Jay Powell, Tech, Credit, and Markets (Podcast)

He'll be back at some point, but he's missing. An all star round table here. Neil Grossman, former c I O with t k n G Capital, Danielle di Martino Booth Quill Intelligence, both in our Bloomberg Interactive Broker Studio, stars from Paul Gold stars for me because you're not phoning it in your coming. All right, guys, here's my takeaway. I don't know anything, but you guys are the experts. But listening to Pal yesterday, I just felt like he's

over doing. He's over compensating. Danielle, do you agree. I don't think he's overcompensating as much as he is. He's kind of the new sheriff in town, and he really is. I maintained that his aim is to kill the feed PUT. And if you want to do that, then you disregard any signs of slowing inflation, You disregard any kind of anecdotal data on the employment market. You just stick to the lad the most lagging data in order to continue

pushing through with your agenda. If your agenda is to kill the FED put, this agenda to kill the FED put, or is it? Do we take him out his word? Neil, I'm just here to fight inflation. I well, first of all, I agree with Danielle. I think the problem is that he's doing as little in the sense as he did before. I mean, if you want to we had hyper liquidity for generation, and in fact, I think it's not only killing the fed PUT, but the problem with letting stocks rise.

I mean, you look, you went from thirty four and changed to almost four thousand and week or ten days. Ask yourself what four s and P points equates to in liquidity. And the bottom line is if they're going to reflate the stock market while you still have I I don't totally agree. Yes, there are signs inflation is coming down. But the real question, by let's let's throw back in a really interesting word called transitory. We are going to have a transitory period now where prices moderate.

My guess is by next June or so, we're gonna probably at four and a half to five and a half six inflation. But the real question is going to be where we settle in after that period. And my guess is we're gonna be lucky if it's three to five, and it's going to have high the upside risk if they don't do why did they talk about two? By the way, Well, there's their mandate zero. Let's keep that in mind, price stability. If anyone has any mathematical training,

zero rate of change. Well, green Span maintained that zero was the absolute ideal rate, and it was not until green Span left that Bernanke and Yellen were able to tag team and impose that two percent inflation target. That became very arbitrary. Well, so I would not agree with you with not or I think the problem is they have a dual mandate, which is full employment and price stability has nothing to do with equities. The problem is it becomes a two factor optimization problem and you it's

almost impossible to get both near zero. The sad thing is they actually had it almost perfectly in a sense, with one and a quarter one and a half inflation and roughly in unemployment at these rates, and and um Powell and BERNANKI decided they wanted to say that's not good enough. We want to push inflation up, by the way the two percent averaging, which they've gone for it, so I think he should do. You're gonna have to run inflation at one percent or less for almost a

decade to get back to a two percent average. They've let the cat out of the bag, and the distortions with this type of inflation are gonna are gonna propagate through this economy and for a long time to come. Well, Danielle, that brings me to a question on the fiscal role that Washington, Washington plays. We're looking at two percent long term inflation target? Is that taking into account these massive moves from Washington to bring a lot of this manufacturing

right back here state side, things cost more money. Wage spiral is a very real thing. Doesn't that kind of throw the two percent long term inflation target out the window? The whole idea of on shoring, is that there's an implicit agreement to have wages run higher than they have before, given what caused off shoring to begin with, which was

desperately seeking lower wages somewhere in Asia. So, uh, you know, if this is really the long term goal, and you see in company earnings reports and conference calls that there are tons of mentions of freend shoring, reshoring, talking about building stronger ties between Canada, Mexico, and the United States, all of this is going to be inflationary on a long term structural basis in order to reverse years of effectively China exporting deflation to the United States via lower

wage costs. But then why is the Fed still sticking to that two inflation target? Then I think right now that the two percent inflation target gives j. Powell cover because it's such a difficult number to get back to. But he keeps repeating the number two, meaning don't get your hopes up that that I'm going to pivot if it hits four. Maybe. Well, first of all, again, this is the problem, and this is my legal side, you know, as a lawyer as well, um the shop. Um, the

the problem is there's there's a statutory authorization. The FED is an agency that is created and it's been given a legal obligation. It really shouldn't be up to the FED to read deefine, which by the way, they have been doing for a long time. But for the FED to simply say we don't really care and inflation shouldn't be that's congress is obligation. Congress can change it. Otherwise, the FED should be looking at what the authorization statutes

say and they should be following it. And that actually, again one of the things I like to say about economists, they're not really mathematicians. They use the wrong mathematical manifold, the manifold they should be using as a five or ten year lens. And trying to do things for three weeks to have a shorter time span than a tweet is a bad idea. Like a true trader, Danielle, are we going into recession here? I just had the bunch of transportation companies saying they don't see it, but boy,

everybody else seems to see it. Well, it's ironic that you say transportation companies, because truckers are going out of business at the fastest pace in two thousand eighteen. Right now and transportations in a pickle um. But no, I I don't think that there should be a debate anymore about whether or not we're going into recession. When the conference board queries uh CEO of them say that we are or almost in a recession and thereby you know,

therefore they are in cost cutting mode. I would point out that the I S M Services UH survey that just came out a few minutes ago showed that that employment actually such a contraction last month. So if if the employment caboose is finally going to come into the station, I mean, that's that's the final nail and the coffin

of the recession debate. I'm confused, Neil, when it comes to what you're actually supposed to do in this environment in terms of the trade itself, because it kind of felt like the bowl case for the equity market and arguably for yields as well, was the idea that the terminal rate would stall out at five percent and that was going to be the peak policy rate. But it keeps kind of shifting higher and higher every every couple of months, So it kind of feels like there's this

consistent upside risk that just doesn't go away. What do you trade in that environment? Well, a couple of things. Right now, I think UM number one. From a dollar perspective, this probably still raises um the strength of the dollar, at least in the short term. You're seeing, for example, commodities come off today. I think probably commodity prices have some pressure, which of course is what they what they want. I've been having a rougher time trying to figure out

what I would do with the yield curve. I'm looking for a point where I can actually put on a yield curse steep and her. I think the long end of the yeld curve is still too low, but you know, you're still fighting with the adjustment at the front of

the curve. And from a broader perspective, what I like to in this environment I use I use optionality because I think with higher volatility prices, even though we have had the haven't had the explosion in volatility that you might like to see, volatility is still high enough that you can put on trades with very very favorable break even. So, um, that's sort of what I've been doing. Um. Hey, Daniel, you know, I'm a simple equity guy, and I get

the inflation talk. I get the recession talk. I think I've got that. What else am I missing? What's the thing out there that you think maybe investors or people in general are just not talking about enough, are thinking about enough? So I think I think what is getting left behind is any talk or discussion of what's happening in the credit markets. You've seen rates volatility, The VIX is like subdued, Yes, it's like it under a rock. But rates volatility viewed through the move index has just

gone ballistic. It's at the highest level since two thousand seven, and it's basically saying there's a credit event lurking out, lurking out there, and we forget that in two thousand eighteen, the last time we were trying quantitative tightening that it was a credit event that actually bled through into the equity market at around this time of the year, heading into Thanksgiving in the holidays that caused that that Christmas Eve sell off in two thousand eighteen, which by the way,

prompted the first pal pivot. That's right, That's right, So, Neil, I mean again, I'll I'll put it to you. What what am I missing? I'm a simple guy. Well, let's buy stock. Let's go to things for going back. Let's go back to the Fed for one moment. That there are two things they're watching, employment and inflation, and the employment one is beginning to rise in priority because the

unemployment rate has stults so low. You have to understand, if you went back in history up until COVID and what happened afterwards, the single highest twelve month average job creation was about three thirty thousand a month. Even after last month's number, we're still at four hundred fifty one thousand a month. So and and an historical basis, the general view has been that a hundred hundred fifty thousand

is a static employment market. Now, we have a very low um job participation rate, and so if you can get a large jump that would help bring that, you know, push up the unemployment rate. But if we're not going to get that, To get a four and a half percent unemployment rate, which they're talking about is going to take a lot of work, and even that, well you just have to look at them. It may happen next year this time, but it's not going to happen easily.

For six months. You're gonna have to lay off, you're gonna have to have losing jobs two hundred thousand a month for six months net to get there. So I'm gonna push back a little bit if you if you look into the weekly jobless claims data, which appears to be benign on the surface, you'll see that in early September that jobless claims nationwide we're down. In the subsequent weeks up until this morning's data, now they're down. Continuing claims bottomed out in early May. They have continued to

quietly march upwards. Continuing claims is the one that you should follow more closely because that's people actually week after week collecting unemployment insurance. So that's an early May low point that I think there's an unemployment rate shock building in this system right now. Just just what this economy needs. Al Right, guys, thank you so much for spending this extended a period of time with us. We really appreciated

smart discussion. That's what we tried to do here. Neo Grossman, former CEO of t k n G Capital, and Daniel D. Martino Booth of Quill Intelligence, both in the Bloomberg Interactive Broker studio. They are not mailing it in so the guys, you get gold stars here. Read on the screen for your equities. We've got the ten year treasury yielding four

point one four percent here. I want to check in with a professional who does this stuff for a living to get a sense of where we go from here, because we have a Federal Reserve that is raising rates and they may go even higher than market initially anticipated. Brent Shooty, he's a chief investment strategist for Northwestern UH Mutual. We got an NBA from Chicago, so that means he likes numbers. I'm not a real big numbers guy, but

that's why we talk to these smart people. So, Brett, what did you take away from FED Chairman Pal yesterday? Because that seemed to move the markets yesterday afternoon and today, so I think it's good. I started talking about long and variable legs and so they've done a lot already,

and the economy is weak. We can talk about that because I keep hering the economy strong, and I think we're one jobs report away from ending that conversation, which maybe tomorrow's um but in general, I'm glad they brought that conversation in. But to me, the FED is still too backwards looking Um, they are looking at the CPI data and that's what they're looking at. And they're so worried about the US to the nineteen seventies that they're going to go too far. I don't. I don't think

they have to do much more of anything. I think you're seeing the economy weekend. I think you're seeing all the forward looking variables of inflation coming down. That's why I think the market is actually starting to come off the boil. Just are starting to rally just a bit today or at least erase some the losses because the market sees the potential for a week jobs report tomorrow and then what happens to me, I think that's gonna

be done soon. One of the things that stuck out to me which Harryan Powell spoke yesterday was he said, well, the risk to overtightening is still less than undertightening. And the logic he kind of put out was if we overtightened, we can use our policy tools a k a. Cutting rates to kind of reverse and back pedal a little bit.

But I have to ask if, if if the Federal Reserve has undergone so much scrutiny for perhaps using of the idea of cutting rates to the point where created kind of a bubble in asset prices, which I think is consensus now that it did. Can we really take to your power at his word that he's willing to cut rates when it has gone too far. I think you hit the nail on the head. I mean to me,

if you recall. So the odd thing about all this is that you know, two or three years ago we're talking about deflation and talking about getting inflation up, and the Federal Reserve would tell you, look, we have all the tools necessary, so when inflation rises, we know how to stomp it out. But we don't know how to create inflation. We don't know how to create recoveries that are really robust yet. And so think about what he

told you yesterday. He told you the exact opposite. What just goes to show you how how how kind of reactionary this Federal Reserve is. And to me, I don't think that's as easy as that. I do think they will cut rates. But what I worry about is that you have all these people who have been rehired into the labor market. I worry that they're going to lose their jobs and then become disenfranchised and drop out of the labor market for some time, which will hurt our

economic growth. I don't think the FED needs to eviscerate the labor market to get inflation down. I think it's happening, and I think it's so um. I don't know what the correct word is. I think his comments were a little out of line with what reality actually is. Pretty guess where Brent in the Northwestern Mutual folks reside is the Chicago. No, it's even better than that. Remember my favorite financial market that is most overlooked Milwaukee is Milwaukee.

The wicked smart people Milwaukee. I was there two or three times a year when I was a cellsider, because there's some smart people there, you know, Northwestern Mutual. We've got the strong folks, lots of good I've never been. Oh, it's awesome, especially in the winter. You go there for the winter car Yeah, we gotta get blue Market Field trip. Yes, we'll go to walk and you do it in January, go to like the winter festival where it's like twelve below and the people like a happy planning out the

air conditioning all day today. If all not ready for Milwaukee, winter comes exactly all right, Brett, So what do you guys thinking at Northwestern Mutual? And by the way, you have some of my money, so so behave carefully. What do you guys think about a recession here? Is it gonna are we gonna have one? Is it going to be a deep one, a long one? What are your thoughts? I mean, I unless the FED decides to keep going and tightening into it, I think it's going to be

mild just given the state of the consumer. And that's brought up quite a bit. But the consumers in as good as shape as they have been since nineteen seventy from a balance sheet perspective and from an income statement perspective, yes, rising grates will road that UM. But if you look at what mortgages have been delivered the past thirteen years, or what mortgages have been chosen by consumers, they're fixed and so it will happen with a with a lag UM as far as kind of harming that UM that

income statement. So there's still in good shape. Uh. And I think that's an important effect. You know, at the beginning year we call for an uneven recession UM, and I think you're seeing that right now. I think parts of the economy are in recession. You're seeing job losses there, which I I do think the jobs market is weakening. I can give you a data point here in a second, UM, but I think you're seeing the services side kind of carry away. It's not a recession yet there, and so

overall I think it's mild. I think it's uneven. Uh, And I'm hopeful that the opposite side of this is much better. With the standpoint of both stocks and bonds, which, as you mentioned in kind of creating your bubble comments, they've both been repriced to more reasonable levels. Right now, the Broactly's aggregate yield five, people are hiding in the front of the yield curve unnecessarily that began the year one.

I think people should think about, um not hiding in the front and not hiding in cash and beginning to potentially lock in some of these rates that are a little bit higher longer term as a just in case we go back down to based upon the Fed's reactionary has pretty kind of opened with the FED actually cutting

rates back down to again front. What does that then mean for the equity market if we have now priced in or are pricing in, for example, even higher terminal rate than five percent, which, by the way, just a couple of months ago was such a contrarian take, especially from Anna long over Economics way ahead of the game on that call. But if we if the if the goal post basically keeps changing, does that just mean that the bull case for equities may never resurface, or at

least that's what it feels like. I'm sure for a lot of short term traders. No, I mean, I certainly it will. And I think if you've looked, I mean the cheaper parts of the market that we've encouraged people to invest in network under love, that are unloved for the prior four or five years, are the areas of the market that are actually doing well, and they're actually cheap right now. Um. And so I'm not suggesting that

earnings might not fall some more. But if you look at small caps, the S and P six hundred, not the Rustle two thousand, they traded around eleven times earnings, eleven and a half times rings cut my earning. Um certainly, Um, you know it won't be pleasant, but they're still roomed

um from that standpoint of margin of safety. And I think on the opposite side of this, if we're able to get past this inflation without too much damage inflicted by the FED, think about the opposite side of that and asset class being one that typically performs well earlier in an economic cycle. And so I just think it's a little bit different position that people aren't used to. They're used to buying tech stocks, are used to buying growth stocks. UM. I still think value owes opportunities. UM,

you can own sector neutral value, which we own. You can own US UH small caps and dare I say at some point UH international stocks after we get past the FED talking tough and overtightening. The opposite side of this, if you're a US based investor, could have currency strength that will that will be a tail wind, not a headwind like it has been over the past few months. All Right, Brent, great stuff. We appreciate it as always.

Brent Shooty, chief investment strategist for north Western Mutual based in what I think is a financial powerhouse hub of Milwaukee, Wisconsin. I'm telling you there's a four or five six really good firms in that town. I think it's you know, you go to Chicago, yeah, but you gotta go to Milwaukee when you're touring the Midwest and seeing the smart money managers check it out. Yeah, we'll do it. Do it in February when they have their winter carnival. It's

like twenty below. When the people are happy, they don't mind it. It's it's good stuff, Nathan. We've got so much tech stories to digest, and but it's the it's the I don't want to say tier two companies, but not your megacap tech companies, your qual calms, your Twitters, your pelotons. We were given strict instructions by our producer Slash DJ slash bouncer Eric Molow to run the gambit with blah blow. Well, we do have quite a lot to talk about with Ed Ludlow or West Coast correspondent

out there. The are you in the nine sixties studios in San Francisco? Their Ed, I am in the nine sixties studios. Hello from the nine sixties studios. Gotta flog all the frequencies, Ed, what is going on with Twitter? How how deep is this ax gonna fall? We heard seventy five percent first, now something like fifty. What's going on? Yeah? I mean deep? We reported Kurt Wagner and I last night that the list was finalized at around thirty seven

hundred Twitter staffers to be laid off. Um. There was a meeting I understand, between Elon Musk and some of the allies he's brought in to run the place, Jason Callicanis and David Zachs and and Shri ram Um from A sixteen and and they are finalizing this. I'm told that staff will be informed of their their situation on Friday, whether they're laid off or not. But I think it's

a bit more than that. Remember they Twitter is one of these companies that has a sort very broad work from home remote working policy, and my understanding is that Musk is going to cancel that you have to be in the office if you're if you survive. Um And the expectation from Twitter insiders is actually a lot of people will resign anyway because they don't want to work

in an office. Should we believe that this kind of eight dollar Twitter verification thing is really going to pan out in terms of making Twitter a legitimate, uh legitimately monetized company. It's really interesting, isn't it. Kurt and I also reported yesterday that this change eight dollar Twitter blue could happen as soon as Monday, and the big focuses on verification, Right, you're paying for the privilege of a blue check rather than being verified because you are actually

who you say you are. There are four hundred and fifty thousand ish verified users currently, So you guys do the math. Eight dollars a month times four hundred and fifty thousand times by twelve months of the year. It's a it's a it's a negligible sum of money relative to the core advertising business that it stands as it stands.

But take this as a whole layoffs an eight dollar premium subscription service coupled with the existing ad platform, and there's a real focused on cost cutting and profitability here from Musk. If you think about the debt burden on this company as well, which is incredibly important. Yeah, it's going to be a long road ahead in terms of a turnaround here and the volatility that I think we're probably going to see for quite some time when it

comes to Twitter. But what about Peloton here, we got weaker than expected earnings there, but you hear from the management they're saying they're well on track to their turnaround plan. Yeah, it's fighting talk from from Barry McCarthy. The ship is turning around. The data doesn't not back that up. That the forecast of the final three months of this year seven hundred millions to seven five million dollars of sales well below what the street was looking to profit well

below or the loss wider than expected. I should say, the real thing the streets seizing on is that the growth doesn't appear to be anywhere. Where is the growth coming from. Um subscriber revenue did beat in the court had just gone, but the overall number of apps subscribers, the people that are using Peloton software dropped off. And the story here is supposed to be a company that's moving away from bikes and treadmills to that software emphasis.

But the user base is getting smaller. That's not a good sign. I think the other thing as well is that we actually have no evidence from Peloton, no matter how hard they try to restructure, that the consumer has normalized in the post pandemic period on how it uses at home fitness technology. We know about people going back to Too Jim's, but there is not actually evidence that we're getting a picture for the future of how somebody uses a peloton piece of hardware, all the classes at home.

What is the addressable market there? That's the concern from the street. I want to ask you about qual Calm as well. We got about when it's left. We were told to run the gamuts, were running the gambut qual Calm as well. What's interesting to me about qual Calm is that they're talking about this ass of iPhone deceleration and there is this macroeconomic concern, but the bigger exposure is to China. I'm curious about how a lot of these chip companies, given COVID nineteen lockdowns are kind of

a regular feature, are navigating some of this. You know, according to Qualcom, it's a simple formula that the COVID lockdowns in China are impacting handset demand. Um broadly. There are two key things to take away from Qualcolm. They had said that for four year twenty two hand set shipments would drop single digits. They're now saying as of last night it will be double digits. Qualcom is the biggest maker of smartphone processes and it's the main modem

maker for iPhone. So pick up your iPhone in your hand. Just believe me, there's a little piece of Qualcom in there. There are a good lens of what's happening. The other thing is what's happening in the chip sector. Supply has got better very quickly. Demand has dropped off a cliff, largely attributed to China. What does that mean inventories? Customers

have eight to ten weeks of inventory. What does that mean by extension, They're not ordering more chips, They're waiting to work through those in and trees, a reverse of what we've been talking about for two years. And Calcolm see that phenomenon lasting a couple of quarters. It was not a good earnings print and a good outlook, and the streets worried, but a little bit of sympathy for Qualcolm. The third quarter calendar quarter was a record revenue quarter

for Qualcom, So congratulations to them real quick. And Nicola looks like it's going to be a little while longer before they get to part the territory. Nicola bad. They will not be three trucks this year. They will have a much worse year in and then expected. Customers are very hesitant. They're not investing in electrification and they're not investing in the charging infrastructure that that helps actually move towards a battery electric truck, some limited progress on a

hydrogen fuel cell truck. We're a long way away from this company making meaningful money. I had to get you electric vehicles one last time before we let you go, and thanks for that. We have a truly transnational broadcast Eric Coast to coast, San Francisco to d C, New York. Very exciting stuff. We just need someone from Milwaukee. Maybe Paul Will will call in. Well Ed Ludlaw West Coast correspondent. We thank you as always creating a Nathan Hagar filling

in on a really exciting day. Nathan, I mean like this is a post fed You're seeing a very strange reaction in the stock market. It feels like there isn't really a consensus on whether or not the terminal rate could go much much higher. As a chairman, Powell is is certainly suggesting in his press conference, never less, bonds are selling across across the spectrum, across maturities. There's a

lot to digest here. And when we have this kind of conundrum of where do we even start, there's only one person to bring into the conversation, That of course is Liz McCormick. She's our chief markets correspondent on the effects and rate space, writing a pretty interesting story about all the FED is still enemy number one for a lot of these Wall Street traders. Liz, thank you as always for joy eating us. It's hard to pick a place to start because there's so much going on here.

But if five percent is no longer the terminal rate in March of as was price didn't going into the meeting, how high can we go? Yeah? Boy, it's like a brain spending time, right, Um, it's I think all bets are off now, Like how was just so crystal clear? Like, hey, the data we saw since last meeting means our rates that we're going to project or higher, and so the markets pricing the terminal rate, it's interesting creating like out

to June. It's it's got to have five point TwUI ish now, right, So and you don't see barely any cuts by the end of the year. So that's like FED higher keeps going higher and it's very slow to cut rates, you know. So that's kind of a double problem for bond investors, right, high rates and sticky high rates. Yeah, it keeps getting pushed back and back and back and now we're seeing the inversion on the two's ten year

at fifty five basis point. And so I'm looking at a chart on it where it's like a spread that we're not we haven't seen since the early days of the Reagan administration. It makes you wonder how much further the idea of long and deep recession could be going in the bond market. Well, yeah, that's totally interesting, and I think you know our Jersey and our Blueberg the Eye Group had a note saying, you know that that inversion is going to go further right beyond these like

already like you're saying historic levels. And but the Feds in a bind, right, I mean, Pal said yesterday the kind of path to a soft landing is getting worse. But they they're backs to the wall with inflation high. So yeah, Nathan, it could be that they have to go so far and the recession maybe a worse recession than it would have been, right because the system, like look at the housing market. Luckily, I'm not buying a

house now, but over seven percent. Yeah, Les, I asked this question to to I think a source of yours actually, Danielle DiMartino Booth, who is a favorite of our show. We talked a little bit about this comment that Chairman Powell had made his press conference. He said, well, the risk of overtightening is actually perhaps not that bad. And I'm paraphrasing, of course, but he says, we can always take a u turn. We can always kind of use the tools in our toolbox and and cut rates if

we if we go too far. But Liz, in an environment where the Federal Reserve has gotten a lot of scrutiny for using those rates, um and for quantitative easing as well, is there perhaps some hurdles for Chairman Powell to actually cut rates when the time comes. Yeah, I mean that you're right. It's a good point. And I really like Danielle like you said too. But yeah, I mean it's not so easy, right, you know. Like um, he seemed to say, well now, and he said in

the past it was vice versa. But now, like you said, he said, the risks are you know, we let inflation stay too long, we can you know, and that's a problem. So we can always cut rates. But you're right, Um, you know, they they're in a situation where it may not be that easy, especially you know, created them to kind of redeploy que. There's a lot of political pushback against that, right, you know, So I don't think he's

got it too easy on either way. You know. Yeah, if they turn around too soon, and if they were to pivot, which they definitely didn't yesterday, and they let inflation get too bad, then then they got to double down and then hike again. But I think you're right that it may not be too easy if they crush this economy just to quickly revive it. So could things get worse before they get better next year for the Fed, laz And Well, I think sounds land. We should all

not look at our retirement accounts now. I think it's going to get worse for everything, Like stocks are obviously taking it on the chin, the bond markets down. We've we've had that sixty forty. There was no place to hide in the last year or two. And if the Fed we've got two CPI reports before their next meeting, if they're still strong, I mean, nothing will change as far as them seeming hawkers. So I think rates could go higher. This kind of sixty forty pain could last.

And I'm not an equity analysts. I'm just saying you know what I see on the screens. But yeah, and you know, Pal, that's what they need, even though senators like Elizabeth Warrener saying we don't want too much pain, but Pale saying, sadly, we're going to have to have some pain for the American people. Otherwise the pain could be worse if we have inflation for years and years entrenched. List thirty seconds here the bull case for the dollar.

Does it turn around or does it decrease the minute there is actually some sort of stalling out on the terminal rate. Well, wow, the bull case for the dollar, which was maybe seeming to kind of falter a little, it just got supercharged, right. Um. But I think if the terminal rate keeps getting pushed higher, and you have other central banks like the B A a B today saying hey, pull back your peak rates, you've aout this divergence.

So I think for now there's not a lot to stop the dollar higher unless we get like two really soft cpis, which I'm not predicting. Certainly something to watch. Liz McCormick, our chief Global Market macro markets correspondent, We thank you as always, Okay, Davian Sasaur, the chief e M fix income strategist over at Bloomberg Intelligence and fellow

sports fan joins us right here in studio. And and it's a special day because it's the day after the Federal Reserve meetings, So naturally we have to talk about not just the U S or the UK or whatever other country want to talk about. We have talked about the emerging markets complex broadly, especially on a day when the dollar is actually higher and stronger by about six tenths of one percent Damien twenty thousand foot view. If that's even high enough. What's going on with e M

when it comes to the federal reserves? Ripple effect? Okay, the ripple effect is this all the US dollar pegs are the countries that try to peg their currencies to the dollar. I'm talking Hong Kong for example. Have allum have all adjusted? Right? So you have banks like HSBC and Standard Chartered hiring charging higher rates to depositors on the ground there as a result of the FED move. And we see the trickle effect. I mean check although they left rates on hold. Just this morning, you had

Malaysia raised rates by tips overnight. So you've got more coming and next week is going to be a big week. You've got Poland, you've got Mexico, You've got Peru, so we expect more central bank rate hikes ahead. However, the pace is certainly decelerating. Critty, how much more volatility can we expect for e M from China sort of keeping us guessing on what they're doing with COVID zero. Nathan. Fundamentally, the whole pyramid in China is collapsing as we speak.

And what I mean by that is what started with weak property developers. And this is all about real estate. Mind you ever Grand Agile have you know, has really moved to stronger hands Country Garden von k and now it's pushed into you know, government government backed property developers like Cify and Greenland, with potential for spill over into the municipal market inch which is the lower local government

financing vehicle market. So we've got two hundred billion dollars of enthore and offshore deet coming due through the end of three that's a lot of money of China dollar. Property bonds now trade below seventy cents on the dollar. Nathan. I mean, we have some real pain there. So fundamentally, I think the property crisis is going to get worse, and it's got potential for trickle down effect into municipalities, into cities and prefectures, and I think that's still playing

itself out, all right, Damian. We covered e M. We covered the US, sort of we covered China. H I. We have to talk about some real nerdy stuff here, and that of course is Brazil. There is a cross, a currency cross that I love to talk about, and we don't talk about it enough. We really got to learn out about it over on the Market's Live team back in the day. The Brazilian Real versus the Mexican pain.

Love this one, I know, I do love this one because the way I was taught it was that this is how a lot of at least American traders on the Western hemisphere get exposure to em. It's either Brazil or its Mexico. It's kind of a seesaw. You kind of trade off depending on what exposure you want. Because there are the two large economies in Latin America in the European kind of a MIA sphere. It used to be I think the South African Rand versus the Turkish lear.

That of course since change. But back to the Brazilian Real and Mexican peso. Talk to us about that pair. Well, the reason that pair is actually interesting is because they're both relatively high yielders. Right, So the cost of funding if you've got to go short the rail versus the paso or vice versa. You know, the funding cost doesn't really penalize you so much for having to short one of those currencies. Which is why you hear about lea iran, which is what you're referring to. That used to be

a pretty well traded cross. But the real crust that everybody's missing here, and it is the big money maker in emerging markets year to date. Next Paso versus the Japanese yen. Now I know it's the Japanese yen whatever, but I mean it's it's a hugely liquid cross. I'm not just talking emerging I'm talking developed markets as well. And I mean, my goodness, I know a lot of traders are not a p A lot of pms have made their mint this year trading that cross while really

not trading and just buying it and holding it. Right, So, um, so that's been a good trade. And look, I mean, if you want to talk about Brazil, look we had the election. You know, Balsonaro step back, you know, on

cautiously optimist, optimistic on Brazil. I mean, we had huge, huge, foreign influence coming into Brazilian equities in October, with literally four million dollars alone coming in on Monday, which was the last trading day of the month, on back of the election, on the back of the re election of Lula. So there's some current surrounding Petro Brass whether whether or not Lula is going to look to privatize the you know,

you know, the state of and oil company. And there's some concern on how Lula is gonna basically govern, but given the slim margin of victory, cretty, you know, he's got to manage from the center. And I believe that's what the markets are planning for. And I think there's more to coma. You stay positive, Damian on the Brazilian rail if the oil volatility continues interesting, I mean yes, I do. I mean oil in Brazil. Look at commodity prices.

Have they used to have a very very large impact on commodity producing currencies, but they really haven't had much of an impact of late, and certainly not in the Brazilian rail. If anything, that's gonna be medals prices. I would think that have more like iron Ore for example, because Paul he's a huge producer there. But you know, for me, I mean, yeah, the Brazilian real, I'm pretty optimistic on it. I mean, look, you want to talk about currencies you don't want to be optimistic on. I'm

gonna point out five of them. The Chilean paste, of the Philippine paste, of the Malaysian ringing, the Polish slotti, and the Hungarian foreigns are all at all time lows today right now versus the dollar. So there are more, There's more pain out there to come. I wonder if Damien has all these physical currencies somewhere in his office. I have quite a few of them, actually cool, very cool collection dollars too. Damian's as our chief em fixed

income strategists of Bloomberg Intelligence. 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. Put on false Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch US, worldwide at Bloomberg Radient