1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 2 00:00:09,200 --> 00:00:13,200 Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you 3 00:00:13,280 --> 00:00:18,600 Speaker 1: insight from the best and economics, finance, investment, and international relations. 4 00:00:18,800 --> 00:00:23,799 Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 5 00:00:23,920 --> 00:00:29,400 Speaker 1: and of course on the Bloomberg terminal. What we need 6 00:00:29,440 --> 00:00:31,920 Speaker 1: to do is not look back to jobs. It's old news. 7 00:00:32,080 --> 00:00:34,160 Speaker 1: You know, we all know that it's like ancient news, 8 00:00:34,159 --> 00:00:36,240 Speaker 1: and we're always looking forward here at surveillance. Let's do 9 00:00:36,360 --> 00:00:39,200 Speaker 1: that on the labor economy and on the view forward 10 00:00:39,200 --> 00:00:41,520 Speaker 1: of the car wreck and Donna Chief Fosconist at BNP 11 00:00:41,640 --> 00:00:45,559 Speaker 1: Pariba Markets three six, Carl, I want to slice and 12 00:00:45,600 --> 00:00:47,519 Speaker 1: you do this in your research note, you slice and 13 00:00:47,560 --> 00:00:50,720 Speaker 1: dice the confusion that's out there. I think the financial 14 00:00:50,720 --> 00:00:54,400 Speaker 1: media is way too simplistic about the labor reports plural 15 00:00:55,200 --> 00:00:57,680 Speaker 1: and the debate Friday was at a good report or 16 00:00:57,800 --> 00:01:01,920 Speaker 1: a bad report? Which part of the complexities of labor 17 00:01:02,520 --> 00:01:05,880 Speaker 1: matter to this confusion. Was it a good report? Was 18 00:01:05,920 --> 00:01:08,520 Speaker 1: it a bad report? I would say it was a 19 00:01:08,560 --> 00:01:10,959 Speaker 1: good report, not a great report, and not as strong 20 00:01:11,000 --> 00:01:13,280 Speaker 1: as the headline would have you. Believe because when we 21 00:01:13,319 --> 00:01:16,080 Speaker 1: start parsing into the details, not only was there a 22 00:01:16,120 --> 00:01:18,840 Speaker 1: big negative net revision to the prior two months, you 23 00:01:18,840 --> 00:01:21,759 Speaker 1: should lop that off of the top line. Also the 24 00:01:22,000 --> 00:01:24,920 Speaker 1: decline in the work week, So one tenth decline in 25 00:01:24,959 --> 00:01:27,640 Speaker 1: the work week is equivalent to about two hundred thousand jobs, 26 00:01:27,920 --> 00:01:29,559 Speaker 1: So you take that off of the number, and you're 27 00:01:29,600 --> 00:01:32,919 Speaker 1: really talking about a labor market that is showing signs 28 00:01:32,920 --> 00:01:35,800 Speaker 1: of weakness. So we have all these different labor gauges. 29 00:01:36,440 --> 00:01:38,360 Speaker 1: What I think we need to do because the most 30 00:01:38,400 --> 00:01:41,600 Speaker 1: important thing is the take home pay for workers. And 31 00:01:41,600 --> 00:01:44,000 Speaker 1: when we look at that number in aggregate, we can 32 00:01:44,080 --> 00:01:47,880 Speaker 1: absolutely see that the trend is decelerating. It's heading uh 33 00:01:48,320 --> 00:01:51,240 Speaker 1: below the rate of inflation at the moment, and so 34 00:01:51,320 --> 00:01:55,400 Speaker 1: this is a big problem for households. The the rocket 35 00:01:55,400 --> 00:01:58,280 Speaker 1: fuel for consumer spending is coming in and you know, 36 00:01:58,360 --> 00:02:01,480 Speaker 1: dramatically slower fashion going forward, and that has big implications 37 00:02:01,480 --> 00:02:04,480 Speaker 1: for how consumers look later at this quarter and especially internet. 38 00:02:04,720 --> 00:02:07,280 Speaker 1: Part of this is the microeconomics foundations of this. You 39 00:02:07,320 --> 00:02:10,359 Speaker 1: were so fortunate Princeton to have a guy named H. Rosen. 40 00:02:10,440 --> 00:02:13,760 Speaker 1: Harvey Rosen held court on look at the minutia you 41 00:02:13,800 --> 00:02:15,680 Speaker 1: do that in your research. No, what you're doing, Harvey 42 00:02:15,760 --> 00:02:18,960 Speaker 1: Rosen one oh one, and you're saying, look at labor supply, 43 00:02:19,520 --> 00:02:23,839 Speaker 1: what is the distinction of the American labor supply right now? 44 00:02:24,200 --> 00:02:26,440 Speaker 1: The supply simply isn't there. And it's not just a 45 00:02:26,480 --> 00:02:30,280 Speaker 1: story of early retirements. It's happening across a broad swath 46 00:02:30,400 --> 00:02:33,480 Speaker 1: of the labor base. Uh. And this tells us there's 47 00:02:33,560 --> 00:02:36,520 Speaker 1: less slack than meets the eye. And if we're printing 48 00:02:36,600 --> 00:02:39,600 Speaker 1: jobs at a pace of two hundred thousand plus per month, 49 00:02:40,000 --> 00:02:42,560 Speaker 1: this is continuing continuing to amp up the pressure in 50 00:02:42,600 --> 00:02:46,000 Speaker 1: the labor market. And we saw that in the latest average. 51 00:02:47,520 --> 00:02:48,840 Speaker 1: Not to correct you on there, but I think it's 52 00:02:48,840 --> 00:02:51,000 Speaker 1: Harvey Rosen one oh two, not one oh one. Okay, 53 00:02:51,040 --> 00:02:53,440 Speaker 1: excuse me. That's not very late. How fast this fed 54 00:02:53,520 --> 00:02:56,360 Speaker 1: kinda because another band paid code. It's a little bit 55 00:02:56,360 --> 00:02:59,320 Speaker 1: out that compared to maybe the consensus. Sure, well it 56 00:02:59,440 --> 00:03:02,040 Speaker 1: is now. We'll see what happens after the press conference 57 00:03:02,240 --> 00:03:04,880 Speaker 1: next week, but we do think that there's another fifty 58 00:03:04,919 --> 00:03:08,600 Speaker 1: basis point tightening in December. We expect another fifty basis 59 00:03:08,600 --> 00:03:11,440 Speaker 1: points in February and then finishing it off at twenty 60 00:03:11,480 --> 00:03:13,720 Speaker 1: five pips at the March meeting. So we're a terminal 61 00:03:13,800 --> 00:03:17,920 Speaker 1: rate of five and a quarter, consistent entirely with what 62 00:03:17,960 --> 00:03:21,240 Speaker 1: we're seeing in terms of the upward surprises on labor GDP. 63 00:03:21,440 --> 00:03:24,840 Speaker 1: Consumer're spending uh and uh, you know, we're slowing, but 64 00:03:24,880 --> 00:03:26,680 Speaker 1: we're not slowing quite fast enough. So the Fed has 65 00:03:26,680 --> 00:03:28,400 Speaker 1: a bit more work to dr rica. Don It's like 66 00:03:28,440 --> 00:03:30,600 Speaker 1: take to Aspurn. He doesn't talk the same as when 67 00:03:30,600 --> 00:03:32,600 Speaker 1: he was here. I mean he's quick, he's he's like, 68 00:03:32,840 --> 00:03:36,640 Speaker 1: he's like this this this why kind of got kind 69 00:03:36,640 --> 00:03:39,080 Speaker 1: of got back to the office now. Is there're upside 70 00:03:39,160 --> 00:03:41,280 Speaker 1: risk to that col what's the balance of risk around 71 00:03:41,280 --> 00:03:43,840 Speaker 1: that coal? I think it's a pretty balanced risk at 72 00:03:43,880 --> 00:03:46,680 Speaker 1: this point in time. But you know, the story has 73 00:03:46,720 --> 00:03:49,560 Speaker 1: been over the last few months, the resilience and in 74 00:03:49,600 --> 00:03:52,360 Speaker 1: the labor market. So we jokingly put a subtitle in 75 00:03:52,400 --> 00:03:55,280 Speaker 1: our right up of the jobs report. Uh, more Rocky 76 00:03:55,320 --> 00:04:00,400 Speaker 1: Balboa than Rocky in terms of the labor markets alone. 77 00:04:01,240 --> 00:04:07,840 Speaker 1: O Rocky in Philadelphia. This is wasted on you, isn't it. 78 00:04:07,840 --> 00:04:10,840 Speaker 1: It's Philadelphia. I haven't seen the movie actually, but the 79 00:04:10,920 --> 00:04:17,240 Speaker 1: point is that can see whether three tail sales labor data. Uh, 80 00:04:17,360 --> 00:04:19,880 Speaker 1: you know, GDP figures, etcetera, etcetera. So you know the 81 00:04:19,920 --> 00:04:21,680 Speaker 1: FET is going to keep at it until the job 82 00:04:21,760 --> 00:04:23,640 Speaker 1: is done, and the latest data suggests they may have 83 00:04:23,680 --> 00:04:26,280 Speaker 1: to keep at it a little bit more than previously entist. 84 00:04:26,440 --> 00:04:28,440 Speaker 1: We're seeing a shift from cham and Pal from the 85 00:04:28,440 --> 00:04:30,680 Speaker 1: news conference to Brookings. What did you think about I 86 00:04:30,680 --> 00:04:32,960 Speaker 1: think we're seeing a shift just because he didn't talk 87 00:04:33,000 --> 00:04:35,680 Speaker 1: about the financial conditions, the point you were highlighting earlier 88 00:04:35,680 --> 00:04:39,839 Speaker 1: today on the program. He's there's a big difference between 89 00:04:39,839 --> 00:04:42,120 Speaker 1: where we are now compared to where we were between 90 00:04:42,160 --> 00:04:44,880 Speaker 1: the July A form C presser and the Jackson Hole 91 00:04:45,279 --> 00:04:47,800 Speaker 1: uh speech where he ripped up the script and delivered 92 00:04:47,800 --> 00:04:51,560 Speaker 1: this very hawk ish message. We see a turn happening 93 00:04:51,560 --> 00:04:54,479 Speaker 1: in the inflation numbers. We see that the housing sector 94 00:04:54,560 --> 00:04:57,200 Speaker 1: slowing down. We see the impact of a stronger dollar 95 00:04:57,279 --> 00:04:59,840 Speaker 1: and tighter rates in the factory sector and manufacturing. So 96 00:05:00,160 --> 00:05:02,559 Speaker 1: the Fed feels less behind the curve at the moment, 97 00:05:02,600 --> 00:05:05,240 Speaker 1: and so there's less need to aggressively run out and 98 00:05:05,240 --> 00:05:08,360 Speaker 1: try to stage manage of financial conditions and staid they 99 00:05:08,360 --> 00:05:10,800 Speaker 1: can let the markets react to the signaling from the 100 00:05:10,920 --> 00:05:13,720 Speaker 1: updated dot plot in summer Summer of economic projects I'm 101 00:05:13,760 --> 00:05:17,039 Speaker 1: gonna move to nine o'clock hour looking at you know, 102 00:05:17,160 --> 00:05:19,440 Speaker 1: different things with Stephen Roach, and I want to start 103 00:05:19,440 --> 00:05:22,640 Speaker 1: with him with wage spiral. Help us out here define 104 00:05:23,120 --> 00:05:27,080 Speaker 1: what a wage spiral is? Is it slips into our conversation, well, 105 00:05:27,120 --> 00:05:30,880 Speaker 1: wage price spiral is when workers are demanding higher wages 106 00:05:30,920 --> 00:05:33,280 Speaker 1: to keep up with inflation, but those higher wages are 107 00:05:33,320 --> 00:05:36,520 Speaker 1: than providing the fuel and the funding to sustain those 108 00:05:36,520 --> 00:05:40,080 Speaker 1: price increases. It's too early to say that we're in 109 00:05:40,120 --> 00:05:42,600 Speaker 1: that dynamic at the moment because the economy is undergoing 110 00:05:42,640 --> 00:05:45,560 Speaker 1: a massive deceleration. Right If we look at real GDP 111 00:05:46,080 --> 00:05:48,559 Speaker 1: was about thirteen percent year on year in the middle 112 00:05:49,080 --> 00:05:52,200 Speaker 1: of last year. Uh, it was six percent a year end, 113 00:05:52,520 --> 00:05:55,560 Speaker 1: about two percent middle of this year. It's heading close 114 00:05:55,640 --> 00:05:58,840 Speaker 1: to zero this year. So with that kind of deceleration, 115 00:05:58,960 --> 00:06:00,880 Speaker 1: you know that the way age trend is going to 116 00:06:00,920 --> 00:06:04,040 Speaker 1: decelerate as well. UH. And therefore there's a good chance 117 00:06:04,080 --> 00:06:08,839 Speaker 1: that we break this dynamic before a real, uh deleterious 118 00:06:08,880 --> 00:06:11,880 Speaker 1: feedback loop comes about. How is it broken? What's the 119 00:06:11,960 --> 00:06:14,960 Speaker 1: actual your study of history and how we do we 120 00:06:15,000 --> 00:06:18,400 Speaker 1: have wages deflate or we will have wages deflate, But 121 00:06:18,520 --> 00:06:21,200 Speaker 1: what will happen is that as the labor market starts 122 00:06:21,240 --> 00:06:23,960 Speaker 1: to loosen up, then you'll see that bargaining power quickly 123 00:06:23,960 --> 00:06:27,000 Speaker 1: eroded from U S workers. So we're not there yet. 124 00:06:27,040 --> 00:06:29,839 Speaker 1: We're printing north of two hundred thousand on jobs, but 125 00:06:29,920 --> 00:06:32,279 Speaker 1: I think by the first quarter of this year we 126 00:06:32,320 --> 00:06:34,680 Speaker 1: could very well see our first negative payroll print. And 127 00:06:34,720 --> 00:06:37,520 Speaker 1: then as the loosening starts to come about, we are 128 00:06:37,560 --> 00:06:40,480 Speaker 1: in the recession camp for next year, probably starting in 129 00:06:40,560 --> 00:06:43,680 Speaker 1: Q two. That loosening of labor conditions, as the unemployment 130 00:06:43,760 --> 00:06:45,880 Speaker 1: rate moves from a low of three and a half 131 00:06:45,920 --> 00:06:49,159 Speaker 1: towards six percent at the peak, that will erode the 132 00:06:49,160 --> 00:06:51,960 Speaker 1: bargaining power and prevent the feedback loop from that's the 133 00:06:52,040 --> 00:06:54,839 Speaker 1: trajectory for gross Can you give us the line paths 134 00:06:54,839 --> 00:06:58,160 Speaker 1: for inflation? Maybe a sneak paken next week and beyond sure, Well, 135 00:06:58,160 --> 00:07:00,560 Speaker 1: the first bid is easy. So getting the eight from 136 00:07:00,600 --> 00:07:03,480 Speaker 1: eight percent c p I to four is something that 137 00:07:03,520 --> 00:07:06,760 Speaker 1: can probably happen in about two or three quarters. Getting 138 00:07:06,760 --> 00:07:10,040 Speaker 1: from four to two is the hard part. And and 139 00:07:10,080 --> 00:07:14,360 Speaker 1: so you know that requires the rent story to change 140 00:07:14,360 --> 00:07:17,560 Speaker 1: meaningfully and also really the core inflation metric we have 141 00:07:17,600 --> 00:07:21,240 Speaker 1: to be watching at the moment UH is core services 142 00:07:21,400 --> 00:07:23,640 Speaker 1: X rents and not to be too cute, but now 143 00:07:23,640 --> 00:07:25,840 Speaker 1: we have to strip out medical services as well because 144 00:07:25,880 --> 00:07:29,520 Speaker 1: of these UH this accounting dynamic related to insurance payments 145 00:07:29,520 --> 00:07:31,280 Speaker 1: and COVID and whatnot. So if you look at that 146 00:07:31,360 --> 00:07:34,120 Speaker 1: component of the CPI, that's where you watch for your 147 00:07:34,160 --> 00:07:37,240 Speaker 1: wage price spiral dynamics. Interest, we're saying no improvement on 148 00:07:37,280 --> 00:07:39,600 Speaker 1: that front yet, right, So that that tells the Fed 149 00:07:39,640 --> 00:07:42,160 Speaker 1: they have to keep hammering away at the problem. It's 150 00:07:42,200 --> 00:07:44,360 Speaker 1: easy to get from eight to four. From four to 151 00:07:44,400 --> 00:07:48,080 Speaker 1: two probably takes till about the end of twenty four. 152 00:07:48,160 --> 00:07:50,120 Speaker 1: So this is a question more along the lines of 153 00:07:50,760 --> 00:07:53,200 Speaker 1: reaction function question on the fat. Yes, so if I 154 00:07:53,240 --> 00:07:56,800 Speaker 1: put the two paces together, you've got growth, recession, inflation 155 00:07:57,000 --> 00:07:58,920 Speaker 1: kind of sticky, difficult to get from four to two. 156 00:07:59,560 --> 00:08:03,320 Speaker 1: It's the hold an interest writes that your five as 157 00:08:03,360 --> 00:08:08,280 Speaker 1: the economy rolls for a much longer period of time, John, 158 00:08:08,400 --> 00:08:10,760 Speaker 1: And this is something that the markets haven't fully come 159 00:08:10,760 --> 00:08:14,600 Speaker 1: to appreciate. Powell tease this in the November press conference 160 00:08:14,600 --> 00:08:16,880 Speaker 1: when he said, shift away from the pace to the 161 00:08:16,960 --> 00:08:20,360 Speaker 1: level in the duration. The market has refocused to the level, 162 00:08:20,360 --> 00:08:22,840 Speaker 1: but I don't think they fully incorporated the duration, and 163 00:08:22,880 --> 00:08:25,520 Speaker 1: the FED won't be the white Knight riding to the 164 00:08:25,560 --> 00:08:28,480 Speaker 1: rescue as it normally is in the recession. Instead, the 165 00:08:28,520 --> 00:08:30,360 Speaker 1: FED we expect to stay at this five and a 166 00:08:30,440 --> 00:08:33,440 Speaker 1: quarter level basically through the entirety of next year, and 167 00:08:33,440 --> 00:08:38,640 Speaker 1: they could start up easing but not moving into accommodative territory. 168 00:08:38,800 --> 00:08:42,800 Speaker 1: This is sacrilegic bmped very conservative shot. But the zeitgeist 169 00:08:42,840 --> 00:08:47,160 Speaker 1: now is old Carrenco at Virginia Commonwealth University over to 170 00:08:47,240 --> 00:08:50,600 Speaker 1: the giant Olivier blond Chard at the Peterson Institute, which 171 00:08:50,640 --> 00:08:53,520 Speaker 1: Paul Krugman wrote about four or five days ago, of 172 00:08:53,559 --> 00:08:55,840 Speaker 1: the new two percent. As you mentioned four percent as 173 00:08:55,840 --> 00:08:58,600 Speaker 1: a challenge, the new two percent is going to be 174 00:08:58,679 --> 00:09:02,560 Speaker 1: elevated our in the vicinity of three. Can we would 175 00:09:02,720 --> 00:09:06,959 Speaker 1: stand that is, you know that theoretical chit chat of 176 00:09:07,040 --> 00:09:11,440 Speaker 1: people like you, can we withstand a new inflation level 177 00:09:11,480 --> 00:09:14,360 Speaker 1: above two percent? It's going to be hard to get 178 00:09:14,360 --> 00:09:16,080 Speaker 1: to that two percent level. And I know there's a 179 00:09:16,080 --> 00:09:18,480 Speaker 1: lot of discussion right now. I'm fielding lots of questions 180 00:09:18,480 --> 00:09:22,280 Speaker 1: why not change the inflation target? Uh? And the FED officials, 181 00:09:22,440 --> 00:09:25,080 Speaker 1: presidents and governors alike are of the same view that 182 00:09:25,120 --> 00:09:29,200 Speaker 1: we have to achieve two percent to to prove that 183 00:09:29,240 --> 00:09:31,120 Speaker 1: we can't hit the two percent target. If there is 184 00:09:31,160 --> 00:09:34,440 Speaker 1: a time to relax the inflation thre threshold and whatnot, 185 00:09:34,559 --> 00:09:36,480 Speaker 1: they have to do it from the other side of 186 00:09:37,080 --> 00:09:38,679 Speaker 1: of the new threshold, and so they have to get 187 00:09:38,720 --> 00:09:40,480 Speaker 1: to two percent prove we can stay there if they 188 00:09:40,520 --> 00:09:43,920 Speaker 1: have a compelling reason because of demographics or energy costs 189 00:09:44,000 --> 00:09:46,640 Speaker 1: or otherwise why they would then need to maybe re 190 00:09:46,760 --> 00:09:49,719 Speaker 1: evaluate what the longer term target could be. They can 191 00:09:49,760 --> 00:09:51,480 Speaker 1: do that, but you can't. You can't do that when 192 00:09:51,480 --> 00:09:54,000 Speaker 1: you're this far off of the target. To the highside 193 00:09:54,200 --> 00:09:57,719 Speaker 1: party of Carl Saturday morning, France, England and now you're 194 00:09:57,720 --> 00:09:59,520 Speaker 1: at being page. You have to pretend to like you 195 00:09:59,520 --> 00:10:02,720 Speaker 1: have to we the world coup. We just fluent French 196 00:10:02,760 --> 00:10:08,400 Speaker 1: now as well walk around with French flags for the 197 00:10:08,480 --> 00:10:14,240 Speaker 1: national team. Is that it works? Just that if you 198 00:10:14,360 --> 00:10:16,880 Speaker 1: seriously never can we clear this up? Because people want 199 00:10:16,880 --> 00:10:20,080 Speaker 1: to know if you never watched Rocky, I have honestly 200 00:10:20,160 --> 00:10:23,680 Speaker 1: never watched the movie. You've never watched Rocky. It was 201 00:10:23,720 --> 00:10:31,479 Speaker 1: a show. I walked off set. What t K come with? What? Seriously, 202 00:10:32,280 --> 00:10:37,320 Speaker 1: you've never watched Rocky? I'm leaving the car you are 203 00:10:39,040 --> 00:10:42,200 Speaker 1: Have you never watched Rocky? Has that even happened? I 204 00:10:42,240 --> 00:10:55,160 Speaker 1: don't know. Let's do this right now. And we really 205 00:10:55,160 --> 00:10:58,280 Speaker 1: think Rebecca Patterson for being where this was Bridgewater. She 206 00:10:58,360 --> 00:11:01,640 Speaker 1: had every reason to cancel after the shock last week 207 00:11:01,679 --> 00:11:04,760 Speaker 1: of their performance. She is a chief investment strategist for 208 00:11:04,840 --> 00:11:08,440 Speaker 1: Bridgewater which was doing so better than good and ran 209 00:11:08,520 --> 00:11:13,120 Speaker 1: into challenges. Rebecca, without getting into the nitte gritte of Bridgewater, 210 00:11:13,520 --> 00:11:18,240 Speaker 1: what were the challenges you faced in the last ninety days. Well, 211 00:11:18,480 --> 00:11:22,600 Speaker 1: we take views that are usually six to eighteen months out, 212 00:11:22,880 --> 00:11:25,920 Speaker 1: and so as we're looking at the world, we continue 213 00:11:25,960 --> 00:11:29,440 Speaker 1: to be quite cautious on assets. We think that the 214 00:11:29,520 --> 00:11:32,079 Speaker 1: market is discounting goldilocks, that the FETE is going to 215 00:11:32,120 --> 00:11:34,360 Speaker 1: be able to start easing in the second half of 216 00:11:34,400 --> 00:11:37,680 Speaker 1: next year without any material hit to earnings and only 217 00:11:37,720 --> 00:11:39,800 Speaker 1: a very moderate slow down in the economy. And we 218 00:11:39,880 --> 00:11:42,640 Speaker 1: just don't think that adds up. And so as we've 219 00:11:42,640 --> 00:11:45,880 Speaker 1: seen this bear market rally in recent months, the market 220 00:11:45,920 --> 00:11:49,520 Speaker 1: responding to increased hope that the feeble pause and then 221 00:11:49,600 --> 00:11:54,240 Speaker 1: start actually cutting rates next year. We have seen growth assets, 222 00:11:54,280 --> 00:11:58,360 Speaker 1: risky assets performing well um, but we we still believe 223 00:11:58,559 --> 00:12:01,480 Speaker 1: that as we go into three, while there is going 224 00:12:01,559 --> 00:12:03,400 Speaker 1: to be this tug of war, how much will the 225 00:12:03,440 --> 00:12:07,120 Speaker 1: Fed accept inflation versus force inflation to its target? How 226 00:12:07,200 --> 00:12:09,920 Speaker 1: much growth pain will we get. We continue to believe 227 00:12:09,960 --> 00:12:12,240 Speaker 1: that there's another shoe that has to drop, and that 228 00:12:12,440 --> 00:12:16,000 Speaker 1: is the economy. It's resilient today still with the exception 229 00:12:16,040 --> 00:12:18,480 Speaker 1: of housing, but we think the feed is going to 230 00:12:18,600 --> 00:12:22,240 Speaker 1: have to push demand lower to get that wage inflation down, 231 00:12:22,640 --> 00:12:25,040 Speaker 1: and they're not likely to ease next year. With your 232 00:12:25,120 --> 00:12:28,960 Speaker 1: years A Champ Morgenvessemer now with Bridgewater tell us about 233 00:12:28,960 --> 00:12:32,040 Speaker 1: the dollar is the litmus paper of the system? Suddenly 234 00:12:32,440 --> 00:12:35,880 Speaker 1: weak dollar? Did that diminish the Bridgewater total return and 235 00:12:35,960 --> 00:12:38,840 Speaker 1: lead to those quarterly losses? And what is a weaker 236 00:12:38,920 --> 00:12:43,480 Speaker 1: dollar signal? Now? Well, the dollar, as you said, has 237 00:12:43,520 --> 00:12:46,040 Speaker 1: been giving up a lot of its gains from earlier 238 00:12:46,080 --> 00:12:48,800 Speaker 1: this year and in the last year or so. We 239 00:12:48,920 --> 00:12:52,439 Speaker 1: think as long as liquidity conditions remain tight, and remember 240 00:12:52,720 --> 00:12:55,600 Speaker 1: the feed is still raising rates. They may slow the pace, 241 00:12:55,760 --> 00:12:59,360 Speaker 1: but they're still raising rates. And we've got quantitative tightening, 242 00:12:59,360 --> 00:13:01,240 Speaker 1: which is of all the pace of what we saw 243 00:13:01,240 --> 00:13:05,480 Speaker 1: in plus we have rate hikes going globally, with the 244 00:13:05,480 --> 00:13:09,760 Speaker 1: exception of maybe Japan China, and so these tightening liquidity 245 00:13:09,800 --> 00:13:12,880 Speaker 1: conditions tend to support the dollar, the dollars the world's 246 00:13:12,920 --> 00:13:17,320 Speaker 1: funding currency. So yes, you've seen this sell off, this 247 00:13:17,480 --> 00:13:20,760 Speaker 1: technical um profit taking if you will, on the dollar 248 00:13:20,840 --> 00:13:23,680 Speaker 1: in recent months, but we don't think we've seen a 249 00:13:23,760 --> 00:13:26,080 Speaker 1: major dollar top along the lines of what we saw 250 00:13:26,120 --> 00:13:30,240 Speaker 1: in Night five their early two thousands. Maybe we're going 251 00:13:30,280 --> 00:13:32,040 Speaker 1: to be in a bit more of a range over 252 00:13:32,080 --> 00:13:34,480 Speaker 1: the coming months as we play through this tug of 253 00:13:34,559 --> 00:13:37,760 Speaker 1: war of China reopening and the and central banks how 254 00:13:37,880 --> 00:13:40,600 Speaker 1: much will they tighten, But we don't think we've seen 255 00:13:40,640 --> 00:13:43,240 Speaker 1: a sustained turn yet. Rebecca, what you have the terminal 256 00:13:43,320 --> 00:13:46,560 Speaker 1: right at least Federal reserve. Well, we're not trying to 257 00:13:46,640 --> 00:13:50,600 Speaker 1: predict specific numbers for the stock market or the Fed funds. 258 00:13:50,679 --> 00:13:53,960 Speaker 1: We're trying to understand the degree of pressures on the 259 00:13:54,000 --> 00:13:58,960 Speaker 1: economy that's going to translate into market outcomes. But certainly, 260 00:13:59,160 --> 00:14:02,199 Speaker 1: if we need to see wage inflation, which by the 261 00:14:02,240 --> 00:14:05,559 Speaker 1: Atlanta FEDS measure is still running well over six percent, 262 00:14:05,960 --> 00:14:08,079 Speaker 1: if we need to get that down two or three 263 00:14:08,120 --> 00:14:12,160 Speaker 1: percentage points to get us inflation closer to the Fed's 264 00:14:12,280 --> 00:14:14,920 Speaker 1: target um, then I think we're going to see the 265 00:14:14,960 --> 00:14:18,400 Speaker 1: FED going at least to five percent on the FED funds, 266 00:14:18,720 --> 00:14:22,360 Speaker 1: with a probability that's not not di minimus that they 267 00:14:22,360 --> 00:14:25,040 Speaker 1: may have to go higher. The trick is, if they 268 00:14:25,040 --> 00:14:28,520 Speaker 1: get to the spring sometime and maybe pause to give 269 00:14:28,640 --> 00:14:32,360 Speaker 1: time for FED hiking so far to play through the economy, 270 00:14:32,480 --> 00:14:36,560 Speaker 1: maybe inflation comes down to three four percent, But if 271 00:14:36,560 --> 00:14:39,040 Speaker 1: the Feds not happy with that, then they may have 272 00:14:39,120 --> 00:14:41,800 Speaker 1: to do an additional round of tightening. And we saw 273 00:14:41,840 --> 00:14:44,480 Speaker 1: that before in the nineties, seventies and early eighties. You 274 00:14:44,520 --> 00:14:47,560 Speaker 1: needed three rounds of tightening for the FED to actually 275 00:14:47,560 --> 00:14:51,440 Speaker 1: get inflation under control. The market absolutely is not discounting 276 00:14:51,440 --> 00:14:54,240 Speaker 1: that possibility. We're not saying it's our base case, but 277 00:14:54,280 --> 00:14:56,840 Speaker 1: it's certainly a risk that we think is is something 278 00:14:56,880 --> 00:15:00,080 Speaker 1: people should consider. Your base case sounds like five. Is 279 00:15:00,120 --> 00:15:02,440 Speaker 1: that fair? From what I just heard, there's five fair. 280 00:15:03,360 --> 00:15:06,600 Speaker 1: I think I think five is certainly plausible, and it 281 00:15:06,720 --> 00:15:08,960 Speaker 1: is very possible we could go higher than that. So 282 00:15:09,120 --> 00:15:11,560 Speaker 1: five s the base coats. That's largely what's been priced 283 00:15:11,560 --> 00:15:14,080 Speaker 1: in the market for quite a while, largely expecting the 284 00:15:14,080 --> 00:15:17,720 Speaker 1: Federal Reserve to put that in that projections next week. Rebecca, 285 00:15:17,760 --> 00:15:19,880 Speaker 1: I think a lot of people might sit here and say, well, 286 00:15:19,880 --> 00:15:23,040 Speaker 1: that's priced, We're done with that, and to get that 287 00:15:23,160 --> 00:15:26,080 Speaker 1: extra leg of dollar strength, I need something else. And Rebecca, 288 00:15:26,080 --> 00:15:27,520 Speaker 1: I guess the question is what is it in your 289 00:15:27,520 --> 00:15:31,680 Speaker 1: base case that delivers that something else. I try not 290 00:15:31,760 --> 00:15:34,080 Speaker 1: to interrupt you, because I'm dying to answer the questions. 291 00:15:34,480 --> 00:15:38,760 Speaker 1: It's easy. What's not priced is the FED going high 292 00:15:38,920 --> 00:15:42,520 Speaker 1: and holding the markets anticipating right now that we get 293 00:15:42,640 --> 00:15:45,960 Speaker 1: significant rate cuts starting in the second half of next year. 294 00:15:46,480 --> 00:15:51,080 Speaker 1: And we think without severe economic weakness to justify that, 295 00:15:51,320 --> 00:15:53,880 Speaker 1: we're going to get the Fed pausing but not cutting, 296 00:15:54,240 --> 00:15:57,200 Speaker 1: and so as that is changed, and what the discounted, 297 00:15:57,920 --> 00:16:00,360 Speaker 1: what the market is discounting, we think that it add 298 00:16:00,360 --> 00:16:03,080 Speaker 1: a layers or to the dollar. Again, don't forget we're 299 00:16:03,080 --> 00:16:05,600 Speaker 1: not talking about an end of quantitative tightening or rate 300 00:16:05,640 --> 00:16:07,680 Speaker 1: hikes around the world as well. You know, I just 301 00:16:07,680 --> 00:16:09,960 Speaker 1: want to point out miss Patterson never is dying to 302 00:16:10,040 --> 00:16:13,080 Speaker 1: interrupt me. It's only you she is dying. Do you 303 00:16:13,120 --> 00:16:15,200 Speaker 1: think that's what? What do you think that is? Because 304 00:16:15,360 --> 00:16:19,080 Speaker 1: you know, I don't know. I'm just saying, uh, it's 305 00:16:19,080 --> 00:16:21,640 Speaker 1: a good response about a persistence of the facts staying 306 00:16:21,680 --> 00:16:25,080 Speaker 1: there and back against this view that we get these 307 00:16:25,160 --> 00:16:26,880 Speaker 1: right cuts from the front of us a time. So 308 00:16:27,000 --> 00:16:28,760 Speaker 1: back and I remember when you made a six month 309 00:16:28,800 --> 00:16:31,280 Speaker 1: call if you were really you know, an eighteen month 310 00:16:31,280 --> 00:16:33,880 Speaker 1: call was now we got we're gonna pivot in January. 311 00:16:33,960 --> 00:16:36,760 Speaker 1: The fourth week of February, we're gonna pivot again. And 312 00:16:36,800 --> 00:16:38,720 Speaker 1: then by the first week April, we're gonna do this 313 00:16:38,800 --> 00:16:42,520 Speaker 1: this this forget about it, Rebecca, Cash is trash. What 314 00:16:42,680 --> 00:16:46,680 Speaker 1: is the value of cash to our listeners and viewers 315 00:16:46,840 --> 00:16:51,240 Speaker 1: into two thousand twenty three. Well, what's so interesting, Tom, 316 00:16:51,360 --> 00:16:54,640 Speaker 1: is that we're really seeing the market move into a 317 00:16:54,640 --> 00:16:57,840 Speaker 1: new paradigm. We haven't had short term rates this high 318 00:16:57,880 --> 00:17:00,920 Speaker 1: in a very long time, and so it is interesting 319 00:17:00,960 --> 00:17:04,440 Speaker 1: to think about how our investors are going to position 320 00:17:04,520 --> 00:17:07,200 Speaker 1: for the next decade versus the last decade. The last 321 00:17:07,200 --> 00:17:11,359 Speaker 1: decade was all about um low and stable inflation, low 322 00:17:11,440 --> 00:17:15,960 Speaker 1: macro volatility, low commodity prices. And now if we're in 323 00:17:15,960 --> 00:17:20,159 Speaker 1: a regime where there's more uncertainty around the level of inflation, 324 00:17:20,240 --> 00:17:25,080 Speaker 1: more uncertainty around where where interest rates should settle, what's 325 00:17:25,080 --> 00:17:28,080 Speaker 1: the right portfolio to construct? Should you stay overweight the 326 00:17:28,160 --> 00:17:31,080 Speaker 1: U S. Should you stay overweight tech? How much private 327 00:17:31,119 --> 00:17:34,080 Speaker 1: assets did you have in your portfolio. We think there's 328 00:17:34,119 --> 00:17:38,520 Speaker 1: some tectonic plates that are shifting right now, and assuming 329 00:17:38,560 --> 00:17:40,960 Speaker 1: that they can be sustained, and we think there's a 330 00:17:41,000 --> 00:17:43,439 Speaker 1: real chance they can. I think we're gonna get a 331 00:17:43,440 --> 00:17:48,560 Speaker 1: lot of more structural, bigger market changes, portfolio allocation changes 332 00:17:48,600 --> 00:17:51,720 Speaker 1: in the year two ahead, as people realize this is 333 00:17:51,760 --> 00:17:54,760 Speaker 1: a different world we're moving into. Not that inflation is 334 00:17:54,800 --> 00:17:57,760 Speaker 1: going to settle at four or five, but um, it 335 00:17:57,920 --> 00:18:00,520 Speaker 1: certainly could settle higher than where it's been, with rates 336 00:18:00,600 --> 00:18:02,720 Speaker 1: higher than they've been as well. I gotta squeeze this in. 337 00:18:02,760 --> 00:18:05,320 Speaker 1: This is great, Rebecca, Just one final question, what's the 338 00:18:05,320 --> 00:18:09,000 Speaker 1: biggest change that you're expecting the South On the conversations 339 00:18:09,000 --> 00:18:11,000 Speaker 1: that you're having with clients that push him back on still, 340 00:18:11,040 --> 00:18:15,040 Speaker 1: what's the number one change you think we're gonna say? Well, 341 00:18:15,320 --> 00:18:18,359 Speaker 1: I think the structural change is inflation. I think the 342 00:18:18,480 --> 00:18:22,280 Speaker 1: cyclical change. The biggest thing to watch for three is growth. 343 00:18:22,560 --> 00:18:25,400 Speaker 1: I think we're gonna have to see growth weaker for 344 00:18:25,600 --> 00:18:28,240 Speaker 1: central banks to hit their targets, and that's not yet 345 00:18:28,280 --> 00:18:31,960 Speaker 1: reflected in earnings. Rebecca Patterson thank you, Bruin riche Water. 346 00:18:32,000 --> 00:18:39,920 Speaker 1: Just fantastic because we celebrate and I mean truly celebrate 347 00:18:40,520 --> 00:18:45,600 Speaker 1: accidental conflict America, China and the clash of false narratives. This, 348 00:18:45,720 --> 00:18:47,679 Speaker 1: of course was Stephen Rod. You've heard me in the 349 00:18:47,760 --> 00:18:52,480 Speaker 1: recent days say essentially he invented modern market economics at 350 00:18:52,520 --> 00:18:56,040 Speaker 1: Morgan Stanley and of course now at his Yale University. 351 00:18:56,119 --> 00:18:58,639 Speaker 1: Dr Roarge, thank you so much for joining us UM 352 00:18:59,080 --> 00:19:01,960 Speaker 1: this morning. I do and ask one American question before 353 00:19:01,960 --> 00:19:06,800 Speaker 1: we celebrate your informative book, and that is, simply, do 354 00:19:06,960 --> 00:19:09,480 Speaker 1: we hearken back to the fears of the sixties and 355 00:19:09,520 --> 00:19:15,720 Speaker 1: the seventies and a wage price spiral, well wage price spiral. 356 00:19:15,760 --> 00:19:19,639 Speaker 1: Back then, Tom was heavily impacted by cost of living 357 00:19:20,560 --> 00:19:27,200 Speaker 1: UH indexation clauses in labor union contracts. And two things 358 00:19:27,200 --> 00:19:30,720 Speaker 1: have happened. Uh labor unions are a much smaller share 359 00:19:30,720 --> 00:19:35,560 Speaker 1: of the workforce, and these coal adjustment clauses are less 360 00:19:35,600 --> 00:19:39,280 Speaker 1: prevalent than they were back then. And nevertheless, you know, 361 00:19:39,520 --> 00:19:44,920 Speaker 1: wages are Labor is a very important segment of overall 362 00:19:45,080 --> 00:19:51,840 Speaker 1: business costs, and tight labor markets are certainly boosting the 363 00:19:51,880 --> 00:19:55,840 Speaker 1: compensation piece of that. And weak productivity is reinforcing it. 364 00:19:55,920 --> 00:19:59,040 Speaker 1: So it's it's important to stay focused on this issue. 365 00:19:59,359 --> 00:20:02,840 Speaker 1: Steven Ros to China, Sir Howard Davies mentions of your 366 00:20:03,560 --> 00:20:05,919 Speaker 1: book that it is is is a way to a 367 00:20:05,960 --> 00:20:10,600 Speaker 1: new framework, a new discussion of both parties. We need 368 00:20:10,760 --> 00:20:14,920 Speaker 1: goodwill among the United States and China. How do we 369 00:20:15,000 --> 00:20:20,119 Speaker 1: find that goodwill? Well? Number One, we have to recognize 370 00:20:20,119 --> 00:20:23,840 Speaker 1: that the current approach that we've both been wedded to 371 00:20:24,119 --> 00:20:27,600 Speaker 1: over the past twenty years is an abysmal failure. In 372 00:20:27,600 --> 00:20:31,560 Speaker 1: the last five years, we've had the beginnings of a 373 00:20:31,600 --> 00:20:34,120 Speaker 1: trade war, at tech war, and now the early stages 374 00:20:34,760 --> 00:20:38,159 Speaker 1: of a new Cold war, so an accidental conflict. I 375 00:20:38,240 --> 00:20:43,960 Speaker 1: propose a a new approach based on three key pillars. 376 00:20:45,160 --> 00:20:50,159 Speaker 1: One UH rebuilding trust by going after the low hanging 377 00:20:50,200 --> 00:20:56,640 Speaker 1: fruits of reopening consulates and restarting exchange programs, taking pressure 378 00:20:56,680 --> 00:21:05,919 Speaker 1: off of NGO's. Secondly, abandoning the zero sum bilateral trade framework, 379 00:21:06,040 --> 00:21:08,560 Speaker 1: which makes no sense and has not worked at all, 380 00:21:09,280 --> 00:21:14,240 Speaker 1: embracing a market opening pro growth initiative framed around a 381 00:21:14,800 --> 00:21:21,200 Speaker 1: bilateral investment treaty. And Thirdly, UH really making an effort 382 00:21:21,280 --> 00:21:26,680 Speaker 1: to establish a new architecture for engagement. These summits like 383 00:21:26,840 --> 00:21:31,479 Speaker 1: the one that Shi Jumping and Joe Biden had November fourteen. Uh, 384 00:21:31,600 --> 00:21:34,560 Speaker 1: they're long on the photo ops, but they accomplished nothing. 385 00:21:35,000 --> 00:21:38,560 Speaker 1: I'm in favor of a new full time organization that 386 00:21:38,640 --> 00:21:41,920 Speaker 1: I call a U S. China Secretariat, which is detailed 387 00:21:41,960 --> 00:21:45,159 Speaker 1: in the book. But after the Party Congress and what 388 00:21:45,359 --> 00:21:49,479 Speaker 1: we see from the leadership in Beijing, a leadership perhaps 389 00:21:49,600 --> 00:21:52,320 Speaker 1: forever is the idea. As you mentioned in one of 390 00:21:52,440 --> 00:21:56,920 Speaker 1: your chapters of China with American characteristics, there seems to 391 00:21:57,000 --> 00:22:02,639 Speaker 1: be zero desire for that out of Beijing. Well, China 392 00:22:02,720 --> 00:22:04,679 Speaker 1: wants to do it its way, and that's been an 393 00:22:04,720 --> 00:22:08,320 Speaker 1: affront to us. We had this rather naive presumption that 394 00:22:08,400 --> 00:22:11,520 Speaker 1: we let China into the w t O, they would 395 00:22:11,560 --> 00:22:15,359 Speaker 1: play by our rules and become more like us. They 396 00:22:15,440 --> 00:22:19,639 Speaker 1: had the facade of presenting, uh, that similar appearance, but 397 00:22:19,720 --> 00:22:23,159 Speaker 1: they've certainly gone their own way, and that that remains 398 00:22:23,200 --> 00:22:25,639 Speaker 1: a worrisome part of the ongoing conflict. See if you 399 00:22:25,960 --> 00:22:27,560 Speaker 1: live this, I mean some would say with you the 400 00:22:27,640 --> 00:22:29,840 Speaker 1: next day as you you actually were the first one 401 00:22:29,880 --> 00:22:32,800 Speaker 1: to write about this. Within market economics. You're sitting with 402 00:22:32,920 --> 00:22:35,760 Speaker 1: James Gorman now having a cup of coffee. Does Morgan 403 00:22:35,840 --> 00:22:39,639 Speaker 1: Stanley move from Hong Kong to Singapore? Well, I'm no 404 00:22:39,800 --> 00:22:42,440 Speaker 1: longer employed by that firm where I worked for thirty years, 405 00:22:42,480 --> 00:22:44,960 Speaker 1: so I'll leave that up to them to comment on. 406 00:22:45,160 --> 00:22:50,000 Speaker 1: But certainly Singapore has benefited a lot from the shifts 407 00:22:50,040 --> 00:22:52,680 Speaker 1: that have occurred in Hong Kong. But Hong Kong, to 408 00:22:52,760 --> 00:22:56,760 Speaker 1: its credit, is trying to reclaim it's a position as 409 00:22:58,000 --> 00:23:02,840 Speaker 1: the major financial center uh in non Japan Asia, and 410 00:23:03,000 --> 00:23:04,600 Speaker 1: we'll see if they can pull it off. How do 411 00:23:04,680 --> 00:23:07,600 Speaker 1: you react to the bipartisan nature of this in Washington, Steve? 412 00:23:07,680 --> 00:23:09,800 Speaker 1: I mean, it's one of the very very few ideas 413 00:23:09,880 --> 00:23:13,280 Speaker 1: in Washington where there seems to be common ground. And 414 00:23:13,440 --> 00:23:15,560 Speaker 1: you know there there were waves of this going from 415 00:23:15,640 --> 00:23:19,960 Speaker 1: Shanghai Secon back to World War to in all. Is 416 00:23:20,040 --> 00:23:24,080 Speaker 1: this just another wave of bipartisan anti China feeling or 417 00:23:24,200 --> 00:23:27,960 Speaker 1: is there a permanence to this? Well, it's politically expedient 418 00:23:28,440 --> 00:23:30,200 Speaker 1: for the the US to do it. I mean, the 419 00:23:30,760 --> 00:23:34,960 Speaker 1: the sentiment is virtually the only thing, as you said, Tom, 420 00:23:35,080 --> 00:23:41,359 Speaker 1: that's unanimous um uh within the Republican and Democratic ranks, 421 00:23:41,480 --> 00:23:44,240 Speaker 1: and it's it's going to be hard to dislodge one 422 00:23:44,280 --> 00:23:47,880 Speaker 1: of the big surprises for for me was the election 423 00:23:47,920 --> 00:23:52,280 Speaker 1: of Joe Biden. If anything has not altered the Trump 424 00:23:52,880 --> 00:23:56,080 Speaker 1: UH anti China policies of anything, that's amplified it. And 425 00:23:56,800 --> 00:23:59,879 Speaker 1: for a president who repudiated so much of his predace 426 00:24:01,320 --> 00:24:04,720 Speaker 1: on popular policies like the border wall and the Muslim 427 00:24:04,760 --> 00:24:09,400 Speaker 1: travel band to perpetuate what I think is a wrong 428 00:24:09,480 --> 00:24:13,600 Speaker 1: footed US China policy is a disappointment and a surprise. 429 00:24:14,040 --> 00:24:17,680 Speaker 1: Tim Cook reads accidental conflicts Stephen Roach, what does he do? 430 00:24:18,000 --> 00:24:20,480 Speaker 1: I mean, what is the what is the approach for 431 00:24:20,960 --> 00:24:25,720 Speaker 1: multinational Americans led by Apple in China? Well, you know, 432 00:24:25,800 --> 00:24:29,600 Speaker 1: Tim Cook has been leading the way in reevaluating UH, 433 00:24:29,960 --> 00:24:36,760 Speaker 1: the commitment of US based multinationals to a full outsourcing 434 00:24:37,800 --> 00:24:43,080 Speaker 1: bet in in China. Apple is obviously the quintessential UH 435 00:24:43,240 --> 00:24:46,960 Speaker 1: A producer who's taken advantage of this production platform and 436 00:24:47,280 --> 00:24:50,920 Speaker 1: m Guangdong province and they're now for a variety of 437 00:24:51,080 --> 00:24:54,600 Speaker 1: reasons understandable, but the conduct is part of it. Starting 438 00:24:54,640 --> 00:24:58,560 Speaker 1: a diversified production of the iPhone into India slowly, but 439 00:24:59,600 --> 00:25:02,240 Speaker 1: that's a move that needs to be watched very carefully 440 00:25:02,280 --> 00:25:04,800 Speaker 1: for the future. With all of your experience, do you 441 00:25:04,880 --> 00:25:08,560 Speaker 1: have a confidence they can get manufacturing process and other 442 00:25:08,760 --> 00:25:14,520 Speaker 1: nations equal to what they've invented in China. Well, you know, 443 00:25:14,600 --> 00:25:18,600 Speaker 1: I think China certainly has made a huge bet in 444 00:25:18,920 --> 00:25:24,440 Speaker 1: in terms of revamping its infrastructure and equipping its companies 445 00:25:24,480 --> 00:25:29,760 Speaker 1: and workers with the latest in technical skills and new technologies. 446 00:25:29,840 --> 00:25:32,399 Speaker 1: But by no means does that have a monopoly on 447 00:25:33,080 --> 00:25:37,159 Speaker 1: that opportunity. And that's what globalization does. It It offers 448 00:25:37,359 --> 00:25:43,080 Speaker 1: similar opportunities for other offshore low cost production platforms. Steven, 449 00:25:43,080 --> 00:25:45,200 Speaker 1: at the time that I've got left, I think we 450 00:25:45,320 --> 00:25:47,320 Speaker 1: need to talk about one of your calls, and you've 451 00:25:47,359 --> 00:25:50,440 Speaker 1: been very very candid about this and the idea of 452 00:25:50,560 --> 00:25:53,520 Speaker 1: week dollar. Well, guess what it's been a Steve roach quarter. 453 00:25:54,000 --> 00:25:57,320 Speaker 1: We had a resilient dollar and finally there's a new 454 00:25:57,400 --> 00:26:01,399 Speaker 1: weakness with international investment doing utter with that week dollar. 455 00:26:02,000 --> 00:26:05,280 Speaker 1: Is this the great Rocchi In turn? Well, I don't 456 00:26:05,280 --> 00:26:07,639 Speaker 1: know how great that that is for me, because it 457 00:26:07,800 --> 00:26:13,800 Speaker 1: was one of my more humiliating forecasts. I promised myself. Yeah, 458 00:26:13,800 --> 00:26:15,440 Speaker 1: I've had a few, but this was this was a 459 00:26:15,520 --> 00:26:19,720 Speaker 1: bad one. Um. But you know, it's it's very much 460 00:26:19,800 --> 00:26:22,520 Speaker 1: tied to the fed um. As I look back on 461 00:26:22,720 --> 00:26:25,800 Speaker 1: the mistake that I made. Um. I think it was 462 00:26:25,840 --> 00:26:27,840 Speaker 1: a fair mistake to make at the time, because the 463 00:26:27,920 --> 00:26:32,439 Speaker 1: FED a couple of years ago showed uh no desire 464 00:26:32,520 --> 00:26:36,320 Speaker 1: to be aggressive to tighten monetary policy to counter what 465 00:26:36,560 --> 00:26:40,800 Speaker 1: incorrectly presumed was a transitory inflation. The FED has gotten 466 00:26:40,880 --> 00:26:45,240 Speaker 1: religion and now as it is a nearing not so 467 00:26:45,400 --> 00:26:48,400 Speaker 1: much a pivot, but a sort of a second derivative 468 00:26:48,480 --> 00:26:51,320 Speaker 1: slowing in the rate of rate hikes. Uh some of 469 00:26:51,359 --> 00:26:53,280 Speaker 1: the bid has come off the dollar, but the dollar 470 00:26:53,359 --> 00:26:55,760 Speaker 1: is still a good deal higher than it was when 471 00:26:55,800 --> 00:26:59,960 Speaker 1: I made that seemingly dumb call. Well, Stephen, let me 472 00:27:00,080 --> 00:27:03,560 Speaker 1: finish up with the optimism and accidental conflict is well, 473 00:27:04,320 --> 00:27:06,719 Speaker 1: where do you want to be in twelve months? I mean, 474 00:27:06,840 --> 00:27:09,440 Speaker 1: short term for the Chinese and frankly short term for 475 00:27:09,520 --> 00:27:12,240 Speaker 1: America as well. What is the to the to do 476 00:27:12,520 --> 00:27:15,360 Speaker 1: list that we need to do to get to the goodwill? 477 00:27:15,520 --> 00:27:19,640 Speaker 1: Howard Davies talks about, we need to re engage. There 478 00:27:19,760 --> 00:27:25,439 Speaker 1: is absolutely not anyone, uh, in our political structure, Republicans 479 00:27:25,480 --> 00:27:29,240 Speaker 1: and Democrats alike, especially in leadership roles, who's willing to 480 00:27:29,320 --> 00:27:32,920 Speaker 1: make a bet in re engaging with the Chinese. There's 481 00:27:32,960 --> 00:27:36,159 Speaker 1: a lot of things about China that are uncomfortable and 482 00:27:36,359 --> 00:27:40,280 Speaker 1: unpleasant that we have focused on. But the two most 483 00:27:41,000 --> 00:27:46,080 Speaker 1: powerful economies, the two superpowers, UH, need a more constructive 484 00:27:46,160 --> 00:27:49,160 Speaker 1: framework of engagement, and I propose that in the book 485 00:27:49,200 --> 00:27:52,880 Speaker 1: with a very optimistic final chapter on on this new plan. 486 00:27:53,040 --> 00:27:54,800 Speaker 1: You have to leave it there. Steven Rhodes, thank you 487 00:27:54,880 --> 00:27:58,200 Speaker 1: so much in congratulations on decades of work on the 488 00:27:58,320 --> 00:28:13,879 Speaker 1: thinking of America and China. Gabriel Knocklof is with the 489 00:28:13,960 --> 00:28:17,320 Speaker 1: Bank of Ireland. He is their governor. And can you imagine, 490 00:28:17,359 --> 00:28:21,240 Speaker 1: folks in America if basically the Federal Reserve System to 491 00:28:21,320 --> 00:28:24,359 Speaker 1: find a new chairman went out and did a worldwide search. 492 00:28:24,480 --> 00:28:26,800 Speaker 1: That's what the Bank of Ireland did, with some controversy, 493 00:28:27,359 --> 00:28:31,760 Speaker 1: the British economists of type moving from New Zealand to Ireland. 494 00:28:31,800 --> 00:28:35,240 Speaker 1: And we're thrilled that the governor could join us this morning. Governor, 495 00:28:35,320 --> 00:28:38,680 Speaker 1: what is the biggest challenge that Christine Laguard has just 496 00:28:38,880 --> 00:28:44,520 Speaker 1: in the coming ninety days? Well, Christine and the thank 497 00:28:44,560 --> 00:28:49,760 Speaker 1: you for having me. Firstly, um and uh, thank you 498 00:28:49,880 --> 00:28:53,040 Speaker 1: for describing me as the most interesting custom But that's 499 00:28:53,080 --> 00:28:55,800 Speaker 1: for a separate discussion. I had Christine and all the 500 00:28:55,840 --> 00:29:00,200 Speaker 1: members of the Governing Council um how facing the the 501 00:29:00,280 --> 00:29:04,120 Speaker 1: sorts of challenges that I think many people across Europe, 502 00:29:04,120 --> 00:29:06,920 Speaker 1: if not the world, are facing, which is dealing with 503 00:29:07,160 --> 00:29:11,520 Speaker 1: some extreme uncertainty. I know we've been talking about that 504 00:29:11,640 --> 00:29:15,840 Speaker 1: for a while, but the combination of the recovery from 505 00:29:15,880 --> 00:29:20,240 Speaker 1: the pandemic, the supply chain problems that we've had, the 506 00:29:20,400 --> 00:29:23,920 Speaker 1: news about China that I've just heard you talk about, 507 00:29:24,920 --> 00:29:30,240 Speaker 1: the ongoing Russian war in Ukraine, and so on, we 508 00:29:30,360 --> 00:29:35,320 Speaker 1: have a constellation of um of issues that we have 509 00:29:35,440 --> 00:29:40,400 Speaker 1: to navigate through to arrive at the right monetary political 510 00:29:40,440 --> 00:29:42,720 Speaker 1: for the new area. So it's a challenge the government, 511 00:29:42,760 --> 00:29:44,840 Speaker 1: one of the great challenges, and I would not Ireland's 512 00:29:44,920 --> 00:29:48,000 Speaker 1: leadership in growth for whatever reason is debatable, but the 513 00:29:48,080 --> 00:29:50,720 Speaker 1: fact is it's been a growth engine. Everything is said 514 00:29:50,800 --> 00:29:53,680 Speaker 1: and done, Governor. One of the distinctions here is a 515 00:29:53,760 --> 00:29:56,880 Speaker 1: belief in the strength of technology, the nominal GDP of 516 00:29:56,920 --> 00:30:01,680 Speaker 1: America versus a lesser nominal g d P in Europe. 517 00:30:02,120 --> 00:30:05,360 Speaker 1: Do you push against it? Do you say we underestimate 518 00:30:05,440 --> 00:30:12,320 Speaker 1: the potential of European growth forward? I absolutely do. I 519 00:30:12,400 --> 00:30:15,000 Speaker 1: think the potential there is huge. It's already a very 520 00:30:15,120 --> 00:30:20,000 Speaker 1: very big economy, um, and it's ambitious for itself. So 521 00:30:20,120 --> 00:30:22,920 Speaker 1: I think UH and technology is going to be a 522 00:30:23,000 --> 00:30:29,520 Speaker 1: critical platform for the future. Digitalization, climate change, and demography 523 00:30:30,040 --> 00:30:35,000 Speaker 1: are the big economic transitions that we're all going through 524 00:30:35,200 --> 00:30:39,360 Speaker 1: right now, and I think Europe is has the potential 525 00:30:40,440 --> 00:30:43,920 Speaker 1: um to to be at the head of all of those. Actually, 526 00:30:44,160 --> 00:30:46,200 Speaker 1: and let's talk about the reality of the decision, Governor 527 00:30:46,240 --> 00:30:48,920 Speaker 1: that you face on December fifteen. Can I just start 528 00:30:48,960 --> 00:30:51,400 Speaker 1: with your base case? Does it include a recession in 529 00:30:51,480 --> 00:30:56,640 Speaker 1: the uros own economy? Now, I haven't seen the ECB 530 00:30:56,720 --> 00:31:01,000 Speaker 1: staffs forecasts, which we're going to see next week, but 531 00:31:01,160 --> 00:31:04,400 Speaker 1: my own my own view is that we're likely to 532 00:31:06,200 --> 00:31:09,240 Speaker 1: to see the euro Area in a technical recession. I 533 00:31:09,360 --> 00:31:14,080 Speaker 1: suspect that Q four this year, the one that we're 534 00:31:14,120 --> 00:31:18,720 Speaker 1: in now, we'll see a very slightly negative m g 535 00:31:18,960 --> 00:31:23,800 Speaker 1: P number, and we're likely to see that for Q 536 00:31:24,000 --> 00:31:26,920 Speaker 1: one next year. On the other hand, my expectations were 537 00:31:27,000 --> 00:31:31,240 Speaker 1: not going to see three as a year of recession. 538 00:31:31,320 --> 00:31:32,960 Speaker 1: The governor, with that in mind, how does that influence 539 00:31:33,000 --> 00:31:36,640 Speaker 1: your view of how much tightening we ultimately need? Well, 540 00:31:36,760 --> 00:31:41,360 Speaker 1: I in my view, um, you know, we started the 541 00:31:41,440 --> 00:31:45,480 Speaker 1: normalization of interest rates. People have forgotten that back in 542 00:31:45,600 --> 00:31:49,160 Speaker 1: June we were in negative rate territory and we're definitely 543 00:31:49,200 --> 00:31:53,280 Speaker 1: not there now. But I also think that next week 544 00:31:53,320 --> 00:31:58,280 Speaker 1: when we meet, I think a fifty basis point increase 545 00:31:58,520 --> 00:32:00,640 Speaker 1: is the sort of flaw that we've to be discussing. 546 00:32:00,680 --> 00:32:03,440 Speaker 1: I expect us to go there, but I don't expect 547 00:32:03,520 --> 00:32:05,680 Speaker 1: us to end there. I do expect us to continue 548 00:32:05,880 --> 00:32:08,280 Speaker 1: in future meetings. And you've got an idea of how 549 00:32:08,360 --> 00:32:11,360 Speaker 1: far you would push that. I was about to say 550 00:32:11,600 --> 00:32:16,560 Speaker 1: how far, I mean, how far I will push that 551 00:32:17,520 --> 00:32:21,240 Speaker 1: will very much depend on the data, uh and seeing 552 00:32:21,320 --> 00:32:24,960 Speaker 1: where the projections are telling us, seeing what the latest 553 00:32:25,480 --> 00:32:27,880 Speaker 1: data are are telling us. But I think in my 554 00:32:28,000 --> 00:32:30,840 Speaker 1: view it's pretty clear that we're inflation running at ten 555 00:32:31,520 --> 00:32:36,720 Speaker 1: our target at two core inflation at five UM. I 556 00:32:36,800 --> 00:32:40,480 Speaker 1: think it's pretty clear that next week's decision won't be 557 00:32:40,560 --> 00:32:43,000 Speaker 1: the last increase that we make. Interest rate policy only 558 00:32:43,080 --> 00:32:44,720 Speaker 1: one part of this. Of course, we've also got to 559 00:32:44,760 --> 00:32:46,960 Speaker 1: talk about the undwind of the balance sheet. Can you 560 00:32:47,080 --> 00:32:49,760 Speaker 1: update us on how discussions are going, how your thoughts 561 00:32:49,800 --> 00:32:51,560 Speaker 1: were evolving on what we should be doing with the 562 00:32:51,600 --> 00:32:53,400 Speaker 1: balance sheet that larger the e c B, and how 563 00:32:53,760 --> 00:32:58,320 Speaker 1: you would prefer to unwind it. I mean my uh, Well, firstly, 564 00:32:58,480 --> 00:33:02,800 Speaker 1: my preference is to unwind it. I think the reasons 565 00:33:02,880 --> 00:33:05,640 Speaker 1: for having it in the first place, the very long 566 00:33:05,760 --> 00:33:09,600 Speaker 1: period of the rates and the risk of deflation, those 567 00:33:09,680 --> 00:33:13,400 Speaker 1: reasons are gone, so we now need to look to 568 00:33:13,840 --> 00:33:16,480 Speaker 1: unwind it. My view is that it needs to be 569 00:33:16,600 --> 00:33:24,160 Speaker 1: done cautiously and carefully, um and predictably. So my preference 570 00:33:24,280 --> 00:33:28,240 Speaker 1: would be for us to start slowly, leave ourselves the 571 00:33:28,360 --> 00:33:32,520 Speaker 1: room for accelerating if we feel it's warranted, but to 572 00:33:32,600 --> 00:33:35,080 Speaker 1: do it in that order. I don't expect I expect 573 00:33:35,160 --> 00:33:39,120 Speaker 1: us to set out at or to agree at the 574 00:33:39,800 --> 00:33:43,200 Speaker 1: next week's meeting a set of principles which the President 575 00:33:43,280 --> 00:33:46,120 Speaker 1: will for for winding the balance sheet down, which the 576 00:33:46,160 --> 00:33:49,600 Speaker 1: President will announce. I don't expect anything to start until 577 00:33:50,120 --> 00:33:53,760 Speaker 1: next year. My own preference would be something towards the 578 00:33:53,920 --> 00:33:57,440 Speaker 1: end of Q one beginning of Q two. The governors 579 00:33:57,440 --> 00:33:59,840 Speaker 1: some important years your experience in New zeal And, where 580 00:33:59,840 --> 00:34:01,920 Speaker 1: they has been a real idea of rules of the 581 00:34:02,120 --> 00:34:05,520 Speaker 1: road in central banking. I think they've provided decades of 582 00:34:05,640 --> 00:34:09,479 Speaker 1: leadership on that. Olivia Blanchard and others are talking about 583 00:34:09,520 --> 00:34:13,759 Speaker 1: a set above two percent in America. Combine your New 584 00:34:13,840 --> 00:34:17,520 Speaker 1: Zealand experience with the idea that we may not bring 585 00:34:17,640 --> 00:34:21,000 Speaker 1: inflation down to the comfort level, the anchored level of 586 00:34:21,160 --> 00:34:24,800 Speaker 1: decades of theory. Can we live in America or in 587 00:34:24,960 --> 00:34:28,480 Speaker 1: Europe with a higher inflation set? Let's use America as 588 00:34:28,480 --> 00:34:31,640 Speaker 1: an example of near three percent? Can we live with that? 589 00:34:32,080 --> 00:34:36,640 Speaker 1: Can there be a permanence to that? Well? At d CB, 590 00:34:36,960 --> 00:34:39,120 Speaker 1: we had a review of our strategy like the FED 591 00:34:39,239 --> 00:34:43,160 Speaker 1: did before us at one we which we concluded last 592 00:34:43,320 --> 00:34:48,120 Speaker 1: in July one and we concluded that two inflation should 593 00:34:48,160 --> 00:34:53,520 Speaker 1: be the target that we focus on and nimful there's 594 00:34:53,560 --> 00:34:57,200 Speaker 1: been no discussion within the Governing Council as to whether 595 00:34:57,320 --> 00:34:59,680 Speaker 1: or not that target should be changed, and I unexpected 596 00:34:59,760 --> 00:35:04,040 Speaker 1: to that should remain our focus. But the other hand, 597 00:35:04,080 --> 00:35:08,440 Speaker 1: I I am interested in the debates that academics and 598 00:35:08,440 --> 00:35:11,239 Speaker 1: animals are having and it's I mean, it's interesting to 599 00:35:11,360 --> 00:35:16,040 Speaker 1: observe um. Part of this is about in my view anyway, 600 00:35:16,120 --> 00:35:19,240 Speaker 1: part of this is about communication. So in New Zealand 601 00:35:20,880 --> 00:35:24,960 Speaker 1: the target was actually a range between one to three percent, 602 00:35:25,440 --> 00:35:31,400 Speaker 1: with the midpoint being So it's about how you communicate 603 00:35:32,040 --> 00:35:35,040 Speaker 1: and then explain what you're doing. But for the For 604 00:35:35,160 --> 00:35:38,680 Speaker 1: the moment, the ECB is absolutely focused on two percent. 605 00:35:38,880 --> 00:35:41,839 Speaker 1: In the medium term, is England communicating in the World Cup? 606 00:35:44,680 --> 00:35:46,799 Speaker 1: I think I think the English team have got an 607 00:35:46,880 --> 00:35:50,920 Speaker 1: excellent chance to win the World Cup. One of the 608 00:35:51,000 --> 00:35:55,400 Speaker 1: challenges you mentioned Christine Legarde has to maneuver over the 609 00:35:55,520 --> 00:35:59,640 Speaker 1: coming weeks is making sure that all the members of 610 00:35:59,680 --> 00:36:02,520 Speaker 1: the Girl and in Council who are supporting different teams 611 00:36:03,280 --> 00:36:05,880 Speaker 1: can be managed appropriately. I'm not sure how your Irish 612 00:36:05,920 --> 00:36:13,879 Speaker 1: colleagues might fish eight. Imagine there might be some French 613 00:36:13,920 --> 00:36:17,160 Speaker 1: pride coming on that time. I'm gonna wonderful to catch 614 00:36:17,200 --> 00:36:19,160 Speaker 1: up with you said, let's stay this against saying Governor 615 00:36:19,200 --> 00:36:22,080 Speaker 1: Maclift of the Bank of Islands some dublin. I mean, 616 00:36:22,239 --> 00:36:24,239 Speaker 1: I've been saying, why is it always to trip them off? 617 00:36:24,280 --> 00:36:27,880 Speaker 1: With you? This is the Bloomberg Surveillance Podcast. Thanks for listening. 618 00:36:28,280 --> 00:36:31,560 Speaker 1: Join us live weekdays from seven to ten AMI Eastern. 619 00:36:31,880 --> 00:36:35,839 Speaker 1: I'm Bloomberg Radio and on Bloomberg Television each day from 620 00:36:35,960 --> 00:36:41,200 Speaker 1: six to nine am for insight from the best in economics, finance, investment, 621 00:36:41,400 --> 00:36:46,360 Speaker 1: and international relations. And subscribe to the Surveillance podcast on 622 00:36:46,480 --> 00:36:50,279 Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com and of course on 623 00:36:50,400 --> 00:36:54,520 Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg.