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The Fed, Interest Rates, and JetBlue · Bloomberg Intelligence

0:00
Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
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Speaker 1: my co host Matt Miller.
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Speaker 2: Every business day, we bring you interviews from CEOs, market pros,
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Speaker 2: and Bloomberg experts, along with essential market moving news.
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Speaker 1: Find the Bloomberg Markets Podcast on Apple Podcasts or wherever
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Speaker 1: you listen to podcasts, and at Bloomberg dot com slash podcast. Now, Matt,
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Speaker 1: we're gonna get some some smart conversation about Treasury refunding,
0:26
Speaker 1: Federal Reserve, all that kind of stuff.
0:27
Speaker 3: We can do that with Campbell Harvey.
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Speaker 1: He's a professor of finance at the Fucal School of
0:30
Speaker 1: Business at Duke University, my former professor, and I can
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Speaker 1: vouch that I did pass his Futures and Options class.
0:37
Speaker 1: I can't say I did more than pass, but pass
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Speaker 1: is good enough back in the day, Hey, Cam, thanks
0:42
Speaker 1: so much for joining us here. Matt really wants to
0:45
Speaker 1: get smart on this Treasury refunding today.
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Speaker 3: What are your takeaways from what they announced?
0:52
Speaker 4: So I think we need to look kind of beyond
0:55
Speaker 4: the refunding that was announced and just in general. So
1:01
Speaker 4: right now, the amount of debt service is about six
1:08
Speaker 4: hundred and thirty billion dollars a year, and the average
1:13
Speaker 4: interest rate on that is two point eight percent. Okay,
1:17
Speaker 4: so we know that rates are like four point eight
1:21
Speaker 4: percent or are up into the fives with the short term.
1:26
Speaker 4: So it's reasonable to assume that, given the needs and
1:32
Speaker 4: given the two trillion dollar deficet, that the debt service
1:38
Speaker 4: will explode. Indeed, it will in twenty twenty four be
1:43
Speaker 4: the second largest spending category. Right now, again, it's two
1:49
Speaker 4: hundred and thirty billion dollars a year, and that will
1:53
Speaker 4: will definitely go up to probably nine hundred over the
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Speaker 4: next year. Just the deficit of.
2:01
Speaker 2: Nine hundred billion dollars that's going to be the interest costs.
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Speaker 4: Yeah, so right now it's six hundred and thirty trillion.
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Speaker 2: Dollars a year in interest costs.
2:10
Speaker 3: That is insane.
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Speaker 2: I mean, we talk about big numbers, professor all the
2:16
Speaker 2: time here, but that's just bonkers. I mean, didn't like
2:22
Speaker 2: Treasury understand what was happening when we were at zero.
2:26
Speaker 2: Why didn't they just put out one hundred year bonds
2:29
Speaker 2: like the Austrians.
2:31
Speaker 4: Well, you know, I advocated that take advantage of the
2:35
Speaker 4: super low rates, and obviously when you do that the
2:37
Speaker 4: rates go up. But still it's not normal to have
2:41
Speaker 4: one percent rate on a ten year treasury given what inflation.
2:48
Speaker 2: Was we hit on a thirty year in twenty twenty.
2:51
Speaker 4: Yeah, so again you could argue you should take advantage
2:56
Speaker 4: of that, but look, the problem is a structural problem.
2:59
Speaker 4: So when we have reasonably good growth and to a
3:04
Speaker 4: trillion dollar deficit, you know that that's a big problem.
3:09
Speaker 4: And again that.
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Speaker 5: So the the six hundred and thirty is carefully calculated,
3:18
Speaker 5: So for example, we need to be careful with the
3:22
Speaker 5: Fed balance sheet and stuff like that, which is kind
3:26
Speaker 5: of left pocket the right pocket for the government.
3:29
Speaker 4: But if you carefully calculate that, it's about six hundred
3:33
Speaker 4: and thirty billion dollars and that's at two point eight percent,
3:38
Speaker 4: it's reasonable to expect that rate will go up. And
3:42
Speaker 4: when it goes up, it'll be the second largest spending
3:45
Speaker 4: category just paying interest. That that is not a good situation,
3:50
Speaker 4: and especially if we have slower growth. So we had
3:53
Speaker 4: a great print, and this is kind of consumers running
3:57
Speaker 4: down their savings and if you look at kind of
4:00
Speaker 4: the leading data, you can see that those savings are
4:04
Speaker 4: pretty well depleted. The consumer is not going to bail
4:07
Speaker 4: out the economy in twenty twenty four like it did
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Speaker 4: in twenty twenty three.
4:13
Speaker 3: Hey, Cam, when we hear from the FED Chairman J.
4:15
Speaker 1: Palace Effternoon, he's probably going to come out with the
4:17
Speaker 1: language that, as it relates to inflation, we have.
4:20
Speaker 3: A long way to go to defeat inflation. Do you
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Speaker 3: buy that?
4:24
Speaker 6: No?
4:25
Speaker 4: And we've talked about this before. So if you calculate
4:29
Speaker 4: the inflation rate with kind of real time prices for
4:34
Speaker 4: housing and rents, the inflation rate is below two percent. Really,
4:39
Speaker 4: the only reason it's above three is we've got that
4:42
Speaker 4: lagged effect from rental and housing inflation that happened last year,
4:48
Speaker 4: so in real time we're below two percent. I have
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Speaker 4: no idea what they're talking about and making policy based
4:54
Speaker 4: upon data from last year, that doesn't make any sense.
4:57
Speaker 4: You make policy based upon data today and what you
5:00
Speaker 4: anticipate will happen in the future.
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Speaker 2: Isn't it frustrating to watch this happen? I mean, if
5:09
Speaker 2: you advocated for you know, longer term debt when we
5:12
Speaker 2: were at zero inustrate policy, I can't imagine who would
5:17
Speaker 2: push back against that. Why would the Treasury Secretary not
5:19
Speaker 2: do that? And then if you think the FED is
5:23
Speaker 2: using you know, clearly bad data in order to drive policy.
5:28
Speaker 2: That should I imagine annoy you too, like is it
5:32
Speaker 2: difficult to move around in this world?
5:35
Speaker 4: Yeah? I think annoying us the right word. This is
5:39
Speaker 4: not rocket science. Just look at the data. It's very
5:43
Speaker 4: clear of what's happening, especially with the housing inflation. So
5:49
Speaker 4: the housing inflation, if you believe the CPI is running
5:54
Speaker 4: at a rate over seven percent year over year, and
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Speaker 4: that just doesn't squear with the data. It doesn't where
6:00
Speaker 4: with a year over year rents, it doesn't square with
6:03
Speaker 4: year over year housing prices. It's because it's reflecting what
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Speaker 4: happened last year. So I think that there is a problem.
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Speaker 4: We need to use data that is real time data.
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Speaker 4: Housing inflation is not over seven percent, and that is
6:19
Speaker 4: the reason most of the print that we get, the
6:23
Speaker 4: prints that have been over three percent, is being driven
6:27
Speaker 4: by stale data on housing and that just doesn't seem right.
6:32
Speaker 4: And also we've seen the long rates increase pretty dramatically,
6:39
Speaker 4: and this is kind of flattening the yell curve, but
6:44
Speaker 4: in a very bad way. So usually what happens before
6:50
Speaker 4: kind of recessions that you've got a yield curve inversion
6:55
Speaker 4: where the long rates are below the short rates, but
6:59
Speaker 4: then it becomes normal. And usually what happens is that
7:05
Speaker 4: the short rates decrease to cause the normal yokur, that's
7:10
Speaker 4: not what we're seeing. We're seeing the long rates go up.
7:13
Speaker 4: That's very bad. That increases the cost of capital, and
7:18
Speaker 4: that serves to slow the economy. So this is not
7:22
Speaker 4: a good situation in any dimension. And don't be fooled
7:27
Speaker 4: by that GDP print?
7:30
Speaker 7: Yep?
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Speaker 3: So does is the risk here, professor?
7:32
Speaker 1: That the Fed is overdoing it and will in fact
7:37
Speaker 1: push us into recession?
7:38
Speaker 2: GDP will fall off a cliff. Plus, our interest payments
7:40
Speaker 2: are ballooning at a level that's going to make it
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Speaker 2: hard to invest in things like solving diseases and funding
7:45
Speaker 2: the military.
7:46
Speaker 3: That's not not bueno. So is that the recession risk?
7:49
Speaker 6: Yeah?
7:50
Speaker 4: So the Fed should have stood down in January of
7:55
Speaker 4: this year. So I agree that they've made things worse.
8:01
Speaker 4: And it's especially bad given what we've seen happened to
8:05
Speaker 4: the long term rate that ripples through and just think of,
8:12
Speaker 4: you know, the these firms with commercial real estate loans
8:15
Speaker 4: and things like that, where that market is already cretered,
8:19
Speaker 4: and what's going to happen so we saw kind of
8:23
Speaker 4: a mini banking crisis in March and then as hush hush, Well,
8:28
Speaker 4: I'd like to see what's going to happen in the
8:31
Speaker 4: next few months, because we're not going to have four
8:34
Speaker 4: plus GDP growth. That consumer spending has been depleted, savings
8:40
Speaker 4: have been drawn down, and on the investment side, we've
8:44
Speaker 4: already seen that decrease in twenty twenty three. So I
8:49
Speaker 4: do believe that the FED has overdone it, unnecessarily shot
8:53
Speaker 4: themselves in the foot and the economy at the same time.
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Speaker 1: All right, Cam, thanks so much for joining us. A
8:59
Speaker 1: bunch of us class at ninety one. We're coming down
9:01
Speaker 1: to Fuqua next weekend, so watch out. Cam Harvey, Professor Finance,
9:05
Speaker 1: a Fucal School of Business at Duke University that can
9:07
Speaker 1: vouch he has no basketball game, but he's a genius
9:10
Speaker 1: on the world of finance and economics and all that
9:12
Speaker 1: kind of stuff.
9:14
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9:17
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9:28
Speaker 1: Jen Reed joins us here. George Ferguson joins us via
9:32
Speaker 1: the Princeton office. The camera there.
9:34
Speaker 3: Why we have.
9:34
Speaker 1: Jenery and George Ferguson here together. They're from Bloomberg Intelligence
9:38
Speaker 1: because we want to talk about Spirit and Jet Blue.
9:40
Speaker 3: Those airlines are trying to merge or one by the other.
9:43
Speaker 3: Matt doesn't believe in mergers. One is buying the other.
9:46
Speaker 2: Obviously Jet Blue is trying to buy Spirit, but.
9:49
Speaker 3: The Department of Justice is saying, whoa whoa, whoa whoa whoa.
9:51
Speaker 1: Wo Yeah, George. He follows the airlines for Bloomberg Intelligence.
9:55
Speaker 1: Jen follows all the anti trustuff for Bloomberg Intelligence. Jen,
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Speaker 1: let's start with you, sir, why can't we these two
10:00
Speaker 1: little ittybity airlines get together? I mean, it's not United
10:04
Speaker 1: in Delta here.
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Speaker 8: You know, it is exactly the way you look at it.
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Speaker 8: So this is what Jeff Blue says. We're two little,
10:09
Speaker 8: itty bitty airlines right Nationally, we're tiny, maybe eight percent
10:13
Speaker 8: combined share. But from an anti trust perspective, that isn't
10:16
Speaker 8: how you look at it. When you look at the
10:18
Speaker 8: way antitrust might impact a consumer, you look at it
10:21
Speaker 8: from a consumer's viewpoint. So when you're looking at it.
10:24
Speaker 8: You don't look at airlines nationally. You look at them
10:26
Speaker 8: city to city. You look at routes that consumers buy
10:29
Speaker 8: to travel, right, and if you reduce the options in
10:34
Speaker 8: a route from let's say New York to Los Angeles,
10:36
Speaker 8: a consumer can't choose some different route because the prices
10:39
Speaker 8: went up. So you're looking route to route much more
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Speaker 8: narrowly and in route to route. This is a different
10:44
Speaker 8: kind of merger than the way you'd look at it nationally.
10:47
Speaker 1: Hey, George, how important is this merger for either of
10:50
Speaker 1: these companies if it doesn't happen?
10:54
Speaker 9: I don't know, right. I guess we'll see, right because
10:59
Speaker 9: right now both these up. But he's are losing money,
11:02
Speaker 9: so clearly, I think the fares that gen is concerned about,
11:06
Speaker 9: they aren't enough to support even profitability. And I think
11:10
Speaker 9: that the Jet Blue CEO is going to have to
11:13
Speaker 9: figure out soon how bad he really wants to spirit airlines,
11:16
Speaker 9: because he's gonna have to raise three and a half
11:20
Speaker 9: four billion dollars to buy it at interest rates that
11:23
Speaker 9: are probably going to be above eight percent, and again
11:27
Speaker 9: in a marketplace that looks like it has too much
11:29
Speaker 9: capacity and fares can't support profitability.
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Speaker 2: Hang on, I assumed that Jet Blue had that money
11:35
Speaker 2: stashed aside already, aren't they No, I.
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Speaker 9: Don't see it's I don't see it's dashing.
11:42
Speaker 3: Okay.
11:43
Speaker 8: The other thing I find it they may not need it, George.
11:46
Speaker 2: The other thing I wonder about is, you know Jet
11:48
Speaker 2: Blue yesterday George said there's basically a dearth of travelers,
11:53
Speaker 2: or said differently, in the airline industry, there are way
11:56
Speaker 2: too many empty seats in the domestic US. But then
12:01
Speaker 2: somebody tweeted at me the TSA checkpoint travel numbers and
12:05
Speaker 2: looks pretty pretty healthy to me. I mean, we're last
12:09
Speaker 2: week we had two point three million, the week before
12:12
Speaker 2: that two point five million, much better than we had
12:15
Speaker 2: in twenty twenty two or twenty twenty one or twenty twenty.
12:19
Speaker 2: It's it's basically up there with twenty nineteen.
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Speaker 9: So I would say, you can't always judge airline health
12:26
Speaker 9: by numbers.
12:27
Speaker 7: Right.
12:27
Speaker 9: So in the new world of airline revenue management, you
12:32
Speaker 9: know load factors, we're seeing eighty five ninety percent, right,
12:35
Speaker 9: These are really high load factors. Those revenue managers, they
12:38
Speaker 9: don't let an airplane go down the runway without it
12:41
Speaker 9: being almost full The secret, though, is you got to
12:45
Speaker 9: get people to pay the price that's going to cover
12:47
Speaker 9: the cost of the airline. And what we're seeing right
12:50
Speaker 9: now in the marketplace is that the low end is
12:53
Speaker 9: that you know, that consumer that may not be as
12:56
Speaker 9: well healed, they they're seeing softness and their fares are
13:02
Speaker 9: going down. We saw yield at Jeff Blue fall a
13:06
Speaker 9: thirteen percent since the year prior, right, So that's not
13:10
Speaker 9: I mean, that's not a healthy environment.
13:13
Speaker 1: So Jen, when does his trial start? You're going to
13:15
Speaker 1: go to this trial. You're going to attend this trial.
13:17
Speaker 1: Where is it, When is it and what do you expect.
13:19
Speaker 8: So it's in Boston. It started yesterday. I reviewed that
13:22
Speaker 8: transcript from yesterday, which was mostly opening statements. I'm heading
13:25
Speaker 8: out today. I'll be there the rest of this week
13:27
Speaker 8: and next week it will go to December fifth, non
13:30
Speaker 8: consecutive days. I think we'll probably get a decision in January.
13:34
Speaker 8: The judge said he may try to do something by
13:36
Speaker 8: the end of December, but that was when the trial
13:38
Speaker 8: was supposed to start in early October, so I think
13:41
Speaker 8: January is more likely. And I just have to one
13:43
Speaker 8: comment about what George said. I mean, this judge is
13:46
Speaker 8: concerned actually about the health of the airlines, which is
13:48
Speaker 8: unusual in an anti trust case. He has asked not
13:51
Speaker 8: about Jeff Blue, but actually about Spirit and Spirit survive
13:54
Speaker 8: if this merger doesn't go through. And you know, we're
13:57
Speaker 8: just getting in, but we'll see what the documents look
13:59
Speaker 8: like with back to Spirits growth plans.
14:01
Speaker 1: Well, it was just looking I mean at George's common
14:04
Speaker 1: I went to the FA function for both.
14:07
Speaker 3: Spirit Airlines and Jet Blue.
14:09
Speaker 1: Neither company is making money. What extent historically do the
14:13
Speaker 1: courts think about that kind of stuff?
14:15
Speaker 8: Well, you know, there's a history here. So we've had
14:17
Speaker 8: a lot of consolidation in the airlines and there's a
14:19
Speaker 8: lot of concern about that from the DOJ, and they're
14:22
Speaker 8: going to be using that to their benefit and trial.
14:24
Speaker 8: But we've also had a lot of bankruptcies, right, and
14:27
Speaker 8: bankruptcies aren't good for consumers either, and the judge is
14:30
Speaker 8: going to be looking at that and thinking about that.
14:32
Speaker 8: But the bottom line is the most difficult part about
14:35
Speaker 8: this trial for Spirit and Jet Blue is that they themselves,
14:38
Speaker 8: They Spirit have argued that this is an anti competitive
14:42
Speaker 8: deal when they preferred Frontier as a buyer and there
14:44
Speaker 8: was a fight. So these documents have already been admitted
14:47
Speaker 8: by the judge against the objections of the lawyers, and
14:50
Speaker 8: they're going to have to explain those away.
14:52
Speaker 1: Hey, George, if the judge put you on the stand
14:55
Speaker 1: as an expert witness of you know, Wall Street analysts,
14:58
Speaker 1: would you testify that if these guys don't merge, neither
15:02
Speaker 1: of them is going to make it, or one of
15:03
Speaker 1: them is not going to make it, what would your
15:04
Speaker 1: forecast be?
15:06
Speaker 9: I guess I would testify that the market clearly appears
15:10
Speaker 9: to be overcapacitized, if that's a word, and that it
15:16
Speaker 9: needs some rationalization, and putting these two together could rationalize
15:21
Speaker 9: that and would improve their potential to create profits. So
15:24
Speaker 9: that's I would argue that.
15:25
Speaker 8: And I will say that the DJ opened an investigation
15:28
Speaker 8: of the airlines just for saying exactly that, because rationalization
15:32
Speaker 8: in the anti tryst world is a bad thing. It
15:34
Speaker 8: means let's reduce demand to increase prices, and antitrust don't
15:38
Speaker 8: doesn't want that.
15:40
Speaker 1: Right, So can't they just say, all right, on a
15:44
Speaker 1: couple of these routes where we're going to overlap or
15:46
Speaker 1: we'd have too much pricing power, We'll just divest these routes.
15:49
Speaker 3: Can't we do that?
15:50
Speaker 8: That's exactly what they're trying to do. And you know what,
15:52
Speaker 8: the judge might accept that. You know, it's it's this
15:54
Speaker 8: is just the beginning of trial. It's not a done deal.
15:57
Speaker 8: The judge might say, these divestriss are good enough. You
15:59
Speaker 8: go ahead, merge, that's the healthier option. The issue is
16:03
Speaker 8: that DJ is also concerned about routes where they do
16:05
Speaker 8: not overlap, because they believe that blues fares are higher
16:09
Speaker 8: than spirits fares in those routes and it'll take out
16:12
Speaker 8: that lower cost option.
16:14
Speaker 2: I mean, none of this is low cost compared to
16:17
Speaker 2: what I experienced living in Germany for the past six years.
16:20
Speaker 3: You can point for.
16:21
Speaker 2: Ninety dollars, yes, and somehow that just keeps going. You know,
16:26
Speaker 2: that's been happening for at least a decade, right, low
16:29
Speaker 2: cost airlines in Europe. I don't know states that the
16:33
Speaker 2: that the industry would be good for the industry to
16:35
Speaker 2: have that here? Probably not. But can we get that?
16:40
Speaker 9: So you're asking me that, yes, George, I mean, look,
16:44
Speaker 9: I think you can. You know, I think that when
16:46
Speaker 9: when you know, we look at a lot of analysis
16:49
Speaker 9: of these ultra low cost carriers and the low cost carriers,
16:54
Speaker 9: and even the full service carriers. When you take all
16:58
Speaker 9: that ancillary cost that they unbundle and try to put
17:02
Speaker 9: back on top of you when you get to the
17:04
Speaker 9: airport and check your bags, blah blah blah, the fares
17:07
Speaker 9: aren't a lot different than full service carriers. And so
17:13
Speaker 9: I think the whole thing is, you know, it's sometimes
17:16
Speaker 9: it seems a little bit bait and switches, right, because
17:19
Speaker 9: you sign up for like a fifty or seventy dollars fare,
17:23
Speaker 9: and next thing you know, there's all these added costs.
17:26
Speaker 9: And so I think that we can have the industry
17:30
Speaker 9: because they are getting fares that again are probably as
17:33
Speaker 9: good as some of the big full service carriers. What
17:36
Speaker 9: I will say, though, there's an extraordinary challenge I think
17:40
Speaker 9: in the US, and that is that we just gave
17:43
Speaker 9: away some really large pay increases to the pilots. And
17:47
Speaker 9: what you didn't see under that pilot headline was that
17:51
Speaker 9: everyone else got paying increases to the flight attendants are
17:54
Speaker 9: looking for theirs, but line maintenance, all those folks have
17:57
Speaker 9: gotten increases. That's going to drive up the average cost
18:01
Speaker 9: of fares, right. And when you drive up the price
18:03
Speaker 9: of something less needs to be consumed, right because because
18:08
Speaker 9: you just can't offer as much. So that's one of
18:11
Speaker 9: the major challenges in the US market right now.
18:13
Speaker 1: All right, George, thanks so much for joining us. George
18:15
Speaker 1: Ferguson covers the airlines for Bloomberg Intelligence and generally senior
18:18
Speaker 1: legal analysts covering an android trust for Bloomberg Intelligence.
18:21
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18:42
Speaker 1: The story of the day, and that is interest rates,
18:44
Speaker 1: the Federal Reserve, the US Treasury refunding that balance you
18:47
Speaker 1: all that good stuff. Tim Dewey joins is chief US
18:50
Speaker 1: Economists from SGH Macro Advisors. Tim, thanks so much for
18:54
Speaker 1: taking the time here to join us here. What do
18:55
Speaker 1: you expect to hear from our Federal Reserve this afternoon?
19:00
Speaker 7: I think the Fed's going to sound very much like
19:02
Speaker 7: we've seen in recent comments, particularly in Sairman Paul's speech.
19:07
Speaker 7: Basically they think that they might have to raise rates again,
19:12
Speaker 7: but they're more and more confident they're near the top
19:15
Speaker 7: peak of the cycle.
19:18
Speaker 2: So I'll ask you the same question I was just
19:21
Speaker 2: asking Tim Fiori. Do you see some kind of cliff
19:23
Speaker 2: here that we're about to fall off? As there some
19:25
Speaker 2: way that we go into recession? You know in Q four,
19:30
Speaker 2: Q one, Q two from five percent Q three.
19:34
Speaker 7: You know, I would be I would be surprised. Really
19:39
Speaker 7: is the economy and the GDP almost certainly has to
19:41
Speaker 7: slow from the third quarter pace. I mean, it was
19:45
Speaker 7: probably it doesn't really represent the true underlying pace to
19:48
Speaker 7: the economy. However, there's not really a lot of signs
19:51
Speaker 7: out there that the economy is about to roll over hard,
19:54
Speaker 7: that we're about to walk off the cliff. And so
19:57
Speaker 7: I'm you know, I'm still skeptical we're going to see
20:00
Speaker 7: that sort of in the fourth quarter, because we're already
20:02
Speaker 7: in it, but you know, before the first the second
20:06
Speaker 7: half of the next year. So trying to try to
20:09
Speaker 7: pin down the exact time of a recession is really
20:13
Speaker 7: a very very difficult.
20:15
Speaker 2: Well, but there seemed to be look drunken. Miller was
20:18
Speaker 2: on stage with Paul Tudor Jones last week. That's an
20:22
Speaker 2: All Star conference already, right, he says, he's he says
20:26
Speaker 2: he started to get really nervous. He says he has
20:29
Speaker 2: massive bullish positions in two year notes leveraged. So he
20:35
Speaker 2: says there's too much risk in the world. And Bill
20:39
Speaker 2: Ackman's saying this similar thing. Bill Gross was saying something
20:43
Speaker 2: similar to these big albeit old names are worried about something.
20:49
Speaker 3: What is it?
20:50
Speaker 7: Well, I honestly don't know why. The way the enhancedphere,
20:56
Speaker 7: I mean, there's a good reason to think that you're
20:58
Speaker 7: near you know, you're near peak heels, so, you know,
21:00
Speaker 7: putting aside any worry about you know, the broader economy.
21:05
Speaker 7: You know, we are at a point where the FED
21:07
Speaker 7: is close to being done hiking. The more it looks
21:11
Speaker 7: like that's that's going to happen. Traditionally, long yield eventually
21:15
Speaker 7: fall after that point. So from from from a strategic perspective,
21:20
Speaker 7: thinking about this as a peage is certainly not not
21:23
Speaker 7: crazy at all. As far as the warning signs. You know,
21:28
Speaker 7: remember a year ago in October, everyone thought the chance
21:33
Speaker 7: of recession in the US economy over the next year
21:35
Speaker 7: was one hundred percent, and that obviously did not work
21:39
Speaker 7: out that way. So the world has changed, the world
21:43
Speaker 7: is different. It is in some sense risk here. Is
21:46
Speaker 7: it any risk yer than it was, you know, during
21:49
Speaker 7: the Cuban missile crisis? I don't know about that.
21:52
Speaker 3: So it's interesting, Tim.
21:54
Speaker 1: We just had Cam Harvey on financial professor at the
21:57
Speaker 1: Fucal School of Business at Duke.
21:59
Speaker 3: He was really bear.
22:00
Speaker 1: He thinks the FED has gone way, way too far,
22:03
Speaker 1: and he thinks inflation, if you really look at current data,
22:06
Speaker 1: not historical data, inflation is already below two percent. How
22:10
Speaker 1: do you respond to that?
22:12
Speaker 7: Well, so I didn't did see the interview. If you
22:16
Speaker 7: if you look at the the recent core PC numbers,
22:21
Speaker 7: it's not below two percent. Yeah, so I think, you know,
22:24
Speaker 7: depending you know what you use as your inflation metric,
22:27
Speaker 7: you probably can find one that's below two percent.
22:29
Speaker 2: He was taking out housing, he was taking out rent
22:31
Speaker 2: and home ownership. I think so.
22:34
Speaker 7: Yeah, so you can strip it down and get to
22:36
Speaker 7: something that slow. And you know that this is a
22:39
Speaker 7: feature of the policy, right, is that the Fed intended
22:42
Speaker 7: to raise interest rates until we got interest rates above inflation.
22:47
Speaker 7: They're above inflation. They're waiting for evidence to slow. The
22:50
Speaker 7: economy is slow. You know, they are seeing that evidence,
22:54
Speaker 7: which is why we've been paused since you know, July. Here,
22:58
Speaker 7: I would like you remain paused. Yeah, has the Fed
23:01
Speaker 7: reached its peak? Have they gone too far? I don't
23:03
Speaker 7: know because one of the one of the counteracting issues
23:07
Speaker 7: here is we've had plenty of fiscal policy to help
23:09
Speaker 7: counteract some of the momentary tightening.
23:14
Speaker 3: So I guess.
23:16
Speaker 6: I guess.
23:16
Speaker 1: The question is if it's higher for longer, how much
23:19
Speaker 1: longer do you think?
23:23
Speaker 7: So funny thing you usually people will say, you know
23:26
Speaker 7: the Fed is going to cut, you know, roughly six
23:28
Speaker 7: months after the first rate the last rate hike. You know,
23:33
Speaker 7: the last rate hike could have been in July, which
23:36
Speaker 7: means by the time in the December meeting, if they
23:38
Speaker 7: don't hike in December, they'll have got five months without
23:41
Speaker 7: right hike. So you know, the sort of traditional metrics
23:45
Speaker 7: would put you in January in sense, I don't think
23:48
Speaker 7: that that's likely. I don't think they're ready to cut
23:50
Speaker 7: in July. I think the economy will show enough strength
23:53
Speaker 7: that they don't. I do think that they are. They
23:56
Speaker 7: are determined to be very confident that inflation is on
24:00
Speaker 7: track to two percent before they cut. Really, what we
24:03
Speaker 7: need to see is a little bit more weakness in
24:05
Speaker 7: in in the real economy data.
24:09
Speaker 2: What are you watching for? Where are you going to
24:10
Speaker 2: see that weakness?
24:13
Speaker 7: So that's a great question. If you started to see
24:18
Speaker 7: job growth really running below one hundred thousand every month,
24:22
Speaker 7: I think that would be a key, key signal.
24:27
Speaker 2: I think that which we're not expecting, by the way,
24:30
Speaker 2: on Friday. I mean I'm just looking at expecting them
24:33
Speaker 2: on Friday.
24:33
Speaker 7: Yet it's just not it's it's not in the cars
24:36
Speaker 7: if you look at so look at say the Jolts
24:39
Speaker 7: report this morning. We're hiring's basically at pre pandemic levels, right,
24:43
Speaker 7: and quits ray was basically pre pandemic levels. Openings was
24:47
Speaker 7: still arguably a little elevated, but not that much different
24:49
Speaker 7: than trend and the fence looking at the saying this
24:52
Speaker 7: is this is a labor market that's more in balance. Right.
24:55
Speaker 7: You need to see something really trip up investments, spending,
24:58
Speaker 7: trimp mob hire and those are the things that generally
25:02
Speaker 7: are precursors to recession. And you need to get firms
25:06
Speaker 7: much much more pessimistic on the outlook than we're seeing, right, now,
25:10
Speaker 7: so again, where i'd see that is is in the
25:12
Speaker 7: jobs numbers, in the initial claims data. I'd expect to
25:16
Speaker 7: see it more in durable goods orders than we've seen
25:20
Speaker 7: somelf aren't.
25:22
Speaker 3: Are you surprised by this labor marketing, Tim? I sure am.
25:25
Speaker 1: I you know, it's just we have such a shock
25:27
Speaker 1: to the system, and people are concerned about the economy,
25:31
Speaker 1: even though again that good three three q GD print
25:34
Speaker 1: that Matt was mentioned, But it just seems like this
25:36
Speaker 1: market is just incredibly strong.
25:37
Speaker 3: I'm not really sure why.
25:40
Speaker 7: You know, It's a bunch of factors. I think people
25:43
Speaker 7: estimated just the the you know, the the underlying strength
25:48
Speaker 7: that or the momentum that the economy received from the
25:53
Speaker 7: fiscal stimulus and the low monitory leasing monetary policy. I
25:57
Speaker 7: think that just had bigger lays during the from the
26:00
Speaker 7: from the pandemic era policy. Then people anticipated just too
26:05
Speaker 7: longer and work some of that through the economy. I
26:07
Speaker 7: think the other thing that's out there is that nobody
26:09
Speaker 7: really expected fiscal policy to be such a driving force
26:12
Speaker 7: this late in the cycle, and we've seen doctors expand
26:18
Speaker 7: uh and and I think that's been a real factor
26:21
Speaker 7: that people discounted last year and is really starting to
26:24
Speaker 7: show up this year. And also, I think fundamentally people
26:28
Speaker 7: underestimate the resilience of the US economy. You know, we
26:32
Speaker 7: talk a lot more about recessions than we actually have recessions.
26:36
Speaker 1: All right, Tim, thanks so much for joining us. As always,
26:38
Speaker 1: appreciate getting your thoughts. Tim Dewey, Chief US Economists for
26:42
Speaker 1: s g H Macro Advisors.
26:45
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26:48
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26:55
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27:04
Speaker 3: I'm going to talk to Chris Whalen. He's a shairing
27:06
Speaker 3: of Whaling Global Advisors.
27:08
Speaker 1: Hey, Chris, I'd love to get your thoughts on what
27:10
Speaker 1: you think the FED should do and why.
27:15
Speaker 10: Well. I think they should stop hiking FED funds rate
27:18
Speaker 10: before we break something. We're pretty close to that point now,
27:22
Speaker 10: and I think they need to try and articulate to
27:26
Speaker 10: the public and the policy makers what we can expect
27:29
Speaker 10: going forward. There was a fascinating letter from the mortgage
27:32
Speaker 10: bankers and the home builders and the filters a couple
27:35
Speaker 10: of weeks ago that said, can you give us some
27:37
Speaker 10: guidance because the guidance of feed gave us before about
27:42
Speaker 10: transitory inflation was clearly wrong and a lot of companies
27:47
Speaker 10: use that guidance and planning your business. So I think
27:51
Speaker 10: the FED has to be very careful what they say
27:53
Speaker 10: in the future about inflation and other benchmarks because people
27:58
Speaker 10: sometimes take them at its value.
28:00
Speaker 2: Well, but they've been saying for a couple of years
28:02
Speaker 2: that they're going to hike rates like we've never seen
28:05
Speaker 2: it before to try and quash inflation. I mean, they've
28:07
Speaker 2: been telling everyone in the market hasn't believed them, you know,
28:12
Speaker 2: for two years.
28:15
Speaker 10: Well, they've caused a lot of inflation. Though, look at housing.
28:19
Speaker 10: We're not going to take that back easily. We're going
28:22
Speaker 10: to deflate housing percent. No, we're not going to do
28:26
Speaker 10: that because they know that there's a deflationary aspect out
28:30
Speaker 10: there still, and it's called bad debt. You know, when
28:33
Speaker 10: debts go bad, that's when you get deflation. So I
28:36
Speaker 10: think the FED is you know, as Craig Torreus was
28:39
Speaker 10: saying this morning, they're in risk management mode now because
28:43
Speaker 10: I think they know they can't go any higher without
28:45
Speaker 10: really seriously causing something to break.
28:49
Speaker 2: In the world of credit, where do you think, by
28:51
Speaker 2: the way, we're going to see debt go bad. We've
28:53
Speaker 2: been talking all morning with people about high yield and
28:57
Speaker 2: no one is concerned. Spread are relatively tight. And the
29:02
Speaker 2: answer they tell us is that all these companies, you know,
29:07
Speaker 2: we're so much smarter than Janet Yellen. They got all
29:10
Speaker 2: their financing under control when rates were zero, and they're
29:14
Speaker 2: in a great situation now.
29:16
Speaker 10: But it seems hard to believe they're getting the financing done,
29:20
Speaker 10: not necessarily on advantageous terms. They're doing a lot of
29:25
Speaker 10: discount issues, for example, to keep the coupon down. But
29:28
Speaker 10: you issue the bonds at eight now, when the bonds
29:31
Speaker 10: get redeemed, that's gonna hurt. So I think there's a
29:34
Speaker 10: lot of ways people are adjusting to this. But you know,
29:37
Speaker 10: to be honest, you see the carnage now in commercial,
29:41
Speaker 10: commercial real estate. You know, I think every day you
29:45
Speaker 10: see a headline across in the screen in commercial and
29:49
Speaker 10: what you don't see is the other five events. They're private,
29:52
Speaker 10: and you won't see them until they hit the courts.
29:55
Speaker 10: So believe me, there's a lot of destruction going on
29:58
Speaker 10: right now on the commercial side. And it's it's the
30:01
Speaker 10: opposite of two thousand and eight. It's the way I
30:03
Speaker 10: put it, this is not consumer and you're not seeing
30:07
Speaker 10: it yet in consumer facing vehicles like fintech and that
30:11
Speaker 10: sort of thing. Yeah, so you know, is this three prices?
30:14
Speaker 10: You'll see more? Yeah?
30:15
Speaker 1: I want to you know that kind of goes. So
30:17
Speaker 1: you think we'll see it in I guess one of
30:19
Speaker 1: the areas you think we'll see a break will be
30:20
Speaker 1: in commercial real estate.
30:22
Speaker 6: Is that?
30:22
Speaker 3: Do I understand that right yet?
30:24
Speaker 10: Yeah, it's happening now. Okay, look at it this way.
30:27
Speaker 10: Most banks have fifty cents worth of equity in commercial loans, Okay,
30:31
Speaker 10: So that means I'll wipe out the quote unquote owner
30:34
Speaker 10: and then they'll end up boning the asset of fifty
30:37
Speaker 10: cents on the dollar. Now, even then, though they may
30:40
Speaker 10: not be able to sell it, because you know, in
30:42
Speaker 10: a rising great environment, it's hard to sell assets, and
30:45
Speaker 10: it's hard to sell dead banks. Usually when the FDIIC
30:49
Speaker 10: is taking care of dead banks, the Fed's already dropped
30:52
Speaker 10: interest rate. So there's a kind of a synchronization problem
30:55
Speaker 10: right now. The FED is trying to address inflation, but
30:58
Speaker 10: we still don't have a recession. I mean, whole prices
31:01
Speaker 10: in New York State are still going up. For Christ's sake,
31:04
Speaker 10: were the weakest state in the US before COVID pricing.
31:08
Speaker 2: So do you expect some big financial names to come
31:14
Speaker 2: under pressure. They're already sitting on hold of maturity portfolios
31:17
Speaker 2: that you know are worth far less than they'd like
31:23
Speaker 2: us to know. And commercial real estate we thought was
31:27
Speaker 2: the next shoe to drop, Now it looks like it's following.
31:29
Speaker 3: Who's going to get hurt?
31:31
Speaker 10: It's an earnings problem, Matthew, more than a a you know,
31:35
Speaker 10: systemic problem. I don't think the FED will let it
31:37
Speaker 10: get that far. But the inflationary implications of say another
31:42
Speaker 10: bank failure are huge, because if I can't find another
31:45
Speaker 10: bank to buy the dead bank, I have to liquefy
31:48
Speaker 10: the whole fan, which is why the FED had to
31:51
Speaker 10: lend the FDIC two in a billion dollars. So, you know,
31:55
Speaker 10: I think that if we see another problem in the
31:57
Speaker 10: credit markets of sized, it's going to have to retriat
32:01
Speaker 10: almost immediately. I think that'd be good for a point
32:04
Speaker 10: on FED funds, because you can't deal with problems of
32:07
Speaker 10: credit unless rates. Aublorady essentially concede. You know what I mean?
32:13
Speaker 10: If people think rates are going up, how do I
32:15
Speaker 10: sell those assets? Even at a discount. FDIIC you will
32:19
Speaker 10: normally give you a thirty percent discount to create new
32:22
Speaker 10: equity under the asset, but even then you might have
32:25
Speaker 10: a hard time getting buyers in this environment. So the
32:28
Speaker 10: funny part is to your point is there's people creating
32:31
Speaker 10: the buying assets today at really crazy prices because there's
32:35
Speaker 10: cash on the sidelines. There's a huge amount of cash
32:38
Speaker 10: on the sidelines. What they're waiting for is a signal
32:41
Speaker 10: that we're done, a real signal.
32:43
Speaker 2: Yeah, we're done raising rates, And it seems like the
32:46
Speaker 2: market feels that way right now. The question is what
32:51
Speaker 2: happens with the economy, you know, in Q four in
32:54
Speaker 2: twenty twenty four, and then does the Fed have to
32:56
Speaker 2: cut rates and not by fifty basis points but maybe more.
33:01
Speaker 10: I think they're going to try and keep rates more
33:04
Speaker 10: or less where they are because they realize that voluntility
33:08
Speaker 10: has not been helpful for a lot of businesses and
33:11
Speaker 10: I think they also realize that housing particularly is going
33:14
Speaker 10: to get absolutely crunched in the next twelve months. We're
33:18
Speaker 10: going to take another third capacity out of the residential
33:21
Speaker 10: mortgage level, and you're also going to see capacity coming
33:25
Speaker 10: out of commercial too, because there's not much volumes. I
33:29
Speaker 10: sit with the loan production team calling in New York.
33:32
Speaker 10: They're not busy right now. And the reason is is
33:34
Speaker 10: that the buyside investors, who typically are the cash fires
33:38
Speaker 10: for commercial loans hotel loans, I kind of think they're
33:41
Speaker 10: on the sidelines tope. They're trying to figure out where
33:44
Speaker 10: price and where value is today. And most of them
33:47
Speaker 10: have already filled up their allocations for this year, so
33:51
Speaker 10: they're happy to go into the you know, the end
33:53
Speaker 10: of the year flat. That's not helpful to people who
33:56
Speaker 10: need to do deals. You know what I mean, Well,
33:59
Speaker 10: what is.
34:00
Speaker 2: It happened, Chris to those markets?
34:01
Speaker 3: I mean.
34:04
Speaker 7: Volume.
34:05
Speaker 2: No one's going to want to sell. No one's going
34:06
Speaker 2: to want to sell a commercial building if they don't
34:09
Speaker 2: have to at a sixty percent haircut. Nobody wants to
34:12
Speaker 2: sell a residential home right because you don't you're not
34:15
Speaker 2: going to remortgage to get someplace else. At eight percent
34:17
Speaker 2: when you're in at three sous.
34:20
Speaker 10: These different though. You remember commercial for the last seventy
34:23
Speaker 10: five years, the assumption has been that the asset would
34:26
Speaker 10: go up in price and we could just do interest only,
34:30
Speaker 10: and that was very much the style in the commercial
34:33
Speaker 10: real estate business. Now you can't because when the lender
34:36
Speaker 10: comes to you, if the rent roll is down the building,
34:39
Speaker 10: it's worthless. They want equity. You've got to put more
34:43
Speaker 10: cash in to roll the mortgage. That's the difference in
34:46
Speaker 10: the dynamic today. And as the treasury deficit goes up,
34:49
Speaker 10: guess what the Fed has to hold more cash? And
34:52
Speaker 10: what do they do with that cash? Matthew, they collateralize
34:55
Speaker 10: the treasury box for price sake. It makes no sense.
34:58
Speaker 2: So it makes sense, he would get that sounds like
35:01
Speaker 2: something ftx S.
35:02
Speaker 10: Would have done. Well, Listen, they race at rates already,
35:05
Speaker 10: and we're going to make collateral more deal at a
35:08
Speaker 10: time when we're producing nothing on the mortgage side. By
35:11
Speaker 10: the way, we'll do a trillion and a half this
35:13
Speaker 10: year in new coupons, and treasury issuance will be big.
35:17
Speaker 10: But still, you know, and they're going to be buying
35:19
Speaker 10: back low coupon bonds too while we're doing all the
35:21
Speaker 10: rest of this stuff. That's going to be interesting, all.
35:24
Speaker 1: Right, Chris as always a really interesting the discussion Chris
35:27
Speaker 1: Well and Chairman breaking the whale in Silence, Breaking the
35:29
Speaker 1: whaleen silence, which I've heard Tom say that a million times.
35:32
Speaker 1: I still not one hundred percent.
35:34
Speaker 3: Sure what it is, but that's a Tom keenism, all right.
35:37
Speaker 1: Chris Well and Chairman Whale and Global Advisor, Thanks so
35:38
Speaker 1: much for joining us there.
35:41
Speaker 2: Thanks for listening to the Bloomberg Markets podcast. You can
35:44
Speaker 2: subscribe and listen to interviews at Apple Podcasts or whatever
35:48
Speaker 2: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
35:52
Speaker 2: at Matt Miller nineteen seventy three.
35:54
Speaker 3: And I'm Faull Sweeney.
35:55
Speaker 1: I'm on Twitter at pt Sweeney. Before the podcast, you
35:58
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