Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. We welcome all
Speaker 1: of you on Bloomberg Radio, on Bloomberg Television worldwide. To
Speaker 1: the very unretired Mark Karney of Canada and the United Kingdom,
Speaker 1: the former governor of the Bank of England went right
Speaker 1: back to work after that tenure with the U n
Speaker 1: Special Envoy for Climate Action and of course his work
Speaker 1: in other areas of finance. Governor Karney, thank you so
Speaker 1: much for joining us today. The Paris Accord unraveled, t
Speaker 1: p P unraveled. We now have she meeting with Biden
Speaker 1: resum or whatever, uh and they're gonna talk climate. What
Speaker 1: kind of agreement can we get from Biden g on climate? Well, first, Tom,
Speaker 1: thanks for having me on. Biden g Uh, Suga, Trudeau, Johnson, uh,
Speaker 1: forty world leaders coming to this summit that the presidents
Speaker 1: called for the next few days. I think we're gonna
Speaker 1: see we are going to see some big announcements from
Speaker 1: some of the G seven economies. I'll let them unveil
Speaker 1: those as they come. That's the first point. In the
Speaker 1: second m it is encouraging that the President g is
Speaker 1: part of this summit. It's also encouraging that the private
Speaker 1: sector is leading the way. And Uh. Part of what's
Speaker 1: coming out on the eve of the summit, as you know,
Speaker 1: is is a big, big announcement from the core of
Speaker 1: the financial sector. Governor Curney, I'm gonna make it real simple.
Speaker 1: You were born in the north northwest of the Northwest Territories.
Speaker 1: I'm suggest none of our authorities have ever been as
Speaker 1: far to the Arctic Circle as you. The Arctic Circle
Speaker 1: is melting and arcticle as gladi is moving. What is
Speaker 1: the urgency to a northern guy like you to get
Speaker 1: this done? Well, there's an urgent. Yeah, absolutely. Uh. We
Speaker 1: did drag the G seven up to a Callawood. You
Speaker 1: might remember Tom about eight years ago, so that they
Speaker 1: got close um and they started to see some of
Speaker 1: the impacts. Look, there is an urgency to this. Um.
Speaker 1: We're tracking as a world. You said Paris didn't succeed
Speaker 1: it succeeded in the objective a goot people in. But
Speaker 1: the policies are still consistent with the world. It's north
Speaker 1: of three degrees warming north to three degrees. So this
Speaker 1: is a critical year for action. There's tremendous momentum. Now
Speaker 1: we need to reinforce that momentum. And again, having seventy
Speaker 1: trillion of private capital coming behind that zero, which is
Speaker 1: what's been announced today, is the type of momentum the
Speaker 1: world needs. Let me ask a rude question, how do
Speaker 1: you convince the United States Senate? You can? Well, you first,
Speaker 1: it's in the United States interests directly in terms of
Speaker 1: the impacts of climate chain. It's also fundamentally, and I'll
Speaker 1: refer to the comments of Secretary Blincoln a couple of
Speaker 1: days ago, this is fundamentally an issue becoming an issue
Speaker 1: of competitiveness, of economic competitiveness. The world is moving in
Speaker 1: this direction. UH. The firms that that are innovating, that
Speaker 1: are lower carbon, that are part of the solution UH,
Speaker 1: and the financial institutions that are getting behind those solutions
Speaker 1: are doing very well. They will do much much better.
Speaker 1: This is where the world's headed. The question is pace
Speaker 1: the US, as in many things, should be the leader,
Speaker 1: can be the leader, and those countries that are the
Speaker 1: leader will reap reap the rewards as they should. I
Speaker 1: love that Tom still referring to you as governor County.
Speaker 1: Mark should continue doing that. Do you want me to
Speaker 1: keep that up? That's an American thing. I haven't done that.
Speaker 1: I haven't done that for CREWD Like you lads from Britain,
Speaker 1: we always do that. We had to put up with
Speaker 1: a lot of that in the news conferences on threaten
Speaker 1: NATO Street. I'll go with it, Governor Khanty. I remember
Speaker 1: a news conference at the back end you were fresh
Speaker 1: and your tenure the Bank of England, and everybody was
Speaker 1: worried about bubbles our swhere and why we needed higher
Speaker 1: interest rates, and I remember a line from you, we
Speaker 1: don't set a monetary policy for inside the circle line. Now,
Speaker 1: if you live in London or appreciate the underground system
Speaker 1: in London, you'll remember that quote and you'll know what
Speaker 1: it means. So Mark, I wanted you to help us
Speaker 1: understand the moment we're in right now as well, the
Speaker 1: financial instability, stability concerns that go with very low and
Speaker 1: exceptionally low interest rates for a long long time two things, John,
Speaker 1: thanks for remembering that we do set financial stability policy
Speaker 1: for inside the circle line or the equivalent in the
Speaker 1: US and Canada around the world. UM. So it is
Speaker 1: very important that authorities are focused on pockets of excess,
Speaker 1: making sure that they don't spread more broadly within the
Speaker 1: financial system UM and undermine the recovery, which well strong
Speaker 1: out of the gate. UH, particularly the United States is
Speaker 1: really just getting going UH and needs to be followed through.
Speaker 1: The word transitory keeps coming up again and again. You've
Speaker 1: been in a scene where you've seen above target inflation,
Speaker 1: not the three percent, think of turn a mark. How
Speaker 1: different is this moment? Do you think you face downside
Speaker 1: risk of growth at that time as well? Now we
Speaker 1: face upside risk to growth. How different is this moment? Uh?
Speaker 1: It is different. I mean we're in a unique situation
Speaker 1: given the nature of the pandemic. I won't list all
Speaker 1: the reasons why it's different, but in essence, it's a
Speaker 1: supply shock. It's hopefully a temporary supply shock. UM. Part
Speaker 1: of getting out of this whole is big fiscal much
Speaker 1: bigger than we saw two thousand eight nine, UM, and
Speaker 1: also a monetary policy that is explicitly targeting some degree
Speaker 1: of overshooting responsible overshoot of inflation. So it is quite different.
Speaker 1: But the combination of that mix is maximizing the prospects
Speaker 1: that we will get out of this. To loop back
Speaker 1: to the Biden summit, if I may, uh, it's important
Speaker 1: where the hand what are we handing off too? Though
Speaker 1: we'll get this initial pop in the economy, we need
Speaker 1: an investment driven recovery in order to really have traction,
Speaker 1: really have high paying jobs, and that investment driven recovery
Speaker 1: is going to be oriented. Part of it surround sustainability,
Speaker 1: a much more efficient economy. We need a financial sector
Speaker 1: that's there, and that's why having twenty eight trillion of
Speaker 1: balance sheet of banks led by you know, Morgan Stanley,
Speaker 1: Bank of America, City, HSBC and others announced today that's
Speaker 1: the kind of capital we're going to need in the
Speaker 1: US and globally to have a sustained recovery. So what
Speaker 1: are the negative consequences mark of the incredible amount of
Speaker 1: fiscal and monetary stimulus that have impumped into the economy
Speaker 1: over the past thirteen months. Is this just without harm? Well, no,
Speaker 1: I mean all these everything, I wouldn't say everything in moderation, Lisa,
Speaker 1: But everything needs to be calibrated. Uh. You know, the
Speaker 1: FED and other central banks will have to make as
Speaker 1: they always do, um, timely decisions on the tapering of
Speaker 1: stimulus tapering first and then uh in the fullest of
Speaker 1: time with the recovery that we want and deserve, withdrawal
Speaker 1: of some of that stimulus. Fiscal stimulus, UM in all
Speaker 1: jurisdictions needs to move more towards the type of support
Speaker 1: for private investment as opposed to sustaining individual consumption. I mean,
Speaker 1: I'm saying that after the measures that have been passed
Speaker 1: in the in the United States and elsewhere. So there
Speaker 1: is a pivot on both policies coming. But where policy
Speaker 1: stances today needs to needs to be seen through. But
Speaker 1: absolutely li So, Um, you know there are some tough
Speaker 1: decisions ahead. Go to Karney if it is an inflation.
Speaker 1: When going back to your issue. As a special envoy
Speaker 1: for the United Nations, Secretary Treasury Janet Yellen said that
Speaker 1: climate change was the biggest threat to markets. That was
Speaker 1: the biggest threat, frankly, existential threat the way that we operate,
Speaker 1: and we've seen the FED taking more active role. Can
Speaker 1: you dovetail how monetary policy fits in with climate policy well.
Speaker 1: First and foremost defense actions are related to financial stability
Speaker 1: risk what John was talking about earlier, um so making
Speaker 1: sure that as we're in this transition that lending investing
Speaker 1: is consistent with the industries of the future and not
Speaker 1: those of the past, and we don't build up large
Speaker 1: losses in the in the core of the system, monetary
Speaker 1: policy is going to have to uh largely, I think largely.
Speaker 1: Certainly in the United States. It's largely a question of
Speaker 1: the classics supply demand shifts in in the economy, so
Speaker 1: more traditional monetary policy, I will say, in the UK
Speaker 1: and in Europe. Uh. The way monetary policy has operated,
Speaker 1: the type of collateral that's used, the type of assets
Speaker 1: that are purchased, will be influenced by climate policy, and
Speaker 1: as a consequence, that will be yet another influence on
Speaker 1: the pricing of securities. Governor Karney, Christopher Friedland is making
Speaker 1: really quite a splash in your Canada, and I want
Speaker 1: to take it globally certainly G seven and G eight,
Speaker 1: but actually globally do we see in Canada as we
Speaker 1: come out of this pandemic a new interpretation of what
Speaker 1: government will do? Christoph Friedland has made worldwide news with
Speaker 1: a more liberal approach. Is out a tone of the future. Uh,
Speaker 1: it's uh. It's recognition aspects of the Canadian budget or
Speaker 1: recognition of uh, the inequalities that still exists in this
Speaker 1: economy and very important. I think the centerpiece element in
Speaker 1: that budget was is around childcare and universal childcare. And
Speaker 1: and you know, to speak as an economist, I mean
Speaker 1: we're moments from you talking about ranger causality and the
Speaker 1: time series analysis as speakers an economists. One of the things,
Speaker 1: of course, what that's doing, it's issue of social justice.
Speaker 1: It also is an issue of supply capacity of the economy.
Speaker 1: You know, more women can work, UH, border participation in
Speaker 1: the economy. That's that's good and is right and its just.
Speaker 1: But it also supports uh supports growth UM. But in Canada,
Speaker 1: as in the United States, what I was saying earlier,
Speaker 1: the shift from some board needs to come from immediate
Speaker 1: support to households during the course of the pandemic, which
Speaker 1: is still raging here. Unfortunately, the moment to that type
Speaker 1: of longer term growth UM and and a responsible fiscal
Speaker 1: policy that is consistent with longer term ARO. What's so
Speaker 1: great about this folks in these conversations that John, Lisa
Speaker 1: and I have as you get little windows for a
Speaker 1: split second, and how competent these people are. As Mark
Speaker 1: Kearney picks up on Granger causality and brings it right
Speaker 1: over to the political theory of his Canada, Mark Arney,
Speaker 1: I think John Farrow would agree with me that you
Speaker 1: are more qualified than any global thought leader. And I
Speaker 1: hate that phrase, Mark, to talk about what you learned
Speaker 1: in the United Kingdom. John Pharaoh is beat the table
Speaker 1: throughout this entire pandemic that there is a social contract
Speaker 1: in Europe and indeed in Boris Johnson's United Kingdom that
Speaker 1: is different than America. Out of this pandemic, are we
Speaker 1: shifting to a new social contract where we budget for
Speaker 1: they have not? I think we are. And the starting
Speaker 1: place is different, and I think you summarize a well, Tom.
Speaker 1: The starting place is different in Europe, it's different in Canada,
Speaker 1: different in the US, but the direction of travel is similar.
Speaker 1: We've learned through this pandemic that we don't have as
Speaker 1: resilient economies and societies. I mean, individuals have proven themselves
Speaker 1: to be resilient, to their great credit, but we haven't
Speaker 1: had the support, we haven't had the protections we need
Speaker 1: UH and and I can extend that analogy not just
Speaker 1: from financial stability to health and pandemics, but over to
Speaker 1: cyber UH and other issues where government needs to play
Speaker 1: a role. UM also playing a role in the adjustment
Speaker 1: of the economy. Now in the end, and we the
Speaker 1: economy needs to move to the future UM and the future,
Speaker 1: to grossly simplify, is sustainable and digital UM. So whereas
Speaker 1: we have the support, we also need UM, the dynamism
Speaker 1: and the openness in order to move forward, or else
Speaker 1: we're supporting livelihoods of the past, not not not of
Speaker 1: the future. We could save these questions for the end
Speaker 1: of the interview with that right now, So let's do it.
Speaker 1: Do you miss central banking? Do you miss the world?
Speaker 1: A central bankake? I'm gonna get to the Brexit question
Speaker 1: at a second. Don't worry, Tom, that's not a central banking.
Speaker 1: Do you miss it? Mam? You already feeling Mark? You know, John, Tom,
Speaker 1: at least I've been in this room for six months. Yes,
Speaker 1: I miss Mark. Are the are the maple leaves gonna
Speaker 1: finally break the whole the curse? If you will back
Speaker 1: in nineteen sixty seven. They haven't one cent your you.
Speaker 1: Conor McDavid and the oilers, they're going to spoil it
Speaker 1: for him. You heard it here. I'm going there at
Speaker 1: the oilers, Tom, Tom, I've I've silenced you. I can't
Speaker 1: believe it. He has silence. That's unbelievable. I've never seen
Speaker 1: that before. Just to ask a Brexit question. You want
Speaker 1: me to ask a Brexit question. I don't think Mark
Speaker 1: wants to answer a Brexit question. Mark Conney. Before you go,
Speaker 1: let's finish on the story in the UK. Things have
Speaker 1: changed so much the relationship with Europe. Has this ended
Speaker 1: up where you expected it to end up? Uh, it's
Speaker 1: I mean, we're more or less at this stage, but
Speaker 1: we're still in the in the early innings, to use
Speaker 1: the US expression um of the of the post. Obviously,
Speaker 1: the post Brexit relationship will take take a while to
Speaker 1: re establish some of those relationships, including in the financial sector.
Speaker 1: I think the interests are still very much aligned, and
Speaker 1: I would hope that over time the degree of openness
Speaker 1: cooperation will will increase from this base, which is which
Speaker 1: is lower than it should be. Uh, in the interests
Speaker 1: of both Europe and the UK. Governor County. This is
Speaker 1: the world of central banking, and I'm sure you don't
Speaker 1: miss those news conferences though, Mark County, you went Special
Speaker 1: Envoy for Climate Action FANCI, former banking and the Governor.
Speaker 1: We will reach the time at which we will taper
Speaker 1: asset purchases when we've made substantial further progress toward our
Speaker 1: goals from last December when we announced that guidance, and
Speaker 1: that would that would in all likelihood be before well
Speaker 1: before at the time we consider raising interest rates. We
Speaker 1: haven't you know, voted on that order, but that is
Speaker 1: the sense of the guidance, is that it would work
Speaker 1: in that way. The Chairman of the Feller Reserve System
Speaker 1: Jerome Powell, and that is a different Jerome Powell than
Speaker 1: when he was speaking early in his tenure. He has
Speaker 1: really grown into the conversation and the guidance forward. He
Speaker 1: gives guidance of David Rubinstein peer to peer conversations. This
Speaker 1: is a piercing interview off of the Economic Club of Washington.
Speaker 1: Look for tonight at nine pm and Mr Rubenstein joins
Speaker 1: us right now. David, what did you learn from Chairman Powell?
Speaker 1: He speaks a lot, he messages a lot. What was new.
Speaker 1: In your conversation, I think he made it very clear
Speaker 1: that interest rates are unlikely to go up until after.
Speaker 1: But the standard really is whether inflation gets to two
Speaker 1: percent or above and be can sustained at that level,
Speaker 1: and secondly, whether the unemployment rate goes down to what's
Speaker 1: called full employment. So if you get full employment, let's
Speaker 1: say four percent or four and a half percent, inflation
Speaker 1: is at two percent and appears to be going above
Speaker 1: two percent, then I think he would look at an
Speaker 1: interest rate increase, but he does not anticipate that happening
Speaker 1: before is over. David Rubinstein, the arc of your career
Speaker 1: from working for Carter Mondale years ago and and also
Speaker 1: the development with Carlyle of the allocation of capital. In
Speaker 1: your conversation, did you speak about the distortions to our
Speaker 1: capital incentives by negative real yields? Well, we didn't really
Speaker 1: talk about negative real yields because it just hasn't been
Speaker 1: something that they have really focused on. The offender reserves
Speaker 1: view is that negative yields is not a really good
Speaker 1: thing to do. Now we in effect have negative yields
Speaker 1: to some extent, But he's more focused on making certain
Speaker 1: the economy comes back to a full employment situation. That's
Speaker 1: his main focus. And I would say he's very confident
Speaker 1: in his position now, he's obviously been doing it for
Speaker 1: a while. I think he's got the confidence of the
Speaker 1: of the Federal Reserve Board, and I think he's got
Speaker 1: the confidence of the Secretary of Treasury, and I would
Speaker 1: say the President United States as well. I think he's
Speaker 1: done a very good job. And as we talked about,
Speaker 1: he doesn't talk in what I called FED speak. He's
Speaker 1: not an economist, and therefore he talks like a normal
Speaker 1: human being, and that's a good thing. So this is
Speaker 1: a hugely important deal. I really agree with David on that.
Speaker 1: And as I've said your own, Powell's really grown into
Speaker 1: being comfortable not doing FED speak. There is a question
Speaker 1: of whether also highlights how the Federal Reserve has transformed
Speaker 1: from controlling the monetary system or sort of setting rates
Speaker 1: to a much more popular body, basically trying to speak
Speaker 1: to a broader mandate. And I think about the meaning
Speaker 1: behind full ployment was that the message, David, that you
Speaker 1: got from share Powell. He is not in an ivory tower.
Speaker 1: He's not an economist. He spends a lot more time
Speaker 1: up on Capitol hill talking to members or talking with
Speaker 1: them on telephone than the normal FED chairman does. He
Speaker 1: regards that as part of his job. His mandate is
Speaker 1: not to worry about climate change or to worry about
Speaker 1: minority unemployment, but they do consider those factors, I think
Speaker 1: in an oblique way, and so I think he's much
Speaker 1: more sensitive to these issues than maybe some of his predecessors.
Speaker 1: In fact, he talked about in a prior interview and
Speaker 1: in this interview the fact that when he goes the
Speaker 1: FED every day and he often bikes in um, he
Speaker 1: drives past a kind of a homeless shelter or a
Speaker 1: home set of homeless tense, and it affects him and
Speaker 1: he obviously talks about it because he recognizes the impact
Speaker 1: of the economy has not been very good on many
Speaker 1: people in the lower part of the economic strata, and
Speaker 1: he does worry about that, even though it's not technically
Speaker 1: in his mandate. He also waited on cryptocurrencies, and this
Speaker 1: comes as a coin base went public and he talked them.
Speaker 1: He talked about them being a speculative asset. What's your
Speaker 1: sense of his view, I mean, do you think that
Speaker 1: that is the correct view right now? Or is this
Speaker 1: a future, not the future, but a future of an
Speaker 1: entire investing class. I would be surprised if it disappears.
Speaker 1: It seems to serve a purpose for some people, and
Speaker 1: I do think that, uh, it's likely to be around
Speaker 1: for a while. He did say that people aren't using
Speaker 1: it to pay bills and so forth, but actually, in
Speaker 1: some places now I think you can actually use cryptocurrency
Speaker 1: to pay for certain things. It's a small part of
Speaker 1: the economy, but I think they're watching it. They're monitoring it.
Speaker 1: His main job is to make certain that the economy
Speaker 1: comes back in a reasonable way without a lot of inflation,
Speaker 1: and I think he's very, very attentive to it. He
Speaker 1: did work at my firm for a number of years.
Speaker 1: I got to know him before he was in government,
Speaker 1: and I would say he's an incredibly hard working, very
Speaker 1: articulate person. I think I think that the fact that
Speaker 1: he has a close relationship with Janet Yellen is a plus. David,
Speaker 1: I must digress in that you were familiar with the
Speaker 1: entrepreneurial spirit of the Glazer family of Rochester, New York,
Speaker 1: the acuity and financial wisdom of Johnny Henry of the
Speaker 1: Fenway Group. All these people dabbled in English football. We
Speaker 1: have seen a complete debacle of people with a lot
Speaker 1: of money trying to impute a business plan on a
Speaker 1: culture in society. What is your observation of the collapse
Speaker 1: of this soccer league across Europe? What is your observation
Speaker 1: of how fancy guys got this so wrong? Well, a
Speaker 1: lot of American entrepreneurs did make a fair amount of
Speaker 1: money investing in European soccer, typically uh British British soccer teams,
Speaker 1: and a lot of people were surprised when the Glazier
Speaker 1: family originally bought Manchester United. It turned out to be
Speaker 1: a very good deal, and I think John Henry's investment
Speaker 1: turned out to be good too. Whether the new effort
Speaker 1: will work or not, it's too early to say, but
Speaker 1: it is interesting how so many wealthy people today want
Speaker 1: to invest in sports franchises, not so much because they
Speaker 1: love the sport, because they think it's a good investment.
Speaker 1: You know, a hundred years ago, or maybe seventy five
Speaker 1: years ago, people often bought sports teams because they really
Speaker 1: loved the sport. And while I wouldn't say these people
Speaker 1: dislike the sport, it's basically an investment kind of process. Now,
Speaker 1: David's a slow day. I gotta make some news quick here.
Speaker 1: How much do you love the Baltimore Orioles right now?
Speaker 1: My goodness, Well, I did grow up in Baltimore, and
Speaker 1: I am a big fan of the Baltimore Orioles and
Speaker 1: I am hopeful that they can live up to their
Speaker 1: glory days when I was a young person. And I'm
Speaker 1: sorry so how he stepped around that, Lisa, Yeah, the headlines, David.
Speaker 1: I just think the entrepreneurial spirit you would bring to
Speaker 1: the Orioles into an American league, it would be wonderful. Well,
Speaker 1: right now, I'm focused on this interview and the J
Speaker 1: Pal which is being broadcast tonight on Bloomberg TV. I
Speaker 1: spent an hour with him down well, and I wouldn't
Speaker 1: say that the producer on the show. The producer on
Speaker 1: the show is done a wonderful job of edding it down.
Speaker 1: And I should say, Kelly, I want to congratulate her
Speaker 1: and just getting engaged this weekend, So thank you for
Speaker 1: there for that and for all the good job you're
Speaker 1: doing and edding this interview down. I think it's look
Speaker 1: if you want to see j Pal and kind of
Speaker 1: up close and personally a good way to do it,
Speaker 1: because he really does open up. He's fairly frank, and
Speaker 1: I would say I have a good relationship with him,
Speaker 1: and I think he was fairly open about it. David,
Speaker 1: thank you so much for mentioning that, and of course,
Speaker 1: with Kelly's been doing for you and all these interviews
Speaker 1: from Jeff Bezos and on his well, David Rubinstein with
Speaker 1: Jerome Paul and as Mr Rubinstein mentions, it is a
Speaker 1: piercing and different interview than the usual that you hear
Speaker 1: from Jerom Poe. Abraham rock Berry joined this Now City
Speaker 1: Global head of FX Analysis. Now, Abrahim, the conversation that
Speaker 1: the debate is pretty simple. Has we just paused or
Speaker 1: are we set to reverse? What do you think it is?
Speaker 1: Abraham greater to me back on the show, Our view
Speaker 1: is that we're only pausing and that we are very
Speaker 1: much in what you called this exhaustion phase where a
Speaker 1: number of I think the more challenging trade that trends
Speaker 1: have exhausted just as much as maybe the stabilizing forces
Speaker 1: that we've seen over the last two weeks or so,
Speaker 1: with you know, rates probably finding just about a bottom,
Speaker 1: but also actually some of the more positive sentiment about
Speaker 1: maybe peak pessimism about the third COVID wave in Europe
Speaker 1: or maybe in a place like Brazil, even also already
Speaker 1: being reflected to some degree in market prices. So we
Speaker 1: think this is probably no more than a period of consolidation,
Speaker 1: but that that cyclical trade still has further to run
Speaker 1: in the coming months. Every within your very sophisticated notes,
Speaker 1: there's a lot of mathematics and correlations on the linkages
Speaker 1: of asset classes. How LinkedIn smooth are the dynamics working
Speaker 1: right now or is it all this steph, is it
Speaker 1: all dis greed and separate? Well, they have been somewhat
Speaker 1: unstable for for for for quite a while, and that's
Speaker 1: in line with I think these uh if you like,
Speaker 1: the most fundamental market trends changing. But I do think
Speaker 1: there's one correlation that is both unstable but equally ultimately
Speaker 1: very stabilizing for broader mark borod markets, and that's between
Speaker 1: rates and risk acids, and the fact that we've seen
Speaker 1: probably the volatility of US rates top out here that
Speaker 1: we are probably in the arrange for the US ten
Speaker 1: year rate of between one fifty one seventy five for
Speaker 1: the time being. I think that puts US back into
Speaker 1: a world where equity prices and risk acids can resume
Speaker 1: their ascent. So it is not quite maybe a negative
Speaker 1: correlation that is re established there, but there is hope
Speaker 1: for the so called risk charity trade now that US
Speaker 1: rates have have probably peaked in the short term. Ebra him.
Speaker 1: I've seen a lot of analysts talk about the reflation
Speaker 1: trade as a monolith, basically this idea that it has
Speaker 1: been consistent throughout the past few months. It has not.
Speaker 1: The nature has changed significantly over this period of time
Speaker 1: in terms of what's getting reflated. The US was the
Speaker 1: dominant reflated trade based on the economic prowess of the nation.
Speaker 1: Why is that not going to continue as the reflation
Speaker 1: trade gains traction as you say it will. Yes, I
Speaker 1: mean I would highlight two I think changing developments over
Speaker 1: the last couple of months that are notable. One was,
Speaker 1: as you said, US exceptionalism, and there our view is
Speaker 1: we've probably peaked out in the exceptional nature of that,
Speaker 1: and the rest of the world does have hope of
Speaker 1: maybe catching up somewhat, not converging, but catching up somewhat.
Speaker 1: But the other is that even in the US, what's
Speaker 1: happened over the last month or so is investors have
Speaker 1: decided that they are not extrapolating that exceptionalism too much
Speaker 1: further out. So if you look at the US rates,
Speaker 1: US inflation expectations, if you go a couple of years out,
Speaker 1: when investors are telling you we're getting a big impulse
Speaker 1: to growth and inflation in the very short term, but
Speaker 1: further out we might well be going back to where
Speaker 1: we were. And again, that was very important for where
Speaker 1: US rates are, and it's very important for whether US
Speaker 1: it's relative to the rest of the world. Our view
Speaker 1: is we're still in a more or less synchronous global
Speaker 1: recovery environment. A few months from now. Give us a
Speaker 1: conviction of the dynamics of the euro. We've got eight nine,
Speaker 1: ten houses for the most part, all looking for stronger euro.
Speaker 1: But it is a path of one three even after
Speaker 1: one thirty. I need to make some news here this morning.
Speaker 1: Give us a City group conviction on that path. Well, well,
Speaker 1: we have been on the on the higher side for
Speaker 1: euro dollar for the year. We came into the thinking
Speaker 1: he could go high as one thirty. Now we think
Speaker 1: it's probably in the one to one twenty seven fifty range.
Speaker 1: As a as a target. I will note that's reinforced
Speaker 1: by the more recent trends, reinforced by people moving back
Speaker 1: into dollar funding, which boosts the value of the euro,
Speaker 1: so cutting short positions in the Europe as a result.
Speaker 1: But I will also tell you where our optimistic case
Speaker 1: on the euro will end, because we've already started to
Speaker 1: hear a few murmurs and noises around the French election.
Speaker 1: So later in the year, sometime in the second half
Speaker 1: of the I think that will start to become a
Speaker 1: market theme that will be a prime candidate to top
Speaker 1: out of the euro. Dollar is in Abraham, always good
Speaker 1: to catch up with you, sir, Thanks for faming with us.
Speaker 1: Abraham ra Barery, the City clubal head of ex analysis.
Speaker 1: Oh Berto Gallo with us, John, I want you to
Speaker 1: go to Mr Gallo with with your wisdom here. But John,
Speaker 1: I first want to talk about in the Super League
Speaker 1: blow up, we've been making jokes about leads, but this
Speaker 1: is not funny. I mean, leads has succeeded over the
Speaker 1: last number of months and the toughest thing in Italy
Speaker 1: like leads is Gallows, Naples or Napoli. I believe it's
Speaker 1: called I mean the fact is there's a real parallel here,
Speaker 1: isn't there. And Napoli has been one of the clubs
Speaker 1: in Italy that has actually managed to challenge you've into
Speaker 1: dominance over the last decade, coming close to winning the
Speaker 1: title a couple of times. And they are a great
Speaker 1: example tom of a club that would have been frozen
Speaker 1: out of this European football league with little chance of
Speaker 1: joining it, and the leads of this world, the Napolies
Speaker 1: of this world that have had in times at times
Speaker 1: some kind of European heritage, wouldn't be able to get
Speaker 1: back in and conquer those names. And I think that's
Speaker 1: the beauty of sport that even if you're a small club,
Speaker 1: that somehow you can climb up the ranks and get
Speaker 1: it done. At some point, give us a give our
Speaker 1: American audience a window winter this. We've got a guest
Speaker 1: qualified to speak, Alberta Gallop, Algebras investment portfolio manager, was
Speaker 1: hoping you'd talk about the credit markets and it's two
Speaker 1: and a half percent game year today in its credit fund.
Speaker 1: So we've got to start with Napoli first. You'll take
Speaker 1: on the events of this week, Albert. So it was
Speaker 1: a Napoli fan that would have been frozen out of
Speaker 1: all of this. What did you think? Well, I think
Speaker 1: this is the time for markets to an also society
Speaker 1: to fight inequalities or we don't want it at the
Speaker 1: social level. We also don't want it at the sports level.
Speaker 1: Or you know, even though they're a few teams that
Speaker 1: are wealthier, people want to have a game with despair
Speaker 1: and where also, you know, the less wealthy teams can compete.
Speaker 1: Same with society right where we're definitely we don't want
Speaker 1: to go in that direction to encourage in equality. He
Speaker 1: fights in zero right as a port filio manager is
Speaker 1: well not better? How are you getting on? This is
Speaker 1: a much tougher year because we have seen that at
Speaker 1: the with the extreme crisis that we got last year.
Speaker 1: You know, we've had central banks, emphisis of policy all
Speaker 1: pushing down the accelerator. The result is governments have more
Speaker 1: dead and central banks have had to do more. They
Speaker 1: continue to do more. What we see today is real
Speaker 1: yields are negative everywhere and there is sixty percent of
Speaker 1: the bond market yielding below one percent. So before and
Speaker 1: over the last Mareny years was very easy to make
Speaker 1: money bonds. Now it's much tougher, and that's where alpha
Speaker 1: also surprises more and it's more needed by investors compared
Speaker 1: to where we were before. Uh, it's much topper, but
Speaker 1: we still find a few opportunities. However, I would say
Speaker 1: the second half of the year we think would be
Speaker 1: a lot more volatile than the first half. We got
Speaker 1: some bigger risks on the horizon, and markets are very
Speaker 1: complacent now, Alberto, where do you see a boom economy
Speaker 1: outcome to see price up and yield down? I just
Speaker 1: I'm fascinated where you are in your head Q three,
Speaker 1: Q four, even the first quarter of next year. How
Speaker 1: do you get there? So you know. In the first
Speaker 1: half of the year, especially Q one, the big news
Speaker 1: was the US fiscal stimus, the new administration. The point
Speaker 1: this firepower not just to combat the virus, but also
Speaker 1: to create new growth. This news is gone now. We have, yes,
Speaker 1: our government spending like Europe, but it's much slower and
Speaker 1: ahead of us. We have three big risks. The first
Speaker 1: one in central banks might withdraw the paunch bowl. At
Speaker 1: some point there's gonna be a discussion of tapering from
Speaker 1: the Fed, and it could in Q three Q four.
Speaker 1: Already the second risk is geopolitics. Russia and China are
Speaker 1: teaming up against the US in Ukraine and in Taiwan.
Speaker 1: There's also a shortage of semiconductors that's gonna affect you know,
Speaker 1: they're testing the Biden administration. This risk is not really
Speaker 1: priced in by markets. And then the third risk is
Speaker 1: that the vaccines are still going pretty slow in Europe
Speaker 1: and in a lot of emerging markets. You know, the
Speaker 1: economy is the non US, non UK economies are going
Speaker 1: to take a lot longer to reopen. So it's it's
Speaker 1: a really key shaped recovery, and markets are have been
Speaker 1: pricing a B shaped recovery, so we're going to see
Speaker 1: more volatility in our view in Q three and Q
Speaker 1: four today where the record low levels for credit spreads,
Speaker 1: in high yield in investment grade, we have the one
Speaker 1: hundred year low wipe out buffer the lowest yield level
Speaker 1: on US investment grade, so we're really really thin levels.
Speaker 1: Markets are priced for perfection. It's time to take a
Speaker 1: step back and focus on hedges and protection. So hedges
Speaker 1: in protection, can you elaborate on what protection means at
Speaker 1: a time when there's fear of rising rates of premier
Speaker 1: of early withdrawal of volnetary stimulus as you were talking about,
Speaker 1: as well as are we priced to perfection on the
Speaker 1: risk your credit side, we're almost prised to perfection. One
Speaker 1: of the protection that you want to have if you're
Speaker 1: fixed income investors exactly prevent a declining price from a
Speaker 1: rise in rates from a rising inflation. And you know,
Speaker 1: so far treasuries were leading the widening. We have seen
Speaker 1: also European bonds, you know, boons and and BTPs have
Speaker 1: been widening more. And you know, the bar is much
Speaker 1: lower for Europe because everyone has been verished. So for
Speaker 1: boons to go to zero, for example, between and your end,
Speaker 1: you just need a little bit of positive US, a
Speaker 1: bit of spending, and some agreements on the EU Recovery Fund.
Speaker 1: So that's gonna drive boons a little bit higher. You
Speaker 1: could wipe out all your carry if you have a
Speaker 1: very high duration in credit. Similarly, we have a lot
Speaker 1: of firms that have not restructured and are pretty levered
Speaker 1: trading at really low spreads. You know, US sill spreads
Speaker 1: are close to two and eighty basis points. There is
Speaker 1: very little chance of um you know, making money during
Speaker 1: a cycle if you invest at that low level. At
Speaker 1: some point you're gonna have a You're gonna have a problem.
Speaker 1: So it's just a matter of when. So the question
Speaker 1: there is how to engineer strategies that had your portfolio
Speaker 1: or to have enough liquidity to buy when other people
Speaker 1: are selling. That's that's exactly what we're doing. You have
Speaker 1: to be a bit patient, but you know, chasing the
Speaker 1: market now is um is foolish in in fixing, you know,
Speaker 1: bonds are very negatively convex for investors, but it doesn't
Speaker 1: mean you can't make money. You can make money when
Speaker 1: volatility comes back. Here's the conundrum that, yes, this makes
Speaker 1: perfect sense based on historical investing principles, and yet every
Speaker 1: time that we see a sell off in rates, if
Speaker 1: it gets a commensurate sell off in credit, you get
Speaker 1: a flight to safety. That flight to safety is bonds.
Speaker 1: The yield goes lower, and we get a reset of
Speaker 1: where we were before. Put on repeat, play it again.
Speaker 1: That is what we have seen. Why are we going
Speaker 1: into a new regime where that perhaps is not the
Speaker 1: cycle that we're going into. There's two options for policymakers.
Speaker 1: One is to make the bond market reprice quickly. That
Speaker 1: would also entail higher funding costs for different treasuries around
Speaker 1: the world. Policy makers cannot afford that, So that's the
Speaker 1: second option is to impose on investors and negative real return.
Speaker 1: So having inflation at two and a half or three
Speaker 1: percent in the US by interest rates of one and
Speaker 1: a half to two and that's probably what's going to happen,
Speaker 1: so essentially bond investors, but that means also insurance companies
Speaker 1: and pension funds will lose money slowly instead of losing
Speaker 1: money quickly. It's a second best option, but it's still
Speaker 1: a very bad option. So as an active manager, as ventially,
Speaker 1: what we have to do is to trade these cycles,
Speaker 1: these policy cycles of widening in rates which will not
Speaker 1: go back to a positive level against inflation. You've also
Speaker 1: got you You've got a trade Alberta as well off
Speaker 1: of what ECP does. I guess there's a La guard message.
Speaker 1: Are you more interested in what she says? Are you
Speaker 1: more interested in what she does not say? We're more
Speaker 1: interested in what she doesn't say. At the moment, there's
Speaker 1: not a lot of things the ECB can do. They're
Speaker 1: basically running on all cylinders. But the question is when
Speaker 1: will the discussion about the end of the emergency purchase
Speaker 1: programs start, so tapering and UM. And also there's other
Speaker 1: long term discussions about the strategic review of the CP,
Speaker 1: about average inflation targeting, which are going in play, you know,
Speaker 1: during the summer. And finally, there's another more important factor here,
Speaker 1: which is central bank digital currency. A lot of central
Speaker 1: banks have walked about this, and ultimately this UM is
Speaker 1: something that could unleash a lot more livers for Montreal policy.
Speaker 1: For example, interest rates could become a lot more negative,
Speaker 1: or central banks could inject money to firms directly. So
Speaker 1: that's the ultimate frontier. It's not for today, it's not
Speaker 1: for this meeting, but it's a lot more interesting to
Speaker 1: hear what they don't say now, Bets. So we've gotta
Speaker 1: leave it there. It's gonna hear from you said on football,
Speaker 1: of course, and a little bit on credit, the markets
Speaker 1: and the CP coming up tomorrow, Bets. I've got to
Speaker 1: catch up Bets again the Avoultebrisk Investments Portfilio Manager. This
Speaker 1: is the Bloomberg Surveillance Podcast. Thanks for listening. Join us
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Speaker 1: Tom keene In. This is Bloomer