1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along 2 00:00:09,200 --> 00:00:12,720 Speaker 1: with Jonathan Ferrell and Lisa A. Brawmowitz Jay Lee. We 3 00:00:12,840 --> 00:00:16,759 Speaker 1: bring you insight from the best and economics, finance, investment 4 00:00:17,079 --> 00:00:22,440 Speaker 1: and international relations Fine Bloomberg Surveillance on Apple Podcast, Suncloud, 5 00:00:22,800 --> 00:00:26,280 Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Terminal. 6 00:00:29,360 --> 00:00:31,680 Speaker 1: I'm looking at jud In Emmanuel and he's just itching 7 00:00:31,880 --> 00:00:34,040 Speaker 1: to jump in on this. Judy and Dipping Rip, I 8 00:00:34,040 --> 00:00:37,960 Speaker 1: think Mike Wilson and Morgan Stanley asked yesterday, I wouldn't 9 00:00:37,960 --> 00:00:43,400 Speaker 1: do this for anyone else. Mike Wilson turned round and said, 10 00:00:43,440 --> 00:00:45,800 Speaker 1: how is the consensus wrong? He thinks it's not the direction, 11 00:00:45,840 --> 00:00:48,080 Speaker 1: it's the magnitude. Max Kentner coming out this morning, same 12 00:00:48,120 --> 00:00:50,800 Speaker 1: first half. First half might be better than people expect. 13 00:00:50,840 --> 00:00:53,720 Speaker 1: What do you say, Well, look, you know that we're 14 00:00:53,760 --> 00:00:58,240 Speaker 1: in in the dipping rip camp, and frankly, being in 15 00:00:58,280 --> 00:01:01,400 Speaker 1: the consensus has always in a point of of bother 16 00:01:02,400 --> 00:01:04,600 Speaker 1: for us. But when you when you look at it, 17 00:01:04,680 --> 00:01:09,320 Speaker 1: you know you're fighting this whole notion that the FED 18 00:01:09,560 --> 00:01:12,560 Speaker 1: is going to hike at least fifty, maybe seventy five 19 00:01:12,600 --> 00:01:15,360 Speaker 1: basis points more and the I S M S both 20 00:01:15,400 --> 00:01:20,520 Speaker 1: manufacturing and now services are in recession. Let's not hey 21 00:01:20,520 --> 00:01:23,560 Speaker 1: with cham and pal three has away. Some mentioned it 22 00:01:23,680 --> 00:01:26,319 Speaker 1: financial conditions of a somewhat. Do you think he pushes 23 00:01:26,360 --> 00:01:31,319 Speaker 1: back against that? He does? Do you think it works? Uh? Here, 24 00:01:31,360 --> 00:01:33,360 Speaker 1: here's the issue. The issue is there's a lot of 25 00:01:33,400 --> 00:01:36,160 Speaker 1: position in going on in front of Thursday's cp I. 26 00:01:36,760 --> 00:01:41,600 Speaker 1: Uh so, So from the aspect of a cap being 27 00:01:41,720 --> 00:01:45,039 Speaker 1: on risk assets like we saw basically two hours into 28 00:01:45,120 --> 00:01:48,680 Speaker 1: yesterday's session, it probably does work, but it's could be 29 00:01:48,720 --> 00:01:52,080 Speaker 1: an entirely new narrative after that report comes out. Your 30 00:01:52,200 --> 00:01:57,880 Speaker 1: shop invented the synthesis of equity analysis and economic analysis. 31 00:01:57,920 --> 00:02:01,000 Speaker 1: A guy from Texas to this a few years years ago. 32 00:02:01,360 --> 00:02:06,919 Speaker 1: Synthesize right now the enduring Ed Hyman belief that America 33 00:02:07,080 --> 00:02:11,239 Speaker 1: clears itself like nobody else. We will get through higher rates, 34 00:02:11,560 --> 00:02:13,680 Speaker 1: we will get through all the tech layoffs and all 35 00:02:13,720 --> 00:02:17,560 Speaker 1: the other drama. It's out there. Synthesize the optimism on 36 00:02:17,639 --> 00:02:20,920 Speaker 1: your floor right now, well point blank. Ed has been 37 00:02:21,160 --> 00:02:24,880 Speaker 1: of the view a good nine months now that inflation 38 00:02:24,960 --> 00:02:27,840 Speaker 1: is going to fall faster than the market believes, and 39 00:02:27,919 --> 00:02:31,720 Speaker 1: thus far it's starting to materialize. His full year inflation 40 00:02:31,760 --> 00:02:36,359 Speaker 1: forecast is two and a half percent the golden to handle. Okay, 41 00:02:36,720 --> 00:02:40,040 Speaker 1: that is an entire new set of circumstances for the 42 00:02:40,080 --> 00:02:42,840 Speaker 1: FED to deal with if in fact that's right, And 43 00:02:42,840 --> 00:02:46,520 Speaker 1: and you know that is probably in and of itself 44 00:02:46,680 --> 00:02:49,960 Speaker 1: the argument for risk assets that we think materializes at 45 00:02:50,000 --> 00:02:51,440 Speaker 1: the end of the year, at the end of the year, 46 00:02:51,560 --> 00:02:53,040 Speaker 1: but not at the beginning of the year. And this 47 00:02:53,080 --> 00:02:55,000 Speaker 1: is what I wanted to raise because I actually understand 48 00:02:55,000 --> 00:02:57,000 Speaker 1: what Max Kettner is getting at people who are saying, 49 00:02:57,200 --> 00:02:59,560 Speaker 1: wait a second, the data isn't that bad. There has 50 00:02:59,600 --> 00:03:02,040 Speaker 1: been eight change in facts with better than expected weather, 51 00:03:02,120 --> 00:03:05,119 Speaker 1: warmer than expected weather, and a China that's reopening. Why 52 00:03:05,160 --> 00:03:07,960 Speaker 1: isn't that enough to sustain things for a bit longer? 53 00:03:08,000 --> 00:03:10,640 Speaker 1: Before people hear what Raphael Boss is saying. I am 54 00:03:10,680 --> 00:03:13,480 Speaker 1: not a pivot guy, look, no question about it. The 55 00:03:13,919 --> 00:03:16,399 Speaker 1: surprise to me when I got to the green room 56 00:03:16,840 --> 00:03:19,240 Speaker 1: was to look at natural guests and realize it has 57 00:03:19,280 --> 00:03:21,600 Speaker 1: a three handle on it after what we've seen the 58 00:03:21,680 --> 00:03:24,920 Speaker 1: last several months. That's a big deal. But but at 59 00:03:24,919 --> 00:03:26,920 Speaker 1: the end of the day, we have this set of 60 00:03:26,960 --> 00:03:32,000 Speaker 1: circumstances where the FED is intent on raining in the 61 00:03:32,120 --> 00:03:35,480 Speaker 1: labor situation, and the only way you do that at 62 00:03:35,520 --> 00:03:38,280 Speaker 1: this point is to cause I wouldn't call it a 63 00:03:38,360 --> 00:03:41,280 Speaker 1: material slow down, but look ed is looking for a 64 00:03:41,320 --> 00:03:44,360 Speaker 1: couple of negative GDP quarters what we used to call 65 00:03:44,480 --> 00:03:47,840 Speaker 1: until the first half of last year a recession. Okay, 66 00:03:48,080 --> 00:03:50,240 Speaker 1: and I understand they dig There is a lot of 67 00:03:50,240 --> 00:03:52,680 Speaker 1: people are saying it didn't actually happen. So what causes 68 00:03:53,120 --> 00:03:55,760 Speaker 1: the rip? What causes the upside? If the FETE is 69 00:03:55,800 --> 00:03:59,839 Speaker 1: determined to bring inflation down, if they're really going gangbusters 70 00:03:59,840 --> 00:04:02,720 Speaker 1: the air, and you don't necessarily get some sort of 71 00:04:02,760 --> 00:04:05,640 Speaker 1: fiscal impulse or anything to really drive things near the direction. 72 00:04:06,680 --> 00:04:11,520 Speaker 1: It's essentially this idea that there is a terminal, you know, 73 00:04:11,800 --> 00:04:16,440 Speaker 1: endpoint to the hiking. You don't necessarily need to see 74 00:04:16,480 --> 00:04:19,720 Speaker 1: the easing, and the market is probably and I think 75 00:04:19,760 --> 00:04:22,160 Speaker 1: we're going to hear this in a few hours incorrect 76 00:04:22,240 --> 00:04:25,400 Speaker 1: and believing that there's going to be any sort of 77 00:04:25,480 --> 00:04:29,599 Speaker 1: material easing in three But what it really is is 78 00:04:29,640 --> 00:04:33,039 Speaker 1: what you have every time at market bottoms. There has 79 00:04:33,160 --> 00:04:37,520 Speaker 1: never been a bear market bottom without a capitulation, without 80 00:04:37,560 --> 00:04:41,600 Speaker 1: an emotional volatility spike, and that in it of itself 81 00:04:41,960 --> 00:04:44,359 Speaker 1: clears the playing field for the next bowl market. And 82 00:04:44,400 --> 00:04:47,039 Speaker 1: we think that's going to happen if I'm not in cash, 83 00:04:47,080 --> 00:04:50,680 Speaker 1: where am I? What sectors have value and have protection? 84 00:04:51,200 --> 00:04:55,120 Speaker 1: We continue to think that value has value. Okay, it 85 00:04:55,279 --> 00:04:58,320 Speaker 1: is going to be challenged for the next couple of 86 00:04:58,360 --> 00:05:02,960 Speaker 1: weeks at mids Uh, That's that's part of it. Look, 87 00:05:03,000 --> 00:05:08,320 Speaker 1: we're very defensive minded right now. Consumer staples, healthcare, and 88 00:05:08,560 --> 00:05:11,520 Speaker 1: energy continues to be you know, it's sort of the 89 00:05:11,560 --> 00:05:15,080 Speaker 1: pinata back and forth, you know, with ways of emotion 90 00:05:15,240 --> 00:05:17,479 Speaker 1: and you know, ticks in the oil price. But at 91 00:05:17,520 --> 00:05:19,800 Speaker 1: the end of the day, even if we dip into 92 00:05:19,839 --> 00:05:23,280 Speaker 1: a recession, energy is five percent of the index weight 93 00:05:23,440 --> 00:05:25,479 Speaker 1: and it's going to account for nine percent of the 94 00:05:25,480 --> 00:05:28,320 Speaker 1: earnings issues. So you don't think TANK can regain leadership here, 95 00:05:28,440 --> 00:05:31,920 Speaker 1: it's basically the message. In the short term, it absolutely can. 96 00:05:32,120 --> 00:05:35,279 Speaker 1: But in the long term, look, the fact is is 97 00:05:35,320 --> 00:05:39,040 Speaker 1: that the investing public still owns too much. Fang, you're 98 00:05:39,040 --> 00:05:41,400 Speaker 1: a student of market history. I think what we're all 99 00:05:41,480 --> 00:05:43,919 Speaker 1: leaning on here is this idea that's incredibly rare to 100 00:05:43,960 --> 00:05:47,000 Speaker 1: get a market low before the recession. Is that basically 101 00:05:47,000 --> 00:05:50,839 Speaker 1: the argument here? Yeah, in a nutshell, absolutely it would 102 00:05:50,880 --> 00:05:54,160 Speaker 1: it would look again, we have to take it from 103 00:05:54,200 --> 00:05:57,120 Speaker 1: the jump off point that everything that we've seen in 104 00:05:57,160 --> 00:06:01,040 Speaker 1: the last three years is about, you know, has very little, 105 00:06:01,120 --> 00:06:04,880 Speaker 1: if any historical precedent, but this is one of these things. 106 00:06:05,920 --> 00:06:09,760 Speaker 1: Entire the entirety of two We were asked, when's the capitulation, 107 00:06:09,839 --> 00:06:13,680 Speaker 1: when's the chicarsis, when's the emotion? It's coming? And the 108 00:06:13,800 --> 00:06:16,880 Speaker 1: saint Yeah, Junemanny, what have a acre alongside us in 109 00:06:16,960 --> 00:06:19,240 Speaker 1: the studio today, Judy, what do you make of all 110 00:06:19,279 --> 00:06:22,080 Speaker 1: this euro optimism we're waking up to this morning and 111 00:06:22,080 --> 00:06:23,960 Speaker 1: this dollar weakness was seeing as well off the back 112 00:06:23,960 --> 00:06:27,719 Speaker 1: of this chin of reopening story. Uh. In the immediate term, 113 00:06:27,839 --> 00:06:30,080 Speaker 1: it may be a little bit in terms of the 114 00:06:30,120 --> 00:06:34,719 Speaker 1: reaction of of euro dollar at one oh seven, that's understandable. 115 00:06:35,080 --> 00:06:38,240 Speaker 1: But the bigger picture is is that what the last 116 00:06:38,400 --> 00:06:42,839 Speaker 1: nine months have been about is ridding the Eurozone of 117 00:06:42,920 --> 00:06:47,520 Speaker 1: the psychology of negative interest rates. It's very difficult to 118 00:06:47,720 --> 00:06:52,720 Speaker 1: overstate how important that is for risk assets, for investors, 119 00:06:52,960 --> 00:06:57,320 Speaker 1: you know, assessing capital allocation decisions. Uh, you know, in 120 00:06:57,440 --> 00:07:01,279 Speaker 1: that part of the world. And when you think at 121 00:07:01,320 --> 00:07:05,520 Speaker 1: the about the discount for over a decade during which 122 00:07:05,560 --> 00:07:10,720 Speaker 1: time the dollar rallied almost consistently. It makes sense the 123 00:07:10,760 --> 00:07:13,520 Speaker 1: case for Europe. What's revenue growth do if we get 124 00:07:13,520 --> 00:07:16,800 Speaker 1: an ed him an inflation scenario, which is a forty 125 00:07:16,880 --> 00:07:19,280 Speaker 1: eight or fifty two I can't remember even into alright, 126 00:07:19,320 --> 00:07:22,600 Speaker 1: deflation in the early fifties, What does corporate revenue growth 127 00:07:22,680 --> 00:07:26,960 Speaker 1: do given a rapid disinflation. It's certainly going to decline, 128 00:07:26,960 --> 00:07:31,880 Speaker 1: and it's going to decline faster than the market expects. 129 00:07:32,600 --> 00:07:36,239 Speaker 1: Is it going to go negative? Very unlikely, because frankly, 130 00:07:36,280 --> 00:07:39,400 Speaker 1: again you have the other side of the fact that 131 00:07:39,480 --> 00:07:44,440 Speaker 1: you've got so much stock of consumer savings, and in 132 00:07:44,480 --> 00:07:47,560 Speaker 1: that environment, one might be able to argue that you're 133 00:07:47,560 --> 00:07:49,800 Speaker 1: going to have I wouldn't say a soft landing, but 134 00:07:50,000 --> 00:07:53,360 Speaker 1: not a crash to call it over five in the 135 00:07:53,440 --> 00:07:56,840 Speaker 1: unemployment rate, and so you're still going to have that 136 00:07:56,960 --> 00:08:01,080 Speaker 1: backstop that gets you through the shallow session to the 137 00:08:01,160 --> 00:08:04,000 Speaker 1: recovery in twenty four. If this is true, does that 138 00:08:04,040 --> 00:08:08,080 Speaker 1: mean that the FED the e CP can remove accommodation completely, 139 00:08:08,320 --> 00:08:12,240 Speaker 1: go from negative or zero to two three four percent 140 00:08:12,560 --> 00:08:15,480 Speaker 1: without causing a financial crisis, without causing a crash, a 141 00:08:15,480 --> 00:08:18,400 Speaker 1: normalization that just leaves a couple of potholes, but not 142 00:08:18,440 --> 00:08:21,680 Speaker 1: that much more along the way. It's very difficult. It's 143 00:08:21,840 --> 00:08:28,000 Speaker 1: literally only happened. Uh And interestingly enough, when you look 144 00:08:28,040 --> 00:08:31,000 Speaker 1: at ninety four, that was the only other year in 145 00:08:31,040 --> 00:08:34,400 Speaker 1: the bond stock quadrant where you had negative returns to 146 00:08:34,520 --> 00:08:37,000 Speaker 1: both bonds and socks. Granted there were nowhere near the 147 00:08:37,040 --> 00:08:40,680 Speaker 1: scope of what we saw in two, but the upside 148 00:08:40,720 --> 00:08:42,840 Speaker 1: is it is possible. But we reverted back to low 149 00:08:42,920 --> 00:08:45,360 Speaker 1: yields after that, and it really entered this decade, these 150 00:08:45,360 --> 00:08:48,520 Speaker 1: two decades, three decades of the incredible bond rally. If 151 00:08:48,520 --> 00:08:50,520 Speaker 1: we don't get that, if this is the new normal, 152 00:08:50,600 --> 00:08:53,520 Speaker 1: maybe not this high, but a three percent fed funds rate, 153 00:08:53,640 --> 00:08:55,840 Speaker 1: an e c B rate of two percent, does that 154 00:08:55,920 --> 00:08:57,520 Speaker 1: mean that we can just live with that? Then it 155 00:08:57,600 --> 00:09:00,320 Speaker 1: just is basically, money isn't free, but it's not gonna 156 00:09:00,360 --> 00:09:03,520 Speaker 1: necessarily cause some complete rereading of stock and bond returns 157 00:09:03,520 --> 00:09:05,760 Speaker 1: for a longer period of time. It is possible. It's 158 00:09:05,760 --> 00:09:09,880 Speaker 1: going to compress multiples, it's going to compress leverage, it's 159 00:09:09,920 --> 00:09:13,560 Speaker 1: going to compress valuations across assets. But it isn't a 160 00:09:13,640 --> 00:09:16,080 Speaker 1: deal killer, and at the end of the day, it 161 00:09:16,160 --> 00:09:20,520 Speaker 1: doesn't depress materially the concept of earnings and earning growth, 162 00:09:20,640 --> 00:09:23,320 Speaker 1: which is what drives stock process in Europe. This goes 163 00:09:23,520 --> 00:09:26,600 Speaker 1: beyond the weather. This seems to all go back to China. 164 00:09:27,120 --> 00:09:28,600 Speaker 1: I think so many of the calls that we're seeing 165 00:09:28,600 --> 00:09:31,280 Speaker 1: this morning are underpinned by this more optimistic constructive for 166 00:09:31,280 --> 00:09:34,320 Speaker 1: you on China reopening, Morgan Stanley, We're pretty blunt about it. 167 00:09:34,360 --> 00:09:36,920 Speaker 1: We believe the market is under appreciating the farm reaching 168 00:09:37,000 --> 00:09:40,800 Speaker 1: ramifications of reopening and the possibility that a robust cyclical 169 00:09:40,800 --> 00:09:44,080 Speaker 1: recovery can occur despite lingering structural headwinds. So make it 170 00:09:44,120 --> 00:09:46,000 Speaker 1: really simple. I think for a lot of people waking 171 00:09:46,040 --> 00:09:48,120 Speaker 1: up this morning in the market, they want to work 172 00:09:48,120 --> 00:09:50,800 Speaker 1: out whether they should be investing in a story where 173 00:09:50,800 --> 00:09:53,839 Speaker 1: growth slows or investing in a story where growth rebounds. 174 00:09:53,920 --> 00:09:57,480 Speaker 1: Which one is it. We think there's a very good 175 00:09:57,520 --> 00:10:01,439 Speaker 1: case to be made for China assets right now. In fact, 176 00:10:01,440 --> 00:10:04,679 Speaker 1: our China strategist Neo Wang thinks we get to six 177 00:10:04,760 --> 00:10:10,120 Speaker 1: point two percent GDP growth this year. Yep. It's just stunning. 178 00:10:10,200 --> 00:10:14,679 Speaker 1: Yep exactly, And I s I ever Core Asian Economists 179 00:10:14,679 --> 00:10:18,840 Speaker 1: feels they get a six plus handle. Ye wow, absolutely, John, 180 00:10:18,840 --> 00:10:21,559 Speaker 1: what we're talking about here in my head is spinning 181 00:10:21,600 --> 00:10:23,719 Speaker 1: over where we were three weeks So I believe three 182 00:10:23,760 --> 00:10:25,560 Speaker 1: weeks ago the world was ending as we know it, 183 00:10:26,240 --> 00:10:28,360 Speaker 1: and now we've got all this optimism mere and only 184 00:10:28,440 --> 00:10:33,240 Speaker 1: one thing has changed. Disinflation in Spain, disinflation in France, 185 00:10:33,320 --> 00:10:37,360 Speaker 1: some other place. I can't remember this stunning six percent call, 186 00:10:37,920 --> 00:10:41,160 Speaker 1: stunning six percent call on China, and what are we 187 00:10:41,200 --> 00:10:43,079 Speaker 1: going to see Thursday in the United So I'll answer 188 00:10:43,080 --> 00:10:45,280 Speaker 1: my own question. I guess it depends where you look. 189 00:10:45,360 --> 00:10:47,280 Speaker 1: If you look to China, things look better. If you 190 00:10:47,280 --> 00:10:49,360 Speaker 1: look to the United States, maybe things look worse. And 191 00:10:49,440 --> 00:10:52,160 Speaker 1: Judian just as a final question that teas up the 192 00:10:52,320 --> 00:10:55,000 Speaker 1: question we ask almost every single January, every single year 193 00:10:55,400 --> 00:10:58,800 Speaker 1: is whether we can get our performance x US, whether 194 00:10:58,840 --> 00:11:02,760 Speaker 1: that's where the performance is international markets beyond US shows 195 00:11:02,880 --> 00:11:05,400 Speaker 1: isn't that where it is? So so it's it's been 196 00:11:05,440 --> 00:11:08,600 Speaker 1: it fits and starts type of argument. And again, if 197 00:11:08,600 --> 00:11:11,760 Speaker 1: you look at the broad sweep, it's because of the 198 00:11:11,760 --> 00:11:14,160 Speaker 1: prevalence of negative rates in much of the rest of 199 00:11:14,160 --> 00:11:17,240 Speaker 1: the world and because the dollar has rallied. We think 200 00:11:17,280 --> 00:11:19,720 Speaker 1: that we're not saying you're in the dollar bearer market, 201 00:11:19,920 --> 00:11:22,240 Speaker 1: but the dollar has topped in our view, and that 202 00:11:22,400 --> 00:11:25,120 Speaker 1: is absolutely tail when for the rest of the world 203 00:11:25,160 --> 00:11:28,240 Speaker 1: out performance this was great. Should Manuel I've a kill 204 00:11:28,320 --> 00:11:40,080 Speaker 1: in a studio. Let's go on dow in an important 205 00:11:40,080 --> 00:11:42,880 Speaker 1: conversation for Global Wall Street, Mr Kentner, where the chief 206 00:11:42,960 --> 00:11:46,040 Speaker 1: multiss strategist that hus be seeing, Max John's got a 207 00:11:46,040 --> 00:11:48,880 Speaker 1: lot of important questions. I'm gonna do this simple. How 208 00:11:48,920 --> 00:11:52,520 Speaker 1: do you dovetail your shift into Steve Major's call for 209 00:11:52,600 --> 00:11:56,319 Speaker 1: low interest rates? Yeah? Good morning. So I think it's 210 00:11:56,320 --> 00:11:59,199 Speaker 1: probably the key question is already around the sequencing, right, 211 00:11:59,280 --> 00:12:01,760 Speaker 1: not so much where the end results is going to be. 212 00:12:02,080 --> 00:12:05,480 Speaker 1: I think it's really a sequencing question. And with this 213 00:12:05,840 --> 00:12:10,079 Speaker 1: really really pessimistic, you know, these pessimistic outlooks that we 214 00:12:10,200 --> 00:12:12,040 Speaker 1: got both from the cell side and the buy side 215 00:12:12,720 --> 00:12:16,040 Speaker 1: in the last couple of months, I think there is 216 00:12:16,080 --> 00:12:18,520 Speaker 1: a very very strong contenders, and it is my feeling 217 00:12:18,559 --> 00:12:22,800 Speaker 1: that it's probably the most concentrated consensus that we had 218 00:12:22,840 --> 00:12:25,400 Speaker 1: ever since the end of twenties seventeen. You may remember 219 00:12:25,400 --> 00:12:29,440 Speaker 1: back then we had this idea of globally synchronized growth 220 00:12:29,480 --> 00:12:32,400 Speaker 1: that really then went horribly wrong in twenty eighteen, and 221 00:12:32,480 --> 00:12:34,720 Speaker 1: I think that's probably as much you know as much 222 00:12:34,720 --> 00:12:38,480 Speaker 1: of a concentrated consensus as we've got right now. So therefore, 223 00:12:38,600 --> 00:12:41,719 Speaker 1: what simply what we're saying is that actually against the 224 00:12:41,720 --> 00:12:45,360 Speaker 1: backgroup of such a concentrated consentus, there's simply a lack 225 00:12:45,360 --> 00:12:48,720 Speaker 1: of downside catalysts, a lack of downsides of prises, and 226 00:12:48,800 --> 00:12:51,600 Speaker 1: therefore the only way is up. So Max, let's talk 227 00:12:51,640 --> 00:12:56,319 Speaker 1: about that. So your words super depressed growth expectations are key. 228 00:12:56,600 --> 00:12:59,120 Speaker 1: Is there any evidence Max, here that those growth expectations 229 00:12:59,120 --> 00:13:01,920 Speaker 1: are captured in the ice of markets right now and 230 00:13:01,960 --> 00:13:04,760 Speaker 1: where you're seeing that? Yeah? I think so. I think 231 00:13:04,760 --> 00:13:06,880 Speaker 1: when we look at market pricing, so we look at 232 00:13:06,880 --> 00:13:10,480 Speaker 1: things like equities versus rates, we look at equities versus 233 00:13:10,559 --> 00:13:13,000 Speaker 1: rates against p M e s, equities versus fixed income, 234 00:13:13,400 --> 00:13:17,040 Speaker 1: comparing that against break evens, across acid relationships or cross 235 00:13:17,040 --> 00:13:20,200 Speaker 1: acid against macro relationships. All of that looks a bit more, 236 00:13:20,559 --> 00:13:23,079 Speaker 1: a bit more realistic now. And I think one thing 237 00:13:23,080 --> 00:13:25,400 Speaker 1: that I would say is it's it's not like we're 238 00:13:25,480 --> 00:13:27,400 Speaker 1: super bullish, right, It's not like I'm saying, you know, 239 00:13:27,440 --> 00:13:29,280 Speaker 1: growth is going to go through the roof and it's 240 00:13:29,280 --> 00:13:31,920 Speaker 1: gonna be rock and roll. The only thing I'm gonna 241 00:13:31,960 --> 00:13:34,000 Speaker 1: say as well. It's not gonna be a rocky horror show, 242 00:13:34,120 --> 00:13:36,839 Speaker 1: right so that that's the only thing that I'm saying 243 00:13:36,840 --> 00:13:41,439 Speaker 1: that basically we're not going to see such extreme pessimism 244 00:13:41,520 --> 00:13:45,600 Speaker 1: and such against the factup of such extreme pessimism. You know, 245 00:13:45,840 --> 00:13:49,080 Speaker 1: you don't need an awful lot of positive surprises, right 246 00:13:49,160 --> 00:13:52,640 Speaker 1: to really make risk asses get going a little bit 247 00:13:52,960 --> 00:13:54,840 Speaker 1: at the upside. And in the first half of the year, 248 00:13:55,000 --> 00:13:56,559 Speaker 1: it could change in the second half of the year, 249 00:13:56,640 --> 00:14:00,720 Speaker 1: right when the ultimate the ultimate level of inflation. Perhaps 250 00:14:00,760 --> 00:14:02,800 Speaker 1: then it's a bit sticky then thought, But you know 251 00:14:03,000 --> 00:14:06,080 Speaker 1: that's something for in six nine months time, not something 252 00:14:06,080 --> 00:14:08,120 Speaker 1: to fret about right now. Why don't get the feeling 253 00:14:08,120 --> 00:14:13,520 Speaker 1: you practiced that line a little bit earlier this morning, Suitely, Max, 254 00:14:13,600 --> 00:14:16,040 Speaker 1: Let's finish on this underweight in cash that you did have. 255 00:14:16,520 --> 00:14:19,080 Speaker 1: Where you allocating that capital? Where does it go? We've 256 00:14:19,080 --> 00:14:22,200 Speaker 1: had some big calls this morning on China reopening, Morkan 257 00:14:22,280 --> 00:14:24,920 Speaker 1: Stanley one of them on the Eurozone Goldener dropping its 258 00:14:24,920 --> 00:14:29,440 Speaker 1: recession call. Where does that cash call go now? So 259 00:14:29,480 --> 00:14:33,080 Speaker 1: it's not going into full on overweight equities yet, right, 260 00:14:33,080 --> 00:14:35,800 Speaker 1: So we haven't been as crazy as going from maximum 261 00:14:35,880 --> 00:14:38,520 Speaker 1: weeight equity is to max overweight equities, So we're sort 262 00:14:38,520 --> 00:14:41,160 Speaker 1: of dipping out of toes. We're going into i G credit, 263 00:14:41,240 --> 00:14:44,320 Speaker 1: into high yeld credit, into emerging market debt, right, so 264 00:14:44,400 --> 00:14:47,800 Speaker 1: really sort of dipping out toes into risk acids. It's 265 00:14:47,840 --> 00:14:50,440 Speaker 1: still a preference of value over growth rate and equities. 266 00:14:50,480 --> 00:14:53,680 Speaker 1: So we still actually like European equities, um, you know, 267 00:14:53,720 --> 00:14:56,680 Speaker 1: we like European equities more than US equities. Really like 268 00:14:56,800 --> 00:14:59,680 Speaker 1: also in EM and Chinese equities now, so I do 269 00:15:00,080 --> 00:15:03,080 Speaker 1: in against the backdrup of Chinese reopening. Still a bit 270 00:15:03,120 --> 00:15:06,640 Speaker 1: of underlying pessimism around Chinese growth, right, So we've just 271 00:15:06,720 --> 00:15:09,840 Speaker 1: heard a bit of a pretty old call around China 272 00:15:09,880 --> 00:15:12,760 Speaker 1: growth early on in your program. It's at starting to 273 00:15:12,800 --> 00:15:16,160 Speaker 1: happen now people are starting to drop recession calls for 274 00:15:16,240 --> 00:15:19,560 Speaker 1: Europe and for the Eurozone. All that really should be 275 00:15:19,800 --> 00:15:22,320 Speaker 1: continuing in the next couple of weeks, and as that 276 00:15:22,440 --> 00:15:26,520 Speaker 1: rear repraisal really continues, that should be beneficial for EM 277 00:15:26,600 --> 00:15:29,600 Speaker 1: equities and for European equity. So what's on the other side, Max, 278 00:15:29,840 --> 00:15:33,160 Speaker 1: with the rocky horror show potential that you were talking 279 00:15:33,200 --> 00:15:35,680 Speaker 1: about for the first half that seems to be pushed out. 280 00:15:35,960 --> 00:15:38,200 Speaker 1: What are you looking for to determine whether you should 281 00:15:38,240 --> 00:15:41,840 Speaker 1: go back into your defensive hunch. Yeah, I think the 282 00:15:41,840 --> 00:15:44,560 Speaker 1: defensive haunch is probably towards the second half of the year. 283 00:15:44,640 --> 00:15:48,880 Speaker 1: Once we've seen the negative rate of change in inflation 284 00:15:48,960 --> 00:15:51,000 Speaker 1: play out, which is really probably going to be happening 285 00:15:51,080 --> 00:15:53,400 Speaker 1: over the next sort of four or five months, right 286 00:15:54,000 --> 00:15:57,400 Speaker 1: then was something you to start saying, Okay, now the 287 00:15:57,440 --> 00:16:00,720 Speaker 1: negative rate of inflation is in the real right, that's 288 00:16:00,720 --> 00:16:03,480 Speaker 1: the rear view. Now we've played that. Now let's talk 289 00:16:03,480 --> 00:16:06,280 Speaker 1: about the ultimate level of inflation work in a state? 290 00:16:06,920 --> 00:16:09,320 Speaker 1: Does the FED have to you know, and does the 291 00:16:09,360 --> 00:16:11,840 Speaker 1: FED in other center branks have to keep raids a 292 00:16:11,840 --> 00:16:14,160 Speaker 1: little bit higher for longer? Does do the put first 293 00:16:14,240 --> 00:16:16,600 Speaker 1: have to be praised at? And that then could be 294 00:16:16,760 --> 00:16:20,280 Speaker 1: leading to perhaps an accident on financial markets or a 295 00:16:20,320 --> 00:16:26,280 Speaker 1: retightening of financial conditions via higher higher credit spreads, lower equities. 296 00:16:26,680 --> 00:16:28,800 Speaker 1: That's then something for the second half of the year 297 00:16:28,880 --> 00:16:32,240 Speaker 1: once that, you know, once that focus shift from initially 298 00:16:32,280 --> 00:16:35,360 Speaker 1: now the negative rate of change in inflation, so the 299 00:16:35,440 --> 00:16:38,880 Speaker 1: delta and inflation, to the ultimate level of inflation where 300 00:16:38,880 --> 00:16:41,560 Speaker 1: we're going to encompat. Do you think that the ultimate 301 00:16:41,680 --> 00:16:45,480 Speaker 1: path for European equities is actually more positive than you 302 00:16:45,560 --> 00:16:49,480 Speaker 1: previously thought because of this d emphasis a U s 303 00:16:49,520 --> 00:16:52,640 Speaker 1: tech basically that yes, there might be a downturn, but 304 00:16:52,680 --> 00:16:56,920 Speaker 1: the optimism around Europe is sustainable. Yeah, I think so, 305 00:16:57,040 --> 00:17:00,240 Speaker 1: especially against the expectations. Right. Let's let's remember there's two 306 00:17:00,240 --> 00:17:01,920 Speaker 1: things that we do in markets. We trade the rate 307 00:17:02,000 --> 00:17:05,240 Speaker 1: of change and we trade data versus consensus. Right, we 308 00:17:05,280 --> 00:17:08,760 Speaker 1: don't really care whether data is, say, we care about 309 00:17:08,800 --> 00:17:12,359 Speaker 1: how it pans out against consensus expectations. And I would 310 00:17:12,440 --> 00:17:14,879 Speaker 1: argue one and a half two months ago it was 311 00:17:15,280 --> 00:17:18,120 Speaker 1: there was barely any ball to be found on Europe. Right, 312 00:17:18,160 --> 00:17:21,240 Speaker 1: So that's not long ago. That's just starting now, right, 313 00:17:21,440 --> 00:17:24,280 Speaker 1: that shift is just starting. So I would really expect 314 00:17:24,600 --> 00:17:27,480 Speaker 1: there is a bit more, a bit more more positive, 315 00:17:27,640 --> 00:17:31,040 Speaker 1: a bit more a positive run to go for for Europe, 316 00:17:31,080 --> 00:17:35,080 Speaker 1: both on the credit side, on EFX and on equities. Wow. Max, 317 00:17:35,240 --> 00:17:37,119 Speaker 1: great to catch out, buddy, Thanks for jumping on with us. 318 00:17:37,200 --> 00:17:44,399 Speaker 1: Max counting there of HSPC Lindsay pegs are with US 319 00:17:44,800 --> 00:17:47,760 Speaker 1: chief economists Stephile lindsay, I'm gonna cut to the chase. 320 00:17:47,960 --> 00:17:51,240 Speaker 1: Our audiences, our viewers are listeners, their heads are spinning 321 00:17:51,680 --> 00:17:55,399 Speaker 1: Atlanta GDP now is a stunning three and a half 322 00:17:55,440 --> 00:17:59,359 Speaker 1: percent plus guestimate of where we are. The fourth quarter 323 00:17:59,400 --> 00:18:02,639 Speaker 1: looks pretty good after all the gloom. Where is the 324 00:18:02,720 --> 00:18:07,399 Speaker 1: assured nous of economic slowdown in this ninety days or 325 00:18:07,520 --> 00:18:10,760 Speaker 1: dare I say even Q two? Well, I think the 326 00:18:10,800 --> 00:18:14,040 Speaker 1: assuredness comes from the weakness that we're seeing on part 327 00:18:14,040 --> 00:18:16,480 Speaker 1: of the consumer. As a consumer based economy, if the 328 00:18:16,560 --> 00:18:19,679 Speaker 1: consumer is not out in the marketplace, happy and healthy, 329 00:18:19,760 --> 00:18:22,919 Speaker 1: we would expect a meaningful decline from that more robust 330 00:18:23,000 --> 00:18:25,560 Speaker 1: pace as we saw in the second half of the year, 331 00:18:25,920 --> 00:18:29,119 Speaker 1: and against the backdrop of negative real income growth, higher 332 00:18:29,160 --> 00:18:32,680 Speaker 1: borrowing cards, and of course many consumers facing the risk 333 00:18:32,920 --> 00:18:36,320 Speaker 1: of variable rate debt resetting in the first quarter at 334 00:18:36,400 --> 00:18:41,080 Speaker 1: higher levels. This will compound the pressure on consumers. Linsy, 335 00:18:41,119 --> 00:18:44,000 Speaker 1: you're reading my mind. The chart yesterday, I believe zero 336 00:18:44,000 --> 00:18:46,080 Speaker 1: hedg chat at thank you zero hedge and it was 337 00:18:46,240 --> 00:18:49,320 Speaker 1: a big, a bloomberg chart. I can't remember of the 338 00:18:49,359 --> 00:18:52,760 Speaker 1: credit card interest rate is a variable rate. I mean, 339 00:18:52,760 --> 00:18:55,640 Speaker 1: we're all looking at housing in that, but fold into 340 00:18:55,680 --> 00:19:02,960 Speaker 1: your analysis credit card rates that were to how does 341 00:19:03,000 --> 00:19:07,240 Speaker 1: that play in to the caution Well, it plays in significantly, 342 00:19:07,240 --> 00:19:11,760 Speaker 1: particularly as savings are now drawn down to near zero levels. 343 00:19:11,800 --> 00:19:15,119 Speaker 1: Whmembere the consumer was very much supported by this accumulation 344 00:19:15,160 --> 00:19:18,600 Speaker 1: of wealth during the pandemic and the immediate aftermath. We 345 00:19:18,760 --> 00:19:21,560 Speaker 1: estimate there was an additional about six trillion in terms 346 00:19:21,600 --> 00:19:25,080 Speaker 1: of a wealth cushion supporting consumers, and that removed any 347 00:19:25,080 --> 00:19:28,160 Speaker 1: sense of immediacy to revert back to the normal labor 348 00:19:28,200 --> 00:19:32,320 Speaker 1: force participation formation that we've seen in previous cycles. But 349 00:19:32,359 --> 00:19:35,240 Speaker 1: now as we go forward and consumers draw down that savings, 350 00:19:35,560 --> 00:19:39,080 Speaker 1: we're seeing this return to a reliance on credit card debt. Now, 351 00:19:39,160 --> 00:19:43,600 Speaker 1: arguably the household balance sheet is beginning from relatively healthier 352 00:19:43,680 --> 00:19:47,080 Speaker 1: position than in previous cycles, but still we don't have 353 00:19:47,520 --> 00:19:50,600 Speaker 1: this unlimited amount of wiggle room for consumers to take 354 00:19:50,600 --> 00:19:53,240 Speaker 1: on that new amount of debt, and particularly as that 355 00:19:53,280 --> 00:19:57,080 Speaker 1: debt is now repricing at higher levels, this will compound 356 00:19:57,119 --> 00:20:00,720 Speaker 1: that pressure as I said, on consumers limited their ability 357 00:20:00,720 --> 00:20:03,119 Speaker 1: to go out into the marketplace. That doesn't mean that 358 00:20:03,160 --> 00:20:05,600 Speaker 1: consumers are going to fall off a cliff, but that 359 00:20:05,640 --> 00:20:09,359 Speaker 1: does mean a meaningful loss of momentum, and again is 360 00:20:09,359 --> 00:20:11,320 Speaker 1: the key part of the economy is going to be 361 00:20:11,400 --> 00:20:14,639 Speaker 1: nearly impossible to maintain then that level of three percent 362 00:20:14,760 --> 00:20:17,359 Speaker 1: growth as we turned the corner now into the new year. So, lindsay, 363 00:20:17,359 --> 00:20:19,199 Speaker 1: would you push back against some of the optimism that 364 00:20:19,240 --> 00:20:21,720 Speaker 1: we've been hearing from people who have been pessimistic through 365 00:20:21,760 --> 00:20:24,959 Speaker 1: all of the second half of last year. Well, I 366 00:20:25,000 --> 00:20:28,679 Speaker 1: think the timeline for the pessimism to set in was extended. 367 00:20:28,760 --> 00:20:33,080 Speaker 1: Consumers did prove to be surprisingly resilient through much of 368 00:20:33,080 --> 00:20:37,000 Speaker 1: this turmoil INWO But again, it doesn't negate the fact 369 00:20:37,080 --> 00:20:41,159 Speaker 1: that these outlying variables will weigh on the consumer and 370 00:20:41,240 --> 00:20:44,320 Speaker 1: limit their ability to spend. There's only so much savings 371 00:20:44,560 --> 00:20:46,679 Speaker 1: that we can draw down, there's only so much credit 372 00:20:46,680 --> 00:20:49,320 Speaker 1: card debt that consumers can ramp up. And so just 373 00:20:49,520 --> 00:20:52,760 Speaker 1: looking at this from a quantitative perspective, regardless of our 374 00:20:52,840 --> 00:20:57,600 Speaker 1: qualitative optimism, the numbers suggests that consumers simply will not 375 00:20:57,760 --> 00:21:00,119 Speaker 1: be there in the first half of the year. Just 376 00:21:00,240 --> 00:21:03,840 Speaker 1: changing the timeline change the depths of whatever downturn you're 377 00:21:03,840 --> 00:21:05,679 Speaker 1: expecting to happen. In other words, does it make it 378 00:21:05,760 --> 00:21:08,600 Speaker 1: less or does it make it more? As new excesses 379 00:21:08,760 --> 00:21:11,880 Speaker 1: build up Now, well, I think the depth and duration 380 00:21:11,960 --> 00:21:14,000 Speaker 1: in terms of the downturn is very much going to 381 00:21:14,040 --> 00:21:18,159 Speaker 1: be hinged on monetary policy and the sticky nature of inflation. 382 00:21:18,600 --> 00:21:21,600 Speaker 1: The higher that prices remain, the longer that prices remain 383 00:21:21,680 --> 00:21:24,280 Speaker 1: in this uncomfortable level relative to what the Fed can 384 00:21:24,320 --> 00:21:27,120 Speaker 1: would stand, that's going to force the Fed to raise 385 00:21:27,280 --> 00:21:30,800 Speaker 1: rates higher and potentially keep rates higher for a longer 386 00:21:30,840 --> 00:21:33,720 Speaker 1: period of time. And that's going to be the scenario 387 00:21:34,119 --> 00:21:36,520 Speaker 1: that's going to compound that that downturn in the duration 388 00:21:36,600 --> 00:21:38,440 Speaker 1: of that downturn. You know, Lindsay, I know you hang 389 00:21:38,440 --> 00:21:41,359 Speaker 1: on every word we do. And Julian Emmanuel is just 390 00:21:41,440 --> 00:21:44,800 Speaker 1: done with Mr Edward S. Highman and their team in 391 00:21:44,840 --> 00:21:49,680 Speaker 1: Asia modeling six percent plus China g d P. Not 392 00:21:49,920 --> 00:21:51,560 Speaker 1: that I don't need you to tell me that's what 393 00:21:51,600 --> 00:21:54,880 Speaker 1: we're gonna see. But if we get five point eight, 394 00:21:54,920 --> 00:21:58,280 Speaker 1: six point to whatever, what does that do to exports 395 00:21:58,280 --> 00:22:03,400 Speaker 1: and imports in your US g d P mass, Well, 396 00:22:03,480 --> 00:22:06,119 Speaker 1: certainly it's it's going to be difficult to get to 397 00:22:06,200 --> 00:22:09,520 Speaker 1: six per cent. That that's extremely optimistic. That being said, 398 00:22:09,600 --> 00:22:11,720 Speaker 1: it does seem as if there's nowhere to go but up. 399 00:22:11,720 --> 00:22:16,040 Speaker 1: When you're talking about an economy emerging from a nationwide 400 00:22:16,040 --> 00:22:19,960 Speaker 1: shutdown or or more restrictive zero COVID policies. But that 401 00:22:20,040 --> 00:22:23,120 Speaker 1: being said, what we've seen thus far has been far 402 00:22:23,280 --> 00:22:27,520 Speaker 1: from an ideal reopening. It isn't a flip the switch scenario, 403 00:22:27,640 --> 00:22:30,600 Speaker 1: so it's more going to be a slow bleed, particularly 404 00:22:30,640 --> 00:22:33,000 Speaker 1: against the backdrop of a number of black swans that 405 00:22:33,080 --> 00:22:37,800 Speaker 1: continue to float around. Those with overheightened optimism, new variants, 406 00:22:38,320 --> 00:22:41,800 Speaker 1: a lack of natural immunity to the virus. Any of 407 00:22:41,840 --> 00:22:47,040 Speaker 1: these resurgences, as deemed by the government is inappropriate or intolerable, 408 00:22:47,440 --> 00:22:50,399 Speaker 1: could lead back to many of these zero COVID policies. 409 00:22:50,400 --> 00:22:53,399 Speaker 1: So I do think it's overly optimistic to think that 410 00:22:53,480 --> 00:22:56,000 Speaker 1: once the door cracks open, it's going to swing wide 411 00:22:56,040 --> 00:22:59,119 Speaker 1: open and get us back to that structural fluidity that 412 00:22:59,200 --> 00:23:02,520 Speaker 1: we saw prior of the COVID pandemic. John Piggsy there 413 00:23:02,560 --> 00:23:04,800 Speaker 1: was on the edge of Bramo. I mean, that's that's 414 00:23:04,840 --> 00:23:06,840 Speaker 1: what I noted there. I mean, you know, she's on 415 00:23:06,880 --> 00:23:08,480 Speaker 1: the edge of Brammo. This I think a lot of 416 00:23:08,520 --> 00:23:10,480 Speaker 1: people waking up this morning feeling like they've been told 417 00:23:10,480 --> 00:23:15,920 Speaker 1: conflicting things. Three weeks for manufacturing and services. Then we've 418 00:23:15,920 --> 00:23:18,200 Speaker 1: got this big boom the people are talking about over 419 00:23:18,200 --> 00:23:20,600 Speaker 1: in China, and they're wondering whether they should be pricing 420 00:23:20,680 --> 00:23:23,840 Speaker 1: in slower growth or a growth rate band, And lindsay, 421 00:23:23,920 --> 00:23:26,640 Speaker 1: what's so important here, to go back to your earlier insight, 422 00:23:26,920 --> 00:23:30,480 Speaker 1: is variable rate. John Farrell lives this in England there 423 00:23:30,520 --> 00:23:33,240 Speaker 1: the land of the variable rate, the floating rate mortgage 424 00:23:33,280 --> 00:23:35,920 Speaker 1: and all that. How big a deal is the variable 425 00:23:36,160 --> 00:23:40,040 Speaker 1: variable rate in America, I'll get it out. I think 426 00:23:40,040 --> 00:23:42,200 Speaker 1: it's a very big deal, particularly when we go back 427 00:23:42,200 --> 00:23:45,560 Speaker 1: to the conversation we had about consumers, when we're talking 428 00:23:45,560 --> 00:23:49,959 Speaker 1: about credit cards as a key support to consumer spending 429 00:23:50,000 --> 00:23:54,160 Speaker 1: going forward. As that interest charge continues to rise, that's 430 00:23:54,160 --> 00:23:57,520 Speaker 1: going to limit the ability for consumers to access alternative 431 00:23:57,560 --> 00:24:00,760 Speaker 1: sources of income aside from returning to a more traditional 432 00:24:00,800 --> 00:24:03,520 Speaker 1: position in the labor market. Now, this could actually be 433 00:24:03,720 --> 00:24:06,080 Speaker 1: somewhat of a double edged sword, but but a positive 434 00:24:06,119 --> 00:24:08,760 Speaker 1: in the way that if consumers feel they can't rely 435 00:24:08,920 --> 00:24:12,520 Speaker 1: on these alternative sources, that may create more of an 436 00:24:12,680 --> 00:24:16,439 Speaker 1: incentive for these sideline workers to move back into the 437 00:24:16,520 --> 00:24:20,280 Speaker 1: labor market and help increase that labor force participation, which, 438 00:24:20,320 --> 00:24:23,600 Speaker 1: of course, as labor demand outpaces labor supply, we've seen 439 00:24:23,680 --> 00:24:26,600 Speaker 1: this upward pressure on wages. If we see the reverse 440 00:24:26,640 --> 00:24:30,200 Speaker 1: occur that could put some welcomed downward pressure on wages, 441 00:24:30,600 --> 00:24:33,239 Speaker 1: something the FED is certainly looking for. Just real quick here, 442 00:24:33,240 --> 00:24:34,679 Speaker 1: if you choose a data point, you can tell your 443 00:24:34,720 --> 00:24:36,520 Speaker 1: own story. You can pick whatever data point you want 444 00:24:36,560 --> 00:24:39,240 Speaker 1: to edify your view. That has been basically the belief 445 00:24:39,320 --> 00:24:41,880 Speaker 1: for the first couple of weeks of this year. Which 446 00:24:41,960 --> 00:24:45,040 Speaker 1: data would you be watching most closely? Free true read 447 00:24:45,400 --> 00:24:48,600 Speaker 1: on the pace of how the economy is developing? Well, 448 00:24:48,640 --> 00:24:51,480 Speaker 1: I think when we turn the page looking at the consumer, 449 00:24:51,520 --> 00:24:54,000 Speaker 1: I think negative real income growth for the better part 450 00:24:54,000 --> 00:24:56,879 Speaker 1: of the past year tells a longer term story about 451 00:24:56,880 --> 00:25:01,600 Speaker 1: the unsustainability of positive spending act and that is really 452 00:25:01,640 --> 00:25:04,760 Speaker 1: going to be the driver of whether or not the 453 00:25:04,760 --> 00:25:08,840 Speaker 1: consumer can continue to shoulder these elevated prices against the 454 00:25:08,880 --> 00:25:12,040 Speaker 1: backdrop of negative real income growth. Lindsay, thanks for this 455 00:25:12,640 --> 00:25:26,199 Speaker 1: accident of steel on the US economy. Last year, in 456 00:25:26,240 --> 00:25:30,880 Speaker 1: the shock of Ukraine and Putin in Russia, I name 457 00:25:30,960 --> 00:25:33,879 Speaker 1: my book of the year in February or maybe the 458 00:25:33,920 --> 00:25:36,520 Speaker 1: first week of March. It was the absolute must read 459 00:25:36,800 --> 00:25:40,200 Speaker 1: Putin's World by Angelus Stanton. I'd never had a book 460 00:25:40,240 --> 00:25:42,399 Speaker 1: of the year that early, and I'm not going to 461 00:25:42,520 --> 00:25:48,080 Speaker 1: top it this year with Olivier Blanchard's Magisterial Fiscal Policy 462 00:25:48,640 --> 00:25:52,199 Speaker 1: under low interest rates. All you need to know is 463 00:25:52,240 --> 00:25:55,720 Speaker 1: this is the definitive short read with the rigor of 464 00:25:55,760 --> 00:26:00,600 Speaker 1: the Massachusetts Institute of Technology and blenchcharded, is the mediate 465 00:26:00,720 --> 00:26:06,080 Speaker 1: must read for every economic geek that is out there, uh, 466 00:26:06,119 --> 00:26:09,399 Speaker 1: trying to get smarter, trying to get curious. Blanchard of 467 00:26:09,520 --> 00:26:12,480 Speaker 1: m I T and the Peterson Institute, the former chief 468 00:26:12,480 --> 00:26:17,040 Speaker 1: economist for the International Monetary Fund, joins us this morning, Olivia, 469 00:26:17,160 --> 00:26:19,920 Speaker 1: at least is gonna vault into your wonderful new book, 470 00:26:19,960 --> 00:26:22,639 Speaker 1: a short but but dense read. I need to go 471 00:26:22,760 --> 00:26:25,840 Speaker 1: to my essay of the year for last year, which 472 00:26:25,880 --> 00:26:28,800 Speaker 1: is you late in the year in the financial times, 473 00:26:28,880 --> 00:26:33,199 Speaker 1: where you said everybody calmed down. The American public doesn't 474 00:26:33,800 --> 00:26:37,720 Speaker 1: doesn't worry about inflation at two percent, and the new 475 00:26:37,720 --> 00:26:42,440 Speaker 1: two percent worry is maybe a three percent. What happens 476 00:26:42,480 --> 00:26:46,840 Speaker 1: to our financial and economic system if we get the 477 00:26:46,840 --> 00:26:50,719 Speaker 1: the the level of three percent with inflation, is that 478 00:26:50,800 --> 00:26:55,520 Speaker 1: the new two percent? Well that's not that's not my 479 00:26:55,600 --> 00:27:00,400 Speaker 1: decision to take. It's a decision of the central vacs Um. 480 00:27:00,480 --> 00:27:02,359 Speaker 1: Out of the book is based on the fact that 481 00:27:02,560 --> 00:27:04,600 Speaker 1: when we had the target of two percent, which we 482 00:27:04,640 --> 00:27:08,640 Speaker 1: still have, this implies fairly low nominal rates on average, 483 00:27:09,000 --> 00:27:11,439 Speaker 1: and that really limits the ability of a fact to 484 00:27:11,800 --> 00:27:14,800 Speaker 1: help the economy. If it's closed down. You can only 485 00:27:14,840 --> 00:27:17,720 Speaker 1: decrease the rates by you say, phenomenal rates are two 486 00:27:17,720 --> 00:27:21,440 Speaker 1: percent of represent by three percent. And what we have 487 00:27:21,440 --> 00:27:25,600 Speaker 1: seen over the last twenty years is that that is 488 00:27:25,600 --> 00:27:28,000 Speaker 1: not enough for the fact to actually do the job 489 00:27:28,000 --> 00:27:30,959 Speaker 1: of e CP or whoever any central back and so 490 00:27:31,040 --> 00:27:34,040 Speaker 1: I have valued that might be better to actually when 491 00:27:34,080 --> 00:27:36,920 Speaker 1: the economy on average at three percent, which would imply 492 00:27:37,080 --> 00:27:39,600 Speaker 1: higher rates, which would give more room for my tree 493 00:27:39,640 --> 00:27:42,520 Speaker 1: policy and would make some of the issues in my 494 00:27:42,560 --> 00:27:44,960 Speaker 1: book less whatever, because if my foo policy can do 495 00:27:45,000 --> 00:27:47,040 Speaker 1: most of the job, it should do most of the job. 496 00:27:47,960 --> 00:27:50,439 Speaker 1: If it cannot, then physical policy has to come in, 497 00:27:50,480 --> 00:27:54,800 Speaker 1: which is the title of and and thisss Lisa is 498 00:27:54,840 --> 00:27:57,640 Speaker 1: so profound. Professor Bonchard at I m F with stig 499 00:27:57,720 --> 00:28:02,080 Speaker 1: Let's talked about four and that was hugely controversial in 500 00:28:02,200 --> 00:28:04,480 Speaker 1: oh eight and oh nine. And this is a bit 501 00:28:04,480 --> 00:28:06,480 Speaker 1: of a different discussion, as you and I have heard 502 00:28:06,480 --> 00:28:09,760 Speaker 1: from his colleague at Peterson, Adam Posen Right, this question 503 00:28:09,880 --> 00:28:12,320 Speaker 1: of do you let it run hot? But on the 504 00:28:12,320 --> 00:28:15,160 Speaker 1: flip side, and Olivia Blanchard the title of your book 505 00:28:15,240 --> 00:28:19,040 Speaker 1: fiscal policy under low interest rates, fiscal policy of trying 506 00:28:19,040 --> 00:28:22,199 Speaker 1: to fuel growth when monetary policy didn't have room to 507 00:28:22,240 --> 00:28:24,760 Speaker 1: do so does it get flipped on its head, especially 508 00:28:24,800 --> 00:28:28,480 Speaker 1: after fiscal policy created the problem that monetary policy is 509 00:28:28,480 --> 00:28:33,600 Speaker 1: now trying to address. So as as you may know, 510 00:28:34,359 --> 00:28:37,040 Speaker 1: fiscal policy can do too much, and I think that 511 00:28:37,119 --> 00:28:42,080 Speaker 1: we're paying in large part major fiscal policy mistake. There 512 00:28:42,160 --> 00:28:45,560 Speaker 1: was no need for very large programs that we saw 513 00:28:45,720 --> 00:28:49,280 Speaker 1: in twenty but more especially at the beginning of twenty 514 00:28:49,360 --> 00:28:53,240 Speaker 1: twenty one, which led to very large of the heating 515 00:28:53,600 --> 00:28:57,880 Speaker 1: of the US economy UH and supply change options which 516 00:28:57,880 --> 00:29:01,320 Speaker 1: would have been there, but we're did by it and 517 00:29:01,920 --> 00:29:04,080 Speaker 1: in general of the hitting in the world. So yes, 518 00:29:04,320 --> 00:29:06,920 Speaker 1: in this such a thing as using physical policy too much, 519 00:29:07,360 --> 00:29:09,480 Speaker 1: I had a sense that although I was arguing for 520 00:29:09,640 --> 00:29:15,040 Speaker 1: using physical policy, the Biden administration in particular was probably 521 00:29:15,040 --> 00:29:17,520 Speaker 1: doing to two times or three times what I would 522 00:29:17,520 --> 00:29:19,880 Speaker 1: have liked. And the result has been Indeed, there are 523 00:29:19,880 --> 00:29:22,600 Speaker 1: some other reasons, and it clearly Ukraine has been very 524 00:29:22,640 --> 00:29:25,480 Speaker 1: high inflation and the fact has had to react the 525 00:29:25,480 --> 00:29:28,880 Speaker 1: other way with with with very high interest rates are 526 00:29:28,960 --> 00:29:33,080 Speaker 1: relatively high interest rates. I think that's the phase. I 527 00:29:33,120 --> 00:29:37,280 Speaker 1: think that the book is rewritten looking beyond the current 528 00:29:37,360 --> 00:29:41,600 Speaker 1: inflation episode, the cult higher rate episode, and one of 529 00:29:41,840 --> 00:29:44,440 Speaker 1: the thesis of the book is that we're probably going 530 00:29:44,480 --> 00:29:48,040 Speaker 1: to return to an environment in which the rate that 531 00:29:48,120 --> 00:29:51,560 Speaker 1: the central banks need to choose in order to get 532 00:29:51,600 --> 00:29:54,920 Speaker 1: the econmicate potential is going to be very low again. 533 00:29:55,120 --> 00:29:57,000 Speaker 1: So we are again going to be in this situation 534 00:29:57,040 --> 00:29:59,840 Speaker 1: in which might be constraints on the mintric policy, and 535 00:30:00,000 --> 00:30:02,720 Speaker 1: school post has to do more. But the point is 536 00:30:02,800 --> 00:30:05,760 Speaker 1: clearly adverstage. The discussion is very much about the high rates. 537 00:30:06,040 --> 00:30:08,520 Speaker 1: So there's a bit of a publication in coming with 538 00:30:08,760 --> 00:30:11,880 Speaker 1: coming out with a book with the title of it 539 00:30:11,920 --> 00:30:15,400 Speaker 1: is low res. But I would argue that firstly or not, 540 00:30:15,440 --> 00:30:18,720 Speaker 1: they'bly like are surprisingly low at the height of a 541 00:30:18,720 --> 00:30:23,160 Speaker 1: battle against inflation, uh, and there's no reason to think 542 00:30:23,160 --> 00:30:25,440 Speaker 1: that they will now go back to something like we 543 00:30:25,480 --> 00:30:28,280 Speaker 1: had before COVID. So then where does that leave the 544 00:30:28,280 --> 00:30:30,560 Speaker 1: federals are of the ECB in terms of the balance 545 00:30:30,640 --> 00:30:33,400 Speaker 1: of risks? Is it to go too far with a 546 00:30:33,400 --> 00:30:35,880 Speaker 1: benchmark rates and hold them there too for too long now? 547 00:30:36,280 --> 00:30:38,760 Speaker 1: Or is it not do enough given that we are 548 00:30:38,840 --> 00:30:41,440 Speaker 1: going back to perhaps something that is slightly different than 549 00:30:41,480 --> 00:30:44,800 Speaker 1: what we experience of the past several decades. So I 550 00:30:44,800 --> 00:30:48,480 Speaker 1: think that with respect to the inflasion process. Uh, you know, 551 00:30:48,520 --> 00:30:51,200 Speaker 1: I'm slightly older than you are, and so I've seen 552 00:30:51,240 --> 00:30:54,480 Speaker 1: it before and it seems to me and maybe tell 553 00:30:54,560 --> 00:30:57,440 Speaker 1: me is in between us? It's my guess, Uh, it's 554 00:30:57,480 --> 00:30:59,160 Speaker 1: it's it seems to me that I have seen it 555 00:30:59,200 --> 00:31:01,640 Speaker 1: before and the shoes are always the same, which is 556 00:31:01,760 --> 00:31:04,280 Speaker 1: as well. Infortion is too high. Part of it is 557 00:31:04,320 --> 00:31:06,040 Speaker 1: going to go away because part of it is due 558 00:31:06,080 --> 00:31:09,120 Speaker 1: to energy prices. For prices, and these are going to decline. 559 00:31:09,160 --> 00:31:13,320 Speaker 1: They have started declining. But you know, we still don't 560 00:31:13,320 --> 00:31:15,360 Speaker 1: have to basically slow down the economy a bit, and 561 00:31:15,360 --> 00:31:18,720 Speaker 1: we don't know how resilient the ecomy is. Right in 562 00:31:18,800 --> 00:31:22,239 Speaker 1: the textbook or in the simplified stories you hear on 563 00:31:22,360 --> 00:31:25,160 Speaker 1: the radio, you know, you're basically increasing interest rate and 564 00:31:25,240 --> 00:31:28,600 Speaker 1: the ecomy just slows down, but you don't know how 565 00:31:28,640 --> 00:31:31,080 Speaker 1: easily you get to that. So I think that's what 566 00:31:31,320 --> 00:31:34,720 Speaker 1: the FED, the ECB in all central banks are facing, 567 00:31:34,960 --> 00:31:37,840 Speaker 1: which is should we do the more should we do less? 568 00:31:37,880 --> 00:31:41,400 Speaker 1: And then there are two issues if if if you 569 00:31:41,480 --> 00:31:44,680 Speaker 1: give me too much more. The first one is that 570 00:31:44,680 --> 00:31:47,240 Speaker 1: they are what we call lacks right, which is that 571 00:31:47,720 --> 00:31:50,600 Speaker 1: even if it works, it doesn't work quight away, and 572 00:31:50,640 --> 00:31:54,560 Speaker 1: so you have to kind of stop tightening or going 573 00:31:54,640 --> 00:31:57,560 Speaker 1: easy before you actually have seen the results, because the 574 00:31:57,600 --> 00:32:00,640 Speaker 1: results take six months or yeah by. And then the 575 00:32:00,640 --> 00:32:03,200 Speaker 1: other aspect, which I think is one of them in 576 00:32:03,280 --> 00:32:06,040 Speaker 1: this case, is that some of the factors which increased 577 00:32:06,080 --> 00:32:10,000 Speaker 1: inflation turned around on their own, independent of the independent 578 00:32:10,080 --> 00:32:13,280 Speaker 1: of these So energy prices go down, and that's what 579 00:32:13,600 --> 00:32:18,520 Speaker 1: I've called falls down, which is inflation falls. And it 580 00:32:18,680 --> 00:32:20,760 Speaker 1: is following. Now you know, month to month, the numbers 581 00:32:20,760 --> 00:32:25,160 Speaker 1: are very good, and some people say we're done, Olivia. 582 00:32:25,280 --> 00:32:28,840 Speaker 1: I got I got one minute left, Olivia. I'm gonna 583 00:32:28,920 --> 00:32:31,480 Speaker 1: rip up the script here. I got Alan Blinder writing 584 00:32:31,480 --> 00:32:35,160 Speaker 1: in the Wall Street Journal that disinflation is intact Krugman's 585 00:32:35,200 --> 00:32:37,880 Speaker 1: and pounding the table on this for months. You know, 586 00:32:37,960 --> 00:32:41,480 Speaker 1: the history of forty seven, forty nine into the Eisenhower 587 00:32:41,920 --> 00:32:46,280 Speaker 1: deflation that we saw in fifty two. Come you just 588 00:32:46,520 --> 00:32:49,520 Speaker 1: thank you, But Robert Solo is who you dedicated your 589 00:32:49,520 --> 00:32:52,160 Speaker 1: book to at ninety eight years old. Do we have 590 00:32:52,360 --> 00:32:56,560 Speaker 1: any clue? What do we have any clue what we're doing? 591 00:32:56,680 --> 00:33:02,640 Speaker 1: Olivier given disinflation in place a mid technology so low 592 00:33:02,920 --> 00:33:06,920 Speaker 1: the laureate Paul Romer, there should be Laurier, Olivia Blanchard, 593 00:33:07,000 --> 00:33:09,040 Speaker 1: Do we have a clue where we are given the 594 00:33:09,080 --> 00:33:14,640 Speaker 1: technological progress that's solo invented? Yeah, I think I think 595 00:33:14,680 --> 00:33:17,480 Speaker 1: we do. But there's uncertainty. I think there's the usual 596 00:33:17,480 --> 00:33:20,360 Speaker 1: amount of uncertainty, which is your vecom is always changing, 597 00:33:20,400 --> 00:33:23,200 Speaker 1: so you have to take this into account the response 598 00:33:23,240 --> 00:33:26,120 Speaker 1: to interest which changes as technology changes, and so that 599 00:33:26,520 --> 00:33:28,920 Speaker 1: I think for the moment we're roughly where we should be. 600 00:33:29,360 --> 00:33:31,400 Speaker 1: It looks like we have a probably more or less 601 00:33:31,480 --> 00:33:36,000 Speaker 1: under control. The really difficult tissue, uh Tom, is what 602 00:33:36,240 --> 00:33:38,920 Speaker 1: is the unemployment rate that we can sustain? Can we 603 00:33:38,960 --> 00:33:41,480 Speaker 1: basically get inflation down all the way to free point 604 00:33:41,520 --> 00:33:44,880 Speaker 1: five as it is now and keep it there or 605 00:33:44,920 --> 00:33:48,000 Speaker 1: do we have to accept slightly how unemployment in order 606 00:33:48,040 --> 00:33:51,080 Speaker 1: to stabilize inflation. And I think that's the big issue. 607 00:33:51,120 --> 00:33:54,320 Speaker 1: That's where all kinds of the dog school issues come up, 608 00:33:55,120 --> 00:33:57,720 Speaker 1: matching re allocation, all kinds of things like that. We 609 00:33:57,760 --> 00:34:01,240 Speaker 1: are out of time, Olivia Blanchard at Tersons too. This 610 00:34:01,320 --> 00:34:05,120 Speaker 1: is the Bloomberg Surveillance Podcast. Thanks for listening. Join us 611 00:34:05,160 --> 00:34:08,920 Speaker 1: live weekdays from seven to ten am Eastern on Bloomberg 612 00:34:09,000 --> 00:34:12,840 Speaker 1: Radio and on Bloomberg Television each day from six to 613 00:34:12,960 --> 00:34:17,600 Speaker 1: nine am for insight from the best in economics, finance, investment, 614 00:34:17,760 --> 00:34:22,759 Speaker 1: and international relations. And subscribe to the Surveillance podcast on 615 00:34:22,880 --> 00:34:26,680 Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course on 616 00:34:26,800 --> 00:34:30,920 Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg