WEBVTT - Surveillance: Market Conditions with Cooperman 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 Ferroll and Lisa Brownowitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.800 --> 0:00:23.840 To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot com, 0:00:23.920 --> 0:00:32.240 and of course on the Bloomberg terminal. Leon Cooperman folks 0:00:32.280 --> 0:00:35.640 for like forty seven years, was named head Research Strategists 0:00:35.920 --> 0:00:39.720 by Institutional Investor at a tour of duty with Goldman 0:00:39.760 --> 0:00:42.000 Sax a few years ago, Leon, I want to talk 0:00:42.040 --> 0:00:45.080 about the character of this bear market, and you and 0:00:45.159 --> 0:00:48.760 I do that with a bond overlay we've never seen, 0:00:49.280 --> 0:00:53.159 which is bond priced down, yield up. The losses and 0:00:53.240 --> 0:00:58.000 bonds are extraordinary. How does that redound over to a 0:00:58.240 --> 0:01:02.960 stock bear market? Well, actually I went taking a slightly 0:01:02.960 --> 0:01:05.240 different approach. I'm shocked at interest rate to as low 0:01:05.280 --> 0:01:07.800 as they are. You know, for most of my career 0:01:07.880 --> 0:01:10.080 there was a real return associated with buying a bond. 0:01:10.600 --> 0:01:14.000 The bond nominally yield was an excess of inflation. We 0:01:14.080 --> 0:01:16.880 have inflation rate in this country, quote eight percent. You 0:01:16.880 --> 0:01:19.240 have real growth a couple of percent. You have nominal 0:01:19.319 --> 0:01:22.440 GDP growing at ten percent and you have the tenure 0:01:22.480 --> 0:01:25.840 bond at three makes no sense. And that makes everything 0:01:25.840 --> 0:01:29.640 in the stock market look attractive. The stock market looks attractive. 0:01:29.680 --> 0:01:31.720 What parton looks attractive to you? Or are you in 0:01:31.760 --> 0:01:36.319 the triple leverage doll cash fund? No, I'm basically I'm 0:01:36.319 --> 0:01:38.840 of the view that equities are the best house and 0:01:38.880 --> 0:01:42.160 the financial asset neighborhood. But I don't like the neighborhood 0:01:42.600 --> 0:01:45.360 for a lot of reasons, so I have a cautious view. 0:01:45.840 --> 0:01:48.280 I've been a seller on strength and not a buyer 0:01:48.360 --> 0:01:52.320 a weakness. I think that ultimately the price of oil 0:01:53.040 --> 0:01:57.120 or the FED or maybe the strong dollar will lead 0:01:57.200 --> 0:02:00.200 us into a recession. And when the recession hits, which 0:02:00.200 --> 0:02:04.680 will be a three event, when it is that, the 0:02:04.720 --> 0:02:08.800 market will find the bottom somewhere between thirty five below 0:02:09.280 --> 0:02:13.520 its peak of And I think coming on the program 0:02:13.600 --> 0:02:17.440 and having excuse me, a questious view is not evaluated, 0:02:17.960 --> 0:02:21.600 so I differentiate myself. I talked about the Pharaoh. You know, 0:02:21.960 --> 0:02:23.800 I don't know what you know about the Bible. Tom 0:02:23.880 --> 0:02:26.440 but the foul had a dream. The dream was interpreted 0:02:26.440 --> 0:02:28.880 by Joseph, and the dream was We're gonna have seven 0:02:28.919 --> 0:02:32.200 lean years following the seven fat years. I'm not making 0:02:32.200 --> 0:02:35.360 a seven year forecast, but what I'm saying is I 0:02:35.360 --> 0:02:37.519 would be very, very surprised if we went into a 0:02:37.560 --> 0:02:40.760 new bull market anytime soon. We've just been through the 0:02:40.760 --> 0:02:45.640 most speculative period now financials three you know, SPACs, Uh 0:02:46.120 --> 0:02:51.639 would be you know, um fangs, zero commissions and interests. 0:02:51.880 --> 0:02:55.200 We just saw an extraordinary expected the period and Uh, 0:02:55.760 --> 0:02:57.720 we're not going into a bull market at least. What's 0:02:57.720 --> 0:03:00.079 so important here is we can't have the coup for 0:03:00.160 --> 0:03:02.840 bond angle because the seven years of abundance led by 0:03:02.880 --> 0:03:06.080 the seven years of famine. Lisa, that doesn't get it 0:03:06.120 --> 0:03:09.640 done for us. We'll have to put the exodus aside 0:03:09.720 --> 0:03:12.960 and talk about what we're looking for in terms of 0:03:12.960 --> 0:03:16.480 the safety during the seven years of leanness. And you 0:03:16.560 --> 0:03:19.360 talked about bonds in the surprise that yields were so low, 0:03:19.919 --> 0:03:24.080 particularly a bunchmark rates. What is the safety if it's 0:03:24.120 --> 0:03:29.480 not bonds, Oh, I would think under valid common stocks. 0:03:30.040 --> 0:03:32.240 I'd rather be in a common stock that would be 0:03:32.240 --> 0:03:34.360 in a bond any day of the week. Given the 0:03:34.360 --> 0:03:38.760 relative price of bonds versus equities, can buy what we 0:03:38.840 --> 0:03:42.840 gotta what we gotta understand is stocks are very heterogeneous. 0:03:43.080 --> 0:03:45.800 Bonds are homeost genius. What I mean by that is 0:03:46.240 --> 0:03:48.840 a triple a bond, double a bond. They're all trade 0:03:48.840 --> 0:03:52.800 within a quarter point of each other. Stocks are heterogeneous. 0:03:53.240 --> 0:03:55.120 You know, I look at a City bank at seven 0:03:55.120 --> 0:03:58.360 times journeys at discount, the Book Bank of American nine 0:03:58.400 --> 0:04:03.960 times earnings, Apole, Uh, the financial service company at any 0:04:04.040 --> 0:04:07.680 times earnings. Uh. You know I have my I'm doing 0:04:07.680 --> 0:04:09.760 relatively well this year because I have a big energy 0:04:09.800 --> 0:04:12.280 exposure and I had breakfast with the CEO of a 0:04:12.360 --> 0:04:15.680 coming called Paramount Resources up in Canada, and the stocks 0:04:15.680 --> 0:04:18.920 gone from two to like, and I was wondering where 0:04:18.920 --> 0:04:20.640 I should take some money off the table. When I 0:04:20.640 --> 0:04:24.200 got finished talking to the CEO, I figured, I add 0:04:24.240 --> 0:04:27.080 to my position, this is a company that generates over 0:04:27.240 --> 0:04:29.080 three percent of it in the yield, so it was 0:04:29.120 --> 0:04:33.920 at three times cash earnings. It's growing production double digits UM. 0:04:34.279 --> 0:04:37.200 And uh, they have something like the ten eleven twelve 0:04:37.240 --> 0:04:41.320 dollars of cash flow training it like three times cash flow, 0:04:41.600 --> 0:04:44.080 and they have a portfolilo on the other energy holdings 0:04:44.240 --> 0:04:46.960 that are equal to five dollars per share. The ironomy, 0:04:47.200 --> 0:04:50.080 I'm very negative on bonds. My biggest position is a bond, 0:04:50.360 --> 0:04:53.640 but it's very complex. But I happen to think it's 0:04:53.640 --> 0:04:55.960 like a layup. I could be dead wrong. It's a 0:04:56.040 --> 0:04:59.680 coming called Lagato. They had first lean dead outstanding fifteen 0:04:59.680 --> 0:05:02.400 and a half sent coupon. We're to make hope of vision. 0:05:02.480 --> 0:05:04.840 You have paid interest to the end of twenty three 0:05:04.839 --> 0:05:08.000 when the bond matures. And these are very real people, 0:05:08.320 --> 0:05:10.880 they have very real assets. Where I say real people. 0:05:10.960 --> 0:05:14.599 Chairman the boards, Ivan Seidenberg, formerly head of Horizon Red Hunt, 0:05:14.640 --> 0:05:17.479 formerly had of the fccs on the board. Mr Kana 0:05:17.520 --> 0:05:19.520 you who is number two guy to Craig mccoord built 0:05:19.560 --> 0:05:23.320 mcorse Cellulos on the board. There's so much of the 0:05:23.480 --> 0:05:26.800 specific story here that's important to talk about and discern. 0:05:27.200 --> 0:05:29.720 Let's talk about the bear case or the recession call 0:05:29.920 --> 0:05:32.679 of a draw down from the peak, which is about 0:05:33.520 --> 0:05:36.760 further than where we are today in the SMP. What 0:05:37.040 --> 0:05:40.760 leads things lower If there are these positive stories of 0:05:40.800 --> 0:05:44.040 whether it's undervalued financials as you said, or whether it's 0:05:44.160 --> 0:05:48.680 undervalued or at least uh fairly valued energy companies, well, 0:05:48.680 --> 0:05:52.520 I'm a classicist, you know. Let's face it, we have recessions. 0:05:52.760 --> 0:05:54.839 We used to have recessions every four or five years, 0:05:55.200 --> 0:05:58.400 but because of very liberal policies, has been stretched out. 0:05:58.760 --> 0:06:01.520 But if we have a recession, and uh, typically you 0:06:01.560 --> 0:06:04.479 have a bad market preceding recession, and uh, you know 0:06:04.520 --> 0:06:07.120 we're in a bad market already, and the question is 0:06:07.240 --> 0:06:10.320 we're probing for the bottom. And I think given the 0:06:10.360 --> 0:06:13.760 excesses that we've had, having a bottom thirty five or 0:06:14.440 --> 0:06:17.720 below the peak would not be an unreasonable guests multiples, 0:06:17.760 --> 0:06:21.960 that would not unreasonable, you know. Uh, let's face, everybody's 0:06:22.040 --> 0:06:24.240 using the wrong profit est of it. You know, I 0:06:24.279 --> 0:06:26.440 think someone on your program this morning said every one 0:06:26.480 --> 0:06:30.200 percent point improvement a dollar is about eight percent off 0:06:30.200 --> 0:06:34.200 of earnings. Uh, let's talk about that, Leon Cooperman, you 0:06:34.240 --> 0:06:36.480 have seen dollar a bounce. You know, I believe you 0:06:36.520 --> 0:06:38.360 were in the meetings of the Plaza Court a few 0:06:38.440 --> 0:06:41.360 years ago. What does a strong dollar mean for our 0:06:41.480 --> 0:06:46.239 viewers and our listeners? Negative for corporate profits? You already 0:06:46.279 --> 0:06:49.719 got a profit warning out of Microsoft on the strong dollar, 0:06:50.320 --> 0:06:53.360 and uh, you know in a recession, profits typically drop. 0:06:54.480 --> 0:06:58.040 I don't see any uh estimates that would have earnings 0:06:58.120 --> 0:07:03.800 on the SMP five comes, Leon, help me with institutional 0:07:03.920 --> 0:07:07.159 money and what they do with whatever part of their 0:07:07.160 --> 0:07:11.200 portfolio was bonds and those bond losses. We have guests 0:07:11.280 --> 0:07:15.560 after guests after guests rationalizing a bond bear market. Do this, 0:07:15.640 --> 0:07:18.720 do this, do this, do this? Fine, But the fact is, 0:07:18.760 --> 0:07:21.760 on an actually assumption, even if you have a formal 0:07:21.800 --> 0:07:25.120 water or you don't boy, or you underwater off that 0:07:25.160 --> 0:07:29.800 bond bear market, what do you do shift the stocks? Well, 0:07:31.080 --> 0:07:34.440 I would say it's a combination of cash and stocks 0:07:34.920 --> 0:07:38.080 that were in my answer. You know, I'm a different position. 0:07:38.400 --> 0:07:41.400 I'm approaching eighty years of age. I don't have any clients. 0:07:41.440 --> 0:07:43.640 I run my own money. I could take a longer 0:07:43.720 --> 0:07:47.760 term horizon, and I recognize that in the bear market, 0:07:47.840 --> 0:07:51.120 he who loses wins, he who loses least wins. We 0:07:51.200 --> 0:07:55.320 all leon at your August age of seventy nine in holding. 0:07:55.960 --> 0:07:59.560 Should President Biden's serve a second term? Give us the 0:07:59.600 --> 0:08:04.840 Cooper energy level? Is the nation considers a second term 0:08:04.920 --> 0:08:08.800 for the president? I think he definitely should not run, 0:08:08.920 --> 0:08:11.520 and I don't think he will run. I am told 0:08:11.520 --> 0:08:13.800 by people that you're not happy in Washington. He spent 0:08:13.960 --> 0:08:17.920 more time with his grandkids in Delaware. You know, he 0:08:17.960 --> 0:08:20.560 has not done a good job. I voted for him 0:08:20.720 --> 0:08:23.760 because I voted my values and not my pocketbook. And 0:08:24.120 --> 0:08:28.160 I found Trump, who has superior economic ideas to Biden. 0:08:28.560 --> 0:08:33.080 His conduct was just totally unacceptable. And uh, but I 0:08:33.120 --> 0:08:36.520 think the Democrats are gonna get crushed in December, the 0:08:36.559 --> 0:08:39.040 progressives that led them too far to the left, the 0:08:39.040 --> 0:08:42.280 country of centrist in nature. And uh, we gotta we 0:08:42.360 --> 0:08:45.600 gotta start working together, we gotta start cooperating. And you know, 0:08:46.280 --> 0:08:48.240 let me if I may make this point, it's not 0:08:48.320 --> 0:08:51.520 about politics, but I had a sense I would have 0:08:51.559 --> 0:08:54.760 smile my face blame a good man by the name 0:08:54.760 --> 0:08:57.640 of Barack Obama for a lot of these problems. I 0:08:57.679 --> 0:09:00.840 don't think that Bush wanted Bush to don't Reagan. Bill 0:09:00.880 --> 0:09:04.440 Clinton villainized wealth. He villainized wealth. And I sent him 0:09:04.440 --> 0:09:06.400 a letter twelve years ago. They went viral on the end, 0:09:06.559 --> 0:09:09.720 remember that, Okay, And I said to him, Mr President, 0:09:10.120 --> 0:09:13.280 you're telling the pent being screwed by the one percent. 0:09:13.400 --> 0:09:15.840 You should be telling the ercent. But hard work and luck, 0:09:15.840 --> 0:09:18.319 they could become part of the one percent. You depreciate 0:09:18.320 --> 0:09:21.720 the American dream. And unfortunately President Biden has picked up 0:09:21.720 --> 0:09:24.559 on that theme. I see no reason to villainize wealth. 0:09:24.760 --> 0:09:26.360 How do you get to be wealthy? You develop a 0:09:26.360 --> 0:09:29.240 partner service in world needs. And we continue with Leon 0:09:29.320 --> 0:09:32.199 Cooperman of Omega Leon just because Jasmin and beat me 0:09:32.320 --> 0:09:35.120 over the head with this. Are you in bitcoin? Leon? 0:09:35.280 --> 0:09:38.240 What do you think a bitcoin? I take the easy 0:09:38.280 --> 0:09:41.079 way out of bitcoin. They say, if you don't understand bitcoin, 0:09:41.120 --> 0:09:43.280 it means you're old. I'm old, But I take a 0:09:43.360 --> 0:09:47.720 side with Warren Buffett who had said he wouldn't pay 0:09:47.960 --> 0:09:50.480 cents for all the bitcoin out standing for his partner 0:09:50.559 --> 0:09:53.720 Charlie Mungo, who refers to his rat poison. I don't 0:09:53.760 --> 0:09:56.079 see it at all. I don't understand it. I think 0:09:56.120 --> 0:09:59.840 it's a product of the times of very similative policies. 0:10:00.440 --> 0:10:04.840 And uh think, okay, I think Leon Cooperman. Critty just 0:10:04.920 --> 0:10:07.760 told me I was old. I think guess what I heard. 0:10:07.800 --> 0:10:11.160 They're thrilled heavily on Cooperman as we extend our discussion 0:10:11.640 --> 0:10:15.319 with him in these tumultuous times, Leon, over the years, 0:10:15.320 --> 0:10:18.320 how do you adapt and adjust when there's a CEO 0:10:18.600 --> 0:10:23.600 change at a company, even if it's coordinated and there's 0:10:23.600 --> 0:10:26.680 a ballet of course, I'm thinking of Amazon. It could 0:10:26.679 --> 0:10:29.040 be any other company. Is it well, but let's just 0:10:29.040 --> 0:10:32.160 take Amazon Bezos to Jesse. How do you adapt it 0:10:32.200 --> 0:10:34.959 adjust to that? Well, you have to make a judgment 0:10:35.000 --> 0:10:41.120 whether the change in leadership is appropriate, uh and logical? 0:10:41.160 --> 0:10:43.720 It makes sense? And is his leadership change occurring at 0:10:43.720 --> 0:10:46.440 the time when the company doing well poorly? I get 0:10:46.480 --> 0:10:49.120 more worried when the chief financial officers leave for no 0:10:49.280 --> 0:10:53.640 apparent reason. I don't worry about CEOs. You know, Bezos 0:10:53.880 --> 0:10:56.360 wants to kick back a little bit. He has outside ventures. 0:10:57.480 --> 0:11:00.880 It's his handpicked successor. He's not selling his uck, you know, 0:11:01.000 --> 0:11:04.079 So I don't get worried about that. Leon, I want to. 0:11:04.200 --> 0:11:06.120 I can't generalize, you know, you've got to take each 0:11:06.160 --> 0:11:09.560 situation one at a time. Fair enough, Leon, I want to. 0:11:09.600 --> 0:11:11.040 I want to circle back to a comment you made 0:11:11.040 --> 0:11:14.000 on Bloomberg Surveillance just moments ago. You brought up a 0:11:14.040 --> 0:11:16.440 historical trend that a recession used to come every four 0:11:16.520 --> 0:11:19.000 or five years. That's, of course not been the recent trend. 0:11:19.000 --> 0:11:21.600 But I'm curious if you see a return to that 0:11:21.679 --> 0:11:25.600 kind of pattern. No, I wouldn't forecast. And look, we're 0:11:25.640 --> 0:11:30.360 a democracy. Democracy politicians do a better job and fighting recession. 0:11:30.400 --> 0:11:34.760 They're doing fighting inflation, so you know we're I wouldn't 0:11:34.840 --> 0:11:37.560 forecast a change in the pattern, but I what I'm 0:11:37.600 --> 0:11:40.520 worried about is that we're long in the tooth and 0:11:40.559 --> 0:11:43.760 we see a lot of structural imbalances, and we've created 0:11:43.760 --> 0:11:46.559 a tremendous amount of debt, and we don't have the 0:11:46.679 --> 0:11:49.800 leadership in the country that we need. So I'm assuming 0:11:49.840 --> 0:11:52.800 that we're heading to recession, not that they want one, 0:11:53.080 --> 0:11:56.559 but I think this idea of inflation moderating, My guess 0:11:56.600 --> 0:11:58.400 is you have to split it two for one to 0:11:58.440 --> 0:12:00.640 get the inflation rate down to where the Fed wants it. 0:12:01.200 --> 0:12:05.520 You know, a typical business courses labor. Labor is not moderating. 0:12:05.520 --> 0:12:07.319 We're in an environment where there's much more demand for 0:12:07.440 --> 0:12:10.160 labor than their supply. There's not an environment with prices 0:12:10.160 --> 0:12:13.880 go down. So we don't have we don't have intelligent policies. 0:12:14.160 --> 0:12:16.920 They wanted to cut the gasoline tax the last time 0:12:16.960 --> 0:12:18.960 I heard the way do you get prices downage you 0:12:19.000 --> 0:12:22.800 get more supplied, not more, not more not not lower taxes, 0:12:22.840 --> 0:12:27.599 which stimulates consumption. Leon you mentioned the eye word inflation. 0:12:27.679 --> 0:12:30.400 I'm curious about the macro heads that seems to be. 0:12:30.480 --> 0:12:32.320 It feels like the momentum trade of the day, which 0:12:32.320 --> 0:12:35.080 is you buy commodities to hedge against all the other 0:12:35.120 --> 0:12:37.480 turmoil in the markets. Is that a trade you support? 0:12:40.400 --> 0:12:42.839 I understand the merits of the trade. Now. I'm very 0:12:42.920 --> 0:12:45.280 much of a bottom up stock picking kind of guy. 0:12:45.559 --> 0:12:47.280 I got lucky the last couple of years. You know. 0:12:47.320 --> 0:12:50.400 I came into last year with a very overweighted energy 0:12:50.440 --> 0:12:53.040 position because you know, the energy was three percent of 0:12:53.080 --> 0:12:55.480 the index and nobody liked it. And these guys were 0:12:55.600 --> 0:12:58.480 very cheap, And now over a sudden, everybody likes it, 0:12:58.520 --> 0:13:02.040 and I'm getting nervous, but I've held on because they 0:13:02.080 --> 0:13:06.200 seem so inexpensive. Flow you at the time we've got 0:13:06.320 --> 0:13:10.480 left with you, I am fascinated what you think of 0:13:10.600 --> 0:13:14.240 the speed that the SEC is moving where Mr Gunsler 0:13:14.320 --> 0:13:18.520 has so many issues. You mentioned crypto bitcoin whatever earlier, 0:13:19.040 --> 0:13:21.600 or the meme stocks. I know, Leon, you were sitting 0:13:21.640 --> 0:13:25.400 on your couch down in Florida playing Game Stop. But 0:13:26.240 --> 0:13:29.760 for you and me, some of this modern trading stuff 0:13:30.120 --> 0:13:35.079 is nuts. What should THEE do about a tremendous disservice 0:13:35.160 --> 0:13:37.880 to the public? And I expressed that, you know, I 0:13:37.920 --> 0:13:41.160 became a big letter writer in my old age. I 0:13:41.200 --> 0:13:45.680 followed the advice of Aristotle, who said in tolerance and 0:13:45.760 --> 0:13:48.319 indifference is the last vertues of society. So I started 0:13:48.320 --> 0:13:51.880 to speak out. So I sent Jake Clayton a letter 0:13:52.400 --> 0:13:55.559 pointing out to him that the market structure has been destroyed. 0:13:56.200 --> 0:13:57.800 And why do I say that? When I came to 0:13:57.840 --> 0:14:01.680 Goldman Sacks sixty years ago, whether it's Golden Morgan, Stanley, Solomon, Brothers, 0:14:02.080 --> 0:14:04.600 Mary Lynch, they traded stocks to fifty or sixty cents 0:14:04.600 --> 0:14:06.959 to share, and the vocal rule didn't exist. Now it 0:14:07.040 --> 0:14:09.880 commissions near zero and the vocal rule the brokers are 0:14:09.880 --> 0:14:13.440 not stabilizers. Secondly, fifty years ago specialist in New York 0:14:13.440 --> 0:14:16.839 Stock Exchange, and eighty percent of the vium today is 0:14:16.920 --> 0:14:20.600 offboard and thot polls, So specialists are not stabilizers. And 0:14:20.600 --> 0:14:24.520 then finally, for some unexplained reason, they limited the uptick rule, 0:14:24.720 --> 0:14:29.000 which gave rise to these high frequency algorithmic traders. Nothing 0:14:29.040 --> 0:14:31.640 about value, you know everything about price, and they drive 0:14:31.720 --> 0:14:33.720 the market higher than there should be on fundamentals, and 0:14:33.760 --> 0:14:36.600 they driving lower than it should be on fundamentals. Uh 0:14:36.640 --> 0:14:39.920 and uh. He pleaded with the SEC to reinstate the 0:14:40.000 --> 0:14:42.680 uptick role for a period of a few months to 0:14:42.800 --> 0:14:47.840 see what just to experiment. Just I agree, we're out 0:14:47.840 --> 0:14:49.720 of time, we gotta go, but I want to get 0:14:49.720 --> 0:14:52.080 you back on to pick up on the uptick rule. 0:14:52.120 --> 0:14:55.680 I think that's a not a small item. Leon Cooperman, 0:14:55.840 --> 0:14:59.880 I'm gonna call him constructively cautious on the markets, of course, 0:15:00.240 --> 0:15:10.480 iconic and with his omega as well. The distinction today 0:15:10.600 --> 0:15:12.600 is a link up here with yen weaker as well. 0:15:12.680 --> 0:15:15.360 One seven thirty nine is critical and one thirty eight 0:15:15.440 --> 0:15:18.320 print would be truly shocking. George Sarah Ellis has been 0:15:18.360 --> 0:15:20.440 out front on this with global head of Foreign Exchange 0:15:20.440 --> 0:15:24.280 Research at Deutsche Bank, with a note published Worldwide moments. 0:15:25.040 --> 0:15:28.520 I go, there are real interest rates, nominal interest rates, 0:15:28.560 --> 0:15:32.800 George Sarah Ellis, their capital flows, and then there is 0:15:32.840 --> 0:15:38.040 the thermodynamics statics of the hoarding of dollars. What is 0:15:38.080 --> 0:15:43.000 the importance of a static hoarding of dollars versus normative 0:15:43.120 --> 0:15:48.120 flows in the global economy? Hi, tom So, I think 0:15:48.160 --> 0:15:51.080 it's extremely important because if you look at what happened 0:15:51.120 --> 0:15:53.280 this year, you've had a very big regime shift in 0:15:53.320 --> 0:15:57.880 the market. Currencies were generally pretty highly correlated to interest 0:15:57.960 --> 0:16:01.360 rate differentials up until Arch, so you had the more 0:16:01.360 --> 0:16:05.600 hawkish fed the dollar was rallying. Then the ECB turn 0:16:05.680 --> 0:16:09.200 more hawkish, and the rate differential actually turned significantly higher 0:16:09.240 --> 0:16:12.160 in favor of the Euro. But the euro failed to follow, 0:16:12.320 --> 0:16:16.200 and the market more broadly has stopped being responsive to 0:16:16.400 --> 0:16:19.040 the interest rate differential and is instead a lot more 0:16:19.080 --> 0:16:22.480 sensitive to the flow dynamics you discussed, And what we're 0:16:22.480 --> 0:16:27.080 seeing globally is essentially a huge holding of dollars from investors. 0:16:28.000 --> 0:16:31.800 Europe obviously really burdened at the moment by this huge 0:16:31.920 --> 0:16:35.640 energy crisis. Japan also has the energy problems, plus the 0:16:35.720 --> 0:16:39.200 b o J which is easing aggressively. And the conclusion 0:16:39.240 --> 0:16:42.680 the market has is it's just holding onto dollars even 0:16:42.720 --> 0:16:45.880 if investors are selling US assets, the selling U S 0:16:45.880 --> 0:16:48.200 ecurities and bonds as we're seeing, it's just not being 0:16:48.200 --> 0:16:51.120 repatriated back. And for example, that's one reason why the 0:16:51.160 --> 0:16:53.480 yen is no longer a safe haven. So George, let's 0:16:53.480 --> 0:16:55.960 focus on the euro hand locan that currency pair go 0:16:56.560 --> 0:17:00.400 one and two great heights from the ECB. Alish your 0:17:00.440 --> 0:17:04.119 bearish for that, Couracy. Well, your last question is an 0:17:04.160 --> 0:17:06.000 interesting one if if you look at the UK, the 0:17:06.040 --> 0:17:08.560 Bank of England was one of the first currencies, one 0:17:08.560 --> 0:17:10.960 of the first central banks to high grates, and that 0:17:11.000 --> 0:17:13.800 really didn't benefit You've seen the RB a Swede and 0:17:13.840 --> 0:17:16.679 altern hawk ish. So I would say at the moment, 0:17:17.119 --> 0:17:20.639 central bank reaction functions, rate hikes don't seem to matter 0:17:20.720 --> 0:17:23.240 all that much, and it's a lot more about the 0:17:23.320 --> 0:17:26.760 underlying energy balance. How far can it go? I just 0:17:26.760 --> 0:17:30.119 crunched some numbers in the piece this morning. If you 0:17:30.200 --> 0:17:33.760 map out the extra energy deterioration on the back of 0:17:33.760 --> 0:17:37.520 this big spike in natural gas prices, that's worth about 0:17:37.520 --> 0:17:40.920 two hundred billion euros extra off supplying to the market. 0:17:41.560 --> 0:17:45.639 Roughly speaking, that equates to euro dollar parity. But of 0:17:45.680 --> 0:17:48.600 course these are only rough estimates and numbers. When you 0:17:48.720 --> 0:17:52.119 look at how much the Euro has overshot in the past, 0:17:52.760 --> 0:17:54.919 we've come up with a range of anywhere between nine 0:17:55.560 --> 0:17:58.320 and parity, and I think in the current environment that 0:17:58.440 --> 0:18:01.800 sort of range is not early unreasonable. This is actually 0:18:01.880 --> 0:18:04.200 biling on towards City Group is calling for as well 0:18:04.200 --> 0:18:08.160 in on the Euro. Should this gas band go into 0:18:08.200 --> 0:18:11.160 an effect with some sort of weaponization, at what point 0:18:11.240 --> 0:18:14.480 does that become your base case versus a bearish outlier. 0:18:14.480 --> 0:18:16.960 At what point do you have conviction around it? Given 0:18:17.240 --> 0:18:20.520 that Germany is already starting to tweak how it's handling 0:18:20.640 --> 0:18:22.959 a potential lack of gas applies down at the end 0:18:22.960 --> 0:18:27.320 of the year. So when an outcome rests so much 0:18:27.640 --> 0:18:30.439 on what would happen out of Russia and President Putin, 0:18:30.640 --> 0:18:33.600 it's very difficult to have a base case. I think 0:18:33.880 --> 0:18:35.440 the best thing we can do at the moment is 0:18:35.480 --> 0:18:39.000 just put numbers around the different scenarios, and under the 0:18:39.000 --> 0:18:42.840 scenario of a complete gas cut off, I really wouldn't 0:18:42.840 --> 0:18:45.080 say ninety five would be unreasonable, but we can just 0:18:45.119 --> 0:18:48.560 see how unpredictable things are up until three weeks ago, 0:18:48.600 --> 0:18:51.320 and that gas prices will much lower and the flows 0:18:52.720 --> 0:18:55.080 we're going through that pipe, So it is all about 0:18:55.160 --> 0:18:58.280 the North Stream pipeline. What I would say, however, now 0:18:58.359 --> 0:19:01.080 the market is built to risk premium because it knows 0:19:01.080 --> 0:19:03.800 there's uncertainty. It knows it can be switched off. So 0:19:03.920 --> 0:19:07.600 even if this gas returns in terms of full flow 0:19:07.680 --> 0:19:10.720 after the maintenance period, the risk premium is unlikely to 0:19:10.720 --> 0:19:13.120 go away. And I think that's a critical thing that's 0:19:13.200 --> 0:19:15.400 changed over the last few weeks. George, to your point, 0:19:15.440 --> 0:19:17.240 we can do a bunch of scenario studies, but you 0:19:17.280 --> 0:19:19.800 have to understand what regime we're in and what manage 0:19:19.800 --> 0:19:22.359 to foreign exchange and what doesn't. And to your point, 0:19:22.760 --> 0:19:24.720 it's not been about rate so much as it's been 0:19:24.760 --> 0:19:26.879 about flows. So, George, do you think it's going to 0:19:27.040 --> 0:19:29.200 stay that way? Is the reason to believe it stays 0:19:29.240 --> 0:19:32.400 that way because the recession scenario staff, all the scenario analysis, 0:19:32.480 --> 0:19:34.800 whatever it is, that's helpful, But unless we understand what's 0:19:34.840 --> 0:19:39.800 actually driving the underlying currency, who knows where this goes absolutely? 0:19:39.840 --> 0:19:41.960 And what's driving the dollar at the moment is safe 0:19:41.960 --> 0:19:45.560 haven flows. The dollar is the so called risk parity antipole. 0:19:45.640 --> 0:19:47.280 And I think you would need two things for that 0:19:47.359 --> 0:19:51.639 to change, the FED being more sensitive to growth, and 0:19:51.680 --> 0:19:53.800 at the moment that's not the case. They're very growth 0:19:53.800 --> 0:19:56.080 agnostic so to speak. The u S data is slowing, 0:19:56.320 --> 0:19:59.000 but they're still talking about three percent. So number one 0:19:59.040 --> 0:20:01.040 and shift from the FED, and number two are change 0:20:01.080 --> 0:20:03.960 in the energy dynamics, especially as they relate to your 0:20:04.080 --> 0:20:06.200 and the end. So I don't really see the current 0:20:06.320 --> 0:20:08.959 environment changing, which is why we we pushed down our 0:20:09.000 --> 0:20:12.800 euro dollar forecasts in recent months. The last point I'd 0:20:12.800 --> 0:20:17.240 make everyone is talking about this recession. I'd argue the 0:20:17.280 --> 0:20:21.040 recession should be a given. Indeed, the markets already pricing it. 0:20:21.040 --> 0:20:24.240 It's now a question of length and depth, and the 0:20:24.320 --> 0:20:26.359 second half of the year is all going to be 0:20:26.400 --> 0:20:31.080 about that learning process amidst an extremely unusual environment. For example, 0:20:31.280 --> 0:20:34.680 the growth data is slowing, the labor markets globally are 0:20:34.760 --> 0:20:38.399 extremely tight and strong, and people talk about the US. 0:20:38.440 --> 0:20:41.520 If you look at the Canadian data, the unemployment rate 0:20:41.600 --> 0:20:45.560 built a huge record low and drop sharply, and it's 0:20:45.640 --> 0:20:48.320 these things central banks are looking at and they would 0:20:48.320 --> 0:20:51.400 need to see the labor markets overall. Turn, I think 0:20:51.480 --> 0:20:53.879 before we start talking about a more dabash pivot and 0:20:53.880 --> 0:20:57.000 George super interest is stuff as always George Saravellos there 0:20:57.320 --> 0:21:04.960 of Deutsche Bank. Yeah, it's a quote for you. We 0:21:05.000 --> 0:21:07.520 see a high probability that further Hawke is surprises lae 0:21:07.560 --> 0:21:10.840 ahead as even the current expected policy path would leave 0:21:10.880 --> 0:21:13.920 real interest rates negative one into next year. The team 0:21:13.920 --> 0:21:16.920 behind that quote Franklin Templeton, the fixed incomes ce IO 0:21:17.320 --> 0:21:19.400 join us right now, sort I desire sort of great 0:21:19.400 --> 0:21:21.159 to catch up with you. Walk me through why you 0:21:21.200 --> 0:21:24.440 still believe that we could face further hawke Is surprises. 0:21:25.600 --> 0:21:28.240 So I think the surprises stopped being surprises as the 0:21:28.280 --> 0:21:32.560 market starts expecting them, right, so we wrote that even before. Currently, 0:21:32.760 --> 0:21:35.840 I would say, I think that we're going to get 0:21:35.880 --> 0:21:39.200 an inflation number which is higher than one percent this 0:21:39.200 --> 0:21:42.400 this week month on month terms, so we're getting close 0:21:42.480 --> 0:21:44.840 to nine. We might even trickle a little bit about 0:21:44.960 --> 0:21:47.920 nine this month. That's a big number, and I think 0:21:48.000 --> 0:21:50.480 it's going to be extremely difficult to end this year 0:21:51.320 --> 0:21:54.640 with inflation being significantly below eight, which means we're looking 0:21:54.680 --> 0:21:56.960 at seven and a half to eight percent for year end. 0:21:57.400 --> 0:22:00.720 And my concern is that regardless of where we are 0:22:00.800 --> 0:22:03.400 on FED funds at btwhere at three or three point 0:22:03.400 --> 0:22:06.520 two five, it's not going to be enough. And the 0:22:06.560 --> 0:22:11.160 market currently is already pricing in rate cuts next year, 0:22:11.600 --> 0:22:14.000 that might just be way too soon, And that that's 0:22:14.000 --> 0:22:17.080 the call that we will actually see the FED deliver 0:22:17.480 --> 0:22:20.560 getting closer the form, but it will not spin on 0:22:20.600 --> 0:22:23.160 a dime and start cutting as soon as it hits 0:22:23.200 --> 0:22:26.040