Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jay Lee, we bring
Speaker 1: you insight from the best and economics, financial investment, and
Speaker 1: international relations fine Bloomberg Surveillance on Apple podcast, sun Cloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Terminal.
Speaker 1: I'm happy to say that joining us now is Bill Dudley,
Speaker 1: the former New York Fed President and currently Bloomberg opinion
Speaker 1: columnists and so much more. Bell great to catch up
Speaker 1: with you, sir. I just want to reflect on something
Speaker 1: we heard about five minutes ago from David Rosenberg pushing
Speaker 1: back against this idea that inflation will be stickier on
Speaker 1: the way down. Bill. I know you listen to some
Speaker 1: of that conversation. What did you make of it? I
Speaker 1: agree with Dade that inflation is going to take a
Speaker 1: longer time to corral, and people think, I mean, people
Speaker 1: are focusing so much on the improvement in goods inflation
Speaker 1: that was well expected as as a time he has
Speaker 1: opened up the composition demand shifted away from goods back
Speaker 1: to services, So of course whose prices are gonna be weaker,
Speaker 1: But services inflation is really high, and the labor market
Speaker 1: is still really tight. We're still having job gains well
Speaker 1: above what's consistent with a loosening labor market. So the
Speaker 1: Fed's got a lot of work to do. I think
Speaker 1: the big thing about what the next you know you're
Speaker 1: is gonna look like it's really it's really in the
Speaker 1: fense control. The FED is going to keep policy tight
Speaker 1: enough for long enough to get inflation back down, and
Speaker 1: you know, the outcome we get for the economy is
Speaker 1: gonna depend on how how much that actually hurts economic growth.
Speaker 1: I think there is gonna be a recession. I think
Speaker 1: it's gonna last quite a while, but it's not gonna
Speaker 1: be a dangerous recession in the sense that the FED
Speaker 1: can relent at any time uh and end that recession,
Speaker 1: which is very unusual compared to past cycles. This is
Speaker 1: not a recession that has been driven by you know, uh,
Speaker 1: financial instability. Is not gonna be a recession driven by
Speaker 1: you know, household and corporate balance sheets being over extended.
Speaker 1: It's a recession that's clearly induced by a tight Monterrey
Speaker 1: policy regime, and so the FAT can end it when
Speaker 1: they think that the time is great. Given the strength
Speaker 1: that we've continue to see in the economy, and Evan
Speaker 1: Brown of UBSS Management was talking about them seeing it
Speaker 1: sustained through the first half of next year. Do you
Speaker 1: think the FED could go even higher than you previously
Speaker 1: thought in terms of a benchmark rate, I'm thinking the
Speaker 1: peak is probably in the five to five and a
Speaker 1: half percent range. Just for what you for the point
Speaker 1: you just made that the news will probably be stronger
Speaker 1: for longer and will be very hard for the FED
Speaker 1: just to stop if we're still, you know, at an
Speaker 1: unemployed rate below four percent and underlying inflation still running
Speaker 1: you four percent or higher. So I think that it
Speaker 1: will get a series of smaller rate hikes, but that
Speaker 1: will probably push us up above above five percent. But
Speaker 1: clearly the feds of strategy here is they're stressing the
Speaker 1: longer rather than the ever higher. So I think once
Speaker 1: we get you know, five and a quarter five and
Speaker 1: a half, I think they'll they'll relent and they'll just
Speaker 1: si sit there and wait for that restrictive Monterrey policy
Speaker 1: to slow the calmy down, generate more slack in the
Speaker 1: layer market, and that will gradually put both wage inflation
Speaker 1: and services price inflation down. This is what FEDE officials
Speaker 1: have been saying, Bill, I mean, this is basically pretty
Speaker 1: much in line with what they're saying. The market is
Speaker 1: not buying it. They are still pricing in rate cuts
Speaker 1: by the end of next year. What does the FED
Speaker 1: have to see to start becoming less restrictive, And I
Speaker 1: don't mean that with respect to keeping rates where they
Speaker 1: I mean actually lowering them in a significant way. Well,
Speaker 1: they have to be highly confident that they're gonna be
Speaker 1: able to achieve their two percent inflation object doesn't mean
Speaker 1: that inflation you have to be at two percent when
Speaker 1: they finally reliant, but they have to be highly confident.
Speaker 1: Highly confidently mean means that they have to see significant
Speaker 1: slack developing in the labor market that brings down wage
Speaker 1: inflation to the three or four percent range. And they
Speaker 1: need to see the inflation pressures be much, uh, you know,
Speaker 1: much less persistent and broad as as they are today.
Speaker 1: So they need to see probably inflation in the sort
Speaker 1: of three percent range headed down, uh. And once they
Speaker 1: once they've accomplished both of those things, then maybe they
Speaker 1: can start to relent. But I think it's gonna take
Speaker 1: away some time because the commie still has a considerable
Speaker 1: for momentum, and it's it's going to be sustained by
Speaker 1: by by the past inflation that we've seen. For example,
Speaker 1: so security recipients are gonna get eight points seven percent
Speaker 1: increase in their checks come January, and they're gonna go
Speaker 1: ahead and spend a bunch of that money, and that's
Speaker 1: gonna keep moving along, and that's gonna make it hard,
Speaker 1: really fit to restrain things. But you wrote yesterday on
Speaker 1: bloom Bag Opinion that the FED shouldn't rate his inflation target.
Speaker 1: He said changing the objective now would be bad for
Speaker 1: the economy and for the central banks and credibility. But
Speaker 1: I did wonder when that will got published. I wondered
Speaker 1: why you wrote it. You've really worried that they might
Speaker 1: actually go through with that next year. Well, I wrote
Speaker 1: it because I'm being asked about it all the time, Uh,
Speaker 1: And so I thought that I should write down what
Speaker 1: I think the ant right answers. You know, the argument
Speaker 1: for raising the inflation target really sort of two potential arguments.
Speaker 1: Number one can't hit too so let's make the objective
Speaker 1: a little bit easier. That's that's obviously not a very
Speaker 1: good argument. The other arguments a little bit better, which is,
Speaker 1: we have a higher inflation target and the peak in
Speaker 1: a short term interest rates during the cycle will be higher,
Speaker 1: more room to ease when when recession hits, and so
Speaker 1: they'll be less risk of being pinned at the zero
Speaker 1: or bound for interest rates. I think that risk, though,
Speaker 1: has diminished considerably because the peak in church and rates
Speaker 1: this cycle is probably gonna be about five percent, So
Speaker 1: the Federal Reserve has plenty of ammunition to cut rates
Speaker 1: uh in environment where there where their inflation target is
Speaker 1: still two percent. So I think this idea that the
Speaker 1: zero or bound continues to be this huge risk. Uh
Speaker 1: And and there's a big constraint on Montrey policy. I
Speaker 1: think that's overstated at this point. But Bill, how concerned
Speaker 1: are you that the Fed will not have the same
Speaker 1: resolve in the middle of next year to keep rates
Speaker 1: where they are if we do see the unemployment rate
Speaker 1: going up but we do see the US entering into recession. Well,
Speaker 1: I think the Committee it will be interesting to see
Speaker 1: whether the Committee is united twelve months from now as
Speaker 1: it is today. I think Chera Paula means what he
Speaker 1: says that he because he wants to behave in a
Speaker 1: way uh, that he's not like Arthur Burns, so he
Speaker 1: doesn't have to be like pauled Loker. But whether you
Speaker 1: can keep the rest of the committee along with him.
Speaker 1: As the unemployer rate goes up and the trade offs
Speaker 1: between the two two objectives of the FED prastability and
Speaker 1: maximum sustainable employment become more in conflict with one another.
Speaker 1: So I think we don't know the answer to that.
Speaker 1: I'm hopeful that power will here in the day. I
Speaker 1: remember when inflation was sub two percent and people were
Speaker 1: talking about raising the inflation target than do you remember
Speaker 1: that you should raise it to three about because then
Speaker 1: there'd be more ambitious and people would believe they're committed
Speaker 1: to getting inflation high. Then they might hit two. Remember
Speaker 1: when they were also talking about free money and of
Speaker 1: modern monetary theory. We did that too crazy times. Bill Dudley,
Speaker 1: thank you. I appreciate it as always alongside Lisa Brabbit's
Speaker 1: Sam Jonathan Pharaoh, together with election of a bm Y
Speaker 1: and Madam. Great to have you with us in a studio.
Speaker 1: And Leah, what is more important the FED speak or
Speaker 1: the data? So so I think it's the data, and
Speaker 1: I think it's precisely the Pabor data, because the FED
Speaker 1: has explicitly targeted the labor market here as inflation has
Speaker 1: remained higher and stickier and not transitory. They've been talking
Speaker 1: about the labor market trying to get rid of job openings,
Speaker 1: the beverage curve, which is the Jolts data, and then
Speaker 1: of course you know the wage data. And I think
Speaker 1: if you don't see softness in either of those two reads,
Speaker 1: it's going to be difficult for them. Are you saying
Speaker 1: that good news is bad news in the labor market data.
Speaker 1: I hate to say that, but we're back to this world.
Speaker 1: I mean we're back to the world where a softer
Speaker 1: real economy will be more pleasing for the FED and
Speaker 1: means that whatever their target is five to five and
Speaker 1: a quarter five to five and a half is still
Speaker 1: the right target. The issue is if you get no
Speaker 1: softness in the labor market, and let's face it, we
Speaker 1: haven't seen any softness in the labor market in the
Speaker 1: aggregate data, then we're going to have to go higher
Speaker 1: because in the end, every FED hiking side goal ends
Speaker 1: when the FED funds rate is above c p I
Speaker 1: and we are not there yet. What are you thinking
Speaker 1: that Fed funds is going so we're going to get
Speaker 1: some real economic projections in the next FED meeting. At
Speaker 1: the last FED meeting where we had an SEP, which
Speaker 1: was back in September, they pushed the twenty three dot
Speaker 1: from three point eight to four point six. I think
Speaker 1: most people, assuming it goes to five is their scope
Speaker 1: for surprise. There there is some scope for it to
Speaker 1: be a little bit higher than that, just because, as
Speaker 1: I've said, the services, the services inflation is not rolling over,
Speaker 1: and the sticky services inflation is not rolling over. So
Speaker 1: while headline is and clearly the goods inflation has peaked
Speaker 1: and coming down hard services has not. And that's six
Speaker 1: c p I so I think there's room to go higher.
Speaker 1: I think as you get higher on FED funds, you're
Speaker 1: going to see a wider dispersion and you're going to
Speaker 1: see some some conversation in the f O m C
Speaker 1: about where we go from here. The I think the
Speaker 1: easy part of the hiking cycle is in a sense
Speaker 1: behind us after this December meeting, and after that you're
Speaker 1: gonna start getting some dissents. What do you think is
Speaker 1: going to be the bigger surprise for markets if we
Speaker 1: get softer than expected jobs prints or stronger, hotter than
Speaker 1: expected jobs prints. So I think the biggest surprise would
Speaker 1: be if we got hotter here. How we were having
Speaker 1: really high um and that number of announcements of of
Speaker 1: layoffs and yet and yet it's not showing up in
Speaker 1: the aggregate data at all. I mean, those those Thursday
Speaker 1: morning new claims data are hitting new lows, are you know,
Speaker 1: barely moving off of off flows. So it's not hitting
Speaker 1: the data yet. So I think if the if the
Speaker 1: numbers were hotter, it would it would be a surprise here.
Speaker 1: People are talking about short and shallow and we've been
Speaker 1: talking about this all morning. What is the consequence of
Speaker 1: this type of recession? How long will it last? We
Speaker 1: were just speaking with Bill Dudley, who agrees with the
Speaker 1: idea of a longer and shallow type of recession. Is
Speaker 1: that an okay scenario for risk assets? So that's a
Speaker 1: great question. And this goes back to the difference between
Speaker 1: the real economy and risk assets. So even in a
Speaker 1: shallow recession, you can still have SMP earnings declines of
Speaker 1: and I'll just point to a two thousand and one
Speaker 1: is a great example of that. Risk assets did not
Speaker 1: do well even with a short and shallow recession, so
Speaker 1: there is still risk here. And in the end, this
Speaker 1: year was about rates and multiple compression and and and
Speaker 1: the correlation between the you know, the bond and equity market,
Speaker 1: you know, the worst being since n one, that this
Speaker 1: is the transition year. Next year is okay, Now your
Speaker 1: rates are higher, what does it mean for the real economy?
Speaker 1: And that's I think we really have not priced in.
Speaker 1: I'm not the only one saying this, but it is
Speaker 1: true that the earnings really are too high and not
Speaker 1: essentially reflecting five basis points of tightening within ten or
Speaker 1: eleven months. I mean, we've never really hyped this fast
Speaker 1: and we haven't seen the effect yet. So that is
Speaker 1: that is down the road and that is short to come.
Speaker 1: Let's talk about leadership. Is it early to talk about
Speaker 1: potential leadership for next year or not? So in a
Speaker 1: funny way, we have started to price in a recession
Speaker 1: around June, then against September, and now we're starting to
Speaker 1: price in a recovery. We haven't even gotten to the recession.
Speaker 1: We haven't even gotten to realistic earnings numbers. So I
Speaker 1: don't think it's too early yet. I mean, there are
Speaker 1: certain sectors, there are certain companies that are just beaten
Speaker 1: down and left for dead, okay, And and that is
Speaker 1: where you can go shopping for for your stock. Like,
Speaker 1: we think the bond market is going to look much
Speaker 1: better next year simply because all the work was done
Speaker 1: this year. And historically, if you look at the ten
Speaker 1: worst starts to the year in the bond market, you
Speaker 1: have a positive year the following year. And it makes
Speaker 1: sense if you think about it. I mean, it's related
Speaker 1: to the rolling over and the and the inversion of
Speaker 1: the yell curve which you mentioned the two thousands. Some
Speaker 1: of those names were left for dead for a long
Speaker 1: long time. Can you help me understand what should be
Speaker 1: left for dead for a long long time? So speculations
Speaker 1: should be left for dead, right, So anything where it's
Speaker 1: multiple of revenue or you know that no earnings, that
Speaker 1: that will be left for dead probably forever. And I
Speaker 1: would suggest there'll be some consolidation in those areas, but
Speaker 1: that's not something to look forward to because there's many
Speaker 1: of these assets still have a ways to go. We're
Speaker 1: not there yet. Left for dead is when you're down
Speaker 1: from the peak. So if you're in a speculative asset
Speaker 1: or a speculative name and you're hoping for you know
Speaker 1: that it's going to you know, the market will stabilize
Speaker 1: one day, you actually still probably have to go on
Speaker 1: the downside. Here, what percent of the overall market cap
Speaker 1: of the SMP is that speculative sort of quadrant that's
Speaker 1: going to be left for dead? I don't like so
Speaker 1: I'd say, my I think it's about it's about ten percent. Here,
Speaker 1: it's about ten percent. I think that some of the
Speaker 1: biggest risk we've talked about this is the large cap
Speaker 1: names which are still trading at higher multiples. You know,
Speaker 1: in the end, when you get a multiple compression year
Speaker 1: and you get the ends of of the of the
Speaker 1: you know, exuberant on the valuation side, you have to
Speaker 1: bring value investors back into invest in these growth names.
Speaker 1: And some of our favorite growth names are still trading
Speaker 1: at pretty high multiples UM. And so the top the
Speaker 1: top of the market still has risk. Here you can
Speaker 1: see it and how how the overall market and the
Speaker 1: aggregate has has has traded. The Dow versus the nasdack,
Speaker 1: the Dow versus the SMP, and the SMP is overly weighted.
Speaker 1: Top ten names twenty nine of the index a lot
Speaker 1: of those names are still not cheap, and they're still expensive.
Speaker 1: I think Tom Peter to talk about the talk about
Speaker 1: but it's it does make sense though, Uh it does.
Speaker 1: I think that I think that it is a good
Speaker 1: point going forward. Then do you think that the potential
Speaker 1: for contagion is off the table considering that we still
Speaker 1: have potentially more wash out to go here? So I
Speaker 1: think there's still a risk of sovereign debt issues in Europe.
Speaker 1: I think we are not through this winter. We are
Speaker 1: not through the nat gas problem of this winter, and
Speaker 1: then after this winter there's a summer and another winter,
Speaker 1: and I think the markets very shortsighted in piecing this
Speaker 1: through and who's going to be paying for this and
Speaker 1: how it's going to be funded that these are not
Speaker 1: easy questions. And I think this is kind of an
Speaker 1: issue that's been left for dead because it's been a
Speaker 1: warmer than expected autumn in Europe and so the reserves
Speaker 1: are high. But again that's a one winter story. We
Speaker 1: don't have a plan yet moving forward, so I think
Speaker 1: there is some risk there. I think the contagion risk
Speaker 1: is lower, but not dead yet. I think that the
Speaker 1: bitcoin blow up is likely to be contained there clearly
Speaker 1: with some counterparty risk, but I don't think it was
Speaker 1: a big enough asset for it to have huge reverberation.
Speaker 1: I agree with you in Europe, have you got to
Speaker 1: think about why the reserves are where they are? Not stream,
Speaker 1: We're going to have the same ability to build up
Speaker 1: those reserves through next summer. Doesn't seem so, doesn't seem
Speaker 1: so right now? What do you do? Also in an
Speaker 1: economy where the inflation is coming from something completely out
Speaker 1: of control of central banks and even a policymakers because
Speaker 1: it's being it's getting difficult for them to source enough
Speaker 1: natural gas from enough places over the longer term with
Speaker 1: contracts that aren't necessarily ten or twenty years. They worry
Speaker 1: about expectations, They worry about a second round of effects
Speaker 1: of inflation, going into wage negotiations, those kind of things.
Speaker 1: That's a tough spot for the Europeans. It will be
Speaker 1: next year as well, based on where people think the
Speaker 1: energy market's going. Have people priced out some of that
Speaker 1: bear case though? For Europe? Based so much traded I
Speaker 1: mean how much around look, I mean the most you know,
Speaker 1: the most exposed asset over the last decade has rallied enormously.
Speaker 1: So you know, risk assets are back on and the
Speaker 1: the the recovery is getting priced in, and the question
Speaker 1: is is this a bear trap? Right? Is this too early? Um?
Speaker 1: Everybody likes picking the bottom and everybody thinks they have
Speaker 1: the turn. I just think that the net gas, the funding,
Speaker 1: the sovereign debt issue all related in Europe is not
Speaker 1: over yet. And the wage issue, as you point out,
Speaker 1: we have a wage issue here. Let's talk about the
Speaker 1: reil strike. Okay, really quiet? Well, if if if rail
Speaker 1: workers were really concerned about a deepening recession, they probably
Speaker 1: wouldn't be fighting for higher wages the West Coast. Next,
Speaker 1: That's what I'd be asking. The sports negotiations, did they
Speaker 1: break down? I wonder if you're interested in a five
Speaker 1: part dollar bond sale from Amazon at Licia, I wonder
Speaker 1: if that gets your cut? And that headline just crossing
Speaker 1: the Bloomberg Team USA? Did they get it done? Later?
Speaker 1: Did they get it done? Team USA? Such an exciting game? Yes,
Speaker 1: there we go a white man and that's conviction. She's
Speaker 1: fired up, so excited. I'm gonna yes, I'm going to
Speaker 1: say yes to joining US NAN. Please to say, is
Speaker 1: Evan Brown had a multi asset strategy at Upssset Management
Speaker 1: even always fantastic to catch up with you and the team.
Speaker 1: Let's just start with the core theme for you guys,
Speaker 1: which is that you think investors are going to be
Speaker 1: surprised by how resilient this US economy will continue to be,
Speaker 1: perhaps deep into three even you can you walk us
Speaker 1: through the y and for how long you think we
Speaker 1: might be surprised? Yeah, so, I I think the For one,
Speaker 1: we're in an environment where you still have a lot
Speaker 1: of excess savings on household balanties in aggregate, so we
Speaker 1: know that those excess savings are are dwindling somewhat for
Speaker 1: some of the lower earners, but the biggest spenders in
Speaker 1: the economy are higher earners. We still have a very
Speaker 1: tight labor market for those lower earners, lower income earners
Speaker 1: um plus. And I think this is a very big deal.
Speaker 1: A big decline in gasoline prices that's going to be
Speaker 1: a big support for the U. S consumer. You've got
Speaker 1: a Social Security adjustment, costs of living adjustment that's gonna
Speaker 1: effectively boost incomes. The States have a lot of excess
Speaker 1: savings themselves, and there's direct support for consumers coming coming
Speaker 1: through there. So, so what we're talking about is a
Speaker 1: reasonably healthy economy despite all the rate hikes that we've
Speaker 1: seen today. Can you beat a stands constructive on ann X? Yeah,
Speaker 1: I mean I think as inflation comes down, that's going
Speaker 1: to weigh somewhat on on earnings. But I think a
Speaker 1: lot of that is known, right, A lot of that
Speaker 1: even if you haven't seen analyst expectations come down as much.
Speaker 1: Everyone's talking about recession, everyone's talking about earnings coming down,
Speaker 1: and so the surprise is that they hang in there. Right.
Speaker 1: We're not talking about a boom in earnings. They're definitely
Speaker 1: coming down, but we are talking about them just I'm
Speaker 1: hanging in and at this point that's probably enough. Do
Speaker 1: you think we could see the outcome fore flipped from
Speaker 1: what people are expecting, which is a good first half
Speaker 1: and a really bad second half. It could be because
Speaker 1: I do think that the the tightness of the labor
Speaker 1: market can continue, and that's going to keep the Fed
Speaker 1: on edge. There's a lot of narrative right now that, Okay,
Speaker 1: the Fed's gonna do another fifty basis point basis and
Speaker 1: hYP and more or less be be done. But if
Speaker 1: the labor market is staying tight, then there's a bias
Speaker 1: that the FED has to you know, kind of extend
Speaker 1: to do a more a few more basis point. Can
Speaker 1: we get to a five and a half six percent
Speaker 1: expected terminal rate? I think we can, and ultimately, you know,
Speaker 1: that can be the thing that makes the economy crack
Speaker 1: down the road. But it's too early to trade that
Speaker 1: right now. What does that mean in terms of the
Speaker 1: bond trade? Given that so many people hid out in
Speaker 1: the long end, does that mean that that could be
Speaker 1: fine for now and we could see that work for
Speaker 1: another couple of months, But if we go to a
Speaker 1: five to six percent benchmark FED funds rate, all of
Speaker 1: a sudden that trade gets blown up. Yeah. I think
Speaker 1: that's I think that's right. I mean, I do think
Speaker 1: a lot of the bond rally is a result of
Speaker 1: people kind of short covering. Everyone's been short bonds for
Speaker 1: a long time. Uh. And I think a lot of
Speaker 1: it too, has been the round trip that we've seen
Speaker 1: from from the UK transitioning from fiscal stimulus coming from
Speaker 1: the Trust administration to now SUNAC and fiscal austerity. So
Speaker 1: that's putting downward pressure globally on on yields. But all
Speaker 1: of that is kind of played out and now and
Speaker 1: now we get to the point where you know, growth
Speaker 1: is okay, inflation is sticky, fed might be doing more
Speaker 1: than people expect. And then right out there you have
Speaker 1: the Bank of the Japan right which which at some
Speaker 1: point next year, probably in the first half, is going
Speaker 1: to be adjusting. And even if that's kind of known,
Speaker 1: that's really the last anchor that there is on bond yield.
Speaker 1: So I think almost even psychologically, that's going to be
Speaker 1: injecting some term premium and bomb markets and perhaps leading
Speaker 1: to a renewed sell off and uh in duration. Even
Speaker 1: if that's the case, where does that leave the dollar?
Speaker 1: Trite because I pick up on cable you mentioned the
Speaker 1: UK that went from one oh three fifty intraday loads
Speaker 1: of the year on September one, twenty right now. Similarly,
Speaker 1: we've had a turnaround in europe dollar as well at least,
Speaker 1: and that don't the strength can kick back into Yeah,
Speaker 1: I think it'll it will kick back in, but not
Speaker 1: to the same extent that that we've seen for the
Speaker 1: bulk of this year. And the reason being that Europe,
Speaker 1: you know, the we all know that they're in recession,
Speaker 1: are about to be in recession. They're going to be
Speaker 1: bouncing back. In fact, you're already seeing the confidence measure,
Speaker 1: consumer confidence, business confidence measure statilize and in some cases turn.
Speaker 1: So you should get on a forward looking basis, a
Speaker 1: little bit of bounced from from your China. The path
Speaker 1: is bumpy bumpy, leaving zero COVID, but the destination is reopening.
Speaker 1: I mean they're going to have to reopen in order
Speaker 1: to make sure that the economy uh just doesn't completely
Speaker 1: fall apart, and that that the government has the tax
Speaker 1: revenues to actually kind of uh pursue their policies on
Speaker 1: on common prosperity and redistribution and the like. So the
Speaker 1: current situation is unsustainable in China, and so we'll pick
Speaker 1: up there. So if you're getting, you know, more support
Speaker 1: from Europe, more support from China, it's not just a
Speaker 1: US riven economic story. Having final forecast, we want from you.
Speaker 1: Team USA against Iran two pm Eastern time. What's the score?
Speaker 1: The US is going to win to one. That's you
Speaker 1: can count on that, and we go Ubs. You see,
Speaker 1: Ubs likes to play ball. What was pimcom about earlier?
Speaker 1: They're playing a different baseball Banter joining us with silk Is,
Speaker 1: the head of European f X strategy over its city said,
Speaker 1: it was great to catch up with you. Let's talk
Speaker 1: about what went right, or rather what went wrong for
Speaker 1: some of these calls around sterling, which is now pushed
Speaker 1: through one twenty. Well. Look, I think first of all,
Speaker 1: there has been a fandom in the reason in the
Speaker 1: sense that there has been the pricing out of the
Speaker 1: excessive risk premium UH related to the fiscal policies that
Speaker 1: we're basically announced back at the end of September. And
Speaker 1: the second thing, you know, during that period there was
Speaker 1: an enormous build up of sterling shorts UM and given
Speaker 1: the fact that we are now in an environment of
Speaker 1: relative dollar weakness, sterling has pushed higher and you get
Speaker 1: the unwinding of the sterling shorts. As far as I mean,
Speaker 1: if you want to get the direction of sterling, it
Speaker 1: wouldn't be looking at cable, because cable it's going to
Speaker 1: be the mirror image of what the dollar is doing.
Speaker 1: It's got to bet at the dollar around one, I
Speaker 1: would be mostly looking at euro Sterling, and you know,
Speaker 1: I have to say, I'm quite surprised that it's still
Speaker 1: hovering around eight six, So you would reload sterling shorts
Speaker 1: but against the euro yes, absolutely, But the the the
Speaker 1: trigger point for me to do that is that I
Speaker 1: think we need to reach a point at which positioning,
Speaker 1: especially by their speculative community, is reaching relatively neutral levels.
Speaker 1: We're getting quite close used to that if you look
Speaker 1: at the SFETYC data as well as our proprietary in
Speaker 1: this is UM. But I'm quite confident in that call
Speaker 1: for yours certainly higher. How much are you trying to
Speaker 1: move away from the dollar just in general in terms
Speaker 1: of your crosses, your pairs, simply because the dollar story
Speaker 1: has been a so dominant and be so unpredictable. UM.
Speaker 1: I think to twenty three is going to be a
Speaker 1: year in which relative value is going to make sense
Speaker 1: from a trading perspective, and I think by far the
Speaker 1: biggest thing is going to be the housing market on
Speaker 1: the back of very strong monetary policy tightening. One needs
Speaker 1: to identify the places where housing markets are most vulnerable,
Speaker 1: UH and in US at least in Europe if you look,
Speaker 1: Sweden and the UK are by far the most vulnerable ones.
Speaker 1: But aside proble, and I'd like to add that as
Speaker 1: far as the dollar call is concerned, I have to
Speaker 1: say that I'm inclined to believe that we're an inflection
Speaker 1: point in the dollar. It's the FED, and it's also
Speaker 1: the elephant in the room, which is China inflection point
Speaker 1: to a week or do a weaker dollar. Yes, I
Speaker 1: think if you identify the state the different states of
Speaker 1: the world, what really matters for the dollar is basically
Speaker 1: what the Fed is doing, but also what global growth
Speaker 1: is doing. And I think the market is sniffing that. Basically,
Speaker 1: the genie is out of the bottle. As far as
Speaker 1: China reopening is concerned. So what you think happens with China?
Speaker 1: What's your basic case? Do you think full reopening? Well,
Speaker 1: it depends what you mean full reopening. I think there
Speaker 1: is going to be a very gradual reopening because it's
Speaker 1: not in the authority's interest to do it overnight and
Speaker 1: very very quickly. Um, there are a lot of political
Speaker 1: sensitivity is in that respect, So I think there's going
Speaker 1: to be a very gradual reopening. We also have the
Speaker 1: very comprehensive property package, which is putting a floor underneath
Speaker 1: property prices, which will really some consumption impact by the
Speaker 1: wealth effected potentially is going to start putting some upside
Speaker 1: pressure on Chinese imports. But you know what it's it's
Speaker 1: I think the genie is out of the bottle as
Speaker 1: far as China is concernant. What do you think the
Speaker 1: best China proxy is to push that view through? You're
Speaker 1: a China You're a web side. And the reason for
Speaker 1: that is at the initial stage of the gradual reopening,
Speaker 1: you're going to see an increase in inputs by China,
Speaker 1: which means that you're going to have a deterioration in
Speaker 1: the current account of China, and on the flip side,
Speaker 1: you're going to start having a positive impact on the
Speaker 1: car account for Eurozone and in general, everything that basically
Speaker 1: increases activity from China and Asia more generally is going
Speaker 1: to be good for the euro So e're China, I
Speaker 1: think is it would be my best trade for expressing that.
Speaker 1: Can you pair this into what you were talking about
Speaker 1: earlier about the housing market and how that dictates the
Speaker 1: future of certain nations New point of Sweden and the
Speaker 1: UK transit walk us through how a very weak housing market,
Speaker 1: what kind of deterioration you're expecting to really bleed in
Speaker 1: to currency weakness? Well, as far as them a direct impact,
Speaker 1: that's a direct impact into economic growth and therefore there's
Speaker 1: direct impact consumption and there's direct impact therefore two central
Speaker 1: bank decisions. We at the Bank of England is very
Speaker 1: much aware of the properties in the housing market and
Speaker 1: that's why it puts a lot of weight and growth
Speaker 1: right now, and that is why it seems a likely
Speaker 1: at least to us that it's going to validate market expectations.
Speaker 1: Now why these places are much more vulnerable. I mean
Speaker 1: in the UK you have to understand in vast comparison,
Speaker 1: uh within in in a great difference with the US,
Speaker 1: where here you have thirty year fixed rate mortgages. In
Speaker 1: the UK you have two year, five year a fixed
Speaker 1: rate mortgages, which means that every point in time you
Speaker 1: get a bigger, big percentage of the population going out
Speaker 1: that refinance. So you know, just compare it. You have
Speaker 1: had about two to an a half percent mortgage rates
Speaker 1: in the past ten years. Right now you're potentially going
Speaker 1: to gravity to six and a half to seven. So
Speaker 1: it's going to be a major major hit. It's gonna
Speaker 1: be very so you're seeing the numbers already. UK market approvals. Yes,
Speaker 1: I think the lowest sense COVID nineteen. How bad do
Speaker 1: you think this is going to get and has a
Speaker 1: market in the UK? My view is that it's going
Speaker 1: to get very bad. And the other issue that the
Speaker 1: UK is are facing is that it's actually facing a
Speaker 1: more structural problem into the inflation outlook compared to the
Speaker 1: rest of the world. And the reason for that, um,
Speaker 1: you know we've said that. I think it's to a
Speaker 1: large extent related to Brexit and and as a result
Speaker 1: of this, it will put the Bank of England in
Speaker 1: a much much more difficult spot compared to other central banks.
Speaker 1: It will be faced with a structurally higher inflation and
Speaker 1: a much faster deteriorate in economy. Governor Bailey speaking a
Speaker 1: little bit lightly this morning ten am intent time, yeah
Speaker 1: to the House of Lords. How much does he discuss
Speaker 1: the ramifications on the housing market that could be decimated
Speaker 1: but not just because of interest rates but also just
Speaker 1: because general economy And did Goldman Sachs moving of Theirs
Speaker 1: of London to Milan partly because of this? But look,
Speaker 1: I think what was really imprecedented was in during the
Speaker 1: last press conference by the Bank of England, Bailey actually said, um,
Speaker 1: I hope that the market is getting the message and
Speaker 1: mortgage rates are going to go lower after an interest
Speaker 1: rate hike. I found it confusing from the bank aving
Speaker 1: that at times I I don't know visit Akisss City,
Speaker 1: it's quite to cash up set. Thank you wonderful. This
Speaker 1: is the Bloomberg Surveillance Podcast. Thanks for listening. Join us
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Speaker 1: on the terminal. I'm Tom keene In. This is Bloomberg
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