Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm term Keene
Speaker 1: jay Leie. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot com, and of course on the Bloomberg. Let's
Speaker 1: bring in r Q Economic senior economist and founding partner.
Speaker 1: Good morning to Conrad. Let's just talk about whether these
Speaker 1: central banks are being preemptive or reactive. And I want
Speaker 1: to pick up on the New Zealand Central Bank this
Speaker 1: morning because I was going through the statement after seeing
Speaker 1: this fifty basis point cut. And you can file this
Speaker 1: under things you don't expect to read after a central
Speaker 1: bank just cut rates by fifty basis points, employment is
Speaker 1: around its maximum sustainable level, Inflation remains within our target
Speaker 1: range but below the two percent midpoint. Recent data recording
Speaker 1: improved employment and wage growth is welcome. You don't expect
Speaker 1: to read things like that after a central bank just
Speaker 1: cut rates fifty basis points when they only had a
Speaker 1: hundred and fifty basis points to play with to begin with, Conrad,
Speaker 1: what is going on? Well, I mean, I think what
Speaker 1: that shows is that these strange communications that are going
Speaker 1: along policy easings. The US doesn't have a monopoly on that,
Speaker 1: and we've had Uh. Yesterday we heard from from St.
Speaker 1: Louis FED President Bullard who said that the FED can't
Speaker 1: react to every trade dispute or every trade risk UM.
Speaker 1: But that's exactly what they said that they did last week.
Speaker 1: So I think markets are are are looking at at
Speaker 1: all of this and saying what is driving monetary policy
Speaker 1: not just in the US, but but but everywhere UM
Speaker 1: and and there's there might be some areas around the
Speaker 1: world where you could make a case for easier policy.
Speaker 1: Europe might be one of those areas. We have inflation
Speaker 1: that's very low in Europe. UM, we have growth that's
Speaker 1: lower and weaker than what the what the European Center
Speaker 1: Bank was projecting just a couple of months ago. UM.
Speaker 1: But here we have data that strong. You you you've
Speaker 1: pointed out what's what's going on in New Zealand, where
Speaker 1: we have UM strong labor markets. We have inflation that's
Speaker 1: closer to target in these areas than it is in
Speaker 1: Europe UM, and central banks are cutting rates because they're
Speaker 1: trying to offset some some policy risk UM. And then
Speaker 1: the other point that you made, there's not a lot
Speaker 1: of a lot of the FED has more room than
Speaker 1: other central banks. But um, the question is why are
Speaker 1: they using ammunition now? Is it a waste of ammunition?
Speaker 1: And I think what's going on in markets is we
Speaker 1: talked about the yel curve and the rallies in the
Speaker 1: long end, is that markets are looking forward to what
Speaker 1: comes next once these banks, once the central banks use
Speaker 1: up the ammunition as limited as is that they have,
Speaker 1: what do they do next? And they what they do
Speaker 1: next is QUEI and I think that's what's driving down
Speaker 1: long term yields. Well, let's talk about what's run in
Speaker 1: front of our face right now. It's what the Federal
Speaker 1: Reserve does in the here and now. There was a
Speaker 1: belief over the last few months that they would move
Speaker 1: to a more preemptive stance, perhaps move early. We've heard
Speaker 1: the arguments from several officials do more with less. That
Speaker 1: was what led to many people thinking perhaps we get
Speaker 1: a fifty basis point cut. Didn't get one. Then the
Speaker 1: conversation shifted last week. Here we have a central bank
Speaker 1: that has no choice but to underwrite the trade war.
Speaker 1: And then Jim Bullard happened yesterday the president of the
Speaker 1: Saint Louis FED and he sounded really reluctant to get
Speaker 1: drawn into that. What do you think about that, Stantce Conrad,
Speaker 1: and how risky it could be if the Federal Reserve
Speaker 1: decides that actually it's not its place to underwrite the
Speaker 1: trade war. I think that's usually problematic. I mean, particularly
Speaker 1: if the if the data continue on the path that
Speaker 1: we've seen. I mean, I think don't think there's anyone
Speaker 1: that can deny that. UM, that risks have gone up
Speaker 1: with the ratcheting up in the trade war. UM, the
Speaker 1: likelihood that businesses might be more reticent on investing and
Speaker 1: potentially hiring than they were previously. If this trade war
Speaker 1: continues to to escalate. UM, those risks have gone up.
Speaker 1: But what do we know so far? We know that
Speaker 1: businesses on the hiring fund, we still have have pretty
Speaker 1: solid levels of business demand. The alter it that came
Speaker 1: out yesterday, albeit for June. UM, but the more up
Speaker 1: to date data that we've had from the n f
Speaker 1: I B, we have very high levels of job openings.
Speaker 1: So businesses aren't pulling back on hiring. UM. The consumer
Speaker 1: seems to be in great shape. Inflation is not that
Speaker 1: far off. And you remember back at the main meeting
Speaker 1: when the FED made a big deal Pal in his
Speaker 1: press conference in the minutes of the meeting about trim
Speaker 1: meetings exactly he advised it on Friday, it's two percent.
Speaker 1: So inflation is close to target. The labor market is
Speaker 1: doing fine. We do have consumed concerns on the business
Speaker 1: front with business investment um. But it just seems to
Speaker 1: me that the argument for preemption is too early. O
Speaker 1: B overcome by events. I'm looking at the data screen
Speaker 1: that tells me Chairman Paul is going to be overcome
Speaker 1: by events. Where where in your mind, just using his
Speaker 1: one benchmark, the tenure two point ones excuse me, one
Speaker 1: point six four percent, where does Jerome Powell become overcome
Speaker 1: by market events? Well, I hope what the FED does
Speaker 1: is realize that that their role in driving these moves.
Speaker 1: I think it's problematic for markets to move based on
Speaker 1: the expectation for FED action, whether or not that that
Speaker 1: whether or not that's justified, and then for the FED
Speaker 1: to look at the markets and say, well, the markets
Speaker 1: are telling us that the economy is weak. Well to
Speaker 1: your inflation point, are you saying the service sector inflation
Speaker 1: will not diminish down to what goods inflation is is
Speaker 1: a lot of people are are forecasting. I don't think so,
Speaker 1: and I will still to think that. I also think
Speaker 1: that what what if we're talking about the good side. UM. Firstly,
Speaker 1: on the producer price front, those prices are rising much
Speaker 1: more rapidly on consumers, so there's the potential for some
Speaker 1: feed through there. And the tariffs have an impact on
Speaker 1: goods prices, not yet, but eventually they will. If if
Speaker 1: we do get this additional ten percent tariff on two
Speaker 1: billion dollars of imports from China, that will have an impact,
Speaker 1: more of an impact than I think the first round
Speaker 1: of tariffs had um and so goods prices will will
Speaker 1: be pressured higher. But the point is the inflation environment,
Speaker 1: even with goods price inflation real aatively subdued um, it
Speaker 1: has been driven by the services side. Inflation is running
Speaker 1: pretty close to two percent on on many measures of
Speaker 1: of kind of underlying prices. So um, you know, I
Speaker 1: I think, based on the data, it's really hard to
Speaker 1: make to make the argument. I think what's happening with
Speaker 1: the FED is that the markets are anticipating them cutting rates. UM.
Speaker 1: The markets on on the risk asset side. The risky
Speaker 1: assets are are are skittish, and the Fed just doesn't
Speaker 1: feel like it's in a position to disappoint markets in
Speaker 1: this kind of environment. A Conrad right to catch you
Speaker 1: out with your Conrad the quadraus dropping by the studio.
Speaker 1: To get us up to speed on what's happening worldwide
Speaker 1: are th Q Economic Senior Economist and founding partner. Let's
Speaker 1: bring in David Pole. Shall we Epic Investment Partners co
Speaker 1: Chief investment Officer and portfolio manager. Can we begin in Europe? David?
Speaker 1: While we've just heard from a series of banks through
Speaker 1: the morning, Commas Bank the goal of lifting profit increasingly
Speaker 1: ambitious UNI Credit slashing its full year revenue target by
Speaker 1: a billion a b mm row adding to all of this,
Speaker 1: saying it's margins might be hit. These guys are struggling
Speaker 1: with low rates. Will any of this get any better
Speaker 1: anytime soon? Probably not, unfortunately. But the UH What really
Speaker 1: matters though is economic growth because banks are economically sensitive.
Speaker 1: This is this really matters. You have to have growth.
Speaker 1: Monetary policy for all it was trying to do, has
Speaker 1: run out of gas, and European companies are just not
Speaker 1: borrowing there is no economic growth and it's not just
Speaker 1: a matter of rates. You need to have more loan
Speaker 1: volume and they're not getting than jenniferro Why did we
Speaker 1: hear that from the CFO of Commerce Bank this morning
Speaker 1: that like it's like no big deal. This is the
Speaker 1: really problem with the business strategy for the European lenders
Speaker 1: at the moment. They refocus the business models and guess
Speaker 1: how they refocused the domestically and what's happening domestically in
Speaker 1: Europe right now. Nothing. It's really really not good. And
Speaker 1: what also strikes me and it's absolutely stunning. Matt Miller,
Speaker 1: our colleague, caught up with the Commerce Banks CFO a
Speaker 1: little bit earlier today and a complacency coming from German
Speaker 1: politicians and even corporate leaders is absolutely stunning. The best
Speaker 1: case at the moment is the economy is staminating. The
Speaker 1: worst cases were already in recession in a place like Germany,
Speaker 1: and yet when you speak to these individuals you hear
Speaker 1: things like we are in good shape. I mean for Germany,
Speaker 1: they really have an export economy. They've already been hit
Speaker 1: by China. Uh. To refocus domestically is kind of pointless
Speaker 1: because the domestic economy just isn't growing. Do you suggest
Speaker 1: that the international banks that you know so well, David
Speaker 1: Prul in the United States could really take advantage of that?
Speaker 1: Do the is there a desire there to expand abroad
Speaker 1: and take market shire? Uh? They they are taking advantage
Speaker 1: in capital markets, but they're not going to expand through Europe.
Speaker 1: That's not where the growth is. So JA is really
Speaker 1: the focus in Latin America. With the limited time we
Speaker 1: have with you, banks lagged last year. They're all trading
Speaker 1: it like a nine multiple book. You know data, how
Speaker 1: cheap is it? Once in a lifetime on the U
Speaker 1: S banks. So so banks on average had double digit
Speaker 1: growth and profits and dividends. If you add them up,
Speaker 1: you're in double digits plus share buy back. The reason
Speaker 1: they underperformed last year is their multiples compressed. So we
Speaker 1: had a market that went from like fifteen times in
Speaker 1: the Q four last year to eighteen and banks went
Speaker 1: from fourteen to ten on a multiple basis. So basically
Speaker 1: the consensus for you is that banks can't continue to
Speaker 1: earn money. We're going into recession. Credit quality is going
Speaker 1: to deteriorate. And by the way, the number one metric
Speaker 1: for a bank is credit quality. So when we look
Speaker 1: at banks today, their true bargain credit is fantastic because
Speaker 1: consumer credit is strong, job growth is good, wages have
Speaker 1: been okay, there has been no deterioration. So they are
Speaker 1: basically having record earnings and returning a hundred percent of
Speaker 1: profits to shareholders. You can get a double digit return
Speaker 1: even if the multiple stays at end times earnings in
Speaker 1: the market at eighteen. But there's a massive spread between
Speaker 1: what they're delivering and how they're performing in the stock market.
Speaker 1: So we need to talk about why they're performing this
Speaker 1: when the stock market. I caught up with Credit Sweet
Speaker 1: this week and said, counter intuitively, this is the sector
Speaker 1: that is at most risks from the trade war. Why
Speaker 1: because every time it bubbles up, rates drop aggressively, and
Speaker 1: what gets beaten up on that day it's banks. And
Speaker 1: as you point out, David, what they've done so well
Speaker 1: over the last decade has changed the business model, fee
Speaker 1: based recurring revenue away from just spread lending. The business
Speaker 1: model has changed, but the investor bias hasn't shifted, and
Speaker 1: I'm just trying to work out whether it does and
Speaker 1: when it will. Right right, I mean, the knee jerk
Speaker 1: reaction is when the yield curve flattens, you sell the banks.
Speaker 1: It turns out they're not that sensitive to the yield
Speaker 1: curve anymore. Most of the loans are variable. The fee
Speaker 1: based business is becoming a big so for them, the
Speaker 1: profits have continued. Um, I hate to say this, but
Speaker 1: probably the turning point would be a recession where banks
Speaker 1: do better in a recession than other economically sensitive areas,
Speaker 1: and they would given what has happened to them. Right, So, David,
Speaker 1: that makes the argument of buying the financial is really
Speaker 1: difficult for investors. Why don't want to own a sector
Speaker 1: until we come into a recession case? So the reason
Speaker 1: right now is that bank yields are superior in a
Speaker 1: market where yields are going down and the alternatives are
Speaker 1: really expensive. Owning consumer staples, telecoms or utilities, you're paying
Speaker 1: twenty five times earnings for companies with almost no growth. Uh,
Speaker 1: And here you are with banks with a three or
Speaker 1: four percent dividend. So it's very attractive. Please come back,
Speaker 1: come back when yields go up, you know, really appreciate
Speaker 1: and I'll bring in the next guest. We esteemed to
Speaker 1: give you without question. The historical perspective of China and
Speaker 1: the United States. You can only do that with Fred Bergston,
Speaker 1: the founder of the Peterson Institute for International Economics, and
Speaker 1: he is definitive on diplomacy and expecting the unexpected. As
Speaker 1: we speak to China, Fred, we are thrilled to have
Speaker 1: you on today. What does President Trump not know? With
Speaker 1: all your decades of experience of international economics in China?
Speaker 1: What's the unexpected? For President Trump? He overestimates his own
Speaker 1: ability to get the Chinese to capitulate to his demands.
Speaker 1: He fails to recognize the need to mobilize America's allies
Speaker 1: to work with him in the confrontation with China, and
Speaker 1: therefore he risks triggering a really major and continuing trade
Speaker 1: and now currency war that could really tank both our
Speaker 1: own economy and the world economy. We see Fred Burkston
Speaker 1: this morning, yields ever lower. We see central banks on
Speaker 1: an attact basis slashing interest rates as well. City Group
Speaker 1: Asia published a short note on United States intervention in
Speaker 1: the currency markets? Are we at the point where we
Speaker 1: get less coordinated intervention by the Bank of Japan to
Speaker 1: weaken the end or by US Treasury to adjust the dialogue?
Speaker 1: There's a risk of that. UH. When the United States
Speaker 1: designates China as a currency manipulator, and it did two
Speaker 1: days ago, when there is no evidence that China is manipulating,
Speaker 1: it really the whole fabric of monetary cooperation that has
Speaker 1: been so important for the last thirty or forty years.
Speaker 1: There are agreements in the G twenty and the G
Speaker 1: seven and bilaterally between the United States and other key
Speaker 1: allies the Japanese, the Europeans and others UH to coordinate
Speaker 1: and consult closely before operating in the currency markets. When
Speaker 1: the US designates China manipulator with no evidence, and in fact,
Speaker 1: when China has been operating on the other side of
Speaker 1: the market, it just causes our allies and treasuries and
Speaker 1: central banks around the world to shake their heads ask
Speaker 1: what the Americans are doing. Obviously know that it's President
Speaker 1: Trump forcing his Secretary of the Treasury to make a
Speaker 1: designation that has no basis in fact, and therefore undermines
Speaker 1: any prospect for really cooperative and effective behavior in the
Speaker 1: currency markets. Who are more broadly so Fred. The big worry,
Speaker 1: of course, and the ultimate irony of all of this,
Speaker 1: is that actually the administration would quite like is for
Speaker 1: the Chinese to manipulate the currency just to continue manipulating
Speaker 1: the currency stronger, which is what they've been doing for
Speaker 1: the last year or so. Fred, I think a question
Speaker 1: for a lot of our listeners is whether the Chinese,
Speaker 1: by allowing it to weaken on Monday, sent a signal
Speaker 1: to the administration that they may well be prepared to
Speaker 1: use the currency to weaponize the currency. Fred, what are
Speaker 1: your thoughts on that. I think one has to really
Speaker 1: nuanced that carefully. Well, please do. Yeah, I think the
Speaker 1: Chinese have been quite careful not to manipulate in the
Speaker 1: sense of driving their currency down. They know that would
Speaker 1: be objectionable and would justifiably trigger a counter response. However,
Speaker 1: they have undone their manipulation, which you point out has
Speaker 1: been in our favor. They have been intervening to keep
Speaker 1: their currency from weakening. That's been very much to our advantage.
Speaker 1: They have now undone that, at least to some extent,
Speaker 1: let the market forces that are driving their currency down
Speaker 1: prevail at least to some extent. And yes, we use
Speaker 1: that to respond to Trump's trade threats and trade actions,
Speaker 1: but one has to distinguish between that permitting market forces
Speaker 1: to drive their currency down a bit. That's very different
Speaker 1: from there taking overt action intervening to drive it down.
Speaker 1: As you say, they've been manipulating. To use the term
Speaker 1: in a colloquial says in our direction. Uh, and Trump
Speaker 1: is actually asking them to manipulate more to keep their
Speaker 1: currency from weakening. Rather ironic, you might say. But they
Speaker 1: can encounter and do so in a justifiable way by
Speaker 1: simply letting the market forces, which are certainly pushing the
Speaker 1: RNN be in a weakening direction, to prevail, at least
Speaker 1: to some extent. So Fred, we have to understand though,
Speaker 1: whether the end result is the same. So they move
Speaker 1: away from constraining the currency. They don't move towards actively
Speaker 1: weakening the currency, but moving from constraining to tolerating a
Speaker 1: weaker currency that still sends a signal. And I'm just
Speaker 1: wondering whether they continue to send that signal in the
Speaker 1: coming weeks, or whether that strategy is too big a
Speaker 1: double edged sword for the Chinese to really lean on. Well,
Speaker 1: I think they may continue that, but only to a
Speaker 1: limited extent. For the reason you imply, the Chinese are
Speaker 1: horrified by the thought of a free fall or a
Speaker 1: sharp plunge in the exchange rate of their currency. They
Speaker 1: experienced that in it had very negative and worrisome effects
Speaker 1: on their own economy. It triggered some capital flight out
Speaker 1: of China. They want to avoid that at all costs.
Speaker 1: So to whatever extent they may weaponize, as you say,
Speaker 1: the exchange rate by letting it weaken the offset Trump's tariffs.
Speaker 1: I think they would do so only to a very
Speaker 1: limited extent, and though it would compensate to some extent
Speaker 1: for Trump's tariffs, I don't think we should fear that
Speaker 1: it will have a massive effect in improving their competitive position.
Speaker 1: Fred Burst in one final question, Madam the guard has
Speaker 1: had a tenure on the watch at the i m F.
Speaker 1: She wanders off to Frankfurt for you know, a crisis
Speaker 1: free era at the ECB. Who's the right person to
Speaker 1: take over the I m F. Is a time to
Speaker 1: look someplace other than Europe. I think it is time
Speaker 1: to look around the world to get the best person
Speaker 1: to run the I m F. Could be an American,
Speaker 1: it could be an Asian. Uh. There are several very
Speaker 1: plausible Asian candidates. UH. I think the time to end.
Speaker 1: Time has come to end this monopoly which the US
Speaker 1: runs the World Bank and the europe has run the
Speaker 1: i m F. That is an anachronism and it should
Speaker 1: be should need scarred. It is Adam Posen on your shortlist.
Speaker 1: Run the i m F. Very good. Fred Burston will
Speaker 1: leave with thank you so much, Fred Burston. He is
Speaker 1: a founder of the Institute for International Economics, the Peterson
Speaker 1: Institute for International Economics. It's math Wednesday. We can do
Speaker 1: that with John Norman of JP Morgan, who has been
Speaker 1: very kind to stay around with us. Given the market
Speaker 1: sell off, we see price up, yield down in bonds.
Speaker 1: I don't want to get into the Greek letters John
Speaker 1: Norman because it's summer, but I would suggest the systemic risk,
Speaker 1: the epsilon that is out there, is substantial. What do
Speaker 1: you see at the end of all these equations, What
Speaker 1: do you see in terms of the built in risks
Speaker 1: of the system. The risks are pretty substantial because you
Speaker 1: have what um is transpiring the manufacturing sector, which is
Speaker 1: kind of a near recession. And if there's a near
Speaker 1: recession in one sector, you really have to worry about
Speaker 1: contamination other sectors that are more resilient, like services and labors.
Speaker 1: Who This is basically the thin end of the wedge.
Speaker 1: I guess the risk is it just kind of widens
Speaker 1: out as terrorists go up and and the months pass,
Speaker 1: and and if that's the scenario, you have to think
Speaker 1: markets need to more cheap and still accommodate that. And that,
Speaker 1: to me is kind of the biggest connected markets just
Speaker 1: don't acknowledge that facturing, which is pretty worrisome spreads out.
Speaker 1: Are we correlated or is the idiosyncratic tone of a
Speaker 1: year still in place. Let's let's say the correlations are
Speaker 1: about as you would expect when recession risks arising, meaning
Speaker 1: anything that's considered cyclical, whether it's credit, um equities, the
Speaker 1: emerging market complex is going down, and and bond markets
Speaker 1: are rallying, and the its of currencies like yen and
Speaker 1: Swiss and and defensive commodities like older or rallying. I
Speaker 1: think I think the only correlation that's kind of broken
Speaker 1: down is what's going on in EM local rates. You know,
Speaker 1: EM local rates are behaving like developed market rates. They're
Speaker 1: rallying and stress increases, and that's something that's you know,
Speaker 1: kind of unusual to see that part of the e
Speaker 1: M complex pretty firm, even as global growth is moving down.
Speaker 1: So John, let's talk about that. What is happening. I
Speaker 1: understood the argument as people are anticipating a wiki dollar,
Speaker 1: they're not getting one, so what are they looking for
Speaker 1: in local rates? So when the M well, what they're
Speaker 1: assuming is that because rates going down in the d MS,
Speaker 1: that the the all the e M s can ease
Speaker 1: as well. And and that's typically not how it plays out.
Speaker 1: There's some ems that can ease because they have current
Speaker 1: accounts surpluss and therefore they're not subject to uh sudden
Speaker 1: shocks from big capital alflows when when stress is rising.
Speaker 1: But um, I would say that doesn't characterize all of em,
Speaker 1: right now, That's that's a way to talk about Asia.
Speaker 1: That's why Asia can cut rates. That's the way you
Speaker 1: can talk about maybe some EMS like Russia that of
Speaker 1: current conservices. But it's just not the place that countries
Speaker 1: like Turkey and South Africa can be cutting constantially when
Speaker 1: they're running deficits. And there are a lot of concerns
Speaker 1: around global growth. So I think you know, that's probably
Speaker 1: a place where you can see a bit more um
Speaker 1: recorrelation opening up where where maybe the e M bond
Speaker 1: markets are not going to rally as consistently with d
Speaker 1: M bond markets, and and maybe those e M bonds
Speaker 1: start to go up a bit as as global stock
Speaker 1: markets go down, and John, maybe we start to see
Speaker 1: some differentiation in global fixed income. Interestingly, in Europe was
Speaker 1: seeing a similar phenomenon take place. Italy, which is behaved
Speaker 1: like a d M e M credit rates hybrid, is
Speaker 1: actually behaving more like a developed market as well. You'ld
Speaker 1: tore in seven basis points on a tenure maturity today
Speaker 1: down ten basis points on a thirty year even against
Speaker 1: the backdrop that has decided to the risk off. So
Speaker 1: if your idea and e M right now is local
Speaker 1: rates need to back up and we need to see
Speaker 1: some differentiation again between EM and developed markets. Where does
Speaker 1: Italy fits into all of that? I think you look
Speaker 1: at it as uh quasi e M type product in
Speaker 1: the sense that what it embeds is the racial risk
Speaker 1: and credit risk. And there is more credit risk in
Speaker 1: Italian bonds relative to other d M bonds simply because
Speaker 1: the fiscal position and the research that the country is in.
Speaker 1: So I agree with you. I think it is we
Speaker 1: are maybe setting up for a bit of a turney
Speaker 1: point where where Italian bonds just don't keep pace with
Speaker 1: um with with bonds. And maybe there's even directional decorrelation
Speaker 1: where the bun yoke goes down and the btp yo
Speaker 1: goes up. How should American listeners, and particularly American Wall
Speaker 1: Street listeners interpret the decline of an ever greater negative
Speaker 1: yields in Germany? I think they should see that as
Speaker 1: a combination of fear and scarcity. The fear is just
Speaker 1: that Europe is moving from south trend growth into this
Speaker 1: recession that I won't be able to extract itself from.
Speaker 1: And the scarcity argument is that the ECB owns one.
Speaker 1: They're the German bond market. So with investors who were
Speaker 1: fear of well just can't find a paper to buy,
Speaker 1: or rather as they as they buy at the rates
Speaker 1: just go every more negative. Are you and Lon Lewis
Speaker 1: still Jean Louise? Are you still in speaking terms? After
Speaker 1: his shaking, shaking, his earth shaking paper of ten days ago.
Speaker 1: I know James Diamond called me last night said be
Speaker 1: sure to asked John about this. Jamie was concerned. I mean,
Speaker 1: lowis comes out not with the forecast, folks, but with
Speaker 1: a model of how we get a vector down to
Speaker 1: a zero percent tenure. How did you digest that, Mr Norman. So,
Speaker 1: the idea behind that is with with yields great around
Speaker 1: the world, there's um a drive for anything with the
Speaker 1: positive interest rate, and that's one of the mechanisms by
Speaker 1: which US rates could go down to even lower in
Speaker 1: the tenure. I think where the analogy breaks down a
Speaker 1: little bit is thinking about that rally in US rates
Speaker 1: as a Japanization effect, because a Japanization effected me is
Speaker 1: about rates that go down to zero because the country
Speaker 1: is in deflation and it also fails to generate GDP growth.
Speaker 1: And I don't think the US is even close to that.
Speaker 1: So I would kind of distinguish between, you know, what
Speaker 1: happens from the market, which can look incredibly Japanese because
Speaker 1: investors are scared, and and what's happening in the economy,
Speaker 1: which could actually be better. Brilliant defense. John Norman, thank
Speaker 1: you so much, greatly appreciate your time this morning. Ahead
Speaker 1: of all of cross asset analysis at JP, I'm work
Speaker 1: helping us kind of navigate what we can expect with
Speaker 1: all things equity. Welcome our good friend Gina Martin Adams.
Speaker 1: She is the chief Equity strategist for Bloomberg Intelligence. She
Speaker 1: joins us here in our Bloomberg Interactive Broker studio. Gina,
Speaker 1: thanks so much for making the long walk up to
Speaker 1: our studio exactly, so give us a sense of kind
Speaker 1: of how you're framing the vault hility we've seen in
Speaker 1: the equity markets that just this week. Yeah, well, I
Speaker 1: think it's um, you know, reflective of a market that
Speaker 1: certainly is weakening very substantially on a technical basis. And
Speaker 1: it just to put things in perspective, the three percent
Speaker 1: to client on Monday, three percent to clients are very
Speaker 1: very rare in the broader equity market on a on
Speaker 1: a single day basis, and they usually only occur in
Speaker 1: the midst of corrections that exceed ten percent. So we
Speaker 1: put it in an out a note on Tuesday morning saying, look,
Speaker 1: it's it's highly unlikely that we're going to shake this off.
Speaker 1: There have only been two instances, indeed, in which a
Speaker 1: three percent correction was not in the midst of a
Speaker 1: ten percent or a greater correction since two thousand nine
Speaker 1: percent of the time, it means you're in for a
Speaker 1: wild ride. We think we're still in for a wild ride.
Speaker 1: What's really interesting today is initially oversees the interpretation of
Speaker 1: these moves by global central banks, it's pretty positive. And
Speaker 1: then as soon as the traders came into the US
Speaker 1: this morning at all, sort of the floor fell out
Speaker 1: from from under the market. And I think that's reflective
Speaker 1: of the current sentiment, which is, no matter what monetary
Speaker 1: policymakers do, we're more concerned about earnings right now, and
Speaker 1: until there is some form of cooperative resolution with respect
Speaker 1: to trade, even if it's in a baby step forward,
Speaker 1: the market is going to remain very very volatile. Right
Speaker 1: So it's trade is trade, it's trade, and it's I
Speaker 1: think as we get through pretty much this quarters earnings,
Speaker 1: what did you hear from a lot of the companies
Speaker 1: as it relates to how are the trade uncertainties impacting
Speaker 1: their businesses? There any themes you guys have picked up? Yeah,
Speaker 1: so there's there are a lot of themes. I mean,
Speaker 1: I would say that the biggest theme is that it's
Speaker 1: just more about China growth as opposed to tariffs so far,
Speaker 1: and I think that that's largely because you know, the
Speaker 1: the tariffs on the products that are getting imported from
Speaker 1: China are in companies that are generally pretty flexible. They
Speaker 1: imported a lot before the tariffs were put in place. Um,
Speaker 1: there's a lot of supply chain angst in the tech
Speaker 1: sector with respect to China. But most of this is
Speaker 1: really more about slowing global growth, and it is specifically
Speaker 1: about tariffs. So it's more about the byproduct or the
Speaker 1: snowball effective tariffs on global growth, which is suppressing economic activity.
Speaker 1: Ga mar names I know you know you don't speak
Speaker 1: to Carda, which is probably how do you fold anyone's
Speaker 1: economic forecast in equity analysis? Now? Do you just take
Speaker 1: it right to a interpretation of what the revenue lines
Speaker 1: are going to be? What do you do with economic
Speaker 1: forecast right now? Well, as you know, Tom, I was
Speaker 1: an economist before I became a strategist, and I spent
Speaker 1: a good five years. Yeah, we were trying to keep
Speaker 1: it quiet that we need to review. I will say
Speaker 1: it's an incredible challenge because I had to spend a
Speaker 1: good five years trying to figure out, you know, what
Speaker 1: really is relevant from the economic data of our markets,
Speaker 1: and it truly is a subset of indicators that actually
Speaker 1: matter for stocks, and what matters are things like initial claims,
Speaker 1: the unemployment rate, interest rates, and absolutely order flow. And
Speaker 1: this the orders are the weakest component of the economic
Speaker 1: outlook right now, and that is definitely weighing on earnings
Speaker 1: expectations for companies. But they're not one and the same.
Speaker 1: Stocks are not representative of the economy all the time, um,
Speaker 1: and the economy is not always representative of stocks. And
Speaker 1: is it your sense that the Federal Reserve? Uh, does
Speaker 1: the Federal Reserve have enough arrows in a quiver to
Speaker 1: kind of help the equity markets in a meanful way
Speaker 1: going forward? Yeah? I know so, I do think so.
Speaker 1: I don't think you need to dismiss the FED, say,
Speaker 1: certainly what happens when liquidity increases. When the FED moves
Speaker 1: to an easier stances, you naturally have higher valuation multiples
Speaker 1: that result. The problem is that there is that offset.
Speaker 1: The FED can only do so much because, yes, you
Speaker 1: have to rely on the transmit connects transmission mechanism of
Speaker 1: monetary policy to actually effectively create some sort of better
Speaker 1: economic growth outlook. And many have argued that that that
Speaker 1: policy is broken. But the other side of this is,
Speaker 1: no matter what you think about the broader economy, when
Speaker 1: liquid it is ample, it's going to inflate asset price valuations.
Speaker 1: So the offset is, yes, valuations may expand, but that
Speaker 1: valuation expansion can only do so much in the face
Speaker 1: of deteriorating earnings on the other side of the price equation.
Speaker 1: So I think the Fed can do some. Can they
Speaker 1: manufacture economic growth out of nowhere? No, um, but they
Speaker 1: can help to soothe the pain of what is becoming
Speaker 1: a pretty negative outlook or at least a stagnant outlook
Speaker 1: for earnings. Jenna, thank you for the updates. The last
Speaker 1: number of days or team has been extraordinary. How many
Speaker 1: people do you have down in the salt mine on
Speaker 1: the equity strategy team we have twelve Yeah, no, not
Speaker 1: all ex economists, thank god, not all, not all carrying
Speaker 1: my sins. But on the broad bi team these three
Speaker 1: now yeah, GM Martin Adams, thank you so much. It's
Speaker 1: been hugely valuable just to call upon Bloomberg Intelligence. Thanks
Speaker 1: for listening to the Bloomberg Surveillance podcast. Subscribe right and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keene before
Speaker 1: the podcast, you can always catch us worldwide. I'm Bloomberg Radio,