WEBVTT - Our Sentiment is Still Good on EM, Santos Says 0:00:06.320 --> 0:00:13.040 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 0:00:13.480 --> 0:00:17.560 Jay Leye. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:33.560 Bloomberg dot Com, and of course on the Bloomberg The 0:00:33.600 --> 0:00:36.040 main event and then the G seven and leaders meeting 0:00:36.080 --> 0:00:38.080 today and Saturday and what's shaping up to be the 0:00:38.080 --> 0:00:42.240 most divisive gathering of leaders from major industrialized nations in years. 0:00:42.440 --> 0:00:44.680 I'm really pleased to say that joining us from Canada 0:00:45.040 --> 0:00:48.760 is Andrew barda Bloomberg's European government reporter, and you just 0:00:48.800 --> 0:00:51.600 walked me through the issues on the table and why 0:00:51.680 --> 0:00:54.360 this could be so contentious out the next twenty four hours. 0:00:55.400 --> 0:00:57.880 Good morning. Look that there's really only one issue on 0:00:57.920 --> 0:01:03.720 the table that that matters is um obviously the trade war, 0:01:03.800 --> 0:01:06.400 though though their scheduled to talk about other things have 0:01:06.560 --> 0:01:10.000 invited a few emerging markets here, they'll talk about terror, 0:01:10.040 --> 0:01:14.759 they'll talk about cybercrime. It's really all about about trade. 0:01:14.760 --> 0:01:16.800 And as you said, you know, the setting the table 0:01:17.319 --> 0:01:19.480 and it's and it's not looking good. You had McCaw 0:01:19.600 --> 0:01:22.800 come out and saying, um, you know, we have no 0:01:22.959 --> 0:01:25.800 problem signing in agreement with only six countries if we 0:01:25.840 --> 0:01:28.240 need to be, and we have, we have May saying 0:01:28.240 --> 0:01:31.840 there would be a measured proportional response. Trump then comes 0:01:31.880 --> 0:01:34.959 out and in a very personal attack on Trudeau, accuses 0:01:35.000 --> 0:01:38.800 him of being so indignant um and and thirty seven 0:01:38.800 --> 0:01:42.880 minutes ago, uh tweeted that um he was looking forward 0:01:42.880 --> 0:01:45.760 to straightening out unfair trade deals with the seven countries 0:01:45.800 --> 0:01:48.360 and if that doesn't happen, well, from his perspective, the 0:01:48.440 --> 0:01:50.840 US will come out even stronger. So you know, he 0:01:50.840 --> 0:01:53.120 would sort of expect before meeting like this to have 0:01:53.320 --> 0:01:57.720 conciliatory comments, to have leaders, you know, lay the groundwork 0:01:57.800 --> 0:02:02.680 for having a conversation, and we're seeing the opposite takes place. 0:02:02.720 --> 0:02:05.040 And I think that that's what's being reflected in the 0:02:05.080 --> 0:02:09.520 markets now, very aggressive tone from Trump and and leaders 0:02:09.560 --> 0:02:13.119 who previously had tried, you know, appeasement and being kind 0:02:13.120 --> 0:02:15.679 of Trump whisperer and trying to see if they could 0:02:15.680 --> 0:02:18.920 get him on board, they're realizing that that hasn't hasn't worked. 0:02:19.000 --> 0:02:21.119 So the gloves are coming off and now the other 0:02:21.160 --> 0:02:25.639 g seven countries are retaliating and responding with their own language. 0:02:25.680 --> 0:02:27.839 So as you say it will be the first meeting 0:02:27.919 --> 0:02:31.520 in many years where we're probably see some fireworks, and 0:02:31.520 --> 0:02:34.280 we'll be looking closely at the final communicate in the 0:02:34.320 --> 0:02:37.960 body language leading up to that, the final I imagine 0:02:37.960 --> 0:02:40.160 we're going to see fireworks. But as you know better 0:02:40.200 --> 0:02:43.680 than anyone else, UM in our in our team at Bloomberg, 0:02:43.760 --> 0:02:47.000 that noise and news are two very different things, um, 0:02:47.000 --> 0:02:48.840 And over the last twenty four hours and imagine over 0:02:48.840 --> 0:02:50.480 the next twenty four hours, we have heard a lot 0:02:50.480 --> 0:02:52.520 of news, a lot of noise, a lot of bluster, 0:02:52.960 --> 0:02:54.799 and I just wonder, will it be all about mood, 0:02:54.880 --> 0:02:57.120 music and optics or we actually have some news to 0:02:57.160 --> 0:02:59.880 deal with at the other side of the summit. I 0:03:00.320 --> 0:03:01.919 think that I think the worry is not that we're 0:03:01.919 --> 0:03:03.360 going to have news at the end of it, but 0:03:03.400 --> 0:03:05.400 that we're not going to have news. And what I 0:03:05.400 --> 0:03:07.400 mean by that is, you know, usually the G seven 0:03:07.880 --> 0:03:10.280 all the countries by now will have will be like 0:03:11.200 --> 0:03:13.320 on the draft of the final commun k, They'll be 0:03:13.320 --> 0:03:16.440 talking about every period, every comma, every word, and and 0:03:16.480 --> 0:03:19.040 having having this kind of consensus where you come out 0:03:19.080 --> 0:03:21.040 of the summit and you have an agreement that you 0:03:21.080 --> 0:03:23.480 communicate to the world, and you say we the G 0:03:23.560 --> 0:03:27.120 seven united, you know, believe X y Z that that's 0:03:27.120 --> 0:03:29.919 not happening. You know, we're we're seeing the opposite. We're 0:03:29.960 --> 0:03:31.800 seeing you know, and maybe a lot of noise, but 0:03:31.840 --> 0:03:35.240 we're not seeing them come come together. And and and 0:03:35.280 --> 0:03:37.760 that's sort of important because what you're gonna have at 0:03:37.760 --> 0:03:39.720 the end of this at the end of this agreement 0:03:39.800 --> 0:03:42.040 is either going to be you know, a G six 0:03:42.080 --> 0:03:45.000 plus one, which which may be about as good as 0:03:45.000 --> 0:03:46.680 a guest, but it could even be worse than that. 0:03:46.760 --> 0:03:49.440 It could be that there is zero statement and the 0:03:49.480 --> 0:03:51.920 Trudeau has to come out and kind of recap and 0:03:51.920 --> 0:03:54.240 and say, you know what he thinks happens. And then 0:03:54.280 --> 0:03:56.360 you have all the different countries come out and put 0:03:56.400 --> 0:03:59.640 their spin on it. And and from a market's point 0:03:59.640 --> 0:04:01.560 of view, that that may be the worst the worst, 0:04:01.960 --> 0:04:04.520 you know, the worst case no agreement. Everybody's pushing their 0:04:04.560 --> 0:04:07.200 own thing, and we leave the G seven with with 0:04:07.240 --> 0:04:10.480 nothing to stop this this global trade war from from 0:04:11.080 --> 0:04:13.680 getting work. Okay, so it's tipped for tad. I get that. 0:04:13.840 --> 0:04:19.120 The president. I mean, I'm gonna essentially call it transactional bluster. 0:04:20.160 --> 0:04:25.120 Does Europe have a bluster? As they come to CHAUVROI, well, 0:04:25.800 --> 0:04:27.800 you remember in the in the past, in the in 0:04:27.839 --> 0:04:30.719 the in the past sanctions, Europe was very quick to 0:04:30.800 --> 0:04:33.960 respond and they were very targeted spots, like they knew 0:04:34.000 --> 0:04:37.040 exactly you know, who to hit, how to hit, how 0:04:37.040 --> 0:04:39.520 to hurt the Republicans. And you've got the mid terms 0:04:39.520 --> 0:04:41.560 coming up, and and you have to assume that all 0:04:41.640 --> 0:04:45.280 the other get no. But are they gonna bluster? Andrew, 0:04:45.320 --> 0:04:47.760 I don't sense that there'll be any bluster. They're just 0:04:47.800 --> 0:04:51.040 gonna show up. They're gonna act diplomatic and then tip 0:04:51.080 --> 0:04:54.360 for tad will click in. Right, Well, that's what we've 0:04:54.360 --> 0:04:56.840 seen so far, and and and you're right, I mean, 0:04:57.160 --> 0:05:00.839 the blusters there. But but Europe has that it's willing 0:05:00.880 --> 0:05:03.279 to retaliate. It is willing to meet Trump head on 0:05:03.320 --> 0:05:06.120 when it comes to the tariffs. And you know we've 0:05:06.200 --> 0:05:09.000 seen that. And there's nothing that suggested that. John, help 0:05:09.040 --> 0:05:10.760 me here. I think you're better at this, you and Andrew, 0:05:10.960 --> 0:05:13.680 Andrew decades of work on this, and you as well. 0:05:13.720 --> 0:05:18.000 I mean, Miracle is a physicist from East Germany who 0:05:18.040 --> 0:05:21.560 grew up I believe under some serious duress, she's got 0:05:21.560 --> 0:05:24.039 to be looking at this side show this carnival act 0:05:24.600 --> 0:05:26.680 and going. You know, we're just gonna go up to Quebec. 0:05:26.680 --> 0:05:29.040 We're gonna make decisions, and then we're gonna go back 0:05:29.080 --> 0:05:32.480 and put an import tax on Budweiser. The Chuncellor Miracle 0:05:32.560 --> 0:05:37.279 understands the importance of international diplomacy and integration. I get that, Andrew, 0:05:37.520 --> 0:05:39.560 And I'm not trying to demean that. We all understand 0:05:39.560 --> 0:05:42.640 how important the last several decades have been for global peace. 0:05:43.480 --> 0:05:46.159 But in terms of the G seven agreement, has it 0:05:46.200 --> 0:05:48.880 ever been worth the paper it's written on in recent years? 0:05:48.920 --> 0:05:50.920 And we can follow in the G twenty communicate into 0:05:50.960 --> 0:05:53.920 that question as well, Andrew, because after the last several years, 0:05:53.960 --> 0:05:55.680 I see a lot of people agreeing on stuff on 0:05:55.760 --> 0:05:59.839 paper and then going back home and doing very different things. Well, look, 0:05:59.839 --> 0:06:02.120 I had this conversation yesterday with John Curtin from the 0:06:02.160 --> 0:06:04.760 G seven Research Group, and and I mean, this is 0:06:04.800 --> 0:06:07.320 all he does. He's been studying this for for decades now, 0:06:07.360 --> 0:06:09.080 and he says, in the history of the G seven, 0:06:09.440 --> 0:06:12.240 you've really only had one meeting where the world was 0:06:12.279 --> 0:06:15.039 worse off because of the G seven. And you know 0:06:15.160 --> 0:06:18.159 that that possibility is back on the table, which is 0:06:18.160 --> 0:06:19.840 something that you have to worry about. I mean, you've 0:06:19.839 --> 0:06:21.880 always had these statements, but you know that you can 0:06:21.960 --> 0:06:24.440 argue what to what extent they've were the they've made 0:06:24.440 --> 0:06:26.080 the world a better place, but there has been some 0:06:26.160 --> 0:06:28.760 incremental progress and you have gotten people to kind of 0:06:28.800 --> 0:06:31.200 agree to certain commitments and move in a certain direction. 0:06:31.480 --> 0:06:33.600 But if you're not putting anybody on that track, then yeah, 0:06:33.640 --> 0:06:34.880 you have to agree. You know what, what are we 0:06:34.920 --> 0:06:36.520 going to get out of this? Andrew Barton, thank you 0:06:36.600 --> 0:06:38.720 so much, brilliant and I just greatly appreciate it. From 0:06:38.760 --> 0:06:57.559 Quebec and these important G seven meetings. Should we talk Brazil? Okay, 0:06:57.560 --> 0:06:59.200 Gabriella Santos, do you want to guess from jam P 0:06:59.320 --> 0:07:02.960 Morgan Asset Management clubal market strategy is very confused, wondering 0:07:02.960 --> 0:07:05.000 what on earth is going on in this studio, Gabby, 0:07:05.080 --> 0:07:07.719 Let's just talk about Brazil. Brazil are intervening in the 0:07:07.760 --> 0:07:10.600 FX market without much success. At the moment, M e 0:07:10.720 --> 0:07:13.040 M is under some significant stress. I would say, relative 0:07:13.080 --> 0:07:15.040 to how it has been in the last year, why 0:07:15.040 --> 0:07:18.000 aren't they hiking interest rates? So let's think about why 0:07:18.000 --> 0:07:20.600 Brazil is under pressure right now? I would say two things. 0:07:20.680 --> 0:07:24.640 The first is the broad uest dollar strength um really 0:07:24.680 --> 0:07:27.280 since mid April, and Brazil seen as a bit vulnerable 0:07:27.320 --> 0:07:30.280 to that given it's very large fiscal deficits. So that's 0:07:30.320 --> 0:07:34.440 one thing. Central bank hiking actually exacerbates that problem. Uh. 0:07:34.600 --> 0:07:37.360 The second reason Brazil's under pressure right now is because 0:07:37.360 --> 0:07:40.600 the investment thesis is falling apart for this year, growth 0:07:40.640 --> 0:07:44.240 has been slashed, growth expectations and there's more of a 0:07:44.280 --> 0:07:48.000 probability of a shall we say, non business friendly candidate 0:07:48.000 --> 0:07:51.440 win in October. Central bank hiking actually doesn't fix either 0:07:51.480 --> 0:07:54.360 of those problems either, So they are pushing back against 0:07:54.400 --> 0:07:56.840 this narrative that raising rates is going to fix any 0:07:56.880 --> 0:08:00.720 of the problems, perhaps even exacerbate them. Let's remember that 0:08:00.760 --> 0:08:03.280 inflation in Brazil is actually very very low at the moment. 0:08:03.480 --> 0:08:06.040 So just to discuss em more broadly, there are calls 0:08:06.080 --> 0:08:09.239 for help from emerging markets, from the Central Bank Governor 0:08:09.240 --> 0:08:12.080 of Indonesia, the Central Bank Governor of the r BI, 0:08:12.200 --> 0:08:15.880 and India Urgent Batel, essentially asking the FED to do something. 0:08:16.120 --> 0:08:18.280 But they do something. Is interesting to me because it's 0:08:18.320 --> 0:08:21.200 not slow down rate hikes, it's slowed down the pace 0:08:21.280 --> 0:08:25.320 of balance sheet reduction. Why is balance sheet reduction so 0:08:25.360 --> 0:08:27.800 important to em right now in a way that maybe 0:08:27.800 --> 0:08:30.400 some people didn't anticipate. I'm not sure that that I 0:08:30.440 --> 0:08:33.800 would agree that it is necessarily because for emerging markets 0:08:33.800 --> 0:08:37.080 in the past, higher rates in the United States in 0:08:37.120 --> 0:08:40.640 and of themselves have not been a problem. Because rates 0:08:40.640 --> 0:08:43.640 are rising, balance sheet is coming down because the economy 0:08:43.720 --> 0:08:46.640 is doing well. That's a good thing for emerging markets. 0:08:47.200 --> 0:08:49.840 So honestly, the trouble we're here, we're having right now 0:08:49.960 --> 0:08:52.520 is not interest rate in and of itself related. It's 0:08:52.640 --> 0:08:56.880 dollar strength related, and that's much more a function of 0:08:57.000 --> 0:08:59.559 some risk aversion that we've been seeing over the past 0:08:59.600 --> 0:09:01.520 few months. So I'm not sure what the FED can 0:09:01.559 --> 0:09:04.960 do here Necessarily, the data just has to come through 0:09:05.040 --> 0:09:07.880 in terms of economies outside. It makes you wonder if 0:09:07.880 --> 0:09:10.240 that's the case, then why are the central bank governors 0:09:10.280 --> 0:09:12.960 of India, Indonesia and others as well asking for this 0:09:13.000 --> 0:09:15.079 help If you're saying it's not as critical. I mean 0:09:15.120 --> 0:09:18.400 the Urgi Baal, the governor of the RBI, essentially was 0:09:18.440 --> 0:09:21.800 warning of a dollar liquidity crisis because of banishing production. 0:09:22.040 --> 0:09:24.880 And I agree, John, you're correct to bring up India. 0:09:25.000 --> 0:09:28.080 I thought that was a very important comments, you know, 0:09:28.679 --> 0:09:31.960 given them mix, There's not been enough talk about India 0:09:32.160 --> 0:09:35.360 and using the word crisis. It just seems it just 0:09:35.400 --> 0:09:38.240 seems a lot to me. We've, like you said, had 0:09:38.240 --> 0:09:40.400 a big move over the last month. It's been kind 0:09:40.400 --> 0:09:43.880 of calm over the last year. Actually, sentiment around emerging 0:09:43.960 --> 0:09:46.559 markets from investors on a by side, it's been incredibly good, 0:09:47.000 --> 0:09:49.160 to be honest with you, from what our sentiment is 0:09:49.160 --> 0:09:51.680 still good on emergency. So just walk me through why 0:09:51.720 --> 0:09:55.439 these central bank governors are so worried right now. I'm 0:09:55.480 --> 0:09:59.679 not particularly sure. I think perhaps it harkens memories right 0:09:59.679 --> 0:10:02.640 of that tough period for emerging markets from two thousand 0:10:02.679 --> 0:10:06.600 eleven up until But let's think about the fact that 0:10:06.640 --> 0:10:10.280 we're not in that place anymore. Growth is improving, That's 0:10:10.280 --> 0:10:13.600 what drives capital flows to emerging markets in the medium term. 0:10:13.720 --> 0:10:17.839 Earnings are improving, vulnerabilities are better, commodity prices are higher, 0:10:17.840 --> 0:10:19.680 and the list goes on and on. It's simply within 0:10:19.720 --> 0:10:25.319 the JP Morgan world. Is it the same financial structures 0:10:25.400 --> 0:10:28.120 of e M as it was crisis to crisis, back 0:10:28.160 --> 0:10:31.080 to crisis, back to crisis back or truly is this 0:10:31.200 --> 0:10:34.280 time different where it's a new e M which is 0:10:34.320 --> 0:10:38.320 more resilient in liquidity and resilient solvency. Is that the 0:10:38.360 --> 0:10:43.280 official line, that is our our view from our side, UM, 0:10:43.320 --> 0:10:46.360 I would say there's a lot of focus on the 0:10:46.440 --> 0:10:49.440 outliers here when it comes to countries which still have 0:10:49.600 --> 0:10:52.880 very large current account deficits and thus are very exposed 0:10:52.880 --> 0:10:56.319 to any sort of ebbs and flows in terms of liquidity. 0:10:56.360 --> 0:10:59.400 That would be a Turkey, and in Argentina there are 0:10:59.520 --> 0:11:03.200 some stream outliers in terms of US dollar Dad taking 0:11:03.240 --> 0:11:06.360 up a large share of debt. That's an Argentina example 0:11:06.440 --> 0:11:09.880 as well. But those are outliers. In terms of emerging 0:11:09.920 --> 0:11:13.720 markets as a whole, it's a much much better, much 0:11:13.760 --> 0:11:18.840 more resilient picture. Very good, Thank you, a real especial tribute. 0:11:18.840 --> 0:11:38.080 More now is Stephen Major, Steve Major of HSBC. Steve 0:11:38.240 --> 0:11:41.680 are rates high or on a relative basis do you 0:11:41.679 --> 0:11:46.720 look at them? Is still low? Uh? US rates too 0:11:46.800 --> 0:11:49.280 high in the forwards. I doubt the FED will get 0:11:49.320 --> 0:11:52.480 anywhere near where they think they're going to go. Well, 0:11:53.160 --> 0:11:54.920 if it doesn't happen in the next few months, I'll 0:11:54.960 --> 0:11:58.920 be very surprised they will choke on the additional great hikes, 0:11:58.960 --> 0:12:02.600 and I imagine and two more would be enough. UM 0:12:03.240 --> 0:12:05.760 to two more gets us to two twenty five. That 0:12:05.880 --> 0:12:08.240 the thing is that the idea that the FED could 0:12:08.320 --> 0:12:10.880 just close their eyes and keep hiking all the weight 0:12:10.960 --> 0:12:15.079 of three or three five without there being some massive event, 0:12:15.160 --> 0:12:19.360 I think is naive. There's been many, many surprises in 0:12:19.400 --> 0:12:22.240 the last month, and I think that we are seeing 0:12:22.559 --> 0:12:26.160 a regime shift in the risky asset markets. Look at 0:12:26.200 --> 0:12:28.880 all the incidents that keep popping up in e M. 0:12:29.520 --> 0:12:33.080 It's not a coincidence that the common denominator is the 0:12:33.280 --> 0:12:37.360 vicious tightening of financial conditions. Now, I can't believe that 0:12:37.360 --> 0:12:40.720 people don't recognize this because they're looking at outdated financial 0:12:40.720 --> 0:12:44.880 conditions indices, and really you've got to look at this 0:12:44.920 --> 0:12:47.640 in a more holistic way. The FED is increasing rates, 0:12:47.679 --> 0:12:50.560 they're shrinking the balance sheet, and the U. S. Treasury 0:12:50.679 --> 0:12:53.640 is rejuvenating cash as an asset class. That is a 0:12:53.800 --> 0:12:56.559 massive tightening um. The last time we had this kind 0:12:56.600 --> 0:13:00.360 of tightening of financial conditions associated with low unemplo moment 0:13:00.679 --> 0:13:04.200 and lucier fiscal policy. The last time this happened, England 0:13:04.200 --> 0:13:08.520 won the World Cup. That's football. For Tom's benefit and 0:13:08.679 --> 0:13:12.880 both football, Steve. Steve's in East London guy west Ham fan. 0:13:13.000 --> 0:13:15.760 But West Town won the World Cup for England. Actually, 0:13:15.920 --> 0:13:19.320 so so in nineteen sixties six England won the football 0:13:19.360 --> 0:13:22.480 World Cup. And it's fifty years fifty two years ago. 0:13:22.880 --> 0:13:25.080 So in nine six you will remember there was a 0:13:25.200 --> 0:13:28.640 very strong tightening of credit conditions and what happened afterwards 0:13:28.679 --> 0:13:31.839 wasn't very nice. And and from the UK perspective, we 0:13:31.880 --> 0:13:35.679 had the nineteen sixty seventy evaluation of course. Um, but 0:13:36.120 --> 0:13:40.559 you can read the St Louis Fed nineteen sixty six papers, 0:13:40.559 --> 0:13:43.000 a paper about nine six written by the St Louis 0:13:43.040 --> 0:13:46.400 Fair that talks in strong tightening of financial conditions. So 0:13:46.440 --> 0:13:48.200 I think it's naive to look at say the I 0:13:48.360 --> 0:13:50.240 O E R or the FED funds rate and say 0:13:50.280 --> 0:13:51.880 they haven't Steve. That's what I was going to ask 0:13:51.920 --> 0:13:54.040 you about actually, because you've mentioned a couple of things. 0:13:54.040 --> 0:13:56.520 You've talked about regime change one and also this tining 0:13:56.520 --> 0:13:58.760 of financial conditions. I think for some listeners they'll be 0:13:58.760 --> 0:14:01.439 looking at financial conditions and thinking things are still easy. 0:14:01.720 --> 0:14:03.240 So what are you looking at, Steve? What are the 0:14:03.280 --> 0:14:05.920 indicated is that you think people should pay attention to well, 0:14:05.920 --> 0:14:09.000 what could possibly be wrong about the idea that financial 0:14:09.040 --> 0:14:10.720 conditions are lose. So if you look at this, if 0:14:10.720 --> 0:14:13.960 you look at the FEDS indicries, and there's a Bloomberg 0:14:13.960 --> 0:14:17.280 index as well asn't as a global index, bloom Bloomberg, 0:14:17.280 --> 0:14:20.960 Bloomberg has one. I think it's got ten or eleven components. Again, 0:14:20.960 --> 0:14:23.280 the Saint Louis fed, by the way, has a seventeen 0:14:23.360 --> 0:14:27.480 component financial conditions index. These these are tighter than they 0:14:27.480 --> 0:14:30.240 were in any time in the last twelve months, I think, 0:14:30.480 --> 0:14:32.760 but in the context of the last ten years, they're 0:14:32.800 --> 0:14:36.400 still loose. I suggest that they're picking up the wrong thing. 0:14:37.080 --> 0:14:40.280 So so in these indicries you've got things like the SMP, 0:14:40.560 --> 0:14:42.640 the VIX and the f O A S and this 0:14:42.720 --> 0:14:44.480 kind of stuff. The thing to make to me is 0:14:44.520 --> 0:14:48.480 that financial conditions for for Turkish corporates who are issuing 0:14:48.520 --> 0:14:51.320 in dollars, they are tight. For Chinese real estate companies 0:14:51.320 --> 0:14:53.480 who are coming to roll some bonds they issued a 0:14:53.520 --> 0:14:56.640 few years ago, they're also tight. For the Italian sovereign 0:14:56.640 --> 0:14:59.040 financial conditions are about to get very tight too. It 0:14:59.040 --> 0:15:01.640 seems to me if you look around the world, you 0:15:01.680 --> 0:15:03.680 go and ask a Japanese Bank, how it is the 0:15:03.720 --> 0:15:06.520 borrow dollars in the open market. You know, there's a 0:15:06.560 --> 0:15:09.480 lot of different institutions in different parts of the world 0:15:09.480 --> 0:15:11.800 will tell you that the financial conditions are getting very tight. 0:15:12.080 --> 0:15:15.160 And of course the FED looks at things globally. Sometimes 0:15:15.200 --> 0:15:17.720 they have to be whacked on the head and it 0:15:17.800 --> 0:15:21.640 might be that a strong dollar would do it for them. 0:15:21.720 --> 0:15:24.200 That the facts are quite simple. In the last five 0:15:24.280 --> 0:15:28.000 or six years, I think the FED has been distracted 0:15:28.040 --> 0:15:32.760 from its expected tightening path by China twice, Greece at 0:15:32.800 --> 0:15:37.560 least once, and even the UK around Brexit. So stuff happens. 0:15:37.920 --> 0:15:40.840 They get distracted or or they get deflected off the 0:15:40.880 --> 0:15:43.120 tightening path, and I think it's sort of happening. Do 0:15:43.280 --> 0:15:47.720 you know, in in May, I read my colleague David 0:15:47.720 --> 0:15:51.480 Bloom's piece about May. His team they put together a 0:15:51.480 --> 0:15:54.680 descriptive piece about what happened last month. And do you 0:15:54.680 --> 0:15:59.840 know in the month of May, you've got stories around Argentina, India, Brazil, 0:16:00.440 --> 0:16:06.040 obviously Malaysia, most recently Italy and Turkey that I've forgotten 0:16:06.080 --> 0:16:08.680 more than I can remember here. And then there's all 0:16:08.680 --> 0:16:12.800 the big set piece global things like trade wars and 0:16:13.680 --> 0:16:17.880 nuclear deals and Iran and North Korea, and there's so 0:16:17.960 --> 0:16:20.360 much stuff going on. That was one of the most 0:16:20.480 --> 0:16:23.760 volatile months we've had in modern times. Just because the 0:16:23.880 --> 0:16:26.320 VIX doesn't show it doesn't mean to say it wasn't volatile. 0:16:26.400 --> 0:16:28.280 It's a really good point, Steve. So it gets it 0:16:28.360 --> 0:16:30.840 gets to an important question. You've talked about regime change, 0:16:30.880 --> 0:16:33.600 in the regime shift, what's the new regime and what 0:16:33.760 --> 0:16:38.040 is the market. Look, my my regime change comment isn't 0:16:38.080 --> 0:16:42.640 just some assertion. It's based on how the term premium 0:16:42.720 --> 0:16:46.760 has decoupled from the level of yields. Now, I wrote 0:16:46.800 --> 0:16:48.560 a paper about this that was published at the beginning 0:16:48.560 --> 0:16:50.960 of the week with the colleagues, and that this is 0:16:51.000 --> 0:16:54.080 really important during the last fifteen years we've been in 0:16:54.120 --> 0:16:57.920 a queue regime. It's fifteen years, not ten. Because when 0:16:58.120 --> 0:17:00.560 Ben Bernanke wrote that paper, deeply should make sure it 0:17:00.600 --> 0:17:03.120 doesn't happen here. In two thousand and two, the Green 0:17:03.240 --> 0:17:07.840 Span fed actually were expected to implement some of Blankie's policies. 0:17:07.880 --> 0:17:10.439 In two thousand and three. It didn't happen, but the 0:17:10.480 --> 0:17:12.399 market built into the idea they were going to do it, 0:17:12.480 --> 0:17:15.000 so by the rumor sell the fact. Ever since then 0:17:15.240 --> 0:17:20.040 we've had We've got six occurrences of bullish flattening followed 0:17:20.040 --> 0:17:24.480 by irish deepening. Suddenly it changed because the fad is hiking. 0:17:24.600 --> 0:17:27.320 It all changed, right, so so this is scary. They're 0:17:27.359 --> 0:17:29.840 going to flip the curve over. Steve, always great to 0:17:29.880 --> 0:17:34.040 catch out with your very major, very thoughtful, always valuable. 0:17:34.119 --> 0:17:37.280 Thank you very much, Managing Director, Global head of Global 0:17:37.320 --> 0:17:40.680 Fixed Income Research over an HSBC and joining us out 0:17:40.720 --> 0:17:56.840 of out of London. Right now we get clarity and 0:17:56.960 --> 0:17:59.400 the economics of our time is this G seven melling 0:17:59.440 --> 0:18:03.480 occurs that do that with Stephen Roschudo, Yes, Stephen, wonderfully 0:18:03.520 --> 0:18:05.199 have you with us? We heard the president there and 0:18:05.920 --> 0:18:10.840 any number of themes. How does trade fold into the 0:18:10.880 --> 0:18:14.679 economic growth of the world economy? Well, I mean, you know, 0:18:14.920 --> 0:18:18.240 you think it's a zero sum game, but in reality 0:18:18.560 --> 0:18:23.400 it's not. Um. The reality is there are places which 0:18:23.400 --> 0:18:26.680 are more efficient at producing products than there are places 0:18:26.680 --> 0:18:29.639 that aren't efficient in producing products. And the whole concept 0:18:29.720 --> 0:18:33.160 of free trade is to allow that to develop. And 0:18:33.240 --> 0:18:36.000 I think the point that is trying to be driven 0:18:36.040 --> 0:18:39.200 home in here is that it's not about free trade, 0:18:39.200 --> 0:18:42.800 it's about fair trade. And there is this concept that 0:18:43.280 --> 0:18:46.680 tariffs are erected in different places to protect different industries, 0:18:46.720 --> 0:18:49.520 and this is a nationalist thing that every country does. 0:18:49.840 --> 0:18:52.000 And I think for many many years, the United States, 0:18:52.040 --> 0:18:54.119 because it was the largest, most powerful nation in the 0:18:54.160 --> 0:18:57.760 world UM, and used a lot of our willingness to 0:18:57.960 --> 0:19:01.600 trade with people as a tarret in order to get 0:19:01.640 --> 0:19:04.320 them to do political things that we were wishing them 0:19:04.320 --> 0:19:06.960 to do UH in supporting us. And now there's a 0:19:06.960 --> 0:19:09.439 bit of a pushback given the change in the world 0:19:09.560 --> 0:19:11.919 order that is brought about by the fact that China 0:19:12.160 --> 0:19:14.520 is so powerful now. And I think it is a 0:19:14.600 --> 0:19:17.880 recognition of that fundamental change. The president. I think there's 0:19:17.880 --> 0:19:20.800 some value there. Stephen s the President. It was some 0:19:20.840 --> 0:19:24.919 commisary you know, thinking about pardoning Muhammad Ali, but one 0:19:24.960 --> 0:19:26.760 of them was to bring Russia back in from the 0:19:26.800 --> 0:19:29.600 G seven to the G eight, which brings up that 0:19:29.720 --> 0:19:34.040 I m f like debate of what to do with China. 0:19:34.440 --> 0:19:36.639 Should we should we leg out here to a G 0:19:36.840 --> 0:19:40.720 E to G nine, a G ten. I would almost 0:19:40.760 --> 0:19:42.520 come up that you might as well just bring it 0:19:42.600 --> 0:19:45.879 down to a much smaller group than that. UM. You know, 0:19:46.000 --> 0:19:49.600 you should focus in on a really new G three UH, 0:19:49.640 --> 0:19:54.359 and that could be something as narrow as the United States, Germany, UM, 0:19:54.560 --> 0:19:59.360 and China, and those three are really the dominant issues here, 0:19:59.400 --> 0:20:02.520 because the problem with Europe and Europe is not being 0:20:02.560 --> 0:20:04.920 able to get itself moving. Is the fact that there 0:20:05.000 --> 0:20:07.920 is an uncertain degree of unfair trade practice that goes 0:20:07.960 --> 0:20:11.639 on within Europe UM and Germany does not contribute its 0:20:11.680 --> 0:20:14.680 fair share back out to the rest of Europe UM 0:20:14.760 --> 0:20:17.040 and that needs to be addressed. And the same thing 0:20:17.160 --> 0:20:19.720 is true with China and other areas. So yeah, the 0:20:19.800 --> 0:20:21.800 reality is those are the three things you've got to 0:20:21.840 --> 0:20:23.840 focus on. Those are the three countries that have to 0:20:23.880 --> 0:20:26.240 get together and decide how this is all going to 0:20:26.320 --> 0:20:28.280 get done. The rest of it really just falls into 0:20:28.280 --> 0:20:30.960 place around those three. Off the Bloomberg. I can figure 0:20:30.960 --> 0:20:33.640 this out, folks. What's list of g seven countries? Because 0:20:33.680 --> 0:20:38.880 Stephen Shood gives us a clinic, Canada, the host, France, Germany, 0:20:39.040 --> 0:20:44.120 the United Kingdom, Japan, Mr Abbe with the President yesterday, Italy, 0:20:44.880 --> 0:20:46.800 and then there's the United States as well. I mean, 0:20:46.840 --> 0:20:50.080 it really is a dated organization, Steve, isn't it. Yes, 0:20:50.119 --> 0:20:52.040 it is, and that's and that's part of the problem, 0:20:52.320 --> 0:20:53.960 and that's one of the reasons why you have this 0:20:54.040 --> 0:20:55.840 fractured behavior, and I think you also have to keep 0:20:55.880 --> 0:20:57.920 them mind. At the same time that this G seven 0:20:57.960 --> 0:21:00.200 discussion is going on, You've got the UK eat in 0:21:00.280 --> 0:21:04.159 the EU, You've got potential problems within Europe with regard 0:21:04.200 --> 0:21:07.399 to Italy and Spain um and this goes directly back 0:21:07.400 --> 0:21:10.000 to the to the German situation. And you have a 0:21:10.080 --> 0:21:13.200 very very aggressive China on the other side of the equation, 0:21:13.200 --> 0:21:16.520 and that all the infighting going on really distracting from 0:21:16.520 --> 0:21:19.919 the more important issue, which is China. And that's what 0:21:20.000 --> 0:21:22.679 I think, you know, the value that comes out of this, 0:21:22.840 --> 0:21:26.240 I hope will be a refocusing of the decision of 0:21:26.320 --> 0:21:28.560 the discussions to where they need to take place. Good 0:21:28.560 --> 0:21:31.840 morning in syrus Sex FM. I'll get it out serious 0:21:32.119 --> 0:21:35.480 x m H one nineteen across the Great Midwest, Steve. 0:21:35.520 --> 0:21:38.480 One of the constant themes of analysis this morning, whether 0:21:38.560 --> 0:21:41.320 Greg Valier at Horizon or Mike Gallen over in Axios, 0:21:41.560 --> 0:21:47.920