WEBVTT - Surveillance: March CPI Sets Stage for Fed 0:00:05.080 --> 0:00:08.440 This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along 0:00:08.480 --> 0:00:12.280 with Jonathan Farrell and Lisa Abramowitz. Join us each day 0:00:12.320 --> 0:00:16.800 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.239 --> 0:00:22.040 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.239 --> 0:00:26.560 anywhere you get your podcasts, and always I'm Bloomberg dot Com, 0:00:26.600 --> 0:00:31.080 the Bloomberg Terminal, and the Bloomberg Business App. Jay Bryson, 0:00:31.160 --> 0:00:34.440 Chief economist at Wills Fargo. Doctor Bryson, thank you so 0:00:34.520 --> 0:00:38.559 much for joining today. One set of data does not 0:00:38.720 --> 0:00:42.960 make a trend. If we put together three months like this, 0:00:43.240 --> 0:00:47.680 what does it signal to Jerome Powell? Well, so, I mean, 0:00:47.680 --> 0:00:49.519 if you look at the last three months, right, if 0:00:50.040 --> 0:00:53.080 that core rate was up zero point four percent, and 0:00:53.120 --> 0:00:55.360 so if you look at the last three months, you're 0:00:55.400 --> 0:01:00.639 still running at an annualized rate of close to five percent. There. Now, 0:01:00.680 --> 0:01:03.520 the good news is that the MP component or the 0:01:04.280 --> 0:01:07.319 owner's equivalent rant component is starting to come in, and 0:01:07.360 --> 0:01:10.920 so that should continue to put some downward pressure on 0:01:10.959 --> 0:01:14.040 inflation as we go forward. But we're still a long 0:01:14.120 --> 0:01:16.960 way from two percent at this point. And so you know, 0:01:17.000 --> 0:01:18.880 if you're Jerome Pal. You look at this, you say, 0:01:18.920 --> 0:01:21.400 I think Mike just said it. We're on the right track, 0:01:21.640 --> 0:01:24.200 But I don't think this makes the case for a 0:01:24.360 --> 0:01:27.039 pause in May. You know this and what we saw 0:01:27.080 --> 0:01:29.720 earlier in terms of the jobs report, I still think, 0:01:29.840 --> 0:01:32.240 knowing what I know right now, that they go twenty 0:01:32.240 --> 0:01:35.160 five in May, a lot of people agree with you, 0:01:35.200 --> 0:01:38.280 and yet they seem to be increasingly pricing out the 0:01:38.400 --> 0:01:41.959 potential for further rate hikes and possibly a great rate 0:01:42.000 --> 0:01:44.400 cutting cycle to start in the second half of this year. Jay, 0:01:44.640 --> 0:01:47.720 what would we have to see on Friday to discount 0:01:47.800 --> 0:01:50.600 the strength, the underlying strength and core that we see 0:01:50.600 --> 0:01:54.960 in this report, albeit perhaps not more than expected. So 0:01:55.200 --> 0:01:57.600 when you say Friday, at least are you talking about 0:01:57.600 --> 0:02:00.040 the retail sales numbers we're going to get out on 0:02:00.040 --> 0:02:06.600 on Friday? Jp, Morgan's earnings earnings? How much that learning stress? Yeah? 0:02:06.640 --> 0:02:09.080 So right, if we're starting to see signs and you 0:02:09.080 --> 0:02:11.600 know the upcoming bank earnings, you know, if there's a 0:02:11.600 --> 0:02:14.600 lot of stress out there in the financial system with 0:02:14.639 --> 0:02:16.400 banks in terms of their earnings, in terms of the 0:02:16.440 --> 0:02:20.119 credit standards tightening, things of that nature, that potentially could 0:02:20.160 --> 0:02:24.120 start to swing things in the direction of a pause 0:02:24.240 --> 0:02:26.840 in May. I mean, we'll see, you know what they 0:02:26.880 --> 0:02:29.320 say with the banks say in the coming weeks here, 0:02:29.639 --> 0:02:31.800 But you know, I think at this point that would 0:02:31.800 --> 0:02:35.040 be the thing that would for me would say, okay, May, 0:02:35.080 --> 0:02:37.280 maybe they actually go and pause. Is what sort of 0:02:37.280 --> 0:02:41.440 stress we're seeing in the banking system? Jay, There seems 0:02:41.480 --> 0:02:44.280 to be a complacency in markets about the fact that 0:02:44.280 --> 0:02:46.919 the FED will be able to get inflation under control, 0:02:47.000 --> 0:02:50.040 that the rates will go back down to three or 0:02:50.080 --> 0:02:53.040 perhaps even two percent in the next couple of years. 0:02:53.080 --> 0:02:55.399 And I'm talking about ten year yields. Are you less 0:02:55.440 --> 0:02:58.760 confident about that based on the increasing pressure for them 0:02:58.840 --> 0:03:01.560 to pause or just take step back as they wait 0:03:01.680 --> 0:03:05.760 to understand what the dynamic is. So in terms of 0:03:05.800 --> 0:03:07.920 the longer end of the curve, least I could see 0:03:07.919 --> 0:03:10.040 that going back to three percent. I mean, I just 0:03:10.120 --> 0:03:14.400 think that given the structural challenges in the US economy 0:03:14.480 --> 0:03:17.480 today in terms of its long run growth potential, for me, 0:03:17.720 --> 0:03:22.040 a long run three percent ten year yields makes perfect sense. 0:03:22.280 --> 0:03:23.880 I guess where I have a little bit more question 0:03:24.000 --> 0:03:27.480 is in terms of the two year yield. I don't 0:03:27.520 --> 0:03:29.000 agree with the view that the FED is going to 0:03:29.040 --> 0:03:31.920 be cutting rates by the end of the year potentially, right, 0:03:31.960 --> 0:03:33.480 if we're in a recession at the end of the year, 0:03:33.480 --> 0:03:35.920 I could definitely see that. But if we have a 0:03:35.960 --> 0:03:40.160 soft landing in the economy, I could see the inflation 0:03:40.280 --> 0:03:43.120 rate here getting stuck at three to three and a 0:03:43.200 --> 0:03:45.440 half percent. What does the FED do at that point? 0:03:45.440 --> 0:03:47.680 Does it throw in the towel and does it say, Okay, 0:03:47.680 --> 0:03:49.119 we can live with three and three and a half 0:03:49.160 --> 0:03:52.080 percent or do they really mean it, we need to 0:03:52.080 --> 0:03:53.800 get back down to two percent. And if they need 0:03:53.840 --> 0:03:56.280 to get back down to two percent, then you're not 0:03:56.320 --> 0:03:58.240 going to see I think rate cuts at the end 0:03:58.280 --> 0:03:59.640 of this year. I think you're going to see rates 0:03:59.680 --> 0:04:03.200 remain at a minimum elevated at that point. And so 0:04:03.600 --> 0:04:05.040 I have it just a little bit of a disagreement 0:04:05.040 --> 0:04:08.040 where the two year is right now. Hey, j you're 0:04:08.040 --> 0:04:10.320 not the only one. Jake Bryson of last FAGO, Thank you, sir, 0:04:10.360 --> 0:04:18.719 on the latest inflation data in America. Jeffrey Rosenberg joins 0:04:18.760 --> 0:04:23.719 portfolio manager of Systematic Multi Strategy fund at black Rock. 0:04:23.800 --> 0:04:26.960 He's been medicated over the last four months the beginning 0:04:26.960 --> 0:04:31.600 of two twenty three. It's been chaos I'm fascinated Jeff 0:04:31.680 --> 0:04:35.760 Rosenberg with your wide mandate at black Rock, how you've 0:04:35.880 --> 0:04:39.800 survived two twenty three. What have you done to your 0:04:39.839 --> 0:04:44.920 portfolio given the cacophony handed to you. Well, it's a 0:04:45.000 --> 0:04:47.279 it's a good framing for the question in front of 0:04:47.320 --> 0:04:50.960 today's data, Tom, because it is it is particularly a 0:04:51.000 --> 0:04:55.960 period of heightened uncertainty around the outlook. We talked about 0:04:55.960 --> 0:04:58.760 it in the earlier segments in terms of the uncertainty 0:04:58.839 --> 0:05:02.839 around in inflation. You know, we're moving through this period 0:05:02.960 --> 0:05:06.719 into a new period of you know, I think a 0:05:06.839 --> 0:05:08.960 pause and a reflection from the Fed, you know, whether 0:05:09.000 --> 0:05:12.359 they hike in May or not. For our portfolios, you know, 0:05:12.440 --> 0:05:16.400 that's made directional exposures whether markets are going up, our 0:05:16.440 --> 0:05:20.440 markets are going down. You know, pretty challenging environment to 0:05:20.520 --> 0:05:23.160 try to pick that direction. We have the benefit of 0:05:23.600 --> 0:05:28.160 being able to do a lot more flexible things around 0:05:28.279 --> 0:05:32.160 our portfolio to take away the direction and really look 0:05:32.240 --> 0:05:36.279 underneath the hood and play the dispersion that we see 0:05:36.320 --> 0:05:38.839 in markets and particularly you know, one of the big 0:05:38.880 --> 0:05:43.120 stories is you know, exceptionally high, historically high interest rate 0:05:43.200 --> 0:05:46.840 volatility relative to low equity volatility. But that low equity 0:05:46.880 --> 0:05:50.400 volatility is really a story of the surface. Underneath the surface, 0:05:50.440 --> 0:05:54.040 there's tremendous amounts of dispersion, and we're trying to take 0:05:54.160 --> 0:05:56.840 more advantage of that and lean our portfolio more into 0:05:57.120 --> 0:06:01.120 dispersion than in direction as you avoid trying to take 0:06:01.120 --> 0:06:03.640 a call unnecessarily what's going to happen at a time 0:06:03.680 --> 0:06:05.720 where that seems to be pretty much impossible. Jeff, I'd 0:06:05.760 --> 0:06:07.719 love your read on what we just experienced, which is 0:06:08.120 --> 0:06:12.880 an almost inline inflation report for CPI, the core CPI 0:06:12.920 --> 0:06:17.080 coming in inline with expectations and this market cheering and 0:06:17.200 --> 0:06:20.320 actually now expecting even greater rate cuts in the next 0:06:20.360 --> 0:06:24.200 twelve months. Does that make sense to you, Well, you know, 0:06:24.600 --> 0:06:27.440 I think Jonathan Farrow has said this in a couple 0:06:27.440 --> 0:06:30.960 of contexts, maybe more around around payroll. Be careful about, 0:06:31.040 --> 0:06:34.520 you know, the initial market reaction as to whether or 0:06:34.560 --> 0:06:37.040 not that's the longer run message. But the initial market 0:06:37.080 --> 0:06:40.040 reaction is really talking about, you know, the beat on 0:06:41.040 --> 0:06:44.599 headline and the impact on food and energy prices. You know, 0:06:44.680 --> 0:06:47.200 it helps, and it helps a lot in terms of 0:06:47.240 --> 0:06:50.520 the optics around inflation going down. I think that's the 0:06:50.600 --> 0:06:54.600 near term market reaction. The stuff I'm focused on and 0:06:54.600 --> 0:06:58.240 we're focused on is really about the labor markets, it's 0:06:58.279 --> 0:07:01.479 about wage inflation. It's really about what we see in 0:07:01.520 --> 0:07:05.120 this report in terms of core services core services X shelter. 0:07:05.600 --> 0:07:09.000 I think Mike mentioned that in the earlier segment, you know, 0:07:09.200 --> 0:07:11.840 there's a little bit of a trend coming down there. 0:07:12.040 --> 0:07:15.600 I wouldn't read a huge amount into this report in 0:07:15.680 --> 0:07:20.080 terms of giving the all clear for that much more 0:07:20.280 --> 0:07:24.320 important and durable services inflation. I think it's a it's 0:07:24.360 --> 0:07:27.280 a positive. It's in the sense that it wasn't a 0:07:27.320 --> 0:07:30.360 big negative surprise upward, and I think the market is 0:07:31.080 --> 0:07:33.160 trading a little bit off of that, but mostly off 0:07:33.160 --> 0:07:36.600 of the headline here this morning, as we careened toward 0:07:36.720 --> 0:07:40.400 that May third meeting of the Federal Reserve, what are 0:07:40.400 --> 0:07:43.560 you watching to get a sense of what is going 0:07:43.560 --> 0:07:46.560 on in real time beneath the hood with credit lending, 0:07:46.760 --> 0:07:51.520 with the expansion or contraction they're in. Yeah, I mean, 0:07:51.520 --> 0:07:55.880 obviously the big uncertainty, and Powell characterized it very well 0:07:55.960 --> 0:07:59.440 in that the direction of the banking crisis in March 0:07:59.520 --> 0:08:03.960 is to contribute towards tighter financial conditions, to contribute to 0:08:04.000 --> 0:08:08.160 the transmission of tighter monetary policy. The direction is clear, 0:08:08.200 --> 0:08:11.720 the magnitude is not, and so everyone's focused on the 0:08:11.720 --> 0:08:15.360 weekly H eight report and what's going on with bank lending. 0:08:15.680 --> 0:08:19.040 The issue, though, is that bank lending and bank lending 0:08:19.760 --> 0:08:24.360 expected standards tightening had been in place well before the 0:08:24.400 --> 0:08:27.880 banking crisis. So the issue isn't whether or not banks 0:08:27.880 --> 0:08:31.600 are tightening credit. The issue is how much did the 0:08:31.640 --> 0:08:36.080 banking crisis in March accelerate those trends. That is very 0:08:36.080 --> 0:08:39.720 hard to measure. It certainly is accelerated something we can measure, 0:08:39.720 --> 0:08:42.800 and that is deposits moving out of banks and into 0:08:42.840 --> 0:08:46.520 money market funds, waking up to it's no longer zero 0:08:46.600 --> 0:08:51.120 interest rates, and that's perhaps accelerated the funding costs of banks. 0:08:51.200 --> 0:08:54.080 But whether or not that transmits, whether that's a bank 0:08:54.200 --> 0:08:57.920 margin issue or whether it's a real economy issue, remains 0:08:57.920 --> 0:09:02.240 to be seen. Frozenberg. In the equity space, we can 0:09:02.320 --> 0:09:05.040 talk about bull market, bear market, We can talk about 0:09:05.160 --> 0:09:07.880 movements op ratios and such. In the bond market, we 0:09:08.000 --> 0:09:12.800 do less. Are we in the beginning a bond bull market, 0:09:12.840 --> 0:09:17.040 which is generally price up and yield down? And if 0:09:17.080 --> 0:09:19.440 I use a ten year as a proxy for that, 0:09:20.120 --> 0:09:24.360 do you frame out a surprisingly lower ten year yield 0:09:24.400 --> 0:09:28.840 out one year or two years. I think the jury 0:09:29.000 --> 0:09:31.760 is out on that kind of one year two year 0:09:31.840 --> 0:09:34.440 framing of the of the question Tom. Clearly, what's been 0:09:34.480 --> 0:09:37.920 happening over the last couple of weeks, really since and 0:09:38.080 --> 0:09:41.840 kicked off by the banking crisis. Remember, pre banking crisis, 0:09:41.880 --> 0:09:44.800 we were debating, you know, a fifty basis point hike 0:09:44.880 --> 0:09:48.960 and whether the FED needed or you know, we kind 0:09:49.000 --> 0:09:53.280 of forgot all about that because it's it's it's really 0:09:53.720 --> 0:09:57.800 much more a pivot towards did this banking crisis accelerate tightening? 0:09:58.200 --> 0:10:00.800 I think the jury is out, but clear the momentum 0:10:00.840 --> 0:10:03.720 in the bond market is towards more of a focus 0:10:03.760 --> 0:10:07.280 on recession risk. And as Lisa's talking about, you know, 0:10:07.360 --> 0:10:10.840 the pricing in of you know, a very rapid turn 0:10:10.880 --> 0:10:14.079 towards FED rights. We think that's probably overstated, but that's 0:10:14.080 --> 0:10:16.320 where the market's at right now. Well, you know, I 0:10:16.320 --> 0:10:19.160 want to be junior portfolio manager today. If people are 0:10:19.200 --> 0:10:23.640 saying long duration does better, big tech inequities does better, 0:10:24.080 --> 0:10:26.120 is this the time for Jeff Rosenberg to do a 0:10:26.200 --> 0:10:30.240 Jeff Nnick George VanDerHeyden reducts from thirty years ago and 0:10:30.440 --> 0:10:31.880 do you need to go out and buy a twenty 0:10:31.960 --> 0:10:36.200 year zero coupon bond to play a long duration play 0:10:36.280 --> 0:10:40.360 over a year or two years or three years. You know, 0:10:40.400 --> 0:10:44.920 the long duration call is really about recession versus inflation. 0:10:45.320 --> 0:10:48.200 And right now, as you can see after today's report, 0:10:48.240 --> 0:10:51.720 it appears that inflation fears are waning and that's going 0:10:51.760 --> 0:10:54.920 to give some more credence towards the notion that duration 0:10:55.000 --> 0:10:59.200 can once again play the diversifier in a recession environment. 0:10:59.240 --> 0:11:01.720 You want to be, you know, out as far in 0:11:01.840 --> 0:11:04.520 duration as you can stomach. We're a little bit more 0:11:04.559 --> 0:11:07.360 cautious on that view, however, Tom and again it was 0:11:07.400 --> 0:11:09.679 to my comments that you know, today the market is 0:11:09.720 --> 0:11:12.679 kind of playing off the headline. It's the services piece 0:11:12.720 --> 0:11:15.800 and the inflation from the wage picture and these still 0:11:16.000 --> 0:11:18.480 very tight labor markets. I think we still need to 0:11:18.520 --> 0:11:21.200 see that loosen up before you can say it's all 0:11:21.280 --> 0:11:27.280 clear and we're back to duration is on equivocally, you know, 0:11:27.320 --> 0:11:31.160 a clear hedge to a recession risk. It certainly is 0:11:31.160 --> 0:11:33.600 if you get the recession, but it becomes much more 0:11:33.679 --> 0:11:37.479 vulnerable if inflation is more sticky than we're currently anticipating, 0:11:37.600 --> 0:11:40.760 and market circles Jeff Rosenberg. Oh, Jeff, thank you so much. 0:11:40.840 --> 0:11:54.560 Jeff Rosenberg always with black Rock ad imposing with is 0:11:54.880 --> 0:11:57.400 always an annual visit at these meetings of the IMF 0:11:57.480 --> 0:12:00.240 from the World Bank. He's president of the peters An 0:12:00.400 --> 0:12:04.240 Institute of International Economics. He is, without question, with Richard Clarato, 0:12:04.360 --> 0:12:07.600 one of the leaders in thinking about Germany in the 0:12:07.679 --> 0:12:10.960 United States of America. Doctor Posen joins us this morning, 0:12:11.040 --> 0:12:13.360 John's going to talk to you about your wonderful essay 0:12:14.040 --> 0:12:18.920 on the simplistic static analysis of manufacturing in America. I 0:12:19.000 --> 0:12:20.719 want to go to the Matthew News. She learn you 0:12:20.800 --> 0:12:23.880 at Brooklyn High School million years ago and they said, 0:12:23.880 --> 0:12:25.880 don't look out five years. And then you went off 0:12:25.920 --> 0:12:28.679 to undergraduate, don't look out five years. Then you did 0:12:28.720 --> 0:12:31.480 your PhD work and they said, don't look out five years. 0:12:31.640 --> 0:12:34.760 And here's the International Monetary Fund with a five year 0:12:34.880 --> 0:12:38.320 model of three percent growth? Can people like you look 0:12:38.360 --> 0:12:42.120 out five years? We can look, but we may not see. 0:12:42.920 --> 0:12:47.360 I think Tom, the IMF is making a judgment call, 0:12:47.400 --> 0:12:50.920 which is within their rights, and I think it's a 0:12:50.920 --> 0:12:55.160 reasonable judgment call, but unfortunately, I think it buries the lead, 0:12:55.760 --> 0:12:57.640 which is that we're going to get a goosing of 0:12:57.679 --> 0:13:02.000 short term growth in the large economies in the US 0:13:02.040 --> 0:13:04.520 and China in Europe because it's going to be public 0:13:04.559 --> 0:13:08.280 spending on defense and on green and there's going to 0:13:08.320 --> 0:13:11.680 be a continued falling off of growth and the poor 0:13:11.720 --> 0:13:15.120 economies who are going to be forced to choose between 0:13:15.240 --> 0:13:18.400 US and China, and for reasons is very good report 0:13:18.400 --> 0:13:20.560 put up by the IMF recently. I know you've covered 0:13:20.679 --> 0:13:23.120 very good report by the World Bank recently you've recovered 0:13:23.400 --> 0:13:26.880 you've covered my stuff, the spillovers on growth for the 0:13:26.960 --> 0:13:30.719 developing world from the US China conflict and the subsidies 0:13:31.160 --> 0:13:33.800 race between Europe and US. It's very bad. What means 0:13:33.800 --> 0:13:36.640 critical here, And David folkarts Landau Deutsche Bank, with some 0:13:37.040 --> 0:13:41.439 serious publishing with Duly years ago, echoed what you said 0:13:41.440 --> 0:13:45.280 the day after Putin invaded Ukraine. So, if we have 0:13:45.400 --> 0:13:48.600 the fiscal stimulus that doctor folkarts Land I was talking about, 0:13:48.640 --> 0:13:51.240 you're talking about right now, and we dove tell that 0:13:51.280 --> 0:13:56.880 into your colleague Olivier Blanchard's phrase, fiscal space. Does the 0:13:56.960 --> 0:14:00.280 United States or Bolivia that we mentioned the other day, 0:14:00.400 --> 0:14:04.120 do they have fiscal space to act given the present promise? 0:14:05.080 --> 0:14:08.160 So you may have seen. I hosted a debate or 0:14:08.200 --> 0:14:11.719 a conversation between Olivier and Larry Summers on Pie dot 0:14:11.760 --> 0:14:14.640 comic a few weeks ago on this very topic, and 0:14:15.200 --> 0:14:18.600 where Olivier, Larry, and I, more importantly Olivia and Larry 0:14:18.679 --> 0:14:23.480 came down was that this kind of sustained fiscal expansion 0:14:23.600 --> 0:14:28.240 and possibly some inflation premium that continues going forward, will 0:14:28.320 --> 0:14:31.680 decrease the amount of fiscal space. Olivier's fiscal space rightly 0:14:32.120 --> 0:14:34.920 is about the gap between real interest rates and real growth, 0:14:35.400 --> 0:14:37.960 and that's been very large for a long time. This 0:14:38.040 --> 0:14:39.880 is probably going to cut that by a third to 0:14:39.960 --> 0:14:43.600 a half. That doesn't mean the US doesn't have fiscal space, 0:14:43.680 --> 0:14:45.640 but it means that there were more at risk than 0:14:45.680 --> 0:14:48.320 we've been for a very long time, and a bad 0:14:48.400 --> 0:14:51.920 shock to productivity to revenue where the interest rates could 0:14:51.960 --> 0:14:56.440 put us quickly into bad space. But additionally, if our star, 0:14:56.560 --> 0:15:00.880 the shorthand for this basically goes up, meaning that the 0:15:00.960 --> 0:15:04.640 gap between interest rates and growth shrinks. The Bolivia's, the 0:15:04.720 --> 0:15:09.600 Sri Lankas, the Pakistans, lots of Central America, lots of 0:15:09.640 --> 0:15:13.360 South Asia, lots of Africa. They lose fiscal space. When 0:15:13.360 --> 0:15:16.440 you have these discussions. Is there a tipping point for 0:15:16.560 --> 0:15:19.720 ten year yield, say for borrowing costs in the United States, 0:15:19.760 --> 0:15:24.840 after which the current fiscal model becomes untenable. Yes and no, 0:15:25.040 --> 0:15:27.800 sorry to do it that way, Lisa. The yes is 0:15:27.880 --> 0:15:32.880 you can do some very fancy mathy stuff. Jeremy Zedelmayer 0:15:32.960 --> 0:15:35.280 now the head of Broigel, used to be at the IMF, 0:15:35.280 --> 0:15:37.280 and Olivier and others have worked on this, and you 0:15:37.320 --> 0:15:42.840 have to do simulations. But cold bottom line, the odds 0:15:42.840 --> 0:15:46.800 of your tipping go up, and probably go up nonlinearly 0:15:46.880 --> 0:15:49.600 the closer you get to our midus G being zero. 0:15:49.680 --> 0:15:53.200 Because this is the math, I mean, the basic math. 0:15:53.320 --> 0:15:56.840 Once you're above, Once that our minus G turns positive, 0:15:56.960 --> 0:15:59.920 meaning interest rates are outpacing growth, that's when the bad 0:16:00.040 --> 0:16:03.080 debt dynamics kick in. That's when if you have debt 0:16:03.080 --> 0:16:05.440 to GDP it's over one hundred percent of kicks in. Now, 0:16:05.480 --> 0:16:08.360 it's not a tipping point that that happens. Going back 0:16:08.360 --> 0:16:11.280 to where Tom started this this week, this month, maybe 0:16:11.320 --> 0:16:14.360 for Bolivia, not for the US. But if that turns 0:16:14.360 --> 0:16:17.600 out to be the case, that being rates above growth 0:16:17.680 --> 0:16:21.960 rates for six months a year, then you start getting serious. 0:16:22.160 --> 0:16:25.120 The bad politics hand stots it. You mentioned that the 0:16:25.160 --> 0:16:28.360 subsidies right between Europe and the United States. I still 0:16:28.360 --> 0:16:30.960 don't think this is getting enough coverage. You said it's 0:16:31.080 --> 0:16:33.680 very bad. Can you paint a pictures to why this 0:16:33.760 --> 0:16:37.320 is so bad? So as it happens Olivia and I 0:16:37.400 --> 0:16:40.120 and some of our trade experts from Peterson, Chad Bound 0:16:40.120 --> 0:16:42.760 and Jeff Shot, we're meeting with a European finance minister 0:16:42.880 --> 0:16:48.720 last night about this very issue. Basically, the problem with 0:16:48.840 --> 0:16:54.600 subsidies in trade is that it ends up being not 0:16:54.720 --> 0:16:56.640 just waste soul. That's bad. But as I've tried to 0:16:56.720 --> 0:16:59.800 argue my article and this history shows us, it escalates 0:17:00.080 --> 0:17:02.400 very quickly. And this is what we're seeing. The US 0:17:02.520 --> 0:17:07.440 puts out this IRA, which includes huge subsidies for particular companies, 0:17:07.480 --> 0:17:10.240 not just subsidies for green tech, not just subsidies for 0:17:10.359 --> 0:17:13.159 R and D that would be nice, but subsidies for 0:17:13.160 --> 0:17:16.360 particular companies on a criteria they have to be producing 0:17:16.400 --> 0:17:18.680 the US and mostly they have to be US headquartered. 0:17:19.640 --> 0:17:21.800 And so then Europe said, okay, well we'll do subsidies 0:17:21.800 --> 0:17:25.840 and retaliation. And then the UK says already has one 0:17:25.840 --> 0:17:29.639 of the opposition politicians, Miliband came out and said, you know, 0:17:29.720 --> 0:17:31.119 we got to keep up with this. We're not going 0:17:31.200 --> 0:17:34.000 to be left behind. We had the Indian Finance Minister 0:17:34.840 --> 0:17:39.200 at PIA on Monday and she said, we're going to 0:17:39.280 --> 0:17:42.000 do subsidies. And so what you end up with is 0:17:42.040 --> 0:17:45.640 like an arms race. Everybody builds up, nobody gains economy 0:17:45.640 --> 0:17:51.080 of scale, the competitive basis for having the winning company, 0:17:51.240 --> 0:17:54.840 say based on better technology, more efficient processes, doesn't win 0:17:55.000 --> 0:17:58.760 because you're subsidizing here and you're subsidizing here, and France 0:17:58.760 --> 0:18:01.160 says we're not going to buy American, and America says 0:18:01.160 --> 0:18:03.840 we're not going to buy French, and so you end 0:18:03.920 --> 0:18:06.639 up with this huge on balance sheet obligation to the 0:18:06.640 --> 0:18:09.080 fiscal to go back to where Lisa was. And one 0:18:09.119 --> 0:18:11.280 of the worst things about this is this is open ended. 0:18:11.320 --> 0:18:14.800 So the way the US pass the latest round of subsidies, 0:18:14.960 --> 0:18:18.119 it's driven by the consumer. It's how much you produce. 0:18:18.200 --> 0:18:20.000 It's not oh, we're going to get to this level. 0:18:20.240 --> 0:18:23.840 You produce more, you get more subsidies. So this becomes 0:18:23.840 --> 0:18:27.280 a fiscal issue as well as you run in place 0:18:28.760 --> 0:18:31.760 to just get to the same spot. And then finally 0:18:32.200 --> 0:18:35.399 it's totally discriminatory against the rest of the world because basically, China, 0:18:35.560 --> 0:18:38.080 the EU, in the US can afford to do this, 0:18:39.240 --> 0:18:42.080 India can pretend to afford to do this, UK can pretend, 0:18:42.400 --> 0:18:43.880 and the rest of the world you're out of luck. 0:18:44.800 --> 0:18:48.080 It's done under the guise of supply chain resiliency, and 0:18:48.160 --> 0:18:49.960 these phrases get thrown around and they take on a 0:18:50.000 --> 0:18:52.679 life in their own. It's almost just the truth. You 0:18:52.760 --> 0:18:54.879 have to get more resiliency into the supply chain, and 0:18:54.920 --> 0:18:57.800 that means you have to bring it home. You've dismissed 0:18:57.800 --> 0:19:00.520 that straight up. I think you've said it proven to 0:19:00.560 --> 0:19:03.360 be a fallacy through economic history, and I can think 0:19:03.359 --> 0:19:07.120 of several failed socialist communist states that attracted the same thing, 0:19:07.160 --> 0:19:10.840 and it's difficult to do it. Is the United States, Europe, China, 0:19:10.920 --> 0:19:12.399 even if they have access to the funds, they can 0:19:12.440 --> 0:19:13.920 afford to do it. Who says it's going to be 0:19:13.920 --> 0:19:17.719 a success? I well, thank you. I agree. You know, 0:19:17.840 --> 0:19:21.520 there is a legitimate question to be raised as private 0:19:21.520 --> 0:19:26.800 supply chains have risen organically, individual purchasing managers saying I 0:19:26.840 --> 0:19:29.080 got an order from the CFO to cut cost ten percent, 0:19:29.119 --> 0:19:31.800 so I'll outsourced this. Oh, I've now outsourced this so 0:19:31.840 --> 0:19:34.840 I know somebody else. You know, there's a reasonable public 0:19:34.880 --> 0:19:39.560 policy interest in saying let's not overdo that. But that's 0:19:39.720 --> 0:19:42.199 very different from saying bringing it home is safer. You know, 0:19:42.240 --> 0:19:46.159 it's the same logic as your investor watchers say diversification matters. 0:19:46.200 --> 0:19:48.800 I think you mentioned all the communist countries. This is 0:19:49.040 --> 0:19:50.600 part of what I've been arguing. I mean, you look 0:19:50.600 --> 0:19:53.240 at Russia. Russia has spent twenty years trying to make 0:19:53.240 --> 0:19:56.280 itself self sufficient just so it could go do things 0:19:56.280 --> 0:19:58.840 like conveyed Ukraine and not worry about it. And like 0:19:58.960 --> 0:20:03.200 the US, like China, it's huge, but it still doesn't work. 0:20:03.280 --> 0:20:04.760 It ends up backfir and you end up with a 0:20:04.800 --> 0:20:08.720 corrupt industrial complex that doesn't give you what you need. John, 0:20:08.720 --> 0:20:12.960 I'm British headline twenty twelve, eleven years ago, Business Group 0:20:13.080 --> 0:20:19.479 economist to replace Arch Dove posead Bank of England. Do 0:20:19.520 --> 0:20:23.399 you have any advice former MPC member for Megan Green 0:20:23.560 --> 0:20:27.440 if she is anointed to There'll be a coronation if 0:20:27.480 --> 0:20:29.440 she moves to the Bank of England. Oh, I hadn't 0:20:29.480 --> 0:20:33.919 heard the news. Congratulations to Megan, that's great. You know, 0:20:33.960 --> 0:20:37.600 the external members including Catherine Mann my former colleague who's 0:20:37.680 --> 0:20:39.760 now one at the Bank of England. Have a good 0:20:39.800 --> 0:20:44.200 record of genuinely giving independent thought. And you mentioned me 0:20:44.240 --> 0:20:46.600 as being characterized as the arch dove a decade or 0:20:46.640 --> 0:20:49.520 eleven years ago. Of course, now I'm considered a hawk 0:20:49.560 --> 0:20:51.560 because I'm telling the Bank of England, you guys are 0:20:52.320 --> 0:20:56.399 whistling fantasies. Inflation stopped coming down, so be data driven 0:20:56.720 --> 0:20:59.720 and everything will be okay. But I hadn't heard about Megan. 0:20:59.800 --> 0:21:02.399 That's great, Adam. The external model at the Bank of 0:21:02.440 --> 0:21:05.960 engand on the MPC. It's different to say the Federal Reserve. 0:21:06.320 --> 0:21:08.480 Why is that so important? And what lessons can we 0:21:08.480 --> 0:21:10.359 take from that? Mohammedan Adam was talking to Tom and 0:21:10.400 --> 0:21:12.600 I about this on Friday. He said that the MPC 0:21:12.720 --> 0:21:16.040 model of having external members is helpful. Do you think 0:21:16.080 --> 0:21:19.520 it is? I think it is. I fear it's not 0:21:19.560 --> 0:21:21.600 as helpful as it should be because sort of you 0:21:21.640 --> 0:21:23.920 look back at what the Bank of England has done 0:21:24.000 --> 0:21:26.760 or others with an external model versus what the Fed 0:21:26.840 --> 0:21:28.879 has done, and the differences aren't as great as I 0:21:28.920 --> 0:21:31.920 would like to think. But I do feel it's been 0:21:32.000 --> 0:21:36.919 important for the bank, both in terms of legitimacy, just 0:21:37.040 --> 0:21:40.920 that they're you end up having more split votes and 0:21:41.040 --> 0:21:43.879 more open discussion and debate, which is better for the 0:21:43.880 --> 0:21:46.399 public sense that this is hard, but they're taking it 0:21:46.480 --> 0:21:50.960 seriously and occasionally you get things right a little faster 0:21:51.080 --> 0:21:53.480 because the external member squeaky you used to have and 0:21:53.520 --> 0:21:57.359 still probably do. My former colleague Danny Blancheflower, who was 0:21:58.040 --> 0:22:02.960 quite squeaky, but so or the worse thins Henry the Eighth, 0:22:03.000 --> 0:22:06.280 I think, but he was, but he in this particular instance, 0:22:06.280 --> 0:22:09.359 he was right. And I think history has shown I 0:22:09.440 --> 0:22:11.240 was probably right on some of the stuff I squeaked 0:22:11.240 --> 0:22:13.680 about while I was there. So it's it's useful. Adam 0:22:13.720 --> 0:22:15.679 a clinic as O Wise, thank you said, it's going 0:22:15.720 --> 0:22:18.320 to from you, Adam Housing that of the Patison Institute 0:22:18.359 --> 0:22:31.359 for International Economics of right now, we're going to wait 0:22:31.400 --> 0:22:33.200 and see on a banking crisis. We do this with 0:22:33.280 --> 0:22:37.440 Timothy Adams, President and chief executive Officer of the very 0:22:37.520 --> 0:22:42.480 important IF the Institute of International Finance. This is a 0:22:42.600 --> 0:22:45.719 gathering of I'm going to say, the large bankers, and 0:22:45.760 --> 0:22:47.440 he's going to get upset with me, I mean, and 0:22:47.560 --> 0:22:49.439 you know that's that's what he's going to say, the 0:22:49.560 --> 0:22:52.119