Speaker 1: Welcome to the Bloombergs Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailee. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com,
Speaker 1: and of course on the Bloomberg Terminal. We've got to
Speaker 1: talk about the ranny we've seen joining us now it's
Speaker 1: Mike Wilson. I'm pleased to say, the chief US equity
Speaker 1: strategist over at Morgan Stanley. Mike covid a weekend and
Speaker 1: Tom and I talked about it. You use that word
Speaker 1: dream this equity market streaming. Why is that dream misplaced? Well,
Speaker 1: we don't know exactly. If it's dream, it is always dreaming. Mean,
Speaker 1: the equity market is tends to be forward thinking, like
Speaker 1: most markets, but particularly equities, and I think what you
Speaker 1: know are The phrase we used was really just trying
Speaker 1: to imply, Look, we had this wind though of opportunity
Speaker 1: for equity investors where rates are coming down, and you
Speaker 1: can interpret that a couple of different ways. You can
Speaker 1: interpret it as if the FED is close to being
Speaker 1: done and they're gonna be able to pose or pivot
Speaker 1: before the next recession arrives, and that window is always
Speaker 1: positive for stocks. So the equity market is trying to
Speaker 1: get in front of that pivot. I think it's premature,
Speaker 1: to say the least. I also believe that by the
Speaker 1: time they do pivot or pause, probably something bad has
Speaker 1: happened on the growth side. And that's really our core views.
Speaker 1: So look, we're we're always open minded. We don't get
Speaker 1: too dogmatic with these These rallies can happen at any time.
Speaker 1: But then we go back to our framework, and our
Speaker 1: framework suggested risk we work now is pretty poor, right,
Speaker 1: given our view on growth and given where rates are
Speaker 1: at this point. Mike, the new new what you've been
Speaker 1: leading on is a divide between service sector kind of
Speaker 1: equities and goods kind of equities. How sharp is a
Speaker 1: divide between Caterpillar and Apple Computer? Well, I mean, I think,
Speaker 1: I mean, you make a good point on the services
Speaker 1: versus goods, but you also make a point that there
Speaker 1: are different types of goods, uh, that some are more
Speaker 1: expendable than others. And you know, this is exactly why
Speaker 1: we've skewed ourselves more defensively, meaning we we like companies
Speaker 1: that have things that you must buy or you know,
Speaker 1: not not luxuries but necessities, things you need for everyday life.
Speaker 1: And and that's those are the kinds of stocks have
Speaker 1: been doing well because why because you know, the volatility
Speaker 1: in their growth is not it's not that volatile, and
Speaker 1: they can deliver on the earnings during this period when
Speaker 1: uncertainty is going to be higher and we're gonna get
Speaker 1: a payback in demand for all these things that we
Speaker 1: over consumed in the last twelve the twenty four months.
Speaker 1: And I think it's pretty obvious that that's just playing
Speaker 1: out now. Mike, You've gotten the playbooks so right this year,
Speaker 1: and you deserve a real congratulations for pin pointing to
Speaker 1: where we are in the cycle and how we see
Speaker 1: rallies and then retracements. Where do you see the trade
Speaker 1: what it comes to energy at this point, given that
Speaker 1: it was one of the big calls in the first
Speaker 1: half of the year, the inflation protection at a time
Speaker 1: where now we're looking down growth fear is really reigning supreme. Well,
Speaker 1: those are nice comments, but energies in one area we
Speaker 1: completely botched. So I mean, I'm not sure I'm the
Speaker 1: guy that asked, but look I mean energy, we were
Speaker 1: not overweight enough. We own a few stocks in our portfolio,
Speaker 1: and we were basically neutral. And I think that energy
Speaker 1: now is vulnerable from an equity standpoint if and this
Speaker 1: is a big if, if you take the view that
Speaker 1: a recession is sometime in the next twelve to twelve months.
Speaker 1: And it's just been our experience. And the thing I'm
Speaker 1: most worried about, Lisa is that you know the commodity complex, uh,
Speaker 1: technically and what it's telling us it's not good. I mean,
Speaker 1: we're seeing demand destruction across the board, some of that,
Speaker 1: you know, when some of the base metals and things
Speaker 1: like that's dude to zero code policy in China, which
Speaker 1: could reverse in the fall potentially. But the charts don't lie,
Speaker 1: and they're telling me that we've seen the peak in
Speaker 1: commodities and if we're gonna have a recession, then they're
Speaker 1: probably going lower. So I would we're continuing to be
Speaker 1: neutral and energy, and quite frankly, I think people are
Speaker 1: probably a little bit too long at this point. Mike.
Speaker 1: How much do you take the pushback that you I'm
Speaker 1: sure you here, which is the earnings have been than expected.
Speaker 1: You see ongoing resilience. Yeah, there are potholes here and there,
Speaker 1: but for the most part, companies are to use Tom's phrase,
Speaker 1: adjusting and adapting and moving forward. No, I mean the
Speaker 1: company and US companies are really good at managing earnings okay,
Speaker 1: but they're not good at doing is forecasting earnings over
Speaker 1: the course of twelve months plus. That's been our experience,
Speaker 1: particularly at major turning points. And so you're right, they've
Speaker 1: done a good job of managing the quarters. And so
Speaker 1: what ends up happening is that you know, the bar
Speaker 1: gets lower, they jump over the lower bar if I
Speaker 1: say it's better than expected, and then you know, it's
Speaker 1: kind of a drip, drip, drip lower. You know, we
Speaker 1: we do a pretty good job of forecasting twelve twenty
Speaker 1: four months out of macro, not at the micro level
Speaker 1: so much, but it informs us. And what we're seeing
Speaker 1: is that it's this drip drip drip is going to
Speaker 1: continue for another two or three quarters, and they'll probably
Speaker 1: be more of a drop as opposed to a drip
Speaker 1: if it's a recession. So like I think the another
Speaker 1: words I'm saying is I think that don't get mesmerized
Speaker 1: by the very near term data on the on the
Speaker 1: earnings because you know these number these numbers are man
Speaker 1: it Okay, that's that's why they look may be better
Speaker 1: relative to the managed numbers. And when you're looking out
Speaker 1: twelve months, you just have to take your own view
Speaker 1: at these turning points. You can't rely necessarily on kind
Speaker 1: of what companies are saying or what the community is saying.
Speaker 1: You need to take a view. And our view is
Speaker 1: very clear the orange revisions are going to be much
Speaker 1: more negative of the next two to three quarters. And
Speaker 1: when we've seen for the last two years, and Mica
Speaker 1: got to squeeze this in, what do you say to
Speaker 1: people getting mesmerized by the bond market move we've seen
Speaker 1: since the middle of June. Well, that's one thing we've
Speaker 1: gotten right. We've been very bullish on bonds, as you know, John,
Speaker 1: thinking that you know, the markets might have been infatuated
Speaker 1: with inflation. Of course, when it became obvious and the
Speaker 1: FED and that was really the story in Q one
Speaker 1: and up until about May June. And at that point,
Speaker 1: we you know, we think that was the time to
Speaker 1: pivot away from that and start thinking about what's growth
Speaker 1: gonna look like. So we think the bond rally makes
Speaker 1: perfect sense in the context of our fire and ice narrative.
Speaker 1: We're staying long the long bonds, and uh we think
Speaker 1: it's great hedge against the nequity portfolio. Right now, Mica
Speaker 1: also to get you on to show this small thank you,
Speaker 1: Sir Mike Wilson, that of Mark and Stanley. As Mandy's
Speaker 1: chief equity derivative strategist at Credit Sway Securities, Mandy joins
Speaker 1: us right now here in New York. Mandy, let's start there.
Speaker 1: How do you play a peak in real yields? Sure?
Speaker 1: I get this question a lot um, you know, and
Speaker 1: the two the most traditional way people look at it
Speaker 1: is either do you go a long tech or do
Speaker 1: you go along gold? Because those two have historically had
Speaker 1: the most inverse relationship with real yields. And in my view,
Speaker 1: I think going along gold is a much better play
Speaker 1: um for a peak in real yield rather than Tech.
Speaker 1: And the and the key here is, you know, real
Speaker 1: yield could be going down either because of a dovish
Speaker 1: FED or because of rising recession risk, right and and
Speaker 1: for tech, if it's rising recession risk, that doesn't bode
Speaker 1: well for tech as a cyclical sector. So for us
Speaker 1: looking at upside and gold, and you have seen in
Speaker 1: the derivatives market more to mean for upside in g
Speaker 1: LD option for example, to play that up peak in
Speaker 1: real yields. Lisen Saunders was with us twenty minutes ago
Speaker 1: just put out on Twitter the Dallas trimmed inflation statistics,
Speaker 1: something Chairman Powell watches carefully. The first derivative of this
Speaker 1: over one month is stunning three point zero three point
Speaker 1: one and then an explosion in the Dallas trim from
Speaker 1: five point two on to a ginormous six point nine.
Speaker 1: How do you fold inflation into a conventional derivative strategy
Speaker 1: and equities? Sure, so I think a couple of ways
Speaker 1: you can look at it, so you can play it
Speaker 1: through uh you know, um bond et s right. So
Speaker 1: looking at for example, we've been recommending people look at
Speaker 1: upside place in TLT, which is longer dated bonds. And
Speaker 1: the view here is that the Fed actually will remain
Speaker 1: aggressive in trying to curb inflation and as a result
Speaker 1: increase recession risk. And that means actually the back end
Speaker 1: of the yold curve goes down because that's much more
Speaker 1: a function of inflation and growth. You can look at
Speaker 1: it through hybrid options or equity options that are contingent
Speaker 1: on rates. So there are different ways and you can
Speaker 1: play it. But I would say, you know, in my view, um,
Speaker 1: the market has it wrong that the feed is gonna pivot.
Speaker 1: I don't think inflation is going to come in that quickly. Um.
Speaker 1: You know, Powell has said that he needs clear and
Speaker 1: convincing evidence that inflation is falling back down to the
Speaker 1: two percent target. I don't think that we're going to
Speaker 1: get that anytime soon. Mandy, how much conviction just to
Speaker 1: sort of zoom out here, how much conviction it has
Speaker 1: this rally had behind it from a derivative's perspective, How
Speaker 1: much have people closed out their bearish bets on the
Speaker 1: US economy, on the U S stock market in particular,
Speaker 1: as the market rally the most in November. Well, first
Speaker 1: of all, what bearish bets right? So I would say
Speaker 1: one of the defining characteristics of this sell off on
Speaker 1: the first half of the year is that we've seen
Speaker 1: very very little hedging in the derivatives market, and that
Speaker 1: contributes to, you know, the relatively lower levels of VIX
Speaker 1: v VIX, all the measures that we track and options
Speaker 1: and part of that is because we've seen already very
Speaker 1: significant deleveraging d risking in terms of underlying positions of
Speaker 1: people selling at US stocks going into cash. Now over
Speaker 1: the past week we have seen some pick up of
Speaker 1: upside call buying, but certainly not significant enough. So I
Speaker 1: don't think this is a high conviction rally of anything.
Speaker 1: I think this is much more a bearer market rally.
Speaker 1: And when you face the kind of headline risk that
Speaker 1: we face today, this event that could take place a
Speaker 1: little bit later this morning speak below sea landing in
Speaker 1: Taiwan and the complete unknown as to how the Chinese
Speaker 1: will respond to it. What do you say to clients
Speaker 1: when they killed you about how they should manage this situation? Sure,
Speaker 1: so on the topic of China, clearly a lot of
Speaker 1: headline risk in the near term, but actually the much
Speaker 1: bigger risk, and what I've been emphasizing over the past
Speaker 1: few months um and in terms of the outlook for China,
Speaker 1: outlook for global economy is China's zero COVID policy, and
Speaker 1: that's going to have a much bigger economic impact. It's
Speaker 1: gonna have a much bigger market impact than whatever happens,
Speaker 1: you know, in the next twenty four hours on the
Speaker 1: geo political front. And the key here is that you know,
Speaker 1: if you talk to investors, most people still expect China
Speaker 1: to pivot from the zero COVID policy because of the
Speaker 1: economic cost. And my view there is, if you listen
Speaker 1: to she, if you listen to the top Chinese leadership,
Speaker 1: they're very ideologically committed to zero COVID. I do not
Speaker 1: think in a politically sensitive year such as this year
Speaker 1: for China, they're going to abandon zero COVID anytime soon. Um.
Speaker 1: And I think that's just gonna mean a bigger demand
Speaker 1: shock for global growth, a bigger demand shock for commodities.
Speaker 1: And I think that, you know, that's one of the
Speaker 1: reasons why we've been pretty barished on commodities as of late.
Speaker 1: Thank you, as O Wise from Credit Swasi. Halene Becker
Speaker 1: knows about jet Blue. She put a reaffirmed outperform on
Speaker 1: jet Blue yesterday. She is at Cowen and she's as
Speaker 1: of this morning going to have the good counsel of
Speaker 1: Mark McCormick. As t D says, they will take out
Speaker 1: Halline Becker's cow and that will be a good match
Speaker 1: Mark McCormick and a Laine Becker and Mr McCormick joins
Speaker 1: US now global head of FX Strategy TV Securities. Let's
Speaker 1: start with square one mark, what's the dollar going to
Speaker 1: do in the next year. I think in the next
Speaker 1: year where we all will talk about the peak dollar story.
Speaker 1: That's really not where we're at right now in the
Speaker 1: next couple of months. But if we look where we
Speaker 1: are in extrapolate pass this year, it does look like
Speaker 1: where we have the conditions of the peak dollar, which
Speaker 1: is Feds cutting rates and global economy can be recovering.
Speaker 1: We know the euro Zone is is slipping into a recession,
Speaker 1: but all of those factors should likely turn by next year.
Speaker 1: So I think that is the big forecasting stories, the
Speaker 1: turning of the dollar in the next year. There a
Speaker 1: risk adjusted basis, including geopolitical risk adjusted, which is the
Speaker 1: currency flat on its back where the greatest week dollar
Speaker 1: opportunity is. It's still again, we've talked about it a lot. Really, yeah,
Speaker 1: it's it's the Yeah. An evaluation perspective, if you think
Speaker 1: about why the dollar could peak, if if the feed
Speaker 1: is cutting rates next year, and if you think about
Speaker 1: and talk about the yield curve of the U S
Speaker 1: yield curve is inverted now, So if we if we
Speaker 1: think about the slowing conditions of the US and we
Speaker 1: think about how much yen has moved from fair value,
Speaker 1: fair value for the end is somewhere in the in
Speaker 1: one ten, one fifteen. So if we think about the
Speaker 1: reversal of the dollar, the d X, Y the euro
Speaker 1: still has a lot of cyclical problems to deal with,
Speaker 1: but you know, the big driver of what's pushed the
Speaker 1: end weaker, it's been global rates moving higher and the
Speaker 1: oil in the terms of trade shock and if you've
Speaker 1: already mentioned on the oil side, like we're expecting oil
Speaker 1: prices to be lower next year as well. So the
Speaker 1: combination of those factors peak higher rates and essentially a
Speaker 1: peak in the terms of trade cycle, which has really
Speaker 1: been challenging for Asian currencies for the last six months,
Speaker 1: those reversals would help us see dollar again move back
Speaker 1: closer towards fair value rather than you know, trading at
Speaker 1: the massive preview we see it now is that regardless
Speaker 1: of where risk sentiment is any given time mark, is
Speaker 1: this a risk off trade that now works? So is
Speaker 1: it just more broadly a tried that's gonna works through
Speaker 1: the end of the year because of the dynamics that
Speaker 1: you described, Well, the risk off helps, and I think
Speaker 1: the risk off helps because it's pushing yields lower, and
Speaker 1: I think that's it's an important combination in what we're
Speaker 1: starting to see is the FED had articulated a bit
Speaker 1: of a focus on growth. We know that they're not
Speaker 1: there yet, and it's too early to trade this as
Speaker 1: a durable theme. Um I still I still think the
Speaker 1: near term we gotta be buying the dollar against most
Speaker 1: major currencies, even the Euro and European currencies. But if
Speaker 1: we are talking about the next six months to a year,
Speaker 1: the conditions are changing where u S data is deteriorating,
Speaker 1: and again in a backdrop, it doesn't have to be
Speaker 1: risk off, but we're not going to see this persistent
Speaker 1: deterioration in terms of trade. Where oil prices are in
Speaker 1: a hundred and a hundred twenty dollars in barrel, we
Speaker 1: are talking about oil below a hundred next year. That
Speaker 1: will be very positive for the Japanese trade balance, which
Speaker 1: would also be good for the European trade balance as well. So, Mark,
Speaker 1: let's say that the FED doesn't pivot. Let's say that
Speaker 1: the FED does continue to raise rates, and that you
Speaker 1: start to see, uh, some concern about having to go
Speaker 1: further and uh and perhaps faster than people are expecting.
Speaker 1: And I think about Zoltan pose are over at Credit
Speaker 1: Squeeze talking about a five to six percent FED funds
Speaker 1: rate eventually in order to get inflation down. Does that
Speaker 1: eradicate the idea of peak dollar and you start to
Speaker 1: forecast a much stronger dollar to come. Absolutely, we are
Speaker 1: not playing, you know, with our baseline as a five
Speaker 1: six percent terminal rate. So right now you can even
Speaker 1: see we're we're a bit more hawkish and where the
Speaker 1: markets currently price, which is why we like the dollar. Now.
Speaker 1: If we're talking about a five six percent terminal rate
Speaker 1: next year, then absolutely we talked about risk off, we
Speaker 1: talk about a global recession. Uh, this reinforces where we've
Speaker 1: been the last couple of months, which is a global
Speaker 1: demand shock. Plus the FED offering the dollar is like
Speaker 1: the world's key safe haven. If you think about three
Speaker 1: factors that have like we're assets that have done quite
Speaker 1: well in the last three months, it's energy prices, Chinese equities,
Speaker 1: and the dollar. Like that's really all there's been. So
Speaker 1: the dollars offering the properties of relatively higher yield and
Speaker 1: a decent you know, relative beta to a declining global economy.
Speaker 1: So if we're talking about a five six uh FED
Speaker 1: terminal rate, then the peak dollar story will not persist. Mark,
Speaker 1: what you has conviction trade? Right now? I still think
Speaker 1: it's the it's the end crosses. I know we've moved
Speaker 1: a lot in the short term, but as you mentioned,
Speaker 1: I think some of the European crosses look honorable. If
Speaker 1: we're talking about just this week, I think Sterling, we've
Speaker 1: got the Bank of England sterling in downside. I think
Speaker 1: it's quite attractive. Euro Yen down downside is quite attractive
Speaker 1: as well. We'll give us some numbers on this. My
Speaker 1: head spinning, Mark, give us some yen you know, John,
Speaker 1: take notes please, I'm I don't I lost my surveillance pencil.
Speaker 1: Give me a yen number like short yen. Now as
Speaker 1: to what so, I'd say right now, if we if
Speaker 1: this week in general we are expecting better the U
Speaker 1: S data, so I think we get a dollar again
Speaker 1: reversal up to about say one thirty three, there is
Speaker 1: a good fade point. So again, if we could see
Speaker 1: another half percent move higher in euro yen um again,
Speaker 1: I think we're going through one thirty as well, so
Speaker 1: I think that would be a good short term set up.
Speaker 1: And then a year from now, are you to one twenty,
Speaker 1: which is students two standard deviations out or canyend strengthen
Speaker 1: that to a one fifteen. We still have Yen kind
Speaker 1: of coming in around one twenty is but again in
Speaker 1: the backdrop that we we had discussed where we do
Speaker 1: see the terminal right probably three and a half to
Speaker 1: four rather than five to six. Uh, that environment we've
Speaker 1: white bullish for the end, particularly for oil prices and
Speaker 1: the terms of trade shock, which would yeah, that would
Speaker 1: start to reverse. John, does this work for my four
Speaker 1: oh one k? Mark can relief to you that foreign
Speaker 1: exchange is no longer boring. It would be great if
Speaker 1: the regime didn't change every week. But yeah, it's got
Speaker 1: a lot of in terms of how you people care
Speaker 1: about effects. I Mark gonna catch out Matt mccomack, it's
Speaker 1: a d We've got a lineup of things to talk
Speaker 1: about with a good John Writing, Chief Economic Adviser, Bring capital.
Speaker 1: He joins us this morning because be the tops starting
Speaker 1: out their season, what ac Milan is going to do,
Speaker 1: and of course his Preston North End playing is Wigan
Speaker 1: or Wegan. We played Wigan Athletic the Latics and drew
Speaker 1: uninspiring performance. Nothing. Nothing. That's our soccer talk for today.
Speaker 1: Just because there's so much going on. I want you
Speaker 1: to talk John writing right now about the Phillips curve.
Speaker 1: This ancient from another time and it has to do
Speaker 1: with the time of beverage. The economist at l s E.
Speaker 1: I want you to link in the Phillips curve myth
Speaker 1: with the raging debate over the beverage curve in the
Speaker 1: efficiency of our labor economy. Well, first of all, I
Speaker 1: was born in the same year that Professor Phillips pend
Speaker 1: his article on the Phillips curve, so that makes me
Speaker 1: an ancient thing from another time as well. Um. And
Speaker 1: that that curve was was really a description of the
Speaker 1: behavior of the labor market over a period of a
Speaker 1: hundred years or so, and it was hijacked um by
Speaker 1: people like Paul Samuelson and solo in the US to
Speaker 1: make it a theory of inflation. And Milton Friedman said,
Speaker 1: it's it's not it's not going to be stable, and
Speaker 1: he that was a very prescient article because what he
Speaker 1: said is workers will find trip in the higher prices
Speaker 1: eventually to the wage bargain, and they will add more
Speaker 1: in the Phillips curve will breakdown. That's exactly what it
Speaker 1: did in the nineties seventies. But now we're back in
Speaker 1: an environment where for the last twenty years or so,
Speaker 1: inflation was so low that nobody took it into account,
Speaker 1: and so the Phillips curve re emerged. And now, um,
Speaker 1: the question is how much unemployment do policymakers think they
Speaker 1: are going to have to engineer? Can they engineer That's
Speaker 1: the heart of the matter, John is, Can any central bank,
Speaker 1: whether in the United Kingdom or the US, engineer a
Speaker 1: labor economy. Well, here's the problem. They want to create
Speaker 1: some slack and that Philip's curve thinking is very clear
Speaker 1: at the FED right now. They want to create some
Speaker 1: slack in the economy without causing a recession, which means
Speaker 1: growth has to be between potential growth, which they thinks
Speaker 1: around one eight percent one point nine percent per year,
Speaker 1: and zero otherwise the economy is in recession. Now US
Speaker 1: just clear up again, the economy is not in recession
Speaker 1: at the present time. The economy created two points seven
Speaker 1: million jobs we've got in the first half of this year.
Speaker 1: We've got another job support on Friday. But as Pal said,
Speaker 1: it's a very narrow path. And if the Fed is
Speaker 1: going to make a mistake, given that it's let inflation
Speaker 1: out for the first time in three decades, it's going
Speaker 1: to make a mistake by raising rates too much, and
Speaker 1: that inevitably is going to result at some point in recession.
Speaker 1: Not imminently, but as the three month ten year curve flattens,
Speaker 1: that recession signal starts to emerge when we when we
Speaker 1: get close to zero a year out. So I think immerged,
Speaker 1: you know, engineering a soft landing. And this latest debate,
Speaker 1: the beverage curve, the relationship between vacancies and unemployment. We
Speaker 1: get the Jolts data, the job openings data later today,
Speaker 1: which gives us a new reading on job openings. There
Speaker 1: are almost two jobs per unemployed person. This bait going
Speaker 1: on right now. Can the Fed deflate the demand for
Speaker 1: labor in the economy without pushing up unemployment a lot
Speaker 1: because there's a lot of job openings. Uh. And you know,
Speaker 1: there's quite a raging debate going on between Governor Waller
Speaker 1: on the one hand and Larry Summers, on the other hand,
Speaker 1: trading blows uh, while I gave a speech on Friday
Speaker 1: and Summers published Engineering Forward Yeah, basically saying that Waller's
Speaker 1: soft landing paper had errors after Chris Waller came out
Speaker 1: and tried to slap down their previous piece. So basically
Speaker 1: a tit for tat and academic journals. The other big
Speaker 1: debate is how far the FED will have to go
Speaker 1: to engineer some sort of softening in the labor market,
Speaker 1: what it will take. And you have some people saying
Speaker 1: we're close to the terminal rate, perhaps even FED share
Speaker 1: J Powell hinting at that, and then you have the
Speaker 1: likes of his olden posar over at Credit Suite saying,
Speaker 1: more likely we have to get to I have to
Speaker 1: six percent because of how entrenched some of these inflationary
Speaker 1: aspects are. Where do you stand, well, Lisa, As you know,
Speaker 1: all through last year, I was warning you that inflation
Speaker 1: was going to be the problem, And when we discussed
Speaker 1: the FED making a mistake, we discussed the FED doing
Speaker 1: too little in one not too much in two. Now
Speaker 1: what the FED has to do now is a consequence
Speaker 1: of the mistake they made last year by continuing to ease,
Speaker 1: continuing to buy assets all through last year as inflation
Speaker 1: picked up. So I don't think Pal signaling the what
Speaker 1: the market is reading right now, which is the FT's
Speaker 1: not going to raise rates as much as this, and
Speaker 1: he was signaling very much. The best guidance we can
Speaker 1: give you, to the extent we can give you guidance,
Speaker 1: is the forecast we gave you the so called SEPs
Speaker 1: in in June, which was three point four percent at
Speaker 1: the end of this year, three point eight percent at
Speaker 1: the end of next year. Now we're two years, we're
Speaker 1: almost talking about them. It's a long way away from
Speaker 1: from that guidance. So from n where the market surprised
Speaker 1: in an interest rate above inflation of about three quarters
Speaker 1: of a point on average for the next ten years,
Speaker 1: it's just about taken out that so called positive real
Speaker 1: interest rate and that tightening in the economy and yet
Speaker 1: not really factor back in inflation. And I think that's
Speaker 1: too easy a choice. Either the Fed is going to
Speaker 1: have to hike rates and get policy restrictive and that's
Speaker 1: higher than the market is currently thing, or we are
Speaker 1: going to have a more protracted inflation problem. And right now,
Speaker 1: I don't think the markets shall lined up in a
Speaker 1: sensible manner of having relatively low inflation break evens and
Speaker 1: a relatively low terminal rate. Given the not only the US,
Speaker 1: but the global scope of this inflation problem, John throw
Speaker 1: into the mix what we're seeing right now with Nancy
Speaker 1: Pelosi expected to land in Taiwan in about two hours.
Speaker 1: This question of whether the safety bid is to go
Speaker 1: into short term treasuries or even treasuries at all, if
Speaker 1: they could potentially increase inflation, and if FED is still
Speaker 1: going to try to fight with the market is assuming
Speaker 1: in terms of a pivot. How do you see the
Speaker 1: response going forward to this type of risk. Look, I
Speaker 1: think the FED has made it clear that beating inflation
Speaker 1: is job one and probably job too, and then other
Speaker 1: things come after that. At the present time, and the
Speaker 1: luxury that the FED has had in the past to
Speaker 1: respond to geopolitical events like for example, breaxit um, and
Speaker 1: to respond to market events, and to respond to the
Speaker 1: unemployment rate and so on was because inflation was so low.
Speaker 1: Now we have inflation that in CPI terms is nine
Speaker 1: point one percent. While the July number will probably show
Speaker 1: a bit of relief because of the decline in gas prices.
Speaker 1: It's by no means to show it that we've even
Speaker 1: seen the peak in inflation yet. John. What's so important
Speaker 1: to John Farrow is the thing of University of Work
Speaker 1: and Robert Skodolski. We've got people doing political economics like
Speaker 1: Lord Skodolski, and at the same time we're talking about
Speaker 1: engineering the economy. Is if there's any evidence we can
Speaker 1: engineer an economy, I find that insane. And someone go
Speaker 1: a step further. There's clearly some policy bus here, some
Speaker 1: political bias which is shaping some of the analysis taking
Speaker 1: place at the moment, John, which I think we all
Speaker 1: find increasingly frustrating. The simple way to frame this is
Speaker 1: soft landing versus hard landing. John, which Camper you went? Ultimately,
Speaker 1: if you had to choose a sign right now, I
Speaker 1: think ultimately it has to be a hard landing. The
Speaker 1: the runway is just too short to carry on the
Speaker 1: airplane analogy to to bring this down on a on
Speaker 1: a soft landing, given how narrow the gap is between
Speaker 1: a potential recession and UH and growth at the economy's
Speaker 1: economic potential, and it's not that the FED tightening causes
Speaker 1: the inflation as such. What it is is when the
Speaker 1: public's expectations of inflation are built in sufficient gentle that
Speaker 1: those expectations are inconsistent with the policy timing. Now, the
Speaker 1: one good piece of news that the FED has is
Speaker 1: that the tenure inflation expectations from US households from the
Speaker 1: University of Michigan is at two point eight percent. Now,
Speaker 1: we don't know how good to survey that is. It's
Speaker 1: only five hundred people, and it was at three point
Speaker 1: three percent in June. And I don't believe long term
Speaker 1: expectations bounce around as much as they do. But that's
Speaker 1: the key thing. If the public believe the inflation increase
Speaker 1: is going to be transitory, then I think the debate
Speaker 1: we should be framed between is it going to be
Speaker 1: a mild recession when it eventually comes probably late. Is
Speaker 1: it going to be a mild recession or is it
Speaker 1: going to be a deeper recession. And that's the key thing.
Speaker 1: We have to watch inflation expectations, because the more entrenched
Speaker 1: inflation expectations are, the deeper the recession. Is just the
Speaker 1: public beliefs about how the economy is going to unfold
Speaker 1: and the Fed's intention of what it's going to do
Speaker 1: about the inflation rate come into conflict. You know what
Speaker 1: I'd love to do just listening to the umage survey
Speaker 1: being conducted in real time and see what people say
Speaker 1: on the phone calls Tom, can you imagine where do
Speaker 1: you think inflation is going to be in five to
Speaker 1: ten years? And how people respond? Have they ever called you,
Speaker 1: John Ferrell, They've never They've never called me. They've never
Speaker 1: called Lesa about every three months at Lesa's anchoring that number?
Speaker 1: Much much? Oh yeah? And there go to no, I've
Speaker 1: never been. I've never been surveying. How much time do
Speaker 1: we have with the writing command seconds Premier League? I
Speaker 1: mean John who looks good at approved John Writing, who
Speaker 1: looks good in the Premier League community shield? Liverpool three
Speaker 1: Matchester City once. So I think those of us Liverpool
Speaker 1: fans are thought, well, it's going to be probably gonna
Speaker 1: be City season with the with the upgrade the I
Speaker 1: think Liverpool is going to give him a real run
Speaker 1: for the money again. Down to the last weekend. There
Speaker 1: we go. We begin this season Premier League coverage, team coverage,
Speaker 1: Bloomberg Surveillance with John Rode his season kicking off this weekend.
Speaker 1: John Riding of Bring Capital thank you sir. This is
Speaker 1: the Bloomberg's Surveillance Podcast. Thanks for listening. Join us live
Speaker 1: weekdays from seven to ten am Eastern on Bloomberg Radio
Speaker 1: and on Bloomberg Television each day from six to nine
Speaker 1: am for insight from the best in economics, finance, investment,
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Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course on
Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg