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00:00No, but I do think rates are going higher, Tom, for a whole host of factors, a higher inflation
00:04risk premium. They need at some point for Treasury to raise more supply. And the fact that the market
00:09has really only priced about one tightening, and I could see potentially a series of tightening,
00:14so yields go higher. Okay, Paul's got eight questions. I'm going to get this one in quickly
00:19here. If yields go higher, price down, it could be ambiguous, good or bad. Orzeg and Posen say
00:28you're going to see a higher wage, a higher real wage. Do you buy that optimism, or is
00:33it going to be stress? It's possible. I mean, the AI, the productivity story could translate
00:38into much higher wages. The corporate share of income is high, so hopefully at some point
00:42that does flow to workers. I was very bullish on the economy and was talking in my prior role
00:48of a disinflationary boom, which seemed very reasonable until the Middle East war started,
00:53because I think that completely changed the dynamics. So yes, I'm bullish on, I was bullish
00:58on growth in terms of being low in non-inflationary and rates coming down in the Fed easing. All
01:03that's kind of thrown by the wayside. In terms of what level of yields cracked the system,
01:07we don't really know. It's really a liquidity and confidence story. Could be 475 on 10s,
01:13it could be 5% on 10s. And there's so many other dynamics at play. And as you're well aware,
01:17the narrowness of the market, the equity market has been a handful of companies. And at some point,
01:22that exuberance may itself be stretched. So if the Fed's tightening, financial conditions
01:27suddenly tighten, risk appetite changes, and it could unravel quickly.
01:31Joe, in your notes, you say inflation is a problem. I think most of our viewers and listeners
01:35would agree with you. How long is it going to be a problem, do you think?
01:39That's a great question. I mean, when's the war going to end, and how quickly can these
01:43bottlenecks stop? I mean, the way to think of this is it's a mini-COVID. And I think that's
01:48what most investors don't understand, which makes me think yields go higher. When I say mini-COVID,
01:51there's major supply chain disruptions. It's not just energy, it's nitrogen, which relates to
01:56fertilizer, different material that go into plastics, other sensitive commodities. And what
02:01we learned during COVID is you just can't turn wells off, you just can't shut, this is a much,
02:05much smaller scale, but you can't just turn the system off. And like a light switch, it automatically
02:10goes back. And the market is, I don't think, the bond market isn't fully appreciative of that.
02:14Joe LaVornia, SMBC and EcoSecurities certainly could be with us today. And we continue here,
02:20I guess, with the arch idea. And you live this at the White House. This is a president who likes
02:26joint stimuli all the time. We've got a nominal GDP popping 5% plus persistently there. We've got,
02:35you know, inflation well above the Fed target and all that. Are we just living in a new stimulus-driven
02:41milieu and it goes until it goes?
02:44We might, Tom, but if that's the case, then, you know, inflation expectations need to be reset
02:49and you need a higher term structure rates to reflect the environment you just described.
02:53So it's either one or the other. Either the economy is going to produce non-inflationary growth
02:58and eventually the Fed can get rates to neutral, or we're in a regime where you've got rising debt
03:03to GDP, higher inflation relative to where the Fed's target is. And that would be, and the Fed's not
03:09cutting, and that's a higher rate regime. Do you perceive that model as a 100 basis point shift?
03:15Sorry, folks, jargon. A one percentage point shift up in the curve, or could it be more 60s-like
03:21and be a real shift into pre-Volker? Well, in the 60s, as you know, Tom, it's very gradual,
03:26yet cyclical, the floor on inflation saw higher cyclical floors as you move through the 60s into
03:33the 70s. Best guess, it's the latter, that it would be like maybe, let's say, 100 basis points
03:38repricing. It's a nice round number. But, you know, could it be something longer as possible?
03:42I mean, in the last couple of years, inflation is running about 75 basis point above the Fed's
03:47target. We're going to go higher than that in the next few months. When could it end? Maybe by the
03:52fall? We'll see. I mean, I guess the question is, how disinflationary is AI in the short term? May
03:58actually be contributing to the problems we have through the data center build-out and energy usage.
04:02Longer term is probably disinflationary.
04:04Okay. We've got a new Fed chairman. Presumably, he feels a little pressure to get rates down.
04:11But boy, the data doesn't seem to... Great question, Paul. I'm going to make some news here.
04:16Are you interviewing for a position at the Fed? No, I'm not interviewing for the position at the
04:21Fed. No. By the way, the... And I've gotten to know them. I think they're a bunch of Fed people.
04:26That was one cool thing about the job. There's a lot of super talented people there. Kevin Warsh
04:31will do a great job. I'm very confident of that. However, I don't see how Kevin's going to make a
04:36plausible case for rate cuts. Yeah. It's just not there. And if the market continues to price
04:42tightening, maybe he just pushes back against a committee that's certainly becoming, at least
04:47from the president, more hawkish. Maybe he pushes back a bit, gets it more center, and then kind of
04:52hope for the best. Things may be unfolding a positive way in the back half of the year. But right
04:56now,
04:56look at the Price is Paid series and the ISMs. The New York Fed's got this Global Pressure Supply
05:02Index. I'm not sure exactly how they put it together, but the picture certainly shows these
05:06supply chain disruptions. That's all pro-inflation in the system.
05:11So, again, is this inflation? I don't know. It just feels stickier to me than just the price of the
05:18oil. It is sticky. Well, you could see it if you look at the San Francisco Fed. They've got the
05:21acyclical and cyclical price trends. You look at the Atlanta Fed sticky price index. Yeah,
05:27you're seeing it. Absolutely sticky. And by the way, it's been above trends. So, you know,
05:31we've been well above, too, in a lot of these components. The super core that the former chair,
05:36Jay Powell, likes looking at, has been running about 3.5 percent. Definitely sticky.
05:40So, I mean, there's nothing the Fed can do, right? I mean,
05:44there's nothing the Fed can do other than, at some point, potentially raise rates to try to slow demand.
05:49And the problem with raising rates to slow demand to bring inflation back to target,
05:53which right now it's probably going to be at least a point, if not a point and a half above
05:56target,
05:58is generally a recession. The question is, does the Fed want to do that? If the Fed doesn't want to
06:01do
06:01that, they implicitly change their target. You're going to be in a world then where rates are higher.
06:06You're going to have a steeper curve and higher yields. Real treat for you across this nation and
06:09worldwide. Joseph LaVornia with us today, with this SMBC, Nico here with his service to the nation
06:16in the first Trump administration. Lots of good work, including serious fixed income chops
06:23with Deutsche Bank a number of years ago, also with the American First Policy Institute.
06:29What happens to the world you parachuted into after the president?
06:35When you say that, you mean after the midterms?
06:37Is there, no, not, thank you. I should have made that clear.
06:40No, after his term. How does Trumpism carry forward after what you witnessed in the hallways?
06:48The shift, there's been a real shift in the base, Tom. And we look at the polling numbers and not
06:53a lot of very good pollsters. Richard Barris of the big data poll, People's Pundit, actually is an
06:59excellent pollster. There's some others out there. And it does show a huge compositional shift in the
07:03base where a lot of independents and others are not identifying with the Trump.
07:08Well, yeah, well, and Rich actually made a very good point. And he's sort of these pollsters sort
07:14of like an inside club. But yes, New York Times Siena poll accurately now reflects what's happening
07:19at the moment because you've got this affordability issue that that is a problem. I'm not sure exactly
07:25what happens. I mean, I don't want to say too much, but I know I understand that. But I've never
07:30said
07:30this, Paul. Are we out there somewhere? I sound like a Linda Ronstadt song out there somewhere is the dreaded
07:38A
07:38word involved austerity. No, I don't think we're gonna get austerity. No, because as you know, neither party wants
07:47to actually do anything. And I didn't want to do it when we had Simpson Bowles over a dozen years
07:54ago. And right now,
07:55unless the bond market or the financial markets put the pressure point on there, there isn't going to
08:01be a resolution, which comes back to like you asked about Iran, which to me is very important, obviously,
08:05development, stating the obvious, but what's the pressure point for the president? Is it $6 gasoline
08:11prices, $7 gasoline prices? I mean, certainly with the stock market at all time record highs,
08:15and rates still relatively low, there isn't really a pressure point for the president necessarily to make
08:21a strong decision. So maybe just the option is just waiting and seeing maybe there's some
08:26sort of change in leadership somehow by luck or whatever it might be. But you just sit and wait,
08:30and these things just drag on. But again, in that world, as inflation is moving up, your real funds
08:36rate is shrinking. And that by that metric, monetary policy is easing. Equity markets high credit spreads
08:41are tight. I mean, there's a lot of financial stimulus that's offsetting this mildly higher interest
08:46rate story we're seeing. And on the interest rate story, I guess when we think back to the
08:50tariffs last year, a lot of folks on Wall Street were saying, boy, 450 on the 10 year, put some
08:56pressure on the White House. And they kind of started to back away a little bit from some of
08:59their initial tariff discussions. But boy, we've blown through that. But S&P was down 15%. Yeah,
09:05let's not forget S&P was down 15%. And the president quickly pivoted and the market had a massive rally.
09:11And we basically repeated the same thing this past year. But that's the key observation. And you know,
09:16I don't need the inside dirt from the White House. It's rude. But but the fact is, he is completely
09:23beholden to the stock market. Is it just simple? Is it seems that way?
09:28Where Secretary Besson or Undersecretary Lavornia walks in on the yellow couch and says, hey,
09:34stupid, the Dow's down. Is it? No, I think the secretary does does a great job giving the president
09:40advice. And the president certainly seeks his counsel. And he I think is a great voice of reason,
09:45given his given his track record. But you know, the secretary is just one person. And the president
09:50listens to a bunch of different people. He's got his own instincts and behaves in a way that
09:53he thinks is the right move. But certainly the stock market, Tom, is a dominant driver. And if the stock
10:00market were to correct any meaningful amount, that would impact policy, both probably more foreign
10:05policy wise, I'm not sure what we can do domestically at this point, given the midterms are so close.
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