Surveillance: 2020 Will Be Quite Weak, Shepherdson Says

commitments that both sides would presumably implement. There was also confusion over when the ninety day tariff truce would begin, with Cutlos saying January one, which the White House later corrected to December one. China has remained largely silent in Shepherds and Joint US now Pantheon macro Economics chief Economists, So ian just what was agreed? Well, nothing very substantive.

The the ninety day delayed to the implantation of the tariffs was apparently agreed, although that didn't appear in the Chinese statement. Uh, and nothing else. An agreement to talk h and an agreement to pursue a more sustainable trading relationship. But ninety days is nothing like enough. I suspect to draw up a fundamental change in China's trading relationship with

the US. So I guess what we're now hoping for, is it in ninety days time or preferably before that the can will be kicked a bit further down the road and will continue to talk uh, and we won't ultimately see the imposition of those tariffs. So markets like that bit. But then the closer you look at it, the less of real substance that there is. We're getting this slow drip feed of more information. There was no mention of autos on the statement released by the United

States or the statement released by China. Then the President tweeted about it, and everyone's scrambling to work out what the agreement is exactly. Currently the terrorists for it's going to be fifteen for the rest of the world. Are they talking about coming down to the rest of the world or coming down to zero? Well, we don't know because China hasn't said so. Jan Ping and his economic entourage are still traveling and the silence is kind of deafening.

So presumably we'll hear something more definitive in due course, but right now we're kind of scrambling now from from a macro perspective, I think what markets really wanted to hear was simply that the tariffs wouldn't be imposed January one, which was the original plan. So we're happy about that, and from a macro perspective, everything else is kind of detail.

Though for individual sectors and for autos in particular, that potential shift from forty down to fifteen possibly would be an enormously big deal, but right now there isn't There is no hard information on this. And let's tig into your base case for where growth will be in just looking at the Bloomberg e CFC, the function on the Bloomberg terminal gives me a very quick snapshot of the median estimate of Wall Street for growth projections forecast two

point six percent. We roll over to one point nine percent into twenty. Are you in and around those kind of figures? Two and a half I think is reasonable, But it's it's a year of two halves because I think in the second half it will be a great deal slower, and so I'm not with the market for twenty. I think twenty likely will be quite weak. I wouldn't

be surprised to see a mild recession. I stressed mild in but at this point that is very contingent on the trade war not flaring up again and certainly not to the point where we end at tariffs are on the two billion currently tariff to ten percent, and certainly not any tariffs on consumer goods, which is another two

seventy billion. So this is very much a kind of a binary position here that if we do go down the rabbit hole on tariffs and then the growth outlook will deteriorate in a heartbeat, and that two and a half number for next year will become extremely difficult to achieve and it will be a real mess. There is

always something to worry about. I and the latest worry of the last twenty four hours once again worries about the yield curve resurfacing two year yields, three year yields trading slightly above where the five year yielded just a little bit of curve in version for the first a long time. Yeah, no, it is. It is the first time in a long time. I think that to me, markets have got shall we say, a little bit ahead

of themselves on this disinflation story. You know, I don't buy the idea that we're heading into a materially lower inflation environment in the US because I think the labor market is so tight that the wage growth, which really is the big driver, is much more likely to head

north and south for the foreseeable future. I think people are putting too much emphasis on the impact of the stronger dollar, which, yeah, it pulls down the price of imported everything, but most of the CPI is not imported goods. It's services. It's about wages. And the housing thing as well, which I think has really got a lot of attention, the idea of the housing markets rolling over, and it isn't.

It's softening, it's not rolling. Well. What's interesting about this is the dollar has been weaker in the last two sessions, crude has been firmer in the last two sessions, yet the long end of the treasury curve is bid. I see that again this morning. Yeah, because you know, we need to see the impact of the of the dollar, and I couple of days of a dollar weakening doesn't doesn't reverse the seven percent appreciation in the trade way to dollar over the last year, and that's really what's

been pushing down goods prices. The yield that we have. What does it signal to our listeners. I think the base feel of all our listeners would be it just means economic slowdown. Is there another signal there? Well? Economic slowdown all lower inflation. And at the moment, I think the market is playing with both of those stories. I think they might be premature on them both, because you know, global growth certainly has lost a bit of its edge.

How much of that is due to tariffs and how much of it is due to China's trend slowdown is another question. But the US is strong. Growth here is strong. The labor market here is super tight. We have a three point seven unemployment rate and we've got zero real short have wage increases there are above three percent now a couple get more med and than anything else. Yeah, you know, when guys like you say wages are people are like, are you out of your mind? Way? Wages

are up. They're not up as much as as a lot of people would like, that's for sure. But especially if you're in a in a in a part of the country where the lab market is even tighter than average, and there are some places but unemployments well below three percent, wage growth in those places is faster. If you're in a very tight sector like transportation trucking. You know, there's some big wage games, but not everywhere. Not everyone. Email just came in from John unless your city, no one cares.

Talked to Ian about the sale of Newcastle United. Why is it so hard to sell a Premier League football team? We want to Sally because the guy, the guy who owns it, wants an insane price for it. That's that's the problem. Rumors that you were bidding, but you know, I mean, I'd love to, but I'm you know, a few hundred million short. Is there usually want to Sally? And if if I went in with former million in

a black suitcase this afternoon, he would take it. But but known in their right mind and to pay that. Let's translate this for the US audience. Is Newcast United like the Kansas City Royals. And I say that with great respect for the memory of George Brett. I mean, is it a smaller market team or it can't compete with the you know, one of the big Manchester United

and the others. It's all about the ownership because the ownership then, you know, if you're owned, as Manchester City is effectively by the state of ABU Dabbi, you have a limitless amount of money to spend. Newcastles owned by so Mike Ashley, who runs Newcastle United is a big sort of main street retail player as well. He's not very popular in that sense either. Tom used to be owned by a gentleman called Freddie Shepherd. These were like

the glory days of Newcastle United in the nineties. Newcastle would great transfer records. They would be that good. They could compete for the best talent on the planet. Things have changed, Things have changed. We've had a negative net spend last year. Well are they going to be is it the right word relegated? They probably not, because fortunately there are three teams worse than us, which is quite an achievement. But I think right now that it is

the case. Well, we measure our teams by economists. I mean, I see Blanche Flowers one notch below Shepherdson, Yeah, am I right on there? And west Ham Steve Major's team beat right now at the weekend. Yeah yeah, but Major got the yield call, right, So that's that's that's that's right, That's right. Okay, we'll leave it. We can have an economist ranking of the Premier League type we should on the back of all the teams in the Economists is identified.

Who's identified with Crystal Palace. Oh, I don't know, although we did have a listener right in about Crystal Palace recently. So there is a Crystal Michael Crystal Palace, Michael Barr. Would that be good? Well? I used to love the Pistons when they played at the Palace, but that's another that's another story completely. I and Shepherdson thank you so much, particularly for your comments for the morning on the protests

in the press conference in France. Widely knowing that John Ferre and I don't get along, but contrary to the belief, we actually almost listen to each other. We rarely talk, but we listened to each other in the break and Iro Jersey with us from Bloomberg Intelligence, just wonderful on bonds and this is the Bond interview of the day. I was thunderstruck by something that John Farroll said, which is it's not where the yield curve is or all

these dynamics, it's the way we're getting there. Just seems so odd right now? How odd is it? So? Well, so the headlines aren't basically keeping up with the with

what the markets doing. The market is someone saying by a bond yield, lower price higher correct, and and you wouldn't expect that given what's happened with equities, given you know, the um some of the some of the headlines that came out over the weekend with you know, maybe an easing of trade tensions, even though that that seems to be um, you know, walking back a little bit um, but you would have expected at least I would have

expected some steepening and probably bear steepening. So basically ten year yields, thirty year yields selling off. But instead we're getting exactly the opposite. So why is that, Well, that's the market telling you that they're skeptical that economy and the economy and inflation are likely to be significantly higher in the future than they are now. But I mean, these moves are not massive, right, We're talking about a

few basis points. It's not like this is a major I'm gonna do my stand fisher here on a percentage change basis. These are big deals. We've gone from twenty two to thirteen beeps on the two stents spread. That's not massive. So if you think about it from a from a total return perspective depending on how you you size your risk. If you did that in say, you know, buying fifty million of one and and um and ten million of another, then um, you wind up with you know,

reasonable returns. But it's not it's not going to make your year, right, that's not what's something that's going to make your year. But you know, if you had that trade right, you did well. Obviously I don't know how many people were, which I think might be one of the reasons that this is a ring that people were in steep Nurse. The only thing that made my year was when John Ferrell canceled his two egg vocation. That's what the British do. Do you know? It's sound one

year anniversary today? Did you know? That? Is it? And I didn't get you guys a car one year on Bloomberg Surveillance Radio together. Yeah, O cake. Nothing. I thought they'd bringing us a cake, but nothing. I didn't get anything. Don't I get a reward for this for last than a year? The wise really interesting. I just want to have a look at what we're now sort of signaling for people, because I think for a lot of equity investors they've been conditioned to worry about this a great deal.

Inversion from front to belly, So from sort of the two year space into the five year is actually quite normal at this kind of time. It's quite normal for a lot of people to be thinking about. Just to help them get their heads around it, that's what you expect to happen first, correct, and then several years later is really when you start to see the economy rollover right, and more importantly, I think, is when you wind up

getting the whole curve in version. Right. So when twos to tend to the two years to the tenure inverts, that's kind of been the signal in the past. It said, um, you know, eighteen months later you expect a recession, um. And but that only happens in this environment if the Fed goes too far. So right now we're pricing for a December hike, We're pricing for one hike in two thousand nineteen. Unless the Fed goes more than that, then

inverting that whole curve is will probably be avoided. That being said, and as Tom noted, you know, the curve has flattened quite a lot the last couple of days, and that's really something that I think some people are going to be concerned with in the long term. But it's also saying I think at some level that we think that the FED is going to stop, and we do think that at some point in the next ten years we're going to see your recess. So this rise

is a big question for a lot of people. I know some people will be trying to gain this and

it's incredibly difficult to do. We started to think about when the next right cup comes, and I'm not talking about in the next twelve months, but when you start to think out where the next right cup comes, you're looking across the treasury curve to work out where in the curve looks cheap relative to the idea that say, the five year ultimately becomes where the Fed funds right is because that maturity will be what you want to

buy when they sort of cut right. So why are we thinking on the curve the think looks cheap where really in several years time is going to be most

lightly impacted by right cut. So when you look at the the overnight index swap market, which is based on where the FED funds rate is expected to be at some period of time, we're not pricing that right now UM basically at all um so, but we're basically saying in two thousand nineteen, the market saying in two thousand nineteen, the Fed's gonna stop, We're gonna stay there four years, right, And that's one reason why you can have this flat

curve from two year to five year UM. And you know there is some chance maybe in twenty one that they'll cut, but the market tends not the price for that until there's a little bit more visibility into UM into things that far out. The market tends to be pretty good at the next two years, not so good when you get significant further all these generations away from

full faith and credit. The you know, his corporate act in the same way yields into so corporate well yields are yields and corporates have come down a little bit, but that's mainly because of the rate move, it's not because of spreads. So corporate spreads haven't really moved a whole heck of a lot recently. What are find portfolio

is doing right now? You know, what's a typical total return fund manager doing besides a yeah, so you know a lot of people I think had had pretty poor years just because of what's happened, you know in uh UM in the market with significant sell off. So earlier in the year, a total return for a lot of total return managers did very well because they were underweight duration there or might might have been short interest rates. And when interest rates went up they did very well.

But they kept that view instead of instead of reversing it um. But you look at you look at things like speculative um positioning in treasury futures, and and everyone was so massively short. In fact, just about six weeks ago they hit the shortest ever. Now they've cut that short by almost half. Don't be a stranger. This was great. This will be out on podcast Ira Jersey with your bond briefing for the day. This is just great for

Global Wall Street. John, this is great. Kevin Book writes in English on oil at clear View Energy and he calls it green span on the Danube. That green span on the Danube. What we're gonna see out of Vienna and a Marie Horden with that great Saudi Arabian interview earlier today, we would not be surprised to find a brain twisting, circumlocutive jumble of word jazz from the clarinet is similar to some of the more obtrue statements that

former FED Chairman Alan Greenspan issued during his uh A tenure. Kevin, that's a great way to put it within the verbi edge. What are we gonna look for from the cartel? Good morning time. I think the number is what we're looking for, and the number that won't inflame President Trump is why it comes in code one point four million. Is that I think in a pretty consensus expectations for what it'll take to balance the market. It helps to have Canada

pulling oil off the market itself. It helps to have a slightly tighter Iran supply picture showing up in the numbers. But at one point for is what we're looking for, a one point four coordinated cut, Kevin. To be clear here, do you think that press release could be for an audience of one? Well, it's never just for an audience of one, but I think it's going to be worded with a particular wariness for that one. That's fascinating to me that the President has this must impact on opaque,

the cartel, not just the Saudias. How will the other individual groups, countries, nations respond? To the pressure the Saudias arunta to do this. As you know, it's never easy, uh. There's there's always big contributions from the kingdom uh, and then pennies from some of the others. In this particular case, it's it's also a question of persuading Russia to stay in the game. For for Russia, right now, this is

still looking like good economic self interest. But as you start to see the see the peeling a way of cutter and start to ask whether or not this is really going to stay in Russia's long term self in First it has to do with whether or not there's a new regional realignment taking place, and whether Russia's other economic goals including selling nuclear power plants and natural gas and other aspects of their their portfolio to Turkey and

other partners in the region, start to predominate. For now, it looks like coordination high five goes a long way towards setting expectation, So Kevin and high five. But it's easy to high five when you boast boosting output at record amounts. I mean, we've got record production in Russia, record production and Saudi arab but what would you consider a material cut? Going back to the levels of before the summer, going to the levels of ELIO this year.

What would a real cut be, thorough peck Well, the real concern is that they might undercut relative to where demand might take us. We have a fairly barished demand outlook, just thinking about the frictional impacts of the nascent trade war. It's hard to prove. We can't see the investments that don't happen, you can't see the demand that didn't materialize, and downward convisions are the stuff of oil analysis, right but still sorry, go on, no, no, it's fine, I'm listening.

I'm I'm loving it, Kevin book. But the the issue Kevin, for me is six weeks ago we were talking about a bond market that was going to go to three and a half per cent tenure. Eight weeks ago, you tell me exactly oil was going to a hundred dollars of barrel. These these fancy people show up in Vienna, and am I right that they're showing up within a cacophony of instability? I mean, do they have any clue

what the underlying microeconomics are. I think that there's nobody, nobody is particularly comfortable with the the instability of an unsynchronized global growth picture. Uh, the idea of oil war roaring ahead as we all go straight into the you know, the three and a half four percent sugar juice vp

HI of the United States. That's over right. So we have such an incredibly strong GDP linkage in the non O E C d H. In addition to that, there's growing price sensitivity and some of those non consumers recruit.

So when you start to see China respond to high prices, when you see currency adjusted acquisition costs tamping down demand, when you see effective trade stagnation, if not outright war starting to crimp investment, those are the warning signs that made me think, gosh, you know, maybe maybe things are a little weaker out there for well than we thought. What happens with the U s off the Bank of the outpect decision this week, Well, the brakes are off

a lot worse than the accelerator. The problem with shale is that the latency takes a while. The on the downside, we saw we saw what happened in it was you know, six to nine months in some formations for things really slowed down. And how quickly can zip back to answer the call from demand when it resurfaces. So I think you probably are in some ways blessed by the constraints coming out of some of the most prolific producing areas like Permian. At this point it's not that easy to

get the additional group to market. Uh. That makes some of the costs an issue. But once those wells start, people are going to run those wells. I can interview US production. Just to be clear, though the rick count has never recovered from the collapse, has it? Is this a region regions that are doing more with less? Absolutely it didn't need to recover because they're getting more out of the ground with fewer rigs. Doing more with less

is terrific. Higher efficiency wells are terrific. Remember those wells run right, We don't We don't shut stuff off. Spare capacity isn't for for US producers. What is the likelihood or probable of the I should say, of revisiting of barrel I have not asked that question folks since the hundred You know the dash to a hundred dollars a barrel? But who says words stasis here? I mean review how we got the thirty dollars a barrel and could it happen right now? Well, yes, of course. The will market

has a wide range, and it's demonstrated. I mean it's it's operatic in its range, all the way from the highest to the loads. A thrilling show. But look, the reality is that at this point we still have some fairly robust consumption going on in the world. Uh, it isn't obvious that you're all the way down to bleakness. You also had the Kingdom unwilling to take action and to muscle up and say all right, let's cut. They

thought they would flood, and flood they did. As production continued to flow out of out of the US producers, the Kingdom didn't stop. Now they've taken a more activist role. Kevin, I want to hit the final point that we haven't touched on just yet. I had no idea that Canada could join the cutting crew. How is that possible that they even have the ability to do this, to tell

a region effectively to shut it down a little bit. Well, there's there's a lot to be said for what it what it means to be Canadian and to be so heavily dependent in the Western Canada sedimentary base and on the fruits of production. Uh, these are the kinds of actions that are are dire. But when you saw differentials to w T I, you know, forty up for West Canada select, I think that speaks to to why there's there's a sense of intervention. Technically, the Canadian people are

owners stakeholders to the oil production in their country. There's there's tax flows, there's other secondary revenue streams. It's the kind of thing that it definitely it doesn't feel quite like capitalism, but then again, you know, not much does sometimes. Kevin has been a huge valuable Kevin book, Thank you so much, with clear view energy, with a briefing on

the vicissitudes. As they say, I'm we are thrilled to end strong hero on Bloomberg Surveillance today with m Ross Thomas driving forward all of our Brexit coverage, Emma, I was thunderstruck by the scathing critique of the former Governor of the Bank of England against Prime Minister May. The headline of the Bloomberg opinion piece May's Brexit deal is a betrayal of Britain. Did you see this coming from

Irvin King? The criticism that is already sort of out there on both sides of it are Brexit debate, which is that this deal not only is it the worst of both worlds, but that it's sort of somehow trapped the UK within the euse orbit um and that really know, it's all from the very beginning. This is about the Irish backstop and you know the problem of how to deal with the Irish border, and that is what we're

still fighting about. And even you though we had in Parliament yesterday, we had Olie Robbins who negotiated this thing, and even he was there saying, yeah, the backstops uncomfortable. You know, if we go if we end up going into this, it's not great. And you know, that really is why Thereason is on course to lose the vote according to all indications. You know that she's going to lose the vote next week because you know, the negotiated something that a lot of people on both sides and

seeing as a trap. Buried in the heat of this essay is a single paragraph but a citing Paul Krugman, the Nobel Laureate, that the analysis of the Bank of England is correct in that these are long term effects. The Brexiteers would say these are one off effects that the United Kingdom can recover from. Discuss that debate right now in the United Kingdom is there a permanence to Brexit effects? Right? So I suppose the debate here very much is about um whether forecasts are are worth anything.

You know, we had projects here with with with the referend campaign in twenty sixteen, the Bank of England came out, everyone came out and said that, you know, vote UM to leave would have disasters consequences for the economy that didn't play out at least immediately, partly of course, because Breast hasn't actually happened yet. And so really the debate here is about how reliable their talks are and also about the you know, the Bank of England weighing into

what is essentially a political debate. And I think that's what was interesting about the Mermen king comments is sort of saying, you know, um, he would kind of hinting that the Bank Anglands has got a bit uh politicized really and and of course you know, can you would say that they're not forecast you know, in fact, last week he was sort of calling forecasts the F word. He's saying his aren't forecasts he's a scenarios, he's a

you know, possibility. And in fact, even this morning he was sort of saying, it's not a this is not a forecast, it's not very likely. Um. But he was the cardly this morning was funny him and saying, you know that the result of two years of work and standing by them. I'm wondering if you could describe, in your opinion or based on sort of listening to the media and to the experts, why did Lord King decide

to write this now and not six months ago? Um. I wish I knew the answer to that, But what we have been I don't know the answer to that. But what we have been seeing, um, recently is that people who have um been reluctant to to speak out, people who normally wouldn't speak out. As we're getting we're now sort of a hundred odd days away from breakfit Day, this historic event that will you know, change the course

of you know, the economy, diplomacy, politics for generations. That people are sort of starting to come out and say, you know, they've read the small print that deal. You know that withdrawal deal took a lot of digesting. You know, it's this massive document and you know, it took days for people to actually realize the implications of the legal

implications of this UM. And now I think what's happening is that people from you know, in you know, public and semi public figures are coming out and saying, you know, we've really got to stop this. And the real argument for backing the deal, the backing the reason is deal

is the end. And this is the argument that the business is coming out with is you know, they just want continuously they want to ender the uncertainty and and any of the sort of more if you subscribe the surface of of the deal, you know, people are tending to come out with arguments are more about how this actually is is not a sarily good deal for the UK, how it is quite lopsided um and how as I say that sort of it risks trapping the UK into

the ease orbit without without a way out. Well, to use a bed analogy, you know, you can break the glass, but you can't hold back the water. It's great to have these comments. At the very last minute. Mark Carney has even kind of mocked Lord King, hasn't he. Well, I mean, Carnie was sort of defending defending his work. I think Carnie, you know, is no stranger to um to criticism he you know, the pro Brexit camp here

has been very critical of Corney from from from the beginning. UM, And I think you know, what we've seen is kind of a continuation of that, really kind of justifying the bank's work and and and it's independence. And one final question, there's so much going on here, what will be the kerry forward of Mervyn King's essay? Does it just float off? Is an interesting essay from a bright, bright, experienced guy, or does it get traction with the other media and

does a contraction within this heated debate in Britain. I mean, I suppose, Um, what we're seeing is it's a question of critical math, isn't it. More and more people come out and and analyze this deal. And you know, just now we've had Unite the Union, very big union has just come out and said that they're also going to be lobbying lawmakers to vote against this. And so I think what's interesting is it's not the one voice, but it's it's the voice is across the spectrum, across the

Brexit debate. UM. You remember Joe Johnson, you know we've had you know, the Borishonson and Joe Johnson on both sides of the debate are coming out against this deal and think that's what's interesting is that across a cross discipline, um, you know, you're seeing people saying this is actually a really bad deal. It's been wonderful. Thank you so much, Emma ros Thomas offer for London's of Courts and are really doing all of our Brexit coverage and organizing that

for us. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple podcast, SoundCloud, or whichever podcast lat for him you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.