WEBVTT - Surveillance: Rolling Correction With Wilson 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownwitz Jaily. We bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com, 0:00:23.920 --> 0:00:31.200 and of course on the Bloomberg Terminal. Joining sell Mike 0:00:31.240 --> 0:00:34.919 Wilson of Morgan Stanley, their chief US equity strate is Mike. 0:00:35.040 --> 0:00:37.560 I want to go sixty feet on you. We have 0:00:37.680 --> 0:00:41.559 had a stretch of disinflation from Vocer to Mike Wilson 0:00:41.720 --> 0:00:44.560 right now. Do you sense that this is a nuance 0:00:44.600 --> 0:00:49.440 within a bullmarket wrapped around fixed income commodities, the rest 0:00:49.440 --> 0:00:52.040 of it, the dollar, et cetera. Or are we at 0:00:52.040 --> 0:00:55.400 a point of a major change in the vectors to 0:00:55.480 --> 0:01:00.160 two thousand? Well, look, I mean we get we've had 0:01:00.160 --> 0:01:02.120 that view for a while. We felt like last year's 0:01:02.120 --> 0:01:05.080 pandemic was the catalyst to kind of move us out 0:01:05.120 --> 0:01:09.440 of this disinflationary, deflationary world we've been in for twenty years. 0:01:09.520 --> 0:01:11.760 Quite frankly, a lot of other things, uh, you know, 0:01:11.800 --> 0:01:15.399 we're happening before the pandemic, deglobalization, Uh, some of the 0:01:15.440 --> 0:01:18.880 populous movement, which was talking about you know, inequality of 0:01:18.920 --> 0:01:21.440 wealth and income, and that that train had already left 0:01:21.440 --> 0:01:24.480 the station. So the pandemic, which by the way, pandemics 0:01:24.480 --> 0:01:28.560 are typically inflationary. Um so that was a perfect foil 0:01:28.680 --> 0:01:31.679 to get the transition from monetary policy dominance to fiscal 0:01:31.720 --> 0:01:35.200 policy dominance. And it's begun. And normally it happens with 0:01:35.200 --> 0:01:37.520 with what I call a kickoff move tom. When you 0:01:37.560 --> 0:01:40.000 see big trends change, you get a big kickoff move 0:01:40.040 --> 0:01:42.840 and that's what we've seen in all the inflation indicators. 0:01:43.040 --> 0:01:45.880 My best guess is it will settle down, but then 0:01:45.760 --> 0:01:48.400 the trend is changing, and so it's gonna be a 0:01:48.400 --> 0:01:50.640 long journey ahead. You know, it took us thirty five 0:01:50.680 --> 0:01:52.640 years to get here, It's gonna take us thirty five 0:01:52.720 --> 0:01:54.440 years probably get to the peak and rates. It's gonna 0:01:54.440 --> 0:01:57.280 be a slow moving train. And you know, essentially what 0:01:57.320 --> 0:02:00.680 before I'm saying is by the dips on inflation, Mike, 0:02:00.760 --> 0:02:03.040 the equity market, you're looking for a ten percent move 0:02:03.160 --> 0:02:06.200 lower on the SP five hundred. We've had five percentage 0:02:06.200 --> 0:02:09.359 points off it. Are you seeing with increasing confidence? It 0:02:09.400 --> 0:02:11.480 could be worse than that. It could drift towards that 0:02:11.560 --> 0:02:14.440 other level you were looking for. Move if you are. 0:02:14.520 --> 0:02:18.320 Why Yeah, Johnny, last time we chatted about this, this 0:02:18.480 --> 0:02:21.120 is kind of after we made that lean h It 0:02:21.200 --> 0:02:24.680 was prior to the situation in in China with the 0:02:24.680 --> 0:02:28.000 property development company, and you know, like I think what 0:02:28.120 --> 0:02:31.440 happened here is uh, you know, we we've got more 0:02:31.520 --> 0:02:34.000 data on the idea that not only are we getting 0:02:34.040 --> 0:02:36.360 a you know, a tightening of financial conditions from the 0:02:36.360 --> 0:02:40.400 FED lower multiples, were also getting a greater slow down 0:02:40.440 --> 0:02:44.000 than perhaps is expected. Now we're seeing the earnings numbers. 0:02:44.280 --> 0:02:45.959 You guys have been talking about the cost pressures to 0:02:46.040 --> 0:02:49.359 supply issues in constraints, but there's also this payback in 0:02:49.480 --> 0:02:52.079 demand thesis that we've had for quite a while. Our 0:02:52.120 --> 0:02:54.440 cost thesis is playing out now. People are aware of it, 0:02:54.800 --> 0:02:57.040 but I don't think they really appreciate how much payback 0:02:57.080 --> 0:02:58.720 and demand there's going to be in these areas that 0:02:58.760 --> 0:03:01.799 we over consumed. Okay, so the bottom line for us 0:03:01.880 --> 0:03:04.799 is that risk has increased um and you know we're 0:03:04.840 --> 0:03:07.840 center base case yet, but but clearly moving that way. Mike, 0:03:07.919 --> 0:03:09.800 touch on this, you've touched on it, briefly built on it. 0:03:09.840 --> 0:03:12.760 For us, what we've seen over the last several months, 0:03:12.760 --> 0:03:16.320 has been so well flagged, it talked about so much, 0:03:16.800 --> 0:03:20.720 so well known, and yet clearly from your perspective, poorly priced. Mike, 0:03:20.720 --> 0:03:24.280 Why is that? Well, it's that poorly priced at the 0:03:24.280 --> 0:03:26.360 stock and sector level, right. I mean, we've talked about 0:03:26.360 --> 0:03:28.320 this too, John. I mean, it's roll. It's been basically 0:03:28.360 --> 0:03:31.440 a rolling correction since March, you know, that's when we 0:03:31.520 --> 0:03:34.640 made the mid cycle transition call. The market has moved 0:03:34.760 --> 0:03:38.880 aggressively towards high quality, large camp high quality in particular. 0:03:39.320 --> 0:03:41.800 And what the market is saying is that we're you know, 0:03:41.840 --> 0:03:45.920 we're getting taking shelter. You know, the market, Uh, it's 0:03:45.920 --> 0:03:48.760 got to own something, right, And what happens is people 0:03:48.840 --> 0:03:51.560 moved to you know, the highest parts of the land 0:03:51.600 --> 0:03:54.000 away from the flood, and that's what the high quality 0:03:54.040 --> 0:03:57.080 stocks are. Typically, when you get to the point that 0:03:57.200 --> 0:03:59.560 the moment of truth, which is now, which is where 0:03:59.600 --> 0:04:02.200 the yearning start to get cut and where the FED 0:04:02.360 --> 0:04:06.720 actually you know, moved to Titan, then even the high 0:04:06.840 --> 0:04:09.800 shelter areas are no longer protected. And that's how the 0:04:09.800 --> 0:04:12.600 mid cycle transition. And so I mean the script is 0:04:12.640 --> 0:04:15.360 really playing how to a t uh, you know, it's 0:04:15.360 --> 0:04:18.679 hard to trade is black cross currents. But generally speaking, 0:04:19.160 --> 0:04:21.039 we're right on scheduled and should finish up in the 0:04:21.040 --> 0:04:24.039 fourth courter. As you said, the rolling correction since March 0:04:24.160 --> 0:04:26.240 has left a lot of big stocks, like big tech 0:04:26.320 --> 0:04:31.120 stocks down substantially. If we get a full correction here, 0:04:31.320 --> 0:04:33.880 what will be the drivers of that given how significant 0:04:33.920 --> 0:04:35.919 the correction has already been in some of the major 0:04:35.960 --> 0:04:40.040 components of the indexes. Well, Lisa, but I mean, quite frankly, 0:04:40.040 --> 0:04:43.120 I mean that you know, those stocks benefited tremendously from 0:04:43.240 --> 0:04:46.360 March until recently, so they had a huge move up 0:04:46.839 --> 0:04:49.600 and that's what's held the averages up. Um. So now 0:04:49.640 --> 0:04:52.520 they're going to have their come up and and and 0:04:52.560 --> 0:04:54.320 they may not even go back to where they were 0:04:54.520 --> 0:04:56.919 in March, and that would be a big drop. But 0:04:56.960 --> 0:04:59.520 they're gonna have to go down if the major indussees 0:04:59.800 --> 0:05:02.239 are gonna have this ten to correction, and that should 0:05:02.240 --> 0:05:04.680 happen anyways, because you know, quite frankly, those stocks are 0:05:04.720 --> 0:05:08.120 most vulnerable to a tightening of financial conditions, and that 0:05:08.240 --> 0:05:10.400 all of them, but I think several of those companies 0:05:10.560 --> 0:05:14.080 are also vulnerable to this payback and demand from the 0:05:14.160 --> 0:05:17.000 overconsumption during the work from home period. So what's the 0:05:17.120 --> 0:05:18.960 driver then? Is it going to be just a direct 0:05:19.040 --> 0:05:21.839 yield correlation story that basically as yields go up, the 0:05:21.880 --> 0:05:23.839 big tech stocks sell off, or is there going to 0:05:23.839 --> 0:05:27.120 be an earnings component as well? Yeah, I think it's both. 0:05:27.120 --> 0:05:29.640 I mean, that's the fire and ice you know scenario. Right. 0:05:29.680 --> 0:05:33.640 The fire is basically the tightening financial conditions, multiples come down, 0:05:33.920 --> 0:05:35.039 and then to get a little bit of ice on 0:05:35.080 --> 0:05:37.159 the back end of that, the deceleration as you always 0:05:37.200 --> 0:05:40.599 get at this stage of the academic cycle is normal. Now, 0:05:40.640 --> 0:05:44.039 normally what happens is, you know, earns continue to go up. 0:05:44.560 --> 0:05:47.640 But because the amplitude of this, you know, recession recovery, 0:05:47.680 --> 0:05:50.680 we're so dramatic, you have to assume that the mid 0:05:50.680 --> 0:05:55.159 cycle transition deceleration will be more or larger than average. Okay, 0:05:55.240 --> 0:05:59.200 I mean to think otherwise would just be intellectually dishonest. Micaer, 0:05:59.320 --> 0:06:02.040 We finally at a point where we've been so wrong 0:06:02.080 --> 0:06:06.760 about single digit actual assumption ten year sp X fifteen 0:06:06.800 --> 0:06:10.839 point seven percent per year. Can you tell your team 0:06:10.839 --> 0:06:15.000 at Morgan Stanley the single digit equity return world is 0:06:15.080 --> 0:06:18.400 finally upon us? Yeah, I mean, look, I mean it's 0:06:18.400 --> 0:06:20.640 it's interesting, Tom, and I'm thinking you understand this, but 0:06:20.800 --> 0:06:23.640 you know it's it's it's easier to predict stock returns 0:06:23.720 --> 0:06:26.560 over a seven year period than it is over a 0:06:26.600 --> 0:06:29.479 one year period. Why is that because over seven years, 0:06:29.960 --> 0:06:33.279 the value, you know, your starting valuation comes to fuition. Okay, 0:06:33.320 --> 0:06:36.320 you can't you can't avoid that. You know, your returns, 0:06:36.920 --> 0:06:39.880 your your actual returns over seven year period are contingent 0:06:39.920 --> 0:06:42.640 upon the price you pay. And we all know assets 0:06:42.640 --> 0:06:45.159 are expensive right now, whether you're talking about bonds which 0:06:45.160 --> 0:06:48.719 are being financially repressed, or stocks or any asset that's 0:06:48.720 --> 0:06:51.760 tied to a ten your treasury yield which is artificially low. 0:06:52.320 --> 0:06:55.359 So yeah, I mean the starting point is poor on 0:06:55.400 --> 0:06:59.280 a seven year basis, and so it's it's high conviction. 0:06:59.360 --> 0:07:01.839 And this is not a call, by the way, high conviction. 0:07:01.880 --> 0:07:04.480 It's a single digit return out Look, Okay, not the 0:07:04.520 --> 0:07:06.279 end of the world, but I mean that's what financial 0:07:06.279 --> 0:07:08.560 oppression is. I mean, that's that's the world we're in. 0:07:09.040 --> 0:07:11.880 Lower returns. It's not the end of the world, but 0:07:11.960 --> 0:07:14.240 you know that's a fact. Mike, trying to catch up 0:07:14.240 --> 0:07:16.320 has always gotta work through this together. Through a key 0:07:16.360 --> 0:07:18.960 forum workout went to buy this market. My Wilson, that 0:07:19.160 --> 0:07:27.840 of Morgan Stanley, chief US equity strategist, and c I oh, 0:07:28.360 --> 0:07:31.840 speaking of Bloom, that means Washington. Andy Blocker joins us 0:07:31.880 --> 0:07:35.440 right now with Invesco, Head of US Government Affairs. Andy, 0:07:35.560 --> 0:07:38.000 I love what you say. We've seen this movie before. 0:07:38.120 --> 0:07:41.000 I'm not sure. I doubt I believe it is a 0:07:41.040 --> 0:07:46.840 negotiation or compromise that we see this movie before. So 0:07:47.520 --> 0:07:51.720 generally speaking, yes, but in specifics it's uncertain. Look, first 0:07:51.760 --> 0:07:53.680 of all, let's just say, look, we we kept the 0:07:53.720 --> 0:07:56.440 government open. Okay, hooray, We're gonna be the open sil 0:07:56.480 --> 0:07:59.440 December third. But on this five part of the infrastructure bill, 0:08:00.040 --> 0:08:03.240 I think there's a real tension between the moderates and 0:08:03.320 --> 0:08:06.280 the liberals and the Democratic Party, and the question is 0:08:06.680 --> 0:08:10.120 are they gonna hang together or they're gonna hang separately? Well, 0:08:10.120 --> 0:08:12.400 I mean, I mean give us a historic precedent here. 0:08:12.440 --> 0:08:15.119 I mean, what do they do? I've never I don't 0:08:15.120 --> 0:08:18.160 believe there's any negotiation going on. They're just getting the 0:08:18.280 --> 0:08:22.880 deadlines and away we go. Do you perceive true negotiation 0:08:23.240 --> 0:08:28.760 in a fractious Democratic Party? Yes? I do. I think Look, 0:08:28.800 --> 0:08:31.200 this is part of the sausage making process of Washington. 0:08:31.280 --> 0:08:34.360 That part hasn't changed, and their political interests at the 0:08:34.440 --> 0:08:37.280 end of the day are aligned. They need to help 0:08:37.280 --> 0:08:40.640 President Biden here. He needs a win. Um, he's been 0:08:40.640 --> 0:08:43.040 taking on water since the summer because of the delta 0:08:43.160 --> 0:08:47.400 variant surge and also because of difficulty in Afghanistan without 0:08:47.480 --> 0:08:50.400 him raising its political standings, showing that he can actually 0:08:50.440 --> 0:08:53.599 get something done for the American people do it in 0:08:53.640 --> 0:08:57.000 a bipartisan way. Ultimately, he's really going to have a 0:08:57.040 --> 0:09:00.320 tough time and still Democrats with him. Andy, We're hearing 0:09:00.360 --> 0:09:03.360 reports of Nancy Pelosi on the halls of Washington, d C. 0:09:03.480 --> 0:09:06.640 In the halls of Congress on her phone NonStop morning 0:09:06.720 --> 0:09:09.959 and night. There is a new feeling of concern among 0:09:10.040 --> 0:09:14.240 Democratic leaders right now of wrangling their party together. When 0:09:14.280 --> 0:09:16.920 you talk to people, is this a new level of 0:09:16.920 --> 0:09:22.280 concern that they cannot get anything done? So it is heightened. 0:09:22.320 --> 0:09:25.440 I will say that, Um, it's to two things are different. 0:09:25.520 --> 0:09:28.880 Number One, Normally what happens is what it's the Republican 0:09:28.880 --> 0:09:32.320 Party and Democratic Party. The more conservatives and the Republican 0:09:32.360 --> 0:09:35.480 Party or the more liberals in the Democratic Party will 0:09:35.600 --> 0:09:37.199 roll the moderates and say, look, we need you to 0:09:37.280 --> 0:09:40.560 vote for this, just take the hit. What different now, 0:09:40.679 --> 0:09:43.760 democratic side is that the monitor actually standing up and saying, look, 0:09:43.760 --> 0:09:45.160 I don't want to take a difficult vote in the 0:09:45.160 --> 0:09:46.800 House that I know the Senate is not going to 0:09:46.880 --> 0:09:50.000 vote for. And so that's creating this tension where normally 0:09:50.040 --> 0:09:52.360 they just take the vote in the House, sucking up 0:09:52.480 --> 0:09:54.199 liberal get what they want, but then the Senate comes 0:09:54.240 --> 0:09:56.920 back and ve it back. What's going on now monitors 0:09:56.960 --> 0:09:59.520 saying look, I don't want to be um like we've 0:09:59.559 --> 0:10:02.960 seen in pass where it was with the BTU tax 0:10:03.120 --> 0:10:06.640 with Marjorie Margos with Sinskey walking down taking that tough 0:10:06.720 --> 0:10:08.720 vote on the BTU text and they knew the Senate 0:10:08.800 --> 0:10:11.920 wasn't gonna vote on and she lost her race. We've 0:10:11.960 --> 0:10:14.920 seen that happened many many times. And so that's gonna 0:10:14.920 --> 0:10:17.240 be the cruxes modern tolding the line thing, I don't 0:10:17.240 --> 0:10:18.920 want to take this toff vote in the House versus 0:10:19.200 --> 0:10:22.719 liberals who are being very very bold here and saying look, 0:10:22.720 --> 0:10:25.640 I'm almost willing to take down this agenda, this entire agenda, 0:10:25.720 --> 0:10:27.800 unless I get what I want. Meanwhile, Andy, a lot 0:10:27.840 --> 0:10:29.559 of people are looking at the softness and markets, and 0:10:29.600 --> 0:10:31.360 they're saying part of it is driven by but just 0:10:31.400 --> 0:10:34.319 peak recovery and the idea of slowing growth. The other 0:10:34.440 --> 0:10:36.800 is driven by policy uncertainty and this fear that we 0:10:36.840 --> 0:10:39.720 potentially could head to some sort of default, some sort 0:10:39.800 --> 0:10:42.439 of disruption in the lack of fiscal spending that was 0:10:42.520 --> 0:10:46.080 largely expected given the year. At the intersection of markets 0:10:46.360 --> 0:10:49.680 and of government affairs, what's the biggest concern you here 0:10:49.800 --> 0:10:53.480 internally in terms of policy uncertainty. Is it them getting 0:10:53.520 --> 0:10:55.920 something done that is too big, is it not getting 0:10:55.960 --> 0:11:00.480 something done, or is it a default? So up ago, 0:11:00.679 --> 0:11:04.840 I would have put the fault higher up because Republicans 0:11:04.840 --> 0:11:06.520 it made it clear that in the Senate they weren't 0:11:06.520 --> 0:11:09.320 going to due bipartisan deal, which they've done recently. That 0:11:09.400 --> 0:11:12.400 put all the onus on Democrats in But now that 0:11:12.600 --> 0:11:15.120 the Democrats, I think no. Now I've seen some comments 0:11:15.160 --> 0:11:17.480 from some members, especially in the House, saying, look, we're 0:11:17.480 --> 0:11:20.080 gonna go through this Dog and Tony show. We're gonna 0:11:20.120 --> 0:11:22.560 try to force the republic to take a few bad votes. 0:11:22.600 --> 0:11:23.880 But even the day they know they're gonna have to 0:11:23.920 --> 0:11:27.199 do their own little reconciliation package paths the debt selling 0:11:27.280 --> 0:11:30.600 raised on their own, so that I think it's gonna 0:11:30.600 --> 0:11:32.520 be off the table by mid October. I think we're 0:11:32.520 --> 0:11:35.160 on a path to get that done. The bigger issue 0:11:35.240 --> 0:11:39.800 for us is how big is this um feature within 0:11:39.840 --> 0:11:42.720 the Democratic Party. Is it so big that that liberal 0:11:42.800 --> 0:11:46.120 Democrats are going to crush the ability to get this 0:11:46.200 --> 0:11:49.200 bipartisan infrastructure bill just so they get the number on 0:11:49.200 --> 0:11:54.000 the reconciliation or are they going to ultimately you're being 0:11:54.040 --> 0:11:56.280 way too kind, are there? You know you're down there 0:11:56.280 --> 0:11:59.440 in the Beltway drinking the kool aid? Are the liberals 0:11:59.440 --> 0:12:03.960 of the democ Credit Party handing the Republicans majorities in 0:12:04.000 --> 0:12:08.640 the Senate in the House if they thank the biparsed 0:12:08.679 --> 0:12:15.320 infrastructure bill? Yes, that's the answer. Okay, So moving forward, 0:12:15.520 --> 0:12:17.680 what are you watching in terms of deadlines with respect 0:12:17.800 --> 0:12:20.560 to getting something done? Because right now it seems like 0:12:20.600 --> 0:12:23.280 the progressive wing is pretty entrenched and uh and Nancy 0:12:23.320 --> 0:12:27.600 Plosi is not going to get any Republicans on her side. Yeah, 0:12:27.640 --> 0:12:29.280 so I don't think Republicans are going to lend a 0:12:29.360 --> 0:12:31.920 helping hand here. I think Democrats are going to have 0:12:31.960 --> 0:12:34.480 to show, whether it's today or week from now or 0:12:34.480 --> 0:12:38.319 whenever they have the votes to get the BIPARS infrastructure 0:12:38.360 --> 0:12:40.600 bill on their own. Once they do that, once they 0:12:40.600 --> 0:12:43.400 show that vote, usually a pose of the Republicans run 0:12:43.480 --> 0:12:45.080 to vote for this, but they're not going to be 0:12:45.080 --> 0:12:47.559 the deciding vote to put the Democrats over the top. 0:12:48.080 --> 0:12:52.760 So the question is can Nancy Pelosi corral the Democrats, 0:12:52.840 --> 0:12:55.839 both Warters and Liberals to say, Hey, we're gonna vote 0:12:55.840 --> 0:12:59.000 on this thing today. The couple this, trust this, We're 0:12:59.000 --> 0:13:02.400 gonna get you your reconciliation package with all the goodies 0:13:02.440 --> 0:13:04.800 that you want. Um, And that's the key tout for 0:13:04.800 --> 0:13:07.440 the day. Andy, thank you. I'm gonna leave it there. 0:13:07.480 --> 0:13:09.960 We appreciate your insights. Come back soon and he block 0:13:10.320 --> 0:13:18.800 invest ahead of US government affairs. The gloom this morning, 0:13:18.920 --> 0:13:21.360 the journey of gloom that we've been on him to 0:13:21.480 --> 0:13:25.520 queue for has been substantial. James Sweeney parachutes in less 0:13:25.520 --> 0:13:28.960 Gloomy with Credit Sweez and their chief economist, James, I'm 0:13:29.000 --> 0:13:32.000 gonna go right to where you went with your global note, 0:13:32.520 --> 0:13:35.319 which is j. Pulaski. A T. T P W is 0:13:35.360 --> 0:13:39.320 on the same page, is James Sweeney. The gloom about 0:13:39.360 --> 0:13:45.319 Asia and China is overwrought discussed well. Asia has contracted 0:13:45.400 --> 0:13:49.640 an industrial production term since early this year, but as 0:13:49.679 --> 0:13:54.040 we got into early summer, it was contracting so significantly 0:13:54.640 --> 0:13:56.960 that it's likely things are gonna get a little bit 0:13:56.960 --> 0:13:59.240 better in the near term. A lot of that weakness 0:13:59.600 --> 0:14:04.320 was due to idiosyncratic factors, short term shutdowns of activity 0:14:04.320 --> 0:14:08.160 because of the virus supply side situations. Now we might 0:14:08.200 --> 0:14:11.080 be short on chips relative to where we want to 0:14:11.080 --> 0:14:14.440 be globally for the next eighteen months, but we're gonna 0:14:14.480 --> 0:14:17.040 have periods where there's no chips and production can't happen, 0:14:17.360 --> 0:14:19.800 and periods where some is gonna come in and production 0:14:19.840 --> 0:14:21.880 is going to be really fast. And I think late 0:14:21.880 --> 0:14:25.640 spring just happened to be a period where production really 0:14:25.640 --> 0:14:29.280 shut down and fell in Asia and reduced for some 0:14:29.400 --> 0:14:32.320 short term re acceleration. I think we've had a global 0:14:32.760 --> 0:14:36.840 trough in the growth rate of industrial production this summer, 0:14:36.920 --> 0:14:38.960 and it will be rebounding in the second half of 0:14:39.000 --> 0:14:41.760 the year. Even though you know some of the some 0:14:41.880 --> 0:14:44.680 of the troubles and worries about China and housing are 0:14:44.760 --> 0:14:47.680 significant over a longer period, you have shown me over 0:14:47.800 --> 0:14:51.280 well in excess of ten years, a great optimism you 0:14:51.440 --> 0:14:56.880 are a glass half full guy. Push against the some gloom, John, 0:14:57.000 --> 0:15:00.160 Lisa and I have heard this morning. Well, you know, 0:15:00.400 --> 0:15:03.480 right now, economic data are all over the place because 0:15:03.520 --> 0:15:07.600 the pandemic has done strange things to the data. One 0:15:07.640 --> 0:15:09.400 of the strange things is that these p M I 0:15:09.560 --> 0:15:12.240 s like the I S M today have been much 0:15:12.360 --> 0:15:15.560 less correlated with industrial activity than they have. So one 0:15:15.600 --> 0:15:17.280 thing that drives me clar hazy is when I read 0:15:17.320 --> 0:15:20.960 in a newspaper that manufacturing just spell in Country X 0:15:21.480 --> 0:15:24.160 because the survey fell by two points. Well, we have 0:15:24.320 --> 0:15:28.080 real data on manufacturing in that country, and and you know, 0:15:28.240 --> 0:15:31.400 basically the real data and surveys have not been correlated. 0:15:31.680 --> 0:15:34.560 Actual production has been pretty weak, but in my view, 0:15:34.760 --> 0:15:37.360 actually it's going to be re accelerating from here. Demand 0:15:37.480 --> 0:15:42.240 is strong, inventories are low, businesses are ready to invest globally. Yes, 0:15:42.320 --> 0:15:46.640 we're worried about further COVID, Yes we're worried about China housing, 0:15:47.080 --> 0:15:49.000 but we should we should do better than we did 0:15:49.120 --> 0:15:51.840 in the Lake. You two, James, we are confusing the 0:15:51.920 --> 0:15:54.520 pace of the journey with the direction of travel. And 0:15:54.600 --> 0:15:56.080 tell him that's what I want to hit some because 0:15:56.120 --> 0:15:57.720 t K I keep hearing the same word again and 0:15:57.760 --> 0:16:01.600 again and again this morning. Thankshilation, Yes, yeah, this is yeah. 0:16:01.600 --> 0:16:03.400 I mean John, it's so good to have Jim James 0:16:03.440 --> 0:16:05.760 Sweeney with us. James wigh in on that that word 0:16:05.880 --> 0:16:09.160 is getting thrown around at the moment so casually. I 0:16:09.240 --> 0:16:11.160 mean the pace of the journey. The markets move in 0:16:11.200 --> 0:16:13.520 the short run with the pace of the journey almost always, 0:16:13.600 --> 0:16:16.720 and the narratives and the fears move with the pace. Recently, 0:16:16.800 --> 0:16:19.240 the pace has been weak, so everyone's panicking now and 0:16:19.280 --> 0:16:22.160 telling doom and gloom stories. In terms of the destination 0:16:22.240 --> 0:16:25.280 where we're going, You're absolutely right, We're going up. Inventories 0:16:25.320 --> 0:16:29.520 are low. Demand is good, Social distancing is being reduced globally, 0:16:29.920 --> 0:16:33.160 and as a service sector comes back, employment will grow, 0:16:33.680 --> 0:16:37.040 as as industrial production comes back, and as these supply 0:16:37.160 --> 0:16:40.520 side issues gradually fixed themselves. Now we're also going to have, 0:16:40.680 --> 0:16:43.280 you know, downward pressure on some of these goods price 0:16:43.400 --> 0:16:46.560 inflation shocks that we've had, and almost all of these 0:16:46.600 --> 0:16:50.960 developments are different from ordinary kind of just after the 0:16:51.040 --> 0:16:55.200 recession type dynamics. The pandemic is weird. It's not a recession, 0:16:55.320 --> 0:16:58.240 it's an asterix. It's a different kind of event, and 0:16:58.520 --> 0:17:01.479 we have to be careful in jumping to strong conclusions 0:17:01.520 --> 0:17:04.720 about strange behavior in p M I S or inflation 0:17:05.040 --> 0:17:07.840 or any of these indicators and stead inflation. Don't get 0:17:07.880 --> 0:17:10.000 me started. It's a silly hypothesis. Well I want to 0:17:10.040 --> 0:17:12.200 start that, James, because I think it's important. It's a word, 0:17:12.280 --> 0:17:15.520 it's being used. People are throwing it around. And let's 0:17:15.520 --> 0:17:17.680 be clear here, I'm not talking about just anyone. I'm 0:17:17.680 --> 0:17:21.960 talking about economists, PhD, economists on Wall Street throwing that 0:17:22.080 --> 0:17:25.119 word around, confusing the pace of the journey with the 0:17:25.200 --> 0:17:28.679 direction to travel. How powerful is a word, even if 0:17:28.720 --> 0:17:31.760 it's being used in the wrong way. Well, I mean, 0:17:31.840 --> 0:17:34.359 if you get if you get some data surprises momentarily 0:17:34.480 --> 0:17:37.400 in the same direction as you're worried about significant downside risks, 0:17:37.440 --> 0:17:39.720 you could have big market moves, and markets can divert 0:17:40.119 --> 0:17:43.920 diverge from the reality UM meaningfully. But the bottom line 0:17:44.720 --> 0:17:47.280 is that GDP is actually growing decently in the US 0:17:47.359 --> 0:17:50.240 and globally right now, is expected to continue to do 0:17:50.400 --> 0:17:54.159 that for the foreseeable future. UM. And so there's a 0:17:54.200 --> 0:17:55.840 lot of growth. I mean, we're we're not at a 0:17:56.000 --> 0:17:59.040 level of activity that we're happy with yet. UM. An 0:17:59.080 --> 0:18:03.560 industrial act. It's actually you're sort of there. In good consumption, 0:18:03.600 --> 0:18:06.160 you're actually beyond there and probably coming down a little 0:18:06.160 --> 0:18:07.959 bit because they sent these huge checks out a few 0:18:08.000 --> 0:18:11.480 months ago. In services consumption, you're not there yet, and 0:18:11.600 --> 0:18:14.040 you're coming up because we have to end this pandemic 0:18:14.480 --> 0:18:16.159 and get some distancing. But when you add all that 0:18:16.280 --> 0:18:19.280 messy stuff up up, you have good growth. You have 0:18:19.400 --> 0:18:22.440 good growth ahead, and you're gonna return to a proper 0:18:22.600 --> 0:18:25.240 level of employment and a proper level of economic activity. 0:18:25.680 --> 0:18:27.760 I just don't see the contraction in that. But James 0:18:27.840 --> 0:18:29.639 is this really does go back to the point of 0:18:29.840 --> 0:18:32.919 trying to compare, for example, ever Grand to two thousand 0:18:32.960 --> 0:18:36.160 and eight or two thousands and John was talking about 0:18:36.200 --> 0:18:38.520 why does it have to be such a catastrophic comparison 0:18:39.240 --> 0:18:42.200 rather than just something that could be negative but not 0:18:42.320 --> 0:18:47.880 necessarily potentially catastrophic. Are we talking about disinflation that could 0:18:47.960 --> 0:18:51.840 be really problematic for specific sectors, even if it's not 0:18:52.040 --> 0:18:56.399 exactly stagflation. I mean, I think there's a margin story. 0:18:56.520 --> 0:18:59.080 I think for some sectors. I think these goods price 0:18:59.160 --> 0:19:00.920 overshoots are going to be coming down, so are gonna 0:19:00.920 --> 0:19:04.399 have less inflation and manufactured goods you know, in the 0:19:04.480 --> 0:19:06.560 next couple of years than than we have now, it 0:19:06.600 --> 0:19:09.840 will be gradually falling on the service society, the economy. 0:19:10.000 --> 0:19:12.800 You know, maybe we're gonna have high inflation in housing, 0:19:13.000 --> 0:19:16.800 maybe we're gonna have faster wage growth, higher inflation and 0:19:17.040 --> 0:19:20.920 in person discretionary services. All of that together still is 0:19:20.960 --> 0:19:25.240 probably consistent with lower overall inflation. Um. Is this something 0:19:25.359 --> 0:19:27.359 that you know every day people need to worry about, 0:19:27.480 --> 0:19:30.680 like not not really, uh, And it should be happening 0:19:31.119 --> 0:19:34.159 while we're in this bigger recovery and hopefully, you know, 0:19:34.240 --> 0:19:38.320 the delta variant goes away, distancing, distancing comes off. Um, 0:19:38.440 --> 0:19:42.560 And we just have a complicated normalization of economic activity, 0:19:42.600 --> 0:19:46.159 which each of these different parts of that normalization following 0:19:46.200 --> 0:19:48.359 its own special path. And it's it's a little bit 0:19:48.680 --> 0:19:50.520 you know, it's a little bit difficult to explain right now, 0:19:50.640 --> 0:19:54.280 but said it's it's complicated. Thanks so much, James Sweeney, John, 0:19:54.520 --> 0:19:56.240 can we have a vote right now? Sweeney has gotta 0:19:56.240 --> 0:19:59.640 be on like every third day. Yeah, I mean, I'm sorry, 0:20:00.000 --> 0:20:01.359 I just don't know if James wants to do that. 0:20:02.320 --> 0:20:06.080 It's not up to us. Entertainment credits waste tone, Okay, 0:20:06.160 --> 0:20:15.200 thank you. Jane Folly is known for writing British paragraphs 0:20:15.240 --> 0:20:19.720 are longer than American paragraphs, but she writes exceptionally terse, 0:20:20.080 --> 0:20:23.840 brilliant notes on the ebbs and flows of foreign exchange. 0:20:23.880 --> 0:20:26.439 She's with Robbo Bank, one of the great commercial banks 0:20:26.760 --> 0:20:30.600 of Europe. She really has to worry about business transactions, 0:20:30.800 --> 0:20:34.600 investment and speculation. She joins US this morning, their senior 0:20:34.920 --> 0:20:39.119 foreign exchange strategist, Jane, I love, love, love your quantification 0:20:39.320 --> 0:20:44.080 of speculation in the Australian dollar. What is the speculation 0:20:44.640 --> 0:20:50.400 entering que four in US dollar, in yen, in euro. Well, 0:20:50.480 --> 0:20:52.320 I think it's really all one way, and we've seen 0:20:52.400 --> 0:20:54.800 this pushing back into the U S dollar, And to 0:20:54.880 --> 0:20:57.400 be honest, I think we've got to include emerging markets. 0:20:57.480 --> 0:21:00.840 That really into your your question there, because what we 0:21:00.920 --> 0:21:02.520 often see in the dollar, what we always see in 0:21:02.520 --> 0:21:05.400 the dollar in recent years is that when risk appetite 0:21:05.520 --> 0:21:08.080 is low and people don't want to invest in emerging markets, 0:21:08.160 --> 0:21:10.400 the dollar does well. And if we look right now 0:21:10.920 --> 0:21:13.679 on the headwinds to emerging market as well, we've got 0:21:13.760 --> 0:21:17.119 energy price increases, we've got the FED potentially potentially I 0:21:17.240 --> 0:21:20.000 can interest rate in twenty two and we've got that 0:21:20.080 --> 0:21:22.879 slowed down in China, and all of these are going 0:21:22.920 --> 0:21:26.280