00:00So how many more hikes would we need before we actually get to be restrictive?
00:06Like you need. So I would say that the neutral rate is probably close to 4.75 and with a
00:11terminal
00:12rate around five. So I think they got a long ways to go. I think you could see another one
00:16this year,
00:17potentially too early next year through the first half. So I think in total you get four hikes.
00:21If you think about it last year, they cut three times. So what you're seeing is you're removing
00:25that stimulus that you added. You're recognizing that the state of the economy that you have,
00:30which is where the unemployment rate is, where initial jobless claims are, where the state of
00:34other labor market and data indicators are telling you, is that even though real rates have gone up,
00:39real rates are running at the highest levels we've seen in a long time. And what we have with that
00:45is
00:45financial conditions are still easing. So what you need to do is find a combination of all these
00:50different indicators and all these different market drivers where what you're doing is you're
00:53tightening financial conditions. And that's what the Fed is trying to message. That's what
00:57they're communicating. And that's what they need for markets is to deliver the financial conditions
01:02tightening. Mark, if we get four hikes, including the one we just had by the middle of next year,
01:07what kind of growth rate would we have at that point? Surely the dot bot would no longer be as
01:13true as it is today, let's say. At least some of the voters would have to be changing their minds
01:18about
01:18that. Well, it's interesting, right? Because I think yields are rising because growth is stronger.
01:25So this is what's very interesting about FX in the context of central banks is Europe's dealing with
01:30a supply shock, which is mostly what's driving central bank reaction, which is why the Bank of
01:34England is probably reluctant to want to hike. This is why the ECB is already at restrictive,
01:40because essentially growth potential becomes lower if you're dealing with a supply chain or a supply
01:44shock. The U.S. is dealing with something different. They're dealing with an investment
01:48boom. They're dealing with an AI CapEx related boom. And again, what you can see, the driver of
01:53growth is in consumers. It's the AI build out. It's the infrastructure build out. It's the data
01:58centers. It's all these different things that are very different from what people look at for the U.S.
02:02So the thing that I would argue is that yields going up, tightening financial conditions
02:08doesn't necessarily, it'll probably lower growth forecasts. But right now, growth is running over 3%.
02:13So potential GDP in the U.S. is running at 1.8 to 2, maybe 2.25. So essentially what
02:19you need to do
02:19is because of where inflation is at and where these drivers are at, you need to get back down to
02:222,
02:232.5. That's where stable growth comes from. So I still think even if that's the lower growth
02:27expectations, we're not talking about a recession. But Mark, isn't it a little concerning that
02:32everything is predicated on this AI build out? And there are so many problems that we could be facing
02:37there from, you know, a moratorium on data center building to a continued chip shortage that may not
02:44alleviate anytime soon to just general public backlash against AI and the AI industry slowing
02:49themselves down, right? Might that not affect growth before the Federal Reserve can?
02:58Well, I think the Federal Reserve is leading the charge here. I do think that's a very interesting
03:02point, because if you think about what's driving a lot of countries, again, I don't think this is
03:06like classic consumption. You can see it in China. You can see it in Korea. I see it in Japan.
03:10You
03:10see it in the U.S. We're talking about reflation. We're talking about currency debasement. That's a
03:15big theme people have used. I would just say this is driven by wealth effect. So one of the best
03:19performing asset classes this year is the Nikkei. What's very interesting is, again, I think the
03:24policymakers in Japan are comfortable with weaker currency because it provides them the cushion for the
03:29large cap corporations to basically see their stock prices go up. So you're seeing a wealth
03:35effect. You're not seeing people. You're not seeing their incomes go up. You're not seeing
03:39employment driving. You're seeing wealth effects maintain growth. And that's the problem. That's
03:43the scary part of what's going on in the U.S. right now is wealth effect is the primary driver
03:47of
03:48consumption. You can track like income relative to wealth generation. And this is linked to AI. This is a
03:54major concern, I think, because this is connected across the world in the same way where it's
03:59about equities. It's about housing value. The thing that would worry me more rather than AI on
04:05rates is housing is starting to slow in the U.S. So I think that is a concern. I think
04:10that's why
04:10they've been trying to keep 30-year yields from going up. I don't think it has anything to do
04:14really with the currency. I don't think this is, again, why they're intervening in the Japanese yen.
04:18I think they're worried about 30-year yields going up and housing turning over even more.
04:22Yeah. And Scott Besson is taking care of that in his lane as Kevin Walsh is taking care of the
04:28two-year yield in his lane, right? Mark, you mentioned that all of your trades are really
04:34converging. So your carry trade, momentum, positioning, and risk portfolios have all
04:38collapsed into a single bet. And that is short dollar long risk. How long are you comfortable
04:44with that trade? So I've been asked about this question, like, is the Fed kind of a new catalyst
04:52for a dollar bull market? And the thing that I would argue, this is an extension of the rallying
04:57the dollar that we've seen fit in starts this year. Like, we've been out of consensus. We've
05:01been bullish the dollar since early Q2, late Q1. And again, I think this move is just an extension.
05:08You priced out earlier in the year that the Fed was going to cut. Now they were priced to be
05:12on hold.
05:12Now, basically, I think the data we've been seeing, we've been looking for that first hike since
05:17May, June area. So I think a part of it, again, this is not the start of a bull market.
05:22But the
05:22thing that is concerning is market positioning. So those portfolios that we've run, we run a carry
05:27portfolio, momentum portfolio. We run a risk on, risk off portfolio. We run these across currencies.
05:34And what we looked at is essentially all these portfolios are short the dollar. So it's one trade.
05:39It's leveraged to risk sentiment. It's basically building momentum behind itself. And when it unravels,
05:45it allows the market to move very aggressively. So I think that's the key thing is the market's
05:49been actually very bearish to dollar since the July Fed meeting. And I think as a result,
05:54it has some legs tactically for the next couple of months. So I would target at least 112 in euro,
05:59maybe 130 in sterling. I think dollar-yen is going back to 160. And I'm actually very nervous about
06:05the LATAM carry trade, particularly in Colombia and Brazil. Well, you say, and you said in this
06:11conversation, everyone's tightening, but not the same way and not for the same reasons, right?
06:15Which central bank is most at risk of making a mistake or getting caught up in somebody else's
06:20maelstrom here?
06:23I think the most interesting, I would say there's two. The ECB, I think, is done. I think the market's
06:29trying to look for reasons that they can continue to go. I think, again, they're dealing with a supply
06:33side shock, which is much different than demand driven, which means you don't want to tighten
06:37above restrictive because growth is already slowing. So I think that's the worry there. And again,
06:41you're going into the French elections next year and the oats have been selling off aggressively.
06:46So there is some elements here of like how much tightening of ECB plus the issues that we're
06:52seeing in France related to the move in Bonnios. I think the interesting one is actually the Bank of
06:57Canada, because what you have are four hikes priced in for the Bank of Canada, mirroring exactly and
07:03trying to do what the Fed's doing. And I don't see this at all. This is two countries that are
07:07next to
07:08each other that are at very different places in this economic cycle, particularly given the level
07:13of uncertainty we have with trade. So the one that I think it's actually a very clear trade is you're
07:17buying dollar cad and you're receiving front end in Canada, because I don't think the BOC wants to
07:22move. And I think they'd actually rather be on the sidelines.
07:24.
07:24.
07:24.
07:24.
07:24.
07:25.
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