Speaker 1: This is the Bloomberg Surveillance Podcast.
Speaker 2: I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz.
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Speaker 2: A huge debate, and of course our theme on this
Speaker 2: Monday morning is the many narratives that are out there.
Speaker 2: Stephen Major is Global head of Fixed Income Research at HSBC,
Speaker 2: joins us here and on through this half hour. Stephen,
Speaker 2: you are iconic for a lower yield call. There is
Speaker 2: a camp aggressively looking for lower yields, led by the
Speaker 2: IMF in a stunning five year GDP projection globally reaffirm
Speaker 2: now the low yield call.
Speaker 3: Yeah, the IMF also have ident the low are style numbers.
Speaker 3: I know you're not a big fan of that from
Speaker 3: what I've.
Speaker 1: I had to be yesterday and Friday.
Speaker 2: I was sitting next to Olivia Blanchard on Friday at
Speaker 2: a panel, so I love our start at right.
Speaker 3: The reason you have to be a fan of it,
Speaker 3: or at least consider it. Is that you need an
Speaker 3: anchor in your process. Now, the word anchor is sometimes
Speaker 3: taken negatively. Are you that you're starts? You can't change
Speaker 3: your mind? But I like it as a sort of
Speaker 3: ballast to the thinking process in that we're anchored around
Speaker 3: this low our style because we seriously believe it. We
Speaker 3: believe that the debt levels in the system, and the
Speaker 3: demographics and the total factor productivity, these are key drivers
Speaker 3: of this destination point. Now, most people seem to spend
Speaker 3: nearly all their time talking about the policy rate today, right,
Speaker 3: but you need both and I think it's completely reasonable
Speaker 3: to have that debate.
Speaker 2: A strategist away from what you do is Ian Lingen,
Speaker 2: who's widely acclaimed in America. He aggressively said today the
Speaker 2: ten year three point five six percent, if it gets
Speaker 2: to three points sixty five percent, that's a buying opportunity,
Speaker 2: yield down.
Speaker 1: Price up.
Speaker 2: Do you have that nuance now or are you just
Speaker 2: saying by the take?
Speaker 3: Yeah, Well, I think people look at me, they read
Speaker 3: the stuff and they think I'm just one way, just
Speaker 3: the bomb ball, And I guess you guys have done
Speaker 3: that to me as well over the years, and it's
Speaker 3: fair enough. I guess consistently we have forecast lower yields.
Speaker 3: There's a tactical overlay as well. We want to buy
Speaker 3: at more cheap at cheaper levels, right, So I think
Speaker 3: somewhere between here and three and three quarters is a
Speaker 3: good entry level. If if if someone says three sixty five,
Speaker 3: then really you want to go in at three sixty four.
Speaker 3: But you know, I think it's very difficult to imagine
Speaker 3: us getting back to four percent on the tenure.
Speaker 4: I'm actually less interested in the tactical movements that I
Speaker 4: am the sort of larger destination call, because that is
Speaker 4: one that I have never seen such a disagreement on
Speaker 4: as I have seen now or so many people say
Speaker 4: this is a new era, that the fragmentation that we're
Speaker 4: seeing with China and with the US and with Europe
Speaker 4: is going to lead to higher costs, that we're going
Speaker 4: to see some sort of more persistent inflation. Why do
Speaker 4: you push back against that?
Speaker 3: Well, look, I respect these views, and we have to
Speaker 3: try and consider all available information. It's intuitively quite logical
Speaker 3: what you just said, So defense spending, the transition to
Speaker 3: net zero, there are questions about the behavior of aging
Speaker 3: populations as well, so they could change. So there's all
Speaker 3: sorts of pushbacks to the lower for longer view. But
Speaker 3: the thing is, I didn't see much science in any
Speaker 3: in any of this. And I've got an observation that
Speaker 3: goes back for decades that says that there is a
Speaker 3: trend in place and the higher debt has been associated
Speaker 3: with lower yields, and I dare say it's even causal
Speaker 3: now until until we can overcome that, until you have
Speaker 3: a tipping point and it goes the other way. I
Speaker 3: think that's that's the central tenant of the hypothesis, if
Speaker 3: you like. And in science you need to be able
Speaker 3: to reject that what I hear at the moment are anecdotes.
Speaker 3: There's there's going to be this, so this this will happen. Well, really,
Speaker 3: where where's the I mean that there's there's a lack
Speaker 3: of rigor around the whole the whole thing.
Speaker 4: Although you could say this is a very quickly moving
Speaker 4: story and that before the past four decades was a
Speaker 4: different inflationary regime, and so people would argue that the
Speaker 4: fact that we've seen such resilience as evidence today by
Speaker 4: that early new York factory data shows that perhaps there
Speaker 4: is more steam behind this recovery, more steam behind this
Speaker 4: inflation growth that people previously have gave credit for.
Speaker 3: Yeah, fair enough, Look, inflation is high and sticky, and
Speaker 3: it's not going to get back to target anytime soon.
Speaker 3: But we've got so many other things to consider, and
Speaker 3: to me, the common denominator behind a lot of the themes
Speaker 3: that keep running through the market is the debt. Now,
Speaker 3: you spent a lot of time on this program talking
Speaker 3: about the bank stress, that that's one sect of this economy,
Speaker 3: not just the global economy of this economy, and the
Speaker 3: common denominator that runs through all of these inflection points
Speaker 3: seems to be debt. It happened to crypto, it happened
Speaker 3: to SPACs, it happened to the UK pension industry, and
Speaker 3: it's just going to keep happening.
Speaker 4: And it's also going to pressure to your point of
Speaker 4: fiscal spending. So there's not going to be the same
Speaker 4: kind of ability to spend on some of these things
Speaker 4: that people are talking about because of that overhead, that
Speaker 4: weight of the debt. So where we are right now
Speaker 4: is this idea where people don't necessarily say that they
Speaker 4: agree with you, and they fight back against the IMF,
Speaker 4: but their trading as though they do the trading is
Speaker 4: though they're going to see rates get cut significantly by
Speaker 4: the end of this year. Do you agree with that?
Speaker 3: Do you know this right or wrong? Or agreeing or
Speaker 3: that doesn't really matter? And in fact that the most
Speaker 3: the most frustrating thing for me is meeting people who
Speaker 3: totally agree with me because they want the confirmation, and
Speaker 3: then you meet the others who completely disagree, and it
Speaker 3: doesn't seem to be much in the middle. And so
Speaker 3: it's not about right or wrong right, it's the process
Speaker 3: and it's the thinking behind it.
Speaker 1: That the wall of money that's out there.
Speaker 2: Sir John Templeton told me once in my ute that
Speaker 2: there would be a shortage of bonds.
Speaker 1: That's exactly what he said.
Speaker 2: There's a wall of money out there and a shortage
Speaker 2: of bonds. To the Steve major belief of abroad of
Speaker 2: you and Blanchard, I think totally agrees with you on
Speaker 2: the trend is in place of a lower our stard
Speaker 2: is price up yield down? How much price up yield down?
Speaker 2: How much of this off the ten year benchmark? Can
Speaker 2: you model a sub three percent ten. You're yield from here.
Speaker 3: Out X number of quarters quite easily. I mean our
Speaker 3: forecast is two and a half. For what it's worth
Speaker 3: that the lack of safe asset to me is a
Speaker 3: paradox because after all these years of QE trillions and trillions,
Speaker 3: surely there's plenty of safe asset out there. Will Actually
Speaker 3: there's too much of the wrong kind of safe asset.
Speaker 3: You see the excess reserves created by central banks to
Speaker 3: buy the bonds in the QE. That's not something that
Speaker 3: the WEE can that you and I can access. So
Speaker 3: you can't get excess reserves, right, you know, that's for
Speaker 3: banks only. What you want a T bows, You want
Speaker 3: T bills, and there's a lack of those. There is
Speaker 3: not enough T balls around, right, So globally there is
Speaker 3: a lack of liquid safe asset. That is still the case.
Speaker 3: So why are people surprised that the two year yield
Speaker 3: can set one hundred basis of points through the money rate?
Speaker 3: Why would you be surprised about it? Because the price,
Speaker 3: because it's factoring in the average policy rate for the
Speaker 3: next two years. It's saying it could be five for
Speaker 3: eight months, it could be four for eight months, but
Speaker 3: it could be three for the next for the next eight.
Speaker 3: The average of those three numbers, I believe is four,
Speaker 3: so it's quite possible.
Speaker 2: Right, this has been fine. I've got like forty five
Speaker 2: seconds or so. I purposely watched west Ham highlights with
Speaker 2: Arsenal yesterday.
Speaker 5: Wow.
Speaker 1: That was exciting.
Speaker 2: How does west Ham rebuild from the threat of relegation?
Speaker 3: Well, they look like they say it quietly, they look
Speaker 3: like it. They're almost safe at the moment. It's a
Speaker 3: shame you don't watch the whole game because the highlights
Speaker 3: don't do it justice.
Speaker 1: After ten American, after.
Speaker 3: Ten minutes, it could have gone to seven or eight zero.
Speaker 3: I was gonna say nil, but this is an American audience.
Speaker 3: I have to.
Speaker 2: No chance will understand nil. But it's really exciting. I mean,
Speaker 2: Pharaoh's got me into all this. It's your fall as well.
Speaker 3: Yeah, it's partly my fault. But try and watch the
Speaker 3: whole match sometimes.
Speaker 1: Thank you. I'll do that. I think I got my marching.
Speaker 4: This is phenomenal.
Speaker 1: Thank you so much for an entire bitch. Stephen Major,
Speaker 1: thank you so much with that.
Speaker 4: Just get it.
Speaker 1: Please are your thoughts on that? To me?
Speaker 2: This is such a rich conversation, and it's not one
Speaker 2: or two ways it could go.
Speaker 1: It's like four or five ways it could go.
Speaker 4: The science underpinning our assumptions. To me, that's my takeaway.
Speaker 4: People make a lot of proclamations based on logic, but
Speaker 4: how do we look to some sort of science at
Speaker 4: a time of such great uncertainty? And this is the
Speaker 4: difficulty right now. People are coming up with different parameters
Speaker 4: and making different arguments and looking at different data points.
Speaker 4: If you look at history and you think of the
Speaker 4: debt overhang, it does complicate issues. Although you could push
Speaker 4: back and say, well, if everybody piles into bonds, that's
Speaker 4: going to lower the interest rate and that'll increase the
Speaker 4: ability to spend fiscally, and then we get right back
Speaker 4: to it. So it's kind of a lot to wrap
Speaker 4: your head around.
Speaker 1: Are you going to watch a whole soccer game with me?
Speaker 4: I used to play soccer. I would love to watch
Speaker 4: a whole soccer game with you.
Speaker 1: We'll have to schedule one.
Speaker 4: Yeah, in twenty twenty seven.
Speaker 1: We'll do that as well.
Speaker 2: Running green on the screen and this is important coming
Speaker 2: up here. John Ferrell's going to have some really good
Speaker 2: coverage with Edward Ludlow of this rocket ship that's going up.
Speaker 2: It's another day, it's in April day, and this is
Speaker 2: a piece of hardware that America has never seen. I
Speaker 2: can't emphasize enough how original this rocket launch, yeah, will be,
Speaker 2: and we'll see that in the next half hour. Rocket
Speaker 2: launch for US is a VIX of seventeen point seven
Speaker 2: to two. Maybe it was a bear market in ending
Speaker 2: in October.
Speaker 1: Stay with us through the morning. This is Bloomberg.
Speaker 6: Let's frame the debate in the equity market right now
Speaker 6: with a bull and a bear. Here's the bear ist
Speaker 6: for you, Mike Wilson. Morgan Stanley kicking off the week
Speaker 6: with the fastest FED policy shift in forty years. We
Speaker 6: think more negative surprises lie I had for investors. He
Speaker 6: goes on to say, one that we think is in
Speaker 6: plain sight is Earning's forecast that remain too optimistic. That
Speaker 6: has been the message from Morgan Stanley for months now.
Speaker 6: Bink Chaa takes the other side. The chief global strategist
Speaker 6: and head of VASA Allocation at Deutsche Bank joins us
Speaker 6: right now, Binkie, so let's start with this one. A
Speaker 6: good morning to you, sir, Thanks for being with US
Speaker 6: still long, still optimistic. What underpins that view for you?
Speaker 7: So in the very near term, it's earnings, and I
Speaker 7: think you know, the things to keep in mind are
Speaker 7: Number one, the acquity market almost always rallies during earning season.
Speaker 7: It's not a huge rally, it's about to two and
Speaker 7: a half percent, but you know that would put us
Speaker 7: change the handle in the S and P to the
Speaker 7: mid forty two hundreds closer to forty three hundred. I
Speaker 7: think on earnings, the big picture issue is very simple,
Speaker 7: which is that if you look at the top down
Speaker 7: macro drivers, what we had is upgrades to growth in
Speaker 7: the US, in Europe, in China, in Japan, we had
Speaker 7: the dollar come down. All of that argues basically for
Speaker 7: you know upside a rebound or a turn basically in
Speaker 7: earnings up. And if you look at the same time
Speaker 7: as what we are measuring earnings against, which is the
Speaker 7: bottom up consensus, it's been falling since June of last year.
Speaker 7: It's down about sixteen seventeen percent now. And so when
Speaker 7: you take the top down drivers and you you know,
Speaker 7: plug them into our earnings models or frameworks, it's telling
Speaker 7: you should get a pretty significant rebound in earnings, we
Speaker 7: should get a pretty average beat of about five percent.
Speaker 7: So there's this narrative out there that the bottom up
Speaker 7: consensus is forecasting you know, the worst season ever and
Speaker 7: down seven percent. I mean, I think they should be
Speaker 7: a little bit careful with that hypothetical because the earnings
Speaker 7: beat almost always by five percent. So you're already down
Speaker 7: to sort of about one and a half percent. And
Speaker 7: so if you get a little bit bigger beat. You
Speaker 7: saw the results on Friday, you know you're back at zero.
Speaker 2: Well, your twenty stocks doing well, and the S and
Speaker 2: P is so basically made it halfway back out of
Speaker 2: a grim bear market. Institutional portfolios, maybe you've made halfway back.
Speaker 2: Is a basic statement you talk and this is great
Speaker 2: biggie chata, and that you take a longer timeline, a
Speaker 2: more relaxed view, and within that you talk about a
Speaker 2: passing of the baton from earnings to the next thing
Speaker 2: to keep your optimism going.
Speaker 1: What's after our earnings analysis.
Speaker 7: Well, you know it will then depend basically on you know,
Speaker 7: the big cloud and whether it's going to erupt into
Speaker 7: a severe rainfall of the US recession. And there what
Speaker 7: I would say is that basically, you know, instead of
Speaker 7: just looking at the aggregate all the time, we should
Speaker 7: do what we used to do when the pandemic began,
Speaker 7: which is differentiate goods and services. And what you will
Speaker 7: see here is a very very clear picture. And what
Speaker 7: I would argue is that you know now really comes
Speaker 7: to test if you think about a trend line. We've
Speaker 7: got services that fell far below and have been rebounding
Speaker 7: and sort of you know, asimp toting or the growth
Speaker 7: rate is slowing basically towards trend. And the important thing
Speaker 7: to keep in mind about services is they don't generally
Speaker 7: slow very much. You don't get really recessions and services
Speaker 7: and all of the action has really been for the
Speaker 7: last two or three years on the good side, where
Speaker 7: we got massively elevated re to trend. Depending on what
Speaker 7: metric we're talking about, anywhere have between fifteen and twenty
Speaker 7: five percent above trend levels. And it is something that
Speaker 7: we wrote about in the summer of twenty twenty one
Speaker 7: called the COVID speed cycle. And since then, what has happened,
Speaker 7: I would argue, is an incredibly resilient outcome, which is
Speaker 7: we've been going sideways in real terms for two years.
Speaker 7: And the key question is as we come back down
Speaker 7: to trend levels, which we are very near now, are
Speaker 7: we going to start growing or are we going to
Speaker 7: suddenly crash?
Speaker 4: But so as we talk about earning season and the
Speaker 4: expectations are all over the place, you have a more
Speaker 4: bullish expectation Mike Wilson, a more bearish one the overlay
Speaker 4: of a banking crisis that wasn't what are stocks currently
Speaker 4: pricing in taking out some of the regional bank stocks.
Speaker 4: What are they pricing in with respect to contraction of credit?
Speaker 7: I don't think that the equity market is pricing in
Speaker 7: that much in terms of a credit downturn. But you know,
Speaker 7: if you look sort of at you know, what is
Speaker 7: the equity market pricing, It's pricing in ism of forty six,
Speaker 7: which is what we got. So's it's kind of right
Speaker 7: where it should be in terms of the very short
Speaker 7: term near term driver. So nothing really more than that.
Speaker 7: And in terms of the banking stress, you know, to
Speaker 7: the extent that it's already captured basically in the pmis
Speaker 7: and the isms, then you know the market's priced it in.
Speaker 7: So something bigger now.
Speaker 6: But do you think it makes sense that we have
Speaker 6: basically an SP five hundred to anticipate we'll get to
Speaker 6: forty three hundred and a rates market that is pricing
Speaker 6: inst some serious rate cuts. Do you think that can persist?
Speaker 7: So, you know, on the rate cuts issue, what I
Speaker 7: would say, you know, if we're talking about the ten
Speaker 7: year yield, you know the difference of view between the
Speaker 7: Fed when you open it's dot plot, the first thing
Speaker 7: that just shields the rates are coming down massively. So
Speaker 7: the question is really about six months over a ten
Speaker 7: year period, six months, eight months, maybe nine months, but
Speaker 7: it's not a huge move. I think the bigger issue
Speaker 7: for rates really is, you know, all of the forward
Speaker 7: guidance that convinced the market to gotively short kind of
Speaker 7: blew up, and so is the risk appetite to be
Speaker 7: just as short going to come back?
Speaker 6: So just ask the question from active, Thank you. I'm
Speaker 6: just wondering, does the S and P five hundred and
Speaker 6: forty three hundred and CPI five percent does that encourage
Speaker 6: the Federal Reserve to cut interest rights? I mean, I'm
Speaker 6: struggling with them.
Speaker 7: What she doesn't now, I mean it's not our house view,
Speaker 7: but our house view is that we will cut interest
Speaker 7: rates next year. So it's again they're going to get
Speaker 7: overhung up on what is a very fluid calendar and
Speaker 7: precise calendar times, and then they're all.
Speaker 1: Out there in the future. So I'd be a bit
Speaker 1: careful on that.
Speaker 6: Thank you, thank you, sir, thank you chatter at Deutsche.
Speaker 2: Bank joining US now Jordan Rochester G ten Ef, strategist
Speaker 2: at the MURA for a morning brief for Global Wall Street. Jordan.
Speaker 2: What I find interesting is if I triangulate and go
Speaker 2: to euro yen, I've got euro yen butter stuff against
Speaker 2: resistance hit a one forty seven. It's unimaginable strong euro
Speaker 2: week yen on the US dollar pair? Is it about
Speaker 2: strong euro? Or is in the zeitgeist this weekend? Is
Speaker 2: it about week dollar?
Speaker 8: It's been a bit of both, Tom.
Speaker 9: I mean, I think in the past few weeks it's
Speaker 9: been the dollar aside that has really moved the needle
Speaker 9: of four euro dollar. With the banking situation sub's collapsed,
Speaker 9: It's allowed markets to price in the idea of FED cuts,
Speaker 9: and a lot of people would argue too many FED
Speaker 9: cuts priced in. The irony is there are these cuts
Speaker 9: priced in, and I don't see anyone arguing for them
Speaker 9: to be priced in. That way, so there is a
Speaker 9: bit of a dislocation between narratives and actual market pricing.
Speaker 8: But Tom, I think the good news for euro isn't over.
Speaker 9: I think the growth pickup that we've seen in the
Speaker 9: first quarter this year should carry on into the second quarter.
Speaker 9: That should keep the ECB in a more hawkish footing.
Speaker 9: The market is pricing very much a too low terminal
Speaker 9: rate for in our view, for the ECB, so we
Speaker 9: look for four to twenty five four point two five
Speaker 9: percent by July.
Speaker 8: The market's somewhere around three point six.
Speaker 9: Now for the Fed, they could do a rate hike
Speaker 9: of twenty five based points in May.
Speaker 8: Our economics team thinks they won't.
Speaker 9: They think they are done with this rate hiker cycle
Speaker 9: after the banking situation. But the market's pricing twenty one
Speaker 9: basis points or so for that meeting. So if the
Speaker 9: Fed do go ahead and do a twenty five I
Speaker 9: don't see much upside for a dollar from that rate hike,
Speaker 9: where with the ECB, the market's not pricing the fifty
Speaker 9: basis points that we expect to see from the next meeting.
Speaker 9: So from a monetary policy point of view and from
Speaker 9: a growth point of view, there's more upside one fourteen
Speaker 9: in euro in the next three months.
Speaker 6: Jordan, you sound like Christine Legard of Domestic over the
Speaker 6: weekend speaking to CBS now, Jordan, I just wonder if
Speaker 6: there's anything to be optimistic about, is this four twenty
Speaker 6: five on race of the ECB because growth can handle it,
Speaker 6: or growth is really outperforming well.
Speaker 9: Last year was pretty doom and gloom. One of the
Speaker 9: best trades we had was just being short yured dollar
Speaker 9: short cable from pretty much January February time onwards, especially
Speaker 9: when Ukrame is invaded by Russia.
Speaker 8: This year it has been super different.
Speaker 9: It's been all of those negatives last year turned around
Speaker 9: from headwinds into tailwinds. So last year was about very
Speaker 9: high energy prices weighing on the consumer, weighing on the
Speaker 9: government spending situation as well as corporates. Now energy prices
Speaker 9: have pretty much collapsed in terms of natural gas. They've
Speaker 9: gone below where they were before Ukraine was invaded too.
Speaker 9: This is a huge sort of disposable income boost for
Speaker 9: consumers and for firms as well, reducing their costs. So
Speaker 9: from that side of things, the terms of trade for
Speaker 9: euro would put euro dollar between one fifteen and one
Speaker 9: twenty massive good news. But for the Euro Area and
Speaker 9: the monetary policy side, we've got all the inflation from
Speaker 9: last year feeding through to second round of effects, very
Speaker 9: tight labor market, we're seeing wage hikes coming through.
Speaker 8: We're seeing strike action in France.
Speaker 9: As well, these sort of stories in the labor market,
Speaker 9: or keep the easy being a hawkish setting until it
Speaker 9: becomes very clear that inflation is going towards two percent.
Speaker 8: Where in the.
Speaker 9: US the Feds more of a dubbish setting now because
Speaker 9: the banking crisis has seen credit conditions tight and of firms,
Speaker 9: and we're already seeing the forward looking indicators suggest that
Speaker 9: this inflation pressures are on the way, and last week's
Speaker 9: CPI not coming in too hot allows the market to
Speaker 9: carry on looking at those forward looking signals of inflation
Speaker 9: because John, the key difference for me is that the
Speaker 9: Fed is perhaps going to turn from looking just at
Speaker 9: realized inflation to maybe considering forecast of inflation when it
Speaker 9: comes to their policy settings. The ECB they're not yet
Speaker 9: at that stage. They're a few months behind. That's why
Speaker 9: we think they'll keep raising rates through to July.
Speaker 6: So this is a conversation about the cycle. Now, Jordan,
Speaker 6: you know how this works. Euro dollar goes from parity
Speaker 6: to one ten, you get a ten percent move and
Speaker 6: you see those doom and gloom articles about the end
Speaker 6: of the US dollar circulating everywhere. Can we talk about
Speaker 6: the structural shifts that you're expecting from the green back, Jordan,
Speaker 6: and whether you subscribe to this theory that you are
Speaker 6: going to see this structural shift away from the US dollar.
Speaker 9: The digitalization of trade is helping, for example, China's role
Speaker 9: in swift payments increase. The actual choice of currency in
Speaker 9: the past was tied to ease of use, and that
Speaker 9: was one of the factors behind it.
Speaker 8: And now there's needs of use of just using any currency.
Speaker 9: So there is a structural tailwind for alternatives to the dollar.
Speaker 9: But there's also when there's a crisis, you need dollars.
Speaker 9: That's still going to be the case for a quite
Speaker 9: long time. Trusting those other currencies to hold their value
Speaker 9: will be difficult in times of stress, especially if it
Speaker 9: was a Eurozone related crisis, or if it was elsewhere
Speaker 9: in em that we had an alternative crisis. High levels
Speaker 9: of inflation in that other choice of currency would erode
Speaker 9: the value of that so it's not a perfect world
Speaker 9: for alternatives for the dollar when it comes to global trade,
Speaker 9: when it comes to just getting things cross border payments done.
Speaker 9: So John, in essence, there are definitely shifting tithes helping
Speaker 9: alternatives to.
Speaker 8: Become more of an option.
Speaker 9: But I do think that the dollar's going to remain
Speaker 9: the majority reserve currency for probably the rest of our lifetimes.
Speaker 4: Go back to something that you said, which is the
Speaker 4: banking crisis in the US will keep lending conditions tighter,
Speaker 4: which will really cap how far the Fed can raise rates,
Speaker 4: and talking about how that could potentially pressure the dollar,
Speaker 4: even if it's not a long term kind of structural shift,
Speaker 4: as you were just talking about with John. Let's say
Speaker 4: there is no banking crisis. The M and T results
Speaker 4: that we got this morning seems to suggest that it's
Speaker 4: not really a problem. Then all of a sudden do
Speaker 4: you start to price in more fed Rica hikes and
Speaker 4: you end up with perhaps a stronger dollar than you'd
Speaker 4: otherwise assume.
Speaker 8: The biggest risk to the trade we have, Lisa. That's it.
Speaker 8: That is the biggest risk.
Speaker 9: If the banking data massively improves, all of the doom
Speaker 9: and gloom goes away and Let's say it's followed by
Speaker 9: an inflation print or two that comes in het Let's
Speaker 9: say shelter doesn't cool down. Let's say good price is rebound,
Speaker 9: then absolutely the dollar strengthens in that scenario.
Speaker 8: The H eight data this gets released every week.
Speaker 9: The update from Friday showed that actually we didn't have
Speaker 9: consumer credit tighten as much as the previous two weeks,
Speaker 9: So we'll have to keep an eye on that data.
Speaker 9: If it massively rebound, which would be completely shocking and weird.
Speaker 9: But if it was to do that, then you could
Speaker 9: definitely see the Fed carry on hiking. Perhaps not at
Speaker 9: the fifty bases points clips that we saw last year.
Speaker 9: Maybe it's just the twenty fives until something else breaks,
Speaker 9: because it seems that when you get to these levels
Speaker 9: of rates, something does break.
Speaker 8: We've seen it already in the banking sector.
Speaker 9: Of the question will be what else is a commercial
Speaker 9: real estate or other factors to consider? So, yes, that
Speaker 9: is the biggest risk to trade. Oil prices is the
Speaker 9: other one. So oil rebounds gets to ninety dollars one
Speaker 9: hundred dollars a barrow, inflation rebounds, and.
Speaker 8: Therefore the Fed continues to remain hawkish.
Speaker 9: So yes, rebound in banking data and energy prices, two
Speaker 9: main risks is long yeared all of you, which.
Speaker 4: Also raises an issue of positioning right and how fragile
Speaker 4: positioning is at a time of great uncertainty. We've seen
Speaker 4: incredible whipsaws in benchmark rates, which should be a ballast
Speaker 4: for markets of stability. How tenuous is positioning that could
Speaker 4: create some really big moves in currencies in currency pairs
Speaker 4: given some of these big risks.
Speaker 9: So positioning data is clear that essentially folks are on
Speaker 9: board with the short dollar trade. The euro seems to
Speaker 9: be where the consensus has built up given all of
Speaker 9: the bad news from from last year has turned into
Speaker 9: good news this year in terms of trade up. So
Speaker 9: the question is if credit conditions titan, can the Euro
Speaker 9: really rally And we saw that with SCB when we
Speaker 9: had the financial conditions titan. Urine dollar did come off
Speaker 9: that day and then it spread through to credit sweets.
Speaker 9: I actually thought it was remarkable how it didn't go
Speaker 9: much lower during that period of crisis. So the positioning
Speaker 9: is one thing. In FX, yes, it's long euro, but
Speaker 9: I do think about last year. Most of last year
Speaker 9: of real money managers invested away from European stocks because
Speaker 9: of the recession, because of Ukraine and Russia, because of
Speaker 9: higher energy prices. Now we're seeing continued inflows into the
Speaker 9: euro Area, are rebalancing away from US equities towards European
Speaker 9: and that's a structural trade as well. We've had underweights
Speaker 9: in European equities amongst investors for the pretty much ten years.
Speaker 9: All of the growth was in technology stocks in the US.
Speaker 9: That's now changed, So I think that it on the
Speaker 9: FXX future side, it suggests long euro is in vogue,
Speaker 9: but I'm still seeing five months of continued equity inflows
Speaker 9: into euro Area, so I don't think investors are overly
Speaker 9: net long Euro to make a big risk for this
Speaker 9: trade right now, because I'm also looking from a terms
Speaker 9: of trade perspective and from the China reopening perspective too,
Speaker 9: So China's data has all come in quite pretty strong.
Speaker 9: China data surprises are at the highs, and Europe is
Speaker 9: three times more exposed to trade with China than the US.
Speaker 9: So all of those factors make it very difficult for
Speaker 9: positioning to be the big concern for me right now.
Speaker 6: Hey Jordan, thank you mate, and congratulations over the weekend
Speaker 6: to Villa. Thank you, sir Jordan Rochester and Namura.
Speaker 2: One of the great voices of Wall Street counseling patients
Speaker 2: in a reach out three years as David Balen, chief
Speaker 2: investment Officer, Global Head of Investments at City Global Wealth,
Speaker 2: we had a certain courage to the pandemic to say
Speaker 2: stay in the market. David, you lead your essay, it
Speaker 2: is not easy to be an investor right now? How
Speaker 2: do I have confidence to stay in stocks?
Speaker 10: Well, right down, Tom, We're sort of two thirds through
Speaker 10: the bear market, and what's standing between us and our
Speaker 10: recovery in portfolios is the recognition of what earnings are
Speaker 10: going to be and what the level of recession that
Speaker 10: the FED anticipates and has actually talked about now actually occurs.
Speaker 10: We think that earnings, you know, are going to go
Speaker 10: down probably between seven and ten percent, much less than
Speaker 10: what analysts are expecting in terms of they're actually expecting growth.
Speaker 10: And the second thing that you and your team have
Speaker 10: just talked about, which I think is critical, is that
Speaker 10: we already see further tightening due to bank lending standards,
Speaker 10: and we see it across several data sources. First, we
Speaker 10: already see that banks are lending less that the actual
Speaker 10: amount of outstanding loans are going down. Second, we see
Speaker 10: the reporting by companies of the fact that lending standards
Speaker 10: are already tighter. And third, we actually are going to
Speaker 10: see that the ability and capacity of small and medium
Speaker 10: sized banks to lend is going to go down as
Speaker 10: a result of almost a half a trillion do of
Speaker 10: deposits moving into treasuries and money market funds over the
Speaker 10: last three months. So these are already constraints on an
Speaker 10: economy that is already slow.
Speaker 4: David, We've been talking on morning about the dispersion, the
Speaker 4: sort of disagreement between bonds and stocks. Bonds seem to
Speaker 4: be pricing in rate cuts on the heels of exactly
Speaker 4: what you're talking about, credit restriction that really just escalates
Speaker 4: throughout the year, and you see stock traders kind of
Speaker 4: shrugging that off and saying things are so all copacetic.
Speaker 4: Who do you think is right?
Speaker 10: Well, the bond market looks to be right for the moment.
Speaker 10: What's interesting is that, you know, bonds have rallied extraordinarily,
Speaker 10: and you've talked about this for the last you know,
Speaker 10: five weeks. You know, the two year and the ten
Speaker 10: year have moved, you know, yields have moved dramatically lower.
Speaker 10: The stock market is anticipating and saying, well, that's great.
Speaker 10: You know, the discount rate for stocks has actually gone down, bravo.
Speaker 10: But really what's happening is that the bond market is
Speaker 10: saying we have to be much more vigilant about where
Speaker 10: their earnings are going to go down and where they're
Speaker 10: going to go up. So companies that have motes around them,
Speaker 10: you know, different technology companies and other you know, industries
Speaker 10: where you can see both margin growth and revenue growth
Speaker 10: should be rewarded. But you've seen you know, the bank
Speaker 10: stocks in particular, and some of the ones you've been
Speaker 10: discussing this morning do poorly. And the industry averages, you know,
Speaker 10: the S and P and stuff, has been largely range
Speaker 10: bound since October of last year. So what we have
Speaker 10: to see is this digesting of what really is going
Speaker 10: to happen with earnings in order to be able to
Speaker 10: look into twenty four and twenty five. And when we do,
Speaker 10: I think we'll see a substantial recovery. But again, we're
Speaker 10: two thirds of a way through a bear market inequities.
Speaker 4: Earlier this year, people were talking about going outside the
Speaker 4: US to Europe in particular as a place, particularly because
Speaker 4: the ECB was still raising rates potentially much more than
Speaker 4: the FED was poised to do so this year. Do
Speaker 4: you still see that as the narrative that could drive
Speaker 4: investment theses or do you think the US looks like
Speaker 4: a better place to park simply because it will go
Speaker 4: through the cycle quicker and there will be more pain
Speaker 4: on the heels of some of the rate hikes elsewhere.
Speaker 8: It's a great question.
Speaker 10: If I had to predict one thing that we would
Speaker 10: be writing, you know, just a month or two from now,
Speaker 10: it would be that, you know, emerging market exposure is
Speaker 10: going to become or non US exposure is going to
Speaker 10: become extremely important. Right now, we are near the third
Speaker 10: highest dollar peak ever, we haven't come very much off
Speaker 10: of that, and valuations for non US stocks and especially
Speaker 10: emerging market stocks are at all time lows. So if
Speaker 10: you're a US investor today, you would like to buy
Speaker 10: companies right in industries outside of the US to take
Speaker 10: advantage of both the disproportionate devaluation of those shares as
Speaker 10: well as the fact that the dollar is going to fall.
Speaker 10: I think it's going to be a major source of
Speaker 10: income for US for profits for US over the course
Speaker 10: of the next two or three years.
Speaker 6: You're not alone, David. We've heard that a lot. David
Speaker 6: Padding of City Global wowth.
Speaker 2: Right now a brief and this comes off the IMF
Speaker 2: World Bank meetings, and thank you to all in Washington
Speaker 2: that helped us, particularly Peggy Noon and running the ship
Speaker 2: for US in one Washington. Julie Norman joins now co
Speaker 2: director of UCL Center in US Politics, Julie is a
Speaker 2: broad stance. What I noticed at the IMF and World
Speaker 2: Bank meetings were the unspoken Nobody wanted to say China.
Speaker 1: That word was banned from the meeting. You couldn't say China.
Speaker 2: But the other thing that was banned was the word
Speaker 2: allies recalibrate for us now the Western allies.
Speaker 1: How allied are the allies?
Speaker 5: Well? Some I think you mentioned China as well, And
Speaker 5: obviously we've seen in the last couple of weeks, and
Speaker 5: I would say even longer than that, a little bit
Speaker 5: of wobbling and what alliance means and how different partners
Speaker 5: approached the question of China in particular. So obviously we
Speaker 5: see strong alliances in terms of the stands towards Ukraine.
Speaker 5: We've seen that with made with European partners, but with
Speaker 5: and as you like, China, it gets a little bit different.
Speaker 5: There's a lot of different interest at play, as you
Speaker 5: all well know, and so I think we still see alliances,
Speaker 5: but at the same time we see some differences among
Speaker 5: that as well, and so there's a little bit more
Speaker 5: caution in using that term when you're talking about some
Speaker 5: of these more complicated issues.
Speaker 2: The bilateralness or that, I should say, the tension between
Speaker 2: Washington and Beijing, to me is just too simplistic. Who
Speaker 2: are you watching among our allies to change the dynamic
Speaker 2: between Washington and Beijing.
Speaker 5: Well, I think the you know, there's obviously the look
Speaker 5: to Europe first and foremost. The UK, I would say,
Speaker 5: has already shifted its policy notably in the last few years.
Speaker 5: I think even more so because of China's actions against
Speaker 5: Hong Kong more than anything else. We started seeing a
Speaker 5: bit of a tilt and some of the UK policies
Speaker 5: continental Europe otherwise. But I'm actually watching some other allies
Speaker 5: kind of outside of West Western Europe, India in particular,
Speaker 5: states that are kind of in this kind of still
Speaker 5: allies with the US, but a lot of different kind
Speaker 5: of interests going on that do have a big say
Speaker 5: and influence on what's happening in the Pacific, in Asia
Speaker 5: and in other parts of the world. China's we think
Speaker 5: of this bilateral relationship with Washington, but so much of
Speaker 5: word power is in its outside of European. It's in Africa,
Speaker 5: it's in you know, Southern Asia, it's across the world,
Speaker 5: and so those are the countries I'm looking at well.
Speaker 4: But Julie taking a step back, one thing that really
Speaker 4: emerged from last week's IMF meetings was a sense of
Speaker 4: not only fragmentation, but an inability to have leadership to
Speaker 4: address it, to come up with what the framework is
Speaker 4: in the modern bipolar or multipolar era. Larry Summer's, a
Speaker 4: former treasure secretary, on Friday said there's growing acceptance of fragmentation,
Speaker 4: and maybe even more troubling, I think there's a growing
Speaker 4: sense that ours may not be the best fragment to
Speaker 4: be associated with. China gives you an airport, we give
Speaker 4: you a lecture. How much is that really your sense
Speaker 4: of what's going on?
Speaker 5: Well, I think you said it exactly right. There. There's
Speaker 5: a lot of states that are finding it advantageous to
Speaker 5: partner with China because they see it as there's not
Speaker 5: strings attached. There isn't going to be pressure on democracy,
Speaker 5: there isn't going to be pressure on human rights. It's
Speaker 5: very transactional. It's very much a business deal, and so
Speaker 5: that works for again a lot of states, and it
Speaker 5: works very well for China. So I would say in
Speaker 5: terms of Summer's comments, again there's a lot at play here. Again,
Speaker 5: the US is still trading at the highest levels ever
Speaker 5: with China as well, so it's not like the US
Speaker 5: is backing away from that, but the US is coupling
Speaker 5: that again with very strong, you know, arms build up,
Speaker 5: with this very strong confrontational stance as well that other
Speaker 5: states are hesitant to get onto that for their own interests.
Speaker 6: Just getting a couple event lines top diplomats in the
Speaker 6: G seven meeting over in Japan over the next two days.
Speaker 6: So the headlines from one US official, G seven ministers
Speaker 6: agree on engagement with China, agreed to stay tightly coordinated
Speaker 6: on Ukraine, and then linking the two issues, G seven
Speaker 6: cooperation on Ukraine tom leads to unity on China. The
Speaker 6: latest headlines from a US official as top diplomats meet
Speaker 6: over in Japan.
Speaker 2: Seem to be massaged. I mean, it's exactly you know,
Speaker 2: I think it's exactly what you'd expect to see. What's
Speaker 2: important there is it's not a G eight. Russia used
Speaker 2: to be in the club, and Russia's not in the
Speaker 2: club anymore.
Speaker 6: Well, also they've got a massage some of the issues
Speaker 6: of the last week. We keep returning to those comments
Speaker 6: Tom from the French leader a couple of weeks ago, assarching.
Speaker 4: To do it's ignoring. I mean, that's what happened with
Speaker 4: European officials just like la la la la la were
Speaker 4: totally united.
Speaker 6: That's that's what I got from the IMF World Bank
Speaker 6: meetings too, at least from so placed you went there.
Speaker 6: I'm just hoping those comments didn't happen, pretending they didn't
Speaker 6: happen totally.
Speaker 2: I mean, you guys, I had to leave late because
Speaker 2: of this wonderful panel I did the IMF, and of
Speaker 2: course I stopped up on U Street at Ben's Chili Bowl.
Speaker 2: And I can tell you from reporting they're still called
Speaker 2: French fries.
Speaker 6: Is that the latest the ladies they didn't hadn't gone
Speaker 6: there fun It.
Speaker 1: Didn't change it's still frenchiest.
Speaker 6: Why don't you continue, Actually I plan to, Julie. I
Speaker 6: wanted to bring that up. When you listen to US
Speaker 6: and European officials, they're almost pretending this tension between the
Speaker 6: two does not exist, Julie. How much tension is there
Speaker 6: right now over trade? Over big foreign policy issues?
Speaker 5: Yeah, I mean, obviously there are tensions. I would say,
Speaker 5: I don't want to overstate them either. I mean, right now,
Speaker 5: the most immediate issue is Ukraine, and I think the US,
Speaker 5: France and other NATO countries are you know, that is
Speaker 5: where the alliance needs to stay tight, and it has
Speaker 5: stayed tight. China has always been complicated. There has been
Speaker 5: a difference between European and US approaches to China for
Speaker 5: some years now. So this isn't really taking anyone by surprise.
Speaker 5: And even Macrone's comments I think are a bit more
Speaker 5: You're probably shared by some others, even though people are
Speaker 5: pretty quick to Gritique, but I think a lot of
Speaker 5: European states, as well as again other states on the periphery,
Speaker 5: are just realistic about the fact that China is going
Speaker 5: to take a little bit of a more nuanced kind
Speaker 5: of approach from any states where their interests are very
Speaker 5: intertwined there, and that's just a reality Jenny.
Speaker 6: Thanks for this perspective, and the reality check has always
Speaker 6: Jenny Norman, that of the UCL Sensor on US politics.
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Speaker 1: Thanks for listening. I'm Tom Keen, and this is Bloomberg