WEBVTT - Vanguard Sours on Riskier Credit, Likes International Equities 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg P and L Podcast. I'm Pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Abramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg P and L 0:00:20.840 --> 0:00:33.520 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. You know, Lisa, 0:00:33.560 --> 0:00:36.840 when you help manage more than five trillion dollars, it's 0:00:37.159 --> 0:00:39.879 very good to listen to people who have that kind 0:00:39.880 --> 0:00:43.080 of responsibility. And we're lucky to have Greg Davis. He's 0:00:43.080 --> 0:00:46.560 the chief investment officer for the Vanguard Group total assets 0:00:46.600 --> 0:00:51.720 under management. I'm sorry, I misspoke. Five point one trillion dollars. 0:00:51.800 --> 0:00:53.559 We have a five point one trillion dollar man in 0:00:53.600 --> 0:00:55.920 the office. Well, it's great to be here with you today. 0:00:57.200 --> 0:01:01.640 All right, Uh, let's let's let's let's do the sort 0:01:01.640 --> 0:01:03.200 of news stuff first and then we can get into 0:01:03.280 --> 0:01:05.240 some details because we want to get your thoughts on 0:01:05.280 --> 0:01:08.120 a lot of stuff. The jobs, the non farm payroll 0:01:08.200 --> 0:01:11.039 report today, your your reaction, your thoughts. You know, it 0:01:11.080 --> 0:01:12.920 was slightly weaker than what we expected, but if you 0:01:13.000 --> 0:01:15.680 take into consideration the two month revisions of fifty nine 0:01:15.760 --> 0:01:18.320 thousand dollar fifty nine thousand jobs. We thought that was 0:01:18.560 --> 0:01:21.520 still a relatively strong report. You saw the unemployment rate 0:01:21.560 --> 0:01:24.880 ticked down slightly and the unemployment rate you six, tick 0:01:24.920 --> 0:01:27.400 down even more at seven point five percent. So overall, 0:01:27.440 --> 0:01:29.520 we thought it was a solid report. And just real quick, 0:01:29.560 --> 0:01:31.160 do you care about the trade tensions or is it 0:01:31.200 --> 0:01:32.800 all just noise at this point? You know, I think 0:01:33.120 --> 0:01:34.640 you have to pay attention to it, but I think 0:01:34.680 --> 0:01:36.520 at this point it's still early on and there is 0:01:36.560 --> 0:01:38.160 a lot of noise in that, and I think the 0:01:38.200 --> 0:01:41.199 market has really discounted just given the you know, conversations 0:01:41.200 --> 0:01:43.600 have been happening for the last several months that you 0:01:43.640 --> 0:01:45.200 still have to wait and see how it plays out 0:01:45.200 --> 0:01:47.240 over time, and the markets have actually held in pretty 0:01:47.240 --> 0:01:49.640 well given that attention. All right, so what are your 0:01:50.000 --> 0:01:53.040 three top bets for this year? So when we think 0:01:53.080 --> 0:01:55.600 about for our for our active you know, active fixed 0:01:55.640 --> 0:01:58.280 income portfolios, again, what we've been trying to do is 0:01:58.280 --> 0:02:00.000 trying to be a bit more defensive when it comes 0:02:00.040 --> 0:02:02.680 to the credit space, given the fact that valuations when 0:02:02.720 --> 0:02:05.760 it comes to investment grade bonds and high yield are 0:02:05.840 --> 0:02:07.640 not as attractive if they were, you know, over the 0:02:07.720 --> 0:02:09.960 last ten years or so, so we think there's been 0:02:10.000 --> 0:02:12.680 a lot of spread compression. We view that as a 0:02:12.680 --> 0:02:15.480 place for us to be slightly more defensive, and given 0:02:15.560 --> 0:02:17.560 where we are in terms of the economic cycle and 0:02:17.560 --> 0:02:19.960 what the Federal Reserve is doing, there's a risk that 0:02:20.040 --> 0:02:24.919 as the Fed goes to more restrictive policy in emerging markets, investment, 0:02:24.960 --> 0:02:27.400 grade and high yield will also all be impacted. From 0:02:27.400 --> 0:02:33.200 a negative standpoint, investors may have been complacent in getting 0:02:33.240 --> 0:02:36.400 double digit returns in the past, are they going to 0:02:36.480 --> 0:02:39.680 have to readjust their thinking. Absolutely. If you look at 0:02:39.720 --> 0:02:42.680 where valuations are around the globe, I mean our our 0:02:42.720 --> 0:02:45.560 investment Strategy group has recently done are done their analysis 0:02:45.600 --> 0:02:48.280 in terms of expectations for the next ten years, and 0:02:48.280 --> 0:02:50.960 when you look at the US equity market, the expectations 0:02:50.960 --> 0:02:53.400 there are that you get a tenure annualized return of 0:02:53.400 --> 0:02:55.960 about three point nine percent. When we ran the same 0:02:55.960 --> 0:02:58.840 analysis five years ago, the expectation was closer to eight percent. 0:02:59.480 --> 0:03:01.400 The reason it means a lot today is that we 0:03:01.440 --> 0:03:04.920 still think that outside of the US given valuations, that 0:03:05.040 --> 0:03:07.960 international equities actually offer more compelling value, and that the 0:03:08.000 --> 0:03:09.880 returns over the next ten years are gonna be somewhere 0:03:09.880 --> 0:03:12.040 in neighborhood about six and a half percent or so. 0:03:12.040 --> 0:03:15.080 So again, the you know, basically saying that investors need 0:03:15.120 --> 0:03:18.200 to focus on international diversification. And the other thing I 0:03:18.200 --> 0:03:20.040 would point out is that the fact that yields have 0:03:20.080 --> 0:03:24.800 started to rise, cash treasuries, investment grade bonds are actually 0:03:24.800 --> 0:03:26.919 more of a compelling investment today than they were five 0:03:27.000 --> 0:03:30.120 years ago. So it's actually a a real competing force 0:03:30.200 --> 0:03:33.359 relative to equities in in certain cases. All right, now, 0:03:33.400 --> 0:03:35.520 let's get to the real issue. Let's talk about fees. 0:03:35.680 --> 0:03:37.640 Let's talk about the fact that Fidelity is trying to 0:03:37.720 --> 0:03:42.160 be you, trying to beat you by being the first 0:03:42.440 --> 0:03:47.520 fund to offer zero fees basically free funds. And this 0:03:47.680 --> 0:03:52.360 made headlines earlier this week. So is Vanguard concerned that 0:03:52.400 --> 0:03:55.920 Fidelity is going to out Vanguard? Vanguard The way we 0:03:56.040 --> 0:03:58.160 think about it, Look, we have we have a mutual 0:03:58.200 --> 0:04:01.000 ownership structure, and you know, the way we see these 0:04:01.000 --> 0:04:03.480 stories playing out, it's really the Vanguard effect. Right at 0:04:03.480 --> 0:04:06.120 the end of the day, Because of Vanguard's approach of 0:04:06.120 --> 0:04:08.920 continuing lowering fees for investors, we're seeing more and more 0:04:08.920 --> 0:04:11.880 competitors continuing to lower fees for their investors as well 0:04:12.000 --> 0:04:14.400 and for the overall marketplace. We think that's a good thing. 0:04:14.760 --> 0:04:17.920 But when you look at Vanguards specifically the average expense 0:04:18.040 --> 0:04:21.760 ratio across our entire complex, both index and active, at 0:04:21.760 --> 0:04:25.839 which of our funds are actually actively managed, our complex 0:04:25.839 --> 0:04:28.360 wide expense ratios of love and basis points. And although 0:04:28.360 --> 0:04:30.200 we might have some competitors out there that use a 0:04:30.200 --> 0:04:32.839 lost leader strategy and reduce the costs in certain areas 0:04:33.200 --> 0:04:36.440 across the board, investors still get tremendous value by coming 0:04:36.440 --> 0:04:40.000 to Vanguard in our ownership structure. I just want you 0:04:40.040 --> 0:04:42.880 to go back to something that kind of alluded to, 0:04:42.960 --> 0:04:45.640 which is that investors are going to get going to 0:04:45.720 --> 0:04:50.160 have to get used to something different, meaning lower returns. 0:04:51.440 --> 0:04:53.800 Do you find that people feel that they will be 0:04:53.839 --> 0:04:57.600 the exception to that, and as a result, they make 0:04:57.760 --> 0:05:01.760 mistakes because they don't want to scept average, They don't 0:05:01.760 --> 0:05:04.680 want to accept those single digit returns, so they go 0:05:04.720 --> 0:05:07.479 and do things that they don't have the experience or 0:05:07.480 --> 0:05:10.080 the knowledge to actually do with their money. You know, 0:05:10.120 --> 0:05:12.200 we we saw this, We saw this um you know, 0:05:12.320 --> 0:05:14.840 shortly after the financial crisis, when you had basically money 0:05:14.839 --> 0:05:18.479 market funds yielding zero, and you saw investors migrating out 0:05:18.520 --> 0:05:20.839 taking on more risks. So they migrated out to the 0:05:20.839 --> 0:05:22.960 further end of the yelker. First it started with short 0:05:23.080 --> 0:05:24.880 term bonds and it was intermediate. Then it was a 0:05:24.920 --> 0:05:27.960 long end again just trying to find other places for yield. 0:05:28.320 --> 0:05:30.360 And then they started going deeper in terms of credit 0:05:30.440 --> 0:05:33.000 risk by going into you know, high yield, and then 0:05:33.040 --> 0:05:35.320 they started to expand it even further by going into 0:05:35.680 --> 0:05:38.600 bond like products. On the equity side, reads high dived 0:05:38.640 --> 0:05:41.039 and yielding stocks. But the great thing now is that 0:05:41.080 --> 0:05:44.040 when you look at the valuations around around the marketplace, 0:05:44.080 --> 0:05:46.160 what you can see is that investors don't need to 0:05:46.160 --> 0:05:48.080 take as much risk anymore, at least at this point 0:05:48.120 --> 0:05:50.359 in time. You're not benefiting a lot taking on a 0:05:50.360 --> 0:05:52.440 lot of duration risk and taking on that interest rate 0:05:52.440 --> 0:05:54.800 exposure further out the curve because the curve is so flat. 0:05:55.360 --> 0:05:58.080 So you can avoid having some of that volatility by 0:05:58.120 --> 0:06:00.440 being more focused on the shorter end of to curve. 0:06:00.720 --> 0:06:03.080 But for most investors, we would tell them to again 0:06:03.080 --> 0:06:06.159 look at the risk tolerance, have a balanced portfolio around 0:06:06.160 --> 0:06:09.279 the globe, both equities and fixed income, and make sure 0:06:09.320 --> 0:06:12.160 that they're continually rebalancing because some of these ratios can 0:06:12.160 --> 0:06:14.800 get out of line over time. So, given the fact 0:06:14.839 --> 0:06:19.280 that we're moving into a more volatile period, supposedly, Um, 0:06:19.480 --> 0:06:22.800 do you think that we've seen peak passive? No? You know, 0:06:22.839 --> 0:06:25.560 when you think about no, I don't think that's the case. 0:06:26.279 --> 0:06:28.040 When you think about when you think about the value 0:06:28.040 --> 0:06:33.279 proposition at passive passive offers to investors is that they 0:06:33.320 --> 0:06:35.919 have they get they get a market return at a 0:06:36.080 --> 0:06:38.880 very low cost. And what it's been shown is that 0:06:39.200 --> 0:06:41.520 active managers really have a hard time in the long 0:06:41.600 --> 0:06:45.320 run out performing their benchmarks net of fees. And so 0:06:45.560 --> 0:06:49.880 in less active managers substantially substantially reduced their fees, they're 0:06:49.880 --> 0:06:51.839 gonna have a hard time in the long run beating 0:06:52.040 --> 0:06:54.640 beating the indiceas. And that's going to continue to allow 0:06:55.320 --> 0:06:58.440 passive investing to be a very popular, you know, technique 0:06:58.440 --> 0:07:03.240 for for investors. Just quickly, what is more overvalue today? 0:07:03.680 --> 0:07:10.120 Corporate bonds high yield or investment grade corporate bonds UM 0:07:10.240 --> 0:07:12.560 investment grade corporate bonds, if you look at where they 0:07:12.560 --> 0:07:15.760 are from the valuation perspective, there's somewhere around the fifteen 0:07:15.920 --> 0:07:20.360 percentile um from a spread perspective over the last ten 0:07:20.440 --> 0:07:23.200 year periods, so we'd say they're pretty deeply overvalued at 0:07:23.200 --> 0:07:25.200 this point in time. I think what you have to 0:07:25.240 --> 0:07:28.000 really really be cognizant of is the fact that again, 0:07:28.040 --> 0:07:30.480 as the Federal Reserve keeps hiking interest rates and they 0:07:30.520 --> 0:07:32.760 get to that point where they start becoming restrictive in 0:07:32.840 --> 0:07:35.440 terms of economic growth, that part of the market is 0:07:35.440 --> 0:07:37.960 definitely going to be at risk for spread widing. So 0:07:38.080 --> 0:07:41.200 at what point will they be restrictive? I mean, people 0:07:41.240 --> 0:07:44.880 are widely expecting the Federal Reserve to raise rates in September. 0:07:45.360 --> 0:07:47.960 Are you expecting two rate hikes this year? And at 0:07:47.960 --> 0:07:50.600 what point next year? How many rate hikes would be 0:07:50.640 --> 0:07:54.600 a mistake. So we're expecting we're expecting two rate hikes 0:07:54.600 --> 0:07:56.840 this year, both in September and December, and we're expecting 0:07:56.840 --> 0:07:59.120 somewhere in the neighborhood of two to three rate hikes 0:07:59.160 --> 0:08:01.240 next year. You know, by the time we get to 0:08:01.320 --> 0:08:03.600 the second half of next year, we could actually start 0:08:03.640 --> 0:08:07.720 approaching the restrictive territory. And the question becomes is there 0:08:07.720 --> 0:08:11.080 still enough momentum in the economy, both from a GDP 0:08:11.200 --> 0:08:14.280 growth and an inflation and jobs perspective. That the FED 0:08:14.400 --> 0:08:16.200 keeps going and if that's the case, we may end 0:08:16.240 --> 0:08:18.360 up going too far. All right, So what are the 0:08:18.480 --> 0:08:20.680 chances of a downturn next year? I know a lot 0:08:20.680 --> 0:08:24.600 of people have been talking about possible recession. So in 0:08:26.040 --> 0:08:29.240 our expectations based upon our models are showing, you know, um, 0:08:29.320 --> 0:08:31.400 the probability of recession the next twelve months have gone 0:08:31.400 --> 0:08:34.680 from about five percent up to ten. Now, what we're 0:08:34.679 --> 0:08:37.920 expecting towards the tail end, the tail end of twenty nineteen, 0:08:37.960 --> 0:08:40.920 if we're looking forward a year from there, we'd expect 0:08:41.120 --> 0:08:43.880 we'd expect that the recession rest starts to rise to 0:08:43.960 --> 0:08:46.880 something like thirty over the course of the next year. 0:08:46.880 --> 0:08:50.120 So I would take us through the end of today. 0:08:50.160 --> 0:08:52.800 We got the news that the Intercontinental Exchange plans to 0:08:52.880 --> 0:08:59.800 launch a regulated physical bitcoin futures contract and warehouse in November. 0:09:00.520 --> 0:09:05.679 What's the conversation at Vanguard about cryptocurrencies and bitcoin? Then 0:09:06.000 --> 0:09:09.439 we're not fans of We're not fans of of of bitcoin. Um. 0:09:09.640 --> 0:09:12.760 We are very interested in the technology that underlies bitcoin 0:09:12.800 --> 0:09:14.400 in terms of blockchain and what it can do in 0:09:14.520 --> 0:09:17.559 terms of increasing efficiency when it comes to settling transaction, 0:09:17.720 --> 0:09:21.240 receiving index data and things of that nature. But the 0:09:21.320 --> 0:09:23.559 concept of investing in bitcoin, we think that's a bit 0:09:23.559 --> 0:09:28.040 of a speculative bubble, all right, So the blockchain trend 0:09:28.120 --> 0:09:31.040 perhaps is not more hype than it is reality because 0:09:31.040 --> 0:09:32.959 there have been some studies at show that. No, we 0:09:32.960 --> 0:09:35.560 think there's real potential there in terms of increasing efficiencies 0:09:35.600 --> 0:09:38.320 and uh. And again that's that The reason we're interested 0:09:38.360 --> 0:09:39.840 in that is because to the extent that can help 0:09:39.920 --> 0:09:42.360 us drive down costs even further, we think there's value there. 0:09:42.600 --> 0:09:45.120 So what about flows, what are you seeing there? And 0:09:45.800 --> 0:09:50.240 is there some divergence between institutional flows and individual flows 0:09:50.320 --> 0:09:53.040 right now? So we haven't seen a big divergence. UM 0:09:53.200 --> 0:09:57.000 So this year, this was through June. UM we have 0:09:57.080 --> 0:10:00.400 taken in about a hundred billion in cash flow, and 0:10:00.440 --> 0:10:03.440 that's been broken up between I'd say about half of 0:10:03.480 --> 0:10:07.160 that was in US equities, with the in the equity market, 0:10:07.160 --> 0:10:09.520 with the majority of going into index products, and then 0:10:09.559 --> 0:10:12.160 we've had you know, fair flows the rest broken up 0:10:12.160 --> 0:10:15.720 between UM fixed income as well as money market. So 0:10:15.720 --> 0:10:18.000 money markets has really seen a lot of growth this year, 0:10:18.040 --> 0:10:21.200 just given the fact that the curve is flattened so much. Right, 0:10:21.960 --> 0:10:24.679 the flows that you're talking about, the people look at 0:10:24.679 --> 0:10:28.760 the expense ratios first rather than the product. I think 0:10:28.800 --> 0:10:32.160 informed investors will always look at the expense ratio first. Um, 0:10:32.240 --> 0:10:33.960 you know, when when they've made the decision that they 0:10:33.960 --> 0:10:36.000 want to invest in the money market product or a 0:10:36.000 --> 0:10:39.360 actively managed fund, the expense ratio is something they always 0:10:39.360 --> 0:10:42.320 take a look at. And especially in an environment where 0:10:42.320 --> 0:10:45.160 you're expecting returns whatnot, it's on the bond side, or 0:10:45.200 --> 0:10:48.199 even on the equity side to be somewhat muted relative 0:10:48.240 --> 0:10:51.880 to what we have experienced historically, expense ratios make a 0:10:51.880 --> 0:10:53.720 big difference. It's eating more and more of your returns 0:10:53.720 --> 0:10:55.440 if you're in a high cost product relative to a 0:10:55.480 --> 0:10:57.000 low cost product. Do you think we're ever going to 0:10:57.080 --> 0:11:00.360 see a fund that actually pays investors to invest with it. 0:11:01.480 --> 0:11:03.800 You know, there's all kinds of marketing gimmicks, gimmicks, so 0:11:03.840 --> 0:11:06.200 I'm not sure. You know, maybe it's possible. I I 0:11:06.200 --> 0:11:07.920 don't know. I really don't know. I mean, like, do 0:11:07.960 --> 0:11:09.559 you think that if we're going to be close to 0:11:09.679 --> 0:11:13.280 zero for almost all funds in five years? I think 0:11:13.280 --> 0:11:15.000 it's difficult to tell, but I would I would. I 0:11:15.040 --> 0:11:18.400 would expect that you will see this continued, this continued 0:11:18.559 --> 0:11:22.160 impact of you know, firms that have economies of scale 0:11:22.160 --> 0:11:24.800 will continue to lower prices, and the firms that are 0:11:24.920 --> 0:11:28.319 you know, higher cost producers will continue to struggle quickly. 0:11:28.800 --> 0:11:31.439 What's your biggest mistake you've made over the last twelve months. 0:11:33.000 --> 0:11:35.560 I would say we were probably as a firm, we're 0:11:35.600 --> 0:11:38.800 probably a bit slow when it comes to um a 0:11:38.800 --> 0:11:40.440 bit too early, i should say, when it comes to 0:11:41.600 --> 0:11:45.920 reducing our exposure to investment grade credit. Again, we expected 0:11:46.000 --> 0:11:48.320 that spreadwood wide and not at some point in time, 0:11:48.320 --> 0:11:50.120 and we're a bit too early to a bit too 0:11:50.120 --> 0:11:52.959 early to that trade. UM. So i'd say that was 0:11:53.000 --> 0:11:54.520 probably a bit of a bit of a miss from 0:11:54.520 --> 0:11:57.480 mark perspective, but not a miss that you've seen a 0:11:57.559 --> 0:11:59.920 hundred billion dollars of influences here and that you are 0:12:00.000 --> 0:12:03.000 a five point one trillion dollar man. Greg Davis, thank 0:12:03.000 --> 0:12:04.760 you so much for being with us. It is such 0:12:04.760 --> 0:12:07.360 a pleasure having in my pleasure. Greg Davis is Chief 0:12:07.400 --> 0:12:12.199 investment Officer at the Vanguard Group. Van's guards total assets 0:12:12.360 --> 0:12:15.760 under management five point one trillion dollars. It is an 0:12:15.760 --> 0:12:33.440 economy unto itself. China's u N is headed up for 0:12:33.520 --> 0:12:37.719 its worst weekly loss in its history, joining US now 0:12:37.720 --> 0:12:40.440 to talk about that. Some of the latest efforts out 0:12:40.440 --> 0:12:44.240 this morning from the PBOC to try to mitigate some 0:12:44.360 --> 0:12:46.840 of those losses is Steven England are Global head of 0:12:47.000 --> 0:12:50.640 G ten FX Research North American macro Strategy for Standard 0:12:50.800 --> 0:12:54.440 Charter Bank. He is also a Bloomberg opinion columnist. Stephen, 0:12:54.480 --> 0:12:56.240 thank you so much for being with us. We really 0:12:56.360 --> 0:13:00.160 enjoy having you on. What's your take on the move 0:13:00.280 --> 0:13:02.800 that the PBOC, the People's Bank of China took this 0:13:02.880 --> 0:13:06.360 morning to try to how should we say this, I 0:13:06.360 --> 0:13:10.520 guess perhaps prevent people from speculating too much on the 0:13:10.600 --> 0:13:14.480 ones drop. UM. First, thank you for having me on. UM. 0:13:15.160 --> 0:13:18.920 I think what you're seeing is that the UH Chinese 0:13:19.000 --> 0:13:21.840 act that markets have been increasingly under pressure. The equity 0:13:21.880 --> 0:13:24.800 market has been under performing, UH, not just the US 0:13:24.840 --> 0:13:29.360 equity market, but even neighboring Asian equity markets. UM. So 0:13:29.880 --> 0:13:33.400 it feels as if, UH, there's a perception that China 0:13:33.520 --> 0:13:37.120 is much more vulnerable to these trade tensions than say 0:13:37.200 --> 0:13:39.439 what's thought a month ago, or even or even two 0:13:39.480 --> 0:13:42.199 months ago. And that's translating into both weakness and equities 0:13:42.240 --> 0:13:47.360 and weakness in the exchange rate. UM. What the Chinese 0:13:47.360 --> 0:13:50.880 authorities want, I think is one to keep money easy 0:13:51.240 --> 0:13:55.960 onshore because there's both an onshore market in continental China 0:13:56.000 --> 0:14:00.480 and an offshore market um outside of China. They want 0:14:00.480 --> 0:14:05.200 to keep monetary conditions easy on shore for domestic economic 0:14:05.240 --> 0:14:07.840 reasons because their their economy has been kind of wobbling 0:14:07.880 --> 0:14:10.640 a little bit, nothing dramatic, but not performing as well 0:14:10.640 --> 0:14:13.320 as they would have wanted. At the same time, they 0:14:13.360 --> 0:14:16.640 don't want by keeping money easy on shore to encourage 0:14:16.640 --> 0:14:19.800 money to leave. So they're saying, look, if you if 0:14:19.800 --> 0:14:23.520 you want to UM do these transactions, you actually have 0:14:23.640 --> 0:14:26.160 to basically like post the margin and just keep it 0:14:26.200 --> 0:14:29.160 on deposit with the PBOC. So it makes it harder 0:14:29.640 --> 0:14:33.840 and discourages the movement to capital from on shore to offshore, 0:14:34.720 --> 0:14:38.400 and in sometimes should mitigate the weakness in c n 0:14:38.600 --> 0:14:41.840 Y in c and Y and c n H. Stephen Anglader, 0:14:41.960 --> 0:14:44.840 we were listening earlier today to an interview with Larry Cudlow, 0:14:44.880 --> 0:14:48.560 Director of the National Economic Council. Larry Cutlow said he 0:14:48.600 --> 0:14:53.000 believes that China's currency is weakening and that it's a 0:14:53.000 --> 0:14:57.360 lousy investment. He also said that China's China has a 0:14:57.400 --> 0:15:03.760 weak economy. Do you agree well, look, you know, I've 0:15:03.800 --> 0:15:05.760 I've been here long enough. I've seen the dollar at 0:15:05.760 --> 0:15:08.480 one sixty against the euro, and and you know now 0:15:08.480 --> 0:15:12.320 it's at one sixteen. So currency is weakened, currency strengths, 0:15:12.360 --> 0:15:15.920 And i'd say the Chinese, the Chinese economy, it's it's 0:15:15.960 --> 0:15:18.240 as I said before, it's disappointing. It's not doing as 0:15:18.280 --> 0:15:21.880 well as some people, you know, many people expected, but 0:15:22.400 --> 0:15:24.960 it's not in free falls by any means. It's just like, 0:15:26.000 --> 0:15:29.560 you know, call it a bump. And I think the uncertainty, 0:15:29.720 --> 0:15:33.880 uncertainty about the parish is adding to some of the pressure. 0:15:34.440 --> 0:15:37.480 But it's not a crisis. It's it's uh, you know, 0:15:37.560 --> 0:15:39.720 it's it's an irritant. But in this way I would 0:15:39.800 --> 0:15:42.600 characterize it. So if it's an irritant, would this be 0:15:42.680 --> 0:15:47.320 a good opportunity to invest in China? Well, you know, 0:15:47.360 --> 0:15:50.520 I think if you're investing in China, you're you're making 0:15:51.560 --> 0:15:56.000 a bet that the paraficies will be resolved in a 0:15:56.080 --> 0:15:58.920 kind of you know what most people expect to happen, 0:15:58.920 --> 0:16:01.760 which is that the US and China will have very 0:16:01.760 --> 0:16:04.720 low tariffs, and they'll keep on talking about intellectual property, 0:16:04.920 --> 0:16:10.160 which is a much more complicated issue. Um, if he 0:16:10.240 --> 0:16:12.960 believes that that's going to be the ultimate outcome, notwithstanding 0:16:13.000 --> 0:16:16.160 the short term gyrations. UM. You know, China would be 0:16:16.240 --> 0:16:18.640 very interesting even you have, given how much it's sold off. 0:16:18.840 --> 0:16:21.560 But you know, you have to be clear that you 0:16:21.880 --> 0:16:23.960 have a strong view that this will be resolved in 0:16:23.960 --> 0:16:26.280 a way where we don't where everyone doesn't end up 0:16:26.320 --> 0:16:30.960 with tariffs on each other. Stephen, you've been covering the 0:16:31.120 --> 0:16:34.720 FX markets and engage with them for about two decades, 0:16:34.960 --> 0:16:38.360 and you've seen a lot of different phases. Has it 0:16:38.440 --> 0:16:41.560 ever been harder to kind of understand the different winds 0:16:41.680 --> 0:16:44.400 at play that it is right now given the rhetoric 0:16:44.560 --> 0:16:47.880 and the tweets and and all of that mixed with 0:16:48.040 --> 0:16:53.920 a lot of easing, a lot of central bank intervention. Well, 0:16:54.240 --> 0:16:57.720 you know, i'd say, in as it's happening, it always 0:16:57.720 --> 0:17:00.600 seems hard. It's very very hard to know what the 0:17:00.640 --> 0:17:03.040 next one percent or five percent move on the dollar 0:17:03.160 --> 0:17:06.000 is going to be. UM, And I'd actually say it's 0:17:06.000 --> 0:17:10.360 not much worse now. I think it's for many of us. 0:17:10.480 --> 0:17:15.840 The the political dimension, both the geopolitical and domestic political dimension, 0:17:15.960 --> 0:17:20.199 is UH an additional complication. But you know, you look 0:17:20.280 --> 0:17:23.960 at volatility in in FX markets as far from from 0:17:23.960 --> 0:17:26.399 being extreme. So I think it's it's something you just 0:17:26.440 --> 0:17:30.080 adjust to. Stephen, taking a look at the dollar euro 0:17:30.240 --> 0:17:35.040 right now one nine pounds, sterling, one thirty yen one eleven, 0:17:35.520 --> 0:17:37.480 you think the dollar is going to continue to strengthen, 0:17:38.800 --> 0:17:41.480 you know, I think the dollar is strengthening on on 0:17:42.200 --> 0:17:45.119 um these power of concerns because it is behaving like 0:17:45.160 --> 0:17:50.560 a safe haven. UM. I think investors have become you know, 0:17:50.640 --> 0:17:52.840 are flirting with the idea that US may actually have 0:17:52.880 --> 0:17:55.480 a good economy, notwithstanding the slope of the yield curve 0:17:55.520 --> 0:17:57.400 and some of the other questions that have been raised. 0:17:57.840 --> 0:18:01.560 And so I think that there's an emerging set more 0:18:01.640 --> 0:18:03.640 comfort with the U S economies and say there worth 0:18:03.680 --> 0:18:07.360 a month ago, two months ago, or six months ago. Um. 0:18:07.480 --> 0:18:10.840 So that's all all the positive, but I'd say overwhelmingly 0:18:10.960 --> 0:18:14.240 the sentiments on Europe is so negative that Europe. You know, 0:18:15.000 --> 0:18:18.760 if Europe just holds its place, that will be a 0:18:18.800 --> 0:18:22.159 euro positive. So you know, again, the euro dollar story 0:18:22.720 --> 0:18:24.879 is one that you know, I don't think it's going 0:18:24.880 --> 0:18:27.880 to be the main story. The story could be how 0:18:27.920 --> 0:18:31.800 the euro and the dollar together do against the rest 0:18:31.800 --> 0:18:35.960 of the world UM, but you know, the usual sort 0:18:35.960 --> 0:18:39.280 of all the up or down against the euro UM. Yeah. 0:18:39.400 --> 0:18:41.600 I don't think that's going to be a dramatic issue 0:18:41.720 --> 0:18:44.960 in in coming months because both of them have strength. 0:18:45.720 --> 0:18:47.520 All right, I'd love to get your view just real 0:18:47.600 --> 0:18:50.240 quick on what this means. If we are seeing dollar 0:18:50.280 --> 0:18:53.840 strength that will continue because people are realizing that the U. 0:18:53.920 --> 0:18:56.280 S economy is doing well, what does this mean for 0:18:56.320 --> 0:19:01.000 emerging markets? Well, you know it's going to be difficult 0:19:01.040 --> 0:19:04.720 for them, um, emerging markets. You know, again, there's there's 0:19:04.760 --> 0:19:07.200 been a sell off, certainly on the currency side, and 0:19:07.359 --> 0:19:11.960 there certainly valuation is there. But the question is, you know, 0:19:12.480 --> 0:19:15.639 where's the sizzle? You know, what are you buying? You know, 0:19:15.760 --> 0:19:19.440 if if growth is coming primarily from the US, it's 0:19:19.480 --> 0:19:23.240 not very good intensive intensive, it's not very commodity is intensive. 0:19:23.920 --> 0:19:26.919 So you know, the question is what is going to 0:19:27.040 --> 0:19:30.520 sort of be the trigger to get people back into 0:19:30.520 --> 0:19:33.840 the emerging markets. And and again, valuation is very important 0:19:33.840 --> 0:19:35.760 at a certain point to get so cheap that they 0:19:35.800 --> 0:19:38.720 can only go up. But I think you'd like to 0:19:38.720 --> 0:19:40.879 see some of you know, some indications that the economies 0:19:40.920 --> 0:19:45.600 are are stabilizing and surprising to the upside. Stephen just quickly, 0:19:45.640 --> 0:19:48.919 Does this mean that commodity based currencies will continue to 0:19:49.440 --> 0:19:54.400 weaken against the dollar? Yeah? I think you know, there's 0:19:54.440 --> 0:19:57.399 a structural story here, which is um, you know, we 0:19:57.520 --> 0:19:59.840 buy services on the margin. We don't. We don't buy 0:20:00.000 --> 0:20:02.399 all the intensive goods. You know, Europe is growing, but 0:20:02.440 --> 0:20:05.639 they buy services as well. I think it's you know, 0:20:05.920 --> 0:20:08.760 there's a supplied demand balance, but serve an uphill battle 0:20:08.840 --> 0:20:12.240 for for the commodity producers, especially if China is looking soft. 0:20:12.720 --> 0:20:15.320 All right, we gotta leave it there. Stephen Englander is 0:20:15.359 --> 0:20:19.560 the global head of g TENX Research and North American 0:20:19.680 --> 0:20:24.080 macro Strategy for Standard Charter Bank, and he is also 0:20:24.160 --> 0:20:44.879 a Bloomberg opinion columnist. Will the explosion of money creation 0:20:45.080 --> 0:20:47.879 catch up with the US economy? This is one of 0:20:47.920 --> 0:20:51.280 the most difficult questions of the moment, especially as the 0:20:51.320 --> 0:20:55.600 Federal Reserve continues to raise interest rates bit by bit 0:20:55.680 --> 0:20:58.360 to try to get to some normal level. To weigh 0:20:58.359 --> 0:21:00.919 into this, and very very happy to say we are 0:21:00.920 --> 0:21:03.159 going to be joined by a Mere Sufi, Professor of 0:21:03.240 --> 0:21:07.440 Economics and public Policy at Chicago's Booth School of Business. Uh, Mere, 0:21:07.560 --> 0:21:11.840 thank you so much for being with us. I'm super 0:21:12.040 --> 0:21:14.520 I'm really I'm excited to hear your perspective. You wrote 0:21:14.760 --> 0:21:18.000 The House of Debt, which was widely thought to be 0:21:18.080 --> 0:21:20.560 a very accurate and interesting look at the explosion of 0:21:20.560 --> 0:21:23.520 debt leading to the financial crisis. You just posted an 0:21:23.600 --> 0:21:28.399 article that was published again, arise at household debt systematically 0:21:28.440 --> 0:21:31.439 predicts a decline in subsequent GDP growth. This was a 0:21:31.480 --> 0:21:34.480 line from the report Where are we now in terms 0:21:34.600 --> 0:21:36.760 of credit explosion and what does it say about growth 0:21:36.800 --> 0:21:40.560 going forward? So one of the positive signs is that 0:21:40.840 --> 0:21:43.760 the household debt expansion during this recent cycle is not 0:21:43.840 --> 0:21:46.080 nearly as dramatic as what it was from two thousand 0:21:46.080 --> 0:21:48.919 two to two thousand and six. And that's mostly because, 0:21:49.080 --> 0:21:51.760 you know, most of household debt is associated with mortgages 0:21:51.880 --> 0:21:54.840