Coming up Treasury yields breaking down to new highs. The Federal Reserve gearing up for big moves in May.
Looking ahead to inflation with an eight handle. We begin with a big issue hoping for a soft landing. The ever elusive soft
landing. It's going to I think require some fancy footwork from the Fed. Growth is slowing and financial conditions are
tightening. Gonna be very difficult for the Fed to focus on just inflation. This is tricky. The big question is does it morph
into a recession. The Fed's path to this soft landing has narrowed. It is this tight wire that they're going to have to be
walking. The goal for the Fed is to bring about a gradual tightening in financial conditions. They need to normalize. They
need to normalize as quickly as possible. It has to be some combination of weaker stock prices higher interest rates a
stronger currency and wider credit spreads. There's a risk that the Fed over tightens. There's a risk that the Fed under
tightened. It seems unlikely that we're going to be able to avoid a harder
landing. Let's have that conversation right now with Goldman's Amanda Lang and CCW land landman and Bank of America's mark
about it. Let's start with you Amanda. Can the Fed engineer a soft landing. How elusive is that and what does it mean to you.
Thanks for having me Jeff. So we heard on on your program this morning saying that it will require some
fancy footwork but the base case is not for a recession. Our economists see about a 30 percent chance of recession but they
don't view it as inevitable. And so that's something that we're watching very closely. I
think the credit markets are telling us a similar story. We've had some pretty meaningful tightening from the local peaks of
mid-March. And I think investors are looking around at fundamentals and bracing for a slowdown in growth.
But it does not seem as though the credit market is incorporating a recessionary fear at this stage either. Let how
binary is the situation right now. There are people who believe it's either all. Either you prolong
inflation or you risk recession. Is it a situation of either all.
I mean I don't like it. That's exactly what the situation is. Carry on that please. Oh
sorry. I think that's exactly the situation. I think that you know
we've had over 20 percent M2 growth over the last couple of years. There's been huge accommodation on the part of the Fed.
When do you get runaway inflation when you have monetary accommodation combined with some of these supply shocks we've
seen. I think obviously some of the supply shocks will clean up by destroying demand. Some of the inflation. But the Federal
Reserve is going to have to throw some people out of work. I very much agree with the economists who are saying that you're
not really going to get relief from the wage price spiral until you see the unemployment rate begin to loosen up here a little
bit. So it's a very tough choice for the Fed. That's exactly what Bill Dudley thinks as well. I'll quote him directly from a
piece he wrote a little bit earlier this week on Bloomberg opinion when he said one thing is certain to be effective it
will have to inflict more losses on stock and bond investors than it has so far. That I want to come to you said we'll get to
the balance sheet issues in a moment. Do you agree with this line from Bill Donnelly the former New York Fed president that
to be clear to be sets and in his words to be effective it will have to inflict more losses on stock and bond investors than it
has so far. Yes we do agree with that especially in the fixed income side.
We do think that in particular real interest rates still have to rise further.
Real interest rates right now are still quite accommodative. Ten year real rates have moved a lot this week and we think that
there's further upside there. And we also think that the Fed probably needs to take real rates at the front end of the curve
into a place where they're finally restricted. The Fed is a long ways away from that today and they really do need inflation to
come down and for those rate hikes to kick in in order to get that real tightening of conditions. So yes we do think that
there are headwinds to risk assets but we also think that real interest rates probably need to rise further in order to bring
this about. Mark the thing that I hear quite a lot of is that we're seeing the peak in Fed hawkishness. And then I'll ask
people okay when you can you tell me what Kutty means to the market. And that's how you know what. I don't really know what
that means to the market. So how can you say that we've seen peak Fed hawkishness if no one really has any conviction on what
Kutty means market. I think that's right. I don't have a lot of conviction that we have seen peak fed
hawkishness especially because we know that the Fed tends to overshoot in these types of environments. They tend to miss some
of the early signs of a slowdown. Keep tightening up both through higher front end interest rates as well as through Kuti.
And the Fed will tell you that they don't have a lot of confidence in exactly how Kuti impacts the real economy. We've
heard estimates from Powell and others on the Fed that Kuti might be worth one 25 basis point rate rise maybe 50 basis
points of rate rise but they don't really know. And so this is a Fed that's very much like Powell said back in 18 like it's
walking in a dark room feeling it's away feeling its way around as it approaches neutral knowing that rate hikes are impacting
the front end Kuti is impacting liquidity in the system. Likely the back end and likely financial conditions. But they don't
know exactly how to calibrate those two. And therefore the risk of an overshoot in our view is quite meaningfully high. So we've
got Kitty Amanda and Amanda. You've also said that corporate credit quality has paid you come on this program in the last few
weeks and said that throwing everything the market banner is speaking about you're underway in credit and throw in this to
cash. Can you talk to me about how cash competes with credit in your mind at the moment.
Absolutely. So from a relative value perspective we believe that as rates continue to rise specifically in the front end cash is
coming back as an investable asset class option. And so it really does reduce the value proposition of things like short
dated IAG corporate bonds high quality fund and paper. So you do have to be careful in terms of erosion of the value proposition
going forward or as you mentioned are kind of a global portfolio strategy. Allocation has an underweight to credit within credit.
We're still having a slight overweight on high yield versus IAG in the US market. In Europe we're a little bit more defensive
overweight. IAG verse high yield and then still expect that kind of curve flattening by so underperformance at the very front end
and then outperformance of the very long end led you underweight cyclicals led you're underweight industrials. You believe the
Fed could do some damage to the labor market as well. That might well be the objective of this Federal Reserve one they won't
talk about of course. Can you talk to me about what. You're overweight.
Sure. I mean I think when we we feel the same way about credit it was worth buying a couple of weeks ago when spreads got out
to 130 you're able to buy new issues in the 140 to 150 area. It's tightened. And since then we don't really understand why
we've been selling. We like we think agency mortgages. You know if you're Fannie Mae's your Ginnie Mae have gotten to the point
where it's worth dipping a toe in. Prices are low. The negative convexity in mortgages is at an all time low and spreads are
pretty wide. And I think there are obviously front running the news of portfolio sales. And I would say as it relates to Kutty
the Fed broke things in 2018 doing Kutty. They'll probably break different things this time. They always in these tightening
cycles they blow things up along the way. They're probably meant to be blown up but there'll be lots of volatility. And I think
for opportunistic investors I don't want to sound too ghoulish but I think they'll be a lot of these trips higher and spreads
and different asset classes that you'll be able to take advantage of. Can you take me back to 2018 and tell me what you
mean by break. Different things this time. What they broke last time. I remember the primary market completely shut down. We
will remember what happened with high yield spreads not December 18. When you say things broke then and you think something
different will break this time what you mean by that. Well I think that the funding market you know they've put
mechanisms in place where it probably won't be the funding market that breaks during Kutty this time. It may be any other
market that you know we could not predict in advance. But I think that this is an experiment. The whole quantitative
tightening quantitative easing experiment we're still in early days on this and this is the second attempt at it. And my guess
is that when we pull this liquidity back we're going to find areas of the markets and mechanisms of the market where the tide
goes out and people are not wearing their bathing suits. As the old expression we find ourselves here at Santa
Monica banner just on the amount of quick cash you say you expect the caps that we got from the Fed minutes this week and
how that influences your thoughts on what you expect. Now this is what you expect did before. Yeah
we were actually a little disappointed in terms of what the Fed announced on Q2. We thought that they would in particular treat
their built portfolio a bit differently and allow for a faster overall runoff. So after the minutes this week we actually
ratcheted down our expectations on how much balance sheet shrinkage we would get this year from around 930 billion to
about 650 billion. And again the delta there is really due to the treatment of the built portfolio.
But look there there's going to be a more aggressive approach to Kuti in 2023 and 2024 than we had previously thought. So the Fed
is just going to be a little bit more gradual in moving into this. But there's a lot of liquidity that's coming out even in
this year alone. Given our expectations of now about a fifth 650 billion liquidity drain that's almost equivalent to what they
did in the last episode of T. So these are very very sizable numbers.
And just in seven months this year you're likely to replicate what you had over the course of about a year and a half in the
last episode. It's all happening much much faster to the three of you. Can I say thank you. We of course had to interrupt this
program for an important historical moment for history in this country. So thank you very much for the patients of Amanda Lang
and Marc about it. And Land Landman from New York City. That does it for us Bloomberg Real Yield. We'll be back next week.
This is Bloomberg.