Speaker 1: Welcome to the Bloomberg's Surveillance Podcast. I'm Tom Keane along
Speaker 1: with Jonathan Ferrell and Lisa Brownowitz Jaily. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. Yeah, Fed Lamont,
Speaker 1: the Democratic governor from a Connecticut who has been in
Speaker 1: office is two thousand nineteen. Thank you so much for
Speaker 1: joining us. And there are a lot of people who
Speaker 1: live here. It was really easy for them to come
Speaker 1: to this conference, many of them who lived in New
Speaker 1: York City prior to the pandemic. Many people who have come,
Speaker 1: including businesses. How do you, as the governor, plan to
Speaker 1: keep them considering the poll the lure of low tax dates.
Speaker 1: I think we have one of the great education systems
Speaker 1: in the country, so a lot of people want to
Speaker 1: come here for their families to start things up. Stanford
Speaker 1: Greenwich has become a real financial center, fintech center, you know, cryptocurrency,
Speaker 1: financial services. Obviously, we've got the insurance capital of the world,
Speaker 1: so there's a great ecosystem and base for finance. And
Speaker 1: I think a lot of We've had a lot of
Speaker 1: finance companies come up to Connecticut over the last few years,
Speaker 1: and we've noticed that right with all of them moving
Speaker 1: their headquarters to both Connecticut and also to Florida because
Speaker 1: it's a low tax state. You're running against Bob Stefanowski,
Speaker 1: and they're about thirty days left in this election cycle.
Speaker 1: He's been espousing lowering taxes. You've previously raised taxes. How
Speaker 1: do you sort of speak to this issue given that
Speaker 1: you talk about the education system, you talk about some
Speaker 1: of the services that cost money. Well, to be exact,
Speaker 1: we inherited a two billion dollar budget deficits as far
Speaker 1: as the eye could see, and we balanced that by
Speaker 1: holding the line on spending. It was the first governor
Speaker 1: in thirty years not to raise income taxes, and this
Speaker 1: last year we put in place the biggest middle class
Speaker 1: tax cut there is. But um making life a little
Speaker 1: more affordable in this inflation every time, but bigger. You're right,
Speaker 1: I've gotten place of rainy day fund. I'm gonna hear
Speaker 1: from the finance people here today whether I'm aeryl on
Speaker 1: the side of caution, I hope i am, But I'm
Speaker 1: gonna be ready you said that you're gonna be listening
Speaker 1: to Ray Dalio talk about how the world's about to implode,
Speaker 1: and then you're gonna sit there and hide under your
Speaker 1: chair as you try to prepare your budget. How do
Speaker 1: you plan to uh really with withstand whatever is to
Speaker 1: calm given the negativity out there, and given that it
Speaker 1: is hard to borrow right now with rates where they are. Well,
Speaker 1: two things. I've got a fifteen percent of our budget
Speaker 1: set aside in cash. We call it the rainy day funds.
Speaker 1: So if capital gains start slipping, which it already has,
Speaker 1: you know, we'll be ready. I don't have to raise taxes.
Speaker 1: I don't have to cut education, you know, funding going forward.
Speaker 1: I budgeted very conservative for this fiscal year. I think
Speaker 1: we could see sort of the storm clouds out there.
Speaker 1: I assumed we were going to have less revenues this
Speaker 1: year already, so I think we're ready for what may
Speaker 1: be coming. I go back to the election cycle, because
Speaker 1: this is the midterm election cycle, as I'm sure you
Speaker 1: are more aware of than anybody else. In Bob Safinowski,
Speaker 1: your opponent, does keep talking about the importance of keeping
Speaker 1: some of the businesses here to keep the revenues. How
Speaker 1: do you balance lowering taxes to be competitive with states
Speaker 1: that have really drawn a lot of Wall Street businesses
Speaker 1: if you think the money to actually make the state livable. Look,
Speaker 1: we had a couple of fortuneies move into the state.
Speaker 1: We had dozens of other companies, but Lisa, more importantly,
Speaker 1: a lot of our local companies are growing and expanding
Speaker 1: big time. We had new more new business startups than
Speaker 1: ever before. You know, I've often said I don't want
Speaker 1: more taxes, but I don't mind more taxpayers. Our economic
Speaker 1: pie is growing and that's why we have a surplus.
Speaker 1: So your tone has shifted a little bit in the
Speaker 1: election cycle, with more focus on just get out and vote.
Speaker 1: Why is there the emphasis on getting people to vote?
Speaker 1: Do you think that there is something that will keep
Speaker 1: Democrats home? I think anger sometimes motivates people. I'm more
Speaker 1: optimistic believe in the state. I've got to make people
Speaker 1: believe we're turning things around. We're making progress every day,
Speaker 1: and I don't want people to be complacent. I want
Speaker 1: you to have a stake in this election. So yeah, vote,
Speaker 1: all right? So going forward, how I'm concerned are you
Speaker 1: about some of the businesses that have been leaving. Given
Speaker 1: the low tax issue, and given the fact that some
Speaker 1: of the revenues are going to be strained for possibly
Speaker 1: years if what Ray Dalio says comes to pass. I
Speaker 1: think a lot of the companies that are coming to
Speaker 1: Connecticut and staying in Connecticut a respect tax stability. They
Speaker 1: know that for the first time in years, we have
Speaker 1: not raised taxes. That makes a big deal, but it's
Speaker 1: it's bigger than that. Again, they love the best education
Speaker 1: system in the country. They love the fact that we
Speaker 1: provide job training so they'll get the people they need
Speaker 1: and the skills they need. Do you feel like there's
Speaker 1: a shift right now? And we talk about this all
Speaker 1: the time on Bloomberg Surveillance about how there is constraint
Speaker 1: on the fiscal response to crises at this moment, because
Speaker 1: when you're dealing with inflation, you're dealing with the situation
Speaker 1: where you cannot borrow money in the same in kind
Speaker 1: of way. How are you preparing for that with the
Speaker 1: lack of ability to plug gaps with simply selling bonds. Hey, look,
Speaker 1: there's a big macro economic world out there and we're
Speaker 1: a small piece of it. We get buffeted by international
Speaker 1: and national things all I can do is prepared, and
Speaker 1: I've prepared by you know, making sure we have a
Speaker 1: lot of dry patterns they suggested before billions of dollars
Speaker 1: set aside. I can't go out and borrow my way
Speaker 1: out of this. Maybe that's a little game they play
Speaker 1: in Washington. You can't do that at the state level.
Speaker 1: And when you look out today and you hear all
Speaker 1: of these executives of major alternative investment firms, many of
Speaker 1: which including Apollo. We're gonna be speaking with Apollo coming up,
Speaker 1: have moved recently to Connecticut. What are you listening to?
Speaker 1: What if you heard from them that you find most
Speaker 1: compelling to sort of shape your narrative going forward. I
Speaker 1: think they like being here. They don't necessarily have to
Speaker 1: be in New York City or Boston, depending of you know,
Speaker 1: five days a week, maybe it's one or two days
Speaker 1: a week. Otherwise, I think they like the lifestyle here,
Speaker 1: They like the coach system. They like the fact we
Speaker 1: have a very well trained, smart educated workforce helps them
Speaker 1: grow and expand right here. Do you have more tax
Speaker 1: hikes planned for anyone? I know that there were tax
Speaker 1: hikes overall, perhaps not for the middle class, but overall
Speaker 1: there were some tax hikes that you did with your
Speaker 1: first budget. Do you plan on doing that again or
Speaker 1: was that a one time thing? No, we didn't. We
Speaker 1: didn't do that. As I said, I was the first
Speaker 1: guy not to raise the income tax, you know, on anybody,
Speaker 1: and we're not doing that. People want tax stability. They
Speaker 1: want to say, what's the state not only look like now,
Speaker 1: but what's it gonna look like in five years? They
Speaker 1: can plan according to Look. I come out of the
Speaker 1: business world. I need to know what the world's gonna
Speaker 1: look like in a few years so I can put
Speaker 1: together my projections and make them happen. Why are you
Speaker 1: a Yankees fan? They like to win, blow, blow anything,
Speaker 1: And we are looking at a situation after the Mets
Speaker 1: going on, and you've been trying to encourage CVI Cohen,
Speaker 1: who is also a resident of your state, to buy
Speaker 1: your local team. Is that correct? Yeah, we have the
Speaker 1: yard Goats. It's an amazing minor league baseball team up
Speaker 1: at Hartford, and uh I doting thought, boy, if you
Speaker 1: want to get a foothold here bigger in Connecticut buying
Speaker 1: the yard Goats and make them a Mets franchise. So
Speaker 1: that's your pitch to him. That's why is he so
Speaker 1: give us the inside scoop? Is he going to buy?
Speaker 1: I think he plays his cards pretty close to the best.
Speaker 1: I think so too, Ned Lamont, thank you so much
Speaker 1: for being with us, Governor of Connecticut, here with us
Speaker 1: in Greta. Right now, we have someone who has been
Speaker 1: in the bond market for decades, Jim Zelter, co president
Speaker 1: of Apollo Global, who has really helped found the entire
Speaker 1: credit business which now has more than three fifty billion
Speaker 1: dollars of assets under management. And as John's been talking
Speaker 1: about all morning, this was the day of bond vigilantes.
Speaker 1: This is the year of bond vigilantes, and this is
Speaker 1: raising so much fear among people who have gotten used
Speaker 1: to zero rates over such a long period of time.
Speaker 1: Are you more nervous today or more excited? Well, you
Speaker 1: gotta respect it. Um. First of all, nice to be
Speaker 1: here this morning. Um. You know, certainly there's a big
Speaker 1: paradigm ship going on right now, and you have to
Speaker 1: respect the markets. As you said, the body vigilantes, they'll
Speaker 1: get rates where they should be, more so than the
Speaker 1: Fed or the central banks. But um, it's an interesting
Speaker 1: paradigm shift where you see where rates have been, and
Speaker 1: we've been in this period where uh there's been an
Speaker 1: undoe focus on low rates and it's put valuations very
Speaker 1: very high. So it's a period of transition. You have
Speaker 1: to respect it, but also you want to be on
Speaker 1: your front foot, which we've been able to do over
Speaker 1: the last several months and will continue to do. So
Speaker 1: what does that mean, Well, what it really means is
Speaker 1: if you've been proved in the last decade and not
Speaker 1: not been over your skis and valuations and have been
Speaker 1: thoughtful about what you put on the books. There's a
Speaker 1: very interesting time. The cost of capital now matters, purchase
Speaker 1: price matters, and those who have capital and have a
Speaker 1: lot of flexibility in their toolbox, you will find many
Speaker 1: interesting companies from which to give capital to. Are you
Speaker 1: taking more risk right now or less risk than you
Speaker 1: are a month ago? You know, we were measured. We
Speaker 1: run a very very large platform, as you said, over
Speaker 1: five fifty billion and aggregate over almost four billion in debt.
Speaker 1: You really can't pick the bottom um, it's really impossible
Speaker 1: to predict. You can prepare along the way, but we
Speaker 1: are we are methodically putting opportunities to work. Um, We've
Speaker 1: been active in the CLO market. We've been active in
Speaker 1: working with some of the banks on the large stocks indications,
Speaker 1: Citrix in particular. So, you know, I think I have
Speaker 1: a healthy respect for what's going on, but I don't
Speaker 1: think we are in the corner of cowering by any means.
Speaker 1: I love the sanitized language that you're using. And then
Speaker 1: I think about some of the stories that we've written,
Speaker 1: including you're talking about clos. We've worked with banks, We've
Speaker 1: helped them. You made incredible amounts of money, especially recently
Speaker 1: with UK c ls in the wake of some of
Speaker 1: the volatility with citrics. The banks that are all with
Speaker 1: all of these hung Bridge loans, right commitments that they
Speaker 1: made to finance mergers and acquisitions that are perhaps not
Speaker 1: priced the way that they were at the time of commitment.
Speaker 1: How many opportunities do you have to go in and
Speaker 1: buy some of these assets for the banks. Well, if
Speaker 1: you just put today in context with a decade or
Speaker 1: so ago in the in the GFC, the banks were
Speaker 1: arguably long five plus billion of loans and high yield.
Speaker 1: Today that number is circa eighty to a hundred billion,
Speaker 1: So it's a much smaller opportunity set uh, and much fewer,
Speaker 1: you know, not not as many names. So we we
Speaker 1: have a constant dialogue. We're a very active trader with
Speaker 1: the banks, you know, no permanent friends, no permanent enemies.
Speaker 1: You know. We we act, We act very very in
Speaker 1: great dialogue with them, but uncertain names. We will we
Speaker 1: will partner um in many regions, especially in the US
Speaker 1: and Europe, with the large banks. Are they willing to
Speaker 1: sell well, I think I think it's it's you. You
Speaker 1: have to have a realistic dialogue, and it's it's a
Speaker 1: it's a challenging position. I think they want to move on,
Speaker 1: they want to get back in business. I mean, the
Speaker 1: reality is the high yield financing markets are arguably shut
Speaker 1: down right now, um and I think that they would
Speaker 1: like to be in addition to be able to make
Speaker 1: new loans at appropriate levels and get paid fairly for those.
Speaker 1: So it's going to be an interesting period of transition
Speaker 1: between now and the end of the year. Traditionally, alternative
Speaker 1: asset managers, including Apollo have lights investing in credit that
Speaker 1: is not traded very often. Right, you invest in a company,
Speaker 1: you get more control, you also have higher yield. Is
Speaker 1: that the same now or do you find more opportunities.
Speaker 1: And the public credit markets, given that yields are now
Speaker 1: north of ten percent in many cases and arguably north
Speaker 1: of eight percent even for pretty high rated credits, well,
Speaker 1: there's a lot of a lot you brought up there, Um.
Speaker 1: In our credit business, we are really a performing investor.
Speaker 1: We're looking to extend, extend capital the companies that are
Speaker 1: growing and get paid back. So there's not really a
Speaker 1: distressed angle in our typical credit business, um to you,
Speaker 1: as you raised, um, there are when you had the
Speaker 1: dislocation we've had thus far, there are opportunities in the
Speaker 1: public markets, within the investment grade market with low dollar price,
Speaker 1: long duration assets, pretty interesting opportunities. And the private markets,
Speaker 1: you know, new capital is coming with better terms and
Speaker 1: better pricing. So you're at this unique period right now
Speaker 1: where there's actually opportunities and the higher end of both
Speaker 1: of those markets. It's interesting. High yield on a yield
Speaker 1: basis is somewhat attractive on a spread basis is sort
Speaker 1: of historical levels, and you know the the spreads this
Speaker 1: morning or mid five hundreds approaching six hundred, that's typically
Speaker 1: a time when when you get interested in high yield.
Speaker 1: Right now, the yields are approaching ten percent, which is
Speaker 1: a very attractive number. So you know, it's our it's
Speaker 1: my view that, you know, having done this for a
Speaker 1: few decades now, things are happening faster and faster and faster.
Speaker 1: The rate rise in the US and globally in the
Speaker 1: last you know, six months has been historic in only
Speaker 1: the space speed which has happened, but also the amount
Speaker 1: and in the past that might have happened over twelve, eighteen,
Speaker 1: twenty four months. So it's my suspicion that by the
Speaker 1: time we really are officially in a recession in twenty
Speaker 1: three or twenty four, the opportunity to buy paper will
Speaker 1: some of it will have evaporated. So you have to
Speaker 1: be measured in patient along the way. Do you think
Speaker 1: we're going to see a default cycle a kin Toy
Speaker 1: saw in two thousand and eight or even some of
Speaker 1: the prior ones into the early two thousands. Yes, you
Speaker 1: will see some degree of a default cycle when you
Speaker 1: you can't slow down the economy with the breaks that
Speaker 1: the the monetary policy is leading to today without expecting
Speaker 1: some accidents, it's going to happen. Reside reside mortgages have
Speaker 1: gone from the low to mid two is the north
Speaker 1: of six percent. There's going to be a default cycle.
Speaker 1: It may not be as pervasive, it may not be
Speaker 1: as wide and deep, but there will be some companies.
Speaker 1: And also not only the amount of debt, but the
Speaker 1: actual interest costs have have have increased dramatically on a
Speaker 1: floating rate basis. What's more attractive to you at this
Speaker 1: point looking for those idiosyncratic companies where you want to
Speaker 1: invest in or investing in niche investors UH actually going
Speaker 1: to other asset managers and saying we'll give you money,
Speaker 1: We'll give you a stake in our assets and go
Speaker 1: at it. Well, my answer us obviously both. Um. You
Speaker 1: know you're alluding to our recent announcements in Diameter, in Sofa, Nova,
Speaker 1: in Havevelli. These are all great managers that are proven
Speaker 1: their their wisdom and their judgment over time in their
Speaker 1: in their strategies. We're providing capital for them to grow.
Speaker 1: At the same time, we're very active on our own accounts,
Speaker 1: so you know we have we have a large platform,
Speaker 1: We're connected to a lot of folks, Um. But I
Speaker 1: think from us you'll see a strategy of being able
Speaker 1: to do both of those in concert you mentioned clos
Speaker 1: and I mentioned the United Kingdom. I know that that
Speaker 1: has been a public issue in terms of how much
Speaker 1: money you made buying clos at the right time and
Speaker 1: then seeing a policy response from the Bank of England.
Speaker 1: How much are you playing in the UK market right now? Well,
Speaker 1: I think from our perspective, the UK market, you know,
Speaker 1: it's it is a robust economy going through some great challenges,
Speaker 1: and you know, we were very active in post the
Speaker 1: GFC in the resi market place over there. I suspect
Speaker 1: in the residential market, in the commercial real estate market,
Speaker 1: you'll see us active over the next couple of years
Speaker 1: as they go through their challenges in the economy. Um,
Speaker 1: it's earlier, you know, really our activity in the celo
Speaker 1: market was really US and raw the Europe, with some
Speaker 1: in the UK. UM. But as you said earlier, like
Speaker 1: the cello market right now, if you look at the
Speaker 1: most senior tranches, um, it's a pretty draft coney assumption.
Speaker 1: They're assuming ten plus percent defaults for the next five years,
Speaker 1: which we think in some cases an opportunity to be
Speaker 1: a buyer. And is in Europe a similar story kind
Speaker 1: of taking place or is that yes? I means well
Speaker 1: in my view, Europe is a bit behind the US
Speaker 1: in terms of it's always um a bit tighter when
Speaker 1: the market's tight, and it and its accentuates the wides
Speaker 1: and courage of volatility. So there's plenty for us to
Speaker 1: focus on right now in the US. I think Europe
Speaker 1: and the UK will be a twenty three and twenty
Speaker 1: four opportunity set, but certainly the US is our primary
Speaker 1: focus right now. When we talk about investing alongside some
Speaker 1: smaller niche investors, do you have any interest in a
Speaker 1: big European bank that might be going through some distress,
Speaker 1: that might be splitting up certain aspects of its business.
Speaker 1: Would you ever be interested in acquiring certain aspects of
Speaker 1: that business? Well, you know, over the as I said,
Speaker 1: since since I weight or nine, there's been many instances
Speaker 1: in two thousand twelve and two thousand fifteen where we
Speaker 1: had strategies that really partnered with the banks or we're
Speaker 1: an off tank for the banks, whether it was credit
Speaker 1: card subsidiaries in Spain and Ireland, whether it was for
Speaker 1: real estate portfolios in in Germany and in the UK.
Speaker 1: We were always there as a partners like we were
Speaker 1: in O eight O nine for the U S Bank.
Speaker 1: So if there's a global bank and they are considering
Speaker 1: large scale strategic transactions, we certainly expect to be part
Speaker 1: of those dialogues. How much does your base case include
Speaker 1: four to four and a half percent fed funds rates
Speaker 1: for perhaps a year or even two, you know, I
Speaker 1: think that's got to be the base case. You were
Speaker 1: in a higher rate regime that has shocked the system,
Speaker 1: and the monetary policy makers are trying to really shock
Speaker 1: the economy on this on this nasty concept of inflation.
Speaker 1: So you have to expect we're in a higher rate
Speaker 1: period for some period of time. We're not macro investors,
Speaker 1: You've got plenty of other folks that can come up
Speaker 1: here and talk to you, but we're certainly in a
Speaker 1: higher rate regime for some period of time, and that's
Speaker 1: definitely shaping this view in terms of what's required in
Speaker 1: terms of payment from a lot of these companies. Jim Selter,
Speaker 1: thank you so much for taking the time a co
Speaker 1: president of Apollo Global. Lucky this morning not just because
Speaker 1: we have Muhammed our area around the table with us,
Speaker 1: but also because we joined by Naria Calvino, the Deputy
Speaker 1: Prime Minister of Spain, mad and Vice President, fantastic to
Speaker 1: have you with us in the building. Thanks for having me.
Speaker 1: Let's start here. The prospect of joint debt to do
Speaker 1: something about the energy crisis in Europe. Is that something
Speaker 1: you think we can find agreement on at the European level. Well,
Speaker 1: when we were hit by the pandemic, Europe reacted in
Speaker 1: a very decisive manner on the basis of unity and solidarity.
Speaker 1: I think that now this time around, that we're faced
Speaker 1: with global challenges again, a war at the DOORSEP of Europe,
Speaker 1: we should react with the same principles. You know. Whether
Speaker 1: that entails additional debt, isissuance or not, we will see.
Speaker 1: But in any case, we should act, you know, together
Speaker 1: in a decisive manner to tackle these challenges based on
Speaker 1: preliminary discussions. Would say the Germans, if they conveyed to
Speaker 1: you that that's something they would support. We were with
Speaker 1: Actually we had the bilateral summits between Spain and Germany
Speaker 1: this last week and we had an exchange with the ministers,
Speaker 1: also with with the Chancellor Shoals. He was one of
Speaker 1: the persons that was behind the issues of joint debt
Speaker 1: to address and to tackle the challenges from the pandemic.
Speaker 1: We didn't go into into the details, but I am
Speaker 1: quite sure that German is aware of the need to
Speaker 1: react in a manner which makes us stronger and allows
Speaker 1: us to to face the current challenges in the best
Speaker 1: possible manner for our populations. To your excellency, there was
Speaker 1: a market consensus developing that this is going to be
Speaker 1: a very difficult winter for Europe. It winter that may
Speaker 1: see Europe fall into recession. What's not clear is the
Speaker 1: length and depth of this potential recession. Do we have
Speaker 1: any indicators of what happens if indeed Europe falls into
Speaker 1: recession this winter? But I think what what what will
Speaker 1: happen will depend on what we do. That is something
Speaker 1: I think we have learned in the last three years.
Speaker 1: So I am not really deterministic in the sense of
Speaker 1: this is what's going to happen. We need to now
Speaker 1: take the right decisions to avoid this situation arising. Where
Speaker 1: mid in this work in the in the World Bank
Speaker 1: and I m F annual meetings. This is a very
Speaker 1: challenging and delicate point in time. The global economy is
Speaker 1: slowing down, inflation is is increasing in some Western economies.
Speaker 1: But I hope that we are able to make the
Speaker 1: right decisions to avoid these scenarios to arise in practice.
Speaker 1: And what do we say to people who say the
Speaker 1: initial conditions are such that there's almost no policy flexibility. UM,
Speaker 1: the ECB has to address inflation, UM, fiscal space is
Speaker 1: limited and if you go too far, the bond vigilantes
Speaker 1: may come in. Just look at what has happened to
Speaker 1: the UK. And the reality is that even if governments
Speaker 1: wish to move, the amount of measures available to them
Speaker 1: is much more limited than in the past. It is
Speaker 1: indeed tricky. It's not easy to to articulate economic policy
Speaker 1: these days. I think that one basic principle is a
Speaker 1: good coordination of monetary and fiscal policy. From the perspective
Speaker 1: of Spain, just to give you an example, we're very
Speaker 1: strongly committed to pursuing the path of deficit and dead reduction,
Speaker 1: and I think that is going along and helping monetary
Speaker 1: policy implementation in the EU. I I do hope that
Speaker 1: we find the right balance, you know, between fighting inflation
Speaker 1: and not endangering growth, because if we want to pursue
Speaker 1: as fiscal responsibility, growth and job creation is a necessary
Speaker 1: function for it to be sustainable. Let's talk about the
Speaker 1: growth forecast from both the Banker Spain and from the
Speaker 1: Spanish government. The Banker span understand for twenty three is
Speaker 1: at one point four pc, your government at two point
Speaker 1: one pc. Do you think that articulates to the Spanish
Speaker 1: people just how much pain the economy is about to
Speaker 1: go through. One thing that's been thrown at this federal
Speaker 1: reserve is that their forecasts have been unrealistic, that they've
Speaker 1: been too aspirational. Is that realistic correspirational? No, it's realistic absolutely.
Speaker 1: In you know, we had very strong growth in twenty
Speaker 1: twenty one, around five point five percent. We're having very
Speaker 1: strong growth in twenty twenty two around four point four percent,
Speaker 1: and that's a quite prudent forecast. And what we anticipate
Speaker 1: is a slowdown of growth in twenty twenty three. Obviously,
Speaker 1: I mean, the European economy is very much affective by
Speaker 1: what happens in Germany, so it would be unrealistic, you know,
Speaker 1: not to think that there will be a slowdown, But
Speaker 1: all institutions, national, public, private, international, they foresee the Spanish
Speaker 1: economy to continue to grow in twenty twenty three. And
Speaker 1: there are some elements that make it particularly resilient and
Speaker 1: strong at this point in time, whether it's the FEDS
Speaker 1: aggressive interest rates hiking cycle, or the strength of the dollar.
Speaker 1: There's a perception that a lot of people are going
Speaker 1: to be going to Washington and talking to the American
Speaker 1: authorities and saying what you do here has major repercussion,
Speaker 1: not just for Neurope, but beyond that, especially in the
Speaker 1: developing world and US. You must have a global perspective.
Speaker 1: Do you think that's even a realistic conversation to have
Speaker 1: in Washington, d C. These days? I do think they
Speaker 1: are well aware of the impact of their decisions throughout
Speaker 1: the world. You know, just like putting actions in Ukraine
Speaker 1: are having a worldwide impact, which is not only having
Speaker 1: to do with security, defense, not only having to do
Speaker 1: with inflation. Also, food security is a key issue that
Speaker 1: we will certainly be talking about in the course of
Speaker 1: this week. I do think that the U S authorities
Speaker 1: are well aware of the impact of their decisions on
Speaker 1: emerging economies and on on inflation throughout the world and
Speaker 1: growth throughout the world. Of course, do you think they
Speaker 1: should snap back from this tiny cycle? Well, you know,
Speaker 1: I would never there to to say anything to a
Speaker 1: monetary policy authority. I am, I am. I hope that
Speaker 1: they will get it right. You know, both in the
Speaker 1: US and and in Europe. I mean, the sources of
Speaker 1: inflation are very different on both sides of the Atlantic.
Speaker 1: It's a demand driven as well as supplied driven inflation.
Speaker 1: In the case of the US, it is really a
Speaker 1: supply side shock you were talking about in just a
Speaker 1: moment ago. It's it's energy prices going up. Is the
Speaker 1: underlying course of inflation in the EU that would call
Speaker 1: for a differentiated monetary policy. But as you were rightly saying,
Speaker 1: interests exchange rates are very very sensitive and very important
Speaker 1: in these regardens, so that that is driving the relationship
Speaker 1: between monetary policy in different parts of the world. I
Speaker 1: really hope they get it right. How clue me is
Speaker 1: this going to be in a couple of days? Dan
Speaker 1: in Washington? How a pressing is this meeting going to be? Well?
Speaker 1: I think that we're quite used to tackling and dealing
Speaker 1: with crisis. Since you were referring to two thousand and seven,
Speaker 1: two thousand and eight, I was already around at the
Speaker 1: time dealing with financial regulation. I think, you know, ever since,
Speaker 1: we haven't really left a very complex scenario where multiple
Speaker 1: inter relationships are hitting each other and having an effect,
Speaker 1: you know. So I think that it's good we have
Speaker 1: the G twenty. It's good that we're meeting this week,
Speaker 1: and I hope we do have a good outcome in
Speaker 1: terms of articulation of a good economic policy at this
Speaker 1: point in time. Let's do that against so diplomatic as
Speaker 1: I would expect. Thank you, now you're calving another Deputy
Speaker 1: Prime Minister of Spain, Vice President, Thank you, yeah, Gandray Holden,
Speaker 1: host of City Joint just right now, the chief US
Speaker 1: Economists and you. Let's start to have why another seventy
Speaker 1: five for you in the next month. So I think
Speaker 1: it really goes back to what you were just discussing
Speaker 1: that the FED has two issues here. One is an
Speaker 1: economic fundamentals issue, and there that's right. There's been a
Speaker 1: lot of progress in terms of tightening financial conditions, probably
Speaker 1: further to go, a lot of that's already priced in.
Speaker 1: But then they also separately have a communication issue, and
Speaker 1: I think that's what they're managing, and that's what you've
Speaker 1: see in some of those comments from Evans and from
Speaker 1: Brainerd where yes, of course interest rates get higher and
Speaker 1: you get into a range that may be more restrictive.
Speaker 1: You start thinking about should you slow down, should you pause?
Speaker 1: The issue is from a communications perspective, how do you
Speaker 1: explain to markets in the public that you still have
Speaker 1: resolved in fighting inflation. If you're slowing down rate hikes,
Speaker 1: you're pausing rate hikes. And it ultimately is back to
Speaker 1: the data. Is the data going to give the FED
Speaker 1: flexibility to do that when we see CPI slowing down,
Speaker 1: when we see a job market that's loosening. Um, So
Speaker 1: I think that's what they're really watching. Now Are we
Speaker 1: seeing any of those things? Are the two things that
Speaker 1: you mentioned. I think you can argue in labor markets
Speaker 1: maybe saw the first sign of some loosening and you
Speaker 1: heard Vice share Brainer talk about this yesterday. Um, where
Speaker 1: we had job openings come off meaningfully. So we had
Speaker 1: a ratio of about two job openings to every one
Speaker 1: unemployed individual. Historically normal ratio would be maybe one one
Speaker 1: point one. That came down now to one point seven
Speaker 1: openings to everyone unemployed individual. So it's moving in the
Speaker 1: right direction for the FED if they want to see
Speaker 1: some of that excess demand coming off. However, that the
Speaker 1: level one point seven openings to everyone unemployed individual. I mean,
Speaker 1: just intuitively, that's a lot of excess demand for labor
Speaker 1: that's still out there. And uh, Andrew, we have a
Speaker 1: big release this week cp I UM is there a
Speaker 1: level that you think shape markets confidence one way or
Speaker 1: the other. So consensus, I think is eight point one annualise?
Speaker 1: Is there a one number or do we need several
Speaker 1: numbers of a certain trend to really kind of move
Speaker 1: fed rhetoric? Yeah, Hi, Greg, I think it really is
Speaker 1: going to come down to where does that core monthly
Speaker 1: inflation number come in. That's what we saw last month
Speaker 1: where it was a stronger core reading, and Brainer talked
Speaker 1: about this yesterday. Core goods in particular stays strong. There's
Speaker 1: a pretty broad consensus that core goods prices should be
Speaker 1: coming off. Until recently, at least, we had commodity prices
Speaker 1: that we're moving lower, used car prices that look like
Speaker 1: they should move lower. We've seen that in the wholesale prices.
Speaker 1: So we're really watching that core goods component in the
Speaker 1: release to see if that slows down. Right now, we
Speaker 1: look at that that core CPI inflation month on month,
Speaker 1: we have that at city at zero point five percent.
Speaker 1: Month on month consensus around zero point four percent month
Speaker 1: on month, you saw that slow down to a zero
Speaker 1: point two or even as zero point three, that would
Speaker 1: be a signal to markets that maybe you're getting some
Speaker 1: easing and price pressure. Um. I think though the risks
Speaker 1: are actually still to the upside that you know, maybe
Speaker 1: we'll see that zero point four even zero point five
Speaker 1: like we're projecting. Andrew picked up on that quote as
Speaker 1: well from Vice champ Raina. She said there was ample
Speaker 1: room for marching recompression to outpreduce goods inflation as demand calls,
Speaker 1: supply constraint, seas, and imagries increase. Andrew tell me the
Speaker 1: pot of inflation that's actually going to be stick here,
Speaker 1: and then Greg and I can have a commis sanction
Speaker 1: about what that means for corporate profits. So I would
Speaker 1: take this back to the labor market. I think, like
Speaker 1: I was saying, there are reasons to think that core
Speaker 1: goods inflation might slow down a bit if I look
Speaker 1: at services, labor intensive services, and then I go back
Speaker 1: to that job market where we have one point seven
Speaker 1: job openings for every one unemployed individual. We have wage
Speaker 1: growth according to the Atlanta fit Wage Tracker. That's still
Speaker 1: running upwards of six point seven percent year on year
Speaker 1: average early earnings a little bit slower, but still well
Speaker 1: above levels that would consistent with two percent inflation. That's
Speaker 1: where I really worry about persistent inflationary pressure. You'll have
Speaker 1: some pressure in rents, also in shelter prices, that's basically
Speaker 1: lagged effects from price increases that we've seen in the
Speaker 1: fast but in the past. But really non shelter services
Speaker 1: and the tight labor market is where I would be
Speaker 1: most concerned about persistent inflationary pressure. Greg we often talk
Speaker 1: about the SMP five hundred and whether the federals F
Speaker 1: has a price target. I wonder if I've got an
Speaker 1: EPs target because right now you've got the vice chair
Speaker 1: nd of guess that there's ample room for marching recompression.
Speaker 1: Isn't that basically the FED sounding the earnings in corporate
Speaker 1: America are going to come down. Yes, But she's not
Speaker 1: wrong either, because you're looking at record profit margins right
Speaker 1: well above anything we've seen on a long term trend basis,
Speaker 1: and so there is ample room, right and so um,
Speaker 1: you know, our expectation is profit margins to come down.
Speaker 1: I've been saying that for over a decade now. But
Speaker 1: you know from labor costs increases, just input costs generally
Speaker 1: U on the rise and revenues slay to come down.
Speaker 1: And keep in mind onhan that corporates have put on
Speaker 1: all this low cost debt, that that's a good news
Speaker 1: bad news store. The good news is when you know
Speaker 1: the operating leverage is working in your favor, you you
Speaker 1: have ample profits. Uh. And when that reverses, it goes
Speaker 1: the other way. So I think there's more of a
Speaker 1: downside deceleration or acceleration to the downside than anticipated. And
Speaker 1: you just find a question from me to you, this
Speaker 1: seventy basis point hike in November, is that the last
Speaker 1: one of the sinko? It? Maybe? It maybe? And that's
Speaker 1: where it comes back to does the FED get that
Speaker 1: flexibility from the data? I think if if you see
Speaker 1: margin compression like you were just talking about, if you
Speaker 1: see goods inflation that's slowing, if we see a job
Speaker 1: market that looks like it's showing some signs of loosening,
Speaker 1: that would give the FED the at least the signs
Speaker 1: that it needs to see to start that process of
Speaker 1: slowing down. If you don't see those things and I
Speaker 1: think that's the risk we could get another seventy five
Speaker 1: basis points that your subsequent meetings. I'm sure at the
Speaker 1: market will price to pivots somewhere in between at some
Speaker 1: point in our future. Andrew, thank you. Andrew Hollin host
Speaker 1: Ifer City, looking for seventy five for the FED next month.
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