Central Banks Must Communicate, Schoenholtz Says

Bloomberg dot Com, and of course on the Bloomberg. Yeah. So, the main event as we wake up here in New York the Bank of Japan, the Governor Harahiko Corona pushing through changes to his radical monetary stimulus program as the central bank repairs for a longer struggle to stoke inflation. DANAA joining us now JP Morgan Asset Management, fixed income portfolio manager joins us to discuss Dana. Great to have you with us on the program to get your thoughts

on the b o J several tweaks to policy. What was the one that stood out for you? Um, I think without a doubt it's um the widening of the range um that they're willing to allow the tenure um JGUB fluctuate. So they kept the rate um the target for the tenure zero, but they moved the range from zero point one to zero point two, so allowing the possibility that if conditions allowed ten orbs could trade up to zero point two percent. I think that's quite significant

in the grand scheme of things. Why is that significant zero point on a tenure Japanese government bond. Well, of first, it's a couple of things. Um. You know the message itself that came out of the Central Bank, wasn't that

a bita message for the Japanese economy? Right? Um they talked about they reduced their inflation expectations for this year from one point three to one point one, but actually for their focus to urizon, they also lowered inflation expectations from one point eight to one point six, keeping in mind their target is too Um. It actually does raise the question of why do they feel they need to

move this rate higher going forward? And the reason for that is because the local banks have been struggling with

this low rate environment. It's been denting their profitability. So we're getting to a point now where quantitative easing and the cost of quantitative evening are coming home to roost um and that has implications for policymakers, especially a policymaker such of the Bunk of Japan where they have a price stability Monday, but they also have a financial stability Monday, So the Bank of Japan today also introduced this forward guidance added to the policy tweaks with a commitment to

keep the current extremely low levels for short term interest right to makes low for an extended period of time. And I just wanted Diana whether that was cover. There's some people out there this morning questioning whether this is just a stealth beginning of a normalization of policy at the Bank of Japan. Do you subscribe to their theory A's or Diana. They the forward guidance UM mixic clear, especially linking it to the v E T hikes that

are expected in October nine. So we still have a long period of time before we're talking at least for the next all months before we're discussing hikes, so it's not quite UM a hike in that extent um. I think they are committed because there are nowhere near the

inflation target. I think what what this braises is the issue of if we're going to be having this slow glide higher in the tenure g g B, so if as conditions improved, it warrants them to let the tenure go higher, or if pressure on these banks remain, what are the implications for the rest of the world. I think that's the bigger question, right, um, what happens to US rates um? And we saw a bit of that a mini preview this week on and last week when

the headlines first came out. Diana, more than anyone we speak to, you blend in portfolio management along with your wonderful trading experience reents. How what do you see in the trading market of foreign exchange that gives you any signal that we move from idiosyncratic stories like Turkey Argentina over to a more correlated currency e M issue. What do you look for from a trading desk that begins to show that things are going to coalesce into some form of fear um. So there are few things that

we keep an eye on. Well, look at volatility implied volves UM. I think one thing that's been quite um interesting in the in the resent period of witness in particularly in the margin markets, is just how low volatilting other assets have been. So while that remains true, and while you know pop markets are able to treat idiosyncratic stories as that and volatiles doesn't pick up correlations, remain

um quite stable. I think we remain in a situation where when you do see those sorts of wobbles, you should try and look for where the value is and buy. I think, you know, the bunk of Japan today was important because if we do start to get a sense that you're getting more synchronized normalization and that's not what

we've seen at all. Um. If it's not just the FED doing all the work, If the bug is now coming out and saying we are looking at normalizing and the ECB likewise, um, then I think that could become a much bigger, bigger problem forst But you and I have studied the chapter and econ four oh two. It's called hope and it's still from President Obama, Hope and audacity.

I'm looking at the chart I put out on Twitter for Bloomberg Radio Diana and its nominal g d P in Japan, and it is irrefutably in the last two and a half years rolled over. They can job bon it all they want. Do they see and escape from deflation and particular kill early? Do they see an escape from disinflation where they turn the vector around? Um? I think, and that's why I say the message from the bog

to day was not a positive economic message. I think there is a lot of hope that goes in some of these projections, and the inflation numbers today that they put out still look extremely unrealistic in our view. Um. They released some paper on the inflation and what they're saying is UM this was on a separate paper saying inflation is low because of the usual suspect global competition. UM. You know, low inflation expectations from an aging population, preferring

low inflation risk covers employees, etcetera. Some of these things are structural issues. They're not going to go away. UM. So I do agree with you. I think you know, Japan's issues are very very entrenched. Or is Europe's issues in trench? I mean, I get the idea. You know, we can all look at the charts inside Japan's its own unique experiment. But I'm taken by the idea on Pharaoh, the g d P came in a little light. In Europe and core inflation there is all of one point

one percent. I mean Diana and helped John and I is this on the edge of Japan? I mean Europe basically on the edge of the challenges that Japan has. I don't think Europe is quite where Japan is. Um. I think you know, when you look at the ALCU cups in Europe, we still have a long way to come, um liabor market dynamics, There's still a lot of room for improvement there. Um. So I think the European story is slightly better in that respect, in terms of the

long term prospects than what Japan faces. This has been wonderful Diana moment, thank you so much with JP. Morgan just thrilled to have her with us. Kim shown holds with us, then why you New York University? And of course he knows of dead meeting when he sees how did we get into this or we have dead in life meetings? Is this your fault? My fault? I hope not. Um. Look, I think that they've they developed this habit of only

making policy changes when they have press conferences. The good news is that they're going to have a press conference with every meeting next year. So this this happened to get away from the stupidity. I think we're going to get away from it pretty quickly. They didn't used to have press conferences to begin with. Kim, that's right, So that gives you an idea of how much things have changed. Yeah, well, they also didn't used to provide their quarterly forecast or

their quarterly projections. They've become far more transparent. That's all good news general. How does the Carne press conference vary from a druggy press conference. It's kind of the same. It's kind of the same. I don't think it's too different. It's quite orchestrated in the same way. They open up with a statement. They sort of reveal their forecast, but their bank aving that puts everything out all at once, so everyone's already got this stuff, so they're laguely repeating

what we already know. And then the Q and A starts, and Q and A is often the interesting bit, kam. It does raise a question though they used to be able to do stuff without a news conference. They used to be able to do stuff without telling the market. They've done stuff, um and now in a needle of radical transparency, they seem to have a problem. Step in a way, How much of a problem is it. Well, I think it's pretty small. I think the transparency is a big plus. I mean, think of it this way.

By being transparent, they condition us to anticipate their behavior. Um, we know sort of know the things that drive them, whether it's strong growth or rising inflation. We know what changes their policy. We know that when they're running a very accommodative policy, they're going to be uncomfortable with it. If the economy is already doing well, that they're going to want to get back to something like normal. Because we know that we can anticipate it and it shows

up in market prices long before they act. Well, that's the problem when you are tightening, when you're easing, that's not a problem. That just amplifies the accommodation you're trying to offer to the markets. When you're tightening, the market can often run ahead of itself before the Bank of Japan has even done it a thin Can we actually all that to some extent with this mating? Is it

not a problem at all? Do you think when they're tightening and they're trying to remove accommodation and the market just keeps running ahead of it. I think the problem is when they're not communicating clearly, and I think what you observe the central Bank in Japan is running this extraordinary policy of capping the long term bond yield. We haven't seen a central bank do that since the FED stopped doing it in so there's a reason why that's

a that's a rare policy. It's extremely aggressive and it's difficult to escape. It creates lots of disturbance in markets, and you're seeing that. So I don't think it's such a bad thing. I think the problem is they need to communicate clearly. Would you be willing to say that the j GB market is no longer a market? I think it's it's heavily influenced by the behavior of the central bank. So if you're asking me, would but would

yields rise if it weren't for central bank behavior? Of yes, they would, But I would say and what I mean this, I think your question is brilliant. Anybody with a memory of July in August has got to ask that question about the artificiality of the of the bond market, the note in the bill market in Japan. It's a huge deal, joone huge deal the way I mean, come on, there's no liquid in he there. Let me ask you a

different question. When the Swiss Center interview the Swiss Central Bank captain the exchange rate against the Euro, would you say there was no longer a market for for Swiss frames. I never said that, but in sense that would be true, in the same sense that it's true because they're the center gang is fixing an exchange rate in that world, John, why do we feel like we're in a class and right, Well, no, I'm happy to be in a class. I'm happy to

be in. But folks, this is what what Professor Showolds has done is moved from a class from Here's the interesting thing about the euro Swiss example. For a long long time people thought that could not be broken, and then it was broken, and a tally of the SMB try to bring back a euro Swiss floor. That have great difficulty doing so because the market wouldn't be can

vins that it would be kept. Now I do wander with j g B S as they've shown that they can shift where they cap the yield on a Japanese tenure.

I do wonder whether the market is going to test the Bank of Japan at some point, Kim, I think you're absolutely right, they will test, in fact, the whole One of the big problems with this approach fixing an exchange rate or fixing a bond yield is that once anybody suspects that you're going to change the policy, um, there will be lots of sales, and so the central

bank would have to come in and buy. Look at the b o J last week, they had to come in and buy aggressively just because people feared they might change policy. Well, this has been way interesting. We're gonna do this on podcast Kim Schoen holds and this will go out on Apple Podcasts also added Spotify as well. Professor shown holds of course with New York at University. But it's been the story of the equity market here

in the United States over the last three days. Then that's that Thursday, down one percent, down almost one and a half percent Friday, and close to more of the same in the yesterday's session, down by one point three nine percent. Your next trading queue comes from Apple. Can Apple lift some battered sentiment for technology stocks? Will Power joining us now? Bad? Senior research analyst Will as always, how many iPhones have you sold? Seems to be the

first question we ask, what's your base case for later on? Well, look, we're looking for a solid quarter and good morning, thanks for having me. We're expecting a company to ship forty two million iPhones and the quarter in your right, that'll be the headline number as always. But I think you know, if even greater focus perhaps could be the services revenue than of course, you know, the next quarter guidance dos we head into this this next dollar fort iPhone cycle.

I think that's going to be really important because many people are going to be looking for where the growth comes from. And I noticed that Loop Capital Luke Ventures were pointing out that the growth phase of the iPhone could well be coming to an end. Will do do you see that too? Well, look, there's no question that smartphone sales globally, you know, have half ended a week spot right, We're just not seeing much growth year of the year, um, you know, from a broader market perspective.

But where apples don't generate growth, of course, was what that average selling price, which has been very impressive, particularly within you know, consumer electronics generally. So we're working for a close to a seven hundred dollar a SP which is up pretty snifficently year the years to candily, that is the bigger growth driver in terms of driving revenue.

So I think it's these astute of the fact that while iPhone units are growing very slowly the new every years, the actual revenue growth is still growing double digits because of that SP. Well, let's be clear, head, the s P in the quarter a year ago the same quarter was six hundred and six dollars. Are you seriously saying we could get a one hundred dollar jump in average

selling prices because that's phenomenal? Well, well, that's right, I mean I will just if you look back this past quarter, I think you are seven eight, So we're expecting that, you know, to drop you know, sequential ways we get you know, later into the cycle. But yes, we are looking for you know, significant you know, your your growth of that metric. Well, let's do a reverse some of the parts. Hundred eighty nine dollars per share, hundred and nine dollars per share rounded up, let's make it two

hundred dollars a share. How much per share is cash? Uh, well today you've got close to thirty dollars, so two hundred down to one seventy. How much is services? What's the plug in value per share of services? Well, yeah, that's a good question. I mean, you know, what are your COPID against? Do you look at you know, the Facebook, the Netflix, is I mean, this is a business that you know, per perspective, this year will generate thirty five

forty billion dollars of revenue. So you put up multiple matt uh, you know you you get to you know, the least perhaps a couple hundred billion dollars. Okay, a couple hundred billion dollars. I can't do the math. Plus it's radio. We don't do math on radio. What I can say, Will, is, if you ex cash and X services, you're basically buying the rest of the company for what Nothing's not the right phrase, but pretty close to nothing. Right, Well, yeah,

you're not. You're not saying you know much over you know, doublity multiple for what's still is a very strong, you know, cast cerative. My point John in this exercise is we're all gonna die. Apple's gonna end, and we're all gonna die.

Apparently not, you know, we're like and I think John, you and Full Disclosure UBS does some great work on this as well as Will Powers great work a baired The answer is the average selling prices lights out stunning could be guest, all all the gloom people relative to where we were a year ago. Well, the the services business.

Are you saying essentially we're already there at target? Because the company wants services to be a fifty billion dollar business, and based on your estimates, will it sounds like we're already there. Well, we're heading the right direction certainly, right, So, I mean just to be to put a point on that, you know, for this year we'll be at seven billion uh in our forecast, you know, going to kind of mid forties and nineteens. Yes, we think we are tracking properly,

you know. I do think there are other opportunities and services that they've fairly tapped into. I think one of those content we of course know they haven't rolled out, you know, a traditional live streaming service, and it's not it's less clear they're gonna do that. Do you think there's some opportunities for a Netflix like service perhaps wider to help supplement that as well? As you're move into nineteen and twenty, when you're on the conference call, what's

like the McKenzie Boston consulting strategy of these guys. I mean, I get the we've gone through the financials. We all understand their minting money. They're gonna be a trillion dollars this it's them in Amazon and and the New York Stock Exchange Fang Index. John, It's it's Amazon, Apple, and Kitten the other one. Thirty three percent of the index is three stocks out of ten stocks. And that's great. But when you're on the conference call, what's they're McKenzie

like big strategy? What's the big strategy of Mr Cook and his team? Well, I think it's increasingly and has been, you know, about the broader ecosystem, right, So it's solidifying your position and ensuring that you don't fall into the traditional consumer electronics trap. And I think they've you know, successfully navigated that today. But but it's on them to continue to you know, push that envelope, you know, further, to drive new ways to keep customers happy, to you know,

to maintain that industry leading retention. And so I think it's really capitalizing on that installed base that you have. Well, you also cover Netflix, and Netflix took an absolute beating yesterday un seemingly no news. Well, what do you make of these moves and a magnitude of the moves we're seeing in technology stocks at the moment. Well, it's it's obviously part of a broader you know, down draft for you know, high growth momentum names and when you're seeing

that across you know, the fast space two. As you look at some of our software, uh coverage, I think any of the you know the high single they double digit revenue, multiple names. You know we're under pressure. There was there was a high correlation there. But I guess the other thing fundamentally is, yeah, Netflix does have more competition coming. That's not new. But of course you had some rumors here the last couple of days on Walmart

rowing outstore for a dreaming service. Tucks know if that had much of an impact or not, but you know those those could be contributors as well. John, you want the real life Netflix. The last three times I've gone to it, they haven't had the movie I want. Now. Granted, I'm looking for secure, stupid bow tie stuff, but but John, the history of It's the face of America exactly. I go to Amazon and often they have the movie. I go with history the audience. What was the movie? It

was like a Lawrence of Arabia thing with camels. Okay, no, seriously, it was something there was some totally obscure thing about. Usually when I go to Netflix, they don't have the damn movie. I mean, you know that's lots of my You're right, am I right? What you mean, put an increasing focus on its original content quickly shows right, that's that's really worth leading in and what's drivings craping day? I'd agree that you know the movie some respects are lacking.

Although you know, well that was a surveillance breaks it was with a serious please go ahead. If I asked the analyst what's happening with tech, they'll give me a very different answer to what I get from say a cross asset portfolio manager. At the moment where I think people are looking at the potential for a rotation again out of some of these growthy names and perhaps into value. What is that a rotation that you can see happening?

Is it's something you have to think about. Well, look, I mean, Candy, yeah, I'm you know, I'm I'm more focused on the names I've been recoverage writer than a broader market call. And it certainly feels like for at least the last couple of days, you've perhaps seen some of that. But I guess I'm not in a position to make a broader uh you know you Marcus It feels like a one of the fundmentals actually for many of these names were still in place. To beat your

valuation is another part of that discussion. Well Power, great to catch up with you as wonderful. Can you take it back just say Tom's wrong. We don't please will until we don't have to deal with this for another hour. Good luck to dealing with that. Thanks a lot, will Well Power bets tomorrow. Would you please bring in Mr Dunovan sure, the UBS Wealth Management Global Chief Economist joining us right here right now, Paul. It's greing to catch up with you as always to get your thoughts. We

had some policy twigs from the Bank of Japan. Which one stood out most for you? Well, to be honest, something what stood out as the Bank of Japan has done what it always does, which is basically nothing of any real note. They're carrying on. Um, they're carrying on with stimulus, and they're just tweaking it in a way to make sure that they can carry on with stimulus. And it now stands out alone amongst the central banks, particularly in this week. UM in not dialing back on

it's it's stimulus at all. But you just continuing with business as usual. So when people say this morning that this looks like a stealth tapering or the beginning somewhat a baby step towards normalization, what do you do, Paul laugh Well, I mean, I think that there is a desire in the market to look now for tightening everywhere. But this wasn't it to be perfectly honest? Um, you know, they're juggling around. They've they've come out with lower inflation

forecasts for the next couple of years. With that, you know, this is not really consistent with the idea that somehow secretly the Bank of Japan is trying to taper. Um. You know, they would at least have made a pretense of coming up with higher inflation. It's if this was what they were trying to achieve. I looked, Paul. You know, as I mentioned to Jennifer earlier, it's almost a Route Goldberg construction. What is the downside to this strategy of

almost a band aid reflation? Um? I mean, I think that the problems that still need to be addressed in Japan is why does the Japanese consumer not have higher inflation expectations? Why does the Japanese worker not have higher wage expectations? And you can't say it's because we're a deflation spiral because the Japanese consumer doesn't believe so in

the United States, is missing something. Okay, In the United States in the nineteen twenties, we came out of the thirties of depression and WED induced a credit bringe and business investment, credit driven binge. And are we just saying that they leverage up. But they can't do that, can they? Because they haven't cleared their previous debt. Right, That's true, although we've got to recognize, I mean a lot of the debt, the public sector debt that now exists in

Japan is held privately. I mean, it's overwhelmingly held privately in Japan. So this is an intergenerational wealth transfer I mean today isn't. Yeah, but their their debt to GDP ratio today is nothing compared to what it was in the UK. For example. Um, you know, the UK had almost two debt to GDP ratio and the economy still managed to interest along quite nicely throughout the fifties and sixties. So that I think we focused too much on the debt. That's less of a problem. Well they need to do

is be more productive in investment. You know, not build bridges nobody wants, or plaster the coastline with concrete, but actually use the government spending and use private sphondcause of spending in a more constructive way to move forward. Well, we talked about this on the program yesterday, and it's great to have you with us because we can get

your perspective on this topic. Whether you go to Japan or go to Switzerland for that matter, these are rich countries and you look around and everything seems to be okay,

yet they have these emergency policy settings. Can you reconcile that with the sort of wealth of those particular nations pool Well, I mean there is this this issue generally in in economics and in financial markets, the focus on the dynamic, on the growth story, and that's something we may have to start to reconsider as we move into periods where populations stopped growing. Um, that's why I call the ferrari a year problem. You know, you buy a ferrari one year, you buy a ferrari, the next year,

you buy a ferrari the third year. I'm describing Tom King's consumption patterns. You've basically got flat consumption of ferraris but you've still got a fleet of ferraris at the end of the day. So this distinction between wealth as the driver of living standards and growth is a problem. But I think that there isn't in Japan because if you if you venture outside of Tokyo or maybe Osaka, then you do come across yeah, sign of economic not deprivation.

That's putting it a bit strongly, but certainly a weaker reconized climate where living stands a problem, where there's papsonic despair. I'm going to do a chart, Paul off this and it's not going to be in my fer I do like the ferraris. You know, John, the three car garage thing off of Central Park doesn't work. You don't drive you driffen. Yeah, but the limos are ferrari. So Paul, if I run per capita, I am f per capita nominal versus I am F per capita reel. Those are

two different charts. I would suggest the spirit of a nation is shown, thank you, man Q in the nominal chart, which is a per capita GDP that's been flat since the nines. I mean, you know, going back to what I think we have to recognize in Japan is and I was working in Japan in the early nineties, and you know, the the economy was massively inefficient in those days. Um. You know, you used to have to take out a second mortgage just to buy a plate of sushi in

a restaurant in Tokyo, um. And so what has happened, I think, and this is a problem with the nominal, is that you have had an element of what an economist would call good disinflation or good deflation, where efficiencies have lowered the cost of things. So I accept that

the nominal GDP is important, particularly for death. Nominal gdpeper capital is important for debt, but the real GDP per capita um, I think, is capturing the fact that Japan has gone from being a very very inefficient country in a lot of areas as it affected the consumer back in the early nineties to one which is certainly more efficient than needs to be the case in John the charter and real per capital Japan as a moon shot, yeah,

I mean, it's a very constructive church, Paul. Before we lose you in the limited time we have, I do want to get your thoughts on a federal reserve. For me, this just sort of underlines how alone the FED is raising interest rates, with the b r J showing no sign that is going to hike anytime soon, in the ECB doing something quite similar a number of months ago, and Paul can carry on go and get alone. Well

it's not quite alone. There's the Bank of England of course, um and you know we shouldn't ignore the Bank of England. But I think that we've got some perhaps move away from this idea that it's all about interest rates, because of course central bank policy has always rested on three pillars. Monetary, that's the interest rates, quantitative which is the money printing

or the bomb buying, and regular prey. And what we're now seeing is that after a long time where two of the pillars were largely in abeyance, I mean, nobody paid much attention to the quantitative or the regulatory policy, they've now become more vibrant, more important. So I think you've got to recognize that it's not just about rates. It's also about how are you balancing liquidity supply with liquidity demand, And that's the other important thing. You know,

what is happening with liquidity demand as well? A central bank could keep rates unchanged, could keep quantitative policy unchanged and yet still be tightening policy if liquidity demand was going up. And that's something that you know, It's it's not so easy to put on a Bloomberg chart, but that's something which I think is going to be increasingly important. Paul is so great to get your insight on a big week for central bank decisions. Pulled down of an

UBS Wealth Management Global chief economists there. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio