Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
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Speaker 2: This is Bloomberg Surveillance. Alongside Damian Sassaur and Gina Martin Adams.
Speaker 2: I am Matt Miller, Tom John and Lisa are on
Speaker 2: assignment today in Jackson Hole, head of our special coverage.
Speaker 2: Let's get out to Jackson Hole. Right now, Bloomberg's Mike
Speaker 2: McKee kicks off our coverage with former Saint Louis FED
Speaker 2: president Jim Bullard, now at Purdue. Mike take it away.
Speaker 3: Well, good morning everybody, and good morning to Jim Bullard.
Speaker 3: You know it's a tradition here at Jackson Hole that
Speaker 3: we start our coverage with an interview with Jim Bullard.
Speaker 4: Every year.
Speaker 3: We come out at six am in the morning and
Speaker 3: Jim joins us in the cold. Jim left the Fed,
Speaker 3: but We're not letting him get away. He's joining us
Speaker 3: now from Purdue University, where he is the dean of
Speaker 3: the Daniels School of Business. Welcome back to our show, Jim,
Speaker 3: even if you're not here in person.
Speaker 5: Well, I'm glad to be here. And I wore my
Speaker 5: Jackson Holt coat in solidarity with the cold weather that
Speaker 5: you have to endure every year when you're out in
Speaker 5: the mountains there.
Speaker 3: Well, I offered you coffee. I just want everybody to
Speaker 3: know that, but you didn't want to come get some
Speaker 3: the first question, and I'm not the only person to
Speaker 3: wonder this, and I'm sure you know this is why
Speaker 3: you left the FED when you did and why you
Speaker 3: took this job that you have now.
Speaker 5: Well, this is a great challenge for me and for
Speaker 5: the Mitch Daniel's School of Business. We're going to get
Speaker 5: much better. We're already good, but we're gonna to go
Speaker 5: to great And I thought it'd be a great opportunity.
Speaker 5: I have been in the FED for fifteen years as
Speaker 5: president and longer before that, so my time was running out.
Speaker 5: So this is a great challenge later in my career,
Speaker 5: so I'm really looking forward to it.
Speaker 4: Well, you recently moved.
Speaker 3: So you still, i'm sure, have a lot of economics
Speaker 3: and monetary policy on your brain.
Speaker 4: Let me pick it a little bit.
Speaker 3: And ask you what you think of the economy at
Speaker 3: the moment if you were still trying to decide whether
Speaker 3: you would vote one way or another. Are we getting
Speaker 3: signals that give you a strong view one way or another?
Speaker 5: I think the biggest question right now is the reacceleration
Speaker 5: in the US economy. Atlanta Feds GDP now showing substantially
Speaker 5: above trend growth for the US economy in the third quarter.
Speaker 5: That's following higher than expected growth in the first half
Speaker 5: of twenty twenty three, and for that matter, in the
Speaker 5: second half of twenty twenty two. So I think that
Speaker 5: those that have been predicting imminent recession are having a
Speaker 5: lot of trouble here. It doesn't seem to be happening,
Speaker 5: and this reacceleration could put upward pressure on inflation, stem
Speaker 5: the disinflation that we're seeing, and instead delay plans for
Speaker 5: the FED to change policy.
Speaker 4: How are we going to do?
Speaker 3: Let me separate those questions out a little bit in
Speaker 3: terms of inflation absent the growth level that we have
Speaker 3: at the moment, and of course.
Speaker 4: That's just a very early read from the Atlanta Fed.
Speaker 3: Absent that would you be thinking that inflation would re
Speaker 3: accelerate anyway based on what you've seen in the economy.
Speaker 5: There's some talk about base effects fading and going the
Speaker 5: other way during the second half of the year, So
Speaker 5: we'll see if that occurs. You know, I like to
Speaker 5: look at the twelve month numbers because they rints out
Speaker 5: some of the seasonal effects, and so you could get
Speaker 5: at least a pause in the disinflation or even a
Speaker 5: little bit of reacceleration. I think that would suggest a
Speaker 5: higher rate profile for the FED than otherwise, So yeah,
Speaker 5: it could happen.
Speaker 4: Well.
Speaker 3: Chairman Powell and the other members of the committee have
Speaker 3: been very careful in what they've said about additional rate
Speaker 3: increases because they seem to feel they're pretty tight right
Speaker 3: now and they want to make sure they don't tip
Speaker 3: the economy into recession.
Speaker 4: How great a danger do you think that is?
Speaker 5: Yeah, I don't know. I think that committee should take
Speaker 5: a little bit of a victory lap here. I mean,
Speaker 5: the unemployment rate is three and a half percent, and
Speaker 5: we were very aggressive in twenty twenty two and into
Speaker 5: twenty twenty three, but the real side of the economy
Speaker 5: has been growing faster than potential. Labor market is still
Speaker 5: very strong, that should consumption, which should continue to proceed
Speaker 5: a pace here in the second half of twenty twenty three. So,
Speaker 5: and in the meantime CPI inflation headline CPI inflation was
Speaker 5: actually on a twelve month basis was nine percent at
Speaker 5: one point, now three percent, and the core measures are
Speaker 5: coming down as well. So it really looks like the
Speaker 5: twenty twenty two policy, including seventy five basis point hikes
Speaker 5: four meetings in a row, has a good chance of success.
Speaker 5: You never know, but it seems like it has a
Speaker 5: good chance of success here. So if there was ever
Speaker 5: a soft landing, taking six percentage points off the headline
Speaker 5: inflation rate without an increase in unemployment would sound like
Speaker 5: a soft landing to me.
Speaker 3: Well, the argument some of your former colleagues make about
Speaker 3: not raising rates further is that we have long and
Speaker 3: variable lags that are just beginning to hit the economy.
Speaker 3: That twenty twenty two rate increase path is only just
Speaker 3: beginning to hit the economy, and we have seen some
Speaker 3: of the sentiment indicators suggest that we have seen manufacturing
Speaker 3: drop off. Do you think that we really need more
Speaker 3: rate increases or should we wait and see if these
Speaker 3: lags are finally starting to hit and this speedy economy
Speaker 3: will slow down at last.
Speaker 6: Yeah.
Speaker 5: I don't think that the long and variable lags are
Speaker 5: quite what they were when Milton Freeman first talked about
Speaker 5: them decades ago. I think a lot of the transmission
Speaker 5: is much faster than it was at that time. I
Speaker 5: would point to housing as one of the prime examples.
Speaker 5: The housing market basically came to a stop in the
Speaker 5: spring of twenty twenty two, and at that point, the
Speaker 5: Committee hadn't actually done anything. The policy rate was still
Speaker 5: not very far from zero at that point, but markets
Speaker 5: anticipate what the Fed is going to do, and so
Speaker 5: you've got a big impact in the spring and summer
Speaker 5: and fall of twenty twenty two on the housing market.
Speaker 5: So that's an example of how markets pull forward the
Speaker 5: policy of the FED, and I think that's more prevalent
Speaker 5: today than would have been in the sixties or the seventies.
Speaker 5: So I think these long and variable lag estimates are
Speaker 5: a little out of date. You have to think about
Speaker 5: transmission coming much faster than it would have during that
Speaker 5: period of time.
Speaker 3: A couple of newspaper stories, and now Wall Street is
Speaker 3: talking about is our star and whether the Fed is
Speaker 3: going to be adjusting its estimates. Two questions, One, what
Speaker 3: do you think it is? And does it tell you anything?
Speaker 3: And the second question is is it really relevant to
Speaker 3: policy at this point?
Speaker 5: I think it is relevant, but we don't have very
Speaker 5: good estimates of this number. I think Chair Powell has
Speaker 5: said we really don't know.
Speaker 7: Oh.
Speaker 5: I think that was one quote from him on our Star.
Speaker 5: So it is an interesting debate, but you probably can't
Speaker 5: make too much of it because the estimates are so uncertain.
Speaker 5: I do think it matters, though, because people want to
Speaker 5: have some idea of where they think they're going.
Speaker 8: In the medium term.
Speaker 3: Well that's my next question is where do you think
Speaker 3: we're going in the medium term. You've got some people
Speaker 3: who think John Williams, a New York FED president, that
Speaker 3: our star, the neutral rate of interest, let's put it
Speaker 3: that way, is going to be somewhere where it was
Speaker 3: prior to the pandemic. Others think we've moved into a
Speaker 3: new regime, to quote the old Saint Louis FED President
Speaker 3: Jim Bullard, and we're going to be back to say,
Speaker 3: the nineteen nineties versions of interest rates and growth rates
Speaker 3: and inflation rates. Where do you think we come out
Speaker 3: of this pandemic?
Speaker 5: Yeah, I think the probabilities are that we are in
Speaker 5: a new regime that'll be a higher interest rate regime.
Speaker 5: It'll be more like the nineties than we're used to
Speaker 5: in the last two decades. And the reason I say
Speaker 5: that is that inflation is above target today. Core inflation
Speaker 5: is likely to be sticky and come down rather slowly,
Speaker 5: and the rule of thumb would be that the policy
Speaker 5: rate has to be above the inflation rate in order
Speaker 5: to continue to push inflation back toward our two percent target.
Speaker 5: So you would expect from those considerations that interest rates
Speaker 5: would be rather high over this timeframe going forward over
Speaker 5: the medium term, more like the nineties, less like the
Speaker 5: twenty nine to twenty nineteen period where you had inflation
Speaker 5: below target and interest rates pinned down at low levels.
Speaker 5: So I think we have probably switched here to a
Speaker 5: higher interest rate regime with higher nominal Interesting. Now, I
Speaker 5: wouldn't say about the nineties. You and I have talked
Speaker 5: about this before. The second half of the nineties was
Speaker 5: actually one of the best periods for US macroeconomic performance.
Speaker 5: So you know, maybe it's a good sign for the economy.
Speaker 5: The economy can boom even with a higher nominal interest
Speaker 5: rate environment.
Speaker 4: Well, we'll hope you're correct.
Speaker 3: Jim Bullard, the dean of the business school at Purdue University,
Speaker 3: the Daniels Business School, thank you for joining us and
Speaker 3: helping us kick off once again our Jackson Hole coverage.
Speaker 2: Matt Michael McKee, thanks very much for that, and thanks
Speaker 2: also to former Saint Louis FED President Jim Bullard reer
Speaker 2: in for Tom John and Lisa. They're out doing some
Speaker 2: reporting at Jackson Hole as well, and there could be
Speaker 2: some really big market moving speeches out of this symposium,
Speaker 2: or maybe not. Let's ask Michael Darla, chief economist and
Speaker 2: macro strategist Roth MKM Partners. Michael, you know, what do
Speaker 2: you expect from the Fed in a week when a
Speaker 2: lot of people have been saying and videos may be
Speaker 2: more important than j Powell's speech.
Speaker 9: Thanks for having me on, Matt. Well, that's clearly been
Speaker 9: the case in terms of the equity market. As we've seen,
Speaker 9: all eyes are going to be on Powell tomorrow at
Speaker 9: ten am. You know, last year it was very short,
Speaker 9: very blunt, very to the point. But the FED has
Speaker 9: certainly moved quite a bit, you know, over the course
Speaker 9: of the last year and a half. So I don't
Speaker 9: think Powell's intent here is going to be to make
Speaker 9: new news. I think, you know, essentially, the FED is
Speaker 9: getting close to where it thinks the policy rate is
Speaker 9: above neutral, but their eyes are on the macro data.
Speaker 9: And you just heard Bollard there essentially saying if the
Speaker 9: data looks like it's above trend, the Fed's to believe
Speaker 9: that the job is not quite finished. So I really
Speaker 9: don't think Paul is going to come out and make
Speaker 9: some kind of declaration that the FED is done tightening.
Speaker 9: I think they're going to take it meeting by meeting,
Speaker 9: which is, you know what they've.
Speaker 10: Been saying, Michael rising, real yields are a negative for
Speaker 10: risk assets. Here we have the US ten year real
Speaker 10: yield approaching ten percent. It's jumped something on the order
Speaker 10: of fifty BIPs since July. Just how much higher can
Speaker 10: real yields go from here?
Speaker 9: Yeah, that's a really important point. They could certainly go
Speaker 9: higher with tighter FED policy. Real rates can go up,
Speaker 9: But you know, consider the fact that the last period
Speaker 9: in which we had ten year real yields around two
Speaker 9: hundred basis points spanning from two thousand and three to
Speaker 9: two thousand and nine. The forward PE ratio on the
Speaker 9: S and P five hundred was right around fifteen and
Speaker 9: we're back above nineteen times now. We were at twenty
Speaker 9: times forward estimates earlier this year before a pullback started.
Speaker 9: So I think that ultimately is going to be a
Speaker 9: hurdle for the equity market. There is competition now from
Speaker 9: the bond market, and there's a lot of competition from cash.
Speaker 6: You know.
Speaker 9: We published a piece yesterday that took a look at
Speaker 9: the treasury bill yield relative to the earnings yield on stocks,
Speaker 9: and T bill yields are now higher than the earnings
Speaker 9: yield on the S and P five hundred. That's actually
Speaker 9: fairly rare historically, and when it has occurred, the equity
Speaker 9: market is tended to fall into fairly serious corrections or
Speaker 9: bear markets. It's going to be impossible to time. But
Speaker 9: the point is a good one. The higher the yield,
Speaker 9: the lower the PE ratio. And we have pretty elevated
Speaker 9: PE ratios now in the equity market, even on a
Speaker 9: forward looking basis.
Speaker 2: But this is great for you know Tom Keen is
Speaker 2: in a triple leverage to all cash lot, right, so
Speaker 2: he's been doing very well. This is when Gina, Michael's
Speaker 2: going to talk about the equity risk premium or the
Speaker 2: negative equity risk premium, which you know, it's difficult for
Speaker 2: me to get my head around that well.
Speaker 11: So the thing I think you want to focus on
Speaker 11: with respect to the equity risk premium is most analysts
Speaker 11: are going to look at the PE on the S
Speaker 11: and P five hundred and compare that to some version
Speaker 11: of a yield or a cash yield, as Michael does
Speaker 11: in some of his notes, And I think that the
Speaker 11: missing link there is when you look at the PE
Speaker 11: of the S and P five hundred, you're really looking
Speaker 11: at a distorted pe based upon seven stocks. When you
Speaker 11: look at the rest of the broader equity markets, you
Speaker 11: look at global stocks, you look at small cap stocks,
Speaker 11: you look at the X seven s and P five hundred,
Speaker 11: you actually find the risk premium is much closer to
Speaker 11: long term average. But you do have these distortions which
Speaker 11: are creating this really bizarre environment for investment. I mean,
Speaker 11: my question to Michael would be where are we going
Speaker 11: to go with this? Michael Are we going to see
Speaker 11: some rotation then as a default of the equity risk
Speaker 11: premium or is this just to sell all stocks because
Speaker 11: you're selling the top seven.
Speaker 9: Yeah, that's a really important point and a great question,
Speaker 9: and I think you know, the answer is it really
Speaker 9: depends on how the business cycle fares from here. So
Speaker 9: we have been seeing the rally broadened out, and we're
Speaker 9: hearing the word soft landing and even goldilocks now fairly frequently.
Speaker 9: And so it looks like a soft landing in the
Speaker 9: sense that the economy has slowed to about trend, inflation
Speaker 9: is coming down, and that's starting to catalyze a lot
Speaker 9: of confidence that will avoid a recession. And there's no
Speaker 9: recession happening now. We know there's a recession on if
Speaker 9: the unemployment rate is lifting, and that has not occurred yet.
Speaker 9: But I don't think we're quite out of the woods
Speaker 9: in terms of, you know, looking out over the next year.
Speaker 9: I still think the probability of a recession is quite high,
Speaker 9: just because we dodged one in the first half of
Speaker 9: the year. Q three looks like it's shaping up pretty
Speaker 9: well so far. I think it's a bit premature to say, Okay,
Speaker 9: the coast is clear now. So if we do end
Speaker 9: up with a recession hitting some time between now and
Speaker 9: say the end of next summer, you know, I think
Speaker 9: that's going to be a difficult environment for the equity market,
Speaker 9: even you know, even given the fact that we've had
Speaker 9: these distortions by the seven stocks you've mentioned. The rest
Speaker 9: of the market certainly doesn't look that expensive. But an
Speaker 9: environment where top line growth is weakening and potentially e've
Speaker 9: ben falling and you have that pressure on profit margins,
Speaker 9: I think we're going to have difficulty and risk assets
Speaker 9: and not just equity markets. I mean, the high yield
Speaker 9: market looks insanely expensive here, so I wouldn't touch that
Speaker 9: with a ten foot hole. The triple levered cash fund
Speaker 9: met that the top is a pretty good way.
Speaker 4: To go here.
Speaker 2: He's done very well, but he's avoided bitcoin from I
Speaker 2: have to say, from like six hundred dollars when I
Speaker 2: first talked to.
Speaker 6: Him about it.
Speaker 2: He could have made a killing in it. I want
Speaker 2: to ask about, getting back to Jackson hole, how restrictive
Speaker 2: the FED is, because you point out that we have
Speaker 2: obviously an inverted yield curve. We're seeing a shrinkage and
Speaker 2: money supply for the first time and who knows how long,
Speaker 2: and that typically indicates a recession is coming. Both of
Speaker 2: those things. On the other hand, you know, Neil Dutta
Speaker 2: the note after the minutes, put out a note pointing
Speaker 2: out something that Damien was bringing up earlier as well,
Speaker 2: which is that we have unemployment at three and a
Speaker 2: half percent, we have growth that looks like four percent
Speaker 2: right now. So how restrictive can the Fed really be?
Speaker 9: Yeah, I think that's the critical question for the Fed.
Speaker 9: If they're looking at you know, the coincident data month
Speaker 9: by month, week by week, If the data looks like
Speaker 9: it's coming in above trend, the Fed is going to
Speaker 9: assume that whatever the policy rate is, it's not high enough. Right.
Speaker 9: So that's why there's still a question about whether they
Speaker 9: raise rates again and whether they're really done in the
Speaker 9: Future's markets have been, you know, starting to price in
Speaker 9: at least one more rate hike although it's you know,
Speaker 9: low probability. So if you continue to get hot data,
Speaker 9: then the Fed is just going to keep at it
Speaker 9: because they don't you know, they will admit they don't
Speaker 9: really know where the so called called our star, the
Speaker 9: equilibrium interest rate. If you think about what they've most
Speaker 9: of them have been saying, the fo MC voters since
Speaker 9: last year. They're talking about getting to a restrictive stance
Speaker 9: and holding there. And if you ask them to define,
Speaker 9: you know what does that mean. It means that activity
Speaker 9: is coming in below trend. So if that's not happening,
Speaker 9: that's going to keep at it until it does happen.
Speaker 9: And you know, in my mind, that's actually the risk
Speaker 9: to the to the business cycle. And you know that
Speaker 9: that reinforces the message of the yield curve in money
Speaker 9: and some of these longer leading indicators that tend to
Speaker 9: weaken well before recessions hit. The problem is, you know,
Speaker 9: there are long and varied lags what's impossible to time,
Speaker 9: and you can have these rip roaring equity market rallies,
Speaker 9: even if they're narrowly driven, leading an economic cycle. We
Speaker 9: saw that in six seven. We also saw the eighty
Speaker 9: nine to ninety, so that one was before most of
Speaker 9: our time here on the panel.
Speaker 2: Absolutely for all of us here, definitely way before our times. Michael,
Speaker 2: thanks so much. Michael Darta there of Wrath MKM talking
Speaker 2: to us about rates.
Speaker 8: Springing.
Speaker 2: Max Kattner right now, chief Multi Asset strategist over at HSBC.
Speaker 2: He joins us live out of Copenhagen. Max, let me
Speaker 2: first get your take on the big news of the day,
Speaker 2: which is yesterday's and Video earnings report. I thought expectations
Speaker 2: were so high it would be tough to beat, and
Speaker 2: yet they did it.
Speaker 8: Yeah, good morning.
Speaker 12: I think, look just like we've had before, right, there's
Speaker 12: really nothing bad about that report, and it's going to
Speaker 12: be you know, it's going to be pretty interesting how
Speaker 12: the stock opens. I guess we're going to go towards
Speaker 12: a new all time high. I guess in terms of
Speaker 12: the market sentiment, and it's a complete switch from what
Speaker 12: we've seen last week. However, I would also say in
Speaker 12: terms of the broader market sentiment, not just in video,
Speaker 12: not just AI, but if we look at the broader
Speaker 12: market sentiment, that's clearly become.
Speaker 8: A little bit more bare over the last you know,
Speaker 8: the last two weeks or so.
Speaker 12: When we look, for example, at survey based sent and sentiment,
Speaker 12: look at the AAII survey, look at several other indicators
Speaker 12: in general, they've become a little bit more bearish. And
Speaker 12: that is good news, right. That means that, you know,
Speaker 12: if you get a bit further further dips in US equities.
Speaker 12: That definitely is really territory to buy on dips.
Speaker 6: Max.
Speaker 11: You've been pretty constructive and talking about buying on dips
Speaker 11: now for a bit of time. Is it more than
Speaker 11: just sentiment. Talk us through your theory or sort of
Speaker 11: your justification for getting a little bit more bullish as
Speaker 11: we approach the end of the year, because it seems
Speaker 11: to stand out as many people have sort of gotten
Speaker 11: a little scared off by what we've experienced over the
Speaker 11: last month.
Speaker 8: Yeah, I do think.
Speaker 12: Look, I do think there could be a few further
Speaker 12: deps now in the next week or two, right, or
Speaker 12: with Jackson Hall, you guys just mentioned treasury supply, right,
Speaker 12: If one or two of these auctions tail a little bit, yeah, fine,
Speaker 12: that may be bringing a few further dips, but those
Speaker 12: steps have to be bought, right. It is number one,
Speaker 12: the sentiment side of things that we've just talked about,
Speaker 12: but it's also the fundamental side, right, Like you before
Speaker 12: mentioned the broad based earnings recovery.
Speaker 8: Let's remember that.
Speaker 12: We've just had the second quarter in a row where
Speaker 12: average earning surprise factors have picked up again, where the
Speaker 12: earnings b trade has picked up again, both way above
Speaker 12: tenure averages and pre COVID averages. So that's pretty good, right,
Speaker 12: And it's also really when we look at the strength
Speaker 12: of the US economy overall, that is pretty broad based
Speaker 12: as well, right, whether that's the consumer, whether it's easier
Speaker 12: financial conditions compared to a year ago. And indeed, if
Speaker 12: we look at some of the leading indicators of the
Speaker 12: manufacturing industry, right, some of those leading indicators, let's say,
Speaker 12: like regional FED surveys.
Speaker 8: Even the ones that we've got for August.
Speaker 12: Already, they're pointing towards perhaps some turning points, some early
Speaker 12: sort of turning points, even in the struggling manufacturing industry
Speaker 12: in the next couple of months.
Speaker 6: Fundamentals don't matter anymore. Come on, you know that. I mean,
Speaker 6: let's sift back to sentiment. Let's shoot back to positioning.
Speaker 10: Let's focus on seasonals, the notoriously weak September October period.
Speaker 10: I mean, should we be even remotely thinking about buying
Speaker 10: the dip into that or should we be looking to
Speaker 10: hedge up, should be looking to cover our bets? I mean, look,
Speaker 10: one of the features of this weakness we've witnessed over
Speaker 10: the better part of the last few weeks has been
Speaker 10: a stronger dollar, and you know, my concern is that,
Speaker 10: you know, what does that mean for US equity earnings?
Speaker 12: So on the second question on the stronger dollar, but
Speaker 12: let's remember that the dollar is still significantly weaker compared to.
Speaker 8: A year ago.
Speaker 12: So the fact is that when we look at the
Speaker 12: year of the year change of the dollar that's typically
Speaker 12: quite well correlated.
Speaker 8: With earnings revisions of the S and P.
Speaker 12: The S and P still has a surprisingly significant degree
Speaker 12: of foreign revenue exposure. So that week of dollar compared
Speaker 12: to a year ago actually is now coming through now
Speaker 12: in Q three earnings and Q four earning, So that helps.
Speaker 8: That's number one.
Speaker 12: Number two on the seasonals, I absolutely hate I did
Speaker 12: test seasonality, right, seasonality, to be perfectly honest, if you
Speaker 12: do any kinds of studies over the last sort of ten, fifteen,
Speaker 12: twenty years, if you adjust them for the big events, right,
Speaker 12: things like you know, nine to eleven, if you think
Speaker 12: about two thousand and eight, right Lehman Brothers. So those
Speaker 12: sorts of things that frankly didn't really have an awful
Speaker 12: lot to do with seasonality, then even in the last
Speaker 12: twenty years, seasonality is gone right, So the seasonality gains
Speaker 12: that people were able to harvest, they really stopped with
Speaker 12: the surge and computing power, which I guess brings us
Speaker 12: back to n video, but it really really stopped really
Speaker 12: from the end of the nineties beginning of two thousand.
Speaker 8: Since then, seasonality hasn't really worked right.
Speaker 12: And also they se yeah, let's remember right, you would
Speaker 12: have thought, oh, let's sell in May, and what happened
Speaker 12: was that the rally took off in June and July.
Speaker 8: So even this year, seasonality didn't really work.
Speaker 2: Max, great talking to you this morning. Thanks so much
Speaker 2: for joining us. Max Keattner of HSBC. Diana Amoa, CIO
Speaker 2: of Long Bias Strategies at Kirkhus Waald Asset Management, joins
Speaker 2: us now to talk about everything that's going on in
Speaker 2: these markets. So Diana really appreciate you coming into the
Speaker 2: Bloomberg Surveillance studios this morning. What's your view of what
Speaker 2: we see going on here? With a couple days ago,
Speaker 2: we were at four thirty four on the ten year
Speaker 2: and it didn't seem to dissuade everybody from still keeping
Speaker 2: these equity markets at relatively high levels.
Speaker 7: So I think what's been supporting equities despite the higher
Speaker 7: rates that we're seeing is actually the earnings I think
Speaker 7: this last earning season especially surprised. We've seen significant revisions
Speaker 7: in some of the key sectors that are big components
Speaker 7: of the indusices, such as in the tech sector. That
Speaker 7: is actually giving investors a degree of comfort that companies
Speaker 7: can still generate profits even with higher funding costs.
Speaker 11: And you are seeing across the world some central banks
Speaker 11: start to pivot to sort of more dubbish policy already.
Speaker 11: Can you talk about the implications of that and how
Speaker 11: you see that playing out over the next six to
Speaker 11: twelve months.
Speaker 7: Indeed, So what we're seeing right now is some of
Speaker 7: the specific inflationary trends that we've been seeing into last
Speaker 7: year have turned into strong disinflation. And I think markets
Speaker 7: underappreciate just how synchronized the disinflation we're seeing globally is
Speaker 7: similarly to when we'd started seeing inflation pick up and
Speaker 7: the developed markets we're ignoring the signs, thinking it was
Speaker 7: em specific or transitory. I think the extent to which
Speaker 7: we get global disinflation might catch markets by surprise. So
Speaker 7: that's the one thing that has been a big turn,
Speaker 7: and especially in the context of growth outside the US
Speaker 7: is actually looking quite lackluster. We've seen the pmis out
Speaker 7: of Europe, We've seen the data out of China, We've
Speaker 7: seen data out of specific emerging market economies. Whether you're
Speaker 7: looking at things like retail sales in Central and Eastern Europe,
Speaker 7: credit growth across a number of key economies, all of
Speaker 7: these are points to tighter financial conditions starting to hit
Speaker 7: growth and inflation is actually off the highs. And we're
Speaker 7: seeing this inflation which means central bunkers can start to
Speaker 7: cut rates. And indeed, over the last few months we've
Speaker 7: seen Brazil cutting rates, Chili cutting rates. We expect we
Speaker 7: might see polar next as one of the major emerging
Speaker 7: markets to start easing rates as well.
Speaker 11: So are we moving into a world then, as you
Speaker 11: correctly identified where emerging markets lead developed markets on the
Speaker 11: inflation front, are emerging markets likely to lead develop markets
Speaker 11: on the central banking front through the disinflationary phase? And
Speaker 11: then how do you structure a portfolio and an environment
Speaker 11: where emerging markets are potentially leading developed markets. That seems
Speaker 11: a very different sort of investment construct than that which
Speaker 11: we've lived in for much of the last twenty years.
Speaker 7: It is indeed, and I keep saying this over and
Speaker 7: over for the first time, you know, the inflation dynamics
Speaker 7: in EM that we've experienced over the last few day
Speaker 7: decades are actually coming in as an advantage to policymakers
Speaker 7: in EM who are early to hike, and they hiked aggressively,
Speaker 7: so they got to their time rates much faster and
Speaker 7: have been on hold for long enough. So keeping monetary
Speaker 7: conditions tight enough that inflation is responding, consumption is actually
Speaker 7: slowing down across a number of economies. In that context,
Speaker 7: portfolio construction would argue that if there is a chance
Speaker 7: that we might have recession in some of the key economies,
Speaker 7: you need to have some duration in your portfolio. And
Speaker 7: I know, given the context of the price action we
Speaker 7: so in August, duration seems to be going in and
Speaker 7: out of fashion. But ultimately we think real rates are
Speaker 7: high in a number of key EM economies and policymakers
Speaker 7: will be responding by cutting rates irrespective of what's playing
Speaker 7: out in the rest of the world, and that gives
Speaker 7: us comfort in seeing EM as a good diversifier of
Speaker 7: portfolios at this point in the cycle.
Speaker 10: Diana, back in June, you participated in the byside panel
Speaker 10: of our Emerging Markets Investment Conference here at seven thirty
Speaker 10: one last Bloomberg Headquarters. And you know, one of the
Speaker 10: things we debated was the shift into a multipolar world,
Speaker 10: where you know.
Speaker 6: Countries have to take a position. Are they on the
Speaker 6: side of the US? Are they on the side of China.
Speaker 10: Now we see China trying to expand its kind of
Speaker 10: bricks plus model, We see the US making forays to
Speaker 10: South Korea and Japan.
Speaker 6: Talk to us a little bit about those.
Speaker 10: Countries that don't have to pick a side. Do you
Speaker 10: believe those countries should command a premium on the part
Speaker 10: of investors.
Speaker 7: So it's interesting that you bring that up in the
Speaker 7: context of we have the Brick Summit taking place right now.
Speaker 7: We had China announcing overnight that they're going to set
Speaker 7: up a ten billion fund to support development in certain
Speaker 7: parts of emerging markets and to help with the supply
Speaker 7: chain integrity. I think that's a theme that's here to stay.
Speaker 7: It's a longer term theme. We're seeing countries across the
Speaker 7: board really thinking about where the supply chains are, where
Speaker 7: the key mineral resources are, and how to secure those.
Speaker 7: And so as a result of that, you've seen near
Speaker 7: shoring friends sharing become much more of a conversation going forward.
Speaker 7: You've seen countries moving more to ally themselves with non
Speaker 7: traditional allies, and you've seen other players such as the
Speaker 7: likes of India Mexico become quite strategically important to the
Speaker 7: likes of China as far as India goes to Mexico,
Speaker 7: to the US as far as you know their manufacturing
Speaker 7: hubs and how they're setting up their supply chains. So
Speaker 7: the near shoring is and this multiplarity is happening in place,
Speaker 7: I think investors will actually think about diversifying their portfolios
Speaker 7: from being too exposed to either China or the US.
Speaker 7: In the context of if you do have a geopolitical fragmentation,
Speaker 7: and so you start to look at the more neutral countries,
Speaker 7: India being one that has benefited from this geopolitical splintering
Speaker 7: and actually look set to continue to grow quite rapidly,
Speaker 7: particularly in manufacturing over the next five years. So those
Speaker 7: countries should command a premium as this trend continues to
Speaker 7: go forward.
Speaker 10: You mentioned China, and you know that's so critical from
Speaker 10: the part from the perspective of a foreign investor. You know,
Speaker 10: we've seen roughly eleven billion dollars exit the Chinese equity
Speaker 10: market in the last two and a half weeks alone.
Speaker 10: In the set quarter, we saw foreign direct investment in China,
Speaker 10: you know, down to its lowest levels pretty much on record.
Speaker 10: As a offshore foreign investors, a US dollar based investor,
Speaker 10: how do you approach China in the current environment.
Speaker 7: One needs to understand the policy direction of China. I
Speaker 7: think what makes it difficult to do direct investment in China.
Speaker 7: It's just the uncertainty as far as regulations go, the
Speaker 7: geopolitical uncertainty, and the tensions domestically. So this is an
Speaker 7: economy that looks like it's decelerating and continuing to accelerate.
Speaker 7: You have sporadic bouts of unrest coming through, and then
Speaker 7: you have flare ups in key sectors of the economy,
Speaker 7: whether we are talking about the financial sector with the
Speaker 7: shadow banking issues, we've seen this last couple of weeks
Speaker 7: in the commercial real estate space, which is key for business,
Speaker 7: and in even domestic real estate markets, which are key
Speaker 7: for the wealth effect for the consumer. So from an
Speaker 7: equity perspective, it becomes quite difficult to look at the
Speaker 7: traditional sectors. It's not to say the interesting stories underneath
Speaker 7: the surface, whether you look at tech and the lips
Speaker 7: that China is making their own technology, et cetera. But
Speaker 7: from an aggregate portfolio perspective, direct investments become hard. So
Speaker 7: the second layer then you have to think about who
Speaker 7: benefits outside China, which countries are likely to benefit if
Speaker 7: we do end up getting the old style stimulus. So
Speaker 7: let's just build a bunch of roads, buildings, let's stimulate
Speaker 7: the property sector. Commodity exporters will benefit, so think about
Speaker 7: em commodity exporters. China has now said the reopening group
Speaker 7: tourism to Europe and the US. They'd already started that
Speaker 7: movement in Thailand and we see that in the recovery
Speaker 7: tourism in Thailand. So that's another proxy of thinking. You know,
Speaker 7: if we are going to get more travel, then those
Speaker 7: are places that could benefit. So there are ways to
Speaker 7: position for the China story without necessarily direct investment in China.
Speaker 6: Diana, thanks so much for coming in.
Speaker 2: Really great to get your perspective, especially there on emerging markets.
Speaker 2: Diana a Moa of Kirkoswold Asset Manager.
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