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Say the action here is not in a stock market today. It's in bitcoin up seven point eight four hundred, almost forty five hundred dollars higher. For now it's sixty one thousand and ninety. What is going on there? I have no idea, but I know somebody who does. That's Mike mcloan. He's a senior commodity strategist for Bloomberg Intelligence. He joins is on Zoom from our Miami BI outpost down there in South Beach. Mike, you've been on this thing since
day one, consistent from day one. You know, fixed supply, presumably ever increasing use cases which will drive demand and that's all you need. So is that still the case here?
It's certainly the case. So I appreciate you saying consistent, because I haven't been that consistent. I was quite concerned that it was getting a little too speculatively excessive around the launch all of the ETFs in the beginning of the year, but it's still the case. In April, we'll have The having is when you cut the supply right now you can only mind nine hundred bit coins a day, it'll drop to four hundred and fifty. That's every four years,
so it'll cut the supply. And we have obviously from ETF flows just in the last week this week a loan one billion of in flows since ETF's have been launched, a total of about seven billion. Yeah, Eric Belchun has been all but that's it, and I'm glad you mentioned so there's a key. But the thing that really struck me is that the ETF conference, the big one they have in Miami every year.
So that wasn't the one in Cleveland in February. This is one in Miami. If okay, right, no hurry to go to Cleveland February.
But so Eric was moderated, a panel in the room was packed, So I went to another presentation room at the same time where actually bigger and no one was no one really cared what they were presenting on. So everybody, all these professional money managers were really looking at watching bitcoin and want to learn about bitcoin.
ETFs.
Wait, can you just break down this whole having thing. I don't understand how that's okay to do that.
You got, Hello, it's it's in the code. I have a son who's a programmer, I asked. Thembuddy says, no, it's the code dead. It's just by by by code.
Every four years the supply gets cut in half. So right now all the miners in the world will only be going to creating nine hundred coins a day, and then as of having it cut the four fifties, so it doesn't have that high price cure that you really see effect most commodities and why most commodities are in bear markets with exception of goal, but also on the supply side, it's just the way it set up. And as our colleague Zeke false roade out wrote, number go up. Well,
that's bitcoin is designed to go up. But now it's becoming an alternative currency on a global basis, and the US is jumping in that frame. We also a key thing you have to look at it from a macroeconomic standpoint is China's kind of pushing back. Remember China's going for gold, the largest gold buyer in the world, and they were associated with this war and the US is
just to prove ETFs and bitcoins. So you see where the world's going towards intangible assets and bitcoins the most significant in cryptos.
So how do we let me go back to something really fundamental, How do we value this thing? How do we decide whether it's expensive or not? Is there any fundamental analysis here or is it just the it's a commodity and supplying demand, it'll go up and then you.
Should buy it at some point. Yes, well I do.
I do appreciate that pole Typically coming from an equity kind of person, that's a question often getting commodities. The one way you can value it is by watching the hash rate. That's just the amount of transactions and and and I guess you could say computer power in the space kind of looking at the voltage and things, and
it's it's exponential, still rising rapidly. But one thing also like the tilt over to when people push back on this particular crypto, I mean, rememb there's thirty thousand wannabes. Is I like to say, when you go on any of the major crypto sites and you click on volume, the number one traded crypto is the dollar via tokens and then one and that is Tether basically trades double the volume of bitcoins, So I'd say bitcoin's the leading
one is like gold in the space. But when people push back to the technology, I'm saying, it's really the whole world's gone for the space, and the base layer they've gone for is the dollar, not any other currency.
That's actually quite interesting. What about ether though, for example, Like you mentioned tether, but ether I've read like ethere ETFs maybe coming too, and I'm wondering what the effect of that would be on the thesis that you have.
Well, to answer your question, Alex, to me, it's a matter of time get ETFs to track a broad index in the space. So Bloomberg Intaligence first proposed the Bloomberg Galaxy Crypto index in twenty seventeen and we launched that in twenty eighteen, so that's what almost six years now. It's just a matter of time. But ethereum ether ETFs will come. It's a question of when the key that theorem has it, do you do have a yield in ethereum? And that's where most equity people come in and say, oh, well,
I can do that and then cost. So it's part of it's the technology e theorem is really kind of making possible. What's happening in the space is NFTs might be speculative, but also coaching token's tokenization of most assets. As I mentioned, the dollar is the most widely traded crypto.
All right, so let's let's back away. We got to let cryptos going higher. I get it in the commodity space that you look at, Mike, you look at everything, and we'll get the pork bellies later. That's that's my air of expertise. What do you like right now? What are you talking to clients about these days?
Gold?
I have to say, because that's what that's what really brought me into cryptos in the first place. And gold is the most enduring, outperforming commodity over time, particularly in times when you have maybe i'd say, in the back end of FED rate hikes, which we're heading towards easing and with China potentially declining. So right now gold is up about ten percent on a one year basis, and broad commodity and this they're down about ten percent. I
think that's going to accelerate. The key thing I think that's been saying about gold forever now is you can't really hold gold anymore without some bitcoin in space and the mess you're willing to take a risk that the world is not going to continue advancing towards a digitalization. So I see gold going higher. And here's a key take is I think crude oil at seventy eight dollars a barrel WTI is more likely head towards fifty. And there's a good indication for that, and that's natural gas.
US natural gas, the number one measure for heat, electricity and fertilizer, has dropped at least a monthly a couple of weeks ago. It dropped to the lowest price when it was first traded in futures in nineteen ninety.
Wow.
Yeah, it's pretty bad. But I mean there's reasons for that in terms of demand here in the US, which is different than say the broader look for oil. So why do you think we're going to go to fifty? I mean, there's no way that OPEC plus will be.
Down with that.
That's the problem. They don't control oil anymore, which just look at the facts. The excess of US and Canadian fuel, liquid fuel and crude oil supply over demand now is about six million barrels a day. And guess what OPEC's spare capacity is about six million barrels a day. So they're fighting a losing battle. But the key fact is if Crudell catches up to industrial metals, it kept us up to grains and corn and virtually all the other commodities, it will go to fifty dollars a barrel. So I
look at the premium, the geopolitical premium. Right now, Crudell is about twenty bucks.
Twenty buck really yeah, that's really interesting because the thesis out there, like the common thought on the street, is that there is no geopotical growth premium, or it's there, it's like a couple bucks. Because you've had the backsup of US supply that's kind of helped offset that. And because Russia is still doing their thing despite sanctions.
Yes, I do appreciate that. And then it's oftentimes they ignore the other commodities. So number one natural gas, number two corn, number three copper, You look at all of them, they're all in pretty severe beer markets. And the laggard in this commodity bear market is crude oil at the moment. So I look at it to me, I just published. I think it's on a cliff's edge. And obviously I've been a bit early. If I was a trader, I
would have been stopped out. But now the trend is clearly lower and you have to ask yourself what keeps it elevated? And I say, you have to have sustained deal political risk. But every day we turn around that these prices right are above the US average cost of production, which is around fifty five dollars a barrel. You just see more supplying coming on and demand is not really
picking up. And here's a key fact that I can mentioned is diesel demand in this country is stagnated to about the same level as it was in twenty seventeen. That's virtually never happened without a recession, unlet a gas to manage declining paperboard demand is declining. So certainly from the largest economy standpoint, we have a problem. And then you look over at China, the number one importer. They are completely dependent on fiscal monetary stimulus for economic buoyancy
at the moment. So the outlook for me for crude oils, I'll put phil kill on it. This year. Initially I said forty about two years ago, and I'm going to at least give it this year if it's going to make it.
There, Phil and killing nice.
Yeah.
So when you get stopped out of a trade, did you put it right back on Mike back in the day.
Well, I used to have hair and you can see on the YouTube, but no, it's it all depends a lot of times it was with my own money, with clients, or with institutional money.
But that was the key thing that really struck me is I was way early. But now that's the advantage I have is being an X trader. I can see where I would have been stopped out, and as an analyst, I can point out the macro. But I think the key thing that people really missed last two years was the significant macro economic stimulus of this unlimited friendship between President Z and President Putin. It's tilted the whole world backwards versus against China, and China was an emoral source
at demand poll for comminities. And then you also had this incentive of high prices because of a war which really kicked in that elasticee. A supplying demand which has been US has been leading that way in almost all commodities I mean yeah, so I think it just accelerated those forces.
Hey, Mike, we gotta leave it there.
And we're gonna do port bellies next time. Don't worry about it.
I'm all up for pork bellies, man. We can definitely hit that for sure. Cattle chicken anyway. Mikelgon on Boomberg Intelligence, Senior Commodity Strategists, you're listening.
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The S and P is just down one tenth and one percent. I mean, we can say that investors are conscious, we can say the stocks are lower, but volume is light. It's hard to get excited about any kind of quote unquote selloup. And my real question is like, what's it going to take for the markets to actually consistently go down? An Barry is founder and managing partner over at thread Needle. She joins us, right now, what's it going to take in for markets to really go down? Here?
Alex, I think it's going to take one of two things. At the macro levels.
Why they're going to take really strong inflation and then for even more resetting by the market of what they think the FED is going to do in terms of continuing to push out rate cuts or is that the macro level or when it comes looking at fundamentals, we
need to see a flew of earnings. So we sort of through the season now, but looking ahead for another three months that basically continues to sort of reset expectations to be a bit more realistic around some of these big productivity boosts and AI boosts that people have been sitting.
We've seen that.
Break a little bit already in places like Palowel to networks, for example. But I think we need some more expectation resetting and it just hasn't happened as any season I think some people thought it might.
So that kind of brings me to valuation here and should we have some valuation concerns in this market because we've seen a big move off of the October lows, yet I'm not sure we saw a commentsar horizon earnings per share of this market. How do you think about valuation?
I think I've long been saying and Alex I've had this conversation that this market feels extremely overvalued on a couple of different dimensions. If you take a look at the equity of RESC premium, it's absolutly low relative to some of the macro risk factors out there, and if you look back historically, so that's number one. Number two, we're looking at p ratios p to growth ratios that are completely unprecedented across the entire industry and then within sectors,
particularly within tech. So I've long been of the view that we were in over valued territory. I think the question is what is that capitalist going to be to get people to focus on.
That again, rather than the sort of vague euphoria.
HSBC had the most reluctant call change I'm beginning I've ever seen. They've had a tactical underweight stands for a while, and they finally said that sentiment and positioning have been stretched and remain elevated, but it isn't enough to prompt a significant correction and risk assets at the same time, and we have I don't I mean Goldman, I'm trying to think Barclays that ubs all kind of chasing the rally and upgrading their price forecasts for the S and
P for this year. I mean, what does that tell you?
I mean there's a little bit of function alex of upgrading of certain of the really big stocks that take up such a big chunk of the S and P and of the NASDAC. So when you're getting big companies like Nvidio getting rerated upwards, when you're getting a lot of the big tech companies rerated up with that sort of lifting the entire And that's where I get really nervous. Back to this point, I think tech has been such
a massive driver of uplift. I do think the sector is over valued and that's spilling over into much broader market sort of bubble charity, and so I'm nervous about it.
So what does that mean for kind of when you talk to your clients here, is it kind of get out of tech those names are lightening up on some of those tech names, try to sign find some value in other parts of the market, or like hold.
Well, it's a little bit of a hybrid.
So it's really trying to look the secular tailwinds I think are going to be there in the long term.
And I'll give you an example cybersecurities that they.
Throw out their pallele outer networks I have invested, for example, this is on the private side of as you clients in a private company that is in the of deep fake detection. So if you think about whether it's Taylor Swift Images or whether it's President Biden's voice being deep faked, this is an area in cybersecurity that's really picking up
in terms of public attention. That's the kind of space that is going to be I think why for consolidation, and players like the Palo Alto Networks and others I think are going to be the acquirers of these companies. So this is one where I say, look, you've got to look for industries of sexuler tael Insider being one of them.
Look for breakpoints. In this case, I did buy that stop.
When I saw it go down with a ninety billion dollars set off, just because the CEO had dared to say, we need a real strategy around pricing, and it's going to be a little bit less, a little bit more aggressive, a little bit less casually positive than someone you thought. So those are the breakpoints I like CEOs that are coming out in these kinds of sectors saying, look, here's reality. It's really tough to execute, but here's a plan. This
is how we're going to do it. And when we see cell offs in those names, that's why I'm looking to go back in.
What about what do you do with the big guys like say Google that's gotten hit hard and also Apple, which were making a bit a lot of hay about technical levels. The chart doesn't look that great when you're looking at maybe a breakdown of some of the big tech names. Do you go on and buy I do.
Alex And it really depends on why the breakdown has happened.
I thought that I think a bit more forgiveness when it to big companies that at the end of the day, our cash flow machines have real market share and big
growing markets. When those companies come out and say, look, we've made a mistake or we're going to shut your product line, as Apple has done when it comes to ev for example, or when we see GEM and I get rolled out too quickly and we see therefore a missteff put Google and therefore Alphabet now saying look, we're really going to have to invest behind slowing this down and fixing it. I've got patience for that, Alex because
I think those are still fundamentally good businesses. Where again, we're seeing these companies experiments.
Sometimes they'll get it wrong.
I'd like to make sure they're not shredding too much capital in the process, and they're being disciplined in their allocation. But at the end of the day, you can't take away the fact these companies aren't going anywhere. They will redirect resources to more profitable outlets, and I've got patients for that. I see those are buying opportunities of them. The rest of the market's running in those.
Moments talking about making a pivot or having some patients for a business line. How about Apple kind of saying back and away from the electric vehicle business, autonomous vehicle business. That's a pretty big move, would it? Would you make of that?
It is a big move.
But here's what I say about Apple again, to compare it specifically and deliberately to another tech names, and that's Amazon.
If you take a look at Amazon, the amount of.
Forgiveness that there has been over the over the decade for that company to experiment throw a bunch of money into big new ideas, whether it's in grocery or whether it's in healthcare, and if it fails, Amazon shuts down relatively quickly those experiments. The market thinks that's great, and they say this is called to its culture and this is why it's such an agile.
Nimble company and will continue to win in the long run.
For some reason, that attitude has faded when it comes to the Apples of the world. I have forgiveness for that because Apple tried. It's still got a huge cash flow machine in its core iPhone eye.
Products, and if easy it's not going to generate return. I'd much rather they.
Shut up, shut up shop in that front, and go refocus and reinvest behind more profitable lines. So I think it's a good thing when companies come out and say didn't work, to move.
On right and thanks lot really appreciate it. Always fun to get your perspective. And Barry founder and managing partner at Thread Needle, I kind of say when I interviewed CEOs, I feel the same way, like when you deliver information to the CEO and they're like, no, no, it's great, Like this is a great buying opportunity for our stock. Everything's amazing. You're like, okay, yea, we know, we know what you're doing. Guys, we can see through that.
And I saw, yeah, Apple just kind of coming right out. Well, I guess they didn't say it's Mark Drman re reporting. Yeah, they haven't had a statement that I was correct on that earlier today, But basically Mark German Bloomberg News reporting that you know, we're going to back away from electric vehicle business. A lot of employees assigned to it, some of them will be re allocated to their AI efforts, some probably losing the jobs. But again it's a big, big pivot there.
I mean, it also makes sense like if you want to be a services business at the end of the day, how does a car kind of fit into that.
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David Welch is our Detroit bureau chief. He joins us now on Zoom from Detroit. Hey David, when we talked about Apple pushing back from the EV market, Is there a China connection there, that China's flooding the market with their own cheap evs, every other car maker's having a hard time with it. Is there something to that?
Very very little, honestly, I mean.
I think, sorry, thanks, No, it's in a way in the sense that the EV market's tough.
It's very competitive in China, even Tesla's losing share there, and it's even tougher here, and then there's a lot of competition in Europe. But look, really, you take the airplane up about twenty thousand feet on Apple's decision, their margins are what thirty or forty percent, and gross margins for Tesla and General motors about the same these days at about sixteen percent, And you have to spend billions of dollars to make this vehicle. Why would they do that?
So I think that's really what this is about. And it's you know, they're also looking at they were looking at a an electric vehicle that was going to be about one hundred thousand dollars, So this was gonna be a luxury Apple EV and we're you know, we see Rivian, we see Lucid. Yeah, you know, that's rarefied air that's a tough sell. There's just they're just don't that many
people who can afford one hundred thousand dollars vehicle. And then one other thing I'd like to bring up with Apple is they talked about Apple TV for a long time and everyone thought we were going to have this Apple TV hanging on the wall. But making television just allows you high capital the bow marching business kind of like automobiles. And then they gave us a box with content. So you know, Apple supplies car plator automakers. You know, they may still have an auto play with some kind
of content sort of thing in their vehicles. But I think they looked at the capital side of this and and said, you know, that's not what they do. They create cool stuff and kind track someone else to make it. The business just never made a lot of sense.
But hey, David, what's the feeling in Detroit these days as to kind of how this ev thing is going to evolve going forward? I mean, it seems to have hit kind of a lull here in terms of the enthusiasm, and I guess a lot of folks are trying to get a sense of is it because the costs is just too high. Is it because people just don't like evs? Is it because there's not enough choice, there's not enough charging stations. What's the feeling in Detroit is how this thing will evolve?
It's all of that, But I would say especially choice and.
Price.
I mean, look, there's one EV on the US market that sells for less than forty thousand dollars. Now it's a Nissan Lead. It's a compact hatchback, which Americans hate, that gets about two hundred miles of range, which nobody thinks, isn't it, And so everything else is much more expensive than that, and for most Americans that doesn't cut it, particularly when the charging network is bad. So all these
things are sort of related. But you know, I think the carmakers are now really cautiously watching this, and in the vehicle to watch in the next year is General Motors is going to sell an electric Chevy Equinox. So the Equinox is a small crossover suv. It's that's kind of the new family car because no one buys Sidanzen.
And they're going to sell that EV for thirty five thousand dollars and it'll go three hundred and twenty miles on a charge, which is pretty good, and that will kind of tell us if the mass market is ready to go electric, because right now, a lot of the people who buy evs, they're not just early adopters and rich people. They are early adopters and rich people with
three or four other cars in the garage. So if they need to drive on a long road trip, they pull the land rover out, gass it up, and go. And so can the industry sell evs to people who have one car in their garage?
And we'll see.
So that's going to tell us a lot about what's going to happen with this market and how flat the middle of this S curve is in order to get to the next way.
Those are the people that can qualify for the one it in that survey, right, so some of us may fall short. David, I'm also wondering just the mood, I mean, to Paul's point, the mood in Detroit, Like, how do the workers feel about all of this? Right? I mean, we know the shift to evs eventually, when you're just making EV's, you need less workers, et cetera. And I'm just wondering, kind of, yeah, like how do they feel right now?
So?
I'm not totally convinced by the way that it's going to need fewer workers. I think over a long period of time maybe, but that's a different issue. That the union worker does think that, and they also think that the engine and transmission jobs will be gone and batteries will come in from someplace else and they won't be the ones making them.
So there is a lot.
Of fear, and I think they're breathing some kind of a sigh of relief that maybe a lot of these workers are a bit older, they'll be retired before this is a real issue. And so I think if you're the union, you're looking at this transition as being longer and slower than everybody thought probably two years ago, and so to be more manageable. You know that the you know, the attrition can be just done by retirements and people want to lose their jobs and be left with nothing.
It'll just But it is the commitment from the car companies still there, David, because I could make an argument I think half of this country will never go electric for reasons other than economics, other than powertrain.
Was it like, look or what politics?
I'm not going green?
You know that's interesting I've sort of thought for a long time that Elon Musk has gone conservative for two reasons. One, he's been fighting with the government, so he hates regulators. Democrats get pinned with regulation, so he went conservative. I think the other is that guy's a brilliant marketer. It's the most underrated thing about Elon Musk. And he knows that EV's have been politicized. He knows those conservatives don't like them, and so I think he went conservative because
maybe they'll buy evs from their guy. Right, he's the guy on Twitter letting them say whatever they want. And I've always sort of thought, with no evidence, that maybe that's what he's doing.
But look, I.
I eventually everyone's going to go EV because I'll just be the powertrain available. Question is how long does it take to get there? And I do think it's going to take a very long time. Price is one thing, and the Parker dwellers and all of that. I mean, there's just practical reasons why not. But look, you know, in the eighties, cell phones were the sides of a suitcase.
They were very expensive, the services obuseeing. A lot of people said I'll never get a cell phone and now everyone's eighty seven percent of the market has a smartphone glued to their head or in their hands, So you know, never is a very long time. I think it will happen, but it's not twenty thirty five or twenty thirty like Mercedes and General Motors tell this. It's like twenty forty five.
Okay, because I'm you know, I think there's a reasonable argument to be made in the boardrooms, like what if this isn't the mass market we thought it was, And I don't know, everything else has been politicized, why not that?
But then at some point you're just gonna have regulations that's going to demand it, so you don't have a choice, which is kind of where we were, and now some of that's being rolled back a little bit. So I think it's it's the whole idea that you're in an industry that is in a structural shift, but there's all these short term headwinds, like how do you manage a business like that? That must be very difficult.
Yep, that's why.
Then again, I don't buy a car from Mary Barra, right, No, I mean, I guess only Tesla. You'd buy it for ELM maybe.
Yeah, I don't know. All right, David, thanks so much for joining us. David Welch, Detroit bureau chief for Bloomberg News. He's in Detroit. I mean he's got his you know, feet to the ground, ear to the ground, that all that kind of stuff for what's happening in the auto business. But it's tough. I mean, it's tough to to make the case to invest in GM or Ford Stock is tough.
I know, these industries that are in fundamental transition, and I equate the auto industry to the entertainment industry fundamental.
Change and the energy industry.
But yeah, yeah, exactly right, exact fundament change to their core business model, and you want me to invest in the equity of this thing.
I mean, I think the difference is that there's a manufacturing element, whether you're in media or whether you're in a car company, versus energy where it's the underlying hydrocarbon. It's different. So they can actually make money. Well, this is all happening, which is a novel idea.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Applecarplay and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station, just say Alexa playing Bloomberg eleven thirty.
We also got that data that was pretty solid, right, you get a second quarter of the second read on the fourth quarter GDP coming a little lighter than estimated, but really that was an inventory issue. The personal consumption part added about two points to that at three percent. Again super solid. It's a big head scratcher. It is joining us now, Heaving in a trades managing partner and director of economic policy at Beta partners Man. There's a
lot to get through. There's this, there's politics. But if I'm Biden's campaign, do I like these numbers?
I mean, there's a double edged sword here. On one hand, you want the Fed to cut interest.
Rates, not that they're encouraging them to or in any way manipulating it, but the perceived benefit of the Fed cutting interest rates is something that any administration running for reelection would like to see going into an election year. But simultaneously, strong GDP growth, which is what we're forecasting and expecting and is consensus at this point and even being revised upwards by NAB and groups like it, is
also a strong indicator. So I have to say, I don't know that there's losing data for Biden in the upcoming economic information that we're about to be getting out. What you really want to see, and I think is a really interesting dynamic, is actual inflation come down, particularly on household.
Goods and groceries.
There is some a study that I conducted a few weeks back about the the gap between women's perception of the US economy and men's perception, and in a number of cases it's you know, sixty seventy eighty, even ninety three percent negative views amongst on the economy from Republican women. And it's an outsized portion of women versus men who believe the economy is struggling right now, and.
That's mostly because of inflation.
So I think the most important data for the Biden campaign writ large is really just inflation on household goods and groceries.
So on that end, I guess, Henriette, Tomorrow's going to be an important day here with the PC deflator data. What do you expect me to see here?
I mean, we've seen economic expectations and forecasts for consumer sentiment come down. You have to think that there's some inflation related components to that, but it could also just be that the four month rise that we've seen is you know, just sort of plateauing or something along those lines. So I don't think inflation is going to be cured by any PC is still going to be a problem. I think it's just really slow going and a struggle for the Fed, which is why the market is repricing
so aggressively on whether there will be interest freecuts. One of the conversations that I used to have a lot was how many cuts are we going to get, you know, between March and June, And now it's more question of are they actually going to cut in March or will it come in June? And I think that signals that there's still a long way to go on inflation.
Right, like no longer how many, but sort of when it actually starts, it does feel like maybe some of the repricing has finally worked its way through. Henrietta tie this into the Michigan primaries yesterday. What did we learn? And I say that because it did feel like anti Israel pro Palestinian group there really sort of put the screws to the Biden campaign, right, And I wonder how much that's going to start affecting the campaign versus say, how much I'm paying for eggs at the grocery store.
Well, I obviously Michigan is a critic state. There's two hundred to three hundred thousand Muslim or Arab voters in that state. Biden was able to win the state by one hundred and fifty thousand last time around, so he does have a cushion. But you know, if female voters, if youth voters, if black voters are migrating to Trump, which is what the polling is suggesting but not necessarily representative of primary turnout data, then you have a problem
when every vote counts. You know, in twenty sixteen, the threshold was just a couple ten or so thousand voters.
So you really want to work for everyone.
But I think there's a misunderstanding of what happened last night because a lot of the takeaways were sort of gelled in the public consciousness a little early in the night. It takes fifteen percent for the undeclared vote to send a delegate to the DNC this summer, and they're only at thirteen percent.
As of this morning.
So this is really the last hurrah in terms of national attention that Michigan and these voters specifically are going to have in a way that I think will carry any of the weight that we've seen for the Biden team to be worried about for the last you know, three or four weeks now that they're not.
Worried about the Israel Kaza situation in general.
They ask for a massive funding request, including humanitarian aid, all the way back in October, and Congress has yet to authorize that, which makes it difficult for Biden to get any messages across. But in general, I think the undeclared vote was not the political earthquake that a lot
of folks in that community wanted it to be. And I think that there should be a lot of breathing room for the Biden administration understanding that they will not have to worry about a delegate from this contingency at the DNC this summer.
All right, So staying on the political front, here are good friends in Congress. So I guess they're getting back to work today or tomorrow, who knows. Let's put that in quotes, yam, Yes, what are they going to do here about keeping this government open? Should the markets be concerned. Learned that we could have an issue here, but either this Friday or next Friday.
Next Friday would be a big issue, and it comes at a very precarious time for the Biden administration specifically. But here's the state of play as I understand it. We're going to get another short term cr It's just a matter of how long. This Friday's deadline only covers about twenty five percent of US federal spending.
It is a three.
Hundred and twenty one billion dollars if I'm not mistaken. Next Friday is the big cahuna at one point two trillion.
So I do think that there's.
Going to be a deal to avert a shutdown this week. That's contrary to my earlier view. What happened is the House changed its schedule. They decided to actually come back into town, as you point out, instead of being gone all week, they are coming back today so that they will be in a position to at least.
Take some votes.
But you can tell from Speaker Johnson's reticence to even release text that this is going to get slammed and Daylight is going to kill it.
If he releases it too early.
So we need to see text, you know, no earlier than tonight, and a vote would come on Friday, but the potential for a short team CR is effectively guaranteed. The real lynchpin here is that, for the first time in two cycles, the Senate Republican conference is really hoping not to lose their races through unforced errors or through endorsing MAGA candidates. This is their last best chance in a while, and they've got eight Democratic seats in purple
states that are highly at risk. On that list is Arizona, Michigan, Nevada, Wisconsin, Ohio, Pennsylvania, Montana. Certainly, so, the Senate Republicans are effectively trying to pull rank on House Republicans here and say, yo, let me get a majority in Congress and in the US Senate. Don't shut it down. Don't ruin our chances by making us all
look dysfunctional. Let's keep the government open. I on the prize, focus on the White House, focus on immigration, and move on from these, you know, sort of futile efforts to cut federal spending from very popular programs like so.
I think that is very helpful.
I would like to see Minority Leader McConnell have a little bit more sway over House Republicans and particularly Speaker Johnson. I think we will get there and we'll avoid a shutdown on Friday, and then optimistically, we'll avoid a bigger one next Friday. The one caveat or the several caveats are one. It's super Tuesday, next Tuesday. The President will deliver the State of the Union address on Thursday, and then that big shutdown would come on Friday.
So there's a lot of moving parts here to be watching.
Oh I love It's like, I don't want to be the most dysfunctional person in my friting. I like that's the bar for some Hey, Henritta, thanks a lot, Henry to tre Is, managing partner and director of Economic Policy at Veda Partners. But I also wonder we didn't get
a chance to ask about Nikki Haley. But we know the nomination is not going to happen, but she keeps making the case like thirty to forty percent of the voters in this state don't want Trump, and I wonder how that eventually evolves over the next few months.
Yeah, and a lot of folks we talked to in the political front say that she may stay in this race longer, if for no other reason than to get to the convention and just kind of be there.
And just sit there and see what happens. Yeah, I've heard that too. I wonder what that winds up looking like and if the polling winds up showing up.
The conventions this year are actually going to be very interesting, I think, I mean, I think both of them are going to be very interesting, and maybe not for the incumbents, but there's gonna be a lot of rhetoric out there, so we'll pay attention to them this summer.
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Let's drill deeper now into the bond market here. We had a ton of supply coming on this week in the corporate bond market. We had record February issuance for the month. We had seven two fives for the treasury market, all doing really well. I want to bring in Jerry Kudziel, He's a group managing director in General's generalist portfolio manager at t c W. Let's kind of get into fixed income here. What is the pain trade headed into tomorrow's PCE in the bond market?
Well, good afternoon, Thanks for having me. I appreciate it. It's a it's a it's a great question. I think the reality is the the market has set itself up for complacency kind of across the board. What we would say is the pain trade is probably for a little bit of a of a of a higher print on inflation, although what you know, the the reality is that there's not a lot of room for error price into the markets at all either way.
So it feels like, is it safe to say, though, Jerry, that from your perspective that we've seen peak inflation? Can we at least say that.
I think we would say we've definitely seen piece whether whether or not inflation ticks back up a little bit or or we see we're both a little bit stronger. I think ultimately, when you look at the numbers of the three month or six month annualized the Feds already hit their target. You know, we're already at we're already at two percent inflation numbers. And I think the data that we're seeing the micro up time internally here is that macro views and formed by the micro you know,
laural of anecdote is data a little bit. We're seeing a lot of things under the surface that lead us to believe that the economy is not as healthy and that inflation is not is not going to remain as strong as so, yes, we've already seen peak inflation.
In our view, does that mean that you like steepeners even though if you were in steepeners the last six months you got you got hurt.
Indeed, I think the calling the timing of a FED cut, and I think we all want to everyone wants to know everyone's opinion of when is the FED going to get moving on interest rate cuts? Are they going to cut? How are they going to roll it back? I think our view is inflation is peaked, real comfortable adding duration, uh, and we think the curve is going to and will normalize, and so we we do we do like steepeners. I think the reality is this has been you know, obviously
the market's pushed pushed just out it. But our view is that's a little bit reflexive. There's a there's a lot of complacency in the market. You can see that in VIX, you can see that in S and P, you can see that in individual equities. You can see that in the corporate bond, in disease UH, in the face of record issue with alex as you mentioned, we're staring at just about all time tights or you know, definitely post GFC tights, and the and the reality is is not, in our opinion, not a lot of not
a lot of room for error. But yeah, I think the short answer to the question is we we like steepeners, and we like and we like duration.
How about corporate credit, how do you feel about going out on the risk premium a little bit?
Well, I think let's look at it this way. We'd say you're supposed to be high grading your credit portfolios right now. When you think about the investment grade credit diet of eighty seven over treasuries, the high yield index trades at three oh seven. But when you start stripping out distressed the high yield index, if you take out the four percent of the high old index that's distressed, the high yield index trades that have spread at two forty.
If you pull that back historically, that's a really difficult time to invest in high yield, and it's a really difficult time to go out the risk spectrum. We've seen spread compression, whether that's between credit quality, between high yield and investment grade, and so we would not recommend going out this picture. The risk spectrum was thing's supposed to be high grading portfolios, being moving up in quality, and we don't. We would not recommend moving out the risk
spectrum right now. We've we've been highgrading our portfolios across the board.
Where do you think you could be wrong? Is it going to be the when the FED cuts?
Is it?
Is it going to be a consistently stronger economy? And I was talking to someone earlier today. They talk very much about a two speed economy. On the one hand, you have big banks, you have a lot of liquidity, and that's pointing us in a positive direction, consumer spending relatively okay. And then the flip side, you have mid sized banks, small caps not doing really well. And it's hard to kind of look at those two and see who's going to win.
Yeah, No, it's we asked this are to ourselves all the time, Where could we where could we be wrong? I'd say the consumer has been significantly more resilient than certainly we anticipated. I think certainly that. I think that probably the majority of the markets anticipated. Could you get a productivity enhanced you know, expansion and boom and the you know a AI you know a AI productivity boom. I think we we ask ourselves this all the time. It's really can the can the economy grow? Can the
consumer remain resilient? And can you continue to see uh upward momentum in or sustained growth in wages. I think we've we've considered all these things. We would say we think we're closer to consumer exhaustion then than not. Excess savings have been spent down. We think the labor market underneath is definitely a little bit weaker than the headline would imply. So we do ask ourselves out all the time.
The reflation, growth, productivity boom, those are kind of the things that would where where you know, kind of a duration long and a steepener call would certainly prove to be premature, you know.
I finally Jerry got around yesterday truly to watching the Big Short, so I got to ask a question about mortgage back secure agency mortgages. How do you feel about that part of the market.
Yeah, I was, it's that's a great question. So agency mortgages look attractive nominally, but they look really attractive relative to corporals. You think about where agency mortgages, you know, the spread on agency mortgage I'll just put it this way. The spread on agency mortgages relative to corporates looks like looks like multi standard deviations, differential, and so our opinion
is that we like we like agency mortgages. Essentially, what you're doing is trading duration risk for credit risk, you know, full faith and credit of the government. Our thought is at one hundred and fifty five over on current coup on agency mortgages, and we can adjust for negative convexity and some other things that we don't need to get into. Ultimately, we think they're really attractive. There are parts of the mortgage market, commercial mortgages, some other areas that are a
little bit more concerting. We think there'll be a lot of opportunity there, but ultimately, you know, we're being but we're certainly buying DC mortgages and we like agency mortgages a lot.
All right, Jerry, thanks a lot, really appreciate. Jerry Kudz, Group Managing Director and Generalist Portfolio manager at TCW. So did you like it most? Kay? Everybody think it's better though.
But yeah, I mean, you know, but no, it's good.
So you're only catching up to that now exactly. Time to kill us time.
Going to the Nick game last night, and my day is over at twelve, literally over at twelve, so I had to wait around the Nick game, So I went up.
What does one do? You can't make fun of him because you're watching a documentary on the Crimean War. Okay, so I'm up to part three now, Yeah, okay, that's just what we do for fun.
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