WEBVTT - Surveillance: Fed Path with Riccadonna 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 --> 0:00:23.799 To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:29.400 and of course on the Bloomberg terminal. What we need 0:00:29.440 --> 0:00:31.920 to do is not look back to jobs. It's old news. 0:00:32.080 --> 0:00:34.160 You know, we all know that it's like ancient news, 0:00:34.159 --> 0:00:36.240 and we're always looking forward here at surveillance. Let's do 0:00:36.360 --> 0:00:39.200 that on the labor economy and on the view forward 0:00:39.200 --> 0:00:41.520 of the car wreck and Donna Chief Fosconist at BNP 0:00:41.640 --> 0:00:45.559 Pariba Markets three six, Carl, I want to slice and 0:00:45.600 --> 0:00:47.519 you do this in your research note, you slice and 0:00:47.560 --> 0:00:50.720 dice the confusion that's out there. I think the financial 0:00:50.720 --> 0:00:54.400 media is way too simplistic about the labor reports plural 0:00:55.200 --> 0:00:57.680 and the debate Friday was at a good report or 0:00:57.800 --> 0:01:01.920 a bad report? Which part of the complexities of labor 0:01:02.520 --> 0:01:05.880 matter to this confusion. Was it a good report? Was 0:01:05.920 --> 0:01:08.520 it a bad report? I would say it was a 0:01:08.560 --> 0:01:10.959 good report, not a great report, and not as strong 0:01:11.000 --> 0:01:13.280 as the headline would have you. Believe because when we 0:01:13.319 --> 0:01:16.080 start parsing into the details, not only was there a 0:01:16.120 --> 0:01:18.840 big negative net revision to the prior two months, you 0:01:18.840 --> 0:01:21.759 should lop that off of the top line. Also the 0:01:22.000 --> 0:01:24.920 decline in the work week, So one tenth decline in 0:01:24.959 --> 0:01:27.640 the work week is equivalent to about two hundred thousand jobs, 0:01:27.920 --> 0:01:29.559 So you take that off of the number, and you're 0:01:29.600 --> 0:01:32.919 really talking about a labor market that is showing signs 0:01:32.920 --> 0:01:35.800 of weakness. So we have all these different labor gauges. 0:01:36.440 --> 0:01:38.360 What I think we need to do because the most 0:01:38.400 --> 0:01:41.600 important thing is the take home pay for workers. And 0:01:41.600 --> 0:01:44.000 when we look at that number in aggregate, we can 0:01:44.080 --> 0:01:47.880 absolutely see that the trend is decelerating. It's heading uh 0:01:48.320 --> 0:01:51.240 below the rate of inflation at the moment, and so 0:01:51.320 --> 0:01:55.400 this is a big problem for households. The the rocket 0:01:55.400 --> 0:01:58.280 fuel for consumer spending is coming in and you know, 0:01:58.360 --> 0:02:01.480 dramatically slower fashion going forward, and that has big implications 0:02:01.480 --> 0:02:04.480 for how consumers look later at this quarter and especially internet. 0:02:04.720 --> 0:02:07.280 Part of this is the microeconomics foundations of this. You 0:02:07.320 --> 0:02:10.359 were so fortunate Princeton to have a guy named H. Rosen. 0:02:10.440 --> 0:02:13.760 Harvey Rosen held court on look at the minutia you 0:02:13.800 --> 0:02:15.680 do that in your research. No, what you're doing, Harvey 0:02:15.760 --> 0:02:18.960 Rosen one oh one, and you're saying, look at labor supply, 0:02:19.520 --> 0:02:23.839 what is the distinction of the American labor supply right now? 0:02:24.200 --> 0:02:26.440 The supply simply isn't there. And it's not just a 0:02:26.480 --> 0:02:30.280 story of early retirements. It's happening across a broad swath 0:02:30.400 --> 0:02:33.480 of the labor base. Uh. And this tells us there's 0:02:33.560 --> 0:02:36.520 less slack than meets the eye. And if we're printing 0:02:36.600 --> 0:02:39.600 jobs at a pace of two hundred thousand plus per month, 0:02:40.000 --> 0:02:42.560 this is continuing continuing to amp up the pressure in 0:02:42.600 --> 0:02:46.000 the labor market. And we saw that in the latest average. 0:02:47.520 --> 0:02:48.840 Not to correct you on there, but I think it's 0:02:48.840 --> 0:02:51.000 Harvey Rosen one oh two, not one oh one. Okay, 0:02:51.040 --> 0:02:53.440 excuse me. That's not very late. How fast this fed 0:02:53.520 --> 0:02:56.360 kinda because another band paid code. It's a little bit 0:02:56.360 --> 0:02:59.320 out that compared to maybe the consensus. Sure, well it 0:02:59.440 --> 0:03:02.040 is now. We'll see what happens after the press conference 0:03:02.240 --> 0:03:04.880 next week, but we do think that there's another fifty 0:03:04.919 --> 0:03:08.600 basis point tightening in December. We expect another fifty basis 0:03:08.600 --> 0:03:11.440 points in February and then finishing it off at twenty 0:03:11.480 --> 0:03:13.720 five pips at the March meeting. So we're a terminal 0:03:13.800 --> 0:03:17.920 rate of five and a quarter, consistent entirely with what 0:03:17.960 --> 0:03:21.240 we're seeing in terms of the upward surprises on labor GDP. 0:03:21.440 --> 0:03:24.840 Consumer're spending uh and uh, you know, we're slowing, but 0:03:24.880 --> 0:03:26.680 we're not slowing quite fast enough. So the Fed has 0:03:26.680 --> 0:03:28.400 a bit more work to dr rica. Don It's like 0:03:28.440 --> 0:03:30.600 take to Aspurn. He doesn't talk the same as when 0:03:30.600 --> 0:03:32.600 he was here. I mean he's quick, he's he's like, 0:03:32.840 --> 0:03:36.640 he's like this this this why kind of got kind 0:03:36.640 --> 0:03:39.080 of got back to the office now. Is there're upside 0:03:39.160 --> 0:03:41.280 risk to that col what's the balance of risk around 0:03:41.280 --> 0:03:43.840 that coal? I think it's a pretty balanced risk at 0:03:43.880 --> 0:03:46.680 this point in time. But you know, the story has 0:03:46.720 --> 0:03:49.560 been over the last few months, the resilience and in 0:03:49.600 --> 0:03:52.360 the labor market. So we jokingly put a subtitle in 0:03:52.400 --> 0:03:55.280 our right up of the jobs report. Uh, more Rocky 0:03:55.320 --> 0:04:00.400 Balboa than Rocky in terms of the labor markets alone. 0:04:01.240 --> 0:04:07.840 O Rocky in Philadelphia. This is wasted on you, isn't it. 0:04:07.840 --> 0:04:10.840 It's Philadelphia. I haven't seen the movie actually, but the 0:04:10.920 --> 0:04:17.240 point is that can see whether three tail sales labor data. Uh, 0:04:17.360 --> 0:04:19.880 you know, GDP figures, etcetera, etcetera. So you know the 0:04:19.920 --> 0:04:21.680 FET is going to keep at it until the job 0:04:21.760 --> 0:04:23.640 is done, and the latest data suggests they may have 0:04:23.680 --> 0:04:26.280 to keep at it a little bit more than previously entist. 0:04:26.440 --> 0:04:28.440 We're seeing a shift from cham and Pal from the 0:04:28.440 --> 0:04:30.680 news conference to Brookings. What did you think about I 0:04:30.680 --> 0:04:32.960 think we're seeing a shift just because he didn't talk 0:04:33.000 --> 0:04:35.680 about the financial conditions, the point you were highlighting earlier 0:04:35.680 --> 0:04:39.839 today on the program. He's there's a big difference between 0:04:39.839 --> 0:04:42.120 where we are now compared to where we were between 0:04:42.160 --> 0:04:44.880 the July A form C presser and the Jackson Hole 0:04:45.279 --> 0:04:47.800 uh speech where he ripped up the script and delivered 0:04:47.800 --> 0:04:51.560 this very hawk ish message. We see a turn happening 0:04:51.560 --> 0:04:54.479 in the inflation numbers. We see that the housing sector 0:04:54.560 --> 0:04:57.200 slowing down. We see the impact of a stronger dollar 0:04:57.279 --> 0:04:59.840 and tighter rates in the factory sector and manufacturing. So 0:05:00.160 --> 0:05:02.559 the Fed feels less behind the curve at the moment, 0:05:02.600 --> 0:05:05.240 and so there's less need to aggressively run out and 0:05:05.240 --> 0:05:08.360 try to stage manage of financial conditions and staid they 0:05:08.360 --> 0:05:10.800 can let the markets react to the signaling from the 0:05:10.920 --> 0:05:13.720 updated dot plot in summer Summer of economic projects I'm 0:05:13.760 --> 0:05:17.039 gonna move to nine o'clock hour looking at you know, 0:05:17.160 --> 0:05:19.440 different things with Stephen Roach, and I want to start 0:05:19.440 --> 0:05:22.640 with him with wage spiral. Help us out here define 0:05:23.120 --> 0:05:27.080 what a wage spiral is? Is it slips into our conversation, well, 0:05:27.120 --> 0:05:30.880 wage price spiral is when workers are demanding higher wages 0:05:30.920 --> 0:05:33.280 to keep up with inflation, but those higher wages are 0:05:33.320 --> 0:05:36.520 than providing the fuel and the funding to sustain those 0:05:36.520 --> 0:05:40.080 price increases. It's too early to say that we're in 0:05:40.120 --> 0:05:42.600 that dynamic at the moment because the economy is undergoing 0:05:42.640 --> 0:05:45.560 a massive deceleration. Right If we look at real GDP 0:05:46.080 --> 0:05:48.559 was about thirteen percent year on year in the middle 0:05:49.080 --> 0:05:52.200 of last year. Uh, it was six percent a year end, 0:05:52.520 --> 0:05:55.560 about two percent middle of this year. It's heading close 0:05:55.640 --> 0:05:58.840 to zero this year. So with that kind of deceleration, 0:05:58.960 --> 0:06:00.880 you know that the way age trend is going to 0:06:00.920 --> 0:06:04.040 decelerate as well. UH. And therefore there's a good chance 0:06:04.080 --> 0:06:08.839 that we break this dynamic before a real, uh deleterious 0:06:08.880 --> 0:06:11.880 feedback loop comes about. How is it broken? What's the 0:06:11.960 --> 0:06:14.960 actual your study of history and how we do we 0:06:15.000 --> 0:06:18.400 have wages deflate or we will have wages deflate, But 0:06:18.520 --> 0:06:21.200 what will happen is that as the labor market starts 0:06:21.240 --> 0:06:23.960 to loosen up, then you'll see that bargaining power quickly 0:06:23.960 --> 0:06:27.000 eroded from U S workers. So we're not there yet. 0:06:27.040 --> 0:06:29.839 We're printing north of two hundred thousand on jobs, but 0:06:29.920 --> 0:06:32.279 I think by the first quarter of this year we 0:06:32.320 --> 0:06:34.680 could very well see our first negative payroll print. And 0:06:34.720 --> 0:06:37.520 then as the loosening starts to come about, we are 0:06:37.560 --> 0:06:40.480 in the recession camp for next year, probably starting in 0:06:40.560 --> 0:06:43.680 Q two. That loosening of labor conditions, as the unemployment 0:06:43.760 --> 0:06:45.880 rate moves from a low of three and a half 0:06:45.920 --> 0:06:49.159 towards six percent at the peak, that will erode the 0:06:49.160 --> 0:06:51.960 bargaining power and prevent the feedback loop from that's the 0:06:52.040 --> 0:06:54.839 trajectory for gross Can you give us the line paths 0:06:54.839 --> 0:06:58.160 for inflation? Maybe a sneak paken next week and beyond sure, Well, 0:06:58.160 --> 0:07:00.560 the first bid is easy. So getting the eight from 0:07:00.600 --> 0:07:03.480 eight percent c p I to four is something that 0:07:03.520 --> 0:07:06.760 can probably happen in about two or three quarters. Getting 0:07:06.760 --> 0:07:10.040 from four to two is the hard part. And and 0:07:10.080 --> 0:07:14.360 so you know that requires the rent story to change 0:07:14.360 --> 0:07:17.560 meaningfully and also really the core inflation metric we have 0:07:17.600 --> 0:07:21.240 to be watching at the moment UH is core services 0:07:21.400 --> 0:07:23.640 X rents and not to be too cute, but now 0:07:23.640 --> 0:07:25.840 we have to strip out medical services as well because 0:07:25.880 --> 0:07:29.520 of these UH this accounting dynamic related to insurance payments 0:07:29.520 --> 0:07:31.280 and COVID and whatnot. So if you look at that 0:07:31.360 --> 0:07:34.120 component of the CPI, that's where you watch for your 0:07:34.160 --> 0:07:37.240 wage price spiral dynamics. Interest, we're saying no improvement on 0:07:37.280 --> 0:07:39.600 that front yet, right, So that that tells the Fed 0:07:39.640 --> 0:07:42.160 they have to keep hammering away at the problem. It's 0:07:42.200 --> 0:07:44.360 easy to get from eight to four. From four to 0:07:44.400 --> 0:07:48.080 two probably takes till about the end of twenty four. 0:07:48.160 --> 0:07:50.120 So this is a question more along the lines of 0:07:50.760 --> 0:07:53.200 reaction function question on the fat. Yes, so if I 0:07:53.240 --> 0:07:56.800 put the two paces together, you've got growth, recession, inflation 0:07:57.000 --> 0:07:58.920 kind of sticky, difficult to get from four to two. 0:07:59.560 --> 0:08:03.320 It's the hold an interest writes that your five as 0:08:03.360 --> 0:08:08.280 the economy rolls for a much longer period of time, John, 0:08:08.400 --> 0:08:10.760 And this is something that the markets haven't fully come 0:08:10.760 --> 0:08:14.600 to appreciate. Powell tease this in the November press conference 0:08:14.600 --> 0:08:16.880 when he said, shift away from the pace to the 0:08:16.960 --> 0:08:20.360 level in the duration. The market has refocused to the level, 0:08:20.360 --> 0:08:22.840 but I don't think they fully incorporated the duration, and 0:08:22.880 --> 0:08:25.520 the FED won't be the white Knight riding to the 0:08:25.560 --> 0:08:28.480 rescue as it normally is in the recession. Instead, the 0:08:28.520 --> 0:08:30.360 FED we expect to stay at this five and a 0:08:30.440 --> 0:08:33.440 quarter level basically through the entirety of next year, and 0:08:33.440 --> 0:08:38.640 they could start up easing but not moving into accommodative territory. 0:08:38.800 --> 0:08:42.800 This is sacrilegic bmped very conservative shot. But the zeitgeist 0:08:42.840 --> 0:08:47.160 now is old Carrenco at Virginia Commonwealth University over to 0:08:47.240 --> 0:08:50.600 the giant Olivier blond Chard at the Peterson Institute, which 0:08:50.640 --> 0:08:53.520 Paul Krugman wrote about four or five days ago, of 0:08:53.559 --> 0:08:55.840 the new two percent. As you mentioned four percent as 0:08:55.840 --> 0:08:58.600 a challenge, the new two percent is going to be 0:08:58.679 --> 0:09:02.560 elevated our in the vicinity of three. Can we would 0:09:02.720 --> 0:09:06.959 stand that is, you know that theoretical chit chat of 0:09:07.040 --> 0:09:11.440 people like you, can we withstand a new inflation level 0:09:11.480 --> 0:09:14.360 above two percent? It's going to be hard to get 0:09:14.360 --> 0:09:16.080 to that two percent level. And I know there's a 0:09:16.080 --> 0:09:18.480 lot of discussion right now. I'm fielding lots of questions 0:09:18.480 --> 0:09:22.280 why not change the inflation target? Uh? And the FED officials, 0:09:22.440 --> 0:09:25.080 presidents and governors alike are of the same view that 0:09:25.120 --> 0:09:29.200 we have to achieve two percent to to prove that 0:09:29.240 --> 0:09:31.120 we can't hit the two percent target. If there is 0:09:31.160 --> 0:09:34.440 a time to relax the inflation thre threshold and whatnot, 0:09:34.559 --> 0:09:36.480 they have to do it from the other side of 0:09:37.080 --> 0:09:38.679 of the new threshold, and so they have to get 0:09:38.720 --> 0:09:40.480 to two percent prove we can stay there if they 0:09:40.520 --> 0:09:43.920 have a compelling reason because of demographics or energy costs 0:09:44.000 --> 0:09:46.640 or otherwise why they would then need to maybe re 0:09:46.760 --> 0:09:49.719 evaluate what the longer term target could be. They can 0:09:49.760 --> 0:09:51.480 do that, but you can't. You can't do that when 0:09:51.480 --> 0:09:54.000 you're this far off of the target. To the highside 0:09:54.200 --> 0:09:57.719 party of Carl Saturday morning, France, England and now you're 0:09:57.720 --> 0:09:59.520 at being page. You have to pretend to like you 0:09:59.520 --> 0:10:02.720 have to we the world coup. We just fluent French 0:10:02.760 --> 0:10:08.400 now as well walk around with French flags for the 0:10:08.480 --> 0:10:14.240 national team. Is that it works? Just that if you 0:10:14.360 --> 0:10:16.880 seriously never can we clear this up? Because people want 0:10:16.880 --> 0:10:20.080 to know if you never watched Rocky, I have honestly 0:10:20.160 --> 0:10:23.680 never watched the movie. You've never watched Rocky. It was 0:10:23.720 --> 0:10:31.479 a show. I walked off set. What t K come with? What? Seriously, 0:10:32.280 --> 0:10:37.320 you've never watched Rocky? I'm leaving the car you are 0:10:39.040 --> 0:10:42.200 Have you never watched Rocky? Has that even happened? I 0:10:42.240 --> 0:10:55.160 don't know. Let's do this right now. And we really 0:10:55.160 --> 0:10:58.280 think Rebecca Patterson for being where this was Bridgewater. She 0:10:58.360 --> 0:11:01.640 had every reason to cancel after the shock last week 0:11:01.679 --> 0:11:04.760 of their performance. She is a chief investment strategist for 0:11:04.840 --> 0:11:08.440 Bridgewater which was doing so better than good and ran 0:11:08.520 --> 0:11:13.120 into challenges. Rebecca, without getting into the nitte gritte of Bridgewater, 0:11:13.520 --> 0:11:18.240 what were the challenges you faced in the last ninety days. Well, 0:11:18.480 --> 0:11:22.600 we take views that are usually six to eighteen months out, 0:11:22.880 --> 0:11:25.920 and so as we're looking at the world, we continue 0:11:25.960 --> 0:11:29.440 to be quite cautious on assets. We think that the 0:11:29.520 --> 0:11:32.079 market is discounting goldilocks, that the FETE is going to 0:11:32.120 --> 0:11:34.360 be able to start easing in the second half of 0:11:34.400 --> 0:11:37.680 next year without any material hit to earnings and only 0:11:37.720 --> 0:11:39.800 a very moderate slow down in the economy. And we 0:11:39.880 --> 0:11:42.640 just don't think that adds up. And so as we've 0:11:42.640 --> 0:11:45.880 seen this bear market rally in recent months, the market 0:11:45.920 --> 0:11:49.520 responding to increased hope that the feeble pause and then 0:11:49.600 --> 0:11:54.240 start actually cutting rates next year. We have seen growth assets, 0:11:54.280 --> 0:11:58.360 risky assets performing well um, but we we still believe 0:11:58.559 --> 0:12:01.480 that as we go into three, while there is going 0:12:01.559 --> 0:12:03.400 to be this tug of war, how much will the 0:12:03.440 --> 0:12:07.120 Fed accept inflation versus force inflation to its target? How 0:12:07.200 --> 0:12:09.920 much growth pain will we get. We continue to believe 0:12:09.960 --> 0:12:12.240 that there's another shoe that has to drop, and that 0:12:12.440 --> 0:12:16.000 is the economy. It's resilient today still with the exception 0:12:16.040 --> 0:12:18.480 of housing, but we think the feed is going to 0:12:18.600 --> 0:12:22.240 have to push demand lower to get that wage inflation down, 0:12:22.640 --> 0:12:25.040 and they're not likely to ease next year. With your 0:12:25.120 --> 0:12:28.960 years A Champ Morgenvessemer now with Bridgewater tell us about 0:12:28.960 --> 0:12:32.040 the dollar is the litmus paper of the system? Suddenly 0:12:32.440 --> 0:12:35.880 weak dollar? Did that diminish the Bridgewater total return and 0:12:35.960 --> 0:12:38.840 lead to those quarterly losses? And what is a weaker 0:12:38.920 --> 0:12:43.480 dollar signal? Now? Well, the dollar, as you said, has 0:12:43.520 --> 0:12:46.040 been giving up a lot of its gains from earlier 0:12:46.080 --> 0:12:48.800 this year and in the last year or so. We 0:12:48.920 --> 0:12:52.439 think as long as liquidity conditions remain tight, and remember 0:12:52.720 --> 0:12:55.600 the feed is still raising rates. They may slow the pace, 0:12:55.760 --> 0:12:59.360 but they're still raising rates. And we've got quantitative tightening, 0:12:59.360 --> 0:13:01.240 which is of all the pace of what we saw 0:13:01.240 --> 0:13:05.480 in plus we have rate hikes going globally, with the 0:13:05.480 --> 0:13:09.760 exception of maybe Japan China, and so these tightening liquidity 0:13:09.800 --> 0:13:12.880 conditions tend to support the dollar, the dollars the world's 0:13:12.920 --> 0:13:17.320 funding currency. So yes, you've seen this sell off, this 0:13:17.480 --> 0:13:20.760 technical um profit taking if you will, on the dollar 0:13:20.840 --> 0:13:23.680 in recent months, but we don't think we've seen a 0:13:23.760 --> 0:13:26.080 major dollar top along the lines of what we saw 0:13:26.120 --> 0:13:30.240 in Night five their early two thousands. Maybe we're going 0:13:30.280 --> 0:13:32.040 to be in a bit more of a range over 0:13:32.080 --> 0:13:34.480 the coming months as we play through this tug of 0:13:34.559 --> 0:13:37.760 war of China reopening and the and central banks how 0:13:37.880 --> 0:13:40.600 much will they tighten, But we don't think we've seen 0:13:40.640 --> 0:13:43.240 a sustained turn yet. Rebecca, what you have the terminal 0:13:43.320 --> 0:13:46.560 right at least Federal reserve. Well, we're not trying to 0:13:46.640 --> 0:13:50.600 predict specific numbers for the stock market or the Fed funds. 0:13:50.679 --> 0:13:53.960 We're trying to understand the degree of pressures on the 0:13:54.000 --> 0:13:58.960 economy that's going to translate into market outcomes. But certainly, 0:13:59.160 --> 0:14:02.199 if we need to see wage inflation, which by the 0:14:02.240 --> 0:14:05.559 Atlanta FEDS measure is still running well over six percent, 0:14:05.960 --> 0:14:08.079 if we need to get that down two or three 0:14:08.120 --> 0:14:12.160 percentage points to get us inflation closer to the Fed's 0:14:12.280 --> 0:14:14.920 target um, then I think we're going to see the 0:14:14.960 --> 0:14:18.400 FED going at least to five percent on the FED funds, 0:14:18.720 --> 0:14:22.360 with a probability that's not not di minimus that they 0:14:22.360 --> 0:14:25.040 may have to go higher. The trick is, if they 0:14:25.040 --> 0:14:28.520 get to the spring sometime and maybe pause to give 0:14:28.640 --> 0:14:32.360 time for FED hiking so far to play through the economy, 0:14:32.480 --> 0:14:36.560 maybe inflation comes down to three four percent, But if 0:14:36.560 --> 0:14:39.040 the Feds not happy with that, then they may have 0:14:39.120 --> 0:14:41.800 to do an additional round of tightening. And we saw 0:14:41.840 --> 0:14:44.480 that before in the nineties, seventies and early eighties. You 0:14:44.520 --> 0:14:47.560 needed three rounds of tightening for the FED to actually 0:14:47.560 --> 0:14:51.440 get inflation under control. The market absolutely is not discounting 0:14:51.440 --> 0:14:54.240 that possibility. We're not saying it's our base case, but 0:14:54.280 --> 0:14:56.840 it's certainly a risk that we think is is something 0:14:56.880 --> 0:15:00.080 people should consider. Your base case sounds like five. Is 0:15:00.120 --> 0:15:02.440 that fair? From what I just heard, there's five fair. 0:15:03.360 --> 0:15:06.600 I think I think five is certainly plausible, and it 0:15:06.720 --> 0:15:08.960 is very possible we could go higher than that. So 0:15:09.120 --> 0:15:11.560 five s the base coats. That's largely what's been priced 0:15:11.560 --> 0:15:14.080 in the market for quite a while, largely expecting the 0:15:14.080 --> 0:15:17.720 Federal Reserve to put that in that projections next week. Rebecca, 0:15:17.760 --> 0:15:19.880 I think a lot of people might sit here and say, well, 0:15:19.880 --> 0:15:23.040 that's priced, We're done with that, and to get that 0:15:23.160 --> 0:15:26.080 extra leg of dollar strength, I need something else. And Rebecca, 0:15:26.080 --> 0:15:27.520 I guess the question is what is it in your 0:15:27.520 --> 0:15:31.680 base case that delivers that something else. I try not 0:15:31.760 --> 0:15:34.080 to interrupt you, because I'm dying to answer the questions. 0:15:34.480 --> 0:15:38.760 It's easy. What's not priced is the FED going high 0:15:38.920 --> 0:15:42.520 and holding the markets anticipating right now that we get 0:15:42.640 --> 0:15:45.960 significant rate cuts starting in the second half of next year. 0:15:46.480 --> 0:15:51.080 And we think without severe economic weakness to justify that, 0:15:51.320 --> 0:15:53.880 we're going to get the Fed pausing but not cutting, 0:15:54.240 --> 0:15:57.200 and so as that is changed, and what the discounted, 0:15:57.920 --> 0:16:00.360 what the market is discounting, we think that it add 0:16:00.360 --> 0:16:03.080 a layers or to the dollar. Again, don't forget we're 0:16:03.080 --> 0:16:05.600 not talking about an end of quantitative tightening or rate 0:16:05.640 --> 0:16:07.680 hikes around the world as well. You know, I just 0:16:07.680 --> 0:16:09.960 want to point out miss Patterson never is dying to 0:16:10.040 --> 0:16:13.080 interrupt me. It's only you she is dying. Do you 0:16:13.120 --> 0:16:15.200 think that's what? What do you think that is? Because 0:16:15.360 --> 0:16:19.080 you know, I don't know. I'm just saying, uh, it's 0:16:19.080 --> 0:16:21.640 a good response about a persistence of the facts staying 0:16:21.680 --> 0:16:25.080 there and back against this view that we get these 0:16:25.160 --> 0:16:26.880 right cuts from the front of us a time. So 0:16:27.000 --> 0:16:28.760 back and I remember when you made a six month 0:16:28.800 --> 0:16:31.280 call if you were really you know, an eighteen month 0:16:31.280 --> 0:16:33.880 call was now we got we're gonna pivot in January. 0:16:33.960 --> 0:16:36.760 The fourth week of February, we're gonna pivot again. And 0:16:36.800 --> 0:16:38.720 then by the first week April, we're gonna do this 0:16:38.800 --> 0:16:42.520 this this forget about it, Rebecca, Cash is trash. What 0:16:42.680 --> 0:16:46.680 is the value of cash to our listeners and viewers 0:16:46.840 --> 0:16:51.240 into two thousand twenty three. Well, what's so interesting, Tom, 0:16:51.360 --> 0:16:54.640 is that we're really seeing the market move into a 0:16:54.640 --> 0:16:57.840 new paradigm. We haven't had short term rates this high 0:16:57.880 --> 0:17:00.920 in a very long time, and so it is interesting 0:17:00.960 --> 0:17:04.440 to think about how our investors are going to position 0:17:04.520 --> 0:17:07.200 for the next decade versus the last decade. The last 0:17:07.200 --> 0:17:11.359 decade was all about um low and stable inflation, low 0:17:11.440 --> 0:17:15.960 macro volatility, low commodity prices. And now if we're in 0:17:15.960 --> 0:17:20.159 a regime where there's more uncertainty around the level of inflation, 0:17:20.240 --> 0:17:25.080 more uncertainty around where where interest rates should settle, what's 0:17:25.080 --> 0:17:28.080 the right portfolio to construct? Should you stay overweight the 0:17:28.160 --> 0:17:31.080 U S. Should you stay overweight tech? How much private 0:17:31.119 --> 0:17:34.080 assets did you have in your portfolio. We think there's 0:17:34.119 --> 0:17:38.520 some tectonic plates that are shifting right now, and assuming 0:17:38.560 --> 0:17:40.960 that they can be sustained, and we think there's a 0:17:41.000 --> 0:17:43.439 real chance they can. I think we're gonna get a 0:17:43.440 --> 0:17:48.560 lot of more structural, bigger market changes, portfolio allocation changes 0:17:48.600 --> 0:17:51.720 in the year two ahead, as people realize this is 0:17:51.760 --> 0:17:54.760 a different world we're moving into. Not that inflation is 0:17:54.800 --> 0:17:57.760 going to settle at four or five, but um, it 0:17:57.920 --> 0:18:00.520 certainly could settle higher than where it's been, with rates 0:18:00.600 --> 0:18:02.720 higher than they've been as well. I gotta squeeze this in. 0:18:02.760 --> 0:18:05.320 This is great, Rebecca, Just one final question, what's the 0:18:05.320 --> 0:18:09.000 biggest change that you're expecting the South On the conversations 0:18:09.000 --> 0:18:11.000 that you're having with clients that push him back on still, 0:18:11.040 --> 0:18:15.040 what's the number one change you think we're gonna say? Well, 0:18:15.320 --> 0:18:18.359 I think the structural change is inflation. I think the 0:18:18.480 --> 0:18:22.280 cyclical change. The biggest thing to watch for three is growth. 0:18:22.560 --> 0:18:25.400 I think we're gonna have to see growth weaker for 0:18:25.600 --> 0:18:28.240 central banks to hit their targets, and that's not yet 0:18:28.280 --> 0:18:31.960 reflected in earnings. Rebecca Patterson thank you, Bruin riche Water. 0:18:32.000 --> 0:18:39.920 Just fantastic because we celebrate and I mean truly celebrate 0:18:40.520 --> 0:18:45.600 accidental conflict America, China and the clash of false narratives. This, 0:18:45.720 --> 0:18:47.679 of course was Stephen Rod. You've heard me in the 0:18:47.760 --> 0:18:52.480 recent days say essentially he invented modern market economics at 0:18:52.520 --> 0:18:56.040 Morgan Stanley and of course now at his Yale University. 0:18:56.119 --> 0:18:58.639 Dr Roarge, thank you so much for joining us UM 0:18:59.080 --> 0:19:01.960 this morning. I do and ask one American question before 0:19:01.960 --> 0:19:06.800 we celebrate your informative book, and that is, simply, do 0:19:06.960 --> 0:19:09.480 we hearken back to the fears of the sixties and 0:19:09.520 --> 0:19:15.720 the seventies and a wage price spiral, well wage price spiral. 0:19:15.760 --> 0:19:19.639 Back then, Tom was heavily impacted by cost of living 0:19:20.560 --> 0:19:27.200 UH indexation clauses in labor union contracts. And two things 0:19:27.200 --> 0:19:30.720 have happened. Uh labor unions are a much smaller share 0:19:30.720 --> 0:19:35.560 of the workforce, and these coal adjustment clauses are less 0:19:35.600 --> 0:19:39.280 prevalent than they were back then. And nevertheless, you know, 0:19:39.520 --> 0:19:44.920 wages are Labor is a very important segment of overall 0:19:45.080 --> 0:19:51.840 business costs, and tight labor markets are certainly boosting the 0:19:51.880 --> 0:19:55.840 compensation piece of that. And weak productivity is reinforcing it. 0:19:55.920 --> 0:19:59.040 So it's it's important to stay focused on this issue. 0:19:59.359 --> 0:20:02.840 Steven Ros to China, Sir Howard Davies mentions of your 0:20:03.560 --> 0:20:05.919 book that it is is is a way to a 0:20:05.960 --> 0:20:10.600 new framework, a new discussion of both parties. We need 0:20:10.760 --> 0:20:14.920 goodwill among the United States and China. How do we 0:20:15.000 --> 0:20:20.119 find that goodwill? Well? Number One, we have to recognize 0:20:20.119 --> 0:20:23.840 that the current approach that we've both been wedded to 0:20:24.119 --> 0:20:27.600 over the past twenty years is an abysmal failure. In 0:20:27.600 --> 0:20:31.560 the last five years, we've had the beginnings of a 0:20:31.600 --> 0:20:34.120 trade war, at tech war, and now the early stages 0:20:34.760 --> 0:20:38.159 of a new Cold war, so an accidental conflict. I 0:20:38.240 --> 0:20:43.960 propose a a new approach based on three key pillars. 0:20:45.160 --> 0:20:50.159 One UH rebuilding trust by going after the low hanging 0:20:50.200 --> 0:20:56.640 fruits of reopening consulates and restarting exchange programs, taking pressure 0:20:56.680 --> 0:21:05.919 off of NGO's. Secondly, abandoning the zero sum bilateral trade framework, 0:21:06.040 --> 0:21:08.560 which makes no sense and has not worked at all, 0:21:09.280 --> 0:21:14.240 embracing a market opening pro growth initiative framed around a 0:21:14.800 --> 0:21:21.200 bilateral investment treaty. And Thirdly, UH really making an effort 0:21:21.280 --> 0:21:26.680 to establish a new architecture for engagement. These summits like 0:21:26.840 --> 0:21:31.479 the one that Shi Jumping and Joe Biden had November fourteen. Uh, 0:21:31.600 --> 0:21:34.560 they're long on the photo ops, but they accomplished nothing. 0:21:35.000 --> 0:21:38.560 I'm in favor of a new full time organization that 0:21:38.640 --> 0:21:41.920 I call a U S. China Secretariat, which is detailed 0:21:41.960 --> 0:21:45.159 in the book. But after the Party Congress and what 0:21:45.359 --> 0:21:49.479 we see from the leadership in Beijing, a leadership perhaps 0:21:49.600 --> 0:21:52.320 forever is the idea. As you mentioned in one of 0:21:52.440 --> 0:21:56.920 your chapters of China with American characteristics, there seems to 0:21:57.000 --> 0:22:02.639 be zero desire for that out of Beijing. Well, China 0:22:02.720 --> 0:22:04.679 wants to do it its way, and that's been an 0:22:04.720 --> 0:22:08.320 affront to us. We had this rather naive presumption that 0:22:08.400 --> 0:22:11.520 we let China into the w t O, they would 0:22:11.560 --> 0:22:15.359 play by our rules and become more like us. They 0:22:15.440 --> 0:22:19.639 had the facade of presenting, uh, that similar appearance, but 0:22:19.720 --> 0:22:23.159 they've certainly gone their own way, and that that remains 0:22:23.200 --> 0:22:25.639 a worrisome part of the ongoing conflict. See if you 0:22:25.960 --> 0:22:27.560 live this, I mean some would say with you the 0:22:27.640 --> 0:22:29.840 next day as you you actually were the first one 0:22:29.880 --> 0:22:32.800