Surveillance: '23 Recession Risk with Piegza

That joins us right now, Lizzie, I don't want to get into the silliness of pivot this or pivot that. Where are we right now? What is your real g d P call for this ending que four? Well, I do think there's enough momentum or ongoing resilience in the consumer that we will see a second quarter of positive activity, albeit markedly below than your three percent pace we saw

on the third quarter. But the bigger question is can we maintain that going into and I don't see that resilience being able to be maintained as we continue to see some of these variables increasingly way on the consumer, i e. Elevated prices, negative income growth, negative manufacturing activity, a housing montment that's under extreme pressure, so I think that we can argue you can check the recessionary box for nearly every sector of the economy even at this

point except for the labor market. But even there we're starting to see cracks, were starting to see signs of emerging weakness. So while we do maintain that positive trajectory through December, I think is opening the door for recession. That's do algebra Monday, lindsay it's wyld coals. I don't know what it is C plus I plus G plus and X is out there somewhere. Can you split your analysis between domestic final sales in real g d P. Can you pair off trade dynamics? Are they part of

getting to a recession? Oh? Absolutely? And I think this this when we passed through the trade and inventory data, that's really what complicates the earlier weakness that we saw at the start of the year and why it's likely that we don't see a technical recession in hindsight called for the first six months, because when you strip out that volatility from trade and inventories, we see that we actually had positive momentum from December into the first quarter

of the year. So this is very much complicating the picture and will continue to complicate the picture going forward. If we look at third quarter g d P. Now, one of the largest contributors to that top line increase was trade, contributing nearly three percent, but a lot of that was reflective of the weakness on the import side, and that reflects a declining demand or at a level of declining demand on the consumer part, again highlighting the

fact that consumers are on increasingly fragile footing. As we turned the calendar page into the next year, lindsay, there will be some people tuned into this program right now listening to another recession call for three and wondering why on earth the Federal Service hiking interest rates by fifty basis points on Wednesday and probably signaling they're going to do a whole lot more after that. Lindsay, how do you reconcile those two things? Well, remember, the Fed is

trying to slow the economy. So the fact that we're seeing increasing calls for recession in three means that the feds earlier policy initiatives are already having the intended effect of tapping down investment, tapping down consumption, and resulting in

a significant slowdown in the economy. Now the reason the FED is so focused on continuing to raise rates, not necessarily at the supersized sevent basis point increase that we saw earlier, but fifty basis points, and as you said, more work to come down the road is because inflation is still elevated and at this point, with the labor markets still arguably on modest footing, the FED is hyper focused on bringing down inflation reinstating price stability, which the

Chairman has said time and time again is the bedrock of the economy. So how much more damage do you think another one hundred basis points of heightening does well? I think it ensures that we do see recessionary conditions, But depending on the behavior of inflation, depending on what we see in terms of international factors, that will determine the depth and duration of the downturn. But again from the FEDS perspective, it's not about whether or not we

see negative activity. It's about whether or not we can get inflation on a meaningful downward trajectory back towards the

committee's desire to processual target range. What's your probability getting back to two percent until England wins in football again, Lindsay, I mean come on, where are we getting back to or is well, if you look at the FEDS trajectory, there's still very optimistic that we're going to see a two handle by twenty by the end of maybe early But I think the reality of the data suggests that Committee members have been calling for this meaningful improvement in

inflation for the better part of the past two years, and we see we have not seen that come to fruition. So the FED the market continues to under appreciate the complicated nature of the inflation equation at this point, and that's why, along with the fifty basis points increased this week, we do expect the FED to meaningfully revise higher their expectations and policy and inflation going forward. Does this PGS

at one oh one? It's service inflation, isn't I mean, we're gonna get a reversion to David malpass A World Bank was great on this years ago. We're gonna get a legit goods disinflation. Dare I say true deflation? But services isn't going to get there? What will you? What do you see as the sustained services inflation above three?

I think that's absolutely reasonable, But you're right, we are going to see this bifurcation between goods and services, and already we're seeing it in the data outside of inflation, manufacturing turning back into contractionary territory, while we look at the I s M Services Index and that is still arguably on solid footing. And so this by vurcation agun does highlight the difficult nature that the FED is going to face and trying to tackle broader inflation pressures, particularly

as we see this wage price spiral continue to accelerate. Well, Lindsay, young John are way too young to understand this. We survived this before. If we only come down with services elevated to five or four percent or three point eight percent, life goes on, right, people adept right, absolutely, and we will come out of this. But I think the trajectory of how we come out of this depends on the

Fed's resolve to reinstate price stability. If they start to get cold feet, if they start to pull back prematurely, then we could see inflation become entrenched in the economy, meaning that we don't see that improvement back to the FEDS two percent target. But if they stay the course, it will be more painful in the near term, but we could see the economy emerged faster and with more gusto as we begin to get back to a potential level after that two percent target is re stated. Lindsay,

Thank you, Lindsay p excident of Stayfall. Lauren Canvas City joins US now at the US Ecrety Strategy at RBC Capital Markets. Laurie, I just want to start with Mike's worts and then we'll get to yours. Mike Wilson says the final chapter to this bare market, it's all about the path of earning's estimates, which we think are far too high. Laurie, you want a similar page. Do you agree with that? So I'm on a similar page with Mike, but I don't exactly agree with him. I think it's

a little bit more complicated. So we're at one for next year. The consensus has been around one, and I do think that the need to pull those forecasts down is going to create some headwinds and additional volatility, perhaps a retesting of the low. But does it have to make a new low. I'm not so sure. I think the main issue here is that the by side wants certainty around multiple so that they can come in and

buy and we can have a sustainable rally. All the by ciders know, and they've known since June the next year's numbers were too high. If you look historically, most of the cuts and down earnings years are in by April. And if you look on a single stock basis, when the rate of revisions to the upside is falling, you watch for it to turn positive again. You watch for that shift from negative revision territory back to positive revision territory.

And stocks typically bottom the smp FI price three to six months before earnings estimate revisions for single stocks stopped going down. What that means is that if we can kind of get all these cuts out of the way by March, it's still reasonable based on the historical playbook, for October to be below. Now that doesn't mean we're not going to turn around, but I don't necessarily think that we have to break to a new low because

of this earnings issue and making a time cooler. Now it's really really difficult, Lorrie, But what do you suggest people do between now and March? So I think you have to back up and say what have people already done and where are they? And most defensive sectors are near peak multiples relative to the SMP five hundred, and people have been loading into staples all year, wrote it into healthcare since the summer. I don't think people have enough recovery trades for when we finally do put that

final bottom in and start to recover. So we tell people look at things like financials, look at things like tech, look at things like small caps. Those are areas that typically outperform when you're coming out of a recession, after you've made that final bottom, and small caps, frankly, John are already starting to outperform. They put in their relative blow back in Bay. So we think that people really

don't need too much more defense. And you know, I wouldn't necessarily dump all your defensive shares right now, but I would start thinking ahead to that recovery trade, not just this final term, Lauren. I think of the great Dave, David Triple and pioneer years ago. It would explain to me the small cap and mid cap go once every nine years, once every eight years, whatever the pop is. And I read in your research you're really looking for

that pop to be this year. If we have a great zombie roll up, which frankly, we're beginning to percolate and see because money actually costs something, how does small caps react to the fact we now have a risk free rate, we have zombie companies that have to do something.

How does that play into your call? So I think you want to be in line with the higher quality small caps, the bigger names, the more liquid names, um, you know, kind of where the typical small and MidCap portfolio manager likes to invest, not kind of the bottom three quintiles of market cap, where you get tend to get the dicier balance sheets, you tend to get the

lower quality names. We actually think there's plenty evaluation appeal in that upper echelot of small cap right now, which is one of the things that makes it so interesting to me because we haven't had that for a really long time. Or small caps correlated to the weaker dollar. Finally, end of strong dollar international play? Do you cross correlate those two categories. I think that the dollar is complicated for small caps. They have been benefiting from an earnings

perspective by dollar strength. If you look at if you try to sort of match up the relative cycle with the dollar, of the time, you're not you're gonna just want to pull your hair out. It's not be careful with. But but recently they've been benefiting from an earnings perspective because they don't have those pressures. I think that what I see right now, And you know, I just got off a week of being in Europe talking to investors there.

They are very European based. Equity investors are very perplexed by the expensive valuations that we have sitting in SMP five companies right now. You don't have that same valuation pressure down in small cap right now. So I think when you're you're starting to cross borders, I think you've still got the better valuation story here and that will be appealing regardless of some of these currents. But are

they gonna? Are they gonna roll up? I mean, I don't mean the quality small caps and there's like three thousand, let's say is a working number. What are the other under gonna do? Is there gonna be one grand roll up? Because money finally costs something? I mean, what do you mean by roll of exactly? Time? Mergers, transactions, combinations. Microsoft taking out tency weensy bit of the London Stock Exchange today just to get on board that kind of stuff. I think I think that you will get that in

certain sectors where you have have more valuation appeal. I think industrials, even though it's not cheap, it's always an area where we see those roll up stories, and the reshoring thesis could further some of that along. But I think ultimately those roll ups in that mn A cycle, that's really more about what waits us on the other side of this recovery and a sluggish GDP environment, growth is scarce, and companies, I think will feel more compelled

to go out and buy growth. And you can find that in some of those higher qualities fall caps, not necessarily the smaller ones, but again it might bring you back to some of those higher quality, you know, more liquid type names and lor. You've touched on something really important here, and that's about ladyship in the recovery in the second half of next year. Is it too added to draw conclusions about where that leadership comes from. That's

a discussion were ultimately happen right now. Why is the now the right time to have that conversation. I think it's the right time because you know, you know as well as I do, John, When these bottoms happen, and people are convinced of these bottoms, they just sort of take off and you don't have time to get in. You have to do your homework early while things are sort of quiet and turning around. But I saw you last week. We did have a lot of discussions about

what is the new leadership. Typically in a sluggish economic growth backdrop, which I think is the price we pay for a short, shallow recession growth, stocks out per form. But is it the old growth or is it the new growth? And that's why I think the sector, like industrials, is starting to get a bit over valued. Now we're just neutral there. We don't like the valuations, but we have been talking to people a lot about how that might be the best long term growth story in town.

And that might be one of the reasons why you're seeing these valuations lift. People basically kind of looking at the old economy and saying what's old might potentially be new again and that might be where you get for the better growth profile going forward. Laurie, this was brilliant.

That would be a stranger come back saying, Laurie canvass in to the BBC capital market it is time for global Wall Street to lean forward for one of the great great calls of the last number of years has when the persistency and courage of HSBC to say strong and brilliant dollar. They amend that sort of So we have a sort of kind of like discussion with Darren Mayor, head of Research America's and ahead of the U s F strategy, with a great Paul Michael as well. I

there's an ambivalence to your note. You're not calling for week dollar right, Well, we're calling for a dollar correction. It kind of amounts to the same. But it's not this big trend reversal. In other words, we don't undo everything that we've we've delivered by virtue of dollar strength over the last eighteen months or so. Let's talk to people like John who you know trade off folks on the break here. John's doing f X trade series. We want to do that. But is it a tradeable come

off the bloom? After it's upon there, come off the bloom. Get that day loop nailed that, okay? Is it a tradeable come off the bloom? Or is this going to be a messy sludge where nobody really makes big figures. Look our whole process was we described it, We thought to be this would be the chop before the flop. We have this really choppy period, then we'll get the flop. Yeah, but nice phraseology, but completely the wrong way around, because what we've had is the flop and we're still kind

of waiting for the chop. You know. This the reverse that we've had over the lad You know, we changed our dollar view for dollar abolitionist to dollar choppiness and then weakness just a month ago, and in that month we've had like one of the biggest monthly declines in the dollar. So it's really you know, even for quote unquote a bear like us, now our new found bear

like us, it's been a big old move. I wonder as the chopping is about to come though, you know, into the CPI, into f O M c UM and and into kind of the beginnings of January where everybody thinks they know what the trend is for three and then they're all suddenly forced to revisit in the first couple of weeks their risk that we're over playing the

one side of the currency pair. When I think about Euro dollar, which got down to about ninety five, and then we avoided the worst case scenario coming into winter. We had that period of mild weather for the Europeans. When I think about Sterling getting down to one or three fifty, I think in to day, the end of September and coming back through one twenty. Largely it was the other side of the trade. It was the Sterling side, the Euro side, that really kicked off that move. We

cleaned up the policy story in the UK. We avoided that terrible winter and the shutdowns we anticipated. Maybe they still evolved. I don't know, But do you think we're overplaying the U S side of the currency pair. I would say, look showed us that the dominant thing to get right was the dollar. I mean we could at the margin we had periods where this Sterling was was the swing factor a couple of peers where euro was.

But I mean look at us this week. We have got an ECB meeting, we have got talking about it. Who knew? You know? Um? And but I think there's a recognition and the reality is you've got to get the dollar right. And in a way, before you get the dollar right, you've got to get the SMP right. Because risk appetite has been the core of everything that's happening in the FX market and to the safe Avan dollar. So I'm not trading rates next year, I'm trading sentiment.

You're training row row risk on risk, all right, that all the way to that. So when you think about paying some of that choppy dollar weakness through G ten, what's the select currency pay you want to do that through? I think the high betac currencies on the way up in the dollar should be the high beta occurrency is in the way down. So your Aussie, New Zealand, your knocky stocky and less so the Canadian dollar. And we we've seen that even in this dollar sell off. You know,

Canada's underperformed others. So I think you go to the I mean, honestly, i'd say the AUSSI perhaps and and the Kiwi, Norway and Sweden. I know that's what you're day trading, just as we came off came on air. But you know they're there for the braver man side, there for the braver man and that's why you're still having to do this gig as well. So I yeah, I think as the US dollars as the US dollar and New Zealand US dollar, they they'd be the two

this China reopening reinforced that trait. I think it's being overplayed a little bit. Um. I mean the transition is going to be complicated towards you know, a reopened China. Perhaps markets slightly overegging the tourist angle and what that might mean in terms of flows. Um. But it is encouraging and the pro growth stances encouraging. But look, even at HSBC, we've been looking for a rebound in China

six months down the road for two years. Um. So you know, as as the market, and it's difficult because every time we think, okay, we're when I get there, we don't get there. And you've got the leadership there with the Hong Kong position of the Hong Kong and Shanghai Banking Corporation. What is the pair in the Pacific rim to play Asia open? I think Korea will be one. Um. It's w against what against the dollar? I mean, I think that's you gotta go. I think I think it's

the cleanest way. I mean, I think you do to your question earlier, you do have to come back to a dollar view. Now, then how do you express it in Asia? I think Korea is one option. Um. I guess the round is another high beta option. Brazil is when you could like so as if you had there for sure. Mohammed from Cairo and Cambridge emails in and he says, would you tell us Dara about Durham ConA? I mean, I mean if we get a Creatian Morocco final, Yes,

I mean they've got all these obscure currencies. I mean going there? You are you like long the Durham? Do you know what I would love to give you? I would love to give you the big figure in that cross, but I have no idea. But as I was mentioned in the break, I am trying to dust off my family treat to see if I've got any Moroccan heritage in there so I can join in the celebrations when they beat Croatian the final three nil. It's been fantastic to see you think of Croatian Morocco final. Is that

what you're looking for? Now? We've always been counter consensus, so why not soccer? Guys? Can I ask you a question? They played before the Sunday game, like the third Wednesday? But yeah, yeah, yeah, that's never a great game. To everybody's like, don't hurt me, right, I don't know why they played that game. I really don't. Yeah, it's a tricky one. I think it's finding this finding the bronze medalist isn't really wanted. How easy was it to get

tickets for this World Cup? I'd love some insight into that because every time I watched the game, they say it's another sell out, and I'm like totally with you and your gas like me because I could see literally from England was like thousands of empty s England. I thought it was busy, but when they keep saying to sell out when there's thousands of empty seats, well, look in English, you might think they're all down the pub, but you know that that could be a reason. I

don't know. It's just when you can sell a ticket, doesnt mean you have to turn up. Steve Major made an appearance ship. If I have spoken to Steve Major, I don't know if he's been out like any of the games. I think he's he's watching from Hong Kong's probably looking forward to Primi League football stats in a new year again, Tom, and we can sort of move on with life and forget about you keep bringing up this seing them noll stn't you you just went at

a guy. No, I'm fascinated by it as a foreigner. I mean, I'm a foreigner to soccer. Okay, let's get let's get to the foreigner point of view. Do you think we've set the stage for a great World Cup in four years time in North America? It is US and canadac superior to where we were ninety days ago. Is it a big deal? I think yes, it will be a big deal to a new America, young and there's an older right now I'm focused on is Carlos were don gonna end up with the Red Sox. That's

all you thinking about that. He's like the Bobby. He throws only fastballs high in the strike zone. But that's a diminishing America, and it's an older America and the new America I think will really embrace it. Does Fox tell him to tell me? Tellamando is going to do it? I'm sure they will. I watch. But I was here in for for the original Soccer World Cup and that's too early for the US. But Ireland be literally so one more. You know, I'm still living off that lost

to Ireland. New York in that atmosphere, was in that final. I can remember that fine penalty shoot out. Oh yes it was, isn't it? Yeah about a batio over the bar. I think Frank Cabaisy missed the penalty. I think miss Sarah missed the penalty. Remember remembers nothing about markets. Oh is Dara one of your friends? Then? Yeah, he paid me before he come on to mind? You got me trying knucky stuff down the Seriously, Maria TODAYO is on leave today, and we thank her for her comments the

other day. That was really go she gave. I think Maria very courageously gave to a lot of the American audience frankly global. How people really care about it? We, I will say, with great certitude, we just don't get that that national identity has wrapped up in their football team. It was a ticket for countries like Brazil. The countries like Brazil on the international stage is something that's super proud of. So for that to go the wrong way, I don't know if Darre's coming back. Maybe you know,

if I'm around the table, maybe that won't happened. As your sports correspondent, I'd appreciate that. Darren fantastic to catch everybody as HSBC right now, in the story that matters to you, the big shock here oil coming in in a breath of fresh air. With the concern of refined products. Stephen Short briefs us his research note with a short group and the Short report is absolutely definitive on dynamics

on vel in pipelines. Stephen Short, what is our integrity now of our system if we get a cold like Aberdeen Scotland is getting. Yeah, absolutely in a lot of dire straits here it has to be called as far as the distolate market tom here in the mid Atlantic and the New England market areas at the northeast United States consumes seventy percent for space heating home heating oil. Uh, and there's still a dearth of product. We we've had a significant sell off over the past week a week

and a half in this market. And quite frankly, my clients, the heating the people on the boots on the ground, people who have to consume, they buy and they sell and they distribute heating oil. They're perplexed by the move lower. They cannot find product, very difficult for them to find product, and yet prices are still moving lower. So it is a conundrum for for some of my home heating oil

people in the Northeast. You know, I look at how they blast with a great shirt off this weekend, as he writes up as Bloomberg opinion piece on the spike the surge in English utility costs, Do we get the same surge if we get the same cold or are we are we managed in a way where distill its core oil, gasoline, diesel the rest of it, where we

don't see a spike like they see in Europe. We won't see quite the spike that we've seen, but we are, we have and we will continue to see a spike in demand, not only for home heating oil, but of course our electricity costs are natural gas costs are sky high relative to recent norms. Tom probably the only market if you heat with propane, That is the only market here in the lower forty eight where there is actually

surplus of propane. We are swimming in propane, whereas in our other heating bt s, be it distill fuels, are natural gas, there is there's actually no product. And that's a piece of thing we got to the deck. I mean, we're using that six days and we prose like a hot You've got the kids eating outside profane. We've got three pieces in there. It's like, you're absolutely ridiculous, Stephen, Can you talk to me about the demand supply bad

drop down into next year. We've drained a big chunk of the spr You have managed to refill natural gas, but only doing so through nord Stream, and they got through most of this year at the back end of this year because the cold snap didn't kick in until now. Steve and I want to understand the dynamics into next year. You heard that warning from Jamie Diamond at JP Morgan.

Can you run us through that well right now? I of course I'm going to agree with Jamie that the long term structural in bounce between supplying demand globally is not going away. And yes, we have for the moment dodged a bullet with regard to the start of winter in the Ukraine War, but we're not addressing the long term issues of bringing more infrastructure to suit growing demand. The narrative has shifted to a point now where it's moved away from supply, which has been the real bullet driver,

and now it's a demand picture. I think all the Wall Street banks now are are singing the same course about economic contraction in the first half. If we look at the Federal Reserve banks favorite procession indicator, the three month ten year yield UH, it has rarely been as barished as it is currently trading on the inversion right now.

So and then of course we look at the employment numbers. Now, the latest job numbers seem to be relatively constructive, but once again, people are not working, especially men in their twenties to forties are not working, and we're looking at a huge chasm between the household numbers and the establishment numbers. One one survey of jobs says yes, jobs are growing, the other one says no, jobs are contracting, and then one that says jobs are contracting. Really uh melds with

what we're seeing in the tech sector. Tech, the white collar, the the halves are now starting to see massive layoffs, layoffs they haven't seen since the Great Recession. So there's a lot of mind fields to kind of navigate. In the first half. It's certainly pointing towards an economic contraction, and therefore that is really I think the overhang on

the market right now. We're worried less about supply and more about dwindling demand for the new year, is that worry about amount of misplace given Shana's reopening, can trying to fill the gap, even if we do rollover next year, trying to can fill absolutely fill the gap. And there is that demand. But but they were giving a nice little gift by the West. They were giving a fantastic negotiating price, saying, okay, Russia, you can't sell your oil

for more than sixty dollars a bet. Now, of course the Indians and the Chinese will continue to buy Russian oil. They will they will buy above sixty dollar. I mean they will negotiate, but there are a far better negotiating deal. So while this demand will continue to grow as trying to continues to lower their their mitigation protocols, were still going to be buying oil at a well below market value. Steven. One final question really important. How's that electric vehicle thing? Owen?

I mean you follow it tangentially over from your expertise to hydrocarbons, but from where you sit, how's Eve doing? Eight s are going to be the biggest drain on the environment that will make a hundred and twenty years of mining for coal and oil look like a like they were members of the cra club here. The amount of rarewas we have to dig up now. Personally, guys, I drive an electric hybrid. It is a seventeen gallon tank. I just drove. I just had to refill my car

after not filling it for two months. I drove nearly fourteen hundred miles on the combined electric seventeen gallant tank. That's the way of the future, and I'm getting out here. It's like compromise. We have to work together. It's not as we are the people that Stephen Short, thank you. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join

us live weekdays from seven to ten am Eastern. I'm Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg