Surveillance: Minerd's Legacy with Diamond

us today. Take us back before Barclays, the credit sweez and you add this young Turk making bond decisions. Why was Scott Minored special in the trenches of fixed income the tumult of Europe in the late eighties early nineties. Uh, First of all, I just already missed him terribly. He had the kindest soul of anyone I've ever worked with, um for every person who worked with and Tom. It actually went before that to Morgan Stanley. Scott and I

were in Morgan Stanley, New York. I moved to London in in uh durun international fixed income trading, the trading outside the US. Scott was good enough to leave his unit and come and join my unit, which was pretty new at the time. And when I think back at the at the incredible transaction we did during that period. Not many people recall this, but we did the first European currency unit bond ever issued in Scott and I

were at Morgan Stanley UM. Ironically the issuer was the Bank of England and it was certainly a precursor to all that came following that with a single currency and the introduction of the Euro. That was just to me just another example of how Scott was always at the very very fourth front of everything going on in the fixed income markets. The Scarlet fu and our FED coverage have always seen how he's supple, how he could change

his mind. As I say, he had a train of thought like a cp A, not like some fancy cf A Macro Bologny. But the answer is Scott minored for you and others, including Googaneim had to manage risk. What was the key risk attribute that he had daily on the desk at Morgan Stanley and a credit suez UM I think of a time at credit suites. First of all, this this is a this is a man who loved

studying the markets, studying the FED. Always had a grasp on the macro environment, the medium term, the long term, and all of his shorter term actions were based on those. What a lot of people forget is the actions he took in Scott was working for me as head of credit trading at CSFB in New York. You will recall that was the last time we had this kind of real strong rate increase, and at that time the victim was Orange County. UM, and I remember Scott coming into

my office. We sat down with a group of traders. He was the first to recognize the problems in Orange County. By that afternoon, we had exited every position. UM. These were repo positions. All the money was returned to Orange County, and it triggered the liquidation of those repo positions across all the other dealers. And to me, it was the vision Scott had then and has always had his grasp of the macro and his grasp of what was right for the regulators as well as what was right for

us at c SFB. And one of the things that goes unrecognized is the incredible execution. We're out of those positions by the afternoon of the first recognition of what was going on with the at the time, the Orange County debacle. Tremendous, tremendous professional the nimbleness that it takes to be able to do that, the conviction, but also what we've been talking about all years. He melity to

change your mind, to move on a dime. How did he embody that in a way that really speaks volumes to you about what it takes to be successful in a very changing place, which is Wall Street. Um, you know, I think right to your point, Leasa. Interesting is his move from Morgan Stanley and CSFP, where he was trading and every night was marked to market and most days you were turning over your inventory. His evolution into the investment management side, I think was a critical factor for Scott.

If he could be better at something than he was at taking risk in the fixed income markets, he was even better as an investor, and I think that was because he spent so much time truly studying what was going on with the FED and the other central banks, and he had such a firm grisp on policy, so that all of his micro decisions were based around a conviction of what was happening in the mac environment, but he never sat on it, Lisa, Just to your point,

he studied it consistently day in and day out. And um, I don't know anyone in either the trading environment or the investment management environment that spent as much time doing research, you know, throughout his career, even in the very very senior position he was in more recently at Guggenheim. As we enter a new territory, a new era, some people are calling it where perhaps central banks are not going to be the tailwin that they were for so long.

Is your view that Wall Street and trading desks more generally have that spirit more broadly, or do you think that perhaps there is a lack of that experience on some of the trading floors after all of the churn that we've seen in the past decades. Well, listen, there's no question that the experience of people that grew up on trading desks in the eighties and the nineties and the two thousands is very different than the most recent period since the financial crisis in two thousd and eight,

it's kind of been a one way, one way um. Bet, I hate to use the word bet, but kind of directionally zero interest rates um doing everything that was was required, that all those efforts kind of redoubled or maybe troubled um during covid um, and it's clearly a different environment right now. So I think the skills of people that are getting marked to market every day, turning their inventory every day far more typical of the trading floors of the of the of the big banks and the hedge funds.

Our skills are gonna be paramount going forward. You've lived this in technicolor, and you know, I think of this year, the challenges you've had an at merchant, like a lot of other people in the equity space, and the whole spack thing in crypto and all the rest of this. Are there young Scott Minors out there? Or are we moving so fast in a two and twenty bonus world immediate gratification that we're not building the future Scott minors because is a brain drain out of our major banks.

I think you just hit the you know you, you

hit it square on the head. Tom. It's up to us as the leaders, because there's definitely the wrought talent out there, and are we're providing an environment um where people can learn m as Scott learned through trading in the US, through trading in Europe, through both trading and being in the investment side of being a real student of the markets and doing the homework day in and day out, the research day in and day out, keeping the relationships with the FED, keeping the relationships with the

regulators and the clients. Um. Yes, the talents out there, it's up to us as leaders to develop talent. A Bob Diamond, thank you so much for Thattlas Merchant Capital of Berkleys of Credit Suite and Morgan Stanley from a bit ago. Today the only word one working at Bank of America's Michael gape In their head of US Economics, and we're thrilled to bring him in. Uh this morning. Michael gape In, I've seen adjustments to Q three g

d P. We've just seen important QUE four data. Is Q four growth a mystery to you or do you have a confidence in where you stand? It seems like well, first of all, good morning, happy holidays to everyone. It seems like growth will come in certainly less than what

we had in the third quarter. You know, estimates are around one to one and a half percent, maybe a little closer to two, but it does think seem like we're moderating into year end, so i'd i'd say somewhere in that range is likely where we're going to end up.

But it does, as I think um Mike mentioned, some of the momentum and personal spending and business spending seems to be slowing as we get into year end, So I do think the fourth quarter will be running around half of where we were in the third quarter that slowed down, and we're seeing it in the bond market now, the two year distancing out over where it was before four point three a solid floor basis point higher yield in the two year equities uh for actually on an

odd day take it on the chin, is well, how far apart are the markets in economics now? Michael Gabon Not too far. I mean, I still think it's an open question of you know, will we have a recession, when, when will it be? How deep and long lasting might it be? So there will be some disconnect here between say,

where equity markets are and bond markets are. It will be hard for equity markets to price in a downturn and kind of know where to revise earnings until we start to see some of that slippage and in the underlying data. So certainly that if you look at the bond market, it is expecting I would say, it is pricing in some mild recession in a FED that's forced to cut in the second half of the year. There's

a little dislocation between that and in equity markets. But you know time worlds tell and in this regard, so I'd say, yeah, there is a gap, um and that that gap is gonna narrow at some point in the data is going to tell us one. I was speaking with Peter Sheer of Academy Securities yesterday and he called for outright deflation next year. He said that prices are going to fall, uh, and that inflation is going to

fade away. How do you push back against that, Well, I think I think you pushed back and say, two seventy two jobs a month wage growth and you know in the four to four and a half percent range kind of expected at least through the first half of

the year. Uh, it's going to be really tough to get deflation unless unless what I'd call it's a bit of a mirage that some of these good prices like use cars, new cars, household furnishings that those just retrace their entire pandemic rise in in twelve months, so that will bring headline inflation down a lot, But underneath, I would still expect services inflation to be firm, so persistent

deflation really hard to see at this point. So I'd say it's probably be a composition story unless you think the economy is about to fall off a cliff and the unemployment rates going to I don't know the Larry Summers six to seven to eight percent range. Otherwise, I think it's probably more just a goods retracement story bringing overall inflation down, but I don't think that's where we would settle in. I've noticed a real shift in tone from a lot of the people we've been speaking with.

There's new optimism about a soft landing that was not there about a month ago. Do you think that it's misplaced or do you think that there's real evidence of that becoming a greater chance of a reality based on some of the disinflationary action that we've seen with goods, Even though it perhaps hasn't trickled into services as much, I would say it hasn't the data flow in the mix and kind of the rolling over goods prices. We've all been expecting that it's it's it's been about kind

of timing and when it would show up. Hasn't really changed my view on the likelihood of a recession in three, because as I think you're getting to it's it's really about the labor market, wage and lation and services, and the FED is not going to feel comfortable that inflation will be going back to two unless it removes and balances from from the labor market. I don't think that picture has changed. It did to Gape, and I'm not

a fan of the Michigan data. It's coming out at nine o'clock, but you know, I'm learning to follow it more and more. And the one thing I get a value there is this odd step snapshot of the public of the inflation guestimate five to ten years out, which is called inflation expectations. It's sort of up in a

seven level three ish. Are we becoming unanchored in our heart and soul out of Olivier Blanchard's wonderful new research, Are we actually becoming unanchored and towards a higher expected inflation? I don't think so. I think if we look across the University of Michigan data and the and the other data on expectations and market implied measures. I still think we're broadly consistent with low and stable something around around

two percent. And I do think with today's PC data, the last couple of CPI reports, I think it'll be kind of built in that, Okay, inflation is coming down. So step step number one, right, gut inflation on a downward trend. Step two, let's see if we can get it around two percent. So I do think it'll it'll become more noticeable that the rate of inflation is slowing. I don't think long run inflation expectations are are inconsistent with what the Fed is trying to achieve. Michael Gabe

and thank you so much. Well hunkred in his office right now trying not to go out as Jim Bianco, who are so pleased is willing to join as president of Bianco Research, who has had some stunning calls over this year, has really been a breath of fresh air in his real reassessment of free money and the lack

of it. Jim, really, I want to start on one of the big questions ending this year, which is the discrepancy between bond markets and their expectations of what the FED is going to do, and with the Fed is saying they are going to do, which is raised rates a lot more than market A certain certainly allowing for can you end the year helping us to understand who is right? Well that historically usually the market has been right,

but in two it's been the Fed. The market has been dragged screaming and kicking to the belief that rates are going to go up. And while both the market and the FED are saying, you know, the terminal rate where they're gonna peak is around five, the market things are going to start cutting rates this year, where the FED has made it pretty much clear that they're not going to be cutting rates this year, and that discrepancy is going to pretty much I think drive you know,

investing in the first half of twenty three. Are we going to get the pivot in? Or are we going to get the pivot in? If the market doesn't get the pivot which it is expecting, I think it's there's

going to be some room for disappointment. I guess that there's another way of asking this, which is have we really gotten out of the woods with respect to some sort of more substantial financial disruption, or have we seen the bulk of it in terms of the rate move and the realization that we are we are in a new higher rate era. I think we've seen the bulk of the move. Yes, there's still more rate hikes to come. There can be as much as seventy more basis points

more between now and say the spring. But yeah, I also think that whether or not we are in an era of higher rates, that's really the question. The market is still of some belief that in the next two years or so, inflation will settle back down to two percent and interest rates can go back down, you know, somewhere around two percent as well, and it can approximate

something that we saw pre pandemic. Where I'm more of the camp that we're in a higher rate environment now that really when the Fed starts cutting, you'll get to three and a half and that will be pretty much at uh that's what what easing will be, or maybe three what's what easing will be in the future, and then in the next flare up rates will go higher from there. You know, Jimmyano, you've seen big shifts like

let's to the Chicago Cubs landed dansby Cody Bellings. You're coming in, I mean, big shifts for the Cubs going into next year. The big shift in our world is Lisa alluded to, is money now costs something. We have a risk free rate, we have a legitimate sharp ratio. Explained to the ute how things change. Well, I think the big thing with that is that in two we saw that the total return in bonds, you know how

much money you lost plus the income you got. Remember you started the year with no income, you started the year with pretty much the zero interest rate has been a record that we've not seen. Bank of America saying it's been a hundred and four years since we've seen these kind of losses in the bond market, and you're right.

I mean I'm a little bit surprised too that if you if you told me in January the worst market in a hundred and four years, I would have thought that we would have had a lot more financial disruption then we've had so far. Maybe that's a sign that you know, rates are not as deletarious as we think they can go even higher. But nevertheless, I think as we're move into twenty three, we're gonna start the year with a coupon. We're gonna start the year with an

interest rate. So if prices go down, you've got a cushion. Now you've got an interest rate that we haven't seen in fifteen years. But does it mean you know, you go back to eighteen and everything that happened there earlier in the year, folks who did the collapse of Russia after the war in Ukraine and what it did. The JP Morgan is really uh something. Let's drag it forward, Jim to seventy four and we were agreeded in seventy five with up up up. Can stocks stunned this year

and do a seventy five or two? Sure? And they need one thing to do that. They need signs that inflation is after all transitory, it is on its way back to two percent without our recession, that that's its natural long run rate, and it's going to stay there. If you see something like that, the Fed can settle down, the market can take off then at that point, but if inflation is not on it's way to two, the

market will struggle. I've argued that inflation in the post pandemic era, inflation is this story is the game and it will continue to be and whether or not it goes back to two on its own naturally, inflation is the story as everyone is saying that it is. How important is today's read the last inflation ryd that we get of two as we get a sense of where

the consumer is ending the year. I think, you know we're gonna get PC, and the Fed is focused on core PC and they've made Chairman Polls made the case that neutral is getting the interest rates, all interest rates sustainably above uh core PCs rate, which should be about four point five or four point six. When we get the number, well, now that all of a sudden, that puts that interest rate or interest rates within that possibility of getting above the inflation rates, something they haven't been

this whole cycle. So if we see that four point five four point six and we see a trending lower, we could be getting a lot closer to at least neutral. According to the fat Jim Biancle, thank you so much from Chicago, Stay warm, Mr Bianco. Bianco Research providing weather forecast for blue mood expiens. This is a joy right now.

I usually when I'm giving speeches, I'll say something like you know, the two great things in America antibiotics, air conditioning, and the other great thing is what Brian Kelly invented. He is the points guy and whatever you say, he's a pinata for the industry. Brian Kelly changed how we travel. No way to butt Brian. I did it, Brian Kelly. The other day I took a family member business class

the Philippines twenty one thousand dollars. I did the Brian Kelly pixie dust and I paid fifth d six dollars for that trip with a lot of miles. Are those kind of things gonna happen next year? Are we still going to get the mileage pop next year? Absolutely? The airlines depend on the mileage programs. You know, they sold billions of dollars worth of miles, you know, to kind

of survive over the pandemic. So the loyalty programs are alive and well, but as you kind of hinted at, their increasing the amount of miles that you need for each trip. So what I recommend to people, instead of holding your miles long term, use them now. And UH airlines like United now you cancel your mileage reservations for free. So what I say during storms like this. Use your frequent Flyer miles as a backup option. If your flight is canceled on one airline, use your miles to fly

out on another. Brian, what's so important to me is the idea interviewed. The interview with airline types, which is their optimistic. But I don't see a lot of thrill about investing in the business. They come off the pandemic lows and that are you optimistic on American a dation out of this horrific pandemic? I am, because you know, when you look at the generations millennials, gen Z, people

want to travel. You know, wealth and luxury are these days defined by having great experiences, and luxury travel is seeing a huge increase from pre pandemic. I don't see that, you know, showing any signs of slowing down. So I think long term the travel industry will be okay. But you know, every industry right now, there's just so many question marks with what's going to happen in twenty three unemployment,

et cetera. But I'm bullish on travel. Maybe bullish on travel for the companies that arrange it, not necessarily the experience of travel for the consumer. We were speaking with Elane Becker over at count and she basically was saying people are going to pay more to get less. How much you seeing that reflected in what's available the perks, whether it's access to clubs, to lounges, whether it's how many points you can use as you're alluding to for each flight. Well, you bring up a good point with

the airline lounges. So starting in March, m X Platinum members will no longer be able to bring in ESTs for free into those Centurion lounges. There's so many lines to get into the lounges. Airports are packed, so, uh, you know, the experience is being downgraded. You know. I was just looking at an hotel in Palm Beach in January three thousand dollars a night for a normal room. It's kind of crazy how much inflation has happened in travel um. But consumers don't show signs of pulling back

because of these increase in prices. So we'll see. I do think there will be a tipping point where people say this is just crazy. I'm not going to spend this much money, uh for the experience that I get. We haven't gotten there yet though, and that's the reason why you continue to see this inflation. You mentioned hotels. What about on the hotel front, how much can you really use these points systems versus the pushback that you're

seeing on the margin certain places in the airline industry. Yeah, hotels are I think particularly egregious. Uh. You know there's still luxury hotels where due to safety, they're not going to do housekeeping, right. I think that's egregious when you're spending at thousand dollars to night and have to thank you. Um. But overall, you know, the hotel industry actually I think is a lot more healthy than the airline industry. The

margins there are much better. But loyal I highly recommend to people use your perks on your those hotel branded credit cards. Uh, you get free nights. You know, you can pay nine a year and get a free night at a hotel. So are a lot play the loyalty system. Brian Kelly, I took Kelly three oh two points Guy three oh two. I gotta be minus folks. I really didn't do that well. In Brian. There was a ratio of economy to premium, economy to business class, and I've

never seen it as stupid it as is now. I've looked at two recent flights where business business was ten times more expensive than economy. Where are we in two years in the mix on airplanes? Yeah, well, you know, during the pandemic, things slowed down a little bit. Business was only moderately more expensive because, you know, the companies, the banks weren't paying for those crazy high you know, fullfare business class prices. You know, the trend is now

airlines are putting in premium economy. That's the sweet spot. That's where they're making money. They charge a premium, but not the five x or ten x that you see for business class. Um. But airline pricing has always been frankly insane. Uh and I don't think that's gonna go away anytime soon. Tell me about the other side of the Brian Kelly equation, which is the charge cards. Are the banks enthused by the Brian Kelly world? Yeah, I mean the banks are making bookoo bucks on the rewards cards.

They want premium consumers, especially going into three, you know, thoughts of a recession, people getting laid off and not paying their credit card balances. We're seeing credit card balances for Americans in general, go up dramatically. Over the pandemic, we saw a lot of people pay off their credit. Now Americans are accruing more credit, so the banks want those premium consumers who are gonna pay off in full

every month. And uh so those people like the travel cards, and so I see a lot of investment in those premium travel credit cards. Just real quick here, Brian, do you think it's a fool's errand to try to travel for the December break? I'm just asking for a friend. Well, I know you're you're traveling today. I think especially out in New York, at third of flights out of Lagarty are canceled today. So if you're going to travel, pack

your patients. And I really do want to urge everyone be nice to frontline employees at the air Yes, you know they are underpaid, overworked, and trust me, they want your flight to go out. Don't scream at them. They don't want you in front of them at the game. You know, just be nice this holiday season. And Brian, you know it's a personal note. I'm not supposed to do this, but I'm just gonna say it. You saved me about three months ago with Brian Kelly one on one.

I I couldn't believe what I did on some of these international junk. It's my family's uh jake, and I can't say enough about it. Folks, usual charge cards care fully and wisely and try to figure out the points an annual visit with Mr Kelly, the Points Guy. Thank you so much. 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