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At Guthentic Joces now president of Youathny Research, and I didn't know whether to be offended or not by those comments. At great to catch out with you, you coined the phrase bon vigilantes at the vigilances back.
I think they are. They're certainly saddling up. Look, usually the bond market is driven by inflation, inflation expectations, and what everybody expects the FED to do about inflation. Usually supply and demand really don't matter that much, and that's usually because federal deficits tend to widen during recessions when the Fed's lowering interest rates. This time around, we've got the federal deficit widening when the economy is doing well.
And I think the vigilianis are quite concerned about that way too much supply.
How much of this bond move is a threat ahead wind to your bullish equity call it?
Well, look, I thought we would end up the year at forty six hundred on the S and P five hundred. We got there at the end of July, and I decided not to raise my forecast. So I'm looking for the market to move sideways or continue with this pullback, maybe even down to the two hundred day move an average, and concerns about what the bond market's bond vigilanis are going to do. But then I think by year end will still end up around forty six hundred. Next year,
I'm looking for fifty four hundred. But I think in the short term here it's why the market has been down for since. Really the end of July, is.
A forty six hundred level or even a fifty four hundred level a next year realistic or consistent with bond yields that don't materially go down from where they are right now.
Well, welcome back to normal. Right We had, you know, abnormally low interest rates for a very long time, and central banks around the world kept trying to pump more liquidity into the system to bring inflation all the way back up to two percent. Now we're back to where we were before the two thousand and seven two thousand and eight calamity. We've seen real interest rates, the tips seel, the ten year tips shield go back to two percent
instead of going staying around zero or slightly negative. You know, two percent plus two and a half percent inflation premium is four and a half percent. So that's pretty close to where we are. And so far the economy is demonstrating that normal is okay. I mean, even the housing market has recovered despite the fact that interest rates has
gone up. Look, I remember when I was younger. I guess it was the When I was younger, it was a nineteen eighties, early nineteen eighties, I been six percent for a mortgage in Westchester, So you know, it's all a matter of perspective, right, Well.
But housing prices were a lot lower that, right, We hadn't necessarily seen the inflation relative to income. We hadn't seen the inflation and assets that was spurred by lower rate policies for so long. There was a theory before we got here that it rates going up to this level would decimate all these bubbles.
That it emerged during that era.
Are you saying that that's not true, that people have basically refinanced and manage their balance.
Sheets well enough to avoid that.
Yes, Empirically, it's pretty clear that all this talk about a recession so far hasn't panned out. I mean, we still have that kind of risk, I suppose. But really the way it's unfolded is as a rolling recession. It hit housing and then it hit goods. Now it's going to hit commercial real estate. But now I think, given what retail sales did in July, the goods recession maybe maybe over, and the housing recession maybe bottoming.
Can I just put it on the record that if a boomer wants to sound with their home for fifty thousand dollars, I'm happy to pay fifteen percent on a loan for that.
Okay, it's on the record number.
Back back then, that was a lot of money for our house.
If anyone's out there at But what was the multiple of the average salary compared to what it is now?
It's ridiculous.
Now, look, look these are different times. But on the other hand, I think the real abnormality was the period since two thousand and eight through the pandemic until really two and twenty two when the Feds had to start raising interest rates. But look, I think inflation's coming down.
I think you were talking about Powell. I think Palell's going to talk hawkish, but when you really listen to the message, I think he's going to agree with John Williams, the president of the Federal Reserve Bank of New York, and say, you know what we have. We are making progress on inflation, and if we continue to do that, we're going to have to lower interest rates next year.
You think he will entertain that conversation at just the idea that you don't want real rates to get more restricted, you want to keep them consistent.
I do. I think John Williams is very influential at the FED, and I think he and Powell tends to talk to each other quite a bit, and Williams tends to be sort of the theoretician and Pollows the pragmatist that implements policy. Look, they can't really afford to see this bond You'll keep going up, so they've got to calm the bond market down. And I think they're going to have to concede or acknowledge that inflation has come down. Look that the CPI excluding shelter is up only two
percent on a euro of your basis. In July, the CPI core excluding shelter is up two and a half percent. We're under two percent. All we have to do is wait for shelter inflation to come down. And we know it's coming down.
But ed, where is the neutral rate then?
Once we get to that, too said, and how high can it be to still allow the stock market reality that you're predicting.
I have to tell you, you know, I wrote a book on my experiences for forty years back in twenty eighteen, and one of the conclusions I came to is I don't really understand the neutral rate the real rate. It's a theoretical construct. Nobody, it's not something you can observe. I'm sort of an empiricist. I do follow the data.
I'm data dependent like the FED, and I think what it demonstrates is that the real rate is higher in the sense that the economy has been able to withstand these kind of levels of interest rates, which we really haven't seen in over a decade.
Right now, we're all bond market dependent, aren't we Thank you, sir, always good thinking at Jah Danny, who, of course decades ago coin that phrase bond vigilancees Kelsi Parichoe just now, fixed income portfolio manager over JP Morgan Esset Management, Cassie, good morning, good morning. We're not going to talk about the house in market. Don't worry, We're going to talk about your bond market.
Cool.
We know you've been pretty bullish on fixed income. We've caught up with Bob and yourself a few times over the last few months. We've been looking for three percent right the way through the curve. This bond market's moved against you. Is this a buy now? And why is it a buy?
Yeah, so the market has moved higher over the course of the month. It feels like bond buyers has essentially gone off to vacation.
But we do view this as a buy.
And the list of items that the consumer is going to need to deal with when they get back from their holidays and they look at their bills, I mean, the list is really growing. So for instance, we're coming back to the fall, student loan payments are restarting. Mortgage rates, as you just mentioned, are at their highest level since two thousand and one, you have people in California, Alabama, and Georgia who deferre their taxes who now need to
make do on that. Credit card balances are also rising, that interest expenses on that are rising as well. So when I look at things like the retail sales report, which is an inherently very volatile number, what I see is a pull forward of consumption, a lot of fun this summer, and we're getting to the point where some of that fun has has run out.
In fact, you know, we talk about the tailor swift tour, the errors tour. She's going abroad. You know, the US economy is going to have to make it on their own.
Right, Okay, all right, So putting Taylor Swift in the swift or tailwind into the US economy aside, how much conviction do you have about what's behind the move that we have seen other than just everyone's on vacation.
Yeah, So we've been looking back at the end of prior rate hiking cycles. So two thousand, two thousand and six, nineteen ninety five. What we've found in that all of those scenarios when the FED stops, everybody thinks.
That we've engineered a soft landing.
If you go back and you look back at two thousand, two thousand and one, two thousand and six, two thousand and seven, we were talking about the exact same things off landing. We weren't sure if policy was tight enough. It looked like the FED had done it, okay, So now we're trying to assess is this another soft landing
or is this potentially a false signal. And then there's a couple things that we're seeing now that indicate to us that, you know, things may get a little bit more tricky as we move into the balance of the year. Things that didn't happen in the nineteen ninety five cycle, for example, and that's I use nineteen ninety five because that's the benchmark, right, everyone uses that as the example
of the perfect example of a soft landing. Well, in nineteen ninety five, the three month tenure yield curve, it never inverted in nineteen ninety five, Credit credit credit in the H eight data from the commercial banks that you look at on Friday at four fifteen never contracted, right, and right now it's in contraction already.
Right.
All of these things are said suggesting to us that policy is actually restrictive. We need to give it time. In fact, policy really has only been tight for a few quarters.
So how aggressively are you buying right now?
I think this is absolutely a time to be buying fixed income.
Sarah, have you increased your purchases recently? Have you been aggressively increasing?
We have been using a dial across the whole year.
Right We've had a view that the FED would get to around five percent, they would be able to pause, and over that time we want to be increasing our allocation to fixed income for the diversification and for the income.
That's what we've been doing.
We continue to do that as we see new highs and yields, and it's new highs. But I would also point out the fact that four thirty three was the intro day high for tens, four forty two is the inter jay high for thirties. We've been able to hold off on those levels. We've been able to back off those levels.
So fairly encouraging there.
Let's go back to last October. What's different about that sell of than what's.
Handling here last October?
Last October, when we hit those levels that we just described on a ten year what's different about this moment. The spantamics behind the move now compared to back then, Well, I.
Think the most striking thing is that the terminal rate pricing has essentially remained unchanged right so it's been static around five point four percent, so really no movement there.
The market is very comfortable with the terminal rate.
I think if we were really if we really believed that these policy rates were not making an impact on the economy and that no one was bothered by seven percent mortgage rates, then the market should be pricing.
A lot higher of a terminal rate, and it's not.
Also, if the market truly believed that policy wasn't restrictive, inflation, break even should.
Be taking off right now. They're not. So that's the difference.
In October of last year, they hadn't done enough yet it was still clear we hadn't done enough.
I think we're in a different place now.
It's a massive difference, And I would say a key dynamic we haven't discussed yet is a supply story that wasn't discussed in October.
It is being discussed now.
Does that change the way we should think about fixed income and treasury specifically at the long runded a curve.
Yeah, so there is more supply. Normally demand comes in to match apply. I think we are still seeing that, right. It may be at a slightly incrementally higher yield to meet that demand, but we are still seeing that.
You know.
One of the things that I've been looking at two things I've been keeping my eye on to see if there's some dislocation in the cash markets. One is swap spreads, So how are cash bonds cash treasury bonds trading to the swap market. And then the other thing is primary dealer holdings. If there was a really big issue taking down this supply, if people weren't interested, we would see those primary dealer holdings really start to ramp up. We've
actually seen fairly good takedown at the auctions. Indirect buying has continued to increase, so there are people, stronger hands that are taking the yields at these levels, just real quickly.
Given the fact that spreads on high yield have remained incredibly tight, how rich do you think that is?
I would be very cautious with spreads in high yields in the low four hundreds. Here, this is a pricing that is perfectly priced for the soft landing, and when you look at the upside downside, how much tighter can you go versus how much wider.
Can you go? On spreads?
I mean to me that asymmetry is very, very obvious. It's obvious in high yield. I think it's obvious in the pricing of the economy, and I think it's also obvious in bond markets. How much higher can you go? Maybe a little bit, how much lower can we go? When the Fed starts cutting.
A lot basically near the tights of the year, which is phenomenal it is, it's really phenomenal for everyone.
Since talking about this breakdown.
In the equity market, I can go through the levels for you just briefly. On the S and P five hundred, we're down five percent from the interday highs in July. Then that's that one hundred down something like eight percent from the interday highs in July. Given the move we've seen in the bond market. If I just said there's your bond market move, guess what's happened to stocks, I
think you go beyond five percent. If I said guess what's happened to high yield, I'm not sure you'd guess we're near the tights of the year.
Everyone would probably say this points to a market that's strugging off and saying Edi Ardeni is right and this is the new normal and it's just fine.
Kelsey, good to see you for the update. Thank you, Cassey bar of JP Morgan. Well.
Sheila Kayalu, senior equity research analyst at Jeffries, joins to actually answer the question that we keep speculating on with absolutely uneducated impressions of the tickets being really pricey. Our ticket price is going down as much as the US CPI report seems to suggest.
Yeah, the CPI report seems to suggest ticket prices are going down, but that is only through not necessarily encompassing all the venues that folks could buy tickets through. But you know, over the long term, as we actually look at ticket prices, they actually.
Have not been increasing. So it's still great value.
Even though it's no longer four hundred dollars to get from the East coast to the west coast, and it might be seven hundred dollars and that seems like a big increase. There's no other way to simply do it. So, yes, ticket prices have not really been increasing over the long
term as much as people expect. And when we look at the industry overall, you know, we're expecting ticket princes to be about fifteen percent above twenty nineteen levels in twenty twenty three and basically flatish year over year in twenty twenty four, so not much of an increase.
And what we're seeing in the airline market right.
Now is a dichotomy between domestic bears and international affairs, where domestic bears are actually seeing declines and sequential declines as we head into Q three, just given demands softness there and we could talk more about that, but international continues to be up robustly twenty five percent or so versus twenty nineteen levels, so much more strength than international strength travel and bears is what we're seeing.
Bear with me for a second.
I want to get a little granular, because domestic fares might be coming down in general and international fares may not be. There is an issue about where domestically is this a question of vacationers seeing prices go up significantly and business travel, which hasn't come back to the same degree not necessarily seeing that same kind of pressure. So some of the sort of mid tier cities that aren't as much vacation destination are the ones where prices are going down.
Yeah, it's really interesting because I think a lot of the uncertainty is out of you know, the macro economic factors. I think we could all agree it's pretty much a soft landing and not a hard landing. So why are we seeing this yield softness in domestic markets or is it just specific markets that are seeing it? Because corporate's stagnating at eighty five percent, so maybe post pandemic, there's
different features that are going on in different cities. So you know, somebody in Ohio might not be necessarily commuting back to Chicago, and January Southwest Side died that as an example of a route that's no longer fulfilled as much as one would expect. So that's on the corporate
demand stagnating and also changing travel trends. And what we're seeing in the US market as well is there's domestic capacity typness right now, but we're expecting domestic capacity to increase at a seven percent rate from twenty twenty two to twenty twenty five. So I think forty four hundred aircraft going to about five thousand plus over the next three years, and that's double the rate of air traffic.
So what's flooding the market with capacity right now is also the low cost carriers like Frontier and Spirit, and so that might be causing the pricing softness as well as everybody adds to these same domestic routes instead of creating new markets.
If prices go down, does that mean that the experience gets even worse?
Not necessarily, but obviously, you know, what we're seeing is also an increase in the cost sided the equation, whether that's.
Jet fuel is up significantly since.
May, and obviously labor agreements are calling for a thirty percent salary increases or so. So yes, one would that if prices are going down, your revenues are going down and your costs are going up, your margins are getting squeezed as an airline, and the customer experience might.
Be impacted by that, which raises this question, Sheila, And it's something that I've been asking myself. At what point is it not worth flying anymore? Or is it worth sort of readjusting vacations to try to drive places or have some sort of alternative.
Are you seeing any kind.
Of exhaustion after two years of YOLO and two years of pandemic revenge spending and revenge traveling. Is there any exhaustion to shift away from this boom that we've seen in the airline industry that is driven so much of the gains across the board.
Not necessarily. I mean, we're still bullish on the certain.
Airlines such as Delta where they have a premium offering an international focus, and that premium offering is really holding on to you know, that pricing that experience.
People are paying up for that.
So and they're also expanding with their sky Miles program and their American Express credit card, so they're providing a little bit more of a lifestyle, expanding beyond just being an airline.
So not necessarily, so can.
We just lean into that American Express thing? We also that's another hot debate on surveillance about whether the lounge is increasingly becoming a perk for credit card owners and less about people who actually fly around on the planes. Is that basically where this is going and how lucrative actually is this at a time where people are crowding into the lounge and trying to eat as much as they can and drink as much as they can before they get on the planes.
Well, if you think.
About it, the airline industry, they trade at about a sixty percent discount to the market, so about five to six times Vada.
And if you think about credit cards.
Like Visa and MX, they trade at double to triple that multiple. So what we've seen with airlines is a focus on loyalty programs, a focus on that experience as well. But obviously, you know, Delta does not disclose what percentage of its free cash flow is generated from its sky Miles program, but we assume it's it's pretty hefty, and you know that helps the company's valuation.
So I think that's where the focus is is.
Just the multiple equation and obviously the loyalty factor as folks keep coming back to a certain airline.
Because of the points and you know, continuing to.
Accumulate those you talk about Delta, we also have talked about United and an American era as far as the gains that we've seen so far, particularly with the international travel and the resurgence there. You mentioned Frontier and some of the other discounters. Are they going to see their time in the sun. Are they going to start to reassert their muscle now?
After lagging behind for.
A while, We don't think so.
We actually just downgraded Southwest Airlines to and underperform rating. Specifically for this carrier, we think that they're going to
be pressured in the middle. They're not part of the network carriers and they're not necessarily part of the low cost carriers, so they're going to see pressure and that's why the company announced a five hundred million dollar plan to five hundred million of it planned improvements in their earnings outlook with their network optimization plan that they're starting now but won't be really fulfilled till Q two, twenty twenty four, and they're going to restructure some of those
routes to better fulfill where they're seeing demand. So for now, we are quite negative on the lower cost carriers, given we don't think that they're going to see a pricing improvement and they're going to continue to see yields office, particularly as US domestic capacity increases over the next two years.
When it comes to the major airlines, how much of the gains that you expect are going to be driven from business versus consumers and just people who are vacationing.
Our assumption is really for total air traffic to grow four percent over the next three years.
That's global air traffic.
And when you think about global air traffic, it grew about five and a half six percent over the last two decades. So we have taken a point off for China being slower to recover, and we have taken and a point off for Zoom replacing some in person meetings. So we've already factored that corporate kind of stagnates at this eighty five percent level eighty five ninety percent of twenty nineteen levels, and I'm kind of surprised that that.
Actually I thought it would be better. My travel schedule is certainly more of a bust than it was in twenty nineteen, but you know, clearly not for everybody else. So really the factor here is how airlines do with leisure and that you know, there's a hybrid leisure and business travel factor, and more focus on how they do internationally in Atlantic markets and Pacific markets as those Asia
Pacific markets as those reopen. Given what you're seeing in US domestic leisure and Latin American leisure is basically already.
Above one hundred percent.
Chila, kayelu, thank you so much for being with us. For joining and giving us a sense of what we can expect in the airline industry.
Steve Falluka, the senior advisor at Bank Capital and co chairman of Atalanta and Italian football club, who kicks off their season later on this weekend against a Swallow on Sunday. Steve wonder for to catch up with you. We just wanted to start with Saudi's influence on the game. You're in the transfer window, the transfer market, you're trying to acquire talent. Just how distorted is this transfer market now, Steve?
In Europe, it's.
Been pretty extraordinary. John.
Actually, we just had a meeting with some of the Saudi folks. One of our one of our players has been purchased by the Saudis this morning and it's, uh, it's been it's been extraordinary kind of injection of capital and increase the price of players dramatically.
Steve is at upset the salary structure at clubs like your own. Have you noticed that have you had players come to you monting larger sums of money.
You know, it has an.
Upset because we've been dealing with the top five leagues pay pretty well, and the Premier League probably pays the best and so we've been dealing with that.
So the Saudis are no different.
But I think the Saudis maybe will disrupt the Premier League because it looks like players are getting paid you three times at least three times what they may either in the Premier League or either in Italy maybe four times. So we'll see how long that's sustainable, but for now it's certainly objected. A lot of capital into football, and football truly is becoming a global sport, and that's why they're focusing on Steve.
How does it shape your investment prospects at a football club like Atalanta when you take a stake and let's say a mid size the Italian team hoping for much bigger things, does it make things less sustainable in football when you're competing against the price and sensitive player like Saudi Arabia.
Well, the good news is each team has eleven players, so there's plenty of great players out there.
You just have to be smart.
And you really have to have a great development capability, and that's what we have here at Atalata. We've developed hundreds of players for our own team and other teams. So it's going to really put the empasis on development and also being disciplined and making smart purchases and not paying inflated prices for mediocre players. So I think it's
no different than the Premier League Premier League. The issue the Premier League is you have a couple of clubs directly controlled by sovereigns and obviously they have lots and lots of capital, so it makes it difficult for the sixteen clubs to compete there.
There is a question also about what the new economic model is if you're investing in some of these clubs. We've seen at least a couple of clubs seem to go into second or third tier and then look to broaden the commercial appeal the content on a broader level, not just the games, but also Netflix series and other ways of popularizing it.
Is that a way to kind of.
Key in give an economic upside to potential players in a way that just paying them off doesn't cut.
You have to look at all mechanisms to help the players, and certainly in European football, you need to have the most attractive team, the most attractive situation, and attractive sponsorships. And so that's what we're trying to do here At Delanta and obviously win where in the Europa League we're trying to get to the Champions League and so it's a big boom for us to be in the Europa
League and play the best clubs. So each team has to have that kind of strategy and have to be creative with the money that's out there.
This is all without risk.
You've seen many teams relegated that there's just as opposed to the US, you have a relegation model where if you don't spend thoughtfully and you don't perform, you know, you get down to the next level and then you're in real trouble financially. So there's high upside of the high downside in this game.
Although that said, leil no Messi.
Watching him down in Florida, he looks like he's had a joy ride.
You know.
John pointed this out that basically he's just going through the field and kicking goals in and left and right and dominating in every which way. People are still signing up, people are still watching.
Is all you need?
One good player, one good drama, one good something to hook in viewers beyond just an incredible competition.
Well, you know, Messi is one of the best two or three players in the entire world. So it's great that Mammy's landed him. And I think he turned down two hundred million a year something on the owner of that to play in Saudi, so that's incredible. So I think Apple has done a great job and the league's had a great job bring him in to continue to grow soccer in the US, and I hope it continues to grow because it's a world game and it's going to benefit everybody.
New York Red Bulls in the next couple of weeks, you send the price of those tickets.
I mean, he's a message.
Have you send the price?
I have not seen them.
If you want to sit, let's say halfway lined, great tickets typically at a stadium like that to watch a team like that, maybe you'd pay like somewhere up to one hundred bucks, maybe one thousand dollars, one thousand dollars to go and watch MESSI.
It's a rockstar in New York.
Just ridiculous, Steve, can we define success for this season and not just for Atalanta? I think there's a lot of people watching that want your view on a Celtics as well.
What does success look like? For your teams this year.
Well, we're contending for a championship in Boston. It's about championships and we try to construct the team so we can win. I'm I'm very optimistic this season. We have a great group of players coming in. Berzingis is going to add a lot upfront. That was a fantastic job Brent Stevens with Grosspeca, the team that getting him to come to Boston. He had several opportunities and we were over pull off a trade. So we're very excited about
this season. Our fans are excited and I can't wait for it to start.
From a financial perspective going forward, do you expect the same amount of interest in buying sports teams across the world if we do have a new interest rate structure, if we do have suddenly a higher cost of money, definitely, a higher.
Cost of money is going to impact that. And team values are already very high, so it is hard for you know, teams to grow ten times or twenty times off off the high basis they're at, and the hygistrates are affecting everything. Now that being said, for at least two thirds of my lifetime, you know, T bills have been at five percent. We've only had this anomalist period since the crisis in two thousand and eight where they
went down to one percent and a half percent. So there's no more free money and that will definitely impact
what people can do. But other factors like the Saudi Oil and the huge expansion of sports in terms of streaming and be able to get any sports team at any time that you want with today's technology, truly globalized sports, and so I see the values continuing to increase because you're having people tune in from China to see Messi in Miami, and you couldn't do that twenty or thirty years where I lived at Hollida in the late seventies and the best I could get was the International Heart
Tribune three days later would give me the sports results from the US to World Series, or I'd have to pay twenty dollars a minute to call someone of the US find out who won a game. So that's a huge advance in my lifetime where now you can get out your phone and be on the subway in China and watch the Celtics play the Lakers.
That's incredible, unreal.
Steve Atlanta, Atalanta, Milan December tenth. Let's make that happen. Your club against against my club. We're going to go watch that together December tenth at Atalanta ac Milan.
Yeah, that's going to be a big one for us. It has a lot of subplots to it as well, with the trading and things we've done with them and their arrival. That's forty five minutes away from here, so that's always a huge game. So let's definitely do that.
I'll book it down, We'll make that happen. Steve.
Congratulations for all your success. Good luck at the weekend. We appreciate your time this morning. Steve Palukuda of Bane of course and at Atalanta Boston Celtics.
Take your pick, Bremo.
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