WEBVTT - Surveillance: Fed Cycle with Mike Wilson (Podcast) 0:00:05.120 --> 0:00:09.200 Welcome to the Bloombergs Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownwitz Jailee. We bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.799 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com, 0:00:23.920 --> 0:00:31.000 and of course on the Bloomberg Terminal. We've got to 0:00:31.000 --> 0:00:32.919 talk about the ranny we've seen joining us now it's 0:00:32.960 --> 0:00:35.040 Mike Wilson. I'm pleased to say, the chief US equity 0:00:35.080 --> 0:00:38.400 strategist over at Morgan Stanley. Mike covid a weekend and 0:00:38.479 --> 0:00:40.520 Tom and I talked about it. You use that word 0:00:40.600 --> 0:00:46.920 dream this equity market streaming. Why is that dream misplaced? Well, 0:00:46.960 --> 0:00:50.120 we don't know exactly. If it's dream, it is always dreaming. Mean, 0:00:50.159 --> 0:00:52.760 the equity market is tends to be forward thinking, like 0:00:52.840 --> 0:00:55.400 most markets, but particularly equities, and I think what you 0:00:55.440 --> 0:00:58.360 know are The phrase we used was really just trying 0:00:58.400 --> 0:01:01.120 to imply, Look, we had this wind though of opportunity 0:01:01.280 --> 0:01:04.679 for equity investors where rates are coming down, and you 0:01:04.720 --> 0:01:06.880 can interpret that a couple of different ways. You can 0:01:06.920 --> 0:01:09.240 interpret it as if the FED is close to being 0:01:09.240 --> 0:01:12.840 done and they're gonna be able to pose or pivot 0:01:12.959 --> 0:01:16.800 before the next recession arrives, and that window is always 0:01:16.840 --> 0:01:19.720 positive for stocks. So the equity market is trying to 0:01:19.720 --> 0:01:21.560 get in front of that pivot. I think it's premature, 0:01:22.240 --> 0:01:25.400 to say the least. I also believe that by the 0:01:25.440 --> 0:01:28.080 time they do pivot or pause, probably something bad has 0:01:28.120 --> 0:01:31.520 happened on the growth side. And that's really our core views. 0:01:31.560 --> 0:01:34.160 So look, we're we're always open minded. We don't get 0:01:34.160 --> 0:01:36.959 too dogmatic with these These rallies can happen at any time. 0:01:37.240 --> 0:01:38.720 But then we go back to our framework, and our 0:01:38.720 --> 0:01:42.399 framework suggested risk we work now is pretty poor, right, 0:01:42.400 --> 0:01:44.679 given our view on growth and given where rates are 0:01:44.720 --> 0:01:46.959 at this point. Mike, the new new what you've been 0:01:47.040 --> 0:01:50.240 leading on is a divide between service sector kind of 0:01:50.360 --> 0:01:54.280 equities and goods kind of equities. How sharp is a 0:01:54.360 --> 0:01:59.600 divide between Caterpillar and Apple Computer? Well, I mean, I think, 0:01:59.720 --> 0:02:01.440 I mean, you make a good point on the services 0:02:01.520 --> 0:02:03.200 versus goods, but you also make a point that there 0:02:03.240 --> 0:02:06.080 are different types of goods, uh, that some are more 0:02:06.080 --> 0:02:09.000 expendable than others. And you know, this is exactly why 0:02:09.040 --> 0:02:13.680 we've skewed ourselves more defensively, meaning we we like companies 0:02:13.680 --> 0:02:16.360 that have things that you must buy or you know, 0:02:16.440 --> 0:02:20.480 not not luxuries but necessities, things you need for everyday life. 0:02:21.040 --> 0:02:22.760 And and that's those are the kinds of stocks have 0:02:22.840 --> 0:02:25.359 been doing well because why because you know, the volatility 0:02:25.360 --> 0:02:27.639 in their growth is not it's not that volatile, and 0:02:27.680 --> 0:02:29.919 they can deliver on the earnings during this period when 0:02:30.120 --> 0:02:32.200 uncertainty is going to be higher and we're gonna get 0:02:32.240 --> 0:02:34.000 a payback in demand for all these things that we 0:02:34.120 --> 0:02:37.519 over consumed in the last twelve the twenty four months. 0:02:37.520 --> 0:02:39.080 And I think it's pretty obvious that that's just playing 0:02:39.080 --> 0:02:41.880 out now. Mike, You've gotten the playbooks so right this year, 0:02:42.080 --> 0:02:45.400 and you deserve a real congratulations for pin pointing to 0:02:45.440 --> 0:02:47.600 where we are in the cycle and how we see 0:02:47.800 --> 0:02:51.280 rallies and then retracements. Where do you see the trade 0:02:51.320 --> 0:02:53.360 what it comes to energy at this point, given that 0:02:53.400 --> 0:02:55.040 it was one of the big calls in the first 0:02:55.040 --> 0:02:58.079 half of the year, the inflation protection at a time 0:02:58.120 --> 0:03:03.119 where now we're looking down growth fear is really reigning supreme. Well, 0:03:03.639 --> 0:03:05.799 those are nice comments, but energies in one area we 0:03:05.919 --> 0:03:08.160 completely botched. So I mean, I'm not sure I'm the 0:03:08.160 --> 0:03:10.520 guy that asked, but look I mean energy, we were 0:03:10.560 --> 0:03:13.800 not overweight enough. We own a few stocks in our portfolio, 0:03:13.880 --> 0:03:17.480 and we were basically neutral. And I think that energy 0:03:17.520 --> 0:03:21.200 now is vulnerable from an equity standpoint if and this 0:03:21.280 --> 0:03:23.040 is a big if, if you take the view that 0:03:23.080 --> 0:03:26.320 a recession is sometime in the next twelve to twelve months. 0:03:26.360 --> 0:03:28.520 And it's just been our experience. And the thing I'm 0:03:28.520 --> 0:03:32.400 most worried about, Lisa is that you know the commodity complex, uh, 0:03:32.440 --> 0:03:35.000 technically and what it's telling us it's not good. I mean, 0:03:35.040 --> 0:03:37.720 we're seeing demand destruction across the board, some of that, 0:03:37.760 --> 0:03:39.240 you know, when some of the base metals and things 0:03:39.240 --> 0:03:41.360 like that's dude to zero code policy in China, which 0:03:41.360 --> 0:03:44.280 could reverse in the fall potentially. But the charts don't lie, 0:03:44.680 --> 0:03:46.640 and they're telling me that we've seen the peak in 0:03:46.680 --> 0:03:49.040 commodities and if we're gonna have a recession, then they're 0:03:49.040 --> 0:03:51.360 probably going lower. So I would we're continuing to be 0:03:51.360 --> 0:03:53.680 neutral and energy, and quite frankly, I think people are 0:03:53.680 --> 0:03:55.680 probably a little bit too long at this point. Mike. 0:03:55.800 --> 0:03:58.080 How much do you take the pushback that you I'm 0:03:58.120 --> 0:04:00.800 sure you here, which is the earnings have been than expected. 0:04:01.080 --> 0:04:04.560 You see ongoing resilience. Yeah, there are potholes here and there, 0:04:04.600 --> 0:04:07.840 but for the most part, companies are to use Tom's phrase, 0:04:07.880 --> 0:04:11.440 adjusting and adapting and moving forward. No, I mean the 0:04:11.480 --> 0:04:15.680 company and US companies are really good at managing earnings okay, 0:04:15.720 --> 0:04:18.960 but they're not good at doing is forecasting earnings over 0:04:19.279 --> 0:04:22.280 the course of twelve months plus. That's been our experience, 0:04:22.279 --> 0:04:25.760 particularly at major turning points. And so you're right, they've 0:04:25.760 --> 0:04:27.440 done a good job of managing the quarters. And so 0:04:27.480 --> 0:04:28.840 what ends up happening is that you know, the bar 0:04:28.839 --> 0:04:30.800 gets lower, they jump over the lower bar if I 0:04:30.880 --> 0:04:33.440 say it's better than expected, and then you know, it's 0:04:33.480 --> 0:04:35.600 kind of a drip, drip, drip lower. You know, we 0:04:35.600 --> 0:04:37.600 we do a pretty good job of forecasting twelve twenty 0:04:37.640 --> 0:04:39.760 four months out of macro, not at the micro level 0:04:40.000 --> 0:04:42.640 so much, but it informs us. And what we're seeing 0:04:43.279 --> 0:04:45.120 is that it's this drip drip drip is going to 0:04:45.160 --> 0:04:47.880 continue for another two or three quarters, and they'll probably 0:04:47.920 --> 0:04:49.760 be more of a drop as opposed to a drip 0:04:49.800 --> 0:04:52.640 if it's a recession. So like I think the another 0:04:52.640 --> 0:04:55.440 words I'm saying is I think that don't get mesmerized 0:04:55.480 --> 0:04:57.680 by the very near term data on the on the 0:04:57.680 --> 0:04:59.960 earnings because you know these number these numbers are man 0:05:00.000 --> 0:05:02.400 it Okay, that's that's why they look may be better 0:05:02.440 --> 0:05:05.520 relative to the managed numbers. And when you're looking out 0:05:05.520 --> 0:05:07.520 twelve months, you just have to take your own view 0:05:07.680 --> 0:05:11.600 at these turning points. You can't rely necessarily on kind 0:05:11.600 --> 0:05:13.800 of what companies are saying or what the community is saying. 0:05:13.800 --> 0:05:15.480 You need to take a view. And our view is 0:05:15.600 --> 0:05:17.840 very clear the orange revisions are going to be much 0:05:17.839 --> 0:05:19.360 more negative of the next two to three quarters. And 0:05:19.360 --> 0:05:21.000 when we've seen for the last two years, and Mica 0:05:21.040 --> 0:05:22.440 got to squeeze this in, what do you say to 0:05:22.520 --> 0:05:25.560 people getting mesmerized by the bond market move we've seen 0:05:25.920 --> 0:05:28.680 since the middle of June. Well, that's one thing we've 0:05:28.680 --> 0:05:31.200 gotten right. We've been very bullish on bonds, as you know, John, 0:05:31.640 --> 0:05:34.960 thinking that you know, the markets might have been infatuated 0:05:35.040 --> 0:05:38.040 with inflation. Of course, when it became obvious and the 0:05:38.080 --> 0:05:40.120 FED and that was really the story in Q one 0:05:40.240 --> 0:05:42.520 and up until about May June. And at that point, 0:05:42.560 --> 0:05:44.200 we you know, we think that was the time to 0:05:44.200 --> 0:05:46.839 pivot away from that and start thinking about what's growth 0:05:46.839 --> 0:05:49.279 gonna look like. So we think the bond rally makes 0:05:49.320 --> 0:05:52.000 perfect sense in the context of our fire and ice narrative. 0:05:52.520 --> 0:05:55.200 We're staying long the long bonds, and uh we think 0:05:55.240 --> 0:05:58.360 it's great hedge against the nequity portfolio. Right now, Mica 0:05:58.440 --> 0:06:00.520 also to get you on to show this small thank you, 0:06:00.560 --> 0:06:09.120 Sir Mike Wilson, that of Mark and Stanley. As Mandy's 0:06:09.440 --> 0:06:12.680 chief equity derivative strategist at Credit Sway Securities, Mandy joins 0:06:12.720 --> 0:06:15.200 us right now here in New York. Mandy, let's start there. 0:06:15.240 --> 0:06:19.160 How do you play a peak in real yields? Sure? 0:06:19.200 --> 0:06:21.080 I get this question a lot um, you know, and 0:06:21.279 --> 0:06:23.960 the two the most traditional way people look at it 0:06:24.000 --> 0:06:26.240 is either do you go a long tech or do 0:06:26.240 --> 0:06:28.960 you go along gold? Because those two have historically had 0:06:29.000 --> 0:06:32.160 the most inverse relationship with real yields. And in my view, 0:06:32.400 --> 0:06:34.919 I think going along gold is a much better play 0:06:35.320 --> 0:06:37.680 um for a peak in real yield rather than Tech. 0:06:37.960 --> 0:06:39.880 And the and the key here is, you know, real 0:06:40.000 --> 0:06:42.679 yield could be going down either because of a dovish 0:06:42.680 --> 0:06:45.800 FED or because of rising recession risk, right and and 0:06:45.839 --> 0:06:48.760 for tech, if it's rising recession risk, that doesn't bode 0:06:48.800 --> 0:06:51.240 well for tech as a cyclical sector. So for us 0:06:52.760 --> 0:06:55.279 looking at upside and gold, and you have seen in 0:06:55.320 --> 0:06:59.160 the derivatives market more to mean for upside in g 0:06:59.360 --> 0:07:02.240 LD option for example, to play that up peak in 0:07:02.320 --> 0:07:05.040 real yields. Lisen Saunders was with us twenty minutes ago 0:07:05.200 --> 0:07:09.840 just put out on Twitter the Dallas trimmed inflation statistics, 0:07:09.840 --> 0:07:14.000 something Chairman Powell watches carefully. The first derivative of this 0:07:14.080 --> 0:07:17.400 over one month is stunning three point zero three point 0:07:17.440 --> 0:07:20.920 one and then an explosion in the Dallas trim from 0:07:20.920 --> 0:07:24.160 five point two on to a ginormous six point nine. 0:07:24.480 --> 0:07:29.600 How do you fold inflation into a conventional derivative strategy 0:07:29.640 --> 0:07:32.120 and equities? Sure, so I think a couple of ways 0:07:32.120 --> 0:07:33.800 you can look at it, so you can play it 0:07:34.360 --> 0:07:37.040 through uh you know, um bond et s right. So 0:07:37.120 --> 0:07:39.520 looking at for example, we've been recommending people look at 0:07:39.600 --> 0:07:43.120 upside place in TLT, which is longer dated bonds. And 0:07:43.160 --> 0:07:45.360 the view here is that the Fed actually will remain 0:07:45.480 --> 0:07:48.920 aggressive in trying to curb inflation and as a result 0:07:49.040 --> 0:07:52.000 increase recession risk. And that means actually the back end 0:07:52.000 --> 0:07:54.640 of the yold curve goes down because that's much more 0:07:54.640 --> 0:07:57.600 a function of inflation and growth. You can look at 0:07:57.640 --> 0:08:01.160 it through hybrid options or equity options that are contingent 0:08:01.160 --> 0:08:02.880 on rates. So there are different ways and you can 0:08:02.920 --> 0:08:05.520 play it. But I would say, you know, in my view, um, 0:08:05.560 --> 0:08:07.920 the market has it wrong that the feed is gonna pivot. 0:08:07.960 --> 0:08:11.520 I don't think inflation is going to come in that quickly. Um. 0:08:11.560 --> 0:08:13.880 You know, Powell has said that he needs clear and 0:08:13.920 --> 0:08:16.600 convincing evidence that inflation is falling back down to the 0:08:16.600 --> 0:08:18.680 two percent target. I don't think that we're going to 0:08:18.720 --> 0:08:21.560 get that anytime soon. Mandy, how much conviction just to 0:08:21.640 --> 0:08:24.320 sort of zoom out here, how much conviction it has 0:08:24.360 --> 0:08:27.480 this rally had behind it from a derivative's perspective, How 0:08:27.560 --> 0:08:30.960 much have people closed out their bearish bets on the 0:08:31.080 --> 0:08:34.359 US economy, on the U S stock market in particular, 0:08:34.640 --> 0:08:38.040 as the market rally the most in November. Well, first 0:08:38.040 --> 0:08:39.960 of all, what bearish bets right? So I would say 0:08:40.000 --> 0:08:43.839 one of the defining characteristics of this sell off on 0:08:43.920 --> 0:08:45.640 the first half of the year is that we've seen 0:08:45.720 --> 0:08:48.520 very very little hedging in the derivatives market, and that 0:08:48.559 --> 0:08:52.000 contributes to, you know, the relatively lower levels of VIX 0:08:52.160 --> 0:08:55.319 v VIX, all the measures that we track and options 0:08:55.400 --> 0:08:58.200 and part of that is because we've seen already very 0:08:58.240 --> 0:09:02.199 significant deleveraging d risking in terms of underlying positions of 0:09:02.320 --> 0:09:06.280 people selling at US stocks going into cash. Now over 0:09:06.280 --> 0:09:08.400 the past week we have seen some pick up of 0:09:08.520 --> 0:09:12.360 upside call buying, but certainly not significant enough. So I 0:09:12.400 --> 0:09:14.840 don't think this is a high conviction rally of anything. 0:09:14.880 --> 0:09:17.040 I think this is much more a bearer market rally. 0:09:17.120 --> 0:09:19.040 And when you face the kind of headline risk that 0:09:19.080 --> 0:09:21.920 we face today, this event that could take place a 0:09:21.960 --> 0:09:24.240 little bit later this morning speak below sea landing in 0:09:24.280 --> 0:09:27.000 Taiwan and the complete unknown as to how the Chinese 0:09:27.040 --> 0:09:29.000 will respond to it. What do you say to clients 0:09:29.000 --> 0:09:32.440 when they killed you about how they should manage this situation? Sure, 0:09:32.640 --> 0:09:34.960 so on the topic of China, clearly a lot of 0:09:34.960 --> 0:09:37.600 headline risk in the near term, but actually the much 0:09:37.720 --> 0:09:40.400 bigger risk, and what I've been emphasizing over the past 0:09:40.400 --> 0:09:43.000 few months um and in terms of the outlook for China, 0:09:43.120 --> 0:09:46.640 outlook for global economy is China's zero COVID policy, and 0:09:46.679 --> 0:09:49.600 that's going to have a much bigger economic impact. It's 0:09:49.600 --> 0:09:52.480 gonna have a much bigger market impact than whatever happens, 0:09:52.480 --> 0:09:54.440 you know, in the next twenty four hours on the 0:09:54.520 --> 0:09:56.959 geo political front. And the key here is that you know, 0:09:56.960 --> 0:10:00.400 if you talk to investors, most people still expect China 0:10:00.480 --> 0:10:03.600 to pivot from the zero COVID policy because of the 0:10:03.679 --> 0:10:06.440 economic cost. And my view there is, if you listen 0:10:06.520 --> 0:10:08.720 to she, if you listen to the top Chinese leadership, 0:10:09.040 --> 0:10:12.640 they're very ideologically committed to zero COVID. I do not 0:10:12.840 --> 0:10:15.400 think in a politically sensitive year such as this year 0:10:15.440 --> 0:10:19.520 for China, they're going to abandon zero COVID anytime soon. Um. 0:10:19.520 --> 0:10:21.640 And I think that's just gonna mean a bigger demand 0:10:21.679 --> 0:10:25.120 shock for global growth, a bigger demand shock for commodities. 0:10:25.360 --> 0:10:26.800 And I think that, you know, that's one of the 0:10:26.800 --> 0:10:30.560 reasons why we've been pretty barished on commodities as of late. 0:10:31.400 --> 0:10:39.840 Thank you, as O Wise from Credit Swasi. Halene Becker 0:10:39.920 --> 0:10:43.320 knows about jet Blue. She put a reaffirmed outperform on 0:10:43.440 --> 0:10:47.240 jet Blue yesterday. She is at Cowen and she's as 0:10:47.280 --> 0:10:49.240 of this morning going to have the good counsel of 0:10:49.280 --> 0:10:51.760 Mark McCormick. As t D says, they will take out 0:10:52.200 --> 0:10:54.520 Halline Becker's cow and that will be a good match 0:10:54.559 --> 0:10:57.600 Mark McCormick and a Laine Becker and Mr McCormick joins 0:10:57.640 --> 0:11:01.680 US now global head of FX Strategy TV Securities. Let's 0:11:01.679 --> 0:11:04.000 start with square one mark, what's the dollar going to 0:11:04.080 --> 0:11:06.840 do in the next year. I think in the next 0:11:06.920 --> 0:11:09.400 year where we all will talk about the peak dollar story. 0:11:09.520 --> 0:11:11.360 That's really not where we're at right now in the 0:11:11.400 --> 0:11:13.320 next couple of months. But if we look where we 0:11:13.360 --> 0:11:16.080 are in extrapolate pass this year, it does look like 0:11:16.120 --> 0:11:17.920 where we have the conditions of the peak dollar, which 0:11:18.000 --> 0:11:20.600 is Feds cutting rates and global economy can be recovering. 0:11:20.640 --> 0:11:23.280 We know the euro Zone is is slipping into a recession, 0:11:23.320 --> 0:11:25.640 but all of those factors should likely turn by next year. 0:11:25.679 --> 0:11:28.600 So I think that is the big forecasting stories, the 0:11:28.640 --> 0:11:30.520 turning of the dollar in the next year. There a 0:11:30.679 --> 0:11:36.160 risk adjusted basis, including geopolitical risk adjusted, which is the 0:11:36.200 --> 0:11:39.400 currency flat on its back where the greatest week dollar 0:11:39.480 --> 0:11:43.960 opportunity is. It's still again, we've talked about it a lot. Really, yeah, 0:11:44.040 --> 0:11:47.160 it's it's the Yeah. An evaluation perspective, if you think 0:11:47.200 --> 0:11:49.520 about why the dollar could peak, if if the feed 0:11:49.640 --> 0:11:51.400 is cutting rates next year, and if you think about 0:11:51.400 --> 0:11:53.599 and talk about the yield curve of the U S 0:11:53.640 --> 0:11:55.360 yield curve is inverted now, So if we if we 0:11:55.360 --> 0:11:57.240 think about the slowing conditions of the US and we 0:11:57.280 --> 0:11:59.760 think about how much yen has moved from fair value, 0:12:00.360 --> 0:12:01.960 fair value for the end is somewhere in the in 0:12:02.160 --> 0:12:04.320 one ten, one fifteen. So if we think about the 0:12:04.360 --> 0:12:06.920 reversal of the dollar, the d X, Y the euro 0:12:06.960 --> 0:12:08.960 still has a lot of cyclical problems to deal with, 0:12:09.080 --> 0:12:11.520 but you know, the big driver of what's pushed the 0:12:11.640 --> 0:12:14.800 end weaker, it's been global rates moving higher and the 0:12:14.800 --> 0:12:17.480 oil in the terms of trade shock and if you've 0:12:17.480 --> 0:12:20.120 already mentioned on the oil side, like we're expecting oil 0:12:20.120 --> 0:12:22.400 prices to be lower next year as well. So the 0:12:22.440 --> 0:12:25.760 combination of those factors peak higher rates and essentially a 0:12:25.840 --> 0:12:27.839 peak in the terms of trade cycle, which has really 0:12:27.880 --> 0:12:30.720 been challenging for Asian currencies for the last six months, 0:12:31.080 --> 0:12:34.120 those reversals would help us see dollar again move back 0:12:34.240 --> 0:12:37.480 closer towards fair value rather than you know, trading at 0:12:37.480 --> 0:12:39.800 the massive preview we see it now is that regardless 0:12:39.800 --> 0:12:42.400 of where risk sentiment is any given time mark, is 0:12:42.440 --> 0:12:44.280 this a risk off trade that now works? So is 0:12:44.320 --> 0:12:46.000 it just more broadly a tried that's gonna works through 0:12:46.000 --> 0:12:47.440 the end of the year because of the dynamics that 0:12:47.480 --> 0:12:51.600 you described, Well, the risk off helps, and I think 0:12:51.600 --> 0:12:54.320 the risk off helps because it's pushing yields lower, and 0:12:54.360 --> 0:12:56.959 I think that's it's an important combination in what we're 0:12:56.960 --> 0:12:59.920 starting to see is the FED had articulated a bit 0:13:00.000 --> 0:13:02.160 of a focus on growth. We know that they're not 0:13:02.240 --> 0:13:04.200 there yet, and it's too early to trade this as 0:13:04.240 --> 0:13:06.560 a durable theme. Um I still I still think the 0:13:06.559 --> 0:13:08.520 near term we gotta be buying the dollar against most 0:13:08.559 --> 0:13:11.520 major currencies, even the Euro and European currencies. But if 0:13:11.559 --> 0:13:13.600 we are talking about the next six months to a year, 0:13:13.960 --> 0:13:17.080 the conditions are changing where u S data is deteriorating, 0:13:17.240 --> 0:13:19.520 and again in a backdrop, it doesn't have to be 0:13:19.640 --> 0:13:22.440 risk off, but we're not going to see this persistent 0:13:23.080 --> 0:13:25.640 deterioration in terms of trade. Where oil prices are in 0:13:25.640 --> 0:13:27.520 a hundred and a hundred twenty dollars in barrel, we 0:13:27.520 --> 0:13:30.120 are talking about oil below a hundred next year. That 0:13:30.160 --> 0:13:32.439 will be very positive for the Japanese trade balance, which 0:13:32.440 --> 0:13:35.320 would also be good for the European trade balance as well. So, Mark, 0:13:35.400 --> 0:13:38.480 let's say that the FED doesn't pivot. Let's say that 0:13:38.520 --> 0:13:41.000 the FED does continue to raise rates, and that you 0:13:41.040 --> 0:13:43.640 start to see, uh, some concern about having to go 0:13:43.760 --> 0:13:47.560 further and uh and perhaps faster than people are expecting. 0:13:47.600 --> 0:13:49.640 And I think about Zoltan pose are over at Credit 0:13:49.679 --> 0:13:52.160 Squeeze talking about a five to six percent FED funds 0:13:52.200 --> 0:13:55.480 rate eventually in order to get inflation down. Does that 0:13:55.559 --> 0:13:58.200 eradicate the idea of peak dollar and you start to 0:13:58.240 --> 0:14:03.120 forecast a much stronger dollar to come. Absolutely, we are 0:14:03.200 --> 0:14:05.960 not playing, you know, with our baseline as a five 0:14:06.040 --> 0:14:08.520 six percent terminal rate. So right now you can even 0:14:08.520 --> 0:14:10.400 see we're we're a bit more hawkish and where the 0:14:10.440 --> 0:14:13.000 markets currently price, which is why we like the dollar. Now. 0:14:13.360 --> 0:14:15.679 If we're talking about a five six percent terminal rate 0:14:15.720 --> 0:14:18.040 next year, then absolutely we talked about risk off, we 0:14:18.040 --> 0:14:21.080 talk about a global recession. Uh, this reinforces where we've 0:14:21.120 --> 0:14:23.040 been the last couple of months, which is a global 0:14:23.080 --> 0:14:25.760 demand shock. Plus the FED offering the dollar is like 0:14:25.840 --> 0:14:28.640 the world's key safe haven. If you think about three 0:14:28.640 --> 0:14:31.120 factors that have like we're assets that have done quite 0:14:31.120 --> 0:14:34.000 well in the last three months, it's energy prices, Chinese equities, 0:14:34.000 --> 0:14:36.160 and the dollar. Like that's really all there's been. So 0:14:36.400 --> 0:14:40.080 the dollars offering the properties of relatively higher yield and 0:14:40.200 --> 0:14:43.840 a decent you know, relative beta to a declining global economy. 0:14:43.880 --> 0:14:46.680 So if we're talking about a five six uh FED 0:14:46.800 --> 0:14:50.760 terminal rate, then the peak dollar story will not persist. Mark, 0:14:50.800 --> 0:14:54.360 what you has conviction trade? Right now? I still think 0:14:54.400 --> 0:14:56.560 it's the it's the end crosses. I know we've moved 0:14:56.600 --> 0:14:58.360 a lot in the short term, but as you mentioned, 0:14:58.400 --> 0:15:00.440 I think some of the European crosses look honorable. If 0:15:00.440 --> 0:15:02.640 we're talking about just this week, I think Sterling, we've 0:15:02.640 --> 0:15:04.720 got the Bank of England sterling in downside. I think 0:15:04.720 --> 0:15:08.360 it's quite attractive. Euro Yen down downside is quite attractive 0:15:08.400 --> 0:15:11.400 as well. We'll give us some numbers on this. My 0:15:11.520 --> 0:15:14.840 head spinning, Mark, give us some yen you know, John, 0:15:14.920 --> 0:15:18.600 take notes please, I'm I don't I lost my surveillance pencil. 0:15:19.160 --> 0:15:22.240 Give me a yen number like short yen. Now as 0:15:22.320 --> 0:15:25.440 to what so, I'd say right now, if we if 0:15:25.520 --> 0:15:27.760 this week in general we are expecting better the U 0:15:27.800 --> 0:15:29.480 S data, so I think we get a dollar again 0:15:29.520 --> 0:15:32.080 reversal up to about say one thirty three, there is 0:15:32.080 --> 0:15:33.880 a good fade point. So again, if we could see 0:15:33.920 --> 0:15:37.120 another half percent move higher in euro yen um again, 0:15:37.120 --> 0:15:38.880 I think we're going through one thirty as well, so 0:15:38.920 --> 0:15:40.560 I think that would be a good short term set up. 0:15:40.640 --> 0:15:42.720 And then a year from now, are you to one twenty, 0:15:42.720 --> 0:15:46.240 which is students two standard deviations out or canyend strengthen 0:15:46.280 --> 0:15:49.840 that to a one fifteen. We still have Yen kind 0:15:49.840 --> 0:15:52.880 of coming in around one twenty is but again in 0:15:52.920 --> 0:15:55.040 the backdrop that we we had discussed where we do 0:15:55.120 --> 0:15:56.960 see the terminal right probably three and a half to 0:15:57.040 --> 0:16:00.000 four rather than five to six. Uh, that environment we've 0:16:00.000 --> 0:16:03.120 white bullish for the end, particularly for oil prices and 0:16:03.200 --> 0:16:05.760 the terms of trade shock, which would yeah, that would 0:16:05.760 --> 0:16:08.840 start to reverse. John, does this work for my four 0:16:08.880 --> 0:16:11.080 oh one k? Mark can relief to you that foreign 0:16:11.120 --> 0:16:15.880 exchange is no longer boring. It would be great if 0:16:15.880 --> 0:16:18.400 the regime didn't change every week. But yeah, it's got 0:16:18.400 --> 0:16:21.840 a lot of in terms of how you people care 0:16:21.880 --> 0:16:25.000 about effects. I Mark gonna catch out Matt mccomack, it's 0:16:25.000 --> 0:16:31.640 a d We've got a lineup of things to talk 0:16:31.680 --> 0:16:34.920 about with a good John Writing, Chief Economic Adviser, Bring capital. 0:16:34.960 --> 0:16:37.240 He joins us this morning because be the tops starting 0:16:37.240 --> 0:16:39.760 out their season, what ac Milan is going to do, 0:16:39.800 --> 0:16:42.960 and of course his Preston North End playing is Wigan 0:16:43.080 --> 0:16:47.840 or Wegan. We played Wigan Athletic the Latics and drew 0:16:48.800 --> 0:16:52.680 uninspiring performance. Nothing. Nothing. That's our soccer talk for today. 0:16:52.680 --> 0:16:55.040 Just because there's so much going on. I want you 0:16:55.080 --> 0:16:59.000 to talk John writing right now about the Phillips curve. 0:16:59.200 --> 0:17:02.880 This ancient from another time and it has to do 0:17:03.080 --> 0:17:06.520 with the time of beverage. The economist at l s E. 0:17:06.760 --> 0:17:10.160 I want you to link in the Phillips curve myth 0:17:10.720 --> 0:17:14.119 with the raging debate over the beverage curve in the 0:17:14.160 --> 0:17:19.000 efficiency of our labor economy. Well, first of all, I 0:17:19.000 --> 0:17:22.760 was born in the same year that Professor Phillips pend 0:17:22.880 --> 0:17:26.879 his article on the Phillips curve, so that makes me 0:17:26.960 --> 0:17:32.400 an ancient thing from another time as well. Um. And 0:17:32.680 --> 0:17:35.280 that that curve was was really a description of the 0:17:35.400 --> 0:17:37.600 behavior of the labor market over a period of a 0:17:37.680 --> 0:17:41.640 hundred years or so, and it was hijacked um by 0:17:41.800 --> 0:17:45.800 people like Paul Samuelson and solo in the US to 0:17:45.880 --> 0:17:51.920 make it a theory of inflation. And Milton Friedman said, 0:17:52.600 --> 0:17:55.040 it's it's not it's not going to be stable, and 0:17:55.080 --> 0:17:57.440 he that was a very prescient article because what he 0:17:57.480 --> 0:18:02.080 said is workers will find trip in the higher prices 0:18:02.080 --> 0:18:04.280 eventually to the wage bargain, and they will add more 0:18:04.280 --> 0:18:06.560 in the Phillips curve will breakdown. That's exactly what it 0:18:06.600 --> 0:18:09.560 did in the nineties seventies. But now we're back in 0:18:09.600 --> 0:18:12.719 an environment where for the last twenty years or so, 0:18:12.880 --> 0:18:16.400 inflation was so low that nobody took it into account, 0:18:16.920 --> 0:18:20.800 and so the Phillips curve re emerged. And now, um, 0:18:21.240 --> 0:18:26.240 the question is how much unemployment do policymakers think they 0:18:26.240 --> 0:18:29.400 are going to have to engineer? Can they engineer That's 0:18:29.400 --> 0:18:32.480 the heart of the matter, John is, Can any central bank, 0:18:32.520 --> 0:18:35.960 whether in the United Kingdom or the US, engineer a 0:18:36.119 --> 0:18:40.719 labor economy. Well, here's the problem. They want to create 0:18:40.800 --> 0:18:43.800 some slack and that Philip's curve thinking is very clear 0:18:43.960 --> 0:18:46.239 at the FED right now. They want to create some 0:18:46.280 --> 0:18:49.440 slack in the economy without causing a recession, which means 0:18:49.480 --> 0:18:52.840 growth has to be between potential growth, which they thinks 0:18:52.880 --> 0:18:55.800 around one eight percent one point nine percent per year, 0:18:56.200 --> 0:19:00.199 and zero otherwise the economy is in recession. Now US 0:19:00.240 --> 0:19:02.200 just clear up again, the economy is not in recession 0:19:02.880 --> 0:19:05.720 at the present time. The economy created two points seven 0:19:05.720 --> 0:19:07.840 million jobs we've got in the first half of this year. 0:19:07.840 --> 0:19:11.080 We've got another job support on Friday. But as Pal said, 0:19:11.160 --> 0:19:14.000 it's a very narrow path. And if the Fed is 0:19:14.000 --> 0:19:17.840 going to make a mistake, given that it's let inflation 0:19:17.960 --> 0:19:21.680 out for the first time in three decades, it's going 0:19:21.760 --> 0:19:24.920 to make a mistake by raising rates too much, and 0:19:25.000 --> 0:19:30.600 that inevitably is going to result at some point in recession. 0:19:30.640 --> 0:19:35.400 Not imminently, but as the three month ten year curve flattens, 0:19:36.040 --> 0:19:39.000 that recession signal starts to emerge when we when we 0:19:39.040 --> 0:19:42.400 get close to zero a year out. So I think immerged, 0:19:42.520 --> 0:19:46.280 you know, engineering a soft landing. And this latest debate, 0:19:46.320 --> 0:19:49.600 the beverage curve, the relationship between vacancies and unemployment. We 0:19:49.640 --> 0:19:53.160 get the Jolts data, the job openings data later today, 0:19:53.440 --> 0:19:56.640 which gives us a new reading on job openings. There 0:19:56.640 --> 0:20:00.440 are almost two jobs per unemployed person. This bait going 0:20:00.440 --> 0:20:03.680