WEBVTT - Surveillance: Defaults Are A Necessary Evil, Kong Says 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:31.800 Bloomberg dot Com, and of course on the Bloomberg him 0:00:31.840 --> 0:00:33.680 in New York joining us. I'm place to say is 0:00:33.760 --> 0:00:37.559 Kate more Plank, Rock Investment Institute Chief Equity Strategist. Good 0:00:37.600 --> 0:00:40.280 morning to Kate, Good morning. What should we be looking for? 0:00:40.320 --> 0:00:42.760 A little bit length from Cham and Pound and coug So, 0:00:42.920 --> 0:00:44.880 I think the equity market and kind of risk assets 0:00:44.880 --> 0:00:48.599 in general have become pretty comfortable and complacent with the 0:00:48.640 --> 0:00:52.440 idea that monetary policy is going to stay accommodative forever 0:00:52.560 --> 0:00:54.760 and ever and ever. So I think the biggest thing 0:00:54.800 --> 0:00:57.680 to watch is going to be for equity markets, the 0:00:57.760 --> 0:01:00.480 dot plot. I think for kind of broad our markets 0:01:00.480 --> 0:01:02.360 and fixed income, we're gonna be focused a lot on 0:01:02.440 --> 0:01:06.240 the bound sheet and reinvestment and the composition um the 0:01:06.280 --> 0:01:09.120 treasury composition, which is a little bit more technical, but 0:01:09.200 --> 0:01:12.399 in general, equity investors and I would say risk asset 0:01:12.400 --> 0:01:16.440 investors broadly want to see that monetary policy is not 0:01:16.480 --> 0:01:19.120 going to move much or slash at all in the 0:01:19.160 --> 0:01:22.360 near term. But here's my question. One is bad news 0:01:22.400 --> 0:01:24.440 bad news again? I mean, one is the idea that 0:01:24.480 --> 0:01:27.399 the FED is being cautious because the economy really does 0:01:27.400 --> 0:01:29.880 not have the strength that many people thought that it did. Uh, 0:01:29.920 --> 0:01:32.520 when is that bad news for risk assets? Yeah, that's 0:01:32.520 --> 0:01:35.120 a that's a really important question. You know, for a 0:01:35.200 --> 0:01:37.840 large portion of the last ten years, we've been in 0:01:37.880 --> 0:01:42.400 this cycle where you know, markets stop panicking when policymakers 0:01:42.440 --> 0:01:45.560 start panicking. You know, as long as policymakers have our back, 0:01:45.600 --> 0:01:47.760 it doesn't matter that the data is bad, or the 0:01:47.840 --> 0:01:51.200 data has softened, or that activity is slowed, or that 0:01:51.240 --> 0:01:53.800 we're talking about a new growth regime. And you know, 0:01:53.880 --> 0:01:56.360 I'm a little worried that we're back there again because 0:01:56.600 --> 0:01:58.680 a few years ago we were really hopeful the markets 0:01:58.720 --> 0:02:01.560 would be focused on fundamental let's talk about activity, let's 0:02:01.560 --> 0:02:05.360 talk about earnings, let's talk about the real idiosyncratic opportunities, 0:02:05.640 --> 0:02:11.160 and we're back to obsessing about monetary policy language, body language. Uh, 0:02:11.280 --> 0:02:14.480 you know, who's had coffee with who and what that 0:02:14.520 --> 0:02:17.960 could potentially mean for stimulus around the world. So this 0:02:18.040 --> 0:02:20.080 is a fair question. I just don't think that we're 0:02:20.080 --> 0:02:21.799 going to get there in the second quarter. So let's 0:02:21.840 --> 0:02:24.960 talk about fundamentals if we can, we have the opportunity 0:02:25.000 --> 0:02:27.760 to do so this morning. How are they? How are learnings? 0:02:27.840 --> 0:02:30.720 Expectations for the rest of the year not great? John, 0:02:30.760 --> 0:02:32.919 I mean, this is this is the this is the problem. 0:02:33.040 --> 0:02:35.080 Most of the returns from the equity market in two 0:02:35.160 --> 0:02:38.320 thousand nineteen have come from multiple expansion. You have higher 0:02:38.360 --> 0:02:42.400 prices and lower earnings expectations um, and we really need 0:02:42.440 --> 0:02:44.840 to turn around in fundamentals. I think in order to 0:02:44.919 --> 0:02:47.839 carry the market meaningfully higher in the second quarter. It's 0:02:47.840 --> 0:02:50.040 like hard to get to a twelve percent return in 0:02:50.040 --> 0:02:52.960 the second quarter if it's not driven by earnings and 0:02:53.000 --> 0:02:55.640 it's just driven by a rerating. So a lot of 0:02:55.639 --> 0:02:58.000 people would actually disagree, and they would say that stocks 0:02:58.000 --> 0:03:01.080 have actually been held back by the trade tensions and 0:03:01.120 --> 0:03:05.839 the ongoing concerns about Brexit, etcetera. You disagree. I think 0:03:05.880 --> 0:03:11.720 that trade concerns, concerns over Chinese growth, concerns over US growth, 0:03:11.720 --> 0:03:14.360 concerns over policy mistakes. I mean, we can make a 0:03:14.360 --> 0:03:17.400 long list. We're all really putting pressure downward, pressure on 0:03:17.480 --> 0:03:20.640 risk assets in the fourth quarter. But some of that 0:03:20.680 --> 0:03:23.320 has eased, and we've gotten to we worry actually a 0:03:23.320 --> 0:03:25.640 little We've gotten a little bit a complacent point where 0:03:25.760 --> 0:03:27.600 we don't really worry so much about trade. We think 0:03:27.639 --> 0:03:30.120 some of the risk there is not being properly priced, 0:03:30.520 --> 0:03:33.000 that people are not as worried about growth, and as 0:03:33.040 --> 0:03:36.400 I mentioned, are expecting a lot of monetary and fiscal 0:03:36.400 --> 0:03:39.320 stimulus from all different regions of the world concurrently in 0:03:39.320 --> 0:03:43.280 two thousand nineteen, and so you know, we need to 0:03:43.280 --> 0:03:45.000 see a little bit more volatility, We need to see 0:03:45.000 --> 0:03:47.680 a little bit more of like fundamental driven markets. So 0:03:47.720 --> 0:03:49.360 this is actually where I was going to go. I 0:03:49.400 --> 0:03:51.119 was looking at the move index. This is the Bank 0:03:51.120 --> 0:03:55.480 of America Mary Lynch Option Volatility Index, and it's fallen 0:03:55.560 --> 0:03:59.320 to its lowest level on record. This is the implied 0:03:59.400 --> 0:04:02.520 volatility and treasury yields over the next three months. I'm 0:04:02.560 --> 0:04:05.840 just wondering, is this dangerous? This setting a warning signal 0:04:05.880 --> 0:04:09.200 about complacency and sort of signaling that there could be 0:04:09.280 --> 0:04:11.680 some kind of more violent move in the very near future. 0:04:12.000 --> 0:04:14.200 You know that the volatility markets in general have been 0:04:14.240 --> 0:04:16.680 really difficult, right, I mean, you think about the last 0:04:16.680 --> 0:04:19.839 couple of years. We keep on making new lows sometimes 0:04:19.839 --> 0:04:22.839 it's really difficult to explain why. What I can say 0:04:22.880 --> 0:04:25.600 in general is that there seems to be on the 0:04:25.640 --> 0:04:29.440 equity side very light participation in the rally. More recently, 0:04:29.480 --> 0:04:32.200 people have been fading that risk have been taken down 0:04:32.240 --> 0:04:34.480 their winners. You know, if they were in the market 0:04:34.520 --> 0:04:37.120 and well positioned at the start of this year because 0:04:37.120 --> 0:04:39.240 of the d rating last year and because they felt 0:04:39.279 --> 0:04:42.160 like the baby was getting thrown out with the bath water, uh, 0:04:42.240 --> 0:04:46.240 they have been systematically taking their their equity exposure down. 0:04:46.480 --> 0:04:48.400 We see this in fund flows from a number of 0:04:48.400 --> 0:04:51.240 different providers. We see this in terms of overall et 0:04:51.360 --> 0:04:53.400 F flows for the best performing parts of the market. 0:04:53.960 --> 0:04:57.080 And so you know, it has all of us scratching 0:04:57.080 --> 0:04:58.520 our heads. I wish I had a better answer on 0:04:58.600 --> 0:05:02.320 volved whether it's the equity or the treasury option involved, 0:05:02.400 --> 0:05:05.600 but it does feel like it should rise a little bit. 0:05:05.839 --> 0:05:08.400 Long fed patients. Short volatility has been the trade of 0:05:08.440 --> 0:05:10.320 the last three months, and in the words of Bank 0:05:10.360 --> 0:05:13.440 of America, the pain trade for stocks is still up. Um. 0:05:13.600 --> 0:05:15.760 Do you agree with that there is simply no greed 0:05:15.800 --> 0:05:18.560 to sell in equities. That's the line from Bank of America. 0:05:18.640 --> 0:05:21.480 It sounds like to some degree it resonates with UK. 0:05:21.839 --> 0:05:24.160 There is some sympathy, you know, full disclosure, I used 0:05:24.160 --> 0:05:26.520 to work on that team, uh some years ago now, 0:05:26.640 --> 0:05:29.240 so I'm very familiar with the pain. Trate is higher 0:05:29.320 --> 0:05:33.200 view UM from a fun flows perspective, I think that's right. 0:05:33.240 --> 0:05:36.960 From a flows and positioning and technical perspective. You can 0:05:37.000 --> 0:05:39.960 make some of that argument. From evaluations perspective. I think 0:05:40.000 --> 0:05:42.720 we're neutral. You know, we've rerated back to a level 0:05:42.760 --> 0:05:45.760 that that feels fair with a UM, you know, an 0:05:45.760 --> 0:05:48.680 economic and macro backdrop, or still having growth. I'll be 0:05:48.760 --> 0:05:51.560 at a slower pace where monetary and fiscal policy looks 0:05:51.560 --> 0:05:55.159 more supportive than it did six months ago. Uh. But 0:05:55.279 --> 0:05:57.560 the fundamentals is what I keep on getting hung up on. 0:05:57.640 --> 0:06:00.400 It's the earning story, the fact that their earnings vision 0:06:00.480 --> 0:06:04.480 ratios are the weakest in three years and are not abating. 0:06:04.839 --> 0:06:09.640 So Kate, where is the biggest opportunity in equities right now? Well, 0:06:09.760 --> 0:06:13.159 so qualities performed very well in two thousand nineteen, but 0:06:13.200 --> 0:06:16.200 I think this is still an opportunity for quality. We're 0:06:16.240 --> 0:06:19.200 really focused on kind of secular growers, and so that 0:06:19.320 --> 0:06:21.480 takes us to technology and healthcare, which I know had 0:06:21.520 --> 0:06:25.640 been very consensive sectors, but frankly deliver. They deliver on earnings, 0:06:25.720 --> 0:06:28.839 They're delivering on consistency of earnings, their balance sheets are great, 0:06:29.240 --> 0:06:31.560 and I really want to own companies that you have 0:06:31.640 --> 0:06:35.200 the ability to continue to expand even in a slowing 0:06:35.200 --> 0:06:38.159 growth environment. So that's kind of our favorite bit. And 0:06:38.160 --> 0:06:41.400 we're also pretty excited about emerging market. Still great to 0:06:41.400 --> 0:06:43.480 catch up with you as always, Thanks for dropping by. 0:06:43.560 --> 0:06:47.200 Kate more blank Rock Investment Institute Chief equity strategist on 0:06:47.240 --> 0:07:04.480 the pain trade, and a whole lot more forecasting patients. 0:07:04.520 --> 0:07:08.400 That is what investors expect from the Federal Reserve later today, unchanged. 0:07:08.440 --> 0:07:10.840 That is what investors expect to happen with interest rates. 0:07:10.840 --> 0:07:13.440 The news conference is where the focus will be with 0:07:13.640 --> 0:07:17.280 Chairman Pale and the summary of economic projections, all of 0:07:17.280 --> 0:07:21.160 the forecasts for the economy, including where each and every 0:07:21.160 --> 0:07:24.440 individual policymaker on the fo MC expects rates to be 0:07:24.520 --> 0:07:27.840 in nineteen twenty and perhaps beyond two. Let's bringing the team, 0:07:27.840 --> 0:07:30.760 shall we to get their forecast, their outlook and the 0:07:30.880 --> 0:07:34.760 day's guide for Federal Reserve decision Day. Carl Rickadonna, Bloomberg 0:07:34.800 --> 0:07:38.080 Economics Chief US economist and on the phone from Washington, 0:07:38.200 --> 0:07:39.960 d C. He will be in the room with Chairman 0:07:39.960 --> 0:07:43.760 Pau a little bit later. Michael McKee, International Economics and 0:07:43.920 --> 0:07:47.720 Policy Correspondent, Mike, you get the honors, sir. Give me 0:07:48.200 --> 0:07:52.360 the outlook the day's guide for the Federal Reserve. Well, really, 0:07:52.360 --> 0:07:55.000 what Wall Street is looking for is for no mistakes, 0:07:55.120 --> 0:07:57.800 no deviation from the Wall Street line, which is the 0:07:57.840 --> 0:08:00.880 Feds on hauld and there's no deem year of them 0:08:01.320 --> 0:08:06.040 raising rates this year. Not likely to get an absolute 0:08:06.120 --> 0:08:07.880 view from J. Paul, but I think he'll be as 0:08:07.920 --> 0:08:11.960 cautious as possible, not try to say anything that will 0:08:12.040 --> 0:08:14.160 lead them to think one way or the other. The 0:08:14.240 --> 0:08:17.560 Fed may change policy this year. Um, we're gonna see 0:08:17.760 --> 0:08:20.440 in new forecast for growth and inflation. They'll have to 0:08:20.440 --> 0:08:23.480 be marked down a little bit, but enough to justify 0:08:23.560 --> 0:08:26.840 a major move in the dots. Not clear, all right? 0:08:26.920 --> 0:08:29.640 So coming in here, Calra Kadonna, because right now I'm 0:08:29.640 --> 0:08:32.960 looking at the work function on the Bloomberg terminal showing 0:08:33.080 --> 0:08:35.520 that there is a thirty seven percent chance of a 0:08:35.640 --> 0:08:40.600 rate cut come January, zero chance of a rate hike 0:08:41.120 --> 0:08:45.640 again this cycle. Probably is this something the Fed like seeing. 0:08:46.480 --> 0:08:49.120 I don't think they like seeing that high of a 0:08:49.160 --> 0:08:51.840 probability of a rape cut at the start of next year. 0:08:52.160 --> 0:08:54.920 That's not really their intention at the moment, and I 0:08:55.000 --> 0:08:58.400 suspect the dot plot will lean against that. Now. The 0:08:58.440 --> 0:09:00.480 Fed is in a bit of a difficult a bind 0:09:00.520 --> 0:09:04.000 here because if they're too optimistic on the economic outlook, 0:09:04.000 --> 0:09:06.920 then they risk a repeat of December, where the markets 0:09:06.960 --> 0:09:10.440 viewed the Fed is having a tin ear two signs 0:09:10.480 --> 0:09:14.640 of economic strain. That being said, if they really focus 0:09:14.960 --> 0:09:18.720 on acknowledging weakness in recent data like retail sales, like 0:09:18.760 --> 0:09:21.640 the last payroll report, then they're going to push those 0:09:21.760 --> 0:09:25.920 rate cut probabilities even higher. And if that's not their 0:09:25.960 --> 0:09:28.000 intention to start cutting rates next year, which I don't 0:09:28.000 --> 0:09:31.920 believe it is, then this creates a significant communications challenge 0:09:31.960 --> 0:09:34.200 that they're going to have to address later this year. 0:09:34.360 --> 0:09:37.840 So that being said, I think they maybe air on 0:09:37.880 --> 0:09:41.320 the side of caution with respect to sounding too dovish 0:09:41.360 --> 0:09:44.120 because they don't want to reinforce that that rate cut. 0:09:44.200 --> 0:09:47.480 But an important question yesterday, when you and I caught up, Mike, 0:09:47.559 --> 0:09:50.360 you said, what does the Federal Reserve do in inflation 0:09:50.440 --> 0:09:54.360 expectations remain low or in fact go lower. Do we 0:09:54.400 --> 0:09:57.080 have any idea, Mike, No, we don't at this point. 0:09:57.280 --> 0:10:00.400 They haven't been able to generate inflation. They're talking longer 0:10:00.520 --> 0:10:03.800 term about changing some of their policy regimes, but that's 0:10:03.800 --> 0:10:06.800 not gonna come up today. So the question is what 0:10:06.960 --> 0:10:09.480 is their inflation out look and what drives it, because 0:10:09.640 --> 0:10:12.640 nobody seems to have a way to get inflation up 0:10:12.640 --> 0:10:15.640 to or above two percent except hope that the Phillips 0:10:15.640 --> 0:10:18.760 curve actually holds. We're waiting on that right now, and 0:10:19.320 --> 0:10:22.240 we haven't seen any evidence that it's happening. We're getting 0:10:22.320 --> 0:10:25.520 stronger wage growth, we've got cycle high wage growth, but 0:10:25.559 --> 0:10:29.560 it's not feeding into the inflation indexes. Although Carl chair 0:10:29.600 --> 0:10:33.079 Powell did say that he thinks that some inflation, some 0:10:33.200 --> 0:10:37.959 wage pressures in particular, are greater than are being reflected 0:10:37.960 --> 0:10:40.200 by the data. Is there any sign that we actually 0:10:40.240 --> 0:10:42.440 are starting to see a return of the Phillips curve. 0:10:43.080 --> 0:10:45.720 I think we're seeing the early stages. Mike's right that 0:10:45.760 --> 0:10:48.600 it's not showing up in the inflation data just yet, 0:10:49.200 --> 0:10:51.959 but we've only recently seen the pickup in wage pressures. 0:10:52.000 --> 0:10:55.320 It really started around November of last year. Amazon had 0:10:55.360 --> 0:10:59.280 the minimum wage increase a lot of retailers. UH followed suit, 0:10:59.440 --> 0:11:04.240 and from November through February you saw a pretty significant 0:11:04.280 --> 0:11:07.960 acceleration and average hourly earnings and the jobs report that 0:11:08.080 --> 0:11:12.160 number may actually underrepresent what's happening in the broader economy 0:11:12.160 --> 0:11:15.079 because it reflects a lot of UH. I hate to 0:11:15.200 --> 0:11:18.160 use the term lower quality, but the lower skilled, lower 0:11:18.240 --> 0:11:21.040 quality jobs which tend to be lower paying, and that 0:11:21.080 --> 0:11:24.680 tends to deflate UH the number overall. So we're seeing 0:11:24.800 --> 0:11:27.559 wage pressures show up, and it's a matter of time 0:11:28.280 --> 0:11:30.920 for that to percolate through the system. So Mike says 0:11:31.080 --> 0:11:33.960 we're not seeing signs of the Phillips curve working. I 0:11:33.960 --> 0:11:36.320 would add a footnote to that, we're not seeing it 0:11:36.600 --> 0:11:38.840 just yet, but I think we will see it later 0:11:38.880 --> 0:11:41.160 this year. It's too soon for the flip FED to 0:11:41.480 --> 0:11:44.240 start focusing on that because they want the data to 0:11:44.320 --> 0:11:46.960 really lead the way. But I do suspect with the 0:11:47.000 --> 0:11:49.880 economy growing above trend and wage pressures at a post 0:11:49.920 --> 0:11:53.200 recession high, we will see more consumer inflation later this 0:11:53.280 --> 0:11:55.839 year and that will put the FED back into play. 0:11:55.960 --> 0:11:57.960 And and and to that point, the fact that we 0:11:58.000 --> 0:12:01.320 are getting some kind of a melting in trade tensions 0:12:01.400 --> 0:12:04.000 also feeds into this. Michael mckebl and brig International Economics 0:12:04.040 --> 0:12:06.920 and Quality correspondent in Washington, d C. Come on in 0:12:07.000 --> 0:12:10.119 here and talk a little bit about how that thawing backdropped. 0:12:10.160 --> 0:12:13.680 The increase in stimulus from the PBOC in China may 0:12:13.880 --> 0:12:17.160 complicate the issue for the Federal Reserve right now. Well, 0:12:17.200 --> 0:12:20.320 one of the Feds lines over the last year or 0:12:20.320 --> 0:12:22.440 the last couple of months, But it that way in 0:12:22.559 --> 0:12:25.920 terms of the idea of being on hold, is that 0:12:26.040 --> 0:12:29.679 economic conditions around the world have slowed, and therefore that 0:12:29.720 --> 0:12:33.960 puts a break on US economic growth possibilities. We're seeing 0:12:34.360 --> 0:12:37.400 some signs that maybe we're getting a little bit of 0:12:37.400 --> 0:12:40.720 a pickup in Europe, and then China has been flooding 0:12:40.760 --> 0:12:44.079 its economy with stimulus. If that works, and if you're 0:12:44.240 --> 0:12:47.120 picks up, then we're going to see additional growth in 0:12:47.160 --> 0:12:50.680 the United States. And uh, that's another factor they have 0:12:50.800 --> 0:12:53.320 to take into account. What it really comes down to 0:12:53.559 --> 0:12:57.640 is a question of timing. The FED believes that the 0:12:57.679 --> 0:13:01.080 economy is going to pick up and that will generate 0:13:01.120 --> 0:13:03.440 more inflation, but when does it do that and how 0:13:03.480 --> 0:13:06.400 does it signal it. Ordinarily, the FED, or up to 0:13:06.440 --> 0:13:09.400 this point, the Fed has wanted to be ahead of 0:13:09.800 --> 0:13:13.440 the economic developments, ahead of the idea of inflation, but 0:13:13.520 --> 0:13:15.800 now they're sort of having to wait because Wall Street 0:13:15.800 --> 0:13:18.320 doesn't trust them to do that. Although and Carl may 0:13:18.400 --> 0:13:20.640 want to weigh in on this, we are seeing break 0:13:20.679 --> 0:13:23.120 even start to rise, so there is a little bit 0:13:23.160 --> 0:13:26.000 of inflation being priced into the markets that kind of 0:13:26.000 --> 0:13:28.480 hasn't been reflected in sentiment yet. Mike makes a very 0:13:28.480 --> 0:13:30.480 good point there. Rather, the FED doesn't want to be 0:13:30.559 --> 0:13:36.880 leading the way. That's always good love with Mike McKee. Uh, 0:13:36.920 --> 0:13:40.400 but the FED tried to lead a little too hard 0:13:40.640 --> 0:13:43.560 back in December, and we saw what the market outcome was. 0:13:43.920 --> 0:13:46.880 So now the FED has been chastened by that experience. Uh. 0:13:46.960 --> 0:13:48.839 And now I was going to let the market kind 0:13:48.880 --> 0:13:51.440 of beg for rate increases and the Fed will not 0:13:51.480 --> 0:13:54.160 be overly concerned about being perceived as being behind the 0:13:54.200 --> 0:13:57.600 curve and then happily delivering what the market is asking for, 0:13:57.640 --> 0:14:00.240 and that will be far less disruptive. I do think 0:14:00.240 --> 0:14:02.400 we could see that start to materialize in the back 0:14:02.400 --> 0:14:04.360 half of the year. Mark you'll be in the news conference. 0:14:04.559 --> 0:14:06.920 Lights A first question for Chairman Pal from you, what 0:14:07.080 --> 0:14:09.600 is it? Well? It depends on what they say, But 0:14:09.679 --> 0:14:13.840 basically you'll be looking for what is that what would 0:14:13.880 --> 0:14:17.880 make them change their patient strategy? A lot of different 0:14:17.880 --> 0:14:20.280 ways you can ask that question, but is there something 0:14:20.320 --> 0:14:22.720 that they're looking at that the market can look at 0:14:22.800 --> 0:14:25.360 to get an idea of what the FED reaction function 0:14:25.440 --> 0:14:28.360 is going to be? Basically, you don't want to give 0:14:28.400 --> 0:14:31.320 away your your secret sauce, right, You're not going to 0:14:31.400 --> 0:14:33.880 give away your question. Um, you kind of gotta know 0:14:33.880 --> 0:14:35.960 what they're gonna do before you ask what they do. 0:14:36.160 --> 0:14:38.720 It's all freaking save Carl. What would be the question 0:14:38.760 --> 0:14:42.920 you'd want to ask I Pepperham on the issue of 0:14:43.160 --> 0:14:45.480 what would get the FED back into play, because it's 0:14:45.480 --> 0:14:49.120 a pretty subtle change and forecast that has shifted them 0:14:49.200 --> 0:14:51.440 from a world where they were looking for two rate 0:14:51.480 --> 0:14:54.120 hikes this year and one rate hike next year to 0:14:54.160 --> 0:14:57.520 a world where they're on perma pause. And really that's 0:14:57.520 --> 0:15:00.960 the difference of GDP growth shifting from two and a 0:15:01.000 --> 0:15:05.120 half to two, inflation shifting from something just above two 0:15:05.240 --> 0:15:08.360 down to two, unemployment rate shifting from three and a 0:15:08.400 --> 0:15:10.920 half up to four for their outlook. So it's not 0:15:11.000 --> 0:15:14.960 going to take a lot in the change mild upward 0:15:15.000 --> 0:15:17.480 surprise in the economy, but to really get them back 0:15:17.520 --> 0:15:20.000 to the type of forecasts they were looking at in 0:15:20.280 --> 0:15:23.440 September and December of last year, when they in fact, 0:15:23.480 --> 0:15:26.360 we're expecting additional rate hikes. The one thing I would 0:15:26.440 --> 0:15:30.000 highlight here right the real Fed funds rate, the inflation 0:15:30.040 --> 0:15:34.160 adjusted interest rate is about point three right now. Uh. 0:15:34.200 --> 0:15:38.000 The economy has never rolled over with real interest rates 0:15:38.000 --> 0:15:40.560 so low. So we're still a long way from the 0:15:40.560 --> 0:15:44.640 Fed actually stepping on the brake pedal. Grant to catch 0:15:44.680 --> 0:15:47.160 out with you always now that you'll be a busy 0:15:47.160 --> 0:15:49.960 man a little bit lights bloom Bug Economics Chief US 0:15:50.000 --> 0:15:54.320 Economists now from Washington, d c Um. He's not really. 0:15:54.440 --> 0:15:57.760 He enjoys this. This is leisure time. So if you 0:15:57.920 --> 0:16:00.880 enjoy you're not busy. He goes. He goes to work 0:16:00.920 --> 0:16:05.040 about ten minutes ago. Are you going to thank Michael 0:16:06.600 --> 0:16:11.680 interrupting make from Washington. He's busy already. He's working. Michael McKay, 0:16:11.800 --> 0:16:16.560 International Economics and Policy correspondent because he hates this calin 0:16:16.680 --> 0:16:33.360 Mike Grant to catch up. Well, one place where you 0:16:33.440 --> 0:16:37.000 are seeing real stimulus is China, where the PBOC has 0:16:37.200 --> 0:16:41.320 doubled back and is adding to what what they had 0:16:41.400 --> 0:16:43.600 been cutting back on. It was interesting to me. Yesterday 0:16:43.640 --> 0:16:48.280 Bloomberg reported the Canada's biggest pension is actually considering opening 0:16:48.440 --> 0:16:51.800 an office in Beijing over the next year as they 0:16:51.840 --> 0:16:55.640 try to expand their holdings in the region, joining US now. 0:16:55.800 --> 0:16:59.200 Teresa Kong, Matthew's Asia head of fixed Income and portfolio 0:16:59.760 --> 0:17:03.560 man aagement here in our Bloomberg Interactive up Brokers Studios. Teresa, 0:17:04.520 --> 0:17:07.080 do you think that this is a good time to 0:17:07.200 --> 0:17:12.760 be plowing into in particular China. Absolutely. I think it's 0:17:13.119 --> 0:17:15.720 a very strategic decision on the part of the largest 0:17:15.760 --> 0:17:19.280 pension fund in Canada. I think there are several catalysts. First, 0:17:19.720 --> 0:17:23.000 there will be inclusion of China into the global agg 0:17:23.400 --> 0:17:26.040 which I think it's going to be transformative for bond investing. 0:17:26.400 --> 0:17:28.639 As we all know, ms C I will be adding 0:17:29.160 --> 0:17:32.119 China as well in in actually greater steps than had 0:17:32.200 --> 0:17:36.240 previously announced. So I think CPP and I'm guessing is 0:17:36.240 --> 0:17:41.200 CPPC is ding ding ding ding. Um will in fact, 0:17:41.520 --> 0:17:43.320 you know, be looking back at this ten years from 0:17:43.359 --> 0:17:46.520 now and congratulating themselves in terms of being very fort looking. 0:17:47.400 --> 0:17:50.280 Let's talk about how you're managing your exposure to Asian 0:17:50.320 --> 0:17:52.560 markets at the moment, what do you do when you 0:17:52.640 --> 0:17:56.240 have this really strong rally and global markets but there's 0:17:56.400 --> 0:17:59.280 very little sign and stability and the fundamentals, how do 0:17:59.359 --> 0:18:02.159 you reconcile the two things at the moment. Well, I 0:18:02.280 --> 0:18:04.640 think what the market is doing right now is pricing 0:18:04.760 --> 0:18:08.160 out a lot of potential tail risks. So for example, 0:18:08.640 --> 0:18:11.280 first let's start with the FED. As you had already mentioned, 0:18:12.040 --> 0:18:15.800 most people are expecting that the FED is more likely 0:18:16.000 --> 0:18:20.280 to actually cut as opposed to raise rates. I think 0:18:20.400 --> 0:18:24.240 the European Central Bank has also been quite clear that 0:18:24.520 --> 0:18:27.200 growth is not there, and therefore they're also going to be, 0:18:27.480 --> 0:18:30.320 you know, continued to provide stimulus. So those are two 0:18:30.640 --> 0:18:33.520 big teril risks out. And then, last but not least, certainly, 0:18:33.600 --> 0:18:36.520 everyone's looking at the trade talks and hoping for some 0:18:36.720 --> 0:18:39.200 type of resolution, even if it's a short term trade 0:18:39.240 --> 0:18:42.800 resolution without a long term resolution on all the other 0:18:42.920 --> 0:18:45.840 areas like intellectual property. I do think that the market 0:18:46.119 --> 0:18:48.760 will really be breathing a sign of relief even with that. 0:18:49.200 --> 0:18:51.040 You know, it's interesting because when people say that they're 0:18:51.119 --> 0:18:54.720 they're going into China and buying assets right now, I 0:18:54.840 --> 0:18:57.240 have to wonder how the recent uptake and defaults corporate 0:18:57.280 --> 0:18:59.919 defaults plays into this. The fact that the PBOC they 0:19:00.040 --> 0:19:04.080 that China is allowing companies and even some local governments 0:19:04.119 --> 0:19:07.280 to actually start to fail to pay their bills, and 0:19:07.320 --> 0:19:10.520 I'm wondering how does that factor into how you invest 0:19:10.600 --> 0:19:13.399 in the region. That's a great point, you know, to 0:19:13.520 --> 0:19:17.960 be sure defaults in China will continue to slowly increase. 0:19:18.920 --> 0:19:21.680 The important point to take away here is that defaults 0:19:21.760 --> 0:19:27.720 are necessary evil in all developed markets. Spreads price in 0:19:27.960 --> 0:19:32.720 the default risk, and arguably China is actually not completely 0:19:32.760 --> 0:19:35.639 pricing in the expect of future default risk. So this 0:19:36.000 --> 0:19:38.640 is what we call the credit spread. So I think 0:19:38.640 --> 0:19:41.120 it's really important to realize that, you know, these defaults 0:19:41.359 --> 0:19:44.080 will continue to slowly take up um. The other thing 0:19:44.119 --> 0:19:45.920 I just want to mention is that, you know, China 0:19:45.960 --> 0:19:49.480 is really the only country where I constantly hear headlines 0:19:49.520 --> 0:19:52.960 about the total notional amount of defaults. Nowhere else in 0:19:53.000 --> 0:19:56.040 the world we talk about notional defaults. So if you're 0:19:56.040 --> 0:19:58.440 actually put in a denominator, and if you actually take 0:19:58.520 --> 0:20:01.080 out all of the government debt and all the policy 0:20:01.160 --> 0:20:04.600 bank con debt, so which you know are arguably truly 0:20:04.680 --> 0:20:07.320 sovereign risk. But if you could include everything else, the 0:20:07.400 --> 0:20:10.720 actual default range China when we measure it with that denominator, 0:20:11.000 --> 0:20:14.080 is about zero point six, which is still substantially below 0:20:14.119 --> 0:20:15.760 where the rest of the world is, which is, you know, 0:20:15.920 --> 0:20:18.800 about hovering between when I have two. That's a good point. 0:20:19.000 --> 0:20:20.600 I think that the fear is that this is the 0:20:20.680 --> 0:20:23.320 tip of the iceberg. Number one, because the defaults are 0:20:23.440 --> 0:20:26.159 just starting to pick up and and then the government 0:20:26.280 --> 0:20:28.879 is just allowing them to actually happen. That's number one. 0:20:28.880 --> 0:20:32.000 But number two, the amount of corporate debt, especially given 0:20:32.000 --> 0:20:35.399 the shadow banking system in China, is materially larger than 0:20:35.440 --> 0:20:38.240 some of the official numbers are stating, and there is concern, 0:20:38.440 --> 0:20:41.800 especially given the fact that the PBOTC itself was ratcheting 0:20:41.840 --> 0:20:44.080 back at stimulus because they were concerned about the growth 0:20:44.119 --> 0:20:47.080 and leverage. The fact that they are backtracking and re 0:20:47.320 --> 0:20:50.800 levering is also a concern. Is that a problem for you? 0:20:53.119 --> 0:20:56.000 I think it's really important to continue to monitor the 0:20:56.160 --> 0:20:59.760 state of monetary policy as well as fiscal policy to 0:21:00.160 --> 0:21:04.159 sure you know, China has taken one step forward and 0:21:04.320 --> 0:21:07.520 one step back with respect to de leveraging, and it's 0:21:07.560 --> 0:21:11.960 certainly true that that defaults ticking up has an impact 0:21:12.000 --> 0:21:15.639 on what we do, but arguably what we've actually been 0:21:15.720 --> 0:21:19.760 looking forward to our actual corporate spreads to actually widen 0:21:19.960 --> 0:21:22.640 to take into account this future default risk. I would 0:21:22.680 --> 0:21:25.400 also like to make the distinction between the different types 0:21:25.440 --> 0:21:27.160 of debt. You know, a lot of times people talk 0:21:27.160 --> 0:21:30.240 about China in one big breath, but it's really important 0:21:30.240 --> 0:21:34.760 to point out that there are corporates completely private health 0:21:34.840 --> 0:21:37.600 enterprises where we do think the faults will certainly pick 0:21:37.680 --> 0:21:39.880 up because of access to capital. As yet pointed out, 0:21:40.600 --> 0:21:43.359 there's the what I call gray area. A lot of 0:21:43.440 --> 0:21:46.520 this state owned enterprises are really part of the mixed 0:21:46.560 --> 0:21:51.320 economy privately health somewhat, um state owned somewhat, but also 0:21:51.640 --> 0:21:54.560 you know, some of these are actually have have public 0:21:54.640 --> 0:21:56.800 trade of stock. And then, last, but not least, there 0:21:56.840 --> 0:21:59.440