WEBVTT - Surveillance: Trade War Is Unquantifiable Force, Normand Says 0:00:00.080 --> 0:00:13.000 Ye, Welcome to the Bloomberg Surveillance Podcast. I'm term Keene 0:00:13.480 --> 0:00:17.520 jay Leie. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:29.080 Bloomberg dot com, and of course on the Bloomberg. Let's 0:00:29.080 --> 0:00:33.520 bring in r Q Economic senior economist and founding partner. 0:00:33.560 --> 0:00:36.159 Good morning to Conrad. Let's just talk about whether these 0:00:36.200 --> 0:00:38.879 central banks are being preemptive or reactive. And I want 0:00:38.920 --> 0:00:40.479 to pick up on the New Zealand Central Bank this 0:00:40.560 --> 0:00:42.920 morning because I was going through the statement after seeing 0:00:42.960 --> 0:00:45.400 this fifty basis point cut. And you can file this 0:00:45.560 --> 0:00:47.520 under things you don't expect to read after a central 0:00:47.520 --> 0:00:50.400 bank just cut rates by fifty basis points, employment is 0:00:50.400 --> 0:00:53.960 around its maximum sustainable level, Inflation remains within our target 0:00:54.080 --> 0:00:57.320 range but below the two percent midpoint. Recent data recording 0:00:57.360 --> 0:01:01.080 improved employment and wage growth is welcome. You don't expect 0:01:01.160 --> 0:01:03.800 to read things like that after a central bank just 0:01:03.920 --> 0:01:06.320 cut rates fifty basis points when they only had a 0:01:06.400 --> 0:01:09.200 hundred and fifty basis points to play with to begin with, Conrad, 0:01:09.520 --> 0:01:11.600 what is going on? Well, I mean, I think what 0:01:11.760 --> 0:01:15.640 that shows is that these strange communications that are going 0:01:15.680 --> 0:01:19.520 along policy easings. The US doesn't have a monopoly on that, 0:01:19.680 --> 0:01:23.720 and we've had Uh. Yesterday we heard from from St. 0:01:23.760 --> 0:01:26.040 Louis FED President Bullard who said that the FED can't 0:01:26.120 --> 0:01:30.240 react to every trade dispute or every trade risk UM. 0:01:30.319 --> 0:01:33.800 But that's exactly what they said that they did last week. 0:01:34.000 --> 0:01:36.360 So I think markets are are are looking at at 0:01:36.400 --> 0:01:39.600 all of this and saying what is driving monetary policy 0:01:39.640 --> 0:01:42.200 not just in the US, but but but everywhere UM 0:01:42.360 --> 0:01:44.800 and and there's there might be some areas around the 0:01:44.840 --> 0:01:47.760 world where you could make a case for easier policy. 0:01:47.840 --> 0:01:49.920 Europe might be one of those areas. We have inflation 0:01:50.000 --> 0:01:53.320 that's very low in Europe. UM, we have growth that's 0:01:53.480 --> 0:01:55.840 lower and weaker than what the what the European Center 0:01:55.880 --> 0:01:58.240 Bank was projecting just a couple of months ago. UM. 0:01:58.360 --> 0:02:00.840 But here we have data that strong. You you you've 0:02:01.160 --> 0:02:03.800 pointed out what's what's going on in New Zealand, where 0:02:03.840 --> 0:02:07.800 we have UM strong labor markets. We have inflation that's 0:02:08.400 --> 0:02:10.720 closer to target in these areas than it is in 0:02:11.120 --> 0:02:14.239 Europe UM, and central banks are cutting rates because they're 0:02:14.240 --> 0:02:17.360 trying to offset some some policy risk UM. And then 0:02:17.440 --> 0:02:19.040 the other point that you made, there's not a lot 0:02:19.080 --> 0:02:21.080 of a lot of the FED has more room than 0:02:21.160 --> 0:02:24.680 other central banks. But um, the question is why are 0:02:24.760 --> 0:02:27.880 they using ammunition now? Is it a waste of ammunition? 0:02:28.120 --> 0:02:30.560 And I think what's going on in markets is we 0:02:30.639 --> 0:02:32.519 talked about the yel curve and the rallies in the 0:02:32.639 --> 0:02:35.120 long end, is that markets are looking forward to what 0:02:35.320 --> 0:02:38.280 comes next once these banks, once the central banks use 0:02:38.360 --> 0:02:41.000 up the ammunition as limited as is that they have, 0:02:41.280 --> 0:02:42.760 what do they do next? And they what they do 0:02:42.880 --> 0:02:45.320 next is QUEI and I think that's what's driving down 0:02:45.400 --> 0:02:47.359 long term yields. Well, let's talk about what's run in 0:02:47.440 --> 0:02:49.240 front of our face right now. It's what the Federal 0:02:49.240 --> 0:02:50.799 Reserve does in the here and now. There was a 0:02:50.840 --> 0:02:52.560 belief over the last few months that they would move 0:02:52.600 --> 0:02:55.320 to a more preemptive stance, perhaps move early. We've heard 0:02:55.320 --> 0:02:58.000 the arguments from several officials do more with less. That 0:02:58.120 --> 0:03:00.560 was what led to many people thinking perhaps we get 0:03:00.560 --> 0:03:03.160 a fifty basis point cut. Didn't get one. Then the 0:03:03.240 --> 0:03:06.440 conversation shifted last week. Here we have a central bank 0:03:06.520 --> 0:03:09.440 that has no choice but to underwrite the trade war. 0:03:10.200 --> 0:03:12.359 And then Jim Bullard happened yesterday the president of the 0:03:12.400 --> 0:03:15.240 Saint Louis FED and he sounded really reluctant to get 0:03:15.320 --> 0:03:18.720 drawn into that. What do you think about that, Stantce Conrad, 0:03:19.000 --> 0:03:20.880 and how risky it could be if the Federal Reserve 0:03:20.960 --> 0:03:23.679 decides that actually it's not its place to underwrite the 0:03:23.720 --> 0:03:27.320 trade war. I think that's usually problematic. I mean, particularly 0:03:27.440 --> 0:03:31.200 if the if the data continue on the path that 0:03:31.280 --> 0:03:33.160 we've seen. I mean, I think don't think there's anyone 0:03:33.200 --> 0:03:36.400 that can deny that. UM, that risks have gone up 0:03:36.880 --> 0:03:40.040 with the ratcheting up in the trade war. UM, the 0:03:40.640 --> 0:03:44.880 likelihood that businesses might be more reticent on investing and 0:03:45.000 --> 0:03:48.400 potentially hiring than they were previously. If this trade war 0:03:48.520 --> 0:03:51.960 continues to to escalate. UM, those risks have gone up. 0:03:52.000 --> 0:03:54.440 But what do we know so far? We know that 0:03:54.680 --> 0:03:57.920 businesses on the hiring fund, we still have have pretty 0:03:57.960 --> 0:04:00.360 solid levels of business demand. The alter it that came 0:04:00.360 --> 0:04:03.360 out yesterday, albeit for June. UM, but the more up 0:04:03.400 --> 0:04:05.320 to date data that we've had from the n f 0:04:05.400 --> 0:04:07.520 I B, we have very high levels of job openings. 0:04:07.760 --> 0:04:10.600 So businesses aren't pulling back on hiring. UM. The consumer 0:04:10.640 --> 0:04:13.360 seems to be in great shape. Inflation is not that 0:04:13.560 --> 0:04:15.360 far off. And you remember back at the main meeting 0:04:15.400 --> 0:04:17.560 when the FED made a big deal Pal in his 0:04:17.640 --> 0:04:20.160 press conference in the minutes of the meeting about trim 0:04:20.320 --> 0:04:23.760 meetings exactly he advised it on Friday, it's two percent. 0:04:24.160 --> 0:04:27.000 So inflation is close to target. The labor market is 0:04:27.040 --> 0:04:29.400 doing fine. We do have consumed concerns on the business 0:04:29.480 --> 0:04:32.680 front with business investment um. But it just seems to 0:04:32.720 --> 0:04:37.000 me that the argument for preemption is too early. O 0:04:37.160 --> 0:04:40.040 B overcome by events. I'm looking at the data screen 0:04:40.080 --> 0:04:42.080 that tells me Chairman Paul is going to be overcome 0:04:42.160 --> 0:04:45.000 by events. Where where in your mind, just using his 0:04:45.120 --> 0:04:49.320 one benchmark, the tenure two point ones excuse me, one 0:04:49.480 --> 0:04:54.120 point six four percent, where does Jerome Powell become overcome 0:04:54.640 --> 0:04:57.720 by market events? Well, I hope what the FED does 0:04:57.839 --> 0:05:01.520 is realize that that their role in driving these moves. 0:05:01.880 --> 0:05:05.480 I think it's problematic for markets to move based on 0:05:05.560 --> 0:05:08.040 the expectation for FED action, whether or not that that 0:05:08.279 --> 0:05:10.600 whether or not that's justified, and then for the FED 0:05:10.680 --> 0:05:12.760 to look at the markets and say, well, the markets 0:05:12.800 --> 0:05:15.160 are telling us that the economy is weak. Well to 0:05:15.240 --> 0:05:18.400 your inflation point, are you saying the service sector inflation 0:05:18.880 --> 0:05:21.960 will not diminish down to what goods inflation is is 0:05:22.040 --> 0:05:26.440 a lot of people are are forecasting. I don't think so, 0:05:26.560 --> 0:05:28.880 and I will still to think that. I also think 0:05:28.920 --> 0:05:33.080 that what what if we're talking about the good side. UM. Firstly, 0:05:33.120 --> 0:05:35.960 on the producer price front, those prices are rising much 0:05:36.000 --> 0:05:38.120 more rapidly on consumers, so there's the potential for some 0:05:38.279 --> 0:05:40.640 feed through there. And the tariffs have an impact on 0:05:40.720 --> 0:05:43.000 goods prices, not yet, but eventually they will. If if 0:05:43.080 --> 0:05:45.840 we do get this additional ten percent tariff on two 0:05:46.200 --> 0:05:48.840 billion dollars of imports from China, that will have an impact, 0:05:49.080 --> 0:05:50.960 more of an impact than I think the first round 0:05:51.000 --> 0:05:53.640 of tariffs had um and so goods prices will will 0:05:53.640 --> 0:05:57.280 be pressured higher. But the point is the inflation environment, 0:05:57.560 --> 0:06:01.600 even with goods price inflation real aatively subdued um, it 0:06:01.680 --> 0:06:04.760 has been driven by the services side. Inflation is running 0:06:04.760 --> 0:06:07.360 pretty close to two percent on on many measures of 0:06:07.520 --> 0:06:11.320 of kind of underlying prices. So um, you know, I 0:06:11.640 --> 0:06:13.480 I think, based on the data, it's really hard to 0:06:13.560 --> 0:06:15.480 make to make the argument. I think what's happening with 0:06:15.560 --> 0:06:19.760 the FED is that the markets are anticipating them cutting rates. UM. 0:06:19.920 --> 0:06:23.080 The markets on on the risk asset side. The risky 0:06:23.120 --> 0:06:26.479 assets are are are skittish, and the Fed just doesn't 0:06:26.480 --> 0:06:28.600 feel like it's in a position to disappoint markets in 0:06:28.640 --> 0:06:30.880 this kind of environment. A Conrad right to catch you 0:06:30.920 --> 0:06:32.920 out with your Conrad the quadraus dropping by the studio. 0:06:33.000 --> 0:06:34.800 To get us up to speed on what's happening worldwide 0:06:34.839 --> 0:06:52.000 are th Q Economic Senior Economist and founding partner. Let's 0:06:52.040 --> 0:06:54.560 bring in David Pole. Shall we Epic Investment Partners co 0:06:54.720 --> 0:06:59.080 Chief investment Officer and portfolio manager. Can we begin in Europe? David? 0:06:59.120 --> 0:07:01.200 While we've just heard from a series of banks through 0:07:01.279 --> 0:07:04.920 the morning, Commas Bank the goal of lifting profit increasingly 0:07:04.960 --> 0:07:08.400 ambitious UNI Credit slashing its full year revenue target by 0:07:08.440 --> 0:07:11.160 a billion a b mm row adding to all of this, 0:07:11.280 --> 0:07:14.680 saying it's margins might be hit. These guys are struggling 0:07:14.720 --> 0:07:17.440 with low rates. Will any of this get any better 0:07:17.680 --> 0:07:26.600 anytime soon? Probably not, unfortunately. But the UH What really 0:07:26.680 --> 0:07:31.120 matters though is economic growth because banks are economically sensitive. 0:07:31.240 --> 0:07:33.680 This is this really matters. You have to have growth. 0:07:33.880 --> 0:07:37.520 Monetary policy for all it was trying to do, has 0:07:38.400 --> 0:07:41.840 run out of gas, and European companies are just not 0:07:42.000 --> 0:07:45.440 borrowing there is no economic growth and it's not just 0:07:45.640 --> 0:07:47.680 a matter of rates. You need to have more loan 0:07:47.840 --> 0:07:50.000 volume and they're not getting than jenniferro Why did we 0:07:50.080 --> 0:07:52.360 hear that from the CFO of Commerce Bank this morning 0:07:52.400 --> 0:07:54.440 that like it's like no big deal. This is the 0:07:54.480 --> 0:07:56.880 really problem with the business strategy for the European lenders 0:07:56.880 --> 0:07:59.120 at the moment. They refocus the business models and guess 0:07:59.160 --> 0:08:03.120 how they refocused the domestically and what's happening domestically in 0:08:03.200 --> 0:08:06.520 Europe right now. Nothing. It's really really not good. And 0:08:06.640 --> 0:08:09.880 what also strikes me and it's absolutely stunning. Matt Miller, 0:08:10.000 --> 0:08:12.880 our colleague, caught up with the Commerce Banks CFO a 0:08:12.920 --> 0:08:16.360 little bit earlier today and a complacency coming from German 0:08:16.400 --> 0:08:19.200 politicians and even corporate leaders is absolutely stunning. The best 0:08:19.240 --> 0:08:21.720 case at the moment is the economy is staminating. The 0:08:21.800 --> 0:08:24.760 worst cases were already in recession in a place like Germany, 0:08:25.280 --> 0:08:27.400 and yet when you speak to these individuals you hear 0:08:27.480 --> 0:08:31.040 things like we are in good shape. I mean for Germany, 0:08:31.200 --> 0:08:34.520 they really have an export economy. They've already been hit 0:08:34.600 --> 0:08:38.360 by China. Uh. To refocus domestically is kind of pointless 0:08:38.520 --> 0:08:41.920 because the domestic economy just isn't growing. Do you suggest 0:08:41.960 --> 0:08:44.120 that the international banks that you know so well, David 0:08:44.160 --> 0:08:47.360 Prul in the United States could really take advantage of that? 0:08:47.720 --> 0:08:49.920 Do the is there a desire there to expand abroad 0:08:50.000 --> 0:08:53.680 and take market shire? Uh? They they are taking advantage 0:08:53.720 --> 0:08:57.960 in capital markets, but they're not going to expand through Europe. 0:08:58.000 --> 0:09:00.760 That's not where the growth is. So JA is really 0:09:00.960 --> 0:09:03.959 the focus in Latin America. With the limited time we 0:09:04.080 --> 0:09:07.360 have with you, banks lagged last year. They're all trading 0:09:07.400 --> 0:09:10.439 it like a nine multiple book. You know data, how 0:09:10.679 --> 0:09:12.880 cheap is it? Once in a lifetime on the U 0:09:13.080 --> 0:09:17.000 S banks. So so banks on average had double digit 0:09:17.240 --> 0:09:20.520 growth and profits and dividends. If you add them up, 0:09:20.559 --> 0:09:23.520 you're in double digits plus share buy back. The reason 0:09:23.600 --> 0:09:26.880 they underperformed last year is their multiples compressed. So we 0:09:26.920 --> 0:09:29.880 had a market that went from like fifteen times in 0:09:30.000 --> 0:09:33.640 the Q four last year to eighteen and banks went 0:09:33.760 --> 0:09:37.800 from fourteen to ten on a multiple basis. So basically 0:09:38.480 --> 0:09:40.959 the consensus for you is that banks can't continue to 0:09:41.080 --> 0:09:44.679 earn money. We're going into recession. Credit quality is going 0:09:44.720 --> 0:09:47.280 to deteriorate. And by the way, the number one metric 0:09:47.360 --> 0:09:49.679 for a bank is credit quality. So when we look 0:09:49.720 --> 0:09:53.840 at banks today, their true bargain credit is fantastic because 0:09:53.960 --> 0:09:57.319 consumer credit is strong, job growth is good, wages have 0:09:57.400 --> 0:10:00.800 been okay, there has been no deterioration. So they are 0:10:01.360 --> 0:10:05.040 basically having record earnings and returning a hundred percent of 0:10:05.160 --> 0:10:08.120 profits to shareholders. You can get a double digit return 0:10:08.520 --> 0:10:11.120 even if the multiple stays at end times earnings in 0:10:11.160 --> 0:10:13.720 the market at eighteen. But there's a massive spread between 0:10:13.760 --> 0:10:15.960 what they're delivering and how they're performing in the stock market. 0:10:16.040 --> 0:10:17.839 So we need to talk about why they're performing this 0:10:17.920 --> 0:10:19.880 when the stock market. I caught up with Credit Sweet 0:10:19.960 --> 0:10:24.400 this week and said, counter intuitively, this is the sector 0:10:24.440 --> 0:10:26.520 that is at most risks from the trade war. Why 0:10:27.040 --> 0:10:30.640 because every time it bubbles up, rates drop aggressively, and 0:10:30.760 --> 0:10:33.640 what gets beaten up on that day it's banks. And 0:10:33.720 --> 0:10:36.400 as you point out, David, what they've done so well 0:10:36.880 --> 0:10:39.240 over the last decade has changed the business model, fee 0:10:39.280 --> 0:10:42.520 based recurring revenue away from just spread lending. The business 0:10:42.600 --> 0:10:46.000 model has changed, but the investor bias hasn't shifted, and 0:10:46.040 --> 0:10:47.520 I'm just trying to work out whether it does and 0:10:47.559 --> 0:10:50.040 when it will. Right right, I mean, the knee jerk 0:10:50.080 --> 0:10:52.880 reaction is when the yield curve flattens, you sell the banks. 0:10:53.320 --> 0:10:56.080 It turns out they're not that sensitive to the yield 0:10:56.120 --> 0:10:58.520 curve anymore. Most of the loans are variable. The fee 0:10:58.559 --> 0:11:01.640 based business is becoming a big so for them, the 0:11:01.720 --> 0:11:05.000 profits have continued. Um, I hate to say this, but 0:11:05.200 --> 0:11:09.400 probably the turning point would be a recession where banks 0:11:09.720 --> 0:11:14.080 do better in a recession than other economically sensitive areas, 0:11:14.160 --> 0:11:17.520 and they would given what has happened to them. Right, So, David, 0:11:17.559 --> 0:11:19.560 that makes the argument of buying the financial is really 0:11:19.600 --> 0:11:22.079 difficult for investors. Why don't want to own a sector 0:11:22.960 --> 0:11:25.319 until we come into a recession case? So the reason 0:11:25.600 --> 0:11:29.120 right now is that bank yields are superior in a 0:11:29.280 --> 0:11:33.439 market where yields are going down and the alternatives are 0:11:33.640 --> 0:11:38.920 really expensive. Owning consumer staples, telecoms or utilities, you're paying 0:11:38.960 --> 0:11:43.480 twenty five times earnings for companies with almost no growth. Uh, 0:11:43.679 --> 0:11:45.880 And here you are with banks with a three or 0:11:45.920 --> 0:11:49.880 four percent dividend. So it's very attractive. Please come back, 0:11:49.960 --> 0:11:58.520 come back when yields go up, you know, really appreciate 0:12:13.880 --> 0:12:15.679 and I'll bring in the next guest. We esteemed to 0:12:15.720 --> 0:12:20.679 give you without question. The historical perspective of China and 0:12:20.760 --> 0:12:23.800 the United States. You can only do that with Fred Bergston, 0:12:24.320 --> 0:12:27.760 the founder of the Peterson Institute for International Economics, and 0:12:27.840 --> 0:12:33.280 he is definitive on diplomacy and expecting the unexpected. As 0:12:33.360 --> 0:12:35.959 we speak to China, Fred, we are thrilled to have 0:12:36.080 --> 0:12:39.719 you on today. What does President Trump not know? With 0:12:39.880 --> 0:12:44.240 all your decades of experience of international economics in China? 0:12:44.679 --> 0:12:51.280 What's the unexpected? For President Trump? He overestimates his own 0:12:51.320 --> 0:12:55.400 ability to get the Chinese to capitulate to his demands. 0:12:56.480 --> 0:13:01.120 He fails to recognize the need to mobilize America's allies 0:13:01.280 --> 0:13:05.559 to work with him in the confrontation with China, and 0:13:05.679 --> 0:13:11.160 therefore he risks triggering a really major and continuing trade 0:13:11.360 --> 0:13:15.120 and now currency war that could really tank both our 0:13:15.120 --> 0:13:18.080 own economy and the world economy. We see Fred Burkston 0:13:18.160 --> 0:13:21.120 this morning, yields ever lower. We see central banks on 0:13:21.200 --> 0:13:25.720 an attact basis slashing interest rates as well. City Group 0:13:25.920 --> 0:13:31.839 Asia published a short note on United States intervention in 0:13:31.960 --> 0:13:35.120 the currency markets? Are we at the point where we 0:13:35.240 --> 0:13:39.599 get less coordinated intervention by the Bank of Japan to 0:13:39.720 --> 0:13:44.280 weaken the end or by US Treasury to adjust the dialogue? 0:13:45.480 --> 0:13:49.520 There's a risk of that. UH. When the United States 0:13:49.760 --> 0:13:54.040 designates China as a currency manipulator, and it did two 0:13:54.400 --> 0:13:58.800 days ago, when there is no evidence that China is manipulating, 0:13:59.480 --> 0:14:04.319 it really the whole fabric of monetary cooperation that has 0:14:04.360 --> 0:14:07.000 been so important for the last thirty or forty years. 0:14:07.640 --> 0:14:10.079 There are agreements in the G twenty and the G 0:14:10.360 --> 0:14:14.199 seven and bilaterally between the United States and other key 0:14:14.240 --> 0:14:18.880 allies the Japanese, the Europeans and others UH to coordinate 0:14:19.120 --> 0:14:23.720 and consult closely before operating in the currency markets. When 0:14:23.760 --> 0:14:28.120 the US designates China manipulator with no evidence, and in fact, 0:14:28.400 --> 0:14:30.480 when China has been operating on the other side of 0:14:30.560 --> 0:14:34.800 the market, it just causes our allies and treasuries and 0:14:34.880 --> 0:14:38.080 central banks around the world to shake their heads ask 0:14:38.200 --> 0:14:41.760 what the Americans are doing. Obviously know that it's President 0:14:41.840 --> 0:14:45.200 Trump forcing his Secretary of the Treasury to make a 0:14:45.320 --> 0:14:49.160 designation that has no basis in fact, and therefore undermines 0:14:49.320 --> 0:14:54.160 any prospect for really cooperative and effective behavior in the 0:14:54.240 --> 0:14:57.320 currency markets. Who are more broadly so Fred. The big worry, 0:14:57.400 --> 0:14:59.160 of course, and the ultimate irony of all of this, 0:14:59.320 --> 0:15:01.800 is that actually the administration would quite like is for 0:15:02.040 --> 0:15:04.840 the Chinese to manipulate the currency just to continue manipulating 0:15:04.840 --> 0:15:07.840 the currency stronger, which is what they've been doing for 0:15:07.960 --> 0:15:09.800 the last year or so. Fred, I think a question 0:15:09.880 --> 0:15:12.680 for a lot of our listeners is whether the Chinese, 0:15:13.160 --> 0:15:16.920 by allowing it to weaken on Monday, sent a signal 0:15:17.000 --> 0:15:19.720 to the administration that they may well be prepared to 0:15:19.920 --> 0:15:23.040 use the currency to weaponize the currency. Fred, what are 0:15:23.080 --> 0:15:26.280 your thoughts on that. I think one has to really 0:15:26.440 --> 0:15:29.800 nuanced that carefully. Well, please do. Yeah, I think the 0:15:30.000 --> 0:15:34.720 Chinese have been quite careful not to manipulate in the 0:15:34.840 --> 0:15:39.560 sense of driving their currency down. They know that would 0:15:39.600 --> 0:15:45.000 be objectionable and would justifiably trigger a counter response. However, 0:15:46.040 --> 0:15:51.960 they have undone their manipulation, which you point out has 0:15:52.040 --> 0:15:54.960 been in our favor. They have been intervening to keep 0:15:55.040 --> 0:15:59.840 their currency from weakening. That's been very much to our advantage. 0:16:00.400 --> 0:16:04.120 They have now undone that, at least to some extent, 0:16:05.040 --> 0:16:08.400 let the market forces that are driving their currency down 0:16:08.680 --> 0:16:13.680 prevail at least to some extent. And yes, we use 0:16:13.840 --> 0:16:17.240 that to respond to Trump's trade threats and trade actions, 0:16:18.200 --> 0:16:23.320 but one has to distinguish between that permitting market forces 0:16:23.840 --> 0:16:27.360 to drive their currency down a bit. That's very different 0:16:28.000 --> 0:16:31.760 from there taking overt action intervening to drive it down. 0:16:31.880 --> 0:16:35.360 As you say, they've been manipulating. To use the term 0:16:35.440 --> 0:16:40.600 in a colloquial says in our direction. Uh, and Trump 0:16:40.720 --> 0:16:43.880 is actually asking them to manipulate more to keep their 0:16:43.920 --> 0:16:47.760 currency from weakening. Rather ironic, you might say. But they 0:16:48.360 --> 0:16:52.560 can encounter and do so in a justifiable way by 0:16:52.640 --> 0:16:56.200 simply letting the market forces, which are certainly pushing the 0:16:57.160 --> 0:17:00.400 RNN be in a weakening direction, to prevail, at least 0:17:00.440 --> 0:17:02.840 to some extent. So Fred, we have to understand though, 0:17:02.920 --> 0:17:05.720 whether the end result is the same. So they move 0:17:05.760 --> 0:17:09.400 away from constraining the currency. They don't move towards actively 0:17:09.600 --> 0:17:13.280 weakening the currency, but moving from constraining to tolerating a 0:17:13.359 --> 0:17:16.960 weaker currency that still sends a signal. And I'm just 0:17:17.119 --> 0:17:20.200 wondering whether they continue to send that signal in the 0:17:20.280 --> 0:17:22.760 coming weeks, or whether that strategy is too big a 0:17:22.800 --> 0:17:25.840 double edged sword for the Chinese to really lean on. Well, 0:17:25.920 --> 0:17:29.399 I think they may continue that, but only to a 0:17:29.640 --> 0:17:33.800 limited extent. For the reason you imply, the Chinese are 0:17:34.200 --> 0:17:37.159 horrified by the thought of a free fall or a 0:17:37.280 --> 0:17:41.280 sharp plunge in the exchange rate of their currency. They 0:17:41.320 --> 0:17:45.959 experienced that in it had very negative and worrisome effects 0:17:46.000 --> 0:17:49.080 on their own economy. It triggered some capital flight out 0:17:49.119 --> 0:17:52.320 of China. They want to avoid that at all costs. 0:17:52.400 --> 0:17:56.359 So to whatever extent they may weaponize, as you say, 0:17:56.920 --> 0:18:00.760 the exchange rate by letting it weaken the offset Trump's tariffs. 0:18:01.400 --> 0:18:03.720 I think they would do so only to a very 0:18:03.960 --> 0:18:08.800 limited extent, and though it would compensate to some extent 0:18:09.240 --> 0:18:12.080 for Trump's tariffs, I don't think we should fear that 0:18:12.160 --> 0:18:15.640 it will have a massive effect in improving their competitive position. 0:18:15.920 --> 0:18:18.840 Fred Burst in one final question, Madam the guard has 0:18:18.880 --> 0:18:21.280 had a tenure on the watch at the i m F. 0:18:21.440 --> 0:18:25.040 She wanders off to Frankfurt for you know, a crisis 0:18:25.160 --> 0:18:29.000 free era at the ECB. Who's the right person to 0:18:29.119 --> 0:18:30.920 take over the I m F. Is a time to 0:18:31.040 --> 0:18:35.320 look someplace other than Europe. I think it is time 0:18:35.400 --> 0:18:38.280 to look around the world to get the best person 0:18:38.760 --> 0:18:41.080 to run the I m F. Could be an American, 0:18:41.600 --> 0:18:45.040 it could be an Asian. Uh. There are several very 0:18:45.160 --> 0:18:49.800 plausible Asian candidates. UH. I think the time to end. 0:18:50.280 --> 0:18:53.960 Time has come to end this monopoly which the US 0:18:54.080 --> 0:18:56.399 runs the World Bank and the europe has run the 0:18:56.440 --> 0:18:59.040 i m F. That is an anachronism and it should 0:18:59.080 --> 0:19:02.359 be should need scarred. It is Adam Posen on your shortlist. 0:19:02.520 --> 0:19:06.360 Run the i m F. Very good. Fred Burston will 0:19:06.440 --> 0:19:08.800 leave with thank you so much, Fred Burston. He is 0:19:08.840 --> 0:19:12.960 a founder of the Institute for International Economics, the Peterson 0:19:13.080 --> 0:19:30.520 Institute for International Economics. It's math Wednesday. We can do 0:19:30.640 --> 0:19:32.679 that with John Norman of JP Morgan, who has been 0:19:32.760 --> 0:19:34.840 very kind to stay around with us. Given the market 0:19:34.960 --> 0:19:37.800 sell off, we see price up, yield down in bonds. 0:19:38.280 --> 0:19:40.080 I don't want to get into the Greek letters John 0:19:40.160 --> 0:19:45.280 Norman because it's summer, but I would suggest the systemic risk, 0:19:45.440 --> 0:19:49.800 the epsilon that is out there, is substantial. What do 0:19:49.960 --> 0:19:52.359 you see at the end of all these equations, What 0:19:52.440 --> 0:19:55.679 do you see in terms of the built in risks 0:19:55.880 --> 0:20:01.560 of the system. The risks are pretty substantial because you 0:20:01.640 --> 0:20:05.920 have what um is transpiring the manufacturing sector, which is 0:20:06.000 --> 0:20:08.400 kind of a near recession. And if there's a near 0:20:08.440 --> 0:20:11.120 recession in one sector, you really have to worry about 0:20:11.119 --> 0:20:16.000 contamination other sectors that are more resilient, like services and labors. 0:20:16.040 --> 0:20:18.399 Who This is basically the thin end of the wedge. 0:20:18.440 --> 0:20:20.200 I guess the risk is it just kind of widens 0:20:20.240 --> 0:20:23.680 out as terrorists go up and and the months pass, 0:20:23.960 --> 0:20:27.040 and and if that's the scenario, you have to think 0:20:27.080 --> 0:20:30.680 markets need to more cheap and still accommodate that. And that, 0:20:30.800 --> 0:20:33.119 to me is kind of the biggest connected markets just 0:20:33.200 --> 0:20:37.320 don't acknowledge that facturing, which is pretty worrisome spreads out. 0:20:37.640 --> 0:20:41.920 Are we correlated or is the idiosyncratic tone of a 0:20:42.040 --> 0:20:46.199 year still in place. Let's let's say the correlations are 0:20:46.359 --> 0:20:49.600 about as you would expect when recession risks arising, meaning 0:20:49.880 --> 0:20:55.240 anything that's considered cyclical, whether it's credit, um equities, the 0:20:55.280 --> 0:20:58.960 emerging market complex is going down, and and bond markets 0:20:59.000 --> 0:21:01.200 are rallying, and the its of currencies like yen and 0:21:01.280 --> 0:21:04.399 Swiss and and defensive commodities like older or rallying. I 0:21:04.480 --> 0:21:06.800 think I think the only correlation that's kind of broken 0:21:06.840 --> 0:21:09.320 down is what's going on in EM local rates. You know, 0:21:09.440 --> 0:21:12.080 EM local rates are behaving like developed market rates. They're 0:21:12.160 --> 0:21:14.960 rallying and stress increases, and that's something that's you know, 0:21:15.080 --> 0:21:17.520 kind of unusual to see that part of the e 0:21:17.720 --> 0:21:20.760 M complex pretty firm, even as global growth is moving down. 0:21:20.960 --> 0:21:22.960 So John, let's talk about that. What is happening. I 0:21:23.200 --> 0:21:26.000 understood the argument as people are anticipating a wiki dollar, 0:21:26.320 --> 0:21:28.639 they're not getting one, so what are they looking for 0:21:28.720 --> 0:21:31.760 in local rates? So when the M well, what they're 0:21:31.760 --> 0:21:34.199 assuming is that because rates going down in the d MS, 0:21:34.240 --> 0:21:36.600 that the the all the e M s can ease 0:21:36.640 --> 0:21:40.040 as well. And and that's typically not how it plays out. 0:21:40.119 --> 0:21:42.520 There's some ems that can ease because they have current 0:21:42.520 --> 0:21:45.760 accounts surpluss and therefore they're not subject to uh sudden 0:21:45.760 --> 0:21:48.960 shocks from big capital alflows when when stress is rising. 0:21:49.359 --> 0:21:52.520 But um, I would say that doesn't characterize all of em, 0:21:52.600 --> 0:21:54.520 right now, That's that's a way to talk about Asia. 0:21:54.560 --> 0:21:56.720 That's why Asia can cut rates. That's the way you 0:21:56.760 --> 0:22:00.040 can talk about maybe some EMS like Russia that of 0:22:00.119 --> 0:22:03.960 current conservices. But it's just not the place that countries 0:22:04.000 --> 0:22:07.040 like Turkey and South Africa can be cutting constantially when 0:22:07.080 --> 0:22:09.320 they're running deficits. And there are a lot of concerns 0:22:09.400 --> 0:22:12.399 around global growth. So I think you know, that's probably 0:22:12.400 --> 0:22:14.919 a place where you can see a bit more um 0:22:15.520 --> 0:22:18.160 recorrelation opening up where where maybe the e M bond 0:22:18.240 --> 0:22:21.399 markets are not going to rally as consistently with d 0:22:21.600 --> 0:22:24.440 M bond markets, and and maybe those e M bonds 0:22:24.680 --> 0:22:26.880 start to go up a bit as as global stock 0:22:26.920 --> 0:22:28.800 markets go down, and John, maybe we start to see 0:22:28.880 --> 0:22:32.119 some differentiation in global fixed income. Interestingly, in Europe was 0:22:32.160 --> 0:22:35.280 seeing a similar phenomenon take place. Italy, which is behaved 0:22:35.359 --> 0:22:38.680 like a d M e M credit rates hybrid, is 0:22:38.720 --> 0:22:41.320 actually behaving more like a developed market as well. You'ld 0:22:41.359 --> 0:22:43.800 tore in seven basis points on a tenure maturity today 0:22:43.920 --> 0:22:46.879 down ten basis points on a thirty year even against 0:22:46.960 --> 0:22:49.320 the backdrop that has decided to the risk off. So 0:22:49.440 --> 0:22:51.400 if your idea and e M right now is local 0:22:51.480 --> 0:22:53.360 rates need to back up and we need to see 0:22:53.440 --> 0:22:56.919 some differentiation again between EM and developed markets. Where does 0:22:56.920 --> 0:23:00.240 Italy fits into all of that? I think you look 0:23:00.280 --> 0:23:04.040 at it as uh quasi e M type product in 0:23:04.080 --> 0:23:06.200