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tv   Bloomberg Real Yield  Bloomberg  April 9, 2021 1:00pm-1:30pm EDT

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>> bloomberg real yield starts right now. coming up, the american economy delivering higher prices, fed reserve official stand firm as credit spreads drop below 3%. we begin with more fuel for the great inflation debate. >> it does not take much to be kindle inflation concerns right now. -- rekindle inflation concerns right now. >> what happens if we get more
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inflation data? >> are we on a rising trend or not? >> the fed is saying it is going to be transitory. >> it is going to take the fed a while to figure out whether transitory is indeed transitory. this is a high risk policy scenario. >> the fed will find itself in a difficult position. it is becoming a real issue. >> the fed will remain less concerned about inflation than the markets. >> the markets tend to have a short fuse. jonathan: let's break in today's panel. -- bring in today's panel. let's talk about the difference between something that is transitory and something that is a little more sinister. what is the distinction? >> i think what is interesting is everyone says transitory,
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what is transitory? is it two months? two quarters? two years? that is the problem. transitory has not been defined and i think there is a real risk that it is not two months, but potentially even more than two years. that is an issue. jonathan: what is your take on that? mike: to use a literary analogy, we are waiting for ghetto -- gad do, and he is not showing up. everyone is freaked out about short-term data. if you look at the equity markets, they are looking to next year and the year after but the bond market, for some reason , i think it is for hedge purposes, is owning up to this inflationary trend and in general, we think we are very much in the camp of transitory and in the view that year, the
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upside case for inflation is very where pico bit. jonathan: you said the word hedge. i wonder whether you can elaborate. you are saying some of the price action is ace -- is a consequence of hedging. mike: i think a lot of what is going on is tech-related but it is the opposite of the traditional hedge. the traditional hedge is going long duration. i think right now, everybody is so focused on risk, so everyone things a little bit of pollution -- a little bit of inflation is going to end the party. a lot of the action is hedging equity exposure and it can end badly for some people. jonathan: gene, weigh in,
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please. gene: what we know is that prices have been low and stable for 25 years. we also know that, after a deep recession that we are still trying to come out of, if you are a fed policy maker looking at bloomberg tv and they are talking about the prospect of rising prices, you are doing back flips. this is what you want to jon ferro to be talking about in 2021 compared to where we were a year ago. does it get out of control? that is the question. what we know as well is the signal-to-noise ratio over the next six months is going to be extremely low. there is going to be a lot of noise coming through the inflation data rather than a true wage price inflation spiral. we need to be humble to the fact that there is going to be a lot of noise and we are embarking on
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an experiment that we have not seen before. i tend to agree that i think the broader trend is still intact, the secular disinflationary forces, but we don't know, we have not had this type of experiment before. jonathan: sonal, let me bring you into the conversation. sonal: i would say the last 25 years, absolutely. i will hold my hand up, i have been an inflation hawk and i have been wrong. in the last 25 years, when have we had two years when you have had ddp budget deficits year after year -- gdp budget deficits year after year, $5 trillion already, which has been a sign to this recession. we are talking about close to 30% of gdp over a two year period. this is happening at the same time that the fed's largest qe
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is larger than 1, 2, and three put together. you have a period where, because of vaccine distribution, you're going to have an economy booming. if you have any one of the three, i would buy it and say inflation is not coming. you have all three pointing in the same direction. i agree, we need to be humble about what we will see and what we will see, but when we talk about an experiment, i think the experiment is a different one. we have never thrown this much stimulus at a recovering economy before and an economy -- the last time we dictator billion dollars -- the last time we did $2 trillion, we had an economy that struck by almost a third. this time, almost the same amount and an economy that is likely to grow this quarter at double digits. bottom line, are we really
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saying that there are no consequences? clearly, you can print, you can do whatever you want with no consequences. which is fascinating, in which case, why stop? why not do $12 trillion? why not have a ubi? jonathan: congressman doc osseo cortez might be getting some ideas because there are some people that like the sound of that. mike, some have gone through point by point. you are talking about secular headwinds, the trend of the story in the previous cycle will kick back in again. i'm not sure that you are saying that there will not be consequent this, but what is unconvincing for you specifically? mike: i can never make the comment we have to be humble because everyone who knows me
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knows that i'm not. i think the argument that is challenging is we have been through many cycles over the casts -- over the last 20 years and we have not gotten to full employment and there are a lot of reasons for that. technology has played a significant role, globalization plays a significant role as well. what we have right now is we have had the global economy completely shut for almost a year and while we are going to have short-term spikes in growth and demand and supply chain issues that are going to cause prices to go up, in the long run my as an investor, we have to be able to see through short-term effects and look at, when things normalize, what will the world look like? there is going to be scarring that comes out of a massive crisis like we just experienced that is going to have an impact on the demand for workers, and impact on the ability for
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companies to raise prices. you look at europe, that has continued to be mired in slow growth, bigger challenges, you have the emerging markets, very significant challenges as well. we are not going to wake up next year and the year after and see massive levels of growth and inflation. there are factors that will cause us to be an environment in 2022 and 23 that looks more like 2019 -- and 2023 that looks more like to do 19. sonal: if i can -- 2019. sonal: if i can jump in, are we talking about a couple years or couple months? what is temporary? it is a little bit like transient. these are words that do not actually fill out. the second thing, when we talk about massive, i'm not talking
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about massive, i am just saying we are probably not going to be sub two again. by this year, we could be approaching 2.5, three. that is not in the price and maybe you could go up further. those secular challenges over three years -- those might revert. i think the slap back, this is a crisis we have never seen before, but it was a mandated shutdown of the economy. the scarring, i accept to some extent, but the scarring is you mandate a lockdown, people cannot go to work. you open, people go to work. i would be curious to know as to how long that scarring lasts relative to the global financial crisis when people were shellshocked and traumatized by the wiping out of their net worth, which happened because of
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the housing crisis. jonathan: gene, let me give you the final word. gene: i think there is something we are missing, which is where is the pent-up demand and where are the supply bottlenecks? the data we are looking at, these are goods. goods are things we have been able to buy readily for the last year and that is where the bottlenecks are. the pent-up demand is not an goods, it is in services, it is in experiences. i think there are still plenty of seats at movie theaters, i think there are plenty of empty seats on planes and empty planes that can absorb that supply. i think it is going to be on even. you cannot make a statement for every sector. -- make that statement for ft sector -- for every sector. jonathan: this job would be much easier if you were around the desk with me. , the jump on bonanza -- next,
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the jump on bonanza. that coming up next. this is bloomberg. ♪
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jonathan: from new york city, this is bloomberg real yield. time now for the option block where we kick things over to europe. italy was saving 60 billion euros for its first new 50 year bond offering in five years. moving to the u.s., volume was subdued, sales falling short of estimates. this court kicking the week off,
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-- kicking the week off. the failure of me to identify the distention between the way you look at the world and the difference in the moment, but then failing to talk about what it meant for your view on the markets, we are familiar with the way you are looking at the world, how you think about inflation. what does that mean for the decisions you are making right now? mike: a few different things. i think we will have accommodative policy for a while. we are ok owning some interest rate risk in countries like the u.s. and australia and canada where you are pricing in a significant recovery. we are still overweight credit. funding emerging markets to be more interesting now. the main thing we are doing as an institution is we recently combined our bank with the
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public asset manager. we now have a public and private investment capability and we are talking to clients about the ability to go from the public markets, which have been picked over by everyone, to looking at private credit as a way to pick up, return, give liquidity, but be able to get better terms than what you are getting in the public market. i would say a little less overweight to credit risk in the public markets, but thinking about the private markets as a good opportunity and area that is underinvested in. jonathan: sonal, the difference between you and mike view the world, i'm wondering how much daylight there is between how you allocate money as well. sonal: i would say we are less comfortable with long-duration, given the views i just described. particularly in the u.s., to a lesser extent in europe. i think european yields get dragged up a bit, but we think
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europe is going to be lacking. the u.s. is a special case. shortening duration, we are more positive on high-yield. we also like private debt markets and we have some important private debt payers and those alternative markets are interesting. people are getting driven more and more into riskier asset classes and it is inevitable, in a sense, at a time when the quiddity is this abundant. finally -- when liquidity is this abundant. finally, we like em. jonathan: what about you? gene: if you look at the last
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six months, the tug-of-war between duration risk and credit risk has been skewed towards credit risk and that has been the place to be. now, when we look at the optimism in markets, we see a lot of that reflected in prices, the barclays index spread yon 300 basis points for the first time since pre-financial crisis. we are stunning to balance that out more, taking advantage of the fact that interest rates have gone higher. we are adding to ration coming from a short the ration position into one that is slightly less so. there is something to take into account related to the conversation we had before, which is if we look at how the market is priced for the fed, the fed has been introducing its interest-rate forecast for 10 years and this is one of those few times when the market is placing interest rates higher
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than the fed's forecast. in the past, it has been a good time to add duration. on the credit side, be a little more picky, not just buying high-yield in total, but looking for shorter maturity opportunities, bank loan opportunities. jonathan: let's talk about credit markets. it is unusual to see what we are seeing at this stage of the cycle, if we can even consider this the beginning of a cycle. you look at the type of the previous cycle, back in 2018. you look at the cycle before that, 2007. it was right before those cycles ended. how unusual is this to see spread as tight as they are before the recovery has even gotten started? mike: it is not incredibly unusual. markets look forward and they are pricing in very strong growth.
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i think the credit markets are also more in my camp with regard to rates staying low and credit benefiting from the combination of easing monetary and fiscal policy. one thing that is important to note, the high-yield index is made up of three investments. you have the equity-like securities, the high-yield, then you have bb's that are more like investment-grade credits. when you look at that, you see that the bb's are more light-sensitive than the rest of the market, they have underperformed. bb's are still offering spreads that are in access -- that are in excess of what you get in bbb land. most of the public credit markets have seen their better days in the private credit
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markets are where there is some return for the level of risk and you are seeing massive growth of the private credit market in a positive way, mainly because you have seen companies in the public equity markets now in the private equity markets. the banks are not providing capital lending to private companies, so real opportunity for investors to get liquidity and pick up returns of her was many years ago. jonathan: still ahead, the week ahead. another round of fed speak, including chairman powell. more still to come. this is bloomberg. ♪
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jonathan: time now for the final spread. coming up, another sign from the
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fed, chairman powell, the vice chair both speaking on wednesday, plus lots of economic data including cpi figures, another round of jobless claims, and retail sales. gene, cpi in america, when we get to see maybe a push towards three. is there anything the fed has left to say that they have not said already? gene: this is where they can prove their point on flexible average inflation targeting. we wanted to see the day when inflation goes above two and they do nothing about it and that is what we expect to see here. we are in that period where the signal-to-noise ratio is low. this is a lot of noise and i think if we are still talking about this two quarters, two years from now, that is a big deal. two days from now, not that
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worried about it. jonathan: if you are and i guess if you and i were in london, we would be talking about 3%, 4% -- if you and i were in london right now, we would be talking about 3%, 4%. mike: we would probably be in zoom -- on zoom in london. why do i think different countries have different tolerance levels for inflation and why is 2.5 ok now? it is ok for the points that were made. i think most people in the market view that we are going to have elevated inflation for a short time. i think the fed recognizes that. i think the fed it their policy directive meaningfully last year where they wanted a target for an extended period of time and as a result, they need to see a certain period of time over the average and they want to get you what they view as full
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employment. we thought we got there at 3.5 and then we thought we got there at three and we did not. i think there is a higher tolerance for running a higher economy when the fed realizes that the bigger risks are impacting growth. jonathan: we have to leave it there. thank you. we have to get this panel back together again. that does it for us. we will see you in a couple weeks time. this is bloomberg. ♪
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president biden's proposal calls for major increases in funding to fight inequality, disease, and climate change as well as a jump in education funding. but republicans are likely to oppose much of what the president is looking for. the federal reserve vice chair says policymakers will wait for evidence on whether they are reaching their goals on stability and employment before adjusting monetary policy. he spoke in an interview with bloomberg television. >> as we think we are making progress, we will communicate that to people who listen to our communication. this is very want to be. it is actual progress, not projected progress. it is hard numbers on the labor market and on prices. karina: the minutes of that meeting showed policymakers expect it will likely be sometime time before substantial further progress is made unemployment and inflation.


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