I dont think without list of names, even witnesses yellen, i dont think the president can make it bad choice. The Political Considerations outweigh the current economic situation. The new administration often just wanted some people on board. The interesting part is this discussion is coming at a time when there is the socalled mystery about the low level of inflation. The interpretation is quite important. I think they refute jay powell is someone to be more continuous in the policy we have been experiencing. Complexll have a very accomplished economist as the head of the Federal Reserve for the foreseeable future. Jonathan joining me is my , head ofbob michele the Global Fixed IncomeCommodities Group at jpmorgan asset management, and Marilyn Watson from blackrock. Lets begin with where the odds are for the race for fed chair. The number one spot seemingly is jay powell. The number two spot, if you look the front runners is reportedly jay powell and john taylor. The spread between those two is really quite wide. Michael in the last few days powells odds have really soared because he is probably the one most conducive to a more continuation of existing policies. More of a certainty, less of an unknown. Less risk to the markets. Taylor is a little bit of a wildcard. Jonathan how are you thinking about this at the moment . Bob i will take jay powell because he is a moderate. I fear john taylor, kevin warsh. I really want gary cohn in their. Jonathan why would you really want gary cohn . Bob i think it is time to get in markets practitioner into the fed seat and balance the econometric models of the ivory towers with the real world we all have to deal with. Jonathan i dont the guy ever anyone talk about gary cohen for weeks. Bob i thought i would serve him in when you gave me the airtime. Jonathan marilyn, as he said around with the guys of blackrock anticipating the decision that could come any day now, how you approach a decision like this . Marilyn you have to look at the probability we are looking at what the market is pricing in. When you look it all the different candidates, a lot is known about several of them. Potentially at taylor and how hawkish he will be, i think its overplayed. When you look at the list of candidates, some on the more hawkish side, but actually it is one person that will be leading the fed with a will have one vote. They will be leading a committee. It is all focused on the fundamentals and the committee as a whole at the Federal Reserve. Jonathan if it dropped across the bloomberg terminal that john taylor have been nominated as the next fed chair, would you be stating that move off the back of it . Marilyn we expect to see more volatility. If you look at the bloomberg terminal when its pricing in where the taylor rule is pricing in Interest Rates, is about 2. 5 higher. When you look at taylor himself, he is much more flexible in his approach to the unemployment rate. Much more flexible in his approach. We would look to trade volatility. We would expect to see a flatten or. Michael i think the Monetary Policy implications for whoever the fed governor is is not that big a deal. I think the Monetary Policy is on a set course. By and large it is driven by the consensus of the committee. I think the regulatory policy is a bigger deal. Trump wants someone new is a regulatory dove. Taylor would fit that bill better. Jonathan there are a lot of things to push about think about. I noticed mr. Powell, the politico story, drives yields lower than the taxcut story drives yields higher. I wonder how that will pus way out of the next several months. Bob i dont think Monetary Policy can be put to the side. Monetary policy is any ridiculous place right now. I think if you look at somebody like john taylor coming in, why the markets are more frightened that the next paul volcker is coming in. 3. 75 telling you it is . Distorted Monetary Policy is something of the past. They need to step up the pace the normalization. What comes out of washington is Something Different than that. If we get some stimulus, what is the stimulus going to do . It will accelerate the recovery we have already seen. I can see rates buffeting backandforth between this. I dont know if it has much to do with the fed chair or stimulus, it is still qe afterthefact. Jonathan people say we want a real market back, but vulgar back . He had inflation to deal with. Come on. Bob inflation is picking up. I will pull up a chart because i get this all the time. People say no, there is no inflation. You see it. You see yearoveryear wage gains coming up. You see the inflation across europe, japan, china. It is all picking up. Jonathan is a picking up marilyn . Marilyn it is picking up to a certain extent. Still from very, very low levels. It is all relative. Michael collins, you will take the other side of that . Michael all day long. Give the fun rate is 03 it will assure we go into a recession and the stock market crash. If you have a Money Market Fund at 3 or 4 , everybody would take all their money out and put it into money markets. It is too good to be true. On the inflation side, im in the disinflationary camp. Im looking at anecdotal evidence of companies in the world that have the ability to raise prices on their goods and services to consumers. It is the opposite. They are all fighting with each other for market share. Bob i found the chart i was looking for. What you are looking at is developed market core inflation and trying to core cpi yearoveryear. This goes back to 2012. There is the deflation . Where is the Downside Risks they are trying to respond to . It is starting to get away from them. You can look at the recent wage data in the jobs report. You can look at the atlanta wage tracker. Jonathan you join me on this Program Since its inception. Mike collins said i will take the other side of the trade. But michael is in trouble bob michele is in trouble. You can be right about inflation but wrong about a market . Bob it is true. Before you claim i have been wrong about everything. Jonathan i have not done that. Bob niels giffey higher and should be approaching 3 now. The other thing we have seen is the weight of quantitative easing that has come in and suffocated the market. Cash that weight of the that is helped yields in a very narrow range. Year. 250 or most of this it has been on the front end of the curve. They will raise rates in december. It will be the third time. It does not make any sense to me that they are still going this low unless you look at qe coming into the markets. Jonathan i wish we had a camera and a microphone during the commercial break. Everyone sticking with us. Michael collins, bob michele, and Marilyn Watson. Coming up, the auction block. Nathans first bond. This is real yield. Jonathan welcome back. This is bloomberg real yield. Some breaking news regarding fed chair janet yellen. Back at the white house. Said to be back at the white house according to a person familiar with the matter. This appearance following the day with her interview with the president. Fed chair janet yellen is said to be back at the white house. This according to a person familiar with the matter. Bob in new york, ireland from b Marilyn Watson from blackrock and Michael Collins from pgim. We barely discussed fed chair janet yellen staying on his fed chair in the previous segment. Why . Bob i think her time has come and gone. I think she did well in the aftermath of the financial crisis, helping to continue bernankes policies. I think the administration feels the need of, breath of fresh air to come in particularly if theyre trying to pull the republicans along with them and trying to bring the rest of congress with them. Signed a i thought she Resignation Letter off the back of the jackson hole speech which he defended the regulatory regime. Is that ultimately look at sign a Resignation Letter as well michael i think so. She pushed back against trumps emphasis on deregulating the banks. In her defense that is the right move. One of the best things that is happened in the cycle with the regulatory pushback has been the fact that banks are in as good as financial shape as they have never been in our career. Bob but not extending credit. It is true the regulation has done a lot of very good things. Has it gone too far . Where is the extension of the credit . Why all this raised capital and then buy riskless government bonds in europe and mostly negative yields . Jonathan janet yellen is said to be back at the white house. The appearance following a day after her interview with the president. You asked for the credit is. Lets get it up on the screen. Credit spreads are as tight as they have been for quite a while across the whole quality spectrum. They could not get much tighter. That is where the credit is, right . Bob the can get a lot tighter. Most investors look at highyield at 5. 5 . It does not strike them as highyield. They think highyield should be 7 to 8 . It is not a 5. 5 yield or the 3. 5 credit spread. It is the riskfree write which is about 2 , and the real yields which are negative. Ive. A chart where i look at real yields on the 10year treasury. You can see the distortion created by quantitative easing and the growth of Central Bank Balance sheets. Defaults ihat 1 think they should be 250 over. Michael credit spreads are getting to the point where they are not only fully valued but potentially overvalued. Im looking at spreads it gets a lot of corporate sectors and the are basically at historical tights now. In the last couple of days we have seen a snap tighter in spreads with the optimism on tax reform. We are pushing back against it. We are fading the credit rally. Jonathan this is a sign of complacency or is the risk mentality here to stay . Marilyn we see the risk on mentality here for the time being. When you look at Global Growth it is still on a very robust stance. Global Monetary Policy and Central Banks, they are at an inflection points where they will reduce Monetary Policy. When you look at the investors, where they are trying to get yields, the markets and credit are two sectors we do feel they have some value. We are becoming increasingly cautious on the names we invest in. It will be incredibly important Going Forward to look at the risk, leverage, and where you are investing. Jonathan where are you selling . Michael double b rated credits. That spreads in the low to mid 100s. Some inside 100 basis points because there is such a demand for extra yield from investors around the world that they are not that pricesensitive. We are selling those and rotating in the triplea assetbacked securities, collateralized Loan Obligations that spread of 100 or higher in some cases. Jonathan i need to take a fee. I can make a market. Bob, buying . Bob absolutely. I dont believe we are anywhere near the tights. 1996, go back to 2006, credit spreads got to Something Like 250 over. That is where we are heading. We have 100 basis points to go. We are selling the markets that are distorted. It is the Central Banks that bought the government bonds and compressed real yield. Get rid of that stuff. Everyone is looking for credit. Corporate balance sheets, earnings, the quality of earnings all the pretty good. Jonathan wait a second. Distorted markets exist across the whole fixedincome environment. Bob true. Jonathan if you want to sell distorted credit, that is it, isnt it . Bob you can go into the loan markets. You take out the fixed rate component. The other is you can buy spread credits. All of us can sell the treasury market against it to hedge Interest Rate sensitivity and just capture the credit spread. You are right. If the fed continues to normalize and the other Central Banks jump in, you will see a return to real yield to the market. That will ripple through every asset class and every discount rate people are using in those asset classes. , bobhan Michael Collins michele, Marilyn Watson sticking with me. Choppy over the last 24 hours. Deals higher throughout the week by seven basis points, front and by 9 end by nine. The final spread. The week ahead features that decision from mario draghi. This is bloomberg real yield. Jonathan this is bloomberg real yield. Coming up japan holds an election with Prime Minister shinzo abe favor to win reelection. Lawmakers will meet in the parliament. You have u. S. Gdp and the ecb decision. Michael collins, bob michele and Marilyn Watson over in london. Janet yellen said to be back at the white house, for just a day after our interview with the president her interview for the president of united states. Some choppy Market Action off the back of that. This fed raises very difficult to interpret. Had a you view the headline risk around all of this . Michael it looked to me like some of he assumed she was there for a followup interview. She is the front runner. I dont think that is the case. I think she is told she will not be the fed chair and will be allowed a chance to step down. Jonathan 24 hours later this will get replayed. We will some really stupid. Bob we have been there before. Jonathan i shouldnt he give her the job . Bob i think mike pointed out there is the whole regulatory issue. You want somebody in there that will be a bit more balanced. Just to get a breath of fresh air and get rid of these unconventional tools. They are distorting the markets. Lets go back to a marketbased economy. Jonathan the ecb is meeting next week. They are set to unveil potentially what they are going to do with the qe program. Do they cut it for an extended period or extended for a longer period . Michael they telegraph what they will do a little bit last week. Their staff came out with a report that looks like they will cut the purchases from 60 billion a month to something less, presumably 30 billion a month and extend that. It is supposed to expire at the end of this calendar year. Extend that through september of next year. Jonathan this is just remarkable from deutsche bank. Seven times net issuance. That is the ecbs activity in this market. How significant is that going to be . Bob is going to be pretty significant, but they will still be buying 3. 5 times the net issuance. They will still be distorting the markets. I think it is not the next nine months where they will cut the purchases in half. It is the nine months after that. You really have to get about a year from now to figure out how the markets are going to revalue. Jonathan the situation when the Federal Reserve steps back and yields went lower. Why cant the same thing that happened with bonds . Unds are already very low. Rates are negative. In both michael and bob pointed out, there will be a sustained period where the ecb is still buying. It is our view they will buy about 30 billion between january and september of next year. Looking forward is one for guidance comes into play. The market will look at if Interest Rates might rise from a negative rate. When you look at the eurozone economy as a whole, it is continuing to grow. Particularly when you look at germany, spain. Economic fundamentals are very positive. Even when you look at the labor market, it is coming back from week levels. Weak levels. Jonathan looking at the periphery, he told me last time you were buying greece. Are you buying any other peripherals at the moment . Michael we are long on a handful of peripheral countries. I think credit spreads are still wide. The eurozone is seeing a real rebound in economic activity. They have been the star performer globally. It feels like a coalescence happening politically in europe as well. We are pretty comfortable with some of the peripheral credits. Jonathan what is the trade in europe for you . Bob still corporate credit. Particularly euro highyield. It looks great to us. We look at Something Like 10 of the universe is going to become a rising star. You can get yields a 2. 5 . I would take that all day long over peripheral europe. Jonathan now with the rapidfire round. Jeter answers as short as possible. Taylor, powell, or yellen . Michael how. Marilyn powell. Bob powell. Jonathan credit or its not getting any cheaper . Andael i think you sell way for the opportunity to buy it wider spreads. Bob buy all day long. Marilyn stay in it for now. Jonathan bond yields higher or lower . Michael lower. Bob higher. Marilyn higher. Jonathan that does it for us. They gave rejoining the thank you for joining me Michael Collins, bob michele, and Marilyn Watson. We will see you next friday at the same time. 12 00 new york time, 5 00 p. M. In london. By that time we might know who the next fed chair is. This is bloomberg real yield. It is 12 30 new york. 12 30 a. M. In hong kong. Shery will come to bloomberg markets. Shery from bloomberg world headquarters, here are the top stories were following. Janettch as we learn yellen is back at the white house, just a day after meeting with president trump. We have the latest on this critical decision for investors worldwide. As a whirlwind week of thirdquarter earnings came to a close, we look at the details. Techs record influence on the cycle in much more. As part of bloombergs special series on automation, we speak with rishi ganti about the coming revolution involving new Technology Like a. I. On the financial industry. Lets get a check of the major averages. Investors looking