Fed Warnings on Asset Prices Could Sour Market, Maley Says

beginning her testimony in front of Congress. Uh, and this is going to be somewhat more important than it has potentially in the past. I want to bring in Matt Malee,

managing director and equity strategist at Miller ta Back and Company. Uh. Matt, you know, I want to talk a little bit about something that you pointed out in a recent recent note where you said that aside from just balance sheet considerations and when the Fed may raise rates next, one of the most important things that Chair Yelling could talk about is asset prices. Can you give us a little bit

of color around that. Well, you know, she came out and you know, said talked about stretch valuations, and that took people a little bit back. I'm saying, well, jeez, if she's worried about it, should we be worried about it? And uh and and usually when when things are misinterpreted by by the public or by the uh financial press with them or the markets. Uh, they quickly marched somebody out from the FED to say, oh, no, no no, no, she didn't mean to say that. Well, she said the

exact opposite happened. She had some more people came up from the FED, including vice the vice chair saying that, you know, kind of reiterating what she was saying. So the reason why I worry about that a little bit is that, you know, people have felt that the FED has had their backs for quite some time now, and I'm not saying that that you know, it is suddenly going to be you know, they're they're looking to the stock market to go down in this to give it way.

But people have a lot of leverages we see in the margin debt numbers, and if uh, people start to say, Jesus, the said doesn't have our back to the same degree, maybe I've got to unwind some of that leverage. So it brings into a back up for one second. So you're saying, if the FED doesn't have our back. Why does that relate to them saying, yeah, well things look a little stretched, because you know, in fairness, things do

look a little stretched. Yes, but it's it's it's for for some of these leverage players and and momentum players. And we all know it was interesting Barons this weekend had this uh you know, the cover story was about, you know, the machine trading and a lot of that is very much momentum based. And if that momentum is going to slow down a little bit, uh, it might cause the market roll over. No, that's not the worst

thing in the world. I mean, you know, it's funny when we talk about seven to ten percent pullbacks um and they was like, well, jeez, I don't know will be that bad. Well, jeez, we've had one of those every single year since. So it wouldn't be the worst thing in the world at all. But if if Janet Yellen starts talking about some of these continues to talk about some of these things, I should say, it could cause people pull pull on their horns a little bit.

And to be honest with you, I think that would be number one to be normal, but it'll also be healthy for the market. Do you think people will buy that dip. Matt, Well, the big question is going to be, uh, I think odd, right, I mean, just isn't it odd that? How? You know, stocks are always an opportunity, whether if they fall there you know, it's by the dip, if they

go up, it's a momentum trade. It doesn't seem to be any point along the way where people say, you know, this is just too expensive and uh, I don't I don't want any part of it. Well, that's why I think what we're seeing right now because not only from what the FED chair yelling and and the vice chair and the pred sorry San Francisco FED presidents have been saying about asset levels, but also the coordinated effort uh talking about you know, shrinking the balance seat raising the rates.

And we're starting to see that creep out into the e c B, the B the Bank of England, the Bank of Canada, and even a little chatter about the B O J. So when you get this kind of coordinated effort that seems to be coming out of this central the global central banks, uh, some of those stretched valuations, I think people will have to change their thinking. This

is not an insignificant change. In instance, and as we heard today from uh, you know, Jamie Diamond talking about how, you know, we we think we could see a pickup of votility because we really don't know. We don't know what will happen when when they start pulling back on

this keew weik. Yeah, you know what Jamie Diamond was talking about was that the market may not be adequately prepared right as yeah, as potentially the Federal Reserve starts in winding its balance sheet and the ECB starts tapering its bond purchases. What do they what do they want though? Do they do they want like a postcard in the mail?

Do they want a little you know? Basically that's my point, more other than you know, getting in a biplane and flying along the beach with this, you know, a sign. I mean, what else do you need to tell people? They don't know? Clearly they're not telling that. It's not like they have some super secret sauce. I mean, they're waiting to see what's going on in the economy as well.

I think that people I mean not to speak for you, Matt, but it seems like people are looking for what is really the guiding factor for the Fed because they have said it's you know, inflation, but that's not really the case. They have said employment, but that's not really the case

because the employment rate plunge. There. Then you know, people are saying, well, financial stability, but you know, is that really the case because they don't want to discrapt the markets or is it uh, you know, making sure that there's not another bubble. I mean, so it's just because they keep moving the goal post both back, you don't know what what's gonna come next. Well, the other thing

too is you have to work. I mean, and again this is I'm not saying because they're not saying this the boy at some point, I mean back in the in the day. This is kind of going back to the very beginning I reread after the crisis, when Ben Bernanki came out and said, hey, listen, we can do all this monetary policy and provide all this liquidity, but it's only a kind of a stock cat measure or a bridge to, you know, to where we can get

we need some help on the fiscal side. Well, we look like we're finally going to get some help on the fiscal side at the beginning of the year, and now we're not going to get it. And it's almost I wonder if if the FED is throwing their hands up and said, hey, we can't. We can't be the parents that you know, you know, you're the thirty year old who is still living off the You need to get out there and do your thing. And uh, you know, it's about time that Washington stepped to the plate. And

we see more and more examples that they're not. So maybe they're finally saying, hey, you can't rely on us anymore. You need to step to the place. So we'll see what happened with the millennial market. Another thing that that might have a pretty significant effect on markets is bank earnings,

which begin on Friday. And I'm wondering, you know, we have seen an expectation that fixed income trading revenues are gonna be down six in the second quarter for the five biggest US banks, trading in general down about uh Is there anything in particular within the bank earnings that

are going to potentially have a material effect on market movements. Well, the thing that's going to be interesting is that is that obviously after these uh uh numbers, that of the c car numbers that give a lot of people allowed confidence. I'm sorry, And and they've rallied nicely off of that, and and and be honest that they're getting a little

over bought on a technical basis. It's interesting. If you'd asked me this question a couple of weeks ago, I would have said, geez, this is this is gonna be a big problem because you worry about guidance because she's look at the way interest rates are, and look how flat the yield curve is. Well, in the last two

weeks that has actually improved a little bit. It's only a two week move, but it will be interesting to see if if that gives them enough enough of impetus to to to give a little bit better guidance than I've been thinking, because, to be honest with you, I was getting a little worried that it was going to be one of those sell the news situations where we have all this good news, everybody's bullish on the group. Everybody said we should be uh, you know, overweight in

the financial stocks. So I thought we were getting a little too frothy there. And and maybe this change in the yield curve, the spread and from the two years in the tenure uh has widened out nicely, but it's still quite low. So my concern is that we're we're not going to get quite the same kind of uh boost that we got out of the stress test results. But uh uh, it's not as bad as I was was thinking, you know, just two or three weeks ago. One.

Thank you very much, Matt Maylee. He is Managing director equity strategist at Miller tay Back. Lack of daisical. So we've had languid, We've had list lists, and we've had lack of daisical. I'm on toucher hooks waiting for the next synonym. I don't have one for you. I'm sorry, but let's just go right on to the long awaited

repeal replaced? How about repair? When it comes to healthcare. Republicans, of course, returned to Washington this week and they wanted to produce a revised version of the Senate healthcare bill, but none of the expected changes so far appear to win sufficient support from at least the ten GOP senators who have publicly opposed the bill. Here to tell us more about what is happening, if anything, is Max Neeson. He is our Bloomberg Gadfly columnist. He knows everything and

others to know about the healthcare on the pharmaceutical industry. Max, go ahead, I want to launch your comments here with all good wishes go for What what is going on here with this healthcare bill? So? Um, you know we have the centers back they're working on a new bill, UH that that's set to be released I believe on Thursday. We do not yet know what's going to be in it. Um. It seems to be one of those situations that we've gotten pretty used to where they're kind of last minute

tweaks and negotiations, horse trading all of that. Um. So what's going on right now is you know, the eternal uh kind of tug of war between moderates and conservatives on the bill. Moderates UH ted Cruz and likely one. Basically a proposal added that would allow insurers to sell much skinnier, much less generous insurance plans as long as

those insurers also offered a c A compliant plans. The issue with that is that it makes insurance a lot more expensive when it's a compliant, like a lot more expensive. Just can you just give an example because I know some of the details here because the having to understand that, you know, the cost of the premium outweighs the deductible on in many cases that is rather ordinary, but this

is even more exceptional. Yeah, I mean, you know, it's hard to tell unless insurers are actually putting out premiums in in kind of this alternative universe. But um, you know, this proposal seems sort of designed to to send them skyrocketing.

Anyone who's not sick is going to pick the cheaper or not a month, right, Yeah, okay, but that comes out to a premium that is going to actually be costing you more than the deductible I and and also deductibles are gonna rise to because that's another another part

of the plans. So not only do you have these these escalaiming premium, also deductibles, and especially for low income people, if you have a deductible that's you know, several thousand dollars, that's a substantial portion portion of your income, you can't really quite call that healthcare coverage. So that's another difficulty to the bill. So, Max, you know, the tenor of

your discussion and your comments is somewhat negative. But that's surprising because you recently wrote probably the most positive piece you've ever written about how there's actually some silver lining and some of the back and forth that's going on, Can you uh give us a little sense of what this sort of gridlock among Republicans could mean for the bill and why this could be potentially a positive for

at least the people in the health care industry. Absolutely, so, it's I'll preface this by saying that, you know, we've been here before. The House bill looked dead with a similar kind of in past, and that ended up getting done. But we've heard over the past couple of days and even last week for Mitch McConnell, is the idea of being floated of bipartisan fix of some kind. And and I want to emphasize that this is a remote possibility, um that just hasn't been you know what's happened lately

in Congress. But I think the potential positive here is that from everything we we know, it wouldn't take all that much to stabilize the individual insurance market. It would take some pretty minor tweaks, a bit of extra spending, but but nothing you know, as as disruptive or kind

of impactful as what we're seeing in this bill. Um, Some things like a permanent reinsurance market, promising to to fund cost sharing subsidies, just things that make it a little easier for people to stay on insurance and for insurance to stay in the market, but go a really long way. So if that is a possibility, and it seems a little closer now that that probably could be

good for the market. Do you find max, though, that these kinds of discussions on on sort of strategy and philosophy of the actual system that really don't matter at this point because it's just about these ten g OP senators and in fact, one them. Senator Susan Collins, Republican from Maine, UH commented about the UH likely insertion of forty five billion dollars in funding to fight the opioid epidemic. Correct forty billion dollars. Her quote is that's helpful, but

it's by no means sufficient. So if that's her issue, you're gonna have to solve that before you get to any of these other lofty philosophical resolutions. Yeah. Absolutely so. A lot of individual senators have their issues. For a lot of them, it's opioids. For others, in medicaid Expecsion states it's a little bit of a ratcheting back in in how much impact that is. But it's hard to fulfill ten of those desires all at once. Uh that there is a substantial pool of money with which they

can do so. Uh. The Senate bill scored is saving a more than d billion dollars more against the deficit than the House bill, so that can be spent. And also the twenty years right, yeah, over over ten years, ten years, I beg And there's also some talk ab out ending the repeal of attacks on high income Americans. That adds another more than two billion dollars. So the question is can you buy it, you know, kind of

give enough funding to various pet projects. But at the end of the day, it's really hard to fix the kind of fundamentally here, which is, you know, more than twenty million people scored to lose health insurance. It's it's hard to vote for that, and uh, it's it's hard to fix that. Well, we're gonna watch what happens. They've got this week and they've got next week, I believe in order to do this before the break, Well, this

is what we don't have time. But that I gotta say, it just seems odd that you would have such an important piece of legislation done in such a I don't know, rush rush, thank you, rushed, okay, rushed manner. Thank you very much. Lisa Bramwit No, thank you very much for joining us. Max Needson is our Bloomberg gad Fly columnist.

Are expert when it comes to all things healthcare. Well, if you have not been living in the Midwest, that particularly in places that depend heavily on harvesting wheat and grain, uh, you might not know, but there has been a drought that has been decimating the US wheat crop. And here to tell us more about it, as Sal GILBERTI. He is the president and the founder of two Cream Trading. Also with us, our guide to everything commodities is Mike McGlone.

Here's our commodity strategist for Bloomberg Intelligence. Mike, do you want to maybe just set up what's been going on? I mean, I've been following it in detail just because I'm interested in the topic. But this is a really uh un sung saga right now. Tell us about the what's happening? Well, I think you nailed the main part of it. Pain, but I look at that as more than the shorter term granular situation. Yes, we're having a bit of a I would say more of a normal

weather event. It's it's drought in kind of the planes in the US, it's in Dakotas in the Minnesota. It's really affected the wheat crop. But the bigger pictures, it's potentially trickling down to the rest of the crops. And the way I look at it in terms of real the real big picture is we've had significant about four five years of down years in the grain markets, corn beans and wheat. In fact, last year wheat was at a ten year low and then plantings were at a

hundred year low. So what's happening is to me is the markets just normalizing, Weather's not so perfect, and prices are coming back, and this might just be the beginning with wheat leading. So sal I want to bring you

in here. Do you think that the backdrop has been set for a surge in these commodities in the prices or do you think that simply efficiencies and farming and other sort of sorts of technological developments have increased production capability to such an extent that prices are going to remain subdued for the foreseeable future. Um, that's a great point. But I think what has atually happen is demand has increased so steadily that we are fortunate that these technological

advantages have kept pace with the demand. And in general, supplies do keep pace with demand in terms of grain production and grain demand. But grain demand is continually rising, which means if it doesn't rain somewhere, people aren't going to stop using it. That you're not gonna let yourself be hungry just because it doesn't rain in some far away place. And that is the perfect setup right now.

We've had uh, wheat prices at lows. We've had corn prices sitting at or near the cost of production now for a good part of three or four years. And what happens is again, no matter what the news is, today is a great day as an example for that, And no wonder what the stock market is doing, no matter what technology is doing, people are going to use grains.

They don't stop using them. And so when there's a supply disruption mostly due to weather, and weather does affect even the new technology and new new new grains that are out there, drought resistance things like that, you do have an almost immediate reaction in prices, which is understandable. And it's happening now and wheat, and it could, as my says, be a precursor to what's to come in corn. And not to harp on the weather, but because Mike knows has just I love the learning about the weather.

But what's going okay, but this it's interesting. But what's happening right now to the spring wheat crop. I think the U s d A says something like only thirty seven of the wheat crop is in good or excellent condition. And that particular wheat crop, to your point, is high in protein, and so it isn't in higher demand, It isn't constant higher demand. That's exactly correct, and in fact, poor protein we if it's so poort, they'll throw it

in an ethanol exactly. So what happens is grains are going to get used one way or another, and people need to understand that farmers will drive the price of grains down to their cost of production because they're going to plant as many seeds as they can to make as much money as they can. But when it stops raining, people don't stop using, and in fact, people are using more over time, the the the global consumption of corn, soybis in wheat is rising, making records hies almost every

single year. That doesn't stop even when it stops raining. So um. Not to not to go real macro here, but when we talk about the weather, we're also getting a heat wave. Yes, weather hasn't been perfect, but we're having quite a substantial heatwave in the South and in parts of the Midwest. And I'm just wondering, you know, on a broader level, if there is a persistent heat wave, call it whatever you will. I don't want to get

into any political debates, but call it whatever you will. Well, this crimp the supply of some of these commodities or is that something that is peripheral and neither here. No, No, it's a it's a key, key point in the bigger picture. We all know what's happening in global warming. The good news is the last few years it's heated up in the grain belt, but we've had more rain. Weather it's

been but I've had more rain. It's that precipitation. If that starts to decline a little, which is historically always has you know, you get these cycles of a lot of precipitation and less so, which seems to be kicking in now. Um that will be a big difference. But oh well, overall heat you hot and dry in the Midwest,

that generally means less production. Even though we have these great you know, you know, advances in technology, just you can't grow without water, and you can only arrogate so much. And I will say that this is a critical time period basically post July four that week after July you can see the extended forecast, you have about four weeks where it really needs to rain and or at least be cool where the corn can survive. This is a

very critical time for pollination. If you look back the last ten years, corn prices have doubled twice from their cost of production, both times it started in July. Both times it's because it did not rain post fourth of July. It was very hot in the critical poll nation time which you're at now, and so you've been sitting across the production for nearly four years. There there could be some very serious opportunity. I'm only going to give you one word. Would this be a trade you'd put on now?

It would be an investment I would consider strongly. Alright, well said, yeah, fascinating, really really fascinating. Thank you so much for joining us. Sal Gioberti, President, chief investment officer and co founder of two Cream Trading, LLC, which is based in Brattleboro, Vermont. Also our sincere thanks to Mike mcgloan, our commodity strategist here at Bloomberg Intelligence and an expert on all things uh, whether actually grain and other commodities.

So we have been touching on a bit the fact that bank earnings will start on Friday and that we're expecting somewhat lower trading volumes. Laura Keller, a financial reporter for Bloomberg News, had a wonderfully colorful take on sort of the effects of slower trading activity at banks, including lots of swiping on Tinder and leaving early for a variety of events. Laura, before we get into the color of it all, I want to just get a sense

of where the slow down is happening most. I mean, we heard yesterday, um from Jim Bianco of Bianco Research, that a lot of traders have trading apps on their phones. It's not just that they're leaving and going to the beach. Sure, sure, and definitely we know any traders listening out there. We don't want to accuse you of not been able to do your job when you're out in the golfers or because of course that's always part of your job, right, Um, But no, at least, I mean, it is not about

necessarily not being in the office. It's the reason that people are not in the office is because there's not much going on. So certainly it's it's a volume problem. You know, if you look at treasuries, if you look at equities, if you look at the corporate bond market, there really is just all down. And that's kind of what we're seeing. I think there are certain markets, um,

that are a little bit better off. I you know, I'm talking some rage traders the other day, and you know they're saying for the third quarter anyway, the last week or so, things have picked up somewhat. So certainly there are pockets. But we are waiting for the big banks to kind of let us know when we hear on all these earnings calls, you know what they are seeing. Is it going to be something like Jeffreys that said, hey,

emerging markets was a little bit slow for us. Leverage credit where we're big that was slow or or are is it going to be different, because as we know, every one of these big five banks has a bit of a different kind of trading franchise and specialized in

different products. You know, I I had a really big laugh this morning when I was reading Matt Levine's Money Stuff, his daily UH compilation of stories, and he quoted a passage from your story Uh in particular, one bond trader says he's been slipping out early to watch his kids

play sports. And Matt framed this as this is apparently bad, and then it talked about how people are saying, well, you know, there's a lot of potential influences that could shake up markets like North Korea and and or terrorist attack, and he said, uh, you know, you can see why this kind of cast some shade over Wall Street because the framing here is basically, quote, boy, I hope there is a terrorist attack so I can spend less time with my children. Is that is that accurate? No? I

don't think that's true at all. I mean there's compete desires. I mean you have family men who definitely want to be able to go to their kids sports practices and would enjoy doing that on a Dailey basis, and then you know, of course you do have traders who you know, are here to have a career, and certainly a terrorist event, while I don't think that's anyone's wish, um, you know, would create some kind of small but they do tend

to do that. But I mean, no one that I'm talking to is saying, hey, I would love to have some kind of you know, something happening in Syria, um, maybe another London attack. No one that I talked to was actually hoping for something like that. Lord. Just on a more general note, the bond trading that is going

on at these big banks. How much are they doing now versus how much they were doing let's say ten years ago, And is there a strategic decision that banks really, or at least some banks, they don't want to be in this business. It's not profitable and there's no real reason for because they're just middlemen. They're not really putting up their own money. They're not holding any of this on their balance sheets, are they. Well, I think payment

is a bit of a structural change. I mean, if you talk to traders who've been on the street for you know, ten, fifteen years, twenty years, they do talk about how it used to be in the old days. You know, there was more volume, there were a lot more people on the desk, less automation and trading. Um. Certainly different kinds of markets have a little bit more of that in a sense of almost more custom markets in a way that you knew as an a holder

of inventory what you had. And then the game or the challenge was to figure out whether you've got a match for someone out there who's looking for something that would fit what you've got, and maybe not even a match, you know, not even necessarily talking about you know, appointment type trading, PIM you have something where you have something and I'm the guy in the middle. But also sort of this more with a lot of traders talk about it's fun trading, which is the prep trading, so they

also got to play their own sort of book. So certainly things have changed. But if we bring it back to present day, I mean, Morgan Stanley, take a look at them. They you know, James Gorman has talked about fixed income and changing there. I mean, they're not even really trading commodities anymore, which is obviously a large part of that C in f I C C fixed income um in the the acronym there. But you know, Morgan Stanley,

what was it? Was it the fourth quarter? I can't even remember anymore, but there was one quarter when we had such a very you know, it's a clobberine at Morgan Stanley, so something like that. You know they've gone through that transition. I don't know that you can say that for some of the other bulls. Bracket bag well asset management does have some of its uh positive characteristics when it's other people's money. Thank you very much, Laura Keller,

financial reporter for Bloomberg News. You can follow her on Twitter at Laura J. Keller. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.