1 00:00:05,080 --> 00:00:07,200 Speaker 1: This is the Bloomberg Surveillance Podcast. 2 00:00:07,680 --> 00:00:08,280 Speaker 2: I'm Lisa A. 3 00:00:08,320 --> 00:00:11,640 Speaker 1: Bromwoid's along with Tom Keen and Jonathan Ferrell. Join us 4 00:00:11,680 --> 00:00:15,280 Speaker 1: each day for insight from the best in economics, geopolitics, 5 00:00:15,320 --> 00:00:19,520 Speaker 1: finance and investment. Subscribe to Bloomberg Surveillance un demand on Apple, 6 00:00:19,600 --> 00:00:22,840 Speaker 1: Spotify and anywhere you get your podcasts, and always on 7 00:00:22,880 --> 00:00:26,440 Speaker 1: Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. 8 00:00:27,000 --> 00:00:30,440 Speaker 2: Let's just get to James Apia in London, investment director 9 00:00:30,720 --> 00:00:33,040 Speaker 2: over at Aberdeen. James, great to catch up with you. 10 00:00:33,120 --> 00:00:35,680 Speaker 2: It's like the question of the week. What's it all about, James? 11 00:00:35,680 --> 00:00:37,680 Speaker 2: What's behind this bond market move? 12 00:00:38,080 --> 00:00:38,520 Speaker 3: Hey? John? 13 00:00:38,600 --> 00:00:41,239 Speaker 4: Yeah, I mean it's a good question. It's been a 14 00:00:41,360 --> 00:00:44,920 Speaker 4: very strange few trading days. We had stronger US data 15 00:00:45,000 --> 00:00:47,960 Speaker 4: and the market seemingly couldn't sell off at all, and 16 00:00:47,720 --> 00:00:50,560 Speaker 4: then we've seemingly got these kind of random sell offs 17 00:00:50,600 --> 00:00:52,200 Speaker 4: out of nowhere with not much behind them. 18 00:00:52,640 --> 00:00:53,880 Speaker 3: I mean, Larry Summer's there. 19 00:00:53,880 --> 00:00:55,920 Speaker 4: I agree with you that it's all a bit spurious, 20 00:00:55,960 --> 00:00:58,040 Speaker 4: some false accuracy in there, but I think that term 21 00:00:58,160 --> 00:01:01,080 Speaker 4: premium element is certainly part of it. But if you 22 00:01:01,080 --> 00:01:03,440 Speaker 4: look at the equity market eleven percent earnings growth price 23 00:01:03,440 --> 00:01:05,600 Speaker 4: for twelve months ahead in the SMP and trading at 24 00:01:05,640 --> 00:01:08,720 Speaker 4: twenty times roughly, that looks like a pretty nice, if 25 00:01:08,720 --> 00:01:11,240 Speaker 4: not soft landing. Yet you've got this massive inversion in 26 00:01:11,280 --> 00:01:12,240 Speaker 4: the bond yield curve. 27 00:01:12,800 --> 00:01:14,640 Speaker 3: One of those is wrong, and it. 28 00:01:14,560 --> 00:01:17,480 Speaker 4: Looks like they're kind of converging from both directions, which 29 00:01:17,520 --> 00:01:20,160 Speaker 4: is probably reasonable given the data we're seen in the US. 30 00:01:20,240 --> 00:01:22,320 Speaker 1: Does it make sense to you, James, that we're seeing 31 00:01:22,800 --> 00:01:25,920 Speaker 1: risk acids hold in there despite some of the moves 32 00:01:25,920 --> 00:01:28,000 Speaker 1: that we're seeing in Birchmark bond yields. 33 00:01:28,440 --> 00:01:30,240 Speaker 4: Is that a loaded question, Lisa, because you and I 34 00:01:30,280 --> 00:01:33,559 Speaker 4: tend to be the only bears that are speaking perfectly. Yeah, Mary, 35 00:01:33,600 --> 00:01:38,280 Speaker 4: I found it difficult to explain or justify really that 36 00:01:38,680 --> 00:01:41,039 Speaker 4: rally in the equity market from a fundamental or from 37 00:01:41,080 --> 00:01:44,280 Speaker 4: a probability weighted, risk adjusted basis. It looked like there 38 00:01:44,319 --> 00:01:46,600 Speaker 4: was a lot of short covering in that in spite 39 00:01:46,640 --> 00:01:48,600 Speaker 4: of the fact that obviously the economic news has been 40 00:01:48,800 --> 00:01:52,800 Speaker 4: has been better than expected. So I am generally surprised 41 00:01:52,800 --> 00:01:56,520 Speaker 4: at how well equities can ignore some of the macro drivers. 42 00:01:57,040 --> 00:01:59,360 Speaker 4: But it's hard to pick holes in for example, retail 43 00:01:59,400 --> 00:02:03,160 Speaker 4: sales data this week. It's hard to try and claim 44 00:02:03,200 --> 00:02:06,040 Speaker 4: that the consumer is on the precipice when the splending 45 00:02:06,080 --> 00:02:07,920 Speaker 4: numbers are strong as that. And so while ever the 46 00:02:08,000 --> 00:02:11,160 Speaker 4: data is okay, I think equities can hang in there. 47 00:02:11,520 --> 00:02:13,840 Speaker 1: What about credit? We were talking about how narrow credit 48 00:02:13,880 --> 00:02:15,840 Speaker 1: spreads were, and we were talking with one of Caesar 49 00:02:16,200 --> 00:02:20,840 Speaker 1: about how much companies have readjusted to prolong some of 50 00:02:20,880 --> 00:02:25,560 Speaker 1: their payment structures and increase their cash or up their 51 00:02:26,080 --> 00:02:30,560 Speaker 1: ability to maintain themselves through this period. Are you getting 52 00:02:30,639 --> 00:02:33,800 Speaker 1: bullish uncredit or do you think that it's over its skis? 53 00:02:33,840 --> 00:02:35,200 Speaker 1: How do you sort of rationalize? 54 00:02:36,320 --> 00:02:38,040 Speaker 3: Well, so, I think spreads are too tight. 55 00:02:38,160 --> 00:02:41,440 Speaker 4: Broadly speaking, I don't think you're really being accurately compensated 56 00:02:41,480 --> 00:02:43,720 Speaker 4: for the likely default risk. You can see that realize, 57 00:02:43,720 --> 00:02:46,360 Speaker 4: defaults in most countries and regions have been ticking up 58 00:02:46,360 --> 00:02:48,800 Speaker 4: to a far greater degree than we've been used to. 59 00:02:48,880 --> 00:02:52,160 Speaker 4: So I don't think the spread component is necessarily attractive. 60 00:02:52,200 --> 00:02:54,200 Speaker 4: But what the balls and a lot of credit guys 61 00:02:54,200 --> 00:02:56,200 Speaker 4: will tell you is that the all in yield is 62 00:02:56,280 --> 00:02:59,120 Speaker 4: very attractive, obviously because of the cheapness of underlying government 63 00:02:59,120 --> 00:02:59,680 Speaker 4: bond shields. 64 00:03:00,080 --> 00:03:01,160 Speaker 3: I think that's reasonable. 65 00:03:01,160 --> 00:03:03,040 Speaker 4: So I think if you're being selective and choosing high 66 00:03:03,120 --> 00:03:07,160 Speaker 4: quality corporate credits, you've probably got some nice investment opportunities there. 67 00:03:07,280 --> 00:03:09,639 Speaker 4: One of the really interesting charts that I've seen recently 68 00:03:09,919 --> 00:03:12,480 Speaker 4: has been that a lot of companies have actually benefited 69 00:03:12,520 --> 00:03:13,280 Speaker 4: from higher rates. 70 00:03:13,320 --> 00:03:14,320 Speaker 3: You know, they engaged in. 71 00:03:14,320 --> 00:03:19,160 Speaker 4: Precautionary borrowing sort for five or seven years when rates 72 00:03:19,160 --> 00:03:21,240 Speaker 4: were low, and now they get to part that cash 73 00:03:21,440 --> 00:03:23,440 Speaker 4: at the deposit rate or at cash rates which are 74 00:03:23,520 --> 00:03:25,880 Speaker 4: five five and a half percent, and so in spite 75 00:03:25,880 --> 00:03:29,400 Speaker 4: of this monetary tightening, it's actually generating positive cash flow 76 00:03:29,440 --> 00:03:31,360 Speaker 4: for a lot of these cash rich corporates. 77 00:03:31,400 --> 00:03:33,240 Speaker 2: Hey, James, we've talked about this kind of stuff before, 78 00:03:33,280 --> 00:03:36,400 Speaker 2: but there's often a geographic regional bias on certain issues. 79 00:03:36,440 --> 00:03:38,200 Speaker 2: If you ask someone in New York on Wall Street 80 00:03:38,200 --> 00:03:41,640 Speaker 2: about China, shrugger the shoulders, and the stereotype would be 81 00:03:41,640 --> 00:03:43,200 Speaker 2: for the boomers at least tell me where the Dow 82 00:03:43,320 --> 00:03:45,800 Speaker 2: is and move on with life. In London, there's a 83 00:03:45,840 --> 00:03:49,520 Speaker 2: much more nuanced view about Macro and China specifically. James, 84 00:03:49,560 --> 00:03:51,800 Speaker 2: what's the view on China right now in the city. 85 00:03:53,440 --> 00:03:56,800 Speaker 4: Yeah, I mean, I think people are nervous slash cautious, 86 00:03:57,000 --> 00:04:00,280 Speaker 4: but to be honest, as is often the case, you know, 87 00:04:00,400 --> 00:04:04,040 Speaker 4: most folks are biased to believe that we will see 88 00:04:04,040 --> 00:04:06,000 Speaker 4: what we have seen, and that is when China has 89 00:04:06,000 --> 00:04:08,160 Speaker 4: a bit of a wobble, we should just expect quote 90 00:04:08,240 --> 00:04:11,560 Speaker 4: unquote stimulus and that'll lead to a positive reaction from markets. 91 00:04:11,560 --> 00:04:13,840 Speaker 4: So it's not something that people are really kind of 92 00:04:13,880 --> 00:04:17,480 Speaker 4: looking to play as a macro theme. And the door 93 00:04:17,520 --> 00:04:19,800 Speaker 4: doesn't swing both ways. When the US sneezes, the world 94 00:04:19,800 --> 00:04:22,080 Speaker 4: catches a cold. The US is a massive consumer with 95 00:04:22,120 --> 00:04:26,280 Speaker 4: a huge current account deficit. China really is consuming domestically 96 00:04:26,440 --> 00:04:29,360 Speaker 4: and exporting a lot, and so it's not the same linkage. 97 00:04:29,600 --> 00:04:32,080 Speaker 4: But you are seeing I think places like Australia and 98 00:04:32,120 --> 00:04:35,479 Speaker 4: Germany likely to struggle going forward, But most people I 99 00:04:35,480 --> 00:04:37,240 Speaker 4: think want to buy dollar see and h as an 100 00:04:37,240 --> 00:04:38,600 Speaker 4: expression of China concerns. 101 00:04:38,640 --> 00:04:40,440 Speaker 3: Maybe sell the Aussie dollar, but not much else. 102 00:04:40,520 --> 00:04:42,120 Speaker 2: So James, with that in mind, are we thinking about 103 00:04:42,120 --> 00:04:44,839 Speaker 2: it the wrong way round? Not how China influences the US, 104 00:04:45,040 --> 00:04:47,720 Speaker 2: but how the US influences China, given what's happened with 105 00:04:47,800 --> 00:04:49,880 Speaker 2: real rates and what could happen with a dollar going 106 00:04:49,880 --> 00:04:50,560 Speaker 2: forward from here? 107 00:04:51,960 --> 00:04:54,320 Speaker 4: Yeah, to a very great degree, and you can see 108 00:04:54,160 --> 00:04:57,640 Speaker 4: the Chinese policymakers, the PBOC really trying to offset this 109 00:04:57,720 --> 00:05:00,320 Speaker 4: weakness in the UN. I guess they're worried about a 110 00:05:00,360 --> 00:05:04,080 Speaker 4: similar situation to twenty fifteen, emerging and capital flight and 111 00:05:04,120 --> 00:05:08,839 Speaker 4: creating bigger stability problems for themselves. But they are fighting 112 00:05:08,880 --> 00:05:11,960 Speaker 4: what looks to be a pretty losing battle because the 113 00:05:12,120 --> 00:05:14,320 Speaker 4: US data is just holding up that much better than 114 00:05:14,360 --> 00:05:17,760 Speaker 4: everywhere else. And so in spite of the market desperate 115 00:05:17,880 --> 00:05:21,039 Speaker 4: to trade carry to trade risk on the US dollar 116 00:05:21,080 --> 00:05:23,599 Speaker 4: really is just starting to generate a bit of upward 117 00:05:23,680 --> 00:05:26,600 Speaker 4: momentum because we are I think we are in a 118 00:05:26,720 --> 00:05:29,240 Speaker 4: US exceptionalism world, at least for now, and that does 119 00:05:29,320 --> 00:05:30,400 Speaker 4: create problems globally. 120 00:05:30,400 --> 00:05:32,400 Speaker 3: It does create problems for dollar borrowers. 121 00:05:32,440 --> 00:05:32,760 Speaker 2: We know that. 122 00:05:33,080 --> 00:05:35,360 Speaker 1: So what are you doing right now, given the fact 123 00:05:35,400 --> 00:05:37,680 Speaker 1: that some people are saying we're at an inflection point? 124 00:05:37,839 --> 00:05:38,680 Speaker 2: Do you believe that? 125 00:05:38,839 --> 00:05:41,400 Speaker 1: Are you shifting some of your allocations in response? 126 00:05:43,720 --> 00:05:45,920 Speaker 4: I mean, I've been saying that we're on the precipice 127 00:05:45,920 --> 00:05:48,479 Speaker 4: of an inflection for quite some time. And sometimes you 128 00:05:48,480 --> 00:05:50,640 Speaker 4: look really clever and sometimes you look really stupid. It's 129 00:05:50,680 --> 00:05:53,880 Speaker 4: been that kind of environment. Bare ball flatter steepner. We've 130 00:05:53,880 --> 00:05:55,840 Speaker 4: had it all over the last eight weeks. I do 131 00:05:55,880 --> 00:05:58,760 Speaker 4: think Europe is starting to show its true colors. They've 132 00:05:58,800 --> 00:06:02,560 Speaker 4: got structural weakness and cyclical headwinds now because of policy 133 00:06:02,600 --> 00:06:06,080 Speaker 4: and the pandemic effects subsiding, So increase a bit ofituation there. 134 00:06:06,160 --> 00:06:07,880 Speaker 4: And I think the USUL curve, I think there's a 135 00:06:07,920 --> 00:06:10,080 Speaker 4: good chance it can steep in both ways. I think 136 00:06:10,120 --> 00:06:12,400 Speaker 4: it can bear steepen in a soft landing, it can 137 00:06:12,440 --> 00:06:14,760 Speaker 4: ball steep and if the data disappoints, you know, I 138 00:06:14,800 --> 00:06:17,800 Speaker 4: love an asymmetric position, so adding to steepening risk and 139 00:06:17,839 --> 00:06:19,880 Speaker 4: actually been paying US five year five year because that 140 00:06:19,880 --> 00:06:21,880 Speaker 4: looks really low. And if we get a bear steepener 141 00:06:22,160 --> 00:06:25,480 Speaker 4: that should rock it higher. But beyond that, it's quite difficult, 142 00:06:25,680 --> 00:06:28,760 Speaker 4: still trying to cling on to the more medium term positions, 143 00:06:29,040 --> 00:06:33,240 Speaker 4: generally being defensive and hoping that the forward looking indicators 144 00:06:33,279 --> 00:06:34,760 Speaker 4: will give us an accurate indication. 145 00:06:35,120 --> 00:06:37,040 Speaker 3: And that suggests things will get worse from here. 146 00:06:37,240 --> 00:06:39,600 Speaker 1: You mentioned a short squeeze. How much have the shorts 147 00:06:39,600 --> 00:06:42,640 Speaker 1: been squeezed out? How much are people really long this 148 00:06:42,720 --> 00:06:45,599 Speaker 1: equity market at a time or where there are some 149 00:06:45,680 --> 00:06:46,360 Speaker 1: real questions. 150 00:06:48,160 --> 00:06:50,080 Speaker 4: I mean It's always difficult to say with any degree 151 00:06:50,080 --> 00:06:52,040 Speaker 4: of accuracy, but if you look at surveys, if you 152 00:06:52,080 --> 00:06:54,919 Speaker 4: look at sort of FMS, Heartnet's flow Show type stuff 153 00:06:54,920 --> 00:06:57,120 Speaker 4: from Bamel, and you look at various other indicators and 154 00:06:57,160 --> 00:06:59,560 Speaker 4: surveys that we would look at, it does suggest that 155 00:06:59,600 --> 00:07:03,080 Speaker 4: there has been a shift. Sentiment has shifted away from 156 00:07:03,080 --> 00:07:05,640 Speaker 4: expecting a recession actually to the majority of people, not 157 00:07:06,120 --> 00:07:09,039 Speaker 4: from people being underweight or short equities and decent size, 158 00:07:09,080 --> 00:07:11,440 Speaker 4: to people being neutral to long. I think from a 159 00:07:11,520 --> 00:07:14,640 Speaker 4: quantitative perspective that the CTA is the vole control of 160 00:07:14,680 --> 00:07:17,880 Speaker 4: the risk parity. These guys have not only been buying 161 00:07:17,880 --> 00:07:20,760 Speaker 4: on rising prices, but they've been adding gross risk because 162 00:07:20,760 --> 00:07:24,280 Speaker 4: of falling implied volatility. So I do think we're getting 163 00:07:24,320 --> 00:07:26,720 Speaker 4: to that stage where most folk are now on the 164 00:07:26,760 --> 00:07:27,720 Speaker 4: other side of the boat. 165 00:07:27,920 --> 00:07:30,040 Speaker 3: That suggests it should take less to tip us over. 166 00:07:30,400 --> 00:07:33,440 Speaker 2: I love the Flow Show note Michael Hartnett. It's one 167 00:07:33,440 --> 00:07:36,560 Speaker 2: of my favorites. And on Friday, James, thank you love 168 00:07:36,640 --> 00:07:38,720 Speaker 2: the new dress code over at Aberdeen as well, James 169 00:07:38,720 --> 00:07:52,760 Speaker 2: athey there of Aberdeen. Let's get the conversation started on China. 170 00:07:52,800 --> 00:07:55,360 Speaker 2: We can do that with Susan Thorden from Yale University 171 00:07:55,520 --> 00:07:57,360 Speaker 2: Law School. Susan, wonderful to have you with us on 172 00:07:57,360 --> 00:08:01,280 Speaker 2: the program. I think we've always given the Chinese policymaker 173 00:08:01,400 --> 00:08:03,680 Speaker 2: the benefit of doubt that they can resolve these issues 174 00:08:03,760 --> 00:08:06,520 Speaker 2: in an orderly way. Is there any reason to believe 175 00:08:06,520 --> 00:08:07,840 Speaker 2: it is different this time? 176 00:08:09,280 --> 00:08:11,280 Speaker 5: Well, I think there are a couple of things going 177 00:08:11,320 --> 00:08:16,560 Speaker 5: on here. One is they're running into structural economic problems. 178 00:08:16,600 --> 00:08:16,760 Speaker 6: Right. 179 00:08:16,760 --> 00:08:18,920 Speaker 5: We've seen them trying to reform over the years, and 180 00:08:18,960 --> 00:08:21,600 Speaker 5: they've obviously run into a lot of difficulty with that. 181 00:08:22,200 --> 00:08:25,200 Speaker 5: And then you see the lack of confidence and the 182 00:08:25,280 --> 00:08:28,800 Speaker 5: faltering and trust in the economic officials and the Chinese 183 00:08:28,880 --> 00:08:33,120 Speaker 5: leadership after the COVID lockdowns and then the unwinding of 184 00:08:33,160 --> 00:08:35,959 Speaker 5: COVID in China, and so I think we're really looking 185 00:08:36,000 --> 00:08:39,520 Speaker 5: at a kind of a loss of confidence on the 186 00:08:39,559 --> 00:08:42,720 Speaker 5: part of both Chinese participants in the Chinese economy and 187 00:08:42,760 --> 00:08:44,480 Speaker 5: also foreign participants. 188 00:08:44,600 --> 00:08:46,560 Speaker 2: We heard from the State Council today they promised to 189 00:08:46,559 --> 00:08:52,640 Speaker 2: meet annual economic targets through quote targeted and forceful macroeconomic adjustments. Susan, 190 00:08:52,640 --> 00:08:54,800 Speaker 2: what does that actually mean? What leavers do they have 191 00:08:54,880 --> 00:08:57,840 Speaker 2: to restore confidence? As you say, there's been absolutely hammered 192 00:08:58,000 --> 00:08:59,000 Speaker 2: over the last few years. 193 00:09:00,080 --> 00:09:02,840 Speaker 5: Yeah, well, they've been struggling to try to find policy 194 00:09:02,920 --> 00:09:05,840 Speaker 5: responses that are going to actually bring about what they need, 195 00:09:05,920 --> 00:09:09,920 Speaker 5: which is they need households to start spending. And this 196 00:09:10,000 --> 00:09:12,559 Speaker 5: has been a problem in the Chinese economy going way back. 197 00:09:12,840 --> 00:09:17,280 Speaker 5: They've got the highest level of sort of savings in 198 00:09:17,360 --> 00:09:21,040 Speaker 5: China and they can't seem to unlock that from households, 199 00:09:21,080 --> 00:09:23,959 Speaker 5: and so I think what we've seen is they've tried 200 00:09:23,960 --> 00:09:27,839 Speaker 5: to kind of lower interest rates, They've tried to push out, 201 00:09:27,880 --> 00:09:30,640 Speaker 5: you know, tiny bits of stimulus, but they're loath to 202 00:09:30,760 --> 00:09:34,040 Speaker 5: kind of push out a lot of stimulus because they've 203 00:09:34,160 --> 00:09:36,320 Speaker 5: got a problem in the housing sector, in the real 204 00:09:36,480 --> 00:09:40,960 Speaker 5: estate sector, and so I think they're really limited. I 205 00:09:41,000 --> 00:09:43,840 Speaker 5: think what they probably need to do is to try 206 00:09:43,880 --> 00:09:46,360 Speaker 5: to give some confidence back to the private sector, which 207 00:09:46,360 --> 00:09:49,199 Speaker 5: is really sitting on the sidelines at this point looking 208 00:09:49,240 --> 00:09:51,680 Speaker 5: to see what's going to happen and lost confidence. 209 00:09:52,040 --> 00:09:54,360 Speaker 1: Part of this is international as well, because there was 210 00:09:54,400 --> 00:09:57,520 Speaker 1: a lot of international investment from US, from European companies. 211 00:09:57,800 --> 00:10:00,400 Speaker 1: We've seen an increasing number of US companies pull back 212 00:10:01,120 --> 00:10:04,280 Speaker 1: just a bit or significantly. How much do the Chinese 213 00:10:04,280 --> 00:10:07,360 Speaker 1: authorities want to see some of those international businesses come 214 00:10:07,400 --> 00:10:11,280 Speaker 1: back versus embrace the isolation, the sort of domestic focus 215 00:10:11,679 --> 00:10:13,560 Speaker 1: that seems to be a more front and center. 216 00:10:14,720 --> 00:10:16,880 Speaker 5: Yeah, I think you really see them trying to do 217 00:10:16,960 --> 00:10:20,520 Speaker 5: everything they can to encourage foreign businesses and foreign direct 218 00:10:20,559 --> 00:10:24,560 Speaker 5: investments to come back into China. You know, it's been 219 00:10:24,800 --> 00:10:27,920 Speaker 5: a tough five years for foreign businesses trying to work 220 00:10:27,920 --> 00:10:30,880 Speaker 5: in China. I mean not just not just COVID, but 221 00:10:31,000 --> 00:10:33,600 Speaker 5: all of this slew of regulations that have come out 222 00:10:34,040 --> 00:10:37,680 Speaker 5: a lot of kind of chilling rules and laws that 223 00:10:37,720 --> 00:10:41,559 Speaker 5: have been passed, especially on cross border data flows. It's 224 00:10:41,600 --> 00:10:44,360 Speaker 5: been very hard for companies to deal with trying to 225 00:10:44,400 --> 00:10:47,160 Speaker 5: get the data that they depend on to do their businesses, 226 00:10:47,200 --> 00:10:50,040 Speaker 5: in many cases back and forth across the border. And 227 00:10:50,080 --> 00:10:52,600 Speaker 5: so there's just been a whole slew of problems that 228 00:10:52,679 --> 00:10:56,080 Speaker 5: have kept people kind of wondering what they should be 229 00:10:56,080 --> 00:10:58,320 Speaker 5: doing about their China business and how they should be 230 00:10:58,320 --> 00:10:59,960 Speaker 5: looking at this market long term. 231 00:11:00,360 --> 00:11:03,040 Speaker 1: With all your years experience as a diplomat for the 232 00:11:03,160 --> 00:11:06,000 Speaker 1: US to a host of Asian nations, I'm wondering if 233 00:11:06,080 --> 00:11:09,640 Speaker 1: the economic difficulties that China is facing makes it more 234 00:11:09,840 --> 00:11:13,080 Speaker 1: or less difficult for the US to negotiate. In other words, 235 00:11:13,160 --> 00:11:15,719 Speaker 1: does the US have more leverage or less leverage as 236 00:11:15,720 --> 00:11:16,199 Speaker 1: a result. 237 00:11:17,200 --> 00:11:20,680 Speaker 5: Well, I think what I've seen since the Chinese have 238 00:11:20,760 --> 00:11:23,200 Speaker 5: really started to face up to the fact that the 239 00:11:23,280 --> 00:11:25,800 Speaker 5: economy is not going to bounce back after COVID the 240 00:11:25,840 --> 00:11:29,720 Speaker 5: way they were talking about initially. There's really been a 241 00:11:29,760 --> 00:11:32,560 Speaker 5: big change, and I think sort of mindset about the 242 00:11:32,679 --> 00:11:37,400 Speaker 5: need to maintain connectedness with the rest of the world economy. 243 00:11:37,440 --> 00:11:40,079 Speaker 5: And I think there was a question about that at 244 00:11:40,080 --> 00:11:42,640 Speaker 5: one point earlier, and there may still be a division 245 00:11:42,679 --> 00:11:46,160 Speaker 5: inside the Chinese leadership on this, but certainly the technocrat 246 00:11:46,360 --> 00:11:49,880 Speaker 5: economic experts in the Chinese government understand that the Chinese 247 00:11:50,480 --> 00:11:53,640 Speaker 5: economy needs to maintain those connections Susan. 248 00:11:53,760 --> 00:11:56,240 Speaker 2: Last week, the President of the United States referred to 249 00:11:56,320 --> 00:11:59,040 Speaker 2: the Chinese economy as a taking time bomb. He referred 250 00:11:59,040 --> 00:12:01,800 Speaker 2: to some government ofs is bad folks, and he said, 251 00:12:02,120 --> 00:12:06,280 Speaker 2: when bad things start to happen, bad folks do bad things. Susan, 252 00:12:06,480 --> 00:12:09,240 Speaker 2: what do you reckon he meant by that just last week. 253 00:12:10,280 --> 00:12:12,240 Speaker 5: Well, it's very hard for me to get inside the 254 00:12:12,280 --> 00:12:15,600 Speaker 5: head of leaders when they say things Hi Jinpang or 255 00:12:15,720 --> 00:12:18,760 Speaker 5: Joe Biden, But My sense is that what he means 256 00:12:19,120 --> 00:12:22,800 Speaker 5: is that the Chinese economy is not as impregnable as 257 00:12:22,800 --> 00:12:26,439 Speaker 5: we've been thinking, that there could be real risks here, 258 00:12:26,960 --> 00:12:30,839 Speaker 5: and that you know, the Chinese economy is really important 259 00:12:30,880 --> 00:12:36,200 Speaker 5: to the sort of stability and psychology and internal kind 260 00:12:36,200 --> 00:12:41,119 Speaker 5: of predictability of the Chinese state and the Chinese leadership. 261 00:12:41,120 --> 00:12:43,600 Speaker 5: And so I think what he meant is that, you know, 262 00:12:43,600 --> 00:12:46,200 Speaker 5: if the Chinese economy isn't going to be doing well, 263 00:12:46,600 --> 00:12:49,560 Speaker 5: then the whole Chinese government is going to be getting 264 00:12:49,720 --> 00:12:54,200 Speaker 5: more desperate, and we may see things that we know 265 00:12:54,280 --> 00:12:57,400 Speaker 5: might not otherwise see. And I think he's worried about 266 00:12:57,440 --> 00:13:01,000 Speaker 5: some kind of incident or accident. It might cause some 267 00:13:01,080 --> 00:13:05,120 Speaker 5: kind of conflict or crisis that we wouldn't normally see 268 00:13:05,160 --> 00:13:07,920 Speaker 5: if the Chinese were more confident than they are now. 269 00:13:08,080 --> 00:13:10,040 Speaker 2: Susan, I have a failum. We'll be talking again soon. 270 00:13:10,200 --> 00:13:13,120 Speaker 2: Susan's thoughts in there of the University law. 271 00:13:12,960 --> 00:13:20,839 Speaker 1: School, we've been asking a lot of questions around how 272 00:13:20,880 --> 00:13:24,280 Speaker 1: long the retailer can keep going, how long the consumer 273 00:13:24,320 --> 00:13:27,280 Speaker 1: can keep spending, whether they're running out of cash, whether 274 00:13:27,320 --> 00:13:28,880 Speaker 1: they're going to be challenged by some of their student 275 00:13:28,880 --> 00:13:33,520 Speaker 1: loan payments, Matt Lazetti has been upgrading his expectation for 276 00:13:33,679 --> 00:13:36,280 Speaker 1: growth in the US. He has been spot on pushing 277 00:13:36,280 --> 00:13:38,800 Speaker 1: out his Recession call. Chief you as economist at Deutsche Bank, 278 00:13:39,240 --> 00:13:41,200 Speaker 1: joining us here in the studio. 279 00:13:41,600 --> 00:13:42,839 Speaker 6: Matt just first. 280 00:13:42,600 --> 00:13:45,520 Speaker 1: Read and what we've seen in terms of retailers, the 281 00:13:45,559 --> 00:13:48,880 Speaker 1: strength the labor market not cracking. Is this an economy 282 00:13:49,040 --> 00:13:51,520 Speaker 1: that can subsist with rates where they are for a 283 00:13:51,640 --> 00:13:52,320 Speaker 1: very long time? 284 00:13:52,720 --> 00:13:55,600 Speaker 7: Look, I think right now it looks like the answers yes, 285 00:13:55,880 --> 00:13:58,760 Speaker 7: in the near term. We just upgraded our Q three 286 00:13:58,800 --> 00:14:02,080 Speaker 7: growth forecast to above three percent. You know, everybody was anticipating, 287 00:14:02,360 --> 00:14:03,920 Speaker 7: I think including the Fed, as we saw in the 288 00:14:03,920 --> 00:14:06,240 Speaker 7: minutes yesterday, that you would see this second half of 289 00:14:06,280 --> 00:14:08,200 Speaker 7: the year growth slow down, that you're beginning to see 290 00:14:08,280 --> 00:14:11,000 Speaker 7: rates bite, that the tightening of financial conditions and bank 291 00:14:11,040 --> 00:14:13,560 Speaker 7: lining conditions was going to be impact in the economy. 292 00:14:13,600 --> 00:14:15,440 Speaker 7: What it looks like we've seen with the data so 293 00:14:15,520 --> 00:14:17,920 Speaker 7: far now it's only a very little bit of data 294 00:14:17,920 --> 00:14:21,440 Speaker 7: for Q three is an acceleration for the consumer, for 295 00:14:21,480 --> 00:14:25,000 Speaker 7: industrial production. It goes against certainly what we were anticipating 296 00:14:25,040 --> 00:14:26,920 Speaker 7: at this point in time and raises really important questions 297 00:14:26,960 --> 00:14:28,120 Speaker 7: I think for the FED one. 298 00:14:27,960 --> 00:14:30,440 Speaker 1: Of the questions, and John asked it earlier. Are rates 299 00:14:30,480 --> 00:14:33,280 Speaker 1: restrictive currently? How do we even know if they are restrictive? 300 00:14:33,920 --> 00:14:36,240 Speaker 7: Yeah, I think the way that we typically view that is, 301 00:14:36,400 --> 00:14:38,360 Speaker 7: you know, either through real rates. The FED leans very 302 00:14:38,360 --> 00:14:41,680 Speaker 7: heavily on real rates, and there we are seeing very 303 00:14:41,720 --> 00:14:44,320 Speaker 7: significant increases in that. You know, ten year reel yields 304 00:14:44,400 --> 00:14:46,560 Speaker 7: at many year highs. I look at if you look 305 00:14:46,600 --> 00:14:49,320 Speaker 7: five for or five year real ois, so some a 306 00:14:49,400 --> 00:14:53,080 Speaker 7: measure of what our star type estimates are. All of 307 00:14:53,120 --> 00:14:55,600 Speaker 7: these things have been rising pretty substantially. But then when 308 00:14:55,600 --> 00:14:58,160 Speaker 7: you translated into financial conditions, it's not obviously that things 309 00:14:58,160 --> 00:15:01,640 Speaker 7: are too tight. Most financial conditions into these are loose, 310 00:15:01,720 --> 00:15:04,080 Speaker 7: have been loosening. The one area where there's tightness is 311 00:15:04,120 --> 00:15:06,600 Speaker 7: bank lending conditions, but we haven't seen that impact the 312 00:15:06,600 --> 00:15:07,520 Speaker 7: economy as of yet. 313 00:15:07,640 --> 00:15:09,440 Speaker 1: So just taking a step back for a second before 314 00:15:09,440 --> 00:15:10,840 Speaker 1: we get to the nitty gritty and I ask you 315 00:15:10,880 --> 00:15:13,120 Speaker 1: best student loan repayments and all sorts of other issues 316 00:15:13,160 --> 00:15:14,920 Speaker 1: that are capturing people's attentions. 317 00:15:15,560 --> 00:15:16,720 Speaker 2: There is a question of. 318 00:15:16,680 --> 00:15:19,080 Speaker 1: Whether this is long and variable lags, or if this 319 00:15:19,360 --> 00:15:22,760 Speaker 1: is companies that have pushed out the maturities consumers that 320 00:15:22,800 --> 00:15:26,119 Speaker 1: have pushed out their maturities, and a lot of resilience 321 00:15:26,160 --> 00:15:28,400 Speaker 1: at a time where consumers keep spending. Is this an 322 00:15:28,400 --> 00:15:31,320 Speaker 1: economy that can keep humming along even if the ten 323 00:15:31,360 --> 00:15:33,760 Speaker 1: year rate continues to go up, even if we see 324 00:15:33,840 --> 00:15:36,000 Speaker 1: four point three percent on a sustainable basis. 325 00:15:36,280 --> 00:15:38,520 Speaker 7: Yeah, So our baseline is no, you know, we still 326 00:15:38,560 --> 00:15:41,480 Speaker 7: have this mild recession in the forecast, that we still 327 00:15:41,520 --> 00:15:44,160 Speaker 7: think the bank lending condition tightening, that we've seen the 328 00:15:44,200 --> 00:15:46,120 Speaker 7: real rates that we've seen, some of the headwinds for 329 00:15:46,160 --> 00:15:48,280 Speaker 7: the consumers that are coming up, the student debt payments, 330 00:15:48,320 --> 00:15:51,880 Speaker 7: a slowing labor market, you're seeing rising delinquencies within the 331 00:15:51,920 --> 00:15:54,520 Speaker 7: consumer for both credit cards and autos, And so our 332 00:15:54,520 --> 00:15:57,880 Speaker 7: baseline is no, that you know, this is an acceleration, 333 00:15:57,960 --> 00:16:01,200 Speaker 7: but it'll be short term. Eventually you'll see monetary policy 334 00:16:01,240 --> 00:16:03,840 Speaker 7: tightening take hold. But on the other side, you know, 335 00:16:04,120 --> 00:16:06,560 Speaker 7: we're being surprised by the data here, and when you 336 00:16:06,600 --> 00:16:08,920 Speaker 7: look at the incoming data for the labor market, obviously 337 00:16:08,960 --> 00:16:12,440 Speaker 7: initial jobless claims not showing any uptick, any softening there. 338 00:16:12,640 --> 00:16:14,960 Speaker 7: Where you're seeing in the retail sales report is broad based. 339 00:16:14,960 --> 00:16:17,000 Speaker 7: Consumer confidence is picking up a little bit, so there 340 00:16:17,000 --> 00:16:19,400 Speaker 7: are you know, some elements there which make you a 341 00:16:19,400 --> 00:16:22,640 Speaker 7: little bit more cautious or in terms of thinking about 342 00:16:22,640 --> 00:16:24,120 Speaker 7: that slow down in the economy. 343 00:16:23,800 --> 00:16:25,200 Speaker 1: What do you have to see to change your view? 344 00:16:26,200 --> 00:16:28,360 Speaker 7: So I think you know to go fully towards the 345 00:16:28,360 --> 00:16:30,600 Speaker 7: soft landing, and I think we've been noting the prospects 346 00:16:30,640 --> 00:16:31,440 Speaker 7: that have been rising. 347 00:16:31,480 --> 00:16:31,760 Speaker 6: Here. 348 00:16:32,400 --> 00:16:34,120 Speaker 7: You need a few things. I think you actually do 349 00:16:34,200 --> 00:16:36,360 Speaker 7: need to see the economy slow. And the reason that 350 00:16:36,400 --> 00:16:38,360 Speaker 7: you need to see the economy slow is because the 351 00:16:38,400 --> 00:16:40,320 Speaker 7: Fed has been very adamant that if it doesn't, they 352 00:16:40,360 --> 00:16:41,760 Speaker 7: think that they have more work to do and that 353 00:16:41,800 --> 00:16:43,840 Speaker 7: they can't have confidence that inflation is going to come 354 00:16:43,880 --> 00:16:46,160 Speaker 7: down to target. We heard that from pal at the 355 00:16:46,240 --> 00:16:48,160 Speaker 7: July fome C, meaning I thought we heard it, and 356 00:16:48,160 --> 00:16:50,400 Speaker 7: that was the big takeaway from yesterday that they need 357 00:16:50,440 --> 00:16:53,200 Speaker 7: to see a slowing economy in order to get confidence 358 00:16:53,200 --> 00:16:55,480 Speaker 7: that inflation is coming down. So I think you need that. 359 00:16:55,520 --> 00:16:57,200 Speaker 7: You need to see wage and price pressures coming off. 360 00:16:57,360 --> 00:16:59,160 Speaker 7: We're seeing some evidence of that the last you know, 361 00:16:59,200 --> 00:17:02,680 Speaker 7: two inflation or some CPI have been very supportive. The 362 00:17:02,720 --> 00:17:04,760 Speaker 7: PC report next week will be a little bit less so, 363 00:17:05,359 --> 00:17:07,679 Speaker 7: but I think that's what you need. We're not getting 364 00:17:07,720 --> 00:17:09,920 Speaker 7: that evidence on the growth front as of yet, and 365 00:17:10,000 --> 00:17:15,040 Speaker 7: so I would anticipate from PAL probably next week. Jackson 366 00:17:15,080 --> 00:17:18,000 Speaker 7: Hole from the FED that they lean into a hawkish 367 00:17:18,040 --> 00:17:22,520 Speaker 7: bias still, that the September SCP probably still shows some 368 00:17:23,080 --> 00:17:26,280 Speaker 7: idea of rate hikes in the profile, and then more 369 00:17:26,320 --> 00:17:28,280 Speaker 7: importantly that they will probably hold that for even longer 370 00:17:28,280 --> 00:17:28,960 Speaker 7: than anticipating. 371 00:17:29,119 --> 00:17:32,119 Speaker 1: Let's talk about some of the potential drivers for weakness 372 00:17:32,520 --> 00:17:35,560 Speaker 1: that might take hold next year. It's what everyone's been expecting, 373 00:17:35,600 --> 00:17:37,199 Speaker 1: and they've been saying this for quite a while, so 374 00:17:37,400 --> 00:17:40,520 Speaker 1: we'll put that as a Caveat student loan repayments, this 375 00:17:40,560 --> 00:17:43,480 Speaker 1: has been a hotly debated topic, with some people coming 376 00:17:43,560 --> 00:17:45,800 Speaker 1: out and saying, well, you know, if students don't want 377 00:17:45,840 --> 00:17:47,760 Speaker 1: to pay, or former students don't want to pay, they 378 00:17:47,760 --> 00:17:49,439 Speaker 1: don't have to. They're not going to be penalized for 379 00:17:49,480 --> 00:17:52,400 Speaker 1: twelve months, and other people saying, well, you know they're 380 00:17:52,400 --> 00:17:53,760 Speaker 1: going to try and they're going to have to pay 381 00:17:53,760 --> 00:17:56,399 Speaker 1: back eventually. It'll crimp their discretionary spending. Where do you 382 00:17:56,480 --> 00:17:56,840 Speaker 1: fall on. 383 00:17:56,800 --> 00:17:59,159 Speaker 7: This, Yeah, so we think we've thought that it's going 384 00:17:59,200 --> 00:18:01,159 Speaker 7: to be this meaningful head winto the consumer. If you 385 00:18:01,200 --> 00:18:05,080 Speaker 7: look at student debt payments in the daily Treasury account, 386 00:18:06,280 --> 00:18:08,800 Speaker 7: they're down about seventy billion dollars relatives where we thought 387 00:18:08,800 --> 00:18:10,600 Speaker 7: they would have been, So that's a meaningful hit to 388 00:18:10,600 --> 00:18:13,800 Speaker 7: consumer income if it gets paid in full. There's been 389 00:18:13,880 --> 00:18:17,359 Speaker 7: certainly programs there that are trying to alleviate some of 390 00:18:17,359 --> 00:18:19,640 Speaker 7: the pressure on consumers in terms of paying that over 391 00:18:19,640 --> 00:18:21,760 Speaker 7: the next year or so. But we can track it 392 00:18:21,800 --> 00:18:23,040 Speaker 7: on a daily basis, and if you look at the 393 00:18:23,040 --> 00:18:25,480 Speaker 7: Treasury daily account, you are seeing a meaningful uptick in 394 00:18:25,480 --> 00:18:28,399 Speaker 7: payments taking place. So people are paying down their student 395 00:18:28,440 --> 00:18:31,440 Speaker 7: debt that we're not doing so previously. But my guess 396 00:18:31,480 --> 00:18:32,800 Speaker 7: is that the impact is going to be less than 397 00:18:32,840 --> 00:18:36,159 Speaker 7: anticipated or less than it was previously, simply because there 398 00:18:36,160 --> 00:18:38,040 Speaker 7: are these programs that are trying to take away some 399 00:18:38,080 --> 00:18:38,520 Speaker 7: of the pain. 400 00:18:38,600 --> 00:18:41,000 Speaker 1: We speaking with Matt Zeti, chief US economist over at 401 00:18:41,080 --> 00:18:43,800 Speaker 1: Deutsche Bank at a time where we're seeing strength pretty 402 00:18:43,840 --> 00:18:46,680 Speaker 1: much across the board. We got reports out of retailers 403 00:18:46,720 --> 00:18:51,800 Speaker 1: including Walmart, Tapestry, Target yesterday, all of them showing strength 404 00:18:51,920 --> 00:18:55,600 Speaker 1: in the consumer spending. Are you seeing any evidence that 405 00:18:55,680 --> 00:19:00,399 Speaker 1: people are wholesale pulling back or not able to spend 406 00:19:00,440 --> 00:19:03,760 Speaker 1: with such profligacy of the recent past. 407 00:19:04,040 --> 00:19:05,760 Speaker 7: Yeah, I think, you know, some things that you would 408 00:19:05,920 --> 00:19:09,400 Speaker 7: would point to are are not primary but kind of secondary. 409 00:19:09,520 --> 00:19:11,960 Speaker 7: So there's you know, evidence that that excess savings have 410 00:19:12,000 --> 00:19:13,760 Speaker 7: been drawn down. The San Francisco Fed put out a 411 00:19:13,800 --> 00:19:16,200 Speaker 7: piece just this week saying that that it'll be gone 412 00:19:16,400 --> 00:19:16,879 Speaker 7: in Q three. 413 00:19:16,920 --> 00:19:19,480 Speaker 1: The current talking about this forever, have you even saying 414 00:19:19,480 --> 00:19:20,800 Speaker 1: it's going to run out, It's going to run out 415 00:19:20,800 --> 00:19:21,520 Speaker 1: and never does. 416 00:19:21,640 --> 00:19:23,600 Speaker 7: So that that part, you know, our view is always 417 00:19:23,600 --> 00:19:25,000 Speaker 7: to the back half of this year, at the end 418 00:19:25,000 --> 00:19:26,600 Speaker 7: of this year, and so I think that part is 419 00:19:26,920 --> 00:19:28,920 Speaker 7: coming to fruition. I think you're seeing the evidence of 420 00:19:28,960 --> 00:19:31,600 Speaker 7: that through. You know, you saw rising credit card borrowing, 421 00:19:31,880 --> 00:19:34,359 Speaker 7: you're seeing rising delinquencies. You know those are now higher 422 00:19:34,359 --> 00:19:36,520 Speaker 7: for autos and credit cards than they were before the pandemic, 423 00:19:36,840 --> 00:19:39,480 Speaker 7: and so there are some strains there now. Obviously, so 424 00:19:39,640 --> 00:19:42,760 Speaker 7: far that has not translated into retail sales data. It 425 00:19:42,760 --> 00:19:45,640 Speaker 7: has in chart translated into the high frequency credit card 426 00:19:45,680 --> 00:19:48,320 Speaker 7: spending data that we've seen, and so so far there's 427 00:19:48,320 --> 00:19:50,680 Speaker 7: not evidence of that. You know, obviously, the big question 428 00:19:50,800 --> 00:19:53,160 Speaker 7: is can that continue to run even as you have 429 00:19:53,560 --> 00:19:56,000 Speaker 7: credit card debt picking up? You have delinquencies, rising strains 430 00:19:56,040 --> 00:19:58,680 Speaker 7: are there, Excess savings come down, student debt payments come 431 00:19:58,680 --> 00:20:01,679 Speaker 7: back again. Are baseline is that it can run forever 432 00:20:01,760 --> 00:20:05,119 Speaker 7: and that you'll see a slowdown that takes place, But 433 00:20:05,200 --> 00:20:06,560 Speaker 7: the data have surprised the upside. 434 00:20:06,600 --> 00:20:09,680 Speaker 1: Everything that we're talking about almost presumes American exceptionalism, that 435 00:20:09,760 --> 00:20:12,680 Speaker 1: the US economy can remain divorced from everything else that's 436 00:20:12,680 --> 00:20:14,919 Speaker 1: been going on elsewhere. And I think about China, and 437 00:20:15,000 --> 00:20:17,359 Speaker 1: every morning we come in and we open with China 438 00:20:17,400 --> 00:20:19,720 Speaker 1: and we discuss everything that's happened in the weakening there. 439 00:20:20,160 --> 00:20:23,879 Speaker 1: When you look at the connections between the world's two 440 00:20:23,920 --> 00:20:28,760 Speaker 1: biggest economies, how divorced is the US from catching a 441 00:20:28,840 --> 00:20:31,760 Speaker 1: cold from what China seems to be experiencing right now? 442 00:20:31,960 --> 00:20:36,880 Speaker 7: Yeah, maybe through two channels. I think directly economically, as 443 00:20:36,920 --> 00:20:39,359 Speaker 7: we look at the US economy today, I think it 444 00:20:39,400 --> 00:20:43,080 Speaker 7: is primarily domestically driven. It's about the services economy. It's 445 00:20:43,080 --> 00:20:46,160 Speaker 7: about the US consumer and whether or not, you know, 446 00:20:46,640 --> 00:20:49,560 Speaker 7: Chinese consumers is strong and that environment is less relevant, 447 00:20:49,560 --> 00:20:52,280 Speaker 7: so that that direct economic impact to the US I 448 00:20:52,320 --> 00:20:54,840 Speaker 7: think is probably more muted. Where I think it can 449 00:20:54,880 --> 00:20:58,119 Speaker 7: have important linkages is through financial markets. And I think, 450 00:20:58,400 --> 00:20:59,760 Speaker 7: you know, some of the risk of version that we're 451 00:20:59,760 --> 00:21:03,720 Speaker 7: seeing is certainly being driven by by what we're hearing 452 00:21:03,760 --> 00:21:05,600 Speaker 7: in the daily headlines that you get out of China. 453 00:21:06,240 --> 00:21:09,360 Speaker 7: If it is to impact the US economy more significantly, 454 00:21:09,400 --> 00:21:11,040 Speaker 7: I think it has to be through financial markets that 455 00:21:11,080 --> 00:21:13,159 Speaker 7: you get turmoil that takes place there. I think it's 456 00:21:13,160 --> 00:21:16,120 Speaker 7: an interesting question. We talk about high real yields. High 457 00:21:16,160 --> 00:21:19,000 Speaker 7: yields maybe not impacting the US consumers much, but perhaps 458 00:21:19,000 --> 00:21:20,760 Speaker 7: where we're seeing it is more on the global sphere, 459 00:21:20,800 --> 00:21:23,400 Speaker 7: and that that's where it's beginning to bite, and maybe 460 00:21:23,400 --> 00:21:25,520 Speaker 7: they will be spillovers, but through financial markets. 461 00:21:25,600 --> 00:21:27,360 Speaker 1: And this is the reason why people are wondering whether 462 00:21:27,400 --> 00:21:29,320 Speaker 1: things are getting close to a breaking point at a 463 00:21:29,440 --> 00:21:33,560 Speaker 1: time where the fundamental economy seems to be doing just fine. 464 00:21:33,920 --> 00:21:37,600 Speaker 1: How closely do you watch that the financial transmission mechanisms, 465 00:21:38,000 --> 00:21:41,480 Speaker 1: the surveys that come out, but also just some of 466 00:21:41,600 --> 00:21:43,840 Speaker 1: the fissures happening on the global market sphere. 467 00:21:44,480 --> 00:21:47,440 Speaker 7: I think you have to follow financial conditions, however you 468 00:21:47,560 --> 00:21:51,040 Speaker 7: might define them very very closely. I think we always, 469 00:21:51,280 --> 00:21:53,200 Speaker 7: you know, part of the reason that we anticipate, or 470 00:21:53,280 --> 00:21:55,440 Speaker 7: people are anticipating, we can get the soft landing is 471 00:21:55,480 --> 00:21:57,560 Speaker 7: because you're getting the economic data take place. You're gaining 472 00:21:57,560 --> 00:21:59,800 Speaker 7: to FED that was hawkish and raise rates very substantially, 473 00:22:00,080 --> 00:22:02,840 Speaker 7: but financial conditions have not fallen apart. I think if 474 00:22:03,080 --> 00:22:06,520 Speaker 7: you see equities come down, credit spreads widen, you know, 475 00:22:06,600 --> 00:22:09,440 Speaker 7: the vics come up, financial conditions tighten in a sharp 476 00:22:09,480 --> 00:22:12,760 Speaker 7: and aggressive way. That often leads to very quick changes 477 00:22:12,800 --> 00:22:15,400 Speaker 7: in narratives. And so if you get that taking place, 478 00:22:15,440 --> 00:22:17,480 Speaker 7: for whatever the reason might be, I think you'll see 479 00:22:17,560 --> 00:22:19,480 Speaker 7: kind of a downgrade of soft landing prospects. 480 00:22:19,600 --> 00:22:21,639 Speaker 1: What do you think people are getting most wrong right now? 481 00:22:22,800 --> 00:22:25,600 Speaker 7: It's a difficult environment. You know, if the economy is 482 00:22:25,640 --> 00:22:28,240 Speaker 7: actually accelerating, then that is certainly I think one that 483 00:22:28,359 --> 00:22:31,960 Speaker 7: that's that that is is getting wrong on our baseline. 484 00:22:32,080 --> 00:22:33,800 Speaker 7: You know, we still think that you have a recession. 485 00:22:34,640 --> 00:22:37,359 Speaker 7: That is not the prevailing narrative in the market right now, 486 00:22:37,440 --> 00:22:41,080 Speaker 7: even if it's you know, the baseline for most economists. 487 00:22:41,640 --> 00:22:42,960 Speaker 7: So I think if you get that, you know, the 488 00:22:43,000 --> 00:22:44,680 Speaker 7: correction markets that we would need to see would be 489 00:22:44,680 --> 00:22:47,040 Speaker 7: pretty substantial. The extent of FED rate cuts next year 490 00:22:47,040 --> 00:22:49,280 Speaker 7: would be far more substantial than what the market is pricing. 491 00:22:49,480 --> 00:22:52,680 Speaker 1: Mala Zeti a chief US economist joining us here over 492 00:22:52,880 --> 00:22:53,880 Speaker 1: at Deutsche Bag. 493 00:23:04,840 --> 00:23:08,399 Speaker 2: One company that's doing well Walmart, once again raising its 494 00:23:08,440 --> 00:23:12,320 Speaker 2: annual profit forecast. This for the second straight quarter. The 495 00:23:12,400 --> 00:23:14,879 Speaker 2: stock is high here by about one point one percent, 496 00:23:15,240 --> 00:23:18,240 Speaker 2: better numbers, a beat on the top and bottom line, 497 00:23:18,560 --> 00:23:20,800 Speaker 2: and a raise to the outlook as well. Joe Fouden 498 00:23:20,880 --> 00:23:24,000 Speaker 2: joins us now the SITY research analyst and Assistant director 499 00:23:24,240 --> 00:23:27,360 Speaker 2: of Research at Taosi Advisory Group. Joe, great to catch 500 00:23:27,440 --> 00:23:29,280 Speaker 2: up with you, sir, and good to continue this conversation 501 00:23:29,400 --> 00:23:31,680 Speaker 2: on US retail. We asked the question, I know you've 502 00:23:31,720 --> 00:23:34,720 Speaker 2: got the answers. If Walmart is doing well, what about 503 00:23:34,760 --> 00:23:35,400 Speaker 2: everybody else? 504 00:23:37,119 --> 00:23:40,080 Speaker 6: Yeah, you know, it really does reflect that there could 505 00:23:40,119 --> 00:23:43,800 Speaker 6: be some concern for other parts of the economy. You know, 506 00:23:43,880 --> 00:23:46,159 Speaker 6: we continue to see the high end doing well, the 507 00:23:46,240 --> 00:23:49,840 Speaker 6: low end is seeking value, the middle income consumer has 508 00:23:49,920 --> 00:23:52,640 Speaker 6: been trading down and seeking value, and now we've seen 509 00:23:52,680 --> 00:23:55,360 Speaker 6: that with Walmart. You know, Amazon recently have very good 510 00:23:55,400 --> 00:23:59,000 Speaker 6: results and even Target yesterday, you know, their food and 511 00:23:59,080 --> 00:24:02,040 Speaker 6: consumable side of the business was pretty healthy and people 512 00:24:02,119 --> 00:24:05,680 Speaker 6: were trading down there in that area. So you know, 513 00:24:05,760 --> 00:24:09,639 Speaker 6: we're seeing increased traffic at Walmart. You're seeing higher sales 514 00:24:09,680 --> 00:24:14,040 Speaker 6: of groceries and basic items and consumables, So you know, 515 00:24:14,080 --> 00:24:16,080 Speaker 6: the consumer is still putting food on the table and 516 00:24:16,840 --> 00:24:19,639 Speaker 6: that's an area of focus. But discretionary has been soft, 517 00:24:19,800 --> 00:24:20,680 Speaker 6: that's for sure, Joe. 518 00:24:20,680 --> 00:24:22,720 Speaker 2: How much clarity have you got on where marches are 519 00:24:22,760 --> 00:24:24,560 Speaker 2: going to be over the next couple of quarters. 520 00:24:25,920 --> 00:24:27,960 Speaker 6: Yeah, you know, I'll tell you. Walmart keeps putting up 521 00:24:28,000 --> 00:24:31,080 Speaker 6: better margines than expect it. You know that. I think 522 00:24:31,359 --> 00:24:35,080 Speaker 6: the lower freight costs are helping, and that's helping all 523 00:24:35,160 --> 00:24:38,000 Speaker 6: of retail. Remember a year ago, two years ago, freight 524 00:24:38,040 --> 00:24:40,280 Speaker 6: costs were through the roof, especially ocean freight, and that's 525 00:24:40,320 --> 00:24:42,480 Speaker 6: come down quite a bit, So that's actually helping to 526 00:24:42,520 --> 00:24:44,560 Speaker 6: provide a little bit of a tail in and give 527 00:24:44,640 --> 00:24:47,840 Speaker 6: some confidence I think for Walmart and others to raise 528 00:24:47,920 --> 00:24:49,760 Speaker 6: numbers for the back half. I mean, others are not 529 00:24:49,840 --> 00:24:52,560 Speaker 6: doing that, but Walmart, for sure. You know, the raise 530 00:24:52,600 --> 00:24:54,720 Speaker 6: that they gave is just really that confident in the 531 00:24:54,800 --> 00:24:57,840 Speaker 6: fact that they're getting the traffic, they're getting the sales 532 00:24:57,920 --> 00:25:00,080 Speaker 6: on the top line, and you know they really they 533 00:25:00,080 --> 00:25:02,040 Speaker 6: are getting the profitability they need to drop to the 534 00:25:02,080 --> 00:25:02,640 Speaker 6: bottom line. 535 00:25:03,119 --> 00:25:03,320 Speaker 3: Joe. 536 00:25:03,359 --> 00:25:05,760 Speaker 1: When you look beyond Walmart, when you look beyond target, 537 00:25:05,840 --> 00:25:07,680 Speaker 1: when you take a look at other retailers, do you 538 00:25:07,760 --> 00:25:11,480 Speaker 1: have a sense of discretionary spending money that people have 539 00:25:11,840 --> 00:25:13,879 Speaker 1: parked in the bank. Do you have a sense of 540 00:25:13,960 --> 00:25:16,800 Speaker 1: whether consumers are running out or whether they're doing just fine. 541 00:25:19,119 --> 00:25:23,360 Speaker 6: Her few is that the consumer is under some pressure 542 00:25:24,119 --> 00:25:27,440 Speaker 6: and they have some money to spend, but it's only 543 00:25:27,520 --> 00:25:30,520 Speaker 6: in pockets. So if you've planned a trip and you're 544 00:25:30,520 --> 00:25:32,240 Speaker 6: going to Europe or you go in other parts of 545 00:25:32,280 --> 00:25:35,320 Speaker 6: the US, or if you've planned a big event, you 546 00:25:35,400 --> 00:25:37,560 Speaker 6: know you're going to Taylor Swift concert, you know that 547 00:25:37,720 --> 00:25:40,000 Speaker 6: might take up a good chunk of your discretionary dollars 548 00:25:40,320 --> 00:25:42,680 Speaker 6: that you would otherwise have spent on some goods. And 549 00:25:42,800 --> 00:25:45,200 Speaker 6: I think during the pandemic when we saw people spending 550 00:25:45,280 --> 00:25:48,159 Speaker 6: a lot on goods, especially home and coming out of it, 551 00:25:48,240 --> 00:25:49,880 Speaker 6: you saw a lot of spend on a parrel last 552 00:25:49,960 --> 00:25:53,680 Speaker 6: year that those dollars that kind of shifted elsewhere. So, 553 00:25:54,640 --> 00:25:56,920 Speaker 6: you know, we've looked at credit. I know consumer credit 554 00:25:56,960 --> 00:26:00,680 Speaker 6: has been rising, but not to alarming levels as of yet, 555 00:26:00,960 --> 00:26:04,040 Speaker 6: and so the consumer is out there and able to spend. 556 00:26:04,640 --> 00:26:07,040 Speaker 6: At the moment. You know, wage growth is still pretty solid, 557 00:26:07,080 --> 00:26:11,600 Speaker 6: employment levels are good, but they're not spending broadly. They're 558 00:26:11,720 --> 00:26:15,640 Speaker 6: just spending within different silos. Obviously food is one of them. 559 00:26:15,960 --> 00:26:19,639 Speaker 6: But right now services going out to eat, while that 560 00:26:19,800 --> 00:26:23,200 Speaker 6: is starting to moderate, you know, they are they have 561 00:26:23,320 --> 00:26:24,920 Speaker 6: been spending there versus goods. 562 00:26:25,440 --> 00:26:28,320 Speaker 1: This sounds prudent, This sounds like good balance sheet management. 563 00:26:28,400 --> 00:26:32,159 Speaker 1: This sounds like actually responsible consumer spending habits. Doesn't it 564 00:26:32,240 --> 00:26:35,000 Speaker 1: seem sustainable and doesn't really speak to some sort of 565 00:26:35,080 --> 00:26:37,160 Speaker 1: broad slow down in retailing that a lot of people 566 00:26:37,240 --> 00:26:39,960 Speaker 1: say has to happen, or consumer spending that has to 567 00:26:40,080 --> 00:26:42,080 Speaker 1: happen for the US economy to soften. 568 00:26:43,760 --> 00:26:45,960 Speaker 6: Yeah, I think that's a fair statement. You know, I 569 00:26:46,040 --> 00:26:49,040 Speaker 6: think that, you know, when you look at retail broadly, 570 00:26:50,160 --> 00:26:54,760 Speaker 6: you know, again, anybody offering value, those catering to essential 571 00:26:54,840 --> 00:26:58,680 Speaker 6: goods are doing well. You know, where there was a 572 00:26:58,720 --> 00:27:01,320 Speaker 6: lot of pull forward of demand during the pandemic. We're 573 00:27:01,359 --> 00:27:04,920 Speaker 6: still in a normalization phase coming off of that, and 574 00:27:05,000 --> 00:27:07,199 Speaker 6: I think the consumer has been very prudent with how 575 00:27:07,240 --> 00:27:10,840 Speaker 6: they've been spending, and you know, we're hopeful that we're 576 00:27:10,840 --> 00:27:13,000 Speaker 6: going to have a solid back half and a decent 577 00:27:13,080 --> 00:27:15,800 Speaker 6: holiday season. We'll hear more from Walmart when they speak 578 00:27:15,840 --> 00:27:18,080 Speaker 6: in a few minutes, But you know, it just seems 579 00:27:18,160 --> 00:27:22,320 Speaker 6: that the consumer has been more resilient than I think 580 00:27:22,359 --> 00:27:24,040 Speaker 6: a lot of us have given credit at this point 581 00:27:24,080 --> 00:27:24,560 Speaker 6: in the year. 582 00:27:24,480 --> 00:27:26,159 Speaker 2: Before you run off for that call, and I know 583 00:27:26,200 --> 00:27:29,640 Speaker 2: you've got to listen to that. Target. Yesterday said this Joe, 584 00:27:30,080 --> 00:27:32,800 Speaker 2: that the resumption of student loan repayments would cause additional 585 00:27:32,880 --> 00:27:36,800 Speaker 2: pressure on strained consumer budgets. Lisa has been saying this 586 00:27:37,040 --> 00:27:39,920 Speaker 2: all week. The White House instituted a twelve month on ramp. 587 00:27:40,520 --> 00:27:42,760 Speaker 2: Are they just setting up a decent thing to blame 588 00:27:43,240 --> 00:27:45,440 Speaker 2: later on this year? Joe, what's your read on that? 589 00:27:46,560 --> 00:27:49,440 Speaker 6: Yeah, well, you know, so we did a deep dive 590 00:27:49,600 --> 00:27:52,440 Speaker 6: report on this and an analysis of student loan debt, 591 00:27:52,440 --> 00:27:54,560 Speaker 6: and you know, there's seventeen percent of the US adult 592 00:27:54,600 --> 00:27:58,040 Speaker 6: population has student loans, federal student loans that are going 593 00:27:58,119 --> 00:28:00,320 Speaker 6: to have to start being paid back. Now it won't 594 00:28:00,359 --> 00:28:02,920 Speaker 6: be penalized perhaps for a year, so there's a little 595 00:28:02,960 --> 00:28:05,760 Speaker 6: bit of a grace period. But you know, our thought 596 00:28:05,880 --> 00:28:09,720 Speaker 6: process on this was that again that middle income, middle 597 00:28:09,800 --> 00:28:11,800 Speaker 6: to upper is where you start to see more of 598 00:28:11,880 --> 00:28:13,840 Speaker 6: that pressure. Those are the people that do have the 599 00:28:13,880 --> 00:28:17,760 Speaker 6: student loans. Target's customer is really that customer, and so 600 00:28:18,560 --> 00:28:20,879 Speaker 6: we called out in our report that we thought Target 601 00:28:21,080 --> 00:28:23,680 Speaker 6: was among those that might see a little more of 602 00:28:23,800 --> 00:28:27,399 Speaker 6: an impact from student loans. Maybe less so at a 603 00:28:27,440 --> 00:28:30,240 Speaker 6: place like Walmart, which sells so much grocery and people 604 00:28:30,280 --> 00:28:33,680 Speaker 6: have been trading down and seeking value. You don't quite 605 00:28:33,760 --> 00:28:35,639 Speaker 6: have that at a Target. So I think there is 606 00:28:35,680 --> 00:28:38,160 Speaker 6: some reality there. I don't think the student loan thing 607 00:28:38,200 --> 00:28:40,400 Speaker 6: will be broad based for everybody. Again, you know, the 608 00:28:40,680 --> 00:28:43,080 Speaker 6: very high end won't be a bit an issue, and 609 00:28:43,200 --> 00:28:46,320 Speaker 6: then that really the low end doesn't. It may not 610 00:28:46,400 --> 00:28:48,000 Speaker 6: be as much of an issue either. It's really the 611 00:28:48,040 --> 00:28:50,000 Speaker 6: middle of it. Once again, it's going to get squeezed on. 612 00:28:50,040 --> 00:28:50,680 Speaker 3: This, Joe. 613 00:28:50,680 --> 00:28:52,440 Speaker 1: I'm just curious where we are in some of the 614 00:28:52,560 --> 00:28:55,080 Speaker 1: durable goods sectors, which a lot of people are wondering 615 00:28:55,160 --> 00:28:58,040 Speaker 1: how long can keep contracting. Are we at a point 616 00:28:58,120 --> 00:29:01,200 Speaker 1: an inflection point to the other direction where suddenly people 617 00:29:01,200 --> 00:29:03,280 Speaker 1: are starting to go back to things that they shunned 618 00:29:03,400 --> 00:29:05,960 Speaker 1: after the mass bingebig during the pandemic. 619 00:29:07,600 --> 00:29:11,240 Speaker 6: You know, we started to see through the summer some 620 00:29:11,440 --> 00:29:14,440 Speaker 6: early signs that you might be seeing a little bit 621 00:29:14,480 --> 00:29:18,240 Speaker 6: of a shift from the services back towards goods. And 622 00:29:18,560 --> 00:29:21,480 Speaker 6: we're hopeful that that will continue into the fall, and 623 00:29:21,760 --> 00:29:24,800 Speaker 6: you know, holiday will come, Christmas will come, kids will 624 00:29:24,840 --> 00:29:29,040 Speaker 6: get gifts, you know, so that spending will happen. We're 625 00:29:29,120 --> 00:29:31,440 Speaker 6: hoping that that shift is a little bit more aggressive 626 00:29:31,480 --> 00:29:33,760 Speaker 6: back towards the goods on the retail side of the sector. 627 00:29:35,480 --> 00:29:38,360 Speaker 6: But it seems again that there are some initial green 628 00:29:38,800 --> 00:29:42,640 Speaker 6: green shoots there that the good spending might start to 629 00:29:42,720 --> 00:29:43,120 Speaker 6: come back. 630 00:29:43,240 --> 00:29:47,160 Speaker 2: I thought you're going to break canto a Christmas soft. 631 00:29:47,640 --> 00:29:49,920 Speaker 2: Kids will get gifts. I hope they get gif well, 632 00:29:50,000 --> 00:29:53,040 Speaker 2: maybe get some of the tree jock. Thank you, Jeff Faudman, 633 00:29:53,080 --> 00:29:54,440 Speaker 2: a Tassi Advisory. 634 00:29:54,000 --> 00:29:58,680 Speaker 1: Great Subscribe the Bloomberg Surveillance Podcast on Apple, Spotify and 635 00:29:58,760 --> 00:30:01,760 Speaker 1: anywhere else you get your PODCAS casts listen live every 636 00:30:01,800 --> 00:30:04,600 Speaker 1: weekday starting at seven am Eastern on Bloomberg dot com, 637 00:30:04,760 --> 00:30:08,200 Speaker 1: the iHeartRadio app, tune In, and the Bloomberg Business app. 638 00:30:08,520 --> 00:30:11,800 Speaker 1: You can watch us live on Bloomberg Television and always 639 00:30:11,920 --> 00:30:15,320 Speaker 1: on the Bloomberg terminal. Thanks for listening. I'm Lisa Abramowitz, 640 00:30:15,360 --> 00:30:16,400 Speaker 1: and this is Bloomberg