WEBVTT - Surveillance: EM Story Isn't Overplayed, Santos Says 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:33.560 Bloomberg dot Com, and of course on the Bloomberg. They're 0:00:33.640 --> 0:00:35.600 sort of a big tension when we talk about China 0:00:35.720 --> 0:00:38.559 trade talks, which is just how much ammunition does the 0:00:38.600 --> 0:00:41.479 Government of China does the PBOC have to stimulate the 0:00:41.479 --> 0:00:44.040 economy amid all of the back and forth between the 0:00:44.120 --> 0:00:47.360 US and China. And Gabrielle Santos has been following this. 0:00:47.560 --> 0:00:50.400 She of course, is a vice president Global market Strategist 0:00:50.720 --> 0:00:53.960 for JPMorgan Asset Management. UM, thank you so much for 0:00:53.960 --> 0:00:56.760 being here. She is in our Bloomberg Interactive Broker Studios. Gabriella, 0:00:57.000 --> 0:00:59.880 what did you make of this record credit growth that 0:01:00.040 --> 0:01:02.760 we saw in January out of China. So China has 0:01:02.800 --> 0:01:06.800 this balancing act they're trying to to play here right there, 0:01:06.840 --> 0:01:10.600 trying to do some structural reforms. They've acknowledged over the 0:01:10.640 --> 0:01:14.319 past couple of years that they have a credit problem. Surprise, UM, 0:01:14.360 --> 0:01:17.320 we can clearly see a big, big increase in corporate 0:01:17.319 --> 0:01:20.520 credit in China, most of them have credit problem. They 0:01:20.520 --> 0:01:23.240 tried to double down on that and you know, try 0:01:23.280 --> 0:01:25.319 to try to do something about it. And now we're 0:01:25.360 --> 0:01:28.280 just seeing them say, all right, actually leverage is great. No, no, no, 0:01:28.360 --> 0:01:30.760 And so that's the balance the act they try to play, right, 0:01:30.840 --> 0:01:33.759 So it's long term, we've got to fix this. Short term, 0:01:34.000 --> 0:01:38.160 we have to guarantee social stability pretty much UM, meaning 0:01:38.680 --> 0:01:41.880 have a decent economic backdrop. So it's a bit of 0:01:41.920 --> 0:01:45.280 a push pull. Long term they want to eventually wind 0:01:45.280 --> 0:01:47.960 down that credit piece. Short term they're happy to step 0:01:48.000 --> 0:01:51.200 on that lever um just to guarantee some stability. But 0:01:51.280 --> 0:01:54.560 what's interesting about the Chinese stimulus is that credit is 0:01:54.600 --> 0:01:57.000 just part of it. They've been relying on some other 0:01:57.080 --> 0:02:00.400 stimulus that's new for them, which is actually reduced saying 0:02:00.400 --> 0:02:03.280 income taxes, corporate taxes. So they have been trying to 0:02:03.320 --> 0:02:05.920 be a little bit more creative UM at the same 0:02:05.960 --> 0:02:07.880 time that unfortunately they have to revert to the old 0:02:07.880 --> 0:02:10.079 playbook from time to time. And yet, Gabby, we've had 0:02:10.120 --> 0:02:15.240 five reserve requirement ratio cuts since early and still growth 0:02:15.240 --> 0:02:18.400 has not stabilized. What is different about the character the 0:02:18.520 --> 0:02:21.440 nature of the stimulus this time around, and why the 0:02:21.480 --> 0:02:24.639 economy isn't stabilizing as it has done in response to 0:02:24.680 --> 0:02:27.519 these kind of measures in previous years, Well because it's 0:02:27.560 --> 0:02:30.720 not a bazooka like they've used in the past post 0:02:31.120 --> 0:02:35.680 global financial crisis, or even they were doing broad based 0:02:35.760 --> 0:02:40.440 monetary easing, broad based stepping on that credit lever This 0:02:40.520 --> 0:02:43.119 time they're doing a little bit of that, but they 0:02:43.200 --> 0:02:45.600 are aware of that structural issues. So they are also 0:02:45.680 --> 0:02:49.120 trying to deal with fiscal uh stimulus, which takes a 0:02:49.120 --> 0:02:51.080 little bit of a there's a bit of a lag 0:02:51.200 --> 0:02:53.560 until that plays out in the economy. Alright. So the 0:02:53.560 --> 0:02:55.760 reason why this all matters, right is because first of all, 0:02:55.840 --> 0:02:57.600 China is the second biggest economy in the world, but 0:02:57.680 --> 0:03:01.519 also we have a situation we're invests are racing, they're 0:03:01.560 --> 0:03:04.840 tripping over themselves to go into emerging markets, debt and 0:03:04.880 --> 0:03:07.440 equities that I have to wonder how much this really 0:03:07.520 --> 0:03:09.960 hinges on the idea that China is going to remain 0:03:10.080 --> 0:03:13.120 a powerhouse come hell or high water, no matter how 0:03:13.160 --> 0:03:15.680 they have to get there, and including adding leverage and 0:03:16.000 --> 0:03:20.280 basically sacrificing their future for the now. So there's very 0:03:20.360 --> 0:03:24.440 much an expectation that China will succeed in stabilizing their economy, 0:03:24.760 --> 0:03:27.160 so it's not that bazook of stimulus, so it's not 0:03:27.240 --> 0:03:30.400 an acceleration and growth, but it is an expectation of 0:03:30.680 --> 0:03:33.840 stabilization and growth. So that's very important of course, as 0:03:33.840 --> 0:03:36.119 you mentioned, because China is a huge economy. It has 0:03:36.280 --> 0:03:39.240 links all over emerging markets, and it has an impact 0:03:39.320 --> 0:03:42.960 on developed markets as well, Europe directly, as as as 0:03:43.120 --> 0:03:45.760 as a big trading partner, but even in the US 0:03:45.880 --> 0:03:48.280 right for US companies, So it matters in so many 0:03:48.320 --> 0:03:51.280 different dimensions, and that's why we have to actually see 0:03:51.280 --> 0:03:53.400 the effect on the data of that stabilization. So let's 0:03:53.400 --> 0:03:55.760 think about the spill over, the potential negative spillover, because 0:03:55.800 --> 0:03:58.520 here are the fears. This morning, you get a decelerating 0:03:58.920 --> 0:04:02.720 PPI reading, perhaps falling back into deflation. There the fearies 0:04:02.760 --> 0:04:06.320 industrial profits will be lower, companies already under pressure from 0:04:06.320 --> 0:04:09.400 a weaker economy. The fear is that the export prices 0:04:09.440 --> 0:04:11.320 are going to roll over, and the fearies you export 0:04:11.360 --> 0:04:14.240 disinflation into the rest of the world. Feels a little 0:04:14.240 --> 0:04:17.520 bit like early perhaps with the volume turned down. Is 0:04:17.520 --> 0:04:21.040 that a decent comparison, that is a decent comparison that 0:04:21.200 --> 0:04:23.440 was that time that we were worried about a Chinese 0:04:23.480 --> 0:04:26.479 hard landing if we recall and all of its negative 0:04:26.480 --> 0:04:30.360 spillover effect on emerging markets developed markets as well. Um So, 0:04:30.400 --> 0:04:32.320 I do think we need to see that stability in 0:04:32.440 --> 0:04:35.000 Chinese data, but that perhaps the old China is not 0:04:35.040 --> 0:04:37.719 where we should look. Right as we were mentioning there 0:04:37.760 --> 0:04:40.320 is more of a fiscal stimulus push. I don't think 0:04:40.320 --> 0:04:43.840 we should overlook the tremendous amount of stimulus they've done 0:04:44.360 --> 0:04:47.120 through their reworking of income taxes. Right, So where we 0:04:47.160 --> 0:04:49.680 should look for that stability is actually on the consumer 0:04:49.720 --> 0:04:52.440 side in China. From an investor perspective, Does this mean 0:04:52.520 --> 0:04:56.800 by Chinese bonds, by Chinese equities? From that perspective, I 0:04:56.800 --> 0:05:00.719 would say it's by you know, emerging market So you 0:05:00.720 --> 0:05:02.839 don't think it's been overplayed this whole em But I 0:05:02.880 --> 0:05:05.039 do not think it's been overplayed. Even though the Bank 0:05:05.040 --> 0:05:07.719 of America Mary Lynch for Manager Survey actually says, for 0:05:07.720 --> 0:05:10.200 the first time in its history, the majority of clients 0:05:10.240 --> 0:05:13.520 think that that the E M long trade is the 0:05:13.640 --> 0:05:15.920 most crowded trade out there. You know, when I actually 0:05:15.920 --> 0:05:18.560 look at flow data for emerging markets, I think the 0:05:18.600 --> 0:05:20.920 best source for for that is the i a F. 0:05:20.960 --> 0:05:23.960 The Institute of International Finance. They do a great job 0:05:24.000 --> 0:05:26.560 of tracking flows to e M. You did see an 0:05:26.600 --> 0:05:29.680 increase in the fourth quarter of last year, but I 0:05:29.680 --> 0:05:32.320 mean it's it's barely a wrinkle in the water. So 0:05:32.800 --> 0:05:36.840 maybe people are saying they're feeling optimistic about emerging markets. Frankly, 0:05:36.880 --> 0:05:38.679 I haven't seen that in the flow days. The market 0:05:38.720 --> 0:05:41.640 seems to be positioning for this reality, just in terms 0:05:41.640 --> 0:05:43.279 of price. I mean, we're up seven and a half 0:05:43.279 --> 0:05:46.200 percent on the Shankai come through en. We're on for 0:05:46.240 --> 0:05:48.960 another week of games for Chinese equities. Gabby, I just 0:05:49.000 --> 0:05:50.760 get the fitting in the market is already behind your 0:05:50.760 --> 0:05:54.200 point of view. The market is already invested to capture 0:05:54.279 --> 0:05:57.400 upside once China stabilizes, and I think the real fear 0:05:57.480 --> 0:05:59.000 and I get a lot of messages about this on 0:05:59.040 --> 0:06:01.279 any given day. Now what happens if we get a 0:06:01.320 --> 0:06:06.240 trade deal and the economy still doesn't stabilize. So, yes, 0:06:06.279 --> 0:06:09.159 we're up seven percent in emerging markets this year, but 0:06:09.240 --> 0:06:12.320 that's after we tanked fifteen percent last year, right, So 0:06:12.400 --> 0:06:15.119 when we look at valuations in e M, still below 0:06:15.160 --> 0:06:17.320 average on a price to book ratio, which is our 0:06:17.360 --> 0:06:21.320 favorite valuation metric. When we look at emerging markets earnings estimates, 0:06:21.320 --> 0:06:24.400 they've been downgraded by seven percent in two months, so 0:06:24.520 --> 0:06:29.680 still very low bar there for earnings, especially in China, Korea, Taiwan. 0:06:30.200 --> 0:06:32.760 Um So, No, I don't think that e M story 0:06:32.800 --> 0:06:35.320 is overplayed, and I think it has further room to go. 0:06:35.520 --> 0:06:38.480 How much is the M e M story uh contingent 0:06:38.640 --> 0:06:42.279 on the dollar continuing to weaken or not strengthening further here, 0:06:42.520 --> 0:06:45.720 that's a really crucial point. It's e M has always 0:06:45.720 --> 0:06:48.800 been very, very highly correlated to dollar moves, not as 0:06:48.880 --> 0:06:51.039 much as in the past because it is less commodity 0:06:51.080 --> 0:06:53.880 focus now, but there is still a strong correlation of 0:06:53.920 --> 0:06:56.960 about zero point seven. Um So, it very much needs 0:06:56.960 --> 0:07:01.080 the dollar to weekend. And I'm somewhat can sarned that 0:07:01.200 --> 0:07:04.279 the dollar has started to strengthen again. Um So, to 0:07:04.440 --> 0:07:07.159 be fair, that's a wrinkle in this positive story that 0:07:07.200 --> 0:07:10.480 we've been discussing. Um I think for em the dollar 0:07:10.640 --> 0:07:14.160 very much trades on growth differentials versus interest rate differentials. 0:07:14.160 --> 0:07:16.640 That's more of a developed market story. Um So. Again, 0:07:16.720 --> 0:07:18.760 going back to that point, if we need to see 0:07:18.800 --> 0:07:21.520 the data stabilized in China, which would get the rest 0:07:21.520 --> 0:07:23.360 of em going well, Lisa, you mentioned the Bank of 0:07:23.440 --> 0:07:26.480 American Mary Lynch Fund Manager survey. The interesting thing about 0:07:26.520 --> 0:07:28.680 it wasn't just the number one most crowded trade, It 0:07:28.720 --> 0:07:30.680 was the number two most crowded traits. The number one 0:07:30.720 --> 0:07:33.920 was long EM. Number two was long the US dollar. 0:07:34.160 --> 0:07:37.800 There's some tension between number one and two. The market 0:07:37.840 --> 0:07:41.440 has positioned for a stronger dollar. It's positioned long EM. 0:07:42.000 --> 0:07:45.440 How of those two things reconcile. No, those are contradictory ideas. 0:07:46.640 --> 0:07:50.840 Very much needs the dollar to weekend. It cannot outperform 0:07:50.920 --> 0:07:53.880 if the dollar is strengthening. Gabby sends us great to 0:07:53.880 --> 0:07:57.120 have you with us JP Morgan Asset Management, Global Market Strategists. 0:07:57.280 --> 0:07:59.760 So the two most crowded trades in the market, according 0:07:59.800 --> 0:08:02.680 to this of contradictory ideas, and most people would agree 0:08:02.680 --> 0:08:04.680 with Gappy. That just makes sense. I just wont to 0:08:04.720 --> 0:08:06.520 how those two traits are going to reconcile in the 0:08:06.600 --> 0:08:09.000 coming months. It shows me just how much confusion there 0:08:09.040 --> 0:08:11.960 is out there. I mean, honestly, right now, uncertainty is 0:08:11.960 --> 0:08:14.040 sort of the key word. You hear sort of a 0:08:14.080 --> 0:08:16.720 bell go off any time anyone says uncertainty, it's saying, 0:08:16.760 --> 0:08:18.600 you know, basically, we don't have conviction because it's really 0:08:18.640 --> 0:08:20.440 hard to know what's going to happen. So who knows. 0:08:20.600 --> 0:08:22.720 Isn't it just a nature of financial markets that there 0:08:22.800 --> 0:08:25.320 is always something to worry about? No, I actually think 0:08:25.360 --> 0:08:26.960 that this is a change. I mean, yes, of course, 0:08:26.960 --> 0:08:28.960 there's always something to worry about. But I think that 0:08:29.000 --> 0:08:30.920 for a number of years there was a don't fight 0:08:30.960 --> 0:08:33.560 the Fed, don't fight the central banks kind of mantra, 0:08:33.840 --> 0:08:36.520 and if people went along with that, they won. And 0:08:36.559 --> 0:08:38.840 I think that there is not the same macro story anymore. 0:08:39.080 --> 0:08:42.480 So essentially, what you're saying is the fedist backed away 0:08:42.640 --> 0:08:45.679 and that is sufficient. That is used to be sufficient 0:08:45.720 --> 0:08:48.360 to stabilize growth and stabilize risk, But now that's just 0:08:48.360 --> 0:08:50.880 the prerequisite and no longer sufficient. No, you're taking the 0:08:50.920 --> 0:08:53.160 morphine away. People actually have to price the market, they 0:08:53.200 --> 0:08:55.040 actually have to figure out You think that's what we're 0:08:55.040 --> 0:08:57.200 doing now. I mean a little bit more than we 0:08:57.320 --> 0:09:01.800 used to. Months of rough market dates and the federals 0:09:01.800 --> 0:09:04.719 of does a full one eight right? I mean, we 0:09:04.760 --> 0:09:07.160 could talk about, you know, whether the morphine actually has 0:09:07.200 --> 0:09:09.000 been pulled away, but that's like guess a conversation for 0:09:09.040 --> 0:09:11.640 another time. I thing, we're still loaded up. We shot 0:09:11.679 --> 0:09:14.560 some more thing worldwide. We can talk about that through this. 0:09:14.720 --> 0:09:28.280 Let's talk about our morphine addiction. Let's not I wanted 0:09:28.240 --> 0:09:30.920 to really dig into the dollar because this seems to 0:09:30.920 --> 0:09:33.280 be one of the biggest conundrums of twenty nineteen. Is 0:09:33.320 --> 0:09:36.280 it going to strengthen or weaken? Joining us now is 0:09:36.280 --> 0:09:38.320 Bip and Rye. He is c IBC head of North 0:09:38.360 --> 0:09:41.800 American Foreign Exchange Strategy, Viben. Thank you so much for 0:09:41.840 --> 0:09:44.760 being with us. Really, this is an area that I 0:09:45.280 --> 0:09:47.960 hear complete lack of conviction on. You've got some people 0:09:48.000 --> 0:09:49.839 saying the dollar is going to weaken because of a 0:09:49.880 --> 0:09:51.800 devilish fed. You have other people saying it's going to 0:09:51.800 --> 0:09:54.120 strengthen because everybody else is going to be more dovish. 0:09:54.360 --> 0:09:57.760 Where do you fall on this, Well, we're on the 0:09:57.760 --> 0:10:00.520 side of the former camp. We do think that's rategically 0:10:00.559 --> 0:10:03.559 the dollar is overvalued by some twelve to fifteen percent, 0:10:03.840 --> 0:10:06.240 and over the longer term, the trend is going to 0:10:06.280 --> 0:10:08.600 be for the dollar to weekend, and of course that's 0:10:08.720 --> 0:10:11.680 reflective of like you said, it dash fed and also 0:10:11.760 --> 0:10:15.760 because of you we we would term is irresponsible fiscal 0:10:15.800 --> 0:10:19.720 policy and as a cyclical deceleration in the U. S. Economy. Now, 0:10:19.880 --> 0:10:22.280 of course, you know tactically that hasn't really born fruit, 0:10:22.360 --> 0:10:24.960 and our view that's because really there's there's a lack 0:10:25.000 --> 0:10:27.960 of alternatives out there worth investing in when you when 0:10:27.960 --> 0:10:31.160 you judge from a fundamental perspective, and that's really what's 0:10:31.200 --> 0:10:33.480 kept the dollar inflow in view for the first month 0:10:33.600 --> 0:10:36.840 or so in two. The argument over the fiscal story 0:10:36.960 --> 0:10:39.000 for foreign exchange that I've heard a couple of times, 0:10:39.360 --> 0:10:41.080 many times over the last couple of years is that 0:10:41.120 --> 0:10:43.000 the fiscal deficit is going to get so big to 0:10:43.120 --> 0:10:46.000 fund it, either you need much high treasury yields or 0:10:46.040 --> 0:10:48.520 you need a much weaker currency. Been why does that 0:10:48.559 --> 0:10:53.079 story play out anytime soon? That's that's probably going to 0:10:53.120 --> 0:10:55.040 be something again, and that's going to weigh on the 0:10:55.080 --> 0:10:58.160 dollar more longer term as opposed to anything short term. 0:10:58.240 --> 0:11:02.120 And again, when we look at deficits or even sorry, 0:11:02.120 --> 0:11:04.319 fiscal deficits versus the dollar, that tends to be a 0:11:04.400 --> 0:11:07.120 fard of five quarter lag. And again you know that 0:11:07.280 --> 0:11:09.880 that was something that was implemented last year, so we 0:11:10.200 --> 0:11:12.480 still expected to be more of a late two eighteen 0:11:12.480 --> 0:11:15.720 early story. And again, you know, the key question to 0:11:15.760 --> 0:11:18.360 ask is that you know you you run the risk 0:11:18.400 --> 0:11:21.400 of running a deficit, a large deficit. Now, what happens 0:11:21.400 --> 0:11:24.280 when the US encounters a recession? Does that depthit blow 0:11:24.280 --> 0:11:27.040 out to say, to nine percent of GDP? We do 0:11:27.120 --> 0:11:28.559 think that that's going to be a little too much 0:11:28.559 --> 0:11:31.000 for foreign investors sy stomach. So you think the reaction 0:11:31.080 --> 0:11:34.760 function of investors, the central bias of investors that has 0:11:34.840 --> 0:11:36.720 existed for a long long time now is going to 0:11:36.800 --> 0:11:38.839 change in the next down term because typically BIP and 0:11:38.920 --> 0:11:41.560 what we used to is if the global economy turns 0:11:41.559 --> 0:11:44.720 to lower, you buy two things, You buy treasuries and 0:11:44.760 --> 0:11:47.120 you buy the US dollar. You think that changes next 0:11:47.120 --> 0:11:50.640 time around. We think that there is a good chance 0:11:50.640 --> 0:11:53.959 because again with the tax cuts last year, what ended 0:11:54.000 --> 0:11:57.760 up happening was a cyclical decoupling of how the year 0:11:57.880 --> 0:12:01.559 zone economic picture it grows, and also how the Japanese 0:12:01.600 --> 0:12:03.760 economic picture goes. And also now with the U s 0:12:03.800 --> 0:12:07.280 economy going undergoing a downturn, I think what's been underappreciated 0:12:07.280 --> 0:12:09.640 is that we're just entering the US cyclical downturn now, 0:12:09.640 --> 0:12:11.960 whereas the euro Zone, Japan have already been going through it. 0:12:12.240 --> 0:12:14.160 So we would expect the years on the Japanese economies 0:12:14.200 --> 0:12:17.480 to come out of this cyclical downturn much sooner than 0:12:17.480 --> 0:12:19.640 the US will. And in our mind, you know, the 0:12:19.679 --> 0:12:23.960 investors will punish the the US fiscal situation because of that. Again, 0:12:24.280 --> 0:12:26.000 you know, that's not a it's not a slide against 0:12:26.000 --> 0:12:28.079 the U S dollars role as a reserve currency. At 0:12:28.080 --> 0:12:30.040 this point, we do think that's much more of a 0:12:30.080 --> 0:12:32.280 longer term theme as opposed to here now. But we 0:12:32.320 --> 0:12:33.640 do think it's going to be more of a story 0:12:33.640 --> 0:12:36.800 about the the decoupling of the cyclical pictures and some 0:12:36.840 --> 0:12:39.120 of the other larger economies in the US. It's so 0:12:39.200 --> 0:12:41.760 interesting because we do talk about the deepening deficit in 0:12:41.760 --> 0:12:44.240 the US, and we talk about, uh, some of the 0:12:44.360 --> 0:12:47.480 concerns around the dollar as a reserve currency, and yet 0:12:47.760 --> 0:12:51.960 there is zero evidence, certainly with rates that people do 0:12:52.200 --> 0:12:54.679 punish the US for borrowing a lot of money. I mean, 0:12:54.679 --> 0:12:57.080 you see people just flooding back to treasuries. So I 0:12:57.080 --> 0:12:59.960 guess where where have we seen any evidence that there 0:13:00.120 --> 0:13:04.760 is any recognition by investors that the fiscal backdrop is weakening? 0:13:06.200 --> 0:13:08.280 You haven't seen it yet. No, that that that's something 0:13:08.320 --> 0:13:10.360 that's going to take a longer time to play out. 0:13:10.440 --> 0:13:13.040 And and again you know you're right. I mean, where's liquidity, 0:13:13.040 --> 0:13:14.959 where's the yield? Right now, it's in the US dollar, 0:13:15.600 --> 0:13:17.800 And that's part and parcel for the reason why the 0:13:17.840 --> 0:13:20.920 US dollars still remained somewhat firm. But again we caution 0:13:21.040 --> 0:13:24.600 that the investors to remember that which which economies are 0:13:24.640 --> 0:13:26.680 running the current account surpluses and where are we seeing 0:13:26.720 --> 0:13:29.760 the portfolio investment really flow out of. And that's of 0:13:29.840 --> 0:13:32.840 course your surplus economies like the Arizone in Japan. So 0:13:32.880 --> 0:13:34.840 what happens when we start to see domestic yields and 0:13:34.880 --> 0:13:37.960 those economy struck to rise when our economies are out 0:13:37.960 --> 0:13:39.800 of from in the US, you would expect to see 0:13:39.840 --> 0:13:42.280 some reversal of portfolio flows that we've seen over the 0:13:42.360 --> 0:13:44.880 last couple of years. So that would be movement out 0:13:44.920 --> 0:13:47.319 of the U s economy and out of US securities 0:13:47.360 --> 0:13:52.040 and back into potentially Japanese, your European or other surplus economies. 0:13:52.040 --> 0:13:54.280 And again that's quite a way on the dollar to 0:13:54.320 --> 0:13:56.040 a certain extent, I want to get your view on 0:13:56.080 --> 0:13:58.160 the prospect for a trade deal. The headlines have dropped 0:13:58.160 --> 0:14:00.720 across the Bloomberg in the last or so and one 0:14:00.760 --> 0:14:03.080 of the headlines that jumped out to me amidst all 0:14:03.120 --> 0:14:05.800 the happy talk about progresses this line right here. The 0:14:05.880 --> 0:14:10.360 United States is focused on technology transfer and currency in 0:14:10.400 --> 0:14:12.760 these talks. But then, how is the currency going to 0:14:12.760 --> 0:14:17.360 be a feature of these negotiations? Well, I mean, there 0:14:17.440 --> 0:14:20.000 is the risk that the Chinese could weaponize the rem 0:14:20.040 --> 0:14:23.360 and b and and and let it depreciate even further. 0:14:23.400 --> 0:14:25.320 And again they if I were the US, I be 0:14:25.360 --> 0:14:27.840 somewhat concerned about that, given the implications for trade, and 0:14:27.880 --> 0:14:30.920 of course we've seen ratcheting up of rhetoric from the 0:14:30.920 --> 0:14:33.760 Trump administration on that. But you know, at the same 0:14:33.800 --> 0:14:36.040 time is the end goal for the Chinese is still 0:14:36.040 --> 0:14:38.440 to liberalize the currency. The only issue is they can't 0:14:38.480 --> 0:14:40.480 do it that quickly because if you were to too quickly, 0:14:40.680 --> 0:14:42.920 you would expect to see massive capital outflows from the 0:14:42.960 --> 0:14:45.160 Chinese economy. Then you get a weaker ribbon be anyway, 0:14:45.480 --> 0:14:47.320 So again, I mean, it's it's kind of a fine 0:14:47.320 --> 0:14:50.920 balancing act for the Chinese to do that. And again, 0:14:51.000 --> 0:14:54.160 the focus on the currency, in our view is still 0:14:54.240 --> 0:14:56.840 very much an important part of the Trump platform when 0:14:56.840 --> 0:14:59.360 it comes to China. But I would argue that the 0:14:59.360 --> 0:15:02.120 technology answer is probably, at least in the near term, 0:15:02.160 --> 0:15:04.000 the more important feature to keep an eye on on 0:15:04.080 --> 0:15:05.880 the currency specifically, though, and then we can get too 0:15:05.880 --> 0:15:09.200 technology transfer just quickly. I find it difficult to see 0:15:09.200 --> 0:15:11.080 how we can push for the Chinese to liberalize the 0:15:11.080 --> 0:15:13.040 currency because, as you say, it will end up with 0:15:13.040 --> 0:15:15.160 a weaker Chinese currency. So what do we effectively asking 0:15:15.200 --> 0:15:18.960 the Chinese to do not to liberalize the currency. I 0:15:19.000 --> 0:15:23.480 think there's still a misplaced, misplace rational among the Trump 0:15:23.520 --> 0:15:26.000 administration that the Chinese are managing the currency to be 0:15:26.680 --> 0:15:30.000 weaker than it really needs to be. In the review, again, 0:15:30.040 --> 0:15:32.640 the current accounts are plus a shrunk over several years, 0:15:33.240 --> 0:15:35.680 and that again alludes to the fact that, you know, 0:15:35.720 --> 0:15:39.080 the currency needs to be somewhat weaker. So again, you know, 0:15:39.080 --> 0:15:41.320 we would chalk it up to somewhat of a misplaced 0:15:41.400 --> 0:15:43.880 view amongst the Trump administration in regards to what the 0:15:43.960 --> 0:15:46.800 Chinese are doing with the currency. It's quite the opposite 0:15:46.800 --> 0:15:48.200 of what we had in the middle part of the 0:15:48.280 --> 0:15:50.880 last decade, where you could make a reagionably sound argument 0:15:50.880 --> 0:15:54.240 that the Chinese we're keeping the currency artificially weak. We 0:15:54.280 --> 0:15:56.640 don't think that's the case anymore. In fact that we 0:15:56.920 --> 0:15:59.080 do think that the Trump administration needs to uptake their 0:15:59.120 --> 0:16:01.880 view on and the Chinese currency and how they're managing it. 0:16:02.400 --> 0:16:04.800 Bib and rye of C I b C. What is 0:16:04.800 --> 0:16:08.760 your highest conviction trade this year? Well, we're some where 0:16:08.800 --> 0:16:11.600 we are bullish on surplus currency such as the Japanese 0:16:11.640 --> 0:16:13.840 yen and UH and the Swiss frank to a degree. 0:16:13.840 --> 0:16:16.560 And again those aren't yield plays naturally, they're more of 0:16:16.600 --> 0:16:19.360 our an expension of our view that liquidity will continue 0:16:19.360 --> 0:16:21.320 to wane and we will be and trading more or 0:16:21.400 --> 0:16:25.000 less of a risk of the environment going forward. We 0:16:25.080 --> 0:16:27.160 do think that this equity rally was overdue, given the 0:16:27.200 --> 0:16:30.000 fact that we we overshot in Q four. But but 0:16:30.120 --> 0:16:32.680 going forward, I mean, given the fact that liquidity is slowing, 0:16:32.680 --> 0:16:35.600 and you can draw a reasonably sounded relationship between the 0:16:35.640 --> 0:16:39.720 flow of liquidity UH and both process of volatility, meaning 0:16:39.720 --> 0:16:42.320 that you know, liquids liquidity does decline. That tends to 0:16:42.440 --> 0:16:45.120 lead to a lot more process of volatility, particularly in 0:16:45.160 --> 0:16:47.560 the f X space. So we expect the Japanese and 0:16:47.720 --> 0:16:49.880 the Swiss frank to have perform in that environment versus 0:16:49.920 --> 0:16:54.400 the US dollar. We're also not entirely optimistic on commodity currencies, 0:16:54.400 --> 0:16:57.520 including the Aussie and and and the kiwi uh weed, 0:16:57.520 --> 0:17:00.440 more or less expect them time to perform. And again, 0:17:01.000 --> 0:17:03.400 you know, if we are looking at the Eurozone, we're 0:17:03.440 --> 0:17:05.560 more or less waiting until the political water has become 0:17:06.000 --> 0:17:09.760 much less uh much much less muddier. Of course, we've 0:17:09.760 --> 0:17:12.120 got the parliamentary elections in May, and of course we've 0:17:12.160 --> 0:17:14.760 got the Spanish election has just been called for on 0:17:14.840 --> 0:17:19.560 a and then you've got the entire the break situation, 0:17:19.640 --> 0:17:22.160 whether or not that represents a shock to the euro Zone. However, 0:17:22.280 --> 0:17:26.119 we remained somewhat optimistic on the Scandinavian currencies, including the 0:17:26.119 --> 0:17:28.800 Swedish chronic and then central bank there's is looking set 0:17:28.800 --> 0:17:31.280 to raise rates going forward. So again it's really a 0:17:31.280 --> 0:17:33.639 story about surplus currencies in our mind going forward, and 0:17:33.680 --> 0:17:37.000 we think that's about perhaps the safest that to play 0:17:37.040 --> 0:17:41.280 in the in the effex markets. So safety above all else. 0:17:41.320 --> 0:17:42.919 Pip and Rye, thank you so much for being with us. 0:17:42.920 --> 0:17:45.520 Pip and Rye, c IBC, head of North American Foreign 0:17:45.520 --> 0:17:58.960 Exchange Strategy. Well, talking about the trade story. Uh, let's 0:17:59.000 --> 0:18:01.360 go to Washington, d C. And talk about what's going 0:18:01.359 --> 0:18:04.199 on there. Let's bring in Isaac Boltanski covers point, Director 0:18:04.240 --> 0:18:08.359 of Policy Research. Isaac, let's start with trade, since that 0:18:08.560 --> 0:18:12.320 is what's moving markets more than staving off another government shutdown. 0:18:12.760 --> 0:18:14.840 Do you think that this time we're actually going to 0:18:14.880 --> 0:18:17.399 get some sort of agreement? Is the happy talk out 0:18:17.440 --> 0:18:21.600 of Washington, d C. And Beijing different this time? Good morning. 0:18:21.800 --> 0:18:25.040 I think this time is different in the both sides 0:18:25.359 --> 0:18:29.399 as you were just discussing, I think are incentivized to 0:18:29.560 --> 0:18:33.000 find some way to Yes. It's still unclear what exactly 0:18:33.040 --> 0:18:35.280 that's going to look like. It's still unclear what the 0:18:35.359 --> 0:18:38.800 enforcement mechanisms will be, which is perhaps the most important 0:18:38.800 --> 0:18:41.240 part of this whole story. But I think that pressures 0:18:41.320 --> 0:18:43.720 on both sides of the Pacific have led us to 0:18:43.720 --> 0:18:47.840 where we are. We have continued negotiations, which is always positive, 0:18:48.119 --> 0:18:50.840 and the President made the biggest point this week, which 0:18:51.000 --> 0:18:55.000 was at least signaling a willingness to push the next 0:18:55.040 --> 0:18:58.640 deadline further if there is progress. And so I think 0:18:58.640 --> 0:19:00.800 this happy talk is different and that it's going to 0:19:00.880 --> 0:19:03.560 at least give us another punt. I would just like 0:19:03.640 --> 0:19:07.159 to also say that happy Talk has a trademark on 0:19:07.240 --> 0:19:11.200 it from Jonathan Farroh, who has absolutely coined the term 0:19:11.240 --> 0:19:13.800 so far, just because I abused it this week doesn't 0:19:13.840 --> 0:19:16.840 mean it's mine. We're gonna give it to you. I 0:19:16.840 --> 0:19:19.720 do have to wonder Kyle Bass of Having Capital Management 0:19:19.720 --> 0:19:22.639 writing a Bloomberg opinion piece in the past few weeks 0:19:22.640 --> 0:19:26.560 talking about how President Trump should double down and ask 0:19:26.680 --> 0:19:30.280 for more from China based on the happy Talk trademark 0:19:30.800 --> 0:19:34.040 registered mark. Based on what we're hearing, do you think 0:19:34.080 --> 0:19:36.679 that President Trump will take a hard enough line on 0:19:36.880 --> 0:19:40.280 China and solidify ideal that is appropriate for what some 0:19:40.320 --> 0:19:42.919 of the concerns are well. This has been one of 0:19:42.920 --> 0:19:48.000 the interesting dynamics the battles within the Trump administration itself. Um. 0:19:48.000 --> 0:19:50.880 And whether that's blight heiser versus minution or you can 0:19:50.880 --> 0:19:53.040 go straight on down the line. I think that what 0:19:53.080 --> 0:19:55.920 we're going to get is a document that broadly outlines 0:19:56.280 --> 0:19:58.360 all of the goals that we've been talking about now 0:19:58.400 --> 0:20:01.520 for the past year almost um. But in terms of 0:20:01.640 --> 0:20:04.280 if it's enough, I don't think there will ever be enough. 0:20:04.520 --> 0:20:06.920 It will simply be a few steps in the right 0:20:07.040 --> 0:20:11.639