Speaker 1: Welcome to the Bloomberg Surveillance podcast name Tom Keene. Along
Speaker 1: with the Jonathan Ferrill and Lisa are Brownwitz Jaylie, we
Speaker 1: bring you insight from the best an economics, finance, investment
Speaker 1: and international relations. Fine Bloomberg Surveillance, an Apple podcast, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course I'm the Bloomberg terminal. Jeff,
Speaker 1: you joined us now seeing a strategist at B and
Speaker 1: Y Melon no secret that one of my favorite foreign
Speaker 1: exchange guests for the best part of a decade plus
Speaker 1: in London is Jeff. Jeff is great to see you. Likewise,
Speaker 1: pleasures be here. The title of your out looks Stepping
Speaker 1: Back from the Brink, is that what we're doing. We
Speaker 1: are stepping back from the brink. And as you mentioned,
Speaker 1: it's it's amazing that would fall it where not falling,
Speaker 1: and I'm stepping back. And given the amount of tightening
Speaker 1: that's gone through and heading into next year, the general
Speaker 1: viewers of probably every reason to be slightly hopeful as well,
Speaker 1: especially with the China News coming through five hundred basis
Speaker 1: points of tightening within a year. What is it nine
Speaker 1: months worth of ten eleven? Whatever it is, Jeff, that
Speaker 1: hasn't hit yet. What's the price we've got to pay
Speaker 1: for that? But it's five points of tightening against how
Speaker 1: much in leverage? Right? How much in terms of shadow leverage?
Speaker 1: Where was the financial system in two thousand and two
Speaker 1: thousand and nine? Where's the financial system now? And one
Speaker 1: keyword here regulation? Where was regulation or where should it
Speaker 1: have been heading into the GFC and whereas it now?
Speaker 1: So I think now those are the things which on
Speaker 1: the upside you could say it inhibited any potential rallies.
Speaker 1: To the downside, it actually prevents things. Do you think
Speaker 1: the price we pay for this then is just down
Speaker 1: draft in the SMP five hundred, we've had five hundred
Speaker 1: basis points of tiening, they've leried on QT on top
Speaker 1: of that, and we walk away. Now on the contrary,
Speaker 1: the price we pay for this is going to be
Speaker 1: in a sustained and structural inflation. A lot of things,
Speaker 1: those returns, you know, the easy money, you know, the
Speaker 1: low risk premier uh, the great moderation which enabled all
Speaker 1: of that we've had in twenty years now, that isn't
Speaker 1: coming back anytime soon. So what does it mean to
Speaker 1: step back the brink? Then? Because it doesn't sound like
Speaker 1: we're going to some lovely place. Well even so, you know,
Speaker 1: if you look at you know where we are. You know,
Speaker 1: for the US economy of the Eurozone economy next year
Speaker 1: is still a chance of recession, absolutely right, but probably
Speaker 1: best in a mild one, both in the U S
Speaker 1: and the Eurozone of course, and how the award develops
Speaker 1: is going to calibrate that to um. In China, clearly
Speaker 1: there's going to be a growth push. But just going
Speaker 1: back to the inflation view, the stagflation problems that we've
Speaker 1: seen this year, they're not going to go away anytime soon,
Speaker 1: and there's going to be a nasty inflation sting in
Speaker 1: the tell Whichina is reopening. Well, Jeff, this is to
Speaker 1: me a really interesting question because people talk about recession
Speaker 1: as though that's a negative case for the economy, but
Speaker 1: how much is that Actually the best case scenario is
Speaker 1: if we get a recession sooner that actually accelerates this
Speaker 1: process of disinflation and gets us to the end quicker.
Speaker 1: So for center backs, and I think the ECB is
Speaker 1: a good example of this. You know, they present a
Speaker 1: headline scenario baseline scenario than an alternative and scenario, right,
Speaker 1: depending on the wall. So from their point of view,
Speaker 1: they looked at an alternative scenario where you in in
Speaker 1: June and March. You know, they're looking at growth contraction
Speaker 1: of two percent or the headline. Okay, that's sure, we're
Speaker 1: going to drive down growth, but no, it's not. That's
Speaker 1: very stagflationary, right, So you've got to calibrate this very
Speaker 1: very carefully. They certainly want moderation. That's what the BOE
Speaker 1: you know, has signaled no two years of household income contraction. Sure, friends,
Speaker 1: you know Backham John are telling you know the situation
Speaker 1: of the housing market now the life So Governor Bailey
Speaker 1: and the MPC they thought that was necessary, but not
Speaker 1: too much. So there's a delicate range there and we
Speaker 1: think we're going to be in the okay side of that. Right,
Speaker 1: So next week be away, ECB, feder Reserve, CPI one
Speaker 1: more event you've got to look at. Now, Sam bank
Speaker 1: Man Freed, it's willing to testify on the thirteenth. He's
Speaker 1: come out with a couple of tweets months ago. I'll
Speaker 1: share some of them with you. I still do not
Speaker 1: have access to much of my data, professional or personal.
Speaker 1: So there is a limit to what I will be
Speaker 1: able to say, and I won't be as helpful as
Speaker 1: i'd like, but as the committee still thinks it would
Speaker 1: be useful, I am willing to testify on the thirteenth.
Speaker 1: At least. She goes on to say, I will try
Speaker 1: to be helpful during the hearing and to shed what
Speaker 1: light I can on the following f t x US
Speaker 1: is solvency and American customers pathways that could return value
Speaker 1: to use as internationally what I think led to the
Speaker 1: crash and my own failings. And he rounds things out
Speaker 1: by saying the following I had thought of myself as
Speaker 1: a model CEO who wouldn't become lazy or disconnected, which
Speaker 1: made it that much more destructive when I did. I'm sorry.
Speaker 1: Hopefully people can learn from the difference between who I
Speaker 1: was and who I could have been, whatever that means.
Speaker 1: So we're looking ahead to next week. To me, and
Speaker 1: this is my layman's interpretation, trying to paint this as
Speaker 1: incompetence or a failure in terms of what he came
Speaker 1: through on, rather than some sort of malfeasance. I'm curious
Speaker 1: about what kind of legal input he's gotten, given that
Speaker 1: he's been talking a lot more than they would like.
Speaker 1: You're not alone, Shiney bast is going to join us
Speaker 1: little bit later this morning, looking forward to that, and
Speaker 1: Marie is going to be with us here in the
Speaker 1: studio in New York to break down what you can
Speaker 1: look forward to next week. Jeff, I want to come
Speaker 1: to you. We started this conversation talking about a lack
Speaker 1: of leverage. Maybe at lack of leverage in the traditional places.
Speaker 1: Is the leverage ou swhere that maybe we can't see
Speaker 1: in the way that we can and say, public markets
Speaker 1: and equities, household banage, she's corporate bannag, she's that kind
Speaker 1: of thing. And also private markets as well. If I
Speaker 1: think about the asallocation views over the last few years
Speaker 1: with my previous and the hats on for example, the
Speaker 1: increased watings and private equity into alternatives with that maturity
Speaker 1: premium right now where you lock things in for ten
Speaker 1: to thirteen years or beyond and then clip that longevity coupon.
Speaker 1: You know when rates are very very low, you know
Speaker 1: that still may come to the four you know BIS
Speaker 1: talking about shadow lending, etcetera, etcetera. So yeah, that pitfalls
Speaker 1: out there still. Effects strategists have been coming on and
Speaker 1: talking about the housing market as underpinning a lot of
Speaker 1: their cars. Which housing markets are most vulnerable? Are you
Speaker 1: as well? So yes, Nordics and the Enterpollion's right, So
Speaker 1: if you look at Australia, you know right now, if
Speaker 1: you compare Australia to New Zealand, New Zealand's basically saying, yes,
Speaker 1: we have a housing market issue as well, but the
Speaker 1: labor market is so tight, income growth is so strong
Speaker 1: that they're not worried about it. They're probably the only
Speaker 1: G ten central banks that can hype more than their
Speaker 1: their five and a half, and I wouldn't rule out six,
Speaker 1: whereas the ib A saying and they might be wrong
Speaker 1: on this given the China situation, but income growth is slowing,
Speaker 1: job markets is slowing, so that means wage growth can't
Speaker 1: offset high mortgage rates UK. You know, that's a well
Speaker 1: known story. Sweden is going to be interesting because finding
Speaker 1: ing there's the governor is leaving the overlap with greenspan
Speaker 1: for a month, right, that's how long he's been around
Speaker 1: US government. It is, But the new governor is was
Speaker 1: is current head of the Swedish Financial Services Authority knows
Speaker 1: you know, where the issues are in the housing market,
Speaker 1: so the risks but also the reforms needed. So you know,
Speaker 1: that's where things can really come off. What does Canada
Speaker 1: fit in? So you know Canada as well. So when
Speaker 1: you are seeing a mortgage roads already seeing the BOC,
Speaker 1: you know, start to shift to the softer side. We
Speaker 1: saw initially in a Canada being like a high beta proxy,
Speaker 1: you know, to the US. Whatever the Fed's going to do,
Speaker 1: Canada and Mexico you know, will follow as well. But
Speaker 1: now we're clearly seeing that divergence UM and and off
Speaker 1: flow monitor and flotos for example, seeing clients diverge as well,
Speaker 1: and they're not owning the cab right now. Jeff, this
Speaker 1: was great. It always says, it's great to have you
Speaker 1: with the same in New York, Jeff. You b Y
Speaker 1: Melon joining us now as somebody who has been absolutely
Speaker 1: amazing on all things having to do with the US
Speaker 1: economy from her experience at Bank of America now at
Speaker 1: MasterCard Economics Institute where she's chief US economist. Michelle Meyer
Speaker 1: joining us here in studio. Michelle, fabulous to have you
Speaker 1: with us. What's your take on these numbers? Well, I
Speaker 1: think it says Mike summarized clearly there's still producer price
Speaker 1: inflation pressures, but you're seeing it different by category. So
Speaker 1: there's some relief in terms of some of the commodity
Speaker 1: price pressure that was a big part of the story
Speaker 1: earlier in the year. But there's still that lingering pressure
Speaker 1: that's happening more on the services side, and that's something
Speaker 1: that's very very clear on the consumer side too. We'll
Speaker 1: presumably see that to some extent. It's CPI next week.
Speaker 1: This differential between core goods inflation, which is coming down
Speaker 1: in part because those producer prices are also coming down, um,
Speaker 1: but services inflation, which remains a lot stickier. Does this
Speaker 1: data point to a recession in the US in the
Speaker 1: first half next year. I don't think so. I mean,
Speaker 1: one of the things that we've been pretty clear on
Speaker 1: is that we don't think a recession is inevitable by
Speaker 1: any means. I mean, I think, you know, looking at
Speaker 1: the data that we are examining on a regular basis,
Speaker 1: and consumer has purchasing power. They've had purchasing power throughout
Speaker 1: the year, and I think people underestimated the resolve of
Speaker 1: the US consumer to spend, the desire to spend, and
Speaker 1: the ability to spend and that's still here. Okay, so
Speaker 1: you moved to the suburbs. You understand this. Everybody drives
Speaker 1: around and when you have to fill up your car
Speaker 1: and you actually get a lower price, you generally have
Speaker 1: more money in your in your account. So how much
Speaker 1: is the decline in gasoline prices perversely going to fuel
Speaker 1: ongoing inflation for longer than people previously expected. Well, I
Speaker 1: might not be the best person to answer that because
Speaker 1: we moved electric, but sorry, car in general, that's exactly right,
Speaker 1: which is that you know, it's something that's tangible, and
Speaker 1: it's not just gasoline, it's also food as well. That's
Speaker 1: a big part of this story, which is you walk
Speaker 1: into a grocery store, you buy, you know, kind of
Speaker 1: the same type of items every week, and you see
Speaker 1: those price differentials. So there's still those dynamics, these kind
Speaker 1: of cross currents. On the one hand, quite a lot
Speaker 1: of nice relief from lower gas prices. On the other hand,
Speaker 1: food price inflation remains high and problematic. Interestingly enough, we
Speaker 1: do have a number here. Gasoline Price Index fell six
Speaker 1: in the PPI in November, so a significant decline there, which,
Speaker 1: of course the Biden administration has been waving like a
Speaker 1: flag recently to get people to figure that out. But uh,
Speaker 1: final demand goods thirty eight point one in the index
Speaker 1: for fresh and dry vegetables, So food prices are still
Speaker 1: going up. Yeah, people can feel that when they go
Speaker 1: to the grocery stores and it's definitely impeding pricing power there.
Speaker 1: But all of the is really confusing. It's a muddle,
Speaker 1: and that's the reason why people believe in this recession,
Speaker 1: and yet it doesn't seem to be feeding into this data.
Speaker 1: Do you buy into this massive disinflationary kind of feel
Speaker 1: that people are basically pricing into the dip and rip
Speaker 1: scenario that John was talking about. So one thing that
Speaker 1: we've seen in our data is that in this holiday
Speaker 1: shopping season, consumers are more promotional based than we've seen
Speaker 1: certainly in the last two holiday season. So when we
Speaker 1: look at our daily data, we saw you know a
Speaker 1: bit of us softening at the end of October early November,
Speaker 1: and then this big surge of activity into the Black
Speaker 1: Friday perry, particularly for things like apperil, which was really
Speaker 1: really strong. So I think consumers are being targeted there
Speaker 1: being you know, cognizant of how they're spending where they're
Speaker 1: spending what they're spending on UM, and relative inflation is
Speaker 1: playing a role, relative interest rates are playing a role.
Speaker 1: So there's, you know, a consumer that's aware of these
Speaker 1: headwinds that they've been facing throughout the year, and they're
Speaker 1: navigating it um But I think they've navigated a whole
Speaker 1: lot better than people had and them credit for. Right now,
Speaker 1: we're looking at a potential for the FED getting a
Speaker 1: soft landing. Just like they said, what does that mean
Speaker 1: in terms of how high rates should go, Well, it
Speaker 1: seems very clear they're not done hiking UM. So in
Speaker 1: the upcoming meeting next week, the expectations for another fifty
Speaker 1: basis point have hikes, which makes sense. That is a
Speaker 1: slowdown in the cadence of hikes. So they're clearly starting
Speaker 1: to see some signs that their monetary policy hikes, that
Speaker 1: it's transmitting into the economy. It's making a difference obviously
Speaker 1: in the housing market, it is in some of the
Speaker 1: good sectors. You're obvious you're seeing those those those ramifications
Speaker 1: as well. But I think that the next step after
Speaker 1: this will be that the FED continues to move up,
Speaker 1: but they do so a little bit slower. They're trying
Speaker 1: to monitor how the economy is reacting to those hikes,
Speaker 1: and they are seeing dynamics in the inflation data that
Speaker 1: also is presumably encouraging, right, the fact that core goods
Speaker 1: is coming down. We'll see what o we are does
Speaker 1: next week. That's going to be really important as well. Meanwhile,
Speaker 1: people are still poising in rate cuts, Mike, well, some
Speaker 1: people in the markets are, but interesting, Bloomberg has just
Speaker 1: done a survey of economists and the majority of economists
Speaker 1: think that the FED will now go to five percent,
Speaker 1: but they also think that the FED will keep it
Speaker 1: at five percent for the entire year, which is a
Speaker 1: little bit different than what you're getting in the futures market.
Speaker 1: So we'll see if those two converge, you know, and
Speaker 1: then a lot of people think that whatever the Fed
Speaker 1: does is going to be enough to bring us back
Speaker 1: down to where we were before. Do you buy that? Yeah?
Speaker 1: So you know, one of the things that we we
Speaker 1: just published our economic piece um this week, and one
Speaker 1: of the themes there is this idea of a rebalancing
Speaker 1: or normalization. So part of what's happening still in the
Speaker 1: economy next year, which the FED is trying to engineer,
Speaker 1: is a normalization of parts of the economy that we're
Speaker 1: in an excess. So think about the labor market. Um,
Speaker 1: should you have all these job openings relative to the
Speaker 1: number of unemployed. No, they want to cool that down,
Speaker 1: they want to normalize it. Um. Some parts of the
Speaker 1: economy they need to do more than normalizing, which is
Speaker 1: housing where you've had a lot of accesses bill that
Speaker 1: they want to try to correct for and prevent a
Speaker 1: bigger shock into the future. So I think it's this
Speaker 1: rebalancing that's been you know, kind of desired throughout two
Speaker 1: which is what the FED was, you know, trying to
Speaker 1: achieve with higher interest rates, andree is going to be
Speaker 1: a story of those outcomes in our In our view,
Speaker 1: what's the outcome in housing? I know you've been terrific
Speaker 1: on this for years. Do you think that we're in
Speaker 1: for a pretty protracted and deep downturn in terms of prices.
Speaker 1: I think housing is in for some real challenges ahead.
Speaker 1: I do, because when you look at how much affordability
Speaker 1: has changed, it's it's huge. It's been a big, big
Speaker 1: shock because home prices ran well above income for a
Speaker 1: period of time, which was facilitated by these extraordinarily low
Speaker 1: rates for the extended period presumably too long um and
Speaker 1: that created this big imbalance. So we're already seeing home
Speaker 1: sales fall sharply. Home prices are starting to fall in
Speaker 1: a month a month basis, and it's particularly in some
Speaker 1: areas like San Francisco. It's fast. So I think there's
Speaker 1: more to come and just quickly here. Is it going
Speaker 1: to be comparable to two in terms of the scope
Speaker 1: of the declines. I don't think it will because you
Speaker 1: won't have the degree of ario, so you won't have
Speaker 1: that force selling which creates a heavy price discounting. Michelle Meyer,
Speaker 1: thank you so much for being here, and have a
Speaker 1: wonderful holiday season. Michelle Meyer of the MasterCard Economics Institute.
Speaker 1: Always great to get that insight. Looking ahead to next week,
Speaker 1: it's Cathy Jones, Chief Fixed Incomes Strategistic swab Canthy. Let's
Speaker 1: start with the Federal Reserve. It seems to me that
Speaker 1: at the moment we're focused on the way the chairman
Speaker 1: frames risk management, whether there is a focus on overtightening
Speaker 1: or UNDERTIGHTENINGE. What do you think the biggest risk is
Speaker 1: for this Federal Reserve. I think the biggest risk is
Speaker 1: if they under tighten because they've sent such a strong
Speaker 1: message about needing to get inflation down before they make
Speaker 1: any other changes that that's the number one priority. I
Speaker 1: think they have to continue to send that message. The
Speaker 1: risk is though, that they probably will overtighten, and you know,
Speaker 1: we'll get a recession and things will break down. But
Speaker 1: I don't think that they can afford to not continue
Speaker 1: to send that message. Kathy, how does that inform your
Speaker 1: view of whether to go along some of these longer
Speaker 1: duration bonds ten year, thirty year notes versus perhaps pair back,
Speaker 1: especially after the enthusiasm we've seen of late. Yeah, you know, Lisa,
Speaker 1: we were pretty enthusiastic a while back about where when
Speaker 1: your tenure yields hit four percent clause, they're pretty enthusiastic
Speaker 1: about extending duration. We still like extending duration on rallies
Speaker 1: are increases in yield going forward, but I think we're
Speaker 1: going to have to have a rough ride here over
Speaker 1: the near term because so much good news has been
Speaker 1: priced into the market. But our long term view is
Speaker 1: that the tenure yields can follow as far as three
Speaker 1: percent this coming year, So we will use those that
Speaker 1: moves up and yield to extenduration. Cathy, you said that
Speaker 1: the biggest risk is under tightening, not overtightening. How much
Speaker 1: do you get pushed back? Is this basically not the
Speaker 1: consensus anymore? Are as people believe in this disinflationary story
Speaker 1: that will pick up steam throughout three Well, we're in
Speaker 1: the disinflation can um. I think the problem is that
Speaker 1: because of the legs that are involved, it will take
Speaker 1: time to feat its way through and the market. When
Speaker 1: I look at the shorter end of the market, it's
Speaker 1: already discounted a re rated what the feed's going to do.
Speaker 1: And given that financial conditions haven't tightened or as much
Speaker 1: or they've loosened over the last couple of months. Um,
Speaker 1: I think that the risk is that the Fed has
Speaker 1: to push back against that, and if they don't overtighten,
Speaker 1: then we're going to see inflation kind of bounce back
Speaker 1: again at the end of next year. So, Kathy, can
Speaker 1: we put some numbers on this? The Federal Reserve in
Speaker 1: their last projections from September they get updated next week.
Speaker 1: Of course, have p C a co PC at three
Speaker 1: point one at the end of twenty three, two point
Speaker 1: three at twenty four as party, because I think twenty
Speaker 1: three is hard enough. Where are you for three? There?
Speaker 1: At three point one? Yeah, I think we can get
Speaker 1: close to the three and a half area. UM. It
Speaker 1: depends really on wage growth and how quickly that starts
Speaker 1: to decline. They're starting to see some hints that it's declining,
Speaker 1: but not as much as anticipated I think at this
Speaker 1: stage of the cycle. So we'll probably have to push
Speaker 1: that out and say about three and a half at
Speaker 1: the end of next year. So just to be super clear,
Speaker 1: that glide path to three and a half, does that
Speaker 1: include a recession to get there? Probably? Yeah? Yeah, Well,
Speaker 1: we think risk of recession is very high. You know
Speaker 1: the indicators from the inverted yield curve to um, you
Speaker 1: know the leading indicators. I mean, I could go a
Speaker 1: long list. Here are things that are rolling over housing, etcetera.
Speaker 1: We do think a recession is pretty high risk. So
Speaker 1: it's important because I'm really interested in how you interpret
Speaker 1: their reaction function. If if they're gliding part fist down
Speaker 1: to three point one and you think three and a
Speaker 1: half year and next year you've got a recession in
Speaker 1: the mix as well, are they cutting in twenty three?
Speaker 1: In that world? I think they could at the end
Speaker 1: of next year. I think it's reasonable that if we
Speaker 1: are in a you know, distinctly clear recession and inflation
Speaker 1: is pretty close to three and a half four pc,
Speaker 1: they could at the end of next year. But again,
Speaker 1: I think the playbook here is the Volker FED. You know,
Speaker 1: we've heard this over and over again that Paul doesn't
Speaker 1: want to be the Arthur Burns of his generation. He
Speaker 1: wants to be the Volker of his generation. So I
Speaker 1: think that they'll try to manage it to avoid a
Speaker 1: deep recession. But I think if the choice is recession
Speaker 1: versus inflation, the choice will be recession. When when history
Speaker 1: books look back, Kathy, do you think that they will
Speaker 1: agree with Harvard University professor Jeremy Stein, formerly on the
Speaker 1: Federal Reserve, who says that it is astonishing that we
Speaker 1: haven't seen a financial system blow up. That if you
Speaker 1: had said a couple of years ago that you would
Speaker 1: have had consecutive seventy five basis point rate hikes, you
Speaker 1: would have said it would have been financial armageddon. The
Speaker 1: fact that we haven't is testimony to what the FED
Speaker 1: has done. Can we actually say at already, well maybe
Speaker 1: a little too soon to say we won't have some
Speaker 1: blow up somewhere, but I would say that that, you know,
Speaker 1: the strength of the banking sector is really what's helped
Speaker 1: us out this time, and that's an outdoor of all
Speaker 1: the regulations from the Great Financial Crisis, where we look
Speaker 1: for potential problems in the private markets. And you know,
Speaker 1: we've talked about this for months now, because of the
Speaker 1: build up of debt in the private credit area, that's
Speaker 1: where we would look for problems, so more simply because
Speaker 1: there's black and well quitted, a huge amount of leverage,
Speaker 1: and that's where the deterioration of lending standards really took place.
Speaker 1: Cathy Jones greed to catch up as always of cha
Speaker 1: Swab looking ahead to next week. Matt Miller joins us
Speaker 1: in the studio. This is cool, Matt. We've got a
Speaker 1: couple of things to do. Need to work out what
Speaker 1: on earth is going on in Germany. Winters arrived, I'm
Speaker 1: told by Maria today. O need to work out what's
Speaker 1: going on to China as well, with the lightest news
Speaker 1: out of the Shanghai factory in Tesla. Yeah. Absolutely, And
Speaker 1: I think it's also interesting to look at the tug
Speaker 1: of war between the possibility of reopening in China driving
Speaker 1: demand up globally, uh, and higher rates around the world
Speaker 1: causing a recession that drives it down. We've seen that
Speaker 1: play in oil and I'm uh. We have the honor
Speaker 1: of welcoming all Loucillennius in the studio, the CEO of
Speaker 1: Mercedes Benz. I want to get you to weigh on
Speaker 1: in on this because it's hugely important for your business
Speaker 1: as well. Um. If they reopen, more drivers are out
Speaker 1: on the roads in China and that's a big growth
Speaker 1: area for your business. Is that good, um? And is
Speaker 1: that good for Mercedes or are you more concerned about
Speaker 1: rates rising around the world causing recessions everywhere? Good morning,
Speaker 1: great to be with you this morning. You said it.
Speaker 1: China is the biggest car market in the world. In fact,
Speaker 1: if you look at the size of the Chinese market,
Speaker 1: it's actually bigger than if you put the United States
Speaker 1: and EU together. So what happens in China matters for
Speaker 1: the auto industry and of course matters for Mercedes Spens.
Speaker 1: We have now come through a period here in the
Speaker 1: fourth quarter where we have had some lockdowns in some places,
Speaker 1: actually extensive lockdowns, which shuts down dealers and frankly speaking,
Speaker 1: if you're if you're at home, you're not going to
Speaker 1: go to dealer and buy a car. But at the
Speaker 1: same time, the central government has now clearly communicated that
Speaker 1: they want to ease up the situation. So what's going
Speaker 1: to happen. Are we going to see a stop and
Speaker 1: go or are we going to see a gradual easing.
Speaker 1: It's it's difficult to say, but how that play out
Speaker 1: will definitely define what the biggest market for US is
Speaker 1: going to do. But hiding beneath that has been generally
Speaker 1: a little bit weaker Chinese economy than we have been
Speaker 1: used to for the last years or decades, and I
Speaker 1: can now see that the central government is trying to
Speaker 1: put some some stimulus into that and see if they
Speaker 1: can restart the economy together with opening up so glass
Speaker 1: half full twenty three could get maybe better. You know,
Speaker 1: the other thing about your company is that you're really
Speaker 1: working on a strategy. You go back to a Mercedes
Speaker 1: Bends of the past, where you make the luxury car
Speaker 1: that everybody wants, and you're focused on those higher margin
Speaker 1: products rather than trying to be everything to everyone. Right, um,
Speaker 1: that coincides with pricing power. That's tremendous um and a
Speaker 1: lack of inventory around the world. So the supply side
Speaker 1: has really been tighter because of supply chains. Can you
Speaker 1: keep that pricing power if we go into a session
Speaker 1: when all the chips come flooding back onto the market
Speaker 1: and everybody can sell as many cars as they want,
Speaker 1: can you can you keep from going back to the
Speaker 1: rebates and the full lots that we used to see
Speaker 1: or Sadespence has always been a cumbination between on the
Speaker 1: on the one hand, innovation and technology, but on the
Speaker 1: other hand, luxury something special. When you get a Mercedes,
Speaker 1: it's almost like you reward yourself. And even before we
Speaker 1: got into this situation with chip shortages artificially keeping supply down,
Speaker 1: we had already pivoted our strategy towards being let's say
Speaker 1: more thoughtful and go to market, uh, look at building
Speaker 1: stronger contribution margins, watching our pricing powers. You know, don't
Speaker 1: you fleet deals that don't make sense. So that that
Speaker 1: was something that we had started before this chip crisis.
Speaker 1: Now it goes without saying that if you have higher demand,
Speaker 1: as has been the case for the last couple of years,
Speaker 1: and you're held back by supply, that provides for very
Speaker 1: very very strong pricing if we now get into situation
Speaker 1: next year where the economy cools down and we get
Speaker 1: back into an equilibrium. So it's demand that controls the
Speaker 1: sales volume as opposed to the chip supply. Yes, of course,
Speaker 1: we've got to stay disciplined, there's no doubt about it.
Speaker 1: We have done a lot of work on our break
Speaker 1: even point to make sure that we can lower the
Speaker 1: break even point in our plans so we're not forced
Speaker 1: to keep the plant running at a certain number. So
Speaker 1: we'll see what happens, but in general it is our
Speaker 1: target to to stay discipline. Do you mentioned your plants?
Speaker 1: And we've been hearing this morning about winter has come
Speaker 1: in Germany. Obviously the gas issue is a difficult one
Speaker 1: for factory um for factories. You can't run a paint
Speaker 1: shop right without gas, you can't run your line without gas.
Speaker 1: What will you do if it comes down to rationing
Speaker 1: well after an unusually warm fall. Indeed, it's now getting colder.
Speaker 1: But the task force to deal with this really started
Speaker 1: on February in Germany. We had we had a scenario
Speaker 1: already at Mercedes Spence what if what if we get
Speaker 1: cut off and we have been working on on optionality
Speaker 1: and resilience. So if we look at before the war started,
Speaker 1: if our gas usage was index hundred, we can go
Speaker 1: now to an index fifties, So reduction of while maintaining
Speaker 1: production for Mercedes Spence. How do we do that? Yes,
Speaker 1: efficiency is part of the equation. Yes, the government has
Speaker 1: suggested that in all buildings temperatures are lowered. We do
Speaker 1: that as well where a sweater, So efficiencies has been
Speaker 1: one part of the answer wwitching to electricity away from gas,
Speaker 1: but also in some cases switching from gas to oil
Speaker 1: and oil is available. So there's been quite significant resilience
Speaker 1: package in our company but in Germany in general. So
Speaker 1: I think we're we are quite strong compared to where
Speaker 1: we were nine or ten months ago to go through
Speaker 1: this winter. But we're not out of the woods. So
Speaker 1: people have to work on efficiency, not just companies, private
Speaker 1: citizens as well. We are in America. So let's talk
Speaker 1: about the Inflation Reduction Act just briefly. It's been criticized
Speaker 1: by European leaders for us to see, I was Mercedes,
Speaker 1: do you criticize it as well? As it's a good
Speaker 1: thing or a bad thing for messides The underlying idea
Speaker 1: to support and accelerate decarbonization. I'm all for that. In fact,
Speaker 1: it is Mercedes strategy to go all in on electric.
Speaker 1: We're going to put the company in a position by
Speaker 1: the end of this decade to have an all electric
Speaker 1: lineup and be able to serve markets that are ready
Speaker 1: fully electric. So any policy that supports that to start
Speaker 1: with is a good thing. Now there's another side of
Speaker 1: the coin here. We shouldn't do that while at the
Speaker 1: same time up end free trade. So one has to
Speaker 1: be mindful that over the last thirty years of globalization,
Speaker 1: why have been we've been able to grow economy is
Speaker 1: as strong as strongly as we have It's been w
Speaker 1: t O driven free trade. So if we take a
Speaker 1: step back on that and we create barriers again, that
Speaker 1: would be a bad thing. And uh And in that case,
Speaker 1: I'm hopeful that between the EU and the United States,
Speaker 1: waste can be found to uphold free trade but at
Speaker 1: the same time accelerate towards the carbon free And that's
Speaker 1: the hope. You're not a policy make you receive have
Speaker 1: you got to put more money to work here in America,
Speaker 1: investment here, and produce more here. Because of this even
Speaker 1: before the Inflation Reduction Act, we had started that. We
Speaker 1: call it region for region strategy. So of course our
Speaker 1: three biggest economic or markets are the three big economic
Speaker 1: regions with Europe, United States, and China, so our vehicle
Speaker 1: production in general, but also the battery supply chain. And
Speaker 1: we have put a billion dollars into our plant in
Speaker 1: Alabama and built the brand new battery factory that I
Speaker 1: opened myself earlier this year in fact, so we had
Speaker 1: started that already. So can we expect more? That is happening.
Speaker 1: But what you can do, especially if you're a premium
Speaker 1: luxury manufacturer, is you can't divide every single model into
Speaker 1: three pieces and make it in every region. It economically
Speaker 1: doesn't make sense. So we also rely on on the
Speaker 1: ability to export, and we will see how that plays out.
Speaker 1: You know one thing that Americans have imported Formula one.
Speaker 1: We've got that Miami, Anally, Vegas, Austin. You must be
Speaker 1: happy about that. How cool is that the Formula one
Speaker 1: is finally broken this country. A Formula one has grown
Speaker 1: tremendously over the last year. So I think uh Liberty,
Speaker 1: who owns Formula one management, has done a tremendous job
Speaker 1: and We have helped them doing that by providing a
Speaker 1: very exciting show. United States. Is Mercedes good at ye?
Speaker 1: And you are you trolling? Well? We can next year.
Speaker 1: We want we want one race. So there was redemption
Speaker 1: about us seeing any sport. There's always next. You've got
Speaker 1: to give Louis Abetta cow come on, it was upset
Speaker 1: this year. That is our job. That is our job,
Speaker 1: and we're working on it. This is great. Thanks for
Speaker 1: Fami with us. This is the Bloomberg Surveillance Podcast. Thanks
Speaker 1: for listening. Join us live weekdays from seven to ten
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Speaker 1: best in economics, finance, investment, and international relations. And subscribe
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Speaker 1: and of course on the terminal. I'm Tom Keene and
Speaker 1: this is Bloomberg