Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
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Speaker 1: I don't want to make him blush, but John Farrell
Speaker 1: changed the discussion and economics world wide at Davos or
Speaker 1: he Tora apart, Mr Prince of Bridgewater over boom and bust.
Speaker 1: It became a three day fund filled derby for us
Speaker 1: talking about the dynamics of our economics system at the
Speaker 1: zero bound. We didn't know then we'd be near a
Speaker 1: record low in the thirty year yield. We didn't know
Speaker 1: then we'd be a near seventeen hundred on gold. We
Speaker 1: didn't know then there would of course be this tragedy
Speaker 1: of a virus in China. To make sense of it
Speaker 1: with a really important FED confab today in New York.
Speaker 1: It's Julia Cornado of Macro Policy Perspectives, and you are
Speaker 1: perfect to talk to about the fear that's out there
Speaker 1: among public officials messaging we are the world happy Happy.
Speaker 1: Jim Bullard's over on the Death Star right now with Joe,
Speaker 1: Andrew and Becky. Everything's fine, Bologny, it's a Bullard regime change.
Speaker 1: Clarida Galli Girtler. The science of monetary policy, what's the
Speaker 1: science in two thousand twenty. Well, that's exactly what they're
Speaker 1: trying to figure out. I mean, they they It's a
Speaker 1: tricky communication challenge, especially at moments like this when there's
Speaker 1: a real threat to the out Okay, but the difference
Speaker 1: here is we're getting yeah, yeah, yeah from Clarida John
Speaker 1: who else will we talk to? Mike McKee's got messed today. Well,
Speaker 1: because you don't want to be the hair on you
Speaker 1: have your hair on fire, as a central bank, have
Speaker 1: your hair on fire. Speak Well, I don't think that
Speaker 1: we know the extent to which this is. It is
Speaker 1: not contained. The virus is not contained. It's spread to Korea.
Speaker 1: It's definitely causing damage in Japan. Uh So we we
Speaker 1: and we don't yet know when it's going to stabilize.
Speaker 1: There are projections that are stabilize by the end of
Speaker 1: the quarter at zero bound, we're very close. What did
Speaker 1: the optionality these bankers have that affects every one of
Speaker 1: our listeners, right So I think it's interesting time to
Speaker 1: have this conversation because, on the one hand, we know
Speaker 1: that the monetary policy officials are running out of tools.
Speaker 1: On the other hand, what we saw last year was
Speaker 1: that they can have a powerful impact with a few
Speaker 1: rate cuts, right, a few rate cuts, a little turn
Speaker 1: in the balance sheet, and all of a sudden, the
Speaker 1: sentiment like switched pretty hard, and the housing market responded,
Speaker 1: commercial real estate responded. So there is some Amma laughed.
Speaker 1: They did keep the train on the tracks last year.
Speaker 1: But if the shock is big enough, obviously you hit
Speaker 1: the zero or bound pretty quickly. Yeah, I agree with
Speaker 1: you here and not Stice. That's the story. And Jimny,
Speaker 1: it's not on the brink of contracting Japan. We're already
Speaker 1: there on the brink of recession. Let's talk about the
Speaker 1: other two biggest economies in the world, the number three
Speaker 1: and four. We can have them in recession by the
Speaker 1: middle of this year, can we do? We could? And
Speaker 1: And the question then is is it a recession that
Speaker 1: is sort of technical in nature in the sense that
Speaker 1: we've already stabilized the virus and we know everything is
Speaker 1: on its way back. That would be less worrisome. Then
Speaker 1: if there is sort of knock on effects to sentiment
Speaker 1: and that's spilling over into um services. And yeah, and
Speaker 1: I think this is key for the market, for this
Speaker 1: bullmarket to finish. A whole range of things can happen,
Speaker 1: but two of them that stand out to me. Either
Speaker 1: we lose faith in the ability and willingness of central
Speaker 1: bank is to act. Muhammad Andy has made that point
Speaker 1: very well over the last couple of weeks. All we
Speaker 1: start to see that tension, that weakness in manufacturing appearing services,
Speaker 1: damage the consumer, hit the labor market, then we've got
Speaker 1: a problem in America. How far away from even thinking
Speaker 1: about that scenario, Well, we've been pretty far. I mean,
Speaker 1: it's been actually a little worrisome that markets haven't been
Speaker 1: reactive to information that suggests risks. We've had almost no
Speaker 1: pricing of risks, So that means we have further to
Speaker 1: fall if in fact there is a materialization that's meaningful. Well,
Speaker 1: and that's exactly where I wanted to go. Sort of
Speaker 1: this tension. Is there too much complacency? We were talking
Speaker 1: earlier about this question. We've got the yield curve, the
Speaker 1: two tens yield curve at the narrowest level since the
Speaker 1: last year, almost inverting yet again. And yet you have
Speaker 1: borrowing costs for the top rated companies at record lows.
Speaker 1: What will another FED rate cut do to stimulate the
Speaker 1: economy given how low borrowing costs already are and the
Speaker 1: fact that asset prices are already so high right again.
Speaker 1: And I think that highlights like there was a little
Speaker 1: bit of ammo last year. They used it to address
Speaker 1: that worry middle of the year. Now we have If
Speaker 1: we have that same worry return, you have less ammunition.
Speaker 1: And I do think there's a lot of complacency in
Speaker 1: in market pricing right now. Julia, I'm gonna go to
Speaker 1: a line from I'm Clarida Gali Girdler twenty one years ago.
Speaker 1: It is then possible to represent the baseline model in
Speaker 1: terms of the I S curve, the real economy curve
Speaker 1: that relates the output gap to the real interest rate.
Speaker 1: There isn't a real interest rate. They wrote this paper
Speaker 1: when there was unimaginable imagine we have negative that where
Speaker 1: we are where we are, it's not that is not
Speaker 1: a roadmap anymore. Where are the new tools? So so
Speaker 1: I think it's been to me a little bit disappointing
Speaker 1: that in this policy review that the FED hasn't sort
Speaker 1: of endeavored to think a little bit more outside the box.
Speaker 1: We need there are a trillion let me help, is
Speaker 1: a trillion dollar deficit outside the box enough? Well? I
Speaker 1: mean the deficit is may need to expand more if
Speaker 1: we get hit with the real shock is John is
Speaker 1: a policy tool now thirty two. Look, financial conditions matter,
Speaker 1: and the FED responded to them quickly. I think what
Speaker 1: the FED really responded to though, in eighteen December eighteen
Speaker 1: was what happened in the credit market when the primary
Speaker 1: shut down the high yield We didn't say that. They
Speaker 1: always take credit as a much more material signal than
Speaker 1: the equity market fluctuation. So I think you're exactly right.
Speaker 1: In December there was nothing trading in credit markets, and
Speaker 1: that was a very meaningful signal for the FED. And
Speaker 1: they what do you do when you have limited ammunition?
Speaker 1: You look to Japan their experiencing right now, it's yield
Speaker 1: curve control right now. Isn't that the next stop for
Speaker 1: this federal reserve beyond q WA? Well they they're already
Speaker 1: talking about yield curve control, so yes, But I think
Speaker 1: there are other ideas out there. In the economics world,
Speaker 1: like automatic stabilizers, some kind of fiscal monetary coordination where
Speaker 1: you you know you you actually get to the problem,
Speaker 1: which is lack of demand. The transmission through financial markets
Speaker 1: is getting less and less powerful as we go on.
Speaker 1: As as as everybody knows that rates are going to
Speaker 1: stay low, they don't need to respond to every wiggle
Speaker 1: and rates, right, so you get less of a delta
Speaker 1: into housing into durable consumer spending. What you need is
Speaker 1: direct cash to consumers. Is that what you're recommending? Yes,
Speaker 1: can you make it up today? We start writing some checks.
Speaker 1: Great to see it. Yeah. That was One of the the
Speaker 1: great bias we have is towards broader strategists that have
Speaker 1: had the courage to go narrow in their earlier career.
Speaker 1: And Mr Leabovitz of JP Morgan Asset Management, Johnny has
Speaker 1: done that. Here the charm of really focusing on small
Speaker 1: in MidCap equities at one point, which is way different
Speaker 1: than saying we have a buy an apple, you bring
Speaker 1: him in now. David Lebovitz, JP market Strategists Microsoft. This
Speaker 1: market where a lot of people are focused and the
Speaker 1: big caps, I think is where most people are looking
Speaker 1: at the moment. Where we've bid up some of these
Speaker 1: massive names. The Economist, the front cover for this weekend
Speaker 1: is just some robotic bulls with the logos of Microsoft, Apple, Google, Amazon, Facebook,
Speaker 1: and the headline big text to trillion dollar bill run.
Speaker 1: And of course the bears said, this is the agument,
Speaker 1: that front page, this is the monument. Why is it
Speaker 1: not the monument? So I think a couple of things.
Speaker 1: First of all, when everybody tells you it's the moment,
Speaker 1: it's very rarely the moment. So I would just I
Speaker 1: would just start with that as a disclaimer. Um. In
Speaker 1: addition to that, you know, we see a lot of
Speaker 1: differences today in in the makeup of the tech sector,
Speaker 1: particularly from a fundamental standpoint, relative to what we saw
Speaker 1: during the tech bubble in the late nineties. And I
Speaker 1: think perhaps the most important thing is just when you
Speaker 1: look at the relationship between market capitalization and contribution to
Speaker 1: overall earnings growth, it's much more balanced today than it
Speaker 1: was during the tech bubble. I mean, during the tech bubble,
Speaker 1: these companies had no earnings. You were you were buying
Speaker 1: an idea. Today those earnings are coming through a little
Speaker 1: bit more. But what I would say is what gives
Speaker 1: me a little bit of pauses. A lot of these
Speaker 1: big tech names, right, they're the ones that are keeping
Speaker 1: the rest of the tech sector afloat. You know, if
Speaker 1: you think about the way that when one of these
Speaker 1: big tech firms spends money that trickles down into the
Speaker 1: broader tech sector and coming back and wearing my small
Speaker 1: and MidCap analyst hat. You know, if if something happens
Speaker 1: to these big names, they're not necessarily going to bear
Speaker 1: the full brunt of of that. It's going to be
Speaker 1: the smaller names that they've been keeping afloat through their
Speaker 1: through their various spending. What's fascinating that, David, is the
Speaker 1: amount of people that use this term secular growth story.
Speaker 1: I want to be in the secular growth stories. Some
Speaker 1: of these companies are old enough to have ever had
Speaker 1: a cyclical test, yet we have that this faith that
Speaker 1: they are the seculic growth story. They are almost the
Speaker 1: havens I dare I say. I remember when a guest
Speaker 1: came on my program and said that Amazon will say haven.
Speaker 1: Is that how some people are treating this just queuing
Speaker 1: off low rate, low yields. Looking at some of these
Speaker 1: big secular growth stories and bitten up software, I think
Speaker 1: I think that that's a big part of it. And
Speaker 1: you know, when when we look at the direction of travel,
Speaker 1: and I'm sympathetic to the secular argument, you know, you
Speaker 1: look at the labor market, you look at the increasing
Speaker 1: use of automation, that clearly benefits the tech sector more
Speaker 1: than it benefits other parts. You know. That said, I
Speaker 1: think that it's important not to get ahead of ourselves.
Speaker 1: And one of the things that's happening in tech more broadly, right,
Speaker 1: if we zoom out away from the public markets and
Speaker 1: think about happening on the private side of the equation.
Speaker 1: You know, you're seeing a lot of VC twop deals.
Speaker 1: You're seeing a lot of sponsor to sponsor deals. They
Speaker 1: don't really care about the earnings. All they care about
Speaker 1: is the revenue. And that makes me a little bit
Speaker 1: uncomfortable about the retroctor. I want to I want to
Speaker 1: flip what you're saying on its head, which is what
Speaker 1: you're saying is the gains in big tech might mask
Speaker 1: the vulnerability of smaller tech companies, but it might also
Speaker 1: mask the underperformance of other companies within the entire rest
Speaker 1: of the U. S economy as well. And I'm struck
Speaker 1: by this figure that John Author has put out that
Speaker 1: if you exclude the big five, Microsoft, Apple, Facebook, Alphabet,
Speaker 1: and Amazon US earnings were down significantly in the fourth quarter.
Speaker 1: If you look at the Russell two thousand, it's continuing
Speaker 1: to underport perform. The SMP five hundred. Is the rally,
Speaker 1: the two trillion dollar rally, and big Tech masking some
Speaker 1: serious underlying weakness. I think it absolutely is. And one
Speaker 1: of our big concerns looking ahead at is actually how
Speaker 1: the earning story plays out. Um. If you look at
Speaker 1: the eleven gifts sectors today, there are only four of
Speaker 1: them that are seeing margins expand. Right, Financial saw margins
Speaker 1: expand in the fourth quarter because of a favorable base effect.
Speaker 1: Staples are seeing their margins expand, Utilities are seeing their
Speaker 1: margins expand, and then tech is seeing its margins expand.
Speaker 1: The rest of the market is seeing profits come under
Speaker 1: a pretty significant amount of pressure. Yet you still have
Speaker 1: consensus looking for eight to nine percent earnings growth in
Speaker 1: which I just can't square that circle. What are your
Speaker 1: clients doing? I mean, part of your job is to
Speaker 1: go out and talk to the troops, and by that
Speaker 1: I mean the clients. We did the backdrop here of
Speaker 1: the Morgan Stanley Trade and you're talking to more substantial
Speaker 1: people at JP Morgan. Great, what are they actually doing
Speaker 1: with their money besides telling you they need more Apple? Yeah.
Speaker 1: So I think what's most interesting, the most interesting trend
Speaker 1: that we've seen over the past couple of quarters is
Speaker 1: primarily a phenomenon in the institutional world, so pensions, endowments, foundations,
Speaker 1: and what we're seeing a lot of folks do is
Speaker 1: is look at the world today, look at their portfolios.
Speaker 1: Not necessarily be keen to add more equity, beata to
Speaker 1: their overall allocation, but they look at fixed income and
Speaker 1: they're not getting paid. Come on, they're gonna making their
Speaker 1: actual assumption and their assumptions going down right now, they're
Speaker 1: under And John, this goes back to Jeff, you and
Speaker 1: the wall of money out there. You will be yes,
Speaker 1: these people are desperate at their actuarial underperformance. Plus Bruce
Speaker 1: Chasmas and Michael Faroli, you're gonna tell them the actual
Speaker 1: assumptions coming down as well. That pressure is immense, isn't
Speaker 1: exactly it is? And so what we're seeing a lot
Speaker 1: of people do because again, you know, adding high yield
Speaker 1: to get that income is just going to increase your
Speaker 1: overall sensitivity to equities. So we're seeing more and more
Speaker 1: people adopt things like real estate and infrastructure and transportation
Speaker 1: strategies as a source source of both diversification and yield
Speaker 1: within portfolios. You know. The flip side of that is
Speaker 1: when I talked to a lot of retail clients, everybody
Speaker 1: feels pretty good. Market was up thirty percent last year.
Speaker 1: Nobody really seems to remember what happened in December of eighteen. Yet,
Speaker 1: coming back to the profit story, we're seeing earnings begin
Speaker 1: to drive brilliant, folks. What you're hearing from Julia Cardano
Speaker 1: back to back with David LEVINWOZ is just outstanding. Okay,
Speaker 1: great is Apple, Amazon and the others? John and the
Speaker 1: cover of the economists this week. Are they under owned
Speaker 1: by institutions? I think that they're probably not under owned
Speaker 1: by institutions because more and more institutions that I speak
Speaker 1: with are are indexing their large cap public equity exposure.
Speaker 1: I mean, it's very difficult to add alpha in that market.
Speaker 1: I mean, there are what north of twenty analysts that
Speaker 1: cover Apple. There's there's no stone that goes that goes
Speaker 1: left up. Just mentioned three Greek letters, can he stay
Speaker 1: pain trade? In last year, equity markets just kept going higher, exactly,
Speaker 1: despite all the outflows. Equity markets kept going high, and
Speaker 1: the biggest risk wasn't a downside risk, it was upside risk.
Speaker 1: And the coals you needed to get right the policy
Speaker 1: coal and the cola multiples any different. I I don't
Speaker 1: think it is. You know, I think that one of
Speaker 1: the things that's been supporting this market as of late
Speaker 1: is an idea that a the coronavirus issue is is
Speaker 1: in fact transit to worry and be whoever ends up
Speaker 1: in the White House this fall. You know, when we
Speaker 1: look at governments more broadly around the world, the fiscal
Speaker 1: taps are staying open. So if there's no inflation, policy
Speaker 1: remains accommodative on the monetary side, and if the fiscal
Speaker 1: taps continue to flow, that's a pretty good environment for
Speaker 1: equity markets overall. Tommy, you asked if institutions under owned
Speaker 1: big tech. I was struck by a Wall Street Journal
Speaker 1: story yesterday about Warren Buffett's apple steak, and it's more
Speaker 1: than double to seventy nine billion dollars since he began
Speaker 1: buying in sixteen. He basically capitulated he still can't put
Speaker 1: in anyone of any of his money to work. But
Speaker 1: he said, I didn't go into Apple because it was
Speaker 1: a tech stock, but rather for its brand and capital
Speaker 1: return strategy. They have so much cash they can keep
Speaker 1: pouring it through investors here. So is that the underpinning here?
Speaker 1: I mean used to be in small cap, in MidCap
Speaker 1: where there was no share by that no dividend growth?
Speaker 1: Is that the mother of all underpinnings here in two
Speaker 1: thousand twenty, they use of cash that Leasta alludes to,
Speaker 1: I think it is. We actually just released a paper
Speaker 1: last Friday on how corporations have been using cash and
Speaker 1: thinking about investment spending versus R and DV is dividends
Speaker 1: versus buy backs. And the way that we're really informing
Speaker 1: ourselves and driving our own strategies this year is by
Speaker 1: focusing on this concept of total shareholder yields, so dividends
Speaker 1: plus buy backs. Right, everybody always wants to know what
Speaker 1: do you like more value or growth? Frankly, I think
Speaker 1: you can own both. The financial sector pays a six
Speaker 1: and a half percent total shareholder yield. Tech is paying
Speaker 1: you a four percent total shareholder yield, and you don't
Speaker 1: have that downside risk if rates do move higher that
Speaker 1: you're getting from utilities and staple John from Coventry emails
Speaker 1: in and says, what should I do with Uber? That's
Speaker 1: you know that what he said? That what he said
Speaker 1: you management Global market strategy Cornado, David levitts back to back,
Speaker 1: right down. Johnny ends to jump in here with the
Speaker 1: new slow we get lucky again. Jonathan Fenby joins us.
Speaker 1: His book on France is absolutely authoritative. I read it
Speaker 1: cover to cover, stunning history for Americans, all this on
Speaker 1: the European distinction. That's a sidecar transaction for him versus
Speaker 1: what he does with China. His monographed John three years ago,
Speaker 1: will China Dominate the century? Was absolutely definitive. And that's
Speaker 1: a little bit of an appoint a question right now
Speaker 1: is China is a bit distracted? Wonderful to bring in
Speaker 1: Jonathan Fambi now Ts Lombard, chairman of China Research. Jonathan,
Speaker 1: fantastic to have you with us on the program. Muhammedan
Speaker 1: Amon has talked about these sudden stop dynamics, and I'm
Speaker 1: interested to see how you think some of these things
Speaker 1: will cascade through the global economy in the coming months.
Speaker 1: How are you thinking about that at the moment, John, Well,
Speaker 1: the the outbreak of the virus, the coronavirus has come
Speaker 1: really as you know, it's it's a big, big test
Speaker 1: for the leadership in China and it's having pretty wide
Speaker 1: effects there obviously in China itself but now increasingly outside China,
Speaker 1: and for the leadership she's in thing the first priority
Speaker 1: is to show that they can sow, they can save
Speaker 1: the protect the nation, you know, prevent this virus taking
Speaker 1: yet more lives and so on, and bring things under control.
Speaker 1: But that comes with as we now are seeing a
Speaker 1: heavy economic price in the terms of the lockdown, the quarantining,
Speaker 1: the closed factories, particularly after the lunar New Year, and
Speaker 1: the disruption to the supply chains which globally depends so
Speaker 1: much on China and which are very very complicated, very
Speaker 1: complex um go both in and out of China, and
Speaker 1: to rebuild those is going to be a major element.
Speaker 1: So we're going to have a slow down in growth,
Speaker 1: probably quite serious in the first quarter. Depends how long
Speaker 1: obviously it is before industry gets going again, and that
Speaker 1: will lead to a stimulus package undoubtedly by the leadership.
Speaker 1: It won't be as big as too oh nine, which
Speaker 1: was mega, but it will be very considerable. It's already starting,
Speaker 1: and that will then in turn raise questions about the
Speaker 1: debt level in China and whether they're going to give
Speaker 1: up the attempt at de leveraging. So the whole series
Speaker 1: of choices and policy issues at the moment which is
Speaker 1: going to affect markets worldwide. Let's pick up on some
Speaker 1: of the issues that you've put out there at the moment.
Speaker 1: On the one hand, containing the virus, on the other hand,
Speaker 1: stabilizing the economy, and somewhere in between social instability issues
Speaker 1: as well, Jonathan, how does that fit into these two issues? Absolutely?
Speaker 1: And control, Controlling China, the Chinese society and that's one
Speaker 1: point four billion people, of course, has always been a
Speaker 1: major priority of the current leadership under Shijin thing Um,
Speaker 1: and that attempt to bring about stability, as it's called,
Speaker 1: in the face of consider a lot of public uncertainty
Speaker 1: and happiness, but also a certain degree of public anger
Speaker 1: which has been manifested through social media. At the way
Speaker 1: the virus has been combated is going to cause quite
Speaker 1: a big political problem. And we've already seen sting sending
Speaker 1: in trusted left tenants to take over key positions in
Speaker 1: the most affected areas of China. Jonathan, it's interesting that
Speaker 1: we had Tony Chris Ansia and from PIMCO earlier, and
Speaker 1: he wrote in a recent report that the general resilience
Speaker 1: that we've seen in equities demonstrates the existence of a
Speaker 1: new global monetary order, highlighted by the prominent rule that
Speaker 1: the PBOC now plays as a circuit breaker for world markets.
Speaker 1: Do you think that that is an accurate characterization? Well,
Speaker 1: it's that that depends on how effective the PBOC measures
Speaker 1: the easing measures which they've undertaken, together with US mentions
Speaker 1: taken by the government, how effective that will prove in
Speaker 1: buying up the economy in China, And frankly, with the
Speaker 1: degree of uncertainty around at the moment, this is something
Speaker 1: we have to watch and wait and watch. John. I
Speaker 1: I look at your expertise on China, the making of
Speaker 1: the history of China and and all that you've written.
Speaker 1: I guess it's you know, they had a script and
Speaker 1: the script has been derilled. If they don't get the
Speaker 1: v shape recovery, even if it's delayed by two three
Speaker 1: four quarters, what's the FENDI timeline where the script begins
Speaker 1: to fall apart. For President g Well, the difficulty is
Speaker 1: next year is a very important historic year. It's the
Speaker 1: hundredth anniversary of the foundation of the Chinese Communist Party,
Speaker 1: and this was due to be a great celebration of
Speaker 1: how China under the Communist Party has built itself up
Speaker 1: and was a model for the world to set alongside
Speaker 1: that of the Western the United States. And that will
Speaker 1: be a big political problems. I think they're gonna throw
Speaker 1: everything at it if it turns out to be a
Speaker 1: U shape or even more an L shaped. For the
Speaker 1: rest of this year, there's going to be a really
Speaker 1: major policy decision taking that's going to have to be
Speaker 1: taken in Beijing, which will affect the whole world. John Femby,
Speaker 1: we want you to fall back on economics, finance, and investment.
Speaker 1: Right now, you're expert on France. The lethargy of Europe
Speaker 1: as well, let's call it eurosclerosis. The yields are there,
Speaker 1: the negative rates are there, the yields are there this
Speaker 1: morning in the United States. What is the yield structure
Speaker 1: of Europe signal to you, well, that Europe is Europe
Speaker 1: is still pretty sluggish. It must be said eurosclerosis. I
Speaker 1: don't know that I go quite that far. And to
Speaker 1: link in with what we were saying earlier, of course,
Speaker 1: a lot of European companies are pretty dependent on components
Speaker 1: and inputs from China, not just in selling into China,
Speaker 1: but also in components in themselves, and the uncertainty I
Speaker 1: think that's around at the moment is going to put
Speaker 1: a premium on what I've seen as safe haven's gold.
Speaker 1: Obviously we've seen the movement in gold and that this
Speaker 1: will mean strength for the dollar still and Europe is
Speaker 1: really floundering a bit, I think in the present situation.
Speaker 1: Although there are some bright spots. You know, French unemployment
Speaker 1: has come down to go to to France, but Germany,
Speaker 1: which is the motor so much in Europe, is really
Speaker 1: in a in a state of economic uncertainty and political
Speaker 1: they don't know where they're going. Just pouring through the
Speaker 1: data this morning, it's a great shame. You get a
Speaker 1: real sense the domestic demand in Europe was just started
Speaker 1: to pick up before it smacked around the head by
Speaker 1: what is happening in China. Jonathan was looking through the
Speaker 1: p m s and they're really quite nuanced, and we
Speaker 1: pour over all of these different sub indices. Delivery times
Speaker 1: lengthened in Germany, but when they calculate the headline number,
Speaker 1: the supply delivery times index is then inverted and you
Speaker 1: end up in this really weird situation in Europe. Today
Speaker 1: we're almost half of the indexes. Month on month gain
Speaker 1: for German manufacturing was attributal attributable to a deterioration its
Speaker 1: supply delivery times. It's pretty clear that we're standing to
Speaker 1: see some supply chain disruption. John, can you assume at
Speaker 1: this point would your base case be that Germany is
Speaker 1: heading into recession or is it still too early? It's
Speaker 1: still probably too early, but it's heading towards a recession
Speaker 1: that I'd say towards rather than into recession. Um And
Speaker 1: the politics come in here because one with the present
Speaker 1: uncertainty with the ruling party of the c DU after mercle,
Speaker 1: what's going to happen on her designate ancestor having stepped down?
Speaker 1: Quite a nasty fight going on among other contenders for
Speaker 1: the leadership. We're not going to get any clear political
Speaker 1: decision on the economy, I think. And although President Macro
Speaker 1: and France has high ambitions, France can't take up that
Speaker 1: durban role. So we're in a real period of uncertainly, which,
Speaker 1: as you absolutely rightly say, the link with China, both
Speaker 1: China as an export market, but also, as I was
Speaker 1: saying earlier, China as a source or vital source in
Speaker 1: the European supply chain is going to leave us in
Speaker 1: considerable uncertainly for months ahead and perhaps on into the
Speaker 1: end of the year. It sounds like the next book,
Speaker 1: the next treatment from Jonathan Fanbi, Thank you so much.
Speaker 1: With t. S Lamber, I focused on the FED, focus
Speaker 1: on the ECB two meetings coming up just a month away,
Speaker 1: to focus on all of that, and police to say,
Speaker 1: tiny crescenzi in the building here in our studios. Pimco
Speaker 1: market strategist, port folio manager and member of the firm's
Speaker 1: investment committee and monitor Tonye the message to the clients
Speaker 1: calling you up and worrying, what'd you tell him? Well, Uh,
Speaker 1: that meant much of what you've seen in the financial markets.
Speaker 1: Both the decline went in markets and risk assets when
Speaker 1: the news of the outbreak occurred, and then the subsequent
Speaker 1: snap back tell you several important things about markets that
Speaker 1: will persist beyond the coronavirus story. Let me give you
Speaker 1: the two negatives and the one positive that brought it back.
Speaker 1: The one big negative is that markets are worried and
Speaker 1: anything could bring this worry about into the surface. That
Speaker 1: economic growth globally is so close to stall speed that
Speaker 1: anything that comes along and weakens it could easily tip
Speaker 1: economies like you saw in Japan with a minus six
Speaker 1: plus print plas quarter into into into recession to negative territory.
Speaker 1: That's number one. Secondly, markets were are worried and they
Speaker 1: will have to persistently worry about this, that central banks
Speaker 1: can't do much about weakness and economic growth and running
Speaker 1: out policy tools. In fact, today out of monetary policy
Speaker 1: form in New York, which my Chael McKee from Bloomberg
Speaker 1: will be at. The main topic will be Michael McKee.
Speaker 1: Of course he has a sheet of paper. I want
Speaker 1: to make sure I get the topic right. The main
Speaker 1: article that will be discussed by Lyle Brainer from the
Speaker 1: Fat and Bostick is um monetary policy for the next
Speaker 1: procession because what is it that they would do so
Speaker 1: on the Corona coronavirus issue. Uh, it just brings to
Speaker 1: the surface these worries about policy buffers, not only from
Speaker 1: the monetary authority, but the fiscal authority. But here's the
Speaker 1: the what broad markets back and is enabling markets to
Speaker 1: look through this all. And it's something monumental, and it's
Speaker 1: a new global monetary order. With two central banks in
Speaker 1: the world, the the US Central Bank and the Chinese
Speaker 1: Central Bank can be circuit breakers to to weakness in
Speaker 1: global economic activity. And here's the central bank, the PBOC
Speaker 1: that is perfectly positioned because it's the problem is in
Speaker 1: China to address the issue. Is in no way position
Speaker 1: to help it out. Tony, the problem on my screen
Speaker 1: is one twelve percent of our listeners we got we
Speaker 1: have to forty two listeners. Okay, thank you, good morning.
Speaker 1: But Tony, what's important here? This is really important. Our
Speaker 1: listeners are getting crushed by essentially record low real rates.
Speaker 1: I get it that there's a policy conference of Brainard
Speaker 1: and Clarida and the rest of them, and Master will
Speaker 1: be there and Michael McKee will be there. That's all
Speaker 1: blah blah blah for the elites. What about the people
Speaker 1: out there getting crushed by this low rate regime. They
Speaker 1: shouldn't look to the monetary authority. That should look to
Speaker 1: the fiscal authority, or look to a dividend growth structure. Right,
Speaker 1: Amazon is a dividend grower. Dividends are for the SMP
Speaker 1: five hundred around two percent, and the tax taxation on
Speaker 1: dividends is better than a taxation on uh. Interesting come
Speaker 1: generally speaking for most individuals, individuals can are you the
Speaker 1: equity straight? Yet for safety of principle, one must be
Speaker 1: in bonds, of course, but they should listen claim they
Speaker 1: should look to the disclaimer too about Mr Bloomberg, but
Speaker 1: continue we have to say that, of course, but it
Speaker 1: is true because we are hiring the capital structure, as
Speaker 1: they say. But the if, if, if, the if citizens
Speaker 1: savers were to look to the two politicians, they should say,
Speaker 1: why don't you do something about academic growth? Low interest
Speaker 1: rates aren't doing it, so why don't you do something transformative?
Speaker 1: Perhaps so when we travel into New York City from
Speaker 1: New Jersey, maybe do what the Senator to Chuck Schumer
Speaker 1: wanted and build that second tunnel, at least the Penn Station,
Speaker 1: the busiest commuting rail station in the country. We should
Speaker 1: do things like that pet project. John. He talks about
Speaker 1: it every single day. We talked about the municipal bonds,
Speaker 1: and he says, how about raising some money for that,
Speaker 1: you know, across states personal very for US Staten Island
Speaker 1: is we crossed the Verrizonta Bridge, which was the largest
Speaker 1: suspension bridge built in the world at the time. Ur,
Speaker 1: maybe we could have a nice tunnel. It's a tour
Speaker 1: of the five boroughs, John, we just save this. Can
Speaker 1: we talk about a cyclical outloo a pimcut the you
Speaker 1: mentioned a couple of minutes ago. Let's get back to
Speaker 1: the we're close to stall speed. That was the outlook.
Speaker 1: We've gone beyond that now in places like Germany. Are
Speaker 1: you worried that maybe you need to revise your cyclical
Speaker 1: outlook for twenty Well, PIMCO, in a week and half
Speaker 1: we'll have another cyclical forum. We held help have them quarterly,
Speaker 1: so we'll see what we conclude. The early view is
Speaker 1: that based on p m iyes purchasing manager in disease,
Speaker 1: that there's a rebound was underway before the coronavirus issue
Speaker 1: began to hit the world economy. We will be questioning
Speaker 1: whether or not we think that that that that thesis
Speaker 1: holds for the second half of the year. Probably it
Speaker 1: probably will because of the notion that central banks are
Speaker 1: coming to the rescue again, but we are questioning again
Speaker 1: the extent to which they can help. Well, let's talk
Speaker 1: about the degree to which people will respond to central
Speaker 1: banks coming to the rescue. It took about eighteen months
Speaker 1: of targeted stimulus from China to finally start seeing some results.
Speaker 1: Do you have that much faith than the policy Mike
Speaker 1: is still well. One could say turns of policy levers
Speaker 1: in China that they have formidable resources to to help
Speaker 1: the economy there, but there's still a lot of worry
Speaker 1: about demand destruction. It can pull the fiscal policy lever
Speaker 1: in ways that no nation can. And remember it has
Speaker 1: three trillion dollars built up in what's called what are
Speaker 1: called international reserves from US buying stuff that's has made
Speaker 1: in China, and so we can use that money wisely
Speaker 1: and to invest and to to promote economic growth. Tony
Speaker 1: is good to see terrible answers. I gave terrible incent
Speaker 1: You could no one could see see the listener couldn't
Speaker 1: see that. I'm using my hands to talk like camera
Speaker 1: on you at some point, Tony, thanks for dropping by
Speaker 1: Tony CRESCENTI. The PIMCO market is trying to just put
Speaker 1: folio manager and member of the firm's investment committee. We've
Speaker 1: got just an incredibly busy day in economics and in
Speaker 1: New York. It is a celebration of the smartest Confest
Speaker 1: going with us Michael McKee, who does all the things
Speaker 1: he can works worldwide. Here today we're gonna get to
Speaker 1: Philip Laneer John is acutely interested in your interview with
Speaker 1: Mr Lane of the e c B as well. But
Speaker 1: but Mike McKee, you know, I look, I look now
Speaker 1: at this confest today and it just seems way more
Speaker 1: important than it usually is. Well, the Chicago Booth School
Speaker 1: puts on a conference every year, one day conference, oddly
Speaker 1: in New York rather than in Chicago. But it's all
Speaker 1: about central banking and basically all of the countries UH
Speaker 1: and Wall Street's biggest name economists, and most of the
Speaker 1: Federal Reserve, and as UH we saw with Philip Lane,
Speaker 1: many central bankers from around the world attend. And John,
Speaker 1: what's so important about this is it sort of that
Speaker 1: we've run out of ideas conference and that's why Mr
Speaker 1: Lane is originally gentle. What ammunition do they have left,
Speaker 1: especially at a time when we're worried about it growth
Speaker 1: scare in China, so I think the coronavirus is the
Speaker 1: focus for central bankers worldwide at the end. At the
Speaker 1: end of the day, let's take a listen to what
Speaker 1: e CB Chief economist Philip Lane had to say. Like
Speaker 1: everyone else, I think the base cases a v tape.
Speaker 1: So I mean number one is let's see how quickly
Speaker 1: the spread of the virus is contained. Um. The sooner
Speaker 1: that happens, then the more confidence that this would be
Speaker 1: indeed something that is mostly in quarter one, maybe spilling
Speaker 1: over into quarter two. But you know, from our perspective,
Speaker 1: I mean, our our main focus is on the year end,
Speaker 1: going into next year and the year after. So for
Speaker 1: us as Montrey policy makers, if this is indeed contained,
Speaker 1: even if there is a hit in terms of the
Speaker 1: initial weeks of twenty, if the recovery happens as we expect,
Speaker 1: then in terms of the medium term policy challenge, it
Speaker 1: remains something that is not going to change our base case.
Speaker 1: But it's definitely downside risk until we see the containment,
Speaker 1: until we see the recovery. After that we have to
Speaker 1: keep a close eye. Well, one of the big issues
Speaker 1: is this could be supply chain disruption. Monetary policy can't
Speaker 1: fix that, So what are the odds of the ECB
Speaker 1: would take any action. Well, this goes back to again,
Speaker 1: any supply chain disruption, if it's a matter of weeks,
Speaker 1: doesn't change the medium term path for the economy. So
Speaker 1: really we think the main mechanism, by the way, is
Speaker 1: obviously through Chinese amount with lower spending in China because
Speaker 1: of the what has been necessary to contain the virus.
Speaker 1: Obviously spending levels in China are different than they would
Speaker 1: have been. The supply chain scenario does exist. We're tracking it,
Speaker 1: we look at it. But so long as these are
Speaker 1: delays in delivery of goods us so long as these
Speaker 1: remain temporary and nature, then it's it's not a dramatic
Speaker 1: issue for for the medium term horizon. E CB Chief
Speaker 1: Economist Philip blind Nest sitting down with marcol McKay. Lucky
Speaker 1: to have my with us in the studio here in
Speaker 1: New York. Back at the end of Mike President Mario Droi,
Speaker 1: former president Mario Dronk. He was talking about things being temporary, transitory,
Speaker 1: and then in that's cut right, somebody stock your week.
Speaker 1: Why is this so different? Why is this economic situation
Speaker 1: we face right now so different to what we faced
Speaker 1: eighteen months or so, AGUN investors have been basically trading
Speaker 1: on patterns, and the pattern has been that we get
Speaker 1: an event that scares people, it lasts for a few weeks,
Speaker 1: it goes away, so you buy the dip, and that's
Speaker 1: seems to be the prevailing psychology on Wall Street. We're
Speaker 1: into our fourth week now or fifth week now of
Speaker 1: the coronavirus, and we wake up the headlines today saying,
Speaker 1: oh no, wait, it's worse, and so now we're starting
Speaker 1: to see maybe some concern that this is a Blacker swan.
Speaker 1: Then people had thought it's hard to know, and as
Speaker 1: Philip was saying, it's very hard for economists UH and
Speaker 1: central bankers to get their hands around what it actually means.
Speaker 1: And it's not really showing up in the data yet.
Speaker 1: The only data we've seen that had a major UH
Speaker 1: that that has shown it is you look at something
Speaker 1: like the German p M I s which you were
Speaker 1: talking about, the sub indexes supplier delivery times they go
Speaker 1: they get longer, usually when demand is high. In this case,
Speaker 1: they're getting longer because the supplies aren't coming in from
Speaker 1: China to build the things that the Germans are selling
Speaker 1: to other people, and so there is a sign that
Speaker 1: something is coming, but it's not there. It's a crazy
Speaker 1: quirk of the data because it's the delivery times Lengthen
Speaker 1: the sub index drops below fifty, then they invert it
Speaker 1: as they compute it into the headline number. So you
Speaker 1: get this boost to German manufacturing p m I that
Speaker 1: seems to be largely from supply side constraints. And this
Speaker 1: is the problem going forward to Mike. When do we
Speaker 1: actually start to get a hands around the data, when
Speaker 1: do we know what this actually coming about the time
Speaker 1: We're going to start to get trade data coming in,
Speaker 1: and we'll see some impacts. Particularly look at the Asian
Speaker 1: trade data that comes in South Korea, Thailand, Uh, places
Speaker 1: like that which are deeply integrated into the Chinese supply chains.
Speaker 1: Um if they if they show some real damage, then
Speaker 1: you can expect it only to spread. Thanks for Japan,
Speaker 1: looks terrible recession, looks thoughts on and some of this
Speaker 1: has been South harm and now the Chinese story is
Speaker 1: just gonna make it worse. It's well, it's it's bad
Speaker 1: for them because not only do they have the supply
Speaker 1: chain issues, but Japan is the biggest destination for Chinese tourists,
Speaker 1: and so probably the only place worse off in that
Speaker 1: sense is Macau with all the casinos closed. Uh. The
Speaker 1: Japanese are definitely going to be hurt by this, Michael.
Speaker 1: This thing in New York at the Intercontinental today is
Speaker 1: a huge celebration of academic thought. And I'm gonna go
Speaker 1: back to yelling two thousand and sixteen on toolkit past,
Speaker 1: present in future. Not only can we not count the
Speaker 1: tools in the tool kit or not figure out how
Speaker 1: to use the tools in the tool kit, I don't
Speaker 1: think there's a confidence in the tools right now. What
Speaker 1: tools are in the toolkit for all these fancy economists,
Speaker 1: well depends on which central bank you're talking about, But
Speaker 1: for the Federal Reserve, they're basically focused on QUEI and
Speaker 1: forward guidance, and they're more focused on forward guidance than
Speaker 1: anything else at this point. The idea is that you
Speaker 1: do buy things, buy more uh more um bonds in
Speaker 1: que but the announcement effect is gone, the surprise effect
Speaker 1: is gone, and you've got a ten year sitting at
Speaker 1: you know, one point five percent roughly, so you're not
Speaker 1: going to get a lot of bang for that buck.
Speaker 1: So let's let's let's be a speculative here. We can
Speaker 1: do that in a Friday Michael one nine five on
Speaker 1: a thirty year bond, John, how negative is that real yield?
Speaker 1: Speaking of your one PM show today? Where is it? Not?
Speaker 1: Just not the two percent? So it depends on which
Speaker 1: deflator you use. Great, you can use you know too.
Speaker 1: So you are looking at a negative real rate for
Speaker 1: for thirty years and allow Brainerd's world and Richard Clarence
Speaker 1: world in Professor Lane's world. Could anybody use any of
Speaker 1: these models with a negative real yield? I don't see
Speaker 1: any of that in the literature. It makes it more difficult. Um,
Speaker 1: that's why they're looking at the I mean, one of
Speaker 1: the things that's in the back pocket of the FED
Speaker 1: is yield curve control. I know you've talked about that before. Um.
Speaker 1: The idea that you say you're just gonna buy X
Speaker 1: number of bonds of a certain tenor and you know
Speaker 1: you're you're you're gonna say here's the price instead of
Speaker 1: going out and buying it in the open market. Um,
Speaker 1: and then that caps a yield. That's one idea they
Speaker 1: could do. The FED is ruled out negative rates. The
Speaker 1: the FED Reserve cannot buy stocks legally in writing, they
Speaker 1: can't be the Swiss national bad they cannot. I don't know.
Speaker 1: And there is a legal question about whether the Fed
Speaker 1: could even do negative rates legally if they wanted to,
Speaker 1: but they say they don't want to. Meanwhile, there's a
Speaker 1: balance of risk here. On one hand, you have financial
Speaker 1: assets which are near record highs or record high valuations.
Speaker 1: You've got corporate bond yields falling to record lows, and
Speaker 1: so people say, financial conditions are easy, we don't need
Speaker 1: another rate cut, we don't need more stimulus. On the
Speaker 1: other hand, you're seeing the lowest income earners finally seeing
Speaker 1: the gains in this cycle, the economic cycle, and there's
Speaker 1: a fear of stymying that since it takes so long
Speaker 1: to get that going. Which is a more important factor
Speaker 1: for the Fed to look at right now? Well, probably
Speaker 1: I throw in the third factor is what would do
Speaker 1: any good? Uh? In either case, the Fed is obviously
Speaker 1: made the decision to let the economy run to try
Speaker 1: to benefit people. For Wall Street, every problem can be
Speaker 1: solved by the Central Bank. It rained last Thursday, they
Speaker 1: should cut rates. Cutting rates isn't going to help if
Speaker 1: you have a supply chain problem because it's the is
Speaker 1: set up to increase demand, not supply, so they may
Speaker 1: they they lean towards doing nothing because there isn't a
Speaker 1: lot they can do. Although you would say this point
Speaker 1: in the credit cycle, we're actually starting to see consumer
Speaker 1: debt pick up. You're starting to see Morgan Stanley with
Speaker 1: their move or Goldman Sachs push into consumer lending as
Speaker 1: the next spot of profitability. Could there be a theory
Speaker 1: that finally, as a greater proportion of the United States
Speaker 1: gains more confidence, goes out and borrows, it sort of
Speaker 1: reignites the economic cycle. As anyone talking about that. Sure, Um,
Speaker 1: there's a lot of people are uh, and the more
Speaker 1: optimistic of the economists are saying, you know, we had
Speaker 1: a dip. We had a not an end of the
Speaker 1: economic cycle, but a sort of reset also sort of
Speaker 1: in the way you have a correction in the financial markets.
Speaker 1: The economic cycle corrected with all the recession fears last summer,
Speaker 1: and now we're starting a new Uh. Hard to measure
Speaker 1: that because the numbers aren't really supporting it, except for
Speaker 1: the job growth numbers. But we're not seeing a dip either.
Speaker 1: So at this point, uh, you know, the one thing
Speaker 1: I would say is our Matt Bows, whom you all
Speaker 1: know and love here put together a great chart yesterday
Speaker 1: added up household and business debt, and it is not
Speaker 1: expanding at the same pace it did the previous psych
Speaker 1: I don't care Bruins Stanley Cup bound. I would hate
Speaker 1: to make a prediction. Well, here's the problem, Tom, You
Speaker 1: know as well as I do, that they're in line
Speaker 1: to win the President's Trophy, which means they have the
Speaker 1: best record in the league at the end of the season,
Speaker 1: and everybody who wins the President's Trophy loses the Stanfing Cup.
Speaker 1: So at this point you gotta hope they fall back
Speaker 1: just a little bit. I'm going to do that to
Speaker 1: balance out the football talk earlier. That thing that's soccer talk.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keene Before
Speaker 1: the podcast, you can always catch us worldwide. I'm Bloomberg
Speaker 1: Radio S