Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. What we need
Speaker 1: to do is not look back to jobs. It's old news.
Speaker 1: You know, we all know that it's like ancient news,
Speaker 1: and we're always looking forward here at surveillance. Let's do
Speaker 1: that on the labor economy and on the view forward
Speaker 1: of the car wreck and Donna Chief Fosconist at BNP
Speaker 1: Pariba Markets three six, Carl, I want to slice and
Speaker 1: you do this in your research note, you slice and
Speaker 1: dice the confusion that's out there. I think the financial
Speaker 1: media is way too simplistic about the labor reports plural
Speaker 1: and the debate Friday was at a good report or
Speaker 1: a bad report? Which part of the complexities of labor
Speaker 1: matter to this confusion. Was it a good report? Was
Speaker 1: it a bad report? I would say it was a
Speaker 1: good report, not a great report, and not as strong
Speaker 1: as the headline would have you. Believe because when we
Speaker 1: start parsing into the details, not only was there a
Speaker 1: big negative net revision to the prior two months, you
Speaker 1: should lop that off of the top line. Also the
Speaker 1: decline in the work week, So one tenth decline in
Speaker 1: the work week is equivalent to about two hundred thousand jobs,
Speaker 1: So you take that off of the number, and you're
Speaker 1: really talking about a labor market that is showing signs
Speaker 1: of weakness. So we have all these different labor gauges.
Speaker 1: What I think we need to do because the most
Speaker 1: important thing is the take home pay for workers. And
Speaker 1: when we look at that number in aggregate, we can
Speaker 1: absolutely see that the trend is decelerating. It's heading uh
Speaker 1: below the rate of inflation at the moment, and so
Speaker 1: this is a big problem for households. The the rocket
Speaker 1: fuel for consumer spending is coming in and you know,
Speaker 1: dramatically slower fashion going forward, and that has big implications
Speaker 1: for how consumers look later at this quarter and especially internet.
Speaker 1: Part of this is the microeconomics foundations of this. You
Speaker 1: were so fortunate Princeton to have a guy named H. Rosen.
Speaker 1: Harvey Rosen held court on look at the minutia you
Speaker 1: do that in your research. No, what you're doing, Harvey
Speaker 1: Rosen one oh one, and you're saying, look at labor supply,
Speaker 1: what is the distinction of the American labor supply right now?
Speaker 1: The supply simply isn't there. And it's not just a
Speaker 1: story of early retirements. It's happening across a broad swath
Speaker 1: of the labor base. Uh. And this tells us there's
Speaker 1: less slack than meets the eye. And if we're printing
Speaker 1: jobs at a pace of two hundred thousand plus per month,
Speaker 1: this is continuing continuing to amp up the pressure in
Speaker 1: the labor market. And we saw that in the latest average.
Speaker 1: Not to correct you on there, but I think it's
Speaker 1: Harvey Rosen one oh two, not one oh one. Okay,
Speaker 1: excuse me. That's not very late. How fast this fed
Speaker 1: kinda because another band paid code. It's a little bit
Speaker 1: out that compared to maybe the consensus. Sure, well it
Speaker 1: is now. We'll see what happens after the press conference
Speaker 1: next week, but we do think that there's another fifty
Speaker 1: basis point tightening in December. We expect another fifty basis
Speaker 1: points in February and then finishing it off at twenty
Speaker 1: five pips at the March meeting. So we're a terminal
Speaker 1: rate of five and a quarter, consistent entirely with what
Speaker 1: we're seeing in terms of the upward surprises on labor GDP.
Speaker 1: Consumer're spending uh and uh, you know, we're slowing, but
Speaker 1: we're not slowing quite fast enough. So the Fed has
Speaker 1: a bit more work to dr rica. Don It's like
Speaker 1: take to Aspurn. He doesn't talk the same as when
Speaker 1: he was here. I mean he's quick, he's he's like,
Speaker 1: he's like this this this why kind of got kind
Speaker 1: of got back to the office now. Is there're upside
Speaker 1: risk to that col what's the balance of risk around
Speaker 1: that coal? I think it's a pretty balanced risk at
Speaker 1: this point in time. But you know, the story has
Speaker 1: been over the last few months, the resilience and in
Speaker 1: the labor market. So we jokingly put a subtitle in
Speaker 1: our right up of the jobs report. Uh, more Rocky
Speaker 1: Balboa than Rocky in terms of the labor markets alone.
Speaker 1: O Rocky in Philadelphia. This is wasted on you, isn't it.
Speaker 1: It's Philadelphia. I haven't seen the movie actually, but the
Speaker 1: point is that can see whether three tail sales labor data. Uh,
Speaker 1: you know, GDP figures, etcetera, etcetera. So you know the
Speaker 1: FET is going to keep at it until the job
Speaker 1: is done, and the latest data suggests they may have
Speaker 1: to keep at it a little bit more than previously entist.
Speaker 1: We're seeing a shift from cham and Pal from the
Speaker 1: news conference to Brookings. What did you think about I
Speaker 1: think we're seeing a shift just because he didn't talk
Speaker 1: about the financial conditions, the point you were highlighting earlier
Speaker 1: today on the program. He's there's a big difference between
Speaker 1: where we are now compared to where we were between
Speaker 1: the July A form C presser and the Jackson Hole
Speaker 1: uh speech where he ripped up the script and delivered
Speaker 1: this very hawk ish message. We see a turn happening
Speaker 1: in the inflation numbers. We see that the housing sector
Speaker 1: slowing down. We see the impact of a stronger dollar
Speaker 1: and tighter rates in the factory sector and manufacturing. So
Speaker 1: the Fed feels less behind the curve at the moment,
Speaker 1: and so there's less need to aggressively run out and
Speaker 1: try to stage manage of financial conditions and staid they
Speaker 1: can let the markets react to the signaling from the
Speaker 1: updated dot plot in summer Summer of economic projects I'm
Speaker 1: gonna move to nine o'clock hour looking at you know,
Speaker 1: different things with Stephen Roach, and I want to start
Speaker 1: with him with wage spiral. Help us out here define
Speaker 1: what a wage spiral is? Is it slips into our conversation, well,
Speaker 1: wage price spiral is when workers are demanding higher wages
Speaker 1: to keep up with inflation, but those higher wages are
Speaker 1: than providing the fuel and the funding to sustain those
Speaker 1: price increases. It's too early to say that we're in
Speaker 1: that dynamic at the moment because the economy is undergoing
Speaker 1: a massive deceleration. Right If we look at real GDP
Speaker 1: was about thirteen percent year on year in the middle
Speaker 1: of last year. Uh, it was six percent a year end,
Speaker 1: about two percent middle of this year. It's heading close
Speaker 1: to zero this year. So with that kind of deceleration,
Speaker 1: you know that the way age trend is going to
Speaker 1: decelerate as well. UH. And therefore there's a good chance
Speaker 1: that we break this dynamic before a real, uh deleterious
Speaker 1: feedback loop comes about. How is it broken? What's the
Speaker 1: actual your study of history and how we do we
Speaker 1: have wages deflate or we will have wages deflate, But
Speaker 1: what will happen is that as the labor market starts
Speaker 1: to loosen up, then you'll see that bargaining power quickly
Speaker 1: eroded from U S workers. So we're not there yet.
Speaker 1: We're printing north of two hundred thousand on jobs, but
Speaker 1: I think by the first quarter of this year we
Speaker 1: could very well see our first negative payroll print. And
Speaker 1: then as the loosening starts to come about, we are
Speaker 1: in the recession camp for next year, probably starting in
Speaker 1: Q two. That loosening of labor conditions, as the unemployment
Speaker 1: rate moves from a low of three and a half
Speaker 1: towards six percent at the peak, that will erode the
Speaker 1: bargaining power and prevent the feedback loop from that's the
Speaker 1: trajectory for gross Can you give us the line paths
Speaker 1: for inflation? Maybe a sneak paken next week and beyond sure, Well,
Speaker 1: the first bid is easy. So getting the eight from
Speaker 1: eight percent c p I to four is something that
Speaker 1: can probably happen in about two or three quarters. Getting
Speaker 1: from four to two is the hard part. And and
Speaker 1: so you know that requires the rent story to change
Speaker 1: meaningfully and also really the core inflation metric we have
Speaker 1: to be watching at the moment UH is core services
Speaker 1: X rents and not to be too cute, but now
Speaker 1: we have to strip out medical services as well because
Speaker 1: of these UH this accounting dynamic related to insurance payments
Speaker 1: and COVID and whatnot. So if you look at that
Speaker 1: component of the CPI, that's where you watch for your
Speaker 1: wage price spiral dynamics. Interest, we're saying no improvement on
Speaker 1: that front yet, right, So that that tells the Fed
Speaker 1: they have to keep hammering away at the problem. It's
Speaker 1: easy to get from eight to four. From four to
Speaker 1: two probably takes till about the end of twenty four.
Speaker 1: So this is a question more along the lines of
Speaker 1: reaction function question on the fat. Yes, so if I
Speaker 1: put the two paces together, you've got growth, recession, inflation
Speaker 1: kind of sticky, difficult to get from four to two.
Speaker 1: It's the hold an interest writes that your five as
Speaker 1: the economy rolls for a much longer period of time, John,
Speaker 1: And this is something that the markets haven't fully come
Speaker 1: to appreciate. Powell tease this in the November press conference
Speaker 1: when he said, shift away from the pace to the
Speaker 1: level in the duration. The market has refocused to the level,
Speaker 1: but I don't think they fully incorporated the duration, and
Speaker 1: the FED won't be the white Knight riding to the
Speaker 1: rescue as it normally is in the recession. Instead, the
Speaker 1: FED we expect to stay at this five and a
Speaker 1: quarter level basically through the entirety of next year, and
Speaker 1: they could start up easing but not moving into accommodative territory.
Speaker 1: This is sacrilegic bmped very conservative shot. But the zeitgeist
Speaker 1: now is old Carrenco at Virginia Commonwealth University over to
Speaker 1: the giant Olivier blond Chard at the Peterson Institute, which
Speaker 1: Paul Krugman wrote about four or five days ago, of
Speaker 1: the new two percent. As you mentioned four percent as
Speaker 1: a challenge, the new two percent is going to be
Speaker 1: elevated our in the vicinity of three. Can we would
Speaker 1: stand that is, you know that theoretical chit chat of
Speaker 1: people like you, can we withstand a new inflation level
Speaker 1: above two percent? It's going to be hard to get
Speaker 1: to that two percent level. And I know there's a
Speaker 1: lot of discussion right now. I'm fielding lots of questions
Speaker 1: why not change the inflation target? Uh? And the FED officials,
Speaker 1: presidents and governors alike are of the same view that
Speaker 1: we have to achieve two percent to to prove that
Speaker 1: we can't hit the two percent target. If there is
Speaker 1: a time to relax the inflation thre threshold and whatnot,
Speaker 1: they have to do it from the other side of
Speaker 1: of the new threshold, and so they have to get
Speaker 1: to two percent prove we can stay there if they
Speaker 1: have a compelling reason because of demographics or energy costs
Speaker 1: or otherwise why they would then need to maybe re
Speaker 1: evaluate what the longer term target could be. They can
Speaker 1: do that, but you can't. You can't do that when
Speaker 1: you're this far off of the target. To the highside
Speaker 1: party of Carl Saturday morning, France, England and now you're
Speaker 1: at being page. You have to pretend to like you
Speaker 1: have to we the world coup. We just fluent French
Speaker 1: now as well walk around with French flags for the
Speaker 1: national team. Is that it works? Just that if you
Speaker 1: seriously never can we clear this up? Because people want
Speaker 1: to know if you never watched Rocky, I have honestly
Speaker 1: never watched the movie. You've never watched Rocky. It was
Speaker 1: a show. I walked off set. What t K come with? What? Seriously,
Speaker 1: you've never watched Rocky? I'm leaving the car you are
Speaker 1: Have you never watched Rocky? Has that even happened? I
Speaker 1: don't know. Let's do this right now. And we really
Speaker 1: think Rebecca Patterson for being where this was Bridgewater. She
Speaker 1: had every reason to cancel after the shock last week
Speaker 1: of their performance. She is a chief investment strategist for
Speaker 1: Bridgewater which was doing so better than good and ran
Speaker 1: into challenges. Rebecca, without getting into the nitte gritte of Bridgewater,
Speaker 1: what were the challenges you faced in the last ninety days. Well,
Speaker 1: we take views that are usually six to eighteen months out,
Speaker 1: and so as we're looking at the world, we continue
Speaker 1: to be quite cautious on assets. We think that the
Speaker 1: market is discounting goldilocks, that the FETE is going to
Speaker 1: be able to start easing in the second half of
Speaker 1: next year without any material hit to earnings and only
Speaker 1: a very moderate slow down in the economy. And we
Speaker 1: just don't think that adds up. And so as we've
Speaker 1: seen this bear market rally in recent months, the market
Speaker 1: responding to increased hope that the feeble pause and then
Speaker 1: start actually cutting rates next year. We have seen growth assets,
Speaker 1: risky assets performing well um, but we we still believe
Speaker 1: that as we go into three, while there is going
Speaker 1: to be this tug of war, how much will the
Speaker 1: Fed accept inflation versus force inflation to its target? How
Speaker 1: much growth pain will we get. We continue to believe
Speaker 1: that there's another shoe that has to drop, and that
Speaker 1: is the economy. It's resilient today still with the exception
Speaker 1: of housing, but we think the feed is going to
Speaker 1: have to push demand lower to get that wage inflation down,
Speaker 1: and they're not likely to ease next year. With your
Speaker 1: years A Champ Morgenvessemer now with Bridgewater tell us about
Speaker 1: the dollar is the litmus paper of the system? Suddenly
Speaker 1: weak dollar? Did that diminish the Bridgewater total return and
Speaker 1: lead to those quarterly losses? And what is a weaker
Speaker 1: dollar signal? Now? Well, the dollar, as you said, has
Speaker 1: been giving up a lot of its gains from earlier
Speaker 1: this year and in the last year or so. We
Speaker 1: think as long as liquidity conditions remain tight, and remember
Speaker 1: the feed is still raising rates. They may slow the pace,
Speaker 1: but they're still raising rates. And we've got quantitative tightening,
Speaker 1: which is of all the pace of what we saw
Speaker 1: in plus we have rate hikes going globally, with the
Speaker 1: exception of maybe Japan China, and so these tightening liquidity
Speaker 1: conditions tend to support the dollar, the dollars the world's
Speaker 1: funding currency. So yes, you've seen this sell off, this
Speaker 1: technical um profit taking if you will, on the dollar
Speaker 1: in recent months, but we don't think we've seen a
Speaker 1: major dollar top along the lines of what we saw
Speaker 1: in Night five their early two thousands. Maybe we're going
Speaker 1: to be in a bit more of a range over
Speaker 1: the coming months as we play through this tug of
Speaker 1: war of China reopening and the and central banks how
Speaker 1: much will they tighten, But we don't think we've seen
Speaker 1: a sustained turn yet. Rebecca, what you have the terminal
Speaker 1: right at least Federal reserve. Well, we're not trying to
Speaker 1: predict specific numbers for the stock market or the Fed funds.
Speaker 1: We're trying to understand the degree of pressures on the
Speaker 1: economy that's going to translate into market outcomes. But certainly,
Speaker 1: if we need to see wage inflation, which by the
Speaker 1: Atlanta FEDS measure is still running well over six percent,
Speaker 1: if we need to get that down two or three
Speaker 1: percentage points to get us inflation closer to the Fed's
Speaker 1: target um, then I think we're going to see the
Speaker 1: FED going at least to five percent on the FED funds,
Speaker 1: with a probability that's not not di minimus that they
Speaker 1: may have to go higher. The trick is, if they
Speaker 1: get to the spring sometime and maybe pause to give
Speaker 1: time for FED hiking so far to play through the economy,
Speaker 1: maybe inflation comes down to three four percent, But if
Speaker 1: the Feds not happy with that, then they may have
Speaker 1: to do an additional round of tightening. And we saw
Speaker 1: that before in the nineties, seventies and early eighties. You
Speaker 1: needed three rounds of tightening for the FED to actually
Speaker 1: get inflation under control. The market absolutely is not discounting
Speaker 1: that possibility. We're not saying it's our base case, but
Speaker 1: it's certainly a risk that we think is is something
Speaker 1: people should consider. Your base case sounds like five. Is
Speaker 1: that fair? From what I just heard, there's five fair.
Speaker 1: I think I think five is certainly plausible, and it
Speaker 1: is very possible we could go higher than that. So
Speaker 1: five s the base coats. That's largely what's been priced
Speaker 1: in the market for quite a while, largely expecting the
Speaker 1: Federal Reserve to put that in that projections next week. Rebecca,
Speaker 1: I think a lot of people might sit here and say, well,
Speaker 1: that's priced, We're done with that, and to get that
Speaker 1: extra leg of dollar strength, I need something else. And Rebecca,
Speaker 1: I guess the question is what is it in your
Speaker 1: base case that delivers that something else. I try not
Speaker 1: to interrupt you, because I'm dying to answer the questions.
Speaker 1: It's easy. What's not priced is the FED going high
Speaker 1: and holding the markets anticipating right now that we get
Speaker 1: significant rate cuts starting in the second half of next year.
Speaker 1: And we think without severe economic weakness to justify that,
Speaker 1: we're going to get the Fed pausing but not cutting,
Speaker 1: and so as that is changed, and what the discounted,
Speaker 1: what the market is discounting, we think that it add
Speaker 1: a layers or to the dollar. Again, don't forget we're
Speaker 1: not talking about an end of quantitative tightening or rate
Speaker 1: hikes around the world as well. You know, I just
Speaker 1: want to point out miss Patterson never is dying to
Speaker 1: interrupt me. It's only you she is dying. Do you
Speaker 1: think that's what? What do you think that is? Because
Speaker 1: you know, I don't know. I'm just saying, uh, it's
Speaker 1: a good response about a persistence of the facts staying
Speaker 1: there and back against this view that we get these
Speaker 1: right cuts from the front of us a time. So
Speaker 1: back and I remember when you made a six month
Speaker 1: call if you were really you know, an eighteen month
Speaker 1: call was now we got we're gonna pivot in January.
Speaker 1: The fourth week of February, we're gonna pivot again. And
Speaker 1: then by the first week April, we're gonna do this
Speaker 1: this this forget about it, Rebecca, Cash is trash. What
Speaker 1: is the value of cash to our listeners and viewers
Speaker 1: into two thousand twenty three. Well, what's so interesting, Tom,
Speaker 1: is that we're really seeing the market move into a
Speaker 1: new paradigm. We haven't had short term rates this high
Speaker 1: in a very long time, and so it is interesting
Speaker 1: to think about how our investors are going to position
Speaker 1: for the next decade versus the last decade. The last
Speaker 1: decade was all about um low and stable inflation, low
Speaker 1: macro volatility, low commodity prices. And now if we're in
Speaker 1: a regime where there's more uncertainty around the level of inflation,
Speaker 1: more uncertainty around where where interest rates should settle, what's
Speaker 1: the right portfolio to construct? Should you stay overweight the
Speaker 1: U S. Should you stay overweight tech? How much private
Speaker 1: assets did you have in your portfolio. We think there's
Speaker 1: some tectonic plates that are shifting right now, and assuming
Speaker 1: that they can be sustained, and we think there's a
Speaker 1: real chance they can. I think we're gonna get a
Speaker 1: lot of more structural, bigger market changes, portfolio allocation changes
Speaker 1: in the year two ahead, as people realize this is
Speaker 1: a different world we're moving into. Not that inflation is
Speaker 1: going to settle at four or five, but um, it
Speaker 1: certainly could settle higher than where it's been, with rates
Speaker 1: higher than they've been as well. I gotta squeeze this in.
Speaker 1: This is great, Rebecca, Just one final question, what's the
Speaker 1: biggest change that you're expecting the South On the conversations
Speaker 1: that you're having with clients that push him back on still,
Speaker 1: what's the number one change you think we're gonna say? Well,
Speaker 1: I think the structural change is inflation. I think the
Speaker 1: cyclical change. The biggest thing to watch for three is growth.
Speaker 1: I think we're gonna have to see growth weaker for
Speaker 1: central banks to hit their targets, and that's not yet
Speaker 1: reflected in earnings. Rebecca Patterson thank you, Bruin riche Water.
Speaker 1: Just fantastic because we celebrate and I mean truly celebrate
Speaker 1: accidental conflict America, China and the clash of false narratives. This,
Speaker 1: of course was Stephen Rod. You've heard me in the
Speaker 1: recent days say essentially he invented modern market economics at
Speaker 1: Morgan Stanley and of course now at his Yale University.
Speaker 1: Dr Roarge, thank you so much for joining us UM
Speaker 1: this morning. I do and ask one American question before
Speaker 1: we celebrate your informative book, and that is, simply, do
Speaker 1: we hearken back to the fears of the sixties and
Speaker 1: the seventies and a wage price spiral, well wage price spiral.
Speaker 1: Back then, Tom was heavily impacted by cost of living
Speaker 1: UH indexation clauses in labor union contracts. And two things
Speaker 1: have happened. Uh labor unions are a much smaller share
Speaker 1: of the workforce, and these coal adjustment clauses are less
Speaker 1: prevalent than they were back then. And nevertheless, you know,
Speaker 1: wages are Labor is a very important segment of overall
Speaker 1: business costs, and tight labor markets are certainly boosting the
Speaker 1: compensation piece of that. And weak productivity is reinforcing it.
Speaker 1: So it's it's important to stay focused on this issue.
Speaker 1: Steven Ros to China, Sir Howard Davies mentions of your
Speaker 1: book that it is is is a way to a
Speaker 1: new framework, a new discussion of both parties. We need
Speaker 1: goodwill among the United States and China. How do we
Speaker 1: find that goodwill? Well? Number One, we have to recognize
Speaker 1: that the current approach that we've both been wedded to
Speaker 1: over the past twenty years is an abysmal failure. In
Speaker 1: the last five years, we've had the beginnings of a
Speaker 1: trade war, at tech war, and now the early stages
Speaker 1: of a new Cold war, so an accidental conflict. I
Speaker 1: propose a a new approach based on three key pillars.
Speaker 1: One UH rebuilding trust by going after the low hanging
Speaker 1: fruits of reopening consulates and restarting exchange programs, taking pressure
Speaker 1: off of NGO's. Secondly, abandoning the zero sum bilateral trade framework,
Speaker 1: which makes no sense and has not worked at all,
Speaker 1: embracing a market opening pro growth initiative framed around a
Speaker 1: bilateral investment treaty. And Thirdly, UH really making an effort
Speaker 1: to establish a new architecture for engagement. These summits like
Speaker 1: the one that Shi Jumping and Joe Biden had November fourteen. Uh,
Speaker 1: they're long on the photo ops, but they accomplished nothing.
Speaker 1: I'm in favor of a new full time organization that
Speaker 1: I call a U S. China Secretariat, which is detailed
Speaker 1: in the book. But after the Party Congress and what
Speaker 1: we see from the leadership in Beijing, a leadership perhaps
Speaker 1: forever is the idea. As you mentioned in one of
Speaker 1: your chapters of China with American characteristics, there seems to
Speaker 1: be zero desire for that out of Beijing. Well, China
Speaker 1: wants to do it its way, and that's been an
Speaker 1: affront to us. We had this rather naive presumption that
Speaker 1: we let China into the w t O, they would
Speaker 1: play by our rules and become more like us. They
Speaker 1: had the facade of presenting, uh, that similar appearance, but
Speaker 1: they've certainly gone their own way, and that that remains
Speaker 1: a worrisome part of the ongoing conflict. See if you
Speaker 1: live this, I mean some would say with you the
Speaker 1: next day as you you actually were the first one
Speaker 1: to write about this. Within market economics. You're sitting with
Speaker 1: James Gorman now having a cup of coffee. Does Morgan
Speaker 1: Stanley move from Hong Kong to Singapore? Well, I'm no
Speaker 1: longer employed by that firm where I worked for thirty years,
Speaker 1: so I'll leave that up to them to comment on.
Speaker 1: But certainly Singapore has benefited a lot from the shifts
Speaker 1: that have occurred in Hong Kong. But Hong Kong, to
Speaker 1: its credit, is trying to reclaim it's a position as
Speaker 1: the major financial center uh in non Japan Asia, and
Speaker 1: we'll see if they can pull it off. How do
Speaker 1: you react to the bipartisan nature of this in Washington, Steve?
Speaker 1: I mean, it's one of the very very few ideas
Speaker 1: in Washington where there seems to be common ground. And
Speaker 1: you know there there were waves of this going from
Speaker 1: Shanghai Secon back to World War to in all. Is
Speaker 1: this just another wave of bipartisan anti China feeling or
Speaker 1: is there a permanence to this? Well, it's politically expedient
Speaker 1: for the the US to do it. I mean, the
Speaker 1: the sentiment is virtually the only thing, as you said, Tom,
Speaker 1: that's unanimous um uh within the Republican and Democratic ranks,
Speaker 1: and it's it's going to be hard to dislodge one
Speaker 1: of the big surprises for for me was the election
Speaker 1: of Joe Biden. If anything has not altered the Trump
Speaker 1: UH anti China policies of anything, that's amplified it. And
Speaker 1: for a president who repudiated so much of his predace
Speaker 1: on popular policies like the border wall and the Muslim
Speaker 1: travel band to perpetuate what I think is a wrong
Speaker 1: footed US China policy is a disappointment and a surprise.
Speaker 1: Tim Cook reads accidental conflicts Stephen Roach, what does he do?
Speaker 1: I mean, what is the what is the approach for
Speaker 1: multinational Americans led by Apple in China? Well, you know,
Speaker 1: Tim Cook has been leading the way in reevaluating UH,
Speaker 1: the commitment of US based multinationals to a full outsourcing
Speaker 1: bet in in China. Apple is obviously the quintessential UH
Speaker 1: A producer who's taken advantage of this production platform and
Speaker 1: m Guangdong province and they're now for a variety of
Speaker 1: reasons understandable, but the conduct is part of it. Starting
Speaker 1: a diversified production of the iPhone into India slowly, but
Speaker 1: that's a move that needs to be watched very carefully
Speaker 1: for the future. With all of your experience, do you
Speaker 1: have a confidence they can get manufacturing process and other
Speaker 1: nations equal to what they've invented in China. Well, you know,
Speaker 1: I think China certainly has made a huge bet in
Speaker 1: in terms of revamping its infrastructure and equipping its companies
Speaker 1: and workers with the latest in technical skills and new technologies.
Speaker 1: But by no means does that have a monopoly on
Speaker 1: that opportunity. And that's what globalization does. It It offers
Speaker 1: similar opportunities for other offshore low cost production platforms. Steven,
Speaker 1: at the time that I've got left, I think we
Speaker 1: need to talk about one of your calls, and you've
Speaker 1: been very very candid about this and the idea of
Speaker 1: week dollar. Well, guess what it's been a Steve roach quarter.
Speaker 1: We had a resilient dollar and finally there's a new
Speaker 1: weakness with international investment doing utter with that week dollar.
Speaker 1: Is this the great Rocchi In turn? Well, I don't
Speaker 1: know how great that that is for me, because it
Speaker 1: was one of my more humiliating forecasts. I promised myself. Yeah,
Speaker 1: I've had a few, but this was this was a
Speaker 1: bad one. Um. But you know, it's it's very much
Speaker 1: tied to the fed um. As I look back on
Speaker 1: the mistake that I made. Um. I think it was
Speaker 1: a fair mistake to make at the time, because the
Speaker 1: FED a couple of years ago showed uh no desire
Speaker 1: to be aggressive to tighten monetary policy to counter what
Speaker 1: incorrectly presumed was a transitory inflation. The FED has gotten
Speaker 1: religion and now as it is a nearing not so
Speaker 1: much a pivot, but a sort of a second derivative
Speaker 1: slowing in the rate of rate hikes. Uh some of
Speaker 1: the bid has come off the dollar, but the dollar
Speaker 1: is still a good deal higher than it was when
Speaker 1: I made that seemingly dumb call. Well, Stephen, let me
Speaker 1: finish up with the optimism and accidental conflict is well,
Speaker 1: where do you want to be in twelve months? I mean,
Speaker 1: short term for the Chinese and frankly short term for
Speaker 1: America as well. What is the to the to do
Speaker 1: list that we need to do to get to the goodwill?
Speaker 1: Howard Davies talks about, we need to re engage. There
Speaker 1: is absolutely not anyone, uh, in our political structure, Republicans
Speaker 1: and Democrats alike, especially in leadership roles, who's willing to
Speaker 1: make a bet in re engaging with the Chinese. There's
Speaker 1: a lot of things about China that are uncomfortable and
Speaker 1: unpleasant that we have focused on. But the two most
Speaker 1: powerful economies, the two superpowers, UH, need a more constructive
Speaker 1: framework of engagement, and I propose that in the book
Speaker 1: with a very optimistic final chapter on on this new plan.
Speaker 1: You have to leave it there. Steven Rhodes, thank you
Speaker 1: so much in congratulations on decades of work on the
Speaker 1: thinking of America and China. Gabriel Knocklof is with the
Speaker 1: Bank of Ireland. He is their governor. And can you imagine,
Speaker 1: folks in America if basically the Federal Reserve System to
Speaker 1: find a new chairman went out and did a worldwide search.
Speaker 1: That's what the Bank of Ireland did, with some controversy,
Speaker 1: the British economists of type moving from New Zealand to Ireland.
Speaker 1: And we're thrilled that the governor could join us this morning. Governor,
Speaker 1: what is the biggest challenge that Christine Laguard has just
Speaker 1: in the coming ninety days? Well, Christine and the thank
Speaker 1: you for having me. Firstly, um and uh, thank you
Speaker 1: for describing me as the most interesting custom But that's
Speaker 1: for a separate discussion. I had Christine and all the
Speaker 1: members of the Governing Council um how facing the the
Speaker 1: sorts of challenges that I think many people across Europe,
Speaker 1: if not the world, are facing, which is dealing with
Speaker 1: some extreme uncertainty. I know we've been talking about that
Speaker 1: for a while, but the combination of the recovery from
Speaker 1: the pandemic, the supply chain problems that we've had, the
Speaker 1: news about China that I've just heard you talk about,
Speaker 1: the ongoing Russian war in Ukraine, and so on, we
Speaker 1: have a constellation of um of issues that we have
Speaker 1: to navigate through to arrive at the right monetary political
Speaker 1: for the new area. So it's a challenge the government,
Speaker 1: one of the great challenges, and I would not Ireland's
Speaker 1: leadership in growth for whatever reason is debatable, but the
Speaker 1: fact is it's been a growth engine. Everything is said
Speaker 1: and done, Governor. One of the distinctions here is a
Speaker 1: belief in the strength of technology, the nominal GDP of
Speaker 1: America versus a lesser nominal g d P in Europe.
Speaker 1: Do you push against it? Do you say we underestimate
Speaker 1: the potential of European growth forward? I absolutely do. I
Speaker 1: think the potential there is huge. It's already a very
Speaker 1: very big economy, um, and it's ambitious for itself. So
Speaker 1: I think UH and technology is going to be a
Speaker 1: critical platform for the future. Digitalization, climate change, and demography
Speaker 1: are the big economic transitions that we're all going through
Speaker 1: right now, and I think Europe is has the potential
Speaker 1: um to to be at the head of all of those. Actually,
Speaker 1: and let's talk about the reality of the decision, Governor
Speaker 1: that you face on December fifteen. Can I just start
Speaker 1: with your base case? Does it include a recession in
Speaker 1: the uros own economy? Now, I haven't seen the ECB
Speaker 1: staffs forecasts, which we're going to see next week, but
Speaker 1: my own my own view is that we're likely to
Speaker 1: to see the euro Area in a technical recession. I
Speaker 1: suspect that Q four this year, the one that we're
Speaker 1: in now, we'll see a very slightly negative m g
Speaker 1: P number, and we're likely to see that for Q
Speaker 1: one next year. On the other hand, my expectations were
Speaker 1: not going to see three as a year of recession.
Speaker 1: The governor, with that in mind, how does that influence
Speaker 1: your view of how much tightening we ultimately need? Well,
Speaker 1: I in my view, um, you know, we started the
Speaker 1: normalization of interest rates. People have forgotten that back in
Speaker 1: June we were in negative rate territory and we're definitely
Speaker 1: not there now. But I also think that next week
Speaker 1: when we meet, I think a fifty basis point increase
Speaker 1: is the sort of flaw that we've to be discussing.
Speaker 1: I expect us to go there, but I don't expect
Speaker 1: us to end there. I do expect us to continue
Speaker 1: in future meetings. And you've got an idea of how
Speaker 1: far you would push that. I was about to say
Speaker 1: how far, I mean, how far I will push that
Speaker 1: will very much depend on the data, uh and seeing
Speaker 1: where the projections are telling us, seeing what the latest
Speaker 1: data are are telling us. But I think in my
Speaker 1: view it's pretty clear that we're inflation running at ten
Speaker 1: our target at two core inflation at five UM. I
Speaker 1: think it's pretty clear that next week's decision won't be
Speaker 1: the last increase that we make. Interest rate policy only
Speaker 1: one part of this. Of course, we've also got to
Speaker 1: talk about the undwind of the balance sheet. Can you
Speaker 1: update us on how discussions are going, how your thoughts
Speaker 1: were evolving on what we should be doing with the
Speaker 1: balance sheet that larger the e c B, and how
Speaker 1: you would prefer to unwind it. I mean my uh, Well, firstly,
Speaker 1: my preference is to unwind it. I think the reasons
Speaker 1: for having it in the first place, the very long
Speaker 1: period of the rates and the risk of deflation, those
Speaker 1: reasons are gone, so we now need to look to
Speaker 1: unwind it. My view is that it needs to be
Speaker 1: done cautiously and carefully, um and predictably. So my preference
Speaker 1: would be for us to start slowly, leave ourselves the
Speaker 1: room for accelerating if we feel it's warranted, but to
Speaker 1: do it in that order. I don't expect I expect
Speaker 1: us to set out at or to agree at the
Speaker 1: next week's meeting a set of principles which the President
Speaker 1: will for for winding the balance sheet down, which the
Speaker 1: President will announce. I don't expect anything to start until
Speaker 1: next year. My own preference would be something towards the
Speaker 1: end of Q one beginning of Q two. The governors
Speaker 1: some important years your experience in New zeal And, where
Speaker 1: they has been a real idea of rules of the
Speaker 1: road in central banking. I think they've provided decades of
Speaker 1: leadership on that. Olivia Blanchard and others are talking about
Speaker 1: a set above two percent in America. Combine your New
Speaker 1: Zealand experience with the idea that we may not bring
Speaker 1: inflation down to the comfort level, the anchored level of
Speaker 1: decades of theory. Can we live in America or in
Speaker 1: Europe with a higher inflation set? Let's use America as
Speaker 1: an example of near three percent? Can we live with that?
Speaker 1: Can there be a permanence to that? Well? At d CB,
Speaker 1: we had a review of our strategy like the FED
Speaker 1: did before us at one we which we concluded last
Speaker 1: in July one and we concluded that two inflation should
Speaker 1: be the target that we focus on and nimful there's
Speaker 1: been no discussion within the Governing Council as to whether
Speaker 1: or not that target should be changed, and I unexpected
Speaker 1: to that should remain our focus. But the other hand,
Speaker 1: I I am interested in the debates that academics and
Speaker 1: animals are having and it's I mean, it's interesting to
Speaker 1: observe um. Part of this is about in my view anyway,
Speaker 1: part of this is about communication. So in New Zealand
Speaker 1: the target was actually a range between one to three percent,
Speaker 1: with the midpoint being So it's about how you communicate
Speaker 1: and then explain what you're doing. But for the For
Speaker 1: the moment, the ECB is absolutely focused on two percent.
Speaker 1: In the medium term, is England communicating in the World Cup?
Speaker 1: I think I think the English team have got an
Speaker 1: excellent chance to win the World Cup. One of the
Speaker 1: challenges you mentioned Christine Legarde has to maneuver over the
Speaker 1: coming weeks is making sure that all the members of
Speaker 1: the Girl and in Council who are supporting different teams
Speaker 1: can be managed appropriately. I'm not sure how your Irish
Speaker 1: colleagues might fish eight. Imagine there might be some French
Speaker 1: pride coming on that time. I'm gonna wonderful to catch
Speaker 1: up with you said, let's stay this against saying Governor
Speaker 1: Maclift of the Bank of Islands some dublin. I mean,
Speaker 1: I've been saying, why is it always to trip them off?
Speaker 1: With you? This is the Bloomberg Surveillance Podcast. Thanks for listening.
Speaker 1: Join us live weekdays from seven to ten AMI Eastern.
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Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg.