Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferrell and Lisa Brownowitz Jaily. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. It's one for
Speaker 1: you from Bill Dudley. The headline of his latest pace,
Speaker 1: The Federal Reserve owes the world a mia coppa. Bill Dudley,
Speaker 1: bloom Big Opinion columnist and former New York Fed President,
Speaker 1: a good friend of this program as well, joined us
Speaker 1: right now, Bill, let's start there, a mia coppo. What
Speaker 1: do you want that to look like? I think the
Speaker 1: Fed needs to explain to the world what went wrong? Why?
Speaker 1: Why are we having to rage rates on four d
Speaker 1: basis points this year four percentage points since year. That's
Speaker 1: a huge amount of taking in a short period of
Speaker 1: time and is evidence that the FIT was very late. Um,
Speaker 1: the FIT made a couple of mistakes. Number one, how
Speaker 1: they implemented their two percent average inflation regime and they
Speaker 1: basically tied their hands and said we can't raise rates
Speaker 1: until a whole bunch of things happen. Number two, they
Speaker 1: made some important forecasting errors, both on inflation and enter
Speaker 1: tightness of the livor market. I think you know, doing
Speaker 1: a mea culp. I think it's important to basically build
Speaker 1: the fits credibility for the future. If you don't admit error,
Speaker 1: how can you be confident that that the central play
Speaker 1: will make make a whole another mistake next time? But
Speaker 1: do you think they can do both of that and
Speaker 1: do something which you asked them to do a number
Speaker 1: of weeks ago, which is to be much more open
Speaker 1: about the pain that this country, this economy is about
Speaker 1: to go through. And I wonder if they do both.
Speaker 1: You say it enhance its credibility. Do you think it
Speaker 1: also invites questions about whether it should retain its independence? Well,
Speaker 1: I think you wanted the Central Bank to retain its
Speaker 1: independence because you don't want monetary policy to be politicized
Speaker 1: monetary policy, Because politicize you're gonna have even worse mindory
Speaker 1: policy that we've gotten over the last couple of years. Bill.
Speaker 1: On the flip side, there is an increasing chorus of
Speaker 1: big names saying that the Fed is moving to make
Speaker 1: a policy error. On the other side, by raising too
Speaker 1: far that a deep recession is not an inevitability, but
Speaker 1: will be the consequence of them and raising rates as
Speaker 1: much as they're expected to raise rates. Are you sympathetic
Speaker 1: to that view? Well, I think that's a logical outcome
Speaker 1: of being very slow to tighten in the first place.
Speaker 1: You've been slow to tighten, and you have to do
Speaker 1: a lot to catch up. If you do a lot
Speaker 1: to catch up, you may not notice that you've done
Speaker 1: more than that's actually sufficient. I think you know, hard
Speaker 1: landing is very likely because the labor market has gotten
Speaker 1: too tight. The FED needs to push the unemploying rate
Speaker 1: up significantly, and that's likely to lead to a recession.
Speaker 1: I think it's almost inevitable at this point. What's the
Speaker 1: economic benefit to the FED coming out and being honest
Speaker 1: and saying what John was pointing out is a very
Speaker 1: difficult message to swallow, which is we made mistakes. Oh
Speaker 1: and by the way, we're gonna necessarily make a mistake
Speaker 1: on the other side, tighten into a hard landing. What
Speaker 1: does that give them in terms of credibility that can
Speaker 1: actually help meal your the cycle. Well, I think that
Speaker 1: they are not going to say that we're going to
Speaker 1: take on purpose to generate a recession. I don't think
Speaker 1: you'd ever expected center back to to say that, but
Speaker 1: I do think Paul has now endorsed the notion that
Speaker 1: there is going to be some pain involved. I think
Speaker 1: what the FIT has not done, though, is admitted how
Speaker 1: do we get into this mess in the first place.
Speaker 1: And I think that's part of the message that the
Speaker 1: FIT needs to send to Marcus to build their credibility
Speaker 1: for the future and build credit to you. I remember
Speaker 1: doing a panel with you and Muhammad Alarian back in June,
Speaker 1: maybe May of one, and you're both making this point
Speaker 1: that the FAT needs to appreciate some two way risk here.
Speaker 1: Perhaps start by pulling back on que that would have
Speaker 1: meant maybe going six months earlier than they actually did. Bill,
Speaker 1: What difference would six months have made, do you think?
Speaker 1: I think that the end of going earlier is you
Speaker 1: wouldn't have to go as fast and you have more
Speaker 1: ability to assess the effects of your actions. Right now,
Speaker 1: they have to get to take very quickly, and given
Speaker 1: a lot long legs of Montary policy, this is increases
Speaker 1: the risk that they overdo it. If you spread out
Speaker 1: the Monterey paulicy tightening over longer period of time, you
Speaker 1: have more time to assess the impact of your actions.
Speaker 1: You've talked Bill about how you could see a peak
Speaker 1: FED funds rate north of five percent. The market is
Speaker 1: coming to your view. You're out front that way right
Speaker 1: now in the market we have a nearly four point
Speaker 1: seven percent terminal rate for next year. Where have you
Speaker 1: changed your view on where you think the FED has
Speaker 1: to go in order to bring in inflation and honestly
Speaker 1: address some of the flaws of the previous thinking. I
Speaker 1: don't think it's so much that the peak and rates
Speaker 1: has to be higher. I think the fact is the
Speaker 1: FED has to hold that peak for for a longer
Speaker 1: period time. I think the Fed's pop strategy here is
Speaker 1: not to just keep hiking regardless of what's what's happening
Speaker 1: in terms of the real economy. But I think they
Speaker 1: want to go to a restrictive policy and then they
Speaker 1: want to hold it there until they see clear signs
Speaker 1: that's actually bringing inflation down and generating more slack in
Speaker 1: the U s leavel market. I built one for to
Speaker 1: catch up a great rate as always, and good have
Speaker 1: you on the program with us this morning. Built Donte
Speaker 1: that they form new York Fed President and now, of
Speaker 1: course Bloomberg opinion columnists, amongst other things. Shout joins USNAP,
Speaker 1: chief Global strategistic Principal Asset Management seem a ringing the
Speaker 1: bout at the nastact today, buzzing for that. I'm sure
Speaker 1: I always look up, don't you always look up around
Speaker 1: the open and bound, and people emphatically clap and with
Speaker 1: their hands even even when it's down, which is always
Speaker 1: kind of I always find that would if we're down today,
Speaker 1: when you screaming and shouting, I'm going to clap, You're
Speaker 1: still going to clap even if we're down. Okay, opportunities
Speaker 1: to buy? Is that? Is that going to be your
Speaker 1: story whilst you're here, the opportunities to buy this on today? No, No,
Speaker 1: I have to say, I think I think there's there's
Speaker 1: worse to come from the market. Unfortunately. You know, you
Speaker 1: talk about we talk all the time about the third
Speaker 1: about inflation, about growth, and then you're adding all these
Speaker 1: additional geopolitical pressures. It's very difficult to find anything to
Speaker 1: be positive about at the moment, and a lot of
Speaker 1: these things. I don't think it's fully priced into the
Speaker 1: market either. Earning seasons. Of course, it's going to be
Speaker 1: really interesting. We are expecting to see weakness study to
Speaker 1: really feed through now, um, a lot of the narrative
Speaker 1: about march and pressures, but also just generally starting to
Speaker 1: feel the pressure of consumers potentially putting back from next year.
Speaker 1: So there's a lot I think to be concerned about convestors.
Speaker 1: When you say it's not priced yet, out of everything
Speaker 1: you've just said, what isn't priced, I still think that
Speaker 1: the recession is not priced right, So I think the
Speaker 1: market is eventually. I mean, look, it keeps switching every
Speaker 1: few days, but I think generally speaking, the market is
Speaker 1: coming to terms with the idea that rates are going
Speaker 1: to go higher and they're going to stay there for longer.
Speaker 1: As well. The bit that the market is still playing
Speaker 1: around with is this recession. You know a lot of
Speaker 1: people still thinking that soft landing is possible. We think
Speaker 1: it's very unlikely. Um And with recession, unfortually does come
Speaker 1: and exprocession. So which aspects of the market are not
Speaker 1: sufficiently priced? Because some people might look at retail for example,
Speaker 1: they might look at some of the semiconductors and they'll
Speaker 1: say recessions price there Where is it not or is
Speaker 1: it even client on semiconductors that has not fully appreciated
Speaker 1: the depth of this downturn, not just whether there will
Speaker 1: be a technical recession. So, like you said, I think
Speaker 1: there are segments of the market which really have struggled,
Speaker 1: and semi conductors have have been one of them. Unfortunately,
Speaker 1: latest news probably suggests that they could be from further
Speaker 1: down Downblard movement from there. So valuations at this kind
Speaker 1: of stage, they are instructive, but they're not going to
Speaker 1: tell the full story. So in the same way, in
Speaker 1: the last five ten years, we've known that valuations are
Speaker 1: very expensive, but it hasn't stopped markets from going up.
Speaker 1: Cheap valuations don't necessarily mean that markets are not going
Speaker 1: to go down. Further, I was reading a piece of
Speaker 1: research over the weekend which was talking about how if
Speaker 1: you look at some of the AII sentiment, it looks
Speaker 1: really bearish. People say they're feeling terrible, things are going
Speaker 1: to go down, and then you look at their actual
Speaker 1: positioning and they're still pretty invested in equities. They're still
Speaker 1: actually fairly bullish, at least in terms of their positioning.
Speaker 1: What's the trigger to wash that out? So I think
Speaker 1: I'm not sure if you're going to see necessarily a
Speaker 1: washing out, because even from today, you know, we are
Speaker 1: expecting further declines. But the quant the one question that
Speaker 1: keeps coming up. I've been traveling around the US in
Speaker 1: the last week. The question keeps coming up. It's like,
Speaker 1: but when is this flow going to come? When can
Speaker 1: I start buy right? So that is the question that
Speaker 1: people are trying to figure out. When is the timing
Speaker 1: for them to increase their exposure. And I think at
Speaker 1: this stage, you know, if we look at historical bear
Speaker 1: market cycles, your average downfall is that if you're down
Speaker 1: and you don't think this is going to be like
Speaker 1: the GFC, then we're more than halfway there. So if
Speaker 1: you're not already underweight, this is probably not the time
Speaker 1: to start reducing even further. What do they ask you
Speaker 1: about Europe when you tow this country? How much do
Speaker 1: they hate that market right now? So much? But I
Speaker 1: understand that, and actually I fully agree with our perspective
Speaker 1: for the Europe It is a very very challenging time.
Speaker 1: And I think that what we're starting to see in
Speaker 1: the US is they are understanding that actually, in Europe
Speaker 1: this situation is considerably worse um, and put on top
Speaker 1: of that is there's so many things that we cannot predict.
Speaker 1: We're not meteorologists. We cannot predict what the weather is
Speaker 1: going to be. No one in the whole world probably
Speaker 1: cann can predict what's going on Putin's head. So with
Speaker 1: those two incredible uncertainties, despite European valuations being so cheap,
Speaker 1: this is probably not the time to increase your exposure
Speaker 1: when you have those two things hanging of you. You
Speaker 1: talked about the persistence of this, particularly around rates, that
Speaker 1: we could be living with this for the next twelve
Speaker 1: months or so, then that's also a conversation taking place
Speaker 1: much more sub in Europe now that we could be
Speaker 1: living with this for more than one winter, maybe too,
Speaker 1: perhaps even longer. When you start to think about the
Speaker 1: United States in that respect, ten years ago we talked
Speaker 1: about the United States decoupling for the mess that was
Speaker 1: playing out in Europe. Is that still the case? Would
Speaker 1: you say say that's still the case? I think it
Speaker 1: is to some extent. I mean, one of the things
Speaker 1: that we are studying to fill is that in the
Speaker 1: US there is this belief that there is a complete decoupling.
Speaker 1: But of course that doesn't happen. You know, Europe. Whatever
Speaker 1: European tensions there are, whatever the energy situation is, they
Speaker 1: will be leakage into the US. In Europe, You're already
Speaker 1: seeing this huge substitution from natural gas towards oil, and
Speaker 1: of course there will be inevitable repercussions for the US
Speaker 1: as well. So I don't think it's a full decoupling.
Speaker 1: I think the U s does come out better than
Speaker 1: Europe sunny, not completely compling. Okay, so wear with me.
Speaker 1: But everyone who I know is going to Europe for
Speaker 1: a vacation, including Tom Keane, who's over in Europe right now.
Speaker 1: And we're hearing about the negative effect from the strong
Speaker 1: dollar on US companies, But that's because things are on
Speaker 1: sale effectively from say European industrial So when is the
Speaker 1: currency differential a good thing for Europe the way it
Speaker 1: used to be, say five years ago, when the currency
Speaker 1: wars were reversed. Well, I think you've already seen some
Speaker 1: of that play out this summer, which is why you
Speaker 1: haven't seen European GDP actually contract yet. If you look
Speaker 1: at Spain, Italy, all of the southern European countries have
Speaker 1: benefited significantly from the weak currency and that is going
Speaker 1: to moderate a little bit some of the downtown that
Speaker 1: Europe is going to feel. But this is I mean,
Speaker 1: from an investment perspective for the U S it's one
Speaker 1: of the key reasons why we've been overweight midcaps Roden
Speaker 1: lodge cap. The MidCap exposure to domestic is significantly higher
Speaker 1: than what you see for large camp UM and you
Speaker 1: know they've out performed to be expecting to continue to
Speaker 1: our perform. One theme that we've heard from a lot
Speaker 1: of the investors who we speak with is it's starting
Speaker 1: to look attractive to go into longer dated bonds. How
Speaker 1: much conviction do you have around that kind of view,
Speaker 1: both in the US but also in places like Europe.
Speaker 1: So we have, for example, increase or exposure to long
Speaker 1: dated bonds fairly significantly in the last two months. UM
Speaker 1: A couple of reasons. One is that we are, as
Speaker 1: I said, expecting recession to hit next year, and in
Speaker 1: that environment typically you should see down with pressure on yields.
Speaker 1: But like you said, in Europe, there's the added pressure.
Speaker 1: What are central banks doing there raising rates but they're
Speaker 1: also pushing down the long end, or at least they're
Speaker 1: trying to push down the long end. At some point
Speaker 1: there's going to be some kind of success or at
Speaker 1: least it's going to stop any further movement. So if
Speaker 1: you have to be anywhere in the yield, cuve, I
Speaker 1: would rather be on the long end than the short
Speaker 1: land for sure. In the guild market or treasuries, I
Speaker 1: don't think you want to be in the UK. I
Speaker 1: asked the question because you're based in London. I just
Speaker 1: wondered whether you've been buying guilts in the last couple
Speaker 1: of weeks. We did not foresee what was going to
Speaker 1: happen to the guild market, like anyone else, I think
Speaker 1: UM just generally speaking, the UK, we have the serious
Speaker 1: concerns about the fiscal story is not going to improve.
Speaker 1: I think as much as they can walk back, there
Speaker 1: are certain segments of that political story, the fiscal story,
Speaker 1: that they're going to stick to. So if you're looking
Speaker 1: at a longer term horizon, in the UK has worse
Speaker 1: inflation problem, it's got a worse growth problem. So if
Speaker 1: I had to pick one over the other, I would
Speaker 1: pick the U S Halloween budget. What do you want
Speaker 1: from there? As an economist, I want them to underwind everything,
Speaker 1: undwind everything, just go back to having some serious fiscal
Speaker 1: policy where they're trying to actually balance the budget in
Speaker 1: the same way that really in the UK, unlike many
Speaker 1: other countries, fiscal balancing is a hallmark a fiscal policy
Speaker 1: for the last two decades. So for them to walk
Speaker 1: away from it at this time is a very difficult time.
Speaker 1: In two or three years time, who knows trickled down
Speaker 1: economics could work. Do you think that everyone in the
Speaker 1: UK right now you ask them about what's going on
Speaker 1: with the guilt market, and they just sort of sigh
Speaker 1: and look at you like, please, can I just disappear
Speaker 1: right now by the guilt market? Sort of? Someone did
Speaker 1: buy the guilt market and made a tremendous amount of money.
Speaker 1: I just say that when the bank having been stepped, dear,
Speaker 1: and yields dropped by what a hundred basis points at
Speaker 1: one point in that day, Which is the reason why
Speaker 1: I mean to see him as point the reason why
Speaker 1: the long end perhaps is getting some credence or some
Speaker 1: conviction on people because they do believe eventually central banks
Speaker 1: will step in at least for that because of some
Speaker 1: of the structural issues that require something from without them
Speaker 1: stepping in. At some point, you'd have to believe bonds
Speaker 1: start behaving like bonds go into an economic downturn. People
Speaker 1: have gotten wrong what that point is though, again and again,
Speaker 1: and we have seen people change their expectations for how
Speaker 1: high yields could go. And at this point, I think
Speaker 1: there's a feeling of being shaken a bit about what
Speaker 1: is the base at this point after a world of
Speaker 1: zero rates for so long, massively zero confidence in a
Speaker 1: high volatility world, zero confidence, a complete lack of conviction
Speaker 1: seem with thank you, enjoy ringing the bow, you press
Speaker 1: a button, right, There's nothing cool about that? Is that
Speaker 1: just sort of principlesca management should go in with your
Speaker 1: own balance, just you know, shake things up. Yeah, film
Speaker 1: is going to join us now. It feels like euro
Speaker 1: crisis all over again, except it's different chief economist to
Speaker 1: acts or investment managers. So let's start there. Let's just
Speaker 1: start with the key differences between what we're facing now
Speaker 1: and what we face back then. Well, first of all,
Speaker 1: at the time, we had massive external imbalances in the periphery.
Speaker 1: We had massive current agaunt deficits. So you had an
Speaker 1: issue with the government, but you had an issue with
Speaker 1: the way the entire economy was working in the South
Speaker 1: of Europe. You don't have that now. Of the those
Speaker 1: countries have really Donald, good Joe and re establishing proper
Speaker 1: external external position. The other big differences that we have
Speaker 1: different instruments. The big issue we had in two thousand
Speaker 1: and ten and ten thousand and eleven is that there
Speaker 1: was nothing in the arsenal that you could use to
Speaker 1: actually stop this. We don't have the the s M,
Speaker 1: we didn't have an ECB, which after that has proved
Speaker 1: it's deexibility. So there was this, you know, scrambled to
Speaker 1: finding institutional solutions in just a matter of month. Now
Speaker 1: at least we know that we can rely on those
Speaker 1: emergency mechanisms if things get to the point that we
Speaker 1: need to to to use them. And I think the
Speaker 1: market knows it, and that explains It's one of the
Speaker 1: reasons why we have unseen, for instance, a lot of
Speaker 1: contagion moving away from Italy and and and and affecting
Speaker 1: other countries in the South. We know that the instruments
Speaker 1: are there. They came up with o MT We're drunk
Speaker 1: in the summer twenty twelve and the beauty of lantiers.
Speaker 1: It never got activated, never had to be used. This
Speaker 1: summer they came up with tp I, the Transmission Protection Instrument.
Speaker 1: Is that right, t p I? Okay, when does tp
Speaker 1: I start to become a real consideration? Fifty basis points
Speaker 1: to spread right now, I'm just trying to wonder what's
Speaker 1: the threshold when that starts to kick in. They they've
Speaker 1: never been clear on this, and they don't want to
Speaker 1: be clear on this. I'm talking about the CP Obviously
Speaker 1: there's a noo full lot of discretion there. And I
Speaker 1: guess is that it's not just a case of the
Speaker 1: level of the spread or the level of interest rates,
Speaker 1: the speed at which things are moving, and so far
Speaker 1: it's been fairly contained. The biggest issue for me with
Speaker 1: t p I is actually not of a technical nature.
Speaker 1: It's it's political. The way t p I has been designed,
Speaker 1: it's definitely not uh done in a way that would
Speaker 1: protect the governments against its own mistakes. And that's the issue.
Speaker 1: If you could come up with the situation where the
Speaker 1: market is punishing a state for things which has not
Speaker 1: even done or announced, then TPI is probably there. If
Speaker 1: a government is doing stuff which is triggering a sort
Speaker 1: of rational reaction by the market, then t p I
Speaker 1: is probably not the right instrument, and then you need
Speaker 1: to go to to MT. But so far, at least,
Speaker 1: the news that we have from Italy, which is the
Speaker 1: biggest tissue in there, is that the government, the new
Speaker 1: government we don't have one yet, but the noises we
Speaker 1: got from the new majority so that they want to
Speaker 1: be prudent. So if they don't do if they don't
Speaker 1: make big policy announcement that would make the CB nervous,
Speaker 1: they could actually benefit from TP and there's a relationship
Speaker 1: with the market that you can build on that. I
Speaker 1: just can hear your voice in my head right now,
Speaker 1: so I can hear Jonathan you're saying, yeah, you're mind
Speaker 1: reading because it's very loud right now, and he's saying, Okay,
Speaker 1: So they're gonna talk about political risk and the peripheries.
Speaker 1: What about the fact that Germany is the biggest risk
Speaker 1: right now to the entire European economy and that some
Speaker 1: of these things. So there you go. So what's the
Speaker 1: what's the answer. How is this situation different, both with
Speaker 1: the political considerations and from just distinguishing from the euro
Speaker 1: crisis of two thousand ten, considering that Germany is one
Speaker 1: of the biggest problems, one of the biggest downside risks
Speaker 1: to the entire economic outlook. Germany is clearly one of
Speaker 1: the biggest downside risks to the macro story, but it's
Speaker 1: also the country which is the whitest policy space, and
Speaker 1: they are using their policy space quite a lot. I mean,
Speaker 1: you've seen the announcements that we we had last week
Speaker 1: from from the German government. The steel can mitigate a
Speaker 1: lot of the current pressure that they get from from
Speaker 1: from guys prices with the billions that they are about
Speaker 1: to spend. So in this case, yes, it's quite negative.
Speaker 1: Of the last two three quarters. A recession in Germany
Speaker 1: is absolutely unavoidable, I think at this stage. But we
Speaker 1: know that they can deal with this on their own forces,
Speaker 1: which is not something that we have in other countries.
Speaker 1: That's the big difference. Although you do have to wonder
Speaker 1: how much higher inflation is going to be for a
Speaker 1: longer period of time given the fiscal response in Germany,
Speaker 1: and that the political pressure from the peripher regions will
Speaker 1: say if you guys can have such a big fiscal response,
Speaker 1: we can too, because you're gonna just let us you
Speaker 1: know suffer as we finance your deficit by bringing down
Speaker 1: the cost of your your financing through a weaker euro
Speaker 1: a Keyshue. There thing is um whether all this triggers
Speaker 1: another round of debt mutilization in Europe, which is definitely
Speaker 1: what we need to see when we have the pandemic.
Speaker 1: We ended up with debt mutilization. It was partial, obviously,
Speaker 1: it was the next generation pack, but we did it.
Speaker 1: I'm a bit surprised and disappointed that we haven't seen
Speaker 1: more progress on debt another round of demonetrilization to deal
Speaker 1: with the full out from the Ukraine War. But there's
Speaker 1: going to be a point where we will get there.
Speaker 1: I mean, Europe is always no tiring for for external
Speaker 1: observers because it takes so much time to get to
Speaker 1: the right solutions. But I'm quite convinced that if we
Speaker 1: get a situation where we will see bigger cracks appearing
Speaker 1: in our fabric, you will see this further movement of demonotization.
Speaker 1: You will see a clear capacity from the EU as
Speaker 1: an entity to provide support to the most fragile countries.
Speaker 1: We've done this with Italy with the next Generation packed
Speaker 1: fourth standing It's not done to deal with the full
Speaker 1: of the Ukraine War. But I really have no doubt
Speaker 1: that we would get there if it be. Let's talk
Speaker 1: about the cracks right now. The mystery for many of
Speaker 1: us the e c P. Why is it not forecasting
Speaker 1: a recession? How on earth they're not forecast and recession
Speaker 1: in the euroSign Now I was, I was, I was
Speaker 1: very surprised, and then I knew. I reminded myself of
Speaker 1: of of my time when I was in central banking.
Speaker 1: You probably don't want to be the one, you know,
Speaker 1: validating market expectations of of of the recession. You probably
Speaker 1: don't want to add to the general bleakness in in
Speaker 1: in in the system by coming up with a very scary,
Speaker 1: scary forecast. I guess it's part of of what central
Speaker 1: banks usually do. I notice that in the U s
Speaker 1: to feders taken an offul left time before saying that yes,
Speaker 1: maybe unemployment would have to rise to get inflation back
Speaker 1: under control. Well, it should be the same in in Europe.
Speaker 1: Central bank very rarely want to be at the bottom
Speaker 1: of the distribution when it comes to forecasts. Sure, except
Speaker 1: that there is a credibility issue that the central banks
Speaker 1: will go through with the tightening plans they're projecting because
Speaker 1: casual observers would say, well, you put A plus B together,
Speaker 1: you get recession. And they're saying no, no, no, A
Speaker 1: plus B equals roses and lots of beautiful things. So
Speaker 1: at what point does that undermine the faith that they
Speaker 1: will continue with their tightening cycle. Well, they don't deny
Speaker 1: the risk of the recession to be to be fair,
Speaker 1: and we we didn't have a super rosy mess age
Speaker 1: coming from from from from the CB. But they are
Speaker 1: in a complicated position because and that's a big difference
Speaker 1: with with the U s um inflation in Europe is
Speaker 1: not or is not essentially domestically driven. It's none o
Speaker 1: our fault to to to to to to to summarize,
Speaker 1: and we have an ECB which is forced into tightening
Speaker 1: UH to keep inflation expectations anchored in a situation of
Speaker 1: massively adverse supply side chalk. It's not an easy thing
Speaker 1: to explain, especially if we've spent the last twenty years,
Speaker 1: not just in Europe but also in the US explaining
Speaker 1: to a stakeholders in the real economy, middles in the
Speaker 1: markets that you know what central banks have have your
Speaker 1: back at this time. No, Sorry, central banks cannot have
Speaker 1: your back because there's an inflation issue, there's an inflation
Speaker 1: expectations issue, and central banks are not going to be
Speaker 1: to be your friend. It's incredibly complicated to explain again
Speaker 1: coming up to twenty years of military policies which have
Speaker 1: been explore and they're only accommodative. They're delaying the inevitable,
Speaker 1: thou aren't they? They have to confront this at some point.
Speaker 1: They're talking about raising interest rates. A lot of people
Speaker 1: assume that by the end of the year, this is
Speaker 1: the economic situation we're looking at, whether they forecasted it
Speaker 1: or not, and they keep on hiking as the numbers
Speaker 1: clearly show this economy is in recession. Yeah. My My
Speaker 1: point is that if there, I think there's already debate
Speaker 1: actually at the ECB, which is for now not having
Speaker 1: a direct impact on their immediate decisions. Um, they all
Speaker 1: agree on the idea that no, our monijtory stance with supercommodative,
Speaker 1: you bring it, let's say, to the upper end of
Speaker 1: the neutral range, and then this is where the differences appear.
Speaker 1: You have those we're going to say, I don't care,
Speaker 1: I just continue hiking as long as insolations there and others,
Speaker 1: And I would probably agree with with those who would say, look,
Speaker 1: once we've brought I would probably see rate at your
Speaker 1: band of neutral range, let's stop awhile, let's pose, and
Speaker 1: let's see how things happen. But for the tending, there
Speaker 1: is an alignment actually of doves and whole around this
Speaker 1: idea that in any case our stands was far too
Speaker 1: accommodative to start with. So I don't expect actually this
Speaker 1: debate to really trigger, to really have an impact on
Speaker 1: decisions before the very end of this year. In the meantime,
Speaker 1: it's you, as as Jo will say, they will keep
Speaker 1: at it. Are you feeling the pain if you're a
Speaker 1: dollar parity personally in your first few days of being
Speaker 1: hit and certainly not the most move all the rule
Speaker 1: person on on on earth. But yeah, I've been in
Speaker 1: New York for two days now, and yeah, you feel
Speaker 1: you feel that your coffee is much worse it sp
Speaker 1: It's a shock, Grandma. I took the other side of
Speaker 1: the trade, going after Europe, and it feels so much better.
Speaker 1: So isn't it great? Everything's on sale. It's so exciting
Speaker 1: for Americans going over jail. It's a fantastic time. Please,
Speaker 1: we we need you, We need Americans. It was there
Speaker 1: in the summer and every where you went, I just
Speaker 1: had American accents Everywhemerican accents pretty much everywhere. Joe Mark,
Speaker 1: thank you sir. It's going to see it. It's why
Speaker 1: Maxi Investment managers and I know you're going down to
Speaker 1: the m F meeting, so enjoy. Bobby Orga can talk
Speaker 1: to us about energy to understand Manergy Future Senior strategist
Speaker 1: and executive director and Miszoo. Bobby, you said you're not
Speaker 1: a big belief in the OPEC plus two million barrel
Speaker 1: production cup. What do you mean by that? Well, I
Speaker 1: think they will see only about one to one point
Speaker 1: one one point two million barrels and cuts that are
Speaker 1: actually made in this opeque um production cut deal. You'll
Speaker 1: see Saudi Arabia cut. They're good for the word United
Speaker 1: at of Ram rights same thing. But there's a lot
Speaker 1: of folks in a lot of countries in OPEC that
Speaker 1: are under producing for size, they're not going to cut
Speaker 1: production further. Russia is basically around one point three below
Speaker 1: the existing quota going into the OPEC meeting. Nigeria was
Speaker 1: about eight hundred thousand barrels below. Angola was four hundred
Speaker 1: thousand barrels below. They're not going to cut any further.
Speaker 1: And a lot of the other participating countries are happy
Speaker 1: just to stay where they were. They're not going to
Speaker 1: go out and pull back on production today. Um, They're
Speaker 1: just going to do their best to stay where they are.
Speaker 1: This struggling to be where they are, So I would
Speaker 1: see I would expect to see Salty's cut. I expect
Speaker 1: to see you a cut for about one point one
Speaker 1: million barrels given the lack of spare capacity, bob wire
Speaker 1: prices not higher demand is really the issue here. I
Speaker 1: think that's another one that do PEC folks missed a
Speaker 1: little bit. The problem is not supply, the problem is demand. Um,
Speaker 1: we are here. The dollar is higher for starters. That
Speaker 1: is a reverse correlation to the to the barrel to
Speaker 1: crude oil. Higher the dollar, the less dollar it takes
Speaker 1: to make to buy a barrel of crude oil. Uh.
Speaker 1: China situation is very negative for for OPEC. That's a
Speaker 1: big piece of the demand puzzle that's been taken off
Speaker 1: the off the table. So until that comes back, you're
Speaker 1: not gonna get We're not going to return to a
Speaker 1: hundred and thirty dollars like we were in March. Um,
Speaker 1: but you also have the global economy teetering on the
Speaker 1: brink of global recession here, that's a demand event. Cutting
Speaker 1: barrels is not going to make a big difference there, Bob.
Speaker 1: On October six, the People's Party Congress National Congress over
Speaker 1: in China is going to kick off, and a lot
Speaker 1: of people are looking at this as a threshold moment
Speaker 1: after which perhaps the zero COVID policy could be lifted
Speaker 1: in some capacity. What would happen if you did see
Speaker 1: a softening, especially as we've heard pushback from other officials
Speaker 1: recently about how unsustainable as policy really is. If you
Speaker 1: come out and you see that red headline on the
Speaker 1: Bloomberg terminal, that's going to definitely see the price go
Speaker 1: up a little bit here. Um, we probably would trade
Speaker 1: towards if China is on the way back, and if
Speaker 1: that's a big move in the right direction, we probably
Speaker 1: will see the market trade towards one hundred dollars. But
Speaker 1: I don't see it returning to a hundred and thirty
Speaker 1: dollars where it was at the beginning of the Ukraine crisis.
Speaker 1: So yes, that would be um that's a big piece.
Speaker 1: That would be a big demand construction event. It would
Speaker 1: be very positive for the market. But um bob. And
Speaker 1: beyond that, with the FED still likely to increase the
Speaker 1: situation by basis points next meeting fifty the one after that,
Speaker 1: I mean, you're purposely pulling back on the global economy.
Speaker 1: So it's it's going to leave a mark. Hi bubb,
Speaker 1: Thank you, sirs. Wi bup yoga that f Americus. This
Speaker 1: is the Bloomberg Surveillance Podcast. Thanks for listening. Join us
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Speaker 1: the terminal. I'm Tom Keene and this is Bloomberg