Rising Rates, China, and Markets (Podcast)

i O of t KNNG Capital. He's spent two decades in the financial industry as a prop trader, asset manager, market maker. UM advised the Norwegian Central Bank, among other things.

UM and UH, I want to just start the conversation off on what happened that we're at this point before we get to what we need to do to fix it, because a lot of people have been saying it's the COVID stimulus that drove this inflation that got us here, UM, but a new friend of mine, from an anarchist from Twitter, has suggested, and I think she's right, that it's really the original quantitative easing that got us in this spot.

We've never gotten the hangover from that high. Um, I would say you have to actually go back a little further. Mat The original sin honestly was Alan Greenspan and the irrational exuberant speech and the concept and the concept that you were going to give the market a put if

they weren't if the stock market went down. And so the FED moved into a situation where I call them a central asset manager, They're not a central bank, and so policy became asymmetrically accommodating, and they were very reluctant to to to to remove it. Is that over? Now? Is the Fed put done? Because that's what everyone's saying, Well, I mean it's still there right now. Seventy basis points is not? Is still? I mean they should have gone

probably three yesterday. I mean, let's let's take I know we're getting off subject quickly, but um, the idea that you have a two to two and a half percent neutral rate at this point within not eight or nine percent as they quote the inflation rate. If you want to compare this to the seventies, by the way, and and use the methodology that was in place back then, this rate would be a lot higher. In any event, neutral depending on you know who you want to speak to.

Using more objective measures would probably be between at this point five and seven. And given the type of inflation we have, in theory, it's supposed to be restrictive. So they are still providing accommodation. They still have not started to see their balance sheet reduced. So, you know, seventy five was nice, but it's not enough. So so neil Um, if you think about something more aggressive, you suggested maybe

basis points or something along those lines. Clearly, this Federal Reserve is trying to I guess balance, you know, fighting inflation without pushing the country into a recession or two deep of a recession. How do you think about that balancing act? Well, I think the fact is that at this point it's very late to worry about the the

economic concept quinces to growth and employment. As a general matter, they have a dual mandate and basically, and this is one of the things that have gone over time, they've totally thrown that out the door. We have an enormous rate of inflation and if you want to measure the impact of what eight or nine percent or I guess we'll have probably six to seven percent in place in two years in a row. I mean, that's a couple

of trillion dollar consequence to this economy. And the longer you go without allowing, without removing the price pressures of that, the worstest is going to get. In my view, to be honest with you, UM, I think what they should have done yesterday would have been maybe one percent, honestly three percent someone extreme. But I think they should have started immediately reducing the balance sheet and announced it could have been done at a slower pace. Remember, they haven't

even started to to indicate they're going to sell. They're gonna let it run off. At this point, the balance sheet is and that goes back to Matt's first question. Quantitative easing, which I apologize I use referred to as q s UM is a very bad idea. The only reason for for that, in my opinion, is to actually deal with a freezing of liquidity in the market. And that happened to no way, and that's fine, but they should have immediately begun to remove that as soon as

as soon as the liquidity mechanism began to function. I mean, I think we can all we can appreciate, maybe not all, but Paul and I can appreciate your ideology here. However, given the political constraints that this independent FED faces and I'm using air quotes for those of you can't see me, which is all of you, given those political constraints, Uh, how do you respond as an investor? You know they're

not going to raise three basis points? Now, this isn't Paul Volker, It's not the seventies or eighties, right, So what what do you do as an investor right now? Well, it's a general metal. Look, it's funny I've started that I've been short. I wasn't short enough, but I've certainly had a reasonable protection on, but not as much as I wanted. Because I call the FED the enemy of the rational, They've been very, very difficult to a is to pate if you wanted to behave and and minimize

or you know, have a reasonable risk profile. At this point, I think there are things that are opportunistically available if you want a little bit of risk. Um, if you have too much risk on, you better be careful because there's certainly a reasonable chance we keep going down in

the short run. How much further do you think, by the way, Neil, I mean, considering the fact that I think we're probably close to the shorter term bottom with me my view, if you want to take my view on longer term, I tell people I have a patriotically optimistic target for the for the SMP of seventeen seventy six, which is way off right, I mean, But but let me just say one thing on that mat just for listeners who don't know. Right now we're looking at SMP,

so it's it's a long way down. But but you have to understand. One of the main factors and how you value with stock or an asset is the cost of money. And for equities, which are the longest duration asset. Theoretically, the twenty year bond is a very good indicator of the type of discount. Right, you can throw a spread on if you want. The long bond is still about one thirty, which means your thirty percent just a potential drop just to get to a six percent yield, which

is at least where it belongs to. Now, all right, now, we gotta have you back on UM very soon. Really appreciate you coming into the Bloomberg Interactive Broker Studio. Neil Grossman, their co founder and former ciot t K A N g Capital, also advisor to the Nougust Bank. All right, let's bring in Brett Downley. He is a president of Spectr Markets. UH. A lot going on in the marketplace here, Brent.

Just in the last forty eight hours we've had to central banks really moving pretty aggressively here, So let's start with this US Federal Reserve seventy five basis points yesterday can perceive by I think many market participants as a pretty bold move. But we had a recent guest on Brent that said they should have been even more aggressive. What did you make of yesterday's news? Sure, well, I agree with that, but the reason the market is not really reacting is that that was leaked, um a couple

of days in advance. So it's You've actually caught me at a really interesting time because I've been bullished the dollar for about the last three months, mostly on central bank divergence. So what you had was a very hawkish FED pivoting doing q T, and then you had a lot of other central banks that were very reticent to do anything um. For example, even the Bank of England who was hiking, was doing so in a very hesitant way. You had the b O J not doing anything, Swiss

National Bank not doing anything. And now actually my view has changed today. Um, I think we're we could be at the peak for the dollar as now we're getting We had divergence before and now we're getting convergence. So we had the SNB, the Swiss National Bank hiked fifty basis points overnight, which was a big surprise. And then we also have the b o J tonight potentially moving

their yield curve target um. And then you also have the e c B saying they don't really want any more currency weakness and they're trying to build some kind of anti fragmentation tool so that they can high rate while keeping the peripheral debt um sell off in check. So what you have now is convergence and that that I think could be bad for the dollar. Now, did you say you've been short the dollar for three months? No,

I've been bullish. Okay, okay, So you've been bullish dollar and now you might be ready to turn I'm just wondering, mechanically, Brent, how you put that trade on. So the simplest way, I mean, I've been trading spot currency since really the simplest way to do the trades is simply to just buy or sell the currency outright. UM. So you can do it through futures, through cash on retail broker systems. You know, institutions tend to do it UM in the

wholesale market, in the OTC market. But you don't need to do anything complicated. You just to me. You just can simply sell dollars. People will also do it through derivatives like options. But because the moves have been so wild lately, um EFX ball is very high right now. It's it's a multi month highs so it's very expensive. UM.

Just to give you a flavor. Even if this doesn't mean anything, it should mean something relatively speaking, that overnight deli and volatility usually trades around ten percent, and right now overnight it's trading at because of the Bank of Japan meeting, and because everything's just been going wild in the up. By the way, what do you expect from the Bank of Japan? This has been so fascinating to watch, And I regret getting a mortgage from my new house

at three and a quarter percent. I should have just shorted ggbs. Yeah, so short g gbs is a popular trade right now. But it also makes sense because very similar to the Reserve Bank of Australia. The Bank of Japan's trying to hold interest rates at an out of equilibrium rate, So they're trying to hold the tenure rate at twenty five basis points, and really it should probably be triple that. There should be at seventy five basis points. And there's a point where the central banks eventually lose

the battle. So the rb A lost the battle, the Swiss National Bank lost the battle. The central banks are very powerful, but they're not omnipotent. So I think we're at the point now where the Bank of Japan is going to have to ease off. There's no theoretical limit. They can do it forever, but the release valve if they keep rates here is a weak er en. And now they've explicitly said that they no longer favor a

week or en, which is something new. I mean, we've had all kinds of historic stuff happening in central banks and and in the FX market, and so if you recall, starting in Japan was trying to weaken the end that was the abonomics plan, and they've succeeded, you know, with flying colors. They took delien from thirty five, and now they're kind of saying enough is enough, no moss. So to me that means that they need to move. Uh,

they need to allow yields to go higher. And so whether that happens to night or not, I mean then it comes down to more of a tactical decision by the b o J. So there seems to be I would say about a thirty chance they do it tonight, but I think it's almost locked in that they do

it in the next three months. And so the timing almost doesn't matter because even if they are pinning that one ten year yield, the rest um the rest of the market will just completely come unhinted, so people will sell g GB futures and anything that's not nailed down by the b o J. Hey, Brent, just real quick, thirty seconds. How long would a dollar weakness call be? Do you think so? I think it could be protracted.

So the dollar strength started with the there is no alternative to US tech um and obviously that's over, and then it continued because US rates were moving so much more than the rest of the world. So now neither of the drivers of dollar strength really are are happening right now. So I think this could be a meaningful turn in the dollar for H. It could us all of age two. Alright, good stuff, Brent Donley, really appreciate you coming on. I learned a lot UH today Brent Donley,

President UH Spector Markets. He had been bullish on the US dollar turning negative just today actually UH in response to what we've seen from a lot of the UH central banks across the world. Again, the Swiss National Bank kind of surprising the marketplace. Totally totally surprising. Yeah. Absolutely, that's kind of what I woke up to here listening to surveillance UH so again concerted effort to raise rates here.

So we'll have to see how that plays out. You're alive from the Gaylord Texan Convention Center in Dallas, Texas. Ben Y Melon Pershing Insight Conference here joining us today Anthony Sessin, Senior Investment Strategistic Crane Chairs and we so happy to have Anthony here with us in the huge exhibition hall here because we want to switch gears a little bit and talk about China. We've been so focused on the US, the Federal Reserve, other central banks, what's

going on with inflation. But we gotta get an update, gotta get a handle on what's going on in China, and Anthony, I love where to give us your thirty thousand foot view with what's going on in China with their economy, with COVID, with we know we have a presidential election coming up, a lot going on there. As you said, thank you Paul for having me. There's a lot going on, a lot to unpack in China. That's

why you have to keep on top of it. Right. So, so all the global uh events we're seeing now with regards to rates, it's definitely impacting markets globally, especially with regards to currency. Right. But but if you look at China specifically, and China entered this year with with the world to stimulate and lift growth. It's an important here

for China, and it was working. They cut rates, They did many uh stimulative actions uh throughout the year, throughout the beginning of the year to kind of lift growth in many different ways, cutting taxes, lifting property, uh, you know, giving facilities for property. But then when the lockdowns happened, it kind of uh you know, hit prog rest a little bit. So we're seeing now China stimulate even more. Right. In addition to that, uh, you know, the consumer is

is now kind of rebounding a little bit. And um and uh, you know, the lockdowns has impacted growth, but now we're starting to see more pent up demand because income has not been impacted in China as much. Last year it grew at nine percent. This year is growing at six percent. So you're gonna see that money kind of trickle into the economy as lockdowns cease and at

stimulus kind of trickle in. Well, Anthony, today you and I heard this Grapevine, Texas at this huge convention, lots of people, very few to no mask seems to be kind of back to normal. Yet in China, Um, they're not there. And what is the I guess the strategy behind the government's handling of COVID And how do you think it may evolve? Yeah, no, absolutely, that's the big wild card a little bit in China. Right, So China have a very strict policy with regards to to COVID.

It started with a zero policy where kind of lockdown Shanghahi for sixty days or more that kind of impacted people living in the area, impact its supply chains across the board, especially with the electric vehicles and another supply chains that are located in in Chunk High. But then when it happened in Beijing, that kind of moved to this dynamic policy right where they were kind of targeting specific areas, you know, doing testing proactively, trying to be

more cognizant of the economic impact. Right, But that's still still causing a lot of issues. Right. Omicron is a little bit different. It passes through very quickly. It's really hard. Like in Beijing, we had this one party at a pub that kind of uh, you know, resulting in twenty six cases, right, and that's gonna be hard to contain without a lockdown. So so, you know, it's a little bit hard situation, especially in a political year where China doesn't want to see people you know, uh sick or

lined up at the hospital. Right. So but I believe they're going to have to adjust that policy soon, uh, you know, in order to be able to to meet their economic targets. How easy is it for China to control economic growth? It is, It is easier than other places. If you were right, it's a command economy. China has the ability to kind of redirect resources, redirect capital to specific industries they want in an easier way than we have it here in the US or or kind of

in Europe. They have a lot of tools, huge reserves, they have a lot of policy levers to pull, right, and they have a vibrant consumer economy, right, so if they want to, they've done it in the past, they can do it in the future. Although you know, as the economy becomes bigger, it becomes harder. Right. But we've seen this year's numbers start to turn around, right, Like property prices which were declining since the summer, we started to see that turning around. We started seeing fixed acid

investments turning around. We started to see you know, a lot of more interest in the economy, more people getting loans, aggregate financing turning up. So China has a lot of levers that can pull in terms of supporting its growth, but lockdowns definitely kind of shuts down these levers very quickly for an extended period of time. You know, at any global Wall Street it's been focusing right fully so on global energy prices and you know, we get w tech cood oil was it over barrel? Uh it's now

pulled back here. But boy, if China fully reopens, that adds a big source of demand there. How do you view Chinese economy now in terms of how much of it is reopened? How far do we have to go to get fully reopened? Kind of where are we there? Yeah? I know so so at some point I think thirty GDP of of cities that contribute GDP was shut down, right, So now it's a lot less Shanghai reopened, Beijing is

there's there are some spots there. So now we're probably at like five to ten percent of GDP kind of a little bit in in a in a lockdown, right, So how far do we have to go? One is you have to relax the policy just like here, right, you kind of have to accept that that you know, there's COVID, it's it's it's going to get people sick. But with a vaccine, uh, you know, the symptoms are going to be less. And the second thing, I think China is going to need to push a vaccine that

is based on MR and a technology. Right today, their cinovac is based on the on the previous, on the past vaccine technologies, which is not as effective. And there are multiple now companies by technology companies who are working on this, but they're not there yet right. But but other than that, we're seeing a lot of work from China. Like now they're trying to under regulations on a platform economy,

so that's very good for China internet companies. They're pushing with the policies green tech, green technology, They're pushing the healthcare industry. So so they're putting a lot of work into the new economy, into directing their economy to be positioned, well positioned for the future. Right. And one of the big things we're seeing now more interested it's trying to China Internet. Yeah, it's interesting. You know, a lot of US investors, through Ali Baba and through ten Cent, they

became very invested in exposed to China tech. It was a great way to play the growth of the middle class. And Ali Baba for example, Boy did they get a rude awakening to what we all call China risk in the you know, on the risk section of the perspectives. That took me off guard how aggressively they clamped down on the jack Miles of the world. Are they give us a sense of where they are now? Are they gonna lighten up here materially or is this the new

world order? You know? Absolutely so so look, uh, you know, if you you have to understand China's culture and China's view of how society of how they won't decide to look right, and they have a very virtuous view of how sight you should look like. They want to provide

free education, they want to provide free healthcare. Uh, you know, they really care about about their their people, that want to provide fairness because the gap between rich and poor has been has been, you know, has widened a lot. And they want to control this, not control, but regularly this this digital economy that became huge, right and became

kind of too big to fail at some point. We're trying to do that here right, Like we're seeing all these bills come through through antitrust against Google, Amazon, right, Facebook. We're seeing the same thing happening in Europe. But but China, as a command economy, they're able to do it. Yeah. So one thing we under estimated less or how aggressive they were going to be, right, but they wanted to go as far and get everything set up, and now

it looks like work. This is concluding and we've heard it from multiple people high up to the chain to the president chooching pit Okay, that's good stuff. Good stuff in the Ali Bob and the other Chinese uh tech owners as well. Anthony Saissein, thank you so much for joining us here. Anthony Sacsen, Senior investment strategist at Crane Share sign. You come to places that put a lot of smart people together, you get to meet a lot of smart, interesting people. So that was great to have

Anthony join us here. Probin, thanks so much for joining us here. This is your first interview with American media since becoming CEO elect. So congratulations there, good luck with this economy. Um, tell us about as you come into your new role here, what is your strategy? What's your to do list? We've got a boy a really volatile world out there, a lot of new things that people have to deal with, whether it's coming back to work, whether it's dealing with the remnants of the pandemic, whether

it's inflation. What you're to do list? Well, you know, when you when you're when you're coming into a ce see, you don't get to choose between all those things you do. You got to do all of them. But look, let me just start by saying thanks for being here. It's great to have you here. Are being y Melon Pershing Insight Conference is one of our flagship events. It's one of the flagship events of the wealth industry. It's great to have our clients here, is great to have you

here as well in Texas with us. So you think about it here um being y Melon financial services industry, it's been a great run. If if you've been an investor, I came into the market in October ninety or June, it's been nothing but up. I had a couple of little bounces along the way. But now we're in a world where it really is challenging at there when you look at the financial markets, the bond markets, the equity markets, whether you look at inflation, central banks, how do you

put that into context? Well, as a firm, we touch about of all of the world's investible assets, so we have that vantage point to really see what's going on, and we're really listening to our clients. One of the reasons why I'm here is really to talk to our wealth advisors to understand what's going on in their worlds and to really push the the concept of innovation in

the wealth tech space. There's so much going on listening driving forward a lot of opportunity, and these volatile markets are an important moment for us all to be saying, connected to our clients, I wonder what your take is robbing on crypto. It's been an incredible crash to watch UM, but we recently had David Rubinstein on who said, listen, this is still an asset that people are going to invest on and work with, and it's not going to zero.

B and y Melon was UM one of the sort of four runners, one of the pioneers of of banking with crypto. What's your take? Well, crypto to me the at least bitcoin, and they're an asset class. We can debate whether the price you go up or down, but that's like any asset class. We can always have that debate. But the ecosystem around them, that is everything that's going on in stable coins, tokenized assets defy the world of blockchain.

There's a lot of interesting opportunity there and we're investing and innovating in the space because this is part of the future of the financial markets. We had an era of paper back fifty years ago. We've been in the era of de materialized ledgers. Now we're getting into the blockchain and tokenized assets era. I think it's going to be exciting, and we've got an important role to play. This is just one of the many assets that has come tumbling down as the market realizes how high the

ft is prepared to raise rates UM. On the other hand, for a bank, traditionally higher rates mean um higher profits. How how do you react to UM this rising rate environment. Look, zero rates aren't good for most people. They're not good for banks, they're not good for consumers either, and so seeing rates lift off the zero bound is a positive thing.

I think it signals the that of course inflation, which is we're really seeing not only the spot inflation, the eight point six percent print that we had last Friday, but also the forward expectations for inflation, which share Powell alluded to in his remarks yesterday. Inflation is a dangerous thing in markets. It's it's it's very important to get a good grip on it. This is a difficult inflation. It's not just demand driven, it's supply side constraint driven.

That makes it a little gnarly, i'd say for for the policymakers. But as chap How showed us yesterday seventy five basis points, he is on the case, Robin. One of the challenges for the financial services industry, like many other industries, has been diversity and inclusion in the workforce. I worked on Wall Street for thirty years, and I saw every incoming class of investment banking analysts very diverse.

Yet by the time it came to see the list for managing directors or partners not So, how do you guys think about that? At b n Y melon critically important topic. I was just on the main stage here of this flagship conference of ours and I was talking to our clients about exactly that topic. But I'll tell you from our point of view, seventy two percent, just starting at the top of our company, seventy of our board are women and people from ethnically historically underrepresented groups.

So we feel very diverse at the top. As you say, we've got a lot of intake at the bottom, and it's an important priority for us. We're really driving that culture, and it's not just about diversity and pure representation. It's about creating a sense of belonging for people in our company so that they can be themselves, they can be authentic, they can bring their whole selves to work. That culture

perpetuates diversity, and it's an important part of the story. Robin, just real quickly, last question, Um, you know what we've seen over the pandemic, it's just kind of the whole change in how people think about work. Where are you at being wide melon in terms of working from home, flex time? How do you guys think about that? So hybrid for me is the future, and I think it's uh. You know, however much some folks may yearn for the five days a week of the past, I personally think

that time's gone. I get that we've had a very tight labor market that does have a lot of choice to employees. But we've got all these great new technologies finding a way for people to have more flexibility in their lives, to be able to combine life and work, even if it's just spending ten minutes picking up your kids from school. Then that's actually good for employees, that's good for the employer. To us, that means several days a week, call it three in the office, a couple

of days hybrid. We get a lot of benefits by having our people in the office, but we don't need all of those benefits five days a week. We can get it by having this hybrid structure. That's the future for us. All right, Robin Vince, President and CEO elect of b n Y Melon Again, we were at their flagship conference here, the b n Y Melon Pershing UH Insight Conference here in Grapevine, Texas, bringing all a lot of good financial partners together. People are here. It's packed there.

They're uh, you know, they're definitely getting together. I see people sitting down in corners, you know, doing deals, talking business. It's good to see Robin. Thanks so much for joining us here. Thanks for listening to the Bloomberg Mark Kids podcasts. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. On Fall Sweeney, I'm

on Twitter at pt Sweeney before the podcast. You can always catch us worldwide at Bloomberg Radio.