Lee Ferridge: Thank you for that, Cayla. There will be a rise in the post. so, yeah, you know me from yesterday. My name is Lee Ferridge. As Cayla said, I run the macro strategy team here in the US. today I'm going to give you my views on the world. titled presentation is higher or lower? Is the price, right? a little game show thing going on. but look, let's, let's kick off with. We all think we're smart, right? We all think we're smart people. We think we've got a good handle on things. We know where the world is going to go. yeah. Somebody should tell it to the market because it's been dead wrong this year on a load of different things. The main one being, where are we going to end the year in terms of rates? We started the year we had about well, we actually back end of last year or Q4 of last year, we had about four cuts in, we got to about seven in January. We got up to about one and a half. Now we're around two. Not exactly a consistent message that we've had all year. so now it's going to be a chance for you to to help me with this. So I have a polling question that hopefully will come up. do we have a polling question? I'm not sure if we do or not. Okay, hopefully there it is.

Lee Ferridge: What is the next fed rate move? Is the cut. Is it a hike? Right. That's the question. Oh. All right. I think we're getting the message. I'm actually. I'm actually surprised there are some people who voted for hike. I mean, I voted five times, so that counts. no. Look, that's pretty much what I expected. We did our poll of the week on this last week, actually, and a slightly different than we asked what what what's the probability of the next move being a hike? 65% of voters said it was less than 10%, which sort of consistent with what we've got here. I am going to focus on the fed, by the way. if we can take that down, I am going to focus on the fed, today. on the basis that the fed is driving everything right now. previous slide, please. Yes. so on the basis the fed is driving everything right now, actually, there's a if you look at n 24 rates, there's a 75% correlation between daily moves in the fed and everywhere else. So it's all about the fed. That's what we're going to focus on. So look let's start off with the higher or lower the lower rate consensus which our poll has shown us. That is the consensus and has been for a while basically since. Svb if you look at rate changes expected in one year or two years, it's consistently been the market expecting rate cuts.

Lee Ferridge: So since March of 2023, we've never gone above zero in terms of one year rates or two year. If we look at the media, you know, Ronnie's presentation yesterday about narratives. So I pulled out some narratives here, fed rate cuts against fed rate hikes. Obviously much more focused on cuts than hikes. Little wobble at the end there, but still a lot more media coverage of, of cuts coming rather than hikes. Soft landing, hard landing. Again a bit of a wobble lately, but still much more coverage in the media of a soft landing and really nothing when it comes to a hard landing. So that's the consensus. That's where we are. And it's predicated on, you know Alberta we're here from yesterday. Inflation pressure is coming down. So you know just about if you look at core CPI core PCE they are coming lower slowly. Price starts led the way as we would hope and expect. And it did. Although price starts look going sideways now just above two Alberto is not worried about it. It's pretty consistent. It's just above two. But there is that gap. And as Alberto talked about yesterday, that gap is shelter. And I'm going to talk more about that in a little bit. But look, lower inflation pretty well behaved. All looks good. And then data is showing a slowdown there's no doubt about it. You know we've had the ISM this week got ISM manufacturing and services here the jolts there.

Lee Ferridge: I had to get this presentation in last week. I'm not missing a data point. I am missing a data point. But that's not on purpose. We had the data on Wednesday. We're now on that blue line. So job openings as a percentage of total payrolls is pretty much at the pre-pandemic peak. So it's come down. But we're at the pre-pandemic peak. But it is lower direction of travel is downwards. Things are slowing. We can look at delinquencies, we can look at conser confidence. All of these things are pointing to a slowdown. All of these things are leading this consensus that the next move is a rate cut. But there's other stuff out there. There's other stuff going on that I think people are not giving enough credence to. They're not giving enough focus to. It is a tail risk. It's not a consensus. It's not my consensus. But I think the prospect of a hike is much higher than the market is giving credit for. And I'll show you why. so look, bottom line, the US economy continues to outperform. So we talk about soft landing. Hard landing. There is really no landing at the moment. So what this chart here shows you this shows you the change in the growth outlook. since the fed stopped hiking rates in July 2023. So it's the growth consensus for 23 and 24. So since the fed stopped hiking rates, we've added 3% on to GDP growth for 23 and 24.

Lee Ferridge: And yet during that whole period, the market still thinks the next moves are cut. It has not wavered from that. But the economy is 3% stronger than we expected. You look at the rest of the world. The economists have been right on the US. They've been horribly wrong. But that hasn't changed the market's view. Let's talk more about the labor market. I mentioned that that that jolts. So I looked at it a percentage of total payrolls here. I'm looking at it as the jolts to unemployed ratio came down this week. We're at 1.24 a bit of historical context here for that. Everyone's rejoicing. You know, labor markets coming back into balance. Jolts data started in 2000. For the first 18 years of the jolts that jolts to unemployed ratio never went above one. We always had more people unemployed than there were job openings, excess supply of labor. That changed in 2018 2018. We went above. That's when we hit the 1.24 pre-pandemic peak that we're at now. But look how unusual that was pre-pandemic. Why are we rejoicing now in saying the labour market is back in balance? Why are we saying, look, everything's fine, nothing to see here. We can cut rates. What was the fed doing in 2018 when we hit that 1.24? They were hiking. They were hiking rates because they were worried about wage inflation, because they were worried about tightness in the labor market.

Lee Ferridge: Now we're at the same point. We're saying the opposite. Because the shortage of workers leads to higher wages. So you see the chart on the right. This shows you real wage growth. Real wages are positive. Alberto talked about this yesterday as well, particularly for lower income workers as well. Real wage growth is positive and that's fueling real spending. So real retail sales or real conser spending is positive. It's at pre-pandemic levels. It's at strong levels. It's at levels where the fed was hiking before. And yet we keep talking about rate cuts. So why is the labor market like this. We have a shortage of workers. Still there is a structural change. I know, having interviewed him yesterday, that Jim Bullard is not worried about demographics, I am. And as you said yesterday, they've talked about demographics my whole career. Yeah, we have, but we've talked about demographics being a problem in the future because we have an aging population. It's aged. We're here. People are retiring. The baby boomers are at maxim retirement years. So if you look at the US workforce, so using pre-pandemic trends, extrapolating out the ten year average, we should be about 171 million people working in the US now in the workforce, we're 168 million. So where are those 3 million people? They retired. If you look at the change in the US economy since pre-pandemic, it's grown by 8.5 million people. From Jan 2020 to last month, 8.5 million increase in the population.

Lee Ferridge: Within that, the over 65 population is growing by 5.5 million. So outside of the over 65, you've only got 3 million change in the population. That's baby boomers. They're retiring. So you look at the chart and this is where we come. You know Dan's coming later Dan Drezner talk politics. and we heard from Geo Quant and MKT on this on the elections yesterday. So I'm not going to go into that. But what I will say, we talk a lot about immigration. We've seen a move by Joe Biden yesterday to limit the border. If we look at the change in the workforce and we split it out by domestic born workers and then foreign born workers, domestic born workers, the change in the workforce from Jan 2020 to last month is 314,000. That's one month decent payrolls nber. Maybe it's tomorrow's nber. Who knows. But that's one month of payrolls 314,000. Nearly four and a half years. If you look at foreign born workforce, it's grown by 4 million. Without immigration, there is no growth in the workforce. Without immigration, that jobs to unemployed ratio can only go back up because more people get a job. Job openings stay where they are. You probably go back up. What's the trend in immigration? What do we see yesterday? We're cutting it. We had big immigration last year. It's being cut back this year dramatically from the executive order yesterday.

Lee Ferridge: Whoever wins in November is going to carry on down that route. So when you're thinking about the underlying structural part of the economy, wage inflation is going to be higher. And as Jim said yesterday, we always deal with these things. We'll get through it. Yeah. But how do you deal with it? You've got to change what you're doing. And that probably means higher rates, not lower. Now another element that does worry me. So Alberto again, Alberto wasn't that worried about shelter. It's not in price that he wasn't that worried about it. I am worried about shelter costs because we have an inventory problem in the housing market. So this is issue nber two. You look at the inventory to household ratio. We're close to all time lows. You look at the relationship between price Shiller house prices. They're on the right hand scale inverted on the left hand chart here. And inventory if you have a lack of inventory inventory prices go up. It's not difficult that supply and demand even I can understand that. Why don't we have inventory in the housing market? Because nobody wants to move, because the average outstanding mortgage rate in the US is 4%. 50% of mortgages are at 3% or less. You want to get a mortgage today, 7.5%, if not higher. Who's going to move from their 3% mortgage to a seven and one half percent mortgage? No one. That gap that you see there is the biggest we've ever seen.

Lee Ferridge: That's what 15 years of QE does. That's what financial repression does. People term out corporates are doing it as well. But in the housing market 90% of mortgages are 30 year, fixed average is 4% 50 of them, 50% of them below 3% or three or below. No one's moving. Lack of inventory. We do have pent up demand that leads to higher house prices. Case-shiller is up 7.4% year on year, and that could be a problem in the second half of the year. When it comes to inflation. We've seen we're sort of price stats is sort of bottomed. It's moving sideways. It's not accelerating. Alberto is not worried about it with no break higher. But we're sort of sideways. Well, if the shelter component starts going back up and doesn't come down. So here I've got Case-Shiller against PCE, the PCE housing and CPI shelter with a 12 month lag. We know there are problems with how it's calculated. It seems to lag house prices by 12 months. So Case-Shiller bottomed last May at around zero year on year. We're now at 7.4. The risk is the implication is that over the second half of this year, the shelter component of CPI doesn't come down and actually starts going back up. So if the other factors are flat and that's going back up, where does that leave the fed? Why are we talking about rate cuts when the risk is it goes back up? Third issue.

Lee Ferridge: Again I've got to disagree. I'm disagreeing with a lot with yesterday. But anyway, ignore that Jim and I are BFFs. Don't worry. Jim, I didn't seem worried about financial conditions. I asked him about it. I had a ton of questions about financial conditions. He didn't worry about it. He's annoyed. They even put it in the statement. Financial conditions matter and the fed were very happy. The reason they put it in the statement is, as Jim said, was last year they saw a tightening of financial conditions. They wanted to use that to justify a more dovish stance. They put it in the statement. The problem is they've gone the wrong way since then. In fact, financial conditions last year weren't that tight. If you use the Chicago Fed Index, which is the one the fed have always used. But they didn't like what it was saying last year because it was saying that financial conditions weren't that tight. So they got the New York Fed to invent new financial conditions index, which is the two blue lines on here. The problem for the fed is the Chicago. The New York index is now showing that financial conditions are loose as well. So Chicago is saying financial conditions now are looser than they were before the fed started hiking. The one year look back on the New York is close to the same thing, and we're not far off from the three year either.

Lee Ferridge: Financial conditions are loose and it does matter. If nothing else, it matters for the wealth effect. So this is change in household net worth since Q4 2019. So obviously last quarter before the pandemic, and this is in real terms, I've deflated this by PC household net worth has gone up by $33 trillion over the last four years. In real terms. That's 28.5%. That's huge. And that's still the end of last year, which is the latest data of that 33,000,000,000,026 trillion is housing and equity markets. We're now in June. What's happened over the first five months of the year. We hit all time highs yesterday again in equity markets. And house prices are going up. So that wealth effect when we get the data which is massively lagged, it comes from the fed. When we get that data, it's going to be even higher. Not only that, where is that wealth concentrated? A lot of that wealth is concentrated in the baby boomers. They own the houses. They've got the 401 KS, etc., etc.. They're retiring suddenly when they retire. Their portfolio is up 28.5%. And not only that, when they come to invest it, if they're buying an annuity or they're buying long, long term bonds, they're getting a much higher yield than they expected. Their lifetime spending power has gone up significantly over the last four years. So that fuels conser spending overall. That's why financial conditions matter. And that's why I was surprised that Jim didn't think that.

Lee Ferridge: so this all comes back to the question now, is policy restrictive? Right. This has been the the override assption that whole time with the expectation of rate cuts is policy restrictive. It depends what you mean by policy. If you mean rates, probably. They're probably above neutral at the short end. But policy isn't just rates. Policy is made up of interest rates. Also the fed balance sheet that's part of monetary policy. And the fed balance sheet is still bloated. We're seven and one half trillion with 2,627% of GDP. Look at the start of this chart here. Pre-gfc balance sheet was always around 6% of GDP. Didn't move. It was boring as anything. No one cared. We did QE, we bit of sht and then we did a massive amount of QE again when it came to the pandemic, we're now at this level 26, 27% of GDP and the fed are tapering. Kutty the balance sheet is bloated. It should not be this big. But the fed is petrified about having a liquidity event like we got in 2018 when they last did. Kutty. So they're pulling back early. So that bit of policy is not restrictive. The other major bit of policy of course is fiscal. This here just shows you annual fiscal deficits. These are Bloomberg consensus rest of the G7 expected over the next few years to get back to sensible levels, 2%, 2.5% of GDP, sort of normal deficits you'd expect.

Lee Ferridge: Look at the US. The consensus is that US deficit will continue to be 6% of GDP through to 20 2829 that I've got on here. If you look at the CBO, their own forecasts, the next ten years, they've got the deficit averaging 6% of GDP a year. Content a bit of context for that. If you look from 1962 to 2022. So 60 year period the deficit averaged 3% of GDP. We are now saying we're going to double that for the next ten years. The IMF back in April published their fiscal monitor next ten years culative fiscal deficit in the US. They have about 80% of GDP that's using current GDP. So it's not going to add 80% to the debt. But for context, 80% of GDP over the next ten years. Dm ex US totals 30% of GDP over that period. M ex China 42%. Us over 80%. That's not restrictive. So if you take the level of rates, you take the balance sheet and you take fiscal policy together. Policy is not restrictive and even the level of rates. So the Fed's preferred measure of real rates is fed funds minus core PCE year on year. We're currently at 2.6%. If you look at the post GFC period we averaged -90 basis points. So 2.6 -90 with 3.5% above that. That must be restrictive right. That's what everyone asses. It's a massive recency bias there. We're assing that post GFC pre-pandemic period was the norm.

Lee Ferridge: Jim said himself yesterday he thinks the economy is more like that 1990s period. Right. That's what he said, the 1990s, late 90s. That's where he thinks we're more like, well, where was this rate back then? This rate back then was pretty much where we are now. So real rates were not negative. They were pretty much where we are now. And I will give you an estimate of our star. I will, look, I think neutral rates are 4 to 4.5%. Right. Nominal. So our star 200 to 250. Jim, actually have a couple of drinks last night. I told you if we applied him with drinks, we get answers. He actually told a colleague of mine after a couple of drinks. He thinks neutral rates are three and one half percent. So our star 150. So I'm above him, but he's higher than you might expect. And then if you look at the long end in terms of real rates. We're not even close. That's the balance sheet impact. So you look at realized real rates using ten year against core PCE. We're about 170 basis points a bit lower now after this week. The average from 90 to 2007, or even from 70 to 2007, 380 basis points. That's the balance sheet. So if you think about or is policy restrictive, not even rates are restrictive. We're above neutral at the short end. But given where fiscal policy is given the size of the balance sheet, so where the long end is, it's very hard to make the argent that rates are restrictive.

Lee Ferridge: And by the way, we all got excited by 0.3 on CPI, 0.3 on on on PC. Base effects over the second half of the year are not going to be favorable if we get 0.3 on CPI from here. Core CPI will end the year at 3.9%. If we get 0.3 every month on PCE, we'll end the year at 3.8%, i.e. going back up, not going towards the 2% target. So what am I saying? Things are slowing. Yeah they are. But that's probably over the last couple of weeks. People have really jped onto that one because, let's be honest, what we've done this year is the last data point changes everyone's view for the next 12 or 18 months, and then we get the next one. In my 12 month view changes, this is where we are. But underlying this, there are concerns in the labor market that are structural, the housing market that is structural, and the fact that financial conditions are too loose and policy overall is not restrictive. And that's why the fact that the market has talked about the next move being a cut since SBB, there are clear tail risks out there that are not properly priced. I think now a lot about the US. what about the rest of the world? Similar but different. So I talked about demographics and wages.

Lee Ferridge: look, we have that problem everywhere. So current wage growth across the developed world against the 2010, 20, 20, 2010, 2019 average everywhere wage growth is elevated. Demographics is not just a US problem, it's a developed world problem. This is why you have sticky inflation in the UK. You have sticky inflation. In Europe you have it everywhere. That's what this chart is showing you. Actually, the US is not that bad compared with others. And then sticky, sticky wage inflation leads to sticky services. Inflation goods inflation comes down. That's global supply chains etc. Alberto can tell you a lot more about that than I can. but with strong domestic wage growth you get sticky services inflation. So you look at goods inflation against their 2015 2019 average. You look at services around the world. Goods inflation is fine. Apart from Australia and Japan, Japan is a currency thing. As we all know services inflation is sticky. So same story for everywhere else. Possibly the hikes. Well they used to be just cut the Bank of Canada cut yesterday. Why are they cutting. And I'm arguing there's a significant tail risk of a hike next time in the US because we're still growing above trend. So current growth minus trend growth. This is using OECD nbers for trend growth. Us is the only developed market still growing above trend. Right. You look at the rest of the world growing below trend.

Lee Ferridge: Now the whole theory. And if you look at the consensus for 2024 similar story, the whole theory about trend growth is if you're growing above trend, the economy is tightening, you're increasing inflationary pressures, you're growing above potential. If you're growing below trend, you're increasing slack. Unemployment will rise, price pressures will fall. So you can make the case. And you know, Alberto showed yesterday we've got sticky prices in Europe. We have. But you can make the case looking forward. And the ECB obviously this is what they think they've cut today. That where the economy is in terms of growth will create slack. And that will reduce inflationary pressures in the future where we measure them now in price stats they're high. But if you look ahead in central banks, look about two years ahead when you're growing or not growing at all. In the case of Europe, you can say these price pressures will ease. That's what the banking calendar can say. The ECB and I think the Bank of England in August when the election's out the way, the fed can't say that yet. We're growing above trend. We're growing at 3%, 2.9% year on year. The fed thinks trend growth is 1 in 3 quarters. We're not there. And yet we're the ones still priced to cut more. Because when you look at, relative rate pricing, there's really no differentiation between the US and the rest of the world. If we look at one year rates, you've got a little bit more priced in in Europe.

Lee Ferridge: But you look at you look at current GDP growth against one year rate expectations on that chart on the left, we're pretty much the same. You look at the next one year or two years, maybe there's one cut difference, but you've got a world of difference when it comes to actual economic performance. So what does it all mean for markets? Let me introduce you to Mount Carry on risk rally. I think we're there, right. Maybe after the elections and what we've seen, maybe we're a little bit further along. I think we're near the end. Right. If I'm right that these risks. And I know this week with the data and we've got payrolls tomorrow, we're now in the okay. Everything's fine. Soft landing rate cuts are back on. You know next week we get strong payrolls. Tomorrow everyone's 18 month view will change. it's getting harder. We've seen from carry over the last week or so. Politically driven. Yes. we're seeing the concentration in the equity market go up even more. We're getting to the end of this rally. Let's be honest, we're getting close to it. Maybe we've got a few more weeks. Maybe we can get into Q3 with risk still being positive. When I think we reached the peak is if the market really starts to wonder if that next or that first cut is coming in the US, if the factors I've talked about and the longer time goes on as we get into the second half of the year that shelter pricing, if the labor market doesn't weaken, financial conditions continue where they are.

Lee Ferridge: The longer we sort of move on, those inflation pressures start to move the other way, or the nbers start to move the other way. And if the market really starts to think maybe that cut isn't coming this year, maybe it's not a cut. And the overwhelming consensus we saw here on the vote is that still there? But if that changes, then we hit the peak. We're close to it. It's going to get harder from here, I think. But look, for now, when I look at our indicators, the guy talked about real money is still positive. So BRS Behavioral Risk Scorecard measures real money sentiment using 22 different cuts of the flows. All of them are risk on risk off decision across asset markets. We've been positive now for 75 days. That's the longest run we've seen since 2021. Not exuberant. You can see there's sort of you know that dark blue line. There's sort of slightly positive. But it's not you know we're not going in plus ten reading or anything like that. It's positive though. Real money is still in the game. There's still happy to run risk. But it's all about concentration and the BRS. If we broke it out, nearly all of that positivity that we've seen over the last 75 days has been focused on equities, and we can see that in our asset class weight series.

Lee Ferridge: so asset class weights looks at equities bonds and cash everything we custody how much is held in equities. How much in bonds. How much in cash. The equity component of the asset class weights is now at a 16 year high. So that concentration risk you think about it within within the equity indices. But within our portfolios we've got a 16 year high in the equity holdings. That's a concern. And still building. You look at the change over the last year, the last three months even the last month still building. But that's a concern. If we get in towards that, that point where that next cut is not a given. We heard about the curve yesterday. Marv's idea didn't win, but he was close about the sort of short duration we heard a lot about curve steepening. It depends which bit of the curve. And actually this was Marv's idea as well. It was two fives tens fly. If you're looking at the twos fives, you're not going to see that steepen if I'm right to, your rates are going to go back up towards 5%. You're probably going to start pricing more of a slowdown. So the belly of the curve, the five year is going to come down. You actually could see that flatten more. If you want to play a steepener you play it through fives tens.

Lee Ferridge: Because then if you priced more of a slowdown. But then we worry about the fiscal side, we worry about the longer term. That term premi fives tens is probably where you play the steepener. On the effects side, I do still like the dollar. It still looks good to me. And our panel yesterday was more mixed. look, holdings are a problem, right? Real money are overweight. The dollar, they went up, it's come back down. We're pretty much around the two year average, but the two year average for dollar holdings is elevated. And our holdings measure matters. You look at holdings against the DXY. You can see the length of the relationship. But we've had an overweight in the dollar now since January 2022. So is this a new regime? Is something different? Yes it is. It's called higher US rates. Because if I look at our hedge ratios, you look at the fixed income hedge ratio. Look how that's come down. So this is foreigners buying us fixed income. How hedged are they. Look at the equity hedge ratio. Foreigners buying US equities. How hedged are they on their fix. Both have come down a lot. Why? Because it's expensive to hedge, right. You're paying a lot away to hedge your US dollar exposure. So the hedge ratios have come down. That's why we have that consistent dollar overweight. That's why I worry about it less. What's the big dollar driver.

Lee Ferridge: What's the big dollar driver. It's all about rates. Look at the relationship to the to the DXY and two year rates. Look at the correlation. Rolling 60 day correlations ten year rates or the or the S&P risk on risk off still works. But by far the biggest driver of the dollar is rates. And if I'm right and rates aren't coming down as much as we think, or if at all, then this rate support is still going to be there. So I do still like the dollar. What I want to buy it against I carry still, we're not quite at the top of mount carry on what risk rally what I call it. so look dollar Swiss still like dollar Swiss dollar yen. I got to worry about the BOJ, but if we don't move anywhere, I'm still going to pick up 5.5%. And they're going to let it drift higher anyway. And then they intervene. But I'm still picking up my 5.5% dollar stock as well. Others are now cutting Bank of Canada yesterday ECB today I can pick up some more carry by being long dollars as others cut rates. And that's where I'm going to do. And when it comes to em again, it's been a great trade. Nothing won yesterday with a long turkey. I don't disagree with her, but just think about Mount carry on risk rally because we're getting near the end, as am I. So that is my time up. I think I have a few minutes for questions. Cayla, you're going to grill me.

Cayla Seder: I'm glad you directly addressed our star, because that was going to be my first question.

Lee Ferridge: I thought it might be. That's why I did it.

Cayla Seder: Okay, we have a couple up here already. Okay. So we talked a lot about or you talked a lot about the fed. You did touch on a couple of other central banks too. And kind of this general trend of okay, there's probably too many cuts priced in in general. But is there one other central bank outside of the fed that stands out the most to you, where there's too much cut? Optimism?

Lee Ferridge: Not really. I mean, you know, the obvious answer would be the ECB. Right? So, you know, we had more priced in for the ECB than anywhere else. And then the data has been sticky. They've delivered today. But I suspect Madame Lagarde, if she's talking now will be playing it down. Data dependent not committing to anything from here. look, eurozone is barely growing, right? You know, as Alberto said yesterday, wages tend to follow inflation rather than the other way around. So we have had sticky wage settlements in Europe that's sort of playing into the narrative now. But with growth virtually at zero, I think you are going to see that slowdown come. So I don't believe that we've got too much priced in for the ECB. I think there are others you can argue we haven't got enough in for maybe the Bank of England. Right. So Bank of England is very similar situation that showed you the highest wage inflation compared with the average pre-pandemic. but again with very little growth, it's hard to believe that they're not going to start cutting soon. So no, not really is the answer. The fed is the one that stands out because of that chart about where are we compared with trend.

Cayla Seder: Growth US exceptionalism.

Lee Ferridge: Still there. Yep.

Cayla Seder: Okay. We have a couple more questions on. I'm going to hop to this one. Through which channel is an aging? Would an aging population imply a higher R star? Wouldn't it imply a decreasing productivity capacity and R star. So kind of pushing back on on some of your demographic ideas.

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Lee Ferridge: No, not really. I would impact productivity necessarily. It just means a smaller workforce. So if you have a shortage of workers, that means structural wage inflation will be higher. Therefore, if you're going to maintain a 2% inflation target then rates have to be higher. Real rates have to be higher in order to achieve that 2% inflation target. They're structurally higher wage inflation level. now that means lower growth. So that would reduce some pressure from wages as well. But but the productivity bit is almost separate. look the productivity if we can achieve huge productivity then we don't have to have higher wage inflation even without workforce growth because you you make up for the lack of workers through productivity. But as Jim said yesterday, the indicator he looks at there's really been no change in productivity. He's not that hopeful that we're going back to that 90s level of productivity. So it just leads me to a shortage of workers, higher structural wages, which requires a higher star if we maintain a 2% inflation target. And again, Jim said yesterday we don't want to be changing that.

Cayla Seder: Okay. Does it? We have time for, I think maybe two more. Okay. Does it matter why the US two year stays elevated for the dollar? For example, what if a Treasury buyer strike causes higher rates?

Lee Ferridge: Our Liz Truss moment. Well, I don't think we're quite there in the US for the Liz Truss moment. look, the deficit nbers are extremely worrying. There's no doubt about that. and maybe we do have a Liz Truss moment at some point in the future, but it is the reserve currency. It is the biggest, most deepest markets in the world. So I don't see it coming any time soon. But you know, you can't run 6% deficits forever. so in that world. So the basic thing is higher rates actually don't support the dollar because you've got a lack of confidence in the US financial system. Yeah. Feasible. I just don't think that's where we are right now. I think we're more in a world where actually we're going to have to have higher rates because of the fiscal deficit, but those higher rates have to get to a level where you attract the capital to pay for the fiscal deficit. And that in turn, if you've got higher relative rates and the hedge ratio has come down, that means you get net dollar buying that supports the dollar.

Cayla Seder: And I think to kind of there's a lot of uncertainty now around the election. Right. Yeah. But one thing that does seem more certain or most certain is regardless of who becomes president, you will probably see the the deficit continue to rise.

Lee Ferridge: So certainly not come down. There's no appetite in Washington. I mean, Dan's coming later. So we can ask Dan this, but there's probably two things that that with the election that are relevant to what I've just been talking about, that actually doesn't matter who wins. And that is when it comes to the deficit and when it comes to immigration, because the trend in both is the same way. And you could argue the third one is actually trade policy towards China and the threat of tariffs, because both are going down that route as well. so when you're thinking about inflation, you're thinking about, okay. And ask Dan about this later. every Trp policy that has been talked about is inflationary. Yes. And so when we're thinking about that path, the rate cuts, those two year rates, you've got to start thinking about that as well. Yep.

Cayla Seder: Okay. One more go. One more for you 10s.

Lee Ferridge: All right.

Cayla Seder: If you can answer it, what will it take for housing to really crack.

Lee Ferridge: Hasn't really crack. yeah. Lower long end rates, lower mortgage rates. Because then you could have pent up supply. so but don't then go down the argent. Should the fed cut rates in order to, to lower inflation because housing inflation comes down because they cut rates? No, because mortgage rates are based off the long end. If they cut rates now when inflation is here you'll just see the curve steepen mortgage rates will go up. The when the housing market cracks is when we have the recession. Long end rates come down, mortgage rates come down. And guess what then then we're going to have a period of disinflation.

Cayla Seder: All right. Sounds like you have a crystal ball I believe you. Thank you so much Lee.

Speaker4: Thank you Cayla. Great. Thank you.