WEBVTT - Surveillance: Oil Feedback Loop with Currie 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.800 --> 0:00:23.840 To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:29.680 and of course on the Bloomberg terminal. Right now, the 0:00:29.720 --> 0:00:33.400 micro economists from the University of Chicago. Jeffrey Curry holds 0:00:33.400 --> 0:00:36.360 court at Golden Sachs's Global head of Commodity Research. Jeff 0:00:36.400 --> 0:00:38.600 love your note where you really go into the price 0:00:38.680 --> 0:00:42.040 theory off the dollar of your commodity space. You have 0:00:42.200 --> 0:00:45.360 something that I would suggest one of our listeners and 0:00:45.440 --> 0:00:50.599 viewers don't understand commodities year to date in Japan up 0:00:50.640 --> 0:00:55.920 fifty year to date in the United States. Up. The 0:00:56.000 --> 0:00:59.960 dollar matters, doesn't it absolutely. That's why we titled the 0:01:00.040 --> 0:01:04.640 piece of Dollar dominance UM. And the main point there 0:01:04.920 --> 0:01:09.000 is as the US hikes interest rates faster than the 0:01:09.040 --> 0:01:12.240 rest of the world, you get a divergence in global 0:01:12.280 --> 0:01:16.440 interest rates UM, which then in turns puts upward pressure 0:01:16.480 --> 0:01:20.680 on the dollar. So funding costs in dollar increase and 0:01:20.680 --> 0:01:25.640 then people d leverage dollar denominated assets in commodities are one. 0:01:25.680 --> 0:01:28.520 I don't care if it's a financially held one or 0:01:28.760 --> 0:01:32.520 a physically held one. You'd rather liquidate that and hold 0:01:32.600 --> 0:01:36.120 cash paying five percent, then take the risk of that. 0:01:36.440 --> 0:01:41.400 And then what happens, deflation sets in and dollar denominated assets. 0:01:41.440 --> 0:01:46.759 That deflation then increases real US incomes, which then puts 0:01:46.760 --> 0:01:49.840 more upward pressure on interest rates, and so it's at 0:01:50.320 --> 0:01:54.600 US negative feedback loop. Take us to supply and demand then, 0:01:54.640 --> 0:01:56.360 and I guess we could go to the next OPEC 0:01:56.400 --> 0:01:59.559 meeting if we really wanted to. But do you throw 0:02:00.560 --> 0:02:05.120 general equilibrium study of oil out the window because of 0:02:05.160 --> 0:02:11.040 this excess dollar move? Really good question, and I keeps 0:02:11.080 --> 0:02:13.680 me up at night. And here's the way I'm thinking 0:02:13.720 --> 0:02:18.040 about it is, let's go to the definition of UM 0:02:18.200 --> 0:02:23.520 inflation too much money chasing too few goods. You have 0:02:23.600 --> 0:02:26.680 two conditions to get inflation, too much money and too 0:02:26.720 --> 0:02:30.560 few goods. We still have too few goods. The oil 0:02:30.639 --> 0:02:33.800 market is in a deficit. Inventories are low. But what's 0:02:33.800 --> 0:02:37.840 happening money supply is shrinking, and so that's taking the 0:02:37.880 --> 0:02:40.960 price level and driving it down even though you still 0:02:41.000 --> 0:02:43.400 have too few goods. So you know, we look at 0:02:43.400 --> 0:02:46.720 the fundamental picture our base cases, it's going to continue 0:02:46.720 --> 0:02:49.280 to tighten as we go into year in and particularly 0:02:49.320 --> 0:02:53.200 you take out the spr barrels. Um, you get stabilization 0:02:53.560 --> 0:02:57.760 in in China, oil, the gas substitution in Europe. Um, 0:02:57.840 --> 0:03:00.079 this market is gonna get tighter and tighter as we 0:03:00.160 --> 0:03:03.560 go into the winter months. Um. So if we we 0:03:03.639 --> 0:03:07.000 need to see some stability in money supply or in 0:03:07.040 --> 0:03:10.360 the dollar in terms of thinking about that liquidity issue, 0:03:10.560 --> 0:03:13.400 then those fundamentals can press higher. But I think right 0:03:13.400 --> 0:03:16.480 now you need to really separate what's happening on the 0:03:16.520 --> 0:03:19.919 money supply side and what's happening on the fundamental supply 0:03:19.960 --> 0:03:22.320 and demand side. One aspect of the story, Jeff that's 0:03:22.320 --> 0:03:24.960 gotten a bit lost in the recent turmoil turmoil and 0:03:25.000 --> 0:03:29.520 worry about a recession is possible capacity to produce. And 0:03:29.560 --> 0:03:32.080 there was a story out today talking about how OPEC 0:03:32.440 --> 0:03:36.880 plus may actually cut its production at its next meeting. 0:03:37.280 --> 0:03:39.960 How much do you expect something like that, not necessarily 0:03:39.960 --> 0:03:42.800 in response to the price going down, but in response 0:03:43.000 --> 0:03:46.760 to a lack of capacity to continue to produce at 0:03:46.840 --> 0:03:50.600 levels that they're doing now. Well, I mean, if their 0:03:50.720 --> 0:03:54.440 data dependent, if they're going to cut production. They're doing 0:03:54.480 --> 0:03:56.520 it because they look at the market being in a 0:03:56.600 --> 0:03:58.760 surplus and that's what made sense. But in terms of 0:03:58.800 --> 0:04:04.240 thinking about the overall capacity, that should affect longer term prices, 0:04:04.240 --> 0:04:06.960 which is one of the reason why we're bullish long 0:04:07.080 --> 0:04:10.040 dated long term oil prices. If we can, you're out 0:04:10.040 --> 0:04:13.760 of capacity, which means you have to forward invest, and 0:04:13.920 --> 0:04:17.520 ultimately that's what you know can solve this problem. But 0:04:17.600 --> 0:04:21.400 to attract that capital, you need higher long dated prices, 0:04:21.600 --> 0:04:25.119 which is why in our note we recognated recommended going 0:04:25.240 --> 0:04:28.440 long long dated oil for precisely that reason. What about 0:04:28.480 --> 0:04:30.279 natural gas? And I know it's a hard pivot because 0:04:30.279 --> 0:04:32.599 it's a different asset class, but we're seeing a bit 0:04:32.680 --> 0:04:36.120 of overlap here as Europe faces a winter of discontent 0:04:36.120 --> 0:04:39.000 where they're flat on their back. Where is the extra 0:04:39.080 --> 0:04:42.200 margin of supply going to come from for Europe at 0:04:42.200 --> 0:04:44.120 a time when the US is exporting more than it 0:04:44.120 --> 0:04:48.280 ever has and it's facing some constraints with production there. Well, 0:04:48.320 --> 0:04:51.480 I think the answer to that is, look, domestically, you're 0:04:51.520 --> 0:04:55.440 gonna get it through weaker demand. You know, we're barished 0:04:55.680 --> 0:04:59.240 European natural gas going into January and February and see 0:04:59.279 --> 0:05:03.000 it trading blow a hundred euros per megawatt hour. Why, 0:05:03.040 --> 0:05:05.159 I like to point out, no one ever gets hit 0:05:05.279 --> 0:05:08.080 by the train they see coming in the sense that 0:05:08.360 --> 0:05:12.280 you know, the disruption happened in August, so you were 0:05:12.320 --> 0:05:16.640 able to make adjustments by reducing demand, industrial demand, destruction, 0:05:17.080 --> 0:05:21.040 making substitution into two other fuels. Um. So we believe, 0:05:21.360 --> 0:05:24.440 you know, barring an absolutely freezing cold winner, they're gonna 0:05:24.520 --> 0:05:27.159 get through this winner. Prices are going to moderate. But 0:05:27.360 --> 0:05:30.880 longer term you have a problem. To get to your point, Um, 0:05:30.920 --> 0:05:33.520 you know, you have to, you know, come up with supplies, 0:05:33.520 --> 0:05:37.000 whether it's through exports of l en G or domestic 0:05:37.080 --> 0:05:40.600 investment or substitution in other fuel. So longer term you've 0:05:40.640 --> 0:05:43.240 got a problem in yourype. Jeffrey, unfair question, but it's 0:05:43.320 --> 0:05:46.920 unfair Thursday, What is the optimal price of a barrel 0:05:46.960 --> 0:05:50.880 of oil for OPEC? Well, if you look at where 0:05:50.880 --> 0:05:54.120 where the equilibrium price should be, um, you know it 0:05:54.200 --> 0:05:58.880 should be somewhere in that dollars a barrel. Um. Given 0:05:58.920 --> 0:06:01.560 the fact that that's we're probably the cost structure in 0:06:01.560 --> 0:06:03.040 the U S. Why don't we know it's got to 0:06:03.120 --> 0:06:07.400 be somewhere in that vicinity because riggs were rising when 0:06:07.400 --> 0:06:09.480 we were above a hundred, and since we've been now 0:06:09.760 --> 0:06:13.040 below that hundred ninety US call it around a hundred. 0:06:13.320 --> 0:06:15.320 Rick counts in the US are coming off. They've been 0:06:15.320 --> 0:06:19.360 they're off about riggs over the last three to four weeks, 0:06:19.520 --> 0:06:21.760 which is telling you're getting down in these levels. You're 0:06:21.760 --> 0:06:25.520 now below the equilibrium price. So somewhere in that, say, 0:06:25.640 --> 0:06:28.080 ninety five hundred dollars of arrel seems to be where 0:06:28.080 --> 0:06:31.159 the markets functioning UM. And we also look at you know, 0:06:31.200 --> 0:06:33.520 that's where our price target is in four que a 0:06:33.600 --> 0:06:36.760 hundred dollars about UM. And you know, the potential for 0:06:36.880 --> 0:06:39.640 upside around that I think is substantial. Going back to 0:06:39.680 --> 0:06:42.680 the point that, uh, you know, we're out of spare capacity. 0:06:43.080 --> 0:06:45.359 Jeff wantedful to hear from you. It's been too long, Jeff, 0:06:45.360 --> 0:06:48.800 carry that of Thank you, buddy, wonderful us a white 0:06:48.880 --> 0:07:02.080 thank you very much. Our team is committed to bringing 0:07:02.120 --> 0:07:05.960 you voices within this crisis. And there's none on policy 0:07:06.120 --> 0:07:09.960 and economics more competent in this world than Michael Spence, 0:07:10.280 --> 0:07:13.840 the Laureate of Stanford, New York University and of course 0:07:13.920 --> 0:07:18.680 chairman of General Antics Global Growth Institute Professor Spence, thank 0:07:18.720 --> 0:07:20.760 you so much for joining us this morning. I want 0:07:20.800 --> 0:07:23.760 to go to another time and place in your ute, 0:07:23.760 --> 0:07:26.800 when you were studying with John Hicks long ago. Let 0:07:26.920 --> 0:07:31.360 us go, folks to nineteen eight one and William Grider's 0:07:31.600 --> 0:07:36.240 classic The Atlantic Essay on a very young David Stockman. 0:07:36.880 --> 0:07:40.720 The whole thing is premised on faith. The inflation premium 0:07:40.720 --> 0:07:44.360 melts away like the morning missed a great battle over 0:07:44.400 --> 0:07:49.880 the conventional theories of economic performance. David Stockman in the 0:07:49.960 --> 0:07:54.679 middle of reconomics. Michael Spence, the tumult of the last 0:07:54.720 --> 0:08:01.800 forty eight hours seems like a Reaganomics redux, is it? 0:08:01.800 --> 0:08:03.680 It looks like it, Tom, But I don't I actually 0:08:03.720 --> 0:08:07.480 don't think it is so both Um, Ronald Reagan and 0:08:07.520 --> 0:08:11.160 Margaret Thatcher. We're dealing with a situation in which you 0:08:11.200 --> 0:08:15.800 had embed inflation uh, but also you know, uh kind 0:08:15.800 --> 0:08:20.000 of stagflation pattern, low growth, and they were basically trying 0:08:20.000 --> 0:08:24.640 to remove the constraints and obstacles to higher rates of growth. 0:08:24.720 --> 0:08:28.640 That that meant cutting back government uh and cutting back 0:08:28.800 --> 0:08:32.559 you know, unfortunate and dysfunctional regulation. I think this is 0:08:32.600 --> 0:08:36.400 a completely different situation we've lived in the you know, 0:08:36.520 --> 0:08:39.720 liberated economics world for a long time, and we're actually 0:08:39.760 --> 0:08:43.560 going in different directions. So uh, you know, I mean, 0:08:44.080 --> 0:08:47.439 policies are always context specific, but but I don't think 0:08:47.480 --> 0:08:50.120 this is an analogous to that situation. So then what 0:08:50.360 --> 0:08:54.320 situation is this? What is the policy prescription for the 0:08:54.400 --> 0:08:57.720 United Kingdom are quite frankly China or any others? What 0:08:57.880 --> 0:09:04.040 is the new Spence prescription? Well, it starts with recognizing that, 0:09:04.240 --> 0:09:06.920 you know, for a whole variety of reasons, we we 0:09:07.000 --> 0:09:11.400 have quite suddenly shifted into a supply constrained world. So 0:09:11.600 --> 0:09:14.719 you know, growth strategies based on expanding demand don't make 0:09:14.760 --> 0:09:17.200 any sense. I mean, I think that's the core of 0:09:17.240 --> 0:09:19.800 the mistake that's been made in the UK. You just 0:09:19.840 --> 0:09:23.680 don't cut taxes if the supply side can't respond, especially 0:09:23.679 --> 0:09:27.160 if you're fighting in the central Bank who's trying to 0:09:27.200 --> 0:09:31.000 get you know, nearly out of control inflation back under control. 0:09:31.760 --> 0:09:33.680 And then at that, you know, I see, I think 0:09:33.679 --> 0:09:35.320 you have to face the fact that in the short 0:09:35.400 --> 0:09:38.840 run we don't have any choice the supply side agenda 0:09:38.880 --> 0:09:42.240 that we really need, you know, reversing the productivity trends 0:09:42.320 --> 0:09:44.679 isn't gonna happen. Overnight. So the central banks, who are 0:09:45.400 --> 0:09:47.760 a little late to the game but in an awkward position, 0:09:47.840 --> 0:09:50.240 just have to, you know, deal with the inflation thing 0:09:50.280 --> 0:09:52.720 by trimming back the demand side as best they can 0:09:53.520 --> 0:09:56.840 and as delicately as they can um. But then the 0:09:56.840 --> 0:09:59.480 rest of the agenda should be focused on real supply 0:09:59.559 --> 0:10:03.040 side can straints, both domestic and global um and there 0:10:03.040 --> 0:10:06.520 are a lot of them, aging populations, you know, fading, 0:10:06.960 --> 0:10:12.440 deflationary pressures from the emerging economies, UH diversification and global 0:10:12.480 --> 0:10:15.840 supply chains, the energy transition in Europe. I mean, the 0:10:15.880 --> 0:10:17.680 list is very long, and I won't bore you with 0:10:17.720 --> 0:10:21.680 the whole thing, but but you know, that's the situation 0:10:21.720 --> 0:10:24.320 that we have to bottom line is we need a 0:10:24.320 --> 0:10:29.040 productivity search without that or to get there. There is 0:10:29.040 --> 0:10:32.040 also an issue with how do you fiscally arrange a 0:10:32.120 --> 0:10:36.679 situation where deficits are not easy to finance anymore? How 0:10:36.800 --> 0:10:40.040 concerned are you about the inability of a lot of 0:10:40.120 --> 0:10:44.360 nations to finance some of the developments required to increase productivity, 0:10:44.440 --> 0:10:48.040 required to increase growth in the face of inflation that 0:10:48.160 --> 0:10:52.800 is persistent. I'm very worried. I mean, you know, one 0:10:52.840 --> 0:10:55.680 of the one of the other sort of constraints that 0:10:55.440 --> 0:10:59.440 that you talked about before, Lisa was a rising levels 0:10:59.480 --> 0:11:01.760 of some and debt, you know, and in a rising 0:11:01.800 --> 0:11:06.120 inflationary environment. You know that that that on in many countries, 0:11:06.160 --> 0:11:09.679 maybe the United States is uniquely an exception. Um places 0:11:09.720 --> 0:11:13.719 fairly superior constraints on the kinds of investments that form 0:11:13.760 --> 0:11:16.800 a portion of you know, sensible growth strategies, you know, 0:11:16.840 --> 0:11:20.280 supply side oriented growth strategies of the type that we 0:11:20.400 --> 0:11:22.559 you know, the bills we passed recently in the US. 0:11:22.679 --> 0:11:27.840 So I think that's, ah, you know, essentially a reason 0:11:27.920 --> 0:11:29.800 why why we may not be able to dig our 0:11:29.840 --> 0:11:31.839 way out of this whole. All that pass well to 0:11:31.880 --> 0:11:34.800 your writing, recent writings on investment, sir, And I'm going 0:11:34.840 --> 0:11:38.160 to assume that Chad Jones Berkeley to Stanford was a 0:11:38.240 --> 0:11:42.440 Michael Spence disciple. He's got the definitive book on post 0:11:42.480 --> 0:11:46.400 solo productivity. And that's all great. But the answer is 0:11:46.440 --> 0:11:52.600 we need capital deepening. How do we do that? Well, 0:11:52.679 --> 0:11:55.800 I mean, you you make sensible choices. So the first 0:11:55.800 --> 0:11:59.360 thing you do is you don't do is cut revenues, right, 0:11:59.800 --> 0:12:02.120 I mean, you know, if we're going to get out 0:12:02.120 --> 0:12:03.760 of this, we all have to pay a price. The 0:12:03.800 --> 0:12:07.840 politicians have a tough job convincing people, that's right. But basically, 0:12:08.400 --> 0:12:10.760 you know, we have to finance the investments we need 0:12:10.800 --> 0:12:14.320 to get out of this and that means probably um 0:12:14.360 --> 0:12:17.839 some at least holding fast on the tax situation, if 0:12:17.840 --> 0:12:21.079 not increasing them. Michael Spence, thank you so much in 0:12:21.160 --> 0:12:24.400 honor to have you with us today from always Stanford 0:12:24.400 --> 0:12:27.720 and New York University in great Atlantic as well coming 0:12:27.760 --> 0:12:34.160 to us from Italy at today right now, and this 0:12:34.240 --> 0:12:36.080 is a joy as we continue to bring in to 0:12:36.160 --> 0:12:39.520 gather in people. As John mentioned, Dr el Arian YenS 0:12:39.640 --> 0:12:42.360 Nordvig with us yesterday. I thought Allen Ruskin was wonderful 0:12:42.800 --> 0:12:46.160 with Deutsche Bank. Right now, Carl Weinberg, chief economist high 0:12:46.160 --> 0:12:49.280 frequency economics and far more out of the Lawrence Klein 0:12:49.360 --> 0:12:53.480 wing of the University of Pennsylvania with real world work 0:12:54.200 --> 0:12:58.080 in the rooms. Is these things get worked out? Carl, 0:12:58.200 --> 0:13:02.319 you nailed at this morning by saying, look, it's liquidation 0:13:02.440 --> 0:13:07.520 of bonds for cash. How will politicians respond to the 0:13:07.600 --> 0:13:12.880 threat of liquidation of bonds for cash? Well? I think 0:13:13.040 --> 0:13:14.840 good morning, Tom, thank you. I'll try to live up 0:13:14.880 --> 0:13:17.880 to your introduction. Um, you know what the government can do, 0:13:18.040 --> 0:13:20.840 is the government can give people a better reason to 0:13:20.880 --> 0:13:24.679 hold bonds, a prospect for thinking that inflation will come 0:13:24.720 --> 0:13:27.160 down and that will bring down bond yields, a prospect 0:13:27.160 --> 0:13:30.199 for thinking that the public finances are stabilized that will 0:13:30.240 --> 0:13:34.040 bring down bond yields. Prospect for thinking that once inflation 0:13:34.080 --> 0:13:36.480 is under control and growth will be able to resume, 0:13:36.760 --> 0:13:39.199 that will bring down bond yields. But right now we're 0:13:39.200 --> 0:13:41.760 not getting any of that in the UK um at 0:13:41.800 --> 0:13:44.080 least not in the judgment of the markets as we're 0:13:44.080 --> 0:13:48.080 plainly seeing. And whether it's right, wrong, good, bad politics, 0:13:48.320 --> 0:13:51.320 it nonetheless seems to be the market's reading it as 0:13:51.360 --> 0:13:54.040 bad economics. And how much is the Bank of England's 0:13:54.040 --> 0:13:56.319 response kind of the playbook for a lot of central 0:13:56.320 --> 0:13:59.559 banks going forward in terms of both hiking rates, keeping 0:13:59.559 --> 0:14:03.680 the front and high and buying bonds to basically monetize 0:14:03.679 --> 0:14:07.640 a fiscal response, to monetize what the policymakers and government 0:14:07.679 --> 0:14:12.200 are going to be doing without completely upending the economy. Hi, 0:14:12.320 --> 0:14:15.240 good morning, Lisa. That's that's all the right questions and 0:14:15.679 --> 0:14:17.760 it's hard to know what the answers are. The Bank 0:14:17.800 --> 0:14:20.520 of England has done a good job of convincing everybody 0:14:20.680 --> 0:14:23.560 that inflation is rampant, and whether I agree with that 0:14:23.760 --> 0:14:26.320 or not, or that's what the market believes and that's 0:14:26.320 --> 0:14:29.800 what the market expects. So having convinced the public, having 0:14:29.840 --> 0:14:32.760 generated expectations in the public that there is a true 0:14:32.760 --> 0:14:35.080 inflation problem and that the right answer to that is 0:14:35.160 --> 0:14:38.040 hiking rates, the Bank of England really has no choice 0:14:38.040 --> 0:14:41.160 but to continue to deliver the remedy for the problem 0:14:41.200 --> 0:14:44.160 that it's defined and continue to raise interest rates. And 0:14:44.160 --> 0:14:46.040 it's going to have to raise that by a lot. 0:14:46.360 --> 0:14:49.000 If you look at their own inflation forecasts, which again 0:14:49.240 --> 0:14:52.680 they aim to convince us are accurate forecasts. Right, real 0:14:52.720 --> 0:14:56.960 interest rates are nowhere near real positive alright, let alone 0:14:57.160 --> 0:15:00.080 high enough to break the economy. And now add to 0:15:00.160 --> 0:15:02.720 it the fiscal stimulus they have to in order to 0:15:02.800 --> 0:15:06.040 deliver the promise, in order to play out the scene 0:15:06.080 --> 0:15:08.520 that they have set, they have to deliver much higher 0:15:08.560 --> 0:15:11.000 interest rates and it won't be until they do. I 0:15:11.040 --> 0:15:13.720 think that the market will find the equilibrium price. Carl, 0:15:13.760 --> 0:15:18.800 Have we reached the limits of deficit financing? Well, certainly 0:15:18.840 --> 0:15:21.280 in the case of the UK, we have to say 0:15:21.320 --> 0:15:25.000 that the market isn't buying what the government is selling 0:15:25.240 --> 0:15:27.720 in terms of the amount of debt that it believes 0:15:27.760 --> 0:15:30.120 it can finance at this time. You know, in the 0:15:30.200 --> 0:15:32.520 longer term, you know, we're all dead, of course, but 0:15:32.600 --> 0:15:34.960 in the longer term we can probably borrow a lot 0:15:34.960 --> 0:15:37.480 more than we are right now. But to amp up 0:15:37.480 --> 0:15:42.280 the game at such a rapid pace under these current circumstances, 0:15:42.440 --> 0:15:45.200 which is to say, an opposition to the stated policy 0:15:45.200 --> 0:15:47.840 goals of the Central Bank, ignoring if you will, the 0:15:47.880 --> 0:15:50.520 advice of the Central Bank governor and his committee and 0:15:50.600 --> 0:15:53.920 his economists and his analysis, all right, and going ahead 0:15:53.920 --> 0:15:56.840 and ramping up spending anyhow, that seems to be a 0:15:56.880 --> 0:16:01.400 movement pushed beyond credibility. Carlinberks have NBO and of course 0:16:01.480 --> 0:16:04.880 Daniel Jurgen wrote this up beautifully and commanding heights. You 0:16:04.960 --> 0:16:07.800 are at the Bank of Montreal doing debt workouts on 0:16:07.880 --> 0:16:12.720 disasters in Latin America. What does trust anomics to look like? 0:16:13.160 --> 0:16:15.440 How do they get from what everybody believes as a 0:16:15.560 --> 0:16:19.320 theoretical train wreck to whatever the outcome is. How do 0:16:19.400 --> 0:16:22.000 you get the reaganomics too? How do you get the 0:16:22.040 --> 0:16:26.200 trusts snomics too? Well, Thomas, I'm sure you've mentioned many 0:16:26.240 --> 0:16:29.080 times over the last couple of days. The Reagan administration 0:16:29.120 --> 0:16:32.960 cut taxes like mad and ran up the federal deficit 0:16:33.040 --> 0:16:36.600 like mad in the early days of its administration. By 0:16:36.600 --> 0:16:38.440 the time we got to the end, they were raising 0:16:38.480 --> 0:16:41.400 taxes to pay for it, and all of the promises 0:16:41.480 --> 0:16:45.120 of supply side economics and voodoo economics or whatever you 0:16:45.200 --> 0:16:47.760 chose to call it didn't seem to work out. So 0:16:48.160 --> 0:16:50.400 I suspect that someday there will be a day of 0:16:50.400 --> 0:16:52.760 reckoning in the UK where they will have to unwant 0:16:52.840 --> 0:16:55.080 some of this. But it's pretty clear from the Prime 0:16:55.120 --> 0:16:57.680 Minister's statement that that's not going to happen this week, 0:16:57.760 --> 0:17:00.920 or next week or the month even after. Okay, I'm 0:17:00.920 --> 0:17:03.680 gonna we gotta continue this. John Farrell jump in here. 0:17:03.720 --> 0:17:06.000 You're the guy from Britain as well. What does the 0:17:07.119 --> 0:17:10.600 committee do under your odd government in Britain? Within the 0:17:10.680 --> 0:17:12.920 market is going to dictate that some potentially over the 0:17:13.000 --> 0:17:15.640 next few weeks, And Carla is right for the next 0:17:15.680 --> 0:17:17.880 few weeks at least. I think a lot of people 0:17:17.880 --> 0:17:20.080 don't see list trust changing our mind at the moment, 0:17:20.200 --> 0:17:23.160 Carl This operation from the Bank aving that goes until 0:17:23.160 --> 0:17:25.880 the middle of October. The concept we're all talking about now, 0:17:25.920 --> 0:17:30.080 Carla's fiscal dominance. Walk us through that concept. Carlin, how 0:17:30.119 --> 0:17:32.240 well do you think this Bank of England can push 0:17:32.240 --> 0:17:35.719 back against it? Well, the Bank of England, John, as 0:17:35.760 --> 0:17:38.600 you know, has unlimited resources. It can raise interest rates 0:17:38.600 --> 0:17:40.840 to a million percent if it wants to to achieve 0:17:40.880 --> 0:17:43.520 its goals. It's said what it wants to do, it's 0:17:43.560 --> 0:17:45.960 said how it's going to do it, and I don't 0:17:46.000 --> 0:17:49.720 think it can or will back down. M On terms 0:17:49.760 --> 0:17:52.959 of the government, the government has limited fiscal resources. If 0:17:53.000 --> 0:17:55.439 it gets into a battle with the Bank of England 0:17:55.480 --> 0:17:58.399 over whether the economy should be stimulated or not not, 0:17:58.600 --> 0:18:01.160 the Bank of England will win. It's a question at 0:18:01.160 --> 0:18:03.800 what interest rate do we have to get there? The risk, 0:18:04.040 --> 0:18:06.480 the big risk, and John, I know you're conscious of this, 0:18:06.680 --> 0:18:08.760 very much more so than I am, is that the 0:18:08.800 --> 0:18:10.840 government gets fed up with the Bank of England and 0:18:10.920 --> 0:18:14.880 starts to restrict its independence. On that day Sterling will 0:18:14.920 --> 0:18:17.520 go down the tubes and on that day go yields 0:18:17.520 --> 0:18:20.119 wolf story levels that I dare not even contemplate. And 0:18:20.160 --> 0:18:22.720 there was a whisper of that in August, and they 0:18:22.720 --> 0:18:24.679 tried to address it as soon as they took out 0:18:24.680 --> 0:18:27.400 of account. Fantastic to hear from me, said as always Kyle, 0:18:27.440 --> 0:18:40.439 wind back. There of high frequency economics right now and 0:18:40.480 --> 0:18:43.280 this is a huge joy to know. The team that 0:18:43.400 --> 0:18:47.000 Neil Sauce of Credit Sweez put together decades ago at 0:18:47.040 --> 0:18:51.159 Credit Suietz included the giant dominic constom now over at 0:18:51.160 --> 0:18:55.520 Missooo and still at Credit Suetz is Ray Ferris. He 0:18:55.640 --> 0:19:00.119 only high ground on Pacific rim analysis and also were 0:19:00.119 --> 0:19:03.240 in exchange in London for the shop. We're thrilled that 0:19:03.280 --> 0:19:06.320 the chief economists of Credit Suites joins us this warning. 0:19:07.040 --> 0:19:09.399 I'm gonna cut right to the chase, Ray, and this 0:19:09.480 --> 0:19:13.959 goes into your foreign exchange of that ground yesterday was original. 0:19:14.440 --> 0:19:19.400 What is the original solution for the Prime Minister. Well, look, 0:19:19.400 --> 0:19:20.960 I'm thrilled to be here. I've been a long time 0:19:21.000 --> 0:19:23.080 listener to the show and it's it's great to be on. 0:19:23.160 --> 0:19:25.480 But I just wanted to address the elephant in the room. 0:19:25.520 --> 0:19:28.919 That is a fantastic bowtie. I love it. Um. I 0:19:28.960 --> 0:19:30.719 think it was said a little bit earlier by one 0:19:30.720 --> 0:19:33.640 of the guests that you know, the UK increasingly needs 0:19:33.640 --> 0:19:36.159 to be viewed in the context of an emerging market 0:19:36.240 --> 0:19:39.040 sort of situation. Not that they're going to default on 0:19:39.080 --> 0:19:42.840 their debt, but the economy has lost a nominal anchor 0:19:42.920 --> 0:19:46.520 for the system, and that's I think why investors don't 0:19:46.520 --> 0:19:48.400 want to hold bonds and they don't want to hold 0:19:48.440 --> 0:19:52.000 the currency. The fiscal agent looks like it's a little 0:19:52.000 --> 0:19:55.240 out of control and the Bank of England isn't stepping 0:19:55.320 --> 0:19:59.159 up to the plate to regain control to establish that 0:19:59.200 --> 0:20:01.760 nominal anchor by saying that we don't care what happens 0:20:01.760 --> 0:20:04.800 on fiscal We're going to control inflation. What needs to 0:20:04.840 --> 0:20:06.880 happen here is the Bank of England needs to step in. 0:20:07.200 --> 0:20:09.480 They need to be aggressive with their next rate. Height 0:20:09.560 --> 0:20:12.119 could be better if they move before November, and they 0:20:12.160 --> 0:20:14.280 need to signal that they will do more after that. 0:20:14.600 --> 0:20:17.640 Markets are pricing very high rates as the terminal rate. 0:20:17.840 --> 0:20:21.080 They don't have to get there if they acts. You 0:20:21.200 --> 0:20:27.160 have a huge credibility with Asia and with China, with Japan, 0:20:27.960 --> 0:20:32.040 and you come out and calculate one point six global 0:20:32.080 --> 0:20:36.800 growth for next year. Are we pricing for that? No? 0:20:36.840 --> 0:20:39.240 I don't think we are, certainly not in equities um 0:20:39.680 --> 0:20:42.280 the way we look at equities and I wear two 0:20:42.320 --> 0:20:44.800 hats of credit. Swiss I'm chief economists but also the 0:20:44.840 --> 0:20:49.600 chief investment officer for the America's About three weeks ago, 0:20:49.680 --> 0:20:53.919 we went underweight in our investment Wealth Division equities for 0:20:53.920 --> 0:20:56.160 the first time since two thousand and thirteen. That's really 0:20:56.160 --> 0:20:59.240 a huge move for us. And when we look at equities, 0:20:59.280 --> 0:21:02.600 we think, as we just published yesterday our new economic quarterly, 0:21:03.040 --> 0:21:05.880 the worst is yet to come was the title, And 0:21:06.080 --> 0:21:09.119 it's all about the fact that nominal growth is going 0:21:09.160 --> 0:21:13.639 to slow. Financiing costs are going up, and wage growth, 0:21:13.640 --> 0:21:16.240 the persistence of a lot of costs you know, are 0:21:16.480 --> 0:21:18.919 going to be there for another few quarters, so profits 0:21:18.920 --> 0:21:21.719 are gonna get squeeze. Margins look too high, consensus earnings 0:21:21.720 --> 0:21:24.160 look too high. To that point, right, Let's go back 0:21:24.200 --> 0:21:25.960 some of the data that we just got. The initial 0:21:26.040 --> 0:21:28.879 jobless claims of a hundred and ninety three thousand, It 0:21:28.920 --> 0:21:32.560 was the expectation of two hundred and fifteen thousand. You 0:21:32.600 --> 0:21:35.440 hear the FED saying they want to see a little 0:21:35.480 --> 0:21:38.040 bit more slack in this labor market, or even a 0:21:38.080 --> 0:21:40.040 lot more with the projection of four and a half 0:21:40.080 --> 0:21:44.320 percent of an unemployment rate possibly by next year. How 0:21:44.359 --> 0:21:47.120 far away are we what kind of Fed funds rate. 0:21:47.160 --> 0:21:49.439 Do we need to get to the type of slack 0:21:49.480 --> 0:21:52.600 to the loosening of this labor market required to bring 0:21:52.600 --> 0:21:55.879 inflation down? Oh? Absolutely, The Fed is going to be 0:21:55.920 --> 0:21:59.560 angry about these numbers. Um, we've got a forecast of 0:22:00.000 --> 0:22:02.920 one and a half percent, but well, really, uh, four 0:22:02.920 --> 0:22:05.480 and five aids for FED funds as a terminal rate. 0:22:05.600 --> 0:22:07.959 But we stress we don't really know where this thing 0:22:08.000 --> 0:22:11.679 could peak, and the the there's an asymmetry still in 0:22:11.720 --> 0:22:14.480 the Fed's reaction functions to the top side. They have 0:22:14.600 --> 0:22:17.920 shown that they aren't going to ease just because numbers 0:22:17.960 --> 0:22:21.040 get or turn a little bit less hawkish, just because 0:22:21.119 --> 0:22:24.240 numbers get a bit better the June July CPI data, 0:22:24.400 --> 0:22:27.960 and they will respond aggressively if the numbers, you know, 0:22:28.080 --> 0:22:31.440 aren't so nice the August CPI data. So could they 0:22:31.520 --> 0:22:33.600 hike beyond what the market's got priced, you know, the 0:22:33.600 --> 0:22:36.280 four and a half percent for terminal rate next year? Yes? 0:22:36.760 --> 0:22:40.800 Do they? I think just really dislike the idea that 0:22:41.320 --> 0:22:43.919 markets have got a cut price for two thousand twenty 0:22:43.960 --> 0:22:48.199 three and are they going to continue to argue against that? Absolutely? Right. 0:22:48.280 --> 0:22:50.680 We saw from the Bank of England the conundrum that's 0:22:50.680 --> 0:22:54.919