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Speaker 1: Let's get to our guest, Sean Cochrane, head of Research

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Speaker 1: c ls A Group, here with us live and in

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Speaker 1: our studios in Hong Kong Shan. Great to see you.

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Speaker 1: So we've got China slowing, we've got Europe slowing, and

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Speaker 1: the US slowing, three very big regions, and you've got

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Speaker 1: interest rates on the way up in at least a

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Speaker 1: couple of those regions. Are the market's a little out

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Speaker 1: of step with what's happening at the moment. Look, it's

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Speaker 1: the challenge that the central bankers are trying to manage

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Speaker 1: in so far as COVID really put pressures on policymakers

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Speaker 1: and regulators that they hadn't seen effectively since the Spanish flew.

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Speaker 1: And so what that meant was that it triggered a

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Speaker 1: willingness globally to push an extraordinary amount of demand support

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Speaker 1: through the global system. Because rightly at the time, it's

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Speaker 1: easy in hindsight to look back and say, we understand

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Speaker 1: how COVID works, and we understand that we have vaccines,

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Speaker 1: and we understand there are ways to manage the path

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Speaker 1: through when then out of COVID. But if you put

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Speaker 1: yourself back in the mind's eye of how it actually

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Speaker 1: felt in the early stages of code. It's understandable that

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Speaker 1: the government's put a huge amount of stimulus into the

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Speaker 1: economy because they didn't know what is the flow, how

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Speaker 1: bad can it get? But of course the unintended consequence

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Speaker 1: of that is when you have success with vaccines, when

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Speaker 1: you have an environment where multiple economies are coming up

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Speaker 1: with treatment solutions, and we find a path to deal

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Speaker 1: with COVID, and then we have an environment where demand

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Speaker 1: comes roaring back and the economy is relatively stable, but

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Speaker 1: the money has already been provided. Those provisions are there

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Speaker 1: and are built up in the reserves for the economy

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Speaker 1: to then be spent, and you saw it in the

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Speaker 1: savings rates of many economies, and so that pushes the

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Speaker 1: demand through later and then the central banks have to relax.

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Speaker 1: There's a whole supply side that's complicating as well. But

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Speaker 1: I'll stop there just in case. Well, Sean, I mean,

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Speaker 1: we still probably haven't haven't seen a flaw from China,

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Speaker 1: and we're expecting further stimulus. We're looking at the potential

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Speaker 1: LPR today as well. What does that mean in terms

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Speaker 1: of how you allocate capital towards China? Sure, so what

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Speaker 1: we would argue is that China has has effectively led

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Speaker 1: us into this cycle. So we've got to separate the

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Speaker 1: fundamentals from what's in the price, in that the returns

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Speaker 1: that we capture on securities are primarily determined by what

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Speaker 1: we pay. The fundamentals obviously can change the value of

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Speaker 1: that with the sufficient passage of time. With China, what

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Speaker 1: we'd see is that the market has understood the risk

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Speaker 1: in China for a very long time. It's been going

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Speaker 1: down for longer than other markets, and its valuations are

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Speaker 1: not expensive. And as a result, we would argue that

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Speaker 1: China has not bottomed. EM has not bottomed, but EM

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Speaker 1: should start to outperform before markets reach a bottom, and

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Speaker 1: that is the point at which the long only community

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Speaker 1: will start to buy China, and that will be when

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Speaker 1: the opportunities really arise. So I would suggest that China

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Speaker 1: is attracted, but not there yet. It's interesting that you

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Speaker 1: started off with a defense of policymakers. I find that

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Speaker 1: quite compelling in a sense. Never mind the blame and

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Speaker 1: never mind you know, the justification, but right now we're here.

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Speaker 1: Uh do you fear? Do you do? You say that

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Speaker 1: what's happening now is likely recession on its way. We're

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Speaker 1: just slowing growth. Absolutely recession in my mind, and that

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Speaker 1: as an analyst, I'm speaking from my own personal views.

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Speaker 1: C less A prides ourselves and being a house of

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Speaker 1: views rather than having a house view. We believe that

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Speaker 1: if you can strain the analysts around what they can

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Speaker 1: say to their clients and how can you offer them

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Speaker 1: the intellectual freedom to add the value of we essentially

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Speaker 1: in the role of providing ideas to help investors think

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Speaker 1: through their investment process. So for me personally, recession is

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Speaker 1: effectively baked into the cake because we have an environment

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Speaker 1: where the economy is slowing down but we must tighten

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Speaker 1: into it. And we have supply constraints that are COVID

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Speaker 1: related for China but conflict related for the rest of

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Speaker 1: the world, and there's a geopolitical lens that's now accelerating

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Speaker 1: through all of that. It's very hard to believe this

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Speaker 1: is easier to deal with. I know we've discussed China,

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Speaker 1: but I do want to get your initial reaction to

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Speaker 1: that cut in the five and one year It was

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Speaker 1: a bit strange there because the read came through as

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Speaker 1: a as a change. But they've both been cut and

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Speaker 1: it certainly looks like that cut to the one year

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Speaker 1: potentially not here to the declining property sector. Yeah, I mean,

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Speaker 1: ultimately we have an environment where China has to deal

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Speaker 1: with a difficult property situation, and the challenge becomes they

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Speaker 1: understand that lowering rates aggressively is not necessarily going to

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Speaker 1: challenge solve the problem. What they really need to structural solutions.

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Speaker 1: And so that's why you're seeing very incremental moves and

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Speaker 1: policy that's essentially stuck. Yeah, it's it's the debt overhang

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Speaker 1: that really concerns policymakers. Otherwise, you know, you you'd figure

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Speaker 1: that they'd be stimulating more. And it's really a problem

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Speaker 1: that the whole globen faces. If you think about going

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Speaker 1: back over the past ten or twenty years, the debt

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Speaker 1: crisis is such that you've got some limitations with what

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Speaker 1: you can do with with interest streets. So does this

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Speaker 1: does this set up for potentially a bigger drop in

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Speaker 1: a sense than what we might have feared. Absolutely, I

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Speaker 1: mean we need to be open minded that you could

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Speaker 1: see a real decline in the SMP off. Now that's

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Speaker 1: going to sound like, oh my, that's how could it

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Speaker 1: be so large? But we need to keep in context

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Speaker 1: that it comes down to the policy choices. We've avoided

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Speaker 1: major drawdowns in markets by aggressive expansion of the monetary base,

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Speaker 1: zero interest rates, combined fiscal policy and talk of a

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Speaker 1: ludicrous idea of modern monetary theory, which is a ridiculous

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Speaker 1: concept that has been disproven through the academic journals for

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Speaker 1: decades and decades. But ultimately, if the markets see enough stimulus,

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Speaker 1: it can stop the downside. We're regulators and policy makers

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Speaker 1: who were complete about face and say, all right, we

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Speaker 1: got it wrong. We need to really just move through

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Speaker 1: this process, except the challenges realize some insolvency that could

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Speaker 1: trigger some serious downside. If inflation is ten cent a

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Speaker 1: year for se a years, that real outcome is much

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Speaker 1: worse than what you see on the nominal print, and

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Speaker 1: that's what everyone's most likely to get wrong in the

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Speaker 1: next couple of years. How hawk is you're expecting speakers

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Speaker 1: to be at Jackson Hole this week and is some

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Speaker 1: of the I guess perhaps anticipation worse than the execution

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Speaker 1: of what we actually could hear. Yeah, it's really interesting

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Speaker 1: because the central bankers that are on this incredible tight

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Speaker 1: rope where they're trying to find the balance. They need

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Speaker 1: to maintain as much credibility as possible. They need to

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Speaker 1: make the market do their work for them as best

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Speaker 1: they can. With this view that they're going to keep raising,

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Speaker 1: but the market is effectively already bet that they'll pivot.

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Speaker 1: So you've seen this inversion of the yield curve. The

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Speaker 1: expectation that rates will be coming down into next year

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Speaker 1: priced into futures markets, and so that's the challenge that

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Speaker 1: they have. Ultimately, I think that they will have to raise,

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Speaker 1: and they'll they'll threaten to keep raising because from their perspective,

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Speaker 1: the worst possible scenario is they lose complete credibility in

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Speaker 1: the market doesn't believe that they can do anything to

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Speaker 1: stop inflation. Ultimately, it's how the long end of the

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Speaker 1: curve responds to that that's interesting. My base case is

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Speaker 1: that the long end cannot back up in yield terms,

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Speaker 1: so the the yield curve inversion worsens, which would reinforce

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Speaker 1: my view that there's a recession coming. That's the thing

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Speaker 1: we need to watch out of. The message is less

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Speaker 1: the message that's relatively straightforward. It's the response to the

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Speaker 1: message that matters. So the market was a little early

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Speaker 1: in playing the FED pivot. The beginning phase of a

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Speaker 1: FED pivot would be slowing of tightening, and we haven't

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Speaker 1: seen that yet, but maybe a fifty signifies the beginning

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Speaker 1: of that. The middle part would be a pause by

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Speaker 1: the Fed, and then the final part would be the

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Speaker 1: mission accomplished or at least or maybe even all the

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Speaker 1: way to the next move is is cutting by the Fed?

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Speaker 1: In in what phase of that might we see? Uh,

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Speaker 1: you know, risk assets take off? Well, this is the

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Speaker 1: challenging bit. Is that typically what you see and that

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Speaker 1: we've we've outlearned some key charts on this. One of

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Speaker 1: our recent reports, Global Themes report that goes through the

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Speaker 1: stages of a bear market. But typically we would argue

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Speaker 1: we are in a bob arrel classic bear market, which

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Speaker 1: means you have the sharp down, then you have the

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Speaker 1: reflexive rebounds, and then you have the drawn out fundamental downtrend. Normally,

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Speaker 1: the reflexive rebound will come at that pause, not the cut,

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Speaker 1: but the pause. It can be a cut, and no

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Speaker 1: two cycles are the same. What we've had here is

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Speaker 1: anticipation of a slowing of rate, which is your point

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Speaker 1: about the markets getting ahead on this. Pivots that's triggered

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Speaker 1: a bounce, but markets were so oversold they tend to

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Speaker 1: do that anyway. Ultimately, rate cuts when there's a fundamental

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Speaker 1: downtrend do not reverse the cycle, and that's my base

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Speaker 1: case here. Sean, great to have you with us in

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Speaker 1: Hong Kong. Studio Sean Cochrane, head of Research, CLS A

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Speaker 1: group with us in Hong Kong,