Surveillance: Kaminski on a 6% 10-Year Yield

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Kadi Kaminski joined US now Chief Research Strategies to out for Simplex Katie, what a call at the start of the year. This short that you've had on bonds is paying off in a big way over the last month. You've put out a headline and you knew it would get attention. You've raised the prospect to gun to six. So let's breathe some life into that conversation. What is it that you saw at the start of the year that's continuing now and you think these forces are here to stay.

Yeah.

So we've seen short signals and fixed income all year, albeit.

Not as strong as last year.

But what's really interesting about this, particularly recently, is we've started to see the market agree with us, and we've also seen some of the fundamental players out there say this might have to happen higher rates for longer.

So, Katy, is it time to back away concerning at the start of the year's contrarian Why is it a movie you want to stick with?

Well, this is a really good question, because I'm asking myself this as well. Is that if we've looked at the data with technical signals, when the curve is still inverted, trend signals short tend to work really well. As we see a flatter curve, it becomes more mixed.

And if we can see a steeper.

Curve, I plan that we're probably going to be long So we're still within that transition period where we could have a very interesting trend.

Environment as we see the curve flatten out.

And everyone realized why hold long term debt when you can have such a good return short term And if the data isn't clear that we're going to cut rates quickly, it's a sticky inflation play.

It's a question about long term cash flows.

And I think people are starting to really realize this is this is the real.

Issue, Katie.

Every single day we ask people why now the bond sell off is something people were talking about for quite a while. Suddenly it seems to be reasserting itself. Do you have an answer to the now of the selloff?

Yes, I really think it has to do with behavior, and I think that everyone would rather wait to see if something is going to come to fruition, and that's exactly what you're.

Seeing this week.

Everyone's sitting around waiting to hear commentary. They're pretty sure they know what it's going to be. And I think the real truth is that we're starting to see the data is pretty consistent with the narrative that this is going to take some time and that higher rates could be part of what is the new normal in a world where we've experienced so much inflation and sort of a very different post pandemic economy.

And I think that's where it's starting to turn around.

And I'm sortain to see fundamental investors agree with the technical signals.

How important is it that stocks have been able to rally in the face of higher yields. Is this sort of defy the idea that this is sustainable and something people can lean into. The yields are going to stay this high and the whole world isn't going to collapse as a result.

Yeah, that's a tricky one because I think the backdrop of yesterday.

So yesterday definitely brought that to light. You saw an environment where.

Stocks were up, the NASAQ was up a ton, and yields were up to sixteen year highs.

That's a weird situation for markets.

I think if it's actually the case that those two things coincide, it means the market's accepting higher.

Rates, which could be a good thing. On the other hand, I'd be a.

Little skeptical of how big of a move we've had this month. We could have just had a little bit of relief rally yesterday, So I think we need to watch that correlation trade a little bit more closely.

Going forward and see if.

This positive correlation environment is actually going to stick.

Hey, Kitty, we can say the rights on the screen. I just want to how many people are paying them, Kitty. We haven't had the great refinancing yet. People maybe think it begins next year in high yield Kitty, do you think this economy can tolerate these kind of rights beyond site six to nine months?

This is the really tough question, and I think that's what Mark showed us, is that suddenly it seems like people.

Wake up and they say, wait a minute, there's a good deal for yield here, or this isn't working.

And I think it's very hard to predict when people are actually going to refinance and when those particular events are either going to change their behavior. The truth is people behave differently and they in a higher rate environment. We've seen that shift in short term rates. We haven't seen it in high yield. We haven't seen it in long term debt yet. This week was interesting to me because it said people might be starting to wake up.

Ketty, just one more question. The six percent, the number six lot of attention. Is that actually a call from you? Is that a forecast?

No, we don't forecast, but we do see trends in data, and if you look over longer term horizons, six percent isn't a crazy number for a tenure. I know it is for those of us that have been living in a decade of really low interest rates. But those of us who look at the technical signals and long term historical patterns, what you see is that that's not a

Katy, great, cool to start the year. Just fantastic and great to catch up with you late into Walgus, Katy Kaminski there of alpha simplex on this bond.

Market, weighing in on how this economy has been strong but will deteriorate in the face of some of these yields. Chief economist and macro strategist at Dreyfus and Mellon, I want to just start there, Vincent. Are these yields sustainable where they are right now?

Yeah?

They sound easier to explain than when they were sub two percent a few years ago. Inflation is going to settle down in two percent, the term premium or the risk premium that investors are going to pay, are going to turn positive instead of negative, and the equal real rate or the natural rate of interest is probably higher given how robust economic activity is. So yeah, it's sustainable.

We've been talking all morning about long and variable lags and whether they're very long and very variable or what that they're very short. We've already seen the worst of it, and now the market is adapting and adjusting. To use the phrase frequently used on this show, which is it?

So it depends on sector, and that is the question for Jackson Hole. By the way, it's about shifts in the economy. From a monetary policy maker, comes down to the question, what's the transmission to monetary policy? How long are the lags? Answer is sector bi sector. The lag defective monetary policy is local, not national. You already went through one segment of the economy where it's shorter real estate. Home buyers depend critically on mortgage rates, builders depend critically

Let's develop on that a little bit more, especially as we get earnings from Macy's and Low's and exporting goods this morning. Showing a kind of motley picture of where the consumer is and how much savings they have left. What's your sense of the fact that everyone's been saying the savings are running out, the savings are running out. Now they're going to be running out, and they still

So it probably tells us we didn't appreciate how big the say cash load was at the beginning. That is, household saved a lot more of what they got from the government than we expected and continued to save for a while to come. You know, if you just look at a typical saving rate relative to what households actually were doing, they must have worked down at least a

Instrument, this is important and it really speaks to what could happen if the Fed keeps rates where they are, even if they don't raise them again, but keeps them where they are through the remainder of this year and all of next year and even potentially into twenty twenty five. How long do they have to keep rates where they are to start feeling the bite to make it so that you know it actually has the transmission mechanism that it was intended.

Yeah, there's a couple of really important points about that. One is, remember how chair pal describes the path for rates.

It's how fast.

You raise them, what level will you go to? And then how long you keep them there? And we're really at that third stage. How long do they keep them there? And in some sense it doesn't matter if they raise them an extra quarter point or a half point, or they keep them unchanged. They can compensate by keeping the policy rate there for a longer time, and that's now

Just quickly here, do you think that Vedcher Powell is going to say anything substantive this week?

I think he can pack a little dubbish. He doesn't have to talk about pain like he did last year. He just has to be a little more neutral than he came across at his last press conference, he's got markets about where he wants. The main message he's going to want to send is rates are going to be around around current levels for a lot longer than you think, and.

That seems to be what people are adapting to right now, and the implications for longer term seem to be really kind of giving everyone some angst in terms of what yield is the appropriate yield for the rest of.

The risk market.

Vincent Reinhardt, thank you so much for your insights.

Let's talk retail, Chuck rum John just now seeing a retail analyst over at Gorgan Haskett. Chuck, you named it. You came out with that phrase in the last couple of months on this program. You said, discretionary recession. Are you seeing signs of that from the earnings we've seen this morning?

Yeah, I mean, I mean generally speaking, almost everybody's copying negative and I think you know, you can go back to last week's Target report and you look at the big bell weathers between Walmart and Target, and you know, Walmart, who sells a lot more food business, was really strong and Target, whose business is more discretionary in nature, continues

Let's talk about some of the specifics that have come out. Macy's in particular, evidently first saw a bit of a pop as a reaffirmed guidance, and then now shares are lower as they're looking at markdowns being insufficient to clear inventory. Is there any larger story to tell here about price tolerance, about the middle tier retailers and how tough it is for them to really move their materials.

Well, no, I mean, I think the bottom line for Mecis is that you know, some art to their banners were really good, and I think generally speaking, inventory levels across retail continue to be really healthy, but there's there's definitely weakness across certain parts of retail.

There's no really size fits all. Right.

Now, we continue to watch the trend and you know, we'll see how some of the data points come out, Like a company like Lows, whose numbers are actually a lot better than expected today. You wouldn't expect to see that with rates moving higher, but their business continues to be really healthy.

Yeah.

Well, people are renovating their homes rather than moving out because they want to keep their mortgage rates at you know, three percent or whatever. I do want to talk about Dick boarding hoods shares plunging after they missed their forecast talking about theft as one of the biggest reasons. How much more have we heard about theft among all the retailers, particularly over the past two years.

It is an issue that is not getting any better, and the problem is retailers can't price to it right away, and that's where the margin surprise comes from. Everybody's talking about it. Targets, talked about it on Depot, has cited it, and even Dix. But this issue today wasn't necessarily because the theft. Their same store sales were below plan and really, for the first time since the pandemic, they kind of put up, you know, a foul ball for them at.

This point, we're looking at a situation where people are expecting discretionary spending to run out. Is there an area of the market where we're seeing this or are we just not seeing this? And do you view some of the warnings that we've heard from Walmart's CEO and Target CEOs as simply being trying to lower the bar so they have an easier time crossing it later.

That's a good question.

One of the things that we're starting to see, and we heard it in Macy's report today and Target called about last week, was a rise in delinquencies in their credit card businesses, and that's something we.

Really need to keep an eye on.

We have not heard that in several years, and we're starting to hear it today. Like I said, Macy's credit income was much weaker, so we're seeing some cracks in the consumer. But broadly speaking, we still are pretty upbeat. You know, when you look at real wage growth, you know, three consecutive months of positive real wage growth, we haven't seen that in years. We actually think back to school could be really healthy. You know, the weather is certainly

Right now, Chuck, you know the new blame game. There's already made excuse in the oven from Target and Walmart at least has talked about it a million times. Student loan repayments. Who does that affect more?

They do'll affect more the targets of the world than Walmart.

I mean, anybody who has a student loan tends to have, you know, household income of seventy five thousand or above, So it's going to be an issue.

I don't think it's a huge issue.

And again we come back to real wage growth offsetting a lot of those student loan repayments. But at the end of the day, people who haven't been paying a student loan are going to be It's a net negative.

At the end of the day.

When you talk about the fact that we are seeing people shift from services back to goods, which goods are getting the biggest pop from that? Is it the idea of investing in your home because you're not moving.

Is it close?

Are there areas you're looking at.

Yeah, that's a great question.

You know, we follow Costco and Costco gives monthly comps and so you get a really good snapshot on the consumer in certain parts of their business. We're starting to see that stabilization in consumer electronics. We're starting to see in home furnishings. And when I see stabilization, I mean we're not seeing declines. You know, we're seeing sort of you know, flat levels on unit volumes. And we'll continue

And if we see services start to pull back.

We think when people are spending more time in their home, they'll continue to invest in their home. And that's an area that we think could continue. And you see again like numbers like home DEEPO last week, stabilization lows numbers Today, we're actually pretty healthy relative to expectations. Home furnishings, you're starting to see signs of it. So I think that's what the market wants to start to look for.

Chuck a bit more constructive. Thank you, sir, Chuck Grum of Golden Basket.

David Rubenside, I am so happy to say joins us now, host of that show and co founder of Carlisle. Let's just start there. Isn't this the golden era for pensions where they can actually get the returns that they need to get to meet their obligations.

Well, clearly, fixed income returns are much better than they were a year or two or three ago, but money pension funds in the United States, state pension funds are underfunded still, and even kal PURRS, which is the largest state pension fund at four hundred and sixty five billion dollars, is underfunded. Underfunded the Centsment actuarily it's about twenty percent below having full funding. Now, these pension funds are still in better shape than the US government's Social Security program,

This is the reason why there had been a concern in a low rate environment of how much some of these funds would have to lever up to get the returns that they needed to become funded. At this point, do you feel like the risk taking appetite, I should say, among some of these funds is diminished or has grown as they see the opportunity to actually meet those obligations without asking for additional contributions from members.

Well, I think a lot of the state pension funds are pleased that the fixed income element of their portfolio is now going to perform much better. So if you can get five percent yields on treasuries, you're getting very close to what you need to do, which say six point eight percent in cal Pers case. But most of the state pension funds are designed for actuarial purposes to yield about six to seven percent or so a year. Some of them are able to do it and some

Money never feels easy, David, Come on, at what point has it ever been easy money at a certain time when people are looking forward? How much are they looking to private equity to sort of give that same kind of feeling and going forward?

Well, private equity has performed pretty well over the last ten twenty and thirty years or so for large public pension funds, and those that have done very well are the ones that are have done enormous amounts of private equity. For example, the best funded state pension fund in the United States is probably the State of Washington. State of

Not to diverge too much from the point, But isn't this part of the reason why yields have risen as much as they have on treasuries, particularly on the long end, as people take a look at that fiscal situation and don't really see an answer for how it's going to come more into balance.

Well, yields have gone up because interest rates have gone up, and that's made it easier for people who are fixed income investors to get a higher rate of return, and that will probably continue for some time. But I do think that it's an issue that all of us have to deal with because we have a demographic issue. In the United States. People are living longer than they were before.

And it's something that we're going to hear about a

Well, the market is more saturated than it was twenty or thirty years ago, there's no doubt, and returns will be higher to achieve, harder to achieve. But there's no doubt that alternative investments, which may mean i'd say distressed real estate, distress debt, buyouts, growth capital, venture capital, those things tend to outperform public equities by a fair bit. And as long as people need to get higher yields, you're going to see a fair amount of money going

There's going to be also a continued focus on ESG, etc. Given the fact that there has been quite a bit of pushback, and I know that you did speak with Nicole Musico about that. What did she have to say about that?

Well, ESG has become controversial in the United States. The controversy over ESG does not really exist so much outside the United States. Obviously we politicize the United States to some extent. But I don't think ESG is going away. I think people will talk about it less. Larry Fink, for example, says he doesn't use the word ESG anymore, the phrase ESG because it's so incendiary in the minds

Let's say, David Rubinstein, thank you so much for taking the time and for your really insightful interviews David Rubinstein of the Carlisle Group. Subscribe 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.