Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferrell and Lisa A. Brawmowitz jay Lee, we
Speaker 1: bring you insight from the best and economics, finance, investment,
Speaker 1: and international relations. To find Bloomberg Surveillance on Apple Podcast, Suncloud,
Speaker 1: Bloomberg dot com and of course on the Bloomberg terminal.
Speaker 1: Jinn and Emmanuel with a surround a table from a
Speaker 1: court Julian. Wonderful to have you with us. Proper introductions, sir,
Speaker 1: which you deserve. What a runny we've just seen in
Speaker 1: October spose over to November. This morning. We asked the
Speaker 1: guest a little bit earlier, Eric Freedom, what he thought
Speaker 1: of it, and he said he'd faith this. Do you
Speaker 1: agree with that? Now? Uh? From our point of view, Uh, Look,
Speaker 1: the next week or two could be very choppy. Obviously,
Speaker 1: we've got the FED tomorrow, you've got the elections next Tuesday,
Speaker 1: and there's likely going to be back in fourth as
Speaker 1: we've seen in the last couple of days. But from
Speaker 1: our point of view, look, we know the FED is
Speaker 1: about the downshift. I don't want to call it plause
Speaker 1: I don't want to get whatever. But we know the
Speaker 1: trajectory is going to change and the market is getting
Speaker 1: comfortable with that. At the same time, just like the
Speaker 1: July earning season, we know the numbers are coming down, okay,
Speaker 1: and it didn't matter stocks in in July, and it
Speaker 1: doesn't matter now because frankly, people have been for the
Speaker 1: most part underinvested. And the last thing, the stock bond correlation.
Speaker 1: You can't get away from that. The UK set the
Speaker 1: line in the sand when we resolve the political issues
Speaker 1: that at least stopped the parabolic move up and yields
Speaker 1: and that supportive for stock. We've got you for the
Speaker 1: whole half hour, which is a real pleasure. I want
Speaker 1: to go into some of the machinery of what you're
Speaker 1: doing day to day that everybody on wall streets treat.
Speaker 1: We'll do that later. Right now, you have a single
Speaker 1: statistic the morning it keeps coming up. Revenues keep taking
Speaker 1: up on your earnings edge nine point five. What's the
Speaker 1: glide path of revenues you see with your optimism and
Speaker 1: to say June of next year, well again, look, we
Speaker 1: know the story is the story that none of us
Speaker 1: as adults have a faced faced in our investing lifetime,
Speaker 1: and the revenues are being driven by the ability to
Speaker 1: pass on prices in an inflationary Absolutely, absolutely, Look, the
Speaker 1: glide path is going to moderate. The question is can
Speaker 1: margins be maintained. They've slipped, there's likely going to be
Speaker 1: some more slippage, but can we maintain And that's really
Speaker 1: the question uh confronting corporate America to politicians want to
Speaker 1: see those profit margins maintained as the federal reserve. In
Speaker 1: other words, the more that profit margins are maintained, the
Speaker 1: higher rates will go at a time when there is
Speaker 1: the lack of sensitivity right now between monetary policy and
Speaker 1: the market response. Look, this again is part of the narrative.
Speaker 1: There are a number of ways the policy titans and
Speaker 1: and certainly and again this is part of the dialogue
Speaker 1: we've seen in the last twenty four hours in pointing
Speaker 1: out the energy industry and in particular that we do
Speaker 1: want to see margins come in. But again that this
Speaker 1: is why the challenge of the soft Ish landing is
Speaker 1: so intense, because there's a lot of things that have
Speaker 1: to go right. Triple overage, all cash fun I have
Speaker 1: no tax losses. Okay, other people have a lot of
Speaker 1: tax losses. How do you play the shell game of
Speaker 1: tax lost candidates into January three. So we are very
Speaker 1: strongly convicted in the idea that you don't want to
Speaker 1: take money out of the market here. Okay, look, could
Speaker 1: we go lower at some point next year, absolutely, but
Speaker 1: that is contingent on We've moved from contingent on a
Speaker 1: recession to contingent on a deep recession. Boom Radio. You
Speaker 1: don't see this, But to put a manual over here
Speaker 1: with me, because Lisa just didn't want to sit next
Speaker 1: to that much optimism to constructive to constructive, at least
Speaker 1: we'll said that the consensus view that has shifted so much, Judy,
Speaker 1: and we've gone from the fence not going to hike
Speaker 1: too much too. It's not gonna hike fifty, it's not
Speaker 1: gonna hike seventy five, or maybe it won't hike seventy
Speaker 1: five again, they're set to do a fourth seventy five
Speaker 1: basis point hike. When it came to the recession, it
Speaker 1: was no recession. That's recession but short and shallow. We're
Speaker 1: a long way from where we started the year, Julian,
Speaker 1: and we've been wrong, wrong, wrong, the whole way through.
Speaker 1: What gives you any confidence about three. Look, we do
Speaker 1: have to understand the fact that when you have a
Speaker 1: year like two, both the left tail and the right tail,
Speaker 1: and you know we talked about options planning at every
Speaker 1: car I s I are very large and frankly, when
Speaker 1: you look at it, and this is one of our
Speaker 1: favorite graphs, the bond stock return quadrant. It's been the
Speaker 1: lower left in an unprecedented nature over the last sixty years. Two.
Speaker 1: But actually the upside of that is the year after
Speaker 1: the only other time it was lower left, you had
Speaker 1: a massive return here for both bonds and stocks. And
Speaker 1: again we respect the concept of seasonality. It's not the
Speaker 1: be all and end all in the markets, but we
Speaker 1: all know the data that supports good years after mid time.
Speaker 1: Can we give him in a shout out? Just quickly?
Speaker 1: Did you say the latest institutional investor survey at him
Speaker 1: and top economist, a title he has earned forty two
Speaker 1: times in the history of the equity racess. I'm sorry,
Speaker 1: forty two fifty one. Well, this is what you're going.
Speaker 1: And you know he's smart enough to hire Michael Chew
Speaker 1: and Julian Emmanuel. You work for Chew, right, That's how
Speaker 1: it works. We'll talk. But the basic idea here John
Speaker 1: has been doing it since C. J. Lawrence, And here's
Speaker 1: how he does it. Granularity. No one is as granular
Speaker 1: is Edward Hyman. He's got a black pencil. He's ruined
Speaker 1: three of his light Grace shoot suits. He's got the
Speaker 1: sharpie thing going. He ruins like a three shoots using
Speaker 1: the sharp uses a black sharpie, and he's got a
Speaker 1: he's looking at railroad crossings in Kansas City. Value. Add
Speaker 1: this is real value. You just take a sharpie and
Speaker 1: you talk about rabbit cross secrets. Yeah, exactly. I had
Speaker 1: a deal once and I had a paragraph on page
Speaker 1: forty two that said, up, I didn't get ed Hyman's literature,
Speaker 1: I wouldn't work there. I was literally give the proper
Speaker 1: shout out, and you just went on around about pencils
Speaker 1: and sharp Pia's Jude Emmanuel the Weekend. Head over to
Speaker 1: our good friend Manace Crowning morning Manus John, thank you
Speaker 1: very much. Yeah, Joimy nive is amatox seeing the Special
Speaker 1: Presidential Coordinator, and what's good to see you in the daby.
Speaker 1: We were just buying some of the presidents on there
Speaker 1: talking about uh, you know, continuing buybacks and dividends would
Speaker 1: perhaps bring the wrath of the wide House upon them
Speaker 1: in terms of taxes. But to speech last night, let's
Speaker 1: talk about last night. The President warned, I'm paraphrasing that
Speaker 1: there's a risk of a windfall tax if you don't
Speaker 1: be invest Is this just political kite find ahead of
Speaker 1: mid terms? Is there any built possibility of windfall taxes? Well, Master,
Speaker 1: first of all, it's great to be here with you
Speaker 1: in uh In Abugabi and I'm Bloomberg. It's it's always great,
Speaker 1: look the president is. This has been a consistent message
Speaker 1: from the President, from the administration asking companies to take
Speaker 1: their profits and invest them back in America, back in
Speaker 1: production and refining. We have been experiencing elevated prices as
Speaker 1: a result of geopolitical dynamics, not because of markets, but
Speaker 1: because we have a war, devastating war in Europe where
Speaker 1: the perpetrator of the war is one of the largest
Speaker 1: oil producers in the world, one of the largest gas
Speaker 1: exporters in the world, and it's using energy as a weapon.
Speaker 1: This has seen a massive increase in prices. Well, of course,
Speaker 1: we're still have a huge economic growth from post COVID
Speaker 1: that is also creating demands growth. So we're telling companies
Speaker 1: make a profit. Hey, your shareholders, but there's a level
Speaker 1: and a limit to how much profit you can tell
Speaker 1: you without investing. You weren't saying not to oil companies
Speaker 1: when oil was at twenty bucks in the United States
Speaker 1: of America. I think I think the point that at
Speaker 1: twenty dollars is when naturally companies don't invest. A hundred dollars,
Speaker 1: ninety dollars is naturally historically when companies do invest. The
Speaker 1: problem now is that they're not doing what they always
Speaker 1: used to do. I'm not here to represent big oil
Speaker 1: and US. I'm here maybe put the problemsation, which is
Speaker 1: people have said to me, you look at this administration's
Speaker 1: guidance to big oil. Day one keystone was bins. We
Speaker 1: have neither discussion about a new taxation format, and we
Speaker 1: have a host of sort of no drilling on on
Speaker 1: federal land. We have various messages which are respectfully schizophrenic.
Speaker 1: How can you plan for five years, ten years, copex
Speaker 1: aim us with schizophrenic policy changes like this? This is
Speaker 1: how it's been described to me. What's your response to that.
Speaker 1: I don't think it's been schizophrenic. I think we've been
Speaker 1: very clear to craft. Look, we're in a we have
Speaker 1: to deal with the short term, medium term, and laun terms.
Speaker 1: We're in a a time when we have to increase
Speaker 1: production because we need to make sure to ensure global
Speaker 1: economic growth. Yes, we have to have reasonably brice affordable
Speaker 1: energy resources oil and gas to meet our goals of
Speaker 1: where we want the world to go. We have to
Speaker 1: accelerate our investments in renewable energy. Those are consistent with
Speaker 1: each other, they're not competing with each other. So investing
Speaker 1: right now, we here's a certainty we're giving oil companies.
Speaker 1: We've said we are going now that we have released
Speaker 1: a hundred and eighty million barrels. Yeah, I've oil onto
Speaker 1: the market from the spr for our national security, and
Speaker 1: just we need to buy it back. We need to
Speaker 1: buy another two hundred million barrels back over the next
Speaker 1: several years, we have said. The President himself has told companies,
Speaker 1: I will get I will tell you what price. I
Speaker 1: will buy it back at seventy dollars or so I
Speaker 1: will start buying back at large amounts. So I will
Speaker 1: provide you with certainty of price to some degree, so
Speaker 1: to enable to answer the questions you've asked, Well, there's
Speaker 1: one way to push a market against you, and that's
Speaker 1: to tell them about what price you want to replenished
Speaker 1: the spr But I know it's a lengthy document and
Speaker 1: I know it has detailed We can we move on,
Speaker 1: which is about the price cap from the United States
Speaker 1: of America. I think the language is an effective and
Speaker 1: a strong level of forty to sixty dollars is what
Speaker 1: I understand. The numbers that's in the Blomberg stories. Do
Speaker 1: you really believe sixty bucks is going to keep Russian
Speaker 1: oil flowing onto the market, because the conversation I've had
Speaker 1: with everybody here, everybody's worried about the sanctions coming to
Speaker 1: bear here in our at home in Europe. To sixty
Speaker 1: bucks keep Russia oil flowing in your mind? So, outside
Speaker 1: of a Bloomberg article, which I would never want to
Speaker 1: argue with Bloomberg, I don't think so. I we are
Speaker 1: going to set the price. When we do that, and
Speaker 1: we'll announce it. I think all these numbers out there
Speaker 1: that are just rumors and leaks that I can tell
Speaker 1: you are not substantiated by reality. Uh, and people should
Speaker 1: just ignore those. I really would hope people would ignore
Speaker 1: those numbers. We are We've always said that our goal
Speaker 1: was to keep the Russian barrels on the market while
Speaker 1: we restrict the revenues to Russia at a point when
Speaker 1: they're using those revenues to finance the war. There's a
Speaker 1: balance here and we have to figure that out. There's
Speaker 1: a difference in the balance between when we were at
Speaker 1: a hundred twenty dollars of arrow versus when we were
Speaker 1: at seventy six dollars of arrow. So we are going
Speaker 1: to have to figure out we're doing that now of
Speaker 1: what the right price is going to be in order
Speaker 1: to make sure that Russia's still incentiviz is so on
Speaker 1: the market while we make sure that they're not overprofiting
Speaker 1: beyond that level. Will it be materially higher than sixty
Speaker 1: I can't tell you what the price is because if
Speaker 1: I say anything now, you're gonna they're gonna have rumors
Speaker 1: again on that. But we look, we get it, We
Speaker 1: understand how the market works, and we want to make
Speaker 1: sure that our goals are achieved to terrify ideal in fact,
Speaker 1: not rumor. And with that in mind, I want to
Speaker 1: understand the potency of the price cap when it comes.
Speaker 1: Because I call up the Indian Oil Ministry yesterday, it's
Speaker 1: very unlikely. The speculation is it's very unlikely Indian China
Speaker 1: to If the biggest customers either for Russian oil will
Speaker 1: sign up, we don't know, but given the price cap,
Speaker 1: it's a fairy impotent proposition if two of the biggest
Speaker 1: customers of Russia won't sign up. I disagree because, um
Speaker 1: the country. What we're telling people, you don't have to
Speaker 1: sign up. It's not you know, a membership. Uh. You
Speaker 1: as long as you are purchasing Russian oil at a
Speaker 1: lower price, that's what we want to achieve. You have
Speaker 1: a market price of brant. Everybody negotiates. You know that
Speaker 1: nobody buys strictly brant. There's all kinds of negotiations. Do
Speaker 1: you really believe that India and China are not going
Speaker 1: to be negotiating and are not already? We know that
Speaker 1: Russian oil is not selling a brant right now. No,
Speaker 1: it's at a discount, So it's just amount. How much
Speaker 1: of a discount? Okay, Well, let's see what you produced
Speaker 1: at your hair in Adipec. How would you describe Starry
Speaker 1: US relations at the moment are they broken, Are they fractured?
Speaker 1: What is the word that describes it at the moment? Well,
Speaker 1: I think people attach too much to the drama of
Speaker 1: things and the soap opera of things. Satura Abrabian the
Speaker 1: United States have had an eight year relationship. We've had
Speaker 1: some ups, we've had some downs. We usually come back
Speaker 1: from the up. We have a broad range of interest
Speaker 1: from security to economic. We had a significant disagreement that
Speaker 1: we're you know, I don't try away from that. We
Speaker 1: had a disagreement about the OPEC decision. We think it
Speaker 1: was a mistake to announce a cut of two million barrels,
Speaker 1: But we all we continue to talk to them, and
Speaker 1: we're going to continue to have a relationship that serves
Speaker 1: our interests. We're just gonna have to evaluate how that is,
Speaker 1: how that best works. In all ways, the last time
Speaker 1: you were in the region, you left here? Did you
Speaker 1: leave here? Did you leave Saudi Arabia with a conviction
Speaker 1: and a solid belief that you were going to get
Speaker 1: more oil on the market. From the side, he's were
Speaker 1: you miss guy? You did? Did you walk away with
Speaker 1: that belief? Clarify for us today. So one of the
Speaker 1: things that I never do was talking about what we
Speaker 1: talked about. What I my conversations with government officially understand
Speaker 1: the scenes. So I will say that we were very
Speaker 1: The good thing about my conversation and folks, I'm always
Speaker 1: very straightforward and I appreciate that they can be with me.
Speaker 1: They knew that we believe that a cut right now
Speaker 1: in this environment, under these conditions was not good for
Speaker 1: the global eco. What I mean, it was not good
Speaker 1: for their consumers. It's not good for our economy consumers.
Speaker 1: We thought it was a mistake. I also, I think
Speaker 1: that we from trip to Saudi Arabia was about oil
Speaker 1: all along. No, it was never about oil. Think about
Speaker 1: the things that we've done. We look, we are the
Speaker 1: United States, Our interests are are varied and deep. And
Speaker 1: look at what we achieved on that trip that I
Speaker 1: think was really important. They were over flights from Israel,
Speaker 1: security arrangements, security integration, security, economic integration of Iraq, visa
Speaker 1: vi Iran, extending the ceasefire with Yemen. I mean, these
Speaker 1: are really important things. We announced all kinds of other
Speaker 1: achievements at the in the wall on that trip that
Speaker 1: I'm nothing to do with oil. At the same time,
Speaker 1: when we announced the trip. We also so after the trip,
Speaker 1: a increase in production in July, an increase in production
Speaker 1: in August, an increase in production in September. Uh the
Speaker 1: com sauity in August had its highest production levels continuity
Speaker 1: of them shock and it provoked immediate press releases. In
Speaker 1: the news conference I was in in Vienna that night,
Speaker 1: the question the market wants to know is how serious
Speaker 1: is the white hot abide a retaliation? You know, is
Speaker 1: retaliation the right word? What are you gonna do? Is it?
Speaker 1: Is it gonna be on sales? Is it gonna be
Speaker 1: no peck? Is it gonna be let's say more additional
Speaker 1: spr releases? What is this retaliation that's been so much
Speaker 1: made off in the media. So again I have to
Speaker 1: deal with the relationship less with what it's made of
Speaker 1: in the media. And we are looking at what the
Speaker 1: interests in the United States are, how we see for
Speaker 1: our own interests and for our interests here in the region.
Speaker 1: We have very strong interests here in the Gulf, across
Speaker 1: the board with you A, with Saudi, with the rest
Speaker 1: of the region. And we are going to continue to
Speaker 1: look at what other actions that we need to take
Speaker 1: that best serve the American interests and what we think
Speaker 1: are the best security interests for this region and the
Speaker 1: economic interests around the world. That's what will guide every
Speaker 1: decision that we make. And I thank you very much
Speaker 1: to taking the time. I know you've got a busy
Speaker 1: schedule and it's been good to catch up and on
Speaker 1: I'll make sure i'll go down fact check my forty
Speaker 1: to sixty dollar oiler price in terms of where the
Speaker 1: cop comes and team Special Presidential Coordinator in OUTA two.
Speaker 1: My final guest, it's a wrapper from the hallowed halls
Speaker 1: where oil dealers are dumb. Jonathan Jane Folly will No,
Speaker 1: I would actually like it. Let's be about the company.
Speaker 1: It's just fun to say the name Billy, Billy say it.
Speaker 1: It's fun. Alright, let's be please, let's move on. Royal
Speaker 1: Dutch show is maybe just as fun to say, Jane Folly.
Speaker 1: Strategy Jane, I did a fancy log study on the
Speaker 1: Bloomberg on Chinese you won USDC N Y and if
Speaker 1: you extrapolated out on this moon shot of weakness, you
Speaker 1: get to eight you want in the summer of next year.
Speaker 1: Can you go through that exercise? Can you extrapolate out
Speaker 1: some of these beleaguered EM currencies and particularly China. Well
Speaker 1: you know again that the news that you were just
Speaker 1: referring to, will they pull out of COVID zero or not,
Speaker 1: Well that's going to have a big, big leaning really
Speaker 1: on the markets expectations for growth in China and therefore
Speaker 1: on the the value of the the remember, because we
Speaker 1: all know that Chinese growth this year is it's really
Speaker 1: disappointing now. And we all know that of course that
Speaker 1: we can economy means that we can exchange rate. So
Speaker 1: those two things that are really really aligned. But you know,
Speaker 1: for many of the e M currencies or the economies,
Speaker 1: I think it really depends whether or not we're talking
Speaker 1: about commodities exporters, commodities importers and certainly the ones that
Speaker 1: have been really struck by the energy yet at crisis
Speaker 1: really in some dire straits or that or the food
Speaker 1: price crisis for many em and you know, there is
Speaker 1: some degree of a doom look for for for many
Speaker 1: of these now and that's going to be really tough
Speaker 1: to break. And of course I think we've talked about
Speaker 1: before if you can look at the doom loop for
Speaker 1: for emerging markets as their fundamentals keep on driving them lower,
Speaker 1: and then of course refers to to do that feedback
Speaker 1: loop with respect to the dollar, to people keep on
Speaker 1: holding the dollar and instead let's go to the first principles.
Speaker 1: Off a FED meeting tomorrow and folks will have our
Speaker 1: college very coverage, very dollar centric. Jane Fawley, Can central
Speaker 1: banks manage a dollar turnaround? Well, you know, I think
Speaker 1: central banks would like a dollar turnaround. I mean, you know,
Speaker 1: there has been keeping up with the jones Is to
Speaker 1: some extent, and that's not just an e M. And
Speaker 1: we saw the emerging market central banks at start hiking
Speaker 1: interest rates really before detenant in many cases. And of course,
Speaker 1: you know you look at the Bank of England, you
Speaker 1: look at the u c B. You know they next
Speaker 1: time they go, I mean the Bank of England obviously
Speaker 1: this week, but next time they go, they could be
Speaker 1: hiking into an interest rate hike into a recession. That's
Speaker 1: not something they want and they don't really want to
Speaker 1: be doing seventy five basis points even fifty basis points
Speaker 1: into a recession. But of course, as long as the
Speaker 1: FED does large increments, then because of the the impact
Speaker 1: or the potential impact on their currencies, you know that
Speaker 1: really keeps alive the possibility that they may have to
Speaker 1: go by large incumments to which crushes demand. This isn't
Speaker 1: just about a doom look for em it's happening here too.
Speaker 1: It crushes demand even more, which is clearly not what
Speaker 1: you want when you've got energy prices crushing demand as well. So, um,
Speaker 1: if the FED were to ease up, I think it
Speaker 1: would be a relief to huge amount of economies around
Speaker 1: the world. Okay, so if there is a step down,
Speaker 1: does that mean that we've seen peak dollar? Well, you know,
Speaker 1: not necessarily. And and this is the interesting thing. Because
Speaker 1: the dollar is a safe haven, the dollar also reacts
Speaker 1: to to slower world growth. And so you know, I
Speaker 1: still come back to the question until you can really answer,
Speaker 1: you know, what else are you going to buy if
Speaker 1: it's not the dollar and you can really say, yeah,
Speaker 1: you know, I really want to go and buy risky assets,
Speaker 1: I want to go back into em or you know,
Speaker 1: I'm confident in the Euro. Until you can answer those questions,
Speaker 1: I think the dollar retains a fair amount of strength.
Speaker 1: And you know, with respect to the Euro, yes, you know,
Speaker 1: the energy prices have come lower in October and that's
Speaker 1: great news, but you know it won't stop. It hasn't stopped.
Speaker 1: You know, big chemical companies, aluminium smelters help manufacturers moving
Speaker 1: out of Europe because they know that it's not just
Speaker 1: about the cost of energy this winter. It's next winter
Speaker 1: and the one after that. Where is that energy going
Speaker 1: to come from? And I don't think that's something that
Speaker 1: the euro is is really priced for yet. So how
Speaker 1: much can we see the dollar continued to rally based
Speaker 1: on that backdrop, which is really a poign to think
Speaker 1: about industries moving out wholesale of Europe because they know
Speaker 1: this is not a one winter problem. Well, you know,
Speaker 1: I think, you know, we could still have euro dollar
Speaker 1: going lower, maybe not right in the in the near term,
Speaker 1: because the market is is getting excited about that the
Speaker 1: story that we've got this this warm period and energy
Speaker 1: prices aren't as expensive as they could have been. But
Speaker 1: I think if we move into the proper winter over
Speaker 1: you know, after Christmas into January February, if it gets
Speaker 1: cold then and I think the reality of this weak
Speaker 1: set of data that we've had from Germany in terms
Speaker 1: of industrial production and manufacturing production, the prems, etcetera, that
Speaker 1: the warning is about recession if they come into fruition.
Speaker 1: I think that's the sort of environment where we could see,
Speaker 1: you know, you were a dollar moving back, maybe towards
Speaker 1: or so. In final word on sterling, if you'd asked
Speaker 1: me just a few weeks ago whether this Bank of
Speaker 1: England will be selling assets, I would have said I
Speaker 1: don't think so. But they are. And it's that currency
Speaker 1: positive or negative. Well, I suppose you know that the
Speaker 1: fact that they managed to pull their credibility back from
Speaker 1: the abyss, you know, is a positive thing. We have
Speaker 1: to see how this this auction is soaked up. But
Speaker 1: for now I think the Bank of England yet credibility.
Speaker 1: It's a good thing. But you know, I think the
Speaker 1: jury is out. I've still got a negative forecast for sterling,
Speaker 1: and that's really because you know, all of this, So
Speaker 1: our fundamentals that existed before that Many budget on September
Speaker 1: twenty three fundamentally still there. In fact the worse, because
Speaker 1: confidences as worse, and business confidence, consumer confidence, that sort
Speaker 1: of thing. We are headed into the recession if we're
Speaker 1: not already in it. So yes, you know, in terms
Speaker 1: of credibility, both the new Prime Minister and the Bank
Speaker 1: of England. Yeah, that's that's certainly a little more solid
Speaker 1: than it was just a few weeks ago. But this
Speaker 1: is a this is a tough set of environments in
Speaker 1: the UK that that both are facing, and I think
Speaker 1: Sterling is still headed for a pretty bumpy ride. The
Speaker 1: pan against the US stellar right now, one fifteen thirty five,
Speaker 1: that dollar week through all the get ten. Jane, thank
Speaker 1: you as always, Jane Pony, there's rather thank you speaking
Speaker 1: from sixty thou feet Carracadanna's on a glide path landing
Speaker 1: with the Fed. Tomorrow we'll have our coverage. He joins
Speaker 1: US now chief US economist at BNP Perry Carl. I
Speaker 1: want to drill right down to the press conference. Everyone's
Speaker 1: gonna want to look out to December. How does Powell
Speaker 1: frame December tomorrow in the vicinity of two pm? Well,
Speaker 1: good morning, Tom. I think that the challenge for tomorrow's
Speaker 1: press conference, obviously November is all about December, but the
Speaker 1: focus is going to be on the Fed's credibility around
Speaker 1: this messaging, and they've previously highlighted that they need to
Speaker 1: see some realized improvement in the inflation numbers, not just
Speaker 1: wishful thinking about a turn on the inflation data, and
Speaker 1: if we look at, for example, the Core cp I,
Speaker 1: the six month annualized rate of change relative to the
Speaker 1: twelve month is not telling us things are moderating. So
Speaker 1: I think, what could happen? I mean, the Fed is
Speaker 1: obviously eager for a downshift at some point, but I
Speaker 1: think that maybe Pal will take a step away from
Speaker 1: that and rather than committing to December, he'll say, well,
Speaker 1: the time is approaching for a downshift. We'll let the
Speaker 1: data do the talking. And we have before the December
Speaker 1: meeting two jobs reports, two more inflation reports, and also
Speaker 1: two more rounds of inflation expectations numbers which I think
Speaker 1: are exceptionally important at this moment. Is the rate regime
Speaker 1: now or what we're going to see in December or
Speaker 1: January the same as it felt the last time we
Speaker 1: were at this level of nominal rate? Well, I think
Speaker 1: that debt levels have gone up in the economy, and
Speaker 1: so interest rate sensitivity has only increased. And that's true
Speaker 1: relative to the last time we are at these levels,
Speaker 1: and it's true over the last fifty years as well.
Speaker 1: So absolutely monetary policy is biting into economic activity. We
Speaker 1: see that very clearly in the housing sector. We'll see
Speaker 1: it through some other channels. You alluded to the manufacturing
Speaker 1: I s M out at ten o'clock this morning, the
Speaker 1: strong dollar taking a very significant toll on the factory sector.
Speaker 1: We've seen new export orders slide into contraction, and I
Speaker 1: think that means that finally today the I s M
Speaker 1: headline will also slide into contraction as well. So we're
Speaker 1: absolutely experiencing multiple channels through which policy is tightening and
Speaker 1: rating and activity, and I think that means we're heading
Speaker 1: into recession next year. Maybe not so early as the
Speaker 1: first quarter, but I think by the time Q two
Speaker 1: rolls around, we will have seen pay rolls slip below
Speaker 1: zero on a monthly basis, and consumers will have exhausted
Speaker 1: their excess savings from the pandemic, and the FED will
Speaker 1: be at level of about five and a quarter on
Speaker 1: the terminal FED funds rate. This will ultimately fix the
Speaker 1: inflation problem, but through the process, it will steer us
Speaker 1: into recession. To fix the inflation problem, how long does
Speaker 1: it FED, in your estimation have to hold rates at
Speaker 1: that five and a quarter percent level. In my estimation,
Speaker 1: my team's estimation, we think that the FED will be
Speaker 1: holding at that terminal rate of five and a quarter
Speaker 1: THROUGHOUTE and then rate cuts could start in four. But
Speaker 1: don't look for the Fed to be the white Knight
Speaker 1: at historically has been riding to the rescue quickly and
Speaker 1: aggressively with rate cuts. Rather, they will be much stingier
Speaker 1: with the lowering of the FED funds rate, keeping it
Speaker 1: in restrictive territory. We're looking for maybe uh fifty basis
Speaker 1: points of cut per quarter after at the start of four.
Speaker 1: So it's going to be a gradual moderation of that
Speaker 1: restrictive stance of policy because it is going to take
Speaker 1: time to choke the inflation pressures out of the economy.
Speaker 1: We're seeing inflation at the moment in very sticky categories
Speaker 1: places like rents UH and services excluding rents, and historically
Speaker 1: it's taken more forceful policy action to bend the trend
Speaker 1: in those types of categories. A lot of people listening
Speaker 1: to this might say five and a quarter percent rates
Speaker 1: for a full year at a time when we haven't
Speaker 1: seen as much sensitivity this year because of some of
Speaker 1: the immunization of balance sheets that we've seen. Next year
Speaker 1: starts to get a little bit different. What are the
Speaker 1: contours of a recession with a full year or more
Speaker 1: of five and a quarter percent fed funds rates. Well, again, Lisa,
Speaker 1: I think the recession probably starts in Q two of
Speaker 1: next year. We have to be careful not to succumb
Speaker 1: to recency bias, as psychologists call it, and draw parallels
Speaker 1: to the last few sessions which were exceptionally deep recessions,
Speaker 1: the COVID recession UH and the global financial crisis before that.
Speaker 1: I think the contours of this recession look more like
Speaker 1: a run of the mill recession, if you will. And
Speaker 1: so why if I had to draw a historical period
Speaker 1: with the closest step parallels, maybe it's the nine recession.
Speaker 1: So I would look for again between three and five
Speaker 1: quarters of recession, probably four quarters of economic contraction, and
Speaker 1: look for the unemployment rate to back up from three
Speaker 1: and a half as it currently stands to something in
Speaker 1: the vicinity of six percent at the peak. But the
Speaker 1: critical thing here, Carl, and you've been a great student
Speaker 1: of history, you know, for years, rolling back to your
Speaker 1: time at Deuts, your bank, and and to me, the
Speaker 1: critical thing here is life goes on. If we get
Speaker 1: a Rick and Dona view, life goes on doesn't it.
Speaker 1: I mean, there's a whole gloom crew out there. We
Speaker 1: roll over and die. I just don't buy it. Well,
Speaker 1: we don't roll over and die. Uh. There's a you know,
Speaker 1: still a decent demographic tray and in the US, especially
Speaker 1: compared to a lot of our developed economy, appears in
Speaker 1: in in Asia and Europe for that matter. So there's
Speaker 1: population growth, maybe we see some improvement on the immigration front. Uh,
Speaker 1: And all of these demographic factors mean that life goes
Speaker 1: on as the population grows, then the economy gets dragged
Speaker 1: along with it, so you get you get hiccups along
Speaker 1: the way, and those hiccups are recessions, but structurally there
Speaker 1: is still a growth paradigm in place. Meanwhile, Senator Warren
Speaker 1: and Bernie Sanders putting out a note basically talking about
Speaker 1: how they want to talk better with FED Chair J.
Speaker 1: Powell about the path of rate hikes and some of
Speaker 1: the pain that it's going to inflict on the economy.
Speaker 1: If the Fed lacks the political will for whatever reason
Speaker 1: to get to that five and a quarter percent level,
Speaker 1: how high could inflation be? I mean, what's necessarily going
Speaker 1: to be the length of time that inflation could remain
Speaker 1: high and the ramifications for the economy, well, if they
Speaker 1: lack the political will to really force full react against inflation,
Speaker 1: and I don't think that's a case by any stretch.
Speaker 1: At the moment, UH, A slew of FED officials have
Speaker 1: made it very clear that inflation is Job one priority
Speaker 1: number one, and they will do whatever it takes to
Speaker 1: accomplish those goals. So as long as J. Powell is
Speaker 1: at the HELM, I think they will have the political
Speaker 1: will to make sure this plays out in an appropriate fashion.
Speaker 1: But if they don't act forcefully, then not only do
Speaker 1: you have a higher inflation over a medium term horizon,
Speaker 1: but possibly some dis anchoring of inflation expectations. And and
Speaker 1: that for me was really the last straw. John had mentioned.
Speaker 1: Crude oil prices at the start of the segment. Crude
Speaker 1: oil prices in the eight to ninety dollar range mean
Speaker 1: that the relief we've seen in gasoline prices UH over
Speaker 1: the last one days or so may prove short lived
Speaker 1: and we could start to drift higher in the coming months.
Speaker 1: And nothing antagonizes inflation expectations in the United States, including
Speaker 1: longer run inflation expectations UH than rising prices at the
Speaker 1: pump We've seen this in the latest University of Michigan
Speaker 1: details for longer run. We've also seen it in the
Speaker 1: New York FEDS survey of consumer expectations on three and
Speaker 1: five year horizons. So I think in the back of
Speaker 1: their minds uh FED officials are looking at that notch
Speaker 1: up in inflation expectations. It's still in territory consistent with
Speaker 1: them moving back to their goal, but it's moving in
Speaker 1: the wrong direction, and I think this is part of
Speaker 1: the reason they may have some pause about really convincingly
Speaker 1: signaling a down shift for the December meeting, and instead
Speaker 1: they'll say, well, let's let the data do the talking,
Speaker 1: and if we do see some relief, maybe they can
Speaker 1: down shift to fifty and December. But I don't think
Speaker 1: we'll get kind of convincing, table pounding confidence on that
Speaker 1: point in tomorrow's press conference. Count thank you go to
Speaker 1: Nave that down that. This is the Bloomberg Surveillance Podcast.
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