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Now, this is a tree his public service to America at the White House for President Trump, Joseph Flifornia.
Jones joins us.
But what you don't know, and probably President Trump didn't know he was at Deutsche Bank years ago and the combine that melded economics into fixed income. We're thrilled he could be with us today with parchment from Vassar and some work at New York University as well. Okay, I got to get this out of the way right now. I saw Gold and Sachs treatment and they look at four point six to zero ten years a pivot point. Okay,
we're there, and we're there quickly. Do you have in your head a ten year yield where the system unravels?
No, but I do think rates are going higher Tom, for a whole host of factors. Higher inflation risk, premium they need at some point for treasure to raise more supply, and the fact that the market has really only priced it's about one tightening, and I could see potentially a series of tightening, so yields go higher.
Okay, Paul's got eight questions. I'm going to get this one in quickly here.
If yields go higher, price down, it can be ambiguous good or bad or zag and posin say you're going to see a higher wage, a higher real wage.
Do you buy that optimism or is it going to be stress?
It's possible, I mean the AI the productivity story could translate into much higher wages. The corporate share of income is high, so hopefully at some point that does flow to workers. I was very bullish on the economy, and we was talking in my prior role of a disinflationary boom, which seems very reasonable until the Middle East War started,
because I think that completely changed the dynamics. So yes, I'm bullish on I was bullish on growth in terms of being lower in non inflationary and rates coming down in the FED easing. All that's kind of thrown by the wayside. In terms of what level of yields crack the system, we don't really know. It's really a liquidity and confidence story. Could be four seventy five on tens, it could be five percent on tens, and there's so
many other dynamics up playing. As you're well aware, the narrowness of the market, the equity market has been a handful of companies, and at some point, you know that exuberance may itself be stretched. So if if it's tightening, financial conditions suddenly tighten risk appetite changes, then it could unravel quickly.
Joe and your notes, you say inflation is a problem. I think most of our viewers and listeners would agree with you.
How long is it going to be a problem?
Do you think that's a great question? I mean, when's the war going to end? And how quickly can these bottlenecks stop. I mean the way to think of this is it's too many COVID, and I think that's what most investors don't understand, which makes me think yields go higher when I say many COVID, there's major supply chain disruptions. It's not just energy, it's NITROGENU relates to fertilizer, different
material to go into. Plastics are the sensitive commodities. And what we learned during COVID is you just can't turn wells off. You just can't shut this on a much much smaller scale, but you can't just turn the system off and like a light switch, automatically goes back and the market is I don't think the bond market isn't fully appreciative of that.
Joe Varna, SMBC and Eco Securities totally could be with us at youday and we continue here. I guess with the arch idea and you live this at the White House. This is a president who likes joint stimuli all the time. We've got a nominal GDP pop in five percent plus persistently there, we've got you know, inflation well above the FED target and all that are we just living in a new stimulus driven miliu and it goes until it goes.
We might tom But if that's the case, then you know inflation expectations need to be reset and you need a higher term structure rates to reflect the environment.
You just describe. So it's either one or the other.
Either the economy is going to produce non inflationary growth and eventually the FED can get rates to neutral or right that works.
Were in a regime where.
You've got rising debt to GDP, higher inflation relative to where the fedce carriot is and that would be in the Fed's not cutting and that's a higher rate region.
Do you perceive that model is one hundred basis point shift? Sorry, folks jargon a one percentage point shift up in the curve or could it be more sixties like and be a real shift into Provoker.
Well, in the sixties is very as you know, Tom's very gradual, yet cyclical. The floor on inflation saw higher cyclical floors as you move through the sixties into the seventies. Best guess it's the latter that it would be like maybe let's say one hundred basis points repricing. It's a nice round number, but you know, could it be something longer?
It's possible.
I mean, in the last couple of years inflation is running about seventy five basis point above the Fed's target. We're going to go higher than that in the next few months. When could it end?
Maybe by the fall, We'll see, I.
Mean, how I guess, question is how disinflationary is AI in the short term may actually be contributing to the problems we have to the data center build out and energy usage. Longer term is probably disinflationary.
We've got a new FED chairman, presumably he feels a little pressure to get rates down, but boy, the data does great.
Question, Paul, We're going to make some news. Here are you interviewing for a position at the FED.
No, I'm not interviewing for the position at the FED.
No.
By the way, the UH and I've gotten to know them. I think they're a bunch of Fed people. That was one cool thing about the job. There's a lot of super talented people there. Kevin worsh will do a great job.
I'm very confident of that.
However, I don't see how Kevin's going to make a plausible case for raycuts.
Yeah, it just is just not there.
And if the market continues to price tightening, maybe he just pushes back against the committee that's certainly becoming, at least on from the President's more hawkish. Maybe he pushes back a bit, gets it more center, and then kind of hope for the best. Things may be unfold in a positive way in the back half of the year. But right now, look at like the Price is Paid series in the isms. The New York Fed's got this
global pressure supply index. Not sure exactly how they put it together, but the picture certainly shows these supply chain disruptions.
That's all pro inflation in the system.
Again, is this a inflation, I don't know. It just feels stickier to me than just a bit sticky.
Well, well, you could see if you look at like the San Francisco Fed, they've got the acyclical and cyclical price trends. You look at the Atlanta fit sticky price index, Yeah, you're seeing it absolutely sticky. And by the way, it's been above trend, so you know, we've been well above two and a lot of these components, the supercre that the former chair Jay Powell likes looking at running about three and a half percent, definitely sticky.
So, I mean there's nothing the FED can do, right, I mean's.
Nothing the Fed can do other than at some point potentially raise rates, try to slow demand. And the problem with raising rates to slow demand to bring inflation back to target, which right now it's probably going to be at least a point, if not a point and a half above target is generally a recession.
The question is does the FED want to do that?
If it doesn't want to do that, they implicitly change their target. You're going to be in a world then where rates are higher, You're gonna have a steeper urb and higher yields.
Real treat for you across this nation and worldwide. Joseph Livornia with us today with this SMBC Nico here with his service to the nation in the first Trump administration, lots of good work, including serious fixed income chaps with Deutsche Bank a number of years ago, also with the American First Policy Institute. What happens to the world you parachuted into after the president?
When you say that, you mean after the midterms, not thank you.
I should have made that clear, No, after his term? How does Trumpism carry forward? After what you witnessed in the hallways?
The shift, There's been a real shift in the base, Tom, I mean, look at the polling numbers, and not a lot of very good pollsters. Richard Barris of the Big Day to Poll, the People's Pundit actually is an excellent polster. There's some others out there, and it does show a huge compositional shift in the base where a lot of independence and others are not identified.
Do you have Tom show that list? Well?
Yeah, well, and she made a very good point, and he's sort of these posters a sort of an inside club. But yes, New York Times SIENA poll accurately now reflects what's happening at the moment, because you've got this affordability issue that that is a problem. I'm not sure exactly what happens. I mean, I don't want to say too much, but I understand that.
But I've never said this, Paul. Are we out there somewhere? I sound like a Linda Renstad song. Out there somewhere? Is the dreaded a word involved austerity?
No? I don't think we're going to get austerity. No, because as you know, neither party wants to actually do anything, and you know they didn't want to do it when we had Simpson Bowls over a dozen years ago, and right now, unless the bond market or the financial markets put the pressure point on there, there isn't going to be a resolution, which comes back to like you ask about Iran, which to me is a very important, obviously development.
I'm stating the obvious. But where's the pressure point for the president? Is it six dollars gassling prices? Seven dollars gasoline prices? I mean, certainly, with the stock market at all time record highs and rates still relatively low, there isn't really a pressure point for the president necessarily to make a strong decision. So maybe just the option is just waiting and seeing maybe there's some sort of change in leadership somehow, by luck or whatever it might be.
But you just sit and wait and these things just drag on. But again, in that world, as inflation's moving up, your real funds rate is shrinking, and that by that metric, monetary policy is easing equity markets, high credit spreads are tight. I mean, there's a lot of financial stimulus that's offsetting this mildly higher interest rate story we're seeing.
And on the interest rate story, I guess when we think back to the tariffs last year, a lot of folks on Wall Street were saying, boy, four point fifty on the tenure put some pressure on the White House, and they kind of started to back away a little bit from some of their initial tariff discussions.
Boy, we've blown through that. But SMP was down fifteen percent.
Yeah, let's not forget s ANDP was down fifteen percent, and then President quickly pivoted and the market of rally and we basically repeated the same thing this past year.
But that's the key observation. And you know, I don't need the inside it from the White House. It's rude, but the fact is he is completely beholden to the stock market. Is it just simple that way, thinking somewhere Secretary Bessen or under Secretary Lavregna walks in on the yellow couch and says, hey, stupid, the Dow's down.
No, I think the secretary does a great job giving the president advice, and the President certainly seeks his counsel, and he I think is a great voice of reason given his given his track record. But you know, the secretary is just one person, and the President listens to a bunch of different people. He's got his own instincts and behaves in a way that he thinks is.
The right move.
But certainly the stock market tom is a dominant driver, and if the stock market were to correct any meaningful amount, that would impact policy both, probably more foreign policy wise. I'm not sure what we can do domestically at this point, given the midterms of so close.
And the consumer. The consumer seems to be hanging in there. I mean, we can never underestimate, it seems the US consumer here. I know, we've got that case shaped economy and the different people are behaving differently, but the consumer generally seems to be pretty such.
Consumer's holding in well. I mean that you get the refund numbers aren't. We'll see what happens. They've not been as big as I would have guessed, or as big as I think what Treasury might have been assuming. But the refunds are helping a little bit. Of course, they're going to pay for higher gas prices, higher energy costs.
That's been an offset.
And aggregate, Yes, the consumer's done well, and it reflects the fact that if you have a job, you're doing reasonably well. Certainly, we're an environment where there's not been a tremendous amount of job growth, but it's been positive enough, and income growth nominally has been strong enough to keep spending going.
And as you know, the build out on AI.
And the spending by the hyperscalers has been massive, and that's been a huge driver of growth. If you look at the contributions table in GDP, about a third of output in the last year has been AI related.
And that's the direct effect.
Of course, there's all these indirect effects through higher equity prices, well effects, things of that sort.
Yeah, I'm looking here. I just went log standard and poors five hundred. I'm doing this for President Trump. I'm doing the you know, the huge boom coming out of COVID for whatever reason, stimulus, whatever, whichever president. I got a correction out point eight standard divitions up in a way of negative twenty one percent. I got a correction of negative twenty seven percent before the Edgyard Denny call with Alfra A Kompora.
I'm only out one point.
Three standard deviations in this crazy boom economy. I mean, we really haven't had a bear market of substance that stay.
We go down and we come right back. That's our new addiction.
Yes, yes, here's the thing though, Tom, this is the hard part is if you look at the earnings revisions or the innings beats in the first quarter, it looks like a right angle. So I mean again the question is how sustainable is it. It's probably not long term sustainable. I like what Paul Tudor Jones had said I talked about, you know, you sort of have to kind of be in it. Even though it looks a bit frothy, they still have some room to run. Of course, he's a
phenomenal investor and been able to time things. But yeah, I mean this could go another six months, you could go another several years if we just don't know.
How do you think about the other part for the FED is the labor market. Again, it seems like it is a no higher, no fire kind of That's fine.
It seems that way.
Labor market does seem to be strengthening a little bit relative to where we were last year. It is still more or less no higher, no fire. I mean, take healthcare out. You don't have a whole lot of job growth for the FED to cut rates, though, just because that was the dominant narrative for quite some time. There us to be labor market deterioration, which means unemployment rate is kind of gapping higher. It's been a very slow,
kind of monotonic rise in the unemployment rate. If it starts to go up, if it's four to three, and if it goes next month to four to five, and then four eight and then five to one, they'll actually probably be cutting I don't see that, but that's that's what it would take.
It take real deterioration.
Care. Do you have Knicks tickets?
No, I don't.
My kids actually are are Pistons fans, so there you go, which I was actually happy they sort of lost so I don't have to take them to a Knicks game, because because then my wife would want to go, and it's you know, it's absorbitive. It's a small fortune for a family of four.
Yes, there you go. He's bar able to do the deuce now that we able to Detroit. He's okay with doing this now that he knows there's two other Knicks fans, Pistons fans in there. Joseph Flavornia, father of Pistons fans, Thank you so much, that said me.
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