WEBVTT - Surveillance: Correction Was Long In The Making, Memani Says 0:00:00.080 --> 0:00:12.960 Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. 0:00:13.480 --> 0:00:17.560 Daily we bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.640 --> 0:00:31.880 Bloomberg dot Com, and of course on the Bloomberg. We 0:00:32.000 --> 0:00:35.360 welcome all of you worldwide. Good morning to Bloomberg Surveillance. 0:00:35.479 --> 0:00:38.200 Right now, we've got futures at negative three eleven over 0:00:38.200 --> 0:00:41.400 on the Bloomberg terminal, We're down over one thousand Dow 0:00:41.600 --> 0:00:45.080 points over the last eighteen hours or so. We are 0:00:45.159 --> 0:00:48.159 thrilled to bring you this morning. Jeffrey, you of UBS 0:00:48.200 --> 0:00:51.839 Wealth Management, of course with his wonderful ability on correlations 0:00:51.840 --> 0:00:55.600 of market, particularly back to foreign exchange. Jeff let's start there. 0:00:55.880 --> 0:00:58.960 What are the correlations in the market now that allow 0:00:59.080 --> 0:01:03.680 you to be more equities? Well, right now, the lack 0:01:03.760 --> 0:01:05.959 of correlations, you know, between what's going on in foreign 0:01:05.959 --> 0:01:08.880 exchange markets, you know, for example, versus what's happening in 0:01:09.080 --> 0:01:12.679 equities and thinking the fact that FX is ignoring this, 0:01:12.760 --> 0:01:14.640 which tells you, especially if you look at the MFX 0:01:14.640 --> 0:01:16.760 and the dollar, it's been discounting. Let's just say the 0:01:16.800 --> 0:01:19.040 divergence between us and the rest of the world already. 0:01:19.160 --> 0:01:21.039 So I think FX traders are not too fuss about 0:01:21.080 --> 0:01:23.240 this dolly and down two big figures, you know from 0:01:23.240 --> 0:01:25.480 the highs. Again, not too fuss about it. So again 0:01:25.600 --> 0:01:27.800 reason to be not pessimistic, Jeff, I want to go 0:01:27.840 --> 0:01:30.720 a little Matthew here right now, within the global leverage, 0:01:30.720 --> 0:01:35.120 within the mysteries of the financial system, everybody, including Mr Tullub, 0:01:35.160 --> 0:01:38.800 worries about tail risk. What are the distributions of the 0:01:38.840 --> 0:01:42.800 financial system now and how exposed are those tail risks, 0:01:42.800 --> 0:01:46.000 those so called fat tales out that lead to jump 0:01:46.040 --> 0:01:49.080 conditions that lead to abrupt moves. I believe you're pretty 0:01:49.120 --> 0:01:52.320 sanguine and that well, again they need to be more 0:01:52.360 --> 0:01:54.480 specific about tail risk coming from. Where is it an 0:01:54.480 --> 0:01:56.880 event risk that's in the price already or is this 0:01:57.000 --> 0:02:00.559 just code for the likes of risk parity, risk control 0:02:00.600 --> 0:02:03.560 other products out there where you have enforced the leveraging 0:02:03.600 --> 0:02:07.480 you know, so leverage type structures, which is actually causing 0:02:07.880 --> 0:02:09.960 vicious cycles in At this point, I think we need 0:02:10.000 --> 0:02:12.200 to be clear about you know what Peter talked about earlier. 0:02:12.320 --> 0:02:15.120 Is it a market structure issue or an event risk issue. 0:02:15.240 --> 0:02:18.040 I think we're looking for technical issues and market structure 0:02:18.120 --> 0:02:20.239 right now a bit too much and ignoring some of 0:02:20.240 --> 0:02:22.640 the positive and negative issues in the markets right now. 0:02:22.639 --> 0:02:25.320 So again focus on fundamentals. I don't worry too much 0:02:25.320 --> 0:02:27.960 about the tail risks coming from market structures. We continue 0:02:27.960 --> 0:02:30.200 to worry about the tail risks from events. But if 0:02:30.240 --> 0:02:32.560 I guess the concern is that we have a numerous 0:02:32.960 --> 0:02:36.400 events or risks, it's emerging markets, it's a dollar higher, 0:02:36.520 --> 0:02:39.720 it's a concern about encycle in the US, it's the 0:02:40.240 --> 0:02:42.600 and if they all come at the same time China, 0:02:42.720 --> 0:02:44.520 they all come at the same time, could it be 0:02:44.560 --> 0:02:46.680 the perfect storm? So there's not one catalyst, but all 0:02:46.720 --> 0:02:50.760 these little bits coming together, absolutely and then the perfect storm. 0:02:51.000 --> 0:02:53.440 Then people ask what is the safe haven? Right So 0:02:53.440 --> 0:02:55.320 it's the safe haven the dollar, and people are asking 0:02:55.800 --> 0:02:58.720 questions from clients already. Do you think China is actually 0:02:58.720 --> 0:03:01.240 exacerbating the treasury sell off, you know as a counter 0:03:01.280 --> 0:03:03.239 punching near to the trade wars and whatnot. Well, in 0:03:03.280 --> 0:03:06.000 an environment where emerging markets are using reserves already and 0:03:06.000 --> 0:03:07.440 you're seeing the data, of course they're not going to 0:03:07.480 --> 0:03:09.720 have less flow to buy treasury. So again that should 0:03:09.720 --> 0:03:11.079 be in the price. It's in the price of dollar 0:03:11.200 --> 0:03:15.120 performance against emerging markets already, So again I wouldn't overplay 0:03:15.160 --> 0:03:18.240 that angle. When the time comes, diversification should start to 0:03:18.280 --> 0:03:20.240 do its job and the FED will react as well. Okay, 0:03:20.280 --> 0:03:21.560 so what do you think the FED will do? I 0:03:21.560 --> 0:03:24.040 know UBS have an outlier call right on the FED 0:03:24.080 --> 0:03:27.280 probably having from here having having to stop hiking. Does 0:03:27.480 --> 0:03:30.600 the Trump accusing them of being local change that? So 0:03:31.040 --> 0:03:32.880 that's where we have to be very careful in terms 0:03:32.919 --> 0:03:35.640 of if is the FED So the sake of argument, 0:03:35.680 --> 0:03:37.320 you know, if they let's say, pause up ahead, are 0:03:37.360 --> 0:03:40.800 they responding to political pressure domestically are they responding to data? 0:03:41.040 --> 0:03:42.880 Let's focus on the data as much as possible. If 0:03:42.920 --> 0:03:44.640 the market starts a second guest that then we may 0:03:44.680 --> 0:03:47.680 have more issues about credibility. Jeff, I want to walk 0:03:47.760 --> 0:03:50.480 your risk parity right now. I want you to explain 0:03:50.520 --> 0:03:53.760 to our global audience what this phrase risk parity is 0:03:54.200 --> 0:03:57.280 and why it may blow up with the correlations where 0:03:57.280 --> 0:04:02.760 they are now between equities and thick income. So fundamentally, 0:04:02.880 --> 0:04:05.480 you are targeting to rather than target and return framework, 0:04:05.520 --> 0:04:09.320 You're you're targeting a volatility framework and deploying leverage at 0:04:09.320 --> 0:04:12.600 the same time. So it starts to break down. And 0:04:12.600 --> 0:04:16.560 that's the worry right now. When conventional diversification starts to do, 0:04:16.640 --> 0:04:19.039 it stops doing its job. So you don't get the 0:04:19.080 --> 0:04:23.680 positive diversification benefits from owning bonds in a leverage manner 0:04:23.720 --> 0:04:25.920 for that matter. And the risk is the fear in 0:04:26.000 --> 0:04:27.920 markets where I know what's been talked about the structure 0:04:28.040 --> 0:04:30.839 is you get a correlated sell off where if equities 0:04:30.880 --> 0:04:33.719 for and bonds for, it starts to accelerate. But I 0:04:33.760 --> 0:04:36.560 think that's overplayed. In January it was shown ultimately risparity 0:04:36.640 --> 0:04:40.160 didn't contribute aggressively to that. So you're this is critical. 0:04:40.240 --> 0:04:44.520 You're not concerned about an overlay of risk parity damage 0:04:44.880 --> 0:04:49.080 that leads to a greater volatility right now, So risk 0:04:49.120 --> 0:04:53.280 parity intrinsically is not short volt It is leverage that 0:04:53.400 --> 0:04:57.039 we need to distinguish leverage short vol versus leverage in 0:04:57.040 --> 0:04:59.800 a volatility framework. These are completely separate, right, very good. 0:04:59.839 --> 0:05:01.640 So it was like the Green Book of the International 0:05:01.680 --> 0:05:04.080 Monetary Funds, Jeff for you there with a clinic. Take 0:05:04.400 --> 0:05:19.240 Christmas charity right now with ubs we enjoy is it 0:05:19.279 --> 0:05:21.200 once a year or twice a year that we go 0:05:21.279 --> 0:05:23.280 to the land of avocado toast. I believe this once 0:05:23.320 --> 0:05:25.560 a year. Okay, Well, here at Oppenheim our Funds, we 0:05:25.600 --> 0:05:28.400 thank them for their commitment to Bloomberg on the economy, 0:05:28.440 --> 0:05:32.400 Bloomberg Surveillance and all of John Farrell's various media properties, 0:05:32.720 --> 0:05:34.640 which is a good way to bring in. Christian Momaney 0:05:34.720 --> 0:05:37.120 can just say that we have a live audience Oppenheim 0:05:37.160 --> 0:05:39.479 the Funds, and it didn't fill out until Krishna walked 0:05:39.520 --> 0:05:42.520 into the room. They're not here for us, they're mostly 0:05:42.600 --> 0:05:47.479 his his entourage, which is a paid audience. Christian mamany 0:05:47.520 --> 0:05:50.520 ce io and had a fixed income here at Oppenheimer Funds. 0:05:50.839 --> 0:05:53.640 What's your observation the keys from the last couple of 0:05:53.640 --> 0:05:56.000 weeks in the price action, we've seen well, so the 0:05:56.480 --> 0:05:59.600 correction was long in the making. When you have the 0:05:59.640 --> 0:06:03.400 Fed talking about there are no neutral rates or we 0:06:03.440 --> 0:06:06.480 are not close to neutral rates and we can keep going. 0:06:07.040 --> 0:06:10.320 And when Trump is declaring victory that NAFTA was an 0:06:10.320 --> 0:06:13.159 easy win and we're gonna show it to the Chinese, 0:06:13.480 --> 0:06:16.360 that's a bad combination for the market. I think at 0:06:16.360 --> 0:06:18.920 the end of the day, though the economy is doing 0:06:19.000 --> 0:06:23.440 reasonably well, earning should be reasonably good. We have. We 0:06:23.520 --> 0:06:27.880 still have an up trend still in place despite the correction. 0:06:28.240 --> 0:06:31.039 We have seen these types of corrections before, so this 0:06:31.120 --> 0:06:32.800 too shall pass. So it's a couple of things I 0:06:32.839 --> 0:06:35.080 want to get into with you, whether you think rights 0:06:35.080 --> 0:06:38.279 have repriced enough in treasuries and whether there are any 0:06:38.320 --> 0:06:40.720 worrying signals coming from credit. So let's do both with 0:06:40.839 --> 0:06:44.080 us now. Sure, so rates have definitely repriced. I think 0:06:44.120 --> 0:06:46.920 the question for US is our rates going to three 0:06:46.960 --> 0:06:49.440 and a half percent anytime soon? And my answer is 0:06:49.680 --> 0:06:54.880 the likelihood is yes. Probability is probably uh, relatively low 0:06:54.960 --> 0:06:59.320 at this point. So the as far as credit is concerned, 0:06:59.360 --> 0:07:01.760 I think that is probably the strongest place in the 0:07:01.800 --> 0:07:04.039 market right now. And I take a great deal of 0:07:04.120 --> 0:07:09.039 comfort watching the credit markets even today after a massive correction, 0:07:09.279 --> 0:07:12.600 and all year for that matter, credit spreads have been 0:07:12.680 --> 0:07:16.240 relatively resilient, especially in the high yield market. And if 0:07:16.240 --> 0:07:20.280 there's if there's going to be a significant correction in equities, 0:07:20.680 --> 0:07:23.600 credit not showing any cracks, I think that would be 0:07:23.680 --> 0:07:27.240 very unusual. The mathiness of this is the search for 0:07:27.320 --> 0:07:30.840 fat tails in the idea of a jump condition. Some 0:07:30.920 --> 0:07:33.920 would say we saw a jump condition in February. Those 0:07:34.000 --> 0:07:36.040 that loaded the boat on what was a February eight 0:07:36.480 --> 0:07:38.920 look pretty smart. Now that was just a correction congresion 0:07:39.600 --> 0:07:41.800 most of the people, and I would suggest most of 0:07:41.840 --> 0:07:45.480 the shareholders of Oppenheimer funds. It's a distant memory what 0:07:45.560 --> 0:07:47.880 a real bear market is, isn't it. We don't remember 0:07:48.280 --> 0:07:51.400 what negative eighteen percent is, do we? We We don't, 0:07:51.440 --> 0:07:55.960 But for good reason that is the underlying trend really 0:07:56.040 --> 0:07:59.280 has been very, very modest. So when you have two 0:07:59.680 --> 0:08:04.360 growth rate, inflation not manifesting itself in any significant way, 0:08:04.680 --> 0:08:08.600 a central bank that is accommodative, that's a good that's 0:08:08.600 --> 0:08:12.760 a good combination expecting type corrections in that environment, I 0:08:12.840 --> 0:08:16.440 think is relatively this is a coiled spring and alogy, 0:08:16.480 --> 0:08:19.200 I mean, we're not being given the opportunity for the 0:08:19.240 --> 0:08:22.560 coil spring unless John we sustained four GDP without an 0:08:22.600 --> 0:08:25.680 inflation re element. Do you see treasury yields at three 0:08:25.760 --> 0:08:28.640 eighteen right now in a ten year going much higher 0:08:28.680 --> 0:08:30.840 than they are at the moment, Krishna, No, I don't. 0:08:30.920 --> 0:08:33.360 I think if you kind of take a one year view, 0:08:33.760 --> 0:08:36.559 our view would be that rates are lower in one 0:08:36.640 --> 0:08:39.679 year's time rather than meaningfully higher from where they are. 0:08:39.760 --> 0:08:41.600 So you think tens and thirties were vine right now, 0:08:41.880 --> 0:08:44.800 I think tenth and thirties for long term investors are 0:08:44.920 --> 0:08:48.600 extraordinarily goodbye at the moment. What than that mix of 0:08:48.640 --> 0:08:52.040 a higher price ands picked a tenure in a lower yield. 0:08:52.480 --> 0:08:56.240 What part of that will be in the real space 0:08:56.400 --> 0:08:59.880 in one part will be in that squishy inflation space 0:09:00.040 --> 0:09:03.839 above it. Well, so I think that's really the kind 0:09:03.880 --> 0:09:06.440 of not the beauty, but I think that's really the 0:09:06.559 --> 0:09:09.400 thing to watch today. That is, the rise in yield 0:09:09.400 --> 0:09:13.560 has been entirely driven by real rates, belief in the economy, 0:09:13.559 --> 0:09:16.680 and all that exactly. The fact that real rates have 0:09:16.880 --> 0:09:21.160 risen sort of slows the economy down meaningfully in six 0:09:21.200 --> 0:09:23.560 to nine months, and I think that will lead to 0:09:23.600 --> 0:09:25.720 a rally and treasuries at something. This is a really 0:09:25.720 --> 0:09:28.400 important point. Goes to Christian's work, but also Jeffrey, you 0:09:28.480 --> 0:09:31.840 we mentioned earlier from us, because John, we've had uprise 0:09:32.080 --> 0:09:36.440 in the real rate. It's a compensating factor that can 0:09:36.440 --> 0:09:39.040 give you confidence out if you believe that story. But 0:09:39.080 --> 0:09:41.640 you think this can be self limiting, essentially, that's what 0:09:41.679 --> 0:09:44.320 you say in Christna, Oh yes it is. And and 0:09:44.400 --> 0:09:47.240 throughout the cycle this has been self limiting. That is, 0:09:47.600 --> 0:09:50.240 coming into two thousand and eighteen, we had a trillion 0:09:50.240 --> 0:09:54.120 dollars worth of stimulus dropped in the economy. Economy accelerated 0:09:54.160 --> 0:09:58.719 in a very very very rapid way. And uh, and 0:09:59.160 --> 0:10:02.200 then we are talking about FED tightening and things like that. 0:10:02.200 --> 0:10:08.800 That's all self regulatory, regular regulating mechanism. UH. In today's world, 0:10:08.880 --> 0:10:11.640 when the trend growth rate is still two percent and 0:10:11.800 --> 0:10:14.560 inflation is absent, you know, we will have lots of 0:10:14.720 --> 0:10:16.439 ups and downs, but at the end of the day, 0:10:16.480 --> 0:10:18.200 things are not going to change. One here, you make 0:10:18.240 --> 0:10:20.000 the observation of what is happening in credit and what 0:10:20.120 --> 0:10:22.240 is been happening in credit through eighteen. And there are 0:10:22.240 --> 0:10:24.840 two observations you can make, and that two binary opinions 0:10:24.840 --> 0:10:26.600 you can have. One is that you look at high 0:10:26.600 --> 0:10:28.640 you and you say, everything's okay. The other is that 0:10:28.640 --> 0:10:30.240 you look at investment gride and you say it's not. 0:10:30.640 --> 0:10:33.240 What's handing an investment grade? And why is that so different? Well, 0:10:33.280 --> 0:10:37.400 so investment grade, the issuance was meaningfully higher in investment 0:10:37.400 --> 0:10:39.560 grade than it was in high yield. So I think 0:10:39.600 --> 0:10:44.720 that technical consideration certainly drove widening in investment grade spreads. 0:10:44.760 --> 0:10:48.320 But even investment grade spreads in the later half of 0:10:48.360 --> 0:10:51.280 two thousand and eighteen into the third quarter, for example, 0:10:51.600 --> 0:10:55.000 have done materially better, and even when they're widened, they 0:10:55.120 --> 0:10:57.680 only widened marginally. So if you you know, with the 0:10:57.800 --> 0:11:00.880 tightest the coming into the year was d basis points 0:11:00.880 --> 0:11:03.760 spreads that went to a little over a hundred and ten. 0:11:04.160 --> 0:11:06.720 Now we are back close to hundreds. So it's been 0:11:07.120 --> 0:11:10.000 back and forth. We panic in the market because it's 0:11:10.000 --> 0:11:13.080 a big move relative to that's the surveillance bre exclusive 0:11:13.200 --> 0:11:15.680 momonty panics. But at the end of the day, the 0:11:15.720 --> 0:11:18.920 move isn't that the move isn't that substantis this is 0:11:18.960 --> 0:11:21.760 important because the conversation for the last thirty two seconds 0:11:21.800 --> 0:11:25.760 has been entirely the real yield conversation. Your property tomorrow? 0:11:25.760 --> 0:11:31.680 What time is it tomorrow? Quite often, oh probably tomorrow? 0:11:31.800 --> 0:11:35.760 So well, Christian, very importantly here the Oppenheimer funds heritages 0:11:35.800 --> 0:11:39.480 the international markets. Is this pullback again with dal future 0:11:39.520 --> 0:11:43.679 is improving negative one versus negative three hundred ninety minutes 0:11:43.720 --> 0:11:48.200 two hours ago? Is it an opportunity in international stocks? 0:11:48.200 --> 0:11:51.400 Were they hammered yesterday or is it just a domestic story? 0:11:51.840 --> 0:11:57.760 So clearly equities have gone down globally, but remember equities 0:11:57.840 --> 0:12:03.559 International equities went down meaningfully lower long before the US 0:12:03.640 --> 0:12:06.640 market crack. So if you look at valuations on a 0:12:06.679 --> 0:12:11.160 global basis, international valuations are extraordinarily cheap. You look at 0:12:11.120 --> 0:12:15.199 the emerging market valuation relative to the U S valuations, 0:12:15.240 --> 0:12:18.800 Even with the sell off, I think international valuations remain 0:12:18.920 --> 0:12:22.439 far more attractive than US. Doesn't mean US equities won't 0:12:22.440 --> 0:12:25.040 come down, but I think for long term investors the 0:12:25.120 --> 0:12:28.439 better opportunities internationally. I've heard a lot of people make 0:12:28.480 --> 0:12:30.720 the big convergence call for equities. Can you make the 0:12:30.760 --> 0:12:32.599 same call for the bond market. I'm looking at the 0:12:32.600 --> 0:12:35.120 BODON treasury spread right now on a ten year maturity 0:12:35.520 --> 0:12:38.000 of about two sixty five basis points. Can you make 0:12:38.040 --> 0:12:41.240 the same code for convergence in fixed income? Well, there's 0:12:41.280 --> 0:12:44.280 not going to be an equity convergence unless there is 0:12:44.320 --> 0:12:46.960 a band convergence. And I think there will be a 0:12:47.000 --> 0:12:50.560 band conversions coming in two thousand nineteen, and it will 0:12:50.559 --> 0:12:55.600 be driven not typically as international economy is doing much better. 0:12:55.880 --> 0:12:58.640 It will come from the U S economy starting to 0:12:58.679 --> 0:13:01.440 slow down. The convert sense will be driven by US 0:13:01.559 --> 0:13:05.319 lowness as opposed to acceloration in internationally kind I want 0:13:05.320 --> 0:13:07.720 to touch on her next conversation is he I am 0:13:07.720 --> 0:13:10.480 f right about global slowdown? Well, I am f is 0:13:10.559 --> 0:13:13.080 right and in that things are slowing down and we 0:13:13.120 --> 0:13:16.840 have probably seen the peak of the recent sport in 0:13:17.000 --> 0:13:20.360 economic growth. So I think two thousand nineteen is going 0:13:20.400 --> 0:13:23.440 to be lots slower than two th canvass the world 0:13:23.440 --> 0:13:25.520 with Christian MoManI here at up and I'm her friends 0:13:25.600 --> 0:13:28.400 John Farren I visiting at today in their studios down 0:13:28.440 --> 0:13:31.640 down their beautiful studios. It's pretty fancy, you know. I 0:13:31.640 --> 0:13:35.080 could get comfortable here. I'm thinking, can we come more often? Christian? 0:13:35.080 --> 0:13:38.360 Would you welcome? You could do your could do your 0:13:38.360 --> 0:13:42.040 other properties here. I'm a nice guy. Really never said that. 0:13:42.800 --> 0:13:55.640 He does not say that about me. She is from 0:13:55.720 --> 0:13:59.920 the University of Middletown, Connecticut. Dana Peterson was City Group 0:14:00.040 --> 0:14:04.319 out of the Wesleyan University Economic Shop as well and 0:14:04.360 --> 0:14:08.240 critically Dana Peterson with expertise at the FED on the 0:14:08.280 --> 0:14:11.200 fiscal watch as well. Dana, wonderful to speak to you. 0:14:11.880 --> 0:14:14.960 Where are we in the dynamic of all the debt 0:14:15.080 --> 0:14:17.680 we're going to have to create to pay for our 0:14:17.760 --> 0:14:21.600 deficit and what it means for the American economy. When 0:14:21.600 --> 0:14:25.200 you see all the gloom, the reports chronic trillion dollar deficits, 0:14:25.200 --> 0:14:28.920 how do you respond? Sure, absolutely, it seems like no 0:14:28.960 --> 0:14:32.080 one's paying attention in Washington. Indeed, as we did have 0:14:32.160 --> 0:14:35.880 the tax reform passed in December of last year, and 0:14:35.880 --> 0:14:39.760 then also the Biparson Budget Act of eighteen earlier this year, 0:14:39.920 --> 0:14:44.320 and certainly how the Republicans have already advanced UM legislation 0:14:44.440 --> 0:14:47.200 for tax reform two point oh which would cost another 0:14:47.240 --> 0:14:50.360 six and sixty billion UM. And when we look at this, 0:14:50.600 --> 0:14:54.440 certainly the fiscal stimulus from the federal government is definitely 0:14:54.520 --> 0:14:57.240 bolstering the U s economy. We're looking at probably three 0:14:57.280 --> 0:14:59.760 pc growth to this year with at least seven tents 0:14:59.760 --> 0:15:03.520 of contributed by fiscal stimulus, and the next year probably 0:15:03.560 --> 0:15:06.680 around two point eight percent, but again around one percentage 0:15:06.720 --> 0:15:10.200 point from fiscal stimulus. But over time this is going 0:15:10.280 --> 0:15:14.960 to to really affect the economy in terms of outside debt, 0:15:15.000 --> 0:15:18.680 as you mentioned um, certainly crowding out of business investment, 0:15:18.840 --> 0:15:21.840 and even currently now we're seeing the Treasury, the US 0:15:21.880 --> 0:15:26.280 Treasury responding to this with increased issuance. In fact, the 0:15:26.320 --> 0:15:30.480 Treasury has increased its nominal UH note issuance and bond 0:15:30.480 --> 0:15:33.080 issuance as a February of this year, and in the 0:15:33.120 --> 0:15:35.000 second half of this year, we're probably looking at the 0:15:35.040 --> 0:15:40.360 most debt issued ever, Danna Peterson. If growth is coming 0:15:40.560 --> 0:15:46.280 from added fiscal stimulus, then what should be the real 0:15:46.520 --> 0:15:51.760 interest rate level currently? If interest rates are moving because 0:15:51.800 --> 0:15:57.080 people anticipate greater economic growth, well, I would like to 0:15:57.120 --> 0:15:59.440 say that underlying growth is still quite strong. We're looking 0:15:59.480 --> 0:16:01.920 at around two in a quarter percent and that's normably 0:16:01.960 --> 0:16:04.560 about potential, which is probably you know, one in three 0:16:04.640 --> 0:16:07.760 quarters percentage point. So the other eyeling economy is doing 0:16:07.840 --> 0:16:10.720 very well despite the stimulus. But the set is is 0:16:10.760 --> 0:16:14.160 normalizing rates so they're not responding to and overheating in 0:16:14.160 --> 0:16:17.960 the economy, and the neutral rate is uh, you know, 0:16:18.000 --> 0:16:21.600 I'm looking and looking at the different research of particularly 0:16:21.760 --> 0:16:25.120 the Lobock Williams model is suggesting that the neutral rate 0:16:25.160 --> 0:16:26.800 is in the range is at two point seven five. 0:16:28.920 --> 0:16:35.040 She she did that without avoiding the art starting She's 0:16:35.040 --> 0:16:37.320 just you know, but see here here's my point. Let 0:16:37.320 --> 0:16:38.760 me just go back to this for a second. The 0:16:38.840 --> 0:16:42.080 idea being that if everyone looks at the physical stimulus 0:16:42.080 --> 0:16:43.760 because and then they say, oh, well, you know, the 0:16:43.800 --> 0:16:46.920 federal government budget deficit and all this is, and that's 0:16:46.920 --> 0:16:49.560 what's fueling the economy or getting us, you know, an 0:16:49.600 --> 0:16:52.600 extra half a percent or an extra percent of GDP growth. 0:16:52.880 --> 0:16:54.280 And then you get people that say, all right, so 0:16:54.280 --> 0:16:56.800 why do interest rates move? They move either because there's 0:16:56.800 --> 0:17:00.200 a lot of the inflation or because there is real 0:17:00.240 --> 0:17:03.760 economic growth. So if you have this one time fiscal 0:17:03.840 --> 0:17:09.760 stimulus that goes away, shouldn't rates then anticipate a lower 0:17:10.320 --> 0:17:14.480 growth trajectory. So as a result, rates should actually be 0:17:14.560 --> 0:17:19.160 going down. Well, rate should actually be rising if you're 0:17:19.160 --> 0:17:23.840 anticipating lots of debt coming down the line. Indeed, for 0:17:24.920 --> 0:17:28.080 the federal budget deficit was close to eight billion dollars 0:17:28.119 --> 0:17:29.600 and then next year we're gonna be looking at a 0:17:29.640 --> 0:17:32.200 trillion dollars and it's only going to get worse going forward. 0:17:32.280 --> 0:17:35.720 So naturally rates should reflect that. And indeed, uh, you know, 0:17:35.720 --> 0:17:38.479 when you look at a tenure yield, it's been lower 0:17:38.480 --> 0:17:42.120 than what fundamentals would suggest. And you know, certainly now 0:17:42.119 --> 0:17:44.280 that we're at three and a a quarter, that's probably more 0:17:44.320 --> 0:17:47.879 in line with the expectations for for growth at least 0:17:48.200 --> 0:17:51.680 the next few years and the tenure outlook for for 0:17:52.240 --> 0:17:54.440 federal budget deficits. Danna, I want to get in troup 0:17:54.520 --> 0:17:57.440 with Katherine Man. That's what our job is here this morning. 0:17:57.440 --> 0:18:01.600 You're wonderful Chief Economists. Is President Trump right about feed independence? 0:18:01.640 --> 0:18:05.760 Do we need a FED that's a little more politically sensitive? Well, 0:18:05.800 --> 0:18:09.919 I think that's great. Actually wrote a couple of papers 0:18:09.960 --> 0:18:13.040 about this, and history tells us that an independent set 0:18:13.080 --> 0:18:16.440 is probably the best bet because when you had instances 0:18:16.680 --> 0:18:20.800 of government, either Congress or presidents or even sometimes a 0:18:20.880 --> 0:18:25.120 populist interfering with the fed's work, you get pretty bad outcomes. 0:18:25.160 --> 0:18:27.080 And I think the important thing is that the FET 0:18:27.200 --> 0:18:31.080 is not restricting policy to slow down and over the economy. 0:18:31.160 --> 0:18:33.640 The FET is just normalizing, trying to create some monetary 0:18:33.680 --> 0:18:37.119 policy space. And it's best if you don't have commentary 0:18:37.240 --> 0:18:41.200 from those, uh you know, who are not within the feed. 0:18:41.840 --> 0:18:44.600 And so FET independence is very important. I think we 0:18:44.600 --> 0:18:47.600 look around the world, we see a number of cases 0:18:47.640 --> 0:18:50.919 where uh, the central bank is not an attendant, and 0:18:50.960 --> 0:18:54.320 you see rampant inflation and flower growth. Dana, thank you. 0:18:54.359 --> 0:18:57.320 So Dana Peterson was City Group and update here more 0:18:57.400 --> 0:19:00.720 towards fiscal and fixed incomes as as you would do 0:19:00.760 --> 0:19:14.240 with the market move then economics him I want you 0:19:14.280 --> 0:19:16.440 to bring in our esteem, guest, but there's two ideas 0:19:16.640 --> 0:19:19.000 here that are really important. First, anybody out of the 0:19:19.080 --> 0:19:24.080 combine at California San Diego is Wayne Matthew, Waste statistics 0:19:24.119 --> 0:19:27.879 like James Hamilton's and time series analysis and all that stuff, 0:19:27.880 --> 0:19:30.000 which is really cool. A bunch of they like grow 0:19:30.080 --> 0:19:33.399 Nobel Laureates out there and in how things move. And 0:19:33.440 --> 0:19:38.200 then you combine that with I think the gross misreporting 0:19:38.280 --> 0:19:41.880 of the Chinese technology companies, including ten Cents. I make 0:19:41.960 --> 0:19:44.440 jokes about it. So we finally have in front of 0:19:44.520 --> 0:19:50.440 us a real authority on that consumer juggernaut in Asia, 0:19:50.520 --> 0:19:52.800 in China and on ten Cent as well. Why don't 0:19:52.800 --> 0:19:56.679 you want justin? Guest? Justin Leverenz is the director of 0:19:56.680 --> 0:20:01.160 Emerging Market Equities portfolio manager of op and Heimer's Developing 0:20:01.200 --> 0:20:05.119 Markets Fund and the Emerging Markets Innovators Fund, and he 0:20:05.240 --> 0:20:09.439 joins us here at beautiful Oppenheimer Funds Studios. Thanks very 0:20:09.520 --> 0:20:12.920 much for being with us, Justin. All right, as Tomas describing, 0:20:13.000 --> 0:20:14.600 We're going to use this as a point for you 0:20:14.680 --> 0:20:17.600 to talk a little bit about Chinese equities and in 0:20:17.680 --> 0:20:21.879 particular ten Cents. I think just before we went on, 0:20:21.960 --> 0:20:25.639 you said you've been buying ten Cent for how long? 0:20:26.240 --> 0:20:31.119 Been in the main dynasty for years? Okay? What is 0:20:31.160 --> 0:20:35.080 going on with that kind of commerce in China? And 0:20:35.119 --> 0:20:37.240 I know in the fund you've also got Ali Baba 0:20:37.240 --> 0:20:40.400 in a variety of other stocks. But what what's the 0:20:40.400 --> 0:20:43.120 thesis for ten Cent for owning it? Now? Sure? Well, 0:20:43.119 --> 0:20:45.400 the thesis for ten Cent is slightly different than commerce. 0:20:45.440 --> 0:20:48.560 Commerce would be Ali Baba or Pindo Door or those companies, 0:20:48.560 --> 0:20:50.800 some of which are related to wehe Chat, the super 0:20:50.840 --> 0:20:54.000 app that ten Cent owns as a property to distribute. 0:20:54.040 --> 0:20:57.600 Does everybody use wheat Chat in China? We Chat has 0:20:57.640 --> 0:21:00.960 a billion subscribers, you know, so slight the smaller than 0:21:01.040 --> 0:21:03.879 Facebook of course, but we're talking about one particular geography, 0:21:04.040 --> 0:21:07.400 so you know, effectively all of organized China has whet Chat. 0:21:08.680 --> 0:21:13.520 Is that something that they have already monetized completely? Absolutely not. 0:21:13.680 --> 0:21:16.240 So if you think about what ten Cent was when 0:21:16.240 --> 0:21:18.399 I invested twelve or thirteen years ago, was kind of 0:21:18.480 --> 0:21:22.240 speculative bet that a large user base would eventually be monetized. 0:21:22.640 --> 0:21:25.760 That got monetized in a way that I had not anticipated, 0:21:26.080 --> 0:21:28.400 which will come to in the moment. I had anticipated 0:21:28.400 --> 0:21:30.960 it was going to become a massive platform for advertising. 0:21:31.359 --> 0:21:34.320 What it became was a massive platform from content. So 0:21:34.480 --> 0:21:37.000 you know, this is the company with the largest music 0:21:37.240 --> 0:21:39.399 of course, the company's going public at the moment, the 0:21:39.480 --> 0:21:41.880 largest literature base, and really the core of the company 0:21:41.880 --> 0:21:45.360 from profitability perspective is games. You know, the largest game 0:21:45.400 --> 0:21:48.000 market in the world, and ten Cent complete dominates games. 0:21:48.480 --> 0:21:50.480 Then four or five years ago they came out with 0:21:50.480 --> 0:21:53.119 wheat Chat, which all of a sudden became a billion 0:21:53.480 --> 0:21:56.520 of users, and is this super app platform that we've 0:21:56.560 --> 0:21:59.040 never seen in the rest of the world that lots 0:21:59.080 --> 0:22:01.240 of the ecosystem, and ten Cents invested in all of 0:22:01.240 --> 0:22:03.560 those companies, whether it's j D or Pindo, a Door 0:22:03.840 --> 0:22:06.560 or may Twin, d mping have invested in all those 0:22:06.560 --> 0:22:09.640 companies which create distribution capabilities for all of these things. 0:22:10.040 --> 0:22:13.439 And that, to your your direct question, is absolutely not 0:22:13.520 --> 0:22:17.000 monetized properly yet because unlike Facebook, in my particular view, 0:22:17.359 --> 0:22:20.159 this company has been very deliberated about user engagement and 0:22:20.200 --> 0:22:23.320 making sure that they don't put ad loads that start 0:22:23.400 --> 0:22:26.920 to disrupt the entire ecosystem. So very cautious. Okay, to 0:22:27.440 --> 0:22:29.280