Fed Sent a Powerful Signal on Friday, Wessel Says

three three percent on ten year treasuries. Tom and the equity market very much softer through the whole of last week. I want to bring the guest show. We Marcus Ashworth, Bloomberg Gaffly columnist and Chris Faron, Strategous Research Partners, Head of Technical Analysis. Chris, let's begin with you. Was that a short term sentiment shift, a regime change, or none of the above of yet? I think the longer term

regime is still very much intact. But in the very short term, I'm not convinced sentiment is as flushed out or as stressed as it needs to be. I'm not convinced this market has cleared yet. While Friday was certainly bad in terms of the headline numbers, volume wasn't terribly pronounced. Um, the internals weren't as stressed as we'd like to see. That often marks interim low, So I think it's too

early to say that we're quote there just yet. Something that you've touched on is something I was questioning through the whole of lost week. Typically, if things are really ugly high yield, it's got something to scream about. We didn't see that in a huge, huge white Chris. Yeah. I mean, hi yeld was down last week, but it didn't lead lower. So I think ultimately, if we're going to see a major shift in this regime, credit likely

has to weaken. The fact that we're not seeing that yet actually gives us some confidence that the longer term picture is still intact. Here now, that doesn't help us in the short term, and I think in the short term there's probably more pain or more weakness before this is over. But so long as credit remains at least reasonably contained, I'm reluctant to say that the longer term

picture is changing meaningfully. Marcus Ashworth, when you were trying to explain the cell off to some individuals maybe not that closely affiliated with Wall Street, and you explained to them that it's off the back of better economic data, better wage growth in the United States. It's just meant

the bond market has finally had to catch up. What are your thoughts, Marcus, Yeah, High, I think it's very much that the two year yield has been telling us something loud and clear, shouting at us for for months now, and the ten year and thirty years has really not responded, and it's led some people to be in this sort of false belief that this is a harbinger of impending recession.

It's quite the reverse. You know, we've finally seen the wage print that everyone has been expecting to see, and that has led to the realization that inflation and the Philips curve is going to come come up up into view um in hiding behind. As it has been a very strong economy with very little obvious signs of of real strength and inflation that now it looks to be normalizing. The curve therefore needs to normalize, which means it should

be steeper. And I think I can agree with Chris that, you know, having trade bonds for the best part of thirty years and being on the wrong end of many a bear market from time to time, you know, you have to sense whether or not this has got some legs to it. And I still don't think we're quite fully flushed out. And he's spot on to say that the fact that credit hasn't moved means that the market sentiment hasn't really shifted. Here. We're not talking about a

bond route. We might get to get three percent in ten year yields. We might get to UM. I think in some ways more importantly three three point three just around the era for thirty years where from whence it came in sixteen. That's really why I think we need to be and test, and I think we'll probably bounce before then. Um. Europe is doing better this morning, is the reason why Treasury is on following on with their sell off. And the key thing in Europe is peripherals.

Its ly, he's got an election in less than a month's time. They're actually doing better, they're tightening. So that's why I think, give me a little bit of stability just as we walk into the US market. However, if US treasuries want to go in high and yield out, they'll go Christopher, Yeah, you know, I think, UM, we're spot on when we talk about three five as a target for ten year yields over the next number of months.

Here it doesn't mean they won't see to sixty or two seventy first, but I think ultimately higher is the path that we're heading now. I would frankly be more worried if equities were selling off and bond yields were moving materially lower. I think that would be a sign that we're still stuck in that old regime. So higher bond yields what tactically it's probably a source of stress.

I think structurally it's a decent signal. One of these Christopher and you and I do in technical analysis is we have a great respect for people that do a lot of back testing. And the back testing is a correction is ten percent down. A bear market is eighteen percent down. We're down four point six percent from the peak on SMP futures. Is a correction still minus ten percent? Or is there a new number in your head for a correction. I'm I'm in the old school. It's still

ten We look at these things very simply. A bull market you're making money, a bear market you're losing money. And a correction. You're not sure yet. Uh. And I think at the end of the day, um SMP down four or four and a half. While it sounds pronounced and it sounds meaningful, it hasn't happened in two years, and it's not John, This is really important. Yeah, I mean, I'm sorry. Four point used to be a day at

the race. And I think we need to remember there are countless examples of exceptional years where there's some meaningful drawnouts. Is an example exceptional year, SMP up thirty, but you have to seven percent pullbacks during the best year for the bull market in this bull market was one of the worst yearest fits right races precisely. Uh. And I think from that perspective is a useful roadmap. But it's not the perfect roadmap, but it's a useful roadmap. I

think seven is also pretty interesting here. Now, let's remember for the last six years the SMP has done better than earnings have done. The street right now is looking for about out of earnings and is this the year where the market underperformed the economy. It's possible. Looking at the screen right now, the pullback to steepens tom the down down body the SMP negative twenty points have you're looking for some stability in the equity market is not

there yet. So Marcus Ashworth, thank you so much. Writing for Bloomberg Gatfi. Look for his good work chart paragraph, chart, paragraph out on Bloomberg gat Flight today. Mr Ashworth in her studios in London, Christopher her own strategous research as well. There were seven thousand, three d and twelve books of the crisis in fed. We trust was one that actually site sliced through the zeitgeist and the added serious value

you Ben Bernanke's wore on the Great Panic. David Wessell, writing for years with a journal, who landed happy in Washington when Glenn Hutchens said, Okay, we got to set up a fiscal and Monetary policy division at Brookings and the tour to force of Mr Wessell has been the signing of Chairman Bernankey and announced a few days ago that Chair Yelling today will join Mr Wessell at the Brookings Institute. David Wessel joins us right now. David, congratulations

on this. How do you attract with your charm, Chairman Bernankey and Chair Yelling together. That's a good question. I think you probably should ask them. I think what we've tried to do is create an environment at Brookings where they can continue the kind of work they did as public servants, but in a more academic atmosphere. It is pretty exciting and we're really looking forward to seeing what

kind of book Jannet Yellen will right. I think it'll be very different than the one Ben Bernanke wrote, because for four years as fetcher have been quite different than his eight years. Absolutely, maybe you could toilet slack and that will get some attention as as as well. David Will they will? They be down the hallway from get paint us the picture of the physical structure here is it? Is it a hallway and they've got one office here in one office there? Or do you have to keep

them apart? Uh. We're on the eighth floor of the Brookings Building on Massages this Avenue near DuPont Circle, and Ben Bernanke got the corner office. I had the really nice spatience office next to him, but I traded it for Janet Yellen, so she'll be right next door to him, and I'm a couple of doors down in a more more modest Brooking scholar office. What is the one I deserve, and when Chairman Powell joined you, you'll be down in the basement next to the heat maxt. That would be

very good. We'll look forward to that. David, let's turn the monetary policy. Chairman Powell is not a monetary PhD. What kind of vice chairman does Chairman Powell need? Well? I think it would be fantastic if Chairman how got a monetary economy ast, somebody who has a PhD in economics and has some experience. We'll have to see whether the Trump White House agrees with that. I think, as you know, the other big job up for grabs is the New York Fed job, and so the presidency of

the New York Fed. So it's important. It seems to me that one of those two jobs go to someone who has some experience of monetary policy and David, it was really interesting the final act of Chair Yelling on Friday to cap the Wells Fargo assets, essentially capping its growth. Do you see the Federal Reserve under Chair Chair Powell as relatively different to under Chair Yelling? Do we see a different regulatory regime? It's that the first of many more acts to come from the Fed, or was that

really the top of the regulatory curve. I think the FEDS had a pretty powerful signal on Friday that they're going to hold directors of the banks accountable when the banks screw up. Of course, Powell was part of that decision. I think it would have happened this week they hadn't got the paperwork done and Wells Fargo ahead and agreed to it on Friday. My gut is that Powell will be just as aggressive at yelling at the enforcement side, but he may not be quite as resistant to changes

in Dodd Frank as she would have been. But so far, you know, the Trump administration has talked a lot of talk about doing away with dot frank, and there's some House Republicans to want to do it. But when you look at what they've actually proposed in the administration, the National Economic Council and the Treasury, they've been pretty modest reforms. What's the base case of Brookings? What do you expecting,

David about what regulatory change? Oh? I expect that this is the high water mark of regulator regulatory uh enforcement. After I think that across the government, you see the government pulling back. I think the Fed maybe the break the resistance on stuff going on in the rest of the government. Tell us David about what Chairman Bernanke has been writing out and what you would like to see Cherry Yellen right about. She's more than independent minded. She'll

donro white about what she wants to write about. But what does the curiosity you have in her first essays? Well, Chairman Bernanke has been quite focused on what led to the financial crisis and how we got out of it. After all, he cut his academic teats on writing about the Great Depression, and so he's long been interested in this stuff. I expect that I'm interested to see what Janet Yellen writes about two things. One, She's long been interested in the labor market. Why does it work the

way it does? Why does some firms pay more wages than they have to? Why has labor force participation been so disappointing lately? What's the role of women in the labor market? So I would imagine that that would be continue to hear interest. And then, of course it's hard to escape, uh, the fact that she's the first woman FED chair in an economics profession where women are really

willfully underrepresented. So I think that people will be interested, whether she wants to write about that or not, what her experiences have been the only woman in her class of PhDs at Yale and so forth. Yeah, I mean these are huge, huge issues that we see right now. Are we free and clear from where you said? I use a chart, David Wessel all the time? Would you just the FED funds target rateed justif for inflation and we're still on the edge of ultra accommodative via Taylor rule. Uh, proxy,

we're still accommodative ultracommendative. How far does the FED have to move to get anywhere near a neutral rate? Well, I think the conventional wisdom is something close to three. I think it's been a bit baffling. My wages haven't grown gone up more given how low unemployment is, So I think the FED will be watching that carefully. And of course there was this new evidence on Friday that

wages are beginning to rise. But as you know, Tom, the consensus among the con him as, including those in the FED, is the neutral real rate, that rate that will prevail when all is calm in the economy has come down quite a bit, and so I think that will affect the Fed's judgment. In the time we've got left to you, I want you to talk about what Mr Hutchins did. You're at Brookings, it's an acclaimed think tank.

You go over and set up this economic tank. You have this huge announcement of Bernankey and Yelling joining you as well. What did Mr Hutchins want to accomplish when he donated money large two Brookings? UM? I think I think Glenn Hutchins wanted to improve the amount of research and thoughtful policy work that goes on in fiscal and monetary policy. And you know Yelling and Bernankey are clearly

our stars, but there's a lot of us stuff going on. UM. But I think the thing that's impressed me about Glenn is he's really the model donor. He gave us a substantial sum of money to get us off for five years and said I want people who I risk back to stay. You're doing good work. Um. He's not one of these donors who has a particular agenda, either on his personal pocketbook or his political agenda. He's trying to

influence that. So it's been really remarkable and as you know, that's not always the norm, and think thanks sometimes donors really want to tie down their their their centers to pursue their own particular interest. David Russell for all of US and economics. Just congratulations Cheer yell And joining Chairman Bernankia Mr Wessell's hutch and Center the Brookings Institution. Just absolutely uh an extraordina announcement. Really looking forward to Cheer

Yellin's first essays. Mr Wessell again with the Brookings Institutions. We sure now to Morgan Stanley's Chief of US Public Policy, Michael Zess, who has got a really interesting pedigree. Not only is he a cf A, but he's done the usual political credit as well. And who including the LBJ School of Public Affairs. Did you study with James K. Galbraith? He was, He was not one of my I never

had class with him, but here, Yeah. I mean that's a really interesting and twisted program as well, and really fits it right now with what we're seeing within public policy. What is the public policy and after after the meetings in Montreal, Well, I think that remains to be seen explicitly, but umly, what the US is asking for um is something that I think really is focus around the bottom line of kind of shrinking trade deficits, and I think it's unclear what both sides are willing to accept that

would actually practically do that. Uh, you know, in our view, there's something ultimately that can be delivered to kind of, um, get the negotiation across the finish line, which I think can allow the US to talk about trade deficits perspectively being shrunk. Something like upping the destination of origin rules around autos for example, where the U s thinks it's

got a competitive advantage around auto labor and manufacturing. Um, something like that, which you know, ultimately, in game theory terms, is is something where both sides can kind of claim victory. But you know it's not evident yet precisely what that is. The public policy is to say face and after for all three parties, right, yeah, I mean more or less. Uh you know what the or what what the US

wants here? If you were to kind of take the President at his word, uh, you know, it's free and fair trade, and he tends to always define it in

terms of shrinking the trade deficit. So I think whatever has to be delivered is something that you can feel like you can credibly tell your base supporters that this is something that's going to shrink the trade deficit, as opposed to something where when they're talking about the border adjustment tax or some other type of tariffing regime which could demonstrably actually shrink a trade deficit, at least in mathematical terms, those things seem to be off the table.

It's something you need to be able to credibly make the argument, as opposed to put it on paper. So we call these big significant issues that need to be addressed, and to address them thanktively, you would hope for stability elsewhere. But we're talking about getting to Thursday now, never mind getting to the next round of naftal negotiations. Can they agree to keep the government open and can they come to any kind of agreement around an immigration plan? Can

they do those two things? Michael, I think that they can agree to keep the government open because I think the base case on all these governments shutdowns because they had so many opportunities for government shutdowns, is that they tend the muddle through because the actual instance of shutdowns is pretty small, and really, when you're thinking about from a market's perspective, um a shutdown on its own to us is not terribly consequential hasn't had a giant feed

through effected gdp UM. What matters more is what that what is that signal telling us about other policies that may or may not be stimulative. If this were a year where we were getting really excited about something like infrastructure policy, which we're not, why aren't we Well, there's political reasons, but just I don't need to interrupt, but this, John Ferrol, this came up like four times this weekend. What is the why? So there's a there's a political reason,

and there's a policy reason. The political reason is that we just don't think there's enough time for the Democrats and Republicans to bridge their difference. They get differences on labor issues, environmental issues, and they get differences on how they want to fund it. Right where the Democrats are willing to raise the gas tax or other revenues, the

Republicans want to kind of redirect money from elsewhere. But even if that were in a problem, the policy issue is the way it appears to be constructed right now. It's not clear to us that this is actually a stimulus. All it really kind of boils down to is is there going to be net new money in the economy

after this policy. And we haven't seen a full proposal yet, but if you're talking about something where you've got twollion dollars from the federal government, where that's not necessarily going to be a new money, it's gonna be redirected from Amtrak or Tiger grants or something like that, and then it requires state and local governments to partner um and to sign on to certain conditions. Not clear to us

that that those governments are going to sign on. They've got easier incentives if they just kind of go go with the traditional funding mechanisms they've been using. Brilliantly describe John Ferrell, I would point out to someone who tests tatted to his brain the time from Coventry to Paddington Station or whatever in London, that, with great respect for the courage of first responders, we've had three major Amtrak accidents in a cup of coffee and it's not funny.

I mean, I'm I would I would suggest Michael that we've almost reached the point with you know, rusted bridges, and this is not funny. This this is serious, Michael. At the same time, though, when you break down the country into individual states and think about where there needs to be the biggest infrastuch just spend. Could you assume and conclude that actually it's the Northeast and it's blue states that probably need the most money spent on them.

I think it's fair to your higher tax jurisdictions are the ones with the most deferred capital. You know, whether or not that becomes a political sticking point is unclear, But I will say that one thing that we threw out there when we were doing our outlook for policy for the years that when it comes the midterm election is one of the things that can unlock this right

if the Democrats are able to take control. Arguably the president the Democrats are on the same page with how to fund this and not necessarily concerned as much about deficits. Now you've got tax reform done, because Republicans seem to be okay with deficits for tax cuts so far, they're signaling that they're not okay with deficits for increased spending. Uh, that view gets marginalized. Obviously, if the Democrats take control

of Congress. I would mention John that there can be c changed things in infrastructure to change debate, and I would go back to Staplehurst in Kent, England, in the train derailment that Charles Dickens was in that he was never the same after that. Radio going back sometime I'm doing that just impressed you with actually thoroughly impressed. Not actually to Tom Covered at the time. I said last week that he graduated with Keynes and that's funny. Michael's like,

what are they talking about? But this, I'm sorry. These accidents drive the conversation. We've had three m track accidents, Michael, and we don't have infrastructure. I listen dazzled by that. There are a lot of urgent things that you would think would kind of spur on Congress at the moment,

and right now just don't seem to be working. I mean, obviously, the the need to take care of the Dreamers and the docket issue is something that kind of keeps getting rolled forward because it is embroiled in all of these other short term government funding fights. You've gotta come back, but very quickly here with your cf A understanding of the dynamics. Are we anywhere near a yield lift that

changes the calculus in Washington? I don't think so. Um the because I think the issue with kind of yields going, the yields increasing and kind of feeding through to the budget and causing concerns with conservative Republicans. That seems to be the type of thing that doesn't get reflected until beyond the mid terms. Okay, Michael, thank you so much. Michael Jays with Morgan Stanley with us this morning. Bond people live in another world than the things we quote.

One would be Margie Patella Wells Capital Management, who joins us in Margaie, I look at the Bloomberg Barkley's High Yield Corporate Index where I get a coupon along the way, and I'm down a lot less than just looking at full faith and credit. Is your high yield market immune from what we've seen in the bottom pullback. Well, it's holding its own as I would expect because with really the default call it two and still a big premium three and a half percent or so more than Treasury's,

it's able to hold its value much better. And as far as total return here today, it's slightly positive. Let me make this clear, folcus, As miss Patel just said, three and a half three fifty US points, three and a half percentage points of yield along the way more than you do with government bonds. Yes, all right, Well, can I just I just want to switch to the stock market because we're going to get it open in just a moment here. And Margaret, you've been quoted as

saying that you see the bull market as continuing. Does what happened last week changed your mind at all? No, because it was actually rather puzzling. Is earnings reports have been great, and even the Sagum earnings which were reported last week, that the large camp tech companies had very very good earnings. And before that the market spiked up, maybe up seven percent in four weeks. So to me, it's a natural correction of something that looked pretty speculative

to me. So I think earnings looked pretty good for the rest of the year. That's been validated at least so far, especially in the tech sector. So do we have any more to give up before the bull market continues? Well, it could. We've had three percent corrections now it looks like we may be maximum, say a five percent correction. I don't think there's much more than that, because the

fundamentals are good, the economies growing rates. Although the curve lantened a lot it's still um doesn't provide much competition compared to stocks that have earnings growth from here and a lot too. All right, So that if you've been planning for this, or you have sort of looked into the future and said, you know, stocks don't grow to the sky, would you be deploying your cash now or maybe wait until the pull back to the fifty day movie average, I mean now would be another fifty points

lower from where we are right now eleven. Let's say, well, I think actually I bought a little on Friday because I thought that provided some opportunity. I don't think there's a lot of downside to this, and some of the names have reacted pretty sharply, especially those that had been up a lot. So I think now it's good at time to get in. I noticed in the thirty year bun that I've enjoyed losing two years of coupon in

the last number of weeks. How do you define a bear market within full faith and credit paper market, Well, it does appear as if we may be starting on at least a mild bear markets, not to say Rachel going to skyrocket up two points, but another fifty basis points across the curve looks pretty likely because we've broken out of that trading range. My rule of thumb PIM is three years coupon is when spouses start screaming when they look at the bond portfolio. Well three years, Cooper.

But clearly you don't manage long term money because you don't have any No, that's there's that, yeah, Mark, I mean I just want to argue I'm in the high yield tuition funds where yeah, well showing the club. But the reason I say that in terms of long term is because if you're a pension plan manager and insurance company executive, you're worried about more than the next three years,

so you're a natural buyer. Yes, and I think there's continuing demand for long duration, long maturity bonds even at these low levels, because they've moved up maybe fifty to a hundred basis points in Treasury's investment grade, so that's at least more yields. It's taken a little bit of the pressure off those kinds of people that need to invest every day. Are you buying this morning? Uh? Well not, I'm just seeing how things sort them out. But yes, I think it'd be a better day to buy on

the stock side than to sell. Sure is that because the Patriots lost? Margaret margat Ptel, thank you so much. She's you know, up in Boston and you know as a wonderful listen she's probably met Tom Brady. You know, we think margat Ptel, thank you so much for the Wells Capital Management this morning, and thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm

on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.