Latest / Bloomberg Intelligence / Breaking Down Jackson Hole and Jay Powell (Podcast)

Transcript

Breaking Down Jackson Hole and Jay Powell (Podcast) · Bloomberg Intelligence

0:00
Speaker 1: Welcome to the Bloomberg Markets Podcast.
0:02
Speaker 2: I'm Paul Sweeney. Alongside my co host Matt Miller.
0:05
Speaker 1: Every business day we bring you interviews from CEOs, market pros,
0:09
Speaker 1: and Bloomberg experts, along with essential market moven News. Find
0:14
Speaker 1: the Bloomberg Markets podcast called Apple Podcasts or wherever you
0:17
Speaker 1: listen to podcasts, and at Bloomberg dot com slash podcast.
0:20
Speaker 1: Let's bring in Liz McCormick. She is our chief correspondent
0:24
Speaker 1: for Global macro markets over at Bloomberg News and Joe
0:28
Speaker 1: Wisenthal host You know him as the host of the
0:31
Speaker 1: Odd Lots podcast. I know I'm as the host of
0:34
Speaker 1: What You Miss. It's a show I deeply miss. That's
0:37
Speaker 1: what I miss is that show. In any case, I
0:42
Speaker 1: want to get the take of both of you. Liz,
0:45
Speaker 1: I'll ask you first because I couldn't sleep last night.
0:47
Speaker 1: I woke up, like in the middle of the night
0:50
Speaker 1: and I read your fantastic story on the increasing and
0:53
Speaker 1: increasingly scary government deficits and interest payments.
0:57
Speaker 2: What do you think about Powell speech?
1:00
Speaker 3: Well, I think pal, like you guys were saying, I
1:02
Speaker 3: think he did what he wanted. He wants to leave
1:04
Speaker 3: himself like Muhammad al Arian said full optionality. He's not
1:08
Speaker 3: boxing himself into a corner. He didn't give at all
1:11
Speaker 3: on you know, they're going to give up on the
1:13
Speaker 3: two percent target. The job isn't done. He noted a
1:16
Speaker 3: few good things, you know where inflations come down. But
1:19
Speaker 3: I think he just he doesn't want to give any signal,
1:22
Speaker 3: you know, like markets pricing. He's not going to do
1:25
Speaker 3: anything in September, him and his folks, but that there
1:28
Speaker 3: could be more. And I think him saying, you know,
1:30
Speaker 3: if the if things remain resilient, we could do more.
1:33
Speaker 3: It just kind of goes in line with I just
1:36
Speaker 3: all these predictions. I think, you know, we will see
1:39
Speaker 3: what happens. And it's all about the data, right. If
1:41
Speaker 3: the data comes out stronger, inflation picks up, they could
1:45
Speaker 3: do more. Like Craig Torus always tells me, they'll do
1:47
Speaker 3: whatever they want.
1:48
Speaker 4: You know, Well, I want to talk there was We
1:51
Speaker 4: had a story out from our Ruth Carson about the
1:55
Speaker 4: the r start, the theoretical level at which rate schnyder
1:59
Speaker 4: st emulate nor restrict and economy and j Pell did
2:04
Speaker 4: have something tiny to say about that. He said, we
2:07
Speaker 4: cannot identify the certainty, with certainty the neutral rate of
2:11
Speaker 4: interest And.
2:13
Speaker 2: We've never been able to write never.
2:15
Speaker 1: It's an abstract number.
2:16
Speaker 2: It's theoretical, it's ephemeral.
2:18
Speaker 1: I mean, all of a sudden, people are acting like
2:21
Speaker 1: our star is calculable.
2:23
Speaker 2: Well, I didn't understand what this debate.
2:25
Speaker 1: Where has this debate coming from? Well, Joe, that's why
2:28
Speaker 1: I want to bring you in.
2:29
Speaker 4: Get what what is the what is the rate of
2:32
Speaker 4: the neutral?
2:33
Speaker 5: Right here?
2:34
Speaker 6: Are you ready for my big number?
2:36
Speaker 1: I'm gonna reveal.
2:37
Speaker 6: I'm going to reveal the news I heard it was
2:39
Speaker 6: two point five I think it may be two point
2:41
Speaker 6: five five percent.
2:42
Speaker 2: Now, no, I have no idea.
2:43
Speaker 6: But you know what's interesting to me is that it's
2:46
Speaker 6: prior to the speech. You know, everyone's like, well, what's
2:48
Speaker 6: the buzzers in checkson hole? What do people talk about?
2:50
Speaker 6: And people are like, oh, is he going to give
2:51
Speaker 6: a speech about like where our star is now and
2:55
Speaker 6: some thing theoretical and or is he going to maybe
2:58
Speaker 6: talk about productivity game? And it's like, you know, this
3:01
Speaker 6: is an academic conference in theory. Last year he sort
3:05
Speaker 6: of pollow speech was like almost infamously short, like eight minutes,
3:08
Speaker 6: and he's just like we're not here to make friends.
3:10
Speaker 6: We're just here to you know, get inflation down. And
3:12
Speaker 6: so this year was like basically the same thing, and
3:15
Speaker 6: it's once again he's sort of passed on the opportunity
3:19
Speaker 6: to deliver some like theoretical academic monetary policy speech and
3:23
Speaker 6: he basically said, this time in a few more words,
3:26
Speaker 6: but not, you know, we're still just our job is
3:29
Speaker 6: to get inflation down. And you know, there's some progress
3:32
Speaker 6: and there's some signs of encouragement, but it's still too
3:34
Speaker 6: high and there's still more work to do. So I
3:36
Speaker 6: do think it's interesting that while people have these discussions
3:39
Speaker 6: about what is our star and can we know it
3:40
Speaker 6: in real time? And is this a useful guide, that
3:44
Speaker 6: he did not come here to address that question. And
3:47
Speaker 6: to the extent he did talk about stars, he's like, well,
3:49
Speaker 6: it's a cloudy sky, so we probably can't see the
3:50
Speaker 6: stars anyway.
3:51
Speaker 1: But Joe, we know what we don't know, right, We
3:54
Speaker 1: know we can't know our star in real time. Everyone like,
3:58
Speaker 1: I've never thought of this as an number someone could pinpoint.
4:01
Speaker 1: Even he's not a theoretical academic j Powell, So especially
4:07
Speaker 1: he doesn't know what it is.
4:09
Speaker 3: Well, you know, bond investors.
4:11
Speaker 2: That's what they do.
4:11
Speaker 3: They would say, Hey, we're trying to figure out our
4:13
Speaker 3: bond math, you know, you know, this is what we
4:16
Speaker 3: price off of, is our biz, you know, so we're
4:19
Speaker 3: going to make an estimate people are watching. I think
4:21
Speaker 3: Joe has talked about this before.
4:23
Speaker 2: You know, the dots.
4:24
Speaker 3: You know, we know the median has stayed at two
4:26
Speaker 3: and a half and that's the nominal neutral rate, but
4:29
Speaker 3: the average is moving up.
4:30
Speaker 1: So that's what bond people do. Right, there's supposed to
4:33
Speaker 1: be ahead of the game.
4:34
Speaker 2: But I think you're right.
4:34
Speaker 3: I mean I come from a math background. Things like
4:37
Speaker 3: even term premium is a residual stuff. That's you know
4:41
Speaker 3: that you can't point put pinpoint estimate. But the bond people,
4:44
Speaker 3: that's what they're about, kind of speculating and doing their
4:47
Speaker 3: models and whatnot.
4:48
Speaker 4: Yeah, was there any sign that like the long term
4:52
Speaker 4: dot plot has changed at all in this speech?
4:55
Speaker 3: Well no, not in this speech, but I will say,
4:58
Speaker 3: you know, the quarterly the economic figures they put out
5:02
Speaker 3: with the dot plot, people have looked at you know,
5:05
Speaker 3: we always flash the median is two and a half,
5:08
Speaker 3: has stayed there for a bit now, but.
5:10
Speaker 2: That the average if you take the average.
5:12
Speaker 3: There's a few more policy makers that have bumped it
5:14
Speaker 3: up a little, like Joe saying two point five to five.
5:17
Speaker 1: You know, so it's but you're taking what the median
5:19
Speaker 1: dot and then taking out inflation.
5:22
Speaker 3: Well, yeah, so if you take the median dot, which
5:24
Speaker 3: is a nominal rate in two and a.
5:25
Speaker 2: Half, which usually and you say the fits to your end.
5:28
Speaker 3: Yeah, but if you say the fits two percent inflation,
5:31
Speaker 3: that's like a neutral real rate of about fifty basis
5:34
Speaker 3: points right, that's kind of the going rate. So bond
5:37
Speaker 3: people are saying, maybe it's gonna tick up a little
5:39
Speaker 3: higher with the long run dot to show us maybe
5:41
Speaker 3: they think neutral is higher. Who knows, but I think
5:45
Speaker 3: you know, I said, we have to talk about this
5:48
Speaker 3: because nothing against stock people, but everybody and their brother
5:51
Speaker 3: stock people, you name it, are talking about our star.
5:54
Speaker 1: Like you said it something like no one gave a
5:56
Speaker 1: hoot about it. I always try and guess on the
5:59
Speaker 1: Bloomber terminal. We have a great tailor rule function and
6:03
Speaker 1: you have to put in your neutral real rate guestimate there,
6:06
Speaker 1: which is part of the fun of it and also
6:09
Speaker 1: mos most the most infuriating part of it. I think
6:12
Speaker 1: the nehru too, Like it's another one of those numbers
6:14
Speaker 1: that we just don't really know, right Joe.
6:17
Speaker 6: But yeah, I mean, look, you will not get any
6:21
Speaker 6: real disagreement anyone's like, oh, like, no one. You'd be
6:25
Speaker 6: hard pressed to find someone who could like really say, oh,
6:27
Speaker 6: this is the number and we know it in real time, etc.
6:29
Speaker 6: But in the defense, if I were gonna like mount
6:31
Speaker 6: some sort of defense of the concept, it's like, well,
6:34
Speaker 6: the economy feels different today in twenty twenty three than
6:37
Speaker 6: it did in twenty thirteen, and what are some reasons. Well,
6:41
Speaker 6: we did get this like really different fiscal response to
6:44
Speaker 6: the crisis that we saw, you know, of COVID versus
6:48
Speaker 6: the fiscal response that we got to the Great Financial
6:51
Speaker 6: Crisis and so forth. So there are some structural differences.
6:54
Speaker 6: It would seem the labor market was really tons of
6:57
Speaker 6: slack over the twenty tens. Now about labor marketing tightness,
7:01
Speaker 6: maybe some demographic changes, maybe some changes in the nature
7:04
Speaker 6: of world trade and whether you know, you know, whether
7:08
Speaker 6: there's this sort of ongoing disinflationary trend. So I don't
7:11
Speaker 6: think it's many people are going to say, Okay, we
7:13
Speaker 6: know this number in real time but is an exercise
7:18
Speaker 6: to think, well, could we have structurally higher rates because
7:21
Speaker 6: of some fundamental difference in macro, particularly around globalization, particularly
7:26
Speaker 6: around fiscal I don't think that's like a crazy conversation
7:29
Speaker 6: to have that. And also, furthermore, this idea that maybe,
7:33
Speaker 6: like you know, we sort of got anchored to this
7:35
Speaker 6: zerup era in our minds where everyone's like, well that
7:38
Speaker 6: was the normal and rates are going to come down.
7:40
Speaker 6: And of course, you know, like we know the twenty
7:42
Speaker 6: tens were sort of a historical aberration. Maybe it could
7:45
Speaker 6: be more like the eighties, Maybe it could be more
7:46
Speaker 6: like the nineties.
7:47
Speaker 2: We don't know.
7:48
Speaker 6: So I think maybe there is some value in discussing
7:52
Speaker 6: did something structural change about the macron landscape globally or
7:56
Speaker 6: in the United States that would say, you know what,
7:58
Speaker 6: we are going to have higher rates for longer than
8:00
Speaker 6: we would have expected. What are those conditions? And maybe
8:02
Speaker 6: that is a fruitful conversation I have.
8:04
Speaker 2: Of course that's fair.
8:05
Speaker 1: And I think I can't remember the name exactly of
8:07
Speaker 1: the Jackson Hole Symposium, but it's like, I think the
8:10
Speaker 1: name out, I think structural change, structural And you know,
8:14
Speaker 1: we heard Jim Bullard talking to Mike McKee yesterday, and
8:18
Speaker 1: he did say he thinks we're in a new and
8:20
Speaker 1: a new inflation regime, a new interest rate regime.
8:24
Speaker 2: But I think we all agree on that already.
8:26
Speaker 1: I thought, you know, yes, our star thing Cloudy Assam
8:30
Speaker 1: told Tom Keen a couple of days ago she of
8:32
Speaker 1: the psalm rule. I can't remember where she went to
8:35
Speaker 1: grad school, but she went to Denise University, which makes
8:37
Speaker 1: me pretty proud.
8:38
Speaker 2: But she said that was to her.
8:39
Speaker 1: The most interesting debate at jacksonvill was where is our start?
8:42
Speaker 1: And that's when I started to think things are getting
8:45
Speaker 1: a little weird.
8:46
Speaker 4: Well, I mean, you talk about a paradigm shift. Though
8:49
Speaker 4: I was looking at the thirty year yield and we're
8:52
Speaker 4: back close to where we were in twenty eleven. I mean,
8:57
Speaker 4: are we just going back like a decade plus but
9:02
Speaker 4: not to the nineties or to the eighties, if that's
9:05
Speaker 4: where we're talking about where long term yields are. And
9:08
Speaker 4: maybe put this in the context.
9:09
Speaker 1: Mortgage rates are where they were when was more the
9:13
Speaker 1: mortgage rate lasted seven and a half.
9:15
Speaker 4: I think that was early two thousands. I forget which year,
9:18
Speaker 4: but I mean, is there a prospect that we as
9:23
Speaker 4: with as with home buyers, simply a just slowly over
9:28
Speaker 4: time to like slightly higher rates. And what does that mean?
9:32
Speaker 4: What do you think that means?
9:33
Speaker 3: Liz, Yeah, I think I think I was gonna bring
9:36
Speaker 3: that up that I think that's the broader picture besides
9:38
Speaker 3: this our star gazing is that there's a lot of people,
9:41
Speaker 3: like Bill Dudley has written about that feel like overall
9:45
Speaker 3: the system is going to have structurally higher rates for longer,
9:49
Speaker 3: meaning you know, we're not going to go like so
9:51
Speaker 3: we're saying, oh, we're at the highest rates since two
9:54
Speaker 3: thousand and seven, and certain tenors and treasuries and whatnot,
9:57
Speaker 3: but you know that maybe we're we're supposed to be there,
10:01
Speaker 3: that things have changed part of a little bit what
10:03
Speaker 3: Joe was saying, that we're you know, maybe inflation is.
10:06
Speaker 1: Going to stay sticky. Even in the Fed's.
10:07
Speaker 3: Forecast, they don't get to their two percent goal for
10:10
Speaker 3: several years, right, So if rates have to stay higher,
10:13
Speaker 3: that may be that we all have to get used
10:15
Speaker 3: to saying, oh, my home equity line is now at
10:18
Speaker 3: seven and three quarters.
10:20
Speaker 4: You know it's not seventeen twenty percent were in the
10:23
Speaker 4: well that's eighty.
10:24
Speaker 3: Right, that's what I mean, you're just going to just
10:26
Speaker 3: and say maybe I'll do these three things in my house,
10:28
Speaker 3: but not that one. But you know, some people are
10:32
Speaker 3: you know, it depends on where you are. Some people
10:34
Speaker 3: are having trouble keeping up with things, of course, you know, Joe.
10:37
Speaker 1: What I think is most interesting is a debate about
10:41
Speaker 1: what the.
10:43
Speaker 2: Inflation target should be.
10:45
Speaker 1: And I'm not saying I think it should change because
10:48
Speaker 1: or or that it's really a special number at two percent.
10:51
Speaker 1: I just think it's interesting when people talk about it.
10:54
Speaker 1: I think, uh, you know, I don't like inflation. I
10:56
Speaker 1: think it's a regressive tax. But that's just my opinion.
11:01
Speaker 1: It could be any any target.
11:02
Speaker 2: What do you think.
11:05
Speaker 6: Yeah, I think it's a really interesting question. I mean,
11:07
Speaker 6: Powell is sort of adamant today that he's like, we're
11:10
Speaker 6: not changing the inflation target, probably because of buzz of
11:12
Speaker 6: people in the media. You know, there's adjacent Ferman columni.
11:15
Speaker 6: It's like, maybe we should go to three percent. It
11:18
Speaker 6: feels kind of academic, and I think they're in terms
11:21
Speaker 6: of like, look, the way I think about it is
11:23
Speaker 6: this three years ago at Jackson Hall. It was virtual
11:27
Speaker 6: that year in twenty twenty, but three years ago at
11:29
Speaker 6: Jackson Hall, the FED laid out it's a new framework,
11:31
Speaker 6: flexible average inflation targeting, which essentially said that we're willing
11:36
Speaker 6: to accept some trade off. We're willing to accept some
11:38
Speaker 6: higher inflation in exchange for a more rapid pace of
11:41
Speaker 6: labor market healing. That's basically what it was. And so
11:45
Speaker 6: I think when you see these conversations about a higher
11:47
Speaker 6: inflation target and whether the FED should tolerate three percent
11:50
Speaker 6: or two and a half percent, etcetera, it's essentially asking
11:53
Speaker 6: the same question, which is, we have a good labor
11:55
Speaker 6: market right now. We have it's great three and a
11:58
Speaker 6: half percent unemployment, that's really encouraging. The spread between black
12:01
Speaker 6: and white employment. Unemployment has narrowed quite a bit. Wages
12:05
Speaker 6: at the low end of the income scale are growing
12:08
Speaker 6: faster than high high end. These are all things that
12:10
Speaker 6: I think people generally wanted to see for a while.
12:13
Speaker 6: So when I when the conversation happens about should we
12:15
Speaker 6: tolerate higher inflation, to me, the real question is like
12:19
Speaker 6: how much are we willing to sacrifice on the inflation
12:22
Speaker 6: side in order to keep the good news on the
12:25
Speaker 6: employment side. And so I think that is sort of
12:27
Speaker 6: what this question is about. It's like two percent isn't
12:30
Speaker 6: fixed in stone, it's ex sense of like what low
12:33
Speaker 6: and stable inflation looks like. But given where we are unemployment,
12:37
Speaker 6: should we tolerate how stressed should we be about some
12:40
Speaker 6: periods where we're a little bit above that or three
12:42
Speaker 6: percent three and a half percent? Do we want to
12:44
Speaker 6: preserve what we have in the labor market? And this,
12:47
Speaker 6: I think is the sort of real question. How much
12:49
Speaker 6: do we how much are we willing to sacrifice of
12:51
Speaker 6: what we've achieved on the labor market side to get
12:54
Speaker 6: back to two percent? Is like, to me, the question
12:56
Speaker 6: that really we're trying, we're really that we're really discussing
12:59
Speaker 6: when we talk talk about raising the inflation target.
13:01
Speaker 1: Joe, great talking to you, Thanks so much for joining us.
13:04
Speaker 1: Joe Wisenthal, who co hosts odd Lots of Course with
13:07
Speaker 1: Tracy Alloy Liz McCormick. Always a pleasure to have you
13:10
Speaker 1: in the studio.
13:11
Speaker 7: You're listening to the team. Ken's a live program Bloomberg
13:15
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg dot com,
13:18
Speaker 7: the iHeartRadio app, and the Bloomberg Business app, or listen
13:22
Speaker 7: on demand wherever you get your podcast.
13:25
Speaker 1: Let's bring in someone who does this for a living. RJ. Gallo,
13:28
Speaker 1: senior portfolio manager at Federated Hermes, joins us am I
13:32
Speaker 1: being too glib, Rj. Because it doesn't seem like Powell
13:37
Speaker 1: moved markets much. And he, I mean, my opinion of
13:41
Speaker 1: what the Fed is going to do, my guess, my
13:44
Speaker 1: forecast is just the same today as it was yesterday.
13:49
Speaker 8: I think that the anticipation for the speech was that
13:51
Speaker 8: it wouldn't necessarily be a seminal message like it was
13:56
Speaker 8: a year ago, which was a really aggressive and powerful
14:00
Speaker 8: message to the markets that we're tightening, and we're tightening
14:02
Speaker 8: a lot that was a year ago intended to rebuild
14:06
Speaker 8: their credibility as an inflation fighter, and I think that
14:09
Speaker 8: has worked. Here we are in August of twenty twenty three.
14:12
Speaker 8: I think we expected sort of an agnostic, cautious speech.
14:15
Speaker 8: I think that's what we got has a little teeny
14:18
Speaker 8: bit of a hawkish tilt to it, and as a result,
14:20
Speaker 8: two year yields or a little cheaper treasurey occurs a
14:25
Speaker 8: little flatter because of that sort of hawkas message. That
14:28
Speaker 8: will tighten again if we need to. But it's a
14:30
Speaker 8: cautious message because He also emphasizes the risk of doing
14:35
Speaker 8: too much versus the risk of doing too little, repeating
14:37
Speaker 8: some other messages that he's said before. As you noted,
14:41
Speaker 8: I think that there's some information in the speech, maybe
14:45
Speaker 8: most notably the line where he basically says the two
14:48
Speaker 8: percent inflation target is the two percent inflation target he's
14:52
Speaker 8: trying to push back I think on media speculation and
14:54
Speaker 8: market speculation that the FED will want to increase its
14:58
Speaker 8: inflation target over time. That was probably a subtle but
15:02
Speaker 8: important point that was added here for specific purposes.
15:05
Speaker 1: I believe one thing.
15:07
Speaker 4: That did change the FED swaps beginning to price out
15:12
Speaker 4: the first twenty five basis point rate cut, wopping next June,
15:18
Speaker 4: moving to next July. And does that change your positioning
15:23
Speaker 4: in treasuries at all? Does that make you any less
15:26
Speaker 4: eager to purchase I think medium to long term duration
15:30
Speaker 4: or is this sort of just all noise here for you?
15:35
Speaker 8: I think were living in a challenging time. Many on
15:41
Speaker 8: Wall Street, many investors, have been expecting that the cumulative
15:44
Speaker 8: impact of the aggressive FED tightening would have produced a
15:48
Speaker 8: sharp growth slowdown, perhaps a recession. By now, that had
15:52
Speaker 8: been our internal call within Federate Hermey's fixed income. We
15:57
Speaker 8: leave positioned to lean a little bit long duration and
16:00
Speaker 8: up in quality, reducing weightings in high yield and investment grade,
16:03
Speaker 8: for example, to underweight positions in anticipation of that economic outcome.
16:07
Speaker 8: And it has not happened. The economy has not just
16:10
Speaker 8: been resilient, it's been strong, supported by the consumer, supported
16:14
Speaker 8: by government spending. Inflation fortunately has come down. Otherwise yields
16:19
Speaker 8: would be a heck of a lot higher than they
16:20
Speaker 8: are today. Imagine what yields would look like if inflation
16:23
Speaker 8: was still six, seven or eight percent and the economy
16:26
Speaker 8: was plugging along at high rates, relatively high rates of growth.
16:29
Speaker 8: So the inflation story has worked, but the recession outcome
16:33
Speaker 8: has not. Our vue is ultimately we are going to
16:36
Speaker 8: see some diminished growth path. We keep pushing that back.
16:41
Speaker 8: Today's news doesn't change our positioning per se, but I
16:45
Speaker 8: think it does emphasize the agree to which the Fed
16:49
Speaker 8: is very committed to seeing inflation return back close to
16:51
Speaker 8: its sup percent target. And that means they're not in
16:55
Speaker 8: a hurry to ease. They anticipate there'll be some easing
16:58
Speaker 8: and growth. Powell explicitly talked about jolts weakening. In his
17:01
Speaker 8: comments today, he also talked about the lower rated non
17:05
Speaker 8: farm payroll job creation that we've been seeing recently. Positive, yes,
17:09
Speaker 8: but at lower lower pace. And I think on net
17:14
Speaker 8: you know this is the news today. Was not hugely
17:17
Speaker 8: marketing movement, but it doesn't change our view. We still
17:20
Speaker 8: lean a little long. We're still up in quality. We
17:22
Speaker 8: think that growth slowdown will come.
17:24
Speaker 1: Yeah. A couple of days ago, I was talking to
17:26
Speaker 1: Michael Dardo over at MKM and he said we were
17:28
Speaker 1: talking about high yield. He said he thinks junk is
17:32
Speaker 1: his words, insanely expensive. And when I look at delinquencies
17:38
Speaker 1: any chart, or or or you know, credit card usage,
17:41
Speaker 1: it just goes up into the right recently. Are you
17:44
Speaker 1: expecting to see more default? Shouldn't investors get more risk, sorry,
17:50
Speaker 1: more reward for that kind of risk.
17:53
Speaker 8: That's part of the reason why we are in fact
17:55
Speaker 8: up in quality. We think on the on the macro front,
17:58
Speaker 8: the consumer has been spending at a breakneck pace, and
18:01
Speaker 8: they're pulling down on the COVID era access savings I
18:06
Speaker 8: think we call it these days. Eventually that's going to
18:08
Speaker 8: run pretty thin for mid and lower income households. We're
18:12
Speaker 8: bringing back the student loan payments. That's going to have
18:14
Speaker 8: some impact. So we think the consumer is going to
18:17
Speaker 8: fade with respect to high yield. We think the evaluations
18:21
Speaker 8: are too tight. We were underweight during the rally. We've
18:24
Speaker 8: missed some of that, ad Midley, but we're not going
18:26
Speaker 8: to chase it now. We think that because the fundamentals
18:29
Speaker 8: should weaken and we think there will be some uptick
18:31
Speaker 8: in defaults that we want to see wider spreads before
18:34
Speaker 8: we start getting back more constructive on high yield.
18:38
Speaker 4: You know, we were talking with our chief economics correspondent
18:42
Speaker 4: or I think that's her title, Liz McCormick, just a
18:44
Speaker 4: few minutes ago, and she had a great piece out
18:47
Speaker 4: about how US budget deficits exploding no end in sight,
18:51
Speaker 4: and there are economists very worried about the potential for
18:56
Speaker 4: that to drive up treasure yields in the long term.
19:00
Speaker 4: But there's sort of this interplay right around what the
19:02
Speaker 4: Fed wants to do versus the US fiscal health. I mean,
19:06
Speaker 4: do you see that having any impact when you think
19:10
Speaker 4: about the kinds of risk you're taking in the long term?
19:15
Speaker 1: Yeah, I know.
19:16
Speaker 8: We when we develop our duration Callum, the head of
19:19
Speaker 8: our Duration Committee, and our duration call expressed as a
19:22
Speaker 8: percentage of index long or short, is predicated clearly on
19:26
Speaker 8: our monetary policy outlook. But fiscal policy is another key
19:29
Speaker 8: ingredient in the discussions about how we're going to manage duration.
19:34
Speaker 8: And on the fiscal front, you know, bottom line is
19:37
Speaker 8: the US government is spending quite a bit more money
19:40
Speaker 8: than it takes in. That's been the case now for
19:42
Speaker 8: quite a while. That was true before the pandemic, it
19:45
Speaker 8: remains true after the pandemic. Neither party seems to really
19:49
Speaker 8: believe in fiscal discipline when they actually have the control
19:52
Speaker 8: of Washington. We saw that when the Republicans had complete
19:55
Speaker 8: control during the Trump early Trump years, they just spent
19:58
Speaker 8: more in tax less episode went up. Eventually, this is
20:02
Speaker 8: going to have to turn, But for now, I think
20:05
Speaker 8: there is a difficult challenge where the FED is trying
20:07
Speaker 8: to restrain the economy and bring down inflation with a policy.
20:12
Speaker 8: Aggressive policy stands for shrinking the balance sheet raising rates. Meanwhile,
20:16
Speaker 8: fiscal policy, on the other hand, is net stimulative through
20:20
Speaker 8: the tax credits linked to the green energy spend that
20:24
Speaker 8: was part of the Inflation Reduction Act, as well as
20:26
Speaker 8: the Infrastructure Bill, which was very bipartisan. So the federal
20:30
Speaker 8: government is doing some things that arguably they probably need
20:32
Speaker 8: to do. If we're going to do some transition to
20:34
Speaker 8: how we become a more green economy, that's going to
20:38
Speaker 8: cost money. If we're going to have rebuild and expanded
20:41
Speaker 8: infrastructure in a country that needs some of that, that's
20:43
Speaker 8: going to cost money. But of course it's coming at
20:45
Speaker 8: a time and the economy is already running pretty hot,
20:48
Speaker 8: and so it is working across purposes with the FED
20:50
Speaker 8: to some degree. And that's why our duration long. You know,
20:53
Speaker 8: we're not max long, We're not even a quartermax long.
20:55
Speaker 8: We're leaning long because we think that fixed income is
20:58
Speaker 8: repriced to the point now where it creates you to investors,
21:01
Speaker 8: as income is real in a real sense net of
21:04
Speaker 8: inflation expectations. And we think ultimately some some slow down
21:07
Speaker 8: in the economy will occur, but the fiscal stance is
21:10
Speaker 8: going to support the economy while the monetary stance is
21:13
Speaker 8: trying to restrain it.
21:14
Speaker 1: How slow, how bad do you think it'll be?
21:16
Speaker 2: R Jy.
21:18
Speaker 8: We had previously thought that, you know, there were some
21:20
Speaker 8: in our you know, we we we were a team,
21:22
Speaker 8: and there's some members of the team who felt that
21:25
Speaker 8: we were going to have a potentially deeper session. Especially
21:27
Speaker 8: last springing when SVB was blowing up, it felt like
21:31
Speaker 8: the early, the early signs of a true crisis brewing.
21:36
Speaker 8: Maybe not as bad as a Lehman Brothers global financial crisis,
21:40
Speaker 8: but something that was going to be very stressful and
21:41
Speaker 8: lead to a deeper downturn. I think when you look
21:44
Speaker 8: at it now, consumers are strong, jobs are plentiful. We
21:47
Speaker 8: think it's going to be a modest recession. I wouldn't
21:50
Speaker 8: be surprised if we get, you know, the traditional two
21:53
Speaker 8: periods two quarters of GDP contraction, but the NV er
21:57
Speaker 8: to see jobs, jobs and retail sales, all the components
22:03
Speaker 8: that they look at to officially call a recession sufficiently
22:07
Speaker 8: tip over to the point where we have a mild
22:09
Speaker 8: recession that's not long lasting. In a world like that,
22:13
Speaker 8: we're not expecting the Fed to go back to the
22:14
Speaker 8: zero lower bound. We're not expecting the tenure Treasury to
22:17
Speaker 8: have a two handle. Again, I wouldn't mind it if
22:20
Speaker 8: it by a three handle. But it's a cyclical downturn,
22:23
Speaker 8: not a big seminal event like a financial crisis.
22:26
Speaker 1: RJ great having in the program. Thanks so much, we
22:30
Speaker 1: really appreciate your insight.
22:31
Speaker 2: RJ.
22:31
Speaker 1: Gallo there from Federated Hermes.
22:34
Speaker 7: You're listening to the tape. Cat's are live program Bloomberg
22:37
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg Radio, the
22:40
Speaker 7: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
22:44
Speaker 7: You can also listen live on Amazon Alexa from our
22:46
Speaker 7: flagship New York station. Just say Alexa play Bloomberg eleven thirty.
22:52
Speaker 1: Let's ask a professional investor. Caterita Seminetti joins us right now.
22:56
Speaker 1: She is a senior vice president private wealth advisor over
22:58
Speaker 1: at Morgan Stanley and Kat, I mean, the one thing
23:02
Speaker 1: that I look to that's a little confusing is the
23:07
Speaker 1: dot plot. And I know it's not supposed to be
23:09
Speaker 1: a forecast, but these are you know, essentially the FED
23:13
Speaker 1: participants on individual forecasts, and they call for fore cuts
23:18
Speaker 1: next year if we get another hike. On the other hand,
23:23
Speaker 1: Powell has said rates are going to stay this high
23:25
Speaker 1: for years, and everybody seems to know that unless something breaks,
23:29
Speaker 1: they're not going to cut.
23:30
Speaker 5: What do you think, Well, Matt, thank you for having
23:33
Speaker 5: me on the show. You know, it's a challenging time
23:36
Speaker 5: and you're right, he hasn't really said anything new. You know,
23:39
Speaker 5: we see inflation coming down, and you know that means
23:43
Speaker 5: that the FED is nearing the rate hike cycle, but
23:45
Speaker 5: does it actually mean that. It justifies the valuations that
23:50
Speaker 5: we have seen and the growth that we have seen
23:52
Speaker 5: earlier this year, and whether they're going to continue really
23:55
Speaker 5: depends on the data. But investors seems to be a
23:58
Speaker 5: little bit distrustful of the messaging because it took FED
24:01
Speaker 5: such a long time to react to inflation and that
24:04
Speaker 5: transitory message that you know, we all heard so much about,
24:07
Speaker 5: you know, But eventually they're going to be done. The
24:09
Speaker 5: question is are they going to pause first or you know,
24:12
Speaker 5: actually continue to raise rates for a little while longer.
24:16
Speaker 5: You know, But when we look at the yield curve
24:18
Speaker 5: and we see higher rates and the longer side of
24:21
Speaker 5: the yield curve, that does point out that the rates
24:24
Speaker 5: might be staying longer for you know, for higher for longer.
24:29
Speaker 1: You know.
24:29
Speaker 5: That plus the treasury over issuance that that we're seeing
24:33
Speaker 5: so far, so we have to incorporate that into our
24:36
Speaker 5: reality and translated into market expectations.
24:39
Speaker 4: Well, we've got a couple of weeks before our next
24:41
Speaker 4: FED meeting there is you know, when you look at
24:44
Speaker 4: swaps market, it is personally going a twenty one percent
24:47
Speaker 4: chance that we could see a second hike here November
24:52
Speaker 4: is a little bit higher.
24:54
Speaker 1: What's your take, What would we.
24:55
Speaker 4: Need to see to actually change those expectations make that
24:58
Speaker 4: a real thing.
25:00
Speaker 5: Well, the earnings are slowing and you know that's good thing,
25:03
Speaker 5: and inflation is coming down, so FED is seeing a
25:05
Speaker 5: lot of the data that they're hoping to see, you know,
25:08
Speaker 5: but at three percent, they're really not close to the
25:10
Speaker 5: target number, you know, so there is a possibility that
25:13
Speaker 5: they might continue, you know, to high grades, but you know,
25:16
Speaker 5: whether they do or not, you know, if we take
25:18
Speaker 5: the larger picture into consideration, they're nearing the end sooner
25:22
Speaker 5: rather than later, they're going to be done, you know,
25:24
Speaker 5: and eventually they're going to pause.
25:26
Speaker 7: You know.
25:26
Speaker 5: What I like personally is that we kind of stopped
25:30
Speaker 5: talking on some level about the rate cuts because we
25:33
Speaker 5: need to concentrate on here and now we still have
25:35
Speaker 5: to get through the end of the year. You know,
25:37
Speaker 5: in market, you know, to us, it's going to look
25:39
Speaker 5: slightly different in the second half that it did in
25:42
Speaker 5: the first half, you know, because again you know, don't
25:44
Speaker 5: do are the evaluations that we have seen, the growth
25:47
Speaker 5: that we have seen only in select areas and in
25:50
Speaker 5: these very select names. Was it actually justified or perhaps
25:54
Speaker 5: it was overly optimistic, which is the way it seems
25:56
Speaker 5: to us.
25:58
Speaker 1: You know, we heard some interesting statements yesterday from Nikki Haley,
26:05
Speaker 1: former governor of South Carolina, she's running for president, concerning
26:08
Speaker 1: the retirement age, and I wonder what you take from
26:12
Speaker 1: those statements. I mean, it's going to be a drastic change,
26:16
Speaker 1: though not necessarily unexpected or difficult to understand, if we
26:22
Speaker 1: raise the retirement age here in the US. What does
26:25
Speaker 1: that mean for some of your clients.
26:27
Speaker 5: Well, our clients are concerned because you know, on one side,
26:30
Speaker 5: you know, of course, nobody likes that notion of kicking
26:33
Speaker 5: the can down the road and taking the responsibility of
26:36
Speaker 5: funding the retirement benefits for our retirees, you know, to
26:39
Speaker 5: the next generation. But at the same time, we have
26:42
Speaker 5: to be responsible and we have to take a close look,
26:44
Speaker 5: you know, at the numbers. You know, because on our
26:47
Speaker 5: side we see investors, you know, on one side, really
26:50
Speaker 5: hoping for the short lending, for the soft lending. I apologize,
26:53
Speaker 5: but you know, but also being very cautious of the
26:57
Speaker 5: market because so much of the retirement income has to
27:00
Speaker 5: come from personal savings. Now good news, of course that
27:03
Speaker 5: we are in the high interest rate environment, and then
27:06
Speaker 5: investors right now can get higher yields, you know, in
27:09
Speaker 5: anything from money market to any area of fixed income.
27:12
Speaker 5: You know, but retirement age is a big subject and
27:15
Speaker 5: it should be addressed sooner rather than later.
27:17
Speaker 1: What do you think is appropriate for a retirement age?
27:20
Speaker 1: I ask this because I see you listened as the
27:22
Speaker 1: corporate Retirement director at Morgan Stanley.
27:24
Speaker 5: Well, of course, I mean, you know, if the calculation
27:26
Speaker 5: is based on the actual areial assumptions, you know, in
27:29
Speaker 5: the way that the Social Security is funded. So it's
27:32
Speaker 5: not an easy question to answer, you know. But on
27:35
Speaker 5: my side, as financial plan and letter, we will plan
27:39
Speaker 5: for any age. We just need to and to understand
27:42
Speaker 5: what retirees you know, should be preparing for. But it's
27:45
Speaker 5: a really larger conversation in the big complicated calculation.
27:49
Speaker 1: I'm planning to retire when I'm about Let's see, I'm
27:51
Speaker 1: having a kid in November. I'll be fifty, so she'll
27:54
Speaker 1: be down to college when she's twenty. So I think
27:56
Speaker 1: I'll retire around seventy two. That makes sense to me.
28:00
Speaker 4: He's the best significant hike from from where the expectation is.
28:04
Speaker 1: I think he's seventy five.
28:05
Speaker 2: I may have to work a little bit longer.
28:06
Speaker 1: Actually, now they think about it college costs, you know.
28:10
Speaker 4: Yeah, it's tough.
28:11
Speaker 1: I mean, so give us the quickly.
28:13
Speaker 4: I think we only have about thirty seconds here. Where
28:16
Speaker 4: are you putting your marginal dollar for your clients at
28:19
Speaker 4: the moment.
28:20
Speaker 5: Simon, We tell investors to be defensive, to stay with quality,
28:23
Speaker 5: you know, with large gap in the areas like you know,
28:26
Speaker 5: industrials and financial, healthcare materials, to look at dividend income,
28:31
Speaker 5: and you know, to flight to safety. It's not a
28:34
Speaker 5: bad thing when interest rates are this high, you know.
28:36
Speaker 5: So we are cautioning our clients to be defensive until
28:42
Speaker 5: you know, things normalize a little bit, until at least
28:44
Speaker 5: through the end of the year.
28:46
Speaker 1: All right, Katherine, great to get your take. Thanks so
28:48
Speaker 1: much for joining us on this the all important Jackson
28:51
Speaker 1: Hoole speech day. Katerina Seminetti there. She is senior vice
28:55
Speaker 1: president and a senior portfolio member as well as Corporate
29:00
Speaker 1: Vironment Director over at Morgan Stanley. Thanks for listening to
29:04
Speaker 1: the Bloomberg Markets podcast. You can subscribe and listen to
29:07
Speaker 1: interviews at Apple Podcasts or whatever podcast platform you prefer.
29:12
Speaker 1: I'm Matt Miller. I'm on Twitter at Matt Miller nineteen
29:15
Speaker 1: seventy three.
29:16
Speaker 2: And I'm Faull Sweeney. I'm on Twitter at pt Sweeney.
29:19
Speaker 1: Before the podcast, you can always catch us worldwide at
29:21
Speaker 1: Bloomberg Radio