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Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along

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Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day

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Speaker 1: for insight from the best an economics, geopolitics, finance and investment.

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Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and

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Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot Com,

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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business app.

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Speaker 2: This is Bloomberg Surveillance. Alongside Damian Sassaur and Gina Martin Adams.

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Speaker 2: I am Matt Miller, Tom John and Lisa are on

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Speaker 2: assignment today in Jackson Hole, head of our special coverage.

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Speaker 2: Let's get out to Jackson Hole. Right now, Bloomberg's Mike

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Speaker 2: McKee kicks off our coverage with former Saint Louis FED

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Speaker 2: president Jim Bullard, now at Purdue. Mike take it away.

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Speaker 3: Well, good morning everybody, and good morning to Jim Bullard.

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Speaker 3: You know it's a tradition here at Jackson Hole that

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Speaker 3: we start our coverage with an interview with Jim Bullard.

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Speaker 4: Every year.

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Speaker 3: We come out at six am in the morning and

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Speaker 3: Jim joins us in the cold. Jim left the Fed,

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Speaker 3: but We're not letting him get away. He's joining us

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Speaker 3: now from Purdue University, where he is the dean of

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Speaker 3: the Daniels School of Business. Welcome back to our show, Jim,

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Speaker 3: even if you're not here in person.

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Speaker 5: Well, I'm glad to be here. And I wore my

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Speaker 5: Jackson Holt coat in solidarity with the cold weather that

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Speaker 5: you have to endure every year when you're out in

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Speaker 5: the mountains there.

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Speaker 3: Well, I offered you coffee. I just want everybody to

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Speaker 3: know that, but you didn't want to come get some

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Speaker 3: the first question, and I'm not the only person to

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Speaker 3: wonder this, and I'm sure you know this is why

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Speaker 3: you left the FED when you did and why you

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Speaker 3: took this job that you have now.

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Speaker 5: Well, this is a great challenge for me and for

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Speaker 5: the Mitch Daniel's School of Business. We're going to get

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Speaker 5: much better. We're already good, but we're gonna to go

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Speaker 5: to great And I thought it'd be a great opportunity.

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Speaker 5: I have been in the FED for fifteen years as

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Speaker 5: president and longer before that, so my time was running out.

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Speaker 5: So this is a great challenge later in my career,

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Speaker 5: so I'm really looking forward to it.

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Speaker 4: Well, you recently moved.

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Speaker 3: So you still, i'm sure, have a lot of economics

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Speaker 3: and monetary policy on your brain.

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Speaker 4: Let me pick it a little bit.

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Speaker 3: And ask you what you think of the economy at

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Speaker 3: the moment if you were still trying to decide whether

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Speaker 3: you would vote one way or another. Are we getting

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Speaker 3: signals that give you a strong view one way or another?

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Speaker 5: I think the biggest question right now is the reacceleration

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Speaker 5: in the US economy. Atlanta Feds GDP now showing substantially

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Speaker 5: above trend growth for the US economy in the third quarter.

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Speaker 5: That's following higher than expected growth in the first half

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Speaker 5: of twenty twenty three, and for that matter, in the

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Speaker 5: second half of twenty twenty two. So I think that

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Speaker 5: those that have been predicting imminent recession are having a

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Speaker 5: lot of trouble here. It doesn't seem to be happening,

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Speaker 5: and this reacceleration could put upward pressure on inflation, stem

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Speaker 5: the disinflation that we're seeing, and instead delay plans for

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Speaker 5: the FED to change policy.

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Speaker 4: How are we going to do?

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Speaker 3: Let me separate those questions out a little bit in

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Speaker 3: terms of inflation absent the growth level that we have

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Speaker 3: at the moment, and of course.

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Speaker 4: That's just a very early read from the Atlanta Fed.

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Speaker 3: Absent that would you be thinking that inflation would re

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Speaker 3: accelerate anyway based on what you've seen in the economy.

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Speaker 5: There's some talk about base effects fading and going the

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Speaker 5: other way during the second half of the year, So

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Speaker 5: we'll see if that occurs. You know, I like to

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Speaker 5: look at the twelve month numbers because they rints out

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Speaker 5: some of the seasonal effects, and so you could get

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Speaker 5: at least a pause in the disinflation or even a

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Speaker 5: little bit of reacceleration. I think that would suggest a

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Speaker 5: higher rate profile for the FED than otherwise, So yeah,

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Speaker 5: it could happen.

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Speaker 4: Well.

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Speaker 3: Chairman Powell and the other members of the committee have

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Speaker 3: been very careful in what they've said about additional rate

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Speaker 3: increases because they seem to feel they're pretty tight right

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Speaker 3: now and they want to make sure they don't tip

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Speaker 3: the economy into recession.

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Speaker 4: How great a danger do you think that is?

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Speaker 5: Yeah, I don't know. I think that committee should take

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Speaker 5: a little bit of a victory lap here. I mean,

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Speaker 5: the unemployment rate is three and a half percent, and

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Speaker 5: we were very aggressive in twenty twenty two and into

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Speaker 5: twenty twenty three, but the real side of the economy

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Speaker 5: has been growing faster than potential. Labor market is still

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Speaker 5: very strong, that should consumption, which should continue to proceed

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Speaker 5: a pace here in the second half of twenty twenty three. So,

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Speaker 5: and in the meantime CPI inflation headline CPI inflation was

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Speaker 5: actually on a twelve month basis was nine percent at

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Speaker 5: one point, now three percent, and the core measures are

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Speaker 5: coming down as well. So it really looks like the

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Speaker 5: twenty twenty two policy, including seventy five basis point hikes

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Speaker 5: four meetings in a row, has a good chance of success.

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Speaker 5: You never know, but it seems like it has a

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Speaker 5: good chance of success here. So if there was ever

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Speaker 5: a soft landing, taking six percentage points off the headline

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Speaker 5: inflation rate without an increase in unemployment would sound like

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Speaker 5: a soft landing to me.

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Speaker 3: Well, the argument some of your former colleagues make about

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Speaker 3: not raising rates further is that we have long and

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Speaker 3: variable lags that are just beginning to hit the economy.

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Speaker 3: That twenty twenty two rate increase path is only just

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Speaker 3: beginning to hit the economy, and we have seen some

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Speaker 3: of the sentiment indicators suggest that we have seen manufacturing

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Speaker 3: drop off. Do you think that we really need more

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Speaker 3: rate increases or should we wait and see if these

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Speaker 3: lags are finally starting to hit and this speedy economy

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Speaker 3: will slow down at last.

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Speaker 6: Yeah.

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Speaker 5: I don't think that the long and variable lags are

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Speaker 5: quite what they were when Milton Freeman first talked about

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Speaker 5: them decades ago. I think a lot of the transmission

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Speaker 5: is much faster than it was at that time. I

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Speaker 5: would point to housing as one of the prime examples.

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Speaker 5: The housing market basically came to a stop in the

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Speaker 5: spring of twenty twenty two, and at that point, the

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Speaker 5: Committee hadn't actually done anything. The policy rate was still

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Speaker 5: not very far from zero at that point, but markets

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Speaker 5: anticipate what the Fed is going to do, and so

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Speaker 5: you've got a big impact in the spring and summer

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Speaker 5: and fall of twenty twenty two on the housing market.

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Speaker 5: So that's an example of how markets pull forward the

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Speaker 5: policy of the FED, and I think that's more prevalent

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Speaker 5: today than would have been in the sixties or the seventies.

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Speaker 5: So I think these long and variable lag estimates are

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Speaker 5: a little out of date. You have to think about

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Speaker 5: transmission coming much faster than it would have during that

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Speaker 5: period of time.

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Speaker 3: A couple of newspaper stories, and now Wall Street is

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Speaker 3: talking about is our star and whether the Fed is

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Speaker 3: going to be adjusting its estimates. Two questions, One, what

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Speaker 3: do you think it is? And does it tell you anything?

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Speaker 3: And the second question is is it really relevant to

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Speaker 3: policy at this point?

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Speaker 5: I think it is relevant, but we don't have very

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Speaker 5: good estimates of this number. I think Chair Powell has

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Speaker 5: said we really don't know.

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Speaker 7: Oh.

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Speaker 5: I think that was one quote from him on our Star.

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Speaker 5: So it is an interesting debate, but you probably can't

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Speaker 5: make too much of it because the estimates are so uncertain.

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Speaker 5: I do think it matters, though, because people want to

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Speaker 5: have some idea of where they think they're going.

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Speaker 8: In the medium term.

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Speaker 3: Well that's my next question is where do you think

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Speaker 3: we're going in the medium term. You've got some people

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Speaker 3: who think John Williams, a New York FED president, that

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Speaker 3: our star, the neutral rate of interest, let's put it

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Speaker 3: that way, is going to be somewhere where it was

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Speaker 3: prior to the pandemic. Others think we've moved into a

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Speaker 3: new regime, to quote the old Saint Louis FED President

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Speaker 3: Jim Bullard, and we're going to be back to say,

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Speaker 3: the nineteen nineties versions of interest rates and growth rates

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Speaker 3: and inflation rates. Where do you think we come out

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Speaker 3: of this pandemic?

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Speaker 5: Yeah, I think the probabilities are that we are in

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Speaker 5: a new regime that'll be a higher interest rate regime.

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Speaker 5: It'll be more like the nineties than we're used to

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Speaker 5: in the last two decades. And the reason I say

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Speaker 5: that is that inflation is above target today. Core inflation

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Speaker 5: is likely to be sticky and come down rather slowly,

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Speaker 5: and the rule of thumb would be that the policy

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Speaker 5: rate has to be above the inflation rate in order

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Speaker 5: to continue to push inflation back toward our two percent target.

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Speaker 5: So you would expect from those considerations that interest rates

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Speaker 5: would be rather high over this timeframe going forward over

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Speaker 5: the medium term, more like the nineties, less like the

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Speaker 5: twenty nine to twenty nineteen period where you had inflation

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Speaker 5: below target and interest rates pinned down at low levels.

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Speaker 5: So I think we have probably switched here to a

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Speaker 5: higher interest rate regime with higher nominal Interesting. Now, I

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Speaker 5: wouldn't say about the nineties. You and I have talked

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Speaker 5: about this before. The second half of the nineties was

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Speaker 5: actually one of the best periods for US macroeconomic performance.

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Speaker 5: So you know, maybe it's a good sign for the economy.

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Speaker 5: The economy can boom even with a higher nominal interest

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Speaker 5: rate environment.

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Speaker 4: Well, we'll hope you're correct.

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Speaker 3: Jim Bullard, the dean of the business school at Purdue University,

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Speaker 3: the Daniels Business School, thank you for joining us and

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Speaker 3: helping us kick off once again our Jackson Hole coverage.

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Speaker 2: Matt Michael McKee, thanks very much for that, and thanks

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Speaker 2: also to former Saint Louis FED President Jim Bullard reer

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Speaker 2: in for Tom John and Lisa. They're out doing some

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Speaker 2: reporting at Jackson Hole as well, and there could be

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Speaker 2: some really big market moving speeches out of this symposium,

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Speaker 2: or maybe not. Let's ask Michael Darla, chief economist and

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Speaker 2: macro strategist Roth MKM Partners. Michael, you know, what do

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Speaker 2: you expect from the Fed in a week when a

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Speaker 2: lot of people have been saying and videos may be

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Speaker 2: more important than j Powell's speech.

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Speaker 9: Thanks for having me on, Matt. Well, that's clearly been

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Speaker 9: the case in terms of the equity market. As we've seen,

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Speaker 9: all eyes are going to be on Powell tomorrow at

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Speaker 9: ten am. You know, last year it was very short,

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Speaker 9: very blunt, very to the point. But the FED has

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Speaker 9: certainly moved quite a bit, you know, over the course

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Speaker 9: of the last year and a half. So I don't

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Speaker 9: think Powell's intent here is going to be to make

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Speaker 9: new news. I think, you know, essentially, the FED is

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Speaker 9: getting close to where it thinks the policy rate is

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Speaker 9: above neutral, but their eyes are on the macro data.

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Speaker 9: And you just heard Bollard there essentially saying if the

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Speaker 9: data looks like it's above trend, the Fed's to believe

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Speaker 9: that the job is not quite finished. So I really

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Speaker 9: don't think Paul is going to come out and make

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Speaker 9: some kind of declaration that the FED is done tightening.

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Speaker 9: I think they're going to take it meeting by meeting,

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Speaker 9: which is, you know what they've.

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Speaker 10: Been saying, Michael rising, real yields are a negative for

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Speaker 10: risk assets. Here we have the US ten year real

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Speaker 10: yield approaching ten percent. It's jumped something on the order

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Speaker 10: of fifty BIPs since July. Just how much higher can

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Speaker 10: real yields go from here?

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Speaker 9: Yeah, that's a really important point. They could certainly go

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Speaker 9: higher with tighter FED policy. Real rates can go up,

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Speaker 9: But you know, consider the fact that the last period

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Speaker 9: in which we had ten year real yields around two

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Speaker 9: hundred basis points spanning from two thousand and three to

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Speaker 9: two thousand and nine. The forward PE ratio on the

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Speaker 9: S and P five hundred was right around fifteen and

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Speaker 9: we're back above nineteen times now. We were at twenty

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Speaker 9: times forward estimates earlier this year before a pullback started.

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Speaker 9: So I think that ultimately is going to be a

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Speaker 9: hurdle for the equity market. There is competition now from

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Speaker 9: the bond market, and there's a lot of competition from cash.

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Speaker 6: You know.

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Speaker 9: We published a piece yesterday that took a look at

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Speaker 9: the treasury bill yield relative to the earnings yield on stocks,

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Speaker 9: and T bill yields are now higher than the earnings

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Speaker 9: yield on the S and P five hundred. That's actually

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Speaker 9: fairly rare historically, and when it has occurred, the equity

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Speaker 9: market is tended to fall into fairly serious corrections or

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Speaker 9: bear markets. It's going to be impossible to time. But

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Speaker 9: the point is a good one. The higher the yield,

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Speaker 9: the lower the PE ratio. And we have pretty elevated

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Speaker 9: PE ratios now in the equity market, even on a

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Speaker 9: forward looking basis.

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Speaker 2: But this is great for you know Tom Keen is

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Speaker 2: in a triple leverage to all cash lot, right, so

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Speaker 2: he's been doing very well. This is when Gina, Michael's

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Speaker 2: going to talk about the equity risk premium or the

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Speaker 2: negative equity risk premium, which you know, it's difficult for

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Speaker 2: me to get my head around that well.

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Speaker 11: So the thing I think you want to focus on

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Speaker 11: with respect to the equity risk premium is most analysts

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Speaker 11: are going to look at the PE on the S

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Speaker 11: and P five hundred and compare that to some version

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Speaker 11: of a yield or a cash yield, as Michael does

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Speaker 11: in some of his notes, And I think that the

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Speaker 11: missing link there is when you look at the PE

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Speaker 11: of the S and P five hundred, you're really looking

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Speaker 11: at a distorted pe based upon seven stocks. When you

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Speaker 11: look at the rest of the broader equity markets, you

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Speaker 11: look at global stocks, you look at small cap stocks,

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Speaker 11: you look at the X seven s and P five hundred,

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Speaker 11: you actually find the risk premium is much closer to

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Speaker 11: long term average. But you do have these distortions which

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Speaker 11: are creating this really bizarre environment for investment. I mean,

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Speaker 11: my question to Michael would be where are we going

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Speaker 11: to go with this? Michael Are we going to see

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Speaker 11: some rotation then as a default of the equity risk

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Speaker 11: premium or is this just to sell all stocks because

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Speaker 11: you're selling the top seven.

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Speaker 9: Yeah, that's a really important point and a great question,

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Speaker 9: and I think you know, the answer is it really

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Speaker 9: depends on how the business cycle fares from here. So

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Speaker 9: we have been seeing the rally broadened out, and we're

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Speaker 9: hearing the word soft landing and even goldilocks now fairly frequently.

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Speaker 9: And so it looks like a soft landing in the

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Speaker 9: sense that the economy has slowed to about trend, inflation

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Speaker 9: is coming down, and that's starting to catalyze a lot

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Speaker 9: of confidence that will avoid a recession. And there's no

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Speaker 9: recession happening now. We know there's a recession on if

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Speaker 9: the unemployment rate is lifting, and that has not occurred yet.

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Speaker 9: But I don't think we're quite out of the woods

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Speaker 9: in terms of, you know, looking out over the next year.

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Speaker 9: I still think the probability of a recession is quite high,

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Speaker 9: just because we dodged one in the first half of

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Speaker 9: the year. Q three looks like it's shaping up pretty

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Speaker 9: well so far. I think it's a bit premature to say, Okay,

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Speaker 9: the coast is clear now. So if we do end

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Speaker 9: up with a recession hitting some time between now and

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Speaker 9: say the end of next summer, you know, I think

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Speaker 9: that's going to be a difficult environment for the equity market,

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Speaker 9: even you know, even given the fact that we've had

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Speaker 9: these distortions by the seven stocks you've mentioned. The rest

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Speaker 9: of the market certainly doesn't look that expensive. But an

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Speaker 9: environment where top line growth is weakening and potentially e've

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Speaker 9: ben falling and you have that pressure on profit margins,

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Speaker 9: I think we're going to have difficulty and risk assets

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Speaker 9: and not just equity markets. I mean, the high yield

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Speaker 9: market looks insanely expensive here, so I wouldn't touch that

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Speaker 9: with a ten foot hole. The triple levered cash fund

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Speaker 9: met that the top is a pretty good way.

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Speaker 4: To go here.

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Speaker 2: He's done very well, but he's avoided bitcoin from I

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Speaker 2: have to say, from like six hundred dollars when I

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Speaker 2: first talked to.

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Speaker 6: Him about it.

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Speaker 2: He could have made a killing in it. I want

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Speaker 2: to ask about, getting back to Jackson hole, how restrictive

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Speaker 2: the FED is, because you point out that we have

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Speaker 2: obviously an inverted yield curve. We're seeing a shrinkage and

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Speaker 2: money supply for the first time and who knows how long,

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Speaker 2: and that typically indicates a recession is coming. Both of

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Speaker 2: those things. On the other hand, you know, Neil Dutta

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Speaker 2: the note after the minutes, put out a note pointing

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Speaker 2: out something that Damien was bringing up earlier as well,

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Speaker 2: which is that we have unemployment at three and a

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Speaker 2: half percent, we have growth that looks like four percent

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Speaker 2: right now. So how restrictive can the Fed really be?

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Speaker 9: Yeah, I think that's the critical question for the Fed.

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Speaker 9: If they're looking at you know, the coincident data month

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Speaker 9: by month, week by week, If the data looks like

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Speaker 9: it's coming in above trend, the Fed is going to

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Speaker 9: assume that whatever the policy rate is, it's not high enough. Right.

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Speaker 9: So that's why there's still a question about whether they

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Speaker 9: raise rates again and whether they're really done in the

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Speaker 9: Future's markets have been, you know, starting to price in

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Speaker 9: at least one more rate hike although it's you know,

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Speaker 9: low probability. So if you continue to get hot data,

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Speaker 9: then the Fed is just going to keep at it

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Speaker 9: because they don't you know, they will admit they don't

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Speaker 9: really know where the so called called our star, the

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Speaker 9: equilibrium interest rate. If you think about what they've most

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Speaker 9: of them have been saying, the fo MC voters since

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Speaker 9: last year. They're talking about getting to a restrictive stance

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Speaker 9: and holding there. And if you ask them to define,

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Speaker 9: you know what does that mean. It means that activity

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Speaker 9: is coming in below trend. So if that's not happening,

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Speaker 9: that's going to keep at it until it does happen.

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Speaker 9: And you know, in my mind, that's actually the risk

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Speaker 9: to the to the business cycle. And you know that

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Speaker 9: that reinforces the message of the yield curve in money

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Speaker 9: and some of these longer leading indicators that tend to

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Speaker 9: weaken well before recessions hit. The problem is, you know,

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Speaker 9: there are long and varied lags what's impossible to time,

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Speaker 9: and you can have these rip roaring equity market rallies,

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Speaker 9: even if they're narrowly driven, leading an economic cycle. We

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Speaker 9: saw that in six seven. We also saw the eighty

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Speaker 9: nine to ninety, so that one was before most of

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Speaker 9: our time here on the panel.

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Speaker 2: Absolutely for all of us here, definitely way before our times. Michael,

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Speaker 2: thanks so much. Michael Darta there of Wrath MKM talking

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Speaker 2: to us about rates.

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Speaker 8: Springing.

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Speaker 2: Max Kattner right now, chief Multi Asset strategist over at HSBC.

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Speaker 2: He joins us live out of Copenhagen. Max, let me

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Speaker 2: first get your take on the big news of the day,

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Speaker 2: which is yesterday's and Video earnings report. I thought expectations

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Speaker 2: were so high it would be tough to beat, and

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Speaker 2: yet they did it.

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Speaker 8: Yeah, good morning.

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Speaker 12: I think, look just like we've had before, right, there's

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Speaker 12: really nothing bad about that report, and it's going to

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Speaker 12: be you know, it's going to be pretty interesting how

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Speaker 12: the stock opens. I guess we're going to go towards

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Speaker 12: a new all time high. I guess in terms of

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Speaker 12: the market sentiment, and it's a complete switch from what

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Speaker 12: we've seen last week. However, I would also say in

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Speaker 12: terms of the broader market sentiment, not just in video,

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Speaker 12: not just AI, but if we look at the broader

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Speaker 12: market sentiment, that's clearly become.

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Speaker 8: A little bit more bare over the last you know,

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Speaker 8: the last two weeks or so.

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Speaker 12: When we look, for example, at survey based sent and sentiment,

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Speaker 12: look at the AAII survey, look at several other indicators

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Speaker 12: in general, they've become a little bit more bearish. And

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Speaker 12: that is good news, right. That means that, you know,

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Speaker 12: if you get a bit further further dips in US equities.

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Speaker 12: That definitely is really territory to buy on dips.

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Speaker 6: Max.

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Speaker 11: You've been pretty constructive and talking about buying on dips

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Speaker 11: now for a bit of time. Is it more than

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Speaker 11: just sentiment. Talk us through your theory or sort of

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Speaker 11: your justification for getting a little bit more bullish as

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Speaker 11: we approach the end of the year, because it seems

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Speaker 11: to stand out as many people have sort of gotten

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Speaker 11: a little scared off by what we've experienced over the

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Speaker 11: last month.

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Speaker 8: Yeah, I do think.

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Speaker 12: Look, I do think there could be a few further

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Speaker 12: deps now in the next week or two, right, or

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Speaker 12: with Jackson Hall, you guys just mentioned treasury supply, right,

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Speaker 12: If one or two of these auctions tail a little bit, yeah, fine,

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Speaker 12: that may be bringing a few further dips, but those

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Speaker 12: steps have to be bought, right. It is number one,

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Speaker 12: the sentiment side of things that we've just talked about,

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Speaker 12: but it's also the fundamental side, right, Like you before

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Speaker 12: mentioned the broad based earnings recovery.

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Speaker 8: Let's remember that.

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Speaker 12: We've just had the second quarter in a row where

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Speaker 12: average earning surprise factors have picked up again, where the

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Speaker 12: earnings b trade has picked up again, both way above

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Speaker 12: tenure averages and pre COVID averages. So that's pretty good, right,

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Speaker 12: And it's also really when we look at the strength

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Speaker 12: of the US economy overall, that is pretty broad based

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Speaker 12: as well, right, whether that's the consumer, whether it's easier

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Speaker 12: financial conditions compared to a year ago. And indeed, if

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Speaker 12: we look at some of the leading indicators of the

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Speaker 12: manufacturing industry, right, some of those leading indicators, let's say,

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Speaker 12: like regional FED surveys.

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Speaker 8: Even the ones that we've got for August.

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Speaker 12: Already, they're pointing towards perhaps some turning points, some early

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Speaker 12: sort of turning points, even in the struggling manufacturing industry

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Speaker 12: in the next couple of months.

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Speaker 6: Fundamentals don't matter anymore. Come on, you know that. I mean,

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Speaker 6: let's sift back to sentiment. Let's shoot back to positioning.

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Speaker 10: Let's focus on seasonals, the notoriously weak September October period.

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Speaker 10: I mean, should we be even remotely thinking about buying

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Speaker 10: the dip into that or should we be looking to

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Speaker 10: hedge up, should be looking to cover our bets? I mean, look,

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Speaker 10: one of the features of this weakness we've witnessed over

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Speaker 10: the better part of the last few weeks has been

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Speaker 10: a stronger dollar, and you know, my concern is that,

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Speaker 10: you know, what does that mean for US equity earnings?

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Speaker 12: So on the second question on the stronger dollar, but

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Speaker 12: let's remember that the dollar is still significantly weaker compared to.

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Speaker 8: A year ago.

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Speaker 12: So the fact is that when we look at the

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Speaker 12: year of the year change of the dollar that's typically

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Speaker 12: quite well correlated.

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Speaker 8: With earnings revisions of the S and P.

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Speaker 12: The S and P still has a surprisingly significant degree

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Speaker 12: of foreign revenue exposure. So that week of dollar compared

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Speaker 12: to a year ago actually is now coming through now

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Speaker 12: in Q three earnings and Q four earning, So that helps.

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Speaker 8: That's number one.

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Speaker 12: Number two on the seasonals, I absolutely hate I did

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Speaker 12: test seasonality, right, seasonality, to be perfectly honest, if you

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Speaker 12: do any kinds of studies over the last sort of ten, fifteen,

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Speaker 12: twenty years, if you adjust them for the big events, right,

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Speaker 12: things like you know, nine to eleven, if you think

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Speaker 12: about two thousand and eight, right Lehman Brothers. So those

439
00:23:13,680 --> 00:23:16,399
Speaker 12: sorts of things that frankly didn't really have an awful

440
00:23:16,400 --> 00:23:19,359
Speaker 12: lot to do with seasonality, then even in the last

441
00:23:19,359 --> 00:23:23,080
Speaker 12: twenty years, seasonality is gone right, So the seasonality gains

442
00:23:23,119 --> 00:23:26,639
Speaker 12: that people were able to harvest, they really stopped with

443
00:23:27,040 --> 00:23:30,040
Speaker 12: the surge and computing power, which I guess brings us

444
00:23:30,080 --> 00:23:32,920
Speaker 12: back to n video, but it really really stopped really

445
00:23:33,320 --> 00:23:35,800
Speaker 12: from the end of the nineties beginning of two thousand.

446
00:23:35,920 --> 00:23:38,919
Speaker 8: Since then, seasonality hasn't really worked right.

447
00:23:38,960 --> 00:23:41,320
Speaker 12: And also they se yeah, let's remember right, you would

448
00:23:41,359 --> 00:23:43,680
Speaker 12: have thought, oh, let's sell in May, and what happened

449
00:23:43,760 --> 00:23:45,800
Speaker 12: was that the rally took off in June and July.

450
00:23:46,080 --> 00:23:48,840
Speaker 8: So even this year, seasonality didn't really work.

451
00:23:49,560 --> 00:23:51,679
Speaker 2: Max, great talking to you this morning. Thanks so much

452
00:23:51,720 --> 00:24:06,920
Speaker 2: for joining us. Max Keattner of HSBC. Diana Amoa, CIO

453
00:24:07,000 --> 00:24:11,439
Speaker 2: of Long Bias Strategies at Kirkhus Waald Asset Management, joins

454
00:24:11,520 --> 00:24:14,159
Speaker 2: us now to talk about everything that's going on in

455
00:24:14,200 --> 00:24:16,800
Speaker 2: these markets. So Diana really appreciate you coming into the

456
00:24:16,840 --> 00:24:22,000
Speaker 2: Bloomberg Surveillance studios this morning. What's your view of what

457
00:24:22,040 --> 00:24:25,320
Speaker 2: we see going on here? With a couple days ago,

458
00:24:25,359 --> 00:24:27,280
Speaker 2: we were at four thirty four on the ten year

459
00:24:27,640 --> 00:24:32,280
Speaker 2: and it didn't seem to dissuade everybody from still keeping

460
00:24:32,280 --> 00:24:34,320
Speaker 2: these equity markets at relatively high levels.

461
00:24:34,960 --> 00:24:37,760
Speaker 7: So I think what's been supporting equities despite the higher

462
00:24:37,840 --> 00:24:40,840
Speaker 7: rates that we're seeing is actually the earnings I think

463
00:24:40,880 --> 00:24:45,160
Speaker 7: this last earning season especially surprised. We've seen significant revisions

464
00:24:45,200 --> 00:24:47,560
Speaker 7: in some of the key sectors that are big components

465
00:24:47,560 --> 00:24:50,639
Speaker 7: of the indusices, such as in the tech sector. That

466
00:24:50,880 --> 00:24:55,119
Speaker 7: is actually giving investors a degree of comfort that companies

467
00:24:55,160 --> 00:24:58,040
Speaker 7: can still generate profits even with higher funding costs.

468
00:24:59,000 --> 00:25:01,840
Speaker 11: And you are seeing across the world some central banks

469
00:25:01,880 --> 00:25:04,199
Speaker 11: start to pivot to sort of more dubbish policy already.

470
00:25:04,200 --> 00:25:06,360
Speaker 11: Can you talk about the implications of that and how

471
00:25:06,400 --> 00:25:08,119
Speaker 11: you see that playing out over the next six to

472
00:25:08,160 --> 00:25:08,840
Speaker 11: twelve months.

473
00:25:09,119 --> 00:25:11,840
Speaker 7: Indeed, So what we're seeing right now is some of

474
00:25:11,880 --> 00:25:15,760
Speaker 7: the specific inflationary trends that we've been seeing into last

475
00:25:15,840 --> 00:25:19,000
Speaker 7: year have turned into strong disinflation. And I think markets

476
00:25:19,119 --> 00:25:23,040
Speaker 7: underappreciate just how synchronized the disinflation we're seeing globally is

477
00:25:23,440 --> 00:25:26,600
Speaker 7: similarly to when we'd started seeing inflation pick up and

478
00:25:26,760 --> 00:25:29,480
Speaker 7: the developed markets we're ignoring the signs, thinking it was

479
00:25:29,520 --> 00:25:32,840
Speaker 7: em specific or transitory. I think the extent to which

480
00:25:32,880 --> 00:25:36,119
Speaker 7: we get global disinflation might catch markets by surprise. So

481
00:25:36,200 --> 00:25:39,440
Speaker 7: that's the one thing that has been a big turn,

482
00:25:39,840 --> 00:25:43,520
Speaker 7: and especially in the context of growth outside the US

483
00:25:43,600 --> 00:25:46,880
Speaker 7: is actually looking quite lackluster. We've seen the pmis out

484
00:25:46,880 --> 00:25:49,000
Speaker 7: of Europe, We've seen the data out of China, We've

485
00:25:49,000 --> 00:25:52,760
Speaker 7: seen data out of specific emerging market economies. Whether you're

486
00:25:52,760 --> 00:25:55,760
Speaker 7: looking at things like retail sales in Central and Eastern Europe,

487
00:25:56,240 --> 00:25:59,399
Speaker 7: credit growth across a number of key economies, all of

488
00:25:59,400 --> 00:26:02,800
Speaker 7: these are points to tighter financial conditions starting to hit

489
00:26:02,880 --> 00:26:06,000
Speaker 7: growth and inflation is actually off the highs. And we're

490
00:26:06,000 --> 00:26:08,680
Speaker 7: seeing this inflation which means central bunkers can start to

491
00:26:08,720 --> 00:26:11,560
Speaker 7: cut rates. And indeed, over the last few months we've

492
00:26:11,560 --> 00:26:15,320
Speaker 7: seen Brazil cutting rates, Chili cutting rates. We expect we

493
00:26:15,440 --> 00:26:17,920
Speaker 7: might see polar next as one of the major emerging

494
00:26:17,920 --> 00:26:19,680
Speaker 7: markets to start easing rates as well.

495
00:26:19,920 --> 00:26:22,159
Speaker 11: So are we moving into a world then, as you

496
00:26:22,280 --> 00:26:25,679
Speaker 11: correctly identified where emerging markets lead developed markets on the

497
00:26:25,720 --> 00:26:28,840
Speaker 11: inflation front, are emerging markets likely to lead develop markets

498
00:26:28,840 --> 00:26:32,119
Speaker 11: on the central banking front through the disinflationary phase? And

499
00:26:32,160 --> 00:26:35,359
Speaker 11: then how do you structure a portfolio and an environment

500
00:26:35,359 --> 00:26:39,159
Speaker 11: where emerging markets are potentially leading developed markets. That seems

501
00:26:39,160 --> 00:26:41,960
Speaker 11: a very different sort of investment construct than that which

502
00:26:41,960 --> 00:26:43,919
Speaker 11: we've lived in for much of the last twenty years.

503
00:26:43,960 --> 00:26:46,240
Speaker 7: It is indeed, and I keep saying this over and

504
00:26:46,280 --> 00:26:49,399
Speaker 7: over for the first time, you know, the inflation dynamics

505
00:26:49,400 --> 00:26:52,320
Speaker 7: in EM that we've experienced over the last few day

506
00:26:52,359 --> 00:26:55,680
Speaker 7: decades are actually coming in as an advantage to policymakers

507
00:26:55,720 --> 00:26:58,639
Speaker 7: in EM who are early to hike, and they hiked aggressively,

508
00:26:58,720 --> 00:27:01,919
Speaker 7: so they got to their time rates much faster and

509
00:27:02,040 --> 00:27:05,280
Speaker 7: have been on hold for long enough. So keeping monetary

510
00:27:05,280 --> 00:27:09,760
Speaker 7: conditions tight enough that inflation is responding, consumption is actually

511
00:27:09,800 --> 00:27:13,000
Speaker 7: slowing down across a number of economies. In that context,

512
00:27:13,200 --> 00:27:16,919
Speaker 7: portfolio construction would argue that if there is a chance

513
00:27:17,000 --> 00:27:19,680
Speaker 7: that we might have recession in some of the key economies,

514
00:27:19,960 --> 00:27:22,719
Speaker 7: you need to have some duration in your portfolio. And

515
00:27:22,800 --> 00:27:24,919
Speaker 7: I know, given the context of the price action we

516
00:27:25,000 --> 00:27:27,879
Speaker 7: so in August, duration seems to be going in and

517
00:27:27,920 --> 00:27:30,919
Speaker 7: out of fashion. But ultimately we think real rates are

518
00:27:31,000 --> 00:27:34,080
Speaker 7: high in a number of key EM economies and policymakers

519
00:27:34,280 --> 00:27:37,480
Speaker 7: will be responding by cutting rates irrespective of what's playing

520
00:27:37,520 --> 00:27:39,680
Speaker 7: out in the rest of the world, and that gives

521
00:27:39,760 --> 00:27:42,639
Speaker 7: us comfort in seeing EM as a good diversifier of

522
00:27:42,680 --> 00:27:44,560
Speaker 7: portfolios at this point in the cycle.

523
00:27:45,240 --> 00:27:48,040
Speaker 10: Diana, back in June, you participated in the byside panel

524
00:27:48,080 --> 00:27:51,800
Speaker 10: of our Emerging Markets Investment Conference here at seven thirty

525
00:27:51,840 --> 00:27:53,919
Speaker 10: one last Bloomberg Headquarters. And you know, one of the

526
00:27:53,960 --> 00:27:56,679
Speaker 10: things we debated was the shift into a multipolar world,

527
00:27:56,920 --> 00:27:57,600
Speaker 10: where you know.

528
00:27:57,560 --> 00:27:59,720
Speaker 6: Countries have to take a position. Are they on the

529
00:27:59,760 --> 00:28:01,879
Speaker 6: side of the US? Are they on the side of China.

530
00:28:02,160 --> 00:28:04,280
Speaker 10: Now we see China trying to expand its kind of

531
00:28:04,280 --> 00:28:07,119
Speaker 10: bricks plus model, We see the US making forays to

532
00:28:07,200 --> 00:28:08,439
Speaker 10: South Korea and Japan.

533
00:28:08,880 --> 00:28:10,600
Speaker 6: Talk to us a little bit about those.

534
00:28:10,359 --> 00:28:12,760
Speaker 10: Countries that don't have to pick a side. Do you

535
00:28:12,800 --> 00:28:14,719
Speaker 10: believe those countries should command a premium on the part

536
00:28:14,760 --> 00:28:15,359
Speaker 10: of investors.

537
00:28:15,440 --> 00:28:17,359
Speaker 7: So it's interesting that you bring that up in the

538
00:28:17,359 --> 00:28:20,120
Speaker 7: context of we have the Brick Summit taking place right now.

539
00:28:20,160 --> 00:28:23,160
Speaker 7: We had China announcing overnight that they're going to set

540
00:28:23,240 --> 00:28:26,080
Speaker 7: up a ten billion fund to support development in certain

541
00:28:26,160 --> 00:28:30,000
Speaker 7: parts of emerging markets and to help with the supply

542
00:28:30,080 --> 00:28:33,200
Speaker 7: chain integrity. I think that's a theme that's here to stay.

543
00:28:33,280 --> 00:28:36,439
Speaker 7: It's a longer term theme. We're seeing countries across the

544
00:28:36,480 --> 00:28:40,560
Speaker 7: board really thinking about where the supply chains are, where

545
00:28:40,600 --> 00:28:43,240
Speaker 7: the key mineral resources are, and how to secure those.

546
00:28:43,600 --> 00:28:46,040
Speaker 7: And so as a result of that, you've seen near

547
00:28:46,120 --> 00:28:49,480
Speaker 7: shoring friends sharing become much more of a conversation going forward.

548
00:28:49,880 --> 00:28:53,760
Speaker 7: You've seen countries moving more to ally themselves with non

549
00:28:53,840 --> 00:28:56,640
Speaker 7: traditional allies, and you've seen other players such as the

550
00:28:56,760 --> 00:29:01,160
Speaker 7: likes of India Mexico become quite strategically important to the

551
00:29:01,320 --> 00:29:06,000
Speaker 7: likes of China as far as India goes to Mexico,

552
00:29:06,040 --> 00:29:08,440
Speaker 7: to the US as far as you know their manufacturing

553
00:29:08,520 --> 00:29:12,040
Speaker 7: hubs and how they're setting up their supply chains. So

554
00:29:12,320 --> 00:29:17,000
Speaker 7: the near shoring is and this multiplarity is happening in place,

555
00:29:17,440 --> 00:29:22,520
Speaker 7: I think investors will actually think about diversifying their portfolios

556
00:29:22,720 --> 00:29:26,040
Speaker 7: from being too exposed to either China or the US.

557
00:29:26,080 --> 00:29:29,480
Speaker 7: In the context of if you do have a geopolitical fragmentation,

558
00:29:29,960 --> 00:29:32,280
Speaker 7: and so you start to look at the more neutral countries,

559
00:29:32,800 --> 00:29:37,840
Speaker 7: India being one that has benefited from this geopolitical splintering

560
00:29:37,880 --> 00:29:41,040
Speaker 7: and actually look set to continue to grow quite rapidly,

561
00:29:41,160 --> 00:29:44,640
Speaker 7: particularly in manufacturing over the next five years. So those

562
00:29:44,680 --> 00:29:48,920
Speaker 7: countries should command a premium as this trend continues to

563
00:29:49,000 --> 00:29:49,560
Speaker 7: go forward.

564
00:29:49,840 --> 00:29:52,240
Speaker 10: You mentioned China, and you know that's so critical from

565
00:29:52,240 --> 00:29:54,640
Speaker 10: the part from the perspective of a foreign investor. You know,

566
00:29:54,680 --> 00:29:57,760
Speaker 10: we've seen roughly eleven billion dollars exit the Chinese equity

567
00:29:57,800 --> 00:29:59,479
Speaker 10: market in the last two and a half weeks alone.

568
00:29:59,600 --> 00:30:02,760
Speaker 10: In the set quarter, we saw foreign direct investment in China,

569
00:30:03,160 --> 00:30:05,720
Speaker 10: you know, down to its lowest levels pretty much on record.

570
00:30:06,120 --> 00:30:09,400
Speaker 10: As a offshore foreign investors, a US dollar based investor,

571
00:30:10,080 --> 00:30:11,960
Speaker 10: how do you approach China in the current environment.

572
00:30:12,760 --> 00:30:15,920
Speaker 7: One needs to understand the policy direction of China. I

573
00:30:15,960 --> 00:30:19,000
Speaker 7: think what makes it difficult to do direct investment in China.

574
00:30:19,080 --> 00:30:22,600
Speaker 7: It's just the uncertainty as far as regulations go, the

575
00:30:22,680 --> 00:30:26,800
Speaker 7: geopolitical uncertainty, and the tensions domestically. So this is an

576
00:30:26,840 --> 00:30:31,320
Speaker 7: economy that looks like it's decelerating and continuing to accelerate.

577
00:30:31,720 --> 00:30:35,680
Speaker 7: You have sporadic bouts of unrest coming through, and then

578
00:30:35,720 --> 00:30:38,040
Speaker 7: you have flare ups in key sectors of the economy,

579
00:30:38,040 --> 00:30:40,760
Speaker 7: whether we are talking about the financial sector with the

580
00:30:40,760 --> 00:30:43,719
Speaker 7: shadow banking issues, we've seen this last couple of weeks

581
00:30:44,400 --> 00:30:48,200
Speaker 7: in the commercial real estate space, which is key for business,

582
00:30:48,400 --> 00:30:51,080
Speaker 7: and in even domestic real estate markets, which are key

583
00:30:51,120 --> 00:30:53,920
Speaker 7: for the wealth effect for the consumer. So from an

584
00:30:53,960 --> 00:30:56,560
Speaker 7: equity perspective, it becomes quite difficult to look at the

585
00:30:56,600 --> 00:31:01,080
Speaker 7: traditional sectors. It's not to say the interesting stories underneath

586
00:31:01,080 --> 00:31:03,160
Speaker 7: the surface, whether you look at tech and the lips

587
00:31:03,200 --> 00:31:05,960
Speaker 7: that China is making their own technology, et cetera. But

588
00:31:06,080 --> 00:31:10,000
Speaker 7: from an aggregate portfolio perspective, direct investments become hard. So

589
00:31:10,160 --> 00:31:12,640
Speaker 7: the second layer then you have to think about who

590
00:31:12,720 --> 00:31:16,880
Speaker 7: benefits outside China, which countries are likely to benefit if

591
00:31:16,880 --> 00:31:19,280
Speaker 7: we do end up getting the old style stimulus. So

592
00:31:19,480 --> 00:31:23,040
Speaker 7: let's just build a bunch of roads, buildings, let's stimulate

593
00:31:23,120 --> 00:31:27,280
Speaker 7: the property sector. Commodity exporters will benefit, so think about

594
00:31:27,320 --> 00:31:31,480
Speaker 7: em commodity exporters. China has now said the reopening group

595
00:31:31,560 --> 00:31:35,680
Speaker 7: tourism to Europe and the US. They'd already started that

596
00:31:35,840 --> 00:31:38,160
Speaker 7: movement in Thailand and we see that in the recovery

597
00:31:38,240 --> 00:31:41,720
Speaker 7: tourism in Thailand. So that's another proxy of thinking. You know,

598
00:31:41,760 --> 00:31:44,280
Speaker 7: if we are going to get more travel, then those

599
00:31:44,320 --> 00:31:46,720
Speaker 7: are places that could benefit. So there are ways to

600
00:31:46,760 --> 00:31:50,720
Speaker 7: position for the China story without necessarily direct investment in China.

601
00:31:51,320 --> 00:31:52,640
Speaker 6: Diana, thanks so much for coming in.

602
00:31:52,720 --> 00:31:57,200
Speaker 2: Really great to get your perspective, especially there on emerging markets.

603
00:31:57,200 --> 00:32:00,000
Speaker 2: Diana a Moa of Kirkoswold Asset Manager.

604
00:32:00,480 --> 00:32:04,320
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605
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