Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jay Lee. We bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg
Speaker 1: dot com, and of course, on the Bloomberg terminal. Lela
Speaker 1: Mata joins US now China based Book International CEO Leland.
Speaker 1: We've got to have a really important conversation. I'm sure
Speaker 1: it's frustrated you through the week that everyone, almost exclusively
Speaker 1: I say everyone, A lot of people have been overwhelmingly
Speaker 1: focused on whether this is a Lehman moment or not.
Speaker 1: You think there should be a bigger focus out swhere.
Speaker 1: Let's start there, Leland, where well, you you have to
Speaker 1: start just saying this is not China's Lehman moment. I
Speaker 1: think everyone's at the point where they're sort of understanding
Speaker 1: that there's not major contagient risk here. China has the
Speaker 1: tools to be able to deal with it. The real
Speaker 1: signal here is is what she is doing in the
Speaker 1: in the property sector. Earlier in one and we saw
Speaker 1: this very clearly in China Beige Book data there was
Speaker 1: a d risking of the financial sector, much tighter conditions
Speaker 1: as the years went on. Year went on. The property
Speaker 1: sector has been in the midst of a de risking
Speaker 1: for the last six months or so, which is which
Speaker 1: has created this uh, much lower growth, much less access
Speaker 1: to capital. This is this is a paradigm shift for
Speaker 1: China's growth model. When she looks forward, I think he
Speaker 1: sees the end of this economic growth model as it
Speaker 1: stands right now. There is too much risk, there's too
Speaker 1: much nonproductive uses of capital, good money chasing bad and
Speaker 1: so at this point, you know this is investors should
Speaker 1: be looking at the medium term trajectory of growth, which
Speaker 1: is gonna be much lower than I think people understand
Speaker 1: it right now. How much lovely do you think? I've
Speaker 1: seen numbers in the low fives for next year? What
Speaker 1: are you talking about? Leyland? Fools three? So what do
Speaker 1: you think? Look two is gonna be very tricky because
Speaker 1: you start off at the beginning of the year with
Speaker 1: the Beijing Olympics, and you have the Party Congress at
Speaker 1: the end of the year. There's no way that the
Speaker 1: party gonna allow bad headlines or disruptions right up into
Speaker 1: the Party Congress. Which is held twice a decade. It's
Speaker 1: where she is going to point himself truly president for
Speaker 1: life and maybe a point of successors. It's gonna be
Speaker 1: a big deal. So the questions really beyond because two
Speaker 1: is a bit hazy in the way that they want
Speaker 1: to handle that run up. Uh, we're looking at numbers.
Speaker 1: They can keep them higher for longer, but but but
Speaker 1: they're going to have to truly downshift. We're not talking about,
Speaker 1: you know, a tenth of a point here, We're gonna
Speaker 1: have to talk about full percentage points going forward in
Speaker 1: growth because they're not going to have the property sector driver,
Speaker 1: and they're not gonna be able to simply snap their
Speaker 1: fingers and transition from investment to consumption because they're not
Speaker 1: doing any of the structural forms necessary for that right now.
Speaker 1: How sustainable Leland is the framework of the Chinese economy
Speaker 1: to handle a three four percent growth rate after basically
Speaker 1: hinging itself on that seven eight nine percent growth rate
Speaker 1: that we've seen. It is absolutely capable. The only reason
Speaker 1: the Party hasn't gotten away with it is because there's
Speaker 1: been decades of of of zelotry around the idea you
Speaker 1: have to have a GDP target. You have to meet
Speaker 1: that target. If you just accepted slower growth. Now, look,
Speaker 1: foreign investors, commodity firms, everyone will be thrown for a
Speaker 1: loop globally. But China itself could embrace slower, healthier growth.
Speaker 1: It would improve the dynamics outside China, it would stop
Speaker 1: the debt build up all of a sudden, capital could
Speaker 1: go to productive uses instead of non productive uses. It
Speaker 1: would be extremely important for China, and I think that's
Speaker 1: why the Party is doing it right now. The true
Speaker 1: risk here is that foreign investors just haven't gotten the
Speaker 1: memo and they they're not expecting what's coming next. Well,
Speaker 1: let's talk about those foreign investors Leland, because China also
Speaker 1: was supposed to be in the process of opening its
Speaker 1: financial markets. Does what She's in pain is doing now
Speaker 1: internally in China run counter to that it does, and
Speaker 1: and there's there's there's just a major conflict here. Um
Speaker 1: she is facing you know, is faced inward. He is
Speaker 1: he is doing a huge rectification campaign in the run
Speaker 1: up to to the Party Congress to to show that
Speaker 1: the social compact has changed between the Party and the people.
Speaker 1: Now the party is is not focused on growth for
Speaker 1: growth sake or creation of wealth. It's there for distributing
Speaker 1: wealth and making sure everybody is happy and rich. So
Speaker 1: there's a major domestic focus right now. You know that
Speaker 1: conflicts dramatically with the idea that you're going to make
Speaker 1: capital markets hospitable to foreign investors. So Leland, this goes
Speaker 1: directly to the question of the dollar bonds of ever Grand.
Speaker 1: If they perhaps if the regulators in China manage to
Speaker 1: avoid contagion risks within the population but allow these bonds
Speaker 1: to default, is there a larger message that it is
Speaker 1: dangerous and unpredictable to invest in dollar bonds from Chinese
Speaker 1: companies going forward. Absolutely, the risk of this is shut
Speaker 1: upward and it doesn't mean that they're going to to
Speaker 1: try to screw for an investors. But could they be
Speaker 1: any clear in signaling where the priorities are right now?
Speaker 1: You know, if you're investing in in dollar bonds, you
Speaker 1: are somewhere in the middle to the bottom of the
Speaker 1: priorty party list forever brand and overall. So the idea
Speaker 1: that these are sort of non non zero risk investments
Speaker 1: or or low risk investments, I should say you have
Speaker 1: to crank up your risk profile for these tools because
Speaker 1: you don't know how deep these crackdowns are going to
Speaker 1: go for the next year plus. And this has been
Speaker 1: such an important conversation. Leland, don't be a stranger. Stay close.
Speaker 1: Let's catch up again soon because I imagine we'll be
Speaker 1: talking about this issue for a while. Leland Mill of
Speaker 1: the China Book International CEO. Let's talk to Michael Gayford,
Speaker 1: Barclay's chief US economists. Michael Kelly talked about real yield
Speaker 1: in this adjustment we've seen in the past twenty four
Speaker 1: hours as well. Darryl crom talked about the belly of
Speaker 1: the curve yield tire on five. So, now, do you
Speaker 1: think with pricing in hikes a little bit too quickly
Speaker 1: here based on what you heard in that FED call
Speaker 1: a little bit earlier this week, No, I think I think,
Speaker 1: given the first of all, good morning, UM, and thank
Speaker 1: you for the for the question, I think given what
Speaker 1: you heard, No, I think you you you are hearing
Speaker 1: hawkish rhetoric out of central banks, the FED giving you
Speaker 1: the signal on taper, the Bank of England, you know,
Speaker 1: signaling tighter monetary policy may be appropriate. We can debate
Speaker 1: whether or not we think it's the right policy, depending
Speaker 1: on how you think of inflation is going to play
Speaker 1: out and where the risks really are. But I think
Speaker 1: given the communication, no, I think markets have been right
Speaker 1: in terms of absorbing the message that that the normalization
Speaker 1: of policy has started, the great exit, if you will,
Speaker 1: from these emergency policy settings has begun and and maybe
Speaker 1: even accelerating. Well, let's at tank that line of thinking,
Speaker 1: not the should should, and let's do the will want,
Speaker 1: what they will do, what they won't do? What do
Speaker 1: you think they will do? What will that rate path
Speaker 1: look like through the next couple of years. Well, I
Speaker 1: think for the for the ft obviously step one is
Speaker 1: get to taper, and I think there's now a very
Speaker 1: high bar to to not taper, given given Powell's comments
Speaker 1: and and the message that they will be done by
Speaker 1: the middle of next year opens the door. Whether they
Speaker 1: walk through that door or not, we don't know. We
Speaker 1: need to see where inflation will will be. The Bank
Speaker 1: of England is now set up a situation where the
Speaker 1: markets pricing in about two hikes over over the next year,
Speaker 1: and they may have a small majority in order to
Speaker 1: deliver those early early next year. So it's probably be
Speaker 1: a coin toss whether or not you get a hike
Speaker 1: in in the US next year. It's a nine to
Speaker 1: nine split right now on on the committee. But I
Speaker 1: think the FED would argue, yeah, okay, fine, we might
Speaker 1: get started, but look three years from now, we still
Speaker 1: think we're going to be below neutral. So it's a
Speaker 1: it's a blend, and that's why I think a steepening
Speaker 1: in the yield curve made made a lot of sense.
Speaker 1: We may get started sooner than than we thought we
Speaker 1: were just even a couple of quarters ago, but we
Speaker 1: still think it's it's going to be a gradual cycle.
Speaker 1: And and the neutral rate is you know, we're not
Speaker 1: going to be touching the neutral rate over that whole
Speaker 1: forecast period from from the FED projection. That's why I
Speaker 1: think you can still argue for a steeper curve. I
Speaker 1: want to get a more elaborate ration on the great
Speaker 1: exit is starting. This sounds dramatic. It is dramatic after
Speaker 1: years and frankly months of extreme accommodation after the pandemic,
Speaker 1: and yet we have not seen any major moves in
Speaker 1: markets in response. Can this stay or is there a
Speaker 1: culative sort of response accumulative effect by all the central
Speaker 1: banks taking a similar type of more hawkish tone at
Speaker 1: the same time. So I think that's a great it's
Speaker 1: a great question, and you look and I think there
Speaker 1: there probably is a day of reckoning at some point
Speaker 1: that no, we all can't be when when when that
Speaker 1: ship turns Globally, historically you're going to get volatility. So
Speaker 1: in your previous segment you talked about downside risk to
Speaker 1: China growth. The Central Bank Brazil tightened a hundred basis points.
Speaker 1: We think, we think Mexico does twenty five next week.
Speaker 1: The FED is going to be starting tapering, The Bank
Speaker 1: of England potentially hikes early next year. That's a lot
Speaker 1: of you know, acute potentially the ship turning in a
Speaker 1: way that's coordinated globally, and it reflects the nature of
Speaker 1: the shock of courts, which was a coordinated pandemic shock.
Speaker 1: We're kind of past the v in terms of we've
Speaker 1: gotten that sharp snap back and economic growth growth could
Speaker 1: be moderating globally going forward, central bank policy could be normalizing.
Speaker 1: That's not always a great recipe for for markets. So
Speaker 1: here it's about the speed of that removal against where
Speaker 1: market expectations are. So far, markets want that and it
Speaker 1: hasn't been destabilizing, and we'll have to see whether that
Speaker 1: balance can be maintained. This is one thing I was
Speaker 1: worrying about last night as John Farrow was talking to
Speaker 1: priamsra I was just quietly worrying about this idea of
Speaker 1: higher yields around the world leading to lower foreign buying
Speaker 1: of treasuries, and what if there is not substantial domestic
Speaker 1: demand to keep yields where they are at a time
Speaker 1: of FED tapering, even if supply isn't that big or
Speaker 1: is a lot lower than it has been in the past,
Speaker 1: could you foresee some sort of development like that? Sure,
Speaker 1: And in that world, I think what you would be
Speaker 1: arguing is that rates would have to back up a
Speaker 1: little bit and would therefore tighten financial conditions on the
Speaker 1: margin and help to moderate growth in the US. So
Speaker 1: it's it's a scenario that I think we have to
Speaker 1: be aware of and and see if that plays out.
Speaker 1: That would mean you're going to get more tightening, kind
Speaker 1: of more effect on on GDP per FED titan if
Speaker 1: you will, because you're you're arguing rates should be higher
Speaker 1: all else sequel given that net shift in demand for treasuries, Michael,
Speaker 1: I want to talk about the consumer because in just
Speaker 1: the last couple of days, we've heard more and more
Speaker 1: about supply chain issues companies are facing, one of them
Speaker 1: being Costco, who last night says we're going to have
Speaker 1: to raise prices for items on our shelves by three
Speaker 1: and a half to four and a half percent. To
Speaker 1: what extent is the consumer still going to be able
Speaker 1: to tolerate that if we aren't getting significant wage inflation. Well,
Speaker 1: I think I would argue that I think we have enough,
Speaker 1: say ammunition in the pipeline for the consumer to keep
Speaker 1: spending going despite what could be potentially higher prices on
Speaker 1: on some goods. So we still have a lot of
Speaker 1: excess saving that's out there on household balance sheets. And
Speaker 1: and we still think there's going to be a lot
Speaker 1: of employment growth. So as you know, income generated from
Speaker 1: labor markets isn't just where wages are, but it's ours work,
Speaker 1: it's total employment. So from an aggregate perspective, I still
Speaker 1: think there's enough momentum there to household spending, say, clicking
Speaker 1: along at reasonable rates, even though yes, there's certainly underlying
Speaker 1: price pressures now that we didn't have twelve to thirty
Speaker 1: six months ago. So I think we're still comfortable with
Speaker 1: where the U. S. Consumer is, So let's talk further
Speaker 1: about employment then, Michael. Obviously you still have a persistently
Speaker 1: lower labor force participation rate. You're starting to see those
Speaker 1: additional benefits rolling off, but you aren't seeing the subsequent
Speaker 1: increase that many were expecting when you remove that incentive
Speaker 1: not to work. What do you make of what's going
Speaker 1: on in the labor market right now and how structural
Speaker 1: these issues are? Yeah, so I think this is the
Speaker 1: literally the big unknown for for the US recovery. Does
Speaker 1: that participation rate rebound? Is it a permanent exit from
Speaker 1: from the workforce? What I make of it. I think
Speaker 1: there's a lot of factors keeping restraining employment and restraining
Speaker 1: a return to the workforce. I still think, you know,
Speaker 1: we can't really parse it all out because there's a
Speaker 1: lot of moving parts here. I still think the number
Speaker 1: one important reason that's stabilizing labor markets is fear of
Speaker 1: infection and infection risk. And and I know that's been
Speaker 1: a well worn you know wheel at this at this
Speaker 1: stage of the pandemic. But if you look where hiring
Speaker 1: came off in the last employment report, all these are
Speaker 1: in hospitality, all retail, outside of those hiring was still
Speaker 1: pretty good. So I think if we want to return,
Speaker 1: you know, and if we want to understand the structural
Speaker 1: outcome in the labor market, we have to you know,
Speaker 1: we have to get a control on on the pandemic.
Speaker 1: It's it's simple to say, hard to do, but I
Speaker 1: still think that's the driving force. We've got to get
Speaker 1: you out of the basement. Mike. We're actually back in
Speaker 1: the office three days a week now, so we're getting there.
Speaker 1: How do you how do you split it, Mike? You
Speaker 1: do Monday at home, Friday at home? Is that how
Speaker 1: it works? A longer weekend varies. It varies depending on
Speaker 1: whether we're seeing people, you know, face to face that
Speaker 1: is actually happening. Again, it depends whether I have interviews
Speaker 1: with with my friends on Bloomberger and not as well.
Speaker 1: Very cool, Thank you, Mike. Right, a catch up Michael
Speaker 1: Kaife and there Francoli's chief US economists. We're not talking
Speaker 1: about a Lehman moment. We're talking about the removal of
Speaker 1: some of the dynamism of global growth from the China slowdown.
Speaker 1: Mike Darta really covers everything on the intersection of global economy,
Speaker 1: the global economy through the lens of the United States
Speaker 1: joining US now MK, I'm partners chief economist and macro strategist.
Speaker 1: I want to start there. How much would a material
Speaker 1: slow down in China's growth affect the United States? It's
Speaker 1: a great question, you know, we don't know off hand.
Speaker 1: It really critically depends on how much contagion there is.
Speaker 1: And so if we listen to what that Chair Powell
Speaker 1: said this week, if financial conditions and credit market conditions
Speaker 1: were too tighten drastically, uh, that's you know, that would
Speaker 1: essentially deliver the same kind of headpoint is if the
Speaker 1: started to tighten much more quickly than expected. So far, however,
Speaker 1: that hasn't really happened. So viewers can watch a few
Speaker 1: different indicators to keep tabs on potential contagion. One is
Speaker 1: just the performance of the high yield market in the
Speaker 1: US because it's very sensitive to liquidity and growth shocks.
Speaker 1: So if China goes into a tail spin that's likely
Speaker 1: to be highly destabilizing the global growth. You'd expect the
Speaker 1: high yield market spreads to wide widened pretty considerably. Nothing
Speaker 1: doing there so far. Now that can change, but so
Speaker 1: far we don't really see any contagious spillovers, flor whatsoever.
Speaker 1: But Mike and I need to say this because it's
Speaker 1: always bad to say this time is different, But this
Speaker 1: time is it different because of the feds involvement in
Speaker 1: credit markets and frankly because of the backstop that we've seen. Yeah,
Speaker 1: that's a great point, and I think that's exactly why
Speaker 1: we're seeing the stability in the high yield market that
Speaker 1: we are. There's essentially three point eight true million dollars
Speaker 1: of foam on the runway, and that's not balance sheet foam.
Speaker 1: That's broad money, spendable assets deposits in the financial system,
Speaker 1: and so because of the FED actions, I think that's
Speaker 1: exactly why we're not seeing the contagion. But it also
Speaker 1: means that there's a lot of support for aggregate demands
Speaker 1: to continue running pretty hot in the US even with
Speaker 1: these setbacks around the globe. So it's a it's a
Speaker 1: good point, but I think the high yield market can
Speaker 1: still still gives us the signal that there is a
Speaker 1: tremendous amount of liquidity and spendable assets in the system,
Speaker 1: and that means that the US business cycle probably keeps
Speaker 1: chugging along, even if ever Grant does a hard based
Speaker 1: plant here, which seems highly likely. Mike, let's talk about
Speaker 1: the intersection of US monetary and fiscal policy. Greg Valier,
Speaker 1: who's a policy strategist, just publishing his note a few
Speaker 1: minutes ago talking about the fiscal drama happening down in DC,
Speaker 1: surrounding the debt ceiling, infrastructure spending, and he said it
Speaker 1: will look so dysfunctional that the Federal Reserve may have
Speaker 1: to wait until winter and the resphiscal clarity to begin
Speaker 1: tapering its asset purchases. Do you agree with that? I
Speaker 1: don't agree with that. I think Paul was very clear.
Speaker 1: He essentially said in his atension, we've all but met
Speaker 1: the threshold for tapering, which is simply a substantial further
Speaker 1: improvement in labor market conditions relative to where we started
Speaker 1: the year. And you know, so the fiscal policy deliberations
Speaker 1: are going to continue to unfold. I think the FET
Speaker 1: is still on course to start the taper, you know,
Speaker 1: this November, unless we get some really shocking data or
Speaker 1: a big financial market accident, which so far has not occurred.
Speaker 1: So those two things, I think, rather than the discussions
Speaker 1: that are going in a going on in Washington, would
Speaker 1: be the only potential snaxt but highly unlikely. I think
Speaker 1: we're on autopilot here too, to see the feed begin
Speaker 1: a taper in November that likely concludes mid year next year.
Speaker 1: Just keep in mind that tapering means they're still adding
Speaker 1: money to the system. That that's balance. Heat will likely
Speaker 1: expand by half a trillion dollars or more over the
Speaker 1: course of the fall through the middle of next year
Speaker 1: if they do it, a fifteen billion dollar tape for
Speaker 1: per month, that is pretty unusual with an economy rapidly
Speaker 1: closing in on full employment. If we just look at
Speaker 1: the trends and what's happening to employment ratios and the
Speaker 1: unemployment rate, and so I don't think physical policy is
Speaker 1: going to be as disruptive of forces as some seem
Speaker 1: to believe. But you know, we'll see how it goes
Speaker 1: next year. Okay, well, let's talk about you were mentioning
Speaker 1: the data there. Obviously, October eight is going to be
Speaker 1: the next big one with the September jobs report, Palace
Speaker 1: set in his news conference, I just want to see
Speaker 1: decent growth. You know, it doesn't have to be anything stellar.
Speaker 1: Is it even possible that what happens on October eight
Speaker 1: changes the equation for November or is that now kind
Speaker 1: of setence don't. Yeah, highly unlikely. I think it would
Speaker 1: have to be a pretty dramatic misrelative to expectations. It's
Speaker 1: always possible, but I think it's not very likely. So
Speaker 1: either something like that or some very sudden uh financial
Speaker 1: market storm um taking place in so far and we're
Speaker 1: not really seeing that even with all the pressure on
Speaker 1: ever grand in Chinese debt market. So I think, you know,
Speaker 1: set in Stone might be a tiny bit strong um.
Speaker 1: But I think kind of life has to a taper
Speaker 1: for for sure, pretty much all but in the bag Mike.
Speaker 1: Yesterday we had on Danny blanche Flower of Dartmouth and
Speaker 1: he called the current field of economics guess anomics, since
Speaker 1: we have no clue what is happening basically in our
Speaker 1: visibility is very low. He was saying that it's a
Speaker 1: mistake for the feeder reserve to be tapering at all
Speaker 1: because the underlying trend in labor markets is actually weaker
Speaker 1: and that frankly, the lack of participation has been a
Speaker 1: high concern. Do you agree, I would have to say
Speaker 1: I actually disagree with that. Um. So if we go
Speaker 1: back to the last cycle, and we look at where
Speaker 1: the labor market is. When the FED taper starting in
Speaker 1: came you worry of announced at the end of twenty thirteen,
Speaker 1: the unemployment rate was considerably higher about you know, hundred
Speaker 1: and forty basis points. Uh. The primate employment to population
Speaker 1: ratio was lower by the same magnitude a little bit
Speaker 1: more actually, uh. And if you know, even if we
Speaker 1: look at this criteria, the FET is now saying it
Speaker 1: wants to be more inclusive in terms of focusing on
Speaker 1: the labor market. We look at African American unemployment rates
Speaker 1: or Hispanic unemployment rates, we're in a much better shape
Speaker 1: now than we were back then when the FED started
Speaker 1: the tapers of the beet is already waited longer. And
Speaker 1: even if we look at these super core measures of inflation,
Speaker 1: right so if you listen to the people that are
Speaker 1: in the temporary transitory base effect camp in terms of saying,
Speaker 1: don't worry about this high headline inflation. Right now, if
Speaker 1: we look at the trimmed mean PCE deflator, the median CPI,
Speaker 1: the employment Employment cost index, those are all run hotter,
Speaker 1: not massively, but you know, I would see materially then
Speaker 1: they were when the FED started the taper in the
Speaker 1: last cycle, so the Fed's already desitioned itself behind the
Speaker 1: curve easy to be the last cycle relative to the
Speaker 1: labor market and relative to even these super pore measures
Speaker 1: of inflation. So I would have to disagree on that score.
Speaker 1: I think, if anything, that FED is probably going to
Speaker 1: end up behind the curve here, because we could be
Speaker 1: rapidly reconverging with not just full employment, interesting casually beyond
Speaker 1: full employment by the you know, by the mid mid
Speaker 1: year next year, the end of next year, before the
Speaker 1: FED even gets up that geral lower bounds. That final
Speaker 1: point is so so important, Mike, it's so important. We'll
Speaker 1: try and talk about that through the morning, Mike Dae
Speaker 1: to that of MKM Partners, Mike, thank you. Sir Patrick
Speaker 1: comp Strong joined the SNAPLIBI Wealth Chief Investment Officer. Let's
Speaker 1: start here, Patrick Poth at least resistance high or LOWA
Speaker 1: for this equity mark, Kid, I think it's going to
Speaker 1: continue to be higher. I think queue is going to
Speaker 1: slow down. It's not going to stop over the next
Speaker 1: nine months, but it's going to be tapered and that
Speaker 1: suppresses volatility. So I think we have a bumpyard grind
Speaker 1: higher potentially. But while we've got massive liquidity you saw
Speaker 1: one point three trillion in the FEDS reverse repo yesterday. Um,
Speaker 1: you've got negative real yields at negative point nine percent,
Speaker 1: and you've got very significant earnings growth forecast for the
Speaker 1: next few years. At the double digit earnings growth still
Speaker 1: is the consensus expectation. While those three things are in place,
Speaker 1: it's hard to see equities having a sustain sustained sell off. Patrick, Yesterday,
Speaker 1: people were saying that there was a reaffirmation of the
Speaker 1: reflation trade, as you could see from higher yields in
Speaker 1: tandem with higher equity prices. Do you agree that there's
Speaker 1: been some shift or was it just choppy as people
Speaker 1: tried to make sense of all the headwinds and tow wins. Yeah,
Speaker 1: I'm not even sure if it's a change in inflation expectations.
Speaker 1: Is it's a change in basically what the Treasury has
Speaker 1: to yield. So you've got the Fed who's been buying
Speaker 1: a hundred and twenty billion of bonds every month and
Speaker 1: that's going to slow. And if you look at inflation
Speaker 1: break evens, they're largely unchanged over the last few days.
Speaker 1: So I think the path of the tenure yield moving
Speaker 1: higher is actually a slightly less negative real yield, and
Speaker 1: you have to incentivize buyers to take those treasuries that
Speaker 1: the FED won't be buying, and I think higher yields
Speaker 1: are needed to that. Okay, So Patrick, let me just
Speaker 1: pick this apart because you mentioned that real yields of
Speaker 1: taking higher were now around negative ninety basis points. You
Speaker 1: talk about three pillars that support equities, one being real yields,
Speaker 1: which are still steeply negative. I'll give you that liquidity, which,
Speaker 1: as the FEDUS said, it's going to start winding down,
Speaker 1: and then earnings growth. So when you look at companies
Speaker 1: like Nike and FedEx over the last week, how nervous
Speaker 1: does that make you. I'm actually avoiding the companies that
Speaker 1: are the price takers and basically they're selling to a
Speaker 1: consumer that they can't massively change their prices, but they
Speaker 1: have input costs that might be admissed. So companies like that,
Speaker 1: I think, with the bottlenecks the world's experiencing right now,
Speaker 1: you're probably best search thing away from them long term.
Speaker 1: Probably this is immaterial short term or for the next
Speaker 1: quarter or two quarters. You might have some hit to margins.
Speaker 1: I like to own the companies that are forcing those
Speaker 1: companies to have margin mrs. Basically so the mower, Mayor's
Speaker 1: tap eg Lloyd's shipping companies. They're able to charge whatever
Speaker 1: they want right now, there's so much demand for shipping
Speaker 1: and there's so much few vessels. Um. The other side
Speaker 1: of things, the semiconductors. You've heard it from all the
Speaker 1: auto companies. They can't produce as many cars as they want,
Speaker 1: and it's going into handsets, television, refrigerators. There's a chip shortage,
Speaker 1: and I think companies that produced them, the machines that
Speaker 1: make those chips, so SML, Tokyo electron Land Research, They're
Speaker 1: set for years of pricing power and very strong demands appatriate.
Speaker 1: That sounds maybe that you think these issues will persist.
Speaker 1: To own the equities for a significant period of time.
Speaker 1: Perhaps makes me wonder how you'd reconcile that cold, that
Speaker 1: position in the equity market with another coal on syte
Speaker 1: Monitory policy, did those two things stack up? Um? Well,
Speaker 1: Monetary policy, we've got the dots that indicate interest rates
Speaker 1: will becoming in a couple of years, but it's the
Speaker 1: charity he's going to make those decisions, and there's going
Speaker 1: to be a massive turnover in the FED over the
Speaker 1: next eighteen months as well. About voting members changing, I
Speaker 1: think there'll be eight new voting members over the next
Speaker 1: two years coming in. So I think the QUEI the
Speaker 1: tapering will happen. I think that's in the cards already.
Speaker 1: The interest rate hikes, I think those are a little
Speaker 1: bit by in this guy. I think those rates will
Speaker 1: only happen if the economy is very strong. If we
Speaker 1: do have inflation, hopefully it's a good kind of inflation
Speaker 1: coming from demand rather than the bottle next I'm talking about,
Speaker 1: but monetary policy, you even have some pressure if it
Speaker 1: is a stagflationary inflation. The FEDS got got a good
Speaker 1: handle on how to deal with that, and I think
Speaker 1: Bank of England the same kind of thing. They're looking
Speaker 1: at those things that a strong demand let inflation is
Speaker 1: something they're equipped to deal with. A stag flationary environment
Speaker 1: would be a lot more difficult. So Patrick, just to
Speaker 1: building which I was talking about, this is an important
Speaker 1: distinction to bet on supply chain disruptions lasting for a
Speaker 1: prolonged period of time, but still feeling bullish more generally
Speaker 1: on stocks indicates that you do see an acceleration in
Speaker 1: in other areas, including wages, to offset those sagflationary trends.
Speaker 1: What do you have to see in the data to
Speaker 1: confirm that view. You need to see continually higher wages.
Speaker 1: You need to see people coming back to the workforce
Speaker 1: and entice back into the workforce with the higher wages.
Speaker 1: The n f I B service show a massive problem
Speaker 1: for American companies that basically filling job vacancies, and that's
Speaker 1: the biggest problem most of them are setting right now.
Speaker 1: So I think higher wages reduced margins, increases spending power
Speaker 1: of the consumers. So for me, I'm very confident there
Speaker 1: will be higher wages and that will provoke hard demand
Speaker 1: but also impact the profit margins for some companies. Patrick,
Speaker 1: I'm sure you heard at the top of the show
Speaker 1: there John and Lisa arguing about why we have to
Speaker 1: care at all about the dead ceiling in the song
Speaker 1: and dance going on down in Washington, d C. When
Speaker 1: you have to make investment decisions, do you care at all?
Speaker 1: I've almost written it off. It's basically thank you if
Speaker 1: it's a long dog at this point where you can
Speaker 1: only make the bell so many times, and the dead ceiling.
Speaker 1: It just it's there. It's gets addressed when it needs to,
Speaker 1: and it's seems to be a bit of an overhang,
Speaker 1: but it's never been in an event fit miss. It's
Speaker 1: really been material Patrick. Thank you, Sir, Pantrick calm Strong,
Speaker 1: Chief Investment Office Set. This is the Bloomberg Surveillance Podcast.
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