EMs Have Different Growth Issues, Bailin Says

M central bankers are asking the Fed for help. Indonesia's new central bank chief joined his counterpart in India in calling on the Federal Reserve to be more mindful of the global repercussions of policy. Technik jointed me to discusses. David Balin, I'm really pleased to say who joins us here in New York City Private Bank Global head of Investments. Good morning, David, Good morning, Thank you for having me.

Another central bank Kaike, this one coming from Turkey and e M is constantly responding now to precious coming from

our swhere. Talk to me about the pain that e M could be about sick out through Well, let's talk about you know what's really happening in the sense that you've got um the US actually sort of sucking up capital because you had a huge, you know, tax um overhaul in the United States which has created both fiscal stimulus, has created a larger deficit at the same time that the FED is actually uh selling securities back to the market, you know, and raising rates. So this is sort of

one two three punch for emerging market currency. So that's the what's what's taking place now. The emerging markets have different stories. If we take a look at Asian emerging markets, their currencies have done better. If you take a look at Latin America and Turkey, they've done worse. And in those circumstances. It really is the fact that they've got their own economic issues and growth issues that are taking place. So you know, there's a lot going on. They're not

going to get much help from the FED. The FED is going to continue along its policy exactly as it intends to over the course of the next eighteen months. So they're gonna have to make an independent decision about what their reach should be and that and they're still going to be under currency pressure. In my mind in even sexture twelve months. This is what I was going to ask you about, just looking at what J. Powell has said very recently in the last month. This was

a month ago, almost to the day. This was J p the Chairman of the Federal Reserve. Monetary stimulus by the FED and other advanced economy central bankers played a relatively limited role in the search of capital flows to emerging markets. There is good reason to think that the normalization of monetary policies and advanced economies should continue to

prove manageable for e ms. What do you think of that statement from the Chairman of the Federal Reserve UM It's very It's supposed to be a calming statement in indicating that everything will happen gradually. And you know, in his defense, if you take a look at the speed with which the feed is moving, given the unemployment rate in the United States and different debates about inflation, you could argue that the Fed is moving very deliberately and

relatively slowly. However, if you were to look at that from the emerging markets perspective, you would sit there and say, my goodness, you can imagine that there could be two four sixth rate hikes from here, and that that's gonna have a materially negative impact on on on emerging market currency. So again, I think what he's seeing is we're going to do this um and he's not really holding their

view to any quarter whatsoever. So if you're just churning in more pain than emerging markets in Brazil in the last couple of days, we've seen it in Argentina, we've seen it in Turkey. Turkey hiked interest rates in an emergency meeting just a couple of weeks ago. They've hiked interest rates again at the scheduled meeting today, taking rates

up to seventeen point seven five. A rally in the Turkish lira, taking dollar lira back through four fifty four forty six forty one is how we're trading in the here and now, Tom Keane, lots going on in the m It's extraordinary new. So I did not expect this today for a Thursday the economics. The economist didn't expect another hike from Turkey today either. And you know, I'm working out right now. I'll function and I'll eventually get it done and get it out on Twitter, Bloomberg Radio,

you'll see it first. But you take that one week repo Turkey rate, it's like their Fed Funds target rate. Whatever seventeen and three quarters percent less twelve percent inflation. I think, John, the math is, that's a five percent real interest rate, David Balan is compared to real rates as they look west to Europe or frankly as they look self more troubled economies. I mean, that is an unsustainable real rate for any economy general. That's right, um.

And certainly if you take a look at it compared to to the you know, the developed world, where you have you know, zero arguably negative rates in terms of what you're earning. Certainly across across Europe, that's exactly right. Um. You know, Turkey is is its own case, and I think we know by focusing on it, you actually we have to look at the emerging markets as a whole

and and there I think the picture is quite different. Um. You know, they didn't get the benefits of Kwei and they're they're gonna have a little bit of pain as

QUI comes off. And so it's gonna be at the end of the day for an investor to look at the actual economy and to look at the value of those stocks, and to look at the growth rate of earnings in those companies and their ability obviously to handle their their own foreign currency risk, and and and and in general, I have to say that that in contrast, you know, we think that you know, three quarters of the emerging market economies are actually going to be a

decent place to put money um over the course of the next couple of years. So I do agree that these are flashpoints. But on the other hand, as an investor, I don't look upon them as bell weathers. Let's get to the three quotas. What are the three quartes? So the quota that you don't want to be in, well, I mean certainly Turkey would be a good example of that, and and and and in my mind Russia as well, which is very very um you know, never diversified, never

diversified away from from oil. But if you were to look at you know, basically all across all across Asia, if you were to look at at Latin America as a whole, uh, if you were to look at the sort of multinational companies operating there, if you were to look at everything when it comes to mining, whether it comes to actual agricultural values companies, these companies are in

some way cases very very inexpensive and healthy. Remember that they've had a chance to repair their balance sheets as well. It's not as if only U S companies are only European companies are only easier companies have benefited. So we when we look at individual baskets of companies and their ability to sort of get major shares of market, we

think that they're quite quite uh dupily approached. There is this hope that in latam and let's take Brazil as one example, there will be this liberalization, they will move towards free markets and there will be great investable opportunities. What we've seen in the last month with a country like Petro Bass is ultimately, when crude prices went up, when petrol prices, gas prices went up, the truckers went on strike and the government lent on Petro Bass to

get rid of the CEO. The CEO goes just like that. That's how quickly things move and stops, and all of a sudden we have to rethink Brazil. It's Brazil kind to be that bastion of free markets and capitalism with available investable opportunities. The last month, the lesson is maybe not, maybe not, but but I think that you know, that's not how you can invest looking at the last month. And you also have to remember that they're in a cycle now where they have the same type of political issue.

They can choose the middle of the road candidate, far left, far right. All of it's still alive right now. Polls are very fluid, the candidates themselves are not, you know, especially dynamic, and so you know, you can't make it. The judgment. Our view on Brazil in terms of where it is and its economic recovery is that very very early, you know, and that for us is very very attractive. So you have to be willing to tolerate volatility in order to make these investments, and and of course you

have to get paid for it at the end. You can't show me a city private bank global head of investments also lagnus with us with OURBC capital markets, and she is a student of foreign exchange and the concept elsa excuse me, it's Berry, Ike and Green, Ricardo Houseman and Ugio Paniza. Original sin in the Great Fear and the original sin of Argentina, Brazil in Turkey is you're not going to be able to go out to the

debt markets because you're so troubled. How close are we to where these emerging market economies can't function in the global debt market. Well, Turkey's problem in particular is UM. It's overseas borrowing, particularly borrowing in US dollars by the corporate sector. And I think, you know, the central bank is doing what it can to bring the situation under control, having come under a lot of political pressure earlier on

in the year to keep rapes low UM. I think the political leadership in Turkey has admitted and acknowledged that's really not working UM. And so today's decision by the central banker larger than expected hike UM is really throwing everything they have at the problem to try and spend the weakness in Can the tools of our textbooks and the tools of previous moments and even crisis can they work today? Or is the world of em changed? You know,

A lot will depend on broader risk appetite. And what we've seen so far is global markets less willing to forgive policy mistakes. We've seen that in Argentina, see that in Turkey. UM. But this is not an em led route where the good get punished along with the bad. UM and Argentina went down this route of hiking rates substantially and somewhat stemmed there out there, Turkey is trying the same. Can it work? That's your question, Um, you know,

remains to be seen. I think the problem all of these central banks are going to face is that the FED is going to be hiking rates US you are going higher, um, and that's going to put more and more pressure over the longer term. Also, just to get to the central bank response from the Federal Reserve, we're seeing a plea for help from India the central bank governor in an o heed in the Financial Times over the last week. The indones In central bank doing the

same thing. This is Federal Reserve Chairman J Powell about a month ago. He's basically saying there is good reason to think that the normalization of monetary policies and advanced economies should continue to prove manageable for EMS. Is this a Federal Reserve that's increasingly less sensitive to what is happening abroad. I don't think they've ever I think they've always been sensive, let me pay my words carefully, but they've never made it their their key focus. And I

think that's fair enough. You know, Channen pal has enough. One has played worrying about managing the U s economy and achieving his targets there without also worrying about the rest of the world unless it feeds through to the outlook for the US. So we saw that a couple of years ago, when you know, capital was going out of China and people were very worried about the pressure on the remombies the central bank. The FED did step back and it didn't high rates um and that was

seen as quite a rational thing to do. But if this is Turkey, Argentino, countries, like Tom said, which you know, have committed the original sin, I don't think it's really the federal reserve place to sort it out for them. So I think you make a really good point, especially when these are the same countries that we're complaining about relative currency strength about five, seven, eight years ago, and

now they're complaining about completely the opposite. So just in terms of em right now, over the last few months, we've heard people say, well, these are all idiosynchronic, very unique stories. Local to Turkey, another one too local to Argentina. We've got another one local to Brazil, local to India, local to Indonesia. We're starting to see it be more than just a couple of cracks, aren't we. I think

we're seeing a couple of things. One is that currencies are doing what they're supposed to do, which is act as a shock absorber. You know, we've seen that in the case of Brazil, We've seen in the case of Mexico, India another good example. Turkey face is a different problem, just because so much of the borrowing has been done

in foreign currency UM. And the second thing is that, more broadly speaking, we're getting into an environment where em carry trades on a wil adjusted basis no longer necessarily makes sense. You know, there's a lot of places now with in g turn um that you can get a decent amount of carry with a lot less volatility. And I think more broadly speaking, investors are taking another look at great term carry trades and thinking, actually, in relative terms, it doesn't look as bad. So what do you do

opportunistically given the interesting mili we're in right now. I think they're still good trades out there. We've been trading very tactically for some time now, you know, and so we'll have our longer term fundamental views. You know, we've been calling your a dollar as you know, UM to end the year round one eighteen UM. Now that's pretty much where we are. But of course two months ago

that looked like a much more barrish euro dollar call. UM. But within that I think you can find oportunistically trades that go the other way. So, for example, this week we're long. You're a cat that's working very nicely. UM. I think there's a good opportunity next week to look for some Sterling strength, potentially around the June twelve vote. Obviously, Sterling has been very hard hit in the last half hour or so, so we'll see how that picks out. UM.

You know, there are good opportunities out there. You just have to be more tactical. What is your strategic dollar call? Forget about making money, you know, very trying to make money to get to St. Petersburg for Italy versus the US, but forgetting forgetting about that. Also, what's the strategic call on dollar? I think it's got to be very careful about jumping onto the bearish dollar bandwagon. And I know we've discussed this together a number of times before, UM,

and I still stick to that view. I'm not saying that dollar is going to go up across the board against every single ot of currency. UM. But there are places where I think the dollar can strengthen materially dollar yen for example, UM. And there are other places where I think it pays to be a lot more cautious, UM about getting too bearish on the dollar. You know, euro dollar. I just don't see one thirty anytime soon.

So I think your broader dollar call has to be looks for the opportunity and don't get carried away with the dollar barousness. I think, can we go into the capital of foreign exchange, Tom, You and I were going to see ALSA in London because cables rolling over again. UM. Sterling at one thirty three eighty four, down about two tents of one on the session Alsa Brexit politics. We don't spend a lot of time talking about it on this program for very good reason. It's been going nowhere

for a long time. But Sterling is starting to look painful over the last couple of months. Just give me your thoughts. An interesting picture, you know. Obviously some live developments at the moment, speculation over David Davis and whether he was threatening to resign. UM. I do think the verte next week will be really critical, very interesting to see how the Commons will react to the Lord's amendments. You know, more than anything, I think this is one

where you've absolutely got to be tactical. Um, but there could be an opportunity to look for a bit of Sterling recovery next week. Now, Selena's going to catch up with you. RBC Global Head of Effects Strategy. We don't do Brexit very much, Tom and I would say I'm happy about that because not much as being achieved between the United Kingdom and the rest of Europe. Yeah, I'll agree with the rest of Europe. But even the the day to day battles of the Conservative Party the Tories

in England with each other. I'm sorry it does get lost in translation. I mean I read about it, folks. I'm trying, you know, seriously, Simon Kennedy and Flavian the rest of them are doing a great job over there trying to explain it to me. But I just I mean, David Davies is running the Brexit debate basically he is upset with the Prime Minister. He is strong leave Europe right, he wants to leave, and Mr Johnson wants to leave.

What is Prime Minister may want is she's just got to try and please as many people as she possibly can, and clearly she can't do that. So I just think for most investors worldwide outside of the UK, they wake up in the morning and they're just like, tell me when I should care. And when Alista says we get into a crucial point, I feel like we've been saying the last eighteen months, we get into it. I remember

that I remember the day after Brexit. We knew a ten pm the night of Brexit that it would pass, which was a shock, and I remember being with you and our London team in watching, watching, and then then you went to a Mayfair five star dinner. I went to the McDonald's at Liverpool Station and I remember this clearly, and you know, I remember the shock of the streets, whether at the McDonald's at Liverpool's. Can we tell the real story? Can we tell the real story? Were freighting

as straight? You went to go to the bow tie store where was it turn Blanassa that you wanted a special boat time and then someone spotted you and said, comforts come to our Brexit party and you went for cigars and whiskey, And I went to work and did eighteen as straight. So let's at a Mayfair restaurant. That was you and I on the Brexit tour. You were in a restaurant with cigars and I was on I'll make it up too. We'll go to the mcdonals. I

can't wait, I can't wait. I can't wait to actually see you that I'm gonna I'm gonna run through the rice sections please quickly, just to get one up to spade this Thursday morning, John Farrell, This is really perfect with a less forty eight hours of debate about G seven and coming into Professor Keane no relations for Stephen k e n. Stephen Keene will be with us with Kingston University the President of the United States four minutes ago.

Isn't it ironic? Already? Get that? That was at channeling alanis the tweet? Isn't it ironic? Question Mark getting ready to go to the G seven in Canada to fight for our country on trade. Parent the sees we have the worst trade deals ever made close parentheses. Then off the Singapore to meet with North Korea and the nuclear problem. But back home we still have the thirteen angry Democrats pushing the which hunt. So I guess this first tweet

is an all encompassing tweet. It is a good time maybe to speak on our fractured Western capitalism with Steve Keane, who has been a student of labor and of course harketing back to the work of Mr Marks of a hundred years ago, Professor Keene, the state of labor here and the professor of the level of economic growth that we're seeing is a backdrop to G seven. Which G seven country is doing best right now? That's a tough question, Tom.

I think in some ways it probably is the States and Lange because Trump's uh, you know, bull in a China Shop project awaken on my policy is meant as a huge government stimulus on it's way into the economy bouts where the tax cuts and increased levels of spending.

So in that sense, I think that that's top topping on top of the momentum that QE gave the economy, very expensive momentum, I might add, but it still gave it to it for the last ten years, and I think we're approaching probably a level where you're likely to finally start seeing wage rises coming through. But as I said earlier on surveillance with you it's likely to spike, it won't be a gradual rise. But what's fascinating, Stephen, this goes to the heart of your study in your

decades of work. Is the wage increases going in any way to all most sum of labor or is it really defined to a gilded age narrow pie of people. It's a guilt it. We're in a guilded age, definitely, and that the real sign of a guilded age is the level of leverage the global economy has. And one

side effect of that leverage. This is something which has only come out of my mathematical modeling of Minski's financial instability hypothesis, is that increase in leverage is actually paid for by the workers, even if they're doing no borrowing whatsoever.

And what actually happened, effectively is an income distribution effect, where the capital hast end up with a roughly the rate of profit that leads them to reach an average level of investment, and the increasing share going to bankers comes at the expensive workers getting a lower share, and at the moment, in some ways, I think probably the worker's share of income in America and possibly globally is

the lowest has been in the history of capitalism. So, Professor, big question, can the president tackle the issue off the worker's share of overall income and support global markets at the same time. And what I mean by that is, can you simultaneously have risk assets performing global markets stock markets, and at the same time have more capital go to labor. Well, not that you're hardly talking about sacrificing a lot. I

mean labor's labor share used to be. You used to talk in terms of a sort of seventy thirty labor share of income, with thirty including both industrial and financial capital. Now is something in the order of sixty two. I think something about that means something above sixty five. So to get back to the previous levels is hardly going to be taking a lot off the of the industrial and financial capital. But I don't think it will even

get that far. I think what's more like that to happen is once there is a set of wage rises coming through the federal reserve, will that will respond in typical neoclassical Pavlovian fashion put up interest rates, believing they're balancing the flows of the economy and completely ignoring the stock of debt private debt that's out there, and you'll see the private sector to go back into d leveraging again, and we'll go from a short, sharp inflationary boom too

higher interest rates, followed by another slump as the private sector starts to cut its debt levels once more. Professor, tell me why the Federals hiking interest rates is the wrong idea? Then why why should they stop? Well, they they believe that interest rates can control the global national economy.

And about twenty years ago I argued to Australia's equivalent Inquiry into the financial sector of the Wallace Committee that you simply couldn't control that when you had massive levels of debt, because it simply was too blunt and instrument. It would always come in too late and too heavy. And the same thing applies here. There is a center of the Reserve bank. All all central banks have three

numbers in their heads. Two percent is their desired rate of inflation, three is the desired rate of economic growth, and four percent is where they think their interest rate should be. And that is a world in which there's no role whatsoever for private debt. So they'll they'll get the two or three four right, and I'll blow up

the global economy. Stick keen. In the time that we've got with you today, I want to step back and look at some of your work and this goes back to Marxist theory and modern capitalism, which is a study of profitability. And I say this in homage to you and all sort of megden to say of the London School of economics, is our profitability today equality profitability or is it an engineered profitability? Good question, Tom, and either

go over the engineered side of things. Because you're talking earlier in the show about level of share buy backs that are occurring. That is a sign of a the management of industrial capitalism that that doesn't think it has any better ideas than to hand them any back to

the shareholders rather than actually investing it and innovating. So, if you want to find a really vibrant stage of American capitalism, it was the forties to the sixties where there was dramatic levels of investment and nobody would even think of handing money back to shareholders, excepted dividends from

successful in your product launchers. Um that that said, we still have the outstanding characters that the billionaires like Musk and Bozis and so on, who are using their incredible fortunes for various quite off the off the scale innovative investments. But as a whole, I think it can say it's a pretty moribund and engineered level of capital. Let's reve up the scripture. Secretary Ross over with Becky Quick on CNBC right now, UM saying that there will be an

enforcement team installed ZTE. This is a controversial tech story in China. Mr Ross, as a U S and ZT have reached an agreement that in itself is headline making. Steve Keene, what is your take on the new China commerce? I guess is how I would put it. Their ability to do business is that business is usual for China? Or are they gonna take a new road that President Trump and others will have to adapt to. They won't. They certainly won't take the road the Trump wants them

to follow. Um. If there's not a long enough memory in China political circles to say we're getting even for the opium Wars and not about the let to America dictate them anything after that identity for two centuries ago. Um, So I think what the new model in China is that they've gone past the stage where they can rely upon credit for the private sector as a driver of economic growth. That's what they've relied upon since two thousand

and ten. What they're now doing, I think is the Silk Road and all the major infrastructure projects as the driver of growth because the last thing they can afford us to have rising unemployment amongst the industrial working class in China, because Chinese are much better revolution than Americans are. Well,

let's see that there, Steve King thinking so much. Greatly appreciated, and folks, whatever your beliefs and politics, I would suggest a careful study of Mr Keen, Professor Keene would be uh important because we saw Turkish leira coming in earlier. Brazil announces extra foreign exchange intervention for the second time in three days. That's an official headline again, Brazilia raises f X intervention again these are swap transactions. Is Brazilian

real gets out to a three ninety one? Uh? Certainly getting near that four level gets your attention and the major headline there is the activity two times in three days on Brazilian at real right now, um, Brazil, if my eyes don't fail me three point nine zero on Brazilian real. He may not look at Brazilian real. He may not look at Turkish lera, but his luck does look at down twenty five futures up sixty five in the dough. Right now joining us, Douglas Cast of Sea

Breeze Partners. Doug, you have been what I would call a supple short, which is you know when to protect yourself. How have you done with a cautious view given the quality of this bull market, which seems to be tech tech tech. Um, I have basically of the view that the market is stretched. We're at the top end of where I see the trading range for two thousand eighteen.

I'm staying long, but I'm using trailing stops to short the market and basically for the purpose of immunizing my portfolio should the price momentum abruptly change, which I suspect could happen at any time. So um, you know we we are in this extraordinary market which is distorted by machines and al goes and other price momentum based strategies and products, and they result in these exaggerated short term moves and is in to market landscape in which buyers

live higher and sellers live lower. Um. So it's a great environment for opportunistic and impassioned trading. I would say, Tom, not so great for the buy and whole crowd. How narrow is this market? I mean Mr Kramer dusk Star came up with saying, is it an all saying, all the time market. Well, we're in a complicated market. You know, the investment mosaic is always complicated. It's not simple to

explain or simple to respond to. UM. If you consider Tom as Jonathan on the wire too, No, John's not here today, okay, okay, Hey, Then with all the great news on the earnings front, the SMP is only up about three percent year to day. So we're seeing a contraction and valuations after last year's or at a large three multiple point rise in the SMP. So the complexion of the market seems to be changing. So this year main Main Street is beating Wall Street. Last year, uh,

Wall Street, the Main Street and UM. The action in the last couple of a couple of days is particularly odd. The market seems to have no sector memory from day to day. Earlier in the week, tech spurted than retail was on fire. Both were subdued yesterday and financials took over on the up side. So it strikes me that the buying and swift rotation in the last couple of days is kind of panicky and a possible event by managers to catch up. Let's bring in Pim Fox in

Florida with the gas. They're about a stand in home run away from each other. And how about those Yankees. The real question of the day is whether the Yankees Pim will be going to the White House after they win the World Series. I'm just gonna let that question float somewhere over. How about the Cubs, Tom Off grand slam by Hayward? Are you kidding me? It was? It

was you always want the Cubs to participate? Mr Fox Well, Doug, you know that's where I was going with the with the change in the rotation in where box are are

being traded. And I'm wondering if you could just step back and give us your thoughts about passive versus active management right now and this widespread use of e T s and do you have any idea what happens if there's a big down draft in the market and people don't realize what they actually own in their E T F s. I'll be very direct, there is an underlying assumption by retail investors that the ets themselves will behave in a much more stable condition than their components, and

I suspect just the opposite will will happen. And we saw this a couple of summers ago, I think it was two thousand sixteen, where they were imbalanced as an E T S VISAVI the components of the E T F. So um, we're we're in a in a very precarious time in which markets are distorted by these machines and al goes uh, and by by quant strategies like volatility, trending, and risk parity, but also importantly by leveraged and unleveraged

passive ets that you mentioned. I mean this is this is a great, a great, great backdrop if you're an unemotional trader and an opportunistic trader who has no fear. Well, that's why I wanted to go next, is that the speed of market reaction can really catch people unawares, and there's an opportunity to take advantage when people react. Are you surprised by the speed of market reaction to I mean, you've written about this, yes, Yes, the discounting is extraordinarily efficient.

It happens within minutes or hours um, and I think some measure it's um um. I think it's like if I can do an analog. It's like it's like accepting Trump's rhetoric before he makes a substance of policy decision. Market participants are beginning to understand that these um exaggerated short term moves are providing short term opportunities. But then you know, we have a we have an unusual backdrop. We have Deutsche Bank, Will you have an Italian dead crisis?

We have a number of potential In a prior segment, three or four segments ago, maybe an hour and a half ago, Tom, you guys were talking. You were talking to a woman about the potential funding stress of US dollar dis Yeah, it was a great segments. Equities Dog Cass, the series partners, that we don't talk to him about the equity markets. Possibly we will talk to Doug Cass about the dreaded New York Yankees. 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 Keene Before the podcast, you can always catch us worldwide I'm Bloomberg Radio