Surveillance: Expect Easing Mid-2020, Misra Says

Gun into I'm watching oil because oil is telling another story. You're seeing a little bit of pressure. They're trying to get above zero. But hard to say because right now this trade deal isn't necessarily firmed up in any way, shape or form and is not giving people confidence. But for now, it's not just that, it's also the tone out of Chinese manufacturing data as well as mother bids as well. Bringing ed to know what figures with us in the studio. Great to have him with us. Exam

Tate Data founder and see. Good morning to Jens, Thank you, thank you your thoughts on the trade story, the trade truths, the Phase one agreement. What are your ton of clients? What is it? We have a deal I think even though the document has not been signed, I think it's going to be very, very difficult after the communication we've had from both sides not to get this deal done. So that's the direction we're heading, and it's a turning point.

Like we have some rollback of tariffs. It's not a dramatic thing to lower from fifteen to seven and a half on on a portion of the tariff stuff, but it is a step in the right direction, and I think it's important. So I think also just if you think about the currency outlook, can China really allow their currency to depreciate from here like we had that big psychological break of seven a couple of months ago, and

now we're trading literally at seven zero zero. I don't think we can have it trading weaker than than seven on in a meaningful way in coming weeks. It's just not going to make the deal look good. So I think the downside is very capped for the Chinese currency. That's very important for e M currencies globally, and it's important for the dollar direction globally as well. So maybe that fits in and this description what's going on with the d H y as well well, with the trade.

There has to be an opportunity to play it. How how do you play a phase one trade deal? I mean, we want to clear uncertainty, we want to be more optimistic, But then how do you affect that in currency pairs? Okay, So I'll answer in two ways. First, like we can we have some epirical models where you say, okay, what's the new equilibrium based on these Teriffer leaves and that gives you six ninety six. So there's a little bit

of appreciation store there. And then there's the broader global dynamic, which is like an e M trending trade that can can run much longer than that. John, I like that you ask, is this sustainable? I you know, I'm struggling with that question, and I'm struggling with the idea that the dollar can continue to weaken because yes, we have the fact that the December fifteen tariffs aren't going to go into effect. But other than that, basically, this phase one deal is let's figure it out as we go.

We'll roll back tariffs perhaps as China complies with different different phases. How does this improve confidence among CEOs in order to make investment, which is a key issue here, right, So I think the CEO question is important that could impact the timing when we get a lift to p M I S and so forth. But there's a couple

of things going on at the same time. Right The Brexit situation, where we have a removal of tail risk, is also going to be helping to lift p M I S in Europe, not in this week's numbers, but probably in the next batch of two. So I I do think in terms of global growth, we got to very very low level of growth expectations, actually weaker than in the downturn we had in two thousand fifteen sixteen, so that the bar we have to beat is extremely low. And I think there's a bunch of reason and now

I think that the momentum is improving. And for the dollar, the most important veriable is global growth is much more important than what the Fed is doing. So if we have that bottom, I feel very strongly that the dollar will trade weaker next year. So this is really important. Yends. One thing you've done brilliantly over the last couple of years is emphasize how little rank differentials tell you about the direction of the dollar over the last couple of years.

So talked to me about global growth and flows, investor flows into places like Europe, Asia, the committally unlocks and dollar witness in the coming twelve months. Yes, so I think. I think one of the things that's really important over the last five six weeks is that you as investors are starting to put more risk cappital to work in international markets. So you as investors were incredibly cautious over the summer and actually repatriated investments from abroad back to

the US, and that has changed. So this goes hand in hand with this bottom of global growth expas expectations. There's a very strong correlation between what those expectations are and what those flows like, and that is key to the dollar right. And that's the one of the factors that can be separate from the right differentials is if

the equity flow goes more inter national. So, Tom Kane, the key question is for your triple leverage cash fund, Uh, is it going to be cash in dollars or hero or or pound After your trip to Europe, Yeah, it's the high point of the European trip was the interview with a gentleman who runs Herod's over how to unload the wall at Knight's Bridge. That was the high point. Um did you pray tide that one missed? You were? You were in the Manola Blonic up on the top floor.

The key us there. Yen's great, We're gonna get a trade deal. We're gonna go week dollar. I still want to know how to express it? Do I do it through a bundled group of of em? Are there one or two? Are they true Pacific? E? M are they Eastern Europe? Are they and eleven? What are they? Okay? Yeah? So I think initiative expresses was m so dollar max

is one dolla, Indonesia's one dollar, Taiwan is one. We talked about it on the on the TV segment that their places where they cannot intervene like them intervened in the past. Taiwan could be a really interesting regime shift on that front. So those are some of the ones I would look at. Good, yes, thank you so much today too short of visit, I do a little vamp here in the United States of America before John Farroll dies in with Lisa and water strategy. We can do

that with David Kelly, who's the JP Morgan. He's had a global strategy for this, that and the other part of the of the Great Beast, and he joins us this morning. You you did a wonderful degree in Ireland

and then you enjoyed Lansing at Michigan. If you go directly west from Lansing, Michigan, there's Kenosha, wiscons There's a company there called snap On Tools, which is as basically as you can get sixteen percent total return, sixteen percent dividend growth, trading at next to nothing compared to this market.

Do I buy more snap On Tool Canona, Kenosha, Wisconsin, Or do I end up buying some fancy pants tech thing out on the West coast, Which I didn't think that was a question you're gonna ask me this morning, But that's the ar question after this year. I think, I think there there's there are large distortions within US, within the US market, but we've got to remember that as it wasn't so long as you're in the momentum

up stage. I think there's more and more money going into eat sid to pass the strategies, which is actually helping momentum stocks. So I wouldn't want to make a short term call. No, I think I think, I think The bigger point for investors is international is cheap realts of the US, and I think that I think you know you need, you need to make your money these

big ascid allocation calls. I wanted to get that out of the way, John, other than to say, the Spartans of Michigan State have a hockey team this year to die for, I feel like that's the only reason you brought up that's right question, Spartan hockey. If you're not familiar with some of the notes that David Kelly puts out, please reach out to him because there's some great lines in there. There's an old saying that the reason some people bash their heads against the wall is because it

feels so good when they stop. What do you referring to, David, I referring to all the all this progress on trade. I mean, if you go back four years ago, we didn't have brexit. We did we had an old nafter and we didn't have trade war in China. And now we've got some We've got a U. S m c A which looks like it's going to pass to deal with sort of an after one point zero zero zero

one we've got. I think Brexit will finally be resolved in a more comfortable way than people fear um and uh, you know, we we have a phase one deal with China to move back a few steps on the on the road we were on. But in the end, all it's doing is, you know, reducing the amount of mutulation we were doing to ourselves. It's not really progress in the long scheme of things. Let's let's continue with this metaphor of banging your head against the wall, uh, and

then stopping and being really happy that you stopped. The question is we're now getting back to can the real global economy generate the kind of growth that is baked into the valuations and equities and risk assets in and right now the consensus seems to be yes, given the certainty that we're getting from the trade truth. But do you disagree based on this idea that we're not moving forward necessarily, we're just not banging our head against the

wall now? I think no, I think we. I think you have to have a different story somewhat on the economy and on markets. Uh. It is true that in absolute terms valuations are expensive, but if you look at it relative to to cash, relative to bonds around the world, valuations are cheap, and so long as you buy the idea that the global economy is going to grow slowly but not generate inflation, you're gonna have these low rates. You're gonna have central banks falling over themselves to be easy.

And that still means that there's nowhere else in the money to go. Some money is getting funneled into into global equities, so let's put some capital to work. Then

the regional breakdown gun into Europe, Asia AM. How you thinking about that breakdown at the moment, David, I would be uh, EM first, probably, UM, Yam Asia first, probably, and then uh Europe, Japan, um, you know, second, and the third I think that I think one of the key things is rising trade tensions hurt the rest of the world more than they hurt the US, and that they also contribute to higher dollar. Falling trade tensions therefore give you a lower dollar and also benefit the big

trade of the world, which your EM countries. So that's where I think you'll see the bands, both in terms of lower dollar and better performance from e M stocks. That's kind of where I want to be over words, David, I'm struggling right now because I'm thinking about what you're saying. This idea of low inflation, central bank stimulating risk acids outlook relatively cheap. That's been a story for ten years. At what point does that run out? At what point

does this create a real problem. Well, it creates a problem if inflation comes back. But there's a there's a funny thing going on in the global economy, and that is that income is getting less and less equally distributed. And the you know, aggregate demand is when people with money want to buy stuff. And the problem in in the global economy right now as the people who have money don't want to buy stuff, and the people want to buy stuff don't have money. And so long as

that that income income inequality grows, you're actually drat. You don't have enough aggregate demand to the economy. That's what's holding inflation though. So you know, the the irony is if you if we ever do fix the problem for middle income consumers, for lower income consumers, then we'll have inflation, and then that's The new Foreign Affairs Magazine is absolutely exquisite. It's the strongest issue they've ever done, including the no

about Lawyer's jerryzy Mueller's in there on capitalism. How do you affect a policy to lift the have nots without diminishing the hats. Well, it's it's productivity. You're trying to reduce some of the nonproductive things you do. And we've got a lot of negative some games going on in the world in things like defense, in trade, trade, trade, yeah, all these things. So you're try and get rid of

the things that are hurting you. You introduce more certainty, I think what you you also try to reduce currency of volatility. I mean, we should get back to a situation where the United States, Europe, China are actually talking about, you know, exchange rates and trying to make this this the less vo also goes right now, everybody's keeping rates low, unreasonably low to try and push our currency down, and that is I think in the end, just distorting for

the global economy. Can we do a ten year bet, and that's what it is. It's going to be a bit of a gamble. Let's do a ten year bet. Where a rights going to be at the e C Bay in ten years time? Higher or lower? I think they could hardly be lower, so they will be higher. The question is are they a little bit higher or much higher. And that really gets back to the first question I'm asking because eventually, you know, think about this

growth and financial assets. What is the financial asset. Of financial asset is a coupon, which says that you can buy some part of the goods and services produced by the real economy. Now, what we've seen is an explosion of the value of financial assets while the global economy is kind like a tortoise. Eventually, when people cash in

those assets, you've got an inflation problem. We don't have it right now, but if you're gonna ask me, could we have that within the next ten years in Europe, Orange, in the United States, yes we could. Well, let's have the same question for the Federal Reserve. Then at the Fed in the next ten years. I think again, by the end of ten years, I think will be higher than that, because that is it's still it's it's crazy,

it's it's a less than the rate of inflation. I mean, you know, the whole the whole concept of saving is that I don't eat ten apples today because you will give me eleven apples in the future. What we're telling people today is, you know, don't consume ten apples today because we'll give you nine apples in the future. That is nuts and it is not sustainable. Just to put the reason I asked this is Bank of America have come out with a fantastic pace about the last ten years.

What performed well? What didn't perform well? Which was the most activist central bank? Which was the least activist central bank, the least active if central bank worldwide over the last ten years Japan one right cut, no hikes, and the same is probably true for the ten years previous to that. As wow that once we get down to these kind of levels, we're stuck here. Why is that going to be different for Europe, different from the United States of the next decade. Well, because, as I said, it is

it is fostering a boom in financial assets. And eventually, if those financial assets end up in the hands of people who actually want to spend the money rather than save the money, then you have a growth and inflation.

And the key thing here is inflation. I mean, I know the Japanese have been looking for inflation, but if they ever distributed income and it's somebody galtarian more egalitarian in Japan, but just used to if you get more consumers spending going and among lower middle incoln consumers, then you could end up inflation, and that's what triggers so changes this whole story. You and I know each other long agoing far away in Boston when a CD was

nine or seven percent. It ain't there anymore. Is there any evidence of central bank quote unquote reflate? Um? Well, they push push up short term rates if if they if they want to the home as they run, they lose their nerve. I mean, you know, did the Federal Reserve really need to ease three times this year? And no, but they did it. Um So can they do it? Yes?

They can push up short term rates and and in the end I think that they I think they should because I think we should get back to more normal monetary polican that will in the end reduce distortions around the global economy. But they can do it. I'm not saying they're going to next time. David Kelly on where the Irish border is, I don't know where it is. After the election, maybe we'll talk to him about that. I think I think it's I think it's now in

the Irish seats. David Kelly, thank you so much, as always, the GMP. Morgan just thrilled that time. Here. What we need now not a clinic on the equity markets. Have done that a little bit this morning, but John, I think we've really got to dive into full faith and credit. We did, and we can do that with pretty a misery club ahead of right strategy at t D Security is pretty great to have you with the summer program.

Tom's got a few questions on Repope, but let's start this conversation where we picked up at the top of the hour ten year rates one eighty four, no big shift higher? Why so thanks for having me. I'll always good to chat with you all. Um. So you know what we heard on Friday in terms of the deal, it's phase one. It's agricultural purchases. I mean, does it remove entire business uncertainty around tariffs for all of next

year and and beyond, I would argue not. I think just two weeks ago we heard from the President that we were going to pose tariffs on Brazil and Argentina. You know, the French tariffs are out there our viewers. That's all we're gonna get for for US. China is going to be phase one. I mean it took them like three months after we had the deal in principle to actually get this somewhat written down, so to try and get Phase two, phase three, which are all much

more difficult structural issues. Our thought as were not she's going to get this until the election. So the global growth dynamic, I think you know it did take away. I think some of the negative or or the the worst case scenario has been removed. I think the escalation of tariffs, which we've all nervous, could that happen on Sunday? That's been taken off, and therefore I think equity is

liked it. But for rates to sell off much more from here, I think we need clear evidence that business uncertainty is going away, that business investment is going to pick up, and the consumer remains resilient. I think all of those questions are still there. So I would argue you near the high end of the rate range if that's the case. And is the rates market sending a very different signal than the equity market in terms of

what we can expect with growth. Yes, I think you know, to some extent, both rates and equities are telling you that the FED is very unlikely to take back the insurance cuts. So even if the consumer remains resilient. I think what we saw in the dot plot is very clear even the Hawks don't really want to take back

all of the joan cuts. So if that's a positive tail wind for equities or or all risk asses, I think that's fair and and and that tells you why interest rate is probably do you know the tenure doesn't go above two percent. Where I think the signals are slightly different is the fact that the equity market takes the straight deal to say okay, all downside risks behind us, and the race market saying you know, not so fast. All we've had is one tail risk being removed. We

still have to deal with them. And look at the US one PM. I'm actually very surprised that Treasury is this morning. I want to ignore that and just sort of go off the China positive data. There's still a lot of growth global growth headwinds, I think for the US next year again into there's a view that the FED is on hold, on hold through the whole of the year. I get the sense from you over the last couple of months that you don't think they are

on hold. In fact, you think right to go on the other way, lower again, you're still thinking that prayer. I still do. I think the FED has told us that the bar to cut is higher than it was over the last couple of months, so you know that's fair. But if the consumer shows any signs of losing momentum, and this is where I think the business investment side is key, because it's very clear that US business investment has slowed pretty dramatically, don't you because of the insert.

I would argue to an uncertainty shock, and that takes a while, and if that doesn't go away, and at some point it's going to affect the labor market and therefore the consumer. So we expect the fact to actually restart easing by the middle of next year. Something we try to do on Bloomberg surveillance is speak to grizzled pros like Priam of TV Securities about whatever the uproar

of the moment is. PREA, based on my reading coming back among particularly the Gloom crew, the world's gonna end like John at eleven am this morning or something that we dashed into the Repo liquidity world and today or Wednesday you get the video up before the world end, Pria, should we have a sweat about the repo market in the year end, So this is where you know, I am worried about the onomy, But on repot, I actually think the FED has understood what's happening and they're using

all the tools they have, and I think these tools are effective. So I'm actually not as worried on the repot year end and all strategies or or report people are sort of divided into two gamps. Those I think it's all going to end on December thirty one. It's as bad as last year. I actually think last year was very different. You had the thread that was letting the portfolio run off. They were not doing any temporary

repo operations. What we heard last week was the FED is actually now pumping almost five hundred billion of repot around the turn and some dealers, So some dealers are obviously capital constrained, balance sheet constraint, but the fact that these operations are all getting oversubscribe actually tells me that there are other dealers out there who are able to expand their balance sheets, take the FED liquidity and distributed

in the system. So with the fact that the FED is using this, plus they're adding to reserves permanently, I think they've understood, they've acknowledged the problem, which is what resulted in that September spike, and they're addressing it. This raise is a really interesting question. If you take the catastrophic view off the table, the end of the world, that repo will ignite that we've all been worried about.

If you take that off the table, Let's take a look at that half trillion dollars of stimulus essentially at the Federal Reserve is pumped into the financial system, especially if dealers are using it to make cheap loans. How much is that supporting risk assets? How much has that driven the rally more than people have really given credit to. So you know, the FED will keep telling us that it's not quee, but if you look at reserves or look at the balon sheet, the FED balon sheet is

growing now. I actually don't agree that this should be very positive for risk assets, but it's a sentiment issue. We've heard from the FED for the last ten years that QUI helps discuss it, and I think that that is part of it. Um it's definitely stimulus into the report market. I don't know if it should result in highest stock market, but I think it is absolutely the FAED banon sheet is growing by a lot over the

next month. Does that vector matter? I mean, does the rate of change of the FED balance sheet growth matter? If they do it in a gradual, measured way, does that solve a lot of problems that you don't get with the abruptness that we've seen the last number of quarters. So the study is between stock and flow. They're fairly mixed. I would argue the combination of both the stock and the flow that matters. But you know, between over the

last two months, they've already injected two billion. Remember they're also buying bills, and my viewers, I know they're only staying into the second quarter. I think they're buying bills almost all of next year because in an ample reserved regime, the FED operations should not happen. So there's five hundred billion, let's say, or five hundred billion gets used. That means the FED needs to buy five billions of bills to

offset these thos over time. So that's a pretty big stock and flow whichever way you look at it is a huge increase in the balance sheet. Terrific briefing, Thank you so much. Pretty misretenious Primities, Head of Global Rate Strategy. This is a joy, Henry, the trades with the Surveta partners here with futures up fifteen, futures up fifty nine. And the joy of Henrietta on a Monday morning is you don't have time to read, and she's got a

note that's wicked, concise and right at the top. Henrietta, you nail it. How about that enforcement mechanism? The Mexicans are flying north because they're worried about the enforcement mechanism of labor in Mexico and that I don't even know what the enforcement mechanism is of phase one or Phase twelve or whatever. How are we doing on enforcement mechanisms

in a trade negotiation? Thanks so much for having me time. Well, the interesting thing about enforcement mechanisms, UM, and the way that it's been rolled out by Usdr Lifehiser over the weekend sounds very much like what we expected. UM. The most important word here is timing. It takes time to inforce something, just a natural component of what it means

to enforce something. So the way that I'm expecting this to roll out for investors to watch is that on a one month, a two months and then a six month basis, there's going to be a sort of rolling series of checks and balances, much like what they're attempting to accomplish with Mexico UM. And the way that it happens is that businesses get a discrete um medium of

communication with the administration. They'll start speaking with the working level train negotiators on a monthly basis, on a bi monthly basis, so every two months they'll bump it up to the Deputy director at the U s TR and see if they've worked out any of their issues, whether it's I P s AFT or Force Technology transfer, or maybe China is stalling on purchasing its agriculture bio bioengineered

seeds UM. And then on a six month basis USTR Lifefise or Advice Premier Luca, I assume it will be Luka will be meeting to go through all those complaints from the US side to make sure that they have been complying with this phase one, so called deal UM.

And so every six months, expectively beginning I'd say June July, where we should roughly be around that time, the US side decides whether we want to ratch it up tariffs or we want to reduce taris further andrietta given the rolling, Given the rolling nature of this deal, the fact that it it's sort of I is going to be implemented as we go. How much certainty does it really give businesses?

Not a whole lot. And you know, a lot of the response that we've gotten over the weekend has been mostly from trade association saying they feel pretty comfortable about

what is included in a phase one deal. But for businesses, unless you were assuming that these tarists would be in place and perpetuity, which a lot of the big global manufacturers, sort of the big multinational supply chains that we all you know know what, are familiar with, they are able to digest the fact that all these tires are going to be in place for the remainder of President Trump's

tenure UM. But the smaller modern pop shops they now have to face the reality that on two D fifty billion dollars worth of goods are going to be in effect for at least the first half of next year, probably well into one UM. And the only remedy we got here is that D billion dollars worth the tariffs drop from fifteen percent to seven and a half. So if you're a smaller multinational and you're shipping your goods from China, you're paying these tariffs for the foreseeable future,

and that's not particularly helpful to them. And we're so let's talk about and just round out this conversation with the risk that this falls apart before it's fully implemented between the United States and China. Was listening to embassat a light Higher Speak on CBS just yesterday on Face the Nation with Market Brennan. I got the sense that there's a risk here that the success on this depends on who implements the deal in China. Will it be

the hardliners or the reformers. What's your sense of things, Henrietta. And the risk that this falls apart before it really gets implemented, Well, once again, we have a three to five week waiting period, so we're going to be transcribing these texts into legal jargon for the next month at least, which means it won't be signed until February. Based on what we saw from China and you know, the extraordinary pop and circumstance that went around their announcement at eleven

o'clock PM their time, on Friday. I don't think that we should expect China to blow up the deal and just say, hey, we're not going to comply. But I could definitely see this dragging on, if you'll recalled, last time we got this close and didn't have legal text was in March of twenty nineteen, and we ultimately didn't get a Phase one deal until Friday, though that was almost nine months later. I could definitely see a delay further from here. Great Henry Atatrice, thank you so much.

Nice update there, and really the Nte grite of I mean, we forgot how thick is the Pias French. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you refer. I'm on Twitter at Tom Keene Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio