Surveillance: Investors Rethink Growth

interview of the day. Carl Weinberg with us with High Frequency Economics are chief economists with a tour to force. Note this afternoon, Carl. One of the fundamental things you do is partition the United States in China from everyone else. Why do you do that? Well, the U S And China are growing right now and growth is far from short and most other places of the world we're looking at, you know, industrial production GDP figures that are pretty weak.

Consumer spending is good in a number of countries, but overall growth has been disappointing, and forecasts is really not that great if you look at it from coming from the central banks and from the official agencies. I'm just afraid that the world economy has now done it's it's v shaped recovery. It's now more of a reverse j shape record than we started. Carl Jerome, Polo's central banker to the world, will the global slowdown you write about?

And frankly George Saravellis at Deutsche Bank touches on this warning. Is that enough to affect Powell's domestic policy? Oh? Absolutely, And in fact, I think among central bankers right now today, the thing that worries them the most is not inflation, which all of them have clearly said is transient in terms of the things that are going up, just a small number of prices going up for a short period

of time. But they're worried that the world is going to fall back into a recession or into a period of subpart growth. With the unemployment rate elevated and with both fiscal and monetary policy tapped out. That's a nightmare scenario for central banks, and their job is to minimize the chances of the worst possible outcome, and that is

the worst possible outcome. That's why all central bankers, I believe, are reluctant to talk about tapering or interest rate heights and say the conversation is weigh in the future, because it is this line that comes from you, the winds of global recession already in the data. A lot of people might be listening to this saying, which data where, Because I'm looking at economic data right now. It looks

really strong. Still no sign of insufficient demand anywhere. What's the leading in the cadifor you cal but in terms of the region of the kind of data that you would look for. Yeah, Well, a lot of people are looking at p m I s and they're saying, well, the p m I s are up, and that means that the economies are booming. But we have to remember that it's the economy that causes the p m I to move and not the p m I to cause

the economy too. When I look at industrial production, I mean starting from the view that everything that matters in this planet is either grown, hammered to get or dug out of the ground. All right, Well, hammering things together

is very important because it drives all of services. And I look, as I do in my global note this morning, at industrial production charts from a dozen countries, and all of them are pointing downward, and all of them are furthermore continuing downward trends that started as long ago as the end of twenty seventeen early eighteen. So it makes me think that we're in the process, in a longer term process of industrial decline that has both a cyplical

as well as a secular component. I'll also point out that industrial production almost every place I look in the world except for China, is lower now than it was in March of two thousand and eight. Well, it reaches a point where we may want to start connecting the dots between what happened in two thousand and eight and what's happening now and viewing it is one longer term episode, but we still have to fix what's wrong. Let me just sort of summarize as follows them before I get

to the big kill. Can you just help me understand the timeframe for this code. When you talk about this cyclical down to and in the future somewhere, what's the time and frame for that. Let's just start off with right now with the immediate problem. The immediate problem is that we're lower now on industrial production than we were in February before the pandemic, and we're not getting closer back to those levels, We're moving further away from it.

That's the immediate problem. The longer term problem is that we're also lower than where we were in two thousand and eight, and while we may have briefly rebounded from that, if you connect the dots and run the regression line from two thousand and eight to today, it's pointing downward. And that's a longer term problem that involves infrastructure investment, spending, and demographic trends. Can we talk about the fiscal part

of this equation. We were just discussing with our Amrie horderned down in Washington, the debate over the bipartisan infrastructure package and then of course the trillions of dollars that they're going to attempt to push through through budget reconciliation. How do you factor in that long term spending. That's a really good question, and we have to separate the long term issues from the short term issues. And of course, the only way to get to the long term is

to get through the short term. But in the longer term, the only way we're going to grow in any meaningful way is that we increase productivity, because our population growth is slowing, and productivity plus population growth gives you long term economic growth. So I encourage and I support, and I think it's great for the longer term outlook to get more investments spending in there so that over the next decade we become richer rather than poorer as our

population growth rates and demographics change. And the short run, though, that's not going to help very much. The net impact on GDP and the very short term is going to be relatively small. It will create jobs, it will certainly help the the the the environment, and that's probably the

most important reason for moving forward quickly with it. But the cyclical problem, the shorter term problem, has its roots in I think credit growth outside the United States, which is flat or down in most of the economies that I'm looking at. That's probably the most important short term issue, much more important than infrastructure. All we're talking about economies outside the United States. It's Freedom Day in the UK. It should be a happy day. Restrictions are being lifted. Great.

Not so great is the resurgence and COVID cases the country is seeing because of the delta variant. How big do you think the economic pick up there will actually be given some of those remaining fears. While you're asking me to look into a crystal ball that's yet to be delivered. We've never seen this before, so we don't

really know. What we do know is we're getting anecdotal evidence that companies are having trouble operating because of absentee ism in the UK, that fifty new cases a day are generating maybe five hundred thousand absentees from work and that's caused production chain problems everywhere along the line. And this is stuff we have no basis to evaluate because

we've never seen it before. So let's say that I'm worried about it, and at the end of the day, in the very very short term, the course of the virus, the course of the pandemic is probably the most important short term restoration, much more important than taper or or interest rates or anything like that. Carl very quickly here, what's the timeline of getting us GDP back to something on the edge of normal, say three or under three percent? Is that sooner rather than later or can we extend

that out it's later rather than sooner. Look at look at two thousand and eight, when everything seemingly went better after two thousand and nine, and it still took us I don't remember the exact time frame, three four years to get GDP back to where it was, and to get the unemployment rate back to where it was it took almost a decade. Right, economies do rebound, and initially they rebound quickly, but then the pace settles down to a slower pace. Is the harder to re employ, take

time to get back to work. So this is you know, this is a marathon, it's not a sprint. And the idea, of course is to get the unemployment rate back down to where it was before the next hit comes. And this is what central bankers want to ensures get a half from you. They that view count Wine back there of high frequency economics, the chief economist and managing director sprat drop us with us suck and and this is the interview of the day folks on fixed income. I'm sorry,

so Brod, so Brad. We were going on saying there, what is what is driving low yield? Is it the pricing in of global slowdown? Yeah, I think that this feels like a classic flight to quality, if you will, Tanning yields at the last ten to fifteen basis points have been reacting more to news flow and safe haven bed risks associated with the data variant, you know, lower core oil prices, um and and general concern if you will, on global economies and not so much on funding that seals.

I mean, the data has been sort of back and forth. We got, you know, somewhat okay detail sales numbers, cp I was above consensus, but the markets, you know, right now, it seems to be more of a safe haven. But are we just textbook for bos where what we're really doing is pricing in the input of global disinflation, even if the US booms, even if the US does better, even if strategists call for higher yields, effect as we

impute global disinflation into America and that suppresses yields. Oh absolutely, I think that it's a it's a it's a global uh, you know, bond market, if you will. The ECB has been very doublished. We get some forward guidance again on this week's the ECB meeting on Thursday. I think everybody's going to be paying attention to all the details, but they're going to broadly remain debbish. And Bonniels are at

close to negative forty basis points. I think the lower global bond years are another fact that's going to keep US bond yields lower, and also the the the CPI or the inflation differential if you work between US and Europe, it's quite dramatic. So I think that as long as I stahould means contained overseas, you're going to see that global bonds are going to remain low. And John, look at the tenure yield for those of you on radio.

I mean it's a decline, John, and then it's a real collapse and yield one right now very briefly breaking below that with down six basis points on a US tenure so bantary. You just mentioned something quite important the inflation dynamics in America. It's a very very different story to what we're experiencing right now in Europe and elsewhere.

Why is that important for this bond market in the US in the treasury market, well, because of the yield differential between treasuries and bonds and tragedies and g gbs. Because the way the global bond market trades, you can you can buy assets in other currencies very easily, and as long as treasuries remain attractive on a currency adjusted basis, you're going to see this demand coming from from foreign investors.

That's not exactly what's driving this price action here. This seems to be much more driven by a safe haven bid if you will, for for for treasuries. But broad speaking, as long as there's yield differentials differentials are wide, you're gonna see, uh, you know, at least treasuries are going to struggle to rise tragedy yields. I mean, I'm going to struggle to rise UM based on fundamentals. Envy you

right now. I think you're in a really tough spot in this bond market, and I just wonder can you give us some insight to what your conversations with colleagues and clients sound like right now. The level of confusion, the degree of confusion about what it's taking place here in this bond market at the moment, Well, there's definitely a decent amount of confusion. And this is a completely

out of consensus move, if you will, in in treasuries. UM. You know, the expectation broadly speaking, was for a gradual rising yields in the in the second half, and now we've basically reversed all the losses we've seen and it's a good portion of it in the last quarter UM that we saw from the beginning of the year, we saw a dramatic sell off between January and March, and I started to reverse those games. So and the flat me of the curve is also not a consensus in

your views. So I think that we're all kind of, you know, trying to figure out where things go from here. I feel like the bondmarket is in a limbo. We're waiting on a whole bunch of other factors to come into play. For fundamental student polandflow, treasury ails to rise, what other factors about it? Because if it's not hot inflation, for instance, if it's not hawkish commentary coming out of the Federal Reserve, what is the catalyst that makes the

old to go higher? I think employment is key. I mean, we're we saw some data that last month's employment print was quite strong. I think that the thread feels like they've reached their substantial for the progress mandate on inflation. Really, the concern now is on the on the employment front, and we need to see anywhere between five hundred thousands million jobs being created for the remainders here, and that I think is going to be the key for both

policy as well as for tragedy. Is moving higher. Consensus has totally broken down, so Batary is going to catch up. Sbautaria that stay general head of US Right Strategy. The weather is always good for Barry red Holts. He wakes up optimistic each and every day. Barry, the toughest thing to do when you're gonna do this in the real world of real money. You're gonna get a call this morning from X number of people that have entrusted you with their money, and they're gonna say, go to cash.

What do you say, Well, you know, the secret to dealing with clients who get nervous with a little volatility is having this conversation not when there's read on the screen, but when they actually first come to us and say, here's what I want to do with my money. Uh, here's the history of markets. Here's how often we get a ten percent draw down, draw down, one to three percent moves. There are dozens and dozens of those every year. If you go to cash every single time the market

twitches one per cent um, you'll never be invested. And that's not what our thought processes. It's not day to day, it's decade to decade. Well, the decade to decade timeline gets across the set of worries that we have this morning. One of them is a consensus call was higher yields. I believe we've gone the other way. What happens the

consensus when they're wrong? When you say, when their consensus is right most of the time when it comes to market prices, but when it comes to forecasting the economy or the stock market, consensus seems to be wrong most of the time. I can't count how many times I've been told that the bond bull market is over, that yields are done going lower, They'll never the tenure will never drop below two percent, I mean one and a

half percent, I mean one point to five percent. You know, the US still is the cleanest shirt in the hamper of dirty laundry. And he we are, you know, we're we're one two that that's just astonishing. The people who have been betting against bonds have been on the losing side of that trade for it's almost forty years. What do you chalk it up to? Though, as you say, we're six right now? Why is that growth concerns? Is

that positioning? What what do you make of that? You know, it's hard to look at the US is completely separated from the rest of the world's um bond markets. And and we've seen negative yields in Japan for how long and and negative yields in Europe. That that black hole, that gravitational pull has been exerted on the US because there's so much capital slashing around and it's not just the FED and que money is looking for a home.

And if you just want to make sure you're gonna get your cash back return of capital, not return on capital, Well who cares if it's one percent? If I put a billion dollars in a bank, there's no guarantee that that bank is going to be there and give me my money back. So this is a way to make sure that money that gets parked for a while is safe.

And maybe it has to do with some geopolitics, maybe it has to do with some economic concerns, but the biggest issue seems to be just an immense amount of capital, trillions of dollars slashing around without a good place to hide. Well, you mentioned the FED in quei there, Barry, how high do you think the risk of is is of a policy mistake? Well, every economic cycle that ends, most contractions are eventually caused by a policy. You know, I don't

know if I would call it. The mistake sort of implies that if we only get this right, we can avoid recessions. Hey, eventually UM economies get old and vulnerable, and what wasn't a mistake in one year suddenly the next year becomes a problematic, and we tend to see bullmarkets killed not by old age, but by UM either fed tightening that's successive or too quick. If you believe the underlying economy is stable and strong and robust, well, sometime next year we should start moving off of this

emergency footing and slowly bring rates up. The question is where does that become problematic for profits and where does that become an issue for consumers who depend so much on credit? Is a two percent, three percent, four percent, that's anybody's guests, And where people get that wrong, that's your policy mistake. Very thanks so much, Very hold to this for the important Brian des interview as well. Really looking forward to that Masters of Business on a podcast US. Well,

Dr Erstein, I'm gonna cut to the chase. You were at Harvard Undergraduate winning a Stidges Hoops Prized. You did Harvard Medical as well, you were at Boston University Hospital, and what you did is you studied Fleming, you studied Sock, you studied Watson and Crick. You also studied Sharfstein. Guess what, there was no social media. How did guys like you and your profession adapt to virology and microbiology in the time of social media. Well, we're seeing just how challenging

it is. Um. The misinformation that's out there, The fact that people are hearing again and again and again things that are just flatly untrue about the virus just shows how powerful for us it is. We don't have that kind of partisan divide on penicillin, but we have it on covid vaccine in the middle of a pandemic. Well, let's talk about who are the unvaccinated doctor and what policy make is it looking to do about it? Well, um,

they're they're they're not all the same. Um. I think that there are a couple of different ways of looking at them. One way is, you know, there's still people who, um are open to getting vaccinated. They just wanted to be really convenient. And I've met them. I've been out vaccinating. I see people who say, you know, this is so easy because I can just walk down from my house. And so I decided to go do it, and I'm gonna bring in some friends. And you think, you know,

that's great, we're here. That's why we're doing this big outreach campaign. There are other people who you really have to spend time with. And I've been talking to people at different workplaces or just friends of friends call me talk it over. Some of them decide yes, UM after a conversation, and then there's some people who really are dug in that they don't want to get vaccinated. And I think that numbers a large I've been seeing recent

polls on that. Um. Initially it was in the ten percent range, but might be higher now with all this misinformation. And these are the people who they get bid and they almost die and they said, well, what do you think about getting a shot now? And they go, I'm not so sure. I hear it might not be safe, you know, and you've got to scratch your head and go like, how could you have that view, you know, given that their hundred fifty million plus people who've been

vaccinated safely and you almost died from COVID. So it's really it's really difficult when you get there. We have to have a sensible approach to these conversations. And I think you're right to draw a distinction between anti vaxus and people who are just hesitant about taking a vaccine.

These vaccines are being deployed under emergency Youth authorization. I just wonder if full authorization, so to speak, Joshua, help things just a little bit, maybe on the margin, if it's all your thoughts, um, I do think it would help. And I think it's important for the US Food and Drug Administration now to be really explaining that process. I thought it's been important for a while. What is the difference, what data are they bringing in, what is the timeline.

I think there are a lot of people who are confused, and I think just the will be really quiet until we tell everyone it's it's licensed. Approach isn't good enough for the pandemic. There should be more transparency, and I think that will affect some individuals who are waiting for that, but it will affect businesses a lot, particularly businesses who are um wondering about requiring vaccination or really pushing vaccination for their employees, but are waiting to see what the

FDA does. Doctor I was catching up with a friend who's down in Florida over the weekend, and she says she knows about a dozen people who are fully vaccinated and yet are sick once again have tested positive for COVID nineteen. What do we really know about the protection that vaccinated people have, especially with the surge of the Delta variant and and others for that matter. Well, there's extraordinary protection against serious illness and death um from the

from the vaccines. It's not perfect, but it's very very rare. I'm guessing those twelve people did not get particularly sick um, but you can get infected. There's still very good protection against any action for the Visor Madurna vaccines. It looks

like for two shots. You know, people who are fully vaccinated, it's it's an excess of um of But that doesn't mean there won't be some people who are exposed, and people who are really opened up their lives and are doing things might well um get a little bit sick or test positive for example. But in general, if you're vaccinated, it's very very unlikely that you'll get sick. Joshua has got to catch up an important conversation, and it gets more important by the day. In a way that I

think some people don't anticipate. John's Houlkins, Bloomberg Stoll of Public Half by State. 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