Surveillance: Mini Bond Bear Market with Jones

some sixty thou foot questions. Kathy, I want to go to the scrub retail investor. I have a Vanilla total fund. It's got sovereign credit in it. It's a blended portfolio. Forget about the yield. On a price basis, it's down five percent. Analyzed it's down twelve percent for for retail. That feels like a bond bear market to me. Are

we on the cusp of a bond bear market? Well, I'd say we're in sort of a mini bond bear market already, because, as you say, it very unusual to get draw down in an excessive two or three percent in the bond market and kind of writ large. So when you're down five percent, it's certainly probably qualifies as a bond bear market. Now we're not in the campus says this is kind of regime change and we're going into a ten year bond bear market or even perhaps

a one year bond bear market. But we've certainly seen a significant define now as you would expect when you start to see rates move the way the half Lisa

under see. If a level to a bond bear market is defined by when you open your monthly statements three months in a row, in itself, that's a bond bear market, right, And the question is whether that's a self fulfilling, self fulfilling prophecy, whether people see the red and they withdraw more cash, or whether some people say, you know what, we want to hide out in some of these securities, especially if we are concerned about the consequence of rate

hikes and cathy. That has been part of your thesis. How how much are you continuing to double down on that duration call. Yeah, we've had a short duration call for you know, really a long time, probably a couple of years. Now we're actually starting to um advocate taking on a bit more duration as yields move up. So one of the things we see is is you get into a rate hike cycle, the yield curve flattens, you get tues tents below about fifty basis points, and you're

probably pretty near the peak in ten years. So as we get into the rate HiPE cycle and we see that yield curve flattening, we're actually advocating starting to take out a little bit more duration, not not jump into thirty year rounds here, but to start to add to that duration because there's nearly the market's gone a long way already to build in this rate hiking cycle. Um, we're already saying financial conditions start to tighten a little bit. So we're on the verge of probably hitting at the

at least an interim peak. All right, in a new interim peak. But can you sit on that for just a minute. We had that ten uere yield now at the highest level is going back to late one nine. This is a near term peak and interim peak. But do you think that this is the peak of the cycle. Um, Probably from this cycle if the FAN and the other central banks follow through on what they're saying they're going to do. So we think this this cycle is pretty

powerful because it's glowly synchronized. The fan is using both quantitative tightening and rate hikes to bring down inflation into slow the economy. Fiscal stimulus is already a thing of the past and will fade. So as we look out over the next year or so, which is probably defined as the cycle here, we think that we're probably fairly close to the peak and longer term meals. Cathy, you point to some data economic data showing that actually you are starting to see a slowdown in the pace of

the economy. Can you give us a sense of the slowdown in the economy versus a slowdown in inflation and whether it makes a different for the two. Sure. So, typically some of the signals that we watch are like the global pm I, they're starting to roll over. We're seeing personal consumption expenditures start to ease up, which isn't too surprising because the fiscal policy boosts with God is waning, and those are indicators that usually precede the peakan inflation.

So we all know inflations of lagging indicator. And so there's also the problem that as oil prices move up, a gasoline prices move up into Rhodes consumer spending power, so our our thesis is that we're getting into a slowing economy as the year plays out, and as a lagging indicator, inflation will come down. As a result, it's non linear when we come from seven percent Kathy Jones down on inflation is as widely presumed. What's a single

point trip point for psychology under four? You know, I'm a think so, although I will point out that certainly the market based expectations for inflation haven't really moved up that much on the retail side, or when we look at say the University of Michigan Consumer Sentiment Survey, um, those have those have become more elevated, although really the long term outlook isn't for much more than three percent.

But I say the trip point in terms of psychology in the market, if I hadn't name it would be gasoline prices. Now, people are very sensitive to what a cost to fill up the tank every every week or whenever. I don't know. I don't drive, so, um, it's not an issue for me. But you know, people are very sensitive to gasoline prices at a course food prices. So if we start to see those gasoline prices come down later in the year, I think that that will change

some of the inflation fears. At least. It's the animal that drives around to hit Kathy, which and the irony. I grew up in New York City, so I relate to that statement. And yet I didn't get you're so rich now you drive out to go skiing on the weekend until not someone I don't get to do that, So d hold on a second. I learned how to drive, just to be very clear, because I went to farther North Dakota and I got my license after begging the

person on the fifth time. You bank the person feeling, let's not get it if you want to disclose, No, I don't. I don't, but I do. I thank you quickly. Kathy John's John Swab, Kathy, thank you very much. Jim Cart joins US now fixed income most Stanley Investment managed. That was a trick question. So Jim, fifty basis point right high? Can march? You actually think we should say this seriously? Why? Well? You know, I think, well, first

of all, thank you for having me on your show. Yes, so I do think that we should take it seriously because what we're starting to see is that inflation pressures are starting to rise more precipitously. We have another inflation number coming out on Thursday. We've recently had, I know,

for some technical quirky reasons, and stronger payroll report. Right now, what central banks are worried about, and this is the one job central banks all around the world all have in common, which is fighting inflation, is that you're starting to get a steeper Phillips curve and you're getting wages starting to move higher. That's allowing companies to pass through

higher prices. What that does, and this is the important point, is that it un anchors inflation expectations, which means that corporations are therefore more likely to more freely raised prices in the future. Consumers are willing to pay those prices, and that's a spiral inflation that we're talking about. So if if we start to move into a situation where the Fed starts to really take this very very seriously and their concerned, I can't rule out a fifty basis

point rate hike. It's not the base case, but I think we should take it very seriously. Jim, what's your dynamic on what foreigners will do given higher yields across all of the Morgan Stanley yields Space two. Foreigners go into a voracious frenzy when they see higher yields? Do they get afraid and wait? Well, how do they respond? I think it's the latter. I think when yields are rising,

they get afraid and weight. Once yields settled down into a range and people are comfortable with that, that's when you start to see the buying. So when when we see these yield rises, we do think that there are some limitations asked to how high these yields can go, as it feeds back into financial conditions, and it feeds back into growth, and it impacts other asset prices like

equities and things like that and credit. However, when you start to see these types of moves, they become somewhat unbounded. So if we're looking at the tenure treasury at one point nine, well, what's to stop it from going to two percent or two or to two point oh five. I think people would be more comfortable with it above two percent to say, well, maybe now is the time

to start to buy. But when we're making that journey up towards two percent, people tend to get very, very nervous and want to, you know, seek out short protection. Let me translate that, folks to a question for the Great Jim Karen. Is our journey that we're heading for a bond bear market? Well, I, you know, I think that we're I think that we're in it right now. UM. I think that we are making an adjustment higher and yields.

But I do think that it probably stops somewhere above two percent, like around two point to five, um, you know, for for this year. And the reason I say that is that right now, what we're seeing is that these rises and yields are now starting to have a negative feedback impact on credit spreads. Credit spreads are starting to widen right now. That's going to create more anxiety in the bond markets. That can also lead to lower equity prices.

And effectively, what I'm really saying is that we start to get a tightening of financial conditions that has a negative feedback loop into economic activity. And we're already seeing global p m I s starting to roll over in some signs of some slowing. So all of this does have a stopping point, but it may not be right here.

It may be a little higher and yield a little above two percent before we get there in the tenure, Jim, the argument from a lot of credit investors is that spreads haven widened so much to where they are to where compared to where they were pre pandemic, and frankly, a lot of comp these have immunized their balance sheets. They've borrowed for such a long time that they don't need to borrow any time soon. Is this signal from credit really all that concerning that, given the fact that

you have highly capitalized companies. Yeah, Look, I think that's a great point. I don't think that there's a credit default risk that's going to run through the markets, you know. I think that incorporation, you know, GDP is still supposed to be pretty good this year. Earnings are you know, are decent as a result of that. So therefore, I don't think default risk is very very high. However, there is an all in yield component to credit. These are

still bonds after all. So when ye'll start to rise, we're already seeing the year to date returns and many of these indices they're you know, they're down um as they can. As the zeals continue to rise, you start not to see the inflows that you saw in the past, you start to see people pulling away from the asset class. And that's why I see this as a natural adjustment higher and yield. It's not a default risk issue at

the moment. So to your point, Lisa, you know, yes, you know, interest coverage costs are low, corporations have better balance, you'd they have more cash, they've termed out there debt. All of these things are good. I think corporate America can handle higher yields. I don't think this is a default risk issue, but I do think it's an all in total return issue when it comes to an adjustment higher and yields, and this can drive people away from

the asset class for the time being. Given the fact that you think that there's more to come, are you hiding out in a lot of cash right now? So so we do have higher levels of cash, and there are also other places that we can look at right so areas for example, like bank loans. I know most things are fully valued these days, but here's an index. It's trading still below part at ninety nine. You get good yield per unit of duration. Um. You know, this is a sector that is a good place to hang

out at this current point. In the cycle as yields are rising. The other is that we start to look for deeper value. Where do we have higher real yields? Where are we in places where we're being compensated to take the risk. And in some of these places it's short end front dated, you know, short short end emerging markets where many of these central banks are way ahead late in the cycle of hiking interest rates. They have the highest real yields around the world, the highest yield

for U bit of credit rating. These are areas that we also think our opportunities. So I'm not just saying it's about defense. We can play a little bit of offense here too, if we watch the valuations. And that's what I recommend, and that's what we're doing in our portfolios. H Wilson as Owhite Countermerican Standing Investment Management. I think everybody knows I'm a huge, huge fan of one Robert Doll. He's chief investment officers crossmart Global Investments. But over the many,

many decades he's been a resilient bull. And then December happened, and Bob Doll in December said, wait a minute, this is a moment where the usual Bob Doll changes. That December Doll call was absolutely stunning. Bob Doll, Are you back in the market after a ten p SPX correction? Our our target tom as we said a few minutes ago. Who would have thunk we would have gotten it so fast? So I'm pretty neutral now. I think we're gonna have

a very volatile but trendless market. Earnings tail winds, valuation headwinds. That's the big change. You guys have been talking about it. The FED is made of hawkish pivot and the market is slowly waking up to that, especially bonds. Let's go see f a factor analysis right now, Bob Doll. What matters individual stock selection? Sector selection? Is it about international sales?

What matters in stock selection? Yes, all the above. Look, I think you have to be positioned for companies that can produce the earnings and the cash flow and not expect valuation improvement. In fact, I think the opposite. That takes me more to value direction. I want to own financials and a rising rate environment energy on a pullback, I want to own that too. Because the world's demand for oil is moving up and supply is somewhat curtailed,

so you're pretty much barished in everything. I mean, yes, you've got pockets that you see value. But you pointed out that equities, even though they're at performing bonds should basically struggle to eke out a positive return for the year. What does that mean in terms of your advice to some of your clients. How do you arrange and deal with the fact that you might expect no returns at

best this year? So for sure, rebalance. If you have not rebalanced your equity waiting because of the gains in the last few years, it is higher than your target, bring it back to target at a minimum. That's the first thing to do. The second is to make sure your portfolio is not overly populated with these growth stocks that have done so well over the last few years until the last few months. You need to cut them

back something. You have to sell out of them. And for goodness sake, if you've been totally in the US, stand up, take a vow and do a little dollar cost averaging outside the US where economies are picking up. All right, we're in particular, Bob, I think that Europe is probably not a bad place to be. I think the emerging markets still have a challenge with China's credit problems, so I would stay with developed markets. Does that break

can peripheral you? Let's worry you until Bobby in Italy increase in our swere it's I think it's a signal of exactly the theme valuation headwinds. When the supply or the amount of bonds selling at negative interest rates dropped sevent in six weeks, that tells you there's a change of foot We need to pay attention. But if you've been around the block a few times, I just wanted do you think the central banks can pull off what they're discussing over the same time together? Now you're onto it,

that's a very good question. I mean you're starting to here at the periphery people talking about as they move interest rates up, as companies struggle with supply shortages, labor shortages, some cause pressures. Could we have a significant economic slowdown? I sure hope not. I don't think so we're going to debate that. I want to go to your Lehigh University, every institution right now. I was having huge trouble trying

to figure out asset allocation. Do you look at the hall march here away from basic common stock ownership is constructive as a diversifier or should people get back on board the good old all American stock market. Look, I think stocks still have a long term place in portfolios as the central piece of what you're doing. I think bonds are going to be challenged for some times as

interest rates normalize. So if you can find alternatives that have bond like returns, bond like volatility, but the interest rate sensitivity, they're the kind of places you want to be. Let me go all j Puloski on your John talks to Mr Puloski a lot. He's huge on Pacific rim. Can you be large on Pacific rim? Yes? I think the Pacific RIM that serves still fast growing, albeit slowing China and India, they're still good places to be. Needs

the world to open up for that to work. Some what we're seeing in Hong Kong with China right now, you're absolutely just gonna be a problem bub And I just wonder what you've used are on that. We just caught up with Dr Amisdowne from John's Help Kids, who was discussing the difficulty that China would have opening cup. I need to see something happened with supply chains, don't we No question about it. And Uh, I heard that interview, and you're right, it's it's legitimate to be concerned. Those

supply change have to open up. I think a year from now we will solve a noticeable peace, but not of all all of our supply chain problems. And that's part of the inflation problem. It's part of companies not being able to satisfy consumer demand. So we can solve a few of those. That's good news, Bob. Find a question, what would make you bullish? Uh? If you tell if you told me that interest rates don't have to go up,

but I can't see how you can get there. We have valuation headwinds when interest rates go up, pees come down Pe where we were just two months ago. Not appropriate for an environment where the Feds taking the punch bowl away. But was fantastic to see you said on a regular basis. I'm enjoying this boto of trust. Thank you said, thank you, buddy. Now on the GOP and really the state of Arkansas politics away from all that's

going on in is Washington. We need to note that he's the most popular congressman in America Valentine's Day because he is a Congressman of Romance, Arkansas. You come out a little rock and go upbrought five to Romance, Arkansas. Have you ever delivered an envelope to Romance, Arkansas, French Hill with Valentine's Greetings? Well, you will want to know, Tom King, that all of my wedding invitations were mailed in Romance, Arkansas. So I'm a big believer in the

Post Office of Romance. And it's a it's a economic magnet for lovers all over the nation. Jonathan Martin in The New York Times six eight months ago had an absolutely wonderful piece on the cauldron of GOP politics in Arkansas. It is arguably the litmus test of the future of the Republican Party. What has changed in the GOP debate in your district in your state in the last six weeks.

When the last six weeks we're talking about redistricting in my district, I lose part of Pulaski County, Tom, which is metro little Rock, and I pick up an additional rural county, Cleveburne County, which is next to two big counties that I already have in that region. And I'd say the party has become definitely more conservative as we see democratic quorum courts out in those rural counties having county judges run either as independence or switching to the

Republican Party. That's a major trend, all right, as we helped Tom keene a Curry favor with his domestic situation. I'm wondering from Valentine's Day, given the fact that prices are going up, I mean, aside from that particular holiday, how do you expect to address the fact that it seems persistent. How do you expect to address the fact that, yes, the president is leaning on the federal reserve, but there

is a legislative aspect to this. Leasa's I've as I've said for many many appearances on this program and other programs, we need to not be spending so much borrowed money in such a continued pandemic manic manner. We need to go back to pre pandemic spending priorities on the fiscal side, while the Treasury withdrawals it's accommodation on its balance sheet in terms of the amount of Treasury securities that it's buying,

and then slowly lifts interest rates. Those are two key points I think to to lowering explationary expectations, Congressman, in fairness, we are cutting spending that actually you're seeing this fiscal drag that everyone's talking about news going down, and there is a feeling that if the government does invest in things like renewable energy and certain programs, we could avoid some of the shocks that we're seeing currently with oil.

What's your view on that, Well, look, you look at the Energy Information Agencies predictions for needed fossil fuel production, electricity and pass between now, and you're not going to produce that through renewables alone. It's not physically possible to

do that. We need to continue to replace our reserves and increase our supply and fossil fuels, and I believe sincerely that we should continue to invest in cheaper, more efficient, more effective nuclear power in this country and around the world in order to fuel the energy demands that both industrial and consumer needs are projected to need over the next twenty five to thirty years. The French show the linkage here on a constructive job to report Friday with

a lot of amendments. We get that as wages up and we've got the inflation report coming out on Thursday. Tell me about near fully employed Arkansas, and this is your wheelhouse as a former local banker. What is the wage story you're hearing from business in Arkansas right now? Well, first, we're about nine thousand jobs below February before the pandemic tom in terms of employed ar Kansas. So that's a

key point. And I'm seeing wage pressure increase both at the low end and the high end UH particularly in healthcare for example. In your previous discussions this morning, you talked a lot about low end working salaries going up and being on pressure to go up. But we're seeing that in the professional ranks, particularly in healthcare, where these wage increases that we saw in the pandemic just to get people to stay on the job. They're being embedded

into the system. So we're seeing wage increases in the four and five percent range and higher. And I think that's reflected in the nine percent producer price index that we saw at the end of the year. Congressman, I understand this a massive game this evening. Should I be watching this one? You should watch Auburn Arkansas at Jonathan, Come on, get with the program. Movies into the American basketball.

This is a this is Auburn, It's a team in the South playing Arkansas, another team in the South and playing basketball, and we're almost to thee for the Sweet sixteen. This is what you need to watch. Comgressman, I'll try it out. French show. Thank you have no idea the morass of Southern basketball. You just hates hemp. 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