WEBVTT - Surveillance: Banks In 4% Rate World 0:00:05.040 --> 0:00:09.160 This is the Bloomberg Surveillance Podcast. I'm Lisa Abramoid's along 0:00:09.160 --> 0:00:12.120 with Tom Keane and Jonathan Ferrell. Join us each day 0:00:12.160 --> 0:00:16.400 for insight from the best in economics, geopolitics, finance and investment. 0:00:16.720 --> 0:00:20.680 Subscribe to Bloomberg Surveillance undemand on Apple, Spotify and anywhere 0:00:20.720 --> 0:00:23.759 you get your podcasts, and always on Bloomberg dot Com, 0:00:23.800 --> 0:00:27.160 the Bloomberg Terminal and the Bloomberg Business app. Luis Is 0:00:27.160 --> 0:00:30.200 and Galas of the University of Chicago Booth School calling 0:00:30.240 --> 0:00:32.680 for an independent commission to look into the FED rights 0:00:32.680 --> 0:00:34.919 in the following In the last two years, the FED 0:00:35.000 --> 0:00:37.760 has failed twice. It is failed to see inflation coming, 0:00:38.000 --> 0:00:40.240 and it has failed to see the banking crisis coming 0:00:40.280 --> 0:00:43.680 to the nation needs to trustworthy FED to combat inflation. 0:00:43.760 --> 0:00:46.960 The only way to recover this trust is through a transparent, 0:00:47.320 --> 0:00:52.480 independent and authoritative commission whose findings are believable. President Biden 0:00:52.520 --> 0:00:56.320 should appoint such a commission without delay. Luigian please to 0:00:56.360 --> 0:00:59.520 say joins us right now, Luigika Mornic. Is it the 0:00:59.520 --> 0:01:02.960 FED chair fault or is this an institutional problem? I 0:01:03.000 --> 0:01:05.000 think that that's what we need to find out. I 0:01:05.040 --> 0:01:07.880 think I fear that it's an institutional problem or the 0:01:08.000 --> 0:01:12.160 just a German problem. Is easier to replace the German 0:01:12.200 --> 0:01:15.360 than to sort of rethink an institution. But I think 0:01:15.360 --> 0:01:19.080 that is a very consensus institution. So I think the 0:01:19.160 --> 0:01:23.040 failures were shared and something has gone wrong. Is that 0:01:23.080 --> 0:01:25.800 a polite website that's too much group think at the fat? 0:01:26.959 --> 0:01:30.319 I think that definitely is the case. But I think 0:01:30.360 --> 0:01:34.440 maybe maybe there is more. Maybe they're not inough economists. 0:01:34.319 --> 0:01:37.000 This is this is I think a low point on 0:01:37.040 --> 0:01:39.800 the board. I think only half of the PhD so 0:01:40.240 --> 0:01:43.280 in economics. Now you don't need to have a PhD 0:01:43.280 --> 0:01:46.679 in economics, but helps in understanding situation like the one 0:01:46.720 --> 0:01:50.080 where now, what are they getting wrong right now? I 0:01:50.120 --> 0:01:54.800 think that they're getting wrong how unstable the banking system is. 0:01:54.880 --> 0:01:59.680 I think that they have this idea that deposits are sticky, 0:02:00.120 --> 0:02:03.120 and I think that first of all, we have never 0:02:03.160 --> 0:02:06.400 experienced in recent time spread of four under business points 0:02:06.400 --> 0:02:09.760 between what you get on the money market and what 0:02:09.840 --> 0:02:12.960 you get on your deposit. And second, the WAD has changed. 0:02:13.040 --> 0:02:16.799 The posits are mobile, they are really Google say, a 0:02:16.880 --> 0:02:21.040 click away, and so I think that if the posits 0:02:21.120 --> 0:02:25.200 move in search of better eels then banks have to 0:02:25.280 --> 0:02:29.040 realize their losses. The idea of losses automaturity that can 0:02:29.080 --> 0:02:31.519 stay there and not have any impact, I think is 0:02:32.040 --> 0:02:33.920 sort of a fantasy. Well, what do you think the 0:02:33.919 --> 0:02:35.600 FAD should be doing? I mean, at a certain point, 0:02:35.840 --> 0:02:38.520 this is really the consequence of banks not managing their 0:02:38.520 --> 0:02:40.480 assets well enough, isn't it. Or do you really think 0:02:40.480 --> 0:02:42.880 this really lies with the FED? No? I think that 0:02:43.240 --> 0:02:45.480 the FED is a huge responsibility of the fact that 0:02:45.520 --> 0:02:48.799 they should have understood then they couldn't raise rates so fast, 0:02:48.919 --> 0:02:51.880 because when you raise rates so fast, you're going to 0:02:51.919 --> 0:02:55.320 impose losses in the bond market. And who's going to 0:02:55.360 --> 0:02:58.240 bear those losses? Insurance companies then you have to bail 0:02:58.280 --> 0:03:00.880 them out. Banks then you have to them out. So 0:03:01.240 --> 0:03:06.120 unless all the losses are among us investors individual investors, 0:03:06.160 --> 0:03:09.480 then something happens, and so there was an extra reason 0:03:09.560 --> 0:03:12.560 to intervene early on inflation said they were very complacent. 0:03:12.600 --> 0:03:14.600 They said, oh, we have the tools, we're going to 0:03:14.680 --> 0:03:16.520 do it. We let it go a little bit, but 0:03:16.800 --> 0:03:18.799 no worry, because we have the tools. I think that 0:03:18.840 --> 0:03:21.079 their tools were not very sharp, and they should have 0:03:21.120 --> 0:03:23.519 recognized that. How much do you think that the banking 0:03:23.639 --> 0:03:26.720 crisis that people talked about three weeks ago has abated, 0:03:27.000 --> 0:03:30.040 has really sort of moved from some sort of acute 0:03:30.080 --> 0:03:34.079 phase into perhaps a chronic question around flows and with 0:03:34.120 --> 0:03:37.640 respect to credit creation, but not necessarily a crisis. I 0:03:37.680 --> 0:03:41.080 think it's possible and hopefully that this is not going 0:03:41.120 --> 0:03:44.280 to be an open crisis like we've seen in the past. However, 0:03:44.480 --> 0:03:46.960 clearly put a lot of softness in the banking sect, 0:03:47.280 --> 0:03:50.720 particularly regional banks, which we need to remember those are 0:03:50.720 --> 0:03:53.320 the ones who land to small and medium enter prices. 0:03:53.600 --> 0:03:56.400 The large banks tend to do syndicated loans or big firms, 0:03:56.680 --> 0:03:59.680 but the brand and bottom of the economy is with 0:03:59.800 --> 0:04:04.560 the original banks, and they're very soft, and they see 0:04:04.600 --> 0:04:08.160 deposits flowing out, and they are not going to make 0:04:08.360 --> 0:04:11.560 loans because if they make loans and then the posits 0:04:11.560 --> 0:04:13.560 flow out, they have to solve securities and have to 0:04:13.640 --> 0:04:16.839 make losses. So I think that the first thing they 0:04:16.920 --> 0:04:19.520 do for sure is not make new loans, and then 0:04:19.720 --> 0:04:23.880 probably they're going to try to slowly divest their securities 0:04:23.880 --> 0:04:26.680 when they can. We saw there was an article on 0:04:26.720 --> 0:04:29.080 the ft showing that at the beginning of the year, 0:04:29.440 --> 0:04:33.400 cash over assets in banks were particularly law and they 0:04:33.400 --> 0:04:35.880 say this is the cause of the current crisis, and no, no, 0:04:36.160 --> 0:04:38.479 this is an effect or the fact that we have 0:04:38.560 --> 0:04:42.000 a withdrawal of the posits, and so banks don't want 0:04:42.040 --> 0:04:45.240 to divest the securities at the loss. So what they 0:04:45.279 --> 0:04:49.200 do is they reduce the cash they have the deposits. 0:04:49.480 --> 0:04:51.800 Let's touch on them. You've been highly critical at the 0:04:51.839 --> 0:04:54.200 Federal Reserve. I'll be the last in line to defend 0:04:54.200 --> 0:04:56.000 the Federal Reserve, so let me be clear about that. 0:04:56.240 --> 0:04:57.680 But we need to talk about the role of the 0:04:57.680 --> 0:04:59.920 banks and all of this. You could only credit the 0:05:00.040 --> 0:05:02.760 and for the way the banks have been run. Look, 0:05:03.000 --> 0:05:06.159 I think that if you don't expect some bankers to 0:05:06.240 --> 0:05:08.640 be stupid, you have not learned the lesson. It's just 0:05:09.440 --> 0:05:15.400 green Span were surprised. Yeah, we're surprised how little people 0:05:15.480 --> 0:05:18.400 were trying to do the right thing, even if they 0:05:18.400 --> 0:05:21.600 had the writing centers. So we learn that people make mistakes. 0:05:21.640 --> 0:05:25.479 A resilient system is a system that can bear the 0:05:25.560 --> 0:05:29.560 mistakes of individual bankers, especially when these bankers are not 0:05:30.240 --> 0:05:32.840 the CEO of JP Morgan. If I go and open 0:05:32.880 --> 0:05:34.839 an account this morning, if we went out at least 0:05:34.839 --> 0:05:36.480 for a night and I open a joint account. It's 0:05:36.480 --> 0:05:38.880 a valance account without Tom's name on it, because we 0:05:38.880 --> 0:05:40.760 know what would happen to the cash. But that's another story. 0:05:41.080 --> 0:05:44.400 They'd probably offer a zero percent one of the big names. Still, 0:05:44.839 --> 0:05:47.159 we've got Barclays out in the last twenty four hours 0:05:47.160 --> 0:05:49.080 saying that money market funds could go up another one 0:05:49.120 --> 0:05:52.160 point five trillion. Do you think they concern right now 0:05:52.839 --> 0:05:56.320 at the banks is return off capital or return on capital? 0:05:56.720 --> 0:05:59.200 And can they prevent deposit flight by quite simply just 0:05:59.240 --> 0:06:03.680 putting up interest rates on deposits. No, they can't. They 0:06:03.720 --> 0:06:06.800 don't have the return to do that. If you look 0:06:06.839 --> 0:06:09.960 at the Silicon Valley Bank, if they had increased their 0:06:10.000 --> 0:06:15.280 return on their deposits by I think seventy five business points, 0:06:15.560 --> 0:06:18.320 they would have wiped out all the profits last year. 0:06:18.839 --> 0:06:20.280 So I don't think that they have a return on 0:06:20.360 --> 0:06:24.280 assets to justify a higher deposits. That's the conundrum. If 0:06:24.320 --> 0:06:27.880 the problem was solved simply by increasing rates would be easy, 0:06:28.240 --> 0:06:30.920 but they cannot afford to. So you're saying this banking 0:06:30.960 --> 0:06:33.479 system does not work with rates of four percent plus? 0:06:33.880 --> 0:06:36.760 Is that basically what you're saying? Yes? So does the 0:06:36.800 --> 0:06:38.640 fat have to cut interest rates and then we just 0:06:38.720 --> 0:06:42.120 have that tolerate inflation. That first of all, I think 0:06:42.120 --> 0:06:44.760 the inflation might not be as big of a problem 0:06:44.839 --> 0:06:47.440 if we get into a recession. I think the recession 0:06:47.440 --> 0:06:49.440 would do the job. Now, that was not the plan 0:06:49.520 --> 0:06:51.560 of the FAT was a soft landing, not crashing the 0:06:51.600 --> 0:06:54.679 banking sector. But that's the part that they should have seen. 0:06:55.320 --> 0:06:57.400 But so let's just put this in a perspective in 0:06:57.520 --> 0:06:59.720 terms of bad news being bad news, which seems to 0:06:59.720 --> 0:07:02.120 be the you seem in markets right now. How much 0:07:02.560 --> 0:07:05.520 is what you're talking about underpinning that that there is 0:07:05.560 --> 0:07:09.560 an imminent tension that's going to perhaps accelerate some sort 0:07:09.560 --> 0:07:13.280 of economic downturn because the banking system just is not 0:07:13.320 --> 0:07:16.000 going to function at these rates. I think that that 0:07:16.320 --> 0:07:19.120 is the underlying bad news. Now, this is tempered by 0:07:19.160 --> 0:07:21.800 the fact that this will come with a reduction in 0:07:21.880 --> 0:07:25.680 interest rates, and as we know, that compensates some of 0:07:25.680 --> 0:07:29.680 the problems. So I think that the real tension is 0:07:29.680 --> 0:07:32.480 the FED will not raise interest rate modes, will probably 0:07:32.480 --> 0:07:34.960 at some point count them, and that is there going 0:07:34.960 --> 0:07:38.520 to be enough to transform what is likely to be 0:07:38.680 --> 0:07:41.720 a hard lending into a more soft lending. That's the 0:07:41.840 --> 0:07:44.520 question I think that we are softening up and there 0:07:44.520 --> 0:07:47.040 will be a lending At this point in my way, 0:07:47.120 --> 0:07:50.120 there is little doubt. The question is how hard let's 0:07:50.120 --> 0:07:52.880 finish where we started. The changes you want to say, 0:07:53.160 --> 0:07:54.760 the changes you want to see over time, But I 0:07:54.760 --> 0:07:56.120 want to talk about the changes you want to say 0:07:56.120 --> 0:07:57.360 in the nice couple of months. What would you like 0:07:57.360 --> 0:08:00.720 to see announced. From the point of view of the 0:08:00.880 --> 0:08:04.000 fat of the government for the Federal Reserve, I think 0:08:04.040 --> 0:08:08.440 that a serious analysis of what are the softness in 0:08:08.480 --> 0:08:11.480 the banking sector. I think that was a regulatory failure 0:08:11.880 --> 0:08:16.560 and the FAD needs to own it and change. And two, 0:08:17.040 --> 0:08:19.760 I think that be honest about the fact that probably 0:08:20.040 --> 0:08:22.240 we need to soften up into at rates because the 0:08:22.240 --> 0:08:26.040 banking crisis is coming, and trying to find way to 0:08:26.080 --> 0:08:29.560 soften up this banking crisis, especially I think for landing 0:08:29.560 --> 0:08:32.240 of the mill a small and medium businesses because those 0:08:32.280 --> 0:08:34.360 are the one affected the most. You said, be honest. 0:08:34.480 --> 0:08:36.240 It implies that they know, but they're not saying it 0:08:36.600 --> 0:08:39.559 to truly believe that I don't know what you know. 0:08:40.080 --> 0:08:43.120 You can be honest and being wrong, And I think 0:08:43.120 --> 0:08:47.400 sometimes people believe their own view of the world. I 0:08:47.440 --> 0:08:51.000 think that I honestly did not understand the twenty five 0:08:51.080 --> 0:08:55.000 business points increase last meeting. I thought that was just 0:08:55.080 --> 0:08:57.440 a signal to say, I want to reassure the things 0:08:57.440 --> 0:09:01.280 are not as bad as they might be. Was not 0:09:01.760 --> 0:09:05.520 determined by the objective situation. Again, but I've been wrong before, 0:09:05.559 --> 0:09:07.600 I can be wrong now. I just wonder whether there's 0:09:07.600 --> 0:09:09.360 a role of regional banks anymore, which are such a 0:09:09.360 --> 0:09:14.240 mainstay of lending. I mean, basically under your paradigm. Not really, No, 0:09:14.480 --> 0:09:17.839 there is a very important role of regional banks because 0:09:17.840 --> 0:09:21.840 we know that small businesses don't borrow the large distance. 0:09:22.080 --> 0:09:28.720 They depend on local banks, and particularly also minorities depend 0:09:29.080 --> 0:09:32.800 dramatically on, for example, minority banks. I had the students 0:09:32.840 --> 0:09:35.479 who went on the market this year showing how important 0:09:35.679 --> 0:09:40.440 is bank ownership in determining who gets the loans. So 0:09:40.679 --> 0:09:43.480 I think we cannot say we only go with a 0:09:43.679 --> 0:09:47.320 few large banks, because that means a complete change in 0:09:47.360 --> 0:09:49.840 the US economy. This was so good. You can promote 0:09:49.800 --> 0:09:53.520 your podcast what's the code? Capital isn't? What is working 0:09:53.520 --> 0:09:56.240 in capitalism? And what isn't nice? Where do I find 0:09:56.280 --> 0:09:59.280 that anywhere? You get your podcast? From there we go. 0:09:59.440 --> 0:10:02.240 That's perfect. You were that good that. He basically was like, 0:10:02.320 --> 0:10:04.679 you know, go for it. You have won yourself an 0:10:04.679 --> 0:10:08.360 advertising second promo. You'll get in trouble with care for 0:10:08.480 --> 0:10:11.560 a now given that away, Luigi. Thank you. This was fantastic. 0:10:11.600 --> 0:10:13.840 Thank you, Luis. She's in Ghanas there of the university. 0:10:13.880 --> 0:10:27.440 If she can't go to school of business, Wiseman regret 0:10:27.720 --> 0:10:31.800 my currency strategistic aquarium already, Terry, thanks for VIM, sir, 0:10:31.920 --> 0:10:34.120 I'm going to see you. This from Towson Slot literally 0:10:34.160 --> 0:10:36.600 just moments ago in my inbox, he said. The credit 0:10:36.600 --> 0:10:39.120 crunch has started. He said, a survey of seventy one 0:10:39.160 --> 0:10:42.040 banks in the Dallas FED District, done after SVB went 0:10:42.120 --> 0:10:45.480 under shows of dramatic reversal and nine volumes. The FED 0:10:45.559 --> 0:10:47.959 survey was carried out from March twenty one to twenty nine. 0:10:48.240 --> 0:10:52.080 Do you agree with that statement the credit crunch has started. Yes, absolutely. 0:10:52.960 --> 0:10:54.320 I want to call it a credit crunch. You might 0:10:54.360 --> 0:10:56.120 want to credit call it a credit crumble, but the 0:10:56.120 --> 0:10:58.560 direction I think is un ambiguous. And I would add 0:10:58.600 --> 0:11:00.319 here that it's not just about the part of leaving 0:11:00.360 --> 0:11:02.559 the system right deposits can you come out of the 0:11:02.600 --> 0:11:04.679 small banks and they can find their way into the 0:11:04.760 --> 0:11:07.319 large banks, they can find their way into money market funds. 0:11:07.520 --> 0:11:09.319 In fact, the system has a way of recycling those 0:11:09.320 --> 0:11:12.120 deposits and potentially bringing them back to the small banks, 0:11:12.200 --> 0:11:14.960 especially if the government leans on the large banks to 0:11:15.040 --> 0:11:18.160 recycle those deposits, as we saw with the First Republic situation. 0:11:18.440 --> 0:11:20.920 I'm not so much concerned about the flight of deposits 0:11:21.000 --> 0:11:24.600 as the origin ideology of a credit crunch or credit 0:11:24.640 --> 0:11:28.200 carbal I'm much more concerned with the regulatory overhang. I'm 0:11:28.200 --> 0:11:30.240 concerned with the fact that Congress is going to be 0:11:30.280 --> 0:11:33.679 doing compensation call backs, at least considering that for bank 0:11:33.800 --> 0:11:36.120 CEOs that get themselves or their or their balance sheets 0:11:36.120 --> 0:11:41.360 into trouble. I'm worried about the more variegated stress tests 0:11:41.679 --> 0:11:45.200 stressing the banks for duration mismatches. I'm worried about the 0:11:45.200 --> 0:11:48.520 banks going back into their balance sheets looking at very 0:11:48.559 --> 0:11:51.360 and scrutinizing them. I'm worried about the regulators doing the 0:11:51.400 --> 0:11:53.240 same for the banks. I think that is going to 0:11:53.360 --> 0:11:57.600 cause an overhang of concern, of worry, of less risk 0:11:57.640 --> 0:12:00.600 taking in the banking community. That's what's going to drive 0:12:00.640 --> 0:12:02.920 the credit crunch or credit crumbled, not the flight of 0:12:02.960 --> 0:12:05.319 the posits necessarily if there is a flight of deposits, 0:12:05.360 --> 0:12:07.360 all right, then we're talking about not just a credit crumble, 0:12:07.360 --> 0:12:11.800 but a real credit crunch. Okay, two questions. One policy consequences, 0:12:12.120 --> 0:12:14.000 well the Fed does ultimately in the coming months. And 0:12:14.080 --> 0:12:16.840 to market outcomes, How are you thinking about those two 0:12:16.840 --> 0:12:19.760 things now? So the good thing with regard to market 0:12:19.760 --> 0:12:22.160 outcomes is we've gotten ten year yields coming down, right, 0:12:22.200 --> 0:12:24.520 and I think to some extent that's supporting multiples. But 0:12:24.600 --> 0:12:26.920 I'm afraid about the market because if you have a 0:12:26.960 --> 0:12:30.160 credit slowdown and you have an economic slowdown that follows 0:12:30.160 --> 0:12:32.560 from it, you're going to have an earning slowdown. You're 0:12:32.559 --> 0:12:37.000 going to have a revenue slowdown, effectively an operating slowdown. 0:12:37.400 --> 0:12:40.160 In the corporate world, we're already seeing that with what 0:12:40.280 --> 0:12:43.600 happened with the Manufacturing Ism survey and the high Headline Index. 0:12:43.880 --> 0:12:46.960 When it falls to the levels it fell in the 0:12:47.000 --> 0:12:51.520 March report, it's typically historically associated with a big declining 0:12:51.600 --> 0:12:53.800 growth in corporate revenues, with a big declining growth in 0:12:53.840 --> 0:12:57.640 corporate earnings. It's also associated with negative revisions from bottom 0:12:57.760 --> 0:13:00.880 up analysts who cover companies in the five hundred and 0:13:00.920 --> 0:13:03.200 the broader indexes so that's what's in front of us 0:13:03.320 --> 0:13:06.880 right now. Now there could be multiple elevation or because 0:13:06.880 --> 0:13:09.480 of the low yields, which you can't expect the market 0:13:09.480 --> 0:13:12.360 to do well in the context of downward revisions and earrings, 0:13:12.360 --> 0:13:14.079 and I think we're just on the verge of seeing 0:13:14.080 --> 0:13:16.840 that start. Just to sort of underscore your point, do 0:13:16.880 --> 0:13:20.199 you agree with professors in Galis that this banking system 0:13:20.600 --> 0:13:24.000 cannot handle rates where they are? No, and I'm going 0:13:24.040 --> 0:13:27.679 to qualify it. I would have said something different. I 0:13:27.679 --> 0:13:31.080 would have said, the banking system cannot handle a very speedy, 0:13:31.200 --> 0:13:35.760 aggressive and abrupt increase it interest rates to four percent. 0:13:36.240 --> 0:13:40.360 If any economic agent, not just banks, any borrowers, any creditors, 0:13:40.400 --> 0:13:42.920 get accustomed to very low interest rates and expect those 0:13:42.960 --> 0:13:46.440 to continue, that their behavior is going to accommodate to 0:13:46.520 --> 0:13:48.679 those low interest rates, and when interest rates rise by 0:13:48.720 --> 0:13:51.160 a lot, that behavior is going to suddenly be forced 0:13:51.200 --> 0:13:53.959 to shift, maybe because of what happens in their balance sheets. 0:13:54.640 --> 0:13:56.920 Duration mismatch with the banks is a good example. So 0:13:56.960 --> 0:13:59.640 it's not the level of interest rate that matters. We've 0:13:59.640 --> 0:14:02.880 had percent interest rates in the past. We've glided through 0:14:02.920 --> 0:14:06.280 that pretty comfortably, not necessarily associated with a lot of 0:14:06.320 --> 0:14:09.079 inflation or low inflation. What has troubled me and I 0:14:09.120 --> 0:14:11.360 think what is troubling the economy right now, and certainly 0:14:11.400 --> 0:14:15.920 the credit economy, is the rapidity which interest rates ever risen. 0:14:16.160 --> 0:14:18.440 That is what is unprecedented, not the fact that interest 0:14:18.480 --> 0:14:21.440 rates at four percent. Translate this into the global market. 0:14:21.440 --> 0:14:24.080 A lot of people are looking at signs that perhaps 0:14:24.120 --> 0:14:26.160 things are cracking a bit more in the US than 0:14:26.200 --> 0:14:28.800 in Europe, and that things are slowing down as a 0:14:28.880 --> 0:14:31.720 sign that Europe is strong and go into European assets. 0:14:31.920 --> 0:14:33.600 Do you disagreed? Do you think that they're just six 0:14:33.640 --> 0:14:35.600 months behind the US and that they're going to see 0:14:35.920 --> 0:14:38.840 the sort of tensions emerge in the economy at the 0:14:38.880 --> 0:14:41.800 same kind of pace based on some of their outside 0:14:41.880 --> 0:14:43.960 rate high There something to be said for the synchronicity 0:14:44.080 --> 0:14:46.640 of business cycles around the world. If the US slows down, 0:14:46.640 --> 0:14:49.760 it's almost impossible that Europe will completely escape the impact 0:14:49.760 --> 0:14:51.480 of a US slowdown. But Europe's got a good things 0:14:51.600 --> 0:14:53.920 happening as well. First, we'll keep in mind that it 0:14:54.040 --> 0:14:55.880 was in its duldrums and it was in its slump 0:14:55.960 --> 0:14:57.880 in the fourth and third quarters of last year. So 0:14:57.920 --> 0:14:59.440 it's coming off a low base, and when you come 0:14:59.480 --> 0:15:01.880 off a low, you know, you can't imagine that it's 0:15:01.880 --> 0:15:04.000 going to be hit hard unless there's another shock. And 0:15:04.040 --> 0:15:05.280 I have to imagine it's going to have to be 0:15:05.320 --> 0:15:08.200 more than a credit crumble in the US. China's recovering, 0:15:08.200 --> 0:15:11.160 that's going to help Europe. Right, there's the prospect that 0:15:11.400 --> 0:15:13.680 the initial shock of the war through the energy price 0:15:13.720 --> 0:15:16.840 mechanism has faded. Certainly, natural gas prices globally are low, 0:15:17.040 --> 0:15:19.760 oil prices relatively low. The things that hurt Europe in 0:15:19.800 --> 0:15:22.520 the third quarter, in the fourth quarter of last year 0:15:22.520 --> 0:15:24.520 are no longer there. At the same time, the things 0:15:24.520 --> 0:15:27.080 that are about to start hurting the US specifically this 0:15:27.160 --> 0:15:29.800 credit crunch credit crumble are on the verge of starting 0:15:30.000 --> 0:15:33.600 that doll a positive or negative. It's dollar, it's dollar negative. 0:15:34.400 --> 0:15:35.920 There's something to be said for the idea that a 0:15:35.920 --> 0:15:39.680 global recession helps the dollar. I think that's an old 0:15:39.680 --> 0:15:42.840 way of thinking. I think I think astolato caters have 0:15:42.880 --> 0:15:46.240 gotten more sophisticated over time. They can make distinctions between 0:15:46.600 --> 0:15:49.560 growth rates and the first order you know, second order 0:15:49.600 --> 0:15:52.200 growth rates around the world, and comparisons between them relative 0:15:52.200 --> 0:15:55.600 growth rates. I mean, and when you know We're going 0:15:55.640 --> 0:15:58.240 to start to see this divergence, indicated by the fact 0:15:58.240 --> 0:16:00.680 that the surprise index in the US is heading down 0:16:00.680 --> 0:16:02.680 and the surprising decks and Europe is still going up. 0:16:02.720 --> 0:16:05.440 I imagine we're going to start to see a weaker dollar. 0:16:05.520 --> 0:16:08.320 We've already seen it right in March. We've already seen 0:16:08.360 --> 0:16:10.320 a weaker dollar. But I think there's room here for 0:16:10.360 --> 0:16:12.360 the euro to get even higher than break above the 0:16:12.400 --> 0:16:14.560 one ten level. We're already seen with Sterling. It got above. 0:16:14.600 --> 0:16:17.800 It's it's um, it's twenty twenty three highs already, right, 0:16:17.840 --> 0:16:21.120 and the next September and the next and the next, 0:16:21.480 --> 0:16:24.560 the next shoe to drop maybe dollar yen right. Um. 0:16:24.880 --> 0:16:27.200 We'll hear more from presently from the boj once the 0:16:27.200 --> 0:16:29.200 new government takes over. But these are these are the 0:16:29.200 --> 0:16:32.680 consequences of effectively of of of the weaker US situation 0:16:32.720 --> 0:16:34.440 compared to the rest of the world's studing right now, 0:16:34.560 --> 0:16:36.920 very close to one twenty five. Terry, this was great, 0:16:37.000 --> 0:16:45.720 Thank you, Terry Weisman there of mcquarie. Jenny Norman joins 0:16:45.800 --> 0:16:47.640 us now the kind of director at the UCR Center 0:16:47.920 --> 0:16:50.560 on US Politics. Jenny, can we start there just the 0:16:50.640 --> 0:16:53.880 difference of approach between the Europeans and the US to 0:16:54.160 --> 0:16:56.600 tension with China at the moment. Sure, So there's a 0:16:56.600 --> 0:16:59.360 couple of things to note here. First, even though the 0:16:59.400 --> 0:17:02.480 writer reckon US and many policies are very tough on 0:17:02.600 --> 0:17:05.440 China from both parties, you know, our trade relationship is 0:17:05.480 --> 0:17:08.000 still the highest ever been with China as well, So 0:17:08.040 --> 0:17:11.240 it's not just Europe that's keeping that economic back and 0:17:11.280 --> 0:17:13.560 forth going. That's very true for the US right now 0:17:13.600 --> 0:17:16.000 as well. And i'd say even Europe is not a 0:17:16.000 --> 0:17:19.760 fully unified block on this. Macrone is extending much more 0:17:19.800 --> 0:17:23.480 open hand than his co traveler or slave underlying, who 0:17:23.480 --> 0:17:26.320 has been a bit more tough on China and her talk, 0:17:26.440 --> 0:17:29.080 especially on China's approach to Ukraine. So I would say 0:17:29.080 --> 0:17:31.520 a lot of diversity between kind of both sides of 0:17:31.560 --> 0:17:34.040 the Atlantic. But for the US, you know, I would 0:17:34.040 --> 0:17:37.040 say the fact that Europe is perhaps being a bit 0:17:37.080 --> 0:17:41.480 more open handed with China, especially through Macrone, could actually 0:17:41.480 --> 0:17:44.360 be an advantage. I mean, the Biden administration has had 0:17:44.400 --> 0:17:48.080 a sort of three prong approach to China like cooperate 0:17:48.160 --> 0:17:51.360 when we can, compete when we should, and confront when 0:17:51.359 --> 0:17:54.800 we must. And the cooperation piece has obviously been the 0:17:54.880 --> 0:17:57.840 trickiest of late, and if you can have Europe keeping 0:17:57.880 --> 0:18:00.840 that door open, I do think that's somewhat important for 0:18:01.080 --> 0:18:05.440 preventing what could be again this increasing alliance really between 0:18:05.680 --> 0:18:07.920 China and Russia. What we don't want to see is 0:18:07.960 --> 0:18:10.320 a cold war that's built on a sense of grievance 0:18:10.520 --> 0:18:13.040 towards the West and towards the US, And so France 0:18:13.280 --> 0:18:15.480 might be kind of the good cop keeping that door 0:18:15.520 --> 0:18:17.600 open for the time being, What does that do to 0:18:17.720 --> 0:18:20.440 US European relations Because at a certain point I understand 0:18:20.480 --> 0:18:24.159 the good cop bad cop kind of dichotomy here, but 0:18:24.240 --> 0:18:27.800 this isn't something that US multinational companies can really depend on. 0:18:27.840 --> 0:18:30.440 And we've already seen reports that Apple is quietly trying 0:18:30.440 --> 0:18:32.680 to shift its supply chains. How much does this create 0:18:32.720 --> 0:18:35.640 a liability for the US and frankly create a real 0:18:35.640 --> 0:18:39.760 fissure in that alliance. Well it could, But I think again, 0:18:39.800 --> 0:18:42.199 what we're seeing both the US and Europe trying to 0:18:42.240 --> 0:18:46.119 do is on couple, as we're saying, in these key sectors, 0:18:46.320 --> 0:18:49.600 but also just very pragmatically knowing that you can't just 0:18:49.680 --> 0:18:53.760 completely cut off this economic relationship with China. So I 0:18:53.800 --> 0:18:56.760 think we'll see this pressure sectorally, but at the same 0:18:56.800 --> 0:18:59.840 time recognizing that some trade relations are going to keep 0:18:59.840 --> 0:19:02.639 going through. So again we see France, you know, probably 0:19:02.720 --> 0:19:05.640 moving forward on the airbus production on that kind of deal, 0:19:05.760 --> 0:19:08.000 at the same time scaling back on other kinds of 0:19:08.000 --> 0:19:11.720 technology where there is more concern around security or surveillance. 0:19:11.760 --> 0:19:13.880 So I think some of that will be on par 0:19:14.000 --> 0:19:18.240 between the two countries. But again, as this essentially you know, 0:19:18.680 --> 0:19:21.679 deepening a riff between the US and China continues, I 0:19:21.800 --> 0:19:24.040 do that becoming a bigger sticking point, but I don't 0:19:24.040 --> 0:19:25.840 think we're quite there yet. John asked me a really 0:19:25.840 --> 0:19:27.520 good question that I gave a pretty bad answer to 0:19:27.640 --> 0:19:29.600 just a couple of minutes ago, where he said, did 0:19:29.720 --> 0:19:33.720 China truly show restraint with the Kevin McCarthy meeting with 0:19:33.920 --> 0:19:37.439 Taiwanese president? Is that really what we saw or is 0:19:37.480 --> 0:19:40.920 there potentially more to come and potentially a bigger and 0:19:40.960 --> 0:19:44.000 broader consequence. Well, I think you were right LEAs in 0:19:44.040 --> 0:19:45.880 saying we heard a lot of right direct from China, 0:19:45.920 --> 0:19:48.920 a lot of pushback in in terms of verbal comments 0:19:48.960 --> 0:19:51.840 to this, and there was some movement, you know, one 0:19:52.119 --> 0:19:54.960 Chinese naval vessel going through the straight yesterday, some Coast 0:19:55.000 --> 0:19:58.359 Guard activities, but nothing like the war games and military 0:19:58.400 --> 0:20:01.600 movements that we saw back in August when Pelosi went 0:20:01.800 --> 0:20:04.080 and you I think, as you note, it's partly because 0:20:04.160 --> 0:20:07.480 the meeting was on US soil, it wasn't taking place 0:20:07.480 --> 0:20:09.840 in Taiwan. The fact that you are having a head 0:20:09.880 --> 0:20:12.640 of state visit with McCrone having a massive military build 0:20:12.680 --> 0:20:14.960 but at the same time is not really the best look. 0:20:15.080 --> 0:20:18.200 And moreover, this is really a long game for China, 0:20:18.280 --> 0:20:21.240 and I think Taiwanese presidents say was very clear about 0:20:21.280 --> 0:20:23.680 that when she was making her comments in the US 0:20:23.840 --> 0:20:27.000 that China is seeing this as a ongoing effort and 0:20:27.040 --> 0:20:29.640 they're working through all different kinds of tactics to put 0:20:29.640 --> 0:20:32.639 pressure on Taiwan, not just military. And so this is 0:20:32.800 --> 0:20:34.600 something that I think is just gonna be very drawn out, 0:20:34.640 --> 0:20:37.560