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Marvin Loh on the Bond Markets (Audio) · Bloomberg Intelligence

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  Speaker 1: This is Taking Stock with Kathleen Hayes and Pim Fox
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  Speaker 1: on Bloomberg Radio. We are broadcasting live from e t
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  Speaker 1: F Exchange b N Y Melon's et F Symposium in
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  Speaker 1: Downa Point, California. I'm Pim Fox, my co host Kathleen
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  Speaker 1: Hayes joining us now as Marvin Lowe. He is managing
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  Speaker 1: director at the b N Y Melon and he's here
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  Speaker 1: to tell us more about bonds. Marvin, always a pleasure,
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  Speaker 1: Thanks for being with us. Thank you for having me again.
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  Speaker 1: What the what is new about bonds? Because boy, I mean,
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  Speaker 1: it seems like we've been beating this forever that you know,
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  Speaker 1: rates are low, We got that, and now people have
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  Speaker 1: to go and find something alternative, like a high yield bond,
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  Speaker 1: or maybe even go outside the United States and look
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  Speaker 1: to emerging markets. What are you hearing? Yeah, I mean
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  Speaker 1: in the grand scheme of things, there isn't a lot new.
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  Speaker 1: Yields are still low, not as low as they were
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  Speaker 1: a couple of months ago. I think what's new is that? Um,
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  Speaker 1: the commentary around what central banks may do as the
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  Speaker 1: next step has certainly shifted. We came out of the
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  Speaker 1: summer with the volatili and Brexit really expecting at least
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  Speaker 1: the investors began to expect that central banks we're going
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  Speaker 1: to move towards the next level of accommodation. We've bit
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  Speaker 1: up assets all around the world based on that. We
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  Speaker 1: push yields kind of back down to levels we hadn't
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  Speaker 1: seen in many, many years. And lo and behold, they
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  Speaker 1: didn't do what they said. And here we are right
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  Speaker 1: now with a lot of um, with a lot of
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  Speaker 1: central bank meetings that are welcome us back from summer vacation. Yes,
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  Speaker 1: and uh, it's a couple of people now have commented
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  Speaker 1: today that even if the Fed were to move the
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  Speaker 1: key rate tomorrow, even though it's more more more of
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  Speaker 1: a bed on December, right, that if it root moves
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  Speaker 1: this year, it's not that big of a deal potentially.
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  Speaker 1: Do you agree with that for the bomb market? You
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  Speaker 1: know what, in the grand scheme of where rates are
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  Speaker 1: basis points, is not a significant um move in terms
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  Speaker 1: of market psyche and the impact that US rates have
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  Speaker 1: on many other asset classes. I think every rate hike
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  Speaker 1: has been significant, and I think we've seen stresses to
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  Speaker 1: various asset classes. Whenever they even talk about rate increases,
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  Speaker 1: you have been looking at bonds on a relative basis correct.
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  Speaker 1: In other words, you can't just look at them in isolation.
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  Speaker 1: You have to say, in relation to what let's say
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  Speaker 1: the US tenure one point six eight percent, are investors
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  Speaker 1: taking on more risk than they really understand when they
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  Speaker 1: look to get yield that is greater than let's say
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  Speaker 1: one point six eight percent. Well, I hope they understand. UM.
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  Speaker 1: You know, certainly we should take our investment processes as
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  Speaker 1: the most important thing, or one of certainly one of
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  Speaker 1: the most important things we wind up doing. UM. There
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  Speaker 1: aren't a lot of choices out there, so hopefully they
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  Speaker 1: are conscious decisions around that. There might be a little
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  Speaker 1: bit of too much comfort that the central banks are
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  Speaker 1: going to be able to control the volatility, if you will,
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  Speaker 1: But that UM investment thesis has actually worked for the
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  Speaker 1: last you know, four to five years. You've had good
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  Speaker 1: returns across you know, many asset classes during this period,
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  Speaker 1: even though UM kind of as as you know, the
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  Speaker 1: professionals in the market, we've a lot of a lot
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  Speaker 1: of times, you know, gone along this path begrudgingly. So, uh,
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  Speaker 1: what's next. We know that the we know that the
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  Speaker 1: money is going to remain in this system, there's still
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  Speaker 1: going to be a lot of liquidity. But if you're
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  Speaker 1: if you're trying to put together a portfolio bonds, a
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  Speaker 1: lot of people been saying shorten duration. A lot of
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  Speaker 1: people are a lot more in cash than they were
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  Speaker 1: a lot of fun managers. What what what are the
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  Speaker 1: marvel thows of the world do? Yeah? You know, I
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  Speaker 1: I like both of those right now. I think that
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  Speaker 1: UM kind of this steepening gield curve and discussion as
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  Speaker 1: to whether or not the next step for monetary policy
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  Speaker 1: is to get to a more steeper yield curve UM
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  Speaker 1: plays into that lower duration type of discussion. I think
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  Speaker 1: UM in the US we've seen UM the CP markets
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  Speaker 1: and the Lieborar markets really increase their rates with money
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  Speaker 1: market reforms. So there are alternatives around there which didn't
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  Speaker 1: exist before. And you know, really from evaluation perspective, if
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  Speaker 1: you're holding onto your fundamental UM analysis with d cfs,
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  Speaker 1: and you know, however, you evaluate some of this corporate
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  Speaker 1: paper that's out there, UM, maybe a greater allocation to
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  Speaker 1: cash does make sense because valuations are high by historical standards.
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  Speaker 1: Who's on the other side of the trade when you're
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  Speaker 1: selling these bonds at such low interest rates because someone
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  Speaker 1: eventually it's got to be holding the bag. And when
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  Speaker 1: they ring that bell, I can't imagine that they're gonna
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  Speaker 1: want to hold onto them. You're gonna see a rush
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  Speaker 1: to the exits. So you know what's really been a
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  Speaker 1: challenge is that on the other side of the trade,
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  Speaker 1: to a larger and larger degree, have been the biggest
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  Speaker 1: asset holders in the world that never have to sell,
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  Speaker 1: that never have a margin call, and those are the
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  Speaker 1: central banks. And if they change, um their philosophy with
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  Speaker 1: regard to how they want to increase their portfolios, yeah, absolutely,
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  Speaker 1: it becomes um a bit more challenging. And remember, um,
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  Speaker 1: not everyone is um uh the bottom fish or not
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  Speaker 1: everyone is kind of a market time or there are
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  Speaker 1: a lot of asset owners that have to own based
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  Speaker 1: on various mandates, you know, whether your insurance companies, whether
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  Speaker 1: you're just you know, an asset allocation that kind of
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  Speaker 1: goes in the market. So there is a natural demand
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  Speaker 1: for this type of product. But when we start talking
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  Speaker 1: about the Bank of Japan that owns thirty of the
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  Speaker 1: j g B market owning a larger and larger percentage
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  Speaker 1: of their equity markets, when you talk about the e
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  Speaker 1: c B running out of bonds to buy, believe it
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  Speaker 1: or not running out of bonds to buy. Those are
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  Speaker 1: thinking about buying equities and thinking about buying other asset classes. Um.
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  Speaker 1: That becomes um a trade that's very powerful, and it's
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  Speaker 1: kind of been that type of trade that's driven a
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  Speaker 1: lot over the last several years. You know, one of
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  Speaker 1: the things that the one of the possible scenarios for
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  Speaker 1: the Bank of Japan, and it's like the fit. It's
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  Speaker 1: kind of binary. Either they can raise the rate of
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  Speaker 1: they don't. But the Bank of Japan you have to
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  Speaker 1: make a Rubik's cube and a diagram, right, because they
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  Speaker 1: could do this in that or none of that. Right.
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  Speaker 1: They could buy more bonds, they could buy fewer bonds.
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  Speaker 1: They can put a range on the you know how
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  Speaker 1: many they're going to buy an outous that number. But
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  Speaker 1: this idea that they can do an operation twist, right,
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  Speaker 1: that they can buy fewer bonds and steep in the
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  Speaker 1: yield curve while they cut the key rate a little
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  Speaker 1: more navative. You know, us tried that a couple of times.
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  Speaker 1: Didn't work. Operation twist didn't work here without work in
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  Speaker 1: Japan and achieve their desired goal. You know, interestingly, it's um,
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  Speaker 1: it's reversed twists right, because it would be an attempt
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  Speaker 1: to steep in the longer end of the curve UM.
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  Speaker 1: It's to be seen whether or not they're able to
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  Speaker 1: um to get it done. I think the market would
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  Speaker 1: initially take it seriously because it is something different. It
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  Speaker 1: certainly is a move away from the paradigm that we've
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  Speaker 1: gotten comfortable with and and pretty much accepted for the
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  Speaker 1: last several years. I will say that when you look
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  Speaker 1: at their economy, it's hard to see them not continuing
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  Speaker 1: to put money into it. It's just the function of
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  Speaker 1: where they decide to do it and how they do it.
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  Speaker 1: Marvin Lowe is Managing director b n Y Melon, where,
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  Speaker 1: of course broadcasting from the BNY Melon et F Some
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  Speaker 1: Posium in Dana Point, California. Marvin Central Banks, as you
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  Speaker 1: just describe buying all these bonds, they end up being
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  Speaker 1: the lenders. If they're the lenders to all of this,
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  Speaker 1: they don't have the same incentives that perhaps institutional lenders
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  Speaker 1: or banks have. How does that change the market, because
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  Speaker 1: if they're going to hold how are you going to know,
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  Speaker 1: whether you know any of the ratings make sense or
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  Speaker 1: any of the cash flow projections makes sense if ultimately
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  Speaker 1: the buyers says, I don't really care about that. I'm
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  Speaker 1: just buying the bonds anyway. It's changed everything already, you know,
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  Speaker 1: the valuation discussion that we talked about. UM. You know,
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  Speaker 1: there is no other alternative, you know, Tina, That's why
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  Speaker 1: we can get That's why we can get valuations where
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  Speaker 1: they are. You know, do they cause asset bubbles elsewhere
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  Speaker 1: just because there's no place else to go? And UM,
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  Speaker 1: the liquidity in the market, UM changes because they're not
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  Speaker 1: UM sellers in it. So you know, everything so one
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  Speaker 1: way trade. Everything has changed, UM, it will remain changed
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  Speaker 1: for a while. It's we're talking I believe in the
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  Speaker 1: range of thirteen and a half trillion in the G
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  Speaker 1: four Central Bank bound sheets. UM. To unwind that type
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  Speaker 1: of trade, you know, it's gonna take a while. You know,
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  Speaker 1: high profile Goldman Sachs in the last couple of weeks
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  Speaker 1: has made this call for much uh, much stronger dollar
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  Speaker 1: and yields rising right uh and and more fed tightening
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  Speaker 1: over the next two or three years. And a lot
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  Speaker 1: of other people are looking for, uh what do you
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  Speaker 1: see on that front? Because I don't know. It seems
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  Speaker 1: like eventually the economists and the Fed will be right
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  Speaker 1: and yields will rise, But the bond market keeps arguing back, no,
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  Speaker 1: we're not, No, we don't believe economies that's not that strong,
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  Speaker 1: and yields have not risen that much even today, right,
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  Speaker 1: I mean to me, I still don't see on the
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  Speaker 1: economy at a level that can support and or justify
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  Speaker 1: significantly higher yields. We can get higher yields, you know,
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  Speaker 1: like like you know, we're talking about twenty five basis
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  Speaker 1: points once again this year we're belaboring it to uh
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  Speaker 1: the nth degree the way we did last year, and
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  Speaker 1: in the grand scheme of basis points, it's not that
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  Speaker 1: big of a deal. Having said, we've seen asset classes
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  Speaker 1: get very, very stressed, and you can see a strong dollar.
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  Speaker 1: Even if we don't get rates that much higher, we
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  Speaker 1: still have a certain degree of divergence amongst monetary policy. UM.
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  Speaker 1: But the one thing that I think we've learned over
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  Speaker 1: the last several years that the stronger dollar and the
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  Speaker 1: dollar itself is a very important catalyst to look at
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  Speaker 1: in the market, UM, and it affects a lot more
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  Speaker 1: than just what's going on here? Do you mean that
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  Speaker 1: it's in terms of the sort of macro effact like
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  Speaker 1: a stronger dollar week again, which the Japanese need and
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  Speaker 1: would love to see, or do you mean in terms
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  Speaker 1: of companies Tyffer time UH exporters strong dollar? You know, um,
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  Speaker 1: the market is very good at um analyzing what we know.
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  Speaker 1: It's what we don't that really cause the stress in
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  Speaker 1: the system. So when you get stronger dollar, you do
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  Speaker 1: see asset classes that get affected that you didn't realize.
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  Speaker 1: We're as reliant on the dollar in the example in
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  Speaker 1: five seconds U emerging market emerging market debt um in
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  Speaker 1: dollar terms, and that certainly saw a lot of stress
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  Speaker 1: right when we saw the tape potential Marmon Lou thank
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  Speaker 1: you so much, covering a lot of ground for us
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  Speaker 1: here to day. He's managing director b N Y Melan,
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  Speaker 1: and of course we're broadcasting alive here at the b
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  Speaker 1: N Y Melan. It's et S Symposium in Dana Point, California.
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  Speaker 1: Katheen Hay's pim Fox. This is Boomberg