WEBVTT - Surveillance: China Regulation with Miller 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa Brownwitz Jay Lee. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg 0:00:23.360 --> 0:00:29.600 dot com, and of course, on the Bloomberg terminal. Lela 0:00:29.640 --> 0:00:32.640 Mata joins US now China based Book International CEO Leland. 0:00:32.640 --> 0:00:34.720 We've got to have a really important conversation. I'm sure 0:00:34.720 --> 0:00:38.080 it's frustrated you through the week that everyone, almost exclusively 0:00:38.240 --> 0:00:40.800 I say everyone, A lot of people have been overwhelmingly 0:00:40.840 --> 0:00:43.199 focused on whether this is a Lehman moment or not. 0:00:43.720 --> 0:00:45.560 You think there should be a bigger focus out swhere. 0:00:45.760 --> 0:00:49.640 Let's start there, Leland, where well, you you have to 0:00:49.760 --> 0:00:52.479 start just saying this is not China's Lehman moment. I 0:00:52.560 --> 0:00:54.760 think everyone's at the point where they're sort of understanding 0:00:54.760 --> 0:00:58.000 that there's not major contagient risk here. China has the 0:00:58.040 --> 0:00:59.920 tools to be able to deal with it. The real 0:01:00.120 --> 0:01:02.560 signal here is is what she is doing in the 0:01:02.640 --> 0:01:05.680 in the property sector. Earlier in one and we saw 0:01:05.720 --> 0:01:08.240 this very clearly in China Beige Book data there was 0:01:08.240 --> 0:01:11.480 a d risking of the financial sector, much tighter conditions 0:01:11.480 --> 0:01:14.040 as the years went on. Year went on. The property 0:01:14.080 --> 0:01:16.319 sector has been in the midst of a de risking 0:01:16.400 --> 0:01:18.560 for the last six months or so, which is which 0:01:18.560 --> 0:01:21.800 has created this uh, much lower growth, much less access 0:01:21.840 --> 0:01:24.920 to capital. This is this is a paradigm shift for 0:01:25.000 --> 0:01:27.160 China's growth model. When she looks forward, I think he 0:01:27.200 --> 0:01:29.800 sees the end of this economic growth model as it 0:01:29.880 --> 0:01:32.440 stands right now. There is too much risk, there's too 0:01:32.520 --> 0:01:36.520 much nonproductive uses of capital, good money chasing bad and 0:01:36.560 --> 0:01:39.240 so at this point, you know this is investors should 0:01:39.240 --> 0:01:41.480 be looking at the medium term trajectory of growth, which 0:01:41.520 --> 0:01:43.920 is gonna be much lower than I think people understand 0:01:43.959 --> 0:01:46.040 it right now. How much lovely do you think? I've 0:01:46.040 --> 0:01:48.640 seen numbers in the low fives for next year? What 0:01:48.680 --> 0:01:50.920 are you talking about? Leyland? Fools three? So what do 0:01:50.960 --> 0:01:54.280 you think? Look two is gonna be very tricky because 0:01:54.280 --> 0:01:55.760 you start off at the beginning of the year with 0:01:55.800 --> 0:01:57.640 the Beijing Olympics, and you have the Party Congress at 0:01:57.640 --> 0:01:59.640 the end of the year. There's no way that the 0:01:59.680 --> 0:02:03.360 party gonna allow bad headlines or disruptions right up into 0:02:03.400 --> 0:02:06.480 the Party Congress. Which is held twice a decade. It's 0:02:06.520 --> 0:02:09.160 where she is going to point himself truly president for 0:02:09.200 --> 0:02:11.360 life and maybe a point of successors. It's gonna be 0:02:11.360 --> 0:02:15.080 a big deal. So the questions really beyond because two 0:02:15.160 --> 0:02:16.480 is a bit hazy in the way that they want 0:02:16.480 --> 0:02:19.480 to handle that run up. Uh, we're looking at numbers. 0:02:19.720 --> 0:02:21.720 They can keep them higher for longer, but but but 0:02:21.800 --> 0:02:24.080 they're going to have to truly downshift. We're not talking about, 0:02:24.240 --> 0:02:25.840 you know, a tenth of a point here, We're gonna 0:02:25.840 --> 0:02:29.160 have to talk about full percentage points going forward in 0:02:29.240 --> 0:02:31.680 growth because they're not going to have the property sector driver, 0:02:32.120 --> 0:02:34.240 and they're not gonna be able to simply snap their 0:02:34.280 --> 0:02:37.960 fingers and transition from investment to consumption because they're not 0:02:38.000 --> 0:02:40.480 doing any of the structural forms necessary for that right now. 0:02:40.480 --> 0:02:43.560 How sustainable Leland is the framework of the Chinese economy 0:02:43.639 --> 0:02:47.119 to handle a three four percent growth rate after basically 0:02:47.240 --> 0:02:50.400 hinging itself on that seven eight nine percent growth rate 0:02:50.440 --> 0:02:53.960 that we've seen. It is absolutely capable. The only reason 0:02:54.000 --> 0:02:55.919 the Party hasn't gotten away with it is because there's 0:02:55.960 --> 0:02:59.880 been decades of of of zelotry around the idea you 0:02:59.919 --> 0:03:01.760 have to have a GDP target. You have to meet 0:03:01.800 --> 0:03:05.400 that target. If you just accepted slower growth. Now, look, 0:03:05.400 --> 0:03:07.920 foreign investors, commodity firms, everyone will be thrown for a 0:03:07.919 --> 0:03:11.280 loop globally. But China itself could embrace slower, healthier growth. 0:03:11.320 --> 0:03:13.840 It would improve the dynamics outside China, it would stop 0:03:13.840 --> 0:03:15.919 the debt build up all of a sudden, capital could 0:03:15.919 --> 0:03:18.400 go to productive uses instead of non productive uses. It 0:03:18.440 --> 0:03:20.959 would be extremely important for China, and I think that's 0:03:20.960 --> 0:03:24.320 why the Party is doing it right now. The true 0:03:24.400 --> 0:03:26.480 risk here is that foreign investors just haven't gotten the 0:03:26.520 --> 0:03:28.880 memo and they they're not expecting what's coming next. Well, 0:03:28.960 --> 0:03:31.520 let's talk about those foreign investors Leland, because China also 0:03:31.600 --> 0:03:33.760 was supposed to be in the process of opening its 0:03:33.800 --> 0:03:36.920 financial markets. Does what She's in pain is doing now 0:03:37.000 --> 0:03:40.720 internally in China run counter to that it does, and 0:03:40.720 --> 0:03:43.600 and there's there's there's just a major conflict here. Um 0:03:44.000 --> 0:03:46.800 she is facing you know, is faced inward. He is 0:03:46.920 --> 0:03:50.080 he is doing a huge rectification campaign in the run 0:03:50.160 --> 0:03:52.280 up to to the Party Congress to to show that 0:03:52.320 --> 0:03:55.440 the social compact has changed between the Party and the people. 0:03:55.760 --> 0:03:57.880 Now the party is is not focused on growth for 0:03:57.920 --> 0:04:01.720 growth sake or creation of wealth. It's there for distributing 0:04:01.720 --> 0:04:04.360 wealth and making sure everybody is happy and rich. So 0:04:04.480 --> 0:04:08.000 there's a major domestic focus right now. You know that 0:04:08.040 --> 0:04:10.760 conflicts dramatically with the idea that you're going to make 0:04:10.760 --> 0:04:13.520 capital markets hospitable to foreign investors. So Leland, this goes 0:04:13.520 --> 0:04:16.040 directly to the question of the dollar bonds of ever Grand. 0:04:16.200 --> 0:04:19.760 If they perhaps if the regulators in China manage to 0:04:19.920 --> 0:04:24.080 avoid contagion risks within the population but allow these bonds 0:04:24.120 --> 0:04:26.680 to default, is there a larger message that it is 0:04:26.760 --> 0:04:30.400 dangerous and unpredictable to invest in dollar bonds from Chinese 0:04:30.400 --> 0:04:34.200 companies going forward. Absolutely, the risk of this is shut 0:04:34.240 --> 0:04:36.360 upward and it doesn't mean that they're going to to 0:04:36.560 --> 0:04:39.599 try to screw for an investors. But could they be 0:04:39.680 --> 0:04:42.240 any clear in signaling where the priorities are right now? 0:04:42.440 --> 0:04:46.000 You know, if you're investing in in dollar bonds, you 0:04:46.040 --> 0:04:47.880 are somewhere in the middle to the bottom of the 0:04:47.920 --> 0:04:51.880 priorty party list forever brand and overall. So the idea 0:04:51.920 --> 0:04:54.560 that these are sort of non non zero risk investments 0:04:55.040 --> 0:04:57.800 or or low risk investments, I should say you have 0:04:57.880 --> 0:05:00.000 to crank up your risk profile for these tools because 0:05:00.080 --> 0:05:02.120 you don't know how deep these crackdowns are going to 0:05:02.200 --> 0:05:04.240 go for the next year plus. And this has been 0:05:04.240 --> 0:05:06.880 such an important conversation. Leland, don't be a stranger. Stay close. 0:05:06.920 --> 0:05:08.719 Let's catch up again soon because I imagine we'll be 0:05:08.720 --> 0:05:11.120 talking about this issue for a while. Leland Mill of 0:05:11.160 --> 0:05:20.360 the China Book International CEO. Let's talk to Michael Gayford, 0:05:20.400 --> 0:05:23.720 Barclay's chief US economists. Michael Kelly talked about real yield 0:05:23.760 --> 0:05:25.680 in this adjustment we've seen in the past twenty four 0:05:25.720 --> 0:05:28.000 hours as well. Darryl crom talked about the belly of 0:05:28.040 --> 0:05:30.760 the curve yield tire on five. So, now, do you 0:05:30.760 --> 0:05:32.760 think with pricing in hikes a little bit too quickly 0:05:32.760 --> 0:05:35.080 here based on what you heard in that FED call 0:05:35.480 --> 0:05:38.520 a little bit earlier this week, No, I think I think, 0:05:38.560 --> 0:05:40.800 given the first of all, good morning, UM, and thank 0:05:40.800 --> 0:05:42.719 you for the for the question, I think given what 0:05:42.800 --> 0:05:46.320 you heard, No, I think you you you are hearing 0:05:46.360 --> 0:05:49.640 hawkish rhetoric out of central banks, the FED giving you 0:05:49.680 --> 0:05:52.640 the signal on taper, the Bank of England, you know, 0:05:52.720 --> 0:05:56.440 signaling tighter monetary policy may be appropriate. We can debate 0:05:56.440 --> 0:05:59.200 whether or not we think it's the right policy, depending 0:05:59.240 --> 0:06:01.080 on how you think of inflation is going to play 0:06:01.080 --> 0:06:02.920 out and where the risks really are. But I think 0:06:02.960 --> 0:06:05.880 given the communication, no, I think markets have been right 0:06:05.960 --> 0:06:10.480 in terms of absorbing the message that that the normalization 0:06:10.480 --> 0:06:13.159 of policy has started, the great exit, if you will, 0:06:13.279 --> 0:06:17.120 from these emergency policy settings has begun and and maybe 0:06:17.160 --> 0:06:19.600 even accelerating. Well, let's at tank that line of thinking, 0:06:19.720 --> 0:06:21.920 not the should should, and let's do the will want, 0:06:21.920 --> 0:06:24.320 what they will do, what they won't do? What do 0:06:24.320 --> 0:06:26.000 you think they will do? What will that rate path 0:06:26.080 --> 0:06:29.159 look like through the next couple of years. Well, I 0:06:29.160 --> 0:06:31.600 think for the for the ft obviously step one is 0:06:31.640 --> 0:06:33.320 get to taper, and I think there's now a very 0:06:33.400 --> 0:06:37.080 high bar to to not taper, given given Powell's comments 0:06:37.279 --> 0:06:39.600 and and the message that they will be done by 0:06:39.640 --> 0:06:43.120 the middle of next year opens the door. Whether they 0:06:43.120 --> 0:06:44.880 walk through that door or not, we don't know. We 0:06:44.920 --> 0:06:48.000 need to see where inflation will will be. The Bank 0:06:48.040 --> 0:06:50.080 of England is now set up a situation where the 0:06:50.120 --> 0:06:53.800 markets pricing in about two hikes over over the next year, 0:06:53.839 --> 0:06:56.159 and they may have a small majority in order to 0:06:56.360 --> 0:07:00.120 deliver those early early next year. So it's probably be 0:07:00.160 --> 0:07:01.960 a coin toss whether or not you get a hike 0:07:02.000 --> 0:07:04.640 in in the US next year. It's a nine to 0:07:04.760 --> 0:07:07.960 nine split right now on on the committee. But I 0:07:07.960 --> 0:07:11.560 think the FED would argue, yeah, okay, fine, we might 0:07:11.560 --> 0:07:14.760 get started, but look three years from now, we still 0:07:14.800 --> 0:07:17.320 think we're going to be below neutral. So it's a 0:07:17.400 --> 0:07:19.480 it's a blend, and that's why I think a steepening 0:07:19.480 --> 0:07:21.800 in the yield curve made made a lot of sense. 0:07:21.800 --> 0:07:23.920 We may get started sooner than than we thought we 0:07:23.920 --> 0:07:26.600 were just even a couple of quarters ago, but we 0:07:26.640 --> 0:07:28.960 still think it's it's going to be a gradual cycle. 0:07:29.520 --> 0:07:32.080 And and the neutral rate is you know, we're not 0:07:32.120 --> 0:07:34.160 going to be touching the neutral rate over that whole 0:07:34.200 --> 0:07:37.920 forecast period from from the FED projection. That's why I 0:07:37.960 --> 0:07:40.040 think you can still argue for a steeper curve. I 0:07:40.080 --> 0:07:43.000 want to get a more elaborate ration on the great 0:07:43.040 --> 0:07:46.320 exit is starting. This sounds dramatic. It is dramatic after 0:07:46.480 --> 0:07:50.720 years and frankly months of extreme accommodation after the pandemic, 0:07:51.240 --> 0:07:54.000 and yet we have not seen any major moves in 0:07:54.080 --> 0:07:57.480 markets in response. Can this stay or is there a 0:07:57.560 --> 0:08:01.320 culative sort of response accumulative effect by all the central 0:08:01.320 --> 0:08:04.760 banks taking a similar type of more hawkish tone at 0:08:04.760 --> 0:08:07.640 the same time. So I think that's a great it's 0:08:07.680 --> 0:08:10.520 a great question, and you look and I think there 0:08:10.560 --> 0:08:13.280 there probably is a day of reckoning at some point 0:08:13.360 --> 0:08:16.320 that no, we all can't be when when when that 0:08:16.400 --> 0:08:21.160 ship turns Globally, historically you're going to get volatility. So 0:08:21.400 --> 0:08:24.080 in your previous segment you talked about downside risk to 0:08:24.200 --> 0:08:28.160 China growth. The Central Bank Brazil tightened a hundred basis points. 0:08:28.200 --> 0:08:31.320 We think, we think Mexico does twenty five next week. 0:08:31.360 --> 0:08:33.320 The FED is going to be starting tapering, The Bank 0:08:33.360 --> 0:08:37.240 of England potentially hikes early next year. That's a lot 0:08:37.320 --> 0:08:41.000 of you know, acute potentially the ship turning in a 0:08:41.000 --> 0:08:45.280 way that's coordinated globally, and it reflects the nature of 0:08:45.280 --> 0:08:48.280 the shock of courts, which was a coordinated pandemic shock. 0:08:48.679 --> 0:08:51.000 We're kind of past the v in terms of we've 0:08:51.040 --> 0:08:54.559 gotten that sharp snap back and economic growth growth could 0:08:54.600 --> 0:08:58.400 be moderating globally going forward, central bank policy could be normalizing. 0:08:58.440 --> 0:09:01.120 That's not always a great recipe for for markets. So 0:09:01.440 --> 0:09:05.200 here it's about the speed of that removal against where 0:09:05.200 --> 0:09:08.880 market expectations are. So far, markets want that and it 0:09:08.920 --> 0:09:11.960 hasn't been destabilizing, and we'll have to see whether that 0:09:12.000 --> 0:09:14.240 balance can be maintained. This is one thing I was 0:09:14.280 --> 0:09:16.640 worrying about last night as John Farrow was talking to 0:09:16.640 --> 0:09:19.880 priamsra I was just quietly worrying about this idea of 0:09:19.960 --> 0:09:23.640 higher yields around the world leading to lower foreign buying 0:09:23.760 --> 0:09:27.640 of treasuries, and what if there is not substantial domestic 0:09:27.720 --> 0:09:30.400 demand to keep yields where they are at a time 0:09:30.440 --> 0:09:33.680 of FED tapering, even if supply isn't that big or 0:09:33.720 --> 0:09:35.280 is a lot lower than it has been in the past, 0:09:35.320 --> 0:09:39.679 could you foresee some sort of development like that? Sure, 0:09:39.800 --> 0:09:41.599 And in that world, I think what you would be 0:09:41.679 --> 0:09:43.880 arguing is that rates would have to back up a 0:09:43.880 --> 0:09:47.320 little bit and would therefore tighten financial conditions on the 0:09:47.360 --> 0:09:51.000 margin and help to moderate growth in the US. So 0:09:51.120 --> 0:09:53.120 it's it's a scenario that I think we have to 0:09:53.120 --> 0:09:55.560 be aware of and and see if that plays out. 0:09:55.960 --> 0:09:58.640 That would mean you're going to get more tightening, kind 0:09:58.640 --> 0:10:02.040 of more effect on on GDP per FED titan if 0:10:02.040 --> 0:10:04.400 you will, because you're you're arguing rates should be higher 0:10:04.440 --> 0:10:08.600 all else sequel given that net shift in demand for treasuries, Michael, 0:10:08.600 --> 0:10:10.520 I want to talk about the consumer because in just 0:10:10.559 --> 0:10:12.600 the last couple of days, we've heard more and more 0:10:12.600 --> 0:10:14.920 about supply chain issues companies are facing, one of them 0:10:14.920 --> 0:10:16.760 being Costco, who last night says we're going to have 0:10:16.800 --> 0:10:19.199 to raise prices for items on our shelves by three 0:10:19.200 --> 0:10:21.440 and a half to four and a half percent. To 0:10:21.520 --> 0:10:24.000 what extent is the consumer still going to be able 0:10:24.040 --> 0:10:28.760 to tolerate that if we aren't getting significant wage inflation. Well, 0:10:28.760 --> 0:10:32.040 I think I would argue that I think we have enough, 0:10:32.440 --> 0:10:36.160 say ammunition in the pipeline for the consumer to keep 0:10:36.440 --> 0:10:40.800 spending going despite what could be potentially higher prices on 0:10:40.800 --> 0:10:42.760 on some goods. So we still have a lot of 0:10:42.800 --> 0:10:46.760 excess saving that's out there on household balance sheets. And 0:10:46.760 --> 0:10:48.280 and we still think there's going to be a lot 0:10:48.280 --> 0:10:51.439 of employment growth. So as you know, income generated from 0:10:51.480 --> 0:10:55.040 labor markets isn't just where wages are, but it's ours work, 0:10:55.120 --> 0:10:58.400 it's total employment. So from an aggregate perspective, I still 0:10:58.440 --> 0:11:02.080 think there's enough momentum there to household spending, say, clicking 0:11:02.080 --> 0:11:05.280 along at reasonable rates, even though yes, there's certainly underlying 0:11:05.320 --> 0:11:08.400 price pressures now that we didn't have twelve to thirty 0:11:08.400 --> 0:11:11.120 six months ago. So I think we're still comfortable with 0:11:11.120 --> 0:11:13.240 where the U. S. Consumer is, So let's talk further 0:11:13.240 --> 0:11:16.839 about employment then, Michael. Obviously you still have a persistently 0:11:16.920 --> 0:11:19.800 lower labor force participation rate. You're starting to see those 0:11:19.800 --> 0:11:23.360 additional benefits rolling off, but you aren't seeing the subsequent 0:11:23.520 --> 0:11:27.920 increase that many were expecting when you remove that incentive 0:11:27.960 --> 0:11:30.199 not to work. What do you make of what's going 0:11:30.240 --> 0:11:32.280 on in the labor market right now and how structural 0:11:32.320 --> 0:11:35.320 these issues are? Yeah, so I think this is the 0:11:36.000 --> 0:11:39.520 literally the big unknown for for the US recovery. Does 0:11:39.559 --> 0:11:43.080 that participation rate rebound? Is it a permanent exit from 0:11:43.080 --> 0:11:45.880 from the workforce? What I make of it. I think 0:11:45.880 --> 0:11:50.800 there's a lot of factors keeping restraining employment and restraining 0:11:50.800 --> 0:11:53.440 a return to the workforce. I still think, you know, 0:11:53.440 --> 0:11:55.440 we can't really parse it all out because there's a 0:11:55.520 --> 0:11:58.280 lot of moving parts here. I still think the number 0:11:58.320 --> 0:12:02.320 one important reason that's stabilizing labor markets is fear of 0:12:02.320 --> 0:12:06.280 infection and infection risk. And and I know that's been 0:12:06.320 --> 0:12:09.320 a well worn you know wheel at this at this 0:12:09.360 --> 0:12:11.560 stage of the pandemic. But if you look where hiring 0:12:11.600 --> 0:12:14.440 came off in the last employment report, all these are 0:12:14.480 --> 0:12:18.400 in hospitality, all retail, outside of those hiring was still 0:12:18.400 --> 0:12:20.959 pretty good. So I think if we want to return, 0:12:21.120 --> 0:12:23.120 you know, and if we want to understand the structural 0:12:23.360 --> 0:12:25.800 outcome in the labor market, we have to you know, 0:12:25.840 --> 0:12:27.840 we have to get a control on on the pandemic. 0:12:28.240 --> 0:12:30.600 It's it's simple to say, hard to do, but I 0:12:30.640 --> 0:12:32.559 still think that's the driving force. We've got to get 0:12:32.559 --> 0:12:38.320 you out of the basement. Mike. We're actually back in 0:12:38.360 --> 0:12:40.880 the office three days a week now, so we're getting there. 0:12:40.920 --> 0:12:42.160 How do you how do you split it, Mike? You 0:12:42.280 --> 0:12:44.560 do Monday at home, Friday at home? Is that how 0:12:44.600 --> 0:12:48.960 it works? A longer weekend varies. It varies depending on 0:12:49.080 --> 0:12:51.480 whether we're seeing people, you know, face to face that 0:12:51.600 --> 0:12:55.640 is actually happening. Again, it depends whether I have interviews 0:12:55.679 --> 0:12:58.000 with with my friends on Bloomberger and not as well. 0:12:58.280 --> 0:13:01.040 Very cool, Thank you, Mike. Right, a catch up Michael 0:13:01.080 --> 0:13:10.000 Kaife and there Francoli's chief US economists. We're not talking 0:13:10.040 --> 0:13:13.080 about a Lehman moment. We're talking about the removal of 0:13:13.080 --> 0:13:16.520 some of the dynamism of global growth from the China slowdown. 0:13:16.600 --> 0:13:20.960 Mike Darta really covers everything on the intersection of global economy, 0:13:21.280 --> 0:13:23.680 the global economy through the lens of the United States 0:13:23.880 --> 0:13:27.120 joining US now MK, I'm partners chief economist and macro strategist. 0:13:27.320 --> 0:13:30.199 I want to start there. How much would a material 0:13:30.320 --> 0:13:35.200 slow down in China's growth affect the United States? It's 0:13:35.200 --> 0:13:37.880 a great question, you know, we don't know off hand. 0:13:38.120 --> 0:13:42.840 It really critically depends on how much contagion there is. 0:13:43.160 --> 0:13:45.920 And so if we listen to what that Chair Powell 0:13:46.040 --> 0:13:50.079 said this week, if financial conditions and credit market conditions 0:13:50.120 --> 0:13:54.080 were too tighten drastically, uh, that's you know, that would 0:13:54.160 --> 0:13:57.040 essentially deliver the same kind of headpoint is if the 0:13:57.920 --> 0:14:02.600 started to tighten much more quickly than expected. So far, however, 0:14:02.640 --> 0:14:06.400 that hasn't really happened. So viewers can watch a few 0:14:06.400 --> 0:14:11.000 different indicators to keep tabs on potential contagion. One is 0:14:11.040 --> 0:14:13.160 just the performance of the high yield market in the 0:14:13.240 --> 0:14:17.520 US because it's very sensitive to liquidity and growth shocks. 0:14:17.520 --> 0:14:20.680 So if China goes into a tail spin that's likely 0:14:20.720 --> 0:14:24.360 to be highly destabilizing the global growth. You'd expect the 0:14:24.440 --> 0:14:28.640 high yield market spreads to wide widened pretty considerably. Nothing 0:14:28.720 --> 0:14:31.440 doing there so far. Now that can change, but so 0:14:31.520 --> 0:14:36.200 far we don't really see any contagious spillovers, flor whatsoever. 0:14:36.440 --> 0:14:38.640 But Mike and I need to say this because it's 0:14:38.680 --> 0:14:41.280 always bad to say this time is different, But this 0:14:41.360 --> 0:14:44.320 time is it different because of the feds involvement in 0:14:44.400 --> 0:14:48.880 credit markets and frankly because of the backstop that we've seen. Yeah, 0:14:48.920 --> 0:14:52.239 that's a great point, and I think that's exactly why 0:14:52.720 --> 0:14:55.840 we're seeing the stability in the high yield market that 0:14:55.920 --> 0:15:00.760 we are. There's essentially three point eight true million dollars 0:15:00.760 --> 0:15:03.560 of foam on the runway, and that's not balance sheet foam. 0:15:03.640 --> 0:15:08.840 That's broad money, spendable assets deposits in the financial system, 0:15:08.880 --> 0:15:11.400 and so because of the FED actions, I think that's 0:15:11.440 --> 0:15:14.440 exactly why we're not seeing the contagion. But it also 0:15:14.560 --> 0:15:17.840 means that there's a lot of support for aggregate demands 0:15:18.160 --> 0:15:21.640 to continue running pretty hot in the US even with 0:15:21.800 --> 0:15:24.840 these setbacks around the globe. So it's a it's a 0:15:24.880 --> 0:15:27.320 good point, but I think the high yield market can 0:15:27.320 --> 0:15:30.040 still still gives us the signal that there is a 0:15:30.080 --> 0:15:33.880 tremendous amount of liquidity and spendable assets in the system, 0:15:33.920 --> 0:15:36.680 and that means that the US business cycle probably keeps 0:15:36.720 --> 0:15:40.200 chugging along, even if ever Grant does a hard based 0:15:40.200 --> 0:15:43.640 plant here, which seems highly likely. Mike, let's talk about 0:15:43.640 --> 0:15:47.440 the intersection of US monetary and fiscal policy. Greg Valier, 0:15:47.520 --> 0:15:50.200 who's a policy strategist, just publishing his note a few 0:15:50.200 --> 0:15:53.000 minutes ago talking about the fiscal drama happening down in DC, 0:15:53.160 --> 0:15:55.880 surrounding the debt ceiling, infrastructure spending, and he said it 0:15:55.880 --> 0:15:58.400 will look so dysfunctional that the Federal Reserve may have 0:15:58.520 --> 0:16:01.760 to wait until winter and the resphiscal clarity to begin 0:16:01.840 --> 0:16:06.240 tapering its asset purchases. Do you agree with that? I 0:16:06.280 --> 0:16:09.200 don't agree with that. I think Paul was very clear. 0:16:09.440 --> 0:16:12.320 He essentially said in his atension, we've all but met 0:16:12.880 --> 0:16:16.640 the threshold for tapering, which is simply a substantial further 0:16:16.720 --> 0:16:20.160 improvement in labor market conditions relative to where we started 0:16:20.160 --> 0:16:24.680 the year. And you know, so the fiscal policy deliberations 0:16:24.720 --> 0:16:28.320 are going to continue to unfold. I think the FET 0:16:28.360 --> 0:16:30.720 is still on course to start the taper, you know, 0:16:30.760 --> 0:16:35.360 this November, unless we get some really shocking data or 0:16:35.640 --> 0:16:39.400 a big financial market accident, which so far has not occurred. 0:16:39.440 --> 0:16:42.960 So those two things, I think, rather than the discussions 0:16:43.000 --> 0:16:46.480 that are going in a going on in Washington, would 0:16:46.480 --> 0:16:49.240 be the only potential snaxt but highly unlikely. I think 0:16:49.240 --> 0:16:52.560 we're on autopilot here too, to see the feed begin 0:16:52.680 --> 0:16:56.960 a taper in November that likely concludes mid year next year. 0:16:57.040 --> 0:17:00.720 Just keep in mind that tapering means they're still adding 0:17:01.160 --> 0:17:04.120 money to the system. That that's balance. Heat will likely 0:17:04.200 --> 0:17:07.719 expand by half a trillion dollars or more over the 0:17:07.720 --> 0:17:09.720 course of the fall through the middle of next year 0:17:09.760 --> 0:17:12.240 if they do it, a fifteen billion dollar tape for 0:17:12.359 --> 0:17:16.880 per month, that is pretty unusual with an economy rapidly 0:17:17.040 --> 0:17:19.239 closing in on full employment. If we just look at 0:17:19.240 --> 0:17:22.000 the trends and what's happening to employment ratios and the 0:17:22.040 --> 0:17:25.480 unemployment rate, and so I don't think physical policy is 0:17:25.520 --> 0:17:28.920 going to be as disruptive of forces as some seem 0:17:29.000 --> 0:17:31.120 to believe. But you know, we'll see how it goes 0:17:31.240 --> 0:17:34.320 next year. Okay, well, let's talk about you were mentioning 0:17:34.320 --> 0:17:36.520 the data there. Obviously, October eight is going to be 0:17:36.560 --> 0:17:39.399 the next big one with the September jobs report, Palace 0:17:39.359 --> 0:17:41.160 set in his news conference, I just want to see 0:17:41.200 --> 0:17:43.560 decent growth. You know, it doesn't have to be anything stellar. 0:17:44.200 --> 0:17:46.680 Is it even possible that what happens on October eight 0:17:46.880 --> 0:17:49.960 changes the equation for November or is that now kind 0:17:49.960 --> 0:17:53.920 of setence don't. Yeah, highly unlikely. I think it would 0:17:53.920 --> 0:17:58.000 have to be a pretty dramatic misrelative to expectations. It's 0:17:58.000 --> 0:18:01.360 always possible, but I think it's not very likely. So 0:18:01.560 --> 0:18:06.000 either something like that or some very sudden uh financial 0:18:06.040 --> 0:18:09.440 market storm um taking place in so far and we're 0:18:09.440 --> 0:18:11.639 not really seeing that even with all the pressure on 0:18:12.320 --> 0:18:15.679 ever grand in Chinese debt market. So I think, you know, 0:18:15.760 --> 0:18:18.840 set in Stone might be a tiny bit strong um. 0:18:18.880 --> 0:18:21.480 But I think kind of life has to a taper 0:18:21.560 --> 0:18:25.200 for for sure, pretty much all but in the bag Mike. 0:18:25.560 --> 0:18:28.080 Yesterday we had on Danny blanche Flower of Dartmouth and 0:18:28.119 --> 0:18:31.560 he called the current field of economics guess anomics, since 0:18:31.640 --> 0:18:34.160 we have no clue what is happening basically in our 0:18:34.320 --> 0:18:37.080 visibility is very low. He was saying that it's a 0:18:37.119 --> 0:18:39.480 mistake for the feeder reserve to be tapering at all 0:18:39.560 --> 0:18:43.359 because the underlying trend in labor markets is actually weaker 0:18:43.400 --> 0:18:45.720 and that frankly, the lack of participation has been a 0:18:45.800 --> 0:18:49.760 high concern. Do you agree, I would have to say 0:18:49.800 --> 0:18:54.439 I actually disagree with that. Um. So if we go 0:18:54.520 --> 0:18:56.840 back to the last cycle, and we look at where 0:18:56.880 --> 0:18:59.600 the labor market is. When the FED taper starting in 0:18:59.720 --> 0:19:03.080 came you worry of announced at the end of twenty thirteen, 0:19:03.680 --> 0:19:07.000 the unemployment rate was considerably higher about you know, hundred 0:19:07.000 --> 0:19:11.800 and forty basis points. Uh. The primate employment to population 0:19:11.920 --> 0:19:15.760 ratio was lower by the same magnitude a little bit 0:19:15.800 --> 0:19:19.159 more actually, uh. And if you know, even if we 0:19:19.200 --> 0:19:21.600 look at this criteria, the FET is now saying it 0:19:21.640 --> 0:19:24.600 wants to be more inclusive in terms of focusing on 0:19:24.640 --> 0:19:27.520 the labor market. We look at African American unemployment rates 0:19:27.600 --> 0:19:32.280 or Hispanic unemployment rates, we're in a much better shape 0:19:32.880 --> 0:19:35.520 now than we were back then when the FED started 0:19:35.560 --> 0:19:38.640 the tapers of the beet is already waited longer. And 0:19:38.720 --> 0:19:41.959 even if we look at these super core measures of inflation, 0:19:42.119 --> 0:19:44.119 right so if you listen to the people that are 0:19:44.119 --> 0:19:48.520 in the temporary transitory base effect camp in terms of saying, 0:19:48.520 --> 0:19:51.760 don't worry about this high headline inflation. Right now, if 0:19:51.760 --> 0:19:55.600 we look at the trimmed mean PCE deflator, the median CPI, 0:19:55.800 --> 0:20:00.600 the employment Employment cost index, those are all run hotter, 0:20:00.840 --> 0:20:04.480 not massively, but you know, I would see materially then 0:20:04.840 --> 0:20:07.439 they were when the FED started the taper in the 0:20:07.520 --> 0:20:11.320 last cycle, so the Fed's already desitioned itself behind the 0:20:11.400 --> 0:20:14.200 curve easy to be the last cycle relative to the 0:20:14.280 --> 0:20:17.640 labor market and relative to even these super pore measures 0:20:17.680 --> 0:20:21.359 of inflation. So I would have to disagree on that score. 0:20:21.400 --> 0:20:24.080 I think, if anything, that FED is probably going to 0:20:24.240 --> 0:20:26.399 end up behind the curve here, because we could be 0:20:26.680 --> 0:20:31.119 rapidly reconverging with not just full employment, interesting casually beyond 0:20:31.200 --> 0:20:33.800 full employment by the you know, by the mid mid 0:20:33.880 --> 0:20:36.040 year next year, the end of next year, before the 0:20:36.080 --> 0:20:38.560 FED even gets up that geral lower bounds. That final 0:20:38.600 --> 0:20:41.440 point is so so important, Mike, it's so important. We'll 0:20:41.440 --> 0:20:43.200 try and talk about that through the morning, Mike Dae 0:20:43.280 --> 0:20:52.159 to that of MKM Partners, Mike, thank you. Sir Patrick 0:20:52.160 --> 0:20:55.440 comp Strong joined the SNAPLIBI Wealth Chief Investment Officer. Let's 0:20:55.440 --> 0:20:58.000 start here, Patrick Poth at least resistance high or LOWA 0:20:58.200 --> 0:21:01.240 for this equity mark, Kid, I think it's going to 0:21:01.240 --> 0:21:04.080