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Concerts Hunter, just Beck, I gotta do this thirty seconds. Latin America. You just visited three countries. What was your take on the prosperity of South America?
So I hadn't been to Argentina since twenty eighteen, and the city felt less vibrant and that some people pointed out to me that could be a COVID effect. I think everybody's very bullish on what the Malay administration is doing in terms of deregulation, in terms of trying to get the economy back on track. But as you know, first quarter GDP was weak, and so I think that's that's not going to be a straight line up for Argentina. They've they've got a lot of work to do to
deregulate that economy. Brazil is doing better, doing stronger. The one thing that Latin America really has going for it is that it is not energy dependent on the Middle East, and they produce lots of agricultural commodities.
Just because the time I got to get the CPI, I got a three point seven percent year over year survey number. Here, could we come in at four percent on this report?
Yes, we absolutely could.
We absolutely could. And there's some there's some wild there's some of those factors are things we should look through. So some of it we expect Shelter to add back some a couple of percentage points to CPI because of some technicalities of the way that that survey is done and the timing of the shutdown in October. We certainly expect to see an increase in goods prices, especially oil based goods, right, and it's the transport of those goods as well as just the I think.
Did she just say she has no clue yet?
Like most most people, I don't know this get it.
We've had some people come in here Constance to say, you think the inflation's you know, peaking or spiking, Now, wait till the second half of the year when it really flows through the economy. We could get some startling high numbers.
Are you in that camp?
So one of the things I was doing in Latin America was I was intending a conference of commercial bank business economists, and we do a survey of what are the what are the biggest risks, And the biggest risks on the board were things like trade war, sort of uh debt debt profiles of developed economies, but interestingly kinetic war or the closure of the Strait of Hormuz did was not a frequent shower. And I don't think the
market is properly pricing this. We're not properly pricing this into inflation, we're not properly pricing this into equity markets, and it's looking like the strait is going to stay closed through the summer.
To synthesize is do you do you get value from CPI in course CPI or you like others including future chairman Wars, where you look at other series.
It's not so much that I look at other series. It's that at times of inflection, data becomes a much more rear view mirror and much less an indicator of what we're going to have in the future. Because if we continue to see the straight closed throughout the summer, that's a shock that's not currently priced in.
So concerts we make here it's coming in, you know, a little bit higher than expected, just the you know kind of the year of a year CPI three point eight percent. It's a lot higher than when we were last month at three point three percent, and it's probably higher than the Fed would like to see it.
It's for sure higher than the FED would like to see it. And I think that's the key thing. If we take the Friday's jobs report, which admittedly was concentrated in healthcare and leisure, in hospitality, all the problems we've been seeing over the past several years with jobs growth and this sort of low higher, low fire environment, we take that, which seems in a strange equilibrium to quote J. Powell, and then we take this stronger inflation very hard to
see how they will cut into this. And it is our estimation actually that they will go to a neutral bias at the next meeting.
Neutral bias. Okay? Is that enough? Though?
I mean, do we need to start thinking about they need to slow down this economy a little bit?
Maybe? Well, I mean they slowed down the inflation here a little bit.
Yeah, So the question is how much demand destruction are we going to get out of this? So this is households have spent an extra twenty eight billion dollars on gasoline since the war started. Now, that's about two hundred and sixty dollars per household. That's a very back of the envelope number. Obviously it depends on how much people drive, but still it's taking a bite out of consumption. That's a dead weight loss. It doesn't go to other consumption,
so it should reduce demand in other areas. But what I'm looking at here is what's happening in services. So as we anticipated two to three tenths increase on shelter, that's going to normalize and dissipate over the course of the rest of the year. So we're looking at shelter at three point three that's probably really normalizing it a closer to three point oh two point nine. But transportation services four point three percent? Is that enough to cause
demand destruction? In which case this isn't going to become a persistent problem.
But Gospel Constance Hunter at the National Association for Business Economics is financial media knowns like me and Paul quote three point eight percent inflation. I am aggressively going to suggest that the inflation of the haves is different than the inflation and the have nots. Discuss that within your public policy background in Columbia.
Yeah, so that's a really important factor. And going back to that doction board, right, we're looking at wages that are not keeping pace with inflation. We know that wages for college educated people are going up faster, so those those supervisory wages are going up faster than the non supervisory wages. We had some catch up after COVID that
that has gone away. We're back to a more normal label market in that regard, and so this becomes an acute political issue for the Republicans, but one that the president seems immune to.
Actually.
Yeah, but again the three point eight the headline here.
That starts to get people's attention.
I think, you know, because you start thinking at four percent inflation the last time, you know.
I mean, I think what gets people's attention, honestly, is what we economists call salient prices. So it's things that people buy frequently. So remember when egg prices were going up, that was all people could talk about, not because eggs are a big part of the consumer basket, but because you buy eggs on a regular basis. The same goes for gasoline. We're heading into summer vacation and travel season,
so people are going to feel gasoline even more. And of course, if you're planning to travel via air, you're going to see that airfare impact your travel plan.
Constance, I gotta ask you this, milk inflation is below three point eight percent? Okay, wonderful, Paul, you're buying the grass fed stuff blessed by the Dalary Lama. Sure you know that's a little more Beef inflation is not milk. Chicken inflation is not chicken. I mean, I'm sorry, this stuff is moving. I get it. How how painful is a three point eight percent statistic?
It's painful and it's going to get worse. That's I think the importance.
You can predict to four percent inflation?
Do you think it's going to be above four point two percent average for the second quarter?
Yes?
Wow?
What how does that change a political debate in America? All your study of the analog of presidents having to get up in front of a four point two percent inflation, right.
I think it's gonna I think it's going to come back to biten. I think that's one of the reasons that people had anticipated that we would bring an end to the war in Iran because the alications are so strong. As I said, this administration seems to have its own perception of the political feedback loops, which may prove to be a bit inactive consens.
Thank you, so stay with us. More from Bloomberg Surveillance coming up after this.
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Edward your Denny joins us this morning. Readjusting ever higher ed with your beautiful CJ. Lawrence like charts, even with CJ. Lawrence Green in the banner you do a log extrapolation of the S and P five hundred. Is that all this is is we're climbing a wall of worry because no one else out there has a.
Courage to simply extrapolate forward. Well, I think we definitely are climbing a wall of worry, and that's the best kind of bull market you can have. You don't want everybody being bullish. You want people to have concerns.
I don't want.
People to to worry on a personal level, but on a professional level, when I see a lot of bearishness from a contrarian perspective, it usually works. I made some of my best calls on market bottoms when my gut was hurting and everybody was was in a panic mode. So we're not in panic mode right now. But on the other hand, there are a lot of people worrying about what's going on in the Middle East, and I'm not saying that's not worrisome, but it's it's certainly adding
to the concerns. They're worrying about the bond market, they're they're they're worrying about a k economy that the consumers not going to continue to spend, and they're working worrying about too much capital spending. So there's a lot of worries up there out there. But meanwhile, it's really pretty simple. Or the market is also getting kind of thrust up, but it's been a rocket ship because of earnings.
And what we're starting to see once again that you know, it's a pillar of this market. I guess last year was you know, kind of a narrower breath in this marketplace. Is the big tech stocks once again leading this market high on good earnings. Certainly, are you concerned about that, I guess, narrowing breath in the market.
Yeah, well again, I think people are always looking for something to worry about with regards to the market, and the breath issue is back. But however, once again I would point out that the earning story is fantastic for the S and P five hundred earnings breath is actually improving. And not only that, but we've got the small cap and MidCap earnings which had been kind of in a
coma since twenty twenty two. For the past six months or so, they're starting to really perk up, and expectations are already showing a record high earnings outlook for this mid caps.
So I mean, again, I guess towards the end of last year, we did have kind of a rotation out of some of those big cap growth names into some more Is there any legs left in that kind of trade, maybe a small MidCap as you suggested, maybe some other sectors here.
Well, I think that other sectors will participate in this latest rally in this bull market. I think we're saying, you know, one of the problems is the magnificent seven are contributing to that. So consumer discretionary has been boosted recently by improvement in Amazon, and communications services have done well because Google and Meta dominate that space. But financials,
I think as still have prospects of doing better. You know, the there's signs that the private credit situation is not get the worst might actually be be getting better as the economy continues to chuck along.
As your Denny with us folks are goin to. Can't say enough about his newsletter. It's wonderful daily brief really one of the major subscriptions out there. Ed, I'm going to assume long ago and far away at Yale they
didn't have econ five seventy four applied empirical methods. This is back ed your Donny folks was back in a simpler time of macro micro our Simon White this morning at Off the London Desk has a spectacular walkthrough of derivative finance, looking at the Greek letters of gamma, dispersion and correlation, and it's worry, worry, worry, OMG, things are terrible. If we created a wall of worry with our mathiness in modern global Wall Street.
Well, I don't think I'm inventing a phrase here, but it's all Greek to me. I actually did an econometric dissertation for James Toubin, and I proved that his theory was right for corporations, and so he loved it and I got through, I got my PhD and moved on. But yeah, I think there's too much. I think a lot of economists start with theories, start with the models, and then look for the data to confirm it. I
worked the other way around. You know, Ben bernanke in his memoir of being at the FED that when he joined the FED he had to learn something that was rather new to him, and now he called the current analysis. And I kind of like that. In other words, he had to learn how the world really works. I had to learn about markets and how markets interact with data, and data impacts the markets. And that's what I practice,
I've been practicing on all long. Is current analysis? Okay, but that's a reality based economic And let.
Me get to say, because Paul's got four more questions. The bottom line, ed is we have physics envy. And it started with you know, Newtonian mechanics nineteenth century, and now we've got alpha beta Gamma, Epsilon, delta the others. And I just, folks, I just think the difference, the distinction between a Yar Denny strategy and some of the quad strategy is the angst of the age. Worry, worry, OMG, Paul Gamma dispersion. We used to call it.
We used to call it political economy, and then suddenly it became a social science. Uh, and it's not a science. It's uh, it's political economy. It's it's too complicated to put in a formula.
So ed, I mean on that front, there, we've got the market's got a lot of cross winds as it released to geopolitics, whether it be tariffs from earlier this year and last.
Year, to the war in Iran.
But boy that at least the stock market seems to look through all of that and focus on maybe just the earnings, which are arguably the most fundamental.
Yeah.
I think what's going on in the stock market is everybody knows that based on history.
That.
Crises, a geopolitical crises in the past have turned out to be buying opportunities. So when we get a geopolitical crisis, we get kind of scared. For a couple of weeks, maybe four weeks, as we did in March, and then
everybody remembers that that's actually a buying opportunity. And that's exactly what happened on March thirty first, is suddenly investors said, well, you know, if the president's going to be looking for an exit ramp and we're going to have a cease fire, then we can buy stocks today at a lower price with record higher earnings.
And thank you so much. How's your beast doing? I don't see your dog in the background there in your couch dogs? Is Max is walking about? He's walking probably reading the Wall Street Journal or Pan on one of the two d there, Denny, thank you so much, greatly appreciate it. One of the great calls of this bull market. Again, we protect the copyright of all of our guests. Look through your Denny Global Research for their just fabulous, fabulous
daily study. Stay with us. More from Bloomberg Surveillance coming up after this.
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Mark Pinto is a grizzled veteran at Moody's of actually sifting through the bs in credit, and he is definitive on private credit. Thank you so much for joining us for this four hour conversation.
Four hour conversation.
Your note is b on grim. You've got ratios here that matter. It's wicked inside baseball, and at the top you say it's okay. So far, so far, define this so far that we are living?
So far well, I can tell you that the market has performed quite well to date. We've been seeing a bit of a test, the liquidity test recently, but asequality still remains fairly robust, even though we're seeing some pockets of discass.
Everyone we're listening on Global Wall Street says Blooney KKR came out yesterday and had to mark something down.
This is when you lend, you will have right offs. This idea of no write offs, no losses doesn't exist in the lending world. The question is the materiality. We need to look at the reality and look at the materiality. So asequality is deteriorating, But the question is whether we're seeing a normalization, a reversion to the mean, or whether or not it's something more than that, and this market hasn't been tested and so we'll have to see where
this goes. But at the moment they're in a decent place, although we're starting to see some deterioration.
So the market has some comfort level with the public credit markets, has some comfort level or understanding of the bank lending market.
What do we know about.
The private credit market in terms of credit quality, standards, covenants, all that kind of stuff.
We have a comfort level that we're going to be okay there.
Well, in some respects, you get more information in certain pockets of private credit than you do in the banking world.
So for example, with.
BDCs, you'll get quarterly valuations of every single position. And however, this segment of the market is very lightly regulated, and I think a lot of people take comfort in the fact that you have very intense prudential regulation in the banking world, in the insurance world, but more really market regularly in the private credit world, which is fairly light touch.
And so I think investors are.
Looking at it very closely and figuring out, can I trust these numbers that are coming out of the industry.
So how does an entity like Moody's who rates and really looks at the credit quality of fixed income markets broadly defined.
How do you guys look at private credit?
Well, the good thing about working at a rating agency is we get all the data that we need. So I like to say, I've been on the buyside, I've been on the cell side, and when you're in that part of the market, you're kind of snorkeling. When you go to a rating agency, you get to scuba dive, we get material non public information, We get all of the data that we need in order to rate overdone,
I would say the worry right now is warranted. It's been intense, and I think on the other side of this, you're going to see more disclosure, You're going to see more discipline, and you're going to see more direction. And that direction may come from regulators, whether it's regulatory oversight for insurance companies and banks that are involved in this market, or whether there's slightly more market regulation on the private
credit industry itself. I think that's coming and that hopefully will will will shrink the trust gap that you're starting to see in this market.
Mark Pinto where this Moodies of private credits really get join us at today. Okay, so what is the exogen is shock here? If I have full faith in credit, curve stapening this that the other thing? How is private credit linked to any unexpected surprises including price down, yield up and full faith in credit?
Well, I think underwriting is underwriting, and when the credit cycle turns, it's going to turn for everyone. It's going to turn for the banks, it's going to turn for the public markets, it's going to term for private credit markets. What's important, though, is how are these loans underwritten, what were the covenants, what is the collateral, and also how is this being funded. So in the banking market, we know that banks are funded by deposits and they engage
in maturity transfer. In the private credit market, you tend to have your funding match the duration of your assets, so you're involved in much less maturity transformation and therefore less vulnerable to a certain amount of shocks.
So some folks were suggesting that this was not a or some of the stress we've seen in the private credit market was not a credit quality problem, but a liquidity problem, particularly from the introduction of more and more retail investors.
Is that accurate?
Yeah, I mean from our view as well, what we just saw was a test. It was a the test, and it was a liquidity test, and it was a test in the non traded BDCs. You have both traded BDCs and non traded BDCs in the non traded BDC market. The way this works is a closed end fund effectively, and when you put your money in, whether you're an institutional investor or retail investor, you can get liquidity out on a quarterly basis, and you can quest liquidity, but
it doesn't always have to be granted. And this is what we've seen of late, a significant number of requests and not all of those aggress for you granted.
Would you put your Trinity College into private credit?
When I put Trinity College into private credit? Well, there's private credit is not a monolith. It's very heterogeneous. You have investment grade private credit and you have non How many basis.
Points do I pick up on quality private credit?
You're probably picking up depending on the instrument and the structure, it could be fifty or one hundred.
Based on this sounds like so much I'm sorry, this sounds like so much like two thousand and six, two thousand and seven.
I don't think it's a good analogy to tell you the truth. What happened is after the Great Financial Crisis, we saw additional regulation on the banks and that created a gap in terms of lending needs. And what was interesting is that private equity guys came in, but they didn't just fill the gap, they reinvented the space. What they did is they provided spoke lending. So instead of just getting your five year, your ten year in the bond market, you were able to get.
A fourteen non call to a thirteen none call one.
Paul, this sounds like talking about the Red Sox in February. They were gonna do it without hitting mark. Everybody's radars up on this. Gary Gensler sat in that chair and said, everything's fine. I look at the KKUR headline yesterday, Paul, help me. Everything is not fine, right?
Not everything is fine. Tom, You're going to see a greater dispersion and performance. Whereas for many years, rising tide lifted all boats. But what we're going to see now is a dispersion. And that's why you're seeing these pockets of write downs. You're seeing these pockets of losses. You're seeing pockets of deterioration, but as a group, act quality continues to be fairly strong, although we do expect it to deteriorate. Even the heads of private credit are saying this as well.
Missus Keane doesn't care. She emails it. I asked Mark Pinto where he got that bow tie. It's great.
It's I got it at a boot sale, probably about thirty years ago. It's from the nineteen sixties.
I wanted to channel you.
Very good, very cool, missus King. Ch Miss King gives it a major thumb up, Thank yous. Did we learn something?
Yeah, I'm good.
What do you think? Where are you on this?
I think private credit is fine. I think it's a listen to you, we got management.
I don't want to be Pollyanna about pollyanna Ish about this, but I also don't want to be Nuriel Rubini. I think that there is a place, there is a value proposition for private credit.
And what we need to understand is whether loans have.
Been underwritten in the private credit space that took into consideration the last ten years of performance or the last forty years of David.
Goldman when he was at Bank of America was brilliant and as he wrote about it my book A Lifetime was it two lifetimes ago? I don't folks all my radars up, Mark Pinto Brillant, don't be a stranger. He is with Moodies on private credit. We really really that stay with us. More from Bloomberg Surveillance coming up after this.
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Jordan Rochester joins us in the tention for Prime Minister. Sturmer is too much, Jordan for our American audience. Explain how this government's going to collapse. But what does it collapse into and what does it mean for United Kingdom markets?
Absolutely what. It's not going to collapse as a government, but the leadership could change. So it's a little bit different to the American system. We have a parliamentary democracy where they're the party who has the largest majority or coalition, et cetera. They choose their prime minister. From the party perspective. This is difficult sort of a path for kids starm to hang on. Really he's had over I think the count over eighty MP's now suggesting that he should resign
and that's enough. When you get to eighty one, that's enough to trigger a leadership contest within the Labor Party. And when you replace the leader, you're essentially replacing the Prime Minister and the rest of the Parliament of Parliament doesn't really have a say, so this is really a drama within the Labor Party.
Is Starmar Blair like, you know, middle of the road Clinton like or is he perceived as more liberal?
That's where he positioned himself for sure, and he's definitely had inspiration from Tony Blair and so forth. But what the Labor Party has done over the past couple of years has shifted to the left. So it was quite astounding that you had a sort of centrist leading the sort of realm, but the lack of sort of political action in terms of policy. It was a manifesto back in twenty twenty four which really didn't have that much
in it, quite vague. That's led to the situation case Stamus finding himself in the constant criticism from political commentators. He's lacked of political vision and that kind of shows in terms of the polling. So he's, according to public opinion polls, with the most unpopular British Prime minister in history and that's the day to going back to the
nineteen seventies. So it really is a net approval rating that has led to a big lost in these local elections and the Labor Party, in an effort to try and survive, are slowly moving to remove the Prime Minister Jordan.
What does the instability in the Labor Department our Labor Party reflect the economy and the economic trends in the UK.
Well, it's the stagnant decline of the UK since Brexit really that has led to this sort of fragmentation of politics. We used to have very strong two party politics. Now we've got several other parties Lib DEM's Reform and Green's vying for power. So you have a very volatile political situation where we have a first past to post electoral system which you can win him a majority, as the Labor Party did, but with a very low amount of the vote share. Previously, in the past, you would win
these elections with large amounts of the vote share. The rest of the public was on side of you, and that's not the case this time around.
I mean one more question than this before we get to the markets. I mean, Isabella deceived Edward? I don't know what Edward it was Edward the second. I think it's like the fourteenth century it was appalling. Is Starmar going to get deceived here? I mean it's just like you know, medieval like warfare among this party or can it be adults like moving on?
Well, he might still hang on, so we can't rule that out. But the sort of joke going around that he's trying to hang on until he gets to at least the champions at league final because he's an Arsenal fan. That's kind of the sort of timeline some people are highlighted. But it's kind of falling out of his power.
Really.
If a leadership contest is triggered, if they go ahead with that formal process, it's nothing he can do to stop it. The iron is he relaxed these rules to make it easier to remove leaders when he became leader because he had also tried to, along with other MPs been involved in the Corbyn's era, and the rules were much harder back then to change leader. But it could be the case that he's looking for a dignified exit and trying to make sure that a leadership contest, if
it happens, happens over the summer rather than instantly. And as you hear a name coming up quite often called Andy Burnham, he's the Manchester mayor and he's the most popular labor figure amongst the public according to opinion polls. So he's actually an MP. So you're going to hear a lot about his name. And can he get back into Parliament to run that's the big question.
We need to have a dignified interview, Paul, can you save the interview by asking something except Missoui base Jordan.
President Trump is heading over to China today for some pretty high level discussions with President How do you think the markets are discounting this? What do you think the markets are looking for here or sensitive to well?
Donald Trump's men summits with big leaders such as us being or Dadimir Putin and then sometimes not much that comes out of it that's market moving for rates and EFX. So my base case is probably gonna be something along those lines. Clearly taking so many big level CEOs tells me that we're going to get some deals announced that are quite close to finalizations. So that's probably what the
headlines that I think will come from this. And then the big questions are on Taiwan or US Iran, and I don't think the Chinese or the US will really materially change their positions on either of those. And then of course trade tariffs, where the courts are making life tougher for Donald Trump than China when it comes to
trade taris at the moment. So I think it's just going to be deals announced from CEOs, etc. But I think for broader markets such as rates and FX, it's going to be a bit of a nothing burger.
Jordan quickly, here is the intervention by Japan been successful? Question?
It has.
I mean, you can't doubt it. We've gone from one sixty to one fifty five and DOLLI over the course of just a few days. The problem for the Ministry of final since they are leaning against the wind, oil prices are rising, which weakens the value of the end and so in between those interventions were having that slow creeppire and dolly in, which means that I will have to keep intervening, or the banks penul needs hike or just hopefully a bit of luck and oil prices fall.
That's any way I can see the dolly in heading lower.
Really thank you, Jordan Rochester, thank you, thank you so much, and all of Mizuo executives. We really appreciate his British perspective there on this moment. For Prime Minister is Starmer.
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