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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along

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Speaker 1: with Jonathan Ferrill and Lisa Brownwitz Jay Lee. We bring

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Speaker 1: you insight from the best and economics, finance, investment and

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Speaker 1: international relations. Find Bloomberg Surveillance, an Apple podcast, SoundCloud, Bloomberg

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Speaker 1: dot Com and of course on the Bloomberg Terminal. I

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Speaker 1: want to send to Sebastian Page on some of this.

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Speaker 1: The chief investment strategist and head a global multi asset

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Speaker 1: at Hero Price said, this is a tough moment for

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Speaker 1: central banks and some people might say they've got themselves

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Speaker 1: into this mess to some extent. For the UK, they

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Speaker 1: face upside risk to inflation, potentially in downside risk to growth.

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Speaker 1: You'll view on what policy is going to look like

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Speaker 1: in that world and ultimately what it means for risk assets. Now,

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Speaker 1: the discussion on the UK is interesting. I like to

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Speaker 1: look at a I call it the Bloomberg Surveillance measure,

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Speaker 1: the five year five year forward. The five year five

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Speaker 1: year forward inflation in the UK is at around four

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Speaker 1: point seven percent. That's high, and compare that to the US,

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Speaker 1: where the five year five year forward is at three

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Speaker 1: point two percent. The signal I'm getting from this is

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Speaker 1: that growth is even more fragile in the UK, and

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Speaker 1: the view is that the BOE won't be able to

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Speaker 1: be as aggressive at the FED. And that also feeds

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Speaker 1: into the weakness in the pound that you were just

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Speaker 1: talking about. Well, the weakness and the pound actually help

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Speaker 1: the economy or hurt the economy. Look, it can help

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Speaker 1: in terms of exports for sure, but generally speaking it

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Speaker 1: also feeds into inflation, which then forces the hand of

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Speaker 1: the b o E as well, and then it gets complicated. Right. Look,

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Speaker 1: I think if you step back, you look at the

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Speaker 1: big picture. Markets got drunk on liquidity post COVID and

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Speaker 1: I know, Jonathan, you were talking about tom being out

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Speaker 1: earlier this week and you mentioned a hangover. I don't

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Speaker 1: know if that if that's the case, but right now

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Speaker 1: we're going through a hangover in world capital markets and

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Speaker 1: it's been remarkable in the sense of both stocks and

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Speaker 1: bonds ring down at the same time. Sterling through Right now, folks,

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Speaker 1: I'm gonna call an important level fifty one point two

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Speaker 1: four five zero on week pound. We'll see if we

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Speaker 1: get there. Sebastian, with your book you on the high

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Speaker 1: grounded tro price on this, John mentions, what's it mean

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Speaker 1: for risk assets? What's it mean for stocks? Does the

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Speaker 1: market valuation if we get a current set of currency

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Speaker 1: depreciations off of these absolutely historic central bank moments, can

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Speaker 1: the stock market adapt on valuation on multiples to sustain

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Speaker 1: a level market or even a modest single digit bull market. Yeah,

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Speaker 1: really good question, Tom. Look, we entered the year position

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Speaker 1: for this in our tactical portfolios underweight stocks and within bonds,

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Speaker 1: underweight deray s. And what's interesting is we tend to

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Speaker 1: be contrarians. We look at valuation opportunities, We look twelve

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Speaker 1: months out, so normally we would be leaning in both

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Speaker 1: stocks and bonds. And what's interesting is not what we're doing,

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Speaker 1: is what we're not doing, Tom. We're actually buying back treasuries,

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Speaker 1: closing our underweights. We're not closing our under weights and stocks.

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Speaker 1: And I said in surveillance back in November inflations the

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Speaker 1: number one risk for markets. I continue to say this.

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Speaker 1: Inflation is the number one risk for markets. And the

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Speaker 1: key question that's debated on your show all the time

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Speaker 1: is will the inflation shock lead to a recession? A

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Speaker 1: growth shock? Said? Great cans shop with you, sir as

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Speaker 1: always Sebastian Page there at t rod Price with a DP,

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Speaker 1: their chief economists wonderfully attuned to the dynamics of the

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Speaker 1: American economy. Neili Richardson joins us. Right now, I'm looking

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Speaker 1: at course cp I that John just mentioned, and I

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Speaker 1: guess it's a pause that McKee just mentioned. We migrate

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Speaker 1: from six point five to six point one percent on

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Speaker 1: the survey on core inflation. One percent of our audience

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Speaker 1: and radio and TV thinks people like mckeeth, Ferrell, Keene

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Speaker 1: and the rest are nuts saying that's a good trend.

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Speaker 1: How much does that trend have to move down to

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Speaker 1: where we can begin to relax? Hi, Tom, thanks for

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Speaker 1: starting off with an easy question. I think we're going

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Speaker 1: to stay on the edge of our seats until we

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Speaker 1: see that core inflation moved down below three percent. I

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Speaker 1: think that we can't take it as a foregone conclusion

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Speaker 1: that it moves down in a straight line either. Um.

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Speaker 1: Many on your show have said that the Fed can

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Speaker 1: only do so much, that this is a supply aside

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Speaker 1: issue as much of it as a demand issue, and

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Speaker 1: so we might see inflation bounds around even in the quarry.

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Speaker 1: Uh And so comfort is I think of below three

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Speaker 1: percent nearly. Do you think that people interpreted yesterday's press

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Speaker 1: conference correctly? No, I don't. Um. I think that it

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Speaker 1: was way too easy for the Fed, and I know

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Speaker 1: that's part of their job. Their job is to make

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Speaker 1: it look easy. But it's not about what the market

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Speaker 1: to do the day after the press conference is what

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Speaker 1: the inflation does months from now, And we haven't seen

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Speaker 1: it yet. And the numbers that might just read are

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Speaker 1: are concerning productivity went down, wages went up, uh, And

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Speaker 1: so that's not the place where the Fed wants to be.

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Speaker 1: They want if wages are going up, it's because the

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Speaker 1: economy is getting more productive, not because we have this

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Speaker 1: super tight, unhealthy supply shortage. And I think that is

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Speaker 1: the concerned. Wages may not boost inflation, but wage growth

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Speaker 1: keep it around a lot longer than anyone's expecting right now.

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Speaker 1: Another thing that really a lot of people picked up

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Speaker 1: on the j Pala said yesterday was that he really

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Speaker 1: sees the core rate, uh, the target rate to still

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Speaker 1: be around two to three percent in terms of how

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Speaker 1: far they will raise rates. Do you think that that's

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Speaker 1: something we can take at face value or do you

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Speaker 1: think that perhaps there is more willingness than perhaps was

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Speaker 1: reflected to go beyond that into a tightening that perhaps

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Speaker 1: was what people were pricing in earlier this week, but

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Speaker 1: not now. Well, I think that that uh four now,

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Speaker 1: in terms of the fundamentals which are strong and where

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Speaker 1: the Fed is guiding towards, I think that's appropriate. I'm

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Speaker 1: always struck by this comparison with going from six to

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Speaker 1: eleven versus where we are not now going from rock

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Speaker 1: bottom zero to three. We're still in the school zone

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Speaker 1: in terms of rate heights. We are not on the

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Speaker 1: open highway. So I think what the Fed is is

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Speaker 1: trying to say is that they can maneuver of soft landing.

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Speaker 1: Given that we're starting from such a very low point

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Speaker 1: on the federal funds rate. You're on an Indiana universe,

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Speaker 1: which I believe is a stomping ground of when James

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Speaker 1: Bullard John Farrell says what your bullet will speak tomorrow

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Speaker 1: and Indiana, folks is a really acclaimed interesting mathematics and economics,

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Speaker 1: uh combine Nila. There's a different view out in Indiana.

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Speaker 1: It's an optimism that America can heal and move on

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Speaker 1: away from the elites on the East coast. Is that

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Speaker 1: still in place. Can we technologically move on and move

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Speaker 1: forward like that Indiana optimism. I'll have to know Tom

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Speaker 1: that Governor Waller is also and I U affiliate we

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Speaker 1: have a good representation on the in the federal reserve

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Speaker 1: system right now. Um. You know, I think that the

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Speaker 1: optimism around innovation and product productivity is warranted. Um. That's

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Speaker 1: what makes the wage gains good for the economy, That's

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Speaker 1: what leads to profitability. Um. And we've seen a a

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Speaker 1: big uptick and an innovation just to get through the pandemic.

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Speaker 1: A lot of things that were expected well into the

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Speaker 1: future in terms of e commerce and I can a

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Speaker 1: I automation have been pulled forward. So the question is

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Speaker 1: can the economy build on that momentum on those games

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Speaker 1: to keep that productivity moving forward? John, I love this

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Speaker 1: that we have NILAN and I'm sorry, John, there's just

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Speaker 1: not enough Midwest, you know, freshwater representation in the economic discussion.

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Speaker 1: You get guys like your own Paul, who are a

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Speaker 1: beast of finance on the East Coast. NATA, we have

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Speaker 1: to run, thank you. Then we did cost a little

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Speaker 1: bit lighter. NATA richardson the of I d P. Thank

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Speaker 1: you very much. We'll drive forward this story through the

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Speaker 1: day on radio and television with Mark Chandler. His book

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Speaker 1: Political Economy of Tomorrow looked at the astrology of the

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Speaker 1: foreign exchange system. He's chief market strategist at Bannockburn. Mark,

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Speaker 1: you're a great student of this. I want to go

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Speaker 1: back too, I believe John Major and essentially the modern

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Speaker 1: collapse of the British financial system. Yes, there was a

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Speaker 1: few other moments along the way, including Mervin King comparing

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Speaker 1: contrast what is coming for Governor Bailey and what John

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Speaker 1: Major dealt with in was sterling collapse. Yeah, so I

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Speaker 1: remember the UK was part of the exchange rate mechanism

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Speaker 1: that limited how much the Sterling could move. It had

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Speaker 1: trouble keeping into that, maintaining that band. And now the

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Speaker 1: UK had gotten its freedom not limited by that band,

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Speaker 1: and Sterling had collapsed. You know, yesterday Chairman Poulos talk

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Speaker 1: that sort of like channeled Paul Looker. But I think

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Speaker 1: it's really Bailey He's doing it. Despite what LEAs was saying,

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Speaker 1: the UK spot the Bank of England's forecasting contraction in

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Speaker 1: g DT next year and still gonna be stagnant in

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Speaker 1: the hiking grates. And not only hiking rates, but they

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Speaker 1: also announced that starting September they will begin starting off

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Speaker 1: it's corporate bond foldings. Mark, What will be the lessons

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Speaker 1: here and this? I think folks of the Great Yan's

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Speaker 1: Nordwig and Mark Chandler together on this, Mark Chandler, How

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Speaker 1: does the ECB, in a more conservative block at the

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Speaker 1: ECB is represented by the bundes Bank, how do they

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Speaker 1: respond to what is we've seen this morning. I don't

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Speaker 1: think that what happens in the Bank of England makes

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Speaker 1: the ECB change their dynamics whatsoever. I do think the

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Speaker 1: hawks have been pressing for a July rate hikes, but

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Speaker 1: and the market, the swaps market had to priced in

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Speaker 1: about a twenty five basis point hike in July. But

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Speaker 1: I think that this is this is scary in the

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Speaker 1: sense that we saw that happen today with the staffew

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Speaker 1: orders in Germany. We could then expected industrial output in

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Speaker 1: trance Europe. You're up as a whole. It's not just

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Speaker 1: the UK, but you're up as a whole. Looks to

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Speaker 1: me like it's headed for her session. Is that being

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Speaker 1: priced into the euro right now? Mark? Well, I think partly,

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Speaker 1: but I think they really would trice into the euro

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Speaker 1: is how aggressive the FED is. I know a lot

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Speaker 1: of people are critical to spend that there behind the curve,

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Speaker 1: but I think that they're playing catchup. And it's not

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Speaker 1: just it's not just that the federals behind the curve.

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Speaker 1: Something wrong with the Federal Reserve. But look what happened Sweden,

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Speaker 1: who said they were gonna have great Greeks. And it's

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Speaker 1: the same thing that we've seen some other central banks,

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Speaker 1: like the Reserve. Think of Australia. I can wait. Even

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Speaker 1: so I think that all the major central banks are

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Speaker 1: behind the curve, partly because I want to stay in there.

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Speaker 1: This thing that the pandemic and then the Russian invasion

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Speaker 1: of Ukraine, and then the slowdown, the COVID sort of

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Speaker 1: induced slowdown in China. It's just it's just more than

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Speaker 1: anybody has would have expected. A ray of nothing in

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Speaker 1: our experience. Let us prepare for this. A lot of

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Speaker 1: people are talking about the potential for recession in Europe.

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Speaker 1: The Bank of England seeing a very high likelihood of

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Speaker 1: recession in England and the United Kingdom in the face

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Speaker 1: of these dynamics. In the US, there seems to be

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Speaker 1: a consensus that that is not the near term forecast

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Speaker 1: that there is so much of a momentum here underpinning

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Speaker 1: the strength. Do you think that that's were stated or

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Speaker 1: do you think that people can bet on that leading

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Speaker 1: to even more dollar strength. Well, I do think they

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Speaker 1: will get some more dollar strength there, and I think

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Speaker 1: that tomorrow we're gonna get the jobs to point the

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Speaker 1: US and I see the falling a little bit, but

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Speaker 1: we're still talking about three hundred tops three hundred eight

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Speaker 1: increasing jobs. It's hard for me to hear your session

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Speaker 1: with that, so I am very expensitive to this. We

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Speaker 1: are going to have a slowed down. I should have

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Speaker 1: just sive the same place later this year and into

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Speaker 1: next year, not so much an immediately. You know, in

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Speaker 1: the next quarter two we did have that sharp contraction

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Speaker 1: to one GDP, but that was really a statistical flues,

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Speaker 1: right because of trade and inventory. What we what we

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Speaker 1: kind of it's called final sales to domestic purchasers with

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Speaker 1: the actually relatively robust number mark. I want to go

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Speaker 1: back to how we were all weaned on this, because

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Speaker 1: all of us began foreign exchange in banking by watching

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Speaker 1: Julie Andrews and Mary Poppins. I mean let's be honest.

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Speaker 1: Dick Van Dyke stole the show and Mark Chandler, there's

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Speaker 1: a view of the Bank of England. I mean, Pharrell

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Speaker 1: grew up of this view of the Fidelity and Fiduciary Bank,

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Speaker 1: which was the bank in the movie Mary Poppins. We

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Speaker 1: have moved on from that from Mark, a new central

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Speaker 1: bank that is supposed to have a new social construct.

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Speaker 1: Is that social construct getting in the way of making

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Speaker 1: tough decisions? I don't know. I mean, he look what

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Speaker 1: they just did, a hight rate six members, I mean

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Speaker 1: they all voted in favor of actually six voted favor

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Speaker 1: of the rate type, three of them one of the

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Speaker 1: fifty basis point rate type. Knowing full well that the

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Speaker 1: cost of living squeeze is going to be crushing the

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Speaker 1: consumer and businesses in the UK. I don't know. I

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Speaker 1: don't see this as as some kind of give back

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Speaker 1: to the social social consciousness. Where I sort of see

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Speaker 1: that happening is really in Mexico, where yesterday Credit a

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Speaker 1: MLO announced the pact with businesses to limit the price

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Speaker 1: increased of like twenty four common products. Mark, we got

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Speaker 1: to leave it there on short notice. Mark Channeler today

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Speaker 1: with Bannock and I just love, love, love hit the tapestry, Lisa,

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Speaker 1: that Mr Chandler puts to the history and the social

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Speaker 1: aspects of all this financial blather that we do. I

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Speaker 1: would respectfully suggest folks to get every second of value

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Speaker 1: we can hear that Benjamin Broadbent, Deputy Governor of the

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Speaker 1: Bank of England X Goldman Sachs truly one of the

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Speaker 1: giant lights of uh United Kingdom economics and Governor Bailey

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Speaker 1: they would like to listen to Paul Sanky he is

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Speaker 1: founder and lead analyst at Sanky Research with an absolutely

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Speaker 1: blistering note for a two hour conversation. Paul, I want

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Speaker 1: to go to the nitty gritty of your expertise, which

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Speaker 1: is you link Henry Hubb and l N G into

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Speaker 1: a net gas explosion in price and profit. Discuss that

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Speaker 1: well supply US production is not U reacting to high prices,

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Speaker 1: so a lot of our normal elasticities are simply not there.

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Speaker 1: And the other key one is that coal prices are

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Speaker 1: very high and cold inventories are very low. So the

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Speaker 1: US prices you know, as you mentioned, has gone to

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Speaker 1: eight dollars fifty per m and b t U, which

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Speaker 1: is you know fifteen year high, and I've got clients

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Speaker 1: that think it's going to twenty. So the reason obviously

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Speaker 1: is that Europe is cutting off Russian gas and as

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Speaker 1: a result they have to import as much energy as

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Speaker 1: they can. They were dependent on the spot market, so

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Speaker 1: they don't have long term contracts and as a result,

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Speaker 1: effectively they're having to buy L and G from a buyer,

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Speaker 1: from someone who's already got the contract from Asia and

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Speaker 1: then put in scale folks in net gas, we frame

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Speaker 1: a two three, it's now eight and Mr Sanky just

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Speaker 1: said we should enjoy at twenty. Paul Sankey, let's look

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Speaker 1: at the United Kingdom and the United States galling to gas.

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Speaker 1: And they understand there's taxes, and John rives a little

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Speaker 1: car over there. I get it, but it's four dollars

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Speaker 1: fifty eight cents up to United Kingdom five dollars seventy

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Speaker 1: nine cents. You say, the profits are out there for

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Speaker 1: big oil like you've never seen in thirty years. It

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Speaker 1: goes back to Urgan in the prize, the whole thing.

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Speaker 1: What's a gal and a gas going to cost in

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Speaker 1: three or five years? Well, I think we're gonna hold

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Speaker 1: a hundred and cents to a hundred and fifty. We've

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Speaker 1: we've wobbled below a hundred and ten, as you know

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Speaker 1: on Brent. But now we're back in the range that

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Speaker 1: I anticipated after Russia, and the call was that it

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Speaker 1: would be a quagmia in in Ukraine and that would

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Speaker 1: over time. The longer that went on, the more Russian

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Speaker 1: oil and gaps we would lose. Now we're focused on

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Speaker 1: May the ninth, for you know, the key dates in

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Speaker 1: Russia where they celebrate the victory over the Nazis, and

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Speaker 1: we're wondering what's going to happen, but that could be

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Speaker 1: a key a key catalyst state whether or not Putin

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Speaker 1: declares victory, whether or not he goes to all out

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Speaker 1: you know, bombing. I don't know what he's going to do,

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Speaker 1: but we're watching that day carefully. But what we do

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Speaker 1: know is that Russian oil and gas is now effectively

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Speaker 1: gone from the market as far as you is concerned.

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Speaker 1: And that's a very very big deal of the markets

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Speaker 1: which were already tight as you know before this all

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Speaker 1: kicked off. Well, all of this goes to how much

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Speaker 1: can people keep betting on oil companies at a time

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Speaker 1: when there's a lot of complaints especially on the regulatory

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Speaker 1: and political side, about how much gas prices are going up,

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Speaker 1: how much oil prices are going up. Well. At the

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Speaker 1: same time, there is this uncertain backdrop on the macroeconomic picture.

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Speaker 1: Shall just reported a record profit. We've seen this time

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Speaker 1: and time again. How much more upside is there in

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Speaker 1: these companies given the fifty rally you're to date, given

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Speaker 1: the fact that there is all of this regulatory scrutiny,

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Speaker 1: you know, that's the number one concern of the clients,

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Speaker 1: so that you know. But the by side obviously is

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Speaker 1: my clients, the investors in oils, so worried that the

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Speaker 1: government won't tolerate The US government, for example, won't tolerate

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Speaker 1: ten or twenty dollar Henry Hub gas because of the

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Speaker 1: impact it will have on the US consumers. But you know,

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Speaker 1: the government's very weak and they don't have an energy policy,

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Speaker 1: and they have a couple of key senators, you know

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Speaker 1: Joe Manson obviously, who oppose any kind of interference and markets.

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Speaker 1: And it's complicated to interfere in the gas market. It's

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Speaker 1: a free market. These guys are selling gas directly by

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Speaker 1: contract through processing hubs like Shanna Um, and you know,

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Speaker 1: to to to shut that down as a government would

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Speaker 1: be would be difficult without legislation, and legislation we think

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Speaker 1: is very difficult. So I think, you know, much like

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Speaker 1: the OPEC meeting that you just asked me about before

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Speaker 1: we came on, they're kind of powerless. You know, there's

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Speaker 1: not much they can do, and we're just at the

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Speaker 1: mercy of the market. And that's why it's such a

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Speaker 1: crazy environment for the oils because you know, the money

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Speaker 1: they're gonna make is going to be enormous and it

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Speaker 1: will infuriate people. But what are you going to do about.

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Speaker 1: It's been a nuts environment, that's for sure. Paul, Thank

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Speaker 1: you as always, Bloody Paul, thank you that, thank you research.

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Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join

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