Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast and I'm Tom
Speaker 1: Keane jay Ley. We bring you insight from the best
Speaker 1: in economics, finance, investment and international relations. Find Bloomberg Surveillance
Speaker 1: on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course
Speaker 1: on the Bloomberg Johnny is now is she on WA
Speaker 1: Labor Member of Parliament and Shadow Minister for the Department
Speaker 1: of Business, Energy and Industrial Strategy. So thank you so
Speaker 1: much for joining us. First of all, we'll Labor support
Speaker 1: this deal if if it's I guess you know, if
Speaker 1: the voters in January we're two months from from kind
Speaker 1: of crash out. Is a prime minister playing with time.
Speaker 1: The part minister is definitely playing with time for the
Speaker 1: for the benefit of her internal party politics. As we've
Speaker 1: seen last night, we are moving toward we're only fourteen
Speaker 1: weeks away and possibly crushing out of the European Union,
Speaker 1: and no deal Brexit is not acceptable to a cross
Speaker 1: parliament of title to our country. So Labor has actually
Speaker 1: been quite clear about what our tests are. We have
Speaker 1: six tests. The current deal that goes so far from
Speaker 1: meeting that if she can, she said that was the
Speaker 1: only deal on the table now apparently she thinks she
Speaker 1: can re negotiate one. If she I don't think it's possible.
Speaker 1: If she can re negotiate one that meets our six tests,
Speaker 1: then we will support it. But do you really think
Speaker 1: she's playing from within her party now, because now she
Speaker 1: she placated that cool, she's in charge for the next
Speaker 1: twelve But she got through a hundred and yes she is.
Speaker 1: But the hundred and seventeen, most of the most of
Speaker 1: the backbenches in her part, those who aren't paid by
Speaker 1: the party to deal, they many of them, in fact,
Speaker 1: will vote toget and May. Some of those who voted
Speaker 1: for to raise and May will vote against the deal
Speaker 1: as well. Because she is she has there's a fundamental
Speaker 1: fracture in the Conservative Party between those who want no
Speaker 1: kind of customs union, no kind of customs hard Brexit
Speaker 1: as they call it, and those many of them who
Speaker 1: want continued economic engagement in integration with the Open Union,
Speaker 1: because that's where a lot of our economy is supported by.
Speaker 1: So that fundamental like break in that party cannot be
Speaker 1: papered over in a couple of weeks. As the Prime
Speaker 1: Minister stronger now than she was three days ago, I
Speaker 1: think the Prime minute and personally, you know, I don't
Speaker 1: whoever was needing the Conservative Party, it wouldn't make that
Speaker 1: much difference because of these fundamental fractures. But I don't
Speaker 1: think she's any stronger than than she was. She has
Speaker 1: has shown that the significant hundred seventeen of her own
Speaker 1: members voted against her can't challenge her again. They can't
Speaker 1: challenge her. But remember she has to get a deal
Speaker 1: through Parliament's right. It's labor and dup and and all
Speaker 1: of you guys we supported. But this is the this
Speaker 1: is definitely the Prime Minister's with real fundamental flaws because
Speaker 1: it doesn't it doesn't say that we have a permanent
Speaker 1: customs union, which means that Northern Ireland, Northern Island have
Speaker 1: been a different position to the rest for the United Kingdom.
Speaker 1: And that is just unacceptable in so many ways. And
Speaker 1: it also, and this is really important for us and labor,
Speaker 1: it doesn't guarantee continued workers rights and environmental protections. You know,
Speaker 1: we love our landscape, we love our country side. We
Speaker 1: want to and we you know, we want to avoid
Speaker 1: litigate climate change. So these are fundamental problems with what
Speaker 1: she's proposing and that's not going to change in the
Speaker 1: next two weeks. I'd say there is there appetite in
Speaker 1: the House of Commons for a second referendum. Is there
Speaker 1: appetite in the House of Commons for fresh elections. There's
Speaker 1: certainly appetite for first elections. And I'm sitting here with
Speaker 1: you as an official spokesperson for the Official Majesty's official opposition,
Speaker 1: and we want a general election because you know what,
Speaker 1: actually enough I mean enough to push it through Parliament
Speaker 1: is what I'm trying to do, what we gauge right now.
Speaker 1: And obviously it's the DUP, the you know, the organized
Speaker 1: MPs who are keeping this government in power, and they
Speaker 1: have said that they won't vote, they won't vote for
Speaker 1: a vote of no confidence, they won't vote against the
Speaker 1: Prime Minister in a vote of no confidence, which means
Speaker 1: that they would affect probably means that they would that
Speaker 1: would win want But there's huge there's huge discontent in Parliament,
Speaker 1: not just in the Labor Party, you know, but also
Speaker 1: on their benches. And we just remember that we're talking
Speaker 1: about Brexit here, but in the country, you know, in
Speaker 1: my constituency, what people are talking about is that they
Speaker 1: haven't not a wage rise in ten years. But they're
Speaker 1: talking about is that, you know, public services were in
Speaker 1: the wh're having a winter, winter health crisis, NHS crisis,
Speaker 1: you know already, the policing, you know, crime is rising.
Speaker 1: That's what people are talking about. It only it's a
Speaker 1: general election that can change that, and that's why there
Speaker 1: is real appetite for general action. But the numbers mean
Speaker 1: that we can't be you know, we want to make
Speaker 1: sure we want to push for that when they have
Speaker 1: a chance of success is in a general election. Another distraction.
Speaker 1: If you vote for this deal, whether you're convinced or not,
Speaker 1: then you can actually get back to fixing the country,
Speaker 1: fixing the NHS and dealing with the real things that
Speaker 1: are in into the common people make a really good
Speaker 1: point about, you know that that that we we don't
Speaker 1: want to spend the next five years talking about Brexit.
Speaker 1: But the fact is that the dealer's on the table
Speaker 1: now will make my constituents worse off, you know, and
Speaker 1: across the country we've seen that. The government's own analysis
Speaker 1: says that GDP will be less than it would have
Speaker 1: been with the kind of deal that we want. So
Speaker 1: how are we going to go about fixing the NHS
Speaker 1: or the other challenges when we have a deal which
Speaker 1: is making us poorer and that for example, you know
Speaker 1: the Northeast where I come from, we have Nissan making
Speaker 1: you know, fantastic cars. It has an integrated supply change
Speaker 1: it needs to have, it needs frictionalist trade. If we
Speaker 1: see a general election, it should labor, you know, build
Speaker 1: a platform saying actually, you know, we want to go
Speaker 1: back to what it was, stay in the EU for
Speaker 1: star you know, so when we you know, when we've
Speaker 1: got this is it's truly right. Well, it's a really complete.
Speaker 1: One of the things I want to make emphasis a
Speaker 1: really complex situation. You can't have simple like will do
Speaker 1: you know, simple responses and take time. But every day
Speaker 1: by day everything is changing. So I'm not going to
Speaker 1: say to you now what I'm sorry, I'm not gonna say,
Speaker 1: you know what our manifesto would be when you know
Speaker 1: we've got a general election. But what's clear, you know
Speaker 1: with what we want out of a brexit, do you know,
Speaker 1: which has continued strong economic integration with the European Union
Speaker 1: and the protection for workers and environmental life, and that
Speaker 1: was what we'll be seeking to another We've got six
Speaker 1: hunch a thousand members and we will be reflecting what
Speaker 1: they want to Well. Kean war thanks so much for
Speaker 1: doing his labor. M P there of course in the
Speaker 1: House of Commons right behind and joining us, oh Andre
Speaker 1: with the Martin Center for European Studies. He is in Brussels,
Speaker 1: um oh, and we spoke to you earlier and I
Speaker 1: guess just through the morning, the Prime Minister is in
Speaker 1: Brussels and she is looking for assurances. To me, all
Speaker 1: of those assurances lead back to the Irish question. I
Speaker 1: think our listeners understand the Irish question, the history of
Speaker 1: the United Kingdom of Great Britain with Ireland and to
Speaker 1: the north Northern Ireland. But what's it mean for Europe.
Speaker 1: What is the Irish question for Brussels in Europe? Well,
Speaker 1: I think, um, I think, what what your listeners have
Speaker 1: to remember is that there's more than stake than just
Speaker 1: you know, the Republic of Ireland, Northern Irish Board, for
Speaker 1: Ireland and for the Irish question. At the European Union level,
Speaker 1: it's about how the European Commation and the European Union
Speaker 1: can show it's relevant and can show it's importance too.
Speaker 1: Smaller members it's like Ireland. So it's not just about
Speaker 1: the Irish border. The Irish border is just the issue
Speaker 1: that arose that shows that tan show the European Union
Speaker 1: how important it is for smaller members stay. It's also
Speaker 1: very very very very important highlights that for Ireland. You know,
Speaker 1: the support shown by the European Union over the last
Speaker 1: two years has fundamentally changed the dynamics in terms of
Speaker 1: how it approaches relations with London. I was thunderstruck by
Speaker 1: a couple of the articles that I read in the
Speaker 1: last few days in the Irish Times and in the
Speaker 1: London papers about the members from Northern Ireland. Of course
Speaker 1: with their leadership from Arlean's foster, she's appeared before on
Speaker 1: Bloomberg surveillance and just a tangible worry or study that
Speaker 1: we could return to the troubles. Is that feasible, Yeah,
Speaker 1: I think it's it's it's a very real worry, particularly
Speaker 1: in border communities where the border would be reinstated. If
Speaker 1: I could put if I could put it like this,
Speaker 1: for an Irish person, the reinstatement of the border north
Speaker 1: and south, it would literally be like reinstating the border,
Speaker 1: the Berlin Wall or the border between the Estonian, Latvia
Speaker 1: or any of the eastern European countries. It's just a
Speaker 1: very important symbol. The free border, or the soft border
Speaker 1: as we like to call it now. It was a
Speaker 1: symbol of peace and reconciliation. It was a symbol of
Speaker 1: how Anglo Irish relations had progressed. And really to to
Speaker 1: kind of reinstate the border would many people think, actually
Speaker 1: be several step backwards, not just not just one step.
Speaker 1: What can America and the Trump administration do? Is this
Speaker 1: so discreet and separate, we stay over on our side
Speaker 1: of the pond? Or could President Trump and as an administration,
Speaker 1: can they add value? Absolutely they can add value. I
Speaker 1: think your your listeners shouldn't forget that. One of the
Speaker 1: the one of the reasons, one of the core reasons
Speaker 1: why the peace process in Northern Ireland has has been
Speaker 1: successful was the extensive involvement of the Clinton administration during
Speaker 1: the ninety nineties. George Mitchell was the U s Special
Speaker 1: in Vy to Northern Ireland for many years, so the
Speaker 1: US could actually play a very important role. The US
Speaker 1: as many historic economic and social linkage is not just
Speaker 1: with Southern Ireland with Northern Ireland, but also of course
Speaker 1: with the UK. Andre thank you so much for the
Speaker 1: Martin Center for European Studies, greatly appreciated. Just terrific perspective
Speaker 1: this morning. Well let's talk about on all of this,
Speaker 1: and there's someone good to speak of is well, and
Speaker 1: that is John Mills. He is well. I frame him
Speaker 1: as a German rather British businessman and economists, but with
Speaker 1: j M L and currently uh someone very much involved
Speaker 1: in the idea of leave. John Mills, we are thrilled
Speaker 1: to have you with us today and we've spoken to
Speaker 1: you many times before. How did leave change yesterday? I'm
Speaker 1: not short lived to change very much yesterday. I think
Speaker 1: the road was a bit of a distraction, but it
Speaker 1: left everybody pretty well where they were before. There's still
Speaker 1: the same problems about getting the withdrawal agreement through. Nothing's
Speaker 1: changed on the difficulties around the backstop. As you say,
Speaker 1: the Prime Ministers in Brussels at the moment trying to
Speaker 1: get assurances on the back stop in Northern Ireland. But
Speaker 1: whether she'll get enough to satisfy the very large majority
Speaker 1: of MPAs in Parliament who are very concerned about the
Speaker 1: dual agreement I think remains to be seen. Gen mill
Speaker 1: is one of the great common features of your thoughts
Speaker 1: of the United Kingdom. And in speaking with Lord Skodolski
Speaker 1: the other day, is everything focused on West Britain, on
Speaker 1: Ireland in Northern Ireland. Explain what happens now to this
Speaker 1: debate of Northern Ireland, and I want to go to
Speaker 1: a broader debate than just the border. There's more going
Speaker 1: on there than the backstop, and the border isn't there.
Speaker 1: There is and that's just really because of all the
Speaker 1: background there is to the troubles that were in Northern
Speaker 1: Ireland in the nineteen seventies and nineteen eighties, which still
Speaker 1: similar a little bit under the surface. And whereas normally
Speaker 1: having a border would not be a huge problem, in
Speaker 1: this particular case, it's got all sorts of political overtones.
Speaker 1: Nobody wants to have a hard border there. That Subnash
Speaker 1: don't want that, The Northernish don't want that, the British
Speaker 1: don't want that. You doesn't want it. But we will
Speaker 1: need to find some solution that will work without being
Speaker 1: a hard border there. And I think technologically that ought
Speaker 1: to be possible, but it's just a question of getting
Speaker 1: everybody to agree to that. John the strategy of Labor
Speaker 1: so far has been to let the Conservatives fight with themselves,
Speaker 1: and to be honest with you, it's been a pretty
Speaker 1: good strategy as well. John, What do you want to
Speaker 1: see from the Labor Party over the coming months. Well,
Speaker 1: my own personal view is that the best solution to
Speaker 1: the difficulties we've got for the European Union will be
Speaker 1: for us to have a Canada type free trade deal,
Speaker 1: and my ideal would be for the Labor Party to
Speaker 1: pivot towards Routie for that rather than anything else. I'm
Speaker 1: not sure that's going to happen. I think the Labor
Speaker 1: Party is going to try and bring down the government
Speaker 1: with a vote of confidence, but I'm not sure that's
Speaker 1: going to work. It may move towards supporting a second referendum.
Speaker 1: All of that a course of faction which is fraught
Speaker 1: with difficulties. The problem is the Labor Party is very split,
Speaker 1: partly because although himps are very remain and so are
Speaker 1: most of the Labor Party members, the people who elect
Speaker 1: the Labor government, the large numbers of industrial people in
Speaker 1: Wales and the midlands of the North, who depends who
Speaker 1: Labor depends on for their support, and mostly voting Leave. Yeah,
Speaker 1: it's true there are parts of the labor core constituencies
Speaker 1: that did vote for Leave. John, I want your view
Speaker 1: on something that's really important to the City of London.
Speaker 1: There's many people that Tom and I will speak to
Speaker 1: in the square mile in the City of London in
Speaker 1: financial services who weren't so much worried about a hard Brexit.
Speaker 1: They're perhaps more worried about the prospect of Jeremy Corbyn
Speaker 1: becoming the prime Minister. John, can you speak to that
Speaker 1: at all? Should we fear Jeremy corbyon um? I think
Speaker 1: it's very easy to exaggerate the problems for the city
Speaker 1: that Jeremy Corbyn uh toward the government that he's heading
Speaker 1: up might might cause. I mean, I think in practice
Speaker 1: the run for maneuver that the labor government would have
Speaker 1: on constraining the city would would be fairly limited. And
Speaker 1: the any labor government, any government, depends very heavily on
Speaker 1: the success of the economy to make sure that its
Speaker 1: support is retained. And I think to attack the city
Speaker 1: in a major way and cause all sorts of economic
Speaker 1: problems and reductions of income and so on, it's not
Speaker 1: really in the labor parties playbook John the idea of leaving.
Speaker 1: I witnessed this firsthand on the green at Westminster. Of
Speaker 1: the geography of of leave. The elite of London aren't
Speaker 1: spoken of enough. They say, they talk about remain. I
Speaker 1: get that, and the global internationalists Zeitgeist and all. Did
Speaker 1: they have a compromise point? Did do the remain people
Speaker 1: have a distance they can travel to meet leave or not? Well,
Speaker 1: I mean, I'm not sure there is. I mean in
Speaker 1: the end that I think there's going to be a
Speaker 1: choice between whether we stay in or rejoin the European
Speaker 1: Union if it's after the twenty nine March, or whether
Speaker 1: we have a free trade from outside. What's happened over
Speaker 1: the last two years is that the result of the
Speaker 1: election held in twenty seventeen was to have a Parliament
Speaker 1: that was determined to stay very close to Europe, half
Speaker 1: in the Single Market and half in the Customs Union.
Speaker 1: And for very understandable reasons, the EU have hated that
Speaker 1: because it affects the compromises the security and integrity of
Speaker 1: the Single Market and Customs Union. And I think what
Speaker 1: in the end may happen is that the British people
Speaker 1: are just going to have to make a choice about
Speaker 1: either being fully in or fully out, and we'll have
Speaker 1: to see how that breaks over the next through Uh,
Speaker 1: well weeks now, it's not even month. We'll jump find
Speaker 1: a question for you. Can this Parliament pass a deal
Speaker 1: before the under January? I would be very surprised if
Speaker 1: it does. I think what's much more likely if they
Speaker 1: do will come back sometime in January, will get voted down,
Speaker 1: and then they'll be all sorts of options on the table,
Speaker 1: whether we go for a Norwegian type deal, whether we
Speaker 1: have a possibly pivoting towards the free trade deal, whether
Speaker 1: we have another another referendum. I think there's all these
Speaker 1: choices that would be built on the table, but whether
Speaker 1: it's actually a majority for any of them, I think
Speaker 1: it's very doubtful. Well we'll leave We're going to leave
Speaker 1: it there, jam Mills, thank you so much with Jamil,
Speaker 1: because we have such an important guest with us. He
Speaker 1: is Steve Major of HSBC. Stephen Major has been just
Speaker 1: absolute spot out and interest rates and with that has
Speaker 1: been a real he knew what HSBC call Steve Major.
Speaker 1: I think of your colleague Ben Laidler in New York
Speaker 1: rather optimistic on equities from my last conversation David Bloom
Speaker 1: with an outlier call and strong dollar is well in
Speaker 1: the backdrop of this, Steve listening to Mr drag E
Speaker 1: is how tempered this time is? How tempered this era
Speaker 1: is to all of our listeners. What's the permanence of
Speaker 1: this low interest rate world? Well? I guess this inflation.
Speaker 1: And the first question that went to Mr Jock just
Speaker 1: then was about the technicalities on the the investment program.
Speaker 1: I dare say the next question might will be on inflation.
Speaker 1: I mean someone's got to ask him, Yes, what what
Speaker 1: happened to the vigor in the labor market that you
Speaker 1: spoke of last time? Because I do remember it very clearly.
Speaker 1: It's only the last meeting. People people were questioning whether
Speaker 1: he was on his own it was. It was either
Speaker 1: the last meeting or the one before Tom But as
Speaker 1: the point, the point is he was talking about an
Speaker 1: inflation that was coming through and vigger in the I
Speaker 1: think it was vigger in the wage market. So where
Speaker 1: is it that? That's the question. And I guess he
Speaker 1: might regret saying that. I guess we will make mistakes. Well,
Speaker 1: but it's it's a proxy, Steve for every single conversation.
Speaker 1: If we can move on from Mr Dragging to the
Speaker 1: challenges of my conversation with Vice Chairman Clarida, he stated
Speaker 1: he saw reasonable growth in the United States. What our
Speaker 1: listeners know is they've got a two C D if
Speaker 1: they're lucky, or you know, they're looking at a bond
Speaker 1: matrix at HSBC that's subdued. What is the permanence of
Speaker 1: this era? Yeah, so um I touched on it with inflation,
Speaker 1: but I guess the Vice chair at the FED is
Speaker 1: familiar because of his previous job with the global output gaps,
Speaker 1: global Phillips curve. And so if you put together the
Speaker 1: economies of the rest of the world and combine them
Speaker 1: with the US, it's quite clear that US yields of
Speaker 1: two for bills quite high and and and that that's
Speaker 1: the simple point. I think it's quite salient. Rather than
Speaker 1: look at the US Phillips curve and the US unemployment
Speaker 1: rate in the US pay rolls, etcetera, let's just go
Speaker 1: more global, let's bring it all together. So what's happened
Speaker 1: in two thousand and eighteen is that the US has
Speaker 1: exported tightening of financial conditions to everybody else. Only in
Speaker 1: the last two months, did it come back home in
Speaker 1: the form of wider credit spreads, we co equities, collapsing
Speaker 1: oil prices, and a you turn from the Fed chair? Okay,
Speaker 1: are you turned from the Fed chair? And a modest
Speaker 1: you turn from Mr Dragon looking at inflation risk to
Speaker 1: the downside, I guess. And and then I want to
Speaker 1: go back to the sharks that our American listeners could see.
Speaker 1: And I've got to go to your valuable colleague, David
Speaker 1: Bloom who I'm sorry, Steve, it's an outlier call of
Speaker 1: a demonstrably stronger dollar. What are the events that get
Speaker 1: you to that stronger dollar? Well, well, look he's been
Speaker 1: right for most of the year, and yes, I guess
Speaker 1: valuable it is quite a good description of him. I
Speaker 1: can think of a few other words, some of them
Speaker 1: less polite. But the thing is with David is that
Speaker 1: he's he's strong on this conviction, but he's equally capable
Speaker 1: of changing his mind. And that's the nature of spot
Speaker 1: effects if the circumstances changed, since they will the few
Speaker 1: I cannot front run the forecast, and I don't know
Speaker 1: what the forecast might be in the future by definition,
Speaker 1: but look, if the cyclical circumstances changed that he is
Speaker 1: one of the factors that he would incorporate. David and
Speaker 1: the team have been very good and also identifying structural
Speaker 1: and political drivers to underpend the dollar, which has been
Speaker 1: very much case this year. This year, you've had political,
Speaker 1: structural and cyclical or driving the dollar higher. But you
Speaker 1: could take the cyclical blank away if the Fed chokes
Speaker 1: on the next rate hike, and then to look at
Speaker 1: another tension point. And we can do this, folks, within
Speaker 1: the matrix of Steve Major's fixed income world. It's one
Speaker 1: of the immovable forces of this entertaining eight weeks or
Speaker 1: make it frankly, twelve weeks has been the trade deficit
Speaker 1: vector in the United States moving uh in a I
Speaker 1: guess negative Trump direction. It's certainly not making the president happy.
Speaker 1: And that gets me, Steve Major to my chart of
Speaker 1: the year, which is twin deficits, which is, all of
Speaker 1: a sudden, we've got fiscal deficit to GDP, trade deficit
Speaker 1: to GDP moving towards the outlook. Is that possible? Yeah.
Speaker 1: Before we started this conversation, the economic data that was
Speaker 1: announced by one of your colleagues was on the the
Speaker 1: the labor market and on the import prices, So import
Speaker 1: prices of four and on the month. I guess that's
Speaker 1: a function of energy and dollar whatever you say, So
Speaker 1: look to answer the question rather than go around it. Um.
Speaker 1: The twin deficit thing is is fascinating to me because
Speaker 1: I'm sure you're aware of the fact that in a way,
Speaker 1: the US needs to run a deficit if the rest
Speaker 1: of the world's insurplus, and whether that's current account or not,
Speaker 1: it's just basic accounting and economics. Unless we want to
Speaker 1: export to the Moon or Mars, that's how it works.
Speaker 1: So so the thing is is that pursuing a smaller deficit,
Speaker 1: someone's going to have to pay either either the domestics
Speaker 1: are going to have to save more or or or
Speaker 1: you know, growth is going to be less foreign foreigners
Speaker 1: are going to sponsor less of the US market. But
Speaker 1: the interesting thing for me is that the budget deficit
Speaker 1: has been going up very late in the cycle, um,
Speaker 1: and this is not what you'd expect. So you've got
Speaker 1: a kind of a crowding out, if I want to
Speaker 1: use an old economic a very strange strange time. So
Speaker 1: the economy is going well, but you've got no lack
Speaker 1: of potential buyers for short dated assets at the current price.
Speaker 1: The price is right, I tell everyone that's that's what's
Speaker 1: being missed. That the other thing that you've got to
Speaker 1: look at when you talk about these deficits, you've got
Speaker 1: to subtract one deficit from the other. When it comes
Speaker 1: to the bomb market, the current account deficit has to
Speaker 1: be has to be funded somehow, right, so there has
Speaker 1: to be equal and offsetting flow. But you've got to
Speaker 1: remember that you can deduct that from the budget deficit.
Speaker 1: So the budget deficit minus the current account is what
Speaker 1: the domestics are going to buy. So if the US
Speaker 1: runs a pick a coming account deficit, then then it
Speaker 1: it is deducted from the budget. But that the way
Speaker 1: I look at it is that there's no lack of
Speaker 1: buyers here. And you're you're right to point out the
Speaker 1: twin deficit. We can go back four decades and talk
Speaker 1: about what was happening then, um in the time of
Speaker 1: Steve just to go with your expertise away from full
Speaker 1: faith in credit without question, the zeitgeist of debt right
Speaker 1: now is this odd word leverage loans. Now, I'm going
Speaker 1: to assume Steve Major is not encyclopedic on leveraged loans.
Speaker 1: But you know there's always a vogue of worry, should
Speaker 1: be we be worried about these odd vehicles leveraged loans. Okay, yeah,
Speaker 1: So previous crises were related to a bunch of acronyms
Speaker 1: in the credit markets CDs, c d O, cpdo etcetera,
Speaker 1: cpdo squares. I think it was. So the point is
Speaker 1: we now have different acronyms, that the risk is sitting
Speaker 1: in different homes. So ten years ago banks will warehousing
Speaker 1: credit risk that isn't happening now after the cleanup and regulation.
Speaker 1: Banks do not hold large amounts inventry, so the risk
Speaker 1: is somewhere now. It could be an asset managers or
Speaker 1: insurance companies. Now the particular sector you're talking about is
Speaker 1: one that might not need so much mark to market,
Speaker 1: So that the interesting thing is we may not see
Speaker 1: it immediately. See in banks, where we're we're we're we're
Speaker 1: where we have to we have to mark in some
Speaker 1: in some other cohorts of the financial markets, there's less
Speaker 1: mark to market. So you're right, there's a risk out there.
Speaker 1: It's had to have had to move somewhere. Um. I
Speaker 1: think that the focus is going on to various aspects
Speaker 1: of the credit markets after a period of extraordinary leverage. So, yes,
Speaker 1: what is your call for the yield curve? We've we've
Speaker 1: spent no time on the spread market, which is it's
Speaker 1: it's been flattening when people have been calling for a steepening.
Speaker 1: And to me, the steep in a trade people keep
Speaker 1: trying to put on it's too early. So I think
Speaker 1: it stays flat until we are sure the fen's gonna ease. Now,
Speaker 1: they're not going to tell us they're gonna ease, but
Speaker 1: they might tell us soon that they're going to pause
Speaker 1: and have a think about it. Um that that that's
Speaker 1: coming at some stage, and in fact, they probably even
Speaker 1: can test that they're gonna pause. We've got to work
Speaker 1: out for ourselves. But we've got in the yield curve.
Speaker 1: It won't steepen until you can break over the other
Speaker 1: side of the mountain. You can start to see what
Speaker 1: you're coming down. I'm gonna I'm gonna go Matthew on
Speaker 1: you here, uh major. But I think it's important is
Speaker 1: the yield curve comes down. And this is folks, basis points,
Speaker 1: which are hundreds of a percentage point. Let's say we're
Speaker 1: at point five, oh or fifty basis points fort etcetera.
Speaker 1: Is it a log rhythmic impulse or is it arithmetic?
Speaker 1: And linear? Is the impulse to inversion to zero? And
Speaker 1: then the negative two or negative five basis points whatever
Speaker 1: doesn't have it's nonlinear, isn't it? It's nonlinear. It's not
Speaker 1: explain that to our audience, because I believe I totally
Speaker 1: agree with you. Now your your your look at a
Speaker 1: basis point today and say it's worth ten cents. So
Speaker 1: the fifty basis points on the tenure yeld you just
Speaker 1: mentioned in your linear fashion as worth five percent of
Speaker 1: total return um, not accounting for coupons and rolled out.
Speaker 1: So look, that's a simple linear relationship. But the point
Speaker 1: is the lower the yield goes, the more value there
Speaker 1: is in each basis point. So it's it's it's nonlinear.
Speaker 1: And the other thing is, with the yield curve flat,
Speaker 1: you've got to think about hedging of derivative products and
Speaker 1: mortgages and all these kind of things people would have
Speaker 1: heard about convexity trades. So so that there's there's a
Speaker 1: there's a potential for the curve to accelerate flatter and
Speaker 1: invert we saw it flirt with inversion recently in certain
Speaker 1: segments of the curve. So I don't think it's time
Speaker 1: for the Stephen. I think we're a long way from that.
Speaker 1: And as you've rctually pointed out, there is that there's
Speaker 1: a risk that may not be brought through because it
Speaker 1: is a non linear relationship. And I'm just doing it
Speaker 1: in my head. I think about ten no, I think
Speaker 1: it's so important and finally, um and it's something I
Speaker 1: don't believe Mr Droggy talked about because it's it's so sensitive.
Speaker 1: Is a chronic nature of negative interest rates? I mean,
Speaker 1: we're back there. You and I had this conversation a
Speaker 1: year ago, eighteen months ago, two years ago, and I'm sorry,
Speaker 1: this is getting old, isn't it. Well. I get questions
Speaker 1: from clients all the time talking about how damaging negative
Speaker 1: rates are to the bank, affect that and everyone else.
Speaker 1: I get that, but wishing for something to go away
Speaker 1: isn't good enough. But there's more to it. Okay, Steve Major,
Speaker 1: you have been more than generous with your time today.
Speaker 1: Thank you so much. Stephen Major is with HSBC. Thanks
Speaker 1: for listening to the Bloomberg Surveillance Podcast. Subscribe and listen
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Speaker 1: you prefer. I'm on Twitter at Tom Keene before the podcast.
Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio