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I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business app.
Jan Hatzius and a team I've read Goldman still calling for a pause at the next meeting, is saying this. Here's the latest from them. The CPI report is supportive of our call for reports at the June FMC meeting. The shelter step down, Tom looks increasingly durable, information breadth soft and somewhat further and the strength and news car prices is likely temporary.
In just in the last forty eight hours, this has changed because of the misguests on housing in the United Kingdom.
Completely different story, but it shows.
You how humility is an order. Here, what's a key point. You have a humility at the moment, doctor Hatzias. You look at the things you've made right, the things you've made wrong. Into the first five months of twenty twenty three. What's the humility you're writing about this weekend on inflation.
I would say mostly things have evolved the way we thought, at least in the labor market. For me, the labor market is really key, and the rebalancing that we're seeing there I think is very encouraging with job openings coming down and the unemployment rates still staying very low. So it's a very benign form of rebalancing. In terms of the tactics of FED policy, I would have thought a pause in March would have made sense, and we thought
that was the likely outcome. But I think now a lot of humility is in order as we go into the next few months. There's obviously a lot of event risk, but I would say were reasonably well set up in terms of the disinflation process that's underway.
The part of gain that's out there that you have to battle every day is on the X axis, and to me, the markets are in short term they're looking for drameda Labor day drama to October. Does Goldman Sachs extend out the X axis? The healing out of the pandemic is the things we're talking about for October twenty three. Really the things we're going to be talking about in June of twenty twenty four.
Well, I think by June of twenty twenty four, I would have you know, our baseline has the rebalancing in the in the labor market completed at that point, and inflation down from right nulbu four and a half by next year, I think will be below three percent. So I do think we're going to be in a very different place in terms of the funds rate, though I would expect that will still be close to here in fact,
where we are right now. I mean, our baseline forecast is that the funds rate stays at five to five and a quarter for the next a year or so. I'm you know, risks of that, certainly on the downside, I think it's much more likely that you go from five to three than that you go from five to seven. Okay, but I do think the market is overly aggressive in building in rate cuts.
Let's explore that a little bit further. This was a question I got from a Bloomberg subscribe, but just moments ago, as soon as they knew that you were appearing, they said, if stock's running big over the summer because of the FED pause, the economy holds up, the debtlimit issue is sorted. What does the FED do in the fall. How would you think about that just a piece of scenario analysis. What would that mean for you?
Well, I mean directionally, it would point to, you know, a higher funds rate. And obviously the market is below the current level in terms of forward pricing, so you know, holding would already be you know, would already have some impact in terms of an impulse, but you might need you know, additional hikes. That's certainly a possibility. I don't
think it's you know, particularly likely. If we see going adjustment, if we see adjustment in inflation and the labor market, then there's also going to be a little bit more tolerance for easier financial conditions and stronger growth. But there's a limit to it.
If forward pricing adjusts upwards towards the federal reserve? Would you consider that a tightening of policy somewhat?
Is that?
How you think about it?
It depends on what is driven by it's if it's driven by a stronger economy, then no. If it's driven by you FED messaging that they're less willing to cut you know, relative to the market's expectation, then I would view it as a tightening.
People are waiting for something big to happen because they're impatient, and they're looking for trading opportunity, And I'm curious, what is the next shoot to drop? Is it housing prices crashing?
Well? Housing? I think, you know, we had declients in house prices in the second half of last year. We actually have seen some stabilization in twenty twenty three so far, so I wouldn't really expect, barring another major shock, for example, the sort of thing that John was talking about, significant further upward pressure on the funds rate, I wouldn't really expect a sharp, sharp drop in house prices from here.
You know, there's still some I think erosion happening. Some of that is also because the official indices lagged behind reality somewhat, but I wouldn't expect that to be a big shot.
Was the banking crisis basically resolved and now it's just sort of the slow bleed of the reality of higher yields or is there something percolating there that you're keeping an eye on as also a potential catalyst, especially if what John said does come to pass. For people price out some of those rate cuts.
I mean, our view is that the banking turmoil is going to be a drag on growth. We've said about you know, forty basis points or so, you know, half a percentage point or a little less.
How did you come up with that?
Yeah? Can I ask there?
How do you even the team come up with that forty to fifty vices points number?
Well, the primary approach was to to basically look at past changes in lending conditions in the FED Senior Law Officers survey, making assumptions about where that goes, and then feeding that into our model, which also includes financial conditions, and then getting sort of the extra effect over and above what you'd normally expect in a tightening financial conditions environment. That's how we came up with it. I would say that so far what we've seen in these surveys has
been less pronounced. There's been less of a tightening that we expected than we expected. And now the question is is it just delayed or are we just seeing a smaller impact. I think that's a little bit too early to tell. Also, because obviously some of these banking issues are not yet resolved. There's still pressure in the market. So the last chapter probably hasn't been written yet, but right now we're still estimating that forty basis point.
What's more pernicious for this economy for it to be a slow burn, a slow tick, tick to a reduced lending of tightening credit standards, or a sudden shock.
Well, a sudden shock is more pernicious because a slow burn, you know, there are a lot of other factors in the economy that can offset the slow barn, policy can react to it. So you know, clearly something that happens very suddenly in large size is much more difficult to manage if you're an economic policy maker. So I'll go with a with a quick shock here.
A longer going far away, there was a guy named O'Neill and Dudley. They were at Goldman Sachs with Ed McKelvey. And there's this young whipper snapper out of Wisconsin, Madison in Germany who made his name on mortgage equity withdrawal. John Farrell brought up in the last hour the new housing dilemma. We have an America of two point six percent mortgages locked in and they're never ever going to sell. What does your team say about the housing economy of America.
This is where you got your fame. Yh what does your team say now about all those people out there locked in the mortgages of their dreams.
So first of all, I would say, you know, the housing bubble was really central in the pre eight economy. Obviously, it hasn't been central in the recent economy. It's been important. There has been a you know, a big boom and somewhat of a bust. And you know, mortgage equity withdrawal did pick up in twenty twenty one to levels that were appreciable I would say, not dramatic, but appreciable. And mortgage equity withdrawal coming down since the peak of that
cycle has been a drag on growth. You know, I'd say specifically on the you know lock in from seven percent thirty mortgage rates versus maybe three percent or four percent that people took out the mortgage rates at I do think that is part of the sort of slow burn that that that Lisa talked about. I mean, I do think it probably at the margin reduces mobility somewhat.
The research on those issues has been somewhat mixed. So that's why I'm putting this in somewhat cautious cautious terms, but I do think it probably is at the margin more negative for mobility, you know, until more time has passed.
Are you're avoriding debt scene? In conversations at the moment with clients, do they want to talk about it?
I talk about what what clients want to talk about.
Of course, is that the solemon method of economics.
Is it top of mind?
Yeah, it's top of mind for for a lot of people, and you know, undoubtedly over the next few few weeks, until you know, whatever the X state is, it will remain top of mind. It probably will go you know, right up to the to the wire just looking at the political dynamics and it's still you know, unclear how
exactly it's going to be resolved. Our baseline is that you know, there's going to be a resolution very close to the X state, and that you know, ultimately you do get some spending cuts of some spending caps, but we don't expect anything as large as what we have in the twenty eleventh situation.
We'll have to say what that means for the outlook as well. Janhasiers at Golban, Yeah, thank you.
What we know is if you go back to the Orlando Sentinel from a few years ago. You can talk about a sterling ballerina and a ballerina career that was legit. In what the parents said to Cameron Dawson is have a fallback. Her fallback has been sterling strategy for Bank of America, among others. She's at New Edge Wealth right now, their chief investment officer. Tell me about the ballet we're in right now. You know, ballet, that's a tough business.
Your body falls apart, is our economy? Is our financial system falling apart?
Right now?
Well, the interesting thing about ballets is that they always either end in a wedding or a death. And so I think that's what we're looking at with this cycle, which is that are we going to have a recession or not? And that's why this market has been flat because we're in this world where we know the risk of recession is high, but we're not seeing the whites of the eyes of it in hard data, and that's why we continue to have this sideways chop.
Do you operate with the assumption that we will get one this year?
This year, I think is the operative word. It could lean more into twenty twenty four. I think the interesting thing is just at the precise moment when economists and the bond market are expecting a recession to hit those cuts to hit is when the equity market has earnings starting to reaccelerate and rebound, and that's a really big schism for this market.
Have you got this tradable window, then what do you do with it between the last FED hike, even dat it was the mating before and the recession that you start to see in some of the days to pay rolls, et cetera. What do you do in that window?
You probably trade on technicals, things like momentum, and you trade on positioning and sentiment. Those kinds of things can drive the market in the short term, and it's really in the medium term where the fundamentals start to matter. So when we look at that forty two hundred level, there is this risk that we move higher, and I
say risk because people aren't positioned for it. That is the pain trade that we don't get above forty two and it may not be justified by the fundamentals in the medium term, but the technicals, the sentiment, positioning, could get us above that and really make it a very big pain trade.
What happens though, if we don't get a catalytic event, if it's just sort of, you know, little data points that you could justify with the narrative that you desire. And this is what we've been getting for a lot of this year, and we're going to continue getting for a number of months based in what a lot of people are saying. Do markets to stay in this range?
It reminds you of two thousand and six, two thousand and seven, because the writing was on the wall that things were certainly starting to weaken, yet market shrug them off because you didn't see the whites of the eyes of the weakness. The Fed had paused, and it was until two thousand and eight that we started to see unemployment tick up and really the Feds start to react to that. So there is a long precedent for these cycles simply taking a long time. It's like watching paint dry.
Which is why we have to think of this in two timeframes, the short term being driven by those momentum indicators, and medium term by the actual fundamentals, the boiling.
Of the frog until suddenly there is no frog that is alive and hopping. There's a question about you know, this is not two thousand and eight, and people are talking about that base in the global banks that have plenty of capital. But is this leading to some sort of fissure, some sort of seizure that is going to lead to mass evaluation drops or is it not or is it going to be something that's more akin to the recessions of your Well, I think it.
Starts from your point, Jonathan all the time about how we shouldn't always just index to two thousand and eight, because just indexing to the extreme is not helpful. The reality here is that we're likely going to see some slowing in loan growth, and that typically coincides with slowing in economic activity. It should be expected that banks, small banks who have been annualizing loan growth at eight percent for the last cycle will see that slow in response
to that. That will have real economic impact, and at this point it's not being priced in.
I'm with you. I agree with you obviously because you agree with mat and you can come back any time to talk about people will want to benchmark to something. Though what should you benchmark too? What is the parallel right now for you?
I think it's somewhere in between the twenty eighteen experience where we didn't have a recession and the FED was able to ease and there was no inflation. In that extreme of two thousand and eight, remember twenty sixteen, we got very very close to a recession. We flew very close to the sun, and we were able to avoid it in that scenario. I think that's probably a good parallel for us to say, where could the earnings risk be.
We think that we have some recession, it just won't be as deep as o weight.
One of the great realities of Florida right now, your Florida's everybody's been there for three cups of coffee and think they're experts. You own the high ground on Florida. Is the economy boom there legit and it is symbol of an optimism in America that we underestimate.
I've always considered Florida beta on the economy because there is so much discretionary spending in Florida and it tends to have more pronounced boom bus cycles than most other states. And always when you're in a boom, there's always this notion that this time is different, It's never going to end. But I'm hearing people leave places like Miami because they're
getting priced out they can't afford it. That may be the first indicators that some of this high beta flying parts of the economy are finally starting to feel the pinch of price pressure.
I mentioned the Bellot at the beginning, and I look at the damage out there, and my whole thing is corporations will adapt and adjust given cards dealt That's what I see right now for a part of the standard impores five hundred not all. How's that trend going to play out this year?
Well, certainly that's what we saw in the first quarter. That's how earnings came in better than expected. Saw corporations adapt and adjust and defend on the margin line. The thing that will be interesting to watch is that if inflation really does roll over and it falls, that means revenue growth is going to fall.
Nomenal GDB comes in, revenue comes.
In, and that usually leads to margin pressure regardless of what you do on the cost side, because you lose the incremental margin dynamic.
John Honeywell with the banner across the Bloomberg years ago, all of a sudden they were doing eight percent organic revenue growth. No one had ever frame that and when they come back to six percent, not to pick on honeywell, that's.
Going to be the game changer.
This was great, Cameron. Thank you. Cameron Dawson of New EDH twelfth may to share with us around the table. They had a macro strategy at Academy Securities. Pete, good morning. Let's start with this one. He's more complacent right now. This market or politicians in Washington.
I think the politicians in Washington, because this market, I think, is trying to figure out do we get some sort of soft landing, does this work out, do we get through a bunch of these problems or not? And I think that's we're on this potential for a large gap either direction. I think the people in DC have kind of lost the focus. There's plenty of other things we should be focusing on other than the debt ceiling, and that's just a time sink. At this point, we've.
Got copper rolling over.
I look carefully at the Bloomberg Commodity indexes, good mathematics, and.
It's not a pretty chart.
You have your firm has a wonderful Pacific RIM study ongoing. What do you see there? Is it real slow down?
Yeah?
I think China is having some troubles, but I think even beyond that, I really sticking to this theme that we're going from maid in China to made by China. We're across the globe. China is now trying to compete with our products, compete with our companies more than they ever did. It's something we're hearing from companies. We're running into people who are losing contracts denominated in the Chinese currency.
I think that's a long going play. China's still struggling, but it's going to be at our expense as well.
With the military exposure of your firm, Can you invest in Taiwan, even with the United States committing to three and indeed four military bases in the Philippines, is Taiwan uninvestable? Yeah?
So I think our firm has a pretty strong view that China is not going to invade Taiwan anymore anytime soon. The defenses of Taiwan are very strong. China has learned a bunch of lessons from Russia. Having said that, there is this erosion of confidence and how we're going to be able to deal with Taiwan overtime. So I think you've got to be careful.
There right now. A lot of people are cautious. We are seeing this sort of volatility come down. People getting a sense that they're just waiting for godoh, waiting for some catalyst, waiting for a sense of which direction we're going to pivot in? What are you looking for to really represent that catalyst?
So I think people have been patient. They latched onto the AI story. So that's been what all the bulls have gravitated to, and it's an interesting story. There's definitely some run room there. For me, the catalyst is what happens with the banking Do we really see this slow down? And you know, when we look at that the SLEUS report, which that we would never really pay that much attention to,
we do now apparently. But I think really the important thing there was it's a demand side issue, right, There's lack of demand for loans. It's not just that banks don't have deposits. So I think we're seeing the economy slow down. Jobs data, a lot of it's still good. You're seeing little bits and pieces like we're starting to see a tick up in unemployment claims. How good is that when every headline really is about layoffs? So I
think there's a slow bleed. It's slowly playing into the economy, and I'm looking for either confirmation for that or that somehow we've avoided that problem.
Okay, so what is that problem?
Right?
Because things are slowing down and this is by design, and this is sort of the difficulty where people are saying that's happening and it's a good thing. Yes, we're seeing a rise in unemployment claims. This is exactly what the FED wanted. Yes, we're seeing deceleration. Okay, great, And guess what. Companies are actually more profitable because margins are increasing, they're passing along those prices. When is it a negative?
I think it's already a negative. I think one of the things is we're addressing something that was really a supply chain shock, and we're trying to use monetary policy to address the supply chain shock. So that was a problem. So we're doing the wrong things, and I think we're forgetting about all these lags. Right. It takes months and months from the person who gets let go by the time they get their severiance package and all these things
to hit the economy. I think the rate hikes from last November haven't even really hit the economy, people rolling over their car loans. Everyone I talked to is looking at releasing a car after their three yearly. They're shocked by the price. They didn't have to deal with that a year ago if their lease wasn't coming due. So I think that lag is something we've all forgotten about in this real time economy.
One of the quiet charts of the week were bankruptcies in the United States. I was thunderstruck how they're elevated here.
It's a process. I think we're all waiting for this event boom. It's a process and you can put the pieces together. The other issue that I think a lot of people have got right now is that we had excessive monetary easing for so long, for an extended period of time, way beyond the time that we needed it, and then the feders have had to play catch up, not frontloading. I hate that language. Wasn't front loading, was backloading.
They were late, and we're trying to work out what the prices we've got to pay for that as market participants. Is it just a thirty percent move on the nastak last year or is there more to come?
I think there's going to be more to come. And I completely agree they were very late, which ironic, even as they were discussing rate hikes, they were still doing large scale asset purchase January twenty twenty two, so they missed a lot on that. And when I look at the banking crisis or whatever you want to call it,
to me, it's very simple. Basically, during COVID, banks went from thirteen trillion to eighteen trillion, So in two years they took in five trillion dollars of assets, which is much more than the five hundred billion they normally take in at the exact worst time to find good investments. So it would not be surprising to find that some percentage of the banks were very conservative and dealt with it well, and some maybe got a little bit aggressive.
And I think that's what's playing out right now. This no longer has anything to do with uninsured deposits, About what did banks do with the money when they took it in and what are they going to pay people to keep the deposits? Because I don't think anyone's really worried about their deposits defaulting. It's now, am I getting a fair rate on that? And what does this bank own on the back of that.
Wow, said Pete. We could be facing what years of some of these banks just being quite unprofitable for a long time.
Yeah, I think that's right. I think it's going to be a unwined period. And my big concern it's a tail risk. I don't think it happens, but the tail risk is as one comes through and their balance sheet becomes availed lable for sale, it drags prices down, bringing another one into that leg. So that domino effects. So I think that's what we've got to be regret working on the Fed's got to be very careful about hiking rates.
They've got to be very careful about causing pressure on bond prices because that will, you know, basically create that domino effect.
We'll be talking about this for years. Yes, mortgages sold at two percent, We'll be talking about this for decades. What people aren't going to sell their houses?
Well, they do with this, you know, the running joke's been for a lot of people. Certainly last year your best asset was your mortgage.
So it's like crazy things about the house. Who on earth is going to sound their house unless they're forced to move for a job or something out of their control happens. Who is voluntarily going to sound their house with a thirty year mortgage on it with the rate of two to three percent.
And so that's been one of the ironies of this whole thing. Right, the home builders are doing well because they can build a new house that someone has to move in because there is the supply shortage because of this weird phenomenal about mortgages.
Well, and then there's this question about financial engineering where people are going to basically just pass along this mortgage is I don't know. Taking a step back, I just wonder how much this is normal, right that you get a washed out in banks, and how much is different? How much is this something that is a unique distortion.
I have no idea what normal is anymore. What's normal?
We don't know what normal is.
We've had a distortion for like the last ten to fifteen years.
This was a calculus exercise the first and second to rud of the rate change, and Peter was way out front on.
This was truly historic.
If you get yields coming back in in a Steve Major way and ed Heiman way in a David Rosenberg way, does this self adjust price up, yield down?
No?
One's looking for that. No one's looking.
You talk two to three percent mortgages, what if you get back to a three point six percent mortgage?
And I just add the one thing, right, We never experienced these large scale asset purchases are QE until two thousand and eight. And I don't think we have any idea how those really affect asset prices are not so I think people like to try and convert. Oh how much Q is or QT is a basis point. I don't think we have any idea, And I think QE and QT go much more directly to asset prices. And you keep looking at the FED balance. She didn't the stock market.
Steve heated about this miszono sta just stop it.
Now.
You know what normal is. It's when you went to the industry on Wall Street, whatever date that was exactly. That's very interesting what you believe when you first got your mortgage. I speaking of some of the airport the other day. Let me tell you about the eighties, just like I had to pay. It's always the same.
Can I say thank you?
I had no idea about snakes and ladders, no idea, no sense.
It's history. It goes back to the India of the raj all that do.
They slide down snakes back then?
No, but they're scary and that's why they changed the shoots.
And Americans scary for the kids forty three. They make him soft hair.
Every they learned something, every single.
Got soft sweet.
You should come.
This is what Governor Youngkin was talking about. Oh my gosh, this is what he was talking about.
Suits and ladders.
You know what's handling an education these days? Should that's the color safe for another time, Peter, Chair of the count Me Securities, Thank you.
Set Kelsey Burrow with us right now.
Fixed Income portfolio manager JP Morgan Asset Management briefing mister Diamond yesterday as he spoke to Friendcing Laqua, I look at the bond market and what I would say in equities, foreign exchanging, commodities, commodities, very weak bonds always send a message. What's the message being sent by fixed income right now?
Well? I think the message being sent by fixed income is there is slower growth and slower inflation ahead. And you know, we continue to look at the yield curve and look at the signal that the yield curve is giving, which is a very inverted yield curve. You have the short rate at five percent now and you have the ten year at three point four percent, and it's saying
that you know things are going to slow down. So historically what happens, our favorite yield curve is the three month bill rate versus the eighteen month forward bill rate. Now that is about two hundred basis points inverted at this point. It's the most inverted back to the nineties. Historically, when that starts to get inverted, it's about twelve months to recession. Now that inverted November of twenty twenty two.
That puts you in about Q four for recession.
For you in the team, we've got first right cut once September. We do September. Do you have any idea of what they come back to? Is it's still too early to make those kind of calls.
We don't necessarily think they're going back to the zero lower bound, but we all we are positioned long duration, which means that we have to feel that the FED is going to be more aggressive than what's already priced into the market. So you know, you've probably heard the expression that you know, the FED takes the stairs up and then the elevator down.
I like of thinking about about it like.
Shoots and Ladders if you've ever played that children's game. Essentially, you know, what we expect is that when the FED does cut, they are going to be hutting fairly aggressively. And it's not because of the inflation store. We actually already see the inflation trends, the disinflationary trends fairly well in trends. We expect to see them over the course of the year. What's going to have to happen for them to actually cut rates is going to be to
start to see cracks in the labor market. So you mentioned continuing claims. Continuing claims really, you know, I think is showing an important trend. So if you look at continuing claims year over year, it's up twenty five percent. That's never happened outside of recession. That's going going back all the way to the nineteen sixties.
But is that enough for cracks? I mean, honestly, this is really the question. A lot of people are saying, Okay, this is what Ed's been looking for. Maybe it's a little bit above. It still is pretty low relative to history. It's coming off an incredibly historically low base. How much is this enough of a crack or does it have to be an acceleration in the regional banking crisis. Does it have to be commercial real estates, does it have to be private equity.
Yeah, So what we're trying to do right now is we're trying to build a ledger, and there's things on both sides of the ledger. There are things that are saying the expansion can continue. And I think, you know, the biggest thing there, you know, is some of the data still in the labor market, we're still growing jobs around two hundred thousand, that's well above the break even rate, and as a result, the unemployment rate is still falling.
But the number of things on the other.
Side of the ledger that are suggesting that we should be slowing is just building and building and building now, and it's really allowing us to, you know, increase our confidence that as bond managers, what we want to be doing is staying long duration, adding curve steepeners to portfolios on opportunities you know, where the curve may tactically flatten, and staying very up in quality in terms of our credit credit quality bias.
This is something that we saw with the fund flows over the past week. Global bond funds had their seventh straight week of inflows, the focus really being on develop market debt equity flows were interesting and how yield up put in there.
There were outflows of the.
US, there were inflows for the rest of the world, particularly China. Do you agree with this assessment the US is the weak spot, but globally risk is a little bit more appealing.
Well, I do think that the stories are not the same, you know, particularly on the central bank side. On the inflation side, you have Europe inflation is really not showing any improvements, UK not showing any improvements in terms of inflation. You know, they are a little bit behind in terms of the monetary policy cycle. But I actually point to something more global, which is the commodity market. We were looking at the copper gold ratio yesterday. That's actually back down to where it was.
Two years ago. So, you know, I think that.
The commodity market is telling you that there may be a little bit more stress globally in terms of demand. Those investors are saying, I'm not sure there's as much demand for all of this industrial product.
That tells you more about love of growth is that the call there is that what you're seeing, Yes, so maybe yield to the long end right cuts to be priced in at the front end. What does the debt scening fit into all of that? When you start talking about curves and mention T bills, I'm like, how much of that at the front end of the curve is just driven by this mess right now in Washington.
So definitely there is distortions in the T bill market as a result of the debt ceiling. I mean, you have five trillion, six trillion nearly in assets and money market funds and they're all being moved around to try to adjust for this potential stress this x state that Cherry Yellen is our Treasury secretary. Yellen is putting on
June first. You know, in our mind, ultimately this is just another stressor at a point where you know, the system is fairly fragile, and what we're thinking about is kind of these unintended consequences and there's a lot of operational risks that people don't understand that's going on in the background. The treasury market is the backbone of the financial system, you know, it's not just that you know we talk about is yield going up, is the eeld's
going down. It's used as collateral, you know, it's used as the safe haven across the world. And so if you have a bill that is going to mature during the X state, and we do run through that X state, there's a lot of questions about how things are.
Going to work.
And you mentioned Jamie, you know here at Bloomberg yesterday, he's talking about the war rooms. You know, that's what everyone is looking at now, is setting up those.
War Roomsacy signed your war room. Can you describe what that day might look like? I want to ask you for the probability that we're going to see that day. That would be unfair, But describe what you think that day might look like. I own an at risk maturity, whatever that one might be. That day comes, we go through it, what happens, What does that look like?
Well?
I do think that the money market funds are preparing for this, and that's why you're already seeing the distortions in the market.
So you know, the investors that.
Are needing to adjust are already making those adjustments now. But I do think, of course, the broader sentiment in the market, if we were to pass the X date and not have the money that we needed to continue to pay bills would be a fairly a stressful situation for the broader markets. I think credit spreads would widening. I think equity markets would be falling.
The treasure he's rallying, and I think treasuries will be rallying similar to the experience we had in twenty eleven.
Were I want to go.
The US aggregate Total Return Index needs to go up twelve percent in price to get back to where it was before all this storm and thunder.
Great.
How long is it going to take for people to get price up yield down so they recover from the bond tobaccle of the last two years.
Well, the good news is they're already getting some of that.
They've gotten some of it.
I'll give you that.
But come on, is it quarters or are you and Bob looking out years to see a price recovery in bonds.
Well, we've looked at how bonds perform once the FED has paused, and bonds handily outperformed cash once.
The FED has paused.
So we are looking at a situation where you know, this is the time to get invested, this is the time to lock in the yields, get them now and benefit from the capital appreciation once the Fed starts hiking.
We expect that in Q four.
So think you rition on what we do leave. It's the last hike seems to be the cool rite.
That's it.
Cassie, wonderful to getting view on things. Cassie Paraday f Jpmulkan asset management.
To so many of Americans, Japan is Tokyo. There's a whole other Japan, and part of it is on the West coast, overlooking the sea to Korea and Russia. That's where Ann Marie Horden is. She is our Bloomberg G seven Finance Minister's corresponded after her most interesting interview with the Secretary of Treasury Emory Harden.
The Secretary is seventy six years old.
She has bulletproof economic academics as well. And what I really heard today is she's going to stay the course and serve out her term.
Is that true?
Yes, that is true. She said this number of times. She confirmed that with me today. I asked her a little bit of a tongue in cheek question at the very end, if she'd considered another four years if President Biden worked to win because Obviously, he has relaunched his next bid for the White House for twenty twenty four, and she laughed, But she says she enjoys doing the
work and she will continue to see out this term. Obviously, her work right now, whether it's in Washington or here in Nagata, Japan, is the debt ceiling on the sidelines. This is what her peers at the G seven are very concerned with. The risks to the global economy. They're all emanating from the United States right now.
Emmery, you know that each White House has a process of debate and dialogue. Where does Secretary Yellen fit into the debate and dialogue of the Biden sixteen hundred Pennsylvania Avenue.
Well, when it comes to the debt ceiling, of course, the Treasury Secretary is the individual that is going to continuously update us on the X date. She said in my conversation that as we get closer to that June first, as early as June first is what she's outlined, that potentially Treasury could run out of the extraordinary measures they've been taking since January, that she will update Congress with
a more precise time frame. So her team is going to be obviously communicating all of this first and foremost to the White House. And then of course we got a little bit into what happens if there were to be a default, if we go over the X date. Treasury Secretary Janet Yellen was at the Fed in twenty eleven when the Fed went through these scenarios of what Treasury was doing, and it was under the assumption then, and I've read the transcript, it was under her assumption
then that Treasury would service the debt first. She says that she has not yet spoken about these paths yet with the President. It's going to be politically fraught for this administration if there is no deal and they need to decide to pay bondholders or pay recipients of Social Security.
Meanwhile, John was saying that it has to get worse before it gets better. In other words, people have to care more before they can resolve anything. In Washington, DC, over at the G seven finance minister meetings. How much do they care? How much is this a focus versus people looking past this and saying the same thing that people in the markets are, which is we've seen this movie before. It always gets resolved.
There's a lot of concern and angst amongst other financial ministers at the G seven, and we heard from the German finance minister. He's saying he hopes that Washington makes a matured decision. They are all also on the edge of their seat waiting to see how this plays out. And there is concern when you think about the makeup of this Congress, only about thirty three percent. NBC recently did analysis of this. Thirty three percent of lawmakers were
here in twenty eleven. They witnessed that down break, they witness the pain in the market. Not a ton of a lot of these lawmakers are fresh, and Kevin McCarthy has a very difficult line to walk. I think many people are viewing that the negotiations stopped today, that the meeting stopped today is postponed for early next week. They do see that as progressed, because that means on the staff level they are working through a number of items
before they want to sit down with the principles. But next week is going to be incredibly busy, and for the Treasury Secretary, she will be meeting with bank executives.
She said recently she's been speaking to business leaders, but she hasn't spoken to bank executives since January, and she wants to learn from them what is going on, and potentially she wants to put some pressure on them to start calling other members of Congress because for her, she does not want to even speak out loud the contingency plans. She says, there is no good deal unless Congress lifts the debt ceiling.
Amory just quickly here putting those ideas together. The concerns about the banking sector, not just with respect to them getting more excited about the bank the debt default ceiling, but also just with some of the regional banking crisis. How much is the US on a back foot relative to where it has been in the past.
These G seven.
Meetings, well, the US always wants to lead, especially at a G seven like this. They want to lead when it comes to China. The G seven meeting is really the prep work as well for the ministerial meeting that also be attending with President Biden in Hiroshima. And one thing we know they want to work on is this economic coersion against China. Secretary Yellen has spoke about the work that they're doing potentially on outbound investment. They're supposed
to be an executive order. But this administration, the way they confront China, they want to do so in a multilateral approach. It's very difficult to make sure you're corraling all the troops when you come here and they're asking you questions, When is the US going to raise the debt ceiling?
How do we know that the.
Treasuries that are the underlying bedrock of the global financial system are going to be paid and secure? It does put them in a very precarious place.
I MH. Wonderful conversation, fantastic job this morning. Thanks for joining us. I'm Marie Hoden. There out of the G seven meetink Open Japan.
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