Surveillance: China Growth with Emanuel

do this for anyone else. Mike Wilson turned round and said, how is the consensus wrong? He thinks it's not the direction, it's the magnitude. Max Kentner coming out this morning, same first half. First half might be better than people expect. What do you say, Well, look, you know that we're in in the dipping rip camp, and frankly, being in the consensus has always in a point of of bother

for us. But when you when you look at it, you know you're fighting this whole notion that the FED is going to hike at least fifty, maybe seventy five basis points more and the I S M S both manufacturing and now services are in recession. Let's not hey with cham and pal three has away. Some mentioned it financial conditions of a somewhat. Do you think he pushes back against that? He does? Do you think it works? Uh? Here,

here's the issue. The issue is there's a lot of position in going on in front of Thursday's cp I. Uh so, So from the aspect of a cap being on risk assets like we saw basically two hours into yesterday's session, it probably does work, but it's could be an entirely new narrative after that report comes out. Your shop invented the synthesis of equity analysis and economic analysis. A guy from Texas to this a few years years ago. Synthesize right now the enduring Ed Hyman belief that America

clears itself like nobody else. We will get through higher rates, we will get through all the tech layoffs and all the other drama. It's out there. Synthesize the optimism on your floor right now, well point blank. Ed has been of the view a good nine months now that inflation is going to fall faster than the market believes, and thus far it's starting to materialize. His full year inflation

forecast is two and a half percent the golden to handle. Okay, that is an entire new set of circumstances for the FED to deal with if in fact that's right, And and you know that is probably in and of itself the argument for risk assets that we think materializes at the end of the year, at the end of the year, but not at the beginning of the year. And this is what I wanted to raise because I actually understand what Max Kettner is getting at people who are saying,

wait a second, the data isn't that bad. There has been eight change in facts with better than expected weather, warmer than expected weather, and a China that's reopening. Why isn't that enough to sustain things for a bit longer? Before people hear what Raphael Boss is saying. I am not a pivot guy, look, no question about it. The surprise to me when I got to the green room was to look at natural guests and realize it has a three handle on it after what we've seen the

last several months. That's a big deal. But but at the end of the day, we have this set of circumstances where the FED is intent on raining in the labor situation, and the only way you do that at this point is to cause I wouldn't call it a material slow down, but look ed is looking for a couple of negative GDP quarters what we used to call until the first half of last year a recession. Okay, and I understand they dig There is a lot of people are saying it didn't actually happen. So what causes

the rip? What causes the upside? If the FETE is determined to bring inflation down, if they're really going gangbusters the air, and you don't necessarily get some sort of fiscal impulse or anything to really drive things near the direction. It's essentially this idea that there is a terminal, you know,

endpoint to the hiking. You don't necessarily need to see the easing, and the market is probably and I think we're going to hear this in a few hours incorrect and believing that there's going to be any sort of material easing in three But what it really is is what you have every time at market bottoms. There has never been a bear market bottom without a capitulation, without an emotional volatility spike, and that in it of itself

clears the playing field for the next bowl market. And we think that's going to happen if I'm not in cash, where am I? What sectors have value and have protection? We continue to think that value has value. Okay, it is going to be challenged for the next couple of weeks at mids Uh, That's that's part of it. Look, we're very defensive minded right now. Consumer staples, healthcare, and energy continues to be you know, it's sort of the pinata back and forth, you know, with ways of emotion

and you know, ticks in the oil price. But at the end of the day, even if we dip into a recession, energy is five percent of the index weight and it's going to account for nine percent of the earnings issues. So you don't think TANK can regain leadership here, it's basically the message. In the short term, it absolutely can. But in the long term, look, the fact is is that the investing public still owns too much. Fang, you're

a student of market history. I think what we're all leaning on here is this idea that's incredibly rare to get a market low before the recession. Is that basically the argument here? Yeah, in a nutshell, absolutely it would it would look again, we have to take it from the jump off point that everything that we've seen in the last three years is about, you know, has very little, if any historical precedent, but this is one of these things.

Entire the entirety of two We were asked, when's the capitulation, when's the chicarsis, when's the emotion? It's coming? And the saint Yeah, Junemanny, what have a acre alongside us in the studio today, Judy, what do you make of all this euro optimism we're waking up to this morning and this dollar weakness was seeing as well off the back

of this chin of reopening story. Uh. In the immediate term, it may be a little bit in terms of the reaction of of euro dollar at one oh seven, that's understandable. But the bigger picture is is that what the last nine months have been about is ridding the Eurozone of the psychology of negative interest rates. It's very difficult to overstate how important that is for risk assets, for investors, you know, assessing capital allocation decisions. Uh, you know, in

that part of the world. And when you think at the about the discount for over a decade during which time the dollar rallied almost consistently. It makes sense the case for Europe. What's revenue growth do if we get an ed him an inflation scenario, which is a forty eight or fifty two I can't remember even into alright, deflation in the early fifties, What does corporate revenue growth

do given a rapid disinflation. It's certainly going to decline, and it's going to decline faster than the market expects.

Is it going to go negative? Very unlikely, because frankly, again you have the other side of the fact that you've got so much stock of consumer savings, and in that environment, one might be able to argue that you're going to have I wouldn't say a soft landing, but not a crash to call it over five in the unemployment rate, and so you're still going to have that backstop that gets you through the shallow session to the

recovery in twenty four. If this is true, does that mean that the FED the e CP can remove accommodation completely, go from negative or zero to two three four percent without causing a financial crisis, without causing a crash, a normalization that just leaves a couple of potholes, but not that much more along the way. It's very difficult. It's

literally only happened. Uh And interestingly enough, when you look at ninety four, that was the only other year in the bond stock quadrant where you had negative returns to both bonds and socks. Granted there were nowhere near the scope of what we saw in two, but the upside is it is possible. But we reverted back to low yields after that, and it really entered this decade, these

two decades, three decades of the incredible bond rally. If we don't get that, if this is the new normal, maybe not this high, but a three percent fed funds rate, an e c B rate of two percent, does that mean that we can just live with that? Then it just is basically, money isn't free, but it's not gonna necessarily cause some complete rereading of stock and bond returns for a longer period of time. It is possible. It's going to compress multiples, it's going to compress leverage, it's

going to compress valuations across assets. But it isn't a deal killer, and at the end of the day, it doesn't depress materially the concept of earnings and earning growth, which is what drives stock process in Europe. This goes beyond the weather. This seems to all go back to China. I think so many of the calls that we're seeing this morning are underpinned by this more optimistic constructive for you on China reopening, Morgan Stanley, We're pretty blunt about it.

We believe the market is under appreciating the farm reaching ramifications of reopening and the possibility that a robust cyclical recovery can occur despite lingering structural headwinds. So make it really simple. I think for a lot of people waking up this morning in the market, they want to work out whether they should be investing in a story where growth slows or investing in a story where growth rebounds. Which one is it. We think there's a very good

case to be made for China assets right now. In fact, our China strategist Neo Wang thinks we get to six point two percent GDP growth this year. Yep. It's just stunning. Yep exactly, And I s I ever Core Asian Economists feels they get a six plus handle. Ye wow, absolutely, John, what we're talking about here in my head is spinning over where we were three weeks So I believe three weeks ago the world was ending as we know it, and now we've got all this optimism mere and only

one thing has changed. Disinflation in Spain, disinflation in France, some other place. I can't remember this stunning six percent call, stunning six percent call on China, and what are we going to see Thursday in the United So I'll answer my own question. I guess it depends where you look. If you look to China, things look better. If you

look to the United States, maybe things look worse. And Judian just as a final question that teas up the question we ask almost every single January, every single year is whether we can get our performance x US, whether that's where the performance is international markets beyond US shows isn't that where it is? So so it's it's been it fits and starts type of argument. And again, if you look at the broad sweep, it's because of the prevalence of negative rates in much of the rest of

the world and because the dollar has rallied. We think that we're not saying you're in the dollar bearer market, but the dollar has topped in our view, and that is absolutely tail when for the rest of the world out performance this was great. Should Manuel I've a kill in a studio. Let's go on dow in an important conversation for Global Wall Street, Mr Kentner, where the chief multiss strategist that hus be seeing, Max John's got a

lot of important questions. I'm gonna do this simple. How do you dovetail your shift into Steve Major's call for low interest rates? Yeah? Good morning. So I think it's probably the key question is already around the sequencing, right, not so much where the end results is going to be.

I think it's really a sequencing question. And with this really really pessimistic, you know, these pessimistic outlooks that we got both from the cell side and the buy side in the last couple of months, I think there is a very very strong contenders, and it is my feeling that it's probably the most concentrated consensus that we had

ever since the end of twenties seventeen. You may remember back then we had this idea of globally synchronized growth that really then went horribly wrong in twenty eighteen, and I think that's probably as much you know as much of a concentrated consensus as we've got right now. So therefore, what simply what we're saying is that actually against the backgroup of such a concentrated consentus, there's simply a lack of downside catalysts, a lack of downsides of prises, and

therefore the only way is up. So Max, let's talk about that. So your words super depressed growth expectations are key. Is there any evidence Max, here that those growth expectations are captured in the ice of markets right now and

where you're seeing that? Yeah? I think so. I think when we look at market pricing, so we look at things like equities versus rates, we look at equities versus rates against p M e s, equities versus fixed income, comparing that against break evens, across acid relationships or cross acid against macro relationships. All of that looks a bit more,

a bit more realistic now. And I think one thing that I would say is it's it's not like we're super bullish, right, It's not like I'm saying, you know, growth is going to go through the roof and it's gonna be rock and roll. The only thing I'm gonna say as well. It's not gonna be a rocky horror show, right so that that's the only thing that I'm saying that basically we're not going to see such extreme pessimism

and such against the factup of such extreme pessimism. You know, you don't need an awful lot of positive surprises, right to really make risk asses get going a little bit at the upside. And in the first half of the year, it could change in the second half of the year, right when the ultimate the ultimate level of inflation. Perhaps then it's a bit sticky then thought, But you know that's something for in six nine months time, not something

to fret about right now. Why don't get the feeling you practiced that line a little bit earlier this morning, Suitely, Max, Let's finish on this underweight in cash that you did have. Where you allocating that capital? Where does it go? We've had some big calls this morning on China reopening, Morkan Stanley one of them on the Eurozone Goldener dropping its

recession call. Where does that cash call go now? So it's not going into full on overweight equities yet, right, So we haven't been as crazy as going from maximum weeight equity is to max overweight equities, So we're sort of dipping out of toes. We're going into i G credit, into high yeld credit, into emerging market debt, right, so really sort of dipping out toes into risk acids. It's still a preference of value over growth rate and equities.

So we still actually like European equities, um, you know, we like European equities more than US equities. Really like also in EM and Chinese equities now, so I do in against the backdrup of Chinese reopening. Still a bit of underlying pessimism around Chinese growth, right, So we've just heard a bit of a pretty old call around China growth early on in your program. It's at starting to happen now people are starting to drop recession calls for

Europe and for the Eurozone. All that really should be continuing in the next couple of weeks, and as that rear repraisal really continues, that should be beneficial for EM equities and for European equity. So what's on the other side, Max, with the rocky horror show potential that you were talking about for the first half that seems to be pushed out. What are you looking for to determine whether you should

go back into your defensive hunch. Yeah, I think the defensive haunch is probably towards the second half of the year. Once we've seen the negative rate of change in inflation play out, which is really probably going to be happening over the next sort of four or five months, right then was something you to start saying, Okay, now the negative rate of inflation is in the real right, that's the rear view. Now we've played that. Now let's talk about the ultimate level of inflation work in a state?

Does the FED have to you know, and does the FED in other center branks have to keep raids a little bit higher for longer? Does do the put first have to be praised at? And that then could be leading to perhaps an accident on financial markets or a retightening of financial conditions via higher higher credit spreads, lower equities.

That's then something for the second half of the year once that, you know, once that focus shift from initially now the negative rate of change in inflation, so the delta and inflation, to the ultimate level of inflation where we're going to encompat. Do you think that the ultimate path for European equities is actually more positive than you previously thought because of this d emphasis a U s tech basically that yes, there might be a downturn, but

the optimism around Europe is sustainable. Yeah, I think so, especially against the expectations. Right. Let's let's remember there's two things that we do in markets. We trade the rate of change and we trade data versus consensus. Right, we don't really care whether data is, say, we care about how it pans out against consensus expectations. And I would argue one and a half two months ago it was there was barely any ball to be found on Europe. Right,

So that's not long ago. That's just starting now, right, that shift is just starting. So I would really expect there is a bit more, a bit more more positive, a bit more a positive run to go for for Europe, both on the credit side, on EFX and on equities. Wow. Max, great to catch out, buddy, Thanks for jumping on with us. Max counting there of HSPC Lindsay pegs are with US chief economists Stephile lindsay, I'm gonna cut to the chase.

Our audiences, our viewers are listeners, their heads are spinning Atlanta GDP now is a stunning three and a half percent plus guestimate of where we are. The fourth quarter looks pretty good after all the gloom. Where is the assured nous of economic slowdown in this ninety days or dare I say even Q two? Well, I think the assuredness comes from the weakness that we're seeing on part

of the consumer. As a consumer based economy, if the consumer is not out in the marketplace, happy and healthy, we would expect a meaningful decline from that more robust pace as we saw in the second half of the year, and against the backdrop of negative real income growth, higher borrowing cards, and of course many consumers facing the risk of variable rate debt resetting in the first quarter at higher levels. This will compound the pressure on consumers. Linsy,

you're reading my mind. The chart yesterday, I believe zero hedg chat at thank you zero hedge and it was a big, a bloomberg chart. I can't remember of the credit card interest rate is a variable rate. I mean, we're all looking at housing in that, but fold into your analysis credit card rates that were to how does that play in to the caution Well, it plays in significantly, particularly as savings are now drawn down to near zero levels.

Whmembere the consumer was very much supported by this accumulation of wealth during the pandemic and the immediate aftermath. We estimate there was an additional about six trillion in terms of a wealth cushion supporting consumers, and that removed any sense of immediacy to revert back to the normal labor force participation formation that we've seen in previous cycles. But now as we go forward and consumers draw down that savings,

we're seeing this return to a reliance on credit card debt. Now, arguably the household balance sheet is beginning from relatively healthier position than in previous cycles, but still we don't have this unlimited amount of wiggle room for consumers to take on that new amount of debt, and particularly as that debt is now repricing at higher levels, this will compound that pressure as I said, on consumers limited their ability

to go out into the marketplace. That doesn't mean that consumers are going to fall off a cliff, but that does mean a meaningful loss of momentum, and again is the key part of the economy is going to be nearly impossible to maintain then that level of three percent growth as we turned the corner now into the new year. So, lindsay, would you push back against some of the optimism that we've been hearing from people who have been pessimistic through

all of the second half of last year. Well, I think the timeline for the pessimism to set in was extended. Consumers did prove to be surprisingly resilient through much of this turmoil INWO But again, it doesn't negate the fact that these outlying variables will weigh on the consumer and limit their ability to spend. There's only so much savings that we can draw down, there's only so much credit

card debt that consumers can ramp up. And so just looking at this from a quantitative perspective, regardless of our qualitative optimism, the numbers suggests that consumers simply will not be there in the first half of the year. Just changing the timeline change the depths of whatever downturn you're expecting to happen. In other words, does it make it

less or does it make it more? As new excesses build up Now, well, I think the depth and duration in terms of the downturn is very much going to be hinged on monetary policy and the sticky nature of inflation. The higher that prices remain, the longer that prices remain in this uncomfortable level relative to what the Fed can would stand, that's going to force the Fed to raise rates higher and potentially keep rates higher for a longer

period of time. And that's going to be the scenario that's going to compound that that downturn in the duration of that downturn. You know, Lindsay, I know you hang on every word we do. And Julian Emmanuel is just done with Mr Edward S. Highman and their team in Asia modeling six percent plus China g d P. Not that I don't need you to tell me that's what

we're gonna see. But if we get five point eight, six point to whatever, what does that do to exports and imports in your US g d P mass, Well, certainly it's it's going to be difficult to get to six per cent. That that's extremely optimistic. That being said, it does seem as if there's nowhere to go but up. When you're talking about an economy emerging from a nationwide shutdown or or more restrictive zero COVID policies. But that being said, what we've seen thus far has been far

from an ideal reopening. It isn't a flip the switch scenario, so it's more going to be a slow bleed, particularly against the backdrop of a number of black swans that continue to float around. Those with overheightened optimism, new variants, a lack of natural immunity to the virus. Any of these resurgences, as deemed by the government is inappropriate or intolerable, could lead back to many of these zero COVID policies.

So I do think it's overly optimistic to think that once the door cracks open, it's going to swing wide open and get us back to that structural fluidity that we saw prior of the COVID pandemic. John Piggsy there was on the edge of Bramo. I mean, that's that's what I noted there. I mean, you know, she's on the edge of Brammo. This I think a lot of people waking up this morning feeling like they've been told

conflicting things. Three weeks for manufacturing and services. Then we've got this big boom the people are talking about over in China, and they're wondering whether they should be pricing in slower growth or a growth rate band, And lindsay, what's so important here, to go back to your earlier insight, is variable rate. John Farrell lives this in England there the land of the variable rate, the floating rate mortgage and all that. How big a deal is the variable

variable rate in America, I'll get it out. I think it's a very big deal, particularly when we go back to the conversation we had about consumers, when we're talking about credit cards as a key support to consumer spending going forward. As that interest charge continues to rise, that's going to limit the ability for consumers to access alternative sources of income aside from returning to a more traditional

position in the labor market. Now, this could actually be somewhat of a double edged sword, but but a positive in the way that if consumers feel they can't rely on these alternative sources, that may create more of an incentive for these sideline workers to move back into the labor market and help increase that labor force participation, which, of course, as labor demand outpaces labor supply, we've seen

this upward pressure on wages. If we see the reverse occur that could put some welcomed downward pressure on wages, something the FED is certainly looking for. Just real quick here, if you choose a data point, you can tell your own story. You can pick whatever data point you want to edify your view. That has been basically the belief for the first couple of weeks of this year. Which data would you be watching most closely? Free true read

on the pace of how the economy is developing? Well, I think when we turn the page looking at the consumer, I think negative real income growth for the better part of the past year tells a longer term story about the unsustainability of positive spending act and that is really going to be the driver of whether or not the consumer can continue to shoulder these elevated prices against the backdrop of negative real income growth. Lindsay, thanks for this

accident of steel on the US economy. Last year, in the shock of Ukraine and Putin in Russia, I name my book of the year in February or maybe the first week of March. It was the absolute must read Putin's World by Angelus Stanton. I'd never had a book of the year that early, and I'm not going to top it this year with Olivier Blanchard's Magisterial Fiscal Policy

under low interest rates. All you need to know is this is the definitive short read with the rigor of the Massachusetts Institute of Technology and blenchcharded, is the mediate must read for every economic geek that is out there, uh, trying to get smarter, trying to get curious. Blanchard of m I T and the Peterson Institute, the former chief economist for the International Monetary Fund, joins us this morning, Olivia, at least is gonna vault into your wonderful new book,

a short but but dense read. I need to go to my essay of the year for last year, which is you late in the year in the financial times, where you said everybody calmed down. The American public doesn't doesn't worry about inflation at two percent, and the new two percent worry is maybe a three percent. What happens to our financial and economic system if we get the the the level of three percent with inflation, is that the new two percent? Well that's not that's not my

decision to take. It's a decision of the central vacs Um. Out of the book is based on the fact that when we had the target of two percent, which we still have, this implies fairly low nominal rates on average, and that really limits the ability of a fact to help the economy. If it's closed down. You can only decrease the rates by you say, phenomenal rates are two

percent of represent by three percent. And what we have seen over the last twenty years is that that is not enough for the fact to actually do the job of e CP or whoever any central back and so I have valued that might be better to actually when the economy on average at three percent, which would imply higher rates, which would give more room for my tree policy and would make some of the issues in my book less whatever, because if my foo policy can do

most of the job, it should do most of the job. If it cannot, then physical policy has to come in, which is the title of and and thisss Lisa is so profound. Professor Bonchard at I m F with stig Let's talked about four and that was hugely controversial in oh eight and oh nine. And this is a bit of a different discussion, as you and I have heard from his colleague at Peterson, Adam Posen Right, this question

of do you let it run hot? But on the flip side, and Olivia Blanchard the title of your book fiscal policy under low interest rates, fiscal policy of trying to fuel growth when monetary policy didn't have room to do so does it get flipped on its head, especially after fiscal policy created the problem that monetary policy is now trying to address. So as as you may know, fiscal policy can do too much, and I think that

we're paying in large part major fiscal policy mistake. There was no need for very large programs that we saw in twenty but more especially at the beginning of twenty twenty one, which led to very large of the heating of the US economy UH and supply change options which would have been there, but we're did by it and

in general of the hitting in the world. So yes, in this such a thing as using physical policy too much, I had a sense that although I was arguing for using physical policy, the Biden administration in particular was probably doing to two times or three times what I would have liked. And the result has been Indeed, there are some other reasons, and it clearly Ukraine has been very high inflation and the fact has had to react the other way with with with very high interest rates are

relatively high interest rates. I think that's the phase. I think that the book is rewritten looking beyond the current inflation episode, the cult higher rate episode, and one of the thesis of the book is that we're probably going to return to an environment in which the rate that the central banks need to choose in order to get the econmicate potential is going to be very low again. So we are again going to be in this situation in which might be constraints on the mintric policy, and

school post has to do more. But the point is clearly adverstage. The discussion is very much about the high rates. So there's a bit of a publication in coming with coming out with a book with the title of it is low res. But I would argue that firstly or not, they'bly like are surprisingly low at the height of a battle against inflation, uh, and there's no reason to think that they will now go back to something like we

had before COVID. So then where does that leave the federals are of the ECB in terms of the balance of risks? Is it to go too far with a benchmark rates and hold them there too for too long now? Or is it not do enough given that we are going back to perhaps something that is slightly different than what we experience of the past several decades. So I

think that with respect to the inflasion process. Uh, you know, I'm slightly older than you are, and so I've seen it before and it seems to me and maybe tell me is in between us? It's my guess, Uh, it's it's it seems to me that I have seen it before and the shoes are always the same, which is as well. Infortion is too high. Part of it is going to go away because part of it is due to energy prices. For prices, and these are going to decline.

They have started declining. But you know, we still don't have to basically slow down the economy a bit, and we don't know how resilient the ecomy is. Right in the textbook or in the simplified stories you hear on the radio, you know, you're basically increasing interest rate and the ecomy just slows down, but you don't know how easily you get to that. So I think that's what the FED, the ECB in all central banks are facing, which is should we do the more should we do less?

And then there are two issues if if if you give me too much more. The first one is that they are what we call lacks right, which is that even if it works, it doesn't work quight away, and so you have to kind of stop tightening or going easy before you actually have seen the results, because the

results take six months or yeah by. And then the other aspect, which I think is one of them in this case, is that some of the factors which increased inflation turned around on their own, independent of the independent of these So energy prices go down, and that's what I've called falls down, which is inflation falls. And it is following. Now you know, month to month, the numbers are very good, and some people say we're done, Olivia. I got I got one minute left, Olivia. I'm gonna

rip up the script here. I got Alan Blinder writing in the Wall Street Journal that disinflation is intact Krugman's and pounding the table on this for months. You know, the history of forty seven, forty nine into the Eisenhower deflation that we saw in fifty two. Come you just thank you, But Robert Solo is who you dedicated your book to at ninety eight years old. Do we have any clue? What do we have any clue what we're doing?

Olivier given disinflation in place a mid technology so low the laureate Paul Romer, there should be Laurier, Olivia Blanchard, Do we have a clue where we are given the technological progress that's solo invented? Yeah, I think I think

we do. But there's uncertainty. I think there's the usual amount of uncertainty, which is your vecom is always changing, so you have to take this into account the response to interest which changes as technology changes, and so that I think for the moment we're roughly where we should be. It looks like we have a probably more or less under control. The really difficult tissue, uh Tom, is what

is the unemployment rate that we can sustain? Can we basically get inflation down all the way to free point five as it is now and keep it there or do we have to accept slightly how unemployment in order to stabilize inflation. And I think that's the big issue. That's where all kinds of the dog school issues come up, matching re allocation, all kinds of things like that. We are out of time, Olivia Blanchard at Tersons too. 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