Let me start with you. I mean, I watched the eco numbers, I
listened to the Fed speak. I sort of felt like I was going both
ways at the same time. What did you see?
Well, for a bond investor, all of us who have been battered this year.
This is one of the weeks that made sense to us.
We had a nice tail wind coming in from the inflation data.
It was great all the way through core. When you look at shelter, everything.
Yes. The markets went a little crazy.
They went wild. And the central bankers did what they're
supposed to do. They came in one by one and reminded us,
don't declare victory yet. These are only a couple prints.
There are more hikes to come. But maybe there is some optimism.
And the markets settled down. So I look at this week and I thought
this is the first great week in a long time.
So I've. Sunny, is that the way you saw it as
well? And there's still some more rate hikes
to come? How many?
I think at least another three to start with, 50 basis points next time in
December, followed by at least 2 or 3, 25 basis points next year.
And then we'll see from there. And I think what Bob said is very true.
At the same time as we were listening to at least three fat people come and
speak. I wrote down.
I think they all had very different quotes.
And you had some of that. Ben Bernanke talked, but you also had
the president of St. Louis Fed say something slightly
different, as if, you know, we would start could do we would continue with
rate increases for a while longer than she had implied.
And then, of course, we had Susan Collins come in today.
I would even, you know, sort of potential 75 basis points.
So we are hearing numbers that a little bit all over the place and trying to
make sense of it. So it's Obama.
Are the markets making it harder for the Fed as a practical matter?
They were at the start of the week, I think not so much now.
I think we're all in the same spot. We've all got realistic expectations.
The Fed is headed to four and a half, five percent.
They'll get there sometime in the first quarter.
We'll see where inflation is. If it's below the Fed funds rate, then
that gives them some scope to pause on the tightening we can re-evaluate at
that point. But right now, bond yields have gone up
a long way in a very short period of time.
It's time for a breath. Bob, does that get us to a soft landing?
Unfortunately, it does not. And I think that's the one consistent
message from the Fed. Susan Collins aside, which is there is
going to be pain for businesses and households when you have this magnitude
of rate hikes in such a short period. And you're also withdrawing liquidity
through quantitative tightening. It's going to bite.
And we're already seeing it's biting the economy hard.
Thankfully, it's also now starting to bite inflation.
So I want to pick on the liquidity just for a moment.
If I could have seen here, how big a problem do we have in the Treasury
market now with liquidity? I hear conflicting things, but some
people are very concerned about it. Big problems.
I think Bob lives. It's much more than I do.
But as as you know, there are very, very big problems with the trading volumes.
And and for big traders or even small traders, getting bit is becoming much
harder. And you're working in a much less liquid
liquid environment. And I know between Treasury and the
banks, there have been a lot of meetings, but I'm not so sure if we have
a solution yet. Well, Bob, could the Fed make it easier
with some regulatory changes? It could, but I think the moaning that
we hear in the bond market about liquidity, it's always there.
We always complain. We don't get the price we want.
The reality is, for the last couple weeks, you could have moved your
portfolio in any direction you wanted, up and down, duration up and down,
credit risk without any kind of penalty. So I'm not that big a believer in the
lack of liquidity. I'm saying we talk about a soft landing.
It brings me back to oil because oil did move this week and it moved down in the
price of oil. And most people I talked to, some
suggest it was in part because of a concern about global recession, really a
backing off or at least a softening in the markets.
You came out of that business. You really know energy backwards and
forwards. What are we seeing in oil?
So as you said, oil prices did the future numbers went down below 80, which
was a big shift from a little while ago. But my view is still that we might just
avoid a recession in the U.S. if we are fortunate, but we may not be
able to avoid it in Europe and the rest of the world.
And a lot of the, I think, softness, but these numbers that we saw today and in
recent days is because of the expectations in China.
Now, China is starting to open up a little bit maybe and loosen its Covid
rules. But that's going to take a while.
And I think that's softening is is softening the oil markets and will
probably continue to do that. Is it opening up?
I mean, I'm not. Exactly, sure who exactly what's
happening, because on the one hand, we hear them saying things that sound a
little softer on zero Covid than anything we hear about a lot of cases.
So it is kind of interesting. We had a team out in Asia as this week
and they came back with interesting news that there is actually some physical
opening up. But now you have people who are afraid
to go out because they've been told so long that if they go out, they'll get
Covid. And so you're seeing a very different
phenomena, which is actual, you know, individuals not wanting to go out of
their houses versus the government, which has been very strict about your
getting out of your house. I'm sorry, of at the G 20, of course,
meeting over in Bali. And some people thought there would be
no single statement coming out of it. They did come to some agreement in part
driven by some of the developing countries.
Should that be encouraging to investors, actually, that we're getting back
perhaps a little toward multilateral cooperation, a much more positive news
came out of the G 20 than we all expected.
And as you said, there was also a lot of big stress on reform of the multilateral
lending, because the big news out of that meeting was that there's huge needs
when it comes particularly to emerging markets, climate related investments.
And there's no way with the existing finances of the multilateral is that
that could be met. So that was why there was a lot of
emphasis on the reform of the multilateral sector.
But also getting the multilateral is to work much better with the private sector
to generate more resources. And you saw that very particular case of
Indonesia, which was discussed a lot and written off a lot, but about 20 billion
going into it to replace coal in Indonesia with cleaner fuels.
But another important to go over this week in sort of a rolling over is the
outcomes of the Malta to the midterm elections.
We found out that the Democrats will hold onto the Senate.
The Republicans will get a narrow majority in the House.
What does that communicate, if anything, to investors?
Is that sort of a steady as you go away because you have a split government?
Not much is going to happen either way. So it for sure is.
I will tell you, going back to the G 20, we're actually hearing from clients,
large institutional clients, that they're more confident, confident about
allocating to markets when the G 20 countries are talking to one another
again and working with one another again.
So that's a huge positive. I don't remember that in, gosh, over a
decade. When you when you go back to the
gridlock in Washington, I hate to say it, but the markets kind of like it.
It's when are dramatic policy changes. You have to reprice everything in the
markets. It becomes destabilizing.
They're always going to be some winners. There are going to be some losers this
time. If we know we're going to have gridlock,
we can focus on bringing inflation down and trying to avoid a recession and have
a soft line. You know, I think a lot of people on the
street think that it's sort of Hippocratic first do no harm.
You know, if you're not doing it, then you're not messing things up.