Surveillance: Central Bank Decisions with Maher

and of course, on the Bloomberg termament. Eight years ago, Tom and I sat around the table and had a big conversation about who would hike first, the Bank of England or the Federal Reserve, and who would hike more, the Bank of England or the Federal Reserve. In the end, the Bank of England waited, waited, and did very little the soul. In fact, it was the Federal Reserve that was almost flying solo for the big developed markets central banks.

It will be different this time. Derren Maya, the head of America's research and fex strategy at HSBC Securities, joins us right now, Darren, how difficult and different will this one be compared to what we saw last time around. It's it's a really tricky time for central banks. I mean, Tom use the word conundrum in the terms of market behavior, but for central banks this is it. I mean, you've got an inflation problem. So do you respond to that you've got a real income squeeze since you take a

greater account of that. This is really tricky. I mean, look as a house where we think the FED errors on the side of a fifty basis point move in March, whereas for the Bank of England we think they're gonna just stake with the twenty five pace that they delivered last time around. Clearly the effects takeaway that is it should be lower cable um but they are pretty well. Certainly the FED call still very finely balanced in our opinion. But dare, let's go to the fan distribution. It's personified

by jump conditions. We have a three point for standard deviation move and United Kingdom inflation. Are we going to start to see currency markets currency pairs in a jump condition where there's big figure opportunity? I think, honestly, I think the efex market is struggling to get its head around this one because it's facing that same conundrum that

policymakers they're facing. What will be the spin And you know, as as John pointed out in the UK, it's a there's gonna be a very transparent income squeeze coming up with the energy price hikes that that are legislated for. We know they're coming, but that's gonna have a huge impact on the consumer consumer sentiment. That said, yesterday we had wages data p A y E data which showed wages growth at least for that sector growing quicker than inflation,

so positive real income growth. That's you're not seeing that the US, You're not seeing that in the Eurozone. So I think that still allows the Bank of England to typen. I just don't see that. The five people who voted for basis points the last time, why is one of them gonna suddenly vote for fifty. I just don't see it. Despite that big inflation upside, the market seems to agree

with some of your concerns about the economy. When you look at the two tens yield curve in the United Kingdom, it's all the a few basis points way from inversion. And George Saravellis was talking about this concern with the market even pricing in rate cuts by the Bank of England next year. What do you think is sort of the consequence for the pound if there is that type

of backdrop. Look, it is very peculiar, isn't it. And I look at the four do I S market, so that has you know, all the tightening coming in the next twelve months um, and then has a hundred basis points lower for five years out. So in other words, the market is saying, hey, yeah, we think you're going to tighten, but we think it's a mistake or at least it won't stick um. And that reflects what we're

seeing in inflation. As you say, in terms of the economy, there's a squeeze and consumers, but there's also squeeze on businesses UM. So it's all a pretty toxic mix, I would say for sterling. And thankfully none of us that you mentioned brexit, so that's great we can get to the lower sterling with that. I'm so pleased we don't talk about that anymore, Dara. That's the framework for thinking about the central banks, the respect of economies, the UK, Europe,

the United States. What's the in fiction trade in foreign exchange for you. Look, I do like lower sterling. I think even this morning we were recommending buying you buying yours sterling as one way to play that. I think lower cable as well. There there for me, the more straightforward trades. You've got seventy five basis points of tightening priced into the bank amongland over the next two meetings, in the words, you have to deliver fifty at one

of them. I just don't see that. I think we get twenty five and twenty five, so that that's one and generally conviction still there in terms of our modest dollar strengthening. It's not glamorous. It will be a modest trand but I think it'll be pretty relentless, so dolerable. Darma, thank you, sir of HSP Security is looking for a little bit of weakness through sterling. There are as always,

thank you very much. Let's get to Mandy's to the chief equity derivative strategist at Credit Swate, Mandy, should I be pricing in great hikes or the cuts that might

be in our future? Both? So what's interesting, Even as traders are pricing in more aggressive rate hikes for this year currently just under seven total hikes being priced for the year UM, they're also pricing in rate cuts further out, So starting in the curve is actually inverted, with about seventy percent probability being priced in currently that the FED will have to cut rates very soon, right, and that what that's held you that there's a real risk that

the FED is about to embark on a policy state, meaning overtaking now and killing out the economic growth and having to cut rates very very quickly soon after, Mandy, there are four cross moments here the pros like you follow, and one of them is this odd thing called scool. Scool. We don't do scool, we don't do derivative math on Wednesdays. But all we can say, Mandy is it has to do with the fear that's out there. And when you are a feared folks in global Wall Street, you hedge.

What is the demand now, the appetite to hedge? So interestingly, to start the year, um, we haven't actually seen much, um, significant increase in demand for hedges up until I say, over the past week. UM. And that's interesting because you know, obviously we had a ten percent pulled back in the SMP in January and actually volatility really underperformed on that sellop because of this lack of hedges UM, and I

was a part of that reason. It's because you know, if you think of the catalyst driving that correction, it was fear of higher rates, and that's really a well anticipated um, you know, cattle, it is not really an unknown or uncertain you know, unexpected risk. UM. What we're seeing over the past couple of days is more demand for hedges on the back of the Russia Ukraine news and also on the back of you know, a speculation of the FED maybe hiking intermeding. I think that has

driven a lot more hedging activity in recent days. What is the leverage exposure wrapped around the hedges and frankly the entire market. I mean frankly, folks Credit Suite literally invented the monitoring of of leverage. I would suggest, what is the depth of leverage there? So I think for a lot of institutional investors they have the leveraged quite

a bit. Especially January was very people for a lot of hedge funds UM and this is I would say the most pronounced of the sector levels for tech UM in terms of kind of the protection buying that we're seeing, um, you know, they're not crash protection buying typically, you know, the protection bying that we are seeing positioning for more

modest pullback from here. So I would say, you know, given what happened in January, given the the leveraging that we have already seen, you know, the protection buying that we're seeing right now. Um, it's more modest. It's not as you know, bearish, um, as you know, as some I think, Mandy, a lot of people will think of me as the person who comes up with a negative scenario no matter what happens. But there is that kind

of basince the hedges to. They're the people who are hedging for a FED policy error on both sides, not only moving too fast, but not moving quickly enough at a time when inflation itself is crimping demand or there is the fear of that. Perhaps we'll see some of that in the retail sales at eight thirty. What's your view on why people are hedging and how you can

determine this from the type of hedge. Sure, um so I would say, you know, on on the on the risk of the FED being behind the curve, U, I would say that's a risk that is I think overblown

because yes, we're seeing very high inflation right now. But the important thing to emphasize is that long term inflation expectations, whether or not you're looking at you know, market based expectations, looking for example, at the five year five year forward break even, or you're looking at consumer surveys, they remain remarkably well anchored. And as long as that remains the case,

I do think that that has more breathing room. UM. But in terms of you know, what is what people are hedging, I would say looking at you know hedges and tech has been very popular. And then the second one that has been more popular right now is looking at cross asset hedges. Given you some of the moves and equities that we have seen people looking across other asset classes, for example fixed income vs UM precious metal like gold for example, that's been another popular one, Mandy.

Have you've seen a lot of investors decided to shift around their allocations with hedges with derivatives rather than actually selling some of those holdings. And I think about tech stacts, for a long time, people were worried about getting rid of them for fear of not being able to buy them back at an appropriate price later. Yeah, I don't think that fear is that as a dominant at this time regarding tech. But in terms of kind of how people are hedging and what they're doing, UM, particularly I

was on the risk of inflation. It's very notable that, Um, what we've seen is in high inflation regimes, UM, the correlation between equities and bonds breakdown. Right, that's an imperful fact. And that's obviously, you know, not good if you're a multi asset portfolio, you know, say a sixty forty traditional fixing condequity portfolio, because you know your bonds are no

longer diversifying your equity risk. UM. So what we have seen from a lot of institutional investors is a look at more equity specific hedges, so less reliance on fixed income to be your hedge. UM. And the second thing is looking at commodities, right, adding a commodities allocation, because obvious the commodity is a big driver of the current infletion that we're seeing and historically always been that case.

So looking at either adding allocation to the underlying commodity or increasing upside exposure to some of the commodity sensitive sectors for example energy. Great a catch up, Thank you, credit swas, thank you very much. Right now to interpret and drive forward, Simona Maccata joins US chief economist State Street Global Advisors in Boston. Simona thrilled to have you with us today. And my arch question all of the Bullard McKey talk I just had, is does this kind

of data assist you in deciding when inflation breaks? If we're at a high level of inflation, the game is the guestimate of when it starts to roll over. Does retail sales today help with that? I don't think so. I think of what I see in the data is a lot of month month volatility. And you know, the January numbers were very strong, but put those against December average the two and you get something much milder. I think that's how you gauge what the trend of these economies.

I don't think the retail sales data and specifically help you with the inflation question. Personally, um, I'm I'm of a view that around media is when we are going to see meaningful signs of inflation deceleration. It's it seems as though we're pushing on this string, and you know, as time goes by and nothing becomes apparent in the data,

we lose hope. But it's possible that when the change occurs, it occurs quite suddenly, and you know, if you go from like nothing's here too, there is plenty of evidence of inflation decelerated. What is not today's data that helps? What is the linkage between an inflation and then under a growth estimate? Well, um, it's very simple. It's a basic econ concept. The higher the price, the fewer the quantity solves. So this is you know, high inflation, think

of it as a as a demand headwind. Um. Of course you can offset it if you have persistent income flow to absorb that inflation. You know, wealth destruction or income destruction. Purchasing our destruction. But in and of itself, high inflation will lead to lower growth. Are we seeing though, that that's not coming to forth the way that a lot of people are expecting. I mean, we are talking about how you're seeing sentiment deteriorate, but it doesn't seem

to be dramatically crimping purchases. At what point does that start to give you a sense that maybe that narrative isn't working this time around? The narrative works, the timing doesn't work precisely, And the reason it does not work precisely is that you have a consumer that in the aggregate still sits on a huge amount of accumulated savings, so you don't need to have a demand response immediately. What you can do you can draw down those accumulated

savings and still finance consumption in the injury. But if that's that's a that works for a while. Eventually, um, there will be a demand response. It may not be a parent until the second half of the year. And let's not forget even in today's data you had a very strong help there from all the vehicles. There's still a lot of pentap demanding parts of you know, of the spectrum, and that will still help. But this is the tricky part, you know, trying to dissect you know,

what is the real message here? I think you cannot take any single data point, you know, put too much weight on any single data point, and try to take a view that takes over the course of the year and not just for the next month or two. What about the fact that we haven't necessarily seen inflation to accelerate to the degree you even start to give signs of peaking the way that people have previously expected. How high does that mean that inflation could go? How much

you revising your estimates about the trajectory of this particular cycle. Yeah, it's been a tough journey. I have to say, I think the inflation revisions are still upwards ums as of this point in time. I think what you are starting to see is leading indicators of a turning inflation, things like um, you know, perhaps things having to do with shipping costs, things having to do with expectations of inventory building,

things having to do with expectations of wage increases. Just to give you an example, in the Small Business survey, for instance, you had current compensations, so current wage increases making a new record, but compensation plans decelerating. So this is all you see at the moment. So it's it's not even in the inflation data, per say, it's in the leading indicators of inflation that you're starting to see

some some shift. I gotta leave it a Samana, Thank you, Samana that of Stay Straight Global Advices, thank you very much. Here in America, do you think Ford Motor Company and General Motors, which have completely retooled in are retooling their factories to build electric Do you think there's suddenly they'll say no electrics not the future. Electric is the future for automobiles all around the world. The John Carey, the former Secretary of State, a most interesting gentleman, and of

course the US Special Envoy for Climate. I did a panel Thank you Bank of America. Mr Mournianne was Secretary Carey and Davos on climate and I was thunderstruck. And how statistically well informed the Senator was. I still I'm sorry, folks, it's Massachusetts. I still call him the Senator. How the Senator was informed legitimately on climate. Whatever your beliefs in the topic, of course, peer to peer conversations with David Rubinstein it will be most interesting as well. I was thunderstruck.

How this guy did not mail it in on climate? Is that what you observed? He knows this stuff colde. This is the job he wanted. Most people, when they finish being Secretary of State never want to go back into government because any position will be less significant than the one they had. He's so interested in this subject he came back. In effect, is a subordinate to to the Secretary State. He's not subordinate, but he's not as significant as a Secretary State who used to be his deputy.

H Tony Lincoln used to be the deputy John Carey, now Tony Lincoln Secretary State and John Carey is in the State Department, but not as significant in a position as he once had. But he wanted to do this because he really cares about climate change, David, because of news slowly of other topics. But one more question this morning on John Carey. He's big time frustrated over where we are right now. Headlines today. I think water uh water lease is gonna rise two or three feet, Baltimore's

Camden Yards is going to be flooded. I mean, climate change is going the wrong way right now. For John Carey, We've had a lot of problems with climate change, and I think people recognize that. He said in this interview that it's here, it's something we have to do something about. But the truth is it's nothing we can do overnight that's going to change. The situation is going to take years. That's why when we talk about standards, we're talking about

things we can do by the year. There's a goal by many people to be net zero in terms of emissions by but that's gonna take some time to get there. Lisa the Secretary Secretary blinkoln speaking with Joe over ad MSNBC no evidence of a Russia pullback and I know that John Kerry did want to talk about the climate change issues. He was, though a former Secretary of State, and Tony Blinkin was his disciple, which leads us to really understand perhaps some of the framework as to how

they have grappled with the situation. David, to the degree that we've gotten some rhetoric out of Tony Blinkin really giving a threat that if this region of Ukraine gets recognized as independent by Russia as a game changer and necessitates a response, how do you think about that in terms of gaming out the potential for an escalation or de escalation. I think this is reminiscent of what George

Herbert Walker Bush did in the Kuwait War. He got a coalition together, put together very effectively by Jim Baker, his Secretary of State, and in the end the Allies were so strong that there was no chance for for Saddam Saying to prevail in Kuwait. Right now, the Allies are so united, uh that I don't think there's any chance that that Putin can move forward and not realize there's going to be a big, big problem for him.

So at this point, my view is he's looking for a way out a graceful way out, and diplomacy now should focus on two things. How can we give him a graceful way out? And how can we not brag about what happened. We want to do what George Herbert Walker Bush did after the Berlin Wall fell. He didn't go over and trumpet what he done. He was very graceful. He didn't want to do the kind of things that people wanted to do because he gave a face saving way out for Gorbitchov. That's what you need to do

here with putin David Rubenstein. My father told me they hid the newspapers from me. During the Cuban missile crisis. Dean Rusk and the team they're off of the crisis had to allow Khruscheff to save face. What do we learn then that we can apply now, Well, we did give him a way out because we actually gave him something. We gave him missiles in Turkey. We said we pull them out, and we didn't really need those missiles anyway,

so it was a face saving way for him. You also, we didn't brag about it in the way that uh I think we could. We we have to prevail, we have to do it in the future as well. We shouldn't be saying two people, we just beat Putin, we beat him, we trumpeted. We don't want to do that. What you really want to do is to say, look, we have an agreement. Now it's good and we're every both sides one. That's what he needs to really do as President Nited States, and I think that's what Joe

Biden is doing. From an executive perspective. David, and as the co founder of Carlisle, I wonder what your experience has been with these rising geopolitical tensions in terms of how to prepare for possible sanctions, how to prepare for a shift in the regulatory landscape. Well, no one can really prepare completely for these kind of things, because sometimes

the regulatory landscape changes so quickly. In the private equi world, you tend to be in a longer term investor, but there's no doubt that firms like ours do have shorter term investments, and we have publicly traded securities as well. There's no perfect way to do it, but anytime you do a long term investment or short term investment, you

now increasingly look at geopolitical risks. In the United States as well as abroad, and and this particular risk is one that people are taking a strong look at now. We not recognize that likely that energy prices will go up if Putin were to invade, and the markets have reflected that, but energy prices should come down if in fact we can come up with a peaceful resolution of this.

The news flow today has been dramatic, and I do want to bring you this headline that the Wall Street Journal is report reporting that the Justice Department is pursuing a wide ranging probe of short sellers, including with Carson Block, a prominent short slower who received a subpoena ahead an FBI search warrant. From your perspective, David, with your legal prowess, what's your view on some of the regulatory crackdown that we're seeing right now from this administration. I wouldn't use

the word crackdown. I would say the chairman of the SEC, Gary Gensler, thinks there should be more disclosure of hedge fund fees and and private equity fees, and and no doubt they'll be comments about that. No something will will move forward. But I think it's important that everybody who invest in these kind of funds do have that does have very good information and fees should be disclosed. And I don't think anybody's against that. The devil is in the details, but I think it can be worked out

to everybody's satisfaction. Let me bring it back to your conversation with Secretary Carry. Here's a guy who's devoted years and years of public service. Now he's dealing with something that appears from all intensi intractable as well. What's the Carry agenda to get something done in the coming quarters and years. Well, John Carey is somebody who's seventy eight years old. He's not somebody who is at the beginning of his career. Why at this age does he want

to go back and work on this issue. It's because he really seriously cares about it and thinks he can make a difference. Everybody wants to have a legacy when they're in public policy, and he thinks his legacy will probably be something related to climate change if he can get some agreements here that more than we've already had. And running out of time, But what can you, with all of your advantages and your firm, Carlyle, do to assist in water or the broader scope and scale of

drought management. Do you have meetings on that? At Carlisle we have a large E s G program, which means Environmental, social and governance, and so all the companies we look at, as do other companies in our industry, we care very much about this, and thirty years ago in our business,

we didn't care about E s G very much. Now everybody cares about that, and so we buy a company, we're very certain to make clear we want to care about the environmental policies of that company going forward, and we try to do things that will make the environmental practice as much better than they were before. It's gonna be interesting. David Rubinstein, thank you so much for peer to peer conversations with John Carey. Look for that peer

to peer conversations. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live week days 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, 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