Speaker 1: Welcome to the Bloomberg's Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jay Lee. 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. Can
Speaker 1: I tell you the Sundgrights have people alongside us Andrew Sheets,
Speaker 1: one of them just dropped by from malc and Stanley,
Speaker 1: the chief cross assets strategist. Andrew, It's gonna say, Mr
Speaker 1: Schats when camp by this equity market, Well, thanks, It's
Speaker 1: nice to be with you. It's nice to be with
Speaker 1: you in person. Look, this is an equity market that
Speaker 1: I think, over the next month is still dealing with
Speaker 1: a real crucible of challenges. We are into the thick
Speaker 1: of what we think is going to be a disappointing
Speaker 1: earnings revision lower. That's a key view of my colleague
Speaker 1: Michael Wilson in the US, by colleagu Graham Secker. Here
Speaker 1: in Europe, I think this is still a period where
Speaker 1: it's going to be very difficult for the Fed to
Speaker 1: sound anything other than hawkish given these upside surprises to inflation.
Speaker 1: And then on the geopolitical front, right, it's too soon
Speaker 1: to get anything real developments in terms of changes in
Speaker 1: China policy, and still a lot of uncertainty into European
Speaker 1: energy policy heading into winter. So we think it's still
Speaker 1: too soon, especially with rates rising, especially in the front end,
Speaker 1: and think investors should stay cautious, and we think that
Speaker 1: cash will outperform a lot of assets. There is at
Speaker 1: Brown University a fabulous tradition of differential geometry. Cornellen Brown
Speaker 1: on the high ground on that, and it all comes
Speaker 1: down to calculus. Are you frightened by the rates of
Speaker 1: change right now? And the second derivative as well well,
Speaker 1: I think the biggest change that I think the market
Speaker 1: is going to have to adjust to is you investors
Speaker 1: over the last twelve years, which is a quite long
Speaker 1: period of time, have known mostly rates of zero or
Speaker 1: less than zero on cash, and so Tell said that's
Speaker 1: out on Twitter yesterday he said, it's like physics without
Speaker 1: are we going to use to gravity again? I think
Speaker 1: we're getting used to gravity. I think we're seeing a
Speaker 1: real large adjustment. And so if you think about the
Speaker 1: SMP five having an earnings yield of about five point
Speaker 1: nine percent, and you know one to five year corporate
Speaker 1: bonds having a yield of four point nine percent, that
Speaker 1: is an enormous convergence in ass cross asset yields and
Speaker 1: so and that's a shift we haven't seen for twelve years.
Speaker 1: So I think that's an adjustment that is truly different
Speaker 1: and that the market's going to have to, you know,
Speaker 1: make some make some adjustments. For there's a difference between
Speaker 1: more downside and risk assets and something breaking and something
Speaker 1: that becomes a systemic issue, that is a fissure, and
Speaker 1: that is rapid when does something break As we take
Speaker 1: a look at that pace of change, particularly with the
Speaker 1: front end rate, Yes, at least I think that's such
Speaker 1: a great point because I think ironically here the fact
Speaker 1: that stuff is good not breaking, means that the FED
Speaker 1: can and likely will do more. You know, I think
Speaker 1: we see banks with very healthy balance sheets. We see
Speaker 1: consumers and corporates with healthy balance sheets. The low rates
Speaker 1: of last two years allowed a lot of Americans to
Speaker 1: refinance into low third year fixed rate mortgages, which means
Speaker 1: their largest liability, their highest cost, is almost immune from
Speaker 1: the rate hikes, and so that strength I think means
Speaker 1: that the market is sending the Fed signals you can
Speaker 1: keep going. We haven't yet hit that point where its disorderly.
Speaker 1: So what is that point? I mean, can they get
Speaker 1: up to the Deutsche Bank call of four point nine
Speaker 1: percent on a FED funds rate and still have things
Speaker 1: be sanguine enough to give them some confidence that they
Speaker 1: can stay there for a while. Well, so we don't
Speaker 1: think rates will get that high, but we do think
Speaker 1: that the skew is that they will continue to press
Speaker 1: higher and go for longer. And again, I think the
Speaker 1: Fed is is having a real challenge right in in
Speaker 1: hockey terms, they're trying to skate to the puck and
Speaker 1: and we don't know exactly what the delay between you know,
Speaker 1: a rate hike today and impact and the economy is
Speaker 1: going to be. And so this is a real, real
Speaker 1: uncertain I think the market was hopeful that we would
Speaker 1: get some relief that inflation would start heading in the
Speaker 1: right direction and that would buy the Fed some time.
Speaker 1: But I think it's quite clear with that sticky core inflation,
Speaker 1: they just cannot pivot yet. And then the skew is
Speaker 1: excu st Gretzky is that what that was like that
Speaker 1: I'm going to tear up here, get the spelling right
Speaker 1: on that banner. I mean, I saw Gretzky actually do
Speaker 1: this is an absolutely where he does. He was playing
Speaker 1: the Buffalo sabers in Pero, and Gretzky did exactly what
Speaker 1: you said, Jerol, Jerol Powell is no way in Gretzky,
Speaker 1: is he? Well. I do think what you're dealing with is,
Speaker 1: if you ask a lot of economists, right, there's not
Speaker 1: an agreement on what that delay between a rate hike
Speaker 1: today is on the economy. And then I think there's
Speaker 1: still very divergent camps theoretically, right, I think there's a
Speaker 1: camp and we heard this last year the Fed can
Speaker 1: never hike very much because there's so much debt in
Speaker 1: the economy. They'll never hike more than one or two
Speaker 1: percent versus well, actually, maybe companies and households have termed
Speaker 1: out so much debt at super low rates that the
Speaker 1: sensitivity is lower. And I think this is a real
Speaker 1: question that you kind of don't really know until it
Speaker 1: makes contact with the economy. So Andrew became out the
Speaker 1: last crisis, and I oh nine, and you all remember
Speaker 1: the projections for high yields every single year high yields
Speaker 1: high yield, it's never materialized year it's went lower. Do
Speaker 1: you sense it's that kind of story in reverse, that
Speaker 1: we haven't quite fully capitulated on this view of a
Speaker 1: low interest rate world, that we just seem to think
Speaker 1: that this is an anomaly and we're going back to
Speaker 1: where we were before. I think there's still some of that,
Speaker 1: you know. And I think that the real rate is
Speaker 1: a very interesting debate where real rates are still quite
Speaker 1: low in the US, in the Eurozone, in the UK,
Speaker 1: they have not yet gone back to kind of just
Speaker 1: the PREGFC level, let alone kind of the higher levels
Speaker 1: we saw in the nineties. So I think there's still
Speaker 1: room for the market to readjust especially as you see
Speaker 1: a healthy household, healthy corporate balance sheets, more capital expenditure
Speaker 1: that again could point to kind of hire somewhat higher
Speaker 1: neutral neutral levels of interest. I put out that Deutsche
Speaker 1: Bank cool from Matt Lizette five fed funds next year.
Speaker 1: The amount of pushback I got on that cool just
Speaker 1: because people wonder whether we can actually live least when
Speaker 1: you've spoken to this a few times in a five
Speaker 1: percent interest rate world anymore. Yeah, And I think that
Speaker 1: Andrew's Jesus point saying that basically people have turned it
Speaker 1: out and the fact that they are coping with it
Speaker 1: gives this uncertainty of maybe we have gotten less rate
Speaker 1: sensitive and allows the FED to go further is really
Speaker 1: underpinning the reality of what people are pressing in. You
Speaker 1: know how you try and get me to explain football
Speaker 1: to people who don't know? Can you explain? Can you
Speaker 1: explain Gretzky to every world? This is where you think
Speaker 1: the park is going to be. Everybody, I mean everybody
Speaker 1: knows I know less about English football ice hockey? Are
Speaker 1: you dazzling me? How do you know that Gretzky skated
Speaker 1: to where the park wasn't because his daughter married a
Speaker 1: very very good golfer. So a sort of reverse engineered
Speaker 1: it from golf through his wife and back into ice hockey.
Speaker 1: That's how I did it. Does that work for you?
Speaker 1: That word? Does that work for you? So sort of
Speaker 1: reversed engineered it from golf to ice hockey and then Tom.
Speaker 1: You know it takes a lot of work. Andrew sheets
Speaker 1: and more? Can Stanley Andrew think it's good to see it? Well,
Speaker 1: we get on for the next two hours. We will
Speaker 1: get along with Jane Foley, I can guarantee you that
Speaker 1: kind of effect strategy at Rubber Bank. Jane. The significance
Speaker 1: of a one thirteen on sterling, can we start there, Well,
Speaker 1: it's very significant. As Leasta talked about Nino and Sterling
Speaker 1: being fuced out of the e RM, and you know,
Speaker 1: thinking about that story this morning, the first thing that
Speaker 1: came to my mind was the current account position of
Speaker 1: the UK, because if you've got a current account deficit,
Speaker 1: and don't forget the UK deficit as in the center
Speaker 1: of GDP is right now at record levels. It's much
Speaker 1: worse than it was. But if you have a deficit,
Speaker 1: really you're you're exposing your country to more of the
Speaker 1: whims of of of non domestic investors. And if they
Speaker 1: do not like the fundamentals that they see, your currency
Speaker 1: is going to adjust lower now right now. I think
Speaker 1: that's something which has been happening to the pound. You know,
Speaker 1: for a while. The market doesn't like the growth story,
Speaker 1: doesn't like the Brexit story, and and it doesn't like
Speaker 1: that the fact that the tax cuts that are coming
Speaker 1: from the new Prime Minister could really push the public finance.
Speaker 1: Isn't it to numbers that people just don't like, so
Speaker 1: Sterling is vulnerable and that current account position really exposes
Speaker 1: the UK. Now, of course a lot of the story
Speaker 1: is Donna strength, but there was certainly Sterling weakness in here.
Speaker 1: And one thing that we did see earlier in the
Speaker 1: years interest rate pikes couldn't it couldn't pull the band
Speaker 1: out of the whole. Less point to Lisa's point, does
Speaker 1: it will a seventy five basis points move offer that
Speaker 1: much protection? Some maybe, but not all. Chris Gerles the too,
Speaker 1: with a brilliant short essay pulling the United Kingdom back
Speaker 1: to I believe nineteen seventy four and Mr Barber the
Speaker 1: complete failed plan. Then is this Chancellor of the Exchequer
Speaker 1: going down in flames with a growth model that's undoable? Well,
Speaker 1: certainly the market is extremely skeptical. I mean he's he's
Speaker 1: been talking about a growth target for the UK to
Speaker 1: two and a half percent. Nobody really expects that can happen.
Speaker 1: So you're talking about tax cuts which will give it
Speaker 1: a bit of a boost, But actually what investors will
Speaker 1: to see our measures that I'm going to prove you know,
Speaker 1: productivity and growth and and and potential app but not
Speaker 1: just a quick from text cuts. So investors a skeptical
Speaker 1: and that is what the government is facing, and that
Speaker 1: is what the government today appears to be ignoring. It's
Speaker 1: a sterling story, it's a Chinese u N story. There
Speaker 1: are specific stories about weakness. But on the other side,
Speaker 1: it's very much a dollar story, especially as we're pricing
Speaker 1: in such high potential FED funds rates next year. What
Speaker 1: is your sense of when things break of, when at
Speaker 1: the stronger dollar creates weakness that becomes hard for all
Speaker 1: of these other central banks and these economies to get
Speaker 1: out from under. I think you could probably already argue
Speaker 1: that the the the the strength of the dollar is
Speaker 1: already pushing half of the economy, half the world economy
Speaker 1: under the bus. You know, it is very, very difficult,
Speaker 1: and I think we see this already for a long
Speaker 1: time in emerging market so many interstrate hikes there to
Speaker 1: try and protect their currencies. Look at just care a well,
Speaker 1: you see it's I don't think that's a particularly logical.
Speaker 1: But because if you have a central bank putting up
Speaker 1: interest rates, you know you've got to say, well, a
Speaker 1: strong dollar is a byproduct that policy, So why then
Speaker 1: come in On the other hand, and say, well, we're
Speaker 1: going to weaken this country. It's not logical. So maybe
Speaker 1: we were talking about some sort of plaza thing maybe
Speaker 1: next year when the FED is confident that it has
Speaker 1: got inflation under control. But a negative feedback loop that
Speaker 1: you can think of, from the rest of the world
Speaker 1: into the US economy for the FED has to respond to. Well,
Speaker 1: I mean, I don't know whether the FED has to
Speaker 1: respond to it, because after all that the FEDS in
Speaker 1: a primary object is domestic inflation and domestic employment. Should
Speaker 1: it address it? You know, I don't know. You know,
Speaker 1: that's another question. But certainly there is a feedback loop
Speaker 1: into the US dollar because as the rest of the
Speaker 1: world weakens, is emerging markets weaken, people tend to buy
Speaker 1: the dollar. And so if you're if you're buying the
Speaker 1: dollar because the strong dollar is worsening the environment for
Speaker 1: the rest of the world. Is you've got this, You've
Speaker 1: got this absolutely, So you know what is going to
Speaker 1: break it? I think it's it's only going to break maybe,
Speaker 1: you know next year when when the FED things, you
Speaker 1: know what, we can come down and this we we've
Speaker 1: got to handle on medium term inflation. Expect Until then,
Speaker 1: let's talk about some levels and squeeze this in cable
Speaker 1: stirring against the US dollar one thirteen. You're a dollar
Speaker 1: in and around parity dollar China through seven. Do you
Speaker 1: think there's some big moves from here or is this
Speaker 1: kind of it? I don't think it's it yet. And
Speaker 1: we're thinking on your a dollar. I mean, we've got
Speaker 1: a horrible winter to come for for Europe, you know,
Speaker 1: energy price crisis, you know, rationing? Is that all priced
Speaker 1: in up? I think perhaps not. Are we going an
Speaker 1: enter turn your election? You know, will the far right
Speaker 1: get in? You know that's that's perhaps you know the
Speaker 1: next potential trigger for the for the euro in just
Speaker 1: a few weeks time on cable. Our target now is
Speaker 1: one oh nine. People are out there talking about parity
Speaker 1: and we dismiss that, you know, no, I don't think
Speaker 1: we can dismiss it's not our target. But you know
Speaker 1: it depends very much on the US dollar. So you know,
Speaker 1: these are are still nasty numbers to come and and
Speaker 1: right now, you know, I think the dollar strength will
Speaker 1: will sustain until you can honestly answer the question, we'll
Speaker 1: what else are you going to buy? For the best
Speaker 1: part of ten years, I think it's fantasize. The phone
Speaker 1: exchange was kind of boring, and it's not boring anymore,
Speaker 1: no at so Jank writes a catch shop, James Rabbit
Speaker 1: Bank right now with your most important brief of the
Speaker 1: day and fixed income. Sobrato Rijapa joins us head of
Speaker 1: the United States rate strategy at the French Bank Society General.
Speaker 1: Their history of math derivative dynamics is world class, Sobrata,
Speaker 1: thank you for joining us. When you look at the
Speaker 1: derivative mathematics of what we've seen in the last two
Speaker 1: days or even the last two weeks, what is the
Speaker 1: telling story about the rates of change in fixed income?
Speaker 1: It's stunning. I mean we were looking at if you
Speaker 1: look at a chart I think John was showing the
Speaker 1: chart earlier the two years, we've gone somewhere between twenty
Speaker 1: basis points last year this time to close to four
Speaker 1: percent right now. So the rate of change has been
Speaker 1: just absolutely stunning. You know. To me, what I'm looking
Speaker 1: at is the message that you're getting from the barn market,
Speaker 1: which is, you know, to take a page from you know,
Speaker 1: I think Facebook's you know, um motto, it's like move
Speaker 1: fast and break things. That's kind of what the FED
Speaker 1: is it's about to do, which is, if they do
Speaker 1: go along the path that the market has laid out,
Speaker 1: they're going to have to break things ultimately, and that's
Speaker 1: what the curve is really suggesting to us. I got
Speaker 1: eight ways to go here, I'm going to go pro
Speaker 1: on your right now, Sabadre. And that's of all the
Speaker 1: different spreads, there's that one across all the yield curve.
Speaker 1: The two years you go to three months, but let's
Speaker 1: take the two years the former benchmark thirty year bond.
Speaker 1: It isn't a place we literally haven't seen almost in
Speaker 1: a lifetime two thousand. What is the importance of the
Speaker 1: level of inversion of the two thirty spread? Absolutely the
Speaker 1: five thirties a two thirty spread is Juliet levels we
Speaker 1: haven't seen in two decades. So so to me, what
Speaker 1: the message there is at the market ultimately, if you
Speaker 1: look at ten years and beyond, is looking at the
Speaker 1: potential for a meaningful slow down and growth and you know,
Speaker 1: perhaps a hard landing, especially if the FED high strates
Speaker 1: as aggressively as what's placed in the market. You're looking
Speaker 1: at the term FED fund strate right now around four
Speaker 1: and a half percent I mean that level was at
Speaker 1: four percent or below just before the CPI print this week.
Speaker 1: So the move and the repricing higher of the term
Speaker 1: I fed fund strates quite dramatic in a very short
Speaker 1: amount of time. So that would mean that there's a potential,
Speaker 1: much higher potential for hard landing at LISA. I'm going
Speaker 1: to tear up here what a control room we have?
Speaker 1: Quantas in the crew they throw up a two thirty
Speaker 1: spread chart. No one else in financial media does you
Speaker 1: stop referring to our Australia to see there on radio.
Speaker 1: It's just it's just active, definitely know he rejected be
Speaker 1: a little bit ago. Let's get back to the bottom market.
Speaker 1: I think that's a safer place for us to sit
Speaker 1: on maybe, although maybe not. The question is where do
Speaker 1: we stop right and where do we stop not only
Speaker 1: with twos but also with tens, given that people are
Speaker 1: wondering are we going to break something? And what does
Speaker 1: the post breakage look like? Are we still looking at
Speaker 1: a higher inflation rate, at a higher uh real interest
Speaker 1: rate in an era where we're not talking about zero
Speaker 1: yields anymore? Yeah? I know I think that really at
Speaker 1: this you know, next meeting, given how dramatically yields have risen.
Speaker 1: I'd be looking to hear from share Powell on what
Speaker 1: they think that policy path is going to be. And
Speaker 1: in my view, at least, I feel like the market
Speaker 1: has gotten a little bit ahead of itself and and
Speaker 1: Powell might have to thread the needle and try to
Speaker 1: sort of talk the market away from the ledge, if
Speaker 1: you will, Because yes, they do want to frontal rate heights.
Speaker 1: Yes they do want to get to four percent and
Speaker 1: a rush, but I think that they're going to take
Speaker 1: a much more measured approach beyond four percent to make
Speaker 1: sure that they're not breaking things as they're raising. Right,
Speaker 1: So it's gonna be balancing act between what's happening on
Speaker 1: the employment front. You know you you spoke about FedEx earlier.
Speaker 1: They'll be looking at a variety of metrics see what
Speaker 1: the impact of high interest rates are on the broader economy.
Speaker 1: They know that Monterrey policy acts with lags, so they're
Speaker 1: gonna have to figure out what that lag is and
Speaker 1: how to act now so that the Montrey policy transmission
Speaker 1: is effective and doesn't break things over the longer run. Sabad,
Speaker 1: does that mean the area they're buying too? Your bonds,
Speaker 1: buying two your bonds, um, you know, not necessarily. I mean,
Speaker 1: I think the FED is not going to be you know,
Speaker 1: buying bonds anytime soon. I'm saying, sorry, excuse me. I'm
Speaker 1: just wondering whether it's a good opportunity, whether we basically
Speaker 1: have seen a peak, if you're gonna expect a FED
Speaker 1: to push back and give the market a little bit
Speaker 1: of ashore as that perhaps they've got ahead of themselves.
Speaker 1: Does this mean there's an opportunity and short term death, Uh,
Speaker 1: there might be. The question is whether you want to
Speaker 1: enter to that trade now, perhaps Legan, if you start
Speaker 1: getting you know, closer to four percent and twoes, I mean,
Speaker 1: you'll start looking very, very attractive. I think you're going
Speaker 1: to see perhaps a little bit of a tactical steepening
Speaker 1: between say the three year and the tenure part of
Speaker 1: the curve. I'm still afraid to ted to year part
Speaker 1: of the curve because it's it's peggy fat expectations that
Speaker 1: has the potential to move higher. But I would say
Speaker 1: tactically position for a three year ten year steepening makes
Speaker 1: sense to me, at least over the short term, so
Speaker 1: broad it's away from your Remit. When I'm going there,
Speaker 1: it's a Friday, no one's listening or watching. What do
Speaker 1: you do with the sixty forty allocations and bonds? I mean,
Speaker 1: come on, in this world where these rates have changed.
Speaker 1: I look at the Bloomberg Total Return Index and sixty
Speaker 1: forty is getting absolutely crushed. Absolutely. I think that you know,
Speaker 1: all assets are very collated. Right now, you're seeing you know,
Speaker 1: bond sell off, equity sell off, the daughter continue to tighten.
Speaker 1: At some point when you've seen a significant move and
Speaker 1: risky assets, you're the best place you want to be
Speaker 1: is going to be in bonds because yields are looking very,
Speaker 1: very attractive across the curve. You know, even in the
Speaker 1: long end, even though yields haven't risen as much as
Speaker 1: they've done in the very front end, you know, you
Speaker 1: still see pretty consistent demand from mass and liability managers
Speaker 1: and pension funds for the very long end. So I
Speaker 1: think that that's sort of trade is here to stay,
Speaker 1: and that's going to keep long and yields you know
Speaker 1: somewhat you know, pegged, and you know it makes sense
Speaker 1: because if you're looking at a much longer term horizon,
Speaker 1: you probably want to be long bonds, especially at a
Speaker 1: time when equities are performing very poorly. So Patra, I'm
Speaker 1: gonna leave it there, thank you, So Padra Jaffa there
Speaker 1: of sock gem on the like market. Jose Antonio Ocounvo
Speaker 1: joins us now Minister of Finance and Public Credit for
Speaker 1: his Columbia or thrilled that he could join us this morning.
Speaker 1: There's so much to talk about, minister, but I have
Speaker 1: to go larger. After reach back to stan Fisher in
Speaker 1: do you, through the prism of Colombia economics and foreign exchange,
Speaker 1: see anything like an international upset that we witnessed in
Speaker 1: and frankly before that in well, thank you, I'm delighted
Speaker 1: to be with you. Let me say on that that
Speaker 1: I don't think the same kind of crisis. It was
Speaker 1: very much an emerging market crisis. This is a global crisis, uh,
Speaker 1: both the slowdown, particularly the inflation on the increasing interest rate,
Speaker 1: which is affecting all very heavily, very importantly, Sir, I
Speaker 1: look at the caps, the limitation of price increase. We
Speaker 1: see it on India and their channel just with Rice.
Speaker 1: Here in the United Kingdom we see it, and indeed
Speaker 1: Colombia and others talk about it given a more global economy,
Speaker 1: the speed of information, the transfer of finance can caps
Speaker 1: be effective in two thousand twenty three. But let me
Speaker 1: say that the major problem that we're getting from the
Speaker 1: global economy is the inflation, but particularly defect it has
Speaker 1: had on interest rates. So both domestic interest rates in
Speaker 1: Colombia as well as the interest rate in in double
Speaker 1: capital markets are very high, and that the major specifically effect.
Speaker 1: Of course, inflation is hard to fight due to the
Speaker 1: international dimensions of inflation. So for a specific country, it
Speaker 1: is very tough to to fight that inflation, which you
Speaker 1: can say it's a supply inflation, right, and the man inflation.
Speaker 1: Central banks are good at managing the man inflation. But
Speaker 1: let's so in imagining supply inflation. There's a great concern
Speaker 1: that when the FED hikes rates by as much as
Speaker 1: the market is currently pricing administer that it will create
Speaker 1: some real problems for the rest of the world. And
Speaker 1: I wonder from your Columbia, whether you're taking a look
Speaker 1: at the dollar market and saying we cannot raise money
Speaker 1: in that right now at affordable rates? Is that really
Speaker 1: the situation as you look at your financing needs looking out, Yes,
Speaker 1: private capital markets are very expensive for emerging economies today,
Speaker 1: including the Fort Columbia. So for the time being, our
Speaker 1: international financing is coming from multilatal development banks and official institutions.
Speaker 1: But so far we have not gone this year into
Speaker 1: the private capital markets. We hope things that normaliza, I
Speaker 1: think in the near future, and we'll go back to
Speaker 1: the market. We're expecting to raise about one half billion
Speaker 1: dollars in the private capital markets next year. What does
Speaker 1: it mean for things to stabilize, Minister? Does it mean
Speaker 1: that the dollar stabilizes. Does it mean that the Fed
Speaker 1: star ups raising rates. Does it mean that inflation stops accelerating.
Speaker 1: But it really means that the the long term interest
Speaker 1: rates of the US start to fall. They were falling
Speaker 1: actually before the the recent announcement of the fact that
Speaker 1: they would likely increase interest rates again in the next meeting,
Speaker 1: But before that they were falling, and and also the
Speaker 1: risk markets for emerging markets were also falling. But the
Speaker 1: situation has changed again, but we helped the At one point,
Speaker 1: when the inflation stabilizes in the United States, UH, the
Speaker 1: interest rates of the US effectively long term interest rate,
Speaker 1: which is irrelevant for for US to start to fall.
Speaker 1: Dr Campo. You have been one of the great voices
Speaker 1: of Columbia through time, and the stereotype in America is
Speaker 1: of true civil unrest. In Colombia, you've moved beyond that
Speaker 1: with a new government. In your participation as well, can
Speaker 1: you describe the stability in Colombia and what it means
Speaker 1: for your tourism. So many people have go on to
Speaker 1: Cartoner and the rest of it. Describe the tourism future
Speaker 1: for Colombia after decades of real unrest. Well, let me
Speaker 1: say that the peace process that took place UH five
Speaker 1: years ago has been fairly successful in in generating UH
Speaker 1: peace in several parts of the country. The current government
Speaker 1: is involved in UH in other negotiations that we hope
Speaker 1: would be successful and and let's say they returned to
Speaker 1: peace in many parts of the country. Has generated UH
Speaker 1: effectively what you say, UH actually a boom of tourism.
Speaker 1: We hope that it will come back when the what
Speaker 1: economy is fully recovers, because the tourism in the world
Speaker 1: is still a bit depressed. Let's say UH oh tho
Speaker 1: it's recovering, and in Columbia, WILL would hope to have
Speaker 1: a boom tourism and then step. We appreciate you time today.
Speaker 1: It's lucky to catch up with you. We're lucky to
Speaker 1: catch up with you. How's the antonio, I'll campo that
Speaker 1: general equilibrium theory and in the middle of all that
Speaker 1: is stochastic. And what that means is things are moving rapidly.
Speaker 1: And Seth Carpenter's chief global economis at Morgan Stanley and
Speaker 1: those decidedly it is a stochastic two thousand twenty two. Seth,
Speaker 1: what is the process or path to get to calmer times,
Speaker 1: a calmer economy and calmer markets. I think that prospect
Speaker 1: will require a fair amount of luck. I think the
Speaker 1: challenge here, especially you started off talking about the Fed.
Speaker 1: They are feeling their way to how far they have
Speaker 1: to raise the federal funds. Right. They want to be restrictive,
Speaker 1: They want to get demand to slow down a lot
Speaker 1: so that that underlying inflationary pressure starts to EBB. But
Speaker 1: what they don't want to do is intentionally cause a
Speaker 1: recession and one and getting to that point I think
Speaker 1: will require a bit of luck. How do you respond
Speaker 1: to the idea that the inflation impulse has a certain
Speaker 1: effect on the public, but the jobless impulse has a
Speaker 1: much greater effect. Oh, I think they're I think they're
Speaker 1: both very very important. Clearly for people who have lost
Speaker 1: their jobs, that's that's just very very difficult. And crimps
Speaker 1: they're spending a great deal. We don't have in our
Speaker 1: forecast any meaningful rise in in in layoffs. In fact,
Speaker 1: if you look at the last jobs report, that was
Speaker 1: super strong and over three hundred thousands of so far,
Speaker 1: that's been okay. Uh. The inflationary side of things, though,
Speaker 1: very much hits the pocketbooks of everyday people. The rise
Speaker 1: in gas prices that we saw a few months ago
Speaker 1: was painful. That's starting to come off now. Think the
Speaker 1: challenge for the FED then will be if gas prices
Speaker 1: come down to people go back to spending more or
Speaker 1: or have they been hit hard enough in the wall
Speaker 1: in the pocketbook it seth We spend the whole of
Speaker 1: summer trying to work out what the threshold would be
Speaker 1: for a pivot, a pause, maybe even right cuts next year.
Speaker 1: You've got right cuts out in. I just wonder what
Speaker 1: is it about where you think this threshold is going
Speaker 1: to be breached and the FETE starts cutting. So I
Speaker 1: will I will just own up front the uncertainty here
Speaker 1: is huge um of what we've been for many many years.
Speaker 1: Lower for longer was what central banks are doing. Now
Speaker 1: it is higher for longer. And again I think what
Speaker 1: the FED is trying to do is feel their way
Speaker 1: to where they can rain in the economy without actually
Speaker 1: causing an outright recession. And that's the reason why they
Speaker 1: go to what they call restrictive territory, but then not
Speaker 1: so much that things actually crashed, and then hang out
Speaker 1: there as the economy slows down. So that's what we
Speaker 1: have as our baseline, is getting some traction and then
Speaker 1: they just wait for things to slow down. John, I
Speaker 1: just want to point out equity futures just moved to
Speaker 1: new lows for the morning. And that's the story so far, Seth.
Speaker 1: And the story many people are grappling with for participants
Speaker 1: in markets at the moment is whether these are sufficiently
Speaker 1: type financial conditions for this FED to achieve its objective.
Speaker 1: Do you think they are right now sufficiently tight? Very
Speaker 1: hard to say. I will say one of the most
Speaker 1: typically sensitive sectors is housing, and we have seen a
Speaker 1: very strong roll over there in housing. On the other hand,
Speaker 1: consumer durable good spending is actually still holding up to
Speaker 1: some degree, so it's not clear that things have actually
Speaker 1: been yet. That said, you were talking about equities. You know,
Speaker 1: my colleague Mike Wilson always points out that this probably
Speaker 1: needs to be a lower and earnings projections, and I
Speaker 1: think that makes sense. If the economy is going to
Speaker 1: slow down enough to get inflationary pressures under control, you
Speaker 1: just have to expect earnings across the board to be
Speaker 1: lower than they are now, and we're just not there yet.
Speaker 1: I like your call for holding it at four percent
Speaker 1: though for almost a year for the Fed funds rate,
Speaker 1: and I wonder if people are underestimating the pain of
Speaker 1: holding rates at a level like that, rather than just
Speaker 1: missing the boat raising too far and then quickly cutting again,
Speaker 1: which seems to be the projection in markets. I think
Speaker 1: there probably is a bit of underestimation there. But I
Speaker 1: suspect the even greater underestimation is is what happens if
Speaker 1: getting hiking rates to four percent isn't enough. What happens
Speaker 1: if they hike to four percent, wait there for a
Speaker 1: quarter or two and the economy just proves to be
Speaker 1: strong enough that demand is there and inflation doesn't come down,
Speaker 1: then the Fed's just going to keep hiking, and I
Speaker 1: think that point that there's not really an upside economic
Speaker 1: growth right now. It is either things slow down and
Speaker 1: inflation comes under control, or they don't slow down and
Speaker 1: the FED just hikes more until they do slow down.
Speaker 1: John and Tom both make fun of me because at
Speaker 1: four thirty pm on Thursdays I take a look at
Speaker 1: the Fed's balance sheet to see where it is and
Speaker 1: whether it's coming down as they promised quantitative tightening. Over
Speaker 1: the past week, it actually rose. It became bigger, even
Speaker 1: though they insensibly we're supposed to be accelerating quantitative tightening.
Speaker 1: When do we start to feel the effects of this,
Speaker 1: When does it start to matter for markets? That's a
Speaker 1: great question, and you and I can can sort of
Speaker 1: bond on Thursday afternoons. That was a big part of
Speaker 1: my job at was in charge of the H four
Speaker 1: one statistical release nerd alert. Um. Yeah. The challenge I
Speaker 1: think with with getting QT to actually show up on
Speaker 1: the balance sheet, and large part is, you know, some
Speaker 1: of the way they're settling their mortgage back securities holdings
Speaker 1: on a forward basis, and so it really hasn't shown up.
Speaker 1: Just give it a couple more months. The treasuries are
Speaker 1: coming off their balanty. Over time, the mortgage backed securities
Speaker 1: will prepay and go away, but it does take a
Speaker 1: long time. So if I look at the d X,
Speaker 1: Y is a bundled Pacific rim thermometer. If you would
Speaker 1: I look at Korean one unraveling through the week, help
Speaker 1: us in the week and into the Asia morning. What
Speaker 1: is the gamesmanship Morgan Stanley season, You've got Robbie Feldman
Speaker 1: in Tokyo, who's iconic, But what is the gamesmanship you
Speaker 1: see of the Bank of Japan and the Ministry of
Speaker 1: Finance into their Monday morning our Sunday evening. Are we
Speaker 1: close to action? That is a great question. So our
Speaker 1: baseline view is no. Not from the Bank of Japan.
Speaker 1: You have Governor Corona in place. His term is up
Speaker 1: in the first half of next year. He has been
Speaker 1: committed for so long to be easy with policy, to
Speaker 1: try to get inflation up. Now it is working, clearly.
Speaker 1: The end has gone on a on a tear, going
Speaker 1: lower and lower and lower against the dollar um but
Speaker 1: finally they're starting to get some traction with inflation. So
Speaker 1: very importantly, what do you read and listen to from
Speaker 1: Robbie Feldman? You have the advantage of Dr Feldman in Tokyo,
Speaker 1: who's absolutely kind of on this. What is Robbie's twist
Speaker 1: on this? No, Robbie is fantastic, and I think everybody
Speaker 1: should get the opportunity to read his work. I think
Speaker 1: the key really is here all about legacy and the
Speaker 1: amount of time and effort that has been put into
Speaker 1: this very easy policy to try to get inflation of
Speaker 1: Japan has had lost decades plural now when it comes
Speaker 1: to the deflationary spiral, and I think there really is
Speaker 1: a sense, at least with Governor Krota, that it's critical
Speaker 1: to to stay the course to get inflation of Seth.
Speaker 1: Can we just wrap things up with FedEx. It's such
Speaker 1: a big story for everyone this morning, guess, arguably contributing
Speaker 1: to some of the nervous that's around the equity market
Speaker 1: as well. The stocks down almost in the pre market.
Speaker 1: We all know this is not a small company. It
Speaker 1: was something like a fifty sixty billion dollar company. It
Speaker 1: won't be if we close here a little bit later, Seth.
Speaker 1: They're talking about speed that things have slowed down really
Speaker 1: really quickly. Is there anything that you look at on
Speaker 1: your dashboard that would perhaps resonate with what FedEx rexperiencing.
Speaker 1: Can you see anything like this? Well, I think one
Speaker 1: of the key points with companies like fed X in
Speaker 1: the shipping business is we did see this massive, massive
Speaker 1: surge in good spending. Yesterday's retail sales report didn't really
Speaker 1: make you feel like it has unwound completely yet, but
Speaker 1: it does seem that at some point we're going to
Speaker 1: have to see that consumer pull back from as much
Speaker 1: consumer spending as had been going on on physical goods,
Speaker 1: and that's going to have ripple effects across the economy.
Speaker 1: Two retailers, but also two companies that do a lot
Speaker 1: of shipping. Seth comment of Morgus Stanley Seth. Thank you, Seth.
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