Speaker 1: This is the Bloomberg Surveillance podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz joined us each day
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Speaker 1: a joy. So lean forward Global Wall Street and for
Speaker 1: those of you are removed from Global All Street, this
Speaker 1: will be a clinic. His name is Steven Eisman. He's
Speaker 1: senior portfolio manager at New Burger Berman and the Icemand
Speaker 1: Group and has a nodded acquaintance with a movie of
Speaker 1: a few years ago. Big short. Thank you so much
Speaker 1: for joining us in studio. It's been like, you know,
Speaker 1: I think it's been three years and and and such,
Speaker 1: and it's good to have you here. And we're gonna
Speaker 1: have Mr Eisman with us for the entire at half hour,
Speaker 1: I to go to what you and I studied. And
Speaker 1: he's always been associated with your Harvard but the fact
Speaker 1: is he wrote his scientific Revolution at Berkeley and that
Speaker 1: as Thomas Coon and the paradigmatic shift. It's a word
Speaker 1: that I think is just hugely misused in investment and financing.
Speaker 1: You're talking about a new paradigm. What is the new paradigm? Well,
Speaker 1: let me just add potential new paradigm. I'm not smart
Speaker 1: enough to know necessarily if it's going to happen, but
Speaker 1: I think it's something people need to think about. You know,
Speaker 1: what's a paradigm. It's something it's basically the assumptions about
Speaker 1: how you think. They're so embedded in your brain that
Speaker 1: it's similar to how you breathe. You don't even think
Speaker 1: about how you breathe. And your paradigm you don't just
Speaker 1: live it, you inhabit it. And paradigms and investing seem
Speaker 1: to last about oh eight to ten years or so.
Speaker 1: So if you go back to the nineties, you know,
Speaker 1: people invested in law conglomerates like ge until that story
Speaker 1: began to fall apart during the recession. You know, then
Speaker 1: they turned to large financial institutions. From two thousand and
Speaker 1: one through early two thousand and eight. They assumed that
Speaker 1: the people who ran those companies were geniuses until they
Speaker 1: realized that they weren't, and then with the FED lowering
Speaker 1: rates to zero and keeping them there, you were essentially
Speaker 1: paid to take risk, and so people invested in growth stocks,
Speaker 1: largely to net technology stocks, and within technology stocks, the
Speaker 1: stock that the stocks that did even the best were
Speaker 1: those with large revenue growth but negative earnings. And that's
Speaker 1: a parent and we've been living in for the last
Speaker 1: ten years. So what could change it? I mean, obviously
Speaker 1: the Feds at some point, and I don't have no
Speaker 1: idea when that point is, will stop raising rates. The
Speaker 1: real operative question is will they cut or will they
Speaker 1: leave them up there? Now Powell keeps saying I'm leaving
Speaker 1: it up there, and the market keeps saying, we don't
Speaker 1: believe you. So let's just assume, for the sake of
Speaker 1: argument that he does cut. Then we'll go back to
Speaker 1: the old paradigm people invest in growth stocks again. But
Speaker 1: assuming you take him at his word, then I think
Speaker 1: the days of just investing in in growth stocks and
Speaker 1: in hyper growth stocks is over. Now, It's not over yet,
Speaker 1: assuming I'm right. I mean, if you go back to
Speaker 1: two thousand and nine, the financials had their last hurrah
Speaker 1: after the world fell apart and the government bailed everybody out,
Speaker 1: two thousand and nine was a very very strong year
Speaker 1: for pretty much every large financial company, and then in
Speaker 1: two thousand and ten it was over, and it was
Speaker 1: over for ten years. So I mean, where do I think?
Speaker 1: I mean, people don't change their paradigms easily. Um, And
Speaker 1: sometimes they have to be head on the head with
Speaker 1: a two by four multiple times before they realize that
Speaker 1: the way they've been thinking for a long period of
Speaker 1: time is no longer right. Um, So you know what's
Speaker 1: going to happen this year? I have no idea. Is this?
Speaker 1: You know, the FED keeps rates high, will this be
Speaker 1: another great year for tech stocks? And then we'll go
Speaker 1: into a new paradigm. I don't know yet by price section, Steve,
Speaker 1: you know that I get a sense from what you're
Speaker 1: saying that you might think that the running we've seen
Speaker 1: you today is somewhat of a last raph. It might be,
Speaker 1: like I said, if the FED keeps rates high for
Speaker 1: a long period of time, then people are gonna you know,
Speaker 1: I'm not sure what the new paradigm is. I'm not
Speaker 1: Einstein literally who created a new paradigm. I'm not that smart.
Speaker 1: I'm not even close to that smart. Like, let me
Speaker 1: emphasize I'm not even close to that smart. But where
Speaker 1: do I think it could go. I mean, maybe it
Speaker 1: just goes to a much more diversified portfolio. Um. Maybe
Speaker 1: it goes a lot more to infrastructure related companies and
Speaker 1: with the United States doesn't start spent me we're beginning to.
Speaker 1: But if we don't improve our infrastructure, all our bridges
Speaker 1: are going to fold down literally. UM. So I'm guessing
Speaker 1: at this point we go to more diversified portfolios. I
Speaker 1: don't think tech will be dead, but it will be
Speaker 1: more focused on companies with actual earnings. Um. People will
Speaker 1: focus on infrastructure companies, They'll be stock picking. That's where
Speaker 1: I think it will go. Call me in a year
Speaker 1: and I'll have a better idea of a different story.
Speaker 1: You can come back in a year. Well, I look
Speaker 1: forward to that start. And it's not just about what
Speaker 1: the FED wants to do, it's what they should have
Speaker 1: shouldn't do based on the incoming information. So, as you
Speaker 1: pointed out, in the last regime, the last paradigm wasn't
Speaker 1: just low rates with low inflation, low growth, and their
Speaker 1: reasons to believe based on what you've seen that the
Speaker 1: inflation regime of the next couple of years will be
Speaker 1: higher stickier than what we've seen in the previous ten
Speaker 1: and the reasons to believe that, oh, I definitely think
Speaker 1: there is um. I mean, one of the major reason
Speaker 1: why inflation has been low and it wasn't the less
Speaker 1: ten years is more like the less twenty five is
Speaker 1: that the supply chain of the United States and all
Speaker 1: developed countries moved out of those countries to Asia China,
Speaker 1: where the labor and the costs were much cheaper. What
Speaker 1: COVID proved to everyone was that while that supply chain
Speaker 1: was cheap, it was also incredibly brittle. And that's been
Speaker 1: This is a two by four multiple times. So companies
Speaker 1: realize they can't have a brutal supply chain because it
Speaker 1: means that if something happens, they'll have no products. So
Speaker 1: you're getting supply chain moving back to the United States
Speaker 1: and other developed countries. That means that you know the
Speaker 1: underlying so you have a more resilient price chain, but
Speaker 1: prices will be higher. You are famous for the big
Speaker 1: short back during the whole mortgage crisis. I was, is
Speaker 1: there another big short type of trade in this paradigm shift. Well,
Speaker 1: it's not. In the financial sector. If you're talking about
Speaker 1: negative the I mean I would give applause to the
Speaker 1: vice Chairman of Supervision, the first one, Daniel Trullo, who
Speaker 1: completely changed the banks, lowering d killing leverage. So whatever happens,
Speaker 1: it's not going to happen in the banks. I mean,
Speaker 1: maybe it happens in private equity, but I don't think
Speaker 1: given that this will probably be just if there is
Speaker 1: a recession, it'll just be a run of the mill recession,
Speaker 1: not a calamity. I don't see a crisis in the
Speaker 1: banks now. Maybe it happens like in the UK and
Speaker 1: the pension funds. I don't know yet. I mean, maybe
Speaker 1: nothing happens and we just have a plane run of
Speaker 1: the mill recession. That's my bet at this point, if
Speaker 1: we have a recession, I want to go to a
Speaker 1: chapter in the Michael Lewis book, The Big Short, which
Speaker 1: is a long quiet. Some would say the long Quiet
Speaker 1: was the artificiality of low, low real rates that we've
Speaker 1: seen for well in excess of ten years. We return
Speaker 1: to a real rate environment. On the paradigm story, we
Speaker 1: can go from Thomas Coon to say someone look not
Speaker 1: seeing teleb who says the gravity has come back into
Speaker 1: our financial physics, and then we go on to you
Speaker 1: that say we have to deal with a new paradigm,
Speaker 1: which to me is potentially but okay, I will, like
Speaker 1: I said, not Einstein, not Einstein, but let's what's potentially
Speaker 1: here as a resurgence of real rates. Do you think
Speaker 1: we're going to see a sustainable real rates that gets
Speaker 1: us back to an environment like two thousand six when
Speaker 1: you started the big short. I mean, look, I first
Speaker 1: of all, I think there's a possibility that inflation goes
Speaker 1: back up. You know you were mentioning before use cars.
Speaker 1: I just sold my use car and at eight five
Speaker 1: thousand miles on it, and I got a price that
Speaker 1: I was shocked by. So I mean, I'll tell you
Speaker 1: one thing that I've been doing lately, which I haven't
Speaker 1: done in fifteen years of I've been You know, our
Speaker 1: groups are actually buying bonds, at least some bonds, and
Speaker 1: when we have cash, we either park it in a
Speaker 1: money market fund that yields over four percent shocking, or
Speaker 1: we even by you know, three months treasuries with the
Speaker 1: yield of four point six percent. I'll say it again,
Speaker 1: four point six percent. So you know, there as long
Speaker 1: as rights stay hi. The old paradigm of what was
Speaker 1: it called Tina. There is nothing, There is no alternatives.
Speaker 1: It's not true that there is norm alternative. I mean
Speaker 1: we tell our clients you can have something in very
Speaker 1: short term duration with a yield of four point five
Speaker 1: percent with zero risk. You know they're happy to park
Speaker 1: some cash. Dan Scaly and Morgan Stanley said the same
Speaker 1: thing this morning. Get paid to white now quite literally.
Speaker 1: So we've had these big moves in the equity market.
Speaker 1: Can we talk about the mix of what you like
Speaker 1: and equities At the moment, the likes of Rio more
Speaker 1: than thirty percent from the lows at the end of October.
Speaker 1: We're starting to see the miners outperformed. We've bought a
Speaker 1: couple of We've bought some minors very recently. I mean,
Speaker 1: it's partially an infrastructure story. And if you look at
Speaker 1: the chart of those stocks, I don't think they've done
Speaker 1: anything in twenty years. So, you know, assuming that the
Speaker 1: resurgence of infrastructure continues to occur, the miners will do
Speaker 1: pretty well here. Do you think that there is a
Speaker 1: bet to really go much more into bonds in cash
Speaker 1: even as you play and some of the old economy
Speaker 1: that's coming to the four again. In other words, can
Speaker 1: you give us a distribution that you're looking for. I mean, look,
Speaker 1: I think you can still invest in tech, but you
Speaker 1: have to be much more selective. We have a much
Speaker 1: more diversified portfolio right now. There's some infrastructure, there are
Speaker 1: a few financials, there's healthcare, there's some utilities, which is
Speaker 1: a story also of infrastructure. So I mean, I just
Speaker 1: like I said before, the days where somebody has of
Speaker 1: their portfolio in tech, I think is might be in
Speaker 1: the past. I want to talk about the short termism
Speaker 1: that's out there. You guys made a battles mentioned in
Speaker 1: the Quiet, the chapter that was a long quiet in
Speaker 1: the Big Short there's a short termism out there. We
Speaker 1: see the last time since we've seen you in here,
Speaker 1: there's the whole meme stop things back thing blah blah blah.
Speaker 1: The answers, how does our audience get back to responsible
Speaker 1: long term investment given how they're buffeted every day, every week,
Speaker 1: every month by the back and forth two by For
Speaker 1: like I said before, people have I mean people have
Speaker 1: to be hit on the head with the two by
Speaker 1: for multiple times before they start to realize that I
Speaker 1: do think the age of speculation of that intensity is
Speaker 1: probably over. I mean, if you look at charts, SPACs
Speaker 1: died the Like I said before, the high revenue growth
Speaker 1: companies with negative earnings got destroyed last year. They were
Speaker 1: down and people are pointing out that they've gone up
Speaker 1: a lot, but they've got up a lot. When you
Speaker 1: go down and then you go up a hundred percent,
Speaker 1: the chart doesn't look that different. You've mentioned that a
Speaker 1: couple of times being hit by a two by four.
Speaker 1: What does that look like in a market that was
Speaker 1: decimated last year that is facing what is looking like
Speaker 1: one of the biggest pain trades in the wrong direction
Speaker 1: towards the old paradigm that we've become familiar with in
Speaker 1: the past decade. I mean, like we're having a resurgence
Speaker 1: right now. You know, if if inflation starts to come
Speaker 1: back and the FED either raises rates more than people
Speaker 1: expect or keeps it there, people's taste for such speculation
Speaker 1: is going to erode. But like I said before, people
Speaker 1: don't give up paradigms easily. It takes time. So you know,
Speaker 1: maybe this is a year of the last Hurrah, assuming
Speaker 1: rates stay high. I don't know. Yet, But something's going
Speaker 1: to happen. I think some people are guilty of becoming
Speaker 1: married to positions. Do you have a favorite position? How
Speaker 1: do you think about that within the portfolio? Do you
Speaker 1: have one? No? I don't um. I'm not married. I'm
Speaker 1: not married to my stock. Get that tramp. How have
Speaker 1: you avoided that? How do you go about doing that?
Speaker 1: I don't think that I should be married to any stock.
Speaker 1: I mean you can invest long term. You know, people
Speaker 1: have invested in tech stocks for a very long time.
Speaker 1: They love them, they're married to them. But I don't
Speaker 1: see being married to the stocks. Steve Iceman of new
Speaker 1: Berger Burma of the Iceman Group joining us right now
Speaker 1: is John Stolfer's chief investment strategy the Oppenheimer Asset Management. John,
Speaker 1: what if I can't shop with you? I know you're
Speaker 1: more constructive than most, especially coming into three and so far,
Speaker 1: so good. Mike Wilson, a margin standing this morning, says
Speaker 1: price is about its disconnected from reality as it's been
Speaker 1: during this band market. What would you say, bank, John,
Speaker 1: I'd say I'd say dark Vader. I disagree with you. Uh,
Speaker 1: you know a length of force be with us? Uh? Effectively?
Speaker 1: I think what we're seeing is that things are actually
Speaker 1: improving around the world, and they at least have just
Speaker 1: just mentioned in terms of Europe the way things are
Speaker 1: looking over there. The better than expected earning so far
Speaker 1: last night looked. I think earnings were of from fourth
Speaker 1: quarter for the SSB five hundred around two and a
Speaker 1: half percent versus expectations I think going into it at
Speaker 1: three and a half were cent or worse. I think
Speaker 1: companies are doing their job to navigate a rough environment overall,
Speaker 1: and we have the Federal Reserve doing the doing the
Speaker 1: job to end the period of free money and put
Speaker 1: us back on a more holistic course that should be
Speaker 1: good or fundamentals overcome momentum and high leverage. John, you're
Speaker 1: very articulate about extending a bullish call out tour. We
Speaker 1: finally got a stulfas market. We certainly have a stulfas
Speaker 1: market around. This is the trading and schuring on the market.
Speaker 1: I thought of you when I saw this observation from
Speaker 1: Ben Laidler of Toro. In the old days, we used
Speaker 1: to hold stocks for years. Now we hold them for months.
Speaker 1: We've gone from a five year old to an average
Speaker 1: ten month hold. How do you do stulfus optimism. If
Speaker 1: people on a ten month basis are pretty close to
Speaker 1: day trading, well, gosh, I think that's that's a great question, Tom.
Speaker 1: I think more than ever before, there really is a
Speaker 1: recognition that there are at the starting from point one,
Speaker 1: you have two different types of investors. You've got the
Speaker 1: short term crowd and you've got the intermediate, long term,
Speaker 1: ground term evidence of fear and greed and longer term
Speaker 1: its need and the realization that investing in innovation in
Speaker 1: corporations that that know how to manage their products and
Speaker 1: their services. Uh, this is the way to go for
Speaker 1: a portion of one's portfolio in terms of meeting the
Speaker 1: needs of whether it's a kid's education, whether it's a retirement, uh,
Speaker 1: what have you. The serious goals and the fun stuff
Speaker 1: is the day trading, you know, I mean not for me.
Speaker 1: I'm an intermediate to longer term investor. I'm a buffet guy. Well.
Speaker 1: I am curious, though, John, at what point you start
Speaker 1: to get worried about the Central banks going much further
Speaker 1: than they previously said they would if you do get
Speaker 1: this re acceleration. It seems like that's the pre eminent
Speaker 1: concern among a growing number of investors right now. I
Speaker 1: would say that is a pre eminent at least among
Speaker 1: the training crowded for sure. And remember the traders are
Speaker 1: closer to equity traders, the dare closer to bodity traders.
Speaker 1: UH from the path in terms of the way they
Speaker 1: position themselves on a day to day, minute demented basis.
Speaker 1: But we have to see the central banks are doing
Speaker 1: their job and are showing remarkable ability to UH to
Speaker 1: essentially if not pivot or pause, and I don't think
Speaker 1: that's needed right now, but to maintain a view that
Speaker 1: they're going to be vigilant against inflation, they're going to
Speaker 1: take action against this. I don't think any central bank
Speaker 1: or around the world wants to be remembered as Arthur
Speaker 1: Burns is remembered. So what's your target for your end
Speaker 1: and what's the parameters, what's sort of the band that
Speaker 1: you see at this point? And given that it is
Speaker 1: a highly uncertain time, and yet there does seem to
Speaker 1: be this growing sentiment of no landing well well, at
Speaker 1: least I've never known a period in forty years almost
Speaker 1: forty years in the market when there has really been
Speaker 1: UH any certainty in the market Uncertainty is part of life,
Speaker 1: and it certainly moves through the market. There's never an
Speaker 1: all clear signal UH sounded. But we'd have to say,
Speaker 1: you know, our target is forty four hundred for the
Speaker 1: SNP this year with based on what we've seen coming
Speaker 1: out of the box or out of the gates or
Speaker 1: to speak at the beginning of the year, a chance
Speaker 1: that we may see that exceeded. Right now, we'll stick
Speaker 1: with thet D. Our main concerns are on the day
Speaker 1: to day basis, you know, are the ability of the
Speaker 1: market to over sell as well as to over buy UH.
Speaker 1: In the near term. You have to curb enthusiasm somewhat
Speaker 1: UH and keep keep a good business mind in terms
Speaker 1: of what you're investing in and UH and your courage
Speaker 1: of your convictions. Ye, John, great to catch you in
Speaker 1: the make Sandy cant you a white at it FS
Speaker 1: six weeks to this year at John Stelfas staff of Oppenheimer.
Speaker 1: Let's get to one of our most successful guests. She
Speaker 1: nailed bonds in two thousand twenty two Priumr associated with
Speaker 1: a ten year yield of TD securities. Pre I want
Speaker 1: to go inside to the two year yield. How do
Speaker 1: you how do you look at the two year yield?
Speaker 1: How do you establish a color around how the two
Speaker 1: year yield may act? Sure, so thanks for having me on.
Speaker 1: I think the two years all about that endpoint of
Speaker 1: the hiking cycle. How long is the Fed going to
Speaker 1: keep it there? And then when are they going to cut?
Speaker 1: I think we should talk about when they're going to cut,
Speaker 1: because inflation is likely to come down at some point
Speaker 1: and we're looking for cuts next year. But I think
Speaker 1: what is the market pricing off that endpoint? That pause,
Speaker 1: and then when do they cut. It's all going to
Speaker 1: come down to inflation. I think inflation and and and
Speaker 1: later on this year. I think it's going to come
Speaker 1: down to the labor market. The labor market is still
Speaker 1: very strong, so I think that inflation print we get
Speaker 1: one CPI tomorrow. You know, if course services X shelter
Speaker 1: remains strong, which is our view, the Fed is not
Speaker 1: stopping yet. I think they're going in our view two
Speaker 1: or I would say there's a decent chance of another
Speaker 1: twenty five and then they pause again. I think it's
Speaker 1: going to depend on how quickly does that service inflation
Speaker 1: come down, which will allow them to start to cut it.
Speaker 1: So I think it's only and we get into that
Speaker 1: to handle two and a half three percent inflation sustained basis,
Speaker 1: can the Fed start to you know, make policy a
Speaker 1: little less restrictive. So we're looking for the two year. Actually,
Speaker 1: I would say the market is actually pretty well well
Speaker 1: priced for that endpoint of the hiking cycle. I do
Speaker 1: think the pause can be a little longer, so a
Speaker 1: little bit higher to U two arrates is what we're
Speaker 1: looking for. Spray were dancing around it a little bit.
Speaker 1: Let's put you on the spark. Do you think we
Speaker 1: are sufficiently restrictive any evidence of that whatsoever? I think
Speaker 1: we are um and I get a lot of pushback
Speaker 1: on that because the data is strong. So number one,
Speaker 1: there are lags, long and variable lags, you know. I
Speaker 1: think we're in that process of lags. The fact that
Speaker 1: the consumer has so much still accumulated savings. Now these
Speaker 1: savings are coming down, but I think that's actually widened
Speaker 1: that lag. Beer I don't think the lags are shorter.
Speaker 1: I know markets priced in, but for the consumer to
Speaker 1: actually start to cut back on spending, and I think
Speaker 1: they are starting to cut back. But the labor market
Speaker 1: is strong, and I still have accumulated savings. When those
Speaker 1: savings on out, in our view, that happens in the
Speaker 1: second half of the year. That's when the consumer starts
Speaker 1: to cut back. So, you know, I think the policy
Speaker 1: is restrictive. Real rates well not of one percent is
Speaker 1: going to have an impact on the consumer um you know.
Speaker 1: I think it just is going to take some time
Speaker 1: where we haven't had a shock to the system. I
Speaker 1: think the last two recessions have been shocked lead, which
Speaker 1: is why the market is just waiting for the data
Speaker 1: to fall apart. I think it's going to be a
Speaker 1: slow grind. You know. It's like that last mile when
Speaker 1: you're running that marathon. It just you slow down. It
Speaker 1: feels really long. I think we're in that moment of
Speaker 1: the market's impatient. So that's why we're moving from you know,
Speaker 1: hard landing, soft landing, no landing. You know, I still
Speaker 1: think that interest rates real interest rates well north of
Speaker 1: that fifty basis point that we think is normal. That
Speaker 1: is restrictive. It just is taking a while for that
Speaker 1: to slow the US economy down. What does restrictive mean
Speaker 1: in terms of the likelihood of a hard landing of
Speaker 1: a recession that a lot of people have written off sure,
Speaker 1: so I think you know what's going to be tricky
Speaker 1: is as the kind of starts to slow down, can
Speaker 1: the FED respond? You know, I don't think we're gonna
Speaker 1: get any fiscal response. In fact, into the dead ceiling,
Speaker 1: we might actually get some spending cuts. What makes us
Speaker 1: more nervous about about a hard landing is policies restrictive.
Speaker 1: The economy starts to slow down, and then we wait
Speaker 1: for the FED to respond. We wait for the fight
Speaker 1: to stop QT to start to cut trade, and we
Speaker 1: think the inflation environment is going to prevent them from
Speaker 1: doing that. And so if policy remains restrictive for longer,
Speaker 1: that soft landing very quickly starts to look like a
Speaker 1: hard landing. You know, every hard landing sort of starts
Speaker 1: looking like a soft landing in the beginning. That's what
Speaker 1: I do worry about. Now. If we're lucky and inflation
Speaker 1: actually does start to come down, I think the FED
Speaker 1: can respond and then we can perhaps get that soft
Speaker 1: landing that it's going to depend on that inflation outlook
Speaker 1: just quickly. Preyer, what does that mean in terms of
Speaker 1: ten uere yields? If there is this feeling of the
Speaker 1: first option where you end up with a hard landing.
Speaker 1: Does that mean that three point seven percent on ten
Speaker 1: year is positive, is attractive right now and that yield
Speaker 1: curveent version could go much much deeper? I do think
Speaker 1: it can. It can go, uh, you know, more deeper.
Speaker 1: I think we're getting to that attractive level. You know,
Speaker 1: is three seventy five the highest we're going to get.
Speaker 1: We could perhaps get closer to four percent. I think
Speaker 1: legging into duration now does start to make sense that
Speaker 1: I would say terminal rate pricing is pretty fair. The
Speaker 1: rate cuts look a little bit early in our view,
Speaker 1: but I think they are going to have to cut
Speaker 1: rates next day. I think starting to leg in three
Speaker 1: seventy add more as as we get closer to four
Speaker 1: percent global rates, watch global rates. I think that can
Speaker 1: maybe push you know, the US tenure closer to four.
Speaker 1: I think you're getting two levels where duration risk is
Speaker 1: going to look more attractive than equity risk, more attractive
Speaker 1: than credit risks even how much uh you know, credit
Speaker 1: spreads have have compressed. That was a green life from
Speaker 1: t D to start bounder ten year premise. R let's
Speaker 1: t D prayer. Thank you. We're to some all this
Speaker 1: to speak of the greater economics and particularly the trans
Speaker 1: Atlantic economics. Megan Green joins US Global Chief Economist Cruel
Speaker 1: Institute with their academics here and there her work with
Speaker 1: The Financial Times. Megan, thank you so much for joining us.
Speaker 1: You wrote in the f T I think early December
Speaker 1: about the recession. Wait, give us an update right now
Speaker 1: on the recession we're all waiting for. Yeah, that's right.
Speaker 1: I mean, this will be the most anticipated recession will
Speaker 1: have ever had if it materializes. And I have to
Speaker 1: say now it looks less likely to materialize, and it
Speaker 1: did two months ago, for example, but I still think
Speaker 1: it would be incredibly weird if we didn't get a
Speaker 1: downturn UM. Given the aggressive rate pace of rate hikes UM,
Speaker 1: the labor market has held up really well UM, and
Speaker 1: I wonder if that's to some degree a result of
Speaker 1: labor hoarding. And we don't really have a great way
Speaker 1: of measuring labor hoarding. It's mostly ANNEC data rather than
Speaker 1: actual data. But I do think that labor hoarding could
Speaker 1: change on a dime. If companies feel like they're earnings
Speaker 1: are starting to turn rates continue to go higher, UM,
Speaker 1: then I think they might figure, well, maybe we should
Speaker 1: lay these people off rather than trying to get through
Speaker 1: this rough period by keeping them on our balance sheet.
Speaker 1: And when the labor market declines, that that's what we
Speaker 1: spark our recession. One part of your academics, Megan, is
Speaker 1: the idea of aggregate versus the modern theory of looking
Speaker 1: at this, looking at that, looking at the itty bitty
Speaker 1: things and not the sum. What I find interesting is
Speaker 1: the parts of America booming Towarsen, Slack and Apollo has
Speaker 1: a chart out this morning on booming air travel over
Speaker 1: the last five six years, and yet other surveys, John
Speaker 1: Farrell mentioning one survey where half of America's flat on
Speaker 1: their backs. Are you aggregating EU, British and American data
Speaker 1: or do you have to break it apart? So I
Speaker 1: think looking at it more granularly is really important in
Speaker 1: the US, in particular, given how weird the economic indicators are.
Speaker 1: Um it is. We're looking at things by sector, and
Speaker 1: I do think that there is a chance that we
Speaker 1: don't get an overall recession in the US, but instead
Speaker 1: we get a series of rolling recessions where you have
Speaker 1: manufacturing and contraction while services are expanding significantly. Then the
Speaker 1: services come off so you get you know, contractions, recessions,
Speaker 1: and individual sectors just not at all at the same time,
Speaker 1: so it doesn't add up into an overall recession for
Speaker 1: the economy. And that's just for the US. I think
Speaker 1: you also need to look at different sectors in Europe
Speaker 1: and the UK, particularly when it comes to energy versus
Speaker 1: non energy, given the relatively big energy shock that Europe
Speaker 1: has experienced over the past year, the idea of rolling recessions,
Speaker 1: what does that mean for inflation, Given there won't be
Speaker 1: one big shock that brings down the acceleration in prices
Speaker 1: that you could still get you know, growth in other
Speaker 1: areas that keep propping up pricing power. So I think
Speaker 1: that means that will inflation, that inflation will be difficult
Speaker 1: to bring down. I always thought that to get from
Speaker 1: ten to six percent inflation was going to be a
Speaker 1: whole lot harder than getting from six to two percent inflation.
Speaker 1: I think that continues to be the case, particularly if
Speaker 1: we have parts of the economy that are remaining buoyant
Speaker 1: and so we're providing demand as the feed is trying
Speaker 1: to lean against demand to bring it back into line
Speaker 1: with supply so that we stopped getting an acceleration in prices,
Speaker 1: So I think it will just mean that inflation is
Speaker 1: more persistent than we had previously thought. I also think
Speaker 1: it's worth thinking about what inflation looks like when the
Speaker 1: dust is finally settled on the pandemic, on the war
Speaker 1: on supply chain disruptions, and I think there's been relatively
Speaker 1: little thinking done on that. But I do think that
Speaker 1: you know, if you believe that we lived in secular
Speaker 1: stagnation and that was driving low inflation, low rate, slow growth,
Speaker 1: and it was based on an excess of global savings,
Speaker 1: we're all going to be spending a lot of money
Speaker 1: on defense, on the green transition um. You know, that
Speaker 1: could fundamentally be moderately inflationary. At the end of the day,
Speaker 1: we could be deglobalizing. I think that's overblown, but on balance,
Speaker 1: that will probably be a bit more inflationary. So when
Speaker 1: the dust is settled, inflation may also be persistently higher
Speaker 1: than what we had before the pandemic. There are a
Speaker 1: lot of different ideas here, and people are trying to
Speaker 1: pass through them. Probably the reason why people aren't talking
Speaker 1: about them more is books it's so difficult to quantify.
Speaker 1: Bill Dudley, formerly of the New York Fed just how
Speaker 1: with an opinion piece talking about perhaps if FED could
Speaker 1: go higher in terms of a terminal rate and keep
Speaker 1: it there for longer, what are you modeling out in
Speaker 1: terms of what you expect versus market expectations. How will
Speaker 1: you know what the sense is given whatever lag effects
Speaker 1: might might already be in the system. Yeah, I wish
Speaker 1: we had some metric for figuring out exactly what the
Speaker 1: lag is for monetary policy feeding through into the real economy.
Speaker 1: We just don't have a great handle on it. But
Speaker 1: I will say that I think the markets have been
Speaker 1: miss pricing the FED for a while now, so I
Speaker 1: think that FED rates could get a bit higher than
Speaker 1: the markets are pricing. They could go a bit higher
Speaker 1: than even the FED is pricing, and the markets are
Speaker 1: still pricing and cuts this year. I think that's unrealistic.
Speaker 1: I think the federal rates high through this year and
Speaker 1: maybe start to cut next year. It depends entirely, of course,
Speaker 1: on on what the economy is looking like, whether we're
Speaker 1: in recession going into recession. I don't think we'll be
Speaker 1: going into a recession in the first half of this year,
Speaker 1: so I think it will take a while. Thanks partly
Speaker 1: to the huge cash buffer that companies and consumers have
Speaker 1: off the back of stimulus measures when the pandemic hits,
Speaker 1: So you know, I think that could be pushed out
Speaker 1: even further. That could be pushed out into the beginning
Speaker 1: of next year. So I think the FED will hike
Speaker 1: more and keep rates higher than the markets are pricing.
Speaker 1: And Megan, do your focus on the United Kingdom. How
Speaker 1: many degrees of freedom is Governor Bailey lost? He's declaring
Speaker 1: victory was almost Churchilli and I thought, there is you know,
Speaker 1: on the last meeting as well, how constrained as Governor
Speaker 1: Bailey and working with the oddities of Rexit and the
Speaker 1: United Kingdom. Well, Brexit is clearly causing a lot of
Speaker 1: uncertainty in the UK economy, and I think that's probably
Speaker 1: been a drag on business investment, which really leveled off
Speaker 1: after the twixteen referend um and and hasn't bounced back since.
Speaker 1: And that's a drag on productivity growth. Um that you
Speaker 1: can have wage growth and it doesn't have to be
Speaker 1: inflationary as long as you have productivity growth. But what
Speaker 1: we have in the UK is really high wage growth,
Speaker 1: much higher than in the US, with much lower productivity growth,
Speaker 1: so there is a risk of that being persistently inflationary
Speaker 1: and that's the challenge at the Bank of England really
Speaker 1: has to grapple with. Now, Megan, thanks for the brief.
Speaker 1: Look for your next writings in the Financial Times. Megan
Speaker 1: Green is with Kroll Institute. What a highlight for us
Speaker 1: to begin the year looking at the risks that Eurasia
Speaker 1: Group sees. It's really a wonderful informative way for us
Speaker 1: to kick off the year. And we do that with
Speaker 1: Ian Bremer, who I believe did not have a risk
Speaker 1: like this in his power of crisis. Dr Bremer joins
Speaker 1: us this morning. Of course, the force at Eurasia Group, Ian,
Speaker 1: this is incredibly difficult. You and I have talked about
Speaker 1: this of the years. There's early Air to Wan, there's
Speaker 1: Middle Air to One, and now there's Air to Wan crushed.
Speaker 1: I saw on an internal feed on here on Friday
Speaker 1: Mr Air to Wan and various leaders dressed in black,
Speaker 1: and the only image I've seen equivalent to it was
Speaker 1: Rudy Giuliani and Mayor Bloomberg after two thousand one, How
Speaker 1: does Mr Air to Juan and the people of Turkey,
Speaker 1: Regroup of thirty thousand dead and southern central Turkey. You can't.
Speaker 1: It's it's staggering hardship. Um. And with thousands and thousands
Speaker 1: of bodies still trapped UM and the survivor stories of course,
Speaker 1: everyone at this point feels like a miracle. UM. But
Speaker 1: the devastation being felt by Or to Wan and of
Speaker 1: course across the border with much worse infrastructure as well
Speaker 1: in Syria, it's really it's hard to fathom. It's hard
Speaker 1: to talk about. Of course, with on your show, we're
Speaker 1: also talking about elections that are coming up in Turkey
Speaker 1: in May. Uh. And the fact is that Turkey has
Speaker 1: limited democratic institutions. UH. This allows Or to want to
Speaker 1: have a lot more control over what his people see
Speaker 1: over the media, as well as how well the opposition
Speaker 1: can compete against him. And the reality of this devastation
Speaker 1: also means that the opposition has had to wait in
Speaker 1: coming up with their own uh you know, the consolidated
Speaker 1: candidate opposition candidates, so they're not able to run their
Speaker 1: campaign because everyone, of course is now having to focus
Speaker 1: on this horrible, horrible tragedy. So I mean, as much
Speaker 1: as it pains me to say this, the reality is
Speaker 1: that Urtawan comes out of this crisis a little bit
Speaker 1: more likely to be reelected. Does he re embrace ian
Speaker 1: a view to the west in NATO? Does he look
Speaker 1: earth with the very complex Black Sea politics with Mr Putin?
Speaker 1: Or does he look south? Does he always wanted to
Speaker 1: be an international voice in the levant? Well, let's first
Speaker 1: of all recognize that even before this earthquake, Urdawan was
Speaker 1: perhaps one of the most effective international interlocutors between Putin
Speaker 1: and Zelenski. He helped facilitate the Black Sea food deal,
Speaker 1: the only piece of good news really that's come out
Speaker 1: of this war over the last year, So that engagement
Speaker 1: has been helpful in the Americans appreciate it. On top
Speaker 1: of that, of course, with this crisis, you have countries
Speaker 1: all over the world providing humanitarian support, the Fins and
Speaker 1: the Swedes, which will make it easier for Urdawan to
Speaker 1: get off of his high horse and allow uh that
Speaker 1: their NATO enlargement applications to proceed after elections. The Armenians,
Speaker 1: despite their historic grievances of a genocide committed against them
Speaker 1: by Turkey, are providing humanitarian support and they're doing that
Speaker 1: even as the blockade continues against the autonomous Region of
Speaker 1: Toabak that will make Turkey more likely to facilitate a
Speaker 1: peace agreement there um. So I do think that Urawa
Speaker 1: comes out of this uh more of a statesman, more
Speaker 1: willing to be engaged with the Americans, with the Europeans,
Speaker 1: and I suspect, by the way, that those American F
Speaker 1: sixteens will get cleared by Biden um in the months
Speaker 1: after the elections as well. Meanwhile, shifting a bit more
Speaker 1: to the east end, when we talk about the potential risks,
Speaker 1: we have to talk about the UFOs and the the plane,
Speaker 1: the balloons that have been shot down above the United
Speaker 1: States airspace. What are the contours of a new Cold
Speaker 1: war between the US and China that a lot of
Speaker 1: people are trying to game out at this point, well
Speaker 1: when we're not in a new Cold war, and the
Speaker 1: Biden and She have both said consistently that is the
Speaker 1: reality of today's politics and they want to avoid it.
Speaker 1: That continues to be true with what's happened over the
Speaker 1: last week. Let's be clear, the American administration believes that
Speaker 1: the purpose of this balloon surveillance program is a backup,
Speaker 1: a backup by the Chinese in case in a conflict
Speaker 1: with the United States, they lose their satellite capabilities, which
Speaker 1: are far more capable in engaging in surveillance than any balloons.
Speaker 1: In other words, if there were a military crisis over Taiwan,
Speaker 1: how would the Chinese be able to continue to assess um,
Speaker 1: you know, sort of intelligence around the world, including principally
Speaker 1: for the United States. So the the U. S Government
Speaker 1: at no point believed that these balloons were reflected a
Speaker 1: significant additional intelligence threat to the United States at all.
Speaker 1: And that's one of the reasons why before this was
Speaker 1: made known publicly, before this became a headline, Lincoln was
Speaker 1: still going to try apple to China and meet with
Speaker 1: Chiji and Ping, and the Americans had literally zero intention
Speaker 1: of shooting anything down. But of course, once it got
Speaker 1: in the headlines, and once you saw you know, everyone
Speaker 1: standing up and saying we've got to be tougher against
Speaker 1: the Chinese, then Biden had to pull off the trip.
Speaker 1: Then Biden had to shoot down um the balloon, And
Speaker 1: of course that leads to more pressure on both sides
Speaker 1: of this relationship. And that's exactly I wanted to go.
Speaker 1: Do you feel like the heads of both states, right,
Speaker 1: both President Biden and Jijan Ping would like to ease relations,
Speaker 1: and yet the populations, a sort of nationalistic tone that
Speaker 1: a lot of politicians have drummed up in both economies
Speaker 1: are making it difficult for them to do so. I'm
Speaker 1: not sure how much it's the populations at large, either
Speaker 1: in China, not a democracy, or in the United States,
Speaker 1: where we're talking mostly about Congress, but it is both
Speaker 1: sides of Congress democratic and Republican um. And there's no
Speaker 1: question that you remember when Nancy Pelosi was making her
Speaker 1: trip to Taiwan, Biden didn't want her to go and
Speaker 1: privately was sending members of his cabinet to tell Pelosi,
Speaker 1: we'd rather you not go on this trip. But once
Speaker 1: that got linked to the Financial Times and to other media,
Speaker 1: then Biden had to get on board. So we're seeing
Speaker 1: this over and over again. McCarthy's probably gonna make his
Speaker 1: trip to Taiwan. I was gonna make it a lot
Speaker 1: harder for the Americans to maintain this policy. So I
Speaker 1: do think both Biden and she wanted as they put
Speaker 1: a floor under the relationship. But that's very different from
Speaker 1: the governments. Dr Bremer, to use your Eurasia context, that
Speaker 1: you have. It is a spectacular note from the US
Speaker 1: Embassy and Consulates in Russia. It is dated twelve February
Speaker 1: two thousand and twenty three, and they're basically saying US
Speaker 1: citizens get out of Russia. But what I find fascinating
Speaker 1: in it is the basic idea of quote, the unprovoked
Speaker 1: full scale invasion of Ukraine. Do you, when you're you
Speaker 1: Great Eurasia Group analysts expect a full scale invasion of
Speaker 1: Ukraine by Russia? Do you mean beyond what they've already done,
Speaker 1: beyond what they've already done, something new, as the U.
Speaker 1: S Embassy alludes to in Moscow. You know, Look, I
Speaker 1: think that what we have seen is that the Russians,
Speaker 1: We've had three hundred plus thousand troops go into Ukraine.
Speaker 1: They tried to remove Zelenski, they tried to take Kiv.
Speaker 1: I think that still is the ultimate intention of Putin,
Speaker 1: but he does not have the troops to affect that
Speaker 1: outcome in the near term. In the near term, um,
Speaker 1: they certainly want to have increased defensives to be able
Speaker 1: to take the territories that they have announced that they've annexed.
Speaker 1: First time in my life I've ever seen an annexation
Speaker 1: announced where the country doing the illegal annexation doesn't actually
Speaker 1: have control the territories on the ground. That that is
Speaker 1: where we are focused right now. The question really is
Speaker 1: beyond that, are we going to see broader Russian in
Speaker 1: you know, asymmetric attacks against NATO. We've seen some of
Speaker 1: that increased attact the UK and Italy in the past
Speaker 1: couple of weeks. We're out of time. Thank you so
Speaker 1: much for the brief Ian Bremmer there on a number
Speaker 1: of topics. Subscribe to the Bloomberg Surveillance podcast on Apple,
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