Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa Abram Woyd's
Speaker 1: along with Tom Keane and Jonathan Farrow. Join us each
Speaker 1: day for insight from the best in economics, geopolitics, finance
Speaker 1: and investment. Subscribe to Bloomberg Surveillance on demand on Apple,
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Speaker 1: Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business app. Francis, Now, Francis,
Speaker 1: do you think that dumb and welcome to the shoug
Speaker 1: They might be done. No, it could be another twenty
Speaker 1: five basis points or nothing. But in the great scheme
Speaker 1: of things, I don't think it really matters. The market
Speaker 1: already has a coin toss for this next meeting. What
Speaker 1: matters and what actually shocks my economic and inflation model
Speaker 1: is not another twenty five basis points or not. It's
Speaker 1: how fast they cut and when they start cutting. So
Speaker 1: the conversation is going to have to shift I think
Speaker 1: in the next few weeks away from this next incremental meeting. Forwards,
Speaker 1: what does the off to the next one to two
Speaker 1: years look like? Because if the FED is going to
Speaker 1: get its way, there's a significant mispricing. I suspect that
Speaker 1: the market is probably going to have to price in
Speaker 1: more cuts moving forward, and the FED is going to
Speaker 1: follow what drives that, the economic daser or further financial
Speaker 1: instability the two And this was a big difference. Li.
Speaker 1: So you talked about the difference between the ECB and
Speaker 1: the FED. The ECB President Le Guard told us there
Speaker 1: is no tension between the price stability and financial stability mandate.
Speaker 1: And even though Chirpowell implied the banking system is sound,
Speaker 1: he also was very clear that they were incorporating real
Speaker 1: economic impact from the banking stress through the lending channel.
Speaker 1: So we know that this is going to dampen growth
Speaker 1: moving forward. And indeed, anyone with an economic model the
Speaker 1: day that we saw the first initial banking stress clud
Speaker 1: in this is going to be a credit crunch, and
Speaker 1: we have a playbook for that. It's not good. It
Speaker 1: leads to recessions. It has every single time, Francis, we've
Speaker 1: heard from executive after executives, this is not a credit crunch,
Speaker 1: This isn't a credit problem. This is simply a liquidity mismatch.
Speaker 1: How do you say to them, you're wrong, This is
Speaker 1: going to become a credit problem, as it always has
Speaker 1: with aquidity issues versus no, you're right, this is something
Speaker 1: that could be addressed, its deposit insurance or other measures.
Speaker 1: I just pull out my charts from before the banking
Speaker 1: stress issues, in which we already saw senior loan officers
Speaker 1: telling us that we were in a sizeable tightening. This
Speaker 1: was happening before we experienced banking stress. So even if
Speaker 1: you want to say the impact is nil, I could
Speaker 1: still proof to you that we are actually seeing a
Speaker 1: wide range of data saying that credit is pulling back.
Speaker 1: And that's particularly important because the bull case for the
Speaker 1: US economy has been the consumer is strong, and the
Speaker 1: consumer was being driven by releveraging. If that slows or stalls,
Speaker 1: then we have a momentum slowing. Is that Q one
Speaker 1: Q two Probably not, But our traditional leads and eggs
Speaker 1: tell us that by Q four of this here, we're
Speaker 1: in a significant soft patch. So my issue is, well,
Speaker 1: maybe the Fed goes twenty five base this point or not.
Speaker 1: I think not at this juncture. But how quickly did
Speaker 1: they choose to respond? And it's possible that the hawkish
Speaker 1: shape here is not the next meaning, but that they
Speaker 1: try to stay on pause as long as possible, given
Speaker 1: inflation in this soft patch is probably still a little
Speaker 1: uncomfortably high. From what I'm hearing, Frances, it seems like
Speaker 1: the thresholds has gone way down for cutting rates, at
Speaker 1: least what you expect in the upcoming months. How low
Speaker 1: do you expect the Fed to be able to cut
Speaker 1: rates given that there is a disinflationary effect from some
Speaker 1: sort of credit contraction. Well, that's right. We have playbooks
Speaker 1: for uncertainty shocks, which the banking system stress is. We
Speaker 1: have playbooks for credit crunches. But it's been a very
Speaker 1: long time, Leaves since we had a playbook for flow growth.
Speaker 1: But inflation still around three to four percent. The most
Speaker 1: important thing I heard from CHERA. Powell yesterday was actually
Speaker 1: his reference to long term inflation expectations being anchored, and
Speaker 1: he said it was true for households, businesses, forecasters, and markets.
Speaker 1: And that may be the direction that Chair Powell and
Speaker 1: the Fed chooses to tilt towards. As we still see
Speaker 1: some sicklidly high inflation. So even if they come to
Speaker 1: the end of the year we have three to four percent,
Speaker 1: they may be able to say, listen, the long run
Speaker 1: concerns about inflation expectations becoming the anchored we no longer
Speaker 1: have those. We can tilt back towards the employment side
Speaker 1: of our mandate because let's remember the Fed does have
Speaker 1: a dual mandate. We just haven't talked about the employment
Speaker 1: side in a very long time. John and I were
Speaker 1: talking about this earlier. Frances, do you think that rate
Speaker 1: cuts in this framework are going to be bullish, are
Speaker 1: going to be positive for risk assets? Well, traditionally the
Speaker 1: context around rate cuts matters, but we got to get
Speaker 1: through a recession first. I mean, there is a little
Speaker 1: bit of something we're seeing now where people are saying, well,
Speaker 1: the leading indicators of the leading indicators, of the leading
Speaker 1: indicators are positive. But that's joking the gun a bit.
Speaker 1: We still have to go through a rerating of this
Speaker 1: economy to a lower growth environment, which means lower earning scrowth,
Speaker 1: less activity and employment. Shop maybe jumping the gun just
Speaker 1: a bit more or a bit too much if we
Speaker 1: get too bullish on at this juncture given the context. Francis,
Speaker 1: thank you as always, Francis Downard. That just brilliant over
Speaker 1: a Mandy Life Investment Management joining us nice Alessia at
Speaker 1: the longest senior porfolio manager and invest go Alesia. How
Speaker 1: you started the year constructive, you came into March less constructive.
Speaker 1: Alessia talked to me about the change there given what
Speaker 1: we've seen transparent the last couple of weeks, Lisa John,
Speaker 1: thank you for having me. Yes. At the beginning of
Speaker 1: the year, we had a very constructive view which panned
Speaker 1: out a little too fast and too far. So when
Speaker 1: we entered in March, many of our indicators started signaling
Speaker 1: a little bit of an extended price action and sentiment
Speaker 1: that was beginning to roll over as a result of
Speaker 1: renewed positive inflation surprises. They're steepening in yield curves and
Speaker 1: the repricing of additional policy hikes. That led us to
Speaker 1: from a cyclical perspective to reposition again for a defensive
Speaker 1: as a location posture. What happened with the bank developments
Speaker 1: over the last couple of weeks has accelerated the path,
Speaker 1: has validated the path, but it's important to make a distinction.
Speaker 1: We have been able over the last couple of weeks
Speaker 1: to rule out, thanks to the policy actions and the
Speaker 1: developments in Switzerland, to rule out a systemic accident in
Speaker 1: the banking sector. With that being said, the tensions in
Speaker 1: the credit markets have increased from a syclical perspective, why
Speaker 1: their credit spreads, why their lending stuff. More restrictive lending
Speaker 1: standards and lower credit growth are necessary conditions to have
Speaker 1: monetary policy titan in the future and bring inflation down. Alessia,
Speaker 1: there seems to be a policy divergence driven by the
Speaker 1: fact that the US financial system, and I'm talking not
Speaker 1: about the big banks but the regionals that are subject
Speaker 1: to some of this deposit flight. The banking system does
Speaker 1: have a more pervasive issue that needs to get dealt with,
Speaker 1: and some other nations, including the UK and including Europe
Speaker 1: more broadly content on Europe, do you agree with that?
Speaker 1: Can you trade on that? Is there something underpinning that
Speaker 1: in terms of perhaps ongoing rate hikes in Europe and
Speaker 1: the end of them in the US. I think the
Speaker 1: cyclical divergence is there in the growth and in monetary
Speaker 1: policy on the margin. From this point on, I think
Speaker 1: with the Federal Reserve we're looking at marginal increases let's say,
Speaker 1: another twenty five business points hike in May. But the
Speaker 1: ECB and potentially the Bank of England I think have
Speaker 1: more to go at least another fifty, if not more.
Speaker 1: That secretical divergence can be expressed through multiple venues. Again,
Speaker 1: I'm ruling out the I wouldn't say that we can
Speaker 1: trade on the ass on the more structural systemic aspects
Speaker 1: of potential bank regulation. I think what we should focus
Speaker 1: on is trading on that cyclical divergence, trading on the
Speaker 1: cyclicality of the perception, which I think has returned. The
Speaker 1: last couple of weeks were more of a risk of
Speaker 1: a systemic shock that would have changed that dynamic, But
Speaker 1: I think now we are more comfortably back into the
Speaker 1: typical end of a tightening cycle pricing dynamics. So when
Speaker 1: can you go back into European banks? European banks are
Speaker 1: not for now. In my mind. We favor a bias
Speaker 1: away from value and away from cyclicals, of which banks
Speaker 1: are one, more into quality oriented, lower vualativity and growth
Speaker 1: oriented sectors. So defensive sectors such as healthcare, consumer staples,
Speaker 1: and even technology, which screens now on quality characteristics, and
Speaker 1: we have seen that quality pan out as soon as
Speaker 1: rates began to rally again, those sectors and styles with
Speaker 1: longer dated cash flows and more duration have outperformed. We
Speaker 1: think this is an environment for defensive sectors. And I said,
Speaker 1: just quickly, just to wrap it up, working on the assumption.
Speaker 1: Now the FED is done, working on the assumption that
Speaker 1: one more hike and then we are done. So secretly
Speaker 1: called divergence in favor of European equities in favor of
Speaker 1: the euro and a global backdrop where a policy being
Speaker 1: done is not necessarily the recipe for a raally. Just yet,
Speaker 1: we need to see the impact on growth. First, interesting Alesia,
Speaker 1: Thank you, Lesa, the longest deep of invested joining us
Speaker 1: down the secondly market John Stelfast, the chief investment strategist
Speaker 1: and Oppenheimer Asset Management. Hi, John, great to catch up
Speaker 1: with you, sir. I mentioned this to you in the
Speaker 1: commercial break. We're going to talk about exactly this. If
Speaker 1: the fedbacks away because things are breaking, are you telling me?
Speaker 1: And that's bullish. It's certainly not a bad thing. Let's
Speaker 1: let's put it that way. And I think the market
Speaker 1: really responded to that intimation from Chair Powell, and I
Speaker 1: think that you know, that was all really doing quite well.
Speaker 1: Later on we had this from its Secretary of Treasury,
Speaker 1: Janet Gallen, and that kind of should people up. But
Speaker 1: this is not uncommon times like this. The main thing,
Speaker 1: it's not so much what brings the market down is
Speaker 1: how quick the response is and a recognition investors need
Speaker 1: to realize not every response is going to be correct
Speaker 1: or exactly what they want to hear. But it's a
Speaker 1: process of working our way back out of another set
Speaker 1: of wood wooded area, so to speak. They setted wooded
Speaker 1: area We're going to get out of somehow with rate cuts.
Speaker 1: That's what the market says, The Fed says, no, how
Speaker 1: much are you counting on rate cuts? To having more
Speaker 1: bullish outlook on how this emerges, how this develops, how
Speaker 1: we emerge from the woods of financial systemic issues, great questions,
Speaker 1: not really relying on rate cuts a heck of a
Speaker 1: lot near term. I think the inflation is sticky. The
Speaker 1: Fed has to do something. It's credibility is still on
Speaker 1: the line. Its credibility is always on that line, whether
Speaker 1: it's a rate high cycle or a cutting cycle. But
Speaker 1: in this particular instance, having been behind the curve badly
Speaker 1: enough so we had this inflation hit before the year
Speaker 1: high as the way it had. This is an important
Speaker 1: period and they've got to show that they can manage
Speaker 1: both this as well as a crisis in confidence within
Speaker 1: the regional banks. And I think they can and I
Speaker 1: think they're very capable of doing it. But it doesn't
Speaker 1: mean they are infallible. They just have to work their
Speaker 1: way through a process. John, you've been a bullish investor
Speaker 1: for quite a while. What does being a bull right
Speaker 1: now mean? What does it mean owning? And what does
Speaker 1: it mean hoping for? Well, I think the main thing
Speaker 1: right now is, you know, we've just been building our
Speaker 1: positions in areas that we think will be reward and
Speaker 1: if if I just take a look, and I hate
Speaker 1: to give the bears, you know, some some areas they
Speaker 1: might hit, you know, if they get if they get
Speaker 1: bugged out today at some point. But it's it's been
Speaker 1: terrific where all of a sudden tech has become the
Speaker 1: new value story. There was a recognition all of a sudden, indeed,
Speaker 1: we're not going back to the abaccus or going uh,
Speaker 1: you know, going back to the slide role. Technology is
Speaker 1: alive and well, the most important thing is it's got
Speaker 1: to be profitable. You know, positive cash flow. Who's a
Speaker 1: good thing. But as well as that it looks good
Speaker 1: for a consumer discretion area, it looks good for areas
Speaker 1: communication services industrials, and this is the area where we
Speaker 1: like to invest, not play a little bit longer on
Speaker 1: the financials. Now, this is going to take to regain
Speaker 1: trust in terms of investors who are not players but
Speaker 1: are rather intermediate to long term investors. It will take
Speaker 1: them a little while to feel more relaxed about financials.
Speaker 1: As the steps steered up. Well, we need the consumer
Speaker 1: to relax about financials before investors can relax about financials, John,
Speaker 1: you need policy to act as a circuit breaker. Do
Speaker 1: you think this financial stability instability can end without blanket
Speaker 1: deposit insurance? Yeah, you know, I think I think that
Speaker 1: the real definition is will all have to be perhaps
Speaker 1: a redefining about what that maximum amount of a deposit
Speaker 1: that gets covered and then anything over that would likely
Speaker 1: have to be paid by the depositor in being over
Speaker 1: and having an overage versus what the covered amount is,
Speaker 1: so that the taxpayer is not really on the hook
Speaker 1: for it, John Stoffers of open Him Rsset Management, John,
Speaker 1: thank you. Mark Warner joining us, a senator from Virginia
Speaker 1: who is leading up some of those hearings in front
Speaker 1: of the house, in front of the Senate Committee, as
Speaker 1: we do expect a no in situation right now for
Speaker 1: the chief executive officer of TikTok. Can give us a
Speaker 1: sense of what you're hoping to get out of the
Speaker 1: out of these hearing, Senator Warner, Well, unfortunately, I'm not
Speaker 1: going to be in the hearing. It's actually hearing today
Speaker 1: in the House. But I've had concerns for some time
Speaker 1: that the United States has not had any kind of
Speaker 1: rational policy about how we deal with foreign technologies from
Speaker 1: countries like China and Russia that pose a national security threat.
Speaker 1: A few years back, it was the Russian software company Gaspersky.
Speaker 1: Back in twenty nineteen, we went through a long debate
Speaker 1: about Walway. Now we're talking about Tiptop. So I put
Speaker 1: a bipartisan built together that's been endorsed by the administration.
Speaker 1: I got ten Democrats, ten Republicans that said we ought
Speaker 1: to give the Secretary Commerce the authorities and tools that could,
Speaker 1: if there is a national security threat, allow her to
Speaker 1: take actions up to and including divestiture and including banning.
Speaker 1: And why TikTok Two reasons. One, TikTok is extraordinarily popular,
Speaker 1: and we acknowledge that one hundred fifty million Americans. Some
Speaker 1: of the data I've seen on average about ninety minutes
Speaker 1: a day. What TikTok's genius is is it learns from
Speaker 1: you every time you're on. So it's getting and collecting
Speaker 1: data that is individually specific at the end of the day,
Speaker 1: no matter what the TikTok CEO says, Chinese law made
Speaker 1: clear in twenty seventeen that Bite Dance Chinese company that
Speaker 1: owns TikTok, at any point the Chinese government can require
Speaker 1: that data be turned over to the government. I think
Speaker 1: that has the ability to harvest data that could be used.
Speaker 1: It's already been demonstrated to be used to spy on journalists.
Speaker 1: It could be used to target certain people in the
Speaker 1: Chinese diaspra. It can be frankly used to ultimately target
Speaker 1: some of our kids who are on that site on
Speaker 1: a such a regular basis. So the data collection is
Speaker 1: number one. The number two part is this is a
Speaker 1: huge potential propaganda tool. Should President she decide that he
Speaker 1: wants to go ahead and take on an invasion of
Speaker 1: China or I'm sorry, invasion of Taiwan, TikTok could be
Speaker 1: that site that is saying to literally hundreds of millions
Speaker 1: of folks all around the world, one hundred and fifty
Speaker 1: million Americans. Hey, that's not so bad in terms of
Speaker 1: the message that is conveyed, and evidence of that in
Speaker 1: many ways has been The Chinese leadership has said they
Speaker 1: would rather have TikTok banned in America than give up
Speaker 1: the source code, which is the secret sauce the algorithms
Speaker 1: that create this wonderfully addictive tool. They would rather give
Speaker 1: up TikTok in America than give up the source code.
Speaker 1: And I don't know how Americans could ever be saved
Speaker 1: without that source code and getting out of China and
Speaker 1: into the United States. Senator just before before, I want
Speaker 1: to make sure that we get this point clarified, just
Speaker 1: to dig into what you're saying little bit more. You're
Speaker 1: talking about national security concern and how this data can
Speaker 1: be used to be a manipulative to a broad swath
Speaker 1: of the public. But there's also this question, as you said,
Speaker 1: of learning from you and data collection. How do you
Speaker 1: draw the distinction between TikTok's use of this as being
Speaker 1: a company that's owned and headquartered in China versus social
Speaker 1: media companies in the US also collect data and also
Speaker 1: have a lot of learning tools from their users. Great
Speaker 1: question in and chanically. I've got some concerns about the
Speaker 1: American companies. I think it's an embarrassment that we don't
Speaker 1: have a national privacy law. I think it's crazy, I'm
Speaker 1: a former telecom guy, that we don't have an ability
Speaker 1: to have data portability and interoperability, so if you get
Speaker 1: tired of Facebook, you can move to a new site
Speaker 1: and basically still talk to your friends. I think it's
Speaker 1: crazy that we've not taken on what's called Section two thirty,
Speaker 1: which gives all these social media companies a get out
Speaker 1: of jail free card for any of the content that
Speaker 1: they post. We've not been able to move on it.
Speaker 1: But all of those concerns I have about American and
Speaker 1: British and Indian and other company companies, those concerns are
Speaker 1: are not national security base. They are I think basic
Speaker 1: fairness and business practice is based into the day TikTok
Speaker 1: Bye dance. It's Chinese parent I believe has to be
Speaker 1: obervated by Chinese law changed in twenty seventeen made very
Speaker 1: clear that every Chinese company ultimately is not responsible to
Speaker 1: shareholders or customers. It is responsible to the government, and
Speaker 1: the fact that this can end up, this data or
Speaker 1: this potential content manipulation can end up in the hands
Speaker 1: of the communist party that moves this platform into the
Speaker 1: realm in my mind of national security. And one of
Speaker 1: the things that my law would also do is require
Speaker 1: the intelligence community do to classify as much information as possible,
Speaker 1: so it's not just a case of a trust us
Speaker 1: that this is a security risk. And I do believe
Speaker 1: that should this action take place, that the market will
Speaker 1: create an alternative. All these folks are making money off
Speaker 1: of TikTok social influencers. I believe there will be other sites.
Speaker 1: There are already some maybe not as quite as attractive
Speaker 1: yet as TikTok, but there will be other sites, and
Speaker 1: that can be companies in America, in India and France,
Speaker 1: you name it. I think the market will provide that alternative.
Speaker 1: Senator of our corner, thank you so much for your comments,
Speaker 1: and we look forward to catching up with you after
Speaker 1: the House hearings and after this has developed even further.
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Speaker 1: the Bloomberg Terminal. Thanks for listening. I'm Lisa Abramowitz, and
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