WEBVTT - Bloomberg Surveillance TV: March 27th, 2026

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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

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<v Speaker 2>with Lisa Bromwitz and Amrie Hordernt. Join us each day

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<v Speaker 2>for insight from the best in markets, economics, and geopolitics

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<v Speaker 2>from our global headquarters in New York City. We are

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<v Speaker 2>live on Bloomberg Television weekday mornings from six to nine

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<v Speaker 2>am Eastern. Subscribe to the podcast on Apple, Spotify or

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<v Speaker 2>anywhere else you listen, and as always on the Bloomberg

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<v Speaker 2>Terminal and the Bloomberg Business app. Let's get to the

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<v Speaker 2>view on Wall Street this morning. Russ Coastrick of Black

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<v Speaker 2>Rock right in the following. While our base case is

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<v Speaker 2>no recession, the energy shock suggests a moderation in near

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<v Speaker 2>term growth expectations. Russ joins us now for more. Russ,

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<v Speaker 2>welcome to the program. You and a team have been

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<v Speaker 2>de risking where and what.

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<v Speaker 3>In Good morning, Jonathan, we've been to you risking across

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<v Speaker 3>the board. We've really been getting most of the benchmark

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<v Speaker 3>in our equity positions, benchmarkt duration. We've been bringing down

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<v Speaker 3>some of the factor risks and the portfolio and there

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<v Speaker 3>are a couple of reasons for that. The obvious one

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<v Speaker 3>is we don't know how long this is going.

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<v Speaker 2>To go to continue.

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<v Speaker 3>I think you used exactly the right word a few

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<v Speaker 3>moments ago, persistence, and the longer this persists, the greater

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<v Speaker 3>the risk to inflation the economy. But the other reason

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<v Speaker 3>for de risking is that there really aren't any hedges

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<v Speaker 3>in this context. In twenty two, the dollar actually was

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<v Speaker 3>an effective hedge against the.

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<v Speaker 1>Sell off inequities.

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<v Speaker 3>Last decade, treasuries were providing some downside when they're concerns

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<v Speaker 3>about growth. In other circumstances, gold has been working. Nothing

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<v Speaker 3>is working right now, So really the only thing you

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<v Speaker 3>can do within a portfolio, other than making some adjustments

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<v Speaker 3>at the stock level, is to bring the risks down.

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<v Speaker 2>I often say in moments like this, the bonds don't work,

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<v Speaker 2>They make things worse. Yields right now up again by

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<v Speaker 2>four basis points for US tens at four forty five

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<v Speaker 2>twos of four percent LEASA and I yes that I

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<v Speaker 2>spent a lot of time on a week two year oction,

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<v Speaker 2>a week five year oction followed by a week seven

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<v Speaker 2>year oaction as well.

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<v Speaker 1>Russ.

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<v Speaker 2>What is happening that? What's behind those moves.

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<v Speaker 3>This to me is actually maybe even a bit more interesting.

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<v Speaker 3>It's going on in equity market, so it's very easy

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<v Speaker 3>to understand. You have an oil shock, higher inflation, hit

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<v Speaker 3>to growth, and what's happening with stocks. The bottom market,

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<v Speaker 3>I think is more nuanced. Obviously, the bottom market is

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<v Speaker 3>reacting to what will be an increase in headline inflation.

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<v Speaker 3>That said, as you point out, I think most people

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<v Speaker 3>realize higher energy, not just oil, but natural gas, higher

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<v Speaker 3>food prices, higher fer fertilizer prices, all of which leads

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<v Speaker 3>to an increase in headline inflation. But the problem is

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<v Speaker 3>one that doesn't necessarily flow into core, and two, it

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<v Speaker 3>is also a drag on growth. And there's happening at a

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<v Speaker 3>time when the labor market has already a bit solved.

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<v Speaker 3>So the notion that you just want to keep selling

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<v Speaker 3>bonds into this, to me, that's less obvious.

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<v Speaker 2>And I do think at some point.

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<v Speaker 3>If the concerns about growth continue to build, if we

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<v Speaker 3>do have one hundred dollars or higher oil for prolonged

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<v Speaker 3>period of time, there is a question about at what

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<v Speaker 3>points you want to start bringing bonds back into your

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<v Speaker 3>portfolio as a hedge against weaker growth. Which is going

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<v Speaker 3>to be another risk we're going to contend with.

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<v Speaker 4>Part of the reason why it's been so hard for

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<v Speaker 4>us to get a handle on when that point is

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<v Speaker 4>when people should step in and by duration? Is it's

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<v Speaker 4>unclear exactly what's behind the sellof Is it technical? Is

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<v Speaker 4>it a question of central banks that are selling what

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<v Speaker 4>they can to raise money for possible fiscal stimulus. Is

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<v Speaker 4>it a potential concern for a fiscal response to any

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<v Speaker 4>kind of slowdown in the future.

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<v Speaker 1>What's your take on this. I think it's a great question.

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<v Speaker 1>To my mind.

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<v Speaker 3>One of the things that's clearly going on is a

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<v Speaker 3>pricing out.

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<v Speaker 1>Of what would have been a number of.

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<v Speaker 3>Rate cuts from the FED and pricing in a greater

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<v Speaker 3>possibility of hikes, particularly from the So is the front

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<v Speaker 3>end of the curve is adjusting. You're seeing that movement

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<v Speaker 3>throughout all of the yield curve. But again, if we're

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<v Speaker 3>going to be an environment where hunderdollar oil persists, and

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<v Speaker 3>I think you all raised a good point a few

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<v Speaker 3>moments ago, it's not as if oil is going to

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<v Speaker 3>go back to sixty five the second the shooting stops.

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<v Speaker 3>There's been damage to infrastructure, there are questions about how

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<v Speaker 3>long it takes to open the straits of horror moves,

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<v Speaker 3>there is likely to be a war premium or a

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<v Speaker 3>risk premium embedded in oil for many, many months. So

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<v Speaker 3>if you're going to have that period of prolonged higher

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<v Speaker 3>energy and all the knock on effects, you've got to

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<v Speaker 3>start to bring down your growth expectations, most of which

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<v Speaker 3>we're high coming into the year, and at some point

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<v Speaker 3>that probably does suggest bring you to ration up further, which.

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<v Speaker 4>Is something that I know others, including JP Morgan, has

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<v Speaker 4>been thinking of doing this doing given all of this

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<v Speaker 4>and given what we know in terms of the prolonged conflict,

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<v Speaker 4>do you think that right now we're facing a market

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<v Speaker 4>that is over complacent when it comes to the growth

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<v Speaker 4>shock that's coming down the pike.

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<v Speaker 3>I don't think it's overly complacent, because they do think

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<v Speaker 3>you've already seen a fairly significant adjustment.

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<v Speaker 2>I also believe that at least in the US, I think.

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<v Speaker 3>The situation in Europe is certainly more serious, giving their

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<v Speaker 3>exposure to higher energy prices.

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<v Speaker 2>I think the US can probably.

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<v Speaker 3>Survive eighty or ninety oil still have a year when

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<v Speaker 3>growth is positive. Of course, the difference is going to

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<v Speaker 3>be that we're not going to get, or we're much

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<v Speaker 3>more less likely to get the type of above trend

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<v Speaker 3>growth that investors were expecting just a few months ago.

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<v Speaker 3>And if you look, what the equity market has been

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<v Speaker 3>doing is actually responding to that. The rotation that dominated

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<v Speaker 3>back in late twenty five early twenty six was all

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<v Speaker 3>about the broadening out. You bought cyclicals, you bought value,

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<v Speaker 3>you bought international stocks, you bought small caps.

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<v Speaker 2>To my mind, those trades.

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<v Speaker 3>Were predicated on above trend growth. As you start to

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<v Speaker 3>price that growth out, you're seeing a reversal of many

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<v Speaker 3>those trends. Investors have been looking for more defensive parks

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<v Speaker 3>in the market, and interestingly enough, they've also been looking

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<v Speaker 3>at tech, at least on a relative basis, is holding

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<v Speaker 3>up better in a world which economic growth is.

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<v Speaker 2>Not as much of a tailment. Stay with us more

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<v Speaker 2>Bloomberg surveillance coming up after this. Let's talk about europe

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<v Speaker 2>Global central banks facing the thread of higher inflation as

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<v Speaker 2>energy prices saw the ECP navigating mixed signals, with some

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<v Speaker 2>policymakers ready to act fast, others urging caution. Join us

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<v Speaker 2>now to discuss as an ECB Governing Council member, and

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<v Speaker 2>the National Bank of Beolgium. Governor Pierre Funch, Governor, Welcome

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<v Speaker 2>to the program, sir. Let's just start with the nature

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<v Speaker 2>of this shark. From your perspective, Is this the kind

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<v Speaker 2>of shark that a central bank should look through?

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<v Speaker 1>Well, that's of course the big question, and we know

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<v Speaker 1>the textbookcase is for looking for if you're confronted with

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<v Speaker 1>the supply shock. Now, in the meantime, we have the

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<v Speaker 1>episode of twenty two, and in twenty two we were

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<v Speaker 1>a little bit late and reacting. We had team transitory.

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<v Speaker 1>We're not alone. I was maybe one of the first

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<v Speaker 1>governors to be concerned about the fact that inflation might

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<v Speaker 1>might go up further than what we had in our models.

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<v Speaker 1>So now we're there, we have again a supply shock,

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<v Speaker 1>and we have to decide how to react to it.

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<v Speaker 1>We should not overreact. I think so far we were able,

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<v Speaker 1>I think to communicate the fact that we would react

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<v Speaker 1>if need be, but that we were not going to

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<v Speaker 1>rush to do anything that would would be looking like overreaction.

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<v Speaker 1>But anyway, I mean, we have to Twenty two is different.

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<v Speaker 1>We have the textbook and we find we need to

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<v Speaker 1>find a middle way between what we have in the textbook,

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<v Speaker 1>which is we don't react, and the experience we had

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<v Speaker 1>in twenty two. But in twenty two, of course, there

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<v Speaker 1>were a lot of bottlenecks in the system, very tight

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<v Speaker 1>labor markets, you had a lot of fiscal support coming

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<v Speaker 1>out of the COVID crisis, and that's not the situation

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<v Speaker 1>we're in today. The labor market is a bit weaker

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<v Speaker 1>in Europe. So we will have to find a good

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<v Speaker 1>balance between the textbook situation and again what we experienced

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<v Speaker 1>twenty two.

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<v Speaker 2>The governor, does that give you more time? Does that

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<v Speaker 2>give you more time? And it's April too soon to

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<v Speaker 2>know what kind of shock this is to understand if

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<v Speaker 2>you should look through it or react to it.

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<v Speaker 1>Well, if the conflict is mainly over by April, then

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<v Speaker 1>I guess we will be closer to what we have

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<v Speaker 1>in our baseline. We just made some projections over the

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<v Speaker 1>during the last weeking of the Governing Council. I think

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<v Speaker 1>the base case that we produced was still relatively benign.

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<v Speaker 1>Inflation was moving to a peak of three percent but

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<v Speaker 1>not only yearly basis, and then going down quite quickly

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<v Speaker 1>to two percent. On the basis of that, it's not

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<v Speaker 1>clear that the reaction would be warranted. Of course, we

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<v Speaker 1>were doing the projection on the basis of two hikes

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<v Speaker 1>that were priced by the market. But I would say,

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<v Speaker 1>you know, if we're if we are still close to

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<v Speaker 1>the baseline, that it's not clear we have to react.

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<v Speaker 1>If we move to what we call the adverse or

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<v Speaker 1>the CV scenario, then we have higher inflation and certainly

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<v Speaker 1>more persistent in the case of the cvere, and then

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<v Speaker 1>my guess would be that we have to do we

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<v Speaker 1>would have to do something. But even then I think

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<v Speaker 1>we need to make a distinction between reacting so that

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<v Speaker 1>real rates remain stable or reacting and increasing real rates.

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<v Speaker 1>So if you believe that core inflation is going to

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<v Speaker 1>go up for a period over a year, you may

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<v Speaker 1>want to react, and the first tike might just be

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<v Speaker 1>adjusting to this higher core inflation. And then there is

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<v Speaker 1>a stage if the shock is bigger and you have

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<v Speaker 1>significant second round effects, which is of course a big

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<v Speaker 1>part of the uncertainty, where you might have to to

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<v Speaker 1>tighten as such, And I would still make this different

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<v Speaker 1>hiking as such, if core inflation is going up, might

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<v Speaker 1>not be tightening. And I'm not talking about you know,

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<v Speaker 1>a spot real rates, but say, over a period of

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<v Speaker 1>one or two years, depending on what's our review of

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<v Speaker 1>the world is.

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<v Speaker 4>Governor, it sounds like your more patient, potentially than some

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<v Speaker 4>other members on the ECB. I'm thinking, for example, of

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<v Speaker 4>a recent interview that President ECB President Christine Leaguard did

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<v Speaker 4>with The Economist yesterday, saying that the ECB would have

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<v Speaker 4>to respond in a force flow persistent way if inflation

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<v Speaker 4>looks set to sit well above it's two percent target

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<v Speaker 4>for an exodent period, most people would agree, but she

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<v Speaker 4>said even a more modest overshoot could call for a

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<v Speaker 4>measured rate move. Do you agree with that that if

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<v Speaker 4>inflation does not look like it is poised to go

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<v Speaker 4>down to two percent, say by the end of this year,

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<v Speaker 4>that it makes sense to signal to markets that you're

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<v Speaker 4>serious about containing inflation by making a hike.

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<v Speaker 1>Well, if I gave the impression that was not aligned

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<v Speaker 1>with Christine Lagad, I'm sorry for that, because we are

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<v Speaker 1>completely aligned, or I'm aligned to her with her you,

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<v Speaker 1>but I was just discussing the case where by the

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<v Speaker 1>meeting of April the conflict would be over and then honestly,

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<v Speaker 1>it's still something that is relatively probably relatively benign and

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<v Speaker 1>we might have to react or not, but that's not,

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<v Speaker 1>you know, a difficult situation probably to deal with. My

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<v Speaker 1>concern is, of course, and the concern of many people

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<v Speaker 1>and of the market, is that it would not be

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<v Speaker 1>over by by April, or maybe not even over by June.

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<v Speaker 1>What I would like to have is a better mapping

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<v Speaker 1>of the scenarios that we are making to actually the

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<v Speaker 1>conflict lasting until April or until June, that we have

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<v Speaker 1>a better mapping of our scenarios and basically the meetings

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<v Speaker 1>of the Governing Council. But it's moving fast. So one

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<v Speaker 1>meeting is April, another meeting is June. If the conflict

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<v Speaker 1>is not over by June, then we are, you know,

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<v Speaker 1>most probably way above our baseline and that would probably

0:11:58.520 --> 0:11:59.960
<v Speaker 1>warrant some some kind of react.

0:12:00.360 --> 0:12:02.920
<v Speaker 4>Governor, do you think that the ECB is hamstrung by

0:12:02.920 --> 0:12:05.160
<v Speaker 4>the fact that it is a single mandate FED dealing

0:12:05.200 --> 0:12:08.480
<v Speaker 4>with an inflationary shock The FED looks like it's currently

0:12:08.520 --> 0:12:12.000
<v Speaker 4>prepared to look through given that there is a serious

0:12:12.200 --> 0:12:14.760
<v Speaker 4>growth hit on the other side that is potentially going

0:12:14.800 --> 0:12:15.480
<v Speaker 4>to transpire.

0:12:17.559 --> 0:12:19.679
<v Speaker 1>Well, in a way, it makes it easier because if

0:12:19.679 --> 0:12:22.840
<v Speaker 1>you have only one objective, you only look at one target,

0:12:22.920 --> 0:12:26.959
<v Speaker 1>but we always insist that we have an objective over

0:12:27.120 --> 0:12:31.400
<v Speaker 1>a medium term horizon. So we do integrate the impacts

0:12:31.400 --> 0:12:33.400
<v Speaker 1>of the shock on growth, and to the extent that

0:12:33.440 --> 0:12:36.400
<v Speaker 1>the impact of the shock on growth would be to

0:12:36.440 --> 0:12:38.840
<v Speaker 1>some extent deflationary, I don't think that's the base case,

0:12:38.880 --> 0:12:40.920
<v Speaker 1>but of course we would have to take that into account.

0:12:41.200 --> 0:12:44.400
<v Speaker 1>But it's taking into account the impact of the shock

0:12:44.480 --> 0:12:49.200
<v Speaker 1>on the real economy and then the repercussion in terms

0:12:49.200 --> 0:12:51.800
<v Speaker 1>of whether we're going to be faced with second rounds

0:12:51.800 --> 0:12:55.520
<v Speaker 1>effects or not. If the economy weakens fast, then the

0:12:55.559 --> 0:13:00.800
<v Speaker 1>second round effects might be limited, which might warrant less

0:13:00.880 --> 0:13:04.200
<v Speaker 1>of a move. And the big uncertainty is, of course

0:13:04.679 --> 0:13:07.600
<v Speaker 1>the labor markets and the economy is less tight than

0:13:07.640 --> 0:13:11.520
<v Speaker 1>it was in twenty two coming out of the COVID crisis,

0:13:12.000 --> 0:13:15.160
<v Speaker 1>with all these bottlenecks in the system. But the economic

0:13:15.200 --> 0:13:18.240
<v Speaker 1>agents were surprised by the pickup in inflation. We had

0:13:18.520 --> 0:13:21.360
<v Speaker 1>known a period of low inflation for a long, very

0:13:21.400 --> 0:13:24.439
<v Speaker 1>long time, so people reacted as much as we did

0:13:24.520 --> 0:13:28.480
<v Speaker 1>in a way slowly to the inflation developments. The big

0:13:28.480 --> 0:13:31.320
<v Speaker 1>thing now we have to monitor is whether economic agents,

0:13:31.360 --> 0:13:35.679
<v Speaker 1>firms and then workers will adapt more quickly this time

0:13:36.440 --> 0:13:39.120
<v Speaker 1>to the shock. If this is the case, it might

0:13:39.200 --> 0:13:42.560
<v Speaker 1>lead to second round effects that will be quote in

0:13:42.640 --> 0:13:47.000
<v Speaker 1>quote higher ketrist paribus compared to the level of the shock.

0:13:47.760 --> 0:13:51.160
<v Speaker 1>If because of weaknesses in the economy in the labor market,

0:13:51.679 --> 0:13:55.520
<v Speaker 1>firms and then workers don't react fast and basically take

0:13:55.559 --> 0:13:59.200
<v Speaker 1>the hit, then the case for reacting is less strong.

0:14:00.120 --> 0:14:02.640
<v Speaker 2>Final question, listening to you to recap what I hear

0:14:02.760 --> 0:14:07.040
<v Speaker 2>is patients the prospect of two different scenarios with different responses.

0:14:07.320 --> 0:14:10.480
<v Speaker 2>What I see in markets, though, is tied to financial conditions.

0:14:10.520 --> 0:14:13.959
<v Speaker 2>The market doing the work for you already high yields

0:14:14.000 --> 0:14:17.440
<v Speaker 2>on government bonds, pricing in the prospect of hikes from

0:14:17.480 --> 0:14:20.000
<v Speaker 2>the Central Bank over the next year or so. When

0:14:20.040 --> 0:14:22.640
<v Speaker 2>you look at that, do you consider that an unwarranted

0:14:22.680 --> 0:14:25.880
<v Speaker 2>timeing of financial conditions given the patients that you've pledged

0:14:26.200 --> 0:14:29.120
<v Speaker 2>this morning already?

0:14:29.320 --> 0:14:33.000
<v Speaker 1>Well, I'm you know, I'm patient today, But in April,

0:14:33.120 --> 0:14:35.360
<v Speaker 1>if we're still there, I might not be patient. So

0:14:35.840 --> 0:14:37.760
<v Speaker 1>I don't want to convey the message that we are

0:14:37.800 --> 0:14:41.080
<v Speaker 1>not ready to act. But I'm comfortable with what I

0:14:41.120 --> 0:14:43.720
<v Speaker 1>see in the market. But given the uncertainty, the uncertainty

0:14:43.760 --> 0:14:47.280
<v Speaker 1>is huge, So you know making any judgment today or

0:14:47.280 --> 0:14:50.080
<v Speaker 1>what we could do in April or June. Given the

0:14:50.160 --> 0:14:55.480
<v Speaker 1>uncertainty the market signals or reaction will be different next

0:14:55.480 --> 0:14:59.080
<v Speaker 1>week and the week after next. We have to monitor that.

0:14:59.120 --> 0:15:04.200
<v Speaker 1>We have to at least, I mean we should not overreact.

0:15:04.240 --> 0:15:06.600
<v Speaker 1>I mean, we are not going to control the first

0:15:06.680 --> 0:15:09.080
<v Speaker 1>round effects of this shock, so we should not even

0:15:09.120 --> 0:15:11.840
<v Speaker 1>try to control the first round effects. So in this

0:15:12.000 --> 0:15:17.160
<v Speaker 1>sense we have time to react react adequately depending on

0:15:17.200 --> 0:15:19.560
<v Speaker 1>what is our perception of what the second round effects

0:15:19.600 --> 0:15:22.560
<v Speaker 1>will be. But you know, April is not out of

0:15:22.560 --> 0:15:27.080
<v Speaker 1>the question. If if by April we have solid evidence

0:15:27.120 --> 0:15:31.040
<v Speaker 1>that the shock will be lasting and will lead to

0:15:32.360 --> 0:15:35.880
<v Speaker 1>a big hike in inflation that is likely to have

0:15:35.920 --> 0:15:38.880
<v Speaker 1>some degree of persistence, then we might have to do something.

0:15:38.920 --> 0:15:41.400
<v Speaker 1>But you know, we still have some time before the

0:15:41.480 --> 0:15:44.240
<v Speaker 1>April meeting, and I don't want to take any any

0:15:44.280 --> 0:15:45.640
<v Speaker 1>bed in one or the other direction.

0:15:46.080 --> 0:15:49.560
<v Speaker 2>Stay with us. More Blandberg surveillance coming up after this.

0:15:58.520 --> 0:16:01.080
<v Speaker 2>So here's the laces. This morning, the President, continuing his

0:16:01.200 --> 0:16:03.640
<v Speaker 2>post for our interest rates is the confirmation of French

0:16:03.680 --> 0:16:07.040
<v Speaker 2>chan nominee Kevin Walsh remains on pause. Sona desire Franklin

0:16:07.080 --> 0:16:09.920
<v Speaker 2>Templeton writing, even before the current shark, I was not

0:16:09.960 --> 0:16:12.560
<v Speaker 2>expecting any more cuts, but it is too early to

0:16:12.640 --> 0:16:15.160
<v Speaker 2>forecast rate high. Sonal joins us now for more, Sonal,

0:16:15.240 --> 0:16:17.920
<v Speaker 2>welcome to the program. I know so many people in

0:16:18.000 --> 0:16:21.200
<v Speaker 2>fixed income itching to get long duration because yields have

0:16:21.280 --> 0:16:24.560
<v Speaker 2>backed up, but they're nervous. What are you advocating for?

0:16:25.640 --> 0:16:28.440
<v Speaker 5>So you know, we came in Thanks for having me on, Jonathan,

0:16:28.680 --> 0:16:31.520
<v Speaker 5>but we came into this year actually a little bit short,

0:16:31.800 --> 0:16:35.480
<v Speaker 5>and we are moving slowly towards neutral, but I am

0:16:35.520 --> 0:16:38.920
<v Speaker 5>not tempted to go a long yet. This is essentially

0:16:38.960 --> 0:16:42.680
<v Speaker 5>when we talk about the two, it's either bimobile distribution

0:16:43.000 --> 0:16:46.680
<v Speaker 5>or more accurately, there are two tail risks, and we

0:16:46.800 --> 0:16:50.440
<v Speaker 5>certainly can't predict which of those tail risks comes to

0:16:50.520 --> 0:16:52.720
<v Speaker 5>fruition if either either one.

0:16:52.600 --> 0:16:53.360
<v Speaker 2>Of them i e.

0:16:53.840 --> 0:16:57.720
<v Speaker 5>A very protracted conflict or a very short conflict. I

0:16:57.720 --> 0:17:01.400
<v Speaker 5>mean you can't, you can't actually position your portfolio to

0:17:01.480 --> 0:17:03.120
<v Speaker 5>either one of those two tail risks.

0:17:03.400 --> 0:17:06.080
<v Speaker 4>Son Now, forgive me. I keep harping on this one topic.

0:17:06.359 --> 0:17:09.359
<v Speaker 4>Why are long end body yields rising right now? And

0:17:09.400 --> 0:17:12.399
<v Speaker 4>I look at inflation expectations and the break even rates

0:17:12.440 --> 0:17:15.119
<v Speaker 4>market long term inflation is not taking up, If anything,

0:17:15.119 --> 0:17:17.960
<v Speaker 4>it's going down. This is a real rate move at

0:17:17.960 --> 0:17:20.840
<v Speaker 4>a time when people are looking out to the potential

0:17:21.280 --> 0:17:24.640
<v Speaker 4>of a decline in growth. Can you explain what's going

0:17:24.640 --> 0:17:26.800
<v Speaker 4>on currently in a long end of the yeld curve?

0:17:27.320 --> 0:17:31.240
<v Speaker 5>To me, actually, what the market is doing is really rational.

0:17:31.680 --> 0:17:34.919
<v Speaker 5>It is anticipating that, yes, there may well be a

0:17:35.000 --> 0:17:37.639
<v Speaker 5>decline in growth, and the response to that decline in

0:17:37.680 --> 0:17:40.520
<v Speaker 5>growth is going to be massive physcal eating. You know

0:17:40.600 --> 0:17:44.720
<v Speaker 5>your prior guest from the ECB, he only spoke about

0:17:44.720 --> 0:17:49.200
<v Speaker 5>monetary policy. He didn't mention what the probable fiscal response

0:17:49.240 --> 0:17:51.960
<v Speaker 5>would be if this were to be a protracted conflict.

0:17:52.240 --> 0:17:54.600
<v Speaker 5>There isn't a government in the developed world which will

0:17:54.640 --> 0:17:59.120
<v Speaker 5>probably not react by trying to accommodate some of that

0:17:59.320 --> 0:18:03.280
<v Speaker 5>weakening through a greater fiscal push. So I think that

0:18:03.359 --> 0:18:06.200
<v Speaker 5>bond markets are actually behaving pretty rationally right now.

0:18:06.720 --> 0:18:08.800
<v Speaker 4>Do we think that we're pushing up against the limits

0:18:08.880 --> 0:18:12.840
<v Speaker 4>of using a fiscal lever to offset weakness based on

0:18:12.880 --> 0:18:16.160
<v Speaker 4>the pushback that we're seeing right now from the bond market.

0:18:16.840 --> 0:18:21.200
<v Speaker 5>So it depends, Well, that's a useful statement. I don't

0:18:21.200 --> 0:18:23.720
<v Speaker 5>think we're getting to a limit. Okay, because here's the thing.

0:18:24.800 --> 0:18:28.440
<v Speaker 5>There is an enormous amount of liquidity floating around globally.

0:18:28.520 --> 0:18:32.960
<v Speaker 5>There is the ability to finance more bonds. However, at

0:18:32.960 --> 0:18:36.840
<v Speaker 5>this point, clearly the market is not accepting that the

0:18:36.960 --> 0:18:41.320
<v Speaker 5>yield is an adequate compensation for the prospect of higher

0:18:41.320 --> 0:18:44.560
<v Speaker 5>inflation and higher bond supply. But you do find a

0:18:44.560 --> 0:18:48.120
<v Speaker 5>market clearing point, So how much can fiscal do. Even

0:18:48.160 --> 0:18:53.040
<v Speaker 5>automatic stabilizers by themselves will lead to widening fhyscal deficits.

0:18:53.359 --> 0:18:55.200
<v Speaker 5>So you know the fact that unemployment goes up to

0:18:55.280 --> 0:18:58.959
<v Speaker 5>unemployment benefits go up, and so you will have a

0:18:59.040 --> 0:19:02.440
<v Speaker 5>widening the event of a significant slowdown. And I think

0:19:02.440 --> 0:19:05.000
<v Speaker 5>there's a big difference between what's happening in Europe as

0:19:05.119 --> 0:19:09.320
<v Speaker 5>I think I think you've mentioned yourself, versus what's happening

0:19:09.359 --> 0:19:11.560
<v Speaker 5>in the US. But in the US, for a whole

0:19:11.560 --> 0:19:15.120
<v Speaker 5>host of other reasons, we're looking at physcal profligacy as

0:19:15.160 --> 0:19:17.160
<v Speaker 5>we've never seen before. For the last five years, we've

0:19:17.160 --> 0:19:20.359
<v Speaker 5>seen it, and I see no indications that this is

0:19:20.440 --> 0:19:22.520
<v Speaker 5>going to go away anytime soon.

0:19:22.880 --> 0:19:24.760
<v Speaker 2>So, now what you just said there on FISCO, I

0:19:24.800 --> 0:19:28.040
<v Speaker 2>think it's really important for multiple reasons. Here's one. Do

0:19:28.080 --> 0:19:30.440
<v Speaker 2>you think it increases the odds that we'll see second

0:19:30.560 --> 0:19:33.400
<v Speaker 2>order effects if governments step in and try and support

0:19:33.800 --> 0:19:35.280
<v Speaker 2>consumers in this moment.

0:19:35.880 --> 0:19:38.919
<v Speaker 5>Oh, in terms of inflation. Yeah, yeah, because actually it

0:19:38.920 --> 0:19:42.480
<v Speaker 5>was the opposite way around. If you think back to

0:19:42.560 --> 0:19:45.399
<v Speaker 5>the famous transitory period of twenty twenty one, what was

0:19:45.440 --> 0:19:48.080
<v Speaker 5>really going on in twenty twenty one. We did have

0:19:48.240 --> 0:19:52.280
<v Speaker 5>very easy monetary policy, but the reality is we had

0:19:52.600 --> 0:19:56.399
<v Speaker 5>an enormous fiscal splurge in the first quarter of twenty

0:19:56.440 --> 0:19:59.359
<v Speaker 5>twenty one as a new administration came in. It was

0:19:59.520 --> 0:20:02.920
<v Speaker 5>absolutely enormous, and so back in those back at that time,

0:20:03.480 --> 0:20:06.280
<v Speaker 5>to me, it appeared absolutely self evident as you were

0:20:06.280 --> 0:20:09.680
<v Speaker 5>going to get demand push inflation, which the FED kept

0:20:09.680 --> 0:20:13.000
<v Speaker 5>saying was a supply side impact, and eventually, of course,

0:20:13.040 --> 0:20:16.879
<v Speaker 5>we got the results we got. If you do get

0:20:17.119 --> 0:20:21.480
<v Speaker 5>that physical accommodation of a shock of this nature, you

0:20:21.520 --> 0:20:25.000
<v Speaker 5>will get second right of it. Ultimately, let's take an

0:20:25.040 --> 0:20:29.840
<v Speaker 5>extreme scenario. Let's suppose that we really are hitting and

0:20:29.920 --> 0:20:33.240
<v Speaker 5>taking out not just twenty percent, but oil facilities, say

0:20:33.280 --> 0:20:36.119
<v Speaker 5>in other parts of the Gulf, which is responsible for

0:20:36.200 --> 0:20:39.159
<v Speaker 5>thirty percent of global oil supply. Supposing you actually do

0:20:39.240 --> 0:20:44.399
<v Speaker 5>something much more terrible, which leads to a several year contraction.

0:20:45.040 --> 0:20:49.160
<v Speaker 5>You can't accommodate it because ultimately you need demand destruction,

0:20:49.560 --> 0:20:51.439
<v Speaker 5>which translates into slower growth.

0:20:52.800 --> 0:20:56.359
<v Speaker 2>This is the Bloomberg's Events podcast, bringing you the best

0:20:56.359 --> 0:20:59.680
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0:20:59.760 --> 0:21:02.720
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0:21:02.840 --> 0:21:06.600
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