Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: Terminal and the Bloomberg Business App. Bob Michael the JP
Speaker 2: Morgan asset management rights. In this the soft landing continues
Speaker 2: to unfold everywhere, with the tail risk of reacceleration or
Speaker 2: contraction looking equally balanced. What's the biggest risk FED policy error?
Speaker 2: Either they cut rates too soon or too late. Bob
Speaker 2: joins us now for more, Bob, good morning, good morning.
Speaker 2: Can you pick one for us? What is the biggest
Speaker 2: risk out of those two options.
Speaker 3: That the soft landing continues to unfold for the next
Speaker 3: eighteen months and people are still stuck in cash And
Speaker 3: every meeting I have, and I've said this for the
Speaker 3: last several months, I've been here. That's the first question
Speaker 3: I get. I have too much cash? What do I
Speaker 3: do with it? Where do I go? Everything's gone up
Speaker 3: in price? What am I going to do? And I
Speaker 3: sit there and I wonder, how could everyone have more cash?
Speaker 3: Yet every asset price has gone up? Where the hell
Speaker 3: is it all coming from?
Speaker 2: Truly, the everything rarey. We've seen it in bonds, We've
Speaker 2: seen it in stocks, We've seen it in commodities. You've
Speaker 2: seen it in gold. Come I ask you the question
Speaker 2: you've asked yourself. Where is it coming from?
Speaker 3: I don't know, but I've lived through this before. And
Speaker 3: it was nineteen ninety five. We had our investment quarterly
Speaker 3: yesterday we talked about it. At the end of ninety four,
Speaker 3: it looked as though we were barreling into recession. The
Speaker 3: FED had doubled the FED funds rate, US Steel had defaulted,
Speaker 3: you had the tequila crisis, Orange County defaulted. Everyone was
Speaker 3: one hundred percent certain we were going into recession and
Speaker 3: everyone was risk off, and then we had that immaculate
Speaker 3: soft landing. The FED took the edge off of things.
Speaker 3: They cut rates from something like six percent to five
Speaker 3: and a quarter percent, and the markets did fantastically well,
Speaker 3: and we were talking about well, surely going into that,
Speaker 3: credit spreads must have whined a lot, and Lisa Coleman,
Speaker 3: who runs Credit for Us, looked at me and said,
Speaker 3: you asked me this question every three months. Now, in
Speaker 3: ninety four, they were dead flat. They didn't move a
Speaker 3: single basis point, and we're seeing the same thing. The
Speaker 3: demons are at work. People are worried about a reacceleration
Speaker 3: or we eventually will roll into recession. They're waiting for
Speaker 3: a better buying opportunity. Yet credit spreads are holding in
Speaker 3: and there's just still too much cash out there.
Speaker 2: Which raises this question.
Speaker 4: Have you shifted your stance a little bit on the margins?
Speaker 4: You used to say that the biggest risk was really
Speaker 4: a recession.
Speaker 2: That was your call.
Speaker 4: Is this a new call for you, the idea that
Speaker 4: it's equally balanced now with a reacceleration potentially a real
Speaker 4: inflation problem.
Speaker 3: Thank you for reminding me that a year ago we
Speaker 3: were also certain that we were headed into recession. After all,
Speaker 3: the regional banking system did blow up and it looked
Speaker 3: as though and the FED still went ahead and hiked
Speaker 3: rates one hundred basis points in the first part of
Speaker 3: last year, and for sure it looked like recession, but
Speaker 3: in September we threw that away and went to more
Speaker 3: of the soft landing caps. So we've done reasonably well.
Speaker 3: I sit here and we try to find where is
Speaker 3: the smoking gum, Where are the demons, Where is their
Speaker 3: legitimate proof that actually there's a frailty that will become
Speaker 3: manifest in the downside, And it's too hard to find.
Speaker 3: And actually there are more signs going the other way.
Speaker 3: When we talked to the credit research teams, whether it's
Speaker 3: investment great or high yield, they're telling their companies just
Speaker 3: look better, that IBADA is starting to go up again,
Speaker 3: that actually companies are more confident about their cash flow
Speaker 3: and their earnings. So it actually feels that there's more
Speaker 3: of a stabilization than downside.
Speaker 4: When you talk about where is the money coming from,
Speaker 4: I'm struck by all of my conversations this week and
Speaker 4: over the past couple of weeks about how much fiscal
Speaker 4: money has been pumped into the system and how people
Speaker 4: who received it and companies that received it aren't going
Speaker 4: to go out and spend it in some of the
Speaker 4: line items. They're going to invest in stock market, which
Speaker 4: is part of the reason why, and the bond market,
Speaker 4: which is part of the reason why there's this wall
Speaker 4: of money just flooding in. Is there a concern on
Speaker 4: the government bond side that there's going to be some
Speaker 4: sort of coming home to roost with respect to the
Speaker 4: leverage being transferred from the private sector to the public sector.
Speaker 1: I don't think so.
Speaker 3: And we also looked at the amount of money in
Speaker 3: plans like ARPA that have yet to be distributed. There's
Speaker 3: still forty four percent of the trillion dollars that have
Speaker 3: been set aside that have yet to go out into
Speaker 3: the economy, so that's already a sunk cost, so to speak.
Speaker 3: And you're right, the policy stimulus was literally off the charge.
Speaker 3: You had to go back when you look at the
Speaker 3: combination of fiscal and monetary to World War two to
Speaker 3: have any kind of relative metric. But we had a pandemic.
Speaker 3: It's what we needed. It got us through it, and
Speaker 3: now we're coming out the other side. It will take
Speaker 3: time to work down, but it doesn't seem to be
Speaker 3: a problem. We can't be concerned about the amount of
Speaker 3: treasury supply out there when the entire treasury curve is
Speaker 3: trading over one hundred basis points through the FED funds
Speaker 3: rate except for the very front end the two year,
Speaker 3: so there's still plenty of demand out there. There is
Speaker 3: no alternate reserve currency in the world other than the dollar,
Speaker 3: so there will always be considering a bitcoin. Let's not
Speaker 3: go there this morning. It's too early for me to
Speaker 3: go there, so that there will be support for the dollar,
Speaker 3: and the quickest easiest way for a large official institution
Speaker 3: to maintain dollar reserves is to buy treasuries.
Speaker 5: Were not worried, but to Lisa's point, do think down
Speaker 5: the road you'll ever have this concern of the path
Speaker 5: we're on in terms of the US deficit.
Speaker 3: We are in a world of modern monetary theory where
Speaker 3: when there's a crisis, even you know the pandemic was
Speaker 3: a big one, the regional banking crisis, people want to
Speaker 3: say it wasn't a crisis, but only because the policy
Speaker 3: response was overwhelming. Governments borrow and the central banks helped
Speaker 3: to underwrite that. But it doesn't just disappear into the ether, right.
Speaker 3: The amount of physical stimulus you get actually goes into
Speaker 3: the system somewhere. There is a credit multiplier, a credit
Speaker 3: extension effect to it. And that's helped to boost the economy,
Speaker 3: and we saw that early this year when the Treasury
Speaker 3: dialed back the expectation on the amount of issuance because
Speaker 3: guess what tax receipts were up, which is exactly what
Speaker 3: you want when you apply that amount of stimulus.
Speaker 2: So let's put together some of the things you've told
Speaker 2: us so fast. So the economy is pretty decent. Biggest
Speaker 2: risk is upside risk and maybe the extension of this
Speaker 2: cycle for another eighteen months. You mentioned the version of
Speaker 2: the yield curve as well, So we've got a two
Speaker 2: year at the moment about four to sixty, a ten
Speaker 2: year at four twenty four. Given everything you've told us,
Speaker 2: how are you convincing clients to go further out along
Speaker 2: the curve to pick up less yield? What are you
Speaker 2: telling them?
Speaker 3: Yeah, that's a really good question, because the Fed funds
Speaker 3: rate has to come down to four percent to legitimize
Speaker 3: the treasury curve where it is. And for sure, if
Speaker 3: it comes down to four percent, the front end the
Speaker 3: two year drops from four to sixty down to about
Speaker 3: four percent, but five tens thirties stay about where they are.
Speaker 3: It's not so much that it's looking out into the market,
Speaker 3: looking into the investment grade market, where you could pick
Speaker 3: up another close to a percent, Going into the high
Speaker 3: yield market to securitize credit market. That's where you're starting
Speaker 3: to pick up yields that are in that five and
Speaker 3: a half and higher in high yeld close to eight
Speaker 3: percent range. And those are the kind of yields and
Speaker 3: credit spreads that will come down once the Fed starts
Speaker 3: its rate cutting cycle.
Speaker 2: You mentioned there was so much cash coming in. Where
Speaker 2: is the cash going where you direct and get at
Speaker 2: the moment, what are the biggest things you're advocating for.
Speaker 3: Well, we do like credit just because corporate America looks
Speaker 3: so good, and I myself have gone full circle on
Speaker 3: private credit. It's so big I accept it as a
Speaker 3: legitimate source of non bank lending into the system.
Speaker 2: Okay, this has change. What's changed your mind?
Speaker 3: Well, one, the fact that it's larger in size than
Speaker 3: the public high yield market, So that's pretty significant that
Speaker 3: it is getting out out there. It is lending to borrowers.
Speaker 3: Those borrowers aren't just sitting on it. They're actually hiring people,
Speaker 3: they're using resources, they're creating economic activity. Even if you
Speaker 3: think put some unimational default rate out there twenty percent.
Speaker 3: That still means eighty percent is money good. And while
Speaker 3: there are problems that are ongoing right now, whether you
Speaker 3: want to call it an amend and extent or exchanges
Speaker 3: or restructurings, they're occurring. They're occurring, and they're happening without
Speaker 3: all the fanfare if they happen in the public market.
Speaker 3: So it's a strange form of reinsurance to the public
Speaker 3: credit market. So it's another reason we like the public
Speaker 3: credit markets because they just look so clean right now.
Speaker 2: I love it. It's like, Okay, shoot a ribbons, that's okay,
Speaker 2: good morning.
Speaker 4: My name is Bob and I am accepting private credit.
Speaker 2: I love how everyone is that LASA just sitting there
Speaker 2: coming out with the biggest comeback for anyone who's feet
Speaker 2: as stop fum.
Speaker 6: I think it's great.
Speaker 2: And we finished basking you a simple one bump. When
Speaker 2: is it last time you were this bullish on your
Speaker 2: asset class? When was the last time you mentioned the
Speaker 2: mid nineties? When was the last time you were this bullish?
Speaker 3: Oh gosh, you have to go back to the mid
Speaker 3: two thousands.
Speaker 2: Wow, does that make you're comfortable or uncomfortable? It's slice
Speaker 2: the Static thousand and seven.
Speaker 3: I feel great because I feel post financial crisis, we've
Speaker 3: sort of been in a la la land where there's
Speaker 3: there's been a lot of policy intervention along the way
Speaker 3: because it was needed to recover from what happened during
Speaker 3: the financial crisis. And hey, blame us, the baby boomers.
Speaker 3: We learned about leverage and housing never went down in price,
Speaker 3: and we figured out how to blow it all up,
Speaker 3: and it took over a decade to put Humpty dumpty
Speaker 3: back together again. And we see that's what's happening. We
Speaker 3: see that the ninety one bursts are the largest population cohort.
Speaker 3: They're turning thirty three this year. They're the dominant earner
Speaker 3: spender saver. I think we can toss away the last
Speaker 3: fifteen or so years and look at the period pre
Speaker 3: financial crisis when there will be a demand for capital,
Speaker 3: there will be a cost to it, and there will
Speaker 3: be a productive use to it. So I'm very optimistic.
Speaker 2: This was thoughtful stuff, Bob. It's craze to catch up with.
Speaker 2: Kick off this Friday morning and start to close out
Speaker 2: this week. Bob Michael of JP Morgan, Thank you, sir
Speaker 2: Peter Oppenheimer Goldman Sachs rights in this, we believe that
Speaker 2: there are many companies outside of the US that should
Speaker 2: be considered as part of a global diversified portfolio and
Speaker 2: should not be ignored simply because their base and listing
Speaker 2: location is outside of the United States. Peter Oppenheimer joins,
Speaker 2: is now for more, let's get straight into this, because
Speaker 2: it's a really important theme. If it's winning, even if
Speaker 2: it's dominant, should I be concerned?
Speaker 6: Well, the short answer, John is no.
Speaker 7: I mean, the outperformance that we've seen of the US,
Speaker 7: which has really been particularly dramatic since the financial crisis,
Speaker 7: has been entirely based on solid fundamentals the US economy,
Speaker 7: but most importantly, profits have simply outgrown those of other regions.
Speaker 7: But as a result of that, its valuation has risen
Speaker 7: a lot compared to other parts of the world, and
Speaker 7: now we're finally seeing a bit of a narrowing in
Speaker 7: the relative fundamentals. Actually profits are picking up outside of
Speaker 7: the US where the valuations are lower, and we think
Speaker 7: that the US market can still do pretty well, but
Speaker 7: there's some great opportunities outside and diversification makes a lot
Speaker 7: of sense.
Speaker 6: And that's true at the sector and the stop level two,
Speaker 6: the PEP.
Speaker 2: We can talk about those opportunities in just a moment,
Speaker 2: but can we also discuss what we're fighting. Are we
Speaker 2: fighting passive flows that just couldn't care less?
Speaker 6: Yeah, to a large extent.
Speaker 7: Look, passive investing has worked very well over the last
Speaker 7: decade or more in an environment of ever lower interest rates,
Speaker 7: where bigger companies are becoming increasingly dominant, and the usc
Speaker 7: D market itself has got the highest share.
Speaker 6: Of the world market since the early nineteen seventies.
Speaker 7: So what's been winning has continued to win and win
Speaker 7: over time, and that's been a great environment for passive investment.
Speaker 7: We think that as interest rates stabilize at a slightly
Speaker 7: higher level, sure they'll come down cyclically, but they won't
Speaker 7: come down structurally.
Speaker 6: Returns at the index level.
Speaker 7: Are going to be slightly lower, and that's an environment
Speaker 7: where the opportunity set is more attractive for active managers
Speaker 7: and also for more differentiation and diversification, and that means
Speaker 7: across regions, across sectors and styles as well.
Speaker 4: Peter, when you talk about the case for international, I'm
Speaker 4: curious where you're looking in particular, and whether it's regional
Speaker 4: based or sector based as you are just noting.
Speaker 6: Look, it's a little bit of both.
Speaker 7: I mean, the US has done extraordinarily well, partly because
Speaker 7: it's had a very high exposure to the growth factor,
Speaker 7: principally dominated by technology, which has been the winning sector
Speaker 7: over the last decade.
Speaker 6: We still really like technology.
Speaker 7: We think that the dominant companies have been justified again
Speaker 7: in their dominance because of incredibly strong fundamentals. But we
Speaker 7: think that you've got better relative valuation opportunities outside geographically
Speaker 7: the US. And indeed, last year, rather quietly, the euros
Speaker 7: dot fifty was slightly stronger than the SMP. Many people
Speaker 7: don't acknowledge that year. Today Europe has outperformed not just
Speaker 7: the SMP, but the Nasdaq.
Speaker 6: So is Japan. So it isn't that we don't like
Speaker 6: the US. It's gone up, it's done well.
Speaker 7: But there are graphical opportunities to diversify, and I think
Speaker 7: that means also broadening out from technology.
Speaker 6: We think technology is still going to be crucially important.
Speaker 7: And do well, but as interest rates come down and
Speaker 7: we get this soft landing, the opportunity for broadening out
Speaker 7: into some more cyclical parts of the market is improving,
Speaker 7: but also into non tech companies. We put together a
Speaker 7: list of what we call ETC's X tech compounders. These
Speaker 7: are global companies outside of the tech sector which have
Speaker 7: strong characteristics of reinvestment at a high rate, compounding high returns,
Speaker 7: and they tend to be somewhat cheaper and I think
Speaker 7: also offer good diversification opportunities.
Speaker 4: Overnight, Peter, the City Group team, the equity team over
Speaker 4: there actually upgraded EU stocks with about six percent more
Speaker 4: upside here today in their view, and it's one of
Speaker 4: the highest in the street. This is the reason why
Speaker 4: more certainty on rate cuts. We've been talking a lot
Speaker 4: about that global growth you alluded to that and dollar weakness.
Speaker 4: How much is dollar weakness necessary for this call to work?
Speaker 7: Actually, I'm less convinced on the dollar weakness part of
Speaker 7: that story, although I agree with the other comments that
Speaker 7: you made. The European economy is growing at a much
Speaker 7: weaker pace than the US. You know, we're looking at
Speaker 7: US growth this year around two point eight percent and
Speaker 7: in Europe about point seven. But we shouldn't forget that
Speaker 7: the European companies that dominate the indices are very global
Speaker 7: and therefore they benefit from a recovery in global growth
Speaker 7: and in the global manufacturing cycle which is beginning beginning
Speaker 7: to happen. And I think actually that what we find
Speaker 7: for European stocks is that growth trumps currency. Growth is accelerating.
Speaker 7: European companies tend to do well even if the currency
Speaker 7: is actually stronger. Now it may well be weaker and
Speaker 7: that will add to its relative competitiveness. But we don't
Speaker 7: think the currency is actually crucial part of this. It's
Speaker 7: much more about relative fundamentals. Our earning is improving, and
Speaker 7: there's growth improving, our interest rates coming down, all of
Speaker 7: those things suggest they are. And Europe is only trading
Speaker 7: at around thirteen thirteen and a half times PE compared
Speaker 7: to something like twenty one in the US. The UK
Speaker 7: only trades around ten and a half time, is about
Speaker 7: half the valuation of the US, and so there is
Speaker 7: a valuation opportunity as well, which isn't really dependent I
Speaker 7: think so much on currency.
Speaker 3: Peter.
Speaker 5: When you look at India and China and you say
Speaker 5: India has good growth, China can be a value opportunity.
Speaker 5: A lot of people move to India because they wanted
Speaker 5: to get away from China. Why do you see something
Speaker 5: interesting in both markets?
Speaker 7: Well, I think that India is a bit of a
Speaker 7: different story. It's got high growth rates, both in terms
Speaker 7: of the corporate sector and in terms of the economy.
Speaker 7: It's a relatively expensive market, but it's one that has
Speaker 7: good exposure to long term growth, and it is benefiting
Speaker 7: a little bit from diversification supply chains and indeed diversification
Speaker 7: of an investor focus away from China towards India. China
Speaker 7: is a bit of a different story. It is a
Speaker 7: valuation value play. I mean that the market trades at
Speaker 7: around seven times earnings, much much cheaper. Of course, it
Speaker 7: has a lot more structural headwinds and a higher risk
Speaker 7: premium giving given current developments, and it's much less I
Speaker 7: think of a consensus than India, but for evaluation.
Speaker 6: Led recovery, if we get.
Speaker 7: Any policy stimulus, we think that there's a reasonable upside
Speaker 7: at least tactically in that market as well.
Speaker 2: I've got to finish on Japan pet it's just been
Speaker 2: amazing ni K two twenty five year today up by
Speaker 2: something like twenty two percent. I think we had a
Speaker 2: move over the last year of something close to fifty
Speaker 2: percent PE when I buy the S and P five
Speaker 2: hundred market, cat weighted. I know what I'm buying. I'm
Speaker 2: buying megacat tech in a big way. When I buy
Speaker 2: japan Pee, what am I dying?
Speaker 1: Well?
Speaker 6: I think there's two things to say about this.
Speaker 7: First of all, actually, just like the US, both Europe
Speaker 7: and Japan have seen an increased concentration by stock. So
Speaker 7: the biggest thirty companies in Japan, which are very global,
Speaker 7: are actually the biggest share of the thousand biggest that
Speaker 7: we've seen going back over several decades. So you are
Speaker 7: getting dominant, large cap globally exposed companies doing very well.
Speaker 7: I think that you know, the Japanese market is much
Speaker 7: cheaper than the US. Of course it's gone up a lot,
Speaker 7: but we shouldn't forget it's only just broken through the
Speaker 7: level that peaked at last in nineteen ninety. And the
Speaker 7: fundamentals are finally very different because you're getting expanding nominal
Speaker 7: GDP with finally coming out of the deflationary stagnation that's
Speaker 7: dominated that economy over the last twenty five thirty years,
Speaker 7: but also quite a lot of restructuring store because of
Speaker 7: bottom up focus on improving return on investment from a
Speaker 7: low level. So with rising margins, return on equity going up.
Speaker 7: That justifies a bit more of a high evaluation. But
Speaker 7: the dominant companies there really are global companies in areas
Speaker 7: around technology, high high value added manufacturing that benefit from
Speaker 7: a bit of a pickup and global manufacturing cycle as well,
Speaker 7: and we think they're pretty well positioned.
Speaker 2: John pet always enjoy your thoughts. Thanks for being with us.
Speaker 2: Pinner up and handed the Mohammed. Let's talk about this.
Speaker 2: How interventionist is America becoming.
Speaker 8: He's becoming more interventionist. I don't think there's any question
Speaker 8: about that. But the more interesting question is does it
Speaker 8: need to be more interventionist. There is a view which
Speaker 8: I must say I have some sympathy with that industrial
Speaker 8: policy is going to be really important in pivoting from
Speaker 8: all styles growth models to new style growth models. And
Speaker 8: you're seeing it not just in the US, you seeing
Speaker 8: it elsewhere as well well.
Speaker 4: This is actually one of the reasons why when we're
Speaker 4: talking about don't fight the FED the Federal Reserve, but
Speaker 4: also don't fight the federal government, because this kind of
Speaker 4: industrial policy is going to be crucial if you want
Speaker 4: to shift away from some of these supply chains. I
Speaker 4: remember maybe a year ago when people thought this would
Speaker 4: be inflationary six months ago. People thought this would be
Speaker 4: inflationary three months ago, probably going to increase pricing. Now
Speaker 4: people don't care.
Speaker 6: Why.
Speaker 8: The reason why people don't care is because inflation has
Speaker 8: been coming down, and it has been coming down without
Speaker 8: a sacrifice and growth.
Speaker 1: So it's not a top issue right now.
Speaker 4: But it's inflationary.
Speaker 1: Yeah, truly, it is inflationary.
Speaker 8: Of course, it is all the restructions that's happening in
Speaker 8: the global economy other than AI life sciences are inflationary.
Speaker 8: The rewiring of supply chains for geopolitical reason inflationary. The
Speaker 8: rewiring of supply chains because companies want more resilience and
Speaker 8: not just efficiency inflationary. What's happening in the labor market
Speaker 8: in terms of mismatches between skills and what people have,
Speaker 8: that inflationary.
Speaker 1: So you have all this going on. On the other side,
Speaker 1: you have the.
Speaker 8: Promise of AI, you have the promises of life sciences,
Speaker 8: and people right now are completely focused on the promise
Speaker 8: and are willing to live with all these other instructions ongoing.
Speaker 2: We post a question earlier on this week, and there
Speaker 2: was actually a really decent piece in the Wall Street
Speaker 2: Journal yesterday. I'm not sure if they've been watching Bloomberg
Speaker 2: surveillance through the week or not. For whether America is
Speaker 2: becoming more like China as opposed to an era where
Speaker 2: we believe China would become more like the United States.
Speaker 2: Is America becoming more like China?
Speaker 8: That's like saying that I as all those are unfit
Speaker 8: as I am and becoming more like an Olympic athletes.
Speaker 8: You know, could I take a small step, yes, But
Speaker 8: am I becoming anything like that person?
Speaker 3: No?
Speaker 2: I'm not saying they're going to become full communist overnight
Speaker 2: in Washington, DC. There might be some Republicans worried about
Speaker 2: that in the Democratic Party. I'm not saying that. I'm
Speaker 2: just saying we look a little bit more like them
Speaker 2: than they do us in the last couple of years,
Speaker 2: and that's not what we expected.
Speaker 1: Well, we look a little bit more like you.
Speaker 8: We've realized that government has to play a bigger role
Speaker 8: in enabling the private sector, and we've realized that private
Speaker 8: public partnerships matter.
Speaker 2: The Federal Reserve came out with a medium projection for
Speaker 2: twenty twenty four, unemployment, a little bit lower, growth a
Speaker 2: whole lot stronger, and PCACPI was revised a little bit higher,
Speaker 2: inflation expectations were firmer, yet still the median JOT showed
Speaker 2: three cuts for twenty twenty four. Now we were trying
Speaker 2: to work out if that was just a small contradiction
Speaker 2: that they can iron out. Chairmen start speaking in the
Speaker 2: news conference, and he didn't sing fussed by it at all,
Speaker 2: didn't seem bothered by the optics of it. The substance nothing,
Speaker 2: What do you think we're going towards? And we mentioned
Speaker 2: the consequences. What are the consequences going to be the
Speaker 2: financial markets?
Speaker 1: So jarathink the critical thing is when he said the
Speaker 1: story has not changed.
Speaker 8: So we could have argued over three cuts versus two cuts,
Speaker 8: or you needed one more member to move, it's furious accuracy.
Speaker 8: But when the chair says the story has not changed,
Speaker 8: when you've had three hotter than expected inflation prints and
Speaker 8: you've revised up your inflation projection, I think that's a
Speaker 8: real message.
Speaker 2: As the story changed for bond markets, then well we.
Speaker 1: See it in what's happening in the bond market.
Speaker 8: Yes, I mean the bond market is now realizing that
Speaker 8: finally the curve is going to steepen and it's realizing
Speaker 8: that we are going to tolerate higher inflation for a while,
Speaker 8: but that inflation is going to be well anchored.
Speaker 1: That is a really consequential statement.
Speaker 2: So this is important because we've been trying to figure
Speaker 2: out if this is good or bad for the long
Speaker 2: end of the curve. Shortend, If they want to come,
Speaker 2: we know what happens. It's influenced by the policy rate.
Speaker 2: I think Lisa was first to ask this question following
Speaker 2: the news conference. What does it mean for bonds? What
Speaker 2: does it mean for the longer end of the curve?
Speaker 8: And I remember sitting here with three amsra and she said,
Speaker 8: don't take me there. I want to talk about the
Speaker 8: front end. I want to talk about the belluy of
Speaker 8: the curve. Don't take me to the long end because
Speaker 8: things get ambiguous when you get beyond five years.
Speaker 2: Well, we're taking you there. What does it mean for
Speaker 2: the tenure?
Speaker 8: So I think for this year, an average ten year
Speaker 8: yield of four to twenty five around where we've in
Speaker 8: is reasonable. We're going to be quite volatile around it,
Speaker 8: but that's going to be reasonable, and the excitement is
Speaker 8: going to be elsewhere in the curve.
Speaker 4: Which raises a question, is this the correct move That
Speaker 4: basically it is important for the fad to have a
Speaker 4: little bit more flexibility, and two to three percent is
Speaker 4: a more simulative kind of environment for the economy to
Speaker 4: avoid the trap that we got into of disinflation for
Speaker 4: so many years.
Speaker 1: So here you go full into the article. Now, okay, so.
Speaker 2: Aaragraph here we go to answer your question.
Speaker 1: It is not without risk, but it is the right move.
Speaker 8: It is not without risk because at some point you
Speaker 8: could destabilize inflation expectations, but it is the right move
Speaker 8: because we live in a different macro paradigm. We're living
Speaker 8: in a paradigm where supply isn't flexible enough globally, and
Speaker 8: if you try to run a two percent inflation target,
Speaker 8: you will end up sacrificing economic well being unnecessarily.
Speaker 4: So concern you that some people are speculating, just to
Speaker 4: your comment about how markets are not the economy, that
Speaker 4: a lot of the inflation is asset inflation. It's not
Speaker 4: real world inflation, because lower income families are the ones
Speaker 4: most likely to spend and are the ones who are
Speaker 4: most at least likely to really benefit from some of
Speaker 4: the rally that we're seeing in asset prices. How much
Speaker 4: does it just divorce financial markets from the fundamental economy
Speaker 4: in a way that could be potentially harmful.
Speaker 8: I mean, that's been the story of QE. That's why
Speaker 8: there was a call for people's QI, the recognition that
Speaker 8: the generosity of the central bank was going to a
Speaker 8: very small group of people who owned assets.
Speaker 1: Look, let's not.
Speaker 8: HydroD or hind it. The low income people have not
Speaker 8: recovered from a nine percent inflation hit. Yes, their wages
Speaker 8: are going up more, but the cumulative impact of the inflation,
Speaker 8: which seems in twenty twenty one, has been significant. And
Speaker 8: if you don't believe me, go to food backs.
Speaker 1: Have a look at what you know.
Speaker 8: I took to one food bank in particular, and they're
Speaker 8: still seeing long lines of people. So underprivileged segments of
Speaker 8: a society have been hit hard by inflation. The good
Speaker 8: news is that wages at the lower levels are going
Speaker 8: up faster than they have been in the past. But
Speaker 8: the inflation hit was painful. And that also explains why
Speaker 8: despite US economic exceptionalism, it doesn't get reflected in President
Speaker 8: Biden's pause on the economy. It doesn't get reflected because
Speaker 8: people remember inflation and for many people out there. When
Speaker 8: you tell them inflation is better, they'll say, well, prices
Speaker 8: aren't coming down. They think that if inflation is better,
Speaker 8: then prices should be coming down.
Speaker 2: So well framed Muhammed. The second plug of the ft
Speaker 2: pace coming out Monday, Coming out Monday, Tuesday. Okay, Chuesday, Tuesday,
Speaker 2: They're going to stand so many car piece on Tuesday.
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Speaker 8: Mm hmm