WEBVTT - Surveillance: Severe Recession with Roubini (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 Ferroll and Lisa Bramowitz. 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 --> 0:00:30.120 and of course on the Bloomberg terminal. Right now, Lisa 0:00:30.160 --> 0:00:32.159 Brown wants and I are thrilled to give you a 0:00:32.200 --> 0:00:35.880 different view. It's been a really intellectually interesting Monday here 0:00:36.280 --> 0:00:39.599 at Surveillance. We've had some optimism out there. We've had 0:00:39.640 --> 0:00:43.560 a lot of measured views of a measured recession. Neira 0:00:43.680 --> 0:00:48.440 Rabini flat out doesn't agree. He's chief executive Officer Rebini 0:00:48.520 --> 0:00:51.800 Macro Associates, who joins us now here and will continue 0:00:51.840 --> 0:00:54.840 on radio into our next hour as well. I have 0:00:54.960 --> 0:00:58.920 talked about Villain Bowder's rigger this weekend and looking at 0:00:58.960 --> 0:01:01.200 t P I which to cut to the chase he 0:01:01.320 --> 0:01:04.959 thinks as complete folly as well, what was it like 0:01:05.040 --> 0:01:09.080 when you walked in his office at Yale University decades 0:01:09.280 --> 0:01:12.199 and decades ago. Well, he was the one who hired 0:01:12.200 --> 0:01:14.920 me at Yale, so it has been a great intellectual friend, 0:01:15.319 --> 0:01:18.319 always a rigorous, very opening your native and so on, 0:01:18.400 --> 0:01:21.800 and mostly right YouTube and mostly right YouTube. The gentleman 0:01:21.840 --> 0:01:24.959 from Netherlands and the gentleman from Mitan Bull in Italy. 0:01:25.200 --> 0:01:28.480 You too have an old world view? What is the 0:01:28.560 --> 0:01:33.040 old world view of this recession, this slowdown that we're 0:01:33.080 --> 0:01:35.600 in where maybe it's a mega threat. As your new 0:01:35.680 --> 0:01:39.280 book is called this this this new world, It's all 0:01:39.319 --> 0:01:42.039 going to be fine? Is off the mark? Well, now 0:01:42.080 --> 0:01:45.440 the consensus view is becoming that hard landing is likely 0:01:45.480 --> 0:01:47.760 as opposed to soft landing. But now people say, well, 0:01:47.800 --> 0:01:52.720 be short, shallow, mild plane, vanilla, you know, garden variety. 0:01:53.040 --> 0:01:55.400 I beg to disagree. I think that many reasons why 0:01:55.440 --> 0:01:58.120 we're gonna have a severe recession and a severe that 0:01:58.360 --> 0:02:02.720 and financial crisis ratios are a historically high for and 0:02:02.760 --> 0:02:06.040 twent of GDP and advanced economies and rising. Lots of 0:02:06.160 --> 0:02:11.480 zombie corporation, household government financial institutions were built out during COVID. 0:02:11.520 --> 0:02:14.400 This time around, we're tightening in monetary policy. During the 0:02:14.440 --> 0:02:18.040 seventies we had stagflation, but that racis were low after 0:02:18.080 --> 0:02:20.880 the GFC where the dead crisis, but the inflation was 0:02:21.120 --> 0:02:24.359 falling deflation because it was a demand shock, and you're 0:02:24.400 --> 0:02:28.359 a credit crunch. This time we have staclationary negative aggregate 0:02:28.400 --> 0:02:32.000 supply shocks and that racis that are historically high and 0:02:32.080 --> 0:02:35.720 in previous recession like the last two, with massive monitoring fiscalism, 0:02:35.880 --> 0:02:39.160 this time around gonna go in recession by tightening monetary policy. 0:02:39.320 --> 0:02:41.320 We have no fiscal space. So the idea this is 0:02:41.360 --> 0:02:44.280 going to be short and shallow. It's a totally delusional 0:02:44.360 --> 0:02:47.800 out of their COVID disaster. Can China come to the rescue? 0:02:47.880 --> 0:02:53.040 If we see resurgen Asian growth, does that help us well? 0:02:53.080 --> 0:02:56.280 If China were to grow faster than otherwise, that would 0:02:56.320 --> 0:02:59.320 help everything. All sequel, But until November, until she is 0:02:59.360 --> 0:03:02.760 re elected, going to keep their zero tolerance COVID policy, 0:03:03.000 --> 0:03:06.720 and the overall policies are essentially against economic growth. Yes, 0:03:06.800 --> 0:03:10.799 political objectives already distributing wealth and income is at the 0:03:10.880 --> 0:03:13.480 backlash against the private sector, against the tax sector, and 0:03:13.600 --> 0:03:15.639 so on. And I don't think that the Chinese policies 0:03:15.639 --> 0:03:18.079 are going to change. That are bound to have low 0:03:18.160 --> 0:03:20.720 economic growth. They have high that ratios. They'll be lack 0:03:20.760 --> 0:03:23.440 if the next few years have four percent growth, most 0:03:23.440 --> 0:03:25.680 likely lower than that. You're not going to be a 0:03:25.680 --> 0:03:27.800 source of growth for the global economy. A lot of 0:03:27.840 --> 0:03:31.239 people look at the lack of leverage, at least financial 0:03:31.280 --> 0:03:33.640 market leverage into what we saw leading up to the 0:03:33.680 --> 0:03:36.040 two thousand and eight crash, and they say that alone 0:03:36.400 --> 0:03:39.280 will allow this recovery to be quicker and allow the 0:03:39.960 --> 0:03:43.280 downturn to be more shallow. Where do you see nodes 0:03:43.400 --> 0:03:47.240 of leverage that could be unwound or be unwieldly, they 0:03:47.240 --> 0:03:50.480 could actually cause what you're looking for. Well, first of all, 0:03:50.520 --> 0:03:53.520 there is leverage in the corporate sector that ratios are 0:03:53.600 --> 0:03:56.560 very high for some subset of the corporate sector. It's 0:03:56.560 --> 0:03:59.440 through the banks now are not as leverage because after 0:03:59.520 --> 0:04:02.240 the global financial crisis they deleverage, but there's been a 0:04:02.360 --> 0:04:06.080 rise significantly of the debt and the leverage of the 0:04:06.720 --> 0:04:10.960 non bank shadow financial system leverage, a loan, cellos and 0:04:11.000 --> 0:04:13.280 you name it, and those spreads already widening and there 0:04:13.280 --> 0:04:15.840 could be a shutdown of them of those markets if 0:04:15.840 --> 0:04:18.680 you have a severe recession. So I would say corporate first, 0:04:19.120 --> 0:04:22.960 then shadow banks. Many sovereigns are in trouble. And there's 0:04:23.040 --> 0:04:26.719 half of the household sector that there's low income, is fragile, 0:04:26.760 --> 0:04:28.919 has a lot of that not much wealth and in 0:04:28.960 --> 0:04:32.919 recessional risk of unemployment. So even the household sector is divided. 0:04:33.240 --> 0:04:36.880 In the past, the financial sector has led the economic sector. 0:04:36.920 --> 0:04:39.240 You've seen the financial meltdown and then some people people 0:04:39.279 --> 0:04:41.200 would say cast right, and I'm thinking about the two 0:04:41.200 --> 0:04:43.760 thousand and seven two eight bust and then the two 0:04:43.800 --> 0:04:46.440 thousand and nine recession. Is this time different? Are we 0:04:46.440 --> 0:04:49.599 going to see the economic downturn before the markets wake 0:04:49.720 --> 0:04:52.240 up to the reality that you're talking about and start 0:04:52.320 --> 0:04:56.479 to respond en suit. Yes, the economic downturn this time 0:04:56.520 --> 0:04:59.520 around is going to lead to severe that distress. I 0:04:59.520 --> 0:05:01.560 would say, you're going to see parts of the corporate 0:05:01.600 --> 0:05:04.840 sector going bass, will see the parts of the shadow 0:05:04.880 --> 0:05:07.560 banking system going Bass, will see the household sector that 0:05:07.760 --> 0:05:10.880 is partly fragile going in trouble. You'll see some sovereign 0:05:11.040 --> 0:05:14.120 going trouble. Yeah, they trigger for the financial distress is 0:05:14.120 --> 0:05:17.279 going to be a recession. And recession is not milch shallow, 0:05:17.440 --> 0:05:19.320 but it's going to be severe and protracted, and there 0:05:19.320 --> 0:05:22.080 will be then afficious cycle within the real side and 0:05:22.120 --> 0:05:24.560 the financial side of the economy. In this tag inflation, 0:05:24.760 --> 0:05:26.640 do you believe with so many guests on this show, 0:05:26.640 --> 0:05:28.320 I've said today that we have seen the peak in 0:05:28.400 --> 0:05:31.760 tenure yields for this cycle. Um No, I expect that 0:05:31.800 --> 0:05:35.800 inflation is gonna remain persistently high. There are actually medium 0:05:35.880 --> 0:05:39.520 term forces gonna lead to stag flation over time. Protection 0:05:39.600 --> 0:05:43.160 is when the globalization reshoring a manufacturing from lock host 0:05:43.200 --> 0:05:47.760 to high cost, aging of populations, restriction to migration, the 0:05:47.880 --> 0:05:52.320 coupling between US and China, global climate change, cyber warfare, 0:05:52.600 --> 0:05:57.479 new pandemics, backlashing, its inequality, weaponization of the dollar. People 0:05:57.480 --> 0:05:59.640 are not thinking about the medium term and the medium 0:05:59.720 --> 0:06:02.000 term I see in my book, but at least a 0:06:02.000 --> 0:06:05.360 dozen different types of stagflation and medium term shocks. Gotta 0:06:05.440 --> 0:06:08.120 keep growth low and cost of production. We're going to 0:06:08.160 --> 0:06:10.520 continue this on radio, but I gotta ask one question 0:06:10.600 --> 0:06:13.960 for a television audience and for those worldwide. Did really 0:06:14.000 --> 0:06:17.279 really listened to New Rubini? Have you ever been this 0:06:17.400 --> 0:06:21.320 gloomy before or is it a different gloomy? Well, it's 0:06:21.320 --> 0:06:24.240 a different grouping. I was gloomy right before the global 0:06:24.240 --> 0:06:28.280 financial crisis. Sertain Davos come on, We Satin Davos over 0:06:28.320 --> 0:06:31.800 a beverage, and you absolutely nailed that. That's why people 0:06:32.040 --> 0:06:34.760 are listening now. Well, I think in some sense right 0:06:34.800 --> 0:06:37.320 now is worse because in the seventhies, as I pointed out, 0:06:37.360 --> 0:06:40.040 we had stagflation, but that ratio were law, so there 0:06:40.120 --> 0:06:42.360 was not a dead crisis. There was one in Latin America, 0:06:42.880 --> 0:06:45.159 and after the GFC we had the dead crisis, but 0:06:45.200 --> 0:06:47.520 we had the low flation and deflation. I think that 0:06:47.600 --> 0:06:50.719 this time around you've got a confluence of stagflation and 0:06:51.000 --> 0:06:54.400 of a severe dead crisis. You have a stagflationary that crisis, 0:06:54.440 --> 0:06:57.160 so it could be worse than the seventhies and POSTFC. 0:06:57.400 --> 0:07:00.000 Really continuing radio Dr Roubini, you dont want to make 0:07:00.040 --> 0:07:01.839 clear he will not be a stranger. And of course 0:07:01.880 --> 0:07:04.320 an important book coming out. It's a kind of book 0:07:04.320 --> 0:07:06.680 where if you're an optimism and you've optimistic and you 0:07:06.800 --> 0:07:09.840 flat out and disagree with Nora Robini, you still got 0:07:09.840 --> 0:07:12.080 to read the book to frame out your thoughts to 0:07:12.120 --> 0:07:14.760 push against mega threats. Will see that. I believe in 0:07:14.760 --> 0:07:23.560 October they we have a new estimate, a new stock 0:07:23.600 --> 0:07:26.920 market killed some SMP five hundred year end price target 0:07:27.000 --> 0:07:30.360 forty two hundred down from forty seven. It's Laurie Canvasino 0:07:30.360 --> 0:07:32.680 of MPC and she joined us right now Laurie, great 0:07:32.720 --> 0:07:34.960 to catch up with you. Why that down? Great, Let's 0:07:34.960 --> 0:07:38.360 stop write that. So look, I think that targets are 0:07:38.400 --> 0:07:41.200 always challenging in years like this, and frankly, the market 0:07:41.280 --> 0:07:43.800 broke lower than we thought it would earlier in the year. 0:07:44.280 --> 0:07:46.280 What we wanted to do with this target was signal 0:07:46.320 --> 0:07:48.320 that we do see upside between now and your end. 0:07:48.360 --> 0:07:50.960 We think there's a decent chance stops bottomed in mid June, 0:07:50.960 --> 0:07:52.800 and if they didn't, we think we could probably get 0:07:52.840 --> 0:07:55.840 that before the end of the third quarter. But really 0:07:55.880 --> 0:07:57.920 we wanted to send the signal that we thought there 0:07:58.000 --> 0:08:00.800 was some modest upside between now and year end, that 0:08:00.880 --> 0:08:03.000 we do think you need to be leaning into recession 0:08:03.040 --> 0:08:05.880 rebound plays as opposed to really kind of leveraging up 0:08:05.880 --> 0:08:08.120 on the defense the defensives here, which we think are 0:08:08.160 --> 0:08:10.800 overbought and over sold. Um. I will tell you John 0:08:10.800 --> 0:08:12.680 that some of my sentiment models tell us that my 0:08:12.680 --> 0:08:16.040 original forty targets probably still the right one. But when 0:08:16.040 --> 0:08:18.720 we look at our cross asset analysis stocks versus bonds, 0:08:18.760 --> 0:08:21.760 that really does temper our enthusiasms. Well, this is important, 0:08:22.320 --> 0:08:26.520 Sarah over in Europe this weekend aggressively rights take risk 0:08:26.720 --> 0:08:30.360 in credit, Sarah says, grab a six to seven percent coupon, 0:08:30.760 --> 0:08:33.400 get your foot in the water, let's go. You're saying 0:08:33.440 --> 0:08:36.800 the same thing on recession rebound. What does the recession 0:08:36.880 --> 0:08:42.319 rebound sector or part of a sector look like. So 0:08:42.360 --> 0:08:45.040 some of the areas that typically do well are things 0:08:45.080 --> 0:08:48.080 like financials and technology stocks. These are areas that typically 0:08:48.200 --> 0:08:51.240 underperform in the draw downs and outperform on the rebounds. 0:08:51.520 --> 0:08:53.280 So those are two areas we like. We think the 0:08:53.320 --> 0:08:56.000 financials are dirt cheap at this point in time. Our 0:08:56.040 --> 0:08:58.959 banks analysts are very, very constructive and think that even 0:08:59.000 --> 0:09:02.120 if we do have a mild technical recession, that banks 0:09:02.120 --> 0:09:04.679 will execute very well through it. Then how will you 0:09:04.840 --> 0:09:07.679 use the GDP statistics and review this week? I get 0:09:07.720 --> 0:09:10.040 it's a first look and all that, but if the 0:09:10.120 --> 0:09:14.679 banks are doing well, that means we underestimate the resiliency 0:09:14.720 --> 0:09:18.240 of the consumer. Do you buy that line? I think 0:09:18.280 --> 0:09:20.440 that the banks are telling you if you look through 0:09:20.480 --> 0:09:22.240 some of the reports that we've seen so far, is 0:09:22.240 --> 0:09:24.679 that the consumer is at a very good starting point 0:09:24.720 --> 0:09:27.880 to whether whatever this economic storm ends up being called. 0:09:28.280 --> 0:09:30.320 And I think that's one of the lessons that equity 0:09:30.360 --> 0:09:32.480 investors have learned over the last four or five years, 0:09:32.520 --> 0:09:34.680 Thomas that every time we enter one of these dicey 0:09:34.720 --> 0:09:36.960 periods in the equity market, whether it was the trade war, 0:09:37.400 --> 0:09:39.760 whether it was the pandemic itself, whether it was simply 0:09:39.760 --> 0:09:42.880 sluggish growth out there, that the consumer is pretty resilient, 0:09:42.920 --> 0:09:45.240 and that consumer part starting point does seem to be 0:09:45.400 --> 0:09:47.560 very very strong right now. I think that's getting lost 0:09:47.559 --> 0:09:50.120 in some of these recession discussions. Hello, the big theme then, 0:09:50.160 --> 0:09:52.959 Am I playing the inflation story still or pivoting to 0:09:53.000 --> 0:09:54.640 slow of growth? Which one? Is it a bit of 0:09:54.720 --> 0:09:57.400 both or one or the other. I would a little 0:09:57.400 --> 0:09:58.880 bit of both. You know. We get asked a lot 0:09:58.880 --> 0:10:01.960 about stagflation, and what we've told people is that we 0:10:02.040 --> 0:10:04.640 do expect inflation rates to moderate, but they could stay 0:10:04.720 --> 0:10:07.000 high relative to history. For that, I think you want 0:10:07.040 --> 0:10:08.800 to keep some energy in your back pocket. I'm a 0:10:08.800 --> 0:10:10.640 little bit, you know, concerned that we may not be 0:10:10.679 --> 0:10:13.280 out of the woods on energy in the very short term, 0:10:13.280 --> 0:10:15.720 but longer term, if we are in that staglationary environment, 0:10:15.720 --> 0:10:17.360 I think you want to play there. I think that 0:10:17.440 --> 0:10:19.520 technology is a great way to sort of play that 0:10:19.559 --> 0:10:22.040 slowing growth theme, and we do see the market starting 0:10:22.080 --> 0:10:25.400 to shift away from these overvalued, over crowded defensives back 0:10:25.440 --> 0:10:28.840 towards more reasonably valued secular growth areas of the market, 0:10:28.880 --> 0:10:31.680 like big cap technology. And I think that one of 0:10:31.679 --> 0:10:34.200 the things we've learned the last few years is that 0:10:34.280 --> 0:10:37.640 these big cap software companies in particular, are the tools 0:10:38.000 --> 0:10:40.600 that companies used to fight just about whatever battle gets 0:10:40.640 --> 0:10:42.240 thrown their way. So if you think that we're sort 0:10:42.240 --> 0:10:44.440 of hitting the bottom in here, that we're gonna get 0:10:44.440 --> 0:10:46.600 perhaps a better path from the FED, that the consumer 0:10:46.679 --> 0:10:48.440 is going to stay resilient, but things aren't gonna be 0:10:48.480 --> 0:10:51.120 all roses and sunshine. I think technology is an area 0:10:51.120 --> 0:10:52.960 you really do want to look at very hard. LORI, 0:10:53.240 --> 0:10:55.760 how do small caps fit into this? Considering that you're 0:10:55.800 --> 0:10:58.839 now going overweight small cats heading into what most people 0:10:58.840 --> 0:11:02.880 think is the US for session. So look, I think 0:11:02.920 --> 0:11:05.439 you have to really evaluate what do you think has 0:11:05.440 --> 0:11:07.880 been priced into different points in the market, different parts 0:11:07.880 --> 0:11:10.080 of the market. At this point in time covered small 0:11:10.120 --> 0:11:11.720 caps for a long time leads, so we know that 0:11:11.760 --> 0:11:14.480 they always have a very hard pivot midway through recession. 0:11:14.760 --> 0:11:17.480 They tend to really underperform hard heading in and on 0:11:17.520 --> 0:11:20.079 the way down initially, but they tend to really experience 0:11:20.080 --> 0:11:22.640 that pivot and outperforming the late parts of recession and 0:11:22.720 --> 0:11:25.280 on the way out. What we see, in particular when 0:11:25.280 --> 0:11:28.520 we look at small cap performance against economic indicators like 0:11:28.600 --> 0:11:31.680 jobless claims and I S N manufacturing is that small 0:11:31.679 --> 0:11:34.199 caps are already trading as though we've had a spiking 0:11:34.280 --> 0:11:37.080 jobless claims and as though I S M manufacturing has 0:11:37.080 --> 0:11:39.920 plunged and hit typical trough like levels. So I don't 0:11:39.920 --> 0:11:42.000 really need to have that are we having a recession? 0:11:42.280 --> 0:11:44.840 When is it happening? Debate within small cap They are 0:11:44.880 --> 0:11:47.000 already pricing then, and it's more clear to me in 0:11:47.080 --> 0:11:49.160 that part of the market than just SUP any other part. 0:11:49.360 --> 0:11:51.360 Do you think that this means that small caps are 0:11:51.400 --> 0:11:53.240 ahead of the rest of the market, or is this 0:11:53.600 --> 0:11:56.040 leading indicator that we're already in recession? As good as 0:11:56.200 --> 0:11:58.439 is going to get confirmed on Thursday with that second 0:11:58.520 --> 0:12:02.080 quarter GDP print. I think it's gonna be interesting if 0:12:02.080 --> 0:12:04.320 you do get a negative GDP print for the quarter, 0:12:04.440 --> 0:12:06.440 whether or not people view that as a recession. I 0:12:06.440 --> 0:12:08.719 think that debate will rage on. But I do think 0:12:08.720 --> 0:12:12.240 that small caps are very economically sensitive because they do 0:12:12.320 --> 0:12:15.280 have primarily most of their revenues coming out of the US. 0:12:15.559 --> 0:12:17.880 So if there was a technical recession in place, small 0:12:17.880 --> 0:12:20.360 caps were going to have snipped that out. Um, and 0:12:20.400 --> 0:12:23.360 it will really make sense kind of the carnage we've 0:12:23.400 --> 0:12:25.640 seen in that space. Frankly since March of last year. 0:12:26.120 --> 0:12:27.800 I could make that, you know, kind of move that 0:12:27.800 --> 0:12:29.800 we've seen make a lot of sense. But frankly, lest 0:12:29.840 --> 0:12:31.560 it already makes sense based on what you're seeing in 0:12:31.559 --> 0:12:34.320 im manufacturing right now. Laurie, great to catch up with you, 0:12:34.360 --> 0:12:36.599 and thank you for issuing the down grade before the 0:12:36.640 --> 0:12:40.680 appearance and unlike some guests who do it after the interview. 0:12:41.160 --> 0:12:47.800 Cavasse and if I let us get a handle on 0:12:47.840 --> 0:12:50.240 where we're going to the FED meeting, and that involves 0:12:50.679 --> 0:12:56.960 actually doing economics at Columbia University. He took, uh, macroeconomics 0:12:57.120 --> 0:12:59.520 kind of sort of three oh one, and Bruce Kasiman 0:12:59.600 --> 0:13:02.760 joins us know from a small bank, JP Morgan this morning, 0:13:03.000 --> 0:13:05.440 I love it. Bruce fer Alwis says, it's a kind 0:13:05.480 --> 0:13:08.599 of sort of recession. What kind of sort of recession 0:13:08.760 --> 0:13:12.679 is this? Well, as you know, there's a good chance 0:13:12.679 --> 0:13:15.600 second quarter GDP will print a negative for a second 0:13:15.640 --> 0:13:18.760 quarter in a row in Q two. UM, as you 0:13:18.880 --> 0:13:21.720 kind of break down the data. With job growth so strong, 0:13:21.800 --> 0:13:24.600 with what we continue to expect to be a positive 0:13:24.600 --> 0:13:28.559 consumer spending number UH in this week's report, it doesn't 0:13:28.880 --> 0:13:31.520 feel like a normal break into what we would call 0:13:31.559 --> 0:13:34.240 a recession, and I think we should We should recognize 0:13:34.240 --> 0:13:36.440 that about the first half, but at the same time, 0:13:36.920 --> 0:13:40.719 we should recognize the momentum loss that we had at midyear. UM, 0:13:40.840 --> 0:13:43.520 we're gonna probably print a second negative consumption number in 0:13:43.520 --> 0:13:45.880 a row this week for June. As you've noted the 0:13:45.920 --> 0:13:49.000 survey data for July, the flash p M I s 0:13:49.040 --> 0:13:51.720 were ugly. We're not just seeing that in the US, 0:13:51.800 --> 0:13:55.160 We're seeing it elsewhere and claims arising. So what feels 0:13:55.200 --> 0:13:58.040 like a technical event as we moved through the first 0:13:58.080 --> 0:14:00.679 half of the year could easily turn into a real 0:14:00.760 --> 0:14:03.240 recession event as we go through the next couple of months. 0:14:03.320 --> 0:14:07.520 In your spreadsheet, you've got a one off on exports 0:14:07.760 --> 0:14:13.640 this quarter. Is it export growth to the rescue? UM, 0:14:13.679 --> 0:14:17.000 There is some support there, particularly as we see China 0:14:17.120 --> 0:14:20.280 and Asia lifting after what was a big second quarter 0:14:20.360 --> 0:14:22.960 set of lockdowns, but with the dollar rising and with 0:14:23.080 --> 0:14:26.560 Europe very much in the crosshairs of a recession right now, 0:14:26.640 --> 0:14:30.080 I would not be counting on on exports saving US here. 0:14:30.120 --> 0:14:32.280 I think the saving grace has to be the business 0:14:32.280 --> 0:14:35.160 sector bending, not breaking in the face of the drags 0:14:35.160 --> 0:14:38.040 that we're seeing. Also inflation coming off in the summer, 0:14:38.240 --> 0:14:41.240 with gasoline prices starting to move lower. Bruce, I'm looking 0:14:41.280 --> 0:14:43.120 at certain data pauns. You're looking at the same ones. 0:14:43.160 --> 0:14:45.320 Claims a higher the last few weeks. The p m 0:14:45.320 --> 0:14:47.760 I last week was really bad. We're starting to see 0:14:47.760 --> 0:14:50.120 this show up in housing, Bruce. I'm trying to work 0:14:50.120 --> 0:14:53.080 out which part of this is desirable, the intended consequence 0:14:53.080 --> 0:14:54.920 of what the central bank is trying to do, and 0:14:55.000 --> 0:15:01.240 which part of it is undesirable. Well, I don't the 0:15:01.280 --> 0:15:05.360 movement towards softer growth is undesirable on the part of 0:15:05.400 --> 0:15:07.480 the Fed. That's what they want. They want to slow 0:15:07.600 --> 0:15:10.960 the economy, they want to take out the demand component 0:15:11.040 --> 0:15:13.720 of inflation, and then they're hoping that that, with the 0:15:13.760 --> 0:15:15.920 moderation of some of the drags, gets you back to 0:15:16.040 --> 0:15:19.240 something more acceptable. However, and I think this is really 0:15:19.240 --> 0:15:22.520 what's behind your question. The momentum loss. There the idea 0:15:22.600 --> 0:15:25.640 that layoffs are starting to rise, that's starting to push 0:15:25.680 --> 0:15:30.000 together a dynamic which traditionally has been recession and recessions. 0:15:30.000 --> 0:15:33.160 We should understand in US context is a breaking, it's 0:15:33.200 --> 0:15:35.960 a move up and unemployment rates of two percent or more. 0:15:36.480 --> 0:15:38.880 That's the risk here is that we're letting something take 0:15:38.920 --> 0:15:41.480 hold here that's going to give us a much sharper 0:15:41.520 --> 0:15:44.640 move than anything like what you might characterize the first 0:15:44.640 --> 0:15:48.040 half of the year is looking like. Embedded in John's question, Bruce, 0:15:48.320 --> 0:15:50.600 is the fight that is articulated in the article on 0:15:50.640 --> 0:15:54.600 Bloomberg the houses of Morgan divided Morgan Stanley disagreeing with 0:15:54.680 --> 0:15:57.080 your own JP Morgan. And when the FED is going 0:15:57.120 --> 0:16:00.600 to reverse course, pause and then start cutting rate after 0:16:00.720 --> 0:16:03.600 raising rates? At what point is the softening that we're 0:16:03.600 --> 0:16:07.080 seeing in data now reflection of a FED that will 0:16:07.120 --> 0:16:11.920 be able to backtrack as soon as next year. Well, 0:16:11.960 --> 0:16:15.440 I actually think that's far sooner than next year. Uh, 0:16:15.800 --> 0:16:18.880 we're looking for seventy five basis points this week. We're 0:16:18.880 --> 0:16:21.240 looking for more open ended guidance. I don't think they're 0:16:21.240 --> 0:16:23.120 going to commit to a size of a move at 0:16:23.160 --> 0:16:26.800 the September meeting. September is a tough call. I think 0:16:26.840 --> 0:16:30.240 we probably still do get a fifty at the September meeting. 0:16:30.520 --> 0:16:33.640 But beyond that, if we're seeing the economy really soften, 0:16:34.000 --> 0:16:36.960 job growth slow towards zero, I don't think the FED 0:16:37.040 --> 0:16:38.760 is going to continue to be tightening here at an 0:16:38.760 --> 0:16:41.840 aggressive pace. We've got them pausing at about three fifty. 0:16:41.920 --> 0:16:44.120 We don't have them easing at this point because we 0:16:44.120 --> 0:16:48.040 don't have a real recession call in our forecast um. 0:16:48.080 --> 0:16:50.120 But I think it's about the economy. If the economy 0:16:50.200 --> 0:16:53.200 starts to slow, given that the FED gets rates into 0:16:53.200 --> 0:16:56.920 a modestly neutral stance, the the equation changes at the FED. 0:16:56.920 --> 0:17:00.160 It's not there today with a level of ray. It's 0:17:00.160 --> 0:17:03.920 an economy that's still generating over four jobs a month, 0:17:04.240 --> 0:17:05.960 but it will be there in three or four months 0:17:05.960 --> 0:17:08.600 if we're right, Bruce. What's enough to cause the FED 0:17:08.840 --> 0:17:11.200 to take a step back? I mean, there's an unemployment 0:17:11.280 --> 0:17:13.520 rate at four and a half percent, is it inflation 0:17:13.600 --> 0:17:16.760 coming down to five from nine point one percent? How 0:17:16.800 --> 0:17:19.080 far do we have to see progress? And I put 0:17:19.080 --> 0:17:21.960 this in quotes when it comes to the deterioration in 0:17:22.040 --> 0:17:25.160 momentum does the FED have to see before perhaps taking 0:17:25.160 --> 0:17:29.679 a break? I think the short answer to that is 0:17:29.720 --> 0:17:33.480 the FED needs to have a policy stance of trajectory 0:17:33.520 --> 0:17:37.360 on inflation and dynamics on growth. That gives them comfort 0:17:37.400 --> 0:17:39.520 that in a year two year and a half time 0:17:39.840 --> 0:17:44.400 inflation is going to be below three perils and the 0:17:44.480 --> 0:17:46.879 job growth we're seeing now is not there. Three or 0:17:46.920 --> 0:17:48.760 four months from now, I payil growth is down to 0:17:48.840 --> 0:17:51.560 a hundred thousand, and the run rate on inflation with 0:17:51.680 --> 0:17:55.080 energy prices off is moving more into the point three 0:17:55.200 --> 0:17:59.000 percent per monthly base. Um, we think you could you 0:17:59.000 --> 0:18:02.040 could easily be in that in that zone. First year 0:18:02.160 --> 0:18:06.639 update please on emerging markets, the currencies give way, I 0:18:06.640 --> 0:18:10.880 am told conversation after conversation, this time is different. All 0:18:10.880 --> 0:18:16.120 my radars up. Well. I think the currencies give way 0:18:16.480 --> 0:18:19.240 creates more risk here, especially since we're not going to 0:18:19.280 --> 0:18:22.720 see the relief on central bank policy. I think where 0:18:22.760 --> 0:18:25.240 this time is different as in the larger e M economies. 0:18:25.280 --> 0:18:27.680 And there is a certainly a significant problem in low 0:18:27.720 --> 0:18:32.160 income economies facing problems with food security and debt dynamics. 0:18:32.160 --> 0:18:34.760 But in the larger e M economies, you just don't 0:18:34.800 --> 0:18:37.920 have the debt overhangs, you don't have the current account imbalances, 0:18:38.160 --> 0:18:40.720 and you have policy makers that have been willing to 0:18:40.840 --> 0:18:44.800 continue to use fiscal policy so growth is slowing. E 0:18:44.960 --> 0:18:47.159 M is certainly a threat if the US and Europe 0:18:47.160 --> 0:18:48.960 go into a sssion, and we shouldn't lose site of 0:18:49.040 --> 0:18:52.000 the European recession story. But we don't think there's a 0:18:52.040 --> 0:18:56.320 systemic magnifying effect through credit, which is often the case 0:18:56.920 --> 0:18:58.960 when you see some of these dynamics take place in 0:18:59.000 --> 0:19:01.400 the M and pretty swam risk the leverage right now? 0:19:01.400 --> 0:19:03.639 Can we finish that because whenever we talk about this 0:19:03.680 --> 0:19:06.840 recession story, you've acknowledged the risk in America, you've acknowledged 0:19:06.840 --> 0:19:08.960 the risk in Europe in AM Yet we keep hearing 0:19:09.000 --> 0:19:11.719 the same thing that consumer advantage seats a strong, corporate 0:19:11.720 --> 0:19:13.960 Bannagh sheets are strong. Why do you think the leverage 0:19:14.000 --> 0:19:18.280 is going to show up? Well, that's the interesting question 0:19:18.359 --> 0:19:20.840 is are we going to see the dynamic on growth 0:19:20.840 --> 0:19:24.240 which still has a healthy private sector uh, you know 0:19:24.400 --> 0:19:27.240 sort of cushion here? Is that going to get magnified 0:19:27.280 --> 0:19:30.840 by credit? It certainly isn't happening yet, but there's certainly 0:19:30.880 --> 0:19:34.040 signs of stress building. And you know, I think there's 0:19:34.080 --> 0:19:37.560 always the underlying point here. When you're raising interest rates 0:19:37.560 --> 0:19:41.159 and slowing growth, you can be surprised that where something 0:19:41.200 --> 0:19:44.040 shows up that doesn't um you know, seem to be 0:19:44.119 --> 0:19:47.160 a big story. I would worry about European banks here 0:19:47.200 --> 0:19:49.600 in an environment in which we're seeing I think more 0:19:49.680 --> 0:19:52.159 sharp slow down and growth than we're just getting the 0:19:52.200 --> 0:19:54.840 ECB going. I would worry that some of the smaller 0:19:54.840 --> 0:19:59.040 em economies show more tendency to spill over in ways 0:19:59.040 --> 0:20:01.760 we're not expecting. From a geopolitical point of view and 0:20:01.840 --> 0:20:04.880 from a credit market point of view, there are things there. 0:20:04.920 --> 0:20:08.080 But I'll tell you for sure, I always am surprised 0:20:08.359 --> 0:20:10.360 where these things show up. But I think we shouldn't 0:20:10.359 --> 0:20:12.720 lose sight of the context that this is an environment 0:20:12.760 --> 0:20:16.040 where that's a likely outcome also gonna catch. I'm gonna 0:20:16.040 --> 0:20:18.919 get your views on a range of things. Bruce Castmanett 0:20:19.040 --> 0:20:28.399 of j K. Mulkin. Stephen Englander is esteemed in foreign 0:20:28.400 --> 0:20:31.320 exchange analysis. He has flat out the best cross rate 0:20:31.400 --> 0:20:35.720 strategist in the world. He joins US now as standard charter. Steve, 0:20:36.000 --> 0:20:39.879