Surveillance: Soft vs Hard Landing

and Massoo. How America's dumb is this? Heke today the penultimate hike of this cycle? Uh, it work could be. I mean we're very close, I think to the Fed. Uh, I'm finishing. UM. I think the key message though, is they can't kind of tell you they're about to finish.

They're going to obviously give a hawks hawkish message around that. Uh. And they could either sort of, you know, in the second quarter to you declare an outright course like the Bank of Canada, or they could keep it more uncertain in a way that almost say that, you know, we might be done, but we'll see how it goes in the end. I think they're going to be done, though, Uh, you know, around five percent, so this could be the

penultimate hike. On the back of that two ideas here you made national world nation worldwide headlines, I should say, was super restrictive the last time you were on is this a fat nearing or in a super restrictive phase? Yeah, I mean they are super restrictive. I mean it kind

of depends on how you look at inflation. And we we were we look at it very carefully in in a in a lot of different ways in terms of the impacts of inflation expectations, wage price spirals you mentioned earlier, and dissecting it in terms of demand drivers and supply drivers, and when you sort of dig really deep, uh, and I would argue the inflation story is looking very good. It is basically normalizing. We're putting to bed the fears

that inflation was in a whole new regime. And when you look at that, then essentially, when you measure uh monthly policy in terms of restrictiveness, both in terms of real interest rates and financial conditions, there's only one conclusion, and that it is super restrictive. And you mentioned NASTAC doing well, etcetera. But of overall, financial conditions are still very restrictive, and there is a danger that as you squeeze out the excess demand and profit margins, you're in

a hard landing before you know it. And that's why the FED has to be quite careful and not pushing

rates too high. Dominic, we're gonna talk to Richard Claire, the founder of DSGE or to talk about the time continuum on the X access the way I see it, and you mentioned this is an extended period of rates here or a little bit above versus pushing rates up up up to a higher rate level can extend it, and can an extended FED substitute for the migration to a higher higher rate absolutely uh, And I think the point is that, um, the idea of the soft landing

versus high hard landing is like a sequencing. You can basically do the soft landing, keep rates uh an extended period elevated, but in order to avoid the hard landing, you need to scurry very fast to get back to neutral, which we think and the FEDS certainly still thinks is around two and a half percent. And that's the story. So the danger is of of not doing extended but just for for example, to keep on raising rates means you just got much more scurrying to do at the

end of the day, and with with more risk. I would argue of making a mistake that you can't move fast enough if you're already you know, at say six percent funds, So basically staying around five getting to two and a half, that's doable. You do a bunch of fifty based point cuts in it's quite aggressive, but they can do that, and that way they avoid the hard landing. This isn't a choice of soft versus hard landing. It's

a soft landing until it becomes a hard landing. And that's why the FED needs to be very alert and that reversal and policy which we would expect in four not the year domin I can feel like a little bit philosophical as we talk about FED communication and the market's response. If the FED speaks and markets don't respond, did the FED make noise? Right? I mean basically, if the FED tries to give guidance laughing me, tries to give guidance but the market doesn't sell off, is that

actually effective in getting the Feds up? Who's laughing at me? In getting the FEDS message across? Yeah? I mean I don't think the FED needs to get the bond markets selling off. I mean, the bond market obviously is looking through all of this and discounting a pretty restrictive policy stance in terms of rates. Obviously, it's the financial condition side of it. It's basically the dollar and credit spreads

and equities. So I think if there's too much of a relief rally in these things, and they can definitely push back, and they can definitely sort of trying jaw bone financial conditions tighter by introducing this uncertainty around maybe the peak and the funds rate, the uncertainty about how how committed they are to actually a pause, and that's very that's very likely they'll do that. I'm not sure they'll do that today. They could hint at that, but it's certainly very likely in Q two or maybe in

the March meeting when to do that. And I think Larry Summers, you know, I mean, he said something sensible over the weekend and maybe the faith maybe the FED shouldn't I said that very carefully. Maybe the Fed shouldn't, you know, shouldn't recommit pre commit to tow hikes, and and that's really you know, it would be an interesting thing of the FED could perhaps have a bit more uncertainty around, you know, their policy going forward, even if

they are effectively pausing with the benefit of hindsight. That's the line in the morning, dumb run I've got nothing left, nothing left for today. If we put it up there, come on, Amy, give me that Summers something says the morning, Professor Summers, and we look for the panel in London, Lawrence Summers and dominate Custom. That'll be a graced in

a don't worry about it. He's not working up yet, Donnie Custom of Mr America's don't thank you now joining us Jerome Schneider, who's better than good in the short term space with Pimco as well. No, Jerome, I'm not gonna ask you about Tom Brady, but I am going to ask you what we've observed through the morning. What a January bounce? I guess you could take four or five six percent? And I know, Jerome, you're sitting with your Bloomberg and your Monroe Trader annualizing that out as well.

What's the now what for you after a January pop? Yeah? In reality, you know what used to be just a handful of basis points is pretty substantial, and you're right, Tom, the annualized returns you have in a single month now add up to something if for cash, that's something in the realm of you know, four and a half to

six percent, depending upon your strategy. That's an important factor to consider when you look at the landscape right now that's punctuated with economic uncertainty, potential for volatility, and we're at a crossroads right now where clearly the market is impass with the Federal Reserve and where they're going, and so that's gonna probably be reconciled over the next couple of weeks months, And as it is, it doesn't necessarily

portrayed to be a smooth ride. So we do still find value within that front end of the yield space, within the within the within the global bond world. However, I think it's what it really The question is not necessarily where to be on the yield curve, but more importantly, it's a discussion of how much to allocate the fixed income in general given the recalibrations we've seen. And Jerome was so important. Here is o b E where you're overcome by events and here Jeroma and I'm speaking as

a total hack. People in the mid maturity decide they want to enter the Jerome Schneider's space, and you get price up, yield down where it's no fun for you. Are you gonna be overwhelmed by people's running dashing to short term Well, there's actually pretty much a truando supply of that, and I think it's sort of met on

two folds. Number one on you have the of course people looking for moving from lower yielding investments now that they're aware that there is attractive options in cash, but there's also significant opportunities that persist, and it's really typically outside the traditional landscape of money market funds and tea bills.

It's more in buying short dated asset back securities, high quality commercial paper, things that really have self liquidating features and but yet remain fairly insulated to where we are

in the global economic cycle. That's the key. But I do think that there is an overall focus right now where people have shunned for more than the past decade, an overallocation to bonds, and that really cuts to the point right now of instead of a discussion of where on the yield curve to be, despite the discussions of where we are with the ft today, it's more about how do you want to create a more balanced portfolio given the yield enhancement that we can see for portfolio performance.

More broadly, the shift in tone drome that you have right now is telling to be because you are one of the most popular people, I'm sure in the investment world. About six months ago and everyone was plotting to cash and it was all about the appeal of cash as an income producing instrument. Now now it's fixed income is an appealing alternative to other assets, perhaps in a way that they haven't been. Does that indicate the people are moving out of cash at a really rapid pace and

going into other either denominations of credit or equities. Well, not necessarily, And I think what is still prevalent in people's mind is sort of getting getting a little bit stung by the third rail of volatility within the broader marketplace. People obviously don't really dismiss what happened in two thousand twenty two so quickly, and more importantly, when they see

periods of risk off. There is a mindset now even in the retail investor, to be very focused on how much volatility your portfolio is going to produce during those uncertain times. And so while people right might might seem opportunistic or perhaps see a Salter landing, given the real data we've seen over the real over the recent past, the reality is you're not seeing that risk appetite being as pervasive as it once was, specifically because that inciting

action was driven by extremely low yields. That has a factor that's recalibrated people's expectations to create a more balanced approach to how they handle risk and again focusing on the volatility within their portfolios, whether institutional investors or retail investors for that matter. So flows continued that you have observed at least into your funds and into the fixed income space at the same clip that they did, say

a month or two months ago. Yeah, No, I think we're seeing a sort of a pause right after the year, and people are really sort of accepting the fact that you know, these higher yields are are are are still here to stay. They're taking that initial step into perhaps money market funds. Some T bill suppli has come and that's sort of being met with some initial demands. But we are seeing people utilize this as a more strategic approach front dated fixed income LOA duration type of strategies.

Things really within the zero to five year part of the YOKER are really sort of giving people an opportunity set to create that balance. What I think is important right now is there's a natural tension within the market attention, which is that the market is clearly trying to forecast and get ahead of the perspective fed cuts that might come. From a historical perspective, the market is fixated that that comes.

But that's a probability based event, and what I mean by that is that there's an uncertain action that when we look at market pricing says there's a certain probability that will be assigned to it. It It doesn't mean with certainty there's cuts on the way at all. It's just the probability that that would happen. What's more important, though, is that the Federal Reserve is operating from the next chapter of that playbook from a historical perspective, and they're

fully in mind that there's lasting damage promotiflation. What it means for the investor is that there is going to be some reconciliation. That reconciliation isn't necessarily as painless as people might portray even if we do get that soft landing. Tom Jr. Own Lisa from Fargo emails in thanks for watching Lisa, and she says, does a guy like Jerome Schneider care about the death ceiling? Do you care? Yeah? Of course we care. Of course we care. But it's

a little bit too early. It's the prelude to the actual act, and not that we're forecasting any default situation, although that is a potentially remote uh situation that we have to be prepared for. This is not really a

discussion for today or tomorrow or even March April. It's well into the summer, and I think that we have a good playbook on how on how it happens for our point of view, where we say right now is really focused not obviously stay on the Fed today, but more over the past over the next six weeks, where we're going to be getting frankly more important messaging from the Fed in terms of the summary of economic projections in March, and so the March toward March is really

where we where we can see a little bit more definitive posturing in terms of the broader market impacts. The death ceiling is not something dou jure that we have to worry about perhaps perhaps being drump by the Tom Brady news. Trum Schinder, thank you so much for their coming in. Mr Brady. He is with Pimco joining us now, Christie Llick Klissman, the managing director for Portfolio Strategy over

Goverment Sacks, Christie, and a simple one for you. Are you expecting chairman Power to deliver a little bit of pushback later on this afternoon? Yeah, I mean it's a good question. I think you mentioned earlier already. UM, it feels like the data has been quite supportive and and you're making progress. I think the wage inflation is coming in, the services inflation is coming in. I think, um, you

are on on track for a soft landing. Certainly markets are shifting in this direction, so it seems to be like everything is on track. UM. So we expect him to reiterate the message he has given. Four. We expect three more twenty five basis point hikes and probably a relatively balanced meeting. You mentioned earlier to me the macro data would be much more important. UM. I think the central banks are probably a bit in state of course mode. Christian.

We talked to the head of the Norwegian Serving Wealth Fund yesterday, who's got an immense challenge moving the needle because of his mass, his size. Many of us don't have that problem. Do we want to be index based or more choosy, skew to a lower our squared, more actively managed Listen, I think, as you know, in the last cycle, it was fine to be an indecs. I think the market cap weights when your favor both in global indcs with the US being the largest market and

within the US with tech being the largest weight. And what we've been saying for some time is um that in the next few years stock picking will get more important. Not the same sector leadership, not the same style leadership, and not the same regional leadership. So it means you have to be a bit more active Christian looking forward, I know government sex has the view the oil prices are going to go up. What trade does that challenge that we saw really invoked during the month of January. Yeah,

I mean like it's it's the big conundrum. Um, everybody is starting to believe the soft landing is happening, and China is reopening, and Europe is avoiding the energy crisis and the recession as a result, But the oil price hasn't moved, and I think it's in my kind of category of good news becomes bad news risks because both rates haven't really followed in the in the optimism and

the commodity prices in particular oil. So if they start following, if further cements, that kind of growth is fine narrative, and that eventually means that good news might become bad news because central banks have to react. So I think the reason why oil hasn't reacted as much might be related again to the winter, because of less gas to oil substitution, and because there's probably still a lot of kind of oil floating around um with regards to Russian oil,

which is being discounted. But I think net net, it's been a big lag. Christian, would you then lean against this long euro trade that we've seen long European equities trade that is really dominated all of January. I think generally we prefer non US versus US markets for all kinds of reasons. I mean, non US equities are cheaper, there's more runway economically, there's more slack um, so you have like a European manufacturing slowdown, you have exposure to

China UM. So I think generally it feels like Europe had a bit of a better asymmetry, both from a valuation point of view and where you are in terms of growth. There's more more roomed improve. The challenge you have now is the repricing has been incredibly fast. So if you look at risk premier credit um like European credit versus US credit, sickly kids versus defensives in Europe compared to the rest of the world, and and also the equity risk premium, you've taken out a lot of

that discount in a short period of time. I think momentum can continue to be positive and risk premier are seldom a good market timing tool. Like short term you always want to follow momentum um and in the more medium term valuations and asymmetry matter more so in the near term, where we were reasonably constructive on Europe. Just quickly, Christian, how far do you think this a CP takes interest? Right?

So we have to terminal rate at three point to five UM, and that's two more fifty bibs and then another twenty five bibs Hyde And I mean it's already quite amazing where we have gotten to considering from negative rates. UM. But I think the fact what we're learning here everywhere in the world is that we are not as addicted to to to low rates as we thought. UM. There's a certain ability to deal with higher rates, and we know that in Europe that historically has always been a

bigger question mark because of sovereign debt concerns UM. And we'll have to see how how that kind of comes back. But as of now, Italian BTP spreads have come in UM, and you are in this positive growth momentum phase. So I think three point two five is the base case and depending on inflation normalization of course, UM, there's there's kind of risks to to both sides and they deposit right right now two maybe a hundred and twenty five

basis points still at Christian Thank you, Christie mcclishman. They have gone with sex. One of the great fears of academics on the island of Manhattan this year has been to audit Professor Cohen that Colombia Business School joining us now is she rockets out of a term into tests and grading Abbey Joseph co And of course I'm not in acquaintance with Goldman Saxon, Professor, Columbia Business School. Are

you enjoying it? Abby? I mean, is this like a whole new life for you where you're gonna you're gonna be there? Tell your emeritus? I mean, is that where we're heading. Good morning, Tom and good morning Lisa. Um. I'm having a great time at Columbia. The students who are absolutely wonderful. About half of them are from outside

the United States, and they're all extraordinarily well prepared. Most of them have worked before they've come to business school, and so these are people who are really committed and focused on what they're doing. Let us talk about a paper you did. I don't know if you dragged it out for your students and punish them c FA Institute where you brought some Greek philosophy to Columbia Business School.

And what Aristotle suggested in your iconic paper is get off the wagon of believing every day to point tell us what suspect right now? What's the humility we in the chairman have to bring to scanning every tea leaf? Um, fabulous question in a very timely one, tom Um. Right now, I think there's so much focus on us data among

us investors. We have to recognize that the FED is also looking internationally UM, and they're looking at the trends they're both with regard to economic growth and inflation UM. And then of course there are the concerns about what happens to the data in China. Uh. People don't quite trust those data UM. And so when we turn our attention back to the US, you know, it's our employment data.

But today alone we're going to be getting the Jolts data, which will be a very important element of what we look at, and of course the employment cost Index information, which is critical. UM. When I think about what I worry about most right now in terms of too much

instant analysis, it would be the company reports. We're in the middle of earnings reporting season, and what we know from history is that in periods when the market has been down, companies will take a look at those fourth quarter results and say, you know what, let's take some reserves, let's throw in the kitchen sink. It clears the slate and gives them a lower base from which to work

for the subsequent year. So I wouldn't read too much into the fourth quarter results, particularly when they seem to be you know, throwing in all kinds of disappointments that they knew about for a long time. Um and and I'm much more focused on economic activity going forward. Have we priced out free money from equity valuations abby UH

to a very large extent? You know, we saw that happening during the course of LISA when we saw pees in general going down, but the segments of the market, not just in the United States but outside as well. We're basically the high beta, fast growing areas that really depended on low interest rates for the low discount rate

and gave the valuation. So now we saw it here in technology stocks other growth areas, but we also saw it in emerging markets, particularly in the first half of last year, and by the time we got to the third quarter, I think that investors were looking at this revaluation, let's call it the devaluation of some of these growth areas and saying there may be some opportunities there. It's one of the reasons we have seen some of these non US markets outperforming the US market, even though our

market has been doing quite well. And of course we've now seen some movement back in to the fast growing companies here in the US. When we teach this segment. When you teach the segment in history talking about zero rates, even negative rates for more than a decade at least in Europe and the unwinding of it ending with a whimper, can you write the book that it was successful that this economy extricated itself from these low rate policies without

a financial collapse. Um. We don't know yet, but clearly it looks like we are moving in that direction. But we're not finished. And it's not just looking at the economy, it's also looking at financial products. UM. And here I do have concerns because we don't yet know what the results were in two for lots of the very leveraged products, including private equity. We don't quite know what the impact will be on the economy of the reduction in capital

available to venture investments and so on. And I also think that some active managers who were okay but not great, who levered up their results so they turned a dime into a quarter as they reported to to their their clients. We don't yet know what the full extent of the damages. I mean, what I think is so important here and it goes to the body of your work. We just all enjoyed the carnage of two in twenty two, whether it was sixty forty or spacks, you name it, all

the stuff that was invented to Columbia Business School. I mean, we've all got to regroup. And the hallmark of Joseph Cohen analysis is you've got to be in the game. I want you to talk now to the people that are all cash or near all cash, or even in bonds away from the equity markets. Speak to them right now. Well, many of the individual investors, of course, have to consider other things like their tax situation, their risk tolerance, and so on. All of my work, Thomas, you know, has

been focused in on institutional investors. UM, and I think that we have seen this revaluation of assets in two that makes me far more comfortable than I was, say nine or ten months ago. Um, we're you know, the bonds fifteen to eighteen months ago when I thought bonds were incredible overpriced, that is, yields were too low, and we've now seen a very significant change. The FED like everyone else, I assume we'll be doing a small increase this year, but most of what they're going to be

doing I think has now occurred. They might do a little bit more, but after we've already seen six extremely large rate increases, most of the damage has occurred to bonds. So that looks like the opportunities of time. The revaluation and equities makes them more appealing than they were a year. I gotta squeeze us in abbey. It's so important. The risk free rate is back. Tobb says, we've got gravity

back in the system. How do the zombie companies that never been profitable companies, week free cash flow companies, how do they work out in two thousand twenty three. UM. I think there will be failures. I also think that good private equity investors may see opportunities. But I also think that M and A activity strategic m and A from successful companies will be making a look at some of these operating assets and figure out ways that they

can acquire and improve the underlying margins. What I worry about in terms of going through the year really is the potential um for the debt crisis, the debt sealing crisis to become real. Um and And the reason I'm worried about it is I take a look at some of the people UH and the Republican Party who publicly stated they think it's okay if the US goes into default. Um, that to me suggests a big problem and meeting I'll

be watching today. In addition to the f O m C is the meeting at the White House between President Biden and Speaker McCarthy Abby. Thank you so much, Professor Joseph Cohen at the Columbia Business School. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Easter. I'm Bloomberg dot Com, the I Heart Radio app, tune In, and the Bloomberg Business app. You can watch

us live. I'm Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keane, and this is Bloomberg