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So, Matt, we've got some news crossing the tape here.
Jason JP Morgan settles with Staley US Virgin Islands to end Epstein legal woes. JP Morgan Chase reached settlements with former executive Jess Stally and the US Virgin Islands over ties to Jeffrey Epstein as it seeks to end its legal woes over its banking relationship to the deceased pedophile. The biggest US bank tentatively agreed to pay seventy five million dollars to the US Virgin Island. That's, according to the statement Tuesday, less than half of one hundred and
ninety million dollars of the territory it sought. So let's kind of break this down a little bit, and we can do that with Elliott Stein. He's the senior analyst of Bloomberg Intelligence. Following all the legal issues for bi Ellie, I guess this, if nothing else, does put an end to kind of what JP Morgan sees is a very bad part of its history.
Yeah.
I mean this, This has been assorted saga ever since Epstein was arrested, and then late last year you had both Deutsche Bank and JP Morgan sued both by the victims Epstein's victims, and then JP Morgan was also sued by the US Virgin Islands. Both banks settled with the victims previously, and now we have this settlement which should put an end to at least, you know, the litigation against the banks.
It's sorry, it's unclear what the settlement with Staley looks like. So we know that in the in terms of the US Virgin Islands, the bank has at least tentatively agree to pay seventy five million dollars. They're not admitting any wrongdoing, I imagine, but when you fork over seventy five million dollars, you know that says something in itself. In terms of Staley, I don't get whether this means that he is going to pay them, and certainly they haven't released any terms.
Yeah, I mean, presumably there's some sort of monetary component to the settlement between JP Morgan and Jess Staley.
They were coming from Staley to JP Morgan.
Right, JP Morgan was you know, they were saying that they were really only on the hook because of Jess Staley's involvement with bringing in Epstein into the bank as a client, and that as a result, the bank was you know, vicariously liable because of his actions, and so they went after him for a few things, you know, reaching his duty to the bank by not telling the bank earlier about what was going on, and then seeking any contribution for any payout that JP Morgan was going to make.
Well for convincing them to keep Epstein's client. Everyone knew what was going on. I mean, his the prosecution and his conviction in what two thousand and eight was public knowledge. So everyone knew.
Right, and you know, and that was the problem for the banks that there were red flags. I mean there was no you know, concrete evidence that he was you know, doing sex trafficking with children, but there were enough red flags, part of which was because he had a prior conviction.
All right.
Deutsche Bank also paid, didn't the actually remember them being involved.
Yeah, So Deutsche earlier this year paid about seventy five million dollars to the class of victims that had sued Deutsche. JP Morgan also settled with that class of victims for about two hundred and ninety million dollars. And you know that was earlier in the year, in the spring and in the summer. And in this case, the US Origin Islands case against J. P. Morgan was going to go
to trial in October. So actually I wrote just a couple weeks ago that it looked like this case was on the path the settlement because neither side wants to go to trial in the case this sillacious.
Yeah, that's the last thing if you're JP Morgan you want to have and then have you know, Jamie Diamond dragged into this.
Exactly right there. These are not facts anyone wants to come out in court.
And so I guess, can we from JP Morgan's perspective, is this issue behind it now?
I think so?
Because you settled with the vic or the class of victims, I guess right, yep. And if you'd enjoined that class, do you have any standing to come back and try to do something again?
No, no, you know, the settlement is like you either opt into the settlement or you don't.
Okay, Well, they were sued by this class of victims, and they were sued by the US Virgin Islands. Right, who knows if some other group will come and sue them as well.
Yeah, it's hard to envision what group that would be. And there's always statutes limitations too, which sort of put a cap on when lawsuits can be brought. So at this point, given you know, this is definitely this resolves everything that's out there right now for JP Morgan related to Epstein.
All right, all right, that's interesting news, just crossing the tape here, So we want to dive into it and see what the impact will be for JP Morgan. But I guess if nothing else, it's like it puts that legal issue behind them. Elliot Stein, thanks so much for joining us. Elliot Stein is the senior analyst with Bloomberg Intelligence.
He went to Stanford.
So that's PAC twelve, right, you're Stanford cow all that kind of stuff. Yeah, guess what, it's Stale and the Stanford cardell Now have to come to the East coast because you're playing in the ACC Going forward, how stupid is.
That they're coming closer to me? So I appreciate it.
It's good for you, I guess for me, I can see more games, but it doesn't make any sense history.
I'm going to ask the volleyball team, some of these young ladies to travel two days to get here, a couple of days, two days to get back for a volleyball game against NC State.
And want to go to the West coast.
You know, yeah, I always see these kids, you know, in the airports, these teams from all these schools, and they're you know, it's not like the football.
Team where they get their own charter or anything. Of the basketball team.
It's the volleyball team, it's the soccer team, it's the golf team or whatever. And they're always like sitting in airports, huddle up, trying to study and everything. I just imagine a cross country stuff. Of course, USC and UCLA they get.
To come to Piscataway, New Jersey they play. How good is that? All right? Ellie, thanks so much for it. He joining us here.
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Definitely a risk off feel to the market here today again, as the high interest rate environment seems to be here for longer.
Is what the market's pricing in.
Let's check in with somebody who has an informed opinion on this. Brent Shooty, chief investment strategist for Northwestern Mutual. Brent, what's your call here on what our federal Reserve is going to do kind of over the next six to twelve months.
Yeah, I think the Federal Reserve is worried about wage growth. So you have seen the disinflation that we thought would happen. That was largely because the inflation that we had over the prior couple years was largely tied to COVID. As we pushed further past that and the economy moved back somewhere towards equilibrium, we thought that inflation would come down, and it has. That's the good news. The bad news is the US economy looks late in an economic cycle.
Typically happens late in the economic cycle is that the labor market is tight, which causes wages to grow and that can lead to inflation being pulled back higher, which I think is the prime warror right now, and so so until the FED sees wages move lower, they are
not going to take that liquidity tourniquet off. Unfortunately, the only way that labor or that wages have moved lower in the past when the labor markets is tied us through job losses, which we think is a likely outcome in the coming months, which will lead to that recession that we still think is on the horizon.
What do you think about the UAW strike and you know, if they come back with wage increases, they're going to be at least twenty percent, right, maybe closer to thirty. That's I guess you could say only one hundred and fifty thousand workers, but people at other shops are going to look over there and say, I want that too. Is that going to be a real factor or is or or are you not expected to have kind of a nationwide effect?
No, I mean, I think it's more indicative of where we are in the economic cycle, which is late where wages rise because there's a lack of workers to fill open positions, which causes that wage growth. Of the FED fears about, I think people forget that the inflationary period that the FED worries about that was so bad in this US economy was called the wage price spiral, and that's where I think we're at right now, and that's why I think the Federal Reserve isn't going to stop.
They're not going to loosen policy until they see wages pull back. Right now, wages are running at four point three to four point five percent, pick your measure. I think in an interview a few weeks ago, John Williams, VP of the FMC said that three point two to three point five was more consistent with two percent inflation. And as I mentioned before, the only way that's happened in the past is through recession, and so maybe this
time is different. But I think there are enough things that are flashing red that you can continue to think about that recession coming in the not too distant future.
Well, if that's the background there, Brent, are you advising folks to just go into two year treasuries at five point one three percent? That doesn't seem like a bad place to be.
Well, we have been repositioning towards fixed income for the better half the last six to nine months, and so we are overweight fixed income and underweight equities. As far as hiding out in the front end of the curve, I would advise people not to do that. I think intermediate term bonds offer value here, and they offer a hedge against equity downside risk, which I think will be caused by too little economic growth, which will cause inflation
to fall. And so if you think about your Bloomberg aggregate index at five point three five percent and a six duration, if inflation does fall, think about the difference between five point three and two percent. That's where I think there's value right now, especially if you believe like I do, inflation is set to falter, which I do.
I think the good news on the opposite side of that is the FED will be able to cut rates, but not until they actually see, you know, that actual recession happen, which I think is still on the horizon.
How far out the curve do you go to you say, six year? I mean, I know nothing about bonds like Paul, but I look at four point eight five percent on the twenty year and I think, when's the next time I'm going to see that?
Yeah, this is where so maybe just a little bit more common sensical. So if you invest in a two year right now. So let's take you back to six and give you a real life example. In O six, the yield care was inverted. I believe the two year was somewhere around five twenty eight to ten year was at five twenty four or something. So it wasn't as big as an inversion of the day. But think about that person in the two year, think about something called
reinvestment rate risk. They would have had to have had to reinvest that tenuere or that two year four more times. The first reinvestment I believe would have occurred sub two percent, the last three sub one percent. And so that's where I think just having bonds across the spectrum for an individual, I think is the most appropriate thing. I just worry right now that people are hiding in cash, and you're right, who knows where rates will be two, three, five years
from now. You know, perhaps rates are hired now. I don't think we're going back to where we were before, but that's still a kind of an uncertain call, and I think that's reflective of if you think about uncertainty, you probably want to spread your bond across the curve just a bit and not hide in any one part of the market.
So on the fixed income space, go out a little bit, and is it really are you staying with investment grade?
Are you considering certain parts of the high yield.
No, not high yield yet, I mean investment grade right now, given that we're headed into an economic contraction, I think you want to stay high quality, especially when those investment grade bonds offer quite a bit of yield, in many cases yields you haven't seen in sixteen to twenty years, which I think you know four years ago, if I came on your show and told you that, you would have told me I'm crazy. So that maybe has a little bit of a commentary about how uncertain the world
can be. And that's where I think, you know, I think people need to reflect that, and I think you need to invest across the curve, but focus more so on intermediate term bonds. Just given the fact that you do lock in those yields for a few more years.
When is the right time to buy high yield debt? I mean, if you see a recession coming next year, do you buy in the middle of it, at the beginning of it, at the end of it?
When, yeah, I think somewhere on the middle of it. I mean, that's where I think, and that's not where it's kind of uncertain about timing. You know, there are many indications to me that the US economy is headed to a recession. I think people ignoring them because they believe this time is different. There are so many things flashing red right now that you know, I think a recession is is probably you know, it could happen in the next three to six months. That's where timing is
a bit uncertain. But that's where you just behave better at the end of an economic cycle, and that's where I think you want to be in high quality bonds now. I think the time for owning things that are less than high quality is after they reprice quite a bit, which they haven't done enough right so yet.
By the way, I got another credit trader writing in with a question, since by rates is sort of consensus decade high yields, how do you outperform your peers if everyone's doing the same trade.
I'm not for sure sure that that is consensus any longer or is consensed. So I think that you know, the soft landing trade was on the higher forever and interest rates when I talk to individual investors, they are scared to buy bonds, and I don't think you're seeing a huge rush into the bond market. I hear enough other voices of people like myself who are telling people the opposite, which I think is the wrong answer.
Inequities, I mean, the big cap growth stocks have been the winners.
Here this year.
Do you stick with them or do you try to find some value elsewhere.
I think you try to find value elsewhere. And this is where my probably my commentary about liking small and mid is a bit odd because they are more economically sensitive. And this is where I do think there is some good news for equity investors. I think parts of the
market have discounted some sort of a recession. And so if you think about most of us on Wall Street, we do have to put money to work every day, and so I think most people have hidden out in those large cap names that they think are economically insensitive, that they're going to grow forever. And that's been the part of the market that has done well. Other parts of the market haven't. Those are small and mid cap stocks.
S and P six hundred trades at twelve point five times four twelve earnings that are down twelve to thirteen percent, and so I suspect that you will see those earnings estimates fall a bit. But I do think there is some cushion there, and that's where I think the opposite side of this can be really good for individual investors in those areas.
All Right, Brent, thanks so much for giving us some of your time. Really appreciated brand shooting. He's a chief investment strategist at Northwestern Mutual. I appreciate getting his thoughts here on the equity side, a little bit underweight and overweight on fixting companies.
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Matt.
We've been talking about this strike against the auto workers that doesn't appear like they're making much headway. One of the questions I have is how long can these auto companies go with this strike? From a financial perspective. Joe Levington Joints As. He's the director of credit research for Bloomberg Intelligence. He covers the auto companies from the credit perspective. He joins us live here in a Bloomberg Interactive broker studio.
So, Joel, how are their balance sheets?
How strong are these auto companies from a financial perspective, because at some point the strike's really going to hurt them financially potentially, oh one.
Hundred percent, Paul.
You know, eventually they all have to get to a table and have to come to agreement because everybody needs to make money, right.
Well, they only have to have more money than the UAW. So how is their balance sheet look compared to that of the United Autoworkers Union.
It's they're significantly significantly stronger than the AW. Okay, it's combined Ford and GF have about ninety billion dollars of liquidity. Stillantes, I think has about seventy billion dollars of liquidity.
So liquidity for you is like cash on the balance sheet plus some bank lines that they control down on.
So if I need cash, how much do I really have?
And they've got like ninety billion years That's what I'm saying. STILLANTIS has like another seventy. So you're talking about one hundred and sixty billion dollars of firepower and the UAW has eight hundred and twenty five million dollars in cash. Oops, that's what I'm trying to say. Yeah, I mean, if you were on the DraftKings app, you'd probably heavily that the Lottos can you like, last a lot longer than the uawken.
And they haven't even really struck where it hurts, right. They hit them at a Bronco plant. That's bad, you know, because there's already a long line of waiting for a Bronco. They're awesome. They hit the Colorado and I know, you know, Mark Royce loves those mid sized pickup trucks.
Actually I drove.
One, and I was really impressed with the turbo charged inline four engine because you're an in like six guy, I like an inline six, I like, you know, but this small engine I thought was super punchy, had a lot of torque. Anyway, they hit him the Wranglers, you know, high margin vehicle, but they haven't hit them on the truck lines, which is where it hurts, right. They haven't
struck where they make the f one fifty. They haven't struck where they make the Tahoe and the suburban, and that would be pretty hardcore if they did that, it would be.
But it goes both ways because the more people you put out of the plants, that also means the more they're draining down that eight hundred and twenty five million dollars right, because they're paying them while they're the UAW is paying their employee that their clients while they're you know, like while they're on strike. But I agree with you if you look back to times like the pandemic, right, the pandemic, really what you saw was about a ten billion dollars swing in cash flow over a couple of
quarters if you're talking about a FORD or GM. So you could kind of get into that range like if this protracts into you know, like a five six, seven week kind of event. But we're not there yet, and I think, you know, while you have this time, both sides are going to hackle out for each percentage increase in salary that they can get.
How are the bonds? How have they been trading?
Bonds really haven't moved all that much because the raiders have been done Actually a very nice job of being republic about how they don't expect this to be impactful, and how they've built in somewhere between five and eight weeks of flexibility. So now that we're, you know, like just getting towards the low end of that range, there's still plenty of room in terms of how they're thinking about ratings.
So we came out of so GM and Stillantis.
They did go bankrupt during the crepy Well, I mean, Chrysler is really what you're talking about, right Stilantis is essentially a French company that bought the Italian company that bought Chrysler for like a dollar.
It's a mix of Pugio Fiat At Chrislis okay coming together.
But I mean, I'm gonna guess where you were going with this. So we talk a lot about the fact that the unions took a crappy deal in order to help support the automaker's post financial crisis. What we don't talk too much about is that the unions had a much greedier deal that kind of pushed these automakers into bankruptcy during the financial crisis.
Right, Yeah, I mean we're still talking about I guess Mary Varrow's out there saying that we made an offer worth one hundred and fifteen thousand dollars uaw worker that was rejected.
So whether you' that's their final pay, one hundred and fifteen thousand dollars.
Right, that's your take home pay. So whether you are, depending on what side of the corner you're on, whether you think that's good or bad. It doesn't sound particularly horrible to me in any way for a unionized manufacturing facility.
But you know, well, I'm just hang on, I'm just dividing. So Mary gets about twenty five million dollars, so divided by one hundred fifteen, so she still gets two hundred and seventeen times more than that. Yeah, and she works hard, I'm sure, and she's steered the company through some tough times, but she's had their help.
Yes, And that's what I say. They eventually have to come together because they both need each other.
Right, if you're going to.
Make money, you have to have workers.
And if workers want to have a salary, that they have to have a proper parable company behind them.
Now, they don't just want a salary, right, Mary has a defined benefits pension plan. Yes, are the workers going to get that too?
Well, Ford seems to have caved a little bit on that front.
Matt.
That's a really difficult front for others to go into, because if you think about GM, I mean, their opebs blew up to like seventy billion before they.
Went to bankrupt I'm sorry that, Paul.
There are other pension liabilities that are on their balance sheet. That's really what drove them into bankruptcy to begin with was to get rid of those liabilities. So to start bringing them back in I think would be a really difficult thing and probably one of the bigger challenges on the GM side. Whereas Ford woulds didn't go into bankruptcy, seems more open to working with the union in that aspect.
So if I'm a creditor too, if I'm a bond holder of the big three auto companies, do I have a threshold where I don't want to see them have an increase more than twenty five thirty percent?
Or do I just not really care? I just want to get a deal done the paper.
It probably doesn't matter, right you care about the pension.
I think you care about the pension first when it comes to pay. You know, when you're talking about these increases between twenty and forty percent are kind of you know, like where people are targeting. Even if you think about forty percent, it's forty percent of four percent of your total cost of your total bill, and that's before there's any cost benefits that the company may get, and that's before you think about price.
So labor's only four percent of their cost. Diructor, it's only four percent.
It's really deal, just well, that's that's what two guys from some it might say, yes, but why does it call it thirty or thirty five percent? Have a drink and revel with life, and then you'd be fine, because really you're talking about a percentage point or two on your price side, or figuring out some cost benefits on the way, and then you can move on with life.
Pensions are much more expensive. They also want a four day work week, which means you got to hire a whole bunch of other people and pay more health care benefits to those men and women. Plus they want to know which products are coming. So, for example, you know, Dodge doesn't have anything coming next year and they're going to cancel a couple of their offerings. Chrysler only has the Pacific, a minivan and nothing else.
It's a good thing that the UAW is not at Bloomberg because we love a seven day work week right here, I don't know what a four day work week would actually look like. It makes no sense to me.
I'm a fan of a four hour work frankly, but clearly that's not going to happen with the autoworkers.
That's just thrown out as a starting point.
But yeah, you're totally right.
It's the full.
Package, and it's really the benefits side that I think is more of the sticking point for a GM or a stillant this.
So how do you think this place out, having you know, listened to both sides and all three companies.
Yeah, I mean I think Paul Well probably wind up somewhere that to some guys could figure it out over cocktail, is that it'll probably be somewhere in the thirty percent range of a salary increase. You're going to have your forty hour work week. Maybe there's some marginal benefit that they give back on pensions, and that's.
About where it'll wind up.
And the reason that it's not that relevant to it to a credit person is because when you think about that increase, you're talking about thirty or forty basis points of margin. It's really not that big a deal for the autos and their outlooks for the long term.
All right, we'll.
See what kind of deal they can get done.
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Deftly, some concerns out there in the credit markets, but one area of a positive sign so Standard and Poors Global Ratings on Wednesday upgraded the Government of Jamaica's long term foreign and local currency issue a default rating from B plus to double B minus with a stable outlook. It is the best credit rating that Jamaica has received from S and P since it started rating the country sovereign dead in nineteen ninety nine.
Some good news there. We're gonna break that.
Down with Senator Auburn Hill, Minister of Industry, Investment and Commerce, Member of the Senate of the Government of Jamaica, joining us live here in our Bloomberg Interactive Broker studio. Minister, Welcome to Bloomberg what drove the increase in the rating outlook from your ratings issuer for Jamaica, if.
I could put towards this discipline management we took over in twenty sixteen, the Andrew Holness administration took over. We made a commitment to the IMF at the time that we would continue to make sure we've become fiscally disciplined. Right through that period of time. We moved our debts down from the high as we might recall at one fur to seven when we took over must have been in the one thirty five or thereabouts, and move it down to where we are today at seventy seven and
going in the direction of sixty. We had planned to get there by twenty sixteen, the pandemic interrupted. We moved it to twenty eighteen, but we might get there before twenty eighteen. And all through that we've gone through the plane them spend one hundred billion Jamaican dollars we didn't plan to spend, haven't borrowed any money, and we haven't raised taxes in seven years, so that kind of fiscal discipline.
The rating agencies have been watching it, and the best rating we've ever had in twenty four years of S and P. We've just had the rating upgrade, and of course we're in not happy with that. We want to continue to make sure that gets to investment grade as quickly as we can.
So what are the industries that are driving this? Are supporting this growth? I have been going to Jamaica my whole life. We go to Silver Sands and Trelawney and if I get a good bonus, then I'll spend a couple of days over at Rose Hall. It's a little pricey, but so tourism obviously is I guess one of the main industries. What else is pushing this because Jamaica is not an offshore economy. This isn't somewhere where people go to hide money, you know, or to start crypto businesses.
No, that's not what we do. What happened is when tourism took a dip or and somebody who you've had here at Bloomberg, Grandite, tims Ed Bartlett, found all kinds of innovative ways to help us open back tourism as quickly as we can so that didn't stay down too long and we're now back this summer, well past what
we were in twenty nineteen before the pandemic. But through the pandemic we had the BPO, the business processing outsourcing business, the knowledge outsourcing business, and that grew by twenty percent per year in the last four years. So we quickly moved to work from home media adjustments because under the BPO arrangement and OECD watching, you have to make sure
you follow certain basic rules. We got those fixed with the Ministry of Finance and through myself, I was then in the Ministry of Economic Growth, which is a Prime minister's ministry, worked it out, got it to work, and it kept on growing and it keeps on growing. But we also are looking at growing or exports because we have had looks like we had a long period of bad debt situation. We've had a longer period of negative trade balances and we're now grapping our hands around that
as we've done with debt. To me, and that's one of my main focus why I'm here with twenty odd thirty businesses to look at new markets and develop new market markets, because you cannot be an exporting business and stay in your office, right, So I take them with me. I took them here, took them to a land I'm going to London from here to make sure we developed the markets that we have, and then wider field.
What are some of those markets that you'd like to develop or some of those products or services that you'd like to develop.
For instance, you know Goya very well. We have something called.
Aki.
Matty would have had Aki courter breakfast in Jamaica. My eggs okay with your egg it looks like eggs, So we we know. Goya said to one of our importants in Florida recently, we want twenty fourty foot containers. They could only give them one. They want something we have color, which is like spinach. They want breadfruit, which is we make into flour and it's gluten free, which people want. We want containers of that. So we have markets I am. While I'm looking for new markets, we really what I'm
looking for as well. The Ministry of Industry. Investment is the second part in commerce. I'm looking for investment to fit those markets. Come in, help us grow agriculture, agro process it and make sure we have the markets for you. Come invest. So that's part of the message I bring as well.
What about cannabis, We talk about the canabis business here a lot Obviously, the legalization across well for recreational use twenty three states in the US has grown the market, the legal market considerably. Here can that be an export from a country that's in a way famous for Bob Marley and and that sort of product we have, We have.
Exported to places like Australia and Germany, But you probably need to get to thirty eight states, at which point you can change a constitution because it's a Schedule one drug, and until the FEDS change it, you can't do interstate banking. So you can do all you want in Colorado, but you can't ship it to California. So until that changes.
As a Schedule one drug, we have to abide by certain international rules that we've signed in treaties, So we can't just export it will in illly and we can't export the United States or even use your airspace to export it.
What is the political climate like in Kingston? I mean, you know, we have here a very partisan, very divided political system, which is driving Moody is to threaten a downgrade. So we've already had downgrades at Fitch and s and P. So what advice can you give to the US government? You know, post upgrade to try and get along and govern correctly.
Why don't I tell you what we've done. We have made sure that we focus on the fiscal part. Because I noticed why Moody is threatening to downgrade the same reason SMP did in twenty eleven. It's from what I've read, it's the fractiousness over the government closing down. Well, we can't say anything about that nor And you have the privilege of having the reserve currents in the world, so
you're in a very particularly privileged position. But what we have done in Jamaica is if we didn't get I remember when the IMF came in twenty thirteen, I was in that meeting called the University of Western is by Oliver Clark, who I know, you know from from Silverton, from Silverstand. Oliver called that meeting. I remember the Governor brand went at the time saying, we cannot get our currency and our inflation under check unless the government gets
its fiscal house in order. You will never hear or know we've made since then. We've made the Bank of Jamaica independent. You never hear the government talk. The governor of the central Bank talks about the talking about the fiscal position of the government because we've put it under control. And if until you get that done, then their the
rating agents will have that discussion. But frankly, your discussion is quite different because you're the reserve We hold the reserve currency and the biggest military in the world.
Minister talks us about the economy today in Jamaica. What's it like for the average in Jamaican today.
The average Jamaican. First of all, we're just recently the most recent figure we had for unemployment is four point five percent. It's the lowest in the history of taking numbers in Jamaica, so we have a historical law in unemployment in the emerging market. Four point five percent is near the full employment. So what's happening people in the knowledge of outsourcing business, the hospitality business, the tourism business, saying, and the construction business.
We want people.
Seventy to eighty percent of our university graduates are women. We have three hundred or four hundred thousand young people on the street who tend to get into gangs their men, primarily men, because they're the ones who weren't graduating. So now we're saying we have heard trust and t we're investing money to take them off the street, put them in a training center for months, pay them a stipend. A part of the stipend we used to open a
bank account. We give them a national idea. We give them a passport, driver's license so they become part of the citizenship. We give them the has been certify them so they could work in Jamaica, the United States or Saudia Arabia, and put them back in the workforce. So we're expanding the workforce in this vicinaty, but with apprenticeship with skills.
All right, that's good news. That's a good story.
The Standard and poorst certainly thinks it's a good story.
Jamaica upgraded its credit rating.
Senator Aubin Hill, he's a Minister of Industry, Investment in Commerce. He's also a member of the Senate in the government of Jamaica. We appreciate getting a few minuts.
You're time.
Great to have you here. Thanks so much for joining us.
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Gary Shilling from a Gary Shilling in company has darkened our door and Gary, we've seen an incredible rise in rates over the last few weeks. What is going on here?
Well, I think there's a conviction that the Fed is not through tightening, and I don't think they are. They really are determined to get inflation back to two percent and to keep it there. And of course they were very much behind the curve when they started early last year. They thought that the inflation spurt was simply reopening the economy after the pandemic and and the problems with the supply change.
Now, hang on a second, what have you got there? Is it like a candy bar wrapper or.
It's a sweetish fish? All right?
Now put the Swedish fish down, because we hear that crackling on the So what do you think about Jamie Diamond's warning? I mean, seven percent maybe just a number that he picked out of the air when he was talking in an interview of the Times of India. Who knows where he got that number, but we all thought that at the most the Fed is going to like five and three quarters, And now all of a sudden, ever talking about seven.
Well, interestingly enough, we've done a lot of work over the years. We just updated on what we call a debt bomb, and that is the question of what is the rate at which the interest on the debt, which of course is part of the deficit, becomes so great that the whole thing grows geometrically and blows up. Now, the interest rate on the federal debt now is under three percent because a lot of a short term but of course it rolls over in time at higher rates.
So if we stay here, it could be a problem. Although our numbers show that unless you got eight percent on the federal debt.
The average eight and we've never been there, right, because I remember reading.
Average maternity is only six years, so until you got to eight percent, you probably didn't have a problem.
But we've never had that problem. We've never had a debt bomb.
The closest we had was nineteen ninety two when interest in relation to GDP was three point one percent. It's now three percent. It's basically the same. We haven't been there. We're not Argentina, but but uh, you know this, this is a this is obviously a concern because if interest rates are up and stay up, of course, there's a lot of other things you worry about.
I mean, you know, the economy.
I don't think could stand anything like eight percent interest on the federal debt because you'd be you'd be talking about double digits for everything else. And we haven't seen that since, uh, since the Boker era and and the ensuing collapsed.
Well, now, there's a lot of things you've done in your career, uh to to become such a famous economist. I probably the biggest is you're a bond bowl and we're for throughout the bond bowl market, and you know, really made your name with with those calls. How painful. Then has this drop in price, run up and yields been for you? And at what point do you say, Okay, now it's time to buy again.
Well, obviously when you've had a long term forecast, and you might recall Matt when I said in nineteen eighty one that we're entering the bond rally of a lifetime to yield on the thirty year bond was fourteen point six percent. It was a long time ago. Obviously it came way down. Now it's rebounded with all other rays. I think we're getting I think we're getting close because the economy simply cannot stand these kind of rates. We're
close to or maybe already in a recession. It's always up to the National Burea of Economic Research to make that call. But I think that will do it. And of course you get a recession. What happens. You get less demand for high quality credit, you get the safe haven of the treasuries, you get the FED easing. But I think the Fed is going to be slow to ease because they want to make sure that inflation.
Is killed and killed dead.
They really were so far behind the curve on this, so I think this whole thing is going to get stretched out. But I don't think we're there quite there yet where I won't go out. We in our portfolio, as we manage, we do have some long gone positions, but relatively small. We're not adding to them right yet.
Is there an irrational investor exuberance back in this market?
Well, he sure is.
I mean if you look at you look a look at example at the FANG index gross stocks. Now to the extent that their prices today are the discounted value of future earnings out five or ten years. Those things ought to be in the tank. Now they've sold off a little bit lately, but I mean they've rallied for most of most of the year. And of course this is a big thorn in the side of the FED
because they see investors really not believing them. They don't really they just don't really believe that they're serious, because if they did, you'd see a lot of things like this. You see stocks in general and says the interest rates sensor is housing already affected by interest rates, but investors in terms of securities not yet convinced.
So so you think, I guess, do you think that there's a there's really risk to the stock market in general?
Oh?
Yeah.
Early last year I said, I thought we have a thirty percent decline. Peaked the trough, we were down twenty five percent.
You got a rally.
That means from here you need about a thirty percent decline. And yeah, I think I think there is is big risk. I mean, you look at all the indicators, you look at the leading indicators, you look at the yield curve, you look at small business hiring intentions. It's just a whole host of factors. And boy, if this isn't if this doesn't tell your recession and all it goes with it, including fedies a lot easier, a lot lower rates, you've got to throw out all the history.
I would think so too. And you know, I have a laundry list of all of the headwinds and all the problems that consumers are facing. And you've got along with that, this strike which could be bad for the economy, and also inflation, government shutdown which doesn't augur well, debts, student debt, coming back, delinquencies on credit card debt, and autolans. Every time I run this list by a bull, he'll say, hey,
unemployment is at three point eight percent. You know, as long as we have jobs, it's no big deal.
Well, one of the real issues here, Matt, is that employers spend so much time and energy hiring people that they're very reluctant to lay them off. It takes time to shift gears one hundred and eighty degrees. But of course as profits and sales weaken, that's what happens. They get layoffs. But this is one of the reasons I think this whole exercise is going to be stretched out.
The other one is the FED taking their good sweet time to shift the east because they want to make sure that inflation is really.
But that could mean a deeper set right if we have that could mean a very deep recession. If we have the kind of UH slow down where you know, companies have been not wanting to fire people, but are all of a sudden then pushed to do it, and then the FED doesn't want to come in cut rates until until the economy is really in trouble, that could mean a big deep drop.
I think it means a long recession, but not necessarily deep. To get a really deep recession, you've got to have a major financial crisis. That That's what happened with the UH, with the dot coms in the in the late nineteen nineties, and of course that's what happened with the subprime mortgages, the.
Great Financial Crisis. I mean, looks like there could be the beginning of that happening in China right now.
Does that deep as opposed along you've got to get a huge inventory correctionion well.
Does the Chinese property problem? Were you or are we too insulated? The economy, not not that much.
I mean, our ourd with China has has atrophied. It does, no, it does. It does mean that China's internal growth is going.
To be weak.
But you look at Si who basically is a present for life. He doesn't really care about the well being of the average Chinese, only that it's good enough that they don't the regime doesn't get tossed out. But but they're in a different world. I mean we look at it through Western eyes where growth is is is good, but they don't look at it. Stay in power is good for as far as their concerned. So I don't
think that China really really cares. And of course they got the property problem, they got overbuilt infrastructure, they got huge deaths. The result of this, particularly at the provincial level. Well, I think China is basically going to be in its own its own sphere.
Now.
One thing that is is does come out of this if it's China's growing more slowly. Uh, it's the second largest economy in the world, and it's a stage of growth where it's it's more emphasis on goods than services. It's economies mature, they shift their services and when you're in goods you need commodities, So I think that I think that that's we can. Commodities obviously is very differentiated the stuff that goes into electric cars, and it's kind of its own world.
But you look at copper. Copper is my favorite.
I like copper because there's no car tell on either the supplier demand side, and it goes into almost any manufactured I mean, again, full disclosure. We're short and short copper and portfolio as we manage.
Your short copper. Yes, that's no bueno. Why why are you short copper?
Well because it because that's a that's a bet on global manufacturing weakness.
Yeah.
Plus the fact say is a bear. I mean, I mean you look at opek.
You can have a great forecast on the oil and yet Opac plus comes out tomorrow and make some announcement and you're.
Really all as that were looking ninety dollars hundred dollar barrels. Gary, great having you in the studio. Thank you so much for coming in. A Gary shilling.
Yeah, just you know, we just turn them on and we can just sit here and listen all day.
Yeah, well I do that sometimes on the weekends.
On the weekends. Okay, very good, All right, Gerry, Thanks so much for joining us.
You're listening to the tape Cat's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and.
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Let's check out our next guest right here.
Tim Dewey, Chief US Economists for sg H Macro Advisors. Tim, I'm not sure if you heard our last discussion. It was with Gary Shilling, and he was bearsh right Man.
Well, he is, obviously, you know, one of the most famous bears on Wall Street exactly. A lot of what he was saying reminded me a little bit of what I've heard from Jeremy Grantham as well, who is you know,
obviously uber. But I have to admit that I have that that that appeals to me because I see so many headwinds in this economy, Tim, and you know, the the exuberance that pushed us up to forty five hundred on the S and P just doesn't make sense to me as the Fed's raising rates five hundred and six hundred basis points. How do you see it?
I am I'm a little bit more optimistic than Gary Schilling. I'm not I'm not not quite as bearish of the economy, and I tend to be much more optimistic that the economy remains more resilient than than people give it credit for. And that's a big reason here why stocks that have performed better than I think anybody would have anticipated in this cycle, you know, given because you said the Fed raised rates, you know, over five hundred basis points and
is threatening you know, the even possibility even more. But I think that's just really real that the the economy is is is at a fundamental level different and stronger than than than than people have really I think been willing to contemplate.
Than ever before in history. Right, I mean, when's the last time the FED was able to raise rates five or six percent without causing a recession.
It's a it's a it's a it's a big it's a big shift, right.
Uh.
And so you know that plenty of people pointed out to you know, uh, you know, indicators over the past year, year and a half that would all point to a recession and in so far you know that that recession just hasn't materialized. And again it's just I think speaks to a very different economic environment than than we've been familiar with.
So I mean, for better or worse him, you know, on my personal agenda, I've taken recession off the table several months ago.
But was I a little premature? There is that still really potentially in the cards here?
Well, so eventually, right, I mean, this is this is the stop clock argument, is there's always going to be a recession sooner or later. But you know, I think you were wise to take it off the table several months ago because you know, clearly, you know, I think that the predictions that we would have a recession by this time, you know, just having materialized, and uh, you know, I don't really see one coming, you know, anytime soon.
I think there's still some momentum under this economy. Uh and and that momentum is not going to fade very quickly. So I really, you know, I don't have a recession in the forecast because you know, it's it's such an idiosyncratic event. And that's what keeps tripping people up, is that every recession is a little bit different. The indicators that that lead you into that recession are a little
bit different every time. So you know, we really, I think, don't have a lot of visibility on on when another recession is going to occur.
And it's a big and diverse economy, who is it? Ed Yard Denny has said that he thinks we're in kind of a rolling recession where different pockets of the economy are hit at different times. You're not just the chief economist at SGH Macro Advisors. You are an actual doctor in economics. I mean you have a PhD and teach courses on this and uh, you know, help to guide the economy of the state of organ as far as I understand it. What do you think of that
idea rolling recession? You know, some states are going to have problems, some industries are going to have recessions, whereas you know, we don't see everyone having a uniform recession. Doesn't that make sense?
Oh?
It makes it makes a lot of sense. I mean we get we sort of forgot it. I mean during the the immediate aftermath of the pandemic, when everything was booming, right, everybody was doing well, That's that's really not the norm, right, if you have, you know, a slower economy. You know it's still someone but even but slower economy.
Uh.
You you have sectors that that that that are op versus down, and that's just you know, that's just part of the national give and take. I think of the economy. You can't expect everything's going to be cruising along at a high speed. And of course that makes you know, it more difficult to assess, you know, if you're going to fall into a recession or not. Because again, one industry sliding. I say this, this industry always slid during
a prior to a recession. Then you turn around and you find another industry that had always slid prior to recession, but now is gaining traction, right, And so you kind of say, well, wait a second, what's going on here? And what's going on here is that you don't have an economy wide shock that is really driving firms to cut investment and cut employment in a very syn synchronized way.
And until you can get that kind of shock, that kind of momentum, you really I think it's really hard to create a recession in the economy.
That's kind of where I want to go. I'm this labor market. Tim just kind of fascinates me.
You know, I've heard the term hoarding of employees and I've never heard that before.
What do you make of a three point seven percent unemployment right here in this economy?
You know?
So yeah, we we. I mean, certainly it was during the case of the pandemic that labor was so hard to get. You didn't want to you didn't want to let it go. I think that, you know, firms, if they had the sort of economic conditions that that drove the need for layoffs, they would react quickly. So the labor hoarding story only takes you so far. And remember last fall, last winter, you know, around the turn of the year, we saw uh, you know, lots and lots and lots of layoffs in the tech industry.
So even though that had been an industry that had struggled immensely to hold onto labor during the pandemic, once it was ready to shed labor, it shed labor. Now that that that story I think has asked us already.
So for me again, you know, when I look at you know, what happens the unemployment right tip Leena cycle, It falls to some level like this, a three and a half to four percent, somewhere in that range, and it just sort of hangs out there until you can get again that massive negative shock that really slips you, pushes you into another direction.
Hey, So, Tim, I just want to jump in because we are looking at pictures of President Biden on the tarmac with UAW President Sean Fain and some other union members, you know, and while we're speaking about labor, I might as well bring up this because I think we've seen a really fascinating shift in the power dynamic between labor and the corporate bosses. This may be coming to a head now as the UAW is asking first thirty six
percent wage increases, bringing back pensions. They want a four day work week, They want to know what the production schedules are at these companies. And I wonder what you think what kind of effect this is going to have, because on the one hand, if they stay on strike, I would think that they're going to drive up the cost of cars even more, and they have barely recovered
from the pandemic and in those in those terms. On the other hand, they're going to boost wages for at least one hundred and fifty thousand workers and probably more who look over and say I want that deal too.
Yeah.
No, So on the one hand, you know, at least the nearest issues you're you're you're, you're correct. I mean, we were counting on lower car prices too, and lower use car prices certainly to help on some of the inflation front. And we kind of supply now again that's gonna that's going to delay that. There's really large, i think strong pent up demand for automobiles already and that's one reason auto sales is in fact hold relatively high despite rising interest rates. So that's clearly a near term
hit for the economy. The interesting thing, and I really like what you just said on the UH on the wages, is that you know, to one extent, does does this because a signal for the rest of the economy, right, is that if auto workers are getting you know, huge raises, and we've seen huge, huge raises in other industries to an extent, does that make other workers expecting a higher wave? So you know, instead of expecting three percent a year, now they're expecting five percent a year. And then how
does that work play into inflation expectations? And you can tell a story where a series of negative shocks or those kinds of shocks really, do you know, create a different inflation environment than we had in the pre pandemic period.
All right, Tim, thanks so much for joining us.
Really appreciate that Tim doing chief EOS Economists, s g H, Macro Advisors, getting his thoughts there a little bit, little bit of a different spin than when we've heard from market Fred Gary Shad.
Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm Paul Sweeney. I'm on Twitter at pt Sweeney.
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