,169 Speaker 1: not decades. 182 00:11:02,409 --> 00:11:06,479 Speaker 2: Uh Yes. And uh I think that we will not 183 00:11:06,489 --> 00:11:10,919 Speaker 2: see any um any sort of fiscal consolidation in years 184 00:11:10,929 --> 00:11:11,419 Speaker 2: to come. 185 00:11:12,020 --> 00:11:15,789 Speaker 2: And uh there's a lot of it in the there 186 00:11:15,799 --> 00:11:19,929 Speaker 2: will be increase in borrowing coming from new sources. Of 187 00:11:19,940 --> 00:11:22,608 Speaker 2: the some of the trust funds are running out by 188 00:11:22,619 --> 00:11:25,070 Speaker 2: the end of this decade. So those will have to 189 00:11:25,080 --> 00:11:28,750 Speaker 2: be run as ongoing entities going forward. So there is 190 00:11:28,760 --> 00:11:31,199 Speaker 2: a lot more insurance needed and this, sorry, 191 00:11:31,210 --> 00:11:32,989 Speaker 1: I just want to interrupt you for one second. So 192 00:11:33,000 --> 00:11:35,080 Speaker 1: by trust funds, you mean social security related 193 00:11:35,090 --> 00:11:36,369 Speaker 2: trust fund by Medicare, 194 00:11:36,640 --> 00:11:42,489 Speaker 2: if Medicare especially is running out uh sometime uh within 195 00:11:42,500 --> 00:11:45,909 Speaker 2: the next 89 years. And so the amount of the 196 00:11:45,919 --> 00:11:49,130 Speaker 2: borrowing that needs to be done just to replenish the 197 00:11:49,140 --> 00:11:52,750 Speaker 2: trust funds or making it an ongoing uh making it 198 00:11:52,760 --> 00:11:56,449 Speaker 2: ongoing rather than using trust fund. Uh will the borrowing 199 00:11:56,520 --> 00:12:00,209 Speaker 2: will go up a lot but interest payments is going 200 00:12:00,219 --> 00:12:04,210 Speaker 2: up also astronomical level, we keep touching a trillion a 201 00:12:04,219 --> 00:12:06,270 Speaker 2: year and these high rates. 202 00:12:06,549 --> 00:12:09,900 Speaker 2: So you uh yes, I I I don't see any 203 00:12:09,909 --> 00:12:12,969 Speaker 2: sort of fiscal consolidation coming up or any kind of ignorance, 204 00:12:14,880 --> 00:12:17,320 Speaker 1: right? So it goes back to your earlier point of 205 00:12:17,330 --> 00:12:21,510 Speaker 1: not being particularly constructive of this income outlook. Um So 206 00:12:21,520 --> 00:12:24,270 Speaker 1: a few months ago, I was visiting you in Washington 207 00:12:24,280 --> 00:12:28,280 Speaker 1: DC and we were talking about the information content in 208 00:12:28,289 --> 00:12:32,579 Speaker 1: the yield curve. Uh It's deeply inverted, it expects lots 209 00:12:32,590 --> 00:12:35,270 Speaker 1: of cuts within a 12 to 18 month horizon. 210 00:12:35,520 --> 00:12:39,229 Speaker 1: Uh Is it necessarily pricing and recession and rate cuts 211 00:12:39,239 --> 00:12:41,218 Speaker 1: or there's something else going on with respect to the 212 00:12:41,229 --> 00:12:44,729 Speaker 1: market structure that we tend to have such steeply inverted 213 00:12:44,739 --> 00:12:45,289 Speaker 1: yield curve? 214 00:12:46,690 --> 00:12:49,159 Speaker 2: I I, I don't think it's, uh, maybe a little 215 00:12:49,169 --> 00:12:52,939 Speaker 2: bit of recession, but I don't think it's, uh, reflecting 216 00:12:52,950 --> 00:12:56,000 Speaker 2: recession or impending recession. Because if you look back a 217 00:12:56,010 --> 00:12:59,140 Speaker 2: year ago, the curve was equally sort of like a 218 00:12:59,150 --> 00:13:03,960 Speaker 2: hockey stick shape is steep decline for the next 219 00:13:05,000 --> 00:13:10,070 Speaker 2: eight quarters and fairly flat after that. And it remained 220 00:13:10,080 --> 00:13:13,929 Speaker 2: the same shape for last one year. So, if the 221 00:13:13,940 --> 00:13:17,989 Speaker 2: yo was any predictor of recession, recession would have uh 222 00:13:18,000 --> 00:13:21,190 Speaker 2: come any uh already by this time. But there's no 223 00:13:21,200 --> 00:13:24,199 Speaker 2: sign of recession. And I don't think when it comes, 224 00:13:24,210 --> 00:13:25,630 Speaker 2: it will be uh 225 00:13:26,760 --> 00:13:30,650 Speaker 2: nowhere close to where the yield curve is telling us. 226 00:13:30,690 --> 00:13:35,770 Speaker 2: I think yellow curve reflects uh mostly markets 227 00:13:36,979 --> 00:13:43,520 Speaker 2: extremely positioned for uh the carry that's available. It's unusually 228 00:13:43,530 --> 00:13:49,069 Speaker 2: large carry from uh betting against the easing that's pricing 229 00:13:49,080 --> 00:13:52,909 Speaker 2: the curve and it's so large that it doesn't allow 230 00:13:52,919 --> 00:13:56,719 Speaker 2: the curve to move much. So every time fed height, 231 00:13:57,119 --> 00:14:01,190 Speaker 2: then the market rep prices one more height and then 232 00:14:01,299 --> 00:14:03,650 Speaker 2: in the curve and not the terminal rate 233 00:14:04,250 --> 00:14:09,039 Speaker 2: and then an offsetting ease after that. And that reflects 234 00:14:09,049 --> 00:14:13,390 Speaker 2: more positioning rather than uh a any kind of uh 235 00:14:13,400 --> 00:14:17,320 Speaker 2: recession uh ahead of us. And I don't think us 236 00:14:17,330 --> 00:14:19,679 Speaker 2: is anywhere near a recession. 237 00:14:20,789 --> 00:14:25,109 Speaker 1: OK. So the flip side of the uh lack of, 238 00:14:25,119 --> 00:14:28,599 Speaker 1: you know, information content in the um inversion of the 239 00:14:28,609 --> 00:14:31,320 Speaker 1: yield curve is also the question that what are the 240 00:14:31,330 --> 00:14:34,590 Speaker 1: uh inflation expectations market telling us? So when we look 241 00:14:34,599 --> 00:14:37,580 Speaker 1: at tips for the five plus five implied inflation rate, 242 00:14:37,590 --> 00:14:43,020 Speaker 1: very well anchored 2.4% 2.5% that doesn't shift. Although in 243 00:14:43,030 --> 00:14:45,679 Speaker 1: the near term, everybody seems to be rather worried about inflation. 244 00:14:45,840 --> 00:14:48,679 Speaker 1: How do you reconcile these two uh perspectives coming from 245 00:14:48,690 --> 00:14:49,219 Speaker 1: the market? 246 00:14:50,669 --> 00:14:53,880 Speaker 2: I think the tips curve is under pricing. Um 247 00:14:55,450 --> 00:14:59,880 Speaker 2: The the tips uh break evens like in the intermediate 248 00:14:59,890 --> 00:15:03,679 Speaker 2: part of the curve uh real rate at so 17 249 00:15:03,989 --> 00:15:09,020 Speaker 2: sort of range, um 10 years sort of uh 1 250 00:15:09,030 --> 00:15:13,520 Speaker 2: 61 51 60 range. The uh the break even on 251 00:15:13,580 --> 00:15:17,440 Speaker 2: between 2 25 I to 2 40 I uh break 252 00:15:17,450 --> 00:15:20,659 Speaker 2: that break even is really low. The the you can 253 00:15:20,669 --> 00:15:21,359 Speaker 2: look at 254 00:15:21,789 --> 00:15:26,750 Speaker 2: many sources to compare why I think it's the first 255 00:15:26,760 --> 00:15:31,140 Speaker 2: Michigan uh consumer expectation one year forward one year, it's 256 00:15:31,150 --> 00:15:37,849 Speaker 2: still 4%. And so 4% minus 2.25, you have 175 257 00:15:37,859 --> 00:15:42,609 Speaker 2: basis points gap between what consumers are expecting versus what 258 00:15:42,619 --> 00:15:44,940 Speaker 2: the tip curve tip curve is staying at. 259 00:15:45,690 --> 00:15:48,510 Speaker 2: Uh So I think that the real rate either the 260 00:15:48,520 --> 00:15:52,750 Speaker 2: real rate is too low uh at five year at 261 00:15:52,760 --> 00:15:54,099 Speaker 2: 1 70. 262 00:15:54,739 --> 00:16:00,289 Speaker 2: Uh And remember also that the Michigan consumers uh one 263 00:16:00,299 --> 00:16:03,820 Speaker 2: year ahead forecast is actually very reliable. If you look 264 00:16:03,830 --> 00:16:09,960 Speaker 2: at 2000 and uh 21 when even uh Chairman Powell 265 00:16:09,969 --> 00:16:13,710 Speaker 2: was saying transitory, et cetera, et cetera, the Michigan consumer 266 00:16:13,719 --> 00:16:15,950 Speaker 2: expectation was actually fairly high. 267 00:16:16,450 --> 00:16:19,599 Speaker 2: And uh so, and that's, that's more of what the 268 00:16:19,609 --> 00:16:22,549 Speaker 2: consumers are feeling on a day to day basis. So 269 00:16:22,559 --> 00:16:28,260 Speaker 2: my feeling is that the market is uh somewhat underpricing 270 00:16:28,270 --> 00:16:35,659 Speaker 2: either uh future uh inflation or uh uh or uh 271 00:16:35,669 --> 00:16:38,979 Speaker 2: also underpricing the fact that uh some 272 00:16:39,729 --> 00:16:43,580 Speaker 2: uh sources of inflation are robust and chances of coming 273 00:16:43,590 --> 00:16:45,780 Speaker 2: back up is very high. And one of them that 274 00:16:45,789 --> 00:16:48,859 Speaker 2: I'm watching quite closely is rental inflation. 275 00:16:49,640 --> 00:16:54,219 Speaker 2: So they initially the views among economists where that there 276 00:16:54,229 --> 00:16:58,570 Speaker 2: is a 12 month lag uh between the real time 277 00:16:58,580 --> 00:17:02,489 Speaker 2: rental measures and the shelter component of CPR and it 278 00:17:02,500 --> 00:17:06,479 Speaker 2: will gradually get incorporated. And so the expectation was that 279 00:17:06,790 --> 00:17:10,780 Speaker 2: uh we'll see the shelter component gradually uh decline and 280 00:17:10,790 --> 00:17:12,170 Speaker 2: which has been the case. 281 00:17:12,948 --> 00:17:15,838 Speaker 2: But if you look at the recent data on rental, 282 00:17:15,848 --> 00:17:19,478 Speaker 2: whether it's uh zero dot com or if you see 283 00:17:19,489 --> 00:17:23,859 Speaker 2: the rental uh read uh the margins and the profits 284 00:17:23,869 --> 00:17:27,898 Speaker 2: of rental rates, the pricing power is very high in 285 00:17:27,909 --> 00:17:33,318 Speaker 2: the rental uh in the apartment industry. And also the 286 00:17:33,328 --> 00:17:38,239 Speaker 2: rent versus buy decision is that is obvious that uh 287 00:17:38,249 --> 00:17:40,639 Speaker 2: rent overwhelms buying 288 00:17:41,339 --> 00:17:45,349 Speaker 2: because of the mortgage rate and the monthly payment. So 289 00:17:45,510 --> 00:17:48,629 Speaker 2: rental is coming back real time rental is coming back up. 290 00:17:48,640 --> 00:17:51,599 Speaker 2: So it will be another shock few months down the 291 00:17:51,609 --> 00:17:54,869 Speaker 2: line that we'll start to see shelter components to P 292 00:17:54,880 --> 00:17:58,829 Speaker 2: I instead of declining as expected starts to go back up. 293 00:17:59,449 --> 00:18:02,708 Speaker 2: So uh all of these are not priced in the 294 00:18:02,719 --> 00:18:06,380 Speaker 2: tips market. So that's one of the recommendation I'm making 295 00:18:06,609 --> 00:18:11,260 Speaker 2: our clients is uh a long term uh value of 296 00:18:11,270 --> 00:18:14,770 Speaker 2: the curve value of the tips curve is probably good 297 00:18:14,780 --> 00:18:21,520 Speaker 2: value plus. Uh this whole question of uh is this 298 00:18:21,530 --> 00:18:24,879 Speaker 2: R star et cetera, which I I'm nervous about 299 00:18:25,349 --> 00:18:28,719 Speaker 2: uh of piling on uh that whether our star has 300 00:18:28,729 --> 00:18:31,349 Speaker 2: gone up a lot and what it is et cetera 301 00:18:31,760 --> 00:18:35,119 Speaker 2: uh is given, given all the other things that have 302 00:18:35,130 --> 00:18:39,439 Speaker 2: been changing structurally. Um buying tips is probably a good idea. 303 00:18:40,199 --> 00:18:43,069 Speaker 1: That's very interesting. So I have to say that one hand, 304 00:18:43,079 --> 00:18:45,069 Speaker 1: you know, there is this question, whether the R star 305 00:18:45,079 --> 00:18:47,079 Speaker 1: is going up or not. And then there is this 306 00:18:47,089 --> 00:18:50,319 Speaker 1: question of this R star star, the financial stability related 307 00:18:50,329 --> 00:18:53,250 Speaker 1: interest rate, whether that the system cannot really absorb the 308 00:18:53,260 --> 00:18:56,709 Speaker 1: actual R star, it'll collapse long before that. Um So 309 00:18:56,719 --> 00:18:58,530 Speaker 1: it seems to me that the market is also sort 310 00:18:58,540 --> 00:19:01,060 Speaker 1: of betting on that, that, you know, 2% inflation will 311 00:19:01,069 --> 00:19:01,709 Speaker 1: never happen, 312 00:19:02,069 --> 00:19:05,280 Speaker 1: any attempt to get there would create a major financial crisis. 313 00:19:05,290 --> 00:19:08,040 Speaker 1: So let's just not assume that inflation will stay high 314 00:19:08,050 --> 00:19:10,599 Speaker 1: uh or rates will stay high even if inflation stays high. 315 00:19:10,750 --> 00:19:12,170 Speaker 1: I'm gonna come back to that because I want to 316 00:19:12,180 --> 00:19:15,219 Speaker 1: ask you two questions on us, fiscal and monetary policy. 317 00:19:15,229 --> 00:19:17,479 Speaker 1: The first one is fiscal, then we'll come back to 318 00:19:17,489 --> 00:19:21,069 Speaker 1: monetary in a second. So Larry Summers famously, almost two 319 00:19:21,079 --> 00:19:23,739 Speaker 1: years ago, wrote that the Biden administration 320 00:19:24,160 --> 00:19:30,079 Speaker 1: um repeated fiscal measures were going to be stimulatory excessively. So, 321 00:19:30,089 --> 00:19:33,260 Speaker 1: and would be inflationary. Now, he had made other nuanced arguments, 322 00:19:33,270 --> 00:19:35,270 Speaker 1: but that's the argument that is stuck and he's become 323 00:19:35,280 --> 00:19:38,349 Speaker 1: so extra famous for making that. So, are you in 324 00:19:38,359 --> 00:19:41,989 Speaker 1: his camp that the last couple of intimate measures on 325 00:19:42,000 --> 00:19:46,448 Speaker 1: the Biden administration coming into office in 2021 was the, 326 00:19:46,989 --> 00:19:49,729 Speaker 1: so the Camels back if you will, that was broken 327 00:19:49,910 --> 00:19:52,149 Speaker 1: and inflation picked up because of that. 328 00:19:53,170 --> 00:19:56,069 Speaker 2: Yes, I totally agree with that. I think that uh 329 00:19:56,079 --> 00:20:00,500 Speaker 2: that took us to about six trillion of uh fiscal spending. 330 00:20:00,510 --> 00:20:04,319 Speaker 2: And remember the student loan forgiveness is still sitting in 331 00:20:04,329 --> 00:20:08,319 Speaker 2: the court system and that will push uh add another 332 00:20:08,329 --> 00:20:13,069 Speaker 2: trillion into the system. So uh uh I totally agree 333 00:20:13,079 --> 00:20:16,319 Speaker 2: with uh Larry Summers on this point that we actually 334 00:20:16,329 --> 00:20:17,899 Speaker 2: went pretty far 335 00:20:18,199 --> 00:20:22,000 Speaker 2: uh even before the Biden a station, the in terms 336 00:20:22,010 --> 00:20:25,250 Speaker 2: of the responses to the uh to COVID. But that's 337 00:20:25,430 --> 00:20:29,310 Speaker 2: sort of hard to judge because if no one knew 338 00:20:29,319 --> 00:20:33,040 Speaker 2: at that time, uh what the, what the total impact 339 00:20:33,050 --> 00:20:37,339 Speaker 2: of COVID would be. But in the last couple of years, 340 00:20:37,469 --> 00:20:40,829 Speaker 2: it's known and we COVID is under control and we 341 00:20:40,839 --> 00:20:44,369 Speaker 2: are still spending uh almost out of control. So I 342 00:20:44,380 --> 00:20:47,890 Speaker 2: think I, I totally agree that uh the fiscal 343 00:20:48,219 --> 00:20:53,069 Speaker 2: uh impulse has been a key driver of the uh 344 00:20:53,079 --> 00:20:55,790 Speaker 2: demand side of the inflation. Equation at least. 345 00:20:56,670 --> 00:20:58,569 Speaker 2: And the supply side was already there. 346 00:20:58,839 --> 00:21:02,280 Speaker 1: Right. Right. And, and now we're seeing supply side easing, 347 00:21:02,290 --> 00:21:04,079 Speaker 1: but the demand side is still not going away 348 00:21:05,810 --> 00:21:08,468 Speaker 2: and, uh, unlikely to go anytime soon. 349 00:21:08,819 --> 00:21:11,458 Speaker 1: Right. Ok. But what about the fat? I mean, do 350 00:21:11,469 --> 00:21:14,449 Speaker 1: you have any sympathy for the ft that it's easy 351 00:21:14,459 --> 00:21:16,670 Speaker 1: for us to look back and say they should have 352 00:21:16,680 --> 00:21:19,650 Speaker 1: started hiking much earlier. But given the information they had 353 00:21:19,660 --> 00:21:23,489 Speaker 1: at that time, uh they probably did the best they could. 354 00:21:23,500 --> 00:21:26,339 Speaker 1: I'm sort of using the Paul Krugman argument. Do you 355 00:21:26,349 --> 00:21:26,579 Speaker 1: have any 356 00:21:26,589 --> 00:21:27,468 Speaker 2: sympathy with that? 357 00:21:28,770 --> 00:21:29,520 Speaker 2: Uh 358 00:21:30,729 --> 00:21:35,760 Speaker 2: Not as much because I think that uh F F I, I, 359 00:21:35,770 --> 00:21:41,239 Speaker 2: I think that the fed has uh fed had uh 360 00:21:41,250 --> 00:21:44,520 Speaker 2: or rather, I'd rather say that this fed 361 00:21:45,239 --> 00:21:50,810 Speaker 2: even before all the dash New Davis members join is 362 00:21:50,819 --> 00:21:51,900 Speaker 2: inherently Davi. 363 00:21:52,989 --> 00:21:56,979 Speaker 2: And so they want always an excuse not to hike 364 00:21:57,239 --> 00:22:02,969 Speaker 2: even now, uh You see, uh the, this whole skip 365 00:22:03,099 --> 00:22:06,530 Speaker 2: versus pause, there is the wording. So there is an 366 00:22:06,540 --> 00:22:12,069 Speaker 2: inherent ness in the Fed and this whole uh transitory 367 00:22:12,079 --> 00:22:16,359 Speaker 2: versus permanent and leaning towards transitory and then suddenly change. 368 00:22:16,369 --> 00:22:17,938 Speaker 2: All the impatient data was 369 00:22:18,609 --> 00:22:25,219 Speaker 2: fairly strong throughout 2021. Not until November that the chairman 370 00:22:25,469 --> 00:22:29,609 Speaker 2: uh first time mentioned something about non transitory. So I, 371 00:22:29,619 --> 00:22:32,640 Speaker 2: I do believe that there, there, there, there was a 372 00:22:32,890 --> 00:22:36,680 Speaker 2: somewhat of a policy error in 2021 we are paying 373 00:22:36,689 --> 00:22:37,800 Speaker 2: some price for that. 374 00:22:39,910 --> 00:22:43,979 Speaker 1: Um Earlier, you said that you don't necessarily see a 375 00:22:43,989 --> 00:22:48,770 Speaker 1: major recession on the horizon. You see rental prices, you know, again, 376 00:22:48,780 --> 00:22:51,239 Speaker 1: ratcheting up demand being strong. 377 00:22:51,609 --> 00:22:57,000 Speaker 1: Um but we've had substantial policy tightening in the last year. Mustafa, 378 00:22:57,250 --> 00:23:00,978 Speaker 1: and we saw perhaps a bit of that percolating through 379 00:23:00,989 --> 00:23:04,919 Speaker 1: the banking system in March and April. Are you worried 380 00:23:04,930 --> 00:23:07,130 Speaker 1: that there are other areas, there are other fault lines 381 00:23:07,140 --> 00:23:09,310 Speaker 1: to borrow a phrase from Ra Ra Rajan that there 382 00:23:09,319 --> 00:23:12,030 Speaker 1: are other fault lines that are lurking here and there 383 00:23:12,140 --> 00:23:15,399 Speaker 1: that would uh cause us some distress by forward. 384 00:23:17,400 --> 00:23:17,930 Speaker 2: Um 385 00:23:18,689 --> 00:23:21,770 Speaker 2: within the banking system there is I I'm not sure 386 00:23:21,780 --> 00:23:23,949 Speaker 2: prices personally. Uh 387 00:23:25,000 --> 00:23:27,469 Speaker 2: in terms of the way the market is positioned, I 388 00:23:27,479 --> 00:23:30,729 Speaker 2: wanted to uh mention that before I answer this question. 389 00:23:31,199 --> 00:23:32,688 Speaker 2: If you look at the market, 390 00:23:33,359 --> 00:23:36,589 Speaker 2: the Silicon Valley Bank news when it came out on 391 00:23:36,599 --> 00:23:41,000 Speaker 2: the first week of March, the interest rate, the two 392 00:23:41,010 --> 00:23:45,489 Speaker 2: year rate rallied something like 125 basis points almost overnight. 393 00:23:46,290 --> 00:23:51,280 Speaker 2: And then whenever we get a news about heights, it 394 00:23:51,290 --> 00:23:55,550 Speaker 2: doesn't sell off. So there is an asymmetry in the market. 395 00:23:55,680 --> 00:24:00,280 Speaker 2: So the the rallies are big if a bad news arrives, 396 00:24:00,459 --> 00:24:03,948 Speaker 2: but the selloffs are not are sort of gradual. It 397 00:24:03,959 --> 00:24:08,000 Speaker 2: just shows where the vulnerability lies in the market. The market, 398 00:24:08,010 --> 00:24:12,699 Speaker 2: the bond market is vulnerable to bad news, bad banking news. 399 00:24:12,709 --> 00:24:15,000 Speaker 2: It's just that banking, bad banking news 400 00:24:15,300 --> 00:24:16,630 Speaker 2: is not happening. 401 00:24:17,510 --> 00:24:22,209 Speaker 2: Uh The the interest of uh in terms of the strength, 402 00:24:22,219 --> 00:24:27,020 Speaker 2: why this session is less likely announced when the fault 403 00:24:27,030 --> 00:24:30,020 Speaker 2: lines are coming, the strength of the market, 404 00:24:30,689 --> 00:24:35,060 Speaker 2: uh the, the fed, the and also the economist commu 405 00:24:35,069 --> 00:24:39,739 Speaker 2: the analyst community et cetera, all sort of misread and 406 00:24:39,750 --> 00:24:45,099 Speaker 2: constantly under uh predicting the payrolls that 15 months in 407 00:24:45,109 --> 00:24:49,060 Speaker 2: a row that the payroll forecasts have been lower than realized. 408 00:24:49,180 --> 00:24:53,349 Speaker 2: So the everyone's forecasting a recession, but it's not happening. 409 00:24:53,540 --> 00:24:54,839 Speaker 2: I think that one of the things that 410 00:24:55,530 --> 00:24:59,910 Speaker 2: the most ignored has been how strong the households are, 411 00:25:00,790 --> 00:25:03,150 Speaker 2: the and most of that is because of the lock 412 00:25:03,160 --> 00:25:03,719 Speaker 2: in effect, 413 00:25:04,329 --> 00:25:07,180 Speaker 2: uh that they're locked in a 2.5 to 3% mortgage, 414 00:25:07,189 --> 00:25:10,300 Speaker 2: but they stay, they close to 7% that created a 415 00:25:10,310 --> 00:25:15,699 Speaker 2: lot of implied wealth in the housing household balance, even 416 00:25:15,709 --> 00:25:18,380 Speaker 2: if it doesn't show up in the bank account and 417 00:25:18,390 --> 00:25:23,739 Speaker 2: the impolitic to take risk uh for the households as well. 418 00:25:24,359 --> 00:25:27,329 Speaker 2: And so what it really means is that 419 00:25:28,050 --> 00:25:31,650 Speaker 2: any, any kind of credit tightening does not seem to 420 00:25:31,660 --> 00:25:36,680 Speaker 2: affect the households, uh They seem to be rock solid fan. 421 00:25:37,109 --> 00:25:40,760 Speaker 2: Uh And I think it, that's that that whole lock 422 00:25:40,770 --> 00:25:44,099 Speaker 2: in effect is way bigger and has not been in 423 00:25:44,109 --> 00:25:47,729 Speaker 2: anybody's model because there is no data uh from the 424 00:25:47,739 --> 00:25:49,640 Speaker 2: past for the lock in effect. 425 00:25:50,079 --> 00:25:54,170 Speaker 2: So when it left leaves us, so we can't tighten 426 00:25:54,180 --> 00:25:58,250 Speaker 2: credit for households because they're coming to this hiking cycle. 427 00:25:58,260 --> 00:26:01,489 Speaker 2: So strong and getting stronger. Um 428 00:26:02,479 --> 00:26:07,929 Speaker 2: But at the same time, firms are gradually starting to 429 00:26:07,939 --> 00:26:10,579 Speaker 2: um with show weakness. And the first we start the 430 00:26:10,589 --> 00:26:15,369 Speaker 2: pricing power and the the ability to maintain margin that's 431 00:26:15,380 --> 00:26:19,489 Speaker 2: starting to deplete somewhat. And the weak link really is, 432 00:26:19,500 --> 00:26:23,228 Speaker 2: uh in my opinion, coming from, eventually come, already started 433 00:26:23,239 --> 00:26:28,389 Speaker 2: coming from and get bigger is the small banks 434 00:26:28,979 --> 00:26:30,430 Speaker 2: to small firms 435 00:26:31,020 --> 00:26:36,010 Speaker 2: to jobs and then demand as opposed to path when 436 00:26:36,020 --> 00:26:42,050 Speaker 2: we had demand directly from tightening credit to consumers. 437 00:26:42,869 --> 00:26:45,728 Speaker 2: So there is a few steps that will happen. And 438 00:26:45,739 --> 00:26:49,879 Speaker 2: that's where the main uh a measure weekly because I'm, 439 00:26:49,890 --> 00:26:53,239 Speaker 2: I'm playing with some data on uh small banks, uh 440 00:26:53,250 --> 00:26:56,919 Speaker 2: financial statements for the first quarter. And I see that 441 00:26:58,040 --> 00:27:02,540 Speaker 2: almost all of them have significant decline in non-interest deposits. 442 00:27:03,000 --> 00:27:06,609 Speaker 2: And then they have replaced that with higher interest rate 443 00:27:06,619 --> 00:27:11,630 Speaker 2: bearing deposits uh or a home loan advances which are 444 00:27:11,640 --> 00:27:15,948 Speaker 2: full interest rates, et cetera. So the margin is compressing 445 00:27:15,959 --> 00:27:20,530 Speaker 2: much faster than the aggregate data show that. And if 446 00:27:20,540 --> 00:27:22,609 Speaker 2: you look at the behavior of the small banks in 447 00:27:22,619 --> 00:27:23,469 Speaker 2: the United States, 448 00:27:23,839 --> 00:27:27,670 Speaker 2: they tend to uh lend, they, they, they usually don't 449 00:27:27,680 --> 00:27:31,869 Speaker 2: have securities and they lend to small businesses that are 450 00:27:31,880 --> 00:27:33,489 Speaker 2: mostly relationship based 451 00:27:34,180 --> 00:27:38,790 Speaker 2: and as uh the margins compressing for small banks, the 452 00:27:38,800 --> 00:27:42,709 Speaker 2: small big businesses will have the first hit in terms 453 00:27:42,719 --> 00:27:45,839 Speaker 2: of credit availability from small banks. And we are already 454 00:27:45,849 --> 00:27:49,869 Speaker 2: seeing that, that some of the survey results for small businesses, 455 00:27:50,170 --> 00:27:54,069 Speaker 2: uh N F I B et cetera. Uh The creditability 456 00:27:54,079 --> 00:27:55,958 Speaker 2: for small businesses are 457 00:27:56,199 --> 00:28:00,458 Speaker 2: uh compressing and so, and the jobs, a large portion 458 00:28:00,469 --> 00:28:03,270 Speaker 2: of the job in the US are actually small firms. 459 00:28:03,439 --> 00:28:06,958 Speaker 2: And so that's where we'll see uh the, the weak 460 00:28:06,969 --> 00:28:12,909 Speaker 2: link coming. Uh but that it's slower process than in 461 00:28:12,920 --> 00:28:16,310 Speaker 2: the past. And, but that's that I think is uh 462 00:28:16,319 --> 00:28:19,469 Speaker 2: a major weakness uh going forward. 463 00:28:20,550 --> 00:28:24,139 Speaker 1: First of all, what about the link between banks and 464 00:28:24,150 --> 00:28:25,180 Speaker 1: commercial real estate? 465 00:28:27,800 --> 00:28:29,410 Speaker 2: Uh If there is a uh 466 00:28:30,130 --> 00:28:34,000 Speaker 2: commercial deals, say that you know, that um really uh 467 00:28:34,010 --> 00:28:34,979 Speaker 2: vulnerable 468 00:28:35,609 --> 00:28:39,339 Speaker 2: uh with the vacancy rate uh and office properties is 469 00:28:39,349 --> 00:28:45,250 Speaker 2: extremely large. Uh so, but proportionate. So there will be 470 00:28:45,260 --> 00:28:51,119 Speaker 2: vulnerability uh especially the same banks that are uh also 471 00:28:51,130 --> 00:28:53,130 Speaker 2: uh the small banks will also be hit with the 472 00:28:53,140 --> 00:28:56,020 Speaker 2: commercial real estate uh but also commercial C N I 473 00:28:56,030 --> 00:29:02,459 Speaker 2: loans for local small banks. But middle price banks um 474 00:29:02,949 --> 00:29:05,569 Speaker 2: uh will also be hit somewhat with the commercial real 475 00:29:05,579 --> 00:29:09,479 Speaker 2: estate as they reprice uh going forward. 476 00:29:10,359 --> 00:29:11,709 Speaker 2: Uh But they are not 477 00:29:13,189 --> 00:29:16,050 Speaker 2: the size of the commercial real estate market is still 478 00:29:16,060 --> 00:29:20,229 Speaker 2: not big enough to cause a serious systemic risk of 479 00:29:20,239 --> 00:29:22,979 Speaker 2: the kind that we have seen in 2008 and nine 480 00:29:22,989 --> 00:29:25,270 Speaker 2: from uh residential real estate. 481 00:29:27,050 --> 00:29:30,349 Speaker 1: Um What about non-bank financial institutions? I mean, over the 482 00:29:30,359 --> 00:29:35,479 Speaker 1: last decade and I have private equity venture capital, these 483 00:29:35,489 --> 00:29:39,619 Speaker 1: entities have played such a big role in fundraising, financing, 484 00:29:39,630 --> 00:29:42,790 Speaker 1: the expansion of the tech cycle and perhaps even going 485 00:29:42,800 --> 00:29:45,719 Speaker 1: forward the industrial policy that is being pursued by the 486 00:29:45,780 --> 00:29:49,780 Speaker 1: US government. Um Where do you see those sort of 487 00:29:50,189 --> 00:29:53,640 Speaker 1: financial models which are highly leveraged, which tend to be, 488 00:29:53,650 --> 00:29:57,219 Speaker 1: you know, long gestation period? Can they survive this spike 489 00:29:57,229 --> 00:29:58,060 Speaker 1: in interest rates? 490 00:30:00,239 --> 00:30:04,089 Speaker 2: Um I the, the, the uh those are uh 491 00:30:04,869 --> 00:30:07,589 Speaker 2: I don't know the survival question, but those are, there 492 00:30:07,599 --> 00:30:07,780 Speaker 2: is 493 00:30:08,390 --> 00:30:11,579 Speaker 2: need to study more of those in general. But in 494 00:30:11,589 --> 00:30:15,609 Speaker 2: the analyst circle, uh there is always uh the question 495 00:30:15,619 --> 00:30:19,060 Speaker 2: of what, what does the price thing mean in private equity? 496 00:30:19,339 --> 00:30:22,010 Speaker 2: Uh the all of the, the whole industry is dependent 497 00:30:22,020 --> 00:30:24,979 Speaker 2: on the fact that uh this sector is not market 498 00:30:24,989 --> 00:30:29,459 Speaker 2: to market and therefore will survive. Uh So the point 499 00:30:29,709 --> 00:30:32,030 Speaker 2: uh the thing to look for is what are the 500 00:30:32,040 --> 00:30:36,680 Speaker 2: events that will lead to market to market uh for 501 00:30:36,689 --> 00:30:39,859 Speaker 2: venture capital, for example. And so they all of that 502 00:30:39,869 --> 00:30:43,310 Speaker 2: will depend on the funding uh as they go for 503 00:30:43,319 --> 00:30:45,910 Speaker 2: refunding and every time they go for refunding, they get 504 00:30:45,920 --> 00:30:49,900 Speaker 2: there is a uh mark to market event for private equity. 505 00:30:50,319 --> 00:30:52,500 Speaker 2: So a lot of this, it is 506 00:30:52,880 --> 00:30:56,010 Speaker 2: uh I I think that will happen, the leverage, the 507 00:30:56,020 --> 00:30:59,839 Speaker 2: refunding will be based on the amount of leverage uh 508 00:30:59,849 --> 00:31:04,630 Speaker 2: in that particular industry. And uh so it may be 509 00:31:04,640 --> 00:31:06,890 Speaker 2: a little slower but there is some vulnerability there 510 00:31:08,780 --> 00:31:11,699 Speaker 1: if we are indeed going to have a higher for 511 00:31:11,709 --> 00:31:16,390 Speaker 1: longer interest rate environment. Comment on the international ramifications of 512 00:31:16,400 --> 00:31:19,489 Speaker 1: that every time we have seen an interest rate cycle 513 00:31:19,500 --> 00:31:22,630 Speaker 1: of the US, it's caused emerging market distress going back 514 00:31:22,640 --> 00:31:25,750 Speaker 1: to the eighties. Uh who's gonna get hurt and how 515 00:31:25,760 --> 00:31:26,890 Speaker 1: bad will be that pain? 516 00:31:29,469 --> 00:31:32,579 Speaker 2: Uh I think it's always the emerging market seems to 517 00:31:32,589 --> 00:31:37,459 Speaker 2: pay a price uh as the interest rates um increase. 518 00:31:37,469 --> 00:31:41,459 Speaker 2: Uh take for example what I think. Uh, so we 519 00:31:41,469 --> 00:31:44,770 Speaker 2: will have no hikes this week, but in July, we 520 00:31:44,780 --> 00:31:49,469 Speaker 2: will have another hike and, um, and maybe one or 521 00:31:49,479 --> 00:31:54,020 Speaker 2: two more hikes the rest of this year. So that, uh, the, the, 522 00:31:54,030 --> 00:31:56,780 Speaker 2: we had a little bit of a do in dollar, 523 00:31:56,959 --> 00:31:58,479 Speaker 2: but we will start to see, 524 00:31:58,819 --> 00:32:02,729 Speaker 2: uh, and this next 100 basis point of hike would 525 00:32:02,739 --> 00:32:07,219 Speaker 2: be a surprise for the market because everyone's thinking, oh, 526 00:32:07,229 --> 00:32:10,619 Speaker 2: it's already too high. It's the end of the hiking cycle. 527 00:32:10,630 --> 00:32:14,640 Speaker 2: But suddenly we are heading for 6, 6.5 in rate. 528 00:32:14,930 --> 00:32:19,130 Speaker 2: And so the dollar, uh, will come back into play and, um, 529 00:32:19,140 --> 00:32:22,469 Speaker 2: hit the emerging market. Uh, I think fairly hard that 530 00:32:22,479 --> 00:32:26,390 Speaker 2: if the dollar, uh starts, uh, we already, uh, 531 00:32:26,670 --> 00:32:33,449 Speaker 2: being three towards, uh, with the euro. Uh, so, uh, 532 00:32:33,469 --> 00:32:35,920 Speaker 2: I think probably about one oh 51 oh six now. 533 00:32:36,239 --> 00:32:40,160 Speaker 2: And so that's, um, I worry about that a lot 534 00:32:40,579 --> 00:32:45,560 Speaker 2: in terms of the US consumers being so strong leading to, 535 00:32:46,270 --> 00:32:51,060 Speaker 2: uh, in, in, in, uh, inflation, persistent more height than 536 00:32:51,739 --> 00:32:57,069 Speaker 2: already happened, which should be a complete surprise to both 537 00:32:57,079 --> 00:33:01,609 Speaker 2: analyst circle and the market. And uh at the end, 538 00:33:01,619 --> 00:33:06,229 Speaker 2: emerging markets and FED has not absolutely always ignored that 539 00:33:06,239 --> 00:33:08,290 Speaker 2: part of their policy decision. 540 00:33:09,750 --> 00:33:13,060 Speaker 1: So I share your concern that yes, of course, you know, 541 00:33:13,069 --> 00:33:16,579 Speaker 1: interest rate channel is one that will create refinancing risks 542 00:33:16,589 --> 00:33:19,569 Speaker 1: all around the world. But this dollar channel in my 543 00:33:19,579 --> 00:33:22,229 Speaker 1: view is even more underpriced because everybody that I talked 544 00:33:22,239 --> 00:33:24,819 Speaker 1: to in the street is basically be the dollar. They 545 00:33:24,829 --> 00:33:27,599 Speaker 1: think the fed is about to pause time to go along. 546 00:33:27,609 --> 00:33:32,060 Speaker 1: Euro long y et cetera. If that scenario that you're 547 00:33:32,069 --> 00:33:35,780 Speaker 1: contemplating that there are several more hikes left in this cycle. 548 00:33:36,119 --> 00:33:39,310 Speaker 1: Um I think it's gonna be pretty bad uh through 549 00:33:39,319 --> 00:33:41,020 Speaker 1: the channel as much as it is through the 550 00:33:41,030 --> 00:33:41,849 Speaker 2: interest rate channel. 551 00:33:42,709 --> 00:33:45,589 Speaker 2: And most interestingly is that it will be, it will 552 00:33:45,599 --> 00:33:49,800 Speaker 2: be bad for everyone else, whether it's emerging markets or 553 00:33:49,810 --> 00:33:54,479 Speaker 2: even credit products like high yield. And uh but us 554 00:33:54,489 --> 00:33:58,170 Speaker 2: consumers will still be fairly redeemed. Yes. Which is the 555 00:33:58,310 --> 00:34:01,760 Speaker 2: interesting part of this whole uh this uh this whole 556 00:34:01,989 --> 00:34:03,699 Speaker 2: uh high episode. 557 00:34:04,569 --> 00:34:06,510 Speaker 1: Yeah, or you could say the unfair part of this 558 00:34:06,520 --> 00:34:07,510 Speaker 1: whole episode, the 559 00:34:07,520 --> 00:34:08,540 Speaker 2: unfair part of it. 560 00:34:09,719 --> 00:34:11,770 Speaker 2: And, and I, one thing I will, I will add 561 00:34:11,780 --> 00:34:16,020 Speaker 2: is uh is that I think the the that the 562 00:34:16,030 --> 00:34:19,729 Speaker 2: part dependency, it's not about what the interest rate level is. 563 00:34:19,750 --> 00:34:23,310 Speaker 2: It's the part which the interest rate took to get 564 00:34:23,320 --> 00:34:27,270 Speaker 2: to this point is critical and everyone's ignored that. And 565 00:34:27,280 --> 00:34:31,320 Speaker 2: the fact that we remained at this zero rate environment 566 00:34:31,590 --> 00:34:36,370 Speaker 2: for almost a decade makes a big difference to 567 00:34:36,719 --> 00:34:41,459 Speaker 2: uh of uh of this uh 500 plus basis point 568 00:34:41,469 --> 00:34:44,209 Speaker 2: than if it was just a V shape cut and high. 569 00:34:44,489 --> 00:34:48,820 Speaker 2: But zero for many years and then coming back up 570 00:34:48,830 --> 00:34:53,169 Speaker 2: has changed the structure of different participants in the economy. 571 00:34:53,179 --> 00:34:55,850 Speaker 2: So we have uh the market hasn't been able to 572 00:34:55,860 --> 00:35:01,449 Speaker 2: capture that and so constantly underpricing the terminal uh rate scenario. 573 00:35:02,340 --> 00:35:05,860 Speaker 1: Very, very well put Mustafa I think that academics themselves 574 00:35:05,870 --> 00:35:08,040 Speaker 1: have not spent a lot of time thinking about this 575 00:35:08,189 --> 00:35:10,219 Speaker 1: a couple of episodes ago, we had Robert M Raj 576 00:35:10,229 --> 00:35:11,669 Speaker 1: and he is one of those few academics who have 577 00:35:11,679 --> 00:35:15,659 Speaker 1: been writing fairly consistently about this asymmetry associated with Q 578 00:35:15,669 --> 00:35:18,780 Speaker 1: E versus Q T and the various applications get through 579 00:35:18,790 --> 00:35:21,310 Speaker 1: the banking system. Uh You echoed it also very, very well. 580 00:35:21,320 --> 00:35:22,810 Speaker 1: So yes, I I I that 581 00:35:23,469 --> 00:35:26,850 Speaker 1: um OK. Uh Here's a final question for you. How 582 00:35:26,860 --> 00:35:30,239 Speaker 1: would you construct a fixed income portfolio for next year? 583 00:35:30,250 --> 00:35:32,419 Speaker 1: You've talked about the belly of the tips curve already, 584 00:35:32,429 --> 00:35:33,580 Speaker 1: but give us a little more. 585 00:35:34,469 --> 00:35:39,239 Speaker 2: Yeah, so I the the portfolio that I have been 586 00:35:39,250 --> 00:35:43,489 Speaker 2: uh recommending uh uh my clients is that the tips, 587 00:35:43,500 --> 00:35:47,909 Speaker 2: of course, the value of the tips curve uh potential for. 588 00:35:47,919 --> 00:35:50,819 Speaker 2: Uh and that's mainly because the fed might change its target, 589 00:35:50,830 --> 00:35:53,669 Speaker 2: even if it's, they don't talk about, they won't announce 590 00:35:53,679 --> 00:35:56,870 Speaker 2: it publicly, but uh just change the target to a 591 00:35:56,879 --> 00:36:00,729 Speaker 2: higher level. So a good long term investment investment, I 592 00:36:00,739 --> 00:36:03,860 Speaker 2: also think that the US consumer would be very solid. 593 00:36:04,229 --> 00:36:09,138 Speaker 2: And so uh mortgage US M BS is a good 594 00:36:09,149 --> 00:36:13,549 Speaker 2: buy even at this current level. And mainly because because 595 00:36:13,560 --> 00:36:16,530 Speaker 2: of the lock in effect, American households are not moving 596 00:36:16,540 --> 00:36:19,600 Speaker 2: around as much as they usually do. And so housing 597 00:36:19,610 --> 00:36:23,540 Speaker 2: turnover is at its historic low record low and 598 00:36:24,310 --> 00:36:28,419 Speaker 2: just because everyone's so happy with their mortgage, they don't 599 00:36:28,429 --> 00:36:31,770 Speaker 2: want to move. But eventually there is a certain minimum 600 00:36:31,780 --> 00:36:36,120 Speaker 2: amount of relocation that the society has to do so 601 00:36:36,129 --> 00:36:40,370 Speaker 2: or there's only upside to uh housing turnover. And at 602 00:36:40,379 --> 00:36:42,949 Speaker 2: this interest rate, housing turnover is going to be very 603 00:36:42,959 --> 00:36:48,500 Speaker 2: positive for uh valuation of uh us uh mortgages. I 604 00:36:48,510 --> 00:36:51,549 Speaker 2: also think that uh there's some turmoil coming up uh 605 00:36:51,560 --> 00:36:53,899 Speaker 2: in terms of valuation in the next few months 606 00:36:54,330 --> 00:36:58,879 Speaker 2: with the uh with especially this how this replenishment of 607 00:36:58,889 --> 00:37:04,500 Speaker 2: the um the the PGA account and whether the Reserves 608 00:37:04,510 --> 00:37:08,469 Speaker 2: bank reserves will have to fluctuate because of that. And 609 00:37:08,479 --> 00:37:12,899 Speaker 2: that might create some happening in credit uh corporate credit products. 610 00:37:13,060 --> 00:37:16,429 Speaker 2: So I will pay with some cash uh Now at 611 00:37:16,439 --> 00:37:20,319 Speaker 2: this very high yield and potential for higher rates going forward. 612 00:37:20,659 --> 00:37:23,138 Speaker 2: And then I jump in later in the year, maybe 613 00:37:23,149 --> 00:37:25,419 Speaker 2: a few months down the line in probably there will 614 00:37:25,429 --> 00:37:31,439 Speaker 2: be opportunities in high yield and also opportunities in investment grade. 615 00:37:31,500 --> 00:37:35,669 Speaker 2: It seems like unusually tight for this environment. If the, 616 00:37:35,679 --> 00:37:40,070 Speaker 2: the curve was reflecting recession, the brand don't show it. 617 00:37:41,129 --> 00:37:42,489 Speaker 2: So on that, 618 00:37:43,840 --> 00:37:45,530 Speaker 1: I was just gonna ask you any view on a 619 00:37:45,540 --> 00:37:46,530 Speaker 1: European fixed income. 620 00:37:49,060 --> 00:37:53,870 Speaker 2: Uh the, the uh I think that they, they will 621 00:37:53,879 --> 00:37:57,989 Speaker 2: probably uh well, we, we have about two hikes price 622 00:37:58,000 --> 00:38:01,399 Speaker 2: in uh uh in the. So I, I still think 623 00:38:01,409 --> 00:38:05,020 Speaker 2: the US will be a better buy uh in the, 624 00:38:05,030 --> 00:38:05,580 Speaker 2: in the tip, 625 00:38:06,659 --> 00:38:11,909 Speaker 2: uh especially uh with the higher dollar uh staying with 626 00:38:11,919 --> 00:38:12,819 Speaker 2: the US will probably. 627 00:38:14,229 --> 00:38:17,540 Speaker 1: All right, you're, you're, you're giving us views that is 628 00:38:17,550 --> 00:38:20,530 Speaker 1: not widely shared in the markets. And uh so we 629 00:38:20,540 --> 00:38:21,260 Speaker 1: will remember these 630 00:38:21,270 --> 00:38:21,310 Speaker 2: ones 631 00:38:23,379 --> 00:38:25,600 Speaker 2: time. We'll catch up again a few months down the 632 00:38:25,610 --> 00:38:28,340 Speaker 2: line and see if that comes back and hikes. Oh, 633 00:38:28,350 --> 00:38:28,939 Speaker 2: it doesn't have to 634 00:38:28,949 --> 00:38:30,279 Speaker 1: be a couple of months. I'll, I'll give you long 635 00:38:30,290 --> 00:38:32,638 Speaker 1: longer than that. We'll, we'll release the six months from 636 00:38:32,649 --> 00:38:34,780 Speaker 1: now and we see during the IMF animal meetings, we'll 637 00:38:34,790 --> 00:38:39,129 Speaker 1: probably take stock. Uh Most of us, thank you so 638 00:38:39,139 --> 00:38:40,439 Speaker 1: much for your time and insights. 639 00:38:42,889 --> 00:38:45,959 Speaker 1: All episodes of copy time are available on youtube as 640 00:38:45,969 --> 00:38:49,260 Speaker 1: well as an all major platform uh for podcasts including 641 00:38:49,270 --> 00:38:52,820 Speaker 1: Apple Google and Spotify. As far as our research publications 642 00:38:52,830 --> 00:38:55,159 Speaker 1: and webinars are concerned, you can find them all by 643 00:38:55,169 --> 00:38:58,280 Speaker 1: Googling D BS research library. Have a great day.