Interest Rates, Housing, And Roe v. Wade (Podcast)

leader and active fixed income. Learned how Pimco creates opportunities for investors at pimco dot Com slash bonds. All investments contain risk and may lose value of con Consult your investment professional before investing. All right, Ira, before we get to the soccer discussion here, I think we've got a FED meeting tomorrow. Some people here are telling me that's kind of important that I should talk to you about

what the FED is gonna do. All I know is because I go like an inch deep on this FED stuff. But I know guys like you go way way deep. Is it fifty basis points or SEVENTI five basis points? Is that what I need to focus on tomorrow. What should I really be looking at when we hear from the feder Reserve chairman. Yeah, so I think in the statement it's not going to be much of anything. I think it would be pretty surprising if they didn't go

fifty basis points as the market expects. But the press conference afterward could have a lot of interesting detail that could really move a short term interest rate markets quite a lot, because if j Powell hints that, hey, if inflation stays at seven percent or six and a half percent, which is very likely to do in the near term on a year on ear basis, then we might go seventy five basis points. That's when you're going to see some fireworks potentially in in the pricing for future moves.

So so I think it's that nuance that you're gonna have to listen for it at the press conference. Or do you think the market is going to react more perhaps to the balance sheet and any indication on what that actually looks like in the exercising of what shrinking the balance sheet actually looks like. Well. So, so it's interesting because the Federal Reserve, and I think this was

missed pile a lot of folks. The Federal Reserve basically pre announced exactly what they're going to do, So the only thing that they really need to say tomorrow is are we going to start in May, are we going to start in June, or we're gonna start in July. But they basically told us almost all of the other relevant details. So we know this size that they're going

to start to shrink. We know that they're going to use T bills to make a sixty billion dollar runoff of treasuries possible every month, so it's that's both a floor and a cap uh and also the size of the mortgage runoff. So so so we know all of those details already except the start date. So so that's gonna be the only relevant information. Um, there is I think a big misconception in the market that runoff is going to mean that you get higher longer term interest

rates because the Federal Reserve is selling long term assets. Um, that's wrong. They are not. The Treasury Department is going to make the decision on what to sell. And so I think while yeah, you might get a little weakness, and I think the knee you are reaction might be for the yield curve to steep in a little bit on the announcement. I think you fade that because it's

not going to persist for very long. But it hasn't been made clear, right, I mean it, correct me if I'm wrong, Ira, and I very well could be here the expert here. But there's two ways that a balance sheet can can be run off, right, You just don't reinvest the funds of or you actively sell it on the market. Are you saying that the actively selling part is off the table? They're they're not going to be

actively selling. They've already told us that actually, and they told us that in January when they get their principles, and then they reiterated it at the last meeting when at the March meeting when they mentioned that they were going to do sixty billion dollars, it was going to be passive runoff. Um. Eventually they might sell, particularly in

the mortgage sector. I don't think that they'll ever sell a treasury, but in the mortgage sector, at some point in a year, eighteen months, two years, they might end up selling some mortgages because as interest rates are so high, you don't get the pre payments of mortgages that maybe the FED wants, in fact, that thirty five billion dollar mortgage number is never going to get hit, um at least not until interest rates go down another hundred or hundred and fifty basis points. So it is going to

be passive. So so we know that. So so that's where, um eight thirty tomorrow morning we get probably the more relevant information for the yield curve, and that's when the Treasury Department announces what they're going to be selling over the next three months in terms of notes and bonds and and even T bills. So so that's gonna be

kind of almost a pre announcement. And now that we know that the FED is at some point in the near future going to be running off its balance sheet, the Treasury Department basically has to increase sales to the public um more than that than they would have had to otherwise. So um, so, so it's all going to be very mechanical. Uh. The market reaction, I think is maybe going to be the wrong market reaction initially until people kind of realize it's not as big of a

deal as they think. Hey, I when the when the FED announced their pivot becoming more hawk is several months ago, it was kind of like three rate hikes in two Now, as I look at my w I RP GO function on the Bloomberg Trumoral World Interest Rate Ability, Yes, there is a function for that. I'm looking at ten, maybe eleven rate hikes through February of next year. Does that seem reasonable to you? Yeah? So, so it's it's not the number of hikes, that's how much they hike at

each of those meetings, right. But but yeah, I mean we're talking about another you know, two hundred and fifty to three hundred basis points of interest rate increases. So um, So, using the w I RP function, what you'll note is eleven eleven hikes or cuts really means you have around two two seventy five bases points of hikes and and you know that's pretty significant. I mean, we haven't seen that pace of hiking really since the nineteen since the

nineteen eighties. So, um, these were very good to me. Yeah, they were good for me too. It was it was a good year for music. It was a good decade for music as well. All right, So here's important stuff. I'm knee deep in the Yankee baseball I got NBA playoffs and then I've got one of my favorite sporting events of the year, which is a Kentucky Derby Saturday. If I do manage to find some free time in my sports viewing schedule, what football slash soccer match should

I be watching? Oh? I think you gotta go with Liverpool Tottenham? Which will happen? Which will be taking place? Actually fight during the Kentucky Derby. Um So, Liverpool is still fighting to try to win the Premier League and Tottenham needs to win in order to uh have hopes to make the Champions League and stay in the top four. So that that's gonna be one heck of a match, all right. I know Tom will be onto that. Tom Keene is a big Tottenham fan. How that came about?

I have no idea Ire Jersey, chief US interest rate strategists for Bloomberg Intelligence, also our go to person on all things soccer. You gotta get that in there because it's big. Um So, we'll see. But the I were talking about the FED tomorrow reporting, you know their meeting today. They're meeting tomorrow, will have the announcement two pm. Wall Street Time, Bloomberg TV coverage and radio starting at one o'clock. That full coverage of that, So we will be all

over that. And again the question for this Feller Reserve is how restive does it need to be to fight uh, this persistent inflation that we're seeing in this economy. What can they do and how should they achieve that? So we'll be all over that tomorrow. Plus we've got jobs later in the week. This is Bloomer. All right, let's head down to Washington right now. I want to check them with Joe Matthew. I said, we gotta talk to Joe because he knows what's going on down there. He's

watching it. Corresponding and host of Bloomberg Sound on that's a weekdays at five pm, All Street time, Joe. This Supreme Court, the United States Supreme Court generally doesn't leak stuff, does it. What's going on today with you folks down in Washington. Well, you know, it's it's interesting when you see the reaction from Democrats versus Republicans. You can imagine the Democratic reaction. Outraged. Senator Schumer just on the floor

called this a dark and disturbing day for America. But Republicans are are demanding an investigation into who leaked this. You know, they're about three dozen clerks in the Supreme Court, the justices themselves. Not many people have access to a document like this. My goodness, the pdf is published right online. So, uh, at some point you can expect hearings into this. Uh. We heard from Senator Mitch McConnell in a written statement

a short time ago. He's even talking about possible criminal charges. He says, the Chief Justice must get to the bottom of it. The Department of Justice must pursue criminal charges if applicable. That's coming from the Republican leader in the Senate, Joe. So I take from that that maybe the the idea that's forming within the Beltway today is that perhaps this was leaked to benefit the Democrats. Well, look, that's certainly

how Republicans might look at it. Not not only that, but just to kind of up end, you know, the balance here in Washington, to turn another institution around. It's hard to tell what the motivation would be, because a lot of people do lead themselves to think that this would help Democrats in the midterm elections. Uh. Certainly could be a motivating principle, could mean a very different level

of turnout for Democrats. But there's gonna be a legislative answer to this, potentially even before November, we heard from Chuck Schumer that he wants to bring this to a vote UH in the Senate. He just said that a short time ago. UH will need more pro choice senators, says President Biden, and a pro choice majority in the House to adopt legislation that codifies ROW, which Joe Biden says he will work to pass and sign into law. So it'll be interesting to see how quickly this could happen.

Of course, it's not likely they have the votes in the United States Senate, but members will be called to say up or down on this. They will have to, likely before the midterms, let the world know how they would vote on abortion. Well, as I was gonna ask next, Joe, do we expect anything to change the result in terms of next steps? Well, look, we have to remember that this is a draft. It is not a ruling. We will get one, we expect by July. So it's frequent

that these change. They evolve dramatically between the draft stage and a final ruling. The thing is, we're talking about Roe v. Wade, and if you're in the legal community, never mind as Supreme Court justice, you probably know how you feel about this. So it's not like we're going into this with with undecided justices or justices that may be compelled to change their minds. That's probably less likely in this case. Uh. And and if this is what it appears to be, we're about to see a major

change in this court. What's the feeling Joe down in Washington as to timing? I mean, I guess you could say, boy, this is you know, we've got the midterm elections coming up and it's tied to that. And any sense of why now this came out? No, Uh, we certainly can't tell you that if we don't know who did it. But uh, I will also remind you though that people knew that this could happen, This was likely gonna come. We've had oral arguments over the Mississippi law back in December.

This was drawn up in February. It's just it's different when you actually see it in writing. It just feels different this morning because a lot of folks, I think, probably didn't want to believe what their what their brains might have been telling them. I mean, it's still shocking to me in terms of that this was even leaked. And I have to ask, is there any precedent for something like this. There's not on this level a creaty

where you've actually got a document dump. But we have had leaks from the court, and ironically or coincidentally, it was in fact Roe v. Wade. It was in two when the Washington Post had had sources reporting on discord within the Court that justices were wrangling over this, struggling to come to a final ruling. But you know, this is a whole other level, This is Pentagon papers level, uh leak here where you've got the document with names people, uh,

their actual language written out very clearly. It's ninety eight pages and it doesn't leave a lot to the imagination. All right, Joe, good stuff. Thank you so much for taking a time Joe to join us. Give us the latest from Washington, d C. Again, this news bombshell this morning that we all woke up to and including our folks down on Washington, about this leaked document purportedly from the Supreme Court as it relates to uh Roe v. Wade.

And obviously it's got everybody talking about and certainly the folks in Washington demanding some action there. Joe, Matthew, Washington corresponded. He's hosted Bloomberg Sound on weekdays at five pm Wall Street Time on Bloomberg Radio. You think about the economics of this country, you look at the labor market. Very interesting story that we're gonna get some labor numbers later this week, but we're near a fifty three year low

of three point six percent in terms of unemployment. About the labor force participation rate is still below its pre pandemic levels at sixty two point four and far off the peak of sixty seven point three percent in two thousand. U Matt Winkler, editor in Chief emeritus, more importantly the founder of Bloomberg News, the whole kit and caboodle. He joined us here in our Bloomberg and after Broker Studio. Matt, you sat down with the Commerce Secretary Gina Ramondo recently.

What did she have to say about kind of how they in the administration are viewing this economy, maybe the messaging around what is going on about current economic conditions. Well as the former treasurer, former governor, and first venture capitalist of Rhode Island, she would say born out of experience and also looking at data that we've compiled at Bloomberg that UM. Childcare, daycare UM are investments UM, and

they're not as many politicians assert social programs. And the data that shows that is in fact true is when you look at states that have invested in child care specifically UH and embraced say the medicaid expansion of the Affordable Care Act, those states have actually generated greater job growth UM, higher labor participation rates, and higher rates of personal income, whereas the states that have done nothing with job care UH sorry, childcare or healthcare UM have inferior

rates of job growth and similarly with personal income. And then again she would look at businesses that disclose annually what they're doing with their workforce, making it more diverse, providing more childcare uh extensions of medical care beyond the Affordable Care Act, and those companies actually outperform the companies that do nothing or disclose nothing UM in terms of share performance and lower volatility. So that's the data, and so her mantra would be, UH, this is all good

for the economy and we should be doing it. And if we do it, then the labor participation rate will improve accordingly. And it kind of makes sense if you think about it, because if women don't have to worry about things like childcare, which they always have to do because they're usually the ones who are saddled with that responsibility. UM, and also healthcare for that matter. Uh, you're gonna get

a higher labor participation rate. And this is coming out of time when you have an extremely tight jobs market. I expect to term of how to speak about that tomorrow as well. But not the only issue, uh, specifically for the American economy inflation, chip shortages, and Gina Vermondo has been very vocal about that as well. Yeah, Unfortunately she doesn't have a magic wand that everybody would like

her to have. However, she did uh do a few things at commerce that are a departure from a predecessor. She created uh, you know, challenge programs that are public private partnerships to get business incentivized to do things that maybe they otherwise wouldn't do it. One of those things, by the way, is you know, she's a big proponent of getting Congress to provide fifty billion dollars UH to create chip manufacturing, computer chip manufacturing in the United States.

And her argument would be looked, this is good for everybody, it's good for the local economies, it's good for the businesses that have a shortage of chips right now. Uh so everything we can do in a public private uh partnership would go a long way to improving the problem.

Having said that, she also says this isn't something that's going to be solved overnight or in six months or you know, the end of next year, because the demand for chips today is inexorable, meaning everything that we do in the twenty one century economy depends on chips, and we just don't have enough of them. Yeah, and that's a whole another story. I still don't understand how this industry did not foresee this and how they missed it. So and I haven't gotten a great answer, but um,

because we'll have to see. But one of the issues, Matt is just you know, when you think about this, it might be a messaging problem for the Democratic Party because when you talk about some of these social programs, programs childcare, Republicans might frame and in context of spending, whereas the Democrats probably preferred to frame it in the context of investment in the economy. But your column shows

the data supports these investments. It seems like that might be something that this Commerce secretary, maybe the administration we want to think about. You know, Uh, Clinton's great political strategist, Jim carverl you know, said it's the economy stupid. And that's one thing that Gena Romundo has always gotten. And she's gotten it because she started out, as I said, as a venture capitalist. She's no stranger by the way to poverty and all the issues associated with broken families

and childcare. I mean, she worked in these programs before she went to Yale Law School. But what she did show when she was Treasurer of Rhode Island and then governor is that if you can frame what ails us in the context of this is what we need to do to solve it. And sometimes it's not a happy message, but it's a very accurate message, and you just need to say it again and again. And that's what she's done. And I suspect that there aren't as many Democrats with

her experience or her knowledge of the economy and business. Uh. You know, she brought thirty companies to Rhode Island to create jobs in the unemployment rate dropped to a record low, I think three point four percent in Rhode Island by

the time she left to become Calmerce secretary. So she knows her way around data, she knows her way around the politics of the economy, and she can frame those politics in a way that is understandable but also you know, compelling, because if it is true according to the data, then why shouldn't we go along with it? And not every politician has her experience or knowledge. Matt, while we've got here in our studio, would need to get the benefit

of your wisdom, your experience. Falling, Washington, d C. What did you make of the news this morning about this Supreme Court potential ruling that has been leaked to the world. Weare initial take, Well, uh, we've never seen a leak, at least in our time modern times. We've never seen a leak of a Supreme Court pending decision. So that's

the first, uh, if you like stunning surprise. The second, of course, is what was written itself, which um, I have to say, if it is the law, if it becomes a Supreme Court decision in June, uh, it will take us all the way back to dread. Scott. We're not just talking about abortion. We're talking about reproductive rights. We're talking about contraception, We're talking about gay rights, gay marriage, the whole package. That's what this decision says to America

right now. It takes us back more than a century. Interesting, all right, We'll have to put that in context and will be a lot more reporting on this as we go forward, and clearly it will be an issue if these upcoming midterm elections. Matt Winkler, editor in chief Bloomberg News. Check out his columns. They're really fascinating talking about Gina Ramundo, the Commerce Secretary, and the benefits of investing in some

of these social programs for the economy. Katherine Hawkins joins us you, Sup, portfolio manager and senior vice president at Baringer UM. Katherine, I want to talk a little bit about housing with you because I take since the beginning of this pandemic, I've been so pleasantly surprised, I think is the way to frame it, how strong the housing market has been. And yes, we've had tremendously low interest rates, and we've got a change in how people think about

their work uh life balance. As we step back today with rising interest rates, how do you view this housing marketing United States? Hi, Paul, thanks for having me back on UM. I think that's a great question. I mean, we have seen a strong housing market, you know, despite the pandemic, and actually in the face of it becomes stronger, UM. And I think that there's a big concerned that that is going to lead to another bust that we all

remember in the two thousands. UM. I think the biggest difference of this market and kind of the two thousands that everyone is really scared about, is that the difference is from what happened fifteen years ago. These high home prices were then driven by really loose lending practices and rampant investors speculation in the market. There was a lot of financial engineering taking place and putting borrowers in homes that they really couldn't afford, um. And then we're hit

with some you know, interest rate hikes. Today, those housing the housing prices ingres increase is really driven by supply and demand rate. Throughout the all time record low, like you mentioned, Um, you had more people wanting to buy a home than you had homes. So these rising rates over the next several years should slow down that demand on home purchases. UM. And when that demand slows, I think we will see prices that the home prices will balance.

So you mentioned potentially waiting for a bust. Is it fair or what precedent makes this rally or this boom look kind of like a bubble? What do you think? I don't think it looks like a bubble. I think that the I think it's because of what is driving those home prices UM is so different than what we've seen previously. Again it's a demand on homes with a

low supply of homes that are available. Is really with driving housing prices up here where UM previously it was inflated inflated underwriting practices UM and just you know, you had incentives for UM the the appraisals to come in higher than they were, so you didn't really have a lot of equity in the home to begin with. And that's not what we see now. We see right now that borrowers have strong equity in the home. They're in

a home that they can afford UM. The research right now was really showing that borrows have stronger equity positions and household income UM and savings. So I think any correction or moderation and that we are going to see won't be on the same scale as we experienced in two thousands seven to two thousand nine, and I just don't see that being a recipe for a bust, you know, Catherine.

What I've learned over the last so we're speaking to people like you and and and developers is that one of the challenges in this country is not so much the number of units being built, but the type of housing being built. I e. A lot of McMansions are being built, um, but not a lot of entry level housing, and that's where the demand is, and that's where there's a problem in this real estate economy. How do you view that? Is that changing at all? I think that

is changing. I think because those entry level houses really um, you know, if you look towards the millennials are the ones that are driving kind of that increase there, and right now we're seeing that they don't want to um purchase a home. That's kind of where the single family rental market is continuing to boom. Those are you know,

kind of your your uh more similar track homes. Um. They're bigger than apartments, they have more privacy than apartments, they have a yard, um you know, for whatever pet that they want, but they're more on the affordability scale for those millennials, um, that are really priced out of a seller dominated market right now. So I agree with you. I think that you know, we're going to see a jump from that single family rental, you know, into kind

of the more um McMansion, if you will. But but I think that that's the millennials are driving that boom, and right now they're just not purchasing homes. Paul, I gotta say, I cannot wait to buy a house. I'm so excited. I live in a studio right now. There's no backyard for my puppy. I just we need room. We need room. I just sold a house. I could have sold it to you. You could have sold it to me. I would have traded your bag chips for it.

Thank you. That's all I can afford at the moment. Catherine. Let's spend it ahead to tomorrow. We're expecting an FMC decision tomorrow, of course, fifty basis point rate hike. Of course that has implications for the mortgage rates as well. I'm curious about just how much damage higher mortgage rates are going to do to this housing market. Yeah, I think when you really, you know, at Vertical, our business

is purchasing mortgages on the secondary market. UM. So right now when we're investing, what we have to keep in mind is that anything we purchase right now is going to be less valuable going forward. Right if we purchase that current market interest rates now, in six months, when current interest rates are higher, what we purchase now is going to be less valuable. Um. We're also we have to take in mind, uh, the duration. So when interest rates are rising, borrowers stay in their home for a

lot longer. In a low rate environment of borrow where typically holds their mortgage for four to five years before they refinance or pay it off to move into a bigger home, or you know, they get relocated. But in a rising rate environment, the borrowers are going to stay put. So we see the duration of a of a mortgage really go from four to five years to seven to eight years. UM. So it will have an effect on

you know, especially on the secondary market. We saw this in the last few months to where you have origination groups that have pipelines full of low rate UM loans that they have committed to close and then you know they by the time those get sixty days later get to close. You know, the current market rates a lot higher, so they're selling those off in a secondary market at a pretty steep discount, which is what we had seen, you know, probably three or four years ago. Um, and

we're going to start seeing that come back. So the spread bowl wine in the secondary market as U interest rates rise. Katherine Hawkins, thank you so much for joining us. Always appreciate getting your thoughts on the real estate market. Katherine Hawkins, portfolio manager, Senior vice President, Vertical Capital Income Fund, the New York Stock Exchange Fund Traded Fund v c i F is a symbol. We appreciate chatting with Katherine here.

And it's interesting we're seeing interesting mortgage rates move up. I know Matt just bought a house a few months ago, and I think he was saying his mortgage was three and a half percent or something. Now we've got mortgage rates a little bit more to five percent here. So just in that timeframe, hemplaining a lot. He's like, oh, I just bought a house, and now he's like, guys,

I bought a house. This total tone change in terms of him bragging about exactly, don't be interesting to see where mortgage RAITs need to go before you start to see it really impacting the demand side, which has been so strong over the last several years. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller. Put

on fal Sweey. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.