WEBVTT - Kopi Time E102 - Mustafa Chowdhury on why rates will remain higher for longer 0:00:06.230 --> 0:00:09.689 Welcome to COVID Time, a podcast series on Markets and 0:00:09.699 --> 0:00:13.869 Economies from Devious Group research. I'm Tambe, chief economist. Welcome 0:00:13.880 --> 0:00:18.760 you to our 102nd episode today. It's time to take 0:00:18.770 --> 0:00:21.049 a deep dive in the world of global fixed income 0:00:21.059 --> 0:00:26.399 macro from debt ceiling to the forthcoming tsunami of treasury issuances, 0:00:26.409 --> 0:00:29.700 funding conditions to fed rates and quantitative tightening. There's a 0:00:29.709 --> 0:00:30.979 lot to chew on. 0:00:31.530 --> 0:00:35.319 Our guest is an absolute expert on these issues. Musta 0:00:35.700 --> 0:00:39.000 Chori has held senior positions at several leading firms including 0:00:39.009 --> 0:00:43.009 voya Investments, Deutsche Bank, Bear Sterns and Freddie Mac. He 0:00:43.020 --> 0:00:46.419 has a wealth of knowledge and expertise on trading research 0:00:46.430 --> 0:00:46.520 and 0:00:46.598 --> 0:00:49.990 proportio management of G 10 macro rates, mortgage backed securities 0:00:50.000 --> 0:00:53.540 and derivatives. Most recently, Mustafa was the head of rates, 0:00:53.549 --> 0:00:56.759 effects and derivatives at Y investments where he was part 0:00:56.770 --> 0:00:59.520 of a team that managed more than $40 billion in 0:00:59.529 --> 0:01:03.909 institutional fixed income portfolios. Must chori a warm welcome to 0:01:03.919 --> 0:01:04.370 Cope Time. 0:01:05.980 --> 0:01:10.768 Thanks for having me on your show and congratulations on 0:01:10.779 --> 0:01:14.690 uh more than 100 100th episode at this point. 0:01:15.529 --> 0:01:17.779 Thanks very much. And you know, we've been talking about 0:01:17.790 --> 0:01:19.830 having you on for a long, long time. So I'm 0:01:19.839 --> 0:01:22.839 finally glad that between your busy schedule and travel, you 0:01:22.849 --> 0:01:25.080 manage to squeeze in some time for us, but I 0:01:25.089 --> 0:01:26.839 will take full advantage of that one. So I have 0:01:26.849 --> 0:01:31.000 lots of questions for you. So, uh let's uh, start 0:01:31.010 --> 0:01:35.019 with the recently quote unquote concluded debt ceiling matter. Looks 0:01:35.029 --> 0:01:37.910 like we're done for a couple of years. What should 0:01:37.919 --> 0:01:40.989 we take away from this drama? And what about the 0:01:41.000 --> 0:01:43.139 eventual resolution that we have right now? 0:01:44.650 --> 0:01:48.220 Uh I think the drama ended a lot better than 0:01:48.230 --> 0:01:53.680 I had anticipated. Uh I had, I was uh deeply 0:01:53.989 --> 0:01:54.980 uh uh 0:01:56.239 --> 0:02:01.160 uh uh uh uh part of our observing 2011 and 0:02:01.169 --> 0:02:06.120 2013 drama and that those both of those ended with 0:02:06.129 --> 0:02:09.149 a lot of volatility and anxiety, et cetera this time around. 0:02:09.490 --> 0:02:13.220 Uh It clearly shows some maturity among the key players 0:02:13.649 --> 0:02:19.008 and so it ended without too much shock. Uh in 0:02:19.020 --> 0:02:21.490 the market 2011 was really ugly 0:02:21.860 --> 0:02:25.559 uh with even rating agencies not knowing what to do 0:02:25.869 --> 0:02:29.529 um downgraded right in the middle of the whole drama. 0:02:29.538 --> 0:02:33.199 This time, rating agencies away from everything. So I, I 0:02:33.210 --> 0:02:37.570 very encouraged by uh the maturity shown by the players. 0:02:37.580 --> 0:02:40.029 Uh what will happen politically. I don't know, there will 0:02:40.038 --> 0:02:43.649 be some turmoil probably in, within individual parties, probably in 0:02:43.660 --> 0:02:45.770 the Republican Party, but that's a different story. 0:02:46.570 --> 0:02:49.800 So you wouldn't say there was any winner or loser. 0:02:49.809 --> 0:02:52.440 This seems like possibly the best of all worlds, a 0:02:52.449 --> 0:02:53.759 bit of a win, win for everybody. 0:02:54.710 --> 0:03:01.119 Well, winner clearly is Biden administration uh in the deal, it, 0:03:01.130 --> 0:03:07.020 they got a much better deal than uh initially anticipated 0:03:07.479 --> 0:03:10.679 and the Republicans, the G O P got a worse 0:03:10.690 --> 0:03:14.759 deal than what they were significantly worse deal than relative 0:03:14.770 --> 0:03:18.429 to what they were asking for. Um And Biden also 0:03:18.440 --> 0:03:19.580 got two years, 0:03:19.990 --> 0:03:23.500 uh time got the and so it don't come up 0:03:23.508 --> 0:03:26.559 until after the next uh coming election. 0:03:27.250 --> 0:03:35.089 So uh winner clearly uh is Biden administration. But as individuals, 0:03:35.100 --> 0:03:39.179 both uh speaker mccarty and President Biden won for their 0:03:39.190 --> 0:03:40.160 personal carriers. 0:03:41.210 --> 0:03:43.940 The uh most of all we are having this discussion 0:03:43.949 --> 0:03:47.240 on the sixth of June. I remember a couple of 0:03:47.250 --> 0:03:50.160 weeks ago, Janet Yellen saying by the first week of June, 0:03:50.169 --> 0:03:53.470 the treasury would be basically out of cash. Um So 0:03:53.479 --> 0:03:55.529 even though the deal has worked out, they need to 0:03:55.539 --> 0:03:59.289 replenish their cash balances. And we're hearing all these astronomical 0:03:59.300 --> 0:04:01.399 numbers about how they have to issue like a trillion 0:04:01.410 --> 0:04:04.690 dollars worth of treasury. And it could have some seismically 0:04:04.699 --> 0:04:07.949 destabilizing impact on the market. What are your views on this? 0:04:09.160 --> 0:04:12.589 Um I don't think it's uh it will be destabilizing 0:04:12.600 --> 0:04:18.250 but it will be important and probably will provide opportunities 0:04:18.260 --> 0:04:23.630 for investors. I think that um they will probably target 0:04:23.980 --> 0:04:30.018 replenishing the PGA that uh uh the uh the treasury's 0:04:30.029 --> 0:04:34.659 account in the Federal Reserve to about 500 billion from 0:04:34.670 --> 0:04:36.230 near zero at this point. 0:04:36.600 --> 0:04:41.209 And so 500 billion plus the ongoing funding needs uh 0:04:41.420 --> 0:04:45.260 could get to a trillion dollars. Uh I think that 0:04:45.488 --> 0:04:48.570 the the treasury will uh focus more on the short 0:04:48.579 --> 0:04:52.329 end of the curve because there is uh the biggest challenge. 0:04:52.579 --> 0:04:56.040 Uh challenge will not be selling the E bills. I 0:04:56.049 --> 0:04:59.709 think there will be enough demand for, for T bills 0:04:59.720 --> 0:05:03.690 just because uh of the higher rates and transition from 0:05:03.700 --> 0:05:06.149 bank deposits to money market funds. 0:05:06.690 --> 0:05:11.219 I think the, the challenge uh would be uh 0:05:12.178 --> 0:05:17.899 not to disturb the reserve bank reserve positions as much 0:05:18.029 --> 0:05:23.599 and try to take away from the revers of uh 0:05:23.940 --> 0:05:28.220 the book of business, the rev reversible funding uh that 0:05:28.230 --> 0:05:32.899 the fed has so the, the slight cheapening or some 0:05:32.910 --> 0:05:37.239 cheapening in T bills will be healthy because that will 0:05:37.250 --> 0:05:37.940 allow 0:05:38.369 --> 0:05:42.450 uh money market funds to switch from reverse people positions 0:05:42.459 --> 0:05:46.579 within the feds that uh with the fed to buying 0:05:46.589 --> 0:05:50.940 G bills uh without fed, having to shrink the bank 0:05:50.950 --> 0:05:54.779 reserves too much. Uh My biggest worry is that uh 0:05:54.790 --> 0:06:00.079 the system is not uh ready to handle large sudden 0:06:00.089 --> 0:06:03.399 changes in bank bank reserves and we can come to that. 0:06:03.410 --> 0:06:06.539 Uh This is a whole lot, whole topic by itself. 0:06:06.839 --> 0:06:11.969 Uh But, but uh it was a bit cheaper and 0:06:11.980 --> 0:06:15.190 it uh and an opportunity probably to buy T bills. 0:06:16.220 --> 0:06:20.040 Would you uh consider the possibility that that half a trillion, 0:06:20.049 --> 0:06:22.549 which is above the sort of the target balance that 0:06:22.559 --> 0:06:25.750 they absorb uh because they need to spend, but they 0:06:25.760 --> 0:06:27.469 go ahead and spend it immediately and the cash then 0:06:27.480 --> 0:06:29.059 just goes back to the economy within a month or 0:06:29.070 --> 0:06:29.349 two. 0:06:31.730 --> 0:06:32.510 Um 0:06:33.428 --> 0:06:36.109 The uh go goes back. Uh 0:06:37.769 --> 0:06:41.660 uh I am uh I'm, I'm not totally sure they, 0:06:41.670 --> 0:06:46.479 uh the uh that's, I, I don't know there is any, 0:06:46.488 --> 0:06:52.489 anything that the, that was uh pending or postponed in 0:06:52.500 --> 0:06:58.359 terms of spending. Uh There, there were some coupon payments 0:06:58.369 --> 0:07:01.159 to some trust funds, et cetera. That was the only 0:07:01.170 --> 0:07:04.779 extraordinary matter that the treasury did in the last 0:07:05.709 --> 0:07:07.359 5.5 months or so. 0:07:07.980 --> 0:07:10.820 So I'm not sure that, that, that itself will be 0:07:10.829 --> 0:07:15.250 very stimulated because the cap will go to the uh 0:07:15.299 --> 0:07:17.750 on the a the asset side of the pet balance 0:07:17.760 --> 0:07:20.309 which will not increase as well. It will just be 0:07:20.320 --> 0:07:24.700 a rebalancing. They're not seeing a huge um stimulus to 0:07:24.709 --> 0:07:26.929 the economy just from that cash. It's more of a 0:07:26.940 --> 0:07:32.880 valuation between bills. Um And uh also the reverse repo 0:07:32.890 --> 0:07:35.708 rates as well as the um 0:07:36.649 --> 0:07:40.070 uh the banks having enough reserve. That's the biggest question, 0:07:40.880 --> 0:07:45.200 correct. Um So Mustafa, you said earlier that there is this, 0:07:45.209 --> 0:07:45.609 you know, 0:07:46.329 --> 0:07:50.630 need for replenishing the target balances. And then uh we're 0:07:50.640 --> 0:07:52.640 gonna have this large insurance which may or may not 0:07:52.649 --> 0:07:56.459 have a establishing impact with the question mark around reserves. 0:07:56.470 --> 0:07:59.880 But who is going to buy this? Um Are we 0:07:59.890 --> 0:08:04.209 talking about non-bank financial institutions with a substantial need for 0:08:04.220 --> 0:08:07.720 short term securities or who else is out there are 0:08:07.730 --> 0:08:10.290 a large demand internationally. What's your sense of the investor 0:08:10.299 --> 0:08:11.779 base that will pick up this issue? 0:08:13.570 --> 0:08:16.519 I think that will, that will be an increasing challenge 0:08:16.529 --> 0:08:22.730 to sell treasuries. Uh Right now, the uh the cushion 0:08:22.739 --> 0:08:24.820 between the H two L A, the H T L 0:08:24.829 --> 0:08:28.540 A cushion for banks is fairly tight. So we might 0:08:28.549 --> 0:08:33.200 see banks try to buy more bills and uh take 0:08:33.210 --> 0:08:37.349 uh get out of uh reduce some of the other 0:08:37.359 --> 0:08:41.679 longer duration assets, et cetera. Uh Just because they trust 0:08:41.690 --> 0:08:42.358 a lot of 0:08:43.000 --> 0:08:46.618 changes are coming in terms of banks uh managing their 0:08:46.630 --> 0:08:50.789 balance sheets as well. Uh I also think that investors 0:08:50.799 --> 0:08:54.848 in general, uh this is an uh for them to 0:08:54.859 --> 0:08:55.650 remain a 0:08:56.549 --> 0:09:00.400 remain more, having a higher rate in cash and using 0:09:00.520 --> 0:09:05.339 bills uh would be uh would be another source of 0:09:05.349 --> 0:09:09.900 um buyers in the in the bills market. But over, 0:09:09.909 --> 0:09:13.059 over a, over a longer horizon, there is a big 0:09:13.070 --> 0:09:16.650 challenge for buyers for treasuries. Uh whether it's foreign central 0:09:16.659 --> 0:09:24.119 banks um or banking system, the traditional buyers are uh 0:09:25.049 --> 0:09:30.468 are slowly going to drift away from us treasuries. Uh 0:09:30.479 --> 0:09:35.169 given the size that's coming, not just this replenishment, but 0:09:35.179 --> 0:09:39.319 just the fiscal expansion that's expe expected over the next 0:09:39.330 --> 0:09:43.299 two years that uh selling would be a big problem. 0:09:43.559 --> 0:09:45.979 So in that context, I do, I also think that 0:09:45.989 --> 0:09:48.699 the Q T, uh, they'll have to stop Q T 0:09:48.710 --> 0:09:49.559 fairly soon. 0:09:50.609 --> 0:09:52.130 Ok. I was gonna ask you a question at the 0:09:52.140 --> 0:09:53.789 very end of the podcast and I will ask you 0:09:53.799 --> 0:09:55.760 that question, but just as an early favor. So it 0:09:55.770 --> 0:09:58.190 sounds like you are not particularly bullish to fix and 0:09:58.200 --> 0:09:58.859 come out luck. 0:10:00.849 --> 0:10:03.539 Uh, I am more. Um, 0:10:04.260 --> 0:10:08.659 I'm not particularly bullish at all, uh, in general in 0:10:08.669 --> 0:10:12.869 terms of duration, in terms of, uh rates. But within 0:10:12.880 --> 0:10:17.429 the fixed income, there are areas where there is value and, 0:10:17.440 --> 0:10:19.630 but generally, I think that the fed will have to 0:10:19.640 --> 0:10:24.359 come back after the skip in this week's meeting, but 0:10:24.369 --> 0:10:26.299 uh they will have to come back and hide quite 0:10:26.309 --> 0:10:26.650 a bit. 0:10:27.390 --> 0:10:29.630 All right. Hold on to that thought, we will get 0:10:29.640 --> 0:10:32.280 a deeper into that later. But before we go in 0:10:32.289 --> 0:10:36.419 that direction, I just wanted to ask you your overall sense, 0:10:36.429 --> 0:10:39.460 you know, given this debt ceiling saga and the fact 0:10:39.469 --> 0:10:43.250 that us fiscal debt GDP ratio is, you know, in 0:10:43.260 --> 0:10:44.739 triple digit territory, 0:10:45.460 --> 0:10:51.679 w what would allow for a political consensus to fiscal 0:10:51.690 --> 0:10:55.520 consolidation or is it just hopeless regardless of Republicans or Democrats, 0:10:55.530 --> 0:11:00.450 we will not see meaningful fiscal consolidation in years if 0:11:00.460 --> 0:11:01.169 not decades. 0:11:02.409 --> 0:11:06.479 Uh Yes. And uh I think that we will not 0:11:06.489 --> 0:11:10.919 see any um any sort of fiscal consolidation in years 0:11:10.929 --> 0:11:11.419 to come. 0:11:12.020 --> 0:11:15.789 And uh there's a lot of it in the there 0:11:15.799 --> 0:11:19.929 will be increase in borrowing coming from new sources. Of 0:11:19.940 --> 0:11:22.608 the some of the trust funds are running out by 0:11:22.619 --> 0:11:25.070 the end of this decade. So those will have to 0:11:25.080 --> 0:11:28.750 be run as ongoing entities going forward. So there is 0:11:28.760 --> 0:11:31.199 a lot more insurance needed and this, sorry, 0:11:31.210 --> 0:11:32.989 I just want to interrupt you for one second. So 0:11:33.000 --> 0:11:35.080 by trust funds, you mean social security related 0:11:35.090 --> 0:11:36.369 trust fund by Medicare, 0:11:36.640 --> 0:11:42.489 if Medicare especially is running out uh sometime uh within 0:11:42.500 --> 0:11:45.909 the next 89 years. And so the amount of the 0:11:45.919 --> 0:11:49.130 borrowing that needs to be done just to replenish the 0:11:49.140 --> 0:11:52.750 trust funds or making it an ongoing uh making it 0:11:52.760 --> 0:11:56.449 ongoing rather than using trust fund. Uh will the borrowing 0:11:56.520 --> 0:12:00.209 will go up a lot but interest payments is going 0:12:00.219 --> 0:12:04.210 up also astronomical level, we keep touching a trillion a 0:12:04.219 --> 0:12:06.270 year and these high rates. 0:12:06.549 --> 0:12:09.900 So you uh yes, I I I don't see any 0:12:09.909 --> 0:12:12.969 sort of fiscal consolidation coming up or any kind of ignorance, 0:12:14.880 --> 0:12:17.320 right? So it goes back to your earlier point of 0:12:17.330 --> 0:12:21.510 not being particularly constructive of this income outlook. Um So 0:12:21.520 --> 0:12:24.270 a few months ago, I was visiting you in Washington 0:12:24.280 --> 0:12:28.280 DC and we were talking about the information content in 0:12:28.289 --> 0:12:32.579 the yield curve. Uh It's deeply inverted, it expects lots 0:12:32.590 --> 0:12:35.270 of cuts within a 12 to 18 month horizon. 0:12:35.520 --> 0:12:39.229 Uh Is it necessarily pricing and recession and rate cuts 0:12:39.239 --> 0:12:41.218 or there's something else going on with respect to the 0:12:41.229 --> 0:12:44.729 market structure that we tend to have such steeply inverted 0:12:44.739 --> 0:12:45.289 yield curve? 0:12:46.690 --> 0:12:49.159 I I, I don't think it's, uh, maybe a little 0:12:49.169 --> 0:12:52.939 bit of recession, but I don't think it's, uh, reflecting 0:12:52.950 --> 0:12:56.000 recession or impending recession. Because if you look back a 0:12:56.010 --> 0:12:59.140 year ago, the curve was equally sort of like a 0:12:59.150 --> 0:13:03.960 hockey stick shape is steep decline for the next 0:13:05.000 --> 0:13:10.070 eight quarters and fairly flat after that. And it remained 0:13:10.080 --> 0:13:13.929 the same shape for last one year. So, if the 0:13:13.940 --> 0:13:17.989 yo was any predictor of recession, recession would have uh 0:13:18.000 --> 0:13:21.190 come any uh already by this time. But there's no 0:13:21.200 --> 0:13:24.199 sign of recession. And I don't think when it comes, 0:13:24.210 --> 0:13:25.630 it will be uh 0:13:26.760 --> 0:13:30.650 nowhere close to where the yield curve is telling us. 0:13:30.690 --> 0:13:35.770 I think yellow curve reflects uh mostly markets 0:13:36.979 --> 0:13:43.520 extremely positioned for uh the carry that's available. It's unusually 0:13:43.530 --> 0:13:49.069 large carry from uh betting against the easing that's pricing 0:13:49.080 --> 0:13:52.909 the curve and it's so large that it doesn't allow 0:13:52.919 --> 0:13:56.719 the curve to move much. So every time fed height, 0:13:57.119 --> 0:14:01.190 then the market rep prices one more height and then 0:14:01.299 --> 0:14:03.650 in the curve and not the terminal rate 0:14:04.250 --> 0:14:09.039 and then an offsetting ease after that. And that reflects 0:14:09.049 --> 0:14:13.390 more positioning rather than uh a any kind of uh 0:14:13.400 --> 0:14:17.320 recession uh ahead of us. And I don't think us 0:14:17.330 --> 0:14:19.679 is anywhere near a recession. 0:14:20.789 --> 0:14:25.109 OK. So the flip side of the uh lack of, 0:14:25.119 --> 0:14:28.599 you know, information content in the um inversion of the 0:14:28.609 --> 0:14:31.320 yield curve is also the question that what are the 0:14:31.330 --> 0:14:34.590 uh inflation expectations market telling us? So when we look 0:14:34.599 --> 0:14:37.580 at tips for the five plus five implied inflation rate, 0:14:37.590 --> 0:14:43.020 very well anchored 2.4% 2.5% that doesn't shift. Although in 0:14:43.030 --> 0:14:45.679 the near term, everybody seems to be rather worried about inflation. 0:14:45.840 --> 0:14:48.679 How do you reconcile these two uh perspectives coming from 0:14:48.690 --> 0:14:49.219 the market? 0:14:50.669 --> 0:14:53.880 I think the tips curve is under pricing. Um 0:14:55.450 --> 0:14:59.880 The the tips uh break evens like in the intermediate 0:14:59.890 --> 0:15:03.679 part of the curve uh real rate at so 17 0:15:03.989 --> 0:15:09.020 sort of range, um 10 years sort of uh 1 0:15:09.030 --> 0:15:13.520 61 51 60 range. The uh the break even on 0:15:13.580 --> 0:15:17.440 between 2 25 I to 2 40 I uh break 0:15:17.450 --> 0:15:20.659 that break even is really low. The the you can 0:15:20.669 --> 0:15:21.359 look at 0:15:21.789 --> 0:15:26.750 many sources to compare why I think it's the first 0:15:26.760 --> 0:15:31.140 Michigan uh consumer expectation one year forward one year, it's 0:15:31.150 --> 0:15:37.849 still 4%. And so 4% minus 2.25, you have 175 0:15:37.859 --> 0:15:42.609 basis points gap between what consumers are expecting versus what 0:15:42.619 --> 0:15:44.940 the tip curve tip curve is staying at. 0:15:45.690 --> 0:15:48.510 Uh So I think that the real rate either the 0:15:48.520 --> 0:15:52.750 real rate is too low uh at five year at 0:15:52.760 --> 0:15:54.099 1 70. 0:15:54.739 --> 0:16:00.289 Uh And remember also that the Michigan consumers uh one 0:16:00.299 --> 0:16:03.820 year ahead forecast is actually very reliable. If you look 0:16:03.830 --> 0:16:09.960 at 2000 and uh 21 when even uh Chairman Powell 0:16:09.969 --> 0:16:13.710 was saying transitory, et cetera, et cetera, the Michigan consumer 0:16:13.719 --> 0:16:15.950 expectation was actually fairly high. 0:16:16.450 --> 0:16:19.599 And uh so, and that's, that's more of what the 0:16:19.609 --> 0:16:22.549 consumers are feeling on a day to day basis. So 0:16:22.559 --> 0:16:28.260 my feeling is that the market is uh somewhat underpricing 0:16:28.270 --> 0:16:35.659 either uh future uh inflation or uh uh or uh 0:16:35.669 --> 0:16:38.979 also underpricing the fact that uh some 0:16:39.729 --> 0:16:43.580 uh sources of inflation are robust and chances of coming 0:16:43.590 --> 0:16:45.780 back up is very high. And one of them that 0:16:45.789 --> 0:16:48.859 I'm watching quite closely is rental inflation. 0:16:49.640 --> 0:16:54.219 So they initially the views among economists where that there 0:16:54.229 --> 0:16:58.570 is a 12 month lag uh between the real time 0:16:58.580 --> 0:17:02.489 rental measures and the shelter component of CPR and it 0:17:02.500 --> 0:17:06.479 will gradually get incorporated. And so the expectation was that 0:17:06.790 --> 0:17:10.780 uh we'll see the shelter component gradually uh decline and 0:17:10.790 --> 0:17:12.170 which has been the case. 0:17:12.948 --> 0:17:15.838 But if you look at the recent data on rental, 0:17:15.848 --> 0:17:19.478 whether it's uh zero dot com or if you see 0:17:19.489 --> 0:17:23.859 the rental uh read uh the margins and the profits 0:17:23.869 --> 0:17:27.898 of rental rates, the pricing power is very high in 0:17:27.909 --> 0:17:33.318 the rental uh in the apartment industry. And also the 0:17:33.328 --> 0:17:38.239 rent versus buy decision is that is obvious that uh 0:17:38.249 --> 0:17:40.639 rent overwhelms buying 0:17:41.339 --> 0:17:45.349 because of the mortgage rate and the monthly payment. So 0:17:45.510 --> 0:17:48.629 rental is coming back real time rental is coming back up. 0:17:48.640 --> 0:17:51.599 So it will be another shock few months down the 0:17:51.609 --> 0:17:54.869 line that we'll start to see shelter components to P 0:17:54.880 --> 0:17:58.829 I instead of declining as expected starts to go back up. 0:17:59.449 --> 0:18:02.708 So uh all of these are not priced in the 0:18:02.719 --> 0:18:06.380 tips market. So that's one of the recommendation I'm making 0:18:06.609 --> 0:18:11.260 our clients is uh a long term uh value of 0:18:11.270 --> 0:18:14.770 the curve value of the tips curve is probably good 0:18:14.780 --> 0:18:21.520 value plus. Uh this whole question of uh is this 0:18:21.530 --> 0:18:24.879 R star et cetera, which I I'm nervous about 0:18:25.349 --> 0:18:28.719 uh of piling on uh that whether our star has 0:18:28.729 --> 0:18:31.349 gone up a lot and what it is et cetera 0:18:31.760 --> 0:18:35.119 uh is given, given all the other things that have 0:18:35.130 --> 0:18:39.439 been changing structurally. Um buying tips is probably a good idea. 0:18:40.199 --> 0:18:43.069 That's very interesting. So I have to say that one hand, 0:18:43.079 --> 0:18:45.069 you know, there is this question, whether the R star 0:18:45.079 --> 0:18:47.079 is going up or not. And then there is this 0:18:47.089 --> 0:18:50.319 question of this R star star, the financial stability related 0:18:50.329 --> 0:18:53.250 interest rate, whether that the system cannot really absorb the 0:18:53.260 --> 0:18:56.709 actual R star, it'll collapse long before that. Um So 0:18:56.719 --> 0:18:58.530 it seems to me that the market is also sort 0:18:58.540 --> 0:19:01.060 of betting on that, that, you know, 2% inflation will 0:19:01.069 --> 0:19:01.709 never happen, 0:19:02.069 --> 0:19:05.280 any attempt to get there would create a major financial crisis. 0:19:05.290 --> 0:19:08.040 So let's just not assume that inflation will stay high 0:19:08.050 --> 0:19:10.599 uh or rates will stay high even if inflation stays high. 0:19:10.750 --> 0:19:12.170 I'm gonna come back to that because I want to 0:19:12.180 --> 0:19:15.219 ask you two questions on us, fiscal and monetary policy. 0:19:15.229 --> 0:19:17.479 The first one is fiscal, then we'll come back to 0:19:17.489 --> 0:19:21.069 monetary in a second. So Larry Summers famously, almost two 0:19:21.079 --> 0:19:23.739 years ago, wrote that the Biden administration 0:19:24.160 --> 0:19:30.079 um repeated fiscal measures were going to be stimulatory excessively. So, 0:19:30.089 --> 0:19:33.260 and would be inflationary. Now, he had made other nuanced arguments, 0:19:33.270 --> 0:19:35.270 but that's the argument that is stuck and he's become 0:19:35.280 --> 0:19:38.349 so extra famous for making that. So, are you in 0:19:38.359 --> 0:19:41.989 his camp that the last couple of intimate measures on 0:19:42.000 --> 0:19:46.448 the Biden administration coming into office in 2021 was the, 0:19:46.989 --> 0:19:49.729 so the Camels back if you will, that was broken 0:19:49.910 --> 0:19:52.149 and inflation picked up because of that. 0:19:53.170 --> 0:19:56.069 Yes, I totally agree with that. I think that uh 0:19:56.079 --> 0:20:00.500 that took us to about six trillion of uh fiscal spending. 0:20:00.510 --> 0:20:04.319 And remember the student loan forgiveness is still sitting in 0:20:04.329 --> 0:20:08.319 the court system and that will push uh add another 0:20:08.329 --> 0:20:13.069 trillion into the system. So uh uh I totally agree 0:20:13.079 --> 0:20:16.319 with uh Larry Summers on this point that we actually 0:20:16.329 --> 0:20:17.899 went pretty far 0:20:18.199 --> 0:20:22.000 uh even before the Biden a station, the in terms 0:20:22.010 --> 0:20:25.250 of the responses to the uh to COVID. But that's 0:20:25.430 --> 0:20:29.310 sort of hard to judge because if no one knew 0:20:29.319 --> 0:20:33.040 at that time, uh what the, what the total impact 0:20:33.050 --> 0:20:37.339 of COVID would be. But in the last couple of years, 0:20:37.469 --> 0:20:40.829 it's known and we COVID is under control and we 0:20:40.839 --> 0:20:44.369 are still spending uh almost out of control. So I 0:20:44.380 --> 0:20:47.890 think I, I totally agree that uh the fiscal 0:20:48.219 --> 0:20:53.069 uh impulse has been a key driver of the uh 0:20:53.079 --> 0:20:55.790 demand side of the inflation. Equation at least. 0:20:56.670 --> 0:20:58.569 And the supply side was already there. 0:20:58.839 --> 0:21:02.280 Right. Right. And, and now we're seeing supply side easing, 0:21:02.290 --> 0:21:04.079 but the demand side is still not going away 0:21:05.810 --> 0:21:08.468 and, uh, unlikely to go anytime soon. 0:21:08.819 --> 0:21:11.458 Right. Ok. But what about the fat? I mean, do 0:21:11.469 --> 0:21:14.449 you have any sympathy for the ft that it's easy 0:21:14.459 --> 0:21:16.670 for us to look back and say they should have 0:21:16.680 --> 0:21:19.650 started hiking much earlier. But given the information they had 0:21:19.660 --> 0:21:23.489 at that time, uh they probably did the best they could. 0:21:23.500 --> 0:21:26.339 I'm sort of using the Paul Krugman argument. Do you 0:21:26.349 --> 0:21:26.579 have any 0:21:26.589 --> 0:21:27.468 sympathy with that? 0:21:28.770 --> 0:21:29.520 Uh 0:21:30.729 --> 0:21:35.760 Not as much because I think that uh F F I, I, 0:21:35.770 --> 0:21:41.239 I think that the fed has uh fed had uh 0:21:41.250 --> 0:21:44.520 or rather, I'd rather say that this fed 0:21:45.239 --> 0:21:50.810 even before all the dash New Davis members join is 0:21:50.819 --> 0:21:51.900 inherently Davi. 0:21:52.989 --> 0:21:56.979 And so they want always an excuse not to hike 0:21:57.239 --> 0:22:02.969 even now, uh You see, uh the, this whole skip 0:22:03.099 --> 0:22:06.530 versus pause, there is the wording. So there is an 0:22:06.540 --> 0:22:12.069 inherent ness in the Fed and this whole uh transitory 0:22:12.079 --> 0:22:16.359 versus permanent and leaning towards transitory and then suddenly change. 0:22:16.369 --> 0:22:17.938 All the impatient data was 0:22:18.609 --> 0:22:25.219 fairly strong throughout 2021. Not until November that the chairman 0:22:25.469 --> 0:22:29.609 uh first time mentioned something about non transitory. So I, 0:22:29.619 --> 0:22:32.640 I do believe that there, there, there, there was a 0:22:32.890 --> 0:22:36.680 somewhat of a policy error in 2021 we are paying 0:22:36.689 --> 0:22:37.800 some price for that. 0:22:39.910 --> 0:22:43.979 Um Earlier, you said that you don't necessarily see a 0:22:43.989 --> 0:22:48.770 major recession on the horizon. You see rental prices, you know, again, 0:22:48.780 --> 0:22:51.239 ratcheting up demand being strong. 0:22:51.609 --> 0:22:57.000 Um but we've had substantial policy tightening in the last year. Mustafa, 0:22:57.250 --> 0:23:00.978 and we saw perhaps a bit of that percolating through 0:23:00.989 --> 0:23:04.919 the banking system in March and April. Are you worried 0:23:04.930 --> 0:23:07.130 that there are other areas, there are other fault lines 0:23:07.140 --> 0:23:09.310 to borrow a phrase from Ra Ra Rajan that there 0:23:09.319 --> 0:23:12.030 are other fault lines that are lurking here and there 0:23:12.140 --> 0:23:15.399 that would uh cause us some distress by forward. 0:23:17.400 --> 0:23:17.930 Um 0:23:18.689 --> 0:23:21.770 within the banking system there is I I'm not sure 0:23:21.780 --> 0:23:23.949 prices personally. Uh 0:23:25.000 --> 0:23:27.469 in terms of the way the market is positioned, I 0:23:27.479 --> 0:23:30.729 wanted to uh mention that before I answer this question. 0:23:31.199 --> 0:23:32.688 If you look at the market, 0:23:33.359 --> 0:23:36.589 the Silicon Valley Bank news when it came out on 0:23:36.599 --> 0:23:41.000 the first week of March, the interest rate, the two 0:23:41.010 --> 0:23:45.489 year rate rallied something like 125 basis points almost overnight. 0:23:46.290 --> 0:23:51.280 And then whenever we get a news about heights, it 0:23:51.290 --> 0:23:55.550 doesn't sell off. So there is an asymmetry in the market. 0:23:55.680 --> 0:24:00.280 So the the rallies are big if a bad news arrives, 0:24:00.459 --> 0:24:03.948 but the selloffs are not are sort of gradual. It 0:24:03.959 --> 0:24:08.000 just shows where the vulnerability lies in the market. The market, 0:24:08.010 --> 0:24:12.699 the bond market is vulnerable to bad news, bad banking news. 0:24:12.709 --> 0:24:15.000 It's just that banking, bad banking news 0:24:15.300 --> 0:24:16.630 is not happening. 0:24:17.510 --> 0:24:22.209