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Speaker 1: Welcome to the Bloomberg's Surveillance Podcast. I'm Tom Keane. Along

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Speaker 1: with Jonathan Ferrell and Lisa Brownwitz. Daily we bring you

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Speaker 1: insight from the best and economics, finance, investment, and international relations.

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Speaker 1: Find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot com,

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Speaker 1: and of course on the Bloomberg Terminal. Let's get to

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Speaker 1: Russo Strick right now, the portfolio manager for the black

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Speaker 1: Rock Global Adication Fund. Russell, I'm trying to work out

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Speaker 1: when Rick and Bock get on the phone some Monday morning,

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Speaker 1: the call goes around and they say, back up the truck,

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Speaker 1: let's buy these bonds. Must the way close to that

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Speaker 1: moment yet? Oh, good morning, Johnathan. Look, I think actually

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Speaker 1: you're probably closer to buying bonds and stocks, if that's

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Speaker 1: any consolation. You know, we've had this enormous move and

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Speaker 1: you know, one of the things we're talking about nominally

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Speaker 1: yields all the time. Let's talk about real yields for

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Speaker 1: a moment. You look at the tenure is recently as

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Speaker 1: March continue, you really yield based on the tips market

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Speaker 1: was negative one percent. Check this morning you're about one.

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Speaker 1: That's the highest is two thousand all eleven. Now, granted

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Speaker 1: we've got a very different inflation environment back then, but

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Speaker 1: what is interesting is that for the first time in years,

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Speaker 1: you can actually build some carry some yield into portfolio

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Speaker 1: with bombs, particularly with the short end of the curve.

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Speaker 1: So like this is a hard market, bonds are not

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Speaker 1: acting as a hedge, but you are starting to get

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Speaker 1: two levels where the income is becoming a little bit

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Speaker 1: more interesting. So we're gonna hear from a whole host

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Speaker 1: of FED speakers stay for us. Do you expect them

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Speaker 1: to push back on some of the hawki is rhetoric

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Speaker 1: and some of the response in markets because of the

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Speaker 1: strong dollar and because of what that does internationally. I'm

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Speaker 1: not sure. Uh. You know, the reality is the FED

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Speaker 1: was pretty resolute in the last few communications. I think

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Speaker 1: there was no doubt left in anyone's mind after last

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Speaker 1: week after Jackson Hole, and you know, we know what

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Speaker 1: the FED is looking at. They're looking with the labor market,

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Speaker 1: they're looking and user demand. And while we have seen

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Speaker 1: some softening and some deceleration realized inflation, it's just not obvious,

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Speaker 1: given you know how intense they're being about this, that

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Speaker 1: there are enough signals all clear signals that they're going

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Speaker 1: to give the market a break in the near term.

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Speaker 1: I completely agree the dollars a challenge. In addition to

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Speaker 1: this surgeon real rates, we're seeing the dollar adding to

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Speaker 1: the tightening financial conditions. And if you want to know

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Speaker 1: why risky aster down as much as they are, you

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Speaker 1: know you don't have to look much further than the Fed.

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Speaker 1: In this very rapid shift in financial conditions US. What's

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Speaker 1: the trigger where you go all in, where you say

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Speaker 1: basically said you said, we're close to buying bonds, closer

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Speaker 1: to buying bonds. What's the trigger to let's go well,

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Speaker 1: I guess the thing is there never is that triggers.

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Speaker 1: I mean, this is about a continuous change reven in

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Speaker 1: discreet So we were much more underweight bonds a year

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Speaker 1: ago than we are today. We're still underweight bonds related

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Speaker 1: to our benchmark. We've closed a lot of that gap

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Speaker 1: in terms of you know, what are some of the

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Speaker 1: milestones In terms of the short end, I think you're

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Speaker 1: already getting a pretty good yield. If you think about

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Speaker 1: the long end, you know, one thing to consider typically

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Speaker 1: longing yields and PETE just about where the terminal FED

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Speaker 1: funds rate is we know from last week the terminal

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Speaker 1: FED funds rate. We're probably not there yet, but certainly

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Speaker 1: as we get to four percent or over that, as

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Speaker 1: we get closer, then maybe you think about closing some

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Speaker 1: more of that underway, closing some more of that gap.

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Speaker 1: A bit of a mere helper from Chris Hopey and

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Speaker 1: the team over at whilst Franco just publishing just moments ago.

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Speaker 1: Here's the quote for our audience. Some belief that we

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Speaker 1: would not retest the twenty two low until the first

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Speaker 1: half of twenty three was wrong. Despite retesting the lows,

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Speaker 1: we feel the market bottom has not been established and

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Speaker 1: stocks will make newer lows, lower lows in three As

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Speaker 1: EPs estimates come down at the Fed titans into recession RUSS.

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Speaker 1: That's the next leg for a lot of people, the

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Speaker 1: next shoe to drop. Do you think we've seen enough

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Speaker 1: of that earnings expectations come in. Probably not. If you

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Speaker 1: look at where earnings estimates are for next year, you're

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Speaker 1: still getting you know, modest growth. Is that consistent with

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Speaker 1: a slowdown near me? You know? Look, I I have

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Speaker 1: some sympathy for the nomation that the next leg for

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Speaker 1: equities is probably more about Ernie's estimates and about revisions.

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Speaker 1: Then it's about the multiple. The multiples already come downalog

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Speaker 1: now Brandon's inflation stays sticky. There's room for more multiple compression,

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Speaker 1: but I would be more worried about the earning side.

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Speaker 1: One of the things we are doing the portfolio. We're

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Speaker 1: very underweight equities, but the equities we do have, we're

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Speaker 1: emphasizing Arnie's consistency, margin, consistency, profitability, because these are the

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Speaker 1: characteristics they think gonna be challenged in twenty three with

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Speaker 1: the economy slow and Russ thank you, So I'm gonna

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Speaker 1: kick off the weight with you, Russ coast of blank

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Speaker 1: Row joining us, Kleen Pickering, Singer out of a Barren Berbreck.

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Speaker 1: What is it like to be paid in sterling and

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Speaker 1: to enjoy a cup of coffee in Manhattan next morning,

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Speaker 1: I'm paying even more for bad coffee. It's great, let's

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Speaker 1: get to it. Your insight here on trust anomics. I

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Speaker 1: saw Martin well, if I saw the economists, the great

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Speaker 1: work at Bloomberg. Your immediate insight on this experiment of

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Speaker 1: the Prime minister. I think if the government had more credibility,

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Speaker 1: markets would be more sanguine about it. We have a

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Speaker 1: government here that lacks economic policy credibility since the Brexit,

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Speaker 1: but markets don't like Brexit. They've been very nervous over

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Speaker 1: the last few years about what's going on in the

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Speaker 1: Northern Irish border. And it means actually the detail at

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Speaker 1: the moment isn't what is driving these markets. It's just

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Speaker 1: the view that the UK is going to borrow more.

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Speaker 1: If I really lean back, though, I find it hard

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Speaker 1: to label this a panic. If I look at the

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Speaker 1: moves in interest rate expectations, If I look at the

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Speaker 1: moves and inflation expectations, what I see is that captures

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Speaker 1: all of the move in guilts. So we don't have

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Speaker 1: an outsized move here, which means me, you know, does

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Speaker 1: the bank givingly intervene if you can't see this as

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Speaker 1: a genuine panic. I don't think they do. I think

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Speaker 1: they stand by and see how markets play out. They

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Speaker 1: stand by and see how the politics plays out as well.

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Speaker 1: Do they risk there? Let's remember this is a young experiments, right,

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Speaker 1: Do they rest their independence? No? I think the Bank

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Speaker 1: of England doesn't risk it's independence. It reacts just to

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Speaker 1: the inflation risks. The problem with trust anomics is we

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Speaker 1: only have let's say one two parts of three parts.

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Speaker 1: So far. We have the tax cuts. They're substantial, but

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Speaker 1: if you look at the detail, actually they don't go

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Speaker 1: as far as the headlines might suggest. Not hiking corporation

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Speaker 1: taxes is not going to be stimulating demand much. The

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Speaker 1: regulatory stuff looks good, but markets just prefer good old

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Speaker 1: fashioned Keynesian demand side shifts in economic policy. Supply side

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Speaker 1: policy is complicated, it will take time. The third element

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Speaker 1: is what happens with government spending. I would not be

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Speaker 1: surprised if the government actually sees this reaction and says

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Speaker 1: we need to come out something soon to shore up

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Speaker 1: confidence that we're not going to be borrowing excessively. So

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Speaker 1: expect I think some policies to cut government spending, to

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Speaker 1: downsize both sides of the state, the tax side and

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Speaker 1: the spending side. Okay, I'm from what your say. And

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Speaker 1: then you think the government blanks before this bank having

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Speaker 1: that does um? I think that would make much more sense.

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Speaker 1: I think if the Bank of England steps here, steps

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Speaker 1: in here aggressively and hikes rates against this huge supply

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Speaker 1: side chuck. Remember the context of all of this is

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Speaker 1: that markets are incredibly worried that the West is basically

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Speaker 1: heading into a recession. I think we're already in a

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Speaker 1: recession in the UK and you are at US is

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Speaker 1: probably going to trail a little, and then the Bank

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Speaker 1: of England and the UK Treasury are well a the

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Speaker 1: Bank of englis behind the curve be the Treasury is

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Speaker 1: about to borrow all this cash to cut taxes. This

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Speaker 1: is an experiment. The UK is now sticking its neck out.

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Speaker 1: The Bank of England doesn't want to double down on

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Speaker 1: the recession pressure by hiking interest rates in order to

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Speaker 1: get these inflation expectations down. It would be better actually

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Speaker 1: if the government came out and said, well, actually, if

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Speaker 1: you look at our tax cuts, they're spread over the

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Speaker 1: next few months and we're going to cut government spending too.

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Speaker 1: So I think it's the borrowing side that markets are

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Speaker 1: afraid of. Um, it's not necessarily the fact that the

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Speaker 1: Bank of England is going to have to help the

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Speaker 1: government bring down inflation. It's it's a complicated issue and

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Speaker 1: picking this is not easy with a lot of people.

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Speaker 1: I think they're uncomfortable with consensus, particularly the last camp years,

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Speaker 1: and overwhelmingly the consensus is this is the wrong thing

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Speaker 1: to do. Is there a small part of you that

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Speaker 1: thinks that perhaps this risk might be a risk we're taking. Well,

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Speaker 1: I'm actually, as it goes, a bit more sanguine about

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Speaker 1: all of this. I think the tax cuts by and

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Speaker 1: large makes sense. I think the regulatory policy by and

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Speaker 1: large makes sense. There's some weird stuff in there. I

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Speaker 1: don't think we should have a growth target in the

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Speaker 1: UK two and a half percents just going to be

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Speaker 1: virtually impossible to hit while you've got Brexit uncertainty hanging

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Speaker 1: over the economy. Um. But again, I think it just

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Speaker 1: comes down to a view that the UK lacks credibility

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Speaker 1: in markets now since the Brexit vote, since the Bank

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Speaker 1: of England let inflation get so high, and so to

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Speaker 1: be non consensus in your economic policy is just asking

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Speaker 1: for a negative reaction. I think again, if we had

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Speaker 1: a more credible government, markets will look more carefully at

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Speaker 1: this and see actually cutting taxes into a recession for

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Speaker 1: an economy that can largely follow the take the additional

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Speaker 1: borrowing with some decent deregulation policy may actually lift trend

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Speaker 1: growth over the next few years. That should be taken

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Speaker 1: positive way. It's just markets aren't thinking clearly at the

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Speaker 1: moment they're not pricing on fundamentals and the UK is

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Speaker 1: basically asked for a negative reaction with this policy and

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Speaker 1: it's got it. Callum John recently requested that we have

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Speaker 1: a meteorologist to add on a regular basis to give

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Speaker 1: us a sense of what this winter looks like, and

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Speaker 1: perhaps that would be more accurate than a lot of prognostications.

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Speaker 1: How much does the UK budget makes sense with a

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Speaker 1: warm winter? Good good question. Um. The real policy to

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Speaker 1: focus on is the energy price cap. If that was

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Speaker 1: the only thing that the UK had announced, I think

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Speaker 1: the markets would be fairly happy with the fiscal move. Essentially,

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Speaker 1: what the government has said is your energy prices aren't

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Speaker 1: going to go up for the next two years further

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Speaker 1: than they already have. That's probably a sensible policy. We

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Speaker 1: could be looking at eyewatering energy bills if you didn't

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Speaker 1: cap energy prices. Somehow, I think it's probably a bit

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Speaker 1: too broad base. You could have just focused on the

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Speaker 1: households that really needed it. But that policy will basically

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Speaker 1: could at least three percentage points off peak inflation, will

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Speaker 1: probably get to about ten and a half and top out,

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Speaker 1: and it will probably mean that inflation rolls over with

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Speaker 1: confidence next year once these energy price base effects, we're

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Speaker 1: not gonna be worried about a renewed spike this time

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Speaker 1: next year. That's a fairly good policy and essentially would

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Speaker 1: be an act of God where energy prices would be

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Speaker 1: if you didn't introduce that policy, And so it makes

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Speaker 1: sense warm winter or cold winter, this is probably the

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Speaker 1: right thing to do, okay, But on the flip side,

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Speaker 1: there's a concern that if you don't damp in demand,

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Speaker 1: you're just going to have the same problem all over again.

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Speaker 1: You're going to create a spiral of spending just basically

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Speaker 1: that's fueling the pickup in demand. That offsets the whole

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Speaker 1: point of the program. What would you like to see

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Speaker 1: from that demand driven type of policy that could potentially

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Speaker 1: bring this more into balance. Demand is certainly a part

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Speaker 1: of it in the UK, no doubt. This is not

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Speaker 1: continental Europe where virtually all of the inflation can be

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Speaker 1: explained by supply. But what you don't have is a

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Speaker 1: US style situation where demand is racing well ahead of

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Speaker 1: its pre um COVID trend. What you have is a

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Speaker 1: supply problem and robust demand in the UK. So the

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Speaker 1: question is what would inflation be if you didn't have

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Speaker 1: this supply problem. Inflation expectations before this recent fiscal intervention

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Speaker 1: might provide a good guide. You've been looking at about

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Speaker 1: two and a half two point six percent on a

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Speaker 1: five year break even. That's high inflation, but it's not

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Speaker 1: incredible inflation. It probably justifies the bank crazing interest rates

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Speaker 1: a little north of three percent. So that's the thing

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Speaker 1: to focus on here. My study is the current account

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Speaker 1: balances matter in this and it's something the media doesn't

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Speaker 1: talk about a lot. We love to talk about sterling

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Speaker 1: to four decimal points in that. I've got up the

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Speaker 1: United Kingdom current account balance folks as a percentage g

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Speaker 1: DP crisis seventy four nine nine, two thousand sixteen, and

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Speaker 1: there are pointing stochastic it gets fixed. Are we close

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Speaker 1: to where it gets fixed? No? I don't think so.

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Speaker 1: The UK is not borrowing in a foreign currency, it's

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Speaker 1: mainly borrowing in sterling. John made a great point earlier

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Speaker 1: if you actually look at structural demand for UM UK guilts,

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Speaker 1: most of its domestic about is international um and most

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Speaker 1: of that is covered by a decent investment position in

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Speaker 1: the UK. What you have here is the UK importing

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Speaker 1: much more energy with a weaker currency. Um if you

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Speaker 1: look through this, If you look through this recession, Sterling

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Speaker 1: is likely to be stronger, energy prices will be lowest.

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Speaker 1: I don't see a structural current account problem that would

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Speaker 1: normally drive a currency crisis. Interesting account. Thank you as

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Speaker 1: always enjoyed that mad com in New York. So the

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Speaker 1: breaks a good act on Benzer. Say they come back

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Speaker 1: from Canam. There was kind of pick during and foreign exchange. Now,

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Speaker 1: Jordan Rochester, I'm gonna get one question in here on

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Speaker 1: the globe, John, I know wants to focus on Sterling.

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Speaker 1: He is with no mura, Jordan, I'm looking at the

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Speaker 1: intervention experiment of the Japanese. They've made back on a

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Speaker 1: Fibonacci retracement about seventy percent of the intervention value. What

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Speaker 1: happens to yen? What happens to those institutions when the

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Speaker 1: yen weakens back to where it was before they intervened.

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Speaker 1: It puts the pressure on the politicians tom to do

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Speaker 1: something about rates rather than focusing on the EFEX intervention.

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Speaker 1: The main problem is for Japan they are one of

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Speaker 1: the few central banks to still have low interest rates

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Speaker 1: and to be conducting quantitative easing purchases until they stop

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Speaker 1: those quantitative purchases. This then intervention is unlikely to have

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Speaker 1: a material impact on moving the end to a stronger place.

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Speaker 1: What it has done is taken the steam out of

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Speaker 1: the long dolly and trade. It does make us question,

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Speaker 1: you know, what's the upside and being long dolly and

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Speaker 1: when you're fighting a central bank with one of the

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Speaker 1: largest efex reserves in the world. But at the moment,

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Speaker 1: the first order was the Japanese most likely used their

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Speaker 1: cash balances, so we had very little impact on the

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Speaker 1: US rates market. But if it carries on, it will

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Speaker 1: probably lead to higher U S shields, which will make

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Speaker 1: this EFFICS intervention even more difficult to lead to a

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Speaker 1: stronger end. And John, that's how everyone's different. As you

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Speaker 1: mentioned earlier. Where Japan has ample cash, maybe the United

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Speaker 1: Kingdom does not. The other issue is outs on with

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Speaker 1: Japan a very domestic bond market, and Jordan could speak

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Speaker 1: to this much better than I can. So a lot

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Speaker 1: of that is priced than end the debt arm, a

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Speaker 1: lot of it is held at home. The thing I'd

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Speaker 1: say about the UK, and this is an important difference too,

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Speaker 1: is that yes, a lot of them might be hold abroad.

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Speaker 1: Thirty percent of the guilt market had abroad, but Jordan

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Speaker 1: a lot of it is sterling denominated anyway, so they

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Speaker 1: don't have that foreign currency problem. So Jordan. I think

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Speaker 1: the issue we're all trying to grapple with in the

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Speaker 1: UK right now is this just a normal required adjustment

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Speaker 1: needed to attract capital to finance a big fiscal package

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Speaker 1: through a weaker currency in high yields, or is it

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Speaker 1: something bigger than that, something worse that we have the

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Speaker 1: ingredients required to have that self fulfilling downward spiral. I

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Speaker 1: think it's something worse. Unfortunately, I don't want it to

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Speaker 1: be worse. Is the country earned my money and I'm

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Speaker 1: long sterling naturally from my my salary. But we just

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Speaker 1: put out a piece just before this I came on

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Speaker 1: live on air. We've now revised lower our sterling view.

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Speaker 1: We were looking for one oh six by year rent.

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Speaker 1: As you know, we've gone through that rapidly quicker than

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Speaker 1: I expected as well, so now we've adjusted our view.

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Speaker 1: It seems like the market is focusing more on the

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Speaker 1: terms of trade deficit that the UK has and it

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Speaker 1: comes to the current account. But there's a terms of

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Speaker 1: trade story with high energy prices and UK imports skyrocketing.

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Speaker 1: So now we're looking for ninety seven fifty cable by

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Speaker 1: year end, so that is unfortunately below parity, and I've

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Speaker 1: been kind of toying whether to make that call sooner.

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Speaker 1: And what the reason I didn't was. I thought markets

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Speaker 1: would be concerned about the banking and raising rates and

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Speaker 1: that would support the sterling. But now we've switched to

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Speaker 1: an emerging market style crisis where it's become very clear

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Speaker 1: that even with rising interest rates in the UK, it's

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Speaker 1: becoming less attractive to investors as this crisis goes on.

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Speaker 1: And therefore I think we break through parity and cable

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Speaker 1: before Christmas, probably by the end of November, and we

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Speaker 1: get down to nine five so the end of March

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Speaker 1: next year. That's if nothing is done about this supply

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Speaker 1: side crisis in Europe and if we have high energy

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Speaker 1: price to continue. I could be wrong, though, yeah, I

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Speaker 1: could be wrong if three things happen. The first one

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Speaker 1: is if we have the banking raids rates now we're

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Speaker 1: expecting them to step in with some sort of warning

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Speaker 1: in the market. Ed Conway from Sky was suggesting that

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Speaker 1: might happen today. If they don't raise rates. There's about

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Speaker 1: at basis points priced this week, So if they don't

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Speaker 1: raise rates this week, Sterling will probably take another hit.

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Speaker 1: But the main thing is on the government side. It's

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Speaker 1: not really the Bank of England that's that's being challenged here.

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Speaker 1: It's because we're not having a fiscal policy with fiscal

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Speaker 1: rules tevering market expectations to a sort of sustainable fiscal spend,

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Speaker 1: and because of the government doubling down over the weekends

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Speaker 1: saying there's more tax cuts to come. It's why we

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Speaker 1: expect more of these sort of moves to come to well.

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Speaker 1: So Jordan's let's pick up on some of those points.

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Speaker 1: Traders now pricing in after two basis points of rate

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Speaker 1: hikes by the Bank of England by November. There is

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Speaker 1: a question what do yields have to do to get

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Speaker 1: to that ninet fifty level without complete capital flight by

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Speaker 1: foreign investors, which is the fear that a lot of

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Speaker 1: people have. We'll look right now at five year guilt,

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Speaker 1: five year yields on guilt going vertical basically at four

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Speaker 1: point six percent right now, up half a percentage point

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Speaker 1: every day. It seems like where do we stop here

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Speaker 1: given your outlook, well, we're looking for a terminal rate

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Speaker 1: in the UK around four and a half percent. The

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Speaker 1: market is doing pretty well getting close to pricing that.

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Speaker 1: That's below by a hundred basis points where we think

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Speaker 1: the Federal Reserve will get to, so five point five

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Speaker 1: for their terminal rate in this cycle. We've just we've

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Speaker 1: just literally revised up that bank giving and call. We

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Speaker 1: were looking for fifty basis points fifty basis points at

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Speaker 1: the next two meetings. We're now looking for that to

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Speaker 1: be in clips of seventy five. So it's quite clear

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Speaker 1: the bankaving and do need to step up. Now, what

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Speaker 1: will stop the problem is not the Bank of England.

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Speaker 1: So the reason I mentioned this is because we have

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Speaker 1: an emerging market. There are two ways to stop a

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Speaker 1: currency crisis from getting bad to worse. The first one

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Speaker 1: is aggressive rate hikes to kind of stamp out speculative

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Speaker 1: trading and also to make the risk return on assets

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Speaker 1: more attractive for foreign investors. But the main thing boils

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Speaker 1: down to where them is in the first place, the

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Speaker 1: fiscal side. So usually in the e M space, you'd say,

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Speaker 1: let's have some fiscal austerity, please guys, reverse those tax

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Speaker 1: cuts that will shore up the conference of investors. We're

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Speaker 1: not getting that in the UK right now. Jordan's as

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Speaker 1: you said, there is some talk about the potential for

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Speaker 1: a Bank of England news conference in the near future.

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Speaker 1: What can they say, what would they potentially do in

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Speaker 1: in such a statement, Well, they need to talk about

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Speaker 1: financial stability, price stability, foreign exchange stability. If the market

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Speaker 1: gets into it, into a framework where the banking was

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Speaker 1: reacting to FX moves, any move we have then met

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Speaker 1: with a rate hike, then perhaps it stems the fall

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Speaker 1: in the currency of the pace of the fall, But

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Speaker 1: the main point from me is that the pace will

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Speaker 1: probably slow down. We're quite used to having flash crashes

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Speaker 1: and stertling unfortunately since Brexit, so it's not the first

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Speaker 1: time I've woken up seeing on my phone the pounds

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Speaker 1: tumbled four to five percent. Usually this leads to a

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Speaker 1: sort of mean reversion the pan recovers. But as I said,

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Speaker 1: this time around is a fundamental regime change that's taken

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Speaker 1: place in the UK. In nineteen the market was trying

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Speaker 1: to price in what Brexit could look like. Now we

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Speaker 1: know what it looks like, and we've got this energy

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Speaker 1: crisis pushing the tarrade deficit and the current account deficit

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Speaker 1: to historical wide current account deficit of g d P.

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Speaker 1: This is the definition of a country that should be

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Speaker 1: experiencing these moves in the FX markets. So until that changes,

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Speaker 1: until energy markets, if we see prices collapse even further

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Speaker 1: than maybe I can change my tune. But on the

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Speaker 1: Bank of England's side, if they do a hundred basis points,

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Speaker 1: let's say this week, and if they signal that they're

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Speaker 1: ready to do more so give the idea of another

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Speaker 1: into meeting, great hight. That could help slow the pace

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Speaker 1: in the move. But the point for me is it

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Speaker 1: won't stop it. Which Jordan, if they did that, they're

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Speaker 1: responding to the move in the market, or they responded

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Speaker 1: to fiscal policy, and what on earth does that look

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Speaker 1: like going into the weekend and a Conservative Party conference. Indeed,

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Speaker 1: the idea of the statement from the Chancellor was that

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Speaker 1: he has been speed king to the bank aving and

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Speaker 1: I think twice a week was what he said. So

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Speaker 1: it looked it would be quite embarrassing for the bank

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Speaker 1: thing because we assume that they have been given a

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Speaker 1: heads up as to what was in the fiscal package.

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Speaker 1: But when they made their decision last week, and like

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Speaker 1: I said, it's this is a market reaction function to

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Speaker 1: the fiscal side. If we look at last week with

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Speaker 1: the Bank of Indian have A, we had a hawkish

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Speaker 1: fifty basis points, we had some members of voting for

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Speaker 1: seventy five, and the market took it pretty well in

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Speaker 1: terms of f X at least, and of guilts moved

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Speaker 1: quite a bit. But in the f X space, the

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Speaker 1: pound held its ground waiting for that budget. But it

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Speaker 1: kind of boils down to a point that my colleague

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Speaker 1: and the change is making. What we learned from the

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Speaker 1: budget last week is fiscal rules are out the window

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Speaker 1: until December when we get an idea of what they

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Speaker 1: will be in December. And that uncertainty has made the

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Speaker 1: fiscal side more untevered. And that's what markets hate the most.

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Speaker 1: It's that uncertainty as to what the UK look like

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Speaker 1: a few months time. Jordan's going to hear from you,

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Speaker 1: Jordan Rochester. There of Nomora, let's get to an important

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Speaker 1: conversation with Stephen Whiting, chief investment strategist, chief economist at

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Speaker 1: City Global Wealth Investments with terrific experience, and I've said

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Speaker 1: many times parsing corporate profits corporate America into what we

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Speaker 1: expect to see in our economy. Stephen Whiting, how have

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Speaker 1: you adjusted to the new rates of change in foreign exchange,

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Speaker 1: in bonds, in the real interest rate? How have you

432
00:21:29,880 --> 00:21:33,720
Speaker 1: adjusted in the last ten days? While you're either in

433
00:21:33,760 --> 00:21:37,320
Speaker 1: a defensive position or you're looking at a lot of

434
00:21:37,320 --> 00:21:40,600
Speaker 1: a media painting portfolios that you can't turn the clock

435
00:21:40,640 --> 00:21:44,640
Speaker 1: back on. Um, you know, we have been adding US treasuries,

436
00:21:44,800 --> 00:21:50,440
Speaker 1: not because the yield is some incredibly high, beautiful inflation

437
00:21:50,480 --> 00:21:54,400
Speaker 1: adjusted level, but it's a defensive asset that's probably going

438
00:21:54,440 --> 00:21:57,399
Speaker 1: to work for a period when the economy turns, and

439
00:21:57,480 --> 00:22:01,440
Speaker 1: unfortunately we are heading for an American commune. I think

440
00:22:01,440 --> 00:22:05,439
Speaker 1: we'll do that quite well below the rates uh that

441
00:22:05,600 --> 00:22:10,160
Speaker 1: the Fed is signaling for Ninety days ago, we were

442
00:22:10,240 --> 00:22:13,320
Speaker 1: angsting about corporate earnings, and I think they did better

443
00:22:13,359 --> 00:22:16,560
Speaker 1: than good. Someone out there has October fourteen is a

444
00:22:16,640 --> 00:22:19,000
Speaker 1: launch date here. We're not a little bit awaye from there.

445
00:22:19,040 --> 00:22:21,639
Speaker 1: But let's go to your expertise. There are we going

446
00:22:21,720 --> 00:22:26,160
Speaker 1: to be shocked again at a resilient corporate America? Well

447
00:22:26,160 --> 00:22:30,119
Speaker 1: we probably shouldn't be. The look back at the third

448
00:22:30,320 --> 00:22:34,520
Speaker 1: quarter is still going to be a period of rising production,

449
00:22:35,119 --> 00:22:39,760
Speaker 1: rising inventories. That's a problem from next year's profits, not

450
00:22:39,840 --> 00:22:43,880
Speaker 1: for this year's profits. What's happening financial markets and financial

451
00:22:43,880 --> 00:22:46,879
Speaker 1: profits is telling us where we are headed for the

452
00:22:46,920 --> 00:22:49,879
Speaker 1: coming year. UM, we would expect about a ten percent

453
00:22:49,960 --> 00:22:53,639
Speaker 1: decline in US EPs next year, again at a level

454
00:22:53,720 --> 00:22:57,040
Speaker 1: will short of that they had funds rate that they

455
00:22:57,080 --> 00:23:00,720
Speaker 1: are guiding us to again trying macimal is the impact

456
00:23:00,920 --> 00:23:04,320
Speaker 1: to sort of pull all open with UM from the

457
00:23:04,320 --> 00:23:06,960
Speaker 1: notion that they might pivot. But if you take a

458
00:23:06,960 --> 00:23:10,400
Speaker 1: look at what the Fed is forecasting the unemployment rate

459
00:23:10,440 --> 00:23:13,719
Speaker 1: to be about a half point within this range for

460
00:23:13,760 --> 00:23:16,600
Speaker 1: the next three years, we think it's very unlikely. We

461
00:23:16,640 --> 00:23:18,720
Speaker 1: think that the US has headed closer to two million

462
00:23:18,800 --> 00:23:22,439
Speaker 1: job losses net over the course of next year. Uh.

463
00:23:22,520 --> 00:23:26,399
Speaker 1: And that's again if the federal reserve will ultimately not

464
00:23:26,520 --> 00:23:30,520
Speaker 1: continue to tighten through those job losses, but we wouldn't

465
00:23:30,560 --> 00:23:34,359
Speaker 1: expect them this year. Right the legs between where the

466
00:23:34,440 --> 00:23:38,600
Speaker 1: economy again started to absorb these rate hikes in peria

467
00:23:38,800 --> 00:23:41,720
Speaker 1: tray am, it's not going to be immediate. We would

468
00:23:41,760 --> 00:23:43,960
Speaker 1: expect nonfarm perils to grow through the rest of the

469
00:23:44,040 --> 00:23:47,160
Speaker 1: year and just one really simple example. If you think

470
00:23:47,160 --> 00:23:49,879
Speaker 1: about what's happened to the monthly piece of new home sales,

471
00:23:50,000 --> 00:23:56,640
Speaker 1: it's down, but home completion spending, construction spending, or even

472
00:23:56,680 --> 00:23:59,920
Speaker 1: employment in residential construction, it's down two percent in the

473
00:24:01,200 --> 00:24:04,080
Speaker 1: new cycle high for employment. That's because we were building

474
00:24:04,119 --> 00:24:06,800
Speaker 1: houses and starting these projects a year ago at a

475
00:24:06,840 --> 00:24:09,880
Speaker 1: lower interest rate level and a higher sales pace. So

476
00:24:09,960 --> 00:24:11,800
Speaker 1: these are the types of things that have to work

477
00:24:11,840 --> 00:24:14,840
Speaker 1: through the economy, But forward looking financial markets would be

478
00:24:14,840 --> 00:24:17,520
Speaker 1: focused on next year. Even where are we heading in

479
00:24:17,600 --> 00:24:20,159
Speaker 1: terms of the new normal? Are we heading toward a

480
00:24:20,240 --> 00:24:22,560
Speaker 1: rebound the likes of which we haven't seen in two

481
00:24:22,560 --> 00:24:25,240
Speaker 1: thousand and nine at some point if the FED does

482
00:24:25,280 --> 00:24:28,720
Speaker 1: shift gears, or if there is some sort of washout event,

483
00:24:28,840 --> 00:24:31,560
Speaker 1: or are we heading toward a lost decade of profits

484
00:24:31,800 --> 00:24:35,480
Speaker 1: where you get basically leadership meandering from one area to

485
00:24:35,560 --> 00:24:40,560
Speaker 1: another and not from big tech. Not. Who imagine is

486
00:24:40,600 --> 00:24:47,280
Speaker 1: that we can have a cyplical recovery in right. Unfortunately,

487
00:24:47,320 --> 00:24:51,560
Speaker 1: we've simply run a pro cyprocal monetary policy with the

488
00:24:51,600 --> 00:24:55,360
Speaker 1: help of fiscal policy makers, turning COVID into a boom right,

489
00:24:55,520 --> 00:25:00,040
Speaker 1: not having targeted limited stimulus giving a boom and and

490
00:25:00,359 --> 00:25:03,640
Speaker 1: taking it away and driving a bust um. These are

491
00:25:03,720 --> 00:25:07,639
Speaker 1: not the things that sort of drive economic growth for

492
00:25:07,800 --> 00:25:10,640
Speaker 1: a ten year period of time. Again, it's some really

493
00:25:10,720 --> 00:25:14,320
Speaker 1: rough elbows here from from policy, but it's not going

494
00:25:14,359 --> 00:25:19,680
Speaker 1: to again stop innovation. It's not going to live economic

495
00:25:19,680 --> 00:25:21,159
Speaker 1: growth in the long run. Just take a look at

496
00:25:21,200 --> 00:25:23,240
Speaker 1: two thousand and oh two. That was a period of

497
00:25:23,280 --> 00:25:27,280
Speaker 1: which the NASDAT fell, But some of the key innovations

498
00:25:27,320 --> 00:25:30,439
Speaker 1: that drove growth over the coming twenty years were literally

499
00:25:30,440 --> 00:25:34,640
Speaker 1: invented that time. Apple's iPod iOS. These are just examples

500
00:25:35,000 --> 00:25:39,560
Speaker 1: of things that the trillion dollar economic games for for

501
00:25:39,640 --> 00:25:41,800
Speaker 1: years and years to come. And I'm sure that Tom

502
00:25:41,800 --> 00:25:43,439
Speaker 1: will pick up on this, and he's been talking a

503
00:25:43,480 --> 00:25:46,879
Speaker 1: lot about this adapting, the adjusting the innovation. On the

504
00:25:46,880 --> 00:25:50,639
Speaker 1: flip side, there's also the social aspect overlaid on top

505
00:25:50,680 --> 00:25:53,960
Speaker 1: of this, especially as inflation starts to bite into the

506
00:25:54,000 --> 00:25:57,720
Speaker 1: lower and media middle income Americans and globally, and we're

507
00:25:57,720 --> 00:26:00,920
Speaker 1: seeing that in elections. We're seeing at in a lot

508
00:26:01,000 --> 00:26:03,320
Speaker 1: of the strikes and the uprisings. How do you price

509
00:26:03,400 --> 00:26:06,440
Speaker 1: in political risk at a time when it's really coming

510
00:26:06,480 --> 00:26:12,480
Speaker 1: to the forefront. Well, it's not terribly easy and usually

511
00:26:12,560 --> 00:26:15,840
Speaker 1: these types of political risks and nine out of ten

512
00:26:15,880 --> 00:26:20,199
Speaker 1: cases in the last eighty years have not been turning

513
00:26:20,200 --> 00:26:23,000
Speaker 1: points for the world economy. Um. They matter a lot

514
00:26:23,320 --> 00:26:28,480
Speaker 1: in terms of driving local regional crises, um, but they

515
00:26:28,560 --> 00:26:32,280
Speaker 1: don't really turn around the world economy. Now. Unfortunately, there

516
00:26:32,359 --> 00:26:35,959
Speaker 1: is a lot of bad news to absorb here and

517
00:26:36,040 --> 00:26:38,840
Speaker 1: markets could have seen more of this coming. Perhaps that

518
00:26:39,000 --> 00:26:44,400
Speaker 1: may overreact to this, but ultimately curing inflation at what

519
00:26:44,440 --> 00:26:47,120
Speaker 1: we expect to end up being unfortunately a good deal

520
00:26:47,119 --> 00:26:49,959
Speaker 1: of cyclical economic pain. Right, It's going to come at

521
00:26:50,000 --> 00:26:52,560
Speaker 1: the expense of the labor market, but we're not going

522
00:26:52,600 --> 00:26:56,080
Speaker 1: to have long term inflation instability. Right, That's what I

523
00:26:56,080 --> 00:26:57,760
Speaker 1: think one of the messages that we're going to see.

524
00:26:57,960 --> 00:27:00,560
Speaker 1: So we're going to end up some interesting it's peaking

525
00:27:00,600 --> 00:27:04,760
Speaker 1: at a relatively low level. Uh. And unfortunately we had

526
00:27:04,800 --> 00:27:08,200
Speaker 1: to go through a boom and bust cycle. But whether

527
00:27:08,240 --> 00:27:10,760
Speaker 1: you can feed that back to a particular political outcome

528
00:27:10,760 --> 00:27:13,400
Speaker 1: that's going to change the economy, um. All we can

529
00:27:13,400 --> 00:27:16,840
Speaker 1: do again is have some safe assets in our portfolios

530
00:27:17,000 --> 00:27:19,840
Speaker 1: in that right. But then looking at the City Group platform,

531
00:27:20,240 --> 00:27:24,040
Speaker 1: and you guys have been phenomenal with the Holland horst

532
00:27:24,200 --> 00:27:27,480
Speaker 1: On on the Fed call and all that. Stephen Whiting,

533
00:27:28,000 --> 00:27:32,480
Speaker 1: when does the United States not ignore what's going on internationally?

534
00:27:32,560 --> 00:27:35,359
Speaker 1: When is the point where it becomes like what you

535
00:27:35,440 --> 00:27:38,880
Speaker 1: and I studied in the nineties where I'm sorry international matters.

536
00:27:40,200 --> 00:27:43,560
Speaker 1: It could take some time. Unfortunately, the Federal Reserve is

537
00:27:43,640 --> 00:27:47,760
Speaker 1: focused very much on lagging economic indicators. In fact, domestic

538
00:27:47,840 --> 00:27:53,879
Speaker 1: services or services again have god, you know, a power

539
00:27:53,920 --> 00:27:56,639
Speaker 1: to them. They are a component of the index of

540
00:27:56,720 --> 00:28:00,440
Speaker 1: lagging economic indicators. And if you just focused on two

541
00:28:00,440 --> 00:28:03,320
Speaker 1: percent we need that two percent, well, we could be

542
00:28:03,359 --> 00:28:06,320
Speaker 1: deep into our recession before we see two percent on

543
00:28:06,359 --> 00:28:09,879
Speaker 1: these measures. Again. Uh, and so these effects from around

544
00:28:09,920 --> 00:28:12,000
Speaker 1: the world, we think will compound against some of the

545
00:28:12,440 --> 00:28:16,560
Speaker 1: downward pressure on the economy, downward pressure on prices. We

546
00:28:16,640 --> 00:28:20,280
Speaker 1: don't expect every CPI reading to look like August on

547
00:28:20,359 --> 00:28:23,040
Speaker 1: the core going forward, but it's gonna be a while

548
00:28:23,280 --> 00:28:26,320
Speaker 1: before you really see that in the economy. So patients

549
00:28:26,400 --> 00:28:29,439
Speaker 1: something that central banks told us to have for a while,

550
00:28:29,920 --> 00:28:31,840
Speaker 1: they've run out of it, and it would be a

551
00:28:31,880 --> 00:28:34,600
Speaker 1: good time for us to realize that. Again, the one

552
00:28:34,600 --> 00:28:36,720
Speaker 1: thing that we heard out of Chair and Power I

553
00:28:36,760 --> 00:28:39,520
Speaker 1: think was really it was a binder point at Jackson

554
00:28:39,560 --> 00:28:42,160
Speaker 1: Hole was that it's going to take some time to

555
00:28:42,240 --> 00:28:44,959
Speaker 1: get inflation lower, and if they tried to achieve very

556
00:28:45,040 --> 00:28:47,440
Speaker 1: very quickly, we're gonna end up with a much more

557
00:28:47,480 --> 00:28:50,120
Speaker 1: sit trade off, more than's necessary. I'm going to fill

558
00:28:50,160 --> 00:28:52,680
Speaker 1: some pain along the way. Well, Stephen, want to thank

559
00:28:52,720 --> 00:28:56,840
Speaker 1: you City Global Wealth Investments. This is the Bloomberg Surveillance Podcast.

560
00:28:57,080 --> 00:29:00,400
Speaker 1: Thanks for listening. Join us live week days some seven

561
00:29:00,400 --> 00:29:04,040
Speaker 1: to ten am Eastern on Bloomberg Radio and on Bloomberg

562
00:29:04,080 --> 00:29:08,560
Speaker 1: Television each day from six to nine am for insight

563
00:29:08,800 --> 00:29:13,000
Speaker 1: from the best in economics, finance, investment, and international relations.

564
00:29:13,440 --> 00:29:18,120
Speaker 1: And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,

565
00:29:18,280 --> 00:29:21,880
Speaker 1: Bloomberg dot com, and of course on the terminal. I'm

566
00:29:21,920 --> 00:29:24,640
Speaker 1: Tom Keene and this is Bloomberg