Surveillance: Policy Mistakes with Chiavarone (Podcast)

what have you changed here? I mean the dynamics now, the new genus we have this panel today, but really the economic data tomorrow, how is Federated tweaked the sixty allocation significantly. Um. You know, we've been sellers really since last September UM, and we took the opportunity with last week's rally, you know, growth and popped about ten percent

and we reduced. We reduced so we're one percent overweight equities, which is you know equities right now, which is the lowest overweight time that we've had really since two thousand and eight, two thousand nine. As you know, along with Steve Off in phil Orlando, we've been one of the most bullish shops on the street really for the last decade plus UM. But we're as as low in our allocation equities as we've been, and we mirror that on

the fixed income side. We are underweight almost every major category of credit, in fact, not almost every major category of credit, and that's really only the third time in the last fifteen years. Help our radio and TV audiences that are saying, okay, underweight, translate that does that mean go to cash? It does um to a certain extent. So we've been you know, our neutral allocation to cash and at sixty is roughly three. You know, we're sitting

at eight, which is you know, darnier. Three times are a normal cash weight, so almost a triple levered cash on the full. But I think, you know, there's gonna be a time to buy longer dated treasuries as as the recession, which we think is more and more likely, comes into view. The problem is, I think the rally of the last couple of weeks and treasuries is still premature.

I still think you're gonna have upside surprises to inflation of FED that's hawkish in a ten year that ultimately moves back to that three and a half percent rate. So we would look to add on treasuries as we move, as we saw a more because I think you're gonna want those longer dated treasuries when you get into kind of worse growth periods. But right now we think cash

is king. Steve, let's take a step back and understand the framing of your parishness and put on your federal reserve suggish hat in terms of commentating, So if you said before you came on that you think that they're in the midst of the biggest policy air going back to the nineteen thirties, what exactly is their policy are? Yeah? I mean, and to Tom's point, I think it's very understandable how they got there, But I don't think this

is malfeasance. But when when you woke up in March and interest rates for zero inflation was eight percent and the you know hood was still buying bonds, I don't care how you got there. That's policy here, um, and that has now forced them into a position right now where you know, they're hiking aggressively and they need to into a slowing economy. And I think what they missed, and Tom you might find this interesting, what they missed

is a longer term structural change in the economy. We were in this kind of new normal, sub two percent growth, sub two percent inflation, sub two percent rate environment for a decade, new normal, if you will. And just in time, inventories are no longer just good enough, so companies are

reorienting their uh their supply chains. Chinese working age population is set to decline over the next twenty years, and the US population growth is set to go from two percent growth to eight percent growth over that same period. And so and at the same time, you've you've undermined the three pillars at least for the short run of globalization.

The free movement of goods really kind of peaked with the trade war, the free movement of people peaked with COVID, and the free movement of finance may have peaked with this with this kind of economic war with Russian So I think you're headed to a scenario at the other side of a recession where you have hired US growth, but it's less efficient. You're gonna get more inflation per

unit of growth. That's a different world. Steve. This a lot of people would agree on, at least in the short term, but in terms of what happens next is the question and there was a belief in the market perhaps last week that the Fed would ease off on rate heikes when they saw dampening in some of the growth expectations and frankly, uh the underlying economy. We just

heard from Laurid Domester of the Cleveland Federal Reserve. She doesn't see that happening, and she still sees a FED funds rate well over four percent when it comes to next year. Do you think the market is miss pricing that? Do you think that the turmoil that will ensue from that will confirm your parishness and the reason why you're

not ready to go full throttle into longer duration yet. Yeah, I think the market has kind of contorted itself and had complacency multiple times over the course of the last next months where it's looking for peak inflation and peak hawkishness, which you know, and I know you guys were talking about this yesterday, But if infletion goes from eight to seven,

that's not a victory lap. You really need to get that number, you know, down, even if it's not quite to two, certainly you know, pretty darn close to it. And so I think defense still has a lot of work to do in order to do that, because you've got service price inflation that's operating around eight nine on a three month basis and wages are high. For that to come down, unemployment needs to rise, and I think

they're gonna have to go for some time. UM. And if they do slow, Tom, I think they're slowing because it's abundantly clear that we've got, you know, a significant decline in growth, if not an outright procession. How fast does the employment dynamic changed? Your own pulse said we have a strong economy in this testimony two cups of coffee ago. We've done a lot of work on this as part of our recession dashboard, and you can go

effective on average. It's a series of indicators that we look at that I mean, there's no perfect formula to understand when a recession is coming, but there's guide trades that you can look at. You try to understand UM on average, you can go from the cycle low and claims to a recession within twelve months. We hit a cycle lowan claims three months ago. So there's no historic relationship between how strong the labor market is coming in

in terms of how fast they can deteriorate. UM and so it's a fickle It's a fickle friend to rely solely on a strong labor, of course, and we may find that the excess inventory that we have this cycle was employment in certain sectors. And I think we've seen some of the tech guys already say we over hired, whether that's Amazon or or or Meta or some of

the other folks that have said that. So I think, look, this idea that you're going to get through this by only making job openings this appear that's a comforting thought, but I think it's ultimately going to prove to be really optimistic. Steve. I just want to wake out something you said earlier in the interview. If people aren't familiar with your work, to hear this from you from Steve

Orth from Phil Orlando, it's quite something. You know, forgive the snark, but it's like Marko Klanovitch a JP Morgan coming out this morning and going Max Bearish, you used to make fun of me for my snark around that. Stay, thank you. Stay Chevaron Federate. By way into the General Mills piece there the nine year piece. Back then it was a ten year piece at a one oh two. I'm enjoying it this morning at one and studied you'll

got it right greatly. Jones here, so I can yell at her because she told me to get spawns there. She fixed income strategist at Charles Schwab, Cathy, that's the reality, not a bunch of bonds strategists talking about spreads and credit quality. People listening and watching bought a piece at par and they're enjoying it a one or eighty two like the General Mills two and a quarter of thirty one. What do you do if you own that bond, Well,

you have two choices. Tom One is you hold it to maturity and it goes back to part because that's what bonds do unless there's a default, or you sell it. Now, take your tax loss and replace it with a higher yielding box, Kathy, When does the concern start to creep in that we're not seeing issueans really pick up? And then a lot of companies can choose not to now, but maybe in six months and certainly in twelve months,

it'll be less of an option. Yeah, you know, I think right now, corporate balance sheets are still among the investment grade community is still pretty strong, and they don't they did load up on debt at lower yields UM. So they're in pretty good shape, but we'll probably see issuance pick up. There's always going to be a window uh oh been um. You know later on in the year, as we get into next year, that will have to

be some refinancing that takes place. I think a lot of the issuance now is just waiting for yields to come back down. Do you think that they will? I mean, that's the issue. If they don't come back down, they're looking at financing costs that are double what they were potentially just a couple of years ago. How much does the need for it to come down really determine the next to fault cycle? Well, I think when you're talking

about high yield are certainly bank loans UM. Then you have a problem with short rates moving up, particularly in the bank loan sector, because they adjust the durations very short, they adjust very rapidly, and for those companies which are basically junk companies UM, their cost of financing is going to jump, and that there's one reason we're not big fans of bank loans right now. I think it will also hit the low end of the high yield market, because you know, spreads have moved up a bit here,

but they're probably gonna move up some more. We think there's a high risk of recession, particularly of the goes really hard and fast the way they're talking about, and that's not going to be good for the hyold market. What is the unexpected if the Fed moves seeps in July or onward. Well, I think it does translate into the FX market. Obviously, if the Fed goes, that's built into the market, and I think a fair amount of

tightening is built into the market. If the Loretto Master gets her four percent next year, then I think that we're seeing an inverted yield curve. All else being equal, would be very difficult with the economic indicators rolling over to see yields move up from there, I think you've seen inverted curve, and that translates when we look at say the Japanese bond market and where the yen is and what's happening in Europe. That's going to translate into

a pretty stiff global tightening cycle and that's when things break. Kathy, thank you, you wanted the best. I love hearing from you. Kathy Jones there to us. Thank you joint to get snabas founder and CEOM of ex Sante Data. You're let's start here, President a Guard, Chairman Pal, Governor Baudi. What's your number one question? Going into that a little bit later this morning, I would say what matters more growth

or inflation? Right? We had a totally different cycle than we've seen for the last forty years, right, that even if we have recession fears, the central banks are a very very tricky spot, right because inflation is way above target and they can really focus on growth as much as they've done in the past. And I think if you look at what's going on in the market, right, we've we've clearly had the recession focused over the last couple of weeks, right. And nevertheless, BONDI bond deals are

close to the highs. Right. It used to be the case the lesson for the last four years was as soon as there was any weakening in growth, you just had to close your eyes and by bonds. And this cycle is totally different, right, because it is an inflation cycle as opposed to just still growth cycle. I look yand it's the path of inflation. And this will be my question today to these bankers and it's a really a steam panel to say at least folks, so I

really pay attention to that. YenS to me, inflation is by part and then there's an easy path down. Core comes down, and then it gets way way more difficult. Where do you perceive the level of inflation where it really becomes heavy lifting for these central bankers. Yes, I think we probably have a period where goods prices and commodity prices are gonna come down over the next year, and that really hasn't not much to do with central

bank policy, right. And then the question is if the wages and the services prices stay elevated so that a drop in in those other prices don't really get the overall inflation numbers down that much, then the central banks are gonna do the heavy heavy lifting and really get tight. Don't forget we're talking about the FED having overdone it. How many months have they actually been hiking? A couple of months? We're a couple of months in here, right

and uh and and that's the discussion already, right. So the real tricky bit will be if they have to go to free and then considering going to five, that's when then the pain on the economy will be well, be severe right. Right now, we're really discussing about getting to neutralish a little bit above but not really tight. It's not a volcal cycle yet, right, but that would come into play if the weights keep going, if the services prices keep going, even beyond the point where the

supply issues has been fixed. Yeah, it's just real quickly here to your point. Lauramester this morning in CenTra said, the FED is just at the beginning of raising rates, and these rates going to three and a half percent by the end of this year and a little above

four percent next year. Has the market adequately priced at it, No, So, so we were at the moment especially Yeah, last week we got to an extreme point where the market is actually pricing significant cuts in two thousand and twenty three, right, so essentially priced that we're gonna have a nine month tightening cycle and then we're gonna start cutting, right. So obviously the hikes are up prices bigger than its normal for a cycle, right because we're talking about fifty and

seventy based upon steps. But nevertheless, we were pricing hiking cycle that was going to be essentially a year and then the cuts were going to start that I think is what's very questionable. Um, I think we're gonna have a situation where the services prices are going to be sticky and it's going to be very very hard for the FED to to switch to cutting mode. It might be the case that we're not gonna be talk about seventy five basis points forever. Maybe we're gonna go to

a more slow pace of up tightening. Maybe we're gonna plateau at a high level of rights. But this notion that the FED is gonna flip from super hawkers to getting ready to cut within a year, that I think

is too early. And I think we're gonna push that out and and that's not priced yet, Ian Tilson, to get your view on things, and so why it's a bit of reality check from human Extant tainst norfic that Greg Villier with us on the elections on what we learned, and I guess it was, no, it's not the first Tuesday of June. We're late in June, and he was, we had an election with some results, Greg, I want to go to what the Democrats need to do to not focus inside the Beltway and have a Democratic Party

strategy across this nation. Kate Zernk in The New York Times destroyed the Democrats this weekend, saying they've simply failed to go across the nation an organization. Yeah, you would think they'd be doing a lot better time on so many issues. I think that there is a need for something more unified. Maybe the abortion issue will finally get the party together. It's given them a catalyst. But you and she and her piece are right. It's there's a

lack of unity and strategy. A single sentence in your note this morning on the governor of California. What does good Mr Newsom need to do well? I think he's running. He's starting to run some ads. I think he's making noise like he may run. You know, everybody's frozen in place right now because of Joe Biden. If if Biden announces he's going to seek a second term, which I doubt, but if he does, that changes everything. If he doesn't, I think Newsome runs, and believe it or not, don't

shoot the messenger here. I think Hillary Clinton may give thought to one last run. Wait what say that one more time? Greg? Yes, I can't let that. Yeah, I mean I do. There's been a lot of speculation in the last few days that if Biden doesn't run and the Democrats don't have any clear favorite, that she might hop into the RACI seventy four that makes her, you know, fairly young by today's standards, But I do I don't

rule out one last run by her if Biden doesn't run. Well, there's a lot to go on that particular line of questioning Greg But I do want to go back to the task at hand for all legislators right now, which is trying to deal with inflation, which is the primary concern for a lot of investors, and social issues creeping

up in terms of priorities for some voters. But is there any chance that this Congress could really take action in a material way from a legislative stance in terms of financing different kinds of programs or offsetting some of the inflationary pressures given the lack of unity, and given the polarization that you're just talking about, Logically, you would think the answer would be yes, they will. But logic

does not dominate Washington. And I think that while there's a lot of talk about terrorists, a lot of talk about other programs that might help a little at the margin on inflation. I don't see it. I think I frankly, I think Ukraine is more important. And as long as this war continues, that we're gonna have high energy prices at high food prices. I think that's the bigger factor.

So Greg, if that does spur some sort of recession, where is the fiscal impulse to respond, typically doing the exact wrong thing at the exact wrong time, You're going to see Congress now get very frugal, not a lot of spending Republicans will take the house. They're not. They don't want to spend a lot of money. So just when you have monetary policy tightening, you're going to see fiscal policy tightening as well. Gregg frame it for me.

A Sunday evening the end of March, Lyndon Baines Johnson, overwhelmed by Vietnam, among others, said I not gonna run again. I was sitting on the couch, remember clear as a belle a nation stunt. What is Biden waiting for or does he have to wait for March of two thousand twenty four. Well, the March that you refer to with LBJ occurs on November eight here in the US. That's the election, and if the House flips, which I still

think is likely. Said it is a tougher call now because of abortion, but you know that could slip as well. I think that would be the catalyst to push Biden out. It's not just his age, it's his polling numbers and the elections on November eight, Greg, we've got to talk about the other ticket, just briefly. That testament yesterday. I

wouldn't you a view on this. Does that change the support that the former president gets and does that open the door a little bit wider for the governor from Florida. John June of the year two will be remembered as the month that pretty much finished off Donald Trump. It's it's not just that he may get indicted. It's not just that he has lost some altitude in the party. It's the near fact that more and more of his own supporters are telling poll takers that one terms enough,

we really are not excited about him running again. And that's his own supporters who are now starting to say that that's the one to watch for show. Greg. Thank you, Jeff Investments. 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