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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jai Leie.

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Speaker 1: We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg. Let's

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Speaker 1: head straight to the global capital of foreign exchange, shall we?

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Speaker 1: Tom King to London we go and catch up with

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Speaker 1: Kitchukes of selk Jen Kit. Let's just start with the

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Speaker 1: economic data ninety minutes away in the United States. What

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Speaker 1: are you looking for, kid, I'm I'm hoping we don't

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Speaker 1: get another uptick in new claims and even more so

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Speaker 1: another uptick in continuing claims, just because this would be

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Speaker 1: this would be an awfully high level of unemployment for

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Speaker 1: things to stabilize with the unemployment rate, get level of

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Speaker 1: getting stuck around here. There's an awful big hole still

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Speaker 1: to fill in. And you've had decent number on on I,

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Speaker 1: S M and on. Quite a lot of the data

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Speaker 1: has said that yes, there's been some battens on the virus,

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Speaker 1: but had to return to loth Dantons carry on um.

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Speaker 1: So the labor market data have to have the capacity

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Speaker 1: to really put a dantoner on on that kind of story.

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Speaker 1: You know, kid, I look at this and I love

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Speaker 1: your morning. Note the acuity of it as you look

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Speaker 1: at the granular data around all these political emotions, including

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Speaker 1: the claims report at eight thirty, and I got to

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Speaker 1: go to the bond market kit and we go out

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Speaker 1: to four digits here on Bloomberg Surveillance. We call these

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Speaker 1: Roman numbers in honor of Roman who made this happen.

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Speaker 1: But going out to four digits on the ten year

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Speaker 1: yield is just simple point five one five zero. What

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Speaker 1: does it say to you, Kit Jukes? And where is

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Speaker 1: the critical ten year yield? I guess the critical tenure

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Speaker 1: yield is when it does negative and joined for the

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Speaker 1: rest of the planet. That's where That's where we're just

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Speaker 1: going out. But I mean it's you know, we are

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Speaker 1: in we are in pretty new territory in terms of

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Speaker 1: this movement. And that's what I mean to say that

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Speaker 1: some of us the day data has shown, you know,

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Speaker 1: resilience would be with the sort of the widest spread

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Speaker 1: around the United States of the pandemic. But there's there's

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Speaker 1: just a continued hunk for safe hunts, for safe assets

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Speaker 1: and a continued belief that rates for staying low for

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Speaker 1: just as far as the eye can possibly imagine. Uh,

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Speaker 1: and you know that doesn't look as if it's going

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Speaker 1: away anytime soon. But but say look at tit shields.

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Speaker 1: I mean they are they are just accelerating away. So

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Speaker 1: today I think that market is clearly we're frightened of

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Speaker 1: bad numbers as opposed to brace for strong ones. What

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Speaker 1: strikes me is the incredible divergence and the widening divergence

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Speaker 1: in developed markets ability the U s is ability to

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Speaker 1: lower rates and even issue more debt, and the lack

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Speaker 1: of that ability by a number of developing markets. Turkey

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Speaker 1: is its own idiosyncratic story, but how representative is it

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Speaker 1: of emerging market nitions that are not able to ease

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Speaker 1: some of their monetary policies to juice growth for fear

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Speaker 1: of capital flight. Yeah, we have to be precise about

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Speaker 1: which emerging markets that there's more than one. I actually

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Speaker 1: think that where we've got through this year, in a sense,

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Speaker 1: the weakest the weakest currencies, it goes um. You know,

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Speaker 1: we still have a considerable weakness out there for the

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Speaker 1: Turkish lear of the South African rand, and we do

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Speaker 1: for the Brazilian real This year, the Morgan family folks

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Speaker 1: talked about the Fragile five. India and Indonesia further east

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Speaker 1: are in much better shape than than the Terrible three

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Speaker 1: or the fragile three. If it's if it's G three

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Speaker 1: um developed currencies which are all resilient, it's really those

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Speaker 1: G three em ones that are together weak. And but

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Speaker 1: but if you, if you are dependent on foreign capital,

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Speaker 1: you do not have the ability for quee aggressive fiscal

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Speaker 1: responses to the pandemic. And you and you live in

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Speaker 1: danger of what sort of global environment is. And here

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Speaker 1: we are in August, and you know August is his

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Speaker 1: star coortally not a good month to need to go

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Speaker 1: to the world and borrow money. And this is what

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Speaker 1: we see. Get your worried about the month of August.

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Speaker 1: Aren't you just walk us through that what you're looking

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Speaker 1: for this month? Well, so you know, we put out

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Speaker 1: a bunch of a bunch of pieces separately at our shot.

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Speaker 1: Whether the rates guys were worried about risk aversion in August,

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Speaker 1: the emerging market guys are worried about risk aversion. And

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Speaker 1: I was looking at various currency trades that do well

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Speaker 1: in August and The currencies that do badly in August

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Speaker 1: do include you know, the turkishly Hera, the Brazilian rail,

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Speaker 1: the South African rand. What does well is the dollar

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Speaker 1: and the yen and gold historically. I don't know if

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Speaker 1: gold can do well starting from here, but um, but

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Speaker 1: but what you know what happens in August is that

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Speaker 1: it's a liquid um and volatile. You see it pick

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Speaker 1: up in volatility typically and therefore uncertain. And what you

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Speaker 1: can see is then he is that in an liquid market,

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Speaker 1: these fragile emerging market currencies can gap wider incredibly quickly

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Speaker 1: on on really no volume at It's just a daft market.

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Speaker 1: And that's what's happening. I mean, you can I think

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Speaker 1: this is brilliant and it's great to go around the world,

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Speaker 1: But the answer is your own powers central banker to

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Speaker 1: the world and to go back to where you said,

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Speaker 1: I guess the tenure yield is important in a negative

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Speaker 1: statistic point five zero, folks are getting very near the

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Speaker 1: workout of a couple a week ago or so. But

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Speaker 1: but kit there's a point here where the central bank

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Speaker 1: has to say, okay, the markets finally testing is that

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Speaker 1: a point for zero? Is it a point to zero

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Speaker 1: or is it really they're gonna wait for a negative statistic.

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Speaker 1: I think they have very little choice. But you know,

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Speaker 1: the Fed has made it clear they're either adding more

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Speaker 1: money or you know, they'll wait for inflation to come up.

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Speaker 1: They know that the dawn side risk of the economy

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Speaker 1: is still there, so you know, sort of mean the

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Speaker 1: Fed is on easy, staying easy. That the day to

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Speaker 1: protect the markets, they came in and delivered, you know,

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Speaker 1: massively accommodative policy globally in March, with all the international

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Speaker 1: moves they did on the treasury we PO and on

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Speaker 1: the swap program, hugely positive in turning around sentiment. That's

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Speaker 1: weakened the dollar, but it's weakened the dollar more against

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Speaker 1: developed market currencies and these fragile ones because it hasn't

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Speaker 1: unlocked global capital and that's really a problem for growth

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Speaker 1: in those sides. If you're just joining us on Bloomberg Television,

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Speaker 1: Bloomberg Radio, Worldwide Surveillance with you this morning, Lisa Bramwa

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Speaker 1: was John Farrow and Time keen markets are on the

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Speaker 1: move before the claims data which we see here in

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Speaker 1: an hour in twenty minutes, Fran seeing the Quase interview

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Speaker 1: with Governor Bailey scheduled at the top of the eight

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Speaker 1: o'clock hour as well. Okay, the bond markets on the move,

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Speaker 1: but the dollars shows that persistent resilience even within a

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Speaker 1: week dollar regime can suck and call week dollar. Yeah,

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Speaker 1: once this comes down. At the moment, the dollar is

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Speaker 1: still slightly stronger than it was at the start of

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Speaker 1: the year in trade weighted terms on the b i

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Speaker 1: S measure of up some broad trade weighted terms. It

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Speaker 1: will weaken, but I don't know if it can weaken

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Speaker 1: until we can stabilize these fragile emerging market economies, because

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Speaker 1: what weakens the dollar is American investors looking for higher

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Speaker 1: yield somewhere else. The said on its job and give

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Speaker 1: made sure that there's no yield unavailable at all in

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Speaker 1: the United States. I don't know the NATS back has

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Speaker 1: done his job to get equity. Bryce is so high.

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Speaker 1: I'm not sure if many people have the stomach to

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Speaker 1: keep on chasing. But but we have to get this

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Speaker 1: is where the pandemic hurts. Can we can we make

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Speaker 1: the rest of the world at active to sell the

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Speaker 1: dollar into buying really in a proper way around emerging

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Speaker 1: market a bit, you know, without getting a vaccine or

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Speaker 1: some some kind of solution to the barrus. That's the

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Speaker 1: key question, Kit, before we let you go positive or

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Speaker 1: negative print in pay rolls tomorrow. I hope positive. The

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Speaker 1: fact that it took a while to answer that question

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Speaker 1: speaks to how uncertain tomorrow is. Kit. Great to catch up,

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Speaker 1: Sir kt Jukes, a sock gen Blimberg's Francine lack work,

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Speaker 1: good friend and Carlie catching up with the bank, aving

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Speaker 1: the governor Andrew Bailey take a listen. The things we've

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Speaker 1: looked at, probably further QUEI, further quantity of easing, potentially

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Speaker 1: use some negative rates, and full guidance. Those are the

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Speaker 1: things that we've looked at. So your curve control has

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Speaker 1: not been discussed or is it something I mean, obviously

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Speaker 1: your control is quite interestingly discussed in in central backs

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Speaker 1: and we do, we do discuss it. It's it's something

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Speaker 1: that I mean, we've we've preferred to to look at

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Speaker 1: quantity of easing and forward guidance as tools in that respect.

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Speaker 1: But it's but I would make the point that we

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Speaker 1: will go on looking at the toolbox. You know, nothing

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Speaker 1: is fixed down forever, but it's not in our planning

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Speaker 1: at the moment. I think it is true that I

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Speaker 1: think when you look at the experience of other countries,

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Speaker 1: they appear to have worked more effectively in the recovery phase. Now,

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Speaker 1: I would however, qualify that a bit by saying, I

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Speaker 1: think there's a there's a tricky identification issue at that

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Speaker 1: point as to what extent it's negative rates that are driving,

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Speaker 1: for instance, the recovery of the banking system, the lifting

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Speaker 1: of the release of provisions, and therefore the ability to

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Speaker 1: lend into what it's that that would have happened anyway,

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Speaker 1: because it's it's a cyclical point, it's a it's a

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Speaker 1: rather tricky issue in that respect. So the evidence is there,

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Speaker 1: but it's a little bit hard to identify the causes.

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Speaker 1: But then again, in terms of sequence, it's not something

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Speaker 1: that that you would rule out, but it could happen

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Speaker 1: at that phase. Oh, definitely. Message we're giving today it's

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Speaker 1: it's there in the box. I mean there are other

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Speaker 1: central banks that have so they're not in the box

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Speaker 1: because again their financial systems have got different properties and

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Speaker 1: they draw different conclusions. I can understand that are in

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Speaker 1: the box. We're not considering using them at the moment.

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Speaker 1: The Governor of the Bank of England with Francine looked

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Speaker 1: quite Neil data with us right now, Renaissance Macro. He

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Speaker 1: has been a great optimistic voice over the last decade

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Speaker 1: or so, Neil Dada, this was a relatively optimistic statistic

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Speaker 1: is and I said, we're beginning to set up a

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Speaker 1: set of data points did show some trend towards healing.

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Speaker 1: Is that what you observe I do? I mean, if

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Speaker 1: you look at the jobless claims number today, Um, you know,

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Speaker 1: the non siically adjusted claims, and remember the seasonals matter

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Speaker 1: a lot right now, just given the sheer volume of

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Speaker 1: claims that are being processed. But the n s a

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Speaker 1: number tom that actually dipped below a million thousand. So

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Speaker 1: that's something to keep an eye on. So that's I

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Speaker 1: think the positive development. You know. Look, I mean, I

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Speaker 1: think the virus this is something that J Powell said.

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Speaker 1: The fet statement has it the course of the economy

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Speaker 1: and reflects the virus to a large degree. And we

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Speaker 1: know the virus spread more rapidly across the country starting

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Speaker 1: sometime in the middle of June. Uh and it's coming

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Speaker 1: under some control, some signs that that it's beginning to

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Speaker 1: EBB a bit now. Uh, and so I think the

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Speaker 1: labor market basically hit a big pothole in in July.

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Speaker 1: But we also know that at ativity, you know, there's

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Speaker 1: still a bunch of sectors that are still doing reasonably

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Speaker 1: well all things considered. I mean, auto sales picked up

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Speaker 1: better than expected. We obviously know. You know, look at

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Speaker 1: any chart type to the housing market, whether that's home

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Speaker 1: builders or Worldpool. Uh, they're all showing very strong recoveries.

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Speaker 1: And that's mirroring the recovery we're seeing in homesale. Um

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Speaker 1: and uh. And they still needs that there needs to

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Speaker 1: be an inventory restocking of some kinds, so that's going

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Speaker 1: to support manufacturing. So UM, I think the activity is

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Speaker 1: doing okay. The labor market kind of hit a pot

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Speaker 1: hole in July, but historically and generally, the labor market

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Speaker 1: follows GDP, and so you should expect labor market activity

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Speaker 1: to accelerate in August. Read in the and green in

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Speaker 1: the screen, folks, SFP future is a negative two and

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Speaker 1: we see green with a dow in the nails deck

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Speaker 1: one as well. Neil Dutta, what is your unemployment rate

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Speaker 1: statistic for tomorrow? I think you get another slight tick down.

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Speaker 1: I mean, the thing about the unemployment rate, which which

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Speaker 1: it was something I've been thinking about, is, um, you know,

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Speaker 1: as we get to the fall, UH, labor force participation

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Speaker 1: may not actually come up as much as it has

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Speaker 1: been because parents are going to need to juggle work

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Speaker 1: from home arrangements and their children's schooling and so do

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Speaker 1: you see a scenario where the labor enforce participation rate

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Speaker 1: isn't actually coming up that much? But the the upshot

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Speaker 1: of that, it would be that's the jobless rate falls

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Speaker 1: a little bit more uh than expected. UM. That that's

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Speaker 1: something I think people need to keep in mind. UH.

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Speaker 1: And whether that maybe leads to a little bit more

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Speaker 1: wage pressure um for those that are working. Obviously, it's

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Speaker 1: hard for parents that physically can't get to work to

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Speaker 1: exert downward pressure on the wages of those that are

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Speaker 1: still working. So that's something I think we should be

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Speaker 1: keeping in the back of our minds. Certainly, if you

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Speaker 1: look at something like the Conference Board labor differential consumers

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Speaker 1: feel relatively buoyant about about the jobs market given some

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Speaker 1: of the data that we've seen UH and now would

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Speaker 1: point to a unemployment rate that probably goes below ten

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Speaker 1: percent by you know, a few months before the end

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Speaker 1: of the year. NaSTA future is positive on the session

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Speaker 1: now a potentive one percent. The S and P just

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Speaker 1: about a raising the losses of the morning so far.

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Speaker 1: Now you mentioned some of the seasonal effects. Let's talk

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Speaker 1: about that with regards to the payrolls report tomorrow. How

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Speaker 1: should we navigate the numbers tomorrow with that in mind? Well? Sure,

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Speaker 1: I mean the most obvious as the state and local

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Speaker 1: government piece, right, So obviously the pandemic for state and

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Speaker 1: local government layoffs much earlier in the year than as

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Speaker 1: normal typically see a big season will drop off in

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Speaker 1: UM in June and July. Uh, you probably got that sooner,

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Speaker 1: which led to disproportionate declines in state and local government

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Speaker 1: perils over the month. So if non seasonally adjusted state

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Speaker 1: and local government employment is flat in July, the seasonal

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Speaker 1: factor will probably add at least eight hundred thousands to it.

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Speaker 1: So UM, this is one reason why you know, you

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Speaker 1: should be a little bit wary of using the ADP

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Speaker 1: to draw a big sweeping conclusion about nonfarm perils in

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Speaker 1: UM for July for tomorrow. And that's the as the

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Speaker 1: stain local piece of it's going to show a large

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Speaker 1: seasonally adjusted increase in my view. Neil, you were talking

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Speaker 1: about consumer spending and how that's giving you some optimism

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Speaker 1: the auto sales in particular, and I'm wondering how much

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Speaker 1: the expiration of enhance unemployment benefits factors into this. Everyone

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Speaker 1: was talking about how crucial this was for the continuation

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Speaker 1: of it in order for the economy to remain up.

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Speaker 1: Now it has expired. No deal in sight, How important

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Speaker 1: is it that there is a deal or do you

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Speaker 1: have to change your outlook? Yeah, I mean I think

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Speaker 1: it's It's definitely something that that I'm worried about every

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Speaker 1: I think everyone's worried about it. Obviously. Um, you know,

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Speaker 1: you mentioned that no deal is in sight. Obviously the

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Speaker 1: markets are disagreeing with that. The market do see some

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Speaker 1: deal inside. Otherwise why would they be rallying on the

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Speaker 1: expectation of, you know, apparently these fiscal authorities getting closer

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Speaker 1: to some kind of an agreement. So, um, you know,

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Speaker 1: I would sort of take issue with the idea that

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Speaker 1: they're moving further apart. I think they're moving closer. Um.

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Speaker 1: But yeah, I mean, you know, obviously people are going

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Speaker 1: to pull back ahead of those benefits expiring, which is

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Speaker 1: one one reason you probably have seen some stalling out

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Speaker 1: and things like credit cards spending them on long income

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Speaker 1: consumers over the last number of weeks. So uh yeah,

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Speaker 1: I mean, I think the US has great physical capacity

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Speaker 1: at the moment, so there's really no excuse to not

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Speaker 1: extend them. So I agree, But it's certainly a downside risk, um,

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Speaker 1: but I do think it'll it'll get resolved to some degree.

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Speaker 1: And to catch with you, sir ahead of tomorrow never

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Speaker 1: Nicelest Macro, thank you fantastic interesting dynamic and nuance in

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Speaker 1: the markets today. And to give his perspective from black

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Speaker 1: Rock head of Global Fundamental Fixed Income Strategy, Maryland Watson

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Speaker 1: with us right now with a wonderful Transatlantic view. Maryland,

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Speaker 1: I look at the bond market and there's a point

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Speaker 1: where you switch from yield analysis to price analysis. Is

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Speaker 1: all this is about, whether it's full faith and credit

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Speaker 1: or it's a new Google forty year piece that there's

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Speaker 1: a buying frenzy for paper. Um. I think it's really

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Speaker 1: just really reflective on the environment right now. I mean,

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Speaker 1: if you look at the huge amount of demands for

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Speaker 1: yield and for carry, you look at the enormous amounts

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Speaker 1: of stimulus that you're seeing still coming through from the Eurozone,

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Speaker 1: from the US UM At the moment, it's just where

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Speaker 1: the investors put the money UM and I think particularly

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Speaker 1: now as well, when you can move into August, you

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Speaker 1: have typically thinner markets, more volatility. We've seen all the

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Speaker 1: events in Turkey today and elsewhere. I think investors are

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Speaker 1: really just scrabbling to find where they can find income

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Speaker 1: and yield and where they can put their money. And

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Speaker 1: so as you say, I mean, you know, looking at

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Speaker 1: price for looking at the yield, I mean yield, aren't

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Speaker 1: They're got to say local a long time. I mean, Lisa,

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Speaker 1: it's great to Google forty year piece. You get a

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Speaker 1: two and something percent coupon. It's up two percent after

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Speaker 1: three day ago offering, which I think is a greater

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Speaker 1: than one thousand percent total return per year. I didn't

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Speaker 1: get into that at least. I'm glad you bought the

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Speaker 1: Google paper. Yeah. I lovered it up with my triple

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Speaker 1: average cash find that I have at the class it

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Speaker 1: along with the oil. I am wondering though, at what

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Speaker 1: point Google is sort of an idiosyncratic story with the

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Speaker 1: idea of it being a pretty strong company that's enjoying

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Speaker 1: a lot of balance sheet advantages, whereas there are a

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Speaker 1: lot of investment grade companies on the cusp potential fallen

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Speaker 1: Angels and Maryland. I pair that with the idea that

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Speaker 1: yields average yields and investment grade bonds have plunged to

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Speaker 1: all timeloads in the US of one point eight three

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Speaker 1: per cent. Is this overdone? Um? Well, so at the moment,

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Speaker 1: I don't think it's necessarily overdone. I think if you

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Speaker 1: look at and say that a huge amount of demands,

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Speaker 1: but you also look at declining issuance, particularly after as

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Speaker 1: you saw that you have the huge supply some of

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Speaker 1: some emergency issuance in Q one, UM, we're still in

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Speaker 1: the world which is really starved of high quality yields UM.

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Speaker 1: You know, and I think, as I say, given the

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Speaker 1: amount of stimulus that we're seeing and support from monetary policy,

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Speaker 1: but also we are expecting something else from the cysteal side.

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Speaker 1: Then and you look at UM, you know, tech companies

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Speaker 1: for example, or communications um the continue to do while

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Speaker 1: during the pandemic, then I don't think it's necessarily overdone.

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Speaker 1: I think it's just that, you know, investors are really

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Speaker 1: trying to find where they can put the money. And

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Speaker 1: you know, so we are still overweight tech in communications

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Speaker 1: for example, um and despite the rally, I think, you know,

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Speaker 1: we investors need to put the put their money somewhere.

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Speaker 1: Obviously we will see a lot of dispersion going forward

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Speaker 1: as we do continue continue to see how the economy

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Speaker 1: evolves and the judictory there obviously have payrolls um tomorrow,

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Speaker 1: we have the day to today. So I think it's

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Speaker 1: just really investors have really trying to find word to

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Speaker 1: put the money. And you know, at the moment you're

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Speaker 1: not getting any value in treasuries, so where do you

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Speaker 1: put it? Yeah, in full disclosure, I did not buy

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Speaker 1: Google or any single name anything, just in case any

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Speaker 1: anyone was wondering. But I am wondering, Marilyn, from your perspective,

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Speaker 1: where do you draw the line? Where is the risk

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Speaker 1: too great to pick up the extra yields? I mean,

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Speaker 1: if you really want extra yield, you can go into Turkey.

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Speaker 1: Well yeah, so so you have to take a very

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Speaker 1: clear view on your risk or profile and your tolerance

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Speaker 1: for for volatility. And I think really, when you're looking

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Speaker 1: at an overall fort of holistic portfolio like, volatility is

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Speaker 1: something that you really have to take into account. Obviously

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Speaker 1: in the measure markets or in Turkey in particular, then um,

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Speaker 1: you know that's that's a specific case because of the

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Speaker 1: dollar demand on shore and the huge funding requirements that

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Speaker 1: they have for the capital account. But um, I think

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Speaker 1: as I say, also just looking at the markets now

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Speaker 1: in terms of volatility, it's really important, as you say,

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Speaker 1: particularly now when you're looking at the moveses thing in

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Speaker 1: the market, when you're looking at the tightness of spreads,

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Speaker 1: but you look at the very quick moves that you

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Speaker 1: can see when there's some sort of trigger, then factoring

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Speaker 1: volatility into your analysis is important. And really understanding liquidity

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Speaker 1: when I can't trust enough how important it is to

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Speaker 1: understand the liquidity of any asset that you that you

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Speaker 1: want to hold. And to give your perspective, there is

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Speaker 1: a bram or, it's a sidle and into the nine

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Speaker 1: year Turkish piece with seven and five aids coupon trading

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Speaker 1: at ninety eight right now. It's traded ugly the last

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Speaker 1: couple of days. No surprise of Turkey as well, Lisa,

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Speaker 1: I just think you should hold out for a nine

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Speaker 1: percent yield in Turkey than you, you know, Maryland. I

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Speaker 1: look at all of this and it's great. But within

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Speaker 1: an allocation it used to be equities and bonds, maybe

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Speaker 1: a little cash as well. Are you finding bonds are

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Speaker 1: part of an institution's allocation now or have they just

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Speaker 1: giving it up because of the real risk? So they

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Speaker 1: do still remain part of an institution allocation. UM definitely UM.

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Speaker 1: And you know, you have seen a shift in terms

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Speaker 1: of what investor putting the money within the six income space,

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Speaker 1: but they still remain a very strong part of institutions

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Speaker 1: investments for a pension funds and when you look at demographics,

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Speaker 1: whether it's in the US or elsewhere, then you know

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Speaker 1: there's an ongoing consistent funding requirement for for pensions, for

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Speaker 1: retirement UH and for other things. And so I think

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Speaker 1: six income remains a key part of an institution's portfolio.

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Speaker 1: But you know, the risk rewards are different. And when

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Speaker 1: you look at the prospect for the extra market versus

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Speaker 1: six income in the short term, that's they particularly given

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Speaker 1: all of the stimulus then UM. And you know, when

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Speaker 1: you look at the correlations and July was an incredibly

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Speaker 1: good month for both equities and credits UM, then it's

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Speaker 1: just really important to continue to look at the beta

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Speaker 1: between the different asset classes, and maybe we balanced a

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Speaker 1: portfolio a little bit. Marilyn, Thank you so much, Marilyn

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Speaker 1: Watson with a black rug. Turkey not looking good this morning,

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Speaker 1: that's for sure. The Turkish they were up very much

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Speaker 1: on the floor. Pyoto, Mattis joins us now Rummer Bank

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Speaker 1: Emerging market strategist, Pyota. I know it's become a bit

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Speaker 1: of a routine that you and I only usually catch

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Speaker 1: up when something like this happens, and it speaks to

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Speaker 1: the frequency of how often these kinds of things happen

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Speaker 1: in Turkey. What's different about this moment um also the

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Speaker 1: first of all lots of similarities of war we witnessed

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Speaker 1: in the summer of two thousand eighteen. The Turkish lira

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Speaker 1: is falling quite precipiously, precipitously, and the central Bank faces

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Speaker 1: the same major dilemma as on previous occasion, whether um

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Speaker 1: interest rates shoot raise quite substantially by a few hundred

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Speaker 1: base points. The main difference between summer dozen eighteen and

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Speaker 1: right now is that government resile who was appointed in

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Speaker 1: the middle of the nineteen to slash interest rates aggressively

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Speaker 1: faces a tremendous challenge of convincing President every One that

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Speaker 1: raising interest rates will be the right thing to do,

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Speaker 1: and my concern is that he will find it so

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Speaker 1: difficult to convince President every One that Turkey may come

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Speaker 1: dangerously close or perhaps beyond the point of no return,

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Speaker 1: and we're getting to witness a full scale currency crisis

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Speaker 1: in Turkey. What does a full scale scent currency crisis

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Speaker 1: actually look like in Turkey? To me, it would we

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Speaker 1: would see dollar lira um at around ten or even higher.

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Speaker 1: We would see Turkey's residents running towards the newest bank

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Speaker 1: to withdraw dollars because suddenly trust in banks may evaporate.

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Speaker 1: And actually, in my note, i emphasized that trust is

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Speaker 1: one of the most important indicators a word watching incoming

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Speaker 1: weeks or even days, because as we know, the central

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Speaker 1: bank currently relies on record high dollar deposits borrows dollars

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Speaker 1: from from commercial banks to replenish following effects reserves. So

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Speaker 1: if there's a run on a bank in in Turkey,

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Speaker 1: important to emphasize no such signals warning signals yet, but

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Speaker 1: if such scenario words unfold, then dollar era would we

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Speaker 1: would say it's significantly high at completely uncharted territory and

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Speaker 1: Bloomberg Radio, Bloomberg Television now watching the markets moving here

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Speaker 1: talking emerging markets with pure dematus of rubble bank gold

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Speaker 1: just out to new record highs. Pure to tell me

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Speaker 1: what a Turkey does where they have two regimes. They

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Speaker 1: have a dollar based financial system in a lira based

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Speaker 1: financial system. How do the people of Turkeys survive this

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Speaker 1: currency collapse? Um? The good news is that Turkish households

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Speaker 1: and corporates are relatively well prepared um. They hedge against

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Speaker 1: even weaker lira, as reflected in record high dollar deposits

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Speaker 1: at above two hundred billion dollars. So there prepared um.

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Speaker 1: That said, they would be tremendous pain never like, because

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Speaker 1: a week lira, even at current levels, is going to

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Speaker 1: have significant inflationary consequences at the time when inflation is

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Speaker 1: at around twelve percent, and it's likely to remain in

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Speaker 1: double digit territory incoming months, which in turn is going

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Speaker 1: to keep real interest rates deeply in negative territory. And

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Speaker 1: this is one of the reasons why Turkish era is

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Speaker 1: so vulnerable. Pyotre just zooming out a little bit. Turkey

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Speaker 1: is its own case. But I wonder how representative it

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Speaker 1: is other emerging markets that have high foreign currency exposure.

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Speaker 1: I'm just thinking about the fact the statistic really struck

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Speaker 1: me that the Turkish central Bank spent more to support

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Speaker 1: its currency in the first six months than all of

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Speaker 1: and you're seeing the foreign currency reserves decline. How much

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Speaker 1: of a common story is this UM Turk usually definitely

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Speaker 1: to large extent the couple from from other emerging currency

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Speaker 1: uh July for most of them was actually a very

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Speaker 1: very good month, So there are some great opportunities in

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Speaker 1: in e M e M space. Turkey is a is

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Speaker 1: a specific story. I think it's a it's a lesson,

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Speaker 1: It's a warning signal to UM other influential leaders not

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Speaker 1: to interfere in monetary policy. Leaves central banks along and

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Speaker 1: make sure that they do their job properly. And my

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Speaker 1: concern is that at the time when across emerging markets

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Speaker 1: central banks cut interest rates to record low levels and

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Speaker 1: more importantly started using quantitative easing, there's going to be

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Speaker 1: lots of far more political interference in monetary policy. So

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Speaker 1: I hope that politicians in other e M countries will

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Speaker 1: refrain from trying to influence monetary policy and Turkey is

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Speaker 1: a very good lesson. I have a feeling we'll be

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Speaker 1: talking against soon automatics of Wrapper Bank on a situation.

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Speaker 1: Thank you for having me on and look forward to

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Speaker 1: it's Thanks for listening to the Bloomberg Surveillance podcast. Subscribe

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Speaker 1: and listen to interviews on Apple Podcasts, SoundCloud, or whichever

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00:27:16,880 --> 00:27:20,840
Speaker 1: podcast platform you prefer. I'm on Twitter at Tom Keane

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Speaker 1: before the podcast. You can always catch us worldwide. I'm

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Speaker 1: Bloomberg Radio