Bloomberg Surveillance TV: April 16, 2024

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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. Mohammed's with us around

I think you have two sets of sources that speak to us exceptionalism. One is the inherent attributes of the US. It is more flexible, it is benefiting from the higher labor force participation, it is more entrepreneurial. And then there's a second element, which is policy. It's been running a very very loose fiscal policy. We're running deficits of seven percent when unemployment is under four percent. That is unthinkable,

How sustainable to youth in the second element is policy.

So I think it is more sustainable than people realize, but there is a limit to it. Look, this can be derailed by one of two things. Oil at one ten or a FED that's too tight. Those are these two things. And if they come together, which is a possibility the geopoliticist gets worse, then you could do ail US growth.

You wrote about this just in terms of the pressures of what's going on with the Middle East and the potential increasing commodity prices on the heels of that. One kind of theme we've heard is that Europe will be hit much harder than the US. You're saying, maybe so, but it doesn't mean that the US is immune. Can you elaborate?

So?

I think the US dominates in relative space. It dominates almost regardless of what the global scenario is. But in absolute space, the US has dominated so far, and for the US to continue to dominate, we need to avoid really high energy prices, and we need to avoid another policy mistake, so it will dominate in relative space for a very long time.

This goes to the question that ECB board members were talking about, which is that they might not be able to cut rates because of geopolitics. Do you think that this sort of one two punch is looking more likely for the Federal Reserve as well, that they will keep rates higher for longer in response to higher commodity prices, even at a time of a potential shock that could curtail growth.

So, Lisa, this is a great question because I think most people, not everybody, most people on your show have now agreed that the last mile of inflation is going to be complicated, that inflation's most sticky. Where there's massive disagreement is what the FED should do and what the FED will do. Right, there's massive disagreement that those who

But if they are data dependent and you see inflation, we had hot retail sales yesterday, and they do, and they do start to get more concerned about inflation. Is it not just they're not going to cut like the ubs? Note, do you think they could hike?

Look inflation. If inflation gets much worse, they could hike. But I think if they do hike, we're going to have a regional banking crisis. We're going to have all sorts of damage in the marketplace. And I think that is at the back of the head. So I think the likelihood of them hiking is low. Is it zero?

No?

They could.

What's the difference between them hiking twenty five basis points and just hold them for the rest of the year. How big is twenty five basis points?

The minute that hack twenty five basis points, they open the way to hiking more. That's the difference we're going to see today. Chair Pal is going to try, I think, to do exactly what he did earlier, which is maintained maximum optionality. On the one hand, I think he's going to basically say the inflation story has not fundamentally changed,

Is it too early to move away from bumps in the road? Three bumps in the road.

I would have moved away a long time ago, but then probably will maintain the bumps in the road.

You talk about all the disagreements, and I'm still sitting here thinking about what fe Williams, New York Fetcher william said when he said, you know, we're not really thinking about the target. We're just kind of playing it by year and taking the data.

And you talked about how the biggest debate.

Among you and your colleagues really is where is the endpoint? It basically is the destination is the biggest issue. What gives you confidence in your goal of the destination that makes you think that they should just sort of adopt some kind of belief and go with it rather than just kind of live in the marass that we're living in of just complete confusion.

So confidence, I don't have, hope I have Okay, I mean there's a definitely confidence and hope. You know, they do have a deal mandate. They do understand how exceptional US economic performance has been. That proud of it, it's incredible. I mean, you opened up with how depressing it is

Need to have a view.

You know, they're being pressed hard on tell us what you view with and at some point they're gonna have to live on that now. You know. President Williams has said, you know, think about the target. You're going to hear this term longer term. Come in every time to talk about the inflation target. Yes, it's our longer term inflation target, yeah, right, or medium term inflation target. And that's the way they're going to do it. They're not going to come out

Can you imagine if Chairman Pound came out this afternoon he said I don't have confidence, I have hope. Can you imagine how that would go down with financial markets?

You know what people would clap, They would say, finally, you're telling us of.

Days type stuff. You know, I don't have confidence, I have hope. I'm really close to say that, Johning us. Now around the table, it's David Hart, the CEO of PGM. David Camonicsy, sir, good morning, it's supposed to be with you. Thank you very much for being with us. I want to pick up on Shinati's comments at the end that the prospective money coming out of money market funds and Mike writing gas sway, are you beginning to see that trend develop?

You know, Jath, we are seeing that.

We've seen that really for the last six months, but it's been in small, small pieces. But I do think it's beginning to pick up pick up steam.

And some of the reasons are obvious. You know.

Certainly, I'm at a higher level of interest rates relative to money market funds, and as we begin to see rates peak and then decline duration begins to look a little bit more more attractive. But there are two other things that are going on which are at least as important. One is that the big pension funds with higher rates are actually better funded and so they actually are using this as a chance to de risk, and that means for them they are moving money into fixed income.

And the second is.

That you know, we have the continued demographic trends going on, not just in this country but around the world, and retirees need income. So we are in the process now of this huge shift from accumulation products to decumulation and income products, and those need fixed income. So if you take the kind of short term shift, you add to them two structural shifts. We think over the next three years, we really are going to see bonds are back.

This sounds like a new regiame. And I'm going to give you obtain a bit of a shouts out because you're a modest man. My Cullings, Greg paid is rubbitt SIP just absolutely phenomenal pre pandemic really defining that bond market regime of yester year. Can you talk to me about how different this regime is going to be compared to that.

We think it will be different, and you're right, they were right on the lower for longer, for quite a long time in that, and then more recently our call has actually been that we're going to be higher. So if you go back six months, we were very early to the hey, we're looking at kind of two cuts for twenty four when the market was pricing in seven, and we held with that view, and the market's.

Kind of come back to us at this point.

So we pride ourselves on taking I think, considered non consensus views that are long term in nature rather than simply trading views. And I think that we've made a very good job on those. And I will say that in order to do that, you need a culture that supports people to take those non consensus views even during times when.

They don't look so ripe.

And many organizations have a hard time doing that, and we're proud of our culture to do it.

To rip up the script just quickly, because I have got Tom Keene's shadow over me and all of these banking earnings that come out, with compensation expenses coming up, is it getting harder to recruit and keep that kind of talent?

No question, It is.

I mean, if you look just over the last twenty years, you would say that many of the functions and things that used to be done in the investment banks are now being done on the buy side. I mean, I have more than one hundred and thirty credit analysts.

You would never have seen that before.

All of that would have been done by Golden Sachs and Morgan Stanley and we would have bought research from them.

So the actual value.

Chain continues to move from the cell side to the buyside. And that's a trend that I don't think is going to change, and that of course puts a lot of pressure on those of us on the buy side because we do need to move our compensation levels up in step with that. So the war for talent is very real and very practical.

For us day to day.

So artificial intelligence, how do you use that? And I'm really I'm diverging here. I was going to talk about bos being back, but this is fascinating.

Today talking about Greg paid his bonus.

Okay, well you can go there next and talk about the winebar. But I am curious about this idea of how you make things more efficient to reduce costs while continuing to prioritize this talent. I mean, how do you see that playing out or do you think that some of the gains of productivity are overstated and that it really just comes down to talent and people who can do the job best.

So I think that we are in the midst of a game changer on technology in asset management. Over the last decade, technology has mostly been about can we automate things? Can we get more efficient at things? And so it has been a bit of a cost play. That's not

So you're saying it's making you more efficient, but not that it means you need a leaner team.

It means that the quality of jobs that we have will actually be better because we will take a bunch of things that are kind of fairly wrote and we'll be able to do that much more efficiently with technology. And then we will be able to augment our portfolio managers with technology so that they're actually making better investment decisions.

When you look at AI and inflation, well let's come back to the US.

We're coming back to.

Sorry, that's my view, isn't it an outlook for the economy is weak inflation? But is that the rest of the economy or also as well in the United States where we see continuosly hot day.

So the big story that I think doesn't really get reported enough is that the world has never been, at least in the last couple of years, more divergent in their views of growth. So spending time in Europe, I would say, actually, the UK is in a technical recession right now.

You spend time in.

Germany, boy, growth is really hard to come by, and it's not looking so terrific and continues to be a worry, but it's come down a lot and is related to mostly to energy prices. You move to the US and actually growth is higher than most people thought. Their labor market is in excellent shape, and growth appears and productivity appears to be better.

Inflation is higher and rates are higher.

I just spent last week in Japan, and you know, it's fascinating. After literally thirty years of trying to get inflation to go again, it's a beautiful spring week. The cherry blossoms were out, and there is a spring in the Japanese stout. They finally have inflation coming back, They have productivity and members that look better, They have some growth, and so the stock market is an all time high and you feel an optimism in Japan.

We saw the numbers come out of China.

So China continues to push on manufacturing in order to get.

Their economy going.

I think all of us wish that they had the tools to get domestic personal consumption going, because that's really the rebalancing that they need.

In their economy.

The way they're going right now is just going to flood the world with cheaper manufacturing goods, which is, you know, maybe going to export deflation back to kind.

Of five years ago.

But it's not the balancing that we would hope. And I think that if they could get their domestic consumption going, it would be good for the Chinese people, good for the Chinese economy, and better.

For the world economy.

So the reason we come to weakflation to come to your question is that the world is very different. But when you put all of that together, growth is going too slow from what it has been, and we are going to have higher inflation we believe for longer and higher rates, and that's where you get the weak flation piece of it. And it's very different from stagflation, where obviously the labor market is in bad shape. We think the labor market is pretty strong.

There's a ton to impact that. I want to unpack the China piece of it just a little bit, focus on that. That growth model at the moment is controversial. It's getting old of the wrong kind of attention from policymakers worldwide, particularly here in the United States, and there is talk of maybe even more policies going against China from the United States. Secretary Evan's been talking about that over the last week. Does that make it harder for

Yes, it certainly is.

And I think many of us are headed down to the IMF meetings this week, and I think that one of the big topics is going to be what are the impacts of the new Chinese economy and what will the US administration.

Do in response to that.

I will say, having spent a week in Japan, that the country that is the number one beneficiary of the tension between the US and China is Japan. When I was there, there were three companies launching new chip manufacturing centers there, There was companies that wanted to invest more in Japan. And so Japan has actually taken on a role in Europe, in Asia and in a Pan Asia

When I spend time with.

Folks in both the diplomatic and security world. There the coming together of Japan, of South Korea, now of the Philippines and Australia is creating a stronger.

Alliance than we had before.

And so you know, these kinds of reverse powerful impacts that we have are hard to predict, but they do change those supply changes quite a lot.

You've mentioned Japan a few times. He visited that it was not the business. Then what are you up to in Japan?

So we are one of the largest foreign asset managers in Japan. We absolutely believe that it's a critical country. Obviously, if you just look at where is the money around the world, Japan remains one of the wealthiest and highest savings places, so there's a lot of money to manage.

It's that money coming home.

So the money is coming home to some extent, but also foreign money, as I mentioned, is going in both portfolio flows and FDI, which again is a fairly new storage.

It's a massive change. Apollos Torston slock with this to say, the strong tail wind from easy financial conditions continues to boost inflation and growth, including consumer spending. In March, given the ongoing re acceleration in the economy, the FED will not cut interest rates in twenty twenty four, Apollos Torston slock Is with this around of table, Torston, it's been quite a cool and I imagine you're feeling better about that called over the last week or so well.

I think that what is happening is that when they're fit pivoted, after having said for two years rates are going up, up, up, now they're actually saying rates are going down. And they're still saying rates are going down when that change came at the November one FMC meeting.

You're not lonely joining you, I think sock Gen and Stephen Gallagher in the last couple of days now saying no cuts. In twenty four even mattless Eli, a Deutsche Bank saying one cut December. Likewise from Mike Gapano for a Bank for America. What's interesting about the way you frame it is you put a lot of this on looser,

That's really important because that discussion splits into two things. Namely, if you look only at rates and the level of the FIT funds rate at five and a half, that is certainly above most estimates of our star, meaning the long run equilibrium interest rate for the economy, which normally the FIT would say is two and a half. So looking at rates on their own in your old school is element models in the economics literature, you will look at that and say, hey, you have that exactly.

Monetary policy is tight.

But what has happened is that has been completely neutralized and offset by the rise in the dark market, the rally in IG in high yield and loans, the incredibly increase we've seen issuance in ITG also in high yield and likewise, IPO and m and a activity coming back. So you have on the one hand, yes, it's true that your old school textbook model tells you the rates are higher than where they will be in the long run. Namely, five and a half is bigger than two and a half,

You could call it a sugar.

High coming from the easy and financial conditions, lifting the wealth component for households, that is boosting consumption. Therefore you see increases of course in travel, restaurants, airplanes, everything when you come to hotels, concerts, sporting events as a huge taill with consumer services, and that's why super coinflation is accelerating so quickly at the moment.

Essentially, are you saying that it was a policy error for Fetcher Reserve chair Powell to talk about in December the potential for cutting rates.

See, I don't think this was the intention. I think the intention was to take the text book out and say, well, when we run Tailor rolls and Phillips curve, we get that it only is rates as John is saying, that matters, and they did not have the intention of lifting financial conditions and boosting the stock market as much as they

This race is a question.

Of what happens if the market starts to completely agree with you and make in no rate cuts this year. Does that curtail some of the sugar high. We're already starting to see some people on Wall Street wonder, okay, are we going to see yield where they are bite into equity valuation slow some of the capital markets activity.

Do you believe that too? Absolutely?

So. I do think that the rate hikes that we have had, and the five and a half higher than two and a half, it is already biting hot on highly levered consumer balance sheets, highly levered corporate balance sheets, and also hard on banks, in particularly on regional banks. So the consequence of this is that we still have the negative effects of the transmission mechanism. Margarry policy is still working, it's just only working on those balances that

So just to mind. This really confusing. If we start to believe there will be no cuts, that will be cut.

Well, eventually, the FED has the goal of getting inflation back to two percent, and inflation is not a two percent If you look at the three month annualized change in super COO, inflation is eight percent. So the trend in particularly in SUPERCOT is really not the Fed's friend here. So the worry is it might take a lot longer to get down to two percent, so that fight against

Inflation first, and what about hikes.

People are actually starting to talk about this.

I think, and this is of course in your world. I think that the ligra of that is still relatively low, because there's just so many complications in doing that and in saying well, we were wrong and now rates are not going down, our rates are going up again. There's also some challenges with the basic effas of inflation, some more technical things about we got to go with it in July, otherwise it'll be in December or next year. Because we have the basic fake there's very supportive for

So you don't think if we get too soft prints on inflation, we end up with a cut in July.

See, but I don't see whether those soft friends should be coming from retails yes yesterday, I mean super core inflation and shelter time inflation is showing signs of coming down much slower than what anyone expected. And if I look at my Bloomberg screen at ism price is paid, you also get that that's also beginning to accelerate. So even goods inflation, which went through the roller coaster of being no problem, a big problem and no problem again.

To be honest toast them, was a reaction function question, not a forecast question. So let's just assume we do get that data. Do two soft prints lead to a cut given how much they've seemed to want to cut still at the Federal Reserve.

So let's turn that around and say, if they do absolutely want to card in June or July, we will need some very very dramatic slow down in inflation in the next several months.

Absolutely, Okay, Tilston, this was great, just really really smart. Tolston's slock of Apollo feeling much much better about its call for no interest rate cuts in twenty twenty four. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiot politics. You can watch the show live on Bloomberg TV weekday mornings from six am to