WEBVTT - Surveillance: Trade Talks Are Unpredictable, Hewson Says 0:00:00.080 --> 0:00:12.960 Ye. Welcome to the Bloomberg Surveillance Podcast. I'm term Keene 0:00:13.480 --> 0:00:17.560 Jay Leye. 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, 0:00:23.600 --> 0:00:29.080 Bloomberg dot Com, and of course on the Bloomberg. To 0:00:29.160 --> 0:00:31.840 start the conversation right there, let's bring in David Paige. 0:00:31.880 --> 0:00:36.040 Shall we access investment managers US and the UK senior economists. 0:00:36.040 --> 0:00:38.200 Good daily, David, Good to see you. So let's start 0:00:38.200 --> 0:00:40.080 with the federal reserves quote, shall we We'll take it 0:00:40.120 --> 0:00:44.040 from there. We are closely monitoring the implications of these 0:00:44.080 --> 0:00:46.519 developments for the US econom account look and as always, 0:00:46.800 --> 0:00:49.239 we will act as appropriate to sustain the expansion with 0:00:49.280 --> 0:00:52.239 a strong labor market and inflation near US symmetric two 0:00:52.240 --> 0:00:55.920 percent objective markets off to the races. My first thought 0:00:56.160 --> 0:00:59.280 is anything new here? David? Yeah, No, I think it's 0:00:59.360 --> 0:01:02.680 interesting markets have reacted to that one paragraph in in 0:01:02.920 --> 0:01:06.679 empower speech. But if and you know that paragraph that 0:01:06.760 --> 0:01:09.640 that talk of expand or continuing the expansion is exactly 0:01:09.640 --> 0:01:12.280 how he started the May press conference. So to some extent, 0:01:12.319 --> 0:01:14.759 there's nothing new and what he said, perhaps there's something 0:01:14.760 --> 0:01:17.240 new and what he didn't saying that we've heard previously 0:01:17.880 --> 0:01:20.320 talk about there being no convincing signs for a need 0:01:20.360 --> 0:01:22.080 for a short term movement one way or the other, 0:01:22.240 --> 0:01:24.080 and he didn't say that. And then I think if 0:01:24.080 --> 0:01:26.720 you layer on top of that the wealth of FED 0:01:26.800 --> 0:01:30.720 speakers that are coming out as we approached the Purdah 0:01:30.720 --> 0:01:33.880 period for the fom C, the message seems to be, 0:01:34.800 --> 0:01:38.200 we are concerned about trade. There are uncertainties brewing and 0:01:38.240 --> 0:01:40.720 that might impact the economy further along, and if it does, 0:01:40.800 --> 0:01:42.880 we will react, but for the short term. And bear 0:01:42.880 --> 0:01:44.639 in mind this is a message that has to govern 0:01:44.959 --> 0:01:47.560 for the Fed's meeting into nearly two weeks time. Now 0:01:48.320 --> 0:01:51.160 that I think the message there is for now no change. Well, 0:01:51.160 --> 0:01:53.160 the risk is David, two weeks out from a Federal 0:01:53.160 --> 0:01:55.280 Reserve meeting, the market standing to hear what it wants 0:01:55.280 --> 0:01:58.560 to hear. The problem is, are we assuming a rate 0:01:58.600 --> 0:02:00.720 cut in two weeks? No? No, no, no, no, no, 0:02:00.720 --> 0:02:02.800 We're not assuming a rate cut in two weeks. I 0:02:02.840 --> 0:02:05.120 think the risk is here that the market starts to 0:02:05.160 --> 0:02:07.520 believe the bulk of market participants begin to believe that 0:02:07.560 --> 0:02:10.239 the Federal Reserve is coming their way. The risk is 0:02:10.280 --> 0:02:12.080 we go into the June meeting in two weeks and 0:02:12.080 --> 0:02:14.720 the summary of economic projections comes out and it hasn't 0:02:14.760 --> 0:02:18.160 come in enough down to market positioning. David, do you 0:02:18.200 --> 0:02:21.800 anticipate that spread coming in and to what degree? I 0:02:21.840 --> 0:02:23.919 think the lesser that that's going to be the lesser 0:02:23.919 --> 0:02:26.000 shock over the next month. I think that the two 0:02:26.040 --> 0:02:27.959 shocks that we're going to be watching at is firstly, 0:02:28.000 --> 0:02:30.359 what happens with Mexico. Do we get these tariffs coming 0:02:30.360 --> 0:02:32.079 through and bear in mind yesterday we were also hearing 0:02:32.080 --> 0:02:34.560 a lot of news about the resistance to these tariffs 0:02:34.639 --> 0:02:36.880 and from the Republicans. And secondly, what happens to that 0:02:36.919 --> 0:02:39.440 G twenty meeting. So in that context, I would imagine 0:02:39.440 --> 0:02:42.440 the SEP is going to that summary economic projections are 0:02:42.480 --> 0:02:45.240 going to suggest that the Fed is considering lower rates 0:02:45.280 --> 0:02:46.959 by the end of the year. But that's not something 0:02:47.000 --> 0:02:48.840 that's going to be hard coded, and certainly, of trade 0:02:48.840 --> 0:02:50.840 moves in a different direction, the Fed will be flexible. 0:02:50.880 --> 0:02:53.120 First of all, I want to suggest, folks, for those 0:02:53.160 --> 0:02:55.400 of you in America, the major risk, which is how 0:02:55.440 --> 0:02:58.440 many days does it take to have your body changed? Sean, 0:02:58.480 --> 0:03:01.160 if you have a full English breakfast every day? Are 0:03:01.160 --> 0:03:05.639 you having a stupid piece of sausage I won't eat 0:03:05.639 --> 0:03:07.280 and that when you live here, tom you do that 0:03:07.320 --> 0:03:11.480 on a Sunday once a week after a big night out. Okay, 0:03:11.520 --> 0:03:14.359 it's not something you should try and do everything tomorrow, 0:03:14.880 --> 0:03:17.960 David Page. The risk here, seriously of all this is 0:03:18.000 --> 0:03:22.160 we have central bankers adapting to political philosophy and political 0:03:22.280 --> 0:03:25.200 policy as well. Where in the history books do we 0:03:25.280 --> 0:03:27.440 show that that can be successful. I'm not sure they 0:03:27.480 --> 0:03:30.080 are reacting to any political philosophy. I think they're really 0:03:30.080 --> 0:03:33.640 reacting to economic risks. And I think what the FED assumes, 0:03:33.680 --> 0:03:35.560 and what we certainly assume, is that if you see 0:03:35.600 --> 0:03:38.920 terasterizing against Mexico, arristterizing against China, and you get an 0:03:39.000 --> 0:03:41.000 escalation of the trade war, you're going to have a 0:03:41.040 --> 0:03:43.960 negative shock to the economy. What what kind of US 0:03:44.040 --> 0:03:46.480 number do you get? Your own pilot interstrates maybe cuts 0:03:46.480 --> 0:03:49.160 interest speeds in two weeks. I mean, is it a 0:03:49.160 --> 0:03:51.680 one handle? You know? I think there is a risk, 0:03:52.000 --> 0:03:53.640 there is a small risk that if you see the 0:03:53.760 --> 0:03:56.680 Mexican tarists going ahead now and you see markets react 0:03:56.680 --> 0:03:59.120 negatively to that, that the FED could be moving in 0:03:59.120 --> 0:04:01.280 a two weeks tign but we think that's very unlikely. 0:04:01.600 --> 0:04:03.440 So you think June could well be a live meeting. 0:04:03.480 --> 0:04:05.240 I've heard this a couple of times over the last week. 0:04:05.280 --> 0:04:07.520 It's not an original thought. I just think it's still 0:04:07.520 --> 0:04:09.839 slightly contrarian. Do you think June could be alive meeting? 0:04:09.880 --> 0:04:12.000 You like to practice original thoughts, but no, I think 0:04:12.040 --> 0:04:15.440 if you see developments moving, if you see Mexico seeing 0:04:15.440 --> 0:04:17.599 Harrison posed on it, and you see a negative reaction 0:04:17.640 --> 0:04:20.080 with markets, yes, I think the FED would consider cutting 0:04:20.120 --> 0:04:22.160 at that point. So do you think it happens. No. 0:04:22.400 --> 0:04:24.880 We have two interviews in the next ninety minutes or 0:04:24.920 --> 0:04:27.040 so right here on Bloomberg Radio. One will be with 0:04:27.080 --> 0:04:29.960 the Dallas FED president Robert Kaplan. Michael McKie will be 0:04:29.960 --> 0:04:32.520 catching up with him. Also catching up with the Chicago 0:04:32.560 --> 0:04:35.200 FED President Charles Evans as well. What do you want 0:04:35.240 --> 0:04:37.720 to hear from the remaining FED speakers through the next 0:04:37.720 --> 0:04:41.000 twenty four hours, because so far, the only one in 0:04:41.040 --> 0:04:44.040 the last week that has actually tied up the prospect 0:04:44.040 --> 0:04:48.479 of a rate cut and directly referenced it is Jim Blood. Yeah, 0:04:48.800 --> 0:04:51.880 and we've seen Evans and Caplan previously talking about need 0:04:51.960 --> 0:04:54.760 more time, so we would expect that's the message that 0:04:54.800 --> 0:04:56.800 the Fed is delivering, and that's what we go into 0:04:56.800 --> 0:04:59.360 this meeting expecting. What I'm saying is two weeks is 0:04:59.400 --> 0:05:02.479 a while. Markets are moving quite quickly. We could see, 0:05:02.800 --> 0:05:05.160 we could see events change, but that's not our expectation. 0:05:05.240 --> 0:05:07.039 I think the FED wants to see what happens with 0:05:07.080 --> 0:05:10.440 trade and it will react accordingly, and we expect a 0:05:10.480 --> 0:05:14.000 relatively benign outlook from trade. We don't necessarily expected Mexican 0:05:14.040 --> 0:05:15.640 tariffs to come through as they as they look at 0:05:15.680 --> 0:05:17.719 the moment, we think there's a good chance you see 0:05:17.760 --> 0:05:20.039 some resolution with China. In that case, the Feds in 0:05:20.040 --> 0:05:23.200 an awkward situation. You could see financial conditions ease, but 0:05:23.279 --> 0:05:26.919 the Fed still considering insurance cuts. What is extraordinary to 0:05:26.960 --> 0:05:29.760 me the John's mention of two good central bank interviews 0:05:30.279 --> 0:05:33.359 is are different. Those central bankers are. Evans is a 0:05:33.440 --> 0:05:38.320 frontline monetary theorists as his vice German clarator, and uh 0:05:38.640 --> 0:05:42.880 Dr Caplan is an interesting guy out of education, his 0:05:42.880 --> 0:05:46.200 his important books and leadership and his work at Harvard 0:05:46.279 --> 0:05:49.960 as well. Is Powell beginning to learn how the Evans 0:05:50.080 --> 0:05:55.120 and the Clarators of the world think and operate very much. 0:05:55.160 --> 0:05:57.520 So I think Clarata has had quite a marked impact. 0:05:57.600 --> 0:05:59.479 And I think when we look at the pivot that 0:05:59.560 --> 0:06:02.000 the Fed put through at the back end of last year, 0:06:02.040 --> 0:06:05.280 other than being governed by significant tightly in financial conditions, 0:06:05.480 --> 0:06:07.560 they looked like there was some evidence of a Clard 0:06:07.600 --> 0:06:10.080 review m starting to come through the see. I think 0:06:10.080 --> 0:06:13.560 PAL very much reflects the underlying statement rather than perhaps 0:06:13.760 --> 0:06:16.960 driving policy individually in quite the same way as Yellen 0:06:17.000 --> 0:06:19.760 potentially didn't, ban Anke did and Greenspan. We see a 0:06:19.800 --> 0:06:23.960 further asset inflation with lower interest rates if they actually 0:06:24.000 --> 0:06:26.320 do rate cut, whether it's what is the two weeks 0:06:26.320 --> 0:06:29.640 show in June nine, or it's after that it is September. 0:06:30.080 --> 0:06:32.440 Do you just assume you follow on with the worry 0:06:32.440 --> 0:06:35.960 of Steve Roach, which is asset inflation Now, I think 0:06:36.000 --> 0:06:38.240 we're starting to worry a little bit more the other way. 0:06:38.279 --> 0:06:40.279 I think the Fed is going to struggle to get 0:06:40.320 --> 0:06:42.279 ahead of the market. The market is already pricing in 0:06:42.320 --> 0:06:45.400 three cuts for the Fed by early next year, possibly 0:06:45.400 --> 0:06:47.240 three by the end of this year. I think the 0:06:47.240 --> 0:06:49.919 Fed has got to see some significant bad news to 0:06:50.000 --> 0:06:52.440 get that um And if it doesn't cut by as 0:06:52.520 --> 0:06:54.279 much as that the market is going to start to 0:06:54.320 --> 0:06:57.000 worry that it's still behind the curve, and I think 0:06:57.040 --> 0:06:59.920 that that becomes more initial David thinking so much, David 0:07:00.000 --> 0:07:19.240 Page of ACTE. Here was some very thoughtful discussion. Stephanie 0:07:19.280 --> 0:07:22.840 Baker joins us right now and without question stuff And 0:07:23.000 --> 0:07:26.920 the site GUIST in Washington is not in Portsmouth, It's 0:07:26.960 --> 0:07:30.960 in Mexico City. And the likelihood of terroriffs. Republicans are 0:07:30.960 --> 0:07:34.000 saying to the President. No, are people in the White 0:07:34.000 --> 0:07:38.160 House saying to the President no, Well, it doesn't the 0:07:38.240 --> 0:07:41.200 message from the Hill doesn't seem to be getting through 0:07:41.240 --> 0:07:43.760 to Trump. Um. You know, he's tweeted out that he's 0:07:43.800 --> 0:07:47.760 got this morning, Yeah, the support of Republicans, but you know, 0:07:47.800 --> 0:07:50.600 we're not seeing that on the Hill. I think Lindsay 0:07:50.600 --> 0:07:53.800 Graham UM. Senator Lindsay Graham has been the most vocal 0:07:54.040 --> 0:07:56.600 supporter of him. But it does look like the issue 0:07:56.640 --> 0:08:01.280 where the Republicans might finally bring ache with Trump and 0:08:01.360 --> 0:08:06.000 oppose Um either through an over you know, they you know, 0:08:06.160 --> 0:08:11.440 they could override Um his veto on this. They may 0:08:11.480 --> 0:08:14.880 have the numbers for it. It does look like they could. Um. 0:08:15.000 --> 0:08:17.880 What's so important, and John, I think this really bears repeating, 0:08:17.880 --> 0:08:20.200 because I think a lot of Americans, including Tom King, 0:08:20.280 --> 0:08:25.040 don't get it. Our trade with Mexico compared to China, China, China, 0:08:25.160 --> 0:08:28.400 China is ginormous. There's no other way to put it. 0:08:28.680 --> 0:08:32.720 The scale of this relationship is something I think so 0:08:32.760 --> 0:08:36.720 many of us don't understand exactly. Um, you know, this 0:08:36.760 --> 0:08:40.480 could have a huge impact because I think people don't 0:08:40.480 --> 0:08:44.320 really appreciate how much trade goes across the border, you know, 0:08:45.080 --> 0:08:47.920 and how complex the supply chain is. This is not 0:08:48.040 --> 0:08:51.560 just things that are made in Mexico and being shipped 0:08:51.600 --> 0:08:55.400 to the USC, their parts going back and forth, being reassembled, 0:08:55.960 --> 0:08:58.480 um you know. And and I think that the fallout 0:08:58.520 --> 0:09:02.240 from it will you know, in packed American consumers in 0:09:02.280 --> 0:09:04.760 a huge way. This can work both ways. Of course, 0:09:04.760 --> 0:09:06.960 it's important for Mexico too. And actually, think what's really 0:09:06.960 --> 0:09:09.840 interesting in the last twenty four hours, the Mexicans believe 0:09:09.880 --> 0:09:13.120 they can satisfy satisfy the President's demands in the next 0:09:13.120 --> 0:09:16.440 week or so. Stephanie, do you think they can Well, 0:09:16.480 --> 0:09:20.360 I'm not clear what would satisfy Trump's demand, and that's important, 0:09:20.440 --> 0:09:23.720 and I don't think he's actually spelled out exactly what 0:09:23.880 --> 0:09:27.400 Mexico needs to do to head off these tariffs. Um. 0:09:27.440 --> 0:09:31.720 You know, is it a complete shutdown of immigration on 0:09:31.760 --> 0:09:34.640 the border? Well, exactly, it's three bullet points when this 0:09:34.760 --> 0:09:37.600 brooke John, and one of them was to, as you say, Steph, 0:09:37.640 --> 0:09:41.599 and you shut down the southern border of Mexico with 0:09:41.760 --> 0:09:44.760 the three Central American states. I don't know how they 0:09:44.800 --> 0:09:47.960 affect that, but that was the granularity where the president 0:09:48.040 --> 0:09:53.280 was at one point. But how does he assess that? Exactly? Yeah, exactly. 0:09:53.400 --> 0:09:55.400 I mean, you know, I do think that there are 0:09:55.400 --> 0:09:58.080 a lot of question marks over if he really wants 0:09:58.080 --> 0:10:00.240 to press ahead with us, shouldn't he be clearer what 0:10:00.360 --> 0:10:03.640 exactly they need to do? Um? Which makes the question 0:10:03.640 --> 0:10:05.920 why the Mexicans seem to be so confident on the 0:10:05.920 --> 0:10:07.800 surface of things. Of course, we've got no ideas what's 0:10:07.960 --> 0:10:11.080 happening behind closed closed doors, but certainly in the statements 0:10:11.080 --> 0:10:13.320 they've made in the last couple of days, Tom may 0:10:13.320 --> 0:10:16.719 sound very optimistic about getting something done and things being 0:10:17.000 --> 0:10:21.160 chanistic or collegial. I'm not you know, I agree with you. 0:10:21.240 --> 0:10:24.199 The tone has been very positive from Mexico, but to me, 0:10:24.240 --> 0:10:27.720 it's more collegial waiting for the president to get back 0:10:27.800 --> 0:10:32.280 from the uh, the pomp and circumstance of your Great Britain. 0:10:32.360 --> 0:10:34.080 So the other thing we have to consider, we've hurt 0:10:34.120 --> 0:10:36.520 the Republican push back. We have to consider how realistic 0:10:36.520 --> 0:10:40.120 it is that they formalize that push back, stephanitiely simply 0:10:40.160 --> 0:10:42.320 saying it is one thing. Doing something about it is 0:10:42.480 --> 0:10:44.719 quite different. Do you see them actually following through and 0:10:44.800 --> 0:10:50.240 formalizing that effort. Well, they could just pass a bill, um, 0:10:50.280 --> 0:10:54.800 you know, a fairly narrowly worded and defined bill trying 0:10:54.840 --> 0:11:00.440 to stop him from using tariffs like this, um. And 0:11:00.480 --> 0:11:04.960 that might be the simplest way forward. Um. And I 0:11:04.960 --> 0:11:08.800 would expect, given the fallout that that you know, everyone 0:11:08.920 --> 0:11:12.199 is looking at from this, that they would press ahead 0:11:12.240 --> 0:11:15.080 with something like this. We have to help, Stephanie. You 0:11:15.120 --> 0:11:17.679 have to help us with our surveillance. Question of the day. 0:11:17.760 --> 0:11:20.160 How many times a week should you have a full 0:11:20.200 --> 0:11:25.480 English breakfast? I've said once, John said once mix on 0:11:25.559 --> 0:11:27.880 the weekend after a big nine ten, after three days 0:11:27.880 --> 0:11:30.319 in a row. I'm being chastised by any and all. 0:11:30.520 --> 0:11:32.720 I am the wrong person to ask this. I don't 0:11:32.800 --> 0:11:36.559 ever eat a full English I'm I'm I'm too healthy 0:11:36.559 --> 0:11:40.040 conscious because I keep. What's the thing do you have 0:11:40.040 --> 0:11:43.600 everything fried? Don't? Do you have a Friday as well? 0:11:43.600 --> 0:11:45.960 I have them over medium? But what's the thing that 0:11:46.000 --> 0:11:49.040 looks unedible? You think you're talking about the black pudding? 0:11:49.800 --> 0:11:52.280 Have you had the black pudding, Stephanie? I have. It's 0:11:52.320 --> 0:11:55.440 not my favorite, but yes, yes, you know I'm well 0:11:55.600 --> 0:11:59.040 versed in the black You haven't. You haven't tried? No, God, no, 0:12:00.000 --> 0:12:05.200 it's actually not bad. You might like it, suggest folks, 0:12:05.240 --> 0:12:07.800 tomorrow morning, I'm having a full English, and I mean 0:12:07.880 --> 0:12:11.839 full Stephanie Baker, have you had a phil Scottish? She 0:12:11.880 --> 0:12:14.600 could have some haggis with that, with iceer without ice. 0:12:16.080 --> 0:12:33.240 Stephanie Baker, thank you so much. Let's see is in 0:12:33.280 --> 0:12:37.120 here an important conversation. The problem with Victoria Houston is 0:12:37.160 --> 0:12:39.760 every time she's on, we want to go longer, longer, longer, 0:12:39.840 --> 0:12:45.880 because she actually knows John what she's talking about about trade, 0:12:46.040 --> 0:12:51.360 like kel A Dover, will I get my Stilton? She's 0:12:51.440 --> 0:12:55.760 unlike now is the stuff that you're interested in? Unlike 0:12:55.800 --> 0:12:59.280 the politicians, she's actually experienced in trade. Wants to bring 0:12:59.320 --> 0:13:02.480 in politicians that didn't know how important Calais Dover was 0:13:02.679 --> 0:13:05.120 at one point. But that's a very different story. Victoria. 0:13:05.120 --> 0:13:06.800 Great to see you into the TUDE of Economic Affairs 0:13:06.800 --> 0:13:10.559 Senior Accounts or International Trade and Competition Unit, Victoria. I 0:13:10.600 --> 0:13:12.800 want to reflect on what we've heard so far this morning. 0:13:12.840 --> 0:13:15.280 There are various FEDE officials that are worried about the 0:13:15.280 --> 0:13:18.280 trade story. They're worried about the heightened risk that emanate 0:13:18.360 --> 0:13:22.000 from US trade policy. The difficulty around this is the 0:13:22.080 --> 0:13:25.760 tensions persist, but it's unclear whether the risks materialize. How 0:13:25.760 --> 0:13:28.079 do you frame that at the moment. Well, it's really 0:13:28.120 --> 0:13:32.000 tough because as a supporter of free trade, there are 0:13:32.080 --> 0:13:36.880 lots of dangers and risks lurking in US current trade policy, 0:13:37.040 --> 0:13:41.360 and in particular, as you've alluded to, it's the things 0:13:41.400 --> 0:13:48.240 are pretty arbitrary and unpredictable, and um President Trump is 0:13:48.360 --> 0:13:52.360 using powers that really weren't supposed to be related to 0:13:52.679 --> 0:13:56.840 day to day trade policy, emergency powers for example, as 0:13:56.880 --> 0:13:59.560 as we've been hearing about in connection with the Mexican 0:13:59.600 --> 0:14:04.520 buddher So it's it's deeply unpredictable and that's really where 0:14:04.600 --> 0:14:07.320 the risk is. In conjunction, of course, it's what the 0:14:07.440 --> 0:14:10.960 UK is doing where we can't say from essentially from 0:14:11.040 --> 0:14:14.520 one day to the next, what UK any policy here 0:14:14.760 --> 0:14:17.400 is going to be. And I guess that's another problem 0:14:17.400 --> 0:14:19.560 in and of itself. Victoria For the United States, there 0:14:19.600 --> 0:14:22.600 is an expectation almost at the moment that maybe we 0:14:22.680 --> 0:14:27.680 get some formalized resistance to the president's executive power around trade. 0:14:28.040 --> 0:14:31.960 Do you expect that to happen? That's a tough one 0:14:32.120 --> 0:14:36.400 because frankly, these executive powers are actually really deeply entrenched, 0:14:36.480 --> 0:14:39.320 and although the way they're being used at present by 0:14:39.400 --> 0:14:43.920 President Trump is being strongly criticized, actually these powers have 0:14:44.000 --> 0:14:46.840 been in place for decades and have equally been used 0:14:47.160 --> 0:14:51.120 by former presidents. Again, as a supporter of free trade 0:14:51.160 --> 0:14:52.960 and the rule of law, I would be delighted if 0:14:53.000 --> 0:14:55.400 Congress was to take this in hand more. But I 0:14:55.720 --> 0:14:59.600 can't particularly see that happening imminently. We have too short 0:14:59.720 --> 0:15:02.360 time with you today, and I just have one question, 0:15:02.360 --> 0:15:04.120 And when I knew you were coming in, I've only 0:15:04.120 --> 0:15:09.280 have one question. How do you respond to Brexity types 0:15:09.480 --> 0:15:13.160 who say no deal will not be a big deal? 0:15:13.880 --> 0:15:17.360 Does life go on three months after no deal where 0:15:17.440 --> 0:15:22.200 trade is normal between in goods and services between the 0:15:22.280 --> 0:15:25.680 United Kingdom and everybody else. That's a That's a really 0:15:25.680 --> 0:15:29.720 tough question because part of the reason why Brexit supporters 0:15:29.760 --> 0:15:33.480 are taking the deeply entrenched position that they are and 0:15:33.560 --> 0:15:37.200 trying to say, oh, no deal, no problem, is that, UM, 0:15:37.240 --> 0:15:40.680 they're having to feel very defensive because on the other hand, 0:15:40.880 --> 0:15:43.920 we have the remains support as the Ramona's as as 0:15:43.960 --> 0:15:47.720 we colloquially call them, who are taking the opposite of view, 0:15:47.720 --> 0:15:50.800 which is that no deal would be going to and 0:15:50.840 --> 0:15:54.640 at a catastropy. So people have really retreated to very entrenched, 0:15:54.640 --> 0:15:59.160 diametric positions UM in order to essentially defend themselves. Now, 0:15:59.200 --> 0:16:01.880 I think the reality he clearly lies somewhere in between 0:16:01.920 --> 0:16:06.440 those two positions, and actually no deal would be a problem. 0:16:06.600 --> 0:16:10.280 It would cause um serious problems for businesses in the 0:16:10.320 --> 0:16:13.720 short term. The issue that I have is that the 0:16:14.080 --> 0:16:16.800 current government and the government we've had for the past 0:16:16.840 --> 0:16:22.040 two years, hasn't done enough to use sensible strategies of 0:16:22.120 --> 0:16:25.800 communication and policy that could have mitigated those effects. Okay, 0:16:25.960 --> 0:16:27.400 I have to leave it there, just because of the news, 0:16:27.480 --> 0:16:30.240 Lord Victoria Houston, thank you, thank you so much. Senior 0:16:30.280 --> 0:16:47.280 Council to Trading Competition Unit in i e. A. Jim 0:16:47.360 --> 0:16:50.520 Carroll and Morgan Stanley is a genius that Morgan Stanley 0:16:50.640 --> 0:16:55.120 call has been extraordinary. Mike Wilson pushing against the equity 0:16:55.120 --> 0:16:58.480 ball market, saying there will be some volatility, things will 0:16:58.520 --> 0:17:01.280 be a bit difficult. Ellen's out there with an arch 0:17:01.960 --> 0:17:05.359 slow down in economics call. And then there's Jim Kraren 0:17:05.440 --> 0:17:09.480 and others driving for their fixed income. Call right now, Jim, 0:17:09.520 --> 0:17:14.120 what do you do if you've enjoyed capital gain in bonds? 0:17:14.720 --> 0:17:18.520 If I'm price up, yield down, and I'm a winner, 0:17:19.160 --> 0:17:24.200 what do you do right now? Um? Very interesting question, Tom, 0:17:24.200 --> 0:17:27.560 and thank you for the introduction. Um. The you know, 0:17:27.600 --> 0:17:29.760 the way I look at it is that tenure treasure 0:17:29.840 --> 0:17:33.200 yields are probably likely to hit that two percent level. 0:17:33.200 --> 0:17:35.160 That's not too far away from where we are right now, 0:17:35.280 --> 0:17:37.640 or at two point o nine in the tenure treasury. 0:17:37.680 --> 0:17:39.080 But here's the way that we need to think about 0:17:39.080 --> 0:17:42.000 it that there are four key components that drive tenure yields. 0:17:42.000 --> 0:17:46.280 One is your changing growth expectations, two as your change 0:17:46.280 --> 0:17:50.000 in inflation expectations, Three is your central bank outlook, and 0:17:50.040 --> 0:17:52.439 then the fourth is the risk premia or term premia 0:17:52.520 --> 0:17:54.920 as we call it in the bond market. All four 0:17:54.960 --> 0:17:59.320 of those components are weakening, meaning that growth expectations are falling, 0:17:59.400 --> 0:18:02.760 even inflation next station expectations despite some tariff maybe there 0:18:02.800 --> 0:18:04.800 might be a one off popping inflation, but that's it. 0:18:05.400 --> 0:18:08.240 Um in the central bank outlook has turned more DUBBSH, 0:18:08.640 --> 0:18:11.640 which means that the demand so I'm now I'm talking 0:18:11.640 --> 0:18:14.240 about the risk premieer, but the demand to own high 0:18:14.320 --> 0:18:18.040 quality fixed income treasuries is actually higher, So the risk 0:18:18.359 --> 0:18:21.320 is actually falling. So it's hard to it's hard to 0:18:21.520 --> 0:18:25.040 point where yields actually turn around, but I will say 0:18:25.040 --> 0:18:27.800 that you have to be very highly convicted that we 0:18:27.840 --> 0:18:30.479 are going to get a recession at some point in 0:18:30.640 --> 0:18:33.360 early two thousand and twenty if you want to own 0:18:33.400 --> 0:18:38.720 ten your treasuries below what does credit and high yield signal? 0:18:39.160 --> 0:18:44.080 If I'm a full faith in credit conservative investor, So 0:18:44.240 --> 0:18:46.800 when we look at investment grade right now, and when 0:18:46.800 --> 0:18:49.840 we look at high yield, high yield, default risk is 0:18:50.280 --> 0:18:53.240 really low at this point. So we're not seeing a 0:18:53.440 --> 0:18:57.879 very um concentrated area within the high yield markets or 0:18:57.920 --> 0:19:00.959 even in the credit markets that are having uh, you know, 0:19:01.160 --> 0:19:04.560 big problems at all. So what it is saying is 0:19:04.560 --> 0:19:05.960 that what you want to do is you want to 0:19:05.960 --> 0:19:08.840 move up in quality. You want to earn some carry, 0:19:08.880 --> 0:19:11.520 you want to have some yield, but very very important, 0:19:11.600 --> 0:19:14.240 you also want to have duration. And that's the gains 0:19:14.600 --> 0:19:17.920 from own owning longer term maturity bonds or the potential 0:19:17.920 --> 0:19:20.360 gains that you can get as as rates fall from 0:19:20.400 --> 0:19:23.679 owning longer maturity bonds. So extending some duration, picking up 0:19:23.720 --> 0:19:26.960 some yield, and moving up in quality is going to 0:19:27.000 --> 0:19:29.680 be important. The high yield market and the investment grade 0:19:29.680 --> 0:19:33.760 market are not signaling anything distressful at this point. Spreads 0:19:33.760 --> 0:19:37.119 are tighter on the year performance so far, how yield 0:19:37.160 --> 0:19:39.760 is up almost day percent on a year to date basis, 0:19:40.080 --> 0:19:44.040 So we're not seeing signs of distress in those markets. So, Jim, 0:19:44.119 --> 0:19:46.199 just to follow up on that, I'm given that you 0:19:46.680 --> 0:19:51.280 suggest that a recession is possible in the high yeld market. Um, 0:19:51.480 --> 0:19:53.440 how do you feel about the credit quality that you're 0:19:53.440 --> 0:19:56.680 seeing in the high yield market right now? Well, I mean, 0:19:57.480 --> 0:19:59.800 it really kind of depends because the high yield market 0:20:00.200 --> 0:20:04.159 very very interesting. We've seen more credit improvement within the 0:20:04.240 --> 0:20:06.719 high yield market. Don't forget, it's so much smaller market 0:20:06.880 --> 0:20:09.720 than we actually have seen in the investment grade market. 0:20:09.720 --> 0:20:13.840 In other words, investment grade markets have been have gravitated 0:20:13.960 --> 0:20:16.960 lower in quality towards more of the triple B level, 0:20:17.040 --> 0:20:19.280 So they've been going down in quality a little bit. 0:20:19.520 --> 0:20:22.320 But the high yield market, oddly enough, has had more 0:20:22.520 --> 0:20:27.080 upgrades than actually downgrades. So the high yield market, from 0:20:27.080 --> 0:20:30.399 a technical standpoint, and given that, I believe the fundamentals 0:20:30.400 --> 0:20:34.639 are still okay right now, fundamentally looks still strong. The 0:20:34.760 --> 0:20:36.919 question that a lot of people have is that the 0:20:36.960 --> 0:20:40.359 investment grade market now has a very high concentration of 0:20:40.400 --> 0:20:43.400 triple b's and they don't have much room before they 0:20:43.480 --> 0:20:47.680 could possibly get downgraded into the high yield space. That's 0:20:47.680 --> 0:20:50.280 not our base case, but that's certainly a risk that's 0:20:50.280 --> 0:20:52.840 out there in the market. So, Jim, if I wanted 0:20:53.000 --> 0:20:55.879 more yield here aside from the high yield market, do 0:20:55.920 --> 0:21:00.720 I even think about emerging markets? I think, yes, you do. Um, 0:21:00.840 --> 0:21:03.240 you know, there are certain emerging markets. I would be 0:21:03.320 --> 0:21:06.359 very specific about some. Um, there are some markets that 0:21:06.400 --> 0:21:09.160 we like. I mean, i'd like to say I like Mexico, 0:21:09.240 --> 0:21:12.440 but there's too much political risk there. But fundamentally I'm 0:21:12.480 --> 0:21:15.320 okay with Mexico if I just exclude all of the 0:21:15.320 --> 0:21:17.520 tariff you know, things that are going on right now. 0:21:17.760 --> 0:21:19.800 So let's exclude that one. Well, you know, let's talk 0:21:19.840 --> 0:21:22.800 about another one. Let's talk about Brazil. Brazil is a 0:21:22.920 --> 0:21:26.160 very interesting market. Bond yields have been going down in Brazil, 0:21:26.800 --> 0:21:30.040 and the central Bank I think there has full full 0:21:30.080 --> 0:21:32.600 ability to cut interest rates at you know, at a 0:21:32.640 --> 0:21:35.640 reasonably aggressive pace if they need to stimulate their economy. 0:21:35.680 --> 0:21:38.720 And I believe that much of the dislocations with the 0:21:38.840 --> 0:21:42.280 U S, China and trade have have have effectively played through. 0:21:42.440 --> 0:21:45.000 And it's very strong demand from the pension fund community 0:21:45.160 --> 0:21:48.440 in Brazil for their local bonds. So there are emerging 0:21:48.440 --> 0:21:52.960 markets that look good. Eastern Europe, Poland Hungry, Czechoslovakia single 0:21:52.960 --> 0:21:56.720 A rated bonds. These are all like high beta Euros 0:21:56.760 --> 0:21:58.520 if you want to your euro bonds, if you want 0:21:58.520 --> 0:22:00.160 to think of it in that sense, meaning that they're 0:22:00.200 --> 0:22:03.320 exposed to Europe but don't have as much exposure to 0:22:04.160 --> 0:22:07.160 so different parts of emerging markets. Being very selective can 0:22:07.200 --> 0:22:10.359 actually you can actually have some very attractive opportunities too. 0:22:10.440 --> 0:22:12.760 Short of conversation, Jim Karen, don't be a strange We 0:22:12.840 --> 0:22:14.399 need to get you in the crack of dawn and 0:22:14.560 --> 0:22:31.840