WEBVTT - Surveillance: We Must Take The Yield Curve Seriously, Fels Says 0:00:00.080 --> 0:00:13.040 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, 0:00:13.480 --> 0:00:16.960 Jai Ley. We bring you inside from the best in economics, finance, 0:00:17.040 --> 0:00:23.480 investment and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:33.920 Bloomberg dot Com and of course on the Bloomberg alongside 0:00:33.960 --> 0:00:36.560 Tom Kane in the City of London. I'm Jonathan Faraoll. 0:00:36.600 --> 0:00:39.720 Good morning to you, Mr Kane, Good morning John Farrell. 0:00:39.760 --> 0:00:43.760 Just exciting last night Tottenham. I'm opening that gorgeous new stadium. 0:00:43.840 --> 0:00:46.000 Did you make it? I did not make it over, 0:00:46.080 --> 0:00:48.800 but we watched every moment. Did you did you enjoy 0:00:48.880 --> 0:00:51.560 every moment? Say? Mr Sun came down and put the 0:00:51.600 --> 0:00:53.600 ball on that and it was very exciting. You want 0:00:53.600 --> 0:00:55.800 be coming back, will you know? I was here with 0:00:55.840 --> 0:00:57.880 our editor in chief John Michael Thwaite, and he made 0:00:57.880 --> 0:01:00.600 clear that you know the idea of going from Liverpool 0:01:00.600 --> 0:01:03.080 and down to see the Todds play, it's a good thing. 0:01:03.160 --> 0:01:05.120 You could just do a football tool for the reason 0:01:05.160 --> 0:01:09.040 while there's Brexit and it's sort of it's a numbing day, John, 0:01:09.080 --> 0:01:13.160 that quiet day, but everybody's done. Roger Boodle was wonderful 0:01:13.240 --> 0:01:16.360 of brexiteer A leave guy writing for the Telegraph once 0:01:16.400 --> 0:01:21.000 a week of capital economics, and Roger was really ferocious 0:01:21.040 --> 0:01:23.960 about the crisis. This is so, where are we now 0:01:24.000 --> 0:01:26.480 and what is the next spring till I think the 0:01:26.600 --> 0:01:29.160 mystery is the support that Mr Corbin will have. I 0:01:29.160 --> 0:01:32.959 think there was pleasantries yesterday. Uh, clearly the Tories the 0:01:33.000 --> 0:01:36.440 Conservatives are very upset. But the next step is really 0:01:36.480 --> 0:01:40.760 to see what actually happens in discussions today. It looks 0:01:40.800 --> 0:01:44.480 like Parliament moving towards blocking a no deal Brexit. I 0:01:44.360 --> 0:01:46.800 imagine everybody else would come along with that, and then 0:01:46.840 --> 0:01:49.080 it's the one next. One of the solutions will be 0:01:49.120 --> 0:01:51.640 to have James Diamond come over and solve Brexit. Do 0:01:51.680 --> 0:01:54.120 you want Jamie Dimond to self Brexit? It was page 0:01:54.160 --> 0:01:56.920 twenty eight of his I think he's busy over at 0:01:57.000 --> 0:01:59.680 JP Morgan for the next five years. He's busy over 0:01:59.680 --> 0:02:02.760 at PEN Morgan. And of course, folks, Mr Diamond out 0:02:02.760 --> 0:02:05.280 where I'm going to guess twenty three pages of detail 0:02:05.520 --> 0:02:08.160 on the financial performance of JP Morgan, but also, as 0:02:08.240 --> 0:02:13.600 usual James Diamond on the American experiment political and economic experiment, 0:02:14.080 --> 0:02:16.640 and also on the view forward we have with us 0:02:16.680 --> 0:02:20.120 this morning, Yacum Fells of PIMCO just thrilled to have 0:02:20.200 --> 0:02:23.440 him for this extended time in our London studios today. 0:02:23.639 --> 0:02:26.519 And Yakom, I want to go to one clear financial 0:02:26.600 --> 0:02:31.320 headline punditry headline from Mr. Diamond. Yield curve in version 0:02:31.600 --> 0:02:35.919 not giving same signal as in past. You've addressed this. 0:02:36.320 --> 0:02:38.960 What do we do with yield curves UH day in 0:02:39.000 --> 0:02:43.680 and day out of this pending recession? Well, Tom, I 0:02:43.680 --> 0:02:46.720 think we have to take the yield curve very seriously. Right, 0:02:46.760 --> 0:02:49.200 there were a lot of voices around UH in the 0:02:49.560 --> 0:02:52.240 last time the yield curve inverted in the previous cycle 0:02:52.320 --> 0:02:54.880 that things were different than it was foreign buying that 0:02:55.000 --> 0:02:58.240 was depressing the long end. That's certainly true. But the 0:02:58.320 --> 0:03:01.560 issue is if the yield curve stay is inverted for longer, 0:03:01.919 --> 0:03:04.440 and you know, to be a reliable recession signal, that 0:03:04.480 --> 0:03:06.760 has to stay inverted for at least three months. But 0:03:06.800 --> 0:03:11.120 if that happens, then it becomes less and less attractive 0:03:11.360 --> 0:03:14.760 for banks to lend. Right, they borrow short, they lend long. 0:03:15.400 --> 0:03:17.799 So that's the reason why the yield curve not only 0:03:17.840 --> 0:03:21.480 predicts recessions but also causes recessions. One of the hallmarks 0:03:21.480 --> 0:03:24.239 of yaka Field's work is the acts as the timeline 0:03:24.240 --> 0:03:26.480 of all these things we speak about every day. And 0:03:26.520 --> 0:03:30.040 as you mentioned, the idea of a chronic inverted yield curve, 0:03:30.120 --> 0:03:34.080 the overlap now versus two thousand sixteen or other periods 0:03:34.480 --> 0:03:38.720 is we've also had chronic negative interest rates. How chronic 0:03:38.840 --> 0:03:42.800 are chronic negative interest rates? Well, they seem to be chronic. 0:03:42.840 --> 0:03:46.000 You know. We've got a huge part of the global 0:03:46.040 --> 0:03:49.600 bond universe trading at negative yields, and there are really 0:03:49.600 --> 0:03:53.120 two factors behind that. One is a fundamental factor, which 0:03:53.200 --> 0:03:56.800 is the global saving blot, and the demand for safe assets, 0:03:57.200 --> 0:04:00.960 which is partly caused by demographics, partly caused by the 0:04:01.000 --> 0:04:03.080 fact that more and more of the savers in this 0:04:03.160 --> 0:04:06.720 world sit in emerging market countries where people have rising 0:04:06.760 --> 0:04:10.000 incomes and they're looking for a safe asset. The other 0:04:10.080 --> 0:04:13.080 explanation for the negative interest is obviously what central banks 0:04:13.080 --> 0:04:14.960 are doing. So if you put the two things together, 0:04:15.040 --> 0:04:17.599 I think we better get used to an environment where 0:04:17.240 --> 0:04:19.960 we were looking at negative yields for a long time. 0:04:20.279 --> 0:04:22.599 Com Fels it's important we bring in John Ferroll because 0:04:22.600 --> 0:04:25.719 he's in tight preparation for the real yield Yakum you 0:04:25.720 --> 0:04:30.240 can see it Fridays. I'm Bloomberg is aware of what 0:04:30.360 --> 0:04:34.040 on what time it is, and privileged to speak to him. 0:04:34.560 --> 0:04:37.599 Let's talk about the distortions work him in fixed income 0:04:37.640 --> 0:04:40.919 globally right now, euro investment grade yields I think are 0:04:40.960 --> 0:04:43.719 about zero point eight percent at the moment. I think 0:04:43.760 --> 0:04:46.760 sixtent of the euro credit universe right now carries a 0:04:46.839 --> 0:04:50.920 negative yield. Yes, that's corporate debt with a negative yield. 0:04:51.520 --> 0:04:53.840 What does pimcotew clients about where you should tilt your 0:04:53.839 --> 0:04:57.359 portfolio in that environment? Well, look, in this environment is 0:04:57.440 --> 0:05:02.720 really really difficult to a find yield at a reasonable price. 0:05:02.800 --> 0:05:04.839 I think that's that's what we're trying to do for 0:05:04.880 --> 0:05:08.400 our clients. So we think the US fixed income universe 0:05:08.680 --> 0:05:11.479 is still attractive. The problem is for European and also 0:05:11.520 --> 0:05:16.760 for Japanese investors, the currency hedging costs are excessive um 0:05:16.839 --> 0:05:19.360 and this is because the short rate differential is so wide. 0:05:19.400 --> 0:05:21.960 So if you want as a European investor, if you 0:05:22.040 --> 0:05:25.560 invest in US fixed income and you want to hedge 0:05:25.680 --> 0:05:29.480 your currency exposure, then you're actually getting a very you know, 0:05:29.520 --> 0:05:32.520 after hedging, you're still getting a very low yield. So 0:05:32.640 --> 0:05:36.960 there's almost no escape from the low yields, and our 0:05:37.080 --> 0:05:41.080 focus is really on the safer parts of the credit spectrum. 0:05:41.120 --> 0:05:44.400 We do worry about the fact that leverage in large 0:05:44.440 --> 0:05:48.640 parts of the corporate universe, including investment grade, has gone 0:05:48.720 --> 0:05:52.800 up so much and the quality of the investment grade 0:05:52.880 --> 0:05:56.520 universe has deteriorated. So that's why we actually recommend to 0:05:56.600 --> 0:05:59.320 be underweight corporate credit in this environment. So just on 0:05:59.400 --> 0:06:03.880 the wholly, coming increasingly defensive, Yes, that's true. We've been 0:06:04.640 --> 0:06:09.520 going increasingly defensive. We are looking for other areas to 0:06:09.640 --> 0:06:13.040 pick up yields, so we're not sitting on hordes of cash. 0:06:13.160 --> 0:06:16.400 We think that, for example, agency and non agency mbs 0:06:16.839 --> 0:06:19.960 are attractive. We think there are some opportunities in emerging 0:06:20.040 --> 0:06:24.600 markets where the outlook has improved. We're just cautious on 0:06:24.720 --> 0:06:28.000 the on on corporate credit per se, which is a 0:06:28.120 --> 0:06:33.320 very crowded trait and where liquidity can ease up, where 0:06:33.279 --> 0:06:36.920 a couidity can tighten, excuse me, can tighten very strongly. Um, 0:06:36.960 --> 0:06:38.800 if you get a sell off, John, can I rip 0:06:38.880 --> 0:06:41.839 up the script? Of course you can. This is really important. 0:06:41.839 --> 0:06:45.120 I'm gonna make a joke, but it's deadly serious. Yet 0:06:45.279 --> 0:06:49.800 last night johnnah Tottenham Stadium, the Todd Stadium, it's a 0:06:49.960 --> 0:06:54.919 cashless stadium. I mean they've overtly said we're a cash 0:06:55.040 --> 0:06:58.279 less stadium. And Yakham Fell's this goes to Ken Rogo's 0:06:58.320 --> 0:07:02.680 magnificent book The Curse of Cash in the experiment in 0:07:02.839 --> 0:07:08.599 Sweden led by Sweden, I should say, of essentially cashless society, 0:07:09.080 --> 0:07:11.120 is that where we're heading? Are we all going to 0:07:11.200 --> 0:07:14.400 be like they are at the Tottenham Stadium. Well, I 0:07:14.640 --> 0:07:17.920 don't think cash will go away, Tom. Yes, Sweden has 0:07:18.000 --> 0:07:21.040 made big strides in that direction. But I think if 0:07:21.080 --> 0:07:23.720 you were to get in a situation where you know, 0:07:23.800 --> 0:07:26.880 interest rates would go even more negative, people would want 0:07:26.920 --> 0:07:29.640 to go back into cash. So rates are probably not 0:07:29.880 --> 0:07:33.920 negative enough yet to induce people to use more cash 0:07:34.040 --> 0:07:36.120 or to hold more cash. But I think that's the 0:07:36.160 --> 0:07:38.720 situation we would get back get get back into. It's 0:07:38.760 --> 0:07:41.200 an interesting experiment. Thank you so much, Jack and Fells 0:07:41.200 --> 0:07:43.560 with us with him, Cooin, just thank you so much 0:07:43.600 --> 0:07:46.119 for being with us today. I was wonderful John Farrell 0:07:46.200 --> 0:07:49.080 to see Roger Brute, Jakom Fells and sat in the 0:07:49.200 --> 0:08:03.800 key of this Brexit debate. Let's bring in Derek Halpenny. 0:08:03.840 --> 0:08:05.920 Shall we m U s G European head of Global 0:08:06.000 --> 0:08:09.720 Markets Research, Derek, let's talk about how price is responding 0:08:09.720 --> 0:08:13.720 to information. The euro is barely moving on week data 0:08:13.800 --> 0:08:15.800 coming out of the euro Zone. What's the signal you 0:08:15.840 --> 0:08:20.400 take from that? Well, I think definitely one of the 0:08:20.440 --> 0:08:24.760 signals is that technicals can be important, and that's one 0:08:24.840 --> 0:08:29.040 twelve level has been pretty important and has been indicated 0:08:29.040 --> 0:08:33.560 in the past as as showing good support. What's behind 0:08:33.640 --> 0:08:37.080 us It's difficult to kind of pinpoint, although I have 0:08:37.240 --> 0:08:41.320 just written a piece covering the i m F FX 0:08:41.360 --> 0:08:44.319 reserved data through to the end of last year, and 0:08:44.360 --> 0:08:48.280 what that shows you, once again for the third consecutive quarter, 0:08:49.080 --> 0:08:53.640 is that center banks appetite for euro is very, very significant. 0:08:53.800 --> 0:08:56.880 And there's only been one period of time going back 0:08:57.000 --> 0:09:01.600 covering the i m F data to when appetite for 0:09:01.720 --> 0:09:04.760 buying the euro has been this strong. Well, what's the why, 0:09:04.920 --> 0:09:08.199 what's the lot of support? Is? Is Santra banks and sorry, 0:09:08.200 --> 0:09:12.880 why why why is this there? Well? Well, you know 0:09:12.960 --> 0:09:18.480 his historically they've tended to purchase euros when they see 0:09:19.160 --> 0:09:22.200 long term value. So whenever you see these periods of 0:09:22.200 --> 0:09:27.520 heavy buying, it has tended to coincide with a period 0:09:27.559 --> 0:09:32.880 that has been where you've seen a fairly notable drop. Unusually, 0:09:33.160 --> 0:09:35.800 Santra banks have been very good at picking bottoms because 0:09:35.840 --> 0:09:40.200 what has transpired after these periods of strong buying is 0:09:40.720 --> 0:09:45.680 nearly always a period of euro appreciation. So Darry, let's 0:09:45.679 --> 0:09:47.320 talk about that. Because we had two guests on the 0:09:47.320 --> 0:09:49.920 program yesterday who were looking to break out of this 0:09:50.000 --> 0:09:53.280 training range on euro dollar very tight, very narrow after 0:09:53.400 --> 0:09:55.880 over the last few months. But they expect to break 0:09:55.880 --> 0:09:58.960 out of that training range to the downside. Why do 0:09:58.960 --> 0:10:03.360 you think we can break out bit to the outside Well, 0:10:03.400 --> 0:10:05.200 you know, well, first of all, I should mention I 0:10:05.200 --> 0:10:08.439 mentioned as the time earlier, I have cut my euro forecasts. 0:10:08.440 --> 0:10:10.679 We were expecting when we were forecasting one twenty for 0:10:10.720 --> 0:10:12.439 the end of this year, and I've had to acknowledge 0:10:12.480 --> 0:10:15.800 that the macro situation in Europe has been far weaker 0:10:15.840 --> 0:10:18.240 than I had anticipated, so I've cut I've cut our 0:10:18.320 --> 0:10:21.760 year end target to one sixteen. So I'm still expecting 0:10:21.800 --> 0:10:23.720 the euro to move a bit higher, but nothing like 0:10:23.800 --> 0:10:26.040 what I was anticipating before. And that is down to 0:10:26.679 --> 0:10:30.359 simply having to acknowledge that the macro situation is is 0:10:30.360 --> 0:10:32.360 is a lot weaker. But you know, I think we're 0:10:32.400 --> 0:10:37.000 in a situation now where when we talk about relative 0:10:37.080 --> 0:10:41.800 cyclical support, not just cyclical supports. From a cyclical support perspective, 0:10:41.840 --> 0:10:44.000 the dollar isn't a worse position than it was last year, 0:10:44.000 --> 0:10:47.720 because clearly we're seeing slower macroeconomic data. But when you 0:10:47.800 --> 0:10:52.320 say relative macro cyclical support, well, you know, nothing really 0:10:52.360 --> 0:10:55.240 has changed, because obviously the slowdown that we're getting is 0:10:55.240 --> 0:10:57.760 not just the United States, it's global, and it's I 0:10:57.800 --> 0:11:01.080 think in part related to Chin that now we're beginning 0:11:01.080 --> 0:11:05.160 to see some tensative evidence of at least demand stabilizing 0:11:05.160 --> 0:11:08.760 in China. And if we get this trade deal, if 0:11:08.800 --> 0:11:11.320 we move towards a softer Brexit, which I think is 0:11:11.600 --> 0:11:14.400 clearly the direction of travel, there's a couple of big 0:11:14.440 --> 0:11:18.800 picture assumptions that fit with some modest recovery and euro 0:11:19.000 --> 0:11:21.600 from from current levels. So, Derek, if the upside on 0:11:21.640 --> 0:11:24.480 euro dollar is somewhat limited because of what is happening 0:11:24.520 --> 0:11:26.680 in the United States, just in terms of the relative 0:11:26.760 --> 0:11:29.760 change for the US economy, where do I get upside 0:11:29.800 --> 0:11:32.319 in European markets right now? We talked a little bit 0:11:32.320 --> 0:11:35.440 earlier on the program about where investment grade euro credit 0:11:35.520 --> 0:11:38.960 was trading. It's actually pretty tight about any basis points 0:11:39.280 --> 0:11:42.440 on on eurodebt right now, that's the yield. I'm just 0:11:42.480 --> 0:11:44.720 wondering where I get my upside of. It's not through credit, 0:11:44.720 --> 0:11:48.319 if it's limited through the Euro, if it's not through equities, 0:11:48.320 --> 0:11:52.440 because we've already had a decent run. Where is it? Derek, Well, again, 0:11:52.480 --> 0:11:55.920 I'm not, I'm not an equities analyst or expert, but 0:11:56.120 --> 0:12:00.720 you know, I at track relative valuation and all I 0:12:00.760 --> 0:12:03.760 would say is that you know the period of out 0:12:03.800 --> 0:12:09.080 performance of US equity is relative to Europe. And further, 0:12:09.120 --> 0:12:15.160 afield tells me that the asset pricing is is priced 0:12:15.200 --> 0:12:18.000 for a kind of a doom gloom scenario across the 0:12:18.040 --> 0:12:19.880 world outside of the US. And I'm not, I'm not 0:12:20.080 --> 0:12:23.959 convinced i'd be that pessimistic. Now again, I go back 0:12:24.040 --> 0:12:26.360 to the data has been more disappointed than than than 0:12:26.440 --> 0:12:29.800 I anticipated. But if if China and we've had a 0:12:29.840 --> 0:12:32.160 lot of stimulus coming through, and if that starts to 0:12:32.280 --> 0:12:35.840 roll out in the economic data, I think the pessimism 0:12:35.840 --> 0:12:38.760 that's there at the moment should should receive somewhat I 0:12:38.800 --> 0:12:41.960 can't afford the next time Arsenal plays at the Tottenham's 0:12:42.000 --> 0:12:46.160 new stadium, the new Stadium. But dear company, um, you 0:12:46.200 --> 0:12:47.959 know I need to make a train in em where 0:12:48.000 --> 0:12:50.760 I actually makes some money. Is Brazil the mother of 0:12:50.800 --> 0:12:57.839 all opportunities right now? Well, again, there's there's doubts there 0:12:57.880 --> 0:13:02.520 in terms of the elocy to get reformed through. Before 0:13:02.559 --> 0:13:05.480 Baltion Arrow came to power, there was optimism that he 0:13:05.480 --> 0:13:09.240 would be able to implement pension reform and and there's 0:13:09.280 --> 0:13:12.880 some question marks over whether or not that can be achieved. 0:13:13.000 --> 0:13:16.880 So again, you look at where dollar Brazil is traded 0:13:17.040 --> 0:13:20.400 and if you have a correct view in terms of 0:13:20.640 --> 0:13:22.959 political progress, well down, Yeah, there's a there's a good 0:13:22.960 --> 0:13:27.120 trade there potentially, but it's still high risk. I mean, John, 0:13:27.160 --> 0:13:29.040 do you remember the romantic days where you'd like you 0:13:29.080 --> 0:13:33.320 actually trade for in exchange to buy the ferrari? Good times? Tim, 0:13:34.000 --> 0:13:37.120 I mean, it's just someone somewhere still doing that. Well 0:13:37.120 --> 0:13:38.760 I don't know, are they? And there's a lot of 0:13:38.760 --> 0:13:40.880 money can be made trade in the range, Derek. I 0:13:40.920 --> 0:13:44.040 mean the range has been narrow, tight and sending predictable 0:13:44.040 --> 0:13:48.280 over the last six months, hasn't it. Yes, And again 0:13:48.320 --> 0:13:50.280 if you look at if you look at volatility. We 0:13:50.360 --> 0:13:53.400 still have relatively high vault in in the pound. So 0:13:53.480 --> 0:13:57.719 if you track volatility for for euro pounds any of 0:13:57.760 --> 0:14:02.240 the other major currencies, pounds stands out. But I don't know. 0:14:02.280 --> 0:14:04.560 I'm beginning to come to the idea that I don't 0:14:04.559 --> 0:14:07.079 think we're going to get this kind of knee jerk 0:14:07.760 --> 0:14:10.800 jump in the pound. I just don't see a moment 0:14:10.960 --> 0:14:15.160 arriving where suddenly people go, ah, Brexit uncertainty, It's gone, 0:14:15.360 --> 0:14:17.920 let's buy the pound. We're just not going to get 0:14:17.960 --> 0:14:21.480 into that situation. So that the level, the elevated level 0:14:21.480 --> 0:14:24.440 of volatility, which I can understand at the moment, if 0:14:24.440 --> 0:14:27.200 we don't get that kind of big move, then you know, 0:14:27.280 --> 0:14:30.560 you could see evolves come back and move back towards 0:14:30.800 --> 0:14:34.080 the other major currencies. Derek, how do you fold the 0:14:34.240 --> 0:14:38.880 dollar analysis into an equity bull market? I mean, are 0:14:38.920 --> 0:14:42.280 they two separate worlds or could you actually take a 0:14:42.400 --> 0:14:46.000 dollar analysis and look at October in December of last 0:14:46.080 --> 0:14:51.000 year and this mother of all recoveries we've had. One 0:14:51.040 --> 0:14:53.720 of the reasons why I have a parish view for 0:14:53.760 --> 0:14:56.760 the U s dollar is I you know, generally I 0:14:56.800 --> 0:15:01.560 think US assets are expensive and the dollar is strong 0:15:02.320 --> 0:15:05.880 and going forward. If, as I mentioned earlier, we see 0:15:05.920 --> 0:15:09.680 some relative change in the extremes about outlooks for for 0:15:09.840 --> 0:15:12.440 US versus the rest of the world, I think that 0:15:12.480 --> 0:15:15.960 could readjust. But if you look at the monthly Treasury 0:15:16.080 --> 0:15:21.119 capital flow data into the US, it's not particularly positive 0:15:21.440 --> 0:15:25.280 and there's clearly evidence there foreign investors reluctance to go 0:15:25.320 --> 0:15:30.240 into the US. Again, an email from a US viewer 0:15:30.280 --> 0:15:34.760 and listener who's Derek like me? Clueless culturally, how is 0:15:34.920 --> 0:15:41.040 Arsenal different from Pattenham in London? Um? Well, the kind 0:15:41.040 --> 0:15:44.640 of the motto is victory through harmony. That's the Arsenal 0:15:45.800 --> 0:15:48.600 long term motto and I think that shows you know, 0:15:48.680 --> 0:15:54.440 we play attractive football. That's our in our genes and 0:15:54.560 --> 0:15:57.560 it's it's it's not to and one more sensible. Our 0:15:57.560 --> 0:16:01.000 our stadium cost three hundred and seventy million pounds, spurs 0:16:01.040 --> 0:16:06.760 cost a billion. There you go, careful analysis from from 0:16:06.800 --> 0:16:11.280 from from Derek Harputny. Thank you so much. I like that. 0:16:11.440 --> 0:16:15.280 What was that victory in the harmony? The North North 0:16:15.360 --> 0:16:17.760 London rivalry? You know there's a day called St. Totter 0:16:17.800 --> 0:16:21.000 Ringham's Day and it's the day when Arsenal fans celebrate 0:16:21.600 --> 0:16:24.920 the the idea, the fact that Spurs can't catch them 0:16:24.960 --> 0:16:28.880 in the league anymore, because typically in recent history at 0:16:28.960 --> 0:16:32.320 least Arsenal used to finish above Spurs. But Spurs have 0:16:32.400 --> 0:16:35.720 a better side now, So those two sides to sort 0:16:35.760 --> 0:16:38.240 of fighting for a for a different trophy at the 0:16:38.320 --> 0:16:41.040 end of the season. That's amazing how they have the same, 0:16:41.240 --> 0:16:45.400 nearlyly the same slogan as Bloomberg Surveillance. Our slogan, Folks 0:16:45.520 --> 0:16:49.840 is surviving through harmony. I'm surviving until eight thirty five 0:16:49.880 --> 0:16:52.880 Eastern when I leave this radio studio and go over 0:16:52.920 --> 0:17:06.160 to day begins right, quieter tape today. We'll see where 0:17:06.200 --> 0:17:09.720 we go tomorrow with jobs reports. Stay with us tomorrow 0:17:09.760 --> 0:17:13.280 for all of our coverage of the American labor economy. 0:17:13.320 --> 0:17:15.359 We're really beginning to focus on this given all the 0:17:15.359 --> 0:17:18.280 news slow as well. John farre will be in New 0:17:18.320 --> 0:17:22.160 York and I will be north of Milan, Italy at 0:17:22.200 --> 0:17:25.480 the meetings in Chernobio. Really looking forward to attend. I've 0:17:25.600 --> 0:17:29.639 literally spent Folks a decade finding excuses to not go 0:17:29.680 --> 0:17:33.200 in this year. Franci Laquise dragged me north of Milan. 0:17:33.359 --> 0:17:35.600 I need a preview, right now, so we do go 0:17:35.680 --> 0:17:39.040 to Milan and Christina Hooper of INDUSCO joining us from 0:17:39.119 --> 0:17:42.399 Northern Italy as well. Christina, what is your observation of 0:17:42.440 --> 0:17:46.600 the Italian economy parachuting into Milan? What do you see 0:17:46.600 --> 0:17:52.080 there as an economist? Well, certainly there is a slowdown underway, 0:17:52.240 --> 0:17:55.560 and we just saw forecast cut to just zero point one. 0:17:56.520 --> 0:18:00.800 But there's also good news coming from Italy, and that 0:18:01.040 --> 0:18:05.879 is that there is no longer talk about an ITHEL exit. Um. 0:18:05.920 --> 0:18:10.480 There is much more consensus around staying within the European Union. 0:18:10.560 --> 0:18:14.920 So that excludes one very big geopolitical risk and UH, 0:18:14.960 --> 0:18:18.760 and it's more now about growing the Italian economy going forward. 0:18:19.200 --> 0:18:22.640 As a market strategist, you've got a dovetail in all 0:18:22.720 --> 0:18:26.879 of this economics. Is there a Christina Hooper optimism about 0:18:26.960 --> 0:18:33.320 participating in markets given some of these real economic growth challenges? Well, 0:18:33.359 --> 0:18:39.199 there's certainly caution there, and caution just suggests selectivity and discernment. 0:18:39.680 --> 0:18:44.240 But there are opportunities, certainly valuation opportunities that are presented. 0:18:44.440 --> 0:18:48.120 I also think it's important to point out that typically, UH, 0:18:48.160 --> 0:18:52.840 the Eurozone's fortunes are correlated with a lag to China's fortunes, 0:18:53.160 --> 0:18:55.320 and one could argue that a lot of the disappointing 0:18:55.400 --> 0:18:58.800 data we've seen recently, certainly um, the German data that 0:18:58.920 --> 0:19:01.800 just came out today, can be at least partially attributed 0:19:01.840 --> 0:19:04.320 to the slowdown in China. Now that we're seeing economic 0:19:04.400 --> 0:19:08.280 data pick up in China could ultimately funnel through to 0:19:08.600 --> 0:19:12.919 the Eurozone. And as usual, its super totally nails the 0:19:13.040 --> 0:19:17.080 debate right now, folks, which is truly a debate of 0:19:17.160 --> 0:19:20.800 gloom versus your way wrong. We're out front of an 0:19:20.840 --> 0:19:24.840 economic recovery. Certainly. We saw that from James Diamond today 0:19:24.880 --> 0:19:28.040 Christina Hooper over at a large bank in New York. 0:19:28.160 --> 0:19:31.720 Mr Diamond with his annual note JP Morgan, he really 0:19:31.800 --> 0:19:37.160 pushed against the recession, Uh certitude that's out there? Help 0:19:37.359 --> 0:19:40.720 Mr Diamond with that? Why can we be more optimistic 0:19:40.800 --> 0:19:45.560 than a pending recession? Well, I think what he was 0:19:45.560 --> 0:19:49.800 was just very realistic. Um. You know, he was talking 0:19:49.840 --> 0:19:55.040 about certainly some challenges set on certainty German economic slowdown, Brexit, 0:19:55.240 --> 0:19:59.000 US China trade war, but there are opportunities in all 0:19:59.080 --> 0:20:02.199 those and quite frankly, Um, what we've seen from the 0:20:02.240 --> 0:20:04.600 set is not so much uncertainty. I would say, as 0:20:04.640 --> 0:20:07.800 just an about phase, and that's creating a much more 0:20:07.840 --> 0:20:11.560 accommodative environment, particularly since other central banks are coming along, 0:20:11.800 --> 0:20:13.760 including the Bank of Canada and the e c B. 0:20:14.200 --> 0:20:17.520 So this should create an environment that's much more supportive 0:20:17.560 --> 0:20:21.000 of risk assets going forward, and of course supportive of 0:20:21.000 --> 0:20:24.600 the economy as well. Why are equities going up? I mean, 0:20:24.800 --> 0:20:27.560 we do this macrobabble every day, but the fact is 0:20:28.320 --> 0:20:32.880 there's revenue dynamics, operating income dynamics. I guess there's an 0:20:32.880 --> 0:20:34.920 earnings gloom out there, but I'm not going to get 0:20:34.960 --> 0:20:38.680 elevated equities with earnings gloom. Is that the great miscall 0:20:39.119 --> 0:20:45.200 that we're actually going to generate profits? Well, certainly we're 0:20:45.240 --> 0:20:47.959 going to see something of an earning slowdown, but I 0:20:48.000 --> 0:20:53.240 think it's really very premature and completely um hyperbole to 0:20:53.280 --> 0:20:57.320 say we're going into an earnings recession. Um, there are challenges, 0:20:57.640 --> 0:21:01.639 but there are also profits still being created and so 0:21:02.040 --> 0:21:05.920 um with you know, with a different rerating, right, We've 0:21:05.960 --> 0:21:10.199 experienced reratings with yields going off that have caused us 0:21:10.240 --> 0:21:15.119 to scrutinize valuations, but the current rerating, which is lower rates, 0:21:15.160 --> 0:21:18.440 has actually made equities look more attractive she's just joining 0:21:18.480 --> 0:21:21.879 us Christina Hooper with Investco. She joins us in Milan, Italy. 0:21:22.359 --> 0:21:25.280 Uh this day, what are correlations in the market right now? 0:21:25.560 --> 0:21:28.800 I love to go equities, bonds, currencies, commodities, and they 0:21:28.800 --> 0:21:34.600 bounce around. How tightly are they coordinated now? Correlated? Well, 0:21:34.680 --> 0:21:37.840 it really depends on the day, UM, But certainly over 0:21:37.840 --> 0:21:40.360 the last few weeks what we've seen is really an 0:21:40.440 --> 0:21:46.320 interesting dichotomy in that equities went up UM, but also 0:21:46.440 --> 0:21:49.760 there was a flight to two treasuries government bonds and 0:21:50.000 --> 0:21:53.359 so yields came down UM. And I think that really 0:21:53.440 --> 0:21:57.680 suggests a lot of the confusion in markets right now. UM. 0:21:57.720 --> 0:22:01.000 There are reasons to be optimistic to me about risk assets, 0:22:01.000 --> 0:22:04.000 and we see that UM evidenced in the stock market. 0:22:04.200 --> 0:22:07.600 But then there's an underlying fear, especially about a potential 0:22:07.600 --> 0:22:09.879 global slow news and that's what we're seeing in Yale. 0:22:10.359 --> 0:22:12.800 This has been wonderful, Christina Hooper. Maybe I'll see in 0:22:12.800 --> 0:22:16.080 the airport here in the next twelve hours Christina Hooper. 0:22:16.119 --> 0:22:19.440 Of course, within Vasco, we hope to see her in 0:22:20.119 --> 0:22:35.160 hold as Tom Keane jets off to the Alps. I'm 0:22:35.240 --> 0:22:38.160 joined in our New York studio by Michael McKee. Michael, 0:22:38.200 --> 0:22:41.800 of course, covers all things economics for Bloomberg Television and Radio, 0:22:42.440 --> 0:22:46.679 and Michael, it's interesting. Asset manager giant black Rock recently 0:22:46.720 --> 0:22:50.640 published a report detailing the physical risk associated with climate 0:22:50.720 --> 0:22:55.600 change on municipal bonds, commercial real estate, and US utilities. 0:22:55.920 --> 0:22:58.119 To help us walk us through that story, we welcome 0:22:58.160 --> 0:23:01.880 Brian de se Bright as black Global Head of Sustainable Investing. 0:23:01.920 --> 0:23:05.199 He's also a former Obama Senior advisor on climate and 0:23:05.320 --> 0:23:09.560 energy policy. He joins us on our Bloomberg Interactive Broker studio. Brian, 0:23:09.600 --> 0:23:13.400 Welcome to Bloomberg. What are the key findings of this 0:23:13.680 --> 0:23:17.640 report that you guys recently published. Well, there's a couple 0:23:17.640 --> 0:23:22.600 of them. The first is that investors are under appreciating 0:23:22.840 --> 0:23:26.640 the physical risks in these three asset classes that are 0:23:26.760 --> 0:23:30.680 in the market today and we believe are not appropriately priced. 0:23:30.840 --> 0:23:33.919 So if we look at US utilities, for example, you 0:23:34.080 --> 0:23:37.760 see a pervasive impact um in the wake of these 0:23:37.800 --> 0:23:41.320 extreme weather events. That signals that investors are not fully 0:23:41.400 --> 0:23:44.720 understanding or fully appreciating these risks, and so that that 0:23:44.800 --> 0:23:47.199 that's that's point one. The second point is that it 0:23:47.280 --> 0:23:51.240 matters there's differences across these different, uh, these different asset classes. 0:23:51.480 --> 0:23:54.560 So with respect to municipalities, we want to look a 0:23:54.560 --> 0:23:58.320 lot at what's the local GDP impact in the municipality 0:23:58.400 --> 0:24:01.639 that affects their resilience to these types of risks. In 0:24:01.680 --> 0:24:03.959 commercial real estate, we want to look at the actual 0:24:04.000 --> 0:24:08.400 impact of inundation and wind share of extreme weather events 0:24:08.440 --> 0:24:11.080 on individual properties and that those those very a lot 0:24:11.160 --> 0:24:14.800 depending property by properties. So the second, the second implication 0:24:14.920 --> 0:24:18.360 is investors need to really drill down to the individual 0:24:18.400 --> 0:24:20.760 asset class level to really understand these risks in a 0:24:20.800 --> 0:24:25.200 more granular way. The two questions two part question here, 0:24:25.240 --> 0:24:30.600 One is, uh, is there something worse now about individual 0:24:31.000 --> 0:24:35.520 weather events winds or forest fires or something like that, 0:24:35.680 --> 0:24:39.240 because we've always had those and they have to be priced. 0:24:39.960 --> 0:24:42.120 But the other is I read that interesting story yet 0:24:42.359 --> 0:24:45.399