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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

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Speaker 1: with Jonathan Ferrell and Lisa Brownowitz. Daily we bring you

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Speaker 1: insight from the best and economics, finance, investment, and international relations.

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Speaker 1: Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,

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Speaker 1: and of course on the Bloomberg terminal. Liz Trust stepping

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Speaker 1: down really highlighting though the tenuousness of an inflationary environment

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Speaker 1: for political parties globally, and our special coverage we're on

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Speaker 1: until Tottenham wins again. Right then to the right now.

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Speaker 1: We want to just get a sense though honestly, it

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Speaker 1: is important to put this into perspective, and Michael Purvis

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Speaker 1: can help us do that just briefly before diving back

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Speaker 1: into the political fright in the United Kingdom. Michael Purvis

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Speaker 1: of Talbak Capital, as you've been passing through all of

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Speaker 1: the political discussion, how much of a message do you

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Speaker 1: take back to markets to this idea that they are

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Speaker 1: in charge and they're imposing fiscal discipline. Well, I think

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Speaker 1: there's a there's a really important overarching theme here that

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Speaker 1: we can divine from this whole Trust episode here, which

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Speaker 1: is that, look, the ft has been on this sort

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Speaker 1: of America first monetary policy that has been of course

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Speaker 1: very hawk is as it needs to tamp down inflation

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Speaker 1: here in the US. But when you have fiscal experiments

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Speaker 1: overseas that are uh that trust you know, put forward,

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Speaker 1: and that are that are not sensible policies, the the

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Speaker 1: the what it means for global risk assets is really

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Speaker 1: really sort of magnified here. So you have a collision

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Speaker 1: that the what what I'm what I'm saying here is

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Speaker 1: is that is that the range of big weird outcomes

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Speaker 1: for the markets is much higher, and you have this

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Speaker 1: collision of bad visible policy with what the FED is

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Speaker 1: doing right now. I think that's that's very very very

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Speaker 1: very important. I mean, I think it's a fair statement

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Speaker 1: that central banks generally like low currency balls here right

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Speaker 1: It just makes their job easier. And we're in a

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Speaker 1: state of where, you know, we can talk about rate

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Speaker 1: fall being super high, and of course equity balls high,

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Speaker 1: but f X balls are are are super super high here,

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Speaker 1: and it it ultimately makes the central bank, you know,

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Speaker 1: we're all grappling through wind. Central banks are going to

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Speaker 1: be more you know, sort of not let around the

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Speaker 1: norse by inflation and hydrocarbons and when they can actually

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Speaker 1: lead as opposed to be reactive. And these types of

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Speaker 1: situations only makes Central banks, whether it's the BOE or

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Speaker 1: even spill over to the bed more reactive. Michael, that's

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Speaker 1: right where I wanted to go. Now. Sharing to join

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Speaker 1: us later in this hour with a real focus on

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Speaker 1: the United Kingdom economy. But as Mr Purvis Folks talks

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Speaker 1: about ball and of course his careful study of the

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Speaker 1: Pacific Rim and a d X Y, it is thrilling

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Speaker 1: to bring you this morning, Nick benn and Brook. He

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Speaker 1: is Wells Fargo international economist, but he viscerally understands a

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Speaker 1: Pacific Rim with his heritage of New Zealand and far

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Speaker 1: more is the only person on the planet who has

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Speaker 1: been award winning in foreign exchange in back to back years. Nick,

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Speaker 1: I guess it's good you're not an f X strategist.

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Speaker 1: This morning Purvis talks about f X vol give us

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Speaker 1: the vault we're gonna see on British pounds, Sterling, Well,

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Speaker 1: I think certainly for the next few days we can

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Speaker 1: expect the volatility to continue. It might actually be in

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Speaker 1: the upwards direction because you could not give it political

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Speaker 1: and policy uncertainty is reducing in the United Kingdom, and

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Speaker 1: so we might see a bit of a relief and

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Speaker 1: go back towards the sort of even up to the

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Speaker 1: one fourteen level UM. So, you know, I think we're

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Speaker 1: going to see some fair of the rup move over

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Speaker 1: the months a hid you know, I think it's a

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Speaker 1: settles will start to see UH markets calmed down a little,

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Speaker 1: and we might actually start see the pound when it's

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Speaker 1: faced with the reality of the UK economy, the pound

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Speaker 1: won't start to give back some of those games nick

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Speaker 1: to what Michael Purvis alluded to. And if it is

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Speaker 1: written in crisis, maybe it's Hungry in crisis, maybe it's

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Speaker 1: UH Thailand in crisis. Will Jerome Powell need to blink

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Speaker 1: because of the international economics and politics we observe, No,

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Speaker 1: I don't think you will have to blink. I mean

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Speaker 1: we would still expect the seventy five basis point increase

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Speaker 1: at that November meeting from from the Field Reserves and

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Speaker 1: and as one of your and you know, I think

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Speaker 1: we still look for a fifty and eventually getting to

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Speaker 1: five on the FED funds rate. I think the UK

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Speaker 1: UM events are instructive in the sense of it does

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Speaker 1: come back as one of your previous gifts said, how

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Speaker 1: sort of unorthodox or unusual are the fiscal policies? And um,

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Speaker 1: you know they were fairly un orthodox in the case

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Speaker 1: of the UK, just in terms of the magnitude in

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Speaker 1: the way that they were delivered. And it doesn't look

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Speaker 1: like here in the US, for example, or even across

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Speaker 1: the Eurozone in general, Um, that we're going to see

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Speaker 1: such expensive fiscal policies. So for the major markets, I

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Speaker 1: think it won't be an issue, um. But for the

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Speaker 1: markets that you mentioned, the likes of Hungary, um in Thailand, UM,

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Speaker 1: they may face some challenges. Michael Purvis is still with us,

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Speaker 1: and Michael, I'd love to get your take and what

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Speaker 1: Nick is talking about that there is some more stability,

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Speaker 1: but the stability speaks to a more significant downturn at

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Speaker 1: least in the short run, based on the lack of borrowing.

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Speaker 1: How much are you factoring that into some of your

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Speaker 1: outcomes in your thesis. Look, I think I think what

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Speaker 1: this whole trust episode really sort of reiterates is that

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Speaker 1: we need kind of boring policy, if you will, right,

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Speaker 1: And I think there's this inevitable tension, um, where where

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Speaker 1: you know, like a politician's biggest and one of the

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Speaker 1: biggest enemies is surging food and energy inflation UM, and

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Speaker 1: there's always sort of attempation to put in novel, novel

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Speaker 1: fiscal policies when when they're not when they're actually the

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Speaker 1: worst things for for for for the situation. So we

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Speaker 1: kind of need to see things get a lot more boring.

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Speaker 1: But I agree with my co guests that I think

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Speaker 1: if if for the major markets here, if things can

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Speaker 1: be a little bit more static and stable, then more

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Speaker 1: of the blow ups we will be relevated, relegated to

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Speaker 1: more than niche the niche markets here. But I think,

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Speaker 1: I think if the takeaway here from this trust um

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Speaker 1: situation is that she's gone, and we're going to go

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Speaker 1: to a much you know, more technocratic and and and

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Speaker 1: less uh quote unquote innovative UM fiscal policy, so you know,

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Speaker 1: responses to this high inflation that's going to be uh

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Speaker 1: stay you know, sort of enhanced market stability here, which

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Speaker 1: is which is sorely needed. Perhaps another way of saying,

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Speaker 1: talk of m m T might have died a very

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Speaker 1: rapid death over the past a few months. Nick Bennenbrook

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Speaker 1: as deal with us and I'm wondering what this means

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Speaker 1: in terms of energy policy for Europe at a time

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Speaker 1: when a lot of nations, including Germany, we're looking to

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Speaker 1: spend extensively to stave off some of the gaps in

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Speaker 1: the household budgets. Does this torpedo some of that or

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Speaker 1: does that pressure the euro and and just German yields

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Speaker 1: higher in a way that hasn't fully been realized yet now.

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Speaker 1: I don't think it's going to derail those energy price

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Speaker 1: plans that we've seen across Europe. I did see some

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Speaker 1: instruments the other day, maybe in the region of forty

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Speaker 1: to fifty billion euros to to sort of help support

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Speaker 1: the energy price plans there. And you know, even going

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Speaker 1: back to the UK experience, it wasn't so much the

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Speaker 1: initial energy price kept that caused the consternation on the

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Speaker 1: part of market participants. It was the the growth plan

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Speaker 1: in late September and the unfunded policies there. So, coming

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Speaker 1: back to my earlier comment, I don't perceive the extent

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Speaker 1: of fiscal support or fiscal expansion that they're talking about

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Speaker 1: across Europe as being so dramatic that that you don't

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Speaker 1: have to move away from those of these, Nick Bennenburk,

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Speaker 1: just for you. There was such respect for your FX

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Speaker 1: ability to call over the years, I looked at sterling

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Speaker 1: New Zealand dollar. I don't know what that's called. Is

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Speaker 1: that sterling Kiwi? You know, is at the fancy talk

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Speaker 1: I've never done. I've never done, Nick Bennenburg. The bottom

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Speaker 1: line is massive New Zealand's strengths over twenty years, and

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Speaker 1: now we're butters down at the low end of strong

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Speaker 1: New Zealand dollar trading range. What are the ramifications for

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Speaker 1: the global system if we see things like sterling Kiwi

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Speaker 1: break out the new Sterling weakness that that's an instability

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Speaker 1: that Michael Purvis was talking about. Well, I think, coming

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Speaker 1: back to your previous comment though, Tom, it depends on

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Speaker 1: the extinct volatility um and just how dramatic those moves are,

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Speaker 1: you know, in my I mean, I've been around for

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Speaker 1: a while, twenty years, maybe even longer, we've seen someone

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Speaker 1: for me and some unusual things. The Australian dollar trading

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Speaker 1: above parody against US dollar, for example, UM would be

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Speaker 1: one of those. So um I think so if this

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Speaker 1: is just reflective of maybe increasing commodity prices in general

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Speaker 1: and just the relative performance of these economies. Then if

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Speaker 1: you continue to move in that direction as so long

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Speaker 1: as it's sortally, I think it's not problematic. It does

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Speaker 1: twenty years ago I was living in London for a

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Speaker 1: couple of years, so you know, maybe I should be

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Speaker 1: living there now. It's would have been much nicer have

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Speaker 1: given the key week stealing exchange. Right, well's far going

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Speaker 1: to National Economist Nick Bennenbrook, Thank you so much. Also

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Speaker 1: our thanks to Michael Purvis for your guidance here right

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Speaker 1: now we want to get a sense just going to

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Speaker 1: the economic picture really at the core of the turmoil

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Speaker 1: and the core of what's to come. Capital Economics chief

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Speaker 1: economist Near Sharing joining us. Now, what's your sense, Neil,

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Speaker 1: of how the ramification of this will play out for

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Speaker 1: the United Kingdom as the world sixth largest economy at

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Speaker 1: a time of such tumult both from the leadership as

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Speaker 1: well as honestly from an inflation standpoint. Well, look at

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Speaker 1: sixth largest economy at the moment, but factoring the weaker pound,

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Speaker 1: it may not be the sixth largest economy for much longer.

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Speaker 1: I think that the key thing, and you touched on

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Speaker 1: this is some of the reporting earlier is less at

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Speaker 1: the moment, who's in number ten and who's in number eleven,

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Speaker 1: who's running the treasury, what they're saying about fiscal policy,

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Speaker 1: the extent to which there's a steady hand on the

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Speaker 1: tiller there in the context of all the tumult that

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Speaker 1: we've seen over the past several weeks now, the news

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Speaker 1: that Johnson might be back and putting his name on

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Speaker 1: the ballot paper, I think is literally the last thing

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Speaker 1: that the UK bond markets will want to want to see. Um.

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Speaker 1: So well, let's let's see how that one plays out.

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Speaker 1: But the economic picture is pretty grimmer to say, there's

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Speaker 1: a huge squeezing real incomes coming down the track. Interest

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Speaker 1: rates aconarise further, irrespective of what's happening to fiscal policy.

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Speaker 1: The housing market looks vulnerable to me. The Bank of

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Speaker 1: England needs to do more work to squeeze inflationized of

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Speaker 1: the system. Every which way you work, there are challenges, Neil,

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Speaker 1: I want you to talk and you've done great work

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Speaker 1: on this. A capitol economics, I'd really say industry leading

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Speaker 1: at work and the polarity. The delusion, folks is I

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Speaker 1: go from Heathrow in on a limo to the fancy hotel,

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Speaker 1: walk across the street, enjoy Queen Victoria Street, fly home

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Speaker 1: and say I went to England. And that's of course

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Speaker 1: a complete fiction. Neil sharing outside the elite climbs of London.

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Speaker 1: How bad is it for the United Kingdom economy? It's

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Speaker 1: I mean, it's bad. It's bad in London, it's bad

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Speaker 1: in the United kings In generally. I think you're right.

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Speaker 1: There's there is huge disparity both of economic growth and

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Speaker 1: income growth and also wealth within the the economy, and

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Speaker 1: that's great to that that's too much greater extent in

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Speaker 1: the UK then is in the case of in other

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Speaker 1: European cities, and there's other European countries, and there's lots

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Speaker 1: of reason for that, poor infrastructure, poor skills, poor dispersion

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Speaker 1: of technologies and across industries within the UK. But you're

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Speaker 1: you're correct. I mean London is um In London in

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Speaker 1: the Southeast, incomes and income growth of far higher than

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Speaker 1: it's the case elsewhere in the country. But unlet's not

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Speaker 1: this is not the case that the rest of the

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Speaker 1: country is suffering while London is powering ahead. London is

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Speaker 1: going to suffer in this downturn too. You talked about

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Speaker 1: the six larger economy for now and where it was headed.

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Speaker 1: What do you see in terms of what kind of

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Speaker 1: downturn you're expecting and how this turmoil really plays into it.

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Speaker 1: We look in terms of the pure economic downturn, I

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Speaker 1: think we're going to we're looking staring down the barrel,

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Speaker 1: barrel of probably a two percent forward in GDP, something

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Speaker 1: like that, pe to trough UM. I think a lot

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Speaker 1: of that will be felt in the household sector, consumers

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Speaker 1: coming under enormous pressure at the housing market, and construction

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Speaker 1: coming under pressure to UM. The question really is whether

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Speaker 1: or not that in turn, this feedback looks through the

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Speaker 1: financial system that amplifies those shocks and makes things even

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Speaker 1: worse UM now. Interestingly that I think the interesting question

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Speaker 1: from the markets perspective is how much of that is

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Speaker 1: now priced in UM. It's interesting that the trust has

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Speaker 1: resigned this afternoon London time, and the bond markets didn't

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Speaker 1: really move, the currency markets not really moved. The big

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Speaker 1: move came last week when Hunt came in unwind a

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Speaker 1: lot of the fiscal measures, and so I think a

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Speaker 1: lot of that risk previoly went into the UK markets

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Speaker 1: has probably already unwarned itself. Now we are advantage to

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Speaker 1: close with you today. Thank you so much, Neil sharing

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Speaker 1: for Capital Economics Again. I can't say enough about the

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Speaker 1: Tom Keene, and this is Bloomberg