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

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Speaker 1: We bring you insight from the best in economics, finance, investment,

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

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg This

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Speaker 1: is the conversation of the day on for Global Wall

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Speaker 1: Street and it's on the repo market. We flew him in. Yeah,

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Speaker 1: I'm Segurian right into the repot. John. You've been falling

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Speaker 1: this more than I have with a real yield and all.

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Speaker 1: But the real repo is like a serious issue, isn't it.

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Speaker 1: So you bring to rhyme Snyderman so you can explain

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Speaker 1: PIMCO had a short term portfolio management of the short

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Speaker 1: term fund over at PIMCO. Gratice to run. Thanks very much.

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Speaker 1: Good to walk us through the difficulties. Well, I think

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Speaker 1: the theme that you actually outlined the politics of the

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Speaker 1: world actually transcends to the repo market. You two things

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Speaker 1: one volatility, the transitioning trying my best here one one

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Speaker 1: uh one volatility and too fragility. And I think you

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Speaker 1: know as as you sort of see where central bank

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Speaker 1: policy has evolved to over the past two years one

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Speaker 1: of more more tighter, a tighter monetary policy one that

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Speaker 1: we see um subtle cracks in the liquidity of the system. Clearly,

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Speaker 1: the FED and other central banks remain more vigilant in

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Speaker 1: terms of how thinking about UM monetary policy should be

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Speaker 1: should be UM effectively effectuated UM that effectively has been

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Speaker 1: done through open market operations. Really a more active approach

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Speaker 1: into making sure that there isn't a tighter liquidity environment

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Speaker 1: and it doesn't necessarily affect monetary policy normalization slight normalization,

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Speaker 1: I'll say. So what we've seen is effectively higher repo

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Speaker 1: rates in September and October really be met with higher

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Speaker 1: liquidity conditions brought on by the FED. And more importantly,

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Speaker 1: we are now in a place where the FED is

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Speaker 1: all hands on deck providing that liquidity that's needed the

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Speaker 1: marketplace to the tune of about six bill through asset

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Speaker 1: purchases like T bills as well as open market operations.

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Speaker 1: And for what it practically means for investors is the

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Speaker 1: following one. UH that we should be recognizing that volatility

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Speaker 1: is in the marketplace and places that it has been

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Speaker 1: removed over the past decade. We should be more comfortable with,

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Speaker 1: so expect some volatility and repo rates, and all that

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Speaker 1: simply means is a natural recalibration or acknowledgement that the

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Speaker 1: cost of capital changes as as investors cost of capital

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Speaker 1: changes all the time. Why shouldn't we expect it to

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Speaker 1: be that way in the basic funding markets that are

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Speaker 1: trillions of dollars every day. That's one takeaway. There's another

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Speaker 1: takeaway too, which is if there is volatility, however small

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Speaker 1: or however normal, the fat's going to step in and

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Speaker 1: try to dampen it, and they're gonna dampen it with

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Speaker 1: six billion dollars of asset purchases. And that this is

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Speaker 1: what is ultimately driving the increase and risk appetite right now,

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Speaker 1: because when you strip away volatility, you get more flows

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Speaker 1: into a lot of quantitative strategies, etcetera. How much is

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Speaker 1: that fueling the rally right now and risk? So it

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Speaker 1: goes hand in hand with with the comment I just

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Speaker 1: made a moment ago. The repo rates are simply a

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Speaker 1: real time barometer of the cost of capital, and the

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Speaker 1: understanding how that translates to risk appetite is a subtle

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Speaker 1: but important mechanism here, not only for central bankers, but

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Speaker 1: for investors alike. So as we see this volatility be

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Speaker 1: be subdued, we saw risk appetite over the past decade

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Speaker 1: really become much more exacerbated on a go forward basis. Well,

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Speaker 1: we are ultimately going to see is higher cost of funding,

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Speaker 1: both in nominal terms and relative terms. So the appetite,

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Speaker 1: the risk appetite shouldn't be as great as it once was.

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Speaker 1: Things that should drive risk appetite are growth trajectories. Maybe

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Speaker 1: growth trajectory is a monetary policy that you know is

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Speaker 1: going to be adjusting to higher inflation, et cetera over

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Speaker 1: those points. That's great, guy, But the truth is a

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Speaker 1: lot of people look at this as a moral imperative.

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Speaker 1: It's not good that the FED has a bigger balance sheet.

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Speaker 1: Where should the Fed balance sheet be? Is it? Do

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Speaker 1: you do you perceive it is normal? Is it in? Did?

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Speaker 1: Is everybody worried about the wrong thing? Well, you need

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Speaker 1: to separate two things. One, what's currently happened with regard

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Speaker 1: to access reserves um doesn't necessarily mean it's quantitative easy.

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Speaker 1: So that's a big policy debate. It's a debate within

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Speaker 1: the FED obviously within that, But if you can separate

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Speaker 1: that for the moment. The reality is that we have

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Speaker 1: to change liquidity conditions, and that's really what the FETE

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Speaker 1: is addressing here is the tighter liquidity conditions that have

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Speaker 1: been brought on by a mismatch in supply and demand

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Speaker 1: out of regulation changes ten years ago. I get all that,

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Speaker 1: I've read all that. Is it immoral that the balance

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Speaker 1: sheet is where it is and there and the reality

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Speaker 1: is this. Think of the balance sheet as another lever

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Speaker 1: to pool, just like rate policy was for decades. So

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Speaker 1: changes in John it's on the weekend. Like the check book,

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Speaker 1: Dad's checkbook is another lever to pool. Yeah, we all

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Speaker 1: a lot of people wish that Dad's check but looked

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Speaker 1: a little something like the fat balance sheet at your run.

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Speaker 1: Just a round this up. When you set on the

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Speaker 1: committee matings at Pimco at the moment and you explain

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Speaker 1: this to the portfolio manages, is what is happening in

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Speaker 1: repo And they turned around to you potentially and say

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Speaker 1: something like, well, this looks like the que tride again.

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Speaker 1: The market is trading as if this is que again.

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Speaker 1: What's that discussion? Sound like a pim cole at the moment? Yeah,

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Speaker 1: Two things. One I think that we recognize the fact

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Speaker 1: that this is not two thousand and eight. When we

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Speaker 1: talk about the repo markets, it's not a it's not

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Speaker 1: a counterparty credit environment. It's not a situation where there's

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Speaker 1: a breakage in the system. This is simply a transmission

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Speaker 1: a system, a problem with a transmission mechanism, meaning that

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Speaker 1: funding isn't getting to the right places, leading to exacerbated

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Speaker 1: repo rates. What does that mean. It ultimately means that

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Speaker 1: levered players, whether you're buying treasuries at a hedge fund,

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Speaker 1: are buying credit and levering it up. Means that you

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Speaker 1: have to be adjusting for those higher cost of funding,

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Speaker 1: and as a result, your expectations for those levered returns

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Speaker 1: has to go down. So two thousand twenty is going

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Speaker 1: to be probably met with more subdued opportunities and a

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Speaker 1: little bit worse risk adjusted returns simply because of this

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Speaker 1: funding dynamic or by apple Stock. Okay, thank you so much,

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Speaker 1: Trump Snyder with us. Thank you going to really really

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Speaker 1: good an important conversation, And I think I re Jersey

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Speaker 1: and our team at Bloomberg for trying to let me

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Speaker 1: almost keep up with your room. Kaugin joins us she's

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Speaker 1: one of the good thinkers at the London School of

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Speaker 1: Economics about international economics and particularly the ramifications into the

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Speaker 1: financial system. Okay, you you're not within market economics. If

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Speaker 1: you were to write a twenty page kickoff essay for

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Speaker 1: two thousand twenty, what would you focus on if you

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Speaker 1: were out of academics and in the market economics world.

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Speaker 1: I would focus on the fact that the trade tensions

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Speaker 1: being eased so far will raise business sentiment and increase investments,

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Speaker 1: so that is all good news for both China US,

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Speaker 1: but also around the world. As we have seen, there's

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Speaker 1: been a divergence between business centerment consumer sentiments, which leaves

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Speaker 1: us to think that the trade war has really taken

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Speaker 1: a toll on business and manufacturing investment. I would also

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Speaker 1: focus on whether lowering and lowering interest rates would actually

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Speaker 1: be effective in terms of creating the demand and making

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Speaker 1: up for the deficit and demand which we're seeing industrialized economies,

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Speaker 1: and I would question the effective monetary policy to make

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Speaker 1: that happen. How much does the trade truce really remove

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Speaker 1: uncertainty for businesses? I think that it will um it

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Speaker 1: sets a good tone for an easing US China relations

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Speaker 1: for the next foreseeable future. Business will probably feel that

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Speaker 1: they can start investing and uh uh, you know kind

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Speaker 1: of you know, setting up their production and supply chains again.

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Speaker 1: And I do think that there will be an impact US,

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Speaker 1: as we've seen that business sentiment dramatically declined after the

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Speaker 1: increased You wrote four years ago an important essay in

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Speaker 1: American Economic Review, credit constraints and growth in the global economy.

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Speaker 1: What has business investment done in this trade war? Um? Well, uh,

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Speaker 1: credit constraint has been a very big problem for China,

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Speaker 1: but the opposite problem for the US. Uh. Chinese government

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Speaker 1: understands the importance of getting more liquidity and credit into

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Speaker 1: the productive private sector. But in the West, we're facing

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Speaker 1: a problem where there's too much liquidity at very low

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Speaker 1: interest rates, and you're not adjecting the firms that should

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Speaker 1: be outsted by the market already. Professor, let's talk about

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Speaker 1: this deal. Of this on the table, we haven't accord,

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Speaker 1: it hasn't been signed, hasn't been implemented. And one of

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Speaker 1: the promises of it, it's forty to fifty billion dollars

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Speaker 1: a year in agricultural commodities. How does China reach that

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Speaker 1: kind of level every year? Importing agricultural goods and as

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Speaker 1: much as that from the part of the Chinese is

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Speaker 1: not a big major horror hurdle because Chinese are actually

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Speaker 1: having an increase in demand for good, high quality agricultural products.

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Speaker 1: Adds its population, increases its prosperity and their demand. So

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Speaker 1: this is very complementary trade. China meets that from the U.

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Speaker 1: S U S supplies it, and so this is actually

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Speaker 1: not difficult to implement and meet. I would say that

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Speaker 1: this is the easy part, not difficult to implement. A

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Speaker 1: lot of people disagree. What are they getting wrong? They

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Speaker 1: probably disagree on the fact that China compete some of

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Speaker 1: the other intellectual property protection UH standards and what is

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Speaker 1: promised there. I happen to think that this is actually

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Speaker 1: completely consistent with China's long term goal of pushing itself

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Speaker 1: into an innovative economy. I p. Is actually central to

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Speaker 1: its own domestic economy, not just for businesses. You wrote

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Speaker 1: an important essay in the Financial Times two cups of

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Speaker 1: coffee ago, and you didn't mince words, Professor. You said,

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Speaker 1: all this trade war stuff is a strategic gift for China.

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Speaker 1: How gifty was the gift three days ago? With phase one.

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Speaker 1: I would see a truth as a gift. Um, but Trump,

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Speaker 1: President Trump is by no means China's worst nightmare. This

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Speaker 1: is pushing what's their worst nightmare? What's their worst nightmare?

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Speaker 1: Were the worst nightmare is somebody who doesn't want to

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Speaker 1: talk about deals? And would we sell it? Would be

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Speaker 1: uh negotiating by based on what Chinese can buy, somebody

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Speaker 1: who will be pressing on human rights and events in

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Speaker 1: Hong Kong, things like that this is actually a business

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Speaker 1: deal and um, yes that's fine. Jan, thank you so much,

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Speaker 1: professor of economics at London School Economics out of a

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Speaker 1: shop on the Charles River in Cambridge as well. Cannon

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Speaker 1: Pickering joins us on the phone out of the United Kingdom,

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Speaker 1: senior economist at Baron Burke. Can I walk us through

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Speaker 1: your thoughts on what your talent clients off the bank

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Speaker 1: of the latest move from the Prime Minister. We think

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Speaker 1: this is an opening gambit. Boris Johnson is partly trying

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Speaker 1: to learn the lessons of his predecessor, Theresa May, that

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Speaker 1: did not set strictly a discipline among her negotiators when

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Speaker 1: she entered the first talks with the EU. Our bet

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Speaker 1: is that if push comes to show with his big majority,

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Speaker 1: Johnson will look for a political foote to give himself

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Speaker 1: a few more months to negotiate rather than face the

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Speaker 1: technical heart at the end of And the thing to

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Speaker 1: keep in mind is here, this is positioning for a

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Speaker 1: negotiation which will last at least eleven months. And there

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Speaker 1: is nothing strictly legally speaking that can pre commit the

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Speaker 1: government to either do or to prevent the government from

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Speaker 1: doing something some twelve months down the line. Parliament is sovereign,

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Speaker 1: it can always change. In mind, so this in mind,

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Speaker 1: this is about in ten rather than certainty. Give us

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Speaker 1: a backdrop in Europe right now, you're with Barrenburg Bank

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Speaker 1: with all their relationships in Europe. Right now, let's get

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Speaker 1: a recession update his Europe escaped recession. Parts of core

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Speaker 1: Europe have been stagnating slash slightly shrinking over the course

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Speaker 1: of two thousand and nineteen. But it's a very focused problem.

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Speaker 1: It's the global industrial recession. It's the global trade recession,

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Speaker 1: which is hitting export oriented Urine. This is mainly due

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Speaker 1: to political uncertainty. The US China trade issues breaks it.

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Speaker 1: The bet for next year is if the risks go

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Speaker 1: the right way. That is no escalation on trade no

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Speaker 1: heart breaksit, then global trade, global industrial friction can recover

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Speaker 1: and on the back of that Europe will see better times.

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Speaker 1: You can't just how bad is it in Europe at

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Speaker 1: the moment. The Bundesstan president, some people listening are familiar

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Speaker 1: with YenS Vidman said recently that Germany shouldn't obsess about

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Speaker 1: his fiscal role roles. YenS Vidman even sounded supportive of

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Speaker 1: loose Marty policy. Now if YenS Widman, the hawk of

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Speaker 1: the European Central Bank, is sounding almost dovish calum, it

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Speaker 1: makes me wonder just how difficult things are on the continent.

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Speaker 1: It is bad for industrial producers, it is bad for exporters,

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Speaker 1: but so far aggregate employment and the services domestic oriented

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Speaker 1: parts of the European economy are holding a bouquet. The

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Speaker 1: theory is that if the downturning trade is protracted into

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Speaker 1: eventually you will see rising unemployment, which will have knock

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Speaker 1: on effects for the domestic parts of the economy. The

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Speaker 1: ECB does not have the pore power to um start

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Speaker 1: the recovery in Europe. That's where fiscal policy comes in.

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Speaker 1: And given that some parts of Europe us still still

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Speaker 1: pretty tight on fiscal policy. If you don't have much headway,

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Speaker 1: it's better to move early rather than later. So these

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Speaker 1: are preemptive, encouraging measures rather than fully fledged panic in Europe.

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Speaker 1: Tell them there's a concern about the industrial sector. So

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Speaker 1: far within Europe, you haven't seen the recession in the

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Speaker 1: industrials really bleed into services as much as people were fearing.

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Speaker 1: And yet today there was a story that European car

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Speaker 1: sales are poised for another negative year, and this comes

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Speaker 1: even with comps that are pretty easy to beat from

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Speaker 1: last year. How concerns shall we be about that? We

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Speaker 1: should be concerned that if the industrial sector does not

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Speaker 1: recover within say three to six months, you will start

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Speaker 1: to see rising unemployment that could then have significant negative

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Speaker 1: effects on consumption and services, and that would then risk

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Speaker 1: a kind of slow motion recession across Europe. Not our

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Speaker 1: base case, but it is the risk to watch. The

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Speaker 1: reason why we have not yet seen a significant bleeding

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Speaker 1: is because actually industrial producers see a recovery on the horizon.

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Speaker 1: They don't think they're fundamental economy problems. They see political

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Speaker 1: risks and they bet that eventually they'll go away, and

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Speaker 1: hence they hold onto their staff. And now for the

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Speaker 1: dumb question of the day, how can you have common

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Speaker 1: recovery with negative interest rates? I looked at the X

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Speaker 1: axis of Swiss twenty year negative interest rates today. I

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Speaker 1: mean it's long and the tooth to say the least.

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Speaker 1: I mean, how can you have recovery with the artificiality

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Speaker 1: of negative interest rates? Well, it's a good question. You

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Speaker 1: could say that the low bond yields across continental Europe,

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Speaker 1: especially in Core Eurozone, is the market telling the Europeans

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Speaker 1: two things. First, we don't expect much in terms of

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Speaker 1: growth and inflation for a very long time, and second,

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Speaker 1: we're happy to lend you money. So there seems to

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Speaker 1: be almost a no brain argument that Europe should use

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Speaker 1: fiscal policy to stimulate growth. But there are some coordination

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Speaker 1: problems across Europe. There are some political challenges that first

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Speaker 1: need to be overcome before you would see a fiscal

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Speaker 1: stimulus in a major way, with the exception of the UK,

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Speaker 1: where you will get a fiscal stimols over the next

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Speaker 1: two years. Can I'm let's get some excited. Let's talk Sweden,

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Speaker 1: the world's oldest central bank mates December nine. And this

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Speaker 1: is why it's interesting. There is a real chance that

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Speaker 1: we have one of the first central banks that has

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Speaker 1: a negative interest rate looking to abandon it and potentially

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Speaker 1: abandon it because it believes that it no longer works,

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Speaker 1: it's no longer effective, perhaps even counterproductive. Can I'm how

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Speaker 1: important will that case study be? Going into Sweden is

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Speaker 1: an interesting economy from the European perspective because it tends

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Speaker 1: to be um one of the first signs of where

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Speaker 1: things are going. If things get bad, Sweden usually tilts

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Speaker 1: down first. When things are improving, Sweden usually improves. It's

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Speaker 1: an advanced economy, it's got well run markets, so the

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Speaker 1: Europeans will be looking to Sweden if indeed we get

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Speaker 1: a removal of the negative race to see how this

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Speaker 1: experiment plays out. We have one argued that that actually

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Speaker 1: it doesn't make much sense to penoile banks for dumping

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Speaker 1: their cash at the ECB when in fact they are lending.

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Speaker 1: The problem in Europe is credit demand, not credit supply.

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Speaker 1: So there is a good argument actually to revise our

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Speaker 1: view about native rate, and Sweden may provide a good

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Speaker 1: example for the next twelve months to see where we

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Speaker 1: get the story developing in Europe. Tom we know that

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Speaker 1: Sweden is the central bank that you get most excited about.

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Speaker 1: But if you could say the second, second central bank

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Speaker 1: that you get most excited about, which would it be,

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Speaker 1: would be more Sweden. I mean what they did in

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Speaker 1: two is absolutely historic and original, their original thinkers, and

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Speaker 1: to to to everybody else's benefit, their tangential to a

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Speaker 1: lot of what's going on, so they can afford to

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Speaker 1: be fearless. I was joking, Lisa thought I was John King.

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Speaker 1: I mean, what they did was extraordinary. People still talk

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Speaker 1: about it. But they have the luxury of being right, Kale,

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Speaker 1: and they have a luxury of being courageous. That's right,

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Speaker 1: and and and the thing we should be focusing on

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Speaker 1: is credit flows over the next twelve months. If indeed

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Speaker 1: Sweden removes the negative rate, let's look at built let's

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Speaker 1: look at credit flows. If the banks are doing fine,

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Speaker 1: credit still flown into the economy, then perhaps to revise

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Speaker 1: are thought about Native bright Kavin, I got no time left.

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Speaker 1: Can they escape from negative interest rates and smooth curves instability?

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Speaker 1: Or will there be jump conditions? Markets are typically volatile

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Speaker 1: when in a new environment, but eventually they are just

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Speaker 1: eventually we get a volatility and then thinks smooth up.

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Speaker 1: He learned that from Mickey Leady. Eventually, stand back, John,

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Speaker 1: I really want to focus two days ahead to December twenty,

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Speaker 1: where there's a raft of economic data adjustments to g DP,

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Speaker 1: but personal income, personal spending, the PC numbers in Michigan sentiment.

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Speaker 1: It's a big day re really that sets maybe where

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Speaker 1: we are in two percent g d P. Linds a

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Speaker 1: pisa with us now with stephile and she's looking at

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Speaker 1: why equal C plus G plus uh n X plus

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Speaker 1: whatever it is? I lindsay, when I look at the

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Speaker 1: economic data and I try to get above two percent,

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Speaker 1: are we modeling two percent right now? Are we actually

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Speaker 1: modeling better? Well? I think the set is certainly modeling

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Speaker 1: two percents, even very clear that that is the new

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Speaker 1: target for the economy growth well as well as two

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Speaker 1: percent inflation. That is very optimistic that price pressure will

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Speaker 1: begin to revert back to two percent. Where are we

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Speaker 1: on GDP right now? Where what what's the handle you're

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Speaker 1: having into Q one Q two. I think the first quarter,

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Speaker 1: in the second quarter is going to show a noticeable

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Speaker 1: slowdown from the feds optimistic forecast. I do think the

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Speaker 1: business investment will continue to trend very weak. We've seen

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Speaker 1: manufacturing and lose a significant amount of momentum, and even

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Speaker 1: the consumer, albeit in positive territory, has begun to show

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Speaker 1: increased volatility on a month to month basis. So it's

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Speaker 1: going to be increasingly difficult for the consumer to continue

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Speaker 1: to shoulder the economy alone without support from other uh

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Speaker 1: from some of these other key sector So Dallas FED

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Speaker 1: President Robert Caplan was speaking in at an event today

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Speaker 1: in New York, and he was saying that we can

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Speaker 1: run a tighter labor force without pricing pressure, and this

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Speaker 1: just sort of goes to the heart of a conundrum

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Speaker 1: of why we haven't seen faster wage growth. What's your

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Speaker 1: take on that? Do you think that the FED is

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Speaker 1: right that all we need is a much tighter labor

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Speaker 1: market and then we'll start to see wages go up

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Speaker 1: more meaningfully. I do think we need to see a

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Speaker 1: tighter labor market. I think the metrics that we're using

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Speaker 1: right now don't necessarily show the true bubble of joblessness

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Speaker 1: in the economy. And of course we've heard this from

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Speaker 1: a number of SET officials, including Cash carri out of Minneapolis,

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Speaker 1: who has essentially said that the civilian unemployment race is worthless.

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Speaker 1: It doesn't accurately capture what we're seeing out in the

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Speaker 1: labor market right now. When we talk about a sub

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Speaker 1: spot percent unemployment rate and the minimal amount of slack

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Speaker 1: that that implies in the labor market, we should easily

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Speaker 1: be talking about three and a half four maybe four

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Speaker 1: percent wage games. And so it's very difficult to reconcile

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Speaker 1: the lack of wage pressures with such a low level

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Speaker 1: of unemployment, meaning that maybe we're not accurately capturing again

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Speaker 1: that level of joblessness out in the US labor market. So,

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Speaker 1: lindsay the Fed A Reserve has undertaken a monetary policy review,

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Speaker 1: do you get the failing that before it's even concluded

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Speaker 1: that it's already part of the decision making process on

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Speaker 1: the FOE M C Well, I do. I do think

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Speaker 1: that they're very acutely aware of the fact that they're

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Speaker 1: not doing a fantastic job in terms of forecasting inflation.

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Speaker 1: As we know the FED has predicted to percent inflation

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Speaker 1: would fall in short of that objective for the better

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Speaker 1: part of the past decade. That being said, even with

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Speaker 1: a review, it remains to be seen whether or not

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Speaker 1: there really is an appetite a monk side officials for

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Speaker 1: any type of meaningful change to policy strategy, given that

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Speaker 1: we have had such a very low success rate and

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Speaker 1: yet there hasn't been any change thus far. So I

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Speaker 1: do understand that they're undergoing a review, but its aims

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Speaker 1: could be seen whether that will actually result in meaningful chairs. Lindsey,

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Speaker 1: thank you so much for the brief. Lindsey pigs with

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Speaker 1: Stephill this morning. Thanks for listening to the Bloomberg Surveillance podcast.

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Speaker 1: Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or

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Speaker 1: whichever podcast platform you prefer. I'm on Twitter at Tom

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Speaker 1: Keane before the podcast. You can always catch us worldwide.

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