Decisions, decisions…

heavy heights of zero percent. We did get a fifty basis point increase. Yes, it's the first increase in more than a decade, and on many levels this really breaks the mold for the way the ECB has been behaving more or less its entire existence. First of all, it's breached its own prior guidance basically told us it was going to be raising by twenty five, and then it raised by fifty. It's also saying in as many words

that there is no forward guidance coming. They don't know what the data is going to be, and they don't therefore know what the interest rates are going to be. They've taken guidance quite a lot more seriously than the other central banks over the years, and they are now putting everything on being able to remain flexible. Well. As you point out, European Central LINKA has so much more to deal with than other central banks. Obviously, it's a

conglomeration of countries. Just for comparison Burpses right now, Germany's tenure yields at one point to Italy's is at three point five, and that's one of the things that the ECB has to deal with. It's possibly the single most important, given that we now have an election coming up in Italy and the last time we had an Italian election

it's caused an almighty mess. This time. All the punditory at the moment says that the Brothers of Italy, who despite their name are led by a woman, Georgie M. Meloney, seemed most likely to form a government or to provide the prime minister, and they are ultimately fairly directly descended from Benito. With Saloni's Fascist Party, members have been urged not to make the Roman salute in public anymore. This is not going to go down well in the rest of Europe. It was bad enough when you had the

League as part of the government. If it comes to pass, that will really amp up the tension much further. But it's all of a piece, right, and this is part of what we're seeing all over the world. So you're seeing these more extreme parties get into government and hous other maybe less extreme parties, partially because of economic concerns and economic difficulties in Italy has been in trouble for a long time. Yes, I think where Italy is different

from some of the others and dangerously so. It really is very much of an aging country and growth has been very slow for some decades now. It actually overtook Britain at one point in the in the years after the war, it did have a boom. It has been languishing for a long time. One of the reasons Mario Dragi took the helm right because he was a technocrat and he had been at the helm of the E C B. And there was hope that he might be able to turn things around. But ultimately he didn't know,

and they've had a succession of attempts. Romano Prodi came in to rescue after Berlusconi during the crisis ten years ago, very reminiscent of Greece in fact. Yes, so the ECB came up with this something that almost sounds like a vaccine.

It's the transmission protection instruments. What is it? It seems to be a promise from the ECB that it's not going to let spreads get too wide, and that it will buy bonds or it's not ruling out in the private securities as well, to keep the different economies within Europe in line with each other. How is this not history rhyming a little bit? We had this before. Yes, this time is different, I would say, because the ECB is trying to give itself more discretion than it had before.

It's really putting much more of its own credibility on the line. We have general criteria for when they would react, to do with how unwarranted the widening of spreads might be,

how disorderly it might be. But those are described in words, not numbers, and it's going to be down to the Central Bank itself to fix the Other thing that's fascinating, though, is that you know, it's ten years since I had to spend most of my life covering this the o m T S. I had forgotten the existence of our m T S and and they were never actually used. The fascinating thing about Mario Dragi saying he would do

whatever it takes. He never needed to the market in going it was market, yes, but it's there on the books as an opportunity. And Leguard said that that's part of their toolkit that they reserve the right to use, that they may well use. So that's a fairly directed mission that we're very close to the kind of existential worries about the Euro that we had a decade ago.

The big difference this time is if you look at Italian spirits compared to Spain or Portugal, it really is an Italy problem now rather than a peripheral economies Portugal and Spain ten your yield in the in the two two and a half percent range, whereas we're talking to another presentative point for Italy at least. Yes, but unfortunately Italy is the biggest of those economies. But this is now very much a drama that focuses on Italy itself.

We also have, unfortunately the issue that Italy is particularly dependent on Russian energy, which is another thing that the ECB has to deal with. As you point out, you're three things were Italy energy and europe banking system, which as we know, is weaker than that of the United States right now, has been since the financial crisis and even before Energy John, just a brief word on that. Yes, I mean I am not using this word lightly. We saw natural gas in Germany over the last two years

skyrockets natural gas. Yes, the north Stream pipeline, which had been closed for maintenance, possibly with air quotes around maintenance, has reopened and some supplies are flowing. I think the read through that most people are taking is that puting his demonstrated very clearly that he can turn off supply if he wants to have a surprised that everybody took that so literally. It's you know, and and that's that's still very much of a risk that he might do

it again. That the sort of almost mafia like comment that if you don't help me get this part, it's going to have to come down to only twenty percent of capacity next week. Yeah, that's that's not encouraging. You don't want to be in Russia's vice, that's for sure. So, as you point out on a recent piece on British positions, are going to give us some light relief in a hot summer for anyone out there who hasn't yet seen Yes, Prime Minister or Armando Yanuchi is the thick of it, which,

by the way, was the inspiration for Viev. I'm sure everyone knows that. Then you're welcome, because you've got a great summer ahead. We've got have a great summer ahead in Britain because we have two candidates now. John talked to us about Liz trust She is, I guess, part of a long line of politicians that swing according to wherever the weather veins take er. She grew up a liberal in protesting Margaret Thatcher at one point, and now

she has embraced Taurism. Yes, I'm not so startled by the fact that when she was at school she was among the crowds going macky Maki, making out out out. That's that was very much the thing all young people in Britain at that time have felt like doing. What is more intriguing is that as a young adult into twenties she was a very active member of the Liberal Democrats.

That is unusual. It's also very unusual that she was actually quite a coherent and persuasive supporter of remaining in the EU during the y and the fact that she has been accepted and is generally regarded in the party now as the hard line Brexity he candidate. When both Penny more than the last person she eliminated, and Risci Sunac her other opponents, actually did vote for Brexit when she didn't, that is really a very strange development. It's

amazing how politics can work that way. Not only that, but she voted Remain. But yet she was one of the politicians loyal to Boris Johnson right at the bitter end. She apparently didn't want him to go, even at the very end. Yes, I think that there's certainly an element of trying to position herself Risci Sunac the year her competitor was one of the two ministers whose resignations a couple of weeks ago really did precipitate the end of Boris Johnson. He had stayed loyal for a long time.

But there is still this sense among those who like Boris and he has a certain degree of personal popularity with the party in the country, that that he is one of the traitors, that he is the brutus figure who put the dagger in. And the more she can suggest that she is the one who didn't want Boris to go, who was loyal. The more that could well help her in this particular electorate over the next two months was seventy five thousand Conservative Wary members are going

to vote. How much of it will be on personality and just the types of things we've been enumerating, and how much will be on economic policy because Richie Sonac and let's trous have very different economic policies. Again, they certainly have been presenting very different economic policies in the last few days. I don't see any particular evidence this Trust was the Chief Secretary to the Treasury, which the junior minister below Chancellor of the Exchequer at one point,

and so is Rischie Soonak. I'm not aware of any great change in Conservative economic policy between the two, but yes, as it stands, and I think this is the fascinating part. The clear policy difference between them is on macro economics, and really because in Britain's case, because you, Europe has just swallowed up all politics on the right of the

spectrum ever since that chair. This really is the first time there has been a direct head on arguments over economics, over over how to run the economy in a generation. What is very interesting here is that you might see the completion of the trend of the reversal of the

traditional parties of the right and left. You've already seen that to some extent in the US, where the Trumpist Republican Party is now getting prepared to be more aggressive with the private sector even than the Democrats are that they were very happy to spend huge amounts of money and not fund it, etcetera. They seem to have completed this transition to being what we have never previously thought of as right wing economics. Richie Sunac doesn't like deficits.

He spent a huge amount of money on COVID, but his emphasis is on tax raises if necessary to try to bring the deficits down. A city slash all Street background. Oh, he was Goldman Sax, followed by Chris Holmes, Hedge Fund, the Children's Investment Fund. He had quite a gold plated City of London financial career. So he is basically arguing for what you might call the orthodox cy that's been

around pretty much since Thatcher. Without the great belief that tax cuts in their own right will pay for themselves, which you would have thought would go down better with the party members. But as you say, we are seeing this shift now now exactly that is what will be one of the points that will be very interesting the

conservative membership. I think the average age is something like sixty, and they tend to be small c conservative, So you would traditionally have thought the sun approach would be more popular with that electorate than Liz trust saying let's cut taxes, and this sounds like early Ronald Reagan and then those tax cuts will pay for themselves as people un least their energy. That is a big difference in approach, both the saying the other one is left wing or socialist.

I wouldn't say either of them were. Basically one is saying, if you want to raise taxes, you're a socialist, and the other is saying, if you want to borrow more money, you're a socialist, which is a little immature. Well, that wouldn't be the first time that we had seen imature going on in all sorts of politics, not just particularly British. Have to ask you though about the US before we let you go. Obviously, Federal Reserve meeting next week, and

we've seen this nice rally. As you point out, the direction of the market and its breadth, both consistent with what we might expect to see if a major low we're near. And yet you're saying it's not compelling enough to just buy diving into the market. Yes, well, I mean it's risky to be out of the market altogether. Don't don't ever saying that. I'm suggesting, don't be in

at all. But in terms of making very big assets allocation calls to move from cash into stocks or from bonds stock at the moment, I don't see a good case to do that, because we still don't have our arms around exactly how bad the effect on profits is going to be, and we don't know how bad the economy is going to be. If inflation, it's not about

where it peaks, it's about how quickly it comes down. Really, if inflation is still, say five percent at the end of this year, which is plenty conceivable, then rates are going to have to stay higher for longer than is currently embedded in prices, and that would suggest stocks herself, it's not going to come down to two this year. If it's down at three and a half percent by the end of the year, then you would get very

much greater confidence that no, I don't. But that's the point I'm making, that that that we really need to find out how quickly inflation can be brought under control. If I had to take an over Under this point, I think the market is underestimating the risks that we continue to have inflation even if the economy isn't doing great. That underestimating the risks that even the economy is slowing, the fit can't bring rates down. I'm not certain that's going to happen, but that seems to me to be

a real risk. And until we can establish that that's not going to happen, that, you know, I'm barking at the moon on that one, I would be cautious about going all in on the stock market. Well, keep at least a little powder dry, if not a lot of powder dry. Just okay, that's always a good idea, John Authors there, don't forget. You can also listen to Bloomberg Opinion as a podcast on Apple, Spotify, or wherever you get your podcasts. This week, General Electric revealed a new

name for its power business, ver Nova. The rebranding coming as GE prepares to split into three over the next couple of years. The renaming reveals, though, a deeper question for the industrial behemoth and for companies more broadly, just how old is too old? We're joined by Book Sutherland. Not many companies around as long as GE hundred and thirty years, and a deglomeration has been underway for some time. Can you explain why GE needed to undertake this man

less task? You know, I think this is a company that for a while now has been too complicated for its own good. Made a lot of arguments for many years, but they were borrowing technology between the different businesses that you know, the ability to have executives jump around between

their diversified portfolio made them stronger management teams. And that all has been turned on his head in recent years, just given the challenges that has faced and I think investors have grown increasingly frustrated with the negative surprises that have come out of the company, from the fifteen billion dollar shortfall and insurance to the cash crunch and the power business or recently the renewable energy business is having difficulties, and I think investors just are ready for a cleaner,

simpler story, right, and the stock still not far off its financial crisis lows. The CURRENCYEO that are called decided to split into three back in November, and at the time you loaded the approach, where are we now with us? They're still sticking with the same plan. One issue is that it takes a while. I mean, he is a very big, complicated company. It's untangling. It is a mammoth task. And so they announced the break up plan in November. The first of the spinoffs is not scheduled to happen

until early twenties three. That will be the health care business um and then they plan to spin off the combination of their gas power, renewable energy, and digital assets in early leaving behind an aerospace business. You're talking about, you know, a multi year timeline and there is a lot of space in between, and within that, we have a volatile economic environment and that just makes it really difficult for investors to make the decision to own ge

right now while it's going through this process. They think it seems like there's a lot of investors out there who would rather wait and owned shares and some of these independing companies than stick around for what is bound to be a messy unraveling. Now I'm quoting from one of your recent columns. If the lesson of g e s past is that it was too bold and it should have been cautious, the lesson of the present maybe that the company is too cautious about letting go of

its legacy when it should be bolder. What do you mean by letting go of its legacy? Book? They came out this week with the branding for these new companies, and they are going to be called Healthcare, ke e, Eero, Space, and ge Vernova is the last one being the combination of the gas power, wind turbine and digital assets that I've described. I think it's surprising to me that they're keeping the g E name with these businesses. Again, this isn't a hundreds and thirty year old company. It has

a very long legacy. It is well known for commercializing modern lighting, being a powerhouse behind jet engines. GE had a hand in developing a gem engine that takes off every two seconds. They power a third of the world's electricity. So there's a lot of history there, But recently that name has not really resonated in a good way with investors, and so you know, if this breakup is meant to

be a reinvention of the company. In my mind, it would be a good time to really give these businesses an independent identity, to let them escape from the legacy g E pass and carve out their own future for sure. And Larry called what's his reasoning behind it? Has he given a presentation on what he's expecting to happen once

these spin offs actually happen, you know? I think Larry Colpe is a big believer in de centralized management, and he's done a lot of this within the confines of the current g structure, pushing more accountability down into the businesses.

But there's obviously only so much that you can do when you are still a conglomerate, and so this is sort of the natural evolution of that, where these businesses will be empowered to make their own decisions when it comes to capital allocation in terms of day to day operations, debt management, whatever it might be. I think there is a strong track record of industrial spinoffs proving that when management is properly incentivized and focused on just one business,

it's beneficial for the company. And so I think that's the end goal here, and nothing about the branding changes that goal by any means. But it will still have that E name um and so you know, the company says that they did as of it, they got feedback from their customers employees that wanted them to keep the name.

I think that if you look at some of the other industrial breakups that have happened, there is some value and letting go and starting fresh will be interesting to see what happens as we go to twenty three and twenty four, what happens generally with these spinoffs books. It's going to be interesting to see how this one slaves out. So there was a time period where you know, all

spin offs essentially did well. They were very hot and people liked them, and then you know, in recent years it's kind of gotten more into flitting hairs in the industrial sector. That is not what is happening with g E. These are obviously very distinct businesses a very separate markets.

But I do think, you know, you might see some new investors taking a look at the companies that maybe weren't interested in owning the g E of the past, even if they liked the healthcare business, because then they also got an aerospace business and insurance headaches and you know, whatever else it might be. I think, you know, you might also see some re shuffling among the AIMA list community.

Right now ges covered by a multi industrial analysts. It's not going to be a multi industrial company in a few years time, so that may bring some different types of perspectives into the fault um. And so you know, I do think they're changing their profile with this breakup and potentially attracting different kinds of people. Brook Sutherland. There to China now with all of its woes from COVID

to growth to this mortgage payer boycott. There's also, of course the prospect of a call between President Biden and she in the coming days. That would be the first since March. Let's get to Schuli Wren. It appears there may be a bit of a rap proschment on the cards, with a call between President Biden and China's Chies and Ping in the coming days. That's the first between the leaders since March. Also a council trip to Taiwan for a House speaker Nancy Pelosi, which likely has something to

do with diplomacy and maybe even deference to China. Let's get straight to Shuli Wren. Shuli China is grappling with a whole range of its own economic and COVID woes. Right now, talk to us a little bit about where China is growth wise for this year. I hope there is growth at all in China. I mean, with the whole COVID A zero UH city lockdowns, it's very very

hardful China's economy to to not any positive growth. So so for this court between US and the Chinese president, presidents actually has an incentive to play nice, to try to you know, to drop export carrots. So so I'm pretty positive on this book. Right. So, if we remember the former president Donald Trump had imposed charles and more

than three billion dollars in Chinese imports. Obviously the Biden administration is trying to do everything it can to bring down inflation in the United States before the midterms, but also to appear to be bringing down inflation with everything possible. What kinds of outcomes could we see from this call that would make any difference to either economy. I think the benefits for China can be quite large, actually, because exports during the pandemic was the strongest economic suit for

the Chinese economy. So if there is progressing this talk, the exports can lift China's economy by I don't know, like a one percentage point. As for us, there has been a lot of study done by economists. They say that the effect on inflation is not going to be very big. I guess Biden has to be seen doing

something right. It's almost a perception thing more than anything else, because we all know that food and shelter are the two main components that are driving off inflation here in the United States, and there's not much that you know,

tarifs on Chinese goods will do for that. But China growth itself is running up against a whole array of problems, including the COVID zero policy, which continues and indeed cases are low in comparison with countries like the United States, but at the same time the economy has been very much hurt. You have a column talking about redlines versus zero. COVID explained to us a little bit what you mean

in terms of putting those two side by side. So the Chinese government has some very big, top top down policies in recent years. One is COVID zero, right, and then the other one is playing off of the Presidentshijin King mentor that housing is to be living, not to be speculated, um, and then like what they did two years ago was setting up the so called free byline

basically restricting developers access to financing. That could have worked, but you cannot have both because one problem we are seeing is that you know, the developers, of course they're indebted. We hear a lot of news clips on how financially distressed the developers are, but they're even more distressed now because of the COVID zero lockdown. How can you tell any apartment if everyone is stuck at home? Right? And then like another problem we're seeing is like in recent days, um,

some Chinese middle class they're having like a boycott. They don't want to pay mortgage anymore because they don't see their apartments delivered by the developer developers. Right. This has been a fascinating development. So once again we're seeing the Chinese populace take matters into their own hands and just boycott mortgage payments. Just explain a little bit more of the context here. Usually so so in China, like all the new you have apartments they are sold based on

this so called the pre sales model. I think a former president Donald Trump did a bench of that himself. Uh, like the developers sell the apartments before their developer they're delivered, right, So the households they're already starting their mortgage payments, but they haven't seen their apartments yet. So right now, the developers they said they don't have money to finish the

projects even though they're already got the whole proceeds. And the households are saying, well, wait a minute, why am I paying for this if I can now see the apartment. That's why they are boycotting. And also there is a problem called so um double renting, so they are paying rent for their current apartment, they're also paying mortgage um um the future apartment that they hope that they can move into, right, and that's very expensive, especially during COVID

zero lockdow when the economy is not very good. I mean, in the US is pretty common for uh, you know, younger middle class to pay thirty percent of their income to rent, So think about that as a benchmark. Like the Chinese. Chinese households they're paying like sixty sev of the income on two apartments one they can never see. That's why they're boycotting. And it's so fascinating because the boycolt spread it started small with some prospective residents not paying,

and then it's spread to several hundred developers properties right July. Yeah, it's quite big, and it is really a big issue, Like it's probably the biggest issue during the last year of property crisis, because we think it's about ten percent of China's presow departments that have this issue right now,

and it's a lot Will they ever be built? Julie, Well, the money has gone, like the developers they have throwing the toot so so right now, one solution is for the government to return the mortgage payments that the house some households already have paid and they say, okay, this this project is just not going to be built. And another solution is to bring the local government of their own enter crisis in and then say okay, we'll finished this building. So um, it's tough they're trying to figure

out now. Well, it's really interesting because it started with the people and then the government had to endorse the move. Right, so the government came out and said, okay, that's fine, you can boycott the payments. Were unilaterally declaring that there is going to be no payments on x number of properties, right, Yes, and uh it makes sense, right like, what can the

government do? I mean, if I see most of my income paign to rent, I can't do it right like as a consumer in the past, during the COVID zero era, right like, the government has has allowed small businesses not to pay, not to repay their loans and the interests and so on. So for so they had to expand the same policy to mortgage payers. But that's what they're

doing right now. So surely this COVID zero strategy, which continues and is by all accounts, I'm pretty successful in terms of the health of the Chinese people with under a thousand cases reported over the last few days, is does it continue forever? When do zero COVID become something else? I so so right now, the whole Chinese economy I

call the modern day sleeping builty uh replay. So basically when they try to hold down to these pop down policies and to November, when President Shi Jumping is expected to take on the third Trump right and after that, the general expectation is that the phoe called COVID, they're always going to be relaxed a little bit because this

is just not sustainable. I mean, we all know how contagious on the chrome is really so uh so, like that's what they're waiting for, their hoping, you know, like another four five months China can continue on and still with those city ye lockdowns. I mean, one thousand cases doesn't sound like much, but if there's one case as more city can just go into a lockdown exactly. There

are several lockdowns ongoing right now. Yeah, so one thousand cases, you like, that number actually is really big because one thousand cases can bean you know, quite a city is being locked up, which is frightening because that is people at home not being able to go to work, and the economic activity, as we've seen in the United States and elsewhere, when there's a lockdown, economic activity completely shuts down. What can President chij and things do otherwise to sort

of spur economic growth past November? I mean, he also will want to look like he's doing as much as he can to help the Chinese economy, just as President Biden is trying to do at the moment before the interms. I think that the market expectation is that the China will have to you know, do quantitative eating, like the government is already bringing forward next year is found the students quota to this year, so if if continues, they

will have to bring forward the quota from four. Basically, you know, flood the economy with a lot of money. But I'm not sure how well that works. Like some some people say, you know, China needs to send out stimulus to checks to people, right, just like the US has done. But she didn change. He's funny, he's a surprise side person. He Rabiti is Similus tracks to small businesses.

And we've seen that policy before from she and thing. Yes, in twenty he gave quite a bit of money to small businesses, but not too people directly, right And as you say, it doesn't tend to work, or at least it didn't in that case. Would you try the same thing again though? He would. But nowaday's small businesses they don't want to reopen because they you know, like it's suddenly a neighborhood the COVID case, you're in trouble, right, like some some small business they just say, I don't

want to reopen. And surely you're based in Hong Kong at the moment, the rules are changing in Hong Kong, so this sort of mandatory quarantine and government run facilities and so on is going away. The new Chief Executive seems to be making moves that look like they might be at odds with what the mainland is doing, but it may also very much be on purpose. Right, what's your sense of the order is that the new Chief Executive,

John Lee is getting from the mainland. Well, I like to be on the optimistic side, but then I'm stuck in Hong Kong, so I have to be more optimistic, right. I think it's interesting when when she became here for the twenty sister Anniversary of July first, he talked about the merits of one country, two systems. So now that she's been executive and his ministers just talking about Hong Kong has this two systems framework going, and you know, there is a lot of leeway to do things that

are different from mainland China. So even though we in theories still adhere to COVID zero, I mean what is zero is one thousand, zero hundred thousand zero, So they are given a little bit lead way and I feel that and also present she is the Hong Kong can rights from the ashes. I mean he has to talk of some policy dividends, right, like we are in ashes right now. She has to, you know, let us reopen

to the rest of the world. Tuli ran there. We're now choosing to end all conversations, not with you, though, as always we love to hear from you. I'm at Bonny Quinn on Twitter, or send your thoughts to v Quinn at Bloomberg dot Net. Were produced, as always by Eric mollow Till next Time on Bloomberg Opinion. H