Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple, podcast, SoundCloud, Bloomberg dot com
Speaker 1: and of course on the Bloomberg terminal. It is an
Speaker 1: historic I MF meeting as well any number of topics
Speaker 1: to speak to Geita Gopeneth about the first deputy Managing
Speaker 1: Director at the International Monetary Fund and as I am
Speaker 1: aggested a GEO with a managing director on the United Kingdom,
Speaker 1: a meeting with the former Chancellor and with the Prime
Speaker 1: Minister just a few days ago, I must begin there
Speaker 1: with you. Your research capability says what is the best
Speaker 1: first practice for this fractured government in the United Kingdom,
Speaker 1: what's the best first for them to get to some
Speaker 1: form of new stability. So Tom first days the leisures
Speaker 1: who join you here. We are following the developments in
Speaker 1: the UK, and of course there are issues which we
Speaker 1: don't comment on. We do hear that there is some
Speaker 1: recalibration likely to happen on the policies, but we don't
Speaker 1: have any details. We'll see what comes next and then
Speaker 1: we will be able to comment more on those. Thank
Speaker 1: you for those comments, and we'll get much more on that,
Speaker 1: I'm sure from the managing director as well. Folks, I've
Speaker 1: got to this up here. This is how quickly things
Speaker 1: are moving at the International Monetary Fund. Released within the
Speaker 1: hour is a definitive weekend read on how countries should
Speaker 1: respond to the strong dollar. Gopen Haf pulling an all
Speaker 1: night or on this. Uh, it's wonderful and with wonderful
Speaker 1: charts as well. What I see within your note as
Speaker 1: you speak of financial amplification leading to instabilities, can the
Speaker 1: strong dollar amplify the world's risks of ability? So so
Speaker 1: when you have sizeable movements in the dollar, it has
Speaker 1: very sizeable implications for the global economy because it's so
Speaker 1: dominant in trade and finance. But the important thing to
Speaker 1: keep in mind is that there are fundamentals that are
Speaker 1: driving these large movements. They seem very quick, they seem
Speaker 1: very steep. The differences in the path of monetary policy
Speaker 1: tightening is one factors. The differences in high energy prices
Speaker 1: are affecting countries is another factor. So I think this
Speaker 1: is going to be a bit of a rocky right
Speaker 1: for countries, but they will have to adjust to it,
Speaker 1: so they have to use their own monetary policy tools
Speaker 1: to be able to keep inflation. Roger here about emerging markets.
Speaker 1: Let me stay with the major countries with you, Dr
Speaker 1: gopen Athide. Let's look at the yen experiment. All of
Speaker 1: this meeting in the world, John Farrell, is transfixed by
Speaker 1: yen one seven. What is the council of you and
Speaker 1: your chief economists to the Japanese to extricate themselves from
Speaker 1: their unique yield curve control experiment. I mean, there are
Speaker 1: fundamental reasons for that particular divergence that were seeing in
Speaker 1: the currency. Japan has decided to stay the course in
Speaker 1: terms of keeping interest rates low, while the Fed has
Speaker 1: decided to stay the course in terms of raising interest
Speaker 1: rates very decisively to bring down inflation, and that, of
Speaker 1: course is the one of the primary drivers of these
Speaker 1: different of the fact that the the end has lost
Speaker 1: value relative to the dollar. Now, of course, over time,
Speaker 1: monetary policy will have to figure out what the best
Speaker 1: course is depending upon inflation developments in Japan. But as
Speaker 1: of now, I believe given the diverging trends. You know,
Speaker 1: currency movements will look like they do now with all
Speaker 1: of your expertise, if Japan capitulates to a more normal
Speaker 1: monetary policy and yend goes strong one one fifty, just
Speaker 1: as pick a number out of the air, one, what
Speaker 1: will that do to the Pacific rim financial system. We
Speaker 1: have to look into that and see how well it
Speaker 1: happens in a disruptive manner. It happens in an orderly manner, right.
Speaker 1: We always have exchange rate movements all the time. When
Speaker 1: you have big movements in exchange rates, the problems that
Speaker 1: come up is when you have phones or banks that
Speaker 1: have borrowed in multiple currencies and haven't sufficiently hedged themselves,
Speaker 1: so those get affected. But if you've hedged yourself, I mean,
Speaker 1: these are movements that you should be used. Because of
Speaker 1: breaking news in the United Kingdom, we're gonna ask one
Speaker 1: more question. I really want to give John and Lisa
Speaker 1: New York enough time with the flow up news there.
Speaker 1: I did a careful read of this blog, folks. Again,
Speaker 1: this blog as the read of the weekend. Look on Twitter.
Speaker 1: I'll have it out with the I M. S website.
Speaker 1: Nowhere in here do I see that you were at
Speaker 1: the Plaza accord. You don't mention the plaza cord. How
Speaker 1: does a grizzled pro like you respond to the media silliness,
Speaker 1: the romance back to how do you respond to people
Speaker 1: we need another plaza accord? I think we are we
Speaker 1: that's not where we are. And frankly, when you know
Speaker 1: the Plaza card worked at all, it was not just
Speaker 1: because there were announcements on currencies, but there was more
Speaker 1: signaling of coordination of other kinds of fiscal and monetary
Speaker 1: policies and so on. So so now, uh, I don't
Speaker 1: think we're going to have a plaza called anything. What
Speaker 1: have you learned at these meetings? I'm fascinated how people's
Speaker 1: time frame is back forty and fifty years, not back
Speaker 1: fifteen years. What has been year observation at these meetings
Speaker 1: and the tension here. I think there is a clear
Speaker 1: recognition that inflation is stubborn, it's persistently high, and I
Speaker 1: do think central banks are very careful not to again
Speaker 1: stumble on the you know the fact that maybe this
Speaker 1: is all going to move correct itself automatically. So I
Speaker 1: think there is very much agreement on staying the course.
Speaker 1: The second piece is about making show monetary policy and
Speaker 1: physical policy are consistent and they're both rowing in the
Speaker 1: same direction as opposed to pulling an opposite direction. And
Speaker 1: everybody is concerned with financial fragility in the sense of
Speaker 1: what could be lying in the dark corners and the
Speaker 1: shadows at this point in different shadows in two thousand
Speaker 1: and Thank you so much for Joanny Bloomberg today, Dr
Speaker 1: Gopen Anthony, I am at first deputy Managing director right
Speaker 1: now in these unusual times, in unusual interview with Robert
Speaker 1: jo And he's former governor of the Central Bank of
Speaker 1: India and far more at the Boosts School of Chicago
Speaker 1: has provided two magnificent books of the era. He defined
Speaker 1: the crisis of OH eight and oh seven with fault
Speaker 1: lines in is the Third Pillar, which was my book
Speaker 1: of the summer one year. The Third Pillar has been
Speaker 1: shockingly prescient about the technological and community changes of America,
Speaker 1: none of which we can talk about this morning, for
Speaker 1: there is only one topic. The topic is the strong
Speaker 1: dollar what it means for all of our Bloomberg surveillance audience,
Speaker 1: and you, with the great financial sophistication you have, are
Speaker 1: watching cash in international overnight lines, which are called swap lines,
Speaker 1: and the nations that don't have those instruments available tell
Speaker 1: us your study of liquidity right now? Well, I think
Speaker 1: this is a phenomenon which is across the board, and
Speaker 1: you see it reflected in the problems in the UK
Speaker 1: right now. What is happening is the central banks flooded
Speaker 1: the markets with the most liquid asset on earth, which
Speaker 1: is central bank results tens of trillions during the pandemic.
Speaker 1: Now they were drawing that cash from those markets. So
Speaker 1: what happens when they would draw that cash? Banks in
Speaker 1: the meantime have written a lot of claims on that cash.
Speaker 1: A lot of people depend on that cash for final settlement.
Speaker 1: That cash is shrinking and as it is, things are
Speaker 1: getting very tight in financial markets. If you look at
Speaker 1: every measure of liquarity, it is off the charges back
Speaker 1: to the uh you know, March levels in the United States.
Speaker 1: Think of what happened in the UK. You have these
Speaker 1: pension funds suddenly have to make margin calls. They need cash,
Speaker 1: but nobody's willing to lend them that cash. And so
Speaker 1: what they do they sell assets as they say assets
Speaker 1: as follen value and you see the interest rates go up.
Speaker 1: I think the problem. There was, of course the government action,
Speaker 1: but you can think about accidents waiting to happen across
Speaker 1: the world, including for emerging markets. So let's split this.
Speaker 1: Let's talk first about the others like the UK that
Speaker 1: have so called swap lines where there's a confidence to
Speaker 1: go to the Central Bank of the United States. Is
Speaker 1: that system working now or do you have a fear
Speaker 1: that we could fail with the larger, more sophisticated nations. Well,
Speaker 1: I think for now, the fedroom Reserve has made commitments
Speaker 1: to a number of countries. It's the country's that are
Speaker 1: outside that system which have bigger problems because when they
Speaker 1: need the cash, what are they going to do? They're
Speaker 1: gonna sell in their stock of treasuries, their reserves, and
Speaker 1: that creates a price impact in various markets. Right now,
Speaker 1: I think they're managing. But if there is a big
Speaker 1: sort of demand for cash, as for example in the UK,
Speaker 1: basically you get must selling you. And I studied Stanley
Speaker 1: Fisher one O one in the crisis of previous decades,
Speaker 1: and people here at these meetings make clear they're looking
Speaker 1: back forty and fifty years. Is EM different this time?
Speaker 1: Is EM more prepared for these liquidity crisis. It is
Speaker 1: more prepared, uh, because it has built reserves during the
Speaker 1: time of easy money. It's seen that story happened again
Speaker 1: and again. So the big e m s are better prepared,
Speaker 1: of course. The small ems and the developing countries not so.
Speaker 1: And for them, of course, the twin effects of high inflation,
Speaker 1: higher food prices, um. That's hurting them a lot, higher
Speaker 1: fuel in food, and so many of them are on
Speaker 1: the brink this time, not so much liquidity but default.
Speaker 1: They simply cannot service their debt yet that people. At
Speaker 1: the same time, Lisa from New York emails in and says, Tom,
Speaker 1: You've got to ask about yen in the Pacific room. Lisa,
Speaker 1: let's do that very simply. Here. The Bank of Japan
Speaker 1: has an original experiment which is not taught by Randall
Speaker 1: Crossner at booth. It's original weekend one of forty seven.
Speaker 1: I've done the math, You've done the math X number
Speaker 1: more interventions possible at some point that will break it.
Speaker 1: As I said to Dr Gopenhath, we will see yen
Speaker 1: and a heartbeat. What did that do to Indonesia? What
Speaker 1: does that do to China? Well, any volatility in asset
Speaker 1: prices creates a problem somewhere now in this case, when
Speaker 1: the yen strength and significantly it probably helps other countries
Speaker 1: a little bit. The problem to some extent is of
Speaker 1: people who have borrowed in in at this point and
Speaker 1: are thinking this is easy money, we can repay it effectively.
Speaker 1: When the again strengthens, that becomes a problem. The bigger
Speaker 1: problem is for people who are holding uh gps, I mean,
Speaker 1: think of what happens to them, because supposing uh you know,
Speaker 1: the part of Japan has to move off its yield
Speaker 1: of control because it's achieved its inflation objective, how does
Speaker 1: it move off? It's writing a tiger. It has to
Speaker 1: move off in small steps. But people, but markets basically
Speaker 1: accelerate that movement. They know that you have to get
Speaker 1: off it. And therefore what happens to g g B
Speaker 1: s is a big price fall. When when the when
Speaker 1: the Bank of Japan, it's the time for one more question.
Speaker 1: Unfortunately they are writing a tiger as the tiger holds
Speaker 1: their party congress in China literally tomorrow in this week
Speaker 1: as well, how does China fit into your view of
Speaker 1: Pacific room and around your India given their absolutely unique
Speaker 1: covide strategy. Well, I think they're hurting themselves. And the
Speaker 1: question is how do they move off given that this
Speaker 1: is so closely associated with President she and it is
Speaker 1: created creating opportunities for countries around the Pacific. Vietnam is
Speaker 1: benefiting as the China plus one India is benefiting a
Speaker 1: little bit. But the real question is what happens to
Speaker 1: China after this? How do they find a way to
Speaker 1: move off this or do they actually buy Western vaccines
Speaker 1: and start vaccinating their population with the effective vaccines. That's
Speaker 1: the big question in front of them because they cannot
Speaker 1: continue this strategy forever. Dr Rogan, thank you so much,
Speaker 1: greatly appreciated a former Reserve Bank of India Governor Raman
Speaker 1: Rajan this morning as well, stated standing joints NOW Chief
Speaker 1: Economist to Amherst Punt Stephen, you're expecting a U turn,
Speaker 1: a pause. I have it from this fed anytime soon
Speaker 1: after that day to yesterday. Good morning, Glyn. I'm sure
Speaker 1: they would love to, but now now it's not in
Speaker 1: the cards. I mean, clearly inflation is becoming more entrenched.
Speaker 1: The the breadth of underlying inflation right now, um is
Speaker 1: just very troubling and I think it's gonna be a
Speaker 1: while until the FED gets inflation under control. Unfortunately, Stephen,
Speaker 1: as a debt that we got yesterday made do you
Speaker 1: rethink the terminal rate that the FED would ultimately get
Speaker 1: to in the cycle. Um, so, my my estimate was
Speaker 1: already above five percent. I think, you know, I'm sticking
Speaker 1: with that for the moment, but I think there's certainly,
Speaker 1: you know, some upside risk to that. Uh, you know,
Speaker 1: I definitely think we'll see another seventy five base point
Speaker 1: move in November, and um, you know, I had thought
Speaker 1: they would slow down to fifty in December, and I'm gonna,
Speaker 1: you know, cling to that for the moment, but certainly,
Speaker 1: if the inflation numbers over the next couple of months
Speaker 1: come in the way that the last two have, then um,
Speaker 1: it's not clear to me that they can stepped down
Speaker 1: from the sevent basis point hikes. Stephen, what do you
Speaker 1: make of all the discussion that perhaps we are overlooking
Speaker 1: the lag effect in the rent component, the fact that
Speaker 1: housing does tend to operate on a lag and that
Speaker 1: there may be a decline in the next six months
Speaker 1: that hasn't yet fed into the data, And so we're
Speaker 1: going to get it. Even if the FED doesn't raise
Speaker 1: rates as aggressively, what do you say to people who
Speaker 1: really are arguing that perhaps the FED is overreacting. Yeah, well,
Speaker 1: the research suggests that the lag is from home prices
Speaker 1: to the shelter cost components of the inflation numbers is
Speaker 1: about twelve to eighteen months. So I think our realistic
Speaker 1: scenario here is that maybe rent and owners equivalent rent
Speaker 1: UH continue to accelerate until around the middle of next year. UM.
Speaker 1: And that's a long time for the FED to sit uh,
Speaker 1: you know, to kind of say, trust us, we got
Speaker 1: this under control. I think the other point would be
Speaker 1: that if it were only about shelter costs UM, then
Speaker 1: that argument UM would be very po awful. But the
Speaker 1: reality is that we're seeing UH inflation very hot and
Speaker 1: in many cases accelerating across UH just a you know,
Speaker 1: virtually the entire UM list of categories within the CPI
Speaker 1: or the pc inflators. So this isn't you know, shelters
Speaker 1: one story, um, but it's it's not the only one.
Speaker 1: And unfortunately the data are pointing to a more systemic issue.
Speaker 1: You know, wage pressures are pushing into prices now UM,
Speaker 1: And I think you know, the the risk is that
Speaker 1: the FETE has talked about is that the longer inflation
Speaker 1: is high, the more people get used to it, the
Speaker 1: more they start to incorporate it into their plans. And
Speaker 1: that's why the Feds in a hurry, because they're trying
Speaker 1: to cut that off before uh, it gets kind of
Speaker 1: set in stone. How many times do we sat here
Speaker 1: later and said, they've got more work today, They've got
Speaker 1: more work today. How much are we getting? Are we
Speaker 1: catching up to the Bill Dudley version of the world
Speaker 1: that here yesterday? I mean, but we're there in terms
Speaker 1: of the market expectation. And then you have some people
Speaker 1: including Jason Furman out in Twitter saying that perhaps it's
Speaker 1: even higher than what the market is currently expecting because
Speaker 1: of the sticky components that are rising at a really
Speaker 1: rapid rate. Steven Stanley ms payphon. Steven always wanted for
Speaker 1: to catch out with you, said Garrick Freeman, US Bank
Speaker 1: Asset Management's chief investment officers. So, yeah, we are coming
Speaker 1: off the highs on this early trade. Eric, what's standing
Speaker 1: out to you? What what do you make of all
Speaker 1: these wild moves that we've seen in just the last
Speaker 1: couple of days on the data. Yeah, Nathan, and I
Speaker 1: think the biggest thing we're focused on is what happens
Speaker 1: in the bond market. Clearly we're focused on stocks like
Speaker 1: everybody else's, but the stock market is absolutely taking it's
Speaker 1: it's que from what's happening in bonds. And so I
Speaker 1: think on the back of it was tresh press conference,
Speaker 1: the thought that you did have a relatively but i'm
Speaker 1: responsive fixed income says that you know, perhaps there is
Speaker 1: a little more calm um uh, you know. I I
Speaker 1: do think ultimately our bias is an equity prices head lower,
Speaker 1: not higher over the next call a couple of months,
Speaker 1: but do expect to see a peer amount of variability
Speaker 1: between now and the end of the year. How about
Speaker 1: on the fixed income side, Eric, because you know, we've
Speaker 1: seen double digit declines across pretty much every fixed fixed
Speaker 1: income category and and all the fixed income folks that
Speaker 1: we speak to say that's unprecedented, It's never happened before.
Speaker 1: So when I hear language like that, I'm like, I'm
Speaker 1: just putting all my chips in the fixed income space.
Speaker 1: I mean, you can't get me lower ken it. How
Speaker 1: do you think about fixed income? Yeah, I think that Um,
Speaker 1: you know, it's really difficult to give up with the
Speaker 1: market giving you right now, which is on six month
Speaker 1: treasury paper a four point two plus percent annualized EEL.
Speaker 1: That's that's capital. That Again, you may have some price
Speaker 1: risk between now or the next six months, but unless
Speaker 1: the US government doesn't pay back, which we expect them to,
Speaker 1: that's a that's a pretty tough thing to ignore. So
Speaker 1: you know, without question, there is more discussion about the
Speaker 1: FED becoming more aggressive, and yesterday's data, coupled with the
Speaker 1: very clear message from j Powell from Jackson Hole, suggests
Speaker 1: that the yields likely head higher. But do think that
Speaker 1: for for investors that can take a staggered view over
Speaker 1: the next six to twelve months, starting to dip into
Speaker 1: the front end of the bond curve, we think makes
Speaker 1: a lot of sense. So that would be a priority
Speaker 1: for us in terms of what we're doing with that
Speaker 1: with capital in the here and now. So you're looking
Speaker 1: at greater recession risk than deeper inversion for the yield curve. Yeah,
Speaker 1: I think that the recession odds that we would put
Speaker 1: are definitely greater than fifty fifty. And uh, look, we
Speaker 1: think that the catchup on the slowdown is going to
Speaker 1: really materialize mostly in the first and second quarter of
Speaker 1: next year. So even though markets are forward discounting mechanisms,
Speaker 1: we've still think that there is some some economic and
Speaker 1: some earnings growth concerns that will start to emerge. And again,
Speaker 1: you've done a great job as a team looking at
Speaker 1: earning season as we really kicked that off. And so
Speaker 1: we think that again this quarter probably fairly benign in
Speaker 1: terms of actual results, but outlooks we expect to be
Speaker 1: a little more truncated in terms of enthusiasm from companies.
Speaker 1: So we do think that the weakness will become most
Speaker 1: pronounced in corporate America in the first and second quarter
Speaker 1: of next year, and that would signal a recession to us.
Speaker 1: You mentioned earnings, Uh there, Eric, and we're just kind
Speaker 1: of kicking off the big boys, starting to say, with
Speaker 1: some of the big banks. Uh. And obviously the forward guidance,
Speaker 1: as you mentioned, is going to be really key here.
Speaker 1: Do you have a feel, I guess what's your call
Speaker 1: here on valuation? Um? I mean, obviously will be dependent
Speaker 1: upon kind of some of the earnings and the earnings
Speaker 1: forecast we get. But for this market, is this market cheap.
Speaker 1: Yet yes, I would say that it's not yet cheap
Speaker 1: enough for us to come off what we've had on
Speaker 1: for some time, which is an underweight position to global
Speaker 1: equities and most specifically US and European equities. So we
Speaker 1: do think that the cheap factor is going to likely
Speaker 1: kick in more as we get deeper into first and
Speaker 1: second quarter of next year. And so what I mean
Speaker 1: by that is that we still think that earning his
Speaker 1: expectations for the early part of next year are just
Speaker 1: too high. And again, like you always talked about really
Speaker 1: thoughtful terminal usage in terms of what you can use
Speaker 1: in the Bloember terminal to look at the next couple
Speaker 1: of quarters, next couple of years, we just think that
Speaker 1: the next two quarters are too high, and so that
Speaker 1: we think that rationalization is going to be step one.
Speaker 1: The other rationalization, we think it's going to be the
Speaker 1: FED staying at a higher interst rate terminal level for
Speaker 1: for longer. And so that says to us that yes,
Speaker 1: things do look obviously less expensive, perhaps we do think
Speaker 1: they'll get cheaper, So we would not be in a
Speaker 1: rush to push the valuation argument right now. We'd especially
Speaker 1: be careful about that argument in Europe. Europe is cheap,
Speaker 1: but cheap for a good reason. We think likely it's
Speaker 1: cheaper from here. Well, what do you think is going
Speaker 1: to trigger a capitulation in this market? Yeah, and they said,
Speaker 1: you know, we actually look at about eight different signals
Speaker 1: across our macro research efforts and we've only seen two
Speaker 1: or three fire and so we're not quite there. And
Speaker 1: again we do think that it's going to be a
Speaker 1: combination of big volume. It's gonna be a combination of
Speaker 1: I think two things. One company's really coming clean with
Speaker 1: what next year will look like and then you know,
Speaker 1: and we hope it doesn't happen, but it's certainly could happen.
Speaker 1: Investors throwing up their hands. We have not seen that
Speaker 1: quite yet. You were right to point out the VIX
Speaker 1: index earlier. We think the VIX index can can be
Speaker 1: somewhat of a of a red herring in terms of
Speaker 1: it's forward predictability. But we also look at the move
Speaker 1: index and fixed income. That's something that has been elevated,
Speaker 1: and if we see that elevate on a prolonged basis,
Speaker 1: that would be a reflection to us that investors maybe
Speaker 1: are a little too pessimistic. And we may take the
Speaker 1: other side. All right, Eric, great stuff. We appreciate you
Speaker 1: sticking around. Eric friedmans u S Bank Asset Management chief
Speaker 1: investment officer getting his thoughts on these markets as we
Speaker 1: really get into the thick of earning season. This is
Speaker 1: the Bloomberg Surveillance Podcast. Thanks for listening. Join us live
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Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg