WEBVTT - Surveillance: UK's Truss Resigns

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<v Speaker 1>Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along

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<v Speaker 1>with Jonathan Ferrell and Lisa Brownowitz. Daily we bring you

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<v Speaker 1>insight from the best and economics, finance, investment, and international relations.

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<v Speaker 1>Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,

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<v Speaker 1>and of course on the Bloomberg terminal. Liz Trust stepping

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<v Speaker 1>down really highlighting though the tenuousness of an inflationary environment

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<v Speaker 1>for political parties globally, and our special coverage we're on

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<v Speaker 1>until Tottenham wins again. Right then to the right now.

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<v Speaker 1>We want to just get a sense though honestly, it

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<v Speaker 1>is important to put this into perspective, and Michael Purvis

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<v Speaker 1>can help us do that just briefly before diving back

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<v Speaker 1>into the political fright in the United Kingdom. Michael Purvis

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<v Speaker 1>of Talbak Capital, as you've been passing through all of

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<v Speaker 1>the political discussion, how much of a message do you

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<v Speaker 1>take back to markets to this idea that they are

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

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<v Speaker 1>there's a there's a really important overarching theme here that

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<v Speaker 1>we can divine from this whole Trust episode here, which

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<v Speaker 1>is that, look, the ft has been on this sort

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<v Speaker 1>of America first monetary policy that has been of course

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<v Speaker 1>very hawk is as it needs to tamp down inflation

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<v Speaker 1>here in the US. But when you have fiscal experiments

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<v Speaker 1>overseas that are uh that trust you know, put forward,

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<v Speaker 1>and that are that are not sensible policies, the the

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<v Speaker 1>the what it means for global risk assets is really

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<v Speaker 1>really sort of magnified here. So you have a collision

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<v Speaker 1>that the what what I'm what I'm saying here is

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<v Speaker 1>is that is that the range of big weird outcomes

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<v Speaker 1>for the markets is much higher, and you have this

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<v Speaker 1>collision of bad visible policy with what the FED is

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<v Speaker 1>doing right now. I think that's that's very very very

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<v Speaker 1>very important. I mean, I think it's a fair statement

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<v Speaker 1>that central banks generally like low currency balls here right

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<v Speaker 1>It just makes their job easier. And we're in a

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<v Speaker 1>state of where, you know, we can talk about rate

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<v Speaker 1>fall being super high, and of course equity balls high,

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<v Speaker 1>but f X balls are are are super super high here,

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<v Speaker 1>and it it ultimately makes the central bank, you know,

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<v Speaker 1>we're all grappling through wind. Central banks are going to

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<v Speaker 1>be more you know, sort of not let around the

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<v Speaker 1>norse by inflation and hydrocarbons and when they can actually

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<v Speaker 1>lead as opposed to be reactive. And these types of

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<v Speaker 1>situations only makes Central banks, whether it's the BOE or

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

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<v Speaker 1>right where I wanted to go. Now. Sharing to join

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<v Speaker 1>us later in this hour with a real focus on

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<v Speaker 1>the United Kingdom economy. But as Mr Purvis Folks talks

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<v Speaker 1>about ball and of course his careful study of the

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<v Speaker 1>Pacific Rim and a d X Y, it is thrilling

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<v Speaker 1>to bring you this morning, Nick benn and Brook. He

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<v Speaker 1>is Wells Fargo international economist, but he viscerally understands a

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<v Speaker 1>Pacific Rim with his heritage of New Zealand and far

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<v Speaker 1>more is the only person on the planet who has

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<v Speaker 1>been award winning in foreign exchange in back to back years. Nick,

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

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<v Speaker 1>This morning Purvis talks about f X vol give us

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<v Speaker 1>the vault we're gonna see on British pounds, Sterling, Well,

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<v Speaker 1>I think certainly for the next few days we can

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<v Speaker 1>expect the volatility to continue. It might actually be in

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<v Speaker 1>the upwards direction because you could not give it political

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<v Speaker 1>and policy uncertainty is reducing in the United Kingdom, and

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<v Speaker 1>so we might see a bit of a relief and

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<v Speaker 1>go back towards the sort of even up to the

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

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<v Speaker 1>going to see some fair of the rup move over

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<v Speaker 1>the months a hid you know, I think it's a

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<v Speaker 1>settles will start to see UH markets calmed down a little,

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<v Speaker 1>and we might actually start see the pound when it's

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<v Speaker 1>faced with the reality of the UK economy, the pound

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<v Speaker 1>won't start to give back some of those games nick

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<v Speaker 1>to what Michael Purvis alluded to. And if it is

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<v Speaker 1>written in crisis, maybe it's Hungry in crisis, maybe it's

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<v Speaker 1>UH Thailand in crisis. Will Jerome Powell need to blink

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<v Speaker 1>because of the international economics and politics we observe, No,

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<v Speaker 1>I don't think you will have to blink. I mean

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<v Speaker 1>we would still expect the seventy five basis point increase

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<v Speaker 1>at that November meeting from from the Field Reserves and

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<v Speaker 1>and as one of your and you know, I think

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<v Speaker 1>we still look for a fifty and eventually getting to

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<v Speaker 1>five on the FED funds rate. I think the UK

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<v Speaker 1>UM events are instructive in the sense of it does

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<v Speaker 1>come back as one of your previous gifts said, how

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<v Speaker 1>sort of unorthodox or unusual are the fiscal policies? And um,

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<v Speaker 1>you know they were fairly un orthodox in the case

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<v Speaker 1>of the UK, just in terms of the magnitude in

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<v Speaker 1>the way that they were delivered. And it doesn't look

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<v Speaker 1>like here in the US, for example, or even across

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<v Speaker 1>the Eurozone in general, Um, that we're going to see

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<v Speaker 1>such expensive fiscal policies. So for the major markets, I

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

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<v Speaker 1>markets that you mentioned, the likes of Hungary, um in Thailand, UM,

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<v Speaker 1>they may face some challenges. Michael Purvis is still with us,

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<v Speaker 1>and Michael, I'd love to get your take and what

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<v Speaker 1>Nick is talking about that there is some more stability,

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<v Speaker 1>but the stability speaks to a more significant downturn at

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<v Speaker 1>least in the short run, based on the lack of borrowing.

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<v Speaker 1>How much are you factoring that into some of your

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<v Speaker 1>outcomes in your thesis. Look, I think I think what

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<v Speaker 1>this whole trust episode really sort of reiterates is that

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<v Speaker 1>we need kind of boring policy, if you will, right,

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<v Speaker 1>And I think there's this inevitable tension, um, where where

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<v Speaker 1>you know, like a politician's biggest and one of the

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<v Speaker 1>biggest enemies is surging food and energy inflation UM, and

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<v Speaker 1>there's always sort of attempation to put in novel, novel

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<v Speaker 1>fiscal policies when when they're not when they're actually the

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<v Speaker 1>worst things for for for for the situation. So we

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<v Speaker 1>kind of need to see things get a lot more boring.

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<v Speaker 1>But I agree with my co guests that I think

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<v Speaker 1>if if for the major markets here, if things can

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<v Speaker 1>be a little bit more static and stable, then more

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<v Speaker 1>of the blow ups we will be relevated, relegated to

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<v Speaker 1>more than niche the niche markets here. But I think,

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<v Speaker 1>I think if the takeaway here from this trust um

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

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<v Speaker 1>to a much you know, more technocratic and and and

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<v Speaker 1>less uh quote unquote innovative UM fiscal policy, so you know,

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<v Speaker 1>responses to this high inflation that's going to be uh

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<v Speaker 1>stay you know, sort of enhanced market stability here, which

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<v Speaker 1>is which is sorely needed. Perhaps another way of saying,

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<v Speaker 1>talk of m m T might have died a very

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<v Speaker 1>rapid death over the past a few months. Nick Bennenbrook

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<v Speaker 1>as deal with us and I'm wondering what this means

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<v Speaker 1>in terms of energy policy for Europe at a time

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<v Speaker 1>when a lot of nations, including Germany, we're looking to

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<v Speaker 1>spend extensively to stave off some of the gaps in

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<v Speaker 1>the household budgets. Does this torpedo some of that or

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<v Speaker 1>does that pressure the euro and and just German yields

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

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<v Speaker 1>I don't think it's going to derail those energy price

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<v Speaker 1>plans that we've seen across Europe. I did see some

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<v Speaker 1>instruments the other day, maybe in the region of forty

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<v Speaker 1>to fifty billion euros to to sort of help support

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<v Speaker 1>the energy price plans there. And you know, even going

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<v Speaker 1>back to the UK experience, it wasn't so much the

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<v Speaker 1>initial energy price kept that caused the consternation on the

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<v Speaker 1>part of market participants. It was the the growth plan

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<v Speaker 1>in late September and the unfunded policies there. So, coming

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<v Speaker 1>back to my earlier comment, I don't perceive the extent

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<v Speaker 1>of fiscal support or fiscal expansion that they're talking about

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<v Speaker 1>across Europe as being so dramatic that that you don't

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<v Speaker 1>have to move away from those of these, Nick Bennenburk,

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<v Speaker 1>just for you. There was such respect for your FX

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<v Speaker 1>ability to call over the years, I looked at sterling

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

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<v Speaker 1>that sterling Kiwi? You know, is at the fancy talk

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<v Speaker 1>I've never done. I've never done, Nick Bennenburg. The bottom

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<v Speaker 1>line is massive New Zealand's strengths over twenty years, and

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<v Speaker 1>now we're butters down at the low end of strong

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<v Speaker 1>New Zealand dollar trading range. What are the ramifications for

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<v Speaker 1>the global system if we see things like sterling Kiwi

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<v Speaker 1>break out the new Sterling weakness that that's an instability

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<v Speaker 1>that Michael Purvis was talking about. Well, I think, coming

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<v Speaker 1>back to your previous comment though, Tom, it depends on

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<v Speaker 1>the extinct volatility um and just how dramatic those moves are,

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<v Speaker 1>you know, in my I mean, I've been around for

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<v Speaker 1>a while, twenty years, maybe even longer, we've seen someone

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<v Speaker 1>for me and some unusual things. The Australian dollar trading

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<v Speaker 1>above parody against US dollar, for example, UM would be

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<v Speaker 1>one of those. So um I think so if this

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<v Speaker 1>is just reflective of maybe increasing commodity prices in general

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<v Speaker 1>and just the relative performance of these economies. Then if

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<v Speaker 1>you continue to move in that direction as so long

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<v Speaker 1>as it's sortally, I think it's not problematic. It does

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<v Speaker 1>twenty years ago I was living in London for a

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<v Speaker 1>couple of years, so you know, maybe I should be

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<v Speaker 1>living there now. It's would have been much nicer have

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

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<v Speaker 1>to National Economist Nick Bennenbrook, Thank you so much. Also

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<v Speaker 1>our thanks to Michael Purvis for your guidance here right

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<v Speaker 1>now we want to get a sense just going to

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<v Speaker 1>the economic picture really at the core of the turmoil

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<v Speaker 1>and the core of what's to come. Capital Economics chief

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

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<v Speaker 1>of how the ramification of this will play out for

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<v Speaker 1>the United Kingdom as the world sixth largest economy at

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<v Speaker 1>a time of such tumult both from the leadership as

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<v Speaker 1>well as honestly from an inflation standpoint. Well, look at

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<v Speaker 1>sixth largest economy at the moment, but factoring the weaker pound,

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<v Speaker 1>it may not be the sixth largest economy for much longer.

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<v Speaker 1>I think that the key thing, and you touched on

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<v Speaker 1>this is some of the reporting earlier is less at

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<v Speaker 1>the moment, who's in number ten and who's in number eleven,

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

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<v Speaker 1>the extent to which there's a steady hand on the

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<v Speaker 1>tiller there in the context of all the tumult that

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<v Speaker 1>we've seen over the past several weeks now, the news

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<v Speaker 1>that Johnson might be back and putting his name on

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<v Speaker 1>the ballot paper, I think is literally the last thing

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<v Speaker 1>that the UK bond markets will want to want to see. Um.

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<v Speaker 1>So well, let's let's see how that one plays out.

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<v Speaker 1>But the economic picture is pretty grimmer to say, there's

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<v Speaker 1>a huge squeezing real incomes coming down the track. Interest

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

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<v Speaker 1>The housing market looks vulnerable to me. The Bank of

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<v Speaker 1>England needs to do more work to squeeze inflationized of

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<v Speaker 1>the system. Every which way you work, there are challenges, Neil,

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<v Speaker 1>I want you to talk and you've done great work

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

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<v Speaker 1>at work and the polarity. The delusion, folks is I

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<v Speaker 1>go from Heathrow in on a limo to the fancy hotel,

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<v Speaker 1>walk across the street, enjoy Queen Victoria Street, fly home

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<v Speaker 1>and say I went to England. And that's of course

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<v Speaker 1>a complete fiction. Neil sharing outside the elite climbs of London.

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<v Speaker 1>How bad is it for the United Kingdom economy? It's

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<v Speaker 1>I mean, it's bad. It's bad in London, it's bad

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<v Speaker 1>in the United kings In generally. I think you're right.

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<v Speaker 1>There's there is huge disparity both of economic growth and

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<v Speaker 1>income growth and also wealth within the the economy, and

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<v Speaker 1>that's great to that that's too much greater extent in

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<v Speaker 1>the UK then is in the case of in other

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<v Speaker 1>European cities, and there's other European countries, and there's lots

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<v Speaker 1>of reason for that, poor infrastructure, poor skills, poor dispersion

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<v Speaker 1>of technologies and across industries within the UK. But you're

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<v Speaker 1>you're correct. I mean London is um In London in

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<v Speaker 1>the Southeast, incomes and income growth of far higher than

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<v Speaker 1>it's the case elsewhere in the country. But unlet's not

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<v Speaker 1>this is not the case that the rest of the

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<v Speaker 1>country is suffering while London is powering ahead. London is

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<v Speaker 1>going to suffer in this downturn too. You talked about

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<v Speaker 1>the six larger economy for now and where it was headed.

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<v Speaker 1>What do you see in terms of what kind of

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

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<v Speaker 1>We look in terms of the pure economic downturn, I

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<v Speaker 1>think we're going to we're looking staring down the barrel,

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<v Speaker 1>barrel of probably a two percent forward in GDP, something

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<v Speaker 1>like that, pe to trough UM. I think a lot

0:12:55.000 --> 0:12:58.239
<v Speaker 1>of that will be felt in the household sector, consumers

0:12:58.280 --> 0:13:02.640
<v Speaker 1>coming under enormous pressure at the housing market, and construction

0:13:02.679 --> 0:13:06.440
<v Speaker 1>coming under pressure to UM. The question really is whether

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<v Speaker 1>or not that in turn, this feedback looks through the

0:13:08.880 --> 0:13:12.000
<v Speaker 1>financial system that amplifies those shocks and makes things even

0:13:12.520 --> 0:13:16.240
<v Speaker 1>worse UM now. Interestingly that I think the interesting question

0:13:16.240 --> 0:13:18.719
<v Speaker 1>from the markets perspective is how much of that is

0:13:18.760 --> 0:13:22.800
<v Speaker 1>now priced in UM. It's interesting that the trust has

0:13:22.840 --> 0:13:26.600
<v Speaker 1>resigned this afternoon London time, and the bond markets didn't

0:13:26.640 --> 0:13:29.360
<v Speaker 1>really move, the currency markets not really moved. The big

0:13:29.440 --> 0:13:32.480
<v Speaker 1>move came last week when Hunt came in unwind a

0:13:32.480 --> 0:13:34.880
<v Speaker 1>lot of the fiscal measures, and so I think a

0:13:34.920 --> 0:13:37.720
<v Speaker 1>lot of that risk previoly went into the UK markets

0:13:37.760 --> 0:13:40.600
<v Speaker 1>has probably already unwarned itself. Now we are advantage to

0:13:40.640 --> 0:13:43.040
<v Speaker 1>close with you today. Thank you so much, Neil sharing

0:13:43.040 --> 0:13:46.200
<v Speaker 1>for Capital Economics Again. I can't say enough about the

0:13:46.240 --> 0:13:49.960
<v Speaker 1>firms were get their research from Capital Economics. We protect

0:13:49.960 --> 0:13:53.679
<v Speaker 1>the copyright all of our guests. This is the Bloomberg

0:13:53.720 --> 0:13:58.080
<v Speaker 1>Surveillance Podcast. Thanks for listening. Join us live weekdays from

0:13:58.120 --> 0:14:01.520
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0:14:19.960 --> 0:14:22.680
<v Speaker 1>Tom Keene, and this is Bloomberg