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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

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Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you

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Speaker 1: insight from the best and economics, finance, investment, and international relations.

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Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot com,

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Speaker 1: and of course, on the Bloomberg terminal. Elon Musk is

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Speaker 1: said to be lining up equity partners for his Twitter bid.

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Speaker 1: The talks continue with other potential co investors. The stock

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Speaker 1: of fifty in the offer price. That's the mouse. Help.

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Speaker 1: I just I'm in absolute silence, John over where it is.

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Speaker 1: There are others out there that have published on this, John,

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Speaker 1: And we go to the experts. Craig Moffatt and Michael

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Speaker 1: Nathanson joining us now, someone who has followed content, the Kings,

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Speaker 1: the Queens of Princes for decades. Mr Nathan said, I

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Speaker 1: gonna go to a price to sales analysis. You gotta

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Speaker 1: be kidding me. I'm modeling seven eight times price to sales.

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Speaker 1: That seems a tad rich top. It's a tad rich.

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Speaker 1: If it wasn't for this bid, the stock would be

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Speaker 1: down about um. You know. Their peak earnings at Twitter

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Speaker 1: were in we think that their margins just here prop

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Speaker 1: margins will be close to zero. Um, this is a gift, right,

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Speaker 1: it just is a gift. And uh, we said take

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Speaker 1: the money and run. I've been saying that a lot,

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Speaker 1: because take the money and run because this is there's

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Speaker 1: no other bid coming after this. Michael, what do you

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Speaker 1: say bank to people who said, well, wait, wait, wait,

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Speaker 1: wait wait, they stock traded in the seventies twelve months ago,

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Speaker 1: why are we sent in this because that was a

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Speaker 1: bubble by John? You know, Netflix traded at seven was

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Speaker 1: a four hundred. You know, that was a bubble and

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Speaker 1: it made no sense then and this price makes no

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Speaker 1: sense now. There wasn't a bit Michael, Why then are

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Speaker 1: other investors on Wall Street getting involved with Elon Musk

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Speaker 1: at this price target? Because he's made money for everyone? Right, Um,

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Speaker 1: he's basically someone you want to bet on. And if

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Speaker 1: you're in the stock already, I want to you know,

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Speaker 1: if you can let a ride with Elon Musk? Why not? Right?

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Speaker 1: You know, basically he's not laid out his plans for

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Speaker 1: turnaround except for his views on on his free speech right,

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Speaker 1: So we don't know what he's gonna do on the

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Speaker 1: cost structure. You don't know who's going to bring it

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Speaker 1: in or run the company. Right, Betting on Elon Musk

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Speaker 1: has been a good bet for everyone, So why not

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Speaker 1: continue with that bet? Michael? Is this a media company

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Speaker 1: or is this going to be an advertising based revenue

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Speaker 1: structure similar to what we see in Facebook and others?

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Speaker 1: That really will be the driving factor that you believe

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Speaker 1: could make this a little bit more profitable. What's interesting,

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Speaker 1: it's like they never We've talked a lot about our

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Speaker 1: subscription model here, and I think there's this traction right

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Speaker 1: If I don't want the advertisements, if I want to

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Speaker 1: base select you know wow, pay attention to and get

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Speaker 1: news feed, you know, lives breaking stories from there's a

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Speaker 1: subscription model. Maybe you can have what you've seen in

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Speaker 1: media now you have an ad here, you have a

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Speaker 1: subscription to here. I would think at some point they

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Speaker 1: moved to that that would make sense to me. Michael.

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Speaker 1: You know, I know you've seen barbarians at the gate

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Speaker 1: fourteen times, and you know what it's like to be honest. Folks.

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Speaker 1: The fancy bankers, the smooth guys out in Menlo Park,

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Speaker 1: they all read Michael Nathans and cover to cover what

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Speaker 1: has changed in the last four to eight hours. When

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Speaker 1: we see Morgan Stanley and other legit bankers are involved

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Speaker 1: in this process, what does it mean when the barbarians

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Speaker 1: are ready to tweet? It means that there are not

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Speaker 1: a lot of great ideas right now on the banking side, right, Like,

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Speaker 1: this is a big idea. You help Elon Musk achieve

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Speaker 1: his goals, and then you tag along wherever he does next. Right,

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Speaker 1: maybe he'll buy some other assets, maybe he'll bring this

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Speaker 1: thing back. I don't mean to interrupt, but do they

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Speaker 1: get equity in a private institution? Is Mr Musk alluded

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Speaker 1: at a Ted talk? I would think you tag along, right, Tom, Like,

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Speaker 1: you know who would ever think that tests would be

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Speaker 1: worth what it is today and he'd be able to

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Speaker 1: achieve what he's done. John Ferrell, he's the only one

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Speaker 1: that got it right. I don't know about that, Michael.

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Speaker 1: I'm thinking about a future platform and whether advertisers want

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Speaker 1: to be a part of that. We know about this

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Speaker 1: increasingly progressive view of multinationals. Let's take side the Walt

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Speaker 1: Disney Company company that falls under your comfortage as they

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Speaker 1: shift to a more aggressive freedom of speech model at

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Speaker 1: Twitter under say Ela Musk, how do you think multinationals

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Speaker 1: will view that platform as maybe somewhere they want to advertise, John,

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Speaker 1: is a great question. I think it's a major, major problem. Um.

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Speaker 1: You know, we've been writing for the longest time, really

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Speaker 1: since two thousand sixteen, that social media has has major,

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Speaker 1: um content quality issues. Right, So if you pretty much

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Speaker 1: take away all the moderation that Twitter is put in,

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Speaker 1: the Facebook is put in, it's gonna it's gonna make

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Speaker 1: averagis as much less willing to participate. Right, They're not

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Speaker 1: going to want to be stuck in content that they

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Speaker 1: deem is uh, you know, is not quality or safe.

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Speaker 1: So I think it's a major problem. It's not going

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Speaker 1: to be the markets problem. Uh. And then they can

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Speaker 1: move to a subscription model, drop the advertising move there.

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Speaker 1: But John, that's a huge issue, and that's something that

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Speaker 1: Twitter has been trying to clean up. And it's a

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Speaker 1: risk to the modernization in you know, the next couple

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Speaker 1: of years, and that's what happens. So how may understands

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Speaker 1: you'll buy on Facebook meta platforms with everything we've just

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Speaker 1: talked about, because then reporting to this way, Yeah, Um,

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Speaker 1: it's been a tough place for us to be but Facebook.

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Speaker 1: Facebook has made their their business based on you know,

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Speaker 1: targeted performance based advertising. Even with all these Apple changes,

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Speaker 1: they still have really strong first party data on who

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Speaker 1: you are, Tom, Lisa. They're able to target you in

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Speaker 1: the way that Twitter has never been able to so

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Speaker 1: our beds in the long tail, long term opportunity that is,

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Speaker 1: you know, targeting advertising online, and Facebook has a dominant

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Speaker 1: position there right. And there's been a bit of a

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Speaker 1: headwind lately either from I d f A for Macro,

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Speaker 1: from from the movement too Reels. I feel really good

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Speaker 1: about it where Facebook is the next twelve months, but

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Speaker 1: they're in a different business which when they were Twitter

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Speaker 1: as Twitters all brand advertising. Michael You and Struck Montfit

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Speaker 1: have had a week to digest Netflix and the other

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Speaker 1: foolishness out there. If we're saying a true structural shift

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Speaker 1: in the streaming game, I think we've seen a true

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Speaker 1: structural shift in the investors willingness to pay five years

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Speaker 1: out for the streaming game. I think we've seen investors

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Speaker 1: realizing you can't pay for revenue multiles, I to pay

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Speaker 1: for earnings. And then in terms of the shift, you know,

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Speaker 1: you've asked me over and over time about like, is

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Speaker 1: this a good model where where's the top on spending?

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Speaker 1: Netflix is telling you that they can't spend as much

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Speaker 1: going forward, Right, that's an opportunity for others to catch

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Speaker 1: up to them, right, So it's really interesting. I would

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Speaker 1: argue that the people who have lagged behind now have

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Speaker 1: an open door to compete with Netflix on their own terms. Right.

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Speaker 1: That's advertising, its sports, it's more theatrical films. It's an opening.

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Speaker 1: It doesn't mean this is a great business for anyone,

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Speaker 1: but it means that the playing fields are gonna be

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Speaker 1: more level than people thought about it about a week ago.

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Speaker 1: Michael just fascinated stuff. Michael Nathan. Isn't there of Moffett Nathan.

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Speaker 1: So Michael, we appreciate your time. Buddy, as always ends

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Speaker 1: an RFIC joints now wondering where we're going the foundering

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Speaker 1: c Exanta data. He ends, I want to start with

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Speaker 1: something that did not develop last year, but it's developing now.

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Speaker 1: It's a weekly Chinese currency YenS. What's coming on there?

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Speaker 1: So when we analyze currencies, right, for for the major

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Speaker 1: currency pays, it's typically about relative monitory policy, but for

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Speaker 1: China is really abound the balance of payments. So there's

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Speaker 1: a number of important parts of bounds of payments in

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Speaker 1: China that are really shifting dramatically, and that's finally come

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Speaker 1: to the four here last week, and we're seeing for

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Speaker 1: for Chinese standards are very very dramatic. New I would

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Speaker 1: say this move is now the most dramatic we've seen,

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Speaker 1: not only since UH two thousand and twenty, I think

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Speaker 1: it's the it's the most dramatic since two thousand and

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Speaker 1: fifteen when we had that reevaluation that that drove everything,

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Speaker 1: and we can see the contagion globally is also in place,

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Speaker 1: not just a Chinese currency issue, it's a global issue.

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Speaker 1: Is there a policy response? Hence that you're given up

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Speaker 1: for your expecting So the Chinese currencies is heavily managed, right,

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Speaker 1: so they're not gonna just sit back and let it

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Speaker 1: do what it wants to. But it came from a

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Speaker 1: pretty strong level, right. Chinese currency has been very strong

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Speaker 1: in two thousand and twenty and two thousand twenty one,

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Speaker 1: so we're coming into this year at a at a

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Speaker 1: level that's pretty strong, and therefore I think they're still

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Speaker 1: pretty comfortable with allowing some degree of weakness perhaps towards

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Speaker 1: six eighty, and that's kind of the signals they're sending.

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Speaker 1: They're not doing anything on the fixing or on the

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Speaker 1: day to day intervention. We track intervention in very real time, right,

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Speaker 1: we're not seeing anything that suggests that just about to

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Speaker 1: stop it yet. So Yen's I'm wondering when you talked

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Speaker 1: about the global aspect of this sell off, I was

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Speaker 1: noticing that Kit Juke's actually sees a relationship to the

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Speaker 1: scene in y della depreciation and the euro depreciation versus

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Speaker 1: the dollar. Do you make that connection as well? Yeah,

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Speaker 1: I think. I think it's very often when when dollars

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Speaker 1: c and Y has a big move that drags a

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Speaker 1: lot of all the dollar crosses with it, including the

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Speaker 1: big ones, and your dollar is affected to it's it's

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Speaker 1: kind of ironic that you have the French election relief,

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Speaker 1: right and okay, is your dollar hi a low? It's

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Speaker 1: lower because actually the Chinese element of the story is

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Speaker 1: dominant on the day. So I think there is that

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Speaker 1: faction play here. Yans Off two thousand five in the

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Speaker 1: Great Chinese Appreciation, I think of Europe in a one

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Speaker 1: sixteen level is sort of the original benchmark, and maybe

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Speaker 1: that guide posts and all of European finance has Does

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Speaker 1: Beijing have a one sixteen like level? Is there is

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Speaker 1: like seven yu one? Is there a Is there a

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Speaker 1: psychological point for them? Yeah, I think we've seen it

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Speaker 1: during the trade war. Right above seven, they start to

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Speaker 1: get very uncomfortable, start to do things to stop it.

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Speaker 1: And that that's also why I think up until six eight,

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Speaker 1: I think they're not gonna be overly concerned. When we

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Speaker 1: get above their start to approach seven, I think would

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Speaker 1: be a different situation. But I think, as with everything

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Speaker 1: in markets this year, we have to be very careful, right.

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Speaker 1: All the cycnical dynamics we're seeing are pretty much unprecedented, right,

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Speaker 1: so we have to be careful about saying, okay, the

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Speaker 1: ranges we've seen the past are the ones that got

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Speaker 1: hold in the future as well. So I think up

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Speaker 1: until seven that there were certainly going to be even

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Speaker 1: within the old machine, going to be okay. But then

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Speaker 1: we have to think about, okay, if this is something

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Speaker 1: really new and what's going on and bouncing payments in

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Speaker 1: China is not something we've really seen before, so we

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Speaker 1: have to be open minded. It's just a fund of

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Speaker 1: question from US going forward from here, a lot of

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Speaker 1: people will want to read on Chinese growth. Perhaps they

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Speaker 1: want that not looking at the Chinese economics, actually find

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Speaker 1: the government. What do you look for to get a

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Speaker 1: pretty decent picture of what's happening there on the ground. Well,

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Speaker 1: so we we are very very focused on the mobility data. Right.

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Speaker 1: The COVID data is perhaps not let's call it easier

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Speaker 1: to interpret, but the mobile mobility data is pretty clean, right,

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Speaker 1: and we've seen just dramatic stuff and in Shanghai, and

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Speaker 1: that's now spreading around the country. Right, So suggest to

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Speaker 1: give you one example, right when we have these supply

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Speaker 1: chain issues like it puts a question mark around Chinese exports,

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Speaker 1: can they really continue to export that space at that

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Speaker 1: pace with with the economy in a in a rolling

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Speaker 1: lockdown situation, that's a big question marking a big uncertainty

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Speaker 1: for the global economy data. Yes, thank you, sir. An

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Speaker 1: indication of making it up as you go, particularly wrapped

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Speaker 1: around COVID, sobroto Jopp and knows that it's Society General

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Speaker 1: Head of US Road Strategy Bed picking it up as

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Speaker 1: they go, sobrat on a Monday morning, and I've called

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Speaker 1: it recalibrate Monday. Everybody's readjusting into the equity market, and

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Speaker 1: I would suggest your world always leads if I'm in

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Speaker 1: the equity markets. What's a single sentence I need to

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Speaker 1: read from sack Gen fixed income this morning. Well, the

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Speaker 1: fact that you know you have the FED, you know

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Speaker 1: next week is going to be really what drives you know,

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Speaker 1: market sentiment for a good portion of this week. Um.

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Speaker 1: You know, for the most part, the market is fully

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Speaker 1: priced in for a fifty basis point eight hike at

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Speaker 1: next week's at form C meeting. Um, So it's going

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Speaker 1: to be a little bit of an adjustment process with

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Speaker 1: all the news you're gonna get on like you mentioned

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Speaker 1: earlier China, as well as developments overseas with the elections

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Speaker 1: in in in France. So it's it's not a whole

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Speaker 1: lot of FED news per se that the market has

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Speaker 1: to adjust to. It has more to do with events

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Speaker 1: that are happening this week. As we're fully priced in

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Speaker 1: for what's what to expect from the Fed next week.

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Speaker 1: How do you think investors would internalize the potential rapid

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Speaker 1: slowdown in the Chinese economy, something perhaps we didn't expect

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Speaker 1: three or four months ago and maybe even a three

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Speaker 1: handle on Chinese GDP. How do you think that'll express

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Speaker 1: that in a treasury market with a federal reserve determined

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Speaker 1: to high interest rights. That's a very good question because

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Speaker 1: it's a very very difficult needle to thread for the

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Speaker 1: FED because on one hand they want to raise rates

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Speaker 1: to find inflation, but a slowdown in growth is going

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Speaker 1: to be very very impactful, especially a country like China.

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Speaker 1: If you're going to see a meaningful store around in

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Speaker 1: growth there, it's going to reverberate through the rest of

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Speaker 1: of the world. Yes, for the most part, the US

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Speaker 1: tends to be somewhat you know, isolated. I think the

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Speaker 1: impact is going to be much more felt in Europe.

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Speaker 1: But broadly speaking, I think that if there's a meaningful

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Speaker 1: store around and growth in in China, that's going to

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Speaker 1: be a concern for the US. And that's kind of

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Speaker 1: what is already in the price if you look at

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Speaker 1: the flatness of the curve of the markets, really concerned

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Speaker 1: about his tac clacier environment where the FED has to

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Speaker 1: raise rates and push front end yields higher, but but

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Speaker 1: that growth might ultimately falter, and that's really where you know,

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Speaker 1: the difficulty comes when you know, the FED starts to

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Speaker 1: think about adjusting Montreal policy. That's why I think that

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Speaker 1: they might raise rates you know, up to or close

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Speaker 1: to neutral, but it's going to be really hard to

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Speaker 1: to to go well beyond that. This year you use

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Speaker 1: the N word, what is neutral suba, Well, there are

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Speaker 1: the FEDS expectations of neutrals around maybe uh, you know,

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Speaker 1: two one a quarter or two and a half percent.

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Speaker 1: I think getting there by the end of the year

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Speaker 1: is going to be pretty challenging. They might be able

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Speaker 1: to you know, deliver fifty basis points rate HIGs in

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Speaker 1: the next you know, a couple of meetings, but beyond that,

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Speaker 1: really the trajectory for growth is what's going to dictate

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Speaker 1: the Fed's going to be able to continue to raise

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Speaker 1: rates aggressively, especially given the fact that they're going to

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Speaker 1: be unwinding the balance sheet quite aggressively as well. During

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Speaker 1: that time frame. It's about we're talking a lot about

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Speaker 1: the Asian currencies really losing value, and we're watching the

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Speaker 1: U N today not really gain back or Paris Millar's

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Speaker 1: declines even the face of further easing by the People's

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Speaker 1: Bank of China. We talked about the Japanese yend appreciating

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Speaker 1: and how that would influence treasury yields, that it could

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Speaker 1: lead to a lack of buyers from Japan into the

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Speaker 1: US market. How much is that an unintended consequence of

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Speaker 1: some of the currency moves, that you might get some

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Speaker 1: investors seeing more value at home on a currency adjusted

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Speaker 1: basis because of what we're seeing in the dollar. Well,

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Speaker 1: I think that that is an important consideration. I mean,

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Speaker 1: you know, throughout the course of this year, I would

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Speaker 1: say that treasuries have and look attractive to Japanese investors

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Speaker 1: in a concier adjusted basis. But what I'm more concerned

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Speaker 1: about is yoko control. I mean, you're sharying to see

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Speaker 1: the weakening of the yen, You're sharying to see the

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Speaker 1: market push back on yoko control. If Japan were to

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Speaker 1: you know, make any adjustments or or you know, sort

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Speaker 1: of step away from its easy montrey policies to hands

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Speaker 1: uh and then and if if long ng g B

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Speaker 1: you will start to rise in the back of that,

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Speaker 1: then that could be the catalyst for higher heels And

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Speaker 1: in the US it doesn't have to be necessarily kept

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Speaker 1: by demand coming from you know, from overseas accounts. But

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Speaker 1: if global bonnios continue to rise, that's going to push

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Speaker 1: tragis higher as well. Sobrit I did something this morning.

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Speaker 1: I can't remember the last time I did this, folks,

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Speaker 1: I believe I had no gray hair. I looked at

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Speaker 1: the Bloomberg Total Return index is sobrata over full. I

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Speaker 1: think credit credit, corporate credit rather in a high yield

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Speaker 1: and these are you know, bear market statistics. Does your

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Speaker 1: world understand there in a bond bear market? So it's

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Speaker 1: interesting that you bring that up because last week we

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Speaker 1: kind of sat down and looked at returns at a

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Speaker 1: variety of assets, not just bonds, you know, but you know,

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Speaker 1: I could also downtown percent bonds and you know your

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Speaker 1: to date, So in some respects you're looking at you know, investors.

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Speaker 1: You know, maybe the best trade to do for investors

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Speaker 1: is to move into cash because returns across the border

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Speaker 1: looking weak, not just in in bonds, but also in

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Speaker 1: in risky assets. So this is sort of a transitionary

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Speaker 1: phase to sort of figure out what the FED is

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Speaker 1: going to do, what where the market's going to settle in.

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Speaker 1: So so I think the Neil drum strategy should be

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Speaker 1: towards perhaps moving some of your holdings into into cash,

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Speaker 1: because you're going you're going to see negative returns across

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Speaker 1: the board in risky acids as well as in treasuries.

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Speaker 1: Savantra Jampa of Silk Gen Savantra A great time to

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Speaker 1: catch up with you this morning. Give him what's taking

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Speaker 1: place in China? What on earth does that make for

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Speaker 1: this treasury market with the Federal Reserve determined high interest

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Speaker 1: rates and Holland Horst will save its chief US economist

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Speaker 1: at City Group who turned American economics on its ear

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Speaker 1: with a call, there's a beverage curve and else there's

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Speaker 1: a Phillips curb and lse now see you this, he

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Speaker 1: acclaimed Holland hors curve, which is a certain number of

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Speaker 1: of interest rate increases. Where in the Holland Horse curve

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Speaker 1: does Mr Powell become restrictive? Yeah, great question, Tommy, and

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Speaker 1: thanks for having me on. I think that's what we're

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Speaker 1: seeing is beneficials trying to find where that restrictive point is. UM.

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Speaker 1: We've definitely had a very concerted pivot shift lean towards

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Speaker 1: the hawkish direction UM as inflation continues to run strong

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Speaker 1: and you're looking for a point where the economy slows down.

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Speaker 1: So we have mortgage rates that are significantly higher now

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Speaker 1: up above five percent on a thirty year fixed rate mortgage.

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Speaker 1: Maybe that's going to slow down the housing market. But

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Speaker 1: the jobs market, that's really where I would look at

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Speaker 1: the end of the day, still about two job openings

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Speaker 1: for every unemployed individual. UM, maybe needing a lot of

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Speaker 1: restriction to slow the economy down enough to kind of

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Speaker 1: take away that inflationary pressure. And to what's the dice

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Speaker 1: of point of the wait for you, the employment cost index, Absolutely,

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Speaker 1: employment costs index. I think this this was the data

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Speaker 1: point for Q four UM. If you remember UM back

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Speaker 1: at the end of last year, when share Powell looked

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Speaker 1: at the data, FED officials looked at the data, and

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Speaker 1: we started to have this concerted movement towards more hawker

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Speaker 1: Is rhetoric from FEDE officials, dots indicating the appropriate level

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Speaker 1: of policy rates that we're moving higher. It was that

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Speaker 1: broad based wage pressure, because that's the fundamental supply demand

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Speaker 1: imbalance in the economy right now. UM. If you have

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Speaker 1: a shortage of workers, you'll keep pushing up wages. If

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Speaker 1: wages keep pushing up, then you'll have this kind of

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Speaker 1: spiral of rising wages and rising prices which were in

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Speaker 1: the very early stages of now. So, so that's the

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Speaker 1: key number this Friday, Andrew. Where is the asymmetry of risk? Then?

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Speaker 1: Given that e C I the Employment cost index when

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Speaker 1: it comes out, is it that it will actually come

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Speaker 1: in hotter than expected or actually weaker than expected in

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Speaker 1: terms of how the FED or respond. Yeah, I think

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Speaker 1: that's right, Lisa, that it's really hotter than expected. Where

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Speaker 1: the risk lie? Um, if you look at some of

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Speaker 1: the underlying data, what's going on with wages on the

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Speaker 1: Atlanta Fed has what they call the wage Tracker, and

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Speaker 1: that controls for a bunch of characteristics of workers. Um

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Speaker 1: that is really picked up in recent months. Um. So

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Speaker 1: you're seeing this kind of broad based wage pressure, it

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Speaker 1: should come through in the employment cost And next we

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Speaker 1: get in the cost index is not just wages, but

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Speaker 1: also the benefits. And I think that's where maybe we're

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Speaker 1: seeing some of the increases around the edges where some

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Speaker 1: firms are reluctant to increase the wage rate but are

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Speaker 1: increasing other benefits. UM So all of those things creience

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Speaker 1: some upside risk the employment cost index, and that's of course,

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Speaker 1: risking more hawk is fed policy. So Andrew, I'm really

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Speaker 1: trying to get my head around this idea of peak hawkishness,

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Speaker 1: which a lot of people were talking about a couple

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Speaker 1: of weeks ago, and then it got even more peaky

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Speaker 1: and more hawkish the following week. I mean, can we

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Speaker 1: get to a point where we're talking about a Bill

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Speaker 1: Dudley ask four percent FED funds rate if the e

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Speaker 1: c I comes in as hot as you expect, or

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Speaker 1: as we start to see some of these other indicators

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Speaker 1: really support that view. Yeah, that's right at least. I mean,

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Speaker 1: if you look at where inflation is running now, it

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Speaker 1: wouldn't be that extreme to think the policy rates could

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Speaker 1: get upwards to something like four percent. In our forecast

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Speaker 1: we have been going above three and a half percent

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Speaker 1: next year. Now, the market is not fully pricing that yet,

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Speaker 1: and I think to your point, we need to see

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Speaker 1: more evidence and inflation continues to run strong. And the

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Speaker 1: other aspect is how much of financial conditions tighten. So

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Speaker 1: you know, we're talking about mortgage rates that have moved higher.

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Speaker 1: That's a tight ending of financial conditions. Equity prices that

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Speaker 1: are lower this morning, that's a tight ending of financial

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Speaker 1: conditions also UM, and that's what the FED kind of

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Speaker 1: has to figure out here is how far do you

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Speaker 1: need to push expectations of policy rates UM to get

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Speaker 1: financial conditions tight enough to slow down the economy? Andrew

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Speaker 1: how much will trade plan into this? I'm really quite

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Speaker 1: taken by the I m F world economic outlook of

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Speaker 1: global trade slowdown. How much will that pair off us

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Speaker 1: GDP and fold right into the FED discussion. So I

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Speaker 1: think there's a g d P component here. There's also

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Speaker 1: an inflation component and in the short run, we have

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Speaker 1: a lot of supply chain issues and that's impacting GDP.

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Speaker 1: We see that in auto sales for instance, that have

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Speaker 1: been weak. But if you think of the longer term implications,

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Speaker 1: if we have a movement away from globalization towards regionalization

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Speaker 1: UM towards rein shoring, essentially you're moving away from lower

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Speaker 1: costs of production technologies to higher costs of production technologies

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Speaker 1: almost by definition, because the reason that globalization occurred is

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Speaker 1: to find the low cost producer UM. So that kind

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Speaker 1: of global down shift down with disinflationary force from from

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Speaker 1: goods prices, that's not going to be there in the

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Speaker 1: same way. So are you suggesting we stand alone. I mean,

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Speaker 1: I'm calling it recalibrate Monday, And do we have to

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Speaker 1: recalibrate too? And new a loneness of the American economy.

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Speaker 1: I think trade will always be part of the economy.

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Speaker 1: I mean, it's not that there will be a kind

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Speaker 1: of full shift away from trade. But do we need

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Speaker 1: to recalibrate to a world where there's less diversity or

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Speaker 1: less global downward pressure on prices? I I think that

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Speaker 1: is the case. Andrey, market pricing has followed you. You've

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Speaker 1: not followed market pricing. And sometimes that's original, and that's

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Speaker 1: not snarky, that's just the truth. Often what happens is

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Speaker 1: you get strategists and economist market to market. Andrew, that's

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Speaker 1: not what you've done. You came out a month ago

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Speaker 1: and looks for four fifty basis point interest rate hikes

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Speaker 1: in a row, fifty after fifty, after fifty after fifty.

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Speaker 1: That was much A month later, it's consent to s Andrew,

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Speaker 1: and it's largely priced. Can you tell me what guided

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Speaker 1: you into that effort? One? And two? Why you're convinced

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Speaker 1: that this federal reserve will not only go to what

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Speaker 1: they think is neutral, that they'll go beyond there, because

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Speaker 1: for me, that's the debate right now. Many people doubt

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Speaker 1: they'll take that next step beyond neutral. They're looking at

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Speaker 1: the FED speak and looking for confusion. They're saying that

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Speaker 1: there's not much appetite to go much beyond that. So

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Speaker 1: tell me, one, what guided you to your big call

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Speaker 1: that's now consensus in two? What guide you to believe

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Speaker 1: that they will go beyond what they think is neutral? Yeah? Thanks, John, Well,

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Speaker 1: we always start with are the fundamentals, and so the

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Speaker 1: number one driver of that hawk is FED call was

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Speaker 1: what our call was on inflation. We saw persistent inflationary pressure.

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Speaker 1: We saw inflation that was going to continue to deliver

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Speaker 1: well above target. And the analysis there was, well, if

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Speaker 1: you have inflation that's delivering well above target and there's

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Speaker 1: nothing organic that's going to bring it down, I think

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Speaker 1: that's where we differed with some other forecasts that you know,

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Speaker 1: supply chains we're going to normalize, or there'd be enough

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Speaker 1: of an increasing labor supply. We saw nothing organic in

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Speaker 1: the economy that was going to bring down inflation. So

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Speaker 1: that means that the FED that needs to fight inflation.

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Speaker 1: And then you go to number two, which is the

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Speaker 1: need to get interest rates to at least neutral, if

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Speaker 1: not above neutral. And if you're trying to get to

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Speaker 1: at least neutral if not above, well, the kind of

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Speaker 1: minimal neutral estimate out there is two to two and

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Speaker 1: a half percent UM for fifty basis point ray hikes

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Speaker 1: is only going to get you to that area. So

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Speaker 1: even if you thought the Fed didn't need to go

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Speaker 1: beyond neutral, and we think that they will UM for

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Speaker 1: fifty basis point rate hikes made a lot of sense

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Speaker 1: on that topic of do they need to go beyond neutral?

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Speaker 1: It goes back to inflation. Are we going to see

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Speaker 1: inflation slowed down enough? And that's you know, goes back

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Speaker 1: to the earlier conversation around the e c I. If

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Speaker 1: the e c I continues to be strong, um we

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Speaker 1: see employment costs that are rising, that inflationary pressure will

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Speaker 1: only be brought down by putting some restraint on the economy,

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Speaker 1: which means interest rates above neutral. At the moment, though,

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Speaker 1: they don't have to choose between growth and inflation because

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Speaker 1: growth is robust Andrew, there are people teeing up a

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Speaker 1: decision at the end of this year into next year

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Speaker 1: where they will have to make that choice. A choice

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Speaker 1: between supporting growth or smacking inflation. You think that when

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Speaker 1: they have to make that choice, they'll keep going at

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Speaker 1: the inflation side of the mandate. Now, Andrew, I wonder

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Speaker 1: what's guiding you towards that, because some people have their

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Speaker 1: doubts still that when the choice comes, push comes to shove.

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Speaker 1: A lot of people believe they'll just tolerate higher inflation

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Speaker 1: and support decelerate growth. Why do you type to get

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Speaker 1: a side right? So first, I agree with the idea

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Speaker 1: that that choice is going to get a lot harder

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Speaker 1: as we get towards the end of this year. There

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Speaker 1: may be a real trade off between growth and between inflation.

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Speaker 1: Um and I do think that the emphasis will continue

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Speaker 1: to be on bringing inflation lower. I think carefully, I

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Speaker 1: think cautiously. I think certainly FED officials are trying to

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Speaker 1: achieve the best version of something that looks like a

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Speaker 1: soft landing that they can. But at the end of

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Speaker 1: the day, this is an economy. This is a country

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Speaker 1: that experienced the nineteen seventies, and if you are a

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Speaker 1: FED official right now, I think the risk that you

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Speaker 1: are protecting against is a repeat of the nineteen seventies.

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Speaker 1: And what happened in the nineteen seventies was concern about growth,

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Speaker 1: which led to not enough concern about inflation and a

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Speaker 1: decade plus overshoot that became very difficult to bring down

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Speaker 1: and ultimately a worre scenario for growth. It involved multiple

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Speaker 1: recessions basically to bring inflation back down. So I think

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Speaker 1: that's what the FED is protecting against, and I think

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Speaker 1: that's why they stayed focused on inflation and to follow

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Speaker 1: your research you and the team over the last few

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Speaker 1: months just fantastic as the world has moved much closer,

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Speaker 1: much much closer to you. Sir Andrew Hollind, host of

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Speaker 1: City Andrew. Thank you, buddy. This is the Bloomberg Surveillance Podcast.

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Speaker 1: Thanks for listening. Join us live weekdays from seven to

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00:27:15,680 --> 00:27:19,720
Speaker 1: ten am Eastern. I'm Bloomberg Radio and on Bloomberg Television

519
00:27:20,119 --> 00:27:24,080
Speaker 1: each day from six to nine am for insight from

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00:27:24,119 --> 00:27:28,639
Speaker 1: the best in economics, finance, investment, and international relations. And

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00:27:28,800 --> 00:27:33,920
Speaker 1: subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg

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00:27:33,960 --> 00:27:37,280
Speaker 1: dot com, and of course on the terminal. I'm Tom

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Speaker 1: Keene and this is Bloomberg