WEBVTT - Surveillance: China Challenges With Citi’s Morse (Podcast) 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:09.200 --> 0:00:13.039 with Jonathan Ferrell and Lisa A. Brawmowitz Jailee. We bring 0:00:13.119 --> 0:00:17.119 you insight from the best and economics, finance, investment, and 0:00:17.239 --> 0:00:23.320 international relations. Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg 0:00:23.360 --> 0:00:29.400 dot com, and of course on the Bloomberg terminal at 0:00:29.400 --> 0:00:32.920 More's Global headed Commodities Research. As City joins us, now add, 0:00:33.200 --> 0:00:35.720 it's not all doom and gloom, as you say on 0:00:35.880 --> 0:00:39.880 natural gas. This perfect storm shall pass, this market should 0:00:39.960 --> 0:00:42.519 loosen up later on. It just walk us through the 0:00:42.520 --> 0:00:45.400 current thinking at City compared to the consensus view that 0:00:45.400 --> 0:00:48.080 I'm sure it's giving you some pushback at the moment. Well, 0:00:48.120 --> 0:00:50.760 our natural gas, we're getting a significant amount of perspect 0:00:51.240 --> 0:00:55.080 The issue that we see is where markets are loosening up. 0:00:55.640 --> 0:00:58.360 And remember we're dealing with a problem that's in the 0:00:58.360 --> 0:01:01.760 power generating sector, not at the moment, in the transportation sector, 0:01:01.840 --> 0:01:05.800 not in buildings, not in industrial processes, are agricultural processes, 0:01:05.840 --> 0:01:09.759 but very much, very specific to fuels. In the power 0:01:09.840 --> 0:01:14.680 gen sector. We're seeing Germany, excuse me, China actually going 0:01:14.720 --> 0:01:18.960 all out for coal. They are already looking at producing 0:01:18.959 --> 0:01:21.000 thirteen and a half percent more coal this year than 0:01:21.080 --> 0:01:23.759 last year. They're adding a hundred million tons of domestic 0:01:23.760 --> 0:01:26.440 production this year and in the following two years each 0:01:26.480 --> 0:01:30.440 another hundred million tons. That's going to displace imports into China, 0:01:30.920 --> 0:01:33.840 making coal available for the rest of the world. And 0:01:33.880 --> 0:01:36.400 at the same time they're reducing their imports of natural 0:01:36.440 --> 0:01:40.560 gas unit date their way down. They have other supplies 0:01:40.560 --> 0:01:44.000 of natural gas other than lerg imports. They have pipeline 0:01:44.000 --> 0:01:48.200 gas from Uzbekistan, a big jump in pipeline gas from Russia. 0:01:48.560 --> 0:01:52.040 Their domestic production of gas went up around six or 0:01:52.080 --> 0:01:53.960 seven percent last year, it's going to go up eight 0:01:54.640 --> 0:01:58.000 percent this year. And they just simply need less natural 0:01:58.040 --> 0:02:01.400 gas that's gonna loosen up markets provide a significant amount 0:02:01.760 --> 0:02:06.360 for Europe. So what we see happening is a progressive 0:02:06.840 --> 0:02:11.120 reduction in where European UH and global gas prices are 0:02:11.400 --> 0:02:13.960 and along with that gas prices in the US. How 0:02:14.040 --> 0:02:16.320 much do you factor in at some sort of ban 0:02:16.639 --> 0:02:22.680 or overall embargo on Russian gas imports to Germany. We 0:02:22.720 --> 0:02:25.400 actually think that's a very low likelihood on both sides. 0:02:25.720 --> 0:02:30.920 UH and if Germany is not gonna use its fetail power, 0:02:30.919 --> 0:02:33.480 and the EU hungry certainly will. So we don't think 0:02:33.520 --> 0:02:37.880 there's going to be an overall EU European community agreement 0:02:38.080 --> 0:02:43.480 on not pulling in natural gas or oil from from Russia. 0:02:43.480 --> 0:02:45.160 And we don't think the Russian is gonna pull back 0:02:45.200 --> 0:02:49.760 because uh, income is better than no income. We actually 0:02:49.960 --> 0:02:54.200 think that, And that's another kind of controversial point that 0:02:54.560 --> 0:02:58.120 where Russia is now, the volumes of Russia's now exploiting 0:02:58.440 --> 0:03:01.280 of natural gas could go down, but they also could 0:03:01.280 --> 0:03:04.720 go up. There's tolerance in the contracts with European countries 0:03:05.200 --> 0:03:08.639 to add on above the taker pay contracts that they 0:03:08.680 --> 0:03:11.680 have and if they added on what they could by contract, 0:03:12.680 --> 0:03:16.440 assuming that the rouble payment issue is dealt with, which 0:03:16.480 --> 0:03:19.680 we think it would be. Uh. Actually more gas means 0:03:19.680 --> 0:03:22.480 lower prices, and we get if we get the volume right, 0:03:22.480 --> 0:03:25.359 it's lower revenue for Russia. So it's another it's another 0:03:25.400 --> 0:03:31.040 strategy that maybe not politically satisfactory, but it could actually work. 0:03:31.919 --> 0:03:34.320 For so long, many months now, we've been focused on 0:03:34.400 --> 0:03:37.760 the supply equation, on how tight supply is. Now the 0:03:37.800 --> 0:03:41.520 conversation shifting back it seems more so toward demand, especially 0:03:41.520 --> 0:03:44.560 when you see a Chinese economy that is looking incredibly 0:03:44.560 --> 0:03:47.080 weak in the face of persistent COVID zero policy. How 0:03:47.080 --> 0:03:49.840 are you thinking about China and the demand story, not 0:03:49.960 --> 0:03:52.960 just for fuels, but also the medals as well. Well, 0:03:52.960 --> 0:03:55.480 it's not just China demand or other countries as well, 0:03:55.520 --> 0:03:58.320 but for China it looks as though demand is down 0:03:58.360 --> 0:04:00.040 more than a million dollars a day to day. It 0:04:00.720 --> 0:04:04.000 doesn't look like that's gonna come back anytime soon. We 0:04:04.040 --> 0:04:07.520 think they're gonna keep the the blockage on international travel 0:04:08.080 --> 0:04:11.040 through the end of the year. So there there is 0:04:11.120 --> 0:04:14.080 much less room for growth from China than people had thought. 0:04:14.560 --> 0:04:17.440 Certainly not the seven hundred thousand barrels a day of 0:04:17.480 --> 0:04:21.280 growth that the OPEC Secretariat has been thinking that's gonna 0:04:21.320 --> 0:04:23.000 come from China. We think it's going to be negative 0:04:23.040 --> 0:04:25.680 growth for the year. Maybe not a million barrels a 0:04:25.760 --> 0:04:28.200 day under year on year, but but a negative number. 0:04:28.520 --> 0:04:31.719 And it's also the US where where we've we've not 0:04:31.880 --> 0:04:35.960 seen demand increasing at the degree to which we would Indeed, 0:04:36.240 --> 0:04:38.719 for the last four weeks on a four week moving average, 0:04:39.080 --> 0:04:42.200 US gasoline demand is lower than any year in the 0:04:42.279 --> 0:04:45.279 last five except for that deep cut in demand during 0:04:46.360 --> 0:04:48.599 part of the deepest part of the pandemic. So US 0:04:48.640 --> 0:04:52.800 demand has actually stalled out, just as Chinese demand has 0:04:53.120 --> 0:04:56.000 has been reduced. European demand is going to be lower, 0:04:56.200 --> 0:04:58.800 Emergency market demand is going to be lower. Uh, it 0:04:58.839 --> 0:05:02.720 would not be surprised and to see significant projections going 0:05:02.800 --> 0:05:04.880 down for where demand is going for the rest of 0:05:04.880 --> 0:05:06.680 the year. Just finished on. Supply in the US has 0:05:06.680 --> 0:05:09.040 been creeping up recently, and where do you see that 0:05:09.080 --> 0:05:12.080 topping up? Topping out? It's about eleven point nine million 0:05:12.080 --> 0:05:14.360 barrels a day at the moment. Yeah, and that's nine 0:05:14.760 --> 0:05:17.279 a day year on year, by the way, Um, we 0:05:17.320 --> 0:05:19.080 think it's going to keep growing at this rate through 0:05:19.120 --> 0:05:21.480 the end of the year. So if we add all liquids, 0:05:21.640 --> 0:05:26.359 including natural gas liquids, we've just raised our outlook for 0:05:26.480 --> 0:05:29.400 US production to be one point four million barrels a 0:05:29.480 --> 0:05:33.120 day year on year deck deck. We think it will 0:05:33.200 --> 0:05:35.880 be getting very close to that thirteen million barrels a 0:05:35.960 --> 0:05:40.080 day that we saw in the winter of and the 0:05:40.120 --> 0:05:43.120 momentum that's built from that should be adding another million 0:05:43.120 --> 0:05:46.880 barrels a day in twenty three. So uh, we think 0:05:46.920 --> 0:05:50.080 that you know, one of the reasons for type markets 0:05:50.080 --> 0:05:53.200 has been that drop in US production. But US production 0:05:53.279 --> 0:05:56.200 is coming back very strongly even and would be even 0:05:56.240 --> 0:05:58.839 without the encouragement of the US government. And thank you, 0:05:58.880 --> 0:06:00.840 sir for catching out with this this morning with a 0:06:00.839 --> 0:06:03.200 bit of a different view on several topics that most 0:06:03.200 --> 0:06:12.240 of citsy you ain't seen nothing yet. And what we 0:06:12.320 --> 0:06:15.960 have seen, at least overnight was that manufacturing and non 0:06:16.040 --> 0:06:19.760 serve and services sector in China plunge to the lowest 0:06:20.040 --> 0:06:24.440 since February of twenty This is the reported data. How 0:06:24.520 --> 0:06:26.760 bad are things getting as you start to get all 0:06:26.800 --> 0:06:30.080 of these shutdowns that are locking up the major economic 0:06:30.240 --> 0:06:32.839 engines of the second biggest economy in the world. Leland 0:06:32.880 --> 0:06:36.000 Miller tracts that on the ground, international CEO of the 0:06:36.080 --> 0:06:39.560 China Beige Book, Leland, how bad have things gotten economically 0:06:39.640 --> 0:06:43.320 in China? Not an official level, but the unofficial nuts 0:06:43.320 --> 0:06:48.000 and bolts surveys that you do in the in the mainland. Well, 0:06:48.120 --> 0:06:51.160 April was the first period in which the lockdowns really 0:06:51.320 --> 0:06:54.080 affected growth in a major way. And you know what 0:06:54.200 --> 0:06:56.800 we saw from that was not just a tickdown you 0:06:56.800 --> 0:07:01.160 know in Shanghai or tickdown in Beijing. We saw widespread 0:07:01.160 --> 0:07:04.880 slowdown everywhere, and pretty intensively so it was not just 0:07:05.000 --> 0:07:07.680 services at retail flailing like what happened at the beginning 0:07:07.680 --> 0:07:11.080 of the you know, COVID shutdowns in China, where manufacturing 0:07:11.120 --> 0:07:12.960 is kept up and running. The big thing now is 0:07:13.000 --> 0:07:15.920 that manufacturing is being hit hard. Factories are being shut 0:07:16.000 --> 0:07:19.800 down by the lockdowns, not not the outbreaks, but the lockdowns, 0:07:19.800 --> 0:07:22.960 and so you no longer have manufacturing pushing growth forward. 0:07:23.080 --> 0:07:25.240 At the same time retail services and all these other 0:07:25.240 --> 0:07:28.440 sectors are flailing. So you've got widespread weakness right now, 0:07:28.680 --> 0:07:32.200 and and there's no there's no definitive timeline for when 0:07:32.200 --> 0:07:35.040 this will end. What's your impression of the proposals that 0:07:35.040 --> 0:07:38.400 the Chinese authorities have put out there to potentially combat 0:07:38.480 --> 0:07:40.400 some of this weakness, given the fact that even if they, 0:07:40.560 --> 0:07:43.880 for example, have construction projects, who's going to be able 0:07:43.920 --> 0:07:46.480 to go out there and actually do them if they're 0:07:46.520 --> 0:07:49.440 locked down. Well, this this is what we've really been 0:07:49.440 --> 0:07:52.320 stressing for the past several weeks. Uh, there is definitely 0:07:52.360 --> 0:07:55.080 worry uh coming out of Beijing in terms of in 0:07:55.160 --> 0:07:56.760 terms of not just what the growth is going to be, 0:07:56.800 --> 0:07:59.640 but how you have a plausible story around they're not 0:07:59.720 --> 0:08:03.680 being flailing flailing results and and and flailing growth and 0:08:04.040 --> 0:08:07.560 flailing overall governance performance. So there's talk and this is 0:08:07.560 --> 0:08:10.480 why you know, you saw the conversation move last week 0:08:10.840 --> 0:08:14.040 from monetary stimulus to to moving into fiscal stimulus. All 0:08:14.040 --> 0:08:16.360 out fiscal stimulos, we're gonna beat the USA and in 0:08:16.440 --> 0:08:19.400 g d P. But like you said, if you're locking 0:08:19.440 --> 0:08:21.480 down all these major cities, if you're closing down the 0:08:21.560 --> 0:08:24.840 arteries between them, how do you do fiscal stimulus in 0:08:24.920 --> 0:08:26.800 a meaningful way? And so I think a lot of 0:08:26.840 --> 0:08:29.920 what you're seeing right now is still rara rhetoric. It 0:08:29.960 --> 0:08:31.680 doesn't mean they're not going to move more and more 0:08:31.720 --> 0:08:33.800 into into the fiscal side. We've seen that in our 0:08:33.920 --> 0:08:36.480 data for for some time now. But the idea that 0:08:36.520 --> 0:08:38.560 they're going to all out stimulus, they're going to recreate 0:08:38.600 --> 0:08:41.040 some of the conditions in previous party conditions year, it's 0:08:41.120 --> 0:08:44.160 way too early to make that jump, alright. So it's 0:08:44.200 --> 0:08:47.000 talking the talk versus actually walking the walk to large 0:08:47.040 --> 0:08:49.720 part to this point, Leland, Something else that authorities have 0:08:49.760 --> 0:08:52.800 talked about, though, is wrapping up the regulatory crackdowns on 0:08:52.880 --> 0:08:56.320 industries like technology. Do you think that actually will come 0:08:56.360 --> 0:08:59.679 to fruition and what difference will that make it might? 0:08:59.760 --> 0:09:01.800 But but here's here's what investors really need to take 0:09:01.840 --> 0:09:04.960 note of. Uh. They are scrambling right now to send 0:09:05.000 --> 0:09:07.880 positive signals to markets, which is why you're seeing positive 0:09:07.880 --> 0:09:11.719 signals about a compromise over audits and delisting issues. You're 0:09:11.720 --> 0:09:15.880 seeing uh, you know, positive signals about the regulatory crackdown ending. 0:09:15.880 --> 0:09:19.120 You're seeing positive signals about fiscal stimulus coming. It doesn't 0:09:19.120 --> 0:09:20.839 mean any of that is gonna happen. I don't think 0:09:20.880 --> 0:09:23.440 any of this was part of their original trajectory for 0:09:23.559 --> 0:09:26.240 policy going into the Party Congress. So they're saying this 0:09:26.360 --> 0:09:29.040 and they're increasing sentiment. They may cut people to run 0:09:29.040 --> 0:09:31.080 into the stock market for the fifteenth time this year. 0:09:31.520 --> 0:09:33.800 But are they actually doing this? You know, it's it's 0:09:33.880 --> 0:09:35.800 it's too early to tell on this stuff. I think 0:09:35.840 --> 0:09:38.520 markets are getting ahead of themselves thinking that a pivot 0:09:38.559 --> 0:09:41.840 has already happened. Well, and of course you have seen 0:09:41.880 --> 0:09:44.200 some money coming back into Chinese equities, but still has 0:09:44.200 --> 0:09:46.240 been absolutely brutal, and it does seem like that in 0:09:46.320 --> 0:09:49.280 large part is where policymakers are focused. We're also looking 0:09:49.280 --> 0:09:51.720 though leland at a Chinese juan at its weakest against 0:09:51.720 --> 0:09:54.599 the dollar since November of how much weaker can it 0:09:54.720 --> 0:09:59.280 get before Beijing starts to get really uncomfortable. Well, look, 0:09:59.280 --> 0:10:02.480 the want all my all my friends who do for 0:10:02.760 --> 0:10:05.280 X are excited about this because big, big movements and 0:10:05.320 --> 0:10:07.240 again in big moments you want. But you know, the 0:10:07.520 --> 0:10:09.679 U want has been range bound for for years and 0:10:09.760 --> 0:10:12.120 years and years and and and there are political numbers 0:10:12.120 --> 0:10:15.560 where they will not go past uh, you know, ultimately seven, 0:10:15.600 --> 0:10:17.840 but that may even be six seven in the short 0:10:17.960 --> 0:10:22.079 term because they're trying to maintain stability here. The importance 0:10:22.120 --> 0:10:23.679 is you're not seeing that you want to fall off 0:10:23.679 --> 0:10:26.280 a cliff. You're seeing a supercharged dollar because of what 0:10:26.280 --> 0:10:29.280 you're seeing around the world, weakness in the euro uh, 0:10:29.360 --> 0:10:31.920 you know, weakness in in in the end, weakness in 0:10:32.000 --> 0:10:34.480 the want now, so you're you're not actually you're not 0:10:34.559 --> 0:10:37.280 actually seeing a r wan disintegrate. You're seeing a dollar 0:10:37.360 --> 0:10:39.760 and so there is not a a rush to try 0:10:39.800 --> 0:10:42.920 to do something about this. There's again, stability is the mandate. 0:10:42.960 --> 0:10:46.800 Stability is within within about within about Leland. We're hearing 0:10:46.800 --> 0:10:49.240 from officials that we're looking to a four or perhaps 0:10:49.320 --> 0:10:53.320 five handle on GDP this year. What realistically is the 0:10:53.360 --> 0:11:00.319 GDP that you expect for China. Mm, look, sorry I 0:11:00.400 --> 0:11:02.920 missed that. What what GDP do you think is realistic 0:11:03.120 --> 0:11:08.079 in China? Not the official one but the actual one. Uh. Look, 0:11:08.440 --> 0:11:11.200 if they can get lockdowns under control in the coming weeks, 0:11:11.200 --> 0:11:13.600 then they're going to still shoot for for four plus. 0:11:13.920 --> 0:11:16.840 You still have Chinese economists right now talking about five 0:11:16.880 --> 0:11:19.440 and a half, which is which is rather silly. If 0:11:19.480 --> 0:11:21.439 they're shut down for all of May, then the question 0:11:21.520 --> 0:11:23.920 is is there a plausible enough story for for guiding 0:11:23.960 --> 0:11:26.000 this over too? So I think what they want to 0:11:26.040 --> 0:11:28.640 do is they want to be able to claim that 0:11:28.840 --> 0:11:30.800 no matter how bad things get, they're still going to 0:11:30.880 --> 0:11:34.079 report four. It just quite a question how whether the 0:11:34.120 --> 0:11:36.000 lockdowns allow the optics for them to be able to 0:11:36.040 --> 0:11:38.720 announce that. Leland Miller of China Beige Book, thank you 0:11:38.760 --> 0:11:40.720 so much. We always love having you on and to 0:11:40.760 --> 0:11:44.760 hear your insights and the more unofficial estimate of what 0:11:44.840 --> 0:11:53.680 things are are happening in terms of the momentum in China. 0:11:54.360 --> 0:11:56.240 It's the big question for our audience at the moment. 0:11:56.280 --> 0:11:58.640 Did Tom Kane take off because the red silks lost 0:11:58.679 --> 0:12:01.640 to the Orioles so now goes on to say they 0:12:01.679 --> 0:12:04.080 destroyed the Red Sox, just curious because he has no 0:12:04.160 --> 0:12:07.360 problem bashing the birds from Baltimore. Will he discuss the 0:12:07.400 --> 0:12:10.360 big loss t k is on day two of a hangover. 0:12:10.559 --> 0:12:12.280 On day three of a hangover, when he's forced to 0:12:12.280 --> 0:12:13.960 come back into work, I'm going to ask him about 0:12:13.960 --> 0:12:17.080 the Red Sox. Kylie, all right, you do that forward 0:12:17.080 --> 0:12:19.600 to look forward to his reaction his Tots one though 0:12:19.640 --> 0:12:22.280 I can't believe I call Spurs tots, but his football 0:12:22.320 --> 0:12:25.040 team one. So he's a happy man. You can et it. 0:12:27.160 --> 0:12:29.840 Let's get to junior manual I've ever caught Jillian. Your 0:12:29.960 --> 0:12:32.120 view is that this is a market of stocks. It's 0:12:32.120 --> 0:12:36.240 not about the index. Walk me three, you're thinking, so look, 0:12:36.480 --> 0:12:39.360 going back to this whole idea of a rising cost 0:12:39.400 --> 0:12:44.800 of capital is clearly the combination of yields moving higher 0:12:45.080 --> 0:12:48.120 and inflation moving out of a twenty five year range 0:12:48.400 --> 0:12:51.920 has changed. The correlation between stocks and bonds. Risk on 0:12:52.080 --> 0:12:55.319 risk off doesn't exist anymore. Now it is risk on 0:12:55.520 --> 0:12:58.160 risk one and lately risk off risk off, and in 0:12:58.160 --> 0:13:01.760 that kind of environment, interest stingly enough, with volatility where 0:13:01.760 --> 0:13:05.880 it is, correlation has been low. Picking stocks wins the day. 0:13:06.160 --> 0:13:09.000 It's no longer longer an index game, and from our 0:13:09.040 --> 0:13:11.440 point of view, there's a whole group of stocks out 0:13:11.440 --> 0:13:15.200 there who actually have had their earnings estimates revised higher 0:13:16.600 --> 0:13:20.719 and still have you know, a situation where they've been 0:13:20.800 --> 0:13:24.280 crushed year to date. Uh And that's where the attractiveness 0:13:24.400 --> 0:13:27.319 lies for us. Okay, So these are specific stocks. First 0:13:27.320 --> 0:13:28.800 of all, can you mentioned which ones you see the 0:13:28.800 --> 0:13:32.320 biggest opportunities in Well, we'll say it's it's across the 0:13:32.360 --> 0:13:36.800 salou The semiconductors have been hit very, very hard in general, 0:13:37.240 --> 0:13:39.160 and actually if you go back to last week, there 0:13:39.280 --> 0:13:42.600 was several which had in an in a season of 0:13:42.880 --> 0:13:47.200 very poor earnings responses, had good earnings responses. The home 0:13:47.240 --> 0:13:50.559 builders is literally the group that everyone loves to hate 0:13:50.679 --> 0:13:54.600 right now, huge short interest there um and you know, 0:13:54.679 --> 0:13:58.240 to us any sign not even that rates are peaking, 0:13:58.679 --> 0:14:02.199 but that the level of ascent of rates is likely 0:14:02.240 --> 0:14:05.640 to moderate, which I think if Pale gives the market 0:14:05.760 --> 0:14:08.480 what it wants, you get to see that those are 0:14:08.480 --> 0:14:10.719 the places we think are worth a look. Do you 0:14:10.720 --> 0:14:12.920 think that there have been pockets of capitulation already in 0:14:12.920 --> 0:14:16.880 this market? Is that basically what you're saying? Uh? So, 0:14:17.120 --> 0:14:22.400 profitless tech is certainly close to capitulation. But again, in 0:14:22.440 --> 0:14:26.400 a rising cost of capital environment, it doesn't necessarily mean 0:14:26.440 --> 0:14:28.960 that there's a bye, because if you look out one 0:14:29.000 --> 0:14:33.440 to three years, clearly refinancing is a more difficult concept 0:14:34.320 --> 0:14:39.240 going forward. But the problem here is, particularly when you 0:14:39.280 --> 0:14:42.440 think about this week, is it's very difficult to explain 0:14:42.480 --> 0:14:46.920 to the public that negative GDP print along with the 0:14:47.120 --> 0:14:50.000 large inflation numbers, and the public is the one that 0:14:50.040 --> 0:14:53.800 disproportionately owns fang, which has been hurt in recent weeks. Well, 0:14:53.840 --> 0:14:56.120 talking of the public, Julian, let's talk about the consumer, 0:14:56.160 --> 0:14:58.200 which by and large seems like it's holding in there, 0:14:58.280 --> 0:15:01.760 is tolerating higher prices, is allowing companies to exercise pricing 0:15:01.800 --> 0:15:04.080 power and retain margin. Do you expect that that's going 0:15:04.160 --> 0:15:06.440 to continue to be the narrative as we move forward 0:15:06.440 --> 0:15:09.440 through the remainder of this year. So we had AVERQUI 0:15:09.840 --> 0:15:12.480 s I s I do really on the ground survey 0:15:12.560 --> 0:15:15.560 work literally day to day and week to week, and 0:15:15.760 --> 0:15:19.080 Ed Hyman's work is try as we might to find 0:15:19.200 --> 0:15:23.600 material weakening. We don't see it. And so it's our 0:15:23.720 --> 0:15:25.880 view that if you look at sort of years like 0:15:26.800 --> 0:15:30.920 twenty sixteen, the last time that an exogenous shock like 0:15:31.080 --> 0:15:35.800 China weakening spilled over into the US. It derailed the 0:15:35.840 --> 0:15:39.360 consumer very briefly and then just kept on going. And 0:15:39.640 --> 0:15:41.880 that's what we see at Julian before we run away. 0:15:42.160 --> 0:15:46.600 The conclusion of your thoughts picking stocks wins the day, Yes, 0:15:46.760 --> 0:15:50.600 and no, Julian, it's very, very difficult to pick stocks. 0:15:51.040 --> 0:15:53.640 Michael Packman pointed out that the average draw down of 0:15:53.680 --> 0:15:57.040 the average stock on the SMP five dred twenty one 0:15:57.640 --> 0:16:01.760 to draw down on the SMP's thirteen point five. Judy, 0:16:01.760 --> 0:16:03.200 and what do you say to people who maybe don't 0:16:03.200 --> 0:16:06.520 have the skill set to pick stocks or the track 0:16:06.600 --> 0:16:08.920 record to do so, and don't want to pay up 0:16:08.920 --> 0:16:10.720 the phase to see if someone's going to be successful 0:16:10.760 --> 0:16:12.880 or not for a very tricky twelve months. Do we 0:16:12.920 --> 0:16:15.200 really want to give up on the index just now? So? 0:16:15.600 --> 0:16:18.200 I think what you do is you really need to 0:16:18.280 --> 0:16:20.840 take a different sort of look. First of all, it's 0:16:20.840 --> 0:16:24.280 our view that given the likelihood that you're still going 0:16:24.320 --> 0:16:28.480 to get above trend, and remember trend pre pandemic was 0:16:28.560 --> 0:16:31.040 two percent growth, that you're going to get above trend 0:16:31.040 --> 0:16:33.880 growth in the US this year and next. You're gonna 0:16:33.880 --> 0:16:37.000 get rising rates. You're going to have to stand high inflation, 0:16:37.320 --> 0:16:41.520 you want to tilt towards value. Value has outperformed this 0:16:41.600 --> 0:16:45.400 year after fifteen years of underperformance. We think that continues. 0:16:45.680 --> 0:16:49.200 But John, look, the fact is is that nothing lasts forever, 0:16:49.720 --> 0:16:54.760 and index exposure has really literally one the day for fifteen, 0:16:54.840 --> 0:16:58.280 perhaps twenty years. We think that good active management, and 0:16:58.320 --> 0:17:00.840 this is where you got to do your research, is 0:17:00.880 --> 0:17:03.280 going to look very attractive going for you know the 0:17:03.280 --> 0:17:05.280 problem people have that Judy, and they've heard that over 0:17:05.320 --> 0:17:07.960 the last fifteen years, and then passive one the day. 0:17:08.560 --> 0:17:10.280 You know where I'm coming from that people have just 0:17:10.359 --> 0:17:12.560 heard this so many times that is this really the 0:17:12.600 --> 0:17:15.879 regime change? Is it finally here? Well? And I would 0:17:15.920 --> 0:17:18.560 argue that that it is simply because if you think 0:17:18.560 --> 0:17:22.000 about it again, we've had two other regime changes that 0:17:22.119 --> 0:17:24.880 people probably hadn't thought that could happen in the last 0:17:24.920 --> 0:17:29.240 twenty five years. That is a bond market that is 0:17:29.280 --> 0:17:33.320 now reversed its bullish trend and is arguably having yields 0:17:33.320 --> 0:17:37.159 headed higher um as well as an inflation breakout, and 0:17:37.200 --> 0:17:41.040 we think these things cause a rethink of the investment landscape. Julian, 0:17:41.119 --> 0:17:44.600 awesome having you in the building as well as you 0:17:44.640 --> 0:17:48.960 exit the building, so weather New York City, Jinetman, you 0:17:48.960 --> 0:17:57.879 would have a core our site. Kathy boss Jansits the 0:17:57.960 --> 0:18:01.239 chief US financial economists for the Economics. Kathy, we love 0:18:01.240 --> 0:18:03.359 catching up with you. Let's get straight to Wednesday that 0:18:03.440 --> 0:18:05.639 news conference. What do you expect to hear from Sham 0:18:05.640 --> 0:18:09.080 and Pale? Thanks John, happy to be with you. Well, 0:18:09.160 --> 0:18:11.840 I think we're gonna have to rely on the forward 0:18:11.880 --> 0:18:14.440 guidance and any tweaks to the policy statement because we're 0:18:14.440 --> 0:18:17.840 not going to begin revised GDP or inflation or those 0:18:18.119 --> 0:18:22.760 infamous UM interest rate that plot estimates. So um. You know, 0:18:22.760 --> 0:18:25.120 it really does come down to the messaging and any 0:18:25.160 --> 0:18:28.399 type of forward guidance UM he provides. I think he 0:18:28.600 --> 0:18:32.160 is going to remain very hawkish. Um. They're very worried 0:18:32.200 --> 0:18:36.359 about inflation. They see wage pressures picking up. Um. So 0:18:36.480 --> 0:18:39.240 fifty basis points done the deal for Wednesday, and and 0:18:39.320 --> 0:18:42.320 our view is probably another fifty basis points in June. 0:18:42.560 --> 0:18:44.640 We don't think they're quite ready to go seventy five, 0:18:45.000 --> 0:18:47.280 although you know, I know the markets have been flirting 0:18:47.320 --> 0:18:49.920 with that. Kathy, what do you think has the more potential, 0:18:49.960 --> 0:18:53.960 the most potential to move markets the Wednesday FED meeting 0:18:54.200 --> 0:18:58.520 or the Friday Perils Report. I would I would bet 0:18:58.560 --> 0:19:02.920 on the FED eating um. You know, payroll should be 0:19:03.000 --> 0:19:07.360 slid um. You know, the wage data probably actually takes 0:19:07.880 --> 0:19:11.440 front center um, you know, in terms of what's most 0:19:11.520 --> 0:19:14.720 important of the data, maybe also the labor force participation rate, 0:19:15.359 --> 0:19:17.719 because of view is at least our view is that 0:19:17.800 --> 0:19:22.520 as labor force um conditions continue to improve, that's gonna 0:19:22.800 --> 0:19:25.280 pull more workers into the labor force. You need that 0:19:25.359 --> 0:19:27.719 to keep a cap on wages going forward. So I 0:19:27.720 --> 0:19:30.600 think it'll really the FED right now sets the stage 0:19:31.040 --> 0:19:34.320 um for the financial markets and really also for the economy. 0:19:34.560 --> 0:19:37.119 Peleey ansked a really good question earlier about what the 0:19:37.200 --> 0:19:40.159 bigger consequence from the China lockdowns would be for the 0:19:40.240 --> 0:19:42.760 U S economy, whether it would be faster inflation or 0:19:42.800 --> 0:19:46.640 slower growth, and the answer, unfortunately is probably some dose 0:19:46.760 --> 0:19:49.520 of both of them. How are you viewing this as 0:19:49.880 --> 0:19:52.080 with respect to the FED and how much more difficult 0:19:52.119 --> 0:19:55.800 it makes their decision? Definitely makes it more difficult. It's 0:19:55.880 --> 0:19:59.919 it's another stagflationary shock, even if we're not in staging 0:20:00.000 --> 0:20:03.720 fflation per se, because we have stronger growth um and 0:20:03.840 --> 0:20:07.520 momentum thankfully for the US still looks very good. The 0:20:07.560 --> 0:20:11.040 consumer spending data on Friday showed the consumers can actually 0:20:11.119 --> 0:20:15.600 outspend inflation um only by two tenths, but that's significant 0:20:15.600 --> 0:20:19.000 because as it gives us a solid handoff the consumer 0:20:19.080 --> 0:20:22.320 spending in in Q two UM. That all said, the 0:20:22.359 --> 0:20:28.159 FEDS looking at still strong domestic demand backdrop UH, supply 0:20:28.240 --> 0:20:31.440 chains are not correcting as you highlighted, as quickly as 0:20:31.480 --> 0:20:33.960 we all thought or hoped um. And and on top 0:20:34.000 --> 0:20:36.960 of that you have wages um picking up a bit. 0:20:36.960 --> 0:20:39.160 So that's just going to keep them in a hawkiche 0:20:39.240 --> 0:20:42.840 mood and they're gonna hope that they contain inflation without 0:20:42.920 --> 0:20:45.879 you know, killing off the business expansion. Well, Kathy, to 0:20:45.920 --> 0:20:48.120 your point on the consumer, that's not just something we're 0:20:48.160 --> 0:20:50.440 getting out of the economic data. You're hearing it from 0:20:50.480 --> 0:20:52.560 a large part of corporate America as well, that the 0:20:52.600 --> 0:20:56.000 consumer is hanging in there and is tolerant of higher prices. 0:20:56.440 --> 0:20:58.919 I'm wondering how long that can remain the case, and 0:20:59.000 --> 0:21:01.480 if the American can sumer and the support from it 0:21:01.520 --> 0:21:04.240 is actually going to allow and support the FED and 0:21:04.320 --> 0:21:08.880 landing softly, we think it can last for quite a bit. 0:21:08.920 --> 0:21:12.280 At least through UM this year. UM. The household balanty 0:21:12.359 --> 0:21:15.800 it's really strong. Right. You have aggregate savings that were 0:21:15.840 --> 0:21:18.879 built up during the pandemic. Uh, they've tapped into a 0:21:18.880 --> 0:21:21.320 little bit. I mean, we estimate somewhere around forty billion, 0:21:21.359 --> 0:21:25.160 but they built up two point seven trillion UM. Leverage 0:21:25.160 --> 0:21:28.119 and debt is quite low UM. And you have the 0:21:28.440 --> 0:21:31.240 wealth gains from housing and even the equity market, even 0:21:31.280 --> 0:21:33.680 though it's faltering a little bit as of late, and 0:21:33.920 --> 0:21:36.320 that still gives a powerful wealth effects. So we think 0:21:36.359 --> 0:21:39.200 it carries us at least through this year and even 0:21:39.320 --> 0:21:41.480 into next year. But that's it's really good to depend 0:21:41.480 --> 0:21:44.679 on the Fed. If if they have to drive rates 0:21:44.800 --> 0:21:47.919 much higher, UM, you know, let's say three or four percent, 0:21:47.960 --> 0:21:49.720 that's not what we think. We think it's somewhere over 0:21:49.880 --> 0:21:52.159 you know, to sixty or so on the Fed fund rate. 0:21:52.200 --> 0:21:54.680