Speaker 1: Welcome to the Bloomberg's Surveillance Podcast. I'm Tom Keane along
Speaker 1: with Jonathan Ferrell and Lisa A. Brawmowitz Jay Lee. We
Speaker 1: bring you insight from the best and economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple podcast, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg terminal.
Speaker 1: Let's get the way it starts it in a very
Speaker 1: very good way. We can do that with Lori Cavassin
Speaker 1: at the head of US equity strategy at RBC Capital Markets.
Speaker 1: Laura saw your likes nowe and I think it's an
Speaker 1: important one to address. Can you establish a major bottom
Speaker 1: before we've seen the big EPs forecast cuts? The truth
Speaker 1: of the matter, John you is and I keep getting that.
Speaker 1: I keep I keep getting that question from clients. And
Speaker 1: it's not only that you can get the market bottom
Speaker 1: while earnings estimates are coming down, but if you go
Speaker 1: back and you look at major periods of stress like
Speaker 1: the tech bubble, like like only sixteen industrial recession, that
Speaker 1: is often the case that the stock market puts on
Speaker 1: the bottom several months while before you actually flip back
Speaker 1: into positive revision territory. So I'm not sitting here telling
Speaker 1: you that reducing earnings estimates further isn't going to be
Speaker 1: a headwind for the market. I think that it is,
Speaker 1: But in my mind it's something that causes us to
Speaker 1: merely retest the June lows, maybe check another swing low
Speaker 1: at them. But I think we probably did put the
Speaker 1: low for the cycle in place in June. Were sentiment
Speaker 1: this morning. So someone asked me this question last week
Speaker 1: and I said, you know, percent of the people I
Speaker 1: talked to are still barish, about fifteen per cent or bullish.
Speaker 1: It did feel like, you know, maybe over the last
Speaker 1: couple of weeks that bullish cohort grew from about five
Speaker 1: to fifteen percent. But if you look at the CFTC
Speaker 1: data and just want to get the quantitative read, I
Speaker 1: think that sentiment and NAZDAC has become euphoric again. Futures
Speaker 1: positioning is getting close to the highs that we've seen
Speaker 1: in recent years. But if you look at something like
Speaker 1: small cap, the DAL futures, or even SMP futures, we
Speaker 1: are still very much in the early days of recovering
Speaker 1: off of an extreme low in the case of small cap,
Speaker 1: in the Dow off of new lows that were below
Speaker 1: PAN or below a great financial crisis lows. So I
Speaker 1: think it's a bit of a mix. I think there
Speaker 1: are some pockets of euphoria, but I do think overall
Speaker 1: positioning has still been pretty depressed, and sentiment reflects that
Speaker 1: Lorie was going to drive small caps higher at a
Speaker 1: time when you see consumer sentiment falling off a cliff
Speaker 1: and consumer spending, while still resilient, showing signs of weakening
Speaker 1: pretty much across the board. So I think the issue
Speaker 1: with small caps is that they have very clearly banked
Speaker 1: in a recession at this point in time, We've gone
Speaker 1: through a bunch of the numbers. UM. What we have
Speaker 1: seen essentially is that if you look at small caps
Speaker 1: against jobless claims, they're already baking in a pretty big
Speaker 1: spike from here. Even with the recent move that we've
Speaker 1: seen up in small cap recently, small caps are also
Speaker 1: baking in a trough like move, a plunge really in
Speaker 1: I S N manufacturing that hasn't happened yet, it's probably coming.
Speaker 1: It is baked into the small cap stocks UM. But
Speaker 1: I think the other issue that we see is that historically,
Speaker 1: long term investors know that recessions are usually good buying
Speaker 1: opportunities for small cap. They sniff out the pain early on,
Speaker 1: they sniff out the recovery early on, and at the
Speaker 1: end of the day, small cap is really, I think
Speaker 1: the one part of the market that has clearly baked
Speaker 1: in an economic downturn. Glauria, over my break, I was
Speaker 1: thinking a lot about the talk about re shoring or
Speaker 1: on shoring a lot of manufacturing from China from Asia
Speaker 1: in response to some of the supply chain disruptions. Is
Speaker 1: this more talk than action? Are you actually seeing this
Speaker 1: on the ground with small caps? So I don't think
Speaker 1: we're seeing it in a massive way yet, but I
Speaker 1: will tell you Lisa and my recent travels with investors,
Speaker 1: that issue is something that small cap portfolio managers are
Speaker 1: highly engaged on and highly focused on, particularly when it
Speaker 1: comes to the industrial sector. And there is a view
Speaker 1: out there from professional money manners who specialize in this space.
Speaker 1: But that will ultimately be a good thing for the
Speaker 1: small cap industrial stocks. It may ultimately be challenging for
Speaker 1: margins for the bigger cap companies um, but there is
Speaker 1: a view that this is something that's going to be
Speaker 1: a tail one for the small cap space and hasn't
Speaker 1: really played out yet. Laurie, I've got you at forty
Speaker 1: two hundred year end on the SMP five hundred. I've
Speaker 1: got the market on Friday at the close at what
Speaker 1: now what you tell clients? So look, I think that
Speaker 1: the argument that valuations are too high right now, I
Speaker 1: think that's kind of a thin argument for saying we
Speaker 1: got to peek out right now. I do think it's
Speaker 1: a concerning data point. It reigns in my enthusiasm through
Speaker 1: the end of the year. We're close to twenty times
Speaker 1: my numbers for next year and this year. Um, But
Speaker 1: I do think that you know, these are year in targets, John,
Speaker 1: We're trying to guess where the market is going to
Speaker 1: be on December thirty one, not high it's gonna achieve
Speaker 1: this year. So I do think that we're setting up
Speaker 1: for further volatility in the very short term, especially if
Speaker 1: we get favorable messages at the end of the week
Speaker 1: from Powell. I could see this thing going just a
Speaker 1: little bit longer, just based on how low and extreme
Speaker 1: the positioning has been. But I do think if we're
Speaker 1: being intellectually honest, we have to set up for some
Speaker 1: choppiness and volatility through the end of the year. Laurie
Speaker 1: awesome as always, Laurie Cavastin and that of obvious capital markets.
Speaker 1: Right now we get a voice on China. Ian Shepherdson
Speaker 1: joined us. We could talk fifteen things with the chief
Speaker 1: economists at Pantheon Macroeconomics, but the duration of his Chinese
Speaker 1: slowdown is jaw dropping. Ian Shepherdson models out twenty four months.
Speaker 1: It's three and five percent, make it four percent China
Speaker 1: g d P. What does that do I into the
Speaker 1: labor mandate that Beijing needs and hairs. Yeah, it's a problem.
Speaker 1: We just cut our China forecast. We just don't see
Speaker 1: any bottom yet to the real estate disaster. Prices falling,
Speaker 1: volumes falling, no sign of affix coming through. And it's
Speaker 1: a huge trunk of the economy. It's been a big
Speaker 1: engine of growth for the last couple of decades and
Speaker 1: it has not found a flaw yet. So it's gonna
Speaker 1: put real pressure on the labor market, real pressure on
Speaker 1: the authorities, and I think the bottom line is that
Speaker 1: they will have to be some substantial policy action from
Speaker 1: the center from beating because the local authorities who effectively
Speaker 1: right now are being tasked with dealing with this mess
Speaker 1: just don't have the resources. So this entral government, which
Speaker 1: is resisting eventually it's going to have to fold, is
Speaker 1: going to have to step in with a lot of
Speaker 1: public money and try and try and put a floor
Speaker 1: under the under the problem, because if they don't, they're
Speaker 1: going to find an economy that is way, way weaker
Speaker 1: than they want for a very extended period. And that's
Speaker 1: a threat. That's a real threat to them, and a
Speaker 1: threat to the global economy as well, because obviously China
Speaker 1: is such a big part of global growth, especially through
Speaker 1: the manufacturing sector. In the ambiguities of inflation Ian Shepherdson,
Speaker 1: do they export disinflation and deflation, thus making some of
Speaker 1: the inflation fear cause of the West maybe overrut Yeah,
Speaker 1: the margin I mean, you know, Chinese inflation PPI inflation,
Speaker 1: which passes through into Europe and into the US, you know,
Speaker 1: is really rolling over, no question about that. But I
Speaker 1: think it's important to appreciate that the bulk of the
Speaker 1: inflation shock in the US especially, but but also in Europe,
Speaker 1: apart from energy in the core, has been through margin
Speaker 1: expansion in the retail services, say too so that's not
Speaker 1: really China contingent. That's really been more a story of
Speaker 1: booming consumer spending against constraint supply. But you know, right now,
Speaker 1: central banks everywhere we'll take anything they can get, and
Speaker 1: if you know, the slow down inflation in China gives
Speaker 1: them a little bit of room from over that, that's great,
Speaker 1: but it's not going to be the heart of the
Speaker 1: of the disinflation story in the US over the next year.
Speaker 1: And of course Europe is still struggling with the energy
Speaker 1: inflation shock, which is much bigger and it's likely to
Speaker 1: have been much more persistent. So we've still got some
Speaker 1: really big problems. Let's talk about u K s Whaler
Speaker 1: and I don't own the rights to that one. And
Speaker 1: how bad are things going to get in the UK
Speaker 1: and across Europe for that matter too. Well, Europe's in
Speaker 1: recession now already. I mean that that's that's pretty obvious.
Speaker 1: Now we see that lasting for a while, there's easy
Speaker 1: be still gonna hike because you know, the German influence
Speaker 1: on the anti inflation story is very intense. So we're
Speaker 1: going to get at fifty bids at the next meeting.
Speaker 1: UK is different. I mean, I think there's a reasonable
Speaker 1: chance of inflation. Sorry, recession can be averted, but only
Speaker 1: if the new Prime minis to who presumably will be
Speaker 1: Liz trust in two weeks time, takes some more drastic
Speaker 1: action to bail out households from the energy price shock.
Speaker 1: So now that isn't a promise right now, it's a forecast,
Speaker 1: and you know it could be wrong. They might not
Speaker 1: do it, which would be crazy given the pressure the
Speaker 1: households are under, and that probably would mean the UK
Speaker 1: would end up been recession lated this year. But right
Speaker 1: now I kind of think the politics pointing towards doing
Speaker 1: something more aggressive, effectively handing households more money and with
Speaker 1: a bit of look that will allow the consumer sector
Speaker 1: to just take over through the second half of the
Speaker 1: preventory session, but it's going to be a close run thing.
Speaker 1: And of course the bankming I still gonna be raising right,
Speaker 1: so there's a real squeeze going on there which is
Speaker 1: unlikely to abate anytime soon. So just avoiding recession, that's
Speaker 1: not the same as the forecast of everything being okay.
Speaker 1: It isn't and it isn't going to be okay for
Speaker 1: the foreseeable future in the UK because you know, even
Speaker 1: if the energy price thing goes away, you've still got
Speaker 1: the lingering catastrophe that is Brexit, dragging the whole economy
Speaker 1: down essentially for the foreseeable future. And it's a looking
Speaker 1: across Europe. Just how love is the bar in Europe?
Speaker 1: Can they afford recession? Well, they've got one now. It's
Speaker 1: it's probably not going to be very deep or very long,
Speaker 1: though that does depend to some extent on what happens
Speaker 1: to energy prices. But but they're in in recession already,
Speaker 1: h and you know, a turnaround probably will come at
Speaker 1: some point next year, but we've got to get through
Speaker 1: the worst of it first. So things are a real mess.
Speaker 1: There's no growth momentum anywhere in Europe. The only place
Speaker 1: where I can see any growth momentum coming through before
Speaker 1: the end of the year is probably in the US,
Speaker 1: and even there it's going to be patchy because the
Speaker 1: housing markets are catastrophe. Manufacturing is under pressure from the
Speaker 1: business is being nervous about energy prices. But it's nowhere
Speaker 1: near as bad as it is in Europe. And I
Speaker 1: think that the US is going to avoid recession quite comfortably,
Speaker 1: which of course is why markets are getting nervous because
Speaker 1: and I'm thinking, well, you know, the US isn't going
Speaker 1: to move into recession and the FED is not yet
Speaker 1: talking Davis Lee, so we've seen this upper pressure on
Speaker 1: heels again. You're making me sound rosy. I'm thinking about this.
Speaker 1: Housing is a catastrophe. Nothing is positive in Europe. At
Speaker 1: what point has this been priced in already and at
Speaker 1: what point is this something that requires a much broader
Speaker 1: and more drastic repricing of risk acids across the board. Well,
Speaker 1: that's a good question. I think a lot of this
Speaker 1: is is priceding. I mean, if you if you're not
Speaker 1: expecting a recession in Europe now, you probably haven't been
Speaker 1: paying attention. So I think that that story is pretty
Speaker 1: well understood. Now. The question is what do we get
Speaker 1: out of it? I mean, the problem, the fundamental problem
Speaker 1: for Europe is that the rising energy prices has made
Speaker 1: everyone in Europe poorer. There's no way to avoid that.
Speaker 1: You know, cutting interest rates or pushing money into people's
Speaker 1: pockets to fiscal policy is just delaying the inevitable and
Speaker 1: hiding the truth, which is that an energy price shock
Speaker 1: in an energy consuming region makes everyone poorer and makes
Speaker 1: the economy weaker and hits corporate earnings, and there's just
Speaker 1: no way to avoid this. You can work through it,
Speaker 1: you can ameliorate some of the worst impacts of that,
Speaker 1: but you can't get away from the fundamental fact that
Speaker 1: if you're an energy user and energy prices go up,
Speaker 1: your poor. And this is much worse, incontinently than it
Speaker 1: is in the UK, and it's it's it's much less
Speaker 1: bad in the US, and it gas prices are are
Speaker 1: falling very sharply, but Europe at the front and center
Speaker 1: of this because of Ukraine and because of their energy
Speaker 1: policy over the last twenty years, and they're going to
Speaker 1: be paying for it for a long time, and so
Speaker 1: risk assets in this environment, you know, it's it's very
Speaker 1: it's very difficult, and it's probably not going to be
Speaker 1: a very quick turnaround. And we talk about the United
Speaker 1: States and how it's in a better situation. A lot
Speaker 1: of the notes that I've been reading, I've been talking
Speaker 1: about the inventory glot that a lot of analysts are
Speaker 1: expecting a company is including big retailers that have ordered
Speaker 1: too much stuff and that this will be disinflationary heading
Speaker 1: into your end. How much will this be a disinflationary force.
Speaker 1: How much will this take some of the pressure off
Speaker 1: the FED? Yeah, this is the thing I'm watching more
Speaker 1: closely than pretty much anything else, because when we had
Speaker 1: the inventory shortages last year, what we saw was a giant,
Speaker 1: gantic widening of retailers margins because effectively, people were bidding
Speaker 1: for whatever imagery they could find, especially in the vehicle market,
Speaker 1: where retail dealers margins tripled. I mean that that's an
Speaker 1: official number of retailed auto dealers margins tripled across last year.
Speaker 1: Now that leads them at a ridiculously overextended level. So
Speaker 1: now the auto production is rising because the chips are
Speaker 1: available again, and now that we've had all this retail
Speaker 1: imagery arriving on boats over the last six months or so,
Speaker 1: we are in a position now where that that that
Speaker 1: enormous margin expansion should reverse and it could easily take
Speaker 1: two or three, even four percentage points off of core
Speaker 1: inflation over the course of the next twelve months. Now,
Speaker 1: it kind of surprises me that the FED isn't talking
Speaker 1: about this. I'm sure they know it's going to happen,
Speaker 1: but but this margin expansion and contraction story, to me,
Speaker 1: has been the big driver of inflation on the upside
Speaker 1: and will be the big driver inflation on the down side.
Speaker 1: Of course, the problem is, you know, for for an
Speaker 1: investor in in in the consumer sphere, you're looking at
Speaker 1: retailers Target, Walmart, we've heard all about them facing a
Speaker 1: margin squeeze. Are really quite substantial proportions over the course
Speaker 1: of the next year. But you know, again this from
Speaker 1: the FATS perspective, this is this is good news because
Speaker 1: this is what we need to renormalize inflation to get
Speaker 1: margins back to something that's recognizably normal. It's a long
Speaker 1: way off, but the return of inventory and the excessive
Speaker 1: inventory is what's going to bring about that margin compression
Speaker 1: and drive inflation down a long way. Can we talk
Speaker 1: about some almost good news if any football games ended
Speaker 1: in the fifty four minute Karen trip here putting you
Speaker 1: up against Manchester City and what a beautiful thing that
Speaker 1: almost was. Yeah, that's all we get. That's a beautiful
Speaker 1: thing for when he scored, it was right in front
Speaker 1: of me, even the stadium. Yesterday's the best date since
Speaker 1: James is for a long time. You happier? Yeah, yes, yeah,
Speaker 1: he is. I mean this is a very mott to you. Too,
Speaker 1: because I'm going to be in the surveillance now. But
Speaker 1: advisors signed this game today Liverpool and the other Manchester.
Speaker 1: Is this like a huge deal or Tom? They lost
Speaker 1: the first two games of the season Manchester United, and
Speaker 1: they're going against one of the best teams in a
Speaker 1: premiership against Liverpool a little bit later. I imagine they're
Speaker 1: gonna get crushed based on recent performance. Does the coach
Speaker 1: go in, Oh, it's a little bit too early for
Speaker 1: that song, not necessarily bit early, but yeah, bit early.
Speaker 1: But if it carries on then yeah, it's a mess
Speaker 1: and awesome to catch up in Cheperdson, Newcastle supporter joining
Speaker 1: us now. It has been far, far too long. Peter
Speaker 1: Truber's professor of International Relations and LS and of course
Speaker 1: with Chatham House and of course an affinity to the
Speaker 1: University of Texas as well. Professor, thank you, thank you
Speaker 1: so much for joining us. What happens after six months
Speaker 1: in a war? What happens now to the two forces
Speaker 1: of this war in Ukraine? Tom, I first want to
Speaker 1: just go on record saying I'm an old time Mets fan,
Speaker 1: so she exactly what you had to say there, Um,
Speaker 1: you know, I mean, it's pretty damn clear that this
Speaker 1: war is going to continue going on. It's a it's
Speaker 1: a long slog. I think the thing that caught my
Speaker 1: attention over the weekend, actually I guess it was announced
Speaker 1: on Friday, was that Biden was going to send another
Speaker 1: seven hundred and seventy five million in military aid to
Speaker 1: two Kiev. And I think the timing of this is
Speaker 1: is no accident. It's it's it's both symbolic and and
Speaker 1: it serves a practical strategic purpose. Um Symbolically, Wednesday is
Speaker 1: Ukrainian Independence Day, and also, you know, as you're suggesting,
Speaker 1: is coincidentally the six month mark in a war that
Speaker 1: I think most analysts I thought it was going to
Speaker 1: be a romp for Moscow, and so I think in
Speaker 1: a way this is, you know, the administration is trying
Speaker 1: to underscore its commitment to Ukraine's security and acknowledge really
Speaker 1: Kiev's tenacity in the face of long odds. But I
Speaker 1: want to pick up something that John began with at
Speaker 1: the start of this segment, which is recession, because I
Speaker 1: think the administration's announcement also comes at a time when
Speaker 1: European financial and political support for the Ukrainian case. I
Speaker 1: would say it's flagging. I mean, European military commitments have
Speaker 1: not increased since um April. Arguably they are on a
Speaker 1: downward trend, and European support for the war is not
Speaker 1: as stout as it was in the spring. And partly
Speaker 1: this is because of concerns about inflation, the price of food,
Speaker 1: the price of gas that you were talking about in
Speaker 1: the last segment, but also fears of recession, which are
Speaker 1: you know, fairly widespread in Europe at this point, Peter
Speaker 1: how To, is the bombing of in Moscow that killed
Speaker 1: Daria Dugina changed the conversation? There was a lot of
Speaker 1: speculation over the weekend that this could harden the nationalist
Speaker 1: sentiment and harden it against both Ukraine and the United States.
Speaker 1: What's your view on how it sort of changes the narrative,
Speaker 1: you know, I mean speculation about the the attackers and
Speaker 1: and how Putin is going to respond is rife right
Speaker 1: now on Twitter. I'm sure you're following it. I Mean,
Speaker 1: one thing I think that's pretty clear already from the
Speaker 1: the attack is that Putin's regime looks a little weaker
Speaker 1: today than it did before the attack. I mean, whether
Speaker 1: it was the result of a Ukrainian strike. I doubt it,
Speaker 1: but that's out there of course, or rivalry within the Kremlin,
Speaker 1: or domestic resistance to Putin's nationalism. The fact is the
Speaker 1: attackers succeeded um and uh. And this is gonna fuel
Speaker 1: doubts about Putin's ability to guarantee security for those aligned
Speaker 1: with him. He'll look for some way to strike out,
Speaker 1: you know, perhaps against Kiev. He has plenty of reasons
Speaker 1: for doing that this week though, as a interrupt independence
Speaker 1: day there, but I think this perhaps adds some fuel
Speaker 1: to that fire. On the flip side, Peter, there is
Speaker 1: this discussion, and we heard about President Biden having discussions
Speaker 1: with a number of the Western allies about reinstating the
Speaker 1: Iranian nuclear deal, and that's gaining steam and giving some
Speaker 1: support and the reason why perhaps the oil prices are
Speaker 1: dipping just to touch at least that's what the narrative.
Speaker 1: It will tell you how much can that actually replace Russia?
Speaker 1: Does that further isolate Russia as a pipeline for Europe
Speaker 1: going forward? I mean, first of all, I don't think
Speaker 1: there's going to be an agreement anytime soon. Maybe I
Speaker 1: end up eating those words, but he's got a lot
Speaker 1: of people to play Kate inside inside the region, and
Speaker 1: it's just hard for me to see from a political standpoint,
Speaker 1: domestic political standpoint, Biden pushing for this before the mid
Speaker 1: term elections. After the mid term elections, Yeah, you know,
Speaker 1: then I can see them moving on it. That's not
Speaker 1: to say there's a lot of interest and push inside
Speaker 1: the administration to make this happen. Partly for the reasons
Speaker 1: that you suggest alternative sources of energy, but I think
Speaker 1: also because they think it was a mistake fundamentally to
Speaker 1: undo the agreement that was struck during the Obama years
Speaker 1: to pay it. Just awesome to catch out with you
Speaker 1: said this morning, thank you pity tributes that on the
Speaker 1: latest in Europe you cry in Russia and beyond. He
Speaker 1: had a big final song the Champions League twenty nine
Speaker 1: s Yeah, I was remember that case. You know, as
Speaker 1: we get prepared for today, we have to remember there
Speaker 1: was a point where Menu defeated Tottenham. Was one of
Speaker 1: the worst to I called him Sunday April, I think
Speaker 1: of eighteen or nineteen. I don't remember any Sanchez was
Speaker 1: just just killed. Us don't remember any of this. We're
Speaker 1: gonna beat Chelsea, but we couldn't beat Chelsea. Okay, we're
Speaker 1: talking about sting, but ultimately we're actually looking forward to
Speaker 1: a bigger game time at three pm astant time, did
Speaker 1: the juring Rochester will be watching in England? He joins
Speaker 1: us now with a sharp research note from numerous internationals.
Speaker 1: This is required listening for Global Wall Street. Jordan's I
Speaker 1: want to know the why right now? The partial differential
Speaker 1: is the euro weaker or is this just dollar flight?
Speaker 1: Is witnessed by strong Swiss Frank as well. But I
Speaker 1: think what Jane Folly was saying before that we came on,
Speaker 1: it has been been resurprising. How Yeah, Euros three party,
Speaker 1: but it has been mostly a dollar story. Euro hasn't
Speaker 1: underperformed as much as I think it should. I think
Speaker 1: the FX market is totally mispricing the situation Europe. I mean,
Speaker 1: credit markets are doing a better job at pricing and
Speaker 1: the riskless seeing credit spreads widen, but in European equities
Speaker 1: they essent. You say it's going to be a mild
Speaker 1: slow down towards average growth in Europe, where every single
Speaker 1: day we're seeing violet hills. In term of the energy
Speaker 1: price spike, it's getting worse. The situation for European energy markets.
Speaker 1: If you look at the past twenty two days of
Speaker 1: August today, check the date. I want to say that
Speaker 1: eighty percent higher energy prices this month alone. And we've
Speaker 1: been talking about this for months. They were awful before
Speaker 1: we got to August. Now eighty percent higher. So if
Speaker 1: the governments do nothing, the UK household, if they have
Speaker 1: no subsidies, and we know they will have, but imagine
Speaker 1: the world where they don't, they'd be spending twenty of
Speaker 1: their disposal income on energy bills for just turning the
Speaker 1: lights on heating in their homes. So the situation is
Speaker 1: a complete rethink of the economic model in the Eurozone,
Speaker 1: and I'm just it is struggle. It's strange for all
Speaker 1: of us to see the euro setting off so slowly.
Speaker 1: I think it should be much faster. We'll be testing
Speaker 1: fifty down towards cents in the next few months, so
Speaker 1: you think maybe get down to ninety five. I guess
Speaker 1: I would us off the back of that. Jordan, does
Speaker 1: interest rate policy even matter in this world to this currency,
Speaker 1: given we're expecting fifty basis points again on September eight, Yeah,
Speaker 1: there is one central amount that matters, which is the Fed.
Speaker 1: If you look at FX, what's been quite strangers. Idiosyncratic
Speaker 1: stories in Europe and all the detail we can go
Speaker 1: into have been largely irrelevant. For the past few weeks
Speaker 1: at least. All you needed to know was what's going
Speaker 1: to happen in US rates, and you knew where you're
Speaker 1: a dollar, where cable was going to go. I think
Speaker 1: in the windsor will be so obvious to everyone there
Speaker 1: is an extreme recession taking place in Europe that those
Speaker 1: idiosyncratic factors, this energy story, what's going on for the
Speaker 1: European consumer will matter. The other factor taken into account
Speaker 1: is that it's not just about what the ECB does
Speaker 1: and what the FED does. You have to take into
Speaker 1: account of the markets inflation premium. So a lot of
Speaker 1: questions this morning from clients and investors why is the
Speaker 1: euro lower when spreads would actually say nominal yield spreads
Speaker 1: would say, you're a dollar should be higher. Well, it's
Speaker 1: because there's now a large inflation component in yields of
Speaker 1: e g B s and UK guilts. You have to
Speaker 1: treat it a bit more like an emerging market. Their
Speaker 1: rates markets are selling off and the currencies are heading lower.
Speaker 1: That is very different to what we've been used to
Speaker 1: for the past twenty years. Joinin the fact that you
Speaker 1: think that the euro is wildly mispriced to the marketers, underplayed.
Speaker 1: Some of the weakness is in starka divide with what
Speaker 1: we heard from Ian Shepherdson earlier on the show. He said,
Speaker 1: if you're not expecting recession in Europe, you haven't been
Speaker 1: paying attention. What is the distinguishing feature of why you
Speaker 1: think there has not been the recognition that you're talking
Speaker 1: about in the currency markets to date. Well, I think
Speaker 1: the market has just been looking at the FED and
Speaker 1: we had that CPI number and the market pricing a
Speaker 1: Fed Dovish pivot, which kind of has come out the
Speaker 1: price a little bit. We've seen the rate cuts for
Speaker 1: last for next year, at one stage of seventy five
Speaker 1: basis points priced in, that's now eased off quite a
Speaker 1: bit more. It's below fifty basis points. I think this morning,
Speaker 1: essentially the markets are feeling pretty yellow about the Eurozone,
Speaker 1: but it's only credit that seems to be reflecting it
Speaker 1: and eventually or feed through the other markets. It happens
Speaker 1: all the time. Markets are not perfect, they're not always rational,
Speaker 1: and they just sometimes need to be given the alarm
Speaker 1: bells such as the ECB. For example, do we really
Speaker 1: think they're going to keep raising rates next year if
Speaker 1: there's blackouts in Germany? So that could leave that could
Speaker 1: be one of those trigger moments when the lights are
Speaker 1: literally turned off for German industry or parts of it,
Speaker 1: where it just becomes unfeasible for euro to keep the levels.
Speaker 1: It's currently asked if Jordan this race is an important
Speaker 1: question and I'm not comparing the two situations. I just
Speaker 1: look for a candalyst. Back in the pandemic, we all
Speaker 1: saw this risk brewing and the market was unshaken, unmoved,
Speaker 1: And I think it was that weekend when Italy shut
Speaker 1: down that people work up on Monday morning and thought, Wow,
Speaker 1: this is real. It's coming, and it's probably gonna come
Speaker 1: to the United States as well. Jording with that in mind,
Speaker 1: are you thinking of that kind of catalyst, because, like
Speaker 1: you say, all of this is so obvious, we're setting
Speaker 1: it play out. You can see it on the screen,
Speaker 1: you see it in the numbers, in the price of gas,
Speaker 1: and yet very calmly, very slowly just sort of breaking down. Again,
Speaker 1: what's the catalysts you think that's going to lead to
Speaker 1: the wake up cool. I think you're right there, John,
Speaker 1: I think the human mind is a part of the
Speaker 1: reason why it's difficult for marketing prices in We are
Speaker 1: linear animals. We think in linear terms. Where these energy
Speaker 1: prices are rising exponentially, it's just really difficult for us
Speaker 1: to comprehend the impact of it. There's another aspect to
Speaker 1: it as well. We do expect that governments will step in.
Speaker 1: If they don't, they'll be risking civil strife essentially, So
Speaker 1: there is an aspect of the market which says, don't worry,
Speaker 1: it is pretty bad in energy, but they're going to
Speaker 1: do something about it. On the government side, the point
Speaker 1: I'm making is when energy prices keep rising in the
Speaker 1: past twenty two days, it's really difficult for governments to
Speaker 1: keep up with those sort of moves and supplies the
Speaker 1: problem and price of the problem. So there's two aspects
Speaker 1: of that. The trigger could be, John, essentially, when Germany
Speaker 1: triggers phase free of its gash ration plan. At the moment,
Speaker 1: it's slowly going to give up the costs to consumer.
Speaker 1: We've had some mixed moves from Germany, so we've got
Speaker 1: an energy levy coming in in October, but they're also
Speaker 1: cutting v A T, so it's kind offsetting it to
Speaker 1: some extent. When Phase free comes in, the government actually
Speaker 1: just needs to do demand destruction and policies literally saying
Speaker 1: you there, you can't turn on your industrial plant, you
Speaker 1: need to turn down your gas usage. When that happens,
Speaker 1: it becomes much clearer to everyone that the Eurozone will
Speaker 1: use a lot more imports to help their supply chains continue.
Speaker 1: Factories will still want to keep producing, keep their jobs,
Speaker 1: but for certain like products like steel, aluminium, glass, ceramics, plastics, chemicals,
Speaker 1: and I think that's at the lower end of the
Speaker 1: supply chain, but very highly energy intensive, or just get
Speaker 1: imported from America from China where energy is much cheaper,
Speaker 1: and that's gonna way on the euro even more. Jordan's
Speaker 1: got ten seconds price target Manchester United, What are you
Speaker 1: thinking We're going to be corregation and still Rochester right now?
Speaker 1: With that question our conversation of the Week on China.
Speaker 1: Leland Miller is co founder and chief executive officer of
Speaker 1: China A Book International. More than anyone I know, is
Speaker 1: wired into the minutia of China. Leland, do you believe
Speaker 1: the GDP numbers. Do you believe the new regime under
Speaker 1: five under four percent three ish g d P. I
Speaker 1: don't even think we're gonna hit three percent. But it
Speaker 1: is notable that the data have gotten, the official data
Speaker 1: have gotten more honest, which is why people are coming
Speaker 1: around with the idea that, wow, this really is a
Speaker 1: very weak economy. Uh, they're they're they're lying on a
Speaker 1: lot lot less about about the numbers, and so people
Speaker 1: can actually see how weak consumption is, how weak the
Speaker 1: property sector is now, how weak every aspect of the
Speaker 1: entire economy outside exports has been, and even exports now
Speaker 1: are fading. So, uh, you know, the data, the data
Speaker 1: aren't great, but what they are signaling is that not
Speaker 1: only you nowhere near the five percent g d P,
Speaker 1: I mean, you're you're probably significantly less than half that
Speaker 1: at this point, Leland. Are we also seeing how little
Speaker 1: power the PBOC has to really stimulate an economy that
Speaker 1: already has got and some stimulus and hasn't really responded absolutely.
Speaker 1: And you know, the story actually goes back about you know,
Speaker 1: six to twelve months on this because when we were
Speaker 1: at the end of beginning two, we actually saw loan
Speaker 1: demand increase from firms across the country. We saw four
Speaker 1: straight months where loan demand was increasing. I think firms
Speaker 1: were starting to get back into it, maybe because it
Speaker 1: was a Party Congress year, maybe because they saw something
Speaker 1: uncertainty going away. But then the COVID lockdowns hit and
Speaker 1: they they they were strangled through that for several months.
Speaker 1: And then even when the lockdowns have eased, you've seen,
Speaker 1: you know, a refusal to get back in it would
Speaker 1: borrow and invest and higher. So now that they're dropping rates,
Speaker 1: you know, had this been done nine months ago, I
Speaker 1: think you would have had some sort of kick from it.
Speaker 1: But right now, all they're trying to do is staunch
Speaker 1: the bleeding. With all of the investors who speak with
Speaker 1: all of the private sector, how much is there a
Speaker 1: recognition of the reality that you're telling them, how much
Speaker 1: is there a recognition of what the ramifications of China's
Speaker 1: slowed down in a much more in fashion will have
Speaker 1: We we have been screaming into the window this. I
Speaker 1: think people are starting to get this now because the
Speaker 1: government itself is admitting that the economy is an extraordinarily
Speaker 1: weak position. But you know, two months ago, four months ago,
Speaker 1: six months ago, we sit on panels, and people on
Speaker 1: our left would say there's a big stimulus coming. People
Speaker 1: on our right the big recoveries coming. Party Congress year,
Speaker 1: all the old, all the old platitudes about how the
Speaker 1: economy would get better simply because of the politics the
Speaker 1: country dictated it. That's not the world we live in
Speaker 1: right now. It's not the Chinese economy that we're tracking. So,
Speaker 1: you know, I think only when the government started to
Speaker 1: admit that, Look, July got worse than June. Lockdowns are easy,
Speaker 1: but the economy is getting worse all of a sudden.
Speaker 1: A lot of light bulbs going off around the world
Speaker 1: right now, Leland, I want to talk about an idea
Speaker 1: that I learned from the engineer, from Leon Jean Claude Triche.
Speaker 1: He would talk about how you diffuse policy and economics
Speaker 1: through a system. You diffuse productivity, you diffuse a fiscal impulse.
Speaker 1: How this Beijing, given their artificial structure, diffuse a large
Speaker 1: fiscal plan. How do they actually do that? Well, I
Speaker 1: think they're gonna have a very hard time doing any
Speaker 1: type of stimulus, fiscal or otherwise until they until COVID's gone,
Speaker 1: until COVID zero is gone, and there doesn't seem to
Speaker 1: be any sign of that happening. You know right now,
Speaker 1: you know lockdowns are easy, so markets thought, oh, well,
Speaker 1: we're going to see a big bounce back. But what
Speaker 1: firms are telling us on the ground is they don't
Speaker 1: want to borrow, they don't want invest that now, they
Speaker 1: don't want to hire, which is something new, because they
Speaker 1: don't see this COVID zero nightmare ending anytime soon. Unless
Speaker 1: you convince businesses that things are going to get better,
Speaker 1: you convinced consumers that they should be spending. Unless you
Speaker 1: can convince China people in China rid large that there's
Speaker 1: that there's an improvement coming and not more lockdowns, you're
Speaker 1: gonna have a very hard time stimulating the economy, no
Speaker 1: matter what your vehicle for that is. Meanwhile, I've been
Speaker 1: focusing on Morning Leland on the drought and the heat
Speaker 1: wave that's been taking place across the world, and it's
Speaker 1: having very real ramifications not just on food supply but
Speaker 1: in China and industrial output. You're seeing this in Sichuan
Speaker 1: in particular, with them halting production in certain areas because
Speaker 1: they want to try to save energy at a time
Speaker 1: when a lot of people are requiring air conditioning. How
Speaker 1: much is this smoke screen to cover just a lack
Speaker 1: of demand and a tack of workers. How much this
Speaker 1: something that's very real that will further disrupt manufacturing. Now,
Speaker 1: I think it's very real, you know, and it's and
Speaker 1: it should be concerning people a great deal because what
Speaker 1: has held up the Chinese economy for the last two
Speaker 1: to three years. It's been big time production. It's been manufacturing,
Speaker 1: it's been exports, while while everything else has been weak properly,
Speaker 1: retail at services have just been just been a mess.
Speaker 1: So what has held the Chinese economy up, It's it's
Speaker 1: been this production. Now you're getting hit production on one
Speaker 1: side from the heat waves that are that are shutting
Speaker 1: down hydropower production and and and uh causing all kinds
Speaker 1: of problems from that. And on the other hand you've
Speaker 1: got a global slow down, so the demand is faltering
Speaker 1: around the globe. This is very concerning. China has got
Speaker 1: a lot of problems to worry about right now, not
Speaker 1: just the normal one two or three of the China
Speaker 1: bash Book International leading awesome, gotta catch up set as
Speaker 1: owis what we're gonna do. Because of the urgency and
Speaker 1: battle over bulls and bears is keep the baseball talk
Speaker 1: to a minimum of Douglas cast. We can do this
Speaker 1: because big series, Mets playing six forty two ball, Yankees
Speaker 1: playing six or seven ball. Are the Yankees done? Doug? Uh?
Speaker 1: The market might be done though. Okay, let's switch right
Speaker 1: now a little. There's little joy in Mudville. You will
Speaker 1: probably not be surprised that I'm thinking more about the
Speaker 1: Massapequa Little League team and Williams Sport than the Bronx.
Speaker 1: There we go, There we go, and that was good
Speaker 1: to see Baltimore, Boston. Uh, and honor of all of that,
Speaker 1: Duck cast, Let's cut to it right now. Why are
Speaker 1: the Bulls wrong? Well? I'm thinking also, um, as it
Speaker 1: relates to the market about that great song from the
Speaker 1: from the Broadway show Anything Goes Cold? Porter is You're
Speaker 1: the top Q Tom Keane and his melodious voice, or
Speaker 1: maybe we should wait for ethel mermon um. But seriously,
Speaker 1: I think there's a non trivial chance that the SMP
Speaker 1: early last year made a top for the balance of
Speaker 1: the year. Um to me after the recent what I
Speaker 1: described as a position based rally, Brammo talked about that
Speaker 1: this morning, which was expected and discussed uh. In my
Speaker 1: lance interview, risk has returned to risk assets as the
Speaker 1: fundamental backdrop is eroding at a time in which stocks
Speaker 1: have rallied traumatically and now we have, as you noted
Speaker 1: on Friday, a vis at twenty and that position based
Speaker 1: rally and squeeze is likely over and stocks have to
Speaker 1: justify for the games based on funds and macro. In
Speaker 1: my view, the available opportunity set up six weeks ago
Speaker 1: is likely coming gone, and we have going to see
Speaker 1: a hyper team about utility. So um, I think an
Speaker 1: important one thing that you guys don't mention that much
Speaker 1: is Tina, and I think Tina is dead. There is
Speaker 1: now an alternative. In terms of history, the differential between
Speaker 1: the yield and stocks and the yield of bonds that
Speaker 1: exists today is uncomfortably wide. The SMP dividend yield has
Speaker 1: recently fallen from one at a time in which the
Speaker 1: two year US note we've gone from there at three.
Speaker 1: Just because of the time, I want Paul to get
Speaker 1: in your dug very quickly. Here ben leylor reaffirms his
Speaker 1: love for the large, big decks, and you know how
Speaker 1: narrow this bullmarket advance was wrapped around four or five stocks.
Speaker 1: What does that narrowness signal to you? And that's a
Speaker 1: real negative, and I think you have to avoid big text.
Speaker 1: In fact, we have new two new big texts shortly
Speaker 1: early last week in Microsoft and Apple UM And we're
Speaker 1: comptant about the strength that yeah, and we're concerned about
Speaker 1: this continuing strength of US dollar, which you've noted incessantly
Speaker 1: this morning, the stickiness inflation and um UM. And one
Speaker 1: interesting note is that the monthly rate of increase in
Speaker 1: the p p I has exceeded that of the CPI
Speaker 1: for nineteen consecutive months. And this means that corporate profitability,
Speaker 1: especially high growth tech and profit margins are living on
Speaker 1: barrow time and are not likely to meet the optimistic
Speaker 1: consensus expectations. That's something that Ian Shepherdson also discussed this morning.
Speaker 1: So we see a vulnerability in SMP profits. I would
Speaker 1: note that only fifty seven percent of the companies that
Speaker 1: reported in the second quarter have beaten and sells estimates
Speaker 1: their sales and profit estimates. Who was over sevent in
Speaker 1: the previous quarter. And I think one out of every
Speaker 1: five companies lowered guidance. And if you take out the
Speaker 1: robust energy profit contribution to second quarter SMP profits overall
Speaker 1: energy was down three percent. So do we retrace? Do
Speaker 1: we retest those June lows in SMP? You think? I know,
Speaker 1: I think that as I said that there's a non
Speaker 1: trivial chance that we've seen a high for the year.
Speaker 1: I personally don't think we're going to retest um, but
Speaker 1: I am concerned about the the magnitude of the overboard. Paul.
Speaker 1: Last week, Um, I remember talking to you in June.
Speaker 1: I was buying when two of the SMP index components
Speaker 1: traded above their daily fifty day moving average, and last
Speaker 1: Tuesday that moved to eighty six. And last week was
Speaker 1: only the thirteenth time in two decades that of industry
Speaker 1: groups closed above their ten week average. That too, is
Speaker 1: an extreme overboard. And in the last ten years of data,
Speaker 1: no bear market is bottom at not even closed. So
Speaker 1: I think there's a lot of vulnerability to the downside.
Speaker 1: There's certainly an unfavorable reward versus risk. So do we
Speaker 1: just trade this market until we get a better sense
Speaker 1: of where the feed is going? And it kind of
Speaker 1: feels like you're talking about, you know, kind of a
Speaker 1: reasonable trading range, but one that can be traded. I
Speaker 1: guess I think we're at the high end of the
Speaker 1: trading range, Paul. That will move towards the lower end,
Speaker 1: and I think we'll probably destined to be. Oh, let's
Speaker 1: say s m P three fifty the balance of the year. Well,
Speaker 1: let's go to that right now. Sp X four one
Speaker 1: six off. Mr cass is fifty down negative four points
Speaker 1: thirty three two nine VIX twenty three point three six.
Speaker 1: Here's me twenty Yes, I got that right. Yeah, my
Speaker 1: eyes are glazing over because I'm still worried about Bucky
Speaker 1: f twenty three point three six. Paul, Doug, what do
Speaker 1: you think about energy here? I mean, I'm looking at
Speaker 1: w t I crude oil below ninety. It kind of
Speaker 1: feels like we've seen the high in crude, but the
Speaker 1: stocks have. They certainly had the strong move off the bottom.
Speaker 1: The people actually talk about the energy space, and we
Speaker 1: haven't done that in a long time. I actually have
Speaker 1: just started by O I H, which is the energy
Speaker 1: E t F, for the first time, um, I think
Speaker 1: in a decade, and I seek down another three percent.
Speaker 1: I'll be buying some more this morning. When we get
Speaker 1: off the phone. There are a bunch of areas that
Speaker 1: I like on the long side, although I have a
Speaker 1: substantial amount of shorts, energy is one of them. The
Speaker 1: dog will pause here go do go? You trade? Yeah?
Speaker 1: Come back, I'm kidding, Doug. What can you talk to
Speaker 1: us in the time we've got left about something? So
Speaker 1: many of our listeners worldwide and certainly in the East Coast,
Speaker 1: are just curious about which is the new boom in Florida?
Speaker 1: What is the character this time of the boom in Florida.
Speaker 1: I mean, you were there with Bogard and McCall a
Speaker 1: few years ago, but what's the character of the boom
Speaker 1: this time? I would say that the real estate boom
Speaker 1: boll and Tom is extraordinary. I purchased my house on
Speaker 1: the on the island of Palm Beach. It is up
Speaker 1: seventeen X. So what do you do? And who is
Speaker 1: and who are these people? I mean are do you
Speaker 1: get the sense? I mean they say that they don't
Speaker 1: have they're moving from up here, but that'sn't always happened.
Speaker 1: But do you think that it's sticky? I mean, aren'
Speaker 1: they aren't they gonna wake up and say, you know
Speaker 1: they are the hedge fund guys like me. But the
Speaker 1: thirty years younger. What's a mistake to hedge fun guys
Speaker 1: like you thirty years younger making right now? Lisian Saunders
Speaker 1: had a great chart out today of the mood of
Speaker 1: alternative investments. What's a different practice now versus when you
Speaker 1: were in your ute? UM, Well, I think i've i've
Speaker 1: I've labored on the transformation of market structure, movement from
Speaker 1: active money management investing to passive investing, with parity the
Speaker 1: popularity and explosion of exchange traded funds. So I think
Speaker 1: the one mistake, and this is one of the reasons
Speaker 1: that Sea Breeze why I always average into my loans
Speaker 1: and shorts, is that market structure changed tend to exaggerate
Speaker 1: short term moves and no short term moves, by the way,
Speaker 1: can be weeks or a month, as we saw in
Speaker 1: um in the polar opposite action in June and July
Speaker 1: in the indices. So I think it's important. The mistake
Speaker 1: to answer your question is to not take a full
Speaker 1: position at the get go to average in because the
Speaker 1: market because the market market structure is so different than
Speaker 1: when I was a kid, a kid Peabody as a
Speaker 1: housing ANALYSIM was a few years ago duck Cast. Thank
Speaker 1: you so much, Series partners, and was in there. He
Speaker 1: is a bit tepid short run the market. This is
Speaker 1: the Bloomberg 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,
Speaker 1: and international relations. And subscribe to the Surveillance podcast on
Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course on
Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg