Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course, on the Bloomberg terminal. Right now, let
Speaker 1: us look at possibly your book of the year, my
Speaker 1: book of the year for the first time ever. I
Speaker 1: did it so early in the year on the shock
Speaker 1: of the war and Vladimir Putin and what we saw.
Speaker 1: Putin's World is my book of the year. But look
Speaker 1: at this short readable, mega threads, mega threats. Noira Rabini,
Speaker 1: crisis economics, coming out of the crisis, and now this
Speaker 1: shockingly readable Noira Rabini joins us for the entire half hour.
Speaker 1: I'm gonna go back. I want to give people little
Speaker 1: vineyard of years in my relationship. We're sitting at a
Speaker 1: wood panel doubles like bar and it's a very famous
Speaker 1: Secretary of Treasury sitting somewhat near us. And you and
Speaker 1: I walked through the excesses of oh five, oh six,
Speaker 1: and you nailed two thousand eight. Are we there? Again. Yes,
Speaker 1: we're here again. But in addition to the economic, monetary
Speaker 1: and financial risks, and there are new ones. Now we're
Speaker 1: going towards stagflation like we've never seen since the seventies.
Speaker 1: In the book, I point out that there are also
Speaker 1: geopolitical risk like we're on the confrontation with some revisionist
Speaker 1: powers like China, Russia, Run or Korea that are challenging
Speaker 1: the geobolical order of the US and the West, and
Speaker 1: that's going to lead potentially to conflict. There are environmental
Speaker 1: risks that are very severe. There are health tries coming
Speaker 1: from pandemics, and there is a relation between global climate
Speaker 1: change and pandemics. There are technological coming from AI, machine learning,
Speaker 1: robotic automation, the section of jobs. There's a backlass against
Speaker 1: globalization and we're going to go to a world that
Speaker 1: is globalized. The political risk with polarization, and we have
Speaker 1: radical extremist party of the extreme right and extreme lefts
Speaker 1: coming to power both in advanced economies and in emerging markets.
Speaker 1: And on top of it, we have amount of the
Speaker 1: debt like we've never seen before. Explicit that well, that
Speaker 1: is a confluence of all these mega threats and of
Speaker 1: them together the Lipsky and I am F was heated
Speaker 1: about the debt build up. On the back of your book,
Speaker 1: you've got a guy named Rogof from Harvard, Bremer of Eurasia.
Speaker 1: Dr Larian from Cambridge, Martin Wolf always wonderful at the
Speaker 1: ft and at the very top the quote of the
Speaker 1: season from TALEB the gravity is returned to the physics.
Speaker 1: We've got a higher real yield. Now we've got a
Speaker 1: risk free rate. Now what are the ramifications in our
Speaker 1: economic system that the gravity is returned to our physics. Well,
Speaker 1: there were many insolvent agents in the economy because private
Speaker 1: and public debt as a sturgy DP has gone from
Speaker 1: to three fifty globally between two thousand and today in
Speaker 1: advanced economies more like four h twenty and rising in
Speaker 1: the US is now higher than after the Great Depression
Speaker 1: and after World two. And we're not out of a
Speaker 1: great depression or a major war. And until now, even
Speaker 1: if you had zombie households, corporates, banks, shadow banks, governments, countries,
Speaker 1: they were built out. There were built out during the
Speaker 1: global financial crisis, zero policy rates, negative quantities, creditizing, and
Speaker 1: even during the COVID crisis, many of them were fragile,
Speaker 1: they were built out again we went back to to
Speaker 1: do even more of the same this time around instead
Speaker 1: is different because we have so much debt and central
Speaker 1: banks like the father to increase interest rates to fight inflation.
Speaker 1: So the zombie institutions are going to go bankrupt. That's
Speaker 1: why not only we're gonna have inflation and stack flation,
Speaker 1: but whatever stack flationary debt crisis. In the seventies, we
Speaker 1: had negative supply shocks seventy three seventy nine, but we're
Speaker 1: very a lot of dead racials, so we didn't have
Speaker 1: a dead crisis in advanced economies with one in Latin America, Argentina, Mexico,
Speaker 1: Bazil borrowed to match in the seventies were all jacked
Speaker 1: up interested went bankrupt after the DUFC. We had the
Speaker 1: debt problem, mortgages that at housing, that bank that, and
Speaker 1: we had the dead crisis, but was a negative aggregate
Speaker 1: demn shock, and therefore we had low flation and deflation
Speaker 1: today with the worst of the seventies with a massive
Speaker 1: amount of stag flassery negative supply shock. In the book,
Speaker 1: identify eleven new ones over the medium term. And at
Speaker 1: the same time we have that racial like we've never
Speaker 1: seen before, so we get stack flashery, dead crisis. Don't
Speaker 1: give us to eleven. The general will be here. I
Speaker 1: was waiting for the elevents jumped in used this phrase
Speaker 1: in there. I could tell your in the sun bite.
Speaker 1: I'm not going to give it. You said, zombie institutions.
Speaker 1: Where aren't they? And you're talking about countries now and
Speaker 1: not companies, not households, not private banage sheet, So you're
Speaker 1: talking about countries sovereigns. Well, there are plenty of solveigns
Speaker 1: that are in trouble in emergen market. We know what
Speaker 1: has happened in Lebanon, what has happened in Zambia, what
Speaker 1: has happened in Sri Lanka, And there's about forty of
Speaker 1: them that the m F in the World Bank said
Speaker 1: that they are on the version of having a dead crisis,
Speaker 1: severe dead crisis because of what's happening. And look what
Speaker 1: happened to the United Kingdom. But now it started to
Speaker 1: be priced in like an emerging market with the fiscal
Speaker 1: stimulus reckless, forcing the Bank of England essentially to monetize it,
Speaker 1: and then the currency falling and it's going much higher
Speaker 1: until they reverse themselves so it has happened in Greece,
Speaker 1: it's happening in the UK, it could happen in Italy.
Speaker 1: Of course, we have a large number of not only
Speaker 1: emerging markets that are at risks, but also of advanced
Speaker 1: economies that there is a risk. So over the last
Speaker 1: ten years we've had a series of kind of cyclical circuit. Right, yes,
Speaker 1: fiscal had the capacity to do that, central banks had
Speaker 1: the capacity to do that. Seemingly we're questioning the capacity
Speaker 1: of those institutions, central banks, soft foreigns to be able
Speaker 1: to do so this time around. You offer solutions in
Speaker 1: this book too, What aren't they Well, for every one
Speaker 1: of these mega threats, there is a solution. But then
Speaker 1: the two final chapter one about a dystopian future where
Speaker 1: all these threads materialized. They feed on each other, and
Speaker 1: it's not just the end of the world economy, could
Speaker 1: be even global war. And there is a less dystopian
Speaker 1: future in chapter twelve, where we have the policies nationally
Speaker 1: and international delids to a better outcome. The problem is
Speaker 1: that are both domestic political constraints and geopolitical political constraints
Speaker 1: to achieving the best solution. And I'll give you an
Speaker 1: example of global climate change. Domestically in this country, half
Speaker 1: of the county doesn't believe into it too. There is
Speaker 1: a conflict between generation. The young people care about the
Speaker 1: future of the elder care less. At the international level,
Speaker 1: there is a free rider problem. If a country catch
Speaker 1: a mission to zero, nobody else does it, then they
Speaker 1: don't get benefit and only the cost. And now because
Speaker 1: of geopolitics, we are telling Indian China, you should cut
Speaker 1: your emission out to zero the next twenty years. But
Speaker 1: we created a problem in the last years. The stock
Speaker 1: of a mission came from advanced economies, and now we're
Speaker 1: telling them, don't grow, don't become rich because there is
Speaker 1: a problem. It's through the flow of new issues coming
Speaker 1: mostly from China and India. So there are four elements
Speaker 1: of conflict to domestic and to international that essentially implied
Speaker 1: that we're not going to find their solutions. So there's
Speaker 1: lots of greenwashing, duren wishing during thick Leaves. A lot
Speaker 1: of the SG is just talk and action. Glasgow cop
Speaker 1: was just a total failure and order, slow motion train wreck,
Speaker 1: which goes to your point on about electric vehicles and
Speaker 1: nine pounds evs in the United States, because they are Green.
Speaker 1: There is an issue they're going forward with the central banks,
Speaker 1: and whether a lot of your thesis and real is
Speaker 1: predicated on their inability to go through with what they
Speaker 1: need to do to get inflation down. Is that your
Speaker 1: base case is that the most likely outcome? Yeah, right now,
Speaker 1: all central banks are playing tough and talking tough and
Speaker 1: acting tough hawkish because they have a problem of credibility.
Speaker 1: But in my view, there are two problems. One problem
Speaker 1: is that they if they try to get to two
Speaker 1: percent inflation, they cause a recession. And this recession is
Speaker 1: not going to be short and shallow, is not gonna
Speaker 1: be guarded. Valiety is not going to be playing the neal.
Speaker 1: It's not gonna be two quarters of negative growth and
Speaker 1: the inflation collapses and they can ease again. In the book,
Speaker 1: I explain all the reasons why it's going to be
Speaker 1: a severe session because of the that ratio, because we're
Speaker 1: going into physical and monetary tightening, and at the same
Speaker 1: time you not only have an economic crush, You're gonna
Speaker 1: have also a physical crush. We're not only in physical
Speaker 1: dominance in this game of chicken between treasury and central bank,
Speaker 1: wherein what the folks at the Bank of International Settlement
Speaker 1: called a debt trap. There is so much private and
Speaker 1: public debt that if central banks try to fight inflation,
Speaker 1: because a crash of financial markets and not just the
Speaker 1: stock market that's the least important credit market, bond markets,
Speaker 1: and that crush and financial crash feeds on the economic
Speaker 1: crush and vice versa, and therefore they're gonna winp out,
Speaker 1: and they're gonna break. And the first one was the
Speaker 1: Bank of England. The FED is gonna do the same.
Speaker 1: This is going to do the same. Have you been
Speaker 1: surprised that we haven't seen some sort of catalysts, some
Speaker 1: sort of financial stress so far, given how quickly quickly
Speaker 1: the FEDS already hied rates, Well, we have not yet seen.
Speaker 1: It's some people worried some major financial institution not in
Speaker 1: the US may go bust. I think that the financial
Speaker 1: strains are going to become more severe because right now
Speaker 1: the FED is on the way to go from three
Speaker 1: towards five percent. You already have a stock market down
Speaker 1: twenty five percent NASA given more public reads thirty three percent.
Speaker 1: You have the crash of Mimi of spark, bubble, of
Speaker 1: the crypto bubble, private equity venture capital growth. Everything is down,
Speaker 1: credit is down, leverage market is shutting down, Celo market
Speaker 1: shutting down. And the only thing they used to be
Speaker 1: saved there were government bonds. Now the price is correlated
Speaker 1: positive equities because when inflation is rising, you lose money
Speaker 1: on your equity side, use money on your bond side.
Speaker 1: You'll have gone from one to four. And the price
Speaker 1: action downward on bond has been worse than an equities
Speaker 1: thirty percent losses. So any sixty forty seventy thirty or
Speaker 1: is party portfolio lost money on both hands. There was
Speaker 1: no worthwide even cash give you a negative real return
Speaker 1: because of inflation. There are other alternatives that can protect
Speaker 1: you against the stale risk, but they're not the traditional ones.
Speaker 1: You're a man of high conviction. We know it was
Speaker 1: some very smart friends. Any pushback to this book that's
Speaker 1: convinced you absolutely anything makes you rethink how bad things
Speaker 1: might be, impossibly made you think that possibly they could
Speaker 1: turn out better than you think. Honestly, everyone was ready
Speaker 1: at any level. As said, the threats you're talking about
Speaker 1: their all too reel. Of course, there may bee solution
Speaker 1: to them, and I discussed them chapter by chapter. In
Speaker 1: the final chapter, about the last dystopian future. But think
Speaker 1: of it this way. I have gray hair. I grew
Speaker 1: up in the sixties seventies in in in Italy. At
Speaker 1: that time, did I ever hear about climate change? The
Speaker 1: never concept? Did I worry about the nuclear war? After that?
Speaker 1: The town between Soviet US, there was nothing they worry
Speaker 1: about AI destroying. Most jobs were in the eye winter.
Speaker 1: With the stable democracy, we didn't have pandemics. Last time
Speaker 1: around was nineteen eighteen. We had low that ratios, We
Speaker 1: had law implicit that because there was no aging of
Speaker 1: population and all that fund the liabilities, there were no
Speaker 1: major financial economic crisis. This is the quantum shift. There
Speaker 1: was a period in nine and the mid eighties that
Speaker 1: was something of a stable period of global prosperity, welfare,
Speaker 1: peace and so on. Today these are threats that did
Speaker 1: not exist, and those threats are more similar to the
Speaker 1: period in nineteen eighteen and teen forty five when word
Speaker 1: World War one, World two, the Great Depression, trade war,
Speaker 1: financial crisis, inflation, hyper inflation, deflation, Nazis, fascists in German, Italy,
Speaker 1: Spain and Japan, and word World War two, and then
Speaker 1: with the Holocaust, and then where the Korean war, as
Speaker 1: as Neil Ferguson on Bloomberg is saying right now this
Speaker 1: column this week, he says, we'll be lucky if you
Speaker 1: repeat the nineteen seventies, because it's more possible we end
Speaker 1: up like in the mteen fourties, meaning it's talking about
Speaker 1: World War three. I love Can we be clear that
Speaker 1: wasn't a column, that was a book. If you read that,
Speaker 1: it's can you tell Neil the columns are short. I
Speaker 1: love his column because you know he's speaking about it.
Speaker 1: He's speaking about the fact that's a meaningful chance that
Speaker 1: we have to inflict between I write it about in
Speaker 1: my own book. There's chapter about the new cold within
Speaker 1: us and these revisionist power and I say it could
Speaker 1: end up into a haltwer it's a significant risk. I
Speaker 1: want to go to the past. And I was so
Speaker 1: pleased that you mentioned on page thirty seven your colleague
Speaker 1: Alberto Alssina. I still can't believe we lost them at
Speaker 1: such a young age. You two looked at the politics
Speaker 1: of our economic system Rubini and Albert Alberto Alsina. I
Speaker 1: want to bring it forward to where we are now,
Speaker 1: which is a massive dollar shortage and central banks that
Speaker 1: got a plan but they're gonna be overrun by a
Speaker 1: global dollar shortage any m and frankly in developing economies
Speaker 1: as well. Is there a dollar shortage now? And is
Speaker 1: that the catalyst for central banks to blink is going
Speaker 1: to be one of the catalysts. There is a dollar shortage,
Speaker 1: and there is an interests in the United States is
Speaker 1: particularly dramatic for em They have in terms of trade, chalk,
Speaker 1: those that are important commodities, They have rising interest rates
Speaker 1: because of what the fat does, and they have they're
Speaker 1: on the take inflation, and that the weakening of the
Speaker 1: currency that increases the real value in local currency of
Speaker 1: drown debt. So for them is this is a perfect storm.
Speaker 1: Some of them have a lot of reserves, some of
Speaker 1: them don't have reserves, Some of them are received I
Speaker 1: left money. But there is right now a strengthening of
Speaker 1: the dollar that is implying even further tightening of financial
Speaker 1: conditions in the rest of the world. Now, I think
Speaker 1: that eventually the dollar is gonna have to fall very
Speaker 1: sharply because we have a twin physical and current account eficits.
Speaker 1: In other advanced ecology of a physical deficit, but the
Speaker 1: current account surplus and now we're essentially using the dollar
Speaker 1: is a tool of national security and foreign policy. We're
Speaker 1: weaponizing it rightly, so sanctions against Russia, against Iran, nor Korea, China,
Speaker 1: we're starting, by the way, tact war with China. Economic
Speaker 1: world is weakness. How do we get there? Forget about this? Plus,
Speaker 1: the company of Left is going to be essentially the
Speaker 1: FED whimping out. Once you see a severe resertion, that
Speaker 1: means blinking, blinking, They're gonna blink and wimp out because
Speaker 1: you'll have a severe session financial out. Well, either you're
Speaker 1: how care you'r a whimp or a dog in this case,
Speaker 1: But that's going to happen. And once the fact is
Speaker 1: going to essentially prevent an economic and financial KASO, try
Speaker 1: to prevent it by essentially stop raising rates. Even inflation
Speaker 1: is too high, then the dollar is going to start
Speaker 1: sharply weakened. That's gonna be the trigger for it. What's
Speaker 1: raising the dollar is of course the type monetary policy
Speaker 1: viewer wrote in and wants to know what you're doing
Speaker 1: with your money, considering that it seems pretty bleak out there.
Speaker 1: You know, if you just stuff into a mattress, No,
Speaker 1: you don't stuff in the matters because then even cash
Speaker 1: loses money because of inflation. There are three solutions to
Speaker 1: the problems of inflation the basement of yet currency, political
Speaker 1: and geopolitical risk, and environmental risk. Solution Number one is
Speaker 1: to have very very short term treasuries that are just
Speaker 1: in rates and don't have the price action of long
Speaker 1: bonds that ever fall enterprise. Secondly, you want to be
Speaker 1: into tips, even if tips right now have not yet
Speaker 1: done well because in pression expectations are not yet the anchored.
Speaker 1: I think you want to go into gold and precious metal. Again,
Speaker 1: gold is not done very well because you have tight
Speaker 1: multi REPULSI strong dollar. But if central banks are gonna
Speaker 1: blink and win pout, gold is gonna rise in value.
Speaker 1: Gold are gonna rising values because the enemies of the
Speaker 1: US are subject to sanctions China Andize worried. There are
Speaker 1: three dollars of reserves in dollar have to move to
Speaker 1: other things. It's you're in the end. They can be seized.
Speaker 1: The only thing that cannot be seis is gold. Of course,
Speaker 1: not in the volved in New York or London, but
Speaker 1: in Beijing or in mosculines on and finally, appropriate types
Speaker 1: of real estate that are environmentally resilient because real estate
Speaker 1: compared to equities in a recessions as well because you
Speaker 1: have more pricing power for rents and so on. So
Speaker 1: a combination of these assets provide you, in an optimized way,
Speaker 1: a hedge against some of these theris. On the flip side,
Speaker 1: you've always been brilliant, un leveraged in the system. I'm
Speaker 1: credit and we've heard from one fund manager after another
Speaker 1: that there is reason alliance in this corporate credit sector,
Speaker 1: even with the death that they have, even with the
Speaker 1: low coupons that are currently paying that what we set higher.
Speaker 1: Do you disagree? Do you think that people are overly
Speaker 1: sanguine about the upcoming credit cycle? They are. Right before
Speaker 1: the COVID crisis, the FED was writing reports on financial stability,
Speaker 1: pointing out the leverage of the corporate sector of course
Speaker 1: high yield and fallen angels. But then during COVID these
Speaker 1: folks should have gone past, but they were built out.
Speaker 1: We both even high yield that you remember, commercial paper
Speaker 1: and everybody under the sun. So the zombies were built out,
Speaker 1: and the excesses of having leverage loans CEE los Co
Speaker 1: of Light got even worse, and people got even more indebted.
Speaker 1: This time around, the party is over because the FED
Speaker 1: for now left to raise rates because that service rations
Speaker 1: got become impossible. And you get the double one me
Speaker 1: for those corporates, you get a p n L because
Speaker 1: income is gonna fall because of the recession, and you
Speaker 1: get that problem with that service in racial rising, and
Speaker 1: therefore there will be a corporate that crisis one we
Speaker 1: avoided during the GFS and during the COVID crimes. It's scarring.
Speaker 1: Now they see a low and leverageable market are shutting
Speaker 1: down right now. I want to get to chapter twelve.
Speaker 1: You talk about a more optimistic future, utopian future. You
Speaker 1: started by quoting the economist Yogi Barra. I thought that
Speaker 1: was very good. You go right in there about predictions
Speaker 1: and Yogi in the future and all that. How do
Speaker 1: you get from Yogi Berra to a more optimistic future. Well,
Speaker 1: the more the place in the future starts with essentially
Speaker 1: technologically innovations, like for example, I don't think it's gonna
Speaker 1: be renewable, maybe fusion. If fusion happens, then you can
Speaker 1: have unlimited amount of essentially energy and cheap costs with
Speaker 1: no green out gas emissions. We look like we are however,
Speaker 1: only fifteen to twenty years away from fusion becoming a reality.
Speaker 1: If it comes faster than we can increase the economic pie.
Speaker 1: We're gonna reduce the cost of energy, We're gonna stop
Speaker 1: greenout emissions. We can grow more. What about fractured What
Speaker 1: about our fractured political system, whether you're Italy in the
Speaker 1: turn there to the right or what we see in
Speaker 1: the election He're coming up in two weeks. How we
Speaker 1: get beyond this fractured political system? For now we're going
Speaker 1: to god the world that is even more divided domestic
Speaker 1: and there's more polarization, there's lack of partnership, and it's happening.
Speaker 1: I mean, you have outwoor Tanni regimes in power. You
Speaker 1: have put In in Russia, you have Erdogan in Turkey,
Speaker 1: you have Kausinsky in Poland, you have Urban in Hungary,
Speaker 1: you have Melane in Italy. You have these Nazi Swedish Democrats.
Speaker 1: Now in Sweden you have the Brexit phenomenal, you have
Speaker 1: the Trump phenomenal. And in Latin America used to be
Speaker 1: only Venezuela Argentina populist of the left, but in the
Speaker 1: last two years, Chile, Ecuador, Peru, Colombia or the left.
Speaker 1: That's the world we're going, unfortunately, is a world that
Speaker 1: is not liberal Democratsy if you saw the movie right here, No,
Speaker 1: not the Capri who love playing Rubini nor Roubini. Where
Speaker 1: this's the book is mega threats. We get lucky this morning,
Speaker 1: jump Ovan around the table with us. They had of
Speaker 1: the Black Rock Investment Institute and formerly so much more
Speaker 1: than that, joan fantasticy catch up with the s. I
Speaker 1: read the weekly note from the Black Rock Investment Institute
Speaker 1: that came out just yesterday, and you talked about the
Speaker 1: significance of the mid terms, and you guys don't think
Speaker 1: they're that significant. The future returns over the next several months. Why,
Speaker 1: First of all, it's so great to be here. Um. No,
Speaker 1: we think the usual playbook for the mid term is that,
Speaker 1: you know, if you have divided government, divided government or houses, um,
Speaker 1: it tends to be a booze for markets. But as
Speaker 1: anything else this time around them and usual playbooks don't apply.
Speaker 1: We think, um, the main stories about their fore told
Speaker 1: recession that we're gonna have, we believe in in the
Speaker 1: quarantin the next year. And as a result, we think
Speaker 1: that this is the second side show um, the the
Speaker 1: important for the future of the country and everything, but
Speaker 1: in terms of markets, we don't think that's an important driver.
Speaker 1: Swap lines front and center. Major question at the meetings
Speaker 1: in Washington here a week or so ago. Give us
Speaker 1: black Rocks estimate of how countries will have to go
Speaker 1: to the FED given a global dollar shortage the liquidities
Speaker 1: that are out there. Is seeing in f R A
Speaker 1: oh yes, yeah, um, you know the important thing is
Speaker 1: here we were seeing like the most rapid tightening of
Speaker 1: financial condition in a in a generation, in a very
Speaker 1: long time. We haven't seen ready the cracks yet here
Speaker 1: in the system. It's remarkable to see all the all
Speaker 1: the strengthening of the US dollar we you've seen without
Speaker 1: like the knock on effect or cracks, we would have
Speaker 1: seen another circumstances. I think that creates a level of
Speaker 1: anxiety that was really clear at the I m F
Speaker 1: A lot of conversations about how we show up the
Speaker 1: system in that context. Swap line will be uh will
Speaker 1: be a key, key tool potentially in that environment. But
Speaker 1: I think so far what is very surprising is that
Speaker 1: you know it's been very stable despite despite what your
Speaker 1: academics at Princeton and your work with the Bank of Canada.
Speaker 1: If we believe it's nonlinear as we disinflate, do you
Speaker 1: think we can succeed that with stability or are there
Speaker 1: going to be instabilities witnessed with Damian says are yesterday
Speaker 1: we looked at the Columbia piece going from ninety eight
Speaker 1: down to sixty three on a price of bund that's
Speaker 1: a crack. I think it's very hard to see something
Speaker 1: that's gonna be smooth landing in any way. That's true
Speaker 1: for the economy, that's true for the financial market in
Speaker 1: this context. That's why you know, we think we're in
Speaker 1: the clear part towards over tightening of Montree policy, but
Speaker 1: it's gonna be very rocky. We're underweight equities, you know,
Speaker 1: as as various as we've ever been against in terms
Speaker 1: of broad risk taking at this moment. At some point
Speaker 1: that's going to change. But the reason is really because um,
Speaker 1: that tightening is um is it could be nonlinear, as
Speaker 1: you say, and um, we haven't seen its cry. I
Speaker 1: think the UK we've seen over the last month is
Speaker 1: like an accelerated peak in the future. Uh, And I
Speaker 1: think that's um. That's where we need to guard against
Speaker 1: Jean If you believe in a hard landing, why not
Speaker 1: by treasuries here, How that's a that's a great question,
Speaker 1: and that's another aspect of the current environment. We wear
Speaker 1: the playbook. The typical playbook might not be applying. We
Speaker 1: don't think it's gonna apply. We are going to see
Speaker 1: a recession, but it's gonna be a recession the context
Speaker 1: where inflation is gonna won't be under control, and it's
Speaker 1: aftone recession. It's ready the recession caused by Montrey policy. Ready,
Speaker 1: that's the way by which inflation will get under control.
Speaker 1: And as a result, when we get to that recession,
Speaker 1: you won't see the typical reaction of yields falling uh
Speaker 1: and bonds playing their safety role. So the typical playbook
Speaker 1: of go find refugion bonds in this recession, I think multiply.
Speaker 1: Is this part of the reason why perhaps the stability
Speaker 1: that you talked about, the surprising resilience of markets is
Speaker 1: almost a headwind to them because it won't necessarily stop
Speaker 1: the rising rate environment. It won't necessarily change where we
Speaker 1: are in a wholesale value. How high can yields go
Speaker 1: and stay for a prolonged period of time before something
Speaker 1: breaks in the financial system. So in our estimates, like
Speaker 1: if we go to five percent as now, we kind
Speaker 1: of assume for early next year, Uh, this is a
Speaker 1: world where we're gonna see a very significant slowdown of activity,
Speaker 1: decline activities. That two percent we think as a as
Speaker 1: a minimum of GDP, it's three million jobs that would
Speaker 1: need to be lost in that context. That so in
Speaker 1: the world where five percent to sustain UM and I
Speaker 1: think in the world like this, the financial system leverage
Speaker 1: as it is as it is, we'll start to see
Speaker 1: some some response and and that's the So five percent
Speaker 1: is um is where we're heading. We don't think we
Speaker 1: can go much further than that. That's why over the
Speaker 1: course of the first half of next year, we're going
Speaker 1: to see central banks having forced into some stopping pause
Speaker 1: before they can go further. It only said recession forced out.
Speaker 1: I'm interested by that phrase. You've also talked about the
Speaker 1: appropriate time horizon to bring inflation back to target, and
Speaker 1: I think you've explained conveyed your disappointment that central banks
Speaker 1: aren't having that discussion a whole lot more. Does it
Speaker 1: have to pay this way? I think what is very interesting.
Speaker 1: And yeah, and we we've written about this is the
Speaker 1: fact that you know there's your you to be two
Speaker 1: sides to any decision in central banking, Like it's not
Speaker 1: typically obvious what you have to do. UM. And I
Speaker 1: think this environment is as tricky as it has ever been.
Speaker 1: I mean, I don't think there's been any so sharp
Speaker 1: trade up that we had to deal with. UM. You know,
Speaker 1: we have to go back the seventies and the seventies
Speaker 1: with a different situation altogether. UM, there's a tendency to
Speaker 1: apply the apply the playbook of the seventies. But we're
Speaker 1: not in the seventies. And so this lack of two
Speaker 1: sided debate on what's gonna happen or nuance is troubling.
Speaker 1: And UM that's why we think that we are going
Speaker 1: to get over tightening. Um. That's not necessarily the outcome
Speaker 1: that had to be, but I think it's happening. Um.
Speaker 1: At some point, I think the pressure the forces will
Speaker 1: be pretty pretty strong. And we've seen that in the UK, right,
Speaker 1: I mean we've seen the accenrated version. You're go in
Speaker 1: one direction. Um, markets will put some pressure and I
Speaker 1: think we'll see some forced pause. That's not great for credibility.
Speaker 1: I think it's better for central banks to be on
Speaker 1: the front foot. And UM, you know, I've signaled that
Speaker 1: there are some nuances here we might need to deal with. UM,
Speaker 1: but this is not the situation where and so I
Speaker 1: think we're gonna be forced into, you know, a wake
Speaker 1: up call, and and we'll look like a pause, but
Speaker 1: one that has been forced as opposed to be playing
Speaker 1: quickly here. And I could go for an hour with
Speaker 1: you on this. There was a guy named Bernanke who
Speaker 1: emailed you when you were a kid and said, do
Speaker 1: you want to try for a PhD at Princeton. You
Speaker 1: talked about it the day he won the Nobel Prize.
Speaker 1: What did he and Anna Schwartz and Milton Friedman do
Speaker 1: so he didn't repeat a depression? Well, I think the
Speaker 1: key lesson of the Great Depression that uh An, Ashwartz
Speaker 1: and Freeman at first like more from an anecdotal perspective
Speaker 1: or documenting the depression was and the Ben Bernanki and
Speaker 1: others of more formalized was that, um, if you tightened
Speaker 1: montre policy as the economy is uh is is going down,
Speaker 1: you create this financial acceperator dynamic. By the true the
Speaker 1: banking systems. That what we're doing right now and with
Speaker 1: and with bank runs. UM. And I think that was
Speaker 1: very much in his mind when two thousand came. I
Speaker 1: was interesting in the speech he gave in two thousand
Speaker 1: two in the anniversary of Freeman that he said, we
Speaker 1: heard you, we won't do it again. That was that
Speaker 1: was reference to the depression. He said he was abusing
Speaker 1: his status at the time, but not his future status.
Speaker 1: He was he was he was a governor, but became
Speaker 1: chairman afterwards. The thing though, is at this time, I
Speaker 1: don't think this is the playbook. This is not the
Speaker 1: playbook for the current situation. This is not a demand
Speaker 1: driven financial crisis bank run story. This is a massive
Speaker 1: supply shock that we're dealing through. UM. I'm not sure
Speaker 1: that those lessons apply right now. So that was for
Speaker 1: two thousand and eight in the city. For twenty twenty
Speaker 1: and after. Joan Vvan of Black Crock Jean fantastic to
Speaker 1: have you within the shade. If you were a student
Speaker 1: of the Midwest and you had parents that were industrial
Speaker 1: on your college list was the West Point of manufacturing
Speaker 1: and engineering. It was called General Motors Institute, now cattering
Speaker 1: and never did they know that one of their students
Speaker 1: would come out to provide leadership for General Motors. She
Speaker 1: has Marie Barra and Matt Miller brings us to her
Speaker 1: today the engineer from the General Motors. I'm looking forward
Speaker 1: to it. Mary, thanks so much for joining us, Really
Speaker 1: appreciated on such a busy day for you. Let me
Speaker 1: pick up where these guys left off and ask you
Speaker 1: about the stronger dollar. Obviously, the lion share of your
Speaker 1: revenue comes here in the US, but you still buy
Speaker 1: purchase a lot of parts in your supply chain from
Speaker 1: outside of the country. Is the stronger dollar a tail
Speaker 1: wind for you? Well, I think you know there's a
Speaker 1: lot of pressures right now. When you look at commodity
Speaker 1: cost transportation, it's just one of the elements and that
Speaker 1: we're facing, UH is not as significant for as it
Speaker 1: is for other companies, just based on our strong position
Speaker 1: in North America, but we continue to monitor and be
Speaker 1: impacted by each of these factors. Rate's obviously a huge
Speaker 1: factor as well. We've seen it UM impacting other lenders,
Speaker 1: and I'm wondering how it's impacting GM Financial. Well, we
Speaker 1: are seeing GM Financial get back to I would say
Speaker 1: historically strong performance. I think we had especially strong performance
Speaker 1: last year in the year prior due to the strength
Speaker 1: of use cares pricing that's coming down with interest rates.
Speaker 1: We are seeing a little softening on leasing, but overall
Speaker 1: GMF is performing very well. You know, the CEOs of
Speaker 1: JP Morgan and Goldman Sachs both UH this morning, have
Speaker 1: said they see a recession as likely for the US.
Speaker 1: I'm wondering your view. You have an unique position. Um,
Speaker 1: what's the economy look like to you? How how is
Speaker 1: it unfolding and car sales specifically, Well, I'm gonna let
Speaker 1: calling a recession to the economists, not not my UH expertise,
Speaker 1: but what I'll tell you what I We are seeing
Speaker 1: and we're seeing still very strong demand for our products.
Speaker 1: We're seeing uh strong UH average transaction prior seen that
Speaker 1: we we continue to be able to build on and
Speaker 1: so you know, we are starting to see inventory build
Speaker 1: just a little bit, but well below levels that were
Speaker 1: in the past. So overall, we're still seeing a very
Speaker 1: strong consumer for our products. And uh, you know, we're
Speaker 1: watching carefully all the different signs, but right now it's
Speaker 1: still very strong. But what about inflation and the pressure
Speaker 1: on margins. I mean, um, does the stronger dollar balance
Speaker 1: that out? Are you seeing a big inflation in arise
Speaker 1: in the costs that you need to pay out for
Speaker 1: UM parts? And is that sort of squeezing your margins here? Well,
Speaker 1: we have, yes, we we have seen you know, commodities, logistics, uh.
Speaker 1: You know, we work with our suppliers to make sure
Speaker 1: that we have a very healthy supplier base. So all
Speaker 1: of those factors we tend to work to offset. And
Speaker 1: you know, we predicted this year would be about a
Speaker 1: five thousand or excuse me, five billion dollar impact and
Speaker 1: we are seeing that. But we have worked effectively to
Speaker 1: find offsets and and that's you know, part of our
Speaker 1: we're all uh equation for this year, which is allowing
Speaker 1: us to still maintain guidance. One big boost is going
Speaker 1: to be the Inflation Reduction Act at least UVS says
Speaker 1: they see the i R a A is very generous.
Speaker 1: They say it has the potential to make the US
Speaker 1: a global evy battery hub. How do you see the
Speaker 1: Inflation Reduction Act for GM? Well, General Motors was already
Speaker 1: investing in North America or in the United States for instance.
Speaker 1: You know, we have a battery plant in Ohio that's
Speaker 1: ramping right now. We have two others, one in Michigan
Speaker 1: one in Tennessee that are also ramping. So we were
Speaker 1: making the investments because we wanted to make sure we
Speaker 1: had a resilient supply chain after we've lived through so
Speaker 1: much disruption over the last few years. So as the
Speaker 1: i ra A came into UH was passed and we're
Speaker 1: looking now for Treasury to set the rules. We think
Speaker 1: we're very very well positioned and we do believe that
Speaker 1: the benefits of our ira A will drive stronger EV
Speaker 1: adoption with the American consumers. So we think it's going
Speaker 1: to do a exactly what was intended to do, and
Speaker 1: we're well positioned to benefit and and work with our
Speaker 1: consumers to make sure they have an EV that's affordable
Speaker 1: that they can really enjoy the benefits of an e V.
Speaker 1: Are you still on track to sell a million e
Speaker 1: vis and beyond? We absolutely are. You know, when you
Speaker 1: look at the lineup that we have, you know, starting
Speaker 1: with the Hummer to the Lyric to now that the
Speaker 1: Chevy Silverado e V. We just last week I'll launch
Speaker 1: the GMC Sierra e V along with the Chevrolet Blazer
Speaker 1: e V and the Equinox EV. I think we're going
Speaker 1: to be well positioned covering the important segments in the
Speaker 1: portfolio to reach that million unit level. By you do
Speaker 1: get a huge boost also from big truck margins, and
Speaker 1: I imagine that helps you um to fund the e
Speaker 1: V business and and get towards that target. If we
Speaker 1: have a recession and you see sales of those big trucks,
Speaker 1: those big I C trucks drop, can you continue to
Speaker 1: fund e V boost? We very much believe we're We
Speaker 1: have a strong enough balance sheet and the strength of
Speaker 1: the business. When you look at the truck we have
Speaker 1: truck leadership, we've had it since and we just did
Speaker 1: a major refresh to our late duty UH full size trucks.
Speaker 1: We have strong SUVs as well, and now the heavy
Speaker 1: duties we just revealed they'll be next year. So we
Speaker 1: think our product portfolio is going to position us well
Speaker 1: in the truck market. I would also say mid sized
Speaker 1: crossovers are very strong as well, and the truck consumer,
Speaker 1: especially the full size truck consumer, they generally are not
Speaker 1: They don't shop as many segments as maybe other customers
Speaker 1: of other segments to so we think we're well positioned
Speaker 1: and obviously will moderate based on what happens from an economy,
Speaker 1: in a in a consumer buying perspective. You know, earlier
Speaker 1: this year, people were asking if we were going to
Speaker 1: get back to a seventeen million star. UM. Now I'm
Speaker 1: hearing people ask if we're gonna go down to a
Speaker 1: twelve million star. What do you expect for car sales
Speaker 1: next year? Well, we UM, you know, because of all
Speaker 1: of the economic UH conditions around the globe. You know,
Speaker 1: we are looking and we're planning for a more modest level.
Speaker 1: We're still going to protect for the upside because we
Speaker 1: don't know next year. But you know, we're at really
Speaker 1: depressed levels right now because of all the semiconductor shortages
Speaker 1: and other supply chain issues. So we think there's an
Speaker 1: opportunity to go up ever so slightly next year. But
Speaker 1: we're going to be very conservative as we plan for
Speaker 1: next year, but be ready to take advantage if there
Speaker 1: is upside and there's still a lot of unknowns. Will
Speaker 1: provide more information on how we view UH and early
Speaker 1: next year. All right, Mary, thanks so much for joining us.
Speaker 1: Real pleasure talking to you on earnings day. General Motors
Speaker 1: Chief executive Officer Mary barrat Mila just awesome as always.
Speaker 1: We're gonna catch up with Jordan Rochester now the strategist
Speaker 1: over Nomura and Jordan, I taste it a little bit earlier,
Speaker 1: a few minutes ago. Let's go there. I saw the
Speaker 1: number one sixty and Dolly next to it in your
Speaker 1: note walk us through it. Well, that wasn't my view, John,
Speaker 1: that was the view from clients. So this time last
Speaker 1: week on Monday, I'll set next to you guys in
Speaker 1: that table. So we met clients around the New York
Speaker 1: area in Connecticut as well, and we're looking for one
Speaker 1: fifty five at num in Dolly n I think after
Speaker 1: this banker Jopan intervention, what you've clearly seen over the
Speaker 1: past let's say twelve hours is extreme lack of qualite city.
Speaker 1: Now we're in a forty pit range where the previous
Speaker 1: two weeks we've been a big vol higher in terms
Speaker 1: of that march up to nearly a D fifty two.
Speaker 1: Then that near six n swing down on that intervention
Speaker 1: on Friday, done during New York hours when liquidity was
Speaker 1: very thin, and just after that Wall Street Journal article
Speaker 1: talking about the FED. Because perhaps a bit more dovish
Speaker 1: in terms of when they will slow down rate hikes.
Speaker 1: So I think we've had some temporary setbacks for that
Speaker 1: long dollar dolly n trade, but the fundamentals still pretty
Speaker 1: clear John that the US interest rate a rising, the
Speaker 1: Japanese are not. That is your long dollar Dolly Enne
Speaker 1: Carrie trade. But for me on the fundamental side, from
Speaker 1: the trade side, the dolly n is likely to keep
Speaker 1: rising from Japanese importers this winter going out and buying energy,
Speaker 1: buying coal, buying oil, even though energy prices are cooling
Speaker 1: down seasonally. As we get into winter, those poems should accelerate,
Speaker 1: pushing dolly and higher towards one fifty five. The honor
Speaker 1: of a formal tea at the Bank of Japan with
Speaker 1: all the pump and circumstances different than the FED. Folks
Speaker 1: at the FED. You're over at Starbucks and you're paying
Speaker 1: for it. That's how they do it in America. Jordan,
Speaker 1: give us an insight on the debate at the Bank
Speaker 1: of Japan. Is a corota son only or is there
Speaker 1: actually a debate there like there is a bore at FED.
Speaker 1: It's definitely a debate. Qurotas of course, representing the rest
Speaker 1: of the bank Japan when he speaks on their behalf,
Speaker 1: but he is also the guy in charge. And when
Speaker 1: we get to March and April, the question for clients
Speaker 1: is Krotas comes to an end, who will be the
Speaker 1: next to lead the Bank Japan? And will that leads
Speaker 1: to policy change? And if you look at rates markets,
Speaker 1: rates markets would tell you yes, we think that something
Speaker 1: will change, at least on the ten year parts of
Speaker 1: the curve. Will the bands be wider on the yield
Speaker 1: curve control? Will they give it up altogether on the
Speaker 1: ten year move it to the five If you look
Speaker 1: at the Japanese JGB curve, even tenors below ten years
Speaker 1: are trading above the sort of levels set by the
Speaker 1: ten year yield curve control. So the markets are challenging
Speaker 1: the Bank Japan. As we speak, they're holding onto their
Speaker 1: their their ten year but the rest of the curve
Speaker 1: is pricing a change in policy to come. And it's
Speaker 1: a message so far for this year Jordan's the currency
Speaker 1: vigilantes will win that we're seeing that when it comes,
Speaker 1: perhaps eventually to Japan, although it hasn't happened yet, and
Speaker 1: then it will has come already to a Great Britain
Speaker 1: where you see a little bit more upside at least
Speaker 1: versus where you used to with the pound. Indeed, well
Speaker 1: for the beginning, used to be everyone's risk off hedge
Speaker 1: of choice. The only lines I've met who are long
Speaker 1: the yen are using it in their portfolio as their
Speaker 1: potential risk off in case we get dollar weakness, and
Speaker 1: as you've seen over past year, that just hasn't worked.
Speaker 1: The fundamentals really did change for the end compared to
Speaker 1: the global financial crash. The carry trade still drives the pair.
Speaker 1: It does track U S yields quite well, but on
Speaker 1: the trade side now have a trade deaf sit. It's
Speaker 1: not your risk off currency of choice when this is
Speaker 1: a risk off driven by energy prices. And then for
Speaker 1: the UK, I think the UK is the canary in
Speaker 1: the coal mine for everybody around the world, for even
Speaker 1: for the US, for Janet Yellen, for the Fed. You
Speaker 1: don't want to do a UK seems to be the
Speaker 1: conclusion from talking to foreign policymakers. When it comes to
Speaker 1: budgetary constraints, don't push it. And also when it comes
Speaker 1: to interest rates, don't suddenly get dubbish and allow inflation
Speaker 1: to run hot. I know we were just talking about
Speaker 1: the previous section use car prices. I think they will
Speaker 1: continue to fall, perhaps quite aggressively, but labor markets are
Speaker 1: really tight, and the risk now it's the second round
Speaker 1: effects for services and that's a lot harder to tain
Speaker 1: that inflation dragon. So I think for the time being
Speaker 1: the Fed to go do seventy five. Then they'll do
Speaker 1: seventy five again, then slow down into the new year.
Speaker 1: That Wall Street Journal talking about the idea of perhaps
Speaker 1: slowing down to fifties come December. That's the debate for
Speaker 1: the dollar right now. That's why you're own cable will
Speaker 1: become quite boring to trade. Just that everyone everyone's waiting
Speaker 1: for this FED meeting next week. I think the message
Speaker 1: will be noe, we're going ahead, We're still staying hawkish,
Speaker 1: and the dollar will rally and Christmas and then waiting
Speaker 1: for the CPI print the week after that. Jordan awesome
Speaker 1: to catch up. Buddy has always Jordan Rochester there of Nomura.
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
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Speaker 1: the terminal. I'm Tom Keene, and this is Bloomer