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

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Speaker 1: with Jonathan Ferrell and Lisa Brownowitz Jaily. We bring you

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Speaker 1: insight from the best and economics, finance, investment, and international relations.

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Speaker 1: Find Bloomberg Surveillance on Apple Podcast, SoundCloud, Bloomberg dot Com,

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Speaker 1: and of course on the Bloomberg terminal. Yeah, Fed Lamont,

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Speaker 1: the Democratic governor from a Connecticut who has been in

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Speaker 1: office is two thousand nineteen. Thank you so much for

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Speaker 1: joining us. And there are a lot of people who

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Speaker 1: live here. It was really easy for them to come

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Speaker 1: to this conference, many of them who lived in New

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Speaker 1: York City prior to the pandemic. Many people who have come,

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Speaker 1: including businesses. How do you, as the governor, plan to

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Speaker 1: keep them considering the poll the lure of low tax dates.

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Speaker 1: I think we have one of the great education systems

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Speaker 1: in the country, so a lot of people want to

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Speaker 1: come here for their families to start things up. Stanford

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Speaker 1: Greenwich has become a real financial center, fintech center, you know, cryptocurrency,

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Speaker 1: financial services. Obviously, we've got the insurance capital of the world,

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Speaker 1: so there's a great ecosystem and base for finance. And

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Speaker 1: I think a lot of We've had a lot of

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Speaker 1: finance companies come up to Connecticut over the last few years,

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Speaker 1: and we've noticed that right with all of them moving

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Speaker 1: their headquarters to both Connecticut and also to Florida because

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Speaker 1: it's a low tax state. You're running against Bob Stefanowski,

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Speaker 1: and they're about thirty days left in this election cycle.

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Speaker 1: He's been espousing lowering taxes. You've previously raised taxes. How

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Speaker 1: do you sort of speak to this issue given that

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Speaker 1: you talk about the education system, you talk about some

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Speaker 1: of the services that cost money. Well, to be exact,

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Speaker 1: we inherited a two billion dollar budget deficits as far

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Speaker 1: as the eye could see, and we balanced that by

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Speaker 1: holding the line on spending. It was the first governor

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Speaker 1: in thirty years not to raise income taxes, and this

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Speaker 1: last year we put in place the biggest middle class

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Speaker 1: tax cut there is. But um making life a little

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Speaker 1: more affordable in this inflation every time, but bigger. You're right,

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Speaker 1: I've gotten place of rainy day fund. I'm gonna hear

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Speaker 1: from the finance people here today whether I'm aeryl on

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Speaker 1: the side of caution, I hope i am, But I'm

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Speaker 1: gonna be ready you said that you're gonna be listening

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Speaker 1: to Ray Dalio talk about how the world's about to implode,

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Speaker 1: and then you're gonna sit there and hide under your

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Speaker 1: chair as you try to prepare your budget. How do

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Speaker 1: you plan to uh really with withstand whatever is to

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Speaker 1: calm given the negativity out there, and given that it

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Speaker 1: is hard to borrow right now with rates where they are. Well,

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Speaker 1: two things. I've got a fifteen percent of our budget

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Speaker 1: set aside in cash. We call it the rainy day funds.

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Speaker 1: So if capital gains start slipping, which it already has,

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Speaker 1: you know, we'll be ready. I don't have to raise taxes.

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Speaker 1: I don't have to cut education, you know, funding going forward.

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Speaker 1: I budgeted very conservative for this fiscal year. I think

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Speaker 1: we could see sort of the storm clouds out there.

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Speaker 1: I assumed we were going to have less revenues this

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Speaker 1: year already, so I think we're ready for what may

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Speaker 1: be coming. I go back to the election cycle, because

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Speaker 1: this is the midterm election cycle, as I'm sure you

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Speaker 1: are more aware of than anybody else. In Bob Safinowski,

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Speaker 1: your opponent, does keep talking about the importance of keeping

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Speaker 1: some of the businesses here to keep the revenues. How

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Speaker 1: do you balance lowering taxes to be competitive with states

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Speaker 1: that have really drawn a lot of Wall Street businesses

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Speaker 1: if you think the money to actually make the state livable. Look,

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Speaker 1: we had a couple of fortuneies move into the state.

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Speaker 1: We had dozens of other companies, but Lisa, more importantly,

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Speaker 1: a lot of our local companies are growing and expanding

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Speaker 1: big time. We had new more new business startups than

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Speaker 1: ever before. You know, I've often said I don't want

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Speaker 1: more taxes, but I don't mind more taxpayers. Our economic

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Speaker 1: pie is growing and that's why we have a surplus.

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Speaker 1: So your tone has shifted a little bit in the

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Speaker 1: election cycle, with more focus on just get out and vote.

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Speaker 1: Why is there the emphasis on getting people to vote?

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Speaker 1: Do you think that there is something that will keep

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Speaker 1: Democrats home? I think anger sometimes motivates people. I'm more

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Speaker 1: optimistic believe in the state. I've got to make people

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Speaker 1: believe we're turning things around. We're making progress every day,

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Speaker 1: and I don't want people to be complacent. I want

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Speaker 1: you to have a stake in this election. So yeah, vote,

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Speaker 1: all right? So going forward, how I'm concerned are you

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Speaker 1: about some of the businesses that have been leaving. Given

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Speaker 1: the low tax issue, and given the fact that some

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Speaker 1: of the revenues are going to be strained for possibly

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Speaker 1: years if what Ray Dalio says comes to pass. I

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Speaker 1: think a lot of the companies that are coming to

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Speaker 1: Connecticut and staying in Connecticut a respect tax stability. They

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Speaker 1: know that for the first time in years, we have

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Speaker 1: not raised taxes. That makes a big deal, but it's

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Speaker 1: it's bigger than that. Again, they love the best education

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Speaker 1: system in the country. They love the fact that we

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Speaker 1: provide job training so they'll get the people they need

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Speaker 1: and the skills they need. Do you feel like there's

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Speaker 1: a shift right now? And we talk about this all

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Speaker 1: the time on Bloomberg Surveillance about how there is constraint

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Speaker 1: on the fiscal response to crises at this moment, because

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Speaker 1: when you're dealing with inflation, you're dealing with the situation

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Speaker 1: where you cannot borrow money in the same in kind

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Speaker 1: of way. How are you preparing for that with the

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Speaker 1: lack of ability to plug gaps with simply selling bonds. Hey, look,

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Speaker 1: there's a big macro economic world out there and we're

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Speaker 1: a small piece of it. We get buffeted by international

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Speaker 1: and national things all I can do is prepared, and

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Speaker 1: I've prepared by you know, making sure we have a

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Speaker 1: lot of dry patterns they suggested before billions of dollars

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Speaker 1: set aside. I can't go out and borrow my way

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Speaker 1: out of this. Maybe that's a little game they play

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Speaker 1: in Washington. You can't do that at the state level.

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Speaker 1: And when you look out today and you hear all

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Speaker 1: of these executives of major alternative investment firms, many of

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Speaker 1: which including Apollo. We're gonna be speaking with Apollo coming up,

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Speaker 1: have moved recently to Connecticut. What are you listening to?

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Speaker 1: What if you heard from them that you find most

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Speaker 1: compelling to sort of shape your narrative going forward. I

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Speaker 1: think they like being here. They don't necessarily have to

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Speaker 1: be in New York City or Boston, depending of you know,

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Speaker 1: five days a week, maybe it's one or two days

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Speaker 1: a week. Otherwise, I think they like the lifestyle here,

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Speaker 1: They like the coach system. They like the fact we

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Speaker 1: have a very well trained, smart educated workforce helps them

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Speaker 1: grow and expand right here. Do you have more tax

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Speaker 1: hikes planned for anyone? I know that there were tax

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Speaker 1: hikes overall, perhaps not for the middle class, but overall

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Speaker 1: there were some tax hikes that you did with your

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Speaker 1: first budget. Do you plan on doing that again or

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Speaker 1: was that a one time thing? No, we didn't. We

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Speaker 1: didn't do that. As I said, I was the first

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Speaker 1: guy not to raise the income tax, you know, on anybody,

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Speaker 1: and we're not doing that. People want tax stability. They

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Speaker 1: want to say, what's the state not only look like now,

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Speaker 1: but what's it gonna look like in five years? They

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Speaker 1: can plan according to Look. I come out of the

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Speaker 1: business world. I need to know what the world's gonna

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Speaker 1: look like in a few years so I can put

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Speaker 1: together my projections and make them happen. Why are you

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Speaker 1: a Yankees fan? They like to win, blow, blow anything,

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Speaker 1: And we are looking at a situation after the Mets

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Speaker 1: going on, and you've been trying to encourage CVI Cohen,

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Speaker 1: who is also a resident of your state, to buy

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Speaker 1: your local team. Is that correct? Yeah, we have the

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Speaker 1: yard Goats. It's an amazing minor league baseball team up

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Speaker 1: at Hartford, and uh I doting thought, boy, if you

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Speaker 1: want to get a foothold here bigger in Connecticut buying

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Speaker 1: the yard Goats and make them a Mets franchise. So

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Speaker 1: that's your pitch to him. That's why is he so

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Speaker 1: give us the inside scoop? Is he going to buy?

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Speaker 1: I think he plays his cards pretty close to the best.

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Speaker 1: I think so too, Ned Lamont, thank you so much

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Speaker 1: for being with us, Governor of Connecticut, here with us

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Speaker 1: in Greta. Right now, we have someone who has been

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Speaker 1: in the bond market for decades, Jim Zelter, co president

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Speaker 1: of Apollo Global, who has really helped found the entire

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Speaker 1: credit business which now has more than three fifty billion

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Speaker 1: dollars of assets under management. And as John's been talking

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Speaker 1: about all morning, this was the day of bond vigilantes.

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Speaker 1: This is the year of bond vigilantes, and this is

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Speaker 1: raising so much fear among people who have gotten used

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Speaker 1: to zero rates over such a long period of time.

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Speaker 1: Are you more nervous today or more excited? Well, you

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Speaker 1: gotta respect it. Um. First of all, nice to be

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Speaker 1: here this morning. Um. You know, certainly there's a big

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Speaker 1: paradigm ship going on right now, and you have to

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Speaker 1: respect the markets. As you said, the body vigilantes, they'll

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Speaker 1: get rates where they should be, more so than the

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Speaker 1: Fed or the central banks. But um, it's an interesting

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Speaker 1: paradigm shift where you see where rates have been, and

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Speaker 1: we've been in this period where uh there's been an

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Speaker 1: undoe focus on low rates and it's put valuations very

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Speaker 1: very high. So it's a period of transition. You have

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Speaker 1: to respect it, but also you want to be on

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Speaker 1: your front foot, which we've been able to do over

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Speaker 1: the last several months and will continue to do. So

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Speaker 1: what does that mean, Well, what it really means is

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Speaker 1: if you've been proved in the last decade and not

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Speaker 1: not been over your skis and valuations and have been

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Speaker 1: thoughtful about what you put on the books. There's a

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Speaker 1: very interesting time. The cost of capital now matters, purchase

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Speaker 1: price matters, and those who have capital and have a

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Speaker 1: lot of flexibility in their toolbox, you will find many

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Speaker 1: interesting companies from which to give capital to. Are you

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Speaker 1: taking more risk right now or less risk than you

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Speaker 1: are a month ago? You know, we were measured. We

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Speaker 1: run a very very large platform, as you said, over

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Speaker 1: five fifty billion and aggregate over almost four billion in debt.

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Speaker 1: You really can't pick the bottom um, it's really impossible

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Speaker 1: to predict. You can prepare along the way, but we

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Speaker 1: are we are methodically putting opportunities to work. Um, We've

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Speaker 1: been active in the CLO market. We've been active in

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Speaker 1: working with some of the banks on the large stocks indications,

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Speaker 1: Citrix in particular. So, you know, I think I have

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Speaker 1: a healthy respect for what's going on, but I don't

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Speaker 1: think we are in the corner of cowering by any means.

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Speaker 1: I love the sanitized language that you're using. And then

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Speaker 1: I think about some of the stories that we've written,

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Speaker 1: including you're talking about clos. We've worked with banks, We've

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Speaker 1: helped them. You made incredible amounts of money, especially recently

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Speaker 1: with UK c ls in the wake of some of

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Speaker 1: the volatility with citrics. The banks that are all with

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Speaker 1: all of these hung Bridge loans, right commitments that they

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Speaker 1: made to finance mergers and acquisitions that are perhaps not

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Speaker 1: priced the way that they were at the time of commitment.

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Speaker 1: How many opportunities do you have to go in and

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Speaker 1: buy some of these assets for the banks. Well, if

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Speaker 1: you just put today in context with a decade or

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Speaker 1: so ago in the in the GFC, the banks were

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Speaker 1: arguably long five plus billion of loans and high yield.

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Speaker 1: Today that number is circa eighty to a hundred billion,

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Speaker 1: So it's a much smaller opportunity set uh, and much fewer,

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Speaker 1: you know, not not as many names. So we we

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Speaker 1: have a constant dialogue. We're a very active trader with

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Speaker 1: the banks, you know, no permanent friends, no permanent enemies.

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Speaker 1: You know. We we act, We act very very in

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Speaker 1: great dialogue with them, but uncertain names. We will we

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Speaker 1: will partner um in many regions, especially in the US

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Speaker 1: and Europe, with the large banks. Are they willing to

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Speaker 1: sell well, I think I think it's it's you. You

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Speaker 1: have to have a realistic dialogue, and it's it's a

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Speaker 1: it's a challenging position. I think they want to move on,

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Speaker 1: they want to get back in business. I mean, the

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Speaker 1: reality is the high yield financing markets are arguably shut

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Speaker 1: down right now, um and I think that they would

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Speaker 1: like to be in addition to be able to make

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Speaker 1: new loans at appropriate levels and get paid fairly for those.

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Speaker 1: So it's going to be an interesting period of transition

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Speaker 1: between now and the end of the year. Traditionally, alternative

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Speaker 1: asset managers, including Apollo have lights investing in credit that

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Speaker 1: is not traded very often. Right, you invest in a company,

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Speaker 1: you get more control, you also have higher yield. Is

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Speaker 1: that the same now or do you find more opportunities.

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Speaker 1: And the public credit markets, given that yields are now

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Speaker 1: north of ten percent in many cases and arguably north

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Speaker 1: of eight percent even for pretty high rated credits, well,

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Speaker 1: there's a lot of a lot you brought up there, Um.

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Speaker 1: In our credit business, we are really a performing investor.

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Speaker 1: We're looking to extend, extend capital the companies that are

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Speaker 1: growing and get paid back. So there's not really a

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Speaker 1: distressed angle in our typical credit business, um to you,

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Speaker 1: as you raised, um, there are when you had the

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Speaker 1: dislocation we've had thus far, there are opportunities in the

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Speaker 1: public markets, within the investment grade market with low dollar price,

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Speaker 1: long duration assets, pretty interesting opportunities. And the private markets,

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Speaker 1: you know, new capital is coming with better terms and

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Speaker 1: better pricing. So you're at this unique period right now

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Speaker 1: where there's actually opportunities and the higher end of both

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Speaker 1: of those markets. It's interesting. High yield on a yield

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Speaker 1: basis is somewhat attractive on a spread basis is sort

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Speaker 1: of historical levels, and you know the the spreads this

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Speaker 1: morning or mid five hundreds approaching six hundred, that's typically

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Speaker 1: a time when when you get interested in high yield.

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Speaker 1: Right now, the yields are approaching ten percent, which is

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Speaker 1: a very attractive number. So you know, it's our it's

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Speaker 1: my view that, you know, having done this for a

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Speaker 1: few decades now, things are happening faster and faster and faster.

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Speaker 1: The rate rise in the US and globally in the

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Speaker 1: last you know, six months has been historic in only

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Speaker 1: the space speed which has happened, but also the amount

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Speaker 1: and in the past that might have happened over twelve, eighteen,

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Speaker 1: twenty four months. So it's my suspicion that by the

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Speaker 1: time we really are officially in a recession in twenty

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Speaker 1: three or twenty four, the opportunity to buy paper will

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Speaker 1: some of it will have evaporated. So you have to

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Speaker 1: be measured in patient along the way. Do you think

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Speaker 1: we're going to see a default cycle a kin Toy

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Speaker 1: saw in two thousand and eight or even some of

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Speaker 1: the prior ones into the early two thousands. Yes, you

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Speaker 1: will see some degree of a default cycle when you

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Speaker 1: you can't slow down the economy with the breaks that

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Speaker 1: the the monetary policy is leading to today without expecting

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Speaker 1: some accidents, it's going to happen. Reside reside mortgages have

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Speaker 1: gone from the low to mid two is the north

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Speaker 1: of six percent. There's going to be a default cycle.

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Speaker 1: It may not be as pervasive, it may not be

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Speaker 1: as wide and deep, but there will be some companies.

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Speaker 1: And also not only the amount of debt, but the

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Speaker 1: actual interest costs have have have increased dramatically on a

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Speaker 1: floating rate basis. What's more attractive to you at this

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Speaker 1: point looking for those idiosyncratic companies where you want to

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Speaker 1: invest in or investing in niche investors UH actually going

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Speaker 1: to other asset managers and saying we'll give you money,

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Speaker 1: We'll give you a stake in our assets and go

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Speaker 1: at it. Well, my answer us obviously both. Um. You

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Speaker 1: know you're alluding to our recent announcements in Diameter, in Sofa, Nova,

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Speaker 1: in Havevelli. These are all great managers that are proven

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Speaker 1: their their wisdom and their judgment over time in their

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Speaker 1: in their strategies. We're providing capital for them to grow.

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Speaker 1: At the same time, we're very active on our own accounts,

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Speaker 1: so you know we have we have a large platform,

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Speaker 1: We're connected to a lot of folks, Um. But I

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Speaker 1: think from us you'll see a strategy of being able

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Speaker 1: to do both of those in concert you mentioned clos

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Speaker 1: and I mentioned the United Kingdom. I know that that

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Speaker 1: has been a public issue in terms of how much

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Speaker 1: money you made buying clos at the right time and

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Speaker 1: then seeing a policy response from the Bank of England.

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Speaker 1: How much are you playing in the UK market right now? Well,

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Speaker 1: I think from our perspective, the UK market, you know,

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Speaker 1: it's it is a robust economy going through some great challenges,

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Speaker 1: and you know, we were very active in post the

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Speaker 1: GFC in the resi market place over there. I suspect

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Speaker 1: in the residential market, in the commercial real estate market,

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Speaker 1: you'll see us active over the next couple of years

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Speaker 1: as they go through their challenges in the economy. Um,

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Speaker 1: it's earlier, you know, really our activity in the celo

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Speaker 1: market was really US and raw the Europe, with some

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Speaker 1: in the UK. UM. But as you said earlier, like

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Speaker 1: the cello market right now, if you look at the

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Speaker 1: most senior tranches, um, it's a pretty draft coney assumption.

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Speaker 1: They're assuming ten plus percent defaults for the next five years,

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Speaker 1: which we think in some cases an opportunity to be

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Speaker 1: a buyer. And is in Europe a similar story kind

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Speaker 1: of taking place or is that yes? I means well

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Speaker 1: in my view, Europe is a bit behind the US

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Speaker 1: in terms of it's always um a bit tighter when

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Speaker 1: the market's tight, and it and its accentuates the wides

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Speaker 1: and courage of volatility. So there's plenty for us to

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Speaker 1: focus on right now in the US. I think Europe

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Speaker 1: and the UK will be a twenty three and twenty

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Speaker 1: four opportunity set, but certainly the US is our primary

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Speaker 1: focus right now. When we talk about investing alongside some

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Speaker 1: smaller niche investors, do you have any interest in a

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Speaker 1: big European bank that might be going through some distress,

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Speaker 1: that might be splitting up certain aspects of its business.

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Speaker 1: Would you ever be interested in acquiring certain aspects of

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Speaker 1: that business? Well, you know, over the as I said,

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Speaker 1: since since I weight or nine, there's been many instances

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Speaker 1: in two thousand twelve and two thousand fifteen where we

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Speaker 1: had strategies that really partnered with the banks or we're

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Speaker 1: an off tank for the banks, whether it was credit

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Speaker 1: card subsidiaries in Spain and Ireland, whether it was for

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Speaker 1: real estate portfolios in in Germany and in the UK.

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Speaker 1: We were always there as a partners like we were

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Speaker 1: in O eight O nine for the U S Bank.

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Speaker 1: So if there's a global bank and they are considering

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Speaker 1: large scale strategic transactions, we certainly expect to be part

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Speaker 1: of those dialogues. How much does your base case include

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Speaker 1: four to four and a half percent fed funds rates

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Speaker 1: for perhaps a year or even two, you know, I

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Speaker 1: think that's got to be the base case. You were

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Speaker 1: in a higher rate regime that has shocked the system,

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Speaker 1: and the monetary policy makers are trying to really shock

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Speaker 1: the economy on this on this nasty concept of inflation.

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Speaker 1: So you have to expect we're in a higher rate

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Speaker 1: period for some period of time. We're not macro investors,

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Speaker 1: You've got plenty of other folks that can come up

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Speaker 1: here and talk to you, but we're certainly in a

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Speaker 1: higher rate regime for some period of time, and that's

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Speaker 1: definitely shaping this view in terms of what's required in

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Speaker 1: terms of payment from a lot of these companies. Jim Selter,

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Speaker 1: thank you so much for taking the time a co

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Speaker 1: president of Apollo Global. Lucky this morning not just because

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Speaker 1: we have Muhammed our area around the table with us,

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Speaker 1: but also because we joined by Naria Calvino, the Deputy

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Speaker 1: Prime Minister of Spain, mad and Vice President, fantastic to

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Speaker 1: have you with us in the building. Thanks for having me.

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Speaker 1: Let's start here. The prospect of joint debt to do

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Speaker 1: something about the energy crisis in Europe. Is that something

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Speaker 1: you think we can find agreement on at the European level. Well,

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Speaker 1: when we were hit by the pandemic, Europe reacted in

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Speaker 1: a very decisive manner on the basis of unity and solidarity.

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Speaker 1: I think that now this time around, that we're faced

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Speaker 1: with global challenges again, a war at the DOORSEP of Europe,

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Speaker 1: we should react with the same principles. You know. Whether

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Speaker 1: that entails additional debt, isissuance or not, we will see.

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Speaker 1: But in any case, we should act, you know, together

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Speaker 1: in a decisive manner to tackle these challenges based on

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Speaker 1: preliminary discussions. Would say the Germans, if they conveyed to

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Speaker 1: you that that's something they would support. We were with

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Speaker 1: Actually we had the bilateral summits between Spain and Germany

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Speaker 1: this last week and we had an exchange with the ministers,

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Speaker 1: also with with the Chancellor Shoals. He was one of

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Speaker 1: the persons that was behind the issues of joint debt

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Speaker 1: to address and to tackle the challenges from the pandemic.

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Speaker 1: We didn't go into into the details, but I am

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Speaker 1: quite sure that German is aware of the need to

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Speaker 1: react in a manner which makes us stronger and allows

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Speaker 1: us to to face the current challenges in the best

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Speaker 1: possible manner for our populations. To your excellency, there was

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Speaker 1: a market consensus developing that this is going to be

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Speaker 1: a very difficult winter for Europe. It winter that may

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Speaker 1: see Europe fall into recession. What's not clear is the

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Speaker 1: length and depth of this potential recession. Do we have

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Speaker 1: any indicators of what happens if indeed Europe falls into

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Speaker 1: recession this winter? But I think what what what will

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Speaker 1: happen will depend on what we do. That is something

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Speaker 1: I think we have learned in the last three years.

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Speaker 1: So I am not really deterministic in the sense of

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Speaker 1: this is what's going to happen. We need to now

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Speaker 1: take the right decisions to avoid this situation arising. Where

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Speaker 1: mid in this work in the in the World Bank

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Speaker 1: and I m F annual meetings. This is a very

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Speaker 1: challenging and delicate point in time. The global economy is

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Speaker 1: slowing down, inflation is is increasing in some Western economies.

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Speaker 1: But I hope that we are able to make the

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Speaker 1: right decisions to avoid these scenarios to arise in practice.

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Speaker 1: And what do we say to people who say the

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Speaker 1: initial conditions are such that there's almost no policy flexibility. UM,

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Speaker 1: the ECB has to address inflation, UM, fiscal space is

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Speaker 1: limited and if you go too far, the bond vigilantes

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Speaker 1: may come in. Just look at what has happened to

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Speaker 1: the UK. And the reality is that even if governments

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Speaker 1: wish to move, the amount of measures available to them

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Speaker 1: is much more limited than in the past. It is

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Speaker 1: indeed tricky. It's not easy to to articulate economic policy

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Speaker 1: these days. I think that one basic principle is a

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Speaker 1: good coordination of monetary and fiscal policy. From the perspective

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Speaker 1: of Spain, just to give you an example, we're very

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Speaker 1: strongly committed to pursuing the path of deficit and dead reduction,

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Speaker 1: and I think that is going along and helping monetary

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Speaker 1: policy implementation in the EU. I I do hope that

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Speaker 1: we find the right balance, you know, between fighting inflation

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Speaker 1: and not endangering growth, because if we want to pursue

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Speaker 1: as fiscal responsibility, growth and job creation is a necessary

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Speaker 1: function for it to be sustainable. Let's talk about the

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Speaker 1: growth forecast from both the Banker Spain and from the

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Speaker 1: Spanish government. The Banker span understand for twenty three is

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Speaker 1: at one point four pc, your government at two point

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Speaker 1: one pc. Do you think that articulates to the Spanish

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Speaker 1: people just how much pain the economy is about to

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Speaker 1: go through. One thing that's been thrown at this federal

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Speaker 1: reserve is that their forecasts have been unrealistic, that they've

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Speaker 1: been too aspirational. Is that realistic correspirational? No, it's realistic absolutely.

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Speaker 1: In you know, we had very strong growth in twenty

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Speaker 1: twenty one, around five point five percent. We're having very

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Speaker 1: strong growth in twenty twenty two around four point four percent,

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Speaker 1: and that's a quite prudent forecast. And what we anticipate

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Speaker 1: is a slowdown of growth in twenty twenty three. Obviously,

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Speaker 1: I mean, the European economy is very much affective by

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Speaker 1: what happens in Germany, so it would be unrealistic, you know,

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Speaker 1: not to think that there will be a slowdown, But

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Speaker 1: all institutions, national, public, private, international, they foresee the Spanish

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Speaker 1: economy to continue to grow in twenty twenty three. And

431
00:22:21,119 --> 00:22:23,879
Speaker 1: there are some elements that make it particularly resilient and

432
00:22:23,920 --> 00:22:27,600
Speaker 1: strong at this point in time, whether it's the FEDS

433
00:22:27,680 --> 00:22:31,760
Speaker 1: aggressive interest rates hiking cycle, or the strength of the dollar.

434
00:22:32,240 --> 00:22:33,879
Speaker 1: There's a perception that a lot of people are going

435
00:22:33,880 --> 00:22:36,800
Speaker 1: to be going to Washington and talking to the American

436
00:22:37,040 --> 00:22:41,800
Speaker 1: authorities and saying what you do here has major repercussion,

437
00:22:41,880 --> 00:22:45,720
Speaker 1: not just for Neurope, but beyond that, especially in the

438
00:22:45,760 --> 00:22:49,480
Speaker 1: developing world and US. You must have a global perspective.

439
00:22:49,520 --> 00:22:51,440
Speaker 1: Do you think that's even a realistic conversation to have

440
00:22:51,520 --> 00:22:53,880
Speaker 1: in Washington, d C. These days? I do think they

441
00:22:53,880 --> 00:22:56,480
Speaker 1: are well aware of the impact of their decisions throughout

442
00:22:56,520 --> 00:22:59,680
Speaker 1: the world. You know, just like putting actions in Ukraine

443
00:22:59,680 --> 00:23:03,040
Speaker 1: are having a worldwide impact, which is not only having

444
00:23:03,040 --> 00:23:05,439
Speaker 1: to do with security, defense, not only having to do

445
00:23:05,480 --> 00:23:08,119
Speaker 1: with inflation. Also, food security is a key issue that

446
00:23:08,160 --> 00:23:10,199
Speaker 1: we will certainly be talking about in the course of

447
00:23:10,240 --> 00:23:13,520
Speaker 1: this week. I do think that the U S authorities

448
00:23:13,520 --> 00:23:15,760
Speaker 1: are well aware of the impact of their decisions on

449
00:23:15,880 --> 00:23:19,200
Speaker 1: emerging economies and on on inflation throughout the world and

450
00:23:19,280 --> 00:23:22,040
Speaker 1: growth throughout the world. Of course, do you think they

451
00:23:22,040 --> 00:23:24,960
Speaker 1: should snap back from this tiny cycle? Well, you know,

452
00:23:25,000 --> 00:23:28,760
Speaker 1: I would never there to to say anything to a

453
00:23:28,800 --> 00:23:33,480
Speaker 1: monetary policy authority. I am, I am. I hope that

454
00:23:33,600 --> 00:23:35,439
Speaker 1: they will get it right. You know, both in the

455
00:23:35,520 --> 00:23:37,960
Speaker 1: US and and in Europe. I mean, the sources of

456
00:23:38,000 --> 00:23:40,639
Speaker 1: inflation are very different on both sides of the Atlantic.

457
00:23:41,000 --> 00:23:43,680
Speaker 1: It's a demand driven as well as supplied driven inflation.

458
00:23:43,680 --> 00:23:45,720
Speaker 1: In the case of the US, it is really a

459
00:23:45,760 --> 00:23:47,800
Speaker 1: supply side shock you were talking about in just a

460
00:23:47,840 --> 00:23:52,119
Speaker 1: moment ago. It's it's energy prices going up. Is the

461
00:23:52,200 --> 00:23:55,560
Speaker 1: underlying course of inflation in the EU that would call

462
00:23:55,640 --> 00:23:58,920
Speaker 1: for a differentiated monetary policy. But as you were rightly saying,

463
00:23:59,240 --> 00:24:04,160
Speaker 1: interests exchange rates are very very sensitive and very important

464
00:24:04,160 --> 00:24:08,000
Speaker 1: in these regardens, so that that is driving the relationship

465
00:24:08,000 --> 00:24:10,879
Speaker 1: between monetary policy in different parts of the world. I

466
00:24:10,920 --> 00:24:12,920
Speaker 1: really hope they get it right. How clue me is

467
00:24:12,960 --> 00:24:14,760
Speaker 1: this going to be in a couple of days? Dan

468
00:24:14,840 --> 00:24:18,040
Speaker 1: in Washington? How a pressing is this meeting going to be? Well?

469
00:24:18,080 --> 00:24:20,440
Speaker 1: I think that we're quite used to tackling and dealing

470
00:24:20,520 --> 00:24:23,440
Speaker 1: with crisis. Since you were referring to two thousand and seven,

471
00:24:23,440 --> 00:24:25,960
Speaker 1: two thousand and eight, I was already around at the

472
00:24:26,000 --> 00:24:30,159
Speaker 1: time dealing with financial regulation. I think, you know, ever since,

473
00:24:30,160 --> 00:24:34,960
Speaker 1: we haven't really left a very complex scenario where multiple

474
00:24:35,119 --> 00:24:38,280
Speaker 1: inter relationships are hitting each other and having an effect,

475
00:24:38,320 --> 00:24:40,919
Speaker 1: you know. So I think that it's good we have

476
00:24:40,960 --> 00:24:43,200
Speaker 1: the G twenty. It's good that we're meeting this week,

477
00:24:43,240 --> 00:24:45,560
Speaker 1: and I hope we do have a good outcome in

478
00:24:45,640 --> 00:24:48,320
Speaker 1: terms of articulation of a good economic policy at this

479
00:24:48,400 --> 00:24:51,280
Speaker 1: point in time. Let's do that against so diplomatic as

480
00:24:51,320 --> 00:24:53,840
Speaker 1: I would expect. Thank you, now you're calving another Deputy

481
00:24:53,840 --> 00:25:07,760
Speaker 1: Prime Minister of Spain, Vice President, Thank you, yeah, Gandray Holden,

482
00:25:07,840 --> 00:25:09,760
Speaker 1: host of City Joint just right now, the chief US

483
00:25:09,800 --> 00:25:12,560
Speaker 1: Economists and you. Let's start to have why another seventy

484
00:25:12,560 --> 00:25:16,080
Speaker 1: five for you in the next month. So I think

485
00:25:16,080 --> 00:25:18,000
Speaker 1: it really goes back to what you were just discussing

486
00:25:18,040 --> 00:25:20,959
Speaker 1: that the FED has two issues here. One is an

487
00:25:20,960 --> 00:25:24,280
Speaker 1: economic fundamentals issue, and there that's right. There's been a

488
00:25:24,280 --> 00:25:27,520
Speaker 1: lot of progress in terms of tightening financial conditions, probably

489
00:25:27,560 --> 00:25:29,480
Speaker 1: further to go, a lot of that's already priced in.

490
00:25:29,800 --> 00:25:33,639
Speaker 1: But then they also separately have a communication issue, and

491
00:25:33,680 --> 00:25:35,639
Speaker 1: I think that's what they're managing, and that's what you've

492
00:25:35,640 --> 00:25:37,360
Speaker 1: see in some of those comments from Evans and from

493
00:25:37,400 --> 00:25:40,840
Speaker 1: Brainerd where yes, of course interest rates get higher and

494
00:25:40,880 --> 00:25:43,520
Speaker 1: you get into a range that may be more restrictive.

495
00:25:43,560 --> 00:25:47,040
Speaker 1: You start thinking about should you slow down, should you pause?

496
00:25:47,400 --> 00:25:51,479
Speaker 1: The issue is from a communications perspective, how do you

497
00:25:51,520 --> 00:25:53,879
Speaker 1: explain to markets in the public that you still have

498
00:25:53,960 --> 00:25:57,359
Speaker 1: resolved in fighting inflation. If you're slowing down rate hikes,

499
00:25:57,400 --> 00:26:00,359
Speaker 1: you're pausing rate hikes. And it ultimately is back to

500
00:26:00,400 --> 00:26:02,040
Speaker 1: the data. Is the data going to give the FED

501
00:26:02,080 --> 00:26:05,320
Speaker 1: flexibility to do that when we see CPI slowing down,

502
00:26:05,320 --> 00:26:07,919
Speaker 1: when we see a job market that's loosening. Um, So

503
00:26:08,119 --> 00:26:10,040
Speaker 1: I think that's what they're really watching. Now Are we

504
00:26:10,080 --> 00:26:11,960
Speaker 1: seeing any of those things? Are the two things that

505
00:26:12,040 --> 00:26:15,920
Speaker 1: you mentioned. I think you can argue in labor markets

506
00:26:16,080 --> 00:26:18,679
Speaker 1: maybe saw the first sign of some loosening and you

507
00:26:18,760 --> 00:26:21,800
Speaker 1: heard Vice share Brainer talk about this yesterday. Um, where

508
00:26:21,840 --> 00:26:25,239
Speaker 1: we had job openings come off meaningfully. So we had

509
00:26:25,240 --> 00:26:27,639
Speaker 1: a ratio of about two job openings to every one

510
00:26:27,720 --> 00:26:31,800
Speaker 1: unemployed individual. Historically normal ratio would be maybe one one

511
00:26:31,840 --> 00:26:35,000
Speaker 1: point one. That came down now to one point seven

512
00:26:35,040 --> 00:26:38,639
Speaker 1: openings to everyone unemployed individual. So it's moving in the

513
00:26:38,720 --> 00:26:40,760
Speaker 1: right direction for the FED if they want to see

514
00:26:40,760 --> 00:26:45,080
Speaker 1: some of that excess demand coming off. However, that the

515
00:26:45,280 --> 00:26:48,760
Speaker 1: level one point seven openings to everyone unemployed individual. I mean,

516
00:26:48,800 --> 00:26:51,240
Speaker 1: just intuitively, that's a lot of excess demand for labor

517
00:26:51,280 --> 00:26:54,080
Speaker 1: that's still out there. And uh, Andrew, we have a

518
00:26:54,200 --> 00:26:58,119
Speaker 1: big release this week cp I UM is there a

519
00:26:58,280 --> 00:27:01,960
Speaker 1: level that you think shape markets confidence one way or

520
00:27:02,040 --> 00:27:06,720
Speaker 1: the other. So consensus, I think is eight point one annualise?

521
00:27:07,040 --> 00:27:10,119
Speaker 1: Is there a one number or do we need several

522
00:27:10,240 --> 00:27:13,880
Speaker 1: numbers of a certain trend to really kind of move

523
00:27:14,440 --> 00:27:18,119
Speaker 1: fed rhetoric? Yeah, Hi, Greg, I think it really is

524
00:27:18,160 --> 00:27:21,280
Speaker 1: going to come down to where does that core monthly

525
00:27:21,359 --> 00:27:24,680
Speaker 1: inflation number come in. That's what we saw last month

526
00:27:24,800 --> 00:27:28,200
Speaker 1: where it was a stronger core reading, and Brainer talked

527
00:27:28,200 --> 00:27:31,880
Speaker 1: about this yesterday. Core goods in particular stays strong. There's

528
00:27:31,880 --> 00:27:34,879
Speaker 1: a pretty broad consensus that core goods prices should be

529
00:27:34,880 --> 00:27:38,399
Speaker 1: coming off. Until recently, at least, we had commodity prices

530
00:27:38,440 --> 00:27:41,439
Speaker 1: that we're moving lower, used car prices that look like

531
00:27:41,480 --> 00:27:44,040
Speaker 1: they should move lower. We've seen that in the wholesale prices.

532
00:27:44,240 --> 00:27:47,320
Speaker 1: So we're really watching that core goods component in the

533
00:27:47,359 --> 00:27:49,960
Speaker 1: release to see if that slows down. Right now, we

534
00:27:50,000 --> 00:27:53,639
Speaker 1: look at that that core CPI inflation month on month,

535
00:27:54,200 --> 00:27:56,320
Speaker 1: we have that at city at zero point five percent.

536
00:27:56,320 --> 00:27:59,120
Speaker 1: Month on month consensus around zero point four percent month

537
00:27:59,160 --> 00:28:01,800
Speaker 1: on month, you saw that slow down to a zero

538
00:28:01,800 --> 00:28:04,080
Speaker 1: point two or even as zero point three, that would

539
00:28:04,119 --> 00:28:06,359
Speaker 1: be a signal to markets that maybe you're getting some

540
00:28:06,480 --> 00:28:09,600
Speaker 1: easing and price pressure. Um. I think though the risks

541
00:28:09,600 --> 00:28:11,360
Speaker 1: are actually still to the upside that you know, maybe

542
00:28:11,400 --> 00:28:13,280
Speaker 1: we'll see that zero point four even zero point five

543
00:28:13,359 --> 00:28:15,600
Speaker 1: like we're projecting. Andrew picked up on that quote as

544
00:28:15,600 --> 00:28:17,920
Speaker 1: well from Vice champ Raina. She said there was ample

545
00:28:18,040 --> 00:28:22,080
Speaker 1: room for marching recompression to outpreduce goods inflation as demand calls,

546
00:28:22,080 --> 00:28:25,840
Speaker 1: supply constraint, seas, and imagries increase. Andrew tell me the

547
00:28:25,840 --> 00:28:27,879
Speaker 1: pot of inflation that's actually going to be stick here,

548
00:28:27,920 --> 00:28:29,400
Speaker 1: and then Greg and I can have a commis sanction

549
00:28:29,400 --> 00:28:33,040
Speaker 1: about what that means for corporate profits. So I would

550
00:28:33,040 --> 00:28:34,919
Speaker 1: take this back to the labor market. I think, like

551
00:28:34,960 --> 00:28:36,760
Speaker 1: I was saying, there are reasons to think that core

552
00:28:36,920 --> 00:28:40,160
Speaker 1: goods inflation might slow down a bit if I look

553
00:28:40,200 --> 00:28:43,880
Speaker 1: at services, labor intensive services, and then I go back

554
00:28:43,960 --> 00:28:46,360
Speaker 1: to that job market where we have one point seven

555
00:28:46,400 --> 00:28:49,520
Speaker 1: job openings for every one unemployed individual. We have wage

556
00:28:49,560 --> 00:28:52,080
Speaker 1: growth according to the Atlanta fit Wage Tracker. That's still

557
00:28:52,160 --> 00:28:55,440
Speaker 1: running upwards of six point seven percent year on year

558
00:28:55,600 --> 00:28:58,720
Speaker 1: average early earnings a little bit slower, but still well

559
00:28:58,840 --> 00:29:02,160
Speaker 1: above levels that would consistent with two percent inflation. That's

560
00:29:02,160 --> 00:29:05,480
Speaker 1: where I really worry about persistent inflationary pressure. You'll have

561
00:29:05,520 --> 00:29:08,479
Speaker 1: some pressure in rents, also in shelter prices, that's basically

562
00:29:08,560 --> 00:29:11,000
Speaker 1: lagged effects from price increases that we've seen in the

563
00:29:11,000 --> 00:29:14,240
Speaker 1: fast but in the past. But really non shelter services

564
00:29:14,480 --> 00:29:16,320
Speaker 1: and the tight labor market is where I would be

565
00:29:16,400 --> 00:29:19,520
Speaker 1: most concerned about persistent inflationary pressure. Greg we often talk

566
00:29:19,560 --> 00:29:21,960
Speaker 1: about the SMP five hundred and whether the federals F

567
00:29:22,040 --> 00:29:24,400
Speaker 1: has a price target. I wonder if I've got an

568
00:29:24,400 --> 00:29:27,560
Speaker 1: EPs target because right now you've got the vice chair

569
00:29:27,760 --> 00:29:30,960
Speaker 1: nd of guess that there's ample room for marching recompression.

570
00:29:31,200 --> 00:29:33,400
Speaker 1: Isn't that basically the FED sounding the earnings in corporate

571
00:29:33,400 --> 00:29:36,120
Speaker 1: America are going to come down. Yes, But she's not

572
00:29:36,200 --> 00:29:40,520
Speaker 1: wrong either, because you're looking at record profit margins right

573
00:29:40,760 --> 00:29:44,840
Speaker 1: well above anything we've seen on a long term trend basis,

574
00:29:44,920 --> 00:29:48,400
Speaker 1: and so there is ample room, right and so um,

575
00:29:48,440 --> 00:29:51,360
Speaker 1: you know, our expectation is profit margins to come down.

576
00:29:51,440 --> 00:29:54,800
Speaker 1: I've been saying that for over a decade now. But

577
00:29:55,280 --> 00:29:59,360
Speaker 1: you know from labor costs increases, just input costs generally

578
00:29:59,760 --> 00:30:03,160
Speaker 1: U on the rise and revenues slay to come down.

579
00:30:03,280 --> 00:30:06,360
Speaker 1: And keep in mind onhan that corporates have put on

580
00:30:06,400 --> 00:30:09,400
Speaker 1: all this low cost debt, that that's a good news

581
00:30:09,480 --> 00:30:11,920
Speaker 1: bad news store. The good news is when you know

582
00:30:11,960 --> 00:30:14,800
Speaker 1: the operating leverage is working in your favor, you you

583
00:30:14,840 --> 00:30:18,640
Speaker 1: have ample profits. Uh. And when that reverses, it goes

584
00:30:18,680 --> 00:30:21,560
Speaker 1: the other way. So I think there's more of a

585
00:30:21,600 --> 00:30:26,320
Speaker 1: downside deceleration or acceleration to the downside than anticipated. And

586
00:30:26,360 --> 00:30:28,480
Speaker 1: you just find a question from me to you, this

587
00:30:28,640 --> 00:30:31,600
Speaker 1: seventy basis point hike in November, is that the last

588
00:30:31,600 --> 00:30:35,480
Speaker 1: one of the sinko? It? Maybe? It maybe? And that's

589
00:30:35,520 --> 00:30:37,840
Speaker 1: where it comes back to does the FED get that

590
00:30:37,880 --> 00:30:40,200
Speaker 1: flexibility from the data? I think if if you see

591
00:30:40,680 --> 00:30:42,960
Speaker 1: margin compression like you were just talking about, if you

592
00:30:43,000 --> 00:30:46,280
Speaker 1: see goods inflation that's slowing, if we see a job

593
00:30:46,320 --> 00:30:48,840
Speaker 1: market that looks like it's showing some signs of loosening,

594
00:30:49,160 --> 00:30:52,440
Speaker 1: that would give the FED the at least the signs

595
00:30:52,440 --> 00:30:54,800
Speaker 1: that it needs to see to start that process of

596
00:30:54,800 --> 00:30:56,760
Speaker 1: slowing down. If you don't see those things and I

597
00:30:56,760 --> 00:30:58,960
Speaker 1: think that's the risk we could get another seventy five

598
00:30:59,000 --> 00:31:01,360
Speaker 1: basis points that your subsequent meetings. I'm sure at the

599
00:31:01,480 --> 00:31:03,600
Speaker 1: market will price to pivots somewhere in between at some

600
00:31:03,680 --> 00:31:06,000
Speaker 1: point in our future. Andrew, thank you. Andrew Hollin host

601
00:31:06,040 --> 00:31:08,280
Speaker 1: Ifer City, looking for seventy five for the FED next month.

602
00:31:08,600 --> 00:31:12,400
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join

603
00:31:12,480 --> 00:31:15,800
Speaker 1: us live weekdays from seven to ten am Eastern on

604
00:31:15,920 --> 00:31:20,160
Speaker 1: Bloomberg Radio and on Bloomberg Television each day from six

605
00:31:20,280 --> 00:31:25,160
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606
00:31:25,280 --> 00:31:30,320
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607
00:31:30,400 --> 00:31:34,200
Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course on

608
00:31:34,320 --> 00:31:38,520
Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg