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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene, along

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Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jay Lee. We bring

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Speaker 1: you insight from the best and economics, finance, investment, and

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Speaker 1: international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg

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Speaker 1: dot com, and of course, on the Bloomberg terminal. Lela

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Speaker 1: Mata joins US now China based Book International CEO Leland.

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Speaker 1: We've got to have a really important conversation. I'm sure

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Speaker 1: it's frustrated you through the week that everyone, almost exclusively

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Speaker 1: I say everyone, A lot of people have been overwhelmingly

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Speaker 1: focused on whether this is a Lehman moment or not.

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Speaker 1: You think there should be a bigger focus out swhere.

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Speaker 1: Let's start there, Leland, where well, you you have to

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Speaker 1: start just saying this is not China's Lehman moment. I

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Speaker 1: think everyone's at the point where they're sort of understanding

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Speaker 1: that there's not major contagient risk here. China has the

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Speaker 1: tools to be able to deal with it. The real

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Speaker 1: signal here is is what she is doing in the

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Speaker 1: in the property sector. Earlier in one and we saw

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Speaker 1: this very clearly in China Beige Book data there was

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Speaker 1: a d risking of the financial sector, much tighter conditions

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Speaker 1: as the years went on. Year went on. The property

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Speaker 1: sector has been in the midst of a de risking

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Speaker 1: for the last six months or so, which is which

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Speaker 1: has created this uh, much lower growth, much less access

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Speaker 1: to capital. This is this is a paradigm shift for

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Speaker 1: China's growth model. When she looks forward, I think he

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Speaker 1: sees the end of this economic growth model as it

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Speaker 1: stands right now. There is too much risk, there's too

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Speaker 1: much nonproductive uses of capital, good money chasing bad and

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Speaker 1: so at this point, you know this is investors should

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Speaker 1: be looking at the medium term trajectory of growth, which

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Speaker 1: is gonna be much lower than I think people understand

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Speaker 1: it right now. How much lovely do you think? I've

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Speaker 1: seen numbers in the low fives for next year? What

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Speaker 1: are you talking about? Leyland? Fools three? So what do

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Speaker 1: you think? Look two is gonna be very tricky because

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Speaker 1: you start off at the beginning of the year with

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Speaker 1: the Beijing Olympics, and you have the Party Congress at

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Speaker 1: the end of the year. There's no way that the

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Speaker 1: party gonna allow bad headlines or disruptions right up into

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Speaker 1: the Party Congress. Which is held twice a decade. It's

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Speaker 1: where she is going to point himself truly president for

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Speaker 1: life and maybe a point of successors. It's gonna be

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Speaker 1: a big deal. So the questions really beyond because two

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Speaker 1: is a bit hazy in the way that they want

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Speaker 1: to handle that run up. Uh, we're looking at numbers.

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Speaker 1: They can keep them higher for longer, but but but

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Speaker 1: they're going to have to truly downshift. We're not talking about,

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Speaker 1: you know, a tenth of a point here, We're gonna

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Speaker 1: have to talk about full percentage points going forward in

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Speaker 1: growth because they're not going to have the property sector driver,

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Speaker 1: and they're not gonna be able to simply snap their

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Speaker 1: fingers and transition from investment to consumption because they're not

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Speaker 1: doing any of the structural forms necessary for that right now.

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Speaker 1: How sustainable Leland is the framework of the Chinese economy

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Speaker 1: to handle a three four percent growth rate after basically

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Speaker 1: hinging itself on that seven eight nine percent growth rate

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Speaker 1: that we've seen. It is absolutely capable. The only reason

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Speaker 1: the Party hasn't gotten away with it is because there's

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Speaker 1: been decades of of of zelotry around the idea you

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Speaker 1: have to have a GDP target. You have to meet

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Speaker 1: that target. If you just accepted slower growth. Now, look,

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Speaker 1: foreign investors, commodity firms, everyone will be thrown for a

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Speaker 1: loop globally. But China itself could embrace slower, healthier growth.

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Speaker 1: It would improve the dynamics outside China, it would stop

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Speaker 1: the debt build up all of a sudden, capital could

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Speaker 1: go to productive uses instead of non productive uses. It

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Speaker 1: would be extremely important for China, and I think that's

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Speaker 1: why the Party is doing it right now. The true

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Speaker 1: risk here is that foreign investors just haven't gotten the

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Speaker 1: memo and they they're not expecting what's coming next. Well,

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Speaker 1: let's talk about those foreign investors Leland, because China also

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Speaker 1: was supposed to be in the process of opening its

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Speaker 1: financial markets. Does what She's in pain is doing now

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Speaker 1: internally in China run counter to that it does, and

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Speaker 1: and there's there's there's just a major conflict here. Um

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Speaker 1: she is facing you know, is faced inward. He is

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Speaker 1: he is doing a huge rectification campaign in the run

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Speaker 1: up to to the Party Congress to to show that

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Speaker 1: the social compact has changed between the Party and the people.

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Speaker 1: Now the party is is not focused on growth for

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Speaker 1: growth sake or creation of wealth. It's there for distributing

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Speaker 1: wealth and making sure everybody is happy and rich. So

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Speaker 1: there's a major domestic focus right now. You know that

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Speaker 1: conflicts dramatically with the idea that you're going to make

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Speaker 1: capital markets hospitable to foreign investors. So Leland, this goes

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Speaker 1: directly to the question of the dollar bonds of ever Grand.

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Speaker 1: If they perhaps if the regulators in China manage to

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Speaker 1: avoid contagion risks within the population but allow these bonds

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Speaker 1: to default, is there a larger message that it is

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Speaker 1: dangerous and unpredictable to invest in dollar bonds from Chinese

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Speaker 1: companies going forward. Absolutely, the risk of this is shut

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Speaker 1: upward and it doesn't mean that they're going to to

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Speaker 1: try to screw for an investors. But could they be

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Speaker 1: any clear in signaling where the priorities are right now?

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Speaker 1: You know, if you're investing in in dollar bonds, you

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Speaker 1: are somewhere in the middle to the bottom of the

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Speaker 1: priorty party list forever brand and overall. So the idea

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Speaker 1: that these are sort of non non zero risk investments

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Speaker 1: or or low risk investments, I should say you have

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Speaker 1: to crank up your risk profile for these tools because

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Speaker 1: you don't know how deep these crackdowns are going to

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Speaker 1: go for the next year plus. And this has been

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Speaker 1: such an important conversation. Leland, don't be a stranger. Stay close.

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Speaker 1: Let's catch up again soon because I imagine we'll be

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Speaker 1: talking about this issue for a while. Leland Mill of

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Speaker 1: the China Book International CEO. Let's talk to Michael Gayford,

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Speaker 1: Barclay's chief US economists. Michael Kelly talked about real yield

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Speaker 1: in this adjustment we've seen in the past twenty four

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Speaker 1: hours as well. Darryl crom talked about the belly of

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Speaker 1: the curve yield tire on five. So, now, do you

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Speaker 1: think with pricing in hikes a little bit too quickly

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Speaker 1: here based on what you heard in that FED call

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Speaker 1: a little bit earlier this week, No, I think I think,

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Speaker 1: given the first of all, good morning, UM, and thank

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Speaker 1: you for the for the question, I think given what

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Speaker 1: you heard, No, I think you you you are hearing

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Speaker 1: hawkish rhetoric out of central banks, the FED giving you

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Speaker 1: the signal on taper, the Bank of England, you know,

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Speaker 1: signaling tighter monetary policy may be appropriate. We can debate

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Speaker 1: whether or not we think it's the right policy, depending

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Speaker 1: on how you think of inflation is going to play

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Speaker 1: out and where the risks really are. But I think

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Speaker 1: given the communication, no, I think markets have been right

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Speaker 1: in terms of absorbing the message that that the normalization

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Speaker 1: of policy has started, the great exit, if you will,

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Speaker 1: from these emergency policy settings has begun and and maybe

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Speaker 1: even accelerating. Well, let's at tank that line of thinking,

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Speaker 1: not the should should, and let's do the will want,

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Speaker 1: what they will do, what they won't do? What do

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Speaker 1: you think they will do? What will that rate path

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Speaker 1: look like through the next couple of years. Well, I

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Speaker 1: think for the for the ft obviously step one is

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Speaker 1: get to taper, and I think there's now a very

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Speaker 1: high bar to to not taper, given given Powell's comments

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Speaker 1: and and the message that they will be done by

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Speaker 1: the middle of next year opens the door. Whether they

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Speaker 1: walk through that door or not, we don't know. We

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Speaker 1: need to see where inflation will will be. The Bank

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Speaker 1: of England is now set up a situation where the

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Speaker 1: markets pricing in about two hikes over over the next year,

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Speaker 1: and they may have a small majority in order to

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Speaker 1: deliver those early early next year. So it's probably be

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Speaker 1: a coin toss whether or not you get a hike

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Speaker 1: in in the US next year. It's a nine to

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Speaker 1: nine split right now on on the committee. But I

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Speaker 1: think the FED would argue, yeah, okay, fine, we might

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Speaker 1: get started, but look three years from now, we still

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Speaker 1: think we're going to be below neutral. So it's a

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Speaker 1: it's a blend, and that's why I think a steepening

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Speaker 1: in the yield curve made made a lot of sense.

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Speaker 1: We may get started sooner than than we thought we

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Speaker 1: were just even a couple of quarters ago, but we

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Speaker 1: still think it's it's going to be a gradual cycle.

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Speaker 1: And and the neutral rate is you know, we're not

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Speaker 1: going to be touching the neutral rate over that whole

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Speaker 1: forecast period from from the FED projection. That's why I

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Speaker 1: think you can still argue for a steeper curve. I

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Speaker 1: want to get a more elaborate ration on the great

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Speaker 1: exit is starting. This sounds dramatic. It is dramatic after

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Speaker 1: years and frankly months of extreme accommodation after the pandemic,

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Speaker 1: and yet we have not seen any major moves in

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Speaker 1: markets in response. Can this stay or is there a

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Speaker 1: culative sort of response accumulative effect by all the central

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Speaker 1: banks taking a similar type of more hawkish tone at

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Speaker 1: the same time. So I think that's a great it's

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Speaker 1: a great question, and you look and I think there

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Speaker 1: there probably is a day of reckoning at some point

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Speaker 1: that no, we all can't be when when when that

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Speaker 1: ship turns Globally, historically you're going to get volatility. So

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Speaker 1: in your previous segment you talked about downside risk to

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Speaker 1: China growth. The Central Bank Brazil tightened a hundred basis points.

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Speaker 1: We think, we think Mexico does twenty five next week.

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Speaker 1: The FED is going to be starting tapering, The Bank

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Speaker 1: of England potentially hikes early next year. That's a lot

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Speaker 1: of you know, acute potentially the ship turning in a

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Speaker 1: way that's coordinated globally, and it reflects the nature of

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Speaker 1: the shock of courts, which was a coordinated pandemic shock.

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Speaker 1: We're kind of past the v in terms of we've

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Speaker 1: gotten that sharp snap back and economic growth growth could

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Speaker 1: be moderating globally going forward, central bank policy could be normalizing.

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Speaker 1: That's not always a great recipe for for markets. So

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Speaker 1: here it's about the speed of that removal against where

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Speaker 1: market expectations are. So far, markets want that and it

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Speaker 1: hasn't been destabilizing, and we'll have to see whether that

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Speaker 1: balance can be maintained. This is one thing I was

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Speaker 1: worrying about last night as John Farrow was talking to

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Speaker 1: priamsra I was just quietly worrying about this idea of

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Speaker 1: higher yields around the world leading to lower foreign buying

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Speaker 1: of treasuries, and what if there is not substantial domestic

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Speaker 1: demand to keep yields where they are at a time

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Speaker 1: of FED tapering, even if supply isn't that big or

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Speaker 1: is a lot lower than it has been in the past,

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Speaker 1: could you foresee some sort of development like that? Sure,

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Speaker 1: And in that world, I think what you would be

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Speaker 1: arguing is that rates would have to back up a

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Speaker 1: little bit and would therefore tighten financial conditions on the

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Speaker 1: margin and help to moderate growth in the US. So

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Speaker 1: it's it's a scenario that I think we have to

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Speaker 1: be aware of and and see if that plays out.

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Speaker 1: That would mean you're going to get more tightening, kind

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Speaker 1: of more effect on on GDP per FED titan if

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Speaker 1: you will, because you're you're arguing rates should be higher

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Speaker 1: all else sequel given that net shift in demand for treasuries, Michael,

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Speaker 1: I want to talk about the consumer because in just

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Speaker 1: the last couple of days, we've heard more and more

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Speaker 1: about supply chain issues companies are facing, one of them

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Speaker 1: being Costco, who last night says we're going to have

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Speaker 1: to raise prices for items on our shelves by three

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Speaker 1: and a half to four and a half percent. To

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Speaker 1: what extent is the consumer still going to be able

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Speaker 1: to tolerate that if we aren't getting significant wage inflation. Well,

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Speaker 1: I think I would argue that I think we have enough,

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Speaker 1: say ammunition in the pipeline for the consumer to keep

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Speaker 1: spending going despite what could be potentially higher prices on

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Speaker 1: on some goods. So we still have a lot of

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Speaker 1: excess saving that's out there on household balance sheets. And

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Speaker 1: and we still think there's going to be a lot

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Speaker 1: of employment growth. So as you know, income generated from

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Speaker 1: labor markets isn't just where wages are, but it's ours work,

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Speaker 1: it's total employment. So from an aggregate perspective, I still

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Speaker 1: think there's enough momentum there to household spending, say, clicking

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Speaker 1: along at reasonable rates, even though yes, there's certainly underlying

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Speaker 1: price pressures now that we didn't have twelve to thirty

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Speaker 1: six months ago. So I think we're still comfortable with

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Speaker 1: where the U. S. Consumer is, So let's talk further

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Speaker 1: about employment then, Michael. Obviously you still have a persistently

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Speaker 1: lower labor force participation rate. You're starting to see those

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Speaker 1: additional benefits rolling off, but you aren't seeing the subsequent

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Speaker 1: increase that many were expecting when you remove that incentive

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Speaker 1: not to work. What do you make of what's going

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Speaker 1: on in the labor market right now and how structural

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Speaker 1: these issues are? Yeah, so I think this is the

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Speaker 1: literally the big unknown for for the US recovery. Does

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Speaker 1: that participation rate rebound? Is it a permanent exit from

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Speaker 1: from the workforce? What I make of it. I think

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Speaker 1: there's a lot of factors keeping restraining employment and restraining

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Speaker 1: a return to the workforce. I still think, you know,

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Speaker 1: we can't really parse it all out because there's a

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Speaker 1: lot of moving parts here. I still think the number

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Speaker 1: one important reason that's stabilizing labor markets is fear of

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Speaker 1: infection and infection risk. And and I know that's been

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Speaker 1: a well worn you know wheel at this at this

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Speaker 1: stage of the pandemic. But if you look where hiring

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Speaker 1: came off in the last employment report, all these are

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Speaker 1: in hospitality, all retail, outside of those hiring was still

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Speaker 1: pretty good. So I think if we want to return,

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Speaker 1: you know, and if we want to understand the structural

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Speaker 1: outcome in the labor market, we have to you know,

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Speaker 1: we have to get a control on on the pandemic.

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Speaker 1: It's it's simple to say, hard to do, but I

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Speaker 1: still think that's the driving force. We've got to get

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Speaker 1: you out of the basement. Mike. We're actually back in

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Speaker 1: the office three days a week now, so we're getting there.

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Speaker 1: How do you how do you split it, Mike? You

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Speaker 1: do Monday at home, Friday at home? Is that how

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Speaker 1: it works? A longer weekend varies. It varies depending on

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Speaker 1: whether we're seeing people, you know, face to face that

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Speaker 1: is actually happening. Again, it depends whether I have interviews

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Speaker 1: with with my friends on Bloomberger and not as well.

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Speaker 1: Very cool, Thank you, Mike. Right, a catch up Michael

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Speaker 1: Kaife and there Francoli's chief US economists. We're not talking

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Speaker 1: about a Lehman moment. We're talking about the removal of

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Speaker 1: some of the dynamism of global growth from the China slowdown.

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Speaker 1: Mike Darta really covers everything on the intersection of global economy,

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Speaker 1: the global economy through the lens of the United States

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Speaker 1: joining US now MK, I'm partners chief economist and macro strategist.

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Speaker 1: I want to start there. How much would a material

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Speaker 1: slow down in China's growth affect the United States? It's

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Speaker 1: a great question, you know, we don't know off hand.

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Speaker 1: It really critically depends on how much contagion there is.

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Speaker 1: And so if we listen to what that Chair Powell

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Speaker 1: said this week, if financial conditions and credit market conditions

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Speaker 1: were too tighten drastically, uh, that's you know, that would

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Speaker 1: essentially deliver the same kind of headpoint is if the

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Speaker 1: started to tighten much more quickly than expected. So far, however,

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Speaker 1: that hasn't really happened. So viewers can watch a few

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Speaker 1: different indicators to keep tabs on potential contagion. One is

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Speaker 1: just the performance of the high yield market in the

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Speaker 1: US because it's very sensitive to liquidity and growth shocks.

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Speaker 1: So if China goes into a tail spin that's likely

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Speaker 1: to be highly destabilizing the global growth. You'd expect the

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Speaker 1: high yield market spreads to wide widened pretty considerably. Nothing

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Speaker 1: doing there so far. Now that can change, but so

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Speaker 1: far we don't really see any contagious spillovers, flor whatsoever.

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Speaker 1: But Mike and I need to say this because it's

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Speaker 1: always bad to say this time is different, But this

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Speaker 1: time is it different because of the feds involvement in

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Speaker 1: credit markets and frankly because of the backstop that we've seen. Yeah,

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Speaker 1: that's a great point, and I think that's exactly why

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Speaker 1: we're seeing the stability in the high yield market that

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Speaker 1: we are. There's essentially three point eight true million dollars

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Speaker 1: of foam on the runway, and that's not balance sheet foam.

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Speaker 1: That's broad money, spendable assets deposits in the financial system,

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Speaker 1: and so because of the FED actions, I think that's

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Speaker 1: exactly why we're not seeing the contagion. But it also

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Speaker 1: means that there's a lot of support for aggregate demands

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Speaker 1: to continue running pretty hot in the US even with

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Speaker 1: these setbacks around the globe. So it's a it's a

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Speaker 1: good point, but I think the high yield market can

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Speaker 1: still still gives us the signal that there is a

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Speaker 1: tremendous amount of liquidity and spendable assets in the system,

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Speaker 1: and that means that the US business cycle probably keeps

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Speaker 1: chugging along, even if ever Grant does a hard based

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Speaker 1: plant here, which seems highly likely. Mike, let's talk about

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Speaker 1: the intersection of US monetary and fiscal policy. Greg Valier,

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Speaker 1: who's a policy strategist, just publishing his note a few

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Speaker 1: minutes ago talking about the fiscal drama happening down in DC,

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Speaker 1: surrounding the debt ceiling, infrastructure spending, and he said it

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Speaker 1: will look so dysfunctional that the Federal Reserve may have

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Speaker 1: to wait until winter and the resphiscal clarity to begin

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Speaker 1: tapering its asset purchases. Do you agree with that? I

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Speaker 1: don't agree with that. I think Paul was very clear.

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Speaker 1: He essentially said in his atension, we've all but met

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Speaker 1: the threshold for tapering, which is simply a substantial further

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Speaker 1: improvement in labor market conditions relative to where we started

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Speaker 1: the year. And you know, so the fiscal policy deliberations

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Speaker 1: are going to continue to unfold. I think the FET

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Speaker 1: is still on course to start the taper, you know,

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Speaker 1: this November, unless we get some really shocking data or

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Speaker 1: a big financial market accident, which so far has not occurred.

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Speaker 1: So those two things, I think, rather than the discussions

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Speaker 1: that are going in a going on in Washington, would

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Speaker 1: be the only potential snaxt but highly unlikely. I think

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Speaker 1: we're on autopilot here too, to see the feed begin

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Speaker 1: a taper in November that likely concludes mid year next year.

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Speaker 1: Just keep in mind that tapering means they're still adding

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Speaker 1: money to the system. That that's balance. Heat will likely

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Speaker 1: expand by half a trillion dollars or more over the

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Speaker 1: course of the fall through the middle of next year

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Speaker 1: if they do it, a fifteen billion dollar tape for

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Speaker 1: per month, that is pretty unusual with an economy rapidly

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Speaker 1: closing in on full employment. If we just look at

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Speaker 1: the trends and what's happening to employment ratios and the

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Speaker 1: unemployment rate, and so I don't think physical policy is

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Speaker 1: going to be as disruptive of forces as some seem

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Speaker 1: to believe. But you know, we'll see how it goes

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Speaker 1: next year. Okay, well, let's talk about you were mentioning

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Speaker 1: the data there. Obviously, October eight is going to be

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Speaker 1: the next big one with the September jobs report, Palace

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Speaker 1: set in his news conference, I just want to see

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Speaker 1: decent growth. You know, it doesn't have to be anything stellar.

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Speaker 1: Is it even possible that what happens on October eight

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Speaker 1: changes the equation for November or is that now kind

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Speaker 1: of setence don't. Yeah, highly unlikely. I think it would

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Speaker 1: have to be a pretty dramatic misrelative to expectations. It's

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Speaker 1: always possible, but I think it's not very likely. So

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Speaker 1: either something like that or some very sudden uh financial

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Speaker 1: market storm um taking place in so far and we're

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Speaker 1: not really seeing that even with all the pressure on

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Speaker 1: ever grand in Chinese debt market. So I think, you know,

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Speaker 1: set in Stone might be a tiny bit strong um.

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Speaker 1: But I think kind of life has to a taper

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Speaker 1: for for sure, pretty much all but in the bag Mike.

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Speaker 1: Yesterday we had on Danny blanche Flower of Dartmouth and

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Speaker 1: he called the current field of economics guess anomics, since

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Speaker 1: we have no clue what is happening basically in our

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Speaker 1: visibility is very low. He was saying that it's a

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Speaker 1: mistake for the feeder reserve to be tapering at all

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Speaker 1: because the underlying trend in labor markets is actually weaker

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Speaker 1: and that frankly, the lack of participation has been a

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Speaker 1: high concern. Do you agree, I would have to say

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Speaker 1: I actually disagree with that. Um. So if we go

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Speaker 1: back to the last cycle, and we look at where

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Speaker 1: the labor market is. When the FED taper starting in

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Speaker 1: came you worry of announced at the end of twenty thirteen,

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Speaker 1: the unemployment rate was considerably higher about you know, hundred

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Speaker 1: and forty basis points. Uh. The primate employment to population

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Speaker 1: ratio was lower by the same magnitude a little bit

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Speaker 1: more actually, uh. And if you know, even if we

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Speaker 1: look at this criteria, the FET is now saying it

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Speaker 1: wants to be more inclusive in terms of focusing on

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Speaker 1: the labor market. We look at African American unemployment rates

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Speaker 1: or Hispanic unemployment rates, we're in a much better shape

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Speaker 1: now than we were back then when the FED started

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Speaker 1: the tapers of the beet is already waited longer. And

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Speaker 1: even if we look at these super core measures of inflation,

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Speaker 1: right so if you listen to the people that are

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Speaker 1: in the temporary transitory base effect camp in terms of saying,

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Speaker 1: don't worry about this high headline inflation. Right now, if

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Speaker 1: we look at the trimmed mean PCE deflator, the median CPI,

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Speaker 1: the employment Employment cost index, those are all run hotter,

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Speaker 1: not massively, but you know, I would see materially then

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Speaker 1: they were when the FED started the taper in the

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Speaker 1: last cycle, so the Fed's already desitioned itself behind the

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Speaker 1: curve easy to be the last cycle relative to the

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Speaker 1: labor market and relative to even these super pore measures

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Speaker 1: of inflation. So I would have to disagree on that score.

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Speaker 1: I think, if anything, that FED is probably going to

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Speaker 1: end up behind the curve here, because we could be

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Speaker 1: rapidly reconverging with not just full employment, interesting casually beyond

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Speaker 1: full employment by the you know, by the mid mid

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Speaker 1: year next year, the end of next year, before the

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Speaker 1: FED even gets up that geral lower bounds. That final

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Speaker 1: point is so so important, Mike, it's so important. We'll

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Speaker 1: try and talk about that through the morning, Mike Dae

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Speaker 1: to that of MKM Partners, Mike, thank you. Sir Patrick

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Speaker 1: comp Strong joined the SNAPLIBI Wealth Chief Investment Officer. Let's

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Speaker 1: start here, Patrick Poth at least resistance high or LOWA

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Speaker 1: for this equity mark, Kid, I think it's going to

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Speaker 1: continue to be higher. I think queue is going to

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Speaker 1: slow down. It's not going to stop over the next

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Speaker 1: nine months, but it's going to be tapered and that

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Speaker 1: suppresses volatility. So I think we have a bumpyard grind

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Speaker 1: higher potentially. But while we've got massive liquidity you saw

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Speaker 1: one point three trillion in the FEDS reverse repo yesterday. Um,

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Speaker 1: you've got negative real yields at negative point nine percent,

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Speaker 1: and you've got very significant earnings growth forecast for the

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Speaker 1: next few years. At the double digit earnings growth still

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Speaker 1: is the consensus expectation. While those three things are in place,

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Speaker 1: it's hard to see equities having a sustain sustained sell off. Patrick, Yesterday,

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Speaker 1: people were saying that there was a reaffirmation of the

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Speaker 1: reflation trade, as you could see from higher yields in

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Speaker 1: tandem with higher equity prices. Do you agree that there's

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Speaker 1: been some shift or was it just choppy as people

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Speaker 1: tried to make sense of all the headwinds and tow wins. Yeah,

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Speaker 1: I'm not even sure if it's a change in inflation expectations.

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Speaker 1: Is it's a change in basically what the Treasury has

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Speaker 1: to yield. So you've got the Fed who's been buying

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Speaker 1: a hundred and twenty billion of bonds every month and

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Speaker 1: that's going to slow. And if you look at inflation

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Speaker 1: break evens, they're largely unchanged over the last few days.

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Speaker 1: So I think the path of the tenure yield moving

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Speaker 1: higher is actually a slightly less negative real yield, and

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Speaker 1: you have to incentivize buyers to take those treasuries that

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Speaker 1: the FED won't be buying, and I think higher yields

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Speaker 1: are needed to that. Okay, So Patrick, let me just

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Speaker 1: pick this apart because you mentioned that real yields of

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Speaker 1: taking higher were now around negative ninety basis points. You

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Speaker 1: talk about three pillars that support equities, one being real yields,

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Speaker 1: which are still steeply negative. I'll give you that liquidity, which,

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Speaker 1: as the FEDUS said, it's going to start winding down,

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Speaker 1: and then earnings growth. So when you look at companies

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Speaker 1: like Nike and FedEx over the last week, how nervous

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Speaker 1: does that make you. I'm actually avoiding the companies that

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Speaker 1: are the price takers and basically they're selling to a

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Speaker 1: consumer that they can't massively change their prices, but they

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Speaker 1: have input costs that might be admissed. So companies like that,

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Speaker 1: I think, with the bottlenecks the world's experiencing right now,

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Speaker 1: you're probably best search thing away from them long term.

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Speaker 1: Probably this is immaterial short term or for the next

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Speaker 1: quarter or two quarters. You might have some hit to margins.

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Speaker 1: I like to own the companies that are forcing those

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Speaker 1: companies to have margin mrs. Basically so the mower, Mayor's

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Speaker 1: tap eg Lloyd's shipping companies. They're able to charge whatever

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Speaker 1: they want right now, there's so much demand for shipping

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Speaker 1: and there's so much few vessels. Um. The other side

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Speaker 1: of things, the semiconductors. You've heard it from all the

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Speaker 1: auto companies. They can't produce as many cars as they want,

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Speaker 1: and it's going into handsets, television, refrigerators. There's a chip shortage,

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Speaker 1: and I think companies that produced them, the machines that

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Speaker 1: make those chips, so SML, Tokyo electron Land Research, They're

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Speaker 1: set for years of pricing power and very strong demands appatriate.

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Speaker 1: That sounds maybe that you think these issues will persist.

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Speaker 1: To own the equities for a significant period of time.

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Speaker 1: Perhaps makes me wonder how you'd reconcile that cold, that

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Speaker 1: position in the equity market with another coal on syte

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Speaker 1: Monitory policy, did those two things stack up? Um? Well,

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Speaker 1: Monetary policy, we've got the dots that indicate interest rates

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Speaker 1: will becoming in a couple of years, but it's the

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Speaker 1: charity he's going to make those decisions, and there's going

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Speaker 1: to be a massive turnover in the FED over the

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Speaker 1: next eighteen months as well. About voting members changing, I

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Speaker 1: think there'll be eight new voting members over the next

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Speaker 1: two years coming in. So I think the QUEI the

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Speaker 1: tapering will happen. I think that's in the cards already.

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Speaker 1: The interest rate hikes, I think those are a little

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Speaker 1: bit by in this guy. I think those rates will

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Speaker 1: only happen if the economy is very strong. If we

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Speaker 1: do have inflation, hopefully it's a good kind of inflation

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Speaker 1: coming from demand rather than the bottle next I'm talking about,

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Speaker 1: but monetary policy, you even have some pressure if it

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Speaker 1: is a stagflationary inflation. The FEDS got got a good

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Speaker 1: handle on how to deal with that, and I think

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Speaker 1: Bank of England the same kind of thing. They're looking

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Speaker 1: at those things that a strong demand let inflation is

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Speaker 1: something they're equipped to deal with. A stag flationary environment

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Speaker 1: would be a lot more difficult. So Patrick, just to

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Speaker 1: building which I was talking about, this is an important

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Speaker 1: distinction to bet on supply chain disruptions lasting for a

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Speaker 1: prolonged period of time, but still feeling bullish more generally

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Speaker 1: on stocks indicates that you do see an acceleration in

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Speaker 1: in other areas, including wages, to offset those sagflationary trends.

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Speaker 1: What do you have to see in the data to

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Speaker 1: confirm that view. You need to see continually higher wages.

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Speaker 1: You need to see people coming back to the workforce

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Speaker 1: and entice back into the workforce with the higher wages.

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Speaker 1: The n f I B service show a massive problem

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Speaker 1: for American companies that basically filling job vacancies, and that's

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Speaker 1: the biggest problem most of them are setting right now.

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Speaker 1: So I think higher wages reduced margins, increases spending power

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Speaker 1: of the consumers. So for me, I'm very confident there

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Speaker 1: will be higher wages and that will provoke hard demand

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Speaker 1: but also impact the profit margins for some companies. Patrick,

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Speaker 1: I'm sure you heard at the top of the show

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Speaker 1: there John and Lisa arguing about why we have to

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Speaker 1: care at all about the dead ceiling in the song

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Speaker 1: and dance going on down in Washington, d C. When

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Speaker 1: you have to make investment decisions, do you care at all?

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Speaker 1: I've almost written it off. It's basically thank you if

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Speaker 1: it's a long dog at this point where you can

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Speaker 1: only make the bell so many times, and the dead ceiling.

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Speaker 1: It just it's there. It's gets addressed when it needs to,

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Speaker 1: and it's seems to be a bit of an overhang,

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Speaker 1: but it's never been in an event fit miss. It's

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Speaker 1: really been material Patrick. Thank you, Sir, Pantrick calm Strong,

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Speaker 1: Chief Investment Office Set. This is the Bloomberg Surveillance Podcast.

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Speaker 1: Thanks for listening. Join us live weekdays from seven to

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00:26:20,080 --> 00:26:24,159
Speaker 1: ten am Eastern on Bloomberg Radio and on Bloomberg Television

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00:26:24,480 --> 00:26:28,520
Speaker 1: each day from six to nine am for insight from

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00:26:28,520 --> 00:26:33,080
Speaker 1: the best in economics, finance, investment, and international relations. And

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00:26:33,200 --> 00:26:38,359
Speaker 1: subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg

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Speaker 1: dot com, and of course on the terminal. I'm Tom Keene,

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Speaker 1: and this is Bloomberg