1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloombergs Surveillance Podcast. I'm Tom Keane. Along 2 00:00:09,200 --> 00:00:13,200 Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailee. We bring you 3 00:00:13,280 --> 00:00:18,600 Speaker 1: insight from the best and economics, finance, investment, and international relations. 4 00:00:18,960 --> 00:00:23,799 Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com, 5 00:00:23,920 --> 00:00:31,000 Speaker 1: and of course on the Bloomberg Terminal. We've got to 6 00:00:31,000 --> 00:00:32,919 Speaker 1: talk about the ranny we've seen joining us now it's 7 00:00:32,960 --> 00:00:35,040 Speaker 1: Mike Wilson. I'm pleased to say, the chief US equity 8 00:00:35,080 --> 00:00:38,400 Speaker 1: strategist over at Morgan Stanley. Mike covid a weekend and 9 00:00:38,479 --> 00:00:40,520 Speaker 1: Tom and I talked about it. You use that word 10 00:00:40,600 --> 00:00:46,920 Speaker 1: dream this equity market streaming. Why is that dream misplaced? Well, 11 00:00:46,960 --> 00:00:50,120 Speaker 1: we don't know exactly. If it's dream, it is always dreaming. Mean, 12 00:00:50,159 --> 00:00:52,760 Speaker 1: the equity market is tends to be forward thinking, like 13 00:00:52,840 --> 00:00:55,400 Speaker 1: most markets, but particularly equities, and I think what you 14 00:00:55,440 --> 00:00:58,360 Speaker 1: know are The phrase we used was really just trying 15 00:00:58,400 --> 00:01:01,120 Speaker 1: to imply, Look, we had this wind though of opportunity 16 00:01:01,280 --> 00:01:04,679 Speaker 1: for equity investors where rates are coming down, and you 17 00:01:04,720 --> 00:01:06,880 Speaker 1: can interpret that a couple of different ways. You can 18 00:01:06,920 --> 00:01:09,240 Speaker 1: interpret it as if the FED is close to being 19 00:01:09,240 --> 00:01:12,840 Speaker 1: done and they're gonna be able to pose or pivot 20 00:01:12,959 --> 00:01:16,800 Speaker 1: before the next recession arrives, and that window is always 21 00:01:16,840 --> 00:01:19,720 Speaker 1: positive for stocks. So the equity market is trying to 22 00:01:19,720 --> 00:01:21,560 Speaker 1: get in front of that pivot. I think it's premature, 23 00:01:22,240 --> 00:01:25,400 Speaker 1: to say the least. I also believe that by the 24 00:01:25,440 --> 00:01:28,080 Speaker 1: time they do pivot or pause, probably something bad has 25 00:01:28,120 --> 00:01:31,520 Speaker 1: happened on the growth side. And that's really our core views. 26 00:01:31,560 --> 00:01:34,160 Speaker 1: So look, we're we're always open minded. We don't get 27 00:01:34,160 --> 00:01:36,959 Speaker 1: too dogmatic with these These rallies can happen at any time. 28 00:01:37,240 --> 00:01:38,720 Speaker 1: But then we go back to our framework, and our 29 00:01:38,720 --> 00:01:42,399 Speaker 1: framework suggested risk we work now is pretty poor, right, 30 00:01:42,400 --> 00:01:44,679 Speaker 1: given our view on growth and given where rates are 31 00:01:44,720 --> 00:01:46,959 Speaker 1: at this point. Mike, the new new what you've been 32 00:01:47,040 --> 00:01:50,240 Speaker 1: leading on is a divide between service sector kind of 33 00:01:50,360 --> 00:01:54,280 Speaker 1: equities and goods kind of equities. How sharp is a 34 00:01:54,360 --> 00:01:59,600 Speaker 1: divide between Caterpillar and Apple Computer? Well, I mean, I think, 35 00:01:59,720 --> 00:02:01,440 Speaker 1: I mean, you make a good point on the services 36 00:02:01,520 --> 00:02:03,200 Speaker 1: versus goods, but you also make a point that there 37 00:02:03,240 --> 00:02:06,080 Speaker 1: are different types of goods, uh, that some are more 38 00:02:06,080 --> 00:02:09,000 Speaker 1: expendable than others. And you know, this is exactly why 39 00:02:09,040 --> 00:02:13,680 Speaker 1: we've skewed ourselves more defensively, meaning we we like companies 40 00:02:13,680 --> 00:02:16,360 Speaker 1: that have things that you must buy or you know, 41 00:02:16,440 --> 00:02:20,480 Speaker 1: not not luxuries but necessities, things you need for everyday life. 42 00:02:21,040 --> 00:02:22,760 Speaker 1: And and that's those are the kinds of stocks have 43 00:02:22,840 --> 00:02:25,359 Speaker 1: been doing well because why because you know, the volatility 44 00:02:25,360 --> 00:02:27,639 Speaker 1: in their growth is not it's not that volatile, and 45 00:02:27,680 --> 00:02:29,919 Speaker 1: they can deliver on the earnings during this period when 46 00:02:30,120 --> 00:02:32,200 Speaker 1: uncertainty is going to be higher and we're gonna get 47 00:02:32,240 --> 00:02:34,000 Speaker 1: a payback in demand for all these things that we 48 00:02:34,120 --> 00:02:37,519 Speaker 1: over consumed in the last twelve the twenty four months. 49 00:02:37,520 --> 00:02:39,080 Speaker 1: And I think it's pretty obvious that that's just playing 50 00:02:39,080 --> 00:02:41,880 Speaker 1: out now. Mike, You've gotten the playbooks so right this year, 51 00:02:42,080 --> 00:02:45,400 Speaker 1: and you deserve a real congratulations for pin pointing to 52 00:02:45,440 --> 00:02:47,600 Speaker 1: where we are in the cycle and how we see 53 00:02:47,800 --> 00:02:51,280 Speaker 1: rallies and then retracements. Where do you see the trade 54 00:02:51,320 --> 00:02:53,360 Speaker 1: what it comes to energy at this point, given that 55 00:02:53,400 --> 00:02:55,040 Speaker 1: it was one of the big calls in the first 56 00:02:55,040 --> 00:02:58,079 Speaker 1: half of the year, the inflation protection at a time 57 00:02:58,120 --> 00:03:03,119 Speaker 1: where now we're looking down growth fear is really reigning supreme. Well, 58 00:03:03,639 --> 00:03:05,799 Speaker 1: those are nice comments, but energies in one area we 59 00:03:05,919 --> 00:03:08,160 Speaker 1: completely botched. So I mean, I'm not sure I'm the 60 00:03:08,160 --> 00:03:10,520 Speaker 1: guy that asked, but look I mean energy, we were 61 00:03:10,560 --> 00:03:13,800 Speaker 1: not overweight enough. We own a few stocks in our portfolio, 62 00:03:13,880 --> 00:03:17,480 Speaker 1: and we were basically neutral. And I think that energy 63 00:03:17,520 --> 00:03:21,200 Speaker 1: now is vulnerable from an equity standpoint if and this 64 00:03:21,280 --> 00:03:23,040 Speaker 1: is a big if, if you take the view that 65 00:03:23,080 --> 00:03:26,320 Speaker 1: a recession is sometime in the next twelve to twelve months. 66 00:03:26,360 --> 00:03:28,520 Speaker 1: And it's just been our experience. And the thing I'm 67 00:03:28,520 --> 00:03:32,400 Speaker 1: most worried about, Lisa is that you know the commodity complex, uh, 68 00:03:32,440 --> 00:03:35,000 Speaker 1: technically and what it's telling us it's not good. I mean, 69 00:03:35,040 --> 00:03:37,720 Speaker 1: we're seeing demand destruction across the board, some of that, 70 00:03:37,760 --> 00:03:39,240 Speaker 1: you know, when some of the base metals and things 71 00:03:39,240 --> 00:03:41,360 Speaker 1: like that's dude to zero code policy in China, which 72 00:03:41,360 --> 00:03:44,280 Speaker 1: could reverse in the fall potentially. But the charts don't lie, 73 00:03:44,680 --> 00:03:46,640 Speaker 1: and they're telling me that we've seen the peak in 74 00:03:46,680 --> 00:03:49,040 Speaker 1: commodities and if we're gonna have a recession, then they're 75 00:03:49,040 --> 00:03:51,360 Speaker 1: probably going lower. So I would we're continuing to be 76 00:03:51,360 --> 00:03:53,680 Speaker 1: neutral and energy, and quite frankly, I think people are 77 00:03:53,680 --> 00:03:55,680 Speaker 1: probably a little bit too long at this point. Mike. 78 00:03:55,800 --> 00:03:58,080 Speaker 1: How much do you take the pushback that you I'm 79 00:03:58,120 --> 00:04:00,800 Speaker 1: sure you here, which is the earnings have been than expected. 80 00:04:01,080 --> 00:04:04,560 Speaker 1: You see ongoing resilience. Yeah, there are potholes here and there, 81 00:04:04,600 --> 00:04:07,840 Speaker 1: but for the most part, companies are to use Tom's phrase, 82 00:04:07,880 --> 00:04:11,440 Speaker 1: adjusting and adapting and moving forward. No, I mean the 83 00:04:11,480 --> 00:04:15,680 Speaker 1: company and US companies are really good at managing earnings okay, 84 00:04:15,720 --> 00:04:18,960 Speaker 1: but they're not good at doing is forecasting earnings over 85 00:04:19,279 --> 00:04:22,280 Speaker 1: the course of twelve months plus. That's been our experience, 86 00:04:22,279 --> 00:04:25,760 Speaker 1: particularly at major turning points. And so you're right, they've 87 00:04:25,760 --> 00:04:27,440 Speaker 1: done a good job of managing the quarters. And so 88 00:04:27,480 --> 00:04:28,840 Speaker 1: what ends up happening is that you know, the bar 89 00:04:28,839 --> 00:04:30,800 Speaker 1: gets lower, they jump over the lower bar if I 90 00:04:30,880 --> 00:04:33,440 Speaker 1: say it's better than expected, and then you know, it's 91 00:04:33,480 --> 00:04:35,600 Speaker 1: kind of a drip, drip, drip lower. You know, we 92 00:04:35,600 --> 00:04:37,600 Speaker 1: we do a pretty good job of forecasting twelve twenty 93 00:04:37,640 --> 00:04:39,760 Speaker 1: four months out of macro, not at the micro level 94 00:04:40,000 --> 00:04:42,640 Speaker 1: so much, but it informs us. And what we're seeing 95 00:04:43,279 --> 00:04:45,120 Speaker 1: is that it's this drip drip drip is going to 96 00:04:45,160 --> 00:04:47,880 Speaker 1: continue for another two or three quarters, and they'll probably 97 00:04:47,920 --> 00:04:49,760 Speaker 1: be more of a drop as opposed to a drip 98 00:04:49,800 --> 00:04:52,640 Speaker 1: if it's a recession. So like I think the another 99 00:04:52,640 --> 00:04:55,440 Speaker 1: words I'm saying is I think that don't get mesmerized 100 00:04:55,480 --> 00:04:57,680 Speaker 1: by the very near term data on the on the 101 00:04:57,680 --> 00:04:59,960 Speaker 1: earnings because you know these number these numbers are man 102 00:05:00,000 --> 00:05:02,400 Speaker 1: it Okay, that's that's why they look may be better 103 00:05:02,440 --> 00:05:05,520 Speaker 1: relative to the managed numbers. And when you're looking out 104 00:05:05,520 --> 00:05:07,520 Speaker 1: twelve months, you just have to take your own view 105 00:05:07,680 --> 00:05:11,600 Speaker 1: at these turning points. You can't rely necessarily on kind 106 00:05:11,600 --> 00:05:13,800 Speaker 1: of what companies are saying or what the community is saying. 107 00:05:13,800 --> 00:05:15,480 Speaker 1: You need to take a view. And our view is 108 00:05:15,600 --> 00:05:17,840 Speaker 1: very clear the orange revisions are going to be much 109 00:05:17,839 --> 00:05:19,360 Speaker 1: more negative of the next two to three quarters. And 110 00:05:19,360 --> 00:05:21,000 Speaker 1: when we've seen for the last two years, and Mica 111 00:05:21,040 --> 00:05:22,440 Speaker 1: got to squeeze this in, what do you say to 112 00:05:22,520 --> 00:05:25,560 Speaker 1: people getting mesmerized by the bond market move we've seen 113 00:05:25,920 --> 00:05:28,680 Speaker 1: since the middle of June. Well, that's one thing we've 114 00:05:28,680 --> 00:05:31,200 Speaker 1: gotten right. We've been very bullish on bonds, as you know, John, 115 00:05:31,640 --> 00:05:34,960 Speaker 1: thinking that you know, the markets might have been infatuated 116 00:05:35,040 --> 00:05:38,040 Speaker 1: with inflation. Of course, when it became obvious and the 117 00:05:38,080 --> 00:05:40,120 Speaker 1: FED and that was really the story in Q one 118 00:05:40,240 --> 00:05:42,520 Speaker 1: and up until about May June. And at that point, 119 00:05:42,560 --> 00:05:44,200 Speaker 1: we you know, we think that was the time to 120 00:05:44,200 --> 00:05:46,839 Speaker 1: pivot away from that and start thinking about what's growth 121 00:05:46,839 --> 00:05:49,279 Speaker 1: gonna look like. So we think the bond rally makes 122 00:05:49,320 --> 00:05:52,000 Speaker 1: perfect sense in the context of our fire and ice narrative. 123 00:05:52,520 --> 00:05:55,200 Speaker 1: We're staying long the long bonds, and uh we think 124 00:05:55,240 --> 00:05:58,360 Speaker 1: it's great hedge against the nequity portfolio. Right now, Mica 125 00:05:58,440 --> 00:06:00,520 Speaker 1: also to get you on to show this small thank you, 126 00:06:00,560 --> 00:06:09,120 Speaker 1: Sir Mike Wilson, that of Mark and Stanley. As Mandy's 127 00:06:09,440 --> 00:06:12,680 Speaker 1: chief equity derivative strategist at Credit Sway Securities, Mandy joins 128 00:06:12,720 --> 00:06:15,200 Speaker 1: us right now here in New York. Mandy, let's start there. 129 00:06:15,240 --> 00:06:19,160 Speaker 1: How do you play a peak in real yields? Sure? 130 00:06:19,200 --> 00:06:21,080 Speaker 1: I get this question a lot um, you know, and 131 00:06:21,279 --> 00:06:23,960 Speaker 1: the two the most traditional way people look at it 132 00:06:24,000 --> 00:06:26,240 Speaker 1: is either do you go a long tech or do 133 00:06:26,240 --> 00:06:28,960 Speaker 1: you go along gold? Because those two have historically had 134 00:06:29,000 --> 00:06:32,160 Speaker 1: the most inverse relationship with real yields. And in my view, 135 00:06:32,400 --> 00:06:34,919 Speaker 1: I think going along gold is a much better play 136 00:06:35,320 --> 00:06:37,680 Speaker 1: um for a peak in real yield rather than Tech. 137 00:06:37,960 --> 00:06:39,880 Speaker 1: And the and the key here is, you know, real 138 00:06:40,000 --> 00:06:42,679 Speaker 1: yield could be going down either because of a dovish 139 00:06:42,680 --> 00:06:45,800 Speaker 1: FED or because of rising recession risk, right and and 140 00:06:45,839 --> 00:06:48,760 Speaker 1: for tech, if it's rising recession risk, that doesn't bode 141 00:06:48,800 --> 00:06:51,240 Speaker 1: well for tech as a cyclical sector. So for us 142 00:06:52,760 --> 00:06:55,279 Speaker 1: looking at upside and gold, and you have seen in 143 00:06:55,320 --> 00:06:59,160 Speaker 1: the derivatives market more to mean for upside in g 144 00:06:59,360 --> 00:07:02,240 Speaker 1: LD option for example, to play that up peak in 145 00:07:02,320 --> 00:07:05,040 Speaker 1: real yields. Lisen Saunders was with us twenty minutes ago 146 00:07:05,200 --> 00:07:09,840 Speaker 1: just put out on Twitter the Dallas trimmed inflation statistics, 147 00:07:09,840 --> 00:07:14,000 Speaker 1: something Chairman Powell watches carefully. The first derivative of this 148 00:07:14,080 --> 00:07:17,400 Speaker 1: over one month is stunning three point zero three point 149 00:07:17,440 --> 00:07:20,920 Speaker 1: one and then an explosion in the Dallas trim from 150 00:07:20,920 --> 00:07:24,160 Speaker 1: five point two on to a ginormous six point nine. 151 00:07:24,480 --> 00:07:29,600 Speaker 1: How do you fold inflation into a conventional derivative strategy 152 00:07:29,640 --> 00:07:32,120 Speaker 1: and equities? Sure, so I think a couple of ways 153 00:07:32,120 --> 00:07:33,800 Speaker 1: you can look at it, so you can play it 154 00:07:34,360 --> 00:07:37,040 Speaker 1: through uh you know, um bond et s right. So 155 00:07:37,120 --> 00:07:39,520 Speaker 1: looking at for example, we've been recommending people look at 156 00:07:39,600 --> 00:07:43,120 Speaker 1: upside place in TLT, which is longer dated bonds. And 157 00:07:43,160 --> 00:07:45,360 Speaker 1: the view here is that the Fed actually will remain 158 00:07:45,480 --> 00:07:48,920 Speaker 1: aggressive in trying to curb inflation and as a result 159 00:07:49,040 --> 00:07:52,000 Speaker 1: increase recession risk. And that means actually the back end 160 00:07:52,000 --> 00:07:54,640 Speaker 1: of the yold curve goes down because that's much more 161 00:07:54,640 --> 00:07:57,600 Speaker 1: a function of inflation and growth. You can look at 162 00:07:57,640 --> 00:08:01,160 Speaker 1: it through hybrid options or equity options that are contingent 163 00:08:01,160 --> 00:08:02,880 Speaker 1: on rates. So there are different ways and you can 164 00:08:02,920 --> 00:08:05,520 Speaker 1: play it. But I would say, you know, in my view, um, 165 00:08:05,560 --> 00:08:07,920 Speaker 1: the market has it wrong that the feed is gonna pivot. 166 00:08:07,960 --> 00:08:11,520 Speaker 1: I don't think inflation is going to come in that quickly. Um. 167 00:08:11,560 --> 00:08:13,880 Speaker 1: You know, Powell has said that he needs clear and 168 00:08:13,920 --> 00:08:16,600 Speaker 1: convincing evidence that inflation is falling back down to the 169 00:08:16,600 --> 00:08:18,680 Speaker 1: two percent target. I don't think that we're going to 170 00:08:18,720 --> 00:08:21,560 Speaker 1: get that anytime soon. Mandy, how much conviction just to 171 00:08:21,640 --> 00:08:24,320 Speaker 1: sort of zoom out here, how much conviction it has 172 00:08:24,360 --> 00:08:27,480 Speaker 1: this rally had behind it from a derivative's perspective, How 173 00:08:27,560 --> 00:08:30,960 Speaker 1: much have people closed out their bearish bets on the 174 00:08:31,080 --> 00:08:34,359 Speaker 1: US economy, on the U S stock market in particular, 175 00:08:34,640 --> 00:08:38,040 Speaker 1: as the market rally the most in November. Well, first 176 00:08:38,040 --> 00:08:39,960 Speaker 1: of all, what bearish bets right? So I would say 177 00:08:40,000 --> 00:08:43,839 Speaker 1: one of the defining characteristics of this sell off on 178 00:08:43,920 --> 00:08:45,640 Speaker 1: the first half of the year is that we've seen 179 00:08:45,720 --> 00:08:48,520 Speaker 1: very very little hedging in the derivatives market, and that 180 00:08:48,559 --> 00:08:52,000 Speaker 1: contributes to, you know, the relatively lower levels of VIX 181 00:08:52,160 --> 00:08:55,319 Speaker 1: v VIX, all the measures that we track and options 182 00:08:55,400 --> 00:08:58,200 Speaker 1: and part of that is because we've seen already very 183 00:08:58,240 --> 00:09:02,199 Speaker 1: significant deleveraging d risking in terms of underlying positions of 184 00:09:02,320 --> 00:09:06,280 Speaker 1: people selling at US stocks going into cash. Now over 185 00:09:06,280 --> 00:09:08,400 Speaker 1: the past week we have seen some pick up of 186 00:09:08,520 --> 00:09:12,360 Speaker 1: upside call buying, but certainly not significant enough. So I 187 00:09:12,400 --> 00:09:14,840 Speaker 1: don't think this is a high conviction rally of anything. 188 00:09:14,880 --> 00:09:17,040 Speaker 1: I think this is much more a bearer market rally. 189 00:09:17,120 --> 00:09:19,040 Speaker 1: And when you face the kind of headline risk that 190 00:09:19,080 --> 00:09:21,920 Speaker 1: we face today, this event that could take place a 191 00:09:21,960 --> 00:09:24,240 Speaker 1: little bit later this morning speak below sea landing in 192 00:09:24,280 --> 00:09:27,000 Speaker 1: Taiwan and the complete unknown as to how the Chinese 193 00:09:27,040 --> 00:09:29,000 Speaker 1: will respond to it. What do you say to clients 194 00:09:29,000 --> 00:09:32,440 Speaker 1: when they killed you about how they should manage this situation? Sure, 195 00:09:32,640 --> 00:09:34,960 Speaker 1: so on the topic of China, clearly a lot of 196 00:09:34,960 --> 00:09:37,600 Speaker 1: headline risk in the near term, but actually the much 197 00:09:37,720 --> 00:09:40,400 Speaker 1: bigger risk, and what I've been emphasizing over the past 198 00:09:40,400 --> 00:09:43,000 Speaker 1: few months um and in terms of the outlook for China, 199 00:09:43,120 --> 00:09:46,640 Speaker 1: outlook for global economy is China's zero COVID policy, and 200 00:09:46,679 --> 00:09:49,600 Speaker 1: that's going to have a much bigger economic impact. It's 201 00:09:49,600 --> 00:09:52,480 Speaker 1: gonna have a much bigger market impact than whatever happens, 202 00:09:52,480 --> 00:09:54,440 Speaker 1: you know, in the next twenty four hours on the 203 00:09:54,520 --> 00:09:56,959 Speaker 1: geo political front. And the key here is that you know, 204 00:09:56,960 --> 00:10:00,400 Speaker 1: if you talk to investors, most people still expect China 205 00:10:00,480 --> 00:10:03,600 Speaker 1: to pivot from the zero COVID policy because of the 206 00:10:03,679 --> 00:10:06,440 Speaker 1: economic cost. And my view there is, if you listen 207 00:10:06,520 --> 00:10:08,720 Speaker 1: to she, if you listen to the top Chinese leadership, 208 00:10:09,040 --> 00:10:12,640 Speaker 1: they're very ideologically committed to zero COVID. I do not 209 00:10:12,840 --> 00:10:15,400 Speaker 1: think in a politically sensitive year such as this year 210 00:10:15,440 --> 00:10:19,520 Speaker 1: for China, they're going to abandon zero COVID anytime soon. Um. 211 00:10:19,520 --> 00:10:21,640 Speaker 1: And I think that's just gonna mean a bigger demand 212 00:10:21,679 --> 00:10:25,120 Speaker 1: shock for global growth, a bigger demand shock for commodities. 213 00:10:25,360 --> 00:10:26,800 Speaker 1: And I think that, you know, that's one of the 214 00:10:26,800 --> 00:10:30,560 Speaker 1: reasons why we've been pretty barished on commodities as of late. 215 00:10:31,400 --> 00:10:39,840 Speaker 1: Thank you, as O Wise from Credit Swasi. Halene Becker 216 00:10:39,920 --> 00:10:43,320 Speaker 1: knows about jet Blue. She put a reaffirmed outperform on 217 00:10:43,440 --> 00:10:47,240 Speaker 1: jet Blue yesterday. She is at Cowen and she's as 218 00:10:47,280 --> 00:10:49,240 Speaker 1: of this morning going to have the good counsel of 219 00:10:49,280 --> 00:10:51,760 Speaker 1: Mark McCormick. As t D says, they will take out 220 00:10:52,200 --> 00:10:54,520 Speaker 1: Halline Becker's cow and that will be a good match 221 00:10:54,559 --> 00:10:57,600 Speaker 1: Mark McCormick and a Laine Becker and Mr McCormick joins 222 00:10:57,640 --> 00:11:01,680 Speaker 1: US now global head of FX Strategy TV Securities. Let's 223 00:11:01,679 --> 00:11:04,000 Speaker 1: start with square one mark, what's the dollar going to 224 00:11:04,080 --> 00:11:06,840 Speaker 1: do in the next year. I think in the next 225 00:11:06,920 --> 00:11:09,400 Speaker 1: year where we all will talk about the peak dollar story. 226 00:11:09,520 --> 00:11:11,360 Speaker 1: That's really not where we're at right now in the 227 00:11:11,400 --> 00:11:13,320 Speaker 1: next couple of months. But if we look where we 228 00:11:13,360 --> 00:11:16,080 Speaker 1: are in extrapolate pass this year, it does look like 229 00:11:16,120 --> 00:11:17,920 Speaker 1: where we have the conditions of the peak dollar, which 230 00:11:18,000 --> 00:11:20,600 Speaker 1: is Feds cutting rates and global economy can be recovering. 231 00:11:20,640 --> 00:11:23,280 Speaker 1: We know the euro Zone is is slipping into a recession, 232 00:11:23,320 --> 00:11:25,640 Speaker 1: but all of those factors should likely turn by next year. 233 00:11:25,679 --> 00:11:28,600 Speaker 1: So I think that is the big forecasting stories, the 234 00:11:28,640 --> 00:11:30,520 Speaker 1: turning of the dollar in the next year. There a 235 00:11:30,679 --> 00:11:36,160 Speaker 1: risk adjusted basis, including geopolitical risk adjusted, which is the 236 00:11:36,200 --> 00:11:39,400 Speaker 1: currency flat on its back where the greatest week dollar 237 00:11:39,480 --> 00:11:43,960 Speaker 1: opportunity is. It's still again, we've talked about it a lot. Really, yeah, 238 00:11:44,040 --> 00:11:47,160 Speaker 1: it's it's the Yeah. An evaluation perspective, if you think 239 00:11:47,200 --> 00:11:49,520 Speaker 1: about why the dollar could peak, if if the feed 240 00:11:49,640 --> 00:11:51,400 Speaker 1: is cutting rates next year, and if you think about 241 00:11:51,400 --> 00:11:53,599 Speaker 1: and talk about the yield curve of the U S 242 00:11:53,640 --> 00:11:55,360 Speaker 1: yield curve is inverted now, So if we if we 243 00:11:55,360 --> 00:11:57,240 Speaker 1: think about the slowing conditions of the US and we 244 00:11:57,280 --> 00:11:59,760 Speaker 1: think about how much yen has moved from fair value, 245 00:12:00,360 --> 00:12:01,960 Speaker 1: fair value for the end is somewhere in the in 246 00:12:02,160 --> 00:12:04,320 Speaker 1: one ten, one fifteen. So if we think about the 247 00:12:04,360 --> 00:12:06,920 Speaker 1: reversal of the dollar, the d X, Y the euro 248 00:12:06,960 --> 00:12:08,960 Speaker 1: still has a lot of cyclical problems to deal with, 249 00:12:09,080 --> 00:12:11,520 Speaker 1: but you know, the big driver of what's pushed the 250 00:12:11,640 --> 00:12:14,800 Speaker 1: end weaker, it's been global rates moving higher and the 251 00:12:14,800 --> 00:12:17,480 Speaker 1: oil in the terms of trade shock and if you've 252 00:12:17,480 --> 00:12:20,120 Speaker 1: already mentioned on the oil side, like we're expecting oil 253 00:12:20,120 --> 00:12:22,400 Speaker 1: prices to be lower next year as well. So the 254 00:12:22,440 --> 00:12:25,760 Speaker 1: combination of those factors peak higher rates and essentially a 255 00:12:25,840 --> 00:12:27,839 Speaker 1: peak in the terms of trade cycle, which has really 256 00:12:27,880 --> 00:12:30,720 Speaker 1: been challenging for Asian currencies for the last six months, 257 00:12:31,080 --> 00:12:34,120 Speaker 1: those reversals would help us see dollar again move back 258 00:12:34,240 --> 00:12:37,480 Speaker 1: closer towards fair value rather than you know, trading at 259 00:12:37,480 --> 00:12:39,800 Speaker 1: the massive preview we see it now is that regardless 260 00:12:39,800 --> 00:12:42,400 Speaker 1: of where risk sentiment is any given time mark, is 261 00:12:42,440 --> 00:12:44,280 Speaker 1: this a risk off trade that now works? So is 262 00:12:44,320 --> 00:12:46,000 Speaker 1: it just more broadly a tried that's gonna works through 263 00:12:46,000 --> 00:12:47,440 Speaker 1: the end of the year because of the dynamics that 264 00:12:47,480 --> 00:12:51,600 Speaker 1: you described, Well, the risk off helps, and I think 265 00:12:51,600 --> 00:12:54,320 Speaker 1: the risk off helps because it's pushing yields lower, and 266 00:12:54,360 --> 00:12:56,959 Speaker 1: I think that's it's an important combination in what we're 267 00:12:56,960 --> 00:12:59,920 Speaker 1: starting to see is the FED had articulated a bit 268 00:13:00,000 --> 00:13:02,160 Speaker 1: of a focus on growth. We know that they're not 269 00:13:02,240 --> 00:13:04,200 Speaker 1: there yet, and it's too early to trade this as 270 00:13:04,240 --> 00:13:06,560 Speaker 1: a durable theme. Um I still I still think the 271 00:13:06,559 --> 00:13:08,520 Speaker 1: near term we gotta be buying the dollar against most 272 00:13:08,559 --> 00:13:11,520 Speaker 1: major currencies, even the Euro and European currencies. But if 273 00:13:11,559 --> 00:13:13,600 Speaker 1: we are talking about the next six months to a year, 274 00:13:13,960 --> 00:13:17,080 Speaker 1: the conditions are changing where u S data is deteriorating, 275 00:13:17,240 --> 00:13:19,520 Speaker 1: and again in a backdrop, it doesn't have to be 276 00:13:19,640 --> 00:13:22,440 Speaker 1: risk off, but we're not going to see this persistent 277 00:13:23,080 --> 00:13:25,640 Speaker 1: deterioration in terms of trade. Where oil prices are in 278 00:13:25,640 --> 00:13:27,520 Speaker 1: a hundred and a hundred twenty dollars in barrel, we 279 00:13:27,520 --> 00:13:30,120 Speaker 1: are talking about oil below a hundred next year. That 280 00:13:30,160 --> 00:13:32,439 Speaker 1: will be very positive for the Japanese trade balance, which 281 00:13:32,440 --> 00:13:35,320 Speaker 1: would also be good for the European trade balance as well. So, Mark, 282 00:13:35,400 --> 00:13:38,480 Speaker 1: let's say that the FED doesn't pivot. Let's say that 283 00:13:38,520 --> 00:13:41,000 Speaker 1: the FED does continue to raise rates, and that you 284 00:13:41,040 --> 00:13:43,640 Speaker 1: start to see, uh, some concern about having to go 285 00:13:43,760 --> 00:13:47,560 Speaker 1: further and uh and perhaps faster than people are expecting. 286 00:13:47,600 --> 00:13:49,640 Speaker 1: And I think about Zoltan pose are over at Credit 287 00:13:49,679 --> 00:13:52,160 Speaker 1: Squeeze talking about a five to six percent FED funds 288 00:13:52,200 --> 00:13:55,480 Speaker 1: rate eventually in order to get inflation down. Does that 289 00:13:55,559 --> 00:13:58,200 Speaker 1: eradicate the idea of peak dollar and you start to 290 00:13:58,240 --> 00:14:03,120 Speaker 1: forecast a much stronger dollar to come. Absolutely, we are 291 00:14:03,200 --> 00:14:05,960 Speaker 1: not playing, you know, with our baseline as a five 292 00:14:06,040 --> 00:14:08,520 Speaker 1: six percent terminal rate. So right now you can even 293 00:14:08,520 --> 00:14:10,400 Speaker 1: see we're we're a bit more hawkish and where the 294 00:14:10,440 --> 00:14:13,000 Speaker 1: markets currently price, which is why we like the dollar. Now. 295 00:14:13,360 --> 00:14:15,679 Speaker 1: If we're talking about a five six percent terminal rate 296 00:14:15,720 --> 00:14:18,040 Speaker 1: next year, then absolutely we talked about risk off, we 297 00:14:18,040 --> 00:14:21,080 Speaker 1: talk about a global recession. Uh, this reinforces where we've 298 00:14:21,120 --> 00:14:23,040 Speaker 1: been the last couple of months, which is a global 299 00:14:23,080 --> 00:14:25,760 Speaker 1: demand shock. Plus the FED offering the dollar is like 300 00:14:25,840 --> 00:14:28,640 Speaker 1: the world's key safe haven. If you think about three 301 00:14:28,640 --> 00:14:31,120 Speaker 1: factors that have like we're assets that have done quite 302 00:14:31,120 --> 00:14:34,000 Speaker 1: well in the last three months, it's energy prices, Chinese equities, 303 00:14:34,000 --> 00:14:36,160 Speaker 1: and the dollar. Like that's really all there's been. So 304 00:14:36,400 --> 00:14:40,080 Speaker 1: the dollars offering the properties of relatively higher yield and 305 00:14:40,200 --> 00:14:43,840 Speaker 1: a decent you know, relative beta to a declining global economy. 306 00:14:43,880 --> 00:14:46,680 Speaker 1: So if we're talking about a five six uh FED 307 00:14:46,800 --> 00:14:50,760 Speaker 1: terminal rate, then the peak dollar story will not persist. Mark, 308 00:14:50,800 --> 00:14:54,360 Speaker 1: what you has conviction trade? Right now? I still think 309 00:14:54,400 --> 00:14:56,560 Speaker 1: it's the it's the end crosses. I know we've moved 310 00:14:56,600 --> 00:14:58,360 Speaker 1: a lot in the short term, but as you mentioned, 311 00:14:58,400 --> 00:15:00,440 Speaker 1: I think some of the European crosses look honorable. If 312 00:15:00,440 --> 00:15:02,640 Speaker 1: we're talking about just this week, I think Sterling, we've 313 00:15:02,640 --> 00:15:04,720 Speaker 1: got the Bank of England sterling in downside. I think 314 00:15:04,720 --> 00:15:08,360 Speaker 1: it's quite attractive. Euro Yen down downside is quite attractive 315 00:15:08,400 --> 00:15:11,400 Speaker 1: as well. We'll give us some numbers on this. My 316 00:15:11,520 --> 00:15:14,840 Speaker 1: head spinning, Mark, give us some yen you know, John, 317 00:15:14,920 --> 00:15:18,600 Speaker 1: take notes please, I'm I don't I lost my surveillance pencil. 318 00:15:19,160 --> 00:15:22,240 Speaker 1: Give me a yen number like short yen. Now as 319 00:15:22,320 --> 00:15:25,440 Speaker 1: to what so, I'd say right now, if we if 320 00:15:25,520 --> 00:15:27,760 Speaker 1: this week in general we are expecting better the U 321 00:15:27,800 --> 00:15:29,480 Speaker 1: S data, so I think we get a dollar again 322 00:15:29,520 --> 00:15:32,080 Speaker 1: reversal up to about say one thirty three, there is 323 00:15:32,080 --> 00:15:33,880 Speaker 1: a good fade point. So again, if we could see 324 00:15:33,920 --> 00:15:37,120 Speaker 1: another half percent move higher in euro yen um again, 325 00:15:37,120 --> 00:15:38,880 Speaker 1: I think we're going through one thirty as well, so 326 00:15:38,920 --> 00:15:40,560 Speaker 1: I think that would be a good short term set up. 327 00:15:40,640 --> 00:15:42,720 Speaker 1: And then a year from now, are you to one twenty, 328 00:15:42,720 --> 00:15:46,240 Speaker 1: which is students two standard deviations out or canyend strengthen 329 00:15:46,280 --> 00:15:49,840 Speaker 1: that to a one fifteen. We still have Yen kind 330 00:15:49,840 --> 00:15:52,880 Speaker 1: of coming in around one twenty is but again in 331 00:15:52,920 --> 00:15:55,040 Speaker 1: the backdrop that we we had discussed where we do 332 00:15:55,120 --> 00:15:56,960 Speaker 1: see the terminal right probably three and a half to 333 00:15:57,040 --> 00:16:00,000 Speaker 1: four rather than five to six. Uh, that environment we've 334 00:16:00,000 --> 00:16:03,120 Speaker 1: white bullish for the end, particularly for oil prices and 335 00:16:03,200 --> 00:16:05,760 Speaker 1: the terms of trade shock, which would yeah, that would 336 00:16:05,760 --> 00:16:08,840 Speaker 1: start to reverse. John, does this work for my four 337 00:16:08,880 --> 00:16:11,080 Speaker 1: oh one k? Mark can relief to you that foreign 338 00:16:11,120 --> 00:16:15,880 Speaker 1: exchange is no longer boring. It would be great if 339 00:16:15,880 --> 00:16:18,400 Speaker 1: the regime didn't change every week. But yeah, it's got 340 00:16:18,400 --> 00:16:21,840 Speaker 1: a lot of in terms of how you people care 341 00:16:21,880 --> 00:16:25,000 Speaker 1: about effects. I Mark gonna catch out Matt mccomack, it's 342 00:16:25,000 --> 00:16:31,640 Speaker 1: a d We've got a lineup of things to talk 343 00:16:31,680 --> 00:16:34,920 Speaker 1: about with a good John Writing, Chief Economic Adviser, Bring capital. 344 00:16:34,960 --> 00:16:37,240 Speaker 1: He joins us this morning because be the tops starting 345 00:16:37,240 --> 00:16:39,760 Speaker 1: out their season, what ac Milan is going to do, 346 00:16:39,800 --> 00:16:42,960 Speaker 1: and of course his Preston North End playing is Wigan 347 00:16:43,080 --> 00:16:47,840 Speaker 1: or Wegan. We played Wigan Athletic the Latics and drew 348 00:16:48,800 --> 00:16:52,680 Speaker 1: uninspiring performance. Nothing. Nothing. That's our soccer talk for today. 349 00:16:52,680 --> 00:16:55,040 Speaker 1: Just because there's so much going on. I want you 350 00:16:55,080 --> 00:16:59,000 Speaker 1: to talk John writing right now about the Phillips curve. 351 00:16:59,200 --> 00:17:02,880 Speaker 1: This ancient from another time and it has to do 352 00:17:03,080 --> 00:17:06,520 Speaker 1: with the time of beverage. The economist at l s E. 353 00:17:06,760 --> 00:17:10,160 Speaker 1: I want you to link in the Phillips curve myth 354 00:17:10,720 --> 00:17:14,119 Speaker 1: with the raging debate over the beverage curve in the 355 00:17:14,160 --> 00:17:19,000 Speaker 1: efficiency of our labor economy. Well, first of all, I 356 00:17:19,000 --> 00:17:22,760 Speaker 1: was born in the same year that Professor Phillips pend 357 00:17:22,880 --> 00:17:26,879 Speaker 1: his article on the Phillips curve, so that makes me 358 00:17:26,960 --> 00:17:32,400 Speaker 1: an ancient thing from another time as well. Um. And 359 00:17:32,680 --> 00:17:35,280 Speaker 1: that that curve was was really a description of the 360 00:17:35,400 --> 00:17:37,600 Speaker 1: behavior of the labor market over a period of a 361 00:17:37,680 --> 00:17:41,640 Speaker 1: hundred years or so, and it was hijacked um by 362 00:17:41,800 --> 00:17:45,800 Speaker 1: people like Paul Samuelson and solo in the US to 363 00:17:45,880 --> 00:17:51,920 Speaker 1: make it a theory of inflation. And Milton Friedman said, 364 00:17:52,600 --> 00:17:55,040 Speaker 1: it's it's not it's not going to be stable, and 365 00:17:55,080 --> 00:17:57,440 Speaker 1: he that was a very prescient article because what he 366 00:17:57,480 --> 00:18:02,080 Speaker 1: said is workers will find trip in the higher prices 367 00:18:02,080 --> 00:18:04,280 Speaker 1: eventually to the wage bargain, and they will add more 368 00:18:04,280 --> 00:18:06,560 Speaker 1: in the Phillips curve will breakdown. That's exactly what it 369 00:18:06,600 --> 00:18:09,560 Speaker 1: did in the nineties seventies. But now we're back in 370 00:18:09,600 --> 00:18:12,719 Speaker 1: an environment where for the last twenty years or so, 371 00:18:12,880 --> 00:18:16,400 Speaker 1: inflation was so low that nobody took it into account, 372 00:18:16,920 --> 00:18:20,800 Speaker 1: and so the Phillips curve re emerged. And now, um, 373 00:18:21,240 --> 00:18:26,240 Speaker 1: the question is how much unemployment do policymakers think they 374 00:18:26,240 --> 00:18:29,400 Speaker 1: are going to have to engineer? Can they engineer That's 375 00:18:29,400 --> 00:18:32,480 Speaker 1: the heart of the matter, John is, Can any central bank, 376 00:18:32,520 --> 00:18:35,960 Speaker 1: whether in the United Kingdom or the US, engineer a 377 00:18:36,119 --> 00:18:40,719 Speaker 1: labor economy. Well, here's the problem. They want to create 378 00:18:40,800 --> 00:18:43,800 Speaker 1: some slack and that Philip's curve thinking is very clear 379 00:18:43,960 --> 00:18:46,239 Speaker 1: at the FED right now. They want to create some 380 00:18:46,280 --> 00:18:49,440 Speaker 1: slack in the economy without causing a recession, which means 381 00:18:49,480 --> 00:18:52,840 Speaker 1: growth has to be between potential growth, which they thinks 382 00:18:52,880 --> 00:18:55,800 Speaker 1: around one eight percent one point nine percent per year, 383 00:18:56,200 --> 00:19:00,199 Speaker 1: and zero otherwise the economy is in recession. Now US 384 00:19:00,240 --> 00:19:02,200 Speaker 1: just clear up again, the economy is not in recession 385 00:19:02,880 --> 00:19:05,720 Speaker 1: at the present time. The economy created two points seven 386 00:19:05,720 --> 00:19:07,840 Speaker 1: million jobs we've got in the first half of this year. 387 00:19:07,840 --> 00:19:11,080 Speaker 1: We've got another job support on Friday. But as Pal said, 388 00:19:11,160 --> 00:19:14,000 Speaker 1: it's a very narrow path. And if the Fed is 389 00:19:14,000 --> 00:19:17,840 Speaker 1: going to make a mistake, given that it's let inflation 390 00:19:17,960 --> 00:19:21,680 Speaker 1: out for the first time in three decades, it's going 391 00:19:21,760 --> 00:19:24,920 Speaker 1: to make a mistake by raising rates too much, and 392 00:19:25,000 --> 00:19:30,600 Speaker 1: that inevitably is going to result at some point in recession. 393 00:19:30,640 --> 00:19:35,400 Speaker 1: Not imminently, but as the three month ten year curve flattens, 394 00:19:36,040 --> 00:19:39,000 Speaker 1: that recession signal starts to emerge when we when we 395 00:19:39,040 --> 00:19:42,400 Speaker 1: get close to zero a year out. So I think immerged, 396 00:19:42,520 --> 00:19:46,280 Speaker 1: you know, engineering a soft landing. And this latest debate, 397 00:19:46,320 --> 00:19:49,600 Speaker 1: the beverage curve, the relationship between vacancies and unemployment. We 398 00:19:49,640 --> 00:19:53,160 Speaker 1: get the Jolts data, the job openings data later today, 399 00:19:53,440 --> 00:19:56,640 Speaker 1: which gives us a new reading on job openings. There 400 00:19:56,640 --> 00:20:00,440 Speaker 1: are almost two jobs per unemployed person. This bait going 401 00:20:00,440 --> 00:20:03,680 Speaker 1: on right now. Can the Fed deflate the demand for 402 00:20:03,880 --> 00:20:07,720 Speaker 1: labor in the economy without pushing up unemployment a lot 403 00:20:07,920 --> 00:20:11,199 Speaker 1: because there's a lot of job openings. Uh. And you know, 404 00:20:11,240 --> 00:20:15,520 Speaker 1: there's quite a raging debate going on between Governor Waller 405 00:20:15,560 --> 00:20:18,560 Speaker 1: on the one hand and Larry Summers, on the other hand, 406 00:20:18,880 --> 00:20:23,080 Speaker 1: trading blows uh, while I gave a speech on Friday 407 00:20:23,200 --> 00:20:31,240 Speaker 1: and Summers published Engineering Forward Yeah, basically saying that Waller's 408 00:20:31,359 --> 00:20:35,280 Speaker 1: soft landing paper had errors after Chris Waller came out 409 00:20:35,520 --> 00:20:38,719 Speaker 1: and tried to slap down their previous piece. So basically 410 00:20:38,800 --> 00:20:41,240 Speaker 1: a tit for tat and academic journals. The other big 411 00:20:41,280 --> 00:20:43,920 Speaker 1: debate is how far the FED will have to go 412 00:20:44,400 --> 00:20:47,800 Speaker 1: to engineer some sort of softening in the labor market, 413 00:20:47,840 --> 00:20:49,840 Speaker 1: what it will take. And you have some people saying 414 00:20:49,840 --> 00:20:52,840 Speaker 1: we're close to the terminal rate, perhaps even FED share 415 00:20:52,920 --> 00:20:55,800 Speaker 1: J Powell hinting at that, and then you have the 416 00:20:55,840 --> 00:20:58,399 Speaker 1: likes of his olden posar over at Credit Suite saying, 417 00:20:58,760 --> 00:21:00,280 Speaker 1: more likely we have to get to I have to 418 00:21:00,320 --> 00:21:03,720 Speaker 1: six percent because of how entrenched some of these inflationary 419 00:21:03,760 --> 00:21:06,919 Speaker 1: aspects are. Where do you stand, well, Lisa, As you know, 420 00:21:07,200 --> 00:21:10,199 Speaker 1: all through last year, I was warning you that inflation 421 00:21:10,320 --> 00:21:12,400 Speaker 1: was going to be the problem, And when we discussed 422 00:21:12,400 --> 00:21:15,920 Speaker 1: the FED making a mistake, we discussed the FED doing 423 00:21:16,000 --> 00:21:21,200 Speaker 1: too little in one not too much in two. Now 424 00:21:21,240 --> 00:21:24,080 Speaker 1: what the FED has to do now is a consequence 425 00:21:24,160 --> 00:21:27,399 Speaker 1: of the mistake they made last year by continuing to ease, 426 00:21:27,480 --> 00:21:31,480 Speaker 1: continuing to buy assets all through last year as inflation 427 00:21:31,640 --> 00:21:36,320 Speaker 1: picked up. So I don't think Pal signaling the what 428 00:21:36,400 --> 00:21:38,200 Speaker 1: the market is reading right now, which is the FT's 429 00:21:38,240 --> 00:21:39,679 Speaker 1: not going to raise rates as much as this, and 430 00:21:39,720 --> 00:21:41,879 Speaker 1: he was signaling very much. The best guidance we can 431 00:21:41,920 --> 00:21:44,000 Speaker 1: give you, to the extent we can give you guidance, 432 00:21:44,800 --> 00:21:47,879 Speaker 1: is the forecast we gave you the so called SEPs 433 00:21:47,960 --> 00:21:50,880 Speaker 1: in in June, which was three point four percent at 434 00:21:50,880 --> 00:21:53,439 Speaker 1: the end of this year, three point eight percent at 435 00:21:53,440 --> 00:21:56,120 Speaker 1: the end of next year. Now we're two years, we're 436 00:21:56,200 --> 00:21:58,680 Speaker 1: almost talking about them. It's a long way away from 437 00:21:58,720 --> 00:22:01,920 Speaker 1: from that guidance. So from n where the market surprised 438 00:22:02,000 --> 00:22:05,600 Speaker 1: in an interest rate above inflation of about three quarters 439 00:22:05,600 --> 00:22:07,680 Speaker 1: of a point on average for the next ten years, 440 00:22:07,960 --> 00:22:11,359 Speaker 1: it's just about taken out that so called positive real 441 00:22:11,359 --> 00:22:14,320 Speaker 1: interest rate and that tightening in the economy and yet 442 00:22:14,359 --> 00:22:16,920 Speaker 1: not really factor back in inflation. And I think that's 443 00:22:16,960 --> 00:22:19,679 Speaker 1: too easy a choice. Either the Fed is going to 444 00:22:19,800 --> 00:22:22,880 Speaker 1: have to hike rates and get policy restrictive and that's 445 00:22:22,920 --> 00:22:25,520 Speaker 1: higher than the market is currently thing, or we are 446 00:22:25,560 --> 00:22:28,440 Speaker 1: going to have a more protracted inflation problem. And right now, 447 00:22:28,680 --> 00:22:31,119 Speaker 1: I don't think the markets shall lined up in a 448 00:22:31,160 --> 00:22:34,800 Speaker 1: sensible manner of having relatively low inflation break evens and 449 00:22:34,920 --> 00:22:38,560 Speaker 1: a relatively low terminal rate. Given the not only the US, 450 00:22:38,640 --> 00:22:42,560 Speaker 1: but the global scope of this inflation problem, John throw 451 00:22:42,560 --> 00:22:45,639 Speaker 1: into the mix what we're seeing right now with Nancy 452 00:22:45,640 --> 00:22:50,000 Speaker 1: Pelosi expected to land in Taiwan in about two hours. 453 00:22:50,040 --> 00:22:53,199 Speaker 1: This question of whether the safety bid is to go 454 00:22:53,400 --> 00:22:57,560 Speaker 1: into short term treasuries or even treasuries at all, if 455 00:22:57,600 --> 00:23:00,600 Speaker 1: they could potentially increase inflation, and if FED is still 456 00:23:00,640 --> 00:23:03,200 Speaker 1: going to try to fight with the market is assuming 457 00:23:03,320 --> 00:23:06,280 Speaker 1: in terms of a pivot. How do you see the 458 00:23:06,359 --> 00:23:09,040 Speaker 1: response going forward to this type of risk. Look, I 459 00:23:09,320 --> 00:23:12,520 Speaker 1: think the FED has made it clear that beating inflation 460 00:23:12,720 --> 00:23:16,560 Speaker 1: is job one and probably job too, and then other 461 00:23:16,680 --> 00:23:19,439 Speaker 1: things come after that. At the present time, and the 462 00:23:19,520 --> 00:23:21,680 Speaker 1: luxury that the FED has had in the past to 463 00:23:21,800 --> 00:23:26,639 Speaker 1: respond to geopolitical events like for example, breaxit um, and 464 00:23:26,680 --> 00:23:30,800 Speaker 1: to respond to market events, and to respond to the 465 00:23:30,880 --> 00:23:34,480 Speaker 1: unemployment rate and so on was because inflation was so low. 466 00:23:34,880 --> 00:23:37,880 Speaker 1: Now we have inflation that in CPI terms is nine 467 00:23:37,920 --> 00:23:40,600 Speaker 1: point one percent. While the July number will probably show 468 00:23:40,600 --> 00:23:42,960 Speaker 1: a bit of relief because of the decline in gas prices. 469 00:23:43,240 --> 00:23:45,679 Speaker 1: It's by no means to show it that we've even 470 00:23:45,760 --> 00:23:49,399 Speaker 1: seen the peak in inflation yet. John. What's so important 471 00:23:49,400 --> 00:23:52,119 Speaker 1: to John Farrow is the thing of University of Work 472 00:23:52,119 --> 00:23:56,320 Speaker 1: and Robert Skodolski. We've got people doing political economics like 473 00:23:56,480 --> 00:23:59,760 Speaker 1: Lord Skodolski, and at the same time we're talking about 474 00:24:00,119 --> 00:24:04,760 Speaker 1: engineering the economy. Is if there's any evidence we can 475 00:24:04,800 --> 00:24:08,520 Speaker 1: engineer an economy, I find that insane. And someone go 476 00:24:08,680 --> 00:24:11,600 Speaker 1: a step further. There's clearly some policy bus here, some 477 00:24:11,640 --> 00:24:15,000 Speaker 1: political bias which is shaping some of the analysis taking 478 00:24:15,000 --> 00:24:16,919 Speaker 1: place at the moment, John, which I think we all 479 00:24:16,960 --> 00:24:20,679 Speaker 1: find increasingly frustrating. The simple way to frame this is 480 00:24:20,720 --> 00:24:25,119 Speaker 1: soft landing versus hard landing. John, which Camper you went? Ultimately, 481 00:24:25,200 --> 00:24:27,080 Speaker 1: if you had to choose a sign right now, I 482 00:24:27,119 --> 00:24:30,359 Speaker 1: think ultimately it has to be a hard landing. The 483 00:24:30,359 --> 00:24:33,960 Speaker 1: the runway is just too short to carry on the 484 00:24:34,040 --> 00:24:37,800 Speaker 1: airplane analogy to to bring this down on a on 485 00:24:37,840 --> 00:24:41,520 Speaker 1: a soft landing, given how narrow the gap is between 486 00:24:41,680 --> 00:24:46,840 Speaker 1: a potential recession and UH and growth at the economy's 487 00:24:46,880 --> 00:24:52,200 Speaker 1: economic potential, and it's not that the FED tightening causes 488 00:24:52,240 --> 00:24:55,800 Speaker 1: the inflation as such. What it is is when the 489 00:24:55,880 --> 00:25:01,159 Speaker 1: public's expectations of inflation are built in sufficient gentle that 490 00:25:01,320 --> 00:25:04,560 Speaker 1: those expectations are inconsistent with the policy timing. Now, the 491 00:25:04,600 --> 00:25:07,639 Speaker 1: one good piece of news that the FED has is 492 00:25:07,640 --> 00:25:11,960 Speaker 1: that the tenure inflation expectations from US households from the 493 00:25:12,040 --> 00:25:15,000 Speaker 1: University of Michigan is at two point eight percent. Now, 494 00:25:15,000 --> 00:25:16,640 Speaker 1: we don't know how good to survey that is. It's 495 00:25:16,680 --> 00:25:19,240 Speaker 1: only five hundred people, and it was at three point 496 00:25:19,280 --> 00:25:21,920 Speaker 1: three percent in June. And I don't believe long term 497 00:25:21,960 --> 00:25:25,600 Speaker 1: expectations bounce around as much as they do. But that's 498 00:25:25,640 --> 00:25:29,880 Speaker 1: the key thing. If the public believe the inflation increase 499 00:25:30,040 --> 00:25:32,080 Speaker 1: is going to be transitory, then I think the debate 500 00:25:32,600 --> 00:25:34,240 Speaker 1: we should be framed between is it going to be 501 00:25:34,280 --> 00:25:38,359 Speaker 1: a mild recession when it eventually comes probably late. Is 502 00:25:38,359 --> 00:25:40,199 Speaker 1: it going to be a mild recession or is it 503 00:25:40,240 --> 00:25:42,880 Speaker 1: going to be a deeper recession. And that's the key thing. 504 00:25:42,920 --> 00:25:46,640 Speaker 1: We have to watch inflation expectations, because the more entrenched 505 00:25:46,640 --> 00:25:50,080 Speaker 1: inflation expectations are, the deeper the recession. Is just the 506 00:25:50,200 --> 00:25:53,640 Speaker 1: public beliefs about how the economy is going to unfold 507 00:25:53,760 --> 00:25:56,040 Speaker 1: and the Fed's intention of what it's going to do 508 00:25:56,080 --> 00:25:58,639 Speaker 1: about the inflation rate come into conflict. You know what 509 00:25:58,640 --> 00:26:01,320 Speaker 1: I'd love to do just listening to the umage survey 510 00:26:01,400 --> 00:26:04,320 Speaker 1: being conducted in real time and see what people say 511 00:26:04,400 --> 00:26:06,280 Speaker 1: on the phone calls Tom, can you imagine where do 512 00:26:06,320 --> 00:26:08,320 Speaker 1: you think inflation is going to be in five to 513 00:26:08,400 --> 00:26:12,280 Speaker 1: ten years? And how people respond? Have they ever called you, 514 00:26:12,400 --> 00:26:14,560 Speaker 1: John Ferrell, They've never They've never called me. They've never 515 00:26:14,640 --> 00:26:18,720 Speaker 1: called Lesa about every three months at Lesa's anchoring that number? 516 00:26:18,800 --> 00:26:22,000 Speaker 1: Much much? Oh yeah? And there go to no, I've 517 00:26:22,040 --> 00:26:24,240 Speaker 1: never been. I've never been surveying. How much time do 518 00:26:24,280 --> 00:26:28,080 Speaker 1: we have with the writing command seconds Premier League? I 519 00:26:28,119 --> 00:26:30,119 Speaker 1: mean John who looks good at approved John Writing, who 520 00:26:30,160 --> 00:26:34,200 Speaker 1: looks good in the Premier League community shield? Liverpool three 521 00:26:34,520 --> 00:26:38,240 Speaker 1: Matchester City once. So I think those of us Liverpool 522 00:26:38,240 --> 00:26:40,480 Speaker 1: fans are thought, well, it's going to be probably gonna 523 00:26:40,520 --> 00:26:43,600 Speaker 1: be City season with the with the upgrade the I 524 00:26:43,600 --> 00:26:45,440 Speaker 1: think Liverpool is going to give him a real run 525 00:26:45,480 --> 00:26:47,480 Speaker 1: for the money again. Down to the last weekend. There 526 00:26:47,520 --> 00:26:50,240 Speaker 1: we go. We begin this season Premier League coverage, team coverage, 527 00:26:50,240 --> 00:26:54,000 Speaker 1: Bloomberg Surveillance with John Rode his season kicking off this weekend. 528 00:26:54,080 --> 00:26:59,280 Speaker 1: John Riding of Bring Capital thank you sir. This is 529 00:26:59,320 --> 00:27:03,280 Speaker 1: the Bloomberg's Surveillance Podcast. Thanks for listening. Join us live 530 00:27:03,480 --> 00:27:07,240 Speaker 1: weekdays from seven to ten am Eastern on Bloomberg Radio 531 00:27:07,440 --> 00:27:11,040 Speaker 1: and on Bloomberg Television each day from six to nine 532 00:27:11,119 --> 00:27:15,520 Speaker 1: am for insight from the best in economics, finance, investment, 533 00:27:15,680 --> 00:27:20,679 Speaker 1: and international relations. And subscribe to the Surveillance podcast on 534 00:27:20,800 --> 00:27:24,600 Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course on 535 00:27:24,720 --> 00:27:28,840 Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg