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Inflation coming up here in four minutes. Michael Ball on deck. But first Jim Karen joins us from Morgan Stanley. The note is brilliant. We protect the copyright of all of our guests. Get Jim Karen's brilliance from Morgan Stanley. Okay, so you're out of aeronautical engineering at Caltech. And the final trick question on the exam sophomore year Jim Kern is what does it mean if the bond markets worry, worry, handringing, worry, and Google can do one hundred year bond nine times
over subscribed. Jim, I've never seen this.
Well.
I think it's I think it's really a statement on the dispersion that's in the markets right now. So, look, there's a lot of volatility that's happening. Right We understand what's happening in the equity markets, but then when we look at the publicly traded fixed income markets, as you're pointing out, the risk isn't necessarily being evenly distributed across all markets. And Tom, that's good news, okay, because whenever we go into these types of market events where there's
a big repricing in a certain sector. In this case in software, the number one question is always about contagent. Is their contagent into other markets? And we're seeing fire breaks between the public markets and the private markets, and certainly equities are taking the brunt of this in some way, but we're not seeing broad based contagent. So I think if there's a silver lining around all of this, I think that's it.
Jim, what do you make about this rotation we've seen out of some higher growth areas, most notably software, into more valuable parts of the market, maybe even a small and midcaps. That spooked a lot of folks who thought software and tech broadly was a good place to be.
Well, it's a great example of why you want to have a diversified portfolio.
Right.
So we've come off of a market over the past couple of years it's been highly concentrated MAG seven Mag seven, Mag seven, and people have just forgot about the other four ninety three right in the s and P. Five hundred And the point here is that if we get this rise in economic growth is higher productivity, there should be a cyclical broadening of the markets. Look at the ISM data. Isms are well above fifty, right, now even new orders are around fifty seven. You've got the manufacturing
above fifty two. You've got GDP growth which is still pretty reasonable.
Jobs.
You know, market seems pretty stable. Let's let's keep our eye on the bigger picture and in the reality here is that I do think that the cyclical broadening of the markets is actually really a healthy line, you know, for more diversified growth.
When you listen to your economics team, is the vector in goods inflation? Usually it's a disinflation, and all of a sudden, in the last six months, Jim Kier and I got goods inflation and rising inflation. Is that going to reverse and get back to quote unquote normal?
No, I don't think it will.
I think that we have gone through a period of time and this goes back to two thousand and one when China joined the wto that goods inflation was relatively flat down and it was all about services inflation and everything else. So therefore overall inflation was able to stay low. Now we're in a different, different place.
Should get Jim Karen into trouble this morning? Oh do you do you agree with a Posen or Zagg thesis of four percent inflation, I do not.
I think the number is probably around two and a half to three.
That's likely where we're going to stabilize.
I don't think we're going to see below two for a while unless we see a recession.
That's brilliant. See that he's so trained by compliance. I mean just about Adam posed it out on Twitter this morning, recapitulating how we get to that worry of high inflation. The release, you will, the reaction function is through maybe a higher wage, which we really haven't seen yet. Well, if that's a bet, that's an outlier, as many people have said to us, Jim Karen with us, and we'll
stay with us. With Morgan Stanley Investment Management, as we go to the nation's inflation report, usually midweek, it's on a Friday because of that brief government shut down as well. We'll you'll give you the headline data, folks, but then we dive into it and give you the nuance as
we can on Bloomberg through the morning. Jim Karen with this, Morgan Stanley, I go to a weeker dollar out there, but some real churn in the market as well, and we see it in Jim Karen's space as they say in the bond market, Jim Karen with a ten year yield four point zero seven percent with a substantial move over the last two three days, can you at Morgan Stanley model a three point ninety nine percent ten year yield.
I mean, it's certainly lower than what we would have expected it to be. It's really a question in terms of how we think the Fed starts to react to this. Does the Fed now start to see a clear runway to cutting rates maybe more aggressively because inflation, as we just saw, is maybe coming down a bit, maybe a bit faster than many people are expecting. I'm still in the camp that there's maybe one more cut this year,
possibly too so. And I think that's pretty much well in the price at this point as far as where the two year treasury is currently trading. And so I think it's going to be very difficult for the ten year yield to stay below four percent for any material period of time unless you believe there's going to be a significant flattening, and we don't, and we think the curve is going to stay relatively steep around you know, sixty bases points or so.
We welcome all of you across America. Bloomberg surveying US commercial free to the nine o'clock our, Micael ball Away meeting us as well, and Veronica Clark will join us some city group here in a moment. Paul Sweeney with Morgan Stanley's Jim Karen.
Jim, this is a pretty eventful week for the FED to reserve lots of data. It's a data rich week, and I guess the takeaway is, boy, we've got a pretty solid labor market. We saw that on Wednesday, and now we've got an inflation environment that continues to be pretty reasonable out there. A boy, the Fed could go either way here. They could sit on their hands, or they could cut rates. How do you think they're going to interpret this week's data.
I think at the moment that they're probably still leaning towards potentially one more cut this year if the inflation numbers are coming down. But we also have to understand that the unemployment rate did tick down from four point four to four point three percent.
Now could that be seasonal? Could that be an aberration?
You know, maybe this is maybe we need to see a couple of more numbers, which is why I don't think the Fed's going to do anything, you know, in the first quarter of this year or probably they're gonna have to wait until the second quarter, maybe late second quarter. So I think the way the FED is likely to interpret this is that we have inflation.
That seems to be stabilizing.
That's good news, a labor market that also seems to be stabilizing, but we need a little bit more confidence in that.
You brought this point up earlier. What about wages, right, So.
You know, I think the big complaint out there, and I did a podcast on this which was to make a twenty dollars hamburger affordable again? And my point was that, you know, the price of that hamburger is not likely coming down. What's going to make it more affordable is that incomes and wages need to start to go up, but they have to go up in a non inflationary way. And the way that happens, this is the magic trick
that the economy does, is through higher productivity. So higher productivity is the non inflationary speed limit on growth, meaning that you can have higher wages better growth, but that higher wages doesn't necessarily increase goods, inflation or anything like that. That's what productivity does, right, now thea any numbers are accelerating higher. So it is likely if we get a recovery, that these incomes in wages can go up without creating
the inflation. And that's what makes the twenty dollars Hamburger more affordable.
See how clear he does that?
Surely learned that if you're at the Bowden Observatory in physics in February and it's twenty below zero and you get the telescope, it's clearer because it's cold air.
That's how you get to think that clearly.
And then he says that bad.
And then he says, I got to go California to California's technology smart tech as well.
Jim Karen go write a report. He is brilliant at Morgan Stanley. We appreciate mister Karen's expertise here