Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. There is a
Speaker 1: single sentence from a Holland Horst and from Nathan Sheets,
Speaker 1: global chief economist at City Group. Also is public service
Speaker 1: to the United States Treasury, and Nathan Sheets joins us
Speaker 1: right now, Nathan, there's that single line of global g
Speaker 1: d P in two thousand twenty three. It is well
Speaker 1: below the typical three percent level. How bad is the
Speaker 1: global recession of next year? The global economy, as you say,
Speaker 1: Thoma's looking very slot at the moment and aggregat our
Speaker 1: projection is two percent global growth if you take out
Speaker 1: our relatively bullish expectation for China, we see global growth
Speaker 1: at less than one percent next year, which is right
Speaker 1: on the border of what's been traditionally associated with the
Speaker 1: with the global recession. Now, looking at a little bit
Speaker 1: more at the details, we see early next year fairly
Speaker 1: severe downturn in Europe clean both the year AWARE in
Speaker 1: the UK, and then as the year progresses, the monetoring
Speaker 1: tightening UH in the United States leads to a recession
Speaker 1: during the second half of the year here as well.
Speaker 1: So pretty pretty tough outlook, challenging in a lot of
Speaker 1: different respects, and UH and that's coupled with an inflation
Speaker 1: outlook remains very concerning Nathan. Financial conditions of East with
Speaker 1: the bactrop they're talking about, financial conditions have started two weights,
Speaker 1: and that's because a lot of people are thinking about
Speaker 1: the Federal Reserve back in a way from the pace
Speaker 1: of hikes from seventy five maybe down to fift day
Speaker 1: the size down to Nathan, what do you make of
Speaker 1: that conversation. I think the Fed has struggled in its communication.
Speaker 1: It has set up, at least implicitly, a syllogism that
Speaker 1: if we're serious about inflation, then we go seventy five
Speaker 1: basis points, and when rates are low, it makes sense
Speaker 1: to have that syllogism. But once you move to three percent,
Speaker 1: and in November there will be at three seventy five.
Speaker 1: As you move higher, you've got to start casting your
Speaker 1: determination and framing your determination to fight inflation in in
Speaker 1: in in different ways. Specifically, the FED can say we've
Speaker 1: moved substantially and that reflects ourn't commitment. And if you
Speaker 1: don't uh believe that we're committed, just watch what we're
Speaker 1: gonna do. So I do think they're in a tough
Speaker 1: situation where they've got to pivot. They can't take rates
Speaker 1: off at seventy five basic points rate indefinitely, and the
Speaker 1: markets are interpreting that as the fat kind of pivoting
Speaker 1: off inflation determination, which I think is a misinterpretation of
Speaker 1: where they are. I'm looking right now at some of
Speaker 1: the GDP components. Michael McKee is breaking them down, and
Speaker 1: we saw housing. He mentioned housing, and he just clarified
Speaker 1: that residential investments attracted one point three seven percent from GDP.
Speaker 1: This is a quickly moving story under the hood, how
Speaker 1: much or other inflationary components off setting some of these
Speaker 1: disinflationary moves that we're seeing in the housing market, that
Speaker 1: we're seeing in retail that we're seeing and used at
Speaker 1: car prices that you could see on the margins around
Speaker 1: the economy. Very clearly, we are now in a dynamic
Speaker 1: of disinflation in terms of goods prices that is clearly happening.
Speaker 1: We expect that it's going to come off quite sharply
Speaker 1: in coming months. Similarly, the shelter prices are persistent the
Speaker 1: way they're calculated in the indexes. But when we're getting
Speaker 1: these monster declines and residential investment, that's point of a
Speaker 1: very soft housing market. But where the heart of inflationary
Speaker 1: pressures remains is in the non shelter services and that
Speaker 1: is tied to the hot labor market, rising wages and
Speaker 1: rising services inflation. That is what the fans worried about.
Speaker 1: And uh, that's what the FED is targeting here effectively,
Speaker 1: is they've got to see a more contained numbers in
Speaker 1: terms of non shelter services price inflation. And then mean yet,
Speaker 1: take a while, I look, Nathan, at how we're going
Speaker 1: to recalibrate. We're gonna recalibrate off this press conference, John
Speaker 1: one in four minutes something. We're gonna recalibrate November two,
Speaker 1: frame the City Group look for next year. I'm going
Speaker 1: back to your stunning global GDP call of two percent
Speaker 1: next year? What is your year opening report gonna look like?
Speaker 1: Give us a heads up, so what we're what we're
Speaker 1: seeing at the moment. Uh, and it's looking pretty durable
Speaker 1: in my mind. We're calling next year rolling recessions in
Speaker 1: the global economy. Uh. We're gonna see various countries turned down. Uh,
Speaker 1: the vast majority of GDP will see a downturn. That
Speaker 1: would particularly be accentuating, exacerbated if the Chinese economy ends
Speaker 1: up being uh somewhat softer and instead of the five
Speaker 1: and a half percent we're forecasting, if it's more like
Speaker 1: this year at at three and a half. As you've
Speaker 1: got this on the growth side, and then you also
Speaker 1: have central banks they're gonna have to early in the
Speaker 1: year continue to hide and as the year rolls on,
Speaker 1: our expectation is hold those those rates and high levels.
Speaker 1: So uh, next year is gonna be a challenging year.
Speaker 1: I'm kind of already turning the page to that's so
Speaker 1: much like that's that's what we need from a former
Speaker 1: government official, Dr Sheath. That was brilliant night in Jessus City, Knithan,
Speaker 1: thank you. This is a joint. Now we're gonna wrap
Speaker 1: this into international economics. We do this with Christine Lagarde
Speaker 1: an extended press conference mat managing the Master of the
Speaker 1: e c B. Carl Weinberg joins US now high frequency economics. Carl,
Speaker 1: I've got to go to e M. I looked at
Speaker 1: a Columbia the Nation bond the other day and has
Speaker 1: enjoyed going from night to sixty three. How big is
Speaker 1: the tention right now in e M due to FED
Speaker 1: policy and a strong dollar? In good morning, Tom Well,
Speaker 1: Historically this would be a classic squeeze, with the FED
Speaker 1: hiking rates and raising borrowing costs with commodity prices for
Speaker 1: comfort countries that import commodities first going up and pairing
Speaker 1: their balance of payments and their flow of dollars coming in,
Speaker 1: and then now with prices going down for countries that
Speaker 1: export them, facing the same kind of squeeze. The bottom
Speaker 1: line is that most of the debt that's out there
Speaker 1: is other at the World Bank with very fixed rates,
Speaker 1: or with China, where the rates are in yuan and
Speaker 1: not in U S dollars. China is now the largest
Speaker 1: lender to emerging markets after the World Bank, more than
Speaker 1: the United States, more than Europe, so to the extent
Speaker 1: that most of the debt is locked into loans to China,
Speaker 1: and the lenders in China our national banks, China Development Bank,
Speaker 1: and China Export of Developed Export Development Bank. UM. I
Speaker 1: don't really think that we're looking at the crisis as
Speaker 1: we saw back in the nineteen seventies coming out of
Speaker 1: all this some stress, yes, but crisis, no, Carl. We
Speaker 1: had a raft of economic data out this morning. I'm
Speaker 1: looking at e C o ECO go on the Bloomberg terminal.
Speaker 1: Let's just start with the top line, the g P
Speaker 1: two point six. You know, it's better than expected. It's
Speaker 1: obviously better to the first two quarters of the year.
Speaker 1: How do I think about that number in context of
Speaker 1: the drumbeat of recession calls out there. How should we
Speaker 1: think about that? Well, you know, the overshoot from expectations
Speaker 1: was only two tenses cent, which, if not exactly a
Speaker 1: big surprise, it was a team we need a little surprise.
Speaker 1: And looking at the components, there are signs of weakness
Speaker 1: within the components. But you know, just because we're not
Speaker 1: in recession now doesn't mean we're not going into a recession.
Speaker 1: That would be the first observation to make. And all
Speaker 1: the INDO haters are on the table, all the factors
Speaker 1: are on the table. That suggests that the U. S
Speaker 1: economy will at least slow if not contract in the
Speaker 1: quarters ahead from where we are right now. For the markets,
Speaker 1: what matters is how this influence is central bank policy,
Speaker 1: and our view at high frequency economics would be not
Speaker 1: at all. The FED is going to be looking at
Speaker 1: the inflation numbers and it's going to be a turn
Speaker 1: in inflation that's going to bring about a turn in
Speaker 1: FED policy. And we're not quite there yet. Okay, we're
Speaker 1: not quite there, but you know, I can play off
Speaker 1: the Chris Low note of put published moments ago. We
Speaker 1: are seeing a little bit of a turn. Do we
Speaker 1: see quite there yet with the November CPI report or
Speaker 1: does it even wait distant out from there? Well, it's
Speaker 1: a it's a tough call for economists, as you know,
Speaker 1: aren't very good at all of this. But we do
Speaker 1: see is that prices of some things are actually going down,
Speaker 1: in particular industrial commodities. Oil now ninety dollars a barrel
Speaker 1: as compared to a high thirty dollars about all six
Speaker 1: months ago, like aluminum, copper, nickel, All these industrial commodities
Speaker 1: are headed down in price. Used car prices headed down
Speaker 1: in price. You know, the things that were starting to
Speaker 1: adjust the other way. Housing going down, thank you, for
Speaker 1: reminding me. Down in price as goes down in volume.
Speaker 1: You know, these are the signs of weakening demand. So
Speaker 1: we're gonna be looking to see. You know, what we
Speaker 1: learned in in two thousand and seven two thousand and
Speaker 1: eight is that prices can turned very quickly. In six months,
Speaker 1: inflation went from four percent to negative in the US
Speaker 1: based on So how does the Fed carl that's brilliant?
Speaker 1: How does the Fed filter that in? You know, they
Speaker 1: put their their paul, they put their left pants on
Speaker 1: one leg time, thank you. But but how do they
Speaker 1: filter what you just said about our collective study of
Speaker 1: the fifties and two thousand seven into this parlor game
Speaker 1: of what the Fed's gonna do with rates? Well, Tom,
Speaker 1: you once gave a exture to my class at n
Speaker 1: y U where you discussed the difference between type one
Speaker 1: and type two errors in the market and at the
Speaker 1: central bank. And what you pointed out, very very precidently,
Speaker 1: is that the central banks job is to avoid the
Speaker 1: worst possible outcome at all costs, and the worst possible
Speaker 1: outcome will be run away inflation. So they're going to
Speaker 1: act keeping things tight and maybe even tightening in some
Speaker 1: wady see that the worst possible outcome has been avoided.
Speaker 1: The market's job is to avoid missing the best possible outcome,
Speaker 1: and that gives them a different sense set of parameters
Speaker 1: to work on. And that's maybe why receive a divergence
Speaker 1: between market expectations and what the said is actually telling us.
Speaker 1: Dr Weinberg speaks of their folks is massive jargon but
Speaker 1: foundational to not losing money, which is an understanding of
Speaker 1: statistical type one. It's Roman numeral one type two, Roman
Speaker 1: numeral two lies do and it's used differently, Paul, across economics, finance, investment,
Speaker 1: and also across social policy, and so you've gotta be
Speaker 1: very careful about the interpretation of it. But basically, as
Speaker 1: Dr Weinberg says, there, it's a FED riveted on avoiding
Speaker 1: the worst outcome, which in their case is name the
Speaker 1: history of FED screwing up, central banks screwing up. That's
Speaker 1: that's their number one focal point. Yeah, absolutely, speaking of
Speaker 1: losing money, Meta stock is exactly fifty two week low. So, Carl,
Speaker 1: I mean you take you take a look at some
Speaker 1: of these companies that are talking about slowing advertising demand,
Speaker 1: like Meta, like Google, um, there are so many as
Speaker 1: you point out there are so many signs out there
Speaker 1: that this economy is in fact cooling. Does that not
Speaker 1: give the Fed an opportunity to say, we're done, are
Speaker 1: pretty close to being done here? Well, are they sure
Speaker 1: that they're done? That's the question. And by the way, Paul,
Speaker 1: don't forget to mention all the companies that have said
Speaker 1: they've stopped hiring or that they're actively reducing headcount. The
Speaker 1: writings on the wall. Now. Households may still have some
Speaker 1: cash left over from pandemic, little subsidies and so forth,
Speaker 1: but their savings are going down. They're turning more and
Speaker 1: more to credit card debt that can't go on forever,
Speaker 1: and their real incomes are falling, and that means eventually
Speaker 1: their spending is going to have to come down. I
Speaker 1: can't tell you whether that's going to be this quarter
Speaker 1: or next quarter or the quarter after, but the writing
Speaker 1: is on the wall. Or a year from now, the U.
Speaker 1: S economy almost certainly will have contracted by one or
Speaker 1: maybe even two quarters, and price increases will be lower
Speaker 1: than they are today. That's our forecast at high frequency Economics.
Speaker 1: But which quart that's going to be, we don't really
Speaker 1: have a confident forecast on where that's going to happen.
Speaker 1: Carl Weinberg, thank you so much, greatly appreciate it. There
Speaker 1: with high frequency economic right now. Also behind us is
Speaker 1: Greg Valier with the mustarid note from a g F
Speaker 1: Investments and he joins us this morning. Greg, I said
Speaker 1: to them, I said, get somebody who remembers driving by
Speaker 1: the ge factory and schennected they knew you ARC on
Speaker 1: your way past Utica. There's only one guy we know
Speaker 1: that remembers Jack walch is s connected in New York.
Speaker 1: It's gone, Greg, Maybe it's the UTICAUS of America. They're
Speaker 1: gonna go to Syracuse today. Dr Biden went to Providences
Speaker 1: as well. Can the Democrats garner votes in the many
Speaker 1: Utica New York's of America? Well, ironically it looks like
Speaker 1: Democrats who have been entrenched in New England are in trouble.
Speaker 1: So no, I think we're seeing a total reversal. We're
Speaker 1: seeing Hispanic voters leave the Democratic Party going to Republicans.
Speaker 1: We're seeing a lot of changes from the old the
Speaker 1: old rules. At least. What I think is so important
Speaker 1: here is is this just simple idea of the Panic
Speaker 1: two weeks into the election and what was the day
Speaker 1: to day year is going to be extraordinary. Well, and
Speaker 1: if you look at some of the betting odds, you
Speaker 1: can see that the Democrats are just dramatically losing seats,
Speaker 1: and there's a question of how bad of a whopping
Speaker 1: they're going to take in both the House and the
Speaker 1: Senate greg from with respect to which ray As you're watching,
Speaker 1: what's going to be most telling to you in terms
Speaker 1: of not just whether the Democrats lease power, but by
Speaker 1: how much. Yeah, I'm at seventeen in the House and
Speaker 1: I'm probably on the low side. I might have to
Speaker 1: revise my final forecast and put it up into the twenties.
Speaker 1: So many, so many interesting dynamics in this election. Polls
Speaker 1: show that crime has surged as a big issue. Polls
Speaker 1: show that abortion is not as big an issue as
Speaker 1: we thought it might be. Poll's also show hispanic voters
Speaker 1: are moving to the Republicans. Really interesting stuff, And I
Speaker 1: do think there's going to be a wicked, wicked post
Speaker 1: mortem among the Democrats trying to figure out just what happened.
Speaker 1: And not to be conspiracy theorist, but I have to
Speaker 1: go to this because there have been some rumblings around
Speaker 1: the edges. How concerned are you about election security at
Speaker 1: a time when it's clear that there are a number
Speaker 1: of international actors as well as domestic ones that want
Speaker 1: to raise doubts about the institution of the United States.
Speaker 1: It's a legitimate fear there was a break in. Yet
Speaker 1: today we don't know the details, so we can't really speculate.
Speaker 1: But I have a hunch that's probably not the only
Speaker 1: incident will have in the next two weeks, Like that
Speaker 1: charges of that ballot box stuffing, you know, all of
Speaker 1: that stuff, Gregor, real focus on the Democrats here, Let's
Speaker 1: focus on the GOP right now. How Grand Old Party
Speaker 1: is the GOP two weeks out. Well, they've got an
Speaker 1: internal debate to resolve, and that is how much money
Speaker 1: do we give Ukraine. Kevin McCarthy has had to walk
Speaker 1: back what he said. I think most Republicans want to
Speaker 1: continue the funding. I wouldn't think please go ahead, I'm sorry, please,
Speaker 1: I'd make this point time. I think this one of
Speaker 1: the sleeper issues, and it involves China, it involves Ukraine,
Speaker 1: involves Iran. Is a dramatic increase in defense spending. I
Speaker 1: think we go to eight hundred billion in this new
Speaker 1: fiscal year. Our Democrats and Republicans on board with that jointly,
Speaker 1: as we see them both jointly with a view on China,
Speaker 1: one of the rare issues where you could see a compromise.
Speaker 1: I think there's unified antipathy in Washington towards China for
Speaker 1: all all of the things that they've done with whether
Speaker 1: it's COVID or treatment of dissidents. Greg Let's say that
Speaker 1: the Republicans do win both the House and the Senate,
Speaker 1: what are they gonna do with the FED when they
Speaker 1: are hiking rates? How much are they going to start
Speaker 1: pushing back against a pretty aggressive tightening in some of
Speaker 1: the monetary policy is simply because it's going to create
Speaker 1: some real problems for this economy. Fearless Forecast, Lisa. I
Speaker 1: think we're going to start to see the FED really
Speaker 1: come under intense criticism. We saw yesterday Shared Brown, the
Speaker 1: Democrat from Ohio, with a pretty harsh letter, and we
Speaker 1: see people in the markets, whether it's Jeremy Siegel or
Speaker 1: Jim Paulson, there are a lot of highly regarded people
Speaker 1: who feel the FED is overdone it. I think that
Speaker 1: criticism is going to increase right to catch up Greg
Speaker 1: just awesome. No doubt we'll speak to you touch bikes
Speaker 1: again before the midsum of I g F Investments. This
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