Jay Powell, Markets, and CVS (Podcast)

of red on the screen. How much of this is really the market's kind of bracing for all the FED speak that we're going to get today. I think it's like just a slew of FED speakers. I don't even remember what the count is, but it's like William's Boston Cook, Neil Cash Carrion's all today. I think it's too much. It's a lot. Well, I would agree with you. I think that I think transparency is actually a bad idea.

Bring back Alan Greenspan. I think I think that they tried so hard to eliminate the idea of any risk and risk analytics and your decision making when you when you make an investment or trade. I think it's a very bad thing. I think it acts He's functionally. We have so shortened the time frame on analysis it's actually quite unhealthy in many ways. So the markets are hunting for this devishnus. The signals out there is anybody pushing

poun didn't sound like he's pushing back. Well. Yesterday at Boston, Raphael I think, came out and said, you know, look, I think I'm pushing up where I may need to push up, where I think my peak rate is. Mr Kashkari was pretty clear yesterday that he said is where

he thinks we're going. Um. You know, I suspect it's going to be very hard from the litany of other members of the FMC to have much more of an impact UM right now, given um what Powell said yesterday, I would have, you know, and last week I was a little shocked last week. Look, as a general matter, I think the biggest problem they have is liquid is

too much liquidity. And every time they allow the stock market, which they seem to ignore and the definition of liquidity, to go rallying a lot, they're throwing more liquidity into a market. It's putting a little bit of you know, of of oil into a fire, and it raises the risk that they have to do more, and it it impedes with their impedes their efforts to try and achieve a lower rate of inflation in a short period of time.

And when I think people also, just as a gentle matter, missed to my my perspective, it's not just getting to two percent, it's getting to a stable, ambient two percent level. So you know, that's to me the bigger problem. I don't know how fast they'll get to two percent. I mean, I think Powell said it yesterday that they're hoping it will be some time next year. But you know, you could hit two percent in a day and then find out six weeks later you're at six percent. That's not

what he wants. And so I think the liquidity issues and constraints that the that the equity market seems to apply or a problem for them. Well, I'm still wondering, though, how much more we really even need to hear from the Fed. Look, I asked Alan Blinder, the former vice chair under Alan Greensman about this yesterday. He is the Fed over communicating? He said, Look, they're not over communicating at all, But how much of this do we do the markets really need to hear? When the message is

repeatedly the same. We don't know what the end terminal rate is, we don't know how much we need to hike or data dependent. How much value are you really getting from from that? Me? I think very little. I think the biggest question, again, let's take a different issue, is not just what the terminal rate is um. I think the market and if you look at the forward curve and the your dollar futures, it's been clear for a while. The market just thinks we're going to hit

a peak and then go right back down right. I think the fault. You know, the forward live or rates are three and a half or so, not very far out, and I think that seems to be a big mistake. The only thing to first of all, look how well

the economy is still performing functionally. Certainly when you look at employment, even with the FED having raised rates four percentage points, give it take half percentage points in seven months, why does anyone think that if we're going to slowly glide into a trajectory towards lower inflation, but we're still at functionally near full employment, that the FETE has to do anything but just stay where they are for a very very long time. All right, What's what's the lag? Then?

I mean, hell, you know what, what are you going to tell Jerome Powell? Well, first off, why do you

assume there's a lagnus? I mean, look, I've been I've been on the show with or on Bloomberg now almost twenty years, and I've been suggesting for actually this goes back to the late nineties, that zero interest rates are actually antithetical to growth and two very too good economic and financial decision making, and that at an ambient level of interest rates, say between two and a half and five percent, is actually a very healthy environment and this

economy will perform just fine at that level once you've gone through the transition of leaving ultra low behind you. And I think what you're seeing in many ways is exactly that there are parts of the economy that are responding to the to the upward movement in rates. But even now you're already seeing where two percentage points lower in mortgages and the mortgage markets coming back to life. Yeah, is it? So? Is is it working here? I mean, in the last about thirty seconds that we have is

the FEDS tightening policy? Are we seeing effects of it already? Or are we so to wait. But you've seen you've seen some effects on certain areas of economy, and you've certainly seen some effect on prices, although again some of that is as much due to the year on your comparisons to very very high rate levels. But what the

longer term effects are we don't know yet. But I wouldn't rush to judgment that that a three and a half to four percent or four and a half interest rate level is going to be catastrophic, which everyone seems to be working on. I'm just now reading his bio the University of Cambridge Department of Applied Mathematics and Theoretical

Physics fusion. How far off fusions exists already in terms of well, you're talking about energy, what you're talking about on the planet of it, I would bet it's forty years off. That the mechanisms for containing the plasma are a problem, but it's the first time they've actually gotten more energy out and man, and as soon as they get it working, of course, that's a tremendous step for humanity.

Although I don't think I don't think the President is gonna be able to complain about too much profitability for oil, the amount the amount of previous nuclear fusion vision whatever people that are now in the financial sector is hilarious. Anyways, Neil Grossman, former CIO with t k NG capitals down four tents of one percent, down down one NASTAC only down half a percent, which that's like not the volatility that we're used to in last year. What do you think, um,

do you are you attention to VIX? I know you're going to make it, Tom Cain, that's my point. Mentioned eighteen sixty seven right now, Now we remember back when it was seventies eighties. Yeah, it was I think in Pete COVID it hit eighty three. That was the highest volatility. But look you were getting eight, like seven eight swings in either direction. Um, but you know, that's a really

good question to ask. Our next guest, Michael Cogito joins US president and portfolio manager of the Permanent Portfolio family of funds, and he joins, of course, the program to talk about this market. Michael, thank he was always for joining. What do you do with the VIX right now? Sure? Good morning. Um, Well, it's an indicator of volatility and concern or fear, but it isn't an indicator of alatility.

Really I think, well, I mean right now, the numbers loaves and there's a lack of volatility, So yes, it isn't it's an indicator at the moment or a byproduct of a lack of vulatility. As as you guys mentioned, Um, you know, you're not seeing white swings like you saw last year, at least right now, and the market appears to be a little bit more calmer um and UM, you know, we'll see what happens. It's a long year,

but but that's what you see right now. Okay, So a stupid question for what is in the driver's seat fed uh FED speak earnings? What I would say the primary driver is the FED, and probably a second concern with the earnings. Um. You know, I think that the FED is story one and has been and will continue to be, and you know it was earlier this week

as well. I think what you've had with the FED is the what you're hearing out of the FED is consistent with the markets expectations, and as a result, the market is okay generally speaking with UM FED speak and where we're at and where we might be going, and so you know you've got kind of a quieter trade going on now. That could all be up ended, you know, an hour from now with some new information, But for the moment of the last few days, that's what you've had.

And even this week with Powell's UH uh d C, you know, one on one Q and A yesterday, I mean, there were no surprises there. UM. Earlier in the week there were no surprises. Or last week's meeting, there were no surprises. And so as a result, the market is settling down to more on fundamentals and UM and maybe UH selling off a little bit after the big run based on earnings, based on maybe a little too far,

too fast. But but you know, stocks were very oversold coming out of December, so that's why you haven't seen a big sell off either. I mean, it's settled into some sort of valuation that makes sense given the Fed and everything else right now. We were always told don't fight the Fed, but we're fighting the Fed. Why is there such a disconnect between the market pricing and uh the Fed speak. I'm not so sure we're fighting the Fed.

I mean, value relations have adjusted from December that some would argue they're a little even I might argue they're a little higher than maybe they should be given the macro with potentially a slowing economy. Um. In terms of how far they came in January, although you had such a strong jobs number last week that really I think was so strong it was a surprise. Um. And it remains to be seen whether there's some novelies and that

it will kick out and in further months. But you know, honestly speaking, it's very difficult to have a recession with the job market so strong, and so what that's done, what that's done is that's kept the soft landing scenario very much alive and the market is comfortable with that. So again getting back to the first question, Um, you know, think think the market perceives things to be okay. Um.

And and as a result of voltio is little muted. Well, does that mean that when it comes to the catalyst that then move the stock market on an inter day basis, You were then seeing more emphasis put on initial jobless

claims the payrolls report as opposed to say the earnings picture. Um. Well, I mean everybody has expected the earnings estimates to come down and and so far the earnings we're still you know, in the middle of ear each season so we don't really have the data on where they ended up, but that wouldn't be a surprise now given the run and stocks multiples have expanded during that time a little bit, which is a little bit interesting given the macro story

of a possible slowdown. Um, but while we may have a slowdown, you're not seeing it in the labor and and so you know, if people are working and spending, then it's very hard to have a deep recession. And as long as that's true, now, labors lagging indicators, so you know that could change, and and then you know, the labor just gets added to the other macro negatives.

But at the moment that hasn't happened. And and as a result, people like the economy, um, you know, soft landing, maybe shallow recession, etcetera, etcetera, And and equities are okay with that for the moment um. I think the one risk factor there in that story though, is that there was such a move and interest late last year and the feat is tapering, but still um, that move hasn't

been fully factored in. It hasn't worked its way through the economy yet, and so it's possible that there's more negative and increasingly negative news to come out in the future as those interest rates work their way through and actually slow things down. We haven't seen that yet, but that's still a distinct possibility. Just back to earnings for a second. That is margin pressure going to go away

anytime soon? Um? Well, in theory, if inflation alleviates, that would decrease the pressure on margins um and you know other cost factors. So yeah, the answer is yes, maybe, um, but we don't know that either. And the inflation has been coming down. I personally don't think it's going to

come down to the fetes two percent. I think it's gonna settle somewhere at three, four or five percent when all of a a sudden done, And then the question becomes, well, you know, can the U. S. Economy uh grow really you know readjusting to inflation rate at that level at least where we are you know right now. So you know that's not the The U. S. Economy has grown

with inflation at those levels. I mean you can look to the nineteen eighties for that, and you know the inflation rate took ten plus years to come down from where it was in the early eighties, Yet you had a good economic growth decade in the eighties for the most parts. So so it can do that, and you know that maybe where we're at the other factor, I think you have to consider with inflation that again we

don't know the effects yet. But you know, we passed three something trillion dollars in in fiscal policy with the Inflation Reduction Act and the Budget Deal late December. That money hasn't been spent, It hasn't cycled its way through the economy yet, um And so will that reduce the decline and inflation once that money starts to work its way through the economy and and so that would be a factor that would maybe mitigate the decline and inflation

that we haven't seen. So you've got a lot of cross currents right now going in both directions, and it remains to be seen where we settle. But but I think you know we're settling somewhere near at least in the short term where the FED maybe tapering and waiting, and that would be around that five percent number. Okay, So what's your investment thesis given all that, Well, we

would be pretty diversified right now under the theory. There's a lot of question marks and um, A lot of unknowns and there really is there's a lot of things we just can't answer at the moment. So we're uh, we we run a strategy that that you know, invest in a variety of different non correlated asset class to so precious metals, real estate, US and non US equities, and US and non US fixed income. And and we

would add to advocate a strategy that does that. UM. We think with inflation risk, with the uncertainty factor UM, and the amount of equity has been created over the last you know, several years, healthy investment in gold would make sense, especially if the fet IS is slowing down and stopping or maybe cutting at some point in the future. Over as well, UM equities were not negative on them,

but we're sensitive to valuation. We would recommend a variety of stocks and different asset classes so that you're not wedded to any one sector UM. And then on the fixed income side, well, lengthening duration probably makes sense at some point. We're not quite there yet, so we would advocate high quality and short duration fixed income, especially on

the on the corporate side. And we've found some opportunities in you know, pretty short term investment grade paper UM and then a health the doe so hard assets like real estate, commodities, so the equities of those businesses which you think on the commodity side, there's a there's a longer cycle at play in that space energy, you know, commodity metals, those sorts of things UM, and real estate as a hedge and and also potentially uh, you know,

rising rentals and all that stuff. Certainly something we're gonna keep our eye on. Brent Crude. Of course at eighty three as we speak, Michael Codino over at President portfolio manager sees me of the permanent portfolio family of funds, we thank you. As always, a lot of uncertainty around the inflation. Look, he says, Uh, if this situation changes, big surprise, the centerment could move faster than uh basis

point pace. Uh. He also said that it's a reasonable view most officials for a cast rates UH in the range of five and five and a quarter percent. That's what he's calling a reasonable view at this point. Thank you for rescuing me. I appreciate that. Well, well, let's ask if it is a reasonable view to someone who has a lot more experience than either one of us on on this front, and Yale. DiMartino Booth joins us.

She's a CEO, Chief strategist of Quill Intelligence. I believe worked for the former Dallas FED as well, so she has the capacity Daniel inside knowledge. Um. I was. I was kind of uh Richard Fisher's senior adviser on all things markets at the intersection of macroeconomic data. So I was I was a role that no longer exists at the Dallas head It's they eliminated the position Anthony left. Yeah, clearly. Yeah, they're like, we can't replace it. End of story, Like

we're just giving up. Um. But it was pretty fascinating throughout the crisis, especially drawing parallels between now and then when Bernanke wanted to foment certainty and Powell and his closest confidence Waller Williams, they want to foment uncertainty. So they don't want to they don't want from markets to lock anything in. And I think that that's why they're having such a difficult time communicating because that's not how we view the FED. It's not how we've been trained

for forty years to view communications from the FED. Well, I mean, we didn't get much communication a law when we had individual's law worth, we couldn't understand it when we had green Span. I mean, what, why is there the drive towards uncertainty at this point? I think they really do want to keep the window open to be higher for longer. And again, the only thing we've ever

known is lower for longer. But I think they're they're they're desperately trying to say we want to maintain rates at a high level that gives them license to continue conducting quantitative tightening quote unquote in the background, what nobody in the media ever asks him about, and what he

doesn't really talk about very much. Uh, you know, he was asked about mortgage backed securities, would you ever consider selling them, obviously for a big loss in this kind of high interest rate environment, to purchase him at two to and alf percent cuban Now mortgage rights are north of six um. You know, when when he was asked directly, he said, you know, it's not really something that we're talking about right now. Next more uncertainty, And I think

that I think that that's his goal, uncertainty. Yeah, it's interesting you bring that up with it the titening, because I just says an aside Europe. I mean, that's the big story I think for or potentially could be with the with a sovereign bond market. Why is it not as we do the unwind here? Why is that not a focus? You know? I think he has tried so hard, And I say he because I really do feel like the Federal Reserve is a community of speakers leaders. But

at the end of the day, we really are. I mean, yesterday was like, oh my gosh, the Super Bowl starting at twelve thirty. I mean, the whole world shut down waiting to hear Powell. So he really is this this one person mechanism. And yet you know, you don't get that same type of focus when you're talking about Europe and tightening potentially faster than the United States. None of

that really matters. If the Fed doesn't pause or pivot, If they really keep going, other central banks are going to have an effect on global liquidity and then the price of money. But if we maintain high rates and don't go in a different direction, if we're not the leader, if we don't follow the Bank of Canada in pausing, then it's all irrelevant, uh, you know, is Michael Burry said on on on Odd lots yesterday on Bloomberg it would be a paradigm shift. Paradigm shift. Some heavy words

from Michael Burry. We don't listen to the shows, just Bloomberg Markets and John and I listen to it on repeating that is all just kidding. Danielle, I am getting a question. I b to here into me. I want to talk to you about the divergence you started seeing the Federal Reserve. It feels like, whereas there was this consensus, especially in the back half of two where it was just be as hawkish as possible, until we start to see some cracks and inflation, that seems to start diverging.

Now we have Neil Kashkary on the most hawkish end um, others perhaps walking back some of the Fed's comments from last Wednesday, to what extent is that by design? To what extent is that divergence worth paying attention to? So I think, I think really to the extent that that the care Powell is guiding other speakers narratives. It's important. And when you are inside the FED, I mean, wandering off the reservation with a crazy view is looked down upon.

You cannot do that. So I mean you bring up the best example of all Neil cash Cary, whose narrative is completely flipped. We used to think he was the biggest dove in the world, and now he's saying, oh, maybe five point four percent, maybe we're gonna go higher. I don't think that that that type of communication is not is on articulated and condoned at the very top of the head. Okay, with your background and experience, what

should they be doing at this point? Look, I think what a few people are talking about, and hats off to Rubensteins were bringing it up. It's it's the debt ceiling. And it was yesterday it was Powell saying I'm not stepping in and doing anything. Good luck, I'll see you on the other side. That's I mean. People are not talking about this ticking clock in the background and the parallels to two thousand and eleven, which was really a

bad time for markets. And we've already had two rating agencies come out and say, if this really does go down to the wire, then we are going to be potentially flirting with another downgrade of the sovereign debt of the United States. People just are not They don't know where to they don't know where to couch it. They

don't know where to put it. And so I think that that that is the thing that so few were talking about, is that we could have a sequel of what markets look like in two thousand eleven, and that would not be a good thing. Was that really his remant? I mean, he's monetary, not fiscal or it's gonna bleed. I gotta look at twenty seconds, of course, I but there are ways for monetary to come to the rescue of fiscal and yesterday Powell said, not on my watch.

That's your that's your takeaway, all right. Danielle di Martino, booth CEO and chief stragist over at Quill Intelligence, we thank you as always on a crucial day. Of course, we're going to get a lot of fed Speaker k CBS shares higher though in the day, up about four percent on the session. Um, there's some M and A news here. There's also some earnings news. We're gonna bring in our very own. Jonathan Palmer, senior industry analyst with

Limberg Intelligence. What do you want to start with first, the earnings or the acquisition? What's bigger for you? Oh? Absolutely the acquisition. I mean the earnings came in and

kind of as expected a little bit stronger. But the real story here is this deal for oak Street Health, which has been rumored and bantered around by Bloomberg News in the Wall Street Journal for the last couple of months, and it really comes on the back of some other big plays here in the health st I've never heard of them, or maybe I should have, but now you probably haven't heard of them. I mean, they're a Medicare advantage platform that they service the Medicare advantage customer base.

They've only been around for about a decade. They have centers in twenty one states where they manage these patients. It's only I think a hundred and fifty five thousand as at the end of last year. But it's really a different kind of new age primary care platform, and primary care is kind of all the rage in the healthcare services business. We have Amazon buying one Medical, We've

got CBS with oak Street. There's been some rumors about some of the other newer platforms um potentially getting acquired as well. So everybody wants to own this primary care space. H The one I forgot to mention was your Walgreens owning Village, m D. So the move in pharmacy and healthcare services in general is to just make the umbrella bigger and and capture more of those patient workflows, you know, in their enterprise and primary care is the kind of

the next battleground. Does um anybody from Justice or the FTC say, hold on, wait a second, Well interesting you say that, because the FTC is going to be examining the Amazon One Medical and I wouldn't be surprised, you know, given that that they also look at this Oak Street and the CBS deal as well. I mean the reality is, you know, for me as a health care analyst, I don't necessarily see any conflicts of interest from a from a pure antitrust perspective for Amazon and and One Medical.

I mean Amazon, that side of owning you know, some pharmacy assets doesn't really deliver healthcare, so it's kind of hard to see where the conflict is. You know, CVS with three billion in revenue, you know, touching basically you know, the majority of pressure points in the healthcare system. You know, maybe there's an issue there, But again, they don't own a lot of primary care assets now outside of minute clinics,

which is a very different beast than primary care. What does that that mean for I mean, you mentioned the Amazon kind of trying to get in. I remember a while back. I think there was some sort of partnership between Amazon. I must say it was a Berkshire Hathaway and right. Um, do you start to see or are we anticipating more of those larger non traditional health players

to enter the space. My view is that you know, somebody famously set healthcare is very hard, and you know, the non traditional players have been trying to get into healthcare for years. I think Amazon's the furthest too long and very frankly, I would say they're at the end of the day nowhere in the grand scheme of things. I mean, they do have their pharmacy. They started a thing called Amazon Clinic, which they were offering two employers,

and then they quickly shuttered it. We'll see what happens with one Medical. Um. You know, again, one medical is not a very big player in the grand scheme of things either. And you have the Googles and the Microsoft's and and facebooks maybe hunting around the margin, but none of them have really stepped into the delivery of care in a meaningful way. So I don't see non traditional

players as being a huge threat. It's the incumbents like CBS, like Walgreens, like United Health who are really the ones who are are changing the healthcare system in the US as we know it. This is a potentially stupid question, as all of my questions are, do they eventually take over my local doctor's office? Well, yeah, I think they do.

I mean, I live in northern New Jersey and the big regional player in that space is a company called Summit and Billa g m D just just bought that uh so slowly but surely, the practices and the regional practices are getting rolled up into these bigger organizations. I don't think it happens overnight, um, but it is a trend that we're seeing happen across the country. And I just wonder how that impacts the health or that you get.

I mean, I'd rather deal with my individual doctor who has his own practice, rather than a giant conglomerate of you know, owned by whomever. Now it's a it's a fair statement. I think that's why there's a lot of skepticism, you know, among practitioners and and people like myself. I mean, I don't even know that the economics, you know, from the small business perspective even works for individual practitioners anymore. Well, that's that's one of the problems. I mean, we have

seen this trend where there's been consolidation among providers. That's why they've moved to some of these regional platforms and consolidated themselves into bigger practices which are now being scooped up by bigger companies. I mean the Amazon's are the one Medicals, and Amazons and United Health and cvs is of the world will tell you that, you know, when they're looking at at the long term, that they're going to provide you know, the best clinical outcomes at the

lowest costs. I think the proof needs to be seen in the pudding to know that that that's actually going to happen. I mean I personally, I mean I cover healthcare, I use everything. I use One Medical, Walgreen, CBS, right Aid. You know, I don't know that I have a great experience across any of them. So when I sit there and think about my primary care now being folded into one of these organizations, I wonder what the future state looks like. And I think that needs to be proven

out across the space. So that's more on the acquisition front. We have about a minute left. I'm gonna put you on the spot. Let's talk to us, talk to us about the earnings here, um and what really stands out to you there. Yeah, so they beat on revenue, they beat a little bit on EPs UM. The retail portion of their business was a little stronger because cold and flu has come back. UM. The PBM, which is their care mark business, continues to hum along. John Menchelin's specialty.

That's a that's always been a big driver of that business. And the benefits business too is humming along as well. There's not really any sea changes in in the core of CVS. I mean, the most exciting thing is that they've had this uh strategy of wanting to acquire primary care and they've been talking about it for a year paus now and and now it's finally come to fruition. So we'll see how that shakes out. But you know,

by all accounts, the markets positive on this deal. Do that make any money selling milk and you know, good ease and stuff like that at the front of the store, Sure they still do, but you know, a lot of that has been impacted by online you know, whether it's Amazon or Walmart. You know, the driver of the pharmacy business used to be that you had the pharmacy and back and you had to walk through all the aisles and you you pay you know, over plus for the

items that you need. But you were willing to pay that for a convenience factor. That's slowly shifting. Okay, that's where I get the Valentine gifts, CBS, the candy. I mean, it's it's a pretty great selection. Um. Jonathan Palmer of Bloomberg Intelligence, we thank you as always covering the health care space. I have a bond market question before you introduced the guests. Do you buy for yield or you're buying for the price depreciation? Um? I believe, Excuse me.

I believe it depends on investment grade versus how yield the way I was taught. Okay, Um, but I believe you're buying for the spread change. Anyways, we should ask Brian Whalen, Co, Chief investment Officer and generalist portfolio manager with t c W Investment He invest Management. Excuse me, he does join us on the phone for his monthly segment on the latest fixed income market moves. Let's start there.

Brian answer John's questions, do you purchase? Yeah, I'll ask do you purchase for a yield appreciation or the price appreciation? Because it was the spread they traveling opposite directions. I think the answer is yes to all the above. You answer for all that and more. I think you you buy it depaying your time rise, and you buy it for the yield, which right now looks better than it

has in a long long time. You know five um, if you have an opinion on the economy and credit spread, you buy it for the total return, which could be the price impact up or down to pen on which way you know, spreads and interest rates go. And then the third reason he didn't manage it, didn't mention excuse me? You can buy it for what it does in your portfolio.

You know, obviously it provides some diversification. Maybe not last year, nothing provided diversification last year, but typically uh and certainly at a at a yield of about five, you know it can offer some diversation and hedging against other pieces of your portfolio, like equities or alternatives or emerging markets. Let's go a little bit more nerdy. If we shall because I'm the person keep going because I'm really a genuinely confused when it comes to the bond market. Look,

they're tied. It's tied at the hip of the Federal Reserve. No brainer there. There are cuts priced in, no brainer there. We're looking at a tenure yield that's really just trading in a range, and it have been for the last few months. So why should we care about the bond market right now? Oh? It drives, it dries everything. I don't think the equity people like to admit that, but that's that's the truth. I mean, you know, it's it's the smart smart John. I'm glad you said that. I'm glad,

but I can't say I disagree. I mean, it's it's it's behind everyone. You know, a neutral John, you can't take the side of the bond people. Oh my god, it's your cost of borrowing, you know, it's it's you know, it's it's your cost of capital. It impacts currency markets, I mean, it has, it has ramifications throughout the global economy. So you're supposed to focus on it. Yeah, I mean it's been amazing. I'm given how volatile last year was.

You know, the ten year. Um, you know, the five ten in the thirty years kind of all kind of settled into a range here. And you know, since the employment report last Friday, we've had a little bit of a sell off, but um, you know, honestly, it feels incredibly um, I'll say, almost son of seamless um in terms of the adjustment the market just made. You know, it's a very strong employment on Friday. It basically then just said, okay, you know what, five or it's not

going to be the upper bound. It's gonna be five and a quarter percent. But once we get there, the Fed's gonna stay on hold for most of the year. And then, just like we've thought for months now, by the end of the year, they're going to make a couple of cuts and by the end of four you know, we're you know, we're they're going to make at least in a hundred more cuts. Uh. And so it's been amazing just how strong that member was. What I'd say is a fairly seamless adjustment, both in the bond market

as well as you know, every other market. But that feels like a fairly consensus take there, which then brings me back to my original question, how do you even trade it? Then? Is that why we're seeing this trading range for the tenure, but you're also seeing in the two years as well. Is it because those cuts are so strongly priced in that's essentially creating a cap. Yeah, you know, I'd say the this whole market reeks of

in patients. You know, it's year to date, it's got kind of like a fomo rally, meaning you know, I think you know, it just feels like investors want to look around and say, all right, you know, we're ten months into a tightening cycle and the economy hasn't rolled over. You know, an unemployment is still low. It must be a soft landing. There isn't gonna be recession, and therefore

I'm gonna run out and buy risk. And you know, I think we kind of scratch our heads a little bit and say, you know what, like, you know, the term long and variable but didn't come out of nowhere. It's there for a reason. And typically typically ten months into a monetary tightening cycle, you don't have a recession. Yet you don't see the economy rolling over, especially this time.

You know, we came into you know, the consumer had well over a trillion dollars of excess savings, you know, and when you look at an employment report ten months into a tightening cycle, with that kind of kind of momentum in the economy, and from all that, you know, that accumulated savings, it shouldn't surprise anybody that we haven't

rolled over yet. But it's just gonna take some time. So, you know, when we look at interest rates, or particularly when we look at things like credit spreads, like you know, high yield trading at three ninety over treasuries and if you exclude kind of the distress part of that market, hi yield bonds only offer a yield cream of about three percent over treasuries, which I will tell you, and you know, the listeners, that's pretty that's that's not a

lot of compensation. That's what we call that's pretty tight. Uh, it's certainly not indicative of of the risk of entering our sessions. So to my first point, it just seems like the market wants to kind of a rush to judgment on what this monetary tightening cycle has done or has not done. And I think, you know, we would kind of caution everyone to be patient because, uh, you know, monetary tightening is long and variable, and we think we'll see the impact of it later this year. Okay, we

both get duration. It's just like how long is the instrument? Right? Can you explain to me give me the real stupid person, me being the stupid person, explanation of convexity in the bond market. Oh, that's the that's that, that's your change of duration. Let let me let me give you an easy example. No, no, it's just we're gonna out your your I warned you your you're you're ready. He's gonna plumb it here. But let's let's do it. So when

you started, thank you, here we go. You've got a mortgage, right, and you have an option you can either pay that forever you know you can, or you can refinance it when interest rates drop. Right, And that means if you think about that, from the timing of all the cash flow that you're paying, it can shift. It can get really short, or it can shift out really long, depending upon what you want to do with your prepayment option. Now, picture a bond backed by a thousand of those mortgages.

What happens is everybody's got a three percent mortgage. You enter a year like two. When interest rates sell off and get much much higher interest rates, you know, mortgage rates go to six or seven percent. Most homeowners are gonna look at that and say, you know what, I love my home, I love my school district. This is

a great place. I don't want to move and pay six percent a three percent, So I think I'll sit here for the next thirty years, which means the bond backed by a thousand of those decisions, just went from being a three year bond to a seven year bond. And I will tell you when you have a seven year bond, it's price goes down a lot more when

rates rise in a three year bond. And so that's what happened to the mortgage market last year, and that's actually why it's one of the cheaper areas of the market. It extended, the price performance was very poor um and a lot of investors fled that market, which made it cheap, which is why it's one of the few places we actually have, let's say, a higher exposure than other areas because it looks cheap because of that extension of duration,

which is negative convex me. Did that answer your question, John Tucker? It does. It's also I guess explains that it's kind of different on the way up and from the way down. There's a different dynamic in place. I guess first drive to bond math right here on Bloomber Radio Market. Yeah, those of you, now that was great. That really was Brian Whale and co Chief investment Officer and generals portfolio manager at we T c W Investment Management. We thank you as always, 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 three pt on Ball Sweeney, I'm on Twitter at pt Sweeney. Before the podcast. You can always catch us worldwide at Bloomberg Radio