1 00:00:10,119 --> 00:00:13,000 Speaker 1: Hello, Odd Lots listeners. We wanted to take a quick 2 00:00:13,080 --> 00:00:15,560 Speaker 1: moment to let you know that this episode of odd 3 00:00:15,600 --> 00:00:18,800 Speaker 1: Lots is a little bit unique. First of all, we 4 00:00:18,840 --> 00:00:22,720 Speaker 1: recorded it on March second, so that's before some of 5 00:00:22,760 --> 00:00:27,240 Speaker 1: this recent turmoil struck. Nonetheless, it remains really relevant because 6 00:00:27,280 --> 00:00:30,960 Speaker 1: it's a discussion in part about how much extra liquidity 7 00:00:31,000 --> 00:00:32,800 Speaker 1: is in the system and how much will we have 8 00:00:32,960 --> 00:00:37,480 Speaker 1: to taken out in order to get inflation back to target. Now, 9 00:00:37,520 --> 00:00:39,920 Speaker 1: our guest Matt King brought a lot of charts to 10 00:00:40,000 --> 00:00:42,880 Speaker 1: show us, and those charts are referenced throughout the conversation. 11 00:00:43,320 --> 00:00:45,280 Speaker 1: So if you want to see those charts and follow 12 00:00:45,320 --> 00:00:47,440 Speaker 1: along with them as you listen, you can find a 13 00:00:47,440 --> 00:00:51,000 Speaker 1: companion article for the episode at Bloomberg dot com slash 14 00:00:51,040 --> 00:00:53,720 Speaker 1: odd Lots, or you can watch a full video version 15 00:00:53,760 --> 00:00:58,600 Speaker 1: of this episode at YouTube dot com slash Bloomberg Podcasts. 16 00:00:58,600 --> 00:01:03,600 Speaker 1: Thank you and enjoy. Hello and welcome to another episode 17 00:01:03,640 --> 00:01:06,319 Speaker 1: of the Odd Thoughts podcast. I'm Tracy Alloway and I'm 18 00:01:06,400 --> 00:01:10,040 Speaker 1: Joe wisnal Joe. It feels like it's been a pretty 19 00:01:10,040 --> 00:01:13,880 Speaker 1: whiplashy start to the year. Yes, it felt like there 20 00:01:13,959 --> 00:01:17,559 Speaker 1: was that moment in February where maybe there were signs 21 00:01:17,560 --> 00:01:21,080 Speaker 1: that inflation was cooling, people were talking about a soft landing, 22 00:01:21,480 --> 00:01:24,559 Speaker 1: and then just a few weeks later we're talking about 23 00:01:24,640 --> 00:01:28,319 Speaker 1: inflation being entrenched. Maybe the Fed has to go even 24 00:01:28,520 --> 00:01:31,800 Speaker 1: harder on the terminal rate. It just feels like it 25 00:01:31,920 --> 00:01:35,320 Speaker 1: changed so quickly. Absolutely, I mean, and I think even 26 00:01:35,400 --> 00:01:39,039 Speaker 1: like January it was still recession watch. So it went 27 00:01:39,080 --> 00:01:42,520 Speaker 1: from recession watch to soft landing to landing to no 28 00:01:42,720 --> 00:01:47,640 Speaker 1: landing overheating fears again. And yeah, quite a lot of 29 00:01:47,640 --> 00:01:51,120 Speaker 1: ambiguity for this short of time into the year. Okay, Well, 30 00:01:51,280 --> 00:01:55,160 Speaker 1: when we have ambiguous macro environments, there was one man 31 00:01:55,200 --> 00:01:57,800 Speaker 1: that we like to turn to an all thoughts favorite, 32 00:01:58,160 --> 00:02:00,600 Speaker 1: and we need to talk to Matt kid Over at 33 00:02:00,600 --> 00:02:03,919 Speaker 1: City Group. Well absolutely, and it's like, okay, has anyone 34 00:02:04,000 --> 00:02:07,040 Speaker 1: gotten the last few years? Right? Completely? No. But the 35 00:02:07,120 --> 00:02:09,040 Speaker 1: last time we talked to Matt was in late twenty 36 00:02:09,160 --> 00:02:12,040 Speaker 1: twenty one, and he said, inflation isn't transitory. It's going 37 00:02:12,080 --> 00:02:14,880 Speaker 1: to be hard. This isn't coming down anytime soon. And 38 00:02:14,960 --> 00:02:18,280 Speaker 1: I think in early twenty twenty three, March twenty twenty three, 39 00:02:18,320 --> 00:02:21,000 Speaker 1: people would say, yeah, that's pretty vindicated. Yeah, I remember 40 00:02:21,000 --> 00:02:23,960 Speaker 1: in that conversation He also talked about the possibility that 41 00:02:24,000 --> 00:02:26,959 Speaker 1: the FED might need to induce a recession to bring 42 00:02:26,960 --> 00:02:31,200 Speaker 1: inflation down, which, again in late twenty twenty one, not conventional, right, 43 00:02:31,280 --> 00:02:33,720 Speaker 1: that was not the consensus. So we need to check 44 00:02:33,760 --> 00:02:36,399 Speaker 1: in with Matt, and I am very happy to say 45 00:02:36,440 --> 00:02:38,400 Speaker 1: that we have him here with us right now. Matt, 46 00:02:38,440 --> 00:02:40,280 Speaker 1: Thank you so much for coming back on our thoughts. 47 00:02:40,639 --> 00:02:43,680 Speaker 1: Thank you very much for inviting me. So how would 48 00:02:43,680 --> 00:02:47,520 Speaker 1: you characterize the current environment? Where are we in this 49 00:02:47,639 --> 00:02:51,799 Speaker 1: sort of macro cycle? I would say that markets are 50 00:02:51,840 --> 00:02:55,560 Speaker 1: still in frul to central bank liquidity to a much 51 00:02:55,600 --> 00:03:01,359 Speaker 1: greater degree than is widely appreciated. That this is contributing 52 00:03:01,400 --> 00:03:04,639 Speaker 1: to the uncertainty about the underlying economic outlook. So, as 53 00:03:04,680 --> 00:03:06,960 Speaker 1: I say, at the central puzzle is, how is it 54 00:03:07,000 --> 00:03:10,560 Speaker 1: that with the inplacent proving stickier than many people imagined, 55 00:03:12,080 --> 00:03:14,320 Speaker 1: and with central banks basically being hawkish on the back 56 00:03:14,320 --> 00:03:17,360 Speaker 1: of that, and with yields and real yields rising again, 57 00:03:17,400 --> 00:03:19,359 Speaker 1: how is it that risk assets are doing so well? 58 00:03:20,080 --> 00:03:23,080 Speaker 1: And most people would say, oh, it's because the economic 59 00:03:23,120 --> 00:03:25,919 Speaker 1: data of surprised positively and the economy is more resilient, 60 00:03:25,919 --> 00:03:28,079 Speaker 1: and maybe we can have this soft landing on the 61 00:03:28,200 --> 00:03:31,320 Speaker 1: landing or whatever, and unfortunately my work puts this in 62 00:03:31,360 --> 00:03:35,320 Speaker 1: a rather different light. For me, the big factor which 63 00:03:35,360 --> 00:03:38,440 Speaker 1: has contributed to the strength of risk assets beneath the 64 00:03:38,440 --> 00:03:41,200 Speaker 1: surface is the way in which even as the central 65 00:03:41,200 --> 00:03:42,840 Speaker 1: banks have told us that they're going to be doing qt, 66 00:03:43,480 --> 00:03:45,960 Speaker 1: actually when you look at the details, they've ended up 67 00:03:46,000 --> 00:03:48,800 Speaker 1: doing QE. They've injected over the last three months a 68 00:03:48,920 --> 00:03:53,640 Speaker 1: trillion dollars of liquidity and on my framework, that equates 69 00:03:53,720 --> 00:03:58,280 Speaker 1: very directly into ten percent directly on equities, and the 70 00:03:58,360 --> 00:03:59,920 Speaker 1: moment that you think of it in those terms, it 71 00:04:00,160 --> 00:04:04,200 Speaker 1: just puts the whole outlook in a very different light. 72 00:04:04,440 --> 00:04:07,240 Speaker 1: Can you explain what is the mechanism bro which you 73 00:04:07,280 --> 00:04:10,680 Speaker 1: would say central banks are still adding to liquidity, because 74 00:04:10,720 --> 00:04:13,000 Speaker 1: of course we know we're in one of the huge 75 00:04:13,560 --> 00:04:16,040 Speaker 1: historic hiking cycle, not just in the US but elsewhere. 76 00:04:16,279 --> 00:04:19,719 Speaker 1: What is actually going on this liquidity expansion? So the 77 00:04:19,720 --> 00:04:22,760 Speaker 1: main thing that I look at is reserves or changes 78 00:04:22,800 --> 00:04:26,159 Speaker 1: in reserves on central bank balance sheets, and the main 79 00:04:26,320 --> 00:04:28,640 Speaker 1: mechanism I think as at work here is the portfolio 80 00:04:28,640 --> 00:04:31,400 Speaker 1: balance effect or how much money have we given to 81 00:04:32,000 --> 00:04:34,359 Speaker 1: the private sector in the form of reserves or deposits. 82 00:04:34,400 --> 00:04:37,720 Speaker 1: But its reserves that correlates best relative to how many 83 00:04:37,760 --> 00:04:41,920 Speaker 1: securities are available to absorb that, and it's actually at 84 00:04:41,920 --> 00:04:43,960 Speaker 1: the FAT in particular, where over the last couple of 85 00:04:44,000 --> 00:04:47,279 Speaker 1: years it's become really apparent that changes in reserves correlate 86 00:04:47,400 --> 00:04:51,839 Speaker 1: much better with changes in risk than looking at securities, 87 00:04:51,839 --> 00:04:53,640 Speaker 1: which is made of the obvious way of doing this, 88 00:04:53,880 --> 00:04:57,040 Speaker 1: And I think the underlying explanation is that money growth 89 00:04:57,040 --> 00:05:00,760 Speaker 1: has always been important for markets, but over the last 90 00:05:00,839 --> 00:05:04,960 Speaker 1: decade changes in money growth have just come overwhelmingly from 91 00:05:05,040 --> 00:05:07,599 Speaker 1: often technical changes on central bank balancies. When the FED 92 00:05:07,680 --> 00:05:09,880 Speaker 1: or other central banks are adding all withdrawing four or 93 00:05:09,880 --> 00:05:12,120 Speaker 1: five hundred billion dollars of liquidity, sometimes even in a 94 00:05:12,120 --> 00:05:14,640 Speaker 1: single week, there's nothing the private sector is doing on 95 00:05:14,760 --> 00:05:17,280 Speaker 1: anything like that scale, and so it has this outsized 96 00:05:17,279 --> 00:05:20,320 Speaker 1: impact on markets. Well, just on that note, talk to 97 00:05:20,440 --> 00:05:23,919 Speaker 1: us about where the liquidity it has been coming from, 98 00:05:24,000 --> 00:05:26,920 Speaker 1: because I think, as you mentioned, most people when they 99 00:05:26,920 --> 00:05:28,919 Speaker 1: think about central banks at the moment, are going to 100 00:05:29,160 --> 00:05:32,239 Speaker 1: be thinking about balance sheet reduction. The FED has said 101 00:05:32,279 --> 00:05:35,479 Speaker 1: that it's started QT, although clearly there's a lot of 102 00:05:35,480 --> 00:05:38,640 Speaker 1: disagreement about whether or not it practically has, and in 103 00:05:38,720 --> 00:05:41,279 Speaker 1: other parts of the world central banks have been raising 104 00:05:41,360 --> 00:05:45,800 Speaker 1: rates and withdrawing liquidity, so where is that access coming from? 105 00:05:46,480 --> 00:05:48,840 Speaker 1: So this gets quite geeky quite quickly, but I think 106 00:05:48,839 --> 00:05:54,200 Speaker 1: it's the most okay. So roughly, depending a little bit 107 00:05:54,200 --> 00:05:57,600 Speaker 1: on when you measure it, this trillion dollars has come 108 00:05:57,760 --> 00:05:59,920 Speaker 1: about two hundred and fifty billion dollars from the BOG, 109 00:06:00,040 --> 00:06:03,039 Speaker 1: about four hundred and fifty billion dollars again depending on 110 00:06:03,040 --> 00:06:07,640 Speaker 1: when we measure it from the PBOC, and about three 111 00:06:07,680 --> 00:06:10,839 Speaker 1: hundred billion dollars also from the ECB. In addition, the 112 00:06:10,960 --> 00:06:14,760 Speaker 1: FED was draining liquidity and reducing reserves last year and 113 00:06:14,920 --> 00:06:17,320 Speaker 1: this year, even as the QT has continued and securities 114 00:06:17,320 --> 00:06:20,279 Speaker 1: have been coming down, reserves have not actually been falling. 115 00:06:20,279 --> 00:06:22,720 Speaker 1: So the fence contribution is technically zero. But again, as 116 00:06:22,720 --> 00:06:26,320 Speaker 1: you said, say, that's surprising when notionally they're doing QT. 117 00:06:26,760 --> 00:06:28,480 Speaker 1: And each of these has its own story, and I'm 118 00:06:28,520 --> 00:06:31,359 Speaker 1: probably more confident in the framework than I am in 119 00:06:31,360 --> 00:06:33,480 Speaker 1: the outlet, but when you start talking at trillion dollars 120 00:06:33,480 --> 00:06:36,960 Speaker 1: over three months, it just has this massive impact on markets. 121 00:06:37,000 --> 00:06:41,000 Speaker 1: How has the FED been doing QT, continued with its 122 00:06:41,080 --> 00:06:44,479 Speaker 1: quantitative tightening, and yet in twenty twenty three we haven't 123 00:06:44,480 --> 00:06:48,839 Speaker 1: seen the decline and reserved in the US. So the 124 00:06:49,000 --> 00:06:51,840 Speaker 1: way that I tend to analyze all of this is 125 00:06:53,400 --> 00:06:59,279 Speaker 1: almost just empirically, what correlates best with markets, and specifically 126 00:06:59,279 --> 00:07:01,800 Speaker 1: what's been going on is the change in reserves. The 127 00:07:01,839 --> 00:07:05,039 Speaker 1: FED in particular is influenced by not only the change 128 00:07:05,040 --> 00:07:07,880 Speaker 1: in securities what most people think of as QT, but 129 00:07:08,080 --> 00:07:10,680 Speaker 1: also the change in the Treasury General account whether you 130 00:07:10,720 --> 00:07:12,680 Speaker 1: as treasury deposits money at the FED, and the change 131 00:07:12,680 --> 00:07:16,840 Speaker 1: in RRP, where money market funds deposit money at the FED. 132 00:07:17,240 --> 00:07:21,239 Speaker 1: And it's actually even reasonably intuitive as to why both 133 00:07:21,240 --> 00:07:24,560 Speaker 1: of the have an impact. So if, for example, the 134 00:07:24,600 --> 00:07:26,640 Speaker 1: Treasury is issuing a lot more bills and you take 135 00:07:26,680 --> 00:07:29,200 Speaker 1: money from your bank account to go and buy those bills, 136 00:07:29,240 --> 00:07:31,600 Speaker 1: but then they don't send you a stimulus check, or 137 00:07:31,640 --> 00:07:34,120 Speaker 1: they don't spend the money in the real economy paying 138 00:07:34,160 --> 00:07:36,760 Speaker 1: employees or whatever, and they just lock the money away 139 00:07:36,760 --> 00:07:39,280 Speaker 1: on the FED balance sheet, well that's kind of like QT. 140 00:07:39,520 --> 00:07:42,360 Speaker 1: The private sector has got less money. There are more 141 00:07:42,440 --> 00:07:46,080 Speaker 1: securities needing to be absorbed in markets, And empirically what 142 00:07:46,120 --> 00:07:49,640 Speaker 1: we observe is that in periods where that's happening, like 143 00:07:49,800 --> 00:07:53,240 Speaker 1: January February last year and April May last year, securities 144 00:07:53,280 --> 00:07:56,440 Speaker 1: may or may not be going down, but is reserves 145 00:07:56,520 --> 00:08:00,960 Speaker 1: full risk trades off. What we've had this year, or 146 00:08:01,000 --> 00:08:03,240 Speaker 1: in fact over the last six months or so is 147 00:08:03,280 --> 00:08:07,000 Speaker 1: that even as securities have continued to roll off, that 148 00:08:07,200 --> 00:08:11,280 Speaker 1: impact has been offset by declines in the Treasury General 149 00:08:11,280 --> 00:08:14,520 Speaker 1: Account and then to a lesser extent by declines or 150 00:08:14,560 --> 00:08:18,200 Speaker 1: moves in RRP. That means that even as the FED 151 00:08:18,280 --> 00:08:21,720 Speaker 1: has nationally been typing and reducing the balance sheet, actually 152 00:08:21,760 --> 00:08:24,960 Speaker 1: in terms of what matters for markets, it hasn't. And 153 00:08:25,600 --> 00:08:28,080 Speaker 1: what we've seen over the last few months is, whereas 154 00:08:28,160 --> 00:08:30,520 Speaker 1: last year you could explain almost everything that was going 155 00:08:30,560 --> 00:08:33,160 Speaker 1: on in terms of the FED balance sheet and only 156 00:08:33,200 --> 00:08:35,920 Speaker 1: the FED balance sheet, what's become relevant over the last 157 00:08:35,920 --> 00:08:39,480 Speaker 1: three months is to look at equivalent processes going on elsewhere. 158 00:08:56,320 --> 00:08:59,679 Speaker 1: He mentioned the portfolio substitution effects, and I think when 159 00:08:59,720 --> 00:09:02,880 Speaker 1: we talk about the impact of liquidity on markets, it's 160 00:09:02,920 --> 00:09:07,360 Speaker 1: sort of like an abstract thing, and could you maybe 161 00:09:07,480 --> 00:09:10,720 Speaker 1: explain to us, like in detail, what is the process 162 00:09:10,760 --> 00:09:14,000 Speaker 1: by which a liquidity injection And I suppose it will 163 00:09:14,000 --> 00:09:16,559 Speaker 1: depend on the form, but like, what is the process 164 00:09:16,600 --> 00:09:20,199 Speaker 1: by which that gets transformed? Into a greater bid for 165 00:09:20,400 --> 00:09:26,199 Speaker 1: risk assets. So I do all of this empirically by 166 00:09:27,000 --> 00:09:32,640 Speaker 1: looking at what correlates effectively with market moves and everything 167 00:09:32,679 --> 00:09:36,080 Speaker 1: I've observed, and I tend to work with the theory afterwards. 168 00:09:36,080 --> 00:09:37,640 Speaker 1: But I do think there's a unifying theory, and as 169 00:09:37,640 --> 00:09:40,880 Speaker 1: I say, it's basically portfolio bounds. But everything I've observed 170 00:09:40,960 --> 00:09:43,520 Speaker 1: over the last decade or so where quee has dominated 171 00:09:43,960 --> 00:09:46,680 Speaker 1: all of my underlying fundamental relationships that used to work, 172 00:09:47,640 --> 00:09:50,200 Speaker 1: suggests more or less the opposite mechanism from what you 173 00:09:50,200 --> 00:09:51,880 Speaker 1: hear from the central banks. So there was a lovely 174 00:09:51,920 --> 00:09:54,839 Speaker 1: article by Bill Dudley on Bloomboad just the other day saying, oh, 175 00:09:54,880 --> 00:09:58,839 Speaker 1: it's the level of the reserves that matters, and this 176 00:09:59,000 --> 00:10:03,440 Speaker 1: all this money change is irrelevant, And on everything I 177 00:10:03,480 --> 00:10:06,920 Speaker 1: see from markets, my chart suggests the opposite is the flow, 178 00:10:06,960 --> 00:10:10,160 Speaker 1: it's the changes. Similarly, the central banks tend to assume 179 00:10:10,160 --> 00:10:12,360 Speaker 1: once they've announced it it's in the price, and instead 180 00:10:12,400 --> 00:10:14,840 Speaker 1: I find it's only as the liquidity hits the marketer 181 00:10:14,920 --> 00:10:16,960 Speaker 1: or is with born from markets, that we see incapable 182 00:10:17,000 --> 00:10:19,240 Speaker 1: of pricing it. In the central banks always look for 183 00:10:19,280 --> 00:10:21,880 Speaker 1: an impact on government bond yields and think in terms 184 00:10:21,920 --> 00:10:24,920 Speaker 1: of reducing duration from bond markets, and then everyone updates 185 00:10:24,920 --> 00:10:28,120 Speaker 1: their dividend discount model with a new estimate for the SMP. 186 00:10:28,400 --> 00:10:30,160 Speaker 1: That's not what I think is going on at all. 187 00:10:30,640 --> 00:10:33,599 Speaker 1: For me, it's all of it. It's kind of simpler 188 00:10:33,600 --> 00:10:38,680 Speaker 1: and cruder, and it's really about this balance between how 189 00:10:38,760 --> 00:10:42,400 Speaker 1: much money has the private sector got relative to how 190 00:10:42,400 --> 00:10:46,240 Speaker 1: many assets are available to absorb that money. And when 191 00:10:46,360 --> 00:10:50,560 Speaker 1: say the treasury or another private borrower borrows in markets, yeah, 192 00:10:50,559 --> 00:10:52,720 Speaker 1: that creates some bonds or some bills that somebody needs 193 00:10:52,760 --> 00:10:55,280 Speaker 1: to buy, But if they spend that money in the 194 00:10:55,320 --> 00:10:58,560 Speaker 1: real economy, that kind of nets out. It's closer to 195 00:10:58,600 --> 00:11:01,560 Speaker 1: being self funding the people imagine. And in fact, that 196 00:11:01,640 --> 00:11:04,000 Speaker 1: process of money creation is the system gains assets and 197 00:11:04,120 --> 00:11:08,760 Speaker 1: liabilities is associated with risk on que though is kind 198 00:11:08,800 --> 00:11:13,360 Speaker 1: of doubly powerful because it simultaneously gives the private sector 199 00:11:13,679 --> 00:11:16,359 Speaker 1: more money in the form of reserves or bank deposits 200 00:11:16,720 --> 00:11:21,240 Speaker 1: and deprives them of the safe assets like t bills 201 00:11:21,320 --> 00:11:25,359 Speaker 1: or bonds to go out and investing, and crowds investors 202 00:11:25,400 --> 00:11:28,720 Speaker 1: into riskier assets as a result. And it's sort of 203 00:11:29,040 --> 00:11:31,719 Speaker 1: unsatisfying in a way because you can't see all these 204 00:11:31,760 --> 00:11:33,760 Speaker 1: moving parts. I think what goes on is the guy 205 00:11:33,760 --> 00:11:35,319 Speaker 1: that would have bought bills by his bonds, the guy 206 00:11:35,320 --> 00:11:37,480 Speaker 1: that would have bought bonds bys ig credit, that would 207 00:11:37,520 --> 00:11:40,760 Speaker 1: have bought ig heal, and so on. You can't see 208 00:11:40,760 --> 00:11:43,960 Speaker 1: all of those moving parts. But this helps to explain 209 00:11:44,160 --> 00:11:47,319 Speaker 1: what is otherwise a significant puzzle, which is how can 210 00:11:47,360 --> 00:11:50,880 Speaker 1: I have all these lovely charts that point to strong relationships, 211 00:11:51,000 --> 00:11:54,160 Speaker 1: but it's always between queue and risk assets and equities 212 00:11:54,160 --> 00:11:57,560 Speaker 1: and credit spreads, even though all of the action is 213 00:11:58,080 --> 00:12:00,320 Speaker 1: mostly in treasuries and government bonds around the world. I 214 00:12:00,400 --> 00:12:02,920 Speaker 1: like this daisy chain. It's like someone buys the bill 215 00:12:02,960 --> 00:12:05,880 Speaker 1: buyer buys bonds, the bond buyer buyers treasury is, the 216 00:12:05,960 --> 00:12:09,520 Speaker 1: treasury buyer buys corporates, the corporate buyer buys junk, the 217 00:12:09,600 --> 00:12:12,360 Speaker 1: junk buyer buys stock, and the stock buyer buys doge coin. 218 00:12:12,559 --> 00:12:15,679 Speaker 1: And that is like the It's like that little domino meme, right, 219 00:12:15,720 --> 00:12:18,559 Speaker 1: It's like that slight change that's some dgen way out 220 00:12:18,600 --> 00:12:21,439 Speaker 1: at the end of the chain is like buying crypto. 221 00:12:21,520 --> 00:12:26,199 Speaker 1: But here's my question. Listen, just since you mentioned that, ironically, 222 00:12:26,320 --> 00:12:29,680 Speaker 1: the best correlations I find of all are exactly with 223 00:12:29,920 --> 00:12:33,520 Speaker 1: the most popular assets like cryptocurrency. You'll like test la 224 00:12:33,559 --> 00:12:36,800 Speaker 1: stop for example. It's just amazing how it shows up 225 00:12:36,840 --> 00:12:39,079 Speaker 1: there in the in the hottest assets, even though the 226 00:12:39,120 --> 00:12:42,120 Speaker 1: correlation applies more broadly too. But let me just ask 227 00:12:42,200 --> 00:12:45,480 Speaker 1: you why there isn't a simpler answer to all of this, 228 00:12:45,559 --> 00:12:47,520 Speaker 1: because I'm just looking, you know, I can look at 229 00:12:47,800 --> 00:12:50,559 Speaker 1: the SMP, or I can look at the relationship between 230 00:12:50,640 --> 00:12:54,560 Speaker 1: QQQ and the SMP. You know, something that's more hibta 231 00:12:54,880 --> 00:12:58,079 Speaker 1: And in Q four of twenty twenty two, we got 232 00:12:58,080 --> 00:13:01,640 Speaker 1: a string of pretty encouraging inflation prints that said, ah, 233 00:13:01,679 --> 00:13:05,040 Speaker 1: it's finally happening. Lots of people saying, yes, it is 234 00:13:05,080 --> 00:13:09,079 Speaker 1: finally coming down, a lot of confidence from the Fed disinflation. 235 00:13:09,240 --> 00:13:12,080 Speaker 1: We can feel confident that the inflationary process has peaked. 236 00:13:12,559 --> 00:13:15,280 Speaker 1: And then in the last you know, the for you know, 237 00:13:15,960 --> 00:13:19,240 Speaker 1: after starting in the middle of January, people started saying, no, 238 00:13:19,320 --> 00:13:21,400 Speaker 1: maybe it hasn't. And we're starting to see some upward 239 00:13:21,440 --> 00:13:24,360 Speaker 1: surprise and used car prices, and we're starting to see 240 00:13:24,400 --> 00:13:28,280 Speaker 1: some ongoing firm dison rents, etc. And why is that 241 00:13:28,440 --> 00:13:33,080 Speaker 1: real activity not a sort of useful way, because that 242 00:13:33,120 --> 00:13:37,640 Speaker 1: would seem to my mind, also explain the trajective risk assets, 243 00:13:37,640 --> 00:13:40,000 Speaker 1: this fact that inflation is not coming down the way 244 00:13:40,040 --> 00:13:42,560 Speaker 1: we might have thought in Q four twenty twenty two. 245 00:13:43,360 --> 00:13:47,200 Speaker 1: I agree that that's probably part of the explanation. But 246 00:13:47,280 --> 00:13:51,360 Speaker 1: if fundamentals were as strong a driver as people traditionally think, 247 00:13:51,760 --> 00:13:54,160 Speaker 1: all my stupid charts with central bank balance, she shouldn't 248 00:13:54,160 --> 00:13:57,679 Speaker 1: work at all, and instead so they are most of 249 00:13:57,720 --> 00:14:01,040 Speaker 1: them all right, Sorry, sorry to keep going like they 250 00:14:01,080 --> 00:14:03,960 Speaker 1: were better than most of the fundamentals. Other ways of 251 00:14:04,080 --> 00:14:07,600 Speaker 1: saying it are when we look at the moment, the 252 00:14:07,679 --> 00:14:11,360 Speaker 1: economic surprises on the city economic surprise indicies, yes, are 253 00:14:11,440 --> 00:14:14,559 Speaker 1: very very positive, but the economic data changes are not. 254 00:14:14,920 --> 00:14:17,080 Speaker 1: You know, we've raised our growth forecast globally by by 255 00:14:17,120 --> 00:14:19,200 Speaker 1: thirty basis points, but it's still to one of the 256 00:14:19,200 --> 00:14:21,160 Speaker 1: lowest levels two point two percent, one of the lowest 257 00:14:21,200 --> 00:14:24,720 Speaker 1: levels over the last forty years. Is that really enough 258 00:14:24,760 --> 00:14:27,280 Speaker 1: to make you super excited to put back? It might 259 00:14:27,320 --> 00:14:28,960 Speaker 1: be if I thought that we were going to if 260 00:14:28,960 --> 00:14:30,760 Speaker 1: I thought two months ago that we were staring down 261 00:14:30,800 --> 00:14:35,280 Speaker 1: the barrel of a hard landing. Yes, true, But the 262 00:14:35,320 --> 00:14:37,080 Speaker 1: sort of explanation people normally come up with this all 263 00:14:37,120 --> 00:14:39,120 Speaker 1: the central banks are being really dovish, and then you 264 00:14:39,160 --> 00:14:41,280 Speaker 1: have power and the guards saying no, we're not being devish. 265 00:14:41,280 --> 00:14:42,960 Speaker 1: We're going to stay the course because the most important 266 00:14:43,000 --> 00:14:46,040 Speaker 1: thing is inflation. You just get to disconnect if you 267 00:14:46,120 --> 00:14:48,800 Speaker 1: try and explain it in those terms. And I think 268 00:14:48,800 --> 00:14:50,400 Speaker 1: what people are trying to do is they're trying to 269 00:14:50,480 --> 00:14:55,680 Speaker 1: retrofit fundamental explanations to price action that was actually driven 270 00:14:55,680 --> 00:15:00,320 Speaker 1: by these technicals. So your contention is that the that 271 00:15:00,360 --> 00:15:03,560 Speaker 1: we've seen recently doesn't really have anything to do with 272 00:15:03,600 --> 00:15:07,360 Speaker 1: what's been happening in the real economy, as evidenced by 273 00:15:07,480 --> 00:15:10,720 Speaker 1: the collapse in private money. But if you look at 274 00:15:10,800 --> 00:15:13,720 Speaker 1: what's going on with public money i e. Central bank 275 00:15:13,720 --> 00:15:17,040 Speaker 1: balance sheets and things like that, the correlation is much stronger. 276 00:15:18,160 --> 00:15:22,840 Speaker 1: That puts it slightly too strongly. But yes, okay, basically okay. 277 00:15:23,040 --> 00:15:27,160 Speaker 1: So one thing like I was kind of wondering just 278 00:15:27,520 --> 00:15:30,920 Speaker 1: on this topic is if you look at China, I mean, 279 00:15:31,080 --> 00:15:36,600 Speaker 1: China is currently a place that wants to stimulate I guess, 280 00:15:36,640 --> 00:15:40,720 Speaker 1: but seems to be having a hard time convincing private 281 00:15:40,760 --> 00:15:44,360 Speaker 1: companies to actually go out and borrow. Can you talk 282 00:15:44,400 --> 00:15:46,640 Speaker 1: a little bit more about what you're seeing there? I 283 00:15:46,680 --> 00:15:49,720 Speaker 1: think that's a very good description of it. So we 284 00:15:50,720 --> 00:15:54,400 Speaker 1: debate this because the Chinese, the cridity injection in December 285 00:15:54,520 --> 00:15:56,720 Speaker 1: was so large, they've been a little bit late publishing 286 00:15:56,720 --> 00:15:59,960 Speaker 1: the January number. But as you say, what we see 287 00:16:00,280 --> 00:16:02,080 Speaker 1: and have seen over the last few months is normally 288 00:16:02,080 --> 00:16:04,360 Speaker 1: at this time of year we're falling off our chairs 289 00:16:04,360 --> 00:16:06,640 Speaker 1: with the sheer magnitude of the total social financing them 290 00:16:06,640 --> 00:16:08,760 Speaker 1: as the broad credit us in China. And what we've 291 00:16:08,760 --> 00:16:11,160 Speaker 1: seen the last few months is actually total social financing 292 00:16:11,160 --> 00:16:14,560 Speaker 1: in particular has been really quite disappointing. Even M two, 293 00:16:14,560 --> 00:16:17,200 Speaker 1: where growth has been of its struggle has not been 294 00:16:17,840 --> 00:16:21,600 Speaker 1: not surprised to the upside. And I think for me 295 00:16:21,680 --> 00:16:25,200 Speaker 1: this is part of a broader story that has maybe 296 00:16:25,240 --> 00:16:28,680 Speaker 1: two legs. The first of them is that what we've 297 00:16:28,800 --> 00:16:32,360 Speaker 1: seen over an extended period, I mean literally decades, is 298 00:16:32,640 --> 00:16:36,720 Speaker 1: one economy after another kind of getting saturated with debt, 299 00:16:36,880 --> 00:16:39,160 Speaker 1: even as it's been cheap to borrow. So Japan drove 300 00:16:39,200 --> 00:16:41,280 Speaker 1: the world borring until nineteen ninety. Since then they haven't 301 00:16:41,320 --> 00:16:43,480 Speaker 1: wanted to do much. US and Europe drove the world's 302 00:16:43,480 --> 00:16:45,400 Speaker 1: boring until two thousand and eight. Since then, the private 303 00:16:45,400 --> 00:16:47,520 Speaker 1: sector hasn't wanted to do much on What they're doing 304 00:16:47,560 --> 00:16:50,040 Speaker 1: is often for share buybacks, and that's where China is 305 00:16:50,040 --> 00:16:52,200 Speaker 1: stepped in. But even in China recently, it feels as 306 00:16:52,200 --> 00:16:54,960 Speaker 1: though you're kind of getting this saturation where it's the 307 00:16:55,040 --> 00:16:58,200 Speaker 1: state run banks lending to the state owned enterprises rather 308 00:16:58,240 --> 00:17:00,080 Speaker 1: than as you say, the private sector of ball and 309 00:17:00,200 --> 00:17:03,720 Speaker 1: oroughly wanting to borrow. In addition, what we tend to 310 00:17:04,320 --> 00:17:09,280 Speaker 1: feel is that even as the authorities are intervening and 311 00:17:09,920 --> 00:17:13,159 Speaker 1: providing support and injecting liquidity to banks at the moment, 312 00:17:13,720 --> 00:17:16,040 Speaker 1: it's not that they want a new investment and real 313 00:17:16,160 --> 00:17:18,760 Speaker 1: estate driven boom in the same way as they've targeted 314 00:17:18,760 --> 00:17:21,719 Speaker 1: in the past. Instead, they're trying to achieve the rebalancing 315 00:17:21,760 --> 00:17:24,200 Speaker 1: to all the consumer that they always wanted. And as 316 00:17:24,240 --> 00:17:27,000 Speaker 1: a result, you see that kind of relative disappointment in 317 00:17:27,040 --> 00:17:29,399 Speaker 1: the broad credit metrics and in the credit impulse. The 318 00:17:29,480 --> 00:17:32,280 Speaker 1: implications for things like commodities and the rest of the 319 00:17:32,320 --> 00:17:34,240 Speaker 1: world are much less positive than they have been in 320 00:17:34,240 --> 00:17:37,400 Speaker 1: previous investment lad booms. Consumer related stuff we still see 321 00:17:37,400 --> 00:17:39,880 Speaker 1: the positive, and things like China equities we still see 322 00:17:39,880 --> 00:17:42,320 Speaker 1: the positive. But if what I care about is those 323 00:17:42,359 --> 00:17:46,000 Speaker 1: credit numbers, it all feels a bit more halfhearted than 324 00:17:46,040 --> 00:17:48,199 Speaker 1: we used to perhaps in the past. And even as 325 00:17:48,200 --> 00:17:51,600 Speaker 1: there's been some narrow liquidity injections on the central bank 326 00:17:51,640 --> 00:17:54,640 Speaker 1: balance sheet recently, again it feels to us as though 327 00:17:54,680 --> 00:17:56,600 Speaker 1: those have been a bit extraordinary and it would be 328 00:17:56,640 --> 00:17:59,240 Speaker 1: a mistake to extrapolate them through the rest of this year. 329 00:17:59,400 --> 00:18:02,680 Speaker 1: So this era of large bank central bank balance sheets, 330 00:18:02,720 --> 00:18:04,440 Speaker 1: I mean, it really started in the wake of the 331 00:18:04,480 --> 00:18:08,040 Speaker 1: Great Financial Crisis, and all the central banks cut rates 332 00:18:08,040 --> 00:18:10,399 Speaker 1: to zero, could not cut further, and so had to 333 00:18:10,480 --> 00:18:14,199 Speaker 1: use balance sheet activities to compensate for their inability to 334 00:18:14,200 --> 00:18:16,920 Speaker 1: cut rates any further. By large, they didn't want to 335 00:18:16,960 --> 00:18:20,240 Speaker 1: go negative. But the reversal of that sowenty twenty. You know, 336 00:18:20,320 --> 00:18:22,920 Speaker 1: we saw some reversal of that in the mid twenty 337 00:18:23,000 --> 00:18:26,000 Speaker 1: tens when the rate hikes and the quantitative tightening. Then 338 00:18:26,200 --> 00:18:28,879 Speaker 1: we're seeing the reversal of that. Now you've been talking 339 00:18:28,880 --> 00:18:31,639 Speaker 1: about what the trajectory is a balance sheet, what is 340 00:18:31,680 --> 00:18:34,719 Speaker 1: the role of the tightening, because Okay, yes, it's true, 341 00:18:34,800 --> 00:18:37,639 Speaker 1: as you point out that in some cases bank balance 342 00:18:37,680 --> 00:18:39,960 Speaker 1: sheet central bank balance sheets still are growing, but we 343 00:18:40,000 --> 00:18:41,960 Speaker 1: do know that they're all tightening, and that part has 344 00:18:42,080 --> 00:18:45,120 Speaker 1: not really changed. What is the rate effect and how 345 00:18:45,160 --> 00:18:47,159 Speaker 1: does that affect either markets or what we see in 346 00:18:47,160 --> 00:18:51,520 Speaker 1: the real economy. So this is unclear and I have 347 00:18:51,640 --> 00:18:55,800 Speaker 1: a very different view from the central banks and traditional economists. 348 00:18:56,240 --> 00:18:59,679 Speaker 1: And this comes back to what I was saying about 349 00:19:01,080 --> 00:19:05,360 Speaker 1: versus level and Mervin King has been doing some nice 350 00:19:05,400 --> 00:19:08,480 Speaker 1: talks for city clients where he actually echoes the points 351 00:19:08,480 --> 00:19:13,800 Speaker 1: that I'm making about the flows of money being important. 352 00:19:14,080 --> 00:19:19,640 Speaker 1: So in the central bank models, not only is inflation 353 00:19:19,680 --> 00:19:25,240 Speaker 1: potentially self reinforcing, but also the level of rates almost mechanically, 354 00:19:25,280 --> 00:19:28,320 Speaker 1: without looking at flows of money, growth is thought to 355 00:19:28,320 --> 00:19:30,480 Speaker 1: translate through into inflation. And never mind that over the 356 00:19:30,560 --> 00:19:33,600 Speaker 1: last decade until recently, that didn't seem to be happening. Again, 357 00:19:33,640 --> 00:19:37,840 Speaker 1: they don't have money growth or a did financial markets 358 00:19:37,840 --> 00:19:41,600 Speaker 1: more broadly, and therefore again it's the rate levels, which 359 00:19:41,640 --> 00:19:45,960 Speaker 1: for them are super important. And the way I think 360 00:19:46,000 --> 00:19:49,639 Speaker 1: about it is instead, no, that low level of rates 361 00:19:49,800 --> 00:19:53,159 Speaker 1: counts only if it dry, if it stimulates somebody to borrow, 362 00:19:53,480 --> 00:19:56,720 Speaker 1: and even when it comes to them and things like unemployment. Again, 363 00:19:56,720 --> 00:19:59,520 Speaker 1: it's the changes that are actually more associated with recessions 364 00:19:59,680 --> 00:20:02,960 Speaker 1: rather than the levels in themselves. And while I'm open 365 00:20:03,040 --> 00:20:06,400 Speaker 1: to the possibility that actually there is now more momentum 366 00:20:06,400 --> 00:20:08,760 Speaker 1: in the economy because of green investment or some of 367 00:20:08,760 --> 00:20:10,919 Speaker 1: the other things that people are speculating about as drivers 368 00:20:10,920 --> 00:20:13,760 Speaker 1: of an increase in our star. In general, I don't 369 00:20:13,800 --> 00:20:16,920 Speaker 1: see that. What money growth I did see as often 370 00:20:16,920 --> 00:20:20,760 Speaker 1: defensive stuff like credit card borrowing, and seems now to 371 00:20:20,800 --> 00:20:23,119 Speaker 1: be reducing being killed off by the rises in rates. 372 00:20:23,400 --> 00:20:26,399 Speaker 1: The bank lending surveys are all showing tightening, And my 373 00:20:26,600 --> 00:20:30,280 Speaker 1: general impression is that actually, while the M two and 374 00:20:30,320 --> 00:20:34,560 Speaker 1: the M three numbers may exaggerate the tendency and the 375 00:20:34,680 --> 00:20:37,359 Speaker 1: negativity because to some extent those are influenced by QT, 376 00:20:38,160 --> 00:20:42,000 Speaker 1: in general, i'd say central banks and economies assume that 377 00:20:42,040 --> 00:20:45,679 Speaker 1: there is a momentum there which would have been the 378 00:20:45,720 --> 00:20:47,959 Speaker 1: case in the past when it was the private sector 379 00:20:48,280 --> 00:20:50,760 Speaker 1: driving the money growth because rates were too low and 380 00:20:50,760 --> 00:20:52,760 Speaker 1: they had a great investment idea or whatever. And this 381 00:20:52,880 --> 00:20:55,080 Speaker 1: time around, while we had the bigger surge of money 382 00:20:55,119 --> 00:20:57,600 Speaker 1: growth since the Second World War, it never came from 383 00:20:57,600 --> 00:20:59,720 Speaker 1: the private sector. It came from the fiscal students. It 384 00:20:59,760 --> 00:21:02,240 Speaker 1: came in the que that had already been turned off 385 00:21:02,560 --> 00:21:05,600 Speaker 1: even before the rate hikes started, and all this to 386 00:21:05,720 --> 00:21:08,520 Speaker 1: my mind, points to the risk of overtightening. I'm not 387 00:21:08,600 --> 00:21:13,199 Speaker 1: convinced that there is this super strong momentum which the 388 00:21:13,520 --> 00:21:16,520 Speaker 1: central banks tend to assume, and yet they're in a 389 00:21:16,560 --> 00:21:18,760 Speaker 1: really difficult place because the lags are so long, and 390 00:21:18,800 --> 00:21:21,600 Speaker 1: it becomes really it's almost impossible to tell the difference 391 00:21:21,640 --> 00:21:26,160 Speaker 1: between a two year lag on inflation and then converse 392 00:21:26,359 --> 00:21:30,040 Speaker 1: relative to money growth and then conversely, Oh, a genuine 393 00:21:30,119 --> 00:21:32,560 Speaker 1: d anchoring and decoupling, especially when you claim that the 394 00:21:32,760 --> 00:21:35,679 Speaker 1: inflation transitory to begin with, and then we're disappointed that 395 00:21:35,720 --> 00:21:38,200 Speaker 1: it took longer to go away than you thought. This 396 00:21:38,280 --> 00:21:40,160 Speaker 1: was going to be my next question on the long 397 00:21:40,240 --> 00:21:43,560 Speaker 1: and variable lags. But talk to us, like, what evidence 398 00:21:43,720 --> 00:21:48,480 Speaker 1: are you seeing right now of higher interest rates impacting 399 00:21:48,640 --> 00:21:51,359 Speaker 1: not markets but the real economy, And what are you 400 00:21:51,480 --> 00:21:55,679 Speaker 1: looking for in terms of signs or evidence that they 401 00:21:55,720 --> 00:21:58,359 Speaker 1: are in fact having an effect in many respects. This 402 00:21:58,480 --> 00:22:03,560 Speaker 1: is hard because those lags are long, and also because 403 00:22:03,600 --> 00:22:07,720 Speaker 1: there's been so much turning out of debt in recent 404 00:22:07,840 --> 00:22:10,960 Speaker 1: years that makes it kind of difficult to tell. So 405 00:22:11,600 --> 00:22:14,040 Speaker 1: let me answer that a different way. Some of that 406 00:22:14,080 --> 00:22:15,879 Speaker 1: I lead to our economists, and you were seeing weakness 407 00:22:15,920 --> 00:22:17,640 Speaker 1: a housing market, and then in the US housing market 408 00:22:17,720 --> 00:22:20,760 Speaker 1: is re strength and you're still getting weakness in other places. 409 00:22:20,960 --> 00:22:23,200 Speaker 1: But let me maybe answer onto this a different way. 410 00:22:23,280 --> 00:22:27,640 Speaker 1: So one of the puzzles of the last few cycles, 411 00:22:27,640 --> 00:22:31,640 Speaker 1: in twenty eighteen in particular, is that in general, it's 412 00:22:31,640 --> 00:22:34,400 Speaker 1: taken lower and lower levels of real yields to kind 413 00:22:34,400 --> 00:22:38,560 Speaker 1: of end each cycle until now, and each time what 414 00:22:38,800 --> 00:22:44,560 Speaker 1: caused the pivot was effectively dysfunction in financial markets threatening 415 00:22:44,560 --> 00:22:47,080 Speaker 1: to feed through into the economy. And each time there's 416 00:22:47,080 --> 00:22:49,360 Speaker 1: been more debt into the system. And maybe there's that's 417 00:22:49,400 --> 00:22:51,040 Speaker 1: part of the explanation as to why it was a 418 00:22:51,119 --> 00:22:54,320 Speaker 1: lower rate each time, And in twenty eighteen to nineteen 419 00:22:54,359 --> 00:22:57,320 Speaker 1: in particular, it's not the case that anyone was running 420 00:22:57,320 --> 00:22:59,320 Speaker 1: around saying, oh I can't roll my corporate debt or 421 00:22:59,320 --> 00:23:02,639 Speaker 1: oh I can't pay my mortgage. Instead, what you had 422 00:23:02,920 --> 00:23:05,919 Speaker 1: was weakness in equities and the weakness in the housing 423 00:23:05,960 --> 00:23:11,080 Speaker 1: market threatening to feed through into something broader. And it 424 00:23:11,119 --> 00:23:14,240 Speaker 1: was that that coupled with broad of his about deflation, 425 00:23:14,440 --> 00:23:17,080 Speaker 1: which allowed the FED to pivot relatively rapidly. Now this 426 00:23:17,200 --> 00:23:19,639 Speaker 1: time around, we haven't had that to anything like the 427 00:23:19,720 --> 00:23:22,600 Speaker 1: same extent. Again, we've seen this year. In particularly last year, 428 00:23:22,640 --> 00:23:24,679 Speaker 1: we had an orderly sell up infant markets. This year 429 00:23:24,720 --> 00:23:28,000 Speaker 1: we're rebounding. But you get this debate as is the 430 00:23:28,040 --> 00:23:32,320 Speaker 1: recession postponed or invoided entirely. And while there are some 431 00:23:32,400 --> 00:23:36,760 Speaker 1: signs of more ongoing momentum in the US consumer in particular, 432 00:23:36,960 --> 00:23:39,320 Speaker 1: perhaps than I had imagined previously, in my economists have 433 00:23:39,320 --> 00:23:42,880 Speaker 1: had a better call on that, I'm still deeply suspicious 434 00:23:42,960 --> 00:23:45,800 Speaker 1: that a lot of the exuminents in markets has come 435 00:23:45,840 --> 00:23:49,439 Speaker 1: because of this stealth que from the global central banks. 436 00:23:49,760 --> 00:23:52,640 Speaker 1: And then in addition, it's just that the lags are 437 00:23:52,760 --> 00:23:56,800 Speaker 1: long before you see that equity markets are correcting downwards 438 00:23:56,800 --> 00:23:59,480 Speaker 1: and house prices are correcting downwards, and then the stock 439 00:23:59,520 --> 00:24:03,520 Speaker 1: of eating accumulated savings begins to diminish. And the main 440 00:24:03,600 --> 00:24:05,480 Speaker 1: thing that would convince me that I'm wrong on all 441 00:24:05,520 --> 00:24:08,239 Speaker 1: of this is if we saw a significant upturn in 442 00:24:08,400 --> 00:24:11,000 Speaker 1: the loan growth numbers, in the money growth numbers, and 443 00:24:11,080 --> 00:24:14,600 Speaker 1: it looked resilient, and that's not what I'm seeing, and 444 00:24:15,040 --> 00:24:18,119 Speaker 1: so and so. There's a similar debate with respect to 445 00:24:18,160 --> 00:24:22,400 Speaker 1: when I speak to corporates themselves. Yes, everyone's having difficulty 446 00:24:22,440 --> 00:24:24,960 Speaker 1: recruiting workers in hotels, and restaurants in particular. And yes, 447 00:24:25,000 --> 00:24:27,399 Speaker 1: there's this pent up demand for things that weren't possible 448 00:24:27,440 --> 00:24:29,919 Speaker 1: during lockdowns. But the question I keep coming back to 449 00:24:30,119 --> 00:24:32,440 Speaker 1: is are the corporates saying we need to build more 450 00:24:32,560 --> 00:24:36,480 Speaker 1: hotels and restaurants? Again? Is there this longer term demand? 451 00:24:37,000 --> 00:24:39,680 Speaker 1: And I'm not nearly as convinced as many people are 452 00:24:39,760 --> 00:24:43,080 Speaker 1: that everything has turned around as much as people like Ian. 453 00:24:43,359 --> 00:24:46,240 Speaker 1: Maybe some of the backstory here, if I may, is 454 00:24:46,440 --> 00:24:50,040 Speaker 1: I think again, this difference between how I think about 455 00:24:50,080 --> 00:24:52,359 Speaker 1: it and how the central banks think about it. So 456 00:24:52,600 --> 00:24:56,159 Speaker 1: the central banks are really embarrassed because while everyone has 457 00:24:56,200 --> 00:25:00,199 Speaker 1: had difficulty forecasting inflation, Oh it's a hair chart, It's 458 00:25:00,240 --> 00:25:02,879 Speaker 1: a Medusa chart. I love that exactly, the hedgehogs over 459 00:25:03,160 --> 00:25:06,720 Speaker 1: there form fines. So not only have they been surprised 460 00:25:06,960 --> 00:25:09,359 Speaker 1: by the inflation being higher than they expected over the 461 00:25:09,400 --> 00:25:12,120 Speaker 1: last couple of years, but of course for the preceding decade, yeah, 462 00:25:12,160 --> 00:25:14,240 Speaker 1: they kept expecting more inflation and then there was less. 463 00:25:14,440 --> 00:25:17,560 Speaker 1: And so they're really having to scratch their heads and say, 464 00:25:17,720 --> 00:25:19,840 Speaker 1: what is it that's turned one hundred and eighty degrees 465 00:25:19,880 --> 00:25:22,320 Speaker 1: and caused our models to go, you know, wrongly in 466 00:25:22,320 --> 00:25:25,800 Speaker 1: one direction in this is it direct. This is one 467 00:25:25,840 --> 00:25:28,200 Speaker 1: of the themes that I'm going back to, this idea 468 00:25:28,200 --> 00:25:30,919 Speaker 1: of like the twenty twenties being the inverse twenty tens 469 00:25:30,920 --> 00:25:34,040 Speaker 1: and that hair chart, hedgehog Medusa chart what have you 470 00:25:34,160 --> 00:25:36,000 Speaker 1: is a good example. It's like, first, you have a 471 00:25:36,080 --> 00:25:41,120 Speaker 1: decade of perennially over your your your inflation expectations being 472 00:25:41,160 --> 00:25:44,119 Speaker 1: perennially over optimistic or too high, and then maybe what 473 00:25:44,160 --> 00:25:46,240 Speaker 1: are we going to have. It's possible that we have 474 00:25:46,359 --> 00:25:49,920 Speaker 1: a decade now of continuing to expect that inflation will 475 00:25:49,920 --> 00:25:52,040 Speaker 1: come down sooner, you know, I want to go back. 476 00:25:52,040 --> 00:25:55,240 Speaker 1: And seems like part of this debate is and the 477 00:25:55,400 --> 00:25:59,080 Speaker 1: sort of the variability of the long and variable legs 478 00:25:59,160 --> 00:26:03,199 Speaker 1: impact on en And it feels like the fat is 479 00:26:03,200 --> 00:26:05,560 Speaker 1: the belief that these lags are much shorter that there 480 00:26:05,640 --> 00:26:09,719 Speaker 1: used to be. The instantaneous financial market effects reflect the speech. 481 00:26:09,960 --> 00:26:12,280 Speaker 1: Paul gives a speech, even if he doesn't raise rates, 482 00:26:12,280 --> 00:26:15,280 Speaker 1: then it all reprices and then the actual rate rises 483 00:26:15,280 --> 00:26:17,720 Speaker 1: are a mirror formality after that. And it sounds like 484 00:26:17,800 --> 00:26:20,080 Speaker 1: from your point of view, it's like the actually you 485 00:26:20,119 --> 00:26:23,000 Speaker 1: still have these long lags because of things like well, 486 00:26:23,359 --> 00:26:26,639 Speaker 1: how companies turned out their debt, and eventually they are 487 00:26:26,640 --> 00:26:28,240 Speaker 1: going to have to roll them over, even if they 488 00:26:28,240 --> 00:26:31,320 Speaker 1: haven't yet. And when that rollover happened, there will be 489 00:26:31,400 --> 00:26:33,640 Speaker 1: a kick up in their interest costs and that will 490 00:26:33,960 --> 00:26:36,480 Speaker 1: create a burden on investment. So it sort of sounds 491 00:26:36,520 --> 00:26:38,639 Speaker 1: like that's where the tension is in your view is 492 00:26:38,640 --> 00:26:41,679 Speaker 1: simply no, there really are still long and variable lagged 493 00:26:41,960 --> 00:26:44,200 Speaker 1: all these rate hikes that we saw in twenty twenty two, 494 00:26:44,560 --> 00:26:48,240 Speaker 1: their impact is still coming. Basically, yes, maybe I have 495 00:26:48,280 --> 00:26:52,680 Speaker 1: a particular view there. I'm not an economist, I'm a strategist, 496 00:26:53,000 --> 00:26:56,440 Speaker 1: and so for me, asset price inflation and CPI inflation 497 00:26:56,960 --> 00:26:59,800 Speaker 1: have always been two sides of the same coin. Now 498 00:26:59,800 --> 00:27:02,520 Speaker 1: this central banks gave up on money growth in the 499 00:27:02,600 --> 00:27:04,159 Speaker 1: eighties and nineties when they said, all there's lots of 500 00:27:04,160 --> 00:27:06,760 Speaker 1: money growth, but there's hardly any inflation. Our job is 501 00:27:06,760 --> 00:27:09,520 Speaker 1: to control CPI inflation. So this money growth thing is 502 00:27:09,600 --> 00:27:12,760 Speaker 1: useless and let's stop using it, or in the FEDS case, 503 00:27:12,880 --> 00:27:15,800 Speaker 1: you can stop measuring some of the metrics they ran previously. 504 00:27:16,160 --> 00:27:18,480 Speaker 1: And for me, though, and I think virtually anyone in 505 00:27:18,520 --> 00:27:21,840 Speaker 1: financial markets, it's kind of obvious what went on. We 506 00:27:21,920 --> 00:27:25,520 Speaker 1: had asset price inflation instead, and those correlations that break 507 00:27:25,600 --> 00:27:28,480 Speaker 1: down with money growth. Even if you build quite crude 508 00:27:28,520 --> 00:27:33,360 Speaker 1: models where you put together asset price inflation and CPI inflation, 509 00:27:33,440 --> 00:27:36,080 Speaker 1: there's correlations that break down with CPI inflation. They basically 510 00:27:36,119 --> 00:27:39,479 Speaker 1: carry on. And so for me, what we're seeing is, 511 00:27:39,520 --> 00:27:44,000 Speaker 1: as you say, not this drastic, drastic turnaround where something 512 00:27:44,040 --> 00:27:47,240 Speaker 1: you know, the globalization shifting to deglobalization and long and 513 00:27:47,280 --> 00:27:51,320 Speaker 1: persistent inflation instead. For me, no, it's just these long 514 00:27:51,480 --> 00:27:54,639 Speaker 1: time lags, and there's a very clear pattern. It's that 515 00:27:54,720 --> 00:27:58,000 Speaker 1: the Surgeon money growth showed up first in asset price inflation, 516 00:27:58,320 --> 00:28:02,000 Speaker 1: then in goods price inflation, now in services inflation, and 517 00:28:02,119 --> 00:28:04,560 Speaker 1: yes in things like wage growth. But the lags are 518 00:28:04,600 --> 00:28:07,399 Speaker 1: long enough that it's really difficult to tell whether this 519 00:28:07,480 --> 00:28:11,040 Speaker 1: is genuinely persistent. Let me ask it a double advocate question. 520 00:28:11,200 --> 00:28:14,400 Speaker 1: Could the correlation go the other direction and where it's 521 00:28:14,400 --> 00:28:18,320 Speaker 1: the surgeon asset prices creating the surge in monetary aggregates. 522 00:28:18,320 --> 00:28:20,760 Speaker 1: And the reason I ask that is because there are 523 00:28:20,800 --> 00:28:25,440 Speaker 1: models of the economy, more managers and bank lenders, etc. 524 00:28:25,800 --> 00:28:27,920 Speaker 1: Look at the price, and I'm going to be more 525 00:28:27,960 --> 00:28:30,000 Speaker 1: likely to make a mortgage loan if I feel like 526 00:28:30,040 --> 00:28:31,840 Speaker 1: this is an ear where house prices are going up, 527 00:28:31,920 --> 00:28:34,440 Speaker 1: I'm going to be more likely to approve a business 528 00:28:34,920 --> 00:28:37,120 Speaker 1: loan if this is an err where stock prices are 529 00:28:37,119 --> 00:28:39,120 Speaker 1: going up and the company is likely to be able 530 00:28:39,120 --> 00:28:41,760 Speaker 1: to tap the equity market. Could it be that some 531 00:28:41,800 --> 00:28:44,840 Speaker 1: of these charts, which do seem to show a compelling 532 00:28:44,880 --> 00:28:49,560 Speaker 1: relationship go from assets first to money supply next. You 533 00:28:49,640 --> 00:28:53,120 Speaker 1: are certainly right that the relationship often works both ways. 534 00:28:53,200 --> 00:28:56,120 Speaker 1: It's not only the credit growth stimulates the housing market, 535 00:28:56,160 --> 00:29:00,240 Speaker 1: it's also the the buoyant housing market encourages more credit growth. 536 00:29:00,840 --> 00:29:04,720 Speaker 1: But if it only worked that way, then this chart 537 00:29:04,720 --> 00:29:08,360 Speaker 1: shouldn't work. Then I shouldn't be able to find a 538 00:29:08,440 --> 00:29:11,680 Speaker 1: really nice relationship going back to the early nineteen hundreds 539 00:29:11,720 --> 00:29:15,400 Speaker 1: where the money growth in the US links through to 540 00:29:15,640 --> 00:29:17,360 Speaker 1: real estate, but with about a one and a half 541 00:29:17,480 --> 00:29:20,360 Speaker 1: year leg. So, yes, you're right, that's part of it. 542 00:29:20,720 --> 00:29:23,080 Speaker 1: But for me, money growth is still the best driver. 543 00:29:23,160 --> 00:29:25,320 Speaker 1: And to come back to this question of lags, it's 544 00:29:25,400 --> 00:29:27,880 Speaker 1: reasonably short when I look at things like the equity market, 545 00:29:27,960 --> 00:29:30,240 Speaker 1: especially now that central banks are driving it. But the 546 00:29:30,320 --> 00:29:32,160 Speaker 1: link to real estate is about one and a half years. 547 00:29:32,200 --> 00:29:34,440 Speaker 1: The link to commodities prices is about one and a 548 00:29:34,480 --> 00:29:37,160 Speaker 1: half years. The link to CPI is harder to tell 549 00:29:37,240 --> 00:29:39,960 Speaker 1: because the relationship is weaker, but as far as I 550 00:29:39,960 --> 00:29:42,360 Speaker 1: can see, it's something like a two year lag. Now 551 00:29:42,360 --> 00:29:44,520 Speaker 1: that puts the FED in a terribly difficult spot because 552 00:29:44,560 --> 00:29:45,920 Speaker 1: you're not going to see the impact of even the 553 00:29:45,920 --> 00:29:48,320 Speaker 1: first rate ikes until late April twenty twenty four, never 554 00:29:48,320 --> 00:30:07,840 Speaker 1: mind the hikes that you're doing at the moment. You know, Matt, 555 00:30:07,880 --> 00:30:11,120 Speaker 1: you emphasized that you are indeed a strategist and not 556 00:30:11,160 --> 00:30:14,640 Speaker 1: an economist, and on this podcast you're you're somewhat famous 557 00:30:14,680 --> 00:30:20,440 Speaker 1: for the sort of flows before pros idea, this idea 558 00:30:20,520 --> 00:30:23,400 Speaker 1: that you know, for many years post financial crisis, it 559 00:30:23,480 --> 00:30:26,360 Speaker 1: made sense to just follow the money and never mind 560 00:30:26,400 --> 00:30:29,880 Speaker 1: whether valuations were reasonable or not. If we assume that 561 00:30:29,920 --> 00:30:33,240 Speaker 1: liquidity does have a big impact on markets, which you 562 00:30:33,320 --> 00:30:35,720 Speaker 1: argue it does, and if it does seem like all 563 00:30:35,760 --> 00:30:39,200 Speaker 1: these one off, sort of stealth liquidity injections are now 564 00:30:39,320 --> 00:30:44,400 Speaker 1: going away, what should investors do here just flee on 565 00:30:44,600 --> 00:30:49,040 Speaker 1: mass or what would be your recommendation? Actually, the outlook 566 00:30:49,120 --> 00:30:53,240 Speaker 1: for the various liquidity factors is complicated. For all of them. 567 00:30:53,400 --> 00:30:56,040 Speaker 1: The surge feels as though it's been extraordinary. There is 568 00:30:56,080 --> 00:30:58,920 Speaker 1: a lot of debate as to just have a negative 569 00:30:59,480 --> 00:31:03,240 Speaker 1: or at least positive they all become on balance, though, Yes, 570 00:31:03,280 --> 00:31:07,360 Speaker 1: what I think we have seen is an extraordinary three months. Yes, 571 00:31:07,440 --> 00:31:13,240 Speaker 1: that's left equity and especially riskier credit valuations at levels 572 00:31:13,280 --> 00:31:15,960 Speaker 1: where I don't like chasing them at this point, especially 573 00:31:15,960 --> 00:31:18,680 Speaker 1: for the more expensive equities, which is still the tech 574 00:31:18,760 --> 00:31:22,400 Speaker 1: sector and the growth sector. And still the US are 575 00:31:22,560 --> 00:31:25,920 Speaker 1: relative to the likes of Europe. If we want risk 576 00:31:26,040 --> 00:31:29,240 Speaker 1: on positions, we would tend to do them through currencies 577 00:31:29,320 --> 00:31:34,080 Speaker 1: or reversus dollar, or through regional preferences European versus US equities, 578 00:31:34,200 --> 00:31:36,440 Speaker 1: or maybe you can say the same thing about China. 579 00:31:36,520 --> 00:31:39,480 Speaker 1: But yes, you're right. The biggest problem that we see 580 00:31:39,560 --> 00:31:46,520 Speaker 1: generally is that for every individual asset class that considered 581 00:31:46,560 --> 00:31:50,640 Speaker 1: in isolation, might seem sort of attractive, what really matters 582 00:31:50,800 --> 00:31:55,120 Speaker 1: is is that the valuation relative to money market farm is, 583 00:31:55,240 --> 00:31:59,719 Speaker 1: especially in dollars, and so you know, IG credit, for example, 584 00:31:59,720 --> 00:32:01,840 Speaker 1: has some the best fields available for the last decade, 585 00:32:02,200 --> 00:32:05,200 Speaker 1: but actually the pickup relative to money market funds or 586 00:32:05,280 --> 00:32:09,080 Speaker 1: deposits is actually the lowest it's been in multiple decades, 587 00:32:09,320 --> 00:32:13,640 Speaker 1: and so that does argue for significantly increased allocations to 588 00:32:14,160 --> 00:32:17,240 Speaker 1: cash and cash equivalents exactly those things which were basically 589 00:32:17,320 --> 00:32:20,360 Speaker 1: uninvestable over the last decade. All right, well, Matt, we're 590 00:32:20,360 --> 00:32:21,880 Speaker 1: going to have to leave it there, but it was 591 00:32:21,960 --> 00:32:39,600 Speaker 1: fantastic having you on the show once again. Really appreciate it, Joe. 592 00:32:39,640 --> 00:32:42,000 Speaker 1: You know what I just realized. Tell me the last 593 00:32:42,000 --> 00:32:44,440 Speaker 1: time we spoke to Matt, I think we ended the 594 00:32:44,520 --> 00:32:48,400 Speaker 1: discussion by saying that we wished that we had a 595 00:32:48,480 --> 00:32:52,600 Speaker 1: video product because during the conversation Matt was bringing up 596 00:32:52,600 --> 00:32:55,200 Speaker 1: all these different charts and showing them. So now we're 597 00:32:55,200 --> 00:32:57,000 Speaker 1: finally able to do it and show off some of 598 00:32:57,000 --> 00:32:59,400 Speaker 1: the So if you just listened to this episode on 599 00:32:59,640 --> 00:33:02,520 Speaker 1: up Apple or Spotify or something like that, go to 600 00:33:02,680 --> 00:33:05,080 Speaker 1: you find this on YouTube where if we had the 601 00:33:05,600 --> 00:33:08,040 Speaker 1: charts that he was bringing up during our conversation, we're 602 00:33:08,040 --> 00:33:09,680 Speaker 1: going to have a video or we're also going to 603 00:33:09,720 --> 00:33:11,920 Speaker 1: write a post with some of the charts, or as 604 00:33:11,920 --> 00:33:14,160 Speaker 1: many of the charts as possible, so you can read 605 00:33:14,400 --> 00:33:16,720 Speaker 1: a story about this with all the charts. Because I 606 00:33:16,800 --> 00:33:19,760 Speaker 1: love the way talking to Matt, how he brings up 607 00:33:19,800 --> 00:33:22,200 Speaker 1: all his charts in real time. It's very fun. Yeah, 608 00:33:22,240 --> 00:33:24,640 Speaker 1: and the charts are excellent, especially the hair charts, which 609 00:33:24,640 --> 00:33:26,640 Speaker 1: I can never get enough of. But I do think 610 00:33:26,800 --> 00:33:30,200 Speaker 1: he hits on something. You know, this overall feeling in 611 00:33:30,240 --> 00:33:32,760 Speaker 1: the market at the moment, which is it does feel 612 00:33:32,800 --> 00:33:37,520 Speaker 1: a little uncomfortable that we still have this overarching question 613 00:33:37,640 --> 00:33:40,720 Speaker 1: of is inflation coming down? Yeah, our central Bank's going 614 00:33:40,800 --> 00:33:42,800 Speaker 1: to have to go harder. I mean people are talking 615 00:33:42,800 --> 00:33:45,360 Speaker 1: about terminal rates at like six point five percent now, 616 00:33:45,560 --> 00:33:48,240 Speaker 1: which seems extreme, and you would think that would have 617 00:33:48,360 --> 00:33:51,680 Speaker 1: more of an impact on asset prices. Yeah, I mean 618 00:33:51,960 --> 00:33:54,160 Speaker 1: it is really striking. I mean it's still you know, 619 00:33:54,600 --> 00:33:58,800 Speaker 1: the fundamental story still seems like it explains something, especially 620 00:33:58,840 --> 00:34:03,080 Speaker 1: like setting aside what markets have done in twenty twenty three, 621 00:34:03,120 --> 00:34:05,040 Speaker 1: as you talked about in the intro, a lot of 622 00:34:05,040 --> 00:34:07,520 Speaker 1: people have gotten suddenly anxious about the overheating and so 623 00:34:07,600 --> 00:34:10,680 Speaker 1: you see it if today we're recording this ten year 624 00:34:10,760 --> 00:34:14,600 Speaker 1: back above four percent, etc. But on the other hand, 625 00:34:14,719 --> 00:34:17,239 Speaker 1: he's right, and one of the charts he showed during 626 00:34:17,239 --> 00:34:21,040 Speaker 1: the conversation specifically had the title of like monetorism has 627 00:34:21,080 --> 00:34:23,799 Speaker 1: gone out of fashion and he's coming back and at 628 00:34:24,000 --> 00:34:26,880 Speaker 1: one hundred percent true. The out of fashion part, I 629 00:34:26,880 --> 00:34:29,880 Speaker 1: think especially in the twenty tens. Yeah, no one was 630 00:34:29,920 --> 00:34:32,160 Speaker 1: talking like M two and all that stuff. And so 631 00:34:32,200 --> 00:34:35,040 Speaker 1: then the question is does this become once again as 632 00:34:35,080 --> 00:34:37,719 Speaker 1: sort of like the eighties, like the Vulcan Era, or 633 00:34:37,800 --> 00:34:41,320 Speaker 1: these monetary aggregates become a sort of like central focus 634 00:34:41,400 --> 00:34:45,680 Speaker 1: for how investors view the economy bringing back M two. Yeah, 635 00:34:45,719 --> 00:34:48,000 Speaker 1: let's do it. It is true though, that you can 636 00:34:48,080 --> 00:34:50,560 Speaker 1: have both things, right. You can have you can have 637 00:34:50,600 --> 00:34:53,359 Speaker 1: technicals that are a tailwind for risk assets and also 638 00:34:53,400 --> 00:34:56,520 Speaker 1: have fundamentals that so far because of the long and 639 00:34:56,600 --> 00:35:00,680 Speaker 1: variable lags that Matt was also laying out like pretty strong. 640 00:35:01,440 --> 00:35:03,719 Speaker 1: Its traces look pretty good to me. All right, shall 641 00:35:03,760 --> 00:35:05,839 Speaker 1: we leave it there? Let's leave it there. This has 642 00:35:05,840 --> 00:35:09,360 Speaker 1: been another episode of the Old Blots podcast. I'm Tracy Alloway. 643 00:35:09,440 --> 00:35:11,799 Speaker 1: You can follow me on Twitter at Tracy Alloway and 644 00:35:11,840 --> 00:35:13,839 Speaker 1: I'm Joe Why Isn't All? You can follow me on 645 00:35:13,880 --> 00:35:17,640 Speaker 1: Twitter at the Stalwart. Follow our producers on Twitter, Carmen 646 00:35:17,719 --> 00:35:21,680 Speaker 1: Rodriguez at Carmen Arman and Dash Bennett at Dashbot. Follow 647 00:35:21,719 --> 00:35:25,320 Speaker 1: all of our podcasts at Bloomberg under the handle at podcasts, 648 00:35:25,680 --> 00:35:28,439 Speaker 1: and for more Oblots content, go to Bloomberg dot com, 649 00:35:28,480 --> 00:35:31,439 Speaker 1: slash oddlots, or we post the transcripts. In this case, 650 00:35:31,480 --> 00:35:33,759 Speaker 1: we're going to post the charts as well. We are 651 00:35:33,800 --> 00:35:36,000 Speaker 1: going to Tracy and I blog and we have a 652 00:35:36,040 --> 00:35:39,879 Speaker 1: newsletter that comes out every Friday. Go there and sign up. 653 00:35:40,080 --> 00:35:40,840 Speaker 1: Thanks for listening.