Latest / Trumponomics / This Market Says Maybe America Isn't So Great Again Yet

Transcript

This Market Says Maybe America Isn't So Great Again Yet · Trumponomics

• 0:00
  Speaker 1: America's GDP is growing at an amazing three percent. Unemployment
• 0:04
  Speaker 1: is at the lowest level in sixteen years. The stock
• 0:07
  Speaker 1: market is reaching a new record high every day. The
• 0:10
  Speaker 1: U s economy is just going to keep on booming, right, Well,
• 0:13
  Speaker 1: not so fast. Stocks might be surging, but investors trading
• 0:18
  Speaker 1: in the sixteen trillion market for US treasury securities are
• 0:23
  Speaker 1: taking a more nuanced view. If you look at what
• 0:26
  Speaker 1: the bond market is signaling, not only is there not
• 0:30
  Speaker 1: going to be a huge surge in growth, but things
• 0:34
  Speaker 1: could conceivably slow down. At the very least, there's skepticism
• 0:38
  Speaker 1: that inflation will ever become a problem. Welcome to Benchmark.
• 0:51
  Speaker 1: I'm Scott Landman, an economics editor with Bloomberg News in Washington,
• 0:55
  Speaker 1: and I'm Daniel Moss, economics writer and editor at Bloomberg
• 0:58
  Speaker 1: View in New York. So, Dan, every time I opened
• 1:01
  Speaker 1: my Twitter feed, it looks like President Trump is talking
• 1:04
  Speaker 1: about how the economy is going gangbusters, the market is
• 1:07
  Speaker 1: always at a record high. But I never see him
• 1:10
  Speaker 1: talking about the bond market. Well, the stock market is
• 1:14
  Speaker 1: easy for Twitter, good economic or financial news. The market
• 1:18
  Speaker 1: goes up with the bond market. It's more complicated strong
• 1:21
  Speaker 1: economic news is often greeted with a decline in the
• 1:24
  Speaker 1: bond market, and the inverse is also true. All right, well,
• 1:29
  Speaker 1: let's bring in our guest for some more insight. David
• 1:32
  Speaker 1: Aider has been following the bond market for thirty years.
• 1:35
  Speaker 1: He's currently the chief macro strategist at Informa Financial Intelligence,
• 1:40
  Speaker 1: and he's been the number one ranked US government bond
• 1:43
  Speaker 1: strategist by Institutional Investor magazine for more than a decade.
• 1:47
  Speaker 1: He joins us on the phone from Connecticut. David, thanks
• 1:50
  Speaker 1: for being with us on Benchmark. Good to be here. So, David,
• 1:55
  Speaker 1: ask most people to talk about the markets and they'll
• 1:58
  Speaker 1: start talking about the stock market it. But why should
• 2:01
  Speaker 1: people care more about the bond market instead. Well, because
• 2:06
  Speaker 1: people borrow money, Corporations borrow money. The government borrows a
• 2:10
  Speaker 1: lot of money, not just this government, but governments around
• 2:13
  Speaker 1: the world, and the bond market determines the cost of
• 2:17
  Speaker 1: that money. So if you were to see the bond market,
• 2:20
  Speaker 1: if you were interesting, interest rates rise, for example, presumably
• 2:24
  Speaker 1: people will borrow less and that can have a slowing
• 2:27
  Speaker 1: impact on economic growth, certainly on inflation. So it impacts
• 2:32
  Speaker 1: us in a big, big way. So when people talk
• 2:35
  Speaker 1: about government borrowing. They're not talking about the U. S.
• 2:38
  Speaker 1: Treasury or the British Treasury walking down to city bank
• 2:43
  Speaker 1: and saying, hey, can I have a loan? They're talking
• 2:45
  Speaker 1: about these securitized lending facilities. So when when the government,
• 2:52
  Speaker 1: when the U. S. Treasury borrows money, now, it doesn't
• 2:56
  Speaker 1: go down to a bank and ask for a loan
• 2:58
  Speaker 1: and fill out an application. It goes to the markets.
• 3:01
  Speaker 1: And the markets do include banks, um, they include central banks,
• 3:06
  Speaker 1: and they have an auction process which determines what the
• 3:10
  Speaker 1: interest rate is going to be. So there's a demand
• 3:12
  Speaker 1: factor that plays a huge amount um into how much
• 3:17
  Speaker 1: how much it's going to cost the government to borrow money.
• 3:20
  Speaker 1: So it's not quite like you or I going down
• 3:23
  Speaker 1: to a bank, but still there is a market rate
• 3:25
  Speaker 1: that is determined now, the market rate for borrowing. It's
• 3:30
  Speaker 1: more it tells a broader story than just how much
• 3:33
  Speaker 1: the government has to pay to borrow money. Uh. You know,
• 3:37
  Speaker 1: one of the widely followed benchmarks, just like people follow
• 3:41
  Speaker 1: the SMP five D for stocks, you have the treasury
• 3:44
  Speaker 1: security maturing in ten years. You know, people just refer
• 3:48
  Speaker 1: to it as the tenure. It's a pretty common benchmark
• 3:51
  Speaker 1: and those are currently yielding somewhere around two point four.
• 3:56
  Speaker 1: What does that mean? What? What does that tell? What?
• 3:58
  Speaker 1: What kind of story does that? Well? You you you
• 4:02
  Speaker 1: can look at the tenure, which indeed is the benchmark,
• 4:05
  Speaker 1: but the treasury market, the the the runs the gamut
• 4:10
  Speaker 1: from you know, short term bills sometimes a matter of
• 4:15
  Speaker 1: weeks to thirty year paper, so that's known as the
• 4:18
  Speaker 1: yield curve. The tenure is merely a point on the
• 4:21
  Speaker 1: yield curve, which has become popular because you know, corporations
• 4:26
  Speaker 1: tend to borrow in the tenure sector and the rest
• 4:28
  Speaker 1: of the world um tends to borrow in the ten
• 4:31
  Speaker 1: year sector. So two point four is only one um
• 4:35
  Speaker 1: one spot on the curve. You could go down to
• 4:38
  Speaker 1: look at the two year note, for example, which would
• 4:41
  Speaker 1: be something on the order of about one eighty, or
• 4:44
  Speaker 1: go out to the end of the curve to take
• 4:46
  Speaker 1: a look at the thirty year which would be considerably higher,
• 4:50
  Speaker 1: considerably higher, So you have what is known as the
• 4:52
  Speaker 1: steep yield curve. The interest rate from the short term
• 4:56
  Speaker 1: to the long term has has a spread, but actually
• 5:00
  Speaker 1: not that steep right now, you know, when we're getting
• 5:04
  Speaker 1: into a little bit of the market jargon. Now, but
• 5:07
  Speaker 1: you hear a lot about the yield curve flattening, and
• 5:11
  Speaker 1: people seem to think that that might not be such
• 5:13
  Speaker 1: a great development. What is happening there? How would you?
• 5:17
  Speaker 1: How do you explain it? I'll put my economists head
• 5:20
  Speaker 1: on and offer that it depends. But but what's going
• 5:24
  Speaker 1: on is this? When when the yield curve is steepening,
• 5:29
  Speaker 1: meaning one the spread between the very short terms borrowing
• 5:32
  Speaker 1: to the long term is wide, it usually tells you,
• 5:38
  Speaker 1: historically that we have a lot of growth in the economy.
• 5:43
  Speaker 1: The set is is is allowing I guess you would say,
• 5:48
  Speaker 1: um for some inflation concerns. The steep deeal curve tells
• 5:52
  Speaker 1: you that the market is concerned about growth and inflation
• 5:55
  Speaker 1: as a as an anecdote or a derivative of growth.
• 5:58
  Speaker 1: The fact that there are two things going on. Not
• 6:01
  Speaker 1: only has the yield curve been flattening, but it's been
• 6:04
  Speaker 1: flattening only because short term rates arising. Long term rates
• 6:09
  Speaker 1: aren't doing anything, and that is the concern, because that
• 6:13
  Speaker 1: suggests that growth is slowing or will slow at least.
• 6:18
  Speaker 1: The Marcus perception that inflation is going to remain low
• 6:24
  Speaker 1: and that the said might be making a mistake. They
• 6:27
  Speaker 1: might be hiking raising short rates too aggressively. Now let
• 6:32
  Speaker 1: me just challenge you on that point. The lack of
• 6:34
  Speaker 1: inflation has been a defining characteristic arguably of say the
• 6:39
  Speaker 1: last twenty yes, certainly in the post financial crisis here,
• 6:44
  Speaker 1: and yet economic growth has been solid, if unspectacular. There's
• 6:49
  Speaker 1: been all sorts of warnings since the economy began growing
• 6:52
  Speaker 1: in two thousand and nine that we're on the verge
• 6:54
  Speaker 1: of a double dip, etcetera. Hasn't happened. You short signaling
• 6:58
  Speaker 1: a slowdown? Am I sure signalians slow down? You know,
• 7:04
  Speaker 1: this time might be different. The The difference might be
• 7:10
  Speaker 1: that that we are facing an era. The next ten years,
• 7:14
  Speaker 1: we're going to see UM a lot more treasury bond issues,
• 7:18
  Speaker 1: a lot more treasury market issuance because the deficits rising,
• 7:22
  Speaker 1: and if this new tax plan goes through, and it
• 7:25
  Speaker 1: likely will, we'll see the deficit rise even more so.
• 7:31
  Speaker 1: The treasury, our government has said that they are going
• 7:35
  Speaker 1: to increase issuance UM at the shorter end of the
• 7:38
  Speaker 1: yield curve. So you have the Fed hiking, you have
• 7:42
  Speaker 1: more issuance at least in the near term at the
• 7:46
  Speaker 1: short end of the yield curve, So it could be
• 7:48
  Speaker 1: a concern about um simply supply and what the Fed
• 7:53
  Speaker 1: is doing. However, historically speaking, the yield curve has been
• 8:00
  Speaker 1: a very good um predictor or prognosticator of of economic activity.
• 8:06
  Speaker 1: And while it is true we've had unspectacular that's how
• 8:10
  Speaker 1: I would say it GDP growth, but we continue to
• 8:13
  Speaker 1: have very, very very subdued inflation. And I think that
• 8:19
  Speaker 1: the yield curve is giving us some warning that the
• 8:22
  Speaker 1: Feds hiking in here when inflation is low. This is
• 8:26
  Speaker 1: you know, we're nine years into this expansion and we
• 8:29
  Speaker 1: still haven't seen inflation. We haven't seen it on the
• 8:32
  Speaker 1: income or the wage front, and it we're getting kind
• 8:35
  Speaker 1: of late in the cycle um to see that develop.
• 8:39
  Speaker 1: And I think that's what the bond market is telling us.
• 8:41
  Speaker 1: So are the bond market and the stock market telling
• 8:45
  Speaker 1: two different stories about the economy, two stories that cannot
• 8:49
  Speaker 1: be reconciled? Are they just telling two sides of the
• 8:52
  Speaker 1: same story. Maybe that the stock market is showing that
• 8:56
  Speaker 1: corporate profits are expected to keep increasing, yet the bond
• 8:59
  Speaker 1: market set well, maybe just not at a spectacular pace.
• 9:04
  Speaker 1: So you know, you're dealing with a bond guy, and
• 9:06
  Speaker 1: as you said earlier, when the economy is doing poorly,
• 9:11
  Speaker 1: me as a bond guy, I'm in my I'm in
• 9:14
  Speaker 1: my my zone that I like to see that. So
• 9:16
  Speaker 1: I would say that they are telling you two different stories.
• 9:20
  Speaker 1: And one of the stories that's been going on with
• 9:21
  Speaker 1: the stock market. Obviously we have we do have a
• 9:24
  Speaker 1: recovery steady issue, if not spectacular, so we go that.
• 9:30
  Speaker 1: But one of the things that has helped um In fact,
• 9:33
  Speaker 1: maybe the thing that has helped the stock market over
• 9:36
  Speaker 1: these last few years is low interest rates. Why because
• 9:40
  Speaker 1: corporations have been borrowing a huge amount of money, tremendous
• 9:44
  Speaker 1: amount um. They issue bonds like the government, and what
• 9:47
  Speaker 1: are they doing with that cash. What are they doing
• 9:49
  Speaker 1: with the bonds that raise money for them? They're buying
• 9:53
  Speaker 1: back their own stock. So you've seen you there is
• 9:57
  Speaker 1: less stock out there today then there was five ten
• 10:03
  Speaker 1: years ago, the buy back situation, and so that has
• 10:06
  Speaker 1: been one of the things that has helped prop up
• 10:09
  Speaker 1: the stock market, the fact that they've been using so
• 10:12
  Speaker 1: much cash to buy back their their own stocks. They're
• 10:15
  Speaker 1: the biggest buyer of the stock market, and that happens
• 10:18
  Speaker 1: when interest rates are low, and the this spread with
• 10:21
  Speaker 1: the corporate bond spread between you know, treasuries and corporate
• 10:25
  Speaker 1: bonds is also very tight. So it makes a lot
• 10:28
  Speaker 1: of sense, but they're not investing, and I think that
• 10:31
  Speaker 1: that will prove a problem. That's why I think the
• 10:33
  Speaker 1: bond market is more right or more correct than the
• 10:38
  Speaker 1: stock market, because if we do see interest rates rise,
• 10:42
  Speaker 1: or if we were to go into an extended period
• 10:44
  Speaker 1: of the slowdown, I think all that corporate barring could
• 10:48
  Speaker 1: prove to be a problem. Now we've often heard not
• 10:52
  Speaker 1: just from government officials, but from investors as well, this mantra,
• 10:56
  Speaker 1: the U s Treasury market is the largest, most liquid,
• 11:01
  Speaker 1: most secure asset class in the world. Does what's going
• 11:07
  Speaker 1: on in the US treasury market now reflect things that
• 11:11
  Speaker 1: are going on outside the United States as well as
• 11:14
  Speaker 1: issues like Treasury Department sales, tax plan FED Well, it
• 11:20
  Speaker 1: certainly does. You know, the bond market is I mean
• 11:24
  Speaker 1: our bond market. All bond markets are are international. The
• 11:28
  Speaker 1: the largest holders of US treasuries are overseas, and one
• 11:32
  Speaker 1: of the largest holders are foreign central banks. Well, when
• 11:36
  Speaker 1: they they have had their about of what is known
• 11:40
  Speaker 1: as quantitative easing meeting. Central banks have been buying bonds
• 11:45
  Speaker 1: to keep interest rates low. They have negative yields in Europe,
• 11:48
  Speaker 1: for example, and so we have we have positive yields.
• 11:53
  Speaker 1: I mean we don't. You don't have to pay the
• 11:57
  Speaker 1: government when you buy a bond. So the point is
• 11:59
  Speaker 1: the point is that the demand for U. S. Treasuries
• 12:02
  Speaker 1: is very much influenced by activity overseas where there is
• 12:07
  Speaker 1: some growth going on. Absolutely, but there are not a
• 12:10
  Speaker 1: lot of bonds around because other central banks have bought them,
• 12:13
  Speaker 1: and the yields and bonds overseas in many cases are negative.
• 12:17
  Speaker 1: There's something on the order of ten trillion dollars worth
• 12:19
  Speaker 1: of bonds overseas and have a negative yield. Well, if
• 12:23
  Speaker 1: you want a positive yield, come to the US are
• 12:25
  Speaker 1: yields might be low or appears to be low, but
• 12:28
  Speaker 1: at least there's a yield, right, But does that necessarily
• 12:31
  Speaker 1: mean there's going to be a slowdown? I guess what
• 12:33
  Speaker 1: I'm saying is we've heard this idea multiple times since
• 12:37
  Speaker 1: two thousand and nine, that the economy is headed for
• 12:40
  Speaker 1: a double dip. Hasn't happened. I'm just wondering whether this
• 12:44
  Speaker 1: reflects the relative attractiveness of the US versus others. The
• 12:49
  Speaker 1: other economy that the US is often compared with is China,
• 12:53
  Speaker 1: and yet their bond market very different and much more
• 12:57
  Speaker 1: difficult for foreign investors to access. So, I mean, it
• 13:03
  Speaker 1: is a good question. And of course, at any given
• 13:05
  Speaker 1: moment in time, you know, we try to make it simple.
• 13:08
  Speaker 1: The yield curve says this UM, and there are these
• 13:11
  Speaker 1: other influences we've We've not experienced, you know, in in
• 13:15
  Speaker 1: my thirty years a lot of time when there's ever
• 13:18
  Speaker 1: been negative yields. So certainly there's a component to that.
• 13:22
  Speaker 1: There's certainly a component to it. But I do think
• 13:25
  Speaker 1: that we can't dismiss the yield curves shape, or or
• 13:31
  Speaker 1: the low yields that we're having UM as simply a
• 13:35
  Speaker 1: matter of you know, there's there's a strong demand from overseas,
• 13:39
  Speaker 1: you know, because of these negative yields. The fact of
• 13:42
  Speaker 1: the matter is here we are nine years into a recovery.
• 13:46
  Speaker 1: That's a very long time. That's a very long time.
• 13:49
  Speaker 1: So when I say we're late cycle, you know, we're
• 13:52
  Speaker 1: closer to the next recession than we were now. The
• 13:55
  Speaker 1: yield curve may be hinting at that UM not yet,
• 13:59
  Speaker 1: but maybe on on the radar. But the other thing
• 14:03
  Speaker 1: is inflation, so we're dealing with like we saw today
• 14:06
  Speaker 1: with the with the core CPI number very low, came
• 14:10
  Speaker 1: in a little bit lower than expectations. We look at
• 14:13
  Speaker 1: the other measures of inflation also very very low one
• 14:18
  Speaker 1: point three percent, one point five when we're looking at
• 14:21
  Speaker 1: the Fed's preferred measures, so low interest rates, particularly at
• 14:26
  Speaker 1: the long end of the Yelk curve. The longer maturities
• 14:30
  Speaker 1: are always a reflection of both current inflation and inflation expectations,
• 14:38
  Speaker 1: whether it's the surveys that come out or other uh known,
• 14:42
  Speaker 1: what the said would call market measures of inflation. Those
• 14:45
  Speaker 1: two are pointing to very low inflation um in the
• 14:49
  Speaker 1: coming months, in the coming year. David will have to
• 14:52
  Speaker 1: wrap it up there. Thanks for explaining that story. It's
• 14:55
  Speaker 1: definitely not something that we normally hear out of President
• 14:58
  Speaker 1: Trump's Twitter feed at eight. Are great to have you
• 15:01
  Speaker 1: on today. Benchmark will be back next week with our
• 15:05
  Speaker 1: two part year and special. In the meantime, you can
• 15:09
  Speaker 1: find us on the Bloomberg terminal, Bloomberg dot com, our
• 15:11
  Speaker 1: Bloomberg app, as well as on Apple Podcasts, pocket Cast,
• 15:15
  Speaker 1: and Stitcher. While you're there, take a minute to rate
• 15:17
  Speaker 1: and review the show so more listeners can find us
• 15:20
  Speaker 1: and let us know what you thought of the show.
• 15:22
  Speaker 1: You can follow me on Twitter at at scott Landman Dan,
• 15:26
  Speaker 1: you are at Moss Underscore Eco and our guest David
• 15:30
  Speaker 1: isn't on Twitter, but you can find insights from his
• 15:33
  Speaker 1: firm at at I f I Underscore. Financial Benchmark is
• 15:37
  Speaker 1: produced by Topor Foreheads and Magnus Hendrickson. The Head of
• 15:41
  Speaker 1: Bloomberg Podcasts is Francesca Levy. Thanks for listening, See you
• 15:44
  Speaker 1: next time.