Surveillance: Central Bank Credibility (Podcast)

in search of a crisis tool. What is the acclaimed rom inflation crisis tool looked like. I think that the crisis tool is clearly just trying to reclaim some credibility. And you know, we've talked about being behind the curve. These central banks just have to try to, uh, you know,

assert control and just calm markets. It's I don't think it's even frustration with some of the air getting let out of financial conditions, but they want to try to calm markets that they are on top of managing inflation and managing policy. And I think that is what has been so difficult, and that's why we're seeing subtle banks around the globe. Really, that's what they struggle with Laura's seventy five basis points enough to get the job done.

I think that the FED, I think it's a step in the right direction, because for the FED, it's just you know, I think giving that impression that they are on it their depend their data dependent. I think that they have suffered from this idea that they're gonna wait several meetings to see how things flush out. That is gone.

Um So there's a proactivity there, but I do think that we are as we get data that is already starting to roll over in several categories, the possible ability that they are going to have to, um, you know, really tighten into the face of weakening demand, and that

I think is going to not help them at all. Well, this is interesting because it's sort of the opposite of Mike McKee and other people have been saying, which is it may help the FED to see a cooling in the economic data because it indicates that perhaps that at this meeting or next meeting, but at the end of this year, they'll be looking at inflation trends that are more in their favor. What's your pushback to that narrative? So, you know, the issue is that federate. Heikes just take

a really long time to impact the economy. And I think the when you think about demand instruction and where inflation is really coming from, it's shifted to now coming not from uh, you know, auto prices, but really coming from rents areas in the economy which are much more sticky. And for that reason, you know, you really need to get and you know, housing to not only roll over,

but house prices to moderate more significantly. These are changes that don't happen overnight, and there are changes that really come with um, you know, a wider implication for growth. So we've already got household sentiment under pressure. We've already seen households be impacted by inflation very negatively. The demand instruction is already here. Well, what's the math here, Laura. If we get a beat movies three quarters of a percentage point move, does a thirty year mortgage go up

three quarters of a percentage point? It's actually mortgage rates have gone up more than the long end has risen. So you know, yeah, I think we continue to see UM mortgage rates go higher. We've already seen Mark, you know, the housing market cool down. I think what we really are talking about is you know, the labor the connection between the economy to the labor market, and the fact that there's a reason the FED has trouble micro managing demand.

You know, they are a broadsword, they're not a scalpel. So for that reason, I think there's just more. This is the tip of the iceberg. When you look at UM demand cooling, and I think you could argue that demand right now isn't even really cooling because of FED rate hikes, it's cooling because of inflation. So you look at the right grate heights they're making right now, that's

going to impact the economy in several quarters. So they're they're really tightening aggressively into an economy that's already slowing. So what if the confused rhetoric b of this central bank? After the press conference today, we've covered confusion and ECB today like truly we've never seen. Are we going to be as confused? I don't think so, because I don't think they're going to change their UM statement very much.

I do think that in the press conference, pal is going to continue to sound very optimistic about the fat's ability to create a soft landing UM. But I think he wants to really strike a very serious tone on the inflation front. I think it be interesting to see, how, you know, if we get another month of an upside surprise of inflation, what this means for the July meeting.

You know, these are things that I think, you know just how sensitive to month to month data they're going to be, because you know, the real I think now piece that we're waiting for is to see how the employment market responds. That to me, is really going to make or break how aggressive the Fed can be in markets. Have you know, priced up the whole curve. They're now expecting the FED to raise rates up to four percent by the beginning of twenty three. Lauren Ryan, thank you

of FS Investments. Looking ahead to the Federal Reserve. I haven't seen many people downrade their earnings estimates. Here's one right now. Banky Chatter, the chief global strategist and head of asset Allocation at Deutsche Bank. Bank you cray to catch up the team at Deutsche Bank first out the gate to say recession at the end of next year. Talk to me about why you're down grading your earning story and why you haven't cut your outlook for the smpgs yet in a big white uh So, a couple

of things. What I would say first is that, you know, I think it's important to keep in mind the house called remains for a recession, you know, at the end of next year, but not near term. Uh. You know, I think the word that everybody is talking about is fluid, So things remain pretty fluid. Uh. And and most of our downgrade to earnings is about next year, building in

that slowing in growth and recession later next year. I think the bigger issue for the equity market on earnings, of course, is, uh, you know, what the bottom up consensus is doing and what basically it is building in. And what I would argue is that basically, you know, the bottom up consensus has ten percent earnings growth for this year ten percent earnings growth for next year. On the face of it, you know, there's nothing wrong with that.

Ten per cent earnings growth is actually the average earnings growth outside of recession. Some of this and the focus land down on your team, Lozetti, whether Social Afternoon folks has just been you guys have been just absolutely lights out on engaging the conversation. Engage this does profit matter? And when you look at earning shortfalls, can you partition companies that will still make the bacon from those that are really challenged? Yeah, but with the market you know,

really reacts to. So if you just overlay upgrades, downgrades or the change in forward estimates and the SMP five hundred, and you'll see these pretty tight fit. Not over the last couple of months where the markets you know, way lower and and and so earnings estimates do matter. Keep in mind that you know, every learning season the SMP five hundred, you know, beats on earnings by about five percent.

So it's you know, not something that the market reacts to in a big way, but you know, persistent period of sort of downgrades is going to be an overhang for the market. And what I would say about the bottom up consensus is while the headline numbers you know local kay for mid cycle or early cycle, uh, they do not look right for late cycle. Our house view, the consensus of economists is for growth to slow, and

as growth slows next year, you know, earnings will come down. Um. And in addition, we have you know, sort of the pandemic hangover as I would call it, built into consensus estimates for megacap growth and tech, you know, which got boosted by the pandemic, and the consensus has them rising with trend even though they are currently above trend levels and staying there would be hard. I'm struggling here with this idea that we're going to get earnings down grades.

We're seeing the end of free money. We're seeing real yields on the tenure go up to point eight percent after having been deeply negative just three months ago. And all of this is going to somehow end the SMP at forty seven fifty at the end of the year. What gets us there? Yeah, So I think the key question is basically, are we going to go into a recession? You know, we've been arguing for some time that the outlook looks pretty binary. We would get down to about

thirty six fifty. We are kind of all there already, and then it looks pretty binary whether we go into a recession or we don't. Recessions are pretty nonlinear events, is the way I would talk about I would think about them. It is not about temporarily negative growth. It's really about corporates becoming risk averse. Not great, you know signs yet, But to take a look at CEO confidence. Um,

it's down. I think the consumer conference numbers get more, you know, sort of attention, but corporate CEO conference down to just real quick here, Then what's your beer case? My bear case is if we go into a recession, we have a target of three thousand, which would basically be in the upper range of typical recession drawbacks, uh or pullbacks. You know, a recession declines in hindsight were extremely well explained basically by initial valuations and the severity

of the recession. So if you use you know, a typical recession, you know, a year and year quarterly decline in earnings of and where we were valued initially before the pullback began, you know, you're talking about thirty, which would take us to basically three thousand from the peace. So I think it just to be clear, if Matt

Lasetti is right, it's three k on the SMP. You know, if Matt Lsti is right that there is no recession right now and that issue gets resolved in the markets and the market starts to price that out, then we

get forty seven fifty by year end. Um, if we do slide into a recession, we're talking about three thousand on the SMP typical recession, assuming it starts now, is about eleven months, so you would get a bottom three thousand around November, and you know you would get to seven fifty by May of next year, since the market typically starts to you know, uh, bottoms basically halfway through. Okay, good to clear that up. Thank you, Thank you, Thank

your chanting with Deutsche Banks. The very very constructive on the security market, Peter Cheers joins us right now ahead of macro strategy and making it up as you go. An academy securities as well. Peter, not a snarky question, but a serious one. Is the bond market right now?

The Central Banker of the United States of America? Yeah, I think the bond markets really in control of things, and I'm increasingly nervous that the lack of liquidity in the bond market is letting us move too far too quickly, and unless we kind of tame inflation get some of this under control, I think we're at a real risk of much higher yields, especially with what's going on in Europe right The Italian and Spanish yields are leading the

way there, but that's dragging global yields around too. Does it happen quickly or does it happen all at once? Right? I mean that we've seen a real quick repricing, But do we see something that is a gap higher that gets the Feds attention? That driven by low liquidity in a sense of uncertainty around both FED policy and how

high yields could go. Yeah, I would not be surprised if you get one of those crazy days where you get our two or three point move in the long bond, largely due to a lack of liquidity and position, not sure which direction it would go. I would have thought a month ago was going to be a gap to lower yields. Now it feels like if we get a gap, it's going to be a dislocation and a know air pocket moved to a much higher yield will probably temporary,

but it will disrupt markets. We haven't talked about bitcoin very much in this show, Peter, and that's by design. It's something that we don't normally cover. Yet the losses have been shocking, and you made a point yesterday Peter that really struck me that there is a systemic import to the losses in the cryptocurrency complex that it feeds into the larger market in a way that perhaps some people are not expecting. Do you still think that that's the case, that it could be a systemic risk, both

economically and on a market basis. Yeah, And I've been thinking about this a lot, and I think there's kind of two main groups of crypto investors. They're a relatively small aggressive people who I think may get wiped out. I think they were using a lot of margin that will have some impacked on the economy, but I don't think a huge one. The other part is very wealthy people who tended to I think you cryptocurrencies is a core part of their asset classes or their asset allocation.

They also tended to invest heavily and disruptive stocks, and then they use some of the big tech almost as very equivalent of a bank account. So I think they were very aggressively positioned, and that's getting unwound right now. So I think there's gonna be a potential for a

huge wealth effect. And as you start looking at the amount of spending that was going on in advertising for crypto, the number of conferences, the number of jobs that were created, the number of semiconductors that were bought to support crypto. If the slowdown is real, and I think it is, I think we're gonna hit maybe even ten thousand on bitcoin. You could see a knock on effect in the economy that we would not have thought about two or three years. Right.

Why am I going to see a knock on effect in the economy, Peter, Because I think this wealth creation has hit stocks, disruptive stocks, in particular big tech. There's less money these people were spending money. You're gonna see a cutdown on princes. You're gonna see less spending on the rigs that are required to make, you know, do the mining. The one option of this that might be good for us is lower energy costs as crypto stuff,

you know, becomes less of a drain on energy. But I think we're gonna be surprised how impactful crypto is, especially to the New York area and the California area. But the amount of money loss is painful. I mean the accounting of this, Peter, I find extraordinary. If we go from one thousand down to a Peter Cheer ten thousand, or from sixty whatever thousand down to ten thousand, I mean that signals the collapse of the scheme. Doesn't it.

I think to a large degree yes. And you know, I think the prior guest you mentioned had um highlighted, oh, we're only down a couple of weeks. The reality is no one who has bought crypto in the last two years and held onto it is now up money. And this is almost Yeah. I don't mean to interrupt the folks, This is important because I got a lot of shade yesterday on David Rubinstein's comments. Lisa, jump in here because

you you were part of that. To Rubinstein made clear original founders of bitcoin still in a profit point and Mr cheers saying, yeah, but in the last number of years, that's not true. People, you're of huge losses. Well, bitcoin is emblematic of the withdrawal of free money, and we are seeing the end of a regime, Peter, and it will be exemplified by what we here today at two

thirty pm from FED chair J Powell. What do you think that he could do to create some calm, a greater backdrop of certainty to a market that has had anything. But I think he's going to try and shock the system.

I now think he's gonna give us seventy bis. I think the market will probably react well to that, initially on the view that Okay, they're going to try and get ahead of this inflation, and then I think over the course of the next couple of days, the sad reality was thinking is we are going to deal with much higher short term rates. That's gonna, you know, slow down the economy. And just briefly back to bitcoin. I think one thing that's also important is we're starting to

see the system come up. Right. You had Celsius kind of block withdrawals, you have Luna Tera had these problems, so you've had this kind of action of networks that all kind of work together. I think people are really going to question that. And if you go back to when Lehman collapse, right, we talked about the Lehman moment, it was never a moment, it was just part of a process. And I think the coming up of the system is going to create a lack of trust and

a lot of people are sitting out there twenty thousand. Yeah, made, they bought up five thousand, but better to get out at twenty than ten. So I think that's the problem there. And I do think the FEDS message of fighting inflation today will push crypto lower as well. Pay one of the best. I love hearing from you. Just wonderful to catch up Pittchure there of academy. But I can things

down for us. Let's get to dominic constant show and we the had a macro strategy of Missou America's dominic straight to you, and let's start with a federal reserve. What are you looking for a little bit later, Well, we're looking for the fetically very hawkish, which means they'll probably do the seventi five and then basically guarantee a very quick moved to neutral. They could do more than seventy five. I mean that would postibly make more sense

they do do fifty, which seems unlikely. Now they don't have to go out of their way to convince the market that they were accelerating rate hikes, and it gets that neutral rate. Dominic give pars a distinction between unlikely and unnecessary. Is a seventy five beep move unlikely or unnecessary? No? I think I think at this stage now, given the market reaction, particularly for the long end, it's absolutely necessary

to to to move to semi five. The problem they've got is that even if their forecast is correct that there's some kind of soft landing out there and that inflation can come down without too much damage to growth. The market is tightening financial conditions for them too aggressively, both in Europe and and in the US, and that's the problem. They have to stabilize long end, so unfortunately it's a different game plan for what they had in visage.

Stabilizing the long end will help them perhaps avoid a hard landing. Otherwise we've got bigger problems ahead of us. Don what's the bigger risk scenario for markets right now that the FED is overly harkish or overly devish in this meeting versus market expectation. No, I would say the biggest risk is if they try and push back. I mean, the poal kind of took Semi five off the table

last time. If they're trying to stick their guns and if you like to a do a b o J trying to sort of draw a line in the sand and saying we're not going to get pushed around, they're going to get into very sticky situation because they're not like the b o J that they obviously don't have that kind of commitment and on that basis, I would think both the bonds and ectaries will sell off hard if the FED is too dublish, if they do do fifty and they don't convince us that they're going to

have a super acceleration to neutral. There's another problem that people are also beginning to focus on is that their measure of neutral may just be too low. No one really knows who neutral is. And it's not a question that of them going to neutral and then question mark

how restrictive they might then have to become. The people will start to ask the question, maybe inflation is too sicky for too long and neutrals up three or three and a half that it gives you know, the mother of all textbooks and the United Kingdom is the Beg John Beg, and as a magisterial one volume first economics textbook, all of us is not in bed were an original

territory and we're all starving for levels. What is the level of yen where this unfolds, When dala yen gets to such and such weakness, where do the pieces begin to fall apart? Well, I think it's specifically for Japan. The issue is wage inflation that drives price inflation, and in a funny way, it's a similar issue across the main economies. The inflation we've got is a very bad inflation.

Wages they may be going up, but they're barely keeping pace with inflation, and so therefore the japan is insane situation. They're not going to react to important inflation unless wages are going up. So dolly en need so if you like, can keep on going down and it may not actually affect at least corrodeous view on what should they should do for y CC sure they're going to try and push back on it. We don't think intervention is really

necessarily going to work. It's more about stabilizing the global bond deals, and that will make the bo j's life a lot easier. If you can say by his tenure, yeels, there's a limit to how far dolly in will will attain your us yells, there's limits and how far dolly and will go down, and that will for them at

least maybe cap some of this important in patient. But unless you can get two wages, I don't think the Japanese are going to really start to ditch y c C or or obviously try and have any kind of normalizational policy. And I just want to finish here on the federal Reserve. And it's a market's question. A lot of people and you've heard this conversation to wondering if they should just come out today and go bigger than seventy five, get it done, get better neutral, go big.

Would that restore confidence in this market or would to scare this market. I'm trying to understand the tipping point between hawkish enough and too hawkish. I think it will restore confidence in the back end. To be honest, I think you will rally the long end if you go big and just get to neutral. I don't think the

extra market will initially react very well. But I think at the end of the day there is a requirement for a massive reallocation out of executis into debt and the level and that normally happens when debt yields are stabilizing, if not rallying. So we have to get to that. And it's sort of light at the end of the tunnel. We see no lights at the end of tunnel until the back end of the bond market stabilizes. When you see that light, then you can begin to see away

in which risk assets can also stabilize. That will come later, but right now you're in this void. You don't know where this tunnel ends. There's no light, and that's why they're going big. Wouldn't be a bad idea, but you know, getting semi five and committing to another semi five or will will sort of almost get you there. I'm just saying thank you, thank you very much down custom that of Missouri of America's This is the Bloomberg Surveillance Podcast.

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