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Narrator/Announcer
Indiana University strengthens tomorrow's workforce with practical real world experience. IU grads make a difference in your community, serving as teachers, nurses and engineers
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Joseph Lavornia Jones
who rise to tomorrow's challenges and meet them. Learn more at iu. Edu Impact
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Narrator/Announcer
Bloomberg Audio Studios Podcasts radio
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Tom (Interviewer)
news for Global Wall Street. Now this is a treat is public service to America at the White House for President Trump. Joseph Lavornia Jones joins us. But what you don't know, and probably President Trump didn't know, he was at Deutsche bank years ago in the combine that melded economics into fixed income. We're thrilled he could be with us today with Parson from Vassar and some work at New York University as well. Okay, I got to get this out of the way right now. I saw Goldman Sachs treatment and they look at 4.60 10 years of piv point. Okay, we're there and we're there quickly. Do you have in your head a 10 year yield where the system unravels?
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Joseph Lavornia Jones
No, but I do think rates are going higher, Tom, for a whole host of factors. A higher inflation risk premium, the need at some point for treasury to raise more supply and the fact that the market has really only priced about one tightening. And I could see potentially a series of tightening so yields go higher.
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Tom (Interviewer)
Okay, Paul's got eight questions. I'm going to get this one in quickly here. If yields go higher, price down, it can be ambiguous, good or bad, or zag imposing. Say you're going to see a higher wage, a higher real wage. Do you buy that optimism or is it going to be stress?
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Joseph Lavornia Jones
It's possible. I mean the AI, the productivity story could translate into much higher wages. The corporate share of income is high, so hopefully at some point that does flow to workers. I was very bullish on the economy and was talking in my prior role of a disinflationary boom, which seemed very reasonable until the Middle east war started because I think that completely changed the the dynamic. So yes, I'm bullish on, I was bullish on growth in terms of being low in non inflationary and rates coming down and the Fed easing. All that's kind of thrown by the wayside in terms of what level of yields crack the system. We don't really know. It's really a liquidity and confidence story. Could be 475 on 10s, it could be 5% on tens. There's so many other dynamics at play and as you're well aware, the narrowness of the market, the equity market has been a handful of companies and at some Point, you know, that exuberance may itself be stretched. So if the Fed's tightening financial conditions suddenly tighten, risk appetite changes and it could unravel quickly.
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Narrator/Announcer
Joe, in your notes you say inflation is a problem. I think most of our viewers and listeners would agree with you. How long is it going to be a problem, do you think?
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Joseph Lavornia Jones
That's a great question. I mean when's the war going to end and how quickly can these bottlenecks stop? I mean the way to think of this is it's a mini Covid and I think that's what most investors don't understand, which makes me think yields go higher. When I say mini Covid, there's major supply chain disruptions. It's not just energy, it's nitrogen, which relates to fertilizer, different material that go into plastics, other sensitive commodities. And what we learned during COVID is you just can't turn wells off, you just can't shut this on a much, much smaller scale, but you can't just turn the system off. And like a light switch it automatically goes back. And the market is, I don't think the bond market isn't fully appreciative of that.
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Tom (Interviewer)
Jovania S&PC Niko securities certainly could be with us today. And we continue here I guess with the arch idea and you live this at the White House. This is a president who likes joint stimuli all the time. We've got a nominal GDP popping 5% plus persistently there. We've got you know, inflation well above the Fed target and all that. Are we just living in a new stimulus driven milieu and it goes until it goes.
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Joseph Lavornia Jones
We might Tom, but if that's the case then you know, inflation expectations need to be reset and you need a higher term structure rates to reflect the environment you just described. So it's either one or the other. Either the economy is going to produce non inflationary growth and eventually the Fed can get rates to neutral or Right. That work in a regime where you've got rising debt to gdp, higher inflation relative to where the Fed's target is and that would be in the Fed's not cutting and that's a higher rate regime.
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Tom (Interviewer)
Do you perceive that model is 100 basis point shift, sorry folks, jargon, a 1 percentage point shift up in the curve or could it be more 60s like and be a real shift into pre Volcker?
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Joseph Lavornia Jones
Well in the 60s is very, as you know Thomas, very gradual yet cyclical. The floor on inflation saw higher cyclical floors as you move through the 60s into the 70s. Best guess it's the latter that it would be like maybe let's say 100 basis points repricing. It's a nice round number but you know, could it be something longer? It's possible. I mean in the last couple of years inflation is running about 75 basis point above the Fed's target. We're going to go higher than that in the next few months. When could it end? Maybe by the fall. We'll see. I mean how this I guess the question is how disinflationary is I in the short term may actually be contributing to the problems we have to the data center build out and energy usage longer term is probably disinflationary.
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Narrator/Announcer
We've got a new Fed chairman. Presumably he feels a little pressure to get rates down. But boy the data.
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Tom (Interviewer)
Great question, Paul. Going to make some news here. Are you interviewing for a position at the Fed?
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Joseph Lavornia Jones
No, I'm not interviewing for the position at the Fed, no. By the way the and I've gotten to know them, I think they're a bunch of Fed people. That was one cool thing about the job. There's a lot of super talented people there. Kevin Warsh will do a great job, I'm very confident of that. However, I don't see how Kevin's going to make a plausible case for rate cuts. Yeah, it's just not there. And if the market continues to price tightening, maybe he just pushes back against the committee. That's certainly becoming at least on from the President's more hawkish. Maybe he pushes back a bit, gets it more center and then kind of hope for the best things maybe unfold in a positive way in the back half of the year. But right now look at like the prices paid series in the isms. The New York Fed's got this global pressure supply index. Not sure exactly how they put it together but the picture certainly shows these supply chain disruptions. That's all pro inflation in the system.
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Narrator/Announcer
So again is this inflation? I don't know, it just feels stickier to me than just the.
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Joseph Lavornia Jones
It is sticky. Well, well you could see it if you look at like the San Francisco Fed. They've got the acyclical and cyclical price trends. You look at the lanafed sticky price index. Yeah, you're seeing it absolutely sticky. And by the way it's been above trend. So you know we've been well above two in a lot of these components. So the super core that the former chair Jay Powell likes looking at running about three and a half percent. Definitely sticky.
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Narrator/Announcer
So I mean there's nothing the Fed can do, right?
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Joseph Lavornia Jones
I mean, there's nothing the Fed can do other than at some point potentially raise rates to try to slow demand. And the problem with raising rates to slow demand to bring inflation back to target, which right now it's probably going to be at least a point, if not a point and a half above target, is, is generally a recession. The question is, does the Fed want to do that? If the Fed doesn't want to do that, they implicitly change their target. You're going to be in a world then where rates are higher, you're going to have a steeper curve and higher yields.
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Tom (Interviewer)
Real treat for you across this nation and worldwide. Joseph Lavornia with us today with this smbc. Nico here with his service to the nation in the first Trump administration. Lots of good work, including serious fixed income chops with Deutsche Bank a number of years ago. Also with the American First Policy Institute. What happens to the world you parachuted into after the president?
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Joseph Lavornia Jones
When you say that, you mean after the midterms?
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Tom (Interviewer)
Is there. No, not. Thank you, I should have made that clear. No, after his term. How does Trumpism carry forward after what you witnessed in the hallways?
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Joseph Lavornia Jones
The shift, there's been a real shift in the base, Tom. I mean, look at the polling numbers and not a lot of very good pollsters. Richard Barris of the Big Data Poll, people's pundit actually is an excellent pollster. There's some others out there and it does show a huge compositional shift in the base where a lot of independents and others are not identifying.
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Tom (Interviewer)
New York Times showed that in the last few hours.
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Joseph Lavornia Jones
Well, and Rich actually made a very good point and he's sort of these pollsters sort of like an inside club. But yes, New York Times Siena poll accurately now reflects what's happening at the moment because you've got this affordability issue that, that is a problem. I'm not sure exactly what happens. I mean, I don't want to say too much, but, and I understand that,
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Tom (Interviewer)
but I've never said this, Paul, are we out there somewhere? I sound like a Linda Ronstadt song. Out there somewhere. Is the dreaded a word involved austerity?
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Joseph Lavornia Jones
No, I don't think we're going to get austerity. No. Because as you know, neither party wants to agree actually do anything and, you know, didn't want to do it when we had Simpson Bowles over a dozen years ago. And right now, unless the bond market or the financial markets put the pressure point on there, there isn't going to be A resolution which comes back to like you ask about Iran, which to me is a very important, obviously development. I'm stating the obvious, but where's the pressure point for the president? Is it $6 gasoline prices, $7 gasoline prices? I mean, certainly with the stock market at all time record highs and rates still relatively low, there isn't really a pressure point for the President necessarily to make a strong decision. So maybe just the option is just waiting and seeing. Maybe there's some sort of change in leadership somehow by luck or whatever it might be, but you just sit and wait and these things just drag on. But again, in that world, as inflation's moving up, your real funds rate is shrinking and that by that metric monetary policy is easing. Equity markets high, credit spreads are tight. I mean there's a lot of financial stimulus that's offsetting this mildly higher interest rate story we're seeing.
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Narrator/Announcer
And on the interest rate story, I guess when we think back to the tariffs last year, a lot of folks on Wall street were saying, boy, 450 on the 10 year put some pressure on the White House and they kind of started to back away a little bit from some of their initial tariff discussions. But boy, we've blown through that.
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Joseph Lavornia Jones
But the S and P was down 15%. Yeah, let's not forget S&P was down 15%. And the President quickly pivoted and marketed a massive rally. And we basically repeated the same thing this past.
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Tom (Interviewer)
Yeah, but that's the key observation and you know, I don't need the inside dirt from the White House. It's rude. But, but the fact is he is completely beholden to the stock market. Is it just simple?
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Joseph Lavornia Jones
Is it just seems that way?
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Tom (Interviewer)
And is somewhere Secretary Besson or Undersecretary Lavrine walks in on the yellow couch and says, hey, stupid, the Dow's down. Is it?
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Joseph Lavornia Jones
No, I think the Secretary does, does a great job giving the President advice and the President certainly seeks his counsel and he I think is a great voice of reason given his, given his track record. But you know, the Secretary is just one person and the President listens to a bunch of different people. He's got his own instincts and behaves in a way that he thinks is the right move. But certainly the stock market, Tom, is a dominant driver. And if the stock market were to correct any meaningful amount, that would impact policy both probably more foreign policy wise. I'm not sure what we can do domestically at this point given the midterms
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Narrator/Announcer
are so close and the consumer, the consumer seems to be hanging in there. I mean we can never underestimate seems the US consumer here. I know we've got that K shaped economy and different people are behaving differently but the consumer generally seems to be
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Joseph Lavornia Jones
pretty consumer is holding in well. I mean the you did get the refund numbers aren't. We'll see what happens. They've not been as big as I would have guessed or as big as I think with treasury might have been assuming but the refunds are helping a little bit. Of course they're going to pay for higher gas prices, higher energy costs. That's been an offset in aggregate. Yes, the consumer has done well and it reflects the fact that if you have a job you're doing reasonably well. Certainly we're in an environment where there's not been a tremendous amount of job growth but it's been positive enough and income growth nominally has been strong enough to keep spending going and as you know the build out on AI and the spending by the hyperscalers has been massive and that's been a huge driver of growth. If you look at the contributions table in gdp about a third of output in the last year has been AI related and that's the direct effect. Of course there's all these indirect effects through higher equity prices, wealth effects, things of that sort.
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Tom (Interviewer)
Yeah, I'm looking here. I just went log Standard Poor's 500. I'm doing this for President Trump. Yeah, I'm doing, you know, the huge boom coming out of COVID for whatever reason, stimulus, whatever, whichever president. I got a correction out.8 standard deviations up in a way of minus 21%. I got a correction of minus 27% before the ED Yardeni call with Alpha and Compora. I'm only at 1.3 standard deviations in this crazy boom economy. I mean we really haven't had a bear market of substance that stay we go down and we come right back Joe, that's our new addiction.
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Joseph Lavornia Jones
Yes. Here's the thing though Tom, this is the hard part is if you look at the earnings revisions or the earnings beats in the first quarter it looks like a right angle. So I mean again the question is how sustainable is it? It's probably not long term sustainable. I like what Paul Tudor Jones had said I talked about you sort of have to kind of be in it even though it looks a bit frothy, may still have some room to run. Of course he's a phenomenal investor and been able to time things but yeah, I mean this could go another six months, could go another several Years. We just don't know.
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Narrator/Announcer
How do you think about the other part for the Fed is the labor market, again, it seems like is a no hire, no fire. Kind of said that. That's fine.
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Joseph Lavornia Jones
It seems that way. The labor market does seem to be strengthening a little bit relative to where we were last year. It is still more or less, no higher, no fire. I mean, take health care out. You don't have a whole lot of job growth. For the Fed to cut rates though, just because that was the dominant narrative for quite some time, there has to be labor market deterioration, which means the unemployment rate is kind of gapping higher. It's been a very slow kind of monotonic rise in the unemployment rate. If it starts to go up, if it's 4, 3 now, if it goes next month to 5, 4, 5 and then 4, 8 and then 5 1, they'll actually probably be cutting. I don't see that. But that's, that's what it would take. It take real deterioration.
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Tom (Interviewer)
We don't care. Do you have Knicks tickets?
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Joseph Lavornia Jones
No, I don't. My, my kids actually are, are Pistons fans. So there you go. Which I was actually happy they sort of lost. So I don't have to take them to a Knicks game because, because then my wife would want to go and it's, you know, it's exorbitant. It's a small fortune for a family of four.
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Narrator/Announcer
Yes, there you go.
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Tom (Interviewer)
Is Barr able to do the news now that we have a Detroit? He's okay with doing this now that he knows there's two other Knicks fan Pistons fans in New York. Joseph Lavornia, father of Pistons fans. Thank you so much. That's NBC.
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Narrator/Announcer
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