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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business App. Bob Michael the JP

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Speaker 2: Morgan asset management rights. In this the soft landing continues

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Speaker 2: to unfold everywhere, with the tail risk of reacceleration or

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Speaker 2: contraction looking equally balanced. What's the biggest risk FED policy error?

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Speaker 2: Either they cut rates too soon or too late. Bob

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Speaker 2: joins us now for more, Bob, good morning, good morning.

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Speaker 2: Can you pick one for us? What is the biggest

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Speaker 2: risk out of those two options.

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Speaker 3: That the soft landing continues to unfold for the next

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Speaker 3: eighteen months and people are still stuck in cash And

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Speaker 3: every meeting I have, and I've said this for the

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Speaker 3: last several months, I've been here. That's the first question

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Speaker 3: I get. I have too much cash? What do I

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Speaker 3: do with it? Where do I go? Everything's gone up

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Speaker 3: in price? What am I going to do? And I

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Speaker 3: sit there and I wonder, how could everyone have more cash?

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Speaker 3: Yet every asset price has gone up? Where the hell

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Speaker 3: is it all coming from?

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Speaker 2: Truly, the everything rarey. We've seen it in bonds, We've

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Speaker 2: seen it in stocks, We've seen it in commodities. You've

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Speaker 2: seen it in gold. Come I ask you the question

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Speaker 2: you've asked yourself. Where is it coming from?

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Speaker 3: I don't know, but I've lived through this before. And

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Speaker 3: it was nineteen ninety five. We had our investment quarterly

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Speaker 3: yesterday we talked about it. At the end of ninety four,

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Speaker 3: it looked as though we were barreling into recession. The

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Speaker 3: FED had doubled the FED funds rate, US Steel had defaulted,

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Speaker 3: you had the tequila crisis, Orange County defaulted. Everyone was

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Speaker 3: one hundred percent certain we were going into recession and

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Speaker 3: everyone was risk off, and then we had that immaculate

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Speaker 3: soft landing. The FED took the edge off of things.

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Speaker 3: They cut rates from something like six percent to five

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Speaker 3: and a quarter percent, and the markets did fantastically well,

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Speaker 3: and we were talking about well, surely going into that,

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Speaker 3: credit spreads must have whined a lot, and Lisa Coleman,

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Speaker 3: who runs Credit for Us, looked at me and said,

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Speaker 3: you asked me this question every three months. Now, in

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Speaker 3: ninety four, they were dead flat. They didn't move a

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Speaker 3: single basis point, and we're seeing the same thing. The

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Speaker 3: demons are at work. People are worried about a reacceleration

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Speaker 3: or we eventually will roll into recession. They're waiting for

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Speaker 3: a better buying opportunity. Yet credit spreads are holding in

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Speaker 3: and there's just still too much cash out there.

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Speaker 2: Which raises this question.

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Speaker 4: Have you shifted your stance a little bit on the margins?

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Speaker 4: You used to say that the biggest risk was really

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Speaker 4: a recession.

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Speaker 2: That was your call.

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Speaker 4: Is this a new call for you, the idea that

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Speaker 4: it's equally balanced now with a reacceleration potentially a real

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Speaker 4: inflation problem.

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Speaker 3: Thank you for reminding me that a year ago we

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Speaker 3: were also certain that we were headed into recession. After all,

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Speaker 3: the regional banking system did blow up and it looked

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Speaker 3: as though and the FED still went ahead and hiked

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Speaker 3: rates one hundred basis points in the first part of

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Speaker 3: last year, and for sure it looked like recession, but

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Speaker 3: in September we threw that away and went to more

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Speaker 3: of the soft landing caps. So we've done reasonably well.

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Speaker 3: I sit here and we try to find where is

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Speaker 3: the smoking gum, Where are the demons, Where is their

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Speaker 3: legitimate proof that actually there's a frailty that will become

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Speaker 3: manifest in the downside, And it's too hard to find.

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Speaker 3: And actually there are more signs going the other way.

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Speaker 3: When we talked to the credit research teams, whether it's

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Speaker 3: investment great or high yield, they're telling their companies just

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Speaker 3: look better, that IBADA is starting to go up again,

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Speaker 3: that actually companies are more confident about their cash flow

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Speaker 3: and their earnings. So it actually feels that there's more

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Speaker 3: of a stabilization than downside.

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Speaker 4: When you talk about where is the money coming from,

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Speaker 4: I'm struck by all of my conversations this week and

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Speaker 4: over the past couple of weeks about how much fiscal

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Speaker 4: money has been pumped into the system and how people

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Speaker 4: who received it and companies that received it aren't going

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Speaker 4: to go out and spend it in some of the

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Speaker 4: line items. They're going to invest in stock market, which

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Speaker 4: is part of the reason why, and the bond market,

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Speaker 4: which is part of the reason why there's this wall

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Speaker 4: of money just flooding in. Is there a concern on

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Speaker 4: the government bond side that there's going to be some

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Speaker 4: sort of coming home to roost with respect to the

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Speaker 4: leverage being transferred from the private sector to the public sector.

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Speaker 1: I don't think so.

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Speaker 3: And we also looked at the amount of money in

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Speaker 3: plans like ARPA that have yet to be distributed. There's

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Speaker 3: still forty four percent of the trillion dollars that have

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Speaker 3: been set aside that have yet to go out into

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Speaker 3: the economy, so that's already a sunk cost, so to speak.

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Speaker 3: And you're right, the policy stimulus was literally off the charge.

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Speaker 3: You had to go back when you look at the

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Speaker 3: combination of fiscal and monetary to World War two to

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Speaker 3: have any kind of relative metric. But we had a pandemic.

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Speaker 3: It's what we needed. It got us through it, and

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Speaker 3: now we're coming out the other side. It will take

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Speaker 3: time to work down, but it doesn't seem to be

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Speaker 3: a problem. We can't be concerned about the amount of

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Speaker 3: treasury supply out there when the entire treasury curve is

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Speaker 3: trading over one hundred basis points through the FED funds

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Speaker 3: rate except for the very front end the two year,

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Speaker 3: so there's still plenty of demand out there. There is

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Speaker 3: no alternate reserve currency in the world other than the dollar,

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Speaker 3: so there will always be considering a bitcoin. Let's not

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Speaker 3: go there this morning. It's too early for me to

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Speaker 3: go there, so that there will be support for the dollar,

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Speaker 3: and the quickest easiest way for a large official institution

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Speaker 3: to maintain dollar reserves is to buy treasuries.

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Speaker 5: Were not worried, but to Lisa's point, do think down

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Speaker 5: the road you'll ever have this concern of the path

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Speaker 5: we're on in terms of the US deficit.

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Speaker 3: We are in a world of modern monetary theory where

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Speaker 3: when there's a crisis, even you know the pandemic was

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Speaker 3: a big one, the regional banking crisis, people want to

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Speaker 3: say it wasn't a crisis, but only because the policy

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Speaker 3: response was overwhelming. Governments borrow and the central banks helped

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Speaker 3: to underwrite that. But it doesn't just disappear into the ether, right.

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Speaker 3: The amount of physical stimulus you get actually goes into

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Speaker 3: the system somewhere. There is a credit multiplier, a credit

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Speaker 3: extension effect to it. And that's helped to boost the economy,

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Speaker 3: and we saw that early this year when the Treasury

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Speaker 3: dialed back the expectation on the amount of issuance because

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Speaker 3: guess what tax receipts were up, which is exactly what

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Speaker 3: you want when you apply that amount of stimulus.

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Speaker 2: So let's put together some of the things you've told

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Speaker 2: us so fast. So the economy is pretty decent. Biggest

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Speaker 2: risk is upside risk and maybe the extension of this

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Speaker 2: cycle for another eighteen months. You mentioned the version of

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Speaker 2: the yield curve as well, So we've got a two

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Speaker 2: year at the moment about four to sixty, a ten

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Speaker 2: year at four twenty four. Given everything you've told us,

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Speaker 2: how are you convincing clients to go further out along

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Speaker 2: the curve to pick up less yield? What are you

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Speaker 2: telling them?

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Speaker 3: Yeah, that's a really good question, because the Fed funds

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Speaker 3: rate has to come down to four percent to legitimize

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Speaker 3: the treasury curve where it is. And for sure, if

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Speaker 3: it comes down to four percent, the front end the

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Speaker 3: two year drops from four to sixty down to about

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Speaker 3: four percent, but five tens thirties stay about where they are.

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Speaker 3: It's not so much that it's looking out into the market,

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Speaker 3: looking into the investment grade market, where you could pick

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Speaker 3: up another close to a percent, Going into the high

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Speaker 3: yield market to securitize credit market. That's where you're starting

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Speaker 3: to pick up yields that are in that five and

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Speaker 3: a half and higher in high yeld close to eight

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Speaker 3: percent range. And those are the kind of yields and

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Speaker 3: credit spreads that will come down once the Fed starts

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Speaker 3: its rate cutting cycle.

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Speaker 2: You mentioned there was so much cash coming in. Where

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Speaker 2: is the cash going where you direct and get at

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Speaker 2: the moment, what are the biggest things you're advocating for.

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Speaker 3: Well, we do like credit just because corporate America looks

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Speaker 3: so good, and I myself have gone full circle on

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Speaker 3: private credit. It's so big I accept it as a

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Speaker 3: legitimate source of non bank lending into the system.

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Speaker 2: Okay, this has change. What's changed your mind?

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Speaker 3: Well, one, the fact that it's larger in size than

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Speaker 3: the public high yield market, So that's pretty significant that

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Speaker 3: it is getting out out there. It is lending to borrowers.

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Speaker 3: Those borrowers aren't just sitting on it. They're actually hiring people,

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Speaker 3: they're using resources, they're creating economic activity. Even if you

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Speaker 3: think put some unimational default rate out there twenty percent.

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Speaker 3: That still means eighty percent is money good. And while

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Speaker 3: there are problems that are ongoing right now, whether you

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Speaker 3: want to call it an amend and extent or exchanges

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Speaker 3: or restructurings, they're occurring. They're occurring, and they're happening without

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Speaker 3: all the fanfare if they happen in the public market.

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Speaker 3: So it's a strange form of reinsurance to the public

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Speaker 3: credit market. So it's another reason we like the public

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Speaker 3: credit markets because they just look so clean right now.

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Speaker 2: I love it. It's like, Okay, shoot a ribbons, that's okay,

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Speaker 2: good morning.

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Speaker 4: My name is Bob and I am accepting private credit.

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Speaker 2: I love how everyone is that LASA just sitting there

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Speaker 2: coming out with the biggest comeback for anyone who's feet

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Speaker 2: as stop fum.

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Speaker 6: I think it's great.

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Speaker 2: And we finished basking you a simple one bump. When

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Speaker 2: is it last time you were this bullish on your

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Speaker 2: asset class? When was the last time you mentioned the

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Speaker 2: mid nineties? When was the last time you were this bullish?

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Speaker 3: Oh gosh, you have to go back to the mid

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Speaker 3: two thousands.

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Speaker 2: Wow, does that make you're comfortable or uncomfortable? It's slice

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Speaker 2: the Static thousand and seven.

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Speaker 3: I feel great because I feel post financial crisis, we've

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Speaker 3: sort of been in a la la land where there's

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Speaker 3: there's been a lot of policy intervention along the way

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Speaker 3: because it was needed to recover from what happened during

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Speaker 3: the financial crisis. And hey, blame us, the baby boomers.

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Speaker 3: We learned about leverage and housing never went down in price,

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Speaker 3: and we figured out how to blow it all up,

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Speaker 3: and it took over a decade to put Humpty dumpty

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Speaker 3: back together again. And we see that's what's happening. We

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Speaker 3: see that the ninety one bursts are the largest population cohort.

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Speaker 3: They're turning thirty three this year. They're the dominant earner

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Speaker 3: spender saver. I think we can toss away the last

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Speaker 3: fifteen or so years and look at the period pre

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Speaker 3: financial crisis when there will be a demand for capital,

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Speaker 3: there will be a cost to it, and there will

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Speaker 3: be a productive use to it. So I'm very optimistic.

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Speaker 2: This was thoughtful stuff, Bob. It's craze to catch up with.

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Speaker 2: Kick off this Friday morning and start to close out

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Speaker 2: this week. Bob Michael of JP Morgan, Thank you, sir

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Speaker 2: Peter Oppenheimer Goldman Sachs rights in this, we believe that

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Speaker 2: there are many companies outside of the US that should

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Speaker 2: be considered as part of a global diversified portfolio and

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Speaker 2: should not be ignored simply because their base and listing

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Speaker 2: location is outside of the United States. Peter Oppenheimer joins,

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Speaker 2: is now for more, let's get straight into this, because

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Speaker 2: it's a really important theme. If it's winning, even if

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Speaker 2: it's dominant, should I be concerned?

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Speaker 6: Well, the short answer, John is no.

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Speaker 7: I mean, the outperformance that we've seen of the US,

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Speaker 7: which has really been particularly dramatic since the financial crisis,

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Speaker 7: has been entirely based on solid fundamentals the US economy,

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Speaker 7: but most importantly, profits have simply outgrown those of other regions.

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Speaker 7: But as a result of that, its valuation has risen

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Speaker 7: a lot compared to other parts of the world, and

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Speaker 7: now we're finally seeing a bit of a narrowing in

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Speaker 7: the relative fundamentals. Actually profits are picking up outside of

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Speaker 7: the US where the valuations are lower, and we think

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Speaker 7: that the US market can still do pretty well, but

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Speaker 7: there's some great opportunities outside and diversification makes a lot

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Speaker 7: of sense.

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Speaker 6: And that's true at the sector and the stop level two,

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Speaker 6: the PEP.

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Speaker 2: We can talk about those opportunities in just a moment,

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Speaker 2: but can we also discuss what we're fighting. Are we

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Speaker 2: fighting passive flows that just couldn't care less?

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Speaker 6: Yeah, to a large extent.

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Speaker 7: Look, passive investing has worked very well over the last

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Speaker 7: decade or more in an environment of ever lower interest rates,

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Speaker 7: where bigger companies are becoming increasingly dominant, and the usc

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Speaker 7: D market itself has got the highest share.

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Speaker 6: Of the world market since the early nineteen seventies.

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Speaker 7: So what's been winning has continued to win and win

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Speaker 7: over time, and that's been a great environment for passive investment.

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Speaker 7: We think that as interest rates stabilize at a slightly

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Speaker 7: higher level, sure they'll come down cyclically, but they won't

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Speaker 7: come down structurally.

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Speaker 6: Returns at the index level.

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Speaker 7: Are going to be slightly lower, and that's an environment

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Speaker 7: where the opportunity set is more attractive for active managers

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Speaker 7: and also for more differentiation and diversification, and that means

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Speaker 7: across regions, across sectors and styles as well.

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Speaker 4: Peter, when you talk about the case for international, I'm

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Speaker 4: curious where you're looking in particular, and whether it's regional

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Speaker 4: based or sector based as you are just noting.

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Speaker 6: Look, it's a little bit of both.

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Speaker 7: I mean, the US has done extraordinarily well, partly because

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Speaker 7: it's had a very high exposure to the growth factor,

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Speaker 7: principally dominated by technology, which has been the winning sector

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Speaker 7: over the last decade.

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Speaker 6: We still really like technology.

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Speaker 7: We think that the dominant companies have been justified again

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Speaker 7: in their dominance because of incredibly strong fundamentals. But we

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Speaker 7: think that you've got better relative valuation opportunities outside geographically

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Speaker 7: the US. And indeed, last year, rather quietly, the euros

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Speaker 7: dot fifty was slightly stronger than the SMP. Many people

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Speaker 7: don't acknowledge that year. Today Europe has outperformed not just

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Speaker 7: the SMP, but the Nasdaq.

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Speaker 6: So is Japan. So it isn't that we don't like

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Speaker 6: the US. It's gone up, it's done well.

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Speaker 7: But there are graphical opportunities to diversify, and I think

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Speaker 7: that means also broadening out from technology.

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Speaker 6: We think technology is still going to be crucially important.

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Speaker 7: And do well, but as interest rates come down and

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Speaker 7: we get this soft landing, the opportunity for broadening out

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Speaker 7: into some more cyclical parts of the market is improving,

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Speaker 7: but also into non tech companies. We put together a

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Speaker 7: list of what we call ETC's X tech compounders. These

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Speaker 7: are global companies outside of the tech sector which have

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Speaker 7: strong characteristics of reinvestment at a high rate, compounding high returns,

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Speaker 7: and they tend to be somewhat cheaper and I think

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Speaker 7: also offer good diversification opportunities.

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Speaker 4: Overnight, Peter, the City Group team, the equity team over

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Speaker 4: there actually upgraded EU stocks with about six percent more

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Speaker 4: upside here today in their view, and it's one of

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Speaker 4: the highest in the street. This is the reason why

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Speaker 4: more certainty on rate cuts. We've been talking a lot

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Speaker 4: about that global growth you alluded to that and dollar weakness.

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Speaker 4: How much is dollar weakness necessary for this call to work?

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Speaker 7: Actually, I'm less convinced on the dollar weakness part of

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Speaker 7: that story, although I agree with the other comments that

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Speaker 7: you made. The European economy is growing at a much

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Speaker 7: weaker pace than the US. You know, we're looking at

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Speaker 7: US growth this year around two point eight percent and

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Speaker 7: in Europe about point seven. But we shouldn't forget that

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Speaker 7: the European companies that dominate the indices are very global

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Speaker 7: and therefore they benefit from a recovery in global growth

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Speaker 7: and in the global manufacturing cycle which is beginning beginning

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Speaker 7: to happen. And I think actually that what we find

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Speaker 7: for European stocks is that growth trumps currency. Growth is accelerating.

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Speaker 7: European companies tend to do well even if the currency

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Speaker 7: is actually stronger. Now it may well be weaker and

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Speaker 7: that will add to its relative competitiveness. But we don't

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Speaker 7: think the currency is actually crucial part of this. It's

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Speaker 7: much more about relative fundamentals. Our earning is improving, and

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Speaker 7: there's growth improving, our interest rates coming down, all of

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Speaker 7: those things suggest they are. And Europe is only trading

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Speaker 7: at around thirteen thirteen and a half times PE compared

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Speaker 7: to something like twenty one in the US. The UK

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Speaker 7: only trades around ten and a half time, is about

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Speaker 7: half the valuation of the US, and so there is

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Speaker 7: a valuation opportunity as well, which isn't really dependent I

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Speaker 7: think so much on currency.

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Speaker 3: Peter.

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Speaker 5: When you look at India and China and you say

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Speaker 5: India has good growth, China can be a value opportunity.

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Speaker 5: A lot of people move to India because they wanted

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Speaker 5: to get away from China. Why do you see something

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Speaker 5: interesting in both markets?

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Speaker 7: Well, I think that India is a bit of a

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Speaker 7: different story. It's got high growth rates, both in terms

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Speaker 7: of the corporate sector and in terms of the economy.

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Speaker 7: It's a relatively expensive market, but it's one that has

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Speaker 7: good exposure to long term growth, and it is benefiting

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Speaker 7: a little bit from diversification supply chains and indeed diversification

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Speaker 7: of an investor focus away from China towards India. China

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Speaker 7: is a bit of a different story. It is a

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Speaker 7: valuation value play. I mean that the market trades at

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Speaker 7: around seven times earnings, much much cheaper. Of course, it

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Speaker 7: has a lot more structural headwinds and a higher risk

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Speaker 7: premium giving given current developments, and it's much less I

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Speaker 7: think of a consensus than India, but for evaluation.

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Speaker 6: Led recovery, if we get.

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Speaker 7: Any policy stimulus, we think that there's a reasonable upside

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Speaker 7: at least tactically in that market as well.

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Speaker 2: I've got to finish on Japan pet it's just been

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Speaker 2: amazing ni K two twenty five year today up by

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Speaker 2: something like twenty two percent. I think we had a

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Speaker 2: move over the last year of something close to fifty

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Speaker 2: percent PE when I buy the S and P five

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Speaker 2: hundred market, cat weighted. I know what I'm buying. I'm

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Speaker 2: buying megacat tech in a big way. When I buy

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Speaker 2: japan Pee, what am I dying?

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Speaker 1: Well?

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Speaker 6: I think there's two things to say about this.

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Speaker 7: First of all, actually, just like the US, both Europe

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Speaker 7: and Japan have seen an increased concentration by stock. So

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Speaker 7: the biggest thirty companies in Japan, which are very global,

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Speaker 7: are actually the biggest share of the thousand biggest that

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Speaker 7: we've seen going back over several decades. So you are

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Speaker 7: getting dominant, large cap globally exposed companies doing very well.

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Speaker 7: I think that you know, the Japanese market is much

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Speaker 7: cheaper than the US. Of course it's gone up a lot,

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Speaker 7: but we shouldn't forget it's only just broken through the

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Speaker 7: level that peaked at last in nineteen ninety. And the

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Speaker 7: fundamentals are finally very different because you're getting expanding nominal

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Speaker 7: GDP with finally coming out of the deflationary stagnation that's

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Speaker 7: dominated that economy over the last twenty five thirty years,

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Speaker 7: but also quite a lot of restructuring store because of

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Speaker 7: bottom up focus on improving return on investment from a

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Speaker 7: low level. So with rising margins, return on equity going up.

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Speaker 7: That justifies a bit more of a high evaluation. But

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Speaker 7: the dominant companies there really are global companies in areas

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Speaker 7: around technology, high high value added manufacturing that benefit from

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Speaker 7: a bit of a pickup and global manufacturing cycle as well,

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Speaker 7: and we think they're pretty well positioned.

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Speaker 2: John pet always enjoy your thoughts. Thanks for being with us.

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Speaker 2: Pinner up and handed the Mohammed. Let's talk about this.

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Speaker 2: How interventionist is America becoming.

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Speaker 8: He's becoming more interventionist. I don't think there's any question

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Speaker 8: about that. But the more interesting question is does it

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Speaker 8: need to be more interventionist. There is a view which

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Speaker 8: I must say I have some sympathy with that industrial

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Speaker 8: policy is going to be really important in pivoting from

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Speaker 8: all styles growth models to new style growth models. And

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Speaker 8: you're seeing it not just in the US, you seeing

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Speaker 8: it elsewhere as well well.

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Speaker 4: This is actually one of the reasons why when we're

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Speaker 4: talking about don't fight the FED the Federal Reserve, but

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Speaker 4: also don't fight the federal government, because this kind of

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Speaker 4: industrial policy is going to be crucial if you want

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Speaker 4: to shift away from some of these supply chains. I

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Speaker 4: remember maybe a year ago when people thought this would

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Speaker 4: be inflationary six months ago. People thought this would be

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Speaker 4: inflationary three months ago, probably going to increase pricing. Now

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Speaker 4: people don't care.

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Speaker 6: Why.

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Speaker 8: The reason why people don't care is because inflation has

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Speaker 8: been coming down, and it has been coming down without

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Speaker 8: a sacrifice and growth.

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Speaker 1: So it's not a top issue right now.

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Speaker 4: But it's inflationary.

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Speaker 1: Yeah, truly, it is inflationary.

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Speaker 8: Of course, it is all the restructions that's happening in

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Speaker 8: the global economy other than AI life sciences are inflationary.

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Speaker 8: The rewiring of supply chains for geopolitical reason inflationary. The

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Speaker 8: rewiring of supply chains because companies want more resilience and

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Speaker 8: not just efficiency inflationary. What's happening in the labor market

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Speaker 8: in terms of mismatches between skills and what people have,

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Speaker 8: that inflationary.

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Speaker 1: So you have all this going on. On the other side,

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Speaker 1: you have the.

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Speaker 8: Promise of AI, you have the promises of life sciences,

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Speaker 8: and people right now are completely focused on the promise

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Speaker 8: and are willing to live with all these other instructions ongoing.

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Speaker 2: We post a question earlier on this week, and there

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Speaker 2: was actually a really decent piece in the Wall Street

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Speaker 2: Journal yesterday. I'm not sure if they've been watching Bloomberg

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Speaker 2: surveillance through the week or not. For whether America is

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Speaker 2: becoming more like China as opposed to an era where

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Speaker 2: we believe China would become more like the United States.

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Speaker 2: Is America becoming more like China?

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Speaker 8: That's like saying that I as all those are unfit

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Speaker 8: as I am and becoming more like an Olympic athletes.

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Speaker 8: You know, could I take a small step, yes, But

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Speaker 8: am I becoming anything like that person?

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Speaker 3: No?

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Speaker 2: I'm not saying they're going to become full communist overnight

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Speaker 2: in Washington, DC. There might be some Republicans worried about

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Speaker 2: that in the Democratic Party. I'm not saying that. I'm

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Speaker 2: just saying we look a little bit more like them

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Speaker 2: than they do us in the last couple of years,

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Speaker 2: and that's not what we expected.

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Speaker 1: Well, we look a little bit more like you.

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Speaker 8: We've realized that government has to play a bigger role

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Speaker 8: in enabling the private sector, and we've realized that private

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Speaker 8: public partnerships matter.

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Speaker 2: The Federal Reserve came out with a medium projection for

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Speaker 2: twenty twenty four, unemployment, a little bit lower, growth a

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Speaker 2: whole lot stronger, and PCACPI was revised a little bit higher,

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Speaker 2: inflation expectations were firmer, yet still the median JOT showed

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Speaker 2: three cuts for twenty twenty four. Now we were trying

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Speaker 2: to work out if that was just a small contradiction

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Speaker 2: that they can iron out. Chairmen start speaking in the

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Speaker 2: news conference, and he didn't sing fussed by it at all,

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Speaker 2: didn't seem bothered by the optics of it. The substance nothing,

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Speaker 2: What do you think we're going towards? And we mentioned

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Speaker 2: the consequences. What are the consequences going to be the

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00:23:42,480 --> 00:23:43,400
Speaker 2: financial markets?

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00:23:44,760 --> 00:23:46,879
Speaker 1: So jarathink the critical thing is when he said the

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00:23:46,960 --> 00:23:48,159
Speaker 1: story has not changed.

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Speaker 8: So we could have argued over three cuts versus two cuts,

445
00:23:53,400 --> 00:23:56,320
Speaker 8: or you needed one more member to move, it's furious accuracy.

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00:23:56,359 --> 00:23:59,520
Speaker 8: But when the chair says the story has not changed,

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00:24:00,000 --> 00:24:02,800
Speaker 8: when you've had three hotter than expected inflation prints and

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00:24:02,920 --> 00:24:06,200
Speaker 8: you've revised up your inflation projection, I think that's a

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Speaker 8: real message.

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Speaker 2: As the story changed for bond markets, then well we.

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Speaker 1: See it in what's happening in the bond market.

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Speaker 8: Yes, I mean the bond market is now realizing that

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Speaker 8: finally the curve is going to steepen and it's realizing

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Speaker 8: that we are going to tolerate higher inflation for a while,

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Speaker 8: but that inflation is going to be well anchored.

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Speaker 1: That is a really consequential statement.

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Speaker 2: So this is important because we've been trying to figure

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Speaker 2: out if this is good or bad for the long

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Speaker 2: end of the curve. Shortend, If they want to come,

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Speaker 2: we know what happens. It's influenced by the policy rate.

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Speaker 2: I think Lisa was first to ask this question following

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Speaker 2: the news conference. What does it mean for bonds? What

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Speaker 2: does it mean for the longer end of the curve?

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Speaker 8: And I remember sitting here with three amsra and she said,

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Speaker 8: don't take me there. I want to talk about the

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Speaker 8: front end. I want to talk about the belluy of

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Speaker 8: the curve. Don't take me to the long end because

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Speaker 8: things get ambiguous when you get beyond five years.

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Speaker 2: Well, we're taking you there. What does it mean for

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Speaker 2: the tenure?

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Speaker 8: So I think for this year, an average ten year

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00:24:58,119 --> 00:25:00,119
Speaker 8: yield of four to twenty five around where we've in

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00:25:01,200 --> 00:25:04,639
Speaker 8: is reasonable. We're going to be quite volatile around it,

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00:25:04,800 --> 00:25:08,760
Speaker 8: but that's going to be reasonable, and the excitement is

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00:25:08,800 --> 00:25:10,080
Speaker 8: going to be elsewhere in the curve.

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Speaker 4: Which raises a question, is this the correct move That

477
00:25:13,440 --> 00:25:15,399
Speaker 4: basically it is important for the fad to have a

478
00:25:15,440 --> 00:25:18,240
Speaker 4: little bit more flexibility, and two to three percent is

479
00:25:18,480 --> 00:25:22,480
Speaker 4: a more simulative kind of environment for the economy to

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00:25:22,560 --> 00:25:25,280
Speaker 4: avoid the trap that we got into of disinflation for

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00:25:25,400 --> 00:25:26,000
Speaker 4: so many years.

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00:25:26,160 --> 00:25:29,879
Speaker 1: So here you go full into the article. Now, okay, so.

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00:25:31,920 --> 00:25:34,000
Speaker 2: Aaragraph here we go to answer your question.

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00:25:35,240 --> 00:25:38,160
Speaker 1: It is not without risk, but it is the right move.

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00:25:38,920 --> 00:25:41,879
Speaker 8: It is not without risk because at some point you

486
00:25:42,000 --> 00:25:45,800
Speaker 8: could destabilize inflation expectations, but it is the right move

487
00:25:45,880 --> 00:25:48,240
Speaker 8: because we live in a different macro paradigm. We're living

488
00:25:48,240 --> 00:25:52,240
Speaker 8: in a paradigm where supply isn't flexible enough globally, and

489
00:25:52,359 --> 00:25:55,480
Speaker 8: if you try to run a two percent inflation target,

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00:25:55,800 --> 00:25:59,280
Speaker 8: you will end up sacrificing economic well being unnecessarily.

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Speaker 4: So concern you that some people are speculating, just to

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00:26:03,000 --> 00:26:05,639
Speaker 4: your comment about how markets are not the economy, that

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00:26:05,760 --> 00:26:08,440
Speaker 4: a lot of the inflation is asset inflation. It's not

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00:26:09,119 --> 00:26:12,600
Speaker 4: real world inflation, because lower income families are the ones

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00:26:12,840 --> 00:26:14,919
Speaker 4: most likely to spend and are the ones who are

496
00:26:14,960 --> 00:26:17,040
Speaker 4: most at least likely to really benefit from some of

497
00:26:17,080 --> 00:26:19,600
Speaker 4: the rally that we're seeing in asset prices. How much

498
00:26:19,640 --> 00:26:23,760
Speaker 4: does it just divorce financial markets from the fundamental economy

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00:26:23,800 --> 00:26:25,480
Speaker 4: in a way that could be potentially harmful.

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00:26:25,640 --> 00:26:27,399
Speaker 8: I mean, that's been the story of QE. That's why

501
00:26:27,960 --> 00:26:30,840
Speaker 8: there was a call for people's QI, the recognition that

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00:26:31,600 --> 00:26:34,639
Speaker 8: the generosity of the central bank was going to a

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00:26:34,760 --> 00:26:36,520
Speaker 8: very small group of people who owned assets.

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00:26:37,240 --> 00:26:38,320
Speaker 1: Look, let's not.

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00:26:39,880 --> 00:26:43,159
Speaker 8: HydroD or hind it. The low income people have not

506
00:26:43,320 --> 00:26:46,280
Speaker 8: recovered from a nine percent inflation hit. Yes, their wages

507
00:26:46,320 --> 00:26:50,600
Speaker 8: are going up more, but the cumulative impact of the inflation,

508
00:26:50,640 --> 00:26:54,040
Speaker 8: which seems in twenty twenty one, has been significant. And

509
00:26:54,119 --> 00:26:56,080
Speaker 8: if you don't believe me, go to food backs.

510
00:26:56,480 --> 00:26:58,200
Speaker 1: Have a look at what you know.

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00:26:58,320 --> 00:27:01,160
Speaker 8: I took to one food bank in particular, and they're

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00:27:01,200 --> 00:27:05,879
Speaker 8: still seeing long lines of people. So underprivileged segments of

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00:27:05,920 --> 00:27:08,360
Speaker 8: a society have been hit hard by inflation. The good

514
00:27:08,440 --> 00:27:10,960
Speaker 8: news is that wages at the lower levels are going

515
00:27:11,040 --> 00:27:13,920
Speaker 8: up faster than they have been in the past. But

516
00:27:14,440 --> 00:27:18,440
Speaker 8: the inflation hit was painful. And that also explains why

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00:27:18,600 --> 00:27:23,879
Speaker 8: despite US economic exceptionalism, it doesn't get reflected in President

518
00:27:23,960 --> 00:27:28,919
Speaker 8: Biden's pause on the economy. It doesn't get reflected because

519
00:27:29,000 --> 00:27:32,600
Speaker 8: people remember inflation and for many people out there. When

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00:27:32,600 --> 00:27:34,960
Speaker 8: you tell them inflation is better, they'll say, well, prices

521
00:27:34,960 --> 00:27:37,680
Speaker 8: aren't coming down. They think that if inflation is better,

522
00:27:37,680 --> 00:27:38,800
Speaker 8: then prices should be coming down.

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00:27:39,119 --> 00:27:41,600
Speaker 2: So well framed Muhammed. The second plug of the ft

524
00:27:41,680 --> 00:27:45,199
Speaker 2: pace coming out Monday, Coming out Monday, Tuesday. Okay, Chuesday, Tuesday,

525
00:27:45,200 --> 00:27:47,440
Speaker 2: They're going to stand so many car piece on Tuesday.

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00:27:48,320 --> 00:27:51,840
Speaker 2: This is the Bloomberg Sevenmans podcast, bringing you the best

527
00:27:51,920 --> 00:27:55,200
Speaker 2: in markets, economics, antient politics. You can watch the show

528
00:27:55,280 --> 00:27:58,200
Speaker 2: live on Bloomberg TV weekday mornings from six am to

529
00:27:58,359 --> 00:28:02,080
Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify,

530
00:28:02,240 --> 00:28:04,480
Speaker 2: or anywhere else you listen, and as always on the

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00:28:04,480 --> 00:28:06,880
Speaker 2: bloom Blog Terminal and the Bloomberg Business out

532
00:28:10,880 --> 00:28:11,400
Speaker 8: Mm hmm