Twitter, Oil, and Equities (Podcast)

I mean, it just gets crazier by the day. He's got a you know, a survey out there, Critty saying, you know, if you want me to step down, I'll step down, and of the respondent says, yeah, you should step down. So that's news. Then my question is who wants the job? So we come back to the story because this story just keeps giving Man deep Seeing, senior technology analyst for Bloomberg Intelligence, and Dan Ives, senior equity

analyst at Wedbush Securities and join us here. Uh. Dan, I hate to kind of keep bringing this up because again, but you know, you've been one of the biggest supporters of this name of electric vehicles, really educating investors over the last you know, five six, seven years about the e V market, the potential, the upside here, but the fundamental calls being overwhelmed by the Elon Musk call any kind of how do you view the lasts worth of news?

Just more the same? I guess yeah, look good. I think it's been a twilight soon because I'd say about of the sell off that we're seeing in Tessa is Twitter driven. I mean, and it would be a step in the right direction clearly from Musk to give up the reins is CEO of Twitter. But look, this is a forty four billion dollar nightmare that you know, just continues to increase. I think it's black eye from Musk, a black eye for Tesla. Mandy. Talk to us a

little bit about this now private business here. Is there any sort of recovery? I think the last time we had you on, I want to say, last week, you said that if this was a publicly traded stock still Twitter would be worth less than ten dollars a share, which incredible, And again Ellen bought and I think he still looking for new investors, by the way, who are

still looking at the same amount. But man, deep is there any sort of scenario here where Twitter's valuation is re upt well, So clearly now he's talking about a management change and bringing in someone else than him to run the company, and I think it will be positive depending on who he gets. Look if you get somebody like Cheryl Sandberg, that's a big you know, uh moment for the company, even if this thing takes a long

time to turn around. But I think somebody with credentials is going to make a big deal in terms of, you know, what could happen to Twitter going forward. But we know right now the company is bleeding advertisers, the employee morale is low, it's struggling with regulators. So clearly a lot is going wrong with the company right now. So you need somebody who can study the ship, somebody who has good credentials, and I think that could make

a difference here. So, Dan, you mentioned that in your opinion, you know, maybe the decline in Tesla stock is due to Twitter. So one of the questions I have, and you've covered this company's systems inception, can you give us a sense of isn't really Elon Musk? How critical is Elon Musk to the day to day management of Tesla to the strategic direction of Tesla. Is there a deep bench, there, is there a management team there? Book Musk is the

hearts and rungs of the Tesla story. And I mean you'd have to go back maybe two jobs with Apple and Jack Wells g E for any sort of comparisons. I mean, look, I think that's the issue is that his attention has really been to focus more on Twitter and the perception perceptions, reality is that Tessa needs him more than they ever have and and and that's sort of the frustration here is that the Twitter spider Web

has just been a disaster for Tesla holders. And it's also have taken attention from much from his golden child Tessa to what's really a quick fan situation when it comes to Twitter. And and Dan, just do you have any sense, again having followed this company since this inception the board, is there any chance that this board can have any influence on this overall situation specifically kind of

dealing with elon Musk. Look, I think ultimately Musk, you know, when he speaks, others listen in terms of you know, the board situation means, I think there could be you know, definitely more pressure from the board or at the end of the day, I mean, must continues to go to the beat of a different drum and he's not really going to listen to anyone. I do think here the writings in the wall, I feel like he did start to understand that he's not gonna be able to turn

around Twitter himself to some extent. Actually, it's made it worse, you know, since Wad October, and that's been part of the overhang on Tesla because with the big this issue pause that he's using Tesla as his own personal ATM machine to fund Twitter. Well, what kind of upside does that then mean for Tesla shares? Specifically, if you say that this split attention is then reverted right back to

to Tesla, what kind of stock performance could we expect? Well, I think then the whole storage change is because they navigate the China headwinds even or a session, I still think they could because of two million vehicles sold in two thousand twenty three, and then the transformation story, which is taking a major hiccup during this period, continues on. Then I think you could be looking, you know, and what I believe is this doctor could be much higher

from here. You know two in the fifty hour is our price target. But in the near term, I mean, this is the black cloud you know over the Tesla story that needs to clear and it's really self inflicted from must that's going to go down and still is we'd is probably most over the attack acquisition issuing men deep Um, you know I'm looking at again the news today is you know the poll that Ellen put out

and his users voting that he should step down. In reality, I mean, you know the business, you know the players here. I can't imagine someone with the chops of like a Sheryl Sandberg coming into this role given the ownership structure. How do you think this might maybe plays after just a Twitter management Twitter business perspective. Yes, so look, I think Elon Musk is surrounded by a lot of people who know how to run this business, so I think

he's gonna get external help. The key question remains how much independence this new person can get in terms of running the company. And look, online advertising, even though it's a secular growth market, the growth seems to be slowing, so we're not talking about you know, plus growth anymore in online ads. This is more of you know, low te means after we are you know, through this cyclical downturn.

That's a kind of growth, and it's getting competitive. I mean you see likes of Netflix and you know Disney Plus getting into online at So Twitter as a company, to my mind is sort of mature stage, you know, use the growth is uh sort of slowing down ads that we know they're having issues and it's not easy to revive Twitter and make it, you know, a growth company again. And that's why I think the choices are narrow. But look, Elon Musk is surrounded by people who can

run this company for sure. But what does that that mean in terms of things like the margin loans for example, what is the likelihood that some of that debt can actually be exchanged and then um, I don't want to say advertised, but actually gain interest for shareholders that aren't

the biggest banks to actually grab them. What do you think? Yeah, So that that's where you know, it's a good thing that the company is private and right now they just have to manage the death situation, make sure they pay off the interests, and manage the margin loan situation. But they have that kind of balance sheet and even though must may have to sell more stock. He can manage

the situation. The question is is there a viable business that he can Uh, you know, at some point I p O again and and get out of this thing. But the way it's being run right now clearly uh you know it's in decline and uh, we're not even thinking about when Twitter may go public again. Dan, just stepping back from the Elon factor, what's the what's your call for Tesla as it relates to just competition with all the big auto manufacturers globally in two seeming to

go all in on evs. How do you think TESTA positions itself? Okay, I think Tesla is in a position of strength, but new doubt the three one three areas where there is going to be a major beneficiary. You look with Mary doing the GM and Farowly for their into benefiting the plan as well as others from the ABU machities and and everyone else. Because this is not a zero from game and you're really getting into a combing an inflection year for e d S and two

thousand and twenty three. But right now, in terms of what's happening with Musk, there's been popping of the Champagne in Detroit as they watched this because it's the best ever. Hap alright, great stuff. We appreciate getting the the updates,

seems like on this never ending story. Dan ives's the senior analysts UH covering all things technology for what Bush Securities, And again it just to put it in context, and it's been a super supporter of UH, you know, the electric vehicle business and Tesla from the beginnings, done such a great job educating Wall Street UH and his investing

clients about, you know, this whole new business. But now obviously shareholders of of Tesla and supporters of the stock have to deal with kind of this issue with Elon Musk and the ownership of Twitter and the impact that's having on Tesla. So tough time for those sharehold Mandeep

Sein covers all things technology for Bloomberg Intelligence. He joins us as well, so we'll have to get those two folks together created just give us a sense of the business of Twitter the business of Tesla as they both try to negotiate ownership by Elon Musk. I don't know about the rest of We've gone'm putting in the rear view. I'm looking forward to three. It's got to be better. Right. Uh, let's check in with some people who kind of do

this stuff for living. Gina Martin Adams, chief equity analystm Bloomberg Intelligence, and Cameron christ macro strategists with Bloomberg News. So, Gina, let's start with you here. My sixty or forty portfolio got slammed around all year, equities down, bonds down. How should I which my expectations? Yeah, I think it's a It's a great question, certainly, and something everyone is thinking

about at this point in time. You know, our expectations are the equity market side of the equation anyway, will be a touch better, but maybe not back to the double digit average annual gains that we became accustomed to in the in the last cycle. So our expectation is a little bit more moderate for the next cycle. We see the likelihood for higher for longer interest rates, higher

for longer inflation, pressuring valuations, and earnings growth alike. So our average anual return expectation for the next three years is somewhere between five and seven as opposed to the average anual growth that you were that you got out of stocks following the Great Financial Crisis. Well, Cameron hop on in here. You wrote a column today and I love the title of your your Macroman column saying it's kind of funny how no one wants crash protection. Talk

to us a little bit about the hedging picture. Are people just going into cold? I wouldn't say that. I mean there are a number of uh peculiarities of the

option market. UM. One is that there's a very large stray that happened every quarter UH where the institution is all buys a slightly out of the money UH put on the SMP and sells a put that's quite a bit further out of the money, and that that probably with some other flow dynamics, may have reduced the relative ball premium that people put on very low delta options UM. And the other thing is that quite unusually, the average winning day in two has been a lot bigger than

the average losing day. I mean, you normally think about the equity market sort of riding the escalator up and

then following down the elevator shaft. But it's it's been quite quite contrary UM this year, where the average winning days about twenty bases points bigger than the average than the average losing day, which suggests that, uh, you know, we we are not experiencing the sort of discontinuous moves that would that would to the downside, that would normally lead lead people to sort of really scramble for crash protection.

A you know, one of the risks out there, at least in my mind, is still maybe some earnings risk. And I look at the Bloomberg terminal for the SMP for next year, like two four bucks up about five. We had Doug cass On from C Breeze Partners early in earlier on today he said, no, way, think about two hundred for earnings. What how are you thinking about

earnings in twenty three. Yeah, we also have an earnings decline baked into our model, our fair value model, so as you get a small single digit drop in earnings growth, I think the really interesting thing about this particular cycle is that most of the SMP five hundred has already entered in earnings recession. When you exclude energy from the equation. The index earning stream actually peaked all the way back at the end of and most sectors showed a decline

in earnings throughout this year. So you've got a lot of moving parts to contend with going into three. Certainly the energy sector will weigh heavily on the earning stream for the SMP five hundred going into three, because we've seen some deterioration in oil prices over the second half of this er, and the really strong sort of operating margin expansion that these companies enjoyed in twenty two will fade into three. That will likely be the biggest drag.

But on the other end of the spectrum, financials have already been in a pretty significant earnings recession this year that should ease in three as long as we move past this m most negative point of spread in the yield curve occurring currently. As long as the yield curve becomes slightly less negative in spread, we should see better earnings growth for the financial sector. Consumer sectors also have been heavily have experienced this heavy weight of compressing operating

margins because of high input costs. That should ease into three as well. So I think the story for twenty three on the earnings and the earning stream is really

just a lot of moving parts. Overall, certainly a decline, but our work would suggest this looks nothing like the two thousand and eight two thousand nine earnings recession or the two thousand one earning stres And it's a really unique experience, mostly because of the fact that we're only two years out of the pandemic recession and we're still contending with a lot of moving parts on the earning stream. It's interesting that you say that, Gina, Mike Wilsonever Morgan

Stanley makes the exact opposite argument. He also says his advice, don't assume the market is pricing this kind of outcome until it actually happens, which cam brings me to you, what exactly is the carnage of the stock market pricing in Uh, Well, you could argue, uh, it's priced in higher interest rates, but it has you know, has yet to price in a significant deterioration in the in the

economic environment. Um. You know, I think the earnings prospects for next year are going to be pretty heavily dependent not on what's happened in the past, but also what happened in the future. And the fact is is that, well, we did have two quarters of slightly negative grow with in the first half of this year. That was largely a function of exports and inventory adjustments rather than underlying

domestic demand. If we see a deterioration and underlying domestic demand, which does seem relatively reasonable given that policy is going to get more restrictive over the course of the year. If we look at the real FED funds, right, Uh, then it does seem plausible to suggest that there could

be some significant down moves in in earnings relative to expectations. Still, and and let's FACTI if we if we have SMP earnings of two bucks, uh, and you slap of fifteen or sixteen p on not you get uh, you know, you get the SMP at three thousand or thirty two hundred, which is a long way from where we are now. I don't want to We're not We're not. We're not in a job to be fun, to have fun. I mean, that's not fun on the job. You know. Two, I thought I took my my pain there, Gina, Are there

I don't know? Are there some sectors? I mean, if I want to go out on the risk curve and the equity space, are there some sectors I should be focusing on here? Do you think? Yeah? You know, our work would suggest actually you start to wiggle your way into some of the early cycle sectors at this stage

in the market. We run a fair value model for the S and P five hundred and as of our October laws and the index that would suggest we not only priced something close to four and a half percent FED funds, but we also priced at double digit decline and earnings growth coming in the next year. So and my work would say that we've done gone a long way to pricing that earnings recession, provided that the FED

does eventually stop raising interest rates. But there is there are a lot of question marks in the outlook um. As I mentioned, I don't see two this as a two thousand ninth scenario, mostly because financials, which is one of those early cycle sectors that I mentioned the leverage scenario, and financial doesn't look at all like two thousand and

two thousand nine. We've got half the overall leverage and the public financial sector that we had at that point in time, despite the fact that the economy is a whole lot bigger. So financial else to us, looks like an area of opportunity along with something like a consumer some of the consumer names that have been inordinately beaten down over the course of this year, anticipating again that

decline and demand coming into three. So I would say you start to leg in to some of the cyclical space, cyclical space into There's no rush to do so, because we do space negative estimate revision pressure for the index at large. But if you look at where the valuation opportunities are, they are in those early cyclical sectors. The

bloated part of the market is still a problem. The bloated part of the market is that large cap growth space that became inordinately excessively valued in the pandemic, and we're still, you know, recovering from that addiction we had to large cap growth and that will probably continue to be a drag. That's too big man. I made my bread and butter and that space, like a lot of other people kind of playing on the big tech names and the big consumer cyclical kind of stuff. So so

we'll have to see how that plays out. Right. Gina Martin items great stuff has always chief equity analysts with Bloomberg Intelligence and Camera Christ macro strategist with the colmdown call of the morning. I mean two on SMP earnings, you put a fifteen sixteen multiple on that. That's some pretty decent downside for the SMP. C Suite Conversation today. Today we're joined by John Carter, All, CEO of en

Dava that is a London, England based company. The A d R S trade here on the New York Socker Strange. U D A v A is your ticker. John, Thanks so much for joining us here, UH technology company, I T services company. Tell us about what you guys are doing at Endava. Sure, and thanks for having me on and I appreciate it. Um So in Dava drives technology change for our customers, so we focus on the technology waves that are rolling through chosen industries that we focus on.

Um and developed the expertise to drive fundamental change for our customers, so things like autonomous vehicles and how that is affecting mobility. Even today, business practices are adjusting using technology to you know, all of the change that's going to come. Has autonomous vehicles hit the market and there are many different technologies across many industries where we're helping

clients go through those adjustments. One of the big themes for obviously companies globally right now is that there is going to be a massive slowdown. We were just talking in our last segment about it really hitting the profits in the bottom line of a lot of these companies. Are you seeing the same for your business? So at the moment, our guidance looking forward is for good solid growth. So we've guided on a constant currency basis of tween twenty three and for our fiscal year which runs to

the end of June. UM and at the moment we're seeing good strong demand supporting that. Um so um. You know, our rationale is that clients are still investing in the areas of deep fundamental change UM that a driving step change shifts in their industries and feeling that they can't step back from it. There's maybe a little bit of review, extra review around should we be spending the money, but

largely we're seeing it come through. So John, give us a sense of maybe who are a typical customer of years or what are some of the verticals that you guys really focus on in kind of what are what's your software do for those clients? Sure, um, so we're we're writing the spoke software for clients you seem sort of the technologies that are out there already touched on mobility.

Another area is payments, so as you see the shift to electronic payments, and frictionless payments and different ways in which that can be done real time and so on. We're helping clients make that adjustment retail as it's becoming more omni channel and adopting some of those friction as payments. I was talking about media. You see the shift to streaming and just coming over the horizon. You can see things like the metaverse coming through AI and wearables transforming

access that personally relevant healthcare. And then in insurance you can see data transforming and personalizing the sorts of products that clients want to put out. In insurance, of course there's digital banking. The shift there continues to gather an momentum. It's got a long way to run and so on. It looks like you have a recently announced acquisition of

a Lexicon in Australia. Talked to us a little bit about that business, sure, So you know, one of our strategies as a business is to diversify our footprint UM. So we do usfy across industries. We started in the financial services space UM and then we diversify geographically. So Lexicon is target that we settled on in Australia to really push what we're doing in the Asia Pacific arena, and they work with clients in a similar way to

the way that we do, accelerating their digital transformation programs. UM. They've got employees in Australia and Vietnam, so very much fits our model. John, How did your business evolve? How has it impacted over the last several years of this pandemic. We know that software generally held up as as a sector pretty darn well, but it be interested to kind of get your view. Yeah, So, I mean, we started the business in February two thousand in London, were inentially

focused on city of London. UM, and you know we've we've built up we I Pod in July, just over four years ago. Since then we've traveled in size um and improved our margins. So that took us through the pandemic. The pandemic was a very short, very slight pull back maybe two percent right at the beginning of the pandemic, where clients like a step back and went, my goodness,

what's happening here? But then very quickly settled into very strong acceleration and when we hit peaks of sixty year on year growth as clients were adopting technologies to enable them to stay in touch with their clients in stay at home environments, et cetera. Delivery being one of the big areas of growth. Part volnability space well delivery, and I would argue the buying now, pay later types of models as well. It's interesting that you kind of talk

about this evolution of technology. You mentioned the e V space, which is really interesting something fort we pay attention to quite a bit at Bloomberg, but talked to us a little bit about the payment system. It almost feels like that's an involving business as well. Yeah, so payments, it's been one of our core areas of focus for over twenty years, so initially working with the banks and then some of the payment providers that got separated out from

the banks. Increasingly we see payments as being something that we're taking to other industries as they're getting to grips with how to provide a more seamless, richingless type of service to quite as retailers, for instance, they want to move to on omni channel in which they're integrating payment solution. They want to take a little bit more ownership of the buy mow pay later type solutions, and they want them to keep their hands on the customer data and

not see it go down the chain into their payments providers. UM. So, actually, you know, the experience we have in other industries is becoming part of the value add that our clients seeing us bringing that payments experience, or in other spaces, for instance, insurance type services might move from being insure a car to actually insure a journey. And you know that that requires a radical rethink of how you build your products and how you relate to the insurance industry. And the

data helps clients to bridge that gap. All right, John, great stuff, appreciate getting a few minutes of your time there. John cut Roll, he CEO of and DAVA. That is a New York Stock Change listed stock. Let's switch over and talk global energy. We've got w t I crude oil here pretty much unchanged on the day, seventy four dollars thirty one cents a barrel Brent crude just under

eighty dollars per barrel. You know, you've got to think about or when you think about global energy, you gotta think about supplying demand and demand big variables always China, and I think China is opening up. I don't know I guess we'll believe it when we see a Fernando. I think it is Fernando Valley used the senior ANALYSTM Bloomberg Intelligence cover the global energy space for Bloomberg Intelligence. So, Fernando, it appears like you might have some movement in your

demand models coming from China. How do you guys think about it? Oh, well, you're you're right, but I think it's actually down first and then up just because similar to us, when you reopen at this space, especially with more contagious variant variant, you have faster transmission and then more sickness and people avoid contact altogether. And you're starting

to see that in large cities and China. UM. But then as you said, uh, as people build naturally immunity and they start to readjust to the to the new normal, is it were? Uh, then we expect an increase in consumption. UM if we go back to levels that could mean as much as six seven hundred thousand barrels a day of additional imports to China. The big question then becomes how does their economy rebound? Remember, this is a country that has very high leverage levels, particularly in their real

estate segment. That accounts for as much as thirty of GDP Fernando. When we're looking at the actual market itself, it looks like open interest in crude contracts has just completely collapsed. How much of the drop in crude really had seventy four seventy four handle on imax? How much of that is due to perhaps a lack of faith in economic growth as opposed to simply people pulling out of these positions. I think you hit the nail on

the head. I think the lack of trust in economic activity lead to traders not wanting to be exposed to this market, and they decided to retreat in their positions. UM. The volatility has clearly been an issue as well. We've had a lot of vlatility over the past three months, with the news of will we have a recession, will defend pivot, will trying to reopen, will COVID zero become

the facto rule in China? And as we've approached the your end as well, traders are trying to lock in gains from the everything that we've seen over the much higher prices earlier this year, and I think all of that led to a drop in liquidity. UM I had as well of governments trying to re fill their their reserves. So the US government is, as I see the reporting, starting to refill its reserves. How does that play out?

I don't really remember how this works. Well, technically, they will buy crude in either open market or forward contracts UH. Currently we've only seen them being out in the market for about three million barrels, which is a drop in the bucket. We've released well over a d eighty million barrels UH since the middle of this year, so it'll take some time for that to um lead to a

recovery in the strategic petroleum reserve. Levels were well below the tenure averages for for the the spr UM and it will take some time and in all likelihood they will space that out so that there isn't a huge surge in oil prices. You know, they try to do it all at once. It would certainly leads to an impact on w t I prices. Well. Fernando talked to us about the broader energy picture. Of course, we have

some headlines coming out the EU this morning. They're agreeing to cap gas prices at a hundred and eighty euros temporarily just to ease the sky high prices, there is there a knock on effect into the other parts of

the energy market. UM. I think with the YOUU CAPT specifically, there are a lot of caveats that to actually being an enacted the prices have to be above those levels for two weeks, and then they have to be above an LERG benchmark for ten days actually on top of that in order for that price CAPT to really play out. So it remains to be seeing whether that that cap

will actually come into effect. Um. And if you think about how the energy system is set up in Europe with renewables, UH, hopefully every two weeks that we would have a change and get some new generations. We saw with the UK now producing more wind over the past two past week than they had in the previous two. So I don't think there will be a huge knock

on effect. If it actually did come into fruition, it might actually spark more less competition in Asia and cheaper prices for lergy because they U is essentially pricing itself out and we're seeing places like Pakistan and India struggling to get some of the supplies that they were hoping for because the U has drained so much of the lergy market. So how about on the supply side here, give us just an update a where US production is here?

Where are we visa V capacity? Do you expect us that the U S producers to ramp up at af they can? How's the supply look from the US? UH? It looks sluggish to say the least. It we're still hovering around the low twelve million barrel day levels. Um. Remember we picked at thirteen point three UH. And there's

a combination of issues there. One, as we said before, Paul, the inventory the wells, they're not just not the same quality as they used to be, so the productivity for a well is not as good as it was in priority. And the second part is just the shortages that we're

seeing across the supply chain aren't really resolved. The costs have risen significantly from steel to Santa labor, and it's difficult for them to make a make a return, especially at seventy four dollar w c I Fernando talked to us a little bit about the SPR release and the Biden administrations. Bid I believe there's a headline a couple of days ago that in February they were going to start looking for bids to buy oil and replenish the

spr It's I think crime every wrong. I think it was like either sixty two or sixty eight or something that the which is the price that the Biden administration would look to buy into. Talk to us a little bit about the effect of that on the market. That can have a significant impact, especially when you look at the spread between Brenton w t I, which has been a support for for US refiners. They especially the ones that are landlocked, they tend to make that spread between

Brenton w t I. That helps their margins. So that would be net for those for that group. Um, but sixty two to sixty eight, I mean they're probably looking at the forward curve and uh, it's just not going to be realistic when you actually come into a spot market and you're trying to make it the strange actions work,

especially at that volume. You know, for talking about a hundred fifty million barrels of UH to refill back to the levels for more UH, they would they would shift that curve very quickly if they don't space it out over the course of several several months of not a couple of a couple of years. Fernando thirty seconds here. Just for clarification, did you say that the refining spread would then be negative and buy an administration hopped into

the market. No, this spread between Brent and w C I so w is five dollars cheaper than Brent, and gasoline and diesel are priced off of Brent. Alright, good stuff. Fernando Valley, he covers the global energy space for Bloomberg Intelligence. Here looking at the i nd GO function created on the Bloomberg terminal gives you all the yeah, the returns Bloomberg Index browser. I'm looking at the Bloomberg u S Aggricultural Value UH index for the credit for the fixed

income stuff. Down about eleven point one. That's bad, but it was actually a lot worse a few months ago. The bonds have been rallying a little bit here, and I want to get a sense of kind of what's going on out there. So we turned to Liz McCormick, chief corresponding Global macro Markets for Bloomberg News. I think she's down in our DC studio, which is pretty cool. Liz,

thanks so much for joining us here. You know, it seems like, you know, it's it's not as bad as it was earlier in the year for the fixed income space. What are you seeing? Yeah, it's amazing And I am in our lovely DC office here, um, but yeah, and you know, our folks in the corporate finance tea and wrote a nice story. And I tell you you see it everywhere from either the credit or the sovereign folks.

It's like they said that the outlooks are all about, oh, the year of the bond, the comeback of the bond, and it's like you just lay down, how brutal the year has been with returns. But the flips out of that is it's brought yields higher, right, And people are saying, oh, well,

maybe we're at peak inflation, you know, maybe stressing. Maybe, you know, even though the Fed said is going to stay at high rates for a long time, you know, maybe at least the uptick is going to stop soon and maybe it's a time to lean back into the fixed income side. So, like you said, there's folks like Vanguard and others saying, you know, investment grade credit looks good and you know, maybe it's the time to dip back in. And even some on the sovereign sides, like

you know, treasuries and you know global sovereigns. Liz. There is a fun fact that Ira Jersey said to me last week, and I've been saying, I think it's like the fourth time on the show that I've said it today, But he essentially argues that the idea of FED cuts being priced in the market is capping yields, especially on the front end of the curve for the two year yield.

Is there a possibility here that rate cuts, or at least the possibility of them next year, get pushed out of the curve And how quickly could you see some sort of shock to the front end of the curve if that happens. Well, I have to say and not have to say, but I do agree with Ira that, um, you know, those cuts being priced in are helping, right,

especially help and flatten the curve. But I mean, we we saw Bill Dudley right on our opinion page today that kind of the market may need to listen to the FED, and a Jerome pal couldn't have been more clear that, like, hey, we're not even thinking about cutting yet. So I think there is a lot of risk despite everyone saying the year of the bond, which sometimes when everyone's saying the same same thing. It almost makes you nervous, right, there's a you know, risking things go the other way.

But I think you're right there there's about fifty basis points of cuts priced in by the end of three. And if you know, we go meeting by meeting by meeting, and the Fed keeps leaving it there and signaling, you know, no cuts to the next year, the market will eventually come in line. And I think you're right. You know that that means maybe then the two year you'll has more room to go upside. So there are some firms like you've probably seeing black Rock is warning like sovereign dead.

You know, there's a lot of risks. Inflation could be sticky in the FED stays high long and and in that world, like you said, creedy two year yields could go higher. And Liz, I mean a lot of folks obviously talking about a recession in three. Are we seeing any signs of that concern? And maybe the high yield

market at all, maybe some of the lower end. Well I do hear from folks and you're seeing their reports and and this, you know, nice story today is talking about you know, when when things get bad and you have a recession, it's you know, defaults you're worried about and some high yield risks. So I think, you know a lot of them leaning into the market are saying,

be selective into the debt markets. Let's go with the safer, you know, like the investment grade, which investment grade like treasury has got really walloped the most because a lot of the bond yield as we've known for the last year, the pain in the bond market has been just pure call it duration risks fed just jamming up rates by over four on your basis points, push yields and you know, not to get too wonky, but you're getting more of a plur pure rake play and investment grade credit, and

of course in sovereigns because it's not you know, there's not as much risk of defaults, but high yields and things like that. Um, you know, I was listening on

the radio for with you guys this morning. I forget it was chatting with him, but Dennis Gartman was on and he was pretty negative on things, saying, you know, recession coming fed to stay high, and that's when you you worry, is they're going to start to be more default and you know, these lesser grade companies not doing well or having trouble rolling over debt now that yields

are higher. It's interesting that you mentioned defaults because it almost feels like at the moment, the consensus here is that if there is a shallow recession, the risk of fallen angels, for example, is very, very low. But let's let's talk a little bit about bond volatility here, because if you look at the move index, you are starting to see it kind of stagnate a little bit. When it comes to volatility, it's extremely high and it's kind

of staying at those high levels. Why if the Federal Reserve has been nothing but clear about their strategy moving forward, Well, that I will admit a bit of a head scratcher, because you you know, there's been a few FED meetings that you know, we kind of said, oh, Jerome Power maybe had a little trouble with communication this time. He seemed to have his notes in line. And you're right,

volatility has come off, but it's still historically high. And I think kind of getting to what Paul was asking is that, you know, even though people are saying, hey, maybe the debt marks will do better next year, maybe inflation is peaked. There's a lot of maybes, right, So I think there's enough risk out there, um that people aren't you know, there is some volatility selling you you know here here you know that going on, but not

in screaming because that I don't know. It's just especially if you've had such bad losses, you've got to be careful, I think. And so people you do still hear people saying I'm holding powder dry keeping cash. Um. And I just don't think people are going to think bond volatile it is over until we kind of see the whites of the eyes, you know, whatever that number is, CPI gets down to four percent, that people really trust that

inflation is in this falling trend. And we're still just looking at the twos and tens liz um still about sixty five basis points of inversion there. Um, How are people thinking about an inverted yield curve. I'm just an equity guy, but I've been told if you get an inverted yield curve, that means a recession. But we've been inverted for a long time. It seems like, yeah, we've been inverted for a long time. Um. But you know, like, um, Campbell. Harvey would say, who's now a duke? Who's the one?

Who's who? Really? Who found that? You know, that relationship between the shape of the curve and recessions. And he always reminds me Lizzen has never failed me, you know, and you know, I'm like, I know, I know. So we've had like he likes to look at the three month tenure and that's inverted for a while now too, So I would have to lean with him and say, I'm hard pressed to think it's going to be like this time is differ. We don't get a recession, of course,

I don't know if it's mild or strong. His thesis doesn't get to that, but um, I do think you know, the Eel curve has been inverted for a long time, and you know, you hear people saying you've probably talked about it. You know, we could see two stents go to minus a hundred basis points, you know, we all you know, we were at minus eighty five on the inversion a bit ago. So maybe it runs further and it takes longer, but it has a pretty good track

record of foreshadowing economic downturn. Alright, great stuff as always Liz really appreciate getting some of your time. Liz McCormick. She's the chief corresponding covering global macro markets for Bloomberg News, reporting from our Washington, d C. Studios, which are pretty awesome down there in the nation's capital. 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, and I'm fall Sweeney. I'm on Twitter at pt Sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio