Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Lee. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg I'm
Speaker 1: placed to say that in London, famous for attackis Joins
Speaker 1: us now the UBS cohead of FX and rates and Females.
Speaker 1: I want to begin with something that's front and center
Speaker 1: for the world of politics, but certainly not front and
Speaker 1: center for global markets. And that's the potential of the
Speaker 1: government shutdown in the United States of America. When the
Speaker 1: clients call you famous and ask you what does it mean?
Speaker 1: What are the consequences? What do you say? Well, long term,
Speaker 1: no US legislative body has basically allowed this to go
Speaker 1: over the cliff in a way that disrupts the payment
Speaker 1: flow for the US. So the long term it's probably
Speaker 1: something that will mean reverted. The short term, it can
Speaker 1: cause some noise in particularly for money markets, as the
Speaker 1: government runs up and down. It's um it's cash balances,
Speaker 1: it creates significant excess or are are less than that
Speaker 1: supply in uh in money markets and that's what's the
Speaker 1: most important short of impact. Well famous in the money
Speaker 1: markets and in the ferry front end of the treasury curve,
Speaker 1: you can get these kind of little kinks and the
Speaker 1: kind of account for when you might get a shut
Speaker 1: down and when things will reopen again. Our swhere though,
Speaker 1: does this actually have any impact for the effects market,
Speaker 1: et cetera. Uh not really, We've done a detailed study.
Speaker 1: This has a lot to do. This with a lot
Speaker 1: of fixed income instruments and how they trade against one another,
Speaker 1: But in terms of money market directions, not that much.
Speaker 1: The thing so far famous it's a weaker dollar. It's
Speaker 1: been you know, dollar that's crept lower lower lower, had
Speaker 1: its worst year in a decade on the dollar index
Speaker 1: last year and continues to plunge through three year. Love's
Speaker 1: on my screen, weaker against the era once again. We
Speaker 1: had someone from Deutsche Bank last week on this program
Speaker 1: saying that we could get to one thirty on euro
Speaker 1: dollar sooner than you think, Tha mus What takes us
Speaker 1: to one thirty from four on my screen? Uh? Well,
Speaker 1: one thirty is our long term target as well, maybe
Speaker 1: not as quickly as we have gone so far, but
Speaker 1: that's the direction of travel. There's a lot of things
Speaker 1: going on. First of all, the dollar is still expensive. Secondly,
Speaker 1: police normalization is not priced outside of the US. So
Speaker 1: the fact that the rest of the world is growing
Speaker 1: quite handsomely means that there is more to pricing currencies
Speaker 1: outside of the US UM And at the same time,
Speaker 1: what is hugely important is that UH, typically when financial
Speaker 1: conditions you get this, you get weaker dollar, you get
Speaker 1: higher oil prices, you get higher youths as equity Israeli
Speaker 1: and this is a good kind of reflationary dynamic. Good
Speaker 1: morning everyone, John Faro in New York on time, keen
Speaker 1: in London on Friday, and it's a Friday to get
Speaker 1: brief done market dynamics and of course a huge focus
Speaker 1: on Washington, but also almost weekend reading to get the
Speaker 1: next week, which will be spirited the same in the
Speaker 1: least and perhaps we'll see President Trump and Davos later.
Speaker 1: Uh in the week theme of fiatokus with us he
Speaker 1: is with ubs Tea mus when I look at the
Speaker 1: dollar dynamics and I look at exogenous shocks, and it
Speaker 1: occur to me. One of the great exogynist shocks last
Speaker 1: year was a single headline by Donald Karney in the
Speaker 1: Bank of England where there was just one point where
Speaker 1: he said, just almost in a whisper, there is no inflation.
Speaker 1: You people see inflation. I get that. You told us
Speaker 1: an hour ago. You're looking for three ish inflation, which
Speaker 1: is a lot. How do you get there? What is
Speaker 1: the catalyst to finally jump start a higher rate of
Speaker 1: price change? So there's a very good question. There's always
Speaker 1: to begin with. There are different things when you talk
Speaker 1: about inflation. When you're talking about underlying core PC, it's
Speaker 1: it's there's a lot of one of components that will
Speaker 1: fall off next year, and we'll take you somewhere around
Speaker 1: one point seven one point eight in core PC, which
Speaker 1: is not astonishing, but at the very least it's better
Speaker 1: than where we are here. That's one layer. The second layer,
Speaker 1: which goes from a quarter headline, particularly when it comes
Speaker 1: to CPI against PC, is the commodities um and commodities.
Speaker 1: You know, if you compare from the middle of the
Speaker 1: year last year until the current levels, oil price have
Speaker 1: almost doubled, and that's going to have an impact which
Speaker 1: will show up in the middle of the year and
Speaker 1: we'll take headline CPI higher depending on how higher oil
Speaker 1: prices go from here you could end up slightly shy.
Speaker 1: A three percent on headline CPI. Is that something that
Speaker 1: should scare us completely. No, it's going to be temporary,
Speaker 1: but at the same time it's going to revive some
Speaker 1: confidence because the risk was that we would continue to
Speaker 1: print that super low prints so far within that, you know,
Speaker 1: super low prints is the parsing almost on an international
Speaker 1: basis of good inflation. It's not there or service sector
Speaker 1: inflation in America. I see it in Cleveland CPI, which
Speaker 1: to me gives me much more of like the reality
Speaker 1: higher CPI. Are we looking at inflation correctly? Is it
Speaker 1: comes over to dollar dynamics and FECs dynamics or are
Speaker 1: we are we askewed because of goods dynamics in China?
Speaker 1: I think that's a very good observation. I think that
Speaker 1: particularly if you look at goods in the US due
Speaker 1: to past dollar strength, and what's going on globally with
Speaker 1: disinflation is not just China, it's also the huge output
Speaker 1: gap in Europe as well. When you're looking at goods
Speaker 1: inflation that has uh you know, it's about a quarter
Speaker 1: of core PC and it has been near zero for
Speaker 1: the last few years. Right, that's a huge disinflationary pressure.
Speaker 1: You need the global output gap to narrow for that
Speaker 1: to start picking up. And that's why we have not
Speaker 1: been on the side of high inflation up until recently.
Speaker 1: And when we don't expect that now either, just gradual
Speaker 1: grind higher from current levels, which should be healthy for
Speaker 1: the markets. That's the macro bank drop. How do central
Speaker 1: banks respond to the world you've just described, So for
Speaker 1: now most central banks are warning for a tighter pace
Speaker 1: of adjustment or normalization. I would add one more point
Speaker 1: to what she said. It's also about what's priced, right,
Speaker 1: So we can talk about the front end in the US,
Speaker 1: but with the long end of the curve at two
Speaker 1: point six destined to rise, I don't know the two
Speaker 1: point seven this year in our forecast, and probably approached something,
Speaker 1: you know, slight side of three percent next couple of years.
Speaker 1: A lot is already priced in UH. The European bond market,
Speaker 1: on the other hand, and the Japanese bond market. The
Speaker 1: yields there are to load their expensive bond markets, and
Speaker 1: the market is trying to gauge when UH these yields
Speaker 1: will adjust, when these central banks will adjust and when
Speaker 1: they adjust, UH, it's going to have an impact on
Speaker 1: those bond markets, and that translates into the currency frontloading
Speaker 1: some of that, which is part of what's happening famous
Speaker 1: US saying that the the front end in Europe that
Speaker 1: needs to adjust more than anywhere else, the overall level
Speaker 1: of the curve and the long end as well, UH,
Speaker 1: and probably particularly outside of Germany, the curve can actually steep,
Speaker 1: and so as the front and just across countries, probably
Speaker 1: outside of Germany, the long and should adjust even further.
Speaker 1: I look, seems just just one more question if we could,
Speaker 1: uh quickly here at the linkage that we see of
Speaker 1: dollar dynamics and fects dynamics with gold. Is there any
Speaker 1: linkage still? It seems like the old maxims are just
Speaker 1: out the door, out the window. Absolutely, But it's not
Speaker 1: just that dollar. It's also the level of real rates UH,
Speaker 1: and and real rates in the US are fair there
Speaker 1: where they should be, if not on the high side,
Speaker 1: which has been something that has anchored gold a lot
Speaker 1: more than other commodities which are a lot more closely
Speaker 1: correlated to oil the dollar as such as oil. This
Speaker 1: is a joy. This is something John Fair and I've
Speaker 1: really looked forward to Conahegan, who I first met through aluminum.
Speaker 1: Uh is truly expert at the detailed fundamental of the softs.
Speaker 1: It's a British thing, John, you have to have a
Speaker 1: British accent to do this. It's just part of the
Speaker 1: act and it is the romance of the commodity business.
Speaker 1: Forget about something boring like oil, you know something like that.
Speaker 1: It's it's the part that we all learned about, which
Speaker 1: is making opportunities and things like cocoa and things like coffee.
Speaker 1: Conahegan's with e DA and f Man ConA. The coffee
Speaker 1: market now seems to be multinational. It seems to be
Speaker 1: all the same physical characteristics of an agricultural commodity. What's
Speaker 1: the demand side of coffee? Look like we talk in
Speaker 1: oil demands better oil up? Is that elasticity there in coffee? Um?
Speaker 1: So No, I'm the industrial commodities like energy or I
Speaker 1: suppose it doesn't move with economic cycles. This is a
Speaker 1: trend that's very long term. So at the moment, coffee
Speaker 1: demand globally is going about two percent per year. There
Speaker 1: was a time was actually going about three percent. This
Speaker 1: was when you were seeing the Asian emerging market in
Speaker 1: particular moving away from tea into coffee, and that's definitely
Speaker 1: been compensating for a slowdown in growth in the mature
Speaker 1: marketers as Europe and America. But don't get me wrong,
Speaker 1: even in Europe and America, compared to consumption of sugar,
Speaker 1: which is static to maybe declining, coffee consumption is still
Speaker 1: very much, very much a desirable commodity and growing still
Speaker 1: within that is the elephant in the room. China. And
Speaker 1: we talk about China, and you know, John Fair and
Speaker 1: I have ten or fifteen topics on China that we
Speaker 1: circle around, but we don't get down to the nitty gritty,
Speaker 1: like I understand that pork is a huge part of
Speaker 1: the Chinese inflation dynamic, and I would believe part of
Speaker 1: the China He's diet where does coffee is just one
Speaker 1: example of a soft command and he fits into China's
Speaker 1: day to day life. So it's definitely not as a
Speaker 1: staple commodity, nothing like pork as you mentioned, or even grains.
Speaker 1: We are talking about a substitution away from your traditional tea,
Speaker 1: green tea, jasmine tea, and a marked shift from that
Speaker 1: towards coffee. And this is definitely a Western influence. So
Speaker 1: as you start seeing more and more coffee shops like
Speaker 1: the Starbucks or independent coffee shops start coming into um
Speaker 1: into China, we are seeing a lot of the middle
Speaker 1: class consumers really tapping into that conda. I can't see
Speaker 1: John Farrell drinking sipping jasmine tea down at Fortnum and
Speaker 1: Mason and just can' I am caffeine free? Believe it? Yeah, yeah,
Speaker 1: believe it or not? Now kind of you? Instead to
Speaker 1: two important things, and it was on the middle class,
Speaker 1: the middle class in China and the consumption of of coffee.
Speaker 1: Does that extend to India as well in the urban
Speaker 1: cities yes, so for sure. In the rural areas no,
Speaker 1: But once you start seeing the delis, the Shanghai's, the Bombays, Mumbai's,
Speaker 1: that is the country's. Those are the cities where high
Speaker 1: urban population growth is seeing a big demand for that
Speaker 1: sort of quick coffee fix, that caffeine boost, which is
Speaker 1: associated with big city dwellers. Because the big E M
Speaker 1: bricks trade of many many years ago was to go long.
Speaker 1: Soft commodities go along, things like coffee and meet as well,
Speaker 1: because it was going to be consumed by a rising
Speaker 1: middle class and seemingly these prices could only go higher,
Speaker 1: higher higher. Is that's still the theme here kind of
Speaker 1: or has it changed? No? I think that theme is
Speaker 1: still very much there. It's just that lately, because agricultural
Speaker 1: commodities have been so well supplied, prices have just been
Speaker 1: flapped to doing nothing. I think that the stories sort
Speaker 1: of disappeared. But there in the middle clas Us wants
Speaker 1: to move away from carbohydrates and basic staples like wheat
Speaker 1: and rice, and they're definitely moving towards high proteins. So
Speaker 1: it's the polks, it's the chickens, it's the beefs, it's
Speaker 1: the dairies milk, and you name it high cafe. It
Speaker 1: sounds like Tom Caine. This was this was the morning
Speaker 1: you got that right, Um, John Field. This was amazing.
Speaker 1: We got through a discussion with Conor Hay without talking
Speaker 1: about bitcoin. That's soft. Do you want to do that? No,
Speaker 1: we shouldn't do that. We did that already and she
Speaker 1: almost stormed out of she did not. Isaac Boltansky is
Speaker 1: more than interesting. Uh he is acclaimed coming out of
Speaker 1: the troubled Asset Relief Program TARP over to Compass Point Research,
Speaker 1: Ian Lucas Devas right, a hyper hyper detailed note on
Speaker 1: all the Washington dynamics. We protect the copyright of our guests.
Speaker 1: We're not going to send you out the note, Isaac,
Speaker 1: how do you put I'm just curious, how do the
Speaker 1: two of you put your note together? It's extraordinary how
Speaker 1: detailed it is. There is a plethora of information that
Speaker 1: comes out of d C, and I think our job
Speaker 1: is to try to track all of it, synthesize it,
Speaker 1: and make it digestible for institutional investors. If the Democrats
Speaker 1: spoke to you today, Senator Schumer and others with your
Speaker 1: your the fire hose of data you have coming in,
Speaker 1: can they actually deflect shut down over to blaming the Republicans?
Speaker 1: You know, I think Tom, the way this is going
Speaker 1: to play out is it's going to be viewed as
Speaker 1: a pox on both their houses. And in that scenario,
Speaker 1: you have to expect a lengthier shutdown if it does occur, because,
Speaker 1: as we all know, thinking polls tend to catalyze lawmakers.
Speaker 1: And if the polls holed up, which right now they
Speaker 1: show general blame for Republicans and Democrats at around the
Speaker 1: world thirties, then neither side is going to be incentivized
Speaker 1: to blink Isaac. Right now, the markets not blinking. The
Speaker 1: market strugging this off. In terms of the price action
Speaker 1: on my screen, Futures firmer. Yes, the dollars weak, but
Speaker 1: the dollar has been weak for over a year now,
Speaker 1: Treasury yields climbing harder. I would say that most people
Speaker 1: on Wall Street aren't really too bothered about this. I
Speaker 1: don't see the urgency on the screen. Do you see
Speaker 1: any urgency from the clients you speak to, from the
Speaker 1: investor base you speak to, and what are they asking
Speaker 1: you about what's happening in Washington, d C. You won't
Speaker 1: hear this often from a DC policy analyst, but I
Speaker 1: have been telling clients to look away from the nonsense
Speaker 1: in my city right now. The reality is that the
Speaker 1: market impact from a government shutdown at this point should
Speaker 1: be muted because it doesn't encompass the debt ceiling, which
Speaker 1: is perhaps the most important component of all of the
Speaker 1: fiscal fights. And as we've seen in the past, the
Speaker 1: missed economic activity will be recovered at a later point,
Speaker 1: so all the folks who aren't getting paid during this,
Speaker 1: all the contracts that get held up will be made up.
Speaker 1: The only cautionary note within that viewpoint is I have
Speaker 1: sent some degree of of jitterariness among equity investors, and
Speaker 1: so there could be a push to use this government
Speaker 1: shut down to justify a risk off bias that was
Speaker 1: already present and maybe not a reason absolutely right. My
Speaker 1: my advice today is we've got to look past this
Speaker 1: and realize that DC has delivered on the one thing
Speaker 1: that it could have possibly delivered on, which was the
Speaker 1: tax cuts. There wasn't much that was going to happen
Speaker 1: this year, and I feel highly confident that the debt
Speaker 1: ceiling is not going to be used in a game
Speaker 1: of chicken between these two parties. Is how many sections
Speaker 1: of the Democratic Party where there are there? I would
Speaker 1: say that within the media over the last excellent number
Speaker 1: of years, the focus has been hugely on the Republicans
Speaker 1: on the hill, and we forget about how fractious the
Speaker 1: Democratic Party has been in our history. How fractious is
Speaker 1: the Democratic Party right now. There's an old line that
Speaker 1: trying to get Democrats to caucus together and and agree
Speaker 1: on a bill is like trying to make cats walk
Speaker 1: in line. And it's been interesting because this year, excusely,
Speaker 1: this Congress they've actually been incredibly unified. And I think
Speaker 1: it's important to note that there's a bit of a
Speaker 1: shifting of the guard going on here, and Chuck Schumer
Speaker 1: has been able to hold his party in line and
Speaker 1: is really orchestrating um a cohesive pushback here. He's only
Speaker 1: lost one of his members in the Senate, Joe Mansion
Speaker 1: from West Virginia, a state that the President won by
Speaker 1: forty two points, and so it's actually been impressive that
Speaker 1: he's been able to hold those Democrats in line. So
Speaker 1: why does it helped me out with something? If getting
Speaker 1: the Democrats together is like herding cats, and we know
Speaker 1: how divided the GOP is right now, why are you
Speaker 1: so confident that the debt scening issue isn't going to
Speaker 1: be an issue at all? Sure, it's a fair question.
Speaker 1: It's a it's a belief that ultimately the markets can
Speaker 1: dictate action in d C and if there is a
Speaker 1: sign that the debt ceiling is being used as a
Speaker 1: bargaining chip unfairly, there will be a market reaction. And
Speaker 1: while most Congress people don't have Bloomberg or CNB, is
Speaker 1: CNBC or any of the markets on their excusing yes,
Speaker 1: um uh, they do have. They do see the screen
Speaker 1: when there's a three or five percent sell off, and
Speaker 1: so that's why I feel confident that the market can
Speaker 1: force action on the debt ceiling. Some came a note
Speaker 1: coming from an official, a headline crossing the Bloomberg terminal.
Speaker 1: Right now, the President United States is said to stay
Speaker 1: in Washington, d C. Until the shutdown is averted. So
Speaker 1: that can have some consequences for his trip next week
Speaker 1: potentially to Dana, Switzerland, if this hasn't been down with
Speaker 1: by then. Yeah, and that percolated in the zeitgeist this morning.
Speaker 1: If you've seen that headline. I don't see that here
Speaker 1: in our London studios, John, but if you see that headline,
Speaker 1: that really begins to turn into news the rumor and
Speaker 1: speculation that was seen earlier. UM, I don't have any
Speaker 1: you know, I'm not doing a Michael Beschlaus act, but
Speaker 1: I don't understand how a president travels during a government shutdown.
Speaker 1: I find that bizarre. But uh, you know, we'll have
Speaker 1: to see. Yeah, you would assume you would assume Isaac
Speaker 1: that he doesn't travel to Dava, Switzerland if the government
Speaker 1: does shut down. Is that something you would assume? I
Speaker 1: think you're absolutely right. Look, the optics of him traveling
Speaker 1: were already ub optimal, so it would be all it
Speaker 1: would be much worse given if there was a government shutdown.
Speaker 1: And then we should say, John Farrell, this is Kazia
Speaker 1: clemens Is. I'll get it right, Klemazinska. There it is
Speaker 1: of Bloomberg. Bloomberg first word. And this is from quote
Speaker 1: unquote an official, which you know usually coming out of Bloomberg. Uh,
Speaker 1: that's got some substance to it. Averted. There it is, Isaac.
Speaker 1: What what do the Democrats want to get out of this?
Speaker 1: All of this? You know, I think I can speak
Speaker 1: for a hundred of our listeners are all sort of
Speaker 1: exhausted by it. It's your fault, Isaac. But what do
Speaker 1: the Democrats want to get out of this? Where do
Speaker 1: they want to be? One week, three weeks, the shutdowns done,
Speaker 1: we all kiss it, makeup, We get to the dead ceiling,
Speaker 1: we all kiss it, makeup. Where do they want to
Speaker 1: be as the campaign season begins for November six? Sure
Speaker 1: Democrats recognize that this is their only leverage point this year.
Speaker 1: Totally agree because that's the heart of the matter, right right,
Speaker 1: So they want they want it all they want to
Speaker 1: They want everything they can get realistically, if they will
Speaker 1: hope to get out of this is a deal over
Speaker 1: DACA funding for the children Health Insurance program, and I
Speaker 1: think if you get that up from the six years
Speaker 1: it's currently being offered to ten years and a deal
Speaker 1: on just DAKA, Democrats would blink. Um. There isn't much
Speaker 1: optimism about a broader immigration deal at this point. Get
Speaker 1: me to the midterms. You get a deal on DHAKA.
Speaker 1: Is that enough to sound the electorate? I think right
Speaker 1: now this is about placating to the base, and the
Speaker 1: base of the Democratic Party has shown that the DOCA
Speaker 1: issue is important to them. It is a central pillar
Speaker 1: for them. It's also an issue that many Democrats uh
Speaker 1: feel they can run on in certain congressional districts. I
Speaker 1: don't think that alone is enough to deliver them the
Speaker 1: House or the Senate, but I still believe that the
Speaker 1: odds heaverly favored Democrats taking the House and Republicans holding
Speaker 1: the Senate. Andrew Bishop Um is quietly legendary Eurasia group
Speaker 1: working with Dr Bremer among others. UM and we're working
Speaker 1: on sort of not only Europe, but the interdependencies of
Speaker 1: Europe and the synthesis of Europe with the rest of
Speaker 1: the global economy. He wrote up with Courts last summer
Speaker 1: on Germany and other nations as well. Andrew Bishop with
Speaker 1: the European Briefing right now with Eurasia Group and Andres
Speaker 1: thrilled to have you with us in Chess or a
Speaker 1: miracle I believe is not going to have a government shutdown.
Speaker 1: Perhaps you'll actually get to Dabos. What is the strength
Speaker 1: and power of the most powerful leader in Europe after
Speaker 1: a coalition battle and frankly after just the years that
Speaker 1: have gone by good morning, I think that's a good point.
Speaker 1: Mercle is, you know, sort of towards the tail end
Speaker 1: of her of her tenure, but she's strong enough, especially
Speaker 1: when combined with President mccronel to send a powerful message
Speaker 1: to to President Trump next week. And I think that
Speaker 1: that truly the spirit behind her going once against the
Speaker 1: Davos and I believe she and McCrow will both be
Speaker 1: speaking on Wednesday, so two days before Trump. We've all
Speaker 1: been fascinated by the frequent flyer Miles on Air France
Speaker 1: and Mr mccrosben. He's been on a road like I
Speaker 1: believe I've never seen. Let's back up, what's the why
Speaker 1: why is Mr McCraw hit the road before these important meetings.
Speaker 1: I think that the main reason is that he perceives opportunity.
Speaker 1: He sees the window of opportunity and the fact that Merkel,
Speaker 1: as you just said, is busy with domestic issues, uh
Speaker 1: and President Trump neither has the interest nor necessarily the
Speaker 1: appeal uh to really be the world's leader, you know.
Speaker 1: And so President she has seen that opportunity as well,
Speaker 1: but he's taking a much slower approach. President McCrow is
Speaker 1: essentially doing the same thing as she, but in a
Speaker 1: in a much more opportunistic and tactical way, really trying
Speaker 1: to find little crises like when Lebanon's Prime minister was was,
Speaker 1: you know, held in in riad to to score some points.
Speaker 1: What can Mircael achieve in her final term, which is
Speaker 1: most likely to be her final term, Andrew, I think
Speaker 1: that the greatest thing she could achieve is to to
Speaker 1: maintain the German polity sort of on on a stable track.
Speaker 1: I mean, one of the big concerns is that, you know,
Speaker 1: yet another grand coalition will further aggravate voters who feel
Speaker 1: like they don't really have a choice that all centrist
Speaker 1: parties are the same and that they're banning together. Uh.
Speaker 1: And and that's part of what's driven all of this
Speaker 1: populism in the first place. So I think the best
Speaker 1: thing she could achieve is actually delivering results that convinced
Speaker 1: voters that centrist parties remain worth trusting. Dare I say
Speaker 1: that this term and her four terms might look back
Speaker 1: on what's going to be perceived as a lost decade.
Speaker 1: And I raised this question, Andrew because in terms of
Speaker 1: the reforms that came before her, economists are looking at
Speaker 1: Germany right now and seeing an opportunity squandered, an opportunity
Speaker 1: to really invest into the economy, to build our infrastructure
Speaker 1: and to continue the hard work that was done in
Speaker 1: the nineteen nineties. Andrew, it seems now that the German
Speaker 1: government is very content and building up a surplus, not
Speaker 1: spending too much money and just hoping things continuous they are.
Speaker 1: Is this a squanded opportunity? Andrew? Yeah, I think the
Speaker 1: last decade is a bit of a strong term in
Speaker 1: the sense that you know, Germany has been performing extremely
Speaker 1: well both politically in terms of stability, uh and economically.
Speaker 1: Now to your point that was partly a legacy of
Speaker 1: what had been laid down before she joined uh government.
Speaker 1: And so there is a question you're right about what
Speaker 1: comes next. I think the bigger issue for Germany. Of
Speaker 1: course everyone's been talking about investment, and that's particularly important
Speaker 1: in the tech sector. But the bigger question is, you know,
Speaker 1: how does a German economy that's highly reliant on exports
Speaker 1: continue to dominate in the world that's going to be
Speaker 1: increasingly protectionist. Is it as simple as the euro is
Speaker 1: a fiction and they're looking at the euro that ought
Speaker 1: to be one sixty whatever, that their distortion of their
Speaker 1: domestic flows a distortion, is Madame Leguarde mentions of their
Speaker 1: trade surplus is strictly the European experiment. Uh, you know,
Speaker 1: I mean we said group look at more at the
Speaker 1: politics of the of the issue rather than the sort
Speaker 1: of evaluation of the asset itself. But um, I think
Speaker 1: there definitely is a question about Germany's long term sustainability
Speaker 1: on that front. Yeah. And and the thing is, now
Speaker 1: that you know, the Greek crisis seems to be behind us,
Speaker 1: the real question is whether she and Macrow will be
Speaker 1: able to reform to Eurozone. And we're unfortunately not extremely
Speaker 1: hopeful about that, both because of her domestic concerns and
Speaker 1: because they don't meet idae on that issue. We've been
Speaker 1: talking with Andrew Bishop of the Eurasia Group, UH, and
Speaker 1: in talking to when we were freely focused on Germany
Speaker 1: and and what we've been really remiss here of taking
Speaker 1: our eye off Russia. There was a point where Russia
Speaker 1: was in the news day after day after day. And
Speaker 1: I don't mean the Mueller scandal and you know, the
Speaker 1: Muller investigation rather and all that, but just whether Russia
Speaker 1: there was play in the London press today Mr Putin
Speaker 1: uh taking some kind of ice cold baptismal baths or
Speaker 1: whatever in Russia. What is the state of Mr Putin?
Speaker 1: He's not going to Davo, Sizzy. I don't believe he
Speaker 1: is going to Davos this year. Um. And the reason
Speaker 1: why you're not not hearing about Russia is because Putin
Speaker 1: has nothing to do. He can just sit back and relax.
Speaker 1: Everything he's been orchestrating in terms of weakening Europe to
Speaker 1: a certain extent, weakening the United States and gaining power
Speaker 1: projection in the Middle East has been working. So for
Speaker 1: him to change anything at this stage would be would
Speaker 1: be an unnecessarily unnecessary risk. Yeah, an unnecessary risk. You
Speaker 1: can just sit back and watch the folies continue or that.
Speaker 1: Then I guess it comes down to the prescriptive desire
Speaker 1: of what the president should do in Davos. What should
Speaker 1: the president do is he approaches an important speech a
Speaker 1: week from today. So I think what President Trump is
Speaker 1: going to going to try to do in Davos is
Speaker 1: address three different audiences. The first is obviously the Davos
Speaker 1: crowd itself, with a clear message, which is, you know,
Speaker 1: the United States remains the world's leading economy. Invest in
Speaker 1: the US, We're reliable. The second message is probably going
Speaker 1: to be geared towards this eight and it's gonna be
Speaker 1: quite different, right, It's going to be more about maybe
Speaker 1: not insulting, but trying to send a message to the
Speaker 1: global elite that they can't get away with murder, etcetera.
Speaker 1: And then the third thing is he's probably going to
Speaker 1: be trying to send a discrete message to China as well, saying,
Speaker 1: you know, you work year last year, I'm here this year,
Speaker 1: and we're we're still in the G two situation at
Speaker 1: at at worst. But that's the heart of it. And
Speaker 1: I get the privilege speaking with Dr Bremer Eurasia Group
Speaker 1: as we begin our year with the Eurasia Group. Top risks.
Speaker 1: You just use the word discreet. This is not a
Speaker 1: discreete center of message, is it. No? I'm not sure
Speaker 1: he's going to be discreet per se, but no, no, yeah,
Speaker 1: I definitely wouldn't go for a discreet actually. Um, but
Speaker 1: he's he's going to be trying to tailor his message
Speaker 1: that I do believe. And I think there's a difference
Speaker 1: between the President being loud spoken, uh and him not
Speaker 1: being strategic. And he actually is quite um, you know,
Speaker 1: quite a great communicator if you think in pure strategy terms.
Speaker 1: So I think he's going to be nuanced in his
Speaker 1: tailored messages. Boy, I wish I could climb on board
Speaker 1: that My answer, I don't have an opinion, folks, about
Speaker 1: what the President is going to do with Davos other
Speaker 1: than it's to me it's beyond unpredictable what he will do.
Speaker 1: What will you listen for from his entourage? I believe
Speaker 1: he's bringing two d and twenty two people with him.
Speaker 1: I'm kidding, folks, but it's a huge entourage, is I mean?
Speaker 1: Basically in my right, Andrew Bishop America descends on Davos.
Speaker 1: Is that an exaggeration? Yeah? So, I mean the United
Speaker 1: States has regularly sent a fairly large delegation, especially on
Speaker 1: the business side, to Davos. So the big change here
Speaker 1: is the president's visit. I think the last time was
Speaker 1: in two thousands. That's really the big change. That the
Speaker 1: huge American contingent isn't particularly surprising in terms of what
Speaker 1: what we're gonna be looking at is whether he's in
Speaker 1: a sort of dissonance visa vias entourage. I mean, you know,
Speaker 1: there's a clums not a clumsy, but there's just this
Speaker 1: odd new soul this morning of whether the president, given
Speaker 1: the shutdown, and I mean the president getting this Sunday
Speaker 1: or getting to Monday, forget about jetting over to Geneva
Speaker 1: zero wherever in heading up uh two Davos, will he
Speaker 1: go if there's a shutdown. I find it unimaginable that
Speaker 1: he will travel if there's a shutdown. But am I
Speaker 1: wrong on that? First of all, I think he you know,
Speaker 1: he could go even if there's a shutdown. I'm not
Speaker 1: really that he is the kind of person to actually
Speaker 1: canceled as plans for that reason. But but more importantly,
Speaker 1: I think it goes the other way around. I think, um,
Speaker 1: we're more likely to see Republicans uh not cave but
Speaker 1: you know, compromise on the doctor issue in order to
Speaker 1: avoid a shutdown, or in order to sort of pass
Speaker 1: a very short term cr that will allow the presidents
Speaker 1: to go to Davos without a wrinkle. The US dollar
Speaker 1: trading at the weakest level in three years. Here to
Speaker 1: help us understand what's going on is Alan Ruskin. He
Speaker 1: is Deutsche Bank's global head of G ten FX strategy
Speaker 1: and he joins us here in our eleven three oh studios. Alan,
Speaker 1: thank you very much for being here. So what what
Speaker 1: explanation are you offering clients and customers about the weakness
Speaker 1: of the U S dollar and its pervasiveness. Well, I
Speaker 1: think what we're seeing as a continuation of what we
Speaker 1: saw much for much of really last year, and last
Speaker 1: year's story was one where, um, particularly after the French election,
Speaker 1: you had a rerating of the euro both in terms
Speaker 1: of political risk and then I think, you know, coincident
Speaker 1: to that, really a rerating in terms of what was
Speaker 1: going on on the economy side of things, and the
Speaker 1: market has been also reconsidering what's going to go on
Speaker 1: in terms of ECB policy and the changes in the
Speaker 1: retreat from really emergency easing that you've had in the ECB,
Speaker 1: and is in fact um much more intent in terms
Speaker 1: of trading off that than what we see from the
Speaker 1: Federal Reserve. Well when do you think, when do you
Speaker 1: think we're going to find out? I mean, it is
Speaker 1: just just going to use to trade at these levels
Speaker 1: until that is resolved. Um, we you know, it seemed
Speaker 1: to be frontloading a lot of the euro positive news
Speaker 1: so far. So we definitely see um a more constructive
Speaker 1: view on the euro early in the year than we
Speaker 1: might have anticipated. Really, it's you know, it's it's one
Speaker 1: where Um, if there is going to be challenges to
Speaker 1: the view, I think it will have to come more
Speaker 1: from the dollar positive side than the euronegative side. So
Speaker 1: in that sense, sometime later this year, the market will
Speaker 1: I think pricing more fed tightening than they're currently pricing
Speaker 1: in and that could be you know, a moment in
Speaker 1: which the dollar we actually get some relief. Is there
Speaker 1: a bet now, alan Is there a trade as there
Speaker 1: are a consensus trade, as there a big bet being placed,
Speaker 1: not as big as you might think. I think, you know,
Speaker 1: we started the year with Euro leverage positions um fairly flat,
Speaker 1: surprisingly so, and it was really asset managers that were
Speaker 1: long Euros, and that was more a story I think
Speaker 1: of building up long euro exposure, particularly as it relates
Speaker 1: to equity markets, and particularly as it relates to hedge ratios.
Speaker 1: The foreigners heade ratios were way too high in Urine,
Speaker 1: They're now wanted some Euro exposures. I think that was,
Speaker 1: you know, a shift we saw last year. This year,
Speaker 1: in the beginning of this year, you are seeing some
Speaker 1: build up in leverage positions and as we know, that
Speaker 1: can be more fly by night as it were, so
Speaker 1: you can get a squeeze of that position going forward.
Speaker 1: I really agree with you that everybody what what Pim
Speaker 1: and I saw ellen end of the end of the
Speaker 1: year was massive ambiguity, uncertainty, lack of belief in calls,
Speaker 1: and it seems with a vengeance that slammed it in
Speaker 1: the last three or four weeks. Do you sense that
Speaker 1: at Deutsche Banker now look at George Sarah Ellis's publish
Speaker 1: call on stronger Euro People are really starting to stake
Speaker 1: our territory aren't they much more so? Tom, definitely, Yeah.
Speaker 1: I think we've had internally obviously much more debate really
Speaker 1: on the framework behind currencies. And I would say I've
Speaker 1: had really, you know, for at least in years since
Speaker 1: two thousand and eight. So that tells you something about
Speaker 1: the uncertainty in terms of the actual underlying forces driving
Speaker 1: currencies right now. But I think people have staked things out.
Speaker 1: We've seen in the past, of course, that the first
Speaker 1: couple of weeks of a year are not necessary, you know,
Speaker 1: indicative of underlying trend really, so I think one has
Speaker 1: to be a little bit cautious, and I think one
Speaker 1: would be definitely cautious if those leverage positions move up,
Speaker 1: you know, another nights. Really I think that, you know,
Speaker 1: that's that would be a cautionary sign Alright, so we've
Speaker 1: got your call there. I want to just step back
Speaker 1: for a second. Commodity based currencies. I know your G
Speaker 1: ten strategies, but where where does the commodity play come
Speaker 1: into into focus? For for for traders, well, I think
Speaker 1: the Euro is still very important because pretty much everyone
Speaker 1: gets caught in the draft of the Euro. The Euro
Speaker 1: is more more or less the anti pole of the dollars,
Speaker 1: so it's on the other side of the dollar and
Speaker 1: it sort of drags everyone with it. So that creates
Speaker 1: a natural propensity for the dollar to be weaker. But
Speaker 1: I think the commodity currency side has had quite a
Speaker 1: special story over the last month or so. Around the
Speaker 1: middle of December, commodity prices went crearly weak, and then
Speaker 1: they went on a real race to the top side.
Speaker 1: Lead in the no small pot by oil, but it
Speaker 1: was more than oils based seven right now for w T.
Speaker 1: I yeah, But I think what we feel there is that,
Speaker 1: if anything, we're gonna see some topping out in terms
Speaker 1: of sending the energy complex because at these kind of
Speaker 1: oil prices, US supply is going to kick in. You're
Speaker 1: gonna say, as riccounts going up again and constraint to
Speaker 1: the top side and beautifully said, and that goes to
Speaker 1: this word, folks, with the word I use in lectures,
Speaker 1: this responsiveness and the fancy Ruskin word is elasticities. There's
Speaker 1: a new elasticity in oil supply. Are those same elasticities
Speaker 1: out there in other commodities? Like if you look at Brazil,
Speaker 1: Allen and you want to play Brazil, are the responsiveness
Speaker 1: is of copper the same as they used to be. No,
Speaker 1: I'd be shous there really. I mean, you know a
Speaker 1: lot of these other commodities need huge capital expenditure UM
Speaker 1: to really lift up supply, and there needs to be
Speaker 1: spare capacity. And I think you know they're on the
Speaker 1: oil side, you know that there's plenty of spare capacity
Speaker 1: at the right price. Effectively, Yeah, I think you can
Speaker 1: say that less confidently with most other commodities. And I
Speaker 1: want to just turn attention to politics and the reaction
Speaker 1: that currency markets have when elections surprised. And I know,
Speaker 1: for example, if you go back to the second election
Speaker 1: for Theresa May in seventeen and the calls for the
Speaker 1: British pound what it would do as a result of
Speaker 1: the election. What election now do you most look at,
Speaker 1: and what are the different scenarios that you're gaming. Well,
Speaker 1: in the political sphere, obviously we have the shutdown story
Speaker 1: here in the US. I think that's does that really
Speaker 1: matter to me? Not really. I don't think I think
Speaker 1: it tends to any enthusiasm that you could have in
Speaker 1: the dollar theoretically at least, or it sounds good, yeah,
Speaker 1: but I don't think that's that that's obviously not the
Speaker 1: big one. Um, there is a big story in Germany
Speaker 1: of course, right that the spd A is still voting
Speaker 1: as to whether you know, they're prepared to go in
Speaker 1: with sort of a grand coalition with Merkele. Merkele is
Speaker 1: the bulk that holds the euro together to some extent
Speaker 1: and in terms of at least political terms. And is
Speaker 1: it surprising to you that there isn't as there isn't
Speaker 1: a lot of cacophony as Tom would say, or a
Speaker 1: noise about the lack of a of a government in Germany. Yeah,
Speaker 1: I think it's a sense sense that when it all
Speaker 1: comes out in the wash, Merkel will still you know,
Speaker 1: be chancell effectively and it'll all be good. So I
Speaker 1: think there's an optimistic view there. Um, you know what
Speaker 1: that future government will look like. Is it a grand coalition?
Speaker 1: Is a so called Jamaica type coalition is still in
Speaker 1: question and I think but the feeling is that Merkel
Speaker 1: will come through in the end, even if you have
Speaker 1: another election. So that's a big one. And then the
Speaker 1: Italian election in March and early March. I think that's
Speaker 1: that's certainly one that could get the market more interested.
Speaker 1: But there's nothing quite like the French election that we
Speaker 1: just had. You know, obviously last year, I think in
Speaker 1: terms of having ramifications for the currency market. Ellen Ruskin
Speaker 1: with Deutsche Bank PIM, I'm glad you mentioned cacophony because
Speaker 1: every time I say a four syllable word, I get
Speaker 1: paid extra. I don't know if you knew that. That's
Speaker 1: why I rely on you. Yeah, you know, we go
Speaker 1: to four syllable words as we can. Kcomphony off the
Speaker 1: Oxford English Dictionary. Ellen Ruskin has it on his desk.
Speaker 1: We have it on the Bloomberg terminal. Sixteen fifties six
Speaker 1: was the first citation for cacophony. Um, I want to
Speaker 1: go Allen, and I don't want to get you in
Speaker 1: trouble here with your compliance people, So you know, dance
Speaker 1: around this observation, which is you remember when foreign exchange
Speaker 1: strategy hedging speculation was of a different beast. All you
Speaker 1: guys drove red ferraris and wrote out written tickets and
Speaker 1: everything was done over the phone. The world is changing
Speaker 1: in PIM fox and I saw that this week with
Speaker 1: a thick trading at the different banks. And I don't
Speaker 1: want you to speak at all about Deutsche bank that
Speaker 1: would be inappropriate. But for the younger people listening who
Speaker 1: want to be Ellen, Ruskin and Alan, there are a
Speaker 1: lot of them. Is there a future in the ballet
Speaker 1: of foreign exchange? Oh? Absolutely, I think at least in
Speaker 1: the strategy area. UM. I think there's still room for
Speaker 1: people for thought process where neural networks, having quite caught
Speaker 1: up with really the cacophony of forces driving currencies, it
Speaker 1: still kind of need people in a sense. I think
Speaker 1: that's that's sitting in the case. UM. At the same time,
Speaker 1: I think when you look at, at least on the
Speaker 1: cell side, UM, electronic trading is sidley taking hold in
Speaker 1: a way in which there are few and fewer spot traders,
Speaker 1: for example, I think that would be a pattern that
Speaker 1: one can say across banks. UM. So it really depends
Speaker 1: where you are, you know. I think you want to
Speaker 1: be at the more knowledge end of the industry. UM.
Speaker 1: And that's probably the same for pretty much every industry.
Speaker 1: You know. I think him of what you and I
Speaker 1: saw this week with the banks, and you're wondering, is
Speaker 1: it a one off? You know, they had a bad
Speaker 1: quarter in trading. I get that, but or is there
Speaker 1: something bigger going on here? Well, the banks are turning
Speaker 1: into commodities. So with all due respect, Alan, I mean,
Speaker 1: you know, a lot of the services that banks offer
Speaker 1: are now being threatened by the advance of a technology,
Speaker 1: whether that is for the retail customer, even for the
Speaker 1: institutional customer. I'd be curious to know your thoughts about bitcoin.
Speaker 1: Everybody's talking about it, and it just defies real explanation
Speaker 1: because I keep hearing bitcoin, I'm not so sure, and
Speaker 1: then the next sentences, Oh, but blockchain, that's great, that's
Speaker 1: a fabulous thing. And I always try to put the
Speaker 1: too together, and I confess I'm much smart enough to
Speaker 1: do so. I don't have any for syllable words for it.
Speaker 1: I think you summed it up perfectly there. I think people,
Speaker 1: I think have question marks about bitcoin as an asset
Speaker 1: if you look at the underlying value in terms of
Speaker 1: you can't you know same Coessentially there's nothing they are
Speaker 1: really I mean, that's that's very very difficult to assess.
Speaker 1: Which you can see is volatility, right, and the extreme
Speaker 1: volatility makes one think that this is not you know,
Speaker 1: this is not the new gold as it were really
Speaker 1: in terms of a stable long term acid or it's
Speaker 1: not there yet it might not be there for a
Speaker 1: long long time. I think to your point in terms
Speaker 1: of blockchain as a technology, I think that you know,
Speaker 1: there's the perception that that can be used in a
Speaker 1: variety of different industries. I think Kodak has obviously put
Speaker 1: their foot forward. UM, So I think there's some logic
Speaker 1: there within the sale is big moves. Guys like big
Speaker 1: figure moves and that are are we at a point
Speaker 1: where we could see big figure your moves or do
Speaker 1: you just look at like we look at a damping
Speaker 1: vix or we look at dampen FX follow it's another
Speaker 1: quiet year, where do we see big figure moves? So
Speaker 1: I think the arbit on that is still the bond
Speaker 1: market and the things not the central banks, No, I
Speaker 1: think less. I think if the bond markets don't respond
Speaker 1: that much to the central banks, then as we saw
Speaker 1: so far in terms of fair tightening, then I think
Speaker 1: that's less problematic. I think a couple of issues in
Speaker 1: terms of bond markets which suggests there is more volatility
Speaker 1: in the air. Um. One of them, of course is inflation,
Speaker 1: and I think that is starting to turn up just slightly.
Speaker 1: I think there's just enough force. I just gotta tell you, Alan,
Speaker 1: you just got a twenty percent increase in the cost
Speaker 1: of your Amazon monthly membership? Did I? Yeah, everybody, everybody did.
Speaker 1: Everybody that's signed up Amazon has raising the price of
Speaker 1: the prime monthly membership by nearly twent How is that
Speaker 1: not inflation? Yeah? No, I think you know, there's questions
Speaker 1: about what inflation we're measuring. Obviously, there's a lot of
Speaker 1: acid inflation, for one thing, So I think, you know
Speaker 1: there's that as an issue for central bankers. But I
Speaker 1: think even in the metrics that we use core PC really,
Speaker 1: which is the central banks focus, I think you'll see
Speaker 1: the beginnings thereof some uptick. You're seeing a little bit
Speaker 1: on the wage side. You see lots of headlines about
Speaker 1: the tax reform passing on or getting passed on too
Speaker 1: higher wages really, so I think that's going to be important.
Speaker 1: You're going to see it in terms of demand. We
Speaker 1: saw a soft patch and inflation in the middle of
Speaker 1: last year that related to what was happening about eighteen
Speaker 1: months prior to that in the economy. As the economy
Speaker 1: has improved, so I think you're going to start to
Speaker 1: see some pick up there. And I think to the
Speaker 1: point in terms of a weeker dollar and stronger oil.
Speaker 1: All those forces are effectively saying, look here, um, it's
Speaker 1: going to all error to the top side. Now, if
Speaker 1: you get a little bit of inflation and the central
Speaker 1: banks are not adding to their balance sheets in the
Speaker 1: same way, then those two forces, I think, in combination
Speaker 1: are actually going to tighten things up as far as
Speaker 1: the back in the bond market, and it's going to
Speaker 1: create more volatility. Thanks for listening to the Bloomberg Surveillance podcast.
Speaker 1: Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or
Speaker 1: whichever podcast platform you prefer. I'm on Twitter at Tom
Speaker 1: Keane before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio