WEBVTT - Surveillance: Net-Zero With UN's Carney 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferroll and Lisa Brownwitz Jay Leye. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg 0:00:23.360 --> 0:00:29.280 dot Com and of course on the Bloomberg Tournament. The 0:00:29.360 --> 0:00:31.400 nikes are of covering a conference as you're sitting there 0:00:31.440 --> 0:00:34.360 and someone drops by for an interview, maybe unexpected the 0:00:34.360 --> 0:00:36.720 time and can shift. And we've got a fantastic guest 0:00:36.760 --> 0:00:40.080 coming up now with Bloomberg's Francine Laqua over in Glasgow, Scotland. 0:00:40.120 --> 0:00:45.239 Hey Francine, Hi John. We're delighted to be joined by 0:00:45.440 --> 0:00:48.320 Mark Karney here of course, so looking at finance, so 0:00:48.360 --> 0:00:50.640 looking at COP twenty six in Glasgow. He's also former 0:00:50.840 --> 0:00:53.120 Bank of England Governor Mark as a voice, Thank you 0:00:53.120 --> 0:00:55.000 so much for making us smart on what finance can do, 0:00:55.000 --> 0:00:58.000 because I mean COMP twenty six starts today. To G 0:00:58.120 --> 0:00:59.840 twenty was a little bit of the dull drum because 0:00:59.840 --> 0:01:01.240 we've and get some of the pledges that a lot 0:01:01.280 --> 0:01:03.320 of people were hoping for. What does it mean for 0:01:03.400 --> 0:01:06.120 your expectations for COP twenty six. Well, I think a 0:01:06.160 --> 0:01:08.120 couple of things. I'm going to quote the Secretary General's 0:01:08.160 --> 0:01:11.160 hopes unfulfilled but not yet buried. The one and a 0:01:11.160 --> 0:01:14.440 half degrees anchor in the G twenty communicate is significant, 0:01:14.880 --> 0:01:16.679 some progress, but we've got a lot of work to do. 0:01:16.920 --> 0:01:19.280 What we and the big question for this week, at 0:01:19.360 --> 0:01:22.280 least for this Wednesday, is what can finance and more 0:01:22.319 --> 0:01:26.679 specifically the private financial sector, what can it do to 0:01:26.760 --> 0:01:28.720 help solve this problem? So it's going to really have 0:01:28.840 --> 0:01:31.040 to step up, and there's been a lot of institutions, 0:01:31.160 --> 0:01:32.800 a lot of people around the world have been working 0:01:32.840 --> 0:01:34.360 in order to do that. Yeah, we don't even have 0:01:34.400 --> 0:01:36.320 a price on carbon yet, when will we get that? Well, 0:01:36.360 --> 0:01:38.520 we don't have a price on carbon. But what I 0:01:39.000 --> 0:01:43.199 think our message on Wednesday to world leaders, to policy makers, 0:01:43.240 --> 0:01:45.759 to business people around the world is finance is going 0:01:45.800 --> 0:01:47.240 to be there, and finance is going to be there 0:01:47.280 --> 0:01:50.760 in two respects. One work we've we've retooled the financial system. 0:01:50.800 --> 0:01:53.000 We've changed the plumbing, if you will, the financial system, 0:01:53.160 --> 0:01:55.600 a bunch of very worthy reforms that actually, to be honest, 0:01:55.640 --> 0:01:58.600 only the audience that Bloomberg would fully understand and appreciate 0:01:58.680 --> 0:02:00.920 and we can go through them for the next hour. UM. 0:02:00.960 --> 0:02:03.680 But you know, think mandatory disclosure, think stress testing all that. 0:02:03.880 --> 0:02:07.440 So part is reallytooling. But then it's also about financial 0:02:07.440 --> 0:02:10.160 institutions stepping up and say saying that they are going 0:02:10.200 --> 0:02:14.120 to finance this transition, this enormous hundred trillion dollar transition 0:02:14.160 --> 0:02:16.160 that needs to happen over the next three decades. They're 0:02:16.160 --> 0:02:18.120 gonna finance it, and they're gonna mark their own homework. 0:02:18.160 --> 0:02:20.360 They're gonna show up year and year out say what 0:02:20.400 --> 0:02:24.440 their emissions are of their clients. UM, have specific strategies 0:02:24.639 --> 0:02:28.440 for reducing carbon fair share of fifty down by That's 0:02:28.440 --> 0:02:30.560 what the Glasgow Financial Alliance is all. But why not 0:02:30.600 --> 0:02:34.200 stop actually putting money into fossil fuel full stop, instead 0:02:34.200 --> 0:02:36.680 of talking about the transition. Well, you've got I mean, 0:02:36.720 --> 0:02:40.040 we're living through problems with the transition right now in 0:02:40.120 --> 0:02:42.920 terms of we have both far far too many fossil 0:02:42.960 --> 0:02:45.480 fuels in the world. We're gonna have enormous stranded assets. 0:02:45.680 --> 0:02:48.320 Half of gas, three quarters of coal, et cetera, maybe 0:02:48.400 --> 0:02:51.359 up as much as half of oil reserves. Proven reserves 0:02:51.560 --> 0:02:52.960 need to stay in the ground if we're gonna get 0:02:53.000 --> 0:02:56.080 to where we are. But we also have local short 0:02:56.240 --> 0:02:59.280 term shortages of some of those exact materials were here 0:02:59.280 --> 0:03:01.680 in the UK. They a shortage of the storage of gas. 0:03:01.720 --> 0:03:06.239 So there needs to be some only some limited financing 0:03:06.600 --> 0:03:09.520 for a transition, but only for a transition, which is 0:03:09.560 --> 0:03:13.280 why you need things like g fans that are relentlessly, ruthlessly, 0:03:13.680 --> 0:03:16.960 absolutely focused on that transition to net zero and not 0:03:17.040 --> 0:03:19.280 just any transition and one and a half degree transition, 0:03:19.320 --> 0:03:21.840 which sorry if I may, which is what G twenty 0:03:22.000 --> 0:03:24.919 leaders signed off on yesterday. But the G twenty leaders 0:03:24.960 --> 0:03:28.440 didn't stop, for example, coal from being used domestically. And 0:03:28.440 --> 0:03:31.280 and so we're doing progress, but we're going at it slowly. Well, 0:03:31.320 --> 0:03:34.000 we're doing progress. We need to accelerate it. We need 0:03:34.040 --> 0:03:37.320 to recognize there's differences and as as obviously are between 0:03:37.320 --> 0:03:40.520 advanced economies developing economies, uh, some of those there's a 0:03:40.600 --> 0:03:44.280 there's a different timeline for fully ending coal. We want 0:03:44.320 --> 0:03:47.240 to stop coal, not just new coal, but stop use 0:03:47.280 --> 0:03:51.080 of coal by the advanced economies. That's what powering past coal, 0:03:51.120 --> 0:03:54.080 which is a big element of of COP is about. 0:03:54.360 --> 0:03:56.440 But also by the end of the next decade in 0:03:56.480 --> 0:03:59.160 the emerging developing world and if I may again to 0:03:59.200 --> 0:04:01.560 bring it back to fin finance. UM. To give them 0:04:01.560 --> 0:04:04.280 the confidence to do that, they need to see literally 0:04:04.680 --> 0:04:07.600 a wall of money that's available for their transition. So 0:04:07.680 --> 0:04:10.800 when they're building up alternative energy that the money is 0:04:10.800 --> 0:04:12.840 going to be there. Who could do better in finance? 0:04:12.960 --> 0:04:15.280 Is it the asset managers or the big banks? Well, 0:04:15.320 --> 0:04:18.359 what we're gonna reveal on Wednesday is who's doing the 0:04:18.400 --> 0:04:22.479 best um and so from asset managers sneak peak. Well, look, 0:04:22.720 --> 0:04:25.320 the problem is it's a hundred trillion dollar problem. And 0:04:25.360 --> 0:04:27.599 so the questions who's stepping up for the solution the 0:04:27.640 --> 0:04:29.960 members of de fans, so those are in net zero 0:04:29.960 --> 0:04:33.039 Banking Alliance, that zer Asset Managers Alliance, the asset owners, 0:04:33.040 --> 0:04:36.400 the big pension funds stepping up with these commitments and 0:04:36.400 --> 0:04:38.760 then we need to channel them to where they're needed 0:04:38.800 --> 0:04:41.000 the most. How much stress is there at the moment 0:04:41.040 --> 0:04:43.560 amongst the asset managers that actually some of the e 0:04:43.680 --> 0:04:46.560 s G labeled products than if you probe are are 0:04:46.560 --> 0:04:49.440 not green? Well, well, look there is some stress, and 0:04:49.440 --> 0:04:51.680 it's great that there is. That's it's not great that 0:04:51.720 --> 0:04:54.400 it happens, but it's great that there's that scrutiny, and 0:04:54.440 --> 0:04:58.360 there's that skepticism or healthy skepticism about E s G 0:04:58.560 --> 0:05:01.720 labels or sustainable lay goals, and that again is one 0:05:01.760 --> 0:05:04.960 of the reasons we're having this ruthless, relentless focus on 0:05:05.040 --> 0:05:08.120 net zero because in the end, look, we can't stabilize 0:05:08.200 --> 0:05:10.479 the climate unless we get to net zero. And it's 0:05:10.480 --> 0:05:13.240 a simple These are hard numbers. Your emissions are either 0:05:13.400 --> 0:05:15.840 A or B. They're going up or down. And if 0:05:15.880 --> 0:05:18.400 they're going down, are they going down consistent with the 0:05:18.440 --> 0:05:21.080 science we've anchored in the science, the same science the 0:05:21.200 --> 0:05:23.159 u N and others used for the one a half 0:05:23.160 --> 0:05:26.359 degree objectives. Compulsory, should you not have regulators coming in 0:05:26.400 --> 0:05:28.440 and saying, well, this is a new definition, you stick 0:05:28.480 --> 0:05:31.240 by it and we're gonna measure. So it's a great question. 0:05:31.320 --> 0:05:33.840 So let's look at what happened with TCFD climate disclosure. 0:05:34.040 --> 0:05:35.599 Six years ago. You and I were in Paris, we 0:05:35.640 --> 0:05:38.479 talked about this, we talked of other things. Now that's 0:05:38.520 --> 0:05:42.280 moving to become mandatory compulsory after after that period of time. 0:05:42.440 --> 0:05:44.720 What we're talking about in terms of net zero disclosure, 0:05:45.200 --> 0:05:48.520 moving that to compulsory absolutely. I think we have a 0:05:48.560 --> 0:05:53.160 couple of weird year window where best practice is developed 0:05:53.160 --> 0:05:57.000 by the private sector on what exact informations use, stakeholders 0:05:57.040 --> 0:06:01.120 make those judgments, and then yes, I think the jurisdictions, 0:06:01.160 --> 0:06:04.400 major jurisdiction should make this compulsory. I mean, economically, where 0:06:04.400 --> 0:06:07.880 the crossroads because of the energy crisis, because of inflationary pressures, 0:06:08.680 --> 0:06:12.000 does it worry you that actually it puts the transition 0:06:12.040 --> 0:06:14.000 backwards a little bit? Well, I mean, if I were 0:06:14.040 --> 0:06:16.719 a policy maker, I'm not one at the moment, but 0:06:16.839 --> 0:06:18.880 if I were in policy, always in policy maker at heart, 0:06:18.880 --> 0:06:21.640 and I care about the economy. Um. Look, I think 0:06:21.680 --> 0:06:25.599 one of the opportunities to turn the easy bit of 0:06:25.640 --> 0:06:28.240 the recovery has been reopening our economies. Yes, there's been 0:06:28.279 --> 0:06:31.360 some frictions, but we've gotten that boost of growth was reopening. 0:06:31.640 --> 0:06:33.840 Now we need to sustain an expansion. We're only going 0:06:33.880 --> 0:06:37.040 to do that with investment. Business investment business balance sheets 0:06:37.040 --> 0:06:39.599 are in pretty good shape. If you have directions such 0:06:39.600 --> 0:06:42.280 as moving towards a net zero economy, we have huge, 0:06:42.360 --> 0:06:45.880 huge investment that a hundred trillion figure I mentioned has 0:06:46.040 --> 0:06:49.760 huge positive GDP multipliers as it comes forward. So that's 0:06:49.800 --> 0:06:53.600 the opportunity done leash to turn recovery into an expansion. 0:06:53.680 --> 0:06:55.920 But so if we get a temper tantrum, I don't 0:06:55.960 --> 0:06:58.640 know whether we do a tap per testum temper tap 0:06:58.640 --> 0:07:01.080 per tenttrum. But then what does that mean for E 0:07:01.200 --> 0:07:06.120 s G. Product appetite? Well, again, what I'm looking for. 0:07:06.680 --> 0:07:09.760 So when you look for where to be in financial markets, 0:07:09.800 --> 0:07:13.200 given a situation which you know, yes, there is an 0:07:13.200 --> 0:07:16.400 adjustment going on on interest rates, I'd rather have this 0:07:16.520 --> 0:07:19.200 adjustment going on at interest rates rather than slipping back 0:07:19.240 --> 0:07:21.800 into a liquidity trap, which is where we were around 0:07:21.840 --> 0:07:25.000 the customer liquidity trap for many years after the financial crisis. 0:07:25.000 --> 0:07:28.120 So now as global interest rates are moving up, ideally 0:07:28.160 --> 0:07:31.040 what's happening is real interest rates are moving up because 0:07:31.040 --> 0:07:33.600 we're getting the kind of investment and kind of returns 0:07:33.600 --> 0:07:35.960 that we need that's sustained recovery. You want me to 0:07:35.960 --> 0:07:37.880 stop you're having that. We have to stop having it 0:07:37.920 --> 0:07:40.520 to a time tantrum. But we'll get you back on 0:07:40.720 --> 0:07:43.760 Mark Arty, thank you for joining us. This is Bloomberg. 0:07:49.560 --> 0:07:51.920 I have to say, sitting in this sea, there's always 0:07:51.920 --> 0:07:54.320 been an honor for me to cover up this industry. 0:07:54.360 --> 0:07:57.880 Working in this industry, it's really really difficult and We're 0:07:57.920 --> 0:08:01.360 always very happy when someone way like gets a new seat. 0:08:01.400 --> 0:08:04.560 Troyes has got a new seat, the chief market strategist 0:08:04.720 --> 0:08:08.520 f f S Investments. Troy Congratulations, before we start a conversation, 0:08:08.600 --> 0:08:10.600 just told to me about the new seat you've got. 0:08:10.800 --> 0:08:13.600 What's going to change for you. Yeah, So I'm incredibly 0:08:13.640 --> 0:08:17.120 excited to join FS Investments as their chief market strategists. So, 0:08:17.520 --> 0:08:19.360 you know, it's a firm that I've known since two 0:08:19.360 --> 0:08:21.880 thousand fourteen, when I had the pleasure of meeting the founder, 0:08:21.960 --> 0:08:24.520 Michael Foreman. You know, one of the things that attracted 0:08:24.520 --> 0:08:26.760 me to them was not only investment excellence, but the 0:08:26.760 --> 0:08:30.040 fact that they took that investment excellence and found pretty 0:08:30.120 --> 0:08:35.040 unique ways to package sophisticated strategies so that retail investors 0:08:35.040 --> 0:08:38.120 could actually access them. As you remember, in our industry, 0:08:38.120 --> 0:08:41.360 a lot of the early stage, more sophisticated alternatives were 0:08:41.360 --> 0:08:44.720 really exclusively for sovereign wealth funds or pensions. So getting 0:08:44.720 --> 0:08:47.400 to work with a firm whose DNA is tied to 0:08:47.679 --> 0:08:51.440 finding ways for retail investors to participate very very exciting. 0:08:52.160 --> 0:08:54.200 UM And you know right now, as you guys know, 0:08:54.280 --> 0:08:57.480 one of the biggest challenges for all investors is what 0:08:57.600 --> 0:09:00.440 to do with their fixed incomm allocation, and they've variety 0:09:00.440 --> 0:09:03.440 of really exciting solutions there. I will never underestimate anyone's 0:09:03.440 --> 0:09:05.840 ability in this industry, Troy, to deliver a marketing pitch 0:09:06.040 --> 0:09:07.760 just like that on a time it's ready to go, 0:09:08.080 --> 0:09:11.920 doing what I can, Troy, let's start this interview properly. 0:09:12.160 --> 0:09:14.520 The Federal Reserve, big big build up in the front 0:09:14.600 --> 0:09:17.040 end of the cup. How much pushback this week? Well, 0:09:17.240 --> 0:09:19.040 I don't think there'll be a lot of pushback from 0:09:19.040 --> 0:09:20.600 the Fed. I mean, I think they're going to talk 0:09:20.640 --> 0:09:23.000 more broadly about the fact that they're going to be patient. 0:09:23.400 --> 0:09:24.880 But you know, at the end of the day, and 0:09:25.000 --> 0:09:27.400 Lisa was bringing this up before, markets are getting more 0:09:27.400 --> 0:09:29.800 and more comfortable with the probability of them hiking at 0:09:29.840 --> 0:09:32.880 least twice next year. And that's certainly good news from 0:09:32.880 --> 0:09:36.439 a standpoint of market stability. But other than that, I mean, 0:09:36.480 --> 0:09:39.760 remember what, we'll stop this rally. And I disagree with 0:09:39.800 --> 0:09:42.000 Mike Wilson with all due respect, it's probably gonna go 0:09:42.040 --> 0:09:45.480 into January at least, is when liquidity finally starts to 0:09:45.480 --> 0:09:48.439 wane meaningfully. We've seen a meaningful drop over the past 0:09:48.480 --> 0:09:51.360 five months but M two is still growing faster the 0:09:51.440 --> 0:09:54.840 nominal GDP and giving the seasonality, right now, we do 0:09:54.920 --> 0:09:58.120 expect the green light to stay go. But as we 0:09:58.160 --> 0:10:01.200 get into next year, that lights darting flash yellow, right 0:10:01.280 --> 0:10:04.080 because you know, as the FED tapers, you're gonna have 0:10:04.160 --> 0:10:07.240 slore and two growth. As markets start to focus more 0:10:07.280 --> 0:10:10.040 and more on the potential hikes, you'll see that flat line. 0:10:10.080 --> 0:10:11.720 And so that's when you start to get into period 0:10:11.760 --> 0:10:14.320 where could have multiple corrections. There's another way of saying this, 0:10:14.400 --> 0:10:16.320 another way of tracking this, and that perhaps is the 0:10:16.440 --> 0:10:18.560 real yield. And I was looking at a Lori Calvacino 0:10:18.640 --> 0:10:21.360 note of RBC Capital and she was saying, really, what's 0:10:21.360 --> 0:10:23.680 behind the rally is the fact that yields have remained 0:10:23.720 --> 0:10:26.360 so negative on a real basis in the ten year space, 0:10:26.360 --> 0:10:29.840 in the five year space, etcetera. Meaning basically, inflation expectations 0:10:29.840 --> 0:10:32.840 are rising much faster phenomenal yields. At what point do 0:10:32.840 --> 0:10:35.200 you expect that to reverse, if at all? In other words, 0:10:35.320 --> 0:10:37.800 is this unsustainable where we are right now? Yes, So 0:10:38.240 --> 0:10:41.000 go back to the last cycle, right, Remember we only 0:10:41.000 --> 0:10:43.200 got two real yields in the front end. Towards the 0:10:43.320 --> 0:10:46.520 end of the Powell hiking regime, and markets didn't take 0:10:46.600 --> 0:10:49.320 that too well. Right, So as we look into next year, 0:10:49.760 --> 0:10:52.120 remember there's a couple of accidents that could happen. One 0:10:52.160 --> 0:10:54.440 is the Fed is forced to tighten faster. Even if 0:10:54.480 --> 0:10:57.160 they should, they probably won't. The other is that the 0:10:57.200 --> 0:11:00.559 bond market starts to actually price in meaningfully higher UH 0:11:00.600 --> 0:11:03.640 inflation like we're living in right now. And as you 0:11:03.679 --> 0:11:05.840 get that big back end of the curve move, you 0:11:05.840 --> 0:11:09.240 start to price in closer to flat. Did you hear me, John, 0:11:09.280 --> 0:11:13.360 I just said closer to flats, and that leads to 0:11:13.480 --> 0:11:17.080 some type of dislocation. But the bottom line is at 0:11:17.160 --> 0:11:19.880 multiples at these levels, you know, when you think about 0:11:19.880 --> 0:11:23.120 where yields are are rising, you think about liquidity is 0:11:23.120 --> 0:11:25.080 going to slow down, you know. Now it is really 0:11:25.080 --> 0:11:26.560 one of those times where you want to start to 0:11:26.600 --> 0:11:29.480 diversify into alternatives. Troy I often say you that it's 0:11:29.480 --> 0:11:31.839 just trying to just job to read bedtime stories to 0:11:31.880 --> 0:11:33.800 people nervous about the market and to help them sleep 0:11:33.840 --> 0:11:36.640 at night and to stay invested. It's not job asier 0:11:36.800 --> 0:11:39.280 or hard to right now. Yeah, you know, I think 0:11:39.360 --> 0:11:41.560 right now it's easier, right because it's a risk on 0:11:41.760 --> 0:11:44.600 environment for markets right, and there's a lot more FOAMO 0:11:44.760 --> 0:11:47.040 now than there was stay you know, during the Eurozone 0:11:47.080 --> 0:11:50.559 crisis or fifteen sixteen. So I think the challenge for 0:11:50.640 --> 0:11:53.080 a strategist now is to get people to focus on 0:11:53.120 --> 0:11:56.400 other assets where they can potentially not have as much 0:11:56.480 --> 0:11:58.959 upside as equities in the short term, but have a 0:11:59.040 --> 0:12:02.120 much less downside, you know, particularly in things like senior 0:12:02.160 --> 0:12:07.360 secured commercial real estate, floating rate debt, other more hybrid 0:12:07.400 --> 0:12:10.839 strategies in corporate fixed income, things that can hit that 0:12:10.960 --> 0:12:14.040 mid to high schinnole digit return with far less downside 0:12:14.320 --> 0:12:17.319 when the inevitable occurs next year in multiple corrections. I'm 0:12:17.320 --> 0:12:20.680 always listening, Troy, you know that, always listening. That's good. 0:12:20.760 --> 0:12:23.640 That's good. I've always listened to you too, John held 0:12:23.679 --> 0:12:32.360 from your buddy of FS Investments on this market, joining 0:12:32.440 --> 0:12:35.080 us on this market. Lisa Hornby had a US multisector 0:12:35.120 --> 0:12:37.440 fixed income as sad as Lasa. We heard from Tiny 0:12:37.520 --> 0:12:39.480 to Iron in the past week, and he talks about 0:12:39.520 --> 0:12:42.200 credit holding gum. So long as credit holds up, equities 0:12:42.240 --> 0:12:44.640 will be okay. Have you been surprised by how well 0:12:44.679 --> 0:12:49.920 insulated credit has been despite everything going on around US? Yeah? Actually, 0:12:49.960 --> 0:12:51.920 I have been a little bit you know, you would 0:12:51.920 --> 0:12:54.600 think that some of this rates volatility would have filtered 0:12:54.640 --> 0:12:58.360 into UM equity and credit and risk markets more broadly, 0:12:58.440 --> 0:13:01.720 but so far it's it's been pretty resilient, you know. 0:13:01.760 --> 0:13:03.960 I guess for us, the thing that we're looking at 0:13:04.000 --> 0:13:07.200 the most closely is, at least for US fixed income markets, 0:13:07.440 --> 0:13:11.760 the UH the impact on foreign and overseas demand. I mean, 0:13:11.800 --> 0:13:14.720 that's something that we've become very reliant on over the 0:13:14.760 --> 0:13:17.880 past years. There's been a tremendous amount of of yield 0:13:17.920 --> 0:13:21.760 buying just by European, Japanese, Asian based investors UM and 0:13:21.800 --> 0:13:24.400 to the extent we start to see front end yields 0:13:24.840 --> 0:13:27.720 move higher, which impacts the cost of their hedging their 0:13:27.760 --> 0:13:32.720 currencies UM, that could eventually have some impact on their 0:13:32.760 --> 0:13:35.920 demand for US credit product. So far, we're not seeing 0:13:36.000 --> 0:13:38.880 much of a change in that front UM and and 0:13:38.880 --> 0:13:42.560 and so we've seen really credit spreads be quite resilient. UM. 0:13:42.640 --> 0:13:44.480 You know, our expectation is that we will get a 0:13:44.480 --> 0:13:48.040 little bit more volatility in the coming months, particularly as 0:13:48.080 --> 0:13:50.800 we get some of these central bank moves UM out 0:13:50.840 --> 0:13:53.600 of the way and we see UM you know, how 0:13:53.679 --> 0:13:56.360 markets can actually stand on their own without the huge 0:13:56.400 --> 0:13:59.760 liquidity uh that we've had provided to us over the 0:13:59.800 --> 0:14:01.920 last speak teen months or so. Lisa, I'm gonna live 0:14:01.960 --> 0:14:05.360 up to my reputation as Dr Gloom because I keep 0:14:05.400 --> 0:14:08.840 thinking about what happens when the FED starts hiking, what 0:14:09.000 --> 0:14:11.320 happens when we get to the end of this cycle? 0:14:11.440 --> 0:14:14.120 What does the end of this credit cycle look like? 0:14:15.720 --> 0:14:17.480 I think the end of this credit cycle probably looks 0:14:17.520 --> 0:14:19.520 like the end of most credit cycles. Right, you start 0:14:19.560 --> 0:14:23.240 to see leverage increase, um, you know, you start to 0:14:23.280 --> 0:14:27.400 see some of the same phenomenon we've seen in the past. UM. 0:14:27.520 --> 0:14:30.040 For us, we tend to use spreads as our guide. 0:14:30.240 --> 0:14:34.800 Right when spreads get almost insanely tight, and I could 0:14:35.160 --> 0:14:37.600 I could almost say we're we're close at that point. Well, 0:14:37.640 --> 0:14:39.760 but forgive me, Lisa, I'm sorry of a breaking in here. 0:14:39.800 --> 0:14:41.600 But it's not just what do you look for, but 0:14:41.680 --> 0:14:43.680 what's the nature of default at a time when the 0:14:43.680 --> 0:14:48.160 Federal Reserve has gotten a reputation of stepping in? Well, 0:14:48.200 --> 0:14:50.840 that's a good question. I guess your question is is 0:14:50.840 --> 0:14:54.640 the FED allowing a credit cycle to exist anymore? Um? 0:14:55.040 --> 0:14:57.400 And I don't know, you know, frankly, we don't know 0:14:57.440 --> 0:14:59.360 the answer to that, I think you think markets are 0:14:59.360 --> 0:15:01.520 still going to the hape like it will exist. But 0:15:01.800 --> 0:15:04.480 what you saw this past crisis and probably what's to 0:15:04.520 --> 0:15:08.160 come in the future is that those bounces low to 0:15:08.280 --> 0:15:10.600 the to the absolutely you know low and credit spreads 0:15:10.640 --> 0:15:13.840 to the peak and then back become shorter in nature 0:15:13.840 --> 0:15:16.280 because the markets start to discount a very quick and 0:15:16.400 --> 0:15:20.320 rapids central bank response. Yeah, I was. I was speaking 0:15:20.320 --> 0:15:23.320 with Steen Jakobson over at Central Saxo Bank earlier today 0:15:23.320 --> 0:15:25.720 and he he basically said that he said central banks 0:15:25.720 --> 0:15:27.840 are so far behind the curve on inflation that they 0:15:27.880 --> 0:15:29.920 are going to have to act more quickly. The cycle 0:15:30.120 --> 0:15:32.120 hiking cycle is going to be shorter, and it actually 0:15:32.200 --> 0:15:35.520 might result in them having to loosen policy again earlier 0:15:35.560 --> 0:15:38.840 because of a kind of overreaction. What's your reaction to that. 0:15:40.320 --> 0:15:44.160 I mean, look, I think central banks are always behind markets. 0:15:44.240 --> 0:15:46.680 You're seeing that today, right, It's the central banks that 0:15:46.720 --> 0:15:48.520 are catching up to what the market has done in 0:15:48.600 --> 0:15:51.760 terms of pricing, at least in the US. UM So, 0:15:52.240 --> 0:15:55.520 I think I think that's probably spot on. Central banks 0:15:55.520 --> 0:15:57.760 are going to respond. They're they're trying to respond on 0:15:57.760 --> 0:15:59.600 a number of fronts. I mean, Powell has a very 0:15:59.640 --> 0:16:03.600 difficult cult message to walk ahead of himself this week. Right, 0:16:03.840 --> 0:16:06.480 he can't be too benign on inflation, otherwise you're gonna 0:16:06.480 --> 0:16:10.560 have the bottom market vigilanty sort of pushing that narrative. 0:16:10.880 --> 0:16:14.320 At the same time, Um, the market has undergone quite 0:16:14.320 --> 0:16:18.560 a significant front end repricing. You cannot you don't want 0:16:18.560 --> 0:16:20.840 to see a situation where the market start to kind 0:16:20.840 --> 0:16:24.000 of go crazy on that front, and and Powell endorses it. 0:16:24.080 --> 0:16:25.880 So I think all of these central bankers are kind 0:16:25.880 --> 0:16:29.520 of in for a difficult a difficult messaging over the 0:16:29.560 --> 0:16:33.240 next couple of years, really, as this inflation narrative is, 0:16:33.560 --> 0:16:36.040 in our view not quite as transitorious people have made 0:16:36.040 --> 0:16:38.080 it out to be. And that's probably a more structural 0:16:38.240 --> 0:16:41.880 trend rather than a very short term one. Lasa, just quickly, 0:16:41.920 --> 0:16:44.440 there must be some weakness somewhere that you're just nibbling 0:16:44.440 --> 0:16:47.200 at thinking about buying. I'm looking at Italian tends right now, 0:16:47.400 --> 0:16:51.040 up ten eleven basis points over in Italy too. This 0:16:51.080 --> 0:16:52.840 is a world, whether it's a struggle to get yield, 0:16:52.840 --> 0:16:56.080 a world where central banks will have some limitations on 0:16:56.120 --> 0:16:58.720 how far they can push the policy. Right, there's one 0:16:58.600 --> 0:17:00.280 seven in Italy, get it down to you, sit out 0:17:00.320 --> 0:17:02.760 and wait for more. What is it, Lisa, We're not 0:17:02.880 --> 0:17:04.840 quite there yet on Italy. I know you love to 0:17:04.880 --> 0:17:07.680 ask me about that one, UM, but I will say 0:17:07.680 --> 0:17:09.879 that emerging markets are starting to open up as an 0:17:09.920 --> 0:17:12.960 opportunity for us. I mean, we have seen pretty dramatic 0:17:13.000 --> 0:17:15.600 underperformance in some of the e M names UM, and 0:17:15.640 --> 0:17:18.000 there are in our view there are some opportunities there. 0:17:18.160 --> 0:17:20.159 We'd like to get a little bit of stability and 0:17:20.240 --> 0:17:22.640 the dollar UM to give us a bit more confidence 0:17:22.680 --> 0:17:25.480 in taking some of that trade. But certainly there are 0:17:25.560 --> 0:17:30.000 emerging market issuers that have underperformed and those that are 0:17:30.000 --> 0:17:32.800 are geared to the US economic recovery. We're a bit 0:17:32.800 --> 0:17:35.600 more favorable on those UM. We are starting to take 0:17:35.640 --> 0:17:39.280 advantage of some of the opportunities. They're interesting. Come on 0:17:39.280 --> 0:17:40.560 when you bind a little bit more and we can 0:17:40.600 --> 0:17:42.920 talk more about at LESA thank you at Lisa Homebias 0:17:42.920 --> 0:17:51.760 Shrouders takes us immediately to the China conversation. It's all 0:17:51.800 --> 0:17:54.920 about one thing. This wait for the Federal Reserve, give 0:17:54.960 --> 0:17:57.440 us your right guidance. Joining us now is Andrew Holland Horst, 0:17:57.520 --> 0:18:02.040 Chief US Economists at City global market. Now, Mr Holland Host, 0:18:02.119 --> 0:18:05.120 you had some forecast out of the standard this yef 0:18:05.200 --> 0:18:07.360 for right hikes from the FETE to stop next year 0:18:07.400 --> 0:18:11.040 in December. As you've indicated, people thought you were whole 0:18:11.080 --> 0:18:15.160 kish and now accusing you of being a dove. That's right, Yeah, 0:18:15.160 --> 0:18:17.159 that's definitely been the evolution. When we came into the 0:18:17.240 --> 0:18:20.199 year with that forecast, people actually asked us, did you 0:18:20.240 --> 0:18:24.320 put the wrong year behind December? December three should have 0:18:24.320 --> 0:18:27.480 been December four, but no, it was two. And we're 0:18:27.520 --> 0:18:29.800 still in December twenty two, even as we see the 0:18:29.800 --> 0:18:31.879 market is starting to move ahead of us here. So 0:18:32.160 --> 0:18:34.439 this is the ultimate win for a strategist, right. This 0:18:34.560 --> 0:18:37.400 means that you are early and potentially late, but probably 0:18:37.840 --> 0:18:41.160 dead on what gave you conviction before and what gives 0:18:41.160 --> 0:18:43.680 you conviction now that they're not going to hike more 0:18:44.000 --> 0:18:46.960 than just once next year. You know, I don't know 0:18:47.000 --> 0:18:49.440 if conviction is really the word that I can use, 0:18:49.640 --> 0:18:52.240 but the single thing that we were looking at was 0:18:52.760 --> 0:18:55.200 the rapid recovery and demand and what that would mean 0:18:55.280 --> 0:18:57.760 for inflation. And really it's the inflation story that matters. 0:18:57.760 --> 0:18:59.320 And that's why I say it's hard to say conviction 0:18:59.359 --> 0:19:04.080 because inflation has been a difficult variable for any macro 0:19:04.119 --> 0:19:06.760 economists to get right, for any policymaker to get right. 0:19:06.800 --> 0:19:08.879 But when we came into the year looking at the numbers, 0:19:08.880 --> 0:19:10.560 it looked like that strong demand was going to be 0:19:10.640 --> 0:19:13.640 there that could drive some stronger inflation. I think that's 0:19:13.640 --> 0:19:15.760 what we're seeing coming through in the data now, and 0:19:15.760 --> 0:19:18.120 when we see the market moving these rate hikes earlier, 0:19:18.400 --> 0:19:20.359 when we see some calls that are thinking about the 0:19:20.359 --> 0:19:23.760 FED hiking earlier, I think it's really about that inflation story. 0:19:23.800 --> 0:19:26.200 What we're seeing in shelter prices, what we're seeing in services. 0:19:26.200 --> 0:19:28.479 We know it's there in goods. The question is does 0:19:28.520 --> 0:19:31.040 it broad in now, does it become more persistent, does 0:19:31.080 --> 0:19:32.760 it stay with us? And does that cause it fed 0:19:32.800 --> 0:19:35.600 the hike. Let's look past Wednesday to Friday to the 0:19:35.600 --> 0:19:38.040 payrolls report that we're going to get. If we get 0:19:38.520 --> 0:19:42.200 a low surprise and negative surprise downside surprise, what does 0:19:42.240 --> 0:19:44.960 that mean in terms of tightness for this labor market. 0:19:46.400 --> 0:19:48.959 It's so interesting because we were so focused on the 0:19:48.960 --> 0:19:52.399 headline jobs number because the Fed told us substantial further 0:19:52.480 --> 0:19:54.440 progress in the labor market. That's what we needed to 0:19:54.480 --> 0:19:56.919