Surveillance: May Vote Was A Distraction, Mills Says

much for joining us. First of all, we'll Labor support this deal if if it's I guess you know, if the voters in January we're two months from from kind of crash out. Is a prime minister playing with time. The part minister is definitely playing with time for the for the benefit of her internal party politics. As we've seen last night, we are moving toward we're only fourteen weeks away and possibly crushing out of the European Union, and no deal Brexit is not acceptable to a cross

parliament of title to our country. So Labor has actually been quite clear about what our tests are. We have six tests. The current deal that goes so far from meeting that if she can, she said that was the only deal on the table now apparently she thinks she can re negotiate one. If she I don't think it's possible. If she can re negotiate one that meets our six tests,

then we will support it. But do you really think she's playing from within her party now, because now she she placated that cool, she's in charge for the next twelve But she got through a hundred and yes she is. But the hundred and seventeen, most of the most of the backbenches in her part, those who aren't paid by the party to deal, they many of them, in fact, will vote toget and May. Some of those who voted for to raise and May will vote against the deal

as well. Because she is she has there's a fundamental fracture in the Conservative Party between those who want no kind of customs union, no kind of customs hard Brexit as they call it, and those many of them who want continued economic engagement in integration with the Open Union, because that's where a lot of our economy is supported by. So that fundamental like break in that party cannot be

papered over in a couple of weeks. As the Prime Minister stronger now than she was three days ago, I think the Prime minute and personally, you know, I don't whoever was needing the Conservative Party, it wouldn't make that much difference because of these fundamental fractures. But I don't think she's any stronger than than she was. She has has shown that the significant hundred seventeen of her own members voted against her can't challenge her again. They can't

challenge her. But remember she has to get a deal through Parliament's right. It's labor and dup and and all of you guys we supported. But this is the this is definitely the Prime Minister's with real fundamental flaws because it doesn't it doesn't say that we have a permanent customs union, which means that Northern Ireland, Northern Island have been a different position to the rest for the United Kingdom.

And that is just unacceptable in so many ways. And it also, and this is really important for us and labor, it doesn't guarantee continued workers rights and environmental protections. You know, we love our landscape, we love our country side. We want to and we you know, we want to avoid litigate climate change. So these are fundamental problems with what she's proposing and that's not going to change in the next two weeks. I'd say there is there appetite in

the House of Commons for a second referendum. Is there appetite in the House of Commons for fresh elections. There's certainly appetite for first elections. And I'm sitting here with you as an official spokesperson for the Official Majesty's official opposition, and we want a general election because you know what, actually enough I mean enough to push it through Parliament is what I'm trying to do, what we gauge right now.

And obviously it's the DUP, the you know, the organized MPs who are keeping this government in power, and they have said that they won't vote, they won't vote for a vote of no confidence, they won't vote against the Prime Minister in a vote of no confidence, which means that they would affect probably means that they would that would win want But there's huge there's huge discontent in Parliament, not just in the Labor Party, you know, but also

on their benches. And we just remember that we're talking about Brexit here, but in the country, you know, in my constituency, what people are talking about is that they haven't not a wage rise in ten years. But they're talking about is that, you know, public services were in the wh're having a winter, winter health crisis, NHS crisis, you know already, the policing, you know, crime is rising.

That's what people are talking about. It only it's a general election that can change that, and that's why there is real appetite for general action. But the numbers mean that we can't be you know, we want to make sure we want to push for that when they have a chance of success is in a general election. Another distraction.

If you vote for this deal, whether you're convinced or not, then you can actually get back to fixing the country, fixing the NHS and dealing with the real things that are in into the common people make a really good point about, you know that that that we we don't want to spend the next five years talking about Brexit. But the fact is that the dealer's on the table now will make my constituents worse off, you know, and

across the country we've seen that. The government's own analysis says that GDP will be less than it would have been with the kind of deal that we want. So how are we going to go about fixing the NHS or the other challenges when we have a deal which is making us poorer and that for example, you know the Northeast where I come from, we have Nissan making you know, fantastic cars. It has an integrated supply change

it needs to have, it needs frictionalist trade. If we see a general election, it should labor, you know, build a platform saying actually, you know, we want to go back to what it was, stay in the EU for star you know, so when we you know, when we've got this is it's truly right. Well, it's a really complete. One of the things I want to make emphasis a really complex situation. You can't have simple like will do you know, simple responses and take time. But every day

by day everything is changing. So I'm not going to say to you now what I'm sorry, I'm not gonna say, you know what our manifesto would be when you know we've got a general election. But what's clear, you know with what we want out of a brexit, do you know, which has continued strong economic integration with the European Union and the protection for workers and environmental life, and that was what we'll be seeking to another We've got six hunch a thousand members and we will be reflecting what

they want to Well. Kean war thanks so much for doing his labor. M P there of course in the House of Commons right behind and joining us, oh Andre with the Martin Center for European Studies. He is in Brussels, um oh, and we spoke to you earlier and I guess just through the morning, the Prime Minister is in Brussels and she is looking for assurances. To me, all

of those assurances lead back to the Irish question. I think our listeners understand the Irish question, the history of the United Kingdom of Great Britain with Ireland and to the north Northern Ireland. But what's it mean for Europe. What is the Irish question for Brussels in Europe? Well, I think, um, I think, what what your listeners have to remember is that there's more than stake than just you know, the Republic of Ireland, Northern Irish Board, for

Ireland and for the Irish question. At the European Union level, it's about how the European Commation and the European Union can show it's relevant and can show it's importance too. Smaller members it's like Ireland. So it's not just about the Irish border. The Irish border is just the issue that arose that shows that tan show the European Union how important it is for smaller members stay. It's also

very very very very important highlights that for Ireland. You know, the support shown by the European Union over the last two years has fundamentally changed the dynamics in terms of how it approaches relations with London. I was thunderstruck by a couple of the articles that I read in the last few days in the Irish Times and in the

London papers about the members from Northern Ireland. Of course with their leadership from Arlean's foster, she's appeared before on Bloomberg surveillance and just a tangible worry or study that we could return to the troubles. Is that feasible, Yeah, I think it's it's it's a very real worry, particularly

in border communities where the border would be reinstated. If I could put if I could put it like this, for an Irish person, the reinstatement of the border north and south, it would literally be like reinstating the border, the Berlin Wall or the border between the Estonian, Latvia or any of the eastern European countries. It's just a very important symbol. The free border, or the soft border as we like to call it now. It was a symbol of peace and reconciliation. It was a symbol of

how Anglo Irish relations had progressed. And really to to kind of reinstate the border would many people think, actually be several step backwards, not just not just one step. What can America and the Trump administration do? Is this so discreet and separate, we stay over on our side of the pond? Or could President Trump and as an administration, can they add value? Absolutely they can add value. I

think your your listeners shouldn't forget that. One of the the one of the reasons, one of the core reasons why the peace process in Northern Ireland has has been successful was the extensive involvement of the Clinton administration during the ninety nineties. George Mitchell was the U s Special in Vy to Northern Ireland for many years, so the

US could actually play a very important role. The US as many historic economic and social linkage is not just with Southern Ireland with Northern Ireland, but also of course with the UK. Andre thank you so much for the Martin Center for European Studies, greatly appreciated. Just terrific perspective this morning. Well let's talk about on all of this, and there's someone good to speak of is well, and

that is John Mills. He is well. I frame him as a German rather British businessman and economists, but with j M L and currently uh someone very much involved in the idea of leave. John Mills, we are thrilled to have you with us today and we've spoken to you many times before. How did leave change yesterday? I'm not short lived to change very much yesterday. I think the road was a bit of a distraction, but it left everybody pretty well where they were before. There's still

the same problems about getting the withdrawal agreement through. Nothing's changed on the difficulties around the backstop. As you say, the Prime Ministers in Brussels at the moment trying to get assurances on the back stop in Northern Ireland. But whether she'll get enough to satisfy the very large majority of MPAs in Parliament who are very concerned about the dual agreement I think remains to be seen. Gen mill is one of the great common features of your thoughts

of the United Kingdom. And in speaking with Lord Skodolski the other day, is everything focused on West Britain, on Ireland in Northern Ireland. Explain what happens now to this debate of Northern Ireland, and I want to go to a broader debate than just the border. There's more going on there than the backstop, and the border isn't there.

There is and that's just really because of all the background there is to the troubles that were in Northern Ireland in the nineteen seventies and nineteen eighties, which still similar a little bit under the surface. And whereas normally having a border would not be a huge problem, in this particular case, it's got all sorts of political overtones. Nobody wants to have a hard border there. That Subnash don't want that, The Northernish don't want that, the British

don't want that. You doesn't want it. But we will need to find some solution that will work without being a hard border there. And I think technologically that ought to be possible, but it's just a question of getting everybody to agree to that. John the strategy of Labor so far has been to let the Conservatives fight with themselves, and to be honest with you, it's been a pretty good strategy as well. John, What do you want to

see from the Labor Party over the coming months. Well, my own personal view is that the best solution to the difficulties we've got for the European Union will be for us to have a Canada type free trade deal, and my ideal would be for the Labor Party to pivot towards Routie for that rather than anything else. I'm not sure that's going to happen. I think the Labor Party is going to try and bring down the government with a vote of confidence, but I'm not sure that's

going to work. It may move towards supporting a second referendum. All of that a course of faction which is fraught with difficulties. The problem is the Labor Party is very split, partly because although himps are very remain and so are most of the Labor Party members, the people who elect the Labor government, the large numbers of industrial people in Wales and the midlands of the North, who depends who

Labor depends on for their support, and mostly voting Leave. Yeah, it's true there are parts of the labor core constituencies that did vote for Leave. John, I want your view on something that's really important to the City of London. There's many people that Tom and I will speak to in the square mile in the City of London in financial services who weren't so much worried about a hard Brexit. They're perhaps more worried about the prospect of Jeremy Corbyn

becoming the prime Minister. John, can you speak to that at all? Should we fear Jeremy corbyon um? I think it's very easy to exaggerate the problems for the city that Jeremy Corbyn uh toward the government that he's heading up might might cause. I mean, I think in practice the run for maneuver that the labor government would have

on constraining the city would would be fairly limited. And the any labor government, any government, depends very heavily on the success of the economy to make sure that its support is retained. And I think to attack the city in a major way and cause all sorts of economic problems and reductions of income and so on, it's not really in the labor parties playbook John the idea of leaving. I witnessed this firsthand on the green at Westminster. Of

the geography of of leave. The elite of London aren't spoken of enough. They say, they talk about remain. I get that, and the global internationalists Zeitgeist and all. Did they have a compromise point? Did do the remain people have a distance they can travel to meet leave or not? Well, I mean, I'm not sure there is. I mean in the end that I think there's going to be a choice between whether we stay in or rejoin the European Union if it's after the twenty nine March, or whether

we have a free trade from outside. What's happened over the last two years is that the result of the election held in twenty seventeen was to have a Parliament that was determined to stay very close to Europe, half in the Single Market and half in the Customs Union. And for very understandable reasons, the EU have hated that because it affects the compromises the security and integrity of

the Single Market and Customs Union. And I think what in the end may happen is that the British people are just going to have to make a choice about either being fully in or fully out, and we'll have to see how that breaks over the next through Uh, well weeks now, it's not even month. We'll jump find a question for you. Can this Parliament pass a deal before the under January? I would be very surprised if

it does. I think what's much more likely if they do will come back sometime in January, will get voted down, and then they'll be all sorts of options on the table, whether we go for a Norwegian type deal, whether we have a possibly pivoting towards the free trade deal, whether we have another another referendum. I think there's all these choices that would be built on the table, but whether it's actually a majority for any of them, I think

it's very doubtful. Well we'll leave We're going to leave it there, jam Mills, thank you so much with Jamil, because we have such an important guest with us. He is Steve Major of HSBC. Stephen Major has been just absolute spot out and interest rates and with that has been a real he knew what HSBC call Steve Major.

I think of your colleague Ben Laidler in New York rather optimistic on equities from my last conversation David Bloom with an outlier call and strong dollar is well in the backdrop of this, Steve listening to Mr drag E is how tempered this time is? How tempered this era is to all of our listeners. What's the permanence of this low interest rate world? Well? I guess this inflation. And the first question that went to Mr Jock just then was about the technicalities on the the investment program.

I dare say the next question might will be on inflation. I mean someone's got to ask him, Yes, what what happened to the vigor in the labor market that you spoke of last time? Because I do remember it very clearly. It's only the last meeting. People people were questioning whether he was on his own it was. It was either the last meeting or the one before Tom But as the point, the point is he was talking about an inflation that was coming through and vigger in the I

think it was vigger in the wage market. So where is it that? That's the question. And I guess he might regret saying that. I guess we will make mistakes. Well, but it's it's a proxy, Steve for every single conversation. If we can move on from Mr Dragging to the challenges of my conversation with Vice Chairman Clarida, he stated he saw reasonable growth in the United States. What our listeners know is they've got a two C D if they're lucky, or you know, they're looking at a bond

matrix at HSBC that's subdued. What is the permanence of this era? Yeah, so um I touched on it with inflation, but I guess the Vice chair at the FED is familiar because of his previous job with the global output gaps, global Phillips curve. And so if you put together the economies of the rest of the world and combine them with the US, it's quite clear that US yields of two for bills quite high and and and that that's

the simple point. I think it's quite salient. Rather than look at the US Phillips curve and the US unemployment rate in the US pay rolls, etcetera, let's just go more global, let's bring it all together. So what's happened in two thousand and eighteen is that the US has exported tightening of financial conditions to everybody else. Only in the last two months, did it come back home in the form of wider credit spreads, we co equities, collapsing

oil prices, and a you turn from the Fed chair? Okay, are you turned from the Fed chair? And a modest you turn from Mr Dragon looking at inflation risk to the downside, I guess. And and then I want to go back to the sharks that our American listeners could see. And I've got to go to your valuable colleague, David Bloom who I'm sorry, Steve, it's an outlier call of a demonstrably stronger dollar. What are the events that get

you to that stronger dollar? Well, well, look he's been right for most of the year, and yes, I guess valuable it is quite a good description of him. I can think of a few other words, some of them less polite. But the thing is with David is that he's he's strong on this conviction, but he's equally capable

of changing his mind. And that's the nature of spot effects if the circumstances changed, since they will the few I cannot front run the forecast, and I don't know what the forecast might be in the future by definition, but look, if the cyclical circumstances changed that he is one of the factors that he would incorporate. David and the team have been very good and also identifying structural and political drivers to underpend the dollar, which has been

very much case this year. This year, you've had political, structural and cyclical or driving the dollar higher. But you could take the cyclical blank away if the Fed chokes on the next rate hike, and then to look at another tension point. And we can do this, folks, within the matrix of Steve Major's fixed income world. It's one of the immovable forces of this entertaining eight weeks or make it frankly, twelve weeks has been the trade deficit vector in the United States moving uh in a I

guess negative Trump direction. It's certainly not making the president happy. And that gets me, Steve Major to my chart of the year, which is twin deficits, which is, all of a sudden, we've got fiscal deficit to GDP, trade deficit to GDP moving towards the outlook. Is that possible? Yeah. Before we started this conversation, the economic data that was announced by one of your colleagues was on the the the labor market and on the import prices, So import

prices of four and on the month. I guess that's a function of energy and dollar whatever you say, So look to answer the question rather than go around it. Um. The twin deficit thing is is fascinating to me because I'm sure you're aware of the fact that in a way, the US needs to run a deficit if the rest of the world's insurplus, and whether that's current account or not, it's just basic accounting and economics. Unless we want to export to the Moon or Mars, that's how it works.

So so the thing is is that pursuing a smaller deficit, someone's going to have to pay either either the domestics are going to have to save more or or or you know, growth is going to be less foreign foreigners are going to sponsor less of the US market. But the interesting thing for me is that the budget deficit has been going up very late in the cycle, um, and this is not what you'd expect. So you've got a kind of a crowding out, if I want to

use an old economic a very strange strange time. So the economy is going well, but you've got no lack of potential buyers for short dated assets at the current price. The price is right, I tell everyone that's that's what's being missed. That the other thing that you've got to look at when you talk about these deficits, you've got to subtract one deficit from the other. When it comes to the bomb market, the current account deficit has to be has to be funded somehow, right, so there has

to be equal and offsetting flow. But you've got to remember that you can deduct that from the budget deficit. So the budget deficit minus the current account is what the domestics are going to buy. So if the US runs a pick a coming account deficit, then then it it is deducted from the budget. But that the way I look at it is that there's no lack of buyers here. And you're you're right to point out the

twin deficit. We can go back four decades and talk about what was happening then, um in the time of Steve just to go with your expertise away from full faith in credit without question, the zeitgeist of debt right now is this odd word leverage loans. Now, I'm going to assume Steve Major is not encyclopedic on leveraged loans. But you know there's always a vogue of worry, should

be we be worried about these odd vehicles leveraged loans. Okay, yeah, So previous crises were related to a bunch of acronyms in the credit markets CDs, c d O, cpdo etcetera, cpdo squares. I think it was. So the point is we now have different acronyms, that the risk is sitting in different homes. So ten years ago banks will warehousing credit risk that isn't happening now after the cleanup and regulation. Banks do not hold large amounts inventry, so the risk

is somewhere now. It could be an asset managers or insurance companies. Now the particular sector you're talking about is one that might not need so much mark to market, So that the interesting thing is we may not see it immediately. See in banks, where we're we're we're we're where we have to we have to mark in some in some other cohorts of the financial markets, there's less mark to market. So you're right, there's a risk out there.

It's had to have had to move somewhere. Um. I think that the focus is going on to various aspects of the credit markets after a period of extraordinary leverage. So, yes, what is your call for the yield curve? We've we've spent no time on the spread market, which is it's it's been flattening when people have been calling for a steepening. And to me, the steep in a trade people keep trying to put on it's too early. So I think

it stays flat until we are sure the fen's gonna ease. Now, they're not going to tell us they're gonna ease, but they might tell us soon that they're going to pause and have a think about it. Um that that that's coming at some stage, and in fact, they probably even can test that they're gonna pause. We've got to work out for ourselves. But we've got in the yield curve. It won't steepen until you can break over the other side of the mountain. You can start to see what

you're coming down. I'm gonna I'm gonna go Matthew on you here, uh major. But I think it's important is the yield curve comes down. And this is folks, basis points, which are hundreds of a percentage point. Let's say we're at point five, oh or fifty basis points fort etcetera. Is it a log rhythmic impulse or is it arithmetic? And linear? Is the impulse to inversion to zero? And then the negative two or negative five basis points whatever

doesn't have it's nonlinear, isn't it? It's nonlinear. It's not explain that to our audience, because I believe I totally agree with you. Now your your your look at a basis point today and say it's worth ten cents. So the fifty basis points on the tenure yeld you just mentioned in your linear fashion as worth five percent of total return um, not accounting for coupons and rolled out. So look, that's a simple linear relationship. But the point is the lower the yield goes, the more value there

is in each basis point. So it's it's it's nonlinear. And the other thing is, with the yield curve flat, you've got to think about hedging of derivative products and mortgages and all these kind of things people would have heard about convexity trades. So so that there's there's a there's a potential for the curve to accelerate flatter and invert we saw it flirt with inversion recently in certain segments of the curve. So I don't think it's time

for the Stephen. I think we're a long way from that. And as you've rctually pointed out, there is that there's a risk that may not be brought through because it is a non linear relationship. And I'm just doing it in my head. I think about ten no, I think it's so important and finally, um and it's something I don't believe Mr Droggy talked about because it's it's so sensitive. Is a chronic nature of negative interest rates? I mean,

we're back there. You and I had this conversation a year ago, eighteen months ago, two years ago, and I'm sorry, this is getting old, isn't it. Well. I get questions from clients all the time talking about how damaging negative rates are to the bank, affect that and everyone else. I get that, but wishing for something to go away isn't good enough. But there's more to it. Okay, Steve Major, you have been more than generous with your time today.

Thank you so much. Stephen Major is with HSBC. Thanks for listening to the Bloomberg Surveillance Podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio