Markets, The Fed, And Crypto

investors is how aggressively will they be doing? Are we talking twenty five basis points at a time, fifty basis points? How much an aggregate? Let's check in with somebody who kind of does this stuff for living. David Riley, chief investment strategist for Blue Bay Asset Management. David, the US Federal Reserve is in a hiking mode. How do you

envision it playing out? Hi, Paul, Well, I actually think the Fed is more likely to have a hiking cycle rather like the one that we had in and that's where the Fed, you know, it was actually very aggressive. It hiked rates by three hundred basis points in the course of um twelve months. It kind of got ahead

of inflation issues. The economy did slow down, but it didn't go into recession, and so you know, the FED engineered a soft landing for the economy, retained its kind of UM anti inflation or reinforced is anti inflation credentially. So I actually think that's a more likely past now for the FED because it is behind the inflation curve than this kind of you know model that a lot of people look at, which is two thousand and four to six, where it was a very gradual, very predictable,

twenty five basis point hike at each meeting. What does this mean then for positioning? Paul and I have talked a lot about duration. Are one hundred year bond is down about fifty has duration does not do well in higher rates. How are you thinking then about what this means for positioning an important folio out. Yeah, so I do think that, um, you know, we've we've got a lot now priced in. I still think the market is underpricing where the FED is actually going to go up.

So in terms of positioning in our fixed income port boliers, we would still have over the medium term a UM short duration bias when it comes to US rates would still rather express that at the shorter end than at the longer end, because as you've been reporting, we're you know, seeing a pretty dramatic flattening of the treasury curve and it's and it's quite I mean we've we've also had a sort of intra day UM that tend to invers

as well. So and then within credit, I think it makes sense to be thinking about kind of moving up in quality, getting access in a high inflation environment to real assets, so maybe taking some exposure through you know, securitized mortgage securities as well. All right, David, I'm going for yield. I'm ready to take some risk. I'm going looking at the high yield market, maybe even the leverage loan market. What are some of the sectors I should

be looking at right now? Yeah, I mean the sectors that have done you know, pretty well within the high yield and leverage loan space, UM, as you would expect, has been UM energy, UM. I think the other areas where I would go would be and we have been going,

is some of the more defensive sectors, so UM, consumer staples, healthcare. UM. There's not so much tech, but you know, what you want to get I think is exposure to sectors or those names which can absorb those higher input prices, those higher input input costs that are coming from you know, higher gasoline, higher ore prices, and energy prices more more generally have the you know, the pricing power to absorb that, where I would the void would be things like sort

of some of the industrials, you know, auto park suppliers margins are pretty low. They're going to get I think quite um squeezed in terms of those margins. And more recently, I've actually been shifting from loans back into high yield bombs because you know, we've had a lot of repricing or higher rate risk is now in in in high your bomb prices. Well, in terms of leverage loans, we're going to see significant increase in the cost of that funding for a lot of uh for a lot of companies.

So a bit more bias towards more defensive sectors, higher margin um and also to you know, starting to shift from from loans into high yield I am curious when you think about credit, how much of that is a sort of a fundamental strong economy call versus shorter modified duration than investment grade and it's just a shorter duration call. Yeah, as a the fair point, um. I mean, I do think when you look at it's interesting when you look at the credit market more more broadly, um, including in

particularly within the high yield market. I mean, we're just not seeing of sort of really meaningful signs signs of of of of cracks. And I do think that, you know, the liquidity position of companies, including within the high yield market, is actually still very strong. I mean they've built up huge, you know, pretty big cash balances. Leverage is actually now the lower it was just prior to the pandemic. So I think, you know, default rates, the fundamental kind of

credit risk is actually looking still um, pretty good. So I still think it makes sense, as you've suggested, to have a bias towards higher yielding because you've got that kind of spread cushion against higher rates and it's a shorter duration asset. So, David, you know, like the rest of the world, we're watching what's happening in the Ukraine, and but for Americans there's a little bit of yeah, but it's over there, But over there is in the

backyard of Europe. How is the European credit markets reacted to the geopolitical issues taking place to the war taking place in Ukraine. Yeah, I mean it's been interesting because I mean, it's certainly the case that European credit has um since Russia's invasion of Ukraine underperformed u US credit. It's sold off initially much harder, and then it's come

back um or tightened less quickly. And I think that makes sense because you know, I mean, I think the economic and the year political risks are much greater for Europe than they are for the United States in terms of the Russia Russia Ukraine crisis. And you know, gas prices is a huge issue for for for Europe. Even though we've seen you know, some um the recent decline or or drop in European natural prices, they're still you know,

five six times where they were a year ago. And you know, talking to some of our analysts have been taught, you know, analyzing companies and talking some of those European companies, they're feeling some companies are starting to fill this neece from this increase in emper prices. And we've just seen German inflation at levels we've not seen since the early mid nine seventies, and that's painful to consumers, but it's painful for businesses as well. Ye. Good stuff. Hey, David,

thanks so much for joining us. David Riley, chief investment strategist for Bloombley Asset Management. We got Michael McKee, Bloomberg Economics Editor. Here's here in a Bloomberg Interactive Broker studio. After chatting with Richmond FED President Thomas Barkin, again he seems like a reasonable business base. FED president came across pretty reasonable to me. But Rachel going up and they're gonna do what it takes. Rachel going up, They're gonna

do what it takes. Uh, He's a little less convinced. I think that grates have to go as high as some people are suggesting, and he's open to a fifty basis point move, but not saying it's definitely has to happen. He's not a voter this year, but in terms of his opinion, because I think he maybe gets a view from the district, from the CEOs in his district that as you heard, things maybe slowing down a little bit, not a whole lot, but these things tend to gain

momentum as you go along. You had a really good question about sort of the wage spiral and maybe that self fulfilling prophecy of if inflations higher costs arising, you need higher wages to keep up with that, and then companies have the ability to raise costs again because they know that workers are getting paid more. Is that a legitimate concern. Well, it's been the fence concerned all along.

They don't want people to start thinking that inflation is embedded and going to stay that way, because then they keep asking for more money. Tom was suggesting that we might be seeing the early signs of that slowing down because companies did raise prices and now people are they had to raise their wages to keep up with it and to get people back into the labor force. But people may at this point have gotten the rays they need, and if gasoline prices in particular come down soon, they

may not need to continue that. But it is their biggest fear. I just had my year in review. I did not experience any wage spiraling anywhere. I mean, maybe inching is maybe the better thing. And you're gonna be complaining when you fill up that pancakes, right, all right? So this federal reserve um is there still an argument to me that they're behind the curve um. I'm not even sure what that means, but it's certainly something people toss out there. But it feels like my federal reserve

is moving here while they are moving. They've moved once, and it looks like they're going to speed it up. Behind the curve is a sort of matter of where you sit and what your view is. Uh. People on trading desks are always going to look for a reason that they didn't lose money. Uh, something else made them lose money. Uh. So you know, some people are gonna say they're behind the curve, some not. The FED is trying to figure things out in a world that's different

because of the pandemic from the past. So that's that's one of the troubles that they have. And now it's gonna be interesting to watch. As I asked Tom, you know, how do you how do you know you've done enough or done too much? When policy works with a lag and we're in a situation like we are now, speaking of curves, I've been breeding a lot of notes recently that, of course, sometimes we really look at the three month tenure, but if the FED is still behind the curve, the

two year tenure is maybe doing a better job. I've given us more of a realistic view. Is the FED looking at yeld curves? What do you make of those comments? Now? I think the people who are looking at yield curves, or the people in the media, when the yield curve gets close to inversions, looking it's you got very excited and all twenty three seconds it was inverted you you were just ecstatic. Um, the FED, is the yield curve tells you that at some point do you think that

the economy is going to slow down? The problem is there's no timing on It could be eighteen months, two years ahead of time, and is it really connected to the yield curve or is it something else that comes along. The FED looks at the three months eighteen months forwards because that tells you sort of where they are now and where the market expects them to be in a year and a half, which is a little bit more sensible in terms of what you're trying to figure out.

But it makes a nice conversation piece and a question to ask people. All Right, Michael McKee, thank you so much for joining us here in our interactive broker studio, giving us a summary of your discussion just moments ago with Richmond FED President Thomas Barkin. Uh, he's uh Richmond the home of the University of Richmond Spiders, my alma mater. Right now, let's check in with Michael Hans Hans ce IO of Clarfelt Citizens Private Wealth. Michael, thanks so much

for joining us here. You know, we look at these markets and kind of you know, not much going on today, but we've certainly had volatility so far in the year. Where do we go from here? What are you telling your clients? Good morning? Thanks for having me. Volatility is likely going to persist for you know, the better part of this year, and I don't think it's a surprise

to anyone. I think there's a fair amount of overall economic uncertainty and then you throw a geo political event into the mix that exacerbates, you know, the challenges that the FED has, and no surprise that we're seeing markets, you know, influx. What what we're expressing at this point in time as it relates our portfolios is you know, very little in the way of meaningful changes. Uh, as

a reactionary function to to what's been going on. However, we are we are thinking about the outlook you know, given given where things are moving, but you know, the forefront UH conversations are let's not react to aggressively to the geopolitical aspect and let's keep our attention onto the path of the economy. Do you have to react though,

to some of the inflationary pressures underway? So I think the elements around inflationary pressures in our minds have been in in UH position over time, right, And so to be underweight duration and fixed income has has been important. And you know, like the key seem that we've outlined over the course of the last year or so, because again it's difficult to to position in an environment where

your compensation was just very limited. That dynamic is changing now and we do not feel we're in a position yet when we want to play offense and and yet long duration yet. But I think that's a meaningful positioning that we've had going into this, and I think that's that's been a clear benefit. I think over time, the interesting dynamic is that duration will become more interesting as everybody is most negative and pessimistic on the space, and

that's that's actually been increasing. So the outlook for fixed income is becoming more constructive while this recent roundy off off of the lows and the equity market again, I think it just dictates that there's going to be a little bit less potential upside the balance of this year as we work through market market fluctuation. Okay, Michael, I've I've heard and read the recession word more and more over the last two to three weeks. Is that something

that's in your outlook not not for this year? And I think think it's it's really interesting prior to guests outlining, and I think you know, Mike mckith mentioned that it's the media that's heavily focused on the yield curve. I think the old curve is is not necessarily the indicator.

It's more of a symptom of what is going on and that and from the timing perspective, you know, the data is very clear that it's a difficult mat and isn't utilized to make significant adjustments, right, It's more of a coincidence factor of what's going on. Our clients are also focused on that, and that's certainly something that comes up, but it's not the first time. So the education around this is something that gives us. Can you know, the

rate race of flax, right. You you look at a variety of other metrics, but I think we keep on coming back to the fact that we have re established trend economic growth. Uh. There there are good stabilizing factors in play this year, specifically balance sheet extation that's coming up.

More exflation is absolutely coming, but I think that's also I think we're looking at historical time frames and again these are the types of words that come into play, but in the environment we're in, we're actually looking at above trend economic growth this year. The first quarter is going to likely come in a little bit softer, but if we have above trend growth for the balance of this year, you know, it does it does beget the need to have again, can newed equity exposure in a portfolio.

The one the things that I think is really important that you don't I don't think we hear enough in in the media is that investing is not a binary game, right, and that that all too often and is what we really emphasize with our clients. We really thoughtfully construct portfolios

that are highly diversified. And I think what's really important now with the context of the last couple of years and this entire cycle you know, and even coming into this year before we had market downturns and when markets were at all time clients are our major points to clients was resetting a level of expectation that we don't anticipate the race of return to continue in the manner of which they did last year. Was that bailed out by a well above historical norm equity market, and that

mass some of the challenges within fixed income. Our outlook today has actually improved in a meaningful manner given where interest rates are interesting. All right, hey, Michael, thank you so much for joining us. Really appreciate getting your thoughts there. Michael hans see i oh of Harfeld Citizens Private Wealth Management. They're based in Terrytown, New York. And Michael's got a green dot next to his name, which is good to seek. Looking at the bitcoin here, we can't do that because

Tom Keen is not here. Bitcoins off just about one percent here, still above forty seven thousand. Feels like it's been in this fairly tight trading range. Maybe that's just me, but you know, we see the moves one or two percent every day, but it's still kind of in this range. Uh, let's bring on Katie Gridfeld. She's a cross as reporter and Bloomberg Quick Take co anchor. She joins us here

in a Bloomberg and her actor broker studio Crypto. What are you looking at take, Katie, Well, like you said, Paul, the price action we did see actually a break above that range, a little bit. It got above forty dollars a coin. It looks like it's staying there. Hasn't pushed much higher beyond that. And I think it was last week that we were having this debate with Matt Miller about whether it's a good or a bad thing, that you've really seen the volatility of bitcoin drop off. And

I have some new numbers to share. This comes from Mike Reagan. He wrote a great column yesterday that if you look at the ratio of bitcoins realized volatility to t l T, it's that long bond long treasury et F, it'small into less than one point five five versus seven just six weeks ago. So you've really seen bitcoin volatility

really drop off a cliff. Even though it did manage to get a little bit out of that range, it hasn't gone Why the retail investors, Okay, that's probably yeah, no, but you have seen some enthusiasm come out of the space. The fact that you saw that big draw down from basically November until February, I think that washed out a lot of positions. That's what I've been hearing. It really flushed out a lot of those retail players who haven't really come back into the market. You do hear about

some big buys. I mean, micro Strategy was out yesterday with an announcement that um they would lever up to borrow more bitcoin, but maybe those retail participants aren't there like they were maybe six months ago. I'm curious the focus has been a lot on Bitcoin. I was watching Ethereum, which hasn't quite you know, sort of recouped a lot of the losses the way we saw with Bitcoin regaining some of the the year to date losses, Ethereum has to, but you just don't quite hear about it. The way

we have about Bitcoin. Ethereum is funny. I mean crypto in general is funny. Where a bitcoin, it's supposed to be this magnificent store of value, really acts like a leverage tech stock. And then Ethereum, there is a lot of excitement around the Ethereum blockchain, but Ether the token more than anything, it acts like a leverage bet on Bitcoin. So it's interesting that in this rebound that we've seen in the crypto space, it's really been Bitcoin lead, not Ethereum.

I'm gonna be interested to see if those correlations ever break apart at some point, because you do have some different fundamentals on those blockchains, but the tokens just trade in tandem. You hear that fundamental? I said it, Where are we now that there was a hack right on one of these crypto things on out now? I know it's a real classroom. We started about talking about hacks. What happened there? There are more and more hacks, so

this is really interesting. Involves what's known as a bridge, which basically likes to move tokens from one block chain to another. So thank you know, it's pretty hard to move money from Venmo to PayPal. This is basically a bridge that kind of connects the different blockchains so you can move money around. But you're seeing more and more hacks of these bridges. You saw one in February with wormhole. You saw another one. Uh, news of this break yesterday.

It's actually took six days for them to uncover this hack, and let me just explain what it was. So there's this play to earn game called Axie Infinity, and what we learned yesterday was that hackers sold about six hundred million dollars worth of tokens from the blockchain network connected to that game, specifically from the bridge that connects it. And again it took six days for them to uncover this,

So that's a lot of money. So hold on. So you could argue that the thesis of ethery um or bitcoin or the blockchain is still intact, because that is supposed to be sort of right, this decentralized, unhackable if you will in quote. So the fact that they can say it was the bridge and not like the underlined blockchain,

does that thesis then still hold up? Yes, I would say that that most people, most of the criticisms I've seen this is mostly focused on the fact that you have these bridges, and the problem with these bridges is that the computer code that makes the mark it it isn't audited. So basically, these hackers are finding ways to exploit that computer code in the way it's written. So you could form an argument that is it really a

hack if we're just following the code. I think a lot of people would say that, yes, you are hacking it, but again it's in the code. They're finding these exploits that let them basically siphen these coins out of the bridges. All Right, we have a Federal Reserve here that is raising interest rates and pretty significantly. Do we have any idea how crypto broadly defined ken and will or could

perform in this type of environment. It's a great question because the last time the Fed really was raising rates in that's when the last cycle ended. I mean, bitcoin was less than five thousand dollars of coins. It wasn't in the mainstream like it is now. So I think this is the biggest test that we're coming up a

real full blown rate hiking cycle. I mean, if bitcoin continues to have the same properties that it does now where it's just a leverage bet on tech stocks, you would think that would be bad news for the price of bitcoin. But I mean we've seen tech stocks completely defyed that logic. So Paul to go back to his desk and try to figure out the discount rate to plug into the cash chairs to get the present value of bitcoin. If you could let me know that would

be really helpful fashionable article out of it. Yeah, exactly, we'll have to see. I mean again, Bitcoin uh kind of steady today, still forty seven thousand dollars per token, and we quote it just like we quote equities and fixed income. It's an asset class to me. That's why I always keep it front center here, Jamie Diamond, I know is still a little uh skit issue about it, but the just and you talk to the younger folks in finance, this is it Crypto is it? I mean

it is you. Yeah, it's not going away, so you've got to get in front of it, I think, and I think the regulators are trying to get in front of it too, because they are not but uh, you know, the SEC chairman against or maybe focusing on that. All right, Katie Gryfeld, thanks so much for joining us. As always, Katie Gryfeld, cross asset reporter and Bloomberg Quick Take a co anchor. 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 full Sweeney. I'm on Twitter at pt Sweeney before the podcast. You can always catch us worldwide at Bloomberg Radio