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: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com,
Speaker 1: and of course on the Bloomberg terminal. If you want
Speaker 1: to clear up John, you can go to Wikipedia and
Speaker 1: you can see the theory that the pros use off
Speaker 1: of what Chairman Paul yesterday. One of those expert on
Speaker 1: the theory is a gentleman from Berkeley. William Dudley joins us,
Speaker 1: the former president of the New York Fed. Obviously for
Speaker 1: years at Goldman Sex. Bill Dudley, you separate the men
Speaker 1: from the boys, the women from the girls with the
Speaker 1: logic theory of necessary and sufficiency in an undergraduate ass
Speaker 1: you speak of the necessary and the sufficiency that we
Speaker 1: saw yesterday from Chairman Powell. What did he do that
Speaker 1: you say was not sufficient? Well, I think that he
Speaker 1: did a good job and basically edging closer to the
Speaker 1: notion of we're gonna start to do the taper, but
Speaker 1: not so much so that it puts the markets on edge.
Speaker 1: The general expectation at this point is uh that probably
Speaker 1: won't start tapering, probably won't make the announcement on tapering
Speaker 1: until November December, and probably won't start until early next year.
Speaker 1: So I think we did a good job on that.
Speaker 1: Where I would but where I would say the Fed
Speaker 1: hasn't gone far enough is the changes that they've made
Speaker 1: in terms of there that's it, Danny repo facility that
Speaker 1: they announced yesterday. It's a good start to have a
Speaker 1: standing repo facility backstop the treasury market, but they capt
Speaker 1: its size at five billion, and they limited limited access
Speaker 1: to only primary dealers, and I think the access should
Speaker 1: be considerably broader than that to support to support the
Speaker 1: function of the treasury market. Also, I think they need
Speaker 1: to make changes to their capers so that when the
Speaker 1: FED buys treasuries and agency mortgage backed securies and that
Speaker 1: increases reserves in the banking system, that doesn't interfere but
Speaker 1: with good market functioning in the treasury market. These are
Speaker 1: delicate phrases and we appreciate the candidacy. As a former
Speaker 1: government official, Bill Duddley, we have the overnight repo market
Speaker 1: now moving back up through one trillion dollars. Let's cut
Speaker 1: to the chase here. If the overnight goes near a trillion,
Speaker 1: above a trillion, how will the FED adapt and adjust
Speaker 1: to that? There's no magic number that where where If
Speaker 1: the FED is soaking up a trillion dollars of of
Speaker 1: repo through their reverse overnight, that's not a problem. But
Speaker 1: I think it does tell you that there are consequences
Speaker 1: of of the FEDS asset purchases banking systems. It's essentially
Speaker 1: a washing reserves and that's making the leverage ratio more binding,
Speaker 1: which is constraining banks activities, and it's also causing banks
Speaker 1: to essentially push away corporate deposits. The thing could fix
Speaker 1: this by making changes to how the leverage ratio is calculated,
Speaker 1: and I think they should do this sooner rather than later.
Speaker 1: Is a treasury market as it is now broken? I
Speaker 1: don't think it's broken. It just needs a little bit
Speaker 1: more belt and suspenders. Uh. The standing repo facility is
Speaker 1: a good start, but as a Group of thirty report
Speaker 1: with published yesterday points out, there's a lot of other
Speaker 1: things that need to be done to the US treasury market.
Speaker 1: The G three report talks about central clearing of treasuries
Speaker 1: for customer trades that would make the market. I think
Speaker 1: a lot more solid talks about increasing the transparency in
Speaker 1: US treasury market. So having a standing repo facility is
Speaker 1: a good start, but there's a lot more to put
Speaker 1: the US treasing market on a firmer footing. This may
Speaker 1: sound esoteric, it is not. It is the underpinning of
Speaker 1: the what we pay for all of the loans that
Speaker 1: we take out is the fun underpinning, frankly, the functioning
Speaker 1: of Wall Street. And there is a question about the
Speaker 1: functioning of the treasury yield as as an indicator right now.
Speaker 1: Even fed share Powell came out and said he didn't
Speaker 1: quite a understand why yields where we're where they were,
Speaker 1: And a lot of analysts have raised the issue of liquidity,
Speaker 1: the fact that there are these malfunctioning aspects of the
Speaker 1: bond market that made it get very difficult to get
Speaker 1: a clear signal from treasuries. Do you think that that
Speaker 1: is a factor in yields that are persistently low given
Speaker 1: the inflationary outlook. Well, I'm surprised by how low long
Speaker 1: dated treasure yields are given the level of inflation. The
Speaker 1: fact that commedies and recovery mode. Uh. And the fact
Speaker 1: that feeds said that they're going to be very very
Speaker 1: patient before they actually ray short term interest rates and
Speaker 1: the environment, you would think treasure yields will be higher.
Speaker 1: I think what it's what's what's really happening is quantitative
Speaker 1: easing is very very powerful. As a federal reserve buys
Speaker 1: more and more assets those that creates deposits in the
Speaker 1: banking system that people don't want to hold, and as
Speaker 1: they don't want to hold those deposits, they bid up
Speaker 1: other financial assets. So I think we're just finding out
Speaker 1: the quantitative easing is very very powerful and pushing around
Speaker 1: bond yields and bond prices. We tossed around the phrase
Speaker 1: reaction function Bill Dudley and the media like it's a mint.
Speaker 1: There's a matthew nous to it. Can we generate constructive
Speaker 1: reaction functions given the wall of liquidity? Or do we
Speaker 1: just need to become a nerd to the idea we
Speaker 1: will have jump conditions, We will have suddenness over the
Speaker 1: next many two three, five years. Well, we'll have some
Speaker 1: suddenness in the sense that the FED at some point
Speaker 1: is gonna go from maximum Monterey policy stimulus to something
Speaker 1: else and at some point the FED has actually being
Speaker 1: a lift off and raise short term rates. Uh. You know,
Speaker 1: the FED, I think it's going to try to minimize
Speaker 1: that jump function by communicating clearly. And I think they've
Speaker 1: done a pretty good job in terms of, you know,
Speaker 1: signaling when the taper might take place and that it's
Speaker 1: going to take place in a gradual, in in an
Speaker 1: organized type of way. Before we came on, we were
Speaker 1: alluding to Alan greenspan and build uh and to Arthur
Speaker 1: Burns And do you just assume and I say this
Speaker 1: Dr Dudley very carefully, that we have is we become
Speaker 1: less accommodative a measured green spanning in a pro coach?
Speaker 1: Are we going to go back to a FED that's
Speaker 1: more at hock like we saw was some of the
Speaker 1: sudden lifts and larger lifts in the Burns era. Well,
Speaker 1: I hope we don't go back to the Burns theory
Speaker 1: because at that point the time that that was very
Speaker 1: very late in terms of raising interest rates and pushing
Speaker 1: down inflation. That would be a very bad model. I
Speaker 1: think that what the FED is doing, though, is basically
Speaker 1: saying we don't really know exactly where full employment is,
Speaker 1: and so we want the economy to run a little
Speaker 1: hot so we can find out where full employment is
Speaker 1: and make sure we employ the maximum number of people
Speaker 1: we can without having a long term inflation problem. Bill
Speaker 1: always got to get your vs. Especially twenty four hounds
Speaker 1: after the fetist Matt that blood bug opinion columnist and
Speaker 1: fum A Federal Bank of New York President Michael Schumacher
Speaker 1: long agoing far away, there was a CCUM five stripe.
Speaker 1: That's a stick the rich kids had, And you say,
Speaker 1: this is a yield that's gonna look like a CCUM
Speaker 1: five stripe hockey stick discussed that the nirvana out to
Speaker 1: a higher yield. Yeah time, especially when you consider the
Speaker 1: idea of really yields in the US being minus one
Speaker 1: some crazy number in ten years. It makes very little sense.
Speaker 1: Really yields that this negative level are remarkably unusual. It's
Speaker 1: happened only a couple of times. Last time was just
Speaker 1: before the Taper tantrum. And you've got to ask yourself,
Speaker 1: what is the economic backdrop today versus twelve months ago?
Speaker 1: Substantially better. We can talk about COVID case counts going
Speaker 1: up recently, et cetera. But still it's pretty hard to
Speaker 1: dispute that things look a lot better now they did
Speaker 1: then get yields are much more negative in real space,
Speaker 1: and we think this is a bit crazy. Frankly, So
Speaker 1: when you've got high inflation, it should push up nominal yields. Really,
Speaker 1: yields probably follow suit. We think the stage is set
Speaker 1: for yields to climb. However, I've said that before in
Speaker 1: this show, and in the last couple of times it's
Speaker 1: been wrong. So I think little humilities in order. We
Speaker 1: think it's going to take a while, probably three to
Speaker 1: four months for this move to get in trained. I
Speaker 1: think it's probably a November December type of scenario. It's
Speaker 1: on the stand why they're going to go high, Mike,
Speaker 1: I need to understand why they went lower in the
Speaker 1: first place. Why did they Mike? Yeah, A bunch of
Speaker 1: things came together, John, and in fact yesterday is a
Speaker 1: good example. So why did yields drop in the last
Speaker 1: hour two a trading yesterday? Well, one of these arcane
Speaker 1: things we think there was tips investors adding duration before
Speaker 1: month in which is tomorrow. So not the sort of
Speaker 1: thing necessarily tied to a FED meeting. But it did
Speaker 1: crop up. But I suspect the bigger thing going back
Speaker 1: to the June FED meeting is the FED really gave
Speaker 1: the green light for people and they said, look, we're
Speaker 1: not going to do anything for a while. We'll sit here,
Speaker 1: maybe we'll put a mention of taper in the statement,
Speaker 1: that sort of thing, but we won't actually really change
Speaker 1: policy for quite some time. So a lot of investors
Speaker 1: out there look at the yield back drop and say, well,
Speaker 1: it's super low. I have to do something. I've got
Speaker 1: to pick up a few pennies in front of the
Speaker 1: Steamberen or what can I do. I can move out,
Speaker 1: I can buy longer maturity, longer duration bonds, maybe I
Speaker 1: can sell some options, that sort of thing. But the
Speaker 1: FED really put that back in play in June, and
Speaker 1: we think that was perhaps the big drive her. On
Speaker 1: top of that, you've got overseas flows which have been
Speaker 1: pretty strong. Mike. One thing that always confuses me, and
Speaker 1: I'm a little bit uncomfortable with, is when people take
Speaker 1: the price of the bond market and say this is
Speaker 1: what the market is looking for inflation x percent over
Speaker 1: whatever time period. Might I'm uncomfortable with that because some
Speaker 1: people buy inflation protection, not with conviction but as a hedge.
Speaker 1: And I just wanted to Mike whether we misread what
Speaker 1: markets are actually tanning us behind the motives of the
Speaker 1: people making these decisions. Like another way to consider that, John,
Speaker 1: is does the inflation market that we trade so tips, swaps, etcetera.
Speaker 1: Is that really predictive of future inflation? I would say
Speaker 1: not very well. I think you make a good point
Speaker 1: that quite a few investors and other players out there
Speaker 1: by inflation protection because they need to, not because they
Speaker 1: want to. It's probably the case again, but still in
Speaker 1: terms of short term market dynamics are have a fairly
Speaker 1: big effect. I think another way to to consider this
Speaker 1: question is do forward rates in aitals really predict future
Speaker 1: actual yields? And the answer consistently from academic after academic
Speaker 1: has been known. And if we take that analysis today,
Speaker 1: the forward ten year treasury rate at year ends about
Speaker 1: one forty Does anyone really think that's a great predictor
Speaker 1: of where it will be? I would say not. So
Speaker 1: what do we have to see? What's the trigger to
Speaker 1: get real yields less negative off their lowest levels ever seen?
Speaker 1: At least I think a few things have to come together,
Speaker 1: probably even more strength out of the labor market. Thinking
Speaker 1: about some of the comments that chair Pole made yesterday,
Speaker 1: very few specifics, a lot of generalities, but one thing
Speaker 1: that came through is more and more strength out of
Speaker 1: the labor market. There's been a lot of concerns, speculation,
Speaker 1: hope perhaps that come September, maybe October, the labor market
Speaker 1: would be much stronger in the US, and it has been.
Speaker 1: If that happens, that probably pushes yields up quite a bit.
Speaker 1: If instead we get a reaction where the COVID case
Speaker 1: counts half worsened, delta seems to becoming almost endemic, that
Speaker 1: scares a lot of people. That keeps yields pretty low.
Speaker 1: So I think the tipping point my colleagues on the
Speaker 1: Walls Fargo Economics team would share this view as well,
Speaker 1: is going out two to three months you really get
Speaker 1: a break. Does that supply chain really start to move
Speaker 1: to the labor market? Clear up, that's the key question,
Speaker 1: Mike for everyone Right now, my shoemaka west Fonca, Global
Speaker 1: head of Macris Strategy, we're getting into a Christianity starting
Speaker 1: to tear it apart for our top Live team, and
Speaker 1: Johnny makes very clear consumptions there. We're gonna get a
Speaker 1: breakout on that data as it comes along. But again
Speaker 1: that goes to where David Rosenberg is, which is not
Speaker 1: the numbers we're looking at right now, which is the
Speaker 1: last three months. But where are we right now? And John?
Speaker 1: That is a raging debate. Let's go right to this
Speaker 1: right now with Matthew. Lizette thrilled he's with us with
Speaker 1: a more optimistic Deutsche Bank right now, Matthew, this data
Speaker 1: totally unfair question. But it's unfair Thursday. Does this data
Speaker 1: allowed Deutsche Bank to adjust to a more cautious economic growth?
Speaker 1: Sure than Thanks so much for having having me. Um.
Speaker 1: You know, I don't think it in and of itself
Speaker 1: really really changes too much. We'll have to see the
Speaker 1: details they are out there. It looks like consumer spending
Speaker 1: was actually a good amount stronger than expected, uh in
Speaker 1: Q two. I think the key question for the growth
Speaker 1: trajectory over these quarters is it is actually a lot
Speaker 1: about inventory. So inventories was expected to be a big
Speaker 1: dragon Q two. We expect to get a big boost
Speaker 1: boost in Q three. But I think you're you're absolutely right.
Speaker 1: You know, this data is backward looking it is Q two.
Speaker 1: I think what is most important for markets and the
Speaker 1: FED right now is the labor market data and the
Speaker 1: stalling on a jobless clims that we've seen is an
Speaker 1: important development. Uh. You know, jobless claims have not been
Speaker 1: as reliable as they wear pre COVID, but it is
Speaker 1: evidence of you know, some stalling out or some softening
Speaker 1: and the improvement that we've seen there. If that continues,
Speaker 1: it's it's certainly an important development from the Fed's perspective,
Speaker 1: because pal noted yesterday, certainly that is the key consideration
Speaker 1: for when they are going to take Matt. For many
Speaker 1: people September and Q four, it's just huge. It's going
Speaker 1: to be massive to shape some of these debates. Golben
Speaker 1: out earlier this week suggesting that that full service sector
Speaker 1: recovery is going to take a little bit more time.
Speaker 1: They downgraded their estimates. Where are you given the team
Speaker 1: at Deutsche Bank on that algument right now, Matt, sure,
Speaker 1: I think there's you know, this is the area of debate.
Speaker 1: We have expecting good spending to be coming off, durable
Speaker 1: good spending, housing to be coming off, and we were
Speaker 1: anticipating that services would help lift the economy to to
Speaker 1: a stronger growth profile and in the second half of
Speaker 1: the year. Obviously the return of COVID and the delta
Speaker 1: variant is a downside risk to that, but I view
Speaker 1: it as a downside risk, not something that impacts our
Speaker 1: baseline outlook at significantly at this point. I think Cherpowe
Speaker 1: made a good point yesterday. If we look back at
Speaker 1: these past waves, they were not as impactful as we
Speaker 1: were anticipating. I anticipate that will probably be the case again.
Speaker 1: And when we look at those states that are probably
Speaker 1: most susceptable, that have lower vaccination rates, I think they
Speaker 1: are also us likely to bring back restrictions. You are
Speaker 1: so less likely to see there's people pulled back from
Speaker 1: economic activity. So it is no data downside risk to
Speaker 1: growth over these coming quarters. But that's how we're viewing it,
Speaker 1: not not impacting our baseline outook at this point, Matt.
Speaker 1: When you dig under the headline of the GDP number,
Speaker 1: are we getting whiffs of stagflation? And I know that
Speaker 1: this is the pendulum of doom. However, residential investment spending
Speaker 1: fell about a ten percent annualize. Paces has to do
Speaker 1: with supply chain issues, a lack of lumber, and of
Speaker 1: course the high prices are the high prices headwind to
Speaker 1: growth at this point. I think in certain areas that
Speaker 1: they certainly are. Housing is one uh and yes there
Speaker 1: are supply chain issues, but we're seeing demand come off.
Speaker 1: Mortgage purchase applications have weakened, perspective, bio traffic has has softened,
Speaker 1: so demand is being impacted. But I don't want to
Speaker 1: just focus on the prices either. We've seen, you know,
Speaker 1: durable good spending was six above where was pre COVID trend.
Speaker 1: Housing jumped above the pre COVID trend. So this is
Speaker 1: a very unusual recovery. It was a very unusual recession,
Speaker 1: and we've been anticipating that these cyclical sectors will come
Speaker 1: off even if you didn't get these these price pressures.
Speaker 1: So that that does make the services sector really critical
Speaker 1: to the trajectory of the economy from here on out,
Speaker 1: and we do think that it will help to carry
Speaker 1: stronger growth over the second half of the year. Do
Speaker 1: you think that this is indicative the weakness or at
Speaker 1: least the disappointments that we're seeing in economic data points.
Speaker 1: And I don't want to stop call a six and
Speaker 1: a half percent growth weakness, but we have gotten disappointment
Speaker 1: after disappointment. Does that indicate a trend that will carry
Speaker 1: into the end of the year or could things change
Speaker 1: in September when kids supposedly go back to school. Yeah.
Speaker 1: From a labor market perspective, I think we are all
Speaker 1: anticipating in share powel that is certainly anticipating that that
Speaker 1: will help to open up labor supply. Um. You know,
Speaker 1: we have focused on COVID as being a big driver
Speaker 1: of the constraints on labor supply, not necessarily the unemployment
Speaker 1: insurance benefits, and so whether or not schools that are
Speaker 1: schools are able to reopen significantly on September fully in person,
Speaker 1: I think is a critical question for the labor market outlook.
Speaker 1: You know, at this point we just don't know. We'll
Speaker 1: have to see how the variant evolves over the next
Speaker 1: couple couple of months, how policy evolves over the next
Speaker 1: couple of months, But that will be a really important
Speaker 1: consideration for getting back to maximum employment or these types
Speaker 1: of labor market numbers that then wants to see. There's
Speaker 1: a lot we don't know. There's a couple of things
Speaker 1: we can take a good guess on. One of them
Speaker 1: is inventories, and you mentioned that earlier on Matt. This
Speaker 1: is what Luke Kawa had to say of UBS. The
Speaker 1: one point one percentage point drank from injurantries in Q
Speaker 1: two is just not sustainable in the slightest Yesterday straw
Speaker 1: downs equal tomorrow's demand, Matt, would you go with that
Speaker 1: as well? That seems to be what has led us
Speaker 1: towards this downside surprise this morning. Absolutely so, we were
Speaker 1: below consensus on on this GDP print, the key driver
Speaker 1: of that being a big drag from inventories. We know
Speaker 1: we have in the retail and especially in the auto sector,
Speaker 1: very low inventories, which we expect to begin to build
Speaker 1: in the second half of the year. And so I
Speaker 1: think what you tend to see in these numbers, if
Speaker 1: private final demand is actually pretty strong, which it looks
Speaker 1: like it might be given a strong consumer spending, you
Speaker 1: should get a reversal of inventory and that should help
Speaker 1: to lift your Q three growth number versus Q two. Mozz,
Speaker 1: you want to use the word for Jean Clautriche that
Speaker 1: he loves to use and he says it with a
Speaker 1: French accent, which has got a lot more punache than
Speaker 1: you and I are going to do. And that is diffusion.
Speaker 1: There's a belief here in a mystery about the diffusion
Speaker 1: from a good centric consumer over to a service sector consumer.
Speaker 1: Do we see that in this data or does that
Speaker 1: wait for another quarters report? We have been seeing it
Speaker 1: in the monthly data, no doubt. We've seen good spending.
Speaker 1: Retail sales in nominal terms has has flatlined out over
Speaker 1: the past couple of months, and adjusting for prices, given
Speaker 1: how strong price games have been, we've seen weakness in
Speaker 1: real spending on goods. I want to emphasize that was
Speaker 1: to be anticipated. We were well above trend on on
Speaker 1: good spending, and price pressures are obviously having an impact.
Speaker 1: So we expect this handoff to the services sector to
Speaker 1: continue over the next couple of months. The next couple
Speaker 1: of quarters. We're still below uh you know where we
Speaker 1: anticipated we would be in leisure and hospitality UH and
Speaker 1: and all these other services items. So I think that
Speaker 1: should continue to be the key driver for growth going forward.
Speaker 1: Matlazette of Deutsche Bank cannot align, so it's going to
Speaker 1: catch up, thank you very much. The movable feast here, folks,
Speaker 1: is the market reaction and maybe some of the childish
Speaker 1: interpretation into very sophisticated political economics. Jeffrey You has made
Speaker 1: a career of this at B and Y Melon as
Speaker 1: their senior strategists. John, why don't you bring in Jeffrey
Speaker 1: You with his perspective synthesizing all this together for vision.
Speaker 1: Jeff You joining us now from BN Y Melon a
Speaker 1: senior strategist. Jeff, as always, you're gonna be super helpful
Speaker 1: working away through this issue for us, all walk me
Speaker 1: through what we need to pay attention to and what
Speaker 1: is worth ignoring. Right, So, firstly, pay attention to differentiation
Speaker 1: what you're seeing with individual companies in China and in
Speaker 1: terms of vidual sectors. The regulatory crackdown. There are different
Speaker 1: motivations behind it. Some have to do with international capital involvement,
Speaker 1: especially in the education sector. For example, they've stressed this
Speaker 1: so much money pouring into an arms race amongst Chinese
Speaker 1: families to get their kids ahead. Um, it's you know,
Speaker 1: it's seen as damaging. So they want to treat this
Speaker 1: on an individual basis. Now, the second part of it
Speaker 1: is this framework of international investors investing in China. How
Speaker 1: should it be done? Should it be in the U S.
Speaker 1: Should it be closer to China. That is something they're
Speaker 1: going to be looking at as well. And here's where
Speaker 1: you know, geopolitics can come into the phrase. Thirdly, and
Speaker 1: most important, I think what people are missing right now.
Speaker 1: We're talking too much about the equity market. Right now,
Speaker 1: we're talking too much about individual companies. What about the
Speaker 1: growth Embarber And no one's talked about the triple our
Speaker 1: Cup that has happened and more that may come now.
Speaker 1: No one's talking about the delta variants starting to spread
Speaker 1: and multiple provinces and the intalities in China. Growth expectations
Speaker 1: are coming off. And this is what we need to
Speaker 1: be a team to heading into the second half of
Speaker 1: the year. Let's build on that, Jeff. The degree to
Speaker 1: which the issues in the property market now are linked
Speaker 1: to perhaps a downgrade to the outlook on the Chinese economy.
Speaker 1: So two things here. Firstly, let's stick with property now,
Speaker 1: so any day now and you're normally it comes out
Speaker 1: around the end of July. In the early August, we
Speaker 1: get the two thousand twenty one Financial Stability Report from
Speaker 1: the pbo C. This is a brilliant report and they
Speaker 1: look at and they do stress test the entire banking
Speaker 1: system last year's numbers. Right, if you have a fifteen
Speaker 1: percentage point rise and property mpls amongst other scenarios, you
Speaker 1: can see catalantic. We see real ratios within Chinese banks
Speaker 1: scope from down to below ten the low the regulatory limit. Right.
Speaker 1: So this is how important this is for the sector,
Speaker 1: individual companies. They're looking at exposures as well. Is it
Speaker 1: manageable yes? Is its systemic? Probably not? At this point
Speaker 1: that the damage to wealth, the damage to consumer expectations
Speaker 1: and helples, that will drive growth lower as well. You know,
Speaker 1: I look at Jeff, you where we are in this
Speaker 1: This is not a crisis. But this moment for China,
Speaker 1: this moment for the Pacific RIM and the elephant in
Speaker 1: the room is we don't have Hong Kong anymore. It's
Speaker 1: a different Hong Kong. How do you perceive, Jeff, the
Speaker 1: Western banks and I don't want you to speak for
Speaker 1: the management of b and y melon, but how do
Speaker 1: the Western banks adapt and adjust now that Hong Kong
Speaker 1: is different? Well, they would adapt to looking at China
Speaker 1: as a whole and the new avenues of opportunities by
Speaker 1: look at what are the the five year Plan detailed.
Speaker 1: It was very explicit welcoming foreign investment into China's industries,
Speaker 1: welcoming foreign talent to drive China's best for self reliance. Right,
Speaker 1: So China notes that cannot grow by itself. It's going
Speaker 1: to need external expertise as well. But at the end
Speaker 1: end of the day, it has to be done in
Speaker 1: a way which is manageable and that does not introduce
Speaker 1: systemic risk or other risks. So, going back to the
Speaker 1: education issue for example, this is not a financial systemic
Speaker 1: risk or anything like that. It's something that's more statial
Speaker 1: and in the prison of falling birth rates and demographics,
Speaker 1: that is a serious challenge. So if foreign investment facilitated
Speaker 1: by the financial institutions, if it's seen as broadly damaging,
Speaker 1: then like any regulator globally, it's not a China specific issue,
Speaker 1: they probably want to do something about it. It's growing
Speaker 1: pains for wall streets and for everyone. And I think
Speaker 1: as China develops and integrates itself with the rest of
Speaker 1: the world financially, we have more index inclusion, c gbs,
Speaker 1: increasing ownership, all of this is going to happen, you know,
Speaker 1: just calibrated pick the right pace, because sometimes you know things,
Speaker 1: even with good intentions, you can actually end up with outcomes, Jeff.
Speaker 1: This is one reason why a number of investors said
Speaker 1: that in particular education sector in China, but including other
Speaker 1: shares as well, were uninvestable following a number of regulatory
Speaker 1: crackdowns over the weekend and Monday. The idea that it
Speaker 1: wasn't just education, it was also the data and the
Speaker 1: control over such things in the country. Given the pushback,
Speaker 1: the fact that authorities did have meetings with banking executives
Speaker 1: to try to push back some of this concern and
Speaker 1: shore up support for the markets. Do we have a
Speaker 1: sense of how far or not they are willing to
Speaker 1: go with crackdowns, with restriction in in specific industries, they
Speaker 1: could further royal markets. So I think China is learning
Speaker 1: as well like any regulator, that this is a new
Speaker 1: environment for China. They've realized how invested in the international
Speaker 1: community is in certain sectors, right so again education and
Speaker 1: being one of them. So they wanted to gauge the
Speaker 1: market fallout and if it has become excessive, and you
Speaker 1: saw the a three pronged launch and from the main
Speaker 1: financial papers in China yesterday expressing that over the medium
Speaker 1: to longer term, China is a strong market welcoming global
Speaker 1: investors to there, so of course they don't want to
Speaker 1: damage sentiment either. Then they know how inter linked it
Speaker 1: is and the country needs to stay inter links. So
Speaker 1: they will learn as well from this, and as future
Speaker 1: sectors go by, maybe they'll do it differently as well.
Speaker 1: But just pay attention to the strategic initiatives they want
Speaker 1: to communicate them better up ahead. By the way, something
Speaker 1: similar happened a few years ago to the childcare sector,
Speaker 1: exactly the same language. Not allowed to make profit and
Speaker 1: not allowed to use captain market to raise money. They
Speaker 1: wanted to dispatch the nationalized framework. As seems we all
Speaker 1: forgot about that that this has happens again and again
Speaker 1: they're learning by doing as we all are. Right now, Jeff,
Speaker 1: let's put some money to work. We spent a long
Speaker 1: time talking about the risks of framework for thinking about
Speaker 1: the situation. Where do you want to put capital to work?
Speaker 1: Considering everything you've just said in the last seven minutes, right,
Speaker 1: so three things here. Firstly, on rem and be I
Speaker 1: still finkering and be trades to arrange and ignoring all
Speaker 1: of their current news right now. They are worried about
Speaker 1: CPI and the PPI divergence, right, so exports are still
Speaker 1: very important mmm, so they wanted to limit them be
Speaker 1: appreciation anyway. So the recent news over the last few days,
Speaker 1: and probably it's not unwelcome in Europe. I think what
Speaker 1: the ECB has done very good for European equities. I
Speaker 1: think those trades and where people invest in European equities
Speaker 1: on their heade basis, I think that will work as well.
Speaker 1: By anchoring expectations and finding the US and the dollar.
Speaker 1: We are not ready to call time on on on
Speaker 1: the dollar strength and not by any means. It's still
Speaker 1: going to lead the way in major policy renewal and
Speaker 1: a normalization. So these carry trades you want to own
Speaker 1: dollar carry against the low yielders, especially in Asia, and
Speaker 1: in the high yielders. I think they're gonna folder against
Speaker 1: his daughter as well. Jeff. Interesting stuff, Jeff, you f
Speaker 1: bn y Melon a strategist I have known from London
Speaker 1: to for a long long time and one of the
Speaker 1: sharpest in the city, that's for sure right now, and
Speaker 1: this is really really important for your infrastructure. We go
Speaker 1: to the gentleman from Flint and on up to Saginaw
Speaker 1: in Base City. Dan Kildee is someone with a real
Speaker 1: view of America, different from maybe inside the Beltway in Washington,
Speaker 1: and we're honored that he could join us from inside
Speaker 1: the Beltway in Washington this morning. Dan, you and your
Speaker 1: family and your constituents have lived the worst water crisis
Speaker 1: in America. You know better than anybody about lead pipes,
Speaker 1: about water structure. Is this bill good for Flint, Michigan. Well,
Speaker 1: it's it's hard to say. It's just up in the
Speaker 1: right direction. The question is whether or not there's enough
Speaker 1: of an emphasis on water infrastructure to prevent the next
Speaker 1: Flint Michigan from happening. In some ways, you know, and ironically,
Speaker 1: Flint has some advantage in the fact that the failure
Speaker 1: of flints infrastructure occurred in public view. I was able
Speaker 1: to get help for Flint even when I was in
Speaker 1: the minority, to replace the lead pipes there. But the
Speaker 1: real question is will the warning that Flint provided the
Speaker 1: rest of the country be heated. Will we have enough
Speaker 1: to be in this legislation to replace every lead pipe
Speaker 1: in America? And I'm not sure yet we do, But
Speaker 1: maybe it's a step in the right direction and the
Speaker 1: Third World Crisis of Flint, Michigan and water. There was
Speaker 1: no discussion to pay for us. It was like, let's go,
Speaker 1: let's fix it. How do you respond to this juvenile
Speaker 1: debate over how we're gonna pay for this versus let's go. Well,
Speaker 1: the way I responed a really good question is to
Speaker 1: point out that when it comes to water infrastructure or
Speaker 1: other infrastructure failures, we're all going to pay for it.
Speaker 1: The question is you can pay now or you can
Speaker 1: pay later. Flint's a good example. If Flint, say seven
Speaker 1: years ago, had thirty or forty million dollars available to
Speaker 1: switch out its lead pipes, we would have saved what
Speaker 1: is now approaching a billion dollars in costs of compensation
Speaker 1: to victims of fixing the infrastructure after it's broken. So, yes,
Speaker 1: we do need to come up with a way to
Speaker 1: pay for it, but we can't start with the premise
Speaker 1: that we're not going to pay for it. If we
Speaker 1: don't do it. If we don't fix our infrastructure, there's
Speaker 1: a big do bill coming our way, much bigger than
Speaker 1: the cost of fixing it in the first place. Congressman,
Speaker 1: billion dollars in light of the fiscal stimulus past of
Speaker 1: the past year is not that big, especially when spent
Speaker 1: over eight years. How much in the conversation and that
Speaker 1: you have in the negotiations that burn the midnight oil
Speaker 1: as you eat tacos and chicken parm each night, as
Speaker 1: you try to hash out the details here, how much
Speaker 1: of the debate is connected to the three and a
Speaker 1: half trillion dollar plan the Senator Sanders is working on
Speaker 1: right now. It is connected because if in fact we
Speaker 1: have a bipartisan deal and the President many of us
Speaker 1: have been very committed to do as much as we
Speaker 1: can in a bipartisan fashion. That doesn't mean our works done,
Speaker 1: but it pushes more of what we may need to
Speaker 1: do into a reconciliation package. And the concern that I
Speaker 1: have is that some of our senators who seem willing
Speaker 1: to work together on the bipartisan piece, get a little
Speaker 1: cold feet when we think about what we want to
Speaker 1: put into the reconciliation package. And I'm talking about Democratic
Speaker 1: senators in this case. We've got a lot of business
Speaker 1: ahead of us. If we don't fix this stuff, it
Speaker 1: doesn't mean it goes away. It doesn't mean that China
Speaker 1: is not spending ten times what we are as a
Speaker 1: percentage of their GDP on infrastructure. What I'm trying to
Speaker 1: convey to my colleagues is, we really don't have a choice.
Speaker 1: We have to do this. We can't have an infrastructure
Speaker 1: bill that says one out of four Americans get to
Speaker 1: have twenty first century infrastructure. The rest of us have
Speaker 1: to compete with nineteenth and twentieth century infrastructure. Sooner or later,
Speaker 1: we got to fix it, and so more of it
Speaker 1: may have to be pushed into that reconciliation bill if
Speaker 1: we don't get enough in the infrastructure package itself. Which
Speaker 1: raises a question, Congressman about unity among Democrats. There's been
Speaker 1: a lot talked about the splintering of the party, the
Speaker 1: whole progressive versus the more moderate wing. Given the conversations
Speaker 1: that you're having, how difficult is it going to be?
Speaker 1: Can you characterize whether people are coming together and coming
Speaker 1: to a more unified vision here? It's hard. I mean,
Speaker 1: one of the things about having a party with a
Speaker 1: lot of diversity of thought is that we have a
Speaker 1: lot of diversity of thought, and it's often hard to
Speaker 1: land on the same spot. The tough thing is if
Speaker 1: we're all being asked to compromise. We all have to compromise.
Speaker 1: We can't have a situation where somebody on the left
Speaker 1: says the right has to compromise or the middle has
Speaker 1: to compromise. If we're going to come together, that means
Speaker 1: everybody's got to acknowledge that the final product is something
Speaker 1: that if they were doing it by themselves, they wouldn't
Speaker 1: do it. And right now, I'm not sure we've completely
Speaker 1: landed that message. I think too many folks are taking
Speaker 1: an absolutist approach that without my specific priority, I'm not
Speaker 1: going to help. And that's just that is not the
Speaker 1: way this place is designed to work. And the American
Speaker 1: people don't care what the excuses are. They just want
Speaker 1: us to get this work done. They want us to
Speaker 1: get the work done that affects their lives. You know,
Speaker 1: the Beltway arguments are of no interest to the people
Speaker 1: I represent. Dan, I got like fourteen more questions, but
Speaker 1: we don't have enough time. Dan Kilde of Flint, Michigan,
Speaker 1: thank you so much for joining us today, the congressman
Speaker 1: from the fifth District not in Michigan. This is the
Speaker 1: Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays
Speaker 1: from seven to ten am Eastern on Bloomberg Radio and
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Speaker 1: Tom Keene, and this is Bloomberg