WEBVTT - Surveillance: Soft Global Economy with Sheets

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<v Speaker 1>Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

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<v Speaker 1>with Jonathan Ferrell and Lisa Brownowitz. Daily we bring you

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<v Speaker 1>insight from the best and economics, finance, investment, and international relations.

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<v Speaker 1>Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,

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<v Speaker 1>and of course on the Bloomberg terminal. There is a

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<v Speaker 1>single sentence from a Holland Horst and from Nathan Sheets,

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<v Speaker 1>global chief economist at City Group. Also is public service

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<v Speaker 1>to the United States Treasury, and Nathan Sheets joins us

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<v Speaker 1>right now, Nathan, there's that single line of global g

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<v Speaker 1>d P in two thousand twenty three. It is well

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<v Speaker 1>below the typical three percent level. How bad is the

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<v Speaker 1>global recession of next year? The global economy, as you say,

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<v Speaker 1>Thoma's looking very slot at the moment and aggregat our

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<v Speaker 1>projection is two percent global growth if you take out

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<v Speaker 1>our relatively bullish expectation for China, we see global growth

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<v Speaker 1>at less than one percent next year, which is right

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<v Speaker 1>on the border of what's been traditionally associated with the

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<v Speaker 1>with the global recession. Now, looking at a little bit

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<v Speaker 1>more at the details, we see early next year fairly

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<v Speaker 1>severe downturn in Europe clean both the year AWARE in

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<v Speaker 1>the UK, and then as the year progresses, the monetoring

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<v Speaker 1>tightening UH in the United States leads to a recession

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<v Speaker 1>during the second half of the year here as well.

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<v Speaker 1>So pretty pretty tough outlook, challenging in a lot of

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<v Speaker 1>different respects, and UH and that's coupled with an inflation

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<v Speaker 1>outlook remains very concerning Nathan. Financial conditions of East with

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<v Speaker 1>the bactrop they're talking about, financial conditions have started two weights,

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<v Speaker 1>and that's because a lot of people are thinking about

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<v Speaker 1>the Federal Reserve back in a way from the pace

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<v Speaker 1>of hikes from seventy five maybe down to fift day

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<v Speaker 1>the size down to Nathan, what do you make of

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<v Speaker 1>that conversation. I think the Fed has struggled in its communication.

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<v Speaker 1>It has set up, at least implicitly, a syllogism that

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<v Speaker 1>if we're serious about inflation, then we go seventy five

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<v Speaker 1>basis points, and when rates are low, it makes sense

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<v Speaker 1>to have that syllogism. But once you move to three percent,

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<v Speaker 1>and in November there will be at three seventy five.

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<v Speaker 1>As you move higher, you've got to start casting your

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<v Speaker 1>determination and framing your determination to fight inflation in in

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<v Speaker 1>in in different ways. Specifically, the FED can say we've

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<v Speaker 1>moved substantially and that reflects ourn't commitment. And if you

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<v Speaker 1>don't uh believe that we're committed, just watch what we're

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<v Speaker 1>gonna do. So I do think they're in a tough

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<v Speaker 1>situation where they've got to pivot. They can't take rates

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<v Speaker 1>off at seventy five basic points rate indefinitely, and the

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<v Speaker 1>markets are interpreting that as the fat kind of pivoting

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<v Speaker 1>off inflation determination, which I think is a misinterpretation of

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<v Speaker 1>where they are. I'm looking right now at some of

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<v Speaker 1>the GDP components. Michael McKee is breaking them down, and

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<v Speaker 1>we saw housing. He mentioned housing, and he just clarified

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<v Speaker 1>that residential investments attracted one point three seven percent from GDP.

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<v Speaker 1>This is a quickly moving story under the hood, how

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<v Speaker 1>much or other inflationary components off setting some of these

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<v Speaker 1>disinflationary moves that we're seeing in the housing market, that

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<v Speaker 1>we're seeing in retail that we're seeing and used at

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<v Speaker 1>car prices that you could see on the margins around

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<v Speaker 1>the economy. Very clearly, we are now in a dynamic

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<v Speaker 1>of disinflation in terms of goods prices that is clearly happening.

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<v Speaker 1>We expect that it's going to come off quite sharply

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<v Speaker 1>in coming months. Similarly, the shelter prices are persistent the

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<v Speaker 1>way they're calculated in the indexes. But when we're getting

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<v Speaker 1>these monster declines and residential investment, that's point of a

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<v Speaker 1>very soft housing market. But where the heart of inflationary

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<v Speaker 1>pressures remains is in the non shelter services and that

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<v Speaker 1>is tied to the hot labor market, rising wages and

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<v Speaker 1>rising services inflation. That is what the fans worried about.

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<v Speaker 1>And uh, that's what the FED is targeting here effectively,

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<v Speaker 1>is they've got to see a more contained numbers in

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<v Speaker 1>terms of non shelter services price inflation. And then mean yet,

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<v Speaker 1>take a while, I look, Nathan, at how we're going

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<v Speaker 1>to recalibrate. We're gonna recalibrate off this press conference, John

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<v Speaker 1>one in four minutes something. We're gonna recalibrate November two,

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<v Speaker 1>frame the City Group look for next year. I'm going

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<v Speaker 1>back to your stunning global GDP call of two percent

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<v Speaker 1>next year? What is your year opening report gonna look like?

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<v Speaker 1>Give us a heads up, so what we're what we're

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<v Speaker 1>seeing at the moment. Uh, and it's looking pretty durable

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<v Speaker 1>in my mind. We're calling next year rolling recessions in

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<v Speaker 1>the global economy. Uh. We're gonna see various countries turned down. Uh,

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<v Speaker 1>the vast majority of GDP will see a downturn. That

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<v Speaker 1>would particularly be accentuating, exacerbated if the Chinese economy ends

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<v Speaker 1>up being uh somewhat softer and instead of the five

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<v Speaker 1>and a half percent we're forecasting, if it's more like

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<v Speaker 1>this year at at three and a half. As you've

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<v Speaker 1>got this on the growth side, and then you also

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<v Speaker 1>have central banks they're gonna have to early in the

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<v Speaker 1>year continue to hide and as the year rolls on,

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<v Speaker 1>our expectation is hold those those rates and high levels.

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<v Speaker 1>So uh, next year is gonna be a challenging year.

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<v Speaker 1>I'm kind of already turning the page to that's so

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<v Speaker 1>much like that's that's what we need from a former

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<v Speaker 1>government official, Dr Sheath. That was brilliant night in Jessus City, Knithan,

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<v Speaker 1>thank you. This is a joint. Now we're gonna wrap

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<v Speaker 1>this into international economics. We do this with Christine Lagarde

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<v Speaker 1>an extended press conference mat managing the Master of the

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<v Speaker 1>e c B. Carl Weinberg joins US now high frequency economics. Carl,

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<v Speaker 1>I've got to go to e M. I looked at

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<v Speaker 1>a Columbia the Nation bond the other day and has

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<v Speaker 1>enjoyed going from night to sixty three. How big is

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<v Speaker 1>the tention right now in e M due to FED

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<v Speaker 1>policy and a strong dollar? In good morning, Tom Well,

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<v Speaker 1>Historically this would be a classic squeeze, with the FED

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<v Speaker 1>hiking rates and raising borrowing costs with commodity prices for

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<v Speaker 1>comfort countries that import commodities first going up and pairing

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<v Speaker 1>their balance of payments and their flow of dollars coming in,

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<v Speaker 1>and then now with prices going down for countries that

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<v Speaker 1>export them, facing the same kind of squeeze. The bottom

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<v Speaker 1>line is that most of the debt that's out there

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<v Speaker 1>is other at the World Bank with very fixed rates,

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<v Speaker 1>or with China, where the rates are in yuan and

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<v Speaker 1>not in U S dollars. China is now the largest

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<v Speaker 1>lender to emerging markets after the World Bank, more than

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<v Speaker 1>the United States, more than Europe, so to the extent

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<v Speaker 1>that most of the debt is locked into loans to China,

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<v Speaker 1>and the lenders in China our national banks, China Development Bank,

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<v Speaker 1>and China Export of Developed Export Development Bank. UM. I

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<v Speaker 1>don't really think that we're looking at the crisis as

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<v Speaker 1>we saw back in the nineteen seventies coming out of

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<v Speaker 1>all this some stress, yes, but crisis, no, Carl. We

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<v Speaker 1>had a raft of economic data out this morning. I'm

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<v Speaker 1>looking at e C o ECO go on the Bloomberg terminal.

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<v Speaker 1>Let's just start with the top line, the g P

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<v Speaker 1>two point six. You know, it's better than expected. It's

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<v Speaker 1>obviously better to the first two quarters of the year.

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<v Speaker 1>How do I think about that number in context of

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<v Speaker 1>the drumbeat of recession calls out there. How should we

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<v Speaker 1>think about that? Well, you know, the overshoot from expectations

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<v Speaker 1>was only two tenses cent, which, if not exactly a

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<v Speaker 1>big surprise, it was a team we need a little surprise.

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<v Speaker 1>And looking at the components, there are signs of weakness

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<v Speaker 1>within the components. But you know, just because we're not

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<v Speaker 1>in recession now doesn't mean we're not going into a recession.

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<v Speaker 1>That would be the first observation to make. And all

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<v Speaker 1>the INDO haters are on the table, all the factors

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<v Speaker 1>are on the table. That suggests that the U. S

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<v Speaker 1>economy will at least slow if not contract in the

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<v Speaker 1>quarters ahead from where we are right now. For the markets,

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<v Speaker 1>what matters is how this influence is central bank policy,

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<v Speaker 1>and our view at high frequency economics would be not

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<v Speaker 1>at all. The FED is going to be looking at

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<v Speaker 1>the inflation numbers and it's going to be a turn

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<v Speaker 1>in inflation that's going to bring about a turn in

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<v Speaker 1>FED policy. And we're not quite there yet. Okay, we're

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<v Speaker 1>not quite there, but you know, I can play off

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<v Speaker 1>the Chris Low note of put published moments ago. We

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<v Speaker 1>are seeing a little bit of a turn. Do we

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<v Speaker 1>see quite there yet with the November CPI report or

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<v Speaker 1>does it even wait distant out from there? Well, it's

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<v Speaker 1>a it's a tough call for economists, as you know,

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<v Speaker 1>aren't very good at all of this. But we do

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<v Speaker 1>see is that prices of some things are actually going down,

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<v Speaker 1>in particular industrial commodities. Oil now ninety dollars a barrel

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<v Speaker 1>as compared to a high thirty dollars about all six

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<v Speaker 1>months ago, like aluminum, copper, nickel, All these industrial commodities

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<v Speaker 1>are headed down in price. Used car prices headed down

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<v Speaker 1>in price. You know, the things that were starting to

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<v Speaker 1>adjust the other way. Housing going down, thank you, for

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<v Speaker 1>reminding me. Down in price as goes down in volume.

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<v Speaker 1>You know, these are the signs of weakening demand. So

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<v Speaker 1>we're gonna be looking to see. You know, what we

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<v Speaker 1>learned in in two thousand and seven two thousand and

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<v Speaker 1>eight is that prices can turned very quickly. In six months,

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<v Speaker 1>inflation went from four percent to negative in the US

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<v Speaker 1>based on So how does the Fed carl that's brilliant?

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<v Speaker 1>How does the Fed filter that in? You know, they

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<v Speaker 1>put their their paul, they put their left pants on

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<v Speaker 1>one leg time, thank you. But but how do they

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<v Speaker 1>filter what you just said about our collective study of

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<v Speaker 1>the fifties and two thousand seven into this parlor game

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<v Speaker 1>of what the Fed's gonna do with rates? Well, Tom,

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<v Speaker 1>you once gave a exture to my class at n

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<v Speaker 1>y U where you discussed the difference between type one

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<v Speaker 1>and type two errors in the market and at the

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<v Speaker 1>central bank. And what you pointed out, very very precidently,

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<v Speaker 1>is that the central banks job is to avoid the

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<v Speaker 1>worst possible outcome at all costs, and the worst possible

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<v Speaker 1>outcome will be run away inflation. So they're going to

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<v Speaker 1>act keeping things tight and maybe even tightening in some

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<v Speaker 1>wady see that the worst possible outcome has been avoided.

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<v Speaker 1>The market's job is to avoid missing the best possible outcome,

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<v Speaker 1>and that gives them a different sense set of parameters

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<v Speaker 1>to work on. And that's maybe why receive a divergence

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<v Speaker 1>between market expectations and what the said is actually telling us.

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<v Speaker 1>Dr Weinberg speaks of their folks is massive jargon but

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<v Speaker 1>foundational to not losing money, which is an understanding of

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<v Speaker 1>statistical type one. It's Roman numeral one type two, Roman

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<v Speaker 1>numeral two lies do and it's used differently, Paul, across economics, finance, investment,

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<v Speaker 1>and also across social policy, and so you've gotta be

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<v Speaker 1>very careful about the interpretation of it. But basically, as

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<v Speaker 1>Dr Weinberg says, there, it's a FED riveted on avoiding

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<v Speaker 1>the worst outcome, which in their case is name the

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<v Speaker 1>history of FED screwing up, central banks screwing up. That's

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<v Speaker 1>that's their number one focal point. Yeah, absolutely, speaking of

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<v Speaker 1>losing money, Meta stock is exactly fifty two week low. So, Carl,

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<v Speaker 1>I mean you take you take a look at some

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<v Speaker 1>of these companies that are talking about slowing advertising demand,

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<v Speaker 1>like Meta, like Google, um, there are so many as

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<v Speaker 1>you point out there are so many signs out there

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<v Speaker 1>that this economy is in fact cooling. Does that not

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<v Speaker 1>give the Fed an opportunity to say, we're done, are

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<v Speaker 1>pretty close to being done here? Well, are they sure

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<v Speaker 1>that they're done? That's the question. And by the way, Paul,

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<v Speaker 1>don't forget to mention all the companies that have said

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<v Speaker 1>they've stopped hiring or that they're actively reducing headcount. The

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<v Speaker 1>writings on the wall. Now. Households may still have some

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<v Speaker 1>cash left over from pandemic, little subsidies and so forth,

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<v Speaker 1>but their savings are going down. They're turning more and

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<v Speaker 1>more to credit card debt that can't go on forever,

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<v Speaker 1>and their real incomes are falling, and that means eventually

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<v Speaker 1>their spending is going to have to come down. I

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<v Speaker 1>can't tell you whether that's going to be this quarter

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<v Speaker 1>or next quarter or the quarter after, but the writing

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<v Speaker 1>is on the wall. Or a year from now, the U.

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<v Speaker 1>S economy almost certainly will have contracted by one or

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<v Speaker 1>maybe even two quarters, and price increases will be lower

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<v Speaker 1>than they are today. That's our forecast at high frequency Economics.

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<v Speaker 1>But which quart that's going to be, we don't really

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<v Speaker 1>have a confident forecast on where that's going to happen.

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<v Speaker 1>Carl Weinberg, thank you so much, greatly appreciate it. There

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<v Speaker 1>with high frequency economic right now. Also behind us is

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<v Speaker 1>Greg Valier with the mustarid note from a g F

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<v Speaker 1>Investments and he joins us this morning. Greg, I said

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<v Speaker 1>to them, I said, get somebody who remembers driving by

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<v Speaker 1>the ge factory and schennected they knew you ARC on

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<v Speaker 1>your way past Utica. There's only one guy we know

0:14:03.240 --> 0:14:06.280
<v Speaker 1>that remembers Jack walch is s connected in New York.

0:14:06.360 --> 0:14:10.560
<v Speaker 1>It's gone, Greg, Maybe it's the UTICAUS of America. They're

0:14:10.559 --> 0:14:14.040
<v Speaker 1>gonna go to Syracuse today. Dr Biden went to Providences

0:14:14.280 --> 0:14:17.600
<v Speaker 1>as well. Can the Democrats garner votes in the many

0:14:17.800 --> 0:14:23.240
<v Speaker 1>Utica New York's of America? Well, ironically it looks like

0:14:23.320 --> 0:14:26.880
<v Speaker 1>Democrats who have been entrenched in New England are in trouble.

0:14:27.320 --> 0:14:30.080
<v Speaker 1>So no, I think we're seeing a total reversal. We're

0:14:30.120 --> 0:14:33.880
<v Speaker 1>seeing Hispanic voters leave the Democratic Party going to Republicans.

0:14:34.080 --> 0:14:37.120
<v Speaker 1>We're seeing a lot of changes from the old the

0:14:37.160 --> 0:14:40.040
<v Speaker 1>old rules. At least. What I think is so important

0:14:40.080 --> 0:14:43.840
<v Speaker 1>here is is this just simple idea of the Panic

0:14:44.000 --> 0:14:46.400
<v Speaker 1>two weeks into the election and what was the day

0:14:46.400 --> 0:14:48.280
<v Speaker 1>to day year is going to be extraordinary. Well, and

0:14:48.320 --> 0:14:50.840
<v Speaker 1>if you look at some of the betting odds, you

0:14:50.840 --> 0:14:53.600
<v Speaker 1>can see that the Democrats are just dramatically losing seats,

0:14:53.600 --> 0:14:55.280
<v Speaker 1>and there's a question of how bad of a whopping

0:14:55.280 --> 0:14:57.280
<v Speaker 1>they're going to take in both the House and the

0:14:57.320 --> 0:15:00.840
<v Speaker 1>Senate greg from with respect to which ray As you're watching,

0:15:00.920 --> 0:15:03.000
<v Speaker 1>what's going to be most telling to you in terms

0:15:03.000 --> 0:15:05.760
<v Speaker 1>of not just whether the Democrats lease power, but by

0:15:05.800 --> 0:15:09.200
<v Speaker 1>how much. Yeah, I'm at seventeen in the House and

0:15:09.200 --> 0:15:11.840
<v Speaker 1>I'm probably on the low side. I might have to

0:15:11.880 --> 0:15:15.440
<v Speaker 1>revise my final forecast and put it up into the twenties.

0:15:15.960 --> 0:15:20.040
<v Speaker 1>So many, so many interesting dynamics in this election. Polls

0:15:20.120 --> 0:15:23.360
<v Speaker 1>show that crime has surged as a big issue. Polls

0:15:23.400 --> 0:15:25.680
<v Speaker 1>show that abortion is not as big an issue as

0:15:25.720 --> 0:15:29.600
<v Speaker 1>we thought it might be. Poll's also show hispanic voters

0:15:29.600 --> 0:15:34.120
<v Speaker 1>are moving to the Republicans. Really interesting stuff, And I

0:15:34.160 --> 0:15:36.880
<v Speaker 1>do think there's going to be a wicked, wicked post

0:15:36.920 --> 0:15:40.240
<v Speaker 1>mortem among the Democrats trying to figure out just what happened.

0:15:40.480 --> 0:15:42.800
<v Speaker 1>And not to be conspiracy theorist, but I have to

0:15:42.840 --> 0:15:45.080
<v Speaker 1>go to this because there have been some rumblings around

0:15:45.120 --> 0:15:48.200
<v Speaker 1>the edges. How concerned are you about election security at

0:15:48.200 --> 0:15:50.240
<v Speaker 1>a time when it's clear that there are a number

0:15:50.320 --> 0:15:53.800
<v Speaker 1>of international actors as well as domestic ones that want

0:15:53.840 --> 0:15:56.600
<v Speaker 1>to raise doubts about the institution of the United States.

0:15:57.200 --> 0:15:59.920
<v Speaker 1>It's a legitimate fear there was a break in. Yet

0:16:00.040 --> 0:16:03.040
<v Speaker 1>today we don't know the details, so we can't really speculate.

0:16:03.080 --> 0:16:05.840
<v Speaker 1>But I have a hunch that's probably not the only

0:16:06.120 --> 0:16:08.480
<v Speaker 1>incident will have in the next two weeks, Like that

0:16:08.840 --> 0:16:11.280
<v Speaker 1>charges of that ballot box stuffing, you know, all of

0:16:11.320 --> 0:16:14.240
<v Speaker 1>that stuff, Gregor, real focus on the Democrats here, Let's

0:16:14.240 --> 0:16:17.280
<v Speaker 1>focus on the GOP right now. How Grand Old Party

0:16:17.400 --> 0:16:21.320
<v Speaker 1>is the GOP two weeks out. Well, they've got an

0:16:21.360 --> 0:16:24.080
<v Speaker 1>internal debate to resolve, and that is how much money

0:16:24.080 --> 0:16:27.320
<v Speaker 1>do we give Ukraine. Kevin McCarthy has had to walk

0:16:27.400 --> 0:16:30.280
<v Speaker 1>back what he said. I think most Republicans want to

0:16:30.280 --> 0:16:34.600
<v Speaker 1>continue the funding. I wouldn't think please go ahead, I'm sorry, please,

0:16:34.720 --> 0:16:37.400
<v Speaker 1>I'd make this point time. I think this one of

0:16:37.400 --> 0:16:40.640
<v Speaker 1>the sleeper issues, and it involves China, it involves Ukraine,

0:16:40.720 --> 0:16:44.560
<v Speaker 1>involves Iran. Is a dramatic increase in defense spending. I

0:16:44.560 --> 0:16:47.600
<v Speaker 1>think we go to eight hundred billion in this new

0:16:47.640 --> 0:16:51.840
<v Speaker 1>fiscal year. Our Democrats and Republicans on board with that jointly,

0:16:51.960 --> 0:16:54.880
<v Speaker 1>as we see them both jointly with a view on China,

0:16:55.680 --> 0:16:58.479
<v Speaker 1>one of the rare issues where you could see a compromise.

0:16:58.600 --> 0:17:02.880
<v Speaker 1>I think there's unified antipathy in Washington towards China for

0:17:02.960 --> 0:17:05.119
<v Speaker 1>all all of the things that they've done with whether

0:17:05.160 --> 0:17:08.320
<v Speaker 1>it's COVID or treatment of dissidents. Greg Let's say that

0:17:08.359 --> 0:17:11.679
<v Speaker 1>the Republicans do win both the House and the Senate,

0:17:11.720 --> 0:17:13.320
<v Speaker 1>what are they gonna do with the FED when they

0:17:13.320 --> 0:17:15.280
<v Speaker 1>are hiking rates? How much are they going to start

0:17:15.320 --> 0:17:19.800
<v Speaker 1>pushing back against a pretty aggressive tightening in some of

0:17:19.840 --> 0:17:23.000
<v Speaker 1>the monetary policy is simply because it's going to create

0:17:23.000 --> 0:17:26.560
<v Speaker 1>some real problems for this economy. Fearless Forecast, Lisa. I

0:17:26.600 --> 0:17:28.680
<v Speaker 1>think we're going to start to see the FED really

0:17:28.720 --> 0:17:32.960
<v Speaker 1>come under intense criticism. We saw yesterday Shared Brown, the

0:17:33.320 --> 0:17:36.320
<v Speaker 1>Democrat from Ohio, with a pretty harsh letter, and we

0:17:36.400 --> 0:17:39.160
<v Speaker 1>see people in the markets, whether it's Jeremy Siegel or

0:17:39.280 --> 0:17:42.040
<v Speaker 1>Jim Paulson, there are a lot of highly regarded people

0:17:42.080 --> 0:17:44.520
<v Speaker 1>who feel the FED is overdone it. I think that

0:17:44.600 --> 0:17:47.600
<v Speaker 1>criticism is going to increase right to catch up Greg

0:17:47.600 --> 0:17:49.800
<v Speaker 1>just awesome. No doubt we'll speak to you touch bikes

0:17:49.840 --> 0:17:53.800
<v Speaker 1>again before the midsum of I g F Investments. This

0:17:53.880 --> 0:17:57.639
<v Speaker 1>is the Bloomberg Surveillance Podcast. Thanks for listening. Join us

0:17:57.720 --> 0:18:00.560
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0:18:00.800 --> 0:18:04.880
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0:18:04.920 --> 0:18:10.160
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