Surveillance: China With Milken's Lee

Friday Smith. No, there is no clean Neat narrative, although if we're going to give it one. Billy has a bird's eye view not only on the United States and Europe, but also in China, and I do want to get to China, Billy chief economists at the Milkin Institute. But before we get there, I want your sense of some of the moves that we saw on the bond market, the whip sawing action that we saw people pricing in rate hikes and then frankly going absolutely in the other way.

When some play says it made sense, in others not so much. Does this mean to you that we're going to see slower growth. Is there any fundamental narrative that we can pin to this. The one thing that came out of the BUILD and Global conferences that economists and market practitioners and portfolio managers really have a very different view of inflation. Uh. The portfolio managers and bond managers were all obsessed with the fact that prices are high and can go higher. Uh. And and there's no shout

of transitory is just completely fair voting um. Economists are still towing the fedline, which says that we have some transitorent but persistent influences keeping prices high and and and one of those influences is the fact that we have these bottom nights slowing down growth. That's really the key. How much is growth gonna be slowing down? And how much of the future is being priced in on the on the slow downside, and how much of it is the persistent high price And that's where you see the

tension and bill. A lot of this is actually stemming from what's happening in China as the Communist Party meets for its annual plan. M I am wondering the price increases that we're seeing or how much does this indicate frankly a protracted increase in prices around the world that people perhaps are not accounting for this sort of deglobalization and frankly changed regime in China filtering into prices and slower growth Globally, China is really being hit by confluence

of domestic and global factors. Uh. This the one thing that we see in China which is almost a microcause what we're seeing globally is the sense that producer prices are double digits, arising by ten percent, and yet consumer prices are maybees point seven percent and project to go up to one point four percent with the new release. Uh. And that's where you see the authoritarian control of being able to manage retail prices and of course at the

expense of profit compression. One of the things that they're banking on is that she jimpings leadership, and that's what they're they're trying to have the historical review to justify is that she jimpings leadership will produce enough productivity gains to be able to keep margins up and to keep Chinese companies profitable. Is that life leadership bill a growing

risk for this economy. Boy, you know, John, that everyone is really looking towards the sense of how is it that Hi Jinping is going to be able to pull off the return to miles doctrines of common prosperity, creating a moderately prosper to comedy for everyone, and at the same time focus innovation on domestic sources and domestic sources of growth and domestic sources for export, and at the same and keep it done in a way that allows the rest of the world to be part of China's growth.

The chijin Ping leadership is something that they're going to come out with and say, the one thought we have to keep in mind is that Mao Zedong allowed China to stand up and unified China. Uh Doping made China rich, But Hijin Ping, who is the one who has made China strong and allows China to stand up among the League of Nations as the first among equals. That's the historical review that will come out in this meeting to

justify we need Chijimping's leadership. That's the rhetoric. And I think the sacrifices gonna be towards focusing on domestic growth, sacrificing innovation, and and doing it in a way that preserves the Communist Party's power as opposed to productivity and growth. Will you mentioned the power of the international states, what about domestically, How strong is that power right now? You know, there are mixed reports from the outside. It looks like

there's a unified frond. Jijan Ping has you know, got abolished term limits and now he's in for life. But he's worried that he's not going to get enough support to be able to carry out these policies. It's not so much at the top levels that he's afraid of, but the municipal governments and and state and local governments that have to implement these policies. There's a huge tension right now, let's say, caused by saying the energy crisis.

The federal government sucks in all the taxes, but the federal the local, state, local governments have to manage their expenditures and and manage their budgets. That tension between state and local governments and the federal government is something that Chimping has to manage. And between now and the time of the next UH National Parties Congress UH National People's Congress in the next year, that has to be solidified because he has to have a unanimous call for him

to stay in power. Do we see a slowdown in growth that's becomes a problem for the global economy bill in China? Oh yeah, because right now China is suffering from an energy crisis, which is stall production and transhipments. The notion of having a common prosperity has has has really focused Chinese policy on hitting the most productive companies

in all of China, the internet companies. They're also hitting on education, which is something that they've been trying to use to try to bootstrap themselves to increase human capital. So managing these policies is something that we in the West would have to worry about. His investors because the role for investment is going to be clearly not one, not a primary role, but only in so far as Western investment will help China become help trying to be

as manufacturing conduits to the rest of the world. If you can help China take its innovations out to the rest of the world, you've got a successful business. If you're in a competing business with Chinese innovation, you're in trouble. But longer term, I mean, does this uh have the potential to cement sheese legacy as one of the most successful leaders. Can he really achieve common prosperity? That's the big bet um. We know that Shenjen, for example, is

a model city off and China's Silicon valley. It's become successful because it was copied China's model, Hong Kong's model of innovation, which is the experiment. Chi Jinping's latest speech on Shinjen says, you should innovate with this eye towards the needs of the center. In other words, they're managing direction of innovation. They're managing the direction in which these companies have to focus their growth. That's a dangerous game

because that may or may not work. And most of the experience we've had with managed growth and industrial policy is that most industrial policies fail. Height Bill, thank you, sir as owise, it's going to catch you up, Bill, leader of the milk An Institute. Let's get to George Santa Velos, global head of FFX research at Deutsche Bank Adda, London. George always going to catch up with you, sir. I want to start right here. Is something least has been

on top of through this morning. What did you make of the bond market move off the back of really solid payrolls data in America. George, that makes sense to you.

Good morning, John. So, I think it's just worth taking a step back and looking at this year and if you think about what's been thrown at the bond market, You've had the highest inflation in thirty years, had the fastest growth rates essentially on record, and yet if you take a look at the long end of the US curve five year, five year real rates, break evens nominals,

they're basically where they were in February. And I think that pattern we saw on Friday as part of this theme that there's something bigger going on in the bond market than just the inflation story. And to me, it's in a story of excess savings, very low our star, and I think unless we understand what is going on there, it's going to be very, very difficult to understand anything else in the market at the moment. Well, Georgia, it's

your job to try to understand it. So what are some of the theories that you're coming out, especially as we hear all these discussions that the savings rate is coming down, that people are actually spending their savings, and yet we are not seeing a material change in the outlook for yields, at least as portrayed by the bond market. So if you go back to the two thousands, you also had the bond conundrum. Back then it was called

the Greenspan conundrum and ended up being china Um. I think that this new source of excess savings now in the market is essentially the fiscal stimulus we had last year. And if you look at what's happened to that, even though saving rates are coming down, saving rates are a flow concept. What happened to all the money that was given last year in payout, It's been stored in bank accounts. And then if you look at what banks are doing, banks are using those depart is, it's and going back

and buying fixed income again. So when I when I look at a lot of the flow metrics, they're just suggesting a recycling of savings. Obviously that's what's keeping asset prices elevated. But then there's there's also this additional question of where is trend growth, and this trend growth coming down, meaning central banks won't be able to hike as much.

And if you look at some indicators, for example, the spread between forward looking and backward looking UM consumer confidence metrics that suggestive of a very very very flat curve, and some curves are starting to invert, for example an emerging market. So i'd say number one flow flow flow, there's huge amount of excess saving in the system, and

number two terminal rates are also pretty low. So even though we're pricing a lot in the front ends, you really struggling to price the back end, George, a lot of that those excess savings has gone into crypto. Um. The total market cap of cryptocurrencies is now more than three trillion dollars. What do you make as chief of FX Research on bitcoin at sixties six grand? So crypto is an error we're starting to look at as well. Obviously, as the market size is growing, it becomes a bigger relevance.

But to me, the ultimate again, it's a symptom of these excess savings in the market that are trying to

find a home. And then of course we need to look at the impact of crypto in terms of the structure of payment systems, and I think that's probably one of the most underestimated areas or underappreciated areas of crypto, these new developments and decentralized finance, they have the potential to change the way the banking system looks in ten years, and we're also trying to spend a bit of time understanding that as well, George, before you run, let's talk

about a currency pave in following closely. It's cable, the pound sterling against the US dollar one thirty five twenty six, just looking at our forecast in our survey forecast into year and one thirty seven, just a little bit north of where we are at the moment, George, where are you on that currency pay at the moment? Given what we heard from Governor Bailey in the past week, so, we have been negative on the pound since September. It proved quite difficult to hold them to that view as

you saw that massive repricing in the front tense. But the key observation here is the repricing was entirely driven by inflation expectations. Real rates in the UK have stayed very, very low. We're worried about the growth outlook in terms of a big fiscal tightening that's coming in, and then of course you have these new Brexit risks. There is a genuine risk that the entire deal unraveled. So we maintain a bearish view on the pound. And I think the risks are you see Cable for example, break to

new multi week cloths incoming weeks. Interesting, Could we not do bre exit again? I thought we were done with that, George, honestly, George Saravellos there of Deutsche Bank out of London, in our headquarters in the city of London too. That's good to see. We start with John stealth As, the chief investment strategist at Oppenheimer Asset Management. John Greater, catch up, sir,

We've got an infrastructure agreement Dan in Washington. Our head to d C in a couple of moments to catch up with Amrie Horden, Washington correspondent, on that the data in America, the i S M last week, the payrolls report is decent. The chairman his patient for an echoy market ball. Thank you, Johnny. You're feeling good. Yeah, I'm feeling very good about it. I think last week was was celebration of all of the above of what you

just mentioned. But beyond that, what you've got is this week you will probably get you know, a little bit of testing UH, and some people take short term profits in here, But the direction looks up from here to the end of the year. The fundamentals are good and we are about where we should be based on all that happened in and since then, both positive and negative

here until the end of the year. What about after that, John, and when people are talking about how it gets a little bit trickier with potentially FED rate hikes, with potentially harder comps year over year. I think, first off least I think the market wanted to see the FED taper. I think the market feels and at least it's got a six month period uh next year where the Fed will be tapering UH, and then after that they'll be worry about where do they take the FED funds rate?

But the reality is what we look at it from our perspective. As you know, I've been in this business for thirty eight years. The FED is a very different FED than it was under Arthur Burns or under a Greenspan. This is the Bernankee legacy FED. Highly transparent, UH, it is highie communicative. It telegraphs moves and the market denies what the FED sees. Our market players do with their own expense. Uh, you know, the FED is your friend during this period. It's been the friend of Main Street

and the Wall Street. If you look at it, even with friends like the Fed, can we really do better than a twenty nine percent gain year to date? John, and the S and P. I mean, that's up there with the greatest gains of all time. Well, you know about the everybody for against the S and P uh six hundred small cap higher qualities small caps in the RUSTLL two thousand has actually been beating the S and

P five hundred this year. We'd have to think, you know, this is all about the the the better comps that we've had for earning season. But the better comps the reality of it, even though you know, it's a softer hurdle or a lower hurdle than we've ever seen for for earnings in that sense, on a comparative basis, Uh, the things are getting better and considering the depth of the crisis, this is remarkable, really is when we look at John, the people talking about a re acceleration in

the economy. Its a year end into new year. I'm hearing people talking about the return of the reopening trade back into the small caps etcetera. What if ice he given it to clients at a moment on that, John, we've been saying for actually for a few years now. We're pretty much either near or actually market cap agnostic. So we spread the chips across the table. When it comes to large caps, small cap mid caps. Mid caps are terrific, we believe, and we also right now are

barbelled growth and value. Garber growth growth at a relatively reasonable price. In growth and value, we want growthier value. You can still get yield that you know, it's better than the tenure with the potential for a capital appreciation. John always going to cash out with you, sir, John, stuff, it's there a bull from Oppenheimer Asset Management. Thank you, sir, thank you very much joining us now, Whendy Schiller, the

Brown University. When do you want to start with? This is something that's come up again and again, time after time, year after year. The Republicans are very diverse as a party, just like the Democratic Party. Said at a Holly is nothing like said at a Romney. Yet when they go out and speak, they're all on message. And then when they need to pivot, they all do and they get

back on the very same message. The word echo is phenomenal white of the Democrats when they struggle doing that, why can't they take the win over the weekend and run with it. Well, there's there's two reasons. One is the Democratic Party regionally, geographically is more diverse. They represent a more diverse set of constituents from you know, suburban women for example, who have supported the Democratic Party recently, to working class people all over the country, urban, some rural.

Uh so there. It's just really hard when you're representing you know, a lot of different kinds of people with views. So that's the one problem. And the second problem is they believe in government and they want to do a lot of things in government. They want the federal government to do a lot of things, and that has a lot of costs and benefits to different people, and it takes a while to explain. And the you know, the advantage of the of the Republicans is they believe in limited, small,

federal government. They don't want to do many things, so they can obstruct and block and it's a much simpler message. Who's getting the independent vote right now, Wendy, I think there's no question that the independents are feeling much more comfortable with the pub lookings now. That's probably because Trump is out and about that. They don't see Trump as a looming factor and getting back into power, for example, So they're assessing Republican candidates on their own merits rather

than being associated with Trump. That's something the Democrats were counting on. I think they have to revamp their strategy. So you look at New Jersey, obviously, a pretty deeply blue state took that Republican candidate quite seriously. That was a narrow victory for the government of New Jersey and that really shook up the Democrats. Virginia didn't shake them up quite as much. But an incumbent, theoretically popular government

governor who's a Democrat who barely hangs on. That tells liberals, moderates, all the Democrats that they have got to get their act together and revamp because they're all in trouble with that very group independence and suburban Wendy, what's the analog today, Given the fact that we're seeing inflation as a major voting issue for the first time in decades, how much can we really change the equation heading into mid terms?

If gas prices stay where they are, well This isn't really important that even you know, a local bakery from example, I go to, you know, they raise their bread prices by seventy five cents. They have a fairly low to middle income constituency for that bakery, but they were hit they had to raise their prices. So it's getting really down to the ground, right, you know, grassroots people are feeling inflation. It's gas prices, but it's everywhere at every level.

And that's what the Democrats haven't quite figured out how to fix. It's their constituency that's getting hurt like everybody else. So and people are pretty cynical and conspiracy oriented by gas prices. You know, they always think they go up automatically. They don't really understand why they go up. And the easiest person to blame is the income of government. One of the other concerns is taxes, right, rising taxes, Wendy. And when you look at for example, to build back

better bill, it's only one point seven five trillion. But actually if the Democrats get the majority of them get what they want, it's gonna balloon to more of like a four trillion dollar number, and that has to be paid for. How do they sell these taxing crazes of the American public. But this is a great question. First of all, it's a ten year bill, five or ten year bill of infrastructures five years. This is ten years,

so it's not portullion tomorrow. That's the first mistake the Democrats have made, right, you know, ballooning this number as if we're spending it all in one year. But the tax situation is interesting. They may raise taxes on people who make, you know, join a couple four thousand dollars

or more. That's sellable sort of if you include a rise in the amount of money you can deduct to the state and local tax deduction that Trump took away from mostly well off blue areas in the country, the Democrats are going to put back, and that actually hits people as suburban voters right where they need a break. So they're gonna offset I think some of these, particularly the highest tax rate with some of these greater deductions.

So I think that's the messaging they're gonna try to engage in to not lose those voters that went with them in. You just want one more thing to come away from this conversation with you on what do you think number one helps to kill to getting the next ill done is what does it come down to? It comes down to whether there's a perceived need for all the programs they want to engage and they want to pass. You know, do people really want this? We saw this

with Obamacare, a bombcaster not to be quite successful. But when it was passed in two thousand, voters didn't know what it was and they didn't know they needed it, and they rejected it really in the elections in and they gave the Republicans the House back. That's the big liability for the Democrats going in with this really big bill. Do people know it, understand it, and do they think they need it? And if they don't, Republicans are gonna have a very good November Monday. Thank you. I so

always looking forward to catching up soon. Wendy showed that a brand university. 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 In. This is Bloomberg m