WEBVTT - Bloomberg Surveillance: The Disinflation Scenario 0:00:05.080 --> 0:00:09.160 This is the Bloomberg Surveillance Podcast. I'm Lisa Abramoyds. Along 0:00:09.200 --> 0:00:12.160 with Tom Keane and Jonathan Ferrow. Join us each day 0:00:12.200 --> 0:00:16.440 for insight from the best in economics, geopolitics, finance and investment. 0:00:16.760 --> 0:00:20.279 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:20.360 --> 0:00:23.840 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:23.840 --> 0:00:27.720 the Bloomberg Terminal, and the Bloomberg Business App. Julian Emmanuel 0:00:27.760 --> 0:00:29.440 of Evercore I say calling for the S and P 0:00:29.520 --> 0:00:32.280 five hundred to end next year at drum roll forty 0:00:32.320 --> 0:00:34.800 seven fifty, basically where we are now. He sees a 0:00:34.800 --> 0:00:37.080 pullback in the first half that will take the index 0:00:37.120 --> 0:00:39.920 down to thirty nine seventy and then a rally kicking 0:00:39.920 --> 0:00:42.960 in quote prior to the twenty twenty four election, based 0:00:43.000 --> 0:00:47.000 on received recession trough and inflation falling to the FEDS 0:00:47.159 --> 0:00:49.760 two percent target. Julian, I'm so glad to say is 0:00:49.840 --> 0:00:53.360 joining us now. Julian, you're calling for a pretty big 0:00:53.440 --> 0:00:56.200 draw down. Does that mean that you're really leaning against 0:00:56.480 --> 0:00:57.480 what we're seeing right now? 0:00:57.600 --> 0:01:01.360 Well, actually, in context of typical raw downs, it isn't 0:01:01.400 --> 0:01:03.520 really that big, you know, on the order of fifteen 0:01:03.600 --> 0:01:07.480 sixteen percent, which you tend to see in most years. 0:01:07.760 --> 0:01:10.200 You didn't see it in twenty twenty three, which is 0:01:10.240 --> 0:01:13.479 why the Vicks is at twelve. And we had this, 0:01:13.560 --> 0:01:16.360 you know, incredibly great feeling and obviously we've had a 0:01:16.400 --> 0:01:21.360 lot of momentum in December, and look, the message we 0:01:21.440 --> 0:01:25.080 got from the FED was very much and all clear. 0:01:25.240 --> 0:01:29.680 The markets responded in kind. But frankly, when you think 0:01:29.720 --> 0:01:32.200 about it and you go back to July when we 0:01:32.280 --> 0:01:36.920 had that interim peak at the time of the last hike, 0:01:37.040 --> 0:01:40.440 in fact of the cycle, there was that diminution of 0:01:40.480 --> 0:01:43.839 the wall of worry. The wall of worry doesn't exist 0:01:43.959 --> 0:01:46.800 right now. And so from our point of view, even 0:01:46.959 --> 0:01:50.720 if you manage to skirt around the recession, which is 0:01:50.720 --> 0:01:53.400 certainly possible, and the data doesn't show that we're in 0:01:53.480 --> 0:01:56.720 imminent danger, but even if you do, there is likely 0:01:56.800 --> 0:02:00.200 going to be a growth scare time, just because there's 0:02:00.240 --> 0:02:02.360 so much optimism in the markets right now. 0:02:02.440 --> 0:02:03.960 So that's what you think is going to crack it. 0:02:04.320 --> 0:02:06.800 Bad economic data, that is what you think is going 0:02:06.840 --> 0:02:10.920 to spur the downside. Not any kind of retlacement about 0:02:10.960 --> 0:02:13.240 the idea of a FED pivot. 0:02:14.120 --> 0:02:19.200 No, the FED is not going to unless the inflation 0:02:19.360 --> 0:02:24.160 data surprise to the upside, which again it doesn't feel 0:02:24.200 --> 0:02:26.080 that that's going to be the case, though I would 0:02:26.080 --> 0:02:29.640 observe that. Notably, you know, oil among other things, have 0:02:29.800 --> 0:02:33.840 rallied quite strongly the last couple of days, perhaps in response, 0:02:34.480 --> 0:02:38.600 but no, I think that that based on what we've seen, 0:02:39.080 --> 0:02:41.400 the FED is likely going to try and be as 0:02:41.520 --> 0:02:43.840 quiet as it can for the next several months. 0:02:44.240 --> 0:02:46.760 Does that mean that it drops out as a driver, 0:02:46.800 --> 0:02:48.800 because you think about the equity markets, they've been so 0:02:49.080 --> 0:02:52.160 macro driven for quite a long time. Right now, if 0:02:52.160 --> 0:02:55.639 the FED really is on hold, maybe starts cutting those 0:02:55.720 --> 0:02:58.600 rate cuts already priced in. Do we start paying more 0:02:58.600 --> 0:03:00.440 attention to corporate fundamental. 0:03:00.639 --> 0:03:03.520 Well, look, the FED will never disappear in this cycle 0:03:03.600 --> 0:03:07.280 because this cycle is so unusual. But you know, we'll 0:03:07.280 --> 0:03:10.280 turn the page to January. We will remember that we 0:03:10.360 --> 0:03:13.160 will have a government that will be facing shutdown, we 0:03:13.200 --> 0:03:16.040 will have elections in Taiwan, and we will have fourth 0:03:16.120 --> 0:03:19.760 quarter earnings reporting season. You know, from our view it's 0:03:19.800 --> 0:03:22.840 not that big a deal, but bottoms up consensus is 0:03:22.840 --> 0:03:26.040 a bit too high in terms of earning expectations. Those 0:03:26.080 --> 0:03:28.560 will be walked back and then, as has been the 0:03:28.600 --> 0:03:31.480 case this entire year, the most important thing is not 0:03:31.560 --> 0:03:34.800 going to be what the news is itself, but the 0:03:34.840 --> 0:03:37.880 price reaction to the news. And if you think about it, 0:03:38.240 --> 0:03:43.200 all the volatility this entire year has been almost exclusively 0:03:43.680 --> 0:03:48.120 the purview of the bond markets. It's been relatively quiet 0:03:48.520 --> 0:03:51.200 in terms of credit, in terms of equity. We think 0:03:51.240 --> 0:03:52.920 that's going to change a little bit next year. 0:03:52.960 --> 0:03:54.400 So Julia, let's say I agree with you, and I 0:03:54.400 --> 0:03:56.600 do believe the time now is to get defensive, given 0:03:56.640 --> 0:03:58.440 where the market is right, what's the best way to 0:03:58.480 --> 0:04:00.160 do it? Do I want to be rotating into some 0:04:00.160 --> 0:04:03.400 of those classic defensive sectors like staples, healthcare, et cetera, 0:04:03.560 --> 0:04:05.880 utilities maybe? Or do I want to be using options? 0:04:05.880 --> 0:04:07.560 Put your options had on for me? Do I want 0:04:07.600 --> 0:04:09.360 to be buying puts? I want to be selling calls? 0:04:09.360 --> 0:04:09.520 Here? 0:04:09.520 --> 0:04:10.280 How do I protect? 0:04:10.480 --> 0:04:15.000 So the beauty of what we've had the last number 0:04:15.000 --> 0:04:18.760 of months is that some of the more classically defensive 0:04:18.760 --> 0:04:25.120 areas haven't actually been the beneficiary of interest rates coming 0:04:25.200 --> 0:04:29.120 down and inflation coming down, a lot of other noise, 0:04:29.200 --> 0:04:32.760 you know, in areas like consumer staples and healthcare there's 0:04:32.800 --> 0:04:35.440 been a lot of confusion and a lot of fear frankly, 0:04:35.839 --> 0:04:39.719 around the GLP one phenomenon, and so people have stayed 0:04:39.720 --> 0:04:42.279 away from there. But now all of a sudden, we're 0:04:42.360 --> 0:04:45.440 in a place where, particularly when you think about inflation, 0:04:45.960 --> 0:04:51.039 input costs into those sectors are moderating, wage gains are 0:04:51.120 --> 0:04:54.680 starting to moderate, they are going to benefit, and frankly, 0:04:55.120 --> 0:04:58.320 the work that we've done shows that the defensive sectors, 0:04:58.480 --> 0:05:02.400 as you said, staples and healthcare and particularly the ones 0:05:02.440 --> 0:05:05.920 we like, tend to outperform on average from the time 0:05:05.960 --> 0:05:08.240 of the last FED hike to the time of the 0:05:08.240 --> 0:05:11.560 first cut. So it's really a way to play offense 0:05:11.640 --> 0:05:12.280 with defense. 0:05:12.600 --> 0:05:14.800 Well, to get to the second part of Damien's question, 0:05:14.960 --> 0:05:18.200 beyond just buying maybe defensive type sectors, are you looking 0:05:18.480 --> 0:05:19.200 to hedge here? 0:05:20.560 --> 0:05:26.200 So it is something where particularly if and we say 0:05:26.200 --> 0:05:30.120 this very much in terms of the retail investor's mindset, 0:05:30.440 --> 0:05:33.680 is that what you want to do is envision yourself 0:05:33.760 --> 0:05:37.720 as a buyer down call it's fifteen percent an average 0:05:38.360 --> 0:05:41.880 type of yearly drawdown. And if you don't see yourself 0:05:41.880 --> 0:05:44.359 as a buyer, because buying the dips has been a 0:05:44.400 --> 0:05:48.120 strategy that's worked our entire investment lifetimes. We don't see 0:05:48.120 --> 0:05:50.960 that changing. Then you want to take advantage of the 0:05:51.000 --> 0:05:54.120 fact that options are incredibly inexpensive. 0:05:54.440 --> 0:05:56.359 Are bond yield's going to go a lot lower in 0:05:56.400 --> 0:05:57.760 the scenario that you put out? 0:05:58.200 --> 0:06:01.560 So I think the bond fields are sort of maybe 0:06:01.760 --> 0:06:05.800 getting to some sort of stasis because obviously, look, if 0:06:05.839 --> 0:06:09.400 we do have an economic turndown or at least a 0:06:09.480 --> 0:06:12.800 growth scare, clearly that's more downward pressure on yields. But 0:06:12.960 --> 0:06:16.560 on the other hand, there's this idea that there's a 0:06:16.680 --> 0:06:21.760 secular change in international investors appetite for fixed income and oh, 0:06:21.800 --> 0:06:25.080 by the way, the Feds still doing QT, so that 0:06:25.240 --> 0:06:27.880 limits any downside in bond yields. 0:06:28.279 --> 0:06:29.800 Just to give you a victory lap, you did call 0:06:29.880 --> 0:06:32.080 the turn in small caps it's been a rip roaring 0:06:32.160 --> 0:06:34.279 rally over the past six weeks. Is it time to 0:06:34.279 --> 0:06:36.520 get out ahead of some concerns about growth? 0:06:37.360 --> 0:06:41.520 We don't think it is. And actually it's fascinating because 0:06:42.120 --> 0:06:45.000 this has never happened for before. In twenty twenty three, 0:06:45.160 --> 0:06:49.920 you undercut your bear market low in small caps just 0:06:50.279 --> 0:06:53.320 at that October low, and then less than a month 0:06:53.400 --> 0:06:55.800 later you had a new fifty two week high in 0:06:55.839 --> 0:06:59.160 the Nasdaq. That kind of divergence has never been seen 0:06:59.200 --> 0:07:02.599 before in the entirety of a calendar year, let alone 0:07:02.839 --> 0:07:05.559 one month. And so if you think about it, even 0:07:05.640 --> 0:07:09.440 if you do get a recession, small caps have for 0:07:09.480 --> 0:07:13.560 the most part already been through their recession in terms 0:07:13.640 --> 0:07:17.600 of share price performance. And again, similar to consumer staples 0:07:17.640 --> 0:07:21.160 and healthcare, they're going to benefit from a labor market 0:07:21.360 --> 0:07:26.640 that's easing. And yes, the consumer still does have excess savings, 0:07:26.760 --> 0:07:29.640 which we think cushions the severity of any downturn. 0:07:29.920 --> 0:07:33.560 Julina Emmanuel of Evercore ISI, thank you so much. Right now, 0:07:33.600 --> 0:07:35.400 we are seeing in the market a little bit of 0:07:35.440 --> 0:07:38.280 a lift to basically beyond the year end target that 0:07:38.360 --> 0:07:41.400 Julian has a forty seven eighty five, up a quarter 0:07:41.480 --> 0:07:44.760 of a percent. Julian, how much do you think though, 0:07:44.800 --> 0:07:47.520 that there is enough fear that could get brought in 0:07:47.920 --> 0:07:50.600 from any weakness to give a drawdown Given that there 0:07:50.680 --> 0:07:52.640 is so much cash it's going to be pushed out 0:07:52.680 --> 0:07:54.640 of money market funds as yields go in. 0:07:54.840 --> 0:07:59.200 Well, it's definitely going to cushion the blow. But again 0:07:59.560 --> 0:08:02.280 going back to this idea, yes, we've more or less 0:08:02.320 --> 0:08:08.080 been promised three rate cuts, but in fact, if inflation 0:08:08.440 --> 0:08:12.320 does not continue that you know very you know marked 0:08:12.400 --> 0:08:15.960 at this point downward path, you're still going to have 0:08:16.160 --> 0:08:19.880 cash yields north of four percent four and a half percent, 0:08:20.200 --> 0:08:23.200 and again within the context of the last fifteen years, 0:08:23.320 --> 0:08:24.480 that's still quite attractive. 0:08:24.600 --> 0:08:37.440 Join em Manuel, thank you so much. We've been talking 0:08:37.480 --> 0:08:40.400 so much about the Israel Hamas war that we have 0:08:40.480 --> 0:08:43.800 lost focus of another war that's been raging, which is Ukraine, 0:08:43.880 --> 0:08:46.880 and we've been focused all week with respect to whether 0:08:46.920 --> 0:08:49.520 they can get aid from the US but also from 0:08:49.559 --> 0:08:52.520 the European Union. Let's get straight to it. This is 0:08:52.520 --> 0:08:55.280 a really important conversation. John Lieber, Managing director at the 0:08:55.240 --> 0:08:58.000 Eurasia Group and former policy advisor to Senator Mitch Baccaddel 0:08:58.120 --> 0:09:00.760 joining us right now. And I do want to start there, John, 0:09:00.880 --> 0:09:02.800 considering the fact that it wasn't just the US that 0:09:02.840 --> 0:09:06.079 failed to pass aid after of lot of Roslenski came 0:09:06.120 --> 0:09:09.320 to Washington, d C. But overnight the EU as well, 0:09:09.559 --> 0:09:11.880 also failing to get anything through before the year of 0:09:11.880 --> 0:09:13.240 the before the end of the year. 0:09:14.920 --> 0:09:18.280 Yeah, I mean, but a lot of veto points in it, 0:09:18.320 --> 0:09:20.760 and it makes it hard to get anything done. But 0:09:20.840 --> 0:09:22.760 in the US, you know, this is less of an 0:09:22.840 --> 0:09:25.240 urgent issue that is in the EU, which of course 0:09:25.320 --> 0:09:27.719 also has a lot of veto points because any one 0:09:27.760 --> 0:09:31.040 country can stop the aid come flowing for now. Ultimately, 0:09:31.160 --> 0:09:33.920 you know, this is a much higher stakes issue in 0:09:33.960 --> 0:09:37.000 Europe than it is for the United States, and probably 0:09:37.440 --> 0:09:40.280 the Europeans are going to be potentially more reliable partners 0:09:40.600 --> 0:09:43.240 than the United States is. But it looks right now 0:09:43.280 --> 0:09:45.760 like the US is set to punt on this issue, 0:09:46.120 --> 0:09:50.000 perhaps into January of next year, when further funding for 0:09:50.120 --> 0:09:53.160 Ukraine will be tied up not only in the Congress's 0:09:53.160 --> 0:09:57.040 ability to negotiate border funds, but also in their ability 0:09:57.080 --> 0:09:59.240 to avoid a government shutdown. So this is a really 0:09:59.320 --> 0:10:02.439 messy ootiation right now, and the outlook does not look 0:10:02.480 --> 0:10:06.640 great for the continued major flow of weapons and support 0:10:06.720 --> 0:10:08.160 that we've seen to Ukraine so far. 0:10:08.640 --> 0:10:10.320 Well, John, that's what I wanted to talk about, the 0:10:10.320 --> 0:10:13.199 point that you made that this is a higher priority, 0:10:13.240 --> 0:10:15.600 a bigger issue with more urgency when it comes to 0:10:15.640 --> 0:10:17.840 the EU. You take a look at what's happening in 0:10:17.880 --> 0:10:22.120 the US Congress that debate between more usaid for Ukraine, 0:10:22.360 --> 0:10:27.200 whereas the Republicans pushing for more border security. Who do 0:10:27.240 --> 0:10:30.360 you think, what does the compromise look like there, and 0:10:30.440 --> 0:10:32.439 how does this evolve in January. 0:10:33.640 --> 0:10:35.720 I think the Republicans have the upper hand in the 0:10:35.720 --> 0:10:38.680 debate right now because they have the ability to veto 0:10:38.800 --> 0:10:42.000 any additional aid, because Speaker Mike Johnson can just say 0:10:43.000 --> 0:10:45.400 thanks for your effort to the Senate, I'm not putting 0:10:45.400 --> 0:10:47.960 your bill on the floor unless I like it. There's 0:10:48.000 --> 0:10:50.920 almost certainly enough votes in both the House and the 0:10:50.960 --> 0:10:54.480 Senate to pass more Ukraine aid plus more border funds. 0:10:55.000 --> 0:10:57.440 The Republicans are using this as a leverage point to 0:10:57.480 --> 0:11:00.840 hold out for everything they want on the southern border, 0:11:00.920 --> 0:11:04.600 changing the asylumn rules, creating more ability for the government 0:11:04.600 --> 0:11:08.880 to deport legal immigrants, and the Democrats are saying, no, 0:11:08.920 --> 0:11:11.520 we aren't gonna do that. They think this is inhumane 0:11:12.000 --> 0:11:14.400 and they don't want to treat migrants on the southern 0:11:14.440 --> 0:11:16.640 border that way, and they're at an impasse. So I 0:11:16.679 --> 0:11:19.200 think ultimately the compromise is going to be something like 0:11:19.320 --> 0:11:24.000 what Biden proposed, which is a tens of billions of 0:11:24.000 --> 0:11:27.240 dollars in additional aid for Ukraine but the whole a 0:11:27.400 --> 0:11:29.160 plus the border but the whole thing could fall apart 0:11:29.240 --> 0:11:31.760 because the two sides just are not close to agree 0:11:32.040 --> 0:11:34.720 on this border issue, which right now is the lynchpin 0:11:34.840 --> 0:11:35.720 towards getting a deal. 0:11:36.200 --> 0:11:37.920 John, I'd like to shift back to Europe here. I'd 0:11:37.960 --> 0:11:39.960 like to talk about Hungary. I'd like to talk about 0:11:40.120 --> 0:11:43.120 Victor Orbon, the Fidez party. I mean, what is going 0:11:43.120 --> 0:11:46.600 on there? I mean, does Victor Orbon represent the belief 0:11:46.640 --> 0:11:48.800 of the Hungarian people? I mean, they are holding up 0:11:48.840 --> 0:11:52.280 the fifty billion odd in funds to Ukraine at this point, 0:11:52.280 --> 0:11:55.960 they're the only EU member doing that. What comes next? 0:11:57.000 --> 0:11:58.760 Yeah, they're holding up the money. But oddly they did 0:11:58.840 --> 0:12:00.640 let they walked out of the room when it came 0:12:00.679 --> 0:12:04.480 to the Ukraine ascension talks. So it seems like they're playing. 0:12:04.840 --> 0:12:08.640 What kind of game he's playing is really unclear right now. Obviously, 0:12:08.760 --> 0:12:11.440 Orbon's trying to flex some muscle inside the EU and 0:12:11.600 --> 0:12:14.600 make sure the Hungary's influence is felt, and they're going 0:12:14.679 --> 0:12:16.320 to revisit this next year as well. I think that 0:12:16.400 --> 0:12:19.800 for both of these bodies, this debate is far from 0:12:19.880 --> 0:12:22.480 over and there's still some more negotiating and horse trading 0:12:22.480 --> 0:12:24.800 that can happen both within the EU and the United States. 0:12:24.840 --> 0:12:27.719 But it's hard to say exactly why Orbon's doing things 0:12:27.800 --> 0:12:29.680 this way. It looks like he's just trying to increase 0:12:29.679 --> 0:12:32.080 some leverage over the EU for Hungary. 0:12:32.120 --> 0:12:34.880 Well, John, Hungary is generally viewed as, you know, the 0:12:34.960 --> 0:12:38.160 closest ally to China within the EU. I wonder can 0:12:38.200 --> 0:12:40.439 we read anything into that is China, you know, kind 0:12:40.440 --> 0:12:41.800 of pulling the strings behind the scenes. 0:12:43.480 --> 0:12:46.280 A little difficult to say, especially at this point. I 0:12:46.280 --> 0:12:48.800 think the outcome yesterday was a little unexpected, particularly on 0:12:48.840 --> 0:12:51.719 the fact they let the Ukraine ascension go forward. I 0:12:51.760 --> 0:12:54.319 think that's a sign. You know, that's a long term process. 0:12:54.800 --> 0:12:57.880 It is going to take many years probably for Ukraine 0:12:58.000 --> 0:13:02.199 to qualify for EU membership. And it's really difficult to 0:13:02.200 --> 0:13:06.280 say what China benefits from the EU not funding this war. 0:13:06.320 --> 0:13:08.400 I think what China wants is probably an end of 0:13:08.440 --> 0:13:11.840 the war as quickly as possible, but not necessarily on 0:13:11.920 --> 0:13:14.240 Russia's terms, which is where all of this is going 0:13:14.320 --> 0:13:17.600 to end up. If the Ukraine can't get more aid 0:13:17.640 --> 0:13:18.840 out of its Western partners. 0:13:18.960 --> 0:13:20.520 Just to sort of put a bow tie on that, 0:13:20.559 --> 0:13:24.160 are you basically saying that Russia will win if Ukraine 0:13:24.160 --> 0:13:24.920 doesn't get more aid. 0:13:25.800 --> 0:13:28.200 If Ukraine doesn't get more aid, Russia has the upper hand. 0:13:28.240 --> 0:13:32.160 They've got the manufacturing capabilities and the patients in long 0:13:32.240 --> 0:13:35.240 term timeframe to wear down the West. So Ukraine really 0:13:35.240 --> 0:13:37.520 needs the West to step up here, and if they don't, 0:13:37.559 --> 0:13:38.400 they will win this war. 0:13:38.559 --> 0:13:40.800 In the meantime, we all also are dealing with the 0:13:41.080 --> 0:13:44.120 Hamas Israel war that keeps going on. But there seems 0:13:44.120 --> 0:13:46.839 to be a real tone shift from this administration really 0:13:46.880 --> 0:13:52.400 warning Israel against more kind of indiscriminate air strikes or 0:13:52.679 --> 0:13:55.520 more broad based military action and more sort of surgical 0:13:56.000 --> 0:13:59.680 types of procedures going forward. How big of a deal 0:13:59.720 --> 0:14:00.440 do you think this is? 0:14:01.320 --> 0:14:03.000 Yeah, I think as the kind of horrors of what 0:14:03.040 --> 0:14:06.000 happened on October seventh fade in the public's imagination, the 0:14:06.040 --> 0:14:10.439 political liability for Biden of the Israeli response in Gaza 0:14:11.160 --> 0:14:14.760 is growing, and Biden, you know, there's a lot of 0:14:14.840 --> 0:14:17.320 damage that's already been done for him domestically among the 0:14:17.320 --> 0:14:20.040 progressive left and young voters, which are both important parts 0:14:20.080 --> 0:14:23.240 of his coalition. And I think that the humanitarian situation 0:14:23.320 --> 0:14:27.040 in Gaza is becoming untenable for the United States to 0:14:27.080 --> 0:14:30.880 support now of course, Biden's only shifting his tone. The 0:14:31.000 --> 0:14:34.680 US is still supporting the Israeli militarily and will continue 0:14:34.720 --> 0:14:37.080 to do so for the foreseeable future. There is a 0:14:37.160 --> 0:14:40.840 broad consensus among in the United States Congress that Israel 0:14:40.880 --> 0:14:43.080 has a right to defend itself and it will continue 0:14:43.080 --> 0:14:46.200 to do so with US support. But for Biden, this 0:14:46.240 --> 0:14:48.760 is becoming a political liability, and I think that they're 0:14:48.760 --> 0:14:50.760 going to start putting more and more pressure on Israel 0:14:51.480 --> 0:14:54.520 privately and publicly to be more tactical than what they 0:14:54.520 --> 0:14:57.800 want to do in how they approach this. But that 0:14:57.800 --> 0:14:59.400 doesn't mean the Israel is going to stop, and it 0:14:59.440 --> 0:15:01.600 doesn't mean that the is going to stop supporting now. 0:15:01.840 --> 0:15:03.560 It just what the US wants to see is that 0:15:03.600 --> 0:15:06.920 hasten hastening to the next stage of this war, where 0:15:07.640 --> 0:15:11.360 you know, Hamas is removed and then you can move 0:15:11.400 --> 0:15:14.440 to a kind of post war period and rebuilding. 0:15:14.880 --> 0:15:17.440 Well, John, to your point on political pressure, we're talking 0:15:17.440 --> 0:15:20.360 about how the Biden administration is handling this, but let's 0:15:20.360 --> 0:15:22.840 talk about Joe Biden, the presidential candidate. Of course, for 0:15:23.080 --> 0:15:26.240 what eleven odd months out from the presidential election, you 0:15:26.240 --> 0:15:28.920 think about these hot wars happening in other parts of 0:15:29.000 --> 0:15:32.120 the world. How is the American voting public ranking that 0:15:32.280 --> 0:15:33.600 when they're heading to the polls. 0:15:34.600 --> 0:15:36.920 I think the wars are bad for Biden because it 0:15:36.960 --> 0:15:39.440 gives this narrative to Trump that the world's on fire, 0:15:39.680 --> 0:15:43.400 and Trump, you know, ignoring COVID, can is go to say, 0:15:44.000 --> 0:15:46.480 when I was president, we had peace, we had prosperity, 0:15:46.520 --> 0:15:49.560 we had growing real incomes, there was no inflation, and 0:15:49.600 --> 0:15:52.000 you didn't have all these wars around the globe that 0:15:52.160 --> 0:15:55.520 are He's going to attribute to President Biden's withdrawal from Afghanistan. 0:15:55.760 --> 0:15:58.720 So as a political matter, the wars are going to 0:15:58.840 --> 0:16:02.720 play in a pretty major way in the narrative of 0:16:02.920 --> 0:16:06.240 the US election next year, even though foreign policy is 0:16:06.280 --> 0:16:09.560 typically not a top issue for American voters, and I 0:16:09.640 --> 0:16:12.200 think that very much works to Trump's benefit. There's nothing 0:16:12.200 --> 0:16:15.400 Biden can do about it. He is committed to funning 0:16:15.480 --> 0:16:17.200 Ukraine if you can, if you can get the money, 0:16:17.320 --> 0:16:20.000 and he's committed to defend allowing Israel to defend itself. 0:16:20.240 --> 0:16:23.040 So this isn't Biden's choice, but it's going to be 0:16:23.080 --> 0:16:25.120 a problem for him next year if these wars are 0:16:25.160 --> 0:16:27.360 both still raging in the middle of the US campaign. 0:16:27.600 --> 0:16:29.440 John Leeb, thank you so much for being with us 0:16:29.480 --> 0:16:36.840 of Eurasia. We appreciate the insights joining us around the table. 0:16:36.840 --> 0:16:39.280 Greg Daco, Chief economist at EY. Do you think that 0:16:39.400 --> 0:16:44.240 hopes and dreams of immaculate disinflation have gotten overblown and 0:16:44.280 --> 0:16:47.360 that there is this concern about a slowdown that's steeper 0:16:47.440 --> 0:16:48.680 than people are pricing. 0:16:48.320 --> 0:16:50.080 In well, I think we have to be nuanced when 0:16:50.080 --> 0:16:52.560 we analyze the economic landscape. We are in an environment 0:16:52.600 --> 0:16:55.280 where we are seeing slower economic activity. I think there's 0:16:55.320 --> 0:16:57.840 no denying that, whether it's on the consumer side or 0:16:57.880 --> 0:17:00.160 on the business side, we have seen a slowdown in 0:17:00.240 --> 0:17:03.480 terms of the pace of growth, so it's not immaculate disinflation. 0:17:03.840 --> 0:17:06.480 We've seen the supply come back online. That's helped with 0:17:06.560 --> 0:17:10.040 the supply the inflationary picture, and we're seeing moderating demand 0:17:10.080 --> 0:17:12.320 which is also putting downward pressure on inflation. So it's 0:17:12.320 --> 0:17:15.360 not immaculate and I think as we look into next year, 0:17:15.600 --> 0:17:19.359 that's going to be continuing to drive inflation lower, whether 0:17:19.520 --> 0:17:23.960 it's rent disinflation, slower momentum in terms of growth activity, 0:17:24.040 --> 0:17:27.600 even wage growth compression, and the fact, let's not forget 0:17:27.680 --> 0:17:31.320 that the FED is still maintaining a restrictive monetary policy stance. 0:17:31.520 --> 0:17:33.320 Combine all of those and you have all the right 0:17:33.440 --> 0:17:35.120 ingredients for a disinflationary environment. 0:17:35.480 --> 0:17:38.399 Let's talk about sentiment a little bit, because we've been 0:17:38.400 --> 0:17:41.119 talking about this morning, the fact that you think about 0:17:41.200 --> 0:17:43.359 the US consumer and you take a look at these 0:17:43.359 --> 0:17:46.480 sentiment surveys and it has just been grim out there 0:17:46.520 --> 0:17:49.520 for years now, and when do you think about inflation. Yes, 0:17:49.640 --> 0:17:52.720 we're in this disinflationary environment, but the outright level of 0:17:52.800 --> 0:17:56.000 prices is still much higher than it was. Do we 0:17:56.040 --> 0:17:59.080 need to see actual deflation to see some of those 0:17:59.200 --> 0:18:00.679 sentiment numbers that. 0:18:00.760 --> 0:18:03.720 You're alluding to the most important point when it comes 0:18:03.800 --> 0:18:07.640 to the inflationary dynamics. Because we talk about inflation, economists, 0:18:07.680 --> 0:18:10.800 policy makers, we all talk about inflation, But what matters 0:18:10.800 --> 0:18:13.560 for the average person, whether it's the consumer or the 0:18:13.560 --> 0:18:18.040 business leader, is the cost level. The cost fatigue phenomenon 0:18:18.200 --> 0:18:21.240 is very real. The cost of everything is much higher 0:18:21.240 --> 0:18:25.200 than it was pre pandemic, whether it's goods, services, labor, inventory, 0:18:25.480 --> 0:18:28.840 even interest rates. Everything is much higher, costs much more. 0:18:29.119 --> 0:18:32.159 That is leading to business decisions being pulled back and 0:18:32.200 --> 0:18:35.359 being more scrutinous about how much to invest. It's leading 0:18:35.359 --> 0:18:38.080 consumers to be more careful about how many goods, how 0:18:38.080 --> 0:18:41.160 many services they buy, even though they're spending a little 0:18:41.160 --> 0:18:43.680 bit less. And I think that's the very important narrative 0:18:43.880 --> 0:18:46.760 that's going to be really underlying the pace of growth 0:18:46.920 --> 0:18:49.720 next year is how sensitive people are to this higher 0:18:49.760 --> 0:18:54.159 cost cost of everything environment and how the labor market reacts. 0:18:54.200 --> 0:18:56.960 Let's not forget the labor market is the key pillar 0:18:57.040 --> 0:18:58.120 to economic activity. 0:18:58.240 --> 0:19:00.919 Greg the dot Pot's calling for seventy five of cuts. 0:19:01.119 --> 0:19:02.880 I think the market's priced inn one hundred and forty 0:19:03.119 --> 0:19:05.399 PIFs of cuts. It's pretty big divergence there. You know. 0:19:05.480 --> 0:19:09.239 Talk to me about the why is disinflation enough of 0:19:09.280 --> 0:19:11.120 a reason for the Fed the cut rates in twenty 0:19:11.160 --> 0:19:11.600 twenty four? 0:19:11.880 --> 0:19:14.040 Well, yeah, I think the key reason why the Fed 0:19:14.080 --> 0:19:17.240 will be adjusting rates is because it sees less inflation. 0:19:17.760 --> 0:19:19.240 Last time I was on the show, I was talking 0:19:19.280 --> 0:19:21.560 about the fact that we have the holy grail of 0:19:21.640 --> 0:19:24.080 non inflationary growth in front of us. We have an 0:19:24.080 --> 0:19:27.359 economy that's still moving forward, but inflation that is moderating. 0:19:27.640 --> 0:19:29.479 That is what the Fed wants. The Fed does not 0:19:29.520 --> 0:19:32.160 want a recession. It wants to see inflation come back 0:19:32.160 --> 0:19:34.879 down to two percent and become a non issue, a 0:19:34.880 --> 0:19:37.880 non topic, something that we don't talk about every day 0:19:37.880 --> 0:19:41.520 on this show or on other platforms. This is really 0:19:41.560 --> 0:19:44.000 what the FED is aiming for. So whether it comes 0:19:44.000 --> 0:19:47.720 to the fed's forecast being realized or the market expectations 0:19:47.760 --> 0:19:50.040 being realized, I think the truth in the end will 0:19:50.080 --> 0:19:53.200 lie somewhere in between, probably one hundred and twenty five 0:19:53.200 --> 0:19:55.280 bases points of rate cuts by the end of the 0:19:55.280 --> 0:19:59.479 next year, with an environment where inflation is gradually slowing 0:19:59.680 --> 0:20:02.440 and we don't enter recession. If we enter a recession, 0:20:02.640 --> 0:20:04.480 the picture in the game is going to be quite different. 0:20:04.560 --> 0:20:06.040 Greg off the year, Lisa and I always like to 0:20:06.080 --> 0:20:07.879 talk about real yields. She likes the five year. I 0:20:07.960 --> 0:20:10.040 like the ten year. Personally ten year real yield one 0:20:10.040 --> 0:20:13.159 point eighty eight percent, down sixty basis points since October. 0:20:13.480 --> 0:20:15.560 How low can real yields go well? 0:20:15.600 --> 0:20:17.560 I think that's the key question for next year is 0:20:17.600 --> 0:20:20.240 going to be what happens in terms of growth momentum, 0:20:20.280 --> 0:20:23.320 what happens in terms of inflation momentum, and how rapidly 0:20:23.400 --> 0:20:26.160 does is a FED ease monetary palsy. That is what 0:20:26.400 --> 0:20:28.520 fetch your Powell and the rest of the FED officials 0:20:28.560 --> 0:20:30.119 are going to be focused on They're going to be 0:20:30.160 --> 0:20:34.040