WEBVTT - Surveillance: Equity & Fixed Income Disjointment 0:00:05.120 --> 0:00:08.480 This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:08.520 --> 0:00:12.360 with Jonathan Farrow and Lisa Abramowitz. Join us each day 0:00:12.400 --> 0:00:16.840 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.280 --> 0:00:22.079 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.320 --> 0:00:26.600 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.640 --> 0:00:30.560 the Bloomberg Terminal and the Bloomberg Business App if you're 0:00:30.680 --> 0:00:34.400 part of Global Wall Street. Arguably this is the conversation 0:00:34.600 --> 0:00:38.320 of the day. Kata Kaminsky and the titles boring Chief 0:00:38.360 --> 0:00:43.360 Research Strategist at Elphas Simplex, but far more importantly out 0:00:43.400 --> 0:00:49.120 of the Andrew Low Combine in MIT Boston is trend based. 0:00:49.440 --> 0:00:53.519 She and her shop follow trends in the probability of 0:00:53.560 --> 0:00:57.560 coming out of a range into some trend across all assets, 0:00:58.080 --> 0:01:02.040 like nobody on the street. Katie Minsky to briefist this morning, Katie, 0:01:02.080 --> 0:01:04.800 I'm gonna be honest here. You correlate across some bonds, 0:01:05.640 --> 0:01:08.600 economics and all that over to equity markets where you 0:01:08.640 --> 0:01:13.280 are more than tentative. Tell us about the repricing that 0:01:13.319 --> 0:01:15.360 we could see in the equity markets. 0:01:16.480 --> 0:01:19.160 Good point. Okay, So this year, what we've really seen 0:01:19.520 --> 0:01:22.319 is that the equity market has been disjointed from the 0:01:22.319 --> 0:01:27.120 fixed income market. So it's been blissfully going along, relatively positively, 0:01:27.480 --> 0:01:29.800 ignoring the fact that there might be some issues and 0:01:29.840 --> 0:01:32.640 we might need to have higher rates for longer. We 0:01:32.720 --> 0:01:36.160 feel like last week we finally saw a point of recognition. 0:01:36.640 --> 0:01:39.080 We saw a breakout in the fixed income market where 0:01:39.120 --> 0:01:42.200 we saw yields higher significantly on the long end. What 0:01:42.280 --> 0:01:45.720 this means is the market has really finally said, wait 0:01:45.760 --> 0:01:50.400 a minute, these upside risks are real, like higher energy praises. 0:01:50.520 --> 0:01:51.280 That's a challenge. 0:01:51.320 --> 0:01:53.840 I mean, these things have to be solved for the 0:01:53.880 --> 0:01:56.480 equity market to waiver through this. 0:01:56.720 --> 0:01:59.040 And now we go over the prosphere to tread Wells 0:01:59.080 --> 0:02:03.480 Wilder nineteen with Katie Coominski. Katie cut to the chase. 0:02:03.880 --> 0:02:06.760 There's a green equity feel of up up, up and 0:02:06.760 --> 0:02:11.160 a red down down down from Wells Wilder called ADX DMI. 0:02:11.520 --> 0:02:14.960 It's a toxic soup of calculus as well. What are 0:02:14.960 --> 0:02:17.840 you learning right now from a broader S and P 0:02:18.040 --> 0:02:21.959 or NASDAQ one hundred ADX DMI available only on the 0:02:22.000 --> 0:02:23.000 Bloomberg terminal. 0:02:24.200 --> 0:02:26.400 Well, if you look at most of the technical signals 0:02:26.480 --> 0:02:30.040 right now, they all are pretty consistent. The equity has 0:02:30.080 --> 0:02:33.720 been relatively positive, but a little more tentative recently. But 0:02:33.800 --> 0:02:36.160 if you look at fixed income, I mean, let's be honest, 0:02:36.240 --> 0:02:39.000 fixed income is actually set to have two years in 0:02:39.040 --> 0:02:42.160 a row of negative returns, and fixed income signals have 0:02:42.240 --> 0:02:47.320 been consistently short for months and working well, particularly this month. 0:02:47.360 --> 0:02:50.520 We've seen energy breaking out more recently, and then we've 0:02:50.560 --> 0:02:53.640 seen in the currency basket we've seen the dollar trade 0:02:53.639 --> 0:02:55.720 also being one of the stronger ones in the last 0:02:55.720 --> 0:02:58.640 two months. So really seeing last year repeating itself. 0:02:58.840 --> 0:03:00.280 So is that what you're leaning in too well? I mean, 0:03:00.320 --> 0:03:02.640 that's my question is are you basically doubling down on 0:03:02.680 --> 0:03:06.320 your bond bar thesis and doubling down also on oil 0:03:06.360 --> 0:03:08.960 prices going higher, or are you seeing this starting to 0:03:09.560 --> 0:03:12.639 reach a top, a topping point that makes you pull back. 0:03:13.680 --> 0:03:15.799 This is a good question, Litza, because we're not really 0:03:15.840 --> 0:03:18.240 in the business of picking tops and bottoms. But what 0:03:18.280 --> 0:03:21.120 we are doing is following where market themes are moving 0:03:21.440 --> 0:03:24.200 and what people are actually doing, and what people have 0:03:24.240 --> 0:03:26.560 been doing all year. Which has confused me is sol 0:03:26.639 --> 0:03:29.520 bonds but said that they like them so it's really 0:03:29.560 --> 0:03:32.400 sort of this weird dichotomy. And so what we're seeing 0:03:32.440 --> 0:03:36.080 as well as we're seeing continued acceleration in the bond 0:03:36.120 --> 0:03:38.320 market on the short side, not more than before, So 0:03:38.320 --> 0:03:41.440 I wouldn't say that we're seeing more short positions. We're 0:03:41.440 --> 0:03:44.960 just seeing a consistent view. Although we've seen somewhat of 0:03:44.960 --> 0:03:46.880 a bottom at the short end of the curve. So 0:03:47.000 --> 0:03:49.880 remember in earlier this year we saw the short end 0:03:49.920 --> 0:03:52.280 of the curve bottom to some degree, we've been looking 0:03:52.320 --> 0:03:54.400 for more of a bottom on the long end of 0:03:54.440 --> 0:03:57.360 the curve. So when are long term rates going to 0:03:57.560 --> 0:04:00.240 sell off or long term bonds And that's exact that 0:04:00.320 --> 0:04:02.400 we saw last week, and that was our point of 0:04:02.440 --> 0:04:06.160 recognition where the market said, wait a minute, you're right, 0:04:06.560 --> 0:04:09.240 maybe we have to be higher for longer and we 0:04:09.320 --> 0:04:12.680 need to disinvert the curve. And that's finally starting to happen. 0:04:12.840 --> 0:04:13.200 Katie. 0:04:13.280 --> 0:04:17.159 I was struck by maybe people capitulate just ahead of 0:04:17.200 --> 0:04:19.360 the market actually turning their way or the economy turning 0:04:19.400 --> 0:04:21.720 their way. And it feels like a market that wants 0:04:21.720 --> 0:04:23.760 to inflict the most pain on the greatest number of 0:04:23.800 --> 0:04:26.760 people as markets are wont to do. It feels like 0:04:26.839 --> 0:04:29.800 things are turning on the edges in ways that might 0:04:29.960 --> 0:04:32.640 challenge the pond very thesis and how high yields can go. 0:04:33.000 --> 0:04:35.320 So is this a point where you start to reassess 0:04:35.360 --> 0:04:38.480 this is the capitulation moment where things can start to 0:04:38.920 --> 0:04:41.560 normalize in a more significant way. How much are you 0:04:41.640 --> 0:04:42.279 leaning into that? 0:04:43.480 --> 0:04:46.040 So what's interesting is we did a study last year. 0:04:46.040 --> 0:04:49.640 We study the short bond trade and empirically, if you 0:04:49.680 --> 0:04:54.000 look over different cycles of the markets during inverted yield curves, 0:04:54.120 --> 0:04:57.000 trend signals tend to work very well being short fixed income. 0:04:57.440 --> 0:05:00.880 During a flatter yield curve, it becomes more mixed, and 0:05:00.960 --> 0:05:03.280 as we see a steeper yield curve, then we tend 0:05:03.279 --> 0:05:06.560 to lean more into longer positions. So that's something we've 0:05:06.560 --> 0:05:09.479 been kind of monitoring and thinking about over the last year, 0:05:09.880 --> 0:05:12.680 is this concept of we need to find that inflection point. 0:05:12.839 --> 0:05:15.080 And since we now have a much flatter you'll look 0:05:15.120 --> 0:05:17.360 at that tenure today, it's close to four or five. 0:05:17.920 --> 0:05:21.480 That's pretty flat, and so as we see that flattening 0:05:21.520 --> 0:05:24.280 and disinversion, it means that we're going to see more 0:05:24.320 --> 0:05:26.680 of that inflection point closer to the bottom of the 0:05:26.680 --> 0:05:27.280 bond market. 0:05:27.320 --> 0:05:30.159 Well, you just heard there, folks, as gospel from Katie community. 0:05:30.240 --> 0:05:33.200 I can't say enough about disinversion and the point of 0:05:33.279 --> 0:05:35.840 a tip point, if you will, an emotional point to 0:05:35.880 --> 0:05:37.880 pick up on that, Katie. I'm looking at the Bloomberg 0:05:38.360 --> 0:05:42.280 Total Return Treasury Index. You know we're back to twenty 0:05:42.440 --> 0:05:45.919 sixteen pricing. You mentioned two years of negative return in 0:05:46.000 --> 0:05:48.479 the bond market. For the pros out there on bills, 0:05:48.480 --> 0:05:52.720 on notes, on bonds, do they have gamma like equities? 0:05:52.880 --> 0:05:55.320 Is there an emotion there where if we break through 0:05:55.720 --> 0:05:59.960 certain support levels on price go lower in price hiring year, 0:06:00.560 --> 0:06:03.360 that you get so called gamma or the emotion. 0:06:03.120 --> 0:06:06.320 Get me out, Yeah, I think. I mean that's part 0:06:06.400 --> 0:06:09.200 of what we've seen recently is at a certain point 0:06:09.240 --> 0:06:12.000 you have that aha moment. We have that in short 0:06:12.080 --> 0:06:14.960 term bonds earlier this year when people realize so people 0:06:15.040 --> 0:06:16.960 can focus on the shorter end of the curve. But 0:06:17.000 --> 0:06:19.640 I think right now you're hitting that moment where people 0:06:19.680 --> 0:06:24.039 are saying, if inflation is higher for longer, longer term 0:06:24.080 --> 0:06:27.480 cash flows will be exposed more to that particular pressure. 0:06:28.000 --> 0:06:30.320 And even if we have higher yields yield you know, 0:06:30.400 --> 0:06:32.960 higher real yields plus inflation is a nominal rates, So 0:06:33.040 --> 0:06:35.920 we have to have higher nominal rates until we deal 0:06:35.960 --> 0:06:38.720 with the problems. And the problems are higher oil prices, 0:06:38.920 --> 0:06:42.520 inflation not going down. It's dealing with supply chain issues 0:06:42.560 --> 0:06:44.520 and other things that we just didn't have in a 0:06:44.600 --> 0:06:46.080 low interstate world a. 0:06:46.080 --> 0:06:48.280 Clinic, Katie, thank you so much. Four point four to 0:06:48.320 --> 0:06:50.080 ninety percent right now in the ten year yield. She 0:06:50.200 --> 0:07:03.880 was quoting Katherine communscate with Elpha simplex. Earl Davis joins 0:07:03.960 --> 0:07:07.039 us to bounce off what Katherin Kaminski just said. Earl, 0:07:07.200 --> 0:07:10.520 you say priced down, yield up. You have a greater 0:07:10.640 --> 0:07:12.880 conviction on that than the last time we talked. 0:07:14.480 --> 0:07:16.920 So here's the interesting thing. The answer is definitely yes. 0:07:17.000 --> 0:07:19.200 This is unfolding largely as we saw it, and we 0:07:19.240 --> 0:07:22.400 still see, you know what, significant room for our sell 0:07:22.440 --> 0:07:25.480 off on ten to thirty year bonds, you know, possibly 0:07:25.520 --> 0:07:28.040 fifty to seventy five basis points higher before the end 0:07:28.080 --> 0:07:30.640 of the year on ten to thirty year bonds. Having 0:07:30.800 --> 0:07:34.000 said that, we do see that as a buying opportunity. 0:07:34.080 --> 0:07:37.520 You know, Friday, we actually reduced our short positions slightly, 0:07:38.320 --> 0:07:42.200 not by buying nominal bonds, interestingly, by buying tips. We 0:07:42.240 --> 0:07:44.440 do see tremendous value in the tip market at a 0:07:44.480 --> 0:07:47.640 two to twenty real yield. Not to say it can't 0:07:47.640 --> 0:07:50.000 get cheaper, which we believe it will, but that's where 0:07:50.000 --> 0:07:52.200 we're looking to buy when we're reducing our short position. 0:07:52.320 --> 0:07:54.760 Well, two questions, one, very short. Where does the ten 0:07:54.840 --> 0:07:56.920 year real yield? Where can that frame out from a 0:07:56.920 --> 0:08:00.440 two twenty? Does that have scope and scale team sweens 0:08:00.480 --> 0:08:03.520 out to twenty two to twenty five or can it really 0:08:03.640 --> 0:08:04.200 jump out? 0:08:05.080 --> 0:08:07.200 It could really jump out to two fifty to three 0:08:07.240 --> 0:08:10.080 percent of that three percent in two thousand and eight, 0:08:10.240 --> 0:08:13.280 And let me explain the reason why. When the real 0:08:13.360 --> 0:08:16.640 yields goes up, investors obviously get a real return. And 0:08:16.680 --> 0:08:20.040 with the economy being so resilient and still being strong, 0:08:20.120 --> 0:08:23.360 you know solid, as the Fed said, what they have 0:08:23.440 --> 0:08:26.880 to do is take dollars out of the growth economy, 0:08:27.080 --> 0:08:29.520 put it in the savings economy, and you do that 0:08:29.600 --> 0:08:32.520 by having a higher real rate to attract more buyers. 0:08:32.520 --> 0:08:35.120 So we can see it going above two fifty We 0:08:35.200 --> 0:08:38.959 think possibly possibly three percent, very top end. 0:08:39.360 --> 0:08:41.800 Don't stop to show your folks, this is so important. 0:08:41.880 --> 0:08:45.720 You've got Katie Kaminski and Earl Davis pushing against the 0:08:45.760 --> 0:08:50.440 broad consensus looking for lower price, higher yield. This is 0:08:50.480 --> 0:08:54.920 a global Wall Street issue right now, Earl Davis. That 0:08:55.040 --> 0:08:58.720 comes down to the gamma that we see, this instability, 0:08:58.920 --> 0:09:03.280 the the convexity almost that we see in equities. If 0:09:03.320 --> 0:09:07.960 we get a Davis bond pricing to things unraveled, did 0:09:07.960 --> 0:09:12.040 we get to an instability? Do we get the greater gamma? 0:09:12.120 --> 0:09:16.760 So the answer is yes, but for a very short period. 0:09:17.480 --> 0:09:20.040 We believe twenty twenty four to market, the economy will 0:09:20.080 --> 0:09:23.200 still do all right. So we do like credit, We 0:09:23.240 --> 0:09:26.720 do like risk assets, not at these valuations. So we 0:09:26.760 --> 0:09:29.360 do believe we unravel because you have to reprice for 0:09:29.400 --> 0:09:32.840 the higher discount rate. Once it does unravel, we will 0:09:32.840 --> 0:09:35.600 be buying, We will be going overweight. And I think 0:09:35.640 --> 0:09:37.880 that's something important to note that you know, these are 0:09:37.880 --> 0:09:40.319 the flows and ebbs of the market, and it presents 0:09:40.360 --> 0:09:43.240 itself with opportunity. That's why you know what we're active managers, 0:09:43.240 --> 0:09:45.200 and that's what we believe active managers should do. 0:09:45.559 --> 0:09:45.760 Well. 0:09:46.000 --> 0:09:47.559 You were saying that real yields go to two and 0:09:47.600 --> 0:09:50.080 a half to three percent? Is that correct? Really? 0:09:50.480 --> 0:09:53.400 Credit by carollability? Nothing for sure, but. 0:09:53.440 --> 0:09:56.400 To me, this is the lead of this whole thing 0:09:56.640 --> 0:09:58.040 because a lot of people are saying this is not 0:09:58.120 --> 0:10:01.160 driven by inflation. It's not driven and by growth, it's 0:10:01.240 --> 0:10:04.280 driven by something else. What is that something else driving 0:10:04.320 --> 0:10:05.160 the real yield hire? 0:10:06.679 --> 0:10:09.960 Well, i'll tell you what it is. It's expectations. You know, 0:10:10.240 --> 0:10:13.680 when you read history books and the seventies and inflation 0:10:14.320 --> 0:10:17.920 throughout the sixty seventies, inflation wasn't an annoyance. It wasn't 0:10:17.960 --> 0:10:21.480 public enemy number one. It wasn't until Reagan and Volker 0:10:21.520 --> 0:10:24.200 came in where they said, inflation's public enemy number one. 0:10:24.280 --> 0:10:26.199 We're going to grasp, we're going to cut it, we're 0:10:26.200 --> 0:10:28.760 going to get it down. Right now, we're still in 0:10:28.840 --> 0:10:33.480 the annoyance sphace of inflation. That's why we think it 0:10:33.480 --> 0:10:35.839 will persist. That's why we think this is a secular 0:10:35.960 --> 0:10:38.480 change towards high yields, because it takes a lot to 0:10:38.480 --> 0:10:40.840 get it to be public enemy number one, and we're 0:10:40.880 --> 0:10:41.959 not quite there yet. 0:10:42.080 --> 0:10:43.319 At this point. You said that you're going to be 0:10:43.360 --> 0:10:45.439 a buyer when there is some sort of unraveling. What 0:10:45.559 --> 0:10:47.120 kind of unraveling is going to cause you to be 0:10:47.160 --> 0:10:49.680 a buyer If everybody's been saying this, they're waiting for 0:10:49.720 --> 0:10:51.440 the dip to buy, and that's the reason why there 0:10:51.440 --> 0:10:52.160 hasn't been a dip. 0:10:53.320 --> 0:10:55.840 Yeah, you know what were The way we take risk 0:10:55.920 --> 0:10:59.240 is a mix of quantitative and qualitative. You know, we 0:10:59.280 --> 0:11:03.200 have structural risk and tactical risk. Our structural risk will 0:11:03.200 --> 0:11:05.800 be buying as yields get higher. We have our levels, 0:11:05.840 --> 0:11:08.480 we have our view, and then we reassess as they 0:11:08.559 --> 0:11:11.160 get to those levels. But as I said, we're still short, 0:11:11.200 --> 0:11:14.040 and we're still fairly significantly short, but we will be 0:11:14.120 --> 0:11:17.480 covering that on any further weakness and ultimately going long. 0:11:18.360 --> 0:11:20.840 How concerned are you about the quintuple risk that we 0:11:20.920 --> 0:11:23.599 keep talking about that maybe we're seeing right now capitulation 0:11:23.920 --> 0:11:26.680 ahead of the market turning towards all of the expectations 0:11:26.960 --> 0:11:32.200 of slower growth given shutdown strikes, higher gas prices, student 0:11:32.240 --> 0:11:34.960 loan repayments, and just the rates the cost of borrowing 0:11:35.040 --> 0:11:37.800 going up as much as it has it. 0:11:37.840 --> 0:11:40.200 Loosten, I don't have any concern, and the reason is 0:11:40.240 --> 0:11:42.000 I look at the market. It's all about framing and 0:11:42.080 --> 0:11:44.080 how you look at the market. So I look at 0:11:44.120 --> 0:11:47.000 the market like a Boeing a Boeing airplane. So We're 0:11:47.040 --> 0:11:49.640 getting all these weather patterns hitting each other, low inflation, 0:11:49.840 --> 0:11:52.840 high grow, low growth, all this and we're getting turbulence. 0:11:53.559 --> 0:11:55.480 And you know what. The turbulence could shake the plane, 0:11:55.480 --> 0:11:57.760 it could drop five hundred feet, but it's going to 0:11:57.800 --> 0:12:00.679 survive coming out of it. So I have no worries 0:12:00.679 --> 0:12:02.240 about it. But I do believe we're going to have 0:12:02.240 --> 0:12:03.800 a lot of turbulence over the next year. 0:12:04.120 --> 0:12:06.880 Ear very quickly here, and folks, we're gonna get a 0:12:06.880 --> 0:12:11.080 little nerdy here, as we did with Katie Kaminski. Excuse me, 0:12:11.120 --> 0:12:15.040 Earl Davis. I've got looney at a one thirty four. 0:12:15.440 --> 0:12:19.880 It is stochastic, weak Canadian dollar, it' all one forty. 0:12:20.040 --> 0:12:24.880 It's stochastic because the systems overcome by events. If I 0:12:24.960 --> 0:12:28.520 get an Earl Davis market, I get a stronger dollar. 0:12:29.120 --> 0:12:33.520 And does a stronger dollar itself solve its own problem? 0:12:34.240 --> 0:12:37.400 That is a great question, and I agree with the 0:12:37.440 --> 0:12:42.920 sequencing of that. What the stronger dollar itself does? It 0:12:42.960 --> 0:12:45.360 allows us to play out into our story where there's 0:12:45.360 --> 0:12:47.600 going to be some volatility in this quarter, but twenty 0:12:47.640 --> 0:12:50.679 twenty four is going to be all right economically. And 0:12:50.720 --> 0:12:54.360 the key to that stability from an economic perspective is 0:12:54.360 --> 0:12:57.719 a stable, strong dollar, so I think it allows us 0:12:57.760 --> 0:13:00.360 to play into the story of yes, we're going to 0:13:00.400 --> 0:13:03.000 have vaults all times, but we're on the best of 0:13:03.080 --> 0:13:06.320 airplanes and we'll serve it's made for this and we'll 0:13:06.320 --> 0:13:09.240 be able to survive and not only rice thrive. You 0:13:09.320 --> 0:13:12.199 have to remember, as yields go higher, that's a longer 0:13:12.320 --> 0:13:16.360 expected return for retirees, for pensioneers, for investors and bonds. 0:13:16.720 --> 0:13:20.040 There's going to be tremendous opportunity here. And even though 0:13:20.080 --> 0:13:23.120 we believe we're in a secular beer market, I see 0:13:23.360 --> 0:13:26.640 twenty twenty four being a cyclical bull for gields. 0:13:27.120 --> 0:13:29.599 This is fabulous. Earl Davis, thank you so much with 0:13:29.679 --> 0:13:36.080 b MO Asset Manager for picking up the debris of 0:13:36.080 --> 0:13:41.000 our London trip. Is Holger Schmeting is chief economist in 0:13:41.080 --> 0:13:45.960 Behrenberg and has been incredibly perceptive about this linkage of 0:13:46.040 --> 0:13:49.280 monetary and fiscal economics in Europe and. 0:13:49.360 --> 0:13:52.320 China, which is really a key question at a moment 0:13:52.480 --> 0:13:55.080 of flux. In Holger Schmeting, I would love to get 0:13:55.080 --> 0:13:57.760 your opinions starting on what we were just talking about, 0:13:57.800 --> 0:14:00.920 which is this trip of all these Sambrovskis over in China. 0:14:01.800 --> 0:14:05.040 What is the likely outcome to some of the rhetoric 0:14:05.160 --> 0:14:08.440 that is increasingly hardline out of European leaders, Well, the. 0:14:08.520 --> 0:14:13.839 Likely outcome is clear. Germany, the European Union is reducing 0:14:13.960 --> 0:14:18.000 its dependence on China. De risking is the word, not decoupling. 0:14:18.440 --> 0:14:21.560 But the message from Dombsko Doro is clear. We are 0:14:21.720 --> 0:14:25.560 serious about this and in a way we are self 0:14:25.640 --> 0:14:28.600 confident in Europe. Yes, we do have some economic problems, 0:14:28.640 --> 0:14:31.840 but China probably has economic problems that are worse. We 0:14:31.920 --> 0:14:35.440 are the bigger market than China. We the European Union. Yeah, 0:14:35.680 --> 0:14:40.040 don't have to just accept what China does with subsidies, 0:14:40.160 --> 0:14:43.520 with its distortions. We can push back. 0:14:43.760 --> 0:14:46.560 Well, is there a sort of a tacit acceptance of 0:14:46.640 --> 0:14:51.040 slower growth or even recession during this transition process away 0:14:51.080 --> 0:14:53.440 from really depending on trade with China. 0:14:54.120 --> 0:14:58.200 There is a tacit acceptance yes, that, of course the 0:14:58.280 --> 0:15:02.160 de risking with China will means some short term losses. 0:15:02.520 --> 0:15:06.160 It also is an acceptance that, yes, if we want 0:15:06.240 --> 0:15:08.800 to be less dependent on China in the long run, 0:15:09.040 --> 0:15:12.040 an economy China that is actually struggling and will likely 0:15:12.120 --> 0:15:15.000 continue to struggle for quite a while. It means we 0:15:15.040 --> 0:15:18.320 get less boost out of foreign create with China. But 0:15:18.440 --> 0:15:22.640 having said that, the lesson we've learned from Putin is clear, 0:15:22.920 --> 0:15:26.400 if you're too dependent on somebody whom you don't fully trust, 0:15:26.640 --> 0:15:29.040 you may eventually pay a heavy price for that. So 0:15:29.120 --> 0:15:32.560 it's probably worth de risking now with modest near term 0:15:32.600 --> 0:15:36.880 pain in order to secure a longer term, fairer, more 0:15:36.920 --> 0:15:38.640 equal relationship with China. 0:15:39.480 --> 0:15:42.560 You know, one of the great criminal acts in New 0:15:42.600 --> 0:15:44.760 York City is the Oak Room at the Plaza Hotel 0:15:44.800 --> 0:15:47.560 has been shut for I think twenty years, absolutely ridiculous, 0:15:47.560 --> 0:15:52.400 beautiful and historic room as well holgrish mating right now 0:15:52.400 --> 0:15:55.400 with dollar day after day, up up, day after day, 0:15:55.480 --> 0:15:58.800 Euro down down down, over nine ten weeks, whatever it is. 0:15:59.040 --> 0:16:01.360 Are we getting a distance to a plaza accord? How 0:16:01.360 --> 0:16:04.640 many kilometers are we from the discussion of a new 0:16:04.640 --> 0:16:05.400 plaza accord? 0:16:05.560 --> 0:16:07.800 I think we are quite far away from any discussion 0:16:07.840 --> 0:16:10.000 of that. So far, the move seems to be gradual. 0:16:10.080 --> 0:16:13.480 It's not disruptive. It seems to reflect that the US 0:16:13.600 --> 0:16:17.160 economy is holding up better than expected, whereas the Eurozone 0:16:17.640 --> 0:16:20.800 is kind of in stagnation. So as long as the 0:16:20.920 --> 0:16:24.520 currency moves gradually, and does not seem to be fully 0:16:24.520 --> 0:16:26.840 out of kilted with fundamentals. I don't think we need 0:16:26.880 --> 0:16:31.000 a massive intervention come next year. With the European economy 0:16:31.000 --> 0:16:34.120 picking up again, the FED cutting rates sometime next year, 0:16:34.120 --> 0:16:36.520 and the easy be possibly not cutting rates, the euro 0:16:36.640 --> 0:16:38.200 will likely recover on its own. 0:16:38.360 --> 0:16:41.120 This is really really important because the key thing there 0:16:41.200 --> 0:16:44.920 you said was we are not disruptive. Right now, market 0:16:44.960 --> 0:16:50.160 participants feel we're disruptive. We're making jokes about a quinfect 0:16:50.200 --> 0:16:54.240 of five different things we're bouncing off of right now. 0:16:54.280 --> 0:16:57.800 What is the policy the best policy prescription for La 0:16:57.840 --> 0:16:59.800 Guard and government leaders in Brussels. 0:17:00.600 --> 0:17:04.719 I think it's basically now, stay the course for monetary policy. Okay, 0:17:04.760 --> 0:17:06.720 I think we've tied a bit more than we should have, 0:17:07.200 --> 0:17:10.440 but now the mythelic clear message is we're probably at 0:17:10.480 --> 0:17:13.320 the peak, which has actually been one when it came out, 0:17:13.520 --> 0:17:16.920 been sort of reassuring for markets and for physical policy. 0:17:16.960 --> 0:17:20.600 I would say the same, stay the course, which largely 0:17:20.720 --> 0:17:23.720 means we have a big fiscal program in Europe. This 0:17:23.960 --> 0:17:26.320 next to any U program which is now above eight 0:17:26.400 --> 0:17:29.600 hundred billion. The task is more to make sure the 0:17:29.680 --> 0:17:33.040 money is being spent. That is the rollout of the 0:17:33.119 --> 0:17:36.200 program rather than thinking about any new money. 0:17:36.160 --> 0:17:38.760 Is Jerown Powell. Central banker to the world is jer 0:17:38.760 --> 0:17:41.440 Own Powell, whether we want to admit it, or a 0:17:41.440 --> 0:17:42.960 central banker to Europe. 0:17:43.720 --> 0:17:46.760 Not quite. Europe is not that dependent on the US 0:17:46.800 --> 0:17:49.399 to really say so. For Europe, it really is Madame 0:17:49.520 --> 0:17:52.400 la Guarde, the central banker that we have to that 0:17:52.440 --> 0:17:54.080 we are glad to watch. 0:17:54.400 --> 0:17:56.159 Do you think that people are too bearish in Europe? 0:17:56.200 --> 0:17:57.440 Is that basically what I'm hearing from you. 0:17:59.080 --> 0:18:01.159 Not. For the next few month, we are having a 0:18:01.200 --> 0:18:05.000 sharp inventory correction manufacturing. We talked about China. The US 0:18:05.080 --> 0:18:07.800 economy near term will probably be slowing down. So near 0:18:07.920 --> 0:18:11.360 term trade export dependent Europe is having trouble. But come 0:18:11.480 --> 0:18:15.639 next year, global manufacturing will pick up. The inventory correction 0:18:15.720 --> 0:18:18.600 will be over next year. I think Europe could actually 0:18:18.640 --> 0:18:21.000 surprise here, and they're a bit on the upside. 0:18:21.160 --> 0:18:24.199 Will some of this slow down and surprising negativity in 0:18:24.280 --> 0:18:25.800 Europe correct inflation? 0:18:27.640 --> 0:18:31.280 Our inflation doesn't have that much to do with domestic demand. 0:18:31.400 --> 0:18:35.040 A bit. Inflation is coming down largely because this big 0:18:35.080 --> 0:18:38.160 poutine shock on energy and food prices is largely fading. 0:18:38.640 --> 0:18:41.080 We have a bit of wage inflation to come to 0:18:41.200 --> 0:18:44.000 pass through for the next half year. But all in all, 0:18:44.080 --> 0:18:46.560 inflation in Europe is having two probably around two point 0:18:46.640 --> 0:18:49.320 five percent by the second half of next year. 0:18:50.040 --> 0:18:52.560 Okay, but this to me is really the dilemma, right 0:18:52.600 --> 0:18:55.640 if it's not going to really lead to low inflation, 0:18:56.160 --> 0:18:59.439 if we're facing a stagflationary type of environment in Europe, 0:18:59.640 --> 0:19:02.440 how much just at the template that we're basically being 0:19:02.520 --> 0:19:07.080 forced to live with higher inflation, even with taking the 0:19:07.119 --> 0:19:10.480 pain of de risking, with taking the pain of recession, 0:19:10.600 --> 0:19:13.159 even with all of the other toxic brew of the 0:19:13.240 --> 0:19:15.200 quinfecta that we're talking about this morning. 0:19:15.960 --> 0:19:18.400 Well, seculation is a description as to where we are now. 0:19:18.440 --> 0:19:21.720 Probably in Europe, we may see later this week already 0:19:21.760 --> 0:19:24.800 a fall in this inflation rate year over year into 0:19:24.840 --> 0:19:27.000 the four percent hand or from a five percent hand 0:19:27.240 --> 0:19:32.639 basically on Bays effects. And again the big prorise in energy, 0:19:32.800 --> 0:19:35.760 especially gears and electricity prices late last year drops out 0:19:35.800 --> 0:19:39.760 of the comparison goods prices are stabilizing. I think that 0:19:40.280 --> 0:19:46.240 even without needing to constrain demand further, inflation will fall 0:19:47.240 --> 0:19:49.680 to around two point five percent by the second half 0:19:49.720 --> 0:19:51.240 of next year on its own. 0:19:52.600 --> 0:19:55.840 I look Holger at our trip to London, and I 0:19:55.920 --> 0:19:59.960 look back on how Europeans the United Kingdom, how they 0:20:00.000 --> 0:20:04.280 we perceive in America in disarray. How's it different this time? 0:20:05.880 --> 0:20:09.359 Well, it is a weird perception. On the one hand, 0:20:09.760 --> 0:20:13.240 we marvel that the US economy is holding up better 0:20:13.280 --> 0:20:17.360 than expected despite the massive FED rate hikes. But if 0:20:17.400 --> 0:20:20.560 we and we find reasons for that, yes, consumers and 0:20:20.880 --> 0:20:25.200 companies had good money to start with. Yeah, but when 0:20:25.240 --> 0:20:27.919 we look at anything that comes close to US politics, 0:20:28.119 --> 0:20:31.760 we basically shake our heads. How is this going to end? 0:20:32.240 --> 0:20:34.680 Was there another talk of a government shut down? We've 0:20:34.720 --> 0:20:38.200 had that so awful that it's kind of pouch by 0:20:38.240 --> 0:20:41.200 those standards we think European politics, especially the ones that 0:20:41.280 --> 0:20:42.800 Brussel actually are not working on. 0:20:43.359 --> 0:20:46.879 A Swiss watch luckily and JFK holders meeting, thank you 0:20:46.960 --> 0:21:02.200 so much with Behner Blverara joins us this morning here 0:21:02.240 --> 0:21:05.719 in another time and place from two thousand and seven. Sheila, 0:21:05.720 --> 0:21:09.600 if I'd read Daisy Bubble on that August afternoon in 0:21:09.600 --> 0:21:13.280 two thousand and seven where libor Ois went out forced 0:21:13.280 --> 0:21:16.560 to enter deviations, what would you have written about to 0:21:16.640 --> 0:21:18.119 sprightly seven year olds? 0:21:20.200 --> 0:21:22.600 Well, to you, I would have said, you should have 0:21:22.800 --> 0:21:25.120 read Daisy Bubble, probably in two thousand and two, Tess 0:21:25.160 --> 0:21:28.840 and three, when the house in Cobble was starting off. Yeah, 0:21:28.920 --> 0:21:30.760 I would say to young people, as I say in 0:21:30.800 --> 0:21:32.920 the book, and there's some back matter in the book 0:21:32.920 --> 0:21:34.920 that talks a bit about the housing bubble and were 0:21:34.920 --> 0:21:39.440