Surveillance: Market Optimism with Kaminski

and of course, on the Bloomberg Terminal. Bob Miller, head of America's Fundamental fixed income truly with decades of experience, Bob Miller, what is the symbolism if the Lehman Barclays Bloomberg Total Return aggregate index breaks down to new lower price and a higher yield, how do you redefine the bear market if we get that technical breakdown? Well, good morning, Tom, I hope all of you are well. It's good to be with you. Um. Look, I I we we think

that yields are now reasonable. So yes, they can you know, prices can go down and yields can go higher from here. But but we're in the range of reasonable fixed income offers. You know, some some reasonably attractive opportunities today after for the first time since two thousand and eighteen UM and and certainly after the period of of no opportunity two

years ago and a year ago. So you can build a high quality portfolio that has a four to five percent yield, including treasuries, you know, high quality credit even high quality adds some high quality high yield in the eight and a half to nine percent range. You can build a pretty attractive portfolio for the first time in years, and specifically in US fixed income. And we think that that's uh, that's something that investors ought to be thinking

about for the next year. No doubt, things have been ugly this year, and and there's no near term relief in sight. But valuations matter, and and these valuations look look reasonable to us. They look reasonable compared perhaps to a year ago. They won't necessarily look as reasonable any year. If ten your treasury yields are five, where some people

are gonna be suggesting they could be. Are you in the camp that says that we have seen peak yields on tenure, that we're close to it, even as we do see them start to climb and push up against and test some of the highs that we've seen of the cycle. Yeah, at least I don't know if we've seen the peak, but but I think we're close. Me because we're in the camp that inflation is going to decelerate,

growth is going to decelerate. I think it's a it's it's it's really important to keep in mind the magnitude of the financial conditions tightening that the Fed has engineered. In just six months time, they're going to raise rates by another seventy most likely in less than two weeks time, pushing the funds right to three. That's in a six month period of time, three basis points off zero, six d basis points annualized. Right, this is this is not

an insignificant move. It's a it's a meaningful move, and and takes time, right the famous long and variable legs. It takes time for policy adjustments easing and tightening to work their way through all of the cracks in the economy. It's coming, I think it'll be. It'll be very unlikely that we we look up in three to six months time and growth and inflation haven't slowed by a sufficient amount that the Fed is probably able to pause with rates around four percent and just sit there for a while.

So in order to get a five ten year on a one year horizon, a lot of things have to go wrong, right, I just that just maybe it could be, but but a lot of things already have gone wrong, and I think it's it's a little dangerous to extrapolate the last nine months into the next nine months without considering what's happening to financial conditions in the US economy. They are tighter, yeah, though you do still see the consumer having some strength, particularly with oil prices or at

least gasoline prices coming down a bit. Have we fully taken into account the fact that Europe has also moved away from negative fielding machine with the biggest ever rate hike at the ECB meeting last week, and it's poised to do more. That there is a cohesive and global synchronized rate hiking cycle that we really haven't seen in

modern history. Yeah, it's a great point, and it would I would argue that that adds to the the reality of financial conditions tightening in a lot of different places, not just the United States, and that will ultimately have a delayed but but likely a real impact on growth and inflation over the next year or two. Keep in mind, there's one central bank that that isn't participating that we think will will likely be forced to buy their own

inflation dynamics in Japan. Sometime over the next six to nine months, we wouldn't be at all surprised to see the yield curve control um program that's been in place for some time at a minimum adjusted slightly, if not adjusted by you know, a reasonable amount. I probably gotta pick up on that phonic question, what does that mean? And how would the rest of the global bond market response to a move like that? Yeah, so, Jonathan, great question.

That that's where like if you asked me, what's the scenario where the question Lisa mentioned about a five percent treasury yield? What what's this? What's the scenario where that's

a reality? It's either it's either just unbelievably persistently high inflation um that the FED cannot get under control, so the front end is likely at five if not higher, or it's some resumption of global term premium by the you know, the ECB not only not only turning off QUI, but perhaps even pursuing some balance you run off, and importantly, the Bank of Japan abandoning yield curve control. I think all of that, each one of those is individually pretty

pretty low odds. But but that is the scenario where if you want to get really bearish on bonds, I think you've got to have something like that in mind, Bob, Thank you. Katy. Kamensk joins out. It's been a joy to speak to a chief research strategist at Alpha Simplex about trend because she off of Andrew lowd M I t is a slave to trend is full disclosure. I am too, Katy. What is the trend now and is the trend different than what we saw in the last

two weeks of June. Yes, I mean, I think we've seen the short bond signals as well as long long positioning and dollar be very dominant recently. But in the last two weeks we've really seen an influx of risk on behavior, a lot of buying pressure, particularly in the equity sector. And this is somewhat of an indication that people are getting optimistic, they're ready to put money back in the market. But the question is going to be is it too early? That's the question that cities asking.

This is what Andrew hollen Host and the team had to say this morning. They published just moments ago. Read through it. Despite the pricing in of hikes, risk on prevails. The message at Jackson Hall was clear the FED will lean against LUCA financial conditions until inflation has convincingly slowed the team. Ever, City go on to say, maybe the FED will be incentivized to push against the nice and risk rally. Do you agree with that, Katy? I do agree with it, but I also think it could take

longer than people expect. And the fact that the FED is remaining steady is they're setting a signal that they're thinking a little differently than the market. And I think we've been the most surprised to see that the market is more optimistic than FED commentary, and that suggests that there's perhaps maybe a little bit more that we need to think about going forward, and that we might see

a little bit of reversion. We'll see what the CPI looks like today, but you know, you're gonna have to see how winter unfolds and how we handle some of these energy issues and other problems. We haven't even really seen q T yet, so I think it's going to take time to know. But I'm a little bit less

optimistic than the market think. Katie John was talking earlier about how we should just interview with med medeollergists all day, and that might be as good as interviewing prognosticators on the market, because that might be what determines the market. So what is the bond response? What is the stock response to uh, really cold winter one in which the

energy shortfall becomes more acute. I mean this is a serious issue because if you see people dealing with higher interest rates in terms of their payments, and you're also seeing people dealing with higher costs, it could really be a difficult situation, particularly for Europe UM and so I think people really need to think about looking at those prices as we roll into the winter season. We're just now starting to move towards December contracts and farther out

in the curve. So I do agree with John that you know, it's really going to depend on how we weather the winter um as as the price pressure is real. Katie, we're speaking with you after you got a thirty eight percent gain in Alpha Simplex's main fund as a result of selling short bonds, something that hasn't worked for years. At what point do double down on that short position at a time where you think the market's getting it

wrong and underestimating the Feds resolve. So I think one thing to know about trend falling is what we do is follow trends, And the truth is that the market, particularly in really difficult environments, is often a better bastion

of information than one individual or anyone particular view. And so what we've seen now, which is kind of why I'm saying it's surprising, is that short bond trends are still there, that positioning is still very strong in the data, and we could definitely see even though rates are reasonable than becoming more unreasonable in the short term. Can you corral a short bond bond priced down yield up into an equity bet on trend? Yes, I mean as once

we see that things have leveled out. I think I've always said that this is an an equity story, it's

a bond story. So once we see that bonds have stabilized and we have a much more healthy curve and more of a risk premium out in the curve, so we see much more of a steeper curve, I would think that that's really sort of a risk on signal that where you can all start to think about those premiums as opposed to the potential destruction of great rises, because we all forget even though it's better going forward, the bonds were now really take a hit. They all

felt that this year. Okay, let's go mathy here. We're doing this on a Monday. We can go math Monday here as well. Is the disinversion of the curve important or is it the first derivative rate of change of sad disinversion? For me, it's much more the inversion of the curve that's going to matter. I mean, that tells us something about the disparity between what we're thinking about

short term rates and long term rates. And if you look empirically at signals in terms of trend and direction of bonds, you see that bonds have tended to fall when the curve is more inverted. And thus, if we continue to see that inversion signal, we're going to see that there's some sort of bearished you on bonds until we can kind of see that longer term risk premio, that steepness really be an issue. So I'd say first derivative Ketty Kamisney, thank you for Alpha simplex, the lightst

in the bond market. So right now we turn to Ukraine. Has been a absolutely unique weekend of infantry movement, which means only we can speak with General Hodges. Ben Hodges is a former Commanding General for US Army Europe. He is a perching chair and Strategic Studies at super But so importantly, Ben Hodges, I'm going to go back to you doing what you do best. You were an instructor

at the United United States Army Infantry School. When you instruct infantry, and particularly if the Ukraine's going after rapidly retreating Russians, what should they do? Uh? Three things? Number one, do not let up the pressure. Do not give the Russians a chance to stop and turn around and fight, So that that's number one. Number two, keep using your combined arms in other words, infantry, tanks, artillery, engineers, all

of these things working together. That's what Ukraine is doing so well, and that the Russians have not done well. And then finally, unleash Ukrainian air power. Um, even though the Russians had all the advantages, they've never been able to dominate the airspace over Ukraine. And I think Ukrainians are gonna try and take advantage of that. This conversation reminds me of one U. S. Grant, an unknown going down the Mississippi River and teaching the North how to

prosecute a full force invasion. What do we need from the Ukraine's Ukrainians now to be like Grant in our civil war? Is it simply they need more MATI You're real well, for sure, they have the same sort of strategic eye as General Grant did. That this is about you have to crush your enemy. And that's that's from President jelinskying down. He said, this thing started with Crimeana, is going to end with Crimea. And so what they

do need from us, of course two things. When they need continued delivery of the type of weapons and ammunition that are helping them make the difference to destroy Russian logistics, destroy Russian command and control, but also the sanctions that the sanctions really are having an effect on Russia's ability, both in terms of their own defense industry, but also domestically. I think more and more Russian people are beginning to feel this war that Pugin was trying to shield from them. Well,

Lieutenant General, that's why I wanted to go. Because there is some discussion about the possibility of conscription. If Vladimir Putin does not want to come to the table does not want to come to some sort of resolution, and if he is running out of troops, as the reports have suggested, what is Vladimir's Vladimir Putin's response to this. How concerned are you about some retaliatory measure that we're perhaps not expecting. Well, you're right that they have a

very serious manpower problem. Uh in the Russian military, which is not doesn't sound like what I would have said a year ago. Uh. Most of their recruits now, many of them are conscripts, come from a way outside of Moscow, in St. Petersburg. The Kremlin has tried to avoid drafting anybody from the two major metropolitan areas because again they want to shield the public from what's happening in Ukraine. Uh that nobody wants to fight, nobody wants to get

involved in this war. They know what's going to happen if they do get sent into Ukraine. So I think part of the reason President Putin has avoided doing this general mobilization is because he wants to preserve the fairy tale. But also they'll be humiliated. People will not show up. They don't have the equipment to to equip that at the uniforms and weapons to equip another hundred thousand troops, and it would still be months before they would be

effective in any way. So attend in general, how does this end? And does it reassert Russia as a member of the global economy or does it leave it incredibly isolated. I think it's gonna be a long time before we can look at Russian and work with them as if things are quasa normal. Um this will end. I believe early next year. The Ukrainians are going to push the Russians back to the twenty three February line before the

end of this year. I believe, of course I could be proven wrong here in another month or two, but that's how I think that's going to happen. And then Crimea probably early sometime next year, a combination of fighting and perhaps some negotiated conclusion. But the Ukrainians are not going to start, nor should they stop. What does Russia look look like when this is over? Of course I cannot for sure what kind of friction and things are

happening inside the Kremlin. We're all seeing various reports of things that are happening. There, a lot of finger pointing, and people may start falling out of windows again. I mean, it's going to be a pretty rough scene around Moscow, I think for the next few months. General, thank you, we appreciate it's on today, said ben Hall. It just that a form of commanding general for the U S Sami Shulmanack now joins us for an important briefing. Why is this important? He is one of the great students

of continental economics. It matters for America right now with the trading relationships that we have, Shelle, what is the distinctive uncertainty you have in the fourth quarter. You are covering on a global basis, but you are covering for Europe a continent in war. What is the distinctive uncertainty you face in the fourth quarter? Well, you know, Q three we still had some support from the fact that

we reopen our economy a bit later than the US. So, for instance, we had really nice spending on tourism, recreational activities and and so forth. That goes away in in Q four, and we have this major uncertainty on the price of gas, and beyond the price of gas, the

availability of gas. So at this juncture we're still waiting for the details of the EU policy on on the possibility of of gas rationing and how the electricity marks can be can be reformed um and we need to to know whether or not they will need to be some actual rationing of of gas of energy in general this winter, because this could have a drastic impact on GDP. If you forced to stop production of energy spending companies, you will have a direct impact on GDP. The backdrop

appear as well over the weekends. Electoral tumult in Canada, certainly the election in Sweden and a coming election of some form in Italy as well give us the political backdrop is it folds into two thousand and twenty three and in Europe in recession, well, Italy is important obviously because all the polls are saying that uh, the frater Italia is probably going to to win in coalition with with Lega and for the Italian and there are questions

obviously as to their approach to the commitments of Italy towards towards Europe. To be fair, Georgia Malone is the leader of Franti Italia has mellowed a loss honor and European rhetorics to the market is probably you know, are ready to to give some some leeway to a new

government in Italy in September. But mordinally, um, if you look beyond the elections per se, what we've had so far is a willingness by government's across Europe to accommodate the shock from a rising energy prices um with rising interest rates. It's going to be increasingly promatic for these governments to maintain this kind of physical policy, and obviously this could lead to some political trouble down the road. So we are in sort of a tipping point for now.

Governments in journal has been able to mitigate a lot of the rowing impact of the rising gas prices. That may become more complicated as we get into days of twenties three. Sorry, I want to double down on this a little bit because we are here in London as this sort of see change happens on multiple prongs. Whether it's the loss of the Queen who has reigned for seventy years, or whether it's the loss of negative yields, which had been the base case for for more than

a decade, whether it's this energy crisis. And the point that you just made is incredibly important that governments have not realized that the more the e c B hikes rates, the more unable they will be to plug the pain for a lot of the residents. What are you looking at in terms of translating into GDP growth in the euroregion as a response to exactly that dynamic that something has to give here, Yes, I mean basically what's happening

is that's we are mitigating the current shock. I mean you can see that everywhere in Europe, including now in the UK, which was hesitant actually as to whether they would mitigate the shock. They are they are going to cap energy prices, so the depth of the recession which is looming right now is probably going to end up shallower than one we could have fear just a few months ago. But at the same time, what we're doing is that we are obviously increasing public deficits, increasing public debt.

So at some point, and we don't know exactly when, we're probably in three or in twenty twenty four at at the latest, there will need to be some efforts on on physical policy. This will probably have the dampening impact on domestic demands. So in a way, we are uh just changing the timing of the pain, and it

makes sense. I mean, we need to deal with the current energy crisis right now, but this will come at a price, and the price is likely to be some measure of austerity in twenty twenty three or again at the latest in there were reports over the weekend deal of manufacturers in Germany industrial companies closing down their plants at different times or early curtailing some of the activity

in response to the energy concerns. The energy cost, how much is that going to really affect the restoring the desire to try to avoid the interest rate hit and the currency hit that a lot of nations have been feeling now. I mean, it's it's it's it's a it's a big issue for for Germany because the industrial specialization of Germany make them very sensitive to the price of energy.

Beyond the fact that they've made themselves reliant on Russian gas, the very fabric of German industry is quite energy energy intensive. So there are questions actually as to how this model could continue of maintaining on German territory those energy engency of engency of companies. Um, it's not the first time that we have questions as to the German industrial model, their reliance on exports. This question is becoming even more

crucial today. So what's what's helping Germany obviously is that they have massive policy space. They don't have much of the hupper pacted public debt. They can actually take time to you know, uh rejig the way their economy is specialized at the moment. But yeah, there are questions specifically to Germany at the moment to borrow for me and Brammer, what is the power of Brussels now, the force of Brussels right now or is it every nation for itself

actually full full standing. I would say that the level of silarity that has been achieved in Europe in the face of this crisis is quite high, mainly have, for instance, this principle of European solidarity on gas. It was not obvious and it has been actually a confirmed. The French president said publicly in a TV address that from the winter would actually help Germany with the gas supply this winter.

So actually there's quite a bit of saadity. One of the issues we have, however, is that there's an issue in terms of of leadership. Mario Dragi is nonger going to be Prime Minister of Italy. He was playing a big role in shaking things up if you want. At the European level, the Chancellor of Germany UM is under massive domestic pressure, probably doesn't have that much time and energy to devote to European matters. And obviously I'm Mayor nack Home is not in the same leading position in

which she was before the planet's redaction. So there's a louit of of of of of a hesitancy if you want, in terms of leadership, bosh at least fourth time being solidarity is continuing. UM. It's there's not a lot of science actually that it's it's every country for itself. We have a few issues with some Eastern countries Hungary as as usual, but by a large the system holds of access. Investment Manager show got to catch alp me said. This

is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten AMI Eastern. I'm 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 keen in this is Bloomer