00:00Housing's kind of stuck at the moment. I mean, there's no two ways about it. You've got rates very, very
00:05steady. You've got prices very, very high, and neither side wants to capitulate. The hope is rates come down, or
00:12the hope was, I should say, rates come down, but that's looking less and less likely this year, maybe a
00:16next year story. So do prices start to stabilize, or do you continue to see this kind of limping of
00:22demand for even longer?
00:25My realtor called me up last night. Emily called me up, Paul. A small man in Woodstock. She said, like
00:34a weekend, the stuff sells, just like in New Jersey. Like a weekend.
00:38You betcha. Gennady, what happened to your market over the last couple of weeks as rates rose? What happened there?
00:45Was it technical? What's going on there?
00:47I think it's a combination of technicals and just almost time decay. The longer we stay here, the longer this
00:54Iran issue remains unresolved, the more upward pressure you have on rates, because we're in this weird environment where, as
01:01you mentioned earlier, the economy's actually doing relatively well, and inflation's actually edging higher and higher and higher.
01:07Oil prices are high, but they're not at high enough levels to start to destroy demand. That would be probably
01:14past $120 a barrel, maybe $150. We're not quite there yet. The longer we stay here, by the way, the
01:19more likely that is to happen.
01:21Our commodity folks are looking for oil to shoot up to $150 if this kind of period persists. But right
01:29now, right here, the longer we stay here, the trickier it is.
01:33And you've seen the Fed pivot towards a less dovish tone.
01:38So, all right, if I'm this new Fed chairman, Warsh, I'm coming in. I kind of got a little bit
01:44of pressure to lower rates, but boy, the data just isn't there, is it?
01:48I was going to say, a little bit of pressure?
01:49Yeah.
01:50You know, Warsh is coming in on the premise that he is going to lower interest rates. I always remind
01:55people he's got to convince 11 other FOMC members that rates should be lower.
02:00He's not a one-man band, and it's going to be tough. You've got growth relatively decent.
02:05Maybe he can convince them to keep rates relatively unchanged, as some of these hawkish expectations actually feed through.
02:13What we don't expect are rate hikes, and that's not a Warsh issue. That's an FOMC issue in general.
02:18We expect them to stay steady for longer. I don't think they'll be hiking rates unless they really see inflation
02:24not just remaining high, but actually threatening to accelerate.
02:27That, I think, would be the threshold.
02:29I don't have a survey yet, but CPI, June 10th. I mean, can you model out at TD Securities of
02:364% year over year?
02:38It's not out of the question, simply because it really depends on where oil prices are, right?
02:44If we're talking about headline CPI, if we can, you know, goodness forbid, we go back to bombing Iran, we'll
02:52see.
02:52I don't do the parlor game, but you bring up the really good point, a la Mervyn King and Times
02:58at the Bank of England.
02:59Are you beginning to model, literally, you know, to be entertainment about it, a revolt at the Fed where governors
03:06and presidents just simply vote down a Mirren-like Warsh?
03:11I think so. I don't think Warsh will be very well supported if he pushes for lower interest rates.
03:18Let's put it that way, at least not in this environment.
03:21What he will push for is some reforms at the margin, maybe less communication by the chair.
03:26The smaller balance sheet seems to be gaining a little bit of traction.
03:29But again, all of these things are, at least the balance sheet side, are relatively gradual.
03:33We're not expecting big balance sheet changes overnight.
03:35This is over the next couple of years.
03:38What can he do day one?
03:40Probably not a whole lot, especially not in this environment.
03:43But hopefully by the end of this year, early next year, as you get inflation under control, assuming Iran is
03:49somewhat buttoned up and resolved,
03:51you can actually see rates starting to drift a little bit lower as inflation comes off.
03:55And the rising rates is not just a U.S. issue.
03:58We're seeing rates around the world go up.
03:59I mean, Japan, for example.
04:01I mean, so this isn't just a U.S. thing, is it?
04:04Well, Japan, Europe as well, and the U.K., they are much more exposed over in Europe to higher energy
04:11prices than we are.
04:12Japan is on this very gradual path towards higher interest rates as well.
04:16Relatively gradual, I would say, in terms of the overnight, right?
04:20But the long end is selling off as well.
04:21So this is a global phenomenon.
04:23But again, we're caught in this really bad environment at the moment until growth actually keels over.
04:29One final question.
04:30It's really important, and it's off your remit, and I say this, Gennady, with great respect.
04:35Michael Green writes a sub stack and says, look, a 5.1% 30-year bond, shut up and buy
04:41it.
04:41Step in, buy it here.
04:43Tell me about buying the dip in bonds right now.
04:47Do you just buy, or are you looking out tenths of a percent of yield or greater?
04:52I think it depends on your holding period, right?
04:55If you are a long-term investor, I think these are good levels.
04:58By the way, especially in real rates, I know you love to ask about those.
05:01Those are relatively high.
05:03Look at 30-year real rates.
05:04They're really approaching 3% at this point.
05:06Yeah.
05:06And that's a great long-term buy.
05:08The problem is conviction levels among investors are extraordinarily low.
05:13Nobody really wants to take the hit, especially now for the six months coming up into their year end.
05:18I think conviction is low.
05:20Nobody wants to stick their neck out, so they're stuck doing very little, and markets are flailing in the wind.
05:25You're kind of seeing that in the price action, where it doesn't take a lot to move markets 10, 15,
05:3020 basis points here.
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