Surveillance: Positive Real Yields Unlikely, Bianco Says

a broadening and price pressures go again too next year? Yeah, I mean it's it's the key debate that every central bank has to sort of focus on. How assistent is this supply show? No question, there's a supply shop at the moment, and we're going to see it in Q three g d P numbers. We're thinking of states when they come through. But the question is how assistant. So for now we've had the view and we share this view that we are seeing a relatively transit. Treatments apply restraints.

So if you look at, for example, participation, it's been very lack luster in recent months. We do expect that to pick up. I think part of this is just a natural indigestion. I don't buy too much that it's it's due to unemployment benefits. Certainly in states we've seen that drop back. We haven't seen a miraculous recovery and labor supply. But I think there is a natural indigestion, and I think that indigestion should fade as we move

into the false quarter. But if it doesn't. If it doesn't fade, then you are seeing a more restricted background. You are going to see earnings continue at the sort of relatively elevated monthly place that we see at the moment, and that's something the FED has to take count of. Effectively, what you're suggesting, or what it would conclude, is that

you're seeing a bigger supply shot than this pandemic. Now that might be because you know, the workers that we're looking for post pandemic a difference to the ones that were employed pre pandemic, and there's a skills mismatch. There could be all sorts of issues. We don't think that's what's going to happen, but that's what we're going to see over the next couple of months, and the FED will have to if it changes that that transitory outlook David,

you and everybody else has lauring a GDP estimates. You've got five point seven percent now and in the next year four point three. Is that a linear extrapolation down a potential GDP UM? No, because I think the potential GDP adjustment that's going to come through UM is a long term figgure, right, So it is a linear extrapolation of the supply shop that we see coming through in the third quarter. We do think that that that's been an impact, but I don't think it's something that we

should therefore extrapolate going forever forwards. We would still see US GDP potential growth in the fullness of time and somewhere around two. So I don't think that that's too much concerned. But in terms of the supply demand imbalance, which is critical for the sort of inflation pressures, then yeah, I mean, I think it is that supply has reduced rather than to the drop off in the land. David.

Investment manager after investment manager has come on this show and said that right now the dynaminism of the U S economy has been pretty much priced in, and it's time to turn to to Europe and potentially even to Asia. For equity exposure. Do you agree, Well, I think the US, the US rebound has been remarkable. It's got to the point where we are closing the Apple gap. We're looking at a very strong growth for that year next year, UM that's going to continue m this this excess demand,

and I think there's still strength in the US marketing. Now. You know, we can talk for all your life about whether we see corrections coming up over the next little while, but now I think you know, in general the U S sector mark is going to remain relatively well underpinned. But in terms of should we switch from a sort of growth model, which is obviously something the US, you know, really exemplifies, or a more value driven active performance, which

is perhaps something where Europe will do better. Then I think as we start see really you pick up towards here and we should start to move more into that that value area. So I think there is scope, certainly for more of a pickup to come through from Europe, but we're not. Let's bring things up with the FED timeline if we can. In the time we have left, we pushed against the clock here. What are you looking for into this September twenty two meeting? And beyond December

gets really interesting. The fIF is the FED, the sixte is the e c B. So I think as you look at September, they cleared the decks and suggest that at any point they could announce paper. They won't do it in September. I don't think they won't do it at the end of October. I think they'll announced in

December and papering will start in January. And there's a debate about whether it comes a little bit quicker than that, But yeah, you're right with with the FED lightly to announced paper in December, with DCB clearly lining up a big set of policy moves at that time. December is going to at the year end, it's gonna be an interesting month a month obviously outlook, David, thank you. Going to hear from you as always the weekend, Sir David Page,

actual investment manager's head of macro research. Right now, watching all this is m alody and value at Wells Fargo Asset Management in active equity as well, and on the banking industry right now, on the big banks, on the super re generals, is their value There is Shanali mentioned they're dealing with a digital onslaught. Do you find value in the big banks? I think our investment teams TOM really do see value in the long run for the

big banks UM. But as you know, they're tied to rates and UM, so as you see rates rise, the banks will benefit. They've also benefit from some of the lending UM as you guys talked about earlier. But they are still attractive from evaluation standpoint. The secular challenges that the banks have, though, are going to continue, so I think you have to be selective as an investor. Well, can we talk about who that campaigns with now? And

they're not competing with each other anymore, aren't they? They're increasingly competing with others outside of their industry, the traditional industry. That's right, they are And I think you know, in the past people worried about credit cards, with the credit cards were always linked to banks UM and benefited the new technology, even bitcoin itself. How does that change the future of banking both here and abroad globally. So UM, I think those are all the things that investors have

to think about. And you know, look, I haven't had time to really look into these changes at Bank of America, but any bank that's thinking about the future is thinking about the right things and making changes directed towards that. And as an investor, this raises an issue of bold moves. Do you want to see banks making bold moves using some of their cash maybe to make acquisitions of smaller tech firms to try to adapt the new normal and banking.

Is that something you would reward? Again, it depends on the individual company, because when our investment teams are looking at companies, they're looking at what does their balance sheet look like, what has been their growth rate? And then you know, sometimes you want to see a measured response, both thinking about current business conditions and the business you have at hand, but investing for that growth over a

long period of time. You don't want to just and you don't want to lose the customers you have today or the business you have today on your way to the future. So most of the time it's measured, especially for mature industries, but there are times where you have to accelerate, especially a piece of the business. And as you pointed out, the banks have gotten very far behind in technology. They have outsourced a lot of it to

make it easy for you and I as consumers. Um not that surprising now, coming out of oh eight oh nine, um, the financial crisis, all of the other things they had to focus on. Right now, it seems like the banks are trading in a bucket of cyclicals. The banks are trading alongside airlines and other reopening stocks as people look

towards the post pandemic reality. I'd love to get your sense and something that we saw yesterday where when we see dat or information that puts a damper on this narrative, like Airlines coming out and down grading their expectations, you saw the shares rally significantly and lead the charge. What do you make of that? Is this basically the appropriate response from investors like yourself? But I think what the market is finally recognized and as something that we've been

talking about for a long time. Don't pick growth or value, or don't pick the marketing, you know, the economy opening or back on shutdown. You have to have a collection of both. And it's because the growth rates in some of these cyclical companies are the strongest of any industry. And it's not surprising. UM. I think there's also a lot of demand and pent up demand, as you all talk about, and so you see things like yes fears of the delta variant, but also a greater proportion of

the population getting vaccinated. And so we're at the tipping point where things are going to get better and investors are always forward looking at what's going to change and always enjoy catching O with you. Thanks for being with us, and Lady the West Fonca Basset Management, head of ACTID Equity. Right now in bonds the US rates, Sadra Rajapa joins us with society general. Wonderful to have you on and I just want to go to one phrase within your

good research note, which is overwhelming demand. What is the why of overwhelming demand for bills, notes and bonds? There's just a lot of cash in the sidelines, right, I mean, this was a week where we got spectacular amounts of of supply, not just in treasuries but also in corporate bonds, and yet everything was absorbed well by the markets. You have over a trillion dollars that the that's parked with

the Feds over an r RP program. There's just a lot of cash to be put to work, and policy for the most part looks like it's going to be somewhat and nine there's no fears of taper, either from the e c B or the U or the the Fed. So broadly speaking, I think that the market parties but feel very comfortable putting money to work. Here, Which duration is most attractive, which duration has the silliest demand? Well, I think you're seeing demand pretty much across the curve.

I mean, the front end is a little bit distorted because bill supplies going down as we head into the death ceiling debate, But broadly speaking, across the curve, you know, three stents thirties, we've seen very very strong demand from end investors. I mean you're seeing demand from pensions and insurance companies for the very long end, the intermediate sector, the ten year bond as well, we saw very good and investor demand. So I think that there's just a

lot of work cash should be put to work. Equities are all time high. It's possible that you're seeing some of these acid liability managers put some money into bonds as well as a diversification going forward. What is the signal from treasure yields where they are at the time of supply. Is it just people looking only in the next couple of days and weeks, or is it a statement about low growth going ahead. Um, I think we're

really waiting on on center banking policy. I think we're looking for you clear sign that we've made substantial for the progress on employment so that the FED can start tapering acid purchases. But I would say that in my conversations, the preoccupation is much more on the inflation side and whether the Fed can and will raise rates sooner than the market expects. So we just don't have enough clarity.

So the bond market fields a little bit like a deer cotton headlines, waiting for more information before we could reprice higher. Although the information that we have, you know, the Fed is going to wait for a very long time and probably a much longer than they have ever before before raising rates, before tightening policy. In any way, we are seeing inflation. We just got that PPI data that came in, uh, you know, pretty much in line with esmiates, but the highest going back a decade. We've

gotten this idea that wages are going up. At one point, we'll inflation called the Fed's hand and actually slow down growth while crimping a lot of the economic activity that corporations depend on. So that's a very good question. List and I think that we just don't have enough data yet for to make that assessment. But you're right. I mean, to me, what's really concerning is the areas of inflation, especially things like rents, medical medical care costs, wages, UH

and supply chain destructions. These all tend to be somewhat sticky, and that could lead to a persistence of inflation, which I think is an underpressed risk in the market. We just don't have enough data to corroborate that. I think what we're getting so far anecdotally from CEOs, even the Beige Book shows that there are a lot of supply chain instructions and and and uh, you know, corporations not

being able to source materials. But we just have to see more data points before we can see what the impact will be on and the feed through to the consumer. And Sivadrea said that it's not being priced into the market. Which markets. Is it just the rates market that yields should be higher, or is it incorporations that yield should be higher. And frankly, some of the corporate bind uh

spremiums or spreads should also be higher. So I think it's in all markets, right, even equities don't seem to be that concerned about the rise and potential for a persistence of inflation or rising inflation. I think the bond market has break evens tenny break evens inway between two twenty five and two fifty. So again, longer term inflation expectations are are quite high, but not out of control. But you know, going forward, the question is how persistent

this inflation will be. And when there's evidence that that there's resistence of inflation, you'll see all of these markets react very very quickly. You'll see a rise and break evens. You'll see that also reflected in the equity market. We're just not there yet. We're not there yet. Give us a tenure call out twelve months. I mean, I'm absolutely fascinated. Are you Are you in the range or you outside

the range? Um? We are thinking that a year from now, we just published our forecast yesterday will be somewhere between two and two UM. Again, I think that this is we're on the high side because we think that uh, you know, the market's enterprising these these risks, and also, uh, you know, ten year yields could gradually rise from from here on if they're if fundamentals start to improve. I think that there's a lot of pessimism on delta delta variants as well as a lot of pestimism on the

stowdown in growth. So once we get through that wall of worry, I think that there's a trajectory towards higher yiels from here on. I looked abroad at the demands of the market, and you know, it's just simple or clipping a coupon. Is anybody with that call on yield managing for total return? I don't think so. Yeah. So I think that the real risk in the bond market. I think that is that is the fact that people aren't really focused on on real returns. Right, you look

at tenny real yields, they're negative one percent. Even if you look at high yield. If you inflation is going to be in the context of fortified percent for the next several months, you're not getting very strong you know, negative in real returns. So that has to be a concern for anybody that's holding bonds, and that's not again a concern that's reflected in the in the market. Given the fact that deals are stubbornly low, I think that that repressing has to happen over the next year. We're

on the Canada' Sadbantra. Do you think the fetch starts to worry they've got it wrong? I would say probably sometime early next year. If these inflation prints that we're seeing, the hild fish prints that we're seeing persist, I think that that's definitely going to be concerned, and the Fed's actually being very very prudent. What they're doing is preparing for that now. I think that they start tapering acid

purchases early next year. They probably end by the middle of the year, so that they can start raising rates if they need to in the second half of next year. So they're prepared for that scenario, but they're just not expressing that concern as of now. How they manage that message if they have to, will be fascinating. Sabantra, Thank you, Sapantraampre sock Gen. They had a US right strategy. John us now is David Paigeacks investment manager's head and macro research. David.

Does that resonate with you, sir, that we could see a broadening and price pressures going againto next year? Yeah, I mean, it's it's the key debate that every central bank has to sort of focus on how persistent is the supply show a question. There's a supply shock at the moment, and we're going to see it in Q three g d P numbers we think in the States when they come through. But the question is how persistent.

So for now we've had the view and we share this view that we are seeing a relatively transitory supply restraints. So if you look at, for example, participation, it's been very lack luster in recent months. We do expect that to pick up. I think part of this is just a natural indigestion. I don't buy too much that it's it's due to unemployment benefits. Certainly in states we've seen that drop back. We haven't seen a miraculous recovery and

labor supply. But I think there is a natural indigestion, and I think that indigestion should fade as we move into a fourth quarter, but it doesn't. If it doesn't fade, then you are seeing a more restricted background. You are going to see earnings continue at the sort of relatively elevated monthly pace that we see at the moment, and that's something the FED has to take count of. Effectively, what you're suggesting or what it would conclude is that

you're seeing a bigger supply shop than this pandemic. Now, that might be because you know, the workers that we're looking for post pandemic are difference to the ones that were employed pre pandemic, and they's a skills mismatch. There could be all sorts of issues. We don't think that's what's going to happen, but that's what we're going to see over the next couple of months, and the FED will have to react if it if it changes that

that transitory outlook. David, you and everybody else's lawing a GDP estimates. You've got five point seven percent now and in the next year four point Is that a linear extrapolation down of potential GDP UM? No, because I think the potential GDP adjustment that's going to come through UM is a long term figure, right, So it is a linear extrapolation of the supply shock that we see coming through in the quarter. We do think that that that's been an impact, but I don't think it's something that

we should therefore extrapolate going forever forwards. We would still see us GDP potential growth in the fullness of time and somewhere around two per cent, So I don't think that that's too much concerned. But in terms of the supply demand imbalance, which is critical for the sort of inflation pressures, then yeah, I mean, I think it is that supply has reduced rather than into the drop off

in the land. David the investment manager after investment manager has come on this show and said that right now the dynamism of the U S economy has been pretty much priced in and it's time to turn to to Europe and potentially even to Asia for equity exposure. Do you agree, Well, I think the US, the US rebound has been remarkable. It's got to the point where we are closing the apple gap. We're looking at a very

strong growth for the year next year. Um that's going to continue this this excess demand, and I think there's still strengthen the US marketing. Now. You know, we can talk for all your life about whether we see corrections coming up over the next little while, but no, I think you know, in general, the US sector arek's going

to remain relatively well underpinned. But in terms of should we switch from a sort of growth model which is obviously something the US, you know, really exemplifies, or a more value driven act performance, which is perhaps something where Europe will do better. Then I think as we start to see really pick up towards here and we should start to move more into that that value area. So I think there is scope certainly for more of a pickup to come through from Europe. But let's bring things

up with the FED timeline if we can. In the time we have left, we pushed against the clock here. What are you looking for into the September, the twenty two meeting and beyond December gets really interesting. The fift is the FED, the sixteenth is the e C big So I think as you look at September they clear the decks and suggest that at any point they could announce paper. They won't do it in September. I don't think they won't do it at the end of October.

I think they'll announced in December and papering will start in January. And there's a debate about whether it comes a little bit bigger than Yeah, you're right with with the FED lightly pronounced paper in December, with bTB clearly lining up a big set of policy moves at that time. December is going to the year end. It's gonna be an interesting oneth A Monstrobos the Outlook, David, thank you. Going to hear from you as always each other weekend.

Sir David Page acts for Investment Manager's head of macro Research. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m 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 Keene and this is Bloomberg