Surveillance: Real Yields with HSBC's Major

could join Bloomberg in our New York studios. Forget about all the market talk here. What is the experience of living in Hong Kong under quarantine? It's it's getting easier, much easier, And uh, I can't wait to go back because we're we're we're free now that there is no quotantine. So I've I've done my time. Now. You think they can salvage their relationship. I don't want to get you

in trouble. They just be management. But you are optimistic they can salvage their relationship with Western banks to stay a financial capital. Yeah, I think I think all the moves have in place. In November is a big month. People are going there. Yes, we're thrilled to join us for this entire half hour. You are known as someone that has said price up and yield will stay down. We've seen a major adjustment here. What is the new major look on how yield finally crawls lower and price higher?

When do we get there? Don't you have a show called real Yield? Is that one of John's one? And you're doing it? At least it's relevant now because because you actually do have a real real you know it's relevant because Lisa's doing it and John's not doing Actually, yeah, let's have fun at John's expense. Seven continue, Mr Major. But but if you can get real yield anywhere near

two percent, that covers real GDP. So if you're building a portfolio from scratch, and you know this is without being an cumbered by all of the carnage markets that last few months, if you're building from scratch, two real yield covers GDP in the longer run. So we don't know where inflation is, it seems to be a good place to start building a portfolio with a real yield close to So let's just put this into something that's

very clear. Do you see ten your yields at four point three percent in the US see screaming by load up because we are not going to see yields like this again. Ye. Well, fortunately I work with some professionals who contained my enthusiasm because I would have been buying every week, right. So, um, that's why I'm not a trailer. But the point is that the valuations today show a

very strong recency bias. I mean, I can honestly believe that yields will keep going up in the near term, but but you could also build a plausible scenario that there's a hard landing and that yields should be less than two percent. You can build that scenario. The question is what waiting do you put on it? Right, So at the moment, we're pricing a very high probability of the FED going to five and staying there forever, which

that doesn't seem plausible. Well, a lot of people well, and this is something that I was really excited that you were coming on to push against. What I'm hearing increasingly is that there is a stickier, more pervasive inflation over the long term, and at the FED funds rate is not going to go below two percent anytime in the next decades simply because of the de globalization or the localized globalization, some of the population trends, and some

of these other macro factors. I don't think the longer term picture has changed, Lisa, demographics, debt, wealth in the quality that the explanations for low our star have not have not reversed. I think you can give me some arguments that may be under right or underpin the arstar, but not reverse it. I don't think you can reverse the pre the pre pandemic trend just to quickly follow onto this and do you see where do you think we're going to see zero percent rates in the next

five years. I think you'll get a hard landing, and the probability of the market pricing and return to the zero cannot be uh ignored. So it's it's all about probabilities the markets of pricing rates at five right, so the two year yield can be a hundred to a hundred and fifty over the current money rate money rate in an easing cycle, the two year can be a

hundred and fifty through the money rate. So so that's not happening this week, but sometime next year at the market would not be wrong to be pricing in an easing cycle at a zillion angles. Here if you're on radio Stephen Major, where this with HSBC for this entire half hour and the one angle I want to talk about, as you mentioned, the breakers that could be there and what we're observing right now in the markets, d x Y getting up near a one fourteen is with our question.

The focus at the i m F was on swap lines. Yeah. Is it enough of a power in the foreign exchange market to see dollars strong where there's a swap line demand or a desire for swap lines even if I can't get them, And is that enough to make your own pile blink? There are a number of economies in Asia where there's been a tightness in the funding markets recently and looking ahead to year end kind of pictures. Yeah.

We we had a fire drill with the UK which shows what what what lessons did we get from the UK? Fast moves are dangerous. It isn't just the level, it's a speed right, Um, So I wouldn't be surprised if the FED was watching that very closely. Was there a point a week or so ago when people were worried? Um? You see at the moment what happened in the UK

wasn't enough to distract the FED from its hawkishness. But who's to know if something spills into a market somewhere, And in fact, it would be wrong with me to speculate. But but there are so many pools of leverage in the global economy, so many areas that need to refinance. And when the dollar is moving like this and the rates are so high that spread it so wide, Um, there's going to be some pain. So I don't want to come on here and speculate as to where it is.

But but but you're right, the swap lines are being looked at because there's tension. Do we have good data now? John burn Murdach. First thing I tweeted out today over at the FT with a fabulous essay on the opacity

of Chinese economic data. Do you feel, sitting at your desk in Hong Kong that you have good Pacific room data, that you have good global data or the tensions Germaine as you see in the swap lind I think, I think we're always struggling to catch up Tom and we're all experts about l d I now in the UK. But we weren't before, were we. Well, we can all quote numbers and talk about what happened, but can I can I do a shout out to Jordan Rochester number

just killed it. I found a number of paper from four or five years ago on l D I absolutely nailed what was going to So we're all experts in ld I and we're also all experts in British politics. I'm wondering as you talk about the speed, and this is something people have been talking about, what happens to ten your treasury yields if Japan abandons, perhaps it's PEG or has some sort of failed intervention as we see almost one one one point nine right now on the dolivers.

We're trying to game this one out um with the with US yields here, if the y c C was changed, if there was an iterative shift, it would have much less impact than where yields were one year ago. So so if Japan had changed its policy, global fixed income could have been de anchored a year ago. If if they were to do it today, it kind of doesn't matter so much because they're going to be adjusting into a bigger spread because US yields are so high, compared

to japan UM. So the Bank of Japan estimates that the ten years GB would be around seventy eighty basis points if there was no y c C. But we're not. This isn't black and white. It's not going to be no y c C. It's going to be an iterative shift. What you're saying, though, is important, which is we've already done a lot of the work to reduce the shock values.

How quickly the moves can be. Does this mean, perversely that you end up with yields higher for longer because there isn't some sort of trigger that causes some sort of monetary policy to step in higher for longer. Well, that's a good one. So is that the opposite of lower for longer? Exactly? We saw that for a long time.

I think that when when when you've had a once in a century pandemic and all the other supply side shocks that we've had, we shouldn't expect a return in the space of a year to what we had before. It's a multi year process. I think that three to five years out will be back where we were in two thousand nine. And what a joy some quiet moments here with Stephen Major of HSBC in a very unquiet time.

My study, and this goes back to Martin Feldstein of Harvard, is if these things end stochastically, things move, and they don't level, they don't plateaux, they get pointy, they turn around in reverse. What is the stochastic event that will allow some of the carnage I see on my screen to reverse? That's that's right, Tom. I think that it might even be a biomodal market. So you've got one mode that's got this strong recency bias, and then there's

the other one that prices in an event. I mean, the facts are that the median number of months between the last hike and the first cut, based on the last seventy years of data, guess what four months? The mean is eight. So it's skewed because of the two thousand and six two thou eight period. But my point is you just just look at the numbers. Once they've hit the peak. The market is not wrong to be

looking over the other side and um, what's the event? Well, the UK could have been if the UK event of fast moving yields and disruption somehow infected affected the US financial markets. And I'm talking here about money markets or mortgage markets, or you said swap lines all this stuff. Who knows that that makes the head think twice about going all the way to five? Or you're living Hong Kong, you're living in the the anti science of China. Fine, the

anti science of monetary policy is Japan. Everyone knows this. What are the ramifications to the steve major world? When they colpitulate on y c C in some face saving form and you get yeah, one to one nine over literally a cup of coffee, what happens to the system. I don't think you get the shock that you could have had if they had changed y SEC a year ago. Because of where US yields sit today, they're so far above so they can soak up easily a Japanese move.

I imagine that the Japanese curve would would flatten, so it will be a bare flattening because the curve is so steep between ten and thirty years now in global fixed income that's not gone unnoticed. If you're sitting in Germany, you can switch from your local market into j g B s and pick up yield because of the curve steepness. The hedging hedging, because because Japanese rates have below zero

at the front end, whereas ECB and FEDER hiking. So so you know there are opportunities here in global fixed income from the divergence to go to your arch thesis, is they manufacture? You know, I'm going to gitoralize here in fay a pseudo inflation. Are we essentially going to have a stochastic move back tow disinflationary trends and the arch major theory, which is some forms of deflation? I

think so. And from a Japanese perspective, if you've waited thirty years to come out of deflation, a couple of months of plus two plus three doesn't do it. And and that's the Corona approach. We don't know who Coroda's replacement is going to be. He or she won't be in place until next year. UM, so it's just speculation on our part and I feel very much that's all we're doing, right or we're trying to game it out anyway. And now, folks, we dive into our World Cup coverage,

we do so that jack fair, which is unfortunate. You of course have a global mandate. You're gonna be in the Middle East. I guess you're going to attend the World Cup. Can you explain to your mortals like me, how we see a good product with eighties six degrees on the field. It might be a slow game, it could be completely different. I'm I'm I'm going to go and see some England games. Um, I'm lucky enough to get tickets. But I think it's going to be a

strange World Cup. It's going to be surreal because in that kind of heat it will be it will be a lot cooler than it is in the summer, obviously, but but the game is going to be slower and I guess more measured. It's not going to be as as crazy as the Premiership because you've seen how fast how fast they play in the Premiership. You've seen it yourself.

And sterling and guilts. Let's let's finish say I've got one four's, we've moved a full stick here on sterling and this morning one twelve down to one ten eighty seven. It's inappropriate for you to comment on the politics, but please and the pressures at Governor Bailey faces, well, he's he's reiterated the independence and um, I think he's been pushed into a bit of a corner. I mean it didn't help that the Bank of England was was hiking a pace less than the FED before the events in

Downing Street. Um. But the Bank of England's role is quite interesting here because they are buyer of last resort and they've shown their ability to do that. And um, I think the guilt market has actually calmed down quite a lot. And one of the big differences between the UK and US is that things can happen very very quickly. In the UK, all of those fiscal proposals have basically been abandoned. Could you be lying ten through year guilt this morning? I think I think you could. I think

you can start to look at it. And I'm interested in how guilts look compared to equities, for example, and and there there will be a lot of fund managers looking at those relationships and bonds versus equities. It's the same in the US. There's there's there's a point when you have to start favor bonds with the risky assets. And I think that that's ultimately for the Bank of England,

it's um. Uh. You know, they've got the QT and they've got the q E, they've got the policy rates, they've got to work with the d m O on on patterns of issuance which could which could be modified. I think that the worst has passed us now and I think we'll probably see a period of calm after after the shot. The period of calm will come after your view forward for two thousand twenty three. Some a theme for two thousand twenty three that we may see written by HSBC. Yeah, I'm not gonna front run the

research because we haven't published. I mean, did you hear that, folks? I didn't hear that. We haven't but we haven't even sat down. I think we'd be pleased to get to the end of this year trying to Stephen Major, thank you so much, greatly, greatly, greatly appreciated this morning. He is with HSBC and this is what we try to do to bring in the conversation on this in settled

times and decidedly unsettled times um as well. Alicia Levine actually joins us here without the star destroyer behind her. Alicia Levine, head of Equities and Capital Market Advisory at bn Y Melon Wealth Management. What is your view, Alicia, and how you view this move upwards and yield? Are we watching something break in slow motion, So I don't think we're watching anything break. But we shouldn't be surprised at this because that last cp I print really said

it all. Core inflation is now higher today than it was in two Forget the top line, it's the core, and that's ultimately what central banks are looking at and what the FED is looking at, and that's our problem. What's amazing to me is that ratch up and yields this week, the equity market kind of shrugged it off. You would have thought there would have been a more dramatic reaction there. So I think we we get something in the next few days to reflect what's happened with

yields and with rates ratchetting up higher. You are hugely adept at the mathematics of the moment. I want you to correlate the bond dynamics we're all talking about over to how you reset for equities in the next year. Can you link the two beasts together or are they

non correlated? So I think you have to link the two together, because in this year, equities were really the caboose and the bond market was driving the train here, which I get teased about blaming the bond market but it is true because your multiples get compressed when yields and rates move higher. What the market is doing is pricing in an over five fed funds, right, You're going to feel it. On the equity side. You can't avoid that. It's it's all one system. You don't have you don't

have assets that just trade on their own. It's against the risk rate in a log Euclidean space, or even if you go to some fancy X y Z space as well. Is it nonlinear from here in the dynamics of the bond market pushing stocks around? So that that's a really interesting question. You're asking has the work been done right? You're asking have we had enough multiple compression? And I think the answer is the direction is still

an evolved hell way. But I do think a lot of the multiple compression has already been taken care of. Because if you think we're headed into recession the first half of the year, you're going to wind up with lower yields eventually, and that, in a weird way, is going to support the market. Also, the earning season is coming in Lisa, as you pointed out, better than expected, in part because of inflation, in part because we had the financials report, and so they're doing well on net

interest margin. And you know that the high end consumer is spending. Think about Nordstrom's, think about LVMH, I mean and travel. So people are out there spending. It's not a total collapse yet, so you could have some stabilization as you have to your to your yields move higher. So what happens first the FED blinking or seeing gilds kind of get out of control and cause some sort of torpedo effect in the multiple valuations. So I don't think the Fed blinks. Okay, the Fed will blink if

there's an event. And right now, the UK walked back from their events, which walk back the event on the global bond market, and they seem very intent on getting higher here and they've they've really trapped themselves, right, They've trapped themselves because they keep on talking about c p I, which as you know, is backward looking, because they want to signal to the the average household that the FED

is on the inflation jobs backward looking. We still haven't seen the effects of the rate hiking cycle for another six months. So you know, you have signs housings rolling over, you have signs of a slowdown, but the Feds out there hiking with old data. Meanwhile taking a look at what we're expecting from earnings, we get some of the big tech names next week. We have seen snap that was concerning, and it's been very concerning this morning for

owners of Meadow, which already has tanked. I mean, Facebook has lost a significant portion of its value. How much more do the tech bubbles have to burst at a time where they've already been devalued de value dramatically. So high growth names when they stopped growing, high growth ly get not only in earnings and earnings down grade, but

you get the multiple compression as well. So to the extent that you have stuck, they're still trading at forty times next Year's that that the tech names are still too high and ultimately those names have not been been driven down dramatically. Slip this in if there's a factor adjustment into two thousand twenty three, and I'm really big on the zombies are going to be taken out in this new rate regime. What do the non zombies do?

In which factors matter? Next year for the profitable non zombies, So there will be a wave of m n A coming from from the non zombies and cheap right, You're gonna have really fire sale of companies here for i P as well. I mean you could have mn ages for i P in some of these sectors. But you know, ultimately, to the extent that companies raised cash during the time of near zero rates, you should have some resiliency there.

I think the credit cycle happens in the private markets, in the in those middle markets where they couldn't quite raise the cash. Because the corporate America is flushed with cash right now, the refinancing there is not going to be the problem, and ultimately the American consumer. You know, I'm looking at the the unemployment data yesterday, the new claims data. I mean, we're at rock bottom. There is

not a problem in the labor market here. So you know, you have this weird push pull where you're getting the bullup effect on inventories and you've got labor working and spending. Alicia Levina, too short. Thank you so much for being with us. Alicia Levine of bn Y mel And Wealth Management. Mark Chandler has written books on the astrology of foreign exchange,

the interdependencies nation to nation. His chief market strategist of Bannock Bird and we start strong with Mr Chandler this morning, Mark, let me go to Global Wall Street and what everybody wants to know, when is the comfortable time for Ministry of Finance in Japan to step in on one fifty one yen? Do they do it now? Do they do it in the quiet of their weekend, or do they wait for the Asian Monday morning, our Sunday seven pm.

It's a great question time after they intervened at the end of last month, and I think they did three things that make the intervention less than successful. First, it was not a surprise. They continue to warn the market they were planning to intervene. Secondly, they did it unilaterally. That is, there's very little support from you. It's Europe where the United States for b o J intervention. And the third thing I think they did they by intervening,

they did not signal the changing policy. And so what we were telling our clients was that the only thing worse than intervention was failed intervention, and I think that's what's happened. And so I think the Bank in Japan is in a tough position. If they do intervene, it probably won't be as successful as a as A as a last about they spent twenty billion dollars practically to get maybe a week's night, a week's night worth of pleasant sleep. Mark. The Chandler word for acceleration, for a

rapid advancement is convexity. There's clear convexity and the unraveling of Japanese yen, Turkish lear and that. Do you anticipate a fourth quarter and in the two thousand and twenty three of acceleration in these trends or can we find stability? Yeah, that's the that's a that's a million dollar question the time.

I think that the dollar is close to a top, partly because I think that FED policy, as the market's got a priced in there five percent now at the seventy five basis point hip in early November and again in December, and another rate hike early next year, I think that inflation is close to a peak. Uh, even if the core rate is too sticky. I think here's what I'm looking at. One, the annualized rate of cp I was over ten percent. In Q two, the annualized rate of U s c p I headline was still

above ten percent. Q three fell to fell to about two. So I'm looking at inflation to be coming off. I know that it's very controversial right now. I know many people have been burned calling for this before. But I think that we're coming to the tail end of this historic dollar move, and I think the Bank of Japan and the PBOC the Central Bank in China are basically playing for time until FED policy peaks, until the market

brings a dollar back off of these historic levels. Does this mean simply that it doesn't matter what happens in Europe, that this is entirely a FED story from your vantage point and peak inflation in the US, and that it's not necessary to see a material turning around in European region. Seems like it's heading into a really difficult ament. Yes, and I agree with that at least. I think that for me, there's two big drivers there. One, of course,

FED policy, everybody everybody knows about that. I think what's less appreciated is that there's been a serious deterioration of Europe's traits balance as well as Japan's. So the deterioration of the external accounts, as economist would call it, I think, is another factor weighing on the currencies. But I think in the most immediate sense that once if the Federal announced today maybe a FED speech says that we've done. I think you see the dollar off very sharply, Mark,

you've just driven the tenure real yield ever higher. Rounded up, we're up at one point seven eight percent. We've moved mightily like eight percent to my study of two point zero five percent is somewhat of a normal tenure real yield. Where's your number on that? What is a normal tenure real yield? Yeah? Kind of truth. I don't have a clue. And I think that because I say that partly because no see these things like a real yield, our star, he can't touch them. There's sort of uh abstractions, the

statistical abstractions. And I think that when you look at FED funds rate, which is really what I focus on for the real rate, I think we're still looking at a negative real rate on Fed funds and typically looking for a further out to the two year you get a positive two year yield real yield, and we don't have that yet. But I think this is a different cycle, and I'm and I think that because it's an unusual cycle. It's all these shocks whether it's COVID, whether it is

the supply shocks, whether it is Russia's invasion. I'm just not sure that these benchmarks are very useful. Now, this is really really important, folks. This is why we have channel leading off today because a he does not have a clothe There's no question about that. This is the

Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to two a m. Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for in site 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