00:00How would you characterize the rise that we've seen in global bond yields this week. It was fairly steady before
00:05really picking up
00:07momentum today. And I'll start with you. Yeah absolutely. I mean I think we're tripping some big numbers in terms
00:13of the level of
00:14these yields. And I think we're starting to see portfolios reposition kind of based on two factors. One risk assets
00:20continue to do
00:21really well. So if you were under risked you're catching up and fixed income is starting to drag. And so
00:27we're seeing that
00:27repositioning show up particularly in the longer term yields at the moment. So that's an interesting
00:32point. I might have made that point yesterday. When you look through yesterday you had S&P 500 up 9
00:37percent
00:37and bond yields kind of flat. And there's been this disconnect that the S&P 500 U.S. equities keep
00:43marching higher. And you know there's this disconnect in the bond market a little bit more
00:47more worried about inflation a little bit more worried about term premium and the equity market
00:52continuing apace. It feels like things have shifted a bit today and equities losing a bit of a
00:57bid. And it seems like you are more appropriately attired in red today than I am in green scarlet. Maybe
01:03I'm just
01:04optimistic here. Yeah. And it's across equities that's across bonds so across all different asset classes. You could argue given
01:10what we're seeing in the U.K. and Japan that the tail is wagging the dog. The dislocations that we're
01:15seeing overseas
01:16spreading to the U.S. today intensifying the sell off. With JGB yields surging. Kaye is global fixed income losing
01:23its anchor.
01:24So gosh it does feel like the bond vigilantes are back. And so I wouldn't say that we're losing the
01:29anchor but I
01:30would say that global term premium is back in focus. And that's exactly right. We'd had a little bit of
01:35a modest
01:36sell off as you noted and Mike noted. Race are really back to where they were a year ago. This
01:41is not that excessive
01:43of a move. We're back to where we were when we had concerns about tariffs on Liberation Day. But what's
01:49really happened
01:49overnight and into today is real concerns about the U.K. about global term premium etc.
01:56And I think if you look at the move we've had this morning it's been more real yield driven not
02:01inflation. Prior to today the concern has been about the inflation on CPI PPI. Today of course we've got
02:08crude gas prices up a little bit higher but we're not seeing that flow through into inflation expectations.
02:13It's more of a global term premium. Which one could make an argument here that the U.S. doesn't have
02:19to
02:19be dragged up to that level. So I wonder now that we're seeing the not panic but the concern seep
02:26into
02:26equities. We have equities lower today. Retreating from record highs but still the direction is down.
02:32Ed are we seeing a repricing of the entire real interest rate environment?
02:36A little bit. I think the picture that's coming into focus for me is one in which monetary policy in
02:43the front
02:44end is a little bit too relaxed. And therefore you're starting to see that bleed into high real rates across
02:50the curve.
02:51You're starting to see that bleed into a little bit more inflation compensation further out. That's much more pronounced in
02:56places like Europe and the U.K. for obvious reasons. But the whole complex is lifting higher in part because
03:03central banks haven't really
03:05acted. They've created a permission structure for higher rates. They haven't really acted on them yet.
03:09And I think we'll see that change in the course of the summer.
03:11Yeah. The betting right now is for higher rates. Traders in the U.S. now see two-thirds odds the
03:16Fed will hike in December.
03:17In Japan they see the BOJ resuming interest rate increases in June. And of course in the U.K. they
03:22see the big Bank of England
03:24hiking rather than cutting. Having said all of this, where do you want to be on the curve, Ed?
03:29Yeah. I think the long part of the curve is getting a lot more attractive. So if you're an income
03:33oriented investor, you're looking
03:35around. You want to hedge some of that equity risk. You want to hedge some of the credit risk. And
03:39both of those asset classes have done
03:41extraordinarily well. The long part of the curve is looking much more interesting, particularly in an environment where central
03:48banks are going to tighten policy in the front end. OK. I'd be more interested in the belly of the
03:53curve.
03:54And I'm not going to sit here and argue in favor of cuts because I don't see those in the
03:58horizon. But I think the picture is more
04:00mixed. And I think we are, of course, talking about the future, which is quite uncertain. And I think there's
04:05a lot of data that will come
04:06in that will reveal it. So, so far we've had two things. The first is in the reason that the
04:11equity market has been so resilient
04:13and credit as well is because of the underlying strength. We came through first quarter earnings season has really been
04:19stronger than anything we've seen. We've got we've got EBITDA, you know, strong EBITDA growth. We've got margins at 20
04:29year
04:29highs. EBITDA growth is higher than it's been in 10 years. So you've got an overall fundamental picture that's really
04:34quite
04:35robust. And that's what's been holding up equity prices. On the other hand, you've had this inflation picture. And I
04:41don't know when the
04:41last time you got gas, it was 445 or something like that for me. What the data shows, and it
04:46was interesting this week, that retail
04:49sales were still stronger than expected and evidenced resilience. What we've seen previously in prior cycles is when gas is
04:57at $4.50 in the
04:59range that it's in now, typically consumers go for substitution. And if I look at our underlying chase data, what
05:05we've seen has been
05:06interesting. You see the price in gas prices, but consumer spending on gas has not tracked it as much. So
05:14you're having some
05:15substitution. Maybe people are working from home. We're not. But maybe people are carpooling whatever they're doing. You're not seeing
05:22that. When what we find is when gasoline is back up to $5, then you start to see more of
05:28demand destruction.
05:29So I think what's really going to unfold, and the picture's not clear on this, is how does the consumer
05:34behave? And my honest answer is I'm not sure.
05:37Yeah, well, we'll get a glimpse of that when the retailers start reporting earnings in the coming days.
05:42Next week. That's exactly right.
05:43So it'll be very interesting. And certainly the companies that sell to the masses will give us a really good
05:49read. When it comes to the risks facing the U.S. economy, Michael Barr, the Fed
05:54Governor, has said inflation is the overwhelming risk facing the U.S. economy. And according to Bank of America, Ed,
06:00U.S. inflation is on course to exceed 5% by the November midterms,
06:03unless the monthly gains that we've seen, the four-tenths of 1% gains that we've seen, start to slow
06:09down dramatically. What gives you confidence that perhaps we can get there?
06:15I think the question for policymakers is the next six months, in some ways, there's a lot of inflation momentum
06:21baked into the cake.
06:23The question is, will inflation start to normalize by the time we get over the hump, by the time we
06:28get to next year? Or is there underlying heat in the economy?
06:32Is this economy heating up to the extent that labor markets are a little bit more stable, to the extent
06:37that there is demand being brought forward on the investment front?
06:41And that's going to keep inflation momentum going. Right now, I think the trajectory has changed slightly versus last year.
06:49Last year, we were concerned about downside labor market issues.
06:52Now that picture is a lot more stable. It just points to the fact that policy, particularly in the front
06:58end, has to get a little bit tighter to control that inflation further out.
07:02But this November, yeah, I mean, I don't think you can do much about that.
07:05No, it's coming up pretty quickly. Michael Barr also pushed back against Kevin Warsh's proposals to shrink the Fed's balance
07:12sheet.
07:12Barr, of course, speaking from the point of view of wanting to promote a sound banking system, I guess I'm
07:17just wondering,
07:18what problems is Kevin Warsh trying to solve by shrinking the Fed's balance sheet?
07:22That's an extraordinarily difficult question. Historically, the argument has been, let's shrink the Fed's balance sheet when times are good
07:31so we can grow it again in periods of distress.
07:34That's very much a political permission structure argument. When you go to Congress, you want to make sure that you
07:39get that permission.
07:40So it's dry powder, basically. Dry powder in an emergency.
07:43The biggest issue is you are introducing new risks into the financial system by drawing down the balance sheet.
07:49This environment of excess reserves, this environment of excess liquidity in the banking system feels okay today.
07:55We could quickly change, and then you're in an environment where you need to grow it again.
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