WEBVTT - Surveillance: UK Crisis

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<v Speaker 1>Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

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<v Speaker 1>with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you

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<v Speaker 1>insight from the best and economics, finance, investment and international relations.

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<v Speaker 1>Find Bloomberg Surveillance on Apple, podcast, SoundCloud, Bloomberg dot com

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<v Speaker 1>and of course on the Bloomberg terminal. It is an

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<v Speaker 1>historic I MF meeting as well any number of topics

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<v Speaker 1>to speak to Geita Gopeneth about the first deputy Managing

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<v Speaker 1>Director at the International Monetary Fund and as I am

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<v Speaker 1>aggested a GEO with a managing director on the United Kingdom,

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<v Speaker 1>a meeting with the former Chancellor and with the Prime

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<v Speaker 1>Minister just a few days ago, I must begin there

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<v Speaker 1>with you. Your research capability says what is the best

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<v Speaker 1>first practice for this fractured government in the United Kingdom,

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<v Speaker 1>what's the best first for them to get to some

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<v Speaker 1>form of new stability. So Tom first days the leisures

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<v Speaker 1>who join you here. We are following the developments in

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<v Speaker 1>the UK, and of course there are issues which we

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<v Speaker 1>don't comment on. We do hear that there is some

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<v Speaker 1>recalibration likely to happen on the policies, but we don't

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<v Speaker 1>have any details. We'll see what comes next and then

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<v Speaker 1>we will be able to comment more on those. Thank

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<v Speaker 1>you for those comments, and we'll get much more on that,

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<v Speaker 1>I'm sure from the managing director as well. Folks, I've

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<v Speaker 1>got to this up here. This is how quickly things

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<v Speaker 1>are moving at the International Monetary Fund. Released within the

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<v Speaker 1>hour is a definitive weekend read on how countries should

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<v Speaker 1>respond to the strong dollar. Gopen Haf pulling an all

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<v Speaker 1>night or on this. Uh, it's wonderful and with wonderful

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<v Speaker 1>charts as well. What I see within your note as

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<v Speaker 1>you speak of financial amplification leading to instabilities, can the

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<v Speaker 1>strong dollar amplify the world's risks of ability? So so

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<v Speaker 1>when you have sizeable movements in the dollar, it has

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<v Speaker 1>very sizeable implications for the global economy because it's so

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<v Speaker 1>dominant in trade and finance. But the important thing to

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<v Speaker 1>keep in mind is that there are fundamentals that are

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<v Speaker 1>driving these large movements. They seem very quick, they seem

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<v Speaker 1>very steep. The differences in the path of monetary policy

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<v Speaker 1>tightening is one factors. The differences in high energy prices

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<v Speaker 1>are affecting countries is another factor. So I think this

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<v Speaker 1>is going to be a bit of a rocky right

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<v Speaker 1>for countries, but they will have to adjust to it,

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<v Speaker 1>so they have to use their own monetary policy tools

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<v Speaker 1>to be able to keep inflation. Roger here about emerging markets.

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<v Speaker 1>Let me stay with the major countries with you, Dr

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<v Speaker 1>gopen Athide. Let's look at the yen experiment. All of

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<v Speaker 1>this meeting in the world, John Farrell, is transfixed by

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<v Speaker 1>yen one seven. What is the council of you and

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<v Speaker 1>your chief economists to the Japanese to extricate themselves from

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<v Speaker 1>their unique yield curve control experiment. I mean, there are

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<v Speaker 1>fundamental reasons for that particular divergence that were seeing in

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<v Speaker 1>the currency. Japan has decided to stay the course in

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<v Speaker 1>terms of keeping interest rates low, while the Fed has

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<v Speaker 1>decided to stay the course in terms of raising interest

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<v Speaker 1>rates very decisively to bring down inflation, and that, of

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<v Speaker 1>course is the one of the primary drivers of these

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<v Speaker 1>different of the fact that the the end has lost

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<v Speaker 1>value relative to the dollar. Now, of course, over time,

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<v Speaker 1>monetary policy will have to figure out what the best

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<v Speaker 1>course is depending upon inflation developments in Japan. But as

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<v Speaker 1>of now, I believe given the diverging trends. You know,

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<v Speaker 1>currency movements will look like they do now with all

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<v Speaker 1>of your expertise, if Japan capitulates to a more normal

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<v Speaker 1>monetary policy and yend goes strong one one fifty, just

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<v Speaker 1>as pick a number out of the air, one, what

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<v Speaker 1>will that do to the Pacific rim financial system. We

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<v Speaker 1>have to look into that and see how well it

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<v Speaker 1>happens in a disruptive manner. It happens in an orderly manner, right.

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<v Speaker 1>We always have exchange rate movements all the time. When

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<v Speaker 1>you have big movements in exchange rates, the problems that

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<v Speaker 1>come up is when you have phones or banks that

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<v Speaker 1>have borrowed in multiple currencies and haven't sufficiently hedged themselves,

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<v Speaker 1>so those get affected. But if you've hedged yourself, I mean,

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<v Speaker 1>these are movements that you should be used. Because of

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<v Speaker 1>breaking news in the United Kingdom, we're gonna ask one

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<v Speaker 1>more question. I really want to give John and Lisa

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<v Speaker 1>New York enough time with the flow up news there.

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<v Speaker 1>I did a careful read of this blog, folks. Again,

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<v Speaker 1>this blog as the read of the weekend. Look on Twitter.

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<v Speaker 1>I'll have it out with the I M. S website.

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<v Speaker 1>Nowhere in here do I see that you were at

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<v Speaker 1>the Plaza accord. You don't mention the plaza cord. How

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<v Speaker 1>does a grizzled pro like you respond to the media silliness,

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<v Speaker 1>the romance back to how do you respond to people

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<v Speaker 1>we need another plaza accord? I think we are we

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<v Speaker 1>that's not where we are. And frankly, when you know

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<v Speaker 1>the Plaza card worked at all, it was not just

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<v Speaker 1>because there were announcements on currencies, but there was more

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<v Speaker 1>signaling of coordination of other kinds of fiscal and monetary

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<v Speaker 1>policies and so on. So so now, uh, I don't

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<v Speaker 1>think we're going to have a plaza called anything. What

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<v Speaker 1>have you learned at these meetings? I'm fascinated how people's

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<v Speaker 1>time frame is back forty and fifty years, not back

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<v Speaker 1>fifteen years. What has been year observation at these meetings

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<v Speaker 1>and the tension here. I think there is a clear

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<v Speaker 1>recognition that inflation is stubborn, it's persistently high, and I

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<v Speaker 1>do think central banks are very careful not to again

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<v Speaker 1>stumble on the you know the fact that maybe this

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<v Speaker 1>is all going to move correct itself automatically. So I

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<v Speaker 1>think there is very much agreement on staying the course.

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<v Speaker 1>The second piece is about making show monetary policy and

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<v Speaker 1>physical policy are consistent and they're both rowing in the

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<v Speaker 1>same direction as opposed to pulling an opposite direction. And

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<v Speaker 1>everybody is concerned with financial fragility in the sense of

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<v Speaker 1>what could be lying in the dark corners and the

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<v Speaker 1>shadows at this point in different shadows in two thousand

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<v Speaker 1>and Thank you so much for Joanny Bloomberg today, Dr

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<v Speaker 1>Gopen Anthony, I am at first deputy Managing director right

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<v Speaker 1>now in these unusual times, in unusual interview with Robert

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<v Speaker 1>jo And he's former governor of the Central Bank of

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<v Speaker 1>India and far more at the Boosts School of Chicago

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<v Speaker 1>has provided two magnificent books of the era. He defined

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<v Speaker 1>the crisis of OH eight and oh seven with fault

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<v Speaker 1>lines in is the Third Pillar, which was my book

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<v Speaker 1>of the summer one year. The Third Pillar has been

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<v Speaker 1>shockingly prescient about the technological and community changes of America,

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<v Speaker 1>none of which we can talk about this morning, for

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<v Speaker 1>there is only one topic. The topic is the strong

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<v Speaker 1>dollar what it means for all of our Bloomberg surveillance audience,

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<v Speaker 1>and you, with the great financial sophistication you have, are

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<v Speaker 1>watching cash in international overnight lines, which are called swap lines,

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<v Speaker 1>and the nations that don't have those instruments available tell

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<v Speaker 1>us your study of liquidity right now? Well, I think

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<v Speaker 1>this is a phenomenon which is across the board, and

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<v Speaker 1>you see it reflected in the problems in the UK

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<v Speaker 1>right now. What is happening is the central banks flooded

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<v Speaker 1>the markets with the most liquid asset on earth, which

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<v Speaker 1>is central bank results tens of trillions during the pandemic.

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<v Speaker 1>Now they were drawing that cash from those markets. So

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<v Speaker 1>what happens when they would draw that cash? Banks in

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<v Speaker 1>the meantime have written a lot of claims on that cash.

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<v Speaker 1>A lot of people depend on that cash for final settlement.

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<v Speaker 1>That cash is shrinking and as it is, things are

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<v Speaker 1>getting very tight in financial markets. If you look at

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<v Speaker 1>every measure of liquarity, it is off the charges back

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<v Speaker 1>to the uh you know, March levels in the United States.

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<v Speaker 1>Think of what happened in the UK. You have these

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<v Speaker 1>pension funds suddenly have to make margin calls. They need cash,

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<v Speaker 1>but nobody's willing to lend them that cash. And so

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<v Speaker 1>what they do they sell assets as they say assets

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<v Speaker 1>as follen value and you see the interest rates go up.

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<v Speaker 1>I think the problem. There was, of course the government action,

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<v Speaker 1>but you can think about accidents waiting to happen across

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<v Speaker 1>the world, including for emerging markets. So let's split this.

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<v Speaker 1>Let's talk first about the others like the UK that

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<v Speaker 1>have so called swap lines where there's a confidence to

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<v Speaker 1>go to the Central Bank of the United States. Is

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<v Speaker 1>that system working now or do you have a fear

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<v Speaker 1>that we could fail with the larger, more sophisticated nations. Well,

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<v Speaker 1>I think for now, the fedroom Reserve has made commitments

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<v Speaker 1>to a number of countries. It's the country's that are

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<v Speaker 1>outside that system which have bigger problems because when they

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<v Speaker 1>need the cash, what are they going to do? They're

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<v Speaker 1>gonna sell in their stock of treasuries, their reserves, and

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<v Speaker 1>that creates a price impact in various markets. Right now,

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<v Speaker 1>I think they're managing. But if there is a big

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<v Speaker 1>sort of demand for cash, as for example in the UK,

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<v Speaker 1>basically you get must selling you. And I studied Stanley

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<v Speaker 1>Fisher one O one in the crisis of previous decades,

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<v Speaker 1>and people here at these meetings make clear they're looking

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<v Speaker 1>back forty and fifty years. Is EM different this time?

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<v Speaker 1>Is EM more prepared for these liquidity crisis. It is

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<v Speaker 1>more prepared, uh, because it has built reserves during the

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<v Speaker 1>time of easy money. It's seen that story happened again

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<v Speaker 1>and again. So the big e m s are better prepared,

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<v Speaker 1>of course. The small ems and the developing countries not so.

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<v Speaker 1>And for them, of course, the twin effects of high inflation,

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<v Speaker 1>higher food prices, um. That's hurting them a lot, higher

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<v Speaker 1>fuel in food, and so many of them are on

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<v Speaker 1>the brink this time, not so much liquidity but default.

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<v Speaker 1>They simply cannot service their debt yet that people. At

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<v Speaker 1>the same time, Lisa from New York emails in and says, Tom,

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<v Speaker 1>You've got to ask about yen in the Pacific room. Lisa,

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<v Speaker 1>let's do that very simply. Here. The Bank of Japan

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<v Speaker 1>has an original experiment which is not taught by Randall

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<v Speaker 1>Crossner at booth. It's original weekend one of forty seven.

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<v Speaker 1>I've done the math, You've done the math X number

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<v Speaker 1>more interventions possible at some point that will break it.

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<v Speaker 1>As I said to Dr Gopenhath, we will see yen

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<v Speaker 1>and a heartbeat. What did that do to Indonesia? What

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<v Speaker 1>does that do to China? Well, any volatility in asset

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<v Speaker 1>prices creates a problem somewhere now in this case, when

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<v Speaker 1>the yen strength and significantly it probably helps other countries

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<v Speaker 1>a little bit. The problem to some extent is of

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<v Speaker 1>people who have borrowed in in at this point and

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<v Speaker 1>are thinking this is easy money, we can repay it effectively.

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<v Speaker 1>When the again strengthens, that becomes a problem. The bigger

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<v Speaker 1>problem is for people who are holding uh gps, I mean,

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<v Speaker 1>think of what happens to them, because supposing uh you know,

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<v Speaker 1>the part of Japan has to move off its yield

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<v Speaker 1>of control because it's achieved its inflation objective, how does

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<v Speaker 1>it move off? It's writing a tiger. It has to

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<v Speaker 1>move off in small steps. But people, but markets basically

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<v Speaker 1>accelerate that movement. They know that you have to get

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<v Speaker 1>off it. And therefore what happens to g g B

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<v Speaker 1>s is a big price fall. When when the when

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<v Speaker 1>the Bank of Japan, it's the time for one more question.

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<v Speaker 1>Unfortunately they are writing a tiger as the tiger holds

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<v Speaker 1>their party congress in China literally tomorrow in this week

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<v Speaker 1>as well, how does China fit into your view of

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<v Speaker 1>Pacific room and around your India given their absolutely unique

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<v Speaker 1>covide strategy. Well, I think they're hurting themselves. And the

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<v Speaker 1>question is how do they move off given that this

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<v Speaker 1>is so closely associated with President she and it is

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<v Speaker 1>created creating opportunities for countries around the Pacific. Vietnam is

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<v Speaker 1>benefiting as the China plus one India is benefiting a

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<v Speaker 1>little bit. But the real question is what happens to

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<v Speaker 1>China after this? How do they find a way to

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<v Speaker 1>move off this or do they actually buy Western vaccines

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<v Speaker 1>and start vaccinating their population with the effective vaccines. That's

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<v Speaker 1>the big question in front of them because they cannot

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<v Speaker 1>continue this strategy forever. Dr Rogan, thank you so much,

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<v Speaker 1>greatly appreciated a former Reserve Bank of India Governor Raman

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<v Speaker 1>Rajan this morning as well, stated standing joints NOW Chief

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<v Speaker 1>Economist to Amherst Punt Stephen, you're expecting a U turn,

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<v Speaker 1>a pause. I have it from this fed anytime soon

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<v Speaker 1>after that day to yesterday. Good morning, Glyn. I'm sure

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<v Speaker 1>they would love to, but now now it's not in

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<v Speaker 1>the cards. I mean, clearly inflation is becoming more entrenched.

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<v Speaker 1>The the breadth of underlying inflation right now, um is

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<v Speaker 1>just very troubling and I think it's gonna be a

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<v Speaker 1>while until the FED gets inflation under control. Unfortunately, Stephen,

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<v Speaker 1>as a debt that we got yesterday made do you

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<v Speaker 1>rethink the terminal rate that the FED would ultimately get

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<v Speaker 1>to in the cycle. Um, so, my my estimate was

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<v Speaker 1>already above five percent. I think, you know, I'm sticking

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<v Speaker 1>with that for the moment, but I think there's certainly,

0:13:38.640 --> 0:13:41.880
<v Speaker 1>you know, some upside risk to that. Uh, you know,

0:13:41.920 --> 0:13:44.360
<v Speaker 1>I definitely think we'll see another seventy five base point

0:13:44.400 --> 0:13:47.800
<v Speaker 1>move in November, and um, you know, I had thought

0:13:47.800 --> 0:13:50.480
<v Speaker 1>they would slow down to fifty in December, and I'm gonna,

0:13:50.600 --> 0:13:52.880
<v Speaker 1>you know, cling to that for the moment, but certainly,

0:13:53.200 --> 0:13:55.400
<v Speaker 1>if the inflation numbers over the next couple of months

0:13:55.480 --> 0:13:58.000
<v Speaker 1>come in the way that the last two have, then um,

0:13:58.040 --> 0:14:00.720
<v Speaker 1>it's not clear to me that they can stepped down

0:14:00.720 --> 0:14:03.080
<v Speaker 1>from the sevent basis point hikes. Stephen, what do you

0:14:03.120 --> 0:14:06.559
<v Speaker 1>make of all the discussion that perhaps we are overlooking

0:14:06.800 --> 0:14:10.040
<v Speaker 1>the lag effect in the rent component, the fact that

0:14:10.120 --> 0:14:13.000
<v Speaker 1>housing does tend to operate on a lag and that

0:14:13.120 --> 0:14:15.640
<v Speaker 1>there may be a decline in the next six months

0:14:15.679 --> 0:14:18.840
<v Speaker 1>that hasn't yet fed into the data, And so we're

0:14:18.840 --> 0:14:20.560
<v Speaker 1>going to get it. Even if the FED doesn't raise

0:14:20.640 --> 0:14:23.480
<v Speaker 1>rates as aggressively, what do you say to people who

0:14:23.480 --> 0:14:28.440
<v Speaker 1>really are arguing that perhaps the FED is overreacting. Yeah, well,

0:14:28.440 --> 0:14:31.440
<v Speaker 1>the research suggests that the lag is from home prices

0:14:31.480 --> 0:14:34.840
<v Speaker 1>to the shelter cost components of the inflation numbers is

0:14:34.880 --> 0:14:38.680
<v Speaker 1>about twelve to eighteen months. So I think our realistic

0:14:38.720 --> 0:14:42.200
<v Speaker 1>scenario here is that maybe rent and owners equivalent rent

0:14:42.800 --> 0:14:46.680
<v Speaker 1>UH continue to accelerate until around the middle of next year. UM.

0:14:46.720 --> 0:14:49.640
<v Speaker 1>And that's a long time for the FED to sit uh,

0:14:49.680 --> 0:14:51.880
<v Speaker 1>you know, to kind of say, trust us, we got

0:14:51.880 --> 0:14:54.600
<v Speaker 1>this under control. I think the other point would be

0:14:54.720 --> 0:14:57.840
<v Speaker 1>that if it were only about shelter costs UM, then

0:14:57.880 --> 0:15:00.680
<v Speaker 1>that argument UM would be very po awful. But the

0:15:00.720 --> 0:15:04.400
<v Speaker 1>reality is that we're seeing UH inflation very hot and

0:15:04.440 --> 0:15:08.360
<v Speaker 1>in many cases accelerating across UH just a you know,

0:15:08.640 --> 0:15:13.400
<v Speaker 1>virtually the entire UM list of categories within the CPI

0:15:13.520 --> 0:15:16.400
<v Speaker 1>or the pc inflators. So this isn't you know, shelters

0:15:16.480 --> 0:15:20.560
<v Speaker 1>one story, um, but it's it's not the only one.

0:15:20.800 --> 0:15:26.440
<v Speaker 1>And unfortunately the data are pointing to a more systemic issue.

0:15:26.520 --> 0:15:30.760
<v Speaker 1>You know, wage pressures are pushing into prices now UM,

0:15:30.800 --> 0:15:33.040
<v Speaker 1>And I think you know, the the risk is that

0:15:33.080 --> 0:15:36.760
<v Speaker 1>the FETE has talked about is that the longer inflation

0:15:36.840 --> 0:15:39.000
<v Speaker 1>is high, the more people get used to it, the

0:15:39.000 --> 0:15:42.000
<v Speaker 1>more they start to incorporate it into their plans. And

0:15:42.040 --> 0:15:44.000
<v Speaker 1>that's why the Feds in a hurry, because they're trying

0:15:44.040 --> 0:15:46.560
<v Speaker 1>to cut that off before uh, it gets kind of

0:15:47.080 --> 0:15:48.920
<v Speaker 1>set in stone. How many times do we sat here

0:15:49.000 --> 0:15:50.920
<v Speaker 1>later and said, they've got more work today, They've got

0:15:50.960 --> 0:15:53.480
<v Speaker 1>more work today. How much are we getting? Are we

0:15:53.520 --> 0:15:55.480
<v Speaker 1>catching up to the Bill Dudley version of the world

0:15:55.480 --> 0:15:58.440
<v Speaker 1>that here yesterday? I mean, but we're there in terms

0:15:58.480 --> 0:16:00.600
<v Speaker 1>of the market expectation. And then you have some people

0:16:00.880 --> 0:16:03.560
<v Speaker 1>including Jason Furman out in Twitter saying that perhaps it's

0:16:03.560 --> 0:16:06.240
<v Speaker 1>even higher than what the market is currently expecting because

0:16:06.360 --> 0:16:08.640
<v Speaker 1>of the sticky components that are rising at a really

0:16:08.720 --> 0:16:11.680
<v Speaker 1>rapid rate. Steven Stanley ms payphon. Steven always wanted for

0:16:11.760 --> 0:16:18.440
<v Speaker 1>to catch out with you, said Garrick Freeman, US Bank

0:16:18.520 --> 0:16:22.600
<v Speaker 1>Asset Management's chief investment officers. So, yeah, we are coming

0:16:22.600 --> 0:16:26.640
<v Speaker 1>off the highs on this early trade. Eric, what's standing

0:16:26.640 --> 0:16:28.840
<v Speaker 1>out to you? What what do you make of all

0:16:28.880 --> 0:16:32.600
<v Speaker 1>these wild moves that we've seen in just the last

0:16:32.600 --> 0:16:36.520
<v Speaker 1>couple of days on the data. Yeah, Nathan, and I

0:16:36.600 --> 0:16:40.360
<v Speaker 1>think the biggest thing we're focused on is what happens

0:16:40.360 --> 0:16:43.440
<v Speaker 1>in the bond market. Clearly we're focused on stocks like

0:16:43.520 --> 0:16:47.160
<v Speaker 1>everybody else's, but the stock market is absolutely taking it's

0:16:47.440 --> 0:16:49.840
<v Speaker 1>it's que from what's happening in bonds. And so I

0:16:49.880 --> 0:16:52.960
<v Speaker 1>think on the back of it was tresh press conference,

0:16:52.960 --> 0:16:55.560
<v Speaker 1>the thought that you did have a relatively but i'm

0:16:55.600 --> 0:16:59.240
<v Speaker 1>responsive fixed income says that you know, perhaps there is

0:16:59.240 --> 0:17:01.520
<v Speaker 1>a little more calm um uh, you know. I I

0:17:01.560 --> 0:17:05.120
<v Speaker 1>do think ultimately our bias is an equity prices head lower,

0:17:05.240 --> 0:17:08.040
<v Speaker 1>not higher over the next call a couple of months,

0:17:08.080 --> 0:17:11.040
<v Speaker 1>but do expect to see a peer amount of variability

0:17:11.600 --> 0:17:13.840
<v Speaker 1>between now and the end of the year. How about

0:17:13.840 --> 0:17:16.280
<v Speaker 1>on the fixed income side, Eric, because you know, we've

0:17:16.320 --> 0:17:19.920
<v Speaker 1>seen double digit declines across pretty much every fixed fixed

0:17:19.960 --> 0:17:23.159
<v Speaker 1>income category and and all the fixed income folks that

0:17:23.200 --> 0:17:26.720
<v Speaker 1>we speak to say that's unprecedented, It's never happened before.

0:17:26.720 --> 0:17:29.840
<v Speaker 1>So when I hear language like that, I'm like, I'm

0:17:29.880 --> 0:17:33.439
<v Speaker 1>just putting all my chips in the fixed income space.

0:17:33.480 --> 0:17:35.720
<v Speaker 1>I mean, you can't get me lower ken it. How

0:17:35.720 --> 0:17:40.200
<v Speaker 1>do you think about fixed income? Yeah, I think that Um,

0:17:40.240 --> 0:17:43.240
<v Speaker 1>you know, it's really difficult to give up with the

0:17:43.280 --> 0:17:47.400
<v Speaker 1>market giving you right now, which is on six month

0:17:47.480 --> 0:17:53.040
<v Speaker 1>treasury paper a four point two plus percent annualized EEL.

0:17:53.160 --> 0:17:56.480
<v Speaker 1>That's that's capital. That Again, you may have some price

0:17:56.600 --> 0:17:58.679
<v Speaker 1>risk between now or the next six months, but unless

0:17:58.680 --> 0:18:01.159
<v Speaker 1>the US government doesn't pay back, which we expect them to,

0:18:01.920 --> 0:18:04.000
<v Speaker 1>that's a that's a pretty tough thing to ignore. So

0:18:04.160 --> 0:18:08.080
<v Speaker 1>you know, without question, there is more discussion about the

0:18:08.080 --> 0:18:13.399
<v Speaker 1>FED becoming more aggressive, and yesterday's data, coupled with the

0:18:13.560 --> 0:18:16.840
<v Speaker 1>very clear message from j Powell from Jackson Hole, suggests

0:18:16.880 --> 0:18:20.720
<v Speaker 1>that the yields likely head higher. But do think that

0:18:20.840 --> 0:18:23.520
<v Speaker 1>for for investors that can take a staggered view over

0:18:23.560 --> 0:18:26.640
<v Speaker 1>the next six to twelve months, starting to dip into

0:18:26.720 --> 0:18:28.680
<v Speaker 1>the front end of the bond curve, we think makes

0:18:28.680 --> 0:18:30.400
<v Speaker 1>a lot of sense. So that would be a priority

0:18:30.440 --> 0:18:32.720
<v Speaker 1>for us in terms of what we're doing with that

0:18:32.800 --> 0:18:34.840
<v Speaker 1>with capital in the here and now. So you're looking

0:18:34.880 --> 0:18:40.360
<v Speaker 1>at greater recession risk than deeper inversion for the yield curve. Yeah,

0:18:40.720 --> 0:18:43.200
<v Speaker 1>I think that the recession odds that we would put

0:18:43.200 --> 0:18:47.399
<v Speaker 1>are definitely greater than fifty fifty. And uh, look, we

0:18:47.440 --> 0:18:51.639
<v Speaker 1>think that the catchup on the slowdown is going to

0:18:51.720 --> 0:18:54.800
<v Speaker 1>really materialize mostly in the first and second quarter of

0:18:54.880 --> 0:18:59.240
<v Speaker 1>next year. So even though markets are forward discounting mechanisms,

0:18:59.680 --> 0:19:02.600
<v Speaker 1>we've still think that there is some some economic and

0:19:02.680 --> 0:19:06.240
<v Speaker 1>some earnings growth concerns that will start to emerge. And again,

0:19:06.280 --> 0:19:08.879
<v Speaker 1>you've done a great job as a team looking at

0:19:08.880 --> 0:19:11.520
<v Speaker 1>earning season as we really kicked that off. And so

0:19:11.600 --> 0:19:15.280
<v Speaker 1>we think that again this quarter probably fairly benign in

0:19:15.400 --> 0:19:18.320
<v Speaker 1>terms of actual results, but outlooks we expect to be

0:19:18.400 --> 0:19:21.840
<v Speaker 1>a little more truncated in terms of enthusiasm from companies.

0:19:21.840 --> 0:19:24.800
<v Speaker 1>So we do think that the weakness will become most

0:19:24.800 --> 0:19:27.320
<v Speaker 1>pronounced in corporate America in the first and second quarter

0:19:27.359 --> 0:19:30.040
<v Speaker 1>of next year, and that would signal a recession to us.

0:19:31.080 --> 0:19:33.320
<v Speaker 1>You mentioned earnings, Uh there, Eric, and we're just kind

0:19:33.320 --> 0:19:35.760
<v Speaker 1>of kicking off the big boys, starting to say, with

0:19:35.800 --> 0:19:39.240
<v Speaker 1>some of the big banks. Uh. And obviously the forward guidance,

0:19:39.280 --> 0:19:41.160
<v Speaker 1>as you mentioned, is going to be really key here.

0:19:41.800 --> 0:19:44.240
<v Speaker 1>Do you have a feel, I guess what's your call

0:19:44.320 --> 0:19:47.200
<v Speaker 1>here on valuation? Um? I mean, obviously will be dependent

0:19:47.280 --> 0:19:48.919
<v Speaker 1>upon kind of some of the earnings and the earnings

0:19:48.960 --> 0:19:52.280
<v Speaker 1>forecast we get. But for this market, is this market cheap.

0:19:52.400 --> 0:19:57.560
<v Speaker 1>Yet yes, I would say that it's not yet cheap

0:19:57.680 --> 0:19:59.800
<v Speaker 1>enough for us to come off what we've had on

0:20:00.040 --> 0:20:02.439
<v Speaker 1>for some time, which is an underweight position to global

0:20:02.480 --> 0:20:06.879
<v Speaker 1>equities and most specifically US and European equities. So we

0:20:06.960 --> 0:20:10.119
<v Speaker 1>do think that the cheap factor is going to likely

0:20:10.240 --> 0:20:14.000
<v Speaker 1>kick in more as we get deeper into first and

0:20:14.080 --> 0:20:16.320
<v Speaker 1>second quarter of next year. And so what I mean

0:20:16.359 --> 0:20:18.040
<v Speaker 1>by that is that we still think that earning his

0:20:18.160 --> 0:20:21.480
<v Speaker 1>expectations for the early part of next year are just

0:20:21.560 --> 0:20:24.879
<v Speaker 1>too high. And again, like you always talked about really

0:20:25.440 --> 0:20:28.399
<v Speaker 1>thoughtful terminal usage in terms of what you can use

0:20:28.400 --> 0:20:30.000
<v Speaker 1>in the Bloember terminal to look at the next couple

0:20:30.000 --> 0:20:31.680
<v Speaker 1>of quarters, next couple of years, we just think that

0:20:31.720 --> 0:20:34.760
<v Speaker 1>the next two quarters are too high, and so that

0:20:35.200 --> 0:20:38.520
<v Speaker 1>we think that rationalization is going to be step one.

0:20:38.600 --> 0:20:41.399
<v Speaker 1>The other rationalization, we think it's going to be the

0:20:41.480 --> 0:20:45.960
<v Speaker 1>FED staying at a higher interst rate terminal level for

0:20:45.960 --> 0:20:49.240
<v Speaker 1>for longer. And so that says to us that yes,

0:20:49.280 --> 0:20:53.199
<v Speaker 1>things do look obviously less expensive, perhaps we do think

0:20:53.240 --> 0:20:55.080
<v Speaker 1>they'll get cheaper, So we would not be in a

0:20:55.160 --> 0:20:57.960
<v Speaker 1>rush to push the valuation argument right now. We'd especially

0:20:58.000 --> 0:21:00.960
<v Speaker 1>be careful about that argument in Europe. Europe is cheap,

0:21:01.000 --> 0:21:02.879
<v Speaker 1>but cheap for a good reason. We think likely it's

0:21:02.960 --> 0:21:04.879
<v Speaker 1>cheaper from here. Well, what do you think is going

0:21:04.920 --> 0:21:09.440
<v Speaker 1>to trigger a capitulation in this market? Yeah, and they said,

0:21:09.440 --> 0:21:12.240
<v Speaker 1>you know, we actually look at about eight different signals

0:21:12.400 --> 0:21:15.879
<v Speaker 1>across our macro research efforts and we've only seen two

0:21:16.760 --> 0:21:19.960
<v Speaker 1>or three fire and so we're not quite there. And

0:21:20.000 --> 0:21:22.520
<v Speaker 1>again we do think that it's going to be a

0:21:22.560 --> 0:21:26.480
<v Speaker 1>combination of big volume. It's gonna be a combination of

0:21:27.480 --> 0:21:31.080
<v Speaker 1>I think two things. One company's really coming clean with

0:21:31.240 --> 0:21:34.080
<v Speaker 1>what next year will look like and then you know,

0:21:34.160 --> 0:21:36.160
<v Speaker 1>and we hope it doesn't happen, but it's certainly could happen.

0:21:36.200 --> 0:21:39.199
<v Speaker 1>Investors throwing up their hands. We have not seen that

0:21:39.480 --> 0:21:41.640
<v Speaker 1>quite yet. You were right to point out the VIX

0:21:41.720 --> 0:21:45.119
<v Speaker 1>index earlier. We think the VIX index can can be

0:21:45.240 --> 0:21:47.439
<v Speaker 1>somewhat of a of a red herring in terms of

0:21:47.560 --> 0:21:50.520
<v Speaker 1>it's forward predictability. But we also look at the move

0:21:50.640 --> 0:21:54.359
<v Speaker 1>index and fixed income. That's something that has been elevated,

0:21:54.480 --> 0:21:56.840
<v Speaker 1>and if we see that elevate on a prolonged basis,

0:21:57.320 --> 0:21:59.879
<v Speaker 1>that would be a reflection to us that investors maybe

0:22:00.000 --> 0:22:02.359
<v Speaker 1>are a little too pessimistic. And we may take the

0:22:02.359 --> 0:22:05.280
<v Speaker 1>other side. All right, Eric, great stuff. We appreciate you

0:22:05.320 --> 0:22:08.600
<v Speaker 1>sticking around. Eric friedmans u S Bank Asset Management chief

0:22:08.640 --> 0:22:11.399
<v Speaker 1>investment officer getting his thoughts on these markets as we

0:22:11.440 --> 0:22:14.480
<v Speaker 1>really get into the thick of earning season. This is

0:22:14.520 --> 0:22:18.520
<v Speaker 1>the Bloomberg Surveillance Podcast. Thanks for listening. Join us live

0:22:18.680 --> 0:22:22.439
<v Speaker 1>weekdays from seven to ten am Eastern on Bloomberg Radio

0:22:22.640 --> 0:22:26.280
<v Speaker 1>and on Bloomberg Television each day from six to nine

0:22:26.320 --> 0:22:30.720
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0:22:30.880 --> 0:22:35.919
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0:22:36.000 --> 0:22:39.800
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0:22:39.920 --> 0:22:44.080
<v Speaker 1>the terminal. I'm Tom Keene, and this is Bloomberg