Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. In
Speaker 1: the vicinity of two pm yesterday, my team came to
Speaker 1: me and said, who's the one person you want to
Speaker 1: talk to that actually understands the fear out there in
Speaker 1: retail portfolios and people's portfolios. She is a course with
Speaker 1: Charles Schwab. Lizi Ane Saunders has been here before and
Speaker 1: we're thrilled that miss Saunders could join us this morning.
Speaker 1: Lizi Ane, you've seen this before. What do you do
Speaker 1: the day after? So we we tend to do actually
Speaker 1: the day of at the close is put out a
Speaker 1: broadcas indication about our perspective on what happened during that
Speaker 1: particular day, but also reinforcing some of the longer term perspectives.
Speaker 1: And Thomas, you know, we started to get a bit
Speaker 1: more cautious about two years ago and from a tactical
Speaker 1: as allocation perspective went to neutral across the equity asset classes,
Speaker 1: including US equities within which we said you wanted to
Speaker 1: focus on large caps at the expense of of small caps,
Speaker 1: and we've had a pretty defensive UH sector positioning as well.
Speaker 1: So we've had a message out there that this is
Speaker 1: late cycle, that there are risks. You don't want to
Speaker 1: get out over your skis, you don't want to sell
Speaker 1: everything and run for the hills, but this is not
Speaker 1: the time to take undo levels of risk relative to
Speaker 1: your long term strategic allocations. So I think we we
Speaker 1: positioned our investors for this type of market volatility, and
Speaker 1: UH hopefully they they stayed disciplined and calm through this.
Speaker 1: Laz John Templeton was one of the great original global investors.
Speaker 1: I remember the evening he and Luu Kayser at it
Speaker 1: in the Crisis of seven. Give us an update on
Speaker 1: your view on the global investment world. Do you have
Speaker 1: to stay US centric? Um, not necessarily. We think actually
Speaker 1: correlations across S classes and even within S classes have
Speaker 1: been generally coming down. I think we've exited this environment
Speaker 1: where all risk assets performed generally the same and all
Speaker 1: lower risk assets performed generally the same. So with a
Speaker 1: breakdown and correlations, diversification actually may start to pay some rewards,
Speaker 1: and that's been our message, where neutral bill across emerging markets,
Speaker 1: developed markets, US market, But that means you want to
Speaker 1: have diversification across those uh, those areas. You know, we
Speaker 1: do have obviously a weak global growth story. We've got
Speaker 1: some records that have been broken fifteen consecutive months of
Speaker 1: declining global p M. I I think it's pretty definitive
Speaker 1: that we're in a global manufacturing recession, if not an
Speaker 1: overall global recession, which it looks in cre suddenly likely
Speaker 1: the US will fall into that trap as well, more
Speaker 1: so on the manufacturing side, maybe not across the spectrum
Speaker 1: and the economy, but the risk has clearly risen with
Speaker 1: with what's going on with trade umsen. What what does
Speaker 1: this mean for bond yields across the board? Are they
Speaker 1: going to go further into negative territory or is it
Speaker 1: just lower for longer. Well, let's hope that in the
Speaker 1: US we don't go into negative territory. You've got about
Speaker 1: thirteen and change trillion dollars of negative yielding bonds globally,
Speaker 1: and there's been some chatter that the US would consider that.
Speaker 1: I don't think there's really any place where central bankers
Speaker 1: have experimented with negative yields that have ultimately been the
Speaker 1: elixir for what ails them, and I don't think it
Speaker 1: would be the case here. So we're certainly hopeful that
Speaker 1: we don't have to head down that path. In the meantime,
Speaker 1: though you're looking at multi year lows in the ten uere.
Speaker 1: We're not back down near where we were three years
Speaker 1: ago in sixteen. When I think the ten you're bottomed
Speaker 1: at one point three five. But the fact that bon
Speaker 1: Niels continued to think has kept the yield curve inverted
Speaker 1: even with the FED rate cut from from last week.
Speaker 1: All Right, thank you so much for joining us at
Speaker 1: Lisienne Sandres, Charles Schwaba, Chief Investment strateches Johnny's. He's esteemed
Speaker 1: with a wonderful history of golden SAX and now working
Speaker 1: for the most interesting Institute of International Finance Books the
Speaker 1: chief economy st over there. Now Robin Brooks joined us. Now, Robin,
Speaker 1: fantastic to have you with us on Blomberg surveillance. Let's
Speaker 1: just start with the Treasury designating China currency manipulator. The
Speaker 1: significance of that or not your thoughts, Robin, Well, thanks
Speaker 1: so much for having me on. Obviously, it's a pretty
Speaker 1: big step um by many men. Sure's China is in
Speaker 1: the past, or has been in the past a currency
Speaker 1: manipulator on average between two thousand six and China bought
Speaker 1: fifty billion dollars in reserves every year, But since then
Speaker 1: things have changed a lot, and intervention was close to zero.
Speaker 1: So this is a bit too late and technically doesn't
Speaker 1: fit the definition. And Robin, the irony is they'll be
Speaker 1: happy with the fact that Chinese did manipulate the currency
Speaker 1: stronger overnight. So let's just talk about what the Chinese
Speaker 1: are doing and what leaves they're pulling to stabilize the currency.
Speaker 1: So let's talk about the big picture. First of all,
Speaker 1: when you have an exchange rate, right, part of that
Speaker 1: exchange rate function is to offset shocks that hit your country,
Speaker 1: and tariffs are a shock, a negative shock. So when
Speaker 1: you have a freely floating currency, and I don't want
Speaker 1: to say China has a freely floating currency, but it's
Speaker 1: getting closer to one, it is natural for that currency
Speaker 1: to weaken in response to tariffs. And so that's what
Speaker 1: we saw at the start of this week. Uh. And
Speaker 1: as you said, China has stepped in now to prevent
Speaker 1: the fix from going through seven. Right, And we got
Speaker 1: about nine questions, but I'll give you one and you
Speaker 1: nail it in your essay, which is how big is
Speaker 1: the dollar? Long positioning? Let's start with China. John Plender
Speaker 1: in the f T I thought was brilliant today. How
Speaker 1: big is the dollar bet by the government of China? Well, um, so,
Speaker 1: China has, because of its interventions, built up a large
Speaker 1: war chest of reserves. So at the peak those reserves
Speaker 1: were about four chillion dollars. They have fallen significantly into
Speaker 1: around three chillions. So that's where we stand now. Is
Speaker 1: there a risk that China could use that strength to
Speaker 1: um bully the president of the United States? I think
Speaker 1: you know, it's a great question, and in a way, uh,
Speaker 1: what you're referring to is kind of game theory, right,
Speaker 1: These two sides are duking it out in a way,
Speaker 1: or it certainly seems like that. But both sides have
Speaker 1: a huge amount to lose. For the United States, it's
Speaker 1: the stock market which really doesn't like these trade tensions,
Speaker 1: and we saw that yesterday. And for China there's always
Speaker 1: the risk of capital outflows starting again. So both sides
Speaker 1: have a strong incentive to de escalate. What what is it?
Speaker 1: What's the relative distancentive. I don't understand why China needs
Speaker 1: to do anything but go China silence. I mean, isn't
Speaker 1: their biggest strength is to just be quiet? Well, you know,
Speaker 1: in the end, China's economy faces headwinds right as you
Speaker 1: As you know and as you've have you've covered in
Speaker 1: many of your shows, there is a leverage overhanging China.
Speaker 1: Um growth has been slowing. These tariffs are a bad
Speaker 1: thing um, and so there is an incentive to engage
Speaker 1: with the United States constructively. And for that you have
Speaker 1: to talk, so you can't be silent um. And I
Speaker 1: think this currency move that we saw at the beginning
Speaker 1: of the yesterday was a sign of exasperation. Right, China
Speaker 1: has put up with multiple rounds of tariffs, done nothing,
Speaker 1: and I think here I think it was a signal.
Speaker 1: Enough is enough, John, to put this in perspective, It
Speaker 1: was exactly for standard deviation move yesterday like they planned it,
Speaker 1: and now we're at about two point eight standard deviation. Well,
Speaker 1: let's talk about that this idea that they planned it
Speaker 1: and that they have a lot of control over what
Speaker 1: happens with this currency. Yes, overnight they set the daily
Speaker 1: currency fixed stronger. Yes, they plan a sale of you
Speaker 1: and denominated bombs in Hong Kong which should flush out
Speaker 1: some of the shorts perhaps, But Robin, this idea, we
Speaker 1: seem to have this immense faith that they have control,
Speaker 1: that they can smooth out the bumps. The market force
Speaker 1: is quite clearly leaning the wrong way, and Robin, I
Speaker 1: just wonder whether they can continue to smooth out the
Speaker 1: bumps in a reliable way. Okay, great questions. So obviously
Speaker 1: China is a huge economy, right, second biggest economy in
Speaker 1: the world. Can you ever really fully control financial markets?
Speaker 1: And I think, Uh, the truth is China has capital controls,
Speaker 1: so it is not a fully convertible currency in the
Speaker 1: way that for example, euro dollar is. And so the
Speaker 1: question is how effective are those capital controls. And I
Speaker 1: think when markets were really worried about a devaluation that
Speaker 1: was a test. But our census that today those capital
Speaker 1: controls are working pretty well. What is the president's best outcome,
Speaker 1: Robin Brooks, What is the to do list for President
Speaker 1: Trump with all of his belief set to constructively move
Speaker 1: forward the dialogue? Look, I think the basic issue on
Speaker 1: China is that even though the headline current account surplus
Speaker 1: has fallen from ten percent close to zero, our underlying
Speaker 1: analysis says that the overall trade surplus that China has
Speaker 1: is still big. So there is a legitimate trade imbalance.
Speaker 1: And I think the President and some of his as
Speaker 1: officials in the administration have a somewhat legitimate issue. But
Speaker 1: obviously you want to address this issue without upsetting the
Speaker 1: SMP and financial markets more broadly. So that's the fine
Speaker 1: line this administration is trying to walk. Robin, I want
Speaker 1: to wrap things up by talking about Europe with you,
Speaker 1: just very quickly. I've been following your work on the continent.
Speaker 1: I think it's really interesting. A lot of people reach
Speaker 1: for the trade story and then just blame everything that's
Speaker 1: happening in Europe on the trade story. You've picked out
Speaker 1: some some other and I hate this word, but I've
Speaker 1: got to use it, some other idiosynchronic reasons as to why,
Speaker 1: because Europe is going through this slowdown, do you have
Speaker 1: to put a dollar in the drinking game. You have
Speaker 1: to have to drink, but continue rubbing. Come on, just
Speaker 1: walk us through some of days, some of those unique
Speaker 1: things that are happening in Europe at the moment. Well, Um,
Speaker 1: one of the big things people are obviously worried about is,
Speaker 1: you know, this trade war in the end is about
Speaker 1: disrupting supply chains, and so that obviously causes anxiety and
Speaker 1: markets about global growth. And one of the main light
Speaker 1: rods and all of this has been German data, which
Speaker 1: have been incredibly weak. Now, the thing about Germany is
Speaker 1: it's obviously an exporter to the world, but it's been
Speaker 1: hit by some one off stories. So Brexit is one,
Speaker 1: and then there's a big credit crunch underway in Turkey,
Speaker 1: and that's the other. And Germany exports a lot to both.
Speaker 1: Exports to China look good, so that's a positive sign
Speaker 1: for the global economy. Exports to the US look very healthy.
Speaker 1: That's another positive sign. So that's why I've been saying
Speaker 1: on Twitter, for example, that overall the global picture actually
Speaker 1: looks pretty okay. So, Robin, when you look at Germany
Speaker 1: right now, you think that slowdown is mainly because of
Speaker 1: Brexit and a credit crunch in Turkey and not China,
Speaker 1: That's exactly right. That's certainly based on the export data.
Speaker 1: There's no sign that China is the reason for a
Speaker 1: slowdown in German exports. Robin, really really great to get
Speaker 1: you on a program to break down some of these effects.
Speaker 1: Moves Robin Brooks, the chief economist over at the Institute
Speaker 1: of International Finance, with our question, Gary Shilling, someone like
Speaker 1: sree Komar has been really striding about a lower rate regime,
Speaker 1: but no one has published on a lower rate regime
Speaker 1: like Stephen Major. This email dropped in my inbox earlier
Speaker 1: this morning. We cut our end twenty nineteen US ten
Speaker 1: year Treasury and bungee of forecast the one fifty and
Speaker 1: negative eight basis points, respectively. I'm very happy to say
Speaker 1: that Steve Major calls us, now HSBC Managing director and
Speaker 1: a global head of fixed income research joining us on
Speaker 1: the phone. Good morning to Steve. Morning, Jonathan, are you
Speaker 1: I'm very well. Let's just start with this call, shall we.
Speaker 1: The one that jumps out of me is not the
Speaker 1: Treasury one. It's the button call negative eighty basis points year,
Speaker 1: and just walk us through the dynamic that you and
Speaker 1: the team are thinking about the framework for this bond market,
Speaker 1: right our Steve. The thing is that the bond market
Speaker 1: and the FX market is all about relatives. It's not
Speaker 1: about absolutes. So if I buy a bond today, I'm
Speaker 1: interested in total return. Is that total return versus cash
Speaker 1: which is zero, or total return versus a two year
Speaker 1: or versus a credit bond or whatever. So look ten
Speaker 1: year yields today a minus fifty. I didn't think they'd
Speaker 1: get much lower than minus forty, to tell you the truth,
Speaker 1: But we're minus fifty and we're now forecasting minus eighty.
Speaker 1: Each one basis point is worth more than ten cents.
Speaker 1: That doesn't sound like much, but fifty basis points becomes
Speaker 1: five of total return. How much money do you think
Speaker 1: you would have made if you'd held the one year
Speaker 1: Austria this year? I think you're up abo you no, no, no, no, John,
Speaker 1: don't tell me, don't tell me. Bonds aren't sex Who
Speaker 1: would have thought the central bomb would out perform that much?
Speaker 1: Thomas return on an Australian. So this is Gary showing
Speaker 1: one on one. Steve Major, explain the inertial force that
Speaker 1: will allow lower for longer. Is it just the desperation
Speaker 1: to own and to buy that makes all this happen?
Speaker 1: You know, there's a lot of theory on the negative rates,
Speaker 1: the policy rate, and I think it was good Friend
Speaker 1: back in two thousand and sixteen that released the paper
Speaker 1: at Jackson Hole, so it's about exactly three years ago
Speaker 1: Marvin good Friend. And and subsequently there's been papers from
Speaker 1: the I m F and staff reports from the CB,
Speaker 1: all exploring that lower bound. In fact, even the FED
Speaker 1: cause it the lower bound now, not the zero bound.
Speaker 1: My point is the constraints that we saw a few
Speaker 1: years ago are slowly being peeled away. One of the
Speaker 1: constraints is cash, the existence of cash. The other constraint
Speaker 1: is the pain on bank The third one is this
Speaker 1: idea about whether it works or not. So I've looked
Speaker 1: at all rate. First of all, in some countries there
Speaker 1: is no cash, so you can forget that. America may
Speaker 1: have cash at the moment, but give it a few years.
Speaker 1: So the resistance in terms of the substitution into cash
Speaker 1: may not be there at some point in the future.
Speaker 1: It's not there in Sweden, it's not there in the
Speaker 1: Nordic countries. Um you may even you may even have
Speaker 1: an exchange rate between cash and electronic money just to
Speaker 1: just to just to encourage this move. As central banks
Speaker 1: explore the lower bound, then the short rate for bonds
Speaker 1: goes even lower. So if the ECB was a mind
Speaker 1: US one hundred and fifty or minus two hundred, than
Speaker 1: two years shots are going to be around the same level.
Speaker 1: So what's the yield in the ten year burned? Well, Steve,
Speaker 1: this is the argument that interests me this morning, and
Speaker 1: I look at your research that this move starts from
Speaker 1: shorter maturities and extends up the curve. Yeah. Yeah, just
Speaker 1: focus through why that dynamic is present right now, what
Speaker 1: we've learned from Japan, and why we're about to see
Speaker 1: it a whole lot more in the United State, in Germany,
Speaker 1: people need to grab the yield to get the total returns.
Speaker 1: So so intuitively, your intuition would say that if they
Speaker 1: cut the rate, the curve with Stephen, but you need
Speaker 1: to forget everything you've learned, especially in the textbooks and universities.
Speaker 1: Nowhere in any of my for boat to see textbooks
Speaker 1: or any fixed income textbook that I own, is there
Speaker 1: a convect shield curve. Now you'll know what that is
Speaker 1: as the curve that bows in so it's flat between
Speaker 1: zero and ten and a bit steeper after ten years.
Speaker 1: That's a convex curve. It's the belly is sucked in.
Speaker 1: All of your books will have concave yield curves. They'll
Speaker 1: talk about preferred habitat and investor preference, the quidity preference,
Speaker 1: blah blah blah. Exactly, that's not how it works, not
Speaker 1: with negatives. But Steve, this is critical. You're with a
Speaker 1: major bank, and I say this with great respect. You're
Speaker 1: not going to go out in bad mount your competition
Speaker 1: in the Steve, major mill you of the next twenty
Speaker 1: four months, how do banks survive? How do they obtain
Speaker 1: profitability or a diminished loss? Okay, so one of the
Speaker 1: other constraints, the second constraint I mentioned. I mentioned was
Speaker 1: bank profitability. So it's not good for earnings. We can
Speaker 1: we can again study what happened in Japan over the
Speaker 1: last thirty years. There are now less banks in Japan. Actually,
Speaker 1: the big, healthy city banks managed to profit from this
Speaker 1: because below zero they were able to pass yields and
Speaker 1: lower rates onto their corporate customers. But the weaker banks
Speaker 1: don't do so well below zero. When when you're cutting
Speaker 1: rates above zero, the weak banks do just great because
Speaker 1: credit constraints are loosened and they can lend more. But
Speaker 1: when you go below zero. The world changes below zero,
Speaker 1: everything is different. The weak banks don't do so well.
Speaker 1: The strong banks still keep their deposits. People don't want
Speaker 1: to keep their deposits in week banks. So from Japan
Speaker 1: we can have a lot. Now that's not a good
Speaker 1: story for the European banking system. But I'm not making
Speaker 1: any call lot of forecast here. I'm just observing what's happening.
Speaker 1: We can see it now. We welcome all of you
Speaker 1: this morning Bloomberg Surveillance, John Faroe and Tim Keen the
Speaker 1: special half hour Steve Major with us with HSBC and
Speaker 1: a bit. Laurence Summer will join as well as we
Speaker 1: give you complete coverage through the thirty minutes. John jumping here, Steve,
Speaker 1: just looking at the ECB. Is there a rate in
Speaker 1: the depot rate that underpins this call? And if so,
Speaker 1: what is the basic assumption on how low the depot
Speaker 1: rate will go at the ECB It's at minus sixty next,
Speaker 1: So bearing in mind we've gone below zero minus ten
Speaker 1: thirty forty minus sixty, each rate cut has supposed to
Speaker 1: have been the last. How many times have people gone
Speaker 1: on your show and said that's it, one and done.
Speaker 1: The e c B would have wanted people to believe
Speaker 1: it's one and done. Don't forget Central banks ECB included
Speaker 1: are well served by selling positivity and optimism. Next year,
Speaker 1: everything's going to be fine. That's what they tell us.
Speaker 1: That's what they have to tell us. They cannot go
Speaker 1: out there and say, oh my word, it's just like Japan.
Speaker 1: We were wrong. So you think we go from negative
Speaker 1: forty to negative sixty. But I'm trying to understand what
Speaker 1: the effective lower bound is for the e c B. Now,
Speaker 1: if they moved to tearing, does that just open a
Speaker 1: whole new range of possibilities? It opens the trap door.
Speaker 1: That's that's the point. We did a calculation three years
Speaker 1: ago if the if the ECB had used the same
Speaker 1: tearing system as the SNB, then approximately one half. In fact,
Speaker 1: in Switzerland it's of the reserves are paid, are charged
Speaker 1: at the minimum rate, and it's minus seventy five minimum
Speaker 1: policy rate. The Swiss ten year trades at minus five right,
Speaker 1: so just as a f y I. My point is
Speaker 1: that you get more efficient, you can drop the policy
Speaker 1: rate even lower with the tearing. How does the Steve
Speaker 1: Major full faith and credit call come over to credit
Speaker 1: to investment grade into high yield. Do they have the
Speaker 1: same lower yield regime? Now? Now, now that's interesting again.
Speaker 1: You you tend to grab yield wherever you can. Now
Speaker 1: with the investment grade, especially in Europe, you've got the
Speaker 1: threat of CSPP being restarted. That's the purchase program for
Speaker 1: corporate bonds. So they never really ended it. There's plenty
Speaker 1: of capacity to restart that they haven't even got to
Speaker 1: announce it. Let's go out and buy them. That changes
Speaker 1: the story for credit globally central banks who ging up
Speaker 1: corporates high yields interesting because because here you get proper
Speaker 1: research and you get proper ideos and credit risk And
Speaker 1: I've got the greatest respect for the analysts in that
Speaker 1: area because these are the guys who are doing bottom
Speaker 1: up research. So making general calls about high yields different call, Tom,
Speaker 1: because you know, each company is different, and it's you know,
Speaker 1: it's about the cash flows and probabilities for each individual situation.
Speaker 1: But that the thing is is that is that now
Speaker 1: for longer tends to stuck people into higher yield and
Speaker 1: returned prospects. I I look, Steve Major, where we go
Speaker 1: from here? What is going to be the reaction of
Speaker 1: the bond world to a one fifty tenure. You walk
Speaker 1: into offices worldwide and explain the permanency of these lower yields.
Speaker 1: What will be the response of your clients and customers. Well, look,
Speaker 1: those that have been resisting it are going to suffer.
Speaker 1: And I think that resistance is futile. Frankly, Um, most
Speaker 1: of the calls I've made in my career, they tend
Speaker 1: not to be right immediately. The good calls have a
Speaker 1: bit of have a bit of durability. If I could
Speaker 1: call the market on on a twenty four hour basis,
Speaker 1: I wouldn't be sitting here talking. Well, you can join
Speaker 1: ferall the piech later this week. Steve Major, what's the new?
Speaker 1: I asked this question a week ago and I thought
Speaker 1: it was like a joke, except now it's not a joke.
Speaker 1: What's the new actuarial assumption for long term assets? The
Speaker 1: people that listen to you, it was eight percent, then
Speaker 1: six percent. Are you under a four percent actual assumption
Speaker 1: for pension money? I don't know where they get these
Speaker 1: assumptions from, but surely it must be lower. If the
Speaker 1: coupon on a hundred years Austria two point one and
Speaker 1: the yield is not point eight. That tells you that
Speaker 1: if they were to issue a fresh one, not tap
Speaker 1: an old one, the coupon wouldn't be any more than one.
Speaker 1: So that's that's telling you where the market is putting
Speaker 1: yields over the longer term. And it's not my opinion,
Speaker 1: it's the it's the collective wisdom of the market. So
Speaker 1: what kind of actuarial assumption is making a number four
Speaker 1: or five? I have no idea. I guess they've got
Speaker 1: some kind of mean reversion mindset. Now, how many times
Speaker 1: in the last thirty years have people called the end
Speaker 1: of the bond market? How many people have come on
Speaker 1: your show called higher yields where they we're looking for
Speaker 1: two and then we broke through that leftl and we
Speaker 1: came aggressively lower. Steve, We've got to leave it. They're
Speaker 1: fantastic to get caught up with you after a really
Speaker 1: interesting note published this morning by Steve Mature and the
Speaker 1: HSBC Scene Steve Major, their HSBC Managing Director and global
Speaker 1: head of Fixed Income research on some big bond market
Speaker 1: calls right now joining us after Mr Major and the
Speaker 1: idea of a stagnation in yields is Laurence Sommers. He's
Speaker 1: a former Secretary of Treasury, president of Harvard University, and
Speaker 1: of course Larry Summers with a heritage of economics going
Speaker 1: back to his uncle, the Laureate Paul Samuelson. What an
Speaker 1: extraordinary day yesterday, Larry, you stop the Twitter world with
Speaker 1: your two tweets yesterday with a comparing contrast to two
Speaker 1: thousand nine. What is the risk of a comparing contrast
Speaker 1: to the instabilities of nineteen that you lived at the
Speaker 1: Clinton administration? Are we heading for that level of instability? Well,
Speaker 1: of course two thousand nine in some ways was much
Speaker 1: more serious uh than nine than I think. We're in
Speaker 1: really quite uncharted territory with the President of the United
Speaker 1: States actively um denigrating the fellow reserve and asserting the
Speaker 1: need for the dollar to dollars value to decline. This
Speaker 1: is a monetary experiment the likes of which we've not
Speaker 1: seen in a long time. We don't know whether it
Speaker 1: will continue. The degree of drama in markets UH yesterday
Speaker 1: suggests that its continuation is at least a possibility, and
Speaker 1: the rush into safe haven assets is a further cause
Speaker 1: for concern. So I'm not prepared to predict with confidence
Speaker 1: that we will have a recession, but I am prepared
Speaker 1: to say that we're taking needless chances with our credibility,
Speaker 1: with our economic health, and that the risks are certainly
Speaker 1: well elevated relative to where they've been or where they
Speaker 1: need to be. Dovetail and give us an update then
Speaker 1: on your Our theme of secular stagnation is what we're
Speaker 1: arguing about here, Professor Summers. The idea of a new
Speaker 1: terminal value of economic growth, a subdue terminal value for
Speaker 1: interest rates and inflation. Are we are we getting ourselves
Speaker 1: to the summer's secular stagnation you've written about. I think
Speaker 1: we are globally, and I think the clearest way to
Speaker 1: see it is by looking at the behavior of long
Speaker 1: term real interest rates. The US ten year real real
Speaker 1: yield is substantially higher than real yields and continental Europe
Speaker 1: and the United Kingdom and Canada or in Japan. So
Speaker 1: we're the leader in terms of long term real interest rates.
Speaker 1: An our long term UH real interest rate down pretty
Speaker 1: close to ten basis points UH yesterday, that's essentially zero. Well,
Speaker 1: that's telling you something about what the market thinks is
Speaker 1: necessary to get asset prices up or to get investment
Speaker 1: demand high enough to push economies forward. If just yes,
Speaker 1: it's the essence of secular stagnation that to get even
Speaker 1: modest growth you need an extraordinary amount of fuel put
Speaker 1: into the engine. And just just look at how low
Speaker 1: interest rates are, look at how much lending is going on,
Speaker 1: look at the magnitude of budget deficits, and I think
Speaker 1: it'll all suggests that secular stagnation is how the market's
Speaker 1: assessing things right now. I would suggest Larry Summers that
Speaker 1: no one knows about the yelling and screaming of strong
Speaker 1: minded economic types at Pennsylvania Avenue. Like you do. You
Speaker 1: lived in three or four different jobs, through three or
Speaker 1: four different crises. Whether people agree or disagree with you,
Speaker 1: there's a lot of emotion. What do you need to
Speaker 1: see from the people around this original president? What what
Speaker 1: would you like to see from free trader Lawrence Cudlow
Speaker 1: or Secretary mean Ouian in the cross heres? What do
Speaker 1: they need to do in the coming hours in days.
Speaker 1: They need to be effective in private in persuading the
Speaker 1: President to restrain his intemperate observations on sensitive financial matters.
Speaker 1: They need to protect their own credibility by not claiming
Speaker 1: that China is a manipulator after being told to do
Speaker 1: so by the President. Step one, that's politicizing what is
Speaker 1: usually a technical economic judgment. And then they need to
Speaker 1: be prudent in what they say. China is not manipulating
Speaker 1: its currency. China doesn't even have a significant trade surplus
Speaker 1: at this point. And if China is taking any artificial
Speaker 1: actions there to buy our m B, not to sell
Speaker 1: r m B, there's a control outflows of RMB, not
Speaker 1: to control inflows of RMB. So I think if the
Speaker 1: President restrained himself, if we focused on are really important
Speaker 1: priorities with China, matters like North Korea rather than these
Speaker 1: mercantile issues that obsess UH the president, and if the
Speaker 1: UH financial authorities themselves were very careful to husband their credibility,
Speaker 1: those would be the steps necessary for Prof. Larry, I've
Speaker 1: got about fourteen more questions. I'd love to get a
Speaker 1: half hour of you in the coming weeks as your
Speaker 1: schedule that province Lawrence Summers, the former Secretary of Treasury
Speaker 1: as well the president of Harvard University at this important moment.
Speaker 1: Now to the chief Economists and global head of Economics
Speaker 1: and more, Constanley chat and I are joining us on
Speaker 1: the phone. Good morning to Chatsen. Good morning. Let's just
Speaker 1: talk about the designation currency manipulator China. What does that
Speaker 1: actually mean and what are the next steps from Treasury now? Well,
Speaker 1: I think the next steps will essentially have to be
Speaker 1: either having a bilateral conversation with the Chinese policymakers or
Speaker 1: having IMF actually be involved and again involving with some
Speaker 1: discussion with the Chinese policymakers. So it's it's really like
Speaker 1: nothing immediately that the measures can be taken by the
Speaker 1: Chinese policymakers or the US policymakers is just more conversation.
Speaker 1: So this this specific measure immediately does not have any
Speaker 1: immediate impact on the economy weight on sentiment overnight than
Speaker 1: sentiments snap back pretty quickly as the p POC strength
Speaker 1: of the currency fix more than analysts expected coming into
Speaker 1: the Tuesday session. Chatting with that in mind, how much
Speaker 1: encouragement should we be taking from the actions of the
Speaker 1: pr b C in the last twenty four hours, Well,
Speaker 1: we think that China would not have the interest to
Speaker 1: do use currency for the trade dispute purposes because ultimately,
Speaker 1: remember that they have this interest to ensure that foreign
Speaker 1: investors get into Chinese assets and they become a more
Speaker 1: effective reserve currency. So in that context, for them to
Speaker 1: actually use currency actively in context of dispute will be
Speaker 1: actually at the cross purpose with that other big picture
Speaker 1: of objective. So we always felt that PBOC will try
Speaker 1: to just check volatility but not really use this aggressively
Speaker 1: for chase dispute, and that's exactly what has come out
Speaker 1: with the overnight move by the PBOC. It's just an
Speaker 1: Someone's argued that Stephen Roach invented modern market economics that
Speaker 1: Morgan stay only, and certainly he invented an analysis of
Speaker 1: China that was very understanding of China's domestic needs. What
Speaker 1: does Morgan Stanley perceive as China's domestic needs right now? Well,
Speaker 1: I think the domestic need is the big picture goal
Speaker 1: that they want to become a high income status country
Speaker 1: and in that context, they want to have higher productivity
Speaker 1: growth and higher GDP growth to be able to get there,
Speaker 1: and all the effort that we're seeing on technology front
Speaker 1: is just with that aspiration in mind. Do they steal
Speaker 1: that from us? Is it mercantile? As a president would
Speaker 1: suggest that if they have that, Steve Rochian goal that
Speaker 1: they're going to take it from us. Well, I think
Speaker 1: that that was probably the issue in the past, but
Speaker 1: I think now we're seeing that China is really at
Speaker 1: the forefront of some of the technology, is especially related
Speaker 1: to the telecom services that we have seen, and how
Speaker 1: that can actually um ensure that in some of the
Speaker 1: other technologies like AI, they can be much better, faster,
Speaker 1: and much ahead of everybody else. There's one data point
Speaker 1: that I would like to highlight here, So if you
Speaker 1: look at the applications for patents that's filed by China,
Speaker 1: they've really gone up significantly now matching with a lot
Speaker 1: of the developed world countries. So now it's, uh, it's
Speaker 1: a different ball game. They're pretty much there themselves in
Speaker 1: the innovation space challenge. Just to wrap things up, you've
Speaker 1: made the point over at Morgan Stanley that to really
Speaker 1: resolve some of the issues in the global economy, we
Speaker 1: need one or two things, either a resolution to the
Speaker 1: trade issues or much bigger stimulus coming from the Chinese authorities.
Speaker 1: Do you see signs of either happening anytime soon? Unfortunately not,
Speaker 1: um you know, we we are seeing actually the trade
Speaker 1: dispute actually going in the other direction. As we've seen
Speaker 1: in the last few days and from the Chinese policymakers
Speaker 1: stimulus perspective, um, they have already put in a huge
Speaker 1: stimulus of two and fifty billion dollars in place, and
Speaker 1: a large part of it this time has been in
Speaker 1: form of tax cuts, and to the extent to which
Speaker 1: corporate confidence is being impacted by this trade dispute, it's
Speaker 1: resulting into that those tax cuts being saved. So yeah,
Speaker 1: at this point of time, we don't have the Chinese
Speaker 1: government again going aggressively and doing public spending, So neither
Speaker 1: of those two options seem like in the near term possible.
Speaker 1: I chadn't great to get your thoughts this morning. A
Speaker 1: busy start this week, that's for sure, Chad, and I
Speaker 1: that Morgan Stanley is Chief Economists and Global head of Economics.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
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Speaker 1: platform you prefer. I'm on Twitter at Tom Keane before
Speaker 1: the podcast. You can always catch us worldwide. I'm Bloomberg
Speaker 1: Radio zero.