Surveillance: Bear Case with Emanuel (Podcast)

back case is twenty hundred. That's a lot of downside on that back case for medicot something John and Lisa want to get to that. I just want to do something her internal housekeeping here on Evercore, I s I Julian Emmanuel. How does Ed Hyman's acclaimed granularity and study of the American corporate economy in fact, this new view that you have, Well, what it does, Tom, is it reinforces the idea that our base case continues to be

that there isn't going to be a recession. Um, you know, and we've had waves of concern obviously economic hurricanes, maybe offshore so on and so forth. But Ed's granular data says we are not at the point where there is likely to be a recession yield curve or no yield curve. And frankly, what it does, though is when you look at the macro environment around you, it increases the probability of a recession off. Why the change, why the change

yesterday evening? Because really, when you look at the move off of the low on May twentie uh and you think about, you know, how these kinds of bottoms form. And to be clear, our our view is that you are in the midst of forming a non recessionary bear market bottom. That's the base view. But what we haven't seen is that fundamental catalyst. And we all know that the biggest fundamental catalyst is falling energy prices, and you know, we look for it every day and it is not happening. Um.

But then the other thing is volume. It tends to be when you get bottoms of that nature that you see surges and volume, real concerted buying interest that's lacking in the downside case. The bad case is that the recessionary bad case. And where does the number come from? So basically, if you look at recession bear markets of the left hundred years, the average is down around that gets you to we're not going there unless we get

a recession. You talk about oil being the distinguishing feature between that recession, that downside scenario, and not what is the pain point in oil that you're looking for? Well, so, Lisa, I think it's pretty fair to say that when you think about the consumer's psychology, and look, you heard the President address it last night on Late night TV, is that the psychological pain point has already arrived, whether it's five dollars a gallon or whatever you wanted to define

that as. But but frankly, when you look at historical data, the longer prices stay elevated at this level, the closer you get to the actual pain. Pry I couldn't believably so what the President said last night on Late night TV. He was very real in trying to address the American people. Julian, you say that you know, it's about how sustained this

is what about the bookcase? What has to happen in order to get to forty eight hundred at a time when people want to hear the Barrish case and want to understand how much downside they have, we need to see visibility into the idea that this so called softish

landing is really going to crystallize. And our fear here is is that you know, again there's only so much the FED can do to get you know, to put a lid, and not not only of the lid, but take energy prices down, and really they can't do much at all, um and that you know, we've seen more hawkish rhetoric out of global central banks in the last week. We're likely to see that next Wednesday. And the fear is is that you know that it doesn't move inflation

materially lower. If you get that break in inflation and you get consumers spending to stay in in you know, hold in there, that's where we get the upside. And that's this attemper pause as well. Ju And do you need to September pause to get that case? Uh? Not necessarily.

And frankly, the whole concept of both volatility around the macro and economic volatility, whether driven by inventories or a number of different issues, is it is such a long time between now in September, the picture is likely to look almost entirely different. So we don't know exactly what monetary policy is going to require, but we do know that inflation is going to need to turn down meaningfully without a turn down and growth at Julian, You've got

three numbers here, forty three hundred hundred. I'll have a waiter with the ten dollars that the only one you get asked about today is the twenty nine hundred, Judy, and thank you buddy. As always, Jenny Manual there of avocor jumping on the phone forest as he downgrades the auto international economist at Wells Fargo, Nick Bennenbrook, who is hugely qualified to speak on this. I know of no one who has consistently applied fect strategy over his career

like Mr Brennenburg. Nick, thrilled to have you with us today in the studio. Does Madame Leguarde you have control of the situation. I think she does. I mean there's both in economic control and also a political control because of all the policymakers on the e CB, and that's where her background as a politician I think is so important. So that medium doing forecast at two percent, that says that you know, the ECB has an inflation problem, but it's not a severe I think as the United States

or the UK. This is so important, folks. I'm gonna get this out front. We're gonna blow the brakes here and go right through the eight o'clock hour with Mr Benningbrook. Is that important? We are welcome you all on Bloomberg Radio and Bloomberg Television, particularly in Europe. John. In the event of a nude market fragmentation, Nick, I'll read out this quotes here and you tell me what you think

about it related to the pandemic. Pet reinvestments can be adjusted flexibly across time, masset classes and juridicitions at any time. Talk to me about what you think fragmentation actually means and what they're planning trying to do here as they high conterest rates. Well, yes, they are seeing probably more fragmentation than they would really like. As you mentioned the the Italian bonds bridge relative to those in Germany have gone from about one percent percentage point out to two

percentage points. But I really think this is about as much as they can do this flexible reinvestment, because it would be difficult for them, for example, to be raising interest rates, which they're going to do some of the options. Other options they had talked about was restarting purchases if there was too much for igmentation or even coming up with a whole new program to help stabilize the markets.

But then you'd be sort of tightening monetary policy on the one here in easing monetary policy on the other, and that would be extremely challenging. So I think they will go with this flexible approach for as long as they possibly can, and and certainly that's going to be a very delicate balance they're gonna have to walk. Nick is delicate to walk walk a delicate balance on the ECB Government Council when you've got some loud hawks, and those hawks are so loud at the ECB. They don't

want twenty five basis point moves. They want bigger moves than that. And clearly there's this line that's been put in this statement for September that I love your thoughts on. They say this on the September decision, the calibration of this rate increase will depend on the updated medium term inflation outlook. If the medium term inflation outlook persists or deteriorates, a larger increment will be appropriate. At the September meeting.

That screams to me an e c B that's trying to please the Hawks and tell them if this carries on through the summer, we'll go fifty. Yes, I mean I think it's certainly, you know, trying to, as you say, allay the concerns of the Hawks. I don't know if we're going to get fifty basis points in September though. I mean, going into today's meeting, the market was pricing thirty six basis points for July, and I think pretty definitively it looks like we're going to get twenty five

in July. UM And so coming back to Thomas question, does Madame reglad have control of the situation. I think she does. I think she's managed to get a consensus behind that twenty five basis point move. Looking at our own forecast for for ECB policy, we expect twenty five in July, we expect in September. So if I was a voter on the e c B, I guess I would not be dissenting. I would be going with gradualism

at this point. For an exchange traders, I don't think know exactly what to do with this, basically a trading range one oh seven for the euro versus the dollar. Unclear of whether this will be supportive or her detract if it ends up slowing growth even further with more rad hikes down the pike. What's your view on that. Do you think that more rad hikes and more hawkish

stance will be positive for the euro or negative? I think if we were to get a more hawkers view than we got today, for example, I think it would be positive for the euro. But you know, looking at the very near term. You know, as I mentioned that today, the question was for July, do we get twenty five or fifty? It looks like we get twenty five. And that's why I think the Euro is selling off just a little bit today. Um, And so really it is going to come down to do we see those high

inflation prints, do we see those hawkish comments? And also at the end of the day, I would say this still the Federal Reserve moving a lot quicker for US has a much larger inflation problem. So macroeconomic fundamentals in addition to central bank I still think means uh, you know, trend is probably for a softer euro over time. Nick. Does it matter that a lot of the inflation is

driven from the energy market in Europe? I mean, certainly in the US as well, but in Europe even more so, and that really the e CB can't do much about that by raising rates. It matters a little bit, and you know, trying to use sort of the economist trick there on, you know, use both hands. Um. You know, certainly I would say the euro Zone doesn't have as severe an inflation problem when you look at their core

inflation of three point eight per cent. You know, typically a central bank would say, well, the underlying inflation trend is not that bad. So you know, in some sense that maybe affixed the pace at which the ECB raises interest rates. But I think there's a huge focus on headline inflation in the Eurozone as well, above eight per cent.

And the reason being is even if all of this, you know, inflation is being driven by energy effect, is these oil prices are going to be at a barrel or higher, so we're just gonna have high inflation, even if the broader inflation pressures aren't that bad. Nick, I want to go back to your heritage, and I think it's really important here. Roger Douglas had a New Zealand it was blowing up forty years ago, and he, with his leadership New Zealand codified inflation targeting. Right now, inflation

is essentially out of control. The response here is not a rigidity or a formula of targeting like John Taylor of Stanford or what the Bank of New Zealand did. The The issue here is a level of dovish nous versus harkersness. How dovish is our dovish central banks right now if they can't affect New Zealand like targeting, Yeah,

I mean, I think you've got a point there. Certainly, you know overall that there is still a lot of devishness, although there is there is an evolution going on, because when you look at a lot of the central banks this yeah, faced with you know, worries about slower growth or this very high inflation, they've been coming down on the side of like, let's raise interstrates, letst try and tackle inflation. But the point you make, I think is

a very good one. These real interest rates, the policy rates are still extremely low relative to the rates of inflation, and so at the end of the day, it's certainly not an early nineteen eighties Paul Vulcan kind of a situation that we have in the United States where they're moving aggristonal you to just sort of squeeze inflation out of the system. Nick Bannerbrook of Fargo Neck, thank you right now. Patrick Armstrong where this chief investment officer at

Plurimi Wealth manager of Patrick. Can you invest in Europe um? You can invest in europe UM. What I did this morning is actually shorted Italian bonds BTPs. I do own multinational European equities companies like a SML, which has a product which is an incredibly high demand. I own shell UM. You can invest in Europe, but I think you want to think global context. I think Europe falling into a recession. It's got a tightening central bank now for the first time in a very long time. UM. But I don't

think the US falls into a recession. I think China is probably going to be enormously stimulative in the second half of this year. So if you do invest in Europe, I want to play growth in other regions, not in Europe. A Patrick, I want to talk to you about the European bond market before we go out too broadly to international equities. Do you think this is achievable addressing eventual fragmentation?

If it does materialize with reinvestments of PEB at the same time to raise interest rates in the way that that kind of gets towards this morning of the statement, Yeah, I don't think so. I think that's so small, um a matter at the margin, it's designed to give the market some confidence in the periphery bonds. But I didn't realize I was betting on fragmentation. That's the term I wouldn't have used before when I shorted Italy this morning.

But I think that's something done deliberately pointing out they know there is going to be consequences to the periphery as they end their que program on July one. But it's words and reinvestment is very small compared to uh the bombaying bond buying program that is in place right now. So you're short of Italian bonds, when do you start to see value again? Where what is sort of the threshold at which you start to say it's a buying opportunity, um,

if it blows out wide versus Germany. I'm actually short

boons and I have been short boons all year. Um. I wish I was short of Italy all year as well, but I just put Italy on I think if we see another fifty basis points wider against Germany, I'll probably start to close Italy because I don't think it is going to be a disaster, but I do think the market pushes for some sort of response from the ec BE where they put in something maybe a little bit more meaningful to make sure that the periphery yields don't

blow out wider, in other words, a more flexible purchasing program from their path and how much they're going to really dive into this market. Do you think that they can be effective in actually suppressing yields in that region, moving against both the inflation as well as the higher yields in the core. UM. We'll see at the press conference today. It will be very important to drag you with the master at it whatever it takes, using words

rather than explicit policy. If le Guard really emphasizes that we're not going to let any widening of perifrey, which can have an impact on inflation, have impact on confidence, UM, if she's really stresses that we we'll do whatever it takes if these kind of things start to happen. In the statement that's out there right now, it doesn't say that, it says she's aware of it, So the rhetoric and the words may have just as much importance as the

policy in the coming weeks. And factually, there's been so many doubts about whether the Federal Reserve can deliver on the right high can cycle that a lot of people are pricing. Can you run me through how likely it is that they CCP can deliver on gratio sustained hikes. I was surprised by that because I didn't even think they'd want to commit themselves to that yet. I think the optionality that she's really been keen to create, she's almost given up some of that by saying this is

the beginning of a gradual hiking cycle. I thought it was going to be maybe even fifty in July and then see what happens. But yes, she set the groundwork July, maybe even fifty in September, which I think is very unlikely. That's meant to appease the hawks, I suppose, but given where growth is, given the impacts of higher oil prices and energy prices on the European consumers and European manufacturing, I think it's going to be very difficult to get

a hiking cycle started in Europe. If it does start, it's great news. Something very good has happened in the economy. I assume you also think then that GDP forecast at two point eight percent for this year is pretty optimistic. Maybe ove least side, I do I think Europes falling into recession. I do believe Germany has committed to moving away from Russian oil and probably the natural gas towards the end of the year, and that's very stag flationary.

That's a huge hit to manufacturing, huge hits to jobs and higher prices as well. We're back to that old equity play. But can't we by Europe, but by companies listed in Europe that have international exposure. Is that the plane now, Patrick, That's the play for me, and that's been the play for me for for quite a long time. Europe's facing a lot of issues with growth and prices and for the first time not having negative interest rates,

which may even be a positive for the banks. But I still prefer to own the bank bonds rather than the bank equities. With this back drop, Patrick, I'm strong, thank you, sir, as always plurally wealthy. Let's get straight to the conversation with Sema Sha, the chief strategist of Principal Global Investors Seema. An hour ago, we spoke to Sebastian Page of trote Price and he said, normally after a sell off of this magnitude, we'd be buying stocks. This time we're not. What are you doing? We are

very much neutral. Um. Look, I think you could see a bear market rally, and I'm going to say that it's a bear market rally rather than a full on rally, and we we have to look for the cattlest one of the things going to change. But once you see some of that economic data, the earning stay to start to roll over, we think that you're going to see a really, really challenging period for ecting markets where it retests the loads that we've seen in the past month

or so and probably goes a little bit beyond. People have been conditioned by the last couple of years seem that they always are near term. They look back the last reference point for this early spring, we hit the lows, we started to rally, and we had this conversation, how do you differentiate distinguish between a bear market rally and

something more durable? What have we learned from that? Because I think a lot of people looking at this right now, just sitting there itching, thinking, yeah, I want to get in because I was told this last time around it was a bear market rally and this market just ripped. Why is this so different? Oh? You know, I think this circumstance that we're in is is very, very different

to anything that we've seen over the last decade. Now, like you said, investors, they've become very accustomed to kind of good returns, low volatility, and always being supported by the FED. With inflation at this level. You know, I pushed back a lot about the idea of FED put any time over the next twelve months or so. So I think in that environment, this is the time where

you have to look at the fundamentals. You have to look at the fact that, as you said, energy bills are really weighing on households at globally US You're wherever you look at it, and in that situation, earnings will start to slow down. You're learning school of economics. There is one glorious morning where they study Irving Fisher of Yale, dudes, does inflation follow rates or does rates follow inflation? The big question that rates should work with a six to

twenty four month lag. That is the way that we should see it. Now, there's going to be a ton of other pressures working through. We're going to have the economic slowd and already in progress because inflation is going to be pushing down as we set on consumers um and then we also have to think about supply to it. This is such a complicated matter compared to previous periods where you have this additional impact from post covid um as I said, the supply chains, and then of course

you've got the Russia Ukraine crisis seema. If you do see the fact that FED putt is not really on the table, what's the argument for a week or dollar. It's a good question. So you know, look, the beginning of this year, we were looking at the valuation factors for the U S dollar and it was flashing red. But as there's always a case, valuations doesn't necessarily mean that things are going to change. You need that catalyst

to see things changing. And in the last month, because we have seen market expectations for the FED hikes probably head a peak, and yet at the same time you're seeing expectations for the ECB for other central banks starting to push up they're going to hit a crescendo at some point, but for the time being, that means that there is downward pressure on the US dollar, but we're not seeing it right now, even as we're expecting a pretty harki ish message from the ECB today the likelihood

of basis point and even more in July. What more could they say that could be a catalyst to send the euro stronger. So I think we need to have confirmation from Laguard exactly where they're going, you know, from from the stuff that she's been saying. UM, she is indicating that this is a twenty five basis point move on occasional occasional meetings, rather than the fifty basis point move that increasingly the market is pricing in. So I think we need to see some of that to see

that additional downreo pressure. But I also want to say that even if we were to see Leguard moving in that fifty basis point hike, that you should be following along with that. UM, I don't think it goes on for too long because we also have an even more negative view for the European economy, So I don't think they can keep moving at these kind of pace of rain hikes for very long. Some of the forecasts a little bit later, this more could be dreadful. Sche Thank

you of Principal Global Investors. This is the Bloomberg Surveillance of podcast. Thanks for listening. Join us live weekdays from seven to ten AMI Eastern and Bloomberg Radio and 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 In. This is Bloomberg