WEBVTT - Surveillance: Forecasting Year-End Bunds At -0.80%, Says Major 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:28.360 Bloomberg dot Com, and of course on the Bloomberg. In 0:00:28.400 --> 0:00:31.720 the vicinity of two pm yesterday, my team came to 0:00:31.760 --> 0:00:33.559 me and said, who's the one person you want to 0:00:33.600 --> 0:00:37.760 talk to that actually understands the fear out there in 0:00:37.920 --> 0:00:42.320 retail portfolios and people's portfolios. She is a course with 0:00:42.400 --> 0:00:45.879 Charles Schwab. Lizi Ane Saunders has been here before and 0:00:45.920 --> 0:00:49.280 we're thrilled that miss Saunders could join us this morning. 0:00:49.360 --> 0:00:51.640 Lizi Ane, you've seen this before. What do you do 0:00:51.720 --> 0:00:56.320 the day after? So we we tend to do actually 0:00:56.360 --> 0:00:59.160 the day of at the close is put out a 0:00:59.440 --> 0:01:03.560 broadcas indication about our perspective on what happened during that 0:01:03.600 --> 0:01:07.640 particular day, but also reinforcing some of the longer term perspectives. 0:01:07.640 --> 0:01:10.240 And Thomas, you know, we started to get a bit 0:01:10.240 --> 0:01:13.039 more cautious about two years ago and from a tactical 0:01:13.160 --> 0:01:17.959 as allocation perspective went to neutral across the equity asset classes, 0:01:18.000 --> 0:01:21.399 including US equities within which we said you wanted to 0:01:21.440 --> 0:01:24.800 focus on large caps at the expense of of small caps, 0:01:24.800 --> 0:01:28.759 and we've had a pretty defensive UH sector positioning as well. 0:01:28.840 --> 0:01:31.160 So we've had a message out there that this is 0:01:31.240 --> 0:01:33.240 late cycle, that there are risks. You don't want to 0:01:33.240 --> 0:01:36.000 get out over your skis, you don't want to sell 0:01:36.080 --> 0:01:38.160 everything and run for the hills, but this is not 0:01:38.640 --> 0:01:41.440 the time to take undo levels of risk relative to 0:01:41.480 --> 0:01:44.680 your long term strategic allocations. So I think we we 0:01:44.880 --> 0:01:48.840 positioned our investors for this type of market volatility, and 0:01:48.960 --> 0:01:52.600 UH hopefully they they stayed disciplined and calm through this. 0:01:52.920 --> 0:01:56.600 Laz John Templeton was one of the great original global investors. 0:01:56.600 --> 0:01:59.520 I remember the evening he and Luu Kayser at it 0:02:00.000 --> 0:02:03.080 in the Crisis of seven. Give us an update on 0:02:03.280 --> 0:02:06.960 your view on the global investment world. Do you have 0:02:07.080 --> 0:02:12.280 to stay US centric? Um, not necessarily. We think actually 0:02:12.280 --> 0:02:15.760 correlations across S classes and even within S classes have 0:02:15.880 --> 0:02:21.080 been generally coming down. I think we've exited this environment 0:02:21.240 --> 0:02:24.440 where all risk assets performed generally the same and all 0:02:24.880 --> 0:02:27.320 lower risk assets performed generally the same. So with a 0:02:27.400 --> 0:02:32.639 breakdown and correlations, diversification actually may start to pay some rewards, 0:02:32.680 --> 0:02:36.000 and that's been our message, where neutral bill across emerging markets, 0:02:36.000 --> 0:02:39.560 developed markets, US market, But that means you want to 0:02:39.600 --> 0:02:43.440 have diversification across those uh, those areas. You know, we 0:02:43.480 --> 0:02:45.919 do have obviously a weak global growth story. We've got 0:02:45.960 --> 0:02:48.959 some records that have been broken fifteen consecutive months of 0:02:49.600 --> 0:02:53.200 declining global p M. I I think it's pretty definitive 0:02:53.280 --> 0:02:57.000 that we're in a global manufacturing recession, if not an 0:02:57.040 --> 0:03:00.840 overall global recession, which it looks in cre suddenly likely 0:03:01.320 --> 0:03:04.119 the US will fall into that trap as well, more 0:03:04.160 --> 0:03:07.760 so on the manufacturing side, maybe not across the spectrum 0:03:07.760 --> 0:03:10.519 and the economy, but the risk has clearly risen with 0:03:10.520 --> 0:03:14.560 with what's going on with trade umsen. What what does 0:03:14.600 --> 0:03:17.200 this mean for bond yields across the board? Are they 0:03:17.200 --> 0:03:20.400 going to go further into negative territory or is it 0:03:20.440 --> 0:03:24.000 just lower for longer. Well, let's hope that in the 0:03:24.080 --> 0:03:27.079 US we don't go into negative territory. You've got about 0:03:27.160 --> 0:03:31.400 thirteen and change trillion dollars of negative yielding bonds globally, 0:03:31.480 --> 0:03:34.440 and there's been some chatter that the US would consider that. 0:03:34.960 --> 0:03:37.840 I don't think there's really any place where central bankers 0:03:37.880 --> 0:03:41.640 have experimented with negative yields that have ultimately been the 0:03:41.680 --> 0:03:43.960 elixir for what ails them, and I don't think it 0:03:43.960 --> 0:03:46.640 would be the case here. So we're certainly hopeful that 0:03:46.720 --> 0:03:50.960 we don't have to head down that path. In the meantime, 0:03:51.000 --> 0:03:54.640 though you're looking at multi year lows in the ten uere. 0:03:54.680 --> 0:03:56.800 We're not back down near where we were three years 0:03:56.800 --> 0:03:59.520 ago in sixteen. When I think the ten you're bottomed 0:03:59.560 --> 0:04:02.280 at one point three five. But the fact that bon 0:04:02.400 --> 0:04:05.080 Niels continued to think has kept the yield curve inverted 0:04:05.240 --> 0:04:08.120 even with the FED rate cut from from last week. 0:04:09.240 --> 0:04:10.680 All Right, thank you so much for joining us at 0:04:10.720 --> 0:04:30.359 Lisienne Sandres, Charles Schwaba, Chief Investment strateches Johnny's. He's esteemed 0:04:30.480 --> 0:04:33.160 with a wonderful history of golden SAX and now working 0:04:33.680 --> 0:04:38.280 for the most interesting Institute of International Finance Books the 0:04:38.360 --> 0:04:41.000 chief economy st over there. Now Robin Brooks joined us. Now, Robin, 0:04:41.080 --> 0:04:43.479 fantastic to have you with us on Blomberg surveillance. Let's 0:04:43.520 --> 0:04:48.120 just start with the Treasury designating China currency manipulator. The 0:04:48.240 --> 0:04:52.599 significance of that or not your thoughts, Robin, Well, thanks 0:04:52.600 --> 0:04:55.839 so much for having me on. Obviously, it's a pretty 0:04:55.880 --> 0:05:01.800 big step um by many men. Sure's China is in 0:05:01.880 --> 0:05:04.960 the past, or has been in the past a currency 0:05:04.960 --> 0:05:10.679 manipulator on average between two thousand six and China bought 0:05:11.600 --> 0:05:15.760 fifty billion dollars in reserves every year, But since then 0:05:15.800 --> 0:05:19.040 things have changed a lot, and intervention was close to zero. 0:05:19.120 --> 0:05:22.080 So this is a bit too late and technically doesn't 0:05:22.120 --> 0:05:25.120 fit the definition. And Robin, the irony is they'll be 0:05:25.160 --> 0:05:27.920 happy with the fact that Chinese did manipulate the currency 0:05:28.000 --> 0:05:31.440 stronger overnight. So let's just talk about what the Chinese 0:05:31.520 --> 0:05:34.560 are doing and what leaves they're pulling to stabilize the currency. 0:05:35.760 --> 0:05:38.360 So let's talk about the big picture. First of all, 0:05:38.440 --> 0:05:40.880 when you have an exchange rate, right, part of that 0:05:40.960 --> 0:05:45.080 exchange rate function is to offset shocks that hit your country, 0:05:45.680 --> 0:05:49.000 and tariffs are a shock, a negative shock. So when 0:05:49.040 --> 0:05:51.480 you have a freely floating currency, and I don't want 0:05:51.480 --> 0:05:53.640 to say China has a freely floating currency, but it's 0:05:53.800 --> 0:05:57.479 getting closer to one, it is natural for that currency 0:05:57.560 --> 0:06:00.760 to weaken in response to tariffs. And so that's what 0:06:00.880 --> 0:06:03.599 we saw at the start of this week. Uh. And 0:06:03.760 --> 0:06:07.720 as you said, China has stepped in now to prevent 0:06:07.720 --> 0:06:09.880 the fix from going through seven. Right, And we got 0:06:09.880 --> 0:06:12.120 about nine questions, but I'll give you one and you 0:06:12.320 --> 0:06:15.760 nail it in your essay, which is how big is 0:06:15.800 --> 0:06:19.719 the dollar? Long positioning? Let's start with China. John Plender 0:06:19.720 --> 0:06:22.360 in the f T I thought was brilliant today. How 0:06:22.400 --> 0:06:28.760 big is the dollar bet by the government of China? Well, um, so, 0:06:29.040 --> 0:06:33.720 China has, because of its interventions, built up a large 0:06:34.160 --> 0:06:37.640 war chest of reserves. So at the peak those reserves 0:06:37.720 --> 0:06:41.600 were about four chillion dollars. They have fallen significantly into 0:06:41.600 --> 0:06:44.120 around three chillions. So that's where we stand now. Is 0:06:44.160 --> 0:06:48.080 there a risk that China could use that strength to 0:06:48.560 --> 0:06:52.839 um bully the president of the United States? I think 0:06:53.160 --> 0:06:55.799 you know, it's a great question, and in a way, uh, 0:06:56.040 --> 0:06:58.520 what you're referring to is kind of game theory, right, 0:06:58.640 --> 0:07:01.400 These two sides are duking it out in a way, 0:07:01.480 --> 0:07:03.720 or it certainly seems like that. But both sides have 0:07:03.760 --> 0:07:06.240 a huge amount to lose. For the United States, it's 0:07:06.279 --> 0:07:09.280 the stock market which really doesn't like these trade tensions, 0:07:09.320 --> 0:07:12.400 and we saw that yesterday. And for China there's always 0:07:12.400 --> 0:07:15.760 the risk of capital outflows starting again. So both sides 0:07:15.800 --> 0:07:18.800 have a strong incentive to de escalate. What what is it? 0:07:19.000 --> 0:07:23.280 What's the relative distancentive. I don't understand why China needs 0:07:23.320 --> 0:07:26.200 to do anything but go China silence. I mean, isn't 0:07:26.240 --> 0:07:31.840 their biggest strength is to just be quiet? Well, you know, 0:07:32.000 --> 0:07:36.400 in the end, China's economy faces headwinds right as you 0:07:36.680 --> 0:07:39.160 As you know and as you've have you've covered in 0:07:39.240 --> 0:07:42.240 many of your shows, there is a leverage overhanging China. 0:07:42.960 --> 0:07:46.480 Um growth has been slowing. These tariffs are a bad 0:07:46.520 --> 0:07:50.280 thing um, and so there is an incentive to engage 0:07:50.320 --> 0:07:52.640 with the United States constructively. And for that you have 0:07:52.720 --> 0:07:56.240 to talk, so you can't be silent um. And I 0:07:56.280 --> 0:07:59.640 think this currency move that we saw at the beginning 0:07:59.640 --> 0:08:03.240 of the yesterday was a sign of exasperation. Right, China 0:08:03.320 --> 0:08:06.560 has put up with multiple rounds of tariffs, done nothing, 0:08:07.320 --> 0:08:09.480 and I think here I think it was a signal. 0:08:09.840 --> 0:08:12.760 Enough is enough, John, to put this in perspective, It 0:08:12.840 --> 0:08:17.120 was exactly for standard deviation move yesterday like they planned it, 0:08:17.640 --> 0:08:20.320 and now we're at about two point eight standard deviation. Well, 0:08:20.360 --> 0:08:23.080 let's talk about that this idea that they planned it 0:08:23.160 --> 0:08:25.320 and that they have a lot of control over what 0:08:25.360 --> 0:08:27.960 happens with this currency. Yes, overnight they set the daily 0:08:27.960 --> 0:08:31.240 currency fixed stronger. Yes, they plan a sale of you 0:08:31.320 --> 0:08:33.920 and denominated bombs in Hong Kong which should flush out 0:08:33.920 --> 0:08:36.959 some of the shorts perhaps, But Robin, this idea, we 0:08:37.240 --> 0:08:39.520 seem to have this immense faith that they have control, 0:08:39.840 --> 0:08:42.480 that they can smooth out the bumps. The market force 0:08:42.520 --> 0:08:44.880 is quite clearly leaning the wrong way, and Robin, I 0:08:44.920 --> 0:08:47.400 just wonder whether they can continue to smooth out the 0:08:47.400 --> 0:08:52.119 bumps in a reliable way. Okay, great questions. So obviously 0:08:52.240 --> 0:08:54.839 China is a huge economy, right, second biggest economy in 0:08:54.880 --> 0:08:58.320 the world. Can you ever really fully control financial markets? 0:08:58.320 --> 0:09:03.719 And I think, Uh, the truth is China has capital controls, 0:09:03.760 --> 0:09:06.720 so it is not a fully convertible currency in the 0:09:06.720 --> 0:09:10.079 way that for example, euro dollar is. And so the 0:09:10.200 --> 0:09:13.679 question is how effective are those capital controls. And I 0:09:13.679 --> 0:09:19.600 think when markets were really worried about a devaluation that 0:09:19.679 --> 0:09:22.679 was a test. But our census that today those capital 0:09:22.720 --> 0:09:26.120 controls are working pretty well. What is the president's best outcome, 0:09:26.240 --> 0:09:29.680 Robin Brooks, What is the to do list for President 0:09:29.760 --> 0:09:33.640 Trump with all of his belief set to constructively move 0:09:33.720 --> 0:09:39.840 forward the dialogue? Look, I think the basic issue on 0:09:40.200 --> 0:09:45.040 China is that even though the headline current account surplus 0:09:45.080 --> 0:09:49.480 has fallen from ten percent close to zero, our underlying 0:09:49.480 --> 0:09:53.560 analysis says that the overall trade surplus that China has 0:09:53.960 --> 0:09:57.000 is still big. So there is a legitimate trade imbalance. 0:09:57.080 --> 0:10:00.160 And I think the President and some of his as 0:10:00.760 --> 0:10:04.800 officials in the administration have a somewhat legitimate issue. But 0:10:04.880 --> 0:10:08.680 obviously you want to address this issue without upsetting the 0:10:08.800 --> 0:10:11.600 SMP and financial markets more broadly. So that's the fine 0:10:11.600 --> 0:10:13.839 line this administration is trying to walk. Robin, I want 0:10:13.840 --> 0:10:15.800 to wrap things up by talking about Europe with you, 0:10:16.040 --> 0:10:18.319 just very quickly. I've been following your work on the continent. 0:10:18.400 --> 0:10:21.120 I think it's really interesting. A lot of people reach 0:10:21.200 --> 0:10:23.640 for the trade story and then just blame everything that's 0:10:23.640 --> 0:10:25.679 happening in Europe on the trade story. You've picked out 0:10:25.720 --> 0:10:27.520 some some other and I hate this word, but I've 0:10:27.559 --> 0:10:30.000 got to use it, some other idiosynchronic reasons as to why, 0:10:30.240 --> 0:10:32.520 because Europe is going through this slowdown, do you have 0:10:32.559 --> 0:10:34.800 to put a dollar in the drinking game. You have 0:10:34.800 --> 0:10:38.720 to have to drink, but continue rubbing. Come on, just 0:10:38.760 --> 0:10:40.840 walk us through some of days, some of those unique 0:10:41.040 --> 0:10:44.559 things that are happening in Europe at the moment. Well, Um, 0:10:44.679 --> 0:10:47.720 one of the big things people are obviously worried about is, 0:10:47.840 --> 0:10:51.280 you know, this trade war in the end is about 0:10:51.400 --> 0:10:55.320 disrupting supply chains, and so that obviously causes anxiety and 0:10:55.400 --> 0:10:59.839 markets about global growth. And one of the main light 0:11:00.160 --> 0:11:02.640 rods and all of this has been German data, which 0:11:02.679 --> 0:11:06.040 have been incredibly weak. Now, the thing about Germany is 0:11:06.080 --> 0:11:08.360 it's obviously an exporter to the world, but it's been 0:11:08.480 --> 0:11:12.960 hit by some one off stories. So Brexit is one, 0:11:13.120 --> 0:11:15.800 and then there's a big credit crunch underway in Turkey, 0:11:15.840 --> 0:11:18.360 and that's the other. And Germany exports a lot to both. 0:11:18.679 --> 0:11:21.600 Exports to China look good, so that's a positive sign 0:11:21.640 --> 0:11:24.480 for the global economy. Exports to the US look very healthy. 0:11:24.520 --> 0:11:27.440 That's another positive sign. So that's why I've been saying 0:11:27.520 --> 0:11:31.160 on Twitter, for example, that overall the global picture actually 0:11:31.160 --> 0:11:33.680 looks pretty okay. So, Robin, when you look at Germany 0:11:33.800 --> 0:11:35.880 right now, you think that slowdown is mainly because of 0:11:35.920 --> 0:11:38.760 Brexit and a credit crunch in Turkey and not China, 0:11:39.960 --> 0:11:44.040 That's exactly right. That's certainly based on the export data. 0:11:44.120 --> 0:11:47.760 There's no sign that China is the reason for a 0:11:47.880 --> 0:11:51.319 slowdown in German exports. Robin, really really great to get 0:11:51.320 --> 0:11:53.200 you on a program to break down some of these effects. 0:11:53.200 --> 0:11:56.880 Moves Robin Brooks, the chief economist over at the Institute 0:11:57.200 --> 0:12:16.360 of International Finance, with our question, Gary Shilling, someone like 0:12:16.400 --> 0:12:20.280 sree Komar has been really striding about a lower rate regime, 0:12:20.360 --> 0:12:23.840 but no one has published on a lower rate regime 0:12:24.360 --> 0:12:27.160 like Stephen Major. This email dropped in my inbox earlier 0:12:27.160 --> 0:12:30.160 this morning. We cut our end twenty nineteen US ten 0:12:30.240 --> 0:12:33.400 year Treasury and bungee of forecast the one fifty and 0:12:33.559 --> 0:12:37.320 negative eight basis points, respectively. I'm very happy to say 0:12:37.320 --> 0:12:41.600 that Steve Major calls us, now HSBC Managing director and 0:12:41.679 --> 0:12:44.200 a global head of fixed income research joining us on 0:12:44.200 --> 0:12:47.640 the phone. Good morning to Steve. Morning, Jonathan, are you 0:12:47.880 --> 0:12:50.199 I'm very well. Let's just start with this call, shall we. 0:12:50.360 --> 0:12:51.760 The one that jumps out of me is not the 0:12:51.800 --> 0:12:54.920 Treasury one. It's the button call negative eighty basis points year, 0:12:55.000 --> 0:12:56.720 and just walk us through the dynamic that you and 0:12:56.720 --> 0:12:59.720 the team are thinking about the framework for this bond market, 0:12:59.800 --> 0:13:02.960 right our Steve. The thing is that the bond market 0:13:03.080 --> 0:13:06.040 and the FX market is all about relatives. It's not 0:13:06.080 --> 0:13:10.280 about absolutes. So if I buy a bond today, I'm 0:13:10.320 --> 0:13:14.360 interested in total return. Is that total return versus cash 0:13:14.400 --> 0:13:17.800 which is zero, or total return versus a two year 0:13:18.360 --> 0:13:22.400 or versus a credit bond or whatever. So look ten 0:13:22.480 --> 0:13:26.120 year yields today a minus fifty. I didn't think they'd 0:13:26.160 --> 0:13:28.520 get much lower than minus forty, to tell you the truth, 0:13:28.600 --> 0:13:33.040 But we're minus fifty and we're now forecasting minus eighty. 0:13:33.080 --> 0:13:36.880 Each one basis point is worth more than ten cents. 0:13:37.480 --> 0:13:41.840 That doesn't sound like much, but fifty basis points becomes 0:13:42.080 --> 0:13:45.960 five of total return. How much money do you think 0:13:46.000 --> 0:13:48.439 you would have made if you'd held the one year 0:13:48.520 --> 0:13:56.440 Austria this year? I think you're up abo you no, no, no, no, John, 0:13:57.720 --> 0:14:01.480 don't tell me, don't tell me. Bonds aren't sex Who 0:14:01.480 --> 0:14:03.520 would have thought the central bomb would out perform that much? 0:14:03.559 --> 0:14:07.320 Thomas return on an Australian. So this is Gary showing 0:14:07.400 --> 0:14:11.160 one on one. Steve Major, explain the inertial force that 0:14:11.240 --> 0:14:15.400 will allow lower for longer. Is it just the desperation 0:14:15.520 --> 0:14:18.440 to own and to buy that makes all this happen? 0:14:19.440 --> 0:14:22.240 You know, there's a lot of theory on the negative rates, 0:14:23.480 --> 0:14:26.280 the policy rate, and I think it was good Friend 0:14:26.400 --> 0:14:28.800 back in two thousand and sixteen that released the paper 0:14:28.840 --> 0:14:31.400 at Jackson Hole, so it's about exactly three years ago 0:14:32.120 --> 0:14:35.160 Marvin good Friend. And and subsequently there's been papers from 0:14:35.160 --> 0:14:37.320 the I m F and staff reports from the CB, 0:14:37.720 --> 0:14:40.800 all exploring that lower bound. In fact, even the FED 0:14:40.920 --> 0:14:43.240 cause it the lower bound now, not the zero bound. 0:14:43.640 --> 0:14:46.520 My point is the constraints that we saw a few 0:14:46.600 --> 0:14:49.640 years ago are slowly being peeled away. One of the 0:14:49.680 --> 0:14:53.800 constraints is cash, the existence of cash. The other constraint 0:14:53.880 --> 0:14:57.040 is the pain on bank The third one is this 0:14:57.120 --> 0:14:59.640 idea about whether it works or not. So I've looked 0:14:59.640 --> 0:15:01.760 at all rate. First of all, in some countries there 0:15:01.840 --> 0:15:05.440 is no cash, so you can forget that. America may 0:15:05.520 --> 0:15:08.160 have cash at the moment, but give it a few years. 0:15:08.680 --> 0:15:12.200 So the resistance in terms of the substitution into cash 0:15:12.440 --> 0:15:14.640 may not be there at some point in the future. 0:15:14.640 --> 0:15:16.680 It's not there in Sweden, it's not there in the 0:15:16.720 --> 0:15:20.120 Nordic countries. Um you may even you may even have 0:15:20.160 --> 0:15:24.960 an exchange rate between cash and electronic money just to 0:15:25.040 --> 0:15:28.560 just to just to encourage this move. As central banks 0:15:28.600 --> 0:15:33.600 explore the lower bound, then the short rate for bonds 0:15:33.720 --> 0:15:36.400 goes even lower. So if the ECB was a mind 0:15:36.480 --> 0:15:38.720 US one hundred and fifty or minus two hundred, than 0:15:38.760 --> 0:15:41.880 two years shots are going to be around the same level. 0:15:42.200 --> 0:15:44.920 So what's the yield in the ten year burned? Well, Steve, 0:15:45.000 --> 0:15:47.240 this is the argument that interests me this morning, and 0:15:47.280 --> 0:15:49.920 I look at your research that this move starts from 0:15:49.920 --> 0:15:53.760 shorter maturities and extends up the curve. Yeah. Yeah, just 0:15:53.800 --> 0:15:56.800 focus through why that dynamic is present right now, what 0:15:56.840 --> 0:15:58.640 we've learned from Japan, and why we're about to see 0:15:58.640 --> 0:16:01.200 it a whole lot more in the United State, in Germany, 0:16:01.560 --> 0:16:04.720 people need to grab the yield to get the total returns. 0:16:04.800 --> 0:16:09.280 So so intuitively, your intuition would say that if they 0:16:09.320 --> 0:16:12.240 cut the rate, the curve with Stephen, but you need 0:16:12.280 --> 0:16:18.160 to forget everything you've learned, especially in the textbooks and universities. 0:16:18.520 --> 0:16:21.240 Nowhere in any of my for boat to see textbooks 0:16:21.320 --> 0:16:24.160 or any fixed income textbook that I own, is there 0:16:24.160 --> 0:16:27.480 a convect shield curve. Now you'll know what that is 0:16:27.560 --> 0:16:30.800 as the curve that bows in so it's flat between 0:16:30.880 --> 0:16:33.400 zero and ten and a bit steeper after ten years. 0:16:33.400 --> 0:16:37.560 That's a convex curve. It's the belly is sucked in. 0:16:38.040 --> 0:16:41.600 All of your books will have concave yield curves. They'll 0:16:41.640 --> 0:16:45.800 talk about preferred habitat and investor preference, the quidity preference, 0:16:45.840 --> 0:16:48.600 blah blah blah. Exactly, that's not how it works, not 0:16:48.640 --> 0:16:52.040 with negatives. But Steve, this is critical. You're with a 0:16:52.080 --> 0:16:54.640 major bank, and I say this with great respect. You're 0:16:54.640 --> 0:16:57.160 not going to go out in bad mount your competition 0:16:57.760 --> 0:17:01.520 in the Steve, major mill you of the next twenty 0:17:01.560 --> 0:17:06.080 four months, how do banks survive? How do they obtain 0:17:06.920 --> 0:17:12.800 profitability or a diminished loss? Okay, so one of the 0:17:12.840 --> 0:17:16.040 other constraints, the second constraint I mentioned. I mentioned was 0:17:16.080 --> 0:17:20.160 bank profitability. So it's not good for earnings. We can 0:17:20.240 --> 0:17:23.439 we can again study what happened in Japan over the 0:17:23.520 --> 0:17:27.600 last thirty years. There are now less banks in Japan. Actually, 0:17:27.640 --> 0:17:31.560 the big, healthy city banks managed to profit from this 0:17:31.720 --> 0:17:35.600 because below zero they were able to pass yields and 0:17:35.720 --> 0:17:40.000 lower rates onto their corporate customers. But the weaker banks 0:17:40.119 --> 0:17:43.000 don't do so well below zero. When when you're cutting 0:17:43.080 --> 0:17:46.680 rates above zero, the weak banks do just great because 0:17:46.920 --> 0:17:50.000 credit constraints are loosened and they can lend more. But 0:17:50.080 --> 0:17:53.960 when you go below zero. The world changes below zero, 0:17:54.000 --> 0:17:57.520 everything is different. The weak banks don't do so well. 0:17:57.840 --> 0:18:01.280 The strong banks still keep their deposits. People don't want 0:18:01.280 --> 0:18:03.800 to keep their deposits in week banks. So from Japan 0:18:03.840 --> 0:18:06.640 we can have a lot. Now that's not a good 0:18:06.680 --> 0:18:10.280 story for the European banking system. But I'm not making 0:18:10.320 --> 0:18:13.280 any call lot of forecast here. I'm just observing what's happening. 0:18:14.000 --> 0:18:16.600 We can see it now. We welcome all of you 0:18:16.680 --> 0:18:19.359 this morning Bloomberg Surveillance, John Faroe and Tim Keen the 0:18:19.480 --> 0:18:22.800 special half hour Steve Major with us with HSBC and 0:18:22.800 --> 0:18:25.679 a bit. Laurence Summer will join as well as we 0:18:25.720 --> 0:18:28.960 give you complete coverage through the thirty minutes. John jumping here, Steve, 0:18:29.320 --> 0:18:32.280 just looking at the ECB. Is there a rate in 0:18:32.320 --> 0:18:34.919 the depot rate that underpins this call? And if so, 0:18:35.119 --> 0:18:37.320 what is the basic assumption on how low the depot 0:18:37.359 --> 0:18:42.400 rate will go at the ECB It's at minus sixty next, 0:18:43.080 --> 0:18:46.400 So bearing in mind we've gone below zero minus ten 0:18:46.960 --> 0:18:50.680 thirty forty minus sixty, each rate cut has supposed to 0:18:50.680 --> 0:18:53.120 have been the last. How many times have people gone 0:18:53.160 --> 0:18:55.160 on your show and said that's it, one and done. 0:18:56.000 --> 0:18:58.040 The e c B would have wanted people to believe 0:18:58.040 --> 0:19:00.920 it's one and done. Don't forget Central banks ECB included 0:19:00.960 --> 0:19:06.600 are well served by selling positivity and optimism. Next year, 0:19:06.720 --> 0:19:09.320 everything's going to be fine. That's what they tell us. 0:19:09.480 --> 0:19:11.960 That's what they have to tell us. They cannot go 0:19:12.119 --> 0:19:15.639 out there and say, oh my word, it's just like Japan. 0:19:15.760 --> 0:19:18.600 We were wrong. So you think we go from negative 0:19:18.600 --> 0:19:21.800 forty to negative sixty. But I'm trying to understand what 0:19:21.880 --> 0:19:24.679 the effective lower bound is for the e c B. Now, 0:19:24.720 --> 0:19:27.399 if they moved to tearing, does that just open a 0:19:27.400 --> 0:19:31.040 whole new range of possibilities? It opens the trap door. 0:19:31.600 --> 0:19:34.520 That's that's the point. We did a calculation three years 0:19:34.520 --> 0:19:38.000 ago if the if the ECB had used the same 0:19:38.080 --> 0:19:42.720 tearing system as the SNB, then approximately one half. In fact, 0:19:42.720 --> 0:19:47.479 in Switzerland it's of the reserves are paid, are charged 0:19:47.520 --> 0:19:51.320 at the minimum rate, and it's minus seventy five minimum 0:19:51.359 --> 0:19:55.440 policy rate. The Swiss ten year trades at minus five right, 0:19:55.960 --> 0:19:58.520 so just as a f y I. My point is 0:19:58.760 --> 0:20:01.360 that you get more efficient, you can drop the policy 0:20:01.440 --> 0:20:04.399 rate even lower with the tearing. How does the Steve 0:20:04.440 --> 0:20:08.120 Major full faith and credit call come over to credit 0:20:08.240 --> 0:20:11.879 to investment grade into high yield. Do they have the 0:20:11.920 --> 0:20:17.199 same lower yield regime? Now? Now, now that's interesting again. 0:20:17.320 --> 0:20:20.960 You you tend to grab yield wherever you can. Now 0:20:20.960 --> 0:20:24.439 with the investment grade, especially in Europe, you've got the 0:20:24.520 --> 0:20:29.920 threat of CSPP being restarted. That's the purchase program for 0:20:29.960 --> 0:20:34.000 corporate bonds. So they never really ended it. There's plenty 0:20:34.000 --> 0:20:36.440 of capacity to restart that they haven't even got to 0:20:36.480 --> 0:20:39.160 announce it. Let's go out and buy them. That changes 0:20:39.240 --> 0:20:42.680 the story for credit globally central banks who ging up 0:20:43.080 --> 0:20:48.439 corporates high yields interesting because because here you get proper 0:20:48.520 --> 0:20:51.439 research and you get proper ideos and credit risk And 0:20:51.560 --> 0:20:53.800 I've got the greatest respect for the analysts in that 0:20:53.880 --> 0:20:56.159 area because these are the guys who are doing bottom 0:20:56.280 --> 0:21:00.520 up research. So making general calls about high yields different call, Tom, 0:21:00.760 --> 0:21:02.920 because you know, each company is different, and it's you know, 0:21:02.960 --> 0:21:07.040 it's about the cash flows and probabilities for each individual situation. 0:21:07.440 --> 0:21:10.120 But that the thing is is that is that now 0:21:10.200 --> 0:21:13.840 for longer tends to stuck people into higher yield and 0:21:13.920 --> 0:21:19.760 returned prospects. I I look, Steve Major, where we go 0:21:19.960 --> 0:21:22.600 from here? What is going to be the reaction of 0:21:22.680 --> 0:21:25.160 the bond world to a one fifty tenure. You walk 0:21:25.200 --> 0:21:30.320 into offices worldwide and explain the permanency of these lower yields. 0:21:30.320 --> 0:21:34.880 What will be the response of your clients and customers. Well, look, 0:21:35.000 --> 0:21:39.120 those that have been resisting it are going to suffer. 0:21:39.760 --> 0:21:45.040 And I think that resistance is futile. Frankly, Um, most 0:21:45.080 --> 0:21:47.320 of the calls I've made in my career, they tend 0:21:47.359 --> 0:21:50.560 not to be right immediately. The good calls have a 0:21:50.560 --> 0:21:53.040 bit of have a bit of durability. If I could 0:21:53.080 --> 0:21:55.399 call the market on on a twenty four hour basis, 0:21:55.440 --> 0:21:59.520 I wouldn't be sitting here talking. Well, you can join 0:21:59.600 --> 0:22:02.720 ferall the piech later this week. Steve Major, what's the new? 0:22:02.760 --> 0:22:05.240 I asked this question a week ago and I thought 0:22:05.280 --> 0:22:07.480 it was like a joke, except now it's not a joke. 0:22:08.000 --> 0:22:12.000 What's the new actuarial assumption for long term assets? The 0:22:12.080 --> 0:22:15.000 people that listen to you, it was eight percent, then 0:22:15.040 --> 0:22:19.280 six percent. Are you under a four percent actual assumption 0:22:19.400 --> 0:22:22.959 for pension money? I don't know where they get these 0:22:22.960 --> 0:22:25.320 assumptions from, but surely it must be lower. If the 0:22:25.359 --> 0:22:28.639 coupon on a hundred years Austria two point one and 0:22:28.680 --> 0:22:31.760 the yield is not point eight. That tells you that 0:22:31.800 --> 0:22:34.200 if they were to issue a fresh one, not tap 0:22:34.240 --> 0:22:37.280 an old one, the coupon wouldn't be any more than one. 0:22:38.480 --> 0:22:41.280 So that's that's telling you where the market is putting 0:22:41.359 --> 0:22:43.600 yields over the longer term. And it's not my opinion, 0:22:43.640 --> 0:22:46.239 it's the it's the collective wisdom of the market. So 0:22:46.320 --> 0:22:49.480 what kind of actuarial assumption is making a number four 0:22:49.600 --> 0:22:51.920 or five? I have no idea. I guess they've got 0:22:51.960 --> 0:22:56.679 some kind of mean reversion mindset. Now, how many times 0:22:56.720 --> 0:22:59.040 in the last thirty years have people called the end 0:22:59.040 --> 0:23:01.320 of the bond market? How many people have come on 0:23:01.359 --> 0:23:04.240 your show called higher yields where they we're looking for 0:23:04.280 --> 0:23:07.119 two and then we broke through that leftl and we 0:23:07.119 --> 0:23:09.840 came aggressively lower. Steve, We've got to leave it. They're 0:23:09.880 --> 0:23:13.240 fantastic to get caught up with you after a really 0:23:13.280 --> 0:23:16.399 interesting note published this morning by Steve Mature and the 0:23:16.560 --> 0:23:20.800 HSBC Scene Steve Major, their HSBC Managing Director and global 0:23:20.840 --> 0:23:23.840 head of Fixed Income research on some big bond market 0:23:23.880 --> 0:23:39.200 calls right now joining us after Mr Major and the 0:23:39.320 --> 0:23:43.360 idea of a stagnation in yields is Laurence Sommers. He's 0:23:43.400 --> 0:23:47.960 a former Secretary of Treasury, president of Harvard University, and 0:23:47.960 --> 0:23:51.320 of course Larry Summers with a heritage of economics going 0:23:51.359 --> 0:23:55.000