Surveillance: Inflation Fighters with Peters

to check in with Greg Peters. He's the co cio at PIGEM Fixed Income and far more has a mantle at home with all sorts of investment managers of the year in fixed income. Greg, thank you for joining us. Just as you rewrite the twelve thirty one outlook for PIGIM, you do this on March thirty one. What do you adjust to look forward within a fixed income portfolio? Yeah, so, I think what you adjust is the probability of our recession.

So we were actually reasonably optimistic that the fit could achieve a soft landing as still possibility Tom, for sure, but I think the probability of a recession is much higher today, just given what's occurring in the banking space. So you know, I think the theme that continues from last year into this year is one of uncertainty that you basically have a set of scenarios and bimodal trimodal type of outcomes and makes it a very difficult space

to navigate. And I think as a consequential see volatility quite pa which actually great opportunities at the same time. So it's one of these things with overall macro pictures cloudy, but we're seeing a lot of opportunities within the space. Greg Peters, a global law Street wants to know from you, and I guess it's pjam in general. But let's go to Greg Peters, what's the new duration forward? I mean, what point? And the maturity curve is a comfortable place

to be given endless algebraic epsilon given the reality of uncertainty. Well, so you know, it is continued on your outlook, of course, but I do believe that rates are too high over

the medium long term that will be remedied over time. Effectively, if you're worried about a recession, then adding duration, having risk out the curve via duration is a very good place to be and The question you have to ask yourself as an investor is do you think the tenure yield will be this called three and a half percent five years forward? Three years forward? And if the answer is no, I think will be lower than you know

whether the volatility and ad duration. So what do you make greg if you think that rates are going to be longer higher? For our brother acts to say, if you think that rates are going to be lower for a longer period of time, then what is the FED getting wrong? How do you push back against the Fed to reserve? It keeps saying we're going to keep rates elevated and we see inflation as a serious concern. Yeah, but inflation is a serious concern. So one of the

gets the other. So in order to get rates lower over time, central banks have to be viewed as inflation fighters. If they lose that credibility and then rates will just

naturally rise. So one big gets the other Lisa, And so it's really critical for the FED and other central banks to be viewed as vigilant around inflation because credibility is based off that, and if central banks lose that credibility, they lose the ability to actually kind of manage the yield curve if you would, so, so it's really important to get it right or the near term and if anything air on the side of you know, reducing eliminating

inflation in the system, I think that's a job number one. Okay. So given that, do you think that rates are too high on the longer end or on the shorter end? In other words, do you think that this market has been overly aggressive with pricing out rate hikes and basically saying to the Fed you're done and oh yeah, you're going to cut rates by almost one hundred basis points in the next twelve months. I do. I think the markets are way too optimistic around the notion of rate cuts.

To me, I don't see that playing out precisely because inflation remains quite high. So I don't see the scope for central banks, namely the FED here cutting rates in the manner that the markets are suggesting. So that seems oft to me, quite frankly, and we're leaning against that notion, so we don't necessarily see the rate cuts being pricings the market coming to fruition. So that's one error the

market that we think it's completely are. So based on what you're saying, which is a short end rates it could stay high and even be much higher, and long term rates could fall much lower. We're talking about really substantial inverted yield curve, perhaps even more than a hundred

basis points that we saw earlier this year. Is that correct, Greg? Yeah, so I think that is the path forward unless you really get this harsh recession with inflation coming down pretty rapidly than I expect the yield curve to remain inverted and continue to get even more inverted. So I still have this triple digit target between two tens. I think that's where where we land, and that's what we're forecast. Well, yeah, I got four questions, Greg, but no time for it.

Where's the ten year yield a year from now off of that triple digit inverted curve? I think there's a very good chance that, you know, the tenure just kind of moves around, you know, plus or minus twenty basis points. So I don't see at this point in time given the data, and you guys mentioned how we're so data dependent, so it makes it hard to port. But I don't really see your radical shift over the near term twelve months.

But on the ten year part of the firm unless you get a real change in the economy, including inflation. So those are the big caveats. Of course, Greg Peters, thank you so much. With PGIM and PJAM fixed income. He is with Renaissance Macro. He is aware we moved from an Atlanta GDP NOW number of three point x percent under two percent as well, the world turning against the optimism of Neil Datta. Neil Dutta, do you like the Atlanta GDP NOW statistic? Is it a value? Oh?

Of course it's a value, Tom. But like anything, your assumptions drive your conclusions, and the Atlanta FED number had a sharp downward revision yesterday because of the ism manufacturing PMI now. The ism manufacturing PMI last I check doesn't formally get looked into the GDP calculation. So it's important to remember that the GDP NOW estimate is not a pure GDP sort of beam counting exercise. Um what does go into GDP, by the way, is unit auto sales.

And auto sales came in a little bit better than expected in March, and that tells me that motor vehicles consumption on motor vehicles will be a significant boost to first quarter GDP and remember that because of the ISM number, the Atlanta fe has, you know, had a sharp down revision to their durable goods consumption estimates for Q one, So you know, it's important to kind of understand how these numbers work as opposed to just sort of finally saying,

look it's down. You know that's not right. It's not that easy. Well, we appreciate the analysis of it versus it's down or it's up as well. What is the state of the American consumer? Now, there's so many cross currents, many of us witnessing packed airplanes, buoyant travel, and yet real worry about different deciles of the American people. What

is the state of that consumer? Well, I think the most important thing is that the real incomes have been climbing and ultimately that is going to plant the seeds of future consumer spending. To me, it's really that straightforward. And I expect real consumer spending real incomes to continue climbing into the second quarter. Remember, natural gas prices have come down. That's going to bleed into household utility bills

over the second quarter. Given the state of the labor market, which is still okay, that's going to mean stronger real income growth in the second quarter, which will in turn support real consumer spending. So I know there's a lot of angst around the consumer. And you know, we've gone

from kind of talking about weird seasonal adjustment factors. Maybe it was the warm weather, but you know, at the end of the day, when you look at consumer spending relative to where it was for the pandemic, it's off the charts. So I think the Bears still have a lot of explaining to do, and you know, I don't really think the consumer is about to fall off the cliff here. Well, Neil, we've got to make note here you've been dead on about the lack of recession and

the resiliency of the American consumer. The zeitgeist right now, Neil Datta is you know, off Adam two's's essay in the Financial Times is a new respect for nominal GDP, which is at real GDP with a movable dynamic of inflation overlaid on top of it. Now you've got nominal GDP, you've got incomes, whether real or top line, and then it boosts right into corporate revenues as well, maybe giving us a buoyant stock market. What does nominal GDP do

over the next nine months. I think the underlying trend of nominal growth is around five to six percent, which makes you know, these sort of calls that basically overlay like corporate earnings over on the im sort of pointless. I mean, um, it's all in the market. I mean the sort of earnings recession that the bears have kind of been talking about. I mean, to me, it's very difficult to get a steeper earnings recession from this at this point, because nominal incomes are running, nominal growth is

running five to six percent. At the same time, keep in mind that the dollar is off about six and a half percent over the last six months or so. That's also a teal one for corporate earnings. And importantly, in my world, it's a it's a tale went for real export activity over the next year. So, um, a lot of what's traded in the markets are you know,

large multinationals that do a lot of business overseas. And if the global economy is looking a bit better than it did last year, and which I think is really frankly undeniable, then then that's gonna that's gonna bleed into corporate earnings, which should support you know US equity price. Now done to one more question, we've better run after Brussels here in the historic moment for Europe. But first to you, finally here on the fed derby all of the gloom that's out there, the FED has to adapt

in a responsible, data dependent way. What data matters for them on the road to May. Third, Well, I mean this is going to sound, you know, pretty obvious, I think, But to me it's it's employment and inflation. And remember we only get one jobs number between now and the May meeting, and I think that's really not enough time for them to assess the fallout from what we saw in the middle of March with the banking stresses that

that flared out. Now that being said, the consensus and the FED are assuming a sudden stop in the economy. Recession is imminent. We're about to fall off the cliff. I mean, these are the sort of things that you hear about, you know, from the consensus economics community. I utterly reject that view. I think the economy is not collapsing.

We're probably growing at potential, and that's going to mean that the unemployment rate is not going to rise in a way that everyone expects and that ultimately leaves inflation I think unresolved, frankly, and that's why I think, you know, give it till June. We got a couple more jobs numbers. At that point we'll see that, you know, we're still cranking out a number of jobs, and ultimately I think that's going to mean the next FED move will be a hike. Neil Dada, thank you so much for joining

us too brief a visit this morning. He is with Renaissance and Macro Research. She's been a resilient bull Lean forward and listen to Barbara Reinhard of Voya Investment Management. Are you still bullish? You have to the move off of October? We are. We still bullish because we believe that the SPB banking crisis really gave the central banks an opportunity to reassess they have muscle memory on what

a systemic crisis looks like. While the FED raised race said its last meeting, we think this gives it an opportunity to slow down some of its hawkishness, who were only talking about fifty basis points hyke just a month ago. They only did twenty five. And you're seeing some relief on inflation, Jamie Diamond in his letter this morning, and I've just skimmed through it, folks, We're all right, you know, I'll go and read the whole thing tonight over a

beverage of my choice. Mister Diamond says, maybe with SVB we have some form of and these are my own words, paradigm shift. How do you shift your equity investment given the shock that we had systemically. It may seem peculiar, but you know what, the big rally off of the bottom, it was participated on very strongly by the international equity markets, so developed international Europe and emerging markets were some of the big gainers off of that bottom of the October low.

But what we saw in March, we think is an important shift. The US outperformed the rest of the world, and pretty strongly. So we think that the seven hundred basis points of the international markets outperformance of the US the past year is largely behind us, and we think it's going to be the US that's going to be the leader going forward. Barbara, what data are you looking at the suggests that the US is doing so much

better than other nations? And I ask this because George Saravellos over at Deutsche Bank put out a note saying that European wages are outpacing those in the US for

the first time in more than a decade. Right, Well, that's the thing is, it gives the opportunity, the slowing inflation scenario that you have in the US gives the central Bank the opportunity to slow their rate hikes even possibly pause at their next meeting, and that means that the US is likely to be one of those first in to fight inflation and one of the first ones also to start pausing and then potentially cutting sometime in

the next year. Remember that first rate pause. When the Fed pauses, there's usually a very big counter trend rally in equities. You have that also coincidence with very high cash levels at mutual funds and also somewhat depress sentiment, and it is a very important kind of push forward for equities, likely onto new highs. Barbara, I absolutely love how you troll all the bears out there and successfully because frankly, you have been right basically saying, what's been

the biggest pain trade since last October? The answer is being short stocks for long cash. What do you think is going to be the leadership here. Is it going to continue to be tech on the heels of that pause, or is it going to be broad based? Is this really something more holistic and longer lasting. Look, for sure, there are parts of the market that are more affected by SVB than others. Right there's going to be a continued tightening of credit conditions that affects US smallcaps, US

midcaps much more than it does large caps. But I would say they've been so beaten down at this point, you're likely to see a broadening out of the equity market. And it's going to broaden out from leadership, not only from US growth, but take some of the other parts of the market, likely the lower cap size along with it. I think it's difficult to mount the sustainable rally in the early cyclicles at this point, but we do think that it's likely indeed to have a very much bigger,

broader base in terms of capsize. I want to address this from Jamie Diamond's letter released an hour ago. I assume you did not get an advanced copy. Now I did not. There's a banking Numbers's joke, folks, there's a banking numbers as well, and down at the bottom. It was the next Secretary of Treasury talking about policy, diplomacy and that, and in the middle he says, there are storm clouds ahead because of the shock we had from SVB deposit flows and things. Maybe we don't know right now.

How do you stay a bull? How do you stay in the market on a Friday afternoon? If mister Diamond and you suggest there are storm clouds ahead, there are always storm clouds ahead. Right You've had this expansion going for quite some time in the US if you count that the COVID reset in the COVID recession that we had wasn't necessarily a classic business cycle contraction. So yes, we're further along in the cycle, but there's always storm

clouds ahead. When you have a five hundred basis point tightening in rates like you've had from the Fed over the past year, things start to break. We've had things breaking for over a year. However, if you do not believe the recession is upon us in the next six months, and we do not think that there is, equity markets tend to do very well in the year up to your recession. The raging theme over the weekend, Adam two is leading a debate in the FT is the power

of nominal GDP. Does an inflation juicd nominal GDP mean a surprise and revenue growth for American corporations, Well, it makes everybody feel better to have faster GPP growth, right. The margin compression story is a real concern, of course in the US, But we do believe that there's enough that the Fed's going to be able to pause, that they've done enough to get inflation under control. And you

start to see it. You had a much better core PC number that was just released, and if you had and in South Korea today we saw disinflation there as well, exactly, So it could be a world that's going to be a wash in slowing inflation at least through the second quarter of this year. What we're gonna do here, folks, is through all of twenty twenty three, we're gonna put Bramo and Reinhard on the desk together here to have a dueling debate on the tone of our economic polity

moving forward. Barbara Reinhard is with Voi Investment Management this morning. Where our heads are spinning home in a way. It's the name of his new sub stack effort. Richard hass joins us on the home and the way, Richard, Let's go to the away first. And the way is what you when you were at Oberlin a million years ago, you were falling asleep on a two pm Thursday afternoon, and somebody said, Finland will forever remain neutral. And here you and I are looking at Finland to enter NATO.

How did we get here? Oh, if you had asked me that when I was in college, I would have said the Cold War was permanent. So much has happened that I didn't quite anticipate. I think this is part of the unintended consequence of mister Putin's war. People thought after the Cold War ended, NATO lacked a rationale. It's one. It's old rationale has come back on stilts. And the fact that Finland is in NATO, Sweden's moving in that direction again. This is what mister Putin has wrought. We

never could have done it, shall we say? Without him? When I look at the map and I don't have it in front of me, folks, you know I flunked finished geography. But if you come down to the bottom near Helsinki and you move over to the east, NATO is not all that far from Saint Petersburg, is it? It's remarkable we worried about Ukraine being close Condoleeza, Rice, Bill, Robert Gates and others pushing back on Ukraine and NATO. My word, NATO to Saint Petersburg now is a quick ride, Ambassador,

isn't it that? And you've also got far more a border for Russia to worry about again. Strategically, this makes zero sense. I think what it shows from Plutin's point of view, either he didn't see this happening, or if he did, he didn't much care. Tom he puts he's put so much of an emphasis on Ukraine, he's in some ways rolled the dice. His own presidency depends upon it. That.

My guess is, whatever costs he has to pay, whether it's manpower, economically, strategically, he's prepared to pay because he's put at risk his own political future and the future of authoritarian Russian Chris, thank you for the headline. Across the Bloomberg Terminal. Finland officially joins NATO is thirty first member. Maria too is in Brussels and will be looking for ceremony there. I believe in the next hour let us turn home of your home and away sub stack effort.

Retired Ambassador hass Here from the Council on Ford Relations. The home event, Well, I've got to go down Fifth Avenue plass Trump Tower, and maybe down into Center Street as well. Your comments on the bills and the obligations, the obligations Richard, the president Trump has to this process of indictment and arrangement. Well, Tommy, it's more than an obligation to follow the law. Obligations or things you should do but don't have to do. And Donald Trump has

been a serial violator of obligations. The idea of norms, the peaceful transfer of political power, the most basic defining norm of American democracy. He violated that. Civility he violates on a daily basis, is signaling about political violence. Another violation the idea of putting country before party or person. I would say, in many ways, his whole career is a violation of that obligation. The law, though, is something else, so we have a system for dealing with it. That's

why we have courts and the light. Obligations though, or something citizens have to insist upon, and that brings it all back to the ballot Box. He could well be the Republican nominee. I think what this indictment has done in some ways is frozen the other Republican candidates. It increases the odds Nonald Trump is the Republican nominee. And let's be brutally honest. If Donald Trump is the Republican nominee, Tom, he's one of the two most likely people to be

the next president of the United States. Richard Hass I don't want to be inflammatory here, and I want to take the arc up to eighteen sixty. It can be Kansas, Nebraska and the rest. But there's a mood there now of disunion of a nation. Not that would break up. I just don't want to go there, but of this absolute polarization we see with the president former president's poll ratings and such, with your people at CFR, how close are we to a dialogue of disunion, if not outright disunion.

I'm not worried about formal disunion. I agree with you, Tom, but we already have very shepherd Americas. The red versus blue look at life expectancy, the differences between red and blue states. You look at him. People now are really separated by geography, by religion by what cable shows they watch. That really worries me. Increasingly America, which is a country founded on ideas, we no longer have a common set of ideas. It's one of the many prices we pay

for not teaching civics in our schools. We're not requiring civics. I'm not worried about a civil war, Tom, but I am worried about something else. You were teasing me about my ambassadorial hot I was the us envoid in Northern Ireland. This spring we marked twenty five years since the so called Troubles. The political and violence in Northern Ireland pretty much came to an end. I worry about an American version of the Troubles, where we could have fairly frequent,

decentralized political violence in this gunloaded country of ours. That is not something we can dismiss. How would the troubles of Ireland been different? And of course this is with a wonderful Irish movie that was Oscar Worthy this year. How would the troubles Richard Hass have been different if we'd had Twitter at the time, would have been much worse. What Twitter does is it's called social media, Tom, It's not serious media. It's not factual media. So Twitter allows

people to traffic in thissinformation or selective information. That's what social media does, and it's really dangerous. It reinforces the tribalism of any society. And you know, our democracy is two and a half centuries old. We're celebrating the declaration of independence in three years. It's two US or fiftieth anniversary. We were not made in some ways for the age of social media. I look where we are, Richard Haas, And of course the import today in a toggle switch.

Here a president that will go to arrayment, be peaceful, quiet. But he speaks tonight from our lago. What would you want to hear from President Trump tonight from mara lago. Look, what I would want to hear him do is put country first, to talk about the importance of the law of the legal process, that he'll respect it, not to attack judges, not to attack prosecutors, to basically part of what makes America America is the rule, rule of laws.

Basic Tom. For all the business people watching your show, this is it's the oxygen of American society. What I would like to see Donald Trump do is respect the rule of law. Richard to finish up here, Let's come full circle here as we looked away and then home. The center tendency of two twenty two was a shock of February, and Vladimir Putin he has to be thunderstruck today, and not only what he sees in the United States and the events in the island of Manhattan, but what

he sees in Finland as well. How would you presume someone so cloistered in the Kremlin, how would you presume he will respond to these new twenty twenty three shocks. Obviously unhappy about Finland, but he will be in some ways feeling good about events here reinforces his sense Tom that time is on his side, that the United States and European support for Ukraine is eventually weak. It will cause Putin to dig in his heels. You had, Leslie,

were even talking about it before. A lot of our allies are uneasy about a return of Trump or trumps Um and all that means. But for somebody like Putin, for Sheej and Ping for some others in the Middle East, they will welcome the possibility of our going on back to the future. Here. I said this a couple of years ago folks. Richard hass The World was the book of the summer. It was the summer book you threw in an older child and said, shut up and read this.

And a bill of obligations follows right behind. It is first class on civics needed in America. Richard hass is with a Council on Foreign Relations in his sub stack effort is home in a way, Lisa, how'd your bracket work out? I think I failed. March Madness took over in a very different way. Considering the past couple of weeks and everything we've been will dealing with Tom feel better? Lisa,

Your bracket was better than my bracket. We have a wonderful annual ritual here at Bloomberg within Brackets, which is various worthies commit to charity and support and there's always a winner. It's something to do with a parquet floor. Steve Paliuca's senior advisor at Bank Capitol, co owner of the Boston Celtics. Mister Paliuca was the winner of the Bloomberg Brackets for a cause. He corrected, How did the hell did he do this? He picked Ukon to win

March Madness. The Huskies dazzled seventy six to fifty nine and a win over San Diego State, and of course of one million dollar brackets for a cause pot will go to mister Paliuca's charity, Reform Alliance, a charity helping people get out of prison and move on to constructive at jobs. I do have to note here in a careful review, because we provide transparency here at Bloomberg. We went from grower to Pallyuca A Peter Grower, Lisa Peter Rour. It came in here underperforming. I guess is how well

constructively put that Bill Ackman Jay Clayton together. That's the first time they've ever been together. Underperforming, as they say, dazzling up higher. Cliff assess respectable one, Michael Bloomberg, Lisa did better than good and we noticed Jonathan Gray at Blackstone among others, all aced out by Steve Paliuca. Steve, what in the ether did you do to win this bracket? What did you see? Is it like the day to day grind of the Celtics means that you've got it

all figured out? I wish I was the case. I think I was just lucky and happy to have the money go to the inform Alliance. As you said, it's an amazing charity set up by Robert Kraft and Michael Rubin to get prisoners work. And we have four million people on parole in the system and really needs to be reformed and rehab So I'm very grateful to Bloomberg and grateful to the basketball gods that helped me this year. The basketball gods gave us as well. And I'm not

up to speed on this, Stevens. If I'm out of turn, say so. Boy did the women to deliver Attorney this year? It seemed to be a real turning point where America paid attention in a new way to women's NCAA basketball. Absolutely, I think all the women's sports are getting more attention. People love to watch sports, and the level of competition was probably the best ever in the women's tournament. The

woman Clark was just just electric out there. Fantastic final, Steve, an important day for all of the global Wall Street and particularly American Wall Street. James Diamond and team at JP Morgan publish a letter They speak there of the storm clouds to come. This is mister Diamond and his team looking at SVB in the banking crisis, how did

the storm clouds look from Boston this morning. Well, as you know time, we've talked about this before, lots of lots of tough dynamics right now, the war in Ukraine, oil prices going up, interest rates gapping up, which has caused some of these problems, so you know, we're definitely heading into murky waters. The good news is there's still a lot of jobs out there. Technology is coming back, biotech is growing, so we have some pockets of good

things happening. But we're in the midst of a correction where we basically had a ten year kind of growth bubble based on cheap money, and it's going to be painful to come out of that. What's the distinction, Steve, between a credit crunch and just credit tightening as many people see ongoing right now. Well, a credit crunch would be that just a total lack of liquidity, and I think right now you're just seeing tightening and again we're

getting back to normalized interest rates. For most of my career, interest rates have been four and a half to five percent. Only in the last twelve or thirteen years have they gapped down. And that cheap money has brought a lot of prosperity, But now we're kind of paying the price for having that long time cheap money. But we're seeing

a tightening now. I don't think we're seeing a crunch the banks, given that Bank of America, we're very well capitalized today, which is the reason why a lot of people are saying they can still take out credit cards, they can still take out loans, especially if they have good credit, and banks are continuing to lend to businesses, they continue to hire in a major way. As an investor, does this make debt look much more valuable than even the equity side of the balance sheet as an investor,

simply because they can pay back their debts. But perhaps equity needs a reevaluation. Well, again, it's to me, I step back. It's basically based on the price you pay for the asset. So so we've been in periods in private equity where debt levels are ten percent equitycent debt. Those days are gone. Deals are much more conservatively financed, so the dead bird is not as high these days. These are sixty debt fifty percent is common in today structures.

Debt is still available for good deals, and deals have repriced, so you're now seeing some opportunities in tech sector and other companies that are backed down to reasonal evaluations based on what you're seeing in the day to day of the companies that you work with and that you see and the fans that go in droves to all of the games and continue to spend money. Do you feel like people who are calling for a recession are perhaps misguided or do you think that you are seeing a

real softening that's borne out by empirical data. We have not seen the empirical data yet showing dramatic softening. Air airlines are still full, restaurants are still full. So we've not seen that in our in our companies. You know, it can be to common, especially with the expensive money out there and pull back into credit markets. But but right now consumers are still out there and uh, and

we haven't seen highly highly negative data. I'm worried about the recent oil price increasing that that is going to increase inflation and is that going to bring us even higher interest rates? But but right now we're I think in an uncertain period and maybe heading towards obsessions, but hopefully it's soft landing. Steve, I got to go back for a number of days here, the basic the basic idea here of what the Celtics did to the box. I mean this is on the edge of what Yukon

did throughout this entire tournament. Are the Celtics destined this year like University at Connecticut? I certainly hope. So we have a great bunch of players, really great on and off the court, and they really pulled together and had

fantastic game against Milwaukee. Milwaukee is a great team. Um So, as they say in the in the in the in the in the K one hundred years sports analogy, he's got to take one game at a time, and that's what they're doing and having fun together and hopefully winning out the rest of the season and doing great playoffs. So we're excited. We're really excited to step Paleoka there with the charity of Robert Craft of the New England Patriots. Here is he is the winner of our bracket this year.

Subscribes to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern on Bloomberg dot Com, the iHeartRadio app tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening. I'm Lisa Abramowitz, and this is Bloomberg