1 00:00:09,880 --> 00:00:13,800 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley. 2 00:00:13,960 --> 00:00:17,560 Speaker 1: We bring you insight from the best in economics, finance, investment, 3 00:00:18,000 --> 00:00:23,480 Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 4 00:00:23,600 --> 00:00:28,360 Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. In 5 00:00:28,400 --> 00:00:31,720 Speaker 1: the vicinity of two pm yesterday, my team came to 6 00:00:31,760 --> 00:00:33,559 Speaker 1: me and said, who's the one person you want to 7 00:00:33,600 --> 00:00:37,760 Speaker 1: talk to that actually understands the fear out there in 8 00:00:37,920 --> 00:00:42,320 Speaker 1: retail portfolios and people's portfolios. She is a course with 9 00:00:42,400 --> 00:00:45,879 Speaker 1: Charles Schwab. Lizi Ane Saunders has been here before and 10 00:00:45,920 --> 00:00:49,280 Speaker 1: we're thrilled that miss Saunders could join us this morning. 11 00:00:49,360 --> 00:00:51,640 Speaker 1: Lizi Ane, you've seen this before. What do you do 12 00:00:51,720 --> 00:00:56,320 Speaker 1: the day after? So we we tend to do actually 13 00:00:56,360 --> 00:00:59,160 Speaker 1: the day of at the close is put out a 14 00:00:59,440 --> 00:01:03,560 Speaker 1: broadcas indication about our perspective on what happened during that 15 00:01:03,600 --> 00:01:07,640 Speaker 1: particular day, but also reinforcing some of the longer term perspectives. 16 00:01:07,640 --> 00:01:10,240 Speaker 1: And Thomas, you know, we started to get a bit 17 00:01:10,240 --> 00:01:13,039 Speaker 1: more cautious about two years ago and from a tactical 18 00:01:13,160 --> 00:01:17,959 Speaker 1: as allocation perspective went to neutral across the equity asset classes, 19 00:01:18,000 --> 00:01:21,399 Speaker 1: including US equities within which we said you wanted to 20 00:01:21,440 --> 00:01:24,800 Speaker 1: focus on large caps at the expense of of small caps, 21 00:01:24,800 --> 00:01:28,759 Speaker 1: and we've had a pretty defensive UH sector positioning as well. 22 00:01:28,840 --> 00:01:31,160 Speaker 1: So we've had a message out there that this is 23 00:01:31,240 --> 00:01:33,240 Speaker 1: late cycle, that there are risks. You don't want to 24 00:01:33,240 --> 00:01:36,000 Speaker 1: get out over your skis, you don't want to sell 25 00:01:36,080 --> 00:01:38,160 Speaker 1: everything and run for the hills, but this is not 26 00:01:38,640 --> 00:01:41,440 Speaker 1: the time to take undo levels of risk relative to 27 00:01:41,480 --> 00:01:44,680 Speaker 1: your long term strategic allocations. So I think we we 28 00:01:44,880 --> 00:01:48,840 Speaker 1: positioned our investors for this type of market volatility, and 29 00:01:48,960 --> 00:01:52,600 Speaker 1: UH hopefully they they stayed disciplined and calm through this. 30 00:01:52,920 --> 00:01:56,600 Speaker 1: Laz John Templeton was one of the great original global investors. 31 00:01:56,600 --> 00:01:59,520 Speaker 1: I remember the evening he and Luu Kayser at it 32 00:02:00,000 --> 00:02:03,080 Speaker 1: in the Crisis of seven. Give us an update on 33 00:02:03,280 --> 00:02:06,960 Speaker 1: your view on the global investment world. Do you have 34 00:02:07,080 --> 00:02:12,280 Speaker 1: to stay US centric? Um, not necessarily. We think actually 35 00:02:12,280 --> 00:02:15,760 Speaker 1: correlations across S classes and even within S classes have 36 00:02:15,880 --> 00:02:21,080 Speaker 1: been generally coming down. I think we've exited this environment 37 00:02:21,240 --> 00:02:24,440 Speaker 1: where all risk assets performed generally the same and all 38 00:02:24,880 --> 00:02:27,320 Speaker 1: lower risk assets performed generally the same. So with a 39 00:02:27,400 --> 00:02:32,639 Speaker 1: breakdown and correlations, diversification actually may start to pay some rewards, 40 00:02:32,680 --> 00:02:36,000 Speaker 1: and that's been our message, where neutral bill across emerging markets, 41 00:02:36,000 --> 00:02:39,560 Speaker 1: developed markets, US market, But that means you want to 42 00:02:39,600 --> 00:02:43,440 Speaker 1: have diversification across those uh, those areas. You know, we 43 00:02:43,480 --> 00:02:45,919 Speaker 1: do have obviously a weak global growth story. We've got 44 00:02:45,960 --> 00:02:48,959 Speaker 1: some records that have been broken fifteen consecutive months of 45 00:02:49,600 --> 00:02:53,200 Speaker 1: declining global p M. I I think it's pretty definitive 46 00:02:53,280 --> 00:02:57,000 Speaker 1: that we're in a global manufacturing recession, if not an 47 00:02:57,040 --> 00:03:00,840 Speaker 1: overall global recession, which it looks in cre suddenly likely 48 00:03:01,320 --> 00:03:04,119 Speaker 1: the US will fall into that trap as well, more 49 00:03:04,160 --> 00:03:07,760 Speaker 1: so on the manufacturing side, maybe not across the spectrum 50 00:03:07,760 --> 00:03:10,519 Speaker 1: and the economy, but the risk has clearly risen with 51 00:03:10,520 --> 00:03:14,560 Speaker 1: with what's going on with trade umsen. What what does 52 00:03:14,600 --> 00:03:17,200 Speaker 1: this mean for bond yields across the board? Are they 53 00:03:17,200 --> 00:03:20,400 Speaker 1: going to go further into negative territory or is it 54 00:03:20,440 --> 00:03:24,000 Speaker 1: just lower for longer. Well, let's hope that in the 55 00:03:24,080 --> 00:03:27,079 Speaker 1: US we don't go into negative territory. You've got about 56 00:03:27,160 --> 00:03:31,400 Speaker 1: thirteen and change trillion dollars of negative yielding bonds globally, 57 00:03:31,480 --> 00:03:34,440 Speaker 1: and there's been some chatter that the US would consider that. 58 00:03:34,960 --> 00:03:37,840 Speaker 1: I don't think there's really any place where central bankers 59 00:03:37,880 --> 00:03:41,640 Speaker 1: have experimented with negative yields that have ultimately been the 60 00:03:41,680 --> 00:03:43,960 Speaker 1: elixir for what ails them, and I don't think it 61 00:03:43,960 --> 00:03:46,640 Speaker 1: would be the case here. So we're certainly hopeful that 62 00:03:46,720 --> 00:03:50,960 Speaker 1: we don't have to head down that path. In the meantime, 63 00:03:51,000 --> 00:03:54,640 Speaker 1: though you're looking at multi year lows in the ten uere. 64 00:03:54,680 --> 00:03:56,800 Speaker 1: We're not back down near where we were three years 65 00:03:56,800 --> 00:03:59,520 Speaker 1: ago in sixteen. When I think the ten you're bottomed 66 00:03:59,560 --> 00:04:02,280 Speaker 1: at one point three five. But the fact that bon 67 00:04:02,400 --> 00:04:05,080 Speaker 1: Niels continued to think has kept the yield curve inverted 68 00:04:05,240 --> 00:04:08,120 Speaker 1: even with the FED rate cut from from last week. 69 00:04:09,240 --> 00:04:10,680 Speaker 1: All Right, thank you so much for joining us at 70 00:04:10,720 --> 00:04:30,359 Speaker 1: Lisienne Sandres, Charles Schwaba, Chief Investment strateches Johnny's. He's esteemed 71 00:04:30,480 --> 00:04:33,160 Speaker 1: with a wonderful history of golden SAX and now working 72 00:04:33,680 --> 00:04:38,280 Speaker 1: for the most interesting Institute of International Finance Books the 73 00:04:38,360 --> 00:04:41,000 Speaker 1: chief economy st over there. Now Robin Brooks joined us. Now, Robin, 74 00:04:41,080 --> 00:04:43,479 Speaker 1: fantastic to have you with us on Blomberg surveillance. Let's 75 00:04:43,520 --> 00:04:48,120 Speaker 1: just start with the Treasury designating China currency manipulator. The 76 00:04:48,240 --> 00:04:52,599 Speaker 1: significance of that or not your thoughts, Robin, Well, thanks 77 00:04:52,600 --> 00:04:55,839 Speaker 1: so much for having me on. Obviously, it's a pretty 78 00:04:55,880 --> 00:05:01,800 Speaker 1: big step um by many men. Sure's China is in 79 00:05:01,880 --> 00:05:04,960 Speaker 1: the past, or has been in the past a currency 80 00:05:04,960 --> 00:05:10,679 Speaker 1: manipulator on average between two thousand six and China bought 81 00:05:11,600 --> 00:05:15,760 Speaker 1: fifty billion dollars in reserves every year, But since then 82 00:05:15,800 --> 00:05:19,040 Speaker 1: things have changed a lot, and intervention was close to zero. 83 00:05:19,120 --> 00:05:22,080 Speaker 1: So this is a bit too late and technically doesn't 84 00:05:22,120 --> 00:05:25,120 Speaker 1: fit the definition. And Robin, the irony is they'll be 85 00:05:25,160 --> 00:05:27,920 Speaker 1: happy with the fact that Chinese did manipulate the currency 86 00:05:28,000 --> 00:05:31,440 Speaker 1: stronger overnight. So let's just talk about what the Chinese 87 00:05:31,520 --> 00:05:34,560 Speaker 1: are doing and what leaves they're pulling to stabilize the currency. 88 00:05:35,760 --> 00:05:38,360 Speaker 1: So let's talk about the big picture. First of all, 89 00:05:38,440 --> 00:05:40,880 Speaker 1: when you have an exchange rate, right, part of that 90 00:05:40,960 --> 00:05:45,080 Speaker 1: exchange rate function is to offset shocks that hit your country, 91 00:05:45,680 --> 00:05:49,000 Speaker 1: and tariffs are a shock, a negative shock. So when 92 00:05:49,040 --> 00:05:51,480 Speaker 1: you have a freely floating currency, and I don't want 93 00:05:51,480 --> 00:05:53,640 Speaker 1: to say China has a freely floating currency, but it's 94 00:05:53,800 --> 00:05:57,479 Speaker 1: getting closer to one, it is natural for that currency 95 00:05:57,560 --> 00:06:00,760 Speaker 1: to weaken in response to tariffs. And so that's what 96 00:06:00,880 --> 00:06:03,599 Speaker 1: we saw at the start of this week. Uh. And 97 00:06:03,760 --> 00:06:07,720 Speaker 1: as you said, China has stepped in now to prevent 98 00:06:07,720 --> 00:06:09,880 Speaker 1: the fix from going through seven. Right, And we got 99 00:06:09,880 --> 00:06:12,120 Speaker 1: about nine questions, but I'll give you one and you 100 00:06:12,320 --> 00:06:15,760 Speaker 1: nail it in your essay, which is how big is 101 00:06:15,800 --> 00:06:19,719 Speaker 1: the dollar? Long positioning? Let's start with China. John Plender 102 00:06:19,720 --> 00:06:22,360 Speaker 1: in the f T I thought was brilliant today. How 103 00:06:22,400 --> 00:06:28,760 Speaker 1: big is the dollar bet by the government of China? Well, um, so, 104 00:06:29,040 --> 00:06:33,720 Speaker 1: China has, because of its interventions, built up a large 105 00:06:34,160 --> 00:06:37,640 Speaker 1: war chest of reserves. So at the peak those reserves 106 00:06:37,720 --> 00:06:41,600 Speaker 1: were about four chillion dollars. They have fallen significantly into 107 00:06:41,600 --> 00:06:44,120 Speaker 1: around three chillions. So that's where we stand now. Is 108 00:06:44,160 --> 00:06:48,080 Speaker 1: there a risk that China could use that strength to 109 00:06:48,560 --> 00:06:52,839 Speaker 1: um bully the president of the United States? I think 110 00:06:53,160 --> 00:06:55,799 Speaker 1: you know, it's a great question, and in a way, uh, 111 00:06:56,040 --> 00:06:58,520 Speaker 1: what you're referring to is kind of game theory, right, 112 00:06:58,640 --> 00:07:01,400 Speaker 1: These two sides are duking it out in a way, 113 00:07:01,480 --> 00:07:03,720 Speaker 1: or it certainly seems like that. But both sides have 114 00:07:03,760 --> 00:07:06,240 Speaker 1: a huge amount to lose. For the United States, it's 115 00:07:06,279 --> 00:07:09,280 Speaker 1: the stock market which really doesn't like these trade tensions, 116 00:07:09,320 --> 00:07:12,400 Speaker 1: and we saw that yesterday. And for China there's always 117 00:07:12,400 --> 00:07:15,760 Speaker 1: the risk of capital outflows starting again. So both sides 118 00:07:15,800 --> 00:07:18,800 Speaker 1: have a strong incentive to de escalate. What what is it? 119 00:07:19,000 --> 00:07:23,280 Speaker 1: What's the relative distancentive. I don't understand why China needs 120 00:07:23,320 --> 00:07:26,200 Speaker 1: to do anything but go China silence. I mean, isn't 121 00:07:26,240 --> 00:07:31,840 Speaker 1: their biggest strength is to just be quiet? Well, you know, 122 00:07:32,000 --> 00:07:36,400 Speaker 1: in the end, China's economy faces headwinds right as you 123 00:07:36,680 --> 00:07:39,160 Speaker 1: As you know and as you've have you've covered in 124 00:07:39,240 --> 00:07:42,240 Speaker 1: many of your shows, there is a leverage overhanging China. 125 00:07:42,960 --> 00:07:46,480 Speaker 1: Um growth has been slowing. These tariffs are a bad 126 00:07:46,520 --> 00:07:50,280 Speaker 1: thing um, and so there is an incentive to engage 127 00:07:50,320 --> 00:07:52,640 Speaker 1: with the United States constructively. And for that you have 128 00:07:52,720 --> 00:07:56,240 Speaker 1: to talk, so you can't be silent um. And I 129 00:07:56,280 --> 00:07:59,640 Speaker 1: think this currency move that we saw at the beginning 130 00:07:59,640 --> 00:08:03,240 Speaker 1: of the yesterday was a sign of exasperation. Right, China 131 00:08:03,320 --> 00:08:06,560 Speaker 1: has put up with multiple rounds of tariffs, done nothing, 132 00:08:07,320 --> 00:08:09,480 Speaker 1: and I think here I think it was a signal. 133 00:08:09,840 --> 00:08:12,760 Speaker 1: Enough is enough, John, to put this in perspective, It 134 00:08:12,840 --> 00:08:17,120 Speaker 1: was exactly for standard deviation move yesterday like they planned it, 135 00:08:17,640 --> 00:08:20,320 Speaker 1: and now we're at about two point eight standard deviation. Well, 136 00:08:20,360 --> 00:08:23,080 Speaker 1: let's talk about that this idea that they planned it 137 00:08:23,160 --> 00:08:25,320 Speaker 1: and that they have a lot of control over what 138 00:08:25,360 --> 00:08:27,960 Speaker 1: happens with this currency. Yes, overnight they set the daily 139 00:08:27,960 --> 00:08:31,240 Speaker 1: currency fixed stronger. Yes, they plan a sale of you 140 00:08:31,320 --> 00:08:33,920 Speaker 1: and denominated bombs in Hong Kong which should flush out 141 00:08:33,920 --> 00:08:36,959 Speaker 1: some of the shorts perhaps, But Robin, this idea, we 142 00:08:37,240 --> 00:08:39,520 Speaker 1: seem to have this immense faith that they have control, 143 00:08:39,840 --> 00:08:42,480 Speaker 1: that they can smooth out the bumps. The market force 144 00:08:42,520 --> 00:08:44,880 Speaker 1: is quite clearly leaning the wrong way, and Robin, I 145 00:08:44,920 --> 00:08:47,400 Speaker 1: just wonder whether they can continue to smooth out the 146 00:08:47,400 --> 00:08:52,119 Speaker 1: bumps in a reliable way. Okay, great questions. So obviously 147 00:08:52,240 --> 00:08:54,839 Speaker 1: China is a huge economy, right, second biggest economy in 148 00:08:54,880 --> 00:08:58,320 Speaker 1: the world. Can you ever really fully control financial markets? 149 00:08:58,320 --> 00:09:03,719 Speaker 1: And I think, Uh, the truth is China has capital controls, 150 00:09:03,760 --> 00:09:06,720 Speaker 1: so it is not a fully convertible currency in the 151 00:09:06,720 --> 00:09:10,079 Speaker 1: way that for example, euro dollar is. And so the 152 00:09:10,200 --> 00:09:13,679 Speaker 1: question is how effective are those capital controls. And I 153 00:09:13,679 --> 00:09:19,600 Speaker 1: think when markets were really worried about a devaluation that 154 00:09:19,679 --> 00:09:22,679 Speaker 1: was a test. But our census that today those capital 155 00:09:22,720 --> 00:09:26,120 Speaker 1: controls are working pretty well. What is the president's best outcome, 156 00:09:26,240 --> 00:09:29,680 Speaker 1: Robin Brooks, What is the to do list for President 157 00:09:29,760 --> 00:09:33,640 Speaker 1: Trump with all of his belief set to constructively move 158 00:09:33,720 --> 00:09:39,840 Speaker 1: forward the dialogue? Look, I think the basic issue on 159 00:09:40,200 --> 00:09:45,040 Speaker 1: China is that even though the headline current account surplus 160 00:09:45,080 --> 00:09:49,480 Speaker 1: has fallen from ten percent close to zero, our underlying 161 00:09:49,480 --> 00:09:53,560 Speaker 1: analysis says that the overall trade surplus that China has 162 00:09:53,960 --> 00:09:57,000 Speaker 1: is still big. So there is a legitimate trade imbalance. 163 00:09:57,080 --> 00:10:00,160 Speaker 1: And I think the President and some of his as 164 00:10:00,760 --> 00:10:04,800 Speaker 1: officials in the administration have a somewhat legitimate issue. But 165 00:10:04,880 --> 00:10:08,680 Speaker 1: obviously you want to address this issue without upsetting the 166 00:10:08,800 --> 00:10:11,600 Speaker 1: SMP and financial markets more broadly. So that's the fine 167 00:10:11,600 --> 00:10:13,839 Speaker 1: line this administration is trying to walk. Robin, I want 168 00:10:13,840 --> 00:10:15,800 Speaker 1: to wrap things up by talking about Europe with you, 169 00:10:16,040 --> 00:10:18,319 Speaker 1: just very quickly. I've been following your work on the continent. 170 00:10:18,400 --> 00:10:21,120 Speaker 1: I think it's really interesting. A lot of people reach 171 00:10:21,200 --> 00:10:23,640 Speaker 1: for the trade story and then just blame everything that's 172 00:10:23,640 --> 00:10:25,679 Speaker 1: happening in Europe on the trade story. You've picked out 173 00:10:25,720 --> 00:10:27,520 Speaker 1: some some other and I hate this word, but I've 174 00:10:27,559 --> 00:10:30,000 Speaker 1: got to use it, some other idiosynchronic reasons as to why, 175 00:10:30,240 --> 00:10:32,520 Speaker 1: because Europe is going through this slowdown, do you have 176 00:10:32,559 --> 00:10:34,800 Speaker 1: to put a dollar in the drinking game. You have 177 00:10:34,800 --> 00:10:38,720 Speaker 1: to have to drink, but continue rubbing. Come on, just 178 00:10:38,760 --> 00:10:40,840 Speaker 1: walk us through some of days, some of those unique 179 00:10:41,040 --> 00:10:44,559 Speaker 1: things that are happening in Europe at the moment. Well, Um, 180 00:10:44,679 --> 00:10:47,720 Speaker 1: one of the big things people are obviously worried about is, 181 00:10:47,840 --> 00:10:51,280 Speaker 1: you know, this trade war in the end is about 182 00:10:51,400 --> 00:10:55,320 Speaker 1: disrupting supply chains, and so that obviously causes anxiety and 183 00:10:55,400 --> 00:10:59,839 Speaker 1: markets about global growth. And one of the main light 184 00:11:00,160 --> 00:11:02,640 Speaker 1: rods and all of this has been German data, which 185 00:11:02,679 --> 00:11:06,040 Speaker 1: have been incredibly weak. Now, the thing about Germany is 186 00:11:06,080 --> 00:11:08,360 Speaker 1: it's obviously an exporter to the world, but it's been 187 00:11:08,480 --> 00:11:12,960 Speaker 1: hit by some one off stories. So Brexit is one, 188 00:11:13,120 --> 00:11:15,800 Speaker 1: and then there's a big credit crunch underway in Turkey, 189 00:11:15,840 --> 00:11:18,360 Speaker 1: and that's the other. And Germany exports a lot to both. 190 00:11:18,679 --> 00:11:21,600 Speaker 1: Exports to China look good, so that's a positive sign 191 00:11:21,640 --> 00:11:24,480 Speaker 1: for the global economy. Exports to the US look very healthy. 192 00:11:24,520 --> 00:11:27,440 Speaker 1: That's another positive sign. So that's why I've been saying 193 00:11:27,520 --> 00:11:31,160 Speaker 1: on Twitter, for example, that overall the global picture actually 194 00:11:31,160 --> 00:11:33,680 Speaker 1: looks pretty okay. So, Robin, when you look at Germany 195 00:11:33,800 --> 00:11:35,880 Speaker 1: right now, you think that slowdown is mainly because of 196 00:11:35,920 --> 00:11:38,760 Speaker 1: Brexit and a credit crunch in Turkey and not China, 197 00:11:39,960 --> 00:11:44,040 Speaker 1: That's exactly right. That's certainly based on the export data. 198 00:11:44,120 --> 00:11:47,760 Speaker 1: There's no sign that China is the reason for a 199 00:11:47,880 --> 00:11:51,319 Speaker 1: slowdown in German exports. Robin, really really great to get 200 00:11:51,320 --> 00:11:53,200 Speaker 1: you on a program to break down some of these effects. 201 00:11:53,200 --> 00:11:56,880 Speaker 1: Moves Robin Brooks, the chief economist over at the Institute 202 00:11:57,200 --> 00:12:16,360 Speaker 1: of International Finance, with our question, Gary Shilling, someone like 203 00:12:16,400 --> 00:12:20,280 Speaker 1: sree Komar has been really striding about a lower rate regime, 204 00:12:20,360 --> 00:12:23,840 Speaker 1: but no one has published on a lower rate regime 205 00:12:24,360 --> 00:12:27,160 Speaker 1: like Stephen Major. This email dropped in my inbox earlier 206 00:12:27,160 --> 00:12:30,160 Speaker 1: this morning. We cut our end twenty nineteen US ten 207 00:12:30,240 --> 00:12:33,400 Speaker 1: year Treasury and bungee of forecast the one fifty and 208 00:12:33,559 --> 00:12:37,320 Speaker 1: negative eight basis points, respectively. I'm very happy to say 209 00:12:37,320 --> 00:12:41,600 Speaker 1: that Steve Major calls us, now HSBC Managing director and 210 00:12:41,679 --> 00:12:44,200 Speaker 1: a global head of fixed income research joining us on 211 00:12:44,200 --> 00:12:47,640 Speaker 1: the phone. Good morning to Steve. Morning, Jonathan, are you 212 00:12:47,880 --> 00:12:50,199 Speaker 1: I'm very well. Let's just start with this call, shall we. 213 00:12:50,360 --> 00:12:51,760 Speaker 1: The one that jumps out of me is not the 214 00:12:51,800 --> 00:12:54,920 Speaker 1: Treasury one. It's the button call negative eighty basis points year, 215 00:12:55,000 --> 00:12:56,720 Speaker 1: and just walk us through the dynamic that you and 216 00:12:56,720 --> 00:12:59,720 Speaker 1: the team are thinking about the framework for this bond market, 217 00:12:59,800 --> 00:13:02,960 Speaker 1: right our Steve. The thing is that the bond market 218 00:13:03,080 --> 00:13:06,040 Speaker 1: and the FX market is all about relatives. It's not 219 00:13:06,080 --> 00:13:10,280 Speaker 1: about absolutes. So if I buy a bond today, I'm 220 00:13:10,320 --> 00:13:14,360 Speaker 1: interested in total return. Is that total return versus cash 221 00:13:14,400 --> 00:13:17,800 Speaker 1: which is zero, or total return versus a two year 222 00:13:18,360 --> 00:13:22,400 Speaker 1: or versus a credit bond or whatever. So look ten 223 00:13:22,480 --> 00:13:26,120 Speaker 1: year yields today a minus fifty. I didn't think they'd 224 00:13:26,160 --> 00:13:28,520 Speaker 1: get much lower than minus forty, to tell you the truth, 225 00:13:28,600 --> 00:13:33,040 Speaker 1: But we're minus fifty and we're now forecasting minus eighty. 226 00:13:33,080 --> 00:13:36,880 Speaker 1: Each one basis point is worth more than ten cents. 227 00:13:37,480 --> 00:13:41,840 Speaker 1: That doesn't sound like much, but fifty basis points becomes 228 00:13:42,080 --> 00:13:45,960 Speaker 1: five of total return. How much money do you think 229 00:13:46,000 --> 00:13:48,439 Speaker 1: you would have made if you'd held the one year 230 00:13:48,520 --> 00:13:56,440 Speaker 1: Austria this year? I think you're up abo you no, no, no, no, John, 231 00:13:57,720 --> 00:14:01,480 Speaker 1: don't tell me, don't tell me. Bonds aren't sex Who 232 00:14:01,480 --> 00:14:03,520 Speaker 1: would have thought the central bomb would out perform that much? 233 00:14:03,559 --> 00:14:07,320 Speaker 1: Thomas return on an Australian. So this is Gary showing 234 00:14:07,400 --> 00:14:11,160 Speaker 1: one on one. Steve Major, explain the inertial force that 235 00:14:11,240 --> 00:14:15,400 Speaker 1: will allow lower for longer. Is it just the desperation 236 00:14:15,520 --> 00:14:18,440 Speaker 1: to own and to buy that makes all this happen? 237 00:14:19,440 --> 00:14:22,240 Speaker 1: You know, there's a lot of theory on the negative rates, 238 00:14:23,480 --> 00:14:26,280 Speaker 1: the policy rate, and I think it was good Friend 239 00:14:26,400 --> 00:14:28,800 Speaker 1: back in two thousand and sixteen that released the paper 240 00:14:28,840 --> 00:14:31,400 Speaker 1: at Jackson Hole, so it's about exactly three years ago 241 00:14:32,120 --> 00:14:35,160 Speaker 1: Marvin good Friend. And and subsequently there's been papers from 242 00:14:35,160 --> 00:14:37,320 Speaker 1: the I m F and staff reports from the CB, 243 00:14:37,720 --> 00:14:40,800 Speaker 1: all exploring that lower bound. In fact, even the FED 244 00:14:40,920 --> 00:14:43,240 Speaker 1: cause it the lower bound now, not the zero bound. 245 00:14:43,640 --> 00:14:46,520 Speaker 1: My point is the constraints that we saw a few 246 00:14:46,600 --> 00:14:49,640 Speaker 1: years ago are slowly being peeled away. One of the 247 00:14:49,680 --> 00:14:53,800 Speaker 1: constraints is cash, the existence of cash. The other constraint 248 00:14:53,880 --> 00:14:57,040 Speaker 1: is the pain on bank The third one is this 249 00:14:57,120 --> 00:14:59,640 Speaker 1: idea about whether it works or not. So I've looked 250 00:14:59,640 --> 00:15:01,760 Speaker 1: at all rate. First of all, in some countries there 251 00:15:01,840 --> 00:15:05,440 Speaker 1: is no cash, so you can forget that. America may 252 00:15:05,520 --> 00:15:08,160 Speaker 1: have cash at the moment, but give it a few years. 253 00:15:08,680 --> 00:15:12,200 Speaker 1: So the resistance in terms of the substitution into cash 254 00:15:12,440 --> 00:15:14,640 Speaker 1: may not be there at some point in the future. 255 00:15:14,640 --> 00:15:16,680 Speaker 1: It's not there in Sweden, it's not there in the 256 00:15:16,720 --> 00:15:20,120 Speaker 1: Nordic countries. Um you may even you may even have 257 00:15:20,160 --> 00:15:24,960 Speaker 1: an exchange rate between cash and electronic money just to 258 00:15:25,040 --> 00:15:28,560 Speaker 1: just to just to encourage this move. As central banks 259 00:15:28,600 --> 00:15:33,600 Speaker 1: explore the lower bound, then the short rate for bonds 260 00:15:33,720 --> 00:15:36,400 Speaker 1: goes even lower. So if the ECB was a mind 261 00:15:36,480 --> 00:15:38,720 Speaker 1: US one hundred and fifty or minus two hundred, than 262 00:15:38,760 --> 00:15:41,880 Speaker 1: two years shots are going to be around the same level. 263 00:15:42,200 --> 00:15:44,920 Speaker 1: So what's the yield in the ten year burned? Well, Steve, 264 00:15:45,000 --> 00:15:47,240 Speaker 1: this is the argument that interests me this morning, and 265 00:15:47,280 --> 00:15:49,920 Speaker 1: I look at your research that this move starts from 266 00:15:49,920 --> 00:15:53,760 Speaker 1: shorter maturities and extends up the curve. Yeah. Yeah, just 267 00:15:53,800 --> 00:15:56,800 Speaker 1: focus through why that dynamic is present right now, what 268 00:15:56,840 --> 00:15:58,640 Speaker 1: we've learned from Japan, and why we're about to see 269 00:15:58,640 --> 00:16:01,200 Speaker 1: it a whole lot more in the United State, in Germany, 270 00:16:01,560 --> 00:16:04,720 Speaker 1: people need to grab the yield to get the total returns. 271 00:16:04,800 --> 00:16:09,280 Speaker 1: So so intuitively, your intuition would say that if they 272 00:16:09,320 --> 00:16:12,240 Speaker 1: cut the rate, the curve with Stephen, but you need 273 00:16:12,280 --> 00:16:18,160 Speaker 1: to forget everything you've learned, especially in the textbooks and universities. 274 00:16:18,520 --> 00:16:21,240 Speaker 1: Nowhere in any of my for boat to see textbooks 275 00:16:21,320 --> 00:16:24,160 Speaker 1: or any fixed income textbook that I own, is there 276 00:16:24,160 --> 00:16:27,480 Speaker 1: a convect shield curve. Now you'll know what that is 277 00:16:27,560 --> 00:16:30,800 Speaker 1: as the curve that bows in so it's flat between 278 00:16:30,880 --> 00:16:33,400 Speaker 1: zero and ten and a bit steeper after ten years. 279 00:16:33,400 --> 00:16:37,560 Speaker 1: That's a convex curve. It's the belly is sucked in. 280 00:16:38,040 --> 00:16:41,600 Speaker 1: All of your books will have concave yield curves. They'll 281 00:16:41,640 --> 00:16:45,800 Speaker 1: talk about preferred habitat and investor preference, the quidity preference, 282 00:16:45,840 --> 00:16:48,600 Speaker 1: blah blah blah. Exactly, that's not how it works, not 283 00:16:48,640 --> 00:16:52,040 Speaker 1: with negatives. But Steve, this is critical. You're with a 284 00:16:52,080 --> 00:16:54,640 Speaker 1: major bank, and I say this with great respect. You're 285 00:16:54,640 --> 00:16:57,160 Speaker 1: not going to go out in bad mount your competition 286 00:16:57,760 --> 00:17:01,520 Speaker 1: in the Steve, major mill you of the next twenty 287 00:17:01,560 --> 00:17:06,080 Speaker 1: four months, how do banks survive? How do they obtain 288 00:17:06,920 --> 00:17:12,800 Speaker 1: profitability or a diminished loss? Okay, so one of the 289 00:17:12,840 --> 00:17:16,040 Speaker 1: other constraints, the second constraint I mentioned. I mentioned was 290 00:17:16,080 --> 00:17:20,160 Speaker 1: bank profitability. So it's not good for earnings. We can 291 00:17:20,240 --> 00:17:23,439 Speaker 1: we can again study what happened in Japan over the 292 00:17:23,520 --> 00:17:27,600 Speaker 1: last thirty years. There are now less banks in Japan. Actually, 293 00:17:27,640 --> 00:17:31,560 Speaker 1: the big, healthy city banks managed to profit from this 294 00:17:31,720 --> 00:17:35,600 Speaker 1: because below zero they were able to pass yields and 295 00:17:35,720 --> 00:17:40,000 Speaker 1: lower rates onto their corporate customers. But the weaker banks 296 00:17:40,119 --> 00:17:43,000 Speaker 1: don't do so well below zero. When when you're cutting 297 00:17:43,080 --> 00:17:46,680 Speaker 1: rates above zero, the weak banks do just great because 298 00:17:46,920 --> 00:17:50,000 Speaker 1: credit constraints are loosened and they can lend more. But 299 00:17:50,080 --> 00:17:53,960 Speaker 1: when you go below zero. The world changes below zero, 300 00:17:54,000 --> 00:17:57,520 Speaker 1: everything is different. The weak banks don't do so well. 301 00:17:57,840 --> 00:18:01,280 Speaker 1: The strong banks still keep their deposits. People don't want 302 00:18:01,280 --> 00:18:03,800 Speaker 1: to keep their deposits in week banks. So from Japan 303 00:18:03,840 --> 00:18:06,640 Speaker 1: we can have a lot. Now that's not a good 304 00:18:06,680 --> 00:18:10,280 Speaker 1: story for the European banking system. But I'm not making 305 00:18:10,320 --> 00:18:13,280 Speaker 1: any call lot of forecast here. I'm just observing what's happening. 306 00:18:14,000 --> 00:18:16,600 Speaker 1: We can see it now. We welcome all of you 307 00:18:16,680 --> 00:18:19,359 Speaker 1: this morning Bloomberg Surveillance, John Faroe and Tim Keen the 308 00:18:19,480 --> 00:18:22,800 Speaker 1: special half hour Steve Major with us with HSBC and 309 00:18:22,800 --> 00:18:25,679 Speaker 1: a bit. Laurence Summer will join as well as we 310 00:18:25,720 --> 00:18:28,960 Speaker 1: give you complete coverage through the thirty minutes. John jumping here, Steve, 311 00:18:29,320 --> 00:18:32,280 Speaker 1: just looking at the ECB. Is there a rate in 312 00:18:32,320 --> 00:18:34,919 Speaker 1: the depot rate that underpins this call? And if so, 313 00:18:35,119 --> 00:18:37,320 Speaker 1: what is the basic assumption on how low the depot 314 00:18:37,359 --> 00:18:42,400 Speaker 1: rate will go at the ECB It's at minus sixty next, 315 00:18:43,080 --> 00:18:46,400 Speaker 1: So bearing in mind we've gone below zero minus ten 316 00:18:46,960 --> 00:18:50,680 Speaker 1: thirty forty minus sixty, each rate cut has supposed to 317 00:18:50,680 --> 00:18:53,120 Speaker 1: have been the last. How many times have people gone 318 00:18:53,160 --> 00:18:55,160 Speaker 1: on your show and said that's it, one and done. 319 00:18:56,000 --> 00:18:58,040 Speaker 1: The e c B would have wanted people to believe 320 00:18:58,040 --> 00:19:00,920 Speaker 1: it's one and done. Don't forget Central banks ECB included 321 00:19:00,960 --> 00:19:06,600 Speaker 1: are well served by selling positivity and optimism. Next year, 322 00:19:06,720 --> 00:19:09,320 Speaker 1: everything's going to be fine. That's what they tell us. 323 00:19:09,480 --> 00:19:11,960 Speaker 1: That's what they have to tell us. They cannot go 324 00:19:12,119 --> 00:19:15,639 Speaker 1: out there and say, oh my word, it's just like Japan. 325 00:19:15,760 --> 00:19:18,600 Speaker 1: We were wrong. So you think we go from negative 326 00:19:18,600 --> 00:19:21,800 Speaker 1: forty to negative sixty. But I'm trying to understand what 327 00:19:21,880 --> 00:19:24,679 Speaker 1: the effective lower bound is for the e c B. Now, 328 00:19:24,720 --> 00:19:27,399 Speaker 1: if they moved to tearing, does that just open a 329 00:19:27,400 --> 00:19:31,040 Speaker 1: whole new range of possibilities? It opens the trap door. 330 00:19:31,600 --> 00:19:34,520 Speaker 1: That's that's the point. We did a calculation three years 331 00:19:34,520 --> 00:19:38,000 Speaker 1: ago if the if the ECB had used the same 332 00:19:38,080 --> 00:19:42,720 Speaker 1: tearing system as the SNB, then approximately one half. In fact, 333 00:19:42,720 --> 00:19:47,479 Speaker 1: in Switzerland it's of the reserves are paid, are charged 334 00:19:47,520 --> 00:19:51,320 Speaker 1: at the minimum rate, and it's minus seventy five minimum 335 00:19:51,359 --> 00:19:55,440 Speaker 1: policy rate. The Swiss ten year trades at minus five right, 336 00:19:55,960 --> 00:19:58,520 Speaker 1: so just as a f y I. My point is 337 00:19:58,760 --> 00:20:01,360 Speaker 1: that you get more efficient, you can drop the policy 338 00:20:01,440 --> 00:20:04,399 Speaker 1: rate even lower with the tearing. How does the Steve 339 00:20:04,440 --> 00:20:08,120 Speaker 1: Major full faith and credit call come over to credit 340 00:20:08,240 --> 00:20:11,879 Speaker 1: to investment grade into high yield. Do they have the 341 00:20:11,920 --> 00:20:17,199 Speaker 1: same lower yield regime? Now? Now, now that's interesting again. 342 00:20:17,320 --> 00:20:20,960 Speaker 1: You you tend to grab yield wherever you can. Now 343 00:20:20,960 --> 00:20:24,439 Speaker 1: with the investment grade, especially in Europe, you've got the 344 00:20:24,520 --> 00:20:29,920 Speaker 1: threat of CSPP being restarted. That's the purchase program for 345 00:20:29,960 --> 00:20:34,000 Speaker 1: corporate bonds. So they never really ended it. There's plenty 346 00:20:34,000 --> 00:20:36,440 Speaker 1: of capacity to restart that they haven't even got to 347 00:20:36,480 --> 00:20:39,160 Speaker 1: announce it. Let's go out and buy them. That changes 348 00:20:39,240 --> 00:20:42,680 Speaker 1: the story for credit globally central banks who ging up 349 00:20:43,080 --> 00:20:48,439 Speaker 1: corporates high yields interesting because because here you get proper 350 00:20:48,520 --> 00:20:51,439 Speaker 1: research and you get proper ideos and credit risk And 351 00:20:51,560 --> 00:20:53,800 Speaker 1: I've got the greatest respect for the analysts in that 352 00:20:53,880 --> 00:20:56,159 Speaker 1: area because these are the guys who are doing bottom 353 00:20:56,280 --> 00:21:00,520 Speaker 1: up research. So making general calls about high yields different call, Tom, 354 00:21:00,760 --> 00:21:02,920 Speaker 1: because you know, each company is different, and it's you know, 355 00:21:02,960 --> 00:21:07,040 Speaker 1: it's about the cash flows and probabilities for each individual situation. 356 00:21:07,440 --> 00:21:10,120 Speaker 1: But that the thing is is that is that now 357 00:21:10,200 --> 00:21:13,840 Speaker 1: for longer tends to stuck people into higher yield and 358 00:21:13,920 --> 00:21:19,760 Speaker 1: returned prospects. I I look, Steve Major, where we go 359 00:21:19,960 --> 00:21:22,600 Speaker 1: from here? What is going to be the reaction of 360 00:21:22,680 --> 00:21:25,160 Speaker 1: the bond world to a one fifty tenure. You walk 361 00:21:25,200 --> 00:21:30,320 Speaker 1: into offices worldwide and explain the permanency of these lower yields. 362 00:21:30,320 --> 00:21:34,880 Speaker 1: What will be the response of your clients and customers. Well, look, 363 00:21:35,000 --> 00:21:39,120 Speaker 1: those that have been resisting it are going to suffer. 364 00:21:39,760 --> 00:21:45,040 Speaker 1: And I think that resistance is futile. Frankly, Um, most 365 00:21:45,080 --> 00:21:47,320 Speaker 1: of the calls I've made in my career, they tend 366 00:21:47,359 --> 00:21:50,560 Speaker 1: not to be right immediately. The good calls have a 367 00:21:50,560 --> 00:21:53,040 Speaker 1: bit of have a bit of durability. If I could 368 00:21:53,080 --> 00:21:55,399 Speaker 1: call the market on on a twenty four hour basis, 369 00:21:55,440 --> 00:21:59,520 Speaker 1: I wouldn't be sitting here talking. Well, you can join 370 00:21:59,600 --> 00:22:02,720 Speaker 1: ferall the piech later this week. Steve Major, what's the new? 371 00:22:02,760 --> 00:22:05,240 Speaker 1: I asked this question a week ago and I thought 372 00:22:05,280 --> 00:22:07,480 Speaker 1: it was like a joke, except now it's not a joke. 373 00:22:08,000 --> 00:22:12,000 Speaker 1: What's the new actuarial assumption for long term assets? The 374 00:22:12,080 --> 00:22:15,000 Speaker 1: people that listen to you, it was eight percent, then 375 00:22:15,040 --> 00:22:19,280 Speaker 1: six percent. Are you under a four percent actual assumption 376 00:22:19,400 --> 00:22:22,959 Speaker 1: for pension money? I don't know where they get these 377 00:22:22,960 --> 00:22:25,320 Speaker 1: assumptions from, but surely it must be lower. If the 378 00:22:25,359 --> 00:22:28,639 Speaker 1: coupon on a hundred years Austria two point one and 379 00:22:28,680 --> 00:22:31,760 Speaker 1: the yield is not point eight. That tells you that 380 00:22:31,800 --> 00:22:34,200 Speaker 1: if they were to issue a fresh one, not tap 381 00:22:34,240 --> 00:22:37,280 Speaker 1: an old one, the coupon wouldn't be any more than one. 382 00:22:38,480 --> 00:22:41,280 Speaker 1: So that's that's telling you where the market is putting 383 00:22:41,359 --> 00:22:43,600 Speaker 1: yields over the longer term. And it's not my opinion, 384 00:22:43,640 --> 00:22:46,239 Speaker 1: it's the it's the collective wisdom of the market. So 385 00:22:46,320 --> 00:22:49,480 Speaker 1: what kind of actuarial assumption is making a number four 386 00:22:49,600 --> 00:22:51,920 Speaker 1: or five? I have no idea. I guess they've got 387 00:22:51,960 --> 00:22:56,679 Speaker 1: some kind of mean reversion mindset. Now, how many times 388 00:22:56,720 --> 00:22:59,040 Speaker 1: in the last thirty years have people called the end 389 00:22:59,040 --> 00:23:01,320 Speaker 1: of the bond market? How many people have come on 390 00:23:01,359 --> 00:23:04,240 Speaker 1: your show called higher yields where they we're looking for 391 00:23:04,280 --> 00:23:07,119 Speaker 1: two and then we broke through that leftl and we 392 00:23:07,119 --> 00:23:09,840 Speaker 1: came aggressively lower. Steve, We've got to leave it. They're 393 00:23:09,880 --> 00:23:13,240 Speaker 1: fantastic to get caught up with you after a really 394 00:23:13,280 --> 00:23:16,399 Speaker 1: interesting note published this morning by Steve Mature and the 395 00:23:16,560 --> 00:23:20,800 Speaker 1: HSBC Scene Steve Major, their HSBC Managing Director and global 396 00:23:20,840 --> 00:23:23,840 Speaker 1: head of Fixed Income research on some big bond market 397 00:23:23,880 --> 00:23:39,200 Speaker 1: calls right now joining us after Mr Major and the 398 00:23:39,320 --> 00:23:43,360 Speaker 1: idea of a stagnation in yields is Laurence Sommers. He's 399 00:23:43,400 --> 00:23:47,960 Speaker 1: a former Secretary of Treasury, president of Harvard University, and 400 00:23:47,960 --> 00:23:51,320 Speaker 1: of course Larry Summers with a heritage of economics going 401 00:23:51,359 --> 00:23:55,000 Speaker 1: back to his uncle, the Laureate Paul Samuelson. What an 402 00:23:55,000 --> 00:23:58,840 Speaker 1: extraordinary day yesterday, Larry, you stop the Twitter world with 403 00:23:58,960 --> 00:24:02,840 Speaker 1: your two tweets yesterday with a comparing contrast to two 404 00:24:02,880 --> 00:24:07,119 Speaker 1: thousand nine. What is the risk of a comparing contrast 405 00:24:07,280 --> 00:24:11,240 Speaker 1: to the instabilities of nineteen that you lived at the 406 00:24:11,240 --> 00:24:18,919 Speaker 1: Clinton administration? Are we heading for that level of instability? Well, 407 00:24:19,000 --> 00:24:21,880 Speaker 1: of course two thousand nine in some ways was much 408 00:24:21,920 --> 00:24:29,439 Speaker 1: more serious uh than nine than I think. We're in 409 00:24:30,680 --> 00:24:36,119 Speaker 1: really quite uncharted territory with the President of the United 410 00:24:36,200 --> 00:24:45,800 Speaker 1: States actively um denigrating the fellow reserve and asserting the 411 00:24:45,920 --> 00:24:51,160 Speaker 1: need for the dollar to dollars value to decline. This 412 00:24:51,280 --> 00:24:55,919 Speaker 1: is a monetary experiment the likes of which we've not 413 00:24:56,119 --> 00:25:00,520 Speaker 1: seen in a long time. We don't know whether it 414 00:25:00,600 --> 00:25:07,280 Speaker 1: will continue. The degree of drama in markets UH yesterday 415 00:25:07,520 --> 00:25:11,960 Speaker 1: suggests that its continuation is at least a possibility, and 416 00:25:12,480 --> 00:25:18,240 Speaker 1: the rush into safe haven assets is a further cause 417 00:25:18,359 --> 00:25:24,400 Speaker 1: for concern. So I'm not prepared to predict with confidence 418 00:25:24,520 --> 00:25:29,720 Speaker 1: that we will have a recession, but I am prepared 419 00:25:29,800 --> 00:25:35,840 Speaker 1: to say that we're taking needless chances with our credibility, 420 00:25:35,880 --> 00:25:41,440 Speaker 1: with our economic health, and that the risks are certainly 421 00:25:41,520 --> 00:25:45,359 Speaker 1: well elevated relative to where they've been or where they 422 00:25:45,400 --> 00:25:48,360 Speaker 1: need to be. Dovetail and give us an update then 423 00:25:48,560 --> 00:25:52,760 Speaker 1: on your Our theme of secular stagnation is what we're 424 00:25:52,880 --> 00:25:57,000 Speaker 1: arguing about here, Professor Summers. The idea of a new 425 00:25:57,119 --> 00:26:01,159 Speaker 1: terminal value of economic growth, a subdue terminal value for 426 00:26:01,240 --> 00:26:05,040 Speaker 1: interest rates and inflation. Are we are we getting ourselves 427 00:26:05,119 --> 00:26:10,280 Speaker 1: to the summer's secular stagnation you've written about. I think 428 00:26:10,320 --> 00:26:12,919 Speaker 1: we are globally, and I think the clearest way to 429 00:26:13,080 --> 00:26:16,360 Speaker 1: see it is by looking at the behavior of long 430 00:26:16,480 --> 00:26:22,160 Speaker 1: term real interest rates. The US ten year real real 431 00:26:22,359 --> 00:26:29,000 Speaker 1: yield is substantially higher than real yields and continental Europe 432 00:26:29,000 --> 00:26:32,560 Speaker 1: and the United Kingdom and Canada or in Japan. So 433 00:26:32,640 --> 00:26:36,440 Speaker 1: we're the leader in terms of long term real interest rates. 434 00:26:36,960 --> 00:26:40,920 Speaker 1: An our long term UH real interest rate down pretty 435 00:26:40,920 --> 00:26:47,040 Speaker 1: close to ten basis points UH yesterday, that's essentially zero. Well, 436 00:26:47,080 --> 00:26:50,520 Speaker 1: that's telling you something about what the market thinks is 437 00:26:50,680 --> 00:26:55,679 Speaker 1: necessary to get asset prices up or to get investment 438 00:26:55,720 --> 00:27:00,720 Speaker 1: demand high enough to push economies forward. If just yes, 439 00:27:00,800 --> 00:27:05,639 Speaker 1: it's the essence of secular stagnation that to get even 440 00:27:06,119 --> 00:27:10,960 Speaker 1: modest growth you need an extraordinary amount of fuel put 441 00:27:11,040 --> 00:27:14,800 Speaker 1: into the engine. And just just look at how low 442 00:27:14,840 --> 00:27:18,360 Speaker 1: interest rates are, look at how much lending is going on, 443 00:27:19,160 --> 00:27:23,080 Speaker 1: look at the magnitude of budget deficits, and I think 444 00:27:23,080 --> 00:27:27,360 Speaker 1: it'll all suggests that secular stagnation is how the market's 445 00:27:27,400 --> 00:27:31,240 Speaker 1: assessing things right now. I would suggest Larry Summers that 446 00:27:31,440 --> 00:27:34,719 Speaker 1: no one knows about the yelling and screaming of strong 447 00:27:34,800 --> 00:27:39,919 Speaker 1: minded economic types at Pennsylvania Avenue. Like you do. You 448 00:27:40,000 --> 00:27:42,440 Speaker 1: lived in three or four different jobs, through three or 449 00:27:42,440 --> 00:27:46,120 Speaker 1: four different crises. Whether people agree or disagree with you, 450 00:27:46,520 --> 00:27:49,720 Speaker 1: there's a lot of emotion. What do you need to 451 00:27:49,760 --> 00:27:54,960 Speaker 1: see from the people around this original president? What what 452 00:27:55,000 --> 00:27:58,600 Speaker 1: would you like to see from free trader Lawrence Cudlow 453 00:27:59,000 --> 00:28:02,080 Speaker 1: or Secretary mean Ouian in the cross heres? What do 454 00:28:02,160 --> 00:28:05,200 Speaker 1: they need to do in the coming hours in days. 455 00:28:07,440 --> 00:28:12,479 Speaker 1: They need to be effective in private in persuading the 456 00:28:12,520 --> 00:28:22,640 Speaker 1: President to restrain his intemperate observations on sensitive financial matters. 457 00:28:23,400 --> 00:28:28,879 Speaker 1: They need to protect their own credibility by not claiming 458 00:28:29,440 --> 00:28:33,600 Speaker 1: that China is a manipulator after being told to do 459 00:28:33,680 --> 00:28:39,720 Speaker 1: so by the President. Step one, that's politicizing what is 460 00:28:39,840 --> 00:28:44,640 Speaker 1: usually a technical economic judgment. And then they need to 461 00:28:44,720 --> 00:28:49,480 Speaker 1: be prudent in what they say. China is not manipulating 462 00:28:49,960 --> 00:28:53,280 Speaker 1: its currency. China doesn't even have a significant trade surplus 463 00:28:53,720 --> 00:28:57,120 Speaker 1: at this point. And if China is taking any artificial 464 00:28:57,120 --> 00:29:00,960 Speaker 1: actions there to buy our m B, not to sell 465 00:29:01,560 --> 00:29:06,040 Speaker 1: r m B, there's a control outflows of RMB, not 466 00:29:06,160 --> 00:29:11,920 Speaker 1: to control inflows of RMB. So I think if the 467 00:29:11,960 --> 00:29:18,480 Speaker 1: President restrained himself, if we focused on are really important 468 00:29:18,520 --> 00:29:24,200 Speaker 1: priorities with China, matters like North Korea rather than these 469 00:29:24,280 --> 00:29:31,600 Speaker 1: mercantile issues that obsess UH the president, and if the 470 00:29:31,680 --> 00:29:38,520 Speaker 1: UH financial authorities themselves were very careful to husband their credibility, 471 00:29:38,960 --> 00:29:41,840 Speaker 1: those would be the steps necessary for Prof. Larry, I've 472 00:29:41,880 --> 00:29:44,040 Speaker 1: got about fourteen more questions. I'd love to get a 473 00:29:44,080 --> 00:29:46,000 Speaker 1: half hour of you in the coming weeks as your 474 00:29:46,000 --> 00:29:49,480 Speaker 1: schedule that province Lawrence Summers, the former Secretary of Treasury 475 00:29:50,080 --> 00:29:54,000 Speaker 1: as well the president of Harvard University at this important moment. 476 00:30:08,720 --> 00:30:10,840 Speaker 1: Now to the chief Economists and global head of Economics 477 00:30:10,840 --> 00:30:12,640 Speaker 1: and more, Constanley chat and I are joining us on 478 00:30:12,680 --> 00:30:15,800 Speaker 1: the phone. Good morning to Chatsen. Good morning. Let's just 479 00:30:15,840 --> 00:30:20,360 Speaker 1: talk about the designation currency manipulator China. What does that 480 00:30:20,400 --> 00:30:24,640 Speaker 1: actually mean and what are the next steps from Treasury now? Well, 481 00:30:24,680 --> 00:30:26,960 Speaker 1: I think the next steps will essentially have to be 482 00:30:27,560 --> 00:30:32,080 Speaker 1: either having a bilateral conversation with the Chinese policymakers or 483 00:30:32,800 --> 00:30:36,880 Speaker 1: having IMF actually be involved and again involving with some 484 00:30:36,960 --> 00:30:40,000 Speaker 1: discussion with the Chinese policymakers. So it's it's really like 485 00:30:40,280 --> 00:30:44,920 Speaker 1: nothing immediately that the measures can be taken by the 486 00:30:45,040 --> 00:30:49,920 Speaker 1: Chinese policymakers or the US policymakers is just more conversation. 487 00:30:50,000 --> 00:30:52,800 Speaker 1: So this this specific measure immediately does not have any 488 00:30:53,520 --> 00:30:56,680 Speaker 1: immediate impact on the economy weight on sentiment overnight than 489 00:30:56,720 --> 00:30:59,840 Speaker 1: sentiments snap back pretty quickly as the p POC strength 490 00:30:59,880 --> 00:31:03,640 Speaker 1: of the currency fix more than analysts expected coming into 491 00:31:03,960 --> 00:31:06,880 Speaker 1: the Tuesday session. Chatting with that in mind, how much 492 00:31:06,920 --> 00:31:09,640 Speaker 1: encouragement should we be taking from the actions of the 493 00:31:09,680 --> 00:31:14,280 Speaker 1: pr b C in the last twenty four hours, Well, 494 00:31:14,360 --> 00:31:17,080 Speaker 1: we think that China would not have the interest to 495 00:31:17,200 --> 00:31:22,840 Speaker 1: do use currency for the trade dispute purposes because ultimately, 496 00:31:22,920 --> 00:31:26,560 Speaker 1: remember that they have this interest to ensure that foreign 497 00:31:26,560 --> 00:31:29,240 Speaker 1: investors get into Chinese assets and they become a more 498 00:31:29,280 --> 00:31:32,720 Speaker 1: effective reserve currency. So in that context, for them to 499 00:31:32,800 --> 00:31:37,520 Speaker 1: actually use currency actively in context of dispute will be 500 00:31:37,560 --> 00:31:40,360 Speaker 1: actually at the cross purpose with that other big picture 501 00:31:40,360 --> 00:31:43,880 Speaker 1: of objective. So we always felt that PBOC will try 502 00:31:43,920 --> 00:31:48,160 Speaker 1: to just check volatility but not really use this aggressively 503 00:31:48,680 --> 00:31:51,000 Speaker 1: for chase dispute, and that's exactly what has come out 504 00:31:51,120 --> 00:31:54,720 Speaker 1: with the overnight move by the PBOC. It's just an 505 00:31:55,720 --> 00:31:59,320 Speaker 1: Someone's argued that Stephen Roach invented modern market economics that 506 00:31:59,400 --> 00:32:03,760 Speaker 1: Morgan stay only, and certainly he invented an analysis of 507 00:32:03,920 --> 00:32:09,640 Speaker 1: China that was very understanding of China's domestic needs. What 508 00:32:09,720 --> 00:32:16,280 Speaker 1: does Morgan Stanley perceive as China's domestic needs right now? Well, 509 00:32:16,320 --> 00:32:19,440 Speaker 1: I think the domestic need is the big picture goal 510 00:32:19,560 --> 00:32:22,360 Speaker 1: that they want to become a high income status country 511 00:32:22,400 --> 00:32:25,960 Speaker 1: and in that context, they want to have higher productivity 512 00:32:26,000 --> 00:32:29,360 Speaker 1: growth and higher GDP growth to be able to get there, 513 00:32:29,760 --> 00:32:33,440 Speaker 1: and all the effort that we're seeing on technology front 514 00:32:33,640 --> 00:32:36,120 Speaker 1: is just with that aspiration in mind. Do they steal 515 00:32:36,160 --> 00:32:39,080 Speaker 1: that from us? Is it mercantile? As a president would 516 00:32:39,080 --> 00:32:42,520 Speaker 1: suggest that if they have that, Steve Rochian goal that 517 00:32:42,560 --> 00:32:45,520 Speaker 1: they're going to take it from us. Well, I think 518 00:32:45,600 --> 00:32:48,880 Speaker 1: that that was probably the issue in the past, but 519 00:32:48,960 --> 00:32:52,160 Speaker 1: I think now we're seeing that China is really at 520 00:32:52,160 --> 00:32:55,040 Speaker 1: the forefront of some of the technology, is especially related 521 00:32:55,080 --> 00:32:58,120 Speaker 1: to the telecom services that we have seen, and how 522 00:32:58,200 --> 00:33:01,440 Speaker 1: that can actually um ensure that in some of the 523 00:33:01,440 --> 00:33:04,360 Speaker 1: other technologies like AI, they can be much better, faster, 524 00:33:04,480 --> 00:33:08,360 Speaker 1: and much ahead of everybody else. There's one data point 525 00:33:08,440 --> 00:33:10,280 Speaker 1: that I would like to highlight here, So if you 526 00:33:10,320 --> 00:33:14,160 Speaker 1: look at the applications for patents that's filed by China, 527 00:33:14,960 --> 00:33:17,800 Speaker 1: they've really gone up significantly now matching with a lot 528 00:33:17,800 --> 00:33:21,600 Speaker 1: of the developed world countries. So now it's, uh, it's 529 00:33:21,640 --> 00:33:24,480 Speaker 1: a different ball game. They're pretty much there themselves in 530 00:33:24,520 --> 00:33:27,160 Speaker 1: the innovation space challenge. Just to wrap things up, you've 531 00:33:27,160 --> 00:33:29,760 Speaker 1: made the point over at Morgan Stanley that to really 532 00:33:29,800 --> 00:33:31,760 Speaker 1: resolve some of the issues in the global economy, we 533 00:33:31,800 --> 00:33:34,320 Speaker 1: need one or two things, either a resolution to the 534 00:33:34,320 --> 00:33:38,840 Speaker 1: trade issues or much bigger stimulus coming from the Chinese authorities. 535 00:33:38,840 --> 00:33:43,400 Speaker 1: Do you see signs of either happening anytime soon? Unfortunately not, 536 00:33:43,760 --> 00:33:46,520 Speaker 1: um you know, we we are seeing actually the trade 537 00:33:47,320 --> 00:33:49,720 Speaker 1: dispute actually going in the other direction. As we've seen 538 00:33:49,720 --> 00:33:52,920 Speaker 1: in the last few days and from the Chinese policymakers 539 00:33:52,920 --> 00:33:56,560 Speaker 1: stimulus perspective, um, they have already put in a huge 540 00:33:56,560 --> 00:34:00,320 Speaker 1: stimulus of two and fifty billion dollars in place, and 541 00:34:00,560 --> 00:34:03,080 Speaker 1: a large part of it this time has been in 542 00:34:03,160 --> 00:34:05,560 Speaker 1: form of tax cuts, and to the extent to which 543 00:34:05,600 --> 00:34:09,160 Speaker 1: corporate confidence is being impacted by this trade dispute, it's 544 00:34:09,160 --> 00:34:12,360 Speaker 1: resulting into that those tax cuts being saved. So yeah, 545 00:34:12,640 --> 00:34:15,080 Speaker 1: at this point of time, we don't have the Chinese 546 00:34:15,120 --> 00:34:18,959 Speaker 1: government again going aggressively and doing public spending, So neither 547 00:34:19,040 --> 00:34:22,160 Speaker 1: of those two options seem like in the near term possible. 548 00:34:22,320 --> 00:34:24,239 Speaker 1: I chadn't great to get your thoughts this morning. A 549 00:34:24,320 --> 00:34:26,320 Speaker 1: busy start this week, that's for sure, Chad, and I 550 00:34:26,400 --> 00:34:29,719 Speaker 1: that Morgan Stanley is Chief Economists and Global head of Economics. 551 00:34:30,840 --> 00:34:35,040 Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and 552 00:34:35,080 --> 00:34:40,400 Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast 553 00:34:40,480 --> 00:34:44,720 Speaker 1: platform you prefer. I'm on Twitter at Tom Keane before 554 00:34:44,719 --> 00:34:48,560 Speaker 1: the podcast. You can always catch us worldwide. I'm Bloomberg 555 00:34:48,640 --> 00:35:00,279 Speaker 1: Radio zero.