Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Ferroll and Lisa Brownwitz Jay Leye. We bring
Speaker 1: you insight from the best and economics, finance, investment and
Speaker 1: international relations. Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg
Speaker 1: dot Com and of course on the Bloomberg Tournament. The
Speaker 1: nikes are of covering a conference as you're sitting there
Speaker 1: and someone drops by for an interview, maybe unexpected the
Speaker 1: time and can shift. And we've got a fantastic guest
Speaker 1: coming up now with Bloomberg's Francine Laqua over in Glasgow, Scotland.
Speaker 1: Hey Francine, Hi John. We're delighted to be joined by
Speaker 1: Mark Karney here of course, so looking at finance, so
Speaker 1: looking at COP twenty six in Glasgow. He's also former
Speaker 1: Bank of England Governor Mark as a voice, Thank you
Speaker 1: so much for making us smart on what finance can do,
Speaker 1: because I mean COMP twenty six starts today. To G
Speaker 1: twenty was a little bit of the dull drum because
Speaker 1: we've and get some of the pledges that a lot
Speaker 1: of people were hoping for. What does it mean for
Speaker 1: your expectations for COP twenty six. Well, I think a
Speaker 1: couple of things. I'm going to quote the Secretary General's
Speaker 1: hopes unfulfilled but not yet buried. The one and a
Speaker 1: half degrees anchor in the G twenty communicate is significant,
Speaker 1: some progress, but we've got a lot of work to do.
Speaker 1: What we and the big question for this week, at
Speaker 1: least for this Wednesday, is what can finance and more
Speaker 1: specifically the private financial sector, what can it do to
Speaker 1: help solve this problem? So it's going to really have
Speaker 1: to step up, and there's been a lot of institutions,
Speaker 1: a lot of people around the world have been working
Speaker 1: in order to do that. Yeah, we don't even have
Speaker 1: a price on carbon yet, when will we get that? Well,
Speaker 1: we don't have a price on carbon. But what I
Speaker 1: think our message on Wednesday to world leaders, to policy makers,
Speaker 1: to business people around the world is finance is going
Speaker 1: to be there, and finance is going to be there
Speaker 1: in two respects. One work we've we've retooled the financial system.
Speaker 1: We've changed the plumbing, if you will, the financial system,
Speaker 1: a bunch of very worthy reforms that actually, to be honest,
Speaker 1: only the audience that Bloomberg would fully understand and appreciate
Speaker 1: and we can go through them for the next hour. UM.
Speaker 1: But you know, think mandatory disclosure, think stress testing all that.
Speaker 1: So part is reallytooling. But then it's also about financial
Speaker 1: institutions stepping up and say saying that they are going
Speaker 1: to finance this transition, this enormous hundred trillion dollar transition
Speaker 1: that needs to happen over the next three decades. They're
Speaker 1: gonna finance it, and they're gonna mark their own homework.
Speaker 1: They're gonna show up year and year out say what
Speaker 1: their emissions are of their clients. UM, have specific strategies
Speaker 1: for reducing carbon fair share of fifty down by That's
Speaker 1: what the Glasgow Financial Alliance is all. But why not
Speaker 1: stop actually putting money into fossil fuel full stop, instead
Speaker 1: of talking about the transition. Well, you've got I mean,
Speaker 1: we're living through problems with the transition right now in
Speaker 1: terms of we have both far far too many fossil
Speaker 1: fuels in the world. We're gonna have enormous stranded assets.
Speaker 1: Half of gas, three quarters of coal, et cetera, maybe
Speaker 1: up as much as half of oil reserves. Proven reserves
Speaker 1: need to stay in the ground if we're gonna get
Speaker 1: to where we are. But we also have local short
Speaker 1: term shortages of some of those exact materials were here
Speaker 1: in the UK. They a shortage of the storage of gas.
Speaker 1: So there needs to be some only some limited financing
Speaker 1: for a transition, but only for a transition, which is
Speaker 1: why you need things like g fans that are relentlessly, ruthlessly,
Speaker 1: absolutely focused on that transition to net zero and not
Speaker 1: just any transition and one and a half degree transition,
Speaker 1: which sorry if I may, which is what G twenty
Speaker 1: leaders signed off on yesterday. But the G twenty leaders
Speaker 1: didn't stop, for example, coal from being used domestically. And
Speaker 1: and so we're doing progress, but we're going at it slowly. Well,
Speaker 1: we're doing progress. We need to accelerate it. We need
Speaker 1: to recognize there's differences and as as obviously are between
Speaker 1: advanced economies developing economies, uh, some of those there's a
Speaker 1: there's a different timeline for fully ending coal. We want
Speaker 1: to stop coal, not just new coal, but stop use
Speaker 1: of coal by the advanced economies. That's what powering past coal,
Speaker 1: which is a big element of of COP is about.
Speaker 1: But also by the end of the next decade in
Speaker 1: the emerging developing world and if I may again to
Speaker 1: bring it back to fin finance. UM. To give them
Speaker 1: the confidence to do that, they need to see literally
Speaker 1: a wall of money that's available for their transition. So
Speaker 1: when they're building up alternative energy that the money is
Speaker 1: going to be there. Who could do better in finance?
Speaker 1: Is it the asset managers or the big banks? Well,
Speaker 1: what we're gonna reveal on Wednesday is who's doing the
Speaker 1: best um and so from asset managers sneak peak. Well, look,
Speaker 1: the problem is it's a hundred trillion dollar problem. And
Speaker 1: so the questions who's stepping up for the solution the
Speaker 1: members of de fans, so those are in net zero
Speaker 1: Banking Alliance, that zer Asset Managers Alliance, the asset owners,
Speaker 1: the big pension funds stepping up with these commitments and
Speaker 1: then we need to channel them to where they're needed
Speaker 1: the most. How much stress is there at the moment
Speaker 1: amongst the asset managers that actually some of the e
Speaker 1: s G labeled products than if you probe are are
Speaker 1: not green? Well, well, look there is some stress, and
Speaker 1: it's great that there is. That's it's not great that
Speaker 1: it happens, but it's great that there's that scrutiny, and
Speaker 1: there's that skepticism or healthy skepticism about E s G
Speaker 1: labels or sustainable lay goals, and that again is one
Speaker 1: of the reasons we're having this ruthless, relentless focus on
Speaker 1: net zero because in the end, look, we can't stabilize
Speaker 1: the climate unless we get to net zero. And it's
Speaker 1: a simple These are hard numbers. Your emissions are either
Speaker 1: A or B. They're going up or down. And if
Speaker 1: they're going down, are they going down consistent with the
Speaker 1: science we've anchored in the science, the same science the
Speaker 1: u N and others used for the one a half
Speaker 1: degree objectives. Compulsory, should you not have regulators coming in
Speaker 1: and saying, well, this is a new definition, you stick
Speaker 1: by it and we're gonna measure. So it's a great question.
Speaker 1: So let's look at what happened with TCFD climate disclosure.
Speaker 1: Six years ago. You and I were in Paris, we
Speaker 1: talked about this, we talked of other things. Now that's
Speaker 1: moving to become mandatory compulsory after after that period of time.
Speaker 1: What we're talking about in terms of net zero disclosure,
Speaker 1: moving that to compulsory absolutely. I think we have a
Speaker 1: couple of weird year window where best practice is developed
Speaker 1: by the private sector on what exact informations use, stakeholders
Speaker 1: make those judgments, and then yes, I think the jurisdictions,
Speaker 1: major jurisdiction should make this compulsory. I mean, economically, where
Speaker 1: the crossroads because of the energy crisis, because of inflationary pressures,
Speaker 1: does it worry you that actually it puts the transition
Speaker 1: backwards a little bit? Well, I mean, if I were
Speaker 1: a policy maker, I'm not one at the moment, but
Speaker 1: if I were in policy, always in policy maker at heart,
Speaker 1: and I care about the economy. Um. Look, I think
Speaker 1: one of the opportunities to turn the easy bit of
Speaker 1: the recovery has been reopening our economies. Yes, there's been
Speaker 1: some frictions, but we've gotten that boost of growth was reopening.
Speaker 1: Now we need to sustain an expansion. We're only going
Speaker 1: to do that with investment. Business investment business balance sheets
Speaker 1: are in pretty good shape. If you have directions such
Speaker 1: as moving towards a net zero economy, we have huge,
Speaker 1: huge investment that a hundred trillion figure I mentioned has
Speaker 1: huge positive GDP multipliers as it comes forward. So that's
Speaker 1: the opportunity done leash to turn recovery into an expansion.
Speaker 1: But so if we get a temper tantrum, I don't
Speaker 1: know whether we do a tap per testum temper tap
Speaker 1: per tenttrum. But then what does that mean for E
Speaker 1: s G. Product appetite? Well, again, what I'm looking for.
Speaker 1: So when you look for where to be in financial markets,
Speaker 1: given a situation which you know, yes, there is an
Speaker 1: adjustment going on on interest rates, I'd rather have this
Speaker 1: adjustment going on at interest rates rather than slipping back
Speaker 1: into a liquidity trap, which is where we were around
Speaker 1: the customer liquidity trap for many years after the financial crisis.
Speaker 1: So now as global interest rates are moving up, ideally
Speaker 1: what's happening is real interest rates are moving up because
Speaker 1: we're getting the kind of investment and kind of returns
Speaker 1: that we need that's sustained recovery. You want me to
Speaker 1: stop you're having that. We have to stop having it
Speaker 1: to a time tantrum. But we'll get you back on
Speaker 1: Mark Arty, thank you for joining us. This is Bloomberg.
Speaker 1: I have to say, sitting in this sea, there's always
Speaker 1: been an honor for me to cover up this industry.
Speaker 1: Working in this industry, it's really really difficult and We're
Speaker 1: always very happy when someone way like gets a new seat.
Speaker 1: Troyes has got a new seat, the chief market strategist
Speaker 1: f f S Investments. Troy Congratulations, before we start a conversation,
Speaker 1: just told to me about the new seat you've got.
Speaker 1: What's going to change for you. Yeah, So I'm incredibly
Speaker 1: excited to join FS Investments as their chief market strategists. So,
Speaker 1: you know, it's a firm that I've known since two
Speaker 1: thousand fourteen, when I had the pleasure of meeting the founder,
Speaker 1: Michael Foreman. You know, one of the things that attracted
Speaker 1: me to them was not only investment excellence, but the
Speaker 1: fact that they took that investment excellence and found pretty
Speaker 1: unique ways to package sophisticated strategies so that retail investors
Speaker 1: could actually access them. As you remember, in our industry,
Speaker 1: a lot of the early stage, more sophisticated alternatives were
Speaker 1: really exclusively for sovereign wealth funds or pensions. So getting
Speaker 1: to work with a firm whose DNA is tied to
Speaker 1: finding ways for retail investors to participate very very exciting.
Speaker 1: UM And you know right now, as you guys know,
Speaker 1: one of the biggest challenges for all investors is what
Speaker 1: to do with their fixed incomm allocation, and they've variety
Speaker 1: of really exciting solutions there. I will never underestimate anyone's
Speaker 1: ability in this industry, Troy, to deliver a marketing pitch
Speaker 1: just like that on a time it's ready to go,
Speaker 1: doing what I can, Troy, let's start this interview properly.
Speaker 1: The Federal Reserve, big big build up in the front
Speaker 1: end of the cup. How much pushback this week? Well,
Speaker 1: I don't think there'll be a lot of pushback from
Speaker 1: the Fed. I mean, I think they're going to talk
Speaker 1: more broadly about the fact that they're going to be patient.
Speaker 1: But you know, at the end of the day, and
Speaker 1: Lisa was bringing this up before, markets are getting more
Speaker 1: and more comfortable with the probability of them hiking at
Speaker 1: least twice next year. And that's certainly good news from
Speaker 1: a standpoint of market stability. But other than that, I mean,
Speaker 1: remember what, we'll stop this rally. And I disagree with
Speaker 1: Mike Wilson with all due respect, it's probably gonna go
Speaker 1: into January at least, is when liquidity finally starts to
Speaker 1: wane meaningfully. We've seen a meaningful drop over the past
Speaker 1: five months but M two is still growing faster the
Speaker 1: nominal GDP and giving the seasonality, right now, we do
Speaker 1: expect the green light to stay go. But as we
Speaker 1: get into next year, that lights darting flash yellow, right
Speaker 1: because you know, as the FED tapers, you're gonna have
Speaker 1: slore and two growth. As markets start to focus more
Speaker 1: and more on the potential hikes, you'll see that flat line.
Speaker 1: And so that's when you start to get into period
Speaker 1: where could have multiple corrections. There's another way of saying this,
Speaker 1: another way of tracking this, and that perhaps is the
Speaker 1: real yield. And I was looking at a Lori Calvacino
Speaker 1: note of RBC Capital and she was saying, really, what's
Speaker 1: behind the rally is the fact that yields have remained
Speaker 1: so negative on a real basis in the ten year space,
Speaker 1: in the five year space, etcetera. Meaning basically, inflation expectations
Speaker 1: are rising much faster phenomenal yields. At what point do
Speaker 1: you expect that to reverse, if at all? In other words,
Speaker 1: is this unsustainable where we are right now? Yes, So
Speaker 1: go back to the last cycle, right, Remember we only
Speaker 1: got two real yields in the front end. Towards the
Speaker 1: end of the Powell hiking regime, and markets didn't take
Speaker 1: that too well. Right, So as we look into next year,
Speaker 1: remember there's a couple of accidents that could happen. One
Speaker 1: is the Fed is forced to tighten faster. Even if
Speaker 1: they should, they probably won't. The other is that the
Speaker 1: bond market starts to actually price in meaningfully higher UH
Speaker 1: inflation like we're living in right now. And as you
Speaker 1: get that big back end of the curve move, you
Speaker 1: start to price in closer to flat. Did you hear me, John,
Speaker 1: I just said closer to flats, and that leads to
Speaker 1: some type of dislocation. But the bottom line is at
Speaker 1: multiples at these levels, you know, when you think about
Speaker 1: where yields are are rising, you think about liquidity is
Speaker 1: going to slow down, you know. Now it is really
Speaker 1: one of those times where you want to start to
Speaker 1: diversify into alternatives. Troy I often say you that it's
Speaker 1: just trying to just job to read bedtime stories to
Speaker 1: people nervous about the market and to help them sleep
Speaker 1: at night and to stay invested. It's not job asier
Speaker 1: or hard to right now. Yeah, you know, I think
Speaker 1: right now it's easier, right because it's a risk on
Speaker 1: environment for markets right, and there's a lot more FOAMO
Speaker 1: now than there was stay you know, during the Eurozone
Speaker 1: crisis or fifteen sixteen. So I think the challenge for
Speaker 1: a strategist now is to get people to focus on
Speaker 1: other assets where they can potentially not have as much
Speaker 1: upside as equities in the short term, but have a
Speaker 1: much less downside, you know, particularly in things like senior
Speaker 1: secured commercial real estate, floating rate debt, other more hybrid
Speaker 1: strategies in corporate fixed income, things that can hit that
Speaker 1: mid to high schinnole digit return with far less downside
Speaker 1: when the inevitable occurs next year in multiple corrections. I'm
Speaker 1: always listening, Troy, you know that, always listening. That's good.
Speaker 1: That's good. I've always listened to you too, John held
Speaker 1: from your buddy of FS Investments on this market, joining
Speaker 1: us on this market. Lisa Hornby had a US multisector
Speaker 1: fixed income as sad as Lasa. We heard from Tiny
Speaker 1: to Iron in the past week, and he talks about
Speaker 1: credit holding gum. So long as credit holds up, equities
Speaker 1: will be okay. Have you been surprised by how well
Speaker 1: insulated credit has been despite everything going on around US? Yeah? Actually,
Speaker 1: I have been a little bit you know, you would
Speaker 1: think that some of this rates volatility would have filtered
Speaker 1: into UM equity and credit and risk markets more broadly,
Speaker 1: but so far it's it's been pretty resilient, you know.
Speaker 1: I guess for us, the thing that we're looking at
Speaker 1: the most closely is, at least for US fixed income markets,
Speaker 1: the UH the impact on foreign and overseas demand. I mean,
Speaker 1: that's something that we've become very reliant on over the
Speaker 1: past years. There's been a tremendous amount of of yield
Speaker 1: buying just by European, Japanese, Asian based investors UM and
Speaker 1: to the extent we start to see front end yields
Speaker 1: move higher, which impacts the cost of their hedging their
Speaker 1: currencies UM, that could eventually have some impact on their
Speaker 1: demand for US credit product. So far, we're not seeing
Speaker 1: much of a change in that front UM and and
Speaker 1: and so we've seen really credit spreads be quite resilient. UM.
Speaker 1: You know, our expectation is that we will get a
Speaker 1: little bit more volatility in the coming months, particularly as
Speaker 1: we get some of these central bank moves UM out
Speaker 1: of the way and we see UM you know, how
Speaker 1: markets can actually stand on their own without the huge
Speaker 1: liquidity uh that we've had provided to us over the
Speaker 1: last speak teen months or so. Lisa, I'm gonna live
Speaker 1: up to my reputation as Dr Gloom because I keep
Speaker 1: thinking about what happens when the FED starts hiking, what
Speaker 1: happens when we get to the end of this cycle?
Speaker 1: What does the end of this credit cycle look like?
Speaker 1: I think the end of this credit cycle probably looks
Speaker 1: like the end of most credit cycles. Right, you start
Speaker 1: to see leverage increase, um, you know, you start to
Speaker 1: see some of the same phenomenon we've seen in the past. UM.
Speaker 1: For us, we tend to use spreads as our guide.
Speaker 1: Right when spreads get almost insanely tight, and I could
Speaker 1: I could almost say we're we're close at that point. Well,
Speaker 1: but forgive me, Lisa, I'm sorry of a breaking in here.
Speaker 1: But it's not just what do you look for, but
Speaker 1: what's the nature of default at a time when the
Speaker 1: Federal Reserve has gotten a reputation of stepping in? Well,
Speaker 1: that's a good question. I guess your question is is
Speaker 1: the FED allowing a credit cycle to exist anymore? Um?
Speaker 1: And I don't know, you know, frankly, we don't know
Speaker 1: the answer to that, I think you think markets are
Speaker 1: still going to the hape like it will exist. But
Speaker 1: what you saw this past crisis and probably what's to
Speaker 1: come in the future is that those bounces low to
Speaker 1: the to the absolutely you know low and credit spreads
Speaker 1: to the peak and then back become shorter in nature
Speaker 1: because the markets start to discount a very quick and
Speaker 1: rapids central bank response. Yeah, I was. I was speaking
Speaker 1: with Steen Jakobson over at Central Saxo Bank earlier today
Speaker 1: and he he basically said that he said central banks
Speaker 1: are so far behind the curve on inflation that they
Speaker 1: are going to have to act more quickly. The cycle
Speaker 1: hiking cycle is going to be shorter, and it actually
Speaker 1: might result in them having to loosen policy again earlier
Speaker 1: because of a kind of overreaction. What's your reaction to that.
Speaker 1: I mean, look, I think central banks are always behind markets.
Speaker 1: You're seeing that today, right, It's the central banks that
Speaker 1: are catching up to what the market has done in
Speaker 1: terms of pricing, at least in the US. UM So,
Speaker 1: I think I think that's probably spot on. Central banks
Speaker 1: are going to respond. They're they're trying to respond on
Speaker 1: a number of fronts. I mean, Powell has a very
Speaker 1: difficult cult message to walk ahead of himself this week. Right,
Speaker 1: he can't be too benign on inflation, otherwise you're gonna
Speaker 1: have the bottom market vigilanty sort of pushing that narrative.
Speaker 1: At the same time, Um, the market has undergone quite
Speaker 1: a significant front end repricing. You cannot you don't want
Speaker 1: to see a situation where the market start to kind
Speaker 1: of go crazy on that front, and and Powell endorses it.
Speaker 1: So I think all of these central bankers are kind
Speaker 1: of in for a difficult a difficult messaging over the
Speaker 1: next couple of years, really, as this inflation narrative is,
Speaker 1: in our view not quite as transitorious people have made
Speaker 1: it out to be. And that's probably a more structural
Speaker 1: trend rather than a very short term one. Lasa, just quickly,
Speaker 1: there must be some weakness somewhere that you're just nibbling
Speaker 1: at thinking about buying. I'm looking at Italian tends right now,
Speaker 1: up ten eleven basis points over in Italy too. This
Speaker 1: is a world, whether it's a struggle to get yield,
Speaker 1: a world where central banks will have some limitations on
Speaker 1: how far they can push the policy. Right, there's one
Speaker 1: seven in Italy, get it down to you, sit out
Speaker 1: and wait for more. What is it, Lisa, We're not
Speaker 1: quite there yet on Italy. I know you love to
Speaker 1: ask me about that one, UM, but I will say
Speaker 1: that emerging markets are starting to open up as an
Speaker 1: opportunity for us. I mean, we have seen pretty dramatic
Speaker 1: underperformance in some of the e M names UM, and
Speaker 1: there are in our view there are some opportunities there.
Speaker 1: We'd like to get a little bit of stability and
Speaker 1: the dollar UM to give us a bit more confidence
Speaker 1: in taking some of that trade. But certainly there are
Speaker 1: emerging market issuers that have underperformed and those that are
Speaker 1: are geared to the US economic recovery. We're a bit
Speaker 1: more favorable on those UM. We are starting to take
Speaker 1: advantage of some of the opportunities. They're interesting. Come on
Speaker 1: when you bind a little bit more and we can
Speaker 1: talk more about at LESA thank you at Lisa Homebias
Speaker 1: Shrouders takes us immediately to the China conversation. It's all
Speaker 1: about one thing. This wait for the Federal Reserve, give
Speaker 1: us your right guidance. Joining us now is Andrew Holland Horst,
Speaker 1: Chief US Economists at City global market. Now, Mr Holland Host,
Speaker 1: you had some forecast out of the standard this yef
Speaker 1: for right hikes from the FETE to stop next year
Speaker 1: in December. As you've indicated, people thought you were whole
Speaker 1: kish and now accusing you of being a dove. That's right, Yeah,
Speaker 1: that's definitely been the evolution. When we came into the
Speaker 1: year with that forecast, people actually asked us, did you
Speaker 1: put the wrong year behind December? December three should have
Speaker 1: been December four, but no, it was two. And we're
Speaker 1: still in December twenty two, even as we see the
Speaker 1: market is starting to move ahead of us here. So
Speaker 1: this is the ultimate win for a strategist, right. This
Speaker 1: means that you are early and potentially late, but probably
Speaker 1: dead on what gave you conviction before and what gives
Speaker 1: you conviction now that they're not going to hike more
Speaker 1: than just once next year. You know, I don't know
Speaker 1: if conviction is really the word that I can use,
Speaker 1: but the single thing that we were looking at was
Speaker 1: the rapid recovery and demand and what that would mean
Speaker 1: for inflation. And really it's the inflation story that matters.
Speaker 1: And that's why I say it's hard to say conviction
Speaker 1: because inflation has been a difficult variable for any macro
Speaker 1: economists to get right, for any policymaker to get right.
Speaker 1: But when we came into the year looking at the numbers,
Speaker 1: it looked like that strong demand was going to be
Speaker 1: there that could drive some stronger inflation. I think that's
Speaker 1: what we're seeing coming through in the data now, and
Speaker 1: when we see the market moving these rate hikes earlier,
Speaker 1: when we see some calls that are thinking about the
Speaker 1: FED hiking earlier, I think it's really about that inflation story.
Speaker 1: What we're seeing in shelter prices, what we're seeing in services.
Speaker 1: We know it's there in goods. The question is does
Speaker 1: it broad in now, does it become more persistent, does
Speaker 1: it stay with us? And does that cause it fed
Speaker 1: the hike. Let's look past Wednesday to Friday to the
Speaker 1: payrolls report that we're going to get. If we get
Speaker 1: a low surprise and negative surprise downside surprise, what does
Speaker 1: that mean in terms of tightness for this labor market.
Speaker 1: It's so interesting because we were so focused on the
Speaker 1: headline jobs number because the Fed told us substantial further
Speaker 1: progress in the labor market. That's what we needed to
Speaker 1: see to get to the taper. Well, we're to the
Speaker 1: taper now. We think that at the FOC meeting this
Speaker 1: EEK will have an announcement of the tapering of a
Speaker 1: D and twenty billion a month of assive purchases. So
Speaker 1: the focus is no longer so much on that headline
Speaker 1: jobs number. Now the focus is is there a shortage
Speaker 1: of workers in the labor market? So you can have
Speaker 1: a week reading and the jobs report because there's no
Speaker 1: demand for jobs. If we get a week reading, I
Speaker 1: think it's going to be driven by the fact that
Speaker 1: there's not the supply of workers there behind it. So
Speaker 1: we're really looking at data on wages, We're looking at
Speaker 1: data on participation. It's that shortage story that matters more
Speaker 1: than the particular headline jobs number. Okay, so let's focus
Speaker 1: in on participation, which has stayed stubbornly low around that level.
Speaker 1: Is that structural now it looks like at least a
Speaker 1: piece of instructural I think where we can most clearly
Speaker 1: say there's probably a structural element is with those fifty
Speaker 1: five and over, somewhere between five hundred thousand and a
Speaker 1: million workers we think have dropped out of the labor force.
Speaker 1: Which are really early retirements. Right, This was you had
Speaker 1: excess savings during the pandemic period, maybe lost some attachment
Speaker 1: to a job, and now that retirement which was five
Speaker 1: years ten years off, it came early, and so those
Speaker 1: workers are probably permanently out. We're watching on a month
Speaker 1: a month basis is the prime age workers. Are you
Speaker 1: seeing those prime maje workers coming back in or staying out?
Speaker 1: And I think that's where the surprise has been, especially
Speaker 1: relative to policymaker expectations. There was a view at the
Speaker 1: FED that enhanced unemployment benefits were going to expire, schools
Speaker 1: are going to reopen, and you'd have really a surge
Speaker 1: of workers coming back into the labor force. And I
Speaker 1: think it's clear now in the data that we're not
Speaker 1: seeing that surge of workers. The question now is is
Speaker 1: there going to be a trickle of workers that's slowly
Speaker 1: coming in and relieving some of the worker shortage that
Speaker 1: we're seeing, or is this really structural People people have
Speaker 1: just re examined their lives, made a different life plan,
Speaker 1: and working for some people is not part of that. Now. Well, Andrew,
Speaker 1: you mentioned excess savings during the course of the pandemic
Speaker 1: and That brings me back to the note out of
Speaker 1: Mike Wilson and the team at Morgan Stanley this morning.
Speaker 1: His whole thesis is that the bowl run in equities
Speaker 1: can't last for much longer. But what's interesting is he
Speaker 1: points to a payback and demand early next year, and
Speaker 1: that a lot of that excess saves is now back
Speaker 1: to pre pandemic levels. Inflation is starting to bite for
Speaker 1: some of those lower end consumers, and you're going to
Speaker 1: see a year over your decline in personal disposable income.
Speaker 1: At what point are you worried about the consumer's proposant
Speaker 1: propensity and willingness to spend and to be tolerant of
Speaker 1: the higher prices that companies are trying to pass through. Yeah,
Speaker 1: great question, and I think I get worried about it
Speaker 1: when I think about late two. If I look at
Speaker 1: at early two, then the story that you mentioned, the
Speaker 1: pent up demand supply that just hasn't satisfied that demand.
Speaker 1: If you look at autos, for instance, running twelve million
Speaker 1: thirteen million annualized auto sales a month, that numbers should
Speaker 1: be sixteen or seventeen million, those people still want to
Speaker 1: buy cars, and as soon as that production ramps up,
Speaker 1: we're gonna see those auto sales. So it's hard to
Speaker 1: get too negative on the first half of two. When
Speaker 1: you look at the second half of two, that's when
Speaker 1: you think about have we worked through some of those
Speaker 1: savings that have been pent up that are ready to
Speaker 1: come out and become demand. Are we seeing higher prices?
Speaker 1: Is that are now outstripping the rises that we're seeing
Speaker 1: in wages. So wages are accelerating, but prices, of course
Speaker 1: are also rising rapidly. That means real incomes are actually
Speaker 1: declining um. So that's, you know, as part of the
Speaker 1: demand story, it's also part of the inflation story. Does
Speaker 1: that become a little bit of a spiral where we
Speaker 1: see prices and wages rising together or does this actually
Speaker 1: become something that's negative for demand where prices are moving
Speaker 1: too much ahead of wages. And this really goes to
Speaker 1: the idea that people in the market tend to be impatient,
Speaker 1: which is probably why I enjoy covering them because I
Speaker 1: relate deeply. But this idea that once we get a
Speaker 1: sense of when the FED will hike, we look to
Speaker 1: what's next? How many more times? What's the pace of
Speaker 1: rate hikes going to look like? What is the end
Speaker 1: of the cycle going to look like and you take
Speaker 1: it on from there. Andrew holl And Harts, chief at
Speaker 1: US economist of City Group, what is your view here
Speaker 1: about the path of this rate hiking cycle? The idea
Speaker 1: that if the Fed hikes sooner, they cannot go for
Speaker 1: that long and it will be a shorter cycle I
Speaker 1: think in terms of where they get to in terms
Speaker 1: of eternal rate. Right now, it looks like maybe that
Speaker 1: terminal rate is not going to be that high. If
Speaker 1: you look at the last hiking cycle, you only really
Speaker 1: got real rates up to about a hundred basis points,
Speaker 1: which means that nominal rates really shouldn't be going much
Speaker 1: past two to three percent. And then you think about
Speaker 1: where rates came back down to. Real rates ended up
Speaker 1: around zero basis points, which would be nominal rates around
Speaker 1: two percent. So the destination I think is not too high,
Speaker 1: or at least will be viewed as not too high.
Speaker 1: On the other hand, remember we're in a flexible average
Speaker 1: inflation targeting regime. What does that mean? It means that
Speaker 1: you allow inflation to overshoot before you start raising rates.
Speaker 1: It means that when you start raising rates, you should
Speaker 1: have a lot of confidence about proceeding with rate hikes.
Speaker 1: So even though the destination is not too far away,
Speaker 1: I think the Fed will be relatively deliberate about raising rates.
Speaker 1: One rate hike every quarter, so about four rate hikes
Speaker 1: a year, maybe only getting up to around two percent
Speaker 1: nominal rates, but still I wouldn't expect that this is
Speaker 1: kind of you know, one or two rate hikes and
Speaker 1: you're done, all right. So that's all on the monetary
Speaker 1: policy side, Andrew on the fiscal policy side, maybe we
Speaker 1: could actually see some action down on Capitol Hill this
Speaker 1: week as it relates to the infrastructure package and the
Speaker 1: social spending package. But both of those are a lot
Speaker 1: smaller in size and scope than originally intended. Net net,
Speaker 1: when you look at a package that is smaller, but
Speaker 1: also maybe you know the revenue the pay for kind
Speaker 1: of side that is also more moderate than expected, how
Speaker 1: does that inform your thesis for what the economy is
Speaker 1: going to look like over the next five ten years. Yeah,
Speaker 1: I think it's a really difficult question over five or
Speaker 1: ten years. And remember that some of the elements of
Speaker 1: this fiscal package, even if they're initially legislated for one
Speaker 1: or two years. Take the enhanced child tax credit as
Speaker 1: an example. For instance, if that becomes popular, then it
Speaker 1: may stay part of legislation even beyond the period when
Speaker 1: it's meant to expire according to this particular fiscal package.
Speaker 1: So when we actually project these things out, we don't
Speaker 1: just take current law as what will happen. We actually
Speaker 1: make assumptions about things like a child tax credit being continued.
Speaker 1: So I think what you're likely to see here is
Speaker 1: spending that exceeds revenue. There's still a lot of questions
Speaker 1: about the revenue side. In any case, it will be
Speaker 1: spending that's pre front loaded relative to revenue. So we'll
Speaker 1: have things like a corporate tax, maybe a fift minimum
Speaker 1: corporate tax that's gonna extend out for ten years, whereas
Speaker 1: the spending hands child tax credit, for instance, that's gonna
Speaker 1: be front loaded in the first couple of years. So
Speaker 1: I think we're looking at larger deficits. I think we're
Speaker 1: looking at net positive physical impulse, but relative to a
Speaker 1: hugely positive physical impulse over the last couple of years.
Speaker 1: So that's really what the economy has to navigate here.
Speaker 1: Is coming from direct transfers on the order of trillions
Speaker 1: of dollars to individuals, and now we're talking about hundreds
Speaker 1: of billions going forward and going to see potential bank
Speaker 1: decisions out the only thing taking place this week. We
Speaker 1: now have to head to Glasgow, Scotland to catch up
Speaker 1: with Blimberg's France st Laqua as the COP twenty six
Speaker 1: summit kicks off. Good morning Francine, Good morning John. I'm
Speaker 1: delighted to be here at COPY six. We're not sure
Speaker 1: whether a lot will be agreed given the downpour of negativity.
Speaker 1: I would say from a lot of chief executive about
Speaker 1: what was achieved at G twenty, which was meant to
Speaker 1: be the preparatory work for them the two hundred countries
Speaker 1: and their delegates arriving here in Glasgow. But I am
Speaker 1: delighted to be speaking to Jacob stoles Holm, the chief
Speaker 1: executive officer of Rio Tinto, who's here in the Glasgow
Speaker 1: trying to achieve well, it's trying to actually get some
Speaker 1: of the targets that you laid out. So thank you
Speaker 1: so much for joining us. Thank you for giving us,
Speaker 1: I think your first interview as chief executive of Rio
Speaker 1: Tinto with very ambitious plans. You're one of, you know,
Speaker 1: the biggest producers of iron ore that Houston steel making,
Speaker 1: steelmaking extremely polluting. What do you now need to achieve
Speaker 1: to make sure that your goals are stuck took? Fighting
Speaker 1: machines isn't challenge for us. We have a big carbon
Speaker 1: foot print. Also, it's a huge opportunity for us because
Speaker 1: fundamentally it's a very physical transition of the society we
Speaker 1: live in an energy transition. You need more solar selves,
Speaker 1: wind turbines, transmission lines, electrical vehicles, all requiring the materials
Speaker 1: that we are producing. But the problem we have right
Speaker 1: now is we first have to de carbonize our change,
Speaker 1: which is expensive and difficult, very expensive. And we just
Speaker 1: laid our plans where we will in this directly seven
Speaker 1: and a half billion, but initiate much more investments in
Speaker 1: this decade in order to a cheap production of our
Speaker 1: carbon foot plant by by the end of the decade.
Speaker 1: It's an ambusiness plan, but it's doable. But it's our
Speaker 1: part in order to also benefit from the growth circoms
Speaker 1: from seen transition. So when will we be able to
Speaker 1: know a lot more about Scope three? This is a
Speaker 1: hard part because it's basically you give the iron or
Speaker 1: the steelmakers. It's how they decarbonize, So what's the plan there. Well,
Speaker 1: first of all, the challenge for steammakers is even bigger
Speaker 1: than it is far US as minors. But I see
Speaker 1: them doing a lot. A lot is happening in China
Speaker 1: right now. We do research and development with them, with
Speaker 1: Japan and in Europe, etcetera. It has to be a corporation.
Speaker 1: The major part of the solution is with the steam makeup,
Speaker 1: but part of it is with us as minors in
Speaker 1: terms of the quality of products we're delivering, etcetera, etcetera.
Speaker 1: And we are exploring various options. And one of the
Speaker 1: options that we are exploring is, for example, is that
Speaker 1: an opportunity for the first part of the steam making,
Speaker 1: the iron making, the production, should that be done green Iroland?
Speaker 1: Is that something that we could participate or activity. So
Speaker 1: we're actually doing an awful lot in that. From spect
Speaker 1: it's China very committed. So we were disappointed by what
Speaker 1: came out of the G twenty. So we don't really
Speaker 1: have an agreement on you know, for example, domestic coal plans.
Speaker 1: We don't really have an agreement on this Global methane
Speaker 1: Um summit. So what can we achieve from now fifty
Speaker 1: is very far. I think people has to focus a
Speaker 1: little bit on the short term what is actually really happening.
Speaker 1: And the reality is China is hit when it comes
Speaker 1: to installing renewable innity. Their their their program is incredible, ambitious,
Speaker 1: they are hit when it comes to a penetration of
Speaker 1: maketure vehicle. So we just see a lot going on
Speaker 1: on the ground in China. In terms of timeline, when
Speaker 1: will you be able to set out your emissions for
Speaker 1: scope to just go three? We have our action plans now.
Speaker 1: We we released that on our Capital Markets Day last week.
Speaker 1: But what we now need to monitor is what will
Speaker 1: the industry, the steammakers do and therefore we plan as
Speaker 1: part of our annual report to be more numerical about it.
Speaker 1: But what it's important right now is to tell what
Speaker 1: are we doing. But at the end of the day,
Speaker 1: school three, we can never be under percent and control
Speaker 1: of when you look at what else not in control
Speaker 1: of is of course the energy crisis. It's a freight
Speaker 1: around the world and the fact that the economy seems
Speaker 1: to be stalling once again, does it make it harder
Speaker 1: for you to achieve your climate goals because of the
Speaker 1: difficult environment we see. No, I wouldn't say so. I mean,
Speaker 1: obviously we were very lucky at the beginning of the
Speaker 1: year and we had our best half year about the
Speaker 1: first half way the economy was growing a lot. Right
Speaker 1: now the economy is slown down, and that probably makes
Speaker 1: sense because, as you say, we're strucking to move things
Speaker 1: around in the world, and there's a looming energy crisis,
Speaker 1: and ultimately it will have an impact. But I think
Speaker 1: it's as your auditorm impact. It's a matter of the
Speaker 1: world to solid supplying issues. How many how much inflationary
Speaker 1: pressure are you seeing across your products? Well, for sure
Speaker 1: there was a lot of inflation induced in the first
Speaker 1: half where the world was growing at a high pace.
Speaker 1: But yes, it's one of the challenges. What does that mean?
Speaker 1: I mean, do you hedge, do your clients ask for
Speaker 1: a little bit of time? It must be actually, you
Speaker 1: know how of something to deal with. It hasn't been
Speaker 1: that bad for us, and quite frankly, we have also
Speaker 1: benefited from from part of the infacing comes from higher
Speaker 1: commodity advices. What does it mean for China? Where are
Speaker 1: we in China right now? If there if there continues
Speaker 1: to be that zero COVID tolerance policy. Is it difficult
Speaker 1: for you to ship things on from China? The whole
Speaker 1: logistics works extremely well personally as the CEO, and they said,
Speaker 1: but I still haven't been able to travel to China.
Speaker 1: We have my biggest customers are but it's it's a
Speaker 1: difficult world for all of us from COVID. What's your
Speaker 1: relationship with stillmakers right now? Is there some kind of
Speaker 1: agreements that you would give them, for example, you know,
Speaker 1: monetize or to try and help fund some of their
Speaker 1: efforts to become more green? YEA. Ultimately, first of all,
Speaker 1: we have very good, very long term relationships with our
Speaker 1: customers that we have worked with for decades and and
Speaker 1: that's where we will tend to on China. Are any aligned,
Speaker 1: We always think in a very long term horizon and
Speaker 1: the air fars natural for us to form research and
Speaker 1: development corporations, including we have the Chinese universities, etcetera. And
Speaker 1: so the problem with A and D is as a businessman,
Speaker 1: I like to see we solve very quickly, but at
Speaker 1: the unfortunately often takes a little longer. You're pushing me
Speaker 1: as well, when can you come with the scope three resolve?
Speaker 1: But but very often it takes a long time. Little
Speaker 1: give you an example, we're trying to decobonize completely aluminium
Speaker 1: with our Illicits project. This project has been going on
Speaker 1: for twenty years and now it's us. We've been promising
Speaker 1: and we might be able to change the hundred year
Speaker 1: old manufacturing method, but it just takes time. And therefore
Speaker 1: what you need now the world in order to achieve
Speaker 1: twenty fifty, the world needs to put in a lot
Speaker 1: of seats of research and development in order to have
Speaker 1: the brake roots necessarily, are you frustrated by the lack
Speaker 1: of time or by you know, by the speed at
Speaker 1: which progress is being made. So you're a new chief executive,
Speaker 1: what's the thing that's most frustrating in your job? I
Speaker 1: don't look at it like that, because there's so much
Speaker 1: we can do with existing technology and we haven't done enough.
Speaker 1: And what I said when we were announcing our targets
Speaker 1: at the Capital market states, we are now starting an
Speaker 1: internal race because there's much much more we can do,
Speaker 1: and we will do. Our thousands of engineers who are
Speaker 1: used to classical energy solutions now have to think about
Speaker 1: renewable energy solutions. That's for us to do. But you
Speaker 1: can't solve of the see you two without some breaks
Speaker 1: through in technology. And there I think the world will
Speaker 1: have to be patient because Auntie just takes longer, I
Speaker 1: mean patients. How so when will we see green steel? Well,
Speaker 1: but look the way we look at it thirty we
Speaker 1: want to have half our carbon foot traunt and I
Speaker 1: want by twenty thirty to have a very clear passway
Speaker 1: without a lot of uncertainty towards zero. Okay, thanks so
Speaker 1: much for joining us as a mute in to chief executive.
Speaker 1: Junco steals home his first interview actually as a chief
Speaker 1: executive with that John, and will send it back to
Speaker 1: you in New York, France saying thank you so much.
Speaker 1: Looking forward to a waste conference with you on the
Speaker 1: ground in Glasgow, Scotland. This is the Bloomberg Surveillance Podcast.
Speaker 1: Thanks for listening. Join us live weekdays from seven to
Speaker 1: ten am Eastern on Bloomberg Radio and on Bloomberg Television
Speaker 1: each day from six to nine am for insight from
Speaker 1: the best in economics, finance, investment, and international relations. And
Speaker 1: subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg
Speaker 1: dot com, and of course on the terminal. I'm Tom Keene,
Speaker 1: and this is Bloomberg