Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferroll and Lisa Bramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. Right now, Lisa
Speaker 1: Brown wants and I are thrilled to give you a
Speaker 1: different view. It's been a really intellectually interesting Monday here
Speaker 1: at Surveillance. We've had some optimism out there. We've had
Speaker 1: a lot of measured views of a measured recession. Neira
Speaker 1: Rabini flat out doesn't agree. He's chief executive Officer Rebini
Speaker 1: Macro Associates, who joins us now here and will continue
Speaker 1: on radio into our next hour as well. I have
Speaker 1: talked about Villain Bowder's rigger this weekend and looking at
Speaker 1: t P I which to cut to the chase he
Speaker 1: thinks as complete folly as well, what was it like
Speaker 1: when you walked in his office at Yale University decades
Speaker 1: and decades ago. Well, he was the one who hired
Speaker 1: me at Yale, so it has been a great intellectual friend,
Speaker 1: always a rigorous, very opening your native and so on,
Speaker 1: and mostly right YouTube and mostly right YouTube. The gentleman
Speaker 1: from Netherlands and the gentleman from Mitan Bull in Italy.
Speaker 1: You too have an old world view? What is the
Speaker 1: old world view of this recession, this slowdown that we're
Speaker 1: in where maybe it's a mega threat. As your new
Speaker 1: book is called this this this new world, It's all
Speaker 1: going to be fine? Is off the mark? Well, now
Speaker 1: the consensus view is becoming that hard landing is likely
Speaker 1: as opposed to soft landing. But now people say, well,
Speaker 1: be short, shallow, mild plane, vanilla, you know, garden variety.
Speaker 1: I beg to disagree. I think that many reasons why
Speaker 1: we're gonna have a severe recession and a severe that
Speaker 1: and financial crisis ratios are a historically high for and
Speaker 1: twent of GDP and advanced economies and rising. Lots of
Speaker 1: zombie corporation, household government financial institutions were built out during COVID.
Speaker 1: This time around, we're tightening in monetary policy. During the
Speaker 1: seventies we had stagflation, but that racis were low after
Speaker 1: the GFC where the dead crisis, but the inflation was
Speaker 1: falling deflation because it was a demand shock, and you're
Speaker 1: a credit crunch. This time we have staclationary negative aggregate
Speaker 1: supply shocks and that racis that are historically high and
Speaker 1: in previous recession like the last two, with massive monitoring fiscalism,
Speaker 1: this time around gonna go in recession by tightening monetary policy.
Speaker 1: We have no fiscal space. So the idea this is
Speaker 1: going to be short and shallow. It's a totally delusional
Speaker 1: out of their COVID disaster. Can China come to the rescue?
Speaker 1: If we see resurgen Asian growth, does that help us well?
Speaker 1: If China were to grow faster than otherwise, that would
Speaker 1: help everything. All sequel, But until November, until she is
Speaker 1: re elected, going to keep their zero tolerance COVID policy,
Speaker 1: and the overall policies are essentially against economic growth. Yes,
Speaker 1: political objectives already distributing wealth and income is at the
Speaker 1: backlash against the private sector, against the tax sector, and
Speaker 1: so on. And I don't think that the Chinese policies
Speaker 1: are going to change. That are bound to have low
Speaker 1: economic growth. They have high that ratios. They'll be lack
Speaker 1: if the next few years have four percent growth, most
Speaker 1: likely lower than that. You're not going to be a
Speaker 1: source of growth for the global economy. A lot of
Speaker 1: people look at the lack of leverage, at least financial
Speaker 1: market leverage into what we saw leading up to the
Speaker 1: two thousand and eight crash, and they say that alone
Speaker 1: will allow this recovery to be quicker and allow the
Speaker 1: downturn to be more shallow. Where do you see nodes
Speaker 1: of leverage that could be unwound or be unwieldly, they
Speaker 1: could actually cause what you're looking for. Well, first of all,
Speaker 1: there is leverage in the corporate sector that ratios are
Speaker 1: very high for some subset of the corporate sector. It's
Speaker 1: through the banks now are not as leverage because after
Speaker 1: the global financial crisis they deleverage, but there's been a
Speaker 1: rise significantly of the debt and the leverage of the
Speaker 1: non bank shadow financial system leverage, a loan, cellos and
Speaker 1: you name it, and those spreads already widening and there
Speaker 1: could be a shutdown of them of those markets if
Speaker 1: you have a severe recession. So I would say corporate first,
Speaker 1: then shadow banks. Many sovereigns are in trouble. And there's
Speaker 1: half of the household sector that there's low income, is fragile,
Speaker 1: has a lot of that not much wealth and in
Speaker 1: recessional risk of unemployment. So even the household sector is divided.
Speaker 1: In the past, the financial sector has led the economic sector.
Speaker 1: You've seen the financial meltdown and then some people people
Speaker 1: would say cast right, and I'm thinking about the two
Speaker 1: thousand and seven two eight bust and then the two
Speaker 1: thousand and nine recession. Is this time different? Are we
Speaker 1: going to see the economic downturn before the markets wake
Speaker 1: up to the reality that you're talking about and start
Speaker 1: to respond en suit. Yes, the economic downturn this time
Speaker 1: around is going to lead to severe that distress. I
Speaker 1: would say, you're going to see parts of the corporate
Speaker 1: sector going bass, will see the parts of the shadow
Speaker 1: banking system going Bass, will see the household sector that
Speaker 1: is partly fragile going in trouble. You'll see some sovereign
Speaker 1: going trouble. Yeah, they trigger for the financial distress is
Speaker 1: going to be a recession. And recession is not milch shallow,
Speaker 1: but it's going to be severe and protracted, and there
Speaker 1: will be then afficious cycle within the real side and
Speaker 1: the financial side of the economy. In this tag inflation,
Speaker 1: do you believe with so many guests on this show,
Speaker 1: I've said today that we have seen the peak in
Speaker 1: tenure yields for this cycle. Um No, I expect that
Speaker 1: inflation is gonna remain persistently high. There are actually medium
Speaker 1: term forces gonna lead to stag flation over time. Protection
Speaker 1: is when the globalization reshoring a manufacturing from lock host
Speaker 1: to high cost, aging of populations, restriction to migration, the
Speaker 1: coupling between US and China, global climate change, cyber warfare,
Speaker 1: new pandemics, backlashing, its inequality, weaponization of the dollar. People
Speaker 1: are not thinking about the medium term and the medium
Speaker 1: term I see in my book, but at least a
Speaker 1: dozen different types of stagflation and medium term shocks. Gotta
Speaker 1: keep growth low and cost of production. We're going to
Speaker 1: continue this on radio, but I gotta ask one question
Speaker 1: for a television audience and for those worldwide. Did really
Speaker 1: really listened to New Rubini? Have you ever been this
Speaker 1: gloomy before or is it a different gloomy? Well, it's
Speaker 1: a different grouping. I was gloomy right before the global
Speaker 1: financial crisis. Sertain Davos come on, We Satin Davos over
Speaker 1: a beverage, and you absolutely nailed that. That's why people
Speaker 1: are listening now. Well, I think in some sense right
Speaker 1: now is worse because in the seventhies, as I pointed out,
Speaker 1: we had stagflation, but that ratio were law, so there
Speaker 1: was not a dead crisis. There was one in Latin America,
Speaker 1: and after the GFC we had the dead crisis, but
Speaker 1: we had the low flation and deflation. I think that
Speaker 1: this time around you've got a confluence of stagflation and
Speaker 1: of a severe dead crisis. You have a stagflationary that crisis,
Speaker 1: so it could be worse than the seventhies and POSTFC.
Speaker 1: Really continuing radio Dr Roubini, you dont want to make
Speaker 1: clear he will not be a stranger. And of course
Speaker 1: an important book coming out. It's a kind of book
Speaker 1: where if you're an optimism and you've optimistic and you
Speaker 1: flat out and disagree with Nora Robini, you still got
Speaker 1: to read the book to frame out your thoughts to
Speaker 1: push against mega threats. Will see that. I believe in
Speaker 1: October they we have a new estimate, a new stock
Speaker 1: market killed some SMP five hundred year end price target
Speaker 1: forty two hundred down from forty seven. It's Laurie Canvasino
Speaker 1: of MPC and she joined us right now Laurie, great
Speaker 1: to catch up with you. Why that down? Great, Let's
Speaker 1: stop write that. So look, I think that targets are
Speaker 1: always challenging in years like this, and frankly, the market
Speaker 1: broke lower than we thought it would earlier in the year.
Speaker 1: What we wanted to do with this target was signal
Speaker 1: that we do see upside between now and your end.
Speaker 1: We think there's a decent chance stops bottomed in mid June,
Speaker 1: and if they didn't, we think we could probably get
Speaker 1: that before the end of the third quarter. But really
Speaker 1: we wanted to send the signal that we thought there
Speaker 1: was some modest upside between now and year end, that
Speaker 1: we do think you need to be leaning into recession
Speaker 1: rebound plays as opposed to really kind of leveraging up
Speaker 1: on the defense the defensives here, which we think are
Speaker 1: overbought and over sold. Um. I will tell you John
Speaker 1: that some of my sentiment models tell us that my
Speaker 1: original forty targets probably still the right one. But when
Speaker 1: we look at our cross asset analysis stocks versus bonds,
Speaker 1: that really does temper our enthusiasms. Well, this is important,
Speaker 1: Sarah over in Europe this weekend aggressively rights take risk
Speaker 1: in credit, Sarah says, grab a six to seven percent coupon,
Speaker 1: get your foot in the water, let's go. You're saying
Speaker 1: the same thing on recession rebound. What does the recession
Speaker 1: rebound sector or part of a sector look like. So
Speaker 1: some of the areas that typically do well are things
Speaker 1: like financials and technology stocks. These are areas that typically
Speaker 1: underperform in the draw downs and outperform on the rebounds.
Speaker 1: So those are two areas we like. We think the
Speaker 1: financials are dirt cheap at this point in time. Our
Speaker 1: banks analysts are very, very constructive and think that even
Speaker 1: if we do have a mild technical recession, that banks
Speaker 1: will execute very well through it. Then how will you
Speaker 1: use the GDP statistics and review this week? I get
Speaker 1: it's a first look and all that, but if the
Speaker 1: banks are doing well, that means we underestimate the resiliency
Speaker 1: of the consumer. Do you buy that line? I think
Speaker 1: that the banks are telling you if you look through
Speaker 1: some of the reports that we've seen so far, is
Speaker 1: that the consumer is at a very good starting point
Speaker 1: to whether whatever this economic storm ends up being called.
Speaker 1: And I think that's one of the lessons that equity
Speaker 1: investors have learned over the last four or five years,
Speaker 1: Thomas that every time we enter one of these dicey
Speaker 1: periods in the equity market, whether it was the trade war,
Speaker 1: whether it was the pandemic itself, whether it was simply
Speaker 1: sluggish growth out there, that the consumer is pretty resilient,
Speaker 1: and that consumer part starting point does seem to be
Speaker 1: very very strong right now. I think that's getting lost
Speaker 1: in some of these recession discussions. Hello, the big theme then,
Speaker 1: Am I playing the inflation story still or pivoting to
Speaker 1: slow of growth? Which one? Is it a bit of
Speaker 1: both or one or the other. I would a little
Speaker 1: bit of both. You know. We get asked a lot
Speaker 1: about stagflation, and what we've told people is that we
Speaker 1: do expect inflation rates to moderate, but they could stay
Speaker 1: high relative to history. For that, I think you want
Speaker 1: to keep some energy in your back pocket. I'm a
Speaker 1: little bit, you know, concerned that we may not be
Speaker 1: out of the woods on energy in the very short term,
Speaker 1: but longer term, if we are in that staglationary environment,
Speaker 1: I think you want to play there. I think that
Speaker 1: technology is a great way to sort of play that
Speaker 1: slowing growth theme, and we do see the market starting
Speaker 1: to shift away from these overvalued, over crowded defensives back
Speaker 1: towards more reasonably valued secular growth areas of the market,
Speaker 1: like big cap technology. And I think that one of
Speaker 1: the things we've learned the last few years is that
Speaker 1: these big cap software companies in particular, are the tools
Speaker 1: that companies used to fight just about whatever battle gets
Speaker 1: thrown their way. So if you think that we're sort
Speaker 1: of hitting the bottom in here, that we're gonna get
Speaker 1: perhaps a better path from the FED, that the consumer
Speaker 1: is going to stay resilient, but things aren't gonna be
Speaker 1: all roses and sunshine. I think technology is an area
Speaker 1: you really do want to look at very hard. LORI,
Speaker 1: how do small caps fit into this? Considering that you're
Speaker 1: now going overweight small cats heading into what most people
Speaker 1: think is the US for session. So look, I think
Speaker 1: you have to really evaluate what do you think has
Speaker 1: been priced into different points in the market, different parts
Speaker 1: of the market. At this point in time covered small
Speaker 1: caps for a long time leads, so we know that
Speaker 1: they always have a very hard pivot midway through recession.
Speaker 1: They tend to really underperform hard heading in and on
Speaker 1: the way down initially, but they tend to really experience
Speaker 1: that pivot and outperforming the late parts of recession and
Speaker 1: on the way out. What we see, in particular when
Speaker 1: we look at small cap performance against economic indicators like
Speaker 1: jobless claims and I S N manufacturing is that small
Speaker 1: caps are already trading as though we've had a spiking
Speaker 1: jobless claims and as though I S M manufacturing has
Speaker 1: plunged and hit typical trough like levels. So I don't
Speaker 1: really need to have that are we having a recession?
Speaker 1: When is it happening? Debate within small cap They are
Speaker 1: already pricing then, and it's more clear to me in
Speaker 1: that part of the market than just SUP any other part.
Speaker 1: Do you think that this means that small caps are
Speaker 1: ahead of the rest of the market, or is this
Speaker 1: leading indicator that we're already in recession? As good as
Speaker 1: is going to get confirmed on Thursday with that second
Speaker 1: quarter GDP print. I think it's gonna be interesting if
Speaker 1: you do get a negative GDP print for the quarter,
Speaker 1: whether or not people view that as a recession. I
Speaker 1: think that debate will rage on. But I do think
Speaker 1: that small caps are very economically sensitive because they do
Speaker 1: have primarily most of their revenues coming out of the US.
Speaker 1: So if there was a technical recession in place, small
Speaker 1: caps were going to have snipped that out. Um, and
Speaker 1: it will really make sense kind of the carnage we've
Speaker 1: seen in that space. Frankly since March of last year.
Speaker 1: I could make that, you know, kind of move that
Speaker 1: we've seen make a lot of sense. But frankly, lest
Speaker 1: it already makes sense based on what you're seeing in
Speaker 1: im manufacturing right now. Laurie, great to catch up with you,
Speaker 1: and thank you for issuing the down grade before the
Speaker 1: appearance and unlike some guests who do it after the interview.
Speaker 1: Cavasse and if I let us get a handle on
Speaker 1: where we're going to the FED meeting, and that involves
Speaker 1: actually doing economics at Columbia University. He took, uh, macroeconomics
Speaker 1: kind of sort of three oh one, and Bruce Kasiman
Speaker 1: joins us know from a small bank, JP Morgan this morning,
Speaker 1: I love it. Bruce fer Alwis says, it's a kind
Speaker 1: of sort of recession. What kind of sort of recession
Speaker 1: is this? Well, as you know, there's a good chance
Speaker 1: second quarter GDP will print a negative for a second
Speaker 1: quarter in a row in Q two. UM, as you
Speaker 1: kind of break down the data. With job growth so strong,
Speaker 1: with what we continue to expect to be a positive
Speaker 1: consumer spending number UH in this week's report, it doesn't
Speaker 1: feel like a normal break into what we would call
Speaker 1: a recession, and I think we should We should recognize
Speaker 1: that about the first half, but at the same time,
Speaker 1: we should recognize the momentum loss that we had at midyear. UM,
Speaker 1: we're gonna probably print a second negative consumption number in
Speaker 1: a row this week for June. As you've noted the
Speaker 1: survey data for July, the flash p M I s
Speaker 1: were ugly. We're not just seeing that in the US,
Speaker 1: We're seeing it elsewhere and claims arising. So what feels
Speaker 1: like a technical event as we moved through the first
Speaker 1: half of the year could easily turn into a real
Speaker 1: recession event as we go through the next couple of months.
Speaker 1: In your spreadsheet, you've got a one off on exports
Speaker 1: this quarter. Is it export growth to the rescue? UM,
Speaker 1: There is some support there, particularly as we see China
Speaker 1: and Asia lifting after what was a big second quarter
Speaker 1: set of lockdowns, but with the dollar rising and with
Speaker 1: Europe very much in the crosshairs of a recession right now,
Speaker 1: I would not be counting on on exports saving US here.
Speaker 1: I think the saving grace has to be the business
Speaker 1: sector bending, not breaking in the face of the drags
Speaker 1: that we're seeing. Also inflation coming off in the summer,
Speaker 1: with gasoline prices starting to move lower. Bruce, I'm looking
Speaker 1: at certain data pauns. You're looking at the same ones.
Speaker 1: Claims a higher the last few weeks. The p m
Speaker 1: I last week was really bad. We're starting to see
Speaker 1: this show up in housing, Bruce. I'm trying to work
Speaker 1: out which part of this is desirable, the intended consequence
Speaker 1: of what the central bank is trying to do, and
Speaker 1: which part of it is undesirable. Well, I don't the
Speaker 1: movement towards softer growth is undesirable on the part of
Speaker 1: the Fed. That's what they want. They want to slow
Speaker 1: the economy, they want to take out the demand component
Speaker 1: of inflation, and then they're hoping that that, with the
Speaker 1: moderation of some of the drags, gets you back to
Speaker 1: something more acceptable. However, and I think this is really
Speaker 1: what's behind your question. The momentum loss. There the idea
Speaker 1: that layoffs are starting to rise, that's starting to push
Speaker 1: together a dynamic which traditionally has been recession and recessions.
Speaker 1: We should understand in US context is a breaking, it's
Speaker 1: a move up and unemployment rates of two percent or more.
Speaker 1: That's the risk here is that we're letting something take
Speaker 1: hold here that's going to give us a much sharper
Speaker 1: move than anything like what you might characterize the first
Speaker 1: half of the year is looking like. Embedded in John's question, Bruce,
Speaker 1: is the fight that is articulated in the article on
Speaker 1: Bloomberg the houses of Morgan divided Morgan Stanley disagreeing with
Speaker 1: your own JP Morgan. And when the FED is going
Speaker 1: to reverse course, pause and then start cutting rate after
Speaker 1: raising rates? At what point is the softening that we're
Speaker 1: seeing in data now reflection of a FED that will
Speaker 1: be able to backtrack as soon as next year. Well,
Speaker 1: I actually think that's far sooner than next year. Uh,
Speaker 1: we're looking for seventy five basis points this week. We're
Speaker 1: looking for more open ended guidance. I don't think they're
Speaker 1: going to commit to a size of a move at
Speaker 1: the September meeting. September is a tough call. I think
Speaker 1: we probably still do get a fifty at the September meeting.
Speaker 1: But beyond that, if we're seeing the economy really soften,
Speaker 1: job growth slow towards zero, I don't think the FED
Speaker 1: is going to continue to be tightening here at an
Speaker 1: aggressive pace. We've got them pausing at about three fifty.
Speaker 1: We don't have them easing at this point because we
Speaker 1: don't have a real recession call in our forecast um.
Speaker 1: But I think it's about the economy. If the economy
Speaker 1: starts to slow, given that the FED gets rates into
Speaker 1: a modestly neutral stance, the the equation changes at the FED.
Speaker 1: It's not there today with a level of ray. It's
Speaker 1: an economy that's still generating over four jobs a month,
Speaker 1: but it will be there in three or four months
Speaker 1: if we're right, Bruce. What's enough to cause the FED
Speaker 1: to take a step back? I mean, there's an unemployment
Speaker 1: rate at four and a half percent, is it inflation
Speaker 1: coming down to five from nine point one percent? How
Speaker 1: far do we have to see progress? And I put
Speaker 1: this in quotes when it comes to the deterioration in
Speaker 1: momentum does the FED have to see before perhaps taking
Speaker 1: a break? I think the short answer to that is
Speaker 1: the FED needs to have a policy stance of trajectory
Speaker 1: on inflation and dynamics on growth. That gives them comfort
Speaker 1: that in a year two year and a half time
Speaker 1: inflation is going to be below three perils and the
Speaker 1: job growth we're seeing now is not there. Three or
Speaker 1: four months from now, I payil growth is down to
Speaker 1: a hundred thousand, and the run rate on inflation with
Speaker 1: energy prices off is moving more into the point three
Speaker 1: percent per monthly base. Um, we think you could you
Speaker 1: could easily be in that in that zone. First year
Speaker 1: update please on emerging markets, the currencies give way, I
Speaker 1: am told conversation after conversation, this time is different. All
Speaker 1: my radars up. Well. I think the currencies give way
Speaker 1: creates more risk here, especially since we're not going to
Speaker 1: see the relief on central bank policy. I think where
Speaker 1: this time is different as in the larger e M economies.
Speaker 1: And there is a certainly a significant problem in low
Speaker 1: income economies facing problems with food security and debt dynamics.
Speaker 1: But in the larger e M economies, you just don't
Speaker 1: have the debt overhangs, you don't have the current account imbalances,
Speaker 1: and you have policy makers that have been willing to
Speaker 1: continue to use fiscal policy so growth is slowing. E
Speaker 1: M is certainly a threat if the US and Europe
Speaker 1: go into a sssion, and we shouldn't lose site of
Speaker 1: the European recession story. But we don't think there's a
Speaker 1: systemic magnifying effect through credit, which is often the case
Speaker 1: when you see some of these dynamics take place in
Speaker 1: the M and pretty swam risk the leverage right now?
Speaker 1: Can we finish that because whenever we talk about this
Speaker 1: recession story, you've acknowledged the risk in America, you've acknowledged
Speaker 1: the risk in Europe in AM Yet we keep hearing
Speaker 1: the same thing that consumer advantage seats a strong, corporate
Speaker 1: Bannagh sheets are strong. Why do you think the leverage
Speaker 1: is going to show up? Well, that's the interesting question
Speaker 1: is are we going to see the dynamic on growth
Speaker 1: which still has a healthy private sector uh, you know
Speaker 1: sort of cushion here? Is that going to get magnified
Speaker 1: by credit? It certainly isn't happening yet, but there's certainly
Speaker 1: signs of stress building. And you know, I think there's
Speaker 1: always the underlying point here. When you're raising interest rates
Speaker 1: and slowing growth, you can be surprised that where something
Speaker 1: shows up that doesn't um you know, seem to be
Speaker 1: a big story. I would worry about European banks here
Speaker 1: in an environment in which we're seeing I think more
Speaker 1: sharp slow down and growth than we're just getting the
Speaker 1: ECB going. I would worry that some of the smaller
Speaker 1: em economies show more tendency to spill over in ways
Speaker 1: we're not expecting. From a geopolitical point of view and
Speaker 1: from a credit market point of view, there are things there.
Speaker 1: But I'll tell you for sure, I always am surprised
Speaker 1: where these things show up. But I think we shouldn't
Speaker 1: lose sight of the context that this is an environment
Speaker 1: where that's a likely outcome also gonna catch. I'm gonna
Speaker 1: get your views on a range of things. Bruce Castmanett
Speaker 1: of j K. Mulkin. Stephen Englander is esteemed in foreign
Speaker 1: exchange analysis. He has flat out the best cross rate
Speaker 1: strategist in the world. He joins US now as standard charter. Steve,
Speaker 1: your view is an outlier. We go to three point
Speaker 1: zero percent and then we stay there for something like
Speaker 1: five or even six quarters. If we get a Stephen
Speaker 1: Englander outcome way below the gloom that's out there, what
Speaker 1: does that do to the certitude, the belief and a
Speaker 1: resilient and strong dollar, it's going to damage it. I
Speaker 1: think that the market is waiting to see, um, you know,
Speaker 1: clear signs of a recession. I mean their designs are
Speaker 1: powerful but not definitive yet, and they're waiting to see
Speaker 1: some sign that inflation is coming off. We think all
Speaker 1: of that will begin to occur in UH to four
Speaker 1: and um, you know, we think the Fed will call
Speaker 1: it quits at that point. That the sort of saying, look,
Speaker 1: we're going to wait and see, um where inflation goes
Speaker 1: until you know, before we start we keep on hiking.
Speaker 1: What size of big figure move does that mean for
Speaker 1: the dollar? I mean, are you looking for five or
Speaker 1: ten big figures of euro strength off of your three
Speaker 1: point zero percent? And stay there? US call mostly but yes,
Speaker 1: but mostly in three I think, um, there's still some
Speaker 1: you know risks that um you know a that the
Speaker 1: you know, profits stay weak or look weak, and that
Speaker 1: the equities come off. We're still not sure what's going
Speaker 1: to happen in China or what's going to happen in
Speaker 1: Europe over the winter. So we think that's you know,
Speaker 1: the risk on trade is going to be harder than
Speaker 1: the market thinks over the last week. But three I
Speaker 1: think will be a week dollar year, and five to
Speaker 1: percent is perfectly reasonable. So five isn't necessarily ten obviously,
Speaker 1: but this is a big differential when it comes to
Speaker 1: how much some of risk assets can rally on the
Speaker 1: heels of that. What will be the driver here? Is
Speaker 1: it euro's strength or is it dollar weakness? More broadly,
Speaker 1: in a phase of more optimistic sentiment and risk assets,
Speaker 1: I'd say it's the second. I think the key thing
Speaker 1: is to get some evidence that inflation is is coming
Speaker 1: down and notwithstanding some of the pessimism. UM, what we've
Speaker 1: seen is that wages are lagging, so there's no sort
Speaker 1: of red hot labor market pushing up inflation. Real wages
Speaker 1: are are falling like a rock. Um, we're likely to
Speaker 1: see uh, some of the you know, demand destruction leading
Speaker 1: to price falls and energy prices. We're ready seeing that
Speaker 1: even in things like cars and some other goods. UM.
Speaker 1: I don't know that this this inflation is going to
Speaker 1: be permanent, but I think the the outlook over the
Speaker 1: next year is actually pretty good, and I think that
Speaker 1: west the market sees that. UM, it's a risk on
Speaker 1: market you know, both hands. Steve is incredibly lonely. I mean,
Speaker 1: you know, everybody's out of three and a half percent,
Speaker 1: and John helped me here, we're out of four. It's
Speaker 1: city group, you mean, some of it's a huge, huge differential, folks.
Speaker 1: I really can't say enough about it. What what do
Speaker 1: you say to people that are convinced they're just gonna
Speaker 1: keep going and going and going. What will be the
Speaker 1: damage to their portfolios? Steve? Well, look, I think a
Speaker 1: very famous economists once everybody's got a plan until they
Speaker 1: get punched in the face. And right now, um, you know,
Speaker 1: we we haven't seen the downside on the economy. Labor
Speaker 1: market numbers. Look okay, you know there's there's you know,
Speaker 1: no big unemployment. We we think that that pickup is coming,
Speaker 1: and when it comes, the pressures on the FED are
Speaker 1: going to be different, and and the FED itself. It's
Speaker 1: not even you know, sort of responding to a shift
Speaker 1: in the political climate. It's the idea that if the
Speaker 1: unemployment rate is going up, it means that demand is
Speaker 1: below supply, and every model they have tells them that
Speaker 1: that means inflation comes down. It's it could come down
Speaker 1: a little bit quicker, come down a little bit slower,
Speaker 1: but it means that they've sort of got themselves on
Speaker 1: the track that they want to be. Having gotten on
Speaker 1: that track, you know, why keep pushing it? Since the
Speaker 1: big uncertainty, if you're at the central bank, is not
Speaker 1: what the neutral rate of interest is, because they don't
Speaker 1: have a clue, and and nobody's got a clue. The
Speaker 1: big uncertainty is how fast the economy is responding to
Speaker 1: h the tightening of monetary conditions, and how fast inflation
Speaker 1: is going to respond to that. And only time will
Speaker 1: give us that answer because we don't have any good
Speaker 1: models for that. Stephen, given with the last point that
Speaker 1: you made that we don't have any good models for this,
Speaker 1: can you give us a sense in your history strategizing
Speaker 1: about markets how uncertain this scenario is, how much of
Speaker 1: a lack of a conviction you have over a dollar
Speaker 1: call at a time when the dollar has really been
Speaker 1: one of the most difficult calls to get right. Well,
Speaker 1: it certainly it's been difficult to get right, but right
Speaker 1: now everybody's got dollars, and you know, markets very long.
Speaker 1: I can't think of a currency that's long versus the
Speaker 1: usd at this stage. And I think that the you know,
Speaker 1: what you're seeing is not evidence that the U. S.
Speaker 1: Economy is better than in some ways than everybody else.
Speaker 1: What you're seeing is indications that, um, the world is
Speaker 1: such a scary place that the only you know, the
Speaker 1: only currency asset you want to hold is dollars. I
Speaker 1: think once those fears received, the dollar is very vulnerable.
Speaker 1: And and you know, again it's a three story. At
Speaker 1: one point we thought this might be a story before
Speaker 1: the Russian invasion. It wasn't the case. But I think
Speaker 1: you have to see continued, like you know, a terrible
Speaker 1: world continuing for dollar strength. Um, you know, to to
Speaker 1: keep going in the way it has them. Stave awsome,
Speaker 1: gonna get ave you on things as things evolve over
Speaker 1: at the same as standard chat as stay congling too.
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Speaker 1: the terminal, I'm Tom Keene and this is Bloomberg two.