Speaker 1: Yeah. Welcome to the Bloomberg Surveillance Podcast and I'm Tom
Speaker 1: Keene Jay Lee. We bring you insight from the best
Speaker 1: in economics, finance, investment, and international relations. Find Bloomberg Surveillance
Speaker 1: on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course
Speaker 1: on the Bloomberg Yeah. Joining us from the City of
Speaker 1: London now is Bloomberg's very on one of our finest
Speaker 1: Guy Johnson. Good morning to your guy. What happens next?
Speaker 1: What happens next is Prime Minister's Questions, which is about
Speaker 1: starts in the House of Commons. It's going to be
Speaker 1: interesting to see kind of the body language that is
Speaker 1: being produced by Theresa May. Does she look relaxed? Does
Speaker 1: she look comfortable with what's going on? She has just
Speaker 1: got to her feet in the House of Commons. She
Speaker 1: does look actually reasonably relaxed. Um. It is worth pointing
Speaker 1: out that there is a theory floating around John that
Speaker 1: she has instigated this leadership challenge, that she has had
Speaker 1: some of her sort of colleagues close to her to
Speaker 1: send letters in to make this happen. Because remember that
Speaker 1: if she wins said leadership challenge, she cannot be challenged
Speaker 1: for another year. So it's unclear at this point in
Speaker 1: time how we got to this point, but this afternoon
Speaker 1: we will start that process. We think it's going to
Speaker 1: be a vote that takes place sometime between six and
Speaker 1: eight pm, so starting roughly at one pm Eastern time,
Speaker 1: we are going to start to see that process unfolding.
Speaker 1: If she were to win, she would be secure for
Speaker 1: another year. If she were to lose, well, that certainly
Speaker 1: opens Pandora's box, and Nmuror is talking about a circuit
Speaker 1: three pc drop in Sterling Guy. The easy part is
Speaker 1: triggering the vote. The tough part is getting the one
Speaker 1: votes needed to get the prime minister out. How likely
Speaker 1: is that um At the moment it seems as if
Speaker 1: most people are judging by the sort of the mathematics
Speaker 1: that Bloomberg is doing, she's certainly up too close to
Speaker 1: a hundred certains at this point in time to back.
Speaker 1: So I think the challenge is an uphill one for
Speaker 1: those that would like to ouse Thereason May at this
Speaker 1: point in time. And the e RG, the European Research Group,
Speaker 1: which is basically a collection of brexiteers, hadn't till last
Speaker 1: night struggled to get the necessary votes together or the
Speaker 1: letters sent in to Grand Brady of the nine two
Speaker 1: Committee of backbench MPs to make this happen, and that
Speaker 1: maybe speaks to the idea that they if they have
Speaker 1: struggled to get to the necessary forty eight letters, they
Speaker 1: would certainly struggle to get to the necessary number of
Speaker 1: MP votes to ouse the Prime Minister John a guy.
Speaker 1: We've learned throughout this whole process not to rule anything out,
Speaker 1: but let's go with the base case that the Prime
Speaker 1: Minister survives the vote. Does it change an I think
Speaker 1: I there is a certainly an argument that says that this,
Speaker 1: from a political point of view, is a red herring.
Speaker 1: A more significant development would be a vote of confidence,
Speaker 1: a parliamentary vote of confidence that would be generated by
Speaker 1: the man that is now on his feet in the
Speaker 1: House of Commons, Jeremy Corbyn, the leader of the Labor Party.
Speaker 1: And then that is something that I think the markets
Speaker 1: would react much more violently too. It is interesting today
Speaker 1: that we don't have a very violent reaction in assets. Sterling,
Speaker 1: for instance, is having what's known as an inside day.
Speaker 1: It is trading within yesterday's price action range. The markets
Speaker 1: are not really reacting to today's news. I think if
Speaker 1: you were to see a parliamentary vote of no confidence
Speaker 1: which could trigger a general election, that would be a
Speaker 1: much more significant development. John Well the Prime Minister facing
Speaker 1: down questions in the House of Commons today. In fact,
Speaker 1: right now the Prime Minister ruling out a general election
Speaker 1: also rulling out a second referendum as well. Guy, I
Speaker 1: have no We've got to run over to to Westminster,
Speaker 1: so we're gonna let you run. Thank you very much
Speaker 1: for dropping by the studio for us. I want to
Speaker 1: bring in Eric Nielsen now in any Credit Group chief
Speaker 1: economists who also joins us from our European headquarters in
Speaker 1: the city of London. Eric, good morning, to use a big,
Speaker 1: big list of issues in Europe for the Europeans. Where
Speaker 1: does Brexit rank? No, good morning, Yeah, I was just
Speaker 1: I was just back from Berlin and uh and you
Speaker 1: would be surprised how slightly amused, confused and and and
Speaker 1: not top of the list issues that Brexit is in Berlin,
Speaker 1: Rome and Paris. Isn't that part of the problem for
Speaker 1: the Prime minister, especially now where the French have increasingly
Speaker 1: bigger domestic problems the Italians have had them for a
Speaker 1: while in Germany relative to the stability we've seen for
Speaker 1: a long time. Eric Germany has its own issues. Well,
Speaker 1: I mean they would take that first. I actually think
Speaker 1: Germany in many ways looked like the most stable democracy
Speaker 1: about of any major countries. And we've just had a
Speaker 1: leadership change in the biggest party and the first contested
Speaker 1: one for about fifty years, and afterwards the three consistents
Speaker 1: congratulated to each other and and we're friends and moved
Speaker 1: off if to they sent you to be friends in politics, right,
Speaker 1: so so so that's actually quite stable, I think. I
Speaker 1: think what your point is right in the sense that
Speaker 1: it's a problem for Britain. But the but the problem
Speaker 1: for Britain is that the euro EU twenty seven have
Speaker 1: been amazingly united, by any stretch of the imagination, through
Speaker 1: these two years from negotiations. EU twenty seven have been
Speaker 1: more united than the government or even the government party
Speaker 1: inside Westminster. This is quite amazing, right, and that has
Speaker 1: obviously weakened to rais amazed hand tremendously and it has
Speaker 1: basically proven the Brexitiers arrogance of well German commagers needed
Speaker 1: are started out of all this completely nonsense. The Europeans
Speaker 1: and the Prime Minister, the Prime Minister essentially on a
Speaker 1: tour of the European capitals before this vote of confidence
Speaker 1: came up. Are do you see any chance of her
Speaker 1: securing any concept since whatsoever from the Europeans, none of substance. Uh.
Speaker 1: They keep saying, well, we'll we'll help with the interpretation
Speaker 1: right there. We'll will help with some clarification, so of
Speaker 1: the political memorandum, not the not the treaty or not
Speaker 1: the the the agreement, the many other pages. So that
Speaker 1: will not be reopened. That's completely in conceivable in my opinion.
Speaker 1: But but they will find they would be happy to
Speaker 1: find some sort of wording that sort of helps a
Speaker 1: little bit here and there maybe. But but to be honest,
Speaker 1: this is not anything of a nature that trades are
Speaker 1: making combat and they see, I got something better. It
Speaker 1: it is it's do you have a base case erk
Speaker 1: on what happens here? Oh? Yeah, we have to have
Speaker 1: a base case. And this is unfortunately, it's it's it's
Speaker 1: a tough one. I so I so I think she
Speaker 1: will survive. Her hand will be slightly strengthened because, as
Speaker 1: Guy said, now there can be no no challenge to
Speaker 1: her for twelve months. And I think if you. If
Speaker 1: she wins today or tonight with just a decent majority,
Speaker 1: which I think is a quite likely outcome, then I
Speaker 1: think she has a little bit of a of a
Speaker 1: of a of a base on which to say to
Speaker 1: her party members, you have to vote for my deal.
Speaker 1: So I think actually the chance that her deals deal
Speaker 1: comes through has increased a little bit. Big meeting on
Speaker 1: Thursday outside of all of this, and it's the European
Speaker 1: Central Bank Eric with President drugging, no change the policy expected.
Speaker 1: But I think that news conference is going to be fascinating.
Speaker 1: There is so much going on on the continent. What
Speaker 1: are you looking for? I'm looking for most and foremost
Speaker 1: forward guidance on the reinvestment. It is when you think
Speaker 1: about the world today and there's somewhat weaker growth numbers
Speaker 1: in Germany and other parts of Europe, it's, by any
Speaker 1: stress of the imagination, unfortunate time to enjoy by the
Speaker 1: end of this month, right, So, so the but that's
Speaker 1: set in stone now, So what does he do to
Speaker 1: try to persuade us that the monitor policy stance is
Speaker 1: not really tightened? Tightening it is in a sense, And
Speaker 1: I think the answer to that is a pretty fair
Speaker 1: and forward guidance that they will commit to reinvest the
Speaker 1: entire principle for at least say two or three years
Speaker 1: three years what defected, so but at least two years
Speaker 1: and maybe talk about some liquidity provision that t l
Speaker 1: TR row extended before June or something. But but it's
Speaker 1: it's a tough one for the EASB now because the
Speaker 1: world is looking pretty nasty right there in the in
Speaker 1: the process of rolling off or ending the QUEUEI which
Speaker 1: is a very unfortunate Hey, Eric, great to catch you
Speaker 1: have with you so much. Govin on every Nelson any
Speaker 1: credit group chief economists wanting us out of the city
Speaker 1: of London. Let's look at something stable like the fixed
Speaker 1: income market. Pretty Emizabeth joins us this morning. Pretty good morning,
Speaker 1: Hello morning, thanks for having me. We have a low
Speaker 1: yield regime. I've been watching two stands spread. I'm distracted
Speaker 1: here in London and I've been watching two stands spread
Speaker 1: go nowhere and yet some stability in the ten year
Speaker 1: two point eight nine percent. Do you have a bet
Speaker 1: right now on what price and yield will do so
Speaker 1: in the tenure um. I think we're in a range.
Speaker 1: We're really I think to eight two three. I mean
Speaker 1: I was planning the table when we were above three
Speaker 1: percent that that was not sustained. I think there's enough
Speaker 1: growth headwinds with real rates rising and no evidence that
Speaker 1: structural growth in the US was higher. I wanted to
Speaker 1: fade the rising rates, and I would still fade the
Speaker 1: rising rates, but you know, we have repriced to FED significantly,
Speaker 1: so at this point to say rates are going lower,
Speaker 1: I think we need evidence that the U s economy
Speaker 1: is actually slowing, and we need evidence that the FED
Speaker 1: is going to continue to march on with gradual hikes
Speaker 1: irrespectable of the tightening and financial conditions. Both of those,
Speaker 1: I would say, the US economy seems okay. All the
Speaker 1: US data may really have inflation today, but the data
Speaker 1: suggests the economy is still growing above potential. And I
Speaker 1: have to say the FED is sounding, um, you know,
Speaker 1: somewhat more cautious and talking about uncertainty, so I think
Speaker 1: the risk of policy mistake is somewhat lower. So I
Speaker 1: think we stay stable. I mean, the Brexit thing is
Speaker 1: really being viewed as something that should affect guilts rather
Speaker 1: than treasuries. Um. But I think the FED next week
Speaker 1: ECB tomorrow, there's a there's a couple of events in
Speaker 1: the near term that could move it, but I think
Speaker 1: we stay somewhat range. Were dashes through December, but previous
Speaker 1: it's the last time we spoke to you. We've seen
Speaker 1: major change is not only in FED view, but in
Speaker 1: the makeup of the yield market. Frankly the vaultil of
Speaker 1: the stock market, and you have the vix only two
Speaker 1: nine and within all of that you have to reframe
Speaker 1: a two thousand nineteen view. Let me cut to the chase.
Speaker 1: Do you just clip a coup pond in the bond
Speaker 1: market for next year or do you have to be
Speaker 1: defensive and those short duration or can you be opportunistic here?
Speaker 1: So I think yes, I think it's an opportunistic environment.
Speaker 1: You have to be nimble. Um. I think you can
Speaker 1: certainly stay in the front end, but you know when
Speaker 1: when duration, when Daniel gets to three percent or higher,
Speaker 1: I think it it makes sense to extend some of
Speaker 1: that duration. But again just trade in a very opportunistic
Speaker 1: fashion because I think the market is dealing with higher
Speaker 1: risk premiums in every asset class. Just because now the
Speaker 1: fair is at neutral, are very close to neutral, the
Speaker 1: risk of a policy mistake increases in real rates arising,
Speaker 1: So I think every asset last you have to be opportunistic.
Speaker 1: Not just in fixed income, I would say in credit,
Speaker 1: in equity, just because the time left pretty away in
Speaker 1: on the leverage loan idea, this is front and center
Speaker 1: for so many listeners. Is the extended part of your world, right.
Speaker 1: I think there's a credit component, which you know, default
Speaker 1: rates are still very low, so our credit strategies still
Speaker 1: believe that as long as the economy is going above potential,
Speaker 1: the credit component is is fairly priced. It's the floating
Speaker 1: rate component. I think a lot of people bought leverage
Speaker 1: loans because the FED was going to continue to hike
Speaker 1: and the market wasn't pricing in as much in hikes.
Speaker 1: I don't find that as attractive. Now we're at neutral,
Speaker 1: so we're talking to hike tree hikes at the most,
Speaker 1: and the market is already pricing into So I think
Speaker 1: you have to move away a little bit from leverage
Speaker 1: loans into thinking about duration because the fair is not
Speaker 1: on a preset path here, Thank you so much, Pretty miserable.
Speaker 1: It's too short today with two these securities. So we're
Speaker 1: bringing out of Housan, bring him in from Vietnam. I'm
Speaker 1: told Patterson Institute for International you can this president formally
Speaker 1: of the Bank of England, and I'm always great to
Speaker 1: catch up with you. What do you reckon the conversations
Speaker 1: like on the MPC on Threatenato Street at the moment.
Speaker 1: Oh jeez, that's a really good question. I think that
Speaker 1: the MPC is trying to just watching the cable very
Speaker 1: very closely and they are trying to figure out how
Speaker 1: much the sticks versus being some intra day blip. And
Speaker 1: what do you think it is, Adam. I think it's
Speaker 1: an intraday blip. Um the it's hard to disentangle. I mean,
Speaker 1: part of the reason Sterling and strengthened is because people
Speaker 1: are watching Corbin hunt his opportunity and there's so much
Speaker 1: anti Corbin sentments some huch for good reason that the
Speaker 1: part of the relief in Sterling is about Corbin and labor,
Speaker 1: not so much about Brexit and imposing I want you
Speaker 1: to take a victory lap. You have been one very
Speaker 1: cautious about four or five six A twelve rate increases
Speaker 1: and you know, I look in two thousand eighteen hindsight,
Speaker 1: you look like a genius. Cut to the chase, the
Speaker 1: view forward for Chairman Paul the chase of my no
Speaker 1: longer looking like the genius. It's it's going to be
Speaker 1: the market I think now priced it about right the
Speaker 1: head where somewhere north of one move in largest threas
Speaker 1: in the colleague Jason Firm and artickuting in the Wall
Speaker 1: Street Journal about two weeks ago that if it's a
Speaker 1: weird thing about his speech, Tom was the framed in
Speaker 1: terms of our star, in terms of the interest rate
Speaker 1: neutral interest rate, instead of in terms of the data.
Speaker 1: The data flow could have easily justified the pause. Not
Speaker 1: so much. Well, I guess we're data, you know, and
Speaker 1: you call it that our start stuff as well. Let's
Speaker 1: go to John Ferrell. Can I go wonky with Dr Posen?
Speaker 1: John Williams Adam pose it and one of his ideas
Speaker 1: of what to do given low rates and permanently entrenched
Speaker 1: low terminal values is to target to nominal g d P.
Speaker 1: We target to inflation adjusted GDP for a host opposing
Speaker 1: like reasons, do we need to go back to the
Speaker 1: fifties and the sixties and target denominal growth plus an
Speaker 1: inflation dynamic? Well, I think it's the right idea in
Speaker 1: the sense um that it's it's trying to take an
Speaker 1: account both pieces of the dual mandate, and it's trying
Speaker 1: to take into account that if you're undershooting on inflation,
Speaker 1: you've got to try to make that up. So in
Speaker 1: those senses, I'm very sympathetic. The problem is, it's not
Speaker 1: clear to me either A that you have any easier
Speaker 1: time getting the desired result by simply saying you're targeting
Speaker 1: nominal GDP and B. If you end up with a
Speaker 1: nominal GDP target and say you get four percent inflation
Speaker 1: and one percent growth, that's supposed to be just as
Speaker 1: happy for you as four percent growth and one percent inflation.
Speaker 1: And I'm not sure that's politically sustainable. What is politically sustainable?
Speaker 1: We've got to fed with a president critical of their approach.
Speaker 1: The the saw call them hawks, say we've got to
Speaker 1: get some lifted rates to develop an uh, not a substantial,
Speaker 1: a measured real yield. An actual inflation is just a
Speaker 1: yield to provide normal incentives within the business system. I mean,
Speaker 1: where do you fall in that great conundrum? I fall
Speaker 1: in the great conundrum in the Unfortunately, the stop clocks
Speaker 1: of this President Trump happens to be right at the moment,
Speaker 1: which is there's good reason to wait and see before
Speaker 1: raising rates further. And they think, to the credit of
Speaker 1: the FOC so far they're not preventing themselves and doing
Speaker 1: what they think is right. I fear of looking like
Speaker 1: they're accommodating the president. John, is that a break exclusive
Speaker 1: of surveillance break exclusive? I think I think we need
Speaker 1: to put that out. I do wonder whether it makes
Speaker 1: it a little bit more difficult just in terms of
Speaker 1: the optics to back away from the hikes you've planned
Speaker 1: when the president is putting so much pressure on you. No, John, absolutely,
Speaker 1: I think that's that's a concern um. And this has
Speaker 1: always been the problem. Right when you're in a central bank,
Speaker 1: you you sometimes get caught up in the sort of
Speaker 1: how people perceive, what your perception is, what you're doing.
Speaker 1: It becomes this big circle. I think, unlike the Supreme Court,
Speaker 1: that the FOMC seems to be elite at the moment,
Speaker 1: just calling the balls and strikes as they come in.
Speaker 1: Now you can critique that about they're not giving you
Speaker 1: enough forward looking guidance, but I actually was very sympathetic
Speaker 1: to Chair pals Uh decks a whole speech in which
Speaker 1: you back off that, Dr pos and you are one
Speaker 1: of our arch experts, not only German economics, but how
Speaker 1: it folds into the post World War two German experience.
Speaker 1: There was that image yesterday, or maybe it was the
Speaker 1: day before. I'm losing track, folks. A prime minister may
Speaker 1: inner desperation with a chancellor miracle who is simply moving on.
Speaker 1: Do you look at this is a smooth transition for
Speaker 1: Germany to a new set of government or is it
Speaker 1: a true generational change? Wow, it's a really good question. Tom.
Speaker 1: To me, it is a true generational change in that
Speaker 1: I don't know enough about a PK. Her her likely
Speaker 1: successor um, but it is a generational change in that
Speaker 1: you're going to have a group of people who neither
Speaker 1: grew up under the Soviets nor grew up in the
Speaker 1: post war glow of American occupation and beneficence. And so
Speaker 1: this is a Germany that is a generation that is
Speaker 1: totally either in Europe or in its own and that's
Speaker 1: going to be very difficult to manage. I think it
Speaker 1: is this real shift. I mean, it really hearkens back
Speaker 1: to almost a seventeenth century Germany. I mean, as Dr
Speaker 1: Kissinger talks about it Westphalian Germany. It really hearkens back
Speaker 1: to that, doesn't it. Well. I mean, part of the
Speaker 1: point of Mr Kissinger's discussion of Westphalia is the idea
Speaker 1: that you don't interfere past other people's borders. You you
Speaker 1: try to keep the borders strict, and you know that's
Speaker 1: going to be Essentially the question for Germany going forward
Speaker 1: is are they willing to allow enough interference internally so
Speaker 1: that they can exert a real EU influence because at
Speaker 1: some point that the bill does come due for Germany
Speaker 1: being hypocritical on the banking system and hypocritical and fiscal policies,
Speaker 1: I mean, the EU either there is this toll that
Speaker 1: I know you and John and others have talked about
Speaker 1: that we're seeing with Macrome now that because Germany didn't mertle,
Speaker 1: didn't come through in the last year with Eurozone reforms,
Speaker 1: other people are distrusted now in the way they haven't
Speaker 1: for a while. And I'm posting great a cat sholing
Speaker 1: you as a wise Peterson Institute for International Economous President.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
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