Surveillance: Fed Tapering With Peters

you know this is true story, folks. I'm on the floor of bear Stearns a million years ago and John writing Lisa is ready to go on, and just before we cut to live, somebody screamed out at John John price up, yield down, and of course the whole place erupted in laughters. We went live. I mean, nobody's laughing, no are they know? Greg Peters that somebody who's gotten the bond market right again and again, as well as all of p Jim fixed Income. He's head of multi

sector and strategy there. And you've been calling Greg for this decline in yields or at least a stasis where we are despite some of the UH inflated expectations earlier in the year for inflation, here we are at a precipice where bulls on Wall Street cannot get bullish enough about equities, where bond bond veterans are looking at the bond yields here and saying they're not going to move that much. Do you think that people could be surprised

by bond yields going lower being a bear case for equities. Yeah, I think that's a distinct possibility. It's not my base case by any stretch. UM actually think we're in the

symbiotic relationship where low yields really allow equities to outperform. Right, it's not only the discounting mechanism that's much lower, so you know, pushing up valuations, But it's just type a low, stable yield environment is just broadly supportive of growth, broad broadly supportive of earnings h and should be broadly supportive of risk asset. So I actually see the two actually

pretty much aligned here. But I think your question ultimately is if the bond market really starts to sense and suss out a rolling over of economic activity, and then that's clearly not a great outlook for stocks. If J Powell this Friday, at his speech at the Virtual that Jackson Holl Symposium comes out and forecasts or four tells an earlier taper than the market is expecting, says November rather than December as most people seem to expect. What's

the reaction markets, I don't know. I mean personally, I don't think a month matters. I mean, if the markets are that sensitive around November versus December, then I just think it's kind of looking for an excuse to uh take some chips off the table. So I'm not overly worried about it. That's my personal expectation that the Fed starts to taper in November, maybe December, but either way

they're tapering, UH. And then equally, I'm not as jammed up over a taper as some other folks, just given the fact that you're seeing this massive shrinking UH in treasury supply at the same time, Gregor, part of the stresses that are out there now is historic liquidity. Every morning I look at overnight repo. We've now gone out over a trillion. We're grinding higher. I've got experts telling me it's no big deal. But how does the wall of money that's out there fold into the pijam yield?

How does it fold into the simple idea that we want to observe and guess where yield is going. Yeah, I think the technical dynamics are important here. Typically I don't think it um changes the direction, but I think it exacerbates the move. Uh. And so that's why I'm focused on treasury supply going forward, as I think the fact that you're going to see a decline in treasury supply next year and several years after, I think is

highly supportive. At the same time, you know, the US is winning by not losing, right, So the fact that you're seeing so much foreign investment into the US into the bond market is also support So I think these are really supportive factors. But ultimately it does does point to the fundamental piece. And so I think fundamentals are the driver. I think the technical is just uh, just exacerbated.

I don't want you to make a sales side bracketed tenure call, but I do you know, as a guy running institutional money with that belief on liquidity and on treasury supply bracket the ten year yield as you see it now a year out or two years out, Yes, so I think our level, uh you know, two years forward is about eight basis points on the ten year. Our call for the end of this year was a hundred and twenty basis points. Um so we're in striking distance.

That felt like a terrible call in the first quarter, Tom, I have to be honest with you, quite painful. Uh, yeah, I did, um so. But I think longer term, Uh,

you know, we see an environment where yield will remain low. Uh. And honestly, I struggle with the narrative that yields are going to jump post Fed taper, post economic activity that's off the charts, peak inflation, all those sorts of things are in the rear view, and to me, I just don't really see in an environment where yields after all that's been thrown at the market, that yields will will

move higher after the fact. If it doesn't happen during then then I'd be shocked to see it happened after the fact. I know that in about four and a half hours time or so, Tom Keen is going to be awakening from his nap, eager really watching the to your Treasury auction we're getting at one pm Eastern time. He cannot wait, neither can Lisa. When it comes to these auctions in the supply and who is buying. How do you think about foreign buyers in the treasury market. Yeah,

I think it's important. I mean, I mean we've been seeing it, uh, particularly as we get closer to taper. Whether it's November or December or January. Who knows, the fact that you're seeing um uh foreign buyers increase their purchase power within the U S treasury market is important, right, So I do think that's a strong technical factor. So I expect that to continue. But I try not to get overly taxed by a single auction event. But I think you know, over time, though, you'll continue to see

the auctions do quite well. Foreign to foreign UH participation to be quite high, uh, but and auctions that go quite well. And of course the US in many ways is attractive because it's still the highest yield you can get in basically sovereign bond markets globally. And if even if you expect yields to be staying lower when it comes to treasury yields, is that still going to remain true? Yeah? I think so it's a relative game. We play a

relative game, So we're looking at where yields are. UH. In Europe, we look at where yields are in Japan, and the US by far has the most attractive field environment, so I don't see that changing anytime soon. I don't think anyone is forecasting European yields to move above zero

uh anywhere over the near term or ever. So UM, I really think the support for U S treasuries US assets period will continue to be quite strong, which is why I think the dollar will continue to do quite well here, which is somewhat against consensus, or was against

consensus right before we let you go. I want to ask a philosophical question as we talk about the FED, and they're ongoing a hundred and twenty billion dollars of asset purchases every month at a time of rising in equality, at a time of inflated asset prices, at a time when a lot of people are saying that corporate profits are as good as they're ever going to get, and we'll contin will continue to accelerate from here because of

their eminence over specific sectors. Is this bond purchasing program more helpful than it is harmful at this point? That's a great question. Um. Clearly inequality is something that has worsened. Is worsened um during the pandemic post pandemic, right, you're creating the wealth effect. Central bank policy is a blunt instrument. This whole portfolio channel effect, whereby raising asset prices to increase kind of spending at all to trickle down hasn't

really worked that well. So I think the FEDS focused will continue to be around getting real wages higher. So for me, the focus is less on asset prices, but getting real wages higher. And I think that's the most important piece of the puzzle here to solve, not only in the US but globally, as inequality has really worsen quite dramatically here over the past twelve eight months. Peters, thank you so much. With p Jim ahead of a

multisector ategy, they're really interesting conversation. I guess this is the point where we begin a look back. It's September eleventh. There are those that have younger children explaining to their younger children exactly what was September eleven, And too many of us it is a collective memory. Everyone will pontificate only foreign affairs gives us wonderful expert opinion across a wonderful cross section. Who won the war on Tera. I

really can't say enough about this. Daniel Kurtsfahlan joining us, driving on the legacy of all that have done foreign affairs. It's, folks, an annual subscription, I believe, is a price of an over priced martini at an overpriced restaurant. Throw it at your offspring and say shut up and read this, Daniel. Congratulations. Ben Rhodes is in there, maybe from conventional Washington's other

people as well. And I'm thrilled to see the marine Elliott Ackerman in there was Travitas writing my book of the Summer, and Elliott Ackerman makes no bones about it. We are a nation preoccupied, We are a nation and fatigued. How tired is America? Well, it's it's appropriate in some ways that we're seeing this messy, chaotic, in many ways tragic withdrawal from Afghanistan, right as the twentieth anniversary of

nine eleven is approaching. As all of us who remember it now, it was such a cataclysmic event for American politics, for American foreign policy, and it really shaped the way we used our power in the world, the way we thought about the rest of the world for so long, and in some ways that it seemed to really drop out of the foreign policy conversation in the last few years in Afghanistan, and what we're seeing now, the scenes from probably are really reminder of just how much it

has changed the world, just how much has changed sense of American power in ourselves. There's so many ways to go here. Stravits's essay of a few days ago in Time magazine what Zacaria rode in the Washington Post into me the exhaustion is an exhaustion of theory or belief. In putting this addition together of foreign affairs, could you

discover a modern American foreign policy theory? Does it exist? Well, if there's a theory or a tendency, it maybe one of overreach and and hubris and these kind of maximalist goals that are eventually walked back in time. If you remember back to the days after nine eleven and the declarations coming from President Bush at the time, but from lots of others about the agenda we had in the world and the way we were going to achieve this ultimate victory in the war in Terror and transform them

into least and transform our own society. Um, all of those goals look so fanciful in retrospect and what we've come out of If we look back at this period, as you see in these essays, it's something that in some ways is would be surprising if you go back to days after nine eleven. We haven't seen the kind of you know, mass casualty terrorist attacks in the United States that most people thought would come repeatedly after nine eleven, and that in some ways is an achievement, but look

at all the costs that have come with it. You see in Elliott Ackerman's essay the one you mentioned, just how much it has affected American service members in the American military and American power. You see in Ben Rhodes essay just how much it has changed American foreign policy.

So we can in some ways look at certain kinds of achievements and certain kinds of victories of American policy in that period, but if you look at the declarations and ambitions that we had in those days right after nine eleven, what we've had to pay for those those achievements is really staggering. And there's also the question of how the concept of the war on terror has changed amid a changing world. What do some of the expert

writers way in on that front. Well, one of the one of the most striking things about the Afghanistan withdrawal, which I think is a theme that runs through a lot of these essays. We closed the issue, of course before we saw what was going to happen this week, but most of the writers really anticipated what this outcome

was gonna look like. Is at this moment when the United States is trying to balance goals in the war on Terror and the kinds of considerations that drove us into Afghanistan in the first place, and that kept us there for for twenty years, against what are seeing is the kind of challenges of our day, China, technology, you know, great power competition. That's what people in the national security

and foreign policy worlds were talking about now. But as you see in these essays, the response to the war in terror has shaped even the way we think about

some of these great challenges today. So, even as it's it's passed out of the kind of core of American foreign policy concerns in many ways, at least before Afghanistan became the headline story of the day, uh, it really has shaped the way we think about the world and about our own power as we discussed this morning the idea of top level officials in the United States meeting with Taliban officials. The idea here of the legitimacy of

groups previously designated as terrorist organizations. How much are we at risk in the Western world generally at risk from terror threats in Afghanistan where we have that much less visibility on the ground. That that is the big question of the day, and it's one we just don't know. Bill Burns, the CIA director who is you you alluded to, was meeting with the Taliban leadership in Cobble yesterday. Really

extraordinary meeting given the history of these past years. Uh. He has said very very explicitly that we're gonna face some more uncertainty and some more risk, something that that I really liked one of the essays that we published by Dan Biman. You know, we talked for a long time about stamping out evil and standing out terrorism everywhere, and what what Dan Bieman points out in his essay is that we've come up with what he calls a good enough doctrine where we accept a degree of risk.

We accept that the United States is not going to go out and destroy or every terrorist or every terrorist group everywhere, but that we can create enough protections that there should be defenses at least against the kind of large attacks that we worried about in the aftermath of

nine eleven. So in the wake of years in which we talked about these grand victories and stamping out evil and all of that really grand, ambitious rhetoric, we're settling for something much murkier, and there will be a degree of risk and uncertainty as part of that. And Dan I saw Emma Ashford's essay on strategies of restraint. It is kind of an extension of that. I mean, twenty years post nine eleven, once we're out of both Afghanistan and of course been out of a rock, are we

looking at a United States that is more restrained going forward? Absolutely. I think it's undeniable that all parts of the political spectrum have become much more attentive to limits on our power after a period in which there was broad agreement.

If you remember those years after nine eleven about using American power, using the American military, and these fairly expansive ways all over the world, people all of a political spectrum are much more hesitant about using that kind of power now, and we may be at You know, there's always a sort of pendulum in American foreign policy between these relatively ambitious uses of power and these this sense of restraint, and maybe that we're at one far extreme

of the pendulum and we're about to see it swing back, because this is what we've seen in Afghanistan. There's a reminder that their costs to restraint as well, just as there are are costs to ambition and overreach. And I wonder too if the United States is going to look internally next. There was also a great piece on from nine eleven to one six January six talking about the domestic terror threat and far right extremist white supremacists. Is that going to be the next error or area of

terrorism focus. This is just an extraordinary sea by Cynthia Miller address who has been studying extremism of all kinds for for for years, and she traces the history of some of the domestic terrorist groups that we have seen a threat more recently, even even as the rep from Islamic terrorism started to receive a bit. She she traces their rise through these years and as we all know, after seeing some of the news events of the past,

the past couple of years. This is sort of the unappreciated threat that crept up on us as we were focused on terrorism coming from far away. And what what something Milliar just points out in this piece is that we tend to apply some of the same frameworks. You know, this goes back to this question of how the War on Terror will continue to affect the way we approach things. We apply some of the same frameworks and tools to these groups, even though it's a very very different kind

of threat. Tell me about our new isolationism. I find Dan absolutely fascinating and your wonderful book on George Marshall, it was a battle of n as well. What is the color of our our two thousand twenty five isolationism, Well, it's it's a it may be a little bit more

subtle than that. It's not purely isolationist. It is a reaction to the perceived failures and the overreach of the years after nine eleven, when we thought we could use the American military to go it in and address threats completely, to stamp out threats completely, and to transform foreign societies. A lot of those uses, whether in Afghanistan or in Iraq or Libia, have proved to be much more difficult than people expected at the time and much bloodier and

much more possible perspective time. At the same time, we are as as you know well, very very focused on this threat from China, and in some ways there are people in Washington and the nash security world who see the China threat as a thing that is going to keep us from receding into isolationism, precisely because it is a kind of what that is defining our our American form policy. That Pottngers piece in the issue is a great demonstration of that. Daniel Kurs, Phil and thank you

so much. Just wonderful to begin our remembrance of September elevens with you on a Tuesday in August. Foreign Affairs who won the War on Terror can't say enough about some very controversial essays there to give up respective In his uh Dr kurtz Phalan said, particularly with all that's going on in Afghanistan, this is a joy because if you're at sixty feet, you've got to keep your eyes

on the ground. Ellen Ruskin has made a career of that, and working with David focus Landau at Deutsche Bank, publishes the most interesting and twisted literature in this time of our paranoias, are worries, are angst about inflation and such? Good to catch up with the chief international strategist of Deutsche Bank, Alan focus Land on the team worry about German inflation. They talk about the tail risks. What is your tail risk in the Q four. I think inflation

globally is very much the tail risk. I think the markets have taken a very sanguine view that, particularly in the US, the Federal Reserve is going to be correct, that a lot of the inflation forces on in fact transitory, that the possibility that they're wrong and the consequences if they're wrong are enormous. So I would say that, you know, in terms of macro risk, this is one of the most elevated risks out there, and and and is much more important as a concern than macro risks we've had

for quite some time, Sertay. Since COVID's broken, the theme from last week's angst to this week's celebration can be institutions changing, arguably keens when the facts change, I change. China came to the rescue with a dialogue of accommodation by their central bank, do you assume other institutions will do the same thing. Under angst, they'll just solve the problem for US. No, I think I think the problems

tend to be quite localized and need local solutions. The US economy is just too big to be able to rely on other central banks solving its problems. I think Tom, you're right to point out that there's there's been this dichotomy really between risks associated with China and optimism essentially

related to the US. And I think you see this in terms of the schism we've we we've seen in terms of the Chinese stock market and the U s stock market, which is having you know, broad ramifications, and you know markets that I cover most closely, the currency market in particular, So you know, I think there's something you've got to watch for. But I think China can make things easier for global markets. Absolutely, it has enormous influence. But if it's US problems like inflation, for example, the

Federal Reserve is gonna have to solve that one. Allen and curious going forward about how consistent it is for a higher inflationary regime and then to see bears become bulls, bulls become even bigger bulls when it comes to equities, particularly in the United States, is there an inconsistency here? Well, I think there are a lot of bond bears out there, and they've had a very hard time since pretty much

the end of the first quarter. Most of them have capitulated at this point in time, I think there's an acceptance that it's a tenure. Heel is going to trade at something like one in a quarter pers end. It's going to be very hard to tell a story that's particularly negative as far as US equities are concerned. Unlike in the Trump era, when you're getting hit by trade related issues every now and then creating clean uts and by and by by the dip opportunities, you don't have

that this time around. So you've got to have other features that create clean uts, and obviously the inflation stories being part of it. But even there, the market is taking a very benign look at the FED. You look at what's priced in through the end of it's less than a hundred basis points of tightening. That's nothing in the grand scheme of you know, FED tightening cycles. So the market has taken a very benign look at things.

But obviously the back end of the bond market, I think is creating the backdrop for very solid equity market and very solid US risk. The SMP is up more than year to date last year, the year before. How much longer can we continue with these kinds of incredible returns? Um, Look, you'd expect the returns to slow down, But I think what you're you're saying there as well is that there are a lot of participants have got into this equity market at relatively good levels, and they're not going to

get shaken out by something that's willy nilly. They're going to have to have some big macro story out there. Um, you know, the most obvious one is what the one we've been speaking about, which is that inflation is not as benign as the FED would make us believe. The FED has to jump in and generate some more aggressive tightening going forward, particularly two. That would be the kind

of story that would upset the Apple card. But right now, um, you know, if you look at if China is going to go through a phase where it's not actually generating huge amounts of international volatility, then the US is not going to be the instigator that, as I said, not whilst the bond markets as well behaved and not while expectations and the FED are this benign, something else that could upset the apple card, at least for some of those more richly valued stocks, would be in theory higher

yields if they do ever materialize. Do you expect them to materialize in the near term? And I think nextary in the near term. I think there have been some fortunate features behind this bond market rally. The most obvious one is that the Treasury has been issuing far less in the way of paper, primarily because they've run down their cash balances at the FED from you know, approaching so one point six trillion in February down to close

to three billion now. So that's one point three trillion that they've avoided in terms of issuance because they've run down their cash balances. So that lack of supply, in combination with what the FED does in terms of quantitative easy has created a very favorable demand and supply dynamic.

That demanded supply dynamic probably deteriorates, but it deteriorates slowly, and therefore I think the pressure will be for higher heels, but it's going to be much slower than certainly I was anticipating back in quarter one, and it wasn't just you. That was the consensus call coming into yields would be higher. The other consensus call was the dollar would be weaker, and yet that too hasn't really materialized. Can you make a case for dollar weakness in this moment? I didn't think.

Right now, I think you'd make a better case for buying dollar the dollar dip as it were. Um, I think the dollars fortunate in terms of where the small dynamic is playing out at the moment. I think you have. On the one hand, if risk looks okay, particularly U s risk looks okay, then the tapering story is still

at play. That's helpful for the dollar against G four currencies. If, on the other hand, you have international worries like we've recently had in China, then you see, you know, risk off, commodity prices coming off, and the dollar does well against commodity currencies. So on both science of the smile, the dollar does pretty well, so I think, and right now that smile those tales as it were, on the smile, on balance, I think more helpful for the dollar than

hurting the dollar Allen Roskin, thank you so much. With Deutsche Bank their chief international strategist joining us now, someone who's fluent, entailed, entire Sarah Malt joins us right now from new being their chief investment officer. Sarah, I love, love, love your research note. It's clear, it's crisp, it's sharp.

What's the single distinction in your note? That's an optimistic note. Well, we'll start with one slightly pessimistic note, which is that disagreement between the bond market and the stock market recently, including yesterday. But really what we think is the stock markets looking for a silver some silver linings for three key reasons. One is we expect to see some good economic data this week, not only with p M I S but in consumer confidence. Also, look at vaccination rates,

they're up quite significantly in August versus July. And we think in the US the delta variant is peaking. All of that together, we think is the positive of the stock market is now leaning into. We expect volatility around some of the Jackson hole and back to school uncertainty around the variant, but soon the page is going to turn too high. Single digit earnings growth, that's not a bear market. It's not a recession. That's a type of

market that can cut up put up strong returns. Not as strong as this year and last year, it's still strong positive returns going forward based on that earnings growth. So how big of a bulls there are you? You know, we're fairly bullish over the We're pretty bulish over the medium term. Shorter term, we think there will be volatility. There could be more of a training range, even a buying opportunity as the market adjust to tapering. But I'm sorry, Sarah.

When I hear this, everyone's like, there could be volatility, which means buying opportunity. No one says there could be volatility which brings gloom and doom and actually will threaten or turns in any meaningful way. I mean, is that a contrarian indicator that concerns you? I mean, you know, when we're thinking doom and gloom, this is a longer

term structural issue with the economy. Um, you know, something that we saw where there was a bubble or inflation is so high that we're going to go into a proper recession. Volatility we see coming up would be short term. This is more like the market adjust to tapering, you see downside of maybe five to ten percent, you know it's going to be very short term market timing in that kind of environment, that's a loser's game. We think

that's where you need to step in and buy. You can even see with China here we were looking at something like Las Vegas Sands. Just recently it's training back at March Lows. You saw what happened last night. You know these when we see that kind of downside, it's very quick to rebound when it's not based on um lawn term structural issues. And we don't think the downside that you see in a around the tapering will be laun term structural for the economy. So I'm wondering what

specifically would be on your shopping list in that. When you look at some of the reopening trades, for example, they are already well off of the highs we saw earlier this year. And we saw a money manager over at Morgan Stanley in an interview with Bloomberg yesterday saying you need to buy those reopening trades before it's too late. Do you agree with that? Now, we're more interested in stocks that have a couple of things going for them. One is pricing power, because we think there is some

permanence to inflation going forward. And second is you need to look at companies. We're looking at decade high margins for many companies. Who also has that pricing power to overcome the margins so they can continue to expand them or at least preserve them from here. We like small caps. Actually, I heard that one of the prior speakers was saying they don't like small caps for us. They're trading back at a discount of large caps that we saw in September.

Looking at January this year, they're some of the lows um. They're tied to higher inflation and higher interest rates. We like industrials. We think infrastructure spending will be positive for them, and as that economic growth continues, positive for industrials. Sarah, the heritage of New Vine of Chicago is that of clipping coupons. I mean, what they did in municipal as I was explaining, is to someone last night with the beverage of my choice in my hand that Neuvin invented

codified the clipping of coupons. Can I clip dividend growth? I mean, is dividend growth so entrenched that neuvine has occuraged to say it's a ten or twenty year trend. If you look at dividend growers um you know, that's the important thing that their companies that are so financially strong that they can continue to grow their dividends. They actually tend to perform well not only in defensive markets, but in periods of higher rates, higher inflation, and in

periods of volatility. These this has been a great segment of the equity market for investors who are focused on income because they have that sweet spot, the combination of not only nice yields to go along with the funnel mentally strong of these that can continue to increase their dividends. Sarah Hi, you bond still a leading indicator for equities now right now. I think what we're seeing is they're going in two different directions. We've seen that with widening

credit spreads. We're also seeing that with the ten year that is not matching this the optimism of the stock market. And the question is, you know, who will win over time. Our view is that economic data is going to be what really is the key winner to this battle, and we agree with the stock market. You know, we think earnings growth, not valuations, will drive markets higher next year, and that high single digit earning spread that we expect can give us what is typically the third year of

positive return to poster recession. It's usually not as strong as what you see in the first couple of years, but it's still as positive even through a tape er tantrum. If the yield curve doesn't flatten or invert, we think that will be what remains positive for the markets it takes its higher after this period of volatility. Sarah Manic, thank you so much. They'll be in their chief investment officer of the Little Acquiti. This is the Bloomberg Surveillance Podcast.

Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg