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Speaker 1: Who you put your trust in matters. Investors have put

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Speaker 1: their trust in independent registered investment advisors to the tune

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Speaker 1: of four trillion dollars. Why learn more and find your

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Speaker 1: independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast.

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Speaker 1: I'm Tom Keane. Always with Michael McKee. Daily we bring

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Speaker 1: you insight from the best in economics, finance, investment and

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Speaker 1: international relations. Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com,

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Speaker 1: and of course on the Bloomberg Michael Pond of Barclays

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Speaker 1: with us in our studios in New York and now

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Speaker 1: joining us some London. Stephen Major of HSBC. Stephen, congratulations

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Speaker 1: on your continued call for lower race. You stunned the morning.

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Speaker 1: We're lower for longer one point three five out to

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Speaker 1: the end of two thousand seventeen. That is an outlier car.

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Speaker 1: What does the street get wrong? Well, it will be

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Speaker 1: the fifth or or sixth year in a road, Tom,

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Speaker 1: when the street has been calling it the wrong way.

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Speaker 1: History is no guide to the future. But I think

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Speaker 1: we've got to understand that this structural backdrop to markets

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Speaker 1: is getting worse, it's not getting better. And I look

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Speaker 1: at the charts and and and everyone's got the same charts.

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Speaker 1: Off the last thirty years, he would have been falling.

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Speaker 1: This move to lower real natural rates is not a

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Speaker 1: new thing. We all understand this structural backdrop. So why

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Speaker 1: are people thinking that the problems will suddenly go away.

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Speaker 1: It's quite unlikely. So on the one hand, I think

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Speaker 1: I'll call is quite modest, but compared to what others

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Speaker 1: are saying, it seems quite outrageous. I mean to bring

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Speaker 1: up a charit, folks. Let's bring us up with Mr

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Speaker 1: Major and my partner. This will get to Mr part

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Speaker 1: in a moment. Steve Major. The other part of your report,

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Speaker 1: a lengthy report, there's the vulcar over on the left,

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Speaker 1: and then down we go with a great moderation which

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Speaker 1: Mr Major says we'll continue. Is we have not cleared markets.

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Speaker 1: You make it very clear deleveraging has not happened. Why

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Speaker 1: is that? Why is that a surprise? Well, look that

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Speaker 1: the facts are quite clear. In the last ten years

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Speaker 1: there's been an increase in leverage. So in developed markets,

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Speaker 1: the sovereigns have increased their debt quite significantly. According to

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Speaker 1: the b i S. Emerging markets is even worse. But

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Speaker 1: what I think many people are missing is the private sector.

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Speaker 1: You've got these debt overhang showing up in the Italian

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Speaker 1: banking sector, or Chinese corporates or Australian households, and and

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Speaker 1: this says to me that the overall picture is still

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Speaker 1: where there's too much debt. So I don't really get

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Speaker 1: the cause for fiscal loosening. It's all very well, it's

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Speaker 1: quite an easy call to make, but it doesn't really

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Speaker 1: fit with the data. There's too much debt out there. Steven,

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Speaker 1: it really struck a chord when you say that everyone's

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Speaker 1: looking at the same charts, and you were talking there

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Speaker 1: about some of the you know, the way that's actually

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Speaker 1: different analysts and you look at things differently. What do

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Speaker 1: you think that I guess the mass market is getting

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Speaker 1: the most wrong. Well, there is this hope that things

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Speaker 1: will get better, and I guess I can I can

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Speaker 1: be accused of being a bit grim because this outlook

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Speaker 1: doesn't really suit any of us in the financial services sector,

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Speaker 1: and we all want to be optimistic and hope that

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Speaker 1: things will be better in the future. But I don't

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Speaker 1: really get the explanations that people have as to why

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Speaker 1: that thirty year bonding your chart is going to start

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Speaker 1: mean reverting. It seems to be more of a hope

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Speaker 1: rather than a piece of robust analysis. It's even just

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Speaker 1: to be clear, you're not predicting a recession. Well, most

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Speaker 1: people recognize that within the next five years it's quite

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Speaker 1: likely that the US will be going that way. It's

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Speaker 1: probably less than five years. And that's why when I

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Speaker 1: look at the forwards, I'm thinking that anything above two

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Speaker 1: for the five year rate in five years time is

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Speaker 1: on the high side. So I don't see the fate

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Speaker 1: of getting to that number within the next two or

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Speaker 1: three years. So actually five years five year forward is

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Speaker 1: looking like good value to me. Michael Ponds, your initial

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Speaker 1: thoughts is there wishful thinking on I guess that the

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Speaker 1: sides of analysts and markets that things do get better,

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Speaker 1: when actually the hard data suggest otherwise. Sure, Francaying. So

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Speaker 1: if you just look at that that chart, you say, well,

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Speaker 1: years are low, therefore they're they're rich. And And where

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Speaker 1: we're consistent with with Mr. Major is we think that's

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Speaker 1: the wrong way to look at things. The structure of

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Speaker 1: the economy, the potential GDP in the economy, are the

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Speaker 1: FEDS real, are star the neutral real rate of policy

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Speaker 1: has come down over over time along with productivity and

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Speaker 1: slower labor force growth, and that justifies lower really yields.

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Speaker 1: That we do think there's scope for inflation expectations and

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Speaker 1: inflation risk premium to move higher here, but really low,

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Speaker 1: really yield seemed quite justified against the structural backdrop of

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Speaker 1: the economy and Michael's extraordinary idea. Let's bring up this

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Speaker 1: chart again that we showed our single best chart for

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Speaker 1: the day to Michael Pond. First, Michael, you just presume

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Speaker 1: that we come up, but we stay below that red extrapolation,

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Speaker 1: that we just don't get back to the joyous rates

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Speaker 1: of thirteen and fourteen. That's right. So where where we

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Speaker 1: agree with the Fed on break evens is that part

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Speaker 1: of the reasons break evens are low is because inflation

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Speaker 1: risk premiums are low. You can think about that is

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Speaker 1: as the markets worrying about four or five six percent inflation,

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Speaker 1: No one's worrying about four or five six percent inflation

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Speaker 1: right now. Charter September, bring it up Towarsen Slock of

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Speaker 1: Deutsche Bank. Steve Major, let me go with you from HSBC.

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Speaker 1: You mentioned earlier how the street in central bankers, good intention,

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Speaker 1: policymakers have been wrong, wrong, wrong, for three or four years.

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Speaker 1: You go out to two thousand twenty one, Steve Bonus round,

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Speaker 1: I'll be older than Steve. You go out to two

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Speaker 1: thousand twenty one. When will we see the collapse in

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Speaker 1: the expectations of the dots? When will we see the

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Speaker 1: collapse of the dream and hope of yields higher. Well,

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Speaker 1: the reason I've looked five years out, Tom is to

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Speaker 1: try and get a clearer, a clever picture for the

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Speaker 1: next one or two years. And I think that the

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Speaker 1: danger is many people are looking at one thing at

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Speaker 1: a time. And obviously there's the US election and all

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Speaker 1: the political back dropping Europe and all the various fits

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Speaker 1: and ECB meetings, and my concern is that nothing much

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Speaker 1: is really going to change. I know that people are

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Speaker 1: talking about the rise of populism, the change of central

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Speaker 1: bank mandates, perhaps all this kind of thing, but I

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Speaker 1: just don't see it. And if you look at the

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Speaker 1: path of that long term dot that you refer to,

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Speaker 1: it's been coming down quite systematically, and and I can

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Speaker 1: imagine one year out there will be even lower. On

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Speaker 1: one day will be at the right level. But we're

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Speaker 1: not there yet. Yeah, and Francine, this is critical. It's

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Speaker 1: the three arrows coming down from just under four down

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Speaker 1: to three and a half percent, and the lower yellow

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Speaker 1: arrow is where we are. And of course Mr Major

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Speaker 1: suggesting we'll drive lower and Mr Pond saying maybe not. Francine, Yeah,

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Speaker 1: Stephen Major. So what will the world look like? So

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Speaker 1: we haven't really moved on from what we're seeing now?

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Speaker 1: Is it a hard brexit? Are you looking at still central?

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Speaker 1: I mean, will we be still discussing on surveillance and

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Speaker 1: whether helicopter money will come? What paints the picture overall? Well,

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Speaker 1: within the next five years, there's a good chance that

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Speaker 1: we would have had something quite radical like helicope the money.

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Speaker 1: But if you go around the world, and I'll start

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Speaker 1: with Japan, I can imagine that we'll still have negative rates,

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Speaker 1: They'll still be trying to cap the yield curve below zero.

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Speaker 1: I can imagine that in the euro Zone we will

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Speaker 1: have steps towards fiscal union. If we don't have that,

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Speaker 1: then there will be no euro So so there will

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Speaker 1: be a completely different looking Eurozone in five years time.

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Speaker 1: The UK will be out by then of the Upan Union,

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Speaker 1: by the sounds of things. If if the timeline that

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Speaker 1: we've been given is correct and fulfilled, then even with

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Speaker 1: some slippage in five years, they will be out. If

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Speaker 1: if the targets to hit, Stephen Major, we're gonna have

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Speaker 1: to leave it there. Were have to cut you off.

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Speaker 1: I'm so sorry. We'll get you on soon again for

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Speaker 1: further discussion of this. Mr Major is with HSBC, and

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Speaker 1: thanks so much to Michael Plant for participating as well.

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Speaker 1: Just extraordinary, Callum Anderson with us. When you raise your

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Speaker 1: gor Callum, it's time free lesson on the linkage of

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Speaker 1: currencies in the equity markets. A bloomberg red banner Footsie

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Speaker 1: up to record highs yes in US dollars No from

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Speaker 1: the peak footsie peak of oh seven round about the

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Speaker 1: beginning of the crisis. In US dollars of footsiets down

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Speaker 1: thirty three from the recent July summer of two thousand fourteen.

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Speaker 1: In US dollars, the Footsie is down twenty. These are

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Speaker 1: in US dollar. I mean, it really matters which currency

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Speaker 1: you're playing with, doesn't it? Absolutely all right. I mean

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Speaker 1: you've obviously had you know, dollar appreciation during that time,

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Speaker 1: and you have the initial hates from the Brexit votes.

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Speaker 1: In terms of the foot see. What we're looking at

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Speaker 1: in terms of UK equities and and stilling is the

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Speaker 1: diversience between the foot see one hundred and the foot

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Speaker 1: see two fifty. Uh. The one hundred is basically the

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Speaker 1: international benchmark, and the key consideration within that is that

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Speaker 1: seventy foot see one earnings come from abroad. So as

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Speaker 1: Stirling falls, that's actually good news for earnings. So it

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Speaker 1: makes absolute sense that as as Stirling falls, uh that

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Speaker 1: eventually after initial shocks resulting from specific events such as

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Speaker 1: the Brexit votes, that that you have the foot see rebounds.

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Speaker 1: If we have renewed economic weakness in the UK, you

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Speaker 1: would expect the foot see to fifty, which is much

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Speaker 1: more domestic, to significantly underperform the one. So that's that's

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Speaker 1: the relative value view within the UK equity market that

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Speaker 1: we're looking at. At the moment. There is so much

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Speaker 1: uncertainty that when you look at yeah, I mean at

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Speaker 1: the at the moment, maybe the keys phrase there because

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Speaker 1: how long does your confidence last that that's a good trade? No,

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Speaker 1: that that that that that's absolutely absolutely true. I mean

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Speaker 1: I think if we take a step back in m

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Speaker 1: in terms of the UK we we've gone from it

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Speaker 1: can't possibly happen, to shock to despair to you for it.

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Speaker 1: I mean, there's you just described to pre t I

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Speaker 1: mean certainly there was. The market believes that the breaks

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Speaker 1: it couldn't possibly happen then and then when it did,

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Speaker 1: you saw this massive shock to to UK markets. And

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Speaker 1: then we we saw UK economic data come out and

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Speaker 1: not only did it not collapse, it was actually better. Therefore,

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Speaker 1: the markets, being short terms, took the view, okay, it's

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Speaker 1: all over, uh and and that's why we had such

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Speaker 1: a such a market reaction to the reason may just

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Speaker 1: talking about article fifty, not not actually doing anything but

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Speaker 1: talking about it because it's it's almost as if the

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Speaker 1: market forgot about it. Well it's coming back. It seems

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Speaker 1: to be coming back with a vengeance. Exactly in the

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Speaker 1: currency market, Is it going to take a dismal economic

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Speaker 1: number or something to start worrying the equity markets? I

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Speaker 1: would say so yes. That's at the moments where we've

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Speaker 1: had the boost to the p M I, the boost

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Speaker 1: to the UK exports from the almost full in the

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Speaker 1: trade weighted value of of sterling. So the currency is

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Speaker 1: actually acting as it should as an automatic stabilizer to

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Speaker 1: to the real economy. When where? When? Not? If when

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Speaker 1: we get a downturn in in UK sentiment indicators as

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Speaker 1: a result of Article fifty being triggered and weakness in

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Speaker 1: the domestic UK economy, maybe not in that right session,

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Speaker 1: but some degree with weakness, then then you'll see it

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Speaker 1: feed through too higher beta market such as equities and credit. Okay,

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Speaker 1: something I'm not sure if you're if you've get the

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Speaker 1: latest on this, but it Italy goes to market with

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Speaker 1: a fifty year bond, why would you do that? And

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Speaker 1: why would you buy that? Is kind of the question.

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Speaker 1: Why would you look at uh, anything in Europe with

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Speaker 1: that long and time horizon, with the great the uncertainty

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Speaker 1: that we see there, why would you buy that? Well?

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Speaker 1: You know, as I said on Tom Show earlier, if

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Speaker 1: if you know a significant part of your benchmark is negative,

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Speaker 1: and it's negative because yields in Europe across the board

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Speaker 1: out to almost ten years are negative, then if your

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Speaker 1: pension founder a life insurer, yeah, and you have longer

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Speaker 1: term liabilities, do you have to buy a longer masses um?

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Speaker 1: You know, Carol, my I look here, we can squeeze

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Speaker 1: us in with your previous work at Standard Charter. How

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Speaker 1: beholden are the emerging markets to the developed nation dynamics.

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Speaker 1: There's a huge no, it's a fantastic question. There's a

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Speaker 1: huge structural tailwind in emerging markets right now for two reasons. One,

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Speaker 1: China stabilized, is no longer no longer falling uh And two,

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Speaker 1: as I said, the very act of benchmarking means that

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Speaker 1: if you have your benchmark that's negative, you have to

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Speaker 1: invest in the US and you have to invest in

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Speaker 1: emerging markets. We've run out of time. We could go

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Speaker 1: much longer. Calm Anderson, don't be bringing in Bremer with you.

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Speaker 1: Sometimes Bremer and Henderson together would be great. Callum Anderson

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Speaker 1: with you. Raise your group. This is Bloomberg. Who you

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Speaker 1: put your trust in matters. Investors have put their trust

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Speaker 1: in independent registered investment advisors to the tune of four

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Speaker 1: trillion dollars. Why they see their role as to serve,

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Speaker 1: not sell. That's why Charles Schwab is committed to the

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Speaker 1: success of over seven thousand independent financial advisors who passionately

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Speaker 1: dedicate themselves to helping people achieve their financial goals. Learn

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Speaker 1: more and find your independent advisor dot com. Brutal is

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Speaker 1: not the right word. More like rocky, like Rocky Colavito,

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Speaker 1: the Cleveland Indians. Rocky for international investment is a good

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Speaker 1: time to catch up with David Harrow, Oakmark and Harris

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Speaker 1: Associates as we look at UH in the case of Mr.

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Speaker 1: Harrow more large cap multinationals and international stocks UM as well. David,

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Speaker 1: how is September You're doing a little bit. You got

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Speaker 1: a nice bounce this September. Well, we had a good

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Speaker 1: third quarter, but again UM, I really judge opportunity by

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Speaker 1: discount that our portfolio trades at to intrinsic value. And

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Speaker 1: despite a strong quarter, we still think that there's significant

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Speaker 1: opportunity in international markets because valuations have really diverse, become

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Speaker 1: very diversified. You have a sector that appears for your

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Speaker 1: overvalued staples, pharmaceuticals, utilities, and then you have sectors that

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Speaker 1: just look pounded and looked extremely undervalued industrials, consumer discretionary

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Speaker 1: and financials. And I think there's opportunity for long term

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Speaker 1: investors to take advantage of this divergence within the opportunity,

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Speaker 1: and the divergence is the catalyst to get it started.

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Speaker 1: Is the catalyst named Janet Yellen. That may be part

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Speaker 1: of it. That certainly may be part of One of

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Speaker 1: the things where that's really hurt financials, of course, has

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Speaker 1: been the low and negative interest rates. And if you

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Speaker 1: start to kind of the end to it. It's interesting

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Speaker 1: to note to cover story of the economists a week

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Speaker 1: or two ago with living for living with low interest

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Speaker 1: rates forever or whatever. When you start to see those things,

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Speaker 1: Business magazine covers, Uh, perhaps we're getting to the bottom

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Speaker 1: and and I think these are officially low interest rates

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Speaker 1: which we have experiences has been one of the things

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Speaker 1: that have waited on global financials. And if we begin

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Speaker 1: to start increasing rates here in the States, that will

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Speaker 1: be one of the catalysts. I would imagine that help

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Speaker 1: get them get up and go. David herero we perceived

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Speaker 1: that US multi nationals can manage their accounting statements and

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Speaker 1: perhaps their stock removed from our political economics. Can the

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Speaker 1: same be said for the big multinationals you look at

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Speaker 1: from other companies, Are they removed as much from their

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Speaker 1: domestic dynamics as US companies. Well, in the short term

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Speaker 1: you see a lot of impact that geopolitical events have

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Speaker 1: on share prices. Now, the interesting thing to note is

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Speaker 1: you see very little impact on underlying change intrinsic value.

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Speaker 1: I mean, it seems like since oh seven, o eight,

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Speaker 1: o nine, investors have been so focused on macro that

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Speaker 1: they've completely missed micro. They completely miss what's happening within

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Speaker 1: the firm, what's happening in their cash flow statements and

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Speaker 1: balance sheets and income statements. And they get scared away

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Speaker 1: by you know, Trump saying this, yell and saying this,

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Speaker 1: Clinton saying this, uh, breggsit whatever, but they ignore what's

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Speaker 1: actually happening within the businesses themselves. And what's been happening

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Speaker 1: is there's been a steady build up and creation of value.

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Speaker 1: And this is what we, as again long term value investors,

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Speaker 1: focus on, and we try to take advantage of the

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Speaker 1: volatility that these macro events provide. Do you perceive that

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Speaker 1: in European banks? I mean, let's start out, do you

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Speaker 1: own deutsch you bank? We do not. And I think

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Speaker 1: this is a perfect example because when that news came

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Speaker 1: out of the fourteen or fifteen billion fine, I mean,

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Speaker 1: someone threw that out there, uh, despite the fact that

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Speaker 1: probably has little attachment to reality, and it just hit

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Speaker 1: the entire European financial sector quite hard. Uh. And again,

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Speaker 1: this is an example people shoot first and ask questions later,

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Speaker 1: and it's an opportunity for long term investors. I mean

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Speaker 1: I look at the opportunity for investors, and you've had

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Speaker 1: an affinity with the French banks to say the least,

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Speaker 1: even wells Fargo pulling back on the stump uproar round

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Speaker 1: is well, how are the French banks valued? Yeah, we

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Speaker 1: own we own b MP, which is, you know, a

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Speaker 1: very large French bank, and with one exception, they've managed

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Speaker 1: to avoid the minefield. And the one exception was, to

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Speaker 1: recall a couple of years ago, there was a very

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Speaker 1: happy hefty d J. Fine. Having said that, having said that,

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Speaker 1: it's a think that trades at about eight times earnings

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Speaker 1: and just over six of book value and yields almost

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Speaker 1: six percent, and they should be able to grow earnings,

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Speaker 1: and they're growing earnings with loan losses are dropping and

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Speaker 1: and costs are dropping and they're getting a better feeding come, etcetera.

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Speaker 1: So this is think. It's something that's gonna grow earnings

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Speaker 1: ten or fift but they could still grow earnings. That's

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Speaker 1: a safe dividend yield, and it's a realistic price to

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Speaker 1: earnings in price to book Ratio was speaking to cheap. Yeah,

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Speaker 1: I was speaking with the Voto about the Swiss banks

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Speaker 1: and particularly Credit Swee. Credit Swees, which you own, doesn't

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Speaker 1: have scale. Many would suggest by definition, does David Harrow

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Speaker 1: own Credit Sweez because it's a merger must. Well, what's

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Speaker 1: happening is it's a transformation must. And those areas which

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Speaker 1: they don't have scale, where they can't make through the

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Speaker 1: cycle returns in some of those areas within the investment

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Speaker 1: bank they've been getting out of and they've been trying

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Speaker 1: to deploy where they do have scale and where they

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Speaker 1: are strong, for instance Asian Wealth Management. So this is

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Speaker 1: what they've been trying to do. It's been messy, as

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Speaker 1: you know, winding down parts of investment bank A and

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Speaker 1: it costs money because you have to get out of

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Speaker 1: positions and be it riles up some of your traders

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Speaker 1: and employees who like to talk to the press and complain.

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Speaker 1: So you know, it's a messy job, but it's a

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Speaker 1: job that had to be done, and it appears to

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Speaker 1: be close to being over. And I think, after all,

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Speaker 1: this is another bank that's just again selling just way

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Speaker 1: too cheap. And Nick got hit on the droits your

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Speaker 1: bank thing. By the way, it got hit on that

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Speaker 1: as well. I'll agree with it. But can you explain

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Speaker 1: to me, with all your experience, particularly out of Chicago, David,

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Speaker 1: the idea that they are immune too into two domestic

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Speaker 1: mergers or international mergers. I mean, that's got to be

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Speaker 1: the path for most of these banks, right, Yeah, you'll

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Speaker 1: you will probably see some of these, some of this

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Speaker 1: business combinations taken place. It's hard to say one where

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Speaker 1: and how, but again you will because of you know,

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Speaker 1: compliance costs and all these things. That just makes sense

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Speaker 1: in some cases to merge. And the other big thing

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Speaker 1: that's happening in banking is to move to digital. And

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Speaker 1: you know this whole thing. Fifteen hours ago everyone was

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Speaker 1: putting branches everywhere. Now everyone's doing it, you know, you know,

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Speaker 1: and I know that rights deals are very European. We

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Speaker 1: don't see them as often in the United States. Of

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Speaker 1: Deutsche Bank has to do a rights deal and Mr

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Speaker 1: Harrow does it own Deutsche Bank shares? Folks, how do

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Speaker 1: you sell that to the shareholders? Is it just you

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Speaker 1: put a gun. It's it's almost the rights down or

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Speaker 1: crammed down. Yeah, you know what happens is what they'll

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Speaker 1: do is if they need capital, and I don't know

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Speaker 1: if they do. The bank has always been a bit

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Speaker 1: too opaque for us. It's been a little they've never

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Speaker 1: made enough money in good times for us. They got

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Speaker 1: a competitive home market, which doesn't make sense with the

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Speaker 1: landa spunk and eating away local profits. Um. But if

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Speaker 1: they have to do a rights issue, though, it will

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Speaker 1: be a discounted rights issue, and it's basically kind of

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Speaker 1: a gun to the existing shareholders head that you're either

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Speaker 1: going to get diluted or you're gonna hip in. And

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Speaker 1: so the economic thing, especially if the rights issue is

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Speaker 1: surrounded by a kind of a restructuring plan, um, you know,

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Speaker 1: then it might be something that's attractive for the existing shareholders.

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Speaker 1: But the thing with the rights issue is is that

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Speaker 1: if you don't participate, you get so deluded that it's

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Speaker 1: almost forces you to do so. Now exactly, it's it's

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Speaker 1: a game theory in action, and maybe Mr Cryan owns

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Speaker 1: more cards and the things. David Harrow with us from

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Speaker 1: Chicago from Wisconsin with Oak Tree and with Harris associates. David,

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Speaker 1: We've been waiting and waiting because excuse me, I was

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Speaker 1: thinking about Chicago I was thinking red Sox cubs. You know,

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Speaker 1: it just wasn't focused. Excuse me, Mr Harrow Um. When

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Speaker 1: I look at um uh the underperformance of international do

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Speaker 1: you worry that it could be permanent or do you

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Speaker 1: just know that someday it will turn up? Um? It

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Speaker 1: will certainly turn up. And this is what happens is

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Speaker 1: when things are bleak, people start to bend in the

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Speaker 1: asset class, usually at the exact wrong time. One of

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Speaker 1: the headwinds international funds have faced over the three four

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Speaker 1: or five years has been the strengthening of the dollar

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Speaker 1: as it finally turned after years and years of dollar

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Speaker 1: weakness and getting that currency movement as a tail wind.

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Speaker 1: It's turned pretty stiffly in the face of international investors.

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Speaker 1: But you know, we're getting to the stage where there's

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Speaker 1: some other impacts that happened as as a result of

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Speaker 1: the strong dollar. This is enhancing to multinationals located outside

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Speaker 1: the U S. It's enhancing to their earnings, and we're

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Speaker 1: starting to see this happen become stimulative to those local

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Speaker 1: localities growth. We're starting to see a little bit of

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Speaker 1: this as well. I mean, one of the reasons why

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Speaker 1: Germany has been doing so well economically is because of

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Speaker 1: the weak euro, and they have a huge export sector.

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Speaker 1: So these things tend to wash out over time. But

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Speaker 1: they go through, you know, cycles, This is not something

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Speaker 1: that happens overnight. That they go through relatively long cycles,

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Speaker 1: a lot of it driven by currency changes, um. And again,

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Speaker 1: investors should try to take advantage and see through these cycles,

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Speaker 1: not just try to you know, buy high and sell

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Speaker 1: low is typically what they do. But how do you

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Speaker 1: do that now when there's so much uncertainty? Rather than

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Speaker 1: see through, aren't people more likely to just kind of uh,

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Speaker 1: not even see at this point look away in the

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Speaker 1: train train wreck. There's just always been uncertainty to some degree.

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Speaker 1: I mean it's yes, there's a different magnitudes of it,

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Speaker 1: but I mean, I can't remember I've been doing this

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Speaker 1: now since the mid nineteen eighties. I can't remember really

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Speaker 1: a quiet period where there was nothing to worry about.

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Speaker 1: I mean, we've gone through a couple of energy crisises,

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Speaker 1: we've gone through wars, we've gone through invasions, we've gone

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Speaker 1: through you know, natural disasters, and you know, the economy

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Speaker 1: plugs along over time. You know, even as we hear

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Speaker 1: the multinational organizations are about to pronounce their outlook on

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Speaker 1: global economic growth and the economy. Global economy still grown

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Speaker 1: around three that is enough. That is enough for companies

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Speaker 1: to grow their earnings and cash flow streams companies in general.

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Speaker 1: But what about financials at this point? I mean, you

429
00:25:37,000 --> 00:25:40,280
Speaker 1: have Tejen time from credits that we're saying is it

430
00:25:40,320 --> 00:25:43,800
Speaker 1: is not investable now. So you know, here you have

431
00:25:43,880 --> 00:25:47,639
Speaker 1: the CEO of a company saying look past us, you know,

432
00:25:48,080 --> 00:25:50,679
Speaker 1: don't even put your money in. Yeah. I think that

433
00:25:50,800 --> 00:25:56,040
Speaker 1: was a blanket statement. And the necessarily pertain to individual uh,

434
00:25:56,160 --> 00:26:00,199
Speaker 1: companies and businesses within those industries. I mean, there are

435
00:26:00,200 --> 00:26:05,080
Speaker 1: certainly many good financial institutions, and as Tom mentioned earlier,

436
00:26:05,359 --> 00:26:08,119
Speaker 1: we will probably start to see some sort of confoundation.

437
00:26:08,600 --> 00:26:12,240
Speaker 1: The regulatory barriers have become so large and so cumbersome.

438
00:26:12,320 --> 00:26:14,720
Speaker 1: And by the way, this is something I wish we

439
00:26:14,800 --> 00:26:17,280
Speaker 1: would we'd hear some of these candidates talk about. Is

440
00:26:17,280 --> 00:26:23,240
Speaker 1: these regulatory issues that have permeated the global economy. Perhaps

441
00:26:23,240 --> 00:26:27,520
Speaker 1: this should be a covert Economists are strangling business entrepreneurs

442
00:26:27,520 --> 00:26:30,760
Speaker 1: and risk takers. It's just overdone. The pendulum has swung

443
00:26:30,960 --> 00:26:36,160
Speaker 1: too far, whether it be healthcare, financial services, environmental and

444
00:26:36,320 --> 00:26:39,040
Speaker 1: these banks you know, it's it's just gotten too far.

445
00:26:39,440 --> 00:26:42,040
Speaker 1: In order for regulation to be effective, it has to

446
00:26:42,080 --> 00:26:45,399
Speaker 1: be transparent and easy to understand, and we don't have that.

447
00:26:46,119 --> 00:26:48,600
Speaker 1: And this might cost some mergers. This might actually cast

448
00:26:48,640 --> 00:26:50,879
Speaker 1: some mergers because it's you know, there's such a barrier

449
00:26:50,920 --> 00:26:53,320
Speaker 1: the small guys can't keep up. How will the pendulum

450
00:26:53,400 --> 00:26:56,960
Speaker 1: swing quickly? David Harrow on the fine towards Deutsche Bank.

451
00:26:57,000 --> 00:26:59,960
Speaker 1: You don't own Deutsche Bank, but fourteen to jillion dollars

452
00:27:00,040 --> 00:27:02,480
Speaker 1: there's a lot of money, isn't it. It's it's a

453
00:27:02,520 --> 00:27:05,359
Speaker 1: lot of money and is unreasonable because the punishment doesn't

454
00:27:05,359 --> 00:27:08,000
Speaker 1: at all fit the crime if there was even a crime,

455
00:27:08,400 --> 00:27:12,119
Speaker 1: I mean trading an RMBS. You know that was there

456
00:27:12,200 --> 00:27:14,879
Speaker 1: was never a law against it. But you know, the

457
00:27:15,000 --> 00:27:18,640
Speaker 1: fine is incredulous, and I think it's it's it's really unacceptable,

458
00:27:18,680 --> 00:27:20,840
Speaker 1: and someone's got to raise their hand and say that

459
00:27:21,160 --> 00:27:23,639
Speaker 1: is not appropriate. You have a working number for what

460
00:27:23,720 --> 00:27:27,560
Speaker 1: would be acceptable, you know, I think you have to

461
00:27:27,560 --> 00:27:30,800
Speaker 1: really argue what were the economic damages and losses and

462
00:27:30,840 --> 00:27:33,720
Speaker 1: then take it from there. As a result of their behavior,

463
00:27:34,040 --> 00:27:36,080
Speaker 1: and in some of these cases, as a result of

464
00:27:36,160 --> 00:27:39,520
Speaker 1: some of these banks behavior, there was very dim DOMINIONUS

465
00:27:40,359 --> 00:27:44,000
Speaker 1: economic loss. You can't just you know, they use this

466
00:27:44,080 --> 00:27:46,280
Speaker 1: brush and they paint it and then they threatened he

467
00:27:46,520 --> 00:27:49,960
Speaker 1: can't operate that way. It has consequences. David Harroll, thank

468
00:27:50,000 --> 00:27:52,000
Speaker 1: you so much. With oak Bark, I'll get it right,

469
00:27:52,080 --> 00:27:56,080
Speaker 1: ok bark and harrises. So it's it's greatly appreciated, Mr Harold.

470
00:28:06,800 --> 00:28:10,159
Speaker 1: Nothing happening today that is going to shift market perceptions

471
00:28:10,920 --> 00:28:14,080
Speaker 1: of what's gonna happen with the FED, or the global

472
00:28:14,200 --> 00:28:20,520
Speaker 1: or the world, the US economy. Okay, but sterling is uh, yes,

473
00:28:20,600 --> 00:28:23,200
Speaker 1: I don't think I and Shepherdson can get home. No,

474
00:28:23,320 --> 00:28:25,359
Speaker 1: he's gonna have to stay here. He got on a

475
00:28:25,480 --> 00:28:29,080
Speaker 1: he got on a plane and he could afford the

476
00:28:29,119 --> 00:28:30,840
Speaker 1: flight to the United States, but he can't afford the

477
00:28:30,880 --> 00:28:33,840
Speaker 1: flight back. What is the sterling price at the moment

478
00:28:35,760 --> 00:28:40,320
Speaker 1: forty two inter day one set six, Ian Shepherdson was

479
00:28:40,640 --> 00:28:47,600
Speaker 1: twelve years old. The less it is it is we're

480
00:28:47,640 --> 00:28:52,320
Speaker 1: finally starting to see the Brexit chickens. I guess yeah, yeah,

481
00:28:52,360 --> 00:28:53,800
Speaker 1: what we've had for the last couple of months. It's

482
00:28:53,800 --> 00:28:55,800
Speaker 1: like it's like the Phony War in nineteen fourteen. No

483
00:28:55,840 --> 00:28:59,200
Speaker 1: wards declared, but nobody's shooting um and now the shooting

484
00:28:59,240 --> 00:29:01,560
Speaker 1: is kind of starting. Is what's happening is that the

485
00:29:01,680 --> 00:29:07,120
Speaker 1: UK domestic political scene is shifting, uh, and the Conservative

486
00:29:07,160 --> 00:29:10,280
Speaker 1: administration is kind of coalescing around this idea of what's

487
00:29:10,320 --> 00:29:14,120
Speaker 1: called a hard Brexit, by which we just walk away

488
00:29:14,320 --> 00:29:19,400
Speaker 1: without negotiating a close relationship with the EU. Afterwards markets

489
00:29:19,400 --> 00:29:22,080
Speaker 1: assumed that wouldn't happen. That the market assumption was that

490
00:29:22,440 --> 00:29:24,240
Speaker 1: there would be a very soft Brexit and we'd actually

491
00:29:24,240 --> 00:29:27,080
Speaker 1: remain quite close to the comfort of the Europeans. And

492
00:29:27,120 --> 00:29:28,720
Speaker 1: it's not going to work out that I know, Ian,

493
00:29:28,800 --> 00:29:30,640
Speaker 1: Mike's got a ton of questions. We're gonna have you

494
00:29:30,680 --> 00:29:34,320
Speaker 1: here for an hour today. The chart is politely elegant

495
00:29:35,000 --> 00:29:38,520
Speaker 1: migrate seuth in. What's frightened to me is a target

496
00:29:39,040 --> 00:29:43,200
Speaker 1: and two standard deviation move weaker Sterling is a one

497
00:29:43,360 --> 00:29:47,960
Speaker 1: twenty two forty. Where does Ian Shephard have in his

498
00:29:48,040 --> 00:29:52,520
Speaker 1: head Shepherdson having your head? Where this becomes a deal,

499
00:29:52,640 --> 00:29:57,760
Speaker 1: where this becomes a deal to financial society in Britain. Well, um,

500
00:29:58,480 --> 00:30:01,200
Speaker 1: the floor to me is is potentially some way off

501
00:30:01,240 --> 00:30:04,440
Speaker 1: because although we're talking about a heartbreaks that we haven't

502
00:30:04,440 --> 00:30:06,400
Speaker 1: actually got it yet. It could be really calamitous and

503
00:30:06,480 --> 00:30:10,479
Speaker 1: so at one twenty two isn't necessarily the floor. This

504
00:30:10,560 --> 00:30:13,440
Speaker 1: could go really substantially lower. I remember, I'm old enough

505
00:30:13,440 --> 00:30:15,960
Speaker 1: to remember it nearly a parity a long long time ago.

506
00:30:16,640 --> 00:30:18,440
Speaker 1: And if you were to tell me, you know, well,

507
00:30:18,520 --> 00:30:20,320
Speaker 1: any year from now things are going to be so messy,

508
00:30:20,440 --> 00:30:22,320
Speaker 1: that's where you're going to be. I'm not going to argue.

509
00:30:23,080 --> 00:30:25,840
Speaker 1: I would say it's entirely plausible. But what we've got

510
00:30:25,880 --> 00:30:28,560
Speaker 1: is is it's kind of a Donald Rumsfeldian hell of

511
00:30:28,640 --> 00:30:32,760
Speaker 1: unknown unknowns. I just don't know where it just it

512
00:30:32,800 --> 00:30:35,720
Speaker 1: goes on forever. You know that the article fifty, that

513
00:30:35,800 --> 00:30:38,000
Speaker 1: the letter to the EU that says, right, we're going

514
00:30:38,440 --> 00:30:40,800
Speaker 1: that's a two year process, but it can be extended

515
00:30:40,840 --> 00:30:44,160
Speaker 1: by mutual agreement. And during that two years anything could happen.

516
00:30:44,200 --> 00:30:46,040
Speaker 1: I mean, if the economy falls apart and the British

517
00:30:46,040 --> 00:30:47,960
Speaker 1: public decide that they don't want to leave the EU

518
00:30:48,040 --> 00:30:51,440
Speaker 1: after all, Um, it could all be off. It just

519
00:30:51,520 --> 00:30:54,360
Speaker 1: depends how messy it gets and how how you know

520
00:30:54,440 --> 00:30:56,920
Speaker 1: to to what extent do people think that reducing immigration

521
00:30:56,960 --> 00:30:58,720
Speaker 1: is the most important thing in the world relative to

522
00:30:58,760 --> 00:31:01,440
Speaker 1: not being impoverished. We don't know now. One thing that

523
00:31:01,480 --> 00:31:05,239
Speaker 1: people have noted is that Theresa make comes from the

524
00:31:05,280 --> 00:31:08,640
Speaker 1: Midlands and she is not a creature of London, nor

525
00:31:08,800 --> 00:31:11,720
Speaker 1: is most of her cabinet. So one I've been to

526
00:31:11,840 --> 00:31:13,920
Speaker 1: it really congrasp the idea that she may not be

527
00:31:14,680 --> 00:31:18,920
Speaker 1: enamored of the city. But what is the benefit. What

528
00:31:19,040 --> 00:31:23,320
Speaker 1: is the argument for a hard Brexit? There really isn't one.

529
00:31:23,400 --> 00:31:26,600
Speaker 1: This is the puzzling thing about it, um the hard

530
00:31:26,600 --> 00:31:29,120
Speaker 1: Breaksit throws you back initially onto just w t O

531
00:31:29,200 --> 00:31:32,480
Speaker 1: trading rules which aren't very favorable for Britain. And the

532
00:31:32,560 --> 00:31:35,800
Speaker 1: real problem right now, of course, is that that negotiating

533
00:31:35,800 --> 00:31:37,920
Speaker 1: trade deals with with everybody else is going to be

534
00:31:37,960 --> 00:31:41,000
Speaker 1: extremely difficult because the words trade deals are the most

535
00:31:41,080 --> 00:31:44,440
Speaker 1: unpopular words in English language right now politically with everybody.

536
00:31:44,720 --> 00:31:47,040
Speaker 1: So the timing for Britain to be going around waving

537
00:31:47,080 --> 00:31:48,920
Speaker 1: pieces of paper and saying, please do a deal with us,

538
00:31:49,000 --> 00:31:51,800
Speaker 1: it just couldn't be worse. And so I'm struggling to

539
00:31:51,840 --> 00:31:53,520
Speaker 1: get inside the heads of people who think that it's

540
00:31:53,520 --> 00:31:55,880
Speaker 1: a great idea just to step away from the EU

541
00:31:56,160 --> 00:31:59,720
Speaker 1: uh and um and start trying to negotiate with everybody

542
00:31:59,720 --> 00:32:02,600
Speaker 1: else simultaneously. It seems to me to be crazy. Well,

543
00:32:02,800 --> 00:32:07,000
Speaker 1: when do we start to see the data reflect what

544
00:32:07,280 --> 00:32:11,680
Speaker 1: the Sterling market cable is now pricing it? Yeah, the

545
00:32:11,680 --> 00:32:13,160
Speaker 1: first place you see it is actually going to be

546
00:32:13,160 --> 00:32:15,800
Speaker 1: on the inflation data, not in the economic activity numbers.

547
00:32:15,800 --> 00:32:19,440
Speaker 1: So kind of, uh, import prices are already rising quite

548
00:32:19,440 --> 00:32:22,440
Speaker 1: strongly the UK, you know, it's the exports and imports

549
00:32:22,480 --> 00:32:24,520
Speaker 1: are thirty percent of GDP roughly, So it's a very

550
00:32:24,560 --> 00:32:27,840
Speaker 1: open economy. And that means that really big movements in Sterling,

551
00:32:27,880 --> 00:32:30,040
Speaker 1: which we haven't had for years and have therefore sort

552
00:32:30,040 --> 00:32:32,560
Speaker 1: of forgotten about, become a really big deal for inflation

553
00:32:32,640 --> 00:32:35,440
Speaker 1: very quickly, and that's where the problems will emerge. As

554
00:32:35,440 --> 00:32:36,880
Speaker 1: far as the public sees it, that's going to be

555
00:32:36,920 --> 00:32:39,720
Speaker 1: the first thing they feel. How do you link euro

556
00:32:39,880 --> 00:32:42,880
Speaker 1: dynamics in this? I mean, you're an economist, we're talking,

557
00:32:43,000 --> 00:32:48,200
Speaker 1: you're foreign exchange. But I'm sorry they're linked. They're arguably hard.

558
00:32:48,280 --> 00:32:54,360
Speaker 1: Soft Brexit is about European response. What does the eurodo? Well? Um,

559
00:32:54,520 --> 00:32:57,320
Speaker 1: the European response is complicated because of course the Europeans

560
00:32:57,320 --> 00:32:59,280
Speaker 1: are kind of split on on these issues as well.

561
00:33:00,320 --> 00:33:02,440
Speaker 1: They don't want us to leave the core European economies,

562
00:33:02,440 --> 00:33:04,400
Speaker 1: don't want the UK to leave, but at the same

563
00:33:04,480 --> 00:33:08,160
Speaker 1: time they want to make the integrity of the Eurozone.

564
00:33:08,160 --> 00:33:10,080
Speaker 1: The integrity of the EU is the most important thing

565
00:33:10,960 --> 00:33:12,720
Speaker 1: to them, and they can't be seen to be offering

566
00:33:12,720 --> 00:33:14,600
Speaker 1: a deal to Britain that appears to make it easy

567
00:33:14,600 --> 00:33:18,360
Speaker 1: to leave less painful to leave. And so um, They're

568
00:33:18,400 --> 00:33:21,120
Speaker 1: negotiating position is not clear, just like the UK's negotiating

569
00:33:21,160 --> 00:33:24,640
Speaker 1: position isn't clear either. Um. And what everyone in Europe

570
00:33:24,680 --> 00:33:26,640
Speaker 1: was worried about is that this starts a sort of,

571
00:33:27,000 --> 00:33:31,560
Speaker 1: you know, a process of falling dominoes where um, where

572
00:33:31,560 --> 00:33:33,520
Speaker 1: other country and of the UK gets a decent deal

573
00:33:33,520 --> 00:33:35,800
Speaker 1: out of things, another countries started say well, we won't

574
00:33:35,840 --> 00:33:38,280
Speaker 1: like some of that as well. So there's huge tension

575
00:33:38,320 --> 00:33:40,560
Speaker 1: within the EU and between the EU and the UK.

576
00:33:41,240 --> 00:33:42,840
Speaker 1: And I've got to say that anyone who says they

577
00:33:42,880 --> 00:33:45,640
Speaker 1: know how it's gonna work out is kind of killing themselves,

578
00:33:45,640 --> 00:33:49,080
Speaker 1: completely deluded, because there's a million different possible outcomes. Here.

579
00:33:49,160 --> 00:33:51,840
Speaker 1: We're here are the foreign exchange strategies. Ian Shepherdson, We've

580
00:33:51,840 --> 00:33:56,520
Speaker 1: been talking Sterling, Michaelmunity. He's coming up with a strategy

581
00:33:56,560 --> 00:33:59,280
Speaker 1: to get back home. Maybe maybe Michael McKee, you could

582
00:33:59,360 --> 00:34:03,760
Speaker 1: nudge Mr Shepherds and towards his core competency, and that

583
00:34:03,800 --> 00:34:07,800
Speaker 1: would be economics. Uh. We we talked a little bit

584
00:34:07,840 --> 00:34:11,239
Speaker 1: about the UK and the fact that had shown up

585
00:34:11,320 --> 00:34:15,080
Speaker 1: yet in the numbers. Uh what about in Europe. We're

586
00:34:15,160 --> 00:34:19,000
Speaker 1: watching the European economy sort of struggle along some good numbers,

587
00:34:19,040 --> 00:34:22,880
Speaker 1: some bad numbers. Doesn't seem to have hit Europe either.

588
00:34:23,080 --> 00:34:24,520
Speaker 1: I mean, there are a lot of things wrong with

589
00:34:24,560 --> 00:34:26,960
Speaker 1: the European economy, but Britain doesn't seem to be one

590
00:34:26,960 --> 00:34:29,959
Speaker 1: of them yet. Yeah, no, not yet, not yet though

591
00:34:30,000 --> 00:34:31,680
Speaker 1: it will. I mean the UK with the with the

592
00:34:31,719 --> 00:34:34,200
Speaker 1: weakest sterling will gain market share at the margin in

593
00:34:34,400 --> 00:34:37,600
Speaker 1: in export markets inside Europe and also competing with European

594
00:34:37,600 --> 00:34:40,319
Speaker 1: businesses in other countries. So there is a hit to them,

595
00:34:40,360 --> 00:34:42,600
Speaker 1: you know. And the UK is a very substantial economy

596
00:34:43,160 --> 00:34:46,960
Speaker 1: at the second biggest economy in Europe after Germany. So um,

597
00:34:47,000 --> 00:34:49,400
Speaker 1: the tearing away process, the breakup is going to be

598
00:34:49,400 --> 00:34:53,359
Speaker 1: really tough for for everybody, including the Europeans. But right now,

599
00:34:53,560 --> 00:34:55,319
Speaker 1: you know, Europe has an economic cycle. I know it's

600
00:34:55,400 --> 00:34:57,600
Speaker 1: very fashionable just to say Europe everything is a disaster,

601
00:34:58,080 --> 00:35:01,280
Speaker 1: which structurally it is, but it also has a cycle,

602
00:35:01,360 --> 00:35:02,920
Speaker 1: and that cycle has been pushed along by the e

603
00:35:03,000 --> 00:35:05,640
Speaker 1: c B with a huge amount of liquidity. It's a

604
00:35:05,719 --> 00:35:08,400
Speaker 1: very much liquidity driven economy, and more so than the US.

605
00:35:08,800 --> 00:35:10,600
Speaker 1: And when you've got ten percent growth in the in

606
00:35:10,640 --> 00:35:12,440
Speaker 1: the narrow measure of the money supply that the e

607
00:35:12,520 --> 00:35:15,840
Speaker 1: c B is driving, you're going to get decent economic growth.

608
00:35:15,920 --> 00:35:18,360
Speaker 1: And that's exactly what they've got so right now for

609
00:35:18,440 --> 00:35:20,840
Speaker 1: Europe it doesn't look so bad. OK. I ask about

610
00:35:20,840 --> 00:35:22,560
Speaker 1: the verb you shows you should pushed along? Is it

611
00:35:22,920 --> 00:35:26,880
Speaker 1: more pulled? Are they pulling activity forward here in the

612
00:35:26,880 --> 00:35:30,480
Speaker 1: traditional way a central bank does. Uh? No, I wouldn't

613
00:35:30,480 --> 00:35:32,760
Speaker 1: say they're pulling it forward. I think they've genuinely created

614
00:35:32,800 --> 00:35:36,279
Speaker 1: activity that wouldn't otherwise have been happening through the liquidity.

615
00:35:36,560 --> 00:35:39,440
Speaker 1: Remember that the European economy, unlike the U S, is

616
00:35:39,520 --> 00:35:42,759
Speaker 1: very heavily bank dependent. There's a much smaller array of

617
00:35:42,800 --> 00:35:45,880
Speaker 1: other financing sources for businesses. The VC business is much smaller,

618
00:35:45,880 --> 00:35:48,359
Speaker 1: the private equity business is much smaller. It's a bank

619
00:35:48,480 --> 00:35:51,960
Speaker 1: driven economy, so you've got a much closer relationship between

620
00:35:52,160 --> 00:35:55,960
Speaker 1: bank sector liquidity and economic growth. And and and that's exactly

621
00:35:55,960 --> 00:35:58,200
Speaker 1: what's happening. It's working in the way that it should.

622
00:35:58,440 --> 00:36:02,280
Speaker 1: It's not generating three percent growth anymore because Europe's trend growth,

623
00:36:02,320 --> 00:36:05,360
Speaker 1: because of its demographics and it's productivity weakness, is nowhere

624
00:36:05,400 --> 00:36:07,600
Speaker 1: near those sort of numbers anymore, just like it isn't here.

625
00:36:07,880 --> 00:36:10,439
Speaker 1: But in terms of what Europe is capable of right now,

626
00:36:10,480 --> 00:36:13,400
Speaker 1: it's probably getting quite close to it. It could be

627
00:36:13,440 --> 00:36:16,080
Speaker 1: a lot worse. Is this, though, an economy on a

628
00:36:16,120 --> 00:36:18,839
Speaker 1: heart lung machine when you pull the plug, Well, that's

629
00:36:18,840 --> 00:36:20,960
Speaker 1: a squillion dollar question, isn't it. You know, what the

630
00:36:20,920 --> 00:36:24,000
Speaker 1: ECB is doing is pumping as much into the economy

631
00:36:24,000 --> 00:36:26,280
Speaker 1: as it possibly we can, because Dragging knows very well

632
00:36:26,440 --> 00:36:28,200
Speaker 1: that when the tide next goes out, and it will,

633
00:36:28,320 --> 00:36:30,279
Speaker 1: there will be a downtown at some point when that

634
00:36:30,280 --> 00:36:32,920
Speaker 1: tide goes out. He wants to have as few economy

635
00:36:33,000 --> 00:36:35,760
Speaker 1: stranded as possible, but some of them will be stranded.

636
00:36:35,840 --> 00:36:37,360
Speaker 1: And the idea that we're never going to have another

637
00:36:37,400 --> 00:36:40,759
Speaker 1: existential crisis for the euro is just delusional. If you

638
00:36:41,480 --> 00:36:47,120
Speaker 1: framed your two thousand seventeen growth calls, I mean, Catherine

639
00:36:47,160 --> 00:36:50,040
Speaker 1: Man trots it out for always. See Mr Absfeld will

640
00:36:50,080 --> 00:36:53,000
Speaker 1: trot it out for I m F this morning. I mean,

641
00:36:53,160 --> 00:36:55,240
Speaker 1: I know they have a hundred and fifty PhDs helping

642
00:36:55,239 --> 00:37:00,000
Speaker 1: them on like you. But if you framed seventeen yet, uh,

643
00:37:00,200 --> 00:37:03,160
Speaker 1: I think it'll be okay. Actually for the US and seventeen,

644
00:37:03,200 --> 00:37:05,560
Speaker 1: a couple of things are happening. First, we're losing an

645
00:37:05,640 --> 00:37:09,040
Speaker 1: enormous drag that we've suffered from this astonishing collapse in

646
00:37:09,080 --> 00:37:11,720
Speaker 1: capital spending in the mining business, mostly in the oil business,

647
00:37:12,040 --> 00:37:14,600
Speaker 1: that is now over, which is a great relief. It

648
00:37:14,680 --> 00:37:17,160
Speaker 1: was it was falling in a fifty percent annualized rate

649
00:37:17,200 --> 00:37:19,640
Speaker 1: quarter after quarter after quarter, and now it's done, and

650
00:37:19,640 --> 00:37:22,400
Speaker 1: in fact Q three Q FOURDAL rebounds. I'm happy about that.

651
00:37:22,760 --> 00:37:26,560
Speaker 1: I'm also very happy to see that finally, capital spending

652
00:37:26,560 --> 00:37:28,600
Speaker 1: plans in the small business sector, which I tracked through

653
00:37:28,600 --> 00:37:31,640
Speaker 1: the n f I B Small Business Survey, they're picking

654
00:37:31,680 --> 00:37:34,840
Speaker 1: up really quite nicely, and that's a huge change. And

655
00:37:34,880 --> 00:37:37,600
Speaker 1: I wonder whether maybe it's because now it's becoming so

656
00:37:37,640 --> 00:37:39,879
Speaker 1: expensive to hire people and there's so few people left

657
00:37:39,880 --> 00:37:41,560
Speaker 1: to hire that are that are qualified. That that's what

658
00:37:41,640 --> 00:37:44,320
Speaker 1: everything tells us in all the surveys, that maybe businesses

659
00:37:44,320 --> 00:37:45,959
Speaker 1: are now thinking that we need to spend some money

660
00:37:45,960 --> 00:37:49,920
Speaker 1: on some equipment technology whatever in order to get that

661
00:37:50,320 --> 00:37:53,200
Speaker 1: extra bit of activity out of our business. So that's

662
00:37:53,200 --> 00:37:55,440
Speaker 1: a big change because we've been we've been moaning and

663
00:37:55,440 --> 00:37:57,799
Speaker 1: complaining about the weakness of capex for a very long time.

664
00:37:57,840 --> 00:37:59,520
Speaker 1: And that's that's that's a nice story if it comes

665
00:37:59,560 --> 00:38:01,479
Speaker 1: through the next Yeah. Well, given what you're saying about

666
00:38:01,600 --> 00:38:04,360
Speaker 1: the labor market, does the Phillips curve still hold that

667
00:38:04,440 --> 00:38:06,480
Speaker 1: we're going to start to see some inflation now? And

668
00:38:06,600 --> 00:38:08,799
Speaker 1: you you'd mentioned the catch because that has to be one. Yeah,

669
00:38:08,840 --> 00:38:10,799
Speaker 1: and there it is. There it is. So you know,

670
00:38:10,840 --> 00:38:12,640
Speaker 1: we had five years of wedge growth at two percent

671
00:38:12,719 --> 00:38:14,040
Speaker 1: now or at two and a half, and I think

672
00:38:14,040 --> 00:38:17,000
Speaker 1: by next spring we might be at three. Now, Tom,

673
00:38:17,040 --> 00:38:18,920
Speaker 1: I don't know if you remember, but but back in February,

674
00:38:18,920 --> 00:38:21,520
Speaker 1: I think you spoke to Stana Fisher, who sat at

675
00:38:21,520 --> 00:38:24,120
Speaker 1: the time that he'd be comfortable with wage growth at

676
00:38:24,120 --> 00:38:27,480
Speaker 1: about three and we're two and a half and I

677
00:38:27,480 --> 00:38:30,279
Speaker 1: think we could be at three the next spring. Now

678
00:38:30,320 --> 00:38:32,600
Speaker 1: that that's when things get interesting, and that's that's something

679
00:38:32,600 --> 00:38:34,520
Speaker 1: that the FED will find it difficult to tolerate. So

680
00:38:34,600 --> 00:38:38,279
Speaker 1: we're alter accommodative. Thank you us German Fisher and then

681
00:38:38,320 --> 00:38:44,400
Speaker 1: we're modestly accommodative. Thank you Cherry yelling. What rate is accommodative?

682
00:38:44,520 --> 00:38:48,680
Speaker 1: What what rate gets us away from adverbs? Yeah? This is?

683
00:38:48,960 --> 00:38:51,600
Speaker 1: You know. I think there's there's two big debates within

684
00:38:51,640 --> 00:38:53,160
Speaker 1: the FED on this. The first is you know how

685
00:38:53,239 --> 00:38:56,279
Speaker 1: much inflation pressure is? And second, when we start to

686
00:38:56,280 --> 00:38:58,640
Speaker 1: deal with it, how does the economy respond? What's the

687
00:38:58,719 --> 00:39:01,560
Speaker 1: reaction function of the economy higher rights? And the answer,

688
00:39:01,640 --> 00:39:03,600
Speaker 1: the short answer is I don't really know, and I

689
00:39:03,600 --> 00:39:06,040
Speaker 1: don't think anybody else does either. We all got some ideas,

690
00:39:06,040 --> 00:39:07,920
Speaker 1: you know, one extreme. A lot of people in the

691
00:39:07,920 --> 00:39:09,880
Speaker 1: markets think we raise rights once or twice and everything

692
00:39:09,880 --> 00:39:12,480
Speaker 1: falls apart. Some people are the FED, think that when

693
00:39:12,520 --> 00:39:15,319
Speaker 1: you start raising rights, actually growth will get better before

694
00:39:15,360 --> 00:39:20,120
Speaker 1: it gets weaker, because it's confidence will improve. Which is it? Ah?

695
00:39:20,200 --> 00:39:22,759
Speaker 1: Can I sit in the middle and say I don't.

696
00:39:23,000 --> 00:39:25,200
Speaker 1: I don't think the economy will fall apart with one

697
00:39:25,280 --> 00:39:26,799
Speaker 1: or two right ecks. I think it will take more

698
00:39:26,800 --> 00:39:29,080
Speaker 1: than that. But I'm not sure that I buy the

699
00:39:29,120 --> 00:39:31,239
Speaker 1: idea that as we start raising rights, everyone will be

700
00:39:31,280 --> 00:39:33,440
Speaker 1: so happy about the normalization that they'll run out and

701
00:39:33,440 --> 00:39:36,360
Speaker 1: start spending more money. But they might Okay, But I

702
00:39:36,360 --> 00:39:38,120
Speaker 1: I get this better than I go to Michael Ponder

703
00:39:38,160 --> 00:39:41,799
Speaker 1: Barkley's Capital earlier this morning, which is depressed five year

704
00:39:41,880 --> 00:39:47,840
Speaker 1: five year forward inflation expectations showing massive disinflation, get better

705
00:39:48,400 --> 00:39:50,920
Speaker 1: and all of a sudden there's a little inflation. Do

706
00:39:51,040 --> 00:39:54,560
Speaker 1: we get back to where we were? Do you subscribe

707
00:39:54,600 --> 00:39:59,759
Speaker 1: to a lower terminal value? Is Catherine Man put out

708
00:39:59,760 --> 00:40:02,080
Speaker 1: in a we see d and you know, maybe we'll

709
00:40:02,120 --> 00:40:05,080
Speaker 1: see from Maurice Absfield this morning. You know, I think

710
00:40:05,200 --> 00:40:07,480
Speaker 1: terminal rates the peak of this cycle are going to

711
00:40:07,520 --> 00:40:09,480
Speaker 1: be substantially lower than in the past. I don't have

712
00:40:09,480 --> 00:40:11,600
Speaker 1: a problem with that, um I do have the problem

713
00:40:11,640 --> 00:40:13,400
Speaker 1: with the idea that that what the market is pricing

714
00:40:13,400 --> 00:40:15,279
Speaker 1: in is the most likely outcome, because the market is

715
00:40:15,320 --> 00:40:18,200
Speaker 1: pricing in very, very little, and that does make me

716
00:40:18,680 --> 00:40:20,319
Speaker 1: nervous that there's a lot of scope in the other

717
00:40:20,320 --> 00:40:23,520
Speaker 1: direction for surprises. And I do think those inflation expectations

718
00:40:23,520 --> 00:40:26,520
Speaker 1: are going to rise. We know that the headline inflation

719
00:40:26,600 --> 00:40:29,840
Speaker 1: rate that gets splashed across the newspapers is going to

720
00:40:30,000 --> 00:40:31,799
Speaker 1: rise over the next few months just because of the

721
00:40:31,840 --> 00:40:34,520
Speaker 1: basis effects the oil price declines last year drop out,

722
00:40:34,560 --> 00:40:37,480
Speaker 1: So we'll see a response to that, and you know,

723
00:40:37,560 --> 00:40:40,719
Speaker 1: as inflation expectations rise, things become more tricky for the

724
00:40:40,719 --> 00:40:43,239
Speaker 1: Fed if wages are picking up at the same time.

725
00:40:43,320 --> 00:40:46,440
Speaker 1: This has been a hugely valuable Ian Shepherdson, Shepherdson, thank

726
00:40:46,480 --> 00:40:49,560
Speaker 1: you so much, particularly for the comments and Sterling before

727
00:40:49,600 --> 00:40:55,719
Speaker 1: Shepherdson singlehandedly boosting sterling this morning the engraved don't from

728
00:40:56,120 --> 00:41:04,520
Speaker 1: Prime Minister May will be it's way. Thanks for listening

729
00:41:04,640 --> 00:41:09,120
Speaker 1: to the Bloomberg Surveillance podcast. Subscribe and listen to interviews

730
00:41:09,120 --> 00:41:14,520
Speaker 1: on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm

731
00:41:14,560 --> 00:41:18,920
Speaker 1: on Twitter at Tom Keane, Michael McKee is at Economy.

732
00:41:18,920 --> 00:41:22,680
Speaker 1: Before the podcast, you can always catch us worldwide. I'm

733
00:41:22,719 --> 00:41:38,680
Speaker 1: Bloomberg Radio. Who you put your trust in matters. Investors

734
00:41:38,680 --> 00:41:42,040
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735
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