Surveillance: Market Pricing with Donald

They might be done. No, it could be another twenty five basis points or nothing. But in the great scheme of things, I don't think it really matters. The market already has a coin toss for this next meeting. What matters and what actually shocks my economic and inflation model is not another twenty five basis points or not. It's how fast they cut and when they start cutting. So the conversation is going to have to shift I think

in the next few weeks away from this next incremental meeting. Forwards, what does the off to the next one to two years look like? Because if the FED is going to get its way, there's a significant mispricing. I suspect that the market is probably going to have to price in more cuts moving forward, and the FED is going to follow what drives that, the economic daser or further financial instability the two And this was a big difference. Li. So you talked about the difference between the ECB and

the FED. The ECB President Le Guard told us there is no tension between the price stability and financial stability mandate. And even though Chirpowell implied the banking system is sound, he also was very clear that they were incorporating real economic impact from the banking stress through the lending channel. So we know that this is going to dampen growth

moving forward. And indeed, anyone with an economic model the day that we saw the first initial banking stress clud in this is going to be a credit crunch, and we have a playbook for that. It's not good. It leads to recessions. It has every single time, Francis, we've heard from executive after executives, this is not a credit crunch, This isn't a credit problem. This is simply a liquidity mismatch.

How do you say to them, you're wrong, This is going to become a credit problem, as it always has with aquidity issues versus no, you're right, this is something that could be addressed, its deposit insurance or other measures. I just pull out my charts from before the banking stress issues, in which we already saw senior loan officers telling us that we were in a sizeable tightening. This

was happening before we experienced banking stress. So even if you want to say the impact is nil, I could still proof to you that we are actually seeing a wide range of data saying that credit is pulling back. And that's particularly important because the bull case for the US economy has been the consumer is strong, and the consumer was being driven by releveraging. If that slows or stalls,

then we have a momentum slowing. Is that Q one Q two Probably not, But our traditional leads and eggs tell us that by Q four of this here, we're in a significant soft patch. So my issue is, well, maybe the Fed goes twenty five base this point or not. I think not at this juncture. But how quickly did

they choose to respond? And it's possible that the hawkish shape here is not the next meaning, but that they try to stay on pause as long as possible, given inflation in this soft patch is probably still a little uncomfortably high. From what I'm hearing, Frances, it seems like the thresholds has gone way down for cutting rates, at least what you expect in the upcoming months. How low do you expect the Fed to be able to cut rates given that there is a disinflationary effect from some

sort of credit contraction. Well, that's right. We have playbooks for uncertainty shocks, which the banking system stress is. We have playbooks for credit crunches. But it's been a very long time, Leaves since we had a playbook for flow growth. But inflation still around three to four percent. The most

important thing I heard from CHERA. Powell yesterday was actually his reference to long term inflation expectations being anchored, and he said it was true for households, businesses, forecasters, and markets. And that may be the direction that Chair Powell and the Fed chooses to tilt towards. As we still see

some sicklidly high inflation. So even if they come to the end of the year we have three to four percent, they may be able to say, listen, the long run concerns about inflation expectations becoming the anchored we no longer have those. We can tilt back towards the employment side of our mandate because let's remember the Fed does have a dual mandate. We just haven't talked about the employment side in a very long time. John and I were

talking about this earlier. Frances, do you think that rate cuts in this framework are going to be bullish, are going to be positive for risk assets? Well, traditionally the context around rate cuts matters, but we got to get through a recession first. I mean, there is a little bit of something we're seeing now where people are saying, well, the leading indicators of the leading indicators, of the leading indicators are positive. But that's joking the gun a bit.

We still have to go through a rerating of this economy to a lower growth environment, which means lower earning scrowth, less activity and employment. Shop maybe jumping the gun just a bit more or a bit too much if we get too bullish on at this juncture given the context. Francis, thank you as always, Francis Downard. That just brilliant over a Mandy Life Investment Management joining us nice Alessia at

the longest senior porfolio manager and invest go Alesia. How you started the year constructive, you came into March less constructive. Alessia talked to me about the change there given what we've seen transparent the last couple of weeks, Lisa John, thank you for having me. Yes. At the beginning of the year, we had a very constructive view which panned

out a little too fast and too far. So when we entered in March, many of our indicators started signaling a little bit of an extended price action and sentiment that was beginning to roll over as a result of renewed positive inflation surprises. They're steepening in yield curves and the repricing of additional policy hikes. That led us to from a cyclical perspective to reposition again for a defensive

as a location posture. What happened with the bank developments over the last couple of weeks has accelerated the path, has validated the path, but it's important to make a distinction. We have been able over the last couple of weeks to rule out, thanks to the policy actions and the developments in Switzerland, to rule out a systemic accident in the banking sector. With that being said, the tensions in the credit markets have increased from a syclical perspective, why

their credit spreads, why their lending stuff. More restrictive lending standards and lower credit growth are necessary conditions to have monetary policy titan in the future and bring inflation down. Alessia, there seems to be a policy divergence driven by the fact that the US financial system, and I'm talking not about the big banks but the regionals that are subject

to some of this deposit flight. The banking system does have a more pervasive issue that needs to get dealt with, and some other nations, including the UK and including Europe more broadly content on Europe, do you agree with that? Can you trade on that? Is there something underpinning that in terms of perhaps ongoing rate hikes in Europe and the end of them in the US. I think the cyclical divergence is there in the growth and in monetary

policy on the margin. From this point on, I think with the Federal Reserve we're looking at marginal increases let's say, another twenty five business points hike in May. But the ECB and potentially the Bank of England I think have more to go at least another fifty, if not more. That secretical divergence can be expressed through multiple venues. Again, I'm ruling out the I wouldn't say that we can trade on the ass on the more structural systemic aspects

of potential bank regulation. I think what we should focus on is trading on that cyclical divergence, trading on the cyclicality of the perception, which I think has returned. The last couple of weeks were more of a risk of a systemic shock that would have changed that dynamic, But I think now we are more comfortably back into the typical end of a tightening cycle pricing dynamics. So when can you go back into European banks? European banks are

not for now. In my mind. We favor a bias away from value and away from cyclicals, of which banks are one, more into quality oriented, lower vualativity and growth oriented sectors. So defensive sectors such as healthcare, consumer staples, and even technology, which screens now on quality characteristics, and we have seen that quality pan out as soon as rates began to rally again, those sectors and styles with longer dated cash flows and more duration have outperformed. We

think this is an environment for defensive sectors. And I said, just quickly, just to wrap it up, working on the assumption. Now the FED is done, working on the assumption that one more hike and then we are done. So secretly called divergence in favor of European equities in favor of the euro and a global backdrop where a policy being done is not necessarily the recipe for a raally. Just yet,

we need to see the impact on growth. First, interesting Alesia, Thank you, Lesa, the longest deep of invested joining us down the secondly market John Stelfast, the chief investment strategist and Oppenheimer Asset Management. Hi, John, great to catch up with you, sir. I mentioned this to you in the commercial break. We're going to talk about exactly this. If the fedbacks away because things are breaking, are you telling me? And that's bullish. It's certainly not a bad thing. Let's

let's put it that way. And I think the market really responded to that intimation from Chair Powell, and I think that you know, that was all really doing quite well. Later on we had this from its Secretary of Treasury, Janet Gallen, and that kind of should people up. But this is not uncommon times like this. The main thing, it's not so much what brings the market down is how quick the response is and a recognition investors need to realize not every response is going to be correct

or exactly what they want to hear. But it's a process of working our way back out of another set of wood wooded area, so to speak. They setted wooded area We're going to get out of somehow with rate cuts. That's what the market says, The Fed says, no, how much are you counting on rate cuts? To having more bullish outlook on how this emerges, how this develops, how we emerge from the woods of financial systemic issues, great questions, not really relying on rate cuts a heck of a

lot near term. I think the inflation is sticky. The Fed has to do something. It's credibility is still on the line. Its credibility is always on that line, whether it's a rate high cycle or a cutting cycle. But in this particular instance, having been behind the curve badly enough so we had this inflation hit before the year high as the way it had. This is an important period and they've got to show that they can manage both this as well as a crisis in confidence within

the regional banks. And I think they can and I think they're very capable of doing it. But it doesn't mean they are infallible. They just have to work their way through a process. John, you've been a bullish investor for quite a while. What does being a bull right now mean? What does it mean owning? And what does

it mean hoping for? Well, I think the main thing right now is, you know, we've just been building our positions in areas that we think will be reward and if if I just take a look, and I hate to give the bears, you know, some some areas they might hit, you know, if they get if they get bugged out today at some point. But it's it's been terrific where all of a sudden tech has become the

new value story. There was a recognition all of a sudden, indeed, we're not going back to the abaccus or going uh, you know, going back to the slide role. Technology is alive and well, the most important thing is it's got to be profitable. You know, positive cash flow. Who's a good thing. But as well as that it looks good for a consumer discretion area, it looks good for areas communication services industrials, and this is the area where we like to invest, not play a little bit longer on

the financials. Now, this is going to take to regain trust in terms of investors who are not players but are rather intermediate to long term investors. It will take them a little while to feel more relaxed about financials. As the steps steered up. Well, we need the consumer to relax about financials before investors can relax about financials, John, you need policy to act as a circuit breaker. Do you think this financial stability instability can end without blanket

deposit insurance? Yeah, you know, I think I think that the real definition is will all have to be perhaps a redefining about what that maximum amount of a deposit that gets covered and then anything over that would likely have to be paid by the depositor in being over and having an overage versus what the covered amount is, so that the taxpayer is not really on the hook for it, John Stoffers of open Him Rsset Management, John,

thank you. Mark Warner joining us, a senator from Virginia who is leading up some of those hearings in front of the house, in front of the Senate Committee, as we do expect a no in situation right now for the chief executive officer of TikTok. Can give us a sense of what you're hoping to get out of the out of these hearing, Senator Warner, Well, unfortunately, I'm not going to be in the hearing. It's actually hearing today

in the House. But I've had concerns for some time that the United States has not had any kind of rational policy about how we deal with foreign technologies from countries like China and Russia that pose a national security threat. A few years back, it was the Russian software company Gaspersky. Back in twenty nineteen, we went through a long debate about Walway. Now we're talking about Tiptop. So I put a bipartisan built together that's been endorsed by the administration.

I got ten Democrats, ten Republicans that said we ought to give the Secretary Commerce the authorities and tools that could, if there is a national security threat, allow her to take actions up to and including divestiture and including banning. And why TikTok Two reasons. One, TikTok is extraordinarily popular, and we acknowledge that one hundred fifty million Americans. Some of the data I've seen on average about ninety minutes a day. What TikTok's genius is is it learns from

you every time you're on. So it's getting and collecting data that is individually specific at the end of the day, no matter what the TikTok CEO says, Chinese law made clear in twenty seventeen that Bite Dance Chinese company that owns TikTok, at any point the Chinese government can require that data be turned over to the government. I think that has the ability to harvest data that could be used. It's already been demonstrated to be used to spy on journalists.

It could be used to target certain people in the Chinese diaspra. It can be frankly used to ultimately target some of our kids who are on that site on a such a regular basis. So the data collection is number one. The number two part is this is a

huge potential propaganda tool. Should President she decide that he wants to go ahead and take on an invasion of China or I'm sorry, invasion of Taiwan, TikTok could be that site that is saying to literally hundreds of millions of folks all around the world, one hundred and fifty

million Americans. Hey, that's not so bad in terms of the message that is conveyed, and evidence of that in many ways has been The Chinese leadership has said they would rather have TikTok banned in America than give up the source code, which is the secret sauce the algorithms that create this wonderfully addictive tool. They would rather give up TikTok in America than give up the source code.

And I don't know how Americans could ever be saved without that source code and getting out of China and into the United States. Senator just before before, I want to make sure that we get this point clarified, just to dig into what you're saying little bit more. You're talking about national security concern and how this data can be used to be a manipulative to a broad swath of the public. But there's also this question, as you said,

of learning from you and data collection. How do you draw the distinction between TikTok's use of this as being a company that's owned and headquartered in China versus social media companies in the US also collect data and also have a lot of learning tools from their users. Great question in and chanically. I've got some concerns about the American companies. I think it's an embarrassment that we don't

have a national privacy law. I think it's crazy, I'm a former telecom guy, that we don't have an ability to have data portability and interoperability, so if you get tired of Facebook, you can move to a new site and basically still talk to your friends. I think it's crazy that we've not taken on what's called Section two thirty, which gives all these social media companies a get out of jail free card for any of the content that they post. We've not been able to move on it.

But all of those concerns I have about American and British and Indian and other company companies, those concerns are are not national security base. They are I think basic fairness and business practice is based into the day TikTok Bye dance. It's Chinese parent I believe has to be obervated by Chinese law changed in twenty seventeen made very clear that every Chinese company ultimately is not responsible to

shareholders or customers. It is responsible to the government, and the fact that this can end up, this data or this potential content manipulation can end up in the hands of the communist party that moves this platform into the realm in my mind of national security. And one of the things that my law would also do is require the intelligence community do to classify as much information as possible, so it's not just a case of a trust us

that this is a security risk. And I do believe that should this action take place, that the market will create an alternative. All these folks are making money off of TikTok social influencers. I believe there will be other sites. There are already some maybe not as quite as attractive yet as TikTok, but there will be other sites, and that can be companies in America, in India and France, you name it. I think the market will provide that alternative.

Senator of our corner, thank you so much for your comments, and we look forward to catching up with you after the House hearings and after this has developed even further. Subscribes to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern on Bloomberg dot com, the iHeartRadio app tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always on

the Bloomberg Terminal. Thanks for listening. I'm Lisa Abramowitz, and this is Bloomberg