Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot
Speaker 1: com and of course on the Bloomberg terminal. Trum Dudley
Speaker 1: and mckelby to the era of Hatzius, Goldman Sachs research
Speaker 1: has been about acuity. On this Friday, we're gonna lose
Speaker 1: the numbers, the many numbers of Jan Hatzius work as
Speaker 1: team's work, but we're gonna go to one number, which
Speaker 1: is your queue four number. They've marked down g d
Speaker 1: P from a sterling one three to sub one. That
Speaker 1: gives you some of the direction of the recession call.
Speaker 1: But at the same time, Jan Hatzius calls for a
Speaker 1: shallow rees session. If we get a shallow recession, you
Speaker 1: quantify what it will mean for jobs in America. How
Speaker 1: does the magnitude of recession work into the dynamics of unemployment. Yeah,
Speaker 1: let's just be clear that we don't have a recession
Speaker 1: in our baseline forecast. We do have significantly below trend
Speaker 1: growth zero point nine percent is only half the long
Speaker 1: term trend pace, but our our best guess is that
Speaker 1: will be below trend, that rebalances the imbalance in the
Speaker 1: labor market, and that ultimately also helps bring inflation back down.
Speaker 1: That said, there's a very significant risk of recession. I
Speaker 1: think it has gone up because it's very difficult to
Speaker 1: reduce labor demand without you know, the deterioration feeding on
Speaker 1: itself and then ultimately culminating in a recession. So we're
Speaker 1: giving one and three chance of a recession in the
Speaker 1: next twelve months, and it's close to fifty fifty I
Speaker 1: think over the next But you've got to to cernam
Speaker 1: floyment rate baked into a two thousand one ish kind
Speaker 1: of recession. In two thousand and one, it was a
Speaker 1: two percentage point increase. That was the bottom end of
Speaker 1: the historical range. If you look at all of the
Speaker 1: recessions in post war history, the top end of the
Speaker 1: range is five and a half percentage points. I think
Speaker 1: if we do have a recession, it's likely that it
Speaker 1: would be on the shallower end for two reasons. One,
Speaker 1: private sector balance sheets are in better shape than at
Speaker 1: the end of previous business cycles, and too, I think
Speaker 1: while inflation was very high, I don't think it's as entrenched,
Speaker 1: certainly not as entrenched and expectations as it was in
Speaker 1: previous high inflation episodes seventies early eighties. Yeah. No, we
Speaker 1: just got off a couple of weeks where people were
Speaker 1: ratcheting up their expectations for the terminal Fed funds rate
Speaker 1: about four percent as of at some point next year,
Speaker 1: And here we are looking at a huge rally in
Speaker 1: two year yields. Can you translate the rally that we
Speaker 1: have seen through an economics lens in terms of what
Speaker 1: people are forecasting and whether it's seems plausible in your mind? Well,
Speaker 1: our forecast is a terminal rate of three and a
Speaker 1: quarter to three and a half percent. We think we'll
Speaker 1: get there by the end of two thousand and twenty two.
Speaker 1: We don't have any additional rate hikes in two thousand
Speaker 1: and twenty three, basically because the economy is decelerating, is
Speaker 1: growing below trend, inflation is coming down, and I think
Speaker 1: at that level the Fed would probably hold. You're right,
Speaker 1: we had priced something around four percent, you know, immediately
Speaker 1: after the ft C meeting or right around the fom
Speaker 1: C meeting. But I think people have looked at the
Speaker 1: fact that the economy actually is decelerating and that has
Speaker 1: led to a reversal of that, and I think fundamentally
Speaker 1: that's appropriate. But yeah, given the fact that we are
Speaker 1: see a deceleration, but we're not seeing a deceleration when
Speaker 1: it comes to the inputs into inflation. We're seeing rents
Speaker 1: continue to climb at a record pace. We're continuing to
Speaker 1: see some of the disruptions to oil supplies and the
Speaker 1: food supplies that causing some of the price increases. When
Speaker 1: do you start to talk stagflation? When do you start
Speaker 1: to talk about a FED that is forced to act
Speaker 1: despite an unemployment rate that's rising and despite weakening economic
Speaker 1: data points. Well, I think it's a little bit more mixed.
Speaker 1: If I look at the inflation indicators, No question, the
Speaker 1: last CPI and the rent number there was bad. There
Speaker 1: was an increase in the long term University of Michigan
Speaker 1: Inflation Expectations measure. But the supply chain measures are actually
Speaker 1: getting better. You look at the supply delivery indices in
Speaker 1: the business surveys, those are coming down. Um, the wage
Speaker 1: numbers in two thousand and twenty two have been sequentially
Speaker 1: clearly slower than the second half of last year, and
Speaker 1: I think broadly speaking, inflation expectations, look at just the
Speaker 1: break evens in the bond market are still very well anchored.
Speaker 1: So I think it's a it's a more mixed picture.
Speaker 1: And in an environment where growth comes down to a
Speaker 1: below trend pace, I just don't think that the FED would,
Speaker 1: you know, keep hiking aggressively when the economy is already
Speaker 1: slowing and inflation is already coming down. So yeah, And
Speaker 1: essentially what you're saying is that when Chairman Powell was
Speaker 1: speaking on Capitol Hill yesterday saying that our commitment to
Speaker 1: fighting inflation is unconditional, that there actually are conditions in
Speaker 1: which the FED blinks. I think there are conditions where
Speaker 1: the FED blinks, but it's partly because there's a feedback
Speaker 1: from economic activity into into inflation. If the economy weakens
Speaker 1: and labor demand declines, and maybe the unemployment rate starts
Speaker 1: edging up, then you also just go and become less
Speaker 1: concerned about inflation. So I do think the commitment to
Speaker 1: ultimately getting back down to two percent is unconditional, but
Speaker 1: they will be, you know, factors other than the current
Speaker 1: inflation prints that will sort of drive what they do
Speaker 1: on a on a meeting by meeting basis. While we're
Speaker 1: talking about the specific year words that your own Powell
Speaker 1: has used. I've talked earlier in the show about the
Speaker 1: tweets Bill Ackman posted overnight talking about how the FED
Speaker 1: clearly has a credibility problem in the bond market is
Speaker 1: misreading the Federal Reserve, and what he said is ultimately
Speaker 1: that comes down to the communication of the chairman. Do
Speaker 1: you think that Powell and others on the f O
Speaker 1: m C are are accurately communicating to this market what
Speaker 1: it is they intend to do. No, I think there
Speaker 1: are accurately uh communicating. I think in ways that that
Speaker 1: that are clear that that they do want to get
Speaker 1: back down to two percent eventually. They're tightening policy aggressively,
Speaker 1: much more aggressively than they expected to do six months
Speaker 1: ago or twelve months ago, in part because inflation turned
Speaker 1: out to be much higher. So I think at that
Speaker 1: level it's it's all pretty clear on the credibility problem.
Speaker 1: I would also say, you know, look at inflation break evens.
Speaker 1: I mean the credibility from the bond market's perspective or
Speaker 1: from the perspective of forecasters of the two percent inflation target,
Speaker 1: it still seems seems intact. Yeah, And I want to
Speaker 1: go to Peter Orzag of the London School of Economics
Speaker 1: and a small banking up in New York. Computer Or
Speaker 1: loves the phrase glide path, and maybe that's differential equations.
Speaker 1: Let's just it's Friday. Let's just stay with calculus. Are
Speaker 1: we completely misjudging the second and first derivative of core
Speaker 1: inflation coming in where it may come in shockingly rapidly
Speaker 1: and we underestimate that? Good news. I do think that
Speaker 1: core inflation is likely to come down. In fact, if
Speaker 1: you look at statistical measures of core inflation, like the
Speaker 1: trimmed means, that has been improving over the last few
Speaker 1: few months. It's so little, too early to tell, but
Speaker 1: the last couple of readings have been more encouraging, and
Speaker 1: I think that does suggest that over time core inflation
Speaker 1: is going to come down. And you know, we were
Speaker 1: at about four percent for core pc core in this
Speaker 1: case to find us ex food and energy by the
Speaker 1: end of the year, and then at about two and
Speaker 1: a half percent by the end of next year. So
Speaker 1: I don't think it is going to happen overnight. But
Speaker 1: I think we're headed in that direct. So when your
Speaker 1: own poulss we get back to two percent inflation, that's
Speaker 1: what he's talking about, And Hatzius says Powell will get
Speaker 1: his wish in eighteen months. Not quite. We're at you know,
Speaker 1: two and a half, but that's not too far away
Speaker 1: from two and two and a half. It's TV who's counting,
Speaker 1: especially if you look at this as an average inflation target.
Speaker 1: So at some point there will you know whether there's
Speaker 1: a recession next year or not. You know, all best
Speaker 1: guests is not, but there will be a recession at
Speaker 1: some point, and that will bring inflation down further. I
Speaker 1: should say, with great respect, I'm busting Dr Horts. Chapter
Speaker 1: is a huge difference between two and two and a
Speaker 1: half percent in the inflation game. With Goldman Sex, thank
Speaker 1: you so much for coming in. Ian Lincoln is out
Speaker 1: of Minnesota and the Carlson School of Finance. It is
Speaker 1: absolutely definitive with a tour of dude to yell as
Speaker 1: well in Old Court at Beamon Capital Markets and writes
Speaker 1: absolutely the most dense note on fixed income dynamics on
Speaker 1: the street. We're Thrilly Goad Jonas and Studio Today. Ian,
Speaker 1: Welcome to Bloomberg. I'm gonna cut to the chase. Forget
Speaker 1: about the y axis moving yields. Your note right now
Speaker 1: is on the mystery of the X axis. Is Bullard
Speaker 1: talks about front loaning and that give us the nuance
Speaker 1: to the pro pro audience of the X axis dynamic,
Speaker 1: the first and second derivatives of the time change we're
Speaker 1: gonna see. Well, I think that this is the most
Speaker 1: important conversation in financial markets at the moment. It's really
Speaker 1: the answer to the question how can Bullard be talking
Speaker 1: about a three fifty terminal rate when the reality is
Speaker 1: that two year yields are trading at or below three.
Speaker 1: It really comes down to the twenty four month moving
Speaker 1: window represented by the two year notes, and effectively, what
Speaker 1: the market is saying is you might hike now, but
Speaker 1: you're going to have to start cutting much sooner than
Speaker 1: in prior cycles. Lee fixed in coming. Go over to
Speaker 1: Jan Nazis Globen Sex Economics, where he and I talked
Speaker 1: about core c p I and the idea that we
Speaker 1: don't have a real understanding of the rate of change
Speaker 1: of how court c p I is going to come
Speaker 1: down do you share that uncertainty, I certainly do. I
Speaker 1: would add one nuance, however, and that is all inflation
Speaker 1: is the same at this moment for the FED headline
Speaker 1: inflation core inflation, they've made no distinction. That's interesting because
Speaker 1: in the past they would always focus on core inflation
Speaker 1: overheadline because it was less volatile. But the realities of
Speaker 1: higher energy prices, higher food prices, and the fact that
Speaker 1: inflation has become the political touchstone at this point makes
Speaker 1: all inflation equal. And I think that will change, but
Speaker 1: not intel the midterms. And it's peak rates, it's peak yields.
Speaker 1: Have we already gotten past that? Are we basically out
Speaker 1: of place where you can say definitively that that is
Speaker 1: an accurate characterization of what we've seen. Well, that is
Speaker 1: certainly our call. But I will note that I said
Speaker 1: the same thing once we got to three twenty. So
Speaker 1: at three fifty the logic holds a lot better. But
Speaker 1: the reality is there's going to eventually be demand for
Speaker 1: ten and thirty years paper and we haven't seen the
Speaker 1: key investor classes of Japan or certain parts of Europe
Speaker 1: really come in and start buying treasuries yet. And when
Speaker 1: we do that will be worth thirty five to forty
Speaker 1: five basis points in tens, and that gets you back
Speaker 1: below three, the curve more inverted and the market even
Speaker 1: more worried about a recession. So ian is this supportive
Speaker 1: for risk assets if the market is going to get
Speaker 1: more worried about recession and could potentially have to reduce
Speaker 1: their estimates for margins and profits. So that is again
Speaker 1: one of the key uncertainties. I would normally say, yes,
Speaker 1: you have a less aggressive FED, you have lower race,
Speaker 1: you should have a good set up for risk assets.
Speaker 1: But this FED is behaving much differently than we might
Speaker 1: have otherwise anticipated. So we could see a process the
Speaker 1: possibility of recession increase. But the FED, instead of having
Speaker 1: the traditional response just push forward and say yeah, three
Speaker 1: and a half, we're going to get there. We might
Speaker 1: push it into a recession. But the reality is it's
Speaker 1: worth keeping the decades of hard one credibility as an
Speaker 1: inflation fighter for the FED for this one cycle. Well.
Speaker 1: Bill Ackman of Pershing Square says the FED already has
Speaker 1: a credibility problem and that the bond market is misreading
Speaker 1: the FED. To quote one of his tweets, he said
Speaker 1: that the market is flat out ignoring Powell and the
Speaker 1: governor's commentary. Expect even more hawkish commentary until the bond
Speaker 1: market wakes up. Who's a sleepy and Bill Ackman or
Speaker 1: the bond market? Well, I'll tell you this much. If
Speaker 1: you look at break evens, what you can see is
Speaker 1: that inflation expectations continue to move lower and lower and lower,
Speaker 1: and that is a vote of confidence in the Fed's
Speaker 1: ability to control inflation and forward and Asian expectations. So
Speaker 1: one thing can be said, the tips market certainly isn't
Speaker 1: asleep at the moment. Well and Jim Bowlard, as we said,
Speaker 1: have said that the tips pricing is pretty much right
Speaker 1: on at the moment. So as we put all of
Speaker 1: this together, the market has confidence in the FED ability
Speaker 1: to fight inflation. What it has less confidence in is
Speaker 1: what the ultimate result of that inflation fighting is, how
Speaker 1: deep a recession will be when and if one arrives in,
Speaker 1: what is your assessment of that and ultimately what that
Speaker 1: means for how low we could see yields going. So
Speaker 1: I think that at this point, part of the conversation
Speaker 1: that isn't occurring in markets is we're just coming off
Speaker 1: of a negative real g DP print for Q one,
Speaker 1: which was negative one point five after revisions. Right now,
Speaker 1: GDP for the second quarter is tracking at zero. So
Speaker 1: if we have a repeat of the higher than expected
Speaker 1: inflation profile in the US, we could actually dip below
Speaker 1: zero for real growth in the second quarter, and that
Speaker 1: would make a recession a very near term event caveat
Speaker 1: though that's not the same type of recession that the
Speaker 1: market is talking about. The markets worried about a real
Speaker 1: recession with higher unemployment, that we actually see an aggregate
Speaker 1: hit to nominal demand, and that's not where we are
Speaker 1: yet in Lincoln party order. If you're on radio and
Speaker 1: television and lingo to bemo, Capital Markets joins us right
Speaker 1: now the conversation of the week on fixed income. You
Speaker 1: and I have never seen these bond losses, and I'm
Speaker 1: fascinated and I wanted to ask you this question, which
Speaker 1: is getaway from the nuances. The bottom line is the
Speaker 1: total return index of Bloomberg Lincoln total return index is
Speaker 1: negative twelve. How does bond psychology change if people are
Speaker 1: looking out to two thousand twenty four to catch up
Speaker 1: from these losses. I think an important aspect of bond
Speaker 1: losses in the treasury market is to keep in mind
Speaker 1: who the major players tend to be. All the people
Speaker 1: taking a loss. A lot of the people taking the
Speaker 1: loss are indexed or are or match attempting to match
Speaker 1: their index. But everybody's been short and so on paper,
Speaker 1: it's a pretty significant loss, but a good portion of
Speaker 1: the investment community has fair reason. Come on, what about
Speaker 1: mere mortals? They open up their statement from Demo Capital
Speaker 1: Markets and go they start saying profanity about Lincoln the
Speaker 1: real world out there. This is a bond market we've
Speaker 1: never seen. It's worse than Boker's bond market. I think
Speaker 1: that the person at home opening their statement what they're
Speaker 1: really going to be thinking in the back of their
Speaker 1: mind as well, mortgage rates are almost six percent, that
Speaker 1: might be the problem. So a little bit of pain
Speaker 1: in terms of the opportunity to invest in higher treasure
Speaker 1: yields is one thing. But as the ramifications of the
Speaker 1: feds tighter monetary policy continue to push through to the
Speaker 1: the employment and the housing market, I think that's where
Speaker 1: we start to get worried. Ian how much is your
Speaker 1: peak yields thesis right now? Hinging on this idea that
Speaker 1: the inflationary inputs our transitory that we still have this
Speaker 1: stealth transitory narrative guiding a lot of investors and even
Speaker 1: the Fedure Reserve. I think that the peak inflation of
Speaker 1: the peak rates narrative is actually based more on the
Speaker 1: hawkishness and the aggressiveness of the FED regardless of how
Speaker 1: inflation plays out. What we know is that a lot
Speaker 1: of what has occurred, at least over the course of
Speaker 1: the last six or eight months, has been a function
Speaker 1: of distortions created by the pandemic, the supply side on
Speaker 1: the energy sector and now food inflation is very material.
Speaker 1: Fast forward to UH this time next year, the year
Speaker 1: over year inflation prints will not be as high. That
Speaker 1: doesn't mean it was necessarily transitory. That either means that
Speaker 1: the FED was that much more hawkish or in fact
Speaker 1: prices moderated just based on demand. Ian While we're fast
Speaker 1: forwarding fast forward to ten AM, when we get those
Speaker 1: humish sentiment numbers, is the bond market going to latch
Speaker 1: onto more the pure sentiment read how how bad it
Speaker 1: is and what that means for growth prospects or the
Speaker 1: inflation expectations, and what that means is to whether or
Speaker 1: not the FED is actually going to have to be
Speaker 1: more hawkish for longer if that is becoming entrenched in
Speaker 1: the economy. I think that the headline consumer confidence figure
Speaker 1: at record low levels is extremely telling. And when we
Speaker 1: look at the correlation, it really comes down to gasoline
Speaker 1: prices and equity performance, and both of those have been
Speaker 1: going the wrong direction for the there to be any
Speaker 1: additional confidence. I think that we are going to focus
Speaker 1: on confidence over inflation expectations because the FED has communicated
Speaker 1: that they're going to do everything it takes to keep
Speaker 1: inflation anchored very quickly. Here do bonds have catharsis? We
Speaker 1: think about stocks going down, vixiforty, etcetera. Does that happen
Speaker 1: with bonds? Does everybody sell at the same time? So
Speaker 1: there does tend to be key moments of capitulation in
Speaker 1: one direction or the other. And right now, as I
Speaker 1: mentioned of the vast majority of the market is short treasuries.
Speaker 1: There will be a point where people wake up and
Speaker 1: they say, I don't I don't want to miss out
Speaker 1: on these higher yields. Wonderful to see. You have a
Speaker 1: lot of message here onions research. Again, we protect the
Speaker 1: copyright of all of our guests. Find that research at
Speaker 1: BEMO Capital markets Ian Lincoln with his It's Tuna Fordam
Speaker 1: with the futures of thirty Right Now founder and geopolitical
Speaker 1: strategist Fordham Global uh Uh Foresight joins us right now,
Speaker 1: thrilled to have her on this morning. Tina, I want
Speaker 1: to digress to the British elections in the uproar of
Speaker 1: Mr Dowton, the Conservative Tory Party leader resigning at five
Speaker 1: thirty in the morning, London time, and I want to
Speaker 1: go out far west of London on the way out
Speaker 1: to Cornwall. And this is not the time of Paul
Speaker 1: Dark this is the time of now and north of Exeter,
Speaker 1: Tiverton and lovely Devon, I hopened pronouncing everything correctly and
Speaker 1: Boris Johnson was absolutely crushed. What is the symbolism that
Speaker 1: he was crushed in friendly Devon going back to nineteen Well,
Speaker 1: it's it's another blow to to this Prime Minister, who
Speaker 1: nevertheless is you will have seen Tom has vowed to
Speaker 1: to carry on exactly as he has been. Um, we've
Speaker 1: had scandal after scandal. The chairman of the Conservative Party,
Speaker 1: as you've said, resigned this morning and a you know,
Speaker 1: sternly worded letter. And yet Boris Johnson doesn't seem to
Speaker 1: have plans to go anywhere, and that tells you a
Speaker 1: lot about the times that we're living in Um. There
Speaker 1: there certainly is no no shame in politics, knows no
Speaker 1: sense of accountability. And as long as the labor leader
Speaker 1: Kire starmer Um is not you know, a serious challenge,
Speaker 1: Johnson will probably stay where he is. Um. It's you know,
Speaker 1: defining the laws of political gravity by elections in the
Speaker 1: UK aren't typically you know, very very much participated in.
Speaker 1: Posters will tell you that they're miner importance. But again,
Speaker 1: in the face of so many crises that this government
Speaker 1: is spacing, um, how many times can Boris Johnson get
Speaker 1: on a plane and go see his friend Zeninski in
Speaker 1: Que when things are looking tough at home, Tina, you
Speaker 1: point to this political gravity or lack thereof that Boris
Speaker 1: Johnson has and other leaders may have as well. As
Speaker 1: we face a lot of individuals who want to be
Speaker 1: heard about the pain that they are feeling in the
Speaker 1: face of inflation. And that brings us to some of
Speaker 1: the strikes and some of the protests that we're seeing
Speaker 1: erupt throughout Europe, throughout the world. What is the hotspot
Speaker 1: that you're watching and what is the consequence both politically
Speaker 1: and economically that will result. Well, strikes in inflation go
Speaker 1: hand in hand, and uh, coming out of the pandemic
Speaker 1: and probably heading into a recession, and with those workers
Speaker 1: who are on kind of fixed contracts not having seen
Speaker 1: a pay rise for a very long time. You know,
Speaker 1: the old summer of discontent term is being bandied about
Speaker 1: a lot. Um. You guys were talking about the price
Speaker 1: of lobster rolls. Um. You know. Similarly, I can say
Speaker 1: that British Airways is threatening I think meaningfully here in
Speaker 1: the UK to start striking as soon as school vacations begin. Um,
Speaker 1: that's going to be very unpopular. But the question is
Speaker 1: whether it's going to to actually force a compromise in advance. Um.
Speaker 1: In the UK, this is very acute. Uh. France also
Speaker 1: is known to to have strikes and that will recur.
Speaker 1: And I guess what I feel is there's a sense
Speaker 1: of helplessness about this for so many public sector and
Speaker 1: other workers. Wages have been staggnant through the pandemic, and
Speaker 1: you know, it's just take the inflation focus mines, Tina,
Speaker 1: we talked about lobster rolls tongue in cheek because this
Speaker 1: is the least of our concerns. It's basic stables, it's wheat,
Speaker 1: it's basic meat, it's all of these other uh, basic
Speaker 1: groceries and gas prices that are impeding. As Tom said,
Speaker 1: the lower deciles. How do we look at possible possible
Speaker 1: fiscal spending to offset some of the pressures that are
Speaker 1: very real, very tangible, and a big threat, and particularly
Speaker 1: to the lower income individuals around the world, in Europe
Speaker 1: in particular. Well, of course, the people most acutely affected
Speaker 1: are are the very poorest in in Mia and those
Speaker 1: who depend on on grain supplies that are being blockaded
Speaker 1: by Russia out of the Black seaports. UM. And so
Speaker 1: that's happening in the Middle East, where there are many
Speaker 1: concerns which I've addressed elsewhere about kind of Arab spring
Speaker 1: to point, oh and that sort of thing. In developed countries,
Speaker 1: we don't get riot sort of civil unrest in the
Speaker 1: same kind of way. We get more organized expressions of
Speaker 1: popular discontent UM and that means strikes of course, UH
Speaker 1: and protests. Governments, having responded with so much fiscal largest
Speaker 1: during the pandemic, are really going to be expected to
Speaker 1: step up. And what I think we're already seeing is
Speaker 1: fuel prices and subsidies for fuel prices are going to
Speaker 1: come first. Food is a bit more difficult in developed countries,
Speaker 1: but winter heating, winter fuel allowances and those kinds of
Speaker 1: subsidies UM in the UK and Europe, I think are
Speaker 1: just a question of of when and not if. Tina,
Speaker 1: we only have about a minute left. But as we
Speaker 1: talk about the economic pain so many countries are feeling,
Speaker 1: are we going to start seeing a dissolution of the
Speaker 1: resolve of the allies to continue to support Ukraine inflict
Speaker 1: economic pain on Russia when it's inflicting so much economic
Speaker 1: pain on their own domestic populations in return. Are we
Speaker 1: reaching that breaking point? We're not there yet. But at
Speaker 1: the G seven meetings, the measures that are being contemplated
Speaker 1: gas rationing in Germany for example, UM, the question of
Speaker 1: whether Russia just slat out, you know, cuts gases lives
Speaker 1: to Europe as punishment in what a tactic called coherstive diplomacy. Uh,
Speaker 1: it's very real. It'll be winter before we see push
Speaker 1: come to shove on this. But that's why getting the
Speaker 1: gas storage facilities in Europe filled is crucial. They have
Speaker 1: to fight this. They can't give into Russia. I think
Speaker 1: leaders understand this. Can they communicate to two citizens? The
Speaker 1: need to make sacrifices is a bigger question because politicians
Speaker 1: don't like to to take. They like to give. Me
Speaker 1: Tina ford and thank you so much, greatly appreciate it.
Speaker 1: With Fordham Global Foresight, this is an immense joy right now.
Speaker 1: Shop John Knows is global head of ex Strategy at
Speaker 1: Credit Suite and joins us this morning. And I want
Speaker 1: to go to the magnitude of your calls. I want
Speaker 1: to go week yend well out past one forty and
Speaker 1: Swiss Frank, We've been watching the last twenty minutes to
Speaker 1: see if we go through parody strong Euroswissy coming down
Speaker 1: nicely under parody, and you say, goes further. Why do
Speaker 1: we get these magnitude of moves in foreign exchange? What
Speaker 1: we're seeing the end of the former system of central
Speaker 1: banks using balance sheets too essentially manipulate where effects rates trade,
Speaker 1: and as that system frees up or comes under pressure,
Speaker 1: you're seeing effects rates react to that. In Switzerland, they're
Speaker 1: much further ahead than where Japan is right now in
Speaker 1: making that transition. Japan is trying to stay stay the
Speaker 1: course as long as possible. So that's what we're seeing
Speaker 1: reflected in. So are you calling for a Brenton Woods moment?
Speaker 1: I mean, is it a big enough shift coming off
Speaker 1: of balance sheet dynamics that it's allah after World War
Speaker 1: two and what Kains and the others did at Mount Washington.
Speaker 1: It doesn't need to be as big as that to
Speaker 1: still have very significant effects for effects investors. Let's let's
Speaker 1: put it that way. So, for example, in the Euros
Speaker 1: Swiss cross, it's very easy for us to imagine that
Speaker 1: cross going down to ninety seven even lower in the
Speaker 1: weeks to come. What does it do to a McDonald's
Speaker 1: hamburger and the baron stuff just down from the credit
Speaker 1: sweets of office asking for Yeah, it's a good idea
Speaker 1: to to think about those things. I guess they will
Speaker 1: get more expensive, but that's not something that is worrying. Yes,
Speaker 1: and be at this point. So at least so they
Speaker 1: have top ticks out of twenty dollars for a number
Speaker 1: two value meal. I'm sure that there is some personal
Speaker 1: experience worked in there. I can't figure it out, but
Speaker 1: I think that's my hunch. Sah. But I wonder how
Speaker 1: much you're looking at peak yield as we were just
Speaker 1: hearing from Mike Bell of JP Morgan, and how much
Speaker 1: does that mean peak dollar? Right? How much are these
Speaker 1: two measures really trading in tandem. Well, look, it's it's
Speaker 1: definitely been the case that rate differentials and the US
Speaker 1: is much higher yields have been helpful for the dollar.
Speaker 1: But to be honest, I think there's more to the
Speaker 1: dollar story than just yields. For example, on the trade side,
Speaker 1: there's been very big shifts in trade dynamics that really
Speaker 1: need to be recognized. So for example, right now we
Speaker 1: have the Ura area with a with a trade deficit.
Speaker 1: We have Japan moving rapidly in this in the same
Speaker 1: direction as well, So currencies like the year in the
Speaker 1: end that historically we're backed by trade surpluses, current account surpluses.
Speaker 1: The whole energy price shift and in terms of trade
Speaker 1: shift has really changed that dynamic materially. And meanwhile, on
Speaker 1: the U S side, you have record experts at this
Speaker 1: point there's going to be nearly two hundred billion dollars
Speaker 1: of just agricultural exports in this fiscal year according to
Speaker 1: projections from from that side of the story. So when
Speaker 1: you put all that together, to me, there's more to
Speaker 1: the dollar strength story than just rate differentials. At this point.
Speaker 1: This is a really important point. How does this translate
Speaker 1: into some of the big crosses, whether it's your oparity
Speaker 1: or just in general how strong the dollar can get. Well,
Speaker 1: I think the dollar right now looks strong compared to
Speaker 1: the last three to five years, that's for sure. But
Speaker 1: I think if you go back much further, the dollar
Speaker 1: has been a lot stronger for a variety of reasons.
Speaker 1: And the key point I would make is it's not
Speaker 1: the same dollar as the last time you're a dollar
Speaker 1: was at one oh five. You know, when you have
Speaker 1: your own now with trade deficits as a problem, you
Speaker 1: basically need capital inflows into the year area and on
Speaker 1: a net basis if you're going to have a current
Speaker 1: account deficit, and that's something that hasn't been missing. The
Speaker 1: EU has been a capital exporter for for many, many years.
Speaker 1: So there's a new value proposition that the Euro needs
Speaker 1: to offer at this point in time simply to avoid
Speaker 1: going down, and I think that's absent right now. Well,
Speaker 1: let's move from Europe to the island just next to it.
Speaker 1: We had UK consumer confidence data earlier today showing a
Speaker 1: record low, the lowest and forty eight years of data
Speaker 1: clearer concern around inflation, the cost of living, the possibility
Speaker 1: of a recession. How does that feed through to your
Speaker 1: view on sterling? We think sterling is still going to
Speaker 1: go lower. We are looking for a test of one
Speaker 1: cable again and eventually a move through that level. The
Speaker 1: problem for sterling really you still have that same trade
Speaker 1: story developing that I mentioned for the for the ur
Speaker 1: area in Japan. It's not like years of a weak
Speaker 1: pound of created big trade surpluses or very competitive UK
Speaker 1: exports that just hasn't happen. And for a variety of reasons. Uh,
Speaker 1: And so you have a currency that doesn't really have
Speaker 1: any reason to go up right now. Um, even when
Speaker 1: you think about the Bank of England, the market is
Speaker 1: pricing in fifty basis point hikes consecutively for a few
Speaker 1: meetings ahead of us, and yet the Bank of England
Speaker 1: is constantly pushing back against that narrative and makes it
Speaker 1: very difficult to realize what's already priced in. So when
Speaker 1: you put that those factors on the table, standing is
Speaker 1: still going to go lower? Sum, I gotta get more questions, Um,
Speaker 1: you gotta go but you know, please come back soon
Speaker 1: as as you can. I got These are some abrupt
Speaker 1: calls here from Shob Jones. It's a different landscape out
Speaker 1: there for all of US investors, including Jerome Powell, with
Speaker 1: a kind of moves of credit, sueez he is talking about.
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
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Speaker 1: the terminal. I'm Tom Keene and this is Bloomberg