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Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm term Keene

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Speaker 1: jay Leie. 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: bring in r Q Economic senior economist and founding partner.

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Speaker 1: Good morning to Conrad. Let's just talk about whether these

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Speaker 1: central banks are being preemptive or reactive. And I want

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Speaker 1: to pick up on the New Zealand Central Bank this

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Speaker 1: morning because I was going through the statement after seeing

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Speaker 1: this fifty basis point cut. And you can file this

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Speaker 1: under things you don't expect to read after a central

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Speaker 1: bank just cut rates by fifty basis points, employment is

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Speaker 1: around its maximum sustainable level, Inflation remains within our target

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Speaker 1: range but below the two percent midpoint. Recent data recording

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Speaker 1: improved employment and wage growth is welcome. You don't expect

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Speaker 1: to read things like that after a central bank just

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Speaker 1: cut rates fifty basis points when they only had a

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Speaker 1: hundred and fifty basis points to play with to begin with, Conrad,

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Speaker 1: what is going on? Well, I mean, I think what

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Speaker 1: that shows is that these strange communications that are going

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Speaker 1: along policy easings. The US doesn't have a monopoly on that,

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Speaker 1: and we've had Uh. Yesterday we heard from from St.

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Speaker 1: Louis FED President Bullard who said that the FED can't

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Speaker 1: react to every trade dispute or every trade risk UM.

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Speaker 1: But that's exactly what they said that they did last week.

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Speaker 1: So I think markets are are are looking at at

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Speaker 1: all of this and saying what is driving monetary policy

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Speaker 1: not just in the US, but but but everywhere UM

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Speaker 1: and and there's there might be some areas around the

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Speaker 1: world where you could make a case for easier policy.

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Speaker 1: Europe might be one of those areas. We have inflation

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Speaker 1: that's very low in Europe. UM, we have growth that's

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Speaker 1: lower and weaker than what the what the European Center

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Speaker 1: Bank was projecting just a couple of months ago. UM.

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Speaker 1: But here we have data that strong. You you you've

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Speaker 1: pointed out what's what's going on in New Zealand, where

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Speaker 1: we have UM strong labor markets. We have inflation that's

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Speaker 1: closer to target in these areas than it is in

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Speaker 1: Europe UM, and central banks are cutting rates because they're

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Speaker 1: trying to offset some some policy risk UM. And then

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Speaker 1: the other point that you made, there's not a lot

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Speaker 1: of a lot of the FED has more room than

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Speaker 1: other central banks. But um, the question is why are

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Speaker 1: they using ammunition now? Is it a waste of ammunition?

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Speaker 1: And I think what's going on in markets is we

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Speaker 1: talked about the yel curve and the rallies in the

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Speaker 1: long end, is that markets are looking forward to what

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Speaker 1: comes next once these banks, once the central banks use

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Speaker 1: up the ammunition as limited as is that they have,

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Speaker 1: what do they do next? And they what they do

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Speaker 1: next is QUEI and I think that's what's driving down

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Speaker 1: long term yields. Well, let's talk about what's run in

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Speaker 1: front of our face right now. It's what the Federal

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Speaker 1: Reserve does in the here and now. There was a

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Speaker 1: belief over the last few months that they would move

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Speaker 1: to a more preemptive stance, perhaps move early. We've heard

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Speaker 1: the arguments from several officials do more with less. That

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Speaker 1: was what led to many people thinking perhaps we get

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Speaker 1: a fifty basis point cut. Didn't get one. Then the

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Speaker 1: conversation shifted last week. Here we have a central bank

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Speaker 1: that has no choice but to underwrite the trade war.

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Speaker 1: And then Jim Bullard happened yesterday the president of the

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Speaker 1: Saint Louis FED and he sounded really reluctant to get

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Speaker 1: drawn into that. What do you think about that, Stantce Conrad,

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Speaker 1: and how risky it could be if the Federal Reserve

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Speaker 1: decides that actually it's not its place to underwrite the

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Speaker 1: trade war. I think that's usually problematic. I mean, particularly

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Speaker 1: if the if the data continue on the path that

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Speaker 1: we've seen. I mean, I think don't think there's anyone

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Speaker 1: that can deny that. UM, that risks have gone up

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Speaker 1: with the ratcheting up in the trade war. UM, the

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Speaker 1: likelihood that businesses might be more reticent on investing and

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Speaker 1: potentially hiring than they were previously. If this trade war

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Speaker 1: continues to to escalate. UM, those risks have gone up.

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Speaker 1: But what do we know so far? We know that

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Speaker 1: businesses on the hiring fund, we still have have pretty

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Speaker 1: solid levels of business demand. The alter it that came

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Speaker 1: out yesterday, albeit for June. UM, but the more up

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Speaker 1: to date data that we've had from the n f

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Speaker 1: I B, we have very high levels of job openings.

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Speaker 1: So businesses aren't pulling back on hiring. UM. The consumer

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Speaker 1: seems to be in great shape. Inflation is not that

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Speaker 1: far off. And you remember back at the main meeting

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Speaker 1: when the FED made a big deal Pal in his

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Speaker 1: press conference in the minutes of the meeting about trim

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Speaker 1: meetings exactly he advised it on Friday, it's two percent.

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Speaker 1: So inflation is close to target. The labor market is

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Speaker 1: doing fine. We do have consumed concerns on the business

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Speaker 1: front with business investment um. But it just seems to

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Speaker 1: me that the argument for preemption is too early. O

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Speaker 1: B overcome by events. I'm looking at the data screen

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Speaker 1: that tells me Chairman Paul is going to be overcome

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Speaker 1: by events. Where where in your mind, just using his

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Speaker 1: one benchmark, the tenure two point ones excuse me, one

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Speaker 1: point six four percent, where does Jerome Powell become overcome

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Speaker 1: by market events? Well, I hope what the FED does

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Speaker 1: is realize that that their role in driving these moves.

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Speaker 1: I think it's problematic for markets to move based on

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Speaker 1: the expectation for FED action, whether or not that that

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Speaker 1: whether or not that's justified, and then for the FED

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Speaker 1: to look at the markets and say, well, the markets

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Speaker 1: are telling us that the economy is weak. Well to

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Speaker 1: your inflation point, are you saying the service sector inflation

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Speaker 1: will not diminish down to what goods inflation is is

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Speaker 1: a lot of people are are forecasting. I don't think so,

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Speaker 1: and I will still to think that. I also think

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Speaker 1: that what what if we're talking about the good side. UM. Firstly,

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Speaker 1: on the producer price front, those prices are rising much

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Speaker 1: more rapidly on consumers, so there's the potential for some

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Speaker 1: feed through there. And the tariffs have an impact on

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Speaker 1: goods prices, not yet, but eventually they will. If if

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Speaker 1: we do get this additional ten percent tariff on two

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Speaker 1: billion dollars of imports from China, that will have an impact,

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Speaker 1: more of an impact than I think the first round

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Speaker 1: of tariffs had um and so goods prices will will

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Speaker 1: be pressured higher. But the point is the inflation environment,

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Speaker 1: even with goods price inflation real aatively subdued um, it

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Speaker 1: has been driven by the services side. Inflation is running

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Speaker 1: pretty close to two percent on on many measures of

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Speaker 1: of kind of underlying prices. So um, you know, I

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Speaker 1: I think, based on the data, it's really hard to

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Speaker 1: make to make the argument. I think what's happening with

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Speaker 1: the FED is that the markets are anticipating them cutting rates. UM.

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Speaker 1: The markets on on the risk asset side. The risky

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Speaker 1: assets are are are skittish, and the Fed just doesn't

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Speaker 1: feel like it's in a position to disappoint markets in

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Speaker 1: this kind of environment. A Conrad right to catch you

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Speaker 1: out with your Conrad the quadraus dropping by the studio.

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Speaker 1: To get us up to speed on what's happening worldwide

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Speaker 1: are th Q Economic Senior Economist and founding partner. Let's

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Speaker 1: bring in David Pole. Shall we Epic Investment Partners co

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Speaker 1: Chief investment Officer and portfolio manager. Can we begin in Europe? David?

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Speaker 1: While we've just heard from a series of banks through

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Speaker 1: the morning, Commas Bank the goal of lifting profit increasingly

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Speaker 1: ambitious UNI Credit slashing its full year revenue target by

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Speaker 1: a billion a b mm row adding to all of this,

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Speaker 1: saying it's margins might be hit. These guys are struggling

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Speaker 1: with low rates. Will any of this get any better

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Speaker 1: anytime soon? Probably not, unfortunately. But the UH What really

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Speaker 1: matters though is economic growth because banks are economically sensitive.

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Speaker 1: This is this really matters. You have to have growth.

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Speaker 1: Monetary policy for all it was trying to do, has

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Speaker 1: run out of gas, and European companies are just not

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Speaker 1: borrowing there is no economic growth and it's not just

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Speaker 1: a matter of rates. You need to have more loan

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Speaker 1: volume and they're not getting than jenniferro Why did we

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Speaker 1: hear that from the CFO of Commerce Bank this morning

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Speaker 1: that like it's like no big deal. This is the

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Speaker 1: really problem with the business strategy for the European lenders

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Speaker 1: at the moment. They refocus the business models and guess

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Speaker 1: how they refocused the domestically and what's happening domestically in

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Speaker 1: Europe right now. Nothing. It's really really not good. And

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Speaker 1: what also strikes me and it's absolutely stunning. Matt Miller,

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Speaker 1: our colleague, caught up with the Commerce Banks CFO a

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Speaker 1: little bit earlier today and a complacency coming from German

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Speaker 1: politicians and even corporate leaders is absolutely stunning. The best

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Speaker 1: case at the moment is the economy is staminating. The

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Speaker 1: worst cases were already in recession in a place like Germany,

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Speaker 1: and yet when you speak to these individuals you hear

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Speaker 1: things like we are in good shape. I mean for Germany,

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Speaker 1: they really have an export economy. They've already been hit

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Speaker 1: by China. Uh. To refocus domestically is kind of pointless

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Speaker 1: because the domestic economy just isn't growing. Do you suggest

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Speaker 1: that the international banks that you know so well, David

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Speaker 1: Prul in the United States could really take advantage of that?

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Speaker 1: Do the is there a desire there to expand abroad

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Speaker 1: and take market shire? Uh? They they are taking advantage

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Speaker 1: in capital markets, but they're not going to expand through Europe.

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Speaker 1: That's not where the growth is. So JA is really

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Speaker 1: the focus in Latin America. With the limited time we

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Speaker 1: have with you, banks lagged last year. They're all trading

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Speaker 1: it like a nine multiple book. You know data, how

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Speaker 1: cheap is it? Once in a lifetime on the U

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Speaker 1: S banks. So so banks on average had double digit

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Speaker 1: growth and profits and dividends. If you add them up,

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Speaker 1: you're in double digits plus share buy back. The reason

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Speaker 1: they underperformed last year is their multiples compressed. So we

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Speaker 1: had a market that went from like fifteen times in

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Speaker 1: the Q four last year to eighteen and banks went

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Speaker 1: from fourteen to ten on a multiple basis. So basically

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Speaker 1: the consensus for you is that banks can't continue to

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Speaker 1: earn money. We're going into recession. Credit quality is going

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Speaker 1: to deteriorate. And by the way, the number one metric

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Speaker 1: for a bank is credit quality. So when we look

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Speaker 1: at banks today, their true bargain credit is fantastic because

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Speaker 1: consumer credit is strong, job growth is good, wages have

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Speaker 1: been okay, there has been no deterioration. So they are

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Speaker 1: basically having record earnings and returning a hundred percent of

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Speaker 1: profits to shareholders. You can get a double digit return

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Speaker 1: even if the multiple stays at end times earnings in

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Speaker 1: the market at eighteen. But there's a massive spread between

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Speaker 1: what they're delivering and how they're performing in the stock market.

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Speaker 1: So we need to talk about why they're performing this

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Speaker 1: when the stock market. I caught up with Credit Sweet

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Speaker 1: this week and said, counter intuitively, this is the sector

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Speaker 1: that is at most risks from the trade war. Why

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Speaker 1: because every time it bubbles up, rates drop aggressively, and

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Speaker 1: what gets beaten up on that day it's banks. And

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Speaker 1: as you point out, David, what they've done so well

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Speaker 1: over the last decade has changed the business model, fee

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Speaker 1: based recurring revenue away from just spread lending. The business

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Speaker 1: model has changed, but the investor bias hasn't shifted, and

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Speaker 1: I'm just trying to work out whether it does and

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Speaker 1: when it will. Right right, I mean, the knee jerk

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Speaker 1: reaction is when the yield curve flattens, you sell the banks.

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Speaker 1: It turns out they're not that sensitive to the yield

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Speaker 1: curve anymore. Most of the loans are variable. The fee

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Speaker 1: based business is becoming a big so for them, the

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Speaker 1: profits have continued. Um, I hate to say this, but

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Speaker 1: probably the turning point would be a recession where banks

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Speaker 1: do better in a recession than other economically sensitive areas,

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Speaker 1: and they would given what has happened to them. Right, So, David,

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Speaker 1: that makes the argument of buying the financial is really

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Speaker 1: difficult for investors. Why don't want to own a sector

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Speaker 1: until we come into a recession case? So the reason

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Speaker 1: right now is that bank yields are superior in a

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Speaker 1: market where yields are going down and the alternatives are

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Speaker 1: really expensive. Owning consumer staples, telecoms or utilities, you're paying

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Speaker 1: twenty five times earnings for companies with almost no growth. Uh,

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Speaker 1: And here you are with banks with a three or

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Speaker 1: four percent dividend. So it's very attractive. Please come back,

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Speaker 1: come back when yields go up, you know, really appreciate

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Speaker 1: and I'll bring in the next guest. We esteemed to

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Speaker 1: give you without question. The historical perspective of China and

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Speaker 1: the United States. You can only do that with Fred Bergston,

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Speaker 1: the founder of the Peterson Institute for International Economics, and

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Speaker 1: he is definitive on diplomacy and expecting the unexpected. As

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Speaker 1: we speak to China, Fred, we are thrilled to have

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Speaker 1: you on today. What does President Trump not know? With

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Speaker 1: all your decades of experience of international economics in China?

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Speaker 1: What's the unexpected? For President Trump? He overestimates his own

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Speaker 1: ability to get the Chinese to capitulate to his demands.

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Speaker 1: He fails to recognize the need to mobilize America's allies

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Speaker 1: to work with him in the confrontation with China, and

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Speaker 1: therefore he risks triggering a really major and continuing trade

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Speaker 1: and now currency war that could really tank both our

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Speaker 1: own economy and the world economy. We see Fred Burkston

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Speaker 1: this morning, yields ever lower. We see central banks on

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Speaker 1: an attact basis slashing interest rates as well. City Group

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Speaker 1: Asia published a short note on United States intervention in

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Speaker 1: the currency markets? Are we at the point where we

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Speaker 1: get less coordinated intervention by the Bank of Japan to

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Speaker 1: weaken the end or by US Treasury to adjust the dialogue?

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Speaker 1: There's a risk of that. UH. When the United States

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Speaker 1: designates China as a currency manipulator, and it did two

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Speaker 1: days ago, when there is no evidence that China is manipulating,

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Speaker 1: it really the whole fabric of monetary cooperation that has

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Speaker 1: been so important for the last thirty or forty years.

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Speaker 1: There are agreements in the G twenty and the G

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Speaker 1: seven and bilaterally between the United States and other key

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Speaker 1: allies the Japanese, the Europeans and others UH to coordinate

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Speaker 1: and consult closely before operating in the currency markets. When

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Speaker 1: the US designates China manipulator with no evidence, and in fact,

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Speaker 1: when China has been operating on the other side of

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Speaker 1: the market, it just causes our allies and treasuries and

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Speaker 1: central banks around the world to shake their heads ask

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Speaker 1: what the Americans are doing. Obviously know that it's President

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Speaker 1: Trump forcing his Secretary of the Treasury to make a

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Speaker 1: designation that has no basis in fact, and therefore undermines

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Speaker 1: any prospect for really cooperative and effective behavior in the

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Speaker 1: currency markets. Who are more broadly so Fred. The big worry,

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Speaker 1: of course, and the ultimate irony of all of this,

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Speaker 1: is that actually the administration would quite like is for

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Speaker 1: the Chinese to manipulate the currency just to continue manipulating

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Speaker 1: the currency stronger, which is what they've been doing for

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Speaker 1: the last year or so. Fred, I think a question

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Speaker 1: for a lot of our listeners is whether the Chinese,

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Speaker 1: by allowing it to weaken on Monday, sent a signal

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Speaker 1: to the administration that they may well be prepared to

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Speaker 1: use the currency to weaponize the currency. Fred, what are

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Speaker 1: your thoughts on that. I think one has to really

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Speaker 1: nuanced that carefully. Well, please do. Yeah, I think the

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Speaker 1: Chinese have been quite careful not to manipulate in the

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Speaker 1: sense of driving their currency down. They know that would

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Speaker 1: be objectionable and would justifiably trigger a counter response. However,

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Speaker 1: they have undone their manipulation, which you point out has

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Speaker 1: been in our favor. They have been intervening to keep

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Speaker 1: their currency from weakening. That's been very much to our advantage.

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Speaker 1: They have now undone that, at least to some extent,

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Speaker 1: let the market forces that are driving their currency down

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Speaker 1: prevail at least to some extent. And yes, we use

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Speaker 1: that to respond to Trump's trade threats and trade actions,

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Speaker 1: but one has to distinguish between that permitting market forces

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Speaker 1: to drive their currency down a bit. That's very different

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Speaker 1: from there taking overt action intervening to drive it down.

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Speaker 1: As you say, they've been manipulating. To use the term

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Speaker 1: in a colloquial says in our direction. Uh, and Trump

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Speaker 1: is actually asking them to manipulate more to keep their

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Speaker 1: currency from weakening. Rather ironic, you might say. But they

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Speaker 1: can encounter and do so in a justifiable way by

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Speaker 1: simply letting the market forces, which are certainly pushing the

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Speaker 1: RNN be in a weakening direction, to prevail, at least

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Speaker 1: to some extent. So Fred, we have to understand though,

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Speaker 1: whether the end result is the same. So they move

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Speaker 1: away from constraining the currency. They don't move towards actively

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Speaker 1: weakening the currency, but moving from constraining to tolerating a

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Speaker 1: weaker currency that still sends a signal. And I'm just

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Speaker 1: wondering whether they continue to send that signal in the

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Speaker 1: coming weeks, or whether that strategy is too big a

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Speaker 1: double edged sword for the Chinese to really lean on. Well,

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Speaker 1: I think they may continue that, but only to a

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Speaker 1: limited extent. For the reason you imply, the Chinese are

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Speaker 1: horrified by the thought of a free fall or a

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Speaker 1: sharp plunge in the exchange rate of their currency. They

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Speaker 1: experienced that in it had very negative and worrisome effects

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Speaker 1: on their own economy. It triggered some capital flight out

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Speaker 1: of China. They want to avoid that at all costs.

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Speaker 1: So to whatever extent they may weaponize, as you say,

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Speaker 1: the exchange rate by letting it weaken the offset Trump's tariffs.

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Speaker 1: I think they would do so only to a very

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Speaker 1: limited extent, and though it would compensate to some extent

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Speaker 1: for Trump's tariffs, I don't think we should fear that

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Speaker 1: it will have a massive effect in improving their competitive position.

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Speaker 1: Fred Burst in one final question, Madam the guard has

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Speaker 1: had a tenure on the watch at the i m F.

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Speaker 1: She wanders off to Frankfurt for you know, a crisis

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Speaker 1: free era at the ECB. Who's the right person to

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Speaker 1: take over the I m F. Is a time to

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Speaker 1: look someplace other than Europe. I think it is time

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Speaker 1: to look around the world to get the best person

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Speaker 1: to run the I m F. Could be an American,

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Speaker 1: it could be an Asian. Uh. There are several very

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Speaker 1: plausible Asian candidates. UH. I think the time to end.

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Speaker 1: Time has come to end this monopoly which the US

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Speaker 1: runs the World Bank and the europe has run the

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Speaker 1: i m F. That is an anachronism and it should

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Speaker 1: be should need scarred. It is Adam Posen on your shortlist.

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Speaker 1: Run the i m F. Very good. Fred Burston will

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Speaker 1: leave with thank you so much, Fred Burston. He is

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Speaker 1: a founder of the Institute for International Economics, the Peterson

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Speaker 1: Institute for International Economics. It's math Wednesday. We can do

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Speaker 1: that with John Norman of JP Morgan, who has been

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Speaker 1: very kind to stay around with us. Given the market

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Speaker 1: sell off, we see price up, yield down in bonds.

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Speaker 1: I don't want to get into the Greek letters John

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Speaker 1: Norman because it's summer, but I would suggest the systemic risk,

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Speaker 1: the epsilon that is out there, is substantial. What do

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Speaker 1: you see at the end of all these equations, What

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Speaker 1: do you see in terms of the built in risks

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Speaker 1: of the system. The risks are pretty substantial because you

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Speaker 1: have what um is transpiring the manufacturing sector, which is

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Speaker 1: kind of a near recession. And if there's a near

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Speaker 1: recession in one sector, you really have to worry about

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Speaker 1: contamination other sectors that are more resilient, like services and labors.

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Speaker 1: Who This is basically the thin end of the wedge.

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Speaker 1: I guess the risk is it just kind of widens

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Speaker 1: out as terrorists go up and and the months pass,

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Speaker 1: and and if that's the scenario, you have to think

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Speaker 1: markets need to more cheap and still accommodate that. And that,

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Speaker 1: to me is kind of the biggest connected markets just

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Speaker 1: don't acknowledge that facturing, which is pretty worrisome spreads out.

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Speaker 1: Are we correlated or is the idiosyncratic tone of a

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Speaker 1: year still in place. Let's let's say the correlations are

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Speaker 1: about as you would expect when recession risks arising, meaning

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Speaker 1: anything that's considered cyclical, whether it's credit, um equities, the

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Speaker 1: emerging market complex is going down, and and bond markets

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Speaker 1: are rallying, and the its of currencies like yen and

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Speaker 1: Swiss and and defensive commodities like older or rallying. I

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Speaker 1: think I think the only correlation that's kind of broken

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Speaker 1: down is what's going on in EM local rates. You know,

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Speaker 1: EM local rates are behaving like developed market rates. They're

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Speaker 1: rallying and stress increases, and that's something that's you know,

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Speaker 1: kind of unusual to see that part of the e

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Speaker 1: M complex pretty firm, even as global growth is moving down.

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Speaker 1: So John, let's talk about that. What is happening. I

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Speaker 1: understood the argument as people are anticipating a wiki dollar,

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Speaker 1: they're not getting one, so what are they looking for

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Speaker 1: in local rates? So when the M well, what they're

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Speaker 1: assuming is that because rates going down in the d MS,

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Speaker 1: that the the all the e M s can ease

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Speaker 1: as well. And and that's typically not how it plays out.

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Speaker 1: There's some ems that can ease because they have current

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Speaker 1: accounts surpluss and therefore they're not subject to uh sudden

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Speaker 1: shocks from big capital alflows when when stress is rising.

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Speaker 1: But um, I would say that doesn't characterize all of em,

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Speaker 1: right now, That's that's a way to talk about Asia.

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Speaker 1: That's why Asia can cut rates. That's the way you

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Speaker 1: can talk about maybe some EMS like Russia that of

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Speaker 1: current conservices. But it's just not the place that countries

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Speaker 1: like Turkey and South Africa can be cutting constantially when

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Speaker 1: they're running deficits. And there are a lot of concerns

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Speaker 1: around global growth. So I think you know, that's probably

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Speaker 1: a place where you can see a bit more um

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Speaker 1: recorrelation opening up where where maybe the e M bond

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Speaker 1: markets are not going to rally as consistently with d

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Speaker 1: M bond markets, and and maybe those e M bonds

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Speaker 1: start to go up a bit as as global stock

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Speaker 1: markets go down, and John, maybe we start to see

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Speaker 1: some differentiation in global fixed income. Interestingly, in Europe was

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Speaker 1: seeing a similar phenomenon take place. Italy, which is behaved

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Speaker 1: like a d M e M credit rates hybrid, is

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Speaker 1: actually behaving more like a developed market as well. You'ld

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Speaker 1: tore in seven basis points on a tenure maturity today

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Speaker 1: down ten basis points on a thirty year even against

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Speaker 1: the backdrop that has decided to the risk off. So

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Speaker 1: if your idea and e M right now is local

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Speaker 1: rates need to back up and we need to see

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Speaker 1: some differentiation again between EM and developed markets. Where does

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Speaker 1: Italy fits into all of that? I think you look

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Speaker 1: at it as uh quasi e M type product in

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Speaker 1: the sense that what it embeds is the racial risk

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Speaker 1: and credit risk. And there is more credit risk in

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Speaker 1: Italian bonds relative to other d M bonds simply because

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Speaker 1: the fiscal position and the research that the country is in.

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Speaker 1: So I agree with you. I think it is we

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Speaker 1: are maybe setting up for a bit of a turney

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Speaker 1: point where where Italian bonds just don't keep pace with

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Speaker 1: um with with bonds. And maybe there's even directional decorrelation

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Speaker 1: where the bun yoke goes down and the btp yo

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Speaker 1: goes up. How should American listeners, and particularly American Wall

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Speaker 1: Street listeners interpret the decline of an ever greater negative

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Speaker 1: yields in Germany? I think they should see that as

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Speaker 1: a combination of fear and scarcity. The fear is just

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Speaker 1: that Europe is moving from south trend growth into this

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Speaker 1: recession that I won't be able to extract itself from.

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Speaker 1: And the scarcity argument is that the ECB owns one.

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Speaker 1: They're the German bond market. So with investors who were

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Speaker 1: fear of well just can't find a paper to buy,

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Speaker 1: or rather as they as they buy at the rates

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Speaker 1: just go every more negative. Are you and Lon Lewis

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Speaker 1: still Jean Louise? Are you still in speaking terms? After

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Speaker 1: his shaking, shaking, his earth shaking paper of ten days ago.

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Speaker 1: I know James Diamond called me last night said be

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Speaker 1: sure to asked John about this. Jamie was concerned. I mean,

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Speaker 1: lowis comes out not with the forecast, folks, but with

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Speaker 1: a model of how we get a vector down to

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Speaker 1: a zero percent tenure. How did you digest that, Mr Norman. So,

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Speaker 1: the idea behind that is with with yields great around

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Speaker 1: the world, there's um a drive for anything with the

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Speaker 1: positive interest rate, and that's one of the mechanisms by

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Speaker 1: which US rates could go down to even lower in

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Speaker 1: the tenure. I think where the analogy breaks down a

433
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Speaker 1: little bit is thinking about that rally in US rates

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Speaker 1: as a Japanization effect, because a Japanization effected me is

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Speaker 1: about rates that go down to zero because the country

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00:24:59,080 --> 00:25:02,960
Speaker 1: is in deflation and it also fails to generate GDP growth.

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Speaker 1: And I don't think the US is even close to that.

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Speaker 1: So I would kind of distinguish between, you know, what

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00:25:08,480 --> 00:25:11,280
Speaker 1: happens from the market, which can look incredibly Japanese because

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00:25:11,480 --> 00:25:15,119
Speaker 1: investors are scared, and and what's happening in the economy,

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00:25:15,200 --> 00:25:18,080
Speaker 1: which could actually be better. Brilliant defense. John Norman, thank

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00:25:18,119 --> 00:25:21,159
Speaker 1: you so much, greatly appreciate your time this morning. Ahead

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00:25:21,200 --> 00:25:25,040
Speaker 1: of all of cross asset analysis at JP, I'm work

444
00:25:40,040 --> 00:25:42,639
Speaker 1: helping us kind of navigate what we can expect with

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00:25:42,800 --> 00:25:45,399
Speaker 1: all things equity. Welcome our good friend Gina Martin Adams.

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00:25:45,720 --> 00:25:48,600
Speaker 1: She is the chief Equity strategist for Bloomberg Intelligence. She

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00:25:48,680 --> 00:25:51,399
Speaker 1: joins us here in our Bloomberg Interactive Broker studio. Gina,

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00:25:51,440 --> 00:25:53,560
Speaker 1: thanks so much for making the long walk up to

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00:25:53,720 --> 00:25:58,040
Speaker 1: our studio exactly, so give us a sense of kind

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00:25:58,040 --> 00:26:00,680
Speaker 1: of how you're framing the vault hility we've seen in

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00:26:00,720 --> 00:26:03,960
Speaker 1: the equity markets that just this week. Yeah, well, I

452
00:26:04,040 --> 00:26:06,960
Speaker 1: think it's um, you know, reflective of a market that

453
00:26:07,040 --> 00:26:10,200
Speaker 1: certainly is weakening very substantially on a technical basis. And

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00:26:10,280 --> 00:26:12,399
Speaker 1: it just to put things in perspective, the three percent

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00:26:12,440 --> 00:26:14,520
Speaker 1: to client on Monday, three percent to clients are very

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00:26:14,640 --> 00:26:17,240
Speaker 1: very rare in the broader equity market on a on

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00:26:17,320 --> 00:26:20,119
Speaker 1: a single day basis, and they usually only occur in

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00:26:20,200 --> 00:26:23,520
Speaker 1: the midst of corrections that exceed ten percent. So we

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00:26:23,560 --> 00:26:25,680
Speaker 1: put it in an out a note on Tuesday morning saying, look,

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00:26:25,760 --> 00:26:28,920
Speaker 1: it's it's highly unlikely that we're going to shake this off.

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00:26:30,000 --> 00:26:32,359
Speaker 1: There have only been two instances, indeed, in which a

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00:26:32,600 --> 00:26:34,879
Speaker 1: three percent correction was not in the midst of a

463
00:26:34,960 --> 00:26:38,760
Speaker 1: ten percent or a greater correction since two thousand nine

464
00:26:39,760 --> 00:26:41,520
Speaker 1: percent of the time, it means you're in for a

465
00:26:41,600 --> 00:26:44,960
Speaker 1: wild ride. We think we're still in for a wild ride.

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00:26:45,400 --> 00:26:49,800
Speaker 1: What's really interesting today is initially oversees the interpretation of

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00:26:49,920 --> 00:26:53,200
Speaker 1: these moves by global central banks, it's pretty positive. And

468
00:26:53,240 --> 00:26:55,200
Speaker 1: then as soon as the traders came into the US

469
00:26:55,280 --> 00:26:57,400
Speaker 1: this morning at all, sort of the floor fell out

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00:26:57,520 --> 00:26:59,800
Speaker 1: from from under the market. And I think that's reflective

471
00:26:59,840 --> 00:27:03,480
Speaker 1: of the current sentiment, which is, no matter what monetary

472
00:27:03,520 --> 00:27:08,159
Speaker 1: policymakers do, we're more concerned about earnings right now, and

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00:27:08,440 --> 00:27:12,760
Speaker 1: until there is some form of cooperative resolution with respect

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00:27:12,800 --> 00:27:14,920
Speaker 1: to trade, even if it's in a baby step forward,

475
00:27:15,359 --> 00:27:17,679
Speaker 1: the market is going to remain very very volatile. Right

476
00:27:17,760 --> 00:27:20,960
Speaker 1: So it's trade is trade, it's trade, and it's I

477
00:27:21,000 --> 00:27:23,480
Speaker 1: think as we get through pretty much this quarters earnings,

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00:27:23,760 --> 00:27:25,359
Speaker 1: what did you hear from a lot of the companies

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00:27:25,400 --> 00:27:28,680
Speaker 1: as it relates to how are the trade uncertainties impacting

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00:27:28,720 --> 00:27:31,120
Speaker 1: their businesses? There any themes you guys have picked up? Yeah,

481
00:27:31,320 --> 00:27:33,199
Speaker 1: so there's there are a lot of themes. I mean,

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00:27:33,200 --> 00:27:35,080
Speaker 1: I would say that the biggest theme is that it's

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00:27:35,160 --> 00:27:39,680
Speaker 1: just more about China growth as opposed to tariffs so far,

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00:27:39,920 --> 00:27:42,639
Speaker 1: and I think that that's largely because you know, the

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00:27:42,680 --> 00:27:45,639
Speaker 1: the tariffs on the products that are getting imported from

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00:27:45,720 --> 00:27:48,840
Speaker 1: China are in companies that are generally pretty flexible. They

487
00:27:48,960 --> 00:27:52,359
Speaker 1: imported a lot before the tariffs were put in place. Um,

488
00:27:52,560 --> 00:27:56,200
Speaker 1: there's a lot of supply chain angst in the tech

489
00:27:56,280 --> 00:27:58,960
Speaker 1: sector with respect to China. But most of this is

490
00:27:59,040 --> 00:28:02,600
Speaker 1: really more about slowing global growth, and it is specifically

491
00:28:02,600 --> 00:28:05,119
Speaker 1: about tariffs. So it's more about the byproduct or the

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00:28:05,240 --> 00:28:09,800
Speaker 1: snowball effective tariffs on global growth, which is suppressing economic activity.

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00:28:09,960 --> 00:28:11,800
Speaker 1: Ga mar names I know you know you don't speak

494
00:28:11,800 --> 00:28:17,480
Speaker 1: to Carda, which is probably how do you fold anyone's

495
00:28:17,520 --> 00:28:21,200
Speaker 1: economic forecast in equity analysis? Now? Do you just take

496
00:28:21,280 --> 00:28:24,360
Speaker 1: it right to a interpretation of what the revenue lines

497
00:28:24,400 --> 00:28:26,760
Speaker 1: are going to be? What do you do with economic

498
00:28:26,880 --> 00:28:29,359
Speaker 1: forecast right now? Well, as you know, Tom, I was

499
00:28:29,680 --> 00:28:32,240
Speaker 1: an economist before I became a strategist, and I spent

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00:28:32,320 --> 00:28:37,680
Speaker 1: a good five years. Yeah, we were trying to keep

501
00:28:37,680 --> 00:28:41,400
Speaker 1: it quiet that we need to review. I will say

502
00:28:41,480 --> 00:28:43,920
Speaker 1: it's an incredible challenge because I had to spend a

503
00:28:43,960 --> 00:28:45,760
Speaker 1: good five years trying to figure out, you know, what

504
00:28:45,920 --> 00:28:48,240
Speaker 1: really is relevant from the economic data of our markets,

505
00:28:48,360 --> 00:28:51,720
Speaker 1: and it truly is a subset of indicators that actually

506
00:28:51,840 --> 00:28:56,520
Speaker 1: matter for stocks, and what matters are things like initial claims,

507
00:28:56,880 --> 00:29:00,800
Speaker 1: the unemployment rate, interest rates, and absolutely order flow. And

508
00:29:00,880 --> 00:29:03,440
Speaker 1: this the orders are the weakest component of the economic

509
00:29:03,480 --> 00:29:06,280
Speaker 1: outlook right now, and that is definitely weighing on earnings

510
00:29:06,320 --> 00:29:09,280
Speaker 1: expectations for companies. But they're not one and the same.

511
00:29:09,400 --> 00:29:12,840
Speaker 1: Stocks are not representative of the economy all the time, um,

512
00:29:12,960 --> 00:29:15,760
Speaker 1: and the economy is not always representative of stocks. And

513
00:29:15,920 --> 00:29:19,520
Speaker 1: is it your sense that the Federal Reserve? Uh, does

514
00:29:19,560 --> 00:29:21,440
Speaker 1: the Federal Reserve have enough arrows in a quiver to

515
00:29:21,560 --> 00:29:23,880
Speaker 1: kind of help the equity markets in a meanful way

516
00:29:23,920 --> 00:29:26,680
Speaker 1: going forward? Yeah? I know so, I do think so.

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00:29:26,800 --> 00:29:29,400
Speaker 1: I don't think you need to dismiss the FED, say,

518
00:29:30,000 --> 00:29:33,800
Speaker 1: certainly what happens when liquidity increases. When the FED moves

519
00:29:33,840 --> 00:29:38,280
Speaker 1: to an easier stances, you naturally have higher valuation multiples

520
00:29:38,360 --> 00:29:41,080
Speaker 1: that result. The problem is that there is that offset.

521
00:29:41,120 --> 00:29:43,240
Speaker 1: The FED can only do so much because, yes, you

522
00:29:43,320 --> 00:29:46,160
Speaker 1: have to rely on the transmit connects transmission mechanism of

523
00:29:46,240 --> 00:29:50,720
Speaker 1: monetary policy to actually effectively create some sort of better

524
00:29:50,800 --> 00:29:53,200
Speaker 1: economic growth outlook. And many have argued that that that

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00:29:53,320 --> 00:29:56,240
Speaker 1: policy is broken. But the other side of this is,

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00:29:56,760 --> 00:29:59,360
Speaker 1: no matter what you think about the broader economy, when

527
00:29:59,560 --> 00:30:03,680
Speaker 1: liquid it is ample, it's going to inflate asset price valuations.

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00:30:04,160 --> 00:30:07,960
Speaker 1: So the offset is, yes, valuations may expand, but that

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00:30:08,080 --> 00:30:10,760
Speaker 1: valuation expansion can only do so much in the face

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00:30:10,880 --> 00:30:13,760
Speaker 1: of deteriorating earnings on the other side of the price equation.

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00:30:14,200 --> 00:30:17,120
Speaker 1: So I think the Fed can do some. Can they

532
00:30:17,280 --> 00:30:21,200
Speaker 1: manufacture economic growth out of nowhere? No, um, but they

533
00:30:21,320 --> 00:30:25,640
Speaker 1: can help to soothe the pain of what is becoming

534
00:30:25,960 --> 00:30:29,880
Speaker 1: a pretty negative outlook or at least a stagnant outlook

535
00:30:29,920 --> 00:30:32,160
Speaker 1: for earnings. Jenna, thank you for the updates. The last

536
00:30:32,240 --> 00:30:34,400
Speaker 1: number of days or team has been extraordinary. How many

537
00:30:34,440 --> 00:30:37,680
Speaker 1: people do you have down in the salt mine on

538
00:30:37,760 --> 00:30:42,880
Speaker 1: the equity strategy team we have twelve Yeah, no, not

539
00:30:43,040 --> 00:30:45,400
Speaker 1: all ex economists, thank god, not all, not all carrying

540
00:30:45,480 --> 00:30:47,520
Speaker 1: my sins. But on the broad bi team these three

541
00:30:47,960 --> 00:30:50,080
Speaker 1: now yeah, GM Martin Adams, thank you so much. It's

542
00:30:50,120 --> 00:30:56,600
Speaker 1: been hugely valuable just to call upon Bloomberg Intelligence. Thanks

543
00:30:56,680 --> 00:31:00,440
Speaker 1: for listening to the Bloomberg Surveillance podcast. Subscribe right and

544
00:31:00,600 --> 00:31:05,880
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast

545
00:31:05,960 --> 00:31:10,160
Speaker 1: platform you prefer. I'm on Twitter at Tom Keene before

546
00:31:10,240 --> 00:31:14,400
Speaker 1: the podcast, you can always catch us worldwide. I'm Bloomberg Radio,