WEBVTT - Surveillance: German Finance Minister 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.800 --> 0:00:23.560 To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot 0:00:23.560 --> 0:00:29.480 Com and of course on the Bloomberg terminal. Right now, 0:00:29.560 --> 0:00:32.720 the challenges of Europe, the many challenges and as we 0:00:32.880 --> 0:00:36.760 heard from David folks Landau of Deutsche Bank uh Many 0:00:36.800 --> 0:00:40.120 many months ago on a difficult February morning, a Europe 0:00:40.120 --> 0:00:42.879 that at some point will need to rebuild and that 0:00:42.920 --> 0:00:46.480 includes finance, which means it's an appropriate moment to speak 0:00:46.520 --> 0:00:50.920 with the Finance Minister of Germany, Christian Linder, here now 0:00:51.080 --> 0:00:55.800 in Berlin, Maria today. Oh, good morning, Tom, a good 0:00:55.840 --> 0:00:58.280 and market and yes we are joined by the German 0:00:58.360 --> 0:01:02.160 Finance Minister, Christian lenderd Head Leonard, how are you? Thank you, 0:01:02.240 --> 0:01:04.440 thank you for having me. And of course when I 0:01:04.480 --> 0:01:06.399 was preparing this interview and I knew that you were 0:01:06.400 --> 0:01:08.960 coming to our studios in Berlin, I thought, what is 0:01:09.000 --> 0:01:11.320 the first question I can ask Christian Leonard And the 0:01:11.360 --> 0:01:15.000 answer is obvious. Inflation When you hear, and I don't 0:01:15.040 --> 0:01:16.280 want to get you to comment on the us to be, 0:01:16.400 --> 0:01:19.600 but when you hear Christian leguards say inflation is now 0:01:19.640 --> 0:01:22.800 our number one priority. We have to bring it down, 0:01:22.840 --> 0:01:26.280 there's no questions. Is it a good thing for you? Yes, 0:01:26.319 --> 0:01:29.959 of course I completely support the language of the e 0:01:30.040 --> 0:01:35.520 c B and it's measures. It's our top priority as 0:01:35.600 --> 0:01:40.440 well to bring down the inflation rates. They are a 0:01:40.520 --> 0:01:46.520 serious risk for the economic development for people and businesses, 0:01:46.560 --> 0:01:51.640 the investment conditions, and so it's our fiscal priority to 0:01:51.800 --> 0:01:55.640 reduce inflation rates. It's the responsibility of e c B, 0:01:56.120 --> 0:01:59.960 but we play our role as JUM government and European government. 0:02:00.000 --> 0:02:02.160 So as a German finance minister, this is where you 0:02:02.240 --> 0:02:05.320 say this is top of my agenda. It's inforition, top 0:02:05.360 --> 0:02:09.560 of my agenda, not only now. In December, when we 0:02:09.639 --> 0:02:13.400 hosted the G seven meeting in Bonn and Petersburg, we 0:02:13.560 --> 0:02:18.559 underlined that bringing down inflation should be our top priority. 0:02:18.800 --> 0:02:24.520 This has been before the policy change of the central banks, 0:02:24.720 --> 0:02:28.800 and I think it proved to be right to do so. 0:02:29.080 --> 0:02:31.720 You see we were proven right on on the analysis 0:02:32.000 --> 0:02:34.720 that's for the inflation. But then there's a growth story 0:02:34.840 --> 0:02:37.200 and you know, there's a lot of negativity around the 0:02:37.280 --> 0:02:39.639 German story on the medium term and the short term 0:02:39.680 --> 0:02:43.680 perhaps and the energy crisis. It's potentially the blackouts the gas. 0:02:43.880 --> 0:02:45.640 When you look at the German economy, do you worry 0:02:45.639 --> 0:02:49.600 about a recession? Do you predict yourself a recession? This 0:02:49.720 --> 0:02:55.440 year has been a difficult. Of course, we were harmed 0:02:55.560 --> 0:03:01.640 by the Russian energy law due to our too high 0:03:02.639 --> 0:03:09.160 dependence on Russian energy imports. Of course, yes, had been 0:03:09.160 --> 0:03:13.480 a mistake. But now we have changed our policies, um 0:03:13.560 --> 0:03:19.160 with light speeds. We are improving our energy infrastructure. We 0:03:19.240 --> 0:03:24.359 are bringing a more capacity of renewable energy to the grid. 0:03:24.600 --> 0:03:30.720 And well, who thought that Germany would be able to 0:03:30.919 --> 0:03:35.520 build new l energy terminals in less than one year? 0:03:35.640 --> 0:03:39.040 You have done it, and I assure you, um, this 0:03:39.120 --> 0:03:45.040 is the the very best moment to invest in Germany. 0:03:45.440 --> 0:03:49.840 This is the very best moment to buy bonds. The 0:03:49.840 --> 0:03:52.680 best of international business is watching you right now. That's 0:03:52.680 --> 0:03:55.120 your pitch. But let me ask you again though on 0:03:55.240 --> 0:03:59.480 the recession. Is there too much negative again, negativity built 0:03:59.520 --> 0:04:02.080 on the German story. Some people say this recession is 0:04:02.440 --> 0:04:05.600 inevitable for you, as that story overblown. If there is 0:04:05.680 --> 0:04:09.240 you will recover fast. We will recover fast and in 0:04:09.320 --> 0:04:15.760 the midterm um Um, I expect a very positive perspective 0:04:15.840 --> 0:04:23.159 for the German economy. Look um, we are improving the 0:04:23.320 --> 0:04:31.200 framework conditions for private businesses. Immigration UM into the labor 0:04:31.279 --> 0:04:37.520 market will be less bureaucratic than it had been. We 0:04:38.160 --> 0:04:43.960 UM invest a lot public and private money in the 0:04:44.000 --> 0:04:50.560 transition of our economy. There will be some tax benefits 0:04:50.640 --> 0:04:58.680 for investors in Germany. So um, after fighting inflation, my 0:04:59.120 --> 0:05:04.560 second prior party is strengthening the German competitiveness and we 0:05:04.640 --> 0:05:06.560 will do and you say that we'll do it. And 0:05:06.960 --> 0:05:09.360 of course the crucial question, especially for me in Germany. 0:05:09.400 --> 0:05:11.880 I know you like Many Germany, you speak highly about it. 0:05:12.000 --> 0:05:14.839 I know you particularly like cars. But my question to 0:05:14.960 --> 0:05:17.599 you is when you look at the Inflation Reduction Act, 0:05:17.800 --> 0:05:20.279 can Germany stay competitive when you have the United States 0:05:20.320 --> 0:05:23.240 coming in with such an aggressive policy on subsidies? Is 0:05:23.279 --> 0:05:25.640 that something that worries you? Are you on the phone 0:05:25.960 --> 0:05:28.120 with your US counterparts? What do you want to see 0:05:28.120 --> 0:05:32.040 out of this? On the one hand, the Germ car 0:05:32.200 --> 0:05:39.200 manufacturers are competitive. I think they say no, b we 0:05:39.360 --> 0:05:46.320 mustn't fear Tesla. Tesla produces in Germany as well near Berlin. 0:05:46.760 --> 0:05:52.039 But I think the German manufacturers they are innovative and 0:05:52.400 --> 0:05:58.400 competitive and um, well, they have plants in the United 0:05:58.480 --> 0:06:03.920 States as well, so I think they are less harmed 0:06:03.920 --> 0:06:08.960 by the inflation Reduction Acts than public opinion in Germany things. 0:06:09.279 --> 0:06:12.440 But on the other hand, on the other hand, UM, 0:06:12.480 --> 0:06:17.120 I take the Inflation Reduction Act seriously. I have my 0:06:17.279 --> 0:06:23.080 concerns regarding a fair level playing field between the US 0:06:23.160 --> 0:06:27.040 Single Market and the European Union, and this is why 0:06:27.240 --> 0:06:32.640 we need to negotiate. I'm in favor for viewers for 0:06:32.880 --> 0:06:37.840 the European businesses in the US markets. You don't want 0:06:37.839 --> 0:06:42.080 a trade war. We want to get We have to 0:06:42.240 --> 0:06:47.480 avoid any kind of trade war. Instead of trade war, 0:06:48.040 --> 0:06:54.400 we need trade diplomacy. We need new free trade agreements. 0:06:55.040 --> 0:06:58.919 At least we have to make efforts to find a 0:06:59.040 --> 0:07:02.360 level playing field in the perspective of a free trade 0:07:02.440 --> 0:07:04.960 between US and European What do you perhaps through some 0:07:04.960 --> 0:07:07.600 critics in the United States that are you Yes, you're 0:07:07.720 --> 0:07:09.400 in a mess, but this is not her fault. Why 0:07:09.400 --> 0:07:16.640 should we give you any waivers? Mm hmm. Value partners? Um, 0:07:16.960 --> 0:07:21.280 who we are should be preferred trade partners. I think 0:07:21.800 --> 0:07:26.960 my My vision is a free trade zone of liberal 0:07:27.040 --> 0:07:31.960 democracies in the world, and one of the first steps 0:07:32.160 --> 0:07:36.880 could be to improve the trade relationship between United States 0:07:36.960 --> 0:07:42.760 and European Union. We would benefit both from from this idea, 0:07:43.360 --> 0:07:47.520 and well, I think there is an openness on the 0:07:47.600 --> 0:07:51.880 U S side. When I remind you of Janet Jones 0:07:52.000 --> 0:07:56.800 idea of friend sharing and Inflation Reduction Act should be 0:07:57.120 --> 0:08:03.240 reconsidered with respect of French showing and your optimistic that 0:08:03.240 --> 0:08:06.240 can happen. Let's talk about today President Zelinski will be 0:08:06.400 --> 0:08:09.080 meeting with President Biden. Of course, it does feel the 0:08:09.160 --> 0:08:12.920 Ukrainians worry about lack of momentum and lack of support 0:08:12.960 --> 0:08:15.000 this time and the war drags on. When it comes 0:08:15.040 --> 0:08:17.880 to Germany and the European Union, will you put this 0:08:18.040 --> 0:08:20.840 bill no matter what? And there's a very serious question 0:08:20.880 --> 0:08:23.440 about the reparations and what to do with the Russian 0:08:23.440 --> 0:08:26.240 Central Bank assets. In your view, who's going to pay 0:08:26.280 --> 0:08:30.000 for this because we're talking about potentially trillion dollars in reconstruction. 0:08:30.000 --> 0:08:34.439 It's a massive bill. At the moment, there are the 0:08:34.559 --> 0:08:38.920 current needs of the queen which have to be met. 0:08:39.559 --> 0:08:45.880 The European Union has decided on the macro economic assistance 0:08:46.480 --> 0:08:54.520 plus eighteen billion years next year two UM support the 0:08:54.559 --> 0:09:00.000 State of Queen and we will continue to support Quean bills, 0:09:00.240 --> 0:09:06.040 military goods such as artillery. And then in the mid 0:09:06.080 --> 0:09:10.480 tim I hope the sooner the better. Then we will 0:09:10.679 --> 0:09:13.840 have to find ways for the re construction of Ukraine, 0:09:14.320 --> 0:09:20.559 and okay, there are reparvations. There is UM macroeconomic assistance. 0:09:20.760 --> 0:09:25.320 We have se multilateral banks, we have the international financial 0:09:25.360 --> 0:09:30.400 institutions such as the I m F and the Ukrainian 0:09:30.679 --> 0:09:36.520 economy itself. I think they have a very good perspectives. 0:09:36.559 --> 0:09:43.200 The naturally resources UM qualified labor force, so I think 0:09:43.559 --> 0:09:46.040 they have a very good perspective after the war. I 0:09:46.080 --> 0:09:47.320 have to let you go, but I have to ask 0:09:47.320 --> 0:09:49.320 you this question very briefly. Yes or no. What's going 0:09:49.360 --> 0:09:52.160 to recover faster the German economy or the German national team? 0:09:52.200 --> 0:09:54.600 Because the World Cup was not good for the economy. 0:09:55.360 --> 0:09:57.040 Well that's a strong bad because you have two years 0:09:57.080 --> 0:09:59.040 until the euro Cup and you posted right here in 0:09:59.080 --> 0:10:03.560 this country economy of economy, Well that's a that's a 0:10:03.600 --> 0:10:06.200 good prediction to make. Well, Mr Lennard, thank you so much, 0:10:06.240 --> 0:10:07.680 appreciate it. Always good to see you here in our 0:10:07.720 --> 0:10:12.360 studios in Berlin. Tom, you are ruthless. I mean, Maria, 0:10:12.600 --> 0:10:15.600 it's just just just just I have to do it. 0:10:15.679 --> 0:10:18.760 I just can't wait for the friendly of Germany and Spain. 0:10:18.920 --> 0:10:24.360 It's just gonna be up team coverage Maria today. Mr 0:10:24.480 --> 0:10:39.360 Lindner of the German government, their finance Minister. This is 0:10:39.400 --> 0:10:41.600 a joy. And for Joe, for Global Wall Street, you 0:10:41.600 --> 0:10:45.040 can take notes right now. P JIM is Prudential and 0:10:45.040 --> 0:10:47.240 when they set up p JIM and resurrected it a 0:10:47.240 --> 0:10:50.440 good number of years ago, no one could expect the 0:10:50.559 --> 0:10:55.199 total return award winning portfolios they put together. The force 0:10:55.320 --> 0:10:58.600 behind that, the thinking behind that was dragging from Morgan Stanley. 0:10:58.640 --> 0:11:01.200 Greg Peters over is co c i O and he 0:11:01.320 --> 0:11:04.160 joins this morning for fixed income brief. Greg, I'm gonna 0:11:04.160 --> 0:11:07.000 cut to the chase. You call for a radical shift 0:11:07.200 --> 0:11:10.000 next year. Where will that shift? So I think the 0:11:10.040 --> 0:11:12.640 shift is in the bonds. So this year has been 0:11:12.679 --> 0:11:18.320 historically difficult to state the obvious, Uh, but yield matters 0:11:18.440 --> 0:11:20.880 and starting place matters, and so if you think about 0:11:20.960 --> 0:11:24.480 just the b O J yesterday, right, we've moved from 0:11:24.720 --> 0:11:28.840 this zero negative interest rate policy to pretty sizeably positive 0:11:29.120 --> 0:11:32.680 territory for yields, and that matters a lot. Like when 0:11:32.720 --> 0:11:35.200 we were looking at the tenure at fifty basis points, 0:11:35.800 --> 0:11:39.160 our future looked really pretty bleak, right, It was hard 0:11:39.200 --> 0:11:42.120 to kind of earn to return and return off of that. 0:11:42.200 --> 0:11:44.199 But where we are today, I think we're in a 0:11:44.320 --> 0:11:47.959 much better place. I think it creates much more balanced portfolios. 0:11:48.480 --> 0:11:50.800 Those who were calling for the death of fixed income, 0:11:51.080 --> 0:11:53.200 we're kind of right right for the year, But I 0:11:53.240 --> 0:11:55.720 think the reset matters a lot, and so we're pretty 0:11:55.720 --> 0:11:59.200 constructive as we head into two thousands and twenty three. 0:11:59.320 --> 0:12:02.000 Is this a colon elfriends, a cold on credit, or 0:12:02.000 --> 0:12:05.480 a cold on the whole universe? It's a sequencing of sorts. 0:12:05.920 --> 0:12:09.880 So I think the first move is on the sovereign side. Uh. 0:12:10.000 --> 0:12:13.640 So the defensive nature of fixed income starts to assert itself. 0:12:14.240 --> 0:12:16.960 Uh it seems like there's a high probability of a recession. 0:12:16.960 --> 0:12:19.240 Who knows. I think it's very bimordal, and so it's 0:12:19.280 --> 0:12:23.960 really difficult to ascertain. But I think that protection mechanism 0:12:24.080 --> 0:12:27.040 matters a lot into two thousand and twenty three, and 0:12:27.080 --> 0:12:29.800 then I think you roll into credit and other things. 0:12:29.800 --> 0:12:32.400 So I think it's a sequencing aspect of fixed income 0:12:32.480 --> 0:12:36.480 that provides different flavors of protection at different times throughout 0:12:36.520 --> 0:12:38.920 the course of the year. Does that sequencing rely on 0:12:39.040 --> 0:12:42.600 inflation disinflating If there's a sort of just sort of 0:12:42.600 --> 0:12:47.040 gradual and linear path to a lower level for inflation, 0:12:47.120 --> 0:12:49.800 does have to really happen that way to make what 0:12:49.840 --> 0:12:52.400 you're saying come true? It does. I mean, I think 0:12:52.440 --> 0:12:56.559 the lesson of two thousand and twenty two was stagflation bad, 0:12:56.800 --> 0:13:01.080 bad for all financial assets, even commodities are to uh 0:13:01.720 --> 0:13:04.520 catch the knife for a little bit here towards the 0:13:04.559 --> 0:13:06.720 end of the year. So I think as we move 0:13:06.880 --> 0:13:10.120 off the stag inflation narrative, I think it bodes much 0:13:10.160 --> 0:13:13.680 more favorably. If we're wrong around that. An inflation is 0:13:13.720 --> 0:13:18.160 incredibly difficult to forecast, of course, but it does seem 0:13:18.200 --> 0:13:21.520 like all indicators point to lower inflation in two thousand 0:13:21.559 --> 0:13:24.800 and twenty three. I think the tell risk that we 0:13:24.800 --> 0:13:28.000 were experiencing in two thousand and twenty three, I'm sorry, 0:13:28.000 --> 0:13:30.400 two thousand and twenty two gets chopped off in twenty three, 0:13:30.400 --> 0:13:32.680 and I think that matters a lot. Although if you 0:13:32.760 --> 0:13:35.559 do see a stickier bottom. Right, let's say we stop 0:13:35.559 --> 0:13:36.959 at three and a half percent by the end of 0:13:37.080 --> 0:13:40.480 next year. How does that leave your call? Considering that 0:13:40.520 --> 0:13:44.000 some people are talking about structurally higher inflation, giving given 0:13:44.040 --> 0:13:46.520 some of the labor market dynamics, given the gaps there, 0:13:46.800 --> 0:13:48.800 and given the de globalization that a lot of people 0:13:48.840 --> 0:13:51.439 are talking about, that's a clear risk. And I think 0:13:51.480 --> 0:13:54.800 that is an underappreciated risk. That said, go back to 0:13:54.840 --> 0:13:57.559 starting points. So do we think the FED is going 0:13:57.600 --> 0:14:00.600 to move another you know, four five hundred basis points 0:14:00.679 --> 0:14:03.640 from here? No? Right, so we're talking about now incremental. 0:14:04.320 --> 0:14:06.760 I do think the markets are wrong in terms of 0:14:06.800 --> 0:14:10.600 the pricing, where the markets are pushing back on the 0:14:10.600 --> 0:14:14.240 FED staying higher for longer. Uh. And I don't know 0:14:14.280 --> 0:14:16.520 if I buy into that myself. I think we are 0:14:16.600 --> 0:14:20.320 in this higher FED rate regime. But that in and 0:14:20.400 --> 0:14:23.400 of itself isn't a bad thing for fixed income assets, 0:14:23.400 --> 0:14:26.920 where it's about role and carry and yield and income 0:14:27.320 --> 0:14:31.640 um And so I think it boes quite favorably. Percolating 0:14:32.160 --> 0:14:35.880 is in the equities space, maybe international with week dollar, 0:14:36.080 --> 0:14:39.320 with what we saw with Japan yesterday, International finally has 0:14:39.360 --> 0:14:43.360 a day after ten twelve, fifteen years. What will international 0:14:43.520 --> 0:14:47.800 buns do? Do they outperform, price up, yield down. I 0:14:47.920 --> 0:14:51.600 still think the preferred habitat is in the US. I 0:14:51.640 --> 0:14:54.840 think Europe has their struggles. Of course, they're fighting a 0:14:54.880 --> 0:14:59.360 different inflation monster. It's a shock, right, the energy shock 0:14:59.600 --> 0:15:02.160 very for then what we've seen here in the US. 0:15:02.440 --> 0:15:05.320 I think the US is you know, much more on 0:15:05.360 --> 0:15:08.360 the path and normalization. The b o J yesterday I 0:15:08.400 --> 0:15:11.360 think was a shock to the system in that it 0:15:11.440 --> 0:15:16.440 creates volatility that doesn't induce investment, it induces exit. Right, 0:15:16.480 --> 0:15:19.560 So I think by virtue of that, the US is 0:15:19.720 --> 0:15:22.200 that preferred place to be. And then if you buy 0:15:22.240 --> 0:15:27.400 into this weaker dollar story and inflation coming down global story, 0:15:27.480 --> 0:15:30.360 then e M has to outperform. In that scenario. You 0:15:30.440 --> 0:15:33.720 expect in that spread between US and Europe to close 0:15:34.360 --> 0:15:37.600 us O it's LOWA and then actually get Europeans creeping higher. 0:15:37.680 --> 0:15:39.880 Is that how that spread is going to close? I 0:15:39.920 --> 0:15:42.840 think that's right. But I think on the margin you'll 0:15:42.920 --> 0:15:46.720 see a bid to the US market. Uh. And I 0:15:46.840 --> 0:15:49.960 think Europe and Sterling in the same boat. Where there's 0:15:50.000 --> 0:15:53.080 a tremendous amount of supply hitting the markets in two 0:15:53.120 --> 0:15:56.400 thousand and twenty three, there's a clearing level there there's 0:15:56.480 --> 0:15:59.600 lots of government spending uh and so I do expect 0:15:59.720 --> 0:16:02.640 things to compress into two thousand and twenty three. Europe 0:16:02.680 --> 0:16:04.920 is in for a difficult time, that's for sure. Time 0:16:05.040 --> 0:16:06.520 not just the ukn E, the whold of the continent 0:16:06.560 --> 0:16:09.000 gun into next year again. To see these numbers coming 0:16:09.040 --> 0:16:12.480 in from the ECB, that delivery from President to Guard, 0:16:12.520 --> 0:16:15.240 I was shocked by it last Thursday. I'm in the 0:16:15.320 --> 0:16:18.800 camp they don't have the nominal GDP to make it work, 0:16:19.360 --> 0:16:22.080 sort of like Japan. They're better than Japan. Some people 0:16:22.160 --> 0:16:24.360 disagree with me and that they think the nominal GDPs. 0:16:24.480 --> 0:16:27.480 Robust I would look at Patriot missile announcements today in 0:16:27.560 --> 0:16:31.120 Washington is linked directly into La guard theory. He's said 0:16:31.120 --> 0:16:35.280 this quote from Torston stock Well, this is the detail 0:16:35.360 --> 0:16:39.120 that made him acclaimed at Deutsche Bank. I remember hanging 0:16:39.160 --> 0:16:41.960 out with him at Davos. And you know when Torston 0:16:42.120 --> 0:16:46.920 Slock speaks fancy Davos, people stop and listen. For those 0:16:46.960 --> 0:16:50.240 on radio, labor demand five million people higher than labor supply, 0:16:50.520 --> 0:16:52.520 which is why wage inflation is so strong. He goes 0:16:52.560 --> 0:16:55.280 on to say the solution to the imbalance is either 0:16:55.360 --> 0:16:58.600 to increase the labor supply, for example through higher immigration, 0:16:59.000 --> 0:17:01.240 or to lower labor demand, for example, through an increase 0:17:01.280 --> 0:17:03.600 in the unemployment rate. Great Peters, it looks like we're 0:17:03.640 --> 0:17:06.280 leaning on the latter pretty hard, doesn't it. It does, indeed, 0:17:06.680 --> 0:17:10.240 it does, indeed, And so this is the I think 0:17:10.280 --> 0:17:13.040 the tricky part of the marketplace and why I think 0:17:13.080 --> 0:17:16.879 it's a bimodal outcome. Right, you know, it's amazing, you're greg. 0:17:17.040 --> 0:17:19.440 You know they're over in Jersey City. It's so cold 0:17:19.520 --> 0:17:21.959 in New York. Journey he walked across the Hudson River 0:17:22.080 --> 0:17:24.600 this morning, skated across, skated across. It's like a Dutch 0:17:24.600 --> 0:17:26.760 things to do that in the Victorian times and attempts. 0:17:27.240 --> 0:17:34.880 Remember that. I don't remember that Victorian times of festive humor. 0:17:34.960 --> 0:17:38.000 That was time that was you know, you guys have 0:17:38.080 --> 0:17:40.080 to lay off the egg knock so early in the morning, 0:17:40.160 --> 0:17:44.880 you know, you know, why why are you telling people 0:17:44.920 --> 0:17:48.159 that's so publicly just a little what do they call that? 0:17:48.200 --> 0:17:49.760 You call that a festive tipple? Right, you know, just 0:17:49.840 --> 0:17:55.960 a little drink. Big story. In the last twenty four answer, 0:17:56.080 --> 0:17:58.560 it's market that b J. This was Verry Nelson of 0:17:58.640 --> 0:18:00.679 Wells Fargo. He had this to say, Dolly end up 0:18:00.680 --> 0:18:04.080 trend is likely over more downside ahead the ends days 0:18:04.240 --> 0:18:08.119 As a no brain of funding currency unlikely, numbered asset 0:18:08.240 --> 0:18:11.200 managers are likely to unwind short positions further over the 0:18:11.280 --> 0:18:15.040 next few weeks, driving Dolly back to one five. This 0:18:15.280 --> 0:18:18.000 morning in the low one thirties, verk Nelson of Wills 0:18:18.040 --> 0:18:20.800 Farco joins us Right now, Eric, can we start there? 0:18:21.160 --> 0:18:23.359 How you think we have to rebalance as we shift 0:18:23.400 --> 0:18:27.960 away from this old regime. Well, yeah, you've you've talked 0:18:28.000 --> 0:18:29.560 a lot this morning, John, and you and the team 0:18:29.600 --> 0:18:32.000 have talked about the end of an era in various 0:18:32.080 --> 0:18:36.000 products and various paradigm shifts. Here one big thing that 0:18:36.040 --> 0:18:38.560 I noted they are on the funding currency side. We've 0:18:38.600 --> 0:18:42.480 had a huge shift from the ECB, the Swiss National 0:18:42.560 --> 0:18:46.000 Bank and the b o J. Now this year I 0:18:46.040 --> 0:18:48.040 think about those are the really the three big funding 0:18:48.080 --> 0:18:51.720 currencies for carry traders in the sex market, and they've 0:18:51.800 --> 0:18:54.680 all just completely shifted on us. This is really a 0:18:54.720 --> 0:18:57.680 warning shot here for carry traders. I want to focus on. 0:18:57.840 --> 0:19:00.680 It's sort of an arcane topic maybe some viewers, but 0:19:01.119 --> 0:19:03.040 at the cross between the Mexican pay so in the 0:19:03.160 --> 0:19:07.720 Japanese yend provided carry train returns of up until about 0:19:07.720 --> 0:19:10.280 two or three weeks ago. We lost about a quarter 0:19:10.400 --> 0:19:12.320 to a third of that in a matter of two weeks. 0:19:12.840 --> 0:19:16.639 So really, I think the E M carry trade is 0:19:16.680 --> 0:19:19.160 really at risk here, and frankly the G ten carry 0:19:19.200 --> 0:19:23.200 trade as well. Pay so yen I'm looking at her quickly, folks. 0:19:23.280 --> 0:19:27.400 Pay so yenn has gone four standard deviations minus two 0:19:27.480 --> 0:19:30.080 to plus two in a cup of coffee. Is a 0:19:30.160 --> 0:19:34.040 dollar going to do the same well? Naturally, Tom, I 0:19:34.080 --> 0:19:36.520 think you'll see some unwines in these yend crosses and 0:19:36.600 --> 0:19:41.159 that's going to spill over to the dollar yen exchange rate. Uh. Certainly, 0:19:41.200 --> 0:19:43.480 if you look at the the asset managed positions in 0:19:43.520 --> 0:19:46.680 the end, they have been stickier and probably up until now. 0:19:46.800 --> 0:19:49.879 We'll find out from the data next week. Um. But 0:19:50.560 --> 0:19:53.000 to me, the question for dollar yen is getting back 0:19:53.000 --> 0:19:57.560 to will be I'll say easy and quotes in the 0:19:57.640 --> 0:20:00.520 sense that that's sort of like getting from say seven 0:20:00.600 --> 0:20:04.080 percent on inflation, but what about from getting from five 0:20:04.119 --> 0:20:08.439 percent to three percent on inflation or from dollar yen? 0:20:08.520 --> 0:20:11.000 And that's going to be the challenge. That's the nonlineararities 0:20:11.040 --> 0:20:13.760 here on real LEASA. I just want to stop and say, 0:20:13.840 --> 0:20:15.879 this is what the Bloomberg terminals about. We have a 0:20:15.960 --> 0:20:18.840 guest who talks yen paso and I can bring it 0:20:18.920 --> 0:20:21.160 up in a cup of coffee. That's what the Bloomberg. 0:20:21.359 --> 0:20:24.600 That's why there's a gazillion of these Bloomberg terminals out there. 0:20:24.800 --> 0:20:26.399 A lot of people are doing that and looking at 0:20:26.440 --> 0:20:29.240 some pretty phenomenal moves over the past forty eight hours. 0:20:29.320 --> 0:20:31.560 In response to this action from the Bank of Japan, 0:20:32.000 --> 0:20:35.600 you noted, Eric that the action that they took does 0:20:35.680 --> 0:20:39.359 not necessarily show that the willing is that the bank 0:20:39.520 --> 0:20:42.320 is going to ease, just simply that they are willing 0:20:42.400 --> 0:20:45.679 to act in some sort of shift, but not necessarily 0:20:46.000 --> 0:20:49.119 a breakup of yield curve control. Given that's the case, 0:20:49.480 --> 0:20:51.760 what would it take for the end to appreciate that 0:20:51.920 --> 0:20:55.040 much more? Why is there so much enthusiasm around the 0:20:55.080 --> 0:20:57.400 strength and the end the confidence of getting inflation under 0:20:57.440 --> 0:21:00.520 control if this is just kicking up the the target 0:21:00.640 --> 0:21:05.680 by bits. Well, Lisa, like I mentioned, there's there's the 0:21:05.800 --> 0:21:08.239 unwind of the carry trade, and that certainly can can 0:21:08.359 --> 0:21:11.920 take yen to some extent. The bigger question here is 0:21:12.480 --> 0:21:15.640 are we going to see a longer shift in capital 0:21:15.680 --> 0:21:19.639 flows from Japan. Japan for twenty thirty years has been 0:21:19.680 --> 0:21:22.080 a huge buyer of foreign assets, probably the biggest in 0:21:22.119 --> 0:21:24.880 the world. Question now is, if we have some real 0:21:25.400 --> 0:21:28.879 positive wage price dynamic taking hold in Japan and we 0:21:29.000 --> 0:21:33.040 have some real increase in nominal rates, here is a 0:21:33.119 --> 0:21:35.919 substantial amount of money going to come back from abroad 0:21:36.040 --> 0:21:38.760 back to Japan that can drive that move from one 0:21:39.600 --> 0:21:42.800 or so down to a hundred. But crucially this relies 0:21:42.920 --> 0:21:47.879 on inflation in Japan, continuing growth remaining quite strong UH 0:21:47.960 --> 0:21:50.640 and the b O J at least providing a little 0:21:50.680 --> 0:21:53.879 bit more upward lift in those nominally yields. So, Eric, 0:21:53.920 --> 0:21:55.520 who are you looking for them? Where are you looking 0:21:55.600 --> 0:21:58.840 for a Japanese demand? That supported European bond markets for 0:21:58.920 --> 0:22:02.120 sure over the few years, and the treasury market, where 0:22:02.119 --> 0:22:05.920 are you looking for that to wine? Well, yeah, John, 0:22:06.000 --> 0:22:08.240 you mentioned the US and European bonds, and look at 0:22:08.280 --> 0:22:10.320 the hedge yield on that when you when you swap 0:22:10.440 --> 0:22:13.920 these these returns back into UH and y end it's 0:22:14.000 --> 0:22:19.159 it's really a brutal picture for Japanese investors buying US treasuries, 0:22:19.760 --> 0:22:23.240 buying French bonds, and so this this really accelerates that 0:22:23.359 --> 0:22:28.359 trend of UH, probably net selling of treasuries and French bonds. UM. 0:22:28.400 --> 0:22:31.200 You certainly have to also watch for UH some some 0:22:31.320 --> 0:22:34.239 asset back products in the United States, where Japan has 0:22:34.280 --> 0:22:37.280 historically been a pretty big present. UM. So that's really 0:22:37.320 --> 0:22:39.639 where I'm focusing my attention. Just to wrap things up 0:22:39.800 --> 0:22:42.000 big picture, Erica was speaking of Jim Caren and Morgan 0:22:42.040 --> 0:22:44.399 Stanley just yesterday over the Bloomberg and I'll catch up 0:22:44.400 --> 0:22:46.720 with him a little bit later this morning. He's asking 0:22:46.760 --> 0:22:49.560 the following question the second order effects of markets leveraged 0:22:50.160 --> 0:22:53.440 to low and stable yields. Muhammadalarian brought that up yesterday 0:22:53.840 --> 0:22:55.879 as well on the program. Eric, can you tell me 0:22:55.960 --> 0:22:58.040 what you think those effects will be as we shift 0:22:58.080 --> 0:23:01.639 away from this regime leveraged to low and staple yields 0:23:01.680 --> 0:23:05.159 for much of the last ten years. Well, John, I 0:23:05.160 --> 0:23:07.080 think central banks really need to be careful here. And 0:23:07.440 --> 0:23:09.280 this comes back to why the b o J has 0:23:09.320 --> 0:23:12.240 sort of couched. This move is not a tightening of 0:23:12.320 --> 0:23:15.000 policy and there's not more to come. They've increased their 0:23:15.040 --> 0:23:18.000 buying of of jgbs because they know just how fragile 0:23:18.480 --> 0:23:21.560 the b o J or the Japanese system is and 0:23:21.680 --> 0:23:24.639 how leveraged this to low yields. UM. So you certainly 0:23:24.720 --> 0:23:27.560 have to watch some of the Japanese banks and there 0:23:27.640 --> 0:23:31.520 exposure and duration risk. I think the bigger point here, though, John, 0:23:31.680 --> 0:23:33.800 is central banks. We talked about the end of the 0:23:33.880 --> 0:23:36.639 central bank. Put in the equity context, what about the 0:23:36.680 --> 0:23:39.760 bond context. You know, every central bank is doing quantitative 0:23:39.800 --> 0:23:43.680 Titan next year. They're hiking pretty aggressively. We've really never 0:23:43.720 --> 0:23:46.720 seen this environment before, especially given our starting points, so 0:23:47.000 --> 0:23:49.199 we've got to really watch out for for long term 0:23:49.240 --> 0:23:53.399 bond yields. Ine, Eric, this is wonderful. Thank you, sir Nowson. 0:23:53.440 --> 0:24:07.119 That of last Faco Alicia Sherman joins us now with Bernstein, 0:24:07.680 --> 0:24:11.679 double degree, Warton Kellogg, all the rest of it, forget 0:24:11.720 --> 0:24:15.720 about it. She enjoyed the trenches at Ross stores with 0:24:15.840 --> 0:24:20.320 a real job before she ended up in securities analysis 0:24:20.359 --> 0:24:23.520 and nation thrilled that you're with us. Your note on 0:24:23.680 --> 0:24:27.760 Nike seems from another planet. Your optimism on their view 0:24:27.920 --> 0:24:32.520 forward is extraordinary. What does the gloom crew have wrong 0:24:32.600 --> 0:24:39.320 about the American consumer buying Nike shoes? Um? Thank you 0:24:39.400 --> 0:24:42.399