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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. Along

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Speaker 1: with Jonathan Ferrill and Lisa brown Witz Jaily, we bring

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Speaker 1: you insight from the best and economics, finance, investment and

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Speaker 1: international relations Fine Bloomberg Surveillance and Apple podcast SoundCloud, Bloomberg

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Speaker 1: dot Com and of course on the Bloomberg terminal we

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Speaker 1: catch up with an optimist that's still more constructive. We

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Speaker 1: can do that with Ben lad Lay, global market strategist

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Speaker 1: at Eat Sorrow. Ben, let's start here looking ahead to

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Speaker 1: ear next season. For many people, that's the next big test.

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Speaker 1: What are you looking for? Absolutely so that's the shoe

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Speaker 1: that hasn't dropped yet. Right, We've had this big draw

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Speaker 1: down evaluations, we've had the evaluation recession, but earnings have

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Speaker 1: been absolutely rock solid. So basically we're in a race

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Speaker 1: here right between inflation peaking on rolling over and are

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Speaker 1: going into recession. And if earnings can continue to sort

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Speaker 1: of hold, then we sort of dodged that bullet and

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Speaker 1: we set ourselves up for a stronger, stronger second half.

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Speaker 1: If earnings crack, then um, you know that's the ingredient

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Speaker 1: for for potentially another leg down. Now for what it's worth.

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Speaker 1: I think expectations already pretty low. We're looking for negative

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Speaker 1: earnings growth um if you strip out, if you strip

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Speaker 1: out the energy sector, expectations have been falling. Companies have

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Speaker 1: been pretty good so far, right, and holding onto that

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Speaker 1: sort of top line growth, which has obviously been helped

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Speaker 1: by inflation and banaging to pass through the cost to

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Speaker 1: too you and I are and keeping their margins frankly

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Speaker 1: pretty close to all time higher. So then this is

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Speaker 1: the heart of the matter to me. Okay, so I

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Speaker 1: get lousy real GDP growth, but I still have a

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Speaker 1: pretty good inflation level, which I believe is a pretty

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Speaker 1: good animal spirit and nominal GDP. Is that the script

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Speaker 1: for the second half. It's all about inflation, right, I

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Speaker 1: think we're pretty close to peak inflation. If we get it,

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Speaker 1: if we get a little bit of relief there, that

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Speaker 1: it's fair to sort of take half a step back.

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Speaker 1: And I think this is a recession freight train which

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Speaker 1: has sort of been picking up speed. I think takes

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Speaker 1: us sort of step back, and I think gives room

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Speaker 1: for both valuations to rise, which are now twenty year averages,

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Speaker 1: and some of this sort of relief of earnings UM

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Speaker 1: expectations a little bit, at least in terms at least

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Speaker 1: in terms of the market. I mean, that's the sort

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Speaker 1: of bullish narrative. But we do have to get through

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Speaker 1: next week, which is big inflation number and the start

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Speaker 1: of Q TW earnings. The expectations is I think the

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Speaker 1: key you know, um Lisa Shallott was on this program

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Speaker 1: last week saying analysts are in crazy town right now.

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Speaker 1: They need to bring their estimates down. And then Michael

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Speaker 1: Burry tweeted, last week we've done the valuation compression. Next

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Speaker 1: up is margins. What do you expect? I mean, are

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Speaker 1: we looking at a fifty percent drop in earnings the

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Speaker 1: way we did in the Great Financial Crisis? Or is

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Speaker 1: this just gonna be twenty well twenties your average? Right?

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Speaker 1: And I think this is going to be less than average.

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Speaker 1: You know, I think there's nothing inevitable about this recession, right,

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Speaker 1: I mean, risks clearly rising, but with corporates in good shape,

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Speaker 1: with consumers in good shape. Your technical point as well taken,

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Speaker 1: but there's nothing inevit to buy. That's recession. It's not

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Speaker 1: going to be global. We saw the China pm I

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Speaker 1: this morning. China's reopening the second biggest economy in the world.

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Speaker 1: And it's not going to be big, right, this is

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Speaker 1: a typical fed driven recession. We're not going to have

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Speaker 1: those sort of two thousand seven, two thousand and eight

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Speaker 1: multipliers of you know, Overlaven housing, Overliven banks, which gave

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Speaker 1: you that sort of forty earnings draw down. So and

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Speaker 1: again remember you know that's five under is is this

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Speaker 1: the cream of the crop. These are the people with

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Speaker 1: the big balance sheets, with the with the global operations.

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Speaker 1: They and if anybody can handle a slowdown or a

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Speaker 1: mild recession, it's them. You are the king then of

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Speaker 1: staying strong amid gloom. Compare the gloom level now to

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Speaker 1: December of two thousand and eighteen when you had the

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Speaker 1: courage to go along in the market, one of the

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Speaker 1: great cause of all time. What's the what's the later

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Speaker 1: gloom meter look like right now? Well, this has been

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Speaker 1: a lot more remorseless. So we've been here for six

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Speaker 1: months and nothing's works, right, We've just closed our first

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Speaker 1: quarter and the first half and second quarter where literally

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Speaker 1: nothing works. Maybe Chinese equities roun two percent and the

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Speaker 1: dollar and the dollars are nothing else works. And so

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Speaker 1: I think people are very depressed and that's one of

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Speaker 1: the ingredients for this for potentially about a second half,

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Speaker 1: that we get some relief on inflation, that valuations already adjusted,

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Speaker 1: that corporate sort of holds strong um. And you know,

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Speaker 1: maybe it's a little bit. You know, I don't think

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Speaker 1: corporates are completely immune here, but I don't think we're

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Speaker 1: set up for an earnings collapse. And sentiment. Um. The

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Speaker 1: sentiment was terrible. Um. So I think those are your

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Speaker 1: four ingredients for a better second half, just on the

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Speaker 1: earnings framp bend. Can you warm me through where you

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Speaker 1: are less constructive the parts of this equity market that

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Speaker 1: because of earnings you would avoid, right. So I think,

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Speaker 1: right now we want to be in the market. But

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Speaker 1: you know I'm not alluded to it. Right, Risks are high, um,

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Speaker 1: and so I think you've gotta be you want to be.

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Speaker 1: I want to be pretty defensive. So I mean the

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Speaker 1: you know, the things that they're the consumer staples, utilities

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Speaker 1: and telcos where I think the earnings risk is a

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Speaker 1: lot lower. Um. And you know the market is telling

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Speaker 1: him with Semmings is now the worst performing sector in

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Speaker 1: the market. Autos is number two. I mean, anything that's

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Speaker 1: sensitive to the economy has just been taken out of

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Speaker 1: the woodshed and and destroyed right now, and I think

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Speaker 1: that's where the risks remain pretty high. The one pocket

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Speaker 1: of the market this hound up and you know it,

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Speaker 1: it's energy here today that story is absolutely ripped. There

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Speaker 1: is this kind of tension between the story man's talking

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Speaker 1: about recession and what's happening at the energy market, and

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Speaker 1: whether those two stories can actually coexist through this year. Ben,

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Speaker 1: do you think they can? I do, actually, I mean

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Speaker 1: maybe not exactly this price, but I think we're in

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Speaker 1: a high, maybe not higher high for longer energy environment.

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Speaker 1: There's no investment drilling. Door rates are half what they

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Speaker 1: were the last time oil prices up in these levels.

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Speaker 1: The curve still backward aided um and the biggest demander

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Speaker 1: of oil in the world is recovering and it's not

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Speaker 1: going into recession, which is which is China. So I

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Speaker 1: still think it's a glass half full rather than roll

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Speaker 1: hard empty story at this point, I Ben, thank you Ben.

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Speaker 1: Later there of r this is a Marina's sense. She

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Speaker 1: was absolutely brilliant the last time she was on with us.

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Speaker 1: And we lean forward now the general lady from energy

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Speaker 1: aspects open question em reader with all that's going on.

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Speaker 1: What is the significant paragraph in the note you're gonna

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Speaker 1: write this week. What's the thing that you're really studying

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Speaker 1: right now? Two things I'd say Tom, first and foremost

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Speaker 1: is around recession. Um. I do think while there's a

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Speaker 1: lot of fears around exactly how the recession is going

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Speaker 1: to pan out, what it means for all demand. Um,

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Speaker 1: for us, the critical thing to highlight is that Asia,

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Speaker 1: and I know you and I've talked about this a

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Speaker 1: lot of times, China's reopening. Um. I really do think recession,

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Speaker 1: at least a mild one, is actually priced in. If

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Speaker 1: you look at December twenty three Brent futures, we're at

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Speaker 1: ninety dollars. Nobody's talking about what if demand holds up

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Speaker 1: a little bit better, what could prices then do? So

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Speaker 1: we are looking into that. And then of course on

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Speaker 1: the supply side, we've got the strikes going on in

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Speaker 1: no way the Libyan outages, but you know we've got

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Speaker 1: some seasonal pressure coming through as well. Are there. Responsiveness

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Speaker 1: is or the fancy word, elasticities of natural gas the

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Speaker 1: same as oil is. The elasticity of Netherlands net gas

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Speaker 1: like Brent crude. So I would see on the industrial side. Um, well,

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Speaker 1: let's start with a consumer side. On the consumer side,

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Speaker 1: absolutely not right, because from a consumer point of view,

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Speaker 1: natural gases electricity, which basically means that you are absolutely

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Speaker 1: going to require it, particularly for home heating during the winter,

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Speaker 1: whereas arguably you could drive less unless and untily you

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Speaker 1: have to drive to work. Right. So from a consumer standpoint,

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Speaker 1: elacessity for gas is it's even more in elastic than

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Speaker 1: oil industry. However, we have already seen if you look

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Speaker 1: at Germany Netherlands that you talk about, they are dialing

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Speaker 1: down a lot of the gas consumption simply because gas

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Speaker 1: prices are so so high. ARM models already build in

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Speaker 1: some significant demand destruction in Europe because of high gas prices,

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Speaker 1: and the risks to gas prices are actually to the

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Speaker 1: upside given what went on with Freeport in the US

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Speaker 1: lower energy from there. If Chinese demand picks up in

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Speaker 1: the winter, you could see even less energy come through

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Speaker 1: to Europe from the Middle East as well. So again risks,

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Speaker 1: just like you guys were talking about, is absolutely to

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Speaker 1: the upside when it comes to TTF prices in Europe.

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Speaker 1: I will, uh, Tom, I will see your elasticity and

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Speaker 1: raise you a funge ability. Why aren't natural gas prices

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Speaker 1: as Why isn't natural gas as fungible as oil? And reader,

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Speaker 1: we see such a huge difference in the price here

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Speaker 1: versus the price in the Netherlands. Why aren't they as interchangeable? Oh, absolutely,

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Speaker 1: great question. Actually, it's just for the simple reason that

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Speaker 1: oil is has always been a more global commodity. Remember

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Speaker 1: when the US used to not be able to export crude,

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Speaker 1: we had double t I trade at twenty dollar discounts

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Speaker 1: to Brent. Right, that's when it wasn't as fungible. Now

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Speaker 1: with exports allowed again, ultimately the price will dictate flows,

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Speaker 1: whereas gas is slowly getting there. It's been more regional markets.

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Speaker 1: And even right now the US doesn't export as much

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Speaker 1: gas as probably it could do at these current prices.

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Speaker 1: And then of course you've had the outages at freeports.

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Speaker 1: So that's the big problem and the and the difference

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Speaker 1: in gas. It's always been more localized markets Midlea supplying Asia,

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Speaker 1: Russia supplying Europe, and kind of US its own little

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Speaker 1: market US and Canada. I want to ask also about

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Speaker 1: the competing calls on oil. This morning, i'mrita city of

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Speaker 1: course sixty five dollars, which makes sense if we have deep,

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Speaker 1: a deep global recession. On the other hand, JP Morgan

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Speaker 1: um is saying it could go as high as three eighty,

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Speaker 1: which is, you know, an eye grabbing headline. But what

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Speaker 1: Natasha Kneva puts behind that, I think is even more interesting.

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Speaker 1: She says, this is the JP Morgan analyst um that

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Speaker 1: being given Moscow's robust fiscal position, they can afford to

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Speaker 1: weaponize oil and just pull five million barrels a day

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Speaker 1: off of the global market. Do you think that's realistic?

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Speaker 1: We actually don't think that's likely because so far um

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Speaker 1: we still see Russia acting as a rational player in

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Speaker 1: the market, both for all and for gas. It doesn't

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Speaker 1: mean that energy doesn't get weaponized, I mean, particularly in

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Speaker 1: the winter, more so for gas than oil. We could

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Speaker 1: see that, but definitely not our base case. But I

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Speaker 1: think in both cases, what I will highlight is that

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Speaker 1: these are very eye grabbing numbers precisely because you know,

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Speaker 1: you guys are talking about it. It makes the media headlines.

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Speaker 1: I would argue, even in a pretty deep recession, I

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Speaker 1: just don't see all prices going below eighty dollars, maybe

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Speaker 1: even not even ninety dollars because of years of underinvestment.

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Speaker 1: Look at the US at hundred and ten dollar w

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Speaker 1: t E the Dallas Fed survey. All it talked about

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Speaker 1: was labor shortages, equipment shortages, and steel costs. Nobody is

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Speaker 1: actually able to raise production very much. So that's on

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Speaker 1: the one side. If Russia were to actually cut five

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Speaker 1: million pounds, but it doesn't even have to do five.

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Speaker 1: We could do just two or three. Given how tight

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Speaker 1: the market is, you can literally pick a number, I

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Speaker 1: mean three, eight t It could be four something, it

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Speaker 1: could be to something. So forgive me. Could the global

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Speaker 1: economy tolerate anything with the two a three handle once

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Speaker 1: you get it too, and we would no, absolutely not.

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Speaker 1: I mean then the only reaction has to be a

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Speaker 1: very very deep recession and oil demand has to collapse

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Speaker 1: by five, like five to eight million bounds per day

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Speaker 1: to even balance this market. And really sent thank you

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Speaker 1: Jordan Rochester. It's not that he's been alone, but he's

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Speaker 1: been way articulate about the case for weaker euro Jordan

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Speaker 1: Rochester is with Uma, He's been with us often. We

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Speaker 1: get an update this morning. Jordan. I mentioned earlier the

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Speaker 1: great Martin Feldstein of Harvard who noticed it when you

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Speaker 1: get weak euro or two thousand and one, you get

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Speaker 1: a stochastic response. It goes down, it's weak, and it

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Speaker 1: turns around. Does this see have the same feeling that

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Speaker 1: when we find Euro week bottom will turn around and

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Speaker 1: come right back. Tommy, you're kind of on the money

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Speaker 1: there about the nonlinearity of the Euro moves this morning.

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Speaker 1: It's I can explain why that it's moved, but it's

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Speaker 1: been nonlinear. It's been much fast, and folks expected a

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Speaker 1: lot of people who are looking to the normal macro

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Speaker 1: driver as a sort of ECB headlines to suggest why

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Speaker 1: it could go low. They didn't have that. There was

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Speaker 1: Norwegian gas flows. We can come back to that. But

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Speaker 1: answer to your question, I don't think euros are buy

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Speaker 1: at all, tom I think we go towards parity. I

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Speaker 1: think we could even break parity, and the moves will

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Speaker 1: be nonlinear when we do that, because it will be

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Speaker 1: because of gas supplies being cut off, perhaps with nord

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Speaker 1: Stream one. And I think as we get to these levels,

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Speaker 1: we've broken te levels all the way back to the

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Speaker 1: French elections and so forth, periods of very strong Euro weakness.

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Speaker 1: We've broken those we're in a no man's land now

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Speaker 1: all the way down to parity. If we are nonlinear,

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Speaker 1: does that suggest that Mr Putin can drive euro lower?

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Speaker 1: He already is, and I think yes he can do more.

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Speaker 1: So to give you some more color on white, I

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Speaker 1: met keep mentioning gas. The move today is because German

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Speaker 1: electricity prices gone to your terminal type. In Germany electricity

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Speaker 1: one year the record highs for the one year part

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Speaker 1: of the curve, So it's not a temporary story anymore.

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Speaker 1: German consumers, we're paying record prices whoever's buying at these

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Speaker 1: levels for the next year, and that's going to affect

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Speaker 1: consumers contracts, So that's consumption squeeze for European consumers. That's

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Speaker 1: recession risks. Recession risks push euro lower. Norwegian workers have

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Speaker 1: gone on strike, so thirteen percent of Norwegian gas supplies

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Speaker 1: are turning off this week and we've looked into it.

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Speaker 1: If someone can let me know, but we don't see

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Speaker 1: an end date to those strikes until their demands are

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Speaker 1: met certainty. On Jordan, this headline just crossing a bloomberg

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Speaker 1: that it could shout fifty six percent of gas exports

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Speaker 1: on further escalation that's the problem. So can you tell

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Speaker 1: me to what extent you'll call on euro dollar and

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Speaker 1: you are looking for parity. I know that and have

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Speaker 1: been for a while. To what extent is that called

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Speaker 1: basically are called on European gas prices. It's it looked

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Speaker 1: a little bit like that. Um that's been the primary

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Speaker 1: driver of the volunteers, especially today. There's a few other

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Speaker 1: factors as well. They feed into the EU re view.

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Speaker 1: It's not just about gas prices, global recession risks. We're

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Speaker 1: looking for a US recession in Q four of this year.

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Speaker 1: Euro does not strengthen when we have recessions, especially with

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Speaker 1: the peripheral yield risks that we have in Italy, in

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Speaker 1: Spain and elsewhere. So there's recession risks driven by the

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Speaker 1: global phenomenal. What's going on. Europe's main trading partner is China.

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Speaker 1: China's going for what we call a COVID business cycle,

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Speaker 1: and we've just had another wave of COVID nineteen cases,

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Speaker 1: some more lockdowns announced just over the past eight hours.

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Speaker 1: So the exports for Germany are being weighed on by

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Speaker 1: gas prices, making German manufacturing less competitive seven times more expensive.

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Speaker 1: That's how much gas prices. Electricity prices are in Germany

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Speaker 1: versus America, so American exports more competitive, and Europe's main

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Speaker 1: trading partner, China is in a state of slow down,

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Speaker 1: dealing with lockdowns. Jordan, you have a lot of the

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Speaker 1: same problems in your island nation there um that people

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Speaker 1: on the continent of Europe have. Plus you've got Brexit

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Speaker 1: seemingly flaring up again, right with the giants and government

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Speaker 1: throwing out agreements that they made just a year ago.

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Speaker 1: How much worse can it be for the pound? Well,

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Speaker 1: we are short sterling looking for one seen in cable,

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Speaker 1: and I think with the non non linear moves are

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Speaker 1: just described in euro dollar, cable could go below that

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Speaker 1: as well, so that the direction is lower. It's just

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Speaker 1: the question of how much lower. And in terms of

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Speaker 1: the risks of reasons. The Bank of England's less hawkish

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Speaker 1: than other central banks. That's making US yields less attractive

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Speaker 1: to foreign investors. The UK's trade surplus and doesn't exist.

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Speaker 1: It's a deficit and it's getting wider, so that the

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Speaker 1: UK is facing similar problems to Europe. But a key

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Speaker 1: difference is the UK has Brexit, of course, and I'll

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Speaker 1: come onto that, but the UK raised taxes, national insurance

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Speaker 1: taxes went up. The energy subsidies that Boris Johnson's government

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Speaker 1: announced didn't really cover everybody. It did a good amount

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Speaker 1: for the lower half of society, but for the middle

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Speaker 1: classes and higher didn't do much. So you see a

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Speaker 1: consumption squeeze. But yes, let's bring it to brexit. I

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Speaker 1: think markets are looking at the Northern Island Protocol noise,

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Speaker 1: but I don't think Sterling actually has a premium for

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Speaker 1: the potential for an FDA to be suspended. Now. I

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Speaker 1: don't think we will see the Northern Ireland Protocol situation

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Speaker 1: lead to the EU issuing sanctions or issuing anything like

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Speaker 1: that in terms of tariffs or quotas. So that's why

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Speaker 1: the market is ignoring it because I agree with the

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Speaker 1: market there. But if it was to happen, who knows

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Speaker 1: what can happen in these markets, then string would be

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Speaker 1: even lower than one eighteen. So we're looking at one

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Speaker 1: ten towards parity, and that's no. That's why I don't

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Speaker 1: think it's going to happen. That is just a nuclear

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Speaker 1: button for the politics some bigs there. Jordan, thank you, buddy,

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Speaker 1: Yes always, Jordan Rochester there of Nomura out of the

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Speaker 1: city of London. It's on the cost of capital. This

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Speaker 1: come and gain the other direction big time. Well, the

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Speaker 1: cost of capital be it both nominal and real. And

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Speaker 1: that is a good place to start with John writing

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Speaker 1: his chief you can have an advisor and bring capital.

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Speaker 1: Has been of assistance to us for many, many a year,

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Speaker 1: and John, I think the question right now and cost

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Speaker 1: of capital is now the businesses do they think in

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Speaker 1: the nominal space or is everybody a slave to the

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Speaker 1: inflation adjusted analysis. Well, Tom, if you think about it,

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Speaker 1: we haven't had these kind of inflation problems since the

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Speaker 1: late seventies early so many businesses are simply not used

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Speaker 1: to handling an inflationary environment. And money illusion exists amongst consumers,

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Speaker 1: and money illusion exists amongst businesses as well. I mean,

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Speaker 1: if you look at the policy rate, so start with

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Speaker 1: the policy rate with a CPI inflation rate of eight

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Speaker 1: point six percent, you're still looking at a policy rate

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Speaker 1: that is extremely negative in real terms. So all the

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Speaker 1: anxiety about the Fed raising interest rates, um, it has

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Speaker 1: to be looked at in the context of that inflation rate.

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Speaker 1: And businesses, I think you know the idea that we've

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Speaker 1: had this bare market in equities, but we it's been

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Speaker 1: a multiple adjustment to a higher nominal yield. It hasn't

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Speaker 1: so far been earning suggestion. I think of you and

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Speaker 1: Michael Dart on this, and this is with your work

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Speaker 1: in the Bank of England at the FED years ago.

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Speaker 1: So many people haven't lived this. And what I'm hearing

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Speaker 1: from relative optimists we will adjust is yields move higher,

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Speaker 1: we will adjust as Powell, the Guard and the rest

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Speaker 1: bring up interest rates like New Zealand this morning. Do

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Speaker 1: you have that optimism that will adjust along the way, Well,

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Speaker 1: there will be adjustments along the way, and to the

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Speaker 1: issue and storry to take issue with Matt for example,

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Speaker 1: two negative quarters of GDP if we have them, don't

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Speaker 1: don't make a recession. Recession is inevitable, but I don't

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Speaker 1: think that it's imminent. And as you know, as companies,

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Speaker 1: I don't think companies experienced a recession or negative GDP

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Speaker 1: in the first quarter. If you look at the inconcide

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Speaker 1: of the accounts, a second equally valid measure of GDP

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Speaker 1: expanded by one point eight percent. And if you look

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Speaker 1: at business surveys and you look at household surveys, people

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Speaker 1: are negative about the economy because they're trying to handle

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Speaker 1: this inflation problem, but the relatively positive of about their

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Speaker 1: own financial prospects, the relatively companies are relatively positive, small

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Speaker 1: businesses relatively positive about their own outlook. So there's this

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Speaker 1: disconnect because people are trying to adjust to that inflation

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Speaker 1: problem and they haven't experienced doing it. But the research shows,

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Speaker 1: contrary to the what the FETE has tried to do,

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Speaker 1: the households do not like inflation. Businesses do not like inflation.

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Speaker 1: I'm worried, and ever since Lloyd Blankfind told me to

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Speaker 1: get my house in order, I've been freaking out about this.

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Speaker 1: But I want to ask a couple of more eurocentric

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Speaker 1: questions John, I asked Tom a couple of weeks ago. Um,

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Speaker 1: if a weaker currency is better or worse in terms

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Speaker 1: of um inflation, how is Germany experiencing this in real time?

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Speaker 1: Right now? As we see a euro go down to

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Speaker 1: one o two, you know the inflation picture had rolled

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Speaker 1: over there is it? Is it on the way down

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Speaker 1: or can it pop back up? What we have to

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Speaker 1: remember that when it comes to using currencies to judge inflation,

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Speaker 1: currencies are a relative of judgment is a relative judgment

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Speaker 1: about the Federal Reserve versus the e c B. And

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Speaker 1: it is quite clear that the Federal Reserve is much

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Speaker 1: more aggressive and planning to be more aggressive in hiking

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Speaker 1: rates than the e c B. So the currency reflects

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Speaker 1: that relative judgment. But the US has had a strengthening

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Speaker 1: dollar and it's suffering just as bad an inflation problem

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Speaker 1: um as it is being experienced in core Europe, certain

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Speaker 1: parts of Europe. Latvia, for example, was referred to in

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Speaker 1: the Powers hearing inflation with the sixtent inflation in Spain ten.

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Speaker 1: Those are way way above the two percent rate that

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Speaker 1: the e c B is. The which has one objective.

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Speaker 1: The CP doesn't have a dual mandate, is a single man.

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Speaker 1: And John's futures to tier eight negative forty three on

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Speaker 1: sp X, and we're watching euro really not through the

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Speaker 1: new weakness one or two eighty eight. John, what's so

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Speaker 1: important here is hilarion and writings seem to be on

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Speaker 1: the pace in page and on a relative analysis, there's

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Speaker 1: some real urgency here. Well, I'm looking at the urgency

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Speaker 1: as some of the data we've seen recently John, and

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Speaker 1: allowed me to go through it. The I s M

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Speaker 1: down a fifty three from fifty six point one. Will

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Speaker 1: take that for the new order's component dropping into contact

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Speaker 1: and territory for the first time, since it's part of

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Speaker 1: the reason we see what we're seeing on the screen

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Speaker 1: right now, and allow me to go that through through

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Speaker 1: that with you yield to lower for a fifth session

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Speaker 1: with down four basis points on a ten year to

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Speaker 1: two eady four on twos with down a basis point

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Speaker 1: to two eady two. The difference between twos and tens

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Speaker 1: a couple of basis points. Twos and fives nothing that

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Speaker 1: basically in line with each other. So John, we're starting

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Speaker 1: to see that inversion again off the back of weak

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Speaker 1: economic data and a feat that's determined to carry on. Hikick,

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Speaker 1: can you walk me through where ultimately you think this

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Speaker 1: is going in the economic data you've pushed back against

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Speaker 1: that argument for a technical recession. Just where are you

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Speaker 1: seeing pockets of weakness that you think we should focus on? Well,

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Speaker 1: I think when you working hypothesis I have when it

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Speaker 1: comes to looking at some of those manufacturing numbers, like

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Speaker 1: the I s M that you're referred to, is in

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Speaker 1: the midst of all of the supply chain difficults, and

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Speaker 1: those supply chains are only easing slightly. Companies may have

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Speaker 1: over ordered in order to try and get some inventory

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Speaker 1: to meet the demands of their customers, and so with

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Speaker 1: that comes a sort of cycle adjustment um where you've

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Speaker 1: over ordered, you cut back on your orders because you

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Speaker 1: start to see better improvement in your supply chains. And

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00:23:26,200 --> 00:23:30,280
Speaker 1: it's not really final demand that is the problem here.

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Speaker 1: For example, in the first quarter, even if we take

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00:23:32,600 --> 00:23:36,080
Speaker 1: the GDP contraction at face value, that was coming off

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Speaker 1: of an inventory adjustment from the fourth quarter, if final

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00:23:38,960 --> 00:23:43,440
Speaker 1: demand was relatively strong, it was too percent in real terms,

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00:23:43,440 --> 00:23:46,639
Speaker 1: but in nominal terms it was much much faster. And

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00:23:46,720 --> 00:23:51,919
Speaker 1: so my greater concern is the impact of inflation eating

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Speaker 1: into real purchasing power than it is this adjustment in

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Speaker 1: the manufacturing sector that we're seeing that I think is

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00:23:59,240 --> 00:24:03,000
Speaker 1: quite possible an adjustment to over ordering to get through

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Speaker 1: supply chaines. So, John, if that is your base case,

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00:24:05,320 --> 00:24:07,320
Speaker 1: can you walk me through how that shapes your FED

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00:24:07,359 --> 00:24:10,440
Speaker 1: call about how far they can take FED funds? Well,

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00:24:10,480 --> 00:24:14,200
Speaker 1: I think it's clear that the FED has signaled they

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00:24:14,280 --> 00:24:18,720
Speaker 1: want to get a positive real or inflation adjusted FED

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00:24:18,760 --> 00:24:21,800
Speaker 1: funds rate. Now for next year, the FED has at

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00:24:21,840 --> 00:24:26,280
Speaker 1: the end of three point percent. Fed funds rate assessment

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00:24:26,440 --> 00:24:29,560
Speaker 1: is the median assessment of the appropriate funds rate against

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00:24:29,560 --> 00:24:33,000
Speaker 1: the backdrop of a two point six percent inflation forecast. Now,

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00:24:33,000 --> 00:24:37,720
Speaker 1: I think it's extremely unlikely that inflation, which this year

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00:24:37,800 --> 00:24:40,040
Speaker 1: is likely to run around five and a quarter percent,

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00:24:40,440 --> 00:24:42,720
Speaker 1: is going to slow so much. We have a real

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00:24:42,800 --> 00:24:46,760
Speaker 1: inflation psychology building in. So let's say inflation runs at

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Speaker 1: three and a half percent next year, which I think

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00:24:49,000 --> 00:24:51,520
Speaker 1: is more likely. Then you're looking at a FED funds

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00:24:51,600 --> 00:24:54,040
Speaker 1: rate that may get to four and a half percent.

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00:24:54,680 --> 00:24:58,359
Speaker 1: And is that a mistake? It may be a mistaken

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00:24:58,359 --> 00:25:00,680
Speaker 1: aback we're looking, but you may remember a while ago

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00:25:00,720 --> 00:25:03,760
Speaker 1: and at least it's not here. But but what if

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00:25:03,800 --> 00:25:06,199
Speaker 1: the FED overhikes? What if they make a mistake? And

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00:25:06,200 --> 00:25:08,920
Speaker 1: I said, the mistake was already made. It was made

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00:25:09,000 --> 00:25:11,359
Speaker 1: last year when the FED continued to ease into a

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00:25:11,480 --> 00:25:14,359
Speaker 1: rising inflation problem. Now they have to correct that problem,

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00:25:14,480 --> 00:25:17,680
Speaker 1: and they're only they don't have a model of inflation

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00:25:17,680 --> 00:25:19,960
Speaker 1: that works the backward looking. They want to see a

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00:25:20,119 --> 00:25:23,840
Speaker 1: compelling reduction inflation, and it probably means they'll overtighten the

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00:25:23,840 --> 00:25:26,639
Speaker 1: funds right and that is when you get the recession problem.

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00:25:26,800 --> 00:25:32,040
Speaker 1: Probably late features negative three forty, John Riding, let's cut

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00:25:32,040 --> 00:25:33,440
Speaker 1: to the chase. John Fair and I are going to

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00:25:33,480 --> 00:25:36,000
Speaker 1: be in Washington this week. We will speak with Adam

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00:25:36,080 --> 00:25:39,200
Speaker 1: Posen who suggests three percent as a new two percent.

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00:25:39,520 --> 00:25:42,520
Speaker 1: Blanchard and others coming out of the Great Financial Crisis,

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00:25:42,720 --> 00:25:46,240
Speaker 1: even model Dada four percent need on inflation to get

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00:25:46,240 --> 00:25:49,560
Speaker 1: things going. Where's the new two percent? For John writing,

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00:25:50,000 --> 00:25:54,040
Speaker 1: the new two percent should be some two percent that

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00:25:54,520 --> 00:25:59,639
Speaker 1: it's clear that they work um on what consumers believe

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00:25:59,680 --> 00:26:03,040
Speaker 1: about inflation. They believe inflation is bad. So the Fed

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00:26:03,160 --> 00:26:06,800
Speaker 1: may have a model and pose and others may talk

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00:26:06,840 --> 00:26:09,840
Speaker 1: about a faster inflation rate to get the economy going.

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00:26:09,960 --> 00:26:13,159
Speaker 1: The faster inflation rate is what is killing this economy

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00:26:13,400 --> 00:26:15,879
Speaker 1: to the extent we are being hurt right now. That

482
00:26:16,040 --> 00:26:19,080
Speaker 1: is a real problem. And and households don't like inflation

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00:26:19,440 --> 00:26:23,280
Speaker 1: because the erodes their finances and they see down the

484
00:26:23,359 --> 00:26:26,440
Speaker 1: road there being some action to be taken to rain

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00:26:26,480 --> 00:26:29,800
Speaker 1: inflation pressures. And so can we had for more than

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00:26:29,880 --> 00:26:33,320
Speaker 1: two decades relatively stable two percent inflation rate? Can we

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00:26:33,400 --> 00:26:35,840
Speaker 1: keep a stable three percent inflation rate? Can we keep

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00:26:35,840 --> 00:26:40,359
Speaker 1: a stable four percent inflation rate. History suggests not. History

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00:26:40,400 --> 00:26:44,520
Speaker 1: suggests not. Then don't talk about flexible average inflation targeting anymore,

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00:26:44,520 --> 00:26:46,760
Speaker 1: do they? Jot? What do you make of that? Well,

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00:26:48,320 --> 00:26:53,639
Speaker 1: it's in September twenty twenty when the Fed introduced we're

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00:26:53,680 --> 00:26:56,280
Speaker 1: gonna average two percent inflation. That's going to be your target,

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00:26:56,320 --> 00:27:01,080
Speaker 1: which means we're going to overshoot inflation. They really contributed

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00:27:01,119 --> 00:27:03,680
Speaker 1: to getting inflation out of the bag. And it wasn't

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00:27:03,720 --> 00:27:07,080
Speaker 1: just the average inflation targeting. It was the backward looking nature.

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00:27:07,080 --> 00:27:08,760
Speaker 1: We have to hit two percent inflation, we have to

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00:27:08,800 --> 00:27:10,919
Speaker 1: hit maxim employment. We have to have the prospect to

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00:27:10,960 --> 00:27:14,240
Speaker 1: be moderately above two percent for some time before they

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00:27:14,320 --> 00:27:17,280
Speaker 1: even began lifting golf on race. So no, I mean,

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00:27:17,320 --> 00:27:20,560
Speaker 1: if you talk about averaging two percent, it becomes a real,

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00:27:21,040 --> 00:27:23,600
Speaker 1: a real problem with given how a high inflation has been.

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00:27:23,840 --> 00:27:27,440
Speaker 1: And so the fete is they put an escape escape clothes.

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00:27:27,520 --> 00:27:29,680
Speaker 1: They're going to switch back at some point just to

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00:27:29,800 --> 00:27:33,000
Speaker 1: straightforward to percent inflation targeting. But we're a long way

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00:27:33,000 --> 00:27:35,280
Speaker 1: away from that number right now. John, we got lucky,

506
00:27:35,520 --> 00:27:38,200
Speaker 1: take a very lucky what a clinic from John Riding

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Speaker 1: of Bring Capital. This is the Bloomberg Surveillance Podcast. Thanks

508
00:27:44,640 --> 00:27:47,960
Speaker 1: for listening. Join us live weekdays from seven to ten

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00:27:48,040 --> 00:27:52,480
Speaker 1: am Eastern on Bloomberg Radio and on Bloomberg Television each

510
00:27:52,600 --> 00:27:56,320
Speaker 1: day from six to nine am for insight from the

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00:27:56,359 --> 00:28:01,560
Speaker 1: best in economics, finance, investment, and international relations. And subscribe

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00:28:01,600 --> 00:28:06,520
Speaker 1: to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com,

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00:28:06,600 --> 00:28:09,840
Speaker 1: and of course, on the terminal. I'm Tom keene In.

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Speaker 1: This is Bloomberg