WEBVTT - Surveillance: Fed Owes Mea Culpa, Says Dudley 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 Brownowitz Jaily. 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 --> 0:00:23.799 To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:29.560 and of course on the Bloomberg terminal. It's one for 0:00:29.680 --> 0:00:32.200 you from Bill Dudley. The headline of his latest pace, 0:00:32.240 --> 0:00:35.680 The Federal Reserve owes the world a mia coppa. Bill Dudley, 0:00:35.680 --> 0:00:38.200 bloom Big Opinion columnist and former New York Fed President, 0:00:38.200 --> 0:00:40.199 a good friend of this program as well, joined us 0:00:40.320 --> 0:00:43.000 right now, Bill, let's start there, a mia coppo. What 0:00:43.040 --> 0:00:45.680 do you want that to look like? I think the 0:00:45.800 --> 0:00:48.720 Fed needs to explain to the world what went wrong? Why? 0:00:48.840 --> 0:00:50.720 Why are we having to rage rates on four d 0:00:50.840 --> 0:00:53.720 basis points this year four percentage points since year. That's 0:00:53.760 --> 0:00:55.920 a huge amount of taking in a short period of 0:00:55.920 --> 0:00:59.520 time and is evidence that the FIT was very late. Um, 0:00:59.680 --> 0:01:01.600 the FIT made a couple of mistakes. Number one, how 0:01:01.640 --> 0:01:05.280 they implemented their two percent average inflation regime and they 0:01:05.319 --> 0:01:07.399 basically tied their hands and said we can't raise rates 0:01:07.440 --> 0:01:10.080 until a whole bunch of things happen. Number two, they 0:01:10.120 --> 0:01:13.880 made some important forecasting errors, both on inflation and enter 0:01:13.920 --> 0:01:16.240 tightness of the livor market. I think you know, doing 0:01:16.240 --> 0:01:19.120 a mea culp. I think it's important to basically build 0:01:19.160 --> 0:01:22.840 the fits credibility for the future. If you don't admit error, 0:01:23.280 --> 0:01:25.640 how can you be confident that that the central play 0:01:25.680 --> 0:01:29.000 will make make a whole another mistake next time? But 0:01:29.280 --> 0:01:31.520 do you think they can do both of that and 0:01:31.560 --> 0:01:33.360 do something which you asked them to do a number 0:01:33.400 --> 0:01:36.319 of weeks ago, which is to be much more open 0:01:36.400 --> 0:01:39.440 about the pain that this country, this economy is about 0:01:39.480 --> 0:01:41.880 to go through. And I wonder if they do both. 0:01:42.360 --> 0:01:44.240 You say it enhance its credibility. Do you think it 0:01:44.280 --> 0:01:49.000 also invites questions about whether it should retain its independence? Well, 0:01:49.040 --> 0:01:50.920 I think you wanted the Central Bank to retain its 0:01:50.960 --> 0:01:54.560 independence because you don't want monetary policy to be politicized 0:01:55.160 --> 0:01:58.000 monetary policy, Because politicize you're gonna have even worse mindory 0:01:58.080 --> 0:02:00.880 policy that we've gotten over the last couple of years. Bill. 0:02:00.920 --> 0:02:04.000 On the flip side, there is an increasing chorus of 0:02:04.200 --> 0:02:06.560 big names saying that the Fed is moving to make 0:02:06.600 --> 0:02:09.359 a policy error. On the other side, by raising too 0:02:09.400 --> 0:02:12.280 far that a deep recession is not an inevitability, but 0:02:12.360 --> 0:02:15.280 will be the consequence of them and raising rates as 0:02:15.360 --> 0:02:17.720 much as they're expected to raise rates. Are you sympathetic 0:02:17.720 --> 0:02:20.840 to that view? Well, I think that's a logical outcome 0:02:20.840 --> 0:02:22.880 of being very slow to tighten in the first place. 0:02:23.120 --> 0:02:24.640 You've been slow to tighten, and you have to do 0:02:24.680 --> 0:02:26.799 a lot to catch up. If you do a lot 0:02:26.840 --> 0:02:28.720 to catch up, you may not notice that you've done 0:02:28.760 --> 0:02:32.000 more than that's actually sufficient. I think you know, hard 0:02:32.080 --> 0:02:34.560 landing is very likely because the labor market has gotten 0:02:34.560 --> 0:02:36.480 too tight. The FED needs to push the unemploying rate 0:02:36.520 --> 0:02:39.600 up significantly, and that's likely to lead to a recession. 0:02:40.080 --> 0:02:42.440 I think it's almost inevitable at this point. What's the 0:02:42.480 --> 0:02:45.440 economic benefit to the FED coming out and being honest 0:02:45.800 --> 0:02:47.600 and saying what John was pointing out is a very 0:02:47.639 --> 0:02:50.680 difficult message to swallow, which is we made mistakes. Oh 0:02:50.720 --> 0:02:53.079 and by the way, we're gonna necessarily make a mistake 0:02:53.080 --> 0:02:56.680 on the other side, tighten into a hard landing. What 0:02:56.760 --> 0:02:58.920 does that give them in terms of credibility that can 0:02:58.960 --> 0:03:02.200 actually help meal your the cycle. Well, I think that 0:03:02.280 --> 0:03:04.200 they are not going to say that we're going to 0:03:04.240 --> 0:03:06.480 take on purpose to generate a recession. I don't think 0:03:06.520 --> 0:03:09.160 you'd ever expected center back to to say that, but 0:03:09.240 --> 0:03:11.720 I do think Paul has now endorsed the notion that 0:03:11.720 --> 0:03:13.799 there is going to be some pain involved. I think 0:03:13.800 --> 0:03:15.720 what the FIT has not done, though, is admitted how 0:03:15.720 --> 0:03:17.519 do we get into this mess in the first place. 0:03:17.880 --> 0:03:20.520 And I think that's part of the message that the 0:03:20.560 --> 0:03:24.000 FIT needs to send to Marcus to build their credibility 0:03:24.000 --> 0:03:26.079 for the future and build credit to you. I remember 0:03:26.080 --> 0:03:28.760 doing a panel with you and Muhammad Alarian back in June, 0:03:28.840 --> 0:03:32.919 maybe May of one, and you're both making this point 0:03:32.960 --> 0:03:35.760 that the FAT needs to appreciate some two way risk here. 0:03:35.800 --> 0:03:38.560 Perhaps start by pulling back on que that would have 0:03:38.640 --> 0:03:42.160 meant maybe going six months earlier than they actually did. Bill, 0:03:42.920 --> 0:03:45.040 What difference would six months have made, do you think? 0:03:46.680 --> 0:03:49.000 I think that the end of going earlier is you 0:03:49.000 --> 0:03:51.560 wouldn't have to go as fast and you have more 0:03:51.600 --> 0:03:54.880 ability to assess the effects of your actions. Right now, 0:03:54.920 --> 0:03:57.360 they have to get to take very quickly, and given 0:03:57.400 --> 0:03:59.920 a lot long legs of Montary policy, this is increases 0:04:00.040 --> 0:04:02.320 the risk that they overdo it. If you spread out 0:04:02.320 --> 0:04:05.040 the Monterey paulicy tightening over longer period of time, you 0:04:05.040 --> 0:04:08.000 have more time to assess the impact of your actions. 0:04:08.960 --> 0:04:11.080 You've talked Bill about how you could see a peak 0:04:11.120 --> 0:04:13.600 FED funds rate north of five percent. The market is 0:04:13.640 --> 0:04:16.200 coming to your view. You're out front that way right 0:04:16.200 --> 0:04:18.600 now in the market we have a nearly four point 0:04:18.680 --> 0:04:22.200 seven percent terminal rate for next year. Where have you 0:04:22.320 --> 0:04:24.680 changed your view on where you think the FED has 0:04:24.720 --> 0:04:27.320 to go in order to bring in inflation and honestly 0:04:27.360 --> 0:04:31.520 address some of the flaws of the previous thinking. I 0:04:31.520 --> 0:04:33.359 don't think it's so much that the peak and rates 0:04:33.360 --> 0:04:35.039 has to be higher. I think the fact is the 0:04:35.040 --> 0:04:37.119 FED has to hold that peak for for a longer 0:04:37.120 --> 0:04:39.520 period time. I think the Fed's pop strategy here is 0:04:39.560 --> 0:04:43.000 not to just keep hiking regardless of what's what's happening 0:04:43.000 --> 0:04:44.920 in terms of the real economy. But I think they 0:04:44.920 --> 0:04:46.800 want to go to a restrictive policy and then they 0:04:46.839 --> 0:04:49.560 want to hold it there until they see clear signs 0:04:49.560 --> 0:04:53.040 that's actually bringing inflation down and generating more slack in 0:04:53.080 --> 0:04:55.200 the U s leavel market. I built one for to 0:04:55.240 --> 0:04:57.320 catch up a great rate as always, and good have 0:04:57.320 --> 0:04:59.240 you on the program with us this morning. Built Donte 0:04:59.240 --> 0:05:01.760 that they form new York Fed President and now, of 0:05:01.800 --> 0:05:08.960 course Bloomberg opinion columnists, amongst other things. Shout joins USNAP, 0:05:09.000 --> 0:05:12.680 chief Global strategistic Principal Asset Management seem a ringing the 0:05:12.720 --> 0:05:15.640 bout at the nastact today, buzzing for that. I'm sure 0:05:15.680 --> 0:05:17.440 I always look up, don't you always look up around 0:05:17.440 --> 0:05:19.760 the open and bound, and people emphatically clap and with 0:05:19.800 --> 0:05:21.960 their hands even even when it's down, which is always 0:05:22.040 --> 0:05:24.320 kind of I always find that would if we're down today, 0:05:24.360 --> 0:05:27.560 when you screaming and shouting, I'm going to clap, You're 0:05:27.560 --> 0:05:30.400 still going to clap even if we're down. Okay, opportunities 0:05:30.440 --> 0:05:32.960 to buy? Is that? Is that going to be your 0:05:33.000 --> 0:05:37.000 story whilst you're here, the opportunities to buy this on today? No, No, 0:05:37.160 --> 0:05:39.520 I have to say, I think I think there's there's 0:05:39.560 --> 0:05:41.919 worse to come from the market. Unfortunately. You know, you 0:05:41.960 --> 0:05:44.080 talk about we talk all the time about the third 0:05:44.080 --> 0:05:46.400 about inflation, about growth, and then you're adding all these 0:05:46.520 --> 0:05:50.479 additional geopolitical pressures. It's very difficult to find anything to 0:05:50.480 --> 0:05:52.560 be positive about at the moment, and a lot of 0:05:52.560 --> 0:05:54.359 these things. I don't think it's fully priced into the 0:05:54.400 --> 0:05:57.320 market either. Earning seasons. Of course, it's going to be 0:05:57.320 --> 0:06:00.080 really interesting. We are expecting to see weakness study to 0:06:00.120 --> 0:06:03.160 really feed through now, um, a lot of the narrative 0:06:03.200 --> 0:06:06.039 about march and pressures, but also just generally starting to 0:06:06.080 --> 0:06:09.599 feel the pressure of consumers potentially putting back from next year. 0:06:09.640 --> 0:06:11.839 So there's a lot I think to be concerned about convestors. 0:06:11.920 --> 0:06:13.960 When you say it's not priced yet, out of everything 0:06:14.000 --> 0:06:16.919 you've just said, what isn't priced, I still think that 0:06:16.960 --> 0:06:19.120 the recession is not priced right, So I think the 0:06:19.160 --> 0:06:22.320 market is eventually. I mean, look, it keeps switching every 0:06:22.320 --> 0:06:24.560 few days, but I think generally speaking, the market is 0:06:24.600 --> 0:06:26.279 coming to terms with the idea that rates are going 0:06:26.320 --> 0:06:28.720 to go higher and they're going to stay there for longer. 0:06:28.760 --> 0:06:30.919 As well. The bit that the market is still playing 0:06:30.960 --> 0:06:33.600 around with is this recession. You know a lot of 0:06:33.640 --> 0:06:36.400 people still thinking that soft landing is possible. We think 0:06:36.440 --> 0:06:40.320 it's very unlikely. Um And with recession, unfortually does come 0:06:40.560 --> 0:06:43.960 and exprocession. So which aspects of the market are not 0:06:44.040 --> 0:06:46.760 sufficiently priced? Because some people might look at retail for example, 0:06:47.000 --> 0:06:48.880 they might look at some of the semiconductors and they'll 0:06:48.880 --> 0:06:52.159 say recessions price there Where is it not or is 0:06:52.160 --> 0:06:56.320 it even client on semiconductors that has not fully appreciated 0:06:56.360 --> 0:06:59.080 the depth of this downturn, not just whether there will 0:06:59.080 --> 0:07:01.520 be a technical recession. So, like you said, I think 0:07:01.560 --> 0:07:03.800 there are segments of the market which really have struggled, 0:07:03.839 --> 0:07:06.480 and semi conductors have have been one of them. Unfortunately, 0:07:06.520 --> 0:07:08.880 latest news probably suggests that they could be from further 0:07:08.920 --> 0:07:11.680 down Downblard movement from there. So valuations at this kind 0:07:11.680 --> 0:07:14.720 of stage, they are instructive, but they're not going to 0:07:14.800 --> 0:07:16.680 tell the full story. So in the same way, in 0:07:16.680 --> 0:07:19.200 the last five ten years, we've known that valuations are 0:07:19.240 --> 0:07:21.480 very expensive, but it hasn't stopped markets from going up. 0:07:22.400 --> 0:07:24.720 Cheap valuations don't necessarily mean that markets are not going 0:07:24.760 --> 0:07:27.080 to go down. Further, I was reading a piece of 0:07:27.120 --> 0:07:30.200 research over the weekend which was talking about how if 0:07:30.240 --> 0:07:32.960 you look at some of the AII sentiment, it looks 0:07:33.000 --> 0:07:35.480 really bearish. People say they're feeling terrible, things are going 0:07:35.480 --> 0:07:37.160 to go down, and then you look at their actual 0:07:37.200 --> 0:07:40.360 positioning and they're still pretty invested in equities. They're still 0:07:40.360 --> 0:07:43.400 actually fairly bullish, at least in terms of their positioning. 0:07:43.880 --> 0:07:48.960 What's the trigger to wash that out? So I think 0:07:49.480 --> 0:07:51.040 I'm not sure if you're going to see necessarily a 0:07:51.120 --> 0:07:53.920 washing out, because even from today, you know, we are 0:07:53.960 --> 0:07:56.800 expecting further declines. But the quant the one question that 0:07:56.880 --> 0:07:58.640 keeps coming up. I've been traveling around the US in 0:07:58.640 --> 0:08:01.160 the last week. The question keeps coming up. It's like, 0:08:01.160 --> 0:08:02.760 but when is this flow going to come? When can 0:08:02.800 --> 0:08:05.200 I start buy right? So that is the question that 0:08:05.200 --> 0:08:07.080 people are trying to figure out. When is the timing 0:08:07.080 --> 0:08:09.640 for them to increase their exposure. And I think at 0:08:09.680 --> 0:08:11.880 this stage, you know, if we look at historical bear 0:08:11.960 --> 0:08:16.640 market cycles, your average downfall is that if you're down 0:08:17.440 --> 0:08:18.560 and you don't think this is going to be like 0:08:18.560 --> 0:08:21.600 the GFC, then we're more than halfway there. So if 0:08:21.640 --> 0:08:23.680 you're not already underweight, this is probably not the time 0:08:23.720 --> 0:08:26.440 to start reducing even further. What do they ask you 0:08:26.440 --> 0:08:29.280 about Europe when you tow this country? How much do 0:08:29.320 --> 0:08:33.000 they hate that market right now? So much? But I 0:08:33.080 --> 0:08:36.199 understand that, and actually I fully agree with our perspective 0:08:36.240 --> 0:08:38.800 for the Europe It is a very very challenging time. 0:08:38.840 --> 0:08:40.640 And I think that what we're starting to see in 0:08:40.679 --> 0:08:43.880 the US is they are understanding that actually, in Europe 0:08:43.880 --> 0:08:47.160 this situation is considerably worse um, and put on top 0:08:47.200 --> 0:08:49.680 of that is there's so many things that we cannot predict. 0:08:49.920 --> 0:08:51.959 We're not meteorologists. We cannot predict what the weather is 0:08:51.960 --> 0:08:54.160 going to be. No one in the whole world probably 0:08:54.160 --> 0:08:57.400 cann can predict what's going on Putin's head. So with 0:08:57.520 --> 0:09:02.199 those two incredible uncertainties, despite European valuations being so cheap, 0:09:02.720 --> 0:09:05.000 this is probably not the time to increase your exposure 0:09:05.000 --> 0:09:06.520 when you have those two things hanging of you. You 0:09:06.600 --> 0:09:09.520 talked about the persistence of this, particularly around rates, that 0:09:09.559 --> 0:09:11.200 we could be living with this for the next twelve 0:09:11.200 --> 0:09:14.000 months or so, then that's also a conversation taking place 0:09:14.080 --> 0:09:15.920 much more sub in Europe now that we could be 0:09:15.920 --> 0:09:18.439 living with this for more than one winter, maybe too, 0:09:18.600 --> 0:09:21.319 perhaps even longer. When you start to think about the 0:09:21.400 --> 0:09:23.720 United States in that respect, ten years ago we talked 0:09:23.720 --> 0:09:26.360 about the United States decoupling for the mess that was 0:09:26.360 --> 0:09:28.800 playing out in Europe. Is that still the case? Would 0:09:28.840 --> 0:09:31.360 you say say that's still the case? I think it 0:09:31.400 --> 0:09:33.240 is to some extent. I mean, one of the things 0:09:33.320 --> 0:09:35.400 that we are studying to fill is that in the 0:09:35.480 --> 0:09:38.400 US there is this belief that there is a complete decoupling. 0:09:39.000 --> 0:09:41.400 But of course that doesn't happen. You know, Europe. Whatever 0:09:41.440 --> 0:09:45.440 European tensions there are, whatever the energy situation is, they 0:09:45.480 --> 0:09:48.440 will be leakage into the US. In Europe, You're already 0:09:48.440 --> 0:09:51.480 seeing this huge substitution from natural gas towards oil, and 0:09:51.480 --> 0:09:54.080 of course there will be inevitable repercussions for the US 0:09:54.120 --> 0:09:56.000 as well. So I don't think it's a full decoupling. 0:09:56.000 --> 0:09:58.880 I think the U s does come out better than 0:09:58.960 --> 0:10:02.280 Europe sunny, not completely compling. Okay, so wear with me. 0:10:02.480 --> 0:10:05.040 But everyone who I know is going to Europe for 0:10:05.120 --> 0:10:09.320 a vacation, including Tom Keane, who's over in Europe right now. 0:10:09.760 --> 0:10:12.480 And we're hearing about the negative effect from the strong 0:10:12.520 --> 0:10:15.440 dollar on US companies, But that's because things are on 0:10:15.520 --> 0:10:19.040 sale effectively from say European industrial So when is the 0:10:19.080 --> 0:10:22.360 currency differential a good thing for Europe the way it 0:10:22.440 --> 0:10:24.840 used to be, say five years ago, when the currency 0:10:24.880 --> 0:10:27.640 wars were reversed. Well, I think you've already seen some 0:10:27.679 --> 0:10:29.720 of that play out this summer, which is why you 0:10:29.760 --> 0:10:32.600 haven't seen European GDP actually contract yet. If you look 0:10:32.640 --> 0:10:34.679 at Spain, Italy, all of the southern European countries have 0:10:34.800 --> 0:10:38.040 benefited significantly from the weak currency and that is going 0:10:38.120 --> 0:10:40.520 to moderate a little bit some of the downtown that 0:10:40.559 --> 0:10:42.600 Europe is going to feel. But this is I mean, 0:10:42.600 --> 0:10:44.640 from an investment perspective for the U S it's one 0:10:44.640 --> 0:10:47.120 of the key reasons why we've been overweight midcaps Roden 0:10:47.160 --> 0:10:50.920 lodge cap. The MidCap exposure to domestic is significantly higher 0:10:50.920 --> 0:10:53.360 than what you see for large camp UM and you 0:10:53.360 --> 0:10:55.240 know they've out performed to be expecting to continue to 0:10:55.240 --> 0:10:57.840 our perform. One theme that we've heard from a lot 0:10:57.880 --> 0:11:00.600 of the investors who we speak with is it's starting 0:11:00.600 --> 0:11:03.880 to look attractive to go into longer dated bonds. How 0:11:03.960 --> 0:11:06.520 much conviction do you have around that kind of view, 0:11:06.880 --> 0:11:09.800 both in the US but also in places like Europe. 0:11:10.400 --> 0:11:12.760 So we have, for example, increase or exposure to long 0:11:12.840 --> 0:11:16.400 dated bonds fairly significantly in the last two months. UM 0:11:16.520 --> 0:11:18.480 A couple of reasons. One is that we are, as 0:11:18.480 --> 0:11:20.880 I said, expecting recession to hit next year, and in 0:11:20.920 --> 0:11:23.960 that environment typically you should see down with pressure on yields. 0:11:24.000 --> 0:11:26.040 But like you said, in Europe, there's the added pressure. 0:11:26.080 --> 0:11:28.280 What are central banks doing there raising rates but they're 0:11:28.320 --> 0:11:30.920 also pushing down the long end, or at least they're 0:11:30.920 --> 0:11:33.600 trying to push down the long end. At some point 0:11:33.600 --> 0:11:35.040 there's going to be some kind of success or at 0:11:35.080 --> 0:11:37.720 least it's going to stop any further movement. So if 0:11:37.720 --> 0:11:39.120 you have to be anywhere in the yield, cuve, I 0:11:39.120 --> 0:11:40.480 would rather be on the long end than the short 0:11:40.520 --> 0:11:43.680 land for sure. In the guild market or treasuries, I 0:11:43.800 --> 0:11:46.199 don't think you want to be in the UK. I 0:11:46.280 --> 0:11:47.880 asked the question because you're based in London. I just 0:11:47.880 --> 0:11:50.280 wondered whether you've been buying guilts in the last couple 0:11:50.280 --> 0:11:53.800 of weeks. We did not foresee what was going to 0:11:53.840 --> 0:11:56.120 happen to the guild market, like anyone else, I think 0:11:56.559 --> 0:12:00.840 UM just generally speaking, the UK, we have the serious 0:12:00.840 --> 0:12:03.640 concerns about the fiscal story is not going to improve. 0:12:03.720 --> 0:12:05.800 I think as much as they can walk back, there 0:12:05.840 --> 0:12:08.160 are certain segments of that political story, the fiscal story, 0:12:08.200 --> 0:12:10.280 that they're going to stick to. So if you're looking 0:12:10.320 --> 0:12:13.040 at a longer term horizon, in the UK has worse 0:12:13.080 --> 0:12:16.160 inflation problem, it's got a worse growth problem. So if 0:12:16.160 --> 0:12:17.480 I had to pick one over the other, I would 0:12:17.480 --> 0:12:19.200 pick the U S Halloween budget. What do you want 0:12:19.200 --> 0:12:23.480 from there? As an economist, I want them to underwind everything, 0:12:23.920 --> 0:12:26.360 undwind everything, just go back to having some serious fiscal 0:12:26.400 --> 0:12:29.760 policy where they're trying to actually balance the budget in 0:12:29.800 --> 0:12:31.600 the same way that really in the UK, unlike many 0:12:31.600 --> 0:12:35.520 other countries, fiscal balancing is a hallmark a fiscal policy 0:12:35.559 --> 0:12:37.840 for the last two decades. So for them to walk 0:12:37.840 --> 0:12:40.000 away from it at this time is a very difficult time. 0:12:40.200 --> 0:12:43.199 In two or three years time, who knows trickled down 0:12:43.200 --> 0:12:45.920 economics could work. Do you think that everyone in the 0:12:46.000 --> 0:12:48.240 UK right now you ask them about what's going on 0:12:48.240 --> 0:12:50.240 with the guilt market, and they just sort of sigh 0:12:50.240 --> 0:12:52.080 and look at you like, please, can I just disappear 0:12:52.160 --> 0:12:55.200 right now by the guilt market? Sort of? Someone did 0:12:55.200 --> 0:12:57.400 buy the guilt market and made a tremendous amount of money. 0:12:57.960 --> 0:12:59.960 I just say that when the bank having been stepped, dear, 0:13:00.040 --> 0:13:02.520 and yields dropped by what a hundred basis points at 0:13:02.600 --> 0:13:04.600 one point in that day, Which is the reason why 0:13:04.760 --> 0:13:06.559 I mean to see him as point the reason why 0:13:06.559 --> 0:13:08.960 the long end perhaps is getting some credence or some 0:13:09.040 --> 0:13:12.000 conviction on people because they do believe eventually central banks 0:13:12.000 --> 0:13:14.520 will step in at least for that because of some 0:13:14.559 --> 0:13:17.400 of the structural issues that require something from without them 0:13:17.400 --> 0:13:19.080 stepping in. At some point, you'd have to believe bonds 0:13:19.080 --> 0:13:22.760 start behaving like bonds go into an economic downturn. People 0:13:22.800 --> 0:13:25.160 have gotten wrong what that point is though, again and again, 0:13:25.360 --> 0:13:27.680 and we have seen people change their expectations for how 0:13:27.760 --> 0:13:30.079 high yields could go. And at this point, I think 0:13:30.080 --> 0:13:32.720 there's a feeling of being shaken a bit about what 0:13:32.920 --> 0:13:35.400 is the base at this point after a world of 0:13:35.480 --> 0:13:38.880 zero rates for so long, massively zero confidence in a 0:13:38.920 --> 0:13:42.120 high volatility world, zero confidence, a complete lack of conviction 0:13:42.160 --> 0:13:44.400 seem with thank you, enjoy ringing the bow, you press 0:13:44.440 --> 0:13:49.600 a button, right, There's nothing cool about that? Is that 0:13:49.720 --> 0:13:56.000 just sort of principlesca management should go in with your 0:13:56.040 --> 0:14:10.760 own balance, just you know, shake things up. Yeah, film 0:14:11.000 --> 0:14:12.320 is going to join us now. It feels like euro 0:14:12.480 --> 0:14:15.120 crisis all over again, except it's different chief economist to 0:14:15.120 --> 0:14:17.920 acts or investment managers. So let's start there. Let's just 0:14:17.920 --> 0:14:20.480 start with the key differences between what we're facing now 0:14:20.520 --> 0:14:23.200 and what we face back then. Well, first of all, 0:14:23.280 --> 0:14:27.600 at the time, we had massive external imbalances in the periphery. 0:14:27.680 --> 0:14:29.960 We had massive current agaunt deficits. So you had an 0:14:29.960 --> 0:14:31.640 issue with the government, but you had an issue with 0:14:31.680 --> 0:14:34.000 the way the entire economy was working in the South 0:14:34.040 --> 0:14:36.920 of Europe. You don't have that now. Of the those 0:14:36.920 --> 0:14:42.560 countries have really Donald, good Joe and re establishing proper 0:14:42.840 --> 0:14:45.960 external external position. The other big differences that we have 0:14:46.040 --> 0:14:49.000 different instruments. The big issue we had in two thousand 0:14:49.000 --> 0:14:50.920 and ten and ten thousand and eleven is that there 0:14:51.000 --> 0:14:53.760 was nothing in the arsenal that you could use to 0:14:53.760 --> 0:14:56.280 actually stop this. We don't have the the s M, 0:14:56.360 --> 0:14:59.800 we didn't have an ECB, which after that has proved 0:15:00.120 --> 0:15:03.600 it's deexibility. So there was this, you know, scrambled to 0:15:03.720 --> 0:15:07.440 finding institutional solutions in just a matter of month. Now 0:15:07.520 --> 0:15:09.880 at least we know that we can rely on those 0:15:09.880 --> 0:15:13.040 emergency mechanisms if things get to the point that we 0:15:13.120 --> 0:15:15.280 need to to to use them. And I think the 0:15:15.280 --> 0:15:18.200 market knows it, and that explains It's one of the 0:15:18.240 --> 0:15:20.560 reasons why we have unseen, for instance, a lot of 0:15:20.600 --> 0:15:24.800 contagion moving away from Italy and and and and affecting 0:15:24.840 --> 0:15:27.080 other countries in the South. We know that the instruments 0:15:27.080 --> 0:15:29.440 are there. They came up with o MT We're drunk 0:15:29.520 --> 0:15:31.480 in the summer twenty twelve and the beauty of lantiers. 0:15:31.520 --> 0:15:33.760 It never got activated, never had to be used. This 0:15:33.840 --> 0:15:37.040 summer they came up with tp I, the Transmission Protection Instrument. 0:15:37.160 --> 0:15:39.800 Is that right, t p I? Okay, when does tp 0:15:39.840 --> 0:15:43.040 I start to become a real consideration? Fifty basis points 0:15:43.040 --> 0:15:45.160 to spread right now, I'm just trying to wonder what's 0:15:45.160 --> 0:15:47.960 the threshold when that starts to kick in. They they've 0:15:48.000 --> 0:15:49.680 never been clear on this, and they don't want to 0:15:49.720 --> 0:15:52.120 be clear on this. I'm talking about the CP Obviously 0:15:52.120 --> 0:15:54.560 there's a noo full lot of discretion there. And I 0:15:54.560 --> 0:15:57.560 guess is that it's not just a case of the 0:15:57.680 --> 0:15:59.880 level of the spread or the level of interest rates, 0:15:59.920 --> 0:16:02.840 the speed at which things are moving, and so far 0:16:02.880 --> 0:16:05.840 it's been fairly contained. The biggest issue for me with 0:16:05.920 --> 0:16:08.320 t p I is actually not of a technical nature. 0:16:08.440 --> 0:16:11.920 It's it's political. The way t p I has been designed, 0:16:12.200 --> 0:16:15.840 it's definitely not uh done in a way that would 0:16:15.840 --> 0:16:19.720 protect the governments against its own mistakes. And that's the issue. 0:16:20.160 --> 0:16:22.680 If you could come up with the situation where the 0:16:22.760 --> 0:16:26.760 market is punishing a state for things which has not 0:16:26.880 --> 0:16:30.280 even done or announced, then TPI is probably there. If 0:16:30.400 --> 0:16:33.040 a government is doing stuff which is triggering a sort 0:16:33.080 --> 0:16:36.040 of rational reaction by the market, then t p I 0:16:36.160 --> 0:16:39.280 is probably not the right instrument, and then you need 0:16:39.320 --> 0:16:41.800 to go to to MT. But so far, at least, 0:16:41.800 --> 0:16:43.600 the news that we have from Italy, which is the 0:16:43.600 --> 0:16:45.720 biggest tissue in there, is that the government, the new 0:16:45.760 --> 0:16:48.440 government we don't have one yet, but the noises we 0:16:48.560 --> 0:16:50.760 got from the new majority so that they want to 0:16:50.760 --> 0:16:54.120 be prudent. So if they don't do if they don't 0:16:54.120 --> 0:16:58.200 make big policy announcement that would make the CB nervous, 0:16:58.600 --> 0:17:01.200 they could actually benefit from TP and there's a relationship 0:17:01.200 --> 0:17:03.000 with the market that you can build on that. I 0:17:03.080 --> 0:17:04.840 just can hear your voice in my head right now, 0:17:05.119 --> 0:17:07.880 so I can hear Jonathan you're saying, yeah, you're mind 0:17:07.880 --> 0:17:10.520 reading because it's very loud right now, and he's saying, Okay, 0:17:10.520 --> 0:17:12.840 So they're gonna talk about political risk and the peripheries. 0:17:13.040 --> 0:17:15.080 What about the fact that Germany is the biggest risk 0:17:15.200 --> 0:17:17.240 right now to the entire European economy and that some 0:17:17.280 --> 0:17:20.560 of these things. So there you go. So what's the 0:17:20.600 --> 0:17:24.080 what's the answer. How is this situation different, both with 0:17:24.119 --> 0:17:28.520 the political considerations and from just distinguishing from the euro 0:17:28.600 --> 0:17:32.040 crisis of two thousand ten, considering that Germany is one 0:17:32.080 --> 0:17:34.359 of the biggest problems, one of the biggest downside risks 0:17:34.400 --> 0:17:38.480 to the entire economic outlook. Germany is clearly one of 0:17:38.520 --> 0:17:41.960 the biggest downside risks to the macro story, but it's 0:17:42.000 --> 0:17:45.000 also the country which is the whitest policy space, and 0:17:45.040 --> 0:17:47.639 they are using their policy space quite a lot. I mean, 0:17:47.640 --> 0:17:49.880 you've seen the announcements that we we had last week 0:17:49.880 --> 0:17:53.240 from from the German government. The steel can mitigate a 0:17:53.359 --> 0:17:55.960 lot of the current pressure that they get from from 0:17:56.000 --> 0:17:59.840 from guys prices with the billions that they are about 0:18:00.240 --> 0:18:04.000 to spend. So in this case, yes, it's quite negative. 0:18:04.040 --> 0:18:08.080 Of the last two three quarters. A recession in Germany 0:18:08.280 --> 0:18:11.240 is absolutely unavoidable, I think at this stage. But we 0:18:11.359 --> 0:18:14.760 know that they can deal with this on their own forces, 0:18:15.119 --> 0:18:17.560 which is not something that we have in other countries. 0:18:17.640 --> 0:18:19.920 That's the big difference. Although you do have to wonder 0:18:19.960 --> 0:18:21.760 how much higher inflation is going to be for a 0:18:21.800 --> 0:18:24.760 longer period of time given the fiscal response in Germany, 0:18:25.119 --> 0:18:28.360 and that the political pressure from the peripher regions will 0:18:28.400 --> 0:18:31.240 say if you guys can have such a big fiscal response, 0:18:31.600 --> 0:18:34.080 we can too, because you're gonna just let us you 0:18:34.119 --> 0:18:37.480 know suffer as we finance your deficit by bringing down 0:18:37.480 --> 0:18:40.720 the cost of your your financing through a weaker euro 0:18:41.400 --> 0:18:45.240 a Keyshue. There thing is um whether all this triggers 0:18:45.359 --> 0:18:48.719 another round of debt mutilization in Europe, which is definitely 0:18:48.720 --> 0:18:50.720 what we need to see when we have the pandemic. 0:18:50.840 --> 0:18:54.320 We ended up with debt mutilization. It was partial, obviously, 0:18:54.320 --> 0:18:56.080 it was the next generation pack, but we did it. 0:18:56.600 --> 0:18:59.760 I'm a bit surprised and disappointed that we haven't seen 0:18:59.760 --> 0:19:03.480 more progress on debt another round of demonetrilization to deal 0:19:03.640 --> 0:19:05.840