Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. We're gonna pause
Speaker 1: and usually a slot that we have at eight thirty
Speaker 1: one Wall Street time on economics and look at the
Speaker 1: reality of asset manager. When we do this with Oliver Beta,
Speaker 1: he's the chief executive officer of Alian's. He's been on
Speaker 1: a tour of duty for a good number of years
Speaker 1: to see their success. All John and I want to
Speaker 1: know is you have the football sponsorship of the soccer team,
Speaker 1: the football team from Munich as well. We see the
Speaker 1: sponsorship of sports. What's the value to Alian's payoff of
Speaker 1: Byron Munich. Oh, it's a hugely positive because that's the
Speaker 1: best brand in sports and at least in our country,
Speaker 1: and we've been associated with it for many, many years.
Speaker 1: I'm very very proud of it. Now you have a
Speaker 1: bond bear market. Some would say your best brand and
Speaker 1: acquisition was the gross Hill area in combine of Pacific
Speaker 1: Investment Management Company years ago. Give us an update on
Speaker 1: bond asset management in the view forward given this great
Speaker 1: bond bear market. Well, the current circumstances are tough, but
Speaker 1: it's very good to be with the best company in
Speaker 1: these environments. Right, so we see a flight quality over time.
Speaker 1: People are watching. But if because we have a very
Speaker 1: very long duration business model, we look forward, we believe
Speaker 1: it's going to be fantastic for Pinko and us over
Speaker 1: the next few years as the interst rate stabilized, because
Speaker 1: the money will come back into bonds, and think about
Speaker 1: accumulation at the interest rates that we have people off.
Speaker 1: You don't run in a simple MPV model and say
Speaker 1: what does it mean if you're reinvested at five percent
Speaker 1: or four point seven five rather than zero. You buried
Speaker 1: an important line there. It was in there, but it
Speaker 1: was buried. When interest rates stabilize, they're not stable. What
Speaker 1: did you make of what happened in the guilt market
Speaker 1: in the last couple of weeks. What are the lessons
Speaker 1: you've learned from that? The first one is um if
Speaker 1: you have a political idea that it's not anchored in economics,
Speaker 1: it's very dangerous, particularly if you're not the world reserve
Speaker 1: currency like the US dollar. We have learned that number
Speaker 1: one brexit now will start to pay the price and
Speaker 1: you see them. And the second thing is that markets
Speaker 1: have become to dominate again. We're coming out of fifteen
Speaker 1: years of quantitative using, no price for risk, nothing, no
Speaker 1: fiscal discipline, no monetary discipline, and suddenly that's back and
Speaker 1: people have to get used to the fact that the
Speaker 1: laws of physics hold again even for governments. Well, and
Speaker 1: we were talking about how this gives room and gives rise,
Speaker 1: and once again to bond vigilantes, are you the bond
Speaker 1: vigilantes do you actually actively go through some of the
Speaker 1: policies and say not going to buy this company, not
Speaker 1: going to buy this nation because of what they're doing.
Speaker 1: I wouldn't be thinking about negative selection, because that's what
Speaker 1: not what we should talk about. But we're looking at
Speaker 1: countries and companies that properly manage. Now, if you have
Speaker 1: a dual, definitely think about that. Three years ago we
Speaker 1: had three times the financial stimulus in the United Kingdom
Speaker 1: that we saw a few days ago. Nothing happened in
Speaker 1: the market, right, nothing happened everybody was sleeping and then
Speaker 1: suddenly people wake up to the fact that what has
Speaker 1: been done is really a disaster, and suddenly the prices
Speaker 1: are coming. Why is that? Because of inflation? People have
Speaker 1: started to reprice assets fundamentally, not just bonds. And by
Speaker 1: the way, we are not even at the midpoint of
Speaker 1: repricing of assets. We've just seen the liquid assets reprice.
Speaker 1: The rest will come. Now. When you said actively selecting
Speaker 1: specific companies, specific nations, that speaks to the active selection
Speaker 1: that so many different fund managers talk about now as
Speaker 1: really rating supreme. Where does that leave passive management. It's
Speaker 1: really interesting. So it is different between equity markets. If
Speaker 1: you have large cab equity, you can invest in them
Speaker 1: very effectively through index. If you're in the bond market,
Speaker 1: you and you don't know where things are going to
Speaker 1: better be with the people that know what is happening
Speaker 1: and can differentiate. It's a great proofpoint. So I hope
Speaker 1: that all our colleagues are proving themselves now to repeat
Speaker 1: something you said moments ago, the liquid markets have reprice,
Speaker 1: their liquid markets haven't yet. What's that going to look like.
Speaker 1: We spent a long time talking about putting back the
Speaker 1: veil and some of the carnage that might take place
Speaker 1: because of ten years worth of zero interest rates. And
Speaker 1: what we get told is that in public markets and
Speaker 1: credit balance sheets are strong, the resilience is there, the
Speaker 1: maturity walls is way out on the horizon, not coming soon.
Speaker 1: What's going to happen in private markets? I'm not a
Speaker 1: great investor, so let's just we're not trying to do.
Speaker 1: To be is very hard, but it's very hard to
Speaker 1: see it, and therefore it doesn't mean it doesn't exist.
Speaker 1: So people have to face a lot of scrutiny now
Speaker 1: on how the funding is. So watch out more not
Speaker 1: just leverage, but liquidity, I think, and we saw that
Speaker 1: in the in the guilt market. People do underestimate liquidity
Speaker 1: uh traps, and that's something that we need to look for.
Speaker 1: And you see that in private equity when people look
Speaker 1: where our earning is really coming from. Our there trading
Speaker 1: amongst each other's are their true exits? What are the
Speaker 1: funding structure? So it's going to go through real estate
Speaker 1: private equity just slow slow motion, but it's gonna come.
Speaker 1: The gravity is back, the risk free rate is back
Speaker 1: as well. Talk about conservative money, pension money, forget about
Speaker 1: all d I and the gyrations in London, just normal
Speaker 1: institutional money. What's the shock going to be is the
Speaker 1: risk free rate returns. So the key thing is really
Speaker 1: and that's what we also have to do, think about resilience. Right.
Speaker 1: The point is the shops were the shocks will be
Speaker 1: harder than people anticipate. The diversification is the thing that
Speaker 1: is never there when you needed the most. So people
Speaker 1: really need to look at their models and saying, you know,
Speaker 1: how come the world completely missed out on inflation. I
Speaker 1: mean when you think about the fact that in November
Speaker 1: of last year we've started to buy inflation link bonds
Speaker 1: lot a lot of people are still saying yeah, but
Speaker 1: in the middle of this was all central banks, even
Speaker 1: some of our best economy. So the question is why
Speaker 1: is that happening? And the first answer is I don't
Speaker 1: know why. But what I know is we have to
Speaker 1: de risk. And so how do you dus you just
Speaker 1: bring in duration? Do you have to change your actual
Speaker 1: how system? Yeah? The adult money is basically yes, if
Speaker 1: we were, you know, completely in an endowment, you would
Speaker 1: really selectively take risk. In this environment, we can't with
Speaker 1: a double A rating and one of the few places
Speaker 1: in the world and even give the impression that we
Speaker 1: don't have our Telerisk under control. Given that you're based
Speaker 1: in Europe right now, how concerned are you about the
Speaker 1: prospect that the pain that you're experiencing now both my
Speaker 1: business and an investment perspective, is not just going to
Speaker 1: be this winter. It's also going to be next winter.
Speaker 1: It's also going to be potentially for years to come
Speaker 1: if there is not some sort of sustainable energy plan
Speaker 1: put into effect. So I have to be a real list,
Speaker 1: but I'm also a bone optimius. Otherwise I think I
Speaker 1: couldn't do the job right. So the first thing is,
Speaker 1: I think particularly the key thing is that people I
Speaker 1: think have been over selling Germany, if I may say so.
Speaker 1: So I'll give you an example. We have had demand
Speaker 1: contraction on gas fifteen percent already this year. Now much
Speaker 1: for example, it's been only two so we will have
Speaker 1: most likely enough gas to come through the winter. People
Speaker 1: do not factor that in now. The second question is
Speaker 1: what will be the implication for industry to reprice its
Speaker 1: products and its production supply change to a higher energy price.
Speaker 1: And that's happening. I really believe in in our engineering
Speaker 1: capability is very comparable to Western Switzerland, where everybody said,
Speaker 1: when you know the Swiss frank was floated, that all
Speaker 1: the manufacturing companies would die. No, no, we invest in innovation,
Speaker 1: will be very good. The key thing is, however, we
Speaker 1: need for Europe to realize now one important thing. Germany
Speaker 1: needs to really focus on reinventing its business model. It's
Speaker 1: over with cheap energy from usha Um. Successful Um exports
Speaker 1: to China and America providing all the security. I mean
Speaker 1: that three formula is ending and that would require a
Speaker 1: lot of energy on the German people to fix it small,
Speaker 1: which means we have less attention and tolerance for dolling
Speaker 1: out money to other people. This has been really really informatives.
Speaker 1: Are just wonderful to have you in with this, but
Speaker 1: this isn't why we had you in. You people finance
Speaker 1: baron Munich, the soccer team in Munich. Are you guys
Speaker 1: gonna steal Harry Kane from Tottenham? I mean that's the
Speaker 1: only reason we had you. Are you going to bankroll
Speaker 1: this football team in Munich to steal the jewel of
Speaker 1: the United Kingdom? Even if I knew the answer, I
Speaker 1: wouldn't be able to tell you. I mean, this is
Speaker 1: this is that's the only reason we had the I
Speaker 1: called up Quantis and I said, get the guy from
Speaker 1: Alliance Alian's in. I said, get him in because these
Speaker 1: are the people they're gonna steal. Harry Kane are we're
Speaker 1: going to do the show from from bay Munich. I
Speaker 1: think October. So I have to say I do like
Speaker 1: the dormant too, though. You know, every forced German is
Speaker 1: our clients, so we have a lot of a lot
Speaker 1: of fancies. It's going to be very difficult. And then
Speaker 1: you Ventus and you ventors. How the stadiums do you
Speaker 1: have quite a few, but if you're twelve twelve across
Speaker 1: Europe or worldwide, no worldwide. For example in sub Paolo,
Speaker 1: the stadiums also branded Alliance has been a great investment. Amazing. Yeah,
Speaker 1: it's really and people pay a lot of attention, and
Speaker 1: you know football, that's something that politics can do. This
Speaker 1: as we unite people, we bring people together, we make
Speaker 1: them enjoy their lives regardless by the way, most often
Speaker 1: on both sides, you know, whether winners and losers. And
Speaker 1: therefore it's it's great, it's bipartisan. You realize if Harry
Speaker 1: Kane goes from Tottenham to Munich. It's un American's been
Speaker 1: trying to have some greatest sport in the world. Just
Speaker 1: the greatest sport in the world, nothing close to it.
Speaker 1: It just is truly the most brilliant. I don't recover
Speaker 1: regardless whether it's Juventus or Bayan, would would be the
Speaker 1: lated dost. You'll thank you, We will take that under.
Speaker 1: But can you too have a discussion in the World Cup?
Speaker 1: First discussion in the World Cup and Bloomberg surveillance like
Speaker 1: you want to throw that in Germany and Kata? What
Speaker 1: are you looking for, sir? Do you think you can
Speaker 1: make it happen when a world come another one? I
Speaker 1: don't know. It's a lot of a lot about passion,
Speaker 1: but it's also about you know, the right moment and
Speaker 1: to have the energy when it really matters. Certainly crossing
Speaker 1: my fingers. But the most important thing is to have
Speaker 1: a great, great, great tournament. Can you tell faifor we
Speaker 1: never want to do this Winter World Cup ever again?
Speaker 1: I think it's a travesty, I really do. We're taking
Speaker 1: a month off in the middle of the season to
Speaker 1: that's it. It's been air conditioning in the football stadiums. Yeah,
Speaker 1: interesting choice, but it is there, and so I think
Speaker 1: we're always great at criticizing things. I think critic think
Speaker 1: that's what this shows about. Thank you for right now
Speaker 1: and this is a joy with the chaotic weeks that
Speaker 1: we've had in a Monday into another week of chaos.
Speaker 1: Bob be aild to joins us. He's head of America's
Speaker 1: Fundamental fixed income at black Rock, with decades of experience. Bob,
Speaker 1: I want to cut to the chase in the great
Speaker 1: bond bear market. What is the level of pain on level?
Speaker 1: I was talking to Axel Weber in Washington and he said,
Speaker 1: forget about the numbers the spreads. Look at level. Bond
Speaker 1: prices are down. What does it signal? Well, Tom, I
Speaker 1: think that's a great point about spreads versus all in levels.
Speaker 1: So the cost you know, debt spreads for example, I G.
Speaker 1: And high yield spreads aren't at recessionary wides that we've
Speaker 1: seen historically, but the all in cost of capital has
Speaker 1: gone up substantially, right and and and in the investment
Speaker 1: grade space, you're talking about an index that's now a
Speaker 1: six percent yield. And in high yield space you've got
Speaker 1: companies that were funding a year a year and a
Speaker 1: half ago at four to that now can't get funded
Speaker 1: inside of ten and and may not be able to
Speaker 1: fund at all. So the cost of capital has gone
Speaker 1: up substantially. And I understand that there are a lot
Speaker 1: of really good savvy liability management UH strategies that firms
Speaker 1: employed and households employed by refinancing their mortgages two years ago,
Speaker 1: and that there's got they's got these very attractive liabilities
Speaker 1: on the balance sheet. But the incremental spend right, the
Speaker 1: next thing that one might invest in, whether it's residential
Speaker 1: or or commercial, is going to be substantially more expensive
Speaker 1: from a debt capital standpoint. Let's talk about the great
Speaker 1: Dan Fuss at loomas sales and he would say, that's great,
Speaker 1: you've got the free lunch of a high nominal yield,
Speaker 1: But do you buy that nominal yield into reduced credit
Speaker 1: quality across all of fixed income assets? Is there credit
Speaker 1: clouds out there that make this not an easy decision? Yeah?
Speaker 1: I think so. I mean, look, you guys were just
Speaker 1: talking about this. The FED is on a mission. This
Speaker 1: is a very intentional and aggressive tightening of domestic monetary
Speaker 1: conditions in an effort to slow growth, slow demands specifically
Speaker 1: loosen up the labor market a little bit um to
Speaker 1: get inflation back to target. So so definitionally there there
Speaker 1: are going to be some things that probably break along
Speaker 1: the way. It will be really really hard to do
Speaker 1: it without some of that happening. And and but but
Speaker 1: I also think at the same time, here's one of
Speaker 1: the interesting things. Volatility is so high in the rates
Speaker 1: market right now that it's really hard to look, you know,
Speaker 1: three months forward or six months forward. It's it's hard
Speaker 1: to look more than three to six days forward because
Speaker 1: the vall is so high. Right But I think if
Speaker 1: you can take a step back and think about the
Speaker 1: valuation of high quality fixed income assets today, you can
Speaker 1: build a pretty reasonable portfolio treasuries, agency mortgages, investment grade
Speaker 1: corporates where you can go in and do the name
Speaker 1: selection so that you can avoid some of the more
Speaker 1: stressed or potentially forward distressed names. You can build a
Speaker 1: high quality portfolio intermediate maturity in the five to six
Speaker 1: percent range, including treasuries. So you've got to flight the
Speaker 1: quality asset in there in in a shock scenario. That's
Speaker 1: we haven't been able to do that in nearly two
Speaker 1: decades it's it's things are starting to look reasonable. I
Speaker 1: get it that we're probably not at the bottom and
Speaker 1: there's more stress to come, but things are starting to
Speaker 1: look pretty reasonable if you can take a longer time horizon.
Speaker 1: That that is the key point, if you could take
Speaker 1: it a longer time horizon. And I wonder about some
Speaker 1: of these mutual funds or open ended funds where they
Speaker 1: could potentially be withdrawals, especially when it comes to investment
Speaker 1: grade credit. It makes sense perhaps on a thesis basis,
Speaker 1: but on a real basis, investment grade is underperformed dramatically
Speaker 1: because of the rate story as well as this forced
Speaker 1: selling that we've seen international investors that sell what you can,
Speaker 1: not what you want to. How much you concerned about
Speaker 1: that creating some sort of fissure in the short term
Speaker 1: as you see things like what happened in the UK
Speaker 1: for some sellingently. So that is exactly the right thing
Speaker 1: to be focused on. We've seen this movie before, right
Speaker 1: when when you tighten financial conditions this aggressively, this abruptly,
Speaker 1: things are going to break And where do they break first?
Speaker 1: Almost always it's in the levered strategy, the levered business model.
Speaker 1: You know, I would look at I would argue in
Speaker 1: the UK that yes, the push toward you know, a
Speaker 1: much more aggressive fiscal policy kicked off more pressure in
Speaker 1: an already deteriorating market, But the proximate cause of the
Speaker 1: real stress in the long end volatility was the levered
Speaker 1: ld I business model and the increased margin calls. Right So,
Speaker 1: if you're if you're levered, if you have to borrow
Speaker 1: to sustain your strategy, and importantly, if you have to
Speaker 1: pay higher margin calls margin costs, excuse me to to
Speaker 1: to to to maintain your leverage, you're in a really
Speaker 1: difficult spot right now. So those business models, you know,
Speaker 1: kind of should be stressed, and I wouldn't be surprised
Speaker 1: if we don't see some more of that before this
Speaker 1: is over over the next three to six months. Thank you, sir.
Speaker 1: As that of black Crop, Lori Cavasina joins us now
Speaker 1: they had a FEU secuity strategy at IBBC Capital Markets, Laurie,
Speaker 1: it wasn't about three Q earnings, it was about gun
Speaker 1: it's a four Q and beyond what are we learning
Speaker 1: so far? So look, I think if so far in
Speaker 1: reporting season, John, I've been a little bit disappointed that
Speaker 1: it sounded a lot like the last couple of reporting season.
Speaker 1: So we're hearing things like the tone around labors improving
Speaker 1: a little bit, not seeing any major crack chat in
Speaker 1: terms of either the consumer or demand UM. But companies
Speaker 1: are battening down the hatches and getting ready for chopp
Speaker 1: of your time. So at least there's that UM. But
Speaker 1: I think that in terms of you know, if you
Speaker 1: wanted the earnings band aid ripped off, and that's what
Speaker 1: a lot of investors have been telling me so far,
Speaker 1: what I'm hearing is, I don't know if we're going
Speaker 1: to get it this reporting season. I think we may
Speaker 1: have to wait till, you know, February March to get that. Laura,
Speaker 1: you and Ben Laylor on the same page. Ben Laylor
Speaker 1: starts off by saying, the first ever so slight glance
Speaker 1: here at earnings are less bad. Start and then you
Speaker 1: talk about moving to high quality. Define what high quality
Speaker 1: is is a comfortable place to be. So high quality
Speaker 1: is a factor discussion that I have with a lot
Speaker 1: of investors. If you talk to your average portfolio manager,
Speaker 1: small cap or large cap, especially in the small cap space,
Speaker 1: odds are they've done some sort of back test that
Speaker 1: tells them that things like positive earnings and high are
Speaker 1: O we outperform over time, So come invest with me,
Speaker 1: because that's the portfolio I run. And so what we're
Speaker 1: starting to see is that after a summer in which
Speaker 1: the low quality stats so negative earners, highly shorted names,
Speaker 1: negative r OWE, low r O WE, those names were
Speaker 1: actually working pretty well coming off the June low on
Speaker 1: a relative basis, And what we're seeing now is that
Speaker 1: more of the high quality versions, positive earners, the high
Speaker 1: r OE, the lowly shorted names are starting to work, which, frankly, Tom,
Speaker 1: is a silver lining heading into the end of the
Speaker 1: year because that actually bodes well for active manager perpartment.
Speaker 1: To me, Laurie, this goes to the risk free rate
Speaker 1: returning here. And maybe it has to do with big
Speaker 1: combinations like Kroger and Albertson. But all of a sudden
Speaker 1: zombies have to report. Is what we're really talking about
Speaker 1: here is not high quality, but that all of a sudden,
Speaker 1: it's zombie November. I think that's a fair way to
Speaker 1: look at it, Tom, But you know, I would also
Speaker 1: say it depends on your definition of zombie a little bit. Um.
Speaker 1: I think that in general, when you're going into sort
Speaker 1: of a lower growth uncertain time. Investors do cling to
Speaker 1: those higher quality names, and typically those are the ones
Speaker 1: that do come through manage through challenging situations a little
Speaker 1: bit better. So I think that you know, investors are
Speaker 1: sort of circling, circling, not closing the ranks um and
Speaker 1: really just clinging to what's worked over time. And there's
Speaker 1: a lot of PM say to me, you're not gonna
Speaker 1: get beaten up by sticking to your philosophy where you're
Speaker 1: going to get beaten up as if you underperform when
Speaker 1: you deviated from your philosophy. Lorie, how much could you
Speaker 1: see the SMP getting to that thirty two level, which
Speaker 1: is the base case for Mike Wilson over at Morgan Stanley,
Speaker 1: even with some of the constructive field that you have
Speaker 1: in select names and select industries. So I think it's
Speaker 1: a great question, Lisa, and and I understand why that
Speaker 1: number is important. You know, when I talked to my
Speaker 1: friends in the Technical Strategy Commune it they'll often say
Speaker 1: thirty hundred or kind of the next big battle grounds.
Speaker 1: And I see that as well. From a fundamental perspective,
Speaker 1: thirty five hundred is your median recession draw down draw
Speaker 1: down from peak. But if the market starts to think
Speaker 1: that the FETE is not going to be able to
Speaker 1: pull that off, and that we're going to price in
Speaker 1: something more challenging from an economic perspective, an average draw
Speaker 1: down was about thirty two percent from uh in a
Speaker 1: recession going back to the thirties, and that takes to
Speaker 1: that thirty two d mark. And if you go back
Speaker 1: to the pandemically, so we lost thirty fo peak to trough,
Speaker 1: and so I think that thirty two hundred mark. If
Speaker 1: thirty five doesn't hold, I think thirty two hundred is
Speaker 1: the next natural place to go. But it's hard for
Speaker 1: me to imagine we go too much lower than that,
Speaker 1: just because in the face of the pandemic, I mean, frankly,
Speaker 1: when life was on the line and there was just
Speaker 1: a massive uncertainty ahead of investors. That's only as bad
Speaker 1: as the market fell. So I think thirty two hundred
Speaker 1: is a good place to look if thirty five dred
Speaker 1: doesn't hold. But thirty five is proving to be a
Speaker 1: major battleground here for good reason. Glor How how hard
Speaker 1: is it to convince some of your clients to be
Speaker 1: optimistic to be constructive when there is this high likelihood
Speaker 1: of that psychological level on the index. I think that
Speaker 1: what's interesting is I talked to people about it from
Speaker 1: a positioning perspective, what is the next big thing that
Speaker 1: you need to do? And I show them my charts
Speaker 1: basically showing that defensives are at peak valuation relative to
Speaker 1: both cyclicals and secular growth. And I tell them, you know,
Speaker 1: I've been traveling around the country pretty NonStop since June,
Speaker 1: and I tell them, you know, everyone I talked to
Speaker 1: has plenty of defense. They've cleaned up their portfolios, they
Speaker 1: own as much staples or utilities as they're ever gonna own.
Speaker 1: The next thing to do is to go on offense.
Speaker 1: And that really resonates with a lot of people because
Speaker 1: they know from that experience over the summer, going back
Speaker 1: to the conversation with Tom about quality, when the low
Speaker 1: quality stuff started to move, that is not where they
Speaker 1: were positioned, and that's where they started to see some
Speaker 1: underperformance in their portfolio. So I think people understand that
Speaker 1: if you're a longer term investor, eventually the tide will turn.
Speaker 1: And frankly, there's just not a lot people need to
Speaker 1: do anymore. On the defensive side. They're already there the
Speaker 1: cat you have with your Lorrie Cavasina there on the
Speaker 1: license in this market from our b say the research
Speaker 1: piece of the weekend and foreign exchange Everyhing Rovari wrote it.
Speaker 1: He is global head of Effects Analysis. City Groper thrilled
Speaker 1: he could join us after his attendance in Washington. Everym.
Speaker 1: What I noticed in Washington is little focus on central
Speaker 1: banks and maximum focus on dollar liquidity among the flushed
Speaker 1: countries and the ones more challenged. How critical is a
Speaker 1: dollar shortage worldwide? Well, I would say the dollar was
Speaker 1: the talk of the town in in Washington, but the
Speaker 1: message that we came away with was actually a little
Speaker 1: bit different. We did come away with thinking the FED
Speaker 1: is still the central focus, and when it comes to
Speaker 1: the dollar, there's a lot of concern, but really the
Speaker 1: sense that isn't very much that could be done about
Speaker 1: it unless the FED was going to wear off its
Speaker 1: unique focus on inflation at present, And when it comes
Speaker 1: to foreign exchange markets as much of a concern as
Speaker 1: they are right now, they seem to be operating in
Speaker 1: a relatively orderly way. So yes, effect funding markets have
Speaker 1: started to show some signs of concern, But we're not
Speaker 1: nearly at a point where policy interventions are likely to
Speaker 1: be in I've got to go to the immediate everyone.
Speaker 1: What does what does the Bank of Japan, the Ministry
Speaker 1: of Finance do in Japan with their unique experience, What
Speaker 1: is the reality of a second interventions efficacy after a
Speaker 1: failed first intervention? Well, we expect more of the same.
Speaker 1: So we think that second intervention is is We're going
Speaker 1: to come likely very soon, copy as early as today.
Speaker 1: And we saw the rhetoric ramp up late on Friday,
Speaker 1: and at the same time we got Governor Coroda reassert
Speaker 1: that Japan was different, that more monetary easing was required
Speaker 1: to bring inflation back up. So we see no reason
Speaker 1: for the efficacy to change in the Japanese case. And
Speaker 1: therefore we do think that just as in the first case,
Speaker 1: dollar and come down once you see those signs of intervention,
Speaker 1: and then they will creep right back up as US
Speaker 1: rates go back up. Well ibriem, some people say it's
Speaker 1: sort of failed intervention the first time around. Their goal
Speaker 1: was simply to slow the pace of the depreciation of
Speaker 1: the end versus the dollar. If that's the case, where
Speaker 1: is the new red line in the sand, this idea
Speaker 1: of when they will get really concerned and have to
Speaker 1: rethink the whole host of issues. Is it one fifty?
Speaker 1: Is it when sixty? Is it one eight? So I
Speaker 1: am sympathy with with that statement. So we think there
Speaker 1: is no clearly defined redline, but if there is one,
Speaker 1: it's probably defined by the politics or when inflation starts
Speaker 1: to credibly be above about two percent and that is
Speaker 1: certainly north of one sixty on that letter criterion, and
Speaker 1: we don't think the politics will probably become acute before then,
Speaker 1: so it's quite a long way away from here. And
Speaker 1: until then, the premiers that Kishida in New York said
Speaker 1: himself that he was dolly and moving thirty handles in
Speaker 1: the year, two handles in a day. That was raising
Speaker 1: his concern. So it was about the pace of appreciation
Speaker 1: in dollar n not at the level. So we don't
Speaker 1: see a line in the sand anywhere close to the
Speaker 1: current land. So perhaps as the future crisis the current crisis,
Speaker 1: or perhaps it's been somewhat averted as in the United
Speaker 1: Kingdom where we're going to be hearing from Jeremyhind a
Speaker 1: couple of times throughout the day trying to stave off
Speaker 1: some of the pain that we saw over the past
Speaker 1: few weeks of holatility. How much credence do you give
Speaker 1: to this idea of foreign investors coming back to the
Speaker 1: UK at a time when the bond vigilantes, if they want,
Speaker 1: that means a sooner and potentially deeper recession. So we
Speaker 1: think the bar for foreign investors to return to the
Speaker 1: UK en mass is very high. And at the heart
Speaker 1: of that, I would quote what we think are probably
Speaker 1: the two most relevant statistics and eight percent current account deficit,
Speaker 1: which I think reflects some of the broader challenges the
Speaker 1: UK is facing, and real interest rates that are still
Speaker 1: just about negative and certainly one to two percent below
Speaker 1: those in the US. So I think that kind of
Speaker 1: environment the bar for foreign investors to see major appeal
Speaker 1: in the UK is incredibly high. There was something in
Speaker 1: him to talk to Rock and Roger and a boost School,
Speaker 1: the former leader of the Indian Central Bank, about the
Speaker 1: flow realities of emerging markets. Is it like the nineties
Speaker 1: for emerging markets right now? Well, I would say there
Speaker 1: is a there's a lot of optimism, maybe a touch
Speaker 1: of complacency when it comes to the large emerging markets
Speaker 1: at present and if you take foreign exchange as an example,
Speaker 1: the appreciation of the dollar has been much more extensive
Speaker 1: against the developed markets than it's been against emerging markets.
Speaker 1: So at present we see more concerned about frontier markets
Speaker 1: a lot less about the emerging markets. But one of
Speaker 1: one of the issues I'm concerned with is that that
Speaker 1: could change that maybe there is a bit too much
Speaker 1: complacency that the large emerging markets are in a better
Speaker 1: position on on the balance sheet side economically to some degree,
Speaker 1: even even for inflation. So we're concerned. But the base
Speaker 1: case is that maybe we have to watch some of
Speaker 1: the developed markets, like the UK bit more closely. Then
Speaker 1: there's all this macro babble, Ibraham, where's the trade I
Speaker 1: can make money on in the queue four? I mean,
Speaker 1: forget about the I m F sixty feet stuff. Where
Speaker 1: gonna make some money in the next ninety days. So
Speaker 1: we we think it's more of the same, So that
Speaker 1: that pattern of higher global interest rates, lower equity prices,
Speaker 1: and a stronger dollar we think will continue into your end.
Speaker 1: And there are these balantee pressures that make that even
Speaker 1: more likely. So in foreign exchange we see further dollar upsiding,
Speaker 1: and in particular the risk epeign currencies, so, for example,
Speaker 1: continue to be short the Australian dollar against the U
Speaker 1: S dollar. We think has promised into the end of
Speaker 1: the year. Just to be clear, to elaborate a little
Speaker 1: bit on that point, is the faith in a stronger
Speaker 1: dollar from here predicated on this idea that the Federal
Speaker 1: Reserve is going to raise rates close to five percent
Speaker 1: by early next year, or is it predicated on the
Speaker 1: idea that the economic data coming in will continue to
Speaker 1: be strong and that is the reason for these rates,
Speaker 1: except really it's the resilience of the economy rather than
Speaker 1: the rateags themselves. The two are related, but I would
Speaker 1: put more weight on on the FED and and those rateags,
Speaker 1: and that is because they do reflect to some degree
Speaker 1: the economic performans of the US. But the central driver
Speaker 1: of dollar strength has been the decline in asset prices
Speaker 1: around the world, and for that FED interest rates in
Speaker 1: US real rates are the primary driver. So both matter,
Speaker 1: But it's more about the FED right now than about us.
Speaker 1: From Abraham, always wonderful to hear from me, Sir Abraham
Speaker 1: Rothbary that f citsy not a rare occurreds is a
Speaker 1: discussion with Leland Miller of China Beige Book to illuminate
Speaker 1: on China. He is just outstanding, the co founder and
Speaker 1: CEO of the hugely prestigious effort Leland, I gotta go
Speaker 1: to the immediate news. The great George magnus over In
Speaker 1: today says he's never seen anything, even in pestilence and
Speaker 1: conflict like a postponing of China g d P. This
Speaker 1: is your wheelhouse. What was your response when they postponed
Speaker 1: Q three g d P. Well, look, I think the
Speaker 1: most obvious, uh, the reason is that they are very
Speaker 1: busy on the Party Congress. You know, you saw all
Speaker 1: those uh pictures of people in wrapped attention to jails
Speaker 1: and statistic bureaus just sitting there very very silently and
Speaker 1: without moving watching she speech. They probably just can't can't
Speaker 1: work because they're too busy listening. But now that I
Speaker 1: don't think there's anything terribly nefarious behind it. You know,
Speaker 1: we we see what the data are week. They've been
Speaker 1: admitting the data week. I think this is probably making
Speaker 1: sure that there's not just another bomb dropping off in
Speaker 1: the middle of a very choreographed event. Forget about the
Speaker 1: choreographed event. What happens in the un choreographed two thousand
Speaker 1: twenty three to the new dynastic g Well, look, it'll
Speaker 1: take a few months for for she to formally get
Speaker 1: the three positions, and so the question then we'll be,
Speaker 1: you know, where does he pivot if at all? Um,
Speaker 1: everyone wants to see a pivot on COVID zero. Uh,
Speaker 1: it's there's been no indication that that pivot's coming. You know,
Speaker 1: you could see how they would do it the rollout
Speaker 1: in three, but you know, it's a it's a it's
Speaker 1: not just announcing COVID zero is over. It is saying, uh,
Speaker 1: you know, you know, here's the policy. Here's harder to
Speaker 1: do the roll out. Here's hard going to deal with
Speaker 1: the fallout. And and and it's not at all clear
Speaker 1: that this isn't a you know, you know, many months
Speaker 1: maybe year long transition. So is she canna pivot on economy?
Speaker 1: Probably not. Is he gonna pivot on COVID zero at
Speaker 1: some point, yes, but it probably not soon. Weren't there
Speaker 1: some small pivots thloughly Land within this speech basically around
Speaker 1: basically having a more business friendly environment both for national
Speaker 1: and international companies. Yeah, look, I mean it's hard at
Speaker 1: this point to see what's talking what's not. I mean,
Speaker 1: if you if you remember how sited investors got all
Speaker 1: throughout two and you know, some party official hood cut
Speaker 1: you on would come out and say, look, we're doing
Speaker 1: this differently, or we're easing this crackdown, We're gonna provide
Speaker 1: this stimulus, and nothing meaningful ever happened, so we'll have
Speaker 1: to wait and see. I think it would behoove sheet
Speaker 1: to to have some sort of outreach, particularly with the
Speaker 1: U S. Hina attentions to you know, to the Europeans.
Speaker 1: I think you're gonna see some of that going forward.
Speaker 1: But in terms of making China more appealing to investors,
Speaker 1: you have to have regulatory certainty, you have to have
Speaker 1: some sort of idea of growth. You have to end
Speaker 1: COVID zero. You know there there's there's a lot of obstacles.
Speaker 1: It's not just saying we're gonna be We're gonna be friendly. Yeah,
Speaker 1: the idea of growth is key here. Economist predict that
Speaker 1: Chinese growth will slow to three point three percent so
Speaker 1: this year. A lot of people say that that's probably
Speaker 1: a high ball estimate. I'm assuming that you probably think so,
Speaker 1: given that you've talked about a two handle. The official
Speaker 1: target is five and a half percent. The gap between
Speaker 1: those would be the biggest since they started setting GDB
Speaker 1: targets in the early nine How do you think that
Speaker 1: this is going to be a problem for this government
Speaker 1: where they start to inject more stimulus and start to
Speaker 1: support the housing market versus a reality of the new
Speaker 1: China in a new regime with a bigger middle class. Yeah,
Speaker 1: I don't think it's a problem at all for them,
Speaker 1: because I think once they descended into lockdowns in the spring,
Speaker 1: the five and a half handle was not only gone,
Speaker 1: but even the fake let's pretend that we got somewhere
Speaker 1: near five was gone. So look, they can blame this
Speaker 1: on COVID zero. Yeah, it's their fault, but they you know,
Speaker 1: there's a reason for not hitting these numbers, and and
Speaker 1: and the the larger. The larger thing is that they've
Speaker 1: changed the priority set. So yes, they still talk about
Speaker 1: high levels of growth for some reason, although the narratives changing,
Speaker 1: particularly in the last couple of weeks. But but that
Speaker 1: is that's not what they're focused on. It's not what
Speaker 1: they're worried about. They're gonna try to deliver enough growth,
Speaker 1: so they don't have a political problem. But the reality
Speaker 1: is they're trying to do some structural changes that are
Speaker 1: very painful, and they're not going to be worried about
Speaker 1: the high hitting the high levels of growth anymore. Leland
Speaker 1: gets you out, not to two thousand five, but just
Speaker 1: all of a sudden gets you out to a new
Speaker 1: week ran Memby strategy. What's the level of ran Memby
Speaker 1: where that unravels? Do you have in your head a
Speaker 1: seven point xx level that this becomes difficult? I don't
Speaker 1: because it's a it's a dollar story, not a not
Speaker 1: a yuan story. Um. You know, if this word, if
Speaker 1: this were uh sort of a reman By exploding because
Speaker 1: of the weak Chinese economy while the dollars stays pad
Speaker 1: against other currencies, you have a different dynamic. People would
Speaker 1: read into it differently. Right now everything is weakening against
Speaker 1: the dollars, so right, the Chinese goal is to maintain
Speaker 1: relative stability, relative strength as much as possible against against
Speaker 1: the rest of the world, but but making sure that
Speaker 1: things don't break on the way up. So so they
Speaker 1: want stability. There isn't a number. It all depends on
Speaker 1: how strong the dollar gets over the next you know,
Speaker 1: six to twelve months. Leyland, Thank you, sir. Always important
Speaker 1: stuff with in the mid It's great, isn't it In
Speaker 1: the middle of that, the China Facebook, It's a national
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