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Speaker 1: Yea. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane.

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Speaker 1: Always with Michael McKee daily we bring you insight from

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Speaker 1: the best in economics, finance, investment and international relations. Find

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Speaker 1: Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com and of

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Speaker 1: course on the Bloomberg Well. There's nobody better Tom to

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Speaker 1: speak to about the implications of this Brexit vote for

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Speaker 1: markets worldwide, for governments and central banks worldwide than Adam

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Speaker 1: Posen of the Peterson Institute, a man who has served

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Speaker 1: as a monetary policymaker here in the accepted Aisle. He

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Speaker 1: is now back in Washington. Adam, good morning to you.

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Speaker 1: Um it is it is for those who are here

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Speaker 1: on trading desks and absolutely stunning morning. Can you put

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Speaker 1: into expective for us though, what it actually means longer term? Sure,

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Speaker 1: my cael, I'll try. Thank you for having me. The

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Speaker 1: longer term has to be thought of in a few ways. First,

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Speaker 1: for the UK, this is unmitigated bad because at a

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Speaker 1: minimum you have ongoing uncertainty about the coherence of the

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Speaker 1: UK with respect to Scotland and Northern Ireland. Um, as

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Speaker 1: well as who's going to be in charge politically? Are

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Speaker 1: they competent as well as will people can be wanting

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Speaker 1: to invest as well as we don't know what the

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Speaker 1: relationship with the EU in terms of trade and migration

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Speaker 1: will be going forward, So just hold on. Terrible for

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Speaker 1: the UK um for the longer term. If you start

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Speaker 1: then thinking through what this means for Europe, it gets nasty,

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Speaker 1: but not as inevitably bad. Uh So clearly following the

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Speaker 1: euro more than offset by declining confidence rise in political risk.

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Speaker 1: How does the European How do the Europeans channel this?

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Speaker 1: Does this mean that you have Marie le pen in

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Speaker 1: France and the Front National and other right wing parties

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Speaker 1: getting more credibility that both they can succeed and that

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Speaker 1: they should succeed in being anti European and certainly anti

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Speaker 1: euro possibly um. But does this also possibly lead to

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Speaker 1: a European push for more sensible integration UM and more

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Speaker 1: reasonable accommodation of some of the non German core countries.

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Speaker 1: Might It might? And that would be better in the end. UM.

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Speaker 1: There's clearly going to be a problem that without a

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Speaker 1: central fiscal authority and with the CB already below the

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Speaker 1: zero lower bound, that you will probably have at least

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Speaker 1: a slight recession coming out of this. Again, the client

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Speaker 1: in the euro will help Germany, but it's not going

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Speaker 1: to make that much difference than anyone else but Spain maybe. Um.

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Speaker 1: And then you have to think about long term what

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Speaker 1: this means for the ability of the so called elites

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Speaker 1: to keep open internal borders in Europe, because free movement

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Speaker 1: of labor, particularly from Eastern Europe to and Southern Europe

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Speaker 1: to the rest of Europe, has been both a source

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Speaker 1: of growth but a huge source of political collesion. And

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Speaker 1: if it turns into now a source of political division, um,

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Speaker 1: the upshot could be very bad. What would what what

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Speaker 1: odds would you put on that you worked over here?

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Speaker 1: You've got a feel for where europe European leaders are

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Speaker 1: coming from. Is it likely that they can do what

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Speaker 1: they have so far been unable to do? Um? I

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Speaker 1: think they can do something, And I think Chancellor Merkel

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Speaker 1: will has or will made clear that this is a

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Speaker 1: threat to the whole project and must be addressed accordingly.

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Speaker 1: And if she says that, it will help. I think

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Speaker 1: as a wake up call to more liberal In the

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Speaker 1: Economist magazine European sense, more more free market people throughout Europe.

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Speaker 1: This will be a wake up call that they have

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Speaker 1: to actually take this seriously. The other thing is there

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Speaker 1: are things that the Europeans can do in terms of

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Speaker 1: banking union, fiscal stimulus, being honest about rewriting the the

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Speaker 1: fiscal rules, treatment visibly of the disaffected in certain other countries,

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Speaker 1: and taking a common approach to migration from outside Europe

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Speaker 1: that they can do without constitutional change or huge expenditures.

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Speaker 1: And I think if they do that they have a

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Speaker 1: chance of rallying people. It just depends how much they're

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Speaker 1: able to turn fear into constructive activity. Overnight I was

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Speaker 1: getting a lot of messages from traders pointing out the

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Speaker 1: drops in the pound and other currencies and suggest central

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Speaker 1: banks we're going to have to step in. So far,

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Speaker 1: the only confirmation we have is that the Swiss did.

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Speaker 1: What's the calculation in when a currency is moving and

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Speaker 1: markets are falling as they are today for for a

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Speaker 1: central bank or to decide whether or not to get

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Speaker 1: into the markets, It's a fair question. There are several

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Speaker 1: things involved. One consideration for the UK is frankly they

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Speaker 1: need to gamble on the exchange rate fall, helping to

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Speaker 1: question the adjustment of big setbacks in their training, relationship

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Speaker 1: and confidence and investment. So the Bank of England is

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Speaker 1: going to be unlikely intervened to stop the currency falling,

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Speaker 1: at least in the short term. If it continues to

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Speaker 1: stay down it creates a lot of inflation. They'll have

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Speaker 1: to looking at the Europeans, they have a more minor

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Speaker 1: version of the same thing. Um. It is a little

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Speaker 1: surprising the ECB is not yet reacted in least in

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Speaker 1: terms of issuing some kind of reassuring statement. I mean,

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Speaker 1: they've obviously done a little of that, but you know,

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Speaker 1: when you're talking about exchange rates of the major economies,

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Speaker 1: it's got to be seen in a context of international cooperation. Um.

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Speaker 1: And so it's very interesting to see the Japanese are waiting, um,

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Speaker 1: trying to figure out whether, because they're being horribly harmed

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Speaker 1: by this, whether or not they have any support either

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Speaker 1: to behave like the Swiss in terms of benign neglect

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Speaker 1: from others, or for coordinated intervention. I think, given that

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Speaker 1: the central banks of the world are already near the

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Speaker 1: zero lower bound, already have done a lot of QUEI uh,

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Speaker 1: they're gonna likely hold their power powder excuse me a

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Speaker 1: little while longer um, and then that will of course

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Speaker 1: feed markets who keep expecting the central banks to bail

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Speaker 1: them out, so things may get worse before they get better.

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Speaker 1: Final point, Michael, that exchange rate policy is remember, really

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Speaker 1: under finance ministries or the U. S. Treasury and not

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Speaker 1: under the central banks themselves. So that's another complication to

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Speaker 1: why they can't just react. What about you know, acting

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Speaker 1: as individuals. Can the Bank of Japan live with a

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Speaker 1: D and two at this point? I mean they certainly can. Um.

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Speaker 1: More importantly, it's not what the b a J can.

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Speaker 1: I know you didn't mean this way, it's what Japanese

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Speaker 1: business and the economy can. You know? This is the

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Speaker 1: under in two is still a huge depreciation from where

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Speaker 1: it was inappropriate and from and which was consistent with

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Speaker 1: very high profits in the Japanese export sector a while ago. Um.

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Speaker 1: But I think there has to be some sense communicated

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Speaker 1: by the bo J and more importantly by the Japanese

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Speaker 1: government that they will not let an exchange rain movement

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Speaker 1: of flight to quality and fear back to Japan completely

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Speaker 1: disrupt their recovery. And I think that's fair. Um. So

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Speaker 1: is whin I'm going to be drawn at a hundred

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Speaker 1: because it's a nice round number. Maybe, But as I said,

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Speaker 1: I think I think it's the Japanese government for its

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Speaker 1: own sake, but also responsibly is G seven chair is

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Speaker 1: trying to reach out to other governments and figure out

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Speaker 1: can they get coordination or at least approval on acting. Well,

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Speaker 1: if you were advising Janet Yellen, what would you have

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Speaker 1: her say? They have to worry about the dollar getting

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Speaker 1: too strong as well? At the Dollar Index is up

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Speaker 1: two and a half percent today, Um, what what? What's

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Speaker 1: the FEDS point of view here? I think the FEDS

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Speaker 1: point of view is going to initially be reassuring people,

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Speaker 1: just as Mark Arney from the Bank of England did

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Speaker 1: that the banking system can take it that there isn't

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Speaker 1: imminent systemic risk in the two eight cents here. Um.

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Speaker 1: But then you're right, they have to think about what

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Speaker 1: does the combination of a stronger dollar and are likely

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Speaker 1: a very sharp slowdown in the UK, which is small,

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Speaker 1: and Europe which is big, um, going to do to

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Speaker 1: the U S outlook. I think, however, that you know,

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Speaker 1: a two percent move is probably at the low end

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Speaker 1: of what I would have expected to happen to the

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Speaker 1: US index. Dollar index, and if that's all we get,

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Speaker 1: then the Fed can just say they're postponing rate decisions.

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Speaker 1: They don't need to really do very much. Yet, what's

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Speaker 1: the overall threat to the U S economy? Do you

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Speaker 1: think we we are long in the expansion and we

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Speaker 1: are seeing drop in profits. The economy is sending mixed signals?

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Speaker 1: Is there a preemptive move for the for the Fed

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Speaker 1: here isn't based on the currency, but based on the

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Speaker 1: economic outlook. I think they've sort of boxed themselves in

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Speaker 1: if they now this was the problem with all the

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Speaker 1: promised rhetoric about tightening cycle and all, which is understandable

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Speaker 1: and which was arguable. But now if they turn around

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Speaker 1: and say, well, we we we're going to cut um

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Speaker 1: then the question comes there would be a probably a

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Speaker 1: terrified reaction by markets and more importantly household saying, oh

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Speaker 1: my god, that what do they know when they're out

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Speaker 1: of AMMO? You know, and you don't want economic decisions

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Speaker 1: to be made on that kind of tactical basis. But

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Speaker 1: in this particular situation, that has to be a consideration

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Speaker 1: that if they really reverse now um it, it could

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Speaker 1: initially at least do more harm than good. I think

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Speaker 1: ultimately the slow down that we're looking at from abroad

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Speaker 1: and the strength of the dollar will not be enough

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Speaker 1: to tip the US into recession. And frankly, if if

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Speaker 1: our dysfunctional Congress just did something on fiscal policy, we

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Speaker 1: wouldn't even have to worry about that. You also have

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Speaker 1: expertise in Asian and we're seeing most Asian currencies outside

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Speaker 1: of the yen UH much lower today. Are they going

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Speaker 1: to be in trouble because of this? I guess part

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Speaker 1: of it? The question is you know, how long does

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Speaker 1: this last? But um, is there a problem in Asia

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Speaker 1: that is worse than for the developed nations? I think not, actually, Michael,

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Speaker 1: I think the I think we can think of this

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Speaker 1: as essentially a decreasing relationship with economic distance. The UK

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Speaker 1: is really not that important for most of emerging Asia. However,

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Speaker 1: even for China, the Euro area is important, but it's

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Speaker 1: not like it's been a huge growth market for UH

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Speaker 1: Asian exports for several years now. UM, So the actual

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Speaker 1: damage to Asia I think is going to be quite limited.

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Speaker 1: Um it really is going to be about Southern Europe,

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Speaker 1: Eastern Europe, and then countries more closely tied to Europe.

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Speaker 1: I think the Chinese there is going to be a

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Speaker 1: bit of a dance between the Chinese, Koreans and Japanese

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Speaker 1: on exchange rates, and they might even I don't think

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Speaker 1: ever explicitly, but they might not mind a coordinated decline

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Speaker 1: in all three um. But you know they always like that,

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Speaker 1: so I wouldn't. I think we don't need to focus

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Speaker 1: on Asia at this moment. I think there are places

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Speaker 1: in Latin America where the ties of via Spain and

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Speaker 1: Portugal to Europe are disproportionately large in Latin America for

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Speaker 1: obvious reasons. In Brazilian Venezuela is already quite fragile, so

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Speaker 1: I actually would be a little more worried they are

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Speaker 1: than emerging Asia. Adam posing, thank you very much for

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Speaker 1: joining us this morning on what is an extraordinary day.

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Speaker 1: Jeffrey Rosenberg is Black Rocks chief fixed income strategist. Uh.

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Speaker 1: You can't call anything that we're we're doing right now normal,

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Speaker 1: I guess, Jeff. But uh, at least it seems we

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Speaker 1: have gotten back to within tradeable ranges, UM for for

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Speaker 1: people who are in the fixed income markets. Well, yes,

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Speaker 1: we are back in in tradeable ranges, but the but

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Speaker 1: the gap is significant and you know, we were up

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Speaker 1: all night. People are waking up this morning and they're

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Speaker 1: driving in and it's kind of like my wife this

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Speaker 1: morning said, I, you've been up all night and and

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Speaker 1: she asked a very simple question. The answer was yes.

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Speaker 1: But why is this bad? Why are financial markets having

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Speaker 1: this reaction? And and and it's worth taking a step

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Speaker 1: back to just think about that and talk about that,

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Speaker 1: which you know, when you're in the weeds, it's it's

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Speaker 1: very clear, but when you're not, it may come as

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Speaker 1: a surprise. Why is this vote out of Europe so important?

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Speaker 1: And it's so important because economic growth is fragile and

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Speaker 1: a shock to economic growth is what this is all about.

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Speaker 1: Why is it a shock because it's a confidence shock.

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Speaker 1: And the implications for US, for US markets, clearly, the

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Speaker 1: implications are in Europe. Clearly the biggest financial market movements

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Speaker 1: are in Europe. But but why do you see the

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Speaker 1: flight to quality, why do you see the impact in

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Speaker 1: US stock markets? Is because of the threat that these

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Speaker 1: external shocks have had. We've seen them over the course

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Speaker 1: of the seven or eight years since the global financial crisis,

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Speaker 1: and they've had negative repercussions to confidence. And that matters

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Speaker 1: when you're not growing very much, because a small change

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Speaker 1: can can be a big turning point for uh the

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Speaker 1: outlook not just for the UK or for Europe, for

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Speaker 1: the global economy. Well, is there any concern about being

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Speaker 1: able to trade with inventory with liquidity at this point?

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Speaker 1: So liquidity is um always a concern. You know, you've

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Speaker 1: had a big shock in terms of now Tom didn't

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Speaker 1: want to give you the standard deviation move. It's a

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Speaker 1: force standard deviation move. It's a it's a big move.

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Speaker 1: But the point of these big moves is that when

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Speaker 1: you when you have big moves like this, what is

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Speaker 1: it reflective of. It's reflective of an entire portion of

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Speaker 1: the market all trying to move in one direction. And

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Speaker 1: what's really been tricky about this market is go back

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Speaker 1: over the last couple of days. What was happening leading

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Speaker 1: up into the market. What was happening was markets were

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Speaker 1: building in expectations for the opposite. They were building in

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Speaker 1: expectations for the remain outcome to occur, which meant that

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Speaker 1: positioning was all offsides. So that when you have this

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Speaker 1: surprise event, what ends up happening is you get this

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Speaker 1: imbalance in orders. Well, when you have imbalance in orders.

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Speaker 1: Liquidity is about the willingness of buyers and sellers to

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Speaker 1: come together. But when you have everybody on one side,

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Speaker 1: what ends up happening is that there is no liquidity

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Speaker 1: until the price adjusts. That's why you're seeing these big gaps.

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Speaker 1: The price adjusts, and that change in price doesn't happen

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Speaker 1: smoothly because you have buyers and sellers all the way

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Speaker 1: through that adjustment. You need to have the gap in

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Speaker 1: the in the prices, which you're seeing across bonds, stocks, currencies, commodities.

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Speaker 1: And then with that new level, now you get the

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Speaker 1: balancing out, and then your liquidity, the ability to have

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Speaker 1: buyers and sellers come back into the market starts to

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Speaker 1: reassert itself. As you are highlighting, now you're starting to

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Speaker 1: see that that happen, Jeff. A lot of people look

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Speaker 1: at the Oh, we look at the TV, and we

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Speaker 1: look at the rate. We listen to the radio and

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Speaker 1: we listen to people talk. Guys like you look at

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Speaker 1: the quote unquote spread market. Okay, things are moving, but

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Speaker 1: what are those differences, those comparing contrasts of yield? What

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Speaker 1: do they show you this morning? So we did this

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Speaker 1: exercise and and and so the exercise that we did

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Speaker 1: was what do we think is going to happen on

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Speaker 1: a on a brexit? What do we think is going

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Speaker 1: to happen on a remain and and and it's it's

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Speaker 1: pretty interesting to see that a lot of the expectations

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Speaker 1: for the macro indicators, what we thought would happen to UH,

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Speaker 1: the sterling, for example, what we thought would happen to

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Speaker 1: the euro, what we thought would happen to the ten

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Speaker 1: year those things came in around expectations. There's a flight

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Speaker 1: to quality into US treasury rates, there's a fear in

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Speaker 1: terms of UH. The impact on Europe reflected in a

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Speaker 1: negative movement in the europe value of the European currency.

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Speaker 1: Clearly the biggest impact is this nine or ten percent

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Speaker 1: move that we're seeing in the in the in the Sterling.

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Speaker 1: But where we've seen in some of the spread markets

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Speaker 1: a little bit less reaction, which is a little bit surprising,

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Speaker 1: is in Europe and the periphery of Europe, which means

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Speaker 1: Spain and Italy. You're seeing a negative reaction there. You're

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Speaker 1: seeing spreads widen out, reflective of risk aversion and uncertainty. Clearly,

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Speaker 1: here we're talking about political uncertainty and what this means

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Speaker 1: for for Europe, but it's been less than what we

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Speaker 1: might have anticipated. A lot of that has to do

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Speaker 1: with the uncertainty of the political response and the uncertainty

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Speaker 1: of the monetary policy response. You have a very powerful

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Speaker 1: monetary policy response going on in Europe, and that's limiting.

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Speaker 1: Here's some of the spread moves. Jeffrey a pro question,

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Speaker 1: and I say, that's with respect for your compliance issues

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Speaker 1: and your general council issues. With the bond market moving

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Speaker 1: like this, do you have a measurement or does your

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Speaker 1: firm have a measurement of banking fragility right now? Are

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Speaker 1: the banks the same as they were forty eight hours

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Speaker 1: ago or is there a new new for that interesting

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Speaker 1: calculus between what we observe in finance and the income

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Speaker 1: statement and liquidity statements of banks. So so first, clearly,

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Speaker 1: here when we go through these kinds of financial shocks,

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Speaker 1: the focuses on the financial system. The financial system is

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Speaker 1: the transmission of financial shocks into the real economy. So

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Speaker 1: just to frame the importance of the question, so we

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Speaker 1: look at what are the financial indicators saying about the

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Speaker 1: fragility of the financial companies in that system? And then

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Speaker 1: to be a little bit more specific matters, Well, where

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Speaker 1: are we looking. Are we looking at UK banks and

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Speaker 1: we're looking at European banks. Okay, So with that all

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Speaker 1: being said, and you you you said it in the

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Speaker 1: earlier Uh, this is this is not two thousand seven,

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Speaker 1: This is not two thousand and eight. Clearly we are

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Speaker 1: seeing some risk aversion and negative price indications. Spreads are widening,

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Speaker 1: the valuations are falling, particularly for subordinated European paper, but

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Speaker 1: it's not outside of what we had anticipated. And from

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Speaker 1: the initial reaction, Uh, things have things have stabilized. And

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Speaker 1: what's important here is that unlike what what people may

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Speaker 1: be really worried about and concerned, Oh this is is

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Speaker 1: this a big shock? Is this going to transmit into

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Speaker 1: big systemic risk? But it was my earlier point. The

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Speaker 1: degree of intervention, the degree of support for bank liquidity,

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Speaker 1: the ability of banks to operate to finance their their

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Speaker 1: balance sheets is orders of magnitude greater than what we

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Speaker 1: had in place prior to the last crisis, and that's

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Speaker 1: dampening the impact. Jeffrey, I believe there's an election in Spain,

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Speaker 1: in election in Italy. I guess the UK economy is troubled,

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Speaker 1: but there worse is that the right statement. Uh. Certainly,

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Speaker 1: the UK economy has been the bright spot uh for

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Speaker 1: the post financial crisis environment, particularly relative to the to

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Speaker 1: those other economies. This obviously is a challenge to that.

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Speaker 1: And you had many studies and forecasts out talking about

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Speaker 1: the risks of the UK economy and that's very much

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Speaker 1: what the UK stock market, particularly domestic versus versus more

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Speaker 1: internationally oriented stocks, those differentials with domestics down almost double

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Speaker 1: what the more internationally oriented UK stocks are telling you

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Speaker 1: is this is quite negative for the domestic UK economy.

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Speaker 1: We do have some headlines out that the G seven

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Speaker 1: finance ministers have finished a conference call and uh they

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Speaker 1: say they will consult closely on market movements and stability

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Speaker 1: and cooperate as appropriate. So it doesn't look like any

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Speaker 1: immediate um involvement. Yeah, you could have predicted that one. So, Jeff,

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Speaker 1: how long does this market disruption last? Is there any

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Speaker 1: way to tell at this point? Is this sort of

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Speaker 1: just the knee jerk reaction to the surprising news and

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Speaker 1: then by Monday it settles down or could we still

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Speaker 1: be going through this on Monday? So Mike, Mike, that's

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Speaker 1: a that's a great question. But we want to separated

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Speaker 1: between the initial market reaction, which is really about this

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Speaker 1: positioning shock markets were off sides, little quidity mismatch that

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Speaker 1: we talked about. That's going to be the initial reaction.

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Speaker 1: That's not gonna We're not gonna be trading with this

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Speaker 1: kind of volatility for every single day. So that's going

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Speaker 1: to settle down. But where it settles down and how

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Speaker 1: it settles down is really about the longer run implications

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Speaker 1: and what are those longer run implications. The key question

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Speaker 1: here is how much does this political uncertainty translate into

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Speaker 1: policy uncertainty, trade uncertainty, and how much does that affect

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Speaker 1: the real economy, Because the real economy, if you're a businessman,

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Speaker 1: think business, our business person thinking about investments, whether they're

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Speaker 1: domestic or international, making new hires, uncertainty is bad. If

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Speaker 1: you're a consumer, thing about making a major purchase, you

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Speaker 1: see this uncertainty. How do most American consumers see the

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Speaker 1: implications of the UK vote? They're going to see it

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Speaker 1: in the domestic stock market. So that's where the longer

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Speaker 1: run implications are. What does the incertainty do to growth?

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Speaker 1: And that becomes a self fulfilling idea because if we're

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Speaker 1: worried about the growth, and those worries way on stock markets.

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Speaker 1: The weighing on stock markets ways on confidence, and you

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Speaker 1: can get yourself back into an environment where it can

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Speaker 1: be a negative feedback. We're out of time. Jeffrey Roosenberg. Somehow,

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Speaker 1: I think we'll do this again. He is with black luck.

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Speaker 1: Figuring out where we go from here is not going

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Speaker 1: to be necessarily that easy for economists, including Brendan Brown.

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Speaker 1: He is head of economic research for Mitsubishi UFJ. Thanks

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Speaker 1: for coming into the studio today, and it's extraordinarily busy day. Uh.

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Speaker 1: We watch the US economic indicators to try to figure

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Speaker 1: out what the FED is going to do, but at

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Speaker 1: the moment um what central banks are going to do

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Speaker 1: seems to be in a in a bit of an

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Speaker 1: air pocket until they figure out where markets go and

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Speaker 1: the impact of all this. Yeah, and and of course

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Speaker 1: the cynical viewers, which are fed to a considerable extent,

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Speaker 1: is following the SNP five hundred anyhow, so a big

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Speaker 1: consideration is what's going to be happening to that. In

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Speaker 1: response to European news, and given the strengthening of a dollar,

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Speaker 1: we're getting aginst you against European currencies and the huge

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Speaker 1: political uncertainties in Europe, it's likely we we do see

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Speaker 1: continued pressure downwards on SNP five hundreds. Would sort of

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Speaker 1: argue in favor of the yelling fed doing nothing. I

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Speaker 1: want to congratulate you, not as a eurosceptic. The subtle

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Speaker 1: thing here is Brendan Brown is not a euroskeptic. Brendan

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Speaker 1: Brown has just said the too good to be true

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Speaker 1: scenario leaves one question. We see okay corporate performance in Europe.

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Speaker 1: Can these political shocks lead to a better system that

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Speaker 1: begins to act like the good corporate performance in Europe? Ultimately, yes,

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Speaker 1: there's a road that's opened up now with the British

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Speaker 1: decision to leave. It could lead to a better Europe,

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Speaker 1: more prosperous Europe, more politically democratic Europe, and Europe which

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Speaker 1: has a greater weight geopolitically. There's dangers along the way,

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Speaker 1: um and those dangers could cause the corporate sector to

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Speaker 1: be even more hesitant about investing in the meantime. Well,

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Speaker 1: the question is how long will it take to get

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Speaker 1: to that ideal state, because you have to question whether

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Speaker 1: people will still believe in it if there is any

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Speaker 1: kind of severe recession or negative knock on effects that

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Speaker 1: last from this decision today, Well, I think it was

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Speaker 1: two crucial political developments besides the change of government in

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Speaker 1: the UK. And the critical question is going to be

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Speaker 1: what sort of government is formed? Is it going to

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Speaker 1: be a Thatcher right free market type of government which

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Speaker 1: could actually see the UK and exit this period of

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Speaker 1: uncertainty and move on fairly quickly. Um on the you

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Speaker 1: in in Germany, the key issue is the future of

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Speaker 1: a Mercile government. Does does it fall in response to

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Speaker 1: growing anti europe European sentiment in Germany? And um, what

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Speaker 1: what sort of shift does that produce? The pity and

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Speaker 1: all of this is the US is out of action.

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Speaker 1: You know, in an ideal world, the US would be

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Speaker 1: putting pressure on Germany and UK to come to a deal,

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Speaker 1: and German manufacturing industry is certainly going to be publing

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Speaker 1: pressure on Mercle to come to a deal. Um. The

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Speaker 1: obstacle is going to be France. But the Obama administration,

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Speaker 1: as we know, favors France, favors of the EU, is

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Speaker 1: in no position to do a deal with anyone. So

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Speaker 1: is a sort of interregnant period there of six or

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Speaker 1: seven months uncertainty. Karl Weinberg wrote a brilliant note to

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Speaker 1: the dovetailing in currency move, the dynamics that brings on

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Speaker 1: with diminished g d P and the dynamics that that

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Speaker 1: brings on into some form of inflation increase, and the

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Speaker 1: dynamics that there's a pattern here, folks. Issue you can

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Speaker 1: see the doubt we hear in interviews is the linkage

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Speaker 1: there assumes higher inflation. Do you assume that for United

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Speaker 1: Kingdom that has jump condition and currency and a diminished

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Speaker 1: g d P. I don't see that at all. I

433
00:27:28,960 --> 00:27:32,840
Speaker 1: think again critical will be the nature of the next government.

434
00:27:32,880 --> 00:27:35,119
Speaker 1: But you could imagine a government coming into par in

435
00:27:35,320 --> 00:27:40,840
Speaker 1: UK UM which is much more free market um conservative

436
00:27:40,920 --> 00:27:43,320
Speaker 1: and as the outgoing government. And I think a critical

437
00:27:43,440 --> 00:27:45,960
Speaker 1: question here is is going to be the future of

438
00:27:46,080 --> 00:27:48,520
Speaker 1: Bank of England Chief Kanny. I mean, after all, he's

439
00:27:48,640 --> 00:27:53,119
Speaker 1: was so much associated with the pro EU camp and

440
00:27:53,600 --> 00:27:56,280
Speaker 1: didn't act independently that it's very difficult to see how

441
00:27:56,320 --> 00:27:58,359
Speaker 1: he could continue under a new government. So a question

442
00:27:58,520 --> 00:28:01,159
Speaker 1: is what sort of placement do we get here? And

443
00:28:01,240 --> 00:28:03,600
Speaker 1: it could be but in fact the UK leads away

444
00:28:03,680 --> 00:28:09,239
Speaker 1: towards a more conservative type monetary policy. How worried are

445
00:28:09,280 --> 00:28:12,040
Speaker 1: the British and especially the Bank of England going to

446
00:28:12,119 --> 00:28:15,920
Speaker 1: be about the pound it is at the moment trading

447
00:28:15,960 --> 00:28:20,879
Speaker 1: for it's down almost eight percent. It was earlier suggested

448
00:28:20,960 --> 00:28:25,240
Speaker 1: that that's not altogether a bad thing because it will

449
00:28:25,359 --> 00:28:29,879
Speaker 1: increase British competitiveness well, and it's certainly true. And in

450
00:28:29,960 --> 00:28:32,560
Speaker 1: a short term, whilst we have all the uncertainty as

451
00:28:32,600 --> 00:28:33,960
Speaker 1: to what sort of deal is going to be done

452
00:28:33,960 --> 00:28:38,400
Speaker 1: between the UK and UM, the remaining euth as long

453
00:28:38,440 --> 00:28:43,160
Speaker 1: as the remaining EUTH stands together UM, a weaker pound

454
00:28:43,480 --> 00:28:47,200
Speaker 1: will produce some welcome increase in profitability for multinationals operating

455
00:28:47,240 --> 00:28:51,080
Speaker 1: in the UK and tied tied the export side of

456
00:28:51,080 --> 00:28:53,520
Speaker 1: the economy through this period. So so it could be

457
00:28:53,640 --> 00:28:57,520
Speaker 1: welcome in that respect. But as I say, I think

458
00:28:57,640 --> 00:28:59,960
Speaker 1: medium term, I wouldn't be at all surprise to see

459
00:29:00,160 --> 00:29:03,800
Speaker 1: the pound in fact improving if we go a change,

460
00:29:03,840 --> 00:29:06,440
Speaker 1: and it's for EUROP where the pressure will be building up.

461
00:29:06,440 --> 00:29:08,960
Speaker 1: Brendan Brown with us with his pH d from Chicago

462
00:29:09,080 --> 00:29:11,880
Speaker 1: has done better, excuse me from London, and as MBA

463
00:29:11,960 --> 00:29:15,040
Speaker 1: from Chicago has done better than good at linking math

464
00:29:15,280 --> 00:29:18,160
Speaker 1: into what we're doing here. And your math is, don't

465
00:29:18,200 --> 00:29:22,080
Speaker 1: look back at David Cameron, look forward to Italy and

466
00:29:22,440 --> 00:29:26,760
Speaker 1: Spain and the measurements we look at in a peripheral Europe.

467
00:29:26,800 --> 00:29:31,520
Speaker 1: Why are we again looking at peripheral Europe Because ultimately

468
00:29:31,680 --> 00:29:34,680
Speaker 1: the backstop for the Italian and Spanish government bond markets

469
00:29:34,840 --> 00:29:37,200
Speaker 1: are the v idea that Germany is always going to

470
00:29:37,320 --> 00:29:39,600
Speaker 1: be there to bail them out and stand behind whatever

471
00:29:39,680 --> 00:29:44,480
Speaker 1: the ECB does in terms of lending to those countries. Now,

472
00:29:44,680 --> 00:29:49,000
Speaker 1: given the changed political climate and we increased support likely

473
00:29:49,080 --> 00:29:52,280
Speaker 1: for the anti euro parties in Germany, one can imagine

474
00:29:52,360 --> 00:29:55,520
Speaker 1: that Merkele and most likely for successor to Merkel, is

475
00:29:55,560 --> 00:29:58,840
Speaker 1: not going to be so happy about dragg E continuing

476
00:29:58,960 --> 00:30:01,920
Speaker 1: if need be, to bail out those countries through the

477
00:30:02,000 --> 00:30:04,520
Speaker 1: back door of ECP or by any other means. So

478
00:30:04,720 --> 00:30:06,280
Speaker 1: to some extent, we have to look at these bond

479
00:30:06,320 --> 00:30:11,160
Speaker 1: markets as in any ultimate um squeeze, as being more

480
00:30:11,240 --> 00:30:12,800
Speaker 1: likely to be on our own and I think that's

481
00:30:12,840 --> 00:30:16,040
Speaker 1: what markets are reflecting. Beginning to reflect it could get

482
00:30:16,080 --> 00:30:20,840
Speaker 1: a lot worse. Do we have an economic problem on

483
00:30:20,920 --> 00:30:24,520
Speaker 1: the continent? There A lot of people say that things

484
00:30:24,560 --> 00:30:27,800
Speaker 1: are not as bad as they may be. Portrayed they

485
00:30:27,880 --> 00:30:30,920
Speaker 1: are at best muddling along here or at worst muddling

486
00:30:30,960 --> 00:30:33,800
Speaker 1: along here, and that maybe we're starting to see some

487
00:30:33,920 --> 00:30:37,760
Speaker 1: of the e CBS extraordinary policy actions take root and

488
00:30:38,600 --> 00:30:41,520
Speaker 1: um so, I guess the first question is do we

489
00:30:41,640 --> 00:30:46,080
Speaker 1: have a pre existing condition of concern for the European

490
00:30:46,120 --> 00:30:48,680
Speaker 1: economy and how does this affect I think in terms

491
00:30:48,720 --> 00:30:51,680
Speaker 1: of coming back to the Italian and Spanish government bond markets, Yes,

492
00:30:51,720 --> 00:30:54,480
Speaker 1: there is a precondition. I think most investors have in

493
00:30:54,520 --> 00:30:57,840
Speaker 1: their mind the idea of that it's really is very

494
00:30:58,120 --> 00:31:01,200
Speaker 1: fragile from a financial standpoint as toward its banking system,

495
00:31:01,600 --> 00:31:04,080
Speaker 1: with its banks holding a large amount of the Italian

496
00:31:04,120 --> 00:31:07,800
Speaker 1: government debt and the there there and a lot of

497
00:31:07,840 --> 00:31:13,280
Speaker 1: bad loans. And this is also hanging together essentially because

498
00:31:13,360 --> 00:31:17,640
Speaker 1: of the ECB being there behind it lending to Italian banks. Now,

499
00:31:17,960 --> 00:31:20,400
Speaker 1: if you see more criticism coming from within the CDU

500
00:31:20,520 --> 00:31:23,120
Speaker 1: party in the German political spectrum about this German backs

501
00:31:23,240 --> 00:31:26,160
Speaker 1: backstop and the penalization of German savers getting negative rates

502
00:31:26,440 --> 00:31:28,640
Speaker 1: to pay for all this, then I think there is

503
00:31:28,680 --> 00:31:32,720
Speaker 1: a real concern here. Link in the concept all of

504
00:31:32,800 --> 00:31:36,640
Speaker 1: our listeners hate, which is kicked the can down the road.

505
00:31:36,680 --> 00:31:39,680
Speaker 1: I don't believe that was taught at Chicago when you

506
00:31:39,760 --> 00:31:42,800
Speaker 1: were there. But link In kicked the can down the

507
00:31:42,960 --> 00:31:47,760
Speaker 1: road to the idea that can stopped the political environment. Well,

508
00:31:47,800 --> 00:31:49,560
Speaker 1: you can't kick the can down the road if there's

509
00:31:49,600 --> 00:31:51,960
Speaker 1: the idea that ultimately Merkel was always going to say

510
00:31:52,080 --> 00:31:54,600
Speaker 1: yes to dragging or whoever it is of E. C. B.

511
00:31:55,320 --> 00:31:58,320
Speaker 1: But that regime may be coming to an end and

512
00:31:58,440 --> 00:32:01,040
Speaker 1: the German public's patients with me can maybe running out,

513
00:32:01,800 --> 00:32:04,280
Speaker 1: and at that stage they can can no longer be

514
00:32:04,400 --> 00:32:08,160
Speaker 1: kicked down around. I believe you are British from the

515
00:32:08,600 --> 00:32:14,440
Speaker 1: Kingdom Boris Johnson as Prime Minister to us away, he

516
00:32:14,600 --> 00:32:18,600
Speaker 1: seems a different prime minister. Would he be a different

517
00:32:18,680 --> 00:32:22,920
Speaker 1: prime minister very that that's very much I think for

518
00:32:23,040 --> 00:32:28,080
Speaker 1: Hope of many many people, and that the the triumvirate

519
00:32:28,320 --> 00:32:33,680
Speaker 1: of Cameron and Osborne and Cannie were very much seen

520
00:32:33,800 --> 00:32:37,600
Speaker 1: by many people. I think as a very centrist government,

521
00:32:37,720 --> 00:32:40,960
Speaker 1: if not like a labor government of the past, and

522
00:32:42,640 --> 00:32:46,480
Speaker 1: certainly not in any way ideologically committed to free markets

523
00:32:46,840 --> 00:32:53,080
Speaker 1: or low low taxes. And this is possible I think

524
00:32:53,120 --> 00:32:55,920
Speaker 1: for Hope under Boris Johnson there will be a resume

525
00:32:56,000 --> 00:32:59,080
Speaker 1: shift there might be a ratio. Last night, listening to

526
00:32:59,200 --> 00:33:01,600
Speaker 1: the wonderful average of the three major networks in the

527
00:33:01,720 --> 00:33:04,800
Speaker 1: United Kingdom, I also got a sense that labors in

528
00:33:04,880 --> 00:33:09,000
Speaker 1: the same turmoil. Will Mr Corbin be giving a speech soon?

529
00:33:09,320 --> 00:33:13,000
Speaker 1: As we heard from the Prime Minister today, Labor is

530
00:33:13,040 --> 00:33:16,160
Speaker 1: in the same turmoil, but of course it's very much

531
00:33:16,200 --> 00:33:19,360
Speaker 1: removed from power. So the interest in the conservative side,

532
00:33:19,520 --> 00:33:22,560
Speaker 1: any any pressures are going to be much more meaningful

533
00:33:22,680 --> 00:33:24,840
Speaker 1: in terms of markets of where the economy is going

534
00:33:24,880 --> 00:33:26,880
Speaker 1: to go from the conservative side. What will you think

535
00:33:26,920 --> 00:33:28,920
Speaker 1: about this weekend? Mike and I, folks, will have a

536
00:33:29,000 --> 00:33:31,200
Speaker 1: lot of special coverage for you this weekend. We are

537
00:33:31,280 --> 00:33:34,680
Speaker 1: thrilled to be in London and thrilled Michael's going to

538
00:33:34,720 --> 00:33:36,760
Speaker 1: go to the church all warm muse him. But we're

539
00:33:36,800 --> 00:33:39,120
Speaker 1: having a warm muse him out here, so I don't

540
00:33:39,120 --> 00:33:42,320
Speaker 1: need to do that. But but what what will Brendan

541
00:33:42,400 --> 00:33:46,800
Speaker 1: Brown be thinking about, or writing about, or going back

542
00:33:46,880 --> 00:33:51,080
Speaker 1: to historically test in your mind this weekend to get

543
00:33:51,120 --> 00:33:53,680
Speaker 1: ready for Monday markets. What I've been looking at in

544
00:33:53,760 --> 00:33:56,640
Speaker 1: particular is, and it's been a long running theme of mind,

545
00:33:56,720 --> 00:33:59,360
Speaker 1: but for the world is in a very severe dose

546
00:33:59,440 --> 00:34:01,920
Speaker 1: of asset ice inflation due to what's been happening with

547
00:34:02,040 --> 00:34:05,880
Speaker 1: central banks. Now they crash. We've had in the Tokyo

548
00:34:06,040 --> 00:34:09,080
Speaker 1: market this year, which has been of course amplified by

549
00:34:09,160 --> 00:34:13,800
Speaker 1: the Brexit, means we've had a very a major asset

550
00:34:13,880 --> 00:34:18,719
Speaker 1: class fall sharply, and that very often is a late

551
00:34:18,960 --> 00:34:21,840
Speaker 1: mid phase of asset price inflation cycle which goes on

552
00:34:21,960 --> 00:34:24,239
Speaker 1: then to a final stage. So my question is, is

553
00:34:24,320 --> 00:34:28,520
Speaker 1: what's happening in Tokyo lead indicating what may happen happen

554
00:34:28,560 --> 00:34:31,200
Speaker 1: more generally, because Mike the linear function, I mean to

555
00:34:31,239 --> 00:34:37,480
Speaker 1: monopolize this, Mike, but finally focused after Actually, folks, I

556
00:34:37,520 --> 00:34:39,480
Speaker 1: am drinking more te here. Thanks for twinings for the

557
00:34:39,520 --> 00:34:44,160
Speaker 1: Bloomberg t I agree with you that all our eyes

558
00:34:44,160 --> 00:34:48,160
Speaker 1: are off the failure of abynomics. Can Brendan Brown say

559
00:34:48,680 --> 00:34:51,239
Speaker 1: abnomics as a failure? I think of the stage, it's

560
00:34:51,280 --> 00:34:55,239
Speaker 1: quite clear as a failure. Yes, one oh two dollah. Yeah, folks,

561
00:34:55,239 --> 00:34:57,719
Speaker 1: we moved there to read shown that church so many

562
00:34:57,800 --> 00:34:59,879
Speaker 1: times and in terms of a stock market, it's it's

563
00:35:00,000 --> 00:35:04,160
Speaker 1: asis was pumping up the stock market and let's completely failed. Interesting.

564
00:35:04,239 --> 00:35:06,680
Speaker 1: Brendan Brown, thank you so much, greatly appreciate it. On

565
00:35:06,760 --> 00:35:12,400
Speaker 1: this historic day. Thanks for listening to the Bloomberg Surveillance Podcast.

566
00:35:12,800 --> 00:35:17,840
Speaker 1: Subscribe and listen to interviews on iTunes, SoundCloud, or whichever

567
00:35:18,040 --> 00:35:21,880
Speaker 1: podcast platform you prefer. I'm on Twitter at Tom Keane,

568
00:35:22,360 --> 00:35:26,319
Speaker 1: Michael McKee is at Economy Before the podcast. You can

569
00:35:26,360 --> 00:35:29,600
Speaker 1: always catch us worldwide. I'm Bloomberg Radio