Surveillance: China Troubles with Mueller-Glissmann

and of course, on the Bloomberg Terminal. Christian Mollery Glissman Banishing, director of Poor Poor Portfolio Strategy at Goldman Sachs, and Christian I want to start in Damien's specialty in the developing world because overnight the lockdowns in Beijing, the first lockdown in the capital of China, to me, is a really significant story that changes potentially the narrative for next year. How do you view that that story in light of some of the optimism around China's reopening. Oh, you make

a great point. I think if you if you think about like outlook for next year, um, like China was one of those bright spots because there's a symmetry. The economy is in its knees for clear reasons like asset prices and in in in very bearish kind of territory. So it felt like there is a story that's emerging that can to some extent support next year and and

drive growth acceleration, drive that trough and economic activity. But I think what we're learning, and I think what our economists have been saying as well, it's going to be incredibly bumpy. I think the end game is that China will probably by second half of next year accelerate with regards to growth, help by the reopening, but the path

to that could be incredibly bumpy. And the real reopening we always thought what would occur kind of around Q two, And as you see those cases go up, you could say that, um, yeah, the risk is definitely that it's

being pushed further out. But Christian, how does this affect, right the different parameters if it reopens, if it doesn't, the bumpy nous that you see, is it bullish if they reopen, if that means incredible demand suddenly coming online for energy to their in for commodities generally at a time when that's one of the main drivers of disinflation right now, Yeah, and you you highlight one of the big discon answers, like one of the big kind of

negative cycles there. I think right now, as you know, oil prices have kind of come down significantly like curves are in the front and a bit in contangle. So I think you're dealing currently with the setup where there's a bit of a buffer. But you're absolutely right there is definitely a chance of a replay of headline inflation volatility next year, which then feeds a bit into rates and and and and to some extent kind of can

drive also spill over us too risky assets. But I think at this juncture, this full reopening, as I mentioned, is to us more of an Age two story. I think in the near term it seems to be more of a dragon oil than anything, but it does highlight

something which you mentioned. I think to me, risk premium um in the last month have significantly come down across the board on China assets, but also on global cyclic classets, on China exposed companies in Europe, and it just feels like there's not that many good growth stories to go on.

The market has embraced it very quickly. Partially that has contributed to a bit of a false start in in kind of relief on on the growth side, and it could very quickly reverse to some extent if if if that doesn't prove to be the case, well, let's just crystallize that. I mean a bit of relief. I mean we saw increase in the HANK saying China Enterprises Index in October, but we're still down year today. Talked to me, I think investors are realizing myself included that you just

can't have zero exposure to emerging markets in China. Right, So my question for you is, you know, what is the best way to get that China exposure? What is the best way to play the reopening narrative in China. You make a great point because it's it's been really difficult for international investors from a strategic point of view um to to to get excited about China. And and there's a concern with regards to how investors will benefit

from from China economic growth in the coming years. There's been a concern with regards to obviously zero covid um and and at the same time you have this reopening story. The reopening story, if you follow the kind of template from developed markets, should be very good for domestic consumer ciglicals, services sectors, and and it's not easy to get exposure to that via the headline indices. Our team generally have become quite a bit more constructive the whole North Asia complex,

which they think will be pulled along. So you can diversify to some extent just being in China with maybe being a bit more in Korea, being a bit more on Taiwan. Um. But but in the end, if you really wanna kind of go directly exposed to the reopening, you need to go potentially much more on specific sector specific stocks, and it becomes much more of an alpha theme. So all strategy team they've created a basket for that,

which clearly for a lot of the acid allocates. I speak to um that that becomes too specific Christian AKA talk South Korean Taiwan with you all day. But let's shift back to the US here for a minute. I mean, look, there's been a lot of talk no recession, shallow recession. I think markets are pretty much coming to terms of the fact that growth will indeed be slower next year in the US. Meanwhile, you know, inflation, while it is expected to come off, it's going to be above pre

COVID levels I think for some time. So in a world of slower growth and inflation, you know kind of remaining elevated, you know what fixed in commassive classes, our best position outperform. Yeah. I mean, especially after what I mentioned this, this risk premium contraction, I mean, you've seen a remarkable tightening and credit spreads even down in quality. UM, it just tells me that you need to be up

in quality into next year. I think generally we feel that next year you you know you you you spoke about this earlier. This year, a lot of the fear was about peak hawcusionness and very high rates volatility. And I think next year will be more about growth volatility.

I think rates volatility will will will normalize just by extension of central banks slowing the pace of hiking and and and that just means that UM, you're shifting a bit towards solvency risk, and you're shifting towards strength of balance sheet UM. And this year, as you know, UM, you have had very little cash flow risk, very little cash flow shops and and next year you would probably see more of those which needs. At this juncture with the type of risk premier, you're getting to move up

the risk curve. We feel up in quality investment create credit is where we would be UM, and and there's opportunities there to to kind of harvest more attractive year to volatility ratios. So, for example, mortgage backed securities that benefit a lot from a decline in rates volatility is a relatively low risk asset. So we'd rather be in these places until we get a bit more read in risk premium, which we expect could be in the Q

one next year rebuild in risk premium. It's such a nice way of say saying, hi, old bonds selling off. Christian Maller, Glisbon and Gilman Sachs, thank you so much for being with us. Joining us now is somebody who thought that it was going to be a great day, you know, I might as well join them because it's going to be so great here, And instead he's se question in a corner because it's so bright in his rooms. Chief effect strategists to see at a general thank you

so much for being with us. Kid, you talk about that it's not a black Friday so much as a gray one, not perhaps in your room, but generally how so, well, it's a day when you know, I'm not sure there's that much optimism around in the global economy this morning, and I'm not sure that there's um, you know, much going on, but but it is this sense of, you know, even in the US, slowing economy across Europe, and it's you know, how do you go running out on all

these cheap crisis to buy things when you're worried about energy costs, worried about mortgage payments and so on. So you know, the global economy is clearly slowing. And that's

the backdrop that the shocker. You mentioned it, but it's how much yields have fallen, how much the market is priced back FED expectations since j. Powell gave that press conference and told us that rates had to be higher for longer than the market was pricing just then, you know, so we are we are just definitely giving the birth to a central bank collectively because we didn't global economy

sign well. But this is really confusing, especially because in those meeting minutes, essentially FED officials said that they expect recession as almost as likely as their base case. This is as close to capitulation from a central bank that yes, there is going to be a downturn, and yes we are going to keep rates high in order to curtail inflation, even if that does become the base case. Do you think that hasn't got enough attention. Um, I think it

gets attention. I think he's the difficulty with this cycle, and it's probably true pretty much everywhere, is that in most major economies were going into a downturn at full employment, and um, you know, I if the last, if the last big recession was, this time is different. This is

different all over again. Differently, I can't remember a time when you have full employment into slowdowns and probably through quite a long time, so that the battle is between central bankers and how much they think they need to tighten and for how long to cool labor market at the same time as they can see economies weakening significantly. Different sides of the Atlantic you have a slightly different take on it. But I think I think that's the

that's the piece. The central bankers are looking at slower at slower data and things, but they're looking at the labor market and thinking, how do I really get to grips with inflation without getting a higher unemployment rate. You know, it's a sleepy Friday here in November, and for me, you know, it's not always been that way. If you think about the year intern if thinking about cross currency

basis swamp spreads. They've really behaved rather well given all of the tightening and the liquidity pressure we would have expected to see into your end. Are you surprised by any of this? Um, Well, they were behaving so badly six weeks ago that everyone got themselves into a into a state about them. And I think and I think people started dealing with it very early, so we had a we had a longer lead through. I still worry that they'll come back in the last week of December

and ruin my life. But that's just that's what we're paid to do, is to worry about things like that. But you know, I think that what we make that there's a possibility that I mean, particularly in the foreign exchange market that you know, from the war in the Ukraine, the FED hiking first, the energy crisis, the fact that the US benefits from terms of trade as the world's second biggest energy producer, never had that before and in

an energy crisis in modern times. That that all all my clients of of you know, written the dollar rally for months and months and by and large that they you know, let's close up the turn, let's shut everything down, let's quieten down, and um and start getting ready for Christmas. Okay, we're also seeing tentative signs of investors re engaging with non dollar asset classes here as we approach your end. So I'm just gonna ask the elephant in the room,

has the dollar peaked? It's ppeaking? I think it's for one of the description it's not a matter Horn peak, but a Dolomite speak if that works for Americans. But it's it's going to be a series of jagged peaks because you know, the other elephants in the room, the crisis in Ukraine. Can you know we're all down playing the tail risk from that. It can come back in a flash, you know. So we we've got we've got

things we can get concerned about. Clearly, if things are escalating, you know, things things get worse in China, that can make us worried. But but yes, I look, the dollar is going to be significantly weaker by the end of next year. We may see I think there's a real chance that we may see the dollar quite a lot weaker by the end of this year and then stronger in January. Just to blow up every outlook piece of anybody, right, just because positions come off Kit I'm glad that you

talked about positioning. And I've to say, when I was reading your note, I felt like it was pretty gloomy, and I thought, you know, okay, I wonder what your pushback is. I get accused of being gloomy all the time. How much do you buy into this argument that there's already so much gloom that there's no room to be gloomier, that stocks have to rally, that the dollar has to weaken just because people have already baked in all of

the bare cases that could potentially happen. I hear that from from our equity people and our credit people, And for example, you know, in the season of outlooks, if the first one I saw from anybody said, you know, the next year is the year of yield, which sounds

pretty gloomy. If before you're supposed to do is to buy bonds um the next you know that the view that we would have is is that credit spreads look as if that that better able to cope with the kind of downturn we will get them than equities in some ways, but that the equity problem is maybe more in small companies than big ones, which small ones which can't cope with the volatility we've had in sort of

events that affect them. But yeah, I think there's a lot of there's a lot of negativity for for the way that this will let play up priced in. I

think in the foreign exchange market. Part of it is that I have you it slightly differently when when people start looking at a soft landing and they say, you know, growth's gonna slow, We're going to manage soft landings, that seems likely the Fed's done soon they sell the dollar because we get to the the the ideal point of the smile, where ECB still raising rates, the Feds, the Fed stop, where it's all priced in and so on.

I I still worry that the bigger problem could be later now we we don't think we're really going to get a recession in the United States. Four. The danger with this labor market and with the Fed hiking the way they've been is is that if the labor market is so tight and going into a recession, that the hammer that you need to break them nup of inflation might have to be hit really hard. Um and you may get later harder landings rather than earlier softer ones.

But kind of so it may well be that you get you know, equities do reasonably well in the first half of next year, and then we have to rethink it. But uh yeah, for now that everybody, everybody is believing that you can soft land the global economy despite this unique combination of zero unemployment. At the beginning of our session, Cecia General, thank you so much for joining us, kid. I hope you enjoy the beautiful sunshine outside despite the

gloom of what we're talking about. Claudia Sam, founder of Some consulting and former Fetterers or of Economist Claudia, thank you so much for being with us on this post Thanksgiving Friday. How much are you looking to this holiday shopping season as a gauge of consumer spending. I'm really optimistic. Consumers have delivered this year. We have had a very steady pace in terms of overall spending, and the labor market is great. I worked at the FED over a

decade focusing on consumer spending, our forecast, our analysis. People when they have income, they spend it. Americans have income these jobs. It's true some of the spending now is going to be at the higher end, but you know what, those people that work at Macy's. They need to keep their paychecks, They need people to come in and spend. I we have everything for another good holiday season, even after inflation adjusted. So I I see a really good

path forward. And honestly, I'm not too worried about some of these businesses, the big businesses taking a little bit less in profit. I've been doing pretty well. But you've got a little big picture here. But Claudia, on the flip side, you could say that that resilience that's spending is exactly what's causing a problem for the Federal Reserve, because it's the reason there's still momentum, the reason that inflation can last longer than many of the lower income

families can stand it. How does this really cohere with this idea that the Fed should be somewhat careful rather than just keep going with a sledgehammer. The Fed needs to back off. It is absolutely clear, and it's become clear over time. A lot of that inflation is coming from disruptions on the supply side, disruptions from COVID, disruptions from the war in Ukraine. We have seen a lot of encouraging signs even in the last consumer price index

numbers that things are turning over. We're seeing things work themselves out. Yeah, it's gonna take time to show up in consumer prices. For whatever reason, the Fed has decided they've got to see it there, even though we see it in producer prices, import prices, rents are turning over like we have all the signs that relief is coming to consumers, and as the ft does too much, they're

gonna undo that relief and and overdo it. Claudia, the sumerule has been It's why they regarded indicator of recession. You know that you created it. Um On. My colleagues at Bloomberg Intelligence are calling for probability of a recession in the US over the next twelve months. What are your thoughts on that? So respectfully, I disagree with them, and and frankly, as the data are coming in, particularly on the inflation side, I am more and more courage

that we could skirt the re session. I think if we see one, it's almost absolutely going to be of a mild variety. At he's given what we know right now, right know, they're bad things could happen, and that forecast could change. But we have again, there's a lot of encouraging signs the labor market is good. You don't. The sound role is based on the unemployment rate rising, and it's really not. Things look really good in the labor market.

You know, we're getting back to a more normal, sustainable pace. So I don't. I don't see it, and less and less I'm seeing it. But you know, I have been wrong multiple times, as economy is upside down and backwards, and we keep having really bad luck in terms of

bad things happening in the world. You know, Claudie, you've also written extensively on FED activity during periods of wartime, right and historically what we've seen, like in World War Two, for example, you saw you know, um, you know, basically the FED not you know, hiking rates, as aggressively providing income support and the like. You know, we just saw, you know, roughly seventy the parity key have knocked out in Ukraine yesterday. We know the difficulties that are going

on on the ground there. What should the FED be doing, Should they be paying attention and how how should they be handling that? Congress should be stepping in and the funder Reserve is following their mandate, that's what they have to do. They're going to follow the letter of the law here in wartime. You can look back to World

War Two. That was a time when the FED worked closely with the Congress and Treasury told them, you are going to keep interest rates load, so financing the war doesn't cost American taxpayers even more than it has to. The independence of the FED is not God given, it is Congress given. Now that's a big step forward. And I know, even talking about it is like wow. If Fed economists is talking about, you know, putting independence temporarily

on the side, I just I don't get it. I don't get why the Federal Reserve is pushing so hard, and I certainly don't understand European Central Bank and the Bank of England. But this is making a very bad situation in Europe worse. Claudia Sam, thank you so much for being with us. Claudia Sam of some consulting and former Federaliser of Economists. Well, let's see what's going on.

As we tried to go on the ground and Joe Feldman in his car going from store to store, senior research analysts and assistant director of research over at Telsey, Joe, where are you right now? What are you seeing on the ground. Yeah, so I'm in West justestern New York, up in the near White Plains, uh and was just going through a Best Buy And so far this morning, it's really quiet out there. I don't think there's this massive rush to get in the store to grab a Doorbuster. Well,

how much is this? How much is this? Joe? That we're just basically seeing the end of this. You know, you get in at four am and you get the goods, and that's you know, see people line up. That that's over because of the online and channels, because of the other areas of distribution. Yeah, I think that's absolutely rightly so that you you are seeing maybe the end of that early morning rush that need to get in for

a Doorbuster. You know, just talking to some associates in one of the stores that I visited, and they were saying, yeah, there was no major rush. The prices are basically the same that you could have had all all this past week online or even walking into the store earlier this week. So I think that impetus that that push to get

you in has maybe waned. But I'm very curious to see how traffic is this afternoon, because I do think that that people will come out, they want to get social, and we haven't had a real true Black Friday in a couple of years. Joe, you're fifteen minutes from my home in roy Brook, New York there on Central Lab and White Plains. How indicative? How representative is that best Buy on Central Lab of you know, what's going on

across the nation. I actually think it's fairly representative. I mean, look, it's a nice you know, um, you know, solid community, middle through the middle class community around here, people that are looking to buy, and and there's a it's a very good retail area here in Westchester. And I do

find that it has been fairly indicative. You know, when I speak to the people on my team who live all around the Tri state area, we have some around the country in other cities, and we we email this morning, and everybody's kind of saying the same thing. It's fairly quiet so far. So John, it's gonna be um, I mean it's gonna be you know, electronics, is it gonna be? Um? Is it gonna be big goods? Is it gonna be you know, durable? As I mean, where do we see a lot of the sales? Where do we see a

lot of deals. Where do we see a lot of promotions taking place here? Yeah, I think we're going to see a lot of promotions. Certainly in electronics, we are seeing that TVs, headphones, and other giftable items. I think we're gonna see special occasion where has been hot lately, and I think that that will continue. We've seen beauty, even jewelry has been been decent. You know, I think people want to feel good and buy some things for themselves. Uh,

that area is where we may see some interest. Toys are always a big, big driver for the holiday season, but um, I think it's going to be much more focused on on value and that the value you can get to in a in a gift for for members of your family or some friends. Value means it's discounted, right, Joe, I mean this is basically we're looking at a pretty steep discounts at a time when there are huge inventories at a number of stores, particularly uh, those that overstocked.

I'm thinking of Target, I'm thinking of a host of others, not necessarily Walmart, not necessarily Macy's. How much are you seeing the optimism in stock market? Perhaps in the stock market outweigh what you're seeing on the ground with all of the discounts that that that that retailers are having to offer, plus the fact that they're trying to remain fully staffed and not lose people that they might not

be able to rehire later. Yeah, I think there there's a lot going on in the retail market right now. There is heavy inventory, there's an eats a discount. What we've noticed is that the discounts are not that steep in the sense that is fairly common this time of year. And that's what we're seeing. You know, we're not seeing these very broad, deep, you know, forty to sixty, fifty

to six discounts. Uh. You know, the retailers are definitely face facing cost pressures and they're spending what they need to to keep the labor force satisfied. And I think that we're going to continue to see that. We continue to hear that from a lot of others. The big question everybody has is really heading into next year, how much pressure we're going to see on the consumer? Uh, it will we tip into a mild recession or a

recession at all? And as long as the labor market is in pretty good shape, which it is right now. We're hopeful that things won't be so bad next year and that will hold up some spending levels. And then you know, there is some room for optimism, certainly as you get deeper into three when you face easier comparisons. So you're talking about overall general numbers, how much you started to see a bifurcation of stores that cater to the lower ends to worse and those that still cater

to the luxury end still going strong. Yeah, the bifurcation is very clear out here right now, where you are seeing, you know, the more affluent UH consumer continuing to spend and those stores are that cater to them are doing fairly well. UM. At the other end of it, there's a lot of focus on value. There's a lot of focus on food and consumables and basics, which is why companies like Walmart and the Dollars stores and even Target you know, are doing very well on the basic side

of things. It's really the discretionary side at the low end has been the big pressure point, UH, and that's where you could see some some continued pressure this holiday season and into next year. Joe Fieldman of Telsey, thank you so much. Joe Feldman, you'll be joining us throughout the morning. How be driving around to check it all out? Damian. I do wonder how much real estate falls into this. This is the Bloomberg Surveillance of 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