Bloomberg Surveillance TV: September 24, 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

Emily joins us for more.

Emily, more good news, more good news, overnight stimulus measures out of China. Is there a reason to buy this morning based on that?

I mean, look one of the biggest risk to being underweight China and underweight emerging markets, is that policymakers can come through with these big packages. I don't know if I'd necessarily call it a bazuka, and it likely needs to be followed up by more on the fiscal side. But this is creating this risk on rotation or prompting it to continue.

You know, as we see these big moves.

I think you guys have been making some great points this morning about is this actually going to get the Chinese consumer off the sidelines. That remains to be seen, but certainly this is adding to the momentum and the sentiment that's permeating markets right now, which is that everything's pretty great.

Well when you look at the US versus the rest of the world, does it change the story for you?

Is it enough?

You know, John, it doesn't.

And it's really amazing to wake up in the morning and you see this terrible data out of Germany from the IFO to manufacturing. I mean German manufacturing PMI is at forty right now, that is in recessionary territory. And meanwhile, you know, you look at the DATS and it's up one percent.

So I think Mark it's.

Globally or really reacting to the FED pivot the fifty basis point cut stimulus out of China.

Again. We want to be fully invested here.

But we want to be mindful of going over our skis and taking risk in a market where you know, I know, you've been shaming everybody for saying price for perfection all morning, but it is really in the price with the S and P five hundred reaching new all time highs every day. Underneath the surface, we would suggest just being mindful of taking too much risk.

It's not shaming, Emily. We think that it's a valid phrase. It sticks in our minds, which is the reason why both John and myself write it down when people.

Say it, which is frequently.

I am curious about how difficult it is to remain cautious at a time where you see so much risk on appetite and a fed that seems to be behind part of it.

At least it's rich, really tough.

I mean, I think again, we are fully invested, we're you know, we're buying high quality stocks and bonds.

But I think the trickiest time in any.

Economic cycle to be bare is at the very beginning and the very end of it.

And I think that's what's happening now.

You know, we think about it like the music's getting turned up at the end of every cycle. The music gets turned up as inflation comes down the challenges.

It gets really, really loud.

Until you start to see initial jobless claims picking up and high yield bond spreads widen, and then things change quickly.

They go quiet, very fast.

Right now, initial claims are sitting in a low two hundred thousand range. High yield bond spreads are three hundred and two basis points. They actually dip below three hundred basis points after the Feds move last week. So the music is still playing. You want to be invested. You

If we do see this market melt.

Up, let's talk about the bond market.

But Spoke Investment just put out this to the ten year yield is up every day since the Fed cut rates, rising fifteen basis points in that period. How do you have conviction in the long end of the yield curve at a time where this market seems to be suggesting, hinting, flirting on the edges with this idea.

The potentially the more.

That the Fed cuts now, the more that inflation could be stickier even pick up later.

Yeah, I don't think it's surprising to see this backup in the ten year yield. You know, certainly the FED supporting the economy with a larger cut is bullish.

It's risk on. It's another part of the risk on puzzle here, you know.

I think the biggest risk is not necessarily inflation picking up, that could be part.

Of it, but more of a melt up in.

Markets, which could create more leverage in the financial system. If you continue to see again equity markets surging, you see that, you know, momentum stocks, bitcoin, you know, low quality companies, all kind of participating in this rally. Eventually, we do think that an economic contraction plays out. It may take some time here, but when you lean into higher quality bonds you know.

That are paying over four percent in yield, you can get paid to wait.

I don't think that the bond market is fully sniffing out this inflationary environment. That's likely to see some type of contraction, some type of increase in the unemployment rate, and it could happen so quickly. I talked to so many investors that are waiting to take advantage of higher bondyards. They're sitting in money market accounts, and we just ransom data that suggests that investors sit in cash for way

Lot of sense right now.

The normalization of the yield curve will give them a little bit of a nuch. Do you think the difference between the two and the ten year at twenty basis points makes a difference?

Does that difference need to be launcher than that.

I don't think anybody is paying much attention to the bond market right now in general, given the risk on environment that we're seeing.

But I do think it's enough.

To start to lean into two higher yielding bonds here again, we could continue to see some more volatility and rates. By the way, the FED just cut amidst an environment where the economic data we're pretty good. You look at things like retail sales, industrial production, regional FED surveys. So I think we could continue to see some chop and yields as the data are still suggesting that we're chugging along right now.

The US economy is doing okay.

It reminds me a little bit of my son's grades right now, like they're okay, but they're not great.

He's still on the football team kind of thing, you know what I.

Mean, Like we're doing all right, and so I think you might have to wait for duration to kick in as a tailwind. But again, that income is there as you kind of embrace.

That patience as he watched it this morning.

I really hope not. I hope he's in math class.

Only just a funal one me. I'm not going to name who this is. I'm just going to share a quote with you. This was from earlier this year. We're price for perfection of easier policy, continued disinflationary forces, and resilient growth versus a bankdrop of US growth continuing to beat expectations.

I won't name in shame anyone.

Because I think that reflected how a lot of people found at the start of the year, and it's the last line there, continuing to beat expectations. Do you think we can continue to do that in the US labor market in the months to come, because it feels like that holds the key to a lot of calls.

The labor market is a tough one.

I'm going to punt on that just because you guys mentioned before the revisions are so critical, so I think we need to take those headline numbers with a grain of salt, focus on the revisions. But I think you know there's a lot of expectations going into this. What I'll say is that valuations are never a catalyst for a shift in market leadership. You've got to see something else change. You have to see the earnings backrop change. You have to see the macro regime seeing a shift.

The bar is really low. It gets much higher from there.

So in terms of beating expectations, from a fundamental standpoint.

Yeah, I think we can do it. The bars, well, let's enjoy it while we can.

The bar is Low Young Rowland, Emily Run of John Hancock. Thank you appreciate it. So here's the late, says Chinese Central Bank, convening a stimulus package, sending stocks to their best day in China since twenty twenty. The plan including a cut to short term interest rates and a reduction of reserve requirements for banks officials. They're also studying sending

Look, I think you know, the stimulus is certainly more than we expected just a few days ago. So I think that's fair and I think that matters. But it seems to me more aimed at putting a floor under the equity market rather than necessarily buoying the currency. And so yes, of course we've had a little bit of a currency strength today. We've had more of it in the last you know, I would say, you know, a month and a half, although I think that has more

So there is this question about whether the FED is opening the door to some sort of stimulus and further easing around the world, and whether it creates a relative I don't want to say race to the bottom, but it gives us a bit of a back drop that could.

Limit how much dollar weakness there could be. Is that kind of your view of things.

I think that's very much in line with our thinking, right. It's the FED is a big deal. The fact that they're cutting rates, and they're cutting rates against a backdrop that is not recessionary. They're cutting rates to get ahead of the curve and support and secure that soft landing. That really does allow em central banks and global central banks really across the world to join in that easing train.

That's not our view.

I have to say, Kamashia, you were listening to a nineteen sixty soundtrack when you're writing this piece. Is the first cut, the deepest, and slow down. You move too fast, Kat Stevens and of course Simon and Garfokl. I am wondering when you say is the first cut the deepest, which set me off on a sort of humming sphere

We've put a lot of effort into our titles. I'm glad you enjoyed those, But you know, I think, yes, I think that you know we're coming, I think to the limits of how much the dollar can weaken just by the FED easing. A lot of easing is now in the price in the FED cuve. I think you know the baton is going to be passed to other central banks, to the economic developments across the rest of

We don't think that.

Picture is going to change anytime soon, and therefore we think the dollars high valuation will erode only very gradually.

You say, a key event risk is the election, obviously for Asian currencies, which are the most vulnerable potentially to Trump tariffs.

Yeah, I think.

Look, I think if we have a set of tariffs, if we have you know, trade disruptions, that's never good for any emerging market or any market really which is plugged into the global trading cycle. And a lot of ems, you know, have that exposure to global trade. You know, I think, you know, if I think of open economies like the Korean Wan, but even sort of neighboring economies like the Mexican pace, So I think, you know, those are the kinds of currencies that could be affected.

You know.

China is another one where you know, there's lots of you know, talk of tariffs, and we saw those implemented in twenty eighteen and twenty nineteen and there was an impact. So I think it's the it's the I would say open economies of Asia that are more plugged into the global trade cycle.

But then also.

Perhaps you know Mexico is one which always features on the top of the list, is given its exposure to US trade.

We'll talk more about that next time. A clinic from you, as always, Commactionatraverdi of Government sanks there. On the latest side of China, Let's get to a big story in the last few days in this country, the rise of artificial intelligence fueling energy amount across the nation's power grid constellations, striking a deal with Microsoft to restart the three Mile

It's very big for electricity to power data centers, which are being built globally at a rate of one a day, and they're very big ones. It's very fast, you know, so very big data center nowadays probably can absorb one nuclear core, you know, six six to eight hundred megawats. So it's better to restart and reuse a nuclear power station than build a new one where we're going to have to build some new ones until there's a reaction, And the reaction is how do you actually reduce the

A big picture.

Do you think it undermines some of the climate goals we have in this country?

Not necessarily. You know, first of all, we have to think about not just this country but the world, and so it's a contribution to this country. There will be ways of offsetting it, and there are ways of getting renewable energy. Part two data centers, So it's a mix of things. There's no one solution to this.

John.

This is the reason why I was excited to talk to you. More than anything. I was looking for some optimism because usually when we talk about climate change, you hear gloom and doom and sort of existential angst.

You said that nearly eighty percent.

Of the technologies that we need to reach net zero by twenty fifty are already developed.

The issue is just capital investment.

Explain well, cabin investment and cost. Cost and capital investment go hand in hand. The more you do of something, the cheaper it becomes. So you've got to get started, and you've got to figure out how to get some form of incentive to get early technologies applied. I'm I remain very optimistic. I do think our biggest problem is we've spent probably a quarter century discussing the problem and doing little about it and actually arguing whether there's a

Okay, what are the right things that could work?

Because we know that just telling people, you know, be better about throwing out fewer items, or you know, don't use plastic bottles, or some of these sort of lifestyle changes are not working.

They are not resting with people.

In fact, they are actually causing people to reject it. So what are the things that are actually working?

So the very big thing, which which has to work, is not quite working yet is how do you how do you take carbon out of hydrocarbons? Because we're going to use hydrocarbons for a long time and so capturing carbon dioxide and storing it away in different ways, not just the old ways that people are thinking and look like big refineries, but there are more sophisticated ways I think being developed. That's the very big thing to crack. The second thing to crack is how do you actually

You know, on a very.

Big scale, it's doing big things, and then finally it's creating new energy. I was in India just a few days ago where I was seeing a huge rollout of you know, solar plants and wind plants up to five hundred gigawa a huge amount will be in place in twenty years time, and it's moving today, moving today, John.

Do you think policy intervention works?

It has to work. Energy is the whole energy scene experience is founded on good policy. You know, there's nothing natural about it. So the government has to both inspire and avoid the use of energy. So taxes are important, but the key is getting them stable and keeping them in place all time.

In the end, it's you.

Know, if we'd stop people putting carbon in the atmosphere, we have to charge them for doing it. And one way or another, the IRA or this stuff about carbon border adjustment mechanisms, all of these things are designed to do just that.

I look at the eye though, and parts of some people say did work. But other parts of things like public charging stations, I think they have about two dozen. They're spending billions of dollars on this. Should this not be left up to capital markets?

Absolutely, And you know that there are things that misfar in all policy. I think one has to be very careful in all these areas of big change during the transition. Not if I can use the old phrase, make perfection the enemy of the good. You know, we've got to get on with these things. It's like carbon markets. You know, they don't work, but they never work until you start them, and so you've got to do a bit and then correct. It was the same when I was, you know, in

We had just to jump in forgive me.

We had a guest on the program yesterday who said, we've managed to reduce some reliance on OPEK, but we've increased some reliance on China when it comes to renewables. Now, when you were the CEO of BP, we were producing something like six million pounds of old day in this country. It's now thirteen. We've managed to reduce some reliance on opek. Can we do the same thing with renewables with China in the same way we did with OPEK and fossil fuels.

Of course, that's again I come back to my experience in India. A few days ago, I went to a wind farm. One hundred percent of it was built and sourced in India. It wasn't imported from somewhere. So if it can be done in one place, it can be done another. You know, trade barriers used to be regarded as somewhat economically inefficient, but they are what they are, and you can get things done.

What do you investigate with regards to that effort? Right now?

So we're doing a lot on energy efficiency and energy effective circular economy. You know, how do you measure things to get more efficient, whether it's supply chains, whether it's whether it's how people think about their own carbon reductions. So a lot of things like that. We're investing in sub so Africa, we're investing in India, variety of things like that.

The difficult part about this is seeing the investment make a lot of money at a time where you're reliant on incentives to make something work. How much is that sort of part of the calculus that you have to sort of suspend or just have faith that there will be the right policy mix to make some of these companies viable.

So I regard all taxation policy as incentives, all of them, and we don't rely on things that are exceptional. We just don't. What we believe very firmly is in order to get sustainable investment, you have to beat the rest of the investment pack. So we invest, for example, for twenty five percent IRR, which is what we get, and you can do it. You have to be selective. You have to go to places where you know that the

You know, John always a clinic. It's going to see it. Thanks for your time, Sarah, appreciate it. Pleasure Lord jump around there beyond net zero. This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, antient politics. You can watch the show live on Bloomberg TV weekday mornings from six am 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 out

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