Market Volatility, EV Outlook, Housing Market

investors at pimco dot com slash bonds. All investments contain risk and may lose value. Consult your investment professional before investing. All right, So Lisa Bramwinz long ago told me I need to pay attention to these treasury auctions and before like, really do I have to? Apparently there was a two year treasury auction yesterday that saw some week demand. I think a five year one is on deck here. So

Ira Jersey, he's our chief US indust rate strategist. He's gonna tell us why don't we need to pay attention?

You know, I had a producer, um Tim Andreacchi. He was always freaking out about the treasury auctions because our show was at one o'clock and they always come out, I mean what, they rarely tell you anything, don't they ira, So they they tell you where demand is at that moment, right And and I think that the reason why the treasury auctions are so important right now is because they give you a hint as to who's willing to take risk and if investors are willing to take risk or not.

And and the last couple of months you've seen a significant reduction in demand by particularly foreigners and domestic investment funds for for treasuries at auction, and and it just shows you that, like you know it, it proves a level when when when you think about the fixed income market UM, it's not as as homogeneous as saying the equity market is in general. So you have multiple bonds with different maturities, so you have a lot of different

instruments at play. And by having a new issue, whether it's in the in the corporate world or in the UM or in the treasure remarket UM, you you get the gauge real demand for that new supply. And you've seen that even though the sizes of the treasury auctions are getting smaller. You're seeing demand go down even faster. And that's the reason you've seen a lot of softness in some of these these issues. So why are the

international buyers, Why are they not there? Maybe like the maybe how they used to be well, but partially because I think there is a preference for cash right now. Because if if you're even if you're a foreign buyer where you know yields in the US or you know, multiples of what they are in your your home jurisdiction, if you think that interest rates are going to keep going up, you you don't want to be buying a bond because then you'll wind up losing money on on

the price side, um you know. So so as as to your treasury yields, if they go up from you know, four percent to five percent, you're gonna lose UM. You're gonna lose a couple of percent in UM in terms of opportunity cost uh and and the price of that

instrument will go down. So I think that's the that's the A couple of the big reasons is that you don't have the um you know, massive demand you also have on the other side, and this is this is part of The issue I think with with the foreign investors and in terms of central banks, is that central banks want to uh, you know, want want to prop up their own currencies because their own currencies are slipping

very quickly against the dollar. And if they go out and they go buy two year treasuries, they also have to buy dollars on top of that, which will just weaken their currency even further. So there's so foreign exchange managers aren't going to be involved in these auctions like they sometimes. I'm just surprised that Japanese. I mean, you're if if you're looking at a situation where there's no

reason for the end um go down. Well, well, let's say this, if you're looking at a situation where the finance ministry is defending the end and um, you know your interest rates on the ten year or zero point two percent versus you know, four percent in the US, wouldn't you want that? Well no, because again you have to buy dollars then, and you're just weakening the end

versus buying versus the dollar. And and if you're trying to defend your currency and trying to stop your currency from falling further, you want to actually be selling uh dollar denominated assets and buying the end denominated assets. And that's the that's the reason why you have those foreign foreign reserves, and and and that is one of the

dynamics that you're seeing in some of these auctions. Now, unfortunately, we don't know what exactly what happened yesterday because this data comes out after the the auction settle and we get all of the other data. But the allotment data, when you look at it from the August auctions certainly showed that there was a slowdown in demand from foreign investors and a lot of the different issues across the curve. And I think that isn't part because of this idea

that they don't want to strengthen their own currency. Now. Now, of course, if if they have a maturing bond, they might participate in the auction just to roll over that bond. They're not buying new dollars or just rolling over the old dollars. Um But but you know, no new money

is going to come in. And and you know, even though even though you know, interest rate dynamics are going to matter here because eventually this might turn very significant because once the once the Fed's done hiking, I think what's gonna happen is that other central banks are gonna be catching up, and that's when you're going to see a significant turn in the dollar. And once you see that turn in the dollar, those all of those flows

could wind up changing very quickly. Um. Now, I don't think that's going to happen until three but um, but it is something to look out for because the FED is ahead of the curve here. Well, I can't see the head of the curve that other central banks in its hiking cycle, right, so therefore it probably will stop before the other central banks are done. The FED is the curve. Now FED has the curve just a quick

thirty seconds. Kind of a plumbing issue, dude. The dealers buy does the JP Morgan's of the world in the Goldmen Sex? Do they buy for their own account? At auctions? They have to Yeah, yeah, they have to bid for pro rata amount, so it's twenty primary dealers. They each have to bid for five percent of the auctions. That's one reason why in the US you won't ever have a failed auction um where you have less bids than

you have issued. But so so they do buy for their own account, but they've been getting much smaller over the last couple of years in favor of money managers who are much more active and really the incremental price setters at a lot of these auctions. See, so I just, you know, I don't know, step up and buy him. See these auctions. See they're important. I just learned something that. Yeah, well, I mean, how important is an auction where you have a whole bunch of giant banks that are that are

required to bid. Yeah, but you want him to bid aggressively, so you gotta put some competition out there, all right, Ira Jersey uh covers interest rates. He's a strategist Bloomberg Intelligence. Also, we didn't get to talk to about soccer, but he follows soccer religiously. He's also a part owner and some I think a minor league I think is a way to term it um soccer team professional soccer team in central New Jersey. So go figure how many strategies you

know that owns a soccer team. I mean, he's just like these big players. Next is gonna be the premier league. Some Americans have to care, Matt. There are a lot of electric vehicle companies out there. Just seems like I saw a Lucid Air the other day. You know, I told my wife, I said, there's a lucid She said, what are you talking about? Said lucid Air said, I still don't know what you're talking about. Um. It was pretty cool, all right. Peter Wine, he's the CEO of Centro.

What I love about There's a lot of things I like that's coming. One of it's based in Freehold, New Jersey. You know who came from Freehold, New Jersey, Grover Cleveland. Jeez, Peter, can you help him out? Who else is? They came from Freehold, New Jersey, between New York and the Pennsylvania and the Philadelphia and being good stuff. All right? Peter talked to us about Central. What do you guys do there?

What's talks about your business? Your company? Sancho's visue actually beginning in twenty thirteen, and that desired to transform the commercial see industry, which to like pseudo mission vehicles. Yeah, that has and the remains are so and singer of focus. Yeah. We grow from one low speed vehicle in twenties Penteam and the two a full product line that the currently will include a commercial vehicles and the seven for industry use with multiple variations and the one for off road use. Yeah.

So so our our mission is really try to lead the transformation in this automotive industry, and they try to become a leader in the electrical commercial vehicle sector. That's a little bit. So who's who's your who's your customer? Who's that a typical customer for one of your vehicles? Yes, it's mostly it's the free operators and also the municiples. They provided the local service and which is basically for

the commercial user morally. Right now, it's like a percent of our our customers for steady deliver and the like urban services. So, um, how much traction are you getting? I mean, what's your revenue growth look like? And how

are your projections? Yeah, we are already finished the face for the vehicle development and the way are looking for the first growing in the revenue and in the deliver delivery, and we are building our distribution and UH and the aftermarket support network in America and the Europe and something in Asia. So you've already you've already got what four or five thousand vehicles out yes, so far, Yeah, we already have more than I think more than five thousand

already being add to the market. So who do you compete against in that part of the market world. You know obviously familiar with the consumer automobile segment, the Tessil's and and now all the other O E M is getting in there, But who do you typically compete against? Who do you think you will compete against in this segment?

I think you know the company like uh like a workhorse, you know, that's our primary competitor, and all they're living and because the living they produce the pickups, they also uh makes deliver van. So that's our I think the biggest main competitor the market now. And I think you know, with the all the the product and ready, I think we are kind of like a leading the sector at this moment. So let me just finally ask you about the supply chain and the chip management that you've been

able to do. What does your supply chain look like and how is your access to microchips? Yeah, that was our you know, last years of struggling. So so it's just like everybody is struggling for the supply chain and aware.

I think we are in the very good position right now because you know, some of the r O E M is a tier one manufacturer and from from China and the previous we have a little bit of shipping problem, and but now we see all the shipping price school going down and that we are not able to get the container. I think, you know, we are strongly positioned and very well developed our supply chain base. I think

away in the supply chain we're doing. I think we're doing very good, all right, Peter, Good stuff interesting story here, Peter, when he's the CEO of Centro making electric vehicles for the commercial commercial vehicle segments. So interesting, you know, segment there that likely will be addressed there with a lot of competitors. Stuff there. What I'm very much focused on is in this space, but more of a consumer vehicle segment.

Harley Davidson. Today is down on the New York Stock Exchange. UM. Today is the day that they merge their live Wire electric motorcycle unit with UM. The spack. The spack name is a E. A. Bridges Impact Corps. Hopefully, dear goodness, they change that name. UM, so it's going to be I guess called live Wire now so you can get an electric Harley Davidson. Yes, Pounds Sterling steady here today one spot zero seven seven, but it has been under siege with mounting bets that it may below drop below

one dollar, the old parody thing. Let's bring in Stephen Gallo. He's had of European FIC strategy for BEMO capital markets. Stephen, is is parity for sterling? Is that a reasonable possibility? I think anything that reasonable possibility or this in this ethics environment, with this type of volatility, in these types of swings, UM, we'd like to say the bottom for the cycle is in. UM. We're kind of hoping that the bottom for the cycle is and the thing goes

for the top in the US dollar. UM, but I'd say we have moderate confection the view at this stage. UM, in terms of the dollar side of the equation, we're pretty confit in at this stage that most of what the FET is signaling is now priced in. Uh So, the transmission of set policy to the FX market via interest rate differentials, we think that has largely when it's

called course. But what we're less what we're more concerned about, unless unless certain is finished, is the extent to which the FX market prices in a higher global recession probability, as well as the the lingering effect or the ongoing effect I should say, of quanticative heightening from the fet Uh. These concern us a loss for non dollar currencies. Uh. If you think most of the Fed rate hikes are

priced in, where do you see the terminal rate? Well, the BEMO house is uh, you know, around four point six issue give or take for the effective set funds rate. And that's what he said basically at the press conference. Yeah, so, I mean, rough roughly in line with that, um, the effective that things are made. Um, we've got them going twice more uh in in two dozen twenty two and then hiking once again at the first meeting of two

dozen and twenty three. But the you know, the main the main point here is that that is largely the old that he reflected, and then some just find a little bit uh into the dollar O I ask her. So, I mean, if if we start to see um, you know, core inflation showing clear signs of decelerating in the United States and we get one or two months of negative job prints, that that will definitely be a big helping

hand for um, this dollar peach story. But on the other side of that, UM, we have to get through this issue of how bad the global and or US recession is going to be and we probably haven't gotten to the peak pricing for global recession risk just yet. Um, and until that happens, it's going to be harder for the dollar to fall sharply. Until we're confirmed that is so, the FED does a major pivot, it's going to be

hard for the dollar to fall sharply. Well, you know, this is a question that Paul has been asking for a couple of weeks now, and UM, we haven't really heard anyone say yes, Is there any bearer case for the US dollar? Is there a bearer case for the US dollar? Is there any bearer case at all in the in the medium to long term, potentially in the short run. Uh, it's tough to see it. Uh, it's

tough to see the dollar following system. I mean just look, I mean, if the FED word to engineer some type of the pivot and were to confirm that it's not that we're starting to see a clear science that core inflation pressures are rolling over and going in the set

for a direction United States. The labor market is well, you still have all of these structural issues ongoing geopolitical and structural issues on the capital flow side, uh, for a number of major European currencies, for Asia ex japan currencies, for the Japanese en. UM, that that defect pivoting to a neutual policy stand is not simply going to make go away. It might help the healing process beginning for those structural um claws and those currencies. UM, but it's

not gonna make no way. UM. You know, when we're moving from an environment or an era of globalization, UM where we got very used to ultra low interest rates, quantitative easing, high asset valuations, to an on the binding of that. Um, it's very hard for non dollar currencies to really sustainably uh. So UM, that's the picture. Unfortunately, Stephen, you've been in this FX game a long time. What did you make in the actual trading of pounds sterling

over the past couple of days? Pretty pretty wild moves there. Well, UM, I'm not I'm a strategist, so I don't I don't have to write, but I mean, it's just just just the movements. What what what was that market, Telly, and just the market was just really give us an adjective. I think I think that we've seen a very here, but probably in my view, a long overdue repricing of UK risk premia um because of the fiscal picture, because of the good picture, because of the balance of payments picture.

And I think that caught up with the currency and the guilt market this week and last week. And what you saw basically was a liquidity event, a low lack of liquidity in both the FX market and the guilt market, which made the price action ten times worse than it would have been. Uh with that to be there, um so um. You know, we're getting into a situation now where risk premia are adjusting, but they're not adjusting an orderly fashion. All right, good stuff, appreciate it as always

Stephen gal Bmo Capital Market. So we didn't even get to the end. We didn't even get to the end. But that was it seems like ancient history, but that was just last week that the Finance Ministry intervened in the Japanese end to defend the currency for the first time since that was twenty four years ago. Remember it. Well,

good year. Look at the housing market. We had new home sales data came out today, came in better than expected, uh six eighty five thousand verses consensus A five thousand, a little bit higher than last month, which was revised higher. But certainly they're housing sales are coming down from the peak of the pandemic. Question is can this housing market and engineer a soft landing or will it be ugly?

Can it serve five rates? Rates? And what did you say that mortgage races today six point seven that's a long way from you know, three and a quarter from just you know, a year ago. Sam Dunlap ce Io at Angelo Capital, join just Sam, love to get your thoughts on kind of the register, you know, the residential real estate market here, how do you how do you characterize the last few years? And and then maybe where

we are right now. Thanks for having me on a great question, you know, the to your point on you know, Cannon housing achieve a soft landing and given the pace of appreciation we saw and home prices really post pandemic um, it's clearly very difficult to sustain those type of levels.

And and as you all know, you know, case Shiller came out this morning and uh it was below expectations and one of the more swift declines we've seen in the index um, you know, rising six on a year of a year basis, but we expect you know, home the home pace of a home price appreciation clearly cannot sustain the current levels. But you know, the housing market was really benefiting from you know, this historic supplying to man mismatch that market participants have been identifying for years.

But the extraordinarily a little mortgage rates fueled surging home prices, particularly during COVID. While that's not sustainable. Uh, you know, we do expect the very favorable supply and demand dynamic in US housing supporting home prices, but the pace of appreciation clearly cannot cannot keep up. But what is um, what what does it look like in terms of US housing that makes you feel like it's supportive in terms of the supply and demand? Right? Is there just not

enough land? Our builders UM still having trouble getting Uh, construction materials are is labored? The problem? What's the issue on the supply side? You know, on the supply side is you know, we just historically underbuilt really after the global financial crisis and that that really has not changed. And very similar to the dynamics that we saw in the not late nineteen seventies with the baby boomers, you know,

they were forming households at a very brisk pace. We're still seeing that from the millennials, you know, on annualized pace of approximately one point two mill and household formations today and that's very supportive. Is is you know, the demand for single family shelter, particularly coming out of COVID,

still remains strong. But affordability has really been the challenge here as the FEDS is inflicted as as Chairman Powell wanted a lot of pain clearly on the economy, and the initial transmission mechanism has definitely been surging mortgage rates as you pointed out, and that's really hurt the affordability aspect, but the underlying demand UH and lack of supply and and just the fact of how underbuilt the US housing as we think, you know, achieves that soft landing for

for US housing and not the you know, extreme downturn that we saw really coming out of the financial crisis. What are you doing in your fund? Sam? You manage the Angelo Multi Strategy Income Fund, the Strategic Credit Fund, the Core Impact Fund, um Multi Strategy Income You see I T S fund. I don't even know what you see I t S means, But what are you doing

in those funds right now. Yeah, So you know, the mortgage market, like all areas fixed income, has been under a tremendous amount of pressure this year, just given the swift pace of tightening and a complete revision of of fat expectations. But uh, mortgages have been particularly sensitive to what we're describing is really a volatility shock. So you know, we we went through the first phase of the inflation shock. Is inflation with parabolic this year, as we all um

know very well at this point. But also you saw rates clearly repriced very swiftly, and volatility surging and the interest rate world to historic highs. And from a volatility perspective, we're really at a crisis like levels from a from an historical standpoint, and uh, that presents an extraordinarily favorable time for mortgages in particular, is uh we view, you know, this near term event is not necessarily a credit event where you know, mortgage credit is is frankly pristine and

it's the best that we've ever seen seen it. Um, the underwriting standards of an extraordinary unemployment remains very very low, and we still have a very brisk labor market. But mortgages, given the volatility and rate shock that we've seen have have really widened out from a spread perspective, both agency and non agency mortgages. UH prevent a present and our view an extraordinarily favorable opportunity here UH to lock in you know, equally like returns and and very high quality

areas of fixed income. UH. And we think that you know, patient investors will will be rewarded. Um. You know in this amidst this volatility shock, we're currently in SAMA about thirty seconds. But where does demanded destruction come in from a motor's rate perspectives here? Well, I think you're starting to see that demand destruction UH pretty significantly just given

the deterioration that we've seen an affordability. But as as mortgage investors, UH, you know, it's not necessarily contingent on the pace of housing activity. We definitely expected to slow

down and housing activity. But what's important clearly is more of the delinquencies and what that actual home price is if you actually have a default particularly nod agen see mortgages, and what that ultimate recovery value is and so uh, you know, if you think about the LTV of the US housing market today at approximately thirty we've never seen this much equity in the housing market. So we think, you know, the resiliency of of the underlying asset class

will will hold up quite well. But there is a tremendous amount of demand destruction just given the surge that we've seen in mortgage rates. UH. And and again activity will continue to slow. All right, Sam, good stuff. Really appreciate getting uh the review update on the mortgage market, housing market. Sam Dunlap see io at angel Oka a Capital talking about the housing market here, such a surgeon early part of the pandemic. Coming back down to reality.

Hurricane Ian, it made landfall in Cuba. Now it's got his sights on Florida. It looks like the west coast of Florida is going to get the brunt of it. Of course, that brings into question and Tampa. When you think about big, big metro cities, you think about, you know, some of the insured losses are and what that means for some of the big insurance companies in addition to the good folks on the ground. Matthew Palazola, Bloomberg Intelligence,

Senior Annals covering property and casualty insurance. He joins us here in a Bloomberg Interactive broker Studio. Tampa is a big market, big insured market. What are some of the estimates here potential damage? And apparently it's not a place that gets hit by hurricanes. A lot does not get hit by hurricanes often. Uh. There were some analogs in the eighteen hundreds, the forties, the fifties, um, but nothing

directly hitting Tampa. Lloyd's of London has a scenario, not for this storm specifically, but for a direct hit on Tampa, which could be a hundred billion dollars of damage. Now that's big, right, that is big. That would be the biggest insured loss ever. I don't know if it would. This storm is probably not getting to that level. But if we're talking about insured value in the region, that's

that's what we're looking at. Uh. It's gonna miss the oil rigs, right, so it's not gonna go Brian Sullivan was telling us yesterday, it's probably not gonna be west enough to hit the oil production hubs. That is correct. So it's it's really focusing more more east. So the models come out every six hours and they've been shifting. Initially they were all the way from Louisiana to Florida, but they've been moving more and more east to the Florida. So how far is it right now from the Florida coast?

So it's about forty eight hours from from landfall in Florida, and we still don't know. The latest run literally just came up minutes before I came in. Here was a little more south of Tampa. So a little bit better of a forecast from an insured lost point of view, a category one to two versus a two to three uh and south of Tampa, okay, So what are some of the companies that maybe have exposure there? From an insurance perspective, So it's interesting what's going on is the

reinsurance companies will definitely have exposure. There's a name is like so reinsure insure insurance company exactly. Those guys are the altar risked bearers, right, the reinsurers. Well, so the primary insurer retains a lot of the risk and then they give some to the resations, not not all of it. And ess interesting what's happening in Florida now anyway, is reinsurance companies don't want to be there. There's rampant fraud

in the state. Aside from the risk of these hurricanes Florida. No, yes, very much so. So they've been stepping back to begin with. So before any of this is even happening, Uh, primary companies are having a lot of trouble getting reinsurance to the point where someone are leaving the state or actually going insolvent. Interesting, So who are the biggest reinsurers? Are we talking about munich Re or International? Yeah, so the biggest reinsurers in the world are this, munich Re, Swiss Ree, Um,

I don't cover them. The companies I cover based out of Bermuda, their names like Renaissance Ree, everest Ree, they probably have. They will definitely have some exposure, probably less than than the bigger companies though. So how about some of the primary insurers that might have some risk. I mean, I just think of all those gleaming office towers that all the Wall Street terms are taking up now on the law firms. I mean, it is a major skyline,

it is a major city, man. I just some of these insurance companies might really be I'm sure they're paying attention to it, like of course they are. Of course they are. So the biggest UM, the biggest primary insurance state farm which is not a public company. H Then there's also a lot of the homes in the state are with the state fund, so that's it's the taxpayers

essentially paying for it themselves. There's other names like all state, um chub would be a name a I g. Who would have exposure to maybe commercial properties not not outsized though. So um does FEMA have any bearing on this? I mean, do they go in there and and help out to some extent or I think I guess so it will, you know, eventually, depending on how bad it is, It wouldn't matter dramatically for the insurance companies what what FEMA does. But I guess it all depends on the severity of

the storm. But what's the big story long term thought about the insurance business? Climate change just more and more radical. You know, there's found more fires, bigger fires, more floods, bigger floods, hurricanes, all that kind of stuff. Yeah, it's all it's all happening. I mean, um, the reinsurers are kind of the first line in this, so they're the ones that are stepping back and saying these risks are

getting too big to take. What probably will happen. We just had a cold today with someone who said there might be more public private partnerships, meaning the insurance just we're just not doing it. And if you want to live close to a wildfire area or you want to live in a hurricane prone area, then the state is going to have to work out some solution with you and it's going to ultimately fall in taxpayers. But you do see um, uh, these kind of events happening more frequently.

We do. I mean, there's no one is saying that country is not happening. I would say one thing, there was a big period of kind of benign weather right before this, and now we're seeing more extreme So could we could we be in a mean reversion or could we be in a kind of crazier weather forever? Uh, you know, we don't know. Alright, good stuff. Matthew Palozola, Bloomberg Intelligent senior analysts covering the property insurance business, joining us in studio. He does not phone it in, he

comes in studio. So we're talking about Hurricane Ian. Obviously it's a big, big, big issue for all the good folks down there in far to to deal with it. Looks like it will be a pretty significant storm. But there's also the business end of at the P and l end of it, which is the insurance angle h and kind of what is the ensurable losses potential in some of these markets. So guys like Matthew help us out there. Thanks for listening to the Bloomberg Markets podcast.

You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Pet On Ball Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio