The Fed, Interest Rates, And Pandemic Darlings (Podcast)

on and on this economy. She's a former advisor to Fedo Reserve Bank of Dallas, so she knows FED speak when she hears it. Danielle, thank you for being in our studio. I think it's been more than two years on my show at least than you've been in the studio. Um. Now to me, we're back. When Danielle D Martino Booth flies up from Dallas comes in studio, we're back. Well, I'm not the only one this place is buzzing. Let's see if humanity it's getting getting better, getting better every time?

All right, what would surprise you from the FED this afternoon? What would spook the markets from the Fed serve, you know, as confident as we're seeing market pricing. I think that if if Powell was to allude to kind of the Bullard bomb of seventy basis points, I don't think markets would take that very easily. I think they want for him to stick to If it's going to be fifty basis points, let's be consistent going forward and plan on

that in June and July. And by the way, caveat that chair pal by saying we're going to remain dated dependent. And the market is expected, the market was expecting in March a little bit more detail on the launch of quantitative easing and how they're going to ramp up to this dollars a month. I think the market is going to demand details today on that also starting off this month.

I think it's the balance sheet that's caught most of my attention, right, I think as as as I would say the entire investor community has, because we've never really been able to successfully execute q T. Right, We've only ever done this once before, and we had to kind of backtrack. And when I say we, I mean the Federal Reserve. I had no hand in it, but I used to use. We we we the people um but talked to us about what is the likelihood of not necessarily the rate high side of it, but the balance

sheet being executed correctly. Well, I think we have to bear in mind that there was this there was this quirky third quarter corporate tax payment that was due that kind of launched the not QE illiquidity era in two thousand nineteen that so spooked the markets. Right now we're seeing reserves already declined because tax receipts are up so much and Americans are about to pay their property taxes.

So as this is with with this as a backdrop, the FEDS about to launch QT, so there's already liquidity coming out of the market, reserves coming down as the FEDS getting ready to launch. So not everything is in their control with Quante Dave tightening, and certainly out of the magnitude and scale that they're contemplating, and most of their mortgage backed securities are at such low cubans that

the Fed would effectively had to book a loss. It wouldn't look like that, but there would be certainly some progressives on the Hill who would view it as a loss if they actually had to go as far as the nuclear option. I call it the nuclear option. That's selling mortgage backed securities off that balance sheet to hit

that bogie that they've got. The FED, you know, in the past, has reacted to market volatility um and maybe being a little bit more cautious, and we have I would argue, we have a volable marketplace so far here in two get the SMP down or so. Do you think that might impact their actions here? They might be even maybe a little bit more cautious and what markets pricing in No. I think that that. I think that the strike price of the foot of the FED puts

has changed dramatically. I think that he realizes. I think that Powell and others realized that speculations become rife in the stock market. I think they want to cool housing down, and I'm I'm being polite and diplomatic on that. I don't think they'll go so far, however, as to break credit. So I think that what they're paying attention to is the fact that we've seen a doubling and triple see

high yields. You know it's north of ten percent. How yield is actually high, and so you don't want, you know, Bloomberg's bankruptcy tracker bc y go. It's a great thing to follow and even know about it. It's ticked up. It's ticked up after hitting an all time low in February, so you're starting to see some insolvency issues creep in. There's a trillion dollars of non financial debt to be refinanced in two thousand twenty two alone globally, Danielle, So

we have the FED today. Are you in the camp that says the FED is behind the curve, ears behind the market? Um? And if you are in that camp, can they do anything about it? I don't think there's any way to make up for lost time. And I clearly I'm in Randy Coral's camp as well, because he came out and said flat out, we would have been acting sooner had there not been a crisis of leadership inside the FED, and so I think that it has

been widely acknowledged. I think that the FED is in a pickle when it comes to continuing to ease credit by virtue of having such a massive footprint in the mortgage back securities market. And I don't think there's an easy, elegant way out. I don't think that there's a reasonable path that anybody can paint of a soft landing. Really wow. Alright, So let we're also talking off air about China Germany recession risks there and how that may drag the US

into a recession. How do you think about those dynamics. In fact, there was some great math that Bloomberg Economics did that they published yesterday that shows that if there's one thing that's going turn US inflation around, it's if China stays in a funk. And we fully anticipate that

to be the case. And so if this carries out in Beijing, and I'm watching Bloomberg Asia every night when it comes on the air, If this carries out from Shanghai into Beijing and we carry this through may that means that China is effectively in recession, that Germany, that

the world's third largest exporter is in recession. So you tell me how the United States, stuck in the middle, is the world's second largest exporter, How how do they resist that gravitational pull of the two other largest exporting nations being in recession. If we were to enter into recession, do you have any sense of how deep, how long it may be. You know, that's also a secondary question.

So it was interesting. UM an interview from Milkin yesterday and Bloomberg talked about, you know, the hopes this was the President Coke from Goldman Sachs, the hope it would be a shallow recession. I just can't say, there's so many If you look at trend, we should have six million more Americans in the workforce right now. They want to do where are they had we stayed on pre

pentemic trend, So there's already that initial drag. And again then I I'll reiterate what Amazon said was really important. They said we're not going to stop at attrition with our warehouses. We built too many warehouses, we hired too many people. They effectively said, we're gonna we're gonna fire a hundred thousand people, and that's going to reduce our headcount. This is kind of the first this is kind of

the first volley, if you will. And if you look at indeed dot com job postings, they decisively turned in very early February because I thought that labor market was just rock solid, and I guess we'll get some more data. Well, this is something that was a point of pride for a while. I remember in early twenty you had ground Powell coming out and saying we have a great labor market. It's really tight, and now that's kind of become a negative almost he says that we have an extremely tight

labor market. This is something we have to address. Do we have to address it? I think the market is going to take care of addressing it on its own. I mean, you don't have goods consumption step back to the extent that Amazon told us that goods consumption was stepping back. You don't have good consumption stepping back and inflation running where it is for essentials uh and and landlords trying to make up on what they lost during

the rental ediction moratorium. So you've got your three essential energy, gas, and housing. You don't have inflation running amok and and and try and say services are going to make up for it. But is there. Sorry I was gonna say, I gotta, I gotta get in here, but there not to make it too simplistic of an approach, but if we're looking at declining demand, a slowing demand from the American consumer specifically, and you're also seeing slower supply chains

MSS or slower exports. You mentioned China, you mentioned Germany in terms of net exports. Does that in some way cancel out a little bit. Well, the one thing that we don't have to worry about as much, and bless j Pal's heart, is the supply change in structure, because what we're seeing is this magnificent build. If you look at if you look at the company earnings conference calls, there are so many companies that are saying, we've got

enough inventory on hand, it's no longer a crisis. But now we have to consider the fact that warehouse expenses are higher than they've ever been, and they have an expense to carry this inventory that not a single operations manager in the current generations accustomed to because their entire career has been just in time as opposed to just in case. I learned just in time back in business school in the late eighties early nineties. Is that a thing of the past. Do you think is that taken

a big blow? The stockpiling that we've seen suggests as much. I mean, they were so burned by not being able to get the product on hand to keep the production lines up and running that they do have inventory on hand now. So it's there's not the same crisis because of what's happening in China, because there's not the same demand pull from our ports, because because supplies have been replenished.

So as it relates to what we're here from the FED today, um like I kind of felt like the inflation we're experiencing today isn't so much a result of the FED, because the FED has been easy for a long time. It was a pandemic, it was a supply chain, and once that stuff plays out, inflation will play out. So I'm surprised that people are depending so much on this Federal Reserve detain inflation. It's it's it's wrong headed,

and a lot of it was all that. You know, when you pump forty of US GDP via fiscal stimulus into the economy, you're gonna generate a heck of a lot of inflation. And that, in my opinion, is why President might have initially scheduled his press conference for two o'clock thinking he could compete with the FED statement being released, which obviously he moved that back to eleven am, figuring

out that he couldn't. But it was I mean, I think initially it was literally an attempt to distract from a fifty basis point right hip, And I don't know if you've already hit this, but we also are expecting comments from President Biden today at two o'clock as well. No, no, he moved it to eleven. Oh to eleven. I'm so sorry, but what did at one point? And the topic of this conversation even at eleven is going to be about economic growth? How much of a concern is this fifty

basis point hike? Is this going to scare the consumer or scare the American public when they see Chairman Powell today if he does indeed deliver what the market's expecting very well? Could I mean sixteenth two thousand, that's the last time that they launched a fifty basis point hike. That was one month almost to the day from from the day the dynastic peaked before it completely imploded. And people are beginning to draw parallels, maybe because they follow

me on Twitter. Daniel d Martino Booth follow you on Twitter. Daniel DeMartino Booth, CEO and chief strategist for Quill Intelligence, former advisor at the Federal Reserve Bank of Dallas. When we talked to FED, we'd like to talk to smart people who have experience with this stuff, and Daniel is certainly not camp here. Let's get back to these markets here, because it's going to be a busy day, a busy afternoon, and probably into tomorrow. Market's gonna be digesting a lot

of commentary coming from the US Federal Reserve. Let's bring an Anders person, chief investment Officer of Global fixed Income for Nuvine Anders thanks so much for joining us here. You know, we kind of we pay a lot of attention here at Bloomberg News and Bloomberg Radio on TV on the Federal Reserve, and when we do have these press conferences with the chairman, this one today seems to be even more so because we're gonna have a FED that's gonna go really into hawkish mode here. What are

you looking for this afternoon from your Federal Reserve chairman? Sure, yeah, we we we do believe that that they're going to be announcing it's if two basis point tied today we're in our mind it's been well telegraphed a Powell and very much in line with that market expectation. So so, certainly, as you said, it's gonna be a lot of focus on this today, um certainly more so on the press conference, um, you know, trying to read between the lines, what kind

of signals and inside the power of passing along. That being said, I'm not so sure that we're going to get a whole lot of tangible new news here. It's probably not going to be much of fireworks where frankly, we're not going to get an updated dot plot or any new forecast at this meeting. So it's going to be again more kind of reading between the lines, kind of figuring out if we can read anything into any

kind of signals one way or another. So while we're hoping for a little more clarity, I have I have a strong suspicion it's going to be a little bit more of a vague message from Powell, more noncommittal, certainly probably not going to be commenting all that much and what kind of size hikes we can expect here going forward, probably reiterating that he's going to be it a dependent

um uh here going forward as well. So certainly key focus here, but I think today probably not a lot of details and maybe more interesting to hear where some of the committee members kind of speak about here in the coming days and weeks, well at least there'll be an in person press conference there, so perhaps we can get a little fireworks going there about the balance sheet run off here, This is something that I think the market's trying to, you know, just you know, learn a

little bit more about what do you think we'll here fed Sherman j pal about how this Federal Reserve will actually you know, affect a balance sheet run off? Yeah, that is that is the area that will hopefully get a little bit more clarity around and let's go a little bit more new news. Um, you know, expectations is on our end, and I think the market is that. Um, they'll they'll talk about a June kind of kick off.

They talked about these cap sizes around sixty billion for treasuries, thirty five billion for mbs, most likely a three month ramp up, So you know, all in all, I would call it probably going to be in line with market expectations.

Maybe a little bit more clarity around that, but I think Powell and team have done a pretty good job communicating sort of where they're heading, and I'm guessing it's mostly going to be radiating what they've been signaling here for a bit I have to ask about negative yielding debt because we are looking at a tenure yield that has bounced off three twice now, once today and once I believe a couple of days ago as well. You're also looking at a German boond that has crossed one

percent several times as well. But negative yielding debt is kind of almost going into extinction. What would reverse that trend? Yeah, No, I think it's it's certainly it's I would call it, first of all healthy to see these changes and things from moving into a more normal kind of state all in all, because I think we can all agree that negative yielding debt is not you know, sort of what we would like to see in a in a fully

functioning econ mean what have you. So I would say, we're you know, setting a new range here, and we would expect more of a range bound both from the treasury side and from the boons and more broadly in Europe.

So I think, um, you know, if if if we were to turn over, um, perhaps if if there is a central bank policy era or FED era going forward where you know they go to aggressively and in fighting the inflation, uh, and we end up you know, kind of dipping into a recession most likely next year either here in the US, so maybe more likely in Europe. Then you know, we we have to assume that those deals will come down again. It could be slipping down

into the negative territory again. We're hoping that's not to

get base case certainly. Um, it seems like we're making the right steps here going forward, but at the end of the day, we have to, you know, take a step back and acknowledge that there's still a lot of uncertainties out there in terms of deal, political kind of top situation, the Chinese lockdowns, some of these cross currents around economic economic growth and inflation, and and the soft lending kind of type approach to all central banks are are trying to achieve. It's not going to be easy,

so I wouldn't rule it out. Um, we're hoping for the best here, but but that's not a base case at this point, and there's a lot of folks are really looking to this for the reserve too bring down inflation. I don't even think they caused inflation. I kind of feel like it was a byproduct of a reopening global economy, supply chain issues. Uh, that those types of things that and that's just gonna take time to play out. How do you envision or how do you think about this

Federal Reserve in its ability to fight inflation? Yeah, I mean, certainly it is unprecedented times, and I think we have to again remind ourselves that we're dealing with with something that we really don't have a playbook around, given of the COVID shutdown and supply chain related issues as you mentioned. That being said, I think our view is that inflation likely did peak, most likely in the last month or so.

When we look at some of the core durable goods numbers, for instance, you know, new cars have been kind of rolling over. We're seeing energy prices moderating at this point. We are seeing the signs that inflation at least is moving, you know, lower and in the right direction. We're we're expecting core inflation kind of at four and a half percent at here and uh and and continue to go lower next year. But um, to your point, I mean, the FEDS job now is to to really kind of

tighten financial conditions. So we see that psychology shifting from consumers from companies and what have you, so we can see that trend continuing here in the coming months. So I think they're on the right path. My you know, the concern I guess we'll have is that they're going to be a little bit too slow in their actions. All right, And this person, thank you so much for

joining us. Really appreciate it. Ander's person, chief Investment Officer of Global Fixing, come for Nouvene giving us his thoughts on kind of how he thinks his Phoederal Reserve is gonna navigate this high level of inflation that we're all experiencing right now. All right, it has been a rocky tech earning season, I would say here for the first quarter.

Some positive surprises, but probably more negative surprises. Cap off just recently, most recently with the lift and Uber lifts down, Uber off ten percent here, So some real challenges for some of these tech investors. So we talked tech. We talked to Dan Ives. He is one of our leading voices on all things technologies. He's an equity research and also would Bush Securities and managing director over there. Um, Dan, thanks so much for joining us here. Let's start with boy.

I go back to last Friday, we had Amazon. What happened there in a big sell off in that stock and then we had lifted Uber. Today as you step back down, I know you have this lens and think about tech. What's the market telling us here? Well, I think it's to have and have not in tech. I mean you look at a m D, Microsoft, cyber Security, Apple, outside the supply chain Strong, you look at some of the e commerce work from home beneficiaries that's been a disaster.

And when we look at with I mean they're spending money like rock stars, and ultimately that's something in this environment, even though for good in terms of a demand rebound to get drivers back on street, any sort of issue, the stocks will get crushed. So I think what we're seeing, Paul, is it's a bifurcation within tech, enterprise, Cloud, cyber semis, Strong, everything else. You know, we're seeing weakness, but I think the there is kind of an extremity, almost to the

extent that some of these stocks are getting punished. I mean, off Amazon earningclin right off the bat. That isn't a normal move, even off of an earnings disappointment. A similar story when you're looking Lift, for example, we're looking at those shares down thirty almost Uber down eight point eight percent as well. These are really extreme moves, and I don't necessarily think you can blame the rates picture. So why these particular stocks, Why such an outsize move. Look,

I think it is as nervous of an environment. I mean, forget Mark two twenty, but it's just nervous as I've seen talking attach investors institutionally, I'd seen eight nine years because of the Rubik's cube macro fed raising rates and what we're seeing on valuations, and I think any crack in the armor, any softness you're seeing what I've use overreaction and a lot of these tech prints, and I think it just speaks to what I view is an

over souled tech tape in a complex macro. But I believe it sets up for what over the next quote three six nine months is going to be a significant rebound tech for the high quality tech games and obviously just this massive white knucle panics. I feel like it also matters who's doing the selling right. I love to quote Vanda Trakh, who has really made a name for themselves in terms of retail flows, and they said, every time they're selling, the selling is coming from institutional players.

The buying is coming from retail players. What does that tell you about the significance of tech and portfolios right now? Well, I think it just shows it's a massive risk off at the same time. So we could say everyone owned the same names from an institutional perspective, and all of a sudden you head for the elevator at the same time. And it's just from a volume perspective. That's why we're seeing some of these moves, whether it's Netflix, Amazon or

Lift today. But again during this you know, twenty two years, like I've seen the cycle before, and that's what happens, just in a panic macro where everyone kind of becomes an economist and they're trying to win up each other on rate hikes. All right, Dan, I am a Peloton user, not as much as I should, but a big Gen Sherman fan over here. Is there any future or what is the future for some of those classic pandemic stocks like Zoom, like Pelican, Pelton, like Docu signed. How do

you think about those? You just have to wait till they wash out. Yeah, Imhamman Corp. But I will go every every vot, like every stock has a price, it goes know that anyone that's sold the house I mean, if you are about five percent one, that will about twenty you're gonna have. So I do believe it's getting washed out. In terms of what we're seeing. You will have M and A and ultimately, some of these business models are not going away. They're just going to go

through a massive transformation. You're seeing a wash out in terms of the stock. You know, there's names like a Doctus Time, which we downgrade this week. I think that's one that's a work from home poster child evaluation still rich in our opinion, What's why we went to a cell So you're you're still gonna have price discovery here. But that's what you're seeing right now is that a lot of these names of basically just become institutional. Even

some retail investors won't touch him. And that's why they've gone from the Golden child to ultimately ones that you know, no one will touch with a ten foot pole. But ultimately, as that price discovery takes effect, you'll see M and A and ultimately I think you'll see some of the evaluations get over extended on the sell off. All right, Dan, good stuff as always again kind of kind of kind of a little bit of a recap there on some of the big moves we've seen from these tech companies

that we always like to check in with. Dan Eyes. He can give us the thirty foot few as well as deep dig, dive down deep into some of the numbers. Dan ives he's an equity research channel's managing director at web Bush Securities. All Right, it is FED day, um Bloomberg will have full coverage beginning at one pm Wall Street time. Tom Keen surveillance team will take you through it.

Our next guest here as it relates to the FED, says, a good scenario for the FED is beginning to look as for called as bringing a jet liner down safely on the Hudson River. John Arthur's senior editor for Bloomberg Opinion, sullid got it done? Can our FED sherman get it done? I mean if he does, then he deserves to be played by Tom hankson uh And it could happen, but it is not very easy. I don't play you in the movie. John Arthur's sorry, who's going to play you

in the movie? That would be that? That would be that, that would be Abert Robert Redford or or or Dustin Hoffman who at this age look a bit more like me than they did when they were in All the President's men anyway, I think them a soft landing is getting harder to achieve because inflation has lasted longer than expected, and because um, the labor market, as we saw from the Jolts numbers yesterday, really is very tight, and because

the first quarter GDP numbers of very strange. But if the economy is already slowing down and the Fed still has to do a lot to bring in inflation, that doesn't all go well for engineering a soft landing. There hasn't been one, if you define a soft landing as being one with the FED gets through an entire hiking campaign without prompting a recession. Hasn't been one since ninety four, and that was the Avon Green spent hiking campaign that

triggered the entire emerging market crisis the nineties. So you know, it's difficult. But you could say from inflation, I'm equity, guys, I'm always glass hair, for we've kind of peeked already from an inflation perspective, maybe last month. There's arguing in Maiden there when you look at use cars or whatever you want to look at there's there's certainly a very good argument that last month may well turn out to

be the highest year on year headline number. UM. The mere fact that oil didn't continue to go up in the exponential, perfect straight line up it's last month compared to the month before improves the chance to that. The fact that April, May and June of last year were pretty bad months for inflation and those months drop off the base. Yes, it's it's reasonable to hope that the peak is in. That said, it's not a slam dunk.

And if the if the numbers are slightly higher when they come out for for for April than they were for March, that's not going to be good. That's going to freak people out. More importantly, UM, at this point the peak is less important than this gets back to the landing analogy than the glide path down. Um. How quickly can inflation be brought down to a reasonable level.

If it's three at the end of this year or three and a half, then befit has done a fantastic job, providing there hasn't been some awful crisis and things are on course even if this guilty high. If it's five and a half percent at the end of this year, we really have a problem. They're going to have to keep hiking to to to squelch inflation, and a recession at that point would be a certainty in the pothectical case that inflation is still five and a half for

the end of this year. Well, inflation is one issue. Growth is the other. And we hear this all about all the time when it comes to the China context. But I'm curious about what reverses the Federal Reserve into easy. I mean, I know we're talking about an aggressive rate high crigion here. We're talking about first fifty basis point

hikes six or basic team two thousand if my date right. Um, But but they will also have calls of a cut as soon as three How quickly will the Federal Reserve have to reverse course in light of these growth cons I can imagine the model here might be that you could get calls for cut in a matter of months.

Radio audience. By the way, you know, I used to sit next to John Arthur's in the office and he taught me you have to look at historical precedents, which is why he's bringing up a historical precedent yes, from when Greety wasn't as old as as I am, I was, Yes, So so the long term capital management crisis. The fed's most recent move had been up. It wasn't in rates, it hadn't been in an aggressive hiking cycle, but it

certainly didn't intend to cut. The long term capital managements debacle, in which the corporate credit market more or less frozen, completely prompted it into making a series of cuts, with all the consequences, I would argue is still living with today, that the Nastak went from a really hot bullmarket into a total historic bubble, largely as a result of of what happened then, and all of the monetary policy that led to two thousand and eight probably wouldn't have happened

without that. So I can imagine pressure for cuts earlier than you know. When we started this whole pivot thing to our more hawkers FED, I think the market was saying, alright, three rate hikes probably in two. Now. I look at my w I r P function world interest rate probability, it's got eleven in the world called to work. It not only that, but that's the one we've already had that adds on to that the one that's already covered

UH inflation. First of all, you did get some alarmingly hot inflation numbers at the end of last year, after during the summer it appeared that things had cooled off a bit. Then you had the FED minutes for December. At this point, if you if you look at a chart one of the you you are trying to explain

why do things move like this? The FED minutes from the incredibly boring thing that comes out in a Wednesday afternoon in a miserable week in early January was probably the single most important one, because at that point nobody

thought QT was in play really this year. And the fact that it announced that they were discussing when it would be relevant to start QUT and said that in as many words in the in the minutes, and that this has been a sort of little land mine that they laid earlier they wanted people to be hit with this in January, that that had an immense effect on on sentiment correctly, and then we've had heaven knows how many hot inflation numbers and hot employment numbers to increase that,

to increase that, John, we have about thirty seconds. I'm gonna put you on the spot here negative yielding debt. There are only a hundred bonds left that have a negative yield, a lot of that coming out of Europe. A lot of this is also a result of the inflationary policy. Thirty seconds does that continue? Do those negative yielding bonds go extinct? I think they probably do fairly soon, and if they don't, we have a problem. If you're

looking Europe. In many ways, that has been much more dramatic and much much further out of left field than what we've had in there in the US. German in expected inflation, inflation, brisk heavens from the bondmarket down now actually higher than they were than they are here in the States, the first time that's been true and well

over a decade um. So that's where most of the negative yielding debties and I don't see how it can stay negative yielding must longer, all right, John Author's good stuff as always, John Author, Senior Editor, Bloomberg Opinion Racing, and I mean literally running into this Bloomberg Interactor Broker studio to get here to give us his thoughts. We always appreciate that. 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. Put on bos Sweeney I'm on Twitter at pt sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio