WEBVTT - Surveillance: Recession Likelihood with Bandholz & Kiesel 0:00:00.080 --> 0:00:12.960 Ye. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 0:00:13.480 --> 0:00:17.560 Jay Leye. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:34.600 Bloomberg dot Com, and of course, on the Bloomberg with 0:00:34.760 --> 0:00:37.320 Chapman pow Back in a spotlight late today when he 0:00:37.360 --> 0:00:39.680 speaks at the Economic Club of Washington, d C. With 0:00:39.840 --> 0:00:43.199 more and more Fed officials expressing a willingness to do 0:00:43.320 --> 0:00:46.840 nothing until the uncertainty clears. It's been a major topic 0:00:46.920 --> 0:00:49.360 in this market over the last week or so. Mark 0:00:49.400 --> 0:00:52.000 Keisel dropping by our studio here in New York, Pimco 0:00:52.159 --> 0:00:55.440 c IO of Credit Good monitor. Mark, Good morning, So 0:00:55.480 --> 0:00:57.480 let's talk about your big theme for the year ahead, 0:00:57.480 --> 0:01:01.560 the global economy sinking lower. Let's stop by having a 0:01:01.560 --> 0:01:03.840 discussion about how policy MICA is world wanted and to 0:01:03.920 --> 0:01:06.840 respond to that. So, I think we're setting up for 0:01:07.000 --> 0:01:11.280 growth to slow. Um. We benefited significantly from the tax 0:01:11.319 --> 0:01:15.320 cuts in two thousand and eighteen US growth three real GDP. 0:01:15.880 --> 0:01:17.600 We think growth gonna slow to two to two and 0:01:17.640 --> 0:01:20.000 a half percent. It could be even be slower than that. 0:01:20.040 --> 0:01:22.679 With the U S. China trade uncertainty. But I think 0:01:22.720 --> 0:01:24.679 this is gonna allow the FED to to take a 0:01:24.720 --> 0:01:28.000 step back and go more data dependent going forward this year. 0:01:28.160 --> 0:01:30.480 So the date to dependence of the FED says they 0:01:30.480 --> 0:01:33.320 are and a market right now and market participants that says, no, 0:01:33.400 --> 0:01:36.000 it's not about the data. It's about a market. It's 0:01:36.000 --> 0:01:38.399 in a market dependent FED or a data dependent FED. 0:01:39.000 --> 0:01:41.240 I think what the markets are sensing is a lot 0:01:41.280 --> 0:01:44.800 of what you said uncertainty. The global economy actually, we 0:01:44.840 --> 0:01:48.640 think is slowing at a slower rate than most people suspect, 0:01:48.680 --> 0:01:53.480 particularly China. Earnings expectations are too high. Earnings growth is slowing, 0:01:53.960 --> 0:01:56.280 and this uncertainty with the U S. China trade is 0:01:56.480 --> 0:01:58.720 a big deal. It's starting to impact confidence. So I 0:01:58.720 --> 0:02:01.720 think the leading indicators out there suggests that growth isn't 0:02:01.720 --> 0:02:05.280 will infect slow and and that, combined with the fact 0:02:05.320 --> 0:02:09.079 that inflation is low under the fed's target, inflationary expectations 0:02:09.080 --> 0:02:10.919 have come down. This allows the FED to take a 0:02:10.960 --> 0:02:13.440 step back and wait, there's a big difference between recession 0:02:13.520 --> 0:02:16.360 risk and moving back towards what we did consider trend 0:02:16.400 --> 0:02:20.480 growth on the ten months ago mook. That's a good point. 0:02:20.600 --> 0:02:23.600 I think the markets have in some cases, like oil 0:02:24.040 --> 0:02:28.919 and perhaps even equities and bonds, overestimated the likelihood of recession. 0:02:28.960 --> 0:02:31.240 If you look out over the next year, we think 0:02:31.280 --> 0:02:35.440 the chances of recession or maybe fifty. Yet the markets, 0:02:35.520 --> 0:02:38.080 you look at oil prices pricing in a much higher 0:02:38.160 --> 0:02:41.680 chance of recession. Bond market rally recently has been pretty significant, 0:02:41.760 --> 0:02:45.240 So we would not chase bonds here. Uh and in fact, 0:02:45.280 --> 0:02:48.799 we we actually think oil and owning some energy makes sense. 0:02:50.280 --> 0:02:53.880 If you look at the bond market, now, are you 0:02:54.000 --> 0:02:57.080 clipping a coupon or you can? You actually, how do 0:02:57.120 --> 0:03:00.799 you clip a coupon with the yields where they are? Right? Well, 0:03:00.840 --> 0:03:03.760 I think you want to own given what how flat 0:03:03.800 --> 0:03:06.239 the yield curve is, and we were talking about this earlier, 0:03:06.480 --> 0:03:08.560 you're better off at the front end of the yield curve. 0:03:08.639 --> 0:03:11.960 Odds are the Fed will still raise rates and therefore 0:03:12.040 --> 0:03:14.880 we will start to get some some risk premium priced 0:03:14.919 --> 0:03:17.800 into the longer end. So all things equal, if you're 0:03:17.800 --> 0:03:20.440 gonna own bonds, stay stay off front end. Okay, that's 0:03:20.480 --> 0:03:22.760 that's some streets. You see that jargon there, that's West 0:03:22.760 --> 0:03:25.320 Coast jargon. Is that premium and all that it's part 0:03:25.360 --> 0:03:29.280 of the real yield what you can see on yes, Mark, 0:03:29.360 --> 0:03:34.280 if you can come okay, so all the more reasons, Mark, 0:03:34.400 --> 0:03:38.600 thank you for joining us. Have an extra cross song, um. Mark. 0:03:38.720 --> 0:03:41.240 If if I look at bonds and I look at 0:03:41.280 --> 0:03:43.920 the coupon and I want to clip it, I'm just 0:03:43.960 --> 0:03:48.200 a small little guy. What maturity do I look at? 0:03:48.480 --> 0:03:51.080 Is it? Don't tell me it's a T bill. Nobody's 0:03:51.080 --> 0:03:53.200 gonna be able to eat on a T bill, sir. 0:03:53.400 --> 0:03:55.680 And and most people when they refer to bonds are 0:03:55.720 --> 0:03:59.280 talking about ten thirty year bonds. Today the tenure U 0:03:59.360 --> 0:04:03.880 S Treasury who seventy the long bound at three UM. 0:04:03.920 --> 0:04:06.280 There are times when you want to hold more cash. 0:04:06.320 --> 0:04:09.720 If you look at last year cash outperform most asset classes, 0:04:10.080 --> 0:04:12.440 now is actually not a bad time to be sitting 0:04:12.440 --> 0:04:15.560 in more cash, wait four yields to go up and 0:04:15.560 --> 0:04:17.800 and then deploy more money into bands. So I'm really 0:04:17.839 --> 0:04:19.640 interested to see what you think is going to happen 0:04:19.640 --> 0:04:21.520 at the long end, because over the last week we've 0:04:21.520 --> 0:04:23.760 had a massive improvement in risk appetite, and all we've 0:04:23.760 --> 0:04:26.159 seen happen with the treasury curve is money come out 0:04:26.160 --> 0:04:29.159 of short term dead instruments as risk aversion fates. What 0:04:29.240 --> 0:04:32.200 I don't see is real curve stepening. I don't see 0:04:32.240 --> 0:04:35.800 a treasury curve that captures a fundamentally positive story about 0:04:35.800 --> 0:04:39.040 the economy in America. In flact, I think the treasury 0:04:39.080 --> 0:04:41.440 curve is flatter now than it was on Friday, and 0:04:41.560 --> 0:04:42.880 that kind of tells you where we're at in the 0:04:42.880 --> 0:04:45.080 treasury market. When am I going to start to see 0:04:45.360 --> 0:04:48.200 the back end pick up to reflect an economy that 0:04:48.240 --> 0:04:50.159 you say isn't as bad as people think it is. 0:04:50.880 --> 0:04:53.160 So I think if we do get a trade deal 0:04:53.200 --> 0:04:55.919 with China, I think that will start to get the 0:04:55.920 --> 0:04:58.360 economy going again, and you'll start to see that your 0:04:58.440 --> 0:05:03.080 curve steepen. Um. These yields are very low right now, uh, 0:05:03.120 --> 0:05:05.320 and so as long as we do not have a recession, 0:05:05.360 --> 0:05:07.280 if we grow it too and two and a half percent, 0:05:07.960 --> 0:05:09.960 we think that tenure is probably gonna go back up 0:05:10.000 --> 0:05:12.560 to three percent. So you've got more I think yield 0:05:12.680 --> 0:05:16.440 upside right now given the base case scenario where growth 0:05:16.800 --> 0:05:19.280 UH growth goes to two two and a half. So 0:05:19.400 --> 0:05:22.280 just think about your strategy. The year progresses, you sank 0:05:22.320 --> 0:05:23.960 sitting cash and his yield to pick up at the 0:05:23.960 --> 0:05:26.240 longer end at duration as the year progresses, It's not 0:05:26.320 --> 0:05:30.440 the strategy for you, guys. We we like bonds longer term. 0:05:30.680 --> 0:05:32.880 So we are still of the view that rates are 0:05:32.880 --> 0:05:35.000 not going to break out on the on the upside 0:05:35.000 --> 0:05:38.279 because inflation globally will still stay relatively low. At the 0:05:38.320 --> 0:05:41.359 same time, we think the market has near term brought 0:05:41.440 --> 0:05:43.920 yields down too low. Can I get a question in here? 0:05:44.000 --> 0:05:50.360 Even though the real yield the party, there's other things 0:05:50.360 --> 0:05:54.640 besides full faith and credit. Where's the opportunity in better quality, 0:05:54.720 --> 0:05:58.640 high yield and actually quality corporate paper. So overall we're 0:05:58.680 --> 0:06:02.480 favoring securitized products, non agencies, which which are linked more 0:06:02.560 --> 0:06:04.840 to the housing market. We still have a constructive view 0:06:04.839 --> 0:06:07.120 on the consumer and housing, so we're going all Jenny 0:06:07.200 --> 0:06:09.320 May like we did thirty years ago. We like we 0:06:09.400 --> 0:06:12.599 like non agencies, We like agency mortgages. Within corporates, we 0:06:12.600 --> 0:06:15.280 want to stay high quality and investment grade. But what 0:06:15.320 --> 0:06:18.000 the couple areas we like We like bank and financials, 0:06:18.000 --> 0:06:20.880 we like reats, We like the consumer, and we like energy. 0:06:20.960 --> 0:06:24.320 We think energy has has interesting self corrected too low. 0:06:24.680 --> 0:06:27.640 We would own pipelines here. Okay, what kind of yield 0:06:27.640 --> 0:06:30.800 do you get on a debt instrument in the pipeline 0:06:30.800 --> 0:06:33.960 and the beleaguered American energy So you can basically get 0:06:34.000 --> 0:06:40.239 five percent on very high quality pipelines. Companies that are 0:06:40.279 --> 0:06:43.719 are generating free cash flow of five six percent annually 0:06:44.000 --> 0:06:46.839 benefiting from the sale revolution. The United States is the 0:06:46.839 --> 0:06:49.640 biggest producer of energy now in the world. It's a 0:06:49.720 --> 0:06:52.640 huge deal. But hey, what you're playing is the volume 0:06:52.720 --> 0:06:56.040 story of oil in America, not the price exactly. And 0:06:56.080 --> 0:06:59.559 midstream is the best sector and energy right now because 0:06:59.600 --> 0:07:03.880 as SENTE is benefiting from increased volume growth throughout the 0:07:03.920 --> 0:07:06.080 shell regions. So does this mean that after the real 0:07:06.200 --> 0:07:09.760 old sponsored by Pimco, the barrel is that where this 0:07:09.800 --> 0:07:13.600 is you can drop buy for that program? Can I 0:07:13.600 --> 0:07:16.280 get the final question in on leverage lounge place MARP 0:07:16.320 --> 0:07:18.360 because there's been a massive discussion about it and a 0:07:18.440 --> 0:07:21.640 huge turnaround and then a huge turnaround again. Where is 0:07:21.680 --> 0:07:24.200 Pimco as a shop on leverage lines at the moment? 0:07:24.600 --> 0:07:29.080 So we we have been very cautious on credit risk overall. 0:07:29.760 --> 0:07:32.360 Um we have been for the most part avoiding a 0:07:32.360 --> 0:07:34.880 lot of these leverage loans. I will tell you towards 0:07:34.920 --> 0:07:39.040 the second and third and fourth week of December. Uh, 0:07:39.280 --> 0:07:42.400 these loans were liquidated. There was four selling, there were 0:07:42.440 --> 0:07:45.080 hedge fun on wines. We saw selling in Asia. That 0:07:45.200 --> 0:07:47.520 was the first time really where we started to step 0:07:47.560 --> 0:07:50.360 in and take the other side. Where we're buying. We're 0:07:50.360 --> 0:07:53.600 being very selective. We're buying in companies that are non cyclical. 0:07:53.640 --> 0:07:57.520 We're buying relatively unlovered credits. But we were literally getting 0:07:57.680 --> 0:08:00.080 at the end of the year six seven percent on 0:08:00.360 --> 0:08:04.080 some pretty decent credits. So there, you know. The strategy 0:08:04.200 --> 0:08:06.640 is to sit back, wait, there's gonna be more volatility, 0:08:06.680 --> 0:08:09.280 hold a lot of cash, and deploy that cash as 0:08:09.320 --> 0:08:12.200 you see bottom up opportunities which will will be coming. 0:08:12.320 --> 0:08:14.760 Mark Hazel, great to have Mark with us. It is 0:08:14.920 --> 0:08:18.200 Mark doesn't come enough. Anybody else joining next week, I 0:08:18.200 --> 0:08:22.560 don't know. I have credit. Seriously, thank you for your 0:08:22.560 --> 0:08:24.800 support of what we're doing here. Thank you. Thank you 0:08:26.440 --> 0:08:43.880 day as well, John Farrowe and Tim came a terrific 0:08:43.960 --> 0:08:48.120 news flow across economics. Of course, FED speak today Chairman 0:08:48.160 --> 0:08:51.720 Paul speaking with David Rubinstein, the Economic Club of New York. 0:08:51.800 --> 0:08:54.400 And two items this morning before we bring in hard 0:08:54.440 --> 0:08:57.319 bundles of UNI credit, and that is capital economics over 0:08:57.360 --> 0:09:01.959 in London severely marking down their EU outlook john to 0:09:02.160 --> 0:09:06.880 one percent like one point zero percent. And then we 0:09:07.000 --> 0:09:10.120 just heard Marquisol PIMCO, and within the wonderful jokes about 0:09:10.559 --> 0:09:14.920 their support of your product, the real yield is I'm sorry, 0:09:14.920 --> 0:09:18.280 he's got a pretty gloomy view on the American economy 0:09:18.640 --> 0:09:21.200 returning to try and growth and join a big distinction 0:09:21.240 --> 0:09:24.520 between that and recession red Where are we you know, 0:09:24.600 --> 0:09:27.520 with UniCredit, what have you done with your you are 0:09:27.520 --> 0:09:30.840 you marking down your g d P numbers for America? No? 0:09:31.040 --> 0:09:33.280 And I'm afraid we are even more gloomy than than 0:09:33.320 --> 0:09:36.200 pim kois because as you just said and heard so 0:09:36.360 --> 0:09:39.160 PIMPO expect to return towards potential. We think we go 0:09:39.280 --> 0:09:41.240 below potential in the second half of this year and 0:09:41.360 --> 0:09:44.360 even further down in so that we that we could 0:09:44.400 --> 0:09:47.480 see in a recession there. So that that is saying, wait, 0:09:47.320 --> 0:09:50.240 wait when you say we'll see a recession there? Are 0:09:50.240 --> 0:09:55.880 you talking NB er recession? Sure? What's the cantalyst for that? 0:09:56.440 --> 0:09:58.640 The catalyst is, well, I mean we have been hearing 0:09:59.600 --> 0:10:02.679 frequent enough that recoveries don't die of old age, most 0:10:02.720 --> 0:10:06.440 recently by Berninky on Friday but we gotta acknowledge that 0:10:06.480 --> 0:10:08.640 we are towards the later part of the cycle and 0:10:08.640 --> 0:10:12.120 we're seeing I think, closed output gaps. It's getting technical, 0:10:12.120 --> 0:10:13.400 but I know you like it here on this show. 0:10:14.080 --> 0:10:16.280 So we get seeing closed output gaps around the globe, 0:10:16.280 --> 0:10:19.000 we seem grows, slowing down, signs of fatigue in the 0:10:19.040 --> 0:10:22.760 global business cycle. The only economy, well, the only meaningful economy, 0:10:22.800 --> 0:10:25.360 if I could say so, um that has the coupled 0:10:25.400 --> 0:10:27.679 so far was the US. But that's easily explained by 0:10:27.720 --> 0:10:30.240 this huge stimulus program. So that is just mask the 0:10:30.320 --> 0:10:32.800 underlying slowdown that we are going to see here as well. 0:10:33.120 --> 0:10:35.760 Once the impact of a stimulus fates, grows, slows down, 0:10:36.040 --> 0:10:39.439 and that then exposes the underlying weaknesses. And we think 0:10:39.440 --> 0:10:41.640 this time the underlying weakness is in the corporate sector. 0:10:42.600 --> 0:10:45.679 We have too much that we have not good ratings. 0:10:46.280 --> 0:10:48.160 Now we have even lower oil prices, which is not 0:10:48.160 --> 0:10:50.800 good for investment spending. So the recession, we think will 0:10:50.800 --> 0:10:52.880 look similar to what we saw in two thousand one, 0:10:53.400 --> 0:10:55.600 not too bad in terms of real macro and it 0:10:55.600 --> 0:10:59.160 comes mostly from the investment side. Why can't productivity pick up? 0:10:59.200 --> 0:11:01.160 Why can't we have us apply side response in the 0:11:01.160 --> 0:11:04.400 way this administration thinks we will get one. I think 0:11:04.400 --> 0:11:06.120 we do probably see a bit of a pickup in 0:11:06.120 --> 0:11:11.120 productivity just because the supply of labor is being depleted. 0:11:11.160 --> 0:11:13.040 You know, we're going where we are closer to full 0:11:13.040 --> 0:11:16.240 employment and we need actually a pick up in productivity 0:11:16.280 --> 0:11:22.640 to sustain some some growth. But in in response to 0:11:22.640 --> 0:11:25.680 to what the administration has done, I don't think there 0:11:25.760 --> 0:11:28.760 is anything that translates from the lower taxes, less regulation 0:11:28.840 --> 0:11:30.800 to higher prouctivity because I don't think we have seen 0:11:30.840 --> 0:11:33.160 the investment that is the missing link there that would 0:11:33.160 --> 0:11:36.280 translate the politics to the real economy, and that hasn't 0:11:36.280 --> 0:11:42.720 been there. Well. Within capital deepening with the new technology, 0:11:42.840 --> 0:11:46.600 do we have any sense of what capital allocation is 0:11:46.640 --> 0:11:49.600 within our society? No, that is a tricky part. I 0:11:49.600 --> 0:11:52.200 know they have been We're focused on labor, but I'm sorry, 0:11:52.200 --> 0:11:54.840 the capital deployment is a mystery, isn't it? It is? 0:11:55.000 --> 0:11:57.200 It is um So, I mean, to some extent, we 0:11:57.280 --> 0:12:02.440 can offset part of the of the lack of availability 0:12:02.440 --> 0:12:06.480 of labor through artificial intelligence machines. So there's a prouctivity 0:12:06.480 --> 0:12:08.960 increase that we see. But of course you always look 0:12:09.000 --> 0:12:11.840 at growth rates, so you know where we want to 0:12:11.840 --> 0:12:15.280 see higher growth rates. That means that this substitution of 0:12:15.360 --> 0:12:18.760 labor by capital, if you want, is happening at an 0:12:18.760 --> 0:12:21.560 accelerating pace. Right, It's not enough if it continues to 0:12:21.559 --> 0:12:23.680 grow at the same pace because there is no pickup 0:12:23.720 --> 0:12:25.560 in the growth rate. The pick up in the growth 0:12:25.600 --> 0:12:29.040 rate only happens when we haven't we have a further acceleration, 0:12:29.400 --> 0:12:31.200 and I don't think this is going to happen. What 0:12:31.240 --> 0:12:33.800 are you looking for from the chairman like to tonight, Well, 0:12:33.840 --> 0:12:35.800 there's a lot of copy and paste, I think so. 0:12:36.120 --> 0:12:37.440 I mean the tone has been said. I think the 0:12:37.440 --> 0:12:39.520 tone has been said. At the December meeting, markets didn't 0:12:39.559 --> 0:12:41.280 understand what the Fat was telling them. I think it 0:12:41.320 --> 0:12:43.360 was very obvious at that point already that the Fat 0:12:43.440 --> 0:12:47.200 got rattled. Markets didn't hear exactly the words they wanted 0:12:47.200 --> 0:12:49.320 to hear. That they threw a tantrum, and then we 0:12:49.360 --> 0:12:52.640 had John Williams and then lastly the chair coming out 0:12:52.679 --> 0:12:54.480 and saying, all right, guys, we got it. We will 0:12:54.520 --> 0:12:57.720 be very careful and do everything you want. So given 0:12:57.720 --> 0:12:59.920 Shamman Pal a bit of a free pass. His perfor 0:13:00.000 --> 0:13:03.000 almost of the news conference was let's just say, disappointing 0:13:03.320 --> 0:13:05.439 relative to what he followed up with. It was totally 0:13:05.480 --> 0:13:09.079 inconsistent with what I saw in the minutes yesterday. Well, 0:13:09.160 --> 0:13:11.640 just in terms of the emphasis. The emphasis in the 0:13:11.679 --> 0:13:14.080 minutes is completely different to the emphasis that he delivered 0:13:14.080 --> 0:13:16.440 in the news conference in December. Well, I mean I 0:13:16.480 --> 0:13:19.480 wrote a flash after the FOMC statement and said basically 0:13:19.520 --> 0:13:22.120 exactly what was in the in the minutes, that the 0:13:22.160 --> 0:13:24.760 FAT confidence was rattled, and they have a look at it. 0:13:24.800 --> 0:13:26.760 I mean, they just changed a few words in the statement, 0:13:26.880 --> 0:13:29.200 they changed the dots, and from that on it was 0:13:29.400 --> 0:13:33.120 very obvious how they thought and what the debate was. Yeah, Powe, 0:13:33.480 --> 0:13:35.520 he said, well, our plan is our baseline is that. 0:13:35.880 --> 0:13:38.040 And the one thing that markets really hated was that 0:13:38.080 --> 0:13:40.040 he talked about the rundown of the balance sheet and 0:13:40.080 --> 0:13:42.160 he shouldn't have used the word autopilot or whatever when 0:13:42.160 --> 0:13:45.720 he didn't emphasize flexibility. But subsequently he has. But the 0:13:45.760 --> 0:13:49.079 FAT is always flexible, right, That's what I think. Richard 0:13:49.080 --> 0:13:50.959 Fisher said it a couple of days ago. When I 0:13:50.960 --> 0:13:54.200 don't know what the market has. That is normal fat communication, 0:13:54.600 --> 0:13:57.640 and the FAT always takes changing developments into acoun They 0:13:57.640 --> 0:13:59.600 always do that, and I think it's a bit almost 0:13:59.640 --> 0:14:02.400 a bit ery. Um if this goes out to people 0:14:02.400 --> 0:14:06.720 who would trust professionals in the sector, that professionals in 0:14:06.760 --> 0:14:10.800 the market do not know what FAT communication is, that 0:14:10.880 --> 0:14:14.880 they have a baseline, but they if if the circumstances change, 0:14:14.960 --> 0:14:16.960 the FAT changes, that then have to say, Um, if 0:14:17.040 --> 0:14:19.440 enough people don't understand, then the problem is with the messenger, 0:14:20.040 --> 0:14:22.600 not with the individuals receiving the message. There's a real 0:14:22.680 --> 0:14:25.800 question about chairman powers delivery over the last several months, 0:14:25.840 --> 0:14:27.960 never mind just the last month alone. I could continue 0:14:27.960 --> 0:14:31.400 this conversational day harm BANDHLTS joining us from ARNI Credit 0:14:31.440 --> 0:14:46.800 great to catch up with you and China and really 0:14:46.840 --> 0:14:50.320 the attendant not kind of effects to China and they're 0:14:50.360 --> 0:14:53.240 not kind of effects back to us. Miranda car joins 0:14:53.280 --> 0:14:55.720 now from High Time. Miranda, one of our themes this 0:14:55.800 --> 0:14:58.960 morning is a lot of fancy people we talked to 0:14:59.120 --> 0:15:03.760 marking down their economic growth estimates. We all understand that's 0:15:03.880 --> 0:15:08.280 got to affect China directly. Do you and your team 0:15:08.360 --> 0:15:14.680 have any gues estimate of china real GDP growth? Well, 0:15:14.800 --> 0:15:18.360 the real GDP growth is obviously slowed significantly in in 0:15:18.480 --> 0:15:21.400 Q four and particularly in December. UM, and hence why 0:15:21.440 --> 0:15:23.640 you've got all the You're we're not going to see 0:15:23.720 --> 0:15:26.080 UH the numbers come out next week. We're not going 0:15:26.120 --> 0:15:29.960 to see a real number reported. UM. But the but 0:15:30.000 --> 0:15:33.360 the real interesting thing about the UM the inflation numbers 0:15:33.360 --> 0:15:37.360 out today is you've got UM. The market is reading 0:15:37.360 --> 0:15:40.880 that as a big drag on sort of economic big 0:15:40.920 --> 0:15:44.080 sign of an economic slowdown UM, Whereas they're missing one 0:15:44.160 --> 0:15:49.240 key part of the equation UM, which is that UM, 0:15:49.320 --> 0:15:51.920 the a lot of the price falls were due to 0:15:52.000 --> 0:15:54.960 the capacity that they didn't shut all capacity over the 0:15:54.960 --> 0:15:58.360 winter season, which is something they normally do ever since 0:15:58.400 --> 0:16:01.720 two thousand and fifteen. So you've had price falls owing 0:16:01.760 --> 0:16:05.280 to the slowdown, but also due to the due to 0:16:05.320 --> 0:16:09.040 the lack of capacity closures. So it's not entirely reflective 0:16:09.120 --> 0:16:13.160 of a huge slump in in all of the upstream pricing. 0:16:13.400 --> 0:16:16.640 So you're saying the base effects of effectively been sort 0:16:16.640 --> 0:16:20.440 of distorted somewhat here. Miranda, Yeah, I mean, if you 0:16:20.440 --> 0:16:22.520 look at two thousands fifteen, when the last time you're 0:16:22.520 --> 0:16:26.800 facing really big global deflationary pressures from China, UM. What 0:16:27.000 --> 0:16:29.960 China came out was with the supply fat reform where 0:16:30.000 --> 0:16:32.760 they cut capacity and prices then shot up, and then 0:16:32.800 --> 0:16:35.640 suddenly there was there was no longer a deflationary There 0:16:35.680 --> 0:16:39.240 was inflation rethreat from China into two thousands and sixteen. 0:16:39.600 --> 0:16:42.560 Now this time we're facing the same issue deflation respect 0:16:42.640 --> 0:16:45.400 coming out into global markets UM and so the question 0:16:45.480 --> 0:16:48.600 is do they then start shutting capacity again. There's a 0:16:48.680 --> 0:16:51.920 lot less room to do that this time around UM 0:16:52.080 --> 0:16:57.600 and so the deflationary pressures could could become significant as 0:16:57.600 --> 0:17:00.280 we come into into each one. So what's your case 0:17:00.400 --> 0:17:02.440 right now, Miranda, Because it's pretty easy at the moment 0:17:02.440 --> 0:17:04.320 to paint a very barest picture of what is happening 0:17:04.320 --> 0:17:06.560 in terms of the deceleration of the Chinese economy. If 0:17:06.560 --> 0:17:08.479 you want to corporate, you can pick out Apple. If 0:17:08.480 --> 0:17:10.120 you want a data point, you can pick out many. 0:17:10.160 --> 0:17:11.800 You can pick out a p m I that came 0:17:11.840 --> 0:17:13.760 out over the last couple of weeks. You can pick 0:17:13.800 --> 0:17:16.920 out the latest PPI data as well, And for that matter, 0:17:17.000 --> 0:17:18.600 you can go on and on and on for China 0:17:18.600 --> 0:17:20.960 at the moment, including the auto sales picture we got 0:17:21.119 --> 0:17:23.800 painted early earlier this week. For us, what is your 0:17:23.800 --> 0:17:25.640 base case? Is it as bad as some of those 0:17:25.720 --> 0:17:29.560 data points tell US. It is UM. Some of those 0:17:29.640 --> 0:17:32.480 data points have other factors involved, but yes, China is 0:17:32.560 --> 0:17:36.000 facing a significant slow down as we come into come 0:17:36.040 --> 0:17:40.399 into January. But the key thing is the monetary shift 0:17:40.440 --> 0:17:43.560 has already happened. I mean, the monetary easing, sort of 0:17:43.640 --> 0:17:47.000 quite large scale Mountrey using already started in October and 0:17:47.040 --> 0:17:49.359 that's when you start seeing the sort of turnaround in 0:17:49.440 --> 0:17:53.200 China's economy. So you've had already several months and now 0:17:53.240 --> 0:17:55.600 they're talking about, you know, going back into sort of, 0:17:55.640 --> 0:17:59.359 if you like, some of the old school subsidies and 0:17:59.600 --> 0:18:02.000 tax cuts in order to try to stimulate the economy. 0:18:02.240 --> 0:18:05.240 So this means although so janj February is always tricky 0:18:05.240 --> 0:18:07.880 because it's a spring festival, it's really hard to get 0:18:07.880 --> 0:18:10.600 a good read across on the data UM. But as 0:18:10.600 --> 0:18:13.720 we come into Q two, a lot of the really 0:18:13.760 --> 0:18:17.160 sort of classic stimulus measures they're going to put, infrastructure investment, 0:18:17.160 --> 0:18:21.280 monetary easing, tax cuts, support for the auto market, support 0:18:21.320 --> 0:18:25.280 for consumer spending should start coming through and leveling things off, because, 0:18:25.280 --> 0:18:27.560 if you like, they've already taken the measures because they 0:18:27.600 --> 0:18:30.520 know how bad things are, Because things are, you know 0:18:30.640 --> 0:18:34.160 that across the board have been very very weak. One 0:18:34.200 --> 0:18:36.520 thing that I've struggled with them are Andrew is understanding 0:18:36.600 --> 0:18:39.719 what is sort of marginal and what is substantial. So 0:18:39.840 --> 0:18:42.880 we're looking at the latest Finance Ministry proposal for a 0:18:42.880 --> 0:18:46.840 a bigger budget deficit, but only incrementally. It doesn't seem 0:18:46.840 --> 0:18:49.240 to me that China is firing everything call guns blazing 0:18:49.240 --> 0:18:51.879 at this slow down just yet. What is the magnitude 0:18:51.880 --> 0:18:53.879 of the policy shift at the moment? Is it incremental 0:18:54.000 --> 0:18:56.879 or is it substantial enough? Well, the thing is that 0:18:56.920 --> 0:18:59.439 they've managed to create a special, a new class of 0:18:59.480 --> 0:19:01.520 debt which is going to fund a lot of the 0:19:01.520 --> 0:19:06.240 infrastructure projects. The fiscal deficit does not increase significantly, but 0:19:06.320 --> 0:19:08.400 what does increases. They have a new class of debt 0:19:08.400 --> 0:19:11.639 called special local government bonds. Now these don't sit on 0:19:11.680 --> 0:19:13.760 the fiscal balance sheet, they don't sit on the corporate 0:19:13.760 --> 0:19:16.399 balance sheet. It's almost like a new, a new debt 0:19:16.400 --> 0:19:19.240 class that China is invented um And we're going to 0:19:19.280 --> 0:19:23.040 see about two trillion of that um of the bonds 0:19:23.240 --> 0:19:27.119 issues to support infrastructure investment in two thousand and nineteen, 0:19:27.480 --> 0:19:30.200 up from about one point three trillion last year. So 0:19:30.400 --> 0:19:33.679 the debt comes in but not in the not the 0:19:33.680 --> 0:19:37.480 fiscal deficit still looks quite responsible. If we get IF 0:19:37.680 --> 0:19:41.199 IF if, if, if we get the capital economics Europe 0:19:41.240 --> 0:19:45.000 and one percent GDP growth sack Jen looking at America 0:19:45.160 --> 0:19:48.760 run rate of one point eight Pimco's two wish and 0:19:48.840 --> 0:19:51.879 even to the low side with China challenges. If the 0:19:51.880 --> 0:19:56.840 rest of the world slows down, what does China do? Yeah, well, 0:19:56.880 --> 0:20:00.320 I mean China is is flowing as well. The I 0:20:00.359 --> 0:20:04.000 mean we expect that the growth target under the Central 0:20:04.000 --> 0:20:07.600 Economic Work Conference in December that everyone now expects the 0:20:07.600 --> 0:20:09.600 growth target for this year to be lowered to six 0:20:09.640 --> 0:20:12.520 to six point five rather than trying to keep up 0:20:12.560 --> 0:20:15.720 at the six point five level full of last year. Now, 0:20:15.800 --> 0:20:20.440 obviously that's still a a sort of government target which 0:20:20.720 --> 0:20:22.720 is not a reflection of what's going on at the 0:20:22.760 --> 0:20:27.080 moment um. So you're likely to see a much um 0:20:27.280 --> 0:20:30.000 sharper slow down in in each one. But yeah, I mean, 0:20:30.000 --> 0:20:33.040 I think there's an exception expectation that China's growth will 0:20:33.080 --> 0:20:35.639 So the key question is obviously how much is the 0:20:36.040 --> 0:20:39.560 government can step into trying to you know, ease off 0:20:39.600 --> 0:20:43.400 some of the pain um and then you know, because 0:20:43.400 --> 0:20:45.200 because one of the question marks I think for this 0:20:45.280 --> 0:20:48.280 year is really how much they boost the property markets, 0:20:48.320 --> 0:20:50.280 because that, if you like, is the is a big 0:20:50.320 --> 0:20:53.760 swing factor. If we go into another um sort of 0:20:53.760 --> 0:20:57.480 real estate boom, then suddenly instead of looking at a 0:20:57.480 --> 0:21:00.520 at a sort of China slow down deflation, new picture, 0:21:00.560 --> 0:21:04.240 you look at another sort of real estate sort of boom, 0:21:04.280 --> 0:21:06.560 which is not maybe helpful in the short term, but 0:21:06.600 --> 0:21:09.400 obviously then just creates much bigger problems in the longer term. 0:21:09.560 --> 0:21:11.040 It's really interesting to me that we've just had a 0:21:11.040 --> 0:21:13.960 conversation of about six seven minutes on China and hardly 0:21:14.000 --> 0:21:16.919 ever at all touched on the trade discussion. Miranda. Some 0:21:17.000 --> 0:21:19.920 people assign a lot of importance to the trade negotiations 0:21:19.960 --> 0:21:23.480 as to what happens next with China and the Chinese economy, 0:21:23.640 --> 0:21:28.680 do you well, of course, yeah. I mean the stopping 0:21:28.680 --> 0:21:32.600