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

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Speaker 1: with Jonathan Ferrell and Lisa A. Brawmowitz Jailee. We bring

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Speaker 1: you insight from the best and economics, finance, investment, and

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Speaker 1: international relations. Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg

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Speaker 1: dot com, and of course on the Bloomberg terminal at

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Speaker 1: More's Global headed Commodities Research. As City joins us, now add,

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Speaker 1: it's not all doom and gloom, as you say on

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Speaker 1: natural gas. This perfect storm shall pass, this market should

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Speaker 1: loosen up later on. It just walk us through the

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Speaker 1: current thinking at City compared to the consensus view that

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Speaker 1: I'm sure it's giving you some pushback at the moment. Well,

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Speaker 1: our natural gas, we're getting a significant amount of perspect

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Speaker 1: The issue that we see is where markets are loosening up.

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Speaker 1: And remember we're dealing with a problem that's in the

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Speaker 1: power generating sector, not at the moment, in the transportation sector,

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Speaker 1: not in buildings, not in industrial processes, are agricultural processes,

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Speaker 1: but very much, very specific to fuels. In the power

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Speaker 1: gen sector. We're seeing Germany, excuse me, China actually going

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Speaker 1: all out for coal. They are already looking at producing

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Speaker 1: thirteen and a half percent more coal this year than

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Speaker 1: last year. They're adding a hundred million tons of domestic

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Speaker 1: production this year and in the following two years each

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Speaker 1: another hundred million tons. That's going to displace imports into China,

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Speaker 1: making coal available for the rest of the world. And

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Speaker 1: at the same time they're reducing their imports of natural

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Speaker 1: gas unit date their way down. They have other supplies

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Speaker 1: of natural gas other than lerg imports. They have pipeline

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Speaker 1: gas from Uzbekistan, a big jump in pipeline gas from Russia.

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Speaker 1: Their domestic production of gas went up around six or

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Speaker 1: seven percent last year, it's going to go up eight

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Speaker 1: percent this year. And they just simply need less natural

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Speaker 1: gas that's gonna loosen up markets provide a significant amount

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Speaker 1: for Europe. So what we see happening is a progressive

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Speaker 1: reduction in where European UH and global gas prices are

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Speaker 1: and along with that gas prices in the US. How

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Speaker 1: much do you factor in at some sort of ban

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Speaker 1: or overall embargo on Russian gas imports to Germany. We

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Speaker 1: actually think that's a very low likelihood on both sides.

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Speaker 1: UH and if Germany is not gonna use its fetail power,

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Speaker 1: and the EU hungry certainly will. So we don't think

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Speaker 1: there's going to be an overall EU European community agreement

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Speaker 1: on not pulling in natural gas or oil from from Russia.

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Speaker 1: And we don't think the Russian is gonna pull back

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Speaker 1: because uh, income is better than no income. We actually

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Speaker 1: think that, And that's another kind of controversial point that

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Speaker 1: where Russia is now, the volumes of Russia's now exploiting

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Speaker 1: of natural gas could go down, but they also could

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Speaker 1: go up. There's tolerance in the contracts with European countries

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Speaker 1: to add on above the taker pay contracts that they

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Speaker 1: have and if they added on what they could by contract,

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Speaker 1: assuming that the rouble payment issue is dealt with, which

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Speaker 1: we think it would be. Uh. Actually more gas means

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Speaker 1: lower prices, and we get if we get the volume right,

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Speaker 1: it's lower revenue for Russia. So it's another it's another

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Speaker 1: strategy that maybe not politically satisfactory, but it could actually work.

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Speaker 1: For so long, many months now, we've been focused on

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Speaker 1: the supply equation, on how tight supply is. Now the

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Speaker 1: conversation shifting back it seems more so toward demand, especially

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Speaker 1: when you see a Chinese economy that is looking incredibly

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Speaker 1: weak in the face of persistent COVID zero policy. How

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Speaker 1: are you thinking about China and the demand story, not

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Speaker 1: just for fuels, but also the medals as well. Well,

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Speaker 1: it's not just China demand or other countries as well,

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Speaker 1: but for China it looks as though demand is down

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Speaker 1: more than a million dollars a day to day. It

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Speaker 1: doesn't look like that's gonna come back anytime soon. We

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Speaker 1: think they're gonna keep the the blockage on international travel

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Speaker 1: through the end of the year. So there there is

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Speaker 1: much less room for growth from China than people had thought.

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Speaker 1: Certainly not the seven hundred thousand barrels a day of

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Speaker 1: growth that the OPEC Secretariat has been thinking that's gonna

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Speaker 1: come from China. We think it's going to be negative

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Speaker 1: growth for the year. Maybe not a million barrels a

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Speaker 1: day under year on year, but but a negative number.

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Speaker 1: And it's also the US where where we've we've not

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Speaker 1: seen demand increasing at the degree to which we would Indeed,

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Speaker 1: for the last four weeks on a four week moving average,

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Speaker 1: US gasoline demand is lower than any year in the

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Speaker 1: last five except for that deep cut in demand during

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Speaker 1: part of the deepest part of the pandemic. So US

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Speaker 1: demand has actually stalled out, just as Chinese demand has

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Speaker 1: has been reduced. European demand is going to be lower,

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Speaker 1: Emergency market demand is going to be lower. Uh, it

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Speaker 1: would not be surprised and to see significant projections going

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Speaker 1: down for where demand is going for the rest of

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Speaker 1: the year. Just finished on. Supply in the US has

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Speaker 1: been creeping up recently, and where do you see that

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Speaker 1: topping up? Topping out? It's about eleven point nine million

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Speaker 1: barrels a day at the moment. Yeah, and that's nine

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Speaker 1: a day year on year, by the way, Um, we

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Speaker 1: think it's going to keep growing at this rate through

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Speaker 1: the end of the year. So if we add all liquids,

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Speaker 1: including natural gas liquids, we've just raised our outlook for

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Speaker 1: US production to be one point four million barrels a

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Speaker 1: day year on year deck deck. We think it will

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Speaker 1: be getting very close to that thirteen million barrels a

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Speaker 1: day that we saw in the winter of and the

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Speaker 1: momentum that's built from that should be adding another million

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Speaker 1: barrels a day in twenty three. So uh, we think

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Speaker 1: that you know, one of the reasons for type markets

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Speaker 1: has been that drop in US production. But US production

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Speaker 1: is coming back very strongly even and would be even

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Speaker 1: without the encouragement of the US government. And thank you,

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Speaker 1: sir for catching out with this this morning with a

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Speaker 1: bit of a different view on several topics that most

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Speaker 1: of citsy you ain't seen nothing yet. And what we

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Speaker 1: have seen, at least overnight was that manufacturing and non

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Speaker 1: serve and services sector in China plunge to the lowest

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Speaker 1: since February of twenty This is the reported data. How

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Speaker 1: bad are things getting as you start to get all

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Speaker 1: of these shutdowns that are locking up the major economic

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Speaker 1: engines of the second biggest economy in the world. Leland

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Speaker 1: Miller tracts that on the ground, international CEO of the

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Speaker 1: China Beige Book, Leland, how bad have things gotten economically

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Speaker 1: in China? Not an official level, but the unofficial nuts

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Speaker 1: and bolts surveys that you do in the in the mainland. Well,

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Speaker 1: April was the first period in which the lockdowns really

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Speaker 1: affected growth in a major way. And you know what

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Speaker 1: we saw from that was not just a tickdown you

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Speaker 1: know in Shanghai or tickdown in Beijing. We saw widespread

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Speaker 1: slowdown everywhere, and pretty intensively so it was not just

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Speaker 1: services at retail flailing like what happened at the beginning

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Speaker 1: of the you know, COVID shutdowns in China, where manufacturing

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Speaker 1: is kept up and running. The big thing now is

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Speaker 1: that manufacturing is being hit hard. Factories are being shut

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Speaker 1: down by the lockdowns, not not the outbreaks, but the lockdowns,

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Speaker 1: and so you no longer have manufacturing pushing growth forward.

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Speaker 1: At the same time retail services and all these other

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Speaker 1: sectors are flailing. So you've got widespread weakness right now,

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Speaker 1: and and there's no there's no definitive timeline for when

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Speaker 1: this will end. What's your impression of the proposals that

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Speaker 1: the Chinese authorities have put out there to potentially combat

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Speaker 1: some of this weakness, given the fact that even if they,

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Speaker 1: for example, have construction projects, who's going to be able

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Speaker 1: to go out there and actually do them if they're

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Speaker 1: locked down. Well, this this is what we've really been

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Speaker 1: stressing for the past several weeks. Uh, there is definitely

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Speaker 1: worry uh coming out of Beijing in terms of in

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Speaker 1: terms of not just what the growth is going to be,

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Speaker 1: but how you have a plausible story around they're not

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Speaker 1: being flailing flailing results and and and flailing growth and

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Speaker 1: flailing overall governance performance. So there's talk and this is

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Speaker 1: why you know, you saw the conversation move last week

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Speaker 1: from monetary stimulus to to moving into fiscal stimulus. All

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Speaker 1: out fiscal stimulos, we're gonna beat the USA and in

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Speaker 1: g d P. But like you said, if you're locking

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Speaker 1: down all these major cities, if you're closing down the

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Speaker 1: arteries between them, how do you do fiscal stimulus in

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Speaker 1: a meaningful way? And so I think a lot of

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Speaker 1: what you're seeing right now is still rara rhetoric. It

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Speaker 1: doesn't mean they're not going to move more and more

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Speaker 1: into into the fiscal side. We've seen that in our

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Speaker 1: data for for some time now. But the idea that

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Speaker 1: they're going to all out stimulus, they're going to recreate

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Speaker 1: some of the conditions in previous party conditions year, it's

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Speaker 1: way too early to make that jump, alright. So it's

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Speaker 1: talking the talk versus actually walking the walk to large

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Speaker 1: part to this point, Leland, Something else that authorities have

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Speaker 1: talked about, though, is wrapping up the regulatory crackdowns on

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Speaker 1: industries like technology. Do you think that actually will come

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Speaker 1: to fruition and what difference will that make it might?

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Speaker 1: But but here's here's what investors really need to take

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Speaker 1: note of. Uh. They are scrambling right now to send

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Speaker 1: positive signals to markets, which is why you're seeing positive

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Speaker 1: signals about a compromise over audits and delisting issues. You're

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Speaker 1: seeing uh, you know, positive signals about the regulatory crackdown ending.

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Speaker 1: You're seeing positive signals about fiscal stimulus coming. It doesn't

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Speaker 1: mean any of that is gonna happen. I don't think

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Speaker 1: any of this was part of their original trajectory for

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Speaker 1: policy going into the Party Congress. So they're saying this

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Speaker 1: and they're increasing sentiment. They may cut people to run

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Speaker 1: into the stock market for the fifteenth time this year.

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Speaker 1: But are they actually doing this? You know, it's it's

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Speaker 1: it's too early to tell on this stuff. I think

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Speaker 1: markets are getting ahead of themselves thinking that a pivot

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Speaker 1: has already happened. Well, and of course you have seen

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Speaker 1: some money coming back into Chinese equities, but still has

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Speaker 1: been absolutely brutal, and it does seem like that in

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Speaker 1: large part is where policymakers are focused. We're also looking

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Speaker 1: though leland at a Chinese juan at its weakest against

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Speaker 1: the dollar since November of how much weaker can it

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Speaker 1: get before Beijing starts to get really uncomfortable. Well, look,

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Speaker 1: the want all my all my friends who do for

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Speaker 1: X are excited about this because big, big movements and

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Speaker 1: again in big moments you want. But you know, the

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Speaker 1: U want has been range bound for for years and

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Speaker 1: years and years and and and there are political numbers

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Speaker 1: where they will not go past uh, you know, ultimately seven,

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Speaker 1: but that may even be six seven in the short

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Speaker 1: term because they're trying to maintain stability here. The importance

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Speaker 1: is you're not seeing that you want to fall off

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Speaker 1: a cliff. You're seeing a supercharged dollar because of what

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Speaker 1: you're seeing around the world, weakness in the euro uh,

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Speaker 1: you know, weakness in in in the end, weakness in

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Speaker 1: the want now, so you're you're not actually you're not

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Speaker 1: actually seeing a r wan disintegrate. You're seeing a dollar

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Speaker 1: and so there is not a a rush to try

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Speaker 1: to do something about this. There's again, stability is the mandate.

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Speaker 1: Stability is within within about within about Leland. We're hearing

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Speaker 1: from officials that we're looking to a four or perhaps

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Speaker 1: five handle on GDP this year. What realistically is the

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Speaker 1: GDP that you expect for China. Mm, look, sorry I

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Speaker 1: missed that. What what GDP do you think is realistic

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Speaker 1: in China? Not the official one but the actual one. Uh. Look,

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Speaker 1: if they can get lockdowns under control in the coming weeks,

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Speaker 1: then they're going to still shoot for for four plus.

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Speaker 1: You still have Chinese economists right now talking about five

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Speaker 1: and a half, which is which is rather silly. If

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Speaker 1: they're shut down for all of May, then the question

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Speaker 1: is is there a plausible enough story for for guiding

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Speaker 1: this over too? So I think what they want to

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Speaker 1: do is they want to be able to claim that

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Speaker 1: no matter how bad things get, they're still going to

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Speaker 1: report four. It just quite a question how whether the

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Speaker 1: lockdowns allow the optics for them to be able to

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Speaker 1: announce that. Leland Miller of China Beige Book, thank you

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Speaker 1: so much. We always love having you on and to

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Speaker 1: hear your insights and the more unofficial estimate of what

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Speaker 1: things are are happening in terms of the momentum in China.

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Speaker 1: It's the big question for our audience at the moment.

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Speaker 1: Did Tom Kane take off because the red silks lost

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Speaker 1: to the Orioles so now goes on to say they

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Speaker 1: destroyed the Red Sox, just curious because he has no

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Speaker 1: problem bashing the birds from Baltimore. Will he discuss the

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Speaker 1: big loss t k is on day two of a hangover.

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Speaker 1: On day three of a hangover, when he's forced to

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Speaker 1: come back into work, I'm going to ask him about

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Speaker 1: the Red Sox. Kylie, all right, you do that forward

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Speaker 1: to look forward to his reaction his Tots one though

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Speaker 1: I can't believe I call Spurs tots, but his football

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Speaker 1: team one. So he's a happy man. You can et it.

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Speaker 1: Let's get to junior manual I've ever caught Jillian. Your

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Speaker 1: view is that this is a market of stocks. It's

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Speaker 1: not about the index. Walk me three, you're thinking, so look,

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Speaker 1: going back to this whole idea of a rising cost

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Speaker 1: of capital is clearly the combination of yields moving higher

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Speaker 1: and inflation moving out of a twenty five year range

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Speaker 1: has changed. The correlation between stocks and bonds. Risk on

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Speaker 1: risk off doesn't exist anymore. Now it is risk on

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Speaker 1: risk one and lately risk off risk off, and in

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Speaker 1: that kind of environment, interest stingly enough, with volatility where

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Speaker 1: it is, correlation has been low. Picking stocks wins the day.

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Speaker 1: It's no longer longer an index game, and from our

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Speaker 1: point of view, there's a whole group of stocks out

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Speaker 1: there who actually have had their earnings estimates revised higher

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Speaker 1: and still have you know, a situation where they've been

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Speaker 1: crushed year to date. Uh And that's where the attractiveness

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Speaker 1: lies for us. Okay, So these are specific stocks. First

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Speaker 1: of all, can you mentioned which ones you see the

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Speaker 1: biggest opportunities in Well, we'll say it's it's across the

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Speaker 1: salou The semiconductors have been hit very, very hard in general,

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Speaker 1: and actually if you go back to last week, there

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Speaker 1: was several which had in an in a season of

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Speaker 1: very poor earnings responses, had good earnings responses. The home

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Speaker 1: builders is literally the group that everyone loves to hate

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Speaker 1: right now, huge short interest there um and you know,

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Speaker 1: to us any sign not even that rates are peaking,

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Speaker 1: but that the level of ascent of rates is likely

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Speaker 1: to moderate, which I think if Pale gives the market

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Speaker 1: what it wants, you get to see that those are

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Speaker 1: the places we think are worth a look. Do you

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Speaker 1: think that there have been pockets of capitulation already in

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Speaker 1: this market? Is that basically what you're saying? Uh? So,

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Speaker 1: profitless tech is certainly close to capitulation. But again, in

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Speaker 1: a rising cost of capital environment, it doesn't necessarily mean

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Speaker 1: that there's a bye, because if you look out one

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Speaker 1: to three years, clearly refinancing is a more difficult concept

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Speaker 1: going forward. But the problem here is, particularly when you

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Speaker 1: think about this week, is it's very difficult to explain

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Speaker 1: to the public that negative GDP print along with the

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Speaker 1: large inflation numbers, and the public is the one that

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Speaker 1: disproportionately owns fang, which has been hurt in recent weeks. Well,

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Speaker 1: talking of the public, Julian, let's talk about the consumer,

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Speaker 1: which by and large seems like it's holding in there,

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Speaker 1: is tolerating higher prices, is allowing companies to exercise pricing

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Speaker 1: power and retain margin. Do you expect that that's going

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Speaker 1: to continue to be the narrative as we move forward

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Speaker 1: through the remainder of this year. So we had AVERQUI

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Speaker 1: s I s I do really on the ground survey

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Speaker 1: work literally day to day and week to week, and

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Speaker 1: Ed Hyman's work is try as we might to find

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Speaker 1: material weakening. We don't see it. And so it's our

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Speaker 1: view that if you look at sort of years like

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Speaker 1: twenty sixteen, the last time that an exogenous shock like

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Speaker 1: China weakening spilled over into the US. It derailed the

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Speaker 1: consumer very briefly and then just kept on going. And

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Speaker 1: that's what we see at Julian before we run away.

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Speaker 1: The conclusion of your thoughts picking stocks wins the day, Yes,

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Speaker 1: and no, Julian, it's very, very difficult to pick stocks.

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Speaker 1: Michael Packman pointed out that the average draw down of

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Speaker 1: the average stock on the SMP five dred twenty one

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Speaker 1: to draw down on the SMP's thirteen point five. Judy,

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Speaker 1: and what do you say to people who maybe don't

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Speaker 1: have the skill set to pick stocks or the track

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Speaker 1: record to do so, and don't want to pay up

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Speaker 1: the phase to see if someone's going to be successful

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Speaker 1: or not for a very tricky twelve months. Do we

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Speaker 1: really want to give up on the index just now? So?

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Speaker 1: I think what you do is you really need to

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Speaker 1: take a different sort of look. First of all, it's

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Speaker 1: our view that given the likelihood that you're still going

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Speaker 1: to get above trend, and remember trend pre pandemic was

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Speaker 1: two percent growth, that you're going to get above trend

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Speaker 1: growth in the US this year and next. You're gonna

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Speaker 1: get rising rates. You're going to have to stand high inflation,

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Speaker 1: you want to tilt towards value. Value has outperformed this

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Speaker 1: year after fifteen years of underperformance. We think that continues.

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Speaker 1: But John, look, the fact is is that nothing lasts forever,

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Speaker 1: and index exposure has really literally one the day for fifteen,

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Speaker 1: perhaps twenty years. We think that good active management, and

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Speaker 1: this is where you got to do your research, is

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Speaker 1: going to look very attractive going for you know the

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Speaker 1: problem people have that Judy, and they've heard that over

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Speaker 1: the last fifteen years, and then passive one the day.

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Speaker 1: You know where I'm coming from that people have just

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Speaker 1: heard this so many times that is this really the

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Speaker 1: regime change? Is it finally here? Well? And I would

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Speaker 1: argue that that it is simply because if you think

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Speaker 1: about it again, we've had two other regime changes that

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Speaker 1: people probably hadn't thought that could happen in the last

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Speaker 1: twenty five years. That is a bond market that is

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Speaker 1: now reversed its bullish trend and is arguably having yields

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Speaker 1: headed higher um as well as an inflation breakout, and

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Speaker 1: we think these things cause a rethink of the investment landscape. Julian,

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Speaker 1: awesome having you in the building as well as you

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Speaker 1: exit the building, so weather New York City, Jinetman, you

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Speaker 1: would have a core our site. Kathy boss Jansits the

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Speaker 1: chief US financial economists for the Economics. Kathy, we love

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Speaker 1: catching up with you. Let's get straight to Wednesday that

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Speaker 1: news conference. What do you expect to hear from Sham

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Speaker 1: and Pale? Thanks John, happy to be with you. Well,

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Speaker 1: I think we're gonna have to rely on the forward

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Speaker 1: guidance and any tweaks to the policy statement because we're

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Speaker 1: not going to begin revised GDP or inflation or those

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Speaker 1: infamous UM interest rate that plot estimates. So um. You know,

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Speaker 1: it really does come down to the messaging and any

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Speaker 1: type of forward guidance UM he provides. I think he

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Speaker 1: is going to remain very hawkish. Um. They're very worried

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Speaker 1: about inflation. They see wage pressures picking up. Um. So

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Speaker 1: fifty basis points done the deal for Wednesday, and and

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Speaker 1: our view is probably another fifty basis points in June.

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Speaker 1: We don't think they're quite ready to go seventy five,

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Speaker 1: although you know, I know the markets have been flirting

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Speaker 1: with that. Kathy, what do you think has the more potential,

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Speaker 1: the most potential to move markets the Wednesday FED meeting

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Speaker 1: or the Friday Perils Report. I would I would bet

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Speaker 1: on the FED eating um. You know, payroll should be

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Speaker 1: slid um. You know, the wage data probably actually takes

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Speaker 1: front center um, you know, in terms of what's most

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Speaker 1: important of the data, maybe also the labor force participation rate,

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Speaker 1: because of view is at least our view is that

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Speaker 1: as labor force um conditions continue to improve, that's gonna

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Speaker 1: pull more workers into the labor force. You need that

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Speaker 1: to keep a cap on wages going forward. So I

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Speaker 1: think it'll really the FED right now sets the stage

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Speaker 1: um for the financial markets and really also for the economy.

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Speaker 1: Peleey ansked a really good question earlier about what the

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Speaker 1: bigger consequence from the China lockdowns would be for the

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Speaker 1: U S economy, whether it would be faster inflation or

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Speaker 1: slower growth, and the answer, unfortunately is probably some dose

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Speaker 1: of both of them. How are you viewing this as

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Speaker 1: with respect to the FED and how much more difficult

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Speaker 1: it makes their decision? Definitely makes it more difficult. It's

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Speaker 1: it's another stagflationary shock, even if we're not in staging

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Speaker 1: fflation per se, because we have stronger growth um and

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Speaker 1: momentum thankfully for the US still looks very good. The

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Speaker 1: consumer spending data on Friday showed the consumers can actually

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Speaker 1: outspend inflation um only by two tenths, but that's significant

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Speaker 1: because as it gives us a solid handoff the consumer

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Speaker 1: spending in in Q two UM. That all said, the

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Speaker 1: FEDS looking at still strong domestic demand backdrop UH, supply

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Speaker 1: chains are not correcting as you highlighted, as quickly as

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Speaker 1: we all thought or hoped um. And and on top

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Speaker 1: of that you have wages um picking up a bit.

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Speaker 1: So that's just going to keep them in a hawkiche

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Speaker 1: mood and they're gonna hope that they contain inflation without

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Speaker 1: you know, killing off the business expansion. Well, Kathy, to

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Speaker 1: your point on the consumer, that's not just something we're

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Speaker 1: getting out of the economic data. You're hearing it from

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Speaker 1: a large part of corporate America as well, that the

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Speaker 1: consumer is hanging in there and is tolerant of higher prices.

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Speaker 1: I'm wondering how long that can remain the case, and

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Speaker 1: if the American can sumer and the support from it

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Speaker 1: is actually going to allow and support the FED and

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Speaker 1: landing softly, we think it can last for quite a bit.

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Speaker 1: At least through UM this year. UM. The household balanty

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Speaker 1: it's really strong. Right. You have aggregate savings that were

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Speaker 1: built up during the pandemic. Uh, they've tapped into a

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Speaker 1: little bit. I mean, we estimate somewhere around forty billion,

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Speaker 1: but they built up two point seven trillion UM. Leverage

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Speaker 1: and debt is quite low UM. And you have the

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Speaker 1: wealth gains from housing and even the equity market, even

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Speaker 1: though it's faltering a little bit as of late, and

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Speaker 1: that still gives a powerful wealth effects. So we think

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Speaker 1: it carries us at least through this year and even

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Speaker 1: into next year. But that's it's really good to depend

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Speaker 1: on the Fed. If if they have to drive rates

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Speaker 1: much higher, UM, you know, let's say three or four percent,

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Speaker 1: that's not what we think. We think it's somewhere over

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Speaker 1: you know, to sixty or so on the Fed fund rate.

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Speaker 1: But if they get higher than that, because inflation stickier,

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Speaker 1: that's gonna be really difficult for the consumer and also

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Speaker 1: for businesses. How is your thinking on the balance sheet evolved, Kathy?

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Speaker 1: And do you think that what we hear from the

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Speaker 1: Federal Reserve on Wednesday on that for an in particular,

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Speaker 1: can hold any surprises I think they'd rather not surprise

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Speaker 1: us on that front. There's so much uncertainty around the

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Speaker 1: rate forecast and outlook, they want to keep it as

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Speaker 1: boring as possible. Of course, we know they've struggled to

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Speaker 1: do that. It's not as boring as watching page dry um.

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Speaker 1: So we we expect that they'll, you know, ramp up

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Speaker 1: the balance sheet reduction. They'll start off with maybe you know,

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Speaker 1: thirty billion in treasuries, fillion in mortgage backed securities and

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Speaker 1: eventually get to somewhere around which is what they floated

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Speaker 1: right in the FOMC minutes, and and it's largely what

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Speaker 1: the market store expecting looking at the moving real yields

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Speaker 1: taking place this morning, the high of the year happening

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Speaker 1: right now. On a closing basis, Lisa, on real yield,

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Speaker 1: it's just about positive, just about positive. We did that intro,

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Speaker 1: I think in the last couple of weeks. We did

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Speaker 1: that in today. But at the same time, people are

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Speaker 1: looking for this being a more sustained move, and we

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Speaker 1: haven't seen a more prolonged decline zero point zero one

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Speaker 1: five four. This is actually interesting because it's been so

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Speaker 1: deeply negative and was more than negative one percent lower

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Speaker 1: than negative one percent. As recently as March. This move

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Speaker 1: has been dramatic as people really assess how tight the

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Speaker 1: FED would like to go and really the ripple effects

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Speaker 1: through equities. I've got to say, John, could be what

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00:23:21,680 --> 00:23:23,800
Speaker 1: we're seeing today in terms of the sentiment. Cathy, just

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00:23:23,800 --> 00:23:25,520
Speaker 1: want to come to you on this so called FED

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00:23:25,600 --> 00:23:28,800
Speaker 1: put and whether this FED is truly data dependent. Bob

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00:23:28,800 --> 00:23:30,480
Speaker 1: middle of Blank Rock said to me on Friday that

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00:23:30,520 --> 00:23:33,439
Speaker 1: they don't have the luxury of being data dependent. Maybe

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00:23:33,440 --> 00:23:36,240
Speaker 1: they will later on in the year. Do you take

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00:23:36,280 --> 00:23:38,120
Speaker 1: that particular position as well, and what do you think

437
00:23:38,119 --> 00:23:42,479
Speaker 1: they can become data dependent? Again, it's a good question.

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00:23:42,840 --> 00:23:45,960
Speaker 1: I think they are data dependent, there's no doubt about it.

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00:23:46,000 --> 00:23:48,160
Speaker 1: But part of the data they're looking at our financial

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00:23:48,200 --> 00:23:51,160
Speaker 1: conditions broad financial conditions, So that is going to include

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00:23:51,640 --> 00:23:54,440
Speaker 1: equity prices, that is going to include corporate bonds, but

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00:23:54,480 --> 00:23:56,920
Speaker 1: it's going to include the dollar. Um. So how they

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00:23:57,000 --> 00:23:59,960
Speaker 1: see financial conditions evolving is going to help them caliber

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00:24:00,080 --> 00:24:02,160
Speaker 1: rate where they think that the funds rate is going

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00:24:02,200 --> 00:24:04,960
Speaker 1: to be. But you know, I think right now front

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00:24:04,960 --> 00:24:08,040
Speaker 1: and center for them is taming inflation. Uh, and that's

447
00:24:08,080 --> 00:24:11,080
Speaker 1: what we're gonna hear for now, um, as we progress

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00:24:11,160 --> 00:24:14,000
Speaker 1: through two twenty two, and if things slow a little,

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00:24:14,080 --> 00:24:16,480
Speaker 1: they may pull back a little bit on that really

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00:24:16,520 --> 00:24:20,480
Speaker 1: hawkish rhetoric, Kathy, what would be a restrictive Fed policy rate?

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00:24:21,840 --> 00:24:24,679
Speaker 1: And our view it's two percent neutral, So anything above

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00:24:24,760 --> 00:24:28,000
Speaker 1: two percent will get you too restrictive. Now the fedserve things,

453
00:24:28,040 --> 00:24:31,720
Speaker 1: it's two point four, um, So there's a little tension there. Um.

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00:24:31,840 --> 00:24:35,480
Speaker 1: Markets probably a little closer to our view frankly, but

455
00:24:36,000 --> 00:24:38,320
Speaker 1: it's an unknown, right, It's it's an estimate. It's very

456
00:24:38,359 --> 00:24:43,080
Speaker 1: difficult to really um pin down precisely. Um. But certainly

457
00:24:43,119 --> 00:24:45,520
Speaker 1: once you get above two percent, that is going to

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00:24:45,680 --> 00:24:47,760
Speaker 1: have some repple effects. And we see that right in

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00:24:47,800 --> 00:24:51,439
Speaker 1: the mortgage market, right, see mortgage rates already jumping, you know,

460
00:24:51,480 --> 00:24:53,440
Speaker 1: well above five percent that is going to start to

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00:24:53,480 --> 00:24:56,040
Speaker 1: slow things down. So keep in mind what the market

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00:24:56,040 --> 00:24:57,639
Speaker 1: has done is already doing some of the work for

463
00:24:57,680 --> 00:25:00,439
Speaker 1: the Fed reserve. And you've certainly seen that showing up

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00:25:00,440 --> 00:25:03,159
Speaker 1: in financial conditions. We were joking earlier at Kathy that

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00:25:03,200 --> 00:25:06,000
Speaker 1: the Fed's only actually moved twenty five basis points, and

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00:25:06,080 --> 00:25:08,439
Speaker 1: yet looking at the market, you may think they moved

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00:25:08,520 --> 00:25:11,600
Speaker 1: a lot more dramatically. Has the market done enough work

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00:25:11,680 --> 00:25:13,600
Speaker 1: that the Federal Reserve may actually have to be less

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00:25:13,640 --> 00:25:18,320
Speaker 1: aggressive than is currently the kind of consensus thinking, yeah,

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00:25:18,400 --> 00:25:20,880
Speaker 1: we we think they're going to go less aggressive than

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00:25:20,920 --> 00:25:24,160
Speaker 1: the markets believe. When I looked at your at Eller curve,

472
00:25:24,240 --> 00:25:26,520
Speaker 1: you know, with the front end short term rates, they

473
00:25:26,520 --> 00:25:29,800
Speaker 1: were predicting a fund funds rate topping out around three

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00:25:29,840 --> 00:25:32,479
Speaker 1: per cent or so next year. Again, we think it's

475
00:25:32,480 --> 00:25:36,120
Speaker 1: about forty basis points lower, So within that ballpark, um so,

476
00:25:36,160 --> 00:25:38,800
Speaker 1: I think. But the fears, you know, the whisper fears

477
00:25:38,800 --> 00:25:42,199
Speaker 1: that they'll have to go even higher, I think are unfounded,

478
00:25:42,240 --> 00:25:44,680
Speaker 1: and we'll have to watch closely the financial conditions, will

479
00:25:44,720 --> 00:25:47,399
Speaker 1: have to watch inflation. But if inflation is close to

480
00:25:47,440 --> 00:25:51,080
Speaker 1: peeking despite you know, the supply chain problems and aggregate

481
00:25:51,160 --> 00:25:54,800
Speaker 1: demand for the consumers shifting from goods to services, that's

482
00:25:54,800 --> 00:25:56,760
Speaker 1: really going to help the fit out a lot, along

483
00:25:56,800 --> 00:26:00,000
Speaker 1: with you know, the tightening in financial conditions. That next

484
00:26:00,000 --> 00:26:02,600
Speaker 1: CPI print I think coming up next week, isn't it, Lisa,

485
00:26:02,720 --> 00:26:06,400
Speaker 1: I believe so, I'm looking at it right now, and

486
00:26:06,560 --> 00:26:08,199
Speaker 1: hold on a second. I will check that for you.

487
00:26:08,240 --> 00:26:10,520
Speaker 1: But the cp I print will be important for the

488
00:26:10,840 --> 00:26:13,359
Speaker 1: perhaps psychological impacts as well as the direction. Do you

489
00:26:13,400 --> 00:26:16,720
Speaker 1: think we're again it is the eleventh? On you? I

490
00:26:16,760 --> 00:26:18,840
Speaker 1: think I kind of knew it was the eleventh. I

491
00:26:18,920 --> 00:26:21,960
Speaker 1: was just imagining you'd have confirmation. Well you just imagine,

492
00:26:22,000 --> 00:26:24,199
Speaker 1: do you imagine more of me than what actually happened?

493
00:26:24,240 --> 00:26:28,919
Speaker 1: Thank you, Thank you. Next week mechanical peaking, you might

494
00:26:28,960 --> 00:26:30,879
Speaker 1: just say thank you to Kathy Kathy bus Jack six.

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00:26:31,359 --> 00:26:33,720
Speaker 1: Thank you very much. Looking ahead to Wednesday in the

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00:26:33,800 --> 00:26:37,960
Speaker 1: Federates seven. This is the Bloomberg Surveillance Podcast. Thanks for listening.

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00:26:38,320 --> 00:26:41,680
Speaker 1: Join us live weekdays from seven to ten AMI Eastern

498
00:26:41,920 --> 00:26:45,880
Speaker 1: on Bloomberg Radio and on Bloomberg Television each day from

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00:26:46,000 --> 00:26:51,280
Speaker 1: six to nine am for insight from the best and economics, finance, investment,

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00:26:51,400 --> 00:26:56,439
Speaker 1: and international relations. And subscribe to the Surveillance podcast on

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00:26:56,520 --> 00:27:00,320
Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course, on

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00:27:00,440 --> 00:27:04,480
Speaker 1: the terminal. I'm Tom keene In. This is Bloomer