Bloomberg Surveillance TV: August 3rd, 2026

Summary

Bloomberg Surveillance TV: August 3rd, 2026 – Episode Summary

Episode Overview

This episode of Bloomberg Surveillance TV, hosted primarily by Jonathan Ferro with contributions from Lisa Abramowicz and Annmarie Hordern, covers the latest themes in global finance, economics, and markets. It features in-depth interviews with Jeremy Stretch (CIBC), Sarah (Clio Capital), and Gary Kung (former NSC director and IBM Vice Chair), scrutinizing topics such as global currency interventions, central bank policy shifts, the real-time pressures on large tech IPOs, and market fragility in an uncertain economic environment.

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Key Discussion Points & Insights

1. Japanese Currency Intervention & Global Market Coordination

Guest: Jeremy Stretch, CIBC

• Context: Japan's government intervention in the Yen market, this time with visible support from the U.S. Treasury, stands out from prior interventions (notably 2011 & 2000 coordinated actions).
• Main Issues Facing Japan:
  • Terms of trade shock, particularly driven by high oil prices.
  • Large fiscal deficits and stark U.S.-Japan interest rate differentials.
• Effectiveness of Intervention:
  • Seen as "containment," not a long-term solution.
  • Driven by bond market dynamics and heavy short positioning in the Yen—“the market was pretty stretched” (Jeremy Stretch, 03:03).
• Broader Implications:
  • Market skepticism around interventions and a potential increase in official actions, adding to volatility/uncertainty.

Notable Quotes

• “[Intervention] arguably carries more weight because of the coordinated moves by the U.S. treasury.” — Jonathan Ferro (01:18)
• “There is going to be increasing skepticism as to whether there will be some degree of increase in official action going forward and that could create additional pockets of volatility and/or uncertainty.” — Jeremy Stretch (04:37)

Timestamps:

• [01:04 – 02:55]: Discussion on Japan’s economic vulnerabilities & the rationale for intervention.
• [03:03 – 04:37]: Analysis of timing and how Fed policy postures influenced the decision to intervene.
• [04:06 – 05:43]: Historical context and future of currency interventions.

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2. SpaceX, Tech IPOs, and Market Sentiment

Guest: Sarah, Clio Capital

• SpaceX IPO Fallout:
  • Stock has dropped 30% since IPO; upcoming staggered lockup expirations pose more risk than earnings alone.
  • Key uncertainty: Who’s able and willing to buy as insiders potentially unload shares.
• Wider Tech Market Lessons:
  • General cooling of "Elon Musk premium" and skepticism about overpromises in tech.
  • “We've been two years away from self-driving cars with him and we always will be” — Sarah (08:52)
  • The speculative fervor that buoyed companies like Tesla is “really, really cooled.”
• Impact on Future IPOs:
  • Similar pressure expected for potential IPOs of OpenAI, Anthropic—companies may have to scale back trillion-dollar aspirations.
  • Private investors are growing hesitant; profits and fundamentals are coming back into focus.
• Risks for Tech & Wall Street Investors:
  • The "diamond hands" mentality is being challenged by increased market scrutiny.
  • Must “look at the individual underlying company and see is it a dip for that company?...if something was 10x overvalued and now it’s 5x overvalued, that’s still 5x overvalued.” — Sarah (11:28)

Notable Quotes

• “I think this is going to be a really fascinating test of who actually wants to hold this and what do they think about the long term sort of promise of the company.” — Sarah (07:27)
• “People just are starting to not believe, no matter how much they like [Elon], that he will deliver what he says when he says it.” — Sarah (08:52)

Timestamps:

• [06:57 – 07:57]: The importance of the staggered lockup and unknown shareholders.
• [08:04 – 09:32]: Market concern about Musk, SpaceX fundamentals, and tech overpromising.
• [09:42 – 11:28]: Ripple effects on future IPOs and the necessity of revisiting company fundamentals.

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3. The Fed’s Shift Away from Forward Guidance

Guest: Gary Kung, former NSC Dir./IBM Vice Chair

• Post-Fed Press Conference Reactions:
  • Chair Kevin Walsh is moving away from hyper-transparency, wanting to wean markets off ‘answers before the test.’
  • "The market became addicted to knowing what the Fed was going to do.” — Gary Kung (13:07)
• Inflation Management:
  • Fed has only two real tools: raising rates and balance sheet reduction.
  • Real tightening is happening in the long-end of the yield curve as markets move autonomously.
• Yield Curve Dynamics:
  • Persistent curve steepening is seen as “doing Kevin's job for him” as it raises long-term borrowing costs, slowing the economy naturally.
• International Coordination:
  • U.S. and Japan interventions in both currency and bond markets are complex, focusing variously on trade, treasury supply/demand, and macro pressures.

Notable Quotes

• “Chairman Walsh...is trying to get the market off the addiction of...having to tell you what we're going to do and...you should go and participate however you think it makes sense.” — Gary Kung (13:07)
• “There's enormous amount of instability in the market. At the same time, rates are going up. But the consumer...continues to spend, spend and spend.” — Gary Kung (20:22)
• “It's probably a better outcome when people look at their risk and say, my interest rate risk is X. Am I happy with that or not? Not, 'oh, I don't really care because the Fed’s got my back.'” — Gary Kung (26:50)

Timestamps:

• [12:45 – 14:18]: The evolution of Fed transparency and market dependence.
• [14:49 – 17:28]: The limitations of Fed tools and how long-end rates impact the actual economy.
• [18:29 – 20:22]: Coordination between U.S. and Japan; what interventions mean for global treasury yield dynamics.
• [20:22 – 22:35]: Instability drivers—AI investment, consumer bifurcation, and market risk.
• [22:35 – 25:37]: How markets must adapt to a world with reduced forward guidance.

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Memorable Quotes & Moments

• On Tech Overpromising:
  “With Elon, we've been two years away from self driving cars with him and we always will be, right?” — Sarah, Clio Capital (08:52)
• On Central Bank Transparency Addiction:
  “People like having the answers to the quiz before they took the test.” — Gary Kung (13:07)
• On Shifting Market Mentality:
  “It's probably a better outcome when people look at their risk and say, my interest rate risk is X. Am I happy with that or not? Not, 'Oh, I don't really care because the Fed’s got my back.'” — Gary Kung (26:50)

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Key Takeaways

• Currency intervention is back in focus, with U.S.-Japan coordination signaling more frequent official actions in uncertain times.
• A reckoning is underway in tech investment: overpromises are faltering, and fundamentals are regaining importance. This will heavily influence upcoming major IPOs.
• Central banks are pushing back on market expectations for constant forward guidance, heralding a return to a more unpredictable, risk-aware investment environment.
• Despite rising instability—from geopolitics to fast-changing tech to bifurcated consumer strength—markets are being forced to rediscover discipline and self-reliance.

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Important Timestamps & Segments

• Japan's currency intervention and market implications: [01:04 – 05:43]
• SpaceX post-IPO turmoil and implications for tech IPOs: [06:57 – 11:28]
• The Fed’s evolving communication strategy and yield curve impact: [12:45 – 17:28]
• Coordinated global interventions, AI investment, and market instability: [18:29 – 22:35]
• Adapting to a world with less central bank forward guidance: [22:35 – 26:50]

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This episode thoughtfully captures the global economic transitions underway—currency volatility, tech sector turbulence, and a paradigm shift in central bank communication—articulating the case for renewed market discipline and renewed attention to fundamentals.

Transcript

[Jonathan Ferro]

Salary bonus 401k stock options investment accounts if your wealth manager only sees one piece of the puzzle, who's connecting the rest? Creative Planning's integrated team of specialists coordinates all of it so everything fits together. Creative Planning where wealth works together creativeplanning.com

[Big Take Podcast Host]

BSP the Big Take Podcast from Bloomberg News keeps you on top of the biggest stories of the day My fellow

[Joe Biden]

Americans, this is Liberation Day.

[Big Take Podcast Host]

Stories that move markets.

[Gary Kung]

Cher Powell opened the door to this

[Big Take Podcast Host]

first interest rate cut, impact politics, change businesses. This is a really stunning development for the AI world and how you think about your bottom line. Listen to the Big Take from Bloomberg News every weekday afternoon on the iHeartRadio app, Apple Podcasts or wherever you get your podcasts.

[Bloomberg Host/Interviewer]

Bloomberg Audio Studios Podcasts Radio News.

[Jonathan Ferro]

This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferro along with Lisa Abramowicz and Annmarie Horden. Join us each day for insight from the best in markets, economics and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from 6 to 9am Eastern. Subscribe to the podcast on Apple Spotify or anywhere else you listen to. And as always on the Bloomberg Terminal and the Bloomberg Business App. Jeremy Stretches CIBC Writing Compared to the April May interventions, the latest round arguably carries more weight because of the coordinated moves by the U.S. treasury. Jeremy joins us now for more. Jeremy, there are some underlying problems in Japan. There is a term of trade shock and welcome to the program buddy. It's always good to see you.

[Joe Biden]

Good morning.

[Jonathan Ferro]

You're facing a terms of trade shock. The oil is tributed to. You've got deficit issues as well, a massive rate differentials with the U.S. why does this intervention help them fight those three?

[Joe Biden]

Well, indeed you are talking about in effect a containment policy because unless the oil price is going to come down materially or unless the interest rate spread between the US and Japan closes exponentially and that would imply that the BOJ would have to bring forward not not only bring forward, their policy tightening would be more aggressive and perhaps the market reprice the Fed expectations. It is seemingly more of a containment issue. But I've just been listening with great interest to your discussion with with Lisa regarding the holdings of Treasuries by Japanese invest investors and I think that is particularly notable. I think that twist steepening that we did see in terms of the US curve after last Wednesday's Fed decision I think was also notable and I think the if we go back to Liberation Day in the post Liberation Day period, it was the discipline of the bond market that really exercised control on the politicians. So I think it is that sort of bond market dynamic that I think is proven to be contingent here in terms of this broader narrative regarding the dollar and exchange rate.

[Bloomberg Host/Interviewer]

Jeremy, just to take that a step further, how much is the timing kind of predicated on the move that we saw following the Wednesday Fed press conference?

[Joe Biden]

Well, certainly I think the two are not, not inconsistent in terms of the timing dynamic. So we have seen obviously a consistent grind higher. We had seen a consistent grind higher in dollar and through the month of July. But clearly that risks, you know, there was an increasing degree of concern or destabilization perhaps in the equity in the bond space after that Fed decision. So I think that did amplify concerns and in a sense it is an opportunity to you try and hit a market which is very extreme in terms of its positioning. I think it was very notable that if you look at yen short positions, they were the most extreme in two years and indeed were pretty close to the levels that we haven't seen since 2007. So the market was pretty stretched. There was a degree of volatility or a degree of uncertainty which had been unleashed in terms of the treasury curve in particular after the Fed guidance narrative. So I think those two things certainly coincided to provide perhaps a fertile ground into the month end for the authorities to try and come in and, and a market which have been heavily skewed in one direction.

[Bloomberg Host/Interviewer]

This is incredibly rare. Jeremy, we were talking about how the last time there was some sort of bilateral coordinated currency intervention was 2011, when at the time a number of nations coordinated with Japan to help depreciate their currency. Then before that was 2000, when the US and a group of other nations helped support the newly formed euro when it was depreciating. Do you think that interventions like this are going to become more frequent given what we're seeing now with Japan, given what happened with the credit line to Argentina, given some of the rhetoric that we're hearing out of the Trump administration?

[Joe Biden]

Well, again, I was listening to your discussion earlier when you were talking about free and fair markets, and in a sense that does beg the question that intervention or the prospect of intervention certainly creates uncertainty regards the sort of the free flow floating nature of both currencies, but also the free flow of information and the market reactions accordingly from that. So I think there are degrees of concern in relation to the current environment and I think there is going to be increasing skepticism as to whether there will be some degree of increase in official action going forward and that could create additional pockets of volatility and or uncertainty. And I think that's the subtext here. And I think it's quite interesting to to tie this with the the forward guidance debate and discussion that you've been having for some time and in relation to Mr. Washington, etc. I think we have to remember that we are in a new world, or at least for many market participants we're in a new world. Because I've unfortunately been around more than long enough to remember pre free forward guidance and perhaps many in the market have yet to understand the ramifications and the uncertainties that could come with that.

[Jonathan Ferro]

Stay with us. More Bloomberg surveillance coming up after this. Salary bonus 401k stock options investment Accounts At a certain wealth level, your financial life is anything but simple. If your wealth manager only sees one piece of the puzzle, who's connecting the rest? Creative Planning's integrated team looks at the whole picture. They coordinate your investments, tax strategy and estate plan to form a complete view of your financial life. So everything fits together. Creative Planning where wealth works together. Learn [e-mail] BSP the Big Take podcast

[Big Take Podcast Host]

from Bloomberg News keeps you on top of the biggest stories of the day.

[Joe Biden]

My fellow Americans, this is Liberation day.

[Big Take Podcast Host]

Stories that move markets.

[Gary Kung]

Chair Powell opened the door to this

[Big Take Podcast Host]

first interest rate cut, impact politics, change businesses. This is a really stunning development for the AI world and how you think about your bottom line. Listen to the Big Take from Bloomberg News every weekday afternoon on the iHeartRadio app, Apple Podcasts or wherever you get your podcasts.

[Jonathan Ferro]

Let's talk about Space X facing its next big test with its first public ear report. You add tomorrow. The stock is down over 30% since its IPO. Sarah, Kansas Clio Capital writing we know the headline story will hear earnings. What we don't know is how much of a fire sale we'll see and how much Elon and other large shareholders are willing to buy to stop the bleed. Sarah joins us now for more. Sarah, are you suggesting the beginning of the end of the lockup? This staggered lockup that we're about to see is more important than the earnings report this week?

[Sarah]

I think it absolutely is. You know we for the most part don't know who owns those shares. We don't know who's able to to participate in this initial lockup tranche. We do know that that sort of 175 I think barrier they had to hit to unlock even more. I'm pretty sure that that is not going to happen. But you know, this is going to be a really fascinating test of who actually wants to hold this and what do they think about the long term sort of promise of the company.

[Jonathan Ferro]

Sarah, how much the move that we seen since the IPO do you think is about front running some of those headwinds?

[Sarah]

I think a lot of the move post IPO is because people are getting nervous about one, the trade, the macro in general, and two, they're realizing that this might be kind of the end of the line for Elon's ability to sort of construct reality. We know that we're not on Mars. And I think that when you look at the fundamentals of the company, you kind of scratch your head and say, wait, what am I paying a trillion plus for?

[Bloomberg Host/Interviewer]

Well, this goes to the heart of the issue. How much is Elon Musk losing some of his capital in markets in a big way? You point out we know the headline story we'll hear at earnings, the rockets are having trouble, the stock is sinking, starlink works pretty well. I needs improvement. I mean, at a certain point, are you seeing people look at the balance sheet more than they are listening to the words, the hopes, the dreams of CEOs in an era where people are saying show me the money.

[Sarah]

Certainly in general that is happening. But with Elon, you know, we've been two years away from self driving cars with him and we always will be, right? So there's a problem, problem when you keep telling people things and they don't come true. And so I think he has a bit of a chicken little problem at this point where people just are starting to not believe, no matter how much they like him, that he will deliver what he says when he says it. And then on top of that, a lot of people don't like the guy. They've heard enough, they've seen enough and they're kind of sick of it. And so I think that sort of mania that took over Tesla for years of believing that he could do the impossible has really, really cooled.

[Bloomberg Host/Interviewer]

Sarah, how much does this set a precedent for the likes of OpenAI and Anthropic or Color? The potential IPOs that could be coming out later this year, I think that

[Sarah]

we've already seen with OpenAI. It's having a huge impact. You know, Sam talks a lot about how he doesn't want to be a public market CEO. You know, there's a lot of hesitation around that ipo, but at the same time, we know they are absolutely bleeding cash and that private markets are getting A lot less excited about putting more money in. And I think with Anthropic, there's a question mark there too. They seem like they have better margins, like they will go public, but I think everybody's going to slowly be dropping that t that trillion and going back to, hey, it's perfectly respectable. The IPO is a hundreds of billions valuation.

[Bloomberg Host/Interviewer]

Is situational awareness a convenient excuse?

[Sarah]

I mean, situational awareness is a very interesting peek, I think into sort of the tech mindset, which is tech is really bad at sort of managing downside risk. We are really good at sort of diamond in hand. You put the money in, money printer go burn number goes up. We are simple, simple investors. And so I think what you're seeing with situational awareness is that there's a lack of it in Silicon Valley and that is likely to be really tough with things like the Space X deal, where the question is where do you sell? When do you stop backing the founder?

[Jonathan Ferro]

Sarah that's also the case sometimes on Wall street as well. And you can see the anticipation building just to buy semis and hardware all over again after the decline of last month. And the to Lisa's point, the collapse of that fund, the near blow up of it has basically told some people that that's a clearing of the decks. That's a clearing event and you can buy again. What would you tell investors this morning who are looking to buy into that dip, particularly going into earnings season this week with numbers from Sandisk, you have

[Sarah]

to look at the individual underlying company and see is it a dip for that company? Right. If something was 10 overvalued and now it's 5x overvalued, that's still 5x overvalued. And so with a lot of these names, they are so different. Until you get under the hood, you look at, you know, the P E ratio, you look at the profit margins, if they're profitable at all, and where the growth is going to come from. Because for a lot of these companies, growth is, is coming from this idea that everyone will need more and more expensive memory forever. And I just don't know if that's true.

[Jonathan Ferro]

Stay with us. More Bloomberg surveillance coming up after this.

[Big Take Podcast Host]

The Big Take podcast from Bloomberg News keeps you on top of the biggest stories of the day.

[Joe Biden]

My fellow Americans, this is Liberation Day.

[Big Take Podcast Host]

Stories that move markets.

[Gary Kung]

Chair Powell opened the door to this

[Big Take Podcast Host]

first interest rate cut, impact politics, change businesses. This is a really stunning development for the AI world and how you think about your bottom. Listen to the big take from Bloomberg News. Every weekday afternoon on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

[Jonathan Ferro]

We begin this hour with stocks rising, accrued, falling ahead of a busy first week of August trading. Joining us now, the former NSC director and IBM Vice Chair, Gary Kung. Gary, good morning. Good to see you.

[Gary Kung]

Good to see you. Thanks for having me.

[Jonathan Ferro]

Been following the debate. I want your reaction. You know Kevin Walsh. Well, what is everyone getting wrong? And I say everyone, I mean the consensus view on their reaction to that news conference last Wednesday.

[Gary Kung]

I'm not going to characterize this. Anyone's getting anything wrong or anything. Anyone's getting it right. What I'm going to characterize this as. Kevin is a masterful student of the market. Kevin has been at the Fed before. He understands the limited toolbox, but the effective toolbox that the Fed has. What Kevin is doing right now, I think people don't like this. This is. Kevin is reverting the Fed to the historic norms of what the Fed did. We unfortunately, as newscasters or as market makers or as traders, we got spoiled. From the eight period on, from, oh, wait, period on. The Fed has been an open box. They've been completely transparent. They have not done anything that you wouldn't know they would do hours or weeks or months before they did it. And the market became addicted to knowing what the Fed was going to do. What Kevin is doing right now is he's trying to get the market off the addiction of me, the Fed, chairman of the Fed board, having to tell you what we're going to do and you, the market and you participants, you should go and participate however you think it makes sense for you and wherever you think the opportunities are. This is a tough transition. People like having the answers to the quiz before they took the test.

[Jonathan Ferro]

So there's a markets question. I also think there's an economics question that needs to be addressed. The issue for us, I think, is less about the lack of guidance, less about having the answers before the test, more about you've got an inflation problem, why you're not doing anything about it, which essentially was the Mike McKee question in the news conference. Why are you waiting? What are you waiting for? Without giving us any real clarity on the preferred tool, why they're waiting, whether they carry on waiting, and at the same time telling us to believe them, that I do something about inflation, I think the economic question is the difficult one to answer.

[Gary Kung]

Look, Chairman Wash has gone out of his way. I mean, he's literally going out of his way to tell you he is an inflation fighter, that the stable price mandate and the 2% inflation guide is his, is his bellwether and he's going there. He has limited tools to get there as we know. In fact, he has said in the speech, I have two tools to help us get there. I can raise rates or I can sell down the balance sheet. Those are his two tools. Raising rates as we know, will affect the overnight rate. The Fed fund has very little effect on the economy as a whole. The real effect on the economy is, let's say, let's call it in a five to ten year bucket. That's where most people borrow. That's where consumers borrow. That's where credit cards are, that's where student loans are. That's where automobile loans are. That's where mortgages are. Kevin knows that. What he's also telling you is right now the market is doing its own work in steepening the yield curve. So in less than a year we have gone from a 2 tens interest rate curve, inverted about 20 basis basis points to positive 40 basis points. We've moved 60 basis points in 2 tens rates. So Kevin is saying, look, the market is doing my job. They're making the ability to borrow money out on the curve more and more expensive and it's going to continue to get more expensive. If I raise. Raise fed funds. Yes, I can raise fed funds. I'm not sure that has the effect. I think what he would probably prefer to do is he prefer to sell down the balance sheet which again would put more supply in the market, which would steepen the yield curve. But the market's doing that for him right now. So being in that chair for less than two months or about two months, but he happened to come in in a funny time where a week and a half after he came in he had his first meeting meeting. Then 30 days later he had a second meeting. He then told you nothing happened in those 30 days. He's sitting here and I think he's evaluating where he wants to be. He's lucky on the schedule. He doesn't have an August meeting. He does have Jackson Hole. He could tell us what's going on in Jackson Hole. So I think Kevin wanted to probably get through those first two meetings, make it clear to the market that he is an inflation fighter, make it clear to everyone who's watching that the market is, is doing much of what he would have tried to get accomplished early. And he's going to going to have the month of August before the September meeting to come out and deliver a Relatively baked plan in his mind. He's not going to give you the baked plan, but he himself will have a highly baked plan.

[Bloomberg Host/Interviewer]

Do you think that the sell off in the long end of the yield curve is by design that what he saw after the fed meeting with 30 year rates going to the highest level, level since 2007 was a good thing?

[Gary Kung]

It's doing Kevin's jobs for him. At the end of the day, if you want to slow down the economy and you want to tamp inflation, you have to make the cost of money more expensive. So if the 30 year rates went up, which they did, and the 10 year rates went up in the front end, the curve basically stayed the same, which means we had a curve steeping. You are accomplishing what a Fed chair would want to accomplish if you're trying to to tamp down inflation and moderate. I don't think it's just Kevin that's doing that. I think Kevin's being very realistic to what the environment is today. He knows that treasury borrowings are going up every year. He also knows there's this, this enormous amount of need for debt in the AI compute data center world where we're talking about potentially another trillion dollars of issuance going on in the market today. The market is finding a home to clear these bonds. Bonds. It's also raising longer, longer term rates. It's putting more risk premium into the curve. All things that Kevin is probably happy are happening without him having to do anything.

[Bloomberg Host/Interviewer]

Scott Bassett did something over the weekend and I wonder how related you see this as the idea that there was a coordinated intervention in the yen. Some people are speculating. It's because the Japanese Finance Ministry was selling treasuries to finance their unilateral intervention in their current currency. And this could potentially help support U.S. yields from going much higher. Do you believe there is any coordination between the two?

[Gary Kung]

Well, we know that the US and Japan coordinate. No, I mean no one's denying, no

[Bloomberg Host/Interviewer]

one's denying the 30 year yields in the US and potentially what happened.

[Gary Kung]

Look, I think there are multiple factors in why the US would have got involved in intervention. Obviously the rate the Yen Trades act would force people into transactions where they may be selling US securities commodities to do to buy at home. It also has to do with trade balances. Remember we've got an administration that is fixated on trade deficits. So to the extent that, you know, foreign products come into the United States below what we think is a market clearing price or our products are extraordinarily expensive to Someone that we would like to sell to. There's a way to try and equal out the trade deficit or trade balance with the country as well. So I don't think it's a single factor model. I think when, when Scott Besson gets the phone call from the bank of Japan, he's evaluating all of these factors. He's evaluating what's going on. Supply, demand of Treasuries from foreigners, what's going on in the trade market, what's going on with the trade deficits, specifically with Japan. And each one of those has a different input into the equation to go ahead and move forward.

[Jonathan Ferro]

No investment. It might have been the one that made the call, you know, sort of laser focused on these issues.

[Bloomberg Host/Interviewer]

Well, he has had it experience with that with the bank of England, so why not bring it over to Japan?

[Jonathan Ferro]

How fragile is the backdrop for markets right now? All these little things going on, tension in Japan, situational awareness, that fund getting into a bit of trouble in the last week to. How fragile do you think the backdrop is?

[Gary Kung]

I don't know if the mark, if I'd call it fragile, I would say we have as much instability or balls up in the air as we've had. I mean, usually there's one or two driving factors in the market. Market today we've got a myriad of factors. You know, we've got the war going on, we've got the price of oil going on, we've got the major CapEx AI investment going on. And the question is, you've taken some of the largest companies in America that historically have owned intellectual property and were massive free cash flow generators and then they recirculated that cash into the, into the market, either by buying assets, buying other things, returning and dividends, buying back shares. You've taken those companies and you've now made them huge, huge asset gatherers, huge asset builders. And they're no longer creating free cash flow. In fact, it's the first time I can remember in the history of an earnings call of some of these largest companies when they're talking about we will stay positive on free cash flow. It's hard to understand that these are companies that were producing tens of billions of dollars a quarter in free cash flow. So the market's digesting that. We went through the software scare versus the AI scare, markets digesting that. We're trying to figure out where all these pieces come together. So there's enormous amount of instability in the market. At the same time, rates are going up. But the consumer, we know the consumer continues to Spend, spend and spend. So even when you look at the GDP numbers the, the strongest pieces in there are the consumer spending. Now we can even go further. We know the consumer is spending, but we also know that's a bit of a bifurcated event. We know that the wealthier consumers in this country are consuming at extraordinary high levels and we know the low end consumer is barely getting by. And this is one of the dilemmas that everyone's trying to deal with. How does this, how does this filter through markets? I think all of these people, pieces of instability are out there and look, markets can handle one or two pieces of instability. They start to, they start to fail when it's 3, 4 and 5 and they really fail when it's 3, 4 and five and they're totally out of their control or the answer is six to 12 to 18 months off.

[Jonathan Ferro]

That's what I'm trying to work out. How close are we? So you've got a massive competition for capital. You articulated that really well. You've had a huge terms of trade shock at the energy market that's hitting Japan when they've already got a fragile backdrop. On top of that there's evidence of leverage building a up in places like South Korea and hedge funds blowing up. And I wanted to go back to the very beginning of this conversation whether now is a good time to go back to the old world of reducing forward guidance in the hand holding post GFC at central banks. How difficult will that mission be?

[Gary Kung]

I don't think it's this difficult. Like I said, we, we've been trained since 2008 to today to expect the Fed to telegraph and forward guide. Prior to 2008 when I was trading for a living and running begging trading desks, we did not know when the Fed was going to move. There were surprise meetings after surprise meetings after surprise meetings. You know the Fed doesn't have to wait for a scheduled meeting to cut or raise interest rates. Now they have not done it really since the. I guess they did it in Covid. The last time they did it was 2020. We had a, we had 100 basis point cut on a Sunday evening in Covid if you remember. But we've now gotten into this point where the market insists not only there be a meeting, there be a meeting with a press conference. You can't have actions unless there's a meeting with a press conference. I think the chair is trying to say no, I have a job to do. We will meet whenever necessary to raise or lower rates. We will meet whenever necessary to do any action we need to do based on what's going on in the environment, not based on the schedule that I put out 18 months in advance.

[Jonathan Ferro]

That's bringing the discipline back to capitalism and financial markets. I'm not averse to that at all. Just trying to work out the consequences of making the switch. When you've been feasting on easy money and Forward guidance for 15, 16 years and knowing they're always going to be there to have you back and step in whenever there's a problem and they'll offer you the guidance and to your. The way you put it, they'll give you the answers to the quiz before you sit the test. Wall Street's feasted on that for years.

[Gary Kung]

They have.

[Jonathan Ferro]

That's why I use the word fragile. How much fragility is in the system that needs to be unwound as we make that transition back to the old world.

[Gary Kung]

I don't think there's as much fragility as you think. Like I said, most of my career trading I had the opposite world. I had.

[Jonathan Ferro]

Because you had the two way discipline. You had the discipline.

[Gary Kung]

I had to be disciplined. I had to assume when I went home with a position or I made a price for something and I ran a big mortgage business for a while man ran a big treasury business for a while ran a big equities. I had to assume assume that the Fed could meet any moment and change policy and were we trading appropriately? Were we managing risk appropriately? Instead of saying oh I don't have to worry about that there's a Fed put or rates can't change until September something now because there's no Fed meeting. Maybe they'll say something in Jackson Hole. So I'll, I'll manage my risk up till the Jackson Hole meeting. I'll wait for that then I'll manage my risk differently after that. That that's not the way market should work. The market should manage themselves in a way that anything is possible on any given day.

[Jonathan Ferro]

I hope we got back to that world. I just know that when the guard tried that we're not here to close spreads. Lagarde quickly closed spreads straight afterwards. Right. It's difficult to make the transition.

[Bloomberg Host/Interviewer]

The question, and I think you're alluding to it John how much is the financial market changed and debt built up under the old regime? Regime that has to be unwound in a period of a new regime that potentially is much less transparent but allows markets to do their thing.

[Jonathan Ferro]

Did you write the piece, Gary?

[Gary Kung]

I did not read the piece that said, you know, there are enormous amount of hedging tools today. So as you see debt move up and you see the private credit markets explode, which has been very helpful, you know, you can hedge your interest rate exposure, you can't hedge your credit exposure as much. But hedging underlying interest rate exposure happens to be one of the most developed markets in the world. You can hedge interest rates exposure in almost virtually every currency that we issue bonds in today. So managing interest rate exposure is not hard. Now, people historically have said, well, I know exactly what the Fed's going to do. I don't need to manage this. That's probably not a good outcome. It's probably a better outcome when people look at their risk and say, my interest rate risk is X. Am I happy with that or not? Not. Oh, I don't really care because the Fed's got my back.

[Jonathan Ferro]

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Chair Powell opened the door to this

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