Surveillance: BOE Bond-Buying with Blanchflower

Com and of course on the Bloomberg terminal. We've got to go to the Dartmouth Bubble to speak to David blanche Flower, of course, professor of economics at Dartmouth That college is experience at the Bank of England and a student and a doubter of a fully employed United Kingdom of fully employed America as well. There he was David blanche Flower, John Major at seventy nine years old, coming down the aisle at Westminster Abbey for the Queen's funeral.

And I've always adored the straight talking Norman Lamott, now eighty years old. In nineteen two, I will editorialize they did not hide. Where is Liz Trust No idea. We have no idea where Liz Trust is, We have no idea where the chancellor is. Tory MPs are hiding and every news organization is trying to get ministers to come on and talk about the chaos that's raining. So the fact that they're hiding is a really a really bad thing. And today is a big anniversary, So are not just

nineties seventy two. September ninety seventy six was when Dennis Healy went to Heathrow Airport and the markets collapsed so much he had to come back to Downing Strea go to the i m F, and the i m F as intervened in the last twenty four hours saying, you know, you've got to reverse these policies. So we're seeing chaos in the markets, but the numbers of us warn I wrote a whole series of problems that this was coming a month ago, saying, you know, the problem is the

markets will actually prevent amateurs doing stupid things. They haven't prevented it. But now we're having to see these organizations in of be in the Bank of England. But we

are now in chaos. Danny. The students at Dartmouth that want to get a quality see with you are forced to gunpoint to read the appendix of the Green Book of the I m F. Their Financial Stability Book explained for our radio and television audience worldwide what the Bank of England does to study financial stability, including the stunning headline an hour ago that they're worried about collateral calls

and the guilt market. Explain that mechanism at thread Needle Street. Well, I mean it's it's in a sense the story that I know. The book was thrown out last week. Um, well, so what we saw was a statement by the Governor of the Bank of England, who does not say I'm sorry, I have to take this take it away. That's okay, that was just a prime minister. Don't worry about it. Probably, Yeah, I've had so many funcles the state of the statement of the government of the Bank of England which caused

markets to crash. Again, the MPC doesn't he doesn't set monetary policy. The Bank of England actually in the MPC actually does. So what we saw today, I mean it's in a sense I can't answer your question, top because today what we saw was a monetary intervention that presumably the Montary Policy Committee should have done. But the statement says, this was not a meeting of the MPC, this was financial policy meeting. I really don't understand. I mean, in

a sense, the book says the job of this. I mean I remember going to the to the MPC and I was told monetary policy is meant to be boring, Monty policy is meant to calm nerves. In some sense, the intervention today was about that. It was about trying to calm nerves at the top end of the in the long term yield market. But but I mean, we we we saw that. They've also said that, I don't know quite how the FBC said it, that the Bank of Being is not going to do quantitative tightening this week.

So the answer is the book says calm nerves, be stable, and it says the same thing to the to the Treasury. But none of that has happened. So I'm afraid the answer to your question is what that All of that was probably true a week ago, but today we're seeing, you know, the economics of pandemonium. If the economics of pandemonium, I like that. Danny, if you were on the Bank of England committee right now, what would you up to do? Well?

You asked me a question last week and he said to me, would you ever vote for a rape wise? And I sort of said, well, of course, But last week I thought that wasn't the right through that. I actually think that I would have banged on the Governor's door today and I would have said, we have to have a Monetary Policy Committee meeting and basically we probably have to raise rates. We have to raise rates by

a hundred basebook. We have to stabilize the economy. Somebody, somehow has to step in there and be the adults in the room. So I think that the Bank has to you know, this is going to cause all kinds of crisis, but somebody somewhere has to calm nerves. So I would literally be calling a meeting the NPC. Why we haven't when I have no idea? Right, so these decisions are made today? How come? I mean in a

sense of suspicion. If I was on the NPC, I would have had the suspicion that the statement issued by the Governor of the Bank of Being on Monday was written by the Treasury. That would have been that would have been a major issue to me. So what we've been seeing is that the Chancellor's been meeted twice a week with the Governor. So the whole structure that Tom talked about is under threat. If you're an MPC member, you say well, I want to sit here and talk

about this. You could certainly persuade me to vote for a hundred basis point rise. But you know, Lisa asked me last week, whatever I said, I said, of course they went. But it's you know, a week's a long time in the economics of pandemonia. Yes, certainly, in this

very moment we just have about a minute. But your perspective going forward of the potential for some sort of politicization of this Bank of England at a time when if they were to raise by a hundred basis points it could really torpedo household balance sheets with mortgages that are tied to that rate. Well, absolutely, And I think in a sense the big story was over the last two days we've seen all the all the mortgage lenders

in the UK basically backing off. We've taken out their products in the markets because they can't price mortgages because of the chaos. So if you're in a position where you, as a chancellor have actually ended up closing markets, I don't know, somehow or Mother Carmy has to come, but there is going to be and the rising house price at the rising interest rate is going to kill the housing market off. The UK was probably already in recession.

It's been driven into recession by this utterly incompetent set of moves by the chances. And I don't know what he can do. I'm not sure I know anything that I do. It's not clear to me. You mean, if he resigned, what are they going to do? I don't know what. Danny, we didn't have you on to talk about the Bank of England. How are you going to do down in Florida with a hurricane? Are you gonna

lose all your great fishing spots. My house is sitting on Santa Bell and I just heard as you came on here the hurricane has moved and it's heading right at my house. So that's not good. Yeah, it does not look good. It's head right at us. We've heard from David the islands had mandate, we've evacuation. We this is not good for us. We have heard this from David Kotok and others as well in Florida. David Blanche Feloire, hope that you do well in Florida, and thank you

always for perspective from Dartmouth at College as well. We get very lucky here with Katrina Dudley. She was privilebly scheduled to talk about Tottenham Spurs, but said we will talk to her about her true expertise and something I'm as dumb as would John Farrell saved me here with Katrina Dudley Franklin Mutual on the nuances of the guilt market. I I just John, I'm I just I'm clueless. Well, we can start here at Katrina. Fantastic to have you

with us. Katrina Danty there a Franklin Mutual advices Katrina walk us through the unique character, the unique profile of the guilt market and the required need of this same Bank of England to respond to what you think he needs to respond to. Look, I'm not sure that they actually need to respond to anything here. I mean, they're

trying to stabilize a market. But I grew up in an environment where we were told that markets were efficient and so I understand it's only temporary, but I'm not sure that the the BOE is doing the right thing. People are now talking about whether or not this pushes off another rate decision, But let's go back and think about what happened last week when the BOE made that rate decision. There wasn't even consensus within the governors um.

You had five of them for fifty, but you actually had three for seventy five and then one lonely person at twenty five. So even within the Bank of England there's not a lot of consensus, and I'm kind of curious whether or not that lack of consensus also is part of the issue why this statement is for temporary intervention and it really doesn't seem to have a lot of support becauld you know, you said you don't know that this was necessary, And we've heard from a host

of US policymakers that say they do not see disorderly markets. Volatility, yes, disorderly no, what is that distinction when you look around the world. To understand disorderly policy maker makers need to step in versus a logical response to policy. Volatility just is caused by movements in price. So you know, the price goes up, the price goes down, and the price is always responding to news. So we've had a lot

of news. We've had a lot of news out of various central banks, not just the b o E. So that's causing the volatility. When we have disorderly markets, you're talking about bias strikes in particular, so no one coming in and I don't think you've heard any of that out of the English markets. I think what you're seeing is people are going in and acting rationally. And when people are acting rationally, I don't think you need to

have the Central Bank come in and intervene. And my fear is that through this intervention, I think that the him this kind of quantitative conundrum because we don't really know what they're trying to do here. No, no, we have to we have a surveillance correction, folks. It's not quantitative conundrum, John, help me here? What is it? We're calling it quantitative confusion to the confusion. The Chancellor will

meet today with collective Wall Street. I wish Sir John Templeton was there, of course, with the Franklin Temperlin funds. That was many years ago. What should Wall Street listen to from a chancellor beleaguered? I think what you're looking for is long term intentions. That's what we want. That's what we've A week a month. Oh no, gosh, the long term and a week a month is not what we're talking about. We're talking about we'd like to understand

what's going to happen over the course of the next year. UM. And that's where the FED dot plots have been very instrumental in giving stability. You don't necessarily need to agree with what the central Bank is doing, but if you understand the direction of travel as an investor, you can position in yourself and you can do the right things

knowing where we're heading. And I think that that's what people are looking for UM and I think that you can distinguish that from the BOE, where we're not quite sure where they're going. Exante datas ends and order to join us. About an hour ago, we just tweeted out the solution to one problem creates another problem. They've stepped into the bond market and Sterling is weaker, Katrina by one point seven percent of one of five fifty three. Do you think by addressing the one problem in the

guilt market they consider it one? Do you think they're creating another problem in the FX market? Look, I think you're you're you're seeing that weakness in the in the guilt market. I think there's two aspects here. First of all, people are thinking that the rate decision in the b o E. You know that they actually meet. You know they're going to delay that given what they're talking about.

The second thing I think is we were talking about you need to understand the importance of controlling inflation in the UK because a lot of the UK debt is inflation linked and that's something that's very different to any other market around the world. So the b O E re Lean needs to keep a hawkish eye on inflation and controlling inflation. And it's not just in order to generate price stability, it's actually also to control their debt costs.

Well said, fantastic to have you with Uskatraine. Thank you that Franklin Mutchell advices right now. Joining is Allen at Ruskin. This is an honor owning the court at Royal Bank of Scotland for decades in chief international strategist for David folkos LANDAU at Deutsche Bank. Ellen. What I love about you is you going to write a research note and six hours later you were wrong. You said in your research note yesterday afternoon that you thought, well, let the

f X panic pass and then act. They didn't read your note. What where would we be now if the Bank of England hadn't acted this morning? Well, I think we'd probably be a better place, Tom. I'm I'm I'm pretty critical with the you know about the actions that we've just seen here. Most obviously this is negative for sterling to the extent that the Bank of England is effectively adding more liquidity into the system. They are lowering

nominal rates. If anything, they are lifting up price expectations, which means real rates are getting a double whammy, as it were, and the pounders under additional pressure, which then puts them under additional pressure. Um. And you know, maybe they would like to see a situation where um, you know, they could see heels coming down in general, but if anything, this place is more pressure on them at the front end of the curve. November three, next sketch of mating Alan,

how big is that height going to be? Um? Well, when I last looked, and there was before this latest actions, a hundred and fifty basis points is effectively priced in, so the market is rarely pushing them into a corner to do something. You and without them acting in that way effectively the pounds going to go down further, so um, you know it. It remains to be seen how much

will be needed on the day itself. There's obviously a lot of water that's going to flow under this bridge before then, but I would suggest that you know, at least a hundred basis points is going to be needed at that point. And can they do anything about what's happening with pounds sterling? The forces worldwide right now are incredibly powerful, the FED hiking cycle, the dollar dominance off the back of it. Can they actually do anything to

fight this? Mean, it's a great point, John, I mean, you know, it's a question of how much should they fight this? You know, one of the big problems the UK has is that it's balance of payments is in a seriously negative condition as far as the pounds concerned. The current account is one, you know, the deficit is one of the largest out there. The narrow basic balance you know, when I last looked in terms of the

last twelve months was amongst the worst. Really of forty five countries are attract so the financing needs are huge, and I think the issue is just, you know, what is the appropriate policy next to stem the tide as it were? And I think the Bank of England has been back to some extent into a corner by unorthodox fiscal policies as well. But Ellen, I guess another way of asking the same question is how much is this a dollar story and not really a pound story, not

really a euro story, not really again story. Yeah, I think you know, obviously you can one to focus on euro sterling probably as the metric that tells you just how much of this is a sterling story, and by that account you say, well, this, you know, this shouldn't really count as any sort of crisis per se. If you look at the sterling on a trade weighted basis, on a real effective basis, it's not all that week,

So you know, don't respond in a sense. So, you know, I have a little bit of sympathy for the idea that the dollar and the Israeli the dominant story behind a lot of what's going on here. When is a strong dollar in and of itself allan create havoc for the rest of the world economy that rebounds back to the US, At what point do we see I don't want to say a global recession, but something that looks

like that because of the strong dollar. Yeah, I mean, I think, you know, so far the disruptions are being quite limited, but both in terms of what we're seeing globally and the sort of feedback loops back to you know, US risk appetite metrics. So, you know, I think some people would say markets a little bit broken because the Japanese are having to intervene. You know. I think you could say there's a yend story there, and there's a

B O J divergent story that's dominant. Um the UK balance of payment stories unique so so far, I think we shouldn't you cry wolf too loudly. I don't think that's warranted. Alan, who's next to blink, The ECB s Holsman is talking up an other seventy five basis point hike. He spoke to our colleague, a good friend of this program area today earlier this morning, a good friend of ours talk. I'm not sure whether she's a good friend of yours, a good friend of ours. Alan, who's next

to blink? Well, look, I think everyone is seen as tightening substantially in terms of the G ten world for this year at least. I think the blinking is probably going to start in three when the US fed cycle you know, essentially comes to an end. At that point in time, you presume the global economy but will be in worse shape in general, growth nationally for most economies will be you know, that much more in a much

more serious downturn. And that point, I think there's going to be this real challenge where growth is very weak and inflation is still at much higher levels and targets suggest is warranted or desired, And at that point, I think policy is going to get into you know, a much more much more tangled and much we'll confuse with the state. And I'm Ruskin at Deutsche Bank. Thank you, Alan, You just one of the best described to catch out what he said as a white right now with a

real view, real worldview, I should say. Sarah Maleck joins US chief investment officer in Novine. Sarah, do you do you ignore this within conventional institutional money? How do you sift in the tumult of the last three days. I think as long as the dollar and eals continue to move upward, investors need to brace themselves for more pain. Now, there's a few things on the horizon that might at least give us some stability here, and that's earnings and

some cracks that we're seeing in inflation, and also watching technicals. Unfortunately, we seem to be breaking through the juvenleles, which means we probably hit thirty four the S and P five hundred. But earnings we're seeing in sensus start to decline a bit, and earnings generally don't crack until p M I going to contractionary territory. So I think actually Q three earnings could be okay, give investors a bit of a short

term sigh of relief. And then also inflation still remains very hot, but we are seeing some moderation in rents, which is a big piece of core inflation, so you might at least start to see a plateau and inflation, which I think again at this point that could be a positive for investors short term bounce, but against some

stabilization for the markets would be a good thing. So the pushback we get against the earning spas is that we live in a nominal world and nominal growth that's been phenomenal because inflation is so high, and how can you push back against earnings in that environment? So you kind if you get focused on the margins on costs,

what a marches look like going into your end. I agree margins are a real issue for for earnings because they're basically at peak levels, and with the costs inputs coming in, only those companies with pricing power will be able to maintain or expand margins. Also, that dollars ahead win for earnings, and some of these signs of demand destructure are eventually going to hit earnings. The question is what's the timing of that. Likely not the third order,

but it is to come. Similar to the employment market, when does that crack? Probably sometime early three and that's when you hit your recession. So I don't think we can just hang on to the positive earners of the third quarter, but given where the market is right now in terms of valuations, that it might at least just help us stabilize because they should come in all right

for this quarter. So as an investor, when do a market directions market momentum, when does that overcome some of these fundamental considerations like margins and earnings, and how quickly this bleeds out into the economy. I think when you get into these periods of extreme stress like we're seeing now, it's somewhat of an unwind given what's going on outside of the US and also the continued pain from higher yields,

which makes equities let us less attractive. We do turn somewhat to tecticles to see can the market hold some of its lows and moving averages. The issue, of course, is that it's not really holding those and I think until we can technically get to a stable, more stable level, markets are going to just keep declining due to these higher yields, higher inflation numbers, and fears over you know, when is the next you to drop? Is it going to be in the UK, Is it going to be

in Russian Ukraine? As some of these areas that just keep piling onto the negative narrative happening sounds like people are hiding under their beds with a whole lot of cash just sort of sitting there waiting for it to pass. Are you is that what's going on? Or is there something else that you're kind of figuring out how to play in here? I mean, I get the reason, you know, cash and and yields are actually but quite attractive, and

that as a headwind for equity. So I think these are challenging, but we're finding areas that are attractives, such as dividend growers. They actually look cheap versus some of the typical PALMD proxies that look expensive to us right now. They can provide you income and protect you against the volatility. We like fixed income here. High yield actually is offering very strong returns in the high single digits. It's much

higher quality than it was in the past. And then look for asset classes that actually can benefit from higher inflation, such as farmland, private real estate or CPI. Escalators are written into some of their contracts. Let's go to core competencies. Sarah, tell me what municipal bonds are doing at Novine. You guys own that French our re binds a place to be. I think that's another area with strong fundamentals that's been hit without flows and a lot of the negative sentiment

that's hitting many asset classes. But it's similar to high yield on taxable fits strong returns from umissible bonds. Municipalities are very or have very healthy coffers right now. So usial bonds is in other area that we think is quite attractive. It's where you can get more bank for your box, a little bit less risk, lower correlation to other asset classes, but good returns to help you wait

through a lot of this pain. Sarah, how many times have you been told that Apple I found amount is faltering. That's the report I feel like this morning. It's interesting because Apple is a post COVID story. We've been waiting a long time for that normalization after the extremely strong demand we saw for all of their products during COVID, and that online hasn't happened. So it is interesting to see it finally start to catch up to Apple. Not surprising.

I think all of these issues for these companies that had very strong, unusual demand during COVID are eventually going to have to normalize. That process could be painful, even for Apple, So I'm mantic. Thank you Wonder for the catch shop of news. Eighth. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on 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