1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along 2 00:00:09,240 --> 00:00:13,200 Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jaily. We bring you 3 00:00:13,320 --> 00:00:18,600 Speaker 1: insight from the best and economics, finance, investment, and international relations. 4 00:00:18,960 --> 00:00:23,840 Speaker 1: Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 5 00:00:23,920 --> 00:00:31,120 Speaker 1: and of course on the Bloomberg terminal. Also Lignos Joints 6 00:00:31,200 --> 00:00:34,720 Speaker 1: right now global head of FX Strategy at RBC Capital Markets. 7 00:00:34,880 --> 00:00:36,720 Speaker 1: And we can go to her physics at Cambridge and 8 00:00:36,720 --> 00:00:39,240 Speaker 1: look at fourteen topics. We're not gonna do that, Elsa. 9 00:00:39,600 --> 00:00:41,560 Speaker 1: I want to look at the one true thing you're 10 00:00:41,600 --> 00:00:44,800 Speaker 1: focused on, which is your e c B. You've provided 11 00:00:45,000 --> 00:00:48,479 Speaker 1: huge research over the last decade on e c B. 12 00:00:49,120 --> 00:00:52,519 Speaker 1: What does Laguard do is there is her degrees of 13 00:00:52,640 --> 00:00:57,160 Speaker 1: freedom so shrunk down that she has limited choice. April fourteen, 14 00:00:59,120 --> 00:01:02,440 Speaker 1: So this stage they'll be doing very little. Um, they're 15 00:01:02,480 --> 00:01:06,880 Speaker 1: setting ourselves up for a normalization coming further in the year. 16 00:01:07,200 --> 00:01:09,240 Speaker 1: But I think what gets really interesting is what they 17 00:01:09,280 --> 00:01:12,880 Speaker 1: do further out. Because the market is pricing hikes and 18 00:01:13,160 --> 00:01:15,720 Speaker 1: it's clear that's the direction of travel. But the question 19 00:01:15,880 --> 00:01:18,280 Speaker 1: is how far do we just get to zero and stop? 20 00:01:18,360 --> 00:01:20,759 Speaker 1: Do we go any further than that. And the reality 21 00:01:20,920 --> 00:01:23,040 Speaker 1: is that unlike the US where you have this really 22 00:01:23,080 --> 00:01:25,880 Speaker 1: strong domestic demand, in Europe it's a bit more about 23 00:01:25,920 --> 00:01:29,759 Speaker 1: inflation without as much strength in the economy. How do 24 00:01:29,840 --> 00:01:33,240 Speaker 1: you respond to the certitude that they will raise rates, 25 00:01:35,240 --> 00:01:37,639 Speaker 1: begin to raise rates, or get out front of raising 26 00:01:37,720 --> 00:01:41,840 Speaker 1: rates to keep up with the Fed. Well, the reality 27 00:01:41,880 --> 00:01:43,440 Speaker 1: is they're not going to keep up with the FED, 28 00:01:43,480 --> 00:01:47,000 Speaker 1: and I think that's what's going to just give increasing 29 00:01:47,040 --> 00:01:49,040 Speaker 1: support to the your solo as the year goes on. 30 00:01:49,120 --> 00:01:52,080 Speaker 1: I mean, our call for for euro dollar is still 31 00:01:52,280 --> 00:01:55,320 Speaker 1: a trough around one oh seven, and quite comfortable with that. 32 00:01:55,520 --> 00:01:57,800 Speaker 1: But you know, if I had to look at where 33 00:01:57,800 --> 00:02:00,400 Speaker 1: the risks lie around that, you know, and less the 34 00:02:00,480 --> 00:02:03,840 Speaker 1: FED change's course, or you know, something happens to derail 35 00:02:03,920 --> 00:02:06,080 Speaker 1: the US tightening, and it may well happen later on 36 00:02:06,120 --> 00:02:08,800 Speaker 1: in the year. Um, if things turn out as market 37 00:02:08,800 --> 00:02:11,080 Speaker 1: surprised at the moment, we're going to have a really 38 00:02:11,080 --> 00:02:13,880 Speaker 1: significant meld advantage for the US over the your area 39 00:02:13,919 --> 00:02:15,920 Speaker 1: by the end of the year, and that in itself 40 00:02:16,080 --> 00:02:18,519 Speaker 1: will be very meaningful for the currency. So what's a 41 00:02:18,600 --> 00:02:21,679 Speaker 1: ramification for the dollar of this balance sheet reduction? That 42 00:02:21,720 --> 00:02:24,239 Speaker 1: we're trying to game out and coming up with question marks. 43 00:02:25,840 --> 00:02:27,919 Speaker 1: So I think it's a little bit more indirect than 44 00:02:28,080 --> 00:02:31,440 Speaker 1: most people perhaps might think, because all of our research 45 00:02:31,480 --> 00:02:34,200 Speaker 1: historically has found that there's no one for one link 46 00:02:34,280 --> 00:02:36,520 Speaker 1: between the size of a central banks balance sheet and 47 00:02:36,560 --> 00:02:38,640 Speaker 1: the domestic currency. A lot of it depends on the 48 00:02:38,720 --> 00:02:41,120 Speaker 1: status of the currency as a haven or as a 49 00:02:41,200 --> 00:02:43,520 Speaker 1: risk proxy. And because in the case of the dollar 50 00:02:43,560 --> 00:02:45,200 Speaker 1: at the moment it is trading as a bit more 51 00:02:45,240 --> 00:02:47,320 Speaker 1: of a haven, you do tend to find that if 52 00:02:47,320 --> 00:02:49,640 Speaker 1: equities sell off, the dollar finds a little bit of 53 00:02:49,639 --> 00:02:52,520 Speaker 1: a boost um to the extent that the market, like 54 00:02:52,600 --> 00:02:55,440 Speaker 1: you said earlier, is not necessarily priced for a full 55 00:02:55,480 --> 00:02:58,640 Speaker 1: one point one trillion of reduction and balance sheet per year. 56 00:02:59,000 --> 00:03:01,760 Speaker 1: You may well see the weighing on equities and boosting 57 00:03:01,760 --> 00:03:04,400 Speaker 1: the dollar as a result. Elsa, you talk about the 58 00:03:04,440 --> 00:03:07,239 Speaker 1: global picture for the currency, and so I have to 59 00:03:07,280 --> 00:03:09,640 Speaker 1: go to a philosophical point, especially as you see China 60 00:03:09,960 --> 00:03:12,280 Speaker 1: start to pay for call from Russia and u N 61 00:03:12,520 --> 00:03:15,120 Speaker 1: and you start to get this concern, especially as you, 62 00:03:15,200 --> 00:03:17,760 Speaker 1: as Treasury Secretary Jenny Ellen yesterday said that they could 63 00:03:17,760 --> 00:03:21,079 Speaker 1: actually actually impose some sanctions similar to what they did 64 00:03:21,280 --> 00:03:25,320 Speaker 1: on Russia to China, should they invade Taiwan? How much 65 00:03:25,520 --> 00:03:28,680 Speaker 1: are you looking at the diminishing of the dollars place 66 00:03:28,840 --> 00:03:31,640 Speaker 1: as a result of what some people are saying the 67 00:03:31,639 --> 00:03:36,400 Speaker 1: weaponization of its cloud on the global financial system? Right? 68 00:03:36,480 --> 00:03:38,480 Speaker 1: You know, a lot of what we've seen with Russia 69 00:03:38,760 --> 00:03:41,360 Speaker 1: in some ways has been unprecedented. But I think the 70 00:03:41,440 --> 00:03:44,040 Speaker 1: key task is what's going to take its place. We 71 00:03:44,080 --> 00:03:47,320 Speaker 1: had a really interesting conversation about this exact topic just 72 00:03:47,360 --> 00:03:49,640 Speaker 1: a few hours ago with the client talking about de 73 00:03:49,720 --> 00:03:52,680 Speaker 1: dollarization and that. Two big obstacles I think for China 74 00:03:53,200 --> 00:03:56,480 Speaker 1: one is the closed capital account, you know, the fact 75 00:03:56,520 --> 00:04:00,000 Speaker 1: that they don't allow free, unflanted access to their capital market. 76 00:04:00,000 --> 00:04:02,680 Speaker 1: It's and the second is liquidity and the ability to 77 00:04:02,800 --> 00:04:07,280 Speaker 1: hedge exposure via the US dollar or via dollar leg 78 00:04:07,320 --> 00:04:10,040 Speaker 1: funding markets. So I think until you get a very 79 00:04:10,080 --> 00:04:13,280 Speaker 1: broadshift on both those topics, you're not really going to 80 00:04:13,320 --> 00:04:15,720 Speaker 1: see a proper challenge. Of course, it's going to happen 81 00:04:15,720 --> 00:04:18,160 Speaker 1: over the next decade or fifteen years, but most investors 82 00:04:18,320 --> 00:04:22,480 Speaker 1: don't think on that horizon. Also, the bet here is 83 00:04:22,560 --> 00:04:26,839 Speaker 1: on all these currencies amid massive uncertainty, can you make 84 00:04:26,880 --> 00:04:30,200 Speaker 1: a big figure bet and dollar or a big figure 85 00:04:30,279 --> 00:04:33,640 Speaker 1: bet and d x Y or the Bloomberg Dollar Index. 86 00:04:33,680 --> 00:04:37,400 Speaker 1: Is that even feasible? Now, I've got to say, Tom, 87 00:04:37,440 --> 00:04:39,640 Speaker 1: we've had a lot of success this year with quite 88 00:04:39,680 --> 00:04:43,359 Speaker 1: short term tactical trades. Um. It's definitely paid off a 89 00:04:43,400 --> 00:04:46,200 Speaker 1: lot better than trying to kind of position for those big, 90 00:04:46,279 --> 00:04:49,400 Speaker 1: longer term trends. Uh. You know, at the moment, I 91 00:04:49,440 --> 00:04:52,799 Speaker 1: think we've been watching your dollar kind of bounce around 92 00:04:52,800 --> 00:04:55,279 Speaker 1: in that range. We obviously have the French election coming 93 00:04:55,320 --> 00:04:58,240 Speaker 1: up that's attracting a lot more interest and attention. My 94 00:04:58,320 --> 00:05:01,599 Speaker 1: bias longer term is still for a grind lower, but 95 00:05:01,680 --> 00:05:04,200 Speaker 1: clearly there's a lot of risks around that. I look 96 00:05:04,240 --> 00:05:08,200 Speaker 1: at the Pacific Rim and of Lisa mentions China and 97 00:05:08,240 --> 00:05:11,840 Speaker 1: the challenges there as well. Is there an opportunity of 98 00:05:12,000 --> 00:05:16,719 Speaker 1: surprise opportunity in the Pacific Rim here, given the COVID 99 00:05:16,800 --> 00:05:20,640 Speaker 1: story in China, given sort of a Pacific Rim gloom 100 00:05:20,640 --> 00:05:25,080 Speaker 1: out there, where's that opportunity? Yeah, it's a really interesting 101 00:05:25,160 --> 00:05:28,560 Speaker 1: question because actually I see quite a lot of optimism 102 00:05:28,560 --> 00:05:30,880 Speaker 1: baked into parts of the Pacific Rim. You know, if 103 00:05:30,920 --> 00:05:33,760 Speaker 1: you look at the Australian dollar, even the new Zealand dollar. 104 00:05:34,080 --> 00:05:36,839 Speaker 1: We model it based on the usual fundamental drivers two 105 00:05:36,880 --> 00:05:39,800 Speaker 1: year yields, commodity prices and so on. And actually for 106 00:05:39,839 --> 00:05:42,440 Speaker 1: the last few months there's been this big unexplained residual, 107 00:05:42,560 --> 00:05:45,000 Speaker 1: so a lot of optimism kind of getting baked in 108 00:05:45,560 --> 00:05:48,080 Speaker 1: to the top side. I do think that as the 109 00:05:48,160 --> 00:05:50,360 Speaker 1: year goes on, you know, if the FED is really 110 00:05:50,360 --> 00:05:52,200 Speaker 1: going to deliver as much as it says it will, 111 00:05:52,320 --> 00:05:54,720 Speaker 1: as much as markets expect it might, Um, then that 112 00:05:54,800 --> 00:05:57,280 Speaker 1: yield advantage for the US is going to undermine not 113 00:05:57,360 --> 00:06:00,680 Speaker 1: just the Pacific rim, but global currencies will oddly else. 114 00:06:00,800 --> 00:06:02,520 Speaker 1: Before we let you go, you're talking about some of 115 00:06:02,560 --> 00:06:06,080 Speaker 1: your conversations with clients. What are the biggest concerns for 116 00:06:06,120 --> 00:06:09,240 Speaker 1: clients right now? What is their biggest worry that they 117 00:06:09,279 --> 00:06:12,440 Speaker 1: present to you? You know, I think there are a 118 00:06:12,520 --> 00:06:16,960 Speaker 1: number of questions topics on people's minds. Um. Clearly, you're 119 00:06:17,040 --> 00:06:19,520 Speaker 1: looking at the situation UK and everybody is sensitive to 120 00:06:19,560 --> 00:06:24,520 Speaker 1: the fact that it can worsen materially at very short notice. UM, 121 00:06:24,560 --> 00:06:27,839 Speaker 1: it's a political decision what extent of sanctions are imposed, 122 00:06:27,839 --> 00:06:31,000 Speaker 1: and and that political pressure for further sanctions could change. 123 00:06:31,279 --> 00:06:33,120 Speaker 1: Now beyond that, I think people are a little bit 124 00:06:33,120 --> 00:06:37,400 Speaker 1: perplex you know, looking at the relative strength of equity markets, 125 00:06:37,400 --> 00:06:40,200 Speaker 1: for example, and constructing their heads trying to figure out 126 00:06:40,320 --> 00:06:42,240 Speaker 1: where that's coming from. Granted, you know, I'm talking to 127 00:06:42,320 --> 00:06:44,880 Speaker 1: macro investors. Probably if you speak to an ext investor, 128 00:06:44,920 --> 00:06:46,960 Speaker 1: they feel a lot more comfortable with it, but there's 129 00:06:46,960 --> 00:06:50,320 Speaker 1: certainly a lot of anticipation of perhaps and weakness further 130 00:06:50,360 --> 00:07:01,680 Speaker 1: out the line. Thank you RBC. Nobody owns it for 131 00:07:01,760 --> 00:07:05,480 Speaker 1: almost a decade. Like Elena Paoliakova, when you are at 132 00:07:05,520 --> 00:07:08,680 Speaker 1: Berkeley and write a thesis on the Dark Side of 133 00:07:08,720 --> 00:07:12,800 Speaker 1: European Integration, you are a decade out front on the 134 00:07:12,920 --> 00:07:16,000 Speaker 1: dark side of this war. Professor, Thank you so much 135 00:07:16,040 --> 00:07:18,760 Speaker 1: for joining us this morning with the Center for European 136 00:07:18,840 --> 00:07:22,440 Speaker 1: Policy Analysis. Elena cut to the chase. You nailed this 137 00:07:22,600 --> 00:07:26,000 Speaker 1: ten years ago. How dark is this war and what 138 00:07:26,040 --> 00:07:31,960 Speaker 1: does Ukraine have to do about it? Unfortunately, the threat 139 00:07:32,000 --> 00:07:34,440 Speaker 1: that is Russia we now know. We tried to ignore 140 00:07:34,440 --> 00:07:38,000 Speaker 1: it and we just can't, you know, in Russian Vida 141 00:07:38,080 --> 00:07:42,280 Speaker 1: Crimea and then you know invaded Russia's sorry crane's eastern 142 00:07:42,280 --> 00:07:45,840 Speaker 1: the dorn Bus. We put sanctions on Russia. Obviously sanctions 143 00:07:45,880 --> 00:07:49,280 Speaker 1: didn't change Putin's calculus, and here we are. This is 144 00:07:49,320 --> 00:07:54,200 Speaker 1: the most significant, most brutal war since we've seen since 145 00:07:54,240 --> 00:07:57,920 Speaker 1: World War two. Um. And it is a dark moment 146 00:07:57,960 --> 00:08:00,520 Speaker 1: for Europe. Absolutely, It's a dark moment for all of us, 147 00:08:00,560 --> 00:08:03,000 Speaker 1: even here in the United States. Elena, I've got John 148 00:08:03,040 --> 00:08:06,240 Speaker 1: Bolton on the right and Elena Farcas working with Obama 149 00:08:06,280 --> 00:08:10,400 Speaker 1: on the left, both agreement that we weigh over estimate 150 00:08:10,480 --> 00:08:14,120 Speaker 1: the ability to start World War three. Do you agree 151 00:08:14,120 --> 00:08:17,440 Speaker 1: with them that we were overwrought in our worries about 152 00:08:17,480 --> 00:08:21,920 Speaker 1: the ghosts of nineteen thirty nine? Uh? You know, it 153 00:08:22,120 --> 00:08:25,880 Speaker 1: is rare to have someone like Bolton and Evelyn, whom 154 00:08:25,880 --> 00:08:28,960 Speaker 1: I know as well, uh, to agree on this issue. 155 00:08:29,040 --> 00:08:32,240 Speaker 1: But it just tells you how Um at the end 156 00:08:32,240 --> 00:08:34,920 Speaker 1: of the day, you know, we are so worried about 157 00:08:35,080 --> 00:08:38,559 Speaker 1: escalating and worrying about what will Putin do if we 158 00:08:38,640 --> 00:08:41,559 Speaker 1: give the Ukrainians more weapons, all we can do if 159 00:08:41,559 --> 00:08:44,040 Speaker 1: we give the Ukrainians fighter jets. But you know the 160 00:08:44,080 --> 00:08:47,360 Speaker 1: truth is we can't predict what Putin will do, and 161 00:08:47,360 --> 00:08:49,680 Speaker 1: we should be worried more about how do we ensure 162 00:08:49,760 --> 00:08:52,720 Speaker 1: that Europe is whole, free and a peace How do 163 00:08:52,760 --> 00:08:55,600 Speaker 1: we ensure the United States, Um isn't going to get 164 00:08:55,640 --> 00:08:57,960 Speaker 1: pulled in with troops and things of the nature into 165 00:08:57,960 --> 00:09:00,240 Speaker 1: the war, and the best way to do that is 166 00:09:00,280 --> 00:09:03,000 Speaker 1: to give you know, as a Swarmers could have said, 167 00:09:03,320 --> 00:09:06,800 Speaker 1: to give the Ukrainians absolutely everything they need to be 168 00:09:06,960 --> 00:09:09,760 Speaker 1: putin in Ukraine so we don't have to fight him 169 00:09:09,800 --> 00:09:13,400 Speaker 1: as Nano in Poland or the Baltic States, because unfortunately, 170 00:09:13,960 --> 00:09:16,520 Speaker 1: if Putin isn't stopped in Ukraine, there is a very 171 00:09:16,559 --> 00:09:19,679 Speaker 1: good chance that he'll take that as an opportunity to 172 00:09:19,800 --> 00:09:23,120 Speaker 1: keep going forward, keep going further into Europe. A leader 173 00:09:23,160 --> 00:09:25,240 Speaker 1: to the sanctions work at a time when a lot 174 00:09:25,280 --> 00:09:29,719 Speaker 1: of the opposition to Vladimir Putin within Russia has been squelched, 175 00:09:29,760 --> 00:09:32,920 Speaker 1: where protests aren't really working if everyone's hauled off to 176 00:09:33,000 --> 00:09:36,640 Speaker 1: jail or forced to leave the country. You know, economic 177 00:09:36,679 --> 00:09:41,160 Speaker 1: sanctions are historically speaking, especially with Russia, have never worked 178 00:09:41,160 --> 00:09:44,880 Speaker 1: to change the short term military behavior on the ground. 179 00:09:45,160 --> 00:09:49,480 Speaker 1: You know, looking back at when Russia invaded in ins Crimea, 180 00:09:49,800 --> 00:09:53,200 Speaker 1: we impose some significant sanctions on Russia, but it didn't 181 00:09:53,320 --> 00:09:56,280 Speaker 1: change Putins calculus. How do we know that because he 182 00:09:56,360 --> 00:09:59,840 Speaker 1: invaded Ukraine eight years later. So now we have an 183 00:10:00,000 --> 00:10:04,000 Speaker 1: incredibly significant round of sanctions that we've imposed on Russia. 184 00:10:04,080 --> 00:10:07,439 Speaker 1: We've never tried this before. It's affecting the global economy. 185 00:10:07,760 --> 00:10:10,240 Speaker 1: The Russian economy is not like North Career orr on 186 00:10:10,320 --> 00:10:12,800 Speaker 1: It's it's significant and we're seeing some of the effects 187 00:10:12,880 --> 00:10:15,960 Speaker 1: of that, you know, in grain prices and oil prices obviously, 188 00:10:16,400 --> 00:10:20,679 Speaker 1: But sanctions are a long term tool in themselves. They 189 00:10:20,720 --> 00:10:23,800 Speaker 1: will not change what's happening day and day out on 190 00:10:23,880 --> 00:10:27,880 Speaker 1: the battlefield. For that, we need the military and security assistance. 191 00:10:27,920 --> 00:10:30,880 Speaker 1: Sanctions in themselves won't change behavior. And at the end 192 00:10:30,960 --> 00:10:34,160 Speaker 1: of the day, the elite, the oligarchs, they're close to Prutin, 193 00:10:34,440 --> 00:10:37,920 Speaker 1: They're not breaking ranks um, They're staying loyal to Mr. Prutin, 194 00:10:38,240 --> 00:10:39,840 Speaker 1: and I don't think that's going to change. This is 195 00:10:39,840 --> 00:10:42,559 Speaker 1: a really important point. The sanctions are not helping in 196 00:10:42,600 --> 00:10:45,000 Speaker 1: the near term when it comes to the day and 197 00:10:45,120 --> 00:10:48,079 Speaker 1: day out of the on the ground military actions. If 198 00:10:48,120 --> 00:10:51,360 Speaker 1: that's the case, do policymakers realized that, Do they sort 199 00:10:51,400 --> 00:10:53,880 Speaker 1: of recognize that, and if so, what are they doing 200 00:10:53,920 --> 00:10:56,080 Speaker 1: to actually affect that at a time when they're talking 201 00:10:56,120 --> 00:10:59,920 Speaker 1: about war crimes. Well, absolutely, I do think there's a 202 00:11:00,040 --> 00:11:03,000 Speaker 1: recognition that sanctions have a way of taking a long 203 00:11:03,080 --> 00:11:06,360 Speaker 1: time to work because we've never tried this level of 204 00:11:06,400 --> 00:11:09,560 Speaker 1: economic sanctions that country as large as Russia. We're still 205 00:11:09,559 --> 00:11:12,680 Speaker 1: waiting to see how they will all interlock and play out. 206 00:11:13,000 --> 00:11:16,160 Speaker 1: Right now, the strategy is too pronged. It's one to 207 00:11:16,240 --> 00:11:18,520 Speaker 1: make it really hard for Russia to sustain the war 208 00:11:18,559 --> 00:11:22,840 Speaker 1: effort financially forced Russia potentially to default. This seems to 209 00:11:22,840 --> 00:11:25,920 Speaker 1: be what the United States is pursuing right now. Close 210 00:11:25,960 --> 00:11:28,920 Speaker 1: all avenues of financing for the Russian government so they 211 00:11:28,960 --> 00:11:31,480 Speaker 1: can no longer pay down on their debts. But you know, 212 00:11:31,679 --> 00:11:34,400 Speaker 1: they'll have a thirty day great spirit if they even uh, 213 00:11:34,559 --> 00:11:36,520 Speaker 1: stop payments on their debts. So it's really not a 214 00:11:36,559 --> 00:11:39,760 Speaker 1: short term solution. So the second prong of the strategy 215 00:11:39,880 --> 00:11:42,840 Speaker 1: has to be making sure that you know, we are 216 00:11:42,920 --> 00:11:45,800 Speaker 1: supplying Ukrainians and what they need on the ground, I mean, 217 00:11:45,840 --> 00:11:51,200 Speaker 1: and together that should contain Russia if we do it rapidly, 218 00:11:51,559 --> 00:11:53,800 Speaker 1: if we do what it takes, and if we don't, 219 00:11:54,040 --> 00:11:56,760 Speaker 1: you know, kind of pursue a very cautious tentative policy 220 00:11:56,840 --> 00:11:59,120 Speaker 1: where you know, we may do eggs, we won't do 221 00:11:59,200 --> 00:12:01,960 Speaker 1: why so if we go in full, we give the 222 00:12:02,040 --> 00:12:05,760 Speaker 1: Ukrainians what they're asking for. We ramp up those economic sanctions. 223 00:12:06,040 --> 00:12:08,080 Speaker 1: You know, the war will eventually have to come to 224 00:12:08,160 --> 00:12:11,600 Speaker 1: a halt by you know, eventually. How many more deaths 225 00:12:11,600 --> 00:12:13,640 Speaker 1: would that mean? How many more brutal images are we 226 00:12:13,720 --> 00:12:15,800 Speaker 1: going to see like we've beens in the last couple 227 00:12:15,880 --> 00:12:18,880 Speaker 1: of days. That's really the where we are right now, 228 00:12:18,920 --> 00:12:22,280 Speaker 1: calculating those costs, and it's it's painful. It's quite painful, 229 00:12:22,440 --> 00:12:25,439 Speaker 1: incredibly painful for the people of Ukraine. Elena, Thank you. 230 00:12:25,679 --> 00:12:29,079 Speaker 1: Elena Polla cover the of the Center for European Policy Analysis. 231 00:12:35,000 --> 00:12:39,240 Speaker 1: Olivia Blanchard joins us this morning. Professor Blanchard, thank you 232 00:12:39,320 --> 00:12:41,640 Speaker 1: so much for joining us. You were just out at 233 00:12:41,760 --> 00:12:46,120 Speaker 1: Washington University with all of the heritage of Murray Weidenbaum 234 00:12:46,240 --> 00:12:50,920 Speaker 1: and all the optimism of Washington University and growth. Can 235 00:12:50,960 --> 00:12:55,600 Speaker 1: you be optimistic about the American economic experiment at this time? 236 00:12:57,240 --> 00:13:00,160 Speaker 1: It depends which one, but the count one one we're 237 00:13:00,160 --> 00:13:03,040 Speaker 1: all thinking about is how we're going to basically decrease 238 00:13:03,080 --> 00:13:06,200 Speaker 1: inflation and get back to to a low level. In 239 00:13:06,280 --> 00:13:11,720 Speaker 1: that I'm not as optimistic as as most people. I 240 00:13:11,800 --> 00:13:15,319 Speaker 1: still think it's going to be viat. I think inflation 241 00:13:15,400 --> 00:13:18,840 Speaker 1: has a lot of momentum. I think wage golf is 242 00:13:19,000 --> 00:13:21,480 Speaker 1: you know, there's a very tight labor market. Wedge golf 243 00:13:21,600 --> 00:13:24,000 Speaker 1: is very strong. The fect is going to have very 244 00:13:24,080 --> 00:13:26,280 Speaker 1: hard time stewing down the machine and it has to 245 00:13:26,320 --> 00:13:28,679 Speaker 1: admit that it has to stow the machine a lot. 246 00:13:28,720 --> 00:13:31,560 Speaker 1: And we don't want a recession. But you know, there's 247 00:13:31,600 --> 00:13:34,760 Speaker 1: this term come golf recession. I think that this will 248 00:13:34,800 --> 00:13:38,320 Speaker 1: have to come with some increasing unemployment and maybe some 249 00:13:38,440 --> 00:13:42,280 Speaker 1: increasing ways beyond what is currently priced in. With all 250 00:13:42,280 --> 00:13:45,040 Speaker 1: of your work, and particularly with the firepowered M I 251 00:13:45,160 --> 00:13:49,200 Speaker 1: T and the seventies you live the dismal seventies and 252 00:13:49,240 --> 00:13:53,840 Speaker 1: the debate over trenched entrenched inflation. You have a chart 253 00:13:53,960 --> 00:13:57,559 Speaker 1: at Peterson Institute of the seven or eight year battle 254 00:13:57,679 --> 00:14:02,800 Speaker 1: to extract ourselves from nine eighteen. Is that our future 255 00:14:03,120 --> 00:14:06,640 Speaker 1: out to two thousand? Now it's the past, it's not 256 00:14:06,679 --> 00:14:09,920 Speaker 1: the future, but it's a warning. Uh. You know, basically 257 00:14:10,000 --> 00:14:14,000 Speaker 1: what happened is that that just delayed doing what it 258 00:14:14,040 --> 00:14:16,680 Speaker 1: had to do, and pull Voca came very late in 259 00:14:16,760 --> 00:14:19,960 Speaker 1: the game and just want at it. But you had 260 00:14:20,000 --> 00:14:23,440 Speaker 1: to increase rays by first in a hundred basis points 261 00:14:23,720 --> 00:14:26,760 Speaker 1: to actually get to where he wanted, We're not going 262 00:14:26,760 --> 00:14:30,320 Speaker 1: to go there with feed is much smart. Facial expectations 263 00:14:30,360 --> 00:14:32,920 Speaker 1: are not as bad. But you know, the hope that 264 00:14:33,000 --> 00:14:35,440 Speaker 1: we can do all this by having rays going to 265 00:14:35,480 --> 00:14:38,520 Speaker 1: two point five or even three, I think it is 266 00:14:38,560 --> 00:14:42,000 Speaker 1: a hope, not not in my my book of forecast. 267 00:14:42,240 --> 00:14:44,800 Speaker 1: The hope is underscored by the mystery of some of 268 00:14:44,840 --> 00:14:46,760 Speaker 1: the tools that the FET is using. And I'm thinking 269 00:14:46,800 --> 00:14:50,560 Speaker 1: most importantly of the federals Ers balance sheet, possibly reducing 270 00:14:50,560 --> 00:14:53,520 Speaker 1: it by one point one trillion dollars over a year. 271 00:14:53,960 --> 00:15:00,520 Speaker 1: How much do we understand how this reduces inflation? Well, 272 00:15:00,840 --> 00:15:03,160 Speaker 1: you know, it's likely to make the long rates a 273 00:15:03,160 --> 00:15:06,640 Speaker 1: bit higher than they would otherwise be so to the 274 00:15:06,680 --> 00:15:09,680 Speaker 1: extent that long rates affect activity, that's going to basically 275 00:15:09,680 --> 00:15:13,680 Speaker 1: slow down again the machine. And that's the way you 276 00:15:13,880 --> 00:15:17,320 Speaker 1: reduce inflation is basically by making the labor market less 277 00:15:17,360 --> 00:15:20,160 Speaker 1: type than it is now exactly how it works, I 278 00:15:20,200 --> 00:15:22,440 Speaker 1: think when it comes to the policy rate, I think 279 00:15:22,440 --> 00:15:25,720 Speaker 1: we have some understanding of how it affects the economy. 280 00:15:25,720 --> 00:15:29,320 Speaker 1: When it comes to quee or QT, now I think 281 00:15:29,320 --> 00:15:32,360 Speaker 1: were we know much less And if I have a 282 00:15:32,440 --> 00:15:35,800 Speaker 1: father would denounce some path but not feel that I'm 283 00:15:35,840 --> 00:15:38,400 Speaker 1: committed to it if it turns out to be the 284 00:15:38,720 --> 00:15:42,240 Speaker 1: stronger weaker than expected. Do you think we're heading into 285 00:15:42,280 --> 00:15:45,680 Speaker 1: a period of time where inflation is structurally higher than 286 00:15:45,720 --> 00:15:48,240 Speaker 1: it has been over the previous few decades because of 287 00:15:48,280 --> 00:15:50,760 Speaker 1: the globalization and because of some of the shifts that 288 00:15:50,840 --> 00:15:54,400 Speaker 1: we've seen that were accelerated during the pandemic. No, I 289 00:15:54,440 --> 00:15:56,920 Speaker 1: don't think so. I don't think there's any close link 290 00:15:57,000 --> 00:16:01,120 Speaker 1: to say, between productivity goal for globalized or any of 291 00:16:01,200 --> 00:16:04,400 Speaker 1: these structural elements and the rate of inflation that the 292 00:16:04,440 --> 00:16:08,080 Speaker 1: economy has. The rate of inflation can be anything. You 293 00:16:08,200 --> 00:16:11,160 Speaker 1: just have to to have it flat. You basically have 294 00:16:11,240 --> 00:16:14,920 Speaker 1: to uplay the economy at for employment, not hotter than that, 295 00:16:15,200 --> 00:16:18,080 Speaker 1: not colder than that. But you can have any rate 296 00:16:18,080 --> 00:16:22,600 Speaker 1: of inflation you want. Olivier, you have lived the vogues 297 00:16:22,680 --> 00:16:25,280 Speaker 1: and the religions of the moment. You and I remember 298 00:16:25,280 --> 00:16:27,280 Speaker 1: where the world stopped. I believe it was on a 299 00:16:27,320 --> 00:16:31,000 Speaker 1: Thursday afternoon at three pm, and we'd all count M one, 300 00:16:31,280 --> 00:16:34,120 Speaker 1: M two, M three. There's been any number of other 301 00:16:34,200 --> 00:16:39,080 Speaker 1: religions of economics. What's the religion right now that we 302 00:16:39,160 --> 00:16:44,360 Speaker 1: need to be aware of that? We need to fear well. 303 00:16:44,400 --> 00:16:46,640 Speaker 1: I was never kind of in the m one and 304 00:16:46,800 --> 00:16:49,200 Speaker 1: to m free religion. I always thought that was that 305 00:16:49,320 --> 00:16:54,160 Speaker 1: was the religion and not not not not science. I think, 306 00:16:54,200 --> 00:16:56,120 Speaker 1: you know, the way to think about how much peoples 307 00:16:56,200 --> 00:16:58,640 Speaker 1: he works is to have to look at the yelk 308 00:16:58,680 --> 00:17:02,520 Speaker 1: of and so of the of economic activity depends on 309 00:17:02,560 --> 00:17:06,000 Speaker 1: the short end of the curve, some of economic activity 310 00:17:06,040 --> 00:17:09,160 Speaker 1: depends on the long ends the mortgage rates and basically 311 00:17:09,280 --> 00:17:15,159 Speaker 1: the however yield curve the more tightening, Okay, is I 312 00:17:15,240 --> 00:17:17,240 Speaker 1: think that you know, if I had to choose one 313 00:17:17,280 --> 00:17:19,840 Speaker 1: object as opposed to say I'm one or I'm two 314 00:17:19,880 --> 00:17:22,320 Speaker 1: or whatever, I would say, just look at the yeld curve, 315 00:17:22,720 --> 00:17:25,120 Speaker 1: and the yel curve, I think is telling us rates 316 00:17:25,160 --> 00:17:27,480 Speaker 1: are going to go work for a while, then maybe 317 00:17:27,480 --> 00:17:31,720 Speaker 1: they'll come down a bit, at least adjusted for inflation. Uh. 318 00:17:31,720 --> 00:17:34,399 Speaker 1: And I think that's you know, that's the tool that 319 00:17:34,480 --> 00:17:36,760 Speaker 1: the FED has. I mean, the old days it only 320 00:17:36,800 --> 00:17:39,919 Speaker 1: played you know, at the short end. Now it plays 321 00:17:40,160 --> 00:17:42,680 Speaker 1: all the way through the yeld curve. But that's the object. 322 00:17:42,760 --> 00:17:44,600 Speaker 1: I think we have to look at, what's the tool 323 00:17:44,760 --> 00:17:47,440 Speaker 1: of real yields. Olivier and I talked about this as 324 00:17:47,480 --> 00:17:50,719 Speaker 1: the real yields, the inflation adjusted yield anten your treasuries 325 00:17:50,880 --> 00:17:53,439 Speaker 1: moves to the highest the least negative, I should say, 326 00:17:53,640 --> 00:17:57,879 Speaker 1: going back to March, Yes, I mean you have to 327 00:17:57,880 --> 00:18:01,560 Speaker 1: realize that we're still in in an era of very 328 00:18:01,680 --> 00:18:04,879 Speaker 1: very low bial rate UH. At the short end of 329 00:18:04,920 --> 00:18:08,280 Speaker 1: the yield curve, bill rates are very large negative. At 330 00:18:08,359 --> 00:18:10,720 Speaker 1: the long end, they are less negative than they used to. 331 00:18:10,840 --> 00:18:14,720 Speaker 1: I think they are getting closer to zero. I think 332 00:18:14,760 --> 00:18:17,720 Speaker 1: that's what's needed to get the economy going in the 333 00:18:17,760 --> 00:18:20,680 Speaker 1: long run. We don't exactly know what the long run 334 00:18:20,960 --> 00:18:23,880 Speaker 1: equilibrium rate, if you want to call it this way, is, 335 00:18:24,200 --> 00:18:27,120 Speaker 1: but it's probably around zero at this point. So if 336 00:18:27,160 --> 00:18:29,560 Speaker 1: we were you know, if we are cruising along with 337 00:18:30,200 --> 00:18:33,520 Speaker 1: no more inflation than target, then I would say zero 338 00:18:33,600 --> 00:18:36,679 Speaker 1: is probably the right number. But we have before we 339 00:18:36,720 --> 00:18:39,439 Speaker 1: get there. We have to get inflation down, so we 340 00:18:39,520 --> 00:18:43,400 Speaker 1: have to go above zero in terms of real rates. Olivia, 341 00:18:43,440 --> 00:18:45,359 Speaker 1: We've better leave it there. Thank you so much, really 342 00:18:45,359 --> 00:18:48,280 Speaker 1: looking forward to your work with the Peterson Institute, particularly 343 00:18:48,320 --> 00:18:57,439 Speaker 1: on the new inflation level. Professor Blanchard. Right now we 344 00:18:57,480 --> 00:19:00,719 Speaker 1: hold court with this colleague severta Supermannian head of Equity 345 00:19:00,720 --> 00:19:03,200 Speaker 1: and derivative strategy at b of a. Buried in your 346 00:19:03,200 --> 00:19:06,000 Speaker 1: note sa Vida is the mathewiness of your Berkeley, which 347 00:19:06,040 --> 00:19:09,760 Speaker 1: is followed the money, follow the cash to borrow from Colbert. 348 00:19:10,080 --> 00:19:16,880 Speaker 1: It's a cashiness moment. How much cash is our cashiness? Cash? Well, listen, 349 00:19:16,920 --> 00:19:19,440 Speaker 1: I think that what we're seeing in the in the 350 00:19:19,440 --> 00:19:24,800 Speaker 1: overall investment landscape is a reallocation towards the short end 351 00:19:24,840 --> 00:19:26,640 Speaker 1: of the curve. I mean, we've seen it with Wall 352 00:19:26,680 --> 00:19:32,160 Speaker 1: Street strategists. They amped up their cash recommended cash allocations 353 00:19:32,160 --> 00:19:35,520 Speaker 1: and took down equity allocations. I think that's actually net 354 00:19:35,600 --> 00:19:39,280 Speaker 1: bullish for equities, because what we found is that when 355 00:19:39,280 --> 00:19:43,600 Speaker 1: Wall Street gets barished, that's generally assigned to get bullish. 356 00:19:43,640 --> 00:19:46,200 Speaker 1: But when you think about the overall market, I think 357 00:19:46,200 --> 00:19:48,440 Speaker 1: the reason that you want to buy stops right now 358 00:19:48,840 --> 00:19:51,800 Speaker 1: is the cashiness of the market. And you know, the 359 00:19:51,880 --> 00:19:55,000 Speaker 1: good the good news about the government and the FED 360 00:19:55,040 --> 00:19:57,440 Speaker 1: being in debt is that they passed on a whole 361 00:19:57,440 --> 00:20:01,560 Speaker 1: bunch of liquidity to consumers and corporate Something like nineteen 362 00:20:01,560 --> 00:20:05,399 Speaker 1: trillion dollars of cash went from the public sector to 363 00:20:06,040 --> 00:20:09,920 Speaker 1: consumers and corporates. And that's good that cash. Like you said, 364 00:20:09,920 --> 00:20:12,200 Speaker 1: it is going to be worth It's going from worthless 365 00:20:12,320 --> 00:20:15,560 Speaker 1: right now yieldless to three percent by the end of 366 00:20:15,560 --> 00:20:17,960 Speaker 1: the year. That's a huge move in terms of the 367 00:20:18,000 --> 00:20:21,480 Speaker 1: return profile, especially against a backdrop. Well, we don't think 368 00:20:21,480 --> 00:20:24,840 Speaker 1: that equities are going to return anything close to that 369 00:20:25,000 --> 00:20:27,879 Speaker 1: on a on a longer term basis. UM. So, I 370 00:20:27,960 --> 00:20:30,640 Speaker 1: think all of this conspires to create an environment where 371 00:20:30,720 --> 00:20:32,879 Speaker 1: some equities are going to do well and those are 372 00:20:32,920 --> 00:20:36,760 Speaker 1: the most cashy of the equities and um and we 373 00:20:36,800 --> 00:20:38,680 Speaker 1: can talk about sectors in a moment, but I think 374 00:20:38,680 --> 00:20:40,640 Speaker 1: that there are a lot of parts of the SMP 375 00:20:40,760 --> 00:20:43,760 Speaker 1: five hundred that look incredibly attractive from a free cash 376 00:20:43,760 --> 00:20:48,600 Speaker 1: flow perspective and are also relatively inexpensive versus say tech 377 00:20:48,800 --> 00:20:51,399 Speaker 1: or you know, high growth stops. At this point, de civated. 378 00:20:51,440 --> 00:20:53,959 Speaker 1: That takes us strike to energy. Why stick with it 379 00:20:54,040 --> 00:20:57,919 Speaker 1: after the massive move we've had here today, Dick with energy. 380 00:20:58,040 --> 00:21:00,800 Speaker 1: I know it sounds crazy because the set has basically 381 00:21:00,840 --> 00:21:03,600 Speaker 1: doubled or tripled, but you know, look, if you look 382 00:21:03,640 --> 00:21:07,560 Speaker 1: at at the world around us, everybody still hates energy, 383 00:21:07,640 --> 00:21:10,600 Speaker 1: and um what we found in our work is that 384 00:21:11,200 --> 00:21:14,440 Speaker 1: energy is still a massive underweight, and the average long 385 00:21:14,480 --> 00:21:18,080 Speaker 1: only portfolio same underweight that we started last year with 386 00:21:18,200 --> 00:21:20,720 Speaker 1: something close to you know, over at ten percent underweight. 387 00:21:21,000 --> 00:21:24,679 Speaker 1: But the sector has basically doubled in its size in 388 00:21:24,720 --> 00:21:28,199 Speaker 1: the benchmark. So last year it didn't necessarily hurt to 389 00:21:28,200 --> 00:21:30,520 Speaker 1: be out of the best performing sector. This year, it 390 00:21:30,560 --> 00:21:32,639 Speaker 1: is probably going to hurt a lot more. And our 391 00:21:32,720 --> 00:21:36,719 Speaker 1: view is that energy is still incredibly inexpensive, still offers 392 00:21:36,760 --> 00:21:39,480 Speaker 1: a very high free cash flow, real free cash flow 393 00:21:39,520 --> 00:21:43,040 Speaker 1: relative to other sectors. Um the free the earnings have 394 00:21:43,160 --> 00:21:45,879 Speaker 1: kept up with its price moves, and it's it's really 395 00:21:45,880 --> 00:21:49,119 Speaker 1: a sector that's gotten capital discipline. It's playing nice with 396 00:21:49,240 --> 00:21:51,439 Speaker 1: E s G investors. I said this all before on 397 00:21:51,480 --> 00:21:54,960 Speaker 1: your show. I think energy is now finally investable again. 398 00:21:55,280 --> 00:21:58,760 Speaker 1: But folks haven't necessarily moved into the sector as aggressively 399 00:21:58,880 --> 00:22:00,520 Speaker 1: as we would have expected it. And a lot of 400 00:22:00,520 --> 00:22:02,520 Speaker 1: people would agree with you. You're seeing an increasing number 401 00:22:02,560 --> 00:22:04,840 Speaker 1: of notes coming out saying that it's frankly, there's an 402 00:22:04,880 --> 00:22:08,000 Speaker 1: under allocation to commodities. What about big tech though? And 403 00:22:08,040 --> 00:22:10,000 Speaker 1: I do want to shift there just because this morning 404 00:22:10,040 --> 00:22:12,080 Speaker 1: has been the bulls and the bears on Apple, with 405 00:22:12,160 --> 00:22:14,120 Speaker 1: Dan Ives coming out and saying this is the most 406 00:22:14,320 --> 00:22:16,720 Speaker 1: attractive time to go all in since two thousand fifteen, 407 00:22:16,760 --> 00:22:19,159 Speaker 1: and then JP Market actually cutting their earnings forecast for 408 00:22:19,200 --> 00:22:22,160 Speaker 1: Apple based on a consumer appetite. Where do you sit 409 00:22:22,200 --> 00:22:25,439 Speaker 1: on this, Well, I'm not a stock analyst, but I 410 00:22:25,440 --> 00:22:27,800 Speaker 1: would say that there are parts of big tech and 411 00:22:28,000 --> 00:22:32,760 Speaker 1: there's a more yield quality, maybe old boring tech areas 412 00:22:32,840 --> 00:22:36,239 Speaker 1: that have sold off enough to become expensive. So, you know, 413 00:22:36,440 --> 00:22:39,320 Speaker 1: I think every week after big moves in the market, 414 00:22:39,680 --> 00:22:41,879 Speaker 1: what we recommend to investors is to just run a 415 00:22:41,920 --> 00:22:45,199 Speaker 1: simple screen of free cash flow to enterprise value and 416 00:22:45,240 --> 00:22:48,840 Speaker 1: look for the cheapest UH tech stops and and they 417 00:22:49,000 --> 00:22:50,919 Speaker 1: you know, the good ones rise to the top, and 418 00:22:50,960 --> 00:22:53,080 Speaker 1: those are the ones that I think are are likely 419 00:22:53,119 --> 00:22:55,919 Speaker 1: to outperform. So look for free cash flow at a 420 00:22:55,920 --> 00:22:59,280 Speaker 1: reasonable price, because, as you mentioned, cash is king. I mean, 421 00:22:59,280 --> 00:23:02,440 Speaker 1: we're moving from zero to three percent on cash. That's 422 00:23:02,480 --> 00:23:03,960 Speaker 1: all you need to know in this type of a 423 00:23:04,000 --> 00:23:07,159 Speaker 1: market environment. Soveta just to found a question the index 424 00:23:07,200 --> 00:23:09,760 Speaker 1: CO year and forty six hundred. Where are we now 425 00:23:09,920 --> 00:23:12,199 Speaker 1: only have some pages short of forty undred? What are 426 00:23:12,200 --> 00:23:15,520 Speaker 1: you telling clients about your index co? You know, look, 427 00:23:15,560 --> 00:23:17,639 Speaker 1: I mean we're neutral on equities. I think the market's 428 00:23:17,680 --> 00:23:19,760 Speaker 1: going to bounce around a lot. You know, I think 429 00:23:19,800 --> 00:23:22,160 Speaker 1: it's gonna hit our target a few times this year 430 00:23:22,200 --> 00:23:24,520 Speaker 1: and then move higher and lower. It's gonna be a 431 00:23:24,600 --> 00:23:27,720 Speaker 1: year where I believe there are gonna be opportunities to 432 00:23:27,760 --> 00:23:31,080 Speaker 1: add exposure to tech, to energy, to areas of the 433 00:23:31,080 --> 00:23:33,920 Speaker 1: market that get punished by you know, the vagaries of 434 00:23:34,119 --> 00:23:37,320 Speaker 1: fat expectations, et cetera. But forty s dred to me 435 00:23:37,400 --> 00:23:40,359 Speaker 1: still seems like a reasonable target. UM I would watch 436 00:23:40,480 --> 00:23:43,600 Speaker 1: corporate and consumer confidence. If those two measures in the 437 00:23:43,680 --> 00:23:47,239 Speaker 1: US start to ail and we see capex, you know, 438 00:23:47,440 --> 00:23:49,920 Speaker 1: expectations start to drop, that's when we would get a 439 00:23:49,920 --> 00:23:52,640 Speaker 1: little bit more bearished on ciplicals. But so far, so 440 00:23:52,720 --> 00:23:56,479 Speaker 1: good to Beta. Wonderful to catch up with you, as always, 441 00:23:56,680 --> 00:23:59,400 Speaker 1: always enjoy the rating of the research out of Bank 442 00:23:59,440 --> 00:24:09,280 Speaker 1: America's vatasive amounting the bit of execuities. We continue with 443 00:24:09,320 --> 00:24:11,600 Speaker 1: this discussion and a lot to talk about in a 444 00:24:11,680 --> 00:24:15,360 Speaker 1: divisive debate on the American economy, and there's no one 445 00:24:15,400 --> 00:24:19,400 Speaker 1: more qualified than Vincent Reinhardt with his heading of economic 446 00:24:19,440 --> 00:24:22,639 Speaker 1: research at the FED and particularly the Greenspan FED Chief 447 00:24:22,680 --> 00:24:26,000 Speaker 1: economist at Venerable Dreyfuss and Melon were thrilled at Vince 448 00:24:26,040 --> 00:24:29,119 Speaker 1: rightin Erica, join us this morning. Vince, A personal note 449 00:24:29,160 --> 00:24:31,960 Speaker 1: after I finished reading every word of the minutes yesterday. 450 00:24:32,520 --> 00:24:35,640 Speaker 1: Who writes the minutes for the FED? When you were 451 00:24:35,640 --> 00:24:38,040 Speaker 1: at the FED, were you the guy that wrote the minutes? 452 00:24:39,600 --> 00:24:41,720 Speaker 1: I finned him for the best six or seven years, 453 00:24:41,800 --> 00:24:46,800 Speaker 1: and was involved in drafting for a decade and a 454 00:24:46,880 --> 00:24:50,879 Speaker 1: half before that. But the reality is is that a 455 00:24:50,960 --> 00:24:54,560 Speaker 1: group does it, and that ultimately it's the responsibility of 456 00:24:54,600 --> 00:24:58,480 Speaker 1: the Secretary of the FOM seat at claus now. But 457 00:24:59,520 --> 00:25:04,199 Speaker 1: every draft is seen by every person who was in 458 00:25:04,280 --> 00:25:08,680 Speaker 1: the half m c room for those two days, so 459 00:25:08,880 --> 00:25:11,880 Speaker 1: it really is a group effort. Interesting, Vince, let's talk 460 00:25:11,880 --> 00:25:15,640 Speaker 1: about this interesting economy. We've seen group a massive division 461 00:25:15,680 --> 00:25:20,240 Speaker 1: this morning. Bloomberg surveillance over glass half full, half empty. 462 00:25:20,320 --> 00:25:24,080 Speaker 1: When you see claims where they are, what does that 463 00:25:24,240 --> 00:25:29,520 Speaker 1: signal to you about a fully employed America? The glass 464 00:25:29,640 --> 00:25:33,440 Speaker 1: is more than half full, and the Federal Reserve is 465 00:25:33,480 --> 00:25:37,359 Speaker 1: gonna have to uh take a little bit out and 466 00:25:37,440 --> 00:25:41,520 Speaker 1: that is a difficult pivot that they're trying to undertake 467 00:25:41,640 --> 00:25:45,439 Speaker 1: right now. Uh and uh, just you know, what was 468 00:25:45,520 --> 00:25:48,920 Speaker 1: your conversation in the last five minutes. It's really hard 469 00:25:48,960 --> 00:25:53,400 Speaker 1: to read the data. It was distorted by the pandemic depression. UH. 470 00:25:53,880 --> 00:25:57,400 Speaker 1: The the experts have no idea what the seasonals are. 471 00:25:58,240 --> 00:26:02,359 Speaker 1: You have to really appreciate eight that the information we're 472 00:26:02,400 --> 00:26:08,280 Speaker 1: getting in real time UH is is somewhat suspect. Vince it. 473 00:26:08,359 --> 00:26:10,720 Speaker 1: Do you agree with Bill Dudley that if if we 474 00:26:10,760 --> 00:26:12,560 Speaker 1: do not see more of US sell off and equities, 475 00:26:12,560 --> 00:26:14,880 Speaker 1: and if we continue to see inflation run as hot 476 00:26:14,880 --> 00:26:16,679 Speaker 1: as it's been, that the Fed is going to have 477 00:26:16,720 --> 00:26:21,440 Speaker 1: a more aggressive action against directly trying to torpedo where 478 00:26:21,440 --> 00:26:25,760 Speaker 1: equity valuations are at this point. I wouldn't put it 479 00:26:25,880 --> 00:26:30,200 Speaker 1: that bluntly, but the reality is monetary policy works through 480 00:26:30,240 --> 00:26:35,160 Speaker 1: financial markets, and unless financial conditions tightened, UH they're not, 481 00:26:36,160 --> 00:26:39,320 Speaker 1: they will be removing policy accommodation and putting restraint on 482 00:26:39,359 --> 00:26:44,640 Speaker 1: the economy. The reality is that the overnight federal funds rate, 483 00:26:44,800 --> 00:26:47,879 Speaker 1: the policy rate of the f MC, doesn't matter a 484 00:26:47,920 --> 00:26:51,080 Speaker 1: whole lot for anything. It matters how it gets priced 485 00:26:51,080 --> 00:26:54,720 Speaker 1: in through the yield curve and into other financial asset prices, 486 00:26:55,160 --> 00:26:58,080 Speaker 1: and unless those prices move in a way to tighten 487 00:26:58,160 --> 00:27:02,560 Speaker 1: financial conditions, the film seeing will not have accomplished UH 488 00:27:02,760 --> 00:27:07,520 Speaker 1: slowing the growth of aggregate demand to something more sustainable 489 00:27:07,880 --> 00:27:10,679 Speaker 1: given the level of where we are. So if the 490 00:27:10,720 --> 00:27:14,320 Speaker 1: market is pricing in several series of fifty basis point 491 00:27:14,400 --> 00:27:16,600 Speaker 1: rate hikes in a row from the Federal Reserve, as 492 00:27:16,600 --> 00:27:19,800 Speaker 1: well as potentially one point one trillion dollars a Federal 493 00:27:20,119 --> 00:27:23,240 Speaker 1: Reserve balance sheet reduction over the course of a year, 494 00:27:23,760 --> 00:27:26,160 Speaker 1: then how much further would the Fed have to go 495 00:27:26,520 --> 00:27:29,440 Speaker 1: in terms of signaling or even rate hikes to actually 496 00:27:29,480 --> 00:27:34,160 Speaker 1: tightening conditions enough. Well. Uh, One thing to point out 497 00:27:34,359 --> 00:27:39,800 Speaker 1: is even those succession at half point hikes imply the 498 00:27:39,840 --> 00:27:44,200 Speaker 1: real federal funds rate denominal federal fund graded less inflation 499 00:27:44,520 --> 00:27:49,040 Speaker 1: will still be negative. And that's the measure of policy impetus. 500 00:27:49,119 --> 00:27:51,720 Speaker 1: So a lot of what the Fed has to do 501 00:27:51,800 --> 00:27:56,240 Speaker 1: initially is just catch up. And until they have passed 502 00:27:56,280 --> 00:27:59,600 Speaker 1: the catch up stage, Uh, then it's it's time to 503 00:28:00,200 --> 00:28:03,439 Speaker 1: the questions you just did. At a pace of a 504 00:28:03,480 --> 00:28:06,480 Speaker 1: half point point point over the next couple of meetings, 505 00:28:07,119 --> 00:28:09,840 Speaker 1: the committee will still have to be tightening well into 506 00:28:09,960 --> 00:28:14,040 Speaker 1: next year. It's not a fordom. You have maybe lived 507 00:28:14,040 --> 00:28:17,920 Speaker 1: the FED more than anyone we speak to and from 508 00:28:18,000 --> 00:28:20,800 Speaker 1: Volker and with all a lile brainers in the uproar 509 00:28:20,920 --> 00:28:24,000 Speaker 1: two days ago. From Voker to where we are now, 510 00:28:24,640 --> 00:28:31,120 Speaker 1: is you look at it is the Great Moderation over? Uh? Yes, 511 00:28:31,640 --> 00:28:35,320 Speaker 1: I think that's right. We have one way to put 512 00:28:35,359 --> 00:28:40,280 Speaker 1: it is we've had two generational shocks, a great finding, 513 00:28:40,760 --> 00:28:45,400 Speaker 1: a pandemic, and uh European war in the space of 514 00:28:45,480 --> 00:28:49,080 Speaker 1: two and a half years. And that's within a decade 515 00:28:49,120 --> 00:28:53,520 Speaker 1: of what we have fought was the Great financial contraction. Uh, 516 00:28:53,920 --> 00:28:57,880 Speaker 1: We've We've added a lot more to volatility. Importantly, the 517 00:28:57,920 --> 00:29:03,360 Speaker 1: Great Moderation was the great anchoring of inflation expectation. We 518 00:29:03,560 --> 00:29:08,840 Speaker 1: achieved what Volker and Greenspan talked about a situation in 519 00:29:08,880 --> 00:29:13,120 Speaker 1: which households and firms were concerned about a changeable price 520 00:29:13,200 --> 00:29:16,680 Speaker 1: level in making their decisions. Were out of that range. 521 00:29:16,840 --> 00:29:19,840 Speaker 1: And we're probably out of the Great Moderation as well. 522 00:29:20,000 --> 00:29:22,800 Speaker 1: So Vince right at the money question is if the 523 00:29:22,920 --> 00:29:28,000 Speaker 1: moderation is over? Greenspan invented with you along the X 524 00:29:28,040 --> 00:29:35,360 Speaker 1: axis this word measured. Are we done being measured? Remember? 525 00:29:35,440 --> 00:29:42,760 Speaker 1: Greenspan also produced the policy tightening of that included uh, 526 00:29:42,920 --> 00:29:46,920 Speaker 1: started with quarters, then put in intermeding actions, then fifties 527 00:29:47,000 --> 00:29:50,680 Speaker 1: and seventy five. Uh. So I think he was willing 528 00:29:50,720 --> 00:29:53,840 Speaker 1: to do what was appropriate. I think you're right. I 529 00:29:53,880 --> 00:29:59,840 Speaker 1: think that being measured at this point, uh has some drawback. 530 00:30:00,560 --> 00:30:04,520 Speaker 1: I think a better word than measured is predictable. The 531 00:30:04,600 --> 00:30:07,040 Speaker 1: fact could do a lot, but they could let everybody 532 00:30:07,080 --> 00:30:11,080 Speaker 1: know about what they're going to do. A feature of 533 00:30:11,200 --> 00:30:15,400 Speaker 1: ninety four ninety five that we forget is markets were 534 00:30:15,440 --> 00:30:19,240 Speaker 1: really volatile. There are a number of blow ups, including 535 00:30:19,280 --> 00:30:24,960 Speaker 1: Orange County and prominent and prominent hedge funds. So uh, 536 00:30:25,000 --> 00:30:29,040 Speaker 1: if you have a more assertive and changeable fed to 537 00:30:29,120 --> 00:30:33,560 Speaker 1: address macroeconomic concerns, we might just get a lot more 538 00:30:34,000 --> 00:30:37,480 Speaker 1: financial market volatility. To Vincent Ran, how that of dry 539 00:30:37,560 --> 00:30:40,080 Speaker 1: for cementa Vincent great to catch out with you said. 540 00:30:41,480 --> 00:30:45,240 Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join 541 00:30:45,360 --> 00:30:48,680 Speaker 1: us live weekdays from seven to ten am Eastern on 542 00:30:48,800 --> 00:30:53,040 Speaker 1: Bloomberg Radio and on Bloomberg Television each day from six 543 00:30:53,120 --> 00:30:58,000 Speaker 1: to nine am for insight from the best and economics, finance, investment, 544 00:30:58,120 --> 00:31:03,160 Speaker 1: and international relations. And subscribe to the Surveillance podcast on 545 00:31:03,240 --> 00:31:07,040 Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course on 546 00:31:07,160 --> 00:31:11,280 Speaker 1: the terminal. I'm Tom keene In. This is Bloomberg