Speaker 1: Welcome to the Bloomberg's Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferrell and Lisa A. Brawmowitz. Daily we bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance on Apple Podcast, SoundCloud, Bloomberg
Speaker 1: dot Com, and of course, on the Bloomberg terminal. Right now,
Speaker 1: we are going to go to Brussels. He is not
Speaker 1: only a foreign minister for Ukraine, but from a family
Speaker 1: of public service to Ukraine's father was ambassador, including a
Speaker 1: long tour of duty to Kazakhstan. Maria. Today, oh with
Speaker 1: Mr Khleba in Brussels, Maria. Good morning, Yes, Tom, good morning.
Speaker 1: And we're now joined by them Culebra, who of course
Speaker 1: is Ukraine's foreign minister. And when this war started, you,
Speaker 1: alongside the rest of the Ukrainian government, you meet the
Speaker 1: decision if we're not going to leave, we're gonna fight
Speaker 1: for our country and we're gonna win this war. I wonder,
Speaker 1: now you've been on almost a global tour, You've met
Speaker 1: pretty much with everyone that can support your cause. What
Speaker 1: is the message that you're sending diplomats when you go
Speaker 1: on this tour Uh, you're not believe in Ukraine. But
Speaker 1: now you can see that Ukraine will win this war.
Speaker 1: Stand by us and share the victory with us for
Speaker 1: the sake of the world. Because this is not only
Speaker 1: the Russia's war against Ukraine. This is the threat that
Speaker 1: Russia and the challenge that Russia poses to the entire world.
Speaker 1: We have to stop them here in order for others
Speaker 1: not to suffer as much as we do. And one
Speaker 1: of the things that you say, and President Lensky repeats
Speaker 1: to is that when you look at the strategic options
Speaker 1: right now, the only strategic option that works for Ukraine
Speaker 1: is winning is a victory. Nothing else will suffice. When
Speaker 1: you say we've got to win, what does it mean
Speaker 1: in real terms, Well, you have to understand that this
Speaker 1: is the world for our existence. Because President Putting does
Speaker 1: not recognize how identity, He does not recognize the right
Speaker 1: of Ukrainian state to exist. This is why we understand
Speaker 1: that we have no other choice but to win this war,
Speaker 1: because it's a war for our existence, and winning it
Speaker 1: means first deal occupying our territories, restoring territorial integrity of
Speaker 1: Ukraine within its internationally recognized borders. We have no intention
Speaker 1: to capture anyone's piece of land, even inach of it.
Speaker 1: We but we want everything that belongs to us to
Speaker 1: be ours. And of course you often hear I know
Speaker 1: this really makes you angry and infuriates Ukrainians when you
Speaker 1: hear things like, oh, but they should just accept the
Speaker 1: ceasefire or perhaps just give away the dam Bass and
Speaker 1: this will put an end to it. What is the
Speaker 1: flaw in that theory? According to you, one of the
Speaker 1: reasons why this war is happening is because since twenty
Speaker 1: and fourteen, some Western countries were countries, you say, some
Speaker 1: Western countries, which human Germany, Germany, France, to some extent,
Speaker 1: the United States and other other other European countries. They
Speaker 1: were always pursuing the policy of half measures towards towards Russia.
Speaker 1: I guess you're scared, you're putting. Well, you know, every
Speaker 1: country is special. Every country has its own reasons to
Speaker 1: pursue one policy or or another. But one of the
Speaker 1: reasons why this war is happening, it's because everyone was
Speaker 1: always telling us Ukraine, you have to consider this to
Speaker 1: pacify Putting, you have to consider that to prevent the
Speaker 1: war from happening. Now, this war happened. It means only
Speaker 1: one thing that this entire policy Ukraine has to consider
Speaker 1: something failed. Doesn't work this way. So instead of asking
Speaker 1: what Ukraine should do for a ceasefire for the end
Speaker 1: of the war, the question should be addressed to Russia.
Speaker 1: What Russia should do? And I would like to command
Speaker 1: now both Germany, France the United States for really changing
Speaker 1: their perspective on this. We still have some discuss but
Speaker 1: in principle they clearly understand that this is a black
Speaker 1: and white situation and it's Russia who bears food responsibility
Speaker 1: for what is happening. And Mr Kula, you mentioned the French,
Speaker 1: and I have to ask you about this because over
Speaker 1: the past for eight hours there's been a huge debate
Speaker 1: as to whether or not and then when my com
Speaker 1: perhaps suggested to Mr Zelenski that he should give away
Speaker 1: some land in order to get a piece deal that,
Speaker 1: of course the French denied this. What's going on here?
Speaker 1: Has anyone ever told you? And when I say anyone,
Speaker 1: of course, I mean global leaders just give away from
Speaker 1: me and give away something in the east. Have you
Speaker 1: been pressured to do that? I was not present in
Speaker 1: the conversation that my President referred to in the conversation
Speaker 1: with President Macron. So I cannot comment on this, but
Speaker 1: before two thousand and fourteen, before the sorry, before twenty
Speaker 1: fourth of February this year, when the war started, yes
Speaker 1: there was some they were not pushing, but they were
Speaker 1: kind of exploring the option of what could be the solution,
Speaker 1: what could Ukraine abandoned in order to make a deal
Speaker 1: with Russia. But I want to make it clear, and
Speaker 1: I think it's everyone who is watching news from Ukraine
Speaker 1: and sees Russian soldiers committing atrocities, Russian army destroying I'll
Speaker 1: see this. It's not Ukraine to blame. This is an
Speaker 1: unprovoked war. Not neither Ukraine, nor Europe, nor NATO, nor
Speaker 1: the nor the United States provoked Putting to do what
Speaker 1: he's doing, and therefore he must bear full responsibility for that.
Speaker 1: And you know, looking for face saving options for Putting
Speaker 1: is a simply false approach. Let's Putting himself find a
Speaker 1: face saving option for for him, And Sir, I have
Speaker 1: to ask you, of course about NATO. Over the weekend
Speaker 1: we had Finland Sweden applying for this. We've heard a
Speaker 1: lot of people saying, yeah, we welcome them. I'm guessing
Speaker 1: for you as a better moment because you tried that
Speaker 1: path two and you didn't get the welcome you're expecting.
Speaker 1: I hope or I wonder are you disappointed or you
Speaker 1: said by that? And when it comes to the europe
Speaker 1: and Union, which we have here in the background, I mean,
Speaker 1: is this your best hope now? Is that the you
Speaker 1: you've given up a NATO. I I believe Ukraine is
Speaker 1: the best hope of the European Union because look how
Speaker 1: the European Union changed in the last two and a
Speaker 1: half months. In the beginning of the war, the perception
Speaker 1: was then NATO is strong, and NATO can act and
Speaker 1: NATO can deliver, and the only thing you can do
Speaker 1: is to express different levels of concern in public statements.
Speaker 1: And the war proved that everything is completely different. It's
Speaker 1: NATO that as alliance as an institution can do very
Speaker 1: literally for anything. Allies, yes, they're very helpful, the Coalition
Speaker 1: of the Willing, the Coalition of the Willing, who represent
Speaker 1: part of the alliance, they are very helpful. We will
Speaker 1: never forget how much how they support us. But NATO
Speaker 1: as an alliance did nothing. EU sanctions, strong political statements,
Speaker 1: economic support, military. If financing military support to Ukraine, European
Speaker 1: Union is back on track as a driving force, as
Speaker 1: someone who shapes the future, who can shape the future
Speaker 1: of youuro and it's Ukraine who gave them the chance
Speaker 1: to demonstrate that they can. And you make that very clear, Metricula.
Speaker 1: Thank you very much. I know you're heading to the
Speaker 1: Hague tomorrow, so too. I know you told me you
Speaker 1: want to pursue this case of criminal charges against Russia
Speaker 1: and the Russian Army. Thank you so much for your time,
Speaker 1: and we appreciate it at such an important hour for
Speaker 1: your country. The pleasure is mine. Thank you, Jonathan Maria,
Speaker 1: Thank you a wonderful interviewed with the Ukrainian Foreign Minister.
Speaker 1: Now to get out front of a sacred oath. Mark Esper,
Speaker 1: you know him as a Secretary of Defense of modest
Speaker 1: controversy for President Trump, but far more, the most coveted
Speaker 1: award at West Point. There is a statue at West
Speaker 1: Point and far more the heritage is seen in the
Speaker 1: theater hotel of one Douglas MacArthur. And when you win
Speaker 1: the leadership Award at West Point and an honor of
Speaker 1: General MacArthur, it's a big deal. One of those winners.
Speaker 1: Mark Esper joined us winner maybe doesn't do it justice. Mark,
Speaker 1: tell me about what General MacArthur would do today with
Speaker 1: all of his controversy within the Republican Party the middle
Speaker 1: twentieth century isolationism, and that what would General MacArthur do
Speaker 1: with this modern defense department that we have. That's a
Speaker 1: great question. And I guess thank you up front for
Speaker 1: the introduction. Tom. You know, I MacArthur what we would
Speaker 1: consider him today to be a combatant commander right because
Speaker 1: of his command in the Pacific and later during the
Speaker 1: Korean War, but you know for West Point, west Pointers
Speaker 1: and and others in the military were we're most recall
Speaker 1: his famous saying about duty, honor, and country, and that
Speaker 1: is the West Point model. He says, those three hallow
Speaker 1: words reverently dictate what you ought to be, what you
Speaker 1: can be, and what you will be. And it was
Speaker 1: that phrase, and that's saying, as it goes, is what
Speaker 1: in some ways guided me during my tenure boat the
Speaker 1: Secretary of the Army and Secretary of Defense. I am
Speaker 1: fascinated by your thoughts of the and this is a
Speaker 1: very sophisticated word, sir. I don't know if you saw
Speaker 1: this at West Point. The ginormous NATO exercises going on
Speaker 1: right now from Estonian Lithuania on down. This is a
Speaker 1: new world we are in. Is our Defense Department ready
Speaker 1: with Secretary Austin for this new world? We are getting ready.
Speaker 1: I think a hallmark of the Trump administration was we
Speaker 1: advanced the National Defense Strategy that I made number one
Speaker 1: my top priority to implement. But this defense strategy also
Speaker 1: described a new era of great power competition to find
Speaker 1: as China as our top strategic adversary and secondly as Russia,
Speaker 1: and to confront these two countries, particularly China. We really
Speaker 1: need to modernize the military from the equipment to our training,
Speaker 1: to our doctrine, and all those things are underway. So
Speaker 1: it's important that the Pentagon continue on with what we
Speaker 1: developed during my tenure, and that we also provide the funding.
Speaker 1: That's really you can't do it without having funding. And
Speaker 1: I've been disappointed by the White Houses the Biden Administration's
Speaker 1: funding request these first two times. They've been flat. And
Speaker 1: thankfully the Congress increased the spending and that's gonna be
Speaker 1: critical to driving change and modernizing the armed forces. Secretary
Speaker 1: as Per based on what we've seen with Russia's invasion
Speaker 1: of Ukraine. How should the US military view what to
Speaker 1: expect with Jijinping and Taiwan, especially as he does seek
Speaker 1: get another term. Yeah, look, it's it's the great question.
Speaker 1: Russia we always defined as a superpower, but a declining power,
Speaker 1: and it's been evident from their actions last ninety days
Speaker 1: and uh in Ukraine that they're not quite the power
Speaker 1: that we thought they were in terms of military capability.
Speaker 1: So this has been a strategic failure across the board
Speaker 1: for Russia. But China is very different, right, It's a
Speaker 1: It's an economy of sixteen trillion dollars, second largest in
Speaker 1: the world, ten times bigger than Russia. Economic interdependencies that
Speaker 1: run around the world. We're seeing just because the shutdowns
Speaker 1: due to COVID in Shanghai and other places, how the
Speaker 1: supply lines reach. So we need to be very careful
Speaker 1: about how we plan and prepared to deal with China.
Speaker 1: We need to send the same and the proper signals
Speaker 1: of resolve and determination to defend young democracies or democracies
Speaker 1: like Taiwan, and make sure they understand that we're going
Speaker 1: to defend this world order. These sets of morms and
Speaker 1: values that have really helped promote prosperity and freedom around
Speaker 1: the world. For the last seventy five years, Secretary Asper,
Speaker 1: the Trumpet administration was known for looking inward to being
Speaker 1: a very nationalistic in the approach to geopolitical concerns. And
Speaker 1: we're at a moment where NATO seems to be coalescing
Speaker 1: in order to deal with Russia and the invasion in Ukraine.
Speaker 1: How much should the US military and beyond sort of
Speaker 1: build on this coalescing of NATO and work with allies
Speaker 1: in order to get some sort of bigger presence, whether
Speaker 1: it's in Asia or at least to figure out how
Speaker 1: to respond if there is an invasion of Taiwan. Yeah, look,
Speaker 1: we absolutely have to. I consider myself a Reagan Republican.
Speaker 1: Ronald Reagan promoted American strength piece through strength. He believed
Speaker 1: in the defense of democracies and the world order as
Speaker 1: we understand it, and believe that we should stand up
Speaker 1: for our friends and allies. And I made an important
Speaker 1: plank of my tenure to really go go out there
Speaker 1: and try and strengthen our allies and grow new partners. Uh.
Speaker 1: And I'm a big believer NATO, and having served in
Speaker 1: NATO's Young Army infantry officer, I believe that we need
Speaker 1: to continue to do this. And it's I'm glad to
Speaker 1: see finally that NATO is coming together, more countries are
Speaker 1: willing to commit more for defense and uh, and that
Speaker 1: we have possibly hopefully new to new countries joining. And
Speaker 1: you know, ironically it's Vladimir Putin who brought the alliance together.
Speaker 1: So uh, the the key thing will be sustaining this
Speaker 1: momentum as we at some point look eastward towards China.
Speaker 1: Marcus Berg, the nation was fractured off of Vietnam. Republicans fractured,
Speaker 1: Democrats fractured. It was equal opportunity. But we're still adjusting.
Speaker 1: And now, as Robert Gates would say, from our our
Speaker 1: our holiday from history, we're still adjusting to the debris
Speaker 1: of Vietnam. Are we adjusting in real time? And how
Speaker 1: do Republicans and Democrats come together to help those with
Speaker 1: the sacred oaths? You know, you're you're right. I mean,
Speaker 1: after the Vietnam War took the army twelve fifteen years
Speaker 1: when I interacted due to really rebuild under again President Reagan,
Speaker 1: and I think now we're coming off the war's last
Speaker 1: twenty years in Iraq and Afghanistan, and again during our
Speaker 1: time and beyond, we began rebuilding the army and all
Speaker 1: the services. So it will take time and money. Look,
Speaker 1: I said on many occasions here the last couple of
Speaker 1: months or so that the greatest threat I see facing
Speaker 1: our country is the extreme partisanship on both sides of
Speaker 1: the aisle that is creating dysfunction in Washington, d c.
Speaker 1: And until we solve that problem, it's gonna be hard
Speaker 1: to challenge to take on the big issues such as
Speaker 1: you know, are growing budget debt, it's what thirty trillion dollars?
Speaker 1: How do we come up with a consensus that with
Speaker 1: regard to a strategy towards China, how do we address
Speaker 1: all these big issues facing our country? And that's gonna
Speaker 1: be key going forward. Going forward is what we wanted
Speaker 1: to accomplish her Mark Asper was an important book for
Speaker 1: those of you on radio. You just need to know.
Speaker 1: There's a certain weight to it, like six plus pages.
Speaker 1: Mark Esper a sacred Oh, it's really can't say enough.
Speaker 1: And of course he leads front and center with a
Speaker 1: gentleman that he worked for at the white House Law,
Speaker 1: you're going far away. Before the advent of financial media,
Speaker 1: there was actually an understanding that bonds were not just
Speaker 1: full faith and credit or f F and C. The
Speaker 1: financial media only quotes full faith and credit. Thank you
Speaker 1: Lisa Bramos, who has made a career of looking at
Speaker 1: credit and high yield, so too, Amanda Line them joining
Speaker 1: his global credit strategistic Golden Sex Right now. In the
Speaker 1: old days, you had a blue book, a Standard and
Speaker 1: Poors blue book, and you thumb through it and you
Speaker 1: looked at corporate bonds and it's say, damn Fuss. The
Speaker 1: giant at Loomas Sales has said, you can enjoy losing
Speaker 1: money at corporate bonds. How much are we losing right now?
Speaker 1: With the aggregate index down ten percent plus? Good morning, Tom,
Speaker 1: thanks for having me so. A couple of weeks ago
Speaker 1: we talked about how both I G and high yield
Speaker 1: total returns were off to their worst start on record.
Speaker 1: So it's been a very, very painful year. I think
Speaker 1: the key risk for bond investors in our view, is
Speaker 1: that that's been entirely driven almost by the rates component,
Speaker 1: and spreads have held in very well. So in the
Speaker 1: event that we do get a recession, which is not
Speaker 1: our economist space case, but if we did get one,
Speaker 1: there's a lot more room for spreads to widen and
Speaker 1: kind of even exacerbate those losses that we've already recorded
Speaker 1: here today. And so that is that is one of
Speaker 1: the key risks to the market. What a what an
Speaker 1: i G investment grade old style bonds? I want to
Speaker 1: buy a general motors behind it's a part of the
Speaker 1: aggregate index. What do you do where equity people say
Speaker 1: I'm going to go to cash or you know, I
Speaker 1: think there's a there's a dialogue about what equity people do.
Speaker 1: What do bond people do when they quote unquote want
Speaker 1: to go to cash? Yeah, they often move up in
Speaker 1: quality or shortened duration. But one of the risks that
Speaker 1: we've highlighted in our recent research is that actually moving
Speaker 1: too far up the quality spectrum. And i G also
Speaker 1: has its risks because those are the companies that are
Speaker 1: likely to move ahead with say debt funded m and
Speaker 1: A or aggressive shareholder returns irrespective of the slowing economy.
Speaker 1: And so we actually like within i G that sweet
Speaker 1: spot of triple B rated firms. Those are companies that
Speaker 1: we believe are committed to staying investment grade, but are
Speaker 1: likely going to behave in a more conservative fashion relative
Speaker 1: to say they're highly rated peers cash rich pharma and
Speaker 1: tech companies for example, that will do M and A
Speaker 1: regardless of the backdrop, Amanda, where are we in terms
Speaker 1: of what we're pricing into the credit market right now?
Speaker 1: Initially you talk about the worst start of the year,
Speaker 1: ever that was largely due to rates. That was not
Speaker 1: due to the extra cushion of yield that accounts for
Speaker 1: potential defaults. Now we're shifting into something else. We're starting
Speaker 1: to see that widen out. How far in that process
Speaker 1: are we? That's right, So we have not priced in
Speaker 1: a lot of default risk and specifically kind of zooming
Speaker 1: in on the high old market, and we do think
Speaker 1: that that's probably appropriate at this stage. So, just to
Speaker 1: set the backdrop, our economists are not expecting a recession
Speaker 1: as their base case this year, and what we've said
Speaker 1: is that even if we do have a downturn and
Speaker 1: growth slow substantially, the high old market is unlikely to
Speaker 1: experience the uptick in defaults that we're kind of used
Speaker 1: to seeing in previous cycles. There are a few reasons
Speaker 1: for that. One is just we didn't have a default
Speaker 1: cycle that long ago, right, so in twenty we had
Speaker 1: a lot of the weaker firms cleaned out of the
Speaker 1: high old market. Energy and metals and mining and kind
Speaker 1: of natural resources are also in a much better position
Speaker 1: now relative to previous cycles, and those are historically the
Speaker 1: vulnerable sectors. And then also we have a lot of
Speaker 1: cash on hand and balance sheets are very strong. So
Speaker 1: um to answer your question specifically, we're not baking in
Speaker 1: a lot of default risk in the high old market
Speaker 1: right now based on current spreads of four fifty. But
Speaker 1: that's that's probably not inappropriate given that, I would say
Speaker 1: the higher quality and the increased strength of the high
Speaker 1: old market movement, Amanda, A lot of people would agree
Speaker 1: with you, and we see this note after note. Basically,
Speaker 1: even if we get a recession, things don't have to
Speaker 1: get that bad in credit because the people have pushed
Speaker 1: out their maturity so far because there was this washout.
Speaker 1: What does that mean in terms of how high the
Speaker 1: Fed can go with the Fed funds rate before we
Speaker 1: have a real problem in credit, which is really the
Speaker 1: market that the Fed watches, and potentially it would respond to.
Speaker 1: Not equity is having a bad day right exactly. So
Speaker 1: our economists expect a terminal value of three to three
Speaker 1: and a quarter percent. A large amount of that is
Speaker 1: already reflected in FED funds futures, for example, and baked
Speaker 1: into the market. UM. I think there's a lot of
Speaker 1: room to go for financial conditions to to tighten and
Speaker 1: really for the FED to deliver on the hikes that
Speaker 1: are already priced in to the market, and I think
Speaker 1: credit investors are expecting that. Really the key risk for
Speaker 1: credit is if we had a freezing up of the
Speaker 1: primary market activities such that corporates, if they wanted to
Speaker 1: access the debt markets could not. Right now, we're actually
Speaker 1: saying that a lot of the muted supply volumes are
Speaker 1: due to an unwillingness to access the market on the
Speaker 1: on the side of corporates, as opposed to an inability.
Speaker 1: And it goes back to exactly what you mentioned. Corporates
Speaker 1: have the luxury of being patient. They spent most of
Speaker 1: one raising cash pre funding years in advance, and so
Speaker 1: they're not really at the whim of the market in
Speaker 1: terms of having to execute in a choppy conditions. I
Speaker 1: know Jonathan talked about this on on Friday Afternoon on
Speaker 1: his program, but really on those windows of stability, you're
Speaker 1: seeing a lot of activity, and we think that's indicative
Speaker 1: of a market that's still remaining open, but yet much
Speaker 1: more challenging in terms of timing that appropriately. You have
Speaker 1: no idea how jettis t K will be, Tom's gonna
Speaker 1: be South, janis that Roy had got the plug there? Amanda,
Speaker 1: thank you. Right now, let's move on with this economic
Speaker 1: analysis of the United States to work global sense off
Speaker 1: of the Milk and Institute meetings. William Lee joins us
Speaker 1: their chief economists. Billy, can the markets constrain or restrict
Speaker 1: the Fed? If we look at the Bloomberg Financial Conditions Index,
Speaker 1: it's sort of doing its job right now making financial
Speaker 1: conditions more restrictive. How will the FED react to that? Well,
Speaker 1: right now, the markets are doing of the Fed's job
Speaker 1: because the market increases our way above whereas as John
Speaker 1: just said, actually increases. But also, uh, the expectations of
Speaker 1: that aggressive policy stands is something that the markets that
Speaker 1: cluly priced in, and I think it's based on some
Speaker 1: misguided information. My my colleague, former colleague Andrew is an
Speaker 1: example of that, where he's focused on the aggregate wage
Speaker 1: price numbers, and I've been looking yet the micro wage
Speaker 1: price numbers, and I really don't see massive size of
Speaker 1: a wage price spirals style. In fact, most of the
Speaker 1: wage increases have been going to where the labor shortages
Speaker 1: are appearing, the low wage workers that be the younger
Speaker 1: tenured workers. Billy your world famous for this. And this
Speaker 1: goes into a death sile analysis. I would guess economists
Speaker 1: like City Group love to aggregate numbers together. What part
Speaker 1: of that death stile analysis matters for Chairman Powell and
Speaker 1: the view forward? Well, Chairman Poule absolutely cares about the
Speaker 1: aggregate number, but do you see aggregate wage price spiral? Uh? Now,
Speaker 1: granted there that has lost credibility since his meetings. The
Speaker 1: average inflation rate break evens that are priced into five
Speaker 1: securities way above three three and a half percent. But
Speaker 1: given that, I think we shouldn't get too carried away
Speaker 1: with how much the Fed has to Titan. Don't forget
Speaker 1: the fit. For the first time in FED history, we
Speaker 1: have two policy tools, the balance sheet and rates, and
Speaker 1: I one of the strategies that they haven't talked about
Speaker 1: enough is using that balance sheet to cool off and
Speaker 1: target those red hot sectors in real estate and consumer
Speaker 1: durables by draining the liquidity from there, especially the mortgage backs,
Speaker 1: and by then easing up on the amount of rate
Speaker 1: increases they'll need that. This is again the first time
Speaker 1: in history of the FED, with two policy instruments, it
Speaker 1: may be able to escape crashing the economy, to bring
Speaker 1: inflation down to its target level and some of that
Speaker 1: in the market, and did in a bit of a
Speaker 1: mess in tween when they trying to wind down a
Speaker 1: balance sheet. They're doing this at a much more aggressive level,
Speaker 1: twice the speed once they get going, Bill, can you
Speaker 1: just add a little bit more kind of to that
Speaker 1: how much they're about to do with a balance sheet
Speaker 1: and how this is going to work through the economy
Speaker 1: through financial conditions. This is one of the most great
Speaker 1: uncharted territory because the FED has really never done balance
Speaker 1: sheet before, and as you said, the last time it
Speaker 1: did it, it it did in a very clumsy way. Right now,
Speaker 1: it has to be very careful and using that that
Speaker 1: mortgage backed securities holdings because that is where the real
Speaker 1: red hot sector is, the real estate market, and draining
Speaker 1: liquidity there is going to be absolutely article. But now
Speaker 1: the treasury run off is something that will be done
Speaker 1: on almost autopilot because it has been trety holders that
Speaker 1: are so short. But I think the key to the
Speaker 1: feeds policy stands is how aggressive doesn't have to be
Speaker 1: with rates on top of that, if you you really
Speaker 1: believe that there's a wage price spiral big priced in,
Speaker 1: then it has to be aggressive, no doubt. But my
Speaker 1: my view of the numbers on the labor market is
Speaker 1: such that you know, if you're above the median wage
Speaker 1: or median profile of the median worker, you're not getting
Speaker 1: the ten twelve percent wage increases. You're getting barely two
Speaker 1: and three for senior managers. So I think the FIT
Speaker 1: has the cool off of it in terms of worrying
Speaker 1: so much about that wage price spiral, there really is
Speaker 1: no sign of it yet taking hold, and I think
Speaker 1: that's something that Wall Street has missed entirely. Even so,
Speaker 1: if the FET is targeting inflation, even if it's not
Speaker 1: coming from the wage price spiral, there are so many
Speaker 1: inflationary pressures coming from China from the supply chain disruptions
Speaker 1: which are not necessarily positive for growth, which are not
Speaker 1: necessarily signs of momentum. But still the FET is shown
Speaker 1: a willingness to target demand in order to respond to
Speaker 1: supply side responses. What's your view on how far they
Speaker 1: would have to go to normalize the supply and demand
Speaker 1: side of the equations. Well, that's our the lesson learned
Speaker 1: from the seventies. You cannot let prices get out of control,
Speaker 1: even though a lot of the inflation is coming from
Speaker 1: the supply side. The Fed's job is to equilibrate supply
Speaker 1: and demand. If you can't get supply up, then you
Speaker 1: certainly have to bring the band down. And the wrong
Speaker 1: way to do it, though, is through hit targeting investment,
Speaker 1: which is the cost of capital right now. I think
Speaker 1: the key to inflation in the future is productivity enhancing
Speaker 1: investment that has to be encouraged, and I think the
Speaker 1: FED to choke that off just for the sake of
Speaker 1: hitting its supercent target in a reasonable amount of time
Speaker 1: would be a serious mistake because that would cost us
Speaker 1: the three to five year horizon in boosting inflation without
Speaker 1: those productivity enhancing investments. Right now, we've got a two
Speaker 1: year treasury yield at about two and a half percent.
Speaker 1: The team over a Bank of America, which will catch
Speaker 1: up with John in a little bit here, believe that
Speaker 1: it will go up to three and a half percent.
Speaker 1: Do you think that would be enough to torpedo this
Speaker 1: economy to actually send the United States into recession? It
Speaker 1: would be enough if we drain liquidity adequately from the
Speaker 1: red hot sectors using the balance sheet. It will not
Speaker 1: be enough by traditional measures. And so so I think
Speaker 1: that this, as they said, there's got to be a
Speaker 1: time when the thing can no longer say the balance
Speaker 1: sheet is the passive tool and the secondary tool. It
Speaker 1: has to become the primary tool for cooling the economy,
Speaker 1: and and and and as far as China's concerned, by
Speaker 1: the way, the real key to watch is whether or
Speaker 1: not China becomes aggressive and takes over more about Taiwan,
Speaker 1: because the lesson learned from Ukraine that shocked the leaders
Speaker 1: over there is that the the world came together and
Speaker 1: became much more cohesive. That will put a stopper, I
Speaker 1: think on military encourasions in Taiwan, but it won't stop
Speaker 1: their cyber attacks or political uh political strategies. So so
Speaker 1: there's the supply constraint is a real issue. Because t
Speaker 1: SMC is global, there is no substitute for advantage IPS.
Speaker 1: We can find other places to find to buy week.
Speaker 1: We can find other places to grow horn, but we
Speaker 1: cannot find another t SMC. But just quickly, within the
Speaker 1: Communist Party, do you think that the leader president, she
Speaker 1: is in a position where he can make a step
Speaker 1: as bold as the one that you just described right
Speaker 1: now if he gets his third term. The one thing
Speaker 1: on she's mind is that he will leave the legacy
Speaker 1: that he created, the path of returning Taiwan to China.
Speaker 1: This is something no one has accomplished, doom shaping, no one,
Speaker 1: not even Joel or Mazy doom and so so this
Speaker 1: has been a China obsession for for decades, ever since
Speaker 1: China open. So you bet you he's going to be
Speaker 1: guilt going after Taiwan. The question is how. And right
Speaker 1: now the world coming together with about Ukraine, I think
Speaker 1: has put a stopper on any overt military actions. But
Speaker 1: wonderful to hear from me, said as always Bill, leader
Speaker 1: of the Milk and Institute. Let's kick off the program
Speaker 1: today with Christian announcing the chief investment officer at Deutsche
Speaker 1: Bank Private Bank. Christian six straight weeks off the clients
Speaker 1: in the equity market in America. Christian, when you buy this,
Speaker 1: when you make a move. Yeah, fortunately a free underweight equities,
Speaker 1: And honestly, we are now thinking also of coming back
Speaker 1: at least to going to a newtube position because we
Speaker 1: are so seeing so various science in the market. There's
Speaker 1: probably no change to zero COVID policy, there's still supply
Speaker 1: chain issues, so everything is superbarious if you look all
Speaker 1: bear index. So I think it's time to go back
Speaker 1: a little bit to a newtube. That's very important. It
Speaker 1: doesn't mean that we are now getting super optimistic, right.
Speaker 1: The environment is certainly a tough one to be very honest.
Speaker 1: Christian ben Leisler's out of the note this morning, or
Speaker 1: he basically says a lot of companies didn't get the
Speaker 1: crisis memo. You see that with a great separation which
Speaker 1: I'm sure you see is well, how does profit matter
Speaker 1: going forward? Yeah, if you if you look at the
Speaker 1: markets and you analyze the market movement of for example,
Speaker 1: the SNP or here in Europe. I think what's very
Speaker 1: interesting in the recent weeks, also including this last six weeks,
Speaker 1: you've seen that very very high correlation of indsease two
Speaker 1: real rates. I think that's important. There's the inflation component.
Speaker 1: It has not been so much about the results of
Speaker 1: the companies. I think that might change down the road.
Speaker 1: For example, if you have the Q two earning season
Speaker 1: coming in then in July, I think, of course there
Speaker 1: will be a lot of focus on how much margin
Speaker 1: pressure was there or is still there because of inflation.
Speaker 1: So I think there's a change. But if you look
Speaker 1: recently at market that was certainly driven by inflation and
Speaker 1: and rerangs for staff. So Christian, you are underweight equities,
Speaker 1: but you are starting to get a little bit more constructive,
Speaker 1: even as you see the prospect for recession continuing to
Speaker 1: climb over the next twelve months. Can you pass through
Speaker 1: how you can be bullish on equities heading into a recession. No,
Speaker 1: I'm not saying I'm bullish on equities, but I'm saying
Speaker 1: we have been underweight equities, which was certainly right call.
Speaker 1: And you have even in bare markets, even recession, in
Speaker 1: markets we have one of the strongest values sometimes in markets.
Speaker 1: And I think if sentiment is all negative, there is
Speaker 1: some room even in a recessionary environment for for some
Speaker 1: market upside you don't want to miss. But it's not
Speaker 1: that I'm saying you get overly optimistic. You do no
Speaker 1: massive overweight and equities. I think that's not the economic environment,
Speaker 1: where in Christingly sounds like you want to get back
Speaker 1: to neutral. So let's talk about that. Where would you
Speaker 1: buy to achieve that? Well? Markets which are mostly underweight.
Speaker 1: Was the US was also China for example, and there's
Speaker 1: a lot of discussion, of course on China. I don't
Speaker 1: see immediate change. Look at the results or the numbers
Speaker 1: we've seen this morning in China. I've I've done called
Speaker 1: colleagues in China. The sentiment is extremely bearish. Um no
Speaker 1: change to zero COVID policy. But if you look longer term, right,
Speaker 1: the market is down more than thirty five percent since
Speaker 1: the peak. I think if you at least go to
Speaker 1: a more neutral position, that cannot be wrong. If you
Speaker 1: buy something thirty five one, not overweight, but going to neutral,
Speaker 1: I think that's that's the actually want to go Christian
Speaker 1: wonderful cantchas as always question now saying at Deutsche Bank
Speaker 1: Private Bank. This is the Bloomberg Surveillance Podcast. Thanks for listening.
Speaker 1: Join us live weekdays from seven to ten am Eastern
Speaker 1: on Bloomberg Radio and on Bloomberg Television each day from
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Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg.