Surveillance: German Finance Minister

Com and of course on the Bloomberg terminal. Right now, the challenges of Europe, the many challenges and as we heard from David folks Landau of Deutsche Bank uh Many many months ago on a difficult February morning, a Europe that at some point will need to rebuild and that includes finance, which means it's an appropriate moment to speak with the Finance Minister of Germany, Christian Linder, here now

in Berlin, Maria today. Oh, good morning, Tom, a good and market and yes we are joined by the German Finance Minister, Christian lenderd Head Leonard, how are you? Thank you, thank you for having me. And of course when I was preparing this interview and I knew that you were coming to our studios in Berlin, I thought, what is the first question I can ask Christian Leonard And the

answer is obvious. Inflation When you hear, and I don't want to get you to comment on the us to be, but when you hear Christian leguards say inflation is now our number one priority. We have to bring it down, there's no questions. Is it a good thing for you? Yes, of course I completely support the language of the e c B and it's measures. It's our top priority as

well to bring down the inflation rates. They are a serious risk for the economic development for people and businesses, the investment conditions, and so it's our fiscal priority to reduce inflation rates. It's the responsibility of e c B, but we play our role as JUM government and European government. So as a German finance minister, this is where you say this is top of my agenda. It's inforition, top

of my agenda, not only now. In December, when we hosted the G seven meeting in Bonn and Petersburg, we underlined that bringing down inflation should be our top priority. This has been before the policy change of the central banks, and I think it proved to be right to do so. You see we were proven right on on the analysis that's for the inflation. But then there's a growth story and you know, there's a lot of negativity around the German story on the medium term and the short term

perhaps and the energy crisis. It's potentially the blackouts the gas. When you look at the German economy, do you worry about a recession? Do you predict yourself a recession? This year has been a difficult. Of course, we were harmed by the Russian energy law due to our too high dependence on Russian energy imports. Of course, yes, had been a mistake. But now we have changed our policies, um

with light speeds. We are improving our energy infrastructure. We are bringing a more capacity of renewable energy to the grid. And well, who thought that Germany would be able to build new l energy terminals in less than one year? You have done it, and I assure you, um, this is the the very best moment to invest in Germany. This is the very best moment to buy bonds. The best of international business is watching you right now. That's your pitch. But let me ask you again though on

the recession. Is there too much negative again, negativity built on the German story. Some people say this recession is inevitable for you, as that story overblown. If there is you will recover fast. We will recover fast and in the midterm um Um, I expect a very positive perspective for the German economy. Look um, we are improving the framework conditions for private businesses. Immigration UM into the labor

market will be less bureaucratic than it had been. We UM invest a lot public and private money in the transition of our economy. There will be some tax benefits for investors in Germany. So um, after fighting inflation, my second prior party is strengthening the German competitiveness and we will do and you say that we'll do it. And of course the crucial question, especially for me in Germany. I know you like Many Germany, you speak highly about it.

I know you particularly like cars. But my question to you is when you look at the Inflation Reduction Act, can Germany stay competitive when you have the United States coming in with such an aggressive policy on subsidies? Is that something that worries you? Are you on the phone with your US counterparts? What do you want to see out of this? On the one hand, the Germ car manufacturers are competitive. I think they say no, b we mustn't fear Tesla. Tesla produces in Germany as well near Berlin.

But I think the German manufacturers they are innovative and competitive and um, well, they have plants in the United States as well, so I think they are less harmed by the inflation Reduction Acts than public opinion in Germany things. But on the other hand, on the other hand, UM, I take the Inflation Reduction Act seriously. I have my concerns regarding a fair level playing field between the US Single Market and the European Union, and this is why

we need to negotiate. I'm in favor for viewers for the European businesses in the US markets. You don't want a trade war. We want to get We have to avoid any kind of trade war. Instead of trade war, we need trade diplomacy. We need new free trade agreements. At least we have to make efforts to find a level playing field in the perspective of a free trade between US and European What do you perhaps through some critics in the United States that are you Yes, you're

in a mess, but this is not her fault. Why should we give you any waivers? Mm hmm. Value partners? Um, who we are should be preferred trade partners. I think my My vision is a free trade zone of liberal democracies in the world, and one of the first steps could be to improve the trade relationship between United States and European Union. We would benefit both from from this idea, and well, I think there is an openness on the

U S side. When I remind you of Janet Jones idea of friend sharing and Inflation Reduction Act should be reconsidered with respect of French showing and your optimistic that can happen. Let's talk about today President Zelinski will be meeting with President Biden. Of course, it does feel the Ukrainians worry about lack of momentum and lack of support this time and the war drags on. When it comes to Germany and the European Union, will you put this

bill no matter what? And there's a very serious question about the reparations and what to do with the Russian Central Bank assets. In your view, who's going to pay for this because we're talking about potentially trillion dollars in reconstruction. It's a massive bill. At the moment, there are the current needs of the queen which have to be met.

The European Union has decided on the macro economic assistance plus eighteen billion years next year two UM support the State of Queen and we will continue to support Quean bills, military goods such as artillery. And then in the mid tim I hope the sooner the better. Then we will have to find ways for the re construction of Ukraine, and okay, there are reparvations. There is UM macroeconomic assistance.

We have se multilateral banks, we have the international financial institutions such as the I m F and the Ukrainian economy itself. I think they have a very good perspectives. The naturally resources UM qualified labor force, so I think they have a very good perspective after the war. I have to let you go, but I have to ask you this question very briefly. Yes or no. What's going to recover faster the German economy or the German national team? Because the World Cup was not good for the economy.

Well that's a strong bad because you have two years until the euro Cup and you posted right here in this country economy of economy, Well that's a that's a good prediction to make. Well, Mr Lennard, thank you so much, appreciate it. Always good to see you here in our studios in Berlin. Tom, you are ruthless. I mean, Maria, it's just just just just I have to do it. I just can't wait for the friendly of Germany and Spain. It's just gonna be up team coverage Maria today. Mr

Lindner of the German government, their finance Minister. This is a joy. And for Joe, for Global Wall Street, you can take notes right now. P JIM is Prudential and when they set up p JIM and resurrected it a good number of years ago, no one could expect the total return award winning portfolios they put together. The force behind that, the thinking behind that was dragging from Morgan Stanley. Greg Peters over is co c i O and he joins this morning for fixed income brief. Greg, I'm gonna

cut to the chase. You call for a radical shift next year. Where will that shift? So I think the shift is in the bonds. So this year has been historically difficult to state the obvious, Uh, but yield matters and starting place matters, and so if you think about just the b O J yesterday, right, we've moved from this zero negative interest rate policy to pretty sizeably positive

territory for yields, and that matters a lot. Like when we were looking at the tenure at fifty basis points, our future looked really pretty bleak, right, It was hard to kind of earn to return and return off of that. But where we are today, I think we're in a much better place. I think it creates much more balanced portfolios.

Those who were calling for the death of fixed income, we're kind of right right for the year, But I think the reset matters a lot, and so we're pretty constructive as we head into two thousands and twenty three. Is this a colon elfriends, a cold on credit, or a cold on the whole universe? It's a sequencing of sorts. So I think the first move is on the sovereign side. Uh. So the defensive nature of fixed income starts to assert itself. Uh it seems like there's a high probability of a recession.

Who knows. I think it's very bimordal, and so it's really difficult to ascertain. But I think that protection mechanism matters a lot into two thousand and twenty three, and then I think you roll into credit and other things. So I think it's a sequencing aspect of fixed income that provides different flavors of protection at different times throughout

the course of the year. Does that sequencing rely on inflation disinflating If there's a sort of just sort of gradual and linear path to a lower level for inflation, does have to really happen that way to make what you're saying come true? It does. I mean, I think the lesson of two thousand and twenty two was stagflation bad, bad for all financial assets, even commodities are to uh catch the knife for a little bit here towards the

end of the year. So I think as we move off the stag inflation narrative, I think it bodes much more favorably. If we're wrong around that. An inflation is incredibly difficult to forecast, of course, but it does seem like all indicators point to lower inflation in two thousand and twenty three. I think the tell risk that we were experiencing in two thousand and twenty three, I'm sorry, two thousand and twenty two gets chopped off in twenty three, and I think that matters a lot. Although if you

do see a stickier bottom. Right, let's say we stop at three and a half percent by the end of next year. How does that leave your call? Considering that some people are talking about structurally higher inflation, giving given some of the labor market dynamics, given the gaps there, and given the de globalization that a lot of people are talking about, that's a clear risk. And I think that is an underappreciated risk. That said, go back to

starting points. So do we think the FED is going to move another you know, four five hundred basis points from here? No? Right, so we're talking about now incremental. I do think the markets are wrong in terms of the pricing, where the markets are pushing back on the FED staying higher for longer. Uh. And I don't know if I buy into that myself. I think we are

in this higher FED rate regime. But that in and of itself isn't a bad thing for fixed income assets, where it's about role and carry and yield and income um And so I think it boes quite favorably. Percolating is in the equities space, maybe international with week dollar, with what we saw with Japan yesterday, International finally has a day after ten twelve, fifteen years. What will international buns do? Do they outperform, price up, yield down. I

still think the preferred habitat is in the US. I think Europe has their struggles. Of course, they're fighting a different inflation monster. It's a shock, right, the energy shock very for then what we've seen here in the US. I think the US is you know, much more on the path and normalization. The b o J yesterday I think was a shock to the system in that it creates volatility that doesn't induce investment, it induces exit. Right, So I think by virtue of that, the US is

that preferred place to be. And then if you buy into this weaker dollar story and inflation coming down global story, then e M has to outperform. In that scenario. You expect in that spread between US and Europe to close us O it's LOWA and then actually get Europeans creeping higher. Is that how that spread is going to close? I think that's right. But I think on the margin you'll see a bid to the US market. Uh. And I

think Europe and Sterling in the same boat. Where there's a tremendous amount of supply hitting the markets in two thousand and twenty three, there's a clearing level there there's lots of government spending uh and so I do expect things to compress into two thousand and twenty three. Europe is in for a difficult time, that's for sure. Time not just the ukn E, the whold of the continent gun into next year again. To see these numbers coming in from the ECB, that delivery from President to Guard,

I was shocked by it last Thursday. I'm in the camp they don't have the nominal GDP to make it work, sort of like Japan. They're better than Japan. Some people disagree with me and that they think the nominal GDPs. Robust I would look at Patriot missile announcements today in Washington is linked directly into La guard theory. He's said this quote from Torston stock Well, this is the detail that made him acclaimed at Deutsche Bank. I remember hanging

out with him at Davos. And you know when Torston Slock speaks fancy Davos, people stop and listen. For those on radio, labor demand five million people higher than labor supply, which is why wage inflation is so strong. He goes on to say the solution to the imbalance is either to increase the labor supply, for example through higher immigration, or to lower labor demand, for example, through an increase in the unemployment rate. Great Peters, it looks like we're

leaning on the latter pretty hard, doesn't it. It does, indeed, it does, indeed, And so this is the I think the tricky part of the marketplace and why I think it's a bimodal outcome. Right, you know, it's amazing, you're greg. You know they're over in Jersey City. It's so cold in New York. Journey he walked across the Hudson River this morning, skated across, skated across. It's like a Dutch things to do that in the Victorian times and attempts.

Remember that. I don't remember that Victorian times of festive humor. That was time that was you know, you guys have to lay off the egg knock so early in the morning, you know, you know, why why are you telling people that's so publicly just a little what do they call that? You call that a festive tipple? Right, you know, just a little drink. Big story. In the last twenty four answer, it's market that b J. This was Verry Nelson of

Wells Fargo. He had this to say, Dolly end up trend is likely over more downside ahead the ends days As a no brain of funding currency unlikely, numbered asset managers are likely to unwind short positions further over the next few weeks, driving Dolly back to one five. This morning in the low one thirties, verk Nelson of Wills Farco joins us Right now, Eric, can we start there? How you think we have to rebalance as we shift

away from this old regime. Well, yeah, you've you've talked a lot this morning, John, and you and the team have talked about the end of an era in various products and various paradigm shifts. Here one big thing that I noted they are on the funding currency side. We've had a huge shift from the ECB, the Swiss National Bank and the b o J. Now this year I think about those are the really the three big funding currencies for carry traders in the sex market, and they've

all just completely shifted on us. This is really a warning shot here for carry traders. I want to focus on. It's sort of an arcane topic maybe some viewers, but at the cross between the Mexican pay so in the Japanese yend provided carry train returns of up until about two or three weeks ago. We lost about a quarter to a third of that in a matter of two weeks. So really, I think the E M carry trade is really at risk here, and frankly the G ten carry

trade as well. Pay so yen I'm looking at her quickly, folks. Pay so yenn has gone four standard deviations minus two to plus two in a cup of coffee. Is a dollar going to do the same well? Naturally, Tom, I think you'll see some unwines in these yend crosses and that's going to spill over to the dollar yen exchange rate. Uh. Certainly, if you look at the the asset managed positions in the end, they have been stickier and probably up until now.

We'll find out from the data next week. Um. But to me, the question for dollar yen is getting back to will be I'll say easy and quotes in the sense that that's sort of like getting from say seven percent on inflation, but what about from getting from five percent to three percent on inflation or from dollar yen? And that's going to be the challenge. That's the nonlineararities here on real LEASA. I just want to stop and say,

this is what the Bloomberg terminals about. We have a guest who talks yen paso and I can bring it up in a cup of coffee. That's what the Bloomberg. That's why there's a gazillion of these Bloomberg terminals out there. A lot of people are doing that and looking at some pretty phenomenal moves over the past forty eight hours.

In response to this action from the Bank of Japan, you noted, Eric that the action that they took does not necessarily show that the willing is that the bank is going to ease, just simply that they are willing to act in some sort of shift, but not necessarily a breakup of yield curve control. Given that's the case, what would it take for the end to appreciate that

much more? Why is there so much enthusiasm around the strength and the end the confidence of getting inflation under control if this is just kicking up the the target by bits. Well, Lisa, like I mentioned, there's there's the unwind of the carry trade, and that certainly can can take yen to some extent. The bigger question here is are we going to see a longer shift in capital flows from Japan. Japan for twenty thirty years has been a huge buyer of foreign assets, probably the biggest in

the world. Question now is, if we have some real positive wage price dynamic taking hold in Japan and we have some real increase in nominal rates, here is a substantial amount of money going to come back from abroad back to Japan that can drive that move from one or so down to a hundred. But crucially this relies on inflation in Japan, continuing growth remaining quite strong UH and the b O J at least providing a little bit more upward lift in those nominally yields. So, Eric,

who are you looking for them? Where are you looking for a Japanese demand? That supported European bond markets for sure over the few years, and the treasury market, where

are you looking for that to wine? Well, yeah, John, you mentioned the US and European bonds, and look at the hedge yield on that when you when you swap these these returns back into UH and y end it's it's really a brutal picture for Japanese investors buying US treasuries, buying French bonds, and so this this really accelerates that

trend of UH, probably net selling of treasuries and French bonds. UM. You certainly have to also watch for UH some some asset back products in the United States, where Japan has historically been a pretty big present. UM. So that's really where I'm focusing my attention. Just to wrap things up big picture, Erica was speaking of Jim Caren and Morgan Stanley just yesterday over the Bloomberg and I'll catch up

with him a little bit later this morning. He's asking the following question the second order effects of markets leveraged to low and stable yields. Muhammadalarian brought that up yesterday as well on the program. Eric, can you tell me what you think those effects will be as we shift away from this regime leveraged to low and staple yields for much of the last ten years. Well, John, I think central banks really need to be careful here. And this comes back to why the b o J has

sort of couched. This move is not a tightening of policy and there's not more to come. They've increased their buying of of jgbs because they know just how fragile the b o J or the Japanese system is and how leveraged this to low yields. UM. So you certainly have to watch some of the Japanese banks and there exposure and duration risk. I think the bigger point here, though, John, is central banks. We talked about the end of the central bank. Put in the equity context, what about the

bond context. You know, every central bank is doing quantitative Titan next year. They're hiking pretty aggressively. We've really never seen this environment before, especially given our starting points, so we've got to really watch out for for long term bond yields. Ine, Eric, this is wonderful. Thank you, sir Nowson. That of last Faco Alicia Sherman joins us now with Bernstein, double degree, Warton Kellogg, all the rest of it, forget

about it. She enjoyed the trenches at Ross stores with a real job before she ended up in securities analysis and nation thrilled that you're with us. Your note on Nike seems from another planet. Your optimism on their view forward is extraordinary. What does the gloom crew have wrong about the American consumer buying Nike shoes? Um? Thank you for having me on so so the negative sentiment around Nike going into this quarter was all about the next

kind of three to six months. It was about an inventory in North American promotions, the pace of China recovery. If you fast forward six months, the brand is stronger than it's ever been. It has more customers, more sales, more distribution points. Um. It is number one in every market in the world. It continues to hold onto its number one China position even despite everything that's happened in the last two years. And we saw evidence of that

in the print yesterday. I mean, you know, we're talking about a cautious consumer. But Nike did thirty plus percent constant currency growth in India and in North America in this quarter. Um. Now, some of that was lapping a softer quarter last year, but you know, it's still shows resilience. It was number one on to mall in China. There is a path to recovery. So I think the bloom and doom is very short term and if you skip forward the short from difficulties, this is a really strong stock.

And these the stock usually does well in a recession coming out of recessionary environment. So long term, I in Varya Bus and Thesa, the gentleman from Argentina were as Adidas the gentleman from France, he have three goals. Where's the Nike Zoom Mercurial super Fly nine km soccer cleats to peep will buy the product? Do they see unit sales because their heroes still where this stuff? Is that

still ger Maine? Yeah? Actually, I mean they highlighted they did not mention Argentina's win, but they did highlights Boot the Mercurial as one of their best selling products. Um, it's not just a football. Boot is also the kids. It's also the merch. So does drive a huge amount of um, you know kind of merchandising sales. And both Nike and NATIDSK because of this big final will have benefited from that. As you say merch, I see Tom's eyes light up. He wants merch and he's been asking

for March for a long time. And I went to the Tots and they were sold out of all the Nike stuff. John showed me the store in the way out, and I was lower. I got I got the sun jersey from Mrs trying and get in the messy Jesse. Now I forget about Yeah. Well, I will say that there's a question about whether Ansia this is a Nike specific story and a hero specific story, or whether this is a broader retail resilience and the sense that people

are going to keep dying. There was a lull and then people will go back to the brands that they know and love. No, I think I'm not that bullish about the about the broader consumer environment. I think I think there is a softening, and you see it in the traffic data, you see it in the guidance of many of the company would just come out of a wave of earnings, and the performance in the current quarter

has been strong. The guidance has been a lot more cautious across the board except for the very hard value retailers and the hard value retailers. You know, I covered the off preisers. They did terribly this year and they're much more abulition about next year. But the mainstream and

slightly premium retailers are facing the opposite issue. And you know, when you look at Nike's guidance, despite the strong performance dis order, they only inched up their guidance a tiny bit because they are being cautious on China and on

North America in particularly. How much do you see consolidation right now in the show around the strongest brands, this idea that we've been waiting for this washout and retail for so long, and suddenly we might actually see something more like the wave of consolidation, the if you will Tom's phrase zombie roll up that a lot of people have been looking for in this sector. We see it

every time we come out of a recession. So if you look at the numbers coming out of the GFC, Nike was the single biggest share gainer in North America. If you look at the numbers even more recently coming out of COVID one, Nike was the single biggest share gainer. And the share losers are the Tier two, Tier three brands. Some of them closed down stores, some of them shut down entirely. So there is a share reallocation, and being the biggest in the market gives you that outsized benefit

when you get your fair share. So I expected to be more coming out of rather than going into a recessionary environment. But yes, I mean that's part of the reason why in the sportswear sector, strong brands do better because they tend to consolidate share over time, particularly when the market is coming out of an area of weakness. An Assia Shaman of Burnstain and Assha. Thank you just wonderful.

This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to in 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