Speaker 1: Welcome to Bloomberg Opinion. I'm Varney Quinn this week. You've
Speaker 1: got this passive. You've got this active on the same
Speaker 1: time as interest rate hikes for a lot of central
Speaker 1: banks around the world. Marcus Ashworth on some central banks
Speaker 1: amping up quantitative tightening and the perils associated with Also,
Speaker 1: we don't have a lot of history at looking at
Speaker 1: what a recession in China might actually make. Dan Moss
Speaker 1: on what china surprise rate cut says about the world's
Speaker 1: second largest economy. First though, to US markets digesting all
Speaker 1: of the above and prepping for Jackson Hole. But first,
Speaker 1: here's a clip of Stephen Major Hong Kong and Shanghai
Speaker 1: Bank recently. The market at the time was convinced a
Speaker 1: FED pivot needed to be priced in at some point.
Speaker 1: Stephen Major had other ideas. The elegant outcome would be,
Speaker 1: presumably to do less, and any central banker who's candid
Speaker 1: enough to admit it would say that, if it's so
Speaker 1: obvious we're going to make a policy in mistake, let's
Speaker 1: not make the mistake. I want to bring in Jared Dillion.
Speaker 1: That was Stephen Major, their Hong Kong and Shang High Bank.
Speaker 1: Is this what's happening now that we've seen the f
Speaker 1: O m C minutes. Do they bear out this analysis
Speaker 1: that the FED will try to be elegant as opposed
Speaker 1: to overdoing it and underdoing it. Well, I think so
Speaker 1: far the rate increases have been in the elegant and
Speaker 1: this is not an elegant central bank. They tend to
Speaker 1: overdo things in both directions. I mean, if you recall,
Speaker 1: we had a period of time that lasted eight or
Speaker 1: nine years where we had rates at zero. That was
Speaker 1: overdoing it in one direction, and now we're overdoing it
Speaker 1: in the other direction. Having said that, I don't think
Speaker 1: there's anyone at the FED who thinks that rates are
Speaker 1: going to go above four percent. If you believe the
Speaker 1: dot plots that come out at the FED meetings, the
Speaker 1: median dot is around three and a half percent for
Speaker 1: FED funds, maybe three and three quarters four percent. But
Speaker 1: I think that's going to be about the terminus for
Speaker 1: the rate hikes. So you do think that we might
Speaker 1: see another fifty basis point increase, Oh absolutely, I absolutely
Speaker 1: believe we're going to see that. I don't know if
Speaker 1: we'll get a fifty or seventy five, I don't know.
Speaker 1: Which it will be in the September meeting, and we'll
Speaker 1: probably get one more rate hike after that, and then
Speaker 1: I think there's going to be a pause for a
Speaker 1: while and they're going to reevaluate. So consumer spending obviously
Speaker 1: held up. Walmart and Target reporting healthy quarters. Is this
Speaker 1: an economy that's booming. It's a strange sort of economy.
Speaker 1: It's booming in some ways and it's very weak in
Speaker 1: other ways. I mean, if you look at the manufacturing surveys,
Speaker 1: the regional manufacturing surveys like Empire State in Richmond FED,
Speaker 1: Dallas FED and stuff like that, you're seeing very poor
Speaker 1: sentiment among manufacturers. But if you look at retail sales
Speaker 1: and some of the other metrics, like the consumer is
Speaker 1: actually doing pretty well. So we have a very distorted
Speaker 1: economy as a result of the message that would pertinent
Speaker 1: place after the pandemic and in fact our Jonathan and
Speaker 1: even pointed this out in a column as well, pointing
Speaker 1: to the fact that the problem isn't uniform and the
Speaker 1: FED to avoid upsetting the whole apple carts. But at
Speaker 1: the same time, the FEDS instruments are pretty blunt, right,
Speaker 1: it either raises rates or it doesn't raise rates or
Speaker 1: raisism by less. Yeah, the Fed only has one tool
Speaker 1: and I was actually thinking about that earlier today. The
Speaker 1: economy that we have now is very confusing to a
Speaker 1: lot of people. This recession or whatever it is, is
Speaker 1: unlike any recession we've ever experienced before. And the only
Speaker 1: tool that the Fed has to deal with this is
Speaker 1: raising or lowering the Fed funds Right, That's pretty much
Speaker 1: all it is. Yes, So what do they do? I mean,
Speaker 1: they do have QT, but that's a slightly separate thing.
Speaker 1: So what do they do about raising or lowering the
Speaker 1: Fed funds rate? To try and have this guide path
Speaker 1: because elegant as possible. Well, the problem is there are
Speaker 1: politics involved here. Inflation is the number one issue in
Speaker 1: the minds of voters going into the mid term. The
Speaker 1: Fed cannot be seen as being complacent or ineffectual on inflation.
Speaker 1: They have to be seen taking action. So it's very
Speaker 1: hard for Jerome Powell to make the case to pause
Speaker 1: here without being viewed as having done enough on inflation.
Speaker 1: So what will you say at Jackson Hole? Because this
Speaker 1: is a market that's continuously looking for more from this
Speaker 1: Federal Reserve of more explanation, more answers more signal. No,
Speaker 1: I mean, forward guidance seems to be a thing of
Speaker 1: the past. But will you have anything to say? I
Speaker 1: think that forward guidance is drawing to a close. If
Speaker 1: the FED is approaching a pivot or a pause or
Speaker 1: whatever you want to call it, and they're going to
Speaker 1: be dated dependent, it's going to be really hard to
Speaker 1: give guidance out six, nine, twelve months as to what
Speaker 1: the FED is going to do. And actually I'm not
Speaker 1: a big fan of the four guidance anyway, because it
Speaker 1: locks the FED into a certain course of action. So
Speaker 1: it's going to be interesting to see what happens China, Jared,
Speaker 1: we had worried some data out of China recently, and
Speaker 1: then an actual interest rate cut this week. I mean
Speaker 1: it was tiny, but it was a sign that the
Speaker 1: Chinese economy is maybe a little bit of troubled waters.
Speaker 1: Does that impact your investment decisions here in the US
Speaker 1: at all? Not really. I mean, the one thing I
Speaker 1: found interesting about the price action after the interest rate cut.
Speaker 1: You know, I've been in the markets for a long
Speaker 1: time twenty one years, and usually the market goes down
Speaker 1: when China raises interest rates, and now it's going down
Speaker 1: when China lowers interest rates, so I find that to
Speaker 1: be very unusual. Well, I suppose the fear is that
Speaker 1: China might actually experience a recession, one of the first
Speaker 1: in the lifetime of the modern Chinese economy, and that
Speaker 1: would have a blowback effect on the US. I mean,
Speaker 1: for sure, absolutely are you a buyer or a seller
Speaker 1: at these levels? Jared, I'm actually a totally neutral. I've
Speaker 1: gone absolutely as neutral as I can possibly get. I
Speaker 1: think technically we're in the middle of a range. There
Speaker 1: are no clear signals. I'm actually not doing anything at all.
Speaker 1: And then the whole meme stock thing has come up again.
Speaker 1: The stock do you or I don't know what you
Speaker 1: can call it? These days? Will this continue on for
Speaker 1: the rest of our lifetime? It's probably going to continue
Speaker 1: on for longer than you think. I mean, what's going
Speaker 1: on here now? This isn't retail investors that are pushing
Speaker 1: up at Bath and beyond. It's absolutely not retail investors.
Speaker 1: So these this is hedge fund activity, and this is
Speaker 1: pro versus pro I mean, basically, after these stocks declined
Speaker 1: a bit, a big short base built up. Somebody in
Speaker 1: the hedge fund world at the idea maybe we can
Speaker 1: squeeze these shorts. Absolutely, what's happening here. The retail investors
Speaker 1: don't have cash, they don't have any m O. They've
Speaker 1: lost a lot of money, and it's not them that's
Speaker 1: doing this. Don't forget listeners, get into to be a
Speaker 1: Twitter at Valley Quinn or email v Quinn at Bloomberg
Speaker 1: dot net. Opinions of comments always welcome. Let's get down
Speaker 1: to the Inflation Reduction Act. One percent tax on stock
Speaker 1: buybacks sounds small, but it might be deceptively mighty. So Jared,
Speaker 1: you did the math as to the government. By your accounts,
Speaker 1: it will raise, according to by backs, about eight and
Speaker 1: a half billion dollars in revenue. It's not nothing. Government
Speaker 1: calculations suggesting seventy four billion over ten years. What's the
Speaker 1: bigger picture here, though, Well, the bigger picture here is
Speaker 1: that what the government is trying to do is nudge
Speaker 1: CFOs into paying dividends instead of doing buy backs. And
Speaker 1: I think this has been a goal for a while.
Speaker 1: If you look at the dividend yield of the SMP
Speaker 1: in it was four percent, and the dividend yield of
Speaker 1: the SMP today is one and a half percent, And
Speaker 1: basically what happened was CFOs got smart and they figured
Speaker 1: out that we had double taxation of that income, and
Speaker 1: they started doing returning cash to shareholders in a more
Speaker 1: efficient way. So how do we think of buy backs?
Speaker 1: Because on the one hand, if you think of it
Speaker 1: from a corporate point of view or an investor point
Speaker 1: of view, you have one opinion. On the other hand,
Speaker 1: if you're thinking in terms of redistribution of wealth, then
Speaker 1: you've got pension funds and retirement funds that like the
Speaker 1: buy backs. But people like Senator Warren and Senator Sanders
Speaker 1: that loads buy backs because they don't do anything actually
Speaker 1: for a company's employees or consumers. So how are we
Speaker 1: meant to think of them? Well, you know, the way
Speaker 1: I think of it is, you know, buy backs kind
Speaker 1: of have a bad reputation. And just to be clear,
Speaker 1: I don't like buy backs either, kind of for different reasons.
Speaker 1: But if you pay dividends instead of buy backs, the
Speaker 1: managers and directors and officers are still going to get dividends,
Speaker 1: you know, because they own a lot of stock. So
Speaker 1: if you're returning cash to shareholders, you're necessarily returning cash
Speaker 1: to all shareholders, including the largest shareholders, the pension funds
Speaker 1: and people like that. Yes, but also management. If a
Speaker 1: company is already spending plenty on investments, so the cash
Speaker 1: can't go there. So so so say a company decides
Speaker 1: not to do a buy back because of this tax,
Speaker 1: they're already spending plenty on investment. Boosting worker pay isn't
Speaker 1: an option. What's better than sit on more cash or
Speaker 1: do a buy back anyway, even with the one tax? Well,
Speaker 1: what's what's better is to pay a dividend even though
Speaker 1: they're double taxed. And the reason you want to do
Speaker 1: that is because you know, if a if a corporation
Speaker 1: doesn't have any projects that are worthy of investment, then
Speaker 1: they should return that cash to shareholders somehow. So if
Speaker 1: by backs are being taxed, even at a small rate, um,
Speaker 1: you should return it in the form of dividends. Why, well,
Speaker 1: I mean it's better than it's better than keeping the
Speaker 1: cash at the corporate level. Like, basically, shareholders are better
Speaker 1: stewards of that capital than the corporation is. So if
Speaker 1: you if if you're a shareholder and you get a dividend,
Speaker 1: you can you can reinvest it in the stock or
Speaker 1: you can reinvest it in other stocks, or you can
Speaker 1: simply spend it. All of that is better than the
Speaker 1: corporation pursuing an investment project which isn't going to yield
Speaker 1: the high rate of return. So, Jerry, between this one
Speaker 1: percent tax on buy bax on the minimum tax on corporations,
Speaker 1: do CEOs have reason to breathe a sigh of relief
Speaker 1: or be a little annoyed by this inflation reduction Act?
Speaker 1: I mean it could have been worse. Each each of
Speaker 1: these could have been worst, right, Yeah, I think I
Speaker 1: think a little annoyed is probably a pretty good characterization. Um.
Speaker 1: You know, in the short term, the buy back tax
Speaker 1: is pretty small, almost insignificant. The problem is is that
Speaker 1: now that it's in place, it will for sure go
Speaker 1: up over time. So lower net effective tax rate areas
Speaker 1: such as healthcare I T they might see a hit too.
Speaker 1: EPs three. Would it calls you to change any investment decisions? Yard? Uh? Me.
Speaker 1: You know, people have different philosophies on this. Um. You know,
Speaker 1: somebody like Warren Buffett pays a great deal of attention
Speaker 1: to tax I. Actually, don't I make investment decisions sort
Speaker 1: of exclusive of tax considerations. Uh? You know, I look,
Speaker 1: what's going to provide the best return, maybe to my detriment. Okay,
Speaker 1: take that advice, and he did at your will. There
Speaker 1: are you know, buy back companies. Obviously, companies that you
Speaker 1: know like to do buy bax. There's an SMP buy
Speaker 1: back Index. There's obviously going to be a raft. Well obviously,
Speaker 1: but I mean I presume there will be a raft
Speaker 1: of buy backs between now and the end of the
Speaker 1: year before this takes effect. Does that e t F
Speaker 1: or do those companies outperform or underperform as a result.
Speaker 1: I think the outperformance of the buy back stocks is
Speaker 1: going to diminish over time. Um, I think the effect
Speaker 1: is going to be pretty minuscule at first. I think
Speaker 1: what you'll see happen is as the tax goes up, uh,
Speaker 1: the outperformance of buy back stocks versus the overall market
Speaker 1: is going to decrease. Darre dillion. There. China cut rates
Speaker 1: this week, a surprise cut. So in the last several
Speaker 1: days out of China we've heard both a warning on
Speaker 1: inflation and a call from economists for stimulus. How then
Speaker 1: do we read the signals emanating from the world's second
Speaker 1: largest economy, I asked Dan Moss in Singapore. So Dan
Speaker 1: back In April, the PBOC implemented targeted policy tools as
Speaker 1: opposed to rate cuts. There are twenty three measures and
Speaker 1: a targeted farmers and mortgage holders and all sorts of industries.
Speaker 1: Then this month it implemented an act tull interest rate card.
Speaker 1: It was a small one, but it was one. What
Speaker 1: do these moves indicate about the economy and its growth
Speaker 1: this year? It tells you, Vonnie, there is growing alarm
Speaker 1: among policy maker is Invaijing about the trajectory of the
Speaker 1: Chinese economy, not just that growth is slow, but it
Speaker 1: could be slow and continually slow. Wing We don't have
Speaker 1: a lot of history at looking at what a recession
Speaker 1: in China might actually mean, how even to define it,
Speaker 1: and might be worth asking ourselves what does this look
Speaker 1: and feel like in China, because if you go back
Speaker 1: for decades, we never had to encounter this question. Now
Speaker 1: I'm not predicting one, but you know, China's economy has
Speaker 1: gone from a world beating initial COVID recovery in the
Speaker 1: second half of to something that is looking pretty sickly
Speaker 1: right now right and this growth target of five and
Speaker 1: a half percent is probably fantasy at this point. It's
Speaker 1: probably been fantasy for quite some time. But if there
Speaker 1: were to be negative growth, if there were to be contraction,
Speaker 1: would we ever hear about it? Yeah, we probably would.
Speaker 1: One of the most interesting things about China's slump induced
Speaker 1: by COVID at the start of was that there was
Speaker 1: no effort to guild the lily on the numbers. There
Speaker 1: was no effort to ober sc for a long time.
Speaker 1: You've heard it. We've talked about on your TV shows.
Speaker 1: Sometimes a narrative guest has o, these numbers are man made,
Speaker 1: their massage, but give them cred. When GDP contracted in
Speaker 1: the first quarter of there was no answer to hide that.
Speaker 1: GDP is now back to a point in China whereafter
Speaker 1: taking off, when the rabents have basically order everyone back
Speaker 1: into factories and stores, it's now petering out again. So
Speaker 1: after three decades of almost uninterrupted growth, we now find
Speaker 1: ourselves looking at a very very subpire econom performance the
Speaker 1: second time in two years. Well, yeah, and what you
Speaker 1: said a moment ago, let's zoom in a little bit further, because,
Speaker 1: as you said, we don't have a traditional definition of
Speaker 1: what a recession in China looks like. We're so used
Speaker 1: to the idea of two quarters of negative growth plus
Speaker 1: a pronouncement by the n b R for us to
Speaker 1: know that we're in or have been in recession in
Speaker 1: the United States. Is there any policy on the part
Speaker 1: of the POC to define recession in China? H? No,
Speaker 1: it's highly unlikely that the POC would be the first
Speaker 1: people you hear that. Well, that's true too, Yes, you know,
Speaker 1: I mean a distinction has to be made. China Central
Speaker 1: Bank has done a lot of work and past five
Speaker 1: to ten years on how they communicate with the public
Speaker 1: domestically and globally. They are not an independent institution in
Speaker 1: a way we think of the Federal Reserve or the
Speaker 1: ECB or the b O e H. They answer to
Speaker 1: the State Council, which is the equivalent of the cabinet,
Speaker 1: which means they answer to the party. Now they have
Speaker 1: a degree of operational AUTONO, but being called that have
Speaker 1: political implications. I doubt you're gonna hear it. Just hasn't
Speaker 1: been that kind of discussion because if you look at
Speaker 1: the growth record since dung Shaoping began opening it up
Speaker 1: in the nineties, where we can't really encountered sadly. Yeah, Well,
Speaker 1: the other thing that was so fascinating was President she
Speaker 1: paying warning about the dangers of inflation, because you know,
Speaker 1: consumer prices came in this month of two point seven percent,
Speaker 1: which granted, you know, is not nothing, but to us
Speaker 1: in the United States, two point seven percent doesn't sound
Speaker 1: that bad. So it brings up several questions. How has
Speaker 1: killed it? Wouldn't we well almost, I'm sure somebody would.
Speaker 1: How has China been avoiding discourage? The rest of the
Speaker 1: world is racing. Many prices in China are controlled. But
Speaker 1: just get back to your broader point, and it's not
Speaker 1: just President She a pdoc report days before this Great
Speaker 1: Cup was breathing heavily about inflation. You know, we can't
Speaker 1: let our guard down. You know, we can't over reach use,
Speaker 1: we can't print one blah blah blah blah blah. So
Speaker 1: that really discouraged people from thinking that, you know, there's
Speaker 1: going to be a lot of monetary stimulus in the pipeline,
Speaker 1: and maybe even as far as interest rates are concerned.
Speaker 1: And then you've got it. And then forty five minutes afterwards,
Speaker 1: you had a string of data releases which could only
Speaker 1: be described as sub past. Preceding that you had very
Speaker 1: very poor data on credit growth. Yes, so yes, when
Speaker 1: you look at the data, sure, the data justified cut.
Speaker 1: It's not the BUBE that was seeming. Yeah, I mean,
Speaker 1: obviously COVID zero and its approach people have talked about,
Speaker 1: you know, how difficult it is to operate an economy
Speaker 1: under those kinds of restrictions. But it's not just COVID
Speaker 1: zero either. There's obviously the Twiff's question. There's obviously the consumer,
Speaker 1: the health of the consumer. You just mentioned credit growth
Speaker 1: and so on. So what are your thoughts on whether
Speaker 1: China inflation at two point seven present is a danger
Speaker 1: to the Chinese economy and the global economy. Well, if
Speaker 1: it got to five percent, they would be extremely concerned
Speaker 1: and there would be all sorts of direct policy responses
Speaker 1: regarding prices. But look, we're not at that point yet.
Speaker 1: A cause for concern a little bit, but they're clearly
Speaker 1: decided that growth is the first order concern. So inflations
Speaker 1: now on the back burner. We've seen a big shift
Speaker 1: in the last few days. You know, it's interesting, body.
Speaker 1: There was a prominent story in a p DOC aligned
Speaker 1: publication that sided a numberly kind of talking about an
Speaker 1: anticipation of further monitary stimulus for a p doc aligned
Speaker 1: newspaper to put it on the front page. That's not
Speaker 1: an accident. We have quipped here, it's all about supporting growth.
Speaker 1: There's this dual narrative, as there is in the United States.
Speaker 1: You need to fight inflation, we also need to support growth.
Speaker 1: So I guess the conundrum is there in China too.
Speaker 1: Just a word on politics, because there's always the potential
Speaker 1: for a disruption. I don't want to characterize it beyond
Speaker 1: but it did seem like we were headed for a
Speaker 1: bit of a cross moment between President Biden and Chinese
Speaker 1: President j and Ping. Suddenly the temperature cooled and in fact,
Speaker 1: let's just have a listen to what Singapore's next Prime
Speaker 1: minister told us recently. We are starting to see a
Speaker 1: series of decisions being taken by both countries that will
Speaker 1: lead us into more and more dangerous territory. If an
Speaker 1: accident would happened today, the consequences may be more difficult
Speaker 1: to manage. So then the Singapore Prime Minister in waiting
Speaker 1: is worried about it. Most of the world thinks about
Speaker 1: it from time to time. What are the options for
Speaker 1: the Biden administration. Well, I think we need to see
Speaker 1: what happens overcoming lots. Right now, there still seems to
Speaker 1: be some petulance in terms of the sort of response
Speaker 1: to announcy policies. There's there's a couple of opportunity President
Speaker 1: President Biden to meet in the one is it that
Speaker 1: you twenty meeting in Jakarta, and the other is the
Speaker 1: APEX meeting in Bangkok. So you know, we'll see what happened.
Speaker 1: I mean, I don't know is that a II one
Speaker 1: straight conflict as opposed to say, I don't know how
Speaker 1: that helps China's economic growth trajectory in all the United States,
Speaker 1: Dan Moss, don't forget to reach out with thoughts, suggestions, opinions.
Speaker 1: I'm at Vanney Quinn on Twitter or email v Quinn
Speaker 1: at Bloomberg dot net. Now to QT quantitative tightening or
Speaker 1: contraction of the Fed's balance sheet, withdrawing stimulus, decreasing the
Speaker 1: amount of liquidity in the economy, however you describe it.
Speaker 1: The FED and also the Bank of England are about
Speaker 1: to do more of it, even as both central banks
Speaker 1: continue with their rate hike cycle. Marcus Ashworth says beware,
Speaker 1: he joins us. Now there is general tightening. Marcus, the
Speaker 1: Fed engineering tightening financial conditions. And then there's this specific
Speaker 1: tool we call quantitative tightening. So to begin with brass tacks,
Speaker 1: what is it. It's the reverse of quantity of easing,
Speaker 1: in the sense instead of bond buying, they are not
Speaker 1: just on selling but also I think their holdings, which
Speaker 1: make sure as they come up to expiring it repaid,
Speaker 1: they're not piling them back in. Up from now, they've
Speaker 1: been maintaining the stock of their total holding close to
Speaker 1: nine trillion for the FED and nearly one trillion dollars
Speaker 1: for the Bank of England. But there's also the flow
Speaker 1: elements that they reverse the flow now, so the stock
Speaker 1: is going to stay quite high for some while, but
Speaker 1: it's going to come down by nearly a hundred billion
Speaker 1: in a month in the US, and you know, a
Speaker 1: bit less obviously in the UK's are a much smaller economy,
Speaker 1: but still quite announced effect as it comes at the
Speaker 1: same time that the central banks, as you mentioned early,
Speaker 1: are hiking industry, so there's a double impact and they
Speaker 1: are now actively going to sell back into the market
Speaker 1: as well as just living maturities run off. So you've
Speaker 1: got this passive you've got this active contentate tiling going
Speaker 1: on the same time as indust rate hikes. Quite a
Speaker 1: lot of contracting to financial conditions. We just don't know
Speaker 1: whether or not the market, the banking system, the quidity,
Speaker 1: all these things could get a bit of a crunch.
Speaker 1: Let's home not as you say, it's uncharted territory. Now
Speaker 1: this is a different tool to raising rates. How does
Speaker 1: the transmission mechanism work in this case? Well, we're not
Speaker 1: really I'm so sure. I mean, we put some academic
Speaker 1: work gone into this, and and really you've not got
Speaker 1: a lot of clarity from the central banks. Obviously some
Speaker 1: of the investment banks have done their own re such
Speaker 1: into it. But you know at the moment that the
Speaker 1: clearest idea we got from J. Powell's that they expect
Speaker 1: to run up about a trillion in the first year.
Speaker 1: So we're around nine trillion now you'll go down to
Speaker 1: eight and below. He only equates that are around a
Speaker 1: twenty five basis point the hiking industrates, which is almost
Speaker 1: nothing when they're hiking seventy side basis points every meeting.
Speaker 1: So the point is is is he right? And the
Speaker 1: propact realities we don't know. I mean, simply the Bank
Speaker 1: of England's got other measurements, and it's it's quite weird.
Speaker 1: When they were quantitarily easing, they thought the effect in
Speaker 1: equivalent interest rate terms was much much more than they
Speaker 1: now believe it will be the reverse. When they whacking
Speaker 1: perverse and they tightened, they seem to think the effect
Speaker 1: will be hardly and at all. I don't know why
Speaker 1: they think that, because I don't know how they can
Speaker 1: know that. Yeah, and various houses have their own ideas
Speaker 1: of what this is equivalent to in terms of a
Speaker 1: basis point rate hike. Seen. You know, many efforts are
Speaker 1: trying to model this out. But in terms of the
Speaker 1: transmission mechanism, we know that raising rates makes it more
Speaker 1: expensive to borrow, for example, so that dampens housing and
Speaker 1: so on. What does taking liquidity out of the system
Speaker 1: do well, It's more about making banks perhaps less keen
Speaker 1: to lend as much or certain to offer leverage. So
Speaker 1: it's more about liquidity into the overall system. If you
Speaker 1: imagine quantitative easy, it's like building a massive climbing frame
Speaker 1: and you hang this balance sheet ever bigger and wider,
Speaker 1: and your assets against liability, so you're you're not really
Speaker 1: creating money until that money gets made into a proper
Speaker 1: loan by a bank, all of the total deserves doing
Speaker 1: is pumping money is a system and giving the bank
Speaker 1: costs equility, hoping at some point the banks will use
Speaker 1: that and actually start lending out, will comedy to corporates,
Speaker 1: what have you. If they don't just stays on balance
Speaker 1: sheets but take it back again. It has a psychological
Speaker 1: effect on corporate lenders, you know, do they want to
Speaker 1: offer as much as possible? And that's where the financial
Speaker 1: conditions index should we say it's very important because if
Speaker 1: that starts planting too much at the same time, as
Speaker 1: you've mentioned before, interest rate to going up, so that's
Speaker 1: not actually taking away a loan demands, it could have
Speaker 1: you know, it could have that that wobble effect and
Speaker 1: until the economy a little bit harder into a slow down.
Speaker 1: As I said, I'm sure that he's very careful about that,
Speaker 1: they're thinking about it, that are watching it very carefully.
Speaker 1: But they are pre programmed to take away ninety five
Speaker 1: billion dollars a month. That's most seniors treasuries, but also
Speaker 1: in mortgage backed security. So it's going to have a
Speaker 1: particularly not going to effect into the housing market, I think.
Speaker 1: Right and now the third is a little bit ahead
Speaker 1: of the b o E in this because it started
Speaker 1: QT in June, but it actually doubles next month to
Speaker 1: as you say, dollars sixty billion of treasuries thirty five
Speaker 1: billion of mortgage securities. Can the Bank Aving can learn
Speaker 1: anything from what it's seeing in terms of the American
Speaker 1: system or is it too early to say? Well, I
Speaker 1: mean they all learn a lot from each other. The
Speaker 1: point is and the back of thing actually were first
Speaker 1: they stopped to be one. They stopped it at the
Speaker 1: end of last year. I think I should have stopped
Speaker 1: it well before. That's not our argument, but I'm neither
Speaker 1: FED was still adding until until April, I think so
Speaker 1: um and they started letting bonds mature the Bank of
Speaker 1: England March. They had a big maturity there which had
Speaker 1: some impact. I've got a few big more maturities coming
Speaker 1: up in recent weeks. But as you quite already saying,
Speaker 1: the Federal Reserve a bit like where their interest rate
Speaker 1: hiking cycles have started behind, but they've caught up and
Speaker 1: will massively overtake the Bank Aving the aggressiveness of what
Speaker 1: they're doing. They've got a much bigger balance sheet and
Speaker 1: lots of different ways. And perhaps what we really need
Speaker 1: to learn from the FED is that they've done quantita
Speaker 1: tightening twice before on the Bonancie, which went horribly wrong,
Speaker 1: and again in twenty eighteen where they had to s
Speaker 1: stop and reverse under j Pale. So everyone has seen
Speaker 1: this movie before, perhaps in the US. We've yet to
Speaker 1: see it in the UK. But we are watching you
Speaker 1: guys very closely. Now as you say, I mean, this
Speaker 1: program it's not really designed to stop and start, but
Speaker 1: obviously it does at times. It's because it runs into
Speaker 1: technical or market difficulty. So what should the market be
Speaker 1: watching for any kind of mishap this time around? Well,
Speaker 1: I mean, you don't want to have a scenario wherebiobviously
Speaker 1: things like the pandemic. I mean, obviously that's a clear crisis,
Speaker 1: you know, obviously just let's just make coming up a
Speaker 1: hedge and goes down like a long term capital management
Speaker 1: did those types of crisis. You know, probably quite easy
Speaker 1: to spot what's happening. You could stop it, and I
Speaker 1: think they would stop it quite quickly. It will be
Speaker 1: event if you know, it yields all of a sudden
Speaker 1: shot up or shot down in a quite an extreme way.
Speaker 1: Very moon we've got quite high volatility at the moment,
Speaker 1: so and they're still going ahead with it. But I
Speaker 1: think the bar them stopping will be pretty high and
Speaker 1: in a pretty unpleasant crisis, but it will. You know,
Speaker 1: they clearly have the means and the and the understanding
Speaker 1: to do so. Um. You know, what happens. The Taper tantrum,
Speaker 1: as it was known at the time, was quite a
Speaker 1: sort of market rejection of perhaps what the FED was
Speaker 1: doing this time around. The Fed of have lagged up
Speaker 1: very clearly months and months in advance, so I don't
Speaker 1: expect we'll get quite the same reaction. But you know,
Speaker 1: the point is this is uncharted trying to orders for
Speaker 1: a lot of uh, you know, central banks around the world,
Speaker 1: even even the European central bankers stopped adding their continented
Speaker 1: pile that they're a long way away from producing it.
Speaker 1: But the point is everyone's watching. Winning dollar equimity is
Speaker 1: what keeps the world afloat King dollar. You know, it's
Speaker 1: been so strong in the last year and a half
Speaker 1: two years, and it's it's still something which is potentially
Speaker 1: the reserve currency of all the basically the entire world.
Speaker 1: So reducing the equidity in dollars is probably a good
Speaker 1: thing if it's done carefully, but it just needs to
Speaker 1: be made sure it doesn't get too extremes. And there
Speaker 1: are desks and banks that are trying to figure out
Speaker 1: when this ends, right, and I've seen different scenarios. There
Speaker 1: are even sort of a range of scenarios at particular
Speaker 1: banks that this could end at the end of next year,
Speaker 1: but it could also end at the end of twenty
Speaker 1: twenty four. We don't know, do we. Yeah, I think
Speaker 1: I think they'd wanted to go alonger than the next
Speaker 1: several years. I think I would say that the FED,
Speaker 1: like the Bank of England, doesn't want to get down
Speaker 1: to zero, and they were going to reduce back to
Speaker 1: where we've put before the pandemic, probably, but they do
Speaker 1: want to get back to pre pandemic levels. I would
Speaker 1: expect in balance sheets have shot up an awful lot
Speaker 1: many trillion through the pandemic, much more, you know, than
Speaker 1: you would actually expect, as a much bigger impact the
Speaker 1: pandemic response than even the global financial crisis. So in
Speaker 1: that context, I would certainly think, you know, the Federal
Speaker 1: reserves balance sheet now the sentence is close to sort
Speaker 1: of nine trillion. I would expect them to probably want
Speaker 1: to get back still at the level around four trillion,
Speaker 1: four or five trillion, which was where it took off
Speaker 1: in and minded to take off in March, and eight
Speaker 1: went and just over four trillion to more than double now,
Speaker 1: So I think they want to let it glide down
Speaker 1: maybe a trillion met year. We've been watching the yield
Speaker 1: curve obviously and its inversions, and this is the US
Speaker 1: yield curve I'm talking about. Does this impact the yield
Speaker 1: curve at any point as we go along? Given them
Speaker 1: even a hundred billion dollars a month, it's kind of
Speaker 1: a tiny amount of liquidity in some ways. Well, I
Speaker 1: know it sounds ridiculous to say, but when you're talking
Speaker 1: about nine trillion dollars, you know, two trillion pandemic transferend
Speaker 1: to what's that with tea of friends they say? I
Speaker 1: would say that the one impact people are perhaps not
Speaker 1: fully appreciating is that everyone thinks that the FED obviously
Speaker 1: controls the front end with fat funds and obviously official rate,
Speaker 1: but you know, depending on how they do it, what
Speaker 1: type of maturities they do sell bad, they cannot course
Speaker 1: influence the yeld curve to a degree because you know,
Speaker 1: by selling more longer ended uh young longer maturity bonds
Speaker 1: that will have by definition push the yields up belonging,
Speaker 1: which could in some senses, you know, semi sort of
Speaker 1: disinvert the curve art. So I think it's gonna be
Speaker 1: one of these types of effects. It really hasn't acted
Speaker 1: yet because the two reasons why you said that they
Speaker 1: stopped off smaller and won't be going up by billion
Speaker 1: a month until next month. But at the same time,
Speaker 1: as also been it's quite technical. It's put a mass
Speaker 1: amount of cash meeting through the treasury catch account, which
Speaker 1: is limited the impact of that, that initial liquidity withdrawn,
Speaker 1: that will stop. So I think the impact when it
Speaker 1: comes towards the end of this year could be a
Speaker 1: lot more than it currently is. Whether it's too much,
Speaker 1: we'll have to wait and see. Thank we can start
Speaker 1: selling guilds next month, and obviously the third is opping
Speaker 1: its sales next month as well, so Marcus, thank you,
Speaker 1: Marcus Ashworth there. We are now choosing to end all
Speaker 1: conversations not with you, though as always we love to
Speaker 1: hear from you. I'm at Vanney Quinn on Twitter or
Speaker 1: send your thoughts to v Quinn at bloomberg dot net,
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Speaker 1: mollow Until next time on Bloomberg Opinion.