WEBVTT - Surveillance: Recession Reset with JPM's Michele 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along 0:00:09.200 --> 0:00:13.080 with Jonathan Ferrell and Lisa A. Brawmowitz Jailely. We bring 0:00:13.119 --> 0:00:17.119 you insight from the best and economics, finance, investment, and 0:00:17.239 --> 0:00:23.320 international relations. Find Bloomberg Surveillance, an Apple podcast, SoundCloud, Bloomberg 0:00:23.360 --> 0:00:29.400 dot Com and of course on the Bloomberg terminal. But 0:00:29.600 --> 0:00:32.280 Michael J. F Margan Aid Management alongside us. Great to 0:00:32.320 --> 0:00:34.840 catch out with you above. As always, should we save 0:00:34.960 --> 0:00:37.280 Liverpool for later in the conversations? You want to start 0:00:37.320 --> 0:00:40.040 with markets. You had an interview with bloom Bake News yesterday. 0:00:40.159 --> 0:00:43.120 It was really really interesting about the risk that maybe 0:00:43.120 --> 0:00:45.839 this FED does not do enough. Can you talk to 0:00:45.880 --> 0:00:49.519 us about that risk? Yeah? I can't get two thousand 0:00:49.560 --> 0:00:52.360 and six out of my mind. The FED had raised 0:00:52.440 --> 0:00:54.960 rates from one percent to five and a quarter percent, 0:00:55.320 --> 0:00:58.520 four and twenty five basis points. Here we are today. 0:00:58.720 --> 0:01:01.760 They've raised rates by four hundred and twenty five basis 0:01:01.800 --> 0:01:06.399 points and then they stopped and was it enough or 0:01:06.520 --> 0:01:09.360 wasn't it enough? It took a while for things to 0:01:09.360 --> 0:01:13.480 slow down, and ultimately it ended in a financial crisis. 0:01:14.240 --> 0:01:17.559 But they got to five and a quarter. We're still 0:01:17.600 --> 0:01:19.920 at four in a quarter. Will they get to five? 0:01:21.000 --> 0:01:23.279 I think there's still a lot going on the labor 0:01:23.319 --> 0:01:28.119 markets type. China's reopening the housing market. Although prices are 0:01:28.120 --> 0:01:31.440 coming down, the competition for houses still very very high. 0:01:31.640 --> 0:01:33.720 So how conservative are you when it comes to this 0:01:33.880 --> 0:01:36.240 rally that was seeing a merge in the last couple 0:01:36.240 --> 0:01:39.679 of weeks, the last few months. Well, we've we've been 0:01:39.800 --> 0:01:42.120 part of it. We thought at the end of last 0:01:42.200 --> 0:01:44.600 year the markets were ripe for a rally. I was 0:01:44.640 --> 0:01:47.680 out meeting lots of clients in a lot of places, 0:01:47.760 --> 0:01:50.440 and a lot of them were telling me they're going 0:01:50.520 --> 0:01:52.760 back into the bond market for the first time in 0:01:52.760 --> 0:01:54.920 a while. And they didn't mean a year. A lot 0:01:55.040 --> 0:01:56.680 of them meant for the first time in sevent to 0:01:56.720 --> 0:01:58.840 eight years. But a lot of them were saying this 0:01:58.920 --> 0:02:00.680 is the first time they've been in the bond market 0:02:00.720 --> 0:02:03.640 since the financial crisis. So there was a lot of 0:02:03.680 --> 0:02:06.680 money desperate to get into bonds, waiting for high really 0:02:06.720 --> 0:02:09.800 else they got it. It's come in. The Fete's thrown 0:02:09.800 --> 0:02:13.360 a lot at this market. They're probably ripe for a pause. 0:02:13.639 --> 0:02:16.200 I think the market runs a bit more and then 0:02:16.200 --> 0:02:18.200 it pauses when the Fete pauses, I want to go 0:02:18.240 --> 0:02:21.119 back to two thousand six and your observation pre GFC 0:02:21.680 --> 0:02:24.320 and what's so important to me? And this goes without 0:02:24.440 --> 0:02:27.440 question the observation of the year last year, not seeing 0:02:27.480 --> 0:02:31.480 Toleb saying the gravity has returned to the system all 0:02:31.520 --> 0:02:34.840 of a sudden, the dynamics hearkened back to two thousand six, 0:02:35.280 --> 0:02:38.919 And what I remember then was the overshoot in real estate. 0:02:38.960 --> 0:02:42.720 It was hugely advanced, hugely inflated down we came in 0:02:42.919 --> 0:02:46.119 overshot through the lag regression. Are we going to see 0:02:46.160 --> 0:02:49.400 that this year with bonds where the yields the price 0:02:49.560 --> 0:02:53.320 moves so much that we overshoot in certain ways. Well, well, 0:02:53.320 --> 0:02:58.640 the overshooting real estate occurred because the apple supply of 0:02:59.080 --> 0:03:03.240 pretty much low cost money was around everywhere, and that's 0:03:03.320 --> 0:03:07.399 happened over the last couple of years. So that costless 0:03:07.480 --> 0:03:11.560 liquidity has been slashing around for a few years, and 0:03:11.600 --> 0:03:15.880 we've only recently started to remove it from the system. 0:03:15.960 --> 0:03:19.360 So yeah, I do get concerned that there will be 0:03:19.400 --> 0:03:23.360 an overshoot. We do get concerned that there are bubbles 0:03:23.360 --> 0:03:27.000 out there that will burst. It's really hard to identify them. 0:03:27.240 --> 0:03:29.920 But the one thing we're pretty sure of is the 0:03:29.960 --> 0:03:33.440 only way this ends is with the recession. You have 0:03:33.560 --> 0:03:37.600 to have a recession to really cool things down and reset. 0:03:37.680 --> 0:03:40.800 And REVS appreciated the Telegraph yesterday with Ken Rogoff. Lisa 0:03:40.840 --> 0:03:44.000 bram was talking with Kennan Dabos and Ken Roof may 0:03:44.080 --> 0:03:47.240 clear this is a different shadow bank than two thousand six, 0:03:47.600 --> 0:03:51.040 but nevertheless there are shadows within the banking system. How 0:03:51.080 --> 0:03:54.520 does that devolve in the JP Morgan fixed income? Well, 0:03:54.800 --> 0:03:59.440 by definition, shadow banking is shadowy. Um, so we need 0:03:59.520 --> 0:04:03.960 to be we can yeah, we need to be concerned 0:04:04.120 --> 0:04:07.600 about that, um. But there's a lot of shadow banking 0:04:07.680 --> 0:04:11.520 that's occurred in the private capital markets that have financed 0:04:11.600 --> 0:04:14.640 a lot of things that may have made sense two 0:04:14.720 --> 0:04:17.640 or three years ago, do they make sense today? Are 0:04:17.680 --> 0:04:22.720 there rightdowns coming there? Where? Will? There is there existence 0:04:22.920 --> 0:04:27.159 within private equity? I think we look at private capital 0:04:27.680 --> 0:04:29.599 in total, and we look at a lot of the 0:04:29.640 --> 0:04:32.640 private credit transactions. For sure, there are going to be 0:04:32.760 --> 0:04:37.360 restructuring exchanges. Is he talking about Menu? I'm not sure. 0:04:37.400 --> 0:04:39.920 I don't think so. Given us about this company, can 0:04:39.920 --> 0:04:42.960 we talk about how what's happening in private markets could 0:04:42.960 --> 0:04:45.520 introduce a new set of risk into public markets. I'm 0:04:45.560 --> 0:04:48.640 told repeatedly you are too that how you're the stronger, 0:04:49.040 --> 0:04:51.960 that the quality is much higher than it was maybe 0:04:51.960 --> 0:04:54.320 a few years ago, five, ten years ago, especially in 0:04:54.320 --> 0:04:56.680 the last decade. But do you push back against that 0:04:56.760 --> 0:04:58.960 knowing that there is this risk here in private markets 0:04:59.000 --> 0:05:03.240 that could spill into public markets. So I've heard those 0:05:03.360 --> 0:05:09.080 arguments before every single recession. This time, high yield will 0:05:09.160 --> 0:05:12.400 hold in. We have to remember, really the high yield 0:05:12.440 --> 0:05:15.800 market got started in the eighties when it became public 0:05:16.080 --> 0:05:19.080 and investors could get invested in it. So it's not 0:05:19.160 --> 0:05:22.279 been around for a long time and there have only 0:05:22.360 --> 0:05:26.320 been a handful of recessions. Every single time headed into 0:05:26.320 --> 0:05:29.960 a recession, it holds in well because this time is different, 0:05:30.160 --> 0:05:33.320 and every single time in a recession, credit spreads blow 0:05:33.360 --> 0:05:37.039 out to the minimum of eight hundred over and yes, 0:05:37.360 --> 0:05:41.000 it may look higher quality, but when defaults start to hit, 0:05:41.279 --> 0:05:44.960 when the economy goes into recession, when corporate profitability comes 0:05:45.040 --> 0:05:48.320 under a lot of pressure, investors will reprice that market. 0:05:48.720 --> 0:05:50.479 The one thing that I wearry about this time that 0:05:50.640 --> 0:05:53.880 is genuinely different is the amount of investment in the 0:05:53.960 --> 0:05:57.520 private credit markets. And if you start to have problems 0:05:57.560 --> 0:06:00.880 there where you start to get restructurings to fall exchanges 0:06:01.240 --> 0:06:06.320 that are in the neighborhood. Investors in no spaces may 0:06:06.360 --> 0:06:09.599 only have the public markets as their relief valve. You 0:06:09.640 --> 0:06:12.760 sound what you can, not what you want, defeature of 0:06:12.800 --> 0:06:14.880 what we could say. There's a question that's just been 0:06:14.920 --> 0:06:17.360 asked on the Bloomberg by a terminal subscribe, but I'd 0:06:17.400 --> 0:06:19.799 like to share with you. Could you ask Bob about 0:06:19.839 --> 0:06:22.680 how what's different this time versus two thousand and eight, 0:06:22.839 --> 0:06:25.080 and that we know the fen has que and they 0:06:25.120 --> 0:06:27.080 know how to use it. The risk of severe credit 0:06:27.160 --> 0:06:30.800 risk contagion was real back then, not anymore. Question mark, 0:06:30.920 --> 0:06:35.279 how would you respond to that? Um? I think what 0:06:35.279 --> 0:06:39.800 what is different this time is everyone's on the lookout 0:06:40.000 --> 0:06:43.839 for a bubble. There is there complacency or not. We've 0:06:43.880 --> 0:06:47.760 all been expecting a recession. It hasn't come yet. There 0:06:47.760 --> 0:06:50.640 are a lot of reasons why it may be pushed 0:06:50.680 --> 0:06:54.760 off until the back half of this year or maybe 0:06:54.800 --> 0:06:58.320 into two next year, and you do have new tools 0:06:58.360 --> 0:07:00.640 out there. I think one of the problem Albems is 0:07:00.880 --> 0:07:03.719 that while we have QUEE, we're also running QT now 0:07:04.160 --> 0:07:08.000 and that's an experiment that we haven't lived through before. 0:07:08.240 --> 0:07:11.720 I mean, let's face it, we are living through history 0:07:12.240 --> 0:07:14.480 and we don't know how it will be written. But 0:07:14.560 --> 0:07:17.600 we shut down the world for some period over the 0:07:17.680 --> 0:07:21.280 last three years, and now the last of it is 0:07:21.360 --> 0:07:24.920 just starting to emerge and return to normal, and we've 0:07:24.920 --> 0:07:28.800 got to adjust for all of that. It just seems 0:07:28.920 --> 0:07:32.560 very aspirational to me that it's all going to end 0:07:32.760 --> 0:07:36.280 in a soft landing, will reset and move on. Nothing 0:07:36.320 --> 0:07:38.960 about this is normal, that's for sure. But Michael J 0:07:39.080 --> 0:07:40.640 p muk and ASI management is going to be sticking 0:07:40.640 --> 0:07:42.960 with someplace to say going through to retail sales in 0:07:42.960 --> 0:07:44.960 about twenty minutes time. I think we can squeeze in 0:07:45.000 --> 0:07:48.640 some sport now. But what's going on your beloved Liverpool. 0:07:48.680 --> 0:07:50.320 We can talk about the Eagles in a moment because 0:07:50.320 --> 0:07:53.120 that's a better story, but your beloved Liverpool. I can 0:07:53.160 --> 0:07:56.280 take it this year last year with a bond bear market. 0:07:56.560 --> 0:07:58.800 If Liverpool had gone off the rows, that would have 0:07:58.800 --> 0:08:01.800 been a disaster. Right out there is a bond ball market. 0:08:01.840 --> 0:08:04.520 There has been some reset money's coming into the market. 0:08:04.840 --> 0:08:07.600 I can live with some restructuring of Liverpool. I like 0:08:07.720 --> 0:08:10.160 what Klop did in the f A club. He played 0:08:10.160 --> 0:08:13.560 the younger players. I'm hungrier they were live. You know, 0:08:13.600 --> 0:08:17.000 I'm the amateur here. Does the World Cup screw this up? 0:08:17.040 --> 0:08:20.520 I mean the TODs are playing in a cloud. Liverpool's 0:08:20.640 --> 0:08:23.440 SUBPARTI say the least. I mean, I get Arsenal there 0:08:23.440 --> 0:08:25.560 in the World Cup too, But the World Cup, as 0:08:25.600 --> 0:08:28.120 you say, in the middle of the season, has that 0:08:28.640 --> 0:08:31.960 it's disrupted. It's just it's disrupted me. I mean, I 0:08:32.040 --> 0:08:35.959 was just so I thought it might disrupt the teams 0:08:36.000 --> 0:08:38.880 with momentum in the Premier League. That was Arsenal in Italy, 0:08:38.920 --> 0:08:43.360 that was Napoli. We've restarted the season. No, I just thought. 0:08:43.400 --> 0:08:45.880 I just thought stopping for a month would disrupt the 0:08:45.880 --> 0:08:48.520 momentum of the high flying teams. And that hasn't happened. 0:08:48.520 --> 0:08:54.400 That was such a I'm learning every day. NOI they 0:08:54.440 --> 0:08:57.400 pulled it off. It was a great World Cup. Before 0:08:57.440 --> 0:09:01.040 we come back, Come on, is that a which one? 0:09:01.160 --> 0:09:06.559 Liverpool Chelsea not about thank Everton. There's another blue team 0:09:06.640 --> 0:09:10.160 up in Merseyside something code Evertson or you would code Avidson. 0:09:12.280 --> 0:09:13.920 So so full hamm is on the way in the 0:09:13.960 --> 0:09:18.360 Heathrow where so that would be a West London Derby 0:09:19.120 --> 0:09:23.320 Chelsea Fullham well it, thank you. The dysfunction here of 0:09:23.360 --> 0:09:27.000 the flows in the capital ownership of debt is tangible, 0:09:27.360 --> 0:09:30.000 and you see it with a Japanese another percentage of debt. 0:09:30.160 --> 0:09:33.240 Do you have an inherent fear within your strategy when 0:09:33.240 --> 0:09:37.400 you see ratios like two or where another nation on 0:09:37.520 --> 0:09:41.319 the eight percent of France's debt. I've got so many 0:09:41.360 --> 0:09:44.080 thoughts on the Bank of Japan one. I think they 0:09:44.120 --> 0:09:47.959 missed an opportunity. I would have done something today and 0:09:48.040 --> 0:09:51.760 keep the process going of get to something that looks 0:09:51.840 --> 0:09:54.120 normal while the rest of the world is doing it. 0:09:54.360 --> 0:09:57.199 We talk about the top end of the band is 0:09:57.280 --> 0:10:01.160 half a percent, the targets actually zero, and official rates 0:10:01.160 --> 0:10:04.920 are actually minus ten basis points. So there's a lot 0:10:04.960 --> 0:10:08.840 of room to get things looking somewhat normal while you're 0:10:08.840 --> 0:10:13.120 printing for percent inflation, and then start the process of 0:10:13.160 --> 0:10:16.199 transitioning the bond market out of the b o J 0:10:16.520 --> 0:10:22.679 hands into public hands, into private investor hands. Get that 0:10:22.760 --> 0:10:26.520 process going. Now. As I'm saying that, I also get 0:10:26.520 --> 0:10:30.920 concerned about what that means for assets in the rest 0:10:30.960 --> 0:10:33.640 of the world, because many of us in the markets 0:10:33.679 --> 0:10:37.600 for a long time have known that Japan is the 0:10:37.640 --> 0:10:42.760 mother of the carry trade that Japan finances carry trades 0:10:43.080 --> 0:10:47.520 in the US market car market someone from the Todds 0:10:47.520 --> 0:10:50.320 and borrows that. I get that that's jargon. What is 0:10:50.320 --> 0:10:53.160 a carry trade? A carry trade is to use the 0:10:53.400 --> 0:10:58.160 very low cost of funding in Japan and then take 0:10:58.200 --> 0:11:01.280 your capital at your call to funding and then send 0:11:01.320 --> 0:11:04.800 it to somebody like me to invest in the US 0:11:04.880 --> 0:11:08.800 bond market, in the corporate bond market at yields of 0:11:08.920 --> 0:11:12.360 four or five percent or higher. So you're enjoying a 0:11:12.520 --> 0:11:15.079 much higher yield than you would have by staying in 0:11:15.160 --> 0:11:18.440 the Do you think these changes that we're seeing in 0:11:18.440 --> 0:11:21.440 the last month, potentially again in March will change how 0:11:21.640 --> 0:11:23.440 you do business and ultimately on the behalf of other 0:11:23.440 --> 0:11:25.960 people who want to invest abroad from Japan. Well, I 0:11:25.960 --> 0:11:29.800 think we're already starting to see some signs of repatriation. 0:11:30.240 --> 0:11:33.000 We're starting to see some clients that have had money 0:11:33.520 --> 0:11:37.120 um in the US market start to take it back 0:11:37.200 --> 0:11:40.920 and put it back into the Japan bond market. And 0:11:41.160 --> 0:11:44.439 when you look at US assets hedge back to end, 0:11:44.720 --> 0:11:48.160 you're actually coming out at a yield that's significantly lower 0:11:48.480 --> 0:11:51.080 than where the j GB market is. So a lot 0:11:51.120 --> 0:11:54.000 of it is the dynamic of the inverted yield curve 0:11:54.040 --> 0:11:57.160 in the U S, so so that's pretty punitive. I 0:11:57.200 --> 0:12:00.200 think the Bank of Japan has to be careful how 0:12:00.240 --> 0:12:03.959 they unwind all these things so they don't create this 0:12:04.240 --> 0:12:09.760 frenzy of repatriation. But as I said, I think they 0:12:09.800 --> 0:12:14.520 can be consistent without creating this sort of frenzy. There 0:12:14.559 --> 0:12:17.800 is a part of me that thinks, great price discovery returns, 0:12:17.800 --> 0:12:21.240 we can start calling these places markets again. Then I 0:12:21.240 --> 0:12:22.800 look at the size of the balance sheets and I 0:12:22.840 --> 0:12:25.040 just think, well, there's a real stock effect here that's 0:12:25.040 --> 0:12:27.560 going to exist for a long long time. But there's 0:12:27.559 --> 0:12:28.960 two ways of looking at it. Isn't that this is 0:12:28.960 --> 0:12:32.000 the final anchor around the neck global bond yields about 0:12:32.000 --> 0:12:35.000 to be released by Japan and that should should have 0:12:35.080 --> 0:12:37.800 some real consequences. The other way of looking at it 0:12:37.840 --> 0:12:40.120 is still we have these massive balance sheets at the ECB, 0:12:40.240 --> 0:12:42.160 the Federal Reserve, the b LJ. They're going to be 0:12:42.160 --> 0:12:45.160 around for a long time. Which one is it? I 0:12:45.200 --> 0:12:48.280 think it's both of those. This is the conversation I'm 0:12:48.320 --> 0:12:52.160 having a lot with our clients because we think we 0:12:52.240 --> 0:12:55.560 have put in a secular low and bond yields and 0:12:56.000 --> 0:12:59.200 a secular, the end of the secular free for all 0:12:59.520 --> 0:13:03.839 in ustless capital, and and we're in a trend that 0:13:03.920 --> 0:13:07.800 will return the cost of funding to something that looks 0:13:07.840 --> 0:13:12.880 historically more normal central bank rates, bond market rates to 0:13:13.000 --> 0:13:15.679 something that looks more normal. But it doesn't happen all 0:13:15.720 --> 0:13:18.880 at once. You don't go from zero to but on 0:13:19.000 --> 0:13:22.520 their time continuing, whatation are you in two years, two months, 0:13:23.200 --> 0:13:26.040 in three months, library to diamond. We got to be 0:13:26.040 --> 0:13:29.320 in three month library com It took twenty seven years 0:13:29.360 --> 0:13:33.400 to get the Fed funds rate from t to zero person, 0:13:33.960 --> 0:13:39.240 and you had a series of lower lows and lower highs. 0:13:39.280 --> 0:13:42.160 I think we're seeing the mirror image of that. We're 0:13:42.160 --> 0:13:45.720 going where we're going to have a series of higher 0:13:45.840 --> 0:13:50.360 highs and higher lows. But every three to five hundred 0:13:50.360 --> 0:13:53.880 basis points shift in the cost of funding through central 0:13:53.880 --> 0:13:56.480 bank rates will have an impact, and then they'll have 0:13:56.559 --> 0:13:58.960 to come back and take some of that back, and 0:13:59.000 --> 0:14:01.079 then they'll start up again. I got two minutes on 0:14:01.080 --> 0:14:02.760 the clock. I've got to fit this in. And I've 0:14:02.760 --> 0:14:04.840 talked about this before. This is a huge thing that 0:14:04.880 --> 0:14:07.640 I think you're really at the forefront of. You're basically 0:14:07.640 --> 0:14:10.000 saying that it's going to take several cycles to basically 0:14:10.080 --> 0:14:13.240 unwind what we've seen over the last several decades. Can 0:14:13.280 --> 0:14:15.880 you tell me what's changing the secular story of the 0:14:15.960 --> 0:14:18.920 last thirty years and why you're projecting that out the 0:14:18.960 --> 0:14:22.320 next several cycles. What's changed? What's that powerful story that's 0:14:22.320 --> 0:14:25.840 going to unwind all of this? Well, there's one, certainly 0:14:25.880 --> 0:14:28.400 in the developed markets. I remember after the financial crisis, 0:14:28.400 --> 0:14:30.680 we're all sitting there going, oh my god, what do 0:14:30.720 --> 0:14:33.960 we do with all this housing stock? The baby boomers 0:14:33.960 --> 0:14:37.800 are rolling over into retirement, and the millennials are too young. 0:14:37.920 --> 0:14:42.720 The one burst at the time were what they were 0:14:42.760 --> 0:14:48.480 seventeen years old. Well, guess what, fourteen years has just passed. 0:14:48.800 --> 0:14:53.480 The births are now thirty two years old, still living 0:14:53.560 --> 0:14:58.680 with me, but well they're they're hitting their peak of earning, spending, 0:14:58.880 --> 0:15:01.840 and saving, much like the baby boomers did in the 0:15:01.960 --> 0:15:05.240 nineteen eighties, and suddenly all the housing we didn't invest 0:15:05.360 --> 0:15:08.400 in after the financial crisis we need it back again. 0:15:08.680 --> 0:15:12.800 So there are some real capital expenditure plans out there, 0:15:12.800 --> 0:15:20.240 sustainable investment, defense, infrastructure, healthcare, education, Those are things that 0:15:20.600 --> 0:15:24.720 a new emerging population of millennials X Y Z whatever 0:15:24.800 --> 0:15:27.480 you want to call it, they're going to be willing 0:15:27.520 --> 0:15:30.920 to spend an invest in. But Michael, this is awesome 0:15:31.120 --> 0:15:34.280 from Jay fantastic. It was too smart. I couldn't you go? 0:15:34.600 --> 0:15:48.560 Second question? Maybe next? Well, I want to try and 0:15:48.640 --> 0:15:51.800 understand from the Europeans time is whether the situation we 0:15:51.840 --> 0:15:55.720 went through this summer, last summer fearing this winter, whether 0:15:55.760 --> 0:15:59.000 we repeat that act this coming summer approaching next winter. 0:15:59.360 --> 0:16:01.800 Someone who help us with that? Simon French chief economist 0:16:01.800 --> 0:16:05.000 Pamer Gordon in the British media, particularly writing some really 0:16:05.040 --> 0:16:08.320 thoughtful essays. Simon, thank you so much for joining today. 0:16:08.400 --> 0:16:12.520 At the margin, it seems like Europe is being buffeted 0:16:12.560 --> 0:16:16.800 by good news, including Chinar reopening his Pam your Gordon 0:16:17.360 --> 0:16:22.960 shifted the two thousand twenty three euro call. No we haven't. 0:16:23.080 --> 0:16:26.480 We went into the year thinking that it's actually the 0:16:26.520 --> 0:16:30.320 behavioral response you were looking for across two parameters would 0:16:30.360 --> 0:16:33.120 play out in terms of a more dynamic behavior. One 0:16:33.120 --> 0:16:36.560 of those two parameters first of all, energy usage, and 0:16:36.600 --> 0:16:38.360 I think Jonathan gave a good sort of tea up 0:16:38.360 --> 0:16:41.960 in terms of next winter, what are the dynamics. Well, 0:16:42.000 --> 0:16:44.800 the strongest argument for why the dynamics might be more 0:16:44.840 --> 0:16:49.360 favorable than consensus, is that you're seeing quite significant behavior 0:16:49.480 --> 0:16:52.000 change in terms of energy consumption, which there is no 0:16:52.080 --> 0:16:55.080 reason with the extra twelve months why that can't actually 0:16:55.080 --> 0:16:58.280 be amplified. And the second thing we're seeing in corporate results, 0:16:58.280 --> 0:17:01.120 not just across Europe, but you mentioned, you know, corporate 0:17:01.160 --> 0:17:03.920 results in the United States as well, is signs now 0:17:03.960 --> 0:17:09.280 that households, which have paradoxically strengthened their balance sheets over 0:17:09.280 --> 0:17:13.240 the last two to three years, starting to divest more rapidly. 0:17:13.240 --> 0:17:15.479 Actually in the US them all the way through that cycle. 0:17:15.520 --> 0:17:18.240 But we're starting to see the data in Europe suggesting 0:17:18.280 --> 0:17:20.400 that the backing of Q four, where it was thought 0:17:20.480 --> 0:17:23.480 of a slamming shut of the European wallets, was not 0:17:23.600 --> 0:17:26.520 that path. We saw both those behavioral changes coming to pass. 0:17:26.800 --> 0:17:28.480 I think the data is on our side, but look, 0:17:28.520 --> 0:17:31.439 we're still early days. There could be a new year hangover, right, Simon. 0:17:31.600 --> 0:17:34.440 We're talking earlier about the glide path and interest rates. 0:17:34.440 --> 0:17:37.280 There's an idea of disinflation, maybe ever so slight in 0:17:37.320 --> 0:17:40.119 the United Kingdom as well. There's a I'm gonna call 0:17:40.240 --> 0:17:43.240 the zeitgeist understanding in the United States. We come down, 0:17:43.280 --> 0:17:46.240 we don't know where to five percent four percent? Dare 0:17:46.280 --> 0:17:49.240 I say three percent? Maybe not two percent? Is there 0:17:49.280 --> 0:17:53.240 a consensus understanding of a disinflationary vector in Europe? I 0:17:53.240 --> 0:17:56.840 don't see it. No, No, there isn't in your the 0:17:56.920 --> 0:18:00.600 ECB commentary which you've been alluding to, if you like, 0:18:00.760 --> 0:18:04.520 reflect the national interests of the national governments in terms 0:18:04.560 --> 0:18:08.439 of how their economies may have quite different experience of 0:18:08.520 --> 0:18:11.280 stubborn core inflation, which really is going to be the 0:18:12.560 --> 0:18:15.919 headline piece of data, perhaps not on our screens each morning, 0:18:16.160 --> 0:18:18.360 but in terms of what's going to affect the ECB 0:18:18.560 --> 0:18:22.800 response function in each of the ECB Governing Councils decisions. 0:18:22.840 --> 0:18:25.680 So the fact that we have amongst investors a very 0:18:25.800 --> 0:18:28.200 very different view as to whether actually you mentioned a 0:18:28.280 --> 0:18:31.760 glide to five for three. I mean, there are quite 0:18:31.760 --> 0:18:34.800 a number of people who think will see active disinflation 0:18:35.000 --> 0:18:39.119 over or deflation by the sort of middle part of 0:18:39.119 --> 0:18:42.560 twenty four versus those people, and I think I sit 0:18:42.600 --> 0:18:45.760 in the latter camp who expect quite a lot of 0:18:45.960 --> 0:18:49.600 quite stubborn, quite sticky inflation because a lot of corporates 0:18:49.600 --> 0:18:52.240 are trying to rebuild margins, trying to delay the past 0:18:52.280 --> 0:18:54.679 through that they couldn't do in one go because of 0:18:54.680 --> 0:18:57.160 the price shocks of twenty twenty two, and therefore they're 0:18:57.160 --> 0:19:00.560 going to pass them through in twenty five as part 0:19:00.560 --> 0:19:03.639 of rebuilding their corporate margins and a delayed pastor of 0:19:03.640 --> 0:19:06.000 invasionary pressures. Something. Can we talk about who's in the 0:19:06.119 --> 0:19:09.040 driving seat at the European Central Bank? I got the 0:19:09.080 --> 0:19:11.280 impression at the last meeting with President the Guard that 0:19:11.359 --> 0:19:13.600 really felt like the bunders Bank was back in control. 0:19:13.920 --> 0:19:16.639 It was so punchy, the most hawkish I've ever heard 0:19:16.640 --> 0:19:18.600 her in a news conference. What did you make of 0:19:18.680 --> 0:19:22.960 that that it was going to be data dependent? Yes, 0:19:22.960 --> 0:19:26.840 it was hawkish, but as always, and we mustn't you know, 0:19:26.920 --> 0:19:29.960 this is far too clever an audience to fall into 0:19:30.000 --> 0:19:33.600 the idea that these are unconditional statements. For years both 0:19:33.720 --> 0:19:37.320 you know, when policy was left to the zero bound 0:19:37.320 --> 0:19:38.720 and we were talking about when we were going to 0:19:38.800 --> 0:19:42.200 leave that, and now when we're talking about the pathway 0:19:42.240 --> 0:19:45.159 through to a plateau through a terminal rate, we have 0:19:45.240 --> 0:19:48.440 to recognize that statements, even one as punchy as Decembers, 0:19:48.680 --> 0:19:51.399 was conditional to how the data revolves. And though the 0:19:51.480 --> 0:19:54.080 fact that we have now in devils this week and 0:19:54.119 --> 0:19:55.520 we're going to get in the run up to the 0:19:55.560 --> 0:20:00.159 next ECB Governing Council different takes on that data is 0:20:00.200 --> 0:20:02.480 that if you like turf war going on on, how 0:20:02.520 --> 0:20:05.240 you interpret that stickiness of involation and the degree to 0:20:05.240 --> 0:20:08.840 which that commentary and December persists through Q one there 0:20:08.880 --> 0:20:11.919 was a phrase that echoed in December. It was sufficiently restrictive, 0:20:12.240 --> 0:20:14.000 started with the Fed. We heard it at the e 0:20:14.040 --> 0:20:16.399 c B as well. If you'd ask me, Simon, what 0:20:16.480 --> 0:20:18.840 was sufficient restrictive for this c c B maybe a 0:20:18.920 --> 0:20:21.919 year ago, I'd say they're struggling to get to one, two, 0:20:22.320 --> 0:20:25.040 not three, because I thought this market would just completely 0:20:25.080 --> 0:20:26.840 collapse under the weight of what they were doing. Simon, 0:20:26.880 --> 0:20:28.719 that hasn't happened in a way that many people, including 0:20:28.760 --> 0:20:31.640 myself anticipated. I guess my question to you is, first 0:20:31.640 --> 0:20:33.560 of all, why do you think that is? Is the 0:20:33.560 --> 0:20:36.760 bondmarket more resilient than we thought it would be? And secondly, 0:20:36.760 --> 0:20:41.320 where do you see sufficient restrictive now? With that in mind? Well, look, 0:20:41.359 --> 0:20:43.880 that's very honest, Jonathan. Myself, I would put also put 0:20:43.920 --> 0:20:46.159 myself in the camp the urine, which I didn't. I 0:20:46.200 --> 0:20:47.760 didn't see this so We have to have a degree 0:20:47.760 --> 0:20:51.080 of humility, don't we when we're appraising what happens next. 0:20:51.160 --> 0:20:54.520 But in terms of why we haven't seen the level 0:20:54.800 --> 0:20:57.960 of if you like, market capitulation in the face of 0:20:57.960 --> 0:20:59.800 a rising rescree rate, there are two things to know 0:21:00.040 --> 0:21:03.560 on There is a delayed pass through. Monetary policy has 0:21:03.600 --> 0:21:06.200 famously long and variable lags. Have we seen the full 0:21:06.240 --> 0:21:10.240 impact of monetary tightening, particularly in private markets in fixed 0:21:10.280 --> 0:21:13.560 US every pricing the revaluation cycle though, I don't think 0:21:13.600 --> 0:21:15.960 we have, so the jury is still out in terms 0:21:16.000 --> 0:21:18.800 of long term economic impact. But and I've written quite 0:21:18.800 --> 0:21:20.439 a lot about this, and I think Tom has alluded 0:21:20.480 --> 0:21:24.240 to this in is very kind intro is potentially a 0:21:24.359 --> 0:21:27.120 return to a higher risk free rate has a nice 0:21:27.119 --> 0:21:30.760 side effect in terms of productivity improvement, the allocation of capital, 0:21:31.040 --> 0:21:35.120 the type of thing that has undermined economic growth. You know, Tom, 0:21:35.160 --> 0:21:36.960 I know you've talked a lot about the impact of 0:21:37.000 --> 0:21:42.320 financial repression on trend economic growth, on productivity. Potentially investors, 0:21:42.320 --> 0:21:44.440 and I've talked a lot investors who see the potential 0:21:44.520 --> 0:21:47.600 corallary of a high risk free rate return to more 0:21:47.640 --> 0:21:50.399 normalized levels of productivity and a welcome return that may 0:21:50.440 --> 0:21:52.720 be one of the explanatory factors. I mean, this is 0:21:52.760 --> 0:21:56.000 really important, folks in this centers on my optimism here 0:21:56.040 --> 0:22:01.119 and things clear. Corporations change if there's a misjudge. I 0:22:01.240 --> 0:22:05.359 was suggest Simon's led by the European, the American, the 0:22:05.400 --> 0:22:09.840 Pacific rim consumer is well, it pam your gordons some 0:22:10.119 --> 0:22:16.399 together your confidence the consumer can deliver the goods well 0:22:16.520 --> 0:22:18.840 if you take the data points in terms of the 0:22:18.920 --> 0:22:25.240 excess savings that took place throughout the pandemic years one. 0:22:26.520 --> 0:22:30.440 With the U S consumer has begun quite a considerable 0:22:30.480 --> 0:22:33.520 divestment phase, but they still have While the savings ratio 0:22:33.640 --> 0:22:37.119 is normalized and will possibly unders it is starting to undershoot. 0:22:37.440 --> 0:22:39.880 There is still a stock effect that can support consumer 0:22:39.920 --> 0:22:43.200