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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

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Speaker 1: with Jonathan Ferrell and Lisa Brownowitz Jaily. We bring you

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Speaker 1: insight from the best and economics, finance, investment, and international relations.

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Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com,

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Speaker 1: and of course on the Bloomberg terminal. If you want

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Speaker 1: to clear up John, you can go to Wikipedia and

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Speaker 1: you can see the theory that the pros use off

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Speaker 1: of what Chairman Paul yesterday. One of those expert on

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Speaker 1: the theory is a gentleman from Berkeley. William Dudley joins us,

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Speaker 1: the former president of the New York Fed. Obviously for

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Speaker 1: years at Goldman Sex. Bill Dudley, you separate the men

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Speaker 1: from the boys, the women from the girls with the

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Speaker 1: logic theory of necessary and sufficiency in an undergraduate ass

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Speaker 1: you speak of the necessary and the sufficiency that we

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Speaker 1: saw yesterday from Chairman Powell. What did he do that

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Speaker 1: you say was not sufficient? Well, I think that he

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Speaker 1: did a good job and basically edging closer to the

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Speaker 1: notion of we're gonna start to do the taper, but

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Speaker 1: not so much so that it puts the markets on edge.

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Speaker 1: The general expectation at this point is uh that probably

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Speaker 1: won't start tapering, probably won't make the announcement on tapering

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Speaker 1: until November December, and probably won't start until early next year.

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Speaker 1: So I think we did a good job on that.

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Speaker 1: Where I would but where I would say the Fed

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Speaker 1: hasn't gone far enough is the changes that they've made

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Speaker 1: in terms of there that's it, Danny repo facility that

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Speaker 1: they announced yesterday. It's a good start to have a

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Speaker 1: standing repo facility backstop the treasury market, but they capt

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Speaker 1: its size at five billion, and they limited limited access

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Speaker 1: to only primary dealers, and I think the access should

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Speaker 1: be considerably broader than that to support to support the

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Speaker 1: function of the treasury market. Also, I think they need

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Speaker 1: to make changes to their capers so that when the

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Speaker 1: FED buys treasuries and agency mortgage backed securies and that

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Speaker 1: increases reserves in the banking system, that doesn't interfere but

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Speaker 1: with good market functioning in the treasury market. These are

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Speaker 1: delicate phrases and we appreciate the candidacy. As a former

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Speaker 1: government official, Bill Duddley, we have the overnight repo market

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Speaker 1: now moving back up through one trillion dollars. Let's cut

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Speaker 1: to the chase here. If the overnight goes near a trillion,

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Speaker 1: above a trillion, how will the FED adapt and adjust

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Speaker 1: to that? There's no magic number that where where If

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Speaker 1: the FED is soaking up a trillion dollars of of

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Speaker 1: repo through their reverse overnight, that's not a problem. But

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Speaker 1: I think it does tell you that there are consequences

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Speaker 1: of of the FEDS asset purchases banking systems. It's essentially

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Speaker 1: a washing reserves and that's making the leverage ratio more binding,

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Speaker 1: which is constraining banks activities, and it's also causing banks

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Speaker 1: to essentially push away corporate deposits. The thing could fix

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Speaker 1: this by making changes to how the leverage ratio is calculated,

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Speaker 1: and I think they should do this sooner rather than later.

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Speaker 1: Is a treasury market as it is now broken? I

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Speaker 1: don't think it's broken. It just needs a little bit

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Speaker 1: more belt and suspenders. Uh. The standing repo facility is

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Speaker 1: a good start, but as a Group of thirty report

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Speaker 1: with published yesterday points out, there's a lot of other

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Speaker 1: things that need to be done to the US treasury market.

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Speaker 1: The G three report talks about central clearing of treasuries

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Speaker 1: for customer trades that would make the market. I think

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Speaker 1: a lot more solid talks about increasing the transparency in

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Speaker 1: US treasury market. So having a standing repo facility is

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Speaker 1: a good start, but there's a lot more to put

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Speaker 1: the US treasing market on a firmer footing. This may

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Speaker 1: sound esoteric, it is not. It is the underpinning of

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Speaker 1: the what we pay for all of the loans that

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Speaker 1: we take out is the fun underpinning, frankly, the functioning

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Speaker 1: of Wall Street. And there is a question about the

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Speaker 1: functioning of the treasury yield as as an indicator right now.

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Speaker 1: Even fed share Powell came out and said he didn't

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Speaker 1: quite a understand why yields where we're where they were,

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Speaker 1: And a lot of analysts have raised the issue of liquidity,

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Speaker 1: the fact that there are these malfunctioning aspects of the

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Speaker 1: bond market that made it get very difficult to get

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Speaker 1: a clear signal from treasuries. Do you think that that

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Speaker 1: is a factor in yields that are persistently low given

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Speaker 1: the inflationary outlook. Well, I'm surprised by how low long

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Speaker 1: dated treasure yields are given the level of inflation. The

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Speaker 1: fact that commedies and recovery mode. Uh. And the fact

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Speaker 1: that feeds said that they're going to be very very

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Speaker 1: patient before they actually ray short term interest rates and

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Speaker 1: the environment, you would think treasure yields will be higher.

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Speaker 1: I think what it's what's what's really happening is quantitative

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Speaker 1: easing is very very powerful. As a federal reserve buys

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Speaker 1: more and more assets those that creates deposits in the

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Speaker 1: banking system that people don't want to hold, and as

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Speaker 1: they don't want to hold those deposits, they bid up

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Speaker 1: other financial assets. So I think we're just finding out

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Speaker 1: the quantitative easing is very very powerful and pushing around

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Speaker 1: bond yields and bond prices. We tossed around the phrase

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Speaker 1: reaction function Bill Dudley and the media like it's a mint.

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Speaker 1: There's a matthew nous to it. Can we generate constructive

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Speaker 1: reaction functions given the wall of liquidity? Or do we

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Speaker 1: just need to become a nerd to the idea we

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Speaker 1: will have jump conditions, We will have suddenness over the

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Speaker 1: next many two three, five years. Well, we'll have some

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Speaker 1: suddenness in the sense that the FED at some point

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Speaker 1: is gonna go from maximum Monterey policy stimulus to something

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Speaker 1: else and at some point the FED has actually being

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Speaker 1: a lift off and raise short term rates. Uh. You know,

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Speaker 1: the FED, I think it's going to try to minimize

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Speaker 1: that jump function by communicating clearly. And I think they've

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Speaker 1: done a pretty good job in terms of, you know,

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Speaker 1: signaling when the taper might take place and that it's

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Speaker 1: going to take place in a gradual, in in an

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Speaker 1: organized type of way. Before we came on, we were

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Speaker 1: alluding to Alan greenspan and build uh and to Arthur

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Speaker 1: Burns And do you just assume and I say this

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Speaker 1: Dr Dudley very carefully, that we have is we become

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Speaker 1: less accommodative a measured green spanning in a pro coach?

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Speaker 1: Are we going to go back to a FED that's

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Speaker 1: more at hock like we saw was some of the

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Speaker 1: sudden lifts and larger lifts in the Burns era. Well,

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Speaker 1: I hope we don't go back to the Burns theory

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Speaker 1: because at that point the time that that was very

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Speaker 1: very late in terms of raising interest rates and pushing

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Speaker 1: down inflation. That would be a very bad model. I

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Speaker 1: think that what the FED is doing, though, is basically

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Speaker 1: saying we don't really know exactly where full employment is,

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Speaker 1: and so we want the economy to run a little

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Speaker 1: hot so we can find out where full employment is

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Speaker 1: and make sure we employ the maximum number of people

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Speaker 1: we can without having a long term inflation problem. Bill

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Speaker 1: always got to get your vs. Especially twenty four hounds

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Speaker 1: after the fetist Matt that blood bug opinion columnist and

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Speaker 1: fum A Federal Bank of New York President Michael Schumacher

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Speaker 1: long agoing far away, there was a CCUM five stripe.

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Speaker 1: That's a stick the rich kids had, And you say,

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Speaker 1: this is a yield that's gonna look like a CCUM

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Speaker 1: five stripe hockey stick discussed that the nirvana out to

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Speaker 1: a higher yield. Yeah time, especially when you consider the

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Speaker 1: idea of really yields in the US being minus one

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Speaker 1: some crazy number in ten years. It makes very little sense.

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Speaker 1: Really yields that this negative level are remarkably unusual. It's

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Speaker 1: happened only a couple of times. Last time was just

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Speaker 1: before the Taper tantrum. And you've got to ask yourself,

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Speaker 1: what is the economic backdrop today versus twelve months ago?

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Speaker 1: Substantially better. We can talk about COVID case counts going

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Speaker 1: up recently, et cetera. But still it's pretty hard to

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Speaker 1: dispute that things look a lot better now they did

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Speaker 1: then get yields are much more negative in real space,

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Speaker 1: and we think this is a bit crazy. Frankly, So

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Speaker 1: when you've got high inflation, it should push up nominal yields. Really,

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Speaker 1: yields probably follow suit. We think the stage is set

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Speaker 1: for yields to climb. However, I've said that before in

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Speaker 1: this show, and in the last couple of times it's

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Speaker 1: been wrong. So I think little humilities in order. We

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Speaker 1: think it's going to take a while, probably three to

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Speaker 1: four months for this move to get in trained. I

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Speaker 1: think it's probably a November December type of scenario. It's

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Speaker 1: on the stand why they're going to go high, Mike,

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Speaker 1: I need to understand why they went lower in the

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Speaker 1: first place. Why did they Mike? Yeah, A bunch of

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Speaker 1: things came together, John, and in fact yesterday is a

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Speaker 1: good example. So why did yields drop in the last

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Speaker 1: hour two a trading yesterday? Well, one of these arcane

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Speaker 1: things we think there was tips investors adding duration before

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Speaker 1: month in which is tomorrow. So not the sort of

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Speaker 1: thing necessarily tied to a FED meeting. But it did

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Speaker 1: crop up. But I suspect the bigger thing going back

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Speaker 1: to the June FED meeting is the FED really gave

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Speaker 1: the green light for people and they said, look, we're

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Speaker 1: not going to do anything for a while. We'll sit here,

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Speaker 1: maybe we'll put a mention of taper in the statement,

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Speaker 1: that sort of thing, but we won't actually really change

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Speaker 1: policy for quite some time. So a lot of investors

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Speaker 1: out there look at the yield back drop and say, well,

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Speaker 1: it's super low. I have to do something. I've got

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Speaker 1: to pick up a few pennies in front of the

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Speaker 1: Steamberen or what can I do. I can move out,

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Speaker 1: I can buy longer maturity, longer duration bonds, maybe I

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Speaker 1: can sell some options, that sort of thing. But the

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Speaker 1: FED really put that back in play in June, and

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Speaker 1: we think that was perhaps the big drive her. On

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Speaker 1: top of that, you've got overseas flows which have been

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Speaker 1: pretty strong. Mike. One thing that always confuses me, and

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Speaker 1: I'm a little bit uncomfortable with, is when people take

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Speaker 1: the price of the bond market and say this is

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Speaker 1: what the market is looking for inflation x percent over

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Speaker 1: whatever time period. Might I'm uncomfortable with that because some

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Speaker 1: people buy inflation protection, not with conviction but as a hedge.

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Speaker 1: And I just wanted to Mike whether we misread what

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Speaker 1: markets are actually tanning us behind the motives of the

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Speaker 1: people making these decisions. Like another way to consider that, John,

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Speaker 1: is does the inflation market that we trade so tips, swaps, etcetera.

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Speaker 1: Is that really predictive of future inflation? I would say

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Speaker 1: not very well. I think you make a good point

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Speaker 1: that quite a few investors and other players out there

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Speaker 1: by inflation protection because they need to, not because they

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Speaker 1: want to. It's probably the case again, but still in

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Speaker 1: terms of short term market dynamics are have a fairly

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Speaker 1: big effect. I think another way to to consider this

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Speaker 1: question is do forward rates in aitals really predict future

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Speaker 1: actual yields? And the answer consistently from academic after academic

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Speaker 1: has been known. And if we take that analysis today,

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Speaker 1: the forward ten year treasury rate at year ends about

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Speaker 1: one forty Does anyone really think that's a great predictor

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Speaker 1: of where it will be? I would say not. So

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Speaker 1: what do we have to see? What's the trigger to

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Speaker 1: get real yields less negative off their lowest levels ever seen?

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Speaker 1: At least I think a few things have to come together,

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Speaker 1: probably even more strength out of the labor market. Thinking

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Speaker 1: about some of the comments that chair Pole made yesterday,

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Speaker 1: very few specifics, a lot of generalities, but one thing

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Speaker 1: that came through is more and more strength out of

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Speaker 1: the labor market. There's been a lot of concerns, speculation,

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Speaker 1: hope perhaps that come September, maybe October, the labor market

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Speaker 1: would be much stronger in the US, and it has been.

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Speaker 1: If that happens, that probably pushes yields up quite a bit.

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Speaker 1: If instead we get a reaction where the COVID case

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Speaker 1: counts half worsened, delta seems to becoming almost endemic, that

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Speaker 1: scares a lot of people. That keeps yields pretty low.

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Speaker 1: So I think the tipping point my colleagues on the

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Speaker 1: Walls Fargo Economics team would share this view as well,

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Speaker 1: is going out two to three months you really get

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Speaker 1: a break. Does that supply chain really start to move

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Speaker 1: to the labor market? Clear up, that's the key question,

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Speaker 1: Mike for everyone Right now, my shoemaka west Fonca, Global

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Speaker 1: head of Macris Strategy, we're getting into a Christianity starting

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Speaker 1: to tear it apart for our top Live team, and

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Speaker 1: Johnny makes very clear consumptions there. We're gonna get a

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Speaker 1: breakout on that data as it comes along. But again

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Speaker 1: that goes to where David Rosenberg is, which is not

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Speaker 1: the numbers we're looking at right now, which is the

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Speaker 1: last three months. But where are we right now? And John?

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Speaker 1: That is a raging debate. Let's go right to this

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Speaker 1: right now with Matthew. Lizette thrilled he's with us with

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Speaker 1: a more optimistic Deutsche Bank right now, Matthew, this data

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Speaker 1: totally unfair question. But it's unfair Thursday. Does this data

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Speaker 1: allowed Deutsche Bank to adjust to a more cautious economic growth?

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Speaker 1: Sure than Thanks so much for having having me. Um.

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Speaker 1: You know, I don't think it in and of itself

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Speaker 1: really really changes too much. We'll have to see the

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Speaker 1: details they are out there. It looks like consumer spending

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Speaker 1: was actually a good amount stronger than expected, uh in

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Speaker 1: Q two. I think the key question for the growth

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Speaker 1: trajectory over these quarters is it is actually a lot

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Speaker 1: about inventory. So inventories was expected to be a big

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Speaker 1: dragon Q two. We expect to get a big boost

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Speaker 1: boost in Q three. But I think you're you're absolutely right.

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Speaker 1: You know, this data is backward looking it is Q two.

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Speaker 1: I think what is most important for markets and the

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Speaker 1: FED right now is the labor market data and the

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Speaker 1: stalling on a jobless clims that we've seen is an

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Speaker 1: important development. Uh. You know, jobless claims have not been

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Speaker 1: as reliable as they wear pre COVID, but it is

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Speaker 1: evidence of you know, some stalling out or some softening

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Speaker 1: and the improvement that we've seen there. If that continues,

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Speaker 1: it's it's certainly an important development from the Fed's perspective,

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Speaker 1: because pal noted yesterday, certainly that is the key consideration

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Speaker 1: for when they are going to take Matt. For many

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Speaker 1: people September and Q four, it's just huge. It's going

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Speaker 1: to be massive to shape some of these debates. Golben

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Speaker 1: out earlier this week suggesting that that full service sector

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Speaker 1: recovery is going to take a little bit more time.

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Speaker 1: They downgraded their estimates. Where are you given the team

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Speaker 1: at Deutsche Bank on that algument right now, Matt, sure,

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Speaker 1: I think there's you know, this is the area of debate.

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Speaker 1: We have expecting good spending to be coming off, durable

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Speaker 1: good spending, housing to be coming off, and we were

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Speaker 1: anticipating that services would help lift the economy to to

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Speaker 1: a stronger growth profile and in the second half of

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Speaker 1: the year. Obviously the return of COVID and the delta

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Speaker 1: variant is a downside risk to that, but I view

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Speaker 1: it as a downside risk, not something that impacts our

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Speaker 1: baseline outlook at significantly at this point. I think Cherpowe

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Speaker 1: made a good point yesterday. If we look back at

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Speaker 1: these past waves, they were not as impactful as we

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Speaker 1: were anticipating. I anticipate that will probably be the case again.

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Speaker 1: And when we look at those states that are probably

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Speaker 1: most susceptable, that have lower vaccination rates, I think they

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Speaker 1: are also us likely to bring back restrictions. You are

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Speaker 1: so less likely to see there's people pulled back from

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Speaker 1: economic activity. So it is no data downside risk to

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Speaker 1: growth over these coming quarters. But that's how we're viewing it,

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Speaker 1: not not impacting our baseline outook at this point, Matt.

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Speaker 1: When you dig under the headline of the GDP number,

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Speaker 1: are we getting whiffs of stagflation? And I know that

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Speaker 1: this is the pendulum of doom. However, residential investment spending

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Speaker 1: fell about a ten percent annualize. Paces has to do

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Speaker 1: with supply chain issues, a lack of lumber, and of

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Speaker 1: course the high prices are the high prices headwind to

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Speaker 1: growth at this point. I think in certain areas that

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Speaker 1: they certainly are. Housing is one uh and yes there

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Speaker 1: are supply chain issues, but we're seeing demand come off.

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Speaker 1: Mortgage purchase applications have weakened, perspective, bio traffic has has softened,

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Speaker 1: so demand is being impacted. But I don't want to

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Speaker 1: just focus on the prices either. We've seen, you know,

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Speaker 1: durable good spending was six above where was pre COVID trend.

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Speaker 1: Housing jumped above the pre COVID trend. So this is

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Speaker 1: a very unusual recovery. It was a very unusual recession,

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Speaker 1: and we've been anticipating that these cyclical sectors will come

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Speaker 1: off even if you didn't get these these price pressures.

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Speaker 1: So that that does make the services sector really critical

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Speaker 1: to the trajectory of the economy from here on out,

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Speaker 1: and we do think that it will help to carry

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Speaker 1: stronger growth over the second half of the year. Do

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Speaker 1: you think that this is indicative the weakness or at

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Speaker 1: least the disappointments that we're seeing in economic data points.

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Speaker 1: And I don't want to stop call a six and

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Speaker 1: a half percent growth weakness, but we have gotten disappointment

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Speaker 1: after disappointment. Does that indicate a trend that will carry

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Speaker 1: into the end of the year or could things change

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Speaker 1: in September when kids supposedly go back to school. Yeah.

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Speaker 1: From a labor market perspective, I think we are all

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Speaker 1: anticipating in share powel that is certainly anticipating that that

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Speaker 1: will help to open up labor supply. Um. You know,

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Speaker 1: we have focused on COVID as being a big driver

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Speaker 1: of the constraints on labor supply, not necessarily the unemployment

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Speaker 1: insurance benefits, and so whether or not schools that are

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Speaker 1: schools are able to reopen significantly on September fully in person,

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Speaker 1: I think is a critical question for the labor market outlook.

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Speaker 1: You know, at this point we just don't know. We'll

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Speaker 1: have to see how the variant evolves over the next

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Speaker 1: couple couple of months, how policy evolves over the next

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Speaker 1: couple of months, But that will be a really important

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Speaker 1: consideration for getting back to maximum employment or these types

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Speaker 1: of labor market numbers that then wants to see. There's

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Speaker 1: a lot we don't know. There's a couple of things

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Speaker 1: we can take a good guess on. One of them

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Speaker 1: is inventories, and you mentioned that earlier on Matt. This

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Speaker 1: is what Luke Kawa had to say of UBS. The

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Speaker 1: one point one percentage point drank from injurantries in Q

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Speaker 1: two is just not sustainable in the slightest Yesterday straw

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Speaker 1: downs equal tomorrow's demand, Matt, would you go with that

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Speaker 1: as well? That seems to be what has led us

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Speaker 1: towards this downside surprise this morning. Absolutely so, we were

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Speaker 1: below consensus on on this GDP print, the key driver

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Speaker 1: of that being a big drag from inventories. We know

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Speaker 1: we have in the retail and especially in the auto sector,

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Speaker 1: very low inventories, which we expect to begin to build

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Speaker 1: in the second half of the year. And so I

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Speaker 1: think what you tend to see in these numbers, if

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Speaker 1: private final demand is actually pretty strong, which it looks

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Speaker 1: like it might be given a strong consumer spending, you

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Speaker 1: should get a reversal of inventory and that should help

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Speaker 1: to lift your Q three growth number versus Q two. Mozz,

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Speaker 1: you want to use the word for Jean Clautriche that

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Speaker 1: he loves to use and he says it with a

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Speaker 1: French accent, which has got a lot more punache than

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Speaker 1: you and I are going to do. And that is diffusion.

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Speaker 1: There's a belief here in a mystery about the diffusion

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Speaker 1: from a good centric consumer over to a service sector consumer.

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Speaker 1: Do we see that in this data or does that

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Speaker 1: wait for another quarters report? We have been seeing it

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Speaker 1: in the monthly data, no doubt. We've seen good spending.

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Speaker 1: Retail sales in nominal terms has has flatlined out over

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Speaker 1: the past couple of months, and adjusting for prices, given

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Speaker 1: how strong price games have been, we've seen weakness in

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Speaker 1: real spending on goods. I want to emphasize that was

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Speaker 1: to be anticipated. We were well above trend on on

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Speaker 1: good spending, and price pressures are obviously having an impact.

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Speaker 1: So we expect this handoff to the services sector to

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Speaker 1: continue over the next couple of months. The next couple

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Speaker 1: of quarters. We're still below uh you know where we

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Speaker 1: anticipated we would be in leisure and hospitality UH and

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Speaker 1: and all these other services items. So I think that

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Speaker 1: should continue to be the key driver for growth going forward.

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Speaker 1: Matlazette of Deutsche Bank cannot align, so it's going to

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Speaker 1: catch up, thank you very much. The movable feast here, folks,

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Speaker 1: is the market reaction and maybe some of the childish

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Speaker 1: interpretation into very sophisticated political economics. Jeffrey You has made

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Speaker 1: a career of this at B and Y Melon as

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Speaker 1: their senior strategists. John, why don't you bring in Jeffrey

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Speaker 1: You with his perspective synthesizing all this together for vision.

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Speaker 1: Jeff You joining us now from BN Y Melon a

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Speaker 1: senior strategist. Jeff, as always, you're gonna be super helpful

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Speaker 1: working away through this issue for us, all walk me

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Speaker 1: through what we need to pay attention to and what

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Speaker 1: is worth ignoring. Right, So, firstly, pay attention to differentiation

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Speaker 1: what you're seeing with individual companies in China and in

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Speaker 1: terms of vidual sectors. The regulatory crackdown. There are different

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Speaker 1: motivations behind it. Some have to do with international capital involvement,

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Speaker 1: especially in the education sector. For example, they've stressed this

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Speaker 1: so much money pouring into an arms race amongst Chinese

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Speaker 1: families to get their kids ahead. Um, it's you know,

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Speaker 1: it's seen as damaging. So they want to treat this

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Speaker 1: on an individual basis. Now, the second part of it

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Speaker 1: is this framework of international investors investing in China. How

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Speaker 1: should it be done? Should it be in the U S.

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Speaker 1: Should it be closer to China. That is something they're

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Speaker 1: going to be looking at as well. And here's where

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Speaker 1: you know, geopolitics can come into the phrase. Thirdly, and

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Speaker 1: most important, I think what people are missing right now.

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Speaker 1: We're talking too much about the equity market. Right now,

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Speaker 1: we're talking too much about individual companies. What about the

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Speaker 1: growth Embarber And no one's talked about the triple our

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Speaker 1: Cup that has happened and more that may come now.

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Speaker 1: No one's talking about the delta variants starting to spread

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Speaker 1: and multiple provinces and the intalities in China. Growth expectations

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Speaker 1: are coming off. And this is what we need to

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Speaker 1: be a team to heading into the second half of

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Speaker 1: the year. Let's build on that, Jeff. The degree to

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Speaker 1: which the issues in the property market now are linked

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Speaker 1: to perhaps a downgrade to the outlook on the Chinese economy.

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Speaker 1: So two things here. Firstly, let's stick with property now,

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Speaker 1: so any day now and you're normally it comes out

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Speaker 1: around the end of July. In the early August, we

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Speaker 1: get the two thousand twenty one Financial Stability Report from

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Speaker 1: the pbo C. This is a brilliant report and they

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Speaker 1: look at and they do stress test the entire banking

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Speaker 1: system last year's numbers. Right, if you have a fifteen

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Speaker 1: percentage point rise and property mpls amongst other scenarios, you

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Speaker 1: can see catalantic. We see real ratios within Chinese banks

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Speaker 1: scope from down to below ten the low the regulatory limit. Right.

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Speaker 1: So this is how important this is for the sector,

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Speaker 1: individual companies. They're looking at exposures as well. Is it

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Speaker 1: manageable yes? Is its systemic? Probably not? At this point

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Speaker 1: that the damage to wealth, the damage to consumer expectations

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Speaker 1: and helples, that will drive growth lower as well. You know,

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Speaker 1: I look at Jeff, you where we are in this

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Speaker 1: This is not a crisis. But this moment for China,

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Speaker 1: this moment for the Pacific RIM and the elephant in

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Speaker 1: the room is we don't have Hong Kong anymore. It's

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Speaker 1: a different Hong Kong. How do you perceive, Jeff, the

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Speaker 1: Western banks and I don't want you to speak for

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Speaker 1: the management of b and y melon, but how do

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Speaker 1: the Western banks adapt and adjust now that Hong Kong

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Speaker 1: is different? Well, they would adapt to looking at China

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Speaker 1: as a whole and the new avenues of opportunities by

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Speaker 1: look at what are the the five year Plan detailed.

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Speaker 1: It was very explicit welcoming foreign investment into China's industries,

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Speaker 1: welcoming foreign talent to drive China's best for self reliance. Right,

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Speaker 1: So China notes that cannot grow by itself. It's going

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Speaker 1: to need external expertise as well. But at the end

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Speaker 1: end of the day, it has to be done in

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Speaker 1: a way which is manageable and that does not introduce

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Speaker 1: systemic risk or other risks. So, going back to the

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Speaker 1: education issue for example, this is not a financial systemic

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Speaker 1: risk or anything like that. It's something that's more statial

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Speaker 1: and in the prison of falling birth rates and demographics,

431
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Speaker 1: that is a serious challenge. So if foreign investment facilitated

432
00:22:02,080 --> 00:22:05,040
Speaker 1: by the financial institutions, if it's seen as broadly damaging,

433
00:22:05,160 --> 00:22:08,160
Speaker 1: then like any regulator globally, it's not a China specific issue,

434
00:22:08,200 --> 00:22:10,280
Speaker 1: they probably want to do something about it. It's growing

435
00:22:10,320 --> 00:22:12,320
Speaker 1: pains for wall streets and for everyone. And I think

436
00:22:12,320 --> 00:22:14,680
Speaker 1: as China develops and integrates itself with the rest of

437
00:22:14,720 --> 00:22:17,720
Speaker 1: the world financially, we have more index inclusion, c gbs,

438
00:22:17,760 --> 00:22:20,760
Speaker 1: increasing ownership, all of this is going to happen, you know,

439
00:22:20,880 --> 00:22:24,960
Speaker 1: just calibrated pick the right pace, because sometimes you know things,

440
00:22:25,080 --> 00:22:29,000
Speaker 1: even with good intentions, you can actually end up with outcomes, Jeff.

441
00:22:29,040 --> 00:22:31,280
Speaker 1: This is one reason why a number of investors said

442
00:22:31,400 --> 00:22:34,240
Speaker 1: that in particular education sector in China, but including other

443
00:22:34,320 --> 00:22:37,919
Speaker 1: shares as well, were uninvestable following a number of regulatory

444
00:22:37,920 --> 00:22:40,439
Speaker 1: crackdowns over the weekend and Monday. The idea that it

445
00:22:40,520 --> 00:22:42,800
Speaker 1: wasn't just education, it was also the data and the

446
00:22:42,880 --> 00:22:47,000
Speaker 1: control over such things in the country. Given the pushback,

447
00:22:47,080 --> 00:22:50,240
Speaker 1: the fact that authorities did have meetings with banking executives

448
00:22:50,280 --> 00:22:52,679
Speaker 1: to try to push back some of this concern and

449
00:22:52,920 --> 00:22:55,159
Speaker 1: shore up support for the markets. Do we have a

450
00:22:55,240 --> 00:22:58,000
Speaker 1: sense of how far or not they are willing to

451
00:22:58,040 --> 00:23:02,479
Speaker 1: go with crackdowns, with restriction in in specific industries, they

452
00:23:02,520 --> 00:23:06,760
Speaker 1: could further royal markets. So I think China is learning

453
00:23:07,000 --> 00:23:09,800
Speaker 1: as well like any regulator, that this is a new

454
00:23:09,880 --> 00:23:12,880
Speaker 1: environment for China. They've realized how invested in the international

455
00:23:12,960 --> 00:23:16,560
Speaker 1: community is in certain sectors, right so again education and

456
00:23:16,640 --> 00:23:18,960
Speaker 1: being one of them. So they wanted to gauge the

457
00:23:18,960 --> 00:23:22,359
Speaker 1: market fallout and if it has become excessive, and you

458
00:23:22,400 --> 00:23:26,800
Speaker 1: saw the a three pronged launch and from the main

459
00:23:26,880 --> 00:23:30,600
Speaker 1: financial papers in China yesterday expressing that over the medium

460
00:23:30,600 --> 00:23:33,800
Speaker 1: to longer term, China is a strong market welcoming global

461
00:23:33,840 --> 00:23:36,040
Speaker 1: investors to there, so of course they don't want to

462
00:23:36,119 --> 00:23:38,439
Speaker 1: damage sentiment either. Then they know how inter linked it

463
00:23:38,480 --> 00:23:41,320
Speaker 1: is and the country needs to stay inter links. So

464
00:23:41,640 --> 00:23:44,040
Speaker 1: they will learn as well from this, and as future

465
00:23:44,040 --> 00:23:46,240
Speaker 1: sectors go by, maybe they'll do it differently as well.

466
00:23:46,600 --> 00:23:49,400
Speaker 1: But just pay attention to the strategic initiatives they want

467
00:23:49,440 --> 00:23:51,840
Speaker 1: to communicate them better up ahead. By the way, something

468
00:23:51,960 --> 00:23:55,399
Speaker 1: similar happened a few years ago to the childcare sector,

469
00:23:55,520 --> 00:23:58,440
Speaker 1: exactly the same language. Not allowed to make profit and

470
00:23:58,560 --> 00:24:01,080
Speaker 1: not allowed to use captain market to raise money. They

471
00:24:01,119 --> 00:24:03,639
Speaker 1: wanted to dispatch the nationalized framework. As seems we all

472
00:24:03,640 --> 00:24:06,159
Speaker 1: forgot about that that this has happens again and again

473
00:24:06,240 --> 00:24:08,640
Speaker 1: they're learning by doing as we all are. Right now, Jeff,

474
00:24:08,680 --> 00:24:10,439
Speaker 1: let's put some money to work. We spent a long

475
00:24:10,480 --> 00:24:12,480
Speaker 1: time talking about the risks of framework for thinking about

476
00:24:12,520 --> 00:24:15,280
Speaker 1: the situation. Where do you want to put capital to work?

477
00:24:15,320 --> 00:24:19,560
Speaker 1: Considering everything you've just said in the last seven minutes, right,

478
00:24:19,800 --> 00:24:21,440
Speaker 1: so three things here. Firstly, on rem and be I

479
00:24:21,480 --> 00:24:23,280
Speaker 1: still finkering and be trades to arrange and ignoring all

480
00:24:23,359 --> 00:24:26,000
Speaker 1: of their current news right now. They are worried about

481
00:24:26,000 --> 00:24:30,040
Speaker 1: CPI and the PPI divergence, right, so exports are still

482
00:24:30,160 --> 00:24:33,040
Speaker 1: very important mmm, so they wanted to limit them be

483
00:24:33,040 --> 00:24:35,760
Speaker 1: appreciation anyway. So the recent news over the last few days,

484
00:24:35,760 --> 00:24:37,879
Speaker 1: and probably it's not unwelcome in Europe. I think what

485
00:24:37,920 --> 00:24:40,320
Speaker 1: the ECB has done very good for European equities. I

486
00:24:40,320 --> 00:24:42,440
Speaker 1: think those trades and where people invest in European equities

487
00:24:42,440 --> 00:24:45,160
Speaker 1: on their heade basis, I think that will work as well.

488
00:24:45,160 --> 00:24:47,760
Speaker 1: By anchoring expectations and finding the US and the dollar.

489
00:24:48,200 --> 00:24:50,119
Speaker 1: We are not ready to call time on on on

490
00:24:50,160 --> 00:24:53,200
Speaker 1: the dollar strength and not by any means. It's still

491
00:24:53,200 --> 00:24:55,600
Speaker 1: going to lead the way in major policy renewal and

492
00:24:55,680 --> 00:24:58,400
Speaker 1: a normalization. So these carry trades you want to own

493
00:24:58,400 --> 00:25:01,040
Speaker 1: dollar carry against the low yielders, especially in Asia, and

494
00:25:01,119 --> 00:25:02,879
Speaker 1: in the high yielders. I think they're gonna folder against

495
00:25:02,880 --> 00:25:05,760
Speaker 1: his daughter as well. Jeff. Interesting stuff, Jeff, you f

496
00:25:05,880 --> 00:25:08,560
Speaker 1: bn y Melon a strategist I have known from London

497
00:25:08,600 --> 00:25:10,399
Speaker 1: to for a long long time and one of the

498
00:25:10,440 --> 00:25:19,639
Speaker 1: sharpest in the city, that's for sure right now, and

499
00:25:19,720 --> 00:25:23,280
Speaker 1: this is really really important for your infrastructure. We go

500
00:25:23,400 --> 00:25:26,399
Speaker 1: to the gentleman from Flint and on up to Saginaw

501
00:25:26,440 --> 00:25:29,680
Speaker 1: in Base City. Dan Kildee is someone with a real

502
00:25:30,320 --> 00:25:34,480
Speaker 1: view of America, different from maybe inside the Beltway in Washington,

503
00:25:34,880 --> 00:25:37,600
Speaker 1: and we're honored that he could join us from inside

504
00:25:37,600 --> 00:25:42,200
Speaker 1: the Beltway in Washington this morning. Dan, you and your

505
00:25:42,280 --> 00:25:47,320
Speaker 1: family and your constituents have lived the worst water crisis

506
00:25:47,359 --> 00:25:52,199
Speaker 1: in America. You know better than anybody about lead pipes,

507
00:25:52,680 --> 00:25:58,399
Speaker 1: about water structure. Is this bill good for Flint, Michigan. Well,

508
00:25:58,520 --> 00:26:00,359
Speaker 1: it's it's hard to say. It's just up in the

509
00:26:00,440 --> 00:26:03,680
Speaker 1: right direction. The question is whether or not there's enough

510
00:26:03,720 --> 00:26:06,840
Speaker 1: of an emphasis on water infrastructure to prevent the next

511
00:26:06,880 --> 00:26:11,480
Speaker 1: Flint Michigan from happening. In some ways, you know, and ironically,

512
00:26:11,600 --> 00:26:16,040
Speaker 1: Flint has some advantage in the fact that the failure

513
00:26:16,080 --> 00:26:20,000
Speaker 1: of flints infrastructure occurred in public view. I was able

514
00:26:20,040 --> 00:26:22,399
Speaker 1: to get help for Flint even when I was in

515
00:26:22,440 --> 00:26:25,520
Speaker 1: the minority, to replace the lead pipes there. But the

516
00:26:25,600 --> 00:26:29,639
Speaker 1: real question is will the warning that Flint provided the

517
00:26:29,640 --> 00:26:33,600
Speaker 1: rest of the country be heated. Will we have enough

518
00:26:33,640 --> 00:26:36,920
Speaker 1: to be in this legislation to replace every lead pipe

519
00:26:36,920 --> 00:26:39,240
Speaker 1: in America? And I'm not sure yet we do, But

520
00:26:39,320 --> 00:26:41,080
Speaker 1: maybe it's a step in the right direction and the

521
00:26:41,160 --> 00:26:45,520
Speaker 1: Third World Crisis of Flint, Michigan and water. There was

522
00:26:45,560 --> 00:26:48,760
Speaker 1: no discussion to pay for us. It was like, let's go,

523
00:26:49,080 --> 00:26:53,240
Speaker 1: let's fix it. How do you respond to this juvenile

524
00:26:53,359 --> 00:26:58,840
Speaker 1: debate over how we're gonna pay for this versus let's go. Well,

525
00:26:59,040 --> 00:27:01,439
Speaker 1: the way I responed a really good question is to

526
00:27:01,560 --> 00:27:04,760
Speaker 1: point out that when it comes to water infrastructure or

527
00:27:04,800 --> 00:27:08,119
Speaker 1: other infrastructure failures, we're all going to pay for it.

528
00:27:08,160 --> 00:27:10,920
Speaker 1: The question is you can pay now or you can

529
00:27:10,920 --> 00:27:14,639
Speaker 1: pay later. Flint's a good example. If Flint, say seven

530
00:27:14,720 --> 00:27:18,320
Speaker 1: years ago, had thirty or forty million dollars available to

531
00:27:18,440 --> 00:27:21,600
Speaker 1: switch out its lead pipes, we would have saved what

532
00:27:21,800 --> 00:27:28,400
Speaker 1: is now approaching a billion dollars in costs of compensation

533
00:27:28,440 --> 00:27:33,240
Speaker 1: to victims of fixing the infrastructure after it's broken. So, yes,

534
00:27:33,280 --> 00:27:34,720
Speaker 1: we do need to come up with a way to

535
00:27:34,760 --> 00:27:37,200
Speaker 1: pay for it, but we can't start with the premise

536
00:27:37,480 --> 00:27:39,439
Speaker 1: that we're not going to pay for it. If we

537
00:27:39,480 --> 00:27:42,960
Speaker 1: don't do it. If we don't fix our infrastructure, there's

538
00:27:43,000 --> 00:27:46,760
Speaker 1: a big do bill coming our way, much bigger than

539
00:27:46,800 --> 00:27:49,879
Speaker 1: the cost of fixing it in the first place. Congressman,

540
00:27:51,040 --> 00:27:53,960
Speaker 1: billion dollars in light of the fiscal stimulus past of

541
00:27:54,040 --> 00:27:56,879
Speaker 1: the past year is not that big, especially when spent

542
00:27:57,000 --> 00:28:00,240
Speaker 1: over eight years. How much in the conversation and that

543
00:28:00,320 --> 00:28:03,040
Speaker 1: you have in the negotiations that burn the midnight oil

544
00:28:03,080 --> 00:28:05,680
Speaker 1: as you eat tacos and chicken parm each night, as

545
00:28:05,720 --> 00:28:07,840
Speaker 1: you try to hash out the details here, how much

546
00:28:07,840 --> 00:28:09,840
Speaker 1: of the debate is connected to the three and a

547
00:28:09,840 --> 00:28:13,040
Speaker 1: half trillion dollar plan the Senator Sanders is working on

548
00:28:13,160 --> 00:28:17,520
Speaker 1: right now. It is connected because if in fact we

549
00:28:17,600 --> 00:28:20,719
Speaker 1: have a bipartisan deal and the President many of us

550
00:28:20,720 --> 00:28:22,639
Speaker 1: have been very committed to do as much as we

551
00:28:22,680 --> 00:28:25,520
Speaker 1: can in a bipartisan fashion. That doesn't mean our works done,

552
00:28:25,880 --> 00:28:28,080
Speaker 1: but it pushes more of what we may need to

553
00:28:28,160 --> 00:28:32,080
Speaker 1: do into a reconciliation package. And the concern that I

554
00:28:32,200 --> 00:28:34,800
Speaker 1: have is that some of our senators who seem willing

555
00:28:34,840 --> 00:28:37,760
Speaker 1: to work together on the bipartisan piece, get a little

556
00:28:37,760 --> 00:28:39,680
Speaker 1: cold feet when we think about what we want to

557
00:28:39,720 --> 00:28:42,880
Speaker 1: put into the reconciliation package. And I'm talking about Democratic

558
00:28:42,920 --> 00:28:46,000
Speaker 1: senators in this case. We've got a lot of business

559
00:28:46,040 --> 00:28:49,560
Speaker 1: ahead of us. If we don't fix this stuff, it

560
00:28:49,640 --> 00:28:53,280
Speaker 1: doesn't mean it goes away. It doesn't mean that China

561
00:28:53,520 --> 00:28:56,000
Speaker 1: is not spending ten times what we are as a

562
00:28:56,040 --> 00:29:00,640
Speaker 1: percentage of their GDP on infrastructure. What I'm trying to

563
00:29:00,680 --> 00:29:03,600
Speaker 1: convey to my colleagues is, we really don't have a choice.

564
00:29:03,920 --> 00:29:06,880
Speaker 1: We have to do this. We can't have an infrastructure

565
00:29:06,880 --> 00:29:10,760
Speaker 1: bill that says one out of four Americans get to

566
00:29:10,800 --> 00:29:14,440
Speaker 1: have twenty first century infrastructure. The rest of us have

567
00:29:14,600 --> 00:29:19,160
Speaker 1: to compete with nineteenth and twentieth century infrastructure. Sooner or later,

568
00:29:19,200 --> 00:29:21,360
Speaker 1: we got to fix it, and so more of it

569
00:29:21,400 --> 00:29:24,200
Speaker 1: may have to be pushed into that reconciliation bill if

570
00:29:24,240 --> 00:29:27,000
Speaker 1: we don't get enough in the infrastructure package itself. Which

571
00:29:27,080 --> 00:29:30,600
Speaker 1: raises a question, Congressman about unity among Democrats. There's been

572
00:29:30,640 --> 00:29:32,800
Speaker 1: a lot talked about the splintering of the party, the

573
00:29:32,840 --> 00:29:37,440
Speaker 1: whole progressive versus the more moderate wing. Given the conversations

574
00:29:37,440 --> 00:29:40,320
Speaker 1: that you're having, how difficult is it going to be?

575
00:29:40,400 --> 00:29:43,320
Speaker 1: Can you characterize whether people are coming together and coming

576
00:29:43,400 --> 00:29:48,040
Speaker 1: to a more unified vision here? It's hard. I mean,

577
00:29:48,080 --> 00:29:49,800
Speaker 1: one of the things about having a party with a

578
00:29:49,800 --> 00:29:51,640
Speaker 1: lot of diversity of thought is that we have a

579
00:29:51,680 --> 00:29:54,080
Speaker 1: lot of diversity of thought, and it's often hard to

580
00:29:54,160 --> 00:29:57,440
Speaker 1: land on the same spot. The tough thing is if

581
00:29:57,480 --> 00:30:01,400
Speaker 1: we're all being asked to compromise. We all have to compromise.

582
00:30:01,960 --> 00:30:04,720
Speaker 1: We can't have a situation where somebody on the left

583
00:30:04,720 --> 00:30:07,680
Speaker 1: says the right has to compromise or the middle has

584
00:30:07,720 --> 00:30:10,800
Speaker 1: to compromise. If we're going to come together, that means

585
00:30:10,840 --> 00:30:14,000
Speaker 1: everybody's got to acknowledge that the final product is something

586
00:30:14,040 --> 00:30:16,000
Speaker 1: that if they were doing it by themselves, they wouldn't

587
00:30:16,040 --> 00:30:18,520
Speaker 1: do it. And right now, I'm not sure we've completely

588
00:30:18,640 --> 00:30:21,920
Speaker 1: landed that message. I think too many folks are taking

589
00:30:21,920 --> 00:30:26,840
Speaker 1: an absolutist approach that without my specific priority, I'm not

590
00:30:26,880 --> 00:30:29,400
Speaker 1: going to help. And that's just that is not the

591
00:30:29,440 --> 00:30:32,680
Speaker 1: way this place is designed to work. And the American

592
00:30:32,680 --> 00:30:35,200
Speaker 1: people don't care what the excuses are. They just want

593
00:30:35,280 --> 00:30:36,880
Speaker 1: us to get this work done. They want us to

594
00:30:36,920 --> 00:30:40,320
Speaker 1: get the work done that affects their lives. You know,

595
00:30:40,400 --> 00:30:43,760
Speaker 1: the Beltway arguments are of no interest to the people

596
00:30:43,800 --> 00:30:47,440
Speaker 1: I represent. Dan, I got like fourteen more questions, but

597
00:30:47,520 --> 00:30:50,120
Speaker 1: we don't have enough time. Dan Kilde of Flint, Michigan,

598
00:30:50,160 --> 00:30:52,640
Speaker 1: thank you so much for joining us today, the congressman

599
00:30:52,640 --> 00:30:56,360
Speaker 1: from the fifth District not in Michigan. This is the

600
00:30:56,400 --> 00:31:01,040
Speaker 1: Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays

601
00:31:01,080 --> 00:31:04,520
Speaker 1: from seven to ten am Eastern on Bloomberg Radio and

602
00:31:04,680 --> 00:31:08,959
Speaker 1: on Bloomberg Television each day from six to nine am

603
00:31:09,000 --> 00:31:12,760
Speaker 1: for insight from the best in economics, finance, investment, and

604
00:31:12,840 --> 00:31:19,400
Speaker 1: international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,

605
00:31:19,560 --> 00:31:23,120
Speaker 1: Bloomberg dot com, and of course, on the terminal. I'm

606
00:31:23,160 --> 00:31:25,880
Speaker 1: Tom Keene, and this is Bloomberg