Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jay Leye. We bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg
Speaker 1: dot Com, and of course, on the Bloomberg terminal. One
Speaker 1: day of price action is hot to taw. We had
Speaker 1: three big central bank decisions last week. I wouldn't run
Speaker 1: away with a clean Nate narrative off the back of
Speaker 1: Friday Smith. No, there is no clean Neat narrative, although
Speaker 1: if we're going to give it one. Billy has a
Speaker 1: bird's eye view not only on the United States and Europe,
Speaker 1: but also in China, and I do want to get
Speaker 1: to China, Billy chief economists at the Milkin Institute. But
Speaker 1: before we get there, I want your sense of some
Speaker 1: of the moves that we saw on the bond market,
Speaker 1: the whip sawing action that we saw people pricing in
Speaker 1: rate hikes and then frankly going absolutely in the other way.
Speaker 1: When some play says it made sense, in others not
Speaker 1: so much. Does this mean to you that we're going
Speaker 1: to see slower growth. Is there any fundamental narrative that
Speaker 1: we can pin to this. The one thing that came
Speaker 1: out of the BUILD and Global conferences that economists and
Speaker 1: market practitioners and portfolio managers really have a very different
Speaker 1: view of inflation. Uh. The portfolio managers and bond managers
Speaker 1: were all obsessed with the fact that prices are high
Speaker 1: and can go higher. Uh. And and there's no shout
Speaker 1: of transitory is just completely fair voting um. Economists are
Speaker 1: still towing the fedline, which says that we have some
Speaker 1: transitorent but persistent influences keeping prices high and and and
Speaker 1: one of those influences is the fact that we have
Speaker 1: these bottom nights slowing down growth. That's really the key.
Speaker 1: How much is growth gonna be slowing down? And how
Speaker 1: much of the future is being priced in on the
Speaker 1: on the slow downside, and how much of it is
Speaker 1: the persistent high price And that's where you see the
Speaker 1: tension and bill. A lot of this is actually stemming
Speaker 1: from what's happening in China as the Communist Party meets
Speaker 1: for its annual plan. M I am wondering the price
Speaker 1: increases that we're seeing or how much does this indicate
Speaker 1: frankly a protracted increase in prices around the world that
Speaker 1: people perhaps are not accounting for this sort of deglobalization
Speaker 1: and frankly changed regime in China filtering into prices and
Speaker 1: slower growth Globally, China is really being hit by confluence
Speaker 1: of domestic and global factors. Uh. This the one thing
Speaker 1: that we see in China which is almost a microcause
Speaker 1: what we're seeing globally is the sense that producer prices
Speaker 1: are double digits, arising by ten percent, and yet consumer
Speaker 1: prices are maybees point seven percent and project to go
Speaker 1: up to one point four percent with the new release. Uh.
Speaker 1: And that's where you see the authoritarian control of being
Speaker 1: able to manage retail prices and of course at the
Speaker 1: expense of profit compression. One of the things that they're
Speaker 1: banking on is that she jimpings leadership, and that's what
Speaker 1: they're they're trying to have the historical review to justify
Speaker 1: is that she jimpings leadership will produce enough productivity gains
Speaker 1: to be able to keep margins up and to keep
Speaker 1: Chinese companies profitable. Is that life leadership bill a growing
Speaker 1: risk for this economy. Boy, you know, John, that everyone
Speaker 1: is really looking towards the sense of how is it
Speaker 1: that Hi Jinping is going to be able to pull
Speaker 1: off the return to miles doctrines of common prosperity, creating
Speaker 1: a moderately prosper to comedy for everyone, and at the
Speaker 1: same time focus innovation on domestic sources and domestic sources
Speaker 1: of growth and domestic sources for export, and at the
Speaker 1: same and keep it done in a way that allows
Speaker 1: the rest of the world to be part of China's growth.
Speaker 1: The chijin Ping leadership is something that they're going to
Speaker 1: come out with and say, the one thought we have
Speaker 1: to keep in mind is that Mao Zedong allowed China
Speaker 1: to stand up and unified China. Uh Doping made China rich,
Speaker 1: But Hijin Ping, who is the one who has made
Speaker 1: China strong and allows China to stand up among the
Speaker 1: League of Nations as the first among equals. That's the
Speaker 1: historical review that will come out in this meeting to
Speaker 1: justify we need Chijimping's leadership. That's the rhetoric. And I
Speaker 1: think the sacrifices gonna be towards focusing on domestic growth,
Speaker 1: sacrificing innovation, and and doing it in a way that
Speaker 1: preserves the Communist Party's power as opposed to productivity and growth.
Speaker 1: Will you mentioned the power of the international states, what
Speaker 1: about domestically, How strong is that power right now? You know,
Speaker 1: there are mixed reports from the outside. It looks like
Speaker 1: there's a unified frond. Jijan Ping has you know, got
Speaker 1: abolished term limits and now he's in for life. But
Speaker 1: he's worried that he's not going to get enough support
Speaker 1: to be able to carry out these policies. It's not
Speaker 1: so much at the top levels that he's afraid of,
Speaker 1: but the municipal governments and and state and local governments
Speaker 1: that have to implement these policies. There's a huge tension
Speaker 1: right now, let's say, caused by saying the energy crisis.
Speaker 1: The federal government sucks in all the taxes, but the
Speaker 1: federal the local, state, local governments have to manage their
Speaker 1: expenditures and and manage their budgets. That tension between state
Speaker 1: and local governments and the federal government is something that
Speaker 1: Chimping has to manage. And between now and the time
Speaker 1: of the next UH National Parties Congress UH National People's
Speaker 1: Congress in the next year, that has to be solidified
Speaker 1: because he has to have a unanimous call for him
Speaker 1: to stay in power. Do we see a slowdown in
Speaker 1: growth that's becomes a problem for the global economy bill
Speaker 1: in China? Oh yeah, because right now China is suffering
Speaker 1: from an energy crisis, which is stall production and transhipments.
Speaker 1: The notion of having a common prosperity has has has
Speaker 1: really focused Chinese policy on hitting the most productive companies
Speaker 1: in all of China, the internet companies. They're also hitting
Speaker 1: on education, which is something that they've been trying to
Speaker 1: use to try to bootstrap themselves to increase human capital.
Speaker 1: So managing these policies is something that we in the
Speaker 1: West would have to worry about. His investors because the
Speaker 1: role for investment is going to be clearly not one,
Speaker 1: not a primary role, but only in so far as
Speaker 1: Western investment will help China become help trying to be
Speaker 1: as manufacturing conduits to the rest of the world. If
Speaker 1: you can help China take its innovations out to the
Speaker 1: rest of the world, you've got a successful business. If
Speaker 1: you're in a competing business with Chinese innovation, you're in trouble.
Speaker 1: But longer term, I mean, does this uh have the
Speaker 1: potential to cement sheese legacy as one of the most
Speaker 1: successful leaders. Can he really achieve common prosperity? That's the
Speaker 1: big bet um. We know that Shenjen, for example, is
Speaker 1: a model city off and China's Silicon valley. It's become
Speaker 1: successful because it was copied China's model, Hong Kong's model
Speaker 1: of innovation, which is the experiment. Chi Jinping's latest speech
Speaker 1: on Shinjen says, you should innovate with this eye towards
Speaker 1: the needs of the center. In other words, they're managing
Speaker 1: direction of innovation. They're managing the direction in which these
Speaker 1: companies have to focus their growth. That's a dangerous game
Speaker 1: because that may or may not work. And most of
Speaker 1: the experience we've had with managed growth and industrial policy
Speaker 1: is that most industrial policies fail. Height Bill, thank you,
Speaker 1: sir as owise, it's going to catch you up, Bill,
Speaker 1: leader of the milk An Institute. Let's get to George
Speaker 1: Santa Velos, global head of FFX research at Deutsche Bank Adda, London.
Speaker 1: George always going to catch up with you, sir. I
Speaker 1: want to start right here. Is something least has been
Speaker 1: on top of through this morning. What did you make
Speaker 1: of the bond market move off the back of really
Speaker 1: solid payrolls data in America. George, that makes sense to you.
Speaker 1: Good morning, John. So, I think it's just worth taking
Speaker 1: a step back and looking at this year and if
Speaker 1: you think about what's been thrown at the bond market,
Speaker 1: You've had the highest inflation in thirty years, had the
Speaker 1: fastest growth rates essentially on record, and yet if you
Speaker 1: take a look at the long end of the US
Speaker 1: curve five year, five year real rates, break evens nominals,
Speaker 1: they're basically where they were in February. And I think
Speaker 1: that pattern we saw on Friday as part of this
Speaker 1: theme that there's something bigger going on in the bond
Speaker 1: market than just the inflation story. And to me, it's
Speaker 1: in a story of excess savings, very low our star,
Speaker 1: and I think unless we understand what is going on there,
Speaker 1: it's going to be very, very difficult to understand anything
Speaker 1: else in the market at the moment. Well, Georgia, it's
Speaker 1: your job to try to understand it. So what are
Speaker 1: some of the theories that you're coming out, especially as
Speaker 1: we hear all these discussions that the savings rate is
Speaker 1: coming down, that people are actually spending their savings, and
Speaker 1: yet we are not seeing a material change in the
Speaker 1: outlook for yields, at least as portrayed by the bond market.
Speaker 1: So if you go back to the two thousands, you
Speaker 1: also had the bond conundrum. Back then it was called
Speaker 1: the Greenspan conundrum and ended up being china Um. I
Speaker 1: think that this new source of excess savings now in
Speaker 1: the market is essentially the fiscal stimulus we had last year.
Speaker 1: And if you look at what's happened to that, even
Speaker 1: though saving rates are coming down, saving rates are a
Speaker 1: flow concept. What happened to all the money that was
Speaker 1: given last year in payout, It's been stored in bank accounts.
Speaker 1: And then if you look at what banks are doing,
Speaker 1: banks are using those depart is, it's and going back
Speaker 1: and buying fixed income again. So when I when I
Speaker 1: look at a lot of the flow metrics, they're just
Speaker 1: suggesting a recycling of savings. Obviously that's what's keeping asset
Speaker 1: prices elevated. But then there's there's also this additional question
Speaker 1: of where is trend growth, and this trend growth coming down,
Speaker 1: meaning central banks won't be able to hike as much.
Speaker 1: And if you look at some indicators, for example, the
Speaker 1: spread between forward looking and backward looking UM consumer confidence
Speaker 1: metrics that suggestive of a very very very flat curve,
Speaker 1: and some curves are starting to invert, for example an
Speaker 1: emerging market. So i'd say number one flow flow flow,
Speaker 1: there's huge amount of excess saving in the system, and
Speaker 1: number two terminal rates are also pretty low. So even
Speaker 1: though we're pricing a lot in the front ends, you
Speaker 1: really struggling to price the back end, George, a lot
Speaker 1: of that those excess savings has gone into crypto. Um.
Speaker 1: The total market cap of cryptocurrencies is now more than
Speaker 1: three trillion dollars. What do you make as chief of
Speaker 1: FX Research on bitcoin at sixties six grand? So crypto
Speaker 1: is an error we're starting to look at as well. Obviously,
Speaker 1: as the market size is growing, it becomes a bigger relevance.
Speaker 1: But to me, the ultimate again, it's a symptom of
Speaker 1: these excess savings in the market that are trying to
Speaker 1: find a home. And then of course we need to
Speaker 1: look at the impact of crypto in terms of the
Speaker 1: structure of payment systems, and I think that's probably one
Speaker 1: of the most underestimated areas or underappreciated areas of crypto,
Speaker 1: these new developments and decentralized finance, they have the potential
Speaker 1: to change the way the banking system looks in ten years,
Speaker 1: and we're also trying to spend a bit of time
Speaker 1: understanding that as well, George, before you run, let's talk
Speaker 1: about a currency pave in following closely. It's cable, the
Speaker 1: pound sterling against the US dollar one thirty five twenty six,
Speaker 1: just looking at our forecast in our survey forecast into
Speaker 1: year and one thirty seven, just a little bit north
Speaker 1: of where we are at the moment, George, where are
Speaker 1: you on that currency pay at the moment? Given what
Speaker 1: we heard from Governor Bailey in the past week, so,
Speaker 1: we have been negative on the pound since September. It
Speaker 1: proved quite difficult to hold them to that view as
Speaker 1: you saw that massive repricing in the front tense. But
Speaker 1: the key observation here is the repricing was entirely driven
Speaker 1: by inflation expectations. Real rates in the UK have stayed very,
Speaker 1: very low. We're worried about the growth outlook in terms
Speaker 1: of a big fiscal tightening that's coming in, and then
Speaker 1: of course you have these new Brexit risks. There is
Speaker 1: a genuine risk that the entire deal unraveled. So we
Speaker 1: maintain a bearish view on the pound. And I think
Speaker 1: the risks are you see Cable for example, break to
Speaker 1: new multi week cloths incoming weeks. Interesting, Could we not
Speaker 1: do bre exit again? I thought we were done with that, George, honestly,
Speaker 1: George Saravellos there of Deutsche Bank out of London, in
Speaker 1: our headquarters in the city of London too. That's good
Speaker 1: to see. We start with John stealth As, the chief
Speaker 1: investment strategist at Oppenheimer Asset Management. John Greater, catch up, sir,
Speaker 1: We've got an infrastructure agreement Dan in Washington. Our head
Speaker 1: to d C in a couple of moments to catch
Speaker 1: up with Amrie Horden, Washington correspondent, on that the data
Speaker 1: in America, the i S M last week, the payrolls
Speaker 1: report is decent. The chairman his patient for an echoy
Speaker 1: market ball. Thank you, Johnny. You're feeling good. Yeah, I'm
Speaker 1: feeling very good about it. I think last week was
Speaker 1: was celebration of all of the above of what you
Speaker 1: just mentioned. But beyond that, what you've got is this
Speaker 1: week you will probably get you know, a little bit
Speaker 1: of testing UH, and some people take short term profits
Speaker 1: in here, But the direction looks up from here to
Speaker 1: the end of the year. The fundamentals are good and
Speaker 1: we are about where we should be based on all
Speaker 1: that happened in and since then, both positive and negative
Speaker 1: here until the end of the year. What about after that, John,
Speaker 1: and when people are talking about how it gets a
Speaker 1: little bit trickier with potentially FED rate hikes, with potentially
Speaker 1: harder comps year over year. I think, first off least
Speaker 1: I think the market wanted to see the FED taper.
Speaker 1: I think the market feels and at least it's got
Speaker 1: a six month period uh next year where the Fed
Speaker 1: will be tapering UH, and then after that they'll be
Speaker 1: worry about where do they take the FED funds rate?
Speaker 1: But the reality is what we look at it from
Speaker 1: our perspective. As you know, I've been in this business
Speaker 1: for thirty eight years. The FED is a very different
Speaker 1: FED than it was under Arthur Burns or under a Greenspan.
Speaker 1: This is the Bernankee legacy FED. Highly transparent, UH, it
Speaker 1: is highie communicative. It telegraphs moves and the market denies
Speaker 1: what the FED sees. Our market players do with their
Speaker 1: own expense. Uh, you know, the FED is your friend
Speaker 1: during this period. It's been the friend of Main Street
Speaker 1: and the Wall Street. If you look at it, even
Speaker 1: with friends like the Fed, can we really do better
Speaker 1: than a twenty nine percent gain year to date? John,
Speaker 1: and the S and P. I mean, that's up there
Speaker 1: with the greatest gains of all time. Well, you know
Speaker 1: about the everybody for against the S and P uh
Speaker 1: six hundred small cap higher qualities small caps in the
Speaker 1: RUSTLL two thousand has actually been beating the S and
Speaker 1: P five hundred this year. We'd have to think, you know,
Speaker 1: this is all about the the the better comps that
Speaker 1: we've had for earning season. But the better comps the
Speaker 1: reality of it, even though you know, it's a softer
Speaker 1: hurdle or a lower hurdle than we've ever seen for
Speaker 1: for earnings in that sense, on a comparative basis, Uh,
Speaker 1: the things are getting better and considering the depth of
Speaker 1: the crisis, this is remarkable, really is when we look
Speaker 1: at John, the people talking about a re acceleration in
Speaker 1: the economy. Its a year end into new year. I'm
Speaker 1: hearing people talking about the return of the reopening trade
Speaker 1: back into the small caps etcetera. What if ice he
Speaker 1: given it to clients at a moment on that, John,
Speaker 1: we've been saying for actually for a few years now.
Speaker 1: We're pretty much either near or actually market cap agnostic.
Speaker 1: So we spread the chips across the table. When it
Speaker 1: comes to large caps, small cap mid caps. Mid caps
Speaker 1: are terrific, we believe, and we also right now are
Speaker 1: barbelled growth and value. Garber growth growth at a relatively
Speaker 1: reasonable price. In growth and value, we want growthier value.
Speaker 1: You can still get yield that you know, it's better
Speaker 1: than the tenure with the potential for a capital appreciation.
Speaker 1: John always going to cash out with you, sir, John, stuff,
Speaker 1: it's there a bull from Oppenheimer Asset Management. Thank you, sir,
Speaker 1: thank you very much joining us now, Whendy Schiller, the
Speaker 1: Brown University. When do you want to start with? This
Speaker 1: is something that's come up again and again, time after time,
Speaker 1: year after year. The Republicans are very diverse as a party,
Speaker 1: just like the Democratic Party. Said at a Holly is
Speaker 1: nothing like said at a Romney. Yet when they go
Speaker 1: out and speak, they're all on message. And then when
Speaker 1: they need to pivot, they all do and they get
Speaker 1: back on the very same message. The word echo is
Speaker 1: phenomenal white of the Democrats when they struggle doing that,
Speaker 1: why can't they take the win over the weekend and
Speaker 1: run with it. Well, there's there's two reasons. One is
Speaker 1: the Democratic Party regionally, geographically is more diverse. They represent
Speaker 1: a more diverse set of constituents from you know, suburban
Speaker 1: women for example, who have supported the Democratic Party recently,
Speaker 1: to working class people all over the country, urban, some rural.
Speaker 1: Uh so there. It's just really hard when you're representing
Speaker 1: you know, a lot of different kinds of people with views.
Speaker 1: So that's the one problem. And the second problem is
Speaker 1: they believe in government and they want to do a
Speaker 1: lot of things in government. They want the federal government
Speaker 1: to do a lot of things, and that has a
Speaker 1: lot of costs and benefits to different people, and it
Speaker 1: takes a while to explain. And the you know, the
Speaker 1: advantage of the of the Republicans is they believe in limited, small,
Speaker 1: federal government. They don't want to do many things, so
Speaker 1: they can obstruct and block and it's a much simpler message.
Speaker 1: Who's getting the independent vote right now, Wendy, I think
Speaker 1: there's no question that the independents are feeling much more
Speaker 1: comfortable with the pub lookings now. That's probably because Trump
Speaker 1: is out and about that. They don't see Trump as
Speaker 1: a looming factor and getting back into power, for example,
Speaker 1: So they're assessing Republican candidates on their own merits rather
Speaker 1: than being associated with Trump. That's something the Democrats were
Speaker 1: counting on. I think they have to revamp their strategy.
Speaker 1: So you look at New Jersey, obviously, a pretty deeply
Speaker 1: blue state took that Republican candidate quite seriously. That was
Speaker 1: a narrow victory for the government of New Jersey and
Speaker 1: that really shook up the Democrats. Virginia didn't shake them
Speaker 1: up quite as much. But an incumbent, theoretically popular government
Speaker 1: governor who's a Democrat who barely hangs on. That tells liberals, moderates,
Speaker 1: all the Democrats that they have got to get their
Speaker 1: act together and revamp because they're all in trouble with
Speaker 1: that very group independence and suburban Wendy, what's the analog today,
Speaker 1: Given the fact that we're seeing inflation as a major
Speaker 1: voting issue for the first time in decades, how much
Speaker 1: can we really change the equation heading into mid terms?
Speaker 1: If gas prices stay where they are, well This isn't
Speaker 1: really important that even you know, a local bakery from example,
Speaker 1: I go to, you know, they raise their bread prices
Speaker 1: by seventy five cents. They have a fairly low to
Speaker 1: middle income constituency for that bakery, but they were hit
Speaker 1: they had to raise their prices. So it's getting really
Speaker 1: down to the ground, right, you know, grassroots people are
Speaker 1: feeling inflation. It's gas prices, but it's everywhere at every level.
Speaker 1: And that's what the Democrats haven't quite figured out how
Speaker 1: to fix. It's their constituency that's getting hurt like everybody else.
Speaker 1: So and people are pretty cynical and conspiracy oriented by
Speaker 1: gas prices. You know, they always think they go up automatically.
Speaker 1: They don't really understand why they go up. And the
Speaker 1: easiest person to blame is the income of government. One
Speaker 1: of the other concerns is taxes, right, rising taxes, Wendy.
Speaker 1: And when you look at for example, to build back
Speaker 1: better bill, it's only one point seven five trillion. But
Speaker 1: actually if the Democrats get the majority of them get
Speaker 1: what they want, it's gonna balloon to more of like
Speaker 1: a four trillion dollar number, and that has to be
Speaker 1: paid for. How do they sell these taxing crazes of
Speaker 1: the American public. But this is a great question. First
Speaker 1: of all, it's a ten year bill, five or ten
Speaker 1: year bill of infrastructures five years. This is ten years,
Speaker 1: so it's not portullion tomorrow. That's the first mistake the
Speaker 1: Democrats have made, right, you know, ballooning this number as
Speaker 1: if we're spending it all in one year. But the
Speaker 1: tax situation is interesting. They may raise taxes on people
Speaker 1: who make, you know, join a couple four thousand dollars
Speaker 1: or more. That's sellable sort of if you include a
Speaker 1: rise in the amount of money you can deduct to
Speaker 1: the state and local tax deduction that Trump took away
Speaker 1: from mostly well off blue areas in the country, the
Speaker 1: Democrats are going to put back, and that actually hits
Speaker 1: people as suburban voters right where they need a break.
Speaker 1: So they're gonna offset I think some of these, particularly
Speaker 1: the highest tax rate with some of these greater deductions.
Speaker 1: So I think that's the messaging they're gonna try to
Speaker 1: engage in to not lose those voters that went with
Speaker 1: them in. You just want one more thing to come
Speaker 1: away from this conversation with you on what do you
Speaker 1: think number one helps to kill to getting the next
Speaker 1: ill done is what does it come down to? It
Speaker 1: comes down to whether there's a perceived need for all
Speaker 1: the programs they want to engage and they want to pass.
Speaker 1: You know, do people really want this? We saw this
Speaker 1: with Obamacare, a bombcaster not to be quite successful. But
Speaker 1: when it was passed in two thousand, voters didn't know
Speaker 1: what it was and they didn't know they needed it,
Speaker 1: and they rejected it really in the elections in and
Speaker 1: they gave the Republicans the House back. That's the big
Speaker 1: liability for the Democrats going in with this really big bill.
Speaker 1: Do people know it, understand it, and do they think
Speaker 1: they need it? And if they don't, Republicans are gonna
Speaker 1: have a very good November Monday. Thank you. I so
Speaker 1: always looking forward to catching up soon. Wendy showed that
Speaker 1: a brand university. This is the Bloomberg Surveillance Podcast. Thanks
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