WEBVTT - Surveillance: Supply Constraints With Le Maire 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa A. Brownowitz. Daily we bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg 0:00:23.360 --> 0:00:29.840 dot Com, and of course on the Bloomberg terminal. This 0:00:30.000 --> 0:00:32.919 is a joy with Amrie Harden in Rome. It is 0:00:33.800 --> 0:00:38.000 entirely appropriate that Maria Todeo is with us, and she's 0:00:38.040 --> 0:00:42.120 from one of truly the most famous embassy buildings in 0:00:42.400 --> 0:00:46.239 the world is the Palazzo Finacea, and it is the 0:00:46.360 --> 0:00:50.080 jewel of the sixteenth century. And Maria I would suggest 0:00:50.120 --> 0:00:53.599 that Mr mccrown the people of France have to spend 0:00:54.200 --> 0:00:58.280 zillions of francs every year keeping it in wonderful restoration. 0:01:02.320 --> 0:01:04.360 They probably do, but you know, the French do have 0:01:04.440 --> 0:01:07.000 a niver beauty. And on that note, we are going 0:01:07.040 --> 0:01:10.000 straight with our guests. Unmail. Always nice to see you, 0:01:10.040 --> 0:01:13.119 French finance minister. You have an important meeting. But before 0:01:13.160 --> 0:01:15.839 we go into the economics, I want to talk about 0:01:15.840 --> 0:01:18.119 the politics your president. I mean, when mccron is meeting 0:01:18.360 --> 0:01:20.800 with President Biden. The last time they met together was 0:01:20.840 --> 0:01:23.720 a very different scenario than the submarine crisis happened. Are 0:01:23.720 --> 0:01:26.360 you making peace this time or are you still angry? 0:01:26.760 --> 0:01:29.280 I don't know. We are on the process to make peace. 0:01:29.319 --> 0:01:33.400 Of course, we have been disappointed. Everybody is aware of that. 0:01:34.040 --> 0:01:37.000 But now this is the first step in the way 0:01:37.080 --> 0:01:42.080 of rebuilding trust and confidence between the United States and France. 0:01:42.520 --> 0:01:45.280 And what's that going to entail? Is there anything specifically 0:01:45.319 --> 0:01:46.560 that will come out of the meetings. I know you 0:01:46.560 --> 0:01:49.840 don't speak on behavin, so I would attend the meeting 0:01:49.840 --> 0:01:54.040 with President Biden and mccon. But let's wait some minutes 0:01:54.160 --> 0:01:58.559 before explaining anything about this meeting, okay. And you're also 0:01:58.640 --> 0:02:02.120 very involved in the O City deal, thecent compermaniment tax. 0:02:02.320 --> 0:02:04.560 We know that this is something you've worked on for years. 0:02:04.680 --> 0:02:07.120 It finally does seem like it will be agreed in 0:02:07.320 --> 0:02:10.400 Rome this weekend. How about the implementation? However, in real life, 0:02:10.440 --> 0:02:11.760 how do you put it to work? It is a 0:02:11.840 --> 0:02:16.359 key agreement and now the key question is implementation. So 0:02:16.400 --> 0:02:19.720 we will do our best as the next EU presidency, 0:02:20.040 --> 0:02:23.600 the fronts will have the EU presidency to implement the 0:02:23.680 --> 0:02:29.600 tupidas of this international taxation, digital taxation and minimum taxation. 0:02:29.880 --> 0:02:33.840 Our goal is to have this international taxation system being 0:02:34.080 --> 0:02:38.000 fully implemented, no letters than twenty three. And what's your 0:02:38.000 --> 0:02:40.840 message to Facebook, Google? Is it prepared to pay more? 0:02:41.520 --> 0:02:45.320 They have to pay, so how much more and powerful 0:02:45.360 --> 0:02:48.680 they're making profits, they have to pay. This is fairness 0:02:48.840 --> 0:02:51.160 And you think they get that now, I think they 0:02:51.160 --> 0:02:53.639 get that. But let's have a look at the consequences 0:02:53.680 --> 0:02:57.520 of the COVID crisis and the econdemic crisis. Facebook, Google 0:02:57.639 --> 0:03:01.440 and all the digital giants of the big winners of 0:03:01.600 --> 0:03:04.600 this crisis. So it's fair that they have to pay 0:03:04.720 --> 0:03:08.400 the due level of taxes. And you know you mentioned 0:03:08.440 --> 0:03:10.600 the economic recovery. We are seeing in Europe that it 0:03:10.680 --> 0:03:13.160 is speeding up, but we do have problems on the 0:03:13.200 --> 0:03:15.079 supply chain. I know that's something that you say. You're 0:03:15.080 --> 0:03:17.440 also concerned in terms of the big French names that 0:03:17.480 --> 0:03:20.120 operate globally. How big an issue is the shortage economy? 0:03:20.160 --> 0:03:22.320 Do you buy into this theory that we're heading into 0:03:22.320 --> 0:03:25.480 a period of type types? Very good news on the 0:03:25.480 --> 0:03:28.840 economic recovery. You know that the last figure for funds 0:03:28.960 --> 0:03:32.639 for the third quarter of the year is three percent 0:03:32.680 --> 0:03:35.520 of growth, which means that we will reach our goal 0:03:35.560 --> 0:03:40.600 of having six point twenty of growth, and we already have. 0:03:40.960 --> 0:03:44.000 We covered the same level of growth and the one 0:03:44.080 --> 0:03:48.000 we had before the crisis. So that's excellent news. The 0:03:48.040 --> 0:03:51.800 economic coqwy is quick, it is rapid, and it is solid. 0:03:52.440 --> 0:03:58.200 Then we are facing the negative consequences of this economic recovery. Bottlenecks, 0:03:58.680 --> 0:04:02.400 shortages on the labor market, on the semi conductors, on 0:04:02.480 --> 0:04:06.200 the whole materials. It might affect the level of gowth 0:04:06.240 --> 0:04:08.640 over the next month and over the next years. It 0:04:08.760 --> 0:04:12.280 means that we clearly need all the twenty countries to 0:04:12.360 --> 0:04:16.000 address the issue and to find very concrete solutions to 0:04:16.080 --> 0:04:18.800 these bottlenecks. And of course, feeding into this as a 0:04:18.880 --> 0:04:22.360 debata around inflation yesterdays, who used to do your job 0:04:22.600 --> 0:04:25.000 in the past. She said, it's it's heating up, but 0:04:25.080 --> 0:04:28.440 it's temporary. The factors are pushing up inflation will fade away. 0:04:28.560 --> 0:04:31.520 To buy her theory, yes, I fully share her point 0:04:31.560 --> 0:04:36.160 of view. I think it is temporary inflation. Nevertheless, once 0:04:36.200 --> 0:04:39.919 again we should be very careful about this question of bottlenecks. 0:04:40.200 --> 0:04:42.720 Let's just have a look at the question of semi conductors. 0:04:43.200 --> 0:04:47.120 Now you have the automotive industry being directly hit by 0:04:47.200 --> 0:04:50.400 the lack of semi conductors, which means that the right solution, 0:04:50.520 --> 0:04:52.600 and we share the same point of view as the 0:04:52.720 --> 0:04:56.600 one expressed by Proson Biden, is to be more independent. 0:04:57.360 --> 0:05:01.159 Mccommed it very clear. We won't Europe to be more independent, 0:05:01.600 --> 0:05:04.360 to invest in new factories so that we can have 0:05:04.520 --> 0:05:08.880 our own semiconductors, not being too much dependent on Asia, 0:05:09.240 --> 0:05:12.120 on South Korea or other nations. And Europe has made 0:05:12.120 --> 0:05:14.040 that very clear too. I want to also follow up 0:05:14.080 --> 0:05:16.599 on the e c B question. I know you don't 0:05:16.720 --> 0:05:18.800 want to talk about the central bank, but yesterday we 0:05:18.880 --> 0:05:21.320 did see markets pricing that there will be an entrance 0:05:21.400 --> 0:05:24.040 rate hike by the end of next year in Europe. 0:05:24.160 --> 0:05:27.039 Is that premature? Does this economy still need more stimulus? 0:05:27.120 --> 0:05:29.240 As a market reading it wrong? I think that we 0:05:29.400 --> 0:05:33.000 have to go step by step. The first step was 0:05:33.279 --> 0:05:37.760 to protect our salaries and our companies against the most 0:05:37.839 --> 0:05:43.560 important crisis since nineteen nine. Second step the economic recovery. 0:05:44.160 --> 0:05:47.640 We are successful on the economic recovery. That's very good 0:05:47.680 --> 0:05:50.880 news for all of us, to the United States and Europe. 0:05:51.400 --> 0:05:54.080 The third step will be to come back to some 0:05:54.400 --> 0:05:58.279 public finances, but we should not hurry up in coming 0:05:58.360 --> 0:06:01.320 back to some public finances or otherwise you run the 0:06:01.400 --> 0:06:04.600 risk of killing growth. And the best response to the 0:06:04.640 --> 0:06:09.560 economic crisis is more gross sustainable growth for all the people. 0:06:10.040 --> 0:06:12.360 Just a very final question energy. This is a big 0:06:12.440 --> 0:06:14.840 conversation in Europe. We're seeing the bills are going through 0:06:14.880 --> 0:06:17.280 the roof. Your government has announced measures to help. Is 0:06:17.360 --> 0:06:20.280 that on households? Are you willing to work more with 0:06:20.520 --> 0:06:22.640 Russia perhaps on that front or does it prove the 0:06:22.720 --> 0:06:26.359 case the nuclear energy is the French way is actually valid. 0:06:26.680 --> 0:06:30.400 She proves the case that nuclear energy is one of 0:06:30.680 --> 0:06:33.480 the best solutions. If you want to be dependent on 0:06:33.600 --> 0:06:36.320 Russia and on vere putting, that's your choice, that's not 0:06:36.480 --> 0:06:39.360 my choice. My choice is to have fronts on the 0:06:39.480 --> 0:06:44.440 open countries, being totally independent, which means investing more in 0:06:44.520 --> 0:06:48.280 nuclear energies, investing more in renewable energies, so that we 0:06:48.360 --> 0:06:52.640 can have a mix which makes Europe fully independence from 0:06:52.640 --> 0:06:55.800 the other countries, perhaps more more French, less German, at 0:06:55.880 --> 0:07:00.919 least on the energy energy, more French rather than German. Yes, okay, 0:07:00.960 --> 0:07:03.240 well one of them. Oil. Thank you so much for 0:07:03.440 --> 0:07:05.080 your time. Always like seeing you, and I hope of 0:07:05.080 --> 0:07:08.480 the meeting with the Treasure Secretary goes well, thanks so much, 0:07:08.520 --> 0:07:11.720 Thank you. Tom all right today, oh thank you so much. 0:07:11.800 --> 0:07:14.560 On radio and television worldwide Maria today O from the 0:07:14.640 --> 0:07:24.040 Embassy of the Republic of France in Rome. Were the 0:07:24.280 --> 0:07:27.720 reset view on the American economy with Bank of America. 0:07:27.840 --> 0:07:30.960 Michelle Meyer joins us. Right now, Michelle, what have you 0:07:31.080 --> 0:07:36.120 done to reset off of two percent yesterday? UM, So 0:07:36.240 --> 0:07:38.920 we were tracking right around two percent, so it came 0:07:38.920 --> 0:07:41.720 in pretty close expectations given all the high frequency data 0:07:41.800 --> 0:07:44.360 we were looking at UM and we are holding to 0:07:44.440 --> 0:07:47.320 review that the fourth quarter should show a rebound. We're 0:07:47.360 --> 0:07:50.400 seeing stronger signs of consumer spending. When we look at 0:07:50.440 --> 0:07:54.280 our aggregated UM card data, we're seeing a really healthy 0:07:54.800 --> 0:07:59.640 UM move higher in spending with UM the services economy 0:07:59.720 --> 0:08:02.800 red gauging UM with potentially an early start to the 0:08:02.840 --> 0:08:05.240 holiday shopping season. So we think we're going to see 0:08:05.600 --> 0:08:09.080 stronger consumer spending into the fourth quarter, business investment continuing, 0:08:09.240 --> 0:08:12.920 and some further contribution from inventories. There's a while to 0:08:13.000 --> 0:08:15.480 go in terms of inventory cycles. So our foecast is 0:08:15.560 --> 0:08:18.360 six percent real GDP growth. Thank you four which is 0:08:18.440 --> 0:08:20.720 again and I pick up from the third quarter. Major 0:08:20.880 --> 0:08:25.920 Inside Baseball, Michelle Meyer, how can you count inventories were 0:08:26.000 --> 0:08:31.680 the upset of supply shock? Okay, so this gets wonky, 0:08:31.760 --> 0:08:36.079 as you can expect, but for gen let's just do it. 0:08:36.400 --> 0:08:40.840 For GDP calculations, it's the change in the change in inventories. 0:08:41.360 --> 0:08:44.959 So if you're simply contracting by less, it's actually a 0:08:45.120 --> 0:08:48.600 positive contribution for GDP growth. And that's what we saw 0:08:48.679 --> 0:08:51.280 in the third quarter. Inventories were still down, but not 0:08:51.440 --> 0:08:53.559 as down as they were in a second quarter, so 0:08:53.679 --> 0:08:57.040 that added two percentage points to GDP growth. So we 0:08:57.600 --> 0:08:59.840 were so far away from a point where we're actually 0:09:00.000 --> 0:09:04.480 adding to inventory levels, but simply subtracting less will support 0:09:04.760 --> 0:09:08.120 the GDP adding up process going forward, Spending will be 0:09:08.160 --> 0:09:10.600 a key issue, Wages a key issue. We just got 0:09:10.679 --> 0:09:13.760 some spending data. How much does that enlighten us about 0:09:13.840 --> 0:09:16.319 what happened with a third quarter GDP reading and what 0:09:16.440 --> 0:09:20.439 we can expect going forward. Absolutely, I think the consumer 0:09:20.720 --> 0:09:23.959 is very much what we should be paying attention to. 0:09:24.240 --> 0:09:26.559 And Lisa, as you noted, it's important to understand the 0:09:26.640 --> 0:09:28.839 money in and the money out right, So I a 0:09:28.960 --> 0:09:31.319 hundred percent agree with you that the wage data this 0:09:31.480 --> 0:09:34.679 morning was by far the most important statistic. That was 0:09:34.720 --> 0:09:37.719 a big increase in the employment costs Index UM, and 0:09:37.840 --> 0:09:40.559 that shows that there's more purchasing power for the consumer, 0:09:40.880 --> 0:09:44.240 but it also tells us that there's more inflationary pressure 0:09:44.360 --> 0:09:47.439 building in the broader economy. Businesses will be able to 0:09:47.559 --> 0:09:50.600 pass more of those costs on they're doing it. We're 0:09:50.640 --> 0:09:53.480 seeing in terms of these price pressures UM. But I 0:09:53.559 --> 0:09:56.080 think the big picture for the consumer is that there's 0:09:56.480 --> 0:09:58.520 still a lot of cash out there. There's a lot 0:09:58.559 --> 0:10:01.360 of availability to borrow to the extent that that's necessary. 0:10:01.400 --> 0:10:03.520 We are seeing some pick up in UM spending on 0:10:03.640 --> 0:10:06.960 credit cards amongst lower income consumers UM, and the savings rate, 0:10:07.000 --> 0:10:10.240 although coming down in today's report, is still pretty elevated. 0:10:10.320 --> 0:10:13.880 So I think the extent that consumers have items to buy, 0:10:14.360 --> 0:10:18.439 are feeling comfortable re engaging in the services economy, we 0:10:18.559 --> 0:10:20.520 will see that play out in the data, even if 0:10:20.559 --> 0:10:23.040 it means coming with more price pressure. Michelle, let's just 0:10:23.160 --> 0:10:25.880 sit on that employment cost index for a minute, because 0:10:25.920 --> 0:10:28.559 I just did the data and this is actually the 0:10:28.679 --> 0:10:32.080 highest read ever in data going back to the I mean, 0:10:32.120 --> 0:10:35.559 this is a shocking increase in wages in how much 0:10:35.800 --> 0:10:38.599 is that labor is demanding. What does this mean in 0:10:38.800 --> 0:10:42.080 terms of the stickiness of inflation and frankly, the response 0:10:42.160 --> 0:10:45.960 from central bankers as the FED meets next week. Yeah, 0:10:46.040 --> 0:10:48.319 So the employment cross the next is the Fed's preferred 0:10:48.360 --> 0:10:50.959 measure of wages. So they can look past some of 0:10:51.000 --> 0:10:53.640 the noise and the average early ernies numbers because of 0:10:54.080 --> 0:10:57.520 composition issues, et cetera. But employment costs Index they pay 0:10:57.559 --> 0:10:59.560 a lot of attention to. And this is a big 0:11:00.080 --> 0:11:02.880 burt and it's very much consistent with what we're staying 0:11:02.880 --> 0:11:05.920 in terms of the high quit rate, the high amount 0:11:05.960 --> 0:11:09.040 of job openings, the fact that purchasing power has shifted 0:11:09.120 --> 0:11:12.400 to the employee UM and we're seeing that in terms 0:11:12.400 --> 0:11:15.520 of these labor costs. So when you have wage growth 0:11:15.600 --> 0:11:18.680 of this magnitude, especially if it proves to be persistent 0:11:18.880 --> 0:11:22.240 the keyword um, it pushes, you know, you get this 0:11:22.280 --> 0:11:25.720 wage price push into broader prices and that sets up 0:11:25.760 --> 0:11:29.360 for a much more of a sticky path higher of inflation. 0:11:29.440 --> 0:11:31.680 And the Feed is going to pay very close attention 0:11:31.760 --> 0:11:34.079 to that well. And obviously we'll be watching the Fed 0:11:34.160 --> 0:11:36.880 decision on Wednesday next week, But then on Friday, we 0:11:37.080 --> 0:11:39.720 have a job's report and given some of those labor 0:11:39.800 --> 0:11:42.280 market dynamics that Lisa was referring to, what are you 0:11:42.440 --> 0:11:45.800 expecting to see from the month of October given September 0:11:46.120 --> 0:11:49.160 took us all by surprise in many ways, so we 0:11:49.200 --> 0:11:51.400 think we will see an acceleration. We're looking for four 0:11:51.480 --> 0:11:54.920 hundred and fifty thousand non farm puerial growth um in 0:11:54.960 --> 0:11:57.079 the next report, which is a nice pick up from 0:11:57.080 --> 0:11:59.080 the last two months, but not quite to the levels 0:11:59.120 --> 0:12:01.559 that we were prior to the pandemic. And I think 0:12:01.600 --> 0:12:05.000 one of the key components within the report will be 0:12:05.280 --> 0:12:08.199 the labor force participation rate, whether or not we're seeing 0:12:08.840 --> 0:12:12.000 move back up supply into labor market, because that's absolutely 0:12:12.040 --> 0:12:15.760 critical in order to step some of the inflationary pressure 0:12:15.800 --> 0:12:18.440 and also keep this business cycle going. You know, we're 0:12:18.480 --> 0:12:21.600 dealing with very large supply side constraints in any sign 0:12:21.679 --> 0:12:24.360 that that's opening up or creating some relief is going 0:12:24.400 --> 0:12:26.920 to be critical. Michelle, Thank you so much, Michelle Meyer, 0:12:27.000 --> 0:12:29.920 Bank of America with us for briefing everyone. Really changing 0:12:30.280 --> 0:12:32.680 and adjusting your folks. I really can't say enough about 0:12:32.720 --> 0:12:39.800 house to house right now. We monitor your problems in 0:12:39.880 --> 0:12:42.640 the fixed income market, and there's no one better to 0:12:42.720 --> 0:12:48.520 do that with George Boy who writes brilliantly clear research notes. George, 0:12:48.559 --> 0:12:51.439 you go all calculus on us and say, get over it. 0:12:51.600 --> 0:12:58.439 We're seeing a deceleration in the fixed income market. Explain that. Yeah, sure, thanks, 0:12:58.760 --> 0:13:01.720 thanks Tom, good morning. Um. You know what we're seeing 0:13:01.840 --> 0:13:04.559 is it is a deceleration in the bond market. You know, 0:13:04.640 --> 0:13:06.920 we've seen a pretty big move over the last week 0:13:07.040 --> 0:13:09.720 or so at the long end of the curve as 0:13:09.800 --> 0:13:12.520 bond yields have dropped UM and the curve is flattened. 0:13:12.840 --> 0:13:16.760 The curve is flattened pretty meaningfully, and very very importantly, 0:13:16.840 --> 0:13:19.640 we've seen a mild inversion out at the very long 0:13:19.760 --> 0:13:22.120 end between the twenty year and the ten year UH 0:13:22.320 --> 0:13:25.080 tenure point on the curves. And and people have rushed 0:13:25.120 --> 0:13:26.839 to assume that this is now a sort of a 0:13:26.960 --> 0:13:31.080 meaningful indicator that we're headed for a hard landing. UM 0:13:31.280 --> 0:13:33.560 And I think that's that's kind of getting a little 0:13:33.559 --> 0:13:36.280 bit ahead of the curve, as they say, um And 0:13:36.440 --> 0:13:39.520 And the reality is is that there there are tremendous 0:13:39.640 --> 0:13:44.079 technicals that that drive fixed income markets. It's it's the 0:13:44.360 --> 0:13:46.920 shape of the curve. One of the best indicators you 0:13:47.040 --> 0:13:49.680 can look at for sort of the direction of the economy, 0:13:49.800 --> 0:13:53.280 the direction of growth and and ultimately markets, and a 0:13:53.360 --> 0:13:56.480 flattening curve usually kind of raises some alarm bells. But 0:13:56.800 --> 0:13:58.560 but when we look at the curve, what we see 0:13:58.679 --> 0:14:01.640 is a curve that's actually is actually what's called, you know, 0:14:01.720 --> 0:14:03.719 what we would call, you know, a bare flatten er. 0:14:03.840 --> 0:14:07.480 Yields are moving incrementally higher. It's not one direction and 0:14:07.559 --> 0:14:10.760 it's not universal, but they are moving higher. And so 0:14:11.280 --> 0:14:14.199 the fact that yields overall are moving higher while the 0:14:14.280 --> 0:14:17.920 curve flattens, that underscores to us a message that the 0:14:18.000 --> 0:14:21.920 economy is decelerating, it's not headed for a hard landing, 0:14:22.360 --> 0:14:25.440 that the economy is still doing well. We saw kind 0:14:25.440 --> 0:14:27.400 of a soft patch in the in the in the 0:14:27.520 --> 0:14:32.400 third quarter, as we saw yesterday, but the the underpinnings 0:14:32.480 --> 0:14:37.680 of demand are very robust. Yes, supply constraints are impacting growth, 0:14:38.520 --> 0:14:41.760 end user is still pretty healthy. I like the discrepancy 0:14:41.800 --> 0:14:43.320 that you make, or there's sort of the distinction that 0:14:43.400 --> 0:14:46.800 you make between heading toward recession, creating off a cliff, 0:14:47.040 --> 0:14:49.440 and just slowing down, which is what pretty much everyone 0:14:49.520 --> 0:14:51.680 expects to see. But a lot of this is predicated 0:14:51.960 --> 0:14:55.080 on central banks raising rates sooner than they say they will. 0:14:55.200 --> 0:14:57.440 Do you buy that story that the market is telling 0:14:57.720 --> 0:15:01.760 or do you buy what central bankers are trying to us? Well, 0:15:01.840 --> 0:15:04.440 I I think that the market is certainly testing the 0:15:04.520 --> 0:15:07.000 limits of the central banks, and I think what the 0:15:07.080 --> 0:15:09.840 central banks have told us is they are again using 0:15:09.880 --> 0:15:12.840 the yield curve as as an example. They definitively want 0:15:12.880 --> 0:15:15.280 to be behind the curve. They're gonna let the market 0:15:15.400 --> 0:15:18.400 move ahead and ultimately sort of guide where they need 0:15:18.480 --> 0:15:21.600 to be. Now you can you can debate whether or 0:15:21.640 --> 0:15:24.280 not the markets getting ahead of itself. You know, current 0:15:24.400 --> 0:15:28.000 levels of inflation are quite high by historical standards and 0:15:28.280 --> 0:15:31.920 are remaining higher than than people would have expected. But 0:15:32.000 --> 0:15:33.920 there is a good chance that they do start to 0:15:34.040 --> 0:15:37.160 decelerate as well as we get into next year. Supply 0:15:37.560 --> 0:15:40.760 supply side constraints don't last forever. They do start to 0:15:40.880 --> 0:15:44.240 get some level of relief, and so, you know, I 0:15:44.320 --> 0:15:46.560 think the market is sort of pressure pro pressuring the 0:15:46.800 --> 0:15:48.840 sort of the limits of the Fed. FED has been 0:15:48.960 --> 0:15:51.240 very clear they're going to you know, they plan to 0:15:51.280 --> 0:15:53.560 start to taper. We're going to hear from them next 0:15:53.640 --> 0:15:55.840 week and then you know that will sort of set 0:15:55.880 --> 0:15:59.160 the stage for other central banks around the world are 0:15:59.240 --> 0:16:01.840 already in ocean. And so the reality is, is that 0:16:01.960 --> 0:16:04.560 sort of the extreme liquidity that's been in the market 0:16:04.640 --> 0:16:07.240 now for you know, eighteen months or so, you know, 0:16:07.480 --> 0:16:10.640 is starting to come out and is starting to decelerate. 0:16:10.680 --> 0:16:14.800 But we're going from extreme extreme liquidity to less liquidity. 0:16:14.880 --> 0:16:18.000 So it's not negative, it's not tightening, it's just less. 0:16:18.160 --> 0:16:19.720 But is there a tipping point? And I think this 0:16:19.840 --> 0:16:21.440 is what people are looking at when they say things 0:16:21.520 --> 0:16:23.800 like a hawkish dot, the idea that there's a similar 0:16:23.880 --> 0:16:26.360 kind of sentiment in central banks around the world where 0:16:26.400 --> 0:16:29.520 you saw all yields go down for years together globally 0:16:30.000 --> 0:16:32.440 in tandem, and now we're starting to see it move 0:16:32.640 --> 0:16:35.560 in the opposite direction in tandem. Could we reach a 0:16:35.640 --> 0:16:38.320 tipping point where it starts to accelerate on itself and 0:16:38.400 --> 0:16:41.160 people start to try to normalize rates with something more 0:16:41.240 --> 0:16:45.680 akin to inflation and growth. We could reach a tipping point. 0:16:45.800 --> 0:16:48.480 I think that's a fair point. It's and I think 0:16:48.560 --> 0:16:50.760 this is sort of the game of cat and mouse 0:16:50.840 --> 0:16:53.760 between markets and between central bankers. You know, I think 0:16:53.840 --> 0:16:56.720 our our our view is that that that the FED 0:16:56.960 --> 0:16:59.640 is trying to recalibrate fixed income markets. I mean they 0:16:59.680 --> 0:17:02.040 see the same data we do, and so, you know, 0:17:02.120 --> 0:17:05.119 sort of moving yields higher, allowing yields to move higher 0:17:05.160 --> 0:17:07.879 to be more in sync with both inflation and growth 0:17:08.240 --> 0:17:11.000 is effectively one of their objectives when they can't let 0:17:11.080 --> 0:17:13.520 it move too far, too fast. Your point about a 0:17:13.560 --> 0:17:17.040 tipping point is that do central bankers lose control of 0:17:17.119 --> 0:17:20.159 the plot, do they allow or do they are they 0:17:20.320 --> 0:17:22.840 unable to sort of control the pace of the move. 0:17:23.240 --> 0:17:25.520 So far that has not been the case, and so 0:17:26.000 --> 0:17:28.600 and and that's sort of exactly what we're seeing right now, 0:17:28.840 --> 0:17:32.920 is that you know, there is still very very strong technicals, goods, 0:17:33.040 --> 0:17:36.240 technical support within the fixed income market. There's a chronic 0:17:36.320 --> 0:17:40.360 shortage of duration globally, and and sort of liability managers, 0:17:40.480 --> 0:17:43.880 pension funds, insurance companies and others still move to sort 0:17:43.920 --> 0:17:47.280 of try and immunize their liabilities. It's not a value trade, 0:17:47.400 --> 0:17:50.480 it's it's a it's a requirement they need to buy duration. 0:17:50.840 --> 0:17:52.399 And so when you get to a point like we 0:17:52.480 --> 0:17:55.240 are now, stock markets at all time highs, we're heading 0:17:55.280 --> 0:17:58.080 into your end. You sell some stocks, you buy some bonds, 0:17:58.160 --> 0:18:02.040 You immunize your liability. Those those are very strong technicals 0:18:02.320 --> 0:18:05.399 that we think keep this market in check. The big picture, 0:18:05.640 --> 0:18:07.879 Fine yields are moving higher. I mean, that's that's our 0:18:08.000 --> 0:18:11.000 central case. It's a matter of pace. So then George, 0:18:11.040 --> 0:18:14.600 what's the read through to credit. Have we seen the tights? Yeah, 0:18:15.320 --> 0:18:18.080 we do think we've seen the tights actually, um, you know, 0:18:18.240 --> 0:18:21.159 and what we've seen in historical uh you know periods, 0:18:21.240 --> 0:18:24.240 is that one central bank policy does start to change, 0:18:24.600 --> 0:18:26.680 you know, sort of it becomes more of a carry 0:18:26.720 --> 0:18:29.560 trade than a compression trade. And that's very consistent with 0:18:29.680 --> 0:18:31.919 what we've seen over the last couple of months. Now 0:18:32.040 --> 0:18:35.879 that carry trade can last years, many years in some instances, 0:18:36.000 --> 0:18:38.440 So it is a little bit dangerous to get too 0:18:38.520 --> 0:18:41.760 far ahead of the curve, again using the curve as 0:18:41.800 --> 0:18:44.920 the analogy. But but importantly, you do start to move 0:18:45.000 --> 0:18:47.960 your portfolio around, You start to move up in quality, 0:18:48.240 --> 0:18:50.440 you start to move sort of down in sort of 0:18:50.560 --> 0:18:54.000 what we call spread duration, so slightly shorter maturities. You 0:18:54.160 --> 0:18:57.159 try to sort of buffer yourself against those potential spikes 0:18:57.200 --> 0:18:59.960 and volatility. But it is still much too early to 0:19:00.119 --> 0:19:02.600 just simply cut and run, you know. We can find 0:19:02.880 --> 0:19:06.800 good value in places like structured credit. We want predictable 0:19:06.920 --> 0:19:09.639 cash flows and we want to try and minimize that 0:19:10.119 --> 0:19:14.000 that volatile How of you on the Boy continuum. I'm 0:19:14.040 --> 0:19:16.440 in the triple leverage all cash fund, so I bring 0:19:17.119 --> 0:19:19.479 bring in the duration and George Boy, thank you so much. 0:19:19.520 --> 0:19:30.199 Not enough. Scott Clemens, partner in chief investment strategist at 0:19:30.200 --> 0:19:32.639 Brown Brothers Harriman, joining us right now. I would love 0:19:32.680 --> 0:19:34.760 to get your sense, Scott, what you make of the 0:19:34.840 --> 0:19:37.760 volatility on the front end of the yield curve across 0:19:37.840 --> 0:19:41.280 the world bleeding into longer end over the past few days, 0:19:41.480 --> 0:19:47.040 when there really hasn't been a major identifiable catalyst. And 0:19:47.119 --> 0:19:49.000 I think you're right, what we're seeing is just a 0:19:49.119 --> 0:19:54.040 reflection of continued uncertainty in the economy. The big sort 0:19:54.040 --> 0:19:57.520 of hundred thousand foot lesson of the last eighteen months 0:19:58.000 --> 0:20:00.479 is that for all of its volatility, the economy financial 0:20:00.520 --> 0:20:04.080 markets are pretty finely tuned, and when you dislocate them, 0:20:04.200 --> 0:20:08.080 as COVID did for the past eighteen months, complex systems 0:20:08.200 --> 0:20:11.720 do not heal quickly. And in almost any data series 0:20:11.800 --> 0:20:16.000 you look at, be at the bond market, being inflation GDP, 0:20:16.240 --> 0:20:20.639 the labor market, anything is still showing these signs of fibrillation, 0:20:20.720 --> 0:20:22.640 and that's going to take some time to sort out. 0:20:23.040 --> 0:20:25.240 So right now the bond market is being pushed and 0:20:25.320 --> 0:20:28.040 pulled between what do I believe a two percent GDP 0:20:28.160 --> 0:20:30.640 growth figure for the third core that we got yesterday, 0:20:31.119 --> 0:20:33.560 or do I believe that inflation is the new normal? 0:20:33.880 --> 0:20:35.119 And I think we're going to see more of this 0:20:35.280 --> 0:20:38.680 volatility on a daily basis as bond market participants sort 0:20:38.800 --> 0:20:42.520 those issues out. Scott Clemens, Brown Brothers Hareman goes back 0:20:42.640 --> 0:20:45.359 almost as far as the setting of the obelisk in St. 0:20:45.400 --> 0:20:48.880 Peter's square. It's a venerable and ancient firm. Your guys 0:20:49.000 --> 0:20:52.080 idea of short term is three years. I'm going to 0:20:52.200 --> 0:20:55.639 even say the BBH rule is short term is five 0:20:55.840 --> 0:20:59.560 or ten years. How do our listeners and viewers in 0:20:59.760 --> 0:21:05.800 that For a true BBH long term um, you focus 0:21:05.880 --> 0:21:09.080 on the fundamentals and you accept the notion that price 0:21:09.280 --> 0:21:12.920 volatility is a feature of financial markets. It is not 0:21:13.080 --> 0:21:16.359 a bug. If anything, I have been surprised that we 0:21:16.440 --> 0:21:20.000 haven't had more volatility in financial markets over the past 0:21:20.119 --> 0:21:21.960 eighteen months. We're getting a little bit now on the 0:21:22.000 --> 0:21:24.000 bond market. We had a little bit in the UH 0:21:24.040 --> 0:21:28.040 the equity markets in September to me the incoming tide. 0:21:28.119 --> 0:21:31.520 The real driver of the equity market in particular is 0:21:31.640 --> 0:21:34.320 the growth we're seeing in corporate earnings and and furthermore, 0:21:34.359 --> 0:21:38.440 the growth and profitability of corporate earnings. That's fundamental. That's 0:21:38.480 --> 0:21:41.480 not day to day price volatility. That's the fuel that 0:21:41.640 --> 0:21:44.000 drives markets forward. And I think that's sort of an 0:21:44.119 --> 0:21:48.399 undertold story driving markets forward on a secular basis. Not 0:21:48.600 --> 0:21:53.679 to deny the likelihood even of short term volatility and prices. Well, 0:21:53.760 --> 0:21:56.880 let's talk about those earnings. Because things were going well 0:21:57.000 --> 0:21:59.320 and then two of the biggest companies out there, Apple 0:21:59.359 --> 0:22:03.200 and Amazon had big disappointments after the bell. If tech 0:22:03.359 --> 0:22:06.480 isn't leading the way, what does that mean for the 0:22:06.520 --> 0:22:10.439 broader equity market. Well, Kayley, it's certainly something that worries 0:22:10.520 --> 0:22:14.119 me because the markets have become so top heavy in 0:22:14.240 --> 0:22:16.920