260198902 - 1_luxaoo21 - PID 1851201 Good afternoon everyone and welcome to the real vision daily briefing. I am address lastly, speaking on an almost historic afternoon, We are live on air Wednesday the 15th of June, hot on the heels of the Federal Reserve press conference, we've had the first 75, 50 basis points hikes since 1994. Ladies and gentlemen, Jay Paul got on stage today with a very firm initial statement that inflation is everything that matters. But we actually have interest rates down a bit after this statement. So it's the flipped, finally getting ahead of the inflation curve. So debate this with me this afternoon. I have invited Joseph Huang, also known as the FET guy. And in my humble opinion, he's one of the best fit watches out there. What a tremendous timing to have you with us this afternoon. Joseph, welcome to the show. In fact, so much, Andrea, Thank you for inviting me excited to be here. Let's have a look at it. Three quarters of the percentage point delivered today. The first time since 990 for I basically think no one dare to think about that just a few weeks ago. What do you make of this FOMC meeting and the rhetorical stance of JPL initially or Yeah, it was pretty, pretty exciting, right? 75 basis points. Now, if you asked me Monday morning, I would say 50 basis points for sure. Because the way the Fed works is that it never surprises the market. So it was guided to market to about 50 basis points. And so I expected them to have done that, but something happened Monday afternoon. So Nick, tomorrow's of the Wall Street Journal, who's like a fat inside are basically broke a story saying, Hey guys, maybe I'm going to do 75 basis points. So this is kind of how that works. Again, because the feathers want to surprise the markets. If it wants to do something that it thinks the markets are not fully prepared for, then they all kind of color sources in the media. Nick is a very good source for the Fed and they'll break it to this too. And so what's that story broke 75 basis points, was basically fully priced into the market. And that became everyone's expectations and Paul ratified that. I thought Paul gave a pretty good press conference. I felt that I saw someone who was I think very earnest in find information, understands the problem, is willing to do whatever it takes. I think in contrast to many other central banks around the world, his performance was very good. So I'm glad to see that I think is his speeches, I mean, his projections in a press conference. It's very interesting and I guess a packet as we go along, definitely we will. Paul received a lot of questions on the change of stands from going with 50 basis points to now 75 basis points a meeting. He also received a few questions on whether that was a credible way to change the stance that quickly. What do you make of that debate in the questions we received on the credibility side of that move. I'm always a bit if when people talk about that credibility, I mean, is it really fair credibility that keeps their inflation because everyone thinks that the Fed is going to do something to keep inflation lower, inflation become too low. I mean, when you poll people on the public, most people have no idea what the Fed does. So I don't really, I don't really look at it that way. But I think it's really good that he's becoming very aggressive. Way if you just look at inflation at 8%, the federal funds rate below 1% and just press about at about 1.5 today, after today. So it's still very low. I think what you want to take what I took away from this meeting, just looking at the projections is an impression that the Fed is taking this very seriously. And the way I look at this is how they view where the center policy is relative to their neutral rate. So the felt looks at the markets throughout the economy, through the lens of the neutral rate. Where if you're both in utero, you're being restrictive and if you're below the new trait, you're being accommodative. The new SRE being the rate at which the economy is growing or shrinking. So if you think of past, the past few meetings, powers always talking about I want to get to new, show me get to neutral. Now, through the dot plots, he's making a very strong commitment that he's going to go above neutral. So John truck on Twitter made this great point. So if you look at where PCE inflation is and look at where the public neutral to be wishes about 50 basis points next year and the year after that, it looks like they're going to be about 80 basis points above neutral. So in nominal terms. So that's going to be a pretty restrictive monetary policy that they haven't really reached two in quite some time. And frankly, I'm not really sure that's going to be enough. That's still just have under 4%. Inflation still pretty high. So it could be even higher depending on events unfold. But at least in this time to their dotplot, they have a very strong commitment to graze monetary policy above what they perceived to be neutral. If we look at the dotplot, I think this is a very interesting theme. After today's press conference, they intend to go to levels just south of 3.5% by year end. And if we take the 12th month change of that level by year, and it will actually lead to the most aggressive 12th month interest rate and hiking cycle since the mid eighties. Do you think that pace is quick enough or will they have to go even faster? I think until you are so your charter is amazing. So it does show that it's super, super aggressive hiking cycle. I think if you hike too fast, you're going to break something, right? So you have to be able to get to where you want to get to as quickly as you can without bringing something from going from now to, let's say 3.5 by year end might involve another 75, definitely involves a few 50. So historically that that's quite rapid. I think that that's published fastest. You can go if you want to go. If you want to take it even further, you're going to have to do it over a longer period of time. So I think, you know, we're we're pricing it at your end. That's probably as fast as they could. They could go without breaking something. It's already very big move. Yeah, there's Churchill's right. For the next meeting. He essentially kept the door open for another debate on whether to hike 50 basis points or is 75 basis points. And it seems as if to me that they will allow the next couple of inflation releases, both in terms of expectations but also actual inflation to decide for them in terms of whether to go ahead with 50 basis points or 75 basis points. Powell had a very interesting remark relating to headline inflation, because he essentially focused a lot on gasoline prices and headline inflation. Do you think that they are now targeting headline CPI instead of PC? The PC is usually their target. What, what do you make of that debate? Yeah, that's that I also current.com and Andrea cells, really interesting. So Paul mentioned verbose as, you know, your target inflation, which are geotargeting the peace, core inflation or CPI and use like CPI. And if you link that with another comment, he may basically that, you know, he's a very concerned about inflation expectations. And inflation expectations are formed off of your headline CPI and not core inflation. Than eaten. You have to put together some kind. You have to kinda come to the conclusion that in some ways he will be thinking about CPI when he, when he, when he's adjusting monetary policy. Because inflation expectations is super-important to them. And if inflation expectations are dependent upon headline CPI, then you kind of have to indirectly target that. If you think back to when he was asked why he did 75, 3050, he talked about the hot CPI print last week, but he also talked about data showing that inflation expectations appear to becoming an anchored. And remember, when you're trying to understand the Fed, you have to think from their perspective. From their perspective, inflation expectations is a really, really big part in what determines actual inflation. So when they see inflation expectations becoming, as they would say, an anchored freak out. And so they immediately did 75 to Sam around. And if as he noted, CPI is feeds into inflation expectations, then I think as you're hinting, it seems like he might have to be targeting CPI. And that's going to be really hard. Because as powers really reiterated many times that press conference, there's a lot of things happening in the economy. And that's really not all up to him, right? So he can control demand a bit. There's a lot of other stuff like commodity supply constraints that, that he doesn't have control over. And unfortunately, stuff like that has a big impact on headline CPI. Like for example, gasoline. Yeah, I want to pick your brain on that exact topic because Paul kept reiterating that a lot of factors are currently beyond the control of the Federal Reserve. Take the example of the commodity supply side issues. The high gasoline prices, et cetera. Do you think that's a way of preparing the public for a potential dark fall when it comes to growth. Is it fat? Speak of saying that there is a recession risk. If you look at their projections, they're projecting unemployment to rise. So there is some suggestion of that. So, okay, I look at it this way. The Fed has fats job as inflation. But inflation is really not a lot to them. Unless they're willing, really willing to say hi, creates excessively and severely cramped demand. So the Fed has power to bring everyone into a ginormous depression rates. So they can just hike rates a 100 basis points or 1000 basis points. And we will be living in caves, write all the market crash, and then we'll have no more inflation will have massive deflation mission accomplished. So they always have that, but you don't want to do that. There are policy levers that the government can pull, but it's not really within the control of the Fed. For example, if you think of, think about the Congress and the White House, one of the, one of the big policy levers they could immediately poets suggest lift Russian sanctions, right? So any policy choice has costs and benefits. Again, this is the political decision. Sanctioning Russia obviously is. We want to punish people who are bad actors in the world. But on the other hand, the people who pay the price for that, our people and let's say Africa who knew him, Mr. after death because of higher food prices in many poor people in America who have trouble forming gas. So this is a policy choice, but it's also a leper that they could pull immediately to 10 inflation. Unfortunately, it's not powered car. The only thing power can do. Manage aggregate demand. I want to pick your brain on a very specific topic that Paul kept talking about through the press conference. Because in terms of the debate on whether the reserve can actually pivot or POS, sometime this year or early next year. In relation to that debate, he kept saying that defect will have to see compelling evidence of inflation slowing down first. And he actually became very concrete and that question, referring to the month over month rate on inflation. Unpack this debate for us and what you make of the comments that Paul made on this topic. Pao first talked about this, I think a couple of weeks ago, he set forth a clear and convincing standard. For those of you who aren't lawyers, clear and convincing is the second highest proof of standard. You have. The most highest being a beyond a reasonable doubt, which is what they would use in a murder case trial. Clear and convincing is what they would use in other trials. And that's basically that is highly, highly likely that, you know, to be true. So this clear and convincing standard today was further clarified in stock and as you noted undress, he wants to see a series of declines in CPI to make sure that inflation is under control. And the thing is, it doesn't look like it's going that way, right? So we, we, with power to their power said that his motto suggests that, that CPI last week would have been lower or at least about the same, but it actually is going in the wrong direction. So he's now getting is clear and convincing. Inflation moderation and I'm not sure if you will, because if you look at where we're commodity prices, cerebral gasoline seems to be going higher. Oil prices simply continued to go higher. That, that doesn't look like it's going to go into moderate in the coming months. So we might actually CCPA continue to increase. And if that's the case, we would have to adjust our expectations for monetary policy. Remember, the Fed looks at monetary policy through the lens of the neutral rate. And that's the real rate plus inflation. If inflation is higher than expected, then the nominal rate is going to be higher than expected. And so going forward, those dot plus are going to go even higher. Yeah, I think that's absolutely true. This is of course, a debate on semantics because I noted that he referred to the sentence, a series of declining monthly Prince of inflation. What does a series mean in this sense? Yeah. He wants to keep going down. It has to look like Bitcoin basically. He mentioned though it's now going to be his car. There's a lot of things here that are beyond his control. So if you look at inflation, part of its demand-driven, obviously we had tremendous amounts of fiscal stimulus and low rates driving a housing boom. That's what he can control. The other part though, is supply-driven. There is in fact fewer commodities available now because the sanctions on Russia, and that's a lever that yields the executive or the White House or Congress has the poor. This is, this is really unfortunate because inflation is the Feds responsibility, but he doesn't have all the tools to do it. One thing that the White House could easily do is it could lift sanctions on Russia. This is the trade off. It would help brushes worth it, but on the other hand, it would also help poor people in America and millions of people in Africa who may start. So it's a trade-off that people have to make. So it, but it's that house choice to make it. He can only do one thing that's manage aggregate demand. And if he were to faithfully carry out his task to bring inflation to 2% in a world where supplies chains are constraint, that means much lower aggregate demand, and that means probably a meaningful recession. Sadly. So in terms of the market reaction, it seemed as if the market had actually begun this interest rate hike in to market prices ahead of the meeting today. But if we look forward a bit here, do you think the market is ready for what's coming from the Federal Reserve? No, I don't think it's ready at our eyes as how I got a question about quantitative tightening, right? The question was whether or not the treasury market could handle what giving the low liquidity. And as we all know this in last Friday, we sell the 10-year go up 20 basis points. That's not normal. That is what happens when you have low liquidity. And there's very, very little liquidity in the treasury market. As a whole. The treasury market is growing a lot, lot bigger than the underlying cash volume. Cash market can support just as a statistic 20 years ago. So the charging market, private marketable church, was about $7 trillion outstanding. And on average, the daily cash firms were about 400 billion. Okay, fast-forward to today, the network private marketable treasuries are about 23 trillion. So it went from 7 trillion to 23 trillion. But the cash market only went from 400 billion to 600 billion. So it's not scaling with respect, It's like a CD and that gets bigger and bigger, but the doors, you don't build the more doors. So in this situation you're going to have weird dislocations and cutie has the potential to exacerbate that. He was fairly dismissive of it. Governor Waller saying that, you know, 2.5 chewing does QT equals to about 50 basis points in tightening, you know, I suspect that that remark would be become legendary and live in the Hall of Fame what inflation is transitory. So I think there's a major disruption here. One is that you have Marshall buyers. Fat is out of the market. Commercial banks are you going to find new buyers need higher prices? And also, while there's this just a whole lot of issuance coming up, QT plus deficit. It's about a $1.5 trillion. So I think that he's, he will say, But I think it might be surprising. We've got a bunch of great questions also related to the debate on causes tip, tightening. One from Adam here, which is a very, very good question. Is it actually possible to measure the tightening in basis points when it comes to the balance sheet tightening and the constitutive typing process, what is 1 billion worth of tightening in basis points? Well, the Fed could give you a model. They'll give you an answer that will certainly be nonsense. So the way that I think about this is now when you're talking about markets, it's not a science. When you, when you're doing the scientific method, you're looking for relationships that are persistent across time, like gravity. If I drop an apple here or drop and up on London, it falls at 9.8 meters per second squared today, in a 100 years ago. But when you're talking about the markets, there's a lot of moving parts, regime changes, things like that. There's no concept relationship. Some models are not useful. So it's a question of judgment. And I don't think we can just boil down the basis points. It's something that we'll find out as we go. Crazy. Monetary policy has, has repercussions. For example, what's happening with the DOJ and what's happening with the ECB in their emergency meeting today, right? That there seems to be dealing with. Suppose in the monetary policy framework they have. Let's touch upon these would be quickly as well because they essentially called for an emergency meeting earlier today, addressing the market turmoil that we've seen in European markets. And one of the things that we've of course seen in markets over the past few weeks is a massive whitening of the spreads between Italian bonds and German bonds. I'm, I'm personally saturated and part of the massive, massive, I think it's a 150 base forthright that if you think back the European sovereign debt crisis, that massive, it seems like super sensitive. Fair enough. We are not at 2011 levels yet. And I put emphasis on the word yet because I base if you don't think that they stop the bleeding with the meeting that they that they hosted today. Essentially, they had no news for us. They tell us that they're working on some sort of backstopping mechanism. But we don't really know the details yet. So what's your take on it? Will they actually present the new Q reprogram for us? So right now I think the standing, standing program, the setting modus up where they are operating as detailed by Isabel Strabo, is that so a whole bunch of stuff during the pandemic right? Now when that stuff matures, they can reinvest it into, let's say more Italian did was, you know, the spreads. So instead of just printing more money and buying stuff, they're just using the existing money they already created and reallocating towards more of the periphery. And Andrea, as I suspect that that might that be enough either. And I'm also surprised that they would do this meeting suddenly. I mean, why? I mean, yeah, they must be really, really worried about what's happening. And doing at the same day as the fed baby, the riskier, the Fed would do something that spreads and so they would have to respond immediately. I am not sure. Usually though there is some degree of coordination between the Fed and the ECB. It could just be that just beforehand. No one knew how the markets will react to what the Fed was going to do. And just in case they thought that you'd get ahead of this. We've received the question from Tim on the exact topic of spreads, but not European bond yield spreads but high yield spreads in the US. He's concerned that we will see a further increase in spreads as a consequence of the Federal Reserve tightening the balance sheet and hiking interest rates. Do you concur with that assessment? Absolutely. That's the whole point of tightening, right? You want to tighten financial conditions. That query press down white and that's what the Fed wants to do. And they're going to keep hiking until they see that. Yeah, pink, plain and simple. The question here is whether the QC process is already baked into prizes and credit spreads? I doubted personally. Do you have a view on that? I agree with you. Address the stuff like I mentioned earlier. It's not a science. It's, it has to do with a lot of judgment, a lot of context. And the thing is, I don't see how you could possibly price what, a 2 trillion extra. Okay, So nutrition and have children extra per year in treasuries are who's going to buy that? Who's going to finance it? What's happening in the world? Then? What happens when there's less liquidity? Because acute. Doesn't just increase the pipe charters, but it's also drawing liquidity out of the banking sector. So these are, these are questions out. It's a pretty hard to know beforehand, so I can't quantify it and I don't think anyone can. And if you can know beforehand, it's really impossible the price and in relation to this topic on bond deals, we've seen speculation against the Bank of Japan. And I think this is maybe an important story that could unfold over the coming, let's say two to four weeks. Because they are still defending the ten-year point on the yield curve. In Japan. They are basically bringing aircraft carrier to a knife fight. They are buying everything they can write. But do you think that they can continue to do so in this global yield environment where interest rates are going up. No, no, no. What's happening there is amazing and Western revision has done amazing work following it. So like you mentioned, address, they have a PEG. But the 10-year GGB at 25 basis points, everyone in the world is hiking rates, even the ECV. And how can you how can you actually manage that? And what's being the release valve is the currency and you see the yen massively depreciate and gets dollar LOINC going past 135 recently. So sooner or later, you're going to be polar. It's going to be some political problems there because people in Japan are going to not like they're purchasing power eroded the import a lot of stuff, right? They import oil and other commodities and that's going to feed through their system and cause inflation. So eventually there's going to be a political choice to be made. You know, cortisone, you've got a sub depreciate our currency. And they're going to have to reset that. The UK of control peg higher. I don't know where. Maybe, maybe 50, maybe 75 basis points. But when they do that though, it's going to push global bond yields higher because Google by nudes, they're all kind of tied together, right? Pension investor in Japan can invest and GDPs are treasuries for or European sovereign bonds. And when they have higher rates in Japan, it's going to affect the relative value traits another bond markets. So it's going to reverberate globally. And I think that's the next leg, higher for yields. I suspect that could happen soon because well, you just can't keep going on like that forever, right. If someone has to put a stop to it, so it's becoming disorderly. You've talked about the need for issuance of treasuries and the lack of a buyer of the reserve. There's a question from Lee related to that because he basically asks you, Joseph, whether the US Treasury and the Federal Reserve at all coordinates the insurance plan and the QE program slash QT program. Do they talk to each other? Absolutely. They talk to each other all the time. It's very close. But in terms of just concretely being like concrete coronation like how I've so I'm going to assure the stuff I'm going to do QE so we can assure the stuff. I don't think it's that explicit, but the surgery very obviously takes into account the Fed decisions when they want to issue will show us, which actually notice is that when the Fed is doing QE, Treasury tends to LinkedIn their maturities. I've, obviously, I mean, they wanted to be smart, right? If you have the Fed buying, well, you should issue longer dated that because it's relatively cheaper. The term premium is actually negative sometimes. So tertiary and fed coordinate very closely, but I don't think it's to the level that they were just so it says I'm going to do QE, they immediately do that or they say that we're going to do something to neutralize cutie. I don't think it works at that specific level, but broadly there, there's no frequent discussions at every level between the Fed and Treasury. We've received another great question from correctly asking about forward guidance. You said initially incident show that essentially think that defeat don't want to surprise us to do any large extent. But Gregory is asking whether we don't need a surprise right now. Wouldn't it be better to surprise us all? Know now that the Fed really, really likes for guidance. It's a very powerful tool because it allows them to control interest rates up to the five-years hand or on. So for example, the power can say today, for one year I will hood rates at 1%. In two years, our heart rates and then after that a hotbed for 2% and after that our heart rates are 3% and that would immediately be reflected into the yield curve, right? Because he's credible and he likes being able to control a range of interest rates up to the belly. If he were to back out of that and start trying to surprise the markets than his Ford guidance would not be as impactful because people would think maybe he does something different to surprise markets. So he wouldn't have as much control over interest rates as he would otherwise. And control is very, very valuable to the Fed. So they wouldn't surprise markets that are not even to get side of financial conditions immediately. Well, if you are tighter financial conditions, you can just give tighter for guidance, right? Just say that I'm just going to hide Grace. Very, very good. Then we'll do a 100 every meeting and you will get all as tight as you want. That's a, that's a very fair point. When we sum this all up. We have the European Central Bank trying to hike interest rates even though they have this loophole option on buying Italian bond. But once in the QE program, we have the Federal Reserve now hiking 75 basis points of meeting probably. And then we have the risk of Bank of Japan allowing the ten-year point to go up. Is there anything speaking against higher long bond yields right now? I, I don't, I don't think so. I think this is just an unprecedented for me, unprecedented because I've lived in a world of QE and low-interest rates of forest began looking at this. So we have a coordinated tightening among all the world's central banks. Eventually, as you, as you suggested address the VHA will have to give the program as well. So that this has never happened before. And I suspect that many people will be surprised by what this means. So there are surprises, you know, coordinated easing made all the asset prices go to the moon. Coordinate retaining. I probably does the opposite. So we'll see this like Paul mentioned, there's a lot of things happening the world that, that could change. We could have discovered a new source of energy. We could have the war end. But as currently on track, It looks like we're entering a new world in the world of easy money is over. Let's remind our audience of the schedule ahead on constitutive typing. As far as I'm concerned, it actually starts more or less right now as we're speaking, right, Joseph today. Today, yes. So, so the way that this works is the Fed basically created a muddy and purchase bonds. And then when it gets, when it gets to those bonds, the purchase their repaid, then it shrinks its balance sheet. So cutie technically happens on days when it gets repaid and that's middle of the month like today and also the end of the month. And there's a three month ramp up period. And eventually the tilt, which is 60 billion and treasuries a month and 35 doing in mortgages. So that that's basically it won't ever get to full, full tilt. So it will always max out of surgeries at 60 billion a month. It won't always max. How does mortgages probably 225 a month. The 35 cap is too high for what the Fed will get repaid in. And that's going to be chugging along. And at the same time, you have the RP suddenly increase maybe two or $3 trillion by the end of the year. That's also sucking liquidity out of the financial system. So you have triple tiny Fed raising the front end. You have QT raising the backend and you have a cutie and the RFP sucking out, sucking at liquidity. So it's very aggressive. I don't know when, but something well, it always us. Yeah, not a pretty scenario for risk assets. I always want to conclude the religion daily briefing with a meme. I'll make this my trademark as the host. And the meme today refers to the European Central Bank emergency meeting earlier today. I'm, I work in asset allocation in Europe myself, and we saw the news on Financial Times that they called for this emergency meeting. But after this meeting, we essentially all concluded, could just have said there's a male hidden, nothing newsworthy. By the end of the day. It was just a paragraph to write that value somewhere else, that paragraph they were 240 minutes over, so it was not necessary? No. It's simply was Joseph. It's been a pleasure to speak to this afternoon. Thanks for joining. Thank you for having me. It's a pleasure being here. And thank you all for watching the real vision daily briefing. We will be back tomorrow with more action. Mucky lake will host the show and Dario stale will join us, the guest. See you again tomorrow.