As you look at this risk in particular When it comes to geopolitics how do you Play it and how has it been played so Far maybe or maybe not been overdone Well I think that um there was certainly risk Premium being priced into russian assets Like the ruble And msci Russia Stock index for example that we follow From Say mid december Until late january and then both of Those markets have rallied significantly As people Um you know kind of faded the whole Russian risk premium move right and Bought rubles back for yield and stuff Like that and if you look at other Assets like euro poland where the polish Lottie's actually been appreciating Against the euro it did sell off a Little on friday late afternoon when it Was untradable and A little bit more a little yesterday but You know it's rallying right back to To new highs against the euro so i don't Think there's huge evidence that a Massive amount of risk premiums been Priced into russian assets we can point To a few assets That have been you know have gone up Significantly like palladium since
Mid-december They're off today a little but um you Know and you might think that that's Evidence of a risk premium but i think In general in markets until a few days Ago most Investors Had a very low weight priced on the Chance of an actual russian incursion Major incursion indeed So you Six weeks ago not many investors had Really factored in the idea that the fed Was going to be aggressively raising Interest rates the last six weeks have Seen obviously significant repositioning Around that it's a quantifiable risk but Talk to me about how your thinking has Evolved Well i think you know we're seeing what We what we anticipated but which you Can't necessarily position for You know completely in advance which is That we're finally starting to see the Fed realize You know that the labor market is too Hot they're going to have to raise rates You know more than you know not going to Raise rates three times the markets Pricing more like six But so far all the market has done is Moved the rate forward they really Haven't raised the total number of hikes At all hardly so it's kind of odd and
This we're seeing the same thing around The world in various markets people Think that the you know as soon as the Bot there's a lot of bond traders for Example think as soon as the fed gets Rates to 175 there'll be a recession And the fed will immediately backtrack We have a different view of it if you Look at inflation it started to really Move higher Uh last spring not only because of base Effects but on higher frequency basis it Went up and that was as u.s unemployment Dropped below you know seven percent and Through six percent right we're now at Four percent we're probably going Towards the low threes Um that acceleration inflation as Unemployment dropped below six or six And a half Might indicate that the non-inflationary Rate of unemployment is more like six or Six and a half and that means that we're Going to have An incredibly tight labor market and the Fed is going to have to hike rates okay Far more than the markets pricing in Still okay so maybe the terminal rate is Going to be higher than anticipated but Let's just talk about liftoff for city Out publishing after ppi saying 50 basis Points is going to have to be the move Do you agree with that I think that okay i think the fed has a
Short period of time Um before the blackout period To really really hit back against that We've seen a few fed officials push back A little on it but not very hard and the Major people haven't pushed back against It so unless they start a concerted Campaign to push back very hard against It and push back market expectations They are going to be boxed into going 50 And i think the political situation in The u.s has also changed dramatically Where there's now political pressure on The fed to actually start to do Something so i think they're going to go 50 And then they might even do another 50 After that but they're going to go and Um They're going to go in march may and June and i think they're going to go 50 Uh in march Unless we See you know governor waller and other People coming out really aggressively Against it So what i think is interesting about What you just said is is not the first 50 but the second 50. And the danger from presumably from a Fed's point of view is that they go 50 The market will then extrapolate in Bigger increments Is that likely do you think to happen
Well i think if they go 50 right there Will be people who'll start to price More than 25 for May as well and then it'll depend on the Data But so far You know the fed's been dead wrong on Inflation They've waited a year longer than they Should have to end like bond buying They're still buying bonds today they Can't explain why And they haven't done any hikes at all Yet so you know they're really far Behind the curve you know the correct Thing to do is if you think your rate Should be today Already you know At like one and a half percent maybe They should just hike the one and a half Right away but they're never going to do That but yeah you know i think the Market is going to start pushing them And the dollar has not been acting very Well Um the dollar has you know been Weakening against a lot of other Currencies um you know so it also Indicates i think that the fed really Needs to get rates higher faster In my opinion And if they move aggressively how ugly Could it get for credits aid Well my guess is that credit is growth
So credit spreads are tight you know Whether you're looking around the world Whether you look in your u.s or europe Um a lot of that has to do with the Massive amount of qe That's pushed down yields around the World and force people into credit Assets right so credit could definitely Widen There's companies have been getting Refinanced to In a normal credit market probably Couldn't get refinancing and some of Those companies may have more difficulty Getting financing eventually as well Which means eventually you're going to See default rates also rise a little Uh a little sorry are we just going to Get defaulterizing a little or are we Going to get a proper proper credit Cycle here You know Let's say i i i think that they have Room to widen but how much wider or how Aggressively you know that's difficult To say the thing you have to keep in Mind Is that the fed hikes rates let's say This year by the end of this year to one And a half percent Okay i still think that's a very Accommodative Fed funds rate given we have inflation Above seven percent and so
That means that it's not like we're Slowing the economy down we're just Starting to maybe we're we're going to Keep it from you know Growing it at a crazy rate but we're not Like putting into recession i don't Think by putting rates up to one and a Half percent i think we have to get Rates up You know into a restrictive territory Eventually uh because we're going to Have to get unemployment higher and Given how low unemployment is going to Get here it's going to be difficult to Avoid a recession ultimately but the Recession isn't going to happen this Year Unless the fed does a much more Aggressive hiking cycle than i think They will You know it's probably Won't be for a couple more years based On the way the fed's talking so you know It all depends on how much they hike but I think the fed's gonna have to get Rates up you know a lot more than the Market prices and then eventually you Will get A softening economy in a recession so The credit cycle you don't want to be Too early too aggressively i mean you Might want to be Betting on credit widening here and more And mbs widening as well but um because
The fed may start active sales mbs at Some point but i don't think you want to Um you know go all in yeah
