WEBVTT - Surveillance: Bear Case with Emanuel (Podcast) 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownwitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.840 --> 0:00:23.840 To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:29.000 and of course on the Bloomberg terminal. Something We've got 0:00:29.080 --> 0:00:31.680 to stop with you, m Emmanuel over aviacore the base 0:00:31.760 --> 0:00:34.440 case with forty eight hundred, it's not forty three. The 0:00:34.479 --> 0:00:37.320 back case is twenty hundred. That's a lot of downside 0:00:37.320 --> 0:00:39.680 on that back case for medicot something John and Lisa 0:00:39.720 --> 0:00:41.000 want to get to that. I just want to do 0:00:41.080 --> 0:00:44.400 something her internal housekeeping here on Evercore, I s I 0:00:44.840 --> 0:00:50.000 Julian Emmanuel. How does Ed Hyman's acclaimed granularity and study 0:00:50.159 --> 0:00:54.600 of the American corporate economy in fact, this new view 0:00:54.640 --> 0:00:58.080 that you have, Well, what it does, Tom, is it 0:00:58.160 --> 0:01:01.560 reinforces the idea that our base case continues to be 0:01:01.680 --> 0:01:04.640 that there isn't going to be a recession. Um, you know, 0:01:04.720 --> 0:01:09.600 and we've had waves of concern obviously economic hurricanes, maybe 0:01:09.959 --> 0:01:13.800 offshore so on and so forth. But Ed's granular data 0:01:13.840 --> 0:01:16.520 says we are not at the point where there is 0:01:16.600 --> 0:01:20.040 likely to be a recession yield curve or no yield curve. 0:01:20.319 --> 0:01:23.280 And frankly, what it does, though is when you look 0:01:23.319 --> 0:01:27.360 at the macro environment around you, it increases the probability 0:01:27.560 --> 0:01:32.160 of a recession off. Why the change, why the change 0:01:32.200 --> 0:01:37.680 yesterday evening? Because really, when you look at the move 0:01:37.920 --> 0:01:42.000 off of the low on May twentie uh and you 0:01:42.040 --> 0:01:45.000 think about, you know, how these kinds of bottoms form. 0:01:45.120 --> 0:01:48.160 And to be clear, our our view is that you 0:01:48.320 --> 0:01:51.960 are in the midst of forming a non recessionary bear 0:01:52.120 --> 0:01:55.520 market bottom. That's the base view. But what we haven't 0:01:55.560 --> 0:01:58.360 seen is that fundamental catalyst. And we all know that 0:01:58.400 --> 0:02:02.520 the biggest fundamental catalyst is falling energy prices, and you know, 0:02:02.560 --> 0:02:05.600 we look for it every day and it is not happening. Um. 0:02:05.640 --> 0:02:08.760 But then the other thing is volume. It tends to 0:02:08.880 --> 0:02:11.360 be when you get bottoms of that nature that you 0:02:11.400 --> 0:02:16.440 see surges and volume, real concerted buying interest that's lacking 0:02:17.000 --> 0:02:20.280 in the downside case. The bad case is that the 0:02:20.360 --> 0:02:23.720 recessionary bad case. And where does the number come from? 0:02:24.240 --> 0:02:28.440 So basically, if you look at recession bear markets of 0:02:28.520 --> 0:02:33.720 the left hundred years, the average is down around that 0:02:33.760 --> 0:02:37.600 gets you to we're not going there unless we get 0:02:37.600 --> 0:02:40.800 a recession. You talk about oil being the distinguishing feature 0:02:40.880 --> 0:02:44.680 between that recession, that downside scenario, and not what is 0:02:44.760 --> 0:02:48.880 the pain point in oil that you're looking for? Well, so, Lisa, 0:02:48.880 --> 0:02:51.320 I think it's pretty fair to say that when you 0:02:51.360 --> 0:02:54.960 think about the consumer's psychology, and look, you heard the 0:02:55.000 --> 0:02:58.400 President address it last night on Late night TV, is 0:02:58.440 --> 0:03:02.320 that the psychological pain point has already arrived, whether it's 0:03:02.360 --> 0:03:05.160 five dollars a gallon or whatever you wanted to define 0:03:05.200 --> 0:03:09.600 that as. But but frankly, when you look at historical data, 0:03:10.320 --> 0:03:15.040 the longer prices stay elevated at this level, the closer 0:03:15.080 --> 0:03:17.840 you get to the actual pain. Pry I couldn't believably 0:03:17.960 --> 0:03:21.240 so what the President said last night on Late night TV. 0:03:22.919 --> 0:03:26.520 He was very real in trying to address the American people. Julian, 0:03:26.919 --> 0:03:29.760 you say that you know, it's about how sustained this 0:03:30.040 --> 0:03:32.639 is what about the bookcase? What has to happen in 0:03:32.800 --> 0:03:34.680 order to get to forty eight hundred at a time 0:03:34.720 --> 0:03:37.360 when people want to hear the Barrish case and want 0:03:37.360 --> 0:03:41.640 to understand how much downside they have, we need to 0:03:41.680 --> 0:03:48.240 see visibility into the idea that this so called softish 0:03:48.320 --> 0:03:52.160 landing is really going to crystallize. And our fear here 0:03:52.320 --> 0:03:55.480 is is that you know, again there's only so much 0:03:55.520 --> 0:03:58.520 the FED can do to get you know, to put 0:03:58.520 --> 0:04:00.560 a lid, and not not only of the lid, but 0:04:00.640 --> 0:04:03.280 take energy prices down, and really they can't do much 0:04:03.320 --> 0:04:06.920 at all, um and that you know, we've seen more 0:04:07.040 --> 0:04:10.360 hawkish rhetoric out of global central banks in the last week. 0:04:10.560 --> 0:04:13.280 We're likely to see that next Wednesday. And the fear 0:04:13.360 --> 0:04:17.640 is is that you know that it doesn't move inflation 0:04:17.800 --> 0:04:21.159 materially lower. If you get that break in inflation and 0:04:21.320 --> 0:04:24.560 you get consumers spending to stay in in you know, 0:04:24.640 --> 0:04:27.159 hold in there, that's where we get the upside. And 0:04:27.240 --> 0:04:29.200 that's this attemper pause as well. Ju And do you 0:04:29.200 --> 0:04:35.320 need to September pause to get that case? Uh? Not necessarily. 0:04:35.440 --> 0:04:39.680 And frankly, the whole concept of both volatility around the 0:04:39.720 --> 0:04:45.599 macro and economic volatility, whether driven by inventories or a 0:04:45.680 --> 0:04:49.440 number of different issues, is it is such a long 0:04:49.520 --> 0:04:52.880 time between now in September, the picture is likely to 0:04:52.960 --> 0:04:56.760 look almost entirely different. So we don't know exactly what 0:04:56.880 --> 0:04:59.720 monetary policy is going to require, but we do know 0:05:00.240 --> 0:05:03.440 that inflation is going to need to turn down meaningfully 0:05:03.640 --> 0:05:06.240 without a turn down and growth at Julian, You've got 0:05:06.279 --> 0:05:10.839 three numbers here, forty three hundred hundred. I'll have a 0:05:10.880 --> 0:05:13.200 waiter with the ten dollars that the only one you 0:05:13.200 --> 0:05:15.560 get asked about today is the twenty nine hundred, Judy, 0:05:15.600 --> 0:05:17.920 and thank you buddy. As always, Jenny Manual there of 0:05:17.960 --> 0:05:20.600 avocor jumping on the phone forest as he downgrades the 0:05:20.640 --> 0:05:29.479 auto international economist at Wells Fargo, Nick Bennenbrook, who is 0:05:29.720 --> 0:05:32.920 hugely qualified to speak on this. I know of no 0:05:32.960 --> 0:05:37.400 one who has consistently applied fect strategy over his career 0:05:37.760 --> 0:05:40.160 like Mr Brennenburg. Nick, thrilled to have you with us 0:05:40.640 --> 0:05:44.080 today in the studio. Does Madame Leguarde you have control 0:05:44.120 --> 0:05:48.000 of the situation. I think she does. I mean there's 0:05:48.040 --> 0:05:50.600 both in economic control and also a political control because 0:05:50.640 --> 0:05:53.240 of all the policymakers on the e CB, and that's 0:05:53.279 --> 0:05:55.800 where her background as a politician I think is so important. 0:05:55.839 --> 0:05:58.960 So that medium doing forecast at two percent, that says 0:05:58.960 --> 0:06:02.000 that you know, the ECB has an inflation problem, but 0:06:02.000 --> 0:06:04.240 it's not a severe I think as the United States 0:06:04.960 --> 0:06:07.360 or the UK. This is so important, folks. I'm gonna 0:06:07.360 --> 0:06:09.320 get this out front. We're gonna blow the brakes here 0:06:09.320 --> 0:06:12.040 and go right through the eight o'clock hour with Mr Benningbrook. 0:06:12.200 --> 0:06:14.960 Is that important? We are welcome you all on Bloomberg 0:06:15.040 --> 0:06:18.839 Radio and Bloomberg Television, particularly in Europe. John. In the 0:06:18.880 --> 0:06:21.520 event of a nude market fragmentation, Nick, I'll read out 0:06:21.560 --> 0:06:22.960 this quotes here and you tell me what you think 0:06:23.000 --> 0:06:25.600 about it related to the pandemic. Pet reinvestments can be 0:06:25.640 --> 0:06:30.160 adjusted flexibly across time, masset classes and juridicitions at any time. 0:06:30.480 --> 0:06:32.800 Talk to me about what you think fragmentation actually means 0:06:33.160 --> 0:06:35.320 and what they're planning trying to do here as they 0:06:35.400 --> 0:06:39.000 high conterest rates. Well, yes, they are seeing probably more 0:06:39.040 --> 0:06:41.600 fragmentation than they would really like. As you mentioned the 0:06:41.600 --> 0:06:43.920 the Italian bonds bridge relative to those in Germany have 0:06:44.160 --> 0:06:46.520 gone from about one percent percentage point out to two 0:06:46.520 --> 0:06:49.120 percentage points. But I really think this is about as 0:06:49.240 --> 0:06:52.040 much as they can do this flexible reinvestment, because it 0:06:52.080 --> 0:06:54.719 would be difficult for them, for example, to be raising 0:06:54.720 --> 0:06:57.240 interest rates, which they're going to do some of the options. 0:06:57.279 --> 0:07:00.200 Other options they had talked about was restarting purchases if 0:07:00.240 --> 0:07:02.160 there was too much for igmentation or even coming up 0:07:02.160 --> 0:07:04.320 with a whole new program to help stabilize the markets. 0:07:04.360 --> 0:07:06.960 But then you'd be sort of tightening monetary policy on 0:07:07.000 --> 0:07:09.240 the one here in easing monetary policy on the other, 0:07:09.279 --> 0:07:11.720 and that would be extremely challenging. So I think they 0:07:11.760 --> 0:07:14.000 will go with this flexible approach for as long as 0:07:14.000 --> 0:07:16.320 they possibly can, and and certainly that's going to be 0:07:16.320 --> 0:07:18.760 a very delicate balance they're gonna have to walk. Nick 0:07:18.920 --> 0:07:21.720 is delicate to walk walk a delicate balance on the 0:07:21.720 --> 0:07:24.480 ECB Government Council when you've got some loud hawks, and 0:07:24.520 --> 0:07:27.160 those hawks are so loud at the ECB. They don't 0:07:27.160 --> 0:07:29.800 want twenty five basis point moves. They want bigger moves 0:07:29.800 --> 0:07:32.280 than that. And clearly there's this line that's been put 0:07:32.280 --> 0:07:34.880 in this statement for September that I love your thoughts on. 0:07:35.560 --> 0:07:38.680 They say this on the September decision, the calibration of 0:07:38.720 --> 0:07:41.520 this rate increase will depend on the updated medium term 0:07:41.520 --> 0:07:45.960 inflation outlook. If the medium term inflation outlook persists or deteriorates, 0:07:46.360 --> 0:07:49.360 a larger increment will be appropriate. At the September meeting. 0:07:50.120 --> 0:07:52.320 That screams to me an e c B that's trying 0:07:52.320 --> 0:07:54.080 to please the Hawks and tell them if this carries 0:07:54.120 --> 0:07:58.360 on through the summer, we'll go fifty. Yes, I mean 0:07:58.480 --> 0:08:01.240 I think it's certainly, you know, trying to, as you say, 0:08:01.240 --> 0:08:03.360 allay the concerns of the Hawks. I don't know if 0:08:03.360 --> 0:08:05.360 we're going to get fifty basis points in September though. 0:08:05.360 --> 0:08:07.880 I mean, going into today's meeting, the market was pricing 0:08:07.880 --> 0:08:10.360 thirty six basis points for July, and I think pretty 0:08:10.360 --> 0:08:12.240 definitively it looks like we're going to get twenty five 0:08:12.240 --> 0:08:15.080 in July. UM And so coming back to Thomas question, 0:08:15.080 --> 0:08:17.840 does Madame reglad have control of the situation. I think 0:08:17.880 --> 0:08:19.600 she does. I think she's managed to get a consensus 0:08:19.640 --> 0:08:22.600 behind that twenty five basis point move. Looking at our 0:08:22.640 --> 0:08:25.880 own forecast for for ECB policy, we expect twenty five 0:08:25.880 --> 0:08:29.760 in July, we expect in September. So if I was 0:08:29.760 --> 0:08:30.960 a voter on the e c B, I guess I 0:08:30.960 --> 0:08:33.160 would not be dissenting. I would be going with gradualism 0:08:33.200 --> 0:08:35.760 at this point. For an exchange traders, I don't think 0:08:35.760 --> 0:08:38.439 know exactly what to do with this, basically a trading 0:08:38.559 --> 0:08:41.559 range one oh seven for the euro versus the dollar. 0:08:41.880 --> 0:08:44.720 Unclear of whether this will be supportive or her detract 0:08:45.040 --> 0:08:47.559 if it ends up slowing growth even further with more 0:08:47.640 --> 0:08:50.040 rad hikes down the pike. What's your view on that. 0:08:50.120 --> 0:08:52.120 Do you think that more rad hikes and more hawkish 0:08:52.160 --> 0:08:55.840 stance will be positive for the euro or negative? I 0:08:55.880 --> 0:08:58.320 think if we were to get a more hawkers view 0:08:58.320 --> 0:09:00.000 than we got today, for example, I think it would 0:09:00.040 --> 0:09:02.280 be positive for the euro. But you know, looking at 0:09:02.280 --> 0:09:05.520 the very near term. You know, as I mentioned that today, 0:09:05.559 --> 0:09:07.640 the question was for July, do we get twenty five 0:09:07.760 --> 0:09:09.800 or fifty? It looks like we get twenty five. And 0:09:09.800 --> 0:09:11.440 that's why I think the Euro is selling off just 0:09:11.480 --> 0:09:14.560 a little bit today. Um, And so really it is 0:09:14.600 --> 0:09:16.480 going to come down to do we see those high 0:09:16.559 --> 0:09:19.640 inflation prints, do we see those hawkish comments? And also 0:09:19.640 --> 0:09:20.720 at the end of the day, I would say this 0:09:21.120 --> 0:09:23.760 still the Federal Reserve moving a lot quicker for US 0:09:23.800 --> 0:09:27.439 has a much larger inflation problem. So macroeconomic fundamentals in 0:09:27.480 --> 0:09:30.640 addition to central bank I still think means uh, you know, 0:09:30.920 --> 0:09:33.600 trend is probably for a softer euro over time. Nick. 0:09:33.679 --> 0:09:35.360 Does it matter that a lot of the inflation is 0:09:35.440 --> 0:09:38.280 driven from the energy market in Europe? I mean, certainly 0:09:38.320 --> 0:09:40.439 in the US as well, but in Europe even more so, 0:09:40.920 --> 0:09:43.920 and that really the e CB can't do much about 0:09:44.000 --> 0:09:48.040 that by raising rates. It matters a little bit, and 0:09:48.200 --> 0:09:51.720 you know, trying to use sort of the economist trick 0:09:51.760 --> 0:09:54.720 there on, you know, use both hands. Um. You know, 0:09:54.800 --> 0:09:57.480 certainly I would say the euro Zone doesn't have as 0:09:57.480 --> 0:09:59.480 severe an inflation problem when you look at their core 0:09:59.520 --> 0:10:01.960 inflation of three point eight per cent. You know, typically 0:10:02.000 --> 0:10:04.280 a central bank would say, well, the underlying inflation trend 0:10:04.360 --> 0:10:06.600 is not that bad. So you know, in some sense 0:10:06.600 --> 0:10:09.160 that maybe affixed the pace at which the ECB raises 0:10:09.200 --> 0:10:11.720 interest rates. But I think there's a huge focus on 0:10:11.760 --> 0:10:14.840 headline inflation in the Eurozone as well, above eight per cent. 0:10:15.160 --> 0:10:17.000 And the reason being is even if all of this, 0:10:17.320 --> 0:10:20.120 you know, inflation is being driven by energy effect, is 0:10:20.160 --> 0:10:23.079 these oil prices are going to be at a barrel 0:10:23.160 --> 0:10:25.199 or higher, so we're just gonna have high inflation, even 0:10:25.240 --> 0:10:27.920 if the broader inflation pressures aren't that bad. Nick, I 0:10:27.960 --> 0:10:29.240 want to go back to your heritage, and I think 0:10:29.240 --> 0:10:32.200 it's really important here. Roger Douglas had a New Zealand 0:10:32.280 --> 0:10:36.240 it was blowing up forty years ago, and he, with 0:10:36.360 --> 0:10:41.640 his leadership New Zealand codified inflation targeting. Right now, inflation 0:10:41.679 --> 0:10:46.400 is essentially out of control. The response here is not 0:10:46.480 --> 0:10:49.680 a rigidity or a formula of targeting like John Taylor 0:10:49.720 --> 0:10:53.440 of Stanford or what the Bank of New Zealand did. 0:10:54.080 --> 0:10:57.440 The The issue here is a level of dovish nous 0:10:57.720 --> 0:11:02.120 versus harkersness. How dovish is our dovish central banks right 0:11:02.160 --> 0:11:07.880 now if they can't affect New Zealand like targeting, Yeah, 0:11:07.880 --> 0:11:09.760 I mean, I think you've got a point there. Certainly, 0:11:09.840 --> 0:11:13.040 you know overall that there is still a lot of devishness, 0:11:13.200 --> 0:11:16.079 although there is there is an evolution going on, because 0:11:16.120 --> 0:11:17.559 when you look at a lot of the central banks 0:11:17.559 --> 0:11:20.080 this yeah, faced with you know, worries about slower growth 0:11:20.240 --> 0:11:24.120 or this very high inflation, they've been coming down on 0:11:24.160 --> 0:11:26.240 the side of like, let's raise interstrates, letst try and 0:11:26.240 --> 0:11:28.079 tackle inflation. But the point you make, I think is 0:11:28.120 --> 0:11:31.000 a very good one. These real interest rates, the policy 0:11:31.080 --> 0:11:33.720 rates are still extremely low relative to the rates of inflation, 0:11:33.760 --> 0:11:36.400 and so at the end of the day, it's certainly 0:11:36.400 --> 0:11:39.160 not an early nineteen eighties Paul Vulcan kind of a 0:11:39.200 --> 0:11:41.000 situation that we have in the United States where they're 0:11:41.000 --> 0:11:43.400 moving aggristonal you to just sort of squeeze inflation out 0:11:43.400 --> 0:11:46.160 of the system. Nick Bannerbrook of Fargo Neck, thank you 0:11:52.000 --> 0:11:55.600 right now. Patrick Armstrong where this chief investment officer at 0:11:55.640 --> 0:12:01.520 Plurimi Wealth manager of Patrick. Can you invest in Europe um? 0:12:01.600 --> 0:12:03.679 You can invest in europe UM. What I did this 0:12:03.720 --> 0:12:08.240 morning is actually shorted Italian bonds BTPs. I do own 0:12:08.760 --> 0:12:12.800 multinational European equities companies like a SML, which has a 0:12:12.840 --> 0:12:16.960 product which is an incredibly high demand. I own shell UM. 0:12:17.040 --> 0:12:18.800 You can invest in Europe, but I think you want 0:12:18.840 --> 0:12:21.679 to think global context. I think Europe falling into a recession. 0:12:22.160 --> 0:12:24.360 It's got a tightening central bank now for the first 0:12:24.400 --> 0:12:27.640 time in a very long time. UM. But I don't 0:12:27.679 --> 0:12:30.120 think the US falls into a recession. I think China 0:12:30.200 --> 0:12:33.800 is probably going to be enormously stimulative in the second 0:12:33.800 --> 0:12:36.160 half of this year. So if you do invest in Europe, 0:12:36.400 --> 0:12:38.480 I want to play growth in other regions, not in Europe. 0:12:38.480 --> 0:12:39.800 A Patrick, I want to talk to you about the 0:12:39.800 --> 0:12:42.120 European bond market before we go out too broadly to 0:12:42.200 --> 0:12:47.800 international equities. Do you think this is achievable addressing eventual fragmentation? 0:12:47.800 --> 0:12:51.320 If it does materialize with reinvestments of PEB at the 0:12:51.360 --> 0:12:53.360 same time to raise interest rates in the way that 0:12:53.400 --> 0:12:56.960 that kind of gets towards this morning of the statement, Yeah, 0:12:57.000 --> 0:12:59.560 I don't think so. I think that's so small, um 0:12:59.559 --> 0:13:02.240 a matter at the margin, it's designed to give the 0:13:02.280 --> 0:13:05.800 market some confidence in the periphery bonds. But I didn't 0:13:05.800 --> 0:13:08.520 realize I was betting on fragmentation. That's the term I 0:13:08.520 --> 0:13:11.040 wouldn't have used before when I shorted Italy this morning. 0:13:11.080 --> 0:13:15.880 But I think that's something done deliberately pointing out they 0:13:15.880 --> 0:13:18.360 know there is going to be consequences to the periphery 0:13:18.440 --> 0:13:21.880 as they end their que program on July one. But 0:13:22.960 --> 0:13:27.360 it's words and reinvestment is very small compared to uh 0:13:27.760 --> 0:13:30.880 the bombaying bond buying program that is in place right now. 0:13:30.960 --> 0:13:32.839 So you're short of Italian bonds, when do you start 0:13:32.880 --> 0:13:34.959 to see value again? Where what is sort of the 0:13:35.000 --> 0:13:40.079 threshold at which you start to say it's a buying opportunity, um, 0:13:40.120 --> 0:13:43.040 if it blows out wide versus Germany. I'm actually short 0:13:43.040 --> 0:13:45.559 boons and I have been short boons all year. Um. 0:13:45.559 --> 0:13:47.520 I wish I was short of Italy all year as well, 0:13:47.559 --> 0:13:49.680 but I just put Italy on I think if we 0:13:49.760 --> 0:13:53.160 see another fifty basis points wider against Germany, I'll probably 0:13:53.160 --> 0:13:55.160 start to close Italy because I don't think it is 0:13:55.200 --> 0:13:56.880 going to be a disaster, but I do think the 0:13:56.920 --> 0:13:59.839 market pushes for some sort of response from the ec 0:14:00.000 --> 0:14:02.440 BE where they put in something maybe a little bit 0:14:02.520 --> 0:14:05.800 more meaningful to make sure that the periphery yields don't 0:14:05.800 --> 0:14:08.560 blow out wider, in other words, a more flexible purchasing 0:14:08.600 --> 0:14:10.880 program from their path and how much they're going to 0:14:11.000 --> 0:14:13.360 really dive into this market. Do you think that they 0:14:13.400 --> 0:14:17.400 can be effective in actually suppressing yields in that region, 0:14:17.480 --> 0:14:20.440 moving against both the inflation as well as the higher 0:14:20.520 --> 0:14:24.320 yields in the core. UM. We'll see at the press 0:14:24.320 --> 0:14:26.760 conference today. It will be very important to drag you 0:14:26.880 --> 0:14:29.360 with the master at it whatever it takes, using words 0:14:29.480 --> 0:14:32.960 rather than explicit policy. If le Guard really emphasizes that 0:14:33.000 --> 0:14:37.240 we're not going to let any widening of perifrey, which 0:14:37.240 --> 0:14:40.720 can have an impact on inflation, have impact on confidence, UM, 0:14:40.720 --> 0:14:44.320 if she's really stresses that we we'll do whatever it 0:14:44.360 --> 0:14:46.720 takes if these kind of things start to happen. In 0:14:46.760 --> 0:14:49.000 the statement that's out there right now, it doesn't say that, 0:14:49.040 --> 0:14:52.280 it says she's aware of it, So the rhetoric and 0:14:52.320 --> 0:14:55.000 the words may have just as much importance as the 0:14:55.000 --> 0:14:56.960 policy in the coming weeks. And factually, there's been so 0:14:57.000 --> 0:14:59.520 many doubts about whether the Federal Reserve can deliver on 0:14:59.560 --> 0:15:01.240 the right high can cycle that a lot of people 0:15:01.240 --> 0:15:03.840 are pricing. Can you run me through how likely it 0:15:03.920 --> 0:15:08.080 is that they CCP can deliver on gratio sustained hikes. 0:15:08.680 --> 0:15:10.760 I was surprised by that because I didn't even think 0:15:10.760 --> 0:15:12.720 they'd want to commit themselves to that yet. I think 0:15:13.280 --> 0:15:16.760 the optionality that she's really been keen to create, she's 0:15:16.800 --> 0:15:19.160 almost given up some of that by saying this is 0:15:19.200 --> 0:15:21.640 the beginning of a gradual hiking cycle. I thought it 0:15:21.680 --> 0:15:24.600 was going to be maybe even fifty in July and 0:15:24.640 --> 0:15:28.880 then see what happens. But yes, she set the groundwork July, 0:15:29.680 --> 0:15:33.200 maybe even fifty in September, which I think is very unlikely. 0:15:33.320 --> 0:15:36.720 That's meant to appease the hawks, I suppose, but given 0:15:36.720 --> 0:15:40.400 where growth is, given the impacts of higher oil prices 0:15:40.400 --> 0:15:44.040 and energy prices on the European consumers and European manufacturing, 0:15:44.720 --> 0:15:48.120 I think it's going to be very difficult to get 0:15:48.120 --> 0:15:51.520 a hiking cycle started in Europe. If it does start, 0:15:51.600 --> 0:15:54.520 it's great news. Something very good has happened in the economy. 0:15:54.600 --> 0:15:56.960 I assume you also think then that GDP forecast at 0:15:56.960 --> 0:15:59.239 two point eight percent for this year is pretty optimistic. 0:15:59.360 --> 0:16:02.280 Maybe ove least side, I do I think Europes falling 0:16:02.320 --> 0:16:05.360 into recession. I do believe Germany has committed to moving 0:16:05.360 --> 0:16:08.720 away from Russian oil and probably the natural gas towards 0:16:08.720 --> 0:16:12.000 the end of the year, and that's very stag flationary. 0:16:12.040 --> 0:16:15.720 That's a huge hit to manufacturing, huge hits to jobs 0:16:15.760 --> 0:16:17.840 and higher prices as well. We're back to that old 0:16:17.880 --> 0:16:20.840 equity play. But can't we by Europe, but by companies 0:16:20.880 --> 0:16:23.720 listed in Europe that have international exposure. Is that the 0:16:23.760 --> 0:16:26.920 plane now, Patrick, That's the play for me, and that's 0:16:26.920 --> 0:16:29.400 been the play for me for for quite a long time. 0:16:29.800 --> 0:16:33.200 Europe's facing a lot of issues with growth and prices 0:16:33.280 --> 0:16:36.760 and for the first time not having negative interest rates, 0:16:36.840 --> 0:16:39.160 which may even be a positive for the banks. But 0:16:39.320 --> 0:16:41.680 I still prefer to own the bank bonds rather than 0:16:41.720 --> 0:16:44.320 the bank equities. With this back drop, Patrick, I'm strong, 0:16:44.720 --> 0:16:51.520 thank you, sir, as always plurally wealthy. Let's get straight 0:16:51.520 --> 0:16:54.120 to the conversation with Sema Sha, the chief strategist of 0:16:54.160 --> 0:16:57.400 Principal Global Investors Seema. An hour ago, we spoke to 0:16:57.400 --> 0:17:00.200 Sebastian Page of trote Price and he said, normally after 0:17:00.240 --> 0:17:02.640 a sell off of this magnitude, we'd be buying stocks. 0:17:02.640 --> 0:17:05.600 This time we're not. What are you doing? We are 0:17:05.720 --> 0:17:08.520 very much neutral. Um. Look, I think you could see 0:17:08.520 --> 0:17:10.240 a bear market rally, and I'm going to say that 0:17:10.240 --> 0:17:12.760 it's a bear market rally rather than a full on rally, 0:17:12.880 --> 0:17:14.679 and we we have to look for the cattlest one 0:17:14.680 --> 0:17:16.800 of the things going to change. But once you see 0:17:16.800 --> 0:17:19.000 some of that economic data, the earning stay to start 0:17:19.040 --> 0:17:21.520 to roll over, we think that you're going to see 0:17:21.520 --> 0:17:24.280 a really, really challenging period for ecting markets where it 0:17:24.400 --> 0:17:26.640 retests the loads that we've seen in the past month 0:17:26.680 --> 0:17:28.840 or so and probably goes a little bit beyond. People 0:17:28.840 --> 0:17:30.640 have been conditioned by the last couple of years seem 0:17:30.640 --> 0:17:32.399 that they always are near term. They look back the 0:17:32.440 --> 0:17:36.880 last reference point for this early spring, we hit the lows, 0:17:36.880 --> 0:17:38.960 we started to rally, and we had this conversation, how 0:17:38.960 --> 0:17:41.879 do you differentiate distinguish between a bear market rally and 0:17:41.920 --> 0:17:44.400 something more durable? What have we learned from that? Because 0:17:44.400 --> 0:17:45.960 I think a lot of people looking at this right now, 0:17:46.000 --> 0:17:48.200 just sitting there itching, thinking, yeah, I want to get 0:17:48.200 --> 0:17:50.080 in because I was told this last time around it 0:17:50.080 --> 0:17:52.000 was a bear market rally and this market just ripped. 0:17:52.160 --> 0:17:54.640 Why is this so different? Oh? You know, I think 0:17:54.680 --> 0:17:57.440 this circumstance that we're in is is very, very different 0:17:57.440 --> 0:17:59.719 to anything that we've seen over the last decade. Now, 0:18:00.040 --> 0:18:03.320 like you said, investors, they've become very accustomed to kind 0:18:03.320 --> 0:18:07.320 of good returns, low volatility, and always being supported by 0:18:07.359 --> 0:18:09.920 the FED. With inflation at this level. You know, I 0:18:10.000 --> 0:18:11.960 pushed back a lot about the idea of FED put 0:18:12.040 --> 0:18:14.400 any time over the next twelve months or so. So 0:18:14.560 --> 0:18:16.720 I think in that environment, this is the time where 0:18:16.760 --> 0:18:18.600 you have to look at the fundamentals. You have to 0:18:18.600 --> 0:18:20.639 look at the fact that, as you said, energy bills 0:18:20.880 --> 0:18:23.760 are really weighing on households at globally US You're wherever 0:18:23.760 --> 0:18:26.440 you look at it, and in that situation, earnings will 0:18:26.480 --> 0:18:29.560 start to slow down. You're learning school of economics. There 0:18:29.640 --> 0:18:34.000 is one glorious morning where they study Irving Fisher of Yale, dudes, 0:18:34.040 --> 0:18:41.320 does inflation follow rates or does rates follow inflation? The 0:18:41.320 --> 0:18:44.879 big question that rates should work with a six to 0:18:44.960 --> 0:18:46.720 twenty four month lag. That is the way that we 0:18:46.760 --> 0:18:48.760 should see it. Now, there's going to be a ton 0:18:48.760 --> 0:18:51.240 of other pressures working through. We're going to have the 0:18:51.280 --> 0:18:53.959 economic slowd and already in progress because inflation is going 0:18:54.000 --> 0:18:57.040 to be pushing down as we set on consumers um 0:18:57.119 --> 0:18:58.560 and then we also have to think about supply to it. 0:18:58.640 --> 0:19:01.280 This is such a complicated matter compared to previous periods 0:19:01.359 --> 0:19:04.440 where you have this additional impact from post covid um 0:19:04.480 --> 0:19:06.040 as I said, the supply chains, and then of course 0:19:06.040 --> 0:19:09.520 you've got the Russia Ukraine crisis seema. If you do 0:19:09.600 --> 0:19:11.720 see the fact that FED putt is not really on 0:19:11.760 --> 0:19:14.400 the table, what's the argument for a week or dollar. 0:19:16.280 --> 0:19:18.159 It's a good question. So you know, look, the beginning 0:19:18.200 --> 0:19:20.240 of this year, we were looking at the valuation factors 0:19:20.240 --> 0:19:21.840 for the U S dollar and it was flashing red. 0:19:22.359 --> 0:19:25.400 But as there's always a case, valuations doesn't necessarily mean 0:19:25.400 --> 0:19:27.160 that things are going to change. You need that catalyst 0:19:27.480 --> 0:19:30.199 to see things changing. And in the last month, because 0:19:30.200 --> 0:19:33.520 we have seen market expectations for the FED hikes probably 0:19:33.560 --> 0:19:35.560 head a peak, and yet at the same time you're 0:19:35.560 --> 0:19:38.679 seeing expectations for the ECB for other central banks starting 0:19:38.680 --> 0:19:40.360 to push up they're going to hit a crescendo at 0:19:40.359 --> 0:19:42.280 some point, but for the time being, that means that 0:19:42.320 --> 0:19:44.840 there is downward pressure on the US dollar, but we're 0:19:44.840 --> 0:19:47.240 not seeing it right now, even as we're expecting a 0:19:47.280 --> 0:19:50.600 pretty harki ish message from the ECB today the likelihood 0:19:50.760 --> 0:19:54.320 of basis point and even more in July. What more 0:19:54.400 --> 0:19:57.040 could they say that could be a catalyst to send 0:19:57.040 --> 0:20:00.359 the euro stronger. So I think we need to have 0:20:00.480 --> 0:20:03.560 confirmation from Laguard exactly where they're going, you know, from 0:20:03.600 --> 0:20:06.119 from the stuff that she's been saying. UM, she is 0:20:06.160 --> 0:20:08.600 indicating that this is a twenty five basis point move 0:20:08.840 --> 0:20:12.760 on occasional occasional meetings, rather than the fifty basis point 0:20:12.760 --> 0:20:15.280 move that increasingly the market is pricing in. So I 0:20:15.320 --> 0:20:16.640 think we need to see some of that to see 0:20:16.680 --> 0:20:18.560 that additional downreo pressure. But I also want to say 0:20:18.720 --> 0:20:21.280 that even if we were to see Leguard moving in 0:20:21.320 --> 0:20:23.320 that fifty basis point hike, that you should be following 0:20:23.359 --> 0:20:25.119 along with that. UM, I don't think it goes on 0:20:25.200 --> 0:20:27.000 for too long because we also have an even more 0:20:27.040 --> 0:20:29.400 negative view for the European economy, So I don't think 0:20:29.400 --> 0:20:31.520